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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 March 31, 1999
Commission File Number 1-6798
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TRANSAMERICA FINANCE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 95-10977235
(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)
(415) 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 3 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 April 28, 1999: 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 March 31, 1999 and 1998, 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, 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 February 18, 1999, Transamerica Corporation, which owns all of the
Company's outstanding common stock, announced that it had signed a merger
agreement with AEGON N.V. (AEGON) providing for AEGON's acquisition of all of
Transamerica's outstanding common stock for a combination of cash and AEGON
stock worth $9.7 billion. The merger is expected to close during the summer of
1999.
The consolidated ratios of earnings to fixed charges were 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.
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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
---------
CONSOLIDATED BALANCE SHEET
(Amounts in millions except for share data)
<CAPTION>
March 31, December 31,
1999 1998
<S> <C> <C>
Assets:
Cash and cash equivalents $ 50.7 $ 51.2
Finance receivables 7,277.1 6,943.7
Less unearned fees ($517.4 in 1999 and
$521.2 in 1998) and allowance for losses 646.2 645.3
----------- -----------
6,630.9 6,298.4
Property and equipment, less accumulated
depreciation of $1,358.7 in 1999 and
$1,300 in 1998:
Land, buildings and equipment 52.7 49.1
Equipment held for lease 3,040.5 3,038.0
Goodwill, less accumulated amortization of
$177.6 in 1999 and $172.6 in 1998 426.5 423.4
Assets held for sale 177.7 180.8
Other assets 764.6 758.7
----------- -----------
$ 11,143.6 $ 10,799.6
=========== ===========
Liabilities and Stockholder's Equity:
Debt:
Unsubordinated $ 7,702.7 $ 7,365.4
Subordinated 413.2 433.2
----------- -----------
Total Debt 8,115.9 7,798.6
Accounts payable and other liabilities 952.6 1,004.1
Income taxes payable 435.6 407.0
Stockholder's equity:
Preferred stock - authorized, 250,000 shares
without par value: none issued
Common stock - authorized, 2,500,000 shares of
$10 par value; issued and outstanding
1,464,285 shares 14.6 14.6
Additional paid-in capital 1,575.5 1,532.9
Retained earnings 72.4 48.0
Component of other cumulative
comprehensive income:
Foreign currency translation adjustments (23.0) (5.6)
----------- -----------
Total Stockholder's Equity 1,639.5 1,589.9
----------- -----------
$ 11,143.6 $ 10,799.6
=========== ===========
</TABLE>
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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
--------
CONSOLIDATED STATEMENT OF INCOME
(Amounts in millions)
<CAPTION>
Three months ended
March 31,
1999 1998
<S> <C> <C>
REVENUES
Finance charges and other fees $ 196.1 $ 167.1
Leasing revenues 170.3 185.7
Other 47.1 19.5
---------- ----------
Total revenues 413.5 372.3
EXPENSES
Interest and debt expense 109.3 94.3
Depreciation on equipment held for lease 71.6 67.5
Salaries and other operating expenses 169.2 14.3
Provision for losses on receivables 20.9 154.5
---------- ----------
Total expenses 371.0 330.6
Income before income taxes 42.5 41.7
Income taxes 18.1 14.2
---------- ----------
Net Income $ 24.4 $ 27.5
========== ==========
Ratio of earnings to fixed charges 1.37 1.41
========== ==========
</TABLE>
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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
--------
CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in millions)
<CAPTION>
Three months ended
March 31,
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 24.4 $ 27.5
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 79.2 72.8
Provision for losses on receivables 20.9 14.3
Amortization of discount on long-term debt 3.6 2.9
Change in accounts payable and other liabilities (79.1) (166.7)
Change in income taxes payable 18.0 50.1
Other (62.5) 180.3
---------- ----------
Net cash provided by operating activities 4.5 181.2
INVESTING ACTIVITIES
Finance receivables originated (5,716.8) (4,791.9)
Finance receivables collected and sold 5,361.9 4,582.7
Purchase of property and equipment (128.9) (86.9)
Sales of property and equipment 11.2 36.3
Purchase of finance receivables from Whirlpool Finance Corporation (351.9)
Other 91.1 (9.8)
---------- ----------
Net cash used by investing activities (381.5) (621.5)
FINANCING ACTIVITIES
Proceeds from debt financing 2,250.2 956.8
Payment of debt (1,916.2) (590.2)
Capital contributions from parent 42.5 38.3
---------- ----------
Net cash provided by financing activities 376.5 404.9
---------- ----------
Decrease in cash and cash equivalents (0.5) (35.4)
Cash and cash equivalents at beginning of year 51.2 70.1
---------- ----------
Cash and cash equivalents at end of period $ 50.7 $ 34.7
========== ==========
</TABLE>
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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
-----------------
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(Amounts in millions)
<CAPTION>
Three months ended
March 31,
1999 1998
<S> <C> <C>
Balance at beginning of year $ 48.0 $
Net income 24.4 27.5
--------- ----------
Balance at end of period $ 72.4 $ 27.5
========= ========
</TABLE>
Item 2. Management's Narrative Analysis of Results of Operations
<TABLE>
REVENUES AND INCOME BY LINE OF BUSINESS
(Amounts in millions)
<CAPTION>
Three months ended March 31,
Revenues Income
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Commercial lending $ 205.4 $ 164.6 $ 18.6 $ 18.0
Leasing 202.9 203.2 12.9 15.6
Other 5.2 4.5 (2.4) (2.7)
Amortization of goodwill (4.7) (3.4)
------- ------- ------- -------
$ 413.5 $ 372.3 $ 24.4 $ 27.5
======= ======= ======= =======
</TABLE>
Commercial Lending
Commercial lending net income for the first quarter of 1999 was $14.4
million compared to $15.1 million for the first quarter of 1998. Income, before
the amortization of goodwill, for the first quarter of 1999 increased $600,000
(3%) from the first quarter of 1998. Operating results for 1999 include after
tax gains of $500,000 on the sale and securitization of inventory floorplan and
equipment lease finance receivables. Prior year operating results included a $3
million tax benefit from tax matters resolved in 1998, a $2.1 million after tax
charge for losses and restructuring of the insurance premium finance business
and a $2.1 million gain on the sale and securitization of floorplan finance
receivables. Excluding the above items, commercial lending income before the
amortization of goodwill increased $3.1 million (21%) over the first quarter of
1998. Higher average net receivables outstanding contributed to the growth in
operating income.
Revenues in the first quarter of 1999 increased $40.8 million (25%)
over the first quarter of 1998 principally as a result of growth in average net
receivables outstanding and higher servicing and other income on securitized
receivables.
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Interest expense increased $15.4 million (32%) in the first quarter of
1999 as compared to the comparable 1998 period due to a higher average interest
rate on borrowings and to higher average outstanding debt as a result of growth
in average net receivables. Operating expenses rose $15.7 million (20%) mainly
as result of startup costs related to product line expansion and servicing of
receivables. The provision for losses on receivables increased $4.3 million
(31%) due primarily to higher credit losses. Credit losses, net of recoveries,
on an annualized basis as a percentage of average net receivables outstanding
were 1.02% for the first quarter of 1999 compared to 0.57% for the first quarter
of 1998.
Net commercial finance receivables outstanding at March 31,1999,
increased $327.4 million (6%) from December 31, 1998 due to continued growth in
each business unit. During the first quarter of 1999, the commercial lending
operation securitized $275 million of floorplan and equipment lease finance
receivables. Management has established an allowance for losses equal to 1.91%
of net commercial finance receivables outstanding as of March 31, 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 receivables balance for all other receivables over 60
days past due. At March 31,1999, delinquent receivables were $74.8 million
(1.18% 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 $59.7 million (0.94% of
receivables outstanding) at March 31, 1999 compared to $65.7 million (1.09% of
receivables outstanding) at December 31, 1998.
Leasing
In the first quarter of 1999, the leasing operation reported net income
of $12.4 million compared to $15.1 million in the first quarter of 1998. Income,
before the amortization of goodwill, for the first quarter of 1999 decreased
$2.7 million (18%) primarily due to fewer container units on hire and higher
operating costs which were partially offset by a $4.9 million benefit from the
termination of a tax-based leveraged lease and improved earnings from a larger
portfolio of finance leases.
Revenues were flat between the first quarter of 1999 and 1998. Trade
imbalances between Asia, the United States and Europe reduced revenues due to
lower levels of containers on-hire and per diem rates. Offsetting these
decreases were increased revenue from a larger portfolio of finance leases, more
on-hire chassis and the previously mentioned favorable termination of a
tax-based leveraged lease arrangement.
Expenses for 1999 increased from 1998 as a result of more strategic
positioning expenditures associated with the movement of container equipment to
meet anticipated demand in the Asian market and higher interest costs on the
larger portfolio of finance leases.
The combined utilization of standard containers, refrigerated
containers, domestic containers, tank containers and chassis averaged 77% for
the first quarter of 1999 compared to 79% in the first quarter of 1998. Rail
trailer utilization was 81% for the first quarter of 1999 compared to 79% in the
first quarter of 1998. European trailer utilization was 80% for the first
quarter of 1999 compared to 90% in the first quarter of 1998. However, European
trailer revenue was unaffected as higher long-term rental revenues offset lower
short term rental revenues associated with less on hires due to a softness in
industrial economic activity in key European markets.
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Other
The loss from other operations for the first quarter of 1999 was $300,000
less than the same period of 1998. This decrease primarily resulted from the
improved performance of the reverse mortgage portfolio, which is held for sale.
Comprehensive Income
In accordance with Financial Accounting Standard No. 130, Reporting
Comprehensive Income, comprehensive income for the nine months ended March 31,
1999 and 1998 comprised (amounts in millions):
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
<S> <C> <C>
Net Income $ 24.4 $ 27.5
Other comprehensive income, net of tax:
Foreign currency translation adjustments (17.4) (2.7)
--------- ---------
Comprehensive income $ 7.0 $ 24.8
========= =========
</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 $2.3 billion
at March 31, 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 March 31, 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 liability hedges at March 31, 1999 and December 31, 1998 was a net
benefit of $113.5 million and $59.9 million comprising agreements with aggregate
gross benefits of $118.4 million and $62.2 million and agreements with aggregate
gross obligations of $4.9 million and $2.3 million.
Year 2000 Issue
The Company has developed a plan to modify its information systems to
ensure the readiness of our 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 has 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 covers remediation where date
occurrences in internally maintained systems are analyzed and corrected and
software and hardware are replaced where necessary. In addition, operating
systems that interface with outside parties are examined in more detail and
modified if required. Phase four includes 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.
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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 well into
1999.
Following is the status of the Company's Year 2000 compliance efforts
for critical systems at each of its business segments.
The commercial lending operation had completed substantially all of the
remediation phase as of March 31, 1999. As of March 31, 1999, testing was well
underway and is expected to be substantially finished by June 1999. The
commercial lending operating systems in Europe, which affect a small percentage
of the business, are being developed and tested for implementation in July 1999.
The leasing operation had completed the remediation and testing phases
as of March 31, 1999. In addition to the systems remediated and tested, the
customer service, fleet management and equipment repair and maintenance system
is scheduled for replacement in June 1999.
The projected total cost associated with required modifications to
become ready for the Year 2000 is approximately $10 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 March 31, 1999, was $7.7 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 will achieve 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 is developing contingency plans to minimize any possible
disruptions.
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
(Chief Accounting Officer)
Date: April 29, 1999
<TABLE>
EXHIBIT 12
TRANSAMERICA FIANANCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Three months ended March 31,
1999 1998
(Dollar amounts in millions)
<S> <C> <C>
Fixed charges:
Interest and debt expense $ 109.3 $ 94.3
One-third of rental expense 5.6 6.5
--------- ---------
Total $ 114.9 $ 100.8
========= =========
Earnings:
Net income $ 24.4 $ 27.5
Provision for income taxes 18.1 14.2
Fixed charges 114.9 100.8
--------- ---------
Total $ 157.4 $ 142.5
========= =========
Ratio of earnings to fixed charges 1.37 1.41
==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 51
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,093
<DEPRECIATION> 1,359
<TOTAL-ASSETS> 11,144
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 1,625
<TOTAL-LIABILITY-AND-EQUITY> 11,144
<SALES> 0
<TOTAL-REVENUES> 414
<CGS> 0
<TOTAL-COSTS> 72
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 21
<INTEREST-EXPENSE> 109
<INCOME-PRETAX> 42
<INCOME-TAX> 18
<INCOME-CONTINUING> 24
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
