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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number 1-6798
TRANSAMERICA FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-1077235
____________________________________________ ________________________
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
600 Montgomery Street San Francisco, California 94111
___________________________________________________ ________________________
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (415) 983-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
________________________ _________________________________________
81/2% Notes Maturing at Holder's Option Annually New York Stock Exchange on
July 1 and due July 1, 2001
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( X )
All of the outstanding shares of the registrant's capital stock are owned
by Transamerica Corporation.
Number of shares of common stock, $10 par value, outstanding as of close of
business on March 30,1998: 1,464,285.
The registrant meets the conditions set forth in General Instruction
J(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
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TABLE OF CONTENTS
Part I:
Item 1. Business ................................................ 3
Item 2. Properties .............................................. 12
Item 3. Legal Proceedings ...................................... 12
Item 4. Submission of Matters to a Vote of Security Holder ....... 13
Part II:
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters .................................... 13
Item 6. Selected Financial Data.............................. 13
Item 7. Management's Narrative Analysis
of Results of Operations ............................... 13
Item 7A Quantitative and Qualitative Disclosures
About Market Risk...................................... 13
Item 8. Financial Statements and Supplementary Data ............. 13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 13
Part III:
Item 10. Directors and Executive Officers of the Registrant .... 13
Item 11. Executive Compensation ............................... 13
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................... 13
Item 13. Certain Relationships and Related Transactions......... 13
Part IV:
Item 14. Exhibits,Financial Statement Schedules, and Reports on
Form 8-K ................................................ 14
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PART I
ITEM 1. BUSINESS
The Company
Transamerica Finance Corporation is a wholly owned subsidiary of
Transamerica Corporation. Transamerica Corporation ("Transamerica") is a
financial services organization which engages through its subsidiaries in
commercial lending, leasing, life insurance and real estate services.
Transamerica Finance Corporation includes Transamerica's commercial lending and
leasing operations. Unless the context indicates otherwise, the terms "Company"
and "Registrant" as used herein refer to Transamerica Finance Corporation and
its subsidiaries.
Effective January 1, 1998, principally through its indirect subsidiary
Transamerica Distribution Finance Corporation, Transamerica completed the
acquisition of substantially all of the inventory and retail finance business of
Whirlpool Financial Corporation for a total purchase price of $1.3 billion in
cash, subject to post-closing adjustments, which was determined through
negotiations with Whirlpool. A definitive agreement for the acquisition was
originally announced on September 18, 1997. The assets acquired consisted of
approximately $1.1 billion of net receivables and other assets of Whirlpool's
inventory financing, retail financing and international factoring businesses, as
well as Whirlpool Financial National Bank, a credit card bank. The assets were
acquired in a series of transactions. The acquisition of the inventory finance
business in the United States, Canada and Mexico, as well as the international
factoring business in Argentina, closed on October 16, 1997. The acquisition of
the retail finance business closed on January 1, 1998. The acquisition of most
of the remaining international assets also has now been completed. Funds for the
purchase of the assets were provided by short term borrowings and cash from
operations.
Effective June 30, 1997, a merger was effected between Transamerica Finance
Corporation and its immediate parent, Transamerica Finance Group, Inc., in which
Transamerica Finance Corporation was the surviving corporation. Among other
things, the merger resulted in the contribution by Transamerica Finance Group,
Inc. of its investment in the insurance premium finance business along with
several other small subsidiaries to the Company. The transfer was accounted for
as a pooling of interest and all periods presented have been restated.
On June 23, 1997, the Company sold its branch-based consumer lending
operation. Gross proceeds from the sale were $3.9 billion, or $1.1 billion after
repayment of associated debt. Net proceeds were used to return capital to
Transamerica. In the fourth quarter of 1997, the consumer lending business was
reclassified as discontinued operations following management's assessment that
the results of the new approach to consumer lending did not meet Transamerica's
criteria for further investment. Results for the consumer segment for prior
periods have been reclassified as results from discontinued operations.
On October 14, 1996, the Company acquired all of the outstanding shares of
Trans Ocean Ltd., a closely held container leasing company, in exchange for 1.6
million shares ($112.7 million) of Transamerica common stock.
The Company provides funding for its subsidiaries' commercial lending and
leasing operations. Capital is allocated among the operations on the basis of
expected returns and creation of shareholder value. The Company's principal
assets are finance receivables and equipment held for lease, which totaled a
combined $6.9 billion at December 31, 1997 and $7.1 billion at December 31,
1996. The Company's total notes and loans payable were $6 billion at December
31, 1997 and $9.9 billion at December 31, 1996. Variable rate debt was $3.5
billion at December 31, 1997 compared to $5.5 billion at December 31, 1996. The
ratio of debt to tangible equity was 6.5:1 at December 31, 1997 and 6.8:1 at
December 31, 1996. Tangible equity is defined as total equity less goodwill plus
minority interest.
The Company offers publicly, from time to time, senior or subordinated debt
securities. Public debt issued totaled $120 million in 1997, $688 million in
1996 and $832 million in 1995. Under a shelf registration statement filed in
April 1995 with the Securities and Exchange Commission the Company may offer up
to $3 billion of senior or subordinated debt securities (which may include
medium term notes) with varying terms, of which $1.8 billion had not been issued
at December 31, 1997. For a further discussion regarding borrowing operations
and related use of derivative, see Note C, Notes and Loans Payable in the
financial statements included in Item 8.
Liquidity is a characteristic of the Company's operations since a
significant portion of the assets consist of finance receivables. Principal cash
collections of finance receivables totaled $24 billion in 1997, $18.1 billion in
1996 and $18 billion in 1995.
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Business Segment Information
"Note J. Business Segment Information" in the financial statements included
in Item 8 is incorporated herein by reference.
The Company's business activities are more fully described below. Unless
otherwise indicated, all dollar and other amounts represent information as of
December 31, 1997.
Commercial Lending
Commercial lending services are provided by two core business units:
distribution finance and business credit. The commercial lending business
operates from 27 branch lending offices located in the United States (20),
Canada (2) and Europe (5). The lending activities of these core businesses are
discussed below.
Distribution finance provides financial services to manufacturers,
distributors, resellers, retailers, and commercial and consumer end users. It
serves companies that sell consumer electronics and appliances, marine products
such as boats and personal watercraft, information technology, lawn and garden
products, recreational vehicles, furnaces and air conditioners, motorcycles and
manufactured housing. The primary strategy in this business is to provide one
source for the financing of goods as they move through the distribution channels
from manufacturer to end user. Distribution finance provides its customers with
a variety of financing programs designed to solve their distribution and capital
management problems. Product offerings include inventory financing, trade
receivable servicing and funding, accounts receivable financing, vendor leasing,
retail consumer financing, and commercial debt recovery services. These products
and services are currently provided in North America and parts of Latin America
and Europe. After initial review of the borrower's credit worthiness, the
ongoing management of credit risk include various monitoring techniques, such as
periodic physical inventory checks, monitoring of the borrower's sales and
quality of collateral, and reviewing customer compliance with financial
covenants. In inventory financing, repurchase agreements are maintained with
manufacturers which provide a degree of security in the event of a repossession.
Business credit provides asset-based loans and equipment financing to
middle-market customers, as well as revolving and term loans to early stage
technology companies. The asset-based lending activities consist of secured,
primarily revolving, loans to manufacturers, retailers, and selected service
businesses, as well as to small finance companies. These loans are
collateralized and consist of retained credit lines typically from $5 million to
$40 million with terms ranging from three to five years. Advances under
asset-based loans are limited to specific percentages of the borrowers' eligible
collateral. Credit risk is managed by monitoring the quality of the collateral,
the borrowers' financial performance, and compliance with financial covenants.
The equipment financing activities of business credit include collateralized
loans and leases, primarily to middle-market manufacturing, transportation and
other service companies, secured by equipment essential to the borrowers'
business. Credit risk in the equipment finance business is managed through
rigorous underwriting and transaction structuring. Loans are structured to
amortize at a rate that is faster than the underlying equipment is expected to
depreciate. Also, leases are structured with guaranteed residuals or are
recorded using conservative estimates of the projected fair market value of the
collateral at lease expiration. Technology financing consists of term and
revolving loans to growing companies in the life sciences and specialized
electronics industries to finance research and development, manufacturing, and
other business activities. All loans are secured and are underwritten based on
the strength and viability of the customers' technology, which is evaluated with
the help of scientists and other advisors retained by business credit.
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.
In January 1998, the distribution finance operation completed the
acquisition of approximately $1.1 billion of net receivables and other assets of
the inventory financing, retail financing and international factoring business
of Whirlpool Financial Corporation for a total purchase price of $1.3 billion in
cash, subject to post closing adjustments. The acquisition of the inventory
financing business and most of the international assets closed in 1997. The
distribution finance operation also entered into a long-term strategic alliance
with Whirlpool under which it will provide financing service to Whirlpool's
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dealers and retail customers (through its credit card bank) and factoring
services to Whirlpool's international operations. In 1997, the commercial
lending operation announced that it intended to sell its insurance premium
finance operation and reclassified the insurance premium finance receivables to
assets held for sale. In early 1998 management decided not to proceed with such
sale. In addition, in 1997 the distribution finance operation securitized $1.5
billion of floor plan finance receivables.
On December 31, 1997, the ongoing mortgage lending division that remained
from the former consumer lending segment, which was sold on June 23, 1997, was
contributed to commercial lending. Receivables at December 31, 1997, net of
unearned finance charges and allowance for loss, totaled $101.2 million and
operating results were breakeven for 1997.
In 1995, the commercial lending operation sold for cash a portfolio of
consumer rediscount loans totaling $118 million of net outstanding receivables
which resulted in an after tax gain of $4.8 million. During 1995, it also
entered into a three-year arrangement in which it securitized a $475 million
participation interest in a pool of its insurance premium finance receivables.
This amount was reduced by $100 million to $375 million during 1997.
The commercial lending industry is highly competitive and has seen
increasing numbers of new market entrants. In addition to competition from other
finance companies, there is competition from captive finance subsidiaries of
manufacturing companies and commercial banks. The commercial lending operation
competes by offering a variety of financing products, superior customer service
including prompt credit review, and competitive pricing.
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The following table sets forth certain statistical information relating to
the commercial lending operation's finance receivables for the years indicated.
The table reflects the decision in 1997 to sell the insurance premium finance
operation and the reclassification of its receivables to assets held for sale.
The table excludes the December 31, 1997 transfer of the residual ongoing assets
from the discontinued consumer lending segment.
Years Ended December 31,
____________________________________
1997 1996 1995
--------- --------- ---------
(Dollar amounts in millions)
Volume of finance receivables
acquired:
Distribution finance(1) .............. $12,415.8 $ 8,315.6 $ 7,479.4
Business credit(2) ................... 10,157.7 8,528.8 8,929.8
--------- --------- ---------
Core businesses ...................... 22,573.5 16,844.4 16,409.2
Insurance premium finance(3) ......... 1,823.4 2,014.9 1,804.5
Other ................................ 0.1 18.8
--------- --------- ---------
Total ................................ $24,396.9 $18,859.4 $18,232.5
========= ========= =========
Finance receivables outstanding
at end of year:
Distribution finance(4) .............. $ 2,081.1 $ 2,530.9 $ 2,242.2
Business credit(5) ................... 1,541.4 953.4 680.8
--------- --------- ---------
Core businesses ...................... 3,622.5 3,484.3 2,923.0
Insurance premium finance(3) ......... 309.6 207.1
Other .............. 3.2 6.9
--------- --------- ---------
3,622.5 3,797.1 3,137.0
========= ======= =======
Less unearned finance charges(5) ...... 197.7 142.0 74.3
--------- --------- ---------
Net finance receivables - owned ....... 3,424.8 3,655.1 3,062.7
Net finance receivables securi-
tized, sold and serviced(6) ........... 1,539.6 474.3 474.2
--------- --------- ---------
Net finance receivables owned
and serviced .......................... $ 4,964.4 $ 4,129.4 $ 3,536.9
========= ========= =========
Allowance for losses at end of
year(7)(8) ............................ $ 92.2 $ 82.5 $ 77.9
Ratio to outstandings less
unearned finance charges:(9)
Owned ................................. 2.24% 2.22% 2.51%
Owned and serviced .................... 1.86% 2.00% 2.20%
Provision for credit losses
charged to income ..................... $ 16.2 $ 10.2 $ 16.1
Credit losses (net of
recoveries) ........................... $ 10.1 $ 5.2 $ 10.0
Ratio to average net finance
receivables outstanding:
Owned ................................. 0.25% 0.16% 0.34%
Owned and serviced .................... 0.22% 0.14% 0.29%
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_______
(1) The 1997 increase was primarily due to aggressive sales and marketing
in most of the product lines and the addition of $888 million in gross
receivables from the acquisition of the inventory finance and international
factoring businesses from Whirlpool Finance Corporation.
(2) The increase in 1997 was primarily due to higher direct originations.
The decrease in 1996 was primarily due to lower direct originations offset in
part by an increase in purchased participations relative to 1995.
(3) In 1997, insurance premium finance receivables were transferred to
assets held for sale in line with a plan to sell the operation in 1998. In early
1998 management decided not to proceed with such sale.
(4) The 1997 decrease was primarily due to the securitization of $1.5
billion of inventory floor plan finance receivables, which more than offset the
$888 million increase due to the acquisition of gross finance receivables from
Whirlpool Finance Corporation. The 1996 increase was due mainly to aggressive
sales and marketing in most of the product lines financed.
(5) The increases were primarily due to growth of net receivables in the
equipment finance and lease and technology finance divisions.
(6) The amounts are the balances of securitized receivables outstanding at
year end. Amounts serviced by the insurance premium finance business are
excluded for 1997 following the decision to reclassify the insurance premium
finance receivables to assets held for sale. In 1997, distribution finance
floorplan receivables were securitized. In 1995 and 1996, insurance premium
finance receivables were securitized.
(7) Includes allowance for losses on the securitized, sold and serviced
portfolio of $15.5 million in 1997 and $1.2 million in 1996 and 1995 which is
reported in other liabilities in the consolidated balance sheet.
(8) The increases were attributable to receivables growth in the core
businesses.
(9) The 1996 decline was due to the decreased allowance related to
portfolios sold and liquidated which had a larger percentage reserve requirement
and continued improvement in the credit quality of accounts in the
core businesses.
_____________________
Delinquent Receivables. Delinquent receivables are defined as the
instalment balance for inventory finance and business credit asset based lending
receivables more than 60 days past due and the receivable balance for all other
receivables over 60 days past due.
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The following table shows the ratio of delinquent commercial finance
receivables to finance receivables outstanding for each category and in total as
of the dates indicated.
As of December 31,
____________________________
1997 1996 1995
---- ---- ----
Distribution finance.......... 0.49% 0.30% 0.20%
Business credit............... 0.16
---- ---- ----
Core businesses............... 0.35 0.22 0.15
Insurance premium finance(1).. 2.34 1.40
Other(2)...................... 79.23 53.47
---- ----- -----
Total owned 0.35% 0.46% 0.35%
===== ===== =====
Total owned and serviced 0.25% 0.41% 0.31%
===== ===== =====
_______
(1) In 1997 the insurance premium finance receivables were reclassified to
assets held for sale. The increase in the 1996 ratio was primarily concentrated
in the European receivables portfolio.
(2) Represents finance receivables retained from businesses sold or exited
which are being liquidated. The increase in the 1996 ratio resulted from the
reduction in receivables outstanding primarily due to the sale of the Puerto
Rico portfolio in 1995 which had a lower delinquency ratio in relation to the
other receivables included in this caption. The remaining finance receivables
were liquidated in 1997.
_____________________
Nonearning Receivables. Nonearning receivables are defined as balances from
borrowers that are more than 90 days delinquent or sooner if it appears doubtful
they will be fully collectible. Accrual of finance charges is suspended on
nonearning receivables until past due amounts are collected. Nonearning
receivables were $21.8 million (0.60% of receivables outstanding), $21.4 million
(0.56% of receivables outstanding) and $18 million (0.57% of receivables
outstanding) at December 31, 1997, 1996 and 1995.
Assets Held for Sale. Assets held for sale at December 31, 1997 totaled
$281 million and consisted of insurance premium finance receivables. Of the
finance receivables held for sale at December 31, 1997, $14.2 million were more
than 60 days past due and $7.5 million were classified as nonearning. At
December 31, 1996, assets held for sale totaled $3.4 million, net of a $1.8
million valuation allowance. At December 31, 1995, assets held for sale totaled
$4.4 million, net of a $6.1 million valuation allowance.
Leasing
Transamerica Leasing leases, services and manages containers, chassis and
trailers throughout the world. The leasing operation is based in Purchase,
New York and maintains approximately 450 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, distribution companies and motor carriers.
In October 1996, the leasing operation acquired all of the outstanding
shares of Trans Ocean Ltd., a container leasing company, in exchange for 1.6
million shares ($112.7 million) of Transamerica common stock. The Trans Ocean
fleet comprised approximately 185,600 owned, leased and managed units consisting
of a variety of intermodal equipment types.
The leasing operation is the largest lessor of intermodal transportation
equipment in the industry based on units of equipment available for hire. The
leasing operation competes by providing a high level of service through an
extensive worldwide network of offices and third party depots and by offering a
wide variety of equipment and lease types. The leasing operation's management
information system provides employees and other users, including customers
around the world, with on-line access to key billing and operational
information. In addition, our leasing operation provides structured financing
that enables customers to purchase equipment over time, and an equipment
matching service in which we manage containers for customers and broker
equipment interchanges among them. The leasing operation's main competitors are
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other transportation equipment leasing companies. Due to a world-wide oversupply
of containers the demand for equipment declined in 1997. As a result, a program
of accelerated equipment disposal was initiated at the end of 1997 and will be
implemented in 1998 and subsequent years. Accordingly, at December 31, 1997, the
leasing operation reclassified $96.1 million of revenue earning equipment to
assets held for sale. The oversupply of containers also resulted in a decrease
in rental rates in 1997 as compared to 1996.
At December 31, 1997, the leasing operation's fleet consisted of standard
twenty and forty foot dry containers and specialized containers such as
refrigerated containers, tank containers, high cube, open top and flatrack
equipment types, chassis and U.S. domestic containers totaling 882,100 units
which are leased to customers from approximately 380 depots worldwide; 29,900
rail trailers leased to all major United States railroads and to roll on/roll
off steamship operators, shippers, shippers' agents and regional truckers; and
15,100 over-the-road trailers in Europe.
The following table sets forth the leasing operation's fleet size, in
units, including owned, managed, leased from others and units held for sale:
As of December 31,
________________________________
1997 1996 1995
---- ---- ----
Containers and chassis(1)... 882,100 896,300 708,400
Rail trailers(2)............ 29,900 34,500 36,900
European trailers(3)........ 15,100 10,300 7,700
_______
(1) The 1997 decrease was primarily due to lower equipment acquisitions
relative to disposals, which reflect the world-wide oversupply of units. The
increase in 1996 was primarily due to the acquisition of Trans Ocean.
(2) The decreases resulted from the sale of older units.
(3) The increases reflect expansion in the European trailer market.
___________________
The percent of the leasing operation's fleet on term lease or service
contract minimum lease was 55% in 1997, 53% in 1996 and 51% in 1995. The
increases reflect the continuing trend toward increasing term and service
contract minimum leases which was partially reduced by a lower percentage of
term and service contract minimum leases from the acquired Trans Ocean fleet. At
December 31, 1997, lease terms were one to 15 years.
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The following table sets forth the leasing operation's fleet utilization
for the years indicated:
Years Ended December 31,
__________________________
1997 1996 1995
---- ---- ----
Containers and chassis(1)........ 79% 81% 85%
Rail trailers(2)................. 85% 82% 77%
European trailers(3)............. 92% 92% 95%
_______
(1) The declines were due primarily to a world-wide oversupply of
equipment.
(2) The increases resulted from a continuing strong U.S. economy and a
decline in the supply of equipment.
(3) The 1996 level of utilization declined due to a greater number of
rental units in the fleet and flat demand in most of continental Europe.
____________________
The following tables set forth the volume of lease finance receivables
acquired during the years indicated and the amount of lease finance receivables
outstanding at the end of each such year:
Years Ended December 31,
_________________________________________
1997 1996 1995
---- ---- ----
(Dollar amounts in millions)
Volume of Lease Finance
Receivables Acquired: (1)
Domestic ................ $ 24.5 $ 46.9 $ 22.7
Foreign ................. 110.9 212.1 102.9
------- ------- -------
Total ................... $ 135.4 $ 259.0 $ 125.6
======= ======= =======
_______
(1) The decrease in 1997 reflects a more competitive business environment.
____________
Years Ended December 31,
________________________________________
1997 1996 1995
---- ---- ----
(Dollar amounts in millions)
Lease Finance Receivables
Outstanding: (1)
Domestic ................. $ 37.7 $ 37.4 $ 28.3
Foreign ......... 422.5 411.7 311.8
------- ------- -------
Net finance receivables .. $ 460.2 $ 449.1 $ 340.1
======= ======= =======
_______
(1) The 1997 increase was due mainly to increased volume.
____________
Following is certain information regarding delinquent lease finance
receivables. Because future changes may be impacted by factors such as economic
conditions, the extent and timing of any change in the trend of delinquent
receivables remains uncertain.
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Delinquent receivables are defined as the receivables contractually past
due 60 days or more.
The following table shows the ratio of delinquent lease finance receivables
to total lease finance receivables outstanding as of the end of each of the
years indicated.
Years Ended December 31,
______________________________
1997 1996 1995
---- ---- ----
Lease finance (1)..................... 0.03% 0.10% 0.22%
_______
(1) The decrease in 1997 and 1996 is due to increased collection efforts by
management.
Certain information regarding credit losses on lease finance receivables
for the leasing operation during the years indicated is set forth in the
following table:
Years Ended December 31,
______________________________
1997 1996 1995
---- ---- ----
(Dollar amounts in millions)
Provision for credit losses charged
to income ............................. $ 1.9 $ 0.7 $(0.2)
Credit losses (net of recoveries) ..... $(0.3) $(0.3) $(0.4)
Ratio to average net finance
receivables outstanding .............. 0.00% 0.08% 0.13%
_____________________
Regulation
Transamerica's commercial lending operation is subject to various state and
federal laws. Depending upon the type of lending, these laws my require
licensing and certain disclosures and may limit the amounts, terms and interest
rates that may be offered.
Employees
The Company and its subsidiaries employed approximately 3,500 persons at
December 31, 1997.
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,
______________________________
1997 1996 1995
---- ---- ----
Return on assets(1) ................. 3.5% 0.8% 1.9%
Return on equity(2) ................. 24.9% 5.3% 12.3%
Dividend payout ratio(3) ........... 131.0% 264.8% 109.5%
Equity to assets ratio(4) ........... 14.3% 14.2% 15.8%
_______
(1) Net income divided by total average assets (2 point method).
(2) Net income divided by total average equity (2 point method).
(3) Cash dividends declared divided by net income.
(4) Average total equity divided by total average assets (2 point method).
____________
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Consolidated Ratios of Earnings to Fixed Charges
The following sets forth the consolidated ratio of earnings from continuing
operations to fixed charges for each of the five years ended December 31, 1997.
Years Ended December 31,
____________________________________________________________
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
1.51 1.68 1.70 1.66 1.37
The ratios were computed by dividing income from continuing operations
before fixed charges, income taxes, and extraordinary loss on early
extinguishment of debt in 1993 by the fixed charges. Fixed charges consist of
interest and debt expense, and one-third of rent expense, which approximates the
interest factor.
ITEM 2. PROPERTIES
Not applicable.
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, 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.
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PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Omitted in accordance with General Instruction I.
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 is owned by Transamerica Corporation.
ITEM 6. SELECTED FINANCIAL DATA
Omitted in accordance with General Instruction I.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Omitted in accordance with General Instruction I. See
"Management's Narrative Analysis of Results of Operations" following the
Notes to Financial Statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The response to this item is set forth in "Market Risk" and
"Interest Rate Risk" in "Management's Narrative Analysis of Results of
Operations" following the Notes to the Financial Statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is submitted in a separate section of
this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Omitted in accordance with General Instruction I.
ITEM 11. EXECUTIVE COMPENSATION
Omitted in accordance with General Instruction I.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted in accordance with General Instruction I.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted in accordance with General Instruction I.
<PAGE>
Page 14
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) and (2) The response to this portion of Item 14 is submitted as a
separate section of this report.
(3) List of Exhibits:
3(i) Transamerica Finance Corporation Certificate of Amendment of
Certificate of Incorporation as filed with the Secretary of State of Delaware on
February 19, 1991 (incorporated by reference to Exhibit 3.1a to Registrant's
Form 10-K Annual Report (File No. 1-6798) for the year ended December 31, 1990).
3(ii) Transamerica Finance Corporation By-Laws, as amended, last amendment
- - February 19, 1991 (incorporated by reference to Exhibit 3(ii) to Registrant's
Form 10-K Annual Report (File No. 1-6798) for the year ended December 31, 1994).
4.1 Indenture dated as of April 1, 1991 between Registrant and Harris Trust
and Savings Bank, as Trustee (incorporated by reference to Exhibit 4.1 to
Registrant's Registration Statement on Form S-3 (File No. 33-40236) as filed
with the Commission on August 16, 1991).
4.2*
10.1 Amended and Restated Guaranty dated February 1, 1995 by the Registrant
in favor of Corporate Asset Funding Company, Inc. et al (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, 1995).
10.2 Stock Purchase Agreement by and among Transamerica Corporation,
Transamerica Finance Corporation, Transamerica Financial Services Holding
Company, Household Acquisition Corp. and Household International, Inc. dated as
of May 20, 1997 (incorporated by reference of Exhibit 10.1 to Registrant's
Current Report on Form 8-K dated June 23, 1997).
10.3 Asset Purchase Agreement by and among Whirlpool Financial Corporation,
Transamerica's Distribution Finance Corporation, Whirlpool Corporation and
Transamerica Commercial Finance Corporation, I dated as of September 17, 1997
(incorporated by reference to Exhibit 10.1 to Registrant's Current Report on
Form 8-K dated January 1, 1998).
12 Ratio of Earnings to Fixed Charges Calculation.
23 Consent of Ernst & Young LLP to the incorporation by reference of their
report dated January 23,1998 in the Registrant's Registration Statement on Form
S-3 (File No. 33-58365).
24 Power of Attorney executed by the directors of the Registrant.
27 Financial Data Schedule.
(b) Reports on Form 8-K filed in the fourth quarter of 1997: None
(c) Exhibits: Certain of the exhibits listed in Item (a) 3 above have been
submitted under separate filings, as indicated.
(d) Financial Statement Schedules: The response to this portion of Item 14
is submitted as a separate
section of this report.
_________
*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.
<PAGE>
Page 15
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
Burton E. Broome
Vice President and Controller
Date: March 30,1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 30,1998 by the following persons on,
behalf of the registrant and in the capacities indicated.
Signature Title
Principal Executive Officer:
RICHARD H. FINN* President, Chief Executive Officer and Director
__________________________
Principal Financial Officer:
ROBERT R. MCDUFF Senior Vice President and Treasurer
__________________________
(Robert R. McDuff)
Principal Accounting Officer:
BURTON E. BROOME Vice President, Controller and Assistant Secretary
__________________________
(Burton E. Broome)
Directors:
THOMAS J. CUSACK* Director
RICHARD H. FINN* Director
EDGAR H. GRUBB* Director
FRANK C. HERRINGER* Director
STEVEN A. READ* Director
CHARLES E. TINGLEY* Director
MITCHELL F. VERNICK* Director
ROBERT A. WATSON* Director
*AUSTIN D. KIM
_________________________
(Austin D. Kim)
Attorney-in-Fact
<PAGE>
Page 16
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2), and ITEM 14(d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
Year Ended December 31, 1997
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
SAN FRANCISCO, CALIFORNIA
<PAGE>
Page 17
FORM 10-K - ITEM 14(a)(1) and (2)
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements:
The following consolidated financial statements of Transamerica Finance
Corporation and subsidiaries are included in Item 8:
Consolidated Balance Sheet--December 31, 1997 and 1996
Consolidated Statement of Income--Years ended December 31, 1997, 1996 and 1995
Consolidated Statement of Cash Flows--Years ended December 31, 1997, 1996
and 1995
Consolidated Statement of Stockholder's Equity-Years ended December 31,
1997, 1996 and 1995
Notes to Financial Statements--December 31, 1997
Management's Narrative Analysis of Results of Operations
Supplementary Financial Information--Years ended December 31, 1997 and 1996
The following consolidated financial statement schedule of Transamerica
Finance Corporation and subsidiaries is included in Item 14(d):
None
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission pertain to items which do
not appear in the financial statements of Transamerica Finance Corporation and
subsidiaries or to items which are not significant or to items as to which the
required disclosure has been made elsewhere in the financial statements and
supplementary notes, and such schedules have therefore been omitted.
<PAGE>
Page 18
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Stockholder and
Board of Directors
Transamerica Finance Corporation
We have audited the accompanying consolidated balance sheet of Transamerica
Finance Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, cash flows, and stockholder's equity
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Transamerica Finance Corporation and subsidiaries at December 31, 1997 and 1996,
and the consolidated results of their operations and their cash flows for each
of the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
San Francisco, California
January 23, 1998
<PAGE>
Page 19
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(Amounts in millions, except for share data)
December 31,
1997 1996
-------- ---------
Assets
Cash and cash equivalent................... $ 70.1 $ 398.5
Finance receivables, net of unearned
finance charges....................... 3,992.6 4,104.2
Less allowance for losses ............ (89.3) (85.8)
-------- ---------
3,903.3 4,018.4
Property and equipment - less accumulated
depreciation of $1,190.5 in 1997 and
$1,007.5 in 1996:
Land, buildings and equipment ........ 25.1 30.9
Equipment held for lease ..... 2,996.5 3,118.5
Goodwill, less accumulated amortization of
$156.2 in 1997 and $141.6 in 1996 .... 423.0 368.1
Assets held for sale....................... 377.8 3.4
Net assets of discontinued operations ..... 40.1 4,326.2
Other assets .............................. 889.6 455.6
-------- ---------
$8,725.5 $12,719.6
======== =========
Liabilities and Stockholde's Equity
Debt:
Unsubordinated ....................... $5,341.5 $ 8,974.7
Subordinated ......................... 683.7 904.6
-------- ---------
Total debt............... 6,025.2 9,879.3
Accounts payable and other liabilities .... 1,034.7 731.5
Income taxes payable, of which $338.2
in 1997 and $278.8 in 1996 is deferred 362.4 356.1
Stockholder's equity:
Preferred stock - authorized, 250,000
shares without par value; none issued.
Common stock - authorized, 2,500,000
shares of $10 par value; issued and
outstanding, 1,464,285 shares ....... 14.6 14.6
Additional paid-in capital ............ 1,300.9 1,620.9
Retained earnings ..................... 117.7
Net unrealized gain from investments
marked to fair value ................ 2.7
Foreign currency translation adjustments (12.3) (3.2)
-------- ---------
Total stockholder's equity ........ 1,303.2 1,752.7
-------- ---------
$8,725.5 $12,719.6
======== =========
See notes to financial statements
<PAGE>
Page 20
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
(Amounts in millions)
Years Ended December 31,
___________________________________
1997 1996 1995
---- ---- ----
Revenues
Finance charges ............................. $ 522.5 $ 457.9 $ 436.5
Leasing revenues ............................ 758.7 689.1 669.5
Other ....................................... 48.3 59.5 58.6
------- ------- -------
Total revenues ............................ 1,329.5 1,206.5 1,164.6
Expenses
Interest and debt expense ................... 354.4 314.2 307.5
Depreciation on equipment held for lease .... 275.8 255.1 236.6
Salaries and other operating expenses........ 490.6 406.0 401.7
Provision for losses on receivables and assets
held for sale ............................. 16.2 10.2 (4.0)
------- ------- -------
Total expenses ............................ 1,137.0 985.5 941.8
Income before income taxes .................. 192.5 221.0 222.8
Income taxes ................................ 74.3 81.7 91.0
------- ------- -------
Income from continuing operations............ 118.2 139.3 131.8
Income (loss) from discontinued operations... 261.8 (45.2) 80.4
------- ------- -------
Net income................................... $ 380.0 $ 94.1 $ 212.2
======= ====== =======
See notes to financial statements
<PAGE>
Page 21
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
________________________
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
___________________________________
1997 1996 1995
---- ---- ----
Operating Activities
<S> <C> <C> <C>
Income from continuing operations...................................... $ 118.2 $ 139.3 $ 131.8
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization............................. 296.9 282.2 262.8
Provision for losses on receivables and assets
held for sale............................................. 16.2 10.2 (4.0)
Amortization of discount on long-term debt................ 10.9 9.6 22.9
Change in accounts payable and other liabilities.......... 394.9 103.7 40.1
Change in income taxes payable ........................... 3.1 (4.0) 149.2
Other..................................................... (476.8) (45.2) 10.0
-------- ------- ------
Net cash provided by operating activities.............. 363.4 495.8 612.8
Investing Activities
Finance receivables originated ...................................... (23,262.4)(18,765.1) (18,125.5)
Finance receivables collected and sold............................... 24,043.1 18,086.8 18,003.1
Purchase of property and equipment................................... (386.4) (399.8) (584.1)
Sales of property and equipment...................................... 174.2 386.6 86.3
Purchase of finance receivables from Whirlpool
Finance Corporation ...................................... (881.9)
Proceeds from sale and cash transactions with
discontinued operations.................................. 4,413.2 1,021.8 (783.6)
Other............................................................... (112.1) (48.8) (55.5)
--------- --------- ---------
Net cash provided (used) by investing
activities........................................... 3,987.7 281.5 (1,459.3)
Financing Activities
Proceeds from debt financing....................................... 3,401.7 6,784.5 8,281.5
Payments of debt .................................................. (7,263.5) (6,932.9) (7,333.6)
Capital contributions from parent company ......................... 41.5 11.3 131.0
Cash dividends paid................................................ (497.7) (249.2) (232.4)
Return of capital.................................................. (361.5)
--------- --------- ---------
Net cash provided (used) by financing
activities .......................................... (4,679.5) (386.3) 846.5
--------- --------- ---------
Increase (decrease) in cash and cash equivalents............ (328.4) 391.0
Cash and cash equivalents at beginning of year.............. 398.5 7.5 7.5
--------- --------- ---------
Cash and cash equivalents at end of year ................... $ 70.1 $ 398.5 $ 7.5
======== ======== ========
<FN>
See notes to financial statements
</FN>
</TABLE>
<PAGE>
Page 22
<TABLE>
<CAPTION>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(Amounts in millions)
Net Unrealized
Gain (Loss) Foreign
Additional From Investments Currency
Common Paid-in Retained Marked to Fair Translation
Stock Capital Earnings Value Adjustments
______________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 .......... $ 14.6 $1,363.5 $ 294.1 $ (3.3) $ (9.7)
Net income ............................ 212.2
Capital contribution from parent
company.......................... 133.2
Dividends declared .................... (233.5)
Other changes.......................... 9.9 4.3
------ -------- ------- ------ ----
Balance at December 31, 1995 .......... 14.6 1,496.7 272.8 6.6 (5.4)
Net income............................. 94.1
Capital contribution from parent
company.......................... 124.2
Dividends declared..................... (249.2)
Other changes.......................... (3.9) 2.2
------ -------- ------- ------ ----
Balance at December 31, 1996........... $ 14.6 $1,620.9 $ 117.7 $ 2.7 $ (3.2)
Net income............................. 380.0
Capital contribution from parent
company.......................... 41.5
Dividends declared..................... (497.7)
Return of capital...................... (361.5)
Other changes.......................... (2.7) (9.1)
------ -------- ------- ------ ----
Balance at December 31, 1997........... $ 14.6 $1,300.9 $ 0.0 $ 0.0 $ (12.3)
====== ======== ======= ===== =======
<FN>
See notes to financial statements
</FN>
</TABLE>
<PAGE>
Page 23
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
Transamerica Finance Corporation, (the "Company"), through its
subsidiaries, is principally engaged in commercial lending and leasing
operations. The Company is a wholly owned subsidiary of Transamerica
Corporation. The United States is the primary market for the services offered by
the commercial lending operations while the leasing business operates in the
container business worldwide.
Effective June 30, 1997, a merger was effected between Transamerica Finance
Corporation and its immediate parent, Transamerica Finance Group, Inc., in which
Transamerica Finance Corporation was the surviving corporation. Among other
things, the merger resulted in the contribution by Transamerica Finance Group,
Inc. of its investment in the insurance premium finance business along with
several other small subsidiaries to the Company. The transfer was accounted for
as a pooling of interest and all periods presented have been restated.
Consolidation: The consolidated financial statements include the accounts
of Transamerica Finance Corporation and its wholly owned commercial lending and
leasing subsidiaries. Certain amounts reported in the consolidated financial
statements are based on management estimates. Such amounts may ultimately differ
from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents include money market
funds and marketable securities with original maturities of three months or
less.
Depreciation and Amortization: Property and equipment, including equipment
held for lease, which are stated on the basis of cost, are depreciated by use of
the straight-line method over their estimated useful lives. Other intangible
assets, principally renewal, referral and other rights incident to businesses
acquired, are amortized over estimated future benefit periods ranging from five
to 25 years in proportion to acquired gross profits. Goodwill is amortized using
the straight-line method over periods up to 40 years.
Foreign Currency Translation: The net assets and operations of foreign
subsidiaries included in the consolidated financial statements are attributable
to Canadian and European operations. The accounts of these subsidiaries have
been converted at rates of exchange in effect at year end as to balance sheet
accounts and at average rates for the year as to operations. The effect of
changes in exchange rates in translating foreign subsidiaries' financial
statements is accumulated in a separate component of stockholder's equity.
Transactions with Affiliates: In the normal course of its operations, the
Company has various transactions with Transamerica Corporation and certain of
its other subsidiaries. In addition to the filing of consolidated income tax
returns and the transactions discussed in Note H, these transactions include
computer and other specialized services, various types of insurance coverage and
pension administration, the effects of which are insignificant for all years
presented.
Finance Charges: Finance charges, including loan origination fees, offset
by direct loan origination costs, are generally recognized as earned on an
effective yield method. Accrual of finance charges is suspended on accounts that
contractually become past due in excess of 90 days. Accrual of finance charges
on accounts in nonaccrual status is resumed only when the accounts have been
paid up to contractually current status. Charges collected in advance, including
renewal charges, on distribution finance receivables are taken into income on a
straight-line basis over the periods to which the charges relate.
<PAGE>
Page 24
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS---(Continued)
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.
Leasing: Leasing revenues include revenues earned from rental and operating
leases. Rental revenues are recognized in the period earned. Operating lease
revenue is recognized on the straight-line method over the lease term. Finance
lease income, included in finance charges, represents the excess of the total
lease receivable over the net cost of the related equipment and is deferred and
amortized over the term of the lease using an accelerated method which provides
a level rate of return on the outstanding lease contract receivable.
Derivatives: The Company uses derivative financial instruments to hedge
some of its interest rate and foreign exchange rate risks. The cost of each
derivative contract is amortized over the life of the contract. The amortization
is classified with the results of the underlying hedged item. Contracts are
designated and accounted for as hedges of certain of the Company's liabilities
and outstanding indebtedness and are not marked to market. Gains or losses on
terminated hedges are deferred and amortized over the remaining life of the
hedged item. When a liability which is hedged by a derivative contract is sold
or otherwise disposed of, the derivative contract is either reassigned to hedge
a liability or closed out, and any gain or loss recognized.
Income Taxes: Taxable results of each of the Company's operations are
included in the consolidated federal and certain state income tax returns filed
by Transamerica Corporation, which by the terms of a tax sharing agreement
generally requires the Company to accrue and settle income tax obligations as if
the individual operations filed separate returns with the applicable taxing
authorities. Under the tax sharing agreement, Transamerica Corporation provides
an unlimited carryforward period for the utilization of federal net operating
losses and foreign tax credits. The Company provides deferred taxes based on
enacted tax rates in effect on the dates temporary differences between the book
and tax basis of assets and liabilities reverse.
<PAGE>
Page 25
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS---(Continued)
NOTE B--FINANCE RECEIVABLES
The carrying amounts of finance receivables outstanding were as follows:
Maximum
Original Term
Receivables (in months)
At December 31 At December 31
______________ ______________
1997 1996 1997 1996
---- ---- ---- ----
(Dollar amounts in millions)
Commercial
Distribution finance . $2,081.1 $2,530.9 12 12
Business credit .................. 1,541.4 953.4 84 84
-------- --------
Core Businesses................. 3,622.5 3,484.3
Insurance Premium Finance 309.6 9
Other .......................... 3.2
-------- --------
3,622.5 3,797.1
Less unearned finance charges (197.7) (142.0)
-------- --------
Net finance receivables ......... 3,424.8 3,655.1
-------- --------
Retail*
Finance receivables............... 109.2 360
Less unearned finance charges..... (1.6)
--------
Net finance receivables........... 107.6
--------
Leasing
Finance receivables .............. 601.7 594.0 144 144
Less unearned finance charges..... (141.5) (144.9)
-------- --------
Net finance receivables .......... 460.2 449.1
-------- --------
3,992.6 4,104.2
Less allowance for losses....... (89.3) (85.8)
-------- --------
Total net finance receivables...... $3,903.3 $4,018.4
======== ========
*Retail lending comprises Metropolitan Mortgage and Transamerica Mortgage
Company which remain from the former Consumer Lending segment. After restatement
these portions of the segment reported breakeven results. Going forward the
retail lending business will also include the results of the retail operation
acquired from Whirlpool Finance Corporation on January 1, 1998.
At December 31, 1997 and 1996, finance receivables for which the accrual of
finance charges was suspended amounted to $21.8 million and $21.4 million.
Contractual maturities of finance receivables outstanding, before deduction
of unearned finance charges, at December 31, 1997 were:
Commercial % Leasing % Total %
and Retail
---------- ---- ------- ---- -------- ----
(Dollar amounts in millions)
1998.......... $2,600.0 69.7% $ 126.9 21.1% $2,726.9 62.9%
1999.......... 436.6 11.7 122.8 20.4 559.4 12.9
2000.......... 273.2 7.3 102.8 17.1 376.0 8.7
2001.......... 131.1 3.5 84.2 14.0 215.3 5.0
2002.......... 62.4 1.7 47.9 7.9 110.3 2.5
Thereafter.... 228.4 6.1 117.1 19.5 345.5 8.0
-------- ---- ------- ---- -------- ----
Total....... $3,731.7 100.0% $ 601.7 100.0% $4,333.4 100.0%
======== ===== ======= ===== ======== =====
<PAGE>
Page 26
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS---(Continued)
The commercial lending operation's business credit unit provides revolving
lines of credit, letters of credit and standby letters of credit. At December
31, 1997 and 1996, borrowers' unused credit available under such arrangements
totaled $1,032.5 million and $774.6 million.
Concentration of Risk
The Company engages in the extension of credit to electronics and appliance
dealers, retail recreational products dealers and computer stores. The majority
of these loans is secured by the assets being financed. Additionally the Company
leases, services and manages containers, chassis and trailers throughout the
world. The risk associated with this credit is subject to economic, competitive
and other influences. While a substantial portion of the risk is diversified,
certain operations are concentrated in one industry or geographic area.
The commercial and leasing finance receivables portfolio included 12
customers with individual balances in excess of $20 million. These accounts in
total represented 13% of total commercial and leasing net finance receivables
outstanding at December 31, 1997.
NOTE C--NOTES AND LOANS PAYABLE
At December 31
1997 1996
---- ----
(Amounts in millions)
Short-term debt:
Commercial paper ............................... $1,524.5 $3,884.6
Bank loans ..................................... 269.2 158.7
Revolving lines of credit....................... 66.1
Current portion of long-term debt:
Unsubordinated ............... 640.3 1,026.9
Subordinated ................. 250.5 202.1
-------- --------
Less amounts classified as long-term debt under 2,684.5 5,338.4
noncancelable long-term credit agreements....... 1,793.7 4,109.4
-------- --------
Total short-term debt .......................... 890.8 1,229.0
Long-term debt due subsequent to one year:
5.76% to 9.85% notes and debentures,
maturing through 2011 ...................... 3,150.9 4,501.3
Zero to 6.50% notes and debentures due 2007 to
2012 issued at a discount to yield 13.8% to13.88%;
effective cost of 8.79% to 12.35%; maturity value of
$582.8 million.............................. 182.4 171.5
5.70% to 9.95% subordinated notes and
debentures maturing through 2003 ........... 683.7 904.6
-------- --------
4,017.0 5,577.4
Less amounts due in less than one year ......... 890.8 1,229.0
-------- --------
3,126.2 4,348.4
Short-term debt supported by noncancelable
credit agreements expiring through 2002..... 1,793.7 4,109.4
-------- --------
Total long-term debt due subsequent to one year 4,919.9 8,457.8
Demand loan due Transamerica Corporation ........... 214.5 192.5
-------- --------
Total debt................................. $6,025.2 $9,879.3
======== ========
.
The weighted average interest rate on short-term borrowings at December 31,
1997 and 1996 was 5.8% and 5.5%.
<PAGE>
Page 27
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS---(Continued)
Long-term debt outstanding at December 31, 1997 matures as follows:
Unsubordinated Subordinated Total Average
-------------- ------------ ----- -------
(Amounts in millions)
1998...................... $640.3 $250.5 $ 890.8 7.04%
1999...................... 956.2 211.2 1,167.4 6.99%
2000...................... 321.5 159.5 481.0 6.75%
2001...................... 564.3 2.0 566.3 6.50%
2002...................... 195.1 7.0 202.1 6.91%
Thereafter (1). .......... 655.9 53.5 709.4 7.02%
-------- ------ --------
Total .................. $3,333.3 $683.7 $4,017.0
======== ====== ========
(1) Includes the accreted values at December 31, 1997 on original issue
discount debt and not the amount due at maturity.
Short-term borrowings supported by a non-cancelable credit agreement, are
primarily in the form of commercial paper notes issued by the Company. Such
commercial paper is continuously offered, with maturities not exceeding 270 days
in the U.S. and 365 days in Canada, at prevailing rates for major finance
companies. The cost of short-term borrowings is directly related to prevailing
rates of interest in the money market; such rates are subject to fluctuation.
In support of the short-term debt classified as long-term debt at December
31, 1997, the Company and its parent, Transamerica Corporation, share a credit
agreement with various banks and had the ability to borrow up to $3.5 billion
with interest at variable rates. There were no borrowings outstanding under the
credit line at December 31, 1997. The credit agreement, which expires through
2002, requires the Company to pay an annual fee on the amount committed.
Demand loans due to Transamerica Corporation, in the amount of $214.5
million and $192.5 million at December 31, 1997 and December 31, 1996, accrue
interest daily based on the 30 day commercial paper rate.
Interest rates on borrowings during the years indicated were as follows:
Years Ended December 31,
___________________________
1997 1996 1995
---- ---- ----
Weighted average annual interest rate during year:(1)
Short-term borrowings ............................. 5.48% 5.39% 6.05%
Long-term borrowings .............................. 7.25% 7.49% 7.36%
Total borrowings .................................. 6.59% 6.49% 6.78%
_______
(1) Excludes the cost of maintaining credit lines and the effect of
interest rates on borrowings denominated in foreign currencies.
<PAGE>
Page 28
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS---(Continued)
Interest payments, net of amounts received from interest rate swap
agreements, totaled $481.7 million in 1997, $618.4 million in 1996, and $616.7
million in 1995.
The Company uses derivative financial instruments to hedge some of its
interest rate and foreign exchange rate risk. The Company uses interest rate
exchange agreements to hedge the interest rate risk of its outstanding
indebtedness. These interest rate exchange agreements are intended to help the
Company more closely match the cash flow received from its assets to the payment
on its liabilities, and generally provide that one party pays interest at a
floating rate in relation to movements in a underlying index and the other party
pays interest at a fixed rate. The Company also uses cross currency exchange
agreements, which fix by contract the amounts of various currencies to be
exchanged at a future date with other contracting parties, and forward exchange
contracts whereby the Company agrees to sell to other contracting parties at a
future date a specified amount of foreign currency for a specified amount of
dollars. These agreements are intended to hedge the Company's exposure to
fluctuations in foreign exchange rates when the Company settles its debt
denominated in foreign currencies. At December 31, 1997 and 1996, contracts
designated as hedges of outstanding indebtedness comprised:
<TABLE>
<CAPTION>
1997 1996
___________________________________ ______________________________________
Weighted Weighted Weighted Weighted
Average Average Average Average
Fixed Floating Fixed Floating
Notional Interest Interest Notional Interest Interest
Amount Rate Rate Amount Rate Rate
-------- ---- ---- -------- ---- ----
(Amounts in millions)
<S> <C> <C> <C> <C> <C> <C>
Interest rate exchange agreements -
the Company pays:
Floating rate interest
expense, receives fixed
rate interest income...... $1,174.7 6.6% 5.8% $654.0 6.8% 5.6%
======== === === ====== === ===
Fixed rate interest
expense, receives floating
rate interest income
.......................... $ 80.5 6.2% 5.8% $483.0 6.5% 5.4%
======== === === ====== === ===
Cross currency exchange
and foreign interest rate
swaps..................... $ 76.0 $116.5
======== ======
</TABLE>
While the Company is exposed to credit risk in the event of nonperformance
by the other party, the likelihood of nonperformance is considered low due to
the high credit ratings of the counterparties. At December 31, 1997, the
interest rate exchange agreements are with financial institutions with
investment grade ratings of A or better by one or more of the major credit
rating agencies.
<PAGE>
Page 29
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS---(Continued)
NOTE D--ALLOWANCE FOR LOSSES
Changes in the allowance for losses on finance receivables and assets held
for sale are as follows:
<TABLE>
<CAPTION>
Finance Receivables Assets
_______________________________________________________ Held
Commercial Leasing Total For Sale
---------- ------- ----- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 ............ $ 89.7 $ 3.9 $ 93.6 $65.1
Provision charged to expense ............ 16.1 16.1 (17.8)
Charge-offs ............................. (18.6) (18.6) (60.3)
Recoveries............................... 8.2 8.2
Other ................................... (18.6) 0.2 (18.4) 19.0
------ ----- ------ -----
Balance at December 31, 1995............. 76.8 4.1 80.9 6.0
Provision charged to expense ............ 10.2 10.2 (3.5)
Charge-offs ............................. (12.3) (12.3) (0.7)
Recoveries............................... 7.1 7.1
Other.................................... (0.5) 0.4 (0.1)
------ ----- ------ -----
Balance at December 31, 1996 ............ 81.3 4.5 85.8 1.8
Provision charged to expense ............ 16.2 1.9 18.1
Charge-offs.............................. (14.8) (0.3) (15.1) (1.8)
Recoveries............................... 4.8 4.8
Other.................................... (4.3) (4.3)
------ ----- ------ -----
Balance at December 31, 1997 ............ $ 83.2 $ 6.1 $ 89.3 $ 0.0
====== ===== ====== =====
</TABLE>
NOTE E--DIVIDEND AND OTHER RESTRICTIONS
Under certain circumstances, the provisions of loan agreements and
statutory requirements place limitations on the amount of funds which can be
remitted by the Company to its parent company. The loan agreements also specify
the minimum level of capital that must be maintained. At December 31, 1997, the
Company's capital level exceeded the minimum requirements by $138.7 million.
NOTE F--FAIR VALUE OF FINANCIAL INSTRUMENTS
Finance Receivables
The carrying amounts and estimated fair values of the finance receivable
portfolio at December 31, 1997 and 1996 were as follows:
1997 1996
___________________ __________________
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
________ ________ ________ _________
Fixed rate receivables:............ $1,248.0 $1,275.3 $1,120.6 1,149.9
Variable rate receivables:......... 2,655.3 2,660.5 2,897.8 2,897.8
-------- -------- -------- --------
Total....................... $3,903.3 $3,935.8 $4,018.4 $4,047.7
======== ======== ======== ========
<PAGE>
Page 30
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS---(Continued)
The estimated fair values of the fixed rate receivables are based on the
discounted value of the future cash flows expected to be received using
available secondary market prices for securities backed by similar loans after
adjustment for differences in loan characteristics. In the absence of readily
available market prices, the expected future cash flows are discounted at
effective rates currently offered by the Company for similar loans. For variable
rate loans, which comprise the majority of the commercial loan portfolio, the
carrying amount represents a reasonable estimate of fair value.
Notes and Loans Payable
At December 31, 1997 and 1996 the estimated fair value of debt, using rates
currently available for debt with similar terms and maturities, was $6.6 billion
and $10.2 billion.
The net present value of the interest rate and cross currency exchange
agreements offsets changes in the fair value of the hedged indebtedness, which
are also carried at amortized cost. The fair value of interest rate and cross
currency exchange agreements is the estimated amounts that the Company would
receive or pay to terminate the agreements at the reporting date, taking into
consideration current interest rates and the current creditworthiness of the
exchange agreement counterparties. The fair value of the liability hedges at
December 31, 1997 and December 31, 1996 were gross obligations to counterparties
of $1.0 million and $13.4 million and gross benefits of $40.7 million and $18.9
million resulting in net benefits from counterparties of $39.7 and $5.5 million.
<PAGE>
Page 31
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS---(Continued)
NOTE G--INCOME TAXES
Provision for income taxes on income from continuing operations comprised:
1997 1996 1995
---- ---- ----
(Amounts in millions)
Current taxes:
Federal ........................... $17.8 $26.2 $14.8
State.............................. 0.4 4.8 0.4
Foreign ........................... 3.1 3.2
----- ----- -----
21.3 34.2 15.2
Deferred taxes:
Federal............................. 40.3 41.2 61.3
State .............................. 9.1 5.1 11.4
Foreign............................. 3.6 1.2 3.1
----- ----- -----
53.0 47.5 75.8
----- ----- -----
Total income taxes .............. $74.3 $81.7 $91.0
===== ===== =====
The difference between federal income taxes on income from continuing
operations computed at the statutory rate and the provision for income taxes
was:
1997 1996 1995
---- ---- ----
(Amounts in millions)
Federal income taxes at statutory rate $67.4 $77.4 $78.0
tax benefit........................ 5.3 6.4 7.3
Book and tax basis difference of assets
acquired .......................... 5.5 4.6 4.6
Prior year items..................... (1.1) (4.4)
Other ............................... (2.8) (2.3) 1.1
----- ----- -----
$74.3 $81.7 $91.0
===== ===== =====
Deferred income taxes reflect the net tax effects or temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Deferred tax liabilities
(assets) comprised the following at December 31:
1997 1996
____ ____
(Amounts in millions)
Accelerated depreciation ............................. $672.2 $617.0
Discount amortization on notes and loans payable ..... 77.0 71.6
Direct finance and sales type leases ................. 50.1 29.1
Other ................................................ 47.2 39.3
------ ------
Gross deferred tax liabilities .............. 846.5 757.0
Allowance for losses ................................. (36.2) (30.4)
Net operating loss and foreign tax credit carry forwards (389.6) (375.3)
Other ................................................ (82.5) (72.5)
------ ------
Gross deferred tax assets ............................ (508.3) (478.2)
------ ------
Net deferred tax liability ........................... $ 338.2 $ 278.8
======= =======
Total income tax payments, net of refunds, totaled $149.3 million in 1997,
$50.4 million in 1996 and $67.5 million in 1995. Pretax income from foreign
operations was $15.3 million in 1997, $9.1 million in 1996 and $ 9.2 million in
1995.
<PAGE>
Page 32
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS---(Continued)
NOTE H--PENSION AND STOCK SAVINGS PLANS AND OTHER POST EMPLOYMENT BENEFITS
The Company participates with Transamerica and its subsidiaries in a number
of noncontributory defined pension plans covering substantially all employees.
The Company also participates in various programs sponsored by Transamerica that
provide medical and certain other benefits to eligible retirees. 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. The
Company recognized for continuing operations, for both the pension plan and the
401(k) plan, income of $.3 million in 1997, expense of $1.1 million in 1996 and
expense of $4.7 million in 1995. Additionally, the company recognized a
curtailment gain of $18.8 million in 1997 as a result of the sale of its branch
based consumer lending operation.
NOTE I--COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have noncancelable lease agreements
expiring mainly through 2002. These agreements are principally operating leases
for facilities used in the Company's operations. Total rental expense amounted
to $71.4 million in 1997, $26.1 million in 1996 and $25.8 million in 1995.
Minimum future rental commitments under operating leases for real estate
and equipment as of December 31, 1997 were as follows (in millions):
1998........................ $ 64.5
1999........................ 58.3
2000........................ 52.1
2001........................ 49.6
2002........................ 50.1
Thereafter.................. 220.4
------
$495.0
======
Contingent liabilities arising from litigation, income taxes and other
matters are not expected to have a material effect on the consolidated financial
position or results of operations of the Company and its subsidiaries.
<PAGE>
Page 33
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS---(Continued)
NOTE J--BUSINESS SEGMENT INFORMATION
Business segment data, as required by Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, for each of the years in the three year period ended December 31,
1997 included in the tables on page 35 to 39 of Management's Narrative Analysis
of Results of Operations are an integral part of these financial statements.
Revenues
_____________________________________
1997 1996 1995
-------- -------- --------
(Amounts in millions)
Commercial lending .............. $ 515.5 $ 432.8 $ 423.7
Leasing ......................... 797.8 765.6 733.9
Other (1)........................ 16.2 8.1 7.0
-------- -------- --------
Total Finance............... $1,329.5 $1,206.5 $1,164.6
======== ======== ========
Assets
_________________
1997 1996
-------- --------
(Amounts in millions)
Commercial lending .................... $4,613.2 $ 4,023.5
Leasing ............................... 3,929.4 3,928.5
Net assets of discontinued operations.. 40.1 4,326.2
Other (1).............................. 142.8 441.4
-------- ---------
Total ....................... $8,725.5 $12,719.6
======== =========
(1) Unallocated items including intercompany eliminations
<PAGE>
Page 34
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS---(Continued)
Foreign revenues of the Company's foreign domiciled operations were as
follows:
1997 1996 1995
______________ ______________ ______________
Foreign Foreign Foreign
Revenue % Revenue % Revenue %
------- ----- ------- ----- ------ -----
(Amounts in millions)
Canada...................... $ 25.2 15.8% $ 24.6 18.8% $ 30.9 27.0%
Europe ..................... 134.6 84.2 106.1 81.2 83.5 73.0
------ ----- ------ ----- ------ -----
Total ...................... $159.8 100.0% $130.7 100.0% $114.4 100.0%
====== ===== ====== ===== ====== =====
Percent of total revenues... 12.0% 10.8% 9.8%
NOTE K--ACQUISITIONS
In 1996, the Company acquired Trans Ocean Ltd., ("TOL") a container leasing
company, through a non-cash capital contribution from Transamerica Corporation.
Transamerica Corporation acquired TOL through the exchange of approximately 1.6
million shares of Transamerica common stock for the outstanding stock of Trans
Ocean Ltd. The fleet contained approximately 185,600 owned and managed units,
consisting of a variety of equipment types.
NOTE L-DISCONTINUED OPERATIONS On June 23, 1997, the Company sold its
branch-based consumer lending operation. Gross proceeds from the sale were $3.9
billion, or $1.1 billion after repayment of associated debt. In December 1997,
the Company decided to exit the Consumer lending business entirely. The results
of the consumer lending business have been reclassified to discontinued
operations and all prior periods have been restated.
At December 31, 1997 and 1996, the net assets of the discontinued consumer
lending business, included in the Company's consolidated balance sheet as net
assets of discontinued operations, are summarized as follows:
(Amounts in millions) 1997 1996
________________________________________________________________________________
ASSETS
Investments................................ $ 126.3
Finance receivables........................ 3,885.4
Assets held for sale....................... $ 33.8 83.1
Deferred income taxes...................... 11.7 111.4
Other assets............................... 20.4 175.1
------ ---------
Total assets........................... $ 65.9 $ 4,381.3
====== =========
LIABILITIES................................ $ 25.8 $ 55.1
------ ---------
Total liabilities...................... 25.8 55.1
------ ---------
Net assets of discontinued operations.. $ 40.1 $ 4,326.2
====== =========
The following results of the discontinued consumer lending business are
included in income from discontinued operations:
(Amounts in millions) 1997 1996 1995
________________________________________________________________________________
Revenues.................................. $290.4 $759.9 $782.5
Gain on sale of branch based consumer
lending operation.................... 469.0
------ ------ ------
Total revenues............................ 759.4 759.9 782.5
Expenses.................................. 310.3 836.4 648.5
------ ------ ------
Income (loss) before taxes................ 449.1 (76.5) 134.0
Income tax provision (benefit)............ 187.3 (31.3) 53.6
------ ------ ------
Income (loss) from discontinued operations $261.8 $(45.2) $ 80.4
====== ====== ======
<PAGE>
Page 35
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
Transamerica Finance Corporation, which is a separate Securities and
Exchange Commission registrant, includes Transamerica's commercial lending and
leasing operations.
The Company provides funding for its subsidiaries' commercial lending and
leasing operations. Capital is allocated among the operations on the basis of
expected returns and creation of shareholder value. The Company's principal
assets are finance receivables and equipment held for lease, which totaled a
combined $6.9 billion at December 31, 1997 and $7.1 billion at December 31,
1996. The Company's total notes and loans payable were $6.0 billion at December
31, 1997 and $9.9 billion at December 31, 1996. Variable rate debt was $3.5
billion at December 31, 1997 compared to $5.5 billion at December 31, 1996. The
ratio of debt to tangible equity was 6.5:1 at December 31, 1997 and 6.8:1 at
December 31, 1996. Tangible equity is defined as total equity less goodwill plus
minority interest.
The Company offers publicly, from time to time, senior or subordinated debt
securities. Public debt issued totaled $120 million in 1997, $688 million in
1996 and $832 million in 1995. Under a shelf registration filed in April 1995
with the Securities and Exchange Commission the Company may offer up to $3
billion of senior or subordinated debt securities (which may include medium term
notes) with varying terms, of which $1.8 billion had not been issued at December
31, 1997. For a further discussion regarding borrowing operations and related
use of derivatives, see Note C, Notes and Loans Payable in the financial
statements included in Item 8.
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 $24 billion during 1997, $18.1
billion during 1996 and $18 billion during 1995.
The following table sets forth income by line of business for the periods
indicated:
Income by Business Segment
(Amounts in Millions) 1997 1996 1995
________________________________________________________________________________
Commercial lending....................... $ 92.1 $ 73.2 $ 75.2
Leasing ................................. 40.6 80.8 75.1
Other ................................... (1.2) (1.9) (5.5)
Amortization of goodwill................. (13.3) (12.8) (13.0)
------ ------ ------
Total income from continuing operations . $118.2 $139.3 $131.8
====== ====== ======
The following discussion should be read in conjunction with the information
presented under Item1, Business.
Commercial Lending
Transamerica's commercial lending operation makes loans to small, medium
and large businesses. At the end of 1997 we had net finance receivables owned
and serviced of $5 billion in two core businesses: distribution finance and
business credit.
Our distribution finance operations provide financial services to
manufacturers, distributors, resellers, retailers and commercial and consumer
end users. We primarily serve companies who sell consumer electronics and
appliances, marine products such as boats and personal watercraft, information
technology, lawn and garden products, recreational vehicles, furnaces and air
conditioners, motorcycles and manufactured housing. Our primary strategy in this
business is to provide one source for the financing of goods as they move
through the distribution channels from manufacturers to end user. We believe
this strategy will help us respond to pricing pressure as new competitors
continue to enter this market. The growing market for securitization of
receivables (selling receivables to third parties while retaining the servicing
of the customer accounts) has enabled new competitors to enter the market using
less capital than was previously required. In 1997, we securitized $1.5 billion
of floor plan finance receivables which adds additional flexibility to our
funding strategies as our receivables portfolio grows. We are pursuing growth
opportunities for distribution finance in Europe, in retail financing, and
through joint ventures with our customers.
<PAGE>
Page 36
In January 1998, the distribution finance operation completed the
acquisition of approximately $1.1 billion of net receivables and other assets of
the inventory financing, retail financing and international factoring
(receivables financing) businesses of Whirlpool Financial Corporation for a
total purchase price of $1.3 billion in cash. The acquisition of the inventory
finance and most of the international finance assets closed in 1997. The
acquisition has given us a stronger presence domestically and a significantly
expanded international business base. We have also entered into a long-term
strategic alliance with Whirlpool under which we will provide financing service
to Whirlpool's dealers and retail customers (through our credit card bank) and
factoring services to Whirlpool's international operations.
Transamerica business credit provides a variety of financial products for
commercial customers. We extend asset-based credit facilities, which are
underwritten based on collateral coverage or cash flow characteristics, to
middle market companies for business expansion, acquisitions, and financial
restructurings. Through our equipment finance and lease division, which was
started in 1995, we support our customers' growth by financing an array of fixed
assets, including manufacturing, construction and transportation equipment. In
late 1996, we began providing short-term equipment loans, leases and revolving
credit facilities for venture capital-supported development stage companies,
primarily in the life sciences and electronics markets, through our technology
finance division. Additionally, Transamerica business credit provides capital
for other financial services providers, primarily in the form of loans extended
by our financial services funding division, as well as through joint venture
arrangements.
Net income from our commercial lending operations was $80.9 million in
1997, an increase of $18.3 million (29%) from $62.6 million in 1996. Income
before the amortization of goodwill grew $18.9 million (26%) from 1996.
Operating results for 1997 included an after tax gain of $5.4 million on the
sale and securitization of $1.5 billion of floor plan finance receivables and a
$3.2 million tax benefit from tax matters resolved in 1997. In 1996, operating
results included a $4.5 million benefit primarily from the favorable resolution
of disputed issues surrounding the 1995 sale of assets in Puerto Rico. In 1995,
operating results included a $12.2 million after tax benefit from reversing a
valuation allowance no longer required following the Puerto Rican asset sale and
a $4.8 million after tax gain on the sale of a portfolio of consumer rediscount
loans.
Excluding the above items, commercial lending income from operations before
the amortization of goodwill increased $14.8 million (22%) in 1997 and $10.5
million (18%) in 1996. In 1997, higher average net receivables outstanding
contributed to the growth in operating income. In 1997, the commercial lending
operation announced that it intends to sell its insurance premium finance
operation and reclassified those receivables as assets held for sale. In 1996,
growth in each of the core businesses led to higher average receivables
outstanding and increased operating income.
Revenues in 1997 grew $82.7 million (19%) from 1996 as higher average net
receivables outstanding more than offset a decline in yield due to increased
competition. Revenues in 1997 included an $8.7 million gain on the
securitization of floor plan finance receivables. Revenues rose $9.1 million
(2%) in 1996 principally due to growth in average net receivables outstanding.
Interest expense increased $31.5 million (21%) from 1996 principally due to
the higher average debt level needed to support receivables growth. In 1996,
interest expense fell $300,000 from 1995 because of the lower average interest
rate paid on borrowings, which was partially offset by a higher average debt
level due to receivables growth.
Operating expenses increased $17 million (11%) in 1997 and $3.6 million
(2%) in 1996 primarily because of higher business volume and average net
receivables outstanding. The provision for losses on receivables increased in
1997 by $6 million (60%) from 1996, partially due to growth in the average net
receivables outstanding. In addition, the provision for losses on receivables
decreased $5.9 million (37%) in 1996 from 1995 due to lower credit losses and
because reserves were higher in the liquidating portfolio than were ultimately
necessary.
Credit losses, net of recoveries, as a percentage of average finance
receivables outstanding, net of unearned finance charges, were 0.25% in 1997,
0.16% in 1996 and 0.34% in 1995.
We have established an allowance for losses equal to 2.24% of net finance
receivables outstanding as of December 31, 1997 compared to 2.22% at December
31, 1996.
<PAGE>
Page 37
Delinquent receivables are defined as instalments for inventory finance and
asset-based lending receivables more than 60 days past due and the outstanding
loan balance for all other receivables more than 60 days past due. At December
31, 1997, delinquent receivables were $12.7 million (0.35% of receivables
outstanding) compared to $17.3 million (0.46% of receivables outstanding) at
December 31, 1996. Delinquent receivables declined due to the reclassification
of the insurance premium finance receivables to assets held for sale.
Nonearning receivables are defined as balances from borrowers that are more
than 90 days delinquent or sooner if it appears doubtful they will be fully
collectible. Accrual of finance charges is suspended on nonearning receivables
until past due amounts are collected. Nonearning receivables were $21.8 million
(0.60% of receivables outstanding) at December 31, 1997 compared to $21.4
million (0.56% of receivables outstanding) at December 31, 1996. An increase in
nonearning receivables in the core business was partly offset by the
reclassification of the insurance premium finance receivables to assets held for
sale.
Assets held for sale as of December 31, 1997 totaled $281 million. Of the
finance receivables held for sale at December 31, 1997, $14.2 million were more
than 60 days past due and $7.5 million were classified as nonearning.
Commercial Lending
(Amounts in millions) 1997 1996 1995
---- ---- ----
REVENUES
Finance charges and related income.................. $515.5 $432.8 $423.7
EXPENSES
Interest............................................ 179.9 148.4 148.7
Operating expenses.................................. 176.9 159.9 156.3
Provision for losses on receivables................. 16.2 10.2 16.1
Provision (benefit) for losses on assets held for sale (20.1)
Income taxes........................................ 50.4 41.1 47.5
------ ------ ------
423.4 359.6 348.5
------ ------ ------
Income from operations.............................. 92.1 73.2 75.2
Amortization of goodwill............................ (11.2) (10.6) (10.9)
------ ------ ------
Net income.......................................... $ 80.9 $ 62.6 $ 64.3
====== ====== ======
<PAGE>
Page 38
Leasing
Transamerica leasing's fleet of intermodal transportation equipment is the
largest in the world. Intermodal equipment can be carried on ships or railcars
or hauled by trucks. We lease this equipment to and manage it for steamship
lines, railroads, shippers, distribution companies and motor carriers. In
addition to service and term operating leases, we provide structured financing
that enables customers to purchase equipment over time, and an equipment
matching service in which we manage containers for customers and broker
equipment interchanges among them.
Most of our intermodal containers are used in international trade, while
our chassis, rail trailers and domestic containers are used primarily within
North America. We also have an over the road trailer leasing business in Europe.
In 1997, utilization rates for our container fleet declined to 79% from 81%
in 1996 due primarily to oversupply in the industry.
Net income from leasing operations in 1997 declined 51% to $38.6 million.
Leasing income before the amortization of goodwill was $40.6 million compared to
$80.8 million in 1996.
Earnings were reduced by a $25.8 million after tax provision for expected
losses on the accelerated disposition of equipment (primarily standard
containers) and the restructuring of the operation's field offices to reduce
costs. The accelerated disposition is in response to an oversupply of units.
Earnings for standard and refrigerated containers were also reduced by lower
rental rates, a decline in utilization and decreased gains on the sale of used
standard containers. Partially offsetting these declines were improved earnings
from tank and domestic containers, chassis and European trailers. All of these
lines had more on-hire units than in 1996. Additionally, rail trailers reported
higher income due to improved utilization and rental rates and structured
finance earnings improved due to a larger portfolio of finance leases.
Excluding the impact of the accelerated equipment disposal and
restructuring, leasing earnings before the amortization of goodwill were $66.4
million compared to $80.8 million in 1996.
In 1996, income from leasing operations rose $5.7 million (8%) from 1995.
The increase was primarily due to a larger portfolio of finance leases and lower
ownership costs for the rail trailer business attributed to a smaller fleet.
Income in 1996 included $4.4 million from the resolution of outstanding tax
issues and the tax benefits from entering into structured lease transactions.
Partially offsetting these increases were reduced earnings in standard and
refrigerated containers and chassis due to lower utilization rates, and lower
standard container and chassis rental rates.
Revenue increased in 1997 by $32.2 million (4%) primarily because the
October 1996 acquisition of Trans Ocean Ltd. increased the size of the fleet of
standard, refrigerated and tank containers and chassis by approximately 25%.
Revenue also increased as a result of a larger portfolio of finance leases and
more on-hire European trailers. Offsetting these increases were the provision
for the expected loss due to the accelerated equipment disposal and lower
revenues from decreased rental rates and decreased utilization for standard and
refrigerated containers resulting primarily from an industry-wide oversupply of
equipment. In addition, rail trailer revenues were lower due to a smaller fleet
size.
Revenues increased in 1996 by $31.7 million (4%) primarily due to a larger
on-hire fleet of refrigerated containers, tank containers and European trailers
and a larger portfolio of finance leases. Partially offsetting these revenue
increases was a decline in standard container revenues due to lower utilization
and rental rates and lower gain on used equipment sales. Rail trailer revenues
also declined because of a smaller fleet and lower gains on used equipment
sales.
Expenses excluding income taxes increased $89.3 million (14%) in 1997 due
to higher ownership and operating costs associated with our larger fleets of
standard and refrigerated containers, chassis and European trailers and the
provision associated with the restructuring. In 1996, expenses excluding income
taxes increased $31.2 million (5%), in line with larger fleets of refrigerated
containers, chassis and European trailers. Lower operating expenses from a
smaller rail trailer fleet partially offset those higher costs.
<PAGE>
Page 39
The combined utilization rate for standard containers, refrigerated
containers, domestic containers, tank containers and chassis averaged 79% in
1997 compared to 81% in 1996 and 85% in 1995. Rail trailer utilization was 85%
in 1997, 82% in 1996 and 77% in 1995. European trailer utilization was 92% in
both 1997 and 1996 and 95% in 1995.
In addition to leasing services, we are developing and using technology to
provide more and better information to our customers via the internet and
offering equipment management services. We are also concentrating on reducing
our costs of operations in line with lower margins in an increasingly
competitive pricing market for international containers. Our European trailer
operation continues to provide opportunities for growth, as we added 5,100 units
in 1997, making us one of only two leasing companies to provide equipment
throughout Europe.
Leasing
(Amounts in millions) 1997 1996 1995
---- ---- ----
REVENUES
Total leasing revenues ....................... $797.8 $765.6 $733.9
EXPENSES
Operating expenses ........................... 174.1 129.2 126.5
Depreciation on equipment held for lease...... 275.8 255.1 236.6
Selling and administrative expenses .......... 116.7 95.5 95.1
Interest ..................................... 166.1 163.6 154.0
Income taxes.................................. 24.5 41.4 46.6
------ ------ ------
757.2 684.8 658.8
------ ------ ------
Income from operations........................ 40.6 80.8 75.1
Amortization of goodwill...................... (2.0) (2.0) (2.0)
------ ------ ------
Net income.................................... $ 38.6 $ 78.8 $ 73.1
====== ====== ======
Market Risk
Market risk is the risk of loss that may occur when fluctuations in
interest and currency exchange rates and equity and commodity prices change the
value of a financial instrument. Both derivative and nonderivative financial
instruments have market risk so our risk management extends beyond derivatives
to encompass all financial instruments we hold that are sensitive to market
risk. The Company is primarily exposed to interest rate risk.
Interest Rate Risk
The Company's operations are subject to risk from interest rate
fluctuations when there is a difference between the amount of our interest
earning assets and the amount of our interest bearing liabilities that are
prepaid, mature or repriced in specified periods. We manage our exposure to
interest rate fluctuations by managing the characteristics of our assets and
liabilities so that changes are offset. Our objectives for asset liability
management are to provide maximum levels of finance income and minimize funding
costs while maintaining acceptable levels of interest rate and liquidity risk
and facilitating the funding needs of the Company. To help achieve these
objectives, we use derivative financial instruments including interest rate
swaps that correlate to instruments recorded on our balance sheet.
If market interest rates on December 31, 1997 abruptly increased 75 basis
points, the fair value of our finance receivables portfolio would decrease
approximately $23 million, the fair value of our debt would decrease
approximately $81 million and the fair value of our interest rate swaps would
decrease approximately $41 million. Conversely, if rates on December 31, 1997
abruptly decreased 75 basis points the fair value of our finance receivables
portfolio would increase approximately $23 million, the fair value of our debt
would increase approximately $81 million and the fair value of our interest rate
swaps would increase approximately $41 million.
We determined these amounts by considering only the impact of the
hypothetical interest rate change. These analyses do not consider the possible
effect a change in economic activity could have in such an environment. Also, in
the event of a change of such magnitude, we would likely take action to mitigate
our exposure to the negative consequences. Our customers and competitors would
also respond to these fluctuations, and regulators or legislators might act in
ways we cannot foresee. Because we cannot be certain what specific actions would
be taken and their effects, the sensitivity analysis above assumes no
significant changes in the Company's financial structure.
<PAGE>
Page 40
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
(Amounts in millions)
Year Ended
Three Months Ended December 31,
__________________________________
3/31/97 6/30/97 9/30/97 12/31/97 1997
------- ------- ------- -------- --------
Revenues ....................... $328.7 $327.0 $336.7 $337.1 $1,329.5
Income from continuing
operations................... $ 35.1 $ 31.1 $ 34.9 $ 17.1 $ 118.2
Income (loss) from discontinued
operations................... 275.0 1.1 (14.3) 261.8
------ ------ ------ ------ --------
Net income...................... $ 35.1 $306.1 $ 36.0 $ 2.8 $ 380.0
====== ====== ====== ===== =======
Year Ended
Three Months Ended December 31,
__________________________________
3/31/96 6/30/96 9/30/96 12/31/96 1996
------- ------- ------- -------- --------
Revenues....................... $288.3 $291.1 $294.1 $333.0 $1,206.5
Income from continuing
operations.................. $ 28.6 $ 33.1 $ 40.0 $ 37.6 $ 139.3
Income (loss) from discontinued
operations.................. 17.8 (4.7) (65.8) 7.5 (45.2)
------ ------ ------ ------ --------
Net income (loss).............. $ 46.4 $ 28.4 $ (25.8) $ 45.1 $ 94.1
====== ====== ======= ====== ======
Page 41
EXHIBIT 12
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (UNAUDITED)
(Dollar amounts in millions)
<TABLE>
<CAPTION>
Years Ended December 31,
________________________________________________________________________________
<S> <C> <C> <C> <C> <C>
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
Fixed charges:
Interest and debt expense........... $354.4 $314.2 $307.5 $234.9 $172.2
One-third of rent expense....... 23.8 8.7 8.6 16.4 13.0
------ ------ ------ ------ ------
Total....................... $378.2 $322.9 $316.1 $251.3 $185.2
====== ====== ====== ====== ======
Earnings:
Income (loss) from continuing
operations before income
taxes and extraordinary
loss on early extinguishment
of debt in 1993............. $192.5 $221.0 $222.8 $166.8 $ 69.2
Fixed charges................. 378.2 322.9 316.1 251.3 185.2
------ ------ ------ ------ ------
Total...................... $570.7 $543.9 $538.9 $418.1 $254.4
====== ====== ====== ====== ======
Ratio of earnings to fixed
charges..................... 1.51 1.68 1.70 1.66 1.37
==== ==== ==== ==== ====
</TABLE>
Page 42
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-3 (File No. 33-58365) and related Prospectuses, of Transamerica
Finance Corporation of our report dated January 23, 1998 with respect to the
consolidated financial statements of Transamerica Finance Corporation included
in this Annual Report (Form 10-K) for the year ended December 31, 1997.
Ernst & Young LLP
San Francisco, California
March 25, 1998
Page 43
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS:
Each of the undersigned hereby constitutes and appoints BURTON E. BROOME,
GEORGE B. SUNDBY and AUSTIN D. KIM, and each of them with power to act alone,
his or her true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead, in any and all capacities, to sign (either manually or electronically
through the EDGAR System of the United States Securities and Exchange
Commission) the 1997 Annual Report on Form 10-K for Transamerica Finance
Corporation and any and all amendments thereto, and to file the same, together
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto such attorney-in-fact full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises hereof, as fully to all intents
and purposes as he or she might do or could do in person, hereby ratifying and
confirming all that said attorney-in-fact or his or her substitutes may lawfully
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned directors of Transamerica Finance
Corporation have executed this Power of Attorney effective as of the 30th day of
March, 1998.
THOMAS J. CUSACK STEVEN A. READ
______________________________ __________________________
Thomas J. Cusack Steven A. Read
RICHARD H. FINN CHARLES E. TINGLEY
______________________________ __________________________
Richard H. Finn Charles E. Tingley
EDGAR H. GRUBB MITCHEL F.VERNICK
______________________________ __________________________
Edgar H. Grubb Mitchel F. Vernick
FRANK C. HERRINGER ROBERT A. WATSON
______________________________ __________________________
Frank C. Herringer Robert A. Watson
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-01-1997
<PERIOD-END> Dec-31-1997
<CASH> 70
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,022
<DEPRECIATION> 1,191
<TOTAL-ASSETS> 8,726
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 1,288
<TOTAL-LIABILITY-AND-EQUITY> 8,726
<SALES> 0
<TOTAL-REVENUES> 1,330
<CGS> 0
<TOTAL-COSTS> 276
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 16
<INTEREST-EXPENSE> 354
<INCOME-PRETAX> 192
<INCOME-TAX> 74
<INCOME-CONTINUING> 118
<DISCONTINUED> 262
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 380
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
