SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended September 30, 1994
Commission File Number 1-6798
_____________________________________
TRANSAMERICA FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-1077235
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1150 South Olive Street
Los Angeles, California 90015
(Address of principal executive offices)
(Zip Code)
(213) 742-4321
(Registrant's telephone number, including area code)
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 _______
Number of shares of common stock, $10 par value, outstanding as of
close of business on November 11, 1994: 1,464,285 shares.
The registrant meets the conditions set forth in General Instructions
H(1)(a) and (b) of Form 10-Q and is therefore filing this Form with the
reduced disclosure format.
<PAGE>
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PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following unaudited consolidated financial statements of
Transamerica Finance Corporation and Subsidiaries (the Company),
for the periods ended September 30, 1994 and 1993, do not include
complete financial information and should be read in conjunction
with the Consolidated Financial Statements filed with the Commission
in the Company's Annual Report on Form 10-K for the year ended
December 31, 1993. The financial information presented in the
financial statements included in this report reflects all adjustments,
consisting only of normal recurring accruals, which are, in the
opinion of management, necessary for a fair statement of results for
the interim periods presented.
The operations of the Company are subject to risk of interest rate
fluctuations to the extent that there is a difference between the cash
flows from the Company's interest-earning assets and the cash flows
related to its liabilities that mature or are repriced in specific
periods. In the normal course of its operations, the Company hedges
some of its interest rate risk with financial instrument derivatives.
Such derivatives comprise primarily interest rate swap agreements.
Interest rate swap agreements are intended to help the Company to more
closely match the cash flow received from its assets to the payments on
its liabilities. These agreements generally provide that one party pays
interest at a floating rate and the other party pays interest at a
fixed rate. While the Company is exposed to credit risk in the event of
nonperformance by the other party, nonperformance is not anticipated due
to the credit rating of the counterparties. At September 30, 1994, the
interest rate swap agreements are with banks rated A or better by one or
more of the major credit rating agencies.
The interest rate swap contracts are designated and accounted
for as hedges of a portion of the Company's outstanding indebtedness,
and their cost is amortized over the shorter of the lives of the
contracts or the lives of the related liabilities. At September 30,
1994, such contracts comprise agreements in which the Company pays
floating rate interest and receives fixed rate payments, at a weighted
average rate of 7.23%, on an aggregate notional amount of $266 million;
agreements whereby it makes fixed rate payments, at a weighted average
interest rate of 6.76%, and receives floating rate interest on an
aggregate notional amount of $525.7 million; and agreements whereby it
makes floating rate payments referenced to one index and receives
floating rate interest referenced to another index on an aggregate
notional amount of $210 million. The net present value of these interest
rate swap agreements, which offset changes in the fair value of the
hedged indebtedness, which in accordance with generally accepted
accounting principles are also carried at amortized cost, was a net
benefit from counterparties of $3.6 million, comprising a gross
obligation of $3.8 million and a gross benefit of $7.4 million.
In the first quarter of 1994 the Company adopted Statement of
Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities. This new standard
requires the Company to report at fair value those investments
which it does not have the positive intent and ability to hold to
maturity. The effect of this adjustment, net of federal income
taxes, is recorded in a separate component of shareholder's
equity. There is no effect on the income statement. All of the
Company's investments in debt securities have been classified as
available for sale at September 30, 1994.
On March 15, 1994, the Company acquired substantially all the
operating assets of the Container Operations of Tiphook plc ("Tiphook"),
a London-based transportation equipment rental company, including
certain dry cargo containers, tank containers, tank chassis, operating
leases and other assets (collectively the "Container Operations")
for $1,051 million in cash. The Company assumed certain specified
liabilities of the Container Operations including trade accounts
payable. The Company did not assume any borrowings, tax liabilities
or contingent liabilities of Tiphook. On March 15, 1994, the Company
paid to Tiphook $1 billion and delivered $50.7 million to escrow agents
for the establishment of a general escrow account ($40.4 million) and a
repairs escrow account ($10.3 million). Subsequently, the Company has
made further payments of $15.6 million upon delivery of certain bills
of sale and releases of liens pending at the date of close.
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Upon completion of examination of the closing balance sheet
of the Container Operations as of March 15, 1994 by the Company's
auditors and Tiphook's auditors, certain purchase price adjustments
were agreed to on September 19, 1994 and resulted in a $15.3 million
purchase price reduction. The funds were paid to the Company from
the escrow accounts, discussed above, in October 1994.
Had the acquisition of the Container Operations been
accomplished as of January 1, 1993, revenues for the Company would
have been approximately $1,260 million and $1,220 million for the
nine month periods ended September 30, 1994 and 1993. The pro
forma effect on net income would have been immaterial. This
information is for illustrative purposes only and is not necessarily
indicative of the future results of the operations of the combined
company, or of the results of the operations of the combined company
that would have actually occurred had the transaction been in effect
for the periods presented. In addition, it should be noted that
Transamerica Finance Corporation's financial statements reflect the
acquisition from March 15, 1994, the closing date of the transaction.
**********
The consolidated ratios of earnings to fixed charges were
computed by dividing income before fixed charges and income taxes
by the fixed charges. Fixed charges consist of interest and debt
expense, and one-third of rent expense, which approximates the
interest factor.
Certain amounts for 1993 have been reclassified to conform
with the 1994 presentation.
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TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, December 31,
1994 1993
----- ----
ASSETS
Cash and cash equivalents $ 29.0 $ 29.3
Investments - available for sale 110.4 110.1
Finance receivables, net of unearned finance
charges and insurance premiums:
Consumer lending 3,992.8 3,650.5
Commercial lending 2,710.4 2,600.5
--------- --------
Net finance receivables 6,703.2 6,251.0
Less allowance for losses 198.7 179.4
--------- --------
6,504.5 6,071.6
Property and equipment - less accumulated
depreciation:
Land, buildings and equipment 48.9 43.7
Equipment held for lease 2,589.6 1,306.5
Investments in and advances to affiliates 272.6 371.0
Goodwill, less accumulated amortization 354.5 372.4
Assets held for sale 254.2 386.3
Less valuation allowance 73.6 159.5
--------- --------
180.6 226.8
Other assets 692.9 500.0
--------- --------
$10,783.0 $9,031.4
LIABILITIES AND SHAREHOLDER'S EQUITY
Debt:
Unsubordinated $ 7,577.2 $6,335.4
Subordinated 845.3 696.1
--------- --------
Total debt 8,422.5 7,031.5
Accounts payable and other liabilities
Income taxes payable 704.5 484.0
Shareholder's equity: 87.3 66.3
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 1,455.7 1,356.5
Retained earnings 109.0 87.1
Net unrealized loss from investments marked to (2.2)
fair value
Foreign currency translation adjustments (8.4) (8.6)
--------- --------
Total shareholder's equity 1,568.7 1,449.6
--------- --------
$10,783.0 $9,031.4
========= ========
(Amounts in millions except for share data)
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TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
Nine Months Ended Three Months Ended
September 30, September 30,
1994 1993 1994 1993
-------- -------- ------- -------
REVENUES
Finance charges $ 729.5 $ 696.6 $ 250.8 $ 233.2
Leasing revenues 445.0 282.7 166.8 99.0
Servicing fees 0.3 0.8 0.1 0.2
Income from affiliates 12.9 13.2 4.3 4.3
Other 36.7 40.5 12.8 13.5
-------- ------- ------ ------
Total revenues 1,224.4 1,033.8 434.8 350.2
-------- -------- ------ ------
EXPENSES
Interest and debt expense 347.2 313.0 126.4 101.0
Depreciation on equipment 140.7 74.3 55.3 26.2
held for lease
Salaries and other 435.6 385.7 150.7 147.4
operating expenses
Provision for losses on
receivables 74.0 68.7 27.3 21.3
Provision for losses on assets
held for sale 50.0 50.0
-------- -------- ------ ------
Total expenses 997.5 891.7 359.7 345.9
-------- -------- ------ ------
Income before income taxes 226.9 142.1 75.1 4.3
Income taxes 90.0 63.2 27.9 6.7
-------- -------- ------ ------
Net income (loss) $ 136.9 $ 78.9 $ 47.2 $ (2.4)
======== ======== ====== ======
Ratio of earnings to
fixed charges 1.62 1.43
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Nine Months Ended
September 30,
1994 1993
------ -----
Balance at beginning of year $ 87.1 $ 62.3
Net income 136.9 78.9
Cash dividends declared (115.0) (75.0)
------- ------
Balance at end of period $ 109.0 $ 66.2
======= ======
(Dollar amounts in millions)
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TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
September 30,
1994 1993
---- ----
OPERATING ACTIVITIES
Net income $ 136.9 $ 78.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of goodwill 159.5 91.3
Provision for losses on receivables 74.0 68.7
Provision for losses on assets held for sale 50.0
Amortization of discount on long-term debt 17.3 23.9
Change in accounts payable and other 121.6 67.4
liabilities
Change in income taxes payable 20.9 (20.8)
Other 89.7 95.7
---------- ---------
Net cash provided by operating activities 619.9 455.1
---------- ---------
INVESTING ACTIVITIES
Finance receivables originated or purchased (11,588.6) (8,333.8)
Finance receivables collected or sold 11,031.6 8,224.5
Purchase of property and equipment (391.9) (297.4)
Sales of property and equipment 28.6 30.8
Purchase of investments (6.8) (26.5)
Sales or maturities of investments 4.3 19.8
Decrease (increase) in investments in and
advances to affiliates 98.4 (55.6)
Purchase of the container division assets of
Tiphook plc (1,051.0)
Other (102.7) (107.5)
---------- ---------
Net cash used by investing activities (1,978.1) (545.7)
---------- ---------
FINANCING ACTIVITIES
Proceeds from debt financing 5,714.3 3,902.6
Payments of debt (4,340.6) (3,726.7)
Capital contribution from parent company 99.2
Cash dividends paid (115.0) (100.0)
---------- ---------
Net cash provided by financing activities 1,357.9 75.9
---------- ---------
Decrease in cash and cash equivalents (0.3) (14.7)
Cash and cash equivalents at beginning of year 29.3 60.5
---------- ----------
Cash and cash equivalents at end of period $ 29.0 $ 45.8
========== ==========
(Amounts in millions)
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TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS
OF OPERATIONS
The following table sets forth revenues and income by line of
business for the periods indicated:
Nine Months Ended September 30,
__________________________________________
Revenues Income
__________________ _________________
1994 1993 1994 1993
_____ _____ ______ ______
(Amounts in millions)
Consumer lending $ 513.0 $ 486.5 $ 67.8 $ 70.7
Commercial lending 254.4 250.3 32.2 (22.6)
Leasing 456.6 297.2 45.1 37.6
Unallocated items 0.4 (0.2) 0.5 1.9
Amortization of goodwill (8.7) (8.7)
-------- -------- ------ ------
Total revenues and net $1,224.4 $1,033.8 $136.9 $ 78.9
income ======== ======== ====== ======
Consumer Lending
Consumer lending net income for the first nine months of 1994 was
$67.7 million compared to $70.7 million for the first nine months of 1993.
Consumer lending income, before the amortization of goodwill, for the
first nine months of 1994 decreased $3 million (4%) from the first nine
months of 1993. Excluding a $5.3 million benefit ($3.1 million after
tax) recorded in the second quarter of 1993 from the reversal of reserves
related to a 1990 sale of receivables to Transamerica Financial Services
Finance Co. which subsequently were securitized, income for the first
nine months of 1994 increased $100,000 (-%). The increase resulted
from higher revenues and lower interest expense that more than offset
increased operating expenses and an increased provision for losses
on receivables.
Revenues increased $26.5 million (5%) in the first nine months of
1994 over the first nine months of 1993 mainly due to increased finance
charges resulting from higher average finance receivables outstanding and
higher fees due to an increased volume of real estate secured loans.
Interest expense for the first nine months of 1994 declined
$100,000 (-%) from the first nine months of 1993 due to a lower average
interest rate on long-term debt as a result of the maturity of certain
high-coupon debt replaced at lower rates, which more than offset the
increase in short-term rates and the cost of increased borrowings as a
result of the higher level of receivables outstanding. Operating
expenses for the first nine months of 1994 increased $20.7 million
(15%) over the first nine months of 1993. Excluding the $5.3 million
reserve reversal recorded in the second quarter of 1993, operating
expenses in the first nine months of 1994 increased $15.4 million (11%).
The increase was mainly due to an increase in the number of branches,
from 536 at September 30, 1993 to 565 at September 30, 1994, and
costs of developing new loan information systems to handle additional
loan products. The provision for losses on receivables for the first
nine months of 1994 increased $14.4 million (33%) due to increased
credit losses and increased growth in net finance receivables over
the first nine months of 1993. Credit losses, net of recoveries, on an
annualized basis as a percentage of average consumer finance receivables
outstanding, net of unearned finance charges and insurance premiums,
were 1.86% for the first nine months of 1994 compared to 1.54% for the
first nine months of 1993. Credit losses increased mainly due to continued
sluggishness in the California economy and a continued weak California
real estate market. Any change in the trend of credit losses is somewhat
dependent upon overall changes in economic conditions and the
California real estate market. The outlook in both areas remains
uncertain.
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Net consumer finance receivables at September 30, 1994 included
$3.2 billion of real estate secured loans, principally first and
second mortgages secured by residential properties, of which
approximately 47% are located in California. Company policy generally
limits the amount of cash advanced on any one loan, plus any
existing mortgage, to between 70% and 80% (depending on location)
of the appraised value of the mortgaged property, as determined
by qualified independent appraisers at the time of loan origination.
Delinquent finance receivables, which are defined as
receivables contractually past due 60 days or more, were $85.6
million (2.04% of finance receivables outstanding) at September
30, 1994 compared to $76.8 million (2.00% of finance receivables
outstanding) at December 31, 1993. Management has established an
allowance for losses equal to 2.83% of net consumer finance
receivables outstanding at September 30, 1994 and December 31, 1993.
Generally, by the time an account secured by residential real estate
becomes past due 90 days, foreclosure proceedings have begun, at which
time the account is moved from finance receivables to other assets and
is written down to the estimated realizable value of the collateral if
less than the account balance. After foreclosure, repossessed assets
are carried at the lower of cost or fair value less estimated selling
costs, and are reclassified to assets held for sale. Accounts in
foreclosure and repossessed assets held for sale totaled $236.5 million
at September 30, 1994 compared to $214.7 million at December 31, 1993.
The increase primarily reflects higher inventory in California due to
California's continuing weak real estate market and resultant longer
disposal times. Since future improvement may be impacted by factors
such as economic conditions and the state of the real estate market,
the extent and timing of any change in the trend of foreclosures and
repossessed assets remains uncertain.
Commercial Lending
Commercial lending net income for the first nine months of 1994
was $25.1 million compared to a net loss of $29.8 million for the
first nine months of 1993. Commercial lending income, before the
amortization of goodwill, for the first nine months of 1994 increased
$54.9 million over the first nine months of 1993. Results for 1993
included: (i) a $50 million ($36 million after tax) provision to
reduce the net carrying value of repossessed rent-to-own stores
to their estimated realizable value; (ii) an $8.8 million after
tax charge for the restructuring of the commercial lending unit's
infrastructure; (iii) a $4.2 million after tax provision for anticipated
legal and other costs associated with the runoff of the liquidating
portfolios; (iv) a $4.2 million tax benefit from the resolution of
prior years' tax matters; and (v) a tax benefit of $1.5 million due
to the one percent federal tax increase applied to deferred taxes.
Excluding the aforementioned items, commercial lending income, before the
amortization of goodwill, for the first nine months of 1994 increased
$11.6 million (56%) over the first nine months of 1993. This improvement
was primarily due to a lower provision for losses on receivables and
stronger margins during 1994. Stronger margins were a result of the
higher spread between the indices at which the commercial lending operation
lends to customers and the indices at which funds are borrowed.
Revenues in the first nine months of 1994 increased $4.1 million (2%)
over the first nine months of 1993. This was primarily a result of
increased yields during the second and third quarters of 1994 attributable
to rising interest rates.
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Interest expense declined $900,000 (1%) compared to the first
nine months of 1993 primarily as a result of lower average borrowings.
Operating expenses declined $22.9 million (18%) during the first nine
months of 1994 from the first nine months of 1993 due mainly to the
previously described third quarter 1993 restructuring charge and
provision for anticipated legal and other costs associated with the
runoff of the liquidating portfolios, aggregating $21.5 million.
Expenses in the third quarter of 1994 include a $9 million ($5.5 million
after tax) charge for the relocation of the corporate home office,
partially offset by the valuation reversal from the sale of the
repossessed rent-to-own stores. In September 1994, the commercial lending
operation sold its U.S. and Canadian repossessed rent-to-own stores with
a net carrying value of $17.7 million for $23 million. The effect of the
transaction resulted in a $5.3 million ($4 million after tax) reversal
of a valuation allowance no longer requred. Excluding the items discussed
above, operating expenses decreased $5.1 million (5%) in the first nine
months of 1994 from the first nine months of 1993 primarily due to
reduced expenses relating to the management of the liquidating
portfolios. The provision for losses on receivables in the first
nine months of 1994 was $9 million (37%) less than in the first nine
months of 1993 due to lower credit losses, and lower delinquent and
nonearning receivables. Credit losses, net of recoveries, on an
annualized basis as a percentage of average commercial finance
receivables outstanding, net of unearned finance charges, were
0.27% for the first nine months of 1994 compared to 1.36% for the
first nine months of 1993.
Net commercial finance receivables outstanding increased $109.9
million (4%) from December 31, 1993 to September 30, 1994. Growth
in the core businesses of inventory finance and business credit
increased $150.4 million (6%) which more than offset the decline
in the liquidating portfolios. Management has established an
allowance for losses equal to 3.16% of net commercial finance
receivables outstanding as of September 30, 1994 compared to 2.93%
at December 31, 1993.
Delinquent receivables, which are defined as the instalment
balance for inventory finance and business credit receivables and
the receivable balance for all other receivables over 60 days past
due, were $19.9 million (0.72% of receivables outstanding) at
September 30, 1994 compared to $26.9 million (1.02% of receivables
outstanding) at December 31, 1993.
Nonearning receivables, which are defined as balances from
borrowers that are over 90 days delinquent or at such earlier time
as full collectibility becomes doubtful, were $26.6 million (0.97%
of receivables outstanding) at September 30, 1994 compared to
$31.8 million (1.20% of receivables outstanding) at December 31, 1993.
Assets held for sale as of September 30, 1994 totaled $27.2
million, net of a $71.1 million valuation allowance, and consisted
of rent-to-own finance receivables of $86.8 million and other
repossessed assets of $11.5 million. In September 1994, commercial
lending sold its repossessed rent-to-own stores. Assets held for sale
at December 31, 1993 totaled $90.1 million, net of a $157 million
valuation allowance, and comprised rent-to-own finance receivables
of $120.5 million, repossessed rent-to-own stores of $107.2 million
and other repossessed assets of $19.4 million. Of the rent-to-own
finance receivables, $25.5 million were classified as both delinquent
and nonearning at September 30, 1994 compared to $27.5 million at
December 31, 1993.
Leasing
As previously discussed, on March 15, 1994, the leasing operation
purchased substantially all of the assets of the container rental
businesses of Tiphook plc for $1,051 million in cash. The acquired
fleet of standard containers and tank containers totaled 363,000 units.
The transaction has been accounted for as a purchase and the operations
of the businesses acquired have been included in the results of the
leasing operation from the date of acquisition.
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Leasing net income for the first nine months of 1994 was $43.6
million compared to $36.1 million for the first nine months of 1993.
Leasing income, before the amortization of goodwill, for the first nine
months of 1994 increased $7.5 million (20%). Included in the 1993
results was a $4.3 million tax provision for the revaluation of the
deferred tax liability. Excluding the effects of this adjustment,
leasing income increased $3.2 million (8%) for the first nine months
of 1994 compared to the first nine months of 1993. The increase was
primarily due to a larger fleet size, more on-hire rail trailer and
chassis units and an increased finance lease portfolio, partially
offset by lower utilization and rates in the standard container line,
and lower gains on disposal of units.
Revenues for the first nine months of 1994 increased $159.4
million (54%) over the first nine months of 1993. The increase was
due to the Tiphook acquisition of standard and tank containers, a
larger fleet of new standard and refrigerated containers, more on-
hire rail trailer and chassis units and a larger finance lease portfolio.
Expenses increased $153.6 million (67%) in the first nine months
of 1994 over 1993's first nine months mainly due to higher ownership
and operating costs of a larger fleet.
The combined utilization of standard containers, refrigerated
containers, domestic containers, tank containers and chassis averaged
81% for the first nine months of 1994 compared to 82% for the first
nine months of 1993. Rail trailer utilization was 91% for the first
nine months of 1994 compared to 89% for the first nine months of 1993.
European trailer utilization was 96% for the first nine months of 1994
compared to 88% for the first nine months of 1993.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Omitted in accordance with General Instructions H. See
"Management's Discussion and Analysis of the Results of Operations"
following the financial statements of the Company (Item I).
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
EX-12 Computation of Ratio of Earnings to Fixed Charges.
(b) Reports on Form 8-K. None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
TRANSAMERICA FINANCE CORPORATION
(Registrant)
By RAYMOND A. GOLAN
Raymond A. Golan, Vice President and Controller
(Chief Accounting Officer)
Date: November 14, 1994
EXHIBIT EX-12
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Nine Months Ended
September 30,
1994 1993
------ ------
(Dollar amounts in millions)
Fixed charges:
Interest and debt expense $347.2 $313.0
One-third of rent expense 18.0 14.5
------ ------
Total $365.2 $327.5
====== ======
Earnings:
Income before income taxes $226.9 $142.1
Fixed charges 365.2 327.5
------ ------
Total $592.1 $469.6
====== ======
Ratio of earnings to fixed charges 1.62 1.43
====== ======
