Page 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 1998
Commission File Number 1-2964
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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 July 31, 1998: 62,554,139 shares.
Page 2
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 June 30, 1998
and 1997, and the balance sheet as of December 31, 1997 do not include complete
financial information and should be read in conjunction with the Consolidated
Financial Statements filed with the Commission in Transamerica's Annual Report
on Form 10-K for the year ended December 31, 1997. The financial information
presented in the financial statements included in this report reflects all
adjustments, consisting only of normal recurring accruals, which are, in the
opinion of management, necessary for a fair statement of results for the interim
periods presented. Results for the interim periods are not necessarily
indicative of the results for the entire year for most of the Corporation's
businesses.
* * * * * * *
Earnings per share is calculated by dividing income available to common
stockholders by the average number of common, and for diluted earnings per share
common stock equivalent, shares outstanding. Basic earnings per share is based
upon the weighted average number of common shares outstanding for the three
months ended June 30, 1998 and 1997 of 62,784,000 and 66,361,000 and for the six
months periods then ended of 62,882,000 and 66,262,000. Diluted earnings per
share is based upon the weighted average number of common shares outstanding
during the period plus the effect of common stock options outstanding, using the
treasury stock method, of 65,325,000 and 68,371,000 for the three months ended
June 30, 1998 and 1997 and 65,411,000 and 68,214,000 for the six month periods
ended June 30, 1998 and 1997. The computations for the six month period of 1997
are based on income after deduction of preferred dividends of $2.6 million and
the premium on redemption of preferred stock of $3.8 million.
Effective January 1, 1998, Transamerica adopted the provisions of
American Institute of Certified Public Accountants Statement of Position No.
98-1 which requires, among other things, that payroll costs incurred in the
development of computer software systems be capitalized. The effect of adoption
was to increase consolidated income for the six months and three months ended
June 30, 1998 by $3.4 million ($0.05 diluted earnings per share) and $1.6
million ($0.02 diluted earnings per share).
The consolidated ratios of earnings to fixed charges were computed by
dividing income from continuing operations before fixed charges and income taxes
by the fixed charges. Fixed charges consist of interest and debt expense,
dividends declared on preferred securities issued by affiliates and one-third of
rent expense, which approximates the interest factor.
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities. This
statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. Transamerica is required to adopt this
statement as of January 1, 2000. The effect on Transamerica's financial
statements of adopting this standard is uncertain at this time.
Page 3
TRANSAMERICA CORPORATION AND SUBSIDIARIES
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CONSOLIDATED BALANCE SHEET
Assets
June 30, December 31,
1998 1997
Investments, principally of life insurance subsidiaries:
Fixed maturities .......................................................... $ 29,768.0 $ 29,210.8
Equity securities ......................................................... 1,653.4 1,607.5
Mortgage loans and real estate ............................................ 813.0 750.2
Loans to life insurance policyholders ..................................... 455.5 451.0
Short-term investments .................................................... 697.0 336.0
----------- -----------
33,386.9 32,355.5
Finance receivables ............................................................ 4,784.6 4,333.4
Less unearned fees ($387.9 in 1998 and
$340.8 in 1997) and allowance for losses .................................. 499.1 430.1
----------- -----------
4,285.5 3,903.3
Cash and cash equivalents ...................................................... 218.1 132.9
Trade and other accounts receivable ............................................ 2,404.0 2,165.8
Net assets of discontinued operations .......................................... 47.3 40.1
Property and equipment, less accumulated
depreciation of $1,500.4 in 1998 and
$1,465.9 in 1997:
Land, buildings and equipment ............................................. 413.7 395.4
Equipment held for lease .................................................. 2,977.8 2,996.5
Deferred policy acquisition costs .............................................. 1,962.0 2,102.6
Separate account assets ........................................................ 8,005.8 5,494.7
Goodwill, less accumulated amortization of
$163.6 in 1998 and $156.2 in 1997 ......................................... 387.8 423.0
Assets held for sale ........................................................... 49.1 377.8
Other assets ................................................................... 710.4 785.3
----------- -----------
$ 54,848.4 $ 51,172.9
=========== ===========
<FN>
(Amounts in millions)
</FN>
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
-----------------
CONSOLIDATED BALANCE SHEET (Continued)
Liabilities and Stockholders' Equity
June 30, December 31,
1998 1997
Life insurance policy liabilities .................................................. $ 30,803.8 $ 30,141.9
Notes and loans payable, principally of
finance subsidiaries, of which $759.7
in 1998 and $998.6 in 1997 matures
within one year ............................................................... 6,302.7 6,235.3
Accounts payable and other liabilities ............................................. 2,193.5 2,096.9
Income taxes ....................................................................... 1,765.3 1,607.8
Separate account liabilities ....................................................... 8,005.8 5,494.7
Minority interest in preferred securities
of affiliates ................................................................. 715.0 715.0
Stockholders' equity:
Preferred Stock ($100 par value)
1,200,000 shares authorized;
none outstanding
Preference Stock (without par value)--
5,000,000 shares authorized; none
outstanding
Common Stock ($1 par value):
Authorized--300,000,000 shares
Outstanding -- 62,443,832 shares in 1998
and 62,904,108 shares in 1997,
after deducting 17,294,630 shares
and 16,834,354 shares in treasury ................................ 62.4 62.9
Retained earnings ............................................................. 3,450.4 3,330.8
Components of other cumulative
comprehensive income:
Net unrealized gain from investments
marked to fair value ............................................. 1,598.9 1,533.6
Foreign currency translation adjustments ............................. (49.4) (46.0)
----------- -----------
5,062.3 4,881.3
----------- -----------
$ 54,848.4 $ 51,172.9
=========== ===========
<FN>
(Amounts in millions except for share data)
</FN>
Page 5
TRANSAMERICA CORPORATION AND SUBSIDIARIES
-----------------
CONSOLIDATED STATEMENT OF INCOME
Six months ended June 30 Three months ended June 30
1998 1997 1998 1997
REVENUES
Investment income $ 1,129.3 $ 1,086.7 $ 564.8 $ 553.7
Life insurance premiums and related income 909.3 893.6 452.4 451.5
Finance charges and other fees 343.0 249.6 175.9 126.3
Leasing revenues 367.0 370.5 181.3 181.6
Real estate and tax service revenues 169.0 146.5 94.4 90.3
Gain on investment transactions 127.6 14.4 43.3 6.2
Other 57.1 42.8 31.3 22.5
------------- ------------- ------------- -------------
3,102.3 2,804.1 1,543.4 1,432.1
EXPENSES
Life insurance benefits 1,428.4 1,402.5 704.0 722.2
Life insurance underwriting, acquisition
and other expenses 359.6 360.3 181.6 160.5
Interest and debt expense 210.0 212.3 105.1 110.9
Leasing operating and maintenance costs 221.9 227.7 110.0 113.7
Provision for losses on receivables 25.0 7.5 11.4 3.9
Other, including administrative and general
expenses 389.7 312.9 192.5 157.1
------------- ------------- ------------- -------------
2,634.6 2,523.2 1,304.6 1,268.3
------------- ------------- ------------- -------------
467.7 280.9 238.8 163.8
Income taxes 161.6 87.0 86.4 50.9
------------- ------------- ------------- -------------
Income from continuing operations 306.1 193.9 152.4 112.9
Income from discontinued operations 275.0 275.0
------------- ------------- ------------- -------------
Net income $ 306.1 $ 468.9 $ 152.4 $ 387.9
============= ============= ============= =============
Earnings per Share of Common Stock
Basic:
Income from continuing operations
before investment transactions $ 3.55 $ 2.69 $ 1.98 $ 1.64
Gain on investment transactions 1.32 0.14 0.45 0.06
------------- ------------- ------------- -------------
Income from continuing operations 4.87 2.83 2.43 1.70
Income from discontinued operations 4.15 4.15
------------- ------------- ------------- -------------
Net income $ 4.87 $ 6.98 $ 2.43 $ 5.85
============= ============= ============= =============
Diluted:
Income from continuing operations
before investment transactions $ 3.41 $ 2.61 $ 1.90 $ 1.59
Gain on investment transactions 1.27 0.14 0.43 0.06
------------- ------------- ------------- -------------
Income from continuing operations 4.68 2.75 2.33 1.65
Income from discontinued operations 4.03 4.02
------------- ------------- ------------- -------------
Net Income $ 4.68 $ 6.78 $ 2.33 $ 5.67
============= ============= ============= =============
Dividends per share of common stock $ 1.00 $ 1.00 $ 0.50 $ 0.50
============= ============= ============= =============
Ratio of earnings to fixed charges 2.82 2.12
============== =============
<FN>
(Amounts in millions except for share data)
</FN>
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
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CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended
June 30,
1998 1997
OPERATING ACTIVITIES
Income from continuing operations ................... $ 306.1 $ 193.9
Adjustments to reconcile income from
continuing operations to net cash
provided by operating activities:
Change in accounts payable and
other liabilities ..................... (44.9) 984.2
Change in accounts receivable
and other assets ...................... (137.0) (324.2)
Increase in life insurance policy
liabilities, excluding policyholder
balances on interest-sensitive policies 675.1 336.1
Amortization of policy acquisition costs ... 180.0 105.4
Policy acquisition costs deferred .......... (302.0) (221.8)
Depreciation and amortization .............. 170.5 166.9
Other ...................................... 122.1 21.8
----------- ----------
Net cash provided by operations ................ 969.9 1,262.3
INVESTING ACTIVITIES
Finance receivables originated ...................... (9,819.7) (9,649.4)
Finance receivables collected ....................... 10,066.6 9,268.3
Purchase of investments ............................. (5,159.0) (5,978.1)
Sales and maturities of investments ................. 4,680.1 4,534.9
Proceeds from the sale of and cash
transactions with discontinued operations ...... (4.0) 4,039.7
Purchase of finance receivables from
Whirlpool Financial Corporation ................ (378.4)
Other ............................................... (138.1) (403.5)
----------- ----------
Net cash provided (used) by
investing activities ....................... (752.5) 1,811.9
FINANCING ACTIVITIES
Proceeds from debt financing ........................ 984.4 2,760.7
Payment of notes and loans .......................... (926.5) (6,404.1)
Receipts from interest-sensitive policies
credited to policyholder account balances ...... 4,231.0 3,810.9
Return of policyholder balances on
interest-sensitive policies .................... (4,234.2) (2,935.8)
Treasury stock purchased ............................ (195.8) (305.2)
Redemption of preferred stock ....................... (318.9)
Proceeds from issuance of common stock .............. 71.7 51.2
Dividends ........................................... (62.8) (67.4)
----------- ----------
Net cash used by financing activities .......... (132.2) (3,408.6)
----------- ----------
Increase (decrease) in cash and cash
equivalents .................................... 85.2 (334.4)
Cash and cash equivalents at beginning
of year ........................................ 132.9 440.9
----------- ----------
Cash and cash equivalents at end of period .......... $ 218.1 $ 106.5
=========== ==========
<FN>
(Amounts in millions)
</FN>
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
-----------------
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Six months ended June 30,
1998 1997
Balance at beginning of year ............... $ 3,330.8 $ 2,920.2
Net income ................................. 306.1 468.9
Dividends on common stock .................. (62.8) (64.8)
Dividends on preferred stock ............... (2.6)
Treasury stock purchased ................... (123.7) (172.2)
---------- ----------
Balance at end of period ................... $ 3,450.4 $ 3,149.5
========== ==========
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Consolidated Results
In the first six months of 1998 income from continuing operations
before investment transactions increased $38.7 million (21%) over the first six
months of 1997 due to increases in life insurance, real estate, commercial
lending and leasing operating results and lower unallocated interest and other
expenses. Net income for the first six months of 1998 included net after tax
gains from investment transactions aggregating $82.8 million compared to $9.3
million in the first six months of 1997. Net income for the first six months of
1997 included a $275 million after tax gain from the sale of the branch based
consumer lending business. Including the net after tax gains from investment
transactions and the 1997 after tax gain from the sale of the branch-based
consumer lending business, Transamerica's net income for the first six months of
1998 decreased $162.8 million (35%), from the first six months of 1997.
In the second quarter of 1998 income from continuing operations before
investment transactions increased $15.4 million (14%) over the second quarter of
1997 primarily due to increases in commercial lending, life insurance and
leasing operating results and lower unallocated interest and other expenses,
partially offset by lower real estate operating results. Net income for the
second quarter of 1998 included net after tax gains from investment transactions
aggregating $28.1 million compared to $4 million in the second quarter of 1997.
Net income for the second quarter of 1997 included the $275 million after tax
gain discussed above. Including the net after tax gains from investment
transactions and the 1997 after tax gain from the sale of the branch-based
consumer lending business, Transamerica's net income for the second quarter of
1998 decreased $235.5 million (61%), compared to the second quarter of 1997.
Gain on investment transactions, pretax, included in consolidated revenues,
comprised (amounts in millions):
Six months ended June 30, Three months ended June 30,
1998 1997 1998 1997
Net gain (loss) on sale of investments .......................... $ 182.6 $ 0.4 $ 89.6 $ 2.7
Adjustment for impairment in value .............................. (29.2) (2.0) (21.3)
Adjustment to amortization of
deferred policy acquisition
costs for realized investment
transactions ................................................ (25.8) 16.0 (25.0) 3.5
-------- ------- ------- ------
$ 127.6 $ 14.4 $ 43.3 $ 6.2
======== ======= ======= ======
The amortization of deferred policy acquisition costs for universal life
and other interest-sensitive life insurance products was adjusted due to gains
or losses realized on the sale of certain investments. The adjustment to the
amortization of deferred policy acquisition costs was included in investment
transactions as an offset to the related gains or losses. Investment
transactions also reflected downward adjustments primarily for impairment in the
value of certain below investment grade fixed maturity investments, mortgage
loans, real estate investments and real estate acquired through foreclosure.
Page 8
REVENUES AND INCOME BY LINE OF BUSINESS
Six months ended June 30 Second Quarter
Revenues Income Income (Loss)
1998 1997 1998 1997 1998 1997
(Amounts in millions)
Life insurance revenue and income
before investment transactions .............. $ 2,026.1 $ 1,964.9 $ 162.9 $ 142.8 $ 85.0 $ 79.9
Commercial lending ............................... 340.5 239.0 47.0 41.9 29.0 20.7
Leasing .......................................... 404.1 408.6 31.2 28.3 15.6 12.5
Amortization of goodwill ......................... (7.3) (6.4) (3.9) (3.2)
---------- ---------- -------- -------- -------- --------
Total finance .................................... 744.6 647.6 70.9 63.8 40.7 30.0
Real estate services revenue and income
before investment transactions .............. 216.9 189.1 44.9 36.7 26.5 28.6
Amortization of goodwill ......................... (0.1) (0.1) (0.1) (0.1)
---------- ---------- -------- -------- -------- --------
216.9 189.1 44.8 36.6 26.4 28.5
Unallocated interest and
other expenses .............................. 18.1 16.4 (55.3) (58.6) (27.8) (29.5)
Consolidation eliminations ....................... (31.0) (28.4)
---------- ---------- -------- -------- -------- --------
Revenues and income from continuing
operations before investment
transactions ............................ 2,974.7 2,789.6 223.3 184.6 124.3 108.9
Gains on investment transactions:
Life insurance .......................... 51.9 3.5 33.8 2.2 16.7 (1.5)
Real estate ............................. 75.7 11.0 49.0 7.1 11.4 5.5
---------- ---------- -------- -------- -------- --------
Total investment gains ........................... 127.6 14.5 82.8 9.3 28.1 4.0
---------- ---------- -------- -------- -------- --------
Total revenues and income from
continuing operations ....................... $ 3,102.3 $ 2,804.1 $ 306.1 $ 193.9 $ 152.4 $ 112.9
========== ========== ======== ======== ======== ========
Life insurance
Net income from the life insurance operations for the six and three month
periods ended June 30, 1998 increased by $51.7 million (36%) and $23.3 million
(30%) compared to the corresponding periods of 1997. Income before investment
transactions for the first half and second quarter of 1998 increased $20.1
million (14%) and $5.1 million (6%) compared to the same periods of 1997. Net
after tax gains from investment transactions for the first half and second
quarter of 1998 increased $31.6 million and $18.2 million compared to the same
periods of 1997. The six month results for 1997 were unfavorably affected by a
$20.1 million after tax charge for a legal settlement recorded in the life
insurance division.
The life insurance division's income before investment transactions for the
six and three month periods ended June 30, 1998 was $44.7 million and $23.9
million compared to $19.2 million and $18.7 million in the same periods of 1997.
The increase for the three month period was primarily the result of
comparatively lower claims activity. The 1997 six month period included the
$20.1 million after tax charge discussed above.
Annuities' income before investment transactions for the six and three
month periods ended June 30, 1998 was $25.9 million and $13.9 million as
compared to $24.5 million and $10.2 million in the same periods of 1997. The
increases were primarily attributable to higher interest spreads and increases
in fee income related to variable annuities.
Page 9
The asset management group's income before investment transactions was
$36.2 million and $19.9 million for the six and three month periods ended June
30, 1998 compared to $28.2 million and $14.9 million for the corresponding
periods of 1997. The increase in earnings was primarily attributable to
favorable interest spreads and increased fee income resulting from overall
growth in the line's asset management business.
Within the reinsurance line, income before investment transactions for
the six and three month periods ended June 30, 1998 was $25.5 million and $12.9
million. Comparable earnings for the same periods of 1997 were $35 million and
$18.1 million. The decreases were primarily due to premium and reserve reporting
issues on certain recent portfolio treaties.
The Canadian line's income before investment transactions of $14.3 million
and $6.8 million in the first six and three month periods of 1998 were slightly
lower than the earnings of $14.7 million and $7.1 million for the same periods
in 1997. The decreases were due primarily to unfavorable foreign exchange rates.
For the corporate line, income before investment transactions decreased
$4.9 million (23%) and $3.4 million (31%) during the six and three month periods
of 1998 as compared to the same periods of 1997. The decreases were attributable
primarily to a higher effective tax rate and increased systems expenses related
to year 2000 compliance.
Gains on investment transactions increased by $31.6 million for the six
month period ended June 30, 1998 as compared to the first six months of 1997.
For the three month period ended June 30, 1998, the life companies experienced
investment transaction gains of $16.7 million after tax as compared to net
losses of $1.5 million for the same three month period of 1997. Included in
these amounts are after tax net gains of $69.6 million and $46.8 million
realized on sales of investments during the six month and three month periods
ended June 30, 1998, compared to after tax net losses of $6.8 million and $3.8
million realized during the comparable periods of 1997. Adjustments to the
amortization of deferred policy acquisition costs reduced investment gains in
the six and three month periods ended June 30, 1998 by $16.8 million and $16.3
million after tax. Investment transactions for the six and three month periods
ended June 30, 1998 reflect adjustments of $19 million and $13.8 million after
tax primarily for impairment in value of certain below investment grade fixed
maturity investments.
Total life companies net investment income increased by $45.4 million (4%)
and $17.2 million (3%) for the six and three month periods ended June 30, 1998
as compared to the same periods of 1997 which was principally the result of a
growing invested asset base.
Total life companies policy revenue increased $15.7 million (2%) and
$900,000 (less than 1%) for the six and three month periods of 1998 as compared
to the same periods of 1997. These increases were primarily due to increased
premiums from traditional life products and higher fees from interest sensitive
policies partially offset by decreases in single premium annuities and
reinsurance.
Total life companies insurance benefit costs and expenses increased $25.4
million (1%) and $3.2 million (less than 1%) for the six and three month periods
ended June 30, 1998 as compared to the same periods of 1997. The increases were
primarily due to increases in interest credited on interest-sensitive policies,
premium and reserve reporting issues on certain recent reinsurance portfolio
treaties and increases in systems related costs, offset in part by lower claims
on life insurance products. The 1997 six month period included the provision for
the legal settlement discussed above.
Cash provided by life companies operations for the six and three month
periods ended June 30, 1998 increased $220.3 million (41%) and $273.4 million
(101%) over the same periods of 1997. These increases 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.
Remaining funds are invested in long term securities.
Commercial Lending
Commercial lending net income for the first half and second quarter of 1998
was $40.7 million and $25.6 million compared to $36.6 million and $18.1 million
for the comparable periods of 1997. Commercial lending income, before the
amortization of goodwill, for the first half and second quarter of 1998
increased $5.1 million (12%) and $8.3 million (40%) from 1997's first half and
second quarter. Operating results for the second quarter of 1998 included $3.2
million in after tax gains on the securitization of $300 million of floorplan
receivables and $200 million of commercial loan and lease receivables. Included
Page 10
in the six months ended June 30, 1998 was a first quarter $3 million tax benefit
from the resolution of prior year tax matters, a first quarter $2.1 million
after tax charge for losses and the restructuring of the insurance premium
finance business, and a first quarter $2.1 million after tax gain on the
securitization of $300 million of floorplan receivables. In the six months ended
June 30, 1997 was a first quarter $3.2 million tax benefit from the satisfactory
resolution of prior years' tax matters. Higher margins due to higher average net
receivables in the first half and second quarter of 1998 were partially offset
by an increase in operating expenses and in the provision for losses on finance
receivables.
Revenues in the first half and second quarter of 1998 increased $101.5
million (42%) and $54.3 million (45%) over the corresponding 1997 periods.
Revenues rose in 1998 principally due to growth in average net receivables
outstanding. Revenues in the first six months and second quarter of 1998
included $8.9 million and $5.7 million in gains from the securitization of
receivables.
Interest expense increased $15 million (18%) and $7.5 million (17%) in the
first half and second quarter of 1998 due to a higher average interest rate on
borrowings and higher average debt levels needed to support receivables growth.
Operating expenses for the first six months and second quarter of 1998 increased
$62.2 million (74%) and $27.5 million (67%) over the corresponding 1997 periods
primarily as a result of the integration of the Whirlpool Finance operations and
higher levels of business volume and outstanding receivables. The provision for
losses on receivables for the first half and second quarter of 1998 increased
$17.5 million (232%) and $7.5 million (191%) from the corresponding 1997 periods
principally as a result of higher credit losses in the retail portfolio and
additional provisions in the first quarter of 1998 on the insurance premium
finance portfolio. Credit losses, net of recoveries, on an annualized basis as a
percentage of average commercial finance receivables outstanding, net of
unearned finance charges, were 0.68% for the first half and 0.79% for the second
quarter of 1998 compared to 0.15% and 0.13% for the comparable periods of 1997.
Net commercial finance receivables outstanding at June 30, 1998 increased
$411 million (12%) from December 31, 1997. The increase in receivables was
largely a result of a decision not to sell the insurance premium finance
operation and the reclassification of those receivables from assets held for
sale to finance receivables, and the acquisition during the first half of 1998
of the retail finance business and the remaining international assets from
Whirlpool Financial Corporation which amounted to $387 million of net finance
receivables. This completed the acquisition of $1.1 billion in net receivables
and other assets representing substantially all of the inventory and retail
finance business from Whirlpool Finance Corporation. The total purchase price
was $1.3 billion in cash subject to post closing adjustments. Management has
established an allowance for losses equal to 2.64% of net commercial finance
receivables outstanding as of June 30, 1998 compared to 2.35% at December 31,
1997.
Delinquent receivables are defined as instalments for inventory finance and
asset based lending receivables more than 60 days past due and the outstanding
loan balance for all other receivables over 60 days past due. Delinquent
receivables were $47.1 million (1.12% of receivables outstanding) at June 30,
1998 compared to $18 million (0.48% of receivables outstanding) at December 31,
1997. The increase in delinquent receivables at June 30,1998 was primarily due
to the inclusion of the insurance premium finance receivables which were
reported as assets held for sale at December 31,1997, and the receivables of the
new retail lending operation. Delinquent insurance premium finance receivables
at December 31, 1997 were $14.2 million.
Nonearning receivables are defined as balances from borrowers that are more
than 90 days delinquent for non credit card receivables or sooner if it appears
doubtful they will be fully collectible. Nonearning receivables on revolving
credit card accounts included in retail are defined as balances from borrowers
in bankruptcy and accounts for which full collectibility is doubtful. Accrual of
finance charges is suspended on nonearning receivables until such time as past
due accounts are collected. Nonearning receivables were $50.7 million (1.21% of
receivables outstanding) at June 30, 1998 compared to $26.4 million (0.71% of
receivables outstanding) at December 31, 1997. The increase in nonearning
receivables at June 30, 1998 was primarily due to the inclusion of the insurance
premium finance receivables which were reported as assets held for sale at
December 31, 1997 and an increase in distribution finance nonearning
receivables. Nonearning insurance premium finance receivables at December 31,
1997 were $7.5 million.
Page 11
Leasing
Leasing net income for the first half and second quarter of 1998 was $30.2
million and $15 million compared to $27.3 million and $12 million for the first
half and second quarter of 1997. Leasing income, before the amortization of
goodwill, was $31.2 million and $15.6 million in the first half and second
quarter of 1998 compared to $28.3 million and $12.5 million in the corresponding
periods of 1997.
Leasing income, before the amortization of goodwill, for the first half and
second quarter of 1998, increased $2.9 million (10%) and $3.1 million (24%)
versus the first half and second quarter of 1997. Higher earnings for both the
first half and second quarter resulted primarily from lower operating and
ownership costs for standard containers attributable to the accelerated
disposition of equipment in line with a fleet downsizing initiative. Chassis
earnings were also favorable due to more units on hire from both increased
utilization and a larger fleet mainly associated with an increased demand for
chassis used with U.S. domestic containers. Partially offsetting the earnings
increases were lower earnings in rail trailers due to fewer units on hire
associated with the continued decline in the demand for this equipment type.
Revenue for the first half of 1998 decreased $4.5 million (1%) versus the
first half of 1997 and was approximately the same level for the second quarter
of 1998 compared to the second quarter of 1997. The revenue decrease was due to
less units on-hire for standard containers associated with continued weak market
conditions and a smaller fleet size and less on-hire rail trailers from
accelerated equipment sales. Offsetting these decreases were increased revenues
from more chassis on-hires due to favorable U.S. market conditions for this
equipment and more on-hire European trailers due to the continued growth of this
product.
Expenses for the first half and second quarter of 1998 decreased $9.6
million (3%) and $5.4 million (3%) over the corresponding 1997 periods, mainly
due to lower ownership and operating costs associated with smaller standard
containers and rail trailer fleets. Offsetting these decreases were increased
expenses associated with Year 2000 information technology expenditures and from
the expansion of our European trailer operations.
The combined utilization of standard containers, refrigerated containers,
domestic containers, tank containers and chassis averaged 79% for both the first
half and second quarter of 1998 compared to 78% for both the first half and
second quarter of 1997. Rail trailer utilization was 79% and 80% for the first
half and second quarter of 1998 compared to 83% for both the first half and
second quarter of 1997. European trailer utilization was 90% and 91% for the
first half and second quarter of 1998 compared to 91% and 92% for the first half
and second quarter of 1997.
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 half of 1998 increased $50.1 million (115%) over
the first half of 1997. Net income included net after tax gains from investment
transactions of $49 million and $7.1 million in the first half of 1998 and 1997.
Income before investment transactions in the first half of 1998 increased $8.2
million (22%) from the first half of 1997 primarily due to higher levels of
mortgage originations and refinancings. Income before investment transactions in
the first half of 1997 included a $15.5 million after tax gain realized on the
sale of a real estate property.
Net income for the second quarter of 1998 increased $3.8 million (11%) over
the second quarter of 1997. Net income included net after tax gains from
investment transactions of $11.4 million and $5.5 million in the second quarters
of 1998 and 1997. Income before investment transactions in the second quarter of
1998 decreased $2.1 million (7%) from the second quarter of 1997 primarily due
to the 1997 gain on sale of the real estate property noted above, offset in part
by higher levels of mortgage originations and refinancings in the 1998 second
quarter.
Revenues for the first half of 1998 increased $92.5 million (46%) over the
first half of 1997. Revenues for the second quarter of 1998 increased $15
million (12%) over the second quarter of 1997. The increases in the six month
period and second quarter of 1998 were primarily due to increased gains from
investment transactions and the higher level of mortgage originations and
refinancings noted above.
Page 12
Unallocated Interest and Expenses
Unallocated interest and other expenses, after related income taxes, for
the first half of 1998 decreased $3.3 million from the first half of 1997.
Unallocated interest and other expenses, after related income taxes, for the
second quarter of 1998 decreased $1.7 million over the same quarter of 1997. The
decreases were primarily due to lower interest expense.
Discontinued Operations
In the first six months and second quarter of 1998, results from
discontinued operations were break even. In the first six months and second
quarter of 1997, income from discontinued operations was $275 million, which
consisted entirely of net gains from the sale of the branch based consumer
lending operations.
Comprehensive Income
In accordance with Financial Accounting Standard No. 130, Reporting Comprehensive Income, comprehensive income for the six
months ended June 30, 1998 and 1997 comprised:
Six months ended Three months ended
June 30, June 30,
1998 1997 1998 1997
Net income ................................................................. $ 306.1 $ 468.9 $ 152.4 $ 387.9
Other comprehensive income, net of tax:
Unrealized gains (losses) from investments marked to fair value: Unrealized
holding gains (losses) arising during period:
Equity securities ............................................. (57.7) 139.5 (189.6) 137.5
Fixed maturities .............................................. 123.0 (41.8) 89.5 269.3
Less: reclassification adjustment
for gains included in net income .................................. (82.8) (9.3) (28.1) (4.0)
$ (17.5) $ 88.4 $ (128.2) $ 402.8
Foreign currency translation adjustments................................ (3.4) (11.0) (2.5) (3.8)
________ ________ ________ ________
Comprehensive income ....................................................... $ 285.2 $ 546.3 $ 21.7 $ 786.9
======== ======== ======== ========
Transamerica is required to mark its equity securities and fixed maturities
portfolios to fair value. These investments support liabilities that are not
marked to fair value.
Transamerica manages its exposure to interest rate fluctuations by managing
the characteristics of the assets and liabilities so that changes are offset.
Transamerica's objectives for asset liability management are to provide maximum
levels of finance and investment income and minimize funding costs while
maintaining acceptable levels of interest rate and liquidity risk and
facilitating the funding needs of the company.
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.
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 to repay working capital loans from the
Corporation.
In May 1997, Transamerica announced that its board of directors had
authorized additional purchases of up to 6 million shares of the company's
common stock. At June 30, 1998, there were 788,900 shares remaining to be
purchased under this authorization. During the second quarter of 1998,
Transamerica purchased 917,600 shares for a total cost of $106.1 million.
Page 13
Investment Portfolio
Transamerica, principally through its life insurance subsidiaries,
maintains an investment portfolio aggregating $33.4 billion at June 30, 1998, of
which $29.8 billion was invested in fixed maturities. At June 30, 1998, 94.3% of
the fixed maturities was rated as "investment grade" with an additional 3.5% in
the BB category or its equivalent. The amortized cost of fixed maturities was
$27.3 billion resulting in a net unrealized gain position, before the effect of
income taxes and adjustments to deferred acquisition costs and policy
liabilities, of $2.5 billion at June 30, 1998. The amortized cost of delinquent
below investment grade securities, before provision for impairment in value, was
$1.9 million at June 30, 1998 and December 31, 1997. Adjustment for impairment
in value has been made to reduce the amortized cost of certain fixed maturity
investments by $90 million at June 30, 1998 and $72.9 million at December 31,
1997.
In addition to the investments in fixed maturities, $813 million (2% of the
investment portfolio), net of allowance for losses of $25.8 million, was
invested in mortgage loans and real estate including $736.1 million in
commercial mortgage loans, $72.5 million in real estate investments, $400,000 in
foreclosed real estate and $29.8 million in residential mortgage loans. Problem
loans, defined as restructured loans yielding less than 8%, and delinquent
loans, totaled $2.9 million at June 30, 1998 and $2.3 million at December 31,
1997. Allowances for possible losses of $1.3 million at June 30, 1998 and $1.5
million at December 31, 1997 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 $10.1 billion at
June 30, 1998 and $10 billion at December 31, 1997 and designated as hedges of
portions of Transamerica's investment portfolio were outstanding. In addition,
derivative financial instruments with a notional amount of $4.7 billion at June
30, 1998 and $4 billion at December 31, 1997 and designated as hedges of
Transamerica's liabilities were outstanding.
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 June 30, 1998, the derivative financial instruments
discussed above were issued by financial institutions rated A or better by one
or more of the major credit rating agencies. The fair value of Transamerica's
derivative financial instruments at June 30, 1998 and December 31, 1997 was a
net benefit of $215.2 million and $212.7 million comprising agreements with
aggregate gross benefits of $245.6 million and $238 million and agreements with
aggregate gross obligations of $30.4 million and $25.3 million.
Year 2000 Issue
Transamerica has developed a plan to modify its information systems
technology to recognize the year 2000. Most of Transamerica's critical systems
have either been remediated or are in the final stages of being remediated.
These systems will be tested during the second half of 1998 and are expected to
be year 2000 ready by the end of 1998. The remaining systems are expected to be
year 2000 ready by mid-1999.
The Corporation currently expects the project to cost between $25 million
and $35 million, which is being expensed as incurred. This estimate includes
internal costs, but excludes the costs to upgrade and replace systems in the
normal course of business. It is currently expected that the project will not
have a significant effect on Transamerica's results of operations.
Page 14
Part II. Other Information
Item 4. Submission of matters to a Vote of Security Holders.
At the Corporation's Annual Meeting of Stockholders held on April 23, 1998, its stockholders voted on a number of proposals and
nominations. Results of these proposals and nominations were:
Votes Votes Votes
For Against Withheld Abstentions
Nomination for director:
Robert W. Matschullat ................ 54,540,535 762,566
Gordon E. Moore ...................... 54,540,396 762,705
Condoleezza Rice ..................... 54,485,948 817,153
Election of auditors ...................... 54,857,551 253,934 191,615
Approval to adopt the
1998 Cash Long Term
Incentive Plan ....................... 51,355,511 3,108,418 839,171
Approval of an amendment
to the Corporation's Certificate
of Incorporation increasing
the number of authorized
shares of common stock ............... 48,055,105 6,854,806 393,189
Approval of an amendment
to the 1995 Performance
Stock Option Plan .................... 45,659,305 8,816,311 827,484
<FN>
A total of 55,303,101 shares were present in person or by proxy at the
Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
12 Computation of Ratio of Earnings from continuing operations to Fixed Charges.
27 Financial Data Schedule.
(b) Reports on Form 8K - None
</FN>
Page 15
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: August 4, 1998