Page 1
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 June 30, 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 (I.R.S. Employer
incorporation or organization) Identification No.)
600 Montgomery Street
San Francisco, California 94111
(Address of principal executive offices)
(Zip Code)
(4l5) 983-4000
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 July 31, 1997: 1,464,285.
<PAGE>
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TRANSAMERICA FINANCE CORPORATION
FORM 10-Q
Part I. Financial Information
Item 1. Financial Statements.
The following unaudited consolidated financial statements of
Transamerica Finance Corporation and Subsidiaries (the "Company") for the
periods ended June 30, 1997 and 1996, do not include complete financial
information and should be read in conjunction with the Consolidated Financial
Statements filed with the Commission on Form 10-K for the year ended December
31, 1996. 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. Results for the
interim periods are not necessarily indicative of the results for the entire
year for most of the Company's businesses.
On June 23, 1997, the Company's parent, Transamerica Corporation, sold
its branch based consumer lending operation as part of its strategy to redeploy
its capital while moving ahead with a plan to build a new, centralized real
estate secured lending operation. Gross proceeds from the sale were $3.9
billion, or $1.1 billion after repayment of associated debt. As a result of the
sale, second quarter results included an after tax gain of $275 million after
taking into account write downs of intangibles and other items. In addition,
another $189.5 million of real estate secured loans, non real estate secured
loans and foreclosed properties and other repossessed assets remain as of June
30, 1997 which will be sold or liquidated separately.
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 an 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.
* * * * *
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.
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TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
-------------
CONSOLIDATED BALANCE SHEET
(Amounts in millions except for share data)
June 30, December 31,
1997 1996
(Restated)
Assets:
Cash and cash equivalents ............................. $ 75.1 $ 429.4
Finance receivables ................................... 4,971.7 8,697.9
Less unearned fees ($298.0 in 1997 and
$437.6 in 1996) and allowance for losses .. 405.1 794.1
--------- ---------
4,566.6 7,903.8
Property and equipment less accumulated depreciation
of $1,110.5 in 1997 and $1,025.0 in 1996:
Land, buildings and equipment ................ 27.7 75.1
Equipment held for lease ..................... 3,119.2 3,118.5
Goodwill, less accumulated amortization of
$148.1 in 1997 and $142.2 in 1996................... 361.6 371.1
Assets held for sale, net of valuation allowance ...... 189.8 86.5
Other assets .......................................... 542.2 660.7
--------- ---------
$ 8,882.2 $ 12,645.1
========= =========
Liabilities and Stockholder's Equity:
Debt:
Unsubordinated ............................... $ 5,268.0 $ 8,974.7
Subordinated ................................. 840.3 904.6
--------- ---------
Total debt .......................... 6,108.3 9,879.3
Accounts payable and other liabilities ................ 840.9 786.7
Income taxes payable .................................. 457.5 244.7
Stockholder's equity:
Preferred stock --authorized, 250,000
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 ................... 1,473.6 1,602.6
Retained earnings ............................ 117.7
Net unrealized gain from investments marked
to fair value ........................... 2.7
Foreign currency translation adjustments ..... (12.7) (3.2)
--------- ---------
Total stockholder's equity .......... 1,475.5 1,734.4
--------- ---------
$ 8,882.2 $ 12,645.1
========= =========
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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
---------------
CONSOLIDATED STATEMENT OF INCOME
(Amounts in millions)
<CAPTION>
Six months ended Three months ended
June 30, June 30,
1997 1996 1997 1996
(Restated) (Restated)
<S> <C> <C> <C> <C>
REVENUES
Finance charges ..................................... $ 491.3 $ 606.6 $ 221.8 $ 303.6
Leasing revenues .................................... 370.5 328.2 181.6 163.8
Gain on sale of consumer
lending branch operations ...................... 469.0 469.0
Other ............................................... 45.5 36.9 22.5 17.9
----------- --------- -------- --------
Total revenues ............................. 1,376.3 971.7 894.9 485.3
EXPENSES
Interest and debt expense ........................... 268.0 304.6 123.9 150.8
Depreciation on equipment
held for lease ................................. 135.2 120.9 67.7 60.5
Salaries and other
operating expenses ............................. 352.4 326.0 173.2 159.0
Provision for losses
on receivables and
assets held for sale ........................... 45.0 101.5 8.6 68.3
----------- --------- -------- --------
Total expenses ............................. 800.6 853.0 373.4 438.6
Income before income taxes ................................... 575.7 118.7 521.5 46.7
Income taxes ................................................. 234.5 44.0 215.4 18.4
----------- --------- -------- --------
Net income ................................................... $ 341.2 $ 74.7 $ 306.1 $ 28.3
=========== ========= ======== ========
Ratio of earnings to fixed charges ........................... 3.10 1.38
=========== =========
</TABLE>
<PAGE>
Page 5
<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
------------
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in millions)
<CAPTION>
Six months ended
June 30,
1997 1996
(Restated)
<S> <C> <C>
OPERATING ACTIVITIES
Net income .................................................................... $ 341.2 $ 74.7
Adjustments to reconcile net income to
net cash provided by operating activities:
Gain on sale of Consumer Lending
branch operations .................................................. (275.0)
Depreciation and amortization ........................................ 147.9 134.8
Provision for losses on receivables
and assets held for sale ......................................... 44.9 101.5
Change in accounts payable and other
liabilities ...................................................... 208.7 64.6
Change in income taxes payable ....................................... (44.2) 1.1
Other ................................................................ 21.2 5.4
----------- ----------
Net cash provided by operating activities ..................................... 444.7 382.1
INVESTING ACTIVITIES
Finance receivables originated ................................................ (10,070.5) (8,753.7)
Finance receivables collected and sold ........................................ 9,922.9 8,577.0
Purchase of property and equipment ............................................ (174.8) (167.7)
Sales of property and equipment ............................................... 49.3 44.9
Proceeds from sale of Consumer Lending branch
operations to Household International, Inc. .............................. 3,860.0
Other ......................................................................... (20.9) 67.0
----------- ----------
Net cash provided (used) by
investing activities .......................................................... 3,566.0 (232.5)
FINANCING ACTIVITIES
Proceeds from debt financing .................................................. 2,879.1 2,977.3
Payments of debt .............................................................. (6,640.0) (3,009.7)
Dividends and capital transactions
with parent ................................................................ (604.1) (92.7)
----------- ----------
Net cash used by financing activities .................................................. (4,365.0) (125.1)
----------- ----------
Increase (decrease) in cash and
cash equivalents ......................................................... (354.3) 24.5
Cash and cash equivalents at beginning
of year .................................................................. 429.4 8.0
----------- ----------
Cash and cash equivalents at end of period .................................... $ 75.1 $ 32.5
=========== ==========
</TABLE>
<PAGE>
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TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(Amounts in millions)
Six months ended
June 30,
1997 1996
(Restated)
Balance at beginning of year .................... $ 117.7 $ 272.7
Net income ...................................... 341.2 74.7
Dividends ....................................... (458.9) (92.7)
-------- --------
Balance at end of period ........................ $ - $ 254.7
======== ========
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
<TABLE>
REVENUES AND INCOME BY LINE OF BUSINESS
<CAPTION>
Six months ended June 30, Second Quarter
Revenues Income Income
1997 1996 1997 1996 1997 1996
(Amounts in millions) (Restated) (Restated) (Restated)
<S> <C> <C> <C> <C> <C> <C>
Consumer lending ..................... $ 720.6 $ 392.3 $ 275.0 $ 13.1 $ 275.0 $ (4.7)
Commercial lending ................... 239.0 211.6 41.9 32.7 20.7 18.2
Leasing .............................. 408.6 363.8 28.3 37.7 12.5 18.9
Unallocated items .................... 8.1 4.0 2.4 (2.3) 1.1 (0.9)
Amortization of goodwill ............. (6.4) (6.5) (3.2) (3.2)
---------- -------- -------- ------- -------- -------
Finance .............................. $ 1,376.3 $ 971.7 $ 341.2 $ 74.7 $ 306.1 $ 28.3
========== ======== ======== ======= ======== =======
</TABLE>
<PAGE>
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Consumer Lending
On June 23, 1997, Transamerica sold its branch based consumer lending
operation as part of its strategy to redeploy capital while moving ahead with a
plan to build a new, centralized real estate secured lending operation. Gross
proceeds from the sale were $3.9 billion, or $1.1 billion after repayment of
associated debt. As a result of the sale, second quarter results included an
after tax gain of $275 million after taking into account writedowns of
intangibles and other items. In addition, another $189.5 million of real estate
secured loans, non real estate secured loans, foreclosed properties and other
repossessed assets remain as of June 30, 1997 which will be sold or liquidated
separately.
Prior to completing the sale of the operations discussed above, loan
loss reserves were adjusted to offset operating results including any gains or
losses from asset sales. Accordingly, except for the $275 million gain on sale
included in second quarter results, no income or loss from the consumer lending
operations was reported for the first half and second quarter of 1997. In the
first half and second quarter of 1996, the consumer lending operation had net
income of $13.1 million and a net loss of $4.7 million.
Revenues increased $328.3 million (84%) for the first half of 1997 over
the comparable period of 1996. For the second quarter of 1997 revenues increased
$373.7 million (193%) over the second quarter of 1996. Both increases reflected
the $469 million pretax gain on the sale of the branch-based lending business
which was offset in part by lower finance charges due to lower average
receivables outstanding which resulted primarily from the sale of the operations
and sales of various loan portfolios during the first six months of 1997.
Interest expense for the first half and second quarter of 1997
decreased $49.2 million (33%) and $35.1 million (47%) from the comparable year
ago periods. Other operating expenses for the first half and second quarter of
1997 decreased $13.8 million (11%) and $5.9 million (10%) from the same periods
a year ago. The provision for losses on receivables for the first six months and
second quarter of 1997 decreased $56.2 million (60%) and $62.3 million (93%)
compared to the same periods a year ago. All declines were due primarily to the
impact of downsizing operations and the sale of the branch-based lending
business.
As previously discussed, Transamerica intends to continue operating in
the consumer lending business and is building a new centralized real estate
secured lending operation. As part of this plan, at June 30, 1997 there were
$180.4 million of net consumer finance receivables relating to continuing
operations. The decrease of $3.7 billion in receivables from December 31,1996 is
due primarily to the sale of the branch-based lending business and the sales of
various loan portfolios.
Delinquent finance receivables, which are defined as receivables
contractually past due 60 days or more, were $2.9 million at June 30, 1997 of
continuing operations receivables (1.57% of finance receivables outstanding).
For continuing business accounts, accrual of interest and other finance
charges is suspended on accounts that become contractually past due more than 90
days. At June 30, 1997 such nonearning receivables amounted to $55,000. Payments
received on accounts while in non accrual status are applied to principal and
interest income according to the terms of the loan.
Management has established an allowance for losses equal to 2.90% of
net consumer finance receivables outstanding at June 30, 1997 on continuing
businesses.
<PAGE>
Page 9
Retained assets from the sold operation held for sale at June 30, 1997
totaled $189.5 million reflecting the net carrying value of $225.5 million of
contractual finance receivables of which $143.8 million is 60 days or more past
due, $35.8 million of foreclosures in process and $26 million of repossessed
assets.
Factors such as economic conditions, competition, and, for accounts
secured by real estate, the state of the real estate market, all affect trends
in receivable levels credit losses, delinquencies, accounts in foreclosure and
repossessed assets. Management intends to continue its efforts to dispose of its
liquidating portfolio.
Commercial Lending
Commercial lending net income for the first half and second quarter of
1997 was $36.6 million and $18.1 million compared to $27.3 million and $15.5
million for the comparable periods of 1996. Commercial lending income, before
the amortization of goodwill, for the first half and second quarter of 1997
increased $9.2 million (28%) and $2.5 million (14%) from 1996's first half and
second quarter. The first half increase resulted primarily from i) the inclusion
in the first quarter of 1997 of a $3.2 million tax benefit from the satisfactory
resolution of prior years' tax matters, ii) the inclusion in the first quarter
of 1996 of the effect of after tax loss provisions of $2.5 million on a
contested account and for settlement of a legal matter and iii) higher average
net receivables outstanding. The increase in the second quarter resulted
primarily from higher average net receivables outstanding.
Revenues in the first half and second quarter of 1997 increased $27.4
million (13%) and $14.6 million (14%) over the corresponding 1996 periods.
Higher average net receivables outstanding attributable to growth more than
offset a decline in yield due to increased competition.
Interest expense increased $12.6 million (18%) and $6.7 million (18%)
in the first half and second quarter of 1997 primarily due to a higher average
debt level needed to support receivables growth. Operating expenses for the
first six months and second quarter of 1997 increased $3.7 million (5%) and $1
million (3%) primarily as a result of higher levels of business volume and
outstanding receivables. The provision for losses on receivables for the first
half and second quarter of 1997 decreased $300,000 (4%) and increased $2.6
million (186%) from the corresponding 1996 periods. The 1996 first quarter
included a $2.9 million ($1.7 million after tax) reserve established on a major
impaired account in the insurance premium finance portfolio. The second quarter
increase was primarily attributable to growth in net receivables outstanding.
Credit losses, net of recoveries, on an annualized basis as a percentage of
average commercial finance receivables outstanding, net of unearned finance
charges, were 0.15% for the first half and 0.13% for the second quarter of 1997
compared to 0.10% and 0.10% for the comparable periods of 1996.
Net commercial finance receivables outstanding were $4 billion at June
30, 1997, an increase of $387.9 million (11%) from December 31, 1996. In 1997,
the distribution finance operation purchased for cash a portfolio of floor plan
finance receivables with a total net outstanding balance of approximately $115
million, and the insurance premium finance operation reduced the level of pooled
securitized receivables by $75 million. Management has established an allowance
for losses equal to 2.16% of net commercial finance receivables outstanding as
of June 30, 1997 compared to 2.22% at December 31, 1996.
Delinquent receivables are defined as installments for inventory
finance and asset based lending receivables more than 60 days past due and the
outstanding loan balance for all other receivables over 60 days past due.
Delinquent receivables were $17.7 million (0.42% of receivables outstanding) at
June 30, 1997 compared to $17.3 million (0.46% of receivables outstanding) at
December 31, 1996.
<PAGE>
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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 such time as past due amounts are collected. Nonearning
receivables were $24.7 million (0.59% of receivables outstanding) at June 30,
1997 compared to $21.4 million (0.56% of receivables outstanding) at December
31, 1996.
Leasing
Leasing net income for the first half and second quarter of 1997 was
$27.3 million and $12 million compared to $36.7 million and $18.4 million for
the first half and second quarter of 1996. Leasing income, before the
amortization of goodwill, was $28.3 million and $12.5 million in the first half
and second quarter of 1997 compared to $37.7 million and $18.9 million in the
corresponding periods of 1996.
Leasing income, before the amortization of goodwill, for the first half
and second quarter of 1997, decreased $9.4 million (25%) and $6.4 million (34%)
as compared to the first half and second quarter of 1996. The 1996 results
included a $2.6 million tax benefit from the favorable resolution of outstanding
state tax issues. Lower earnings for both the first half and second quarter of
1997 resulted from lower standard container utilization and lower per diem
rates, caused by an over capacity of equipment and lower gains from sales of
used standard containers. Offsetting some of these negative factors were
favorable results from a larger portfolio of finance leases and favorable
earnings in the rail trailer and domestic container lines.
Revenue for the first half and second quarter of 1997 increased $44.8
million (12%) and $18.9 million (10%) versus the first half and second quarter
of 1996. This revenue increase was due to a larger on-hire fleet of standard,
refrigerated and tank containers and chassis mainly associated with the October
1996 acquisition of Trans Ocean Ltd. This acquisition increased our fleet size
by approximately 25%. Revenue also increased due to a larger portfolio of
finance leases and more on-hire European trailers. Partially offsetting these
increases were lower revenues from decreased utilization and rental rates for
refrigerated containers and lower utilization from standard containers due to an
over capacity of equipment. The rail trailer operation also reported lower
revenues due to a smaller fleet size.
Expenses for the first half and second quarter of 1997 increased $54.4
million (18%) and $28.7 million (19%) over the corresponding 1996 periods,
mainly due to higher ownership and operating costs associated with larger fleets
of standard and refrigerated containers, chassis and European trailers.
The combined utilization of standard containers, refrigerated
containers, domestic containers, tank containers and chassis averaged 78% for
both the first half and second quarter of 1997 compared to 82% for both the
first half and second quarter of 1996. Rail trailer utilization was 83% for both
the first half and second quarter of 1997 compared to 80% for both the first
half and second quarter of 1996. European trailer utilization was 91% and 92%
for the first half and second quarter of 1997 compared to 93% for both the first
half and second quarter of 1996.
Derivatives
The operations of the Company are subject to risk of interest rate
fluctuations to the extent that there is a difference between the cash flows
from the Company's interest-earning assets and the cash flows related to its
liabilities that mature or are repriced in specified periods. In the normal
course of its operations, the Company hedges some of its interest rate risk with
derivative financial instruments. These derivatives comprise primarily interest
rate swap agreements. The Company does not use derivative financial instruments
for trading or speculative purposes, nor is the Company a party to any leveraged
derivative contracts.
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Page 11
Derivative financial instruments with a notional amount of $703.1
million at June 30, 1997 and $892.8 million at December 31, 1996 and designated
as hedges of the Company's liabilities were outstanding.
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 June 30, 1997, the derivative financial
instruments discussed above were issued by financial institutions rated A or
better by one or more of the major credit rating agencies. At June 30, 1997 and
December 31, 1996 the fair value of the Company's derivative financial
instruments was a net obligation of $6.7 million and $800,000 comprising
agreements with aggregate gross benefits of $17.0 million and $8.9 million and
agreements with aggregate gross obligations of $10.2 million and $9.7 million.
When we sell or otherwise dispose of an asset or liability which is
hedged by a derivative contract, the derivative contract is either reassigned to
hedge another asset or liability or closed out, and any gain or loss recognized.
<PAGE>
Page 12
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(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)
Burton E. Broome
Vice President, Controller and Assistant Secretary
(Chief Accounting Officer)
Date: August 14, 1997
EXHIBIT 12
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Six Months Ended June 30,
1997 1996
(Dollar amounts in millions) (Restated)
Fixed charges:
Interest and debt expense ......... $ 268.0 $ 304.6
One-third of rental expense ....... 6.4 6.3
------- -------
Total ............................. $ 274.4 $ 310.9
======= =======
Earnings:
Income from operations ............ $ 341.2 $ 74.7
Provision for income taxes ........ 234.5 44.0
Fixed charges ..................... 274.4 310.9
------- -------
Total ............................. $ 850.1 $ 429.6
======= =======
Ratio of earnings to fixed charges ......... 3.10 1.38
======= =======
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 75
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,147
<DEPRECIATION> 0
<TOTAL-ASSETS> 8,882
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 1,461
<TOTAL-LIABILITY-AND-EQUITY> 8,882
<SALES> 0
<TOTAL-REVENUES> 1,376
<CGS> 0
<TOTAL-COSTS> 135
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 45
<INTEREST-EXPENSE> 268
<INCOME-PRETAX> 576
<INCOME-TAX> 235
<INCOME-CONTINUING> 341
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 341
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
