Page 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
Commission File Number 1-6798
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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, 1998: 1,464,285.
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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, 1998 and 1997, and the balance sheet as of December 31,
1997 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, 1997. 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.
* * * * *
Effective January 1, 1998, the Company adopted the provisions of
American Institute of Certified Public Accountants Statement of Position No.
98-1 which requires, among other things, that payroll costs incurred in the
development of computer software systems be capitalized. The effect of adoption
on consolidated income for the six months and three months ended June 30, 1998
was immaterial.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. The Company is required to adopt this
statement as of January 1, 2000. The effect on the Company's financial
statements of adopting this standard is uncertain at this time.
The consolidated ratios of earnings to fixed charges were computed by
dividing income from continuing operations 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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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
-------------
CONSOLIDATED BALANCE SHEET
(Amounts in millions except for share data)
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Assets:
Cash and cash equivalents $ 89.1 $ 70.1
Finance receivables 4,784.6 4,333.4
Less unearned fees ($387.9 in 1998 and
$340.8 in 1997) and allowance for losses 499.1 430.1
--------- ----------
4,285.5 3,903.3
Property and equipment less accumulated depreciation
of $1,207.6 in 1998 and $1,190.5 in 1997:
Land, buildings and equipment 28.1 25.1
Equipment held for lease 2,977.8 2,996.5
Goodwill, less accumulated amortization of
$163.6 in 1998 and $156.2 in 1997 387.8 423.0
Assets held for sale 49.1 377.8
Net assets of discontinued operations 47.3 40.1
Other assets 757.6 889.6
---------- ----------
8,622.3 8,725.5
========== ==========
Liabilities and Stockholder's Equity:
Debt:
Unsubordinated $ 5,556.1 $ 5,341.5
Subordinated 537.2 683.7
---------- ----------
Total debt 6,093.3 6,025.2
Accounts payable and other liabilities 791.7 1,034.7
Income taxes payable 422.3 362.4
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 1,310.6 1,300.9
Retained earnings
Component of other cumulative
comprehensive income:
Foreign currency translation adjustments (10.2) (12.3)
---------- ----------
Total stockholder's equity 1,315.0 1,303.2
---------- ----------
$ 8,622.3 $ 8,725.5
========== ==========
</TABLE>
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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,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES
Finance charges and other fees $ 343.0 $ 249.6 $ 175.9 $ 126.3
Leasing revenues 367.0 370.5 181.3 181.6
Other 43.7 35.6 24.2 19.1
-------- -------- ------- -------
Total revenues 753.7 655.7 381.4 327.0
EXPENSES
Interest and debt expense 188.3 166.3 94.0 84.4
Depreciation on equipment held for lease 136.5 135.2 69.0 67.7
Salaries and other operating expenses 300.7 239.8 145.5 118.3
Provision for losses on receivables 25.0 7.5 11.4 3.9
-------- -------- ------- -------
Total expenses 650.5 548.8 319.9 274.3
Income before income taxes 103.2 106.9 61.5 52.7
Income taxes 39.0 40.7 24.8 21.6
-------- -------- ------- -------
Income from continuing operations 64.2 66.2 36.7 31.1
Income from discontinued operations 275.0 275.0
-------- -------- ------- -------
Net income $ 64.2 $ 341.2 $ 36.7 $ 306.1
======== ======== ======= =======
Ratio of earnings to fixed charges 1.51 1.60
==== ====
</TABLE>
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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
------------
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in millions)
<CAPTION>
Six months ended
June 30,
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES
Net income from continuing operations $ 64.2 $ 66.2
Adjustments to reconcile income from continuing
operations to net cash provided by operating activities:
Depreciation and amortization 147.8 145.6
Provision for losses on receivables 25.0 7.5
Amortization of discount on long-term debt 6.0 5.3
Change in accounts payable and other
liabilities (232.6) 160.5
Change in income taxes payable 64.8 (44.2)
Other 180.1 261.6
--------- --------
Net cash provided by operating activities 255.3 602.5
INVESTING ACTIVITIES
Finance receivables originated (9,819.7) (9,649.4)
Finance receivables collected 10,066.6 9,268.3
Purchase of property and equipment (165.4) (173.0)
Sales of property and equipment 66.0 46.3
Proceeds from the sale of and cash
transactions with discontinued operations (4.0) 4,039.7
Purchase of finance receivables from
Whirpool Finance Corporation (378.4)
Other (5.5) (240.3)
--------- --------
Net cash provided (used) by investing activities (240.4) 3,291.6
FINANCING ACTIVITIES
Proceeds from debt financing 951.9 2,879.1
Payments of debt (893.3) (6,640.0)
Capital contributions from parent 38.3
Cash dividends paid (92.8) (464.3)
--------- --------
Net cash provided (used) by financing activities 4.1 (4,225.2)
--------- --------
Increase (decrease) in cash and
cash equivalents 19.0 (331.1)
Cash and cash equivalents at beginning
of year 70.1 398.5
--------- --------
Cash and cash equivalents at end of period $ 89.1 $ 67.4
========= ========
</TABLE>
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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(Amounts in millions)
<CAPTION>
Six months ended
June 30,
1998 1997
<S> <C> <C>
Balance at beginning of year $ $ 117.7
Net income 64.2 341.2
Dividends (64.2) (458.9)
-------- --------
Balance at end of period $ - $ -
======== ========
</TABLE>
Item 2. Management's Narrative Analysis of Results of Operations
<TABLE>
REVENUES AND INCOME BY LINE OF BUSINESS
(Amounts in millions)
<CAPTION>
Six months ended June 30, Second Quarter
Revenues Income Income
1998 1997 1998 1997 1998 1997
<S> <C> <C> <C> <C> <C> <C>
Commercial lending $ 340.5 $ 239.0 $ 47.0 $ 41.9 $ 29.0 $ 20.7
Leasing 404.1 408.6 31.2 28.3 15.6 12.5
Other 9.1 8.1 (6.7) 2.4 (4.0) 1.1
Amortization of goodwill (7.3) (6.4) (3.9) (3.2)
------- ------- ------- ------ ------- -------
Total revenues and income
from continuing operations $ 753.7 $ 655.7 $ 64.2 $ 66.2 $ 36.7 $ 31.1
======= ======= ======= ====== ======= =======
</TABLE>
<PAGE>
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Commercial Lending
Commercial lending net income for the first half and second quarter of 1998
was $40.7 million and $25.6 million compared to $36.6 million and $18.1 million
for the comparable periods of 1997. Commercial lending income, before the
amortization of goodwill, for the first half and second quarter of 1998
increased $5.1 million (12%) and $8.3 million (40%) from 1997's first half and
second quarter. Operating results for the second quarter of 1998 included $3.2
million in after tax gains on the securitization of $300 million of floorplan
receivables, and $200 million of commercial loan and lease receivables. Included
in the six months ended June 30, 1998 was a first quarter $3 million tax benefit
from the resolution of prior year tax matters, a first quarter $2.1 million
after tax charge for losses and the restructuring of the insurance premium
finance business, and a first quarter $2.1 million after tax gain on the
securitization of $300 million of floorplan receivables. In the six months ended
June 30, 1997 was a first quarter $3.2 million tax benefit from the satisfactory
resolution of prior years' tax matters. Higher margins due to higher average net
receivables in the first half and second quarter of 1998 were partially offset
by an increase in operating expenses and in the provision for losses on finance
receivables.
Revenues in the first half and second quarter of 1998 increased $101.5
million (42%) and $54.3 million (45%) over the corresponding 1997 periods.
Revenues rose in 1998 principally due to growth in average net receivables
outstanding. Revenues in the first six months and second quarter of 1998
included $8.9 million and $5.7 million in gains from the securitization of
receivables.
Interest expense increased $15 million (18%) and $7.5 million (17%) in the
first half and second quarter of 1998 due to a higher average interest rate on
borrowings and higher average debt levels needed to support receivables growth.
Operating expenses for the first six months and second quarter of 1998 increased
$62.2 million (74%) and $27.5 million (67%) over the corresponding 1997 periods
primarily as a result of the integration of the Whirlpool Finance operations and
higher levels of business volume and outstanding receivables. The provision for
losses on receivables for the first half and second quarter of 1998 increased
$17.5 million (232%) and $7.5 million (191%) from the corresponding 1997 periods
principally as a result of higher credit losses in the retail portfolio and
additional provisions in the first quarter of 1998 on the insurance premium
finance portfolio. Credit losses, net of recoveries, on an annualized basis as a
percentage of average commercial finance receivables outstanding, net of
unearned finance charges, were 0.68% for the first half and 0.79% for the second
quarter of 1998 compared to 0.15% and 0.13% for the comparable periods of 1997.
Net commercial finance receivables outstanding at June 30, 1998
increased $411 million (12%) from December 31, 1997. The increase in receivables
was largely a result of a decision not to sell the insurance premium finance
operation and the reclassification of those receivables from assets held for
sale to finance receivables, and the acquisition during the first half of 1998
of the retail finance business and the remaining international assets from
Whirlpool Financial Corporation which amounted to $387 million of net finance
receivables. This completed the acquisition of $1.1 billion in net receivables
and other assets representing substantially all of the inventory and retail
finance business from Whirlpool Finance Corporation. The total purchase price
was $1.3 billion in cash subject to post closing adjustments. Management has
established an allowance for losses equal to 2.64% of net commercial finance
receivables outstanding as of June 30, 1998 compared to 2.35% at December 31,
1997.
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 over 60 days past due. Delinquent
receivables were $47.1 million (1.12% of receivables outstanding) at June 30,
1998 compared to $18 million (0.48% of receivables outstanding) at December 31,
1997. The increase in delinquent receivables at June 30, 1998 was primarily due
to the inclusion of the insurance premium finance receivables which were
reported as assets held for sale at December 31, 1997, and the receivables of
the new retail lending operation. Delinquent insurance premium finance
receivables at December 31, 1997 were $14.2 million.
Nonearning receivables are defined as balances from borrowers that are more
than 90 days delinquent for non credit card receivables or sooner if it appears
doubtful they will be fully collectible. Nonearning receivables on revolving
credit card accounts included in retail are defined as balances from borrowers
in bankruptcy and accounts for which full collectibility is doubtful. Accrual of
finance charges is suspended on nonearning receivables until such time as past
due accounts are collected. Nonearning receivables were $50.7 million (1.21% of
receivables outstanding) at June 30, 1998 compared to $26.4 million (0.71% of
receivables outstanding) at December 31, 1997. The increase in nonearning
receivables at June 30, 1998 was primarily due to the inclusion of the insurance
premium finance receivables which were reported as assets held for sale at
December 31, 1997 and an increase in distribution finance nonearning
receivables. Nonearning insurance premium finance receivables at December 31,
1997 were $7.5 million.
<PAGE>
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Leasing
Leasing net income for the first half and second quarter of 1998 was
$30.2 million and $15 million compared to $27.3 million and $12 million for the
first half and second quarter of 1997. Leasing income, before the amortization
of goodwill, was $31.2 million and $15.6 million in the first half and second
quarter of 1998 compared to $28.3 million and $12.5 million in the corresponding
periods of 1997.
Leasing income, before the amortization of goodwill, for the first half
and second quarter of 1998, increased $2.9 million (10%) and $3.1 million (24%)
versus the first half and second quarter of 1997. Higher earnings for both the
first half and second quarter resulted primarily from lower operating and
ownership costs for standard containers attributable to the accelerated
disposition of equipment in line with a fleet downsizing initiative. Chassis
earnings were also favorable due to more units on hire from both increased
utilization and a larger fleet mainly associated with an increased demand for
chassis used with U.S. domestic containers. Partially offsetting the earnings
increases were lower earnings in rail trailers due to fewer units on hire
associated with the continued decline in the demand for this equipment type.
Revenue for the first half of 1998 decreased $4.5 million (1%) versus
the first half of 1997 and was approximately the same level for the second
quarter of 1998 compared to the second quarter of 1997. The revenue decrease was
due to less units on-hire for standard containers associated with continued weak
market conditions and a smaller fleet size and less on-hire rail trailers from
accelerated equipment sales. Offsetting these decreases were increased revenues
from more chassis on-hires due to favorable U.S. market conditions for this
equipment and more on-hire European trailers due to the continued growth of this
product.
Expenses for the first half and second quarter of 1998 decreased $9.6
million (3%) and $5.4 milion (3%) over the corresponding 1997 periods, mainly
due to lower ownership and operating costs associated with smaller standard
containers and rail trailers fleets. Offsetting these decreases were increased
expenses associated with Year 2000 information technology expenditures and from
the expansion of our European trailer operations.
The combined utilization of standard containers, refrigerated
containers, domestic containers, tank containers and chassis averaged 79% for
both the first half and second quarter of 1998 compared to 78% for both the
first half and second quarter of 1997. Rail trailer utilization was 79% and 80%
for the first half and second quarter of 1998 compared to 83% for both the first
half and second quarter of 1997. European trailer utilization was 90% and 91%
for the first half and second quarter of 1998 compared to 91% and 92% for the
first half and second quarter of 1997.
Other
Other operating results for the six months and second quarter of 1998
decreased $9.1 and $5.1 million as compared to the same periods of 1997. These
decreases primarily resulted from the Company's method of allocating interest
expense among its subsidiaries and itself.
Discontinued operations
In the first six months and second quarter of 1998, results from
discontinued operations were break even. In the first six months and second
quarter of 1997, income from discontinued operations was $275 million, which
consisted entirely of net gains from the sale of the branch based consumer
lending operations.
<PAGE>
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Comprehensive Income
In accordance with Financial Accounting Standard No. 130, Reporting
Comprehensive Income, comprehensive income for the six months ended June 30,
1998 and 1997 comprised:
<TABLE>
<CAPTION>
Six months ended June 30, Three months ended June 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 64.2 $ 341.2 $ 36.7 $ 306.1
Other comprehensive income, net of tax:
Unrealized gains (losses) from
investments marked to fair value:
Unrealized holding gains (losses) on
fixed maturities arising during period - -
Less: reclassification adjustment
for gains included in net income (2.7) (2.7)
Foreign currency translation adjustments 2.1 (9.5) 4.8 (3.9)
------- -------- ------- -------
Comprehensive income $ 66.3 $ 329.0 $ 41.5 $ 299.5
======= ======== ======= =======
</TABLE>
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.
Derivative financial instruments with a notional amount of $1.2 billion
at June 30, 1998 and $1.3 billion at December 31, 1997 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, 1998, 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. The fair value of the
Company's liability hedges at June 30, 1998 and December 31, 1997 was a net
benefit of $48.2 million and $39.7 million comprising agreements with aggregate
gross benefits of $49.8 million and $40.7 million and agreements with aggregate
gross obligations of $1.6 million and $1 million.
<PAGE>
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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 and Controller
Date: August 4, 1998
EXHIBIT 12
<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Six Months Ended June 30,
1998 1997
(Dollar amounts in millions)
<S> <C> <C>
Fixed charges:
Interest and debt expense $ 188.3 $ 166.3
One-third of rental expense 12.5 12.3
-------- --------
Total $ 200.8 $ 178.6
======== =======
Earnings:
Income from continuing operations $ 64.2 $ 66.2
Provision for income taxes 39.0 40.7
Fixed charges 200.8 178.6
-------- -------
Total $ 304.0 $ 285.5
======== =======
Ratio of earnings to fixed charges 1.51 1.60
==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 89
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,006
<DEPRECIATION> 1,208
<TOTAL-ASSETS> 8,622
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 1,300
<TOTAL-LIABILITY-AND-EQUITY> 8,622
<SALES> 0
<TOTAL-REVENUES> 754
<CGS> 0
<TOTAL-COSTS> 137
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 188
<INCOME-PRETAX> 103
<INCOME-TAX> 39
<INCOME-CONTINUING> 64
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 64
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
