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, 1999
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 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 June 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, announced that its merger with a subsidiary
of AEGON N.V., a Netherlands based international life insurance group, was
completed. 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.
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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,
1999 1998
<S> <C> <C>
Assets:
Cash and cash equivalents $ 73.0 $ 51.2
Finance receivables
Less unearned fees ($608.8 in 1999 and 7,555.9 6,943.7
$521.2 in 1998) and allowance for losses 736.5 645.3
----------- -----------
6,819.4 6,298.4
Property and equipment less accumulated depreciation
of $1,402.3 in 1999 and $1,300 in 1998:
Land, buildings and equipment 55.3 49.1
Equipment held for lease 3,044.2 3,038.0
Goodwill, less accumulated amortization of
$181.9 in 1999 and $172.6 in 1998 416.2 423.4
Assets held for sale 6.3 180.8
Other assets 706.7 758.7
----------- -----------
$ 11,121.1 $ 10,799.6
=========== ===========
Liabilities and Stockholder's Equity:
Debt:
Unsubordinated $ 7,617.9 $ 7,365.4
Subordinated 381.1 433.2
----------- -----------
Total debt 7,999.0 7,798.6
Accounts payable and other liabilities 1,062.4 1,004.1
Income taxes payable 461.5 407.0
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 1,575.5 1,532.9
Retained earnings 27.4 48.0
Component of other cumulative
comprehensive income:
Foreign currency translation adjustments (19.3) (5.6)
----------- -----------
Total stockholder's equity 1,598.2 1,589.9
----------- -----------
$ 11,121.1 $ 10,799.6
=========== ===========
</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,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES
Finance charges and other fees $409.6 $343.0 $213.5 $175.9
Leasing revenues 340.8 367.0 170.5 181.3
Other 98.4 43.7 51.3 24.2
------ ------ ------ ------
Total revenues 848.8 753.7 435.3 381.4
EXPENSES
Interest and debt expense 219.1 188.3 109.8 94.0
Depreciation on equipment held for lease 144.4 136.5 72.8 69.0
Salaries and other operating expenses 331.6 299.7 162.4 145.2
Provision for losses on receivables 39.7 26.0 18.8 11.7
------ ------ ------ ------
Total expenses 734.8 650.5 363.8 319.9
------ ------ ------ ------
Income before income taxes 114.0 103.2 71.5 61.5
Income taxes 44.9 39.0 26.8 24.8
------ ------ ------ ------
Net income $ 69.1 $ 64.2 $ 44.7 $ 36.7
====== ====== ====== ======
Consolidated ratio of earnings
to fixed charges 1.49 1.51
==== ====
</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,
<S> <C> <C>
1999 1998
OPERATING ACTIVITIES
Net income $ 69.1 $ 64.2
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 159.7 147.8
Provision for losses on receivables 39.7 26.0
Amortization of discount on long-term debt 7.4 6.0
Change in accounts payable and other
liabilities 78.0 (232.6)
Change in income taxes payable 39.2 64.8
Other (104.4) 179.1
-------- -------
Net cash provided by operating activities 288.7 255.3
INVESTING ACTIVITIES
Finance receivables originated (12,509.4) (9,819.7)
Finance receivables collected and sold 11,951.7 10,066.6
Purchase of property and equipment (241.2) (165.4)
Sales of property and equipment 30.1 66.0
Purchase of finance receivables from
Whirpool Finance Corporation (378.4)
Proceeds from sale of Transamerica HomeFirst 200.0
Other 130.0 (9.5)
--------- --------
Net cash used by investing activities (438.8) (240.4)
FINANCING ACTIVITIES
Proceeds from debt financing 3,495.1 951.9
Payments of debt (3,276.0) (893.3)
Net capital contributions from parent 42.5 9.7
Cash dividends paid (89.7) (64.2)
--------- --------
Net cash provided by financing activities 171.9 4.1
--------- --------
Increase in cash and cash equivalents 21.8 19.0
Cash and cash equivalents at beginning of year 51.2 70.1
--------- --------
Cash and cash equivalents at end of period $ 73.0 $ 89.1
========= ========
</TABLE>
<PAGE>
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<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
(Amounts in millions)
<CAPTION>
Six months ended
June 30,
1999 1998
<S> <C> <C>
Balance at beginning of year $ 48.0
Net income 69.1 $ 64.2
Dividends (89.7) (64.2)
------- -------
Balance at end of period $ 27.4 $ --
======= =======
</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(loss) Income(loss)
1999 1998 1999 1998 1999 1998
<S> <C> <C> <C> <C> <C> <C>
Commercial lending $ 426.4 $ 340.5 $ 47.8 $ 47.0 $ 29.2 $ 29.0
Leasing 398.7 404.1 23.7 31.2 10.8 15.6
Other 23.7 9.1 6.9 (6.7) 9.3 (4.0)
Amortization of goodwill (9.3) (7.3) (4.6) (3.9)
------- ------- ------- ------- ------- -------
$ 848.8 $ 753.7 $ 69.1 $ 64.2 $ 44.7 $ 36.7
======= ======= ======= ======= ======= =======
</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
half and second quarter of 1999 was $39.5 million and $25.1 million compared to
$40.7 million and $25.6 million for the comparable periods of 1998. Income
before the amortization of goodwill, for the first half and second quarter of
1999 increased $800,000 (2%) and $200,000 (-%) from 1998's first half and
second quarter.
Operating results for the second quarter of 1999 included after tax gains of
$900,000 on the sale and securitization of retail revolving credit card
receivables and $300,000 on the sale and securitization of inventory floorplan
and equipment lease finance receivables. Operating results for the second
quarter of 1998 included $3.2 million in after tax gains on the sale and
securitization of inventory floorplan and equipment lease finance receivables.
Operating results for the six months ended June 30, 1999 included after tax
gains of $1.7 million from the sale and securitization of inventory floorplan,
equipment lease finance and retail revolving credit card receivables. Operating
results for the first six months of 1998 included $5.3 million of after
tax gains on the securitization of inventory floorplan and equipment lease
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 six months and second quarter of 1999 increased
$5.3 million (13%) and $2.2 million (8%) over the comparable prior year periods.
Higher average net receivables outstanding contributed to the growth in
operating income.
Revenues in the first half and second quarter of 1999 increased $85.9 million
(25%) and $45.1 million (26%) 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 $32 million (32%) and $16.7 million (33%) in the
first half and second quarter of 1999 over the comparable periods of 1998 due to
higher average debt levels needed to support receivables growth. Operating
expenses for the first six months and second quarter of 1999 increased $37.9
million (26%) and $22.1 million (32%) over the corresponding 1998 periods
primarily as a result of costs related to product line expansion and servicing
of receivables. The provision for losses on receivables for the first half and
second quarter of 1999 increased $10.1 million (41%) and $5.9 million (51%) from
the corresponding 1998 periods. The increase was attributable to receivables
growth and higher credit losses. Credit losses, net of recoveries, on an
annualized basis as a percentage of average commercial finance receivables
outstanding, net of unearned finance charges, were 0.93% for the first half and
0.85% for the second quarter of 1999 compared to 0.68% and 0.79% for the
comparable periods of 1998.
Net commercial finance receivables outstanding at June 30,1999, increased $444.8
million (8%) from December 31, 1998. During the first half of 1999, the
commercial lending operation securitized $400 million of inventory floorplan and
equipment lease finance receivables and $150 million of retail revolving credit
card receivables. Management has established an allowance for losses equal to
1.83% of net commercial finance receivables outstanding as of June 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 June 30, 1999, delinquent receivables were $71.6 million (1.10% of
receivables outstanding) compared to $98.6 million (1.63% of receivables
outstanding) at December 31, 1998. The decline occurred primarily in the
equipment leasing portfolio.
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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 $64.7 million (0.99% of receivables
outstanding) at June 30, 1999 compared to $65.7 million (1.09% of receivables
outstanding) at December 31, 1998.
Leasing
Leasing comprises the Company's marine container, structured finance, domestic
products, tank containers and European trailer operations. Leasing net income
for the first half and second quarter of 1999 was $22.7 million and $10.2
million compared to $30.2 million and $15 million for the first half and
second quarter of 1998.
Leasing income, before the amortization of goodwill, for the first half and
second quarter of 1999, decreased $7.5 million (24%) and $4.8 million (31%)
versus the first half and second quarter of 1998. Earnings in 1999 were lower in
both periods as a result of fewer marine container units on hire and higher
operating costs which were partially offset by improved earnings from a larger
portfolio of finance leases and in the six month period by the $4.9 million
first quarter benefit from the termination of a tax-based leveraged lease.
Revenue for the first half and second quarter of 1999 decreased $5.4 million
(1%) and 5.1 million (3%) versus the first half and second quarter 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 rental
rates. Weak economic conditions in Europe had a negative impact on short term
trailers on hire. Partially offsetting these decreases were increased revenue
from a larger portfolio of finance leases and in the six month period by the
first quarter favorable termination of a tax-based leverage lease agreement.
Expenses for the first half and second quarter of 1999 increased $6.7 million
(2%) and $3.1 million (2%) over the corresponding 1998 periods, mainly due to
strategic positioning expenditures during the first half associated with the
movement of dry container equipment to meet anticipated demand in the Asian
market. Operating costs during the first half and second quarter increased
primarily due to higher storage and repair activity. Additionally, interest
expense was higher primarily due to the growth in the finance lease business
while lower year 2000 conversion costs led to lower selling and administrative
expenses in both the six months and second quarter of 1999 compared to the same
periods in 1998.
The combined utilization of dry containers, special containers, refrigerated
containers, domestic containers, tank containers and chassis averaged 76% and
75% for the first half and second quarter of 1999 compared to 79% for both the
first half and second quarter of 1998. Rail trailer utilization was 81% for both
the first half and second quarter of 1999 compared to 79% and 80% for the first
half and second quarter of 1998. European trailer utilization was 80% for both
the first half and second quarter of 1999 compared to 90% and 91% for the first
half and second quarter of 1998.
Other
The favorable results in other operations 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 half and second quarter 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>
Six months ended June 30, Three months ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net income $ 69.1 $ 64.2 $ 44.7 $ 36.7
Other comprehensive income, net of tax:
Foreign currency translation adjustments (13.7) 2.1 3.7 4.8
------ ------ ------ ------
Comprehensive income $ 55.4 $ 66.3 $ 48.4 $ 41.5
====== ====== ====== ======
</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 June 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 June 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 liability hedges at June 30, 1999 and December 31, 1998 was a net
benefit of $9.2 million and $59.9 million comprising agreements with aggregate
gross benefits of $15.2 million and $62.2 million and agreements with aggregate
gross obligations of $6 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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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 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 and testing phases as of June 30, 1999. The commercial lending
operating systems in Europe were fully tested and implemented in July 1999.
The leasing operation had completed the remediation and testing phases
as of June 30, 1999.
The projected total cost associated with required modifications to
become ready for the Year 2000 is approximately $11 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 June 30, 1999, was $9.8 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.
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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)
Burton E. Broome
Vice President and Controller
Date: July 28, 1999
EXHIBIT 12
<TABLE>
TRANSAMERICA FINANCE CORPORATION AND SUBSIDIARIES
COMPUTATION OF CONSOLIDATED RATIO OF EARNINGS TO FIXED CHARGES
<CAPTION>
Six Months Ended June 30,
1999 1998
(Dollar amounts in millions)
<S> <C> <C>
Fixed charges:
Interest and debt expense $ 219.1 $ 188.3
One-third of rental expense 11.9 12.5
-------- --------
Total $ 231.0 $ 200.8
======== ========
Earnings:
Net income $ 69.1 $ 64.2
Provision for income taxes 44.9 39.0
Fixed charges 231.0 200.8
-------- --------
Total $ 345.0 $ 304.0
======== ========
Consolidated ratio of earnings
to fixed charges 1.49 1.51
==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 73
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,100
<DEPRECIATION> 1,402
<TOTAL-ASSETS> 11,121
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 1,583
<TOTAL-LIABILITY-AND-EQUITY> 11,121
<SALES> 0
<TOTAL-REVENUES> 849
<CGS> 0
<TOTAL-COSTS> 144
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 40
<INTEREST-EXPENSE> 219
<INCOME-PRETAX> 114
<INCOME-TAX> 45
<INCOME-CONTINUING> 69
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
