ITEM 1. BUSINESS
THE COMPANY
Transamerica Finance Corporation, a wholly owned subsidiary of Transamerica Finance Group, Inc. ("TFG") which is a wholly owned subsidiary of Transamerica Corporation, is principally engaged in consumer lending, 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.
Transamerica Corporation (Transamerica) is a financial services organization which engages through its subsidiaries in consumer lending, commercial lending, leasing, real estate services, life insurance and asset management. Transamerica was incorporated in Delaware in 1928.
The Company was incorporated in Delaware in 1931 under the name Pacific Finance Corporation, as successor to a California corporation of the same name organized in 1920. In 1961, the Company became a wholly owned subsidiary of Transamerica Corporation, which in 1990 formed TFG to own all the Company's outstanding capital stock.
On July 17, 1990, the Company acquired FIFSI, Inc. (dba NOVA Financial Services), a consumer lending subsidiary of First Interstate Bancorp, for $117,455,000 in cash and the assumption of $445,400,000 of liabilities. The transaction was accounted for as a purchase and the operations of NOVA Financial Services have been included in the Consolidated Statement of Operations from the date of acquisition.
The Company provides funding for its subsidiaries' consumer lending, commercial lending and leasing operations and for the operations of certain wholly owned subsidiaries of TFG. Capital is allocated among the operations based on their capital needs. The operations are required to maintain prudent financial ratios consistent with other companies in their respective industries. The Company's total notes and loans payable were $7,031,503,000 at December 31, 1993 and $6,589,576,000 at December 31, 1992. Variable rate debt was $3,970,484,000 at December 31, 1993 and $3,492,842,000 at December 31, 1992. The ratio of debt to debt plus equity was 83% at December 31, 1993 and 82% at December 31, 1992.
Transamerica Finance Corporation offers publicly, from time to time, senior or subordinated debt securities. Public debt issued totaled approximately $407,000,000 in 1993, $538,700,000 in 1992 and $1,107,800,000 in 1991. Under a shelf registration filed with the Securities and Exchange Commission in 1991 to offer publicly up to $1,500,000,000 of senior or subordinated debt securities with varying terms, debt securities totaling $1,400,000,000 had been sold through December 31, 1993. In addition, under a registration statement filed in July 1993, the Company may offer up to $2,000,000,000 of senior or subordinated debt securities (which may include medium-term notes,) with varying terms, of which $1,853,000,000 remained unsold as of December 31, 1993.
Liquidity is a characteristic of the Company's operations since the majority of the assets consist of finance receivables. Principal cash collections of finance receivables totaled $11,535,766,000 during 1993, $9,415,231,000 during 1992 and $8,375,018,000 during 1991.CONSUMER LENDING
GENERAL
The Company's consumer lending services are provided by Transamerica Financial Services, headquartered in Los Angeles, California, which has 561 branch lending offices. Branch offices are located in the United States (548 in 41 states), Canada (11) and United Kingdom (2).
Transamerica Financial Services makes both real estate secured and unsecured loans to individuals. The company's customers typically borrow to consolidate debt, finance home remodeling, pay for their children's college educations, make major purchases, take vacations, and for other personal uses.
Transamerica Financial Services offers three principal loan products: fixed rate real estate secured loans, revolving real estate secured lines of credit and personal loans. The company's primary business is making fixed rate, home equity loans that generally range up to $200,000. Approximately 83% of the net finance receivables outstanding at December 31, 1993 are secured by residential properties. Of the Company's real estate portfolio, 50% is secured by first mortgages. Since 1991, the company has continued to broaden its receivable portfolio by expanding its revolving real estate secured lines of credit, its unsecured personal loan business and its purchase of retail finance contracts from dealers (i.e., appliances, furniture and services).
When permitted by law, the consumer lending services offer to arrange credit life and disability insurance in connection with consumer instalment loans and generally require that property securing consumer loans be insured. The consumer lending operation receives a fee if it arranges such insurance. Credit life insurance satisfies the obligation of the borrower in the event of death, while credit disability insurance satisfies the borrower's obligation to pay instalments during a period of disability. Property insurance insures the collateral against damage or loss. Beginning in April 1991, substantially all such insurance arranged for by the consumer lending operation was underwritten by subsidiaries of the Company's commercial lending operation.
Nonearning Receivables
Nonearning consumer finance receivables, which are defined as those past due more than 29 days, amounted to $156,542,000 and $140,763,000 at December 31, 1993 and 1992. Payments received on nonearning receivables are applied to principal and interest according to the terms of the loan; however, accrued interest receivable and amortization of other finance charges are recognized in income only on accounts past due less than 30 days. During 1993, the gross amount of interest income that would have been recorded on receivables classified as nonearning at year end was $25,496,000 and the amount of interest on those loans that was recognized in income was $15,234,000.
Accounts in Foreclosure and Assets Held for Sale
Generally, by the time an account secured by residential real estate becomes past due 90 days, foreclosure proceedings have begun, at which time the account is moved from finance receivables to other assets and is written down to the estimated realizable value of the collateral if less than the account balance. After foreclosure, repossessed assets are carried at the lower of cost or fair value less estimated selling costs and are reclassified to assets held for sale. Accounts in foreclosure and repossessed assets held for sale totaled $214,665,000 at December 31, 1993 compared to $176,054,000 at December 31, 1992. The increase primarily reflects increased repossessions in California and longer disposal times due to its weak real estate market. Offices and Employees
The number of offices and employees of the Company in connection with its consumer lending operation as of the dates indicated were as follows:
As of December 31, ------------------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ----
Offices 561 509 464 448 428 Employees 2,381 2,256 2,148 2,093 1,861
The following table sets forth the geographical distribution of the Company's consumer lending offices at December 31, 1993:
No. of No. of Offices Offices ------- ------- United States: United States: Alabama 15 New Jersey 5 Arizona 20 New Mexico 6 California 174 New York 26 Colorado 9 North Carolina 12 Connecticut 2 Ohio 21 Delaware 2 Oklahoma 6 Florida 21 Oregon 10 Georgia 14 Pennsylvania 23 Hawaii 4 Rhode Island 1 Idaho 4 South Carolina 7 Illinois 29 Tennessee 7 Indiana 12 Texas 5 Iowa 6 Utah 4 Kansas 2 Virginia 10 Kentucky 8 Washington 22 Louisiana 8 Wisconsin 10 Maryland 9 Wyoming 1 Massachusetts 3 --- Michigan 8 Minnesota 5 Canada 548 Mississippi 1 United Kingdom 11 Missouri 11 2 Nebraska 2 --- Nevada 3 Total 561 ===
Competition
The Company's consumer lending subsidiaries operate in a highly competitive industry, in many cases competing with companies and financial institutions with long established operating histories and substantial financial resources.
Regulation
The Company's consumer lending operation is subject to various state and federal 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.COMMERCIAL LENDING
General
The Company's commercial lending services are provided by Transamerica Commercial Finance Corporation ("Transamerica Commercial Finance"). Transamerica Commercial Finance operates from its executive office in Chicago, Illinois, as well as from 72 branch lending offices. Branch offices are located in the United States (47), Puerto Rico (15), Canada (6) and Europe (4).
Transamerica Commercial Finance made a decision late in the fourth quarter of 1991 to exit the rent-to-own finance business, reduce lending to certain asset based lending lines, accelerate disposal of repossessed assets and liquidate receivables remaining from previously sold businesses. As a result of this action the commercial lending operation recognized a special after tax charge of $130,000,000.
In conjunction with the decisions discussed above, Transamerica Commercial Finance's operations were reorganized into two core business units: inventory finance and business credit. The lending activities of these core businesses are discussed below.
Inventory Finance
Inventory finance (also known as wholesale financing or floor plan financing) consists principally of financing dealers' purchases from distributors or manufacturers of goods for inventory. The products financed primarily include boats and other recreational equipment, television and stereo equipment, major appliances such as refrigerators, washers, dryers and air conditioners, and manufactured housing. Loan terms typically provide for repayment within 30 days following sale of the inventory by the borrower. After initial review of a borrower's credit worthiness, the ongoing management of credit risk in this area may include various monitoring techniques, such as periodic physical inventory checks and review of the borrower's sales, as well as maintenance of repurchase agreements with manufacturers which provides a degree of security in the event of slow moving or obsolete inventory.
Business Credit
Business credit consists of secured loans, primarily revolving, to manufacturers, distributors and selected service businesses, including financial service companies. The loans are fully collateralized, with credit lines typically from $5,000,000 to $25,000,000 and terms ranging from three to five years. Actual borrowings are limited to specified percentages of the borrower's inventory, receivables and other eligible collateral which are regularly monitored to ascertain that outstandings are within approved limits and that the borrower is otherwise in compliance with the terms of the arrangement. The loans to financial service companies are secured by their respective finance receivable portfolios. The company manages its credit risk in this area by monitoring the quality of the borrower's loan portfolio and compliance with financial covenants.
Other
The "Other" category of receivables includes furniture and appliance retail and finance operations in Puerto Rico and the liquidating portfolios of businesses the company has exited. Transamerica Commercial Finance also offers credit life and credit disability insurance in connection with the financing activities of both the consumer and commercial lending operations and to unrelated third party lenders. The unrelated insurance accounted for substantially all of the insurance subsidiaries' total premium volume in 1990, 64% in 1991, 45% in 1992 and 7% in 1993.Interest Rate Sensitivity
As a result of the relatively short-term nature of its financings, Transamerica Commercial Finance is able to adjust its finance charges rather quickly in response to competitive factors and changes in its costs. However, the interest rates at which Transamerica Commercial Finance borrows funds for its businesses 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 interest rates restabilize. Conversely, in declining interest rate environments, margins are generally enhanced.
Acquisitions and Divestitures
In March 1992, the commercial lending operation purchased for cash a business credit portfolio consisting of twelve manufacturer/distributor accounts with a net outstanding balance of $134,000,000. In September 1991, an inventory finance portfolio was purchased for cash, which comprised lending arrangements with over 700 manufactured housing and recreational product dealers with a net balance outstanding of $290,604,000. These transactions were funded with short-term debt.
The commercial lending operation sold its automobile fleet leasing operation in 1990 and its commercial leasing and wholesale automobile financing operations in 1989. Finance receivables included in the assets sold totaled $45,478,000 in 1990 and $534,734,000 in 1989. Also in 1990, the insurance finance operations were dividended to TFG.
Commercial Finance Receivables
The following tables set forth the volume of commercial finance receivables acquired during the years indicated and the amount of commercial finance receivables outstanding at the end of each such year: Earned finance charges as a percentage of the average amount of net finance receivables outstanding during each of the years 1989 through 1993 were 14.9%, 14.7%, 13.3%, 12.1% and 11.3%.
Delinquent Receivables
Effective in 1993, the policy used for determining delinquent receivables was revised to provide greater consistency among the company's receivable portfolios. It is management's view that the new methodology provides a better and more meaningful assessment of the condition of the portfolio. Delinquent receivables are now defined as the instalment balance for inventory finance and business credit receivables and the receivable balance for all other receivables over 60 days past due. Previously, delinquent receivables were generally defined as financed inventory sold but unpaid 30 days or more, the portion of business credit loans in excess of the approved lending limit and all other receivable balances contractually past due 60 days or more.
The following table shows the ratio of deliquent commercial finance receivables to finance receivables outstanding for each category and in total as of the end of each of the years indicated. Delinquency ratios for 1992 and prior years have not been restated for the change in policy outlined above.
As of December 31, ---------------------------------------------- 1993 1992 1991 1990 1989 ------ ------ ------ ------ -----
Inventory finance(1) 0.13% 0.82% 1.31% 3.42% 2.95% Insurance finance(2) 1.78 Business credit(1)(3) 0.21 0.88 10.34 2.35 ------ ------ ------ ------ ----- Core businesses 0.10 0.68 1.25 5.78 2.63 Other(4) 19.14 22.42 25.84 12.79 9.54 ------ ------ ------ ------ -----
Total(5) 1.02% 2.38% 5.64% 6.65% 3.61% ====== ====== ====== ====== ====== - --------------- (1)The decreases in 1992 and 1991 reflect write offs of delinquent accounts (and accounting reclassifications - see note 3 on preceding table), implementation of stronger portfolio management procedures and general improvement in the economy. Increased delinquency in 1990 reflected the overall weak economy. This trend began in 1989 when consumer spending, which supports these businesses, began to decline. Particularly affected were the marine industry (inventory finance), and the appliance and furniture rental and Canadian computer markets (business credit). (2)See note 2 on preceding table. (3)The decline in 1991 was due principally to rent-to-own finance receivables being reclassified to assets held for sale, and certain finance receivables being reclassified to the "other" category. These reclassifications resulted from the company's decision to exit the rent-to-own finance business and reduce its lending to certain asset based lending lines. Prior year data has not been restated. (4)Represents finance receivables retained from businesses sold or exited which are being liquidated and receivables reclassified in 1991 due to the company's decision to reduce lending to certain asset based lending lines (see note 3 on preceding table). (5)Delinquency statistics exclude assets held for sale (see discussion on page 13).
--------------------
Nonearning Receivables
Effective in 1993, the policy used for determining nonearning receivables was revised to provide greater consistency among the company's receivable portfolios. It is management's view that the new methodology provides a better and more meaningful assessment of the condition of the portfolio. Nonearning receivables are now defined as balances from borrowers that are over 90 days delinquent or at such earlier time as full collectibility becomes doubtful. Previously, nonearning receivables were defined as balances from borrowers in bankruptcy or litigation and other accounts for which full collectibility was doubtful. Accrual of finance charges is suspended on nonearning receivables until such time as past due amounts are collected.
Nonearning receivables were $31,763,000 (1.20% of receivables outstanding) and $90,919,000 (3.42% of receivables outstanding) at December 31, 1993 and 1992; the 1992 data has not been restated. Those amounts exclude nonearning rent-to-own finance receivables which have been reclassified to assets held for sale (see page 13). During 1993, the gross amount of interest income that would have been recorded on receivables classified as nonearning at year end was $4,649,000 and the amount of interest on those loans that was recognized in income was $2,423,000.Assets Held for Sale
Assets held for sale at December 31, 1993 totaled $90,114,000, net of a $156,985,000 valuation allowance and consisted of rent-to-own finance receivables of $120,469,000, repossessed rent-to-own stores of $107,227,000 and other repossessed assets of $19,403,000. Assets held for sale at December 31, 1992 totaled $191,515,000, net of a $121,549,000 valuation allowance, and comprised rent-to-own finance receivables of $179,013,000, repossessed rent-to-own stores of $103,418,000 and other repossessed assets of $30,633,000. At December 31, 1993, $27,489,000 of the rent-to-own finance receivables were classified as both delinquent and nonearning. At December 31, 1992, delinquent rent-to-own finance receivables were $15,397,000 and nonearning rent-to-own finance receivables were $32,615,000. Delinquent and nonearning receivables as of December 31, 1992 have not be restated for the change in policies effective in 1993 as outlined above.
Credit Loss Experience
Certain information regarding credit losses on finance receivables for the commercial lending operation during the years indicated is set forth in the following table:
[CAPTION] Offices and Employees
The number of offices and employees of the Company in connection with its commercial lending operation as of the dates indicated were as follows:
As of December 31, --------------------------------------------- 1993 1992 1991 1990 1989 ------ ------ ------ ------ ------
Offices 72 108 130 152 231 Employees 1,899 1,993 2,114 2,292 3,011
The following table sets forth the geographical distribution of the Company's commercial lending offices at December 31, 1993:
No. of No. of Offices Offices ------- ------- United States: United States: Alabama 1 South Dakota 1 California 3 Tennessee 2 Colorado 1 Texas 4 Florida 1 Virginia 1 Georgia 2 Wisconsin 2 Hawaii 1 --- Illinois 10 47 Indiana 1 --- Iowa 1 Puerto Rico 15 Kansas 1 --- Minnesota 2 Canada: Mississippi 1 Alberta 1 Missouri 1 British Columbia 1 New Hampshire 1 Ontario 3 New Jersey 2 Quebec 1 New York 3 --- North Carolina 2 6 Ohio 1 --- Oregon 1 Europe: Pennsylvania 1 France 1 Netherlands 1 United Kingdom 2 --- --- Total 7 === Competition
The Company's commercial lending subsidiaries operate in a highly competitive industry, in many cases competing with companies with long established operating histories and substantial financial resources.
Regulation
The Company's commercial lending operation is subject to various state and federal 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.LEASING OPERATION
General
Transamerica Leasing Inc. ("Transamerica Leasing") leases, services and manages containers, chassis and trailers around the world. The company is based in Purchase, New York and maintains 386 offices, depots and other facilities in 44 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 and motor carriers.
At December 31, 1993, Transamerica Leasing's fleet consisted of standard containers, refrigerated containers, domestic containers, tank containers and chassis totaling 316,000 units which are owned or managed, and leased from 347 depots worldwide, 36,500 rail trailers leased to all major United States railroads and to roll on/roll off steamship operators, shippers, shippers' agents and regional truckers, and 3,800 over-the-road trailers in Europe. Transamerica Leasing began leasing tank containers for carrying bulk liquids in 1990 and had 1,900 tank containers in its fleet at December 31, 1993.
In November 1992, the company sold its domestic over-the-road trailer business. Proceeds from the sale totaled $191,000,000 and resulted in no gain or loss.
Approximately 49% of the standard container, refrigerated container, domestic container, tank container and chassis fleet is on term lease or service contract minimum lease for periods of one to five years. Also, 34% of the rail trailer fleet is on term lease or service contract minimum lease for periods of one to five years.
The following table sets forth Transamerica Leasing's fleet size in units as of the end of each of the years indicated:
As of December 31, --------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ----
Containers and 316,000 280,000 255,100 244,400 235,900 chassis Rail trailers 36,500 34,400 36,800 40,500 43,300 European trailers 3,800 2,900 1,700 800
The following table sets forth Transamerica Leasing's fleet utilization for the years indicated:
Years Ended December 31, -------------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- Containers and chassis 83% 85% 89% 90% 93% Rail trailers 91% 84% 75% 79% 83% European trailers 89% 84% 83% 81%
The 1993 container and chassis utilization decline was due to slow economic growth in key European economies and Japan; the 1992 decline was due to higher than expected industry-wide supply of equipment. The 1991 and 1990 reductions resulted from a small decline in the rate of growth of world trade and a less favorable geographic balance of business. The rail trailer utilization increased in 1993 and 1992 due to a smaller industry fleet, higher domestic economic activity and because many shippers are moving from trucks to rail transport for long- haul shipments; the 1991 and 1990 declines were due to reduced domestic economic activity.
Revenues of the domestic leasing operation derived from foreign customers were $210,301,000 in 1993, $176,172,000 in 1992 and $137,127,000 in 1991, of which European customers accounted for 41%, 42% and 40%. Revenues of foreign-domiciled leasing operations were less than 10% of the consolidated total in each of the three years in the period ended December 31, 1993.Offices and Employees
The number of offices, depots and other facilities, and employees of the Company in connection with its leasing operation as of the dates indicated were as follows:
As of December 31, ------------------------------------ 1993 1992 1991 1990 1989 ---- ---- ---- ---- ---- Offices, depots and other facilities 386 386 301 306 322 Employees 765 796 946 1,026 1,055
Competition
Transamerica Leasing operates in a highly competitive industry, in many cases competing with companies with long established operating histories and substantial financial resources.
Subsequent Event
On March 15, 1994, the Company completed the purchase of substantially all of the assets of the container rental division of Tiphook plc for approximately $1,100,000,000 in cash.
BORROWING OPERATIONS
Funds employed in the Company's operations are obtained from invested capital, retained earnings and the sale of short and long-term debt.
Capitalization of the Company as of the dates indicated was as follows:
Short-term borrowings before reclassification to long-term debt (see Note G of Notes to Financial Statements, Item 8) 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. Bank loans are an additional source of short-term borrowings. At December 31, 1993, $721,814,000 of bank credit lines were available to the Company, $75,000,000 of which were also available to Transamerica Corporation. At December 31, 1993, all borrowings under these lines were made by the Company and amounted to $240,927,000. The cost of short-term borrowings is directly related to prevailing rates of interest in the money market; such rates are subject to fluctuation. Interest rates on borrowings during the years indicated were as follows:
Years Ended December 31, ----------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ----
Weighted average annual interest rate during year:(1) Short-term borrowings 3.41% 3.93% 6.47% 8.23% 9.26% Long-term borrowings 8.24% 8.71% 9.77% 9.23% 9.69% Total borrowings 6.00% 6.87% 8.28% 9.22% 9.68%
(1) Excludes the cost of maintaining credit lines and the effect of interest rates on borrowings denominated in foreign currencies.
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, ---------------------------------------- 1993 1992 1991 1990 1989 ---- ---- ---- ---- ----
Return on assets(1) 1.1% 1.9% (1.2)% 1.4% 2.1% Return on equity(2) 6.9% 11.7% (7.6)% 8.2% 12.3% Dividend payout ratio(3) 75.2% 55.7% N.A. 136.3% 64.8% Equity to assets ratio(4) 16.2% 16.2% 16.2 % 16.7% 16.8%
(1) Net income divided by simple average total assets. (2) Net income divided by simple average equity. (3) Cash dividends declared (excluding cash dividends in connection with corporate restructuring in 1990) divided by net income. (4) Simple average equity divided by simple average total assets.
Ratio of Earnings to Fixed Charges
The following table sets forth the consolidated ratios of earnings to fixed charges for the years indicated. The ratios are computed by dividing income from continuing operations before income taxes, extraordinary loss on early extinguishment of debt and cumulative effect of change in accounting, and before fixed charges, by the fixed charges. Fixed charges consist of interest and debt expense, and one-third of rent expense (which approximates the interest factor).
Years Ended December 31, -------------------------------------------- 1993 1992 1991 1990 1989
Ratio of earnings 1.50 1.59 0.77 1.28 1.42 to fixed charges
Excluding the effect of the previously discussed special charge ($130,000,000 after tax) reported by the commercial lending operation, the ratio of earnings to fixed charges would have been 1.14 for 1991.
ITEM 2.
ITEM 2. PROPERTIES
Transamerica Finance Corporation leases its principal executive offices at 1150 South Olive Street, Los Angeles, California, from an affiliated company under a lease expiring in November 1994 at an annual rental of approximately $2,000,000. The Company and its subsidiaries have noncancelable lease agreements expiring mainly through 1998. These agreements are principally operating leases for facilities used in the Company's operations.ITEM 3.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted in accordance with General Instruction J.
PART II
ITEM 5.
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 Finance Group, Inc., which is wholly owned by Transamerica Corporation.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Omitted in accordance with General Instruction J.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Omitted in accordance with General Instruction J. See "Management's Discussion and Analysis of the Results of Operations" following the Notes to Financial Statements (Item 8).
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted as a separate section of this report.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted in accordance with General Instruction J.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Omitted in accordance with General Instruction J.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted in accordance with General Instruction J. ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted in accordance with General Instruction J.
PART IV
ITEM 14.
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.
(3) List of Exhibits:
EX-2 Assets Purchase Agreement dated as of February 13, 1994 between Transamerica Container Acquisition Corporation and Tiphook plc and certain of its affiliated companies.
EX-2.1 Amendment and Supplement to Asset Purchase Agreement dated as of March 15, 1994 between Transamerica Container Acquisition Corporation and the Container Rental Division of Tiphook plc.
EX-3(i).1 Transamerica Finance Corporation Restated Certificate of Incorporation as filed with the Secretary of State of Delaware on December 12, 1988 (incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K Annual Report (File No. 1-6798) for the year ended December 31, 1988).
EX-3(i).2 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).
EX-3(ii) Transamerica Finance Corporation By-Laws, as amended, last amendment - December 12, 1988 (incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K Annual Report (File No. 1- 6798) for the year ended December 31, 1988).
EX 4 Indenture dated as of November 1, 1987 between Registrant and Harris Trust and Savings Bank, as Trustee (incorporated by reference to Exhibit 4.2 to Registrant's Form 10-K Annual Report (File No. 1-6798) for the year ended December 31, 1988).
EX-10.1 Lease dated October 31, 1984 between Transamerica Occidental Life Insurance Company, as lessor, and Registrant, as lessee, and Addendums thereto dated November 14, 1984 and November 7, 1989 (incorporated by reference to Exhibit 10.1 to Registrant's Form 10-K Annual Report (File No. 1-6798) for the year ended December 31, 1989).
EX-10.2 Loan Sales Agreement dated as of November 1, 1990 between Transamerica Financial Services and Transamerica Financial Services Finance Co. (incorporated by reference to Exhibit 10.2 to Registrant's Form 10-K Annual Report (File No. 1-6798) for the year ended December 31, 1990).
EX-10.3.a Corporate Separateness Agreement dated as of December 17, 1990 between Transamerica Financial Services and Transamerica Financial Services Finance Co. (incorporated by reference to Exhibit 10.3.a to Registrant's Form 10-K Annual Report (File No. 1-6798) for the year ended December 31, 1990).
EX-10.3.b Corporate Separateness Agreement dated as of December 17, 1990 between Transamerica Finance Group, Inc. [subsequently renamed Transamerica Finance Corporation] and Transamerica Financial Services Finance Co. (incorporated by reference to Exhibit 10.3.b. to Registrant's Form 10-K Annual Report (File No. 1-6798) for the year ended December 31, 1990).EX-10.4 Pooling and Servicing Agreement dated as of November 1, 1990 among Transamerica Financial Services, as servicer, Transamerica Financial Services Finance Co., as seller, and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 2 to Form 8-A Registration Statement re: TFG Home Loan Trust 1990- 1 dated March 26, 1991 - Registration No. 33-36431-01).
EX-10.5 Investment Agreement dated December 17, 1990 among Transamerica Finance Group, Inc. [subsequently renamed Transamerica Finance Corporation], Transamerica Financial Services Finance Co., as seller, and The First National Bank of Chicago, as Trustee (incorporated by reference to Exhibit 2 to Form 8-A Registration Statement re: TFG Home Loan Trust 1990-1 dated March 26, 1991 - Registration No. 33-36431-01).
EX-10.6 Guaranty dated July 31, 1990 by Transamerica Finance Group, Inc. [subsequently renamed Transamerica Finance Corporation], in favor of Corporate Asset Funding Company, Inc. et. al. re: certain obligations of Transamerica Insurance Finance Corporation, California (incorporated by reference to Exhibit 10.6 to Registrant's Form 10-K Annual Report (File No. 1-6798) for the year ended December 31, 1990).
EX-10.7 Guaranty dated July 31, 1990 by Transamerica Finance Group, Inc. [subsequently renamed Transamerica Finance Corporation], in favor of Corporate Asset Funding Company, Inc. et. al. re: certain obligations of Transamerica Insurance Finance Corporation (incorporated by reference to Exhibit 10.7 to Registrant's Form 10-K Annual Report (File No. 1-6798) for the year ended December 31, 1990).
EX-12 Computation of Ratio of Earnings to Fixed Charges.
EX-23 Consent of Ernst & Young to the incorporation by reference of their report dated February 16, 1994 in the Registrant's Registration Statements on Form S-3, File Nos. 33-40236 and 33- 49763.
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 Commission upon request.
(b) Reports on Form 8-K filed in the fourth quarter of 1993:
A report on Form 8-K was filed on November 19, 1993 relating to the proposed acquisition by the Registrant or one of its subsidiaries of Tiphook plc, a London-based container, trailer, and rail equipment lessor.
(c) Exhibits:
The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules:
The response to this portion of Item 14 is submitted as a separate section of this report.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 (Registrant)
By RAYMOND A. GOLAN (Raymond A. Golan, Vice President and Controller) Date: March 15, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 15, 1994.
Signature Title
Principal Executive Officer and Director:
RICHARD H. FINN Chief Executive Officer and Director - ---------------------------- (Richard H. Finn)
Principal Financial Officer and Director:
Senior Vice President, Treasurer and DAVID H. HAWKINS Director - ---------------------------- (David H. Hawkins)
Principal Accounting Officer:
RAYMOND A. GOLAN - ---------------------------- (Raymond A. Golan) Vice President and Controller
Directors:
- ---------------------------- (David R. Carpenter) Director
KENT L. COLWELL - ---------------------------- (Kent L. Colwell) Director
EDGAR H. GRUBB - ---------------------------- (Edgar H. Grubb) Director
FRANK C. HERRINGER - ---------------------------- (Frank C. Herringer) Director
ROBERT R. LINDBERG - ---------------------------- (Robert R. Lindberg) Director
ALLEN C. MIECH - ---------------------------- (Allen C. Miech) Director
CHARLES E. TINGLEY - ---------------------------- (Charles E. Tingley) Director (THIS PAGE INTENTIONALLY LEFT BLANK)
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2), (c) and (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1993
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
LOS ANGELES, CALIFORNIA
(THIS PAGE INTENTIONALLY LEFT BLANK) FORM 10-K - ITEM 8, ITEM 14(a)(1) and (2)
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following financial statements of Transamerica Finance Corporation and subsidiaries, together with the report of the independent auditors, are included in Item 8:
Report of Independent Auditors Consolidated Balance Sheet -- December 31, 1993 and 1992 Consolidated Statement of Operations -- Years ended December 31, 1993, 1992 and 1991 Consolidated Statement of Cash Flows -- Years ended December 31, 1993, 1992 and 1991 Consolidated Statement of Shareholder's Equity -- Years ended December 31, 1993, 1992 and 1991 Notes to Financial Statements Management's Discussion and Analysis of the Results of Operations -- Year ended December 31, 1993 Supplementary Financial Information -- Years ended December 31, 1993 and 1992
The following consolidated financial statement schedules of Transamerica Finance Corporation and subsidiaries are included in Item 14(d):
VIII - Valuation and Qualifying Accounts -- Years ended December 31, 1993, 1992 and 1991 IX - Short-Term Borrowings -- Years ended December 31, 1993, 1992 and 1991 X - Supplementary Income Statement Information -- Years ended December 31, 1993, 1992 and 1991
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. REPORT OF INDEPENDENT AUDITORS
Shareholder 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, 1993 and 1992, and the related consolidated statements of operations, cash flows, and shareholder's equity for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transamerica Finance Corporation and subsidiaries at December 31, 1993 and 1992, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As discussed in Note J to the consolidated financial statements, effective January 1, 1991 the Company adopted Statement of Financial Accounting Standards No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions.
ERNST & YOUNG
Los Angeles, California February 16, 1994, except for Note N, as to which the date is March 15, 1994
See notes to financial statements. TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (dollar amounts in thousands)
Note A - Significant Accounting Policies
Transamerica Finance Corporation (together with its consolidated subsidiaries, the "Company") is principally engaged in consumer lending, commercial lending and leasing operations. The Company is a wholly owned subsidiary of Transamerica Finance Group, Inc., which is a wholly owned subsidiary of Transamerica Corporation.
Certain amounts for prior years have been reclassified to conform with the 1993 presentation.
The significant accounting policies followed by the Company and its subsidiaries are:
Consolidation - The consolidated financial statements include the accounts of Transamerica Finance Corporation and all its majority owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation. The Company's nonvoting preferred stock ownership interest in the distributable earnings of Transamerica Financial Services Finance Co. ("TFSFC"), which is the Company's only significant non-majority owned investee, is accounted for by the equity method after elimination of intercompany transactions (see Note M.)
Cash and Cash Equivalents - Cash and cash equivalents include all highly liquid investments with original maturities of three months or less except for such securities held by the Company's credit insurance subsidiaries which are included in investments.
Depreciation and Amortization - Property and equipment, which are stated on the basis of cost, are depreciated by use of the straight- line method over their estimated useful lives, which range from eight to 15 years (with residual values of 10% to 20%) for equipment held for lease, three to 10 years for administrative and service equipment, and 20 years for buildings. 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 estimated revenues. Goodwill is amortized over 40 years.
Foreign Currency Translation - The net assets and operations of foreign subsidiaries included in the consolidated financial statements are attributable 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 shareholder's equity. The effect of transaction gains and losses on the Consolidated Statement of Operations is insignificant for all years presented.
Transactions with Affiliates - In the normal course of 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 Notes J and M, 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 accrual basis under an effective yield method, except that accrual of finance charges is suspended on accounts that become past due in excess of 29 days in the case of consumer loans or 60 days for commercial loans. At December 31, 1993 and 1992, finance receivables for which the accrual of finance charges was suspended approximated $188,300 and $231,700. Charges collected in advance, including renewal charges, on inventory 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. When foreclosure proceedings are begun in the case of a real estate secured consumer loan, the account is written down to the estimated realizable value of the collateral if less than the account balance. After foreclosure, repossessed assets are carried at the lower cost or fair value less estimated selling costs and are reclassified to assets held for sale. Additionally, accounts are generally charged against the allowance when no payment has been received for six months for consumer lending and when all avenues for repayment have been exhausted for commercial lending.
Leasing Revenues - Leasing revenues include income from operating, finance and sales-type leases. Operating lease income is recognized on the straight-line method over the lease term. Finance lease income, represented by the excess of the total lease receivable (reduced by the amount attributable to contract maintenance) over the net cost of the related equipment, is deferred and amortized over the noncancelable term of the lease using an accelerated method which provides a level rate of return on the outstanding lease contract receivable. Dealer profit on sales-type leases, represented by the excess of the total fair market value of the equipment over its cost or carrying value, is recognized at the inception of the lease. Unearned income is amortized over the term of the lease in the same manner described above. Contract maintenance revenues are credited to income on a straight-line basis over the term of the related leases.
Income Taxes - Taxable results 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 it filed separate returns with the applicable taxing authorities. The Company provides deferred income taxes based on enacted rates in effect on the dates temporary differences between the book and tax bases of assets and liabilities reverse. In 1988, the Company adopted the liability method of accounting for income taxes and the adoption of Financial Accounting Standard No. 109, Accounting for Income Taxes, in 1992 had no effect on the financial statements.
New Accounting Standards - In May 1993, the Financial Accounting Standards Board issued a new standard on accounting for impairment of loans which the Company must adopt by the first quarter of 1995. The new standard requires that impaired loans be measured based on either the fair value of the loan, if discernible, the present value of expected cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. When adopted, the new standard is not expected to have a material effect on the consolidated financial statements of the Company.
Also in May 1993, the Financial Accounting Standards Board issued a new standard on accounting for certain investments in debt and equity securities which the Company will adopt in the first quarter of 1994. Under the new standard the Company will report at fair value its investments in debt securities for which the Company does not have the positive intent and ability to hold to maturity. Unrealized gains and losses will be reported on an after tax basis in a separate component of shareholder's equity.When adopted, the new standard is not expected to have a material effect on the consolidated financial statements of the Company.
Note B - Investments
Investments are summarized as:
1993 1992 ---- ----
Fixed maturities, at amortized cost (market value: $103,035 $ 92,004 $111,621 in 1993 and $97,903 in1992) Equity securities, at market value 765 (cost: $683 in 1992) Short-term investments 7,043 4,933 -------- --------
Total $110,078 $ 97,702
Investments totaling $4,175 at December 31, 1993 and 1992 were on deposit with various states to meet requirements of state insurance and financial codes. In addition, various state insurance codes require that the Company's credit insurance subsidiaries hold an amount equal to their statutory unearned premium reserve ($36,069 and $42,442 at December 31, 1993 and 1992) as cash or in suitable investments for the protection of policyholders. Such assets are not available for distribution until all liabilities on insurance policies have been discharged.
There were no unrealized gains or losses on marketable equity securities at December 31, 1993.
Note C - Concentration of Risk
During the normal conduct of its operations, the Company engages in the extension of credit to homeowners, electronics and appliance dealers, retail recreational product and computer stores, appliance and furniture rental operations and others. The risk associated with that 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 Company's finance receivables at December 31, 1993 included $3,046,579, net of unearned finance charges and insurance premiums, of real estate secured loans, principally first and second mortgages secured by residential properties, of which approximately 49% are located in California. The commercial finance receivables portfolio represents lending arrangements with over 120,000 customers. At December 31, 1993, the portfolio included 11 customers with individual balances in excess of $15,000. These accounts represented 9% of commercial gross finance receivables outstanding at December 31, 1993.Note D - Finance Receivables
The carrying amounts and estimated fair values of the finance receivable portfolio at December 31, 1993 and 1992 are as follows:
1993 1992 ------------------------ ------------------------ Estimated Estimated Carrying Fair Carrying Fair Value Value Value Value --------- ----------- --------- -------- Fixed rate receivables: Consumer $3,547,210 $4,307,048 $3,478,148 $4,216,770 Commercial 134,040 132,662 144,881 143,927 Variable rate receivables: Commercial 2,390,328 2,390,328 2,371,483 2,371,483 ---------- ---------- ---------- ---------- $6,071,578 $6,830,038 $5,994,512 $6,732,180 ========== ========== ========== ==========
The estimated fair values of consumer finance receivables, substantially all of which are fixed rate instalment loans collateralized by residential real estate, and the fixed rate commercial finance loans 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 commercial loans, which comprise the majority of the commercial loan portfolio, the carrying amount represents a reasonable estimate of fair value.
Additional information pertaining to finance receivables outstanding follows:
Contractual maturities of finance receivables outstanding, before deduction of unearned finance charges and insurance premiums, at December 31, 1993 are:
Experience of the Company has shown that a substantial majority of the consumer finance receivables will be renewed or prepaid many months prior to contractual maturity dates. Accordingly, the above schedule is not to be regarded as a forecast of future cash collections. For 1993 and 1992, the ratio for consumer finance receivables of principal cash collections (excluding balances refinanced) to average net finance receivables was 29% and 26%.
The commercial lending operation's business credit unit provides revolving lines of credit, letters of credit and standby letters of credit. At December 31, 1993 and 1992, borrowers' unused credit availability under such arrangements totaled $533,781 and $416,200, and the estimated amount the Company would have to pay another financial institution to assume the possible future obligation to fund them was $1,591 and $,2080.
Note E - Allowance for Losses
Changes in the allowance for losses on finance receivables are:
Consumer Commercial Total --------- ----------- --------
Balance at January 1, 1991 $ 88,535 $ 99,402 $ 187,937 Provision charged to income 42,214 245,190 287,404 Receivables charged off (34,920) (177,083) (212,003) Recoveries 1,934 4,469 6,403 Other 422 (2,449) (2,027) --------- ---------- ----------
Balance at December 31, 1991 98,185 169,529 267,714 Provision charged to income 47,985 36,830 84,815 Receivables charged off (44,448) (122,974) (167,422) Recoveries 1,487 5,922 7,409 Other (2,014) (2,138) (4,152) --------- ---------- ----------
Balance at December 31, 1992 101,195 87,169 188,364 Provision charged to income 62,349 31,793 94,142 Receivables charged off (62,524) (51,832) (114,356) Recoveries 1,871 9,122 10,993 Other 422 (173) 249 --------- ---------- ----------
Balance at December 31, 1993 $ 103,313 $ 76,079 $ 179,392 ========= ========== ========== Note F - Commercial Lending Special Charges and Assets Held for Sale
The commercial lending operation made a decision late in the fourth quarter of 1991 to exit the rent-to-own finance business, reduce lending to certain asset based lending lines, accelerate disposal of repossessed assets and liquidate receivables remaining from previously sold businesses. As a result of this action, the commercial lending operation recognized a special pretax charge of $200,220 ($130,000 after tax). The $200,220 special charge comprised $137,404 included in the provision for losses on assets held for sale and $62,816 included in the provision for losses on receivables. The $137,404 provision consisted of $117,304 for anticipated losses on disposition of the assets, generally comprising rent-to-own finance receivables and repossessed collateral, including rent-to-own stores, and $20,100 for implementation costs. The 1991 provision for losses on assets held for sale of $141,225 comprises the $137,404 portion of the special charge referred to above plus an additional provision of $3,821.
In 1993, an additional provision of $50,000,000 ($35,960 after tax) was made to reduce the net carrying value of repossessed rent-to-own stores to their estimated realizable value.
Assets held for sale are:
1993 1992 ---- ---- Consumer: Repossessed residential properties $137,455 $ 89,405 Other repossessed assets 1,746 2,787 -------- -------- 139,201 92,192 Less valuation allowance 2,547 2,206 -------- -------- 136,654 89,986 -------- --------
Commercial: Rent-to-own finance receivables 120,469 179,013 Repossessed rent-to-own stores 107,227 103,418 Other repossessed assets 19,403 30,633 -------- -------- 247,099 313,064 Less valuation allowance 156,985 121,549 -------- -------- 90,114 191,515 -------- --------
Total $226,768 $281,501 ======== ======== Note G - Debt
Debt consists of:
1993 1992 ----- ----- Unsubordinated Short-term debt: Commercial paper $3,585,249 $2,748,766 Other 84,644 64,342 ---------- ---------- 3,669,893 2,813,108 Less classified as long-term debt 2,505,000 2,813,108 ---------- ---------- Total unsubordinated short-term debt 1,164,893 -- ---------- ---------- Long-term debt: Short-term debt supported by noncancelable credit agreements 2,505,000 2,813,108 4.48% to 9.10% notes and debentures due 1994 to 2002 2,323,110 2,673,847 Loans due to Transamerica Corporation and its subsidiaries, at various interest rates, maturing through 1994 67,491 101,376 Zero to 6.50% notes and debentures due 1994 to 2012 issued at a discount to yield 13.80% to 13.88%; with benefit from deferred taxes, effective cost of 8.79% to 12.35%; maturity value of $722,760 274,884 444,200 ---------- ---------- Total unsubordinated long-term debt 5,170,485 6,032,531 ---------- ---------- Total unsubordinated debt 6,335,378 6,032,531 ---------- ----------
Subordinated 6.75% to 12.75% notes due 1994 to 2003 696,125 557,045 ---------- ----------
Total debt $7,031,503 $6,589,576 ========== ==========
The estimated fair value of debt, using rates currently available for debt with similar terms and maturities, at December 31, 1993 and 1992 was $7,407,000 and $6,805,000.
In 1993, the Company redeemed $125,000 of deep discount long-term debt with a book value of $90,710, which resulted in a $23,084 extraordinary loss, after related taxes of $11,447.
Commercial paper notes are issued for maturities up to 270 days in the U.S. and 365 days in Canada. At December 31, 1993, $200,000 of the outstanding commercial paper, which matured January 24, 1994, was held by Transamerica Corporation. In support of its commercial paper operations, bank credit lines aggregating $721,814 at December 31, 1993 were available to the Company, $75,000 of which were also available to Transamerica Corporation. At December 31, 1993, all borrowings under these lines were made by the Company and amounted to $240,927, of which $156,283 is long-term.
In support of the short-term debt classified as long-term debt at December 31, 1993, the Company has unsubordinated noncancelable credit agreements totaling $3,433,000 with 55 banks, of which $2,505,000 matures after one year. Fees are paid on the average unused commitment.
The Company uses interest rate exchange agreements to hedge the interest rate sensitivity of its outstanding indebtedness. Certain of these agreements call for the payment of fixed rate interest by the Company in return for the assumption by other contracting parties of the variable rate cost. At December 31, 1993, such agreements covering the notional amount of $214,400 at a weighted average fixed interest rate of 8.25% expiring through 1999 and $840,000 of one year agreements expiring in 1994 with an average interest rate of 3.78% were outstanding. Additionally at December 31, 1993, exchange agreements covering the notional amount of $216,000 expiring through 1997 were outstanding, in which the Company receives interest from other contracting parties at a weighted average fixed interest rate of 6.98% and pays interest at variable rates to those parties. While the Company is exposed to credit risk in the event of nonperformance by the other party, nonperformance is not anticipated due to the credit rating of the counter parties. At December 31, 1993, the interest rate exchange agreements are with banks rated A or better by one or more of the major credit rating agencies.The estimated fair value of the interest rate exchange agreements, determined on a net present value basis, at December 31, 1993 and 1992 was a negative $5,320 and $9,067. The fair value represents the estimated amount that the Company would be required to pay to terminate the exchange agreements, taking into account current interest rates.
Long-term debt outstanding at December 31, 1993, other than the $2,505,000 supported by noncancelable credit agreements, matures as follows:
Unsubordinated Subordinated Total -------------- ------------- ------------
1994 $ 900,056 $113,350 $1,013,406 1995 703,414 40,000 743,414 1996 469,813 79,195 549,008 1997 198,900 87,100 286,000 1998 196,005 235,480 431,485 Thereafter 197,297 141,000 338,297 ---------- -------- -----------
$2,665,485 $696,125 $3,361,610* ========== ======== ===========
*Includes the accreted values at December 31, 1993 on original issue discount debt and not the amount due at maturity.
Interest payments, net of amounts received from interest rate exchange agreements, totaled $513,541 in 1993, $558,997 in 1992 and $481,200 in 1991.
Note H - Dividend and Other Restrictions
Consolidated equity is restricted by the provisions of debt agreements. At December 31, 1993, $180,127 was available for dividends and other stock payments. Under certain circumstances, the provisions of loan agreements and statutory requirements place limitations on the amount of funds which can be remitted to the Company by its consolidated subsidiaries. Of the net assets of the Company's consolidated subsidiaries, as adjusted for intercompany account balances, at December 31, 1993, $51,985 is so restricted.
Note I - Income Taxes
The provision for income taxes comprises:
1993 1992 1991 Current taxes: Federal $41,544 $ 95,239 $ 13,606 State 15,427 18,391 20,368 Foreign 88 (14,637) 12,722 ------- -------- -------- 57,059 98,993 46,696 ------- -------- --------
Deferred taxes Federal 32,461 588 (53,963) State 5,034 6,533 (8,443) Foreign 803 14,938 (14,378) ------- -------- -------- 38,298 22,059 (76,784) ------- -------- --------
Total income taxes (benefit) $95,357 $121,052 $(30,088) ======= ======== =========The difference between federal income taxes computed at the statutory rate and the total provision for income taxes is:
1993 1992 1991 --------- -------- -------
Federal income taxes (benefit) at statutory rate $76,967 $96,467 $(42,024) State income taxes, net of federal income tax benefit 13,986 16,449 7,953 Book and tax basis difference of assets acquired 2,999 5,026 6,341 Settlement of disputed items (4,224) Dividends from affiliates (663) (2,109) Other 5,629 3,773 (249) -------- -------- ---------
Total income taxes (benefit) $95,357 $121,052 $ (30,088) ======= ======== =========
Deferred tax liabilities (assets) are comprised of the following at December 31:
1993 1992 ---- ----
Depreciation $197,196 $190,462 Amortization of bond discount and interest 66,071 65,380 Direct finance and sales type leases 7,865 34,134 Insurance reserves and acquisition costs 9,698 7,785 Other 35,475 10,410 -------- -------- Gross deferred tax liabilities 316,305 308,171 -------- --------
Allowances for losses on finance receivables and other assets (113,331) (104,221) Post employment benefits other than pensions (8,166) (8,343) Net operating loss and foreign tax credit carryforwards (10,683) (33,263) Other (15,993) (21,855) -------- -------- Gross deferred tax assets (148,173) (167,682) -------- --------
Net deferred tax liability $168,132 $140,489 ======== ========
Pretax income (loss) from foreign operations totaled $4,236 in 1993, $4,332 in 1992 and $(25,960) in 1991. Income tax payments totaled $77,089 in 1993, $92,190 in 1992 and $27,802 in 1991.
Note J- Pension and Stock Savings Plans and Other Post Employment Benefits
The Company participates in the Retirement Plan for Salaried Employees of Transamerica Corporation and Affiliates (the pension plan). The pension plan is a noncontributory defined benefit plan covering substantially all employees. Pension benefits are based on the employee's compensation during the highest paid 60 consecutive months during the 120 months before retirement. Pension costs are allocated to the Company based on the number of participants. 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. Currently, the Company matches 75 cents for every dollar contributed up to six percent of eligible compensation. The Company matching portion is always invested in Transamerica Corporation common stock. Employees are 25% vested in the matching contributions after three years, 50% vested after four years and 100% vested after five years of service. The Company's total costs for both the pension plan and the 401(k) plan were $9,163 in 1993, $7,913 in 1992 and $9,045 in 1991.
The Company also participates in various programs sponsored by Transamerica Corporation that provide medical and certain other benefits to eligible retirees. Effective January 1, 1991, Transamerica Corporation and its subsidiaries elected early adoption of FASB Statement No. 106 on accounting for post employment benefits other than pensions. Adoption of the statement increased the Company's loss before the cumulative effect of the accounting change and net loss for the year ended December 31, 1991 by $377 and $11,252.Note K - Commitments and Contingencies
The Company and its subsidiaries have noncancelable lease agreements expiring mainly through 1998. These agreements are principally operating leases for facilities used in the Company's operations. Total rental expense amounted to $54,799 in 1993, $60,286 in 1992 and $62,899 in 1991.
Contingent liabilities arising from litigation, income taxes and other matters are not considered material in relation to the consolidated financial position of the Company and its subsidiaries.
Note L - Business Segment Information
Business segment information is:
Note M - Transactions With Affiliates
On November 1, 1990, the Company sold without recourse a pool of real estate secured receivables to TFSFC for cash of $547,655 plus interest of $9,661 to the closing date of December 17, 1990. The purchase price, which represented the fair value of the receivables sold, was based on an independent appraisal. For financial reporting purposes, the intercompany gain on this sale has been deferred and is being amortized to income as a component of the Company's equity in the distributable earnings of TFSFC. TFSFC subsequently securitized and sold to outside investors a $430,000 participation interest in the receivable pool. The Company continues to service these receivables for a fee. The Company has entered into an agreement whereby it directs the investment of excess funds in the pool pending their distribution and guarantees that such funds will be invested at a certain minimum rate, currently 9.25%.
Investments in and advances to affiliates consist of the following at December 31:
1993 1992 ---- ----
Preferred stock of TFSFC $ 72,946 $ 82,665 Unamortized deferred gain on sale of (18,729) (31,571) receivables to TFSFC Unsecured receivable from BWAC Twelve, 308,858 238,595 Inc. Unsecured receivable from Transamerica HomeFirst, Inc. 7,937 551 -------- -------- $371,012 $290,240 ======== ========
The receivables from BWAC Twelve, Inc. and Transamerica HomeFirst, Inc. are payable on demand and bear interest at a rate that varies based on the Company's average cost of borrowings. The weighted average interest rate was 4.21% in 1993, 4.04% in 1992 and 7.18% in 1991. Under the terms of certain debt agreements, the Company may maintain investments in and advances to affiliates up to $649,621 at December 31, 1993.
Income from affiliates comprises the following for the years ended December 31:
1993 1992 1991 ---- ---- ----
Interest income $11,572 $13,486 $14,299 Servicing fees 833 861 866 Amortization of deferred gain and equity in earnings of TFSFC 5,616 6,901 14,359 ------- ------- ------- $18,021 $21,248 $29,524 ======= ======= =======
Note N - Subsequent Event
On March 15, 1994, the Company completed the purchase of substantially all of the assets of the container rental division of Tiphook plc for approximately $1,100,000 in cash. TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
The following table sets forth revenues and income by line of business for the periods indicated (in thousands):
Income (Loss) Before Revenues Extraordinary Item ------------------ --------------------- 1993 1992 1993 1992 ------- -------- ------- -------
Consumer lending $651,218 $654,078 $91,742 $99,210 Commercial lending 333,297 356,275 (12,775) 17,938 Leasing 407,774 420,512 53,641 58,068 Other operations (163) 18 1,931 (888) Amortization of goodwill (11,658) (11,656) ---------- ---------- --------- ---------
Total $1,392,126 $1,430,883 $122,881 $162,672 ========== ========== ======== ========
The following discussion should be read in conjunction with the information presented under Item 1, Business.
Consumer Lending
Consumer lending income, before the amortization of goodwill, in 1993 decreased $7,468,000 (8%) from 1992. The decrease was principally due to increased operating expenses, an increased provision for losses on receivables and lower revenues that more than offset lower interest expense and a $5,269,000 benefit included in operating expenses from a reversal of reserves related to a 1990 sales of receivables to Transamerica Financial Services Finance Co. which subsequently were securitized.
Revenues in 1993 decreased $2,860,000 (%) from 1992 principally because of lower income from affiliates and servicing fees related to the run off of the receivables that Transamerica Financial Services Finance Co. securitized in 1990 and lower fees due to reduced volume of real estate secured loans. Operating expenses increased in 1993 mainly due to investments in new branches and losses on the disposal of repossessed assets. With the adoption in the fourth quarter of 1992 of a required new accounting rule, losses on the disposal of repossessed assets, which were $5,952,000 for 1993 and $3,021,000 in the fourth quarter of 1992, were classified as operating expenses rather than as credit losses. Data for periods prior to the fourth quarter of 1992 have not been reclassified.
The provision for losses on receivables increased $14,364,000 (30%) in 1993 over 1992 due to increased credit losses. Credit losses, net of recoveries, as a percentage of average consumer finance receivables outstanding, net of unearned finance charges and insurance premiums, were 1.67% in 1993 compared to 1.22% in 1992. Credit losses increased partly due to continued sluggishness in the domestic economy and a weak California real estate market.
Interest expense declined $24,449,000 (9%) in 1993 from 1992 due to a lower average interest rate which more than offset the effect of higher borrowings due to increased average receivables outstanding. Net consumer finance receivables outstanding increased $71,180,000 (2%) in 1993.
Net consumer finance receivables at December 31, 1993 included $3,046,579 of real estate secured loans, principally first and second mortgages secured by residential properties, of which approximately 49% are located in California. Company policy generally limits the amount of cash advanced on any one loan, plus any existing mortgage, to between 70% and 80% (depending on location) of the appraised value of the mortgaged property, as determined by qualified independent appraisers at the time ofloan origination. Delinquent real estate secured loans, which are defined as loans contractually past due 60 days or more, totaled $59,767 (1.86% of total real estate secured loans outstanding) at December 31, 1993 compared to $60,211,000 (1.84% of total real estate secured loans outstanding) at December 31, 1992.
Management has established an allowance for losses equal to 2.83% of net consumer finance receivables outstanding at December 31, 1993 and 1992.
Generally, by the time an account secured by residential real estate becomes past due 90 days, foreclosure proceedings have begun, at which time the account is moved from finance receivables to other assets and is written down to the estimated realizable value of the collateral if less than the account balance. After foreclosure, repossessed assets are carried at the lower of cost or fair value less estimated selling costs and are reclassified to assets held for sale. Accounts in foreclosure and repossessed assets held for sale totaled $214,665,000 at December 31, 1993 compared to $176,054,000 at December 31, 1992. The increase primarily reflects increased repossessions in California and longer disposal times due to its weak real estate market.
Commercial Lending
Commercial lending results, before the amortization of goodwill and a $23,084,000 after tax extraordinary loss on the early extinguishment of $125,000,000 deep discount long-term debt in 1993, were a a loss of $12,775,000 for 1993 compared to income in 1992 of $17,938,000. The 1993 loss was due primarily to the inclusion of a $50,000,000 ($35,960,000 after tax) provision to reduce the net carrying value of repossessed rent-to-own stores to their estimated realizable value. Information received during the year from prospective buyers of the repossessed rent-to-own stores held for sale indicated that the realizable value of the business had declined below its carrying value.
The 1993 results also included an $8,799,000 after tax charge for the restructuring of the commercial lending unit's infrastructure, a $4,224,000 after tax provision for anticipated legal and other costs associated with the runoff of the liquidating portfolios and a $4,224,000 tax benefit from the resolution of prior years' tax matters. Excluding the aforementioned items, commercial lending income, before the amortization of goodwill and the extraordinary loss on the early extinguishment of debt, increased $14,046,000 (78%) in 1993 over 1992. This improvement was primarily due to lower operating expenses, a lower provision for losses on receivables and stronger margins brought about by the declining interest rate environment. The interest rates at which commercial lending borrows funds for its businesses have moved more quickly than the rates at which it lends to its customers. As a result, margins have been enhanced by the declining interest rate environment.
Revenues in 1993 decreased $22,978,000 (6%) from 1992 primarily as a result of reduced yields attributable to the current low interest rate environment.
Interest expense declined $25,459,000 (19%) in 1993 from 1992 as a result of lower average interest rates. Operating expenses increased $14,127,000 (9%) during 1993 over 1992 due to the restructuring charge and provision for anticipated legal and other costs associated with the runoff of the liquidating portfolios described above, aggregating $21,500,000, partially offset by cost reduction efforts in the inventory finance and business credit core businesses. The provision for losses on receivables in 1993 was $5,037,000 (14%) less than in 1992 primarily due to lower credit losses. Credit losses, net of recoveries, as a percentage of average commerical finance receivables outstanding, net of unearned finance charges, were 1.64% in 1993 compared to 4.53% in 1992. Credit losses declined in 1993 primarily due to lower losses in the liquidating portfolios.
In March 1992, the commercial lending operation purchased for cash a business credit portfolio consisting of twelve manufacturer/distributor accounts with a net outstanding balance of $134,000,000. Net commercial finance receivables outstanding decreased $3,086,000 (%) from December 31, 1992. Growth in the inventory finance portfolio was more than offset by a decline in the liquidating and business credit portfolios. Management has established an allowance for credit losses equal to 2.93% of net commercial finance receivables outstanding as of December 31, 1993 compared to 3.35% at December 31, 1992.
Effective in 1993, the policies used for the determination of delinquent and nonearning receivables have been revised to provide greater consistency among the company's receivable portfolios. It is management's view that the new methodology provides a better and more meaningful assessment of the condition of the portfolio. Delinquent receivables, which were generally defined as financed inventory sold but unpaid 30 days or more, the portion of business credit loans in excess of the approved lending limit and all other receivable balances contractually past due 60 days or more, are now defined as the instalment balance for inventory finance and business credit receivables and the receivable balance for all other receivables over 60 days past due. Nonearning receivables, which were defined as receivables from borrowers in bankruptcy or litigation and other accounts for which full collectibility was doubtful, are now defined as receivables from borrowers that are over 90 days delinquent or at such earlier time as full collectibility becomes doubtful. At December 31, 1993, delinquent receivables were $26,940,000 (1.02% of receivables outstanding) and nonearning receivables were $31,763,000 (1.20% of receivables outstanding). At December 31, 1992, delinquent receivables were $63,384,000 (2.38% of receivables outstanding) and nonearning receivables were $90,919,000 (3.42% of receivables outstanding). Delinquency and nonearning data as of December 31, 1992 has not been restated.
Assets held for sale as of December 31, 1993 totaled $90,114,000, net of a $156,985,000 valuation allowance, and consisted of rent-to-own finance receivables of $120,469,000, repossessed rent-to-own stores of $107,227,000 and other repossessed assets of $19,403,000. Assets held for sale at December 31, 1992 totaled $191,515,000, net of a $121,549,000 valuation allowance, and comprised rent-to-own finance receivables of $179,013,000, repossessed rent-to-own stores of $103,418,000 and other repossessed assets of $30,633,000. At December 31, 1993, $27,489,000 of the rent-to-own finance receivables were classified as both delinquent and nonearning. At December 31, 1992, delinquent rent-to-own finance receivables were $15,397,000 and nonearning rent-to-own finance receivables were $32,615,000. Delinquency and nonearning data as of December 31, 1992 has not been restated.
Leasing
Leasing income, before the amortization of goodwill, decreased $4,427,000 (8%) in 1993 due primarily to an additional tax provision of $4,300,000 caused by the revaluation of deferred income tax liability for the 1993 federal tax rate increase. Excluding the additional tax provision, results for 1993 were comparable to 1992 as higher fleet utilization and per diem rates in the rail trailer business, a larger finance lease portfolio and a larger fleet of refrigerated containers were offset by a decline in standard container utilization.
In November 1992, the company sold its domestic over-the-road trailer business. Proceeds from the sale totaled $191,000,000 and resulted in no gain or loss.
Revenues for 1993 decreased $12,738,000 (3%) from 1992. The decline was mainly due to the sale of the domestic over-the-road trailer business in November 1992 and a decline in standard container utilization. The decrease was partially offset by higher fleet utilization and per diem rates in the rail trailer business, an increased finance lease portfolio, and a larger fleet of standard containers, refrigerated containers and European trailers. Expenses decreased $12,135,000 (4%) in 1993 from 1992 due to the sale of the domestic over-the-road trailer business. The decrease was partially offset by higher ownership cost due to a larger fleet.
The combined utilization of standard containers, refrigerated containers, domestic containers, tank containers and chassis averaged 83% in 1993 compared to 85% in 1992. Rail trailer utilization was 91% in 1993 compared to 84% in 1992. European trailer utilization was 89% in 1993 compared to 84% in 1992.
The company's standard container, refrigerated container, domestic container, tank container and chassis fleet of 316,000 units increased by 36,000 units (13%) in 1993. The rail trailer fleet of 36,500 units increased by 2,100 units (6%) in 1993. At December 31, 1993, the company also operated a fleet of 3,800 over-the-road trailers in Europe.
Other Operations
The other operations represent principally unallocated interest expense and certain financing activities of Transamerica Equipment Leasing Company, Inc. which are not related to the leasing operations of Transamerica Leasing Inc. and are therefore not combined with such operations.
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Financial Statement Schedules