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Page 1
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, 1998 Commission file number 1-6798
TRANSAMERICA FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-1077235
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
- ------------------------------ -----------------------------------------
81/2% 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 5, 1999: 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.
Page 2
TABLE OF CONTENTS
Page
Part I:
Item 1. Business................................................... 3
Item 2. Properties................................................. 9
Item 3. Legal Proceedings.......................................... 10
Item 4. Submission of Matters to a Vote of
Security Holder.......................................... 10
Part II:
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters.......................... 10
Item 6. Selected Financial Data.................................... 10
Item 7. Management's Narrative Analysis of
Results of Operations.................................... 10
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk........................................ 10
Item 8. Financial Statements and Supplementary Data................ 10
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .................. 10
Part III:
Item 10. Directors and Executive Officers of
the Registrant........................................... 10
Item 11. Executive Compensation..................................... 10
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................... 10
Item 13. Certain Relationships and Related Transactions............. 10
Part IV:
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.................................. 11
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 February 18, 1999, Transamerica announced that it had signed a
merger agreement with AEGON N.V. (AEGON) providing for AEGON's acquisition
of all of Transamerica's outstanding common stock for a combination of cash and
AEGON stock worth $9.7 billion. The merger is expected to close during the
summer of 1999.
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 and cash from
operations.
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 interest.
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.
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 $9.3 billion at December
31, 1998 and $6.9 billion at December 31, 1997. The Company's total notes and
loans payable were $7.8 billion at December 31, 1998 and $6 billion at December
31, 1997. Variable rate debt was $4.5 billion at December 31, 1998 compared to
$3.5 billion at December 31, 1997. The ratio of debt to tangible equity was
6.3:1 at December 31, 1998 and 6.5:1 at December 31, 1997. 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 $1.9 billion in 1998, $120 million
in 1997 and $688 million in 1996. 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, none of which had been issued at December
31, 1998. 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 consist of short term finance receivables.
Principal cash collections of finance receivables totaled $21.2 billion in 1998,
$16.9 billion in 1997 and $12.9 billion in 1996.
Page 4
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 operates from 70 branch lending offices
located in the United States (58), Canada (4) and Europe (8). 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, retail consumer
financing, 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.
The business credit operation of commercial lending provides
asset-based loans and equipment financing to middle-market customers, as well as
revolving and term loans to early 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. 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. The equipment financing
activities include collateralized loans and leases, primarily to middle-market
manufacturing, transportation and other service companies, secured by equipment
essential to the borrowers' businesses. Credit risk in the equipment finance
business is managed through rigorous underwriting and transaction structuring.
Loans are structured to amortize at a rate that is faster than the term over
which the underlying equipment is expected to depreciate. Leases are also
structured with guaranteed residuals or are recorded using conservative
estimates of the projected fair market value of the collateral at lease
expiration. Technology financing consists of term and revolving loans 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.
The relatively short-term nature of the company's financings enables
the commercial lending business to adjust its finance charges in response to
competitive factors and changes in its costs. The interest rates at which the
commercial lending business borrows funds generally move more quickly than the
rates at which it lends to customers. As a result, in rising interest rate
environments, margins are normally compressed until changes in the prime lending
rates are effected. Conversely, in declining interest rate environments, margins
are generally enhanced.
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.
During 1998, the commercial lending operation securitized $600 million
of distribution finance floorplan finance receivables and $200 million of
business credit equipment loans and leases. In 1997 the distribution finance
operation securitized $1.5 billion of floorplan finance receivables.
On December 31, 1997, the ongoing mortgage lending operation that
remained from the former consumer lending segment, which was sold on June 23,
1997, was contributed to commercial lending. Receivables, net of unearned
finance charges, increased from $107.6 million at December 31, 1997 to $320.8
million (198%) at December 31, 1998.
During 1995, the commercial lending operation also entered into a
three-year arrangement in which it securitized a $475 million participation
interest in a pool of its insurance premium finance receivables. This amount was
reduced by $100 million to $375 million during 1997. At December 31, 1998, $360
million of securitized insurance premium finance receivables remained
outstanding.
Page 5
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.
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,
----------------------------------------
1998 1997 1996
--------- ---------- ----------
(Dollar amounts in millions)
Volume of finance receivables acquired:
Distribution finance (1) ...................................... $ 15,720.4 $ 12,415.8 $ 8,315.6
Business credit (2) ........................................... 6,512.1 4,855.6 5,321.6
Retail (3) .................................................... 1,130.8
Other ......................................................... 0.1
---------- ---------- ----------
Total ..................................................... $ 23,363.3 $ 17,271.4 $ 13,637.3
========== ========== ==========
Finance receivables outstanding at end of year:
Distribution finance (4) ...................................... $ 2,220.5 $ 2,081.1 $ 2,530.9
Business credit (5) ........................................... 3,096.1 1,541.4 1,263.0
Retail (3) ................................................... 717.0 109.2
Other ......................................................... 3.2
---------- ---------- ----------
6,033.6 3,731.7 3,797.1
Less unearned finance charges (5) ............................. 330.3 199.3 142.0
---------- ---------- ----------
Net finance receivables - owned ............................... 5,703.3 3,532.4 3,655.1
Net finance receivables securitized, sold and serviced (6) .... 2,988.0 1,810.7 474.3
---------- ---------- ----------
Net finance receivables owned and serviced .................... $ 8,691.3 $ 5,343.1 $ 4,129.4
========== ========== ==========
Allowance for losses at end of year (7) (8) ....................... $ 141.7 $ 98.6 $ 82.5
Ratio to outstandings less unearned finance charges:
Owned ......................................................... 1.99% 2.35% 2.22%
Owned and serviced ............................................ 1.63% 1.85% 2.00%
Provision for credit losses charged to income (9) ................ $ 49.8 $ 16.2 $ 10.2
Credit losses (net of recoveries) (9) ............................ $ 34.2 $ 10.1 $ 5.2
Ratio to average net finance receivables outstanding:
Owned ..................................................... 0.77% 0.25% 0.16%
Owned and serviced ........................................ 0.48% 0.22% 0.14%
Page 6
- ----------
(1) The increases were primarily due to aggressive sales and marketing in most
of the product lines financed and the addition in 1997 of $888 million in
gross receivables from the acquisition of the inventory finance and
international factoring businesses from Whirlpool Finance Corporation.
(2) The increase in 1998 was primarily due to increased sales in the asset
based lending, equipment finance and lease, and technology finance
divisions.
(3) 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.
(4) The 1998 increase was due to the aggressive sales and marketing referred to
above which was significantly offset by the securitization of $600 million
of inventory floor plan finance receivables. The 1997 decrease was
primarily due to the securitization of $1.5 billion of inventory floor plan
finance receivables, which more than offset the $888 million increase of
gross finance receivables from the Whirlpool Finance Corporation
acquisition.
(5) The increases were primarily due to growth of net receivables in the asset
based lending, equipment finance and lease, 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.
(6) The amounts are the balances of securitized receivables outstanding at year
end. In 1998, $600 million of distribution finance floorplan receivables
and $200 million of equipment loans and leases in business credit were
securitized. In 1997, $1.5 billion of distribution finance floorplan
receivables were securitized. 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 1998 and 1996, securitized insurance premium finance
receivables of $360 million and $475 million were included in the balances.
(7) Includes allowance for losses on the securitized, sold and serviced
portfolio of $28 million in 1998, $15.5 million in 1997 and $1.2 million in
1996 which is reported in other liabilities in the consolidated balance
sheet.
(8) The increases were attributable to receivables growth.
(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 430 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.
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.
We provide service, rental and term operating leases through an extensive
worldwide network of offices and third party depots and offer a wide variety of
equipment used in international and domestic commerce around the world, in the
United States and in Europe. We also utilize technology, including our TradexTM
On-line Internet capability, to enable customers around the world to book their
own on-hire and off-hire transactions. In addition, our leasing operation
provides structured financing that enables customers to purchase equipment over
time, and an equipment matching service, GreyboxTM Logistic Services, in which
we manage containers for customers and broker 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 low new equipment prices, the demand for leased container
equipment declined in 1998 and 1997. As a result, a program of accelerated
equipment disposal, initiated at the end of 1997, was implemented in 1998.
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 was still held for sale at December 31, 1998. The oversupply of
containers also resulted in decreased per diem rates in 1998 and 1997.
Page 7
At December 31, 1998, the leasing operation's fleet consisted of
standard twenty and forty foot dry containers and specialized containers such as
refrigerated containers, tank containers, high cube, open top and flatrack
equipment types, chassis and U.S. domestic containers totaling 826,500 units
which are leased to customers from approximately 380 depots worldwide; 26,200
rail trailers leased to all major United States railroads and to roll on/roll
off steamship operators, shippers, shipper's agents and regional truckers; and
19,400 over-the-road trailers in Europe.
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,
---------------------------------
1998 1997 1996
Containers and chassis (1) 826,500 882,100 896,300
Rail trailers (2) 26,200 29,900 34,500
European trailers (3) 19,400 15,100 10,300
- ----------
(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 and 1997.
(2) The decreases were due to a decline in demand for this type of equipment in
favor of domestic container double-stack rail service and from the sale of
older units.
(3) The increases reflect expansion in the European trailer operating lease and
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 56% in 1998, 55% in 1997 and 53% in 1996. The increases reflect the
continuing trend toward increasing term and service contract minimum leases.
The following table sets forth the leasing operation's fleet
utilization for the years indicated:
Years Ended December 31,
---------------------------------------
1998 1997 1996
Containers and chassis (1) 79% 79% 81%
Rail trailers (2) 83% 85% 82%
European trailers (3) 88% 92% 92%
- ----------
(1) Utilization rates have continued to be negatively impacted by the worldwide
oversupply of container equipment despite the accelerated equipment
disposition program implemented in 1998.
(2) The decrease in 1998 was due to a decline in demand for this type of
equipment in favor of domestic container double-stack rail service while
the increase in 1997 resulted from a strong U.S. economy and a decline in
the overall supply of equipment.
(3) 1998 utilization declined as rental on-hires were negatively affected by
the Russian financial crisis and its impact on trade with Western European
countries.
--------------------
The following tables set forth the volume of lease finance receivables
acquired during the years indicated and the amount of lease finance receivables
outstanding at the end of each such year:
Year Ended December 31,
-------------------------------
1998 1997 1996
------- ------- -------
(Dollar amount in millions)
Volume of Lease Finance Receivables
Acquired :(1)
Domestic ........................................ $ 173.7 $ 24.5 $ 46.9
Foreign ......................................... 279.0 110.9 212.1
------- ------- -------
Total ............................................... $ 452.7 $ 135.4 $ 259.0
======= ======= =======
-----------
(1) The increased volume in 1998 was primarily due to an increase in
marketing efforts and investment in the lease finance business.
Page 8
Year Ended December 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
(Dollar amount in millions)
Lease Finance Receivables
Outstanding :(1)
Domestic ......................................... $ 155.8 $ 37.7 $ 37.4
Foreign .......................................... 563.4 422.5 411.7
------- ------- -------
Total ................................................ $ 719.2 $ 460.2 $ 449.1
======= ======= =======
- ---------
(1) The increase in 1998 was due primarily to an increase in marketing
efforts and invesmtment in the lease finance business.
Following is certain information regarding delinquent lease finance
receivables. 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.
Delinquent receivables are defined as the receivables contractually
past due 60 days or more.
The following table shows the ratio of delinquent lease finance
receivables to total lease finance receivables outstanding as of the end of each
of the years indicated.
Year Ended December 31,
-------------------------------
1998 1997 1996
---- ---- ----
(Dollar amount in millions)
Lease Finance (1) 0.50% 0.03% 0.10%
- ---------
(1) The decrease in 1998 and 1997 is due to increased collection efforts
by management.
Page 9
Certain information regarding credit losses on lease finance
receivables for the leasing operation during the years indicated is set forth in
the following table:
Year Ended December 31,
--------------------------------
1998 1997 1996
---- ---- ----
(Dollar amount in millions)
Provision for credit losses charged to
income ...................................................... $ 3.2 $ 1.9 $ 0.7
Credit losses (net of recoveries) ............................... $ 0.0 $ (0.3) $ (0.3)
Ratio to average net finance receivables
outstanding ................................................. 0.00% 0.00% 0.08%
----------------
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, 1998.
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,
------------------------------------
1998 1997 1996
---- ---- ----
Return on assets (1).................... 1.4% 3.5% 0.8%
Return on equity (2).................... 9.7% 24.9% 5.3%
Dividend payout ratio (3)............... 65.9% 131.0% 264.8%
Equity to assets ratio (4).............. 14.8% 14.3% 14.2%
(1) Net income divided by total average assets (2 point method).
(2) Net income divided by total average equity (2 point method).
(3) Cash dividends declared divided by net income.
(4) 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, 1998.
Years Ended December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
1.52 1.51 1.68 1.70 1.66
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.
ITEM 2. PROPERTIES
See Note J of Notes to Financial Statements included in Item 8.
Page 10
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 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.
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 11
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 Certificate of
Amendment of Certificate of Incorporation as filed with
the Secretary of State of Delaware on February 19, 1991
(incorporated by reference to 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 22, 1999 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 1998: 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 12
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/ BURTON E. BROOME
-----------------------------
Burton E. Broome
Vice President and Controller
Date: March 30, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 18, 1999 by the following persons on
behalf of the Registrant and in the capacities indicated.
Signature Title
--------- -----
Principal Executive Officer:
ROBERT A. WATSON * Chairman of the Board, President
- ------------------ and Chief Executive Officer
(Robert A. Watson)
Principal Financial Officer:
ROBERT R. MCDUFF
- ------------------
(Robert R. McDuff) Senior Vice President and
Treasurer
Principal Accounting Officer:
BURTON E. BROOME Vice President, Controller
- ------------------ and Assistant Secretary
(Burton E. Broome)
Directors:
THOMAS J. CUSACK * Director
EDGAR H. GRUBB * Director
FRANK C. HERRINGER * Director
STEVEN A. READ * Director
CHARLES E. TINGLEY * Director
MITCHELL F. VERNICK * Director
ROBERT A. WATSON * Director
* AUSTIN D. KIM
- ----------------
(Austin D. Kim)
Attorney-in-Fact
Page 13
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, 1998
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
SAN FRANCISCO, CALIFORNIA
Page 14
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, 1998 and 1997
Consolidated Statement of Income--Years ended December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows--Years ended December 31, 1998,
1997 and 1996
Consolidated Statement of Stockholder's Equity--Years ended December 31, 1998,
1997 and 1996
Notes to Financial Statements--December 31, 1998
Management's Narrative Analysis of Results of Operations
Supplementary Financial Information--Years ended December 31, 1998 and 1997
The following consolidated financial statement schedules of Transamerica
Finance Corporation and subsidiaries is 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 15
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, 1998 and
1997, 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, 1998. 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 generally accepted auditing
standards. 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, 1998 and 1997,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Francisco, California
January 22, 1999
Page 16
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
December 31,
---------------------
1998 1997
------ ------
(Amounts in millions)
ASSETS
Cash and cash equivalents ....................................................................... $ 51.2 $ 70.1
Finance receivables, net of unearned finance charges ............................................ 6,422.5 3,992.6
Less allowance for losses ................................................................... (124.1) (89.3)
----------- ----------
6,298.4 3,903.3
Property and equipment -- less accumulated depreciation of $1,300 in 1998 and
$1,190.5 in 1997:
Land, buildings and equipment ................................................................... 49.1 25.1
Equipment held for lease ........................................................................ 3,038.0 2,996.5
Goodwill, less accumulated amortization of $172.6 in 1998 and $156.2 in 1997 .................... 423.4 423.0
Assets held for sale ............................................................................ 180.8 377.8
Other assets .................................................................................... 758.7 929.7
----------- ----------
$ 10,799.6 $ 8,725.5
=========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Debt:
Unsubordinated .............................................................................. $ 7,365.4 $ 5,341.5
Subordinated ................................................................................ 433.2 683.7
----------- ----------
Total debt ............................................................................. 7,798.6 6,025.2
Accounts payable and other liabilities .......................................................... 1,004.1 1,034.7
Income taxes payable, of which $397.3 in 1998 and $338.2 in 1997 is deferred .................... 407.0 362.4
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 ................................................................... 1,532.9 1,300.9
Retained earnings ............................................................................ 48.0
Component of other cumulative comprehensive income:
Foreign currency translation adjustments ................................................. (5.6) (12.3)
----------- ----------
Total stockholder's equity ............................................................. 1,589.9 1,303.2
----------- ----------
$ 10,799.6 $ 8,725.5
=========== ==========
See notes to financial statements
Page 17
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Consolidated Statement Of Income
Years Ended December 31,
-------------------------------------
1998 1997 1996
---------- ---------- ----------
(Amounts in millions)
Revenues
Finance charges ........................................................... $ 705.1 $ 522.5 $ 457.9
Leasing revenues .......................................................... 732.5 758.7 689.1
Other ..................................................................... 111.9 48.3 59.5
---------- ---------- ----------
Total revenues ................................................... 1,549.5 1,329.5 1,206.5
Expenses
Interest and debt expense ................................................. 382.2 354.4 314.2
Depreciation on equipment held for lease .................................. 281.5 275.8 255.1
Salaries and other operating expenses ..................................... 620.4 488.7 406.0
Provision for losses on receivables ....................................... 53.0 18.1 10.2
---------- ---------- ----------
Total expenses ................................................... 1,337.1 1,137.0 985.5
Income before income taxes ................................................ 212.4 192.5 221.0
Income taxes .............................................................. 71.6 74.3 81.7
---------- ---------- ----------
Income from continuing operations ......................................... 140.8 118.2 139.3
Income (loss) from discontinued operations ................................ 261.8 (45.2)
---------- ---------- ----------
Net income ....................................................... $ 140.8 $ 380.0 $ 94.1
========== ========== ==========
See notes to financial statements
Page 18
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Years Ended December 31,
-------------------------------------------
1998 1997 1996
----------- ----------- -----------
(Amounts in millions)
OPERATING ACTIVITIES
Income from continuing operations .............................................. $ 140.8 $ 118.2 $ 139.3
Adjustments to reconcile income from continuing operations to net
cash provided by operating activities:
Depreciation and amortization .................................................. 305.8 296.9 282.2
Provision for losses on receivables ............................................ 53.0 18.1 10.2
Amortization of discount on long-term debt ..................................... 12.5 10.9 9.6
Change in accounts payable and other liabilities ............................... (23.0) 394.9 103.7
Change in income taxes payable ................................................. 61.5 3.1 (4.0)
Other .......................................................................... 1.2 (478.7) (45.2)
----------- ----------- -----------
Net cash provided by operating activities ...................................... 551.8 363.4 495.8
INVESTING ACTIVITIES
Finance receivables originated ................................................. (23,035.0) (16,136.9) (13,543.0)
Finance receivables collected and sold ......................................... 21,245.8 16,917.6 12,864.7
Purchase of property and equipment ............................................. (443.8) (386.4) (399.8)
Sales of property and equipment ................................................ 121.3 174.2 386.6
Purchase of finance receivables from Whirlpool Finance Corporation ............. (386.3) (881.9)
Proceeds from sale and cash transactions with discontinued operations .......... 14.9 4,413.2 1,021.8
Other .......................................................................... 17.1 (112.1) (48.8)
----------- ----------- -----------
Net cash provided (used) by investing activities ............................... (2,466.0) 3,987.7 281.5
FINANCING ACTIVITIES
Proceeds from debt financing ................................................... 4,202.7 3,401.7 6,784.5
Payments of debt ............................................................... (2,446.6) (7,263.5) (6,932.9)
Capital contributions from parent company ...................................... 232.0 41.5 11.3
Cash dividends paid ............................................................ (92.8) (497.7) (249.2)
Return of capital .............................................................. (361.5)
----------- ----------- -----------
Net cash provided (used) by financing activities ............................... 1,895.3 (4,679.5) (386.3)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents ............................... (18.9) (328.4) 391.0
Cash and cash equivalents at beginning of year ................................. 70.1 398.5 7.5
----------- ----------- -----------
Cash and cash equivalents at end of year ....................................... $ 51.2 $ 70.1 $ 398.5
=========== =========== ===========
See notes to financial statements
Page 19
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 Value Adjustments
------ ---------- -------- ------------- ---------------- -----------
(Amounts in millions)
Balance at December 31, 1995 ................ $ 14.6 $1,496.7 $272.8 $ 6.6 $ (5.4)
Comprehensive income
Net income .................................. 94.1 $ 94.1
Other comprehensive income, net of tax:
Unrealized losses from
investments marked to fair value ...... (3.9) (3.9)
Foreign currency translation
adjustments ............................ 2.2 2.2
------
Comprehensive income ........................ $ 92.4
======
Capital contribution from parent
company .................................. 124.2
Dividends declared .......................... (249.2)
------- ------- ------ ----- -----
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 .......................... (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 .......................... (92.8)
------ -------- ----- ----- ------
Balance at December 31, 1998 ................ $ 14.6 $1,532.9 $48.0 $ $ (5.6)
====== ======== ===== ===== ======
See notes to financial statements
Page 20
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
in the container business worldwide.
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 interest.
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 in proportion to acquired gross profits. Goodwill is
amortized using the straight-line method over periods up to 40 years.
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 21
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 sold
or otherwise disposed of, the derivative contract is either reassigned to hedge
a 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 Standards: 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, 2000. The effect of the
Company's financial statements of adopting this standard is uncertain at this
time.
Page 22
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements --(Continued)
Note B--Finance Receivables
The carrying amounts of finance receivables outstanding were as follows:
Receivables
At December 31,
1998 1997
-------------- ------------
(Amounts in millions)
Commercial:
Distribution finance $2,220.5 $2,081.1
Business credit 3,096.1 1,541.4
Retail* 717.0 109.2
-------- --------
Core Businesses 6,033.6 3,731.7
Less unearned finance charges (330.3) (199.3)
-------- --------
Net finance receivables 5,703.3 3,532.4
-------- --------
Leasing:
Finance receivables 910.1 601.7
Less unearned finance charges (190.9) (141.5)
-------- --------
Net finance receivables 719.2 460.2
-------- --------
6,422.5 3,992.6
Less allowance for losses (124.1) (89.3)
-------- --------
Total net finance receivables $6,298.4 $3,903.3
======== ========
* Retail lending comprises Metropolitan Mortgage and Transamerica Mortgage
Company which remain from the former Consumer Lending segment and also
includes the results of the retail operation acquired from Whirlpool
Finance Corporation.
At December 31, 1998 and 1997, finance receivables for which the accrual
of finance charges was suspended amounted to $81.4 million and $34.3 million.
Page 23
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, 1998 were:
Commercial
and Retail % Leasing % Total %
---------- - ------- - ----- -
(Dollar amounts in millions)
1999 ................................................ $ 3,663.2 60.7% $ 169.6 18.6% $ 3,832.8 55.2%
2000 ................................................ 760.8 12.6 162.0 17.8 922.8 13.3
2001 ................................................ 637.4 10.6 154.7 17.0 792.1 11.4
2002 ................................................ 241.6 4.0 120.3 13.2 361.9 5.2
2003 ................................................ 151.2 2.5 102.7 11.3 253.9 3.7
Thereafter .......................................... 579.4 9.6 200.8 22.1 780.2 11.2
---------- ------ -------- ------ --------- ------
Total ...................................... $ 6,033.6 100.0% $ 910.1 100.0% $ 6,943.7 100.0%
========== ====== ======== ====== ========= ======
The commercial lending operation's business credit unit provides
revolving lines of credit, letters of credit and standby letters of credit. At
December 31, 1998 and 1997, borrowers' unused credit available under such
arrangements totaled $1,399.4 million and $1,032.5 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 17
customers with individual balances in excess of $25 million. These accounts in
total represented 14% of total commercial and leasing net finance receivables
outstanding at December 31, 1998.
Page 24
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements --(Continued)
Note C--Notes and Loans Payable
At December 31,
1998 1997
-------------- ------------
(Amounts in millions)
Short-term debt:
Commercial paper.............................................................. $ 2,325.8 $ 1,524.5
Bank loans.................................................................... 400.2 269.2
Current portion of long-term debt:
Unsubordinated........................................................... 1,713.2 640.3
Subordinated............................................................. 211.3 250.5
--------- ---------
4,650.5 2,684.5
Less amounts classified as long-term debt under noncancelable
long-term credit agreements............................................... 2,726.0 1,793.7
--------- ---------
Total short-term debt....................................................... 1,924.5 890.8
Long-term debt due subsequent to one year:
4.85% to 9.85% notes and debentures, maturing through 2028.................... 4,444.5 3,150.9
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 8.79% to 12.35%; maturity
value of $582.8 million................................................. 194.9 182.4
6.05% to 9.95% subordinated notes and debentures maturing through
2003.............................................................. 433.2 683.7
--------- ---------
5,072.6 4,017.0
Less amounts due in less than one year........................................ 1,924.5 890.8
--------- ---------
3,148.1 3,126.2
Short-term debt supported by noncancelable credit agreements expiring
through 2002........................................................ 2,726.0 1,793.7
--------- ---------
Total long-term debt due subsequent to one year.......................... 5,874.1 4,919.9
Demand loan due Transamerica Corporation......................................... 214.5
--------- ---------
Total debt............................................................... $ 7,798.6 $ 6,025.2
========= =========
The weighted average interest rate on short-term borrowings at December 31, 1998
and 1997 was 5.2% and 5.8%.
Long-term debt outstanding at December 31, 1998 matures as follows:
Unsubordinated Subordinated Total Average
-------------- ------------ ----- -------
(Dollar amounts in millions)
1999 .............................................................. $1,713.2 $211.3 $1,924.5 6.31%
2000 .............................................................. 425.0 159.5 584.5 6.38%
2001 .............................................................. 1,404.1 2.0 1,406.1 6.07%
2002 .............................................................. 196.0 6.9 202.9 6.91%
2003 .............................................................. 345.1 53.5 398.6 6.92%
Thereafter (1) .................................................... 556.0 556.0 10.49%
-------- ------ --------
Total..................................................... $4,639.4 $433.2 $5,072.6
======== ====== ========
(1) Includes the accreted values at December 31, 1998 on original issue discount
debt and not the amount due at maturity.
Page 25
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Notes to Financial Statements --(Continued)
Short-term borrowings supported by a noncancelable credit agreement, 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. and 365 days in Canada, 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.
In support of the short-term debt classified as long-term debt at
December 31, 1998, the Company and its parent, Transamerica Corporation, share a
credit agreement with various banks and had the ability to borrow up to $3.5
billion with interest at variable rates. There were no borrowings outstanding
under the credit line at December 31, 1998. The credit agreement, which expires
through 2002, requires the Company to pay an annual fee on the amount committed.
The demand loan due to Transamerica Corporation, in the amount of $214.5
million at December 31, 1997, accrues interest daily based on Transamerica
Corporation's 30 day commercial paper rate. No such loan was outstanding at
December 31, 1998.
Interest rates on borrowings during the years indicated were as follows:
Years Ended December 31,
1998 1997 1996
------- ------- -------
Weighted average annual interest rate during year: (1)
Short-term borrowings .......................................... 5.52% 5.48% 5.39%
Long-term borrowings ........................................... 7.23% 7.25% 7.49%
Total borrowings ............................................... 6.49% 6.59% 6.49%
(1) Excludes the cost of maintaining credit lines and the effect of interest
rates on borrowings denominated in foreign currencies.
Interest payments, net of amounts received from interest rate swap
agreements, totaled $377.2 million in 1998, $481.7 million in 1997, and $618.4
million in 1996.
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 to hedge the interest rate risk of its outstanding
indebtedness. These 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. 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 26
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS --(Continued)
At December 31, 1998 and 1997, contracts designated as hedges of
outstanding indebtedness comprised:
1998 1997
---------------------------------- --------------------------------
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 ................................. $1,194.1 6.5% 5.4% $1,174.7 6.6% 5.8%
======== ==== ==== ======== ==== ====
Fixed rate interest expense, receives floating
rate interest income ................................. $ 450.5 5.2% 5.5% $ 80.5 6.2% 5.8%
======== ==== ==== ======== ==== ====
Cross currency exchange and foreign interest
rate swaps ........................................... $ $ 76.0
======== ========
While the Company is exposed to credit risk in the event of
nonperformance by the other party, the likelihood of nonperformance is
considered low due to the high credit ratings of the counterparties. At December
31, 1998, 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.
Note D--Allowance for Losses
Changes in the allowance for losses on finance receivables and assets
held for sale are as follows:
Finance Receivables Assets
---------------------------------- Held
Commercial Leasing Total For Sale
---------- ------- ----- --------
(Amounts in millions)
Balance at December 31, 1995 ............................ $ 76.8 $ 4.1 $ 80.9 $ 6.0
Provision charged to expense ............................ 10.2 10.2 (3.5)
Charge-offs ............................................. (12.3) (12.3) (0.7)
Recoveries .............................................. 7.1 7.1
Other ................................................... (0.5) 0.4 (0.1)
-------- ------- -------- ------
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
======== ======= ======== ======
Page 27
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, 1998, the
Company's capital level exceeded the minimum requirements by $312.7 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, 1998 and 1997 were as follows:
1998 1997
-------------------------- ---------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------- --------- -------- ---------
(Amounts in millions)
Fixed rate receivables ................... $ 2,183.7 $ 2,286.4 $ 1,248.0 $ 1,275.3
Variable rate receivables ................ 4,114.7 4,114.7 2,655.3 2,660.5
---------- ---------- ---------- ----------
Total ................................ $ 6,298.4 $ 6,401.1 $ 3,903.3 $ 3,935.8
========== ========== ========== ==========
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, 1998 and 1997, the estimated fair value of debt, using
rates currently available for debt with similar terms and maturities, was $8.0
billion and $6.6 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, 1998 and December 31, 1997 were gross obligations to counterparties
of $2.3 million and $1.0 million and gross benefits of $62.2 million and $40.7
million resulting in net benefits from counterparties of $59.9 million and
$39.7 million.
Page 28
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:
1998 1997 1996
------- ------- -------
(Amounts in millions)
Current taxes:
Federal ...................................... $ 17.8 $ 26.2
State ........................................ $ (1.6) 0.4 4.8
Foreign ...................................... 4.3 3.1 3.2
------- ------- -------
2.7 21.3 34.2
Deferred taxes:
Federal ...................................... 66.2 40.3 41.2
State ........................................ 8.6 9.1 5.1
Foreign ...................................... (5.9) 3.6 1.2
------- ------- -------
68.9 53.0 47.5
------- ------- -------
Total income taxes ...................... $ 71.6 $ 74.3 $ 81.7
======= ======= =======
The difference between federal income taxes on income from continuing
operations computed at the statutory rate and the provision for income taxes
was:
1998 1997 1996
-------- ------- -------
(Amounts in millions)
Federal income taxes at statutory
rate ....................................... $ 74.3 $ 67.4 $ 77.4
State income taxes, net of federal
income tax benefit ......................... 4.6 5.3 6.4
Book and tax basis difference of
assets acquired ............................ 5.3 5.5 4.6
Prior year items ................................ (6.5) (1.1) (4.4)
Other ........................................... (6.1) (2.8) (2.3)
------- ------- -------
$ 71.6 $ 74.3 $ 81.7
======= ======= =======
Page 29
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 liabilities (assets) comprised the following at December 31:
1998 1997 1996
------- ------- -------
(Amounts in millions)
Deferred tax assets:
Allowance for losses ........................................ $ 40.9 $ 36.2 $ 30.4
Net operating loss and foreign
tax credit carryforwards................................. 420.2 389.6 375.3
Other ....................................................... 86.0 82.5 72.5
--------- ------- -------
547.1 508.3 478.2
Deferred tax liabilities:
Accelerated depreciation .................................... 700.7 672.2 617.0
Discount amortization on notes
and loans payable ....................................... 96.6 77.0 71.6
Direct finance and sales type leases......................... 92.9 50.1 29.1
Other ....................................................... 54.2 47.2 39.3
--------- -------- --------
944.4 846.5 757.0
--------- -------- --------
Net deferred tax liability ..................................... $ 397.3 $ 338.2 $ 278.8
========= ======== ========
Page 30
Total income tax payments, net of refunds, totaled $37.2 million in 1998,
$149.3 million in 1997 and $50.4 million in 1996. Pretax income from foreign
operations was $14.6 million in 1998, $15.3 million in 1997 and $9.1 million in
1996.
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):
1998 1997 1996
------- ------- -------
(Amounts in millions)
Income tax effect on components of other comprehensive income
Unrealized holding losses from investments marked to fair value ............. $ (2.1)
Reclassification adjustment for gains included in income from
discontinued operations .................................................. $ (1.5)
Foreign currency translation adjustments .................................... $ 3.6 (4.9) 1.2
------- -------- ------
Income tax effect on other comprehensive income ................................... $ 3.6 $ (6.4) $ (0.9)
======= ======== ======
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, expense of $0.5 million in 1998, income of $0.3 million
in 1997 and expense of $1.1 million in 1996. 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 2002. These agreements are principally operating leases
for facilities used in the Company's operations. Total rental expense amounted
to $72.5 million in 1998, $71.4 million in 1997 and $26.1 million in 1996.
Minimum future rental commitments under operating leases for real estate
and equipment as of December 31, 1998 were as follows (in millions):
1999........................ $ 65.2
2000........................ 57.9
2001........................ 53.6
2002........................ 53.5
2003........................ 50.8
Thereafter .......... 155.7
------
$436.7
======
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 31
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,
1998 included in the tables on pages 32 to 36 of Management's Narrative
Analysis of Results of Operations are an integral part of these financial
statements.
Revenues
---------------------------------
1998 1997 1996
--------- -------- --------
(Amounts in millions)
Commercial lending .............................................. $ 712.8 $ 515.5 $ 432.8
Leasing ......................................................... 816.5 797.8 765.6
Other (1)........................................................ 20.2 16.2 8.1
----------- ---------- ----------
Total ..................................................... $ 1,549.5 $ 1,329.5 $ 1,206.5
=========== ========== ==========
Assets
------------------------
1998 1997
--------- --------
(Amounts in millions)
Commercial lending .............................................. $ 6,495.4 $ 4,613.2
Leasing ......................................................... 4,108.1 3,929.4
Other (1) ....................................................... 196.1 182.9
----------- ----------
Total ..................................................... $ 10,799.6 $ 8,725.5
=========== ==========
(1) Unallocated items including intercompany eliminations.
Foreign revenues of the Company's foreign domiciled operations were as
follows:
1998 1997 1996
-------------------- -------------------- -----------------------
Foreign Foreign Foreign
Revenue % Revenue % Revenue %
------- ----- ------- ----- ------- -----
(Dollar amounts in millions)
Canada ................................... $ 21.2 10.4% $ 25.2 15.8% $ 24.6 18.8%
Europe ................................... 181.3 88.8% 134.6 84.2 106.1 81.2
Other .................................... 1.6 0.8
--------- ------- -------- ------- -------- ------
Total .................................... $ 204.1 100.0% $ 159.8 100.0% $ 130.7 100.0%
========= ======= ========= ======= ======== ======
Percent of total revenues ................ 13.0% 12.0% 10.8%
Page 32
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 1996
---- ----
(Amounts in millions)
Revenues.................................... $290.4 $759.9
Gain on sale of branch based
consumer lending operation.............. 469.0
------ ------
Total revenues.............................. 759.4 759.9
Expenses.................................... 310.3 836.4
------ ------
Income (loss) before taxes.................. 449.1 (76.5)
Income tax provision (benefit).............. 187.3 (31.3)
------ ------
Income (loss) from discontinued
operations.............................. $261.8 $(45.2)
====== ======
Note M--Subsequent Event (Unaudited)
On February 18, 1999, Transamerica announced that it had signed a merger
agreement with AEGON N.V. (AEGON) providing for AEGON's acquisition of all of
Transamerica's outstanding common stock for a combination of cash and AEGON
stock worth $9.7 billion. The merger is expected to close during the summer of
1999.
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.
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 $9.3 billion at December 31, 1998 and $6.9 billion at December 31,
1997. The Company's total notes and loans payable were $7.8 billion at December
31, 1998 and $6.0 billion at December 31, 1997. Variable rate debt was $4.5
billion at December 31, 1998 compared to 3.5 billion at December 31, 1997. The
ratio of debt to tangible equity was 6.3:1 at December 31, 1998 and 6.5:1 at
December 31, 1997. 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 $1.9 billion in 1998, $120 million
in 1997 and $688 million in 1996. 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, none of which had been issued at December 31, 1998.
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 $21.2 billion during 1998, $16.9
billion during 1997 and $12.9 billion during 1996.
Page 33
The following table sets forth income by line of business for the periods
indicated:
Income by Business Segment 1998 1997 1996
-------------------------- --------- -------- --------
(Amounts in millions)
Commercial lending............................................. $102.9 $ 92.1 $ 73.2
Leasing ....................................................... 63.8 40.6 80.8
Other ......................................................... (10.0) (1.2) (1.9)
Amortization of goodwill ...................................... (15.9) (13.3) (12.8)
------ ------ -------
Total income from continuing operations ................... $140.8 $118.2 $ 139.3
====== ====== =======
The following discussion should be read in conjunction with the
information presented under Item 1, Business.
Commercial Lending
Net income from our commercial lending operations was $89.1 million in
1998, an increase of $8.2 million (10%) from $80.9 million in 1997. Income
before the amortization of goodwill grew $10.8 million (12%) from 1997.
Operating results for 1998 included an after tax gain of $7.2 million on the
sale and securitization of $800 million of floor plan and equipment lease
finance receivables and a $6.5 million tax benefit from the resolution of prior
year tax matters. 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. In
1996, operating results included a $4.5 million benefit primarily from the
favorable resolution of disputed issues surrounding the 1995 sale of assets in
Puerto Rico.
Excluding the above items, commercial lending income from operations
before the amortization of goodwill increased $5.7 million (7%) in 1998 and
$14.8 million (22%) in 1997. Income increased in 1998 because we had higher
average net receivables outstanding which more than offset increased operating
expenses and a higher provision for losses on receivables. Increased income in
1997 was also due to receivables growth.
Commercial lending revenues rose by $197.3 million (38%) in 1998
principally due to strong receivables growth and higher servicing and other
income on securitized receivables. Revenues in 1997 grew $82.7 million (19%)
from 1996 as higher average net receivables outstanding more than offset a
decline in yield due to increased competition in the commercial lending market.
Revenues in 1998 and 1997 included the above-mentioned gains on the
securitization of finance receivables.
Net commercial finance receivables outstanding at December 31, 1998
increased $2.2 billion (61%) from December 31, 1997. The increase in receivables
was largely the result of the following factors: 1) continued growth in the
business credit portfolio, 2) the decision not to sell the insurance premium
finance operation and the reclassification of those receivables from assets held
for sale to finance receivables, and 3) the acquisition during the first half of
1998 of $386.3 million of net finance receivables from Whirlpool Financial
Corporation. This last transaction completed the acquisition of $1.1 billion in
net receivables and other assets that made up substantially all of the inventory
and retail finance businesses of Whirlpool Financial.
Interest expense increased $23.4 million (13%) from 1997 principally
due to the higher average debt levels needed to support receivables growth and
higher average interest rates during the first half of 1998. In 1997, interest
expense increased $31.5 million (21%) from 1996 principally due to higher
average debt levels.
Page 34
Operating expenses rose $131.4 million (74%) in 1998 primarily because
of increases in business volume and receivables outstanding and the integration
of the Whirlpool Financial acquisition described above. Operating expenses rose
$17 million (11%) in 1997 primarily because of higher business volume and
receivables growth. The provision for losses on receivables increased $33.6
million (207%) in 1998 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. The
provision for losses on receivables increased by $6 million (60%) in 1997
partially due to growth in the average net receivables outstanding.
Credit losses, net of recoveries, as a percentage of average commercial
finance receivables outstanding, net of unearned finance charges, were 0.77% in
1998, 0.25% in 1997, and 0.16% in 1996.
We have established an allowance for losses equal to 1.99% of net
commercial finance receivables outstanding as of December 31, 1998 compared to
2.35% at December 31, 1997.
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 60 days
past due. At December 31, 1998, delinquent receivables were $98.6 million (1.63%
of receivables outstanding) compared to $18 million (0.48% of receivables
outstanding) at December 31, 1997. The increase was primarily due to increased
delinquency in the equipment leasing portfolio of the business credit operation,
the inclusion of the insurance premium finance receivables that were reported as
assets held for sale at December 31, 1997, and the inclusion of the receivables
of the new retail lending operation. Delinquent insurance premium finance
receivables included in assets held for sale at December 31, 1997 were $14.2
million.
Nonearning receivables are defined as balances from borrowers that are
over 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 $65.7 million (1.09% of
receivables outstanding) at December 31, 1998 compared to $26.4 million (0.71%
of receivables outstanding) at December 31, 1997. Nonearning receivables
increased primarily due to the inclusion of the receivables of our new retail
lending operation and the inclusion of the insurance premium finance receivables
that were reported as assets held for sale at December 31, 1997. At December 31,
1997, nonearning insurance premium finance receivables totaled $7.5 million.
Commercial Lending
1998 1997 1996
--------- --------- ---------
(Amounts in millions)
Revenues
Finance charges and related income ................................. $ 712.8 $ 515.5 $ 432.8
Expenses
Interest ........................................................... 203.3 179.9 148.4
Operating expenses ................................................. 308.3 176.9 159.9
Provision for losses on receivables ................................ 49.8 16.2 10.2
Income taxes ....................................................... 48.5 50.4 41.1
--------- --------- ---------
609.9 423.4 359.6
--------- --------- ---------
Income from operations ............................................. 102.9 92.1 73.2
Amortization of goodwill ........................................... (13.8) (11.2) (10.6)
--------- --------- ---------
Net income ......................................................... $ 89.1 $ 80.9 $ 62.6
========= ========= =========
Leasing
Net income in 1998 increased 60% to $61.8 million. 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. Income
before the amortization of goodwill was $63.8 million in 1998 versus $40.6
million in 1997 (or $66.4 million excluding the provision).
Page 35
Earnings in 1998 were reduced by 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.
Net income in 1997 declined 51% to $38.6 million. Income before the
amortization of goodwill was $40.6 million compared to $80.8 million in 1996.
Earnings in 1997 were reduced by the provision for fleet downsizing and
organizational realignment noted above, by reduced per diem rates and a decline
in utilization for standard and refrigerated containers, and by decreased gains
on the sale of used standard containers. Improved earnings from tank and
domestic containers and European trailers partially offset these declines.
Income from rail trailers was also higher due to favorable utilization and per
diem rates.
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 fleet provision, revenue declined $12.2 million (2%) 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.
Revenue increased in 1997 by $32.2 million (4%) primarily because the
October 1996 acquisition of Trans Ocean Ltd. increased the standard,
refrigerated and tank container and chassis fleets by approximately 25%. Revenue
also grew due to a larger portfolio of finance leases and more on-hire European
trailers. Offsetting these increases were the fleet provision noted above, lower
revenues from decreased per diem and utilization rates for standard and
refrigerated containers resulting from an industry wide oversupply of equipment
and low new equipment prices. In addition, rail trailer revenues were lower
because the fleet was smaller.
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.
Expenses increased $89.3 million (14%) in 1997 due to the realignment
provision, higher ownership and operating costs associated with the Trans Ocean
Ltd. acquisition and larger fleets of standard and refrigerated containers,
chassis and European trailers.
The combined utilization rate for containers and chassis was 79% in
both 1998 and 1997. Trade imbalances between Asia, the U.S. and Europe
negatively affected container utilization in 1998 while the strong U.S. economy
aided chassis utilization levels. Rail trailer utilization declined to 83% in
1998 from 85% in 1997 reflecting the continued decline in demand for this
equipment type in favor of double-stack domestic containers. European trailer
utilization declined to 88% in 1998 from 92% in 1997 as we increased the size of
our rental fleet. Rental on-hires were negatively affected by the Russian
financial crisis and its impact on trade with Western Europe.
Page 36
Leasing
1998 1997 1996
--------- --------- ---------
(Amounts in millions)
Revenues
Total leasing revenues ........................................ $ 816.5 $ 797.8 $ 765.6
Expenses
Operating expenses ............................................ 175.3 174.1 129.2
Depreciation on equipment held for lease ...................... 281.5 275.8 255.1
Selling and administrative expenses ........................... 113.3 116.7 95.5
Interest ...................................................... 153.7 166.1 163.6
Income taxes .................................................. 28.9 24.5 41.4
--------- --------- ---------
752.7 757.2 684.8
-------- --------- ---------
Income from operations ........................................ 63.8 40.6 80.8
Amortization of goodwill ...................................... (2.0) (2.0) (2.0)
--------- --------- ---------
Net income .................................................... $ 61.8 $ 38.6 $ 78.8
========= ========= =========
Discontinued Operations
In the fourth quarter of 1997, we discontinued the remainder of our
consumer lending business following the sale of our 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.
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 our risk management extends beyond derivatives
to encompass all financial instruments we hold 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 our interest
earning assets and the amount of our interest bearing liabilities that are
prepaid, mature or repriced in specified periods. We manage our exposure to
interest rate fluctuations by managing the characteristics of our assets and
liabilities so that changes are offset. Our 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 the funding needs of the Company. To help achieve these
objectives, we use derivative financial instruments including interest rate
swaps that correlate to instruments recorded on our balance sheet.
If market interest rates on December 31, 1998 and 1997 abruptly
increased 75 basis points, the fair value of our finance receivables portfolio
would decrease approximately $33 million and $23 million, the fair value of our
debt would decrease approximately $90 million and $81 million and the fair value
of our interest rate swaps would decrease approximately $24 million and $41
million. Conversely, if rates on December 31, 1998 and 1997 abruptly decreased
75 basis points the fair value of our finance receivables portfolio would
increase approximately $38 million and $23 million, the fair value of our debt
would increase approximately $90 million and $81 million and the fair value of
our interest rate swaps would increase approximately $33 million and $41
million.
We 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, we would likely take action to mitigate
our exposure to the negative consequences. Our customers and competitors would
also respond to these fluctuations, and regulators or legislators might act in
ways we cannot foresee. Because we 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 37
Year 2000 Issue
The Company has developed a plan to modify its information systems to
ensure the readiness of our business applications, operating systems and
hardware on mainframes, servers and personal computers, and wide and local area
networks to recognize the Year 2000. The project also addresses non-information
technology embedded software and equipment, the readiness of key business
partners, and updating business continuity plans.
The project has four phases: (1) problem determination, (2) planning
and resource acquisition, (3) remediation and (4) testing and acceptance. During
phase one, the Company determined the size and scope of the problem and prepared
an inventory of the hardware, software, interfaces and other items that may be
affected. In addition, software code was scanned and third parties were
contacted to determine the status of their efforts. During phase two, the
Company assessed the risks and decided whether to fix, replace, discard, or test
the items identified in the inventory and prepared a project plan and allocated
appropriate resources as necessary. Phase three covers remediation where date
occurrences in internally maintained systems are analyzed and corrected and
software and hardware are replaced where necessary. In addition, operating
systems that interface with outside parties are examined in more detail and
modified if required. Phase four includes testing and acceptance of all
software, hardware, third party interfaces and related items to ensure they will
work in a number of different Year 2000 scenarios.
The most significant categories of outside parties to the Company are
financial institutions, software vendors, third party service providers and
utility providers (gas, electric and telecommunications). The Company's
assessment of its key business partners continues. Surveys have been mailed,
follow up contacts are underway and strategies are being developed to address
issues as they are identified. This effort is expected to continue well into
1999.
Following is the status of the Company's Year 2000 compliance efforts
for critical systems at each of its business segments.
The commercial lending operation had completed a significant portion of
the remediation phase as of December 31, 1998 and is expected to be
substantially complete by March 1999. As of December 31, 1998, testing had
commenced and is expected to be substantially finished by June 1999. The
commercial lending operating systems in Europe, which affect a small percentage
of the business, will be remedied and tested in 1999.
The leasing operation had completed the remediation phase as of
December 31, 1998. Testing was substantially completed by December 31, 1998. In
addition to the systems being remediated, the customer service, fleet management
and equipment repair and maintenance system is scheduled for replacement in
1999.
The projected total cost associated with required modifications to
become ready for the Year 2000 is approximately $10 million. These costs are
being expensed as incurred and funded through operations. At this time there can
be no assurance that these estimates will not be exceeded and actual results may
differ significantly from those projected. Some factors that may cause actual
expenditures to differ include the availability and cost of trained personnel
and the ability to locate and correct all relevant computer problems. This
estimate includes internal costs, but excludes the costs to upgrade and replace
systems in the normal course of business. The total amount expended on the
project through December 31, 1998, was $5.8 million. The Company does not expect
the project to have a significant effect on its financial condition or results
of operations.
The Company believes it will achieve Year 2000 readiness; however, the
size and complexity of our systems and the need for them to interface with other
systems internally and with those of customers, vendors, partners and other
outside parties, creates the possibility that some of our systems may experience
Year 2000 problems. Specific factors that give rise to this concern include a
possible loss of qualified resources, failure to identify and remediate all
affected systems, noncompliance by third parties whose systems and operations
interface with the Company's systems and other similar uncertainties. The
Company is developing contingency plans to minimize any possible disruptions.
Euro Conversion
The Company conducts business in a number of the European countries that
converted to a common currency, the "Euro," as of January 1, 1999. The Company
has evaluated the potential impact of the Euro conversion on our operations
including possible effects on our competitive position, potential information
technology and currency risks, our derivative and financial instrument exposure,
the continuity of contracts and changes in taxation. As a result of this
evaluation, we are in the process of upgrading those information systems
necessary to support transactions denominated in the Euro. The Company derived
revenues from the group of eleven countries converting to the Euro of $63.9
million and $41.2 million in the years ended December 31, 1998 and 1997, and had
total assets in these countries of $574.7 million at December 31, 1998. The
Company does not anticipate that the Euro conversion will have a material impact
on its financial condition or results of operations.
Page 38
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
---------------------------------------------------- Total
1998 March 31 June 30 September 30 December 31 1998
-------- ------- ------------ ----------- --------
(Amounts in millions)
Revenues ............................................$ 372.3 $ 381.4 $ 380.3 $ 415.5 $ 1,549.5
Income from continuing operations
and Net income ...................................$ 27.5 $ 36.7 $ 33.1 $ 43.5 $ 140.8
Three Months Ended
---------------------------------------------------- Total
1997 March 31 June 30 September 30 December 31 1997
-------- ------- ------------ ----------- --------
(Amounts in millions)
Revenues ............................................$ 328.7 $ 327.0 $ 336.7 $ 337.1 $ 1,329.5
Income from continuing operations ...................$ 35.1 $ 31.1 $ 34.9 $ 17.1 $ 118.2
Income (loss) from discontinued
operations ...................................... 275.0 1.1 (14.3) 261.8
-------- -------- -------- -------- ----------
Net income ..........................................$ 35.1 $ 306.1 $ 36.0 $ 2.8 $ 380.0
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