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 September 30, 1999
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 November 5, 1999: 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
September 30, 1999 and 1998, and the balance sheet as of December 31, 1998 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, 1998. 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 July 21, 1999, Transamerica Corporation, which owns all of the Company's
outstanding common stock, completed its merger with a subsidiary of AEGON N. V.,
a Netherlands based international life insurance group. As a result,
Transamerica Corporation is now a direct subsidiary of AEGON N. V.
The consolidated ratio of earnings to fixed charges was computed by
dividing net 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.
<PAGE>
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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
-------------
CONSOLIDATED BALANCE SHEET
(Amounts in millions except for share data)
<CAPTION>
September 30, December 31,
1999 1998
<S> <C> <C>
Assets:
Cash and cash equivalents $ 118.5 $ 51.2
Finance receivables 8,292.9 6,943.7
Less unearned fees ($666.4 in 1999 and
$521.2 in 1998) and allowance for losses 799.6 645.3
---------- ----------
7,493.3 6,298.4
Property and equipment less accumulated depreciation
of $1,469.9 in 1999 and $1,300 in 1998:
Land, buildings and equipment 61.5 49.1
Equipment held for lease 3,019.9 3,038.0
Goodwill, less accumulated amortization of
$186.6 in 1999 and $172.6 in 1998 411.8 423.4
Assets held for sale 6.7 180.8
Other assets 746.6 758.7
---------- ----------
$ 11,858.3 $ 10,799.6
========== ==========
Liabilities and Stockholder's Equity:
Debt:
Unsubordinated $ 8,191.7 $ 7,365.4
Subordinated 371.1 433.2
---------- ----------
Total debt 8,562.8 7,798.6
Accounts payable and other liabilities 1,149.0 1,004.1
Income taxes payable 474.9 407.0
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 1,631.7 1,532.9
Retained earnings 36.1 48.0
Component of other cumulative
comprehensive income:
Foreign currency translation adjustments (10.8) (5.6)
---------- ----------
Total stockholder's equity 1,671.6 1,589.9
---------- ----------
$ 11,858.3 $ 10,799.6
========== ==========
</TABLE>
<PAGE>
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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
---------------
CONSOLIDATED STATEMENT OF INCOME
(Amounts in millions)
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES
Finance charges and other fees $ 629.0 $ 513.6 $ 219.4 $ 170.6
Leasing revenues 512.8 548.5 172.0 181.5
Other 129.4 71.9 31.0 28.2
--------- ----------- ---------- -----------
Total revenues 1,271.2 1,134.0 422.4 380.3
EXPENSES
Interest and debt expense 327.5 279.9 108.4 91.6
Depreciation on equipment held for lease 218.5 207.1 74.1 70.6
Salaries and other operating expenses 496.1 450.5 164.5 150.8
Provision for losses on receivables 60.2 39.4 20.5 13.4
--------- ----------- ---------- -----------
Total expenses 1,102.3 976.9 367.5 326.4
--------- ----------- ---------- -----------
Income before income taxes 168.9 157.1 54.9 53.9
Income taxes 66.1 59.8 21.2 20.8
--------- ----------- ---------- -----------
Net income $ 102.8 $ 97.3 $ 33.7 $ 33.1
========= =========== ========== ===========
Consolidated ratio of earnings
to fixed charges 1.49 1.53
==== ====
</TABLE>
<PAGE>
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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
------------
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in millions)
<CAPTION>
Nine months ended
September 30,
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 102.8 $ 97.3
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 243.1 224.6
Provision for losses on receivables 60.2 39.4
Amortization of discount on long-term debt 12.1 9.2
Change in accounts payable and other
liabilities 145.9 (141.2)
Change in income taxes payable 52.6 78.5
Other (88.9) 220.7
---------- ---------
Net cash provided by operating activities 527.8 528.5
INVESTING ACTIVITIES
Finance receivables originated (19,538.9) (15,918.0)
Finance receivables collected and sold 18,301.8 15,342.1
Purchase of property and equipment (300.3) (300.9)
Sales of property and equipment 47.9 83.7
Purchase of finance receivables from
Whirlpool Finance Corporation (386.4)
Proceeds from sale of Transamerica HomeFirst 200.0
Other 74.6 4.2
---------- ---------
Net cash used by investing activities (1,214.9) (1,175.3)
FINANCING ACTIVITIES
Proceeds from debt financing 5,382.9 1,776.4
Payments of debt (4,612.6) (1,143.6)
Net capital contributions from parent 98.8 78.0
Cash dividends paid (114.7) (92.8)
---------- ---------
Net cash provided by financing activities 754.4 618.0
---------- ---------
Increase (decrease) in cash and cash equivalents 67.3 (28.8)
Cash and cash equivalents at beginning of year 51.2 70.1
---------- ---------
Cash and cash equivalents at end of period $ 118.5 $ 41.3
========== =========
</TABLE>
<PAGE>
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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(Amounts in millions)
<CAPTION>
Nine months ended
September 30,
1999 1998
<S> <C> <C>
Balance at beginning of year $ 48.0
Net income 102.8 $ 97.3
Dividends (114.7) (92.8)
--------- --------
Balance at end of period $ 36.1 $ 4.5
========= ========
</TABLE>
Item 2. Management's Narrative Analysis of Results of Operations
<TABLE>
REVENUES AND INCOME BY LINE OF BUSINESS
(Amounts in millions)
<CAPTION>
Nine months ended September 30, Third Quarter
Revenues Income (loss) Income (loss)
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Commercial lending $ 650.8 $ 511.4 $ 77.7 $ 72.3 $ 29.9 $ 25.3
Leasing 596.7 608.5 33.1 44.7 9.4 13.5
Other 23.7 14.1 5.7 (8.4) (1.2) (1.7)
Amortization of goodwill (13.7) (11.3) (4.4) (4.0)
--------- ---------- --------- -------- --------- --------
$ 1,271.2 $ 1,134.0 $ 102.8 $ 97.3 $ 33.7 $ 33.1
========= ========== ========= ======== ========= ========
</TABLE>
<PAGE>
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Commercial Lending
Commercial Lending comprises the Company's distribution finance, business
credit and equipment finance operations. Commercial lending net income for the
first nine months and third quarter of 1999 was $65.6 million and $26.1 million
compared to $62.6 million and $21.8 million for the comparable periods of 1998.
Income, before the amortization of goodwill, for the first nine months and third
quarter of 1999 increased $5.4 million (8%) and $4.6 million (19%) from 1998's
nine months and third quarter. Operating results for the first nine months of
1999 included $1.7 million in after tax gains from the sale and securitization
of finance receivables. There were no gains from the sale and securitization of
finance receivables in the third quarters of 1999 or 1998. The first nine months
of 1998 included $5.3 million in after tax gains from the sale and
securitization of finance receivables, a first quarter $3 million tax benefit
from the resolution of prior year tax matters, and a first quarter $2.1 million
after tax charge for losses and the restructuring of the insurance premium
finance business. Excluding the above items, commercial lending income before
the amortization of goodwill for the first nine months of 1999 increased $9.9
million (15%) over the comparable prior year period. Higher margins resulting
from higher average net receivables outstanding contributed to the increased
profits and more than offset increased operating expenses and provision for
losses on receivables in the first nine months and third quarter of 1999
compared to the same periods of 1998.
Revenues in the first nine months and third quarter of 1999 increased
$139.4 million (27%) and $53.4 million (31%) over the corresponding 1998
periods. Revenues rose principally as a result of growth in average net
receivables outstanding and higher servicing and other income on securitized
receivables.
Interest expense increased $53.2 million (36%) and $21.1 million (45%) in
the first nine months and third quarter of 1999 due to higher average debt
levels needed to support receivable growth. Operating expenses for the first
nine months and third quarter of 1999 increased $55.6 million (25%) and $17.8
million (25%) primarily as a result of costs related to product line expansion
and servicing of receivables. The provision for losses on receivables for the
first nine months and third quarter of 1999 increased $16.9 million (45%) and
$6.8 million (53%) from the corresponding 1998 periods principally as a result
of growth in 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 0.90% for the first nine months and 0.83% for
the third quarter of 1999 compared to 0.70% and 0.73% for the comparable periods
of 1998.
Net commercial finance receivables outstanding at September 30, 1999,
increased $1.1 billion (19%) from December 31, 1998 due to continued growth in
each of the business segments. During the first nine months of 1999, the
commercial lending operation securitized approximately $250 million of inventory
floorplan receivables, $150 million of equipment lease finance receivables and
$150 million of retail revolving credit card receivables. Management has
established an allowance for losses equal to 1.72% of net commercial finance
receivables outstanding as of September 30, 1999 compared to 1.99% at December
31, 1998.
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. At September 30, 1999, delinquent receivables were $71.5 million (0.99% of
receivables outstanding) compared to $98.6 million (1.63% of receivables
outstanding) at December 31, 1998. The decline resulted from lower delinquency
in the equipment leasing portfolio.
Nonearning receivables are defined as balances from borrowers that are more
than 90 days delinquent for non credit card receivables or at such earlier time
as full collectibility becomes doubtful. Nonearning receivables on revolving
credit card accounts 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 amounts are
collected. Nonearning receivables were $77.8 million (1.08% of receivables
outstanding) at September 30, 1999 compared to $65.7 million (1.09% of
receivables outstanding) at December 31, 1998.
<PAGE>
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Leasing
Leasing comprises the Company's marine container, structured finance,
domestic products, tank containers, and European trailer operations. Leasing net
income for the first nine months and third quarter of 1999 was $31.6 million and
$8.9 million compared to $43.2 million and $13 million for the comparable
periods of 1998.
Leasing income, before the amortization of goodwill, decreased $11.6
million (26%) and $4.1 million (30%) for the first nine months and third quarter
of 1999 compared to the corresponding periods of 1998. Earnings in 1999 were
lower in both periods as a result of fewer container units on hire and higher
positioning costs which were partially offset by improved earnings from a larger
portfolio of finance leases and in the nine month period by the $4.9 million
benefit from the termination of a tax-based leveraged lease in the first quarter
of 1999.
Revenue for the first nine months and third quarter of 1999 decreased $11.8
million (2%) and $6.3 million (3%) as compared to the corresponding periods of
1998. Trade imbalances between Asia, the United States and Europe, and an over
supply of container equipment negatively affected container on-hire levels and
per diem rates. Weak economic growth in Western Europe during the first nine
months of 1999 had a negative impact on the demand for short term trailer
rentals. Partially offsetting these factors were increased revenue from a larger
portfolio of finance leases and in the nine month period by the benefit from the
termination of a tax-based leverage lease in the first quarter of 1999.
Expenses for the first nine months and third quarter of 1999 increased $6.9
million (1%) and $200,000 (- %) compared to the corresponding periods of 1998.
Operating costs for the first nine months increased primarily due to positioning
expenditures associated with the movement of container equipment from the United
States and Europe to Asia to meet anticipated demand. Partially offsetting these
increases were lower year 2000 conversion costs in both the nine months and
third quarter of 1999 compared to the same periods of 1998.
The combined utilization of standard containers, refrigerated containers,
domestic containers, tank containers and chassis averaged 77% and 76% for the
first nine months and third quarter of 1999 compared to 79% for the first nine
months and third quarter of 1998. Rail trailer utilization was 82% and 84% for
the first nine months and third quarter of 1999 compared to 81% and 84% for the
first nine months and third quarter of 1998. European trailer utilization was
80% for both the first nine months and third quarter of 1999 compared to 89% and
86% for the first nine months and third quarter of 1998.
Other
The favorable results in other operations for the first nine months of 1999
were primarily due to an $11 million after tax gain on the sale of Transamerica
HomeFirst in June 1999, and improved operating results at Transamerica HomeFirst
in the period leading up to its sale compared to the first nine months of 1998.
<PAGE>
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Comprehensive Income
In accordance with Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income, comprehensive income for the periods indicated
comprised (amounts in millions):
<TABLE>
<CAPTION>
Nine months ended Three months ended
September 30, September 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 102.8 $ 97.3 $ 33.7 $ 33.1
Other comprehensive income, net of tax:
Foreign currency translation adjustments (5.2) 11.5 8.5 9.4
--------- ------- -------- -------
Comprehensive income $ 97.6 $ 108.8 $ 42.2 $ 42.5
========= ======= ======== =======
</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 $2.4 billion at
September 30, 1999 and $1.6 billion at December 31, 1998 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 September 30, 1999, 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 hedges at September 30, 1999 and December 31, 1998 was a net benefit
of $700,000 and $59.9 million comprising agreements with aggregate gross
benefits of $15.5 million and $62.2 million and agreements with aggregate gross
obligations of $14.8 million and $2.3 million.
Year 2000 Issue
The Company has developed a plan to modify its information systems to
ensure the readiness of its business applications, operating systems and
hardware on mainframes, servers and personal computers, and wide and local area
networks, to recognize the Year 2000. The plan also addresses non-information
technology embedded software and equipment, the readiness of key business
partners, and updating business continuity plans.
The project was divided into four phases: (1) problem determination, (2)
planning and resource acquisition, (3) remediation and (4) testing and
acceptance. During phase one, the Company determined the size and scope of the
problem and prepared an inventory of the hardware, software, interfaces and
other items that may be affected. In addition, software code was scanned and
third parties were contacted to determine the status of their efforts. During
phase two, the Company assessed the risks and decided whether to fix, replace,
discard, or test the items identified in the inventory, prepared a project plan
and allocated appropriate resources as necessary. Phase three covered
remediation where date occurrences in internally maintained systems were
analyzed and corrected and software and hardware were replaced where necessary.
In addition, operating systems that interface with outside parties were examined
in more detail and modified if required. Phase four included testing and
acceptance of all software, hardware, third party interfaces and related items
to ensure they will work in a number of different Year 2000 scenarios. This
phase accounted for roughly half of the Year 2000 project effort and culminated
in components being certified as Year 2000 ready.
<PAGE>
Page 10
The most significant categories of outside parties to the Company are
financial institutions, software vendors, third party service providers and
utility providers (gas, electric and telecommunications). The Company's
assessment of its key business partners continues. Surveys have been mailed,
follow up contacts are underway and strategies are being developed to address
issues as they are identified. This effort is expected to continue throughout
1999.
Both the commercial lending and leasing segments of the Company's
operations have completed all phases of Year 2000 remediation and testing for
their critical systems.
The projected total cost associated with required modifications to become
ready for the Year 2000 is $11.4 million. These costs are being expensed as
incurred and funded through operations. At this time there can be no assurance
that these estimates will not be exceeded and actual results may differ
significantly from those projected. Some factors that may cause actual
expenditures to differ include the availability and cost of trained personnel
and the ability to locate and correct all relevant computer problems. This
estimate includes internal costs, but excludes the costs to upgrade and replace
systems in the normal course of business. The total amount expended on the
project through September 30, 1999, was $11 million. The Company does not expect
the project to have a significant effect on its financial condition or results
of operations.
The Company believes it has achieved Year 2000 readiness; however, the size
and complexity of its systems and the need for them to interface with other
systems internally and with those of customers, vendors, partners and other
outside parties, creates the possibility that some of these systems may
experience Year 2000 problems. Specific factors that give rise to this concern
include a possible loss of qualified resources, failure to identify and
remediate all affected systems, noncompliance by third parties whose systems and
operations interface with the Company's systems and other similar uncertainties.
The Company has prepared contingency plans to minimize any possible disruptions
to operations. The Company will continue to conduct Year 2000 related testing of
its systems and applications, and its contingency plans will continue to be
refined, through the remainder of 1999.
<PAGE>
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
12 Computation of Consolidated 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)
George B. Sundby
Senior Vice President and Chief Financial Officer
Date: November 12, 1999
EXHIBIT 12
<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Nine Months Ended September 30,
1999 1998
(Dollar amounts in millions)
<S> <C> <C>
Fixed charges:
Interest and debt expense $ 327.5 $ 279.9
One-third of rental expense 18.0 18.9
--------- --------
Total $ 345.5 $ 298.8
========= ========
Earnings:
Net income $ 102.8 $ 97.3
Provision for income taxes 66.1 59.8
Fixed charges 345.5 298.8
--------- --------
Total $ 514.4 $ 455.9
========= ========
Consolidated ratio of earnings
to fixed charges 1.49 1.53
==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 119
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,081
<DEPRECIATION> 1,470
<TOTAL-ASSETS> 11,858
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 1,657
<TOTAL-LIABILITY-AND-EQUITY> 11,858
<SALES> 0
<TOTAL-REVENUES> 1,271
<CGS> 0
<TOTAL-COSTS> 219
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 60
<INTEREST-EXPENSE> 328
<INCOME-PRETAX> 169
<INCOME-TAX> 66
<INCOME-CONTINUING> 103
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 103
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
