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, 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 July 31, 1997: 63,287,441 shares, after deducting 16,451,021
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 June 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 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 another $189.5 million of real estate
secured loans, non real estate secured loans and foreclosed properties and other
repossessed assets remain as of June 30, 1997 which will be sold or liquidated
separately.
* * * * * * *
Primary earnings per share are calculated by dividing income available
to common stockholders by the average number of common shares outstanding during
the period. 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.
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 our 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
June 30, December 31,
1997 1996
Investments, principally of life insurance
subsidiaries:
Fixed maturities $27,919.7 $26,985.9
Equity securities 1,329.9 1,046.0
Mortgage loans and real estate 759.5 745.5
Loans to life insurance policyholders 452.4 442.6
Short-term investments 387.7 165.2
--------- ---------
30,849.2 29,385.2
Finance receivables 4,971.7 8,697.9
Less unearned fees ($307.0 in 1997
and $437.6 in 1996) and allowance for
losses 405.1 794.1
--------- ---------
4,566.6 7,903.8
Cash and cash equivalents 114.2 471.8
Trade and other accounts receivable 2,267.3 1,933.9
Property and equipment, less accumulated
depreciation of $1,406.1 in 1997 and
$1,309.9 in 1996:
Land, buildings and equipment 399.4 436.8
Equipment held for lease 3,119.2 3,118.5
Deferred policy acquisition costs 2,215.2 2,138.2
Separate account assets 4,114.4 3,527.9
Goodwill, less accumulated amortization of
$148.2 in 1997 and $143.9 in 1996 361.6 389.3
Assets held for sale, net of valuation
allowance 189.8 86.5
Other assets 580.2 483.0
--------- ---------
$48,777.1 $49,874.9
========= =========
(Amounts in millions)
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
-----------------
CONSOLIDATED BALANCE SHEET (Continued)
Liabilities and Stockholders' Equity
June 30, December 31,
1997 1996
Life insurance policy liabilities $29,710.2 $28,542.8
Notes and loans payable, principally of
finance subsidiaries, of which $1,532.4
in 1997 and $1,241.3 in 1996 matures
within one year 6,625.1 10,328.3
Accounts payable and other liabilities 2,548.0 1,899.0
Income taxes 1,198.5 911.3
Separate account liabilities 4,114.4 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--63,374,000 shares in 1997
and 65,968,708 shares in 1996,
after deducting 16,364,462 shares
and 13,769,754 shares in treasury 63.4 66.0
Additional paid-in capital 83.0
Retained earnings 3,149.5 2,920.2
Net unrealized gain from investments
marked to fair value 882.1 784.4
Foreign currency translation adjustments (39.1) (28.0)
--------- ---------
4,055.9 4,140.6
--------- ---------
$48,777.1 $49,874.9
========= =========
(Amounts in millions except for share data)
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
----------------------
CONSOLIDATED STATEMENT OF INCOME
Six months ended Three months ended
June 30, June 30,
1997 1996 1997 1996
REVENUES
Investment income $ 1,085.4 $ 1,036.6 $ 549.7 $ 522.5
Life insurance premiums and related
income 967.5 842.6 510.7 425.2
Finance charges and other fees 491.3 606.6 221.8 303.6
Leasing revenues 370.5 328.2 181.6 163.8
Real estate and tax service revenues 146.5 119.5 90.3 61.5
Gain on investment transactions 14.4 29.6 6.2 16.6
Gain on sale of consumer lending
branch operation 469.0 469.0
Other 47.9 45.6 23.8 21.8
--------- --------- --------- ---------
3,592.5 3,008.7 2,053.1 1,515.0
EXPENSES
Life insurance benefits 1,476.3 1,325.0 781.3 659.3
Life insurance underwriting, acquisition
and other expenses 360.3 316.3 160.5 162.9
Interest and debt expense 308.0 343.9 144.4 170.9
Leasing operating and maintenance costs 227.7 183.0 113.7 90.1
Provision for losses on receivables and
assets held for sale 45.0 101.5 8.6 68.3
Other, including administrative and
general expenses 425.5 403.1 212.0 200.9
--------- --------- --------- ---------
2,842.8 2,672.8 1,420.5 1,352.4
--------- --------- --------- ---------
749.7 335.9 632.6 162.6
Income taxes 280.8 114.7 244.7 56.7
--------- --------- --------- ---------
Net Income $ 468.9 $ 221.2 $ 387.9 $ 105.9
========= ========= ========= =========
Earnings per share of common stock:
Primary:
Income before gain on investment
transactions $ 6.84 $ 2.87 $ 5.79 $ 1.36
Gain on investment transactions 0.14 0.28 0.06 0.16
--------- --------- --------- ---------
Net Income $ 6.98 $ 3.15 $ 5.85 $ 1.52
========= ========= ========= =========
Fully diluted:
Income before gain on investment
transactions $ 6.62 $ 2.79 $ 5.60 $ 1.31
Gain on investment transactions 0.14 0.28 0.06 0.16
--------- --------- --------- ---------
Net Income $ 6.76 $ 3.07 $ 5.66 $ 1.47
========= ========= ========= =========
Dividends per share of common stock $ 1.00 $ 1.00 $ 0.50 $ 0.50
========= ========= ========= =========
Ratio of earnings to fixed charges 3.15 1.92
========= =========
<FN>
(Amounts in millions except for per share data)
</FN>
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TRANSAMERICA CORPORATION AND SUBSIDIARIES
-----------------
CONSOLIDATED STATEMENT OF RETAINED EARNINGS
Six months ended
June 30,
1997 1996
Balance at beginning of year $2,920.2 $2,866.0
Net income 468.9 221.2
Dividends on common stock (64.8) (66.9)
Dividends on preferred stock (2.6) (8.6)
Treasury stock purchased (172.2) (134.8)
--------- ---------
Balance at end of period $3,149.5 $2,876.9
========= =========
CONSOLIDATED STATEMENT OF CASH FLOWS
Six months ended
June 30
1997 1996
--------- ---------
OPERATING ACTIVITIES
Net income $ 468.9 $ 221.2
Adjustments to reconcile net income
to net cash provided by operating
activities:
Change in accounts payable and other
liabilities 832.3 (64.8)
Change in accounts receivable and
other assets (507.9) (126.6)
Gain on sale of consumer lending
branch operations (275.0)
Increase in life insurance policy
liabilities, excluding policyholder
balances on interest-sensitive policies 81.8 659.4
Amortization of policy acquisition costs 105.4 118.9
Policy acquisition costs deferred (221.8) (177.0)
Depreciation and amortization 169.3 154.7
Other 57.3 83.7
--------- ---------
Net cash provided by operations 710.3 869.5
INVESTING ACTIVITIES
Finance receivables originated (10,070.6) (8,753.8)
Finance receivables collected and sold 9,891.9 8,577.0
Purchase of investments (5,994.9) (4,222.4)
Sales and maturities of investments 4,578.5 3,164.6
Proceeds from sale of consumer lending branch
operation to Household International, Inc. 3,860.0
Other (178.6) (64.2)
--------- ---------
Net cash provided (used) by investing activities 2,086.3 (1,298.8)
FINANCING ACTIVITIES
Proceeds from debt financing 2,760.7 3,062.6
Payment of notes and loans (6,404.2) (3,021.3)
Receipts from interest-sensitive policies
credited to policyholder account balances 4,106.0 2,810.0
Return of policyholder balances on
interest-sensitive policies (2,976.4) (2,185.5)
Treasury stock purchases (305.2) (169.1)
Redemption of preferred stock (318.9)
Other common stock transactions 51.2 32.6
Dividends (67.4) (75.5)
--------- ---------
Net cash provided (used) by financing activities (3,154.2) 453.8
--------- ---------
Increase (decrease) in cash and cash equivalents (357.6) 24.5
Cash and cash equivalents at beginning of year 471.8 67.6
--------- ---------
Cash and cash equivalents at end of period $ 114.2 $ 92.1
========= =========
(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 six months of 1997 increased
$247.7 million (112%), compared to the first six months of 1996. Net income for
the first six months of 1997 included net after tax gains from investment
transactions aggregating $9.3 million compared to $19.2 million in the first six
months of 1996. In the first six months of 1997 income before investment
transactions increased $257.6 million (128%) over the first six months of 1996.
The 1997 period included a $275 million after tax gain from the sale of the
branch based consumer lending business. Excluding this gain, income before
investment transactions for the first half of 1997 decreased $17.4 million (9%)
due primarily to decreases in consumer lending, life insurance, and leasing
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 second quarter of 1997 increased $282
million (266%), compared to the second quarter of 1996. Net income for the
second quarter of 1997 included net after tax gains from investment transactions
aggregating $4 million compared to $10.7 million in the second quarter of 1996.
In the second quarter of 1997 income before investment transactions increased
$288.7 million (303%) over the second quarter of 1996. Income before investment
transactions in the second quarter of 1997 included the $275 million after tax
gain discussed in the preceding paragraph. Excluding this gain, income before
investment transactions increased $13.7 million (14%) due primarily to increases
in real estate, commercial lending, life insurance and consumer lending
operating results. Partially offsetting these increases were decreased leasing
operating results and higher unallocated interest and other expenses.
The pretax gain on investment transactions, included in consolidated
revenues, comprises (amounts in millions):
Six months ended Three months ended
June 30, June 30
1997 1996 1997 1996
Net gain on sale of investments $ 0.4 $27.6 $2.7 $18.0
Adjustment for impairment in value (2.0) (1.2) (1.2)
Adjustment to amortization of
deferred policy acquisition
costs for realized investment
transactions 16.0 3.2 3.5 (0.2)
----- ----- ---- -----
$14.4 $29.6 $ 6.2 $16.6
===== ===== ===== =====
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.
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REVENUES AND INCOME BY LINE OF BUSINESS
Six months ended June 30 Second Quarter
Revenues Income Income
1997 1996 1997 1996 1997 1996
(Amounts in millions)
Life insurance $2,038.9 $1,869.2 $ 142.8 $ 152.3 $ 79.9 $ 79.5
Gain (loss) on investment
transactions 3.5 25.4 2.2 16.5 (1.5) 3.7
-------- -------- ------- ------- ------ ------
Total life insurance 2,042.4 1,894.6 145.0 168.8 78.4 83.2
Consumer lending 720.6 392.3 275.0 13.1 275.0 (4.7)
Commercial lending 239.0 211.6 41.9 32.7 20.7 18.2
Leasing 408.6 363.8 28.3 37.7 12.5 18.9
Amortization of goodwill (6.4) (6.5) (3.2) (3.2)
-------- -------- ------- ------- ------ ------
Total finance 1,368.2 967.7 338.8 77.0 305.0 29.2
Real estate services 189.1 148.9 36.7 21.3 28.6 11.7
Gain on investment transactions 11.0 18.1 7.1 11.8 5.5 8.3
Amortization of goodwill (0.1) (0.1) (0.1) (0.1)
-------- -------- ------- ------- ------ ------
Total real estate services 200.1 167.0 43.7 33.0 34.0 19.9
Unallocated interest and
other expenses 16.4 13.7 (58.6) (48.5) (29.5) (25.1)
Consolidation eliminations (34.6) (34.3) (9.1) (1.3)
-------- -------- ------- ------- ------ ------
Total revenues and net income $3,592.5 $3,008.7 $ 468.9 $ 221.2 $387.9 $105.9
======== ======== ======= ======= ====== ======
Life insurance
Net income from our life insurance operations for the six and three
month periods ended June 30, 1997 decreased by $23.8 million (14%) and $4.8
million (6%) compared to the corresponding periods of 1996. Income before
investment transactions decreased $9.5 million (6%) in the first half of 1997
from the first half of 1996 and increased $400,000 (-%) in the second quarter of
1997 compared to the second quarter of 1996. Net income for the first half of
1997 included net after tax gains from investment transactions of $2.2 million
compared to $16.5 million in the first half of 1996. In the second quarter of
1997 net income included net after tax losses from investment transactions of
$1.5 million compared to gains of $3.7 million in the second quarter of 1996.
The six month results for 1997 were affected by a $20.1 million after tax charge
for a proposed legal settlement recorded in the life insurance line during the
first quarter. This settlement was approved by the court on June 26.
The life insurance line experienced a decrease in income before
investment transactions for both the six and three month periods ended June 30,
1997 as compared to the same periods of 1996. The decline for the six month
period was primarily the result of the settlement provision described in the
preceding paragraph and unfavorable claims activity. The decline in the second
quarter was primarily the result of unfavorable claims activity.
The annuities line experienced an increase in income before investment
transactions for the six and three month periods ended June 30, 1997 as compared
to the same periods of 1996. These increases were primarily attributable to
increases in fee income related to a higher variable annuity
Page 9
asset base combined with a reduction in operating costs in 1997. Operating
expenses for the 1996 periods were adversely affected by relocation costs
associated with moving portions of the operations to Charlotte, North Carolina
and Kansas City, Missouri.
The asset management group experienced slight increases in income
before investment transactions for both 1997 periods as compared to the
corresponding periods of 1996. This was primarily attributable to favorable
interest spreads and increased fee income resulting from overall growth in the
line's asset management business. The asset management group's performance was
partially offset by decreases in income before investment transactions in the
structured settlements business, which resulted primarily from unfavorable
interest spreads.
In the reinsurance line, favorable claims experience and growth in
policy revenue resulted in an increase in income before investment transactions
for the six month and three month periods ended June 30, 1997 as compared to the
same periods of 1996.
The Canadian line's income before investment transactions increased in
the first six months and second quarter of 1997 over the comparable periods of
1996 due primarily to the result of improved persistency and favorable claims
experience.
For the corporate line, income before investment transactions increased
slightly during the first six months of 1997 as compared to the same period of
1996. This increase was attributable primarily to a favorable effective tax rate
in this period and increases in investment income. For the three month period
ended June 30, 1997 income before investment transactions decreased compared to
the second quarter of 1996 primarily due to less investment income from the
amortization of discounts on securities called as a result of lower bond call
activity and increased operating expenses related to a system reorganization,
partially offset by a favorable effective tax rate in this period and higher
investment income.
Gains on investment transactions declined by $14.3 million (87%) for
the six month period ended June 30, 1997 as compared to the first six months of
1996. For the three month period ended June 30, 1997, the life companies
experienced investment transaction losses of $1.5 million after tax as compared
to gains of $3.7 million after tax for the same three month period of 1996.
Included in these amounts are after tax net losses of $6.8 million after tax and
$3.8 million realized on sales of investments during the six month and three
month periods ended June 30, 1997, compared to after tax net gains of $13.2
million and $2.7 million realized during the comparable periods of 1996. The
$13.2 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 this transaction, 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. During the six and three month periods ended June 30, 1997
and 1996, transactions involving investments backing interest-sensitive products
resulted in losses. Adjustments to the amortization of deferred policy
acquisition costs reduced the six month losses by $10.4 million after tax in
1997 and $2.1 million after tax in 1996. Related losses incurred in the
comparative three month periods were reduced by $2.3 million after tax in 1997
and increased $100,000 after tax in 1996. Investment transactions for the six
month period ended June 30, 1997 reflect downward adjustments of $1.3 million
after tax, primarily for impairment in the value of the mortgage loan portfolio
as compared to downward adjustments recorded in the first half of 1996 of
$800,000, after tax, for the impairment in the value of certain below investment
grade fixed maturity investments.
Page 10
Total life companies net investment income increased by $44.8 million
(4%) and $25.8 million (5%) for the six and three month periods ended June 30,
1997 as compared to the same periods of 1996 which was primarily the result of a
growing invested asset base.
Total life companies policy revenue increased $124.8 million (15%) and
$85.5 million (20%), for the six month and three month periods of 1997 as
compared to the same periods of 1996. These increases were primarily due to an
increase in fees from interest-sensitive policies.
Total life companies insurance benefit costs and expenses increased
$195.2 million (12%) and $119.5 million (15%) for the six month and three month
periods ended June 30, 1997 as compared to the same periods of 1996. The
increases were primarily due to the following : 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 six and three month
periods ended June 30, 1997 decreased $178.7 million (39%) and $61.2 million
(50%) over 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. We continue to maintain a sufficiently
liquid investment portfolio to cover operating requirements. The remainder of
our funds are invested in long term securities.
Consumer Lending
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, another $189.5 million of real estate
secured loans, non real estate secured loans, foreclosed properties and other
repossessed assets remain as of June 30, 1997 which will be sold or liquidated
separately.
Prior to completing the sale of the operations discussed above, loan
loss reserves were adjusted to offset operating results including any gains or
losses from asset sales. Accordingly, except for the $275 million gain on sale
included in second quarter results, no income or loss from the consumer lending
operations was reported for the first half and second quarter of 1997. In the
first half and second quarter of 1996, the consumer lending operation had net
income of $13.1 million and a net loss of $4.7 million.
Revenues increased $328.3 million (84%) for the first half of 1997 over
the comparable period of 1996. For the second quarter of 1997 revenues increased
$373.7 million (193%) over the second quarter of 1996. Both increases reflected
the $469 million pretax gain on the sale of the branch-based lending business
which was offset in part by lower finance charges due to lower average
receivables outstanding which resulted primarily from the sale of the operations
and sales of various loan portfolios during the first six months of 1997.
Interest expense for the first half and second quarter of 1997
decreased $49.2 million (33%) and $35.1 million (47%) from the comparable year
ago periods. Other operating expenses for the first half and second quarter of
1997 decreased $13.8 million (11%) and $5.9 million (10%) from the same periods
a year ago. The provision for losses on receivables for the first six months and
second quarter of 1997 decreased $56.2 million (60%) and $62.3
Page 11
million (93%) compared to the same periods a year ago. All declines were due
primarily to the impact of downsizing operations and the sale of the
branch-based lending business.
As previously discussed, Transamerica intends to continue operating in
the consumer lending business and is building a new centralized real estate
secured lending operation. As part of this plan, at June 30, 1997 there were
$180.4 million of net consumer finance receivables relating to continuing
operations. The decrease of $3.7 billion in receivables from December 31,1996 is
due primarily to the sale of the branch-based lending business and the sales of
various loan portfolios.
Delinquent finance receivables, which are defined as receivables
contractually past due 60 days or more, were $2.9 million at June 30, 1997 of
continuing operations receivables (1.57% of finance receivables outstanding).
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 June 30, 1997 such nonearning receivables amounted to $55,000. 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 equal to 2.90% of
net consumer finance receivables outstanding at June 30, 1997 on continuing
businesses.
Retained assets from the sold operation held for sale at June 30, 1997,
totaled $189.5 million reflecting the net carrying value of $225.5 million of
contractual finance receivables of which $143.8 million is 60 days or more past
due, $35.8 million of foreclosures in process and $26 million of repossessed
assets.
Factors such as economic conditions, competition, and, for accounts
secured by real estate, the state of the real estate market, all affect trends
in receivable levels credit losses, delinquencies, accounts in foreclosure and
repossessed assets. Management intends to continue its efforts to dispose of its
liquidating portfolio.
Commercial Lending
Commercial lending net income for the first half and second quarter of
1997 was $36.6 million and $18.1 million compared to $27.3 million and $15.5
million for the comparable periods of 1996. Commercial lending income, before
the amortization of goodwill, for the first half and second quarter of 1997
increased $9.2 million (28%) and $2.5 million (14%) from 1996's first half and
second quarter. The first half increase resulted primarily from i) the inclusion
in the first quarter of 1997 of a $3.2 million tax benefit from the satisfactory
resolution of prior years' tax matters, ii) 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 iii) higher average
net receivables outstanding. The increase in the second quarter resulted
primarily from higher average net receivables outstanding.
Revenues in the first half and second quarter of 1997 increased $27.4
million (13%) and $14.6 million (14%) over the corresponding 1996 periods.
Higher average net receivables outstanding attributable to growth more than
offset a decline in yield due to increased competition.
Interest expense increased $12.6 million (18%) and $6.7 million (18%)
in the first half and second quarter of 1997 primarily due to a higher average
debt level needed to support receivables growth. Operating expenses for the
first six months and second quarter of 1997 increased $3.7 million (5%) and $1
million (3%) primarily as a result of higher levels of business volume and
outstanding receivables. The provision for losses on receivables for the first
Page 12
half and second quarter of 1997 decreased $300,000 (4%) and increased $2.6
million (186%) 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 second quarter
increase was primarily attributable to growth in net receivables outstanding.
Credit losses, net of recoveries, on an annualized basis as a percentage of
average commercial finance receivables outstanding, net of unearned finance
charges, were 0.15% for the first half and 0.13% for the second quarter of 1997
compared to 0.10% and 0.10% for the comparable periods of 1996.
Net commercial finance receivables outstanding were $4 billion at June
30, 1997, an increase of $387.9 million (11%) 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 the insurance premium finance operation reduced the level of pooled
securitized receivables by $75 million. Management has established an allowance
for losses equal to 2.16% of net commercial finance receivables outstanding as
of June 30, 1997 compared to 2.22% at December 31, 1996.
Delinquent receivables are defined as installments 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 $17.7 million (0.42% of receivables outstanding) at
June 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 $24.7 million (0.59% of receivables outstanding) at June 30,
1997 compared to $21.4 million (0.56% of receivables outstanding) at December
31, 1996.
Leasing
Leasing net income for the first half and second quarter of 1997 was
$27.3 million and $12 million compared to $36.7 million and $18.4 million for
the first half and second quarter of 1996. Leasing income, before the
amortization of goodwill, was $28.3 million and $12.5 million in the first half
and second quarter of 1997 compared to $37.7 million and $18.9 million in the
corresponding periods of 1996.
Leasing income, before the amortization of goodwill, for the first half
and second quarter of 1997, decreased $9.4 million (25%) and $6.4 million (34%)
as compared to the first half and second quarter of 1996. The 1996 results
included a $2.6 million tax benefit from the favorable resolution of outstanding
state tax issues. Lower earnings for both the first half and second quarter of
1997 resulted from lower standard container utilization and lower per diem
rates, caused by an over capacity of equipment and lower gains from sales of
used standard containers. Offsetting some of these negative factors were
favorable results from a larger portfolio of finance leases and favorable
earnings in the rail trailer and domestic container lines.
Revenue for the first half and second quarter of 1997 increased $44.8
million (12%) and $18.9 million (10%) versus the first half and second quarter
of 1996. This revenue increase was due to a larger on-hire fleet of standard,
refrigerated and tank containers and chassis mainly associated with the October
1996 acquisition of Trans Ocean Ltd. This acquisition increased our fleet size
by approximately 25%. Revenue also increased due to a larger portfolio of
finance leases and more on-hire European trailers. Partially offsetting these
increases were lower revenues from decreased utilization and rental rates for
refrigerated containers and lower utilization from standard
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containers due to an over capacity of equipment. The rail trailer operation also
reported lower revenues due to a smaller fleet size.
Expenses for the first half and second quarter of 1997 increased $54.4
million (18%) and $28.7 million (19%) over the corresponding 1996 periods,
mainly due to higher ownership and operating costs associated with larger fleets
of standard and refrigerated containers, chassis and European trailers.
The combined utilization of standard containers, refrigerated
containers, domestic containers, tank containers and chassis averaged 78% for
both the first half and second quarter of 1997 compared to 82% for both the
first half and second quarter of 1996. Rail trailer utilization was 83% for both
the first half and second quarter of 1997 compared to 80% for both the first
half and second quarter of 1996. European trailer utilization was 91% and 92%
for the first half and second quarter of 1997 compared to 93% for both the first
half and second 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 half of 1997 increased $10.7 million (32%)
over the first half of 1996. Net income included net after tax gains from
investment transactions of $7.1 million and $11.8 million in the first half of
1997 and 1996. Income before investment transactions in the first half of 1997
increased $15.4 million (72%) from the first half of 1996 primarily due to a
$15.5 million after tax gain realized on the sale of a real estate property.
Net income for the second quarter of 1997 increased $14.1 million (71%)
over the second quarter of 1996. Net income included net after tax gains from
investment transactions of $5.5 million and $8.3 million in the second quarters
of 1997 and 1996. Income before investment transactions in the second quarter of
1997 increased $16.9 million (144%) from the second quarter of 1996 primarily
due to the gain on sale of the real estate property noted above.
Revenues for the first half of 1997 increased $33.1 million (20%) over
the first half of 1996 as a result of increased investment income and the gain
noted above. Revenues for the second quarter of 1997 increased $26.5 million
(28%) over the first quarter of 1996 primarily as a result of the gain noted
above.
Unallocated Interest and Expenses
Unallocated interest and other expenses, after related income taxes,
for the first half of 1997 increased $10.1 million over the first half of 1996.
The increase was primarily due to increased interest expense associated with the
redemption of preferred stock and increased other expenses primarily due to the
vesting in the first quarter of 1997 of certain performance stock options issued
under the 1995 Performance Stock Option Plan.
Unallocated interest and other expenses, after related income taxes,
for the second quarter of 1997 increased $4.4 million over the same quarter of
1996. The increase was primarily due to increased interest expense associated
with the redemption of the preferred stock.
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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 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 company's
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 second quarter
of 1997 Transamerica purchased 3,166,800 shares for $288.8 million (including
the 3 million share purchase noted above).
Investment Portfolio
Transamerica, principally through its life insurance subsidiaries,
maintains an investment portfolio aggregating $30.8 billion at June 30, 1997, of
which $27.9 billion was invested in fixed maturities. At June 30, 1997, 95.3% of
the fixed maturities was rated as "investment grade" with an additional 3.0% in
the BB category or its equivalent. The amortized cost of fixed maturities was
$26.9 billion resulting in a net unrealized gain, before the effect of income
taxes and adjustments to deferred acquisition costs and policy liabilities, of
$1 billion at June 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 $56.2 million at March
31, 1997 and $62.9 million at December 31, 1996.
In addition to the investments in fixed maturities, $759.5 million (2%
of the investment portfolio), net of allowance for losses of $44.4 million, was
invested in mortgage loans and real estate including $679.8 million in
commercial mortgage loans, $80.1 million in real estate investments, $6 million
in foreclosed real estate and $38 million in residential mortgage loans. Problem
loans, defined as restructured loans yielding less than 8% and delinquent loans,
totaled $3.1 million at June 30, 1997 and $8.1 million at December 31, 1996.
Allowances for possible losses of $44.4 million at June 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
Page 15
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 billion
at June 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 billion at June
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 June 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 June 30, 1997 and December
31, 1996 was a net benefit of $73.0 million and $73.7 million comprising
agreements with aggregate gross benefits of $133.8 million and $91.2 million and
agreements with aggregate gross obligations of $60.7 million and $17.5 million.
When we sell or otherwise dispose of an asset or liability which is
hedged by a derivative contract, the derivative contract is either reassigned to
hedge another asset or liability or closed out, and any gain or loss recognized.
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.
Six months ended Quarter ended
June 30, June 30,
1997 1996 1997 1996
Earnings per share - basic:
Income before gain on
investment transactions $6.84 $2.87 $5.79 $1.36
Gain on investment transactions 0.14 0.28 0.06 0.16
----- ----- ----- -----
Net income $6.98 $3.15 $5.85 $1.52
===== ===== ===== =====
Earnings per share - diluted:
Income before gain on
investment transactions $6.64 $2.79 $5.61 $1.32
Gain on investment transactions 0.14 0.28 0.06 0.16
----- ----- ----- -----
Net income $6.78 $3.07 $5.67 $1.48
===== ===== ===== =====
Page 16
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
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.
None.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRANSAMERICA CORPORATION
(Registrant)
Burton E. Broome
Vice President and Controller
(Chief Accounting Officer)
Date: August 14, 1997