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 September 30, 1997
Commission File Number 1-2964
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TRANSAMERICA CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 94-0932740
(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 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, $1 par value, outstanding as of close
of business on October 31, 1997: 62,836,571 shares, after deducting 16,901,891
shares in treasury.
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TRANSAMERICA CORPORATION
FORM 10-Q
Part I. Financial Information
Item 1. Financial Statements.
The following unaudited consolidated financial statements of
Transamerica Corporation and Subsidiaries, for the periods ended September 30,
1997 and 1996, and the balance sheet as of December 31, 1996 do not include
complete financial information and should be read in conjunction with the
Consolidated Financial Statements filed with the Commission in Transamerica's
Annual Report 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
Corporation's businesses.
On September 18, 1997, Transamerica announced a definitive agreement to
acquire approximately $1.23 billion of net receivables and other assets of the
inventory financing, consumer financing and international factoring businesses
of Whirlpool Financial Corporation for a total purchase price of $1.35 billion,
subject to final closing adjustments. On October 16, 1997, Transamerica
announced that it had completed the acquisition of Whirlpool Financial
Corporation's inventory finance business in the United States, Canada and
Mexico, as well as its international factoring business in Argentina, for $759
million in cash. The acquisition of most of the remaining assets of the
international factoring operations was completed by November 3, 1997, for
approximately $170 million in cash. The acquisition of the consumer finance
business, including Whirlpool Financial National Bank, a credit card bank, will
close separately upon receipt of appropriate regulatory approval.
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, real estate secured loans, non real
estate secured loans and foreclosed properties and other repossessed assets with
a carrying value of $171.5 million remain as of September 30, 1997 which will be
sold or liquidated separately. In October 1997, Transamerica Corporation
completed the sale of another $158.7 million of contractual finance receivables
and foreclosures in process for gross proceeds of $117.8 million subject to
closing adjustments.
* * * * * * *
Primary earnings per share were calculated by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the period and for the periods ended September 30, 1997 the
dilutive effect of common shares contingently issuable from the exercise of
stock options, using the treasury stock method. Earnings available to common
stockholders are computed by deducting preferred dividends and preferred stock
redemption costs from net income. The computation of fully diluted earnings per
share is based upon the weighted average number of common shares outstanding
during the period plus the dilutive effect of common shares contingently
issuable from the exercise of stock options, using the treasury stock method.
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For years and quarters ending after December 15, 1997 Transamerica will
report its earnings per share in accordance with the Financial Accounting
Standards Board's Statement No. 128 - Earnings Per Share. Previously reported
earnings per share will be restated. See Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations, for pro forma
disclosure of Transamerica's earnings per share computed in accordance with this
standard.
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, dividends declared on
preferred securities issued by affiliates and one-third of rent expense, which
approximates the interest factor.
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET
Assets
September 30, December 31,
1997 1996
Investments, principally of life insurance subsidiaries:
Fixed maturities $28,337.7 $26,985.9
Equity securities 1,666.2 1,046.0
Mortgage loans and real estate 757.5 745.5
Loans to life insurance policyholders 455.3 442.6
Short-term investments 220.8 165.2
--------- ---------
31,437.5 29,385.2
Finance receivables 4,710.9 8,697.9
Less unearned fees ($326.2 in 1997
and $437.6 in 1996) and allowance for
losses 424.0 794.1
--------- ---------
4,286.9 7,903.8
Cash and cash equivalents 95.9 471.8
Trade and other accounts receivable 2,210.0 1,933.9
Property and equipment, less accumulated
depreciation of $1,425.3 in 1997 and
$1,309.9 in 1996:
Land, buildings and equipment 408.5 436.8
Equipment held for lease 3,115.0 3,118.5
Deferred policy acquisition costs 2,110.4 2,138.2
Separate account assets 5,236.1 3,527.9
Goodwill, less accumulated amortization of
$151.8 in 1997 and $143.9 in 1996 364.8 389.3
Assets held for sale 171.5 86.5
Other assets 532.1 483.0
--------- ---------
$49,968.7 $49,874.9
========= =========
(Amounts in millions)
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET (Continued)
Liabilities and Stockholders' Equity
September 30, December 31,
1997 1996
Life insurance policy liabilities $29,680.3 $28,542.8
Notes and loans payable, principally of
finance subsidiaries, of which $1,016.8
in 1997 and $1,241.3 in 1996 matures
within one year 6,413.2 10,328.3
Accounts payable and other liabilities 2,038.7 1,899.0
Income taxes 1,496.2 911.3
Separate account liabilities 5,236.1 3,527.9
Minority interest in preferred securities
of affiliates 525.0 525.0
Stockholders' equity:
Preferred Stock ($100 par value):
Authorized--1,200,000 shares; issuable
in series, cumulative
Outstanding--Dutch Auction Rate Trans-
ferable Securities, 2,250 shares in
1996, at liquidation preference of
$100,000 per share 225.0
Outstanding--Series D, 180,091 shares
in 1996, at liquidation preference of
$500 per share, cumulative dividend
rate of 8.5% 90.0
Common Stock ($1 par value):
Authorized--150,000,000 shares
Outstanding--62,736,288 shares in 1997
and 65,968,708 shares in 1996,
after deducting 17,002,174 shares
and 13,769,754 shares in treasury 62.7 66.0
Additional paid-in capital 83.0
Retained earnings 3,187.9 2,920.2
Net unrealized gain from investments
marked to fair value 1,363.0 784.4
Foreign currency translation adjustments (34.4) (28.0)
--------- ---------
4,579.2 4,140.6
--------- ---------
$49,968.7 $49,874.9
========= =========
(Amounts in millions except for share data)
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
----------------------
CONSOLIDATED STATEMENT OF INCOME
Nine months ended Three months ended
September 30, September 30,
1997 1996 1997 1996
REVENUES
Investment income $ 1,640.2 $ 1,566.9 $ 554.9 $ 530.3
Life insurance premiums and related
income 1,541.1 1,350.8 573.7 508.2
Finance charges and other fees 633.5 903.1 142.1 296.5
Leasing revenues 565.3 496.7 194.8 168.5
Real estate and tax service revenues 219.8 191.0 73.2 71.5
Gain (loss) on investment transactions 3.0 28.0 (11.5) (1.6)
Gain on sale of consumer lending
branch operation 469.0
Other 81.6 64.5 33.7 18.9
--------- --------- --------- --------
5,153.5 4,601.0 1,560.9 1,592.3
EXPENSES
Life insurance benefits 2,291.7 2,076.1 815.4 751.1
Life insurance underwriting, acquisition
and other expenses 544.7 473.3 184.4 157.0
Interest and debt expense 418.3 514.4 110.3 170.4
Leasing operating and maintenance costs 340.7 275.5 113.1 92.5
Provision for losses on receivables and
assets held for sale 48.0 249.6 3.0 148.1
Other, including administrative and
general expenses 601.1 610.4 175.5 207.4
--------- --------- --------- --------
4,244.5 4,199.3 1,401.7 1,526.5
--------- --------- --------- --------
909.0 401.7 159.2 65.8
Income taxes 290.1 66.6 9.2 (48.1)
--------- --------- --------- --------
Net Income $ 618.9 $ 335.1 $ 150.0 $ 113.9
========= ========= ========= ========
Earnings per share of common stock:
Primary:
Income before gain on investment
transactions $ 9.12 $ 4.55 $ 2.42 $ 1.68
Gain (loss) on investment transactions 0.02 0.27 (0.12) (0.01)
--------- --------- -------- ---------
Net Income $ 9.14 $ 4.82 $ 2.30 $ 1.67
========= ========= ======== =========
Fully diluted:
Income before gain on investment
transactions $ 9.10 $ 4.44 $ 2.42 $ 1.65
Gain (loss) on investment transactions 0.02 0.27 (0.12) (0.01)
--------- --------- -------- ---------
Net Income $ 9.12 $ 4.71 $ 2.30 $ 1.64
========= ========= ======== =========
Dividends per share of common stock $ 1.50 $ 1.50 $ 0.50 $ 0.50
========= ========= ======== =========
Ratio of earnings to fixed charges 2.90 1.74
==== ====
(Amounts in millions except for per share data)
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Nine months ended
September 30,
1997 1996
Balance at beginning of year $2,920.2 $2,866.0
Net income 618.9 335.1
Dividends on common stock (96.3) (99.2)
Dividends on preferred stock (2.6) (12.8)
Treasury stock purchased (252.3) (252.9)
-------- --------
Balance at end of period $3,187.9 $2,836.2
======== ========
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended
September 30,
1997 1996
OPERATING ACTIVITIES
Net income $ 618.9 $ 335.1
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of consumer lending
branch operation (275.0)
Increase in life insurance policy
liabilities, excluding policyholder
balances on interest-sensitive policies 388.0 764.9
Amortization of policy acquisition costs 180.9 180.3
Policy acquisition costs deferred (335.2) (278.5)
Depreciation and amortization 256.8 237.2
Other 91.1 12.7
--------- ---------
Net cash provided by operations 925.5 1,251.7
INVESTING ACTIVITIES
Finance receivables originated (16,681.0) (13,769.9)
Finance receivables collected and sold 16,819.8 13,541.3
Purchase of investments (8,734.7) (6,218.9)
Sales and maturities of investments 7,595.2 4,431.7
Proceeds from sale of branch based consumer
lending operation 3,860.0
Other (294.7) (163.4)
--------- ---------
Net cash provided (used) by investing activities 2,564.6 (2,179.2)
FINANCING ACTIVITIES
Proceeds from debt financing 3,310.7 4,588.7
Payment of notes and loans (7,169.3) (4,397.2)
Receipts from interest-sensitive policies
credited to policyholder account balances 5,842.5 5,183.6
Return of policyholder balances on
interest-sensitive policies (5,097.3) (4,049.9)
Treasury stock purchases (424.0) (290.9)
Redemption of preferred stock (318.9)
Other common stock transactions 89.2 34.7
Dividends (98.9) (112.0)
-------- -------
Net cash provided (used) by financing activities (3,866.0) 957.0
-------- -------
Increase (decrease) in cash and cash equivalents (375.9) 29.5
Cash and cash equivalents at beginning of year 471.8 67.6
------ ----
Cash and cash equivalents at end of period $ 95.9 $ 97.1
======= =======
(Amounts in millions)
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Consolidated Results
Transamerica's net income for the first nine months of 1997 increased
$283.8 million (85%), compared to the first nine months of 1996. Net income for
the first nine months of 1997 included net after tax gains from investment
transactions aggregating $1.6 million compared to $18.2 million in the first
nine months of 1996. In the first nine months of 1997 income before investment
transactions increased $300.4 million (95%) over the first nine months of 1996.
The 1997 period included a $275 million after tax gain from the sale of the
branch based consumer lending business and a $44.1 million benefit from the
resolution of prior years' tax matters. Income before investment transactions
for the 1996 period included $63.8 million in benefits from the resolution of
prior years' tax matters and a $9.1 million after tax benefit from the
elimination of contingencies associated with the 1995 sale of assets by the
commercial lending operation and contingencies associated with previously
discontinued businesses. Offsetting the 1996 benefits was a $72 million after
tax charge at the consumer lending operation primarily for increased loss
reserves. Excluding these items, income before investment transactions for the
first nine months of 1997 decreased $17.8 million (6%) due primarily to
decreases in consumer lending, leasing and life insurance operating results and
higher unallocated interest and other expenses. Partially offsetting these
decreases were increased real estate and commercial lending operating results.
Transamerica's net income for the third quarter of 1997 increased $36.1
million (32%), compared to the third quarter of 1996. Net income for the third
quarter of 1997 included net after tax losses from investment transactions
aggregating $7.7 million compared to a loss of $1 million in the third quarter
of 1996. In the third quarter of 1997 income before investment transactions
increased $42.8 million (37%) over the third quarter of 1996. Income before
investment transactions in the third quarter of 1997 included the $44.1 million
tax benefit discussed in the preceding paragraph. Income before investment
transactions in the third quarter of 1996 included all the 1996 items discussed
above. Excluding the third quarter 1997 and 1996 items discussed above, income
before investment transactions decreased $400,000 (less than 1%) due primarily
to decreases in consumer lending and leasing operating results partially offset
by increases in commercial lending, real estate and life insurance operating
results and lower unallocated interest and other expenses.
The pretax gain (loss) on investment transactions, included in
consolidated revenues, comprises (amounts in millions):
Nine months ended Three months ended
September 30, September 30,
1997 1996 1997 1996
Net gain (loss) on sale
of investments $(9.6) $34.0 $(10.1) $ 6.5
Adjustment for impairment in value (2.0) (5.5) (4.4)
Adjustment to amortization of
deferred policy acquisition
costs for realized gains/losses
on investment transactions 14.6 (0.5) (1.4) (3.7)
----- ----- ------ -----
$ 3.0 $28.0 $(11.5) $(1.6)
===== ===== ====== =====
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The amortization of deferred policy acquisition costs is adjusted for
gains and losses realized on the sale of certain investments. The adjustment to
the amortization of deferred policy acquisition costs is included in investment
transactions as an offset to the related gains or losses. Investment
transactions also reflect downward adjustments primarily for impairment in the
value of certain nonperforming fixed maturity investments, mortgage loans, real
estate investments and real estate acquired through foreclosure.
REVENUES AND INCOME BY LINE OF BUSINESS
Three month ended
Nine months ended September 30 September 30
Revenues Income (loss) Income (loss)
1997 1996 1997 1996 1997 1996
(Amounts in millions)
Life insurance $3,161.8 $2,901.8 $227.1 $236.4 $ 84.3 $ 84.1
Gain (loss) on investment
transactions (17.6) 21.7 (11.5) 14.1 (13.7) (2.4)
-------- -------- ------ ------ ------ ------
Total life insurance 3,144.2 2,923.5 215.6 250.5 70.6 81.7
Commercial lending 361.4 319.7 63.1 54.5 21.2 21.8
Consumer lending 749.8 579.2 276.5 (52.6) 1.5 (65.7)
Leasing 619.0 548.6 45.6 59.7 17.3 22.0
Amortization of goodwill (9.9) (9.8) (3.5) (3.3)
-------- -------- ------ ------ ------ ------
Total finance 1,730.2 1,447.5 375.3 51.8 36.5 (25.2)
Real estate services 283.9 238.9 54.0 36.5 17.3 15.2
Gain on investment
transactions 20.5 20.2 13.1 13.2 6.0 1.4
Amortization of goodwill (0.1) (0.1)
-------- -------- ------ ------ ------ ------
Total real estate services 304.4 259.1 67.0 49.6 23.3 16.6
Unallocated interest and
other expenses 25.4 19.3 (39.0) (7.7) 19.6 40.8
Consolidation eliminations (50.7) (48.4) (9.1)
-------- -------- ------ ------ ------ ------
Total revenues and net income $5,153.5 $4,601.0 $618.9 $335.1 $150.0 $113.9
======== ======== ====== ====== ====== ======
Life Insurance
Net income from our life insurance operations for the nine and three
month periods ended September 30, 1997 decreased by $34.9 million (14%) and
$11.1 million (14%) compared to the corresponding periods of 1996. Excluding
investment transactions, income from insurance operations decreased $9.3 million
(4%) during the nine month period of 1997 and increased $200,000 (less than 1%)
in the third quarter as compared to the same periods of 1996. The results of the
insurance operations for the first nine months of 1997 were affected by a $20.1
million after tax charge for a legal settlement recorded in the first quarter.
The life insurance line experienced a decrease in income before
investment transactions for both the nine and three month periods ended
September 30, 1997 compared to the same periods of 1996. The decrease for the
nine month period was primarily the result of the settlement provision described
in the preceding paragraph in addition to unfavorable claims activity. The
decrease in the third quarter resulted from a combination of increased operating
expenses and unfavorable claims.
The annuities line income before investment transactions increased for
both the nine and three month periods ended September 30, 1997 compared to the
same periods of 1996. These increases were primarily attributable to increases
in fee income related to a higher variable annuity asset base combined with a
reduction in operating costs in 1997. Operating expenses during 1996 were
adversely affected by relocation costs associated with moving portions of the
operations to Charlotte, North Carolina and Kansas City, Missouri.
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The asset management group experienced slight increases in income
before investment transactions for both the nine and three month periods ended
September 30, 1997 compared to the corresponding periods of 1996. The primary
factors contributing to these increases were favorable interest rate spreads and
increased fee income resulting from overall growth in the asset management line
business. The asset management group's results were negatively impacted by an
earlier decision to reduce the scale of the structured settlements business.
The reinsurance line experienced a slight increase in income before
investment transactions for the nine month period and a decrease for the three
month period ended September 30, 1997 compared to the 1996 periods. The increase
for the nine month period reflected growth in policy revenue partially offset by
increased claim costs. The decline in third quarter results was primarily due to
increased claim costs.
The Canadian line's income before investment transactions increased in
both the first nine months and third quarter of 1997 over the comparable periods
of 1996. The factors contributing to this improvement were improved persistency,
favorable claims experience and higher management fees from the positive growth
in the segregated funds business.
In the corporate line, income before investment transactions increased
slightly during the first nine months and third quarter of 1997 compared to the
same periods of 1996. These increases were attributable primarily to increases
in after tax investment income.
For the nine month period ended September 30, 1997 after tax net losses
on investment transactions were $11.5 million compared to after tax net gains of
$14.1 million for the first nine months of 1996. After tax net losses on
investment transactions increased by $11.3 million for the three month period
ended September 30, 1997, compared to the same three month period of 1996.
Included in these amounts are after tax net losses of $19.6 million and $12.8
million in gains realized on sales of investments during the nine months and
three months periods ended September 30, 1997, compared to after tax net gains
of $18 million and $2.8 million realized during the comparable periods of 1996.
The $18 million after tax gain in 1996 included an after tax gain of $9.1
million resulting from a transaction with a special purpose subsidiary of
Transamerica Corporation in which certain below investment grade bonds were
exchanged for collateralized bond obligations with higher ratings issued by the
subsidiary. This transaction had no effect on Transamerica's consolidated
financial statements. Investment transactions for the nine month period ended
September 30, 1997 reflect downward adjustments of $1.3 million after tax,
primarily for impairment in the value of the mortgage loan portfolio compared to
downward adjustments recorded in the first nine months of 1996 of $3.6 million
after tax for the impairment in the value of certain below investment grade
fixed maturity investments.
Total life companies net investment income increased $69.6 million (5%)
and $24.8 million (5%) for the nine month and three month periods of 1997
compared to the same periods of 1996. These increases were primarily due to a
growing invested asset base.
Total life companies policy revenue increased $190.3 million (14%) and
$65.4 million (13%) for the nine month and three month periods of 1997 compared
to the same periods of 1996. These increases were due primarily to growth in the
modified coinsurance business in the reinsurance line.
Total life companies insurance benefit costs and expenses increased
$287 million (11%) and $91.8 million (10%) for the nine month and three month
periods ended September 30, 1997 compared to the same periods in 1996. The
increases were primarily due to: 1) increase in interest credited on
interest-sensitive policies, 2) unfavorable claims activity and, 3) the
provision for the legal settlement discussed above.
Cash provided by life companies operations for the nine and three month
periods ended September 30, 1997 decreased $285.1 million (43%) and $106.5
million (53%) from the same periods of 1996. These decreases were primarily due
to the timing of the settlement of certain receivables and payables, including
reinsurance receivables and payables. The life companies continue to maintain a
sufficiently liquid investment portfolio to cover operating requirements. The
remainder of our funds are invested in long term securities.
Page 10
Commercial Lending
Commercial lending net income for the first nine months and third
quarter of 1997 was $55.1 million and $18.5 million compared to $46.3 million
and $19.1 million for the comparable periods of 1996. Commercial lending income,
before the amortization of goodwill, for the first nine months and third quarter
of 1997 increased $8.6 million (16%) and decreased $600,000 (3%) from 1996's
first nine months and third quarter. The first nine months increase resulted
primarily from (1) the inclusion in the first quarter 1997 of a $3.2 million tax
benefit from the satisfactory resolution of prior years' tax matters, (2) 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 (3) higher average net receivables outstanding in 1997. These factors
more than offset the inclusion in the third quarter of 1996 of a $4.5 million
benefit from the resolution of previously disputed issues relating to the 1995
sale of certain operating assets. The decrease in the third quarter resulted
primarily from the effect of the $4.5 million benefit described above which more
than offset the positive impact in the third quarter of 1997 of higher average
net receivables outstanding.
Revenues in the first nine months and third quarter of 1997 increased
$41.7 million (13%) and $14.4 million (13%) over the corresponding 1996 periods.
Higher average net receivables outstanding more than offset a decline in yield
due to increased competition.
Interest expense increased $20.5 million (19%) and $7.9 million (22%)
in the first nine months and third quarter of 1997 principally due to a higher
average debt level needed to support receivables growth. Operating expenses for
the first nine months and third quarter of 1997 increased $7.3 million (6%) and
$3.7 million (9%) primarily as a result of higher levels of business volume and
outstanding receivables. The provision for losses on receivables for the first
nine months and third quarter of 1997 increased $2.1 million (25%) and $2.4
million (891%) 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 third quarter
increase in the loss provision was primarily attributable to the third quarter
1996 reversal of reserves no longer required due to the collection of previously
reserved receivables in the liquidating 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 0.14% for the
first nine months and 0.12% for the third quarter of 1997 compared to 0.07% and
0.03% for the comparable periods in 1996.
Net commercial finance receivables outstanding were $3.9 billion at
September 30, 1997 an increase of $213.8 million (6%) 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 securitized and sold approximately $227 million of a pool of
floor plan finance receivables. The insurance premium finance operation reduced
the level of pooled securitized receivables by $75 million ($400 million at
September 30). Management has established an allowance for losses equal to 2.23%
of net commercial finance receivables outstanding as of September 30, 1997
compared to 2.22% at December 31, 1996.
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 $19.4 million (0.48% of receivables outstanding) at
September 30, 1997 compared to $17.3 million (0.46% of receivables outstanding)
at December 31, 1996.
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
$30.8 million (0.76% of receivables outstanding) at September 30, 1997 compared
to $21.4 million (0.56% of receivables outstanding) at December 31, 1996.
Consumer Lending
Consumer finance net income for the first nine months and third quarter
of 1997 was $276.1 million and $1.1 million. Operating income (excluding
goodwill amortization) for the same periods was $276.5 million and $1.5 million.
Third quarter earnings comprise the results of the continuing businesses and the
liquidating operations. The branch based consumer lending operation was sold in
the second quarter of 1997. Prior to completing the sale of the branch based
operation, the consumer finance operation reported breakeven results for the
1997 periods. The sale resulted in an after tax gain of $275 million after
taking into account writedowns of intangibles and other items. In the first nine
months and third quarter of 1996, the consumer lending operation had net losses
of $52.6 million and $65.8 million.
Page 11
Revenues increased $170.6 million (29%) for the first nine months of
1997 over the comparable period of 1996. This increase was due primarily to a
$469 million pre-tax gain on the sale of the branch-based lending business in
the second quarter of 1997 offset in part by lower finance charges due to lower
average receivables outstanding which resulted primarily from the sale of the
branch based consumer lending operation and sale of various loan portfolios
during the first six months of 1997. For the third quarter of 1997 revenues
decreased $157.6 million (84%) from the third quarter of 1996. This decrease was
due primarily to lower average receivables outstanding which resulted primarily
from the sales of receivables during the first six months of 1997, offset
partially by a $5 million pretax settlement of a claim on a prior year portfolio
acquisition and by an $8.5 million pretax gain on the sale (with servicing
rights retained) of certain continuing business loan portfolios in the third
quarter of 1997.
Interest expense for the first nine months and third quarter of 1997
decreased $116.9 million (52%) and $67.7 million (91%) from the comparable 1996
periods. Other operating expenses for the first nine months and third quarter of
1997 decreased $69.5 million (35%) and $55.7 million (75%) compared to the 1996
periods. The provision for losses on receivables for the first nine months and
third quarter of 1997 decreased $203.7 million (84%) and $147.6 million (100%)
compared to the same periods a year ago. All declines were due primarily to the
sale on June 23, 1997 of the branch-based lending business.
Transamerica has commenced building a new centralized real estate
secured lending operation. As part of this plan, at September 30, 1997, there
were $71 million of net consumer finance receivables relating to continuing
operations. This was a reduction of $109.4 million from June 30, 1997 reflecting
the sale with servicing rights retained of $169.5 million of receivables in the
third quarter.
Delinquent continuing operations finance receivables, which are defined
as receivables contractually past due 60 days or more, were $6.7 million at
September 30, 1997 (9.13% of finance receivables outstanding). This was an
increase over the $2.9 million (1.57% of finance receivables outstanding) at
June 30, 1997. The increase reflects a seasoning of a relatively new portfolio.
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 September 30, 1997 such nonearning receivables amounted to $4.7
million. 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 of $5.7 million
equal to 8.05% of net consumer finance receivables outstanding at September 30,
1997 on continuing businesses. At June 30, 1997 the allowance was $5.2 million
or 2.90% of net consumer finance receivables. The increase in the percent of net
consumer finance receivables is due primarily to lower outstandings as a result
of the sale of a portion of the continuing business portfolio during the
quarter.
Assets held for sale at September 30, 1997, totaled $171.5 million
reflecting the net carrying value of $208.3 million of contractual finance
receivables of which $139.9 million is 60 days or more past due, $30.4 million
of foreclosures in process and $15.9 million of repossessed assets. Assets held
for sale at June 30, 1997 were $189.5 million. Early in the fourth quarter,
finance receivables and foreclosures in process of $158.7 million were sold.
Gross proceeds were $117.8 million subject to closing adjustments. Management
intends to continue its efforts to dispose of this portfolio.
Factors such as economic conditions, competition, and the state of the
real estate market all affect trends in receivable levels, credit losses,
delinquencies, accounts in foreclosure and repossessed assets.
Leasing
Leasing net income for the first nine months and third quarter of 1997
was $44 million and $16.8 million compared to $58.1 million and $21.5 million
for the first nine months and third quarter of 1996. Leasing income, before the
amortization of goodwill, was $45.6 million and $17.3 million in the first nine
months and third quarter of 1997 compared to $59.7 million and $22 million in
the corresponding periods of 1996.
Leasing income, before the amortization of goodwill, for the first nine
months and third quarter of 1997 decreased $14.1 million (24%) and $4.7 million
(21%) from the first nine months and third quarter of 1996. Lower earnings for
both the first nine months and third quarter of 1997 resulted from lower per
diem rates and lower standard container utilization caused by an industry over
capacity of equipment, and from lower gains from sales of used standard
containers. Partially offsetting these declines were improved earnings in the
rail trailer, refrigerated, tank and domestic containers and European trailer
lines, mainly associated with increased on-hire units.
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Revenue for the first nine months and third quarter of 1997 increased
$70.4 million (13%) and $25.6 million (14%) versus the first nine months and
third quarter of 1996. The revenue increases were due to a larger on-hire fleet
of standard, refrigerated and tank containers and chassis primarily associated
with the October 1996 acquisition of Trans Ocean Ltd. which increased the fleet
size approximately 25%. Revenue also increased due to a larger portfolio of
finance leases and more on-hire European trailers. Partially offsetting the
increase were lower revenues from decreased rental rates and utilization for
standard containers and refrigerated containers primarily due to an over
capacity of equipment. The rail trailer operation also reported lower revenue
due to a smaller fleet size.
Expenses for the first nine months and third quarter of 1997 increased
$85 million (18%) and $30.6 million (20%) over the corresponding 1996 periods,
primarily due to higher ownership and operating costs associated with larger
fleets of standard and refrigerated containers, chassis and European trailers.
The combined utilization rate for standard containers, refrigerated
containers, domestic containers, tank containers and chassis averaged 78% and
79% for the first nine months and third quarter of 1997 compared to 81% for both
the first nine months and third quarter of 1996. Rail trailer utilization was
83% and 84% for the first nine months and third quarter of 1997 compared to 80%
and 81% for the first nine months and third quarter of 1996. European trailer
utilization was 91% and 90% for the first nine months and third quarter of 1997
compared to 92% for both the first nine months and third quarter of 1996.
Real Estate Services
This segment includes Transamerica's real estate information businesses
as well as certain real estate holdings and other investments.
Net income for the first nine months of 1997 increased $17.4 million
(35%) over the first nine months of 1996. Net income included net after tax
gains from investment transactions of $13.1 million and $13.2 million in the
first nine months of 1997 and 1996. Income before investment transactions in the
first nine months of 1997 increased $17.5 million (48%) from the first nine
months of 1996 primarily due to a $15.5 million after tax gain realized on the
sale of a real estate property in the second quarter of 1997 and increased
earnings at the real estate information companies. Income before investment
transactions in the first nine months and third quarter of 1996 included gains
totaling $5.3 million after tax from the sale of three real estate properties.
Net income for the third quarter of 1997 increased $6.7 million (40%)
over the third quarter of 1996. Net income included net after tax gains from
investment transactions of $6 million and $1.4 million in the third quarters of
1997 and 1996. Income before investment transactions in the third quarter of
1997 increased $2.1 million (14%) from the third quarter of 1996, which included
the $5.3 million of gains discussed above, primarily due to increased earnings
at the real estate information companies.
Revenues for the first nine months of 1997 increased $45.3 million
(17%) over the first nine months of 1996 as a result of increased investment
income and the gain noted above. Revenues for the third quarter of 1997
increased $12.3 million (13%) over the third quarter of 1996 primarily as a
result of increased business at the real estate information companies.
Unallocated Interest and Expenses
Unallocated interest and other expenses, after related income taxes,
for the first nine months and third quarter of 1997 included a $44.1 million
benefit from the satisfactory resolution of prior year tax issues. In the first
nine months and third quarter of 1996 unallocated investment transactions,
interest and expenses, after related income taxes, included a $63.8 million
benefit from the satisfactory resolution of prior year tax issues and a $4.6
million benefit from the resolution of issues associated with previously
discontinued operations. Excluding these items, unallocated interest and
expenses increased $7 million. The increase was primarily due to costs
associated with the Capital Trust Pass-Through Securities issued in November,
1996 and the vesting in the first quarter of 1997 of certain performance stock
options issued under the 1995 Performance Stock Option Plan.
Excluding the items discussed above, unallocated interest and other
expenses, after related income taxes, for the third quarter of 1997 decreased
$3.1 million over the same quarter of 1996. The decrease was primarily due to
decreased interest expense associated with lower outstanding debt.
Corporate Liquidity and Capital Requirements
Transamerica Corporation receives funds from its subsidiaries in the
form of dividends, income taxes and interest on loans. The Corporation uses
these funds to pay dividends to its stockholders, purchase shares of its common
stock, reinvest in the operations of its subsidiaries and pay corporate
interest, expenses and taxes. Reinvested funds are allocated among subsidiaries
on the basis of expected returns, creation of shareholder value and capital
needs. Reinvestment may be accomplished by allowing a subsidiary to retain all
or a portion of its earnings, or by making capital contributions or loans.
Page 13
The Corporation also borrows funds to finance acquisitions or to lend
to certain of its subsidiaries to finance their working capital needs.
Subsidiaries are required to maintain prudent financial ratios consistent with
other companies in their respective industries and retain the capacity through
committed credit lines or liquid assets to repay working capital loans from the
Corporation.
On May 21, 1997, Transamerica announced that its board of directors had
authorized additional purchases of up to 6 million shares of the its common
stock. On June 27, 1997 Transamerica announced the purchase of 3 million shares
of its common stock under this authorization. The shares were purchased from two
investment banks for approximately $273 million at an average price of $91.11
per share, subject to market price adjustment provisions. To complete the
transaction, the investment banks borrowed Transamerica common shares and will
be purchasing replacement shares in the open market. During the first nine
months of 1997 Transamerica purchased 4,082,500 shares for $378.3 million
(including the 3 million share purchase noted above).
Investment Portfolio
Transamerica, principally through its life insurance subsidiaries,
maintains an investment portfolio aggregating $31.4 billion at September 30,
1997, of which $28.3 billion was invested in fixed maturities. At September 30,
1997, 94.9% of the fixed maturities was rated as "investment grade" with an
additional 3.3% in the BB category or its equivalent. The amortized cost of
fixed maturities was $26.6 billion resulting in a net unrealized gain, before
the effect of income taxes and adjustments to deferred acquisition costs and
policy liabilities, of $1.7 billion at September 30, 1997. Fixed maturity
investments are generally held for long-term investment and used primarily to
support life insurance policy liabilities. Adjustment for impairment in value
has been made to reduce the amortized cost of certain fixed maturity investments
by $56 million at September 30, 1997 and $62.9 million at December 31, 1996.
In addition to the investments in fixed maturities, $757.5 million (2%
of the investment portfolio), net of allowance for losses of $43.5 million, was
invested in mortgage loans and real estate including $687.5 million in
commercial mortgage loans, $76.9 million in real estate investments, $4.4
million in foreclosed real estate and $32.2 million in residential mortgage
loans. Problem loans, defined as restructured loans yielding less than 8% and
delinquent loans, totaled $4.7 million at September 30, 1997 and $8.1 million at
December 31, 1996. Allowances for possible losses of $43.5 million at September
30, 1997 and $42.8 million at December 31, 1996 have been established to cover
possible losses from mortgage loans and real estate investments.
Derivatives
The operations of Transamerica are subject to risk of interest rate
fluctuations to the extent that there is a difference between the cash flows
from Transamerica'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, Transamerica hedges some of its interest rate risk
with derivative financial instruments. These derivatives comprise primarily
interest rate swap agreements, interest rate floor agreements, and options to
enter into interest rate swap agreements (swaptions).
Derivative financial instruments with a notional amount of $9.4 billion
at September 30, 1997 and $9.9 billion at December 31, 1996 were outstanding and
designated as hedges of Transamerica's investment portfolio. In addition,
derivative financial instruments with a notional amount of $4.2 billion at
September 30, 1997 and $3.5 billion at December 31, 1996 were outstanding and
designated as hedges of Transamerica's liabilities.
While Transamerica 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, 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. The fair
value of Transamerica's derivative financial instruments at September 30, 1997
and December 31, 1996 was a net benefit of $82.6 million and $73.7 million
comprising agreements with aggregate gross benefits of $132.4 million and $91.2
million and agreements with aggregate gross obligations of $49.8 million and
$17.5 million.
When an asset or liability which is hedged by a derivative contract is
sold or otherwise disposed of, the derivative contract is either reassigned to
hedge another asset or liability or closed out, and any gain or loss recognized.
Page 14
Pro forma Earnings Per Share
In February 1997 the Financial Accounting Standards Board issued
Statement No. 128 - Earnings Per Share. This statement is effective for years
ending after December 15, 1997 and supersedes the earnings per share calculation
methodology and disclosure requirements of APB Opinion No. 15. The earnings per
share amounts below reflect on a pro forma basis Transamerica's earnings per
share in accordance with the new standard.
Nine months ended Three months ended
September 30, September 30,
1997 1996 1997 1996
Earnings per share - basic:
Income before gain on
investment transactions $9.40 $4.55 $2.50 $1.68
Gain (loss) on investment transactions 0.03 0.27 (0.12) (0.01)
----- ----- ----- -----
Net income $9.43 $4.82 $2.38 $1.67
===== ===== ===== =====
Earnings per share - diluted:
Income before gain on
investment transactions $9.12 $4.44 $2.42 $1.65
Gain (loss) on investment transactions 0.02 0.27 (0.12) (0.01)
---- ----- ----- -----
Net income $9.14 $4.71 $2.30 $1.64
===== ===== ===== =====
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
10.1 Employment Agreement by and between Transamerica
Corporation and Frank C. Herringer dated as of November
4, 1997.
11 Statement Re: Computation of Per Share Earnings.
12 Computation of Ratio of Earnings to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
On July 8th, Transamerica reported that it had sold
substantially all of its real estate secured lending operations to a subsidiary
of Household International.
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 CORPORATION
(Registrant)
Burton E. Broome
Vice President and Controller
(Chief Accounting Officer)
Date: November 13, 1997