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, life insurance, real estate services 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.
Information concerning the 1994 acquisition of the container operations of Tiphook plc by the leasing operations of the Company is outlined in Note B of Notes to Financial Statements (Item 8).
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 $8,724,258,000 at December 31, 1994 and $7,031,503,000 at December 31, 1993. Variable rate debt was $4,279,886,000 at December 31, 1994 compared to $3,970,484,000 at December 31, 1993. The ratio of debt to debt plus equity was 85% at December 31, 1994 and 83% at December 31, 1993.
Transamerica Finance Corporation offers publicly, from time to time, senior or subordinated debt securities. Public debt issued totaled approximately $1,516,000,000 in 1994, $407,000,000 in 1993 and $538,700,000 in 1992. 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, $100,000,000 had not been issued at December 31, 1994. In addition, under a shelf 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 $337,220,000 had not been issued at December 31, 1994.
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 $14,807,548,000 during 1994, $11,535,766,000 during 1993 and $9,415,231,000 during 1992.
CONSUMER LENDING
General
The Company's consumer lending services are provided by Transamerica Financial Services, based in Los Angeles, California, which has 568 branch lending offices. Branch offices are located in the United States (549 in 41 states), Canada (13) and United Kingdom (6).
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 Income from the date of acquisition.
The consumer lending operation makes both real estate secured and unsecured loans to individuals. 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.
The consumer lending operation 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. Of the company's net finance receivables outstanding at December 31, 1994, 81% are secured by residential properties. Of the company's net finance receivables secured by residential properties, 64% are secured by first mortgages. 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 on the time of loan origination. Since 1991, the consumer lending operation 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 from dealers of retail finance contracts covering principally appliances, furniture and services.
When permitted by law, the consumer lending operation offers to arrange credit life and disability insurance in connection with consumer instalment loans and generally requires that property securing consumer loans be insured. Consumer lending 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.
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Nonearning Receivables
Nonearning consumer finance receivables, which are defined generally as those past due more than 29 days, amounted to $194,272,000 and $156,542,000 at December 31, 1994 and 1993. 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. Nonearning receivables exclude accounts in foreclosure and assets held for sale. During 1994 and 1993, the gross amount of interest income that would have been recorded on receivables classified as nonearning at year end was $28,539,000 and $25,496,000, and the amount of interest on those loans that was recognized in income was $16,503,000 and $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 $226,119,000 at December 31, 1994 compared to $214,665,000 at December 31, 1993. The increase primarily reflects higher inventory in California due to California's continuing weak real estate market and resultant longer disposal times. Since future improvement may be impacted by factors such as economic conditions and the state of the real estate market, the extent and timing of any change in the trend of foreclosures and repossessed assets remains uncertain.
Credit Loss Experience
Certain information regarding credit losses on finance receivables for the consumer lending operation during the years indicated is set forth in the following table:
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, --------------------------------------- 1994 1993 1992 1991 1990 ----- ---- ---- ---- ---- Offices 568 561 509 464 448 Employees 2,366 2,381 2,256 2,148 2,093
The following table sets forth the geographical distribution of the Company's consumer lending offices at December 31, 1994:
No. of No. of Offices Offices -------- ------- United States: United States: Alabama 14 New Jersey 7 Arizona 20 New Mexico 5 California 157 New York 27 Colorado 9 North Carolina 12 Connecticut 2 Ohio 19 Delaware 2 Oklahoma 5 Florida 31 Oregon 9 Georgia 14 Pennsylvania 21 Hawaii 5 Rhode Island 2 Idaho 5 South Carolina 7 Illinois 30 Tennessee 8 Indiana 14 Texas 6 Iowa 6 Utah 4 Kansas 2 Virginia 10 Kentucky 8 Washington 23 Louisiana 9 Wisconsin 10 Maryland 10 Wyoming 1 Massachusetts 3 --- Michigan 9 549 Minnesota 5 Canada 13 Mississippi 2 United Kingdom 6 Missouri 11 --- Nebraska 2 Total 568 Nevada 3 ===
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 two core business units: inventory finance and business credit. The commercial lending business operates from its base in Chicago, Illinois, as well as from 33 branch lending offices. Branch offices are located in the United States (14), Puerto Rico (12), Canada (3) and Europe (4). 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 collateralized and consist of credit lines typically from $5,000,000 to $25,000,000 with 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 receivables outstanding 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 commercial lending operation 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.
Interest Rate Sensitivity
The relatively short-term nature of the company's financings enables the commercial lending operation to adjust its finance charges in response to competitive factors and changes in its costs. The interest rates at which the commercial lending operation 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. The commercial lending operation did not experience margin compression in the rising interest rate environment of 1994 primarily due to the rapid pace at which changes in its lending rates responded to other rate changes during the year.
Acquisitions and Divestitures
In 1994, the commercial lending operation sold its U.S. and Canadian repossessed rent-to-own stores with a net carrying value of $17,666,000 and in 1990, sold its automobile fleet leasing operation which included $45,478,000 in finance receivables. Also in 1990, the insurance finance operations were dividended to TFG.
In 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 1991, an inventory finance portfolio, which comprised lending arrangements with over 700 manufactured housing and recreational product dealers with a net balance outstanding of $290,604,000, was purchased for cash. These transactions were funded with short-term debt.
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:
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Earned finance charges as a percentage of the average amount of net finance receivables outstanding during each of the years 1990 through 1994 were 14.7%, 13.3%, 12.1%, 11.3% and 11.8%.
Delinquent Receivables
Effective in 1993, the policy used for determining delinquent receivables was revised to provide greater consistency among the commercial lending operation's receivable portfolios. It is management's view that the new methodology provides a better and more meaningful assessment of the condition of the portfolios. 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 delinquent 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.
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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, -------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Offices 33 72 108 130 152 Employees 1,648 1,899 1,993 2,114 2,292
The following table sets forth the geographical distribution of the Company's commercial lending offices at December 31, 1994:
No. of No of. Offices Offices ------- --------
United States: Canada: Colorado 1 British Columbia 1 Georgia 2 Ontario 1 Illinois 5 Quebec 1 New York 1 -- North Carolina 1 3 Tennessee 1 Europe: Texas 2 France 1 Wisconsin 1 Germany 1 -- Netherlands 1 14 United Kingdom 1 -- -- Puerto Rico 12 4 -- -- Total 33 ==
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. leases, services and manages containers, chassis and trailers around the world. The leasing operation is based in Purchase, New York and maintains 564 offices, depots and other facilities in 50 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.
Information concerning the 1994 acquisition for $1,061,441,000 of the container operations of Tiphook plc by the leasing operations of the Company is outlined in Note B of Notes to Financial Statements (Item 8). The acquired fleet of standard containers and tank containers totaled 363,000 units. The initial financing of the acquisition was provided through short-term bank loans which have been repaid and refinanced with long-term debt.
In November 1992, the leasing operation sold its domestic over-the- road trailer business. Proceeds from the sale, which resulted in no gain or loss, totaled $191,000,000 and were used to reduce debt.
At December 31, 1994, the leasing operation's fleet consisted of standard containers, refrigerated containers, domestic containers, tank containers and chassis totaling 685,400 units which are owned or managed, and leased from 526 depots worldwide; 39,300 rail trailers leased to all major United States railroads and to roll on/roll off steamship operators, shippers, shippers' agents and regional truckers; and 5,700 over-the-road trailers in Europe.
At December 31, 1994 and 1993, 33% and 49% of the standard container, refrigerated container, domestic container, tank container and chassis fleet were on term lease or service contract minimum lease for periods of one to ten years. Also at December 31, 1994 and 1993, 33% and 34% of the rail trailer fleet were on term lease or service contract minimum lease for periods of one to five years.
The following table sets forth the leasing operation's fleet size, in units, for the years indicated:
As of December 31, ------------------------------------------------ 1994 1993 1992 1991 1990 -------- -------- ------- ------- ------
Containers and chassis(1) 685,400 316,000 280,000 255,100 244,400 Rail trailers 39,300 36,500 34,400 36,800 40,500 European trailers 5,700 3,800 2,900 1,700 800 - ------------ (1) The 1994 increase was largely due to the acquisition of substantially all of the operating assets of the container operations of Tiphook plc and the acquisition of new standard and refrigerated containers. ----------------
The following table sets forth the leasing operation's fleet utilization for the years indicated:
Years Ended December 31, ------------------------------------------------ 1994 1993 1992 1991 1990 ---- ---- ---- ---- ----
Containers and chassis(1) 81% 83% 85% 89% 90% Rail trailers(2) 92% 91% 84% 75% 79% European trailers(3) 96% 89% 84% 83% 81% - ------------ (1) The 1994 and 1993 declines were due to slow economic growth in key European economies and Japan and, in 1994, the impact of the Tiphook fleet acquisition. The 1992 decline was due to higher than expected industry-wide supply of equipment. The 1991 reduction resulted from a small decline in the rate of growth of world trade and a less favorable geographic balance of business. (2) The 1994, 1993 and 1992 increases were primarily due to higher domestic economic activity and because many shippers continued to move from trucks to rail transport for long-haul shipments and, in 1993 and 1992, due to a smaller industry fleet. The 1991 decline was due to reduced domestic economic activity. (3) The 1994 and 1993 increases were due to a greater number of units on long term lease and improvement in the economy of the United Kingdom. ----------------
Revenues of the domestic leasing operation derived from foreign customers were $440,246,000 in 1994, $210,301,000 in 1993 and $169,925,000 in 1992, of which European customers accounted for 48%, 41% and 44%. Revenues of foreign-domiciled leasing operations were less than 7% of the consolidated total in each of the three years in the period ended December 31, 1994.
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, -------------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ----
Offices, depots and other facilities 564 386 386 301 306 Employees 909 765 796 946 1,026
Competition
The Company's leasing subsidiaries operate in a highly competitive industry, in many cases competing with companies with long established operating histories and substantial financial resources.
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.
Short-term borrowings before reclassification to long-term debt (see Note C 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, 1994, $932,856,000 of bank credit lines were available to the Company, $75,000,000 of which were also available to Transamerica Corporation. At December 31, 1994, all borrowings under these lines were made by the Company and amounted to $253,651,000. 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, 1994 1993 1992 1991 1990 ---- ---- ---- ---- ---- Weighted average annual interest rate during year:(1) Short-term borrowings 4.41% 3.41% 3.93% 6.47% 8.23% Long-term borrowings 7.69% 8.24% 8.71% 9.77% 9.23% Total borrowings 6.05% 6.00% 6.87% 8.28% 9.22%
(1) Excludes the cost of maintaining credit lines and the effect of interest rates on borrowings denominated in foreign currencies.
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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, ------------------------------------- 1994 1993 1992 1991 1990 ---- ---- ---- ---- ----- Return on assets(1) 1.9% 1.1% 1.9% (1.2)% 1.4% Return on equity(2) 12.4% 6.9% 11.7% (7.6)% 8.2% Dividend payout ratio(3) 80.2% 75.2% 55.7% N.A. 136.3% Equity to assets ratio(4) 15.2% 16.2% 16.2% 16.2% 16.7% - -------------- (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.
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Consolidated Ratios of Earnings to Fixed Charges
The following table sets forth the consolidated ratios of earnings to fixed charges for the years indicated. The ratios were computed by dividing income 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, ------------------------------------ 1994 1993 1992 1991 1990 ---- ---- ---- ---- ----
Ratio of earnings to fixed charges 1.62 1.50 1.59 0.77 1.28
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 2004 at an annual rental of approximately $1,500,000. The Company and its subsidiaries have noncancelable lease agreements expiring mainly through 1999. These agreements are principally operating leases for facilities used in the Company's operations.
ITEM 3.
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. Some of these proceedings involve claims for punitive or treble damages in addition to other specific relief.
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.
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 Asset Purchase Agreement dated as of February 13, 1994 between Transamerica Container Acquisition Corporation and Tiphook plc and certain of its affiliated companies (incorporated by reference to Exhibit 2 to Registrant's Form 10-K Annual Report (File No. 1-6798) for the year ended December 31, 1993).
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 (incorporated by reference to Exhibit 2.1 to Registrant's Form 10- K Annual Report (File No. 1-6798) for the year ended December 31, 1993).
EX-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).
EX-3(ii) Transamerica Finance Corporation By-Laws, as amended, last amendment - February 19, 1991.
EX-4 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).
EX-10.1 Lease dated December 1, 1994 between Transamerica Occidental Life Insurance Company, as lessor, and Registrant, as lessee.
EX-10.2 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-10.3 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 LLP to the incorporation by reference of their report dated February 15, 1995 in the Registrant's Registration Statements on Form S-3, File Nos. 33-40236 and 33- 49763.
EX-27 Financial Data Schedule.
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 1994:
None.
(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 28, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 28, 1995 by the following persons on behalf of the registrant and in the capacities indicated.
Signature Title --------- -----
Principal Executive Officer and Director:
RICHARD H. FINN Chief Executive Officer and Director - -------------------------- (Richard H. Finn)
Principal Financial Officer and Director:
DAVID H. HAWKINS Senior Vice President, Treasurer and - --------------------------- Director (David H. Hawkins)
Principal Accounting Officer:
RAYMOND A. GOLAN - -------------------------- (Raymond A. Golan) Vice President and Controller
Directors:
DAVID R. CARPENTER - -------------------------- (David R. Carpenter) Director
RUSSELL T. CHARLTON - -------------------------- (Russell T. Charlton) 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
STEVEN A. READ - -------------------------- (Steven A. Read) Director
CHARLES E. TINGLEY - -------------------------- (Charles E. Tingley) Director
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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, 1994
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, 1994 and 1993 Consolidated Statement of Income -- Years ended December 31, 1994, 1993 and 1992 Consolidated Statement of Cash Flows -- Years ended December 31, 1994, 1993 and 1992 Consolidated Statement of Shareholder's Equity -- Years ended December 31, 1994, 1993 and 1992 Notes to Financial Statements Management's Discussion and Analysis of the Results of Operations - - Year ended December 31, 1994 Supplementary Financial Information -- Years ended December 31, 1994 and 1993
The following consolidated financial statement schedule of Transamerica Finance Corporation and subsidiaries is included in Item 14(d):
II - Valuation and Qualifying Accounts -- Years ended December 31, 1994, 1993 and 1992
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 ERNST & YOUNG LLP, 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, 1994 and 1993, and the related consolidated statements of income, cash flows, and shareholder's equity for each of the three years in the period ended December 31, 1994. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 and related schedule are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and related schedule. 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Los Angeles, California February 15, 1995
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME (Amounts in thousands)
Years Ended December 31 1994 1993 1992 ---------- ---------- ---------- REVENUES Finance charges $ 986,433 $ 929,464 $ 946,687 Leasing revenues 620,680 388,327 402,230 Servicing fees 308 942 1,795 Income from affiliates 17,193 18,021 21,248 Other 53,213 55,372 58,923 __________ __________ __________
Total revenues 1,677,827 1,392,126 1,430,883 __________ __________ __________
EXPENSES Interest and debt expense 485,643 414,556 459,518 Depreciation on equipment held for lease 197,295 102,538 98,789 Salaries and other operating expenses 582,025 512,652 504,037 Provision for losses on receivables 99,071 94,142 84,815 Provision for losses on assets held for sale 50,000 __________ __________ __________
Total expenses 1,364,034 1,173,888 1,147,159 __________ __________ __________ Income before income taxes and extraordinary item 313,793 218,238 283,724 Income taxes 125,551 95,357 121,052 __________ __________ __________ Income before extraordinary item 188,242 122,881 162,672 Extraordinary loss on early extinguishment of debt, net of applicable income tax benefit of $11,447 (23,084) __________ __________ __________ Net income $ 188,242 $ 99,797 $ 162,672 ========== ========== ==========
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.
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.
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. Intangible assets other than goodwill, 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 Income 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 H and K, 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 contractually in excess of 29 days for consumer loans or 60 days for commercial loans. At December 31, 1994 and 1993, finance receivables for which the accrual of finance charges was suspended amounted to $216,144 and $188,305. 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 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 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 consolidated financial statements.
New Accounting Standards - In 1994, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities. Beginning in 1994 with the adoption of this standard, all of the Company's investments have been classified as available for sale and reported at fair value. The effect of this adjustment, net of federal income taxes, is recorded in a separate component of shareholder's equity. There is no effect on the consolidated income statement.
In May 1993, the Financial Accounting Standards Board issued a new standard on accounting for impairment of loans which the Company will adopt in the first quarter of 1995. The new standard, which was amended in October 1994, 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. At adoption, the new standard will not have a material effect on the consolidated financial statements of the Company.
Note B - Acquisitions
In March 1994, the Company acquired substantially all the operating assets of the Container Operations of Tiphook plc ("Tiphook"), a London- based transportation equipment rental company, including certain dry cargo containers, tank containers, tank chassis, operating leases and other assets (collectively the "Container Operations") for $1,061,441 in cash. The Company assumed certain specified liabilities of the Container Operations including trade accounts payable. The Company did not assume any borrowings, tax liabilities or contingent liabilities of Tiphook. The acquired fleet of standard containers and tank containers totaled 363,000 units. The acquisition has been accounted for as a purchase and, accordingly, the operations of Tiphook have been included in the Consolidated Statement of Income from the date of acquisition.
Had the acquisition of the Container Operations been accomplished as of January 1, 1993, revenues for the Company would have been approximately $1,720,000 and $1,640,000 for the years ended December 31, 1994 and 1993. The pro forma effect on net income would have been immaterial. This information is for illustrative purposes only and is not necessarily indicative of the future results of the operations of the combined company, or of the results of the operations of the combined company that would have actually occurred had the transaction been in effect for the periods presented.
Note C - Financial Instruments
Investments
In 1994, investments in fixed maturities are carried at fair value, while in 1993, these investments were carried at amortized cost which was less than fair value. The cost and fair value of investments at December 31, 1994 and 1993 are as follows:
Gross Gross Unrealized Unrealized Cost Gains Losses Fair Value --------- --------- ---------- -----------
December 31, 1994: Fixed maturities $113,271 $1,253 $6,287 $108,237 Short-term investments 4,922 4,922 --------- --------- --------- ---------
Total $118,193 $1,253 $6,287 $113,159 ======== ======== ======== ========
December 31, 1993: Fixed maturities $103,035 $9,212 $626 $111,621 Short-term investments 7,043 7,043 --------- --------- --------- ---------
Total $110,078 $9,212 $626 $118,664 ======== ======== ======== ========
Investments totaling $4,225 at December 31, 1994 and $4,175 at December 31, 1993 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 ($37,250 and $36,069 at December 31, 1994 and 1993) in 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.
The net unrealized loss included in shareholder's equity as a result of marking the fixed maturities to fair value at December 31, 1994 was $3,272.
Finance Receivables
The carrying amounts and estimated fair values of the finance receivable portfolio at December 31, 1994 and 1993 are as follows:
Contractual maturities of finance receivables outstanding, before deduction of unearned finance charges and insurance premiums, at December 31, 1994 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 1994 and 1993, the ratio for consumer finance receivables of principal cash collections (excluding balances refinanced) to average net finance receivables was 28% and 29%.
The commercial lending operation's business credit unit provides revolving lines of credit, letters of credit and standby letters of credit. At December 31, 1994 and 1993, borrowers' unused credit availability under such arrangements totaled $535,214 and $533,781, and the estimated amount the Company would have to pay another financial institution to assume the possible future obligation to fund them was $1,339 and $1,591.
Concentration of Risk
During the normal conduct of its consumer and commercial lending operations, the Company engages in the extension of credit to homeowners, electronics and appliance dealers, retail recreational products dealers, computer stores 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 consumer finance receivables at December 31, 1994 included $3,349,235, 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 45% are located in California. The commercial finance receivables portfolio represents lending arrangements with over 100,000 customers. At December 31, 1994, the portfolio included 18 customers with individual balances in excess of $15,000. These accounts represented 12% of total commercial net finance receivables outstanding at December 31, 1994.
Debt
The weighted average interest rate on short-term borrowings at December 31, 1994 and 1993 was 5.80% and 3.17%.
Long-term debt outstanding at December 31, 1994, other than the $3,672,500 supported by noncancelable credit agreements, matures as follows:
Unsubordinated Subordinated Total -------------- ------------- ------------
1995 $821,891 $152,400 $974,291 1996 653,594 157,575 811,169 1997 682,614 102,100 784,714 1998 258,215 250,480 508,695 1999 509,510 202,000 711,510 Thereafter 527,525 129,000 656,525 ---------- ---------- ----------- Total $3,453,349 $993,555 $4,446,904* ========== ========= ===========
*Includes the accreted values at December 31, 1994 on original issue discount debt and not the amount due at maturity.
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, 1994 and 1993, $192,000 and $200,000 of the outstanding commercial paper, which matured on demand in 1995 and January 24, 1994, was held by Transamerica Corporation. In support of its commercial paper operations, bank credit lines aggregating $932,856 at December 31, 1994 were available to the Company, $75,000 of which were also available to Transamerica Corporation. At December 31, 1994, all borrowings under these lines were made by the Company and amounted to $253,651, of which $157,508 is long-term.
In support of the short-term debt classified as long-term debt at December 31, 1994, the Company has unsubordinated noncancelable credit agreements totaling $4,325,000 with 58 banks, of which $3,672,500 matures after one year. A total of $700,000 thereof is also available to Transamerica Corporation. Fees are paid on the average unused commitment.
Interest payments, net of amounts received from interest rate exchange agreements, totaled $561,874 in 1994, $513,541 in 1993 and $558,997 in 1992.
The estimated fair value of debt, using rates currently available for debt with similar terms and maturities, at December 31, 1994 and 1993 was $8,644,000 and $7,407,000.
Derivatives
The operations of the Company are subject to risk of interest rate fluctuations to the extent that there is a difference between the cash flows from the Company's interest-earning assets and the cash flows related to its liabilities that mature or are repriced in specific periods. In the normal course of its operations, the Company hedges some of its interest rate risk with derivative financial instruments. These derivatives comprise primarily interest rate swap agreements.
The interest rate swap agreements are intended to help the Company to more closely match the cash flow received from its assets to the payments on its liabilities. The Company's interest rate swap agreements 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 interest rate swap contracts are designated and accounted for as hedges of a portion of the Company's outstanding indebtedness.
At December 31, 1994, contracts designated as hedges of outstanding indebtedness comprise:
Weighted Weighted Average Average Fixed Floating Notional Interest Interest Amount Rate Rate -------- -------- --------- Interest rate swap agreements - The Company pays: Floating rate interest expense, receives fixed rate interest income $103,000 7.7% 7.0% ======== ==== ===== Fixed rate interest expense, receives floating rate interest income $540,100 6.6% 5.9% ======== ==== ===== Floating rate interest expense based on one index (5.9%) and receives floating rate interest income based on another index (5.8%) $101,000 ========
The net present value of these interest rate swap agreements offsets changes in the fair value of the hedged indebtedness, which are also carried at amortized cost. The fair value of the liability hedges at December 31, 1994 was a net benefit from counterparties of $10,645.
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 counterparties. At December 31, 1994, the interest rate swap agreements are with banks rated 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 are:
Note E - Assets Held for Sale
Assets held for sale are:
1994 1993 -------- ------- Consumer: Repossessed residential properties $145,633 $137,455 Other repossessed assets 3,409 1,746 --------- --------- 149,042 139,201 Less valuation allowance 2,282 2,547 --------- --------- 146,760 136,654 --------- ---------
Commercial: Rent-to-own finance receivables 72,381 120,469 Repossessed rent-to-own stores 107,227 Other repossessed assets 3,613 19,403 --------- --------- 75,994 247,099 Less valuation allowance 65,086 156,985 --------- --------- 10,908 90,114 --------- ---------
Total $157,668 $226,768 ======== ========
In 1993, a provision of $50,000 ($35,960 after tax) was made to reduce the net carrying value of repossessed rent-to-own stores to their estimated realizable value. In September 1994, the commercial lending operation sold its U.S. and Canadian repossessed rent-to-own stores with a net carrying value of $17,666 for $22,939. The transaction resulted in a $5,273 ($3,980 after tax) gain.
Note F - Dividend and Other Restrictions
Consolidated equity is restricted by the provisions of debt agreements. At December 31, 1994, $237,224 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, 1994, $58,481 is so restricted.
Note G - Income Taxes
The provision for income taxes comprises:
1994 1993 1992 ------- ------- -------- Current taxes: Federal $71,514 $41,617 $95,239 State 18,023 15,354 18,391 Foreign 6,529 88 (14,637) -------- -------- -------- 96,066 57,059 98,993 -------- -------- -------- Deferred taxes: Federal 31,544 32,461 588 State 1,859 5,034 6,533 Foreign (3,918) 803 14,938 -------- -------- -------- 29,485 38,298 22,059 -------- -------- --------
Total income taxes $125,551 $ 95,357 $121,052 ======== ======== ========
The difference between federal income taxes computed at the statutory rate and the total provision for income taxes is:
1994 1993 1992 ---------- --------- ---------
Federal income taxes at statutory rate $109,828 $76,383 $96,467 State income taxes, net of federal income tax benefit 12,978 13,913 16,449 Book and tax basis difference of assets acquired 4,053 2,999 5,026 Settlement of disputed items (4,904) (4,224) Dividends from affiliates (663) Other 3,596 6,286 3,773 --------- --------- ---------
Total income taxes $125,551 $95,357 $121,052 ======== ======== ========
Deferred tax liabilities (assets) are comprised of the following at December 31:
1994 1993
Depreciation $319,949 $232,652 Amortization of bond discount and interest 65,790 66,071 Direct finance and sales type leases 21,942 7,865 Insurance reserves and acquisition costs 7,136 9,698 Other 29,248 35,475 --------- --------- Gross deferred tax liabilities 444,065 351,761 --------- ---------
Allowances for losses on finance receivables and other assets (121,273) (113,331) Post employment benefits other than pensions (8,393) (8,166) Net operating loss and foreign tax credit carryforwards (244,817) (46,139) Other (21,886) (15,993) --------- --------- Gross deferred tax assets (396,369) (183,629) --------- ---------
Net deferred tax liability $ 47,696 $168,132 ========= =========
Pretax income (loss) from foreign operations totaled $(332) in 1994, $3,686 in 1993 and $4,332 in 1992. Income tax payments totaled $87,098 in 1994, $77,089 in 1993 and $92,190 in 1992.
Note H- 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 $9,447 in 1994, $9,163 in 1993 and $7,913 in 1992.
The Company also participates in various programs sponsored by Transamerica Corporation that provide medical and certain other benefits to eligible retirees.
Note I - Commitments and Contingencies
The Company and its subsidiaries have noncancelable lease agreements expiring mainly through 1999. These agreements are principally operating leases for facilities used in the Company's operations. Total rental expense amounted to $67,193 in 1994, $54,799 in 1993 and $60,286 in 1992.
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.
Note K - Transactions With Affiliates
On November 1, 1990, the Company sold without recourse a pool of real estate secured receivables to Transamerica Financial Services Finance Co. (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 was deferred and was 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 continued to service these receivables for a fee. The Company entered into an agreement whereby it directed the investment of excess funds in the pool pending their distribution and guaranteed that such funds would be invested at a certain minimum rate. In 1994, the Company repurchased the remaining serviced receivables and the operations of TFSFC ceased.
Investments in and advances to affiliates consist of the following at December 31:
1994 1993 ---------- ---------
Unsecured receivable from BWAC Twelve, Inc. $225,694 $308,858 Unsecured receivable from Transamerica HomeFirst, Inc. 33,945 7,937 Preferred stock of TFSFC 72,946 Unamortized deferred gain on sale of receivables to TFSFC (18,729) --------- ---------
Total $259,639 $371,012 ======== ========
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 4.98% in 1994, 4.21% in 1993 and 4.04% in 1992. Under the terms of certain debt agreements, the Company may maintain investments in and advances to affiliates up to $782,341 at December 31, 1994.
Income from affiliates comprises the following for the years ended December 31:
1994 1993 1992 ------- ------ ------ Interest income $11,085 $11,572 $13,486 Servicing fees 585 833 861 Amortization of deferred gain and equity in earnings of TFSFC 5,523 5,616 6,901 -------- -------- --------
Total $17,193 $18,021 $21,248 ======= ======= =======
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the information presented under Item 1, Business.
Consumer Lending
Consumer lending net income for 1994 was $89,674,000 compared to $91,651,000 for 1993. Consumer lending income before the amortization of goodwill in 1994 decreased $1,977,000 (2%) from 1993. Excluding a $5,269,000 benefit ($3,088,000 after tax) recorded in 1993 from the reversal of reserves related to a 1990 sale of receivables to Transamerica Financial Services Finance Co. which subsequently were securitized, income for 1994 increased $1,111,000 (1%). The increase resulted from higher revenues offset in part by increased operating and interest expenses, and an increased provision for losses on receivables. Revenues in 1994 increased $37,390,000 (6%) over 1993 mainly due to increased finance charges resulting from higher average finance receivables outstanding and higher fees due to an increased volume of real estate secured loans.
Interest expense for 1994 increased $8,454,000 (3%) from 1993 mainly due to an increase in short-term rates and the cost of increased borrowings as a result of the higher level of receivables outstanding. Operating expenses for 1994 increased $19,853,000 (11%) over 1993. Excluding the $5,269,000 reserve reversal recorded in 1993, operating expenses in 1994 increased $14,584,000 (8%). The increase was mainly due to the higher level of finance receivables outstanding, an increase in the average number of branches during 1994, and costs of developing new loan information systems to handle additional loan products.
The provision for losses on receivables for 1994 increased $18,057,000 (29%) due to increased credit losses and increased growth in net finance receivables over 1993. Credit losses, net of recoveries, as a percentage of average consumer finance receivables outstanding, net of unearned finance charges and insurance premiums, were 1.90% for 1994 compared to 1.67% for 1993. Credit losses increased in 1994 mainly due to continued sluggishness in the California economy and a continued weak California real estate market. Any change in the trend of credit losses is somewhat dependent upon overall changes in economic conditions and the California real estate market. Although recent trends in the economy are encouraging, the outlook for the California real estate market remains uncertain, particularly in Southern California.
Net consumer finance receivables outstanding increased $491,463,000 (13%) in 1994. Net consumer finance receivables at December 31, 1994 included $3,349,235,000 of real estate secured loans, principally first and second mortgages secured by residential properties, of which 45% 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 of loan origination.
Delinquent finance receivables, which are defined as receivables contractually past due 60 days or more, were $90,232,000 (2.08% of finance receivables outstanding) at December 31, 1994 compared to $76,781,000 (2.00% of finance receivables outstanding) at December 31, 1993. The increase in the percentage reflects higher delinquent non-real estate secured receivables offset in part by a decline in the percentage of delinquent real estate secured receivables. The increase in delinquent non-real estate secured receivables reflects the changing mix of products in the portfolio and the introduction of new products with higher delinquency experience. Management has established an allowance for losses equal to 2.83% of net consumer finance receivables outstanding at December 31, 1994 and 1993.
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 $226,119,000 at December 31, 1994 compared to $214,665,000 at December 31, 1993. The increase primarily reflects higher inventory in California due to California's continuing weak real estate market and resultant longer disposal times. Since future improvement may be impacted by factors such as economic conditions and the state of the real estate market, the extent and timing of any change in the trend of foreclosures and repossessed assets remains uncertain.
Commercial Lending
Commercial lending net income for 1994 was $36,762,000 compared to a net loss of $45,374,000 for 1993. Commercial lending results, before the amortization of goodwill and a $23,084,000 after tax extraordinary loss on early extinguishment of debt in 1993, increased $59,051,000 over 1993. Results for 1993 included: (i) 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; (ii) an $8,799,000 after tax charge for the restructuring of the commercial lending unit's infrastructure; (iii) a $4,224,000 after tax provision for anticipated legal and other costs associated with the runoff of the liquidating portfolios; (iv) a $4,224,000 tax benefit from the resolution of prior years' tax matters; and (v) a tax benefit of $1,455,000 due to the one percent federal tax increase applied to deferred taxes. Excluding these items and the 1993 extraordinary loss on early extinguishment of debt, commercial lending income increased $15,747,000 (52%) over 1993. This improvement was primarily due to a lower provision for losses on receivables and stronger margins during 1994. Stronger margins were a result of the higher spread between the indices at which the commercial lending operation lent to customers and the indices at which funds were borrowed.
Revenues in 1994 increased $17,342,000 (5%) over 1993 as a result of increased average net receivables in the core businesses and a higher average portfolio yield attributable to rising interest rates.
Interest expense increased $9,616,000 (9%) in 1994 over 1993 due to a higher average interest rate on borrowings. Operating expenses in 1994 were $23,143,000 (14%) lower than 1993 due to the previously described 1993 restructuring charge and provision for anticipated legal and other costs associated with the runoff of the liquidating portfolios, aggregating $21,500,000 ($13,023,000 after tax). Expenses in 1994 included a $8,967,000 ($5,450,000 after tax) charge for the relocation of the commercial lending home office, partially offset by the gain described below on the sale of the repossessed rent-to-own stores. In 1994, the commercial lending operation sold its U.S. and Canadian repossessed rent-to- own stores with a net carrying value of $17,666,000 for $22,939,000. The transaction resulted in a $5,273,000 ($3,980,000 after tax) gain. Excluding the items discussed above, operating expenses decreased $5,337,000 (4%) in 1994 from 1993, primarily due to reduced expenses related to the management of the liquidating portfolios.
The provision for losses on receivables in 1994 was $13,128,000 (41%) less than in 1993 due to lower credit losses and lower delinquent and nonearning receivables. Credit losses, net of recoveries, as a percentage of average commercial finance receivables outstanding, net of unearned finance charges, were 0.32% in 1994 compared to the 1.64% in 1993.
Net commercial finance receivables outstanding increased $172,133,000 (7%) in 1994. In the core businesses of inventory finance and business credit, receivables increased $215,669,000 (9%), which more than offset the decline in the liquidating portfolios. Management has established an allowance for losses equal to 3.12% of net commercial finance receivables outstanding at December 31, 1994 compared to 2.93% at December 31, 1993.
Delinquent receivables, which are 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, were $17,736,000 (0.63% of receivables outstanding) at December 31, 1994 compared to $26,940,000 (1.02% of receivables outstanding) at December 31, 1993.
Nonearning receivables, which are defined as balances from borrowers that are over 90 days delinquent or at such earlier time as full collectibility becomes doubtful, were $21,872,000 (0.78% of receivables outstanding) at December 31, 1994 compared to $31,763,000 (1.20% of receivables outstanding) at December 31, 1993.
Assets held for sale at December 31, 1994 totaled $10,908,000, net of a $65,086,000 valuation allowance, and consisted of rent-to- own finance receivables of $72,381,000 and repossessed assets of $3,613,000. Assets held for sale at December 31, 1993 totaled $90,114,000, net of a $156,985,000 valuation allowance, and comprised 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. At December 31, 1994, $24,495,000 of the rent-to-own finance receivables were classified as both delinquent and nonearning compared to $27,489,000 at December 31, 1993.
Leasing
In March 1994, the leasing operation acquired substantially all the operating assets of the Container Operations of Tiphook plc ("Tiphook"), a London-based transportation equipment rental company, including certain dry cargo containers, tank containers, tank chassis, operating leases and other assets (collectively the "Container Operations") for $1,061,441,000 in cash. The leasing operation assumed certain specified liabilities of the Container Operations including trade accounts payable. The leasing operation did not assume any borrowings, tax liabilities or contingent liabilities of Tiphook. The acquired fleet of standard containers and tank containers totaled 363,000 units which have been integrated into the leasing operation. The transaction has been accounted for as a purchase and the revenues and expenses associated with operating the assets acquired have been included in the results of the leasing operation from the date of acquisition. This acquisition is the primary reason revenues and expenses increased by more than 50% in 1994.
Leasing net income for 1994 was $61,500,000 compared to $51,589,000 for 1993. Leasing income, before the amortization of goodwill, for 1994 increased $9,911,000 (18%) over 1993. Included in the 1993 results was a $4,320,000 tax provision for the revaluation of the deferred tax liability. Excluding the effect of this adjustment, leasing income increased $5,591,000 (10%) in 1994 compared to 1993. The increase was primarily due to a larger fleet size, more on-hire rail trailer and chassis units and an increased finance lease portfolio, partially offset by lower utilization and rates in the standard container line. In 1994, the leasing operation experienced higher utilization rates for rail trailer and chassis due to improved economic conditions in the U.S., however, the standard container line experienced lower utilization rates due to slow economic growth in some key European economies and Japan.
Revenues for 1994 increased $230,130,000 (56%) over 1993. The increase was due primarily to the acquisition of the Container Operations. Revenue increases were also generated by a larger fleet of new standard and refrigerated containers, more on-hire rail trailer and chassis units and a larger finance lease portfolio.
Expenses increased $219,710,000 (70%) in 1994 over 1993 mainly due to higher depreciation expense, interest expense and operating costs related to the acquisition of the Container Operations.
The combined utilization of standard containers, refrigerated containers, domestic containers, tank containers and chassis averaged 81% in 1994 compared to 83% in 1993. Rail trailer utilization was 92% in 1994 compared to 91% in 1993. European trailer utilization was 96% in 1994 compared to 89% in 1993.
The standard container, refrigerated container, domestic container, tank container and chassis fleet of 685,400 units increased by 369,400 units (117%) in 1994, largely due to the acquisition of the Container Operations. The rail trailer fleet of 39,300 units increased by 2,800 units (8%) in 1994. The leasing operation also operates a fleet of 5,700 over-the-road trailers in Europe.
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TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
Financial Statement Schedules