-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Rd1Cl8b4PHlCLSr4/LSAZwCoMMxE49dIAIYF/HoN8w4kg9XAKwQnPsZBXiP4llED t8z+p/DHJlJLHVnRxe9rtA== 0000099189-98-000002.txt : 19980331 0000099189-98-000002.hdr.sgml : 19980331 ACCESSION NUMBER: 0000099189-98-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 23 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TRANSAMERICA CORP CENTRAL INDEX KEY: 0000099189 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 940932740 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-02964 FILM NUMBER: 98578742 BUSINESS ADDRESS: STREET 1: 600 MONTGOMERY ST CITY: SAN FRANCISCO STATE: CA ZIP: 94111 BUSINESS PHONE: 4159834000 MAIL ADDRESS: STREET 1: 600 MONTGOMERY STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94111 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 Commission file number 1-2964 TRANSAMERICA CORPORATION (Exact name of registrant as specified in its charter) Delaware 94-0932740 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 600 Montgomery Street San Francisco, California 94111 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (415) 983-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock--$1 Par Value New York Stock Exchange Pacific Stock Exchange 9-1/8% Cumulative Monthly Income New York Stock Exchange Preferred Securities, Series A* *Issued by Transamerica Delaware, LP, and guaranteed by Transamerica Corporation Securities registered pursuant to section 12(g) of the Act: None 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 tosuch filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( X ) Aggregate market value of Common Stock, $1 par value, held by nonaffiliates of the registrant as of the close of business on February 13, 1998: $6,851,611,704. Number of shares of Common Stock, $1 par value, outstanding as of the close of business on February 13, 1998: 63,098,593. Documents incorporated by reference: Portions of the Transamerica Corporation 1997 Annual Report to Stockholders are incorporated by reference into Parts I and II. With the exception of those portions which are incorporated by reference, the Transamerica Corporation 1997 Annual Report is not deemed filed as part of this Report. Portions of the Proxy Statement of Transamerica Corporation dated March 6, 1998 are incorporated by reference into Part III. (A definitive proxy statement has been filed with the Commission since the close of the fiscal year.) TABLE OF CONTENTS
Part I: Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Item 4. Submission of Matters to a Vote of Securities Holders . . . . . . . . . . . . . . . . . 17 Item 4A. Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . 17 Part II: Item 5. Market for Registrant's Common Equity and Related Stock- holder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 7. Management's Discussion and Analysis of Financial Condi- tion and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 Item 7a. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . 18 Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 19 Part III: Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . 19 Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . 22 Part IV: Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
PART I ITEM I. BUSINESS Transamerica Corporation is a financial services organization which engages primarily through its subsidiaries in life insurance, commercial lending, leasing and real estate services. Transamerica was incorporated in Delaware in 1928. Effective January 1, 1998, principally through its indirect subsidiary Transamerica Distribution Finance Corporation, Transamerica completed the acquisition of substantially all of the inventory and retail finance business of Whirlpool Financial Corporation for a total purchase price of $1.3 billion in cash, subject to post-closing adjustments, which was determined through negotiations with Whirlpool. A definitive agreement for the acquisition was originally announced on September 18, 1997. The assets acquired consisted of approximately $1.1 billion of net receivables and other assets of Whirlpool's inventory financing, retail financing and international factoring businesses, as well as Whirlpool Financial National Bank, a credit card bank. The assets were acquired in a series of transactions. The acquisition of the inventory finance business in the United States, Canada and Mexico, as well as the international factoring business in Argentina, closed on October 16, 1997. The acquisition of the retail finance business closed on January 1, 1998. The acquisition of most of the remaining international assets also has now been completed. Funds for the purchase of the assets were provided by short term borrowings and cash from operations. On June 23, 1997, Transamerica sold its branch-based consumer lending operation. Gross proceeds from the sale were $3.9 billion, or $1.1 billion after repayment of associated debt. Net Proceeds were used to purchase Transamerica Corporation common stock, reduce debt and for other general corporate purposes. In the fourth quarter of 1997, the consumer lending business was reclassified as discontinued operations following management's assessment that the results of the new approach to consumer lending did not meet Transamerica's criteria for further investment. Results for the consumer segment for prior periods have been reclassified as results from discontinued operations. On October 14, 1996, Transamerica acquired all of the outstanding shares of Trans Ocean Ltd., a closely held container leasing company, in exchange for 1.6 million shares ($112.7 million) of Transamerica common stock. On May 2, 1995, Transamerica sold substantially all of the assets of Criterion Investment Management Company for gross proceeds of $60 million which were used to reduce debt. The transaction resulted in an after tax gain of $4.8 million. Information concerning Transamerica's investment portfolio is incorporated herein by reference to "Investment Portfolio" on pages 49 and 50, and "Note B. Financial Instruments" on pages 59 through 65 of the Transamerica Corporation 1997 Annual Report. BUSINESS SEGMENT INFORMATION "Note D. Business Segment Information" on page 67 of the Transamerica Corporation 1997 Annual Report is incorporated herein by reference. The business activities of Transamerica's principal subsidiaries are more fully described below. Unless otherwise indicated, all dollar and other amounts represent information as of December 31, 1997. LIFE INSURANCE Transamerica's life insurance business is generated through lines of business which include individual life insurance, asset management, structured settlements, annuities, reinsurance and Canada. These lines of business conduct their operations through one or more of the following entities: Transamerica Occidental Life Insurance Company, Transamerica Life Insurance and Annuity Company, Transamerica Life Insurance Company of New York, Transamerica Life Insurance Company of Canada and Transamerica Assurance Company (hereinafter collectively referred to as "Transamerica Life Companies"). The Transamerica Life Companies are engaged primarily in the business of designing, underwriting, distribution and reinsurance of investment based and traditional life insurance products in all states of the United States, the District of Columbia, Puerto Rico, the Virgin Islands, Guam, Canada, Taiwan and Hong Kong. The life insurance business is highly competitive. Competition arises from numerous stock and mutual life insurance companies primarily in the United States, many of which offer products similar to those offered by the Transamerica Life Companies. In the pension and annuity markets, competition also arises from banks, mutual funds and other investment managers. Both product and price competition are intense. The Company believes that Transamerica Life Companies' key competitive strengths are their financial position, broad product range, market position and diversified distribution system. The following table sets forth certain statistical information relating to the Transamerica Life Companies' operations.
Years Ended December 31, --------------------------------------------------------- 1997 1996 1995 Life Insurance in force: ($ in millions) (1) Individual - Universal $ 60,010.9 $ 59,446.5 $ 57,068.0 Individual - Traditional (2) 148,117.4 132,944.1 130,156.1 Worksite marketing - Universal 7,018.2 6,955.8 6,356.5 Group Term Life/Other 26,233.4 20,816.5 13,142.0 ---------- ---------- ---------- 241,379.9 220,162.9 206,722.6 Reinsurance assumed 225,685.7 201,560.4 174,193.6 ---------- ---------- ---------- $467,065.6 $421,723.3 $380,916.2 ========== ========== ========== New life insurance issued and paid: ($ in millions) (volume) (1) Individual - Universal $3,990.4 $4,928.2 $6,399.7 Individual - Traditional (2) 33,206.4 19,527.4 18,465.3 Worksite marketing - Universal 1,560.1 1,657.2 1,353.9 Premiums and other considerations: ($ in millions) (3) Traditional Life Premiums: (2) First year premiums $ 58.7 $ 38.6 $ 49.4 Renewal premiums 319.5 282.5 319.7 Other 92.6 59.8 35.1 -------- -------- -------- 470.8 380.9 404.2 Less: reinsurance premiums ceded (119.8) (101.7) (96.5) -------- -------- -------- Total traditional life premiums 351.0 279.2 307.7 Single premium immediate annuities 61.1 66.9 72.6 Group annuities (4) 15.0 47.6 155.3 Charges on interest-sensitive policies (5) 629.4 555.2 501.6 Insurance ceded on interest-sensitive policies (91.6) (87.1) (98.7) Fee income 58.2 45.8 28.8 Reinsurance (net of retroceded) 619.5 596.8 542.5 Canada 116.8 117.4 119.9 Other income 24.5 18.6 44.0 Corporate and other 34.1 51.6 40.8 --------- -------- -------- Total premiums and other considerations $ 1,818.0 $1,692.0 $1,714.5 ========= ======== ======== Average face amount per life insurance policy in force: (1) Individual - Universal $170,602 $165,656 $164,479 Individual - Traditional $175,101 $169,382 $167,043 Worksite Marketing-Universal $ 36,261 $ 37,550 $ 38,376 Number of life insurance policies in force: (1) Individual - Universal 351,760 358,855 351,252 Individual - Traditional (2) 845,895 784,877 788,811 Worksite Marketing-Universal 193,547 185,239 167,685 Ratio of underwriting expenses to premiums and other considerations (6) 10.2% 8.6% 7.8% Lapse ratio-adjusted for decreases and expiries of term insurance and reinsurance assumed: (7) Transamerica Life Companies 7.9% 8.7% 7.8% All U.S. stock life insurance companies (8) (9) 8.3% 8.6% - ------ (1) Effective December 31, 1997, except as indicated otherwise, amounts reported exclude group term insurance and are based on issued and paid policies only. Prior periods have been restated. (2) The 1997 increase was generated primarily by lower premiums on these policies consistent with industry trends. (3) Effective January 1, 1997, the results of Transamerica Life Insurance Company of New York and the Life Companies' Asian operations are being reported within the life insurance line. In prior years the results of these operations were reported within the corporate line. Prior periods have not been restated. (4) The decreases in group annuity premiums resulted primarily from a decline in single premium pension contracts. (5) Certain modified coinsurance premiums are shown on a net basis and prior periods have been restated. (6) The ratio is the percentage of salaries and other operating expenses to premiums and other considerations. The 1997 increase was due to charges for a legal settlement and higher general operating expenses. (7) The lapse ratio is calculated in accordance with the A.M. Best Company, Inc. formula. It is the ratio of amounts of universal and traditional life insurance terminated during the year to the aggregate of (1) universal and traditional life insurance in force at the beginning of the year plus (2) new business issued during the prior year. (8) Industry median, as provided by A.M. Best Company, Inc. (9) Information not yet available for 1997.
------------ Transamerica Life Companies' individual life insurance business is generated through a system of 688 field sales offices primarily in the United States and Canada, 11 of which are branch offices operated by employees and the remainder are independent offices operated by independent general agents. These offices house a sales force consisting of 25 employees of the Transamerica Life Companies and approximately 200 independent agents operating under contract on an exclusive or near exclusive basis, which together generated approximately 15% of new premiums written in 1997. The remaining 85% of the Transamerica Life Companies' individual life insurance business was generated by more than 17,300 producing independent insurance brokers operating under nonexclusive contracts. In addition to its sales force, the Transamerica Life Companies have approximately 3,000 employees in Los Angeles, California, Kansas City, Missouri, Charlotte, North Carolina, Purchase, New York and Canada who service outstanding policies and new business submitted by agency offices, and approximately 200 field sales office employees serving its sales force. Of life insurance in force at December 31, 1997, 21.8% was on residents of California, followed by Texas (9.0%), Illinois (5.1%), Florida (3.8%) and Pennsylvania (3.1%). No other state accounted for more than 3% of life insurance in force. Canada accounted for 13.4% and all other foreign operations accounted for 2.2% of life insurance in force. Reinsurance. Portions of the Transamerica Life Companies' life insurance risks are reinsured with other companies. The maximum amount of individual insurance retained on any one life is $2 million at ages 16 to 65 inclusive. This maximum is reduced for health impairments, for other ages and for certain other special classes of risks. The Transamerica Life Companies also reinsure a minor part of their liability under accident and health policies. For many years the Transamerica Life Companies have solicited life reinsurance from other companies. As of December 31, 1997, the Transamerica Life Companies were accepting business from 338 companies under automatic reinsurance agreements and from approximately 150 other companies on a case by case basis. Reserves. In accordance with the life insurance laws and regulations under which they operate, the Transamerica Life Companies are required to carry on their books as liabilities actuarial reserves to meet the obligations on their various life insurance policies. Such life insurance reserves are calculated pursuant to mortality and annuity tables in general use in the United States and Canada and are the computed amounts which, with additions from premiums to be received, and with interest on such reserves compounded annually at certain assumed rates, will be sufficient to meet the Transamerica Life Companies' policy obligations at their maturities if deaths occur in accordance with mortality tables employed. For a fee, Transamerica's life insurance operation issues guaranteed investment contracts which guarantee the payment by pension plans of certain qualified benefits if the plans' other sources of liquidity are exhausted. Unlike traditional guaranteed investment contracts, these are synthetic contracts in which the plan sponsor retains the assets and credit risk while the life insurance operation assumes some limited degree of interest rate risk. To minimize the risk of loss, the life insurance operation underwrites these contracts based on the plan sponsor, at the beginning of the contract, agreeing to the investment guidelines to be followed. These guidelines include the overall portfolio credit and maturity requirements. The life insurance operation regularly monitors adherence to these requirements. At December 31, 1997 the life insurance operation had outstanding commitments to maintain liquidity for benefit payments on notional amounts of $3.3 billion compared to $1.9 billion at December 31, 1996. At December 31, 1997 and December 31, 1996 there were no advances outstanding to provide sponsor liquidity under these contracts. Investments. The Transamerica Life Companies' investments at December 31, 1997 totaled $31.7 billion which was invested as follows: 92% in fixed maturities; 2.4% in mortgage loans and real estate; 2.6% in common stocks; 1.4% in policy loans; 1% in short-term investments; 0.4% in redeemable preferred stocks; and 0.2% in other long-term investments. Fixed maturities are invested as follows: 68.7% in industrial and other non-government bonds; 14.9% in public utility bonds; 14.1% in mortgage backed securities (primarily government agencies); 1.2% in United States government bonds; 0.3% in foreign government bonds; and 0.8% in municipal bonds. The following table sets forth pretax mean investment yields, including interest earned and dividends received, before (gross) and after (net) deducting investment expenses for the Transamerica Life Companies' various investments. The yields are computed based on the mean of beginning and end of year assets, producing results which vary somewhat from the daily average yield.
Years Ended December 31, ------------------------------ 1997 1996 1995 Fixed maturities, at amortized cost--gross(1) 7.92% 8.08% 8.30% Equity securities, at market value--gross(2) 1.07 1.59 1.66 Mortgages--gross(3) . . . . . . . . . . . . . . 8.83 9.08 8.74 Total invested assets: Gross . . . . . . . . . . . . . . . . . . . . 7.65 7.86 8.13 Net . . . . . . . . . . . . . . . . . . . . . 7.44% 7.64% 7.93% - ------- (1) The decreases reflect the lower yields on new investments. (2) The decreases in the yield resulted primarily from an increase in the market value of the portfolio. (3) The decrease in the 1997 yield is primarily due to the funding of new loans at current market rates which were below the average of the existing loans.
Commercial Lending Commercial lending services are provided by two core business units: distribution finance and business credit. The commercial lending business operates from 27 branch lending offices located in the United States (20), Canada (2) and Europe (5). The lending activities of these core businesses are discussed below. Distribution finance provides financial services to manufacturers, distributors, resellers, retailers, and commercial and consumer end users. It serves companies that sell consumer electronics and appliances, marine products such as boats and personal watercraft, information technology, lawn and garden products, recreational vehicles, furnaces and air conditioners, motorcycles and manufactured housing. The primary strategy in this business is to provide one source for the financing of goods as they move through the distribution channels from manufacturer to end user. Distribution finance provides its customers with a variety of financing programs designed to solve their distribution and capital management problems. Product offerings include inventory financing, trade receivable servicing and funding, accounts receivable financing, vendor leasing, retail consumer financing, and commercial debt recovery services. These products and services are currently provided in North America and parts of Latin America and Europe. After initial review of the borrower's credit worthiness, the ongoing management of credit risk include various monitoring techniques, such as periodic physical inventory checks, monitoring of the borrower's sales and quality of collateral, and reviewing customer compliance with financial covenants. In inventory financing, repurchase agreements are maintained with manufacturers which provide a degree of security in the event of a repossession. Business credit provides asset-based loans and equipment financing to middle-market customers, as well as revolving and term loans to early stage technology companies. The asset-based lending activities consist of secured, primarily revolving, loans to manufacturers, retailers, and selected service businesses, as well as to small finance companies. These loans are collateralized and consist of retained credit lines typically from $5 million to $40 million with terms ranging from three to five years. Advances under asset-based loans are limited to specific percentages of the borrowers' eligible collateral. Credit risk is managed by monitoring the quality of the collateral, the borrowers' financial performance, and compliance with financial covenants. The equipment financing activities of business credit include collateralized loans and leases, primarily to middle-market manufacturing, transportation and other service companies, secured by equipment essential to the borrowers' business. Credit risk in the equipment finance business is managed through rigorous underwriting and transaction structuring. Loans are structured to amortize at a rate that is faster than the underlying equipment is expected to depreciate. Also, leases are structured with guaranteed residuals or are recorded using conservative estimates of the projected fair market value of the collateral at lease expiration. Technology financing consists of term and revolving loans to growing companies in the life sciences and specialized electronics industries to finance research and development, manufacturing, and other business activities. All loans are secured and are underwritten based on the strength and viability of the customers' technology, which is evaluated with the help of scientists and other advisors retained by business credit. The relatively short-term nature of the company's financings enables the commercial lending operation to adjust its finance charges in response to competitive factors and changes in its costs. The interest rates at which the commercial lending operation borrows funds generally move more quickly than the rates at which it lends to customers. As a result, in rising interest rate environments, margins are normally compressed until changes in the prime lending rates are effected. Conversely, in declining interest rate environments, margins are generally enhanced. In January 1998, the distribution finance operation completed the acquisition of approximately $1.1 billion of net receivables and other assets of the inventory financing, retail financing and international factoring business of Whirlpool Financial Corporation for a total purchase price of $1.3 billion in cash, subject to post closing adjustments. The acquisition of the inventory financing business and most of the international assets closed in 1997. The distribution finance operation also entered into a long-term strategic alliance with Whirlpool under which it will provide financing service to Whirlpool's dealers and retail customers (through its credit card bank) and factoring services to Whirlpool's international operations. In 1997, the commercial lending operation announced that it intended to sell its insurance premium finance operation and reclassified the insurance premium finance receivables to assets held for sale. In early 1998 management decided not to proceed with such sale. In addition, in 1997 the distribution finance operation securitized $1.5 billion of floor plan finance receivables. On December 31, 1997, the ongoing mortgage lending division that remained from the former consumer lending segment, which was sold on June 23, 1997, was contributed to commercial lending. Receivables at December 31, 1997, net of unearned finance charges and allowance for loss, totaled $101.2 million and operating results were breakeven for 1997. In 1995, the commercial lending operation sold for cash a portfolio of consumer rediscount loans totaling $118 million of net outstanding receivables which resulted in an after tax gain of $4.8 million. During 1995, it also entered into a three-year arrangement in which it securitized a $475 million participation interest in a pool of its insurance premium finance receivables. This amount was reduced by $100 million to $375 million during 1997. The commercial lending industry is highly competitive and has seen increasing numbers of new market entrants. In addition to competition from other finance companies, there is competition from captive finance subsidiaries of manufacturing companies and commercial banks. The commercial lending operation competes by offering a variety of financing products, superior customer service including prompt credit review, and competitive pricing. The following table sets forth certain statistical information relating to the commercial lending operation's finance receivables for the years indicated. The table reflects the decision in 1997 to sell the insurance premium finance operation and the reclassification of its receivables to assets held for sale. The table excludes the December 31, 1997 transfer of the residual ongoing assets from the discontinued consumer lending segment.
Years Ended December 31, ------------------------------------------------- 1997 1996 1995 (Dollar amounts in millions) Volume of finance receivables acquired: Distribution finance(1) . . . . . . $12,415.8 $ 8,315.6 $ 7,479.4 Business credit(2) . . . . . . . . 10,157.7 8,528.8 8,929.8 --------- --------- --------- Core businesses . . . . . . . . . 22,573.5 16,844.4 16,409.2 Insurance premium finance(3) . . . 1,823.4 2,014.9 1,804.5 Other . . . . . . . . . . . . . . . 0.1 18.8 --------- --------- --------- Total . . . . . . . . . . . . . . $24,396.9 $18,859.4 $18,232.5 ========= ========= ========= Finance receivables outstanding at end of year: Distribution finance(4) . . . . . . $ 2,081.1 $ 2,530.9 $ 2,242.2 Business credit(5) . . . . . . . . 1,541.4 953.4 680.8 --------- --------- --------- Core businesses . . . . . . . . . 3,622.5 3,484.3 2,923.0 Insurance premium finance(3) . . . 309.6 207.1 Other . . . . . . . . . . . . . . 3.2 6.9 --------- --------- --------- 3,622.5 3,797.1 3,137.0 Less unearned finance charges(5) . . . 197.7 142.0 74.3 --------- --------- --------- Net finance receivables - owned . . 3,424.8 3,655.1 3,062.7 Net finance receivables securi- tized, sold and serviced(6) . . . 1,539.6 474.3 474.2 --------- --------- --------- Net finance receivables owned and serviced . . . . . . . . . . $ 4,964.4 $ 4,129.4 $ 3,536.9 ========== ========= ========= Allowance for losses at end of year(7)(8) . . . . . . . . . . . . $ 92.2 $ 82.5 $ 77.9 Ratio to outstandings less unearned finance charges:(9) Owned . . . . . . . . . . . . . . 2.24% 2.22% 2.51% Owned and serviced . . . . . . . . 1.86% 2.00% 2.20% Provision for credit losses charged to income . . . . . . . . . $ 16.2 $ 10.2 $ 16.1 Credit losses (net of recoveries) . . . . . . . . . . . . $ 10.1 $ 5.2 $ 10.0 Ratio to average net finance receivables outstanding: Owned . . . . . . . . . . . . . . 0.25% 0.16% 0.34% Owned and serviced . . . . . . . 0.22% 0.14% 0.29% - ------- (1) The 1997 increase was primarily due to aggressive sales and marketing in most of the product lines and the addition of $888 million in gross receivables from the acquisition of the inventory finance and international factoring businesses from Whirlpool Finance Corporation. (2) The increase in 1997 was primarily due to higher direct originations. The decrease in 1996 was primarily due to lower direct originations offset in part by an increase in purchased participations relative to 1995. (3) In 1997, insurance premium finance receivables were transferred to assets held for sale in line with a plan to sell the operation in 1998. In early 1998 management decided not to proceed with such sale. (4) The 1997 decrease was primarily due to the securitization of $1.5 billion of inventory floor plan finance receivables, which more than offset the $888 million increase due to the acquisition of gross finance receivables from Whirlpool Finance Corporation. The 1996 increase was due mainly to aggressive sales and marketing in most of the product lines financed. (5) The increases were primarily due to growth of net receivables in the equipment finance and lease and technology finance divisions. (6) The amounts are the balances of securitized receivables outstanding at year end. Amounts serviced by the insurance premium finance business are excluded for 1997 following the decision to reclassify the insurance premium finance receivables to assets held for sale. In 1997, distribution finance floorplan receivables were securitized. In 1995 and 1996, insurance premium finance receivables were securitized. (7) Includes allowance for losses on the securitized, sold and serviced portfolio of $15.5 million in 1997 and $1.2 million in 1996 and 1995 which is reported in other liabilities in the consolidated balance sheet. (8) The increases were attributable to receivables growth in the core businesses. (9) The 1996 decline was due to the decreased allowance related to portfolios sold and liquidated which had a larger percentage reserve requirement and continued improvement in the credit quality of accounts in the core businesses.
--------------------- Delinquent Receivables. Delinquent receivables are defined as the instalment balance for inventory finance and business credit asset based lending receivables more than 60 days past due and the receivable balance for all other receivables over 60 days past due. The following table shows the ratio of delinquent commercial finance receivables to finance receivables outstanding for each category and in total as of the dates indicated.
As of December 31, ----------------------------------- 1997 1996 1995 Distribution finance . . . . . . . 0.49% 0.30% 0.20% Business credit 0.16 ----- ------ ----- Core businesses . . . . . . . . 0.35 0.22 0.15 Insurance premium finance(1) . . . 2.34 1.40 Other(2) . . . . . . . . . . . . . 79.23 53.47 ----- ------ ------ Total owned . . . . . . . . . 0.35% 0.46% 0.35% ===== ===== ===== Total owned and serviced . . . . 0.25% 0.41% 0.31% ===== ===== ===== - ------- (1) In 1997 the insurance premium finance receivables were reclassified to assets held for sale. The increase in the 1996 ratio was primarily concentrated in the European receivables portfolio. (2) Represents finance receivables retained from businesses sold or exited which are being liquidated. The increase in the 1996 ratio resulted from the reduction in receivables outstanding primarily due to the sale of the Puerto Rico portfolio in 1995 which had a lower delinquency ratio in relation to the other receivables included in this caption. The remaining finance receivables were liquidated in 1997.
--------------------- Nonearning Receivables. 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 past due amounts are collected. Nonearning receivables were $21.8 million (0.60% of receivables outstanding), $21.4 million (0.56% of receivables outstanding) and $18 million (0.57% of receivables outstanding) at December 31, 1997, 1996 and 1995. Assets Held for Sale. Assets held for sale at December 31, 1997 totaled $281 million and consisted of insurance premium finance receivables. Of the finance receivables held for sale at December 31, 1997, $14.2 million were more than 60 days past due and $7.5 million were classified as nonearning. At December 31, 1996, assets held for sale totaled $3.4 million, net of a $1.8 million valuation allowance. At December 31, 1995, assets held for sale totaled $4.4 million, net of a $6.1 million valuation allowance. Leasing Transamerica Leasing leases, services and manages containers, chassis and trailers throughout the world. The leasing operation is based in Purchase, New York and maintains approximately 450 offices, depots and other facilities in 50 countries. The company specializes in intermodal transportation equipment, which allows goods to travel by road, rail or ship. The company's customers include railroads, steamship lines, distribution companies and motor carriers. In October 1996, the leasing operation acquired all of the outstanding shares of Trans Ocean Ltd., a container leasing company, in exchange for 1.6 million shares ($112.7 million) of Transamerica common stock. The Trans Ocean fleet comprised approximately 185,600 owned, leased and managed units consisting of a variety of intermodal equipment types. The leasing operation is the largest lessor of intermodal transportation equipment in the industry based on units of equipment available for hire. The leasing operation competes by providing a high level of service through an extensive worldwide network of offices and third party depots and by offering a wide variety of equipment and lease types. The leasing operation's management information system provides employees and other users, including customers around the world, with on-line access to key billing and operational information. In addition, our leasing operation provides structured financing that enables customers to purchase equipment over time, and an equipment matching service in which we manage containers for customers and broker equipment interchanges among them. The leasing operation's main competitors are other transportation equipment leasing companies. Due to a world-wide oversupply of containers the demand for equipment declined in 1997. As a result, a program of accelerated equipment disposal was initiated at the end of 1997 and will be implemented in 1998 and subsequent years. Accordingly, at December 31, 1997, the leasing operation reclassified $96.1 million of revenue earning equipment to assets held for sale. The oversupply of containers also resulted in a decrease in rental rates in 1997 as compared to 1996. At December 31, 1997, the leasing operation's fleet consisted of standard twenty and forty foot dry containers and specialized containers such as refrigerated containers, tank containers, high cube, open top and flatrack equipment types, chassis and U.S. domestic containers totaling 882,100 units which are leased to customers from approximately 380 depots worldwide; 29,900 rail trailers leased to all major United States railroads and to roll on/roll off steamship operators, shippers, shippers' agents and regional truckers; and 15,100 over-the-road trailers in Europe.
The following table sets forth the leasing operation's fleet size, in units, including owned, managed, leased from others and units held for sale: As of December 31, --------------------------------------- 1997 1996 1995 Containers and chassis(1) . 882,100 896,300 708,400 Rail trailers(2) . . . . . 29,900 34,500 36,900 European trailers(3) . . . 15,100 10,300 7,700 - ------- (1) The 1997 decrease was primarily due to lower equipment acquisitions relative to disposals, which reflect the world-wide oversupply of units. The increase in 1996 was primarily due to the acquisition of Trans Ocean. (2) The decreases resulted from the sale of older units. (3) The increases reflect expansion in the European trailer market.
------------------- The percent of the leasing operation's fleet on term lease or service contract minimum lease was 55% in 1997, 53% in 1996 and 51% in 1995. The increases reflect the continuing trend toward increasing term and service contract minimum leases which was partially reduced by a lower percentage of term and service contract minimum leases from the acquired Trans Ocean fleet. At December 31, 1997, lease terms were one to 15 years.
The following table sets forth the leasing operation's fleet utilization for the years indicated: Years Ended December 31, ------------------------ 1997 1996 1995 Containers and chassis(1) . . . . 79% 81% 85% Rail trailers(2) . . . . . . . . 85% 82% 77% European trailers(3) . . . . . . 92% 92% 95% - ------- (1) The declines were due primarily to a world-wide oversupply of equipment. (2) The increases resulted from a continuing strong U.S. economy and a decline in the supply of equipment. (3) The 1996 level of utilization declined due to a greater number of rental units in the fleet and flat demand in most of continental Europe.
--------------------- Real Estate Services Real estate services comprise Transamerica's real estate information businesses as well as certain real estate and other investments. The Transamerica Real Estate Information Companies, the principal operating business of this segment, prepares tax payments and reports and conducts tax searches with respect to real property taxes and assessments and issues flood hazard determinations in all 50 states, and provides real property information services in several states. It also provides customers with information through an on-line computer system. As of December 31, 1997, tax reports were generated for more than 3,000 institutional mortgage servicers and their borrowers. The Transamerica Real Estate Information Companies include the leading tax service operation in the U.S. based on the number of customers and loans serviced. Competition is increasing in the tax service market, driving down fees at the same time that customers are demanding more services. In response, the Transamerica Real Estate Information Companies have initiated a number of strategies to maintain their industry leadership including development of new technology and centralization of operations. The following table sets forth the number of tax service contracts under management at the end of the years indicated and new tax service contracts written during those years:
As of December 31 1997 1996 1995 (Amounts in thousands) Tax service contracts under management . . . . . . 17,735 17,529 17,664 New tax service contracts . . 3,871 4,168 3,911
The real estate services segment includes investments in fixed income and equity securities, and collateralized bond obligations. Certain of these investments collateralize obligations of Transamerica Corporation. At December 31, 1997 and 1996 these investments comprised:
As of December 31 1997 1996 1995 Equity securities at fair value $ 780.0 $ 541.3 $ 361.2 Fixed maturities at fair value 502.7 471.3 136.1 Other 5.8 23.6 14.9 -------- -------- --------- $1,288.5 $1,036.2 $ 512.2 ======== ======== =========
REGULATION Finance Activities Transamerica's commercial lending operation is subject to various state and federal laws. Depending upon the type of lending, these laws may require licensing and certain disclosures and may limit the amounts, terms and interest rates that may be offered. Insurance Activities The Corporation's life insurance business, in common with those of other companies in this industry, is subject to regulation and supervision in the states, territories and countries in which they operate. Although the extent of such regulation varies, in general state laws establish supervisory agencies with broad powers relating to licensing of insurance companies and their agents to transact business therein, supervising premium rates and forms of policies used, and regulating the form and content of required financial statements and the types of investments that may be made. Insurance companies are also required to file annual reports with the supervisory agencies in states in which they do business and are subject to periodic examination by such agencies. EMPLOYEES The Corporation and its subsidiaries employed approximately 8,700 persons at December 31, 1997. CONSOLIDATED RATIOS OF EARNINGS TO FIXED CHARGES The following table sets forth the consolidated ratios of earnings from continuing operations to fixed charges of Transamerica Corporation and its subsidiaries for each of the five years ended December 31, 1997.
Years Ended December 31, ------------------------------------------------ 1997 1996 1995 1994 1993 2.32 2.52 2.36 2.55 2.47
The ratios of earnings from continuing operations to fixed charges were computed by dividing earnings from continuing operations before fixed charges and income taxes by the fixed charges. Fixed charges consist of interest and debt expense, minority interest charges related to certain securities of affiliates and one-third of rent expense, which approximates the interest factor. ITEM 2. PROPERTIES The executive offices of Transamerica Corporation are located in the Transamerica Pyramid in San Francisco, California, a 48-story office building. Approximately 15% of the 460,000 square feet of rentable space is occupied by Transamerica and some of its subsidiaries. The Transamerica Center in Los Angeles, California, consists of a 32-story building, an 11-story building and a 10-story building. Transamerica Center is the home office of certain divisions of Transamerica Life Companies and certain other subsidiaries of Transamerica. Approximately 58% of the 1,210,000 square feet of rentable space is occupied by Transamerica subsidiaries. ITEM 3. LEGAL PROCEEDINGS Various pending or threatened legal proceedings by or against the Corporation or one or more of its subsidiaries involve tax matters, alleged breaches of contract, torts, employment discrimination, violations of antitrust laws and miscellaneous other causes of action arising in the course of their businesses. Based upon information presently available, and in light of legal and other defenses and insurance coverage available to the Corporation and its subsidiaries, contingent liabilities arising from threatened and pending litigation, income taxes and other matters are not expected to have a material effect on the consolidated financial position or results of operations of the Corporation and its subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS Not applicable. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT See Item 10 in Part III of this Report. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The following information in the Transamerica Corporation 1997 Annual Report is incorporated herein by reference: Markets on which the Corporation's common stock is traded--"Common Stock Listed and Traded," page 84. High and low sale prices for the Corporation's common stock for each quarter in 1997 and 1996 --"Supplementary Financial Information," page 75. Frequency and amount of cash dividends declared during 1997 and 1996 --"Selected Eleven-Year Financial Data--Note C," page 77. Number of common stockholders of record as of the close of business on February 13, 1998--"Supplementary Financial Information--Note A," page 75. ITEM 6. SELECTED FINANCIAL DATA The following items for each of the years in the five year period ended December 31, 1997, included in "Selected Eleven-Year Financial Data" on pages 76 and 77 of the Transamerica Corporation 1997 Annual Report, are incorporated herein by reference: Revenues Income from continuing operations Basic earnings per share -- Income from continuing operations Diluted Earnings per share - Income from continuing operations Total assets Notes and loans payable: Long-term debt Dividends declared per share of common stock ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information (other than graphic images and related commentary) set forth under the caption "Financial Review" on pages 32 through 51 of the Transamerica Corporation 1997 Annual Report is incorporated herein by reference.1 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The information set forth under the caption "Market Risk" on pages 50 and 51 of the Transamerica Corporation 1997 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The following consolidated financial statements and supplementary financial information of the Corporation and its subsidiaries in the Transamerica Corporation 1997 Annual Report are incorporated herein by reference: Consolidated Balance Sheet--December 31, 1997 and 1996--pages 52 and 53. Consolidated Statement of Income--Years ended December 31, 1997, 1996 and 1995--page 54. Consolidated Statement of Cash Flows--Years ended December 31, 1997, 1996 and 1995 --page 55. Consolidated Statement of Stockholders' Equity--Years ended December 31, 1997, 1996 and 1995 --page 56. Notes to Financial Statements--December 31, 1997 --pages 57 through 72. Supplementary Financial Information--Years ended December 31, 1997 and 1996 -- page 75. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth under the caption "(1) Election of Directors" in the Proxy Statement of Transamerica Corporation dated March 6, 1998 is incorporated herein by reference. The officers of the Corporation are listed below. Executive officers are designated by an asterisk.
Name ............................ Position ............... Age Name Position Age - ---------------------------------------------------------------------- ------------------------ -- ----- -------- ---- .................... Frank C. Herringer* ................Chairman of the Board, 55 Maureen Breakiron-Evans ......Vice President--Control 43 President and Chief and Services Executive Officer Burton E. Broome* ............Vice President and 62 Thomas J. Cusack* ..................Executive Vice President 42 Controller Richard H. Finn* ...................Executive Vice President 63 James B. Dox .................Vice President--Taxes 58 Edgar H. Grubb* ....................Executive Vice President 58 James B. Lockhart ............Vice President-- 61 and Chief Financial Public Affairs Officer James F. McArdle .............Vice President-- 34 Robert A. Watson* ..................Executive Vice President 52 Investor Relations Shirley H. Buccieri* ...............Senior Vice President, 46 William H. McClave ...........Vice President-- 54 General Counsel and Corporate Communications Secretary John Morrissey ...............Vice President and 40 Richard N. Latzer* .................Senior Vice President 61 General Auditor and Chief Investment Rona Pehrson .................Vice President-- 50 Officer Human Resources Richard H. Fearon* .................Senior Vice President-- 42 George B. Sundby .............Vice President-- 46 Corporate Development Financial Planning Nancy C. Bonner ....................Vice President-- 45 and Analysis and Executive Development Assistant Controller Judith M. Tornese ............Vice President--Risk 55 Management
Mr. Herringer was elected Chairman of the Board of the Corporation effective January 1, 1996.He has been Chief Executive Officer of the Corporation since 1991 and President since 1986. Mr. Cusack was elected Executive Vice President of the Corporation in 1995. He was Senior Vice President of the Corporation from 1993 to 1995 and Vice President--Corporate Development from 1989 to 1993. Mr. Finn was elected Executive Vice President of the Corporation in 1993. He was Group Vice President of the Corporation from 1990 to 1993. Mr. Grubb was elected Executive Vice President and Chief Financial Officer of the Corporation in 1993. He was Senior Vice President of the Corporation from 1989 to 1993. Mr. Watson was elected Executive Vice President of the Corporation in 1995. He was with Westinghouse Electric Corporation from 1992 to 1995 where he served as an Executive Vice President and as Chairman and Chief Executive Officer of Westinghouse's financial services division. Ms. Buccieri was elected Senior Vice President, General Counsel and Secretary of the Corporation in 1995. She was with Gibson, Dunn & Crutcher from 1983 to 1995 and served as a Partner from 1990 to 1995. Mr. Latzer was elected Senior Vice President and Chief Investment Officer of the Corporation in 1988. Mr. Fearon was elected Senior Vice President--Corporate Development of the Corporation in 1997. He was Vice President--Corporate Development in 1995 and 1996. He was General Manager of Corporate Development and Vice Chairman of NatSteel Chemicals from 1990 to 1995. Ms. Bonner was elected Vice President -- Executive Development of the Corporation in 1996. She was Vice President of Executive Development of Banc One from 1991 to 1996. Ms. Breakiron-Evans was elected Vice President--Control and Services in 1997. From 1994 to 1997 she served as Vice President and General Auditor of the Corporation. She was with Arthur Andersen LLP from 1980 to 1994. Mr. Broome was elected Vice President and Controller of the Corporation in 1979. Mr. Dox was elected Vice President--Taxes of the Corporation in 1993. He was a Tax Partner with Ernst & Young LLP from 1977 to 1993. Mr. Lockhart was elected Vice President -- Public Affairs of the Corporation in 1979. Mr. McArdle was elected Vice President--Investor Relations of the Corporation in 1997. He held a number of positions within the commercial lending operation between 1991 and 1997, most recently serving as group vice president of the distribution finance unit. Mr. McClave was elected Vice President--Corporate Communications of the Corporation in 1981. Mr. Morrissey was elected Vice President and General Auditor of the Corporation in 1997. He was with Coopers & Lybrand LLP from 1979 to 1997. Ms. Pehrson was elected Vice President -- Human Resources of the Corporation in 1989. Mr. Sundby was elected Vice President--Financial Planning and Analysis in 1995. He was Assistant Controller and Director of Accounting of the Corporation from 1989 to 1995. He continues to serve as Assistant Controller. Ms. Tornese was elected Vice President -- Risk Management of the Corporation in 1987. There is no family relationship among any of the foregoing officers or between any of the foregoing officers and any director of the Corporation. The information set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement of Transamerica Corporation dated March 6, 1998 is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information set forth under the captions "Director Compensation and Benefits" and "Executive Compensation and Other Information" in the Proxy Statement of Transamerica Corporation dated March 6, 1998 is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under the captions "Principal Stockholders" and "Stockholdings of Directors and Executive Officers" in the Proxy Statement of Transamerica Corporation dated March 6, 1998 is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the captions "Director Compensation and Benefits," "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions" in the Proxy Statement of Transamerica Corporation dated March 6, 1998 is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) and (2) The response to this portion of Item 14 is submitted as a separate section of this report. (3) List of Exhibits: 3.(i) Transamerica Corporation Certificate of Incorporation, as amended (incorporated by reference to Exhibit 4.5 of the Registrant's Registration Statement on Form S-3 (File No. 33-43921) as filed with the Commission on November 13, 1991 and to Exhibits 3 and 4 contained in Form 8-A filed January 21, 1992, as amended by Form 8 filed January 27, 1992). 3.(ii) Transamerica Corporation By-Laws, as amended (incorporated by reference to Exhibit 3.(ii) of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1995). 4.2* 10.1 Form of Non-Qualified Stock Option Agreement under the Registrant's 1971 and 1979 Non-Qualified Stock Option Plan (incorporated by reference to Exhibit 10.4 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1988). 10.2 Executive Benefit Plan for Transamerica Corporation and Affiliates, as amended (incorporated by reference to Exhibit EX-10.2 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1992). --------- *Neither the Corporation nor its subsidiaries are parties to any instrument with respect to long-term debt for which securities authorized thereunder exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. Copies of instruments with respect to long-term debt of lesser amounts will be provided to the Commission upon request. 10.4 1996 Bonus Plan (incorporated by reference to Exhibit 10.7 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1995). 10.5 1997 Bonus Plan (incorporated by reference to Exhibit 10.5 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1996). 10.6 1985 Stock Option and Award Plan, as amended (including Amendments No. 1 through 8). 10.7 Form of Non-Qualified Stock Option Agreement under the Registrant's 1985 Stock Option and Award Plan. 10.8 Form of Incentive Stock Option Agreement under the Registrant's 1985 Stock Option and Award Plan (incorporated by reference to Exhibit 10.9 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1990). 10.9 Form of Restricted Stock Award Agreement under the Registrant's 1985 Stock Option and Award Plan. 10.10 Form of Non-Qualified Stock Option Agreement for Nonemployee Directors under the Registrant's 1985 Stock Option and Award Plan (incorporated by reference to Exhibit EX-10.4 of the Registrant's Quarterly Report on Form 10-Q (File No. 1-2964) for the quarter ended March 31, 1994). 10.11 Deferred Compensation Policy for Transamerica Corporation and Affiliates effective January 1, 1987 (incorporated by reference to Exhibit 10.12 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1991). 10.12 Deferred Compensation Policy for Transamerica Corporation and Affiliates effective January 1, 1988 (incorporated by reference to Exhibit EX-10.14 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1992). 10.13 Deferred Compensation Policy for Transamerica Corporation and Affiliates effective January 1, 1989 (incorporated by reference to Exhibit 10.17 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1989). 10.14 Deferred Compensation Policy for Transamerica Corporation and Affiliates effective January 1, 1990 (incorporated by reference to Exhibit 10.18 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1989). 10.15 Deferred Compensation Policy for Transamerica Corporation and Affiliates effective July 1, 1992 (incorporated by reference to Exhibit EX-10.17 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1992). 10.16 Deferred Compensation Policy for Transamerica Corporation and Affiliates effective January 1, 1994 (incorporated by reference to Exhibit EX-10.18 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1993). 10.17 Transamerica Corporation Deferred Compensation Plan, as amended (including Amendment No. 1) (incorporated by reference to Exhibit 10.19 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1996, and to Exhibit EX-10.20 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1994). 10.18 1971 Non-Qualified Stock Option Plan of Transamerica Corporation, as amended including Amendment Nos. 1 and 2) (incorporated by reference to Exhibit EX-10.20 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1992). 10.19 1979 Stock Option Plan of Transamerica Corpora- tion, as amended (including Amendment Nos. 1, 2 and 3). 10.20 Form of Termination Agreement between Transamerica Corporation and certain of its officers and of its subsidiaries, as amended. 10.21 Reinsurance Agreement dated December 31, 1992 by and between ARC Reinsurance Corporation and Transamerica Insurance Company, as amended (incorporated by reference to Exhibit EX-10.26 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1992). 10.22 Letter dated December 31, 1992 from the Registrant to Transamerica Insurance Company regarding ARC Reinsurance Corporation (incorporated by reference to Exhibit EX-10.27 of the Registrant's Annual Report on Form 10-K (File No. 1-2964) for the year ended December 31, 1992). 10.23 Transamerica Corporation 1995 Performance Stock Option Plan, as amended (including Amendment No. 1) (incorporated by reference to Exhibit B of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 23, 1998.) 10.24 Transamerica Corporation Value Added Incentive Plan (incorporated by reference to Exhibit EX-10.2 of the Registrant's Quarterly Report on Form 10-Q (File No. 1-2964) for the quarter ended March 31, 1994). 10.25 Form of Nonqualified Stock Option Agreement under the Registrant's 1995 Performance Stock Option Plan (incorporated by reference to Exhibit EX-10.2 of the Registrant's Quarterly Report on Form 10-Q (File No. 1-2964) for the quarter ended June 30, 1995). 10.26 Form of Nonqualified Stock Option Agreement granted with Tandem Limited Stock Appreciation Right under the Registrant's 1995 Performance Stock Option Plan (incorporated by reference to Exhibit EX-10.3 of the Registrant's Quarterly Report on Form 10-Q (File No. 1-2964) for the quarter ended June 30, 1995). 10.27 Form of Tandem Limited Stock Appreciation Right under the Registrant's 1995 Performance Stock Option Plan. 10.29 Transamerica Corporation 1998 Cash Long-Term Incentive Plan (incorporated by reference to Exhibit A of the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on April 23, 1998). 10.30 Employment Agreement between Transamerica Corporation and Frank C. Herringer (incorporated by reference to Exhibit 10.1 of the Registrant's Quarterly Report on Form 10Q (File No. 1-2964) for the quarter ended September 30, 1997). 10.31 Transamerica Corporation 1996 Stock Option and Award Plan, as amended ( incorporated by reference to Exhibit 4.3 of the Registrant's Registration Statement on Form S-8 (File No. 333- 23945) as filed with the Commission on March 25, 1997.) 10.32 Form of Nonqualified Stock Option Agreement (100% of Fair Market Value) under the Registrant's 1996 Stock Option and Award Plan (incorporated by reference to Exhibit 4.4 of the Registrant's Registration Statement on Form S-8 (File No. 333- 23945 as filed with the Commission on March 25, 1997). 10.33 Transamerica Corporation 1998 Corporate Bonus Plan. 10.34 Employment Agreement by and between Transamerica Corporation and Frank C. Herringer dated as of November 4, 1997 (incorporated by reference to Exhibit 10.1 to Registrant's Quarterly Report on Form 10-Q (File No. 1-2964) for the quarter ended September 30, 1997). 10.35 Amendment No. 2 to the Transamerica Corporation 1996 Stock Option and Award Plan. 12 Ratio of Earnings to Fixed Charges Calculation. 13 Portions of the Transamerica Corporation 1997 Annual Report (to the extent such portions are expressly incorporated herein). 21 List of Subsidiaries of Transamerica Corporation. 23 Consent of Ernst & Young LLP to the incorporation by reference of their report dated January 23, 1998 in the Registrant's Registration Statements on Form S-8 (File Nos. 2-80934, 2-83724, 33-3722, 33-12324, 33-13389, 33-18911, 33-26317, 33-38267, 33-43927, 33-55587 and 33-64221) and on Form S-3 (File Nos. 33-32419, 33-37889, 33-41008, 33-55047 and 33-63049). 24 Power of Attorney executed by the directors of the Registrant. 27.1 Financial data schedule for the year ended December 31, 1997. 27.2 Financial data schedule for the nine months ended September 30, 1997. 27.3 Financial data schedule for the six months ended June 30, 1997. 27.4 Financial data schedule for the three months ended March 31, 1997. 27.5 Financial data schedule for the year ended December 31, 1996. 27.6 Financial data schedule for the nine months ended September 30, 1996. 27.7 Financial data schedule for the six months ended June 30, 1996. 27.8 Financial data schedule for the three months ended March 31, 1996. 27.9 Financial data schedule for the year ended December 31, 1995. Exhibits will be furnished to stockholders of the Corporation upon written request and, with the exception of Exhibit 13, upon payment of a fee of 30 cents per page, which fee covers the Corporation's reasonable expenses in furnishing such exhibits. (b) Reports on Form 8-K filed in the fourth quarter of 1997: None (c) Exhibits: Certain of the exhibits listed in Item (a)(3) above have been submitted under separate filings, as indicated. (d) Financial Statement Schedules: The response to this portion of Item 14 is submitted as a separate section of this report. Signatures Pursuant to the requirements of Section 13 or 15(d) 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 Date: March 30, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 26, 1998 by the following persons on behalf of the registrant and in the capacities indicated. Signature Title Principal Executive Officer: FRANK C. HERRINGER* Chairman of the Board, President and Chief Executive Officer Principal Financial Officer: Edgar H. Grubb Executive Vice President and Chief Financial Officer Principal Accounting Officer: Burton E. Broome Vice President and Controller Directors: SAMUEL L. GINN* Director FRANK C. HERRINGER* Chairman of the Board and Director ROBERT W. MATSCHULLAT* Director GORDON E. MOORE* Director TONI REMBE* Director CONDOLEEZZA RICE Director CHARLES R. SCHWAB* Director FORREST N. SHUMWAY* Director PETER V. UEBERROTH* Director *Burton E. Broome Attorney-in-Fact A majority of the members of the Board of Directors. ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) and (2) and ITEM 14(d) LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES and FINANCIAL STATEMENT SCHEDULES Year Ended December 31, 1997 TRANSAMERICA CORPORATION AND SUBSIDIARIES SAN FRANCISCO, CALIFORNIA FORM 10-K--ITEM 14(a)(1) AND (2) TRANSAMERICA CORPORATION AND SUBSIDIARIES LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES Financial Statements: The following consolidated financial statements of Transamerica Corporation and subsidiaries, included in the Transamerica Corporation 1997 Annual Report, are incorporated by reference in Item 8: Consolidated Balance Sheet -- December 31, 1997 and 1996 Consolidated Statement of Income --Years ended December 31, 1997, 1996 and 1995 Consolidated Statement of Cash Flows --Years ended December 31, 1997, 1996 and 1995 Consolidated Statement of Stockholders' Equity -- Years ended December 31, 1997, 1996 and 1995 Notes to Financial Statements -- December 31, 1997 Financial Statement Schedules: The following consolidated financial statement schedules of Transamerica Corporation and subsidiaries are included in Item 14(d). I -- Summary of Investments Other Than Investments in Related Parties -- December 31, 1997 II -- Condensed Financial Information of Registrant -- December 31, 1997 and 1996, and years ended December 31, 1997, 1996 and 1995 III -- Supplementary Insurance Information -- Years ended December 31, 1997, 1996 and 1995 IV - Reinsurance -- Years ended December 31, 1997, 1996 and 1995 V -- Valuation and Qualifying Accounts -- Years ended December 31, 1997, 1996 and 1995 All other schedules provided for in the applicable accounting regulation of the Securities and Exchange Commission pertain to items which do not appear in the financial statements of Transamerica Corporation and subsidiaries or to items which are not significant or to items as to which the required disclosures have been made elsewhere in the financial statements and supplementary notes, and such schedules have therefore been omitted. REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Stockholders Transamerica Corporation We have audited the consolidated financial statements of Transamerica Corporation and subsidiaries listed in Item 14(a)(1) and (2) of the Annual Report on Form 10-K of Transamerica Corporation for the year ended December 31, 1997. Our audits also included the financial statement schedules listed in the index at Item 14(a)(1) and (2). These financial statements and schedules are the responsibility of Transamerica Corporation's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and related schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and related schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Transamerica Corporation and subsidiaries at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects the information set forth therein. Ernst & Young LLP San Francisco, California January 23, 1998 SCHEDULE I TRANSAMERICA CORPORATION AND SUBSIDIARIES --------------------- SCHEDULE I--SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1997
Column A Column B Column C Column D - -------------------------------------------------------------------------------------------------------------- Amount at which shown in Type of Investment Cost Value the balance sheet - -------------------------------------------------------------------------------------------------------------- (Amounts in millions) Fixed maturities available for sale: Bonds and notes: U.S. Treasury securities and obligations of U.S. government authorities and agencies . . . $ 274.5 $ 352.9 $ 352.9 Obligations of states and political subdivisions . . . . . . . . . . . . . . . 243.6 262.6 262.6 Foreign governments . . . . . . . . . . . . 139.7 147.0 147.0 Corporate securities . . . . . . . . . . . . 18,420.5 19,837.3 19,837.3 Mortgage-backed securities . . . . . . . . . 3,798.1 4,138.9 4,138.9 Public utilities . . . . . . . . . . . . . . 4,018.8 4,358.6 4,358.6 Redeemable preferred stocks . . . . . . . . . 95.2 113.5 113.5 ----------- ------------ ------------ Total fixed maturities . . . . . . . . 26,990.4 $29,210.8 29,210.8 ========= Equity securities: Common stocks: Banks, trust and insurance companies . . . . Industrial, miscellaneous and all other . . 637.6 $ 1,602.4 1,602.4 Nonredeemable preferred stocks . . . . . . . . 5.1 5.1 5.1 ----------- ---------- ----------- Total equity securities . . . . . . . 642.7 $ 1,607.5 1,607.5 ========== Mortgage loans on real estate . . . . . . . . . 708.8 684.3 Real estate . . . . . . . . . . . . . . . . . . 77.7 65.9 Loans to life insurance policyholders . . . . . 451.0 451.0 Short-term investments . . . . . . . . . . . . . 336.0 336.0 ----------- ---------- Total investments . . . . . . . . . . . $29,206.6 $32,355.5 ========= ========= - ------- The differences between Column B and Column D as to mortgage loans on real estate and real estate represent write downs and allowances for possible permanent impairment in value.
SCHEDULE II TRANSAMERICA CORPORATION AND SUBSIDIARIES --------------------- SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT TRANSAMERICA CORPORATION (PARENT COMPANY) (Amounts in millions except share data) BALANCE SHEET
December 31, 1997 1996 Assets: Investments in subsidiaries $5,762.1 $5,289.2 Equity securities at fair value (cost: $308.8 in 1997 and $236.9 in 1996) 796.1 550.9 Short-term investments 4.8 3.2 Notes and accounts receivable from subsidiaries 359.1 301.0 Cash and cash equivalents 18.5 4.1 Deferred income tax benefit, net of current tax liability of $7.6 in 1996 106.3 Other assets 213.5 207.3 -------- -------- $7,154.1 $6,462.0 ======== ======== Liabilities and Stockholders' Equity: Notes and loans payable $ 404.8 $ 607.9 Income taxes payable, including deferred taxes payable of $45.7 in 1997 78.7 Income taxes due to subsidiaries 356.8 413.5 Notes and accounts payable to subsidiaries 936.5 789.2 Accounts payable and other liabilities 496.0 510.8 Stockholders' equity: Preferred Stock ($100 par value): Authorized--1,200,000 shares; issuable in series Outstanding--Dutch Auction Rate Transferable Securities, 2,250 shares, at liquidation preference of $100,000 per share in 1996 225.0 Outstanding--Series D, 180,091 shares at liquidation preference of $500 per share in 1996 90.0 Common Stock ($1 par value): Authorized--150,000,000 shares Outstanding--62,904,108 shares in 1997 and 65,968,708 shares in 1996, after deducting 16,834,354 and 13,769,754 shares in treasury in 1997 and 1996 62.9 66.0 Additional paid-in capital 83.0 Retained earnings, including equity in undistributed net income of subsidiaries of $1,700.5 in 1997 and $1,826.6 in 1996 3,330.8 2,920.2 Net unrealized gain from investments marked to fair value 1,533.6 784.4 Foreign currency translation adjustments (46.0) (28.0) -------- -------- 4,881.3 4,140.6 -------- -------- $7,154.1 $6,462.0 ======== ========
SCHEDULE II (Continued) TRANSAMERICA CORPORATION AND SUBSIDIARIES --------------------- SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT TRANSAMERICA CORPORATION (PARENT COMPANY) STATEMENT OF INCOME
Years Ended December 31, 1997 1996 1995 (Amounts in millions) Revenues: Dividends from subsidiaries. . . . . . . . . . . . . . $ 615.2 $313.6 $329.8 Tax service fees . . . . . . . . . . . . . . . . . . . 214.7 206.5 152.6 Interest, principally from subsidiaries. . . . . . . . 16.2 3.8 4.8 Investment income . . . . . . . . . . . . . . . . . . . 7.5 10.4 15.1 Gain on investment transactions . . . . . . . . . . . . 18.7 18.1 23.3 -------- ------ ------ 872.3 552.4 525.6 Expenses: Interest . . . . . . . . . . . . . . . . . . . . . . . 131.7 109.7 100.2 General and administrative . . . . . . . . . . . . . . 199.6 213.4 232.5 -------- ------ ------ 331.3 323.1 332.7 -------- ------ ------ 541.0 229.3 192.9 Income tax benefit . . . . . . . . . . . . . . . . . . . . 117.1 88.4 78.3 -------- ------- ------ Income before equity in undistributed income of subsidiaries and income (loss) of discontinued operations. . . . . . . . 658.1 317.7 271.2 Equity in undistributed income (dividends in excess of income) of subsidiaries. . . . . . . (126.1) 183.8 118.9 -------- ------- ------- Income from continuing operations . . . . . . 532.0 501.5 390.1 Income (loss) from discontinued operations. . . . 261.8 (45.2) 80.4 -------- ------- -------- Net income . . . . $ 793.8 $456.3 $470.5 ======== ====== ======
SCHEDULE II (Continued) TRANSAMERICA CORPORATION AND SUBSIDIARIES --------------------- SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT TRANSAMERICA CORPORATION (PARENT COMPANY) STATEMENT OF CASH FLOWS
Years Ended December 31, 1997 1996 1995 (Amounts in millions) Operating activities: Income from continuing operations . . . . . . . . . . . . . . . $ 532.0 $ 501.5 $ 390.1 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . 11.1 5.1 4.5 Accounts payable and other liabilities . . . . . . . . . . (17.1) (71.4) 47.6 Income taxes payable, including related accounts with subsidiaries. . . . . . . . . . . . . . . . . . . . 67.6 (0.6) (33.8) Equity in undistributed income (dividends in excess of income) of subsidiaries. . . . . . . . . . . . . . . 126.1 (183.8) (118.9) Net (gains) on investment transactions . . . . . . . . . . (18.7) (18.1) (23.3) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . (91.6) (2.9) 4.8 --------- --------- ---------- Net cash provided by operating activities . . . . . . . . 609.4 229.8 271.0 Investing activities: Capital transactions with subsidiaries. . . . . . . . . . 302.3 (36.3) (146.0) Sales of investments . . . . . . . . . . . . . . . . . . . . 97.0 219.4 99.4 Purchases of investments . . . . . . . . . . . . . . . . . . (136.6) (158.4) (138.2) Decrease (increase) in short-term investments . . . . . . . . (1.5) 0.4 8.1 Decrease (increase) in accounts with subsidiaries. . . . . . . (44.7) 170.8 108.7 Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12.4) (20.0) (14.0) --------- -------- --------- Net cash provided (used) by investing activities . . . . . . . . . . . . . . . . . . . . . . . 204.1 175.9 (82.0) Financing activities: Proceeds from debt financing . . . . . . . . . . . . . . . . . 188.6 198.4 Increase (decrease) in commercial paper obligations . . . . . (198.3) (157.8) 195.4 Payments of long-term notes . . . . . . . . . . . . . . . . . (5.0) (10.0) (125.0) Redemption of preferred stock . . . . . . . . . . . . . . . . (318.9) (0.8) Treasury stock purchases . . . . . . . . . . . . . . . . . . . (443.6) (330.2) (155.4) Other common stock transactions . . . . . . . . . . . . . . . 108.4 45.6 51.0 Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . (130.3) (149.2) (155.4) -------- ------- ------- Net cash used by financing activities . . . . . . . . . . . (799.1) (403.2) (190.2) -------- ------- ------- Increase (decrease) in cash and cash equivalents . . . . . . . . 14.4 2.5 (1.2) Cash and cash equivalents at beginning of year . . . . . . . . 4.1 1.6 2.8 ---------- --------- --------- Cash and cash equivalents at end of year . . . . . . . . . . . $ 18.5 $ 4.1 $ 1.6 ======== ======== ========
SCHEDULE II (Continued) TRANSAMERICA CORPORATION AND SUBSIDIARIES --------------------- SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT TRANSAMERICA CORPORATION (PARENT COMPANY) NOTES TO BALANCE SHEET Note A - Financial Instruments (Dollar amounts in millions)
December 31, 1997 1996 Notes and loans payable comprise the following amounts: Short-term bank loans, commercial paper and current portion of long-term debt . . . . . . . . . . . . . . . . . . . . $100.0 $ 5.0 Long-term debt due subsequent to one year: Notes; interest at 6.75% to 9.875%; maturing through 2008 . . . . 304.8 198.3 Commercial paper and other notes at various interest rates and terms supported by a credit agreement expiring in 2002. . . . . . . . . . . . . . . . . . . . 404.6 ------ ------ $404.8 $607.9 ====== ====== The aggregate annual maturities for the five years subsequent to December 31, 1997 are: 1998--$100; 1999--None; 2000--None; 2001--$5 and 2002--None.
Transamerica manages a portion of its interest rate risk by entering into interest rate swap agreements. At December 31, 1997 and 1996 interest rate swap agreements comprise:
Weighted Weighted Notional Average Fixed Average Floating Amount Interest Rate Interest Rate 1997: Interest rate swap agreements - Transamerica pays: Floating rate interest expense, receives fixed rate interest income $275.0 6.97% 5.77% 1996: Interest rate swap agreements - Transamerica pays: Fixed rate interest expense, receives floating rate interest income $ 50.0 5.14% 5.54% Floating rate interest expense, receives fixed rate interest income $275.0 7.18% 5.63% Note B - Minority Interest In 1997, an affiliate of Transamerica issued $190 million of 7.625% cumulative Capital Trust Pass-through Securities payable November 15, 2037. Dividends on the outstanding Capital Trust Pass-through Securities are cumulative and payable semi-annually in arrears. Proceeds from the issuance of these securities were invested by the affiliate in subordinated debentures issued by Transamerica, bearing interest at 7.625% and maturing on November 15, 2037. Transamerica has agreed to guarantee to pay in full any accrued and unpaid dividends declared, or the redemption price including accrued and unpaid dividends, if the securities are redeemed by the affiliates. In 1996, two affiliates of Transamerica issued $100 million of 7.80% and $225 million of 7.65% cumulative Capital Trust Pass-through Securities payable December 1, 2026. Dividends on the outstanding Capital Trust Pass-through Securities are cumulative and payable semi-annually in arrears. Proceeds from the issuance of these securities were invested by the affiliates in subordinated debentures issued by Transamerica, bearing interest at 7.65% and 7.80% and maturing on December 1, 2026. Transamerica has agreed to guarantee to pay in full any accrued and unpaid dividends declared, or the redemption price including accrued and unpaid dividends, if the securities are redeemed by the affiliates.
SCHEDULE III TRANSAMERICA CORPORATION AND SUBSIDIARIES --------------------- SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
Column A Column B Column C Column D Column E Column F Future policy Deferred benefits, Other policy policy losses, claims and acquisition claims and Unearned benefits Premium Segment costs loss expenses premiums payable revenue (Amounts in millions) Life insurance: Year ended December 31: 1997 . . . . . . . . . . $2,102.6 (A) $5,957.7 (B) $17.7 $24,184.2 $1,105.9 1996 . . . . . . . . . . $2,138.2 (A) $5,644.5 (B) $17.9 $22,898.4 $1,072.4 1995 . . . . . . . . . . $1,974.2 (A) $5,631.4 (B) $14.4 $22,262.0 $1,140.0 Column G Column H Column I Column J Column K Benefits, Amortization claims, of deferred Net losses and policy Other investment settlement acquisition operating Premiums income expenses costs expenses written (Amounts in millions) Life insurance: Year ended December 31: 1997 . . . . . . . . . . $2,169.4 $2,810.9 $256.3 (C) $469.6 $238.0 (D) 1996 . . . . . . . . . . $2,079.7 $2,649.7 $268.8 (C) $403.6 $286.1 (D) 1995 . . . . . . . . . . $1,974.7 $2,710.4 $191.3 (C) $367.3 $286.1 (D) - ------- (A)Includes reduction from fair value adjustments of $546.1 million in 1997, $306.6 million in 1996 and $355.6 million in 1995 required under Financial Accounting Standards Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. (B)Includes increase from fair value adjustments of $281 million in 1997, $195 million in 1996 and $339 million in 1995 required under Financial Accounting Standards Statement No. 115. (C)Includes accelerated amortization of deferred policy acquisition costs of $9 million in 1997, $33.6 million in 1996 and $9.2 million in 1995 associated with interest-sensitive products due to realized investment gains. (D)Health insurance premiums written.
SCHEDULE IV TRANSAMERICA CORPORATION AND SUBSIDIARIES --------------------- SCHEDULE IV--REINSURANCE
Column A Column B Column C Column D Column E Column F Percentage Ceded to Assumed of amount Gross other from other Net assumed Segment amount companies companies amount to net (Dollar amounts in millions) Year ended December 31, 1997: Life insurance in force . . . $241,379.9 $207,533.1 $225,685.7 $259,532.5 87.0% ========== ========== ========== ========== Premium revenue: Life insurance . . . . . . $ 894.5 $ 637.4 $ 610.2 $ 867.3 70.4% Accident and health insurance . . . . . . . . 90.3 350.6 498.9 238.6 209.1% ------------- ------------ ------------ ------------ $ 984.8 $ 988.0 $ 1,109.1 $ 1,105.9 100.3% ============= ============ ============ ============ Year ended December 31, 1996: Life insurance in force . . . $220,162.9 $195,158.2 $201,560.3 $226,565.0 89.0% ========== ========== ========== ========== Premium revenue: Life insurance . . . . . . $ 816.6 $ 551.9 $ 521.3 $ 786.0 66.3% Accident and health insurance . . . . . . . . 59.2 355.4 582.6 286.4 203.5% ---------- ---------- ---------- ---------- $ 875.8 $ 907.3 $ 1,103.9 $ 1,072.4 102.9% ========== ========== ========== ========== Year ended December 31, 1995: Life insurance in force . . . $206,722.6 $116,762.9 $174,193.6 $264,153.3 65.9% ========== ========== ========== ========== Premium revenue: Life insurance . . . . . . $ 935.0 $ 619.0 $ 537.8 $ 853.8 63.0% Accident and health insurance . . . . . . . . 165.6 439.6 560.2 286.2 195.8% ---------- ---------- ---------- ---------- $ 1,100.6 $ 1,058.6 $ 1,098.0 $ 1,140.0 96.3% ========= ========== ========= =========
SCHEDULE V TRANSAMERICA CORPORATION AND SUBSIDIARIES --------------------- SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
Column A Column B Column C Column D Column E ----------Additions---------- Balance at Charged to Charged to Balance at beginning costs and other accounts - Deductions - end of Description of period expenses describe describe period (Amounts in millions) Year ended December 31, 1997: Deducted from asset accounts: Allowance for losses - Mortgage loans on real estate $ 22.6 $ 2.0 (B) $ 0.1 (D) $ 24.5 Real estate . . . . . . . . . 20.2 8.4 (E) 11.8 Finance receivables . . . . . 87.0 $ 18.1 14.8 (C) 15.1 (F) 104.8 (H) Other assets . . . . . . . . 1.8 1.8 (G) ------- ------- ------- ------- ------- $ 131.6 $ 18.1 $ 16.8 $ 25.4 $ 141.1 ======= ======= ======= ======= ======= Year ended December 31, 1996: Deducted from asset accounts: Allowance for losses - Mortgage loans on real estate $ 21.5 $ 2.1 (B) $ 1.0 (D) $ 22.6 Real estate . . . . . . . . . 27.2 2.5 (B) 9.5 (E) 20.2 Finance receivables . . . . . 82.1 $ 10.2 7.0 (C) 12.3 (F) 87.0 (H) Other assets . . . . . . . . 6.1 (3.6)(A) 0.7 (G) 1.8 ------- ------ ------- ------- ------ $136.9 $ 6.6 $ 11.6 $ 23.5 $131.6 ======= ====== ======= ======= ====== Year ended December 31, 1995: Deducted from asset accounts: Allowance for losses - Mortgage loans on real estate $ 23.5 $ 2.0 (D) $ 21.5 Real estate . . . . . . . . . 26.3 $ 2.1 (B) 1.2 (E) 27.2 Finance receivables . . . . . 94.5 $ 16.1 (9.9)(C) 18.6 (F) 82.1 (H) Other assets . . . . . . . . 67.4 (20.1)(A) 21.4 (I) 62.6 (G) 6.1 ------- ------ ------- ------- ------ $ 211.7 $ (4.0) $ 13.6 $ 84.4 $136.9 ======= ====== ======= ======= ====== - ------- (A) Reversal of excess valuation allowance no longer required due to the favorable terms on disposition of assets held for sale. 1995 reversal is due principally to operations in Puerto Rico. (B) Included in gains on investment transactions. (C) Changes in connection with receivables and other adjustments. (D) Reduction in reserves associated with the settlement of mortgage loan transactions. (E) Reduction in reserves associated with the settlement of real estate transactions. (F) Charges for net credit losses. (G) Charges for losses on disposal of assets held for sale, which in 1995 includes $41.2 million related to the disposal of rent-to-own receivables and $17.8 million related to the disposal of Puerto Rico receivables. (H) Includes $15.5 million in 1997 and $1.2 million in 1996 and 1995 related to securitized, sold and serviced receivables which is reported in other liabilities in the consolidated balance sheet. (I) The increase in 1995 was primarily associated with the transfer of Puerto Rico receivables from finance receivables.
EX-10.6 2 Exhibit 10.6 THE 1985 STOCK OPTION AND AWARD PLAN OF TRANSAMERICA CORPORATION (Working Copy Incorporating Amendment Nos. 1-8) THE 1985 STOCK OPTION AND AWARD PLAN OF TRANSAMERICA CORPORATION TRANSAMERICA CORPORATION, a corporation organized under the laws of the State of Delaware, hereby adopts this The 1985 Stock Option and Award Plan of Transamerica Corporation. The Plan permits the grant of stock options, restricted stock and stock unit awards. The committee of the Board of Directors which administers the Plan may select and grant to key employees of the Company and its Affiliates, the type of option or award which the Company determines to be most effective in advancing the interests of the Company through the motivation and retention of those key employees upon whose judgment, initiative and continued efforts the Company is largely dependent for the successful conduct of its business. The Plan will be submitted for the approval of the Company's stockholders within 12 months after the date of the Plan's initial adoption by the Board, and the Plan will become effective upon such approval. 1 -- DEFINITIONS (a) GENERAL Whenever the following terms are used in this Plan, they shall have the meaning specified below unless the context clearly indicates to the contrary. (b) COMPANY "Company" shall mean Transamerica Corporation, a Delaware corporation. (c) AFFILIATE "Affiliate" shall mean (a) any corporation in which the Corporation owns, directly or indirectly, twenty-five percent or more of the voting stock, or any partnership, limited liability company or other entity in which the Corporation's ownership interest represents, directly or indirectly, twenty-five percent or more of the total ownership interests in such partnership, limited liability company, or entity; or (b) any corporation or any other entity (including, but not limited to, partnerships, joint ventures and limited liability companies) that the Committee, in its sole discretion, determines to be controlling, controlled by, or under common control with the Corporation. (d) BOARD "Board" shall mean the Board of Directors of the Company. (e) COMMITTEE "Committee" shall mean the committee appointed by the Board (pursuant to Section 2(a) of the Plan) to administer the Plan. (f) DIRECTOR "Director" shall mean a member of the Board. (g) EMPLOYEE "Employee" shall mean any employee of the Company, or of any corporation which is then an Affiliate, whether such employee is so employed at the time this Plan is adopted or becomes so employed subsequent to the adoption of the Plan. (h) OPTION "Option" shall mean an option to purchase Common Stock of the Company granted under the provisions of Section 4 of the Plan, and where applicable, shall include an Incentive Stock Option. (i) OPTIONEE "Optionee" shall mean an Employee or Nonemployee Director to whom an Option is granted. (j) AWARD "Award" shall mean an award of restricted stock or restricted units granted under the provisions of Section 5 of the Plan. (k) RESTRICTED STOCK AWARD "Restricted Stock Award" shall mean an Award of restricted Common Stock of the Company. (l) RESTRICTED UNIT AWARD "Restricted Unit Award" shall mean an Award of restricted units. (m) GRANTEE "Grantee" shall mean an Employee to whom an Award is granted. (n) FAIR MARKET VALUE "Fair Market Value" shall mean the last quoted per share selling price of the Company's Common Stock on the relevant date, as quoted in the New York Stock Exchange Composite Transactions Index published in The Wall Street Journal, or if there were no sales on such date, the last quoted selling price on the nearest day after the relevant date, as determined by the Committee. (o) CHANGE OF CONTROL "Change of Control" shall mean the occurrence of any of the following: (a) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Securities Exchange Act of 1934, as amended) of 20% or more of either (1) the then-outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (2) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this paragraph (a) the following acquisitions shall not constitute, or be deemed to cause, a Change of Control: (i) any increase in such percentage ownership of a Person to 20% or more resulting solely from any acquisition of shares directly from the Company or any acquisition of shares by the Company, provided, however, that any subsequent acquisitions of shares by such Person that would add, in the aggregate, 2% or more (measured as of the date of each such subsequent acquisition) to such Person's beneficial ownership of Outstanding Company Common Stock or Outstanding Company Voting Securities shall be deemed to constitute a Change of Control, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iii) any acquisition by any corporation pursuant to a transaction which complies with clauses (1), (2) and (3) of paragraph (c) below; or (b) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents, by or on behalf of a Person other than the Board; or (c) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (1) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the then Outstanding Company Common Stock and Outstanding Company Voting Securities, immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (2) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or of such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then-outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then-outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (3) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred with respect to any Option or Award held by any Optionee or Grantee who incurs a Termination of Employment prior to the event or events which otherwise would have created the occurrence of a Change of Control. (p) RETIREMENT "Retirement" shall mean a Termination of Employment by reason of the Employee's retirement at or after his or her earliest permissible retirement date pursuant to and in accordance with his or her employer's regular retirement plan or practice. With respect to a Nonemployee Director, the term "Retirement" shall mean a termination of service on the Board by reason of the Nonemployee Director's retirement at or after his or her earliest permissible retirement date under the Company's Retirement Plan for Outside Directors. (q) TERMINATION OF EMPLOYMENT "Termination of Employment" shall mean a cessation of the employee-employer relationship between an employee and the Company or an Affiliate for any reason, including, but not by way of limitation, a termination by resignation, discharge, death, Total Disability or Retirement or the disaffiliation of an Affiliate, but excluding any such termination where there is a simultaneous reemployment by the Company or an Affiliate. (r) CODE "Code" shall mean the Internal Revenue Code of 1986, as amended. (s) TOTAL DISABILITY "Total Disability" shall mean permanent and total disability as determined in accordance with Section 22(e)(3), or successor provisions, of the Code. (t) SECRETARY "Secretary" shall mean the Corporate Secretary or an Assistant Secretary of the Company. (u) PLAN "Plan" shall mean The 1985 Stock Option and Award Plan of Transamerica Corporation. (v) INCENTIVE STOCK OPTION "Incentive Stock Option" shall mean an Option designated as such by the Committee which meets the requirements of Section 422 of the Code. (w) SUBSIDIARY "Subsidiary" shall mean any corporation in an unbroken chain of corporations beginning with the Company if each of the corporations other than the last corporation in the unbroken chain then owns stock possessing fifty percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. (x) NONEMPLOYEE DIRECTOR "Nonemployee Director" shall mean a Director who is not an officer or employee of the Company or any Affiliate. (y) RULE 16b-3 "Rule 16b-3" means Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, and any future regulation amending, supplementing or superseding such regulation. 2 -- ADMINISTRATION (a) APPOINTMENT OF COMMITTEE The Committee shall consist of at least three Directors, appointed by and holding office at the pleasure of the Board. No Options or Awards may be granted to any member of the Committee during the term of his or her membership on the Committee. A Director shall be eligible to serve on the Committee only if he or she is a "disinterested person" under Rule 16b-3. The duties and responsibilities of the Committee may be assigned by the Board to another standing committee of the Board; provided, however, that all of the members of such standing committee must satisfy all of the eligibility requirements set forth above for membership on the Committee. (b) DUTY AND POWER OF COMMITTEE It shall be the duty of the Committee to conduct the general administration of the Plan in accordance with its provisions. The Committee shall have the power to determine which Employees are key Employees and to interpret the Plan, the Options and the Awards, and to adopt rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret, amend or revoke any such rules. (c) MATTERS RELATING TO TERMINATION OF EMPLOYMENT The Committee, in its absolute discretion, shall determine the effect of all matters and questions relating to Termination of Employment, including, but not by way of limitation, the question of whether a Termination of Employment resulted from Retirement or Total Disability, and all questions of whether particular leaves of absence constitute Terminations of Employment. (d) TRANSFER RESTRICTIONS The Committee, in its absolute discretion, may impose such restrictions on the transferability of the stock issued upon the exercise of an Option or issued as an Award as it deems appropriate and any such restriction shall be set forth in the respective Option or Award agreement and may be referred to on the Certificates evidencing such shares. (e) COMMITTEE ACTIONS The Committee may act either by vote of a majority of its members at a meeting or by a memorandum or other written instrument signed by all members of the Committee. (f) COMPENSATION; PROFESSIONAL ASSISTANCE; GOOD FAITH ACTIONS Members of the Committee may receive reasonable compensation for their services as members, and all expenses and liabilities they incur in connection with the administration of the Plan shall be borne by the Company. The Committee may, with the approval of the Board, employ attorneys, consultants, accountants, or other persons. The Committee, the Company, and its officers and directors shall be entitled to rely upon the advice, opinions or valuations of any such persons. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon all Optionees, Grantees, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination, or interpretation made in good faith with respect to the Plan, the Options, or the Awards, and all members of the Committee shall be fully protected by the Company in respect to any such action, determination or interpretation. 3 -- SHARES SUBJECT TO PLAN (a) LIMITATIONS The shares of stock issuable pursuant to Options, Restricted Stock Awards, or restricted Unit Awards shall be shares of the Company's Common Stock, $1.00 par value. The total number of such shares which may be subjected to Options and Awards granted under the Plan shall not exceed 14,000,000 in the aggregate. (b) EFFECT OF UNEXERCISED OR CANCELLED OPTIONS, UNVESTED RESTRICTED STOCK OR UNIT AWARDS If an Option or Award expires or is cancelled for any reason without having been fully exercised or vested, the number of shares or units subject to such Option or Award which were not purchased or did not vest prior to such expiration or cancellation may again be made subject to either an Option or an Award granted hereunder (to the same Optionee or Grantee or to a different Optionee or Grantee). (c) CHANGES IN COMPANY'S SHARES In the event that the outstanding shares of Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, stock dividend, spin-off or combination of shares, appropriate adjustments shall be made by the Committee in the numerical limitation of Section 4(a)(2)(i) and in the aggregate number and kinds of shares and units which may be issued on exercise of Options or be issued or granted as Awards. 4 -- STOCK OPTIONS (a) GRANTING OF OPTIONS (1) ELIGIBILITY (A) Any key Employee of the Company or of any corporation which is then an Affiliate shall be eligible to be granted Options. (2) GRANTING OF OPTIONS (A) The Committee shall from time to time, in its absolute discretion: (i) Select from among the eligible key Employees the Employees to whom Options should be granted and determine the number of shares of Common Stock to be subject to such Options, provided that during any fiscal year of the Company, no key Employee shall be granted Options which cover more than 500,000 shares. (ii) Determine the terms and conditions of such Options, consistent with the Plan. (iii) Determine whether such Options are to be Incentive Stock Options or not, provided any Incentive Stock Option must meet the applicable requirements of Section 422 of the Code. (B) Upon the selection of a key Employee to be granted an Option, the Committee shall authorize the Company to grant such Option and may impose such conditions on the grant of such option, as it deems appropriate. (b) TERMS OF OPTIONS (1) OPTION AGREEMENT Each Option shall be evidenced by a written stock option agreement which shall be executed by the Optionee and the Company and which shall contain the terms and conditions determined by the Committee. Notwithstanding anything to the contrary in this Plan, stock option agreements evidencing Incentive Stock Options shall contain such terms and conditions, among others, as may be necessary in the opinion of the Committee to qualify them as Incentive Stock Options under Section 422 of the Code. (2) OPTION PRICE The price of the shares subject to each Option shall be set by the Committee; provided, however, that the price shall not be less than 100% of the Fair Market Value for such shares on the date the option is granted as determined by the Committee. (3) DATE OF GRANT The date on which an Option shall be granted shall be the date of the Committee's authorization of such grant or such later date as may be determined by the Committee at the time such grant is authorized. (4) COMMENCEMENT OF EXERCISABILITY (A) No Option may be exercised in whole or in part during the first year after such Option is granted. (B) Subject to the provisions of Section 4(b)(4)(A) and (C), Options shall become exercisable at such times and in such installments (which may be cumulative) as the Committee shall provide in the terms of each individual Option; provided, however, that after an Option is granted, the Committee may, on such terms and conditions as it may determine to be appropriate and notwithstanding the provisions of Section 4(b)(4)(A) and (C), accelerate the time at which such Option or any portion thereof may be exercised. (C) No portion of an Option which is unexercisable (except an Incentive Stock Option which is unexercisable solely by virtue of the sequential exercise restriction contained in Section 4(b)(10)(C)) at the time of the Optionee's Termination of Employment shall thereafter become exercisable; provided, however, that this does not limit the discretion of the Committee to provide in the terms of an Option that there will be an acceleration of exercisability upon the occurrence of certain types of Terminations of Employment. (5) REPLACEMENT OPTIONS The Committee, in its absolute discretion, may grant to holders of outstanding Options, in exchange for the surrender and cancellation of such Options, new Options having option prices lower (or higher) than the option price provided in the Options so surrendered and cancelled and containing such other terms and conditions as the Committee may deem appropriate. (6) EXPIRATION OF OPTIONS (A) Each Option shall terminate upon the first to occur of the events listed in subparagraph (B) of this section 4(b)(6). Notwithstanding any contrary provision of the Plan, no Incentive Stock Option may be exercised after the expiration of 10 years from the date such Incentive Stock Option was granted. (B) (i) The date for termination of the Option set forth in the written stock option agreement, subject to the provisions of clause (vi), below; or (ii) The expiration of ten years from the date the Option was granted, subject to the provisions of clause (vi), below; or (iii) Except as provided in clause (vii) below, the expiration of three months from the date of the Optionee's Termination of Employment unless such Termination of Employment results from the Optionee's death, Total Disability or Retirement, subject to the provisions of clause (vi) below; or (iv) The expiration of three years from the date of the Optionee's Termination of Employment by reason of Total Disability; provided that no Incentive Stock Option may be exercised after the expiration of one year from the Optionee's Termination of Employment by reason of Total Disability, subject in each case to the provisions of clause (vi) below; or (v) The expiration of three years from the date of the Optionee's Retirement; provided that no Incentive Stock Option may be exercised after the expiration of three months from the date of the Optionee's Retirement, subject in each case to the provisions of clause (vi) below; or (vi) The expiration of one year from the date of the Optionee's death, if such death occurs while the Optionee is in the employ of the Company or an Affiliate or within the three-month, one-year or three-year period referred to in (iii), (iv) or (v) above, or within the one-year period referred to in (vii) below, whichever is applicable; or (vii) The expiration of one year from the date of the Optionee's Termination of Employment if the Optionee's Termination of Employment occurs within one year after a Change of Control unless such Termination of Employment results from the Optionee's death, Total Disability or Retirement. (C) Subject to the provisions of subparagraphs (A) and (B) of this Section 4(b)(6), the Committee shall provide, in the terms of each individual Option, when such Option expires and becomes unexercisable. (7) CONSIDERATION In consideration of the granting of the Option, the Optionee shall agree, in the written stock option agreement, to remain in the employ of the Company or an Affiliate for a period of at least one year after the Option is granted. (8) ADJUSTMENTS IN OUTSTANDING OPTIONS In the event that the outstanding shares of the stock subject to Options are increased or decreased or changed into or exchanged for a different number or kind of shares of the Company, or other securities of the Company, or of another corporation, by reason of reorganization, merger, consolidation, recapitalization, reclassification, stock split-up, stock dividend, spin-off or combination of shares, the Committee shall make an appropriate and equitable adjustment in the number and kind of shares as to which all outstanding Options, or portions thereof then unexercised, shall be exercisable, to the end that after such event the Optionee's proportionate interest shall be maintained as before the occurrence of such event. Such adjustment in an outstanding Option shall be made without change in the total price applicable to the Option or the unexercised portion of the Option (except for any change in the aggregate price resulting from rounding-off of share quantities or prices) and with any necessary corresponding adjustment in Option price per share and provided that any such adjustment in respect to an Incentive Stock Option shall be made in such manner as not to constitute a "modification" as defined in Section 424 of the Code. Any such adjustment made by the Committee shall be final and binding upon all Optionees, the Company and all other interested persons. (9) EFFECT OF A CHANGE OF CONTROL Notwithstanding the provisions of Section 4(b)(4), but subject to the provisions of Section 1(o) (regarding Optionees who have incurred a Termination of Employment), immediately upon the occurrence of a Change of Control, the right to exercise each Option then outstanding shall accrue as to 100% of the shares then subject to such Option. (10) CERTAIN ADDITIONAL PROVISIONS FOR INCENTIVE STOCK OPTIONS Notwithstanding anything to the contrary in this Plan, each Incentive Stock Option must meet the following requirements: (A) The Optionee at the time the Option is granted is an Employee of the Company or a Subsidiary of the Company. (B) The Optionee (together with persons whose stock ownership is attributed to the Optionee pursuant to Section 424(d) of the Code) at the time the Option is granted does not own stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or of any of its Subsidiaries. (C) The aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exerciseable for the first time by any Employee during any calendar year (under all plans of the Company and its Subsidiaries) shall not exceed $100,000. (D) The Option may not be exercised after the expiration of three months after the Optionee ceases to be employed by the Company or a Subsidiary. (c) EXERCISE OF OPTIONS (1) PERSONS ELIGIBLE TO EXERCISE During the lifetime of the Optionee, only he or she may exercise an Option granted to him or her or any portion thereof. After the death of the Optionee, any exercisable portion of an Option may be exercised by the Optionee's designated beneficiary (if beneficiary designations are permitted by the Committee), the person empowered to do so under the Optionee's will, or the appropriate person under applicable law. The Company may require appropriate proof from any such other person of his or her right or power to exercise the Option or any portion thereof. (2) FRACTIONAL SHARES; PARTIAL EXERCISE The Company shall not be required to issue fractional shares on exercise of an Option and the Committee may, by the terms of the Option, require any partial exercise thereof to be with respect to a specified minimum number of shares. (3) MANNER OF EXERCISE An exercisable Option, or any exercisable portion thereof, may be exercised solely by delivery to the Secretary or his or her office of all of the following: (A) Notice in writing signed by the Optionee or other person then entitled to exercise such Option or portion thereof, stating that such Option or portion is exercised, such notice complying with all applicable rules established by the Committee; (B) Full cash payment for the shares with respect to which such Option or portion is thereby exercised and which are to be delivered to him or her pursuant to such exercise; provided, at the discretion of the Committee, payment may be made in whole or in part in shares of stock of the Company which stock will be valued at its then Fair Market Value as determined by the Committee or in whole or in part pursuant to such other arrangement, including any deferred payment arrangement, as the Committee, in its absolute discretion, determines. (C) Such representations and documents as the Committee, in its absolute discretion, deems necessary or advisable to effect compliance with all applicable provisions of the Securities Act of 1933, as amended, and any other federal or state securities laws or regulations. The Committee may, in its absolute discretion, also take whatever additional actions it deems appropriate to effect such compliance including, without limitation, placing legends on share certificates and issuing stop-transfer orders to transfer agents and registrars. (4) RIGHT TO ELECT TO PAY PROFIT OR TO CREDIT PROFIT IN LIEU OF DELIVERING OPTION SHARES The Committee, in its absolute discretion, may elect (in lieu of delivering all or a portion of the shares of Common Stock as to which an Option has been exercised) if the fair market value of the Common Stock exceeds the exercise price of the option (i) to pay the Optionee in cash or in shares of the Company's Common Stock, or a combination of cash and Common Stock, an amount equal to the excess of the Fair Market Value of the Company's Common Stock on the exercise date over the Option Price or, in the case of an option which is not an Incentive Stock Option, (ii) to defer payment and to credit the amount of such excess on the Company's books for the account of the Optionee and either (a) to treat the amount in such account as if it had been invested in the manner from time to time determined by the Committee, with dividends or other income thereon being deemed to have been so reinvested or (b) for the Company's convenience, to contribute the amount in such account to a trust, which may be revocable by the Company, for investment in the manner from time to time determined by the Committee and set forth in the instrument creating such trust. The Committee's election pursuant to this Section 4(c)(4) shall be made by giving written notice to the Optionee (or other person exercising the Option). Shares of the Company's Common Stock paid pursuant to this subparagraph will be valued at the Fair Market Value on the exercise date. For purposes of the limitations in Section 3(a), the number of shares which are paid or credited pursuant to this Section 4(c)(4) shall not be counted, but the full number of shares as to which the Option was exercised shall be counted even though the Committee has made an election under this Section 4(c)(4) in respect to some or all of the shares. (5) CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES The shares of stock deliverable upon exercise of an Option, or any part thereof, may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. The Company shall not be required to issue or deliver any certificate or certificates for shares of stock purchased upon the exercise of any Option or portion thereof prior to fulfillment of all of the following conditions: (A) The admission of such shares to listing on all stock exchanges on which such class of stock is then listed; (B) The completion of any registration or other qualification of such shares under any state or federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Company shall, in its absolute discretion, deem necessary or advisable; (C) The obtaining of any approval or other clearance from any state or federal governmental agency which the Company shall, in its absolute discretion, determine to be necessary or advisable; (D) The provision for any income tax withholding which the Company shall, in its absolute discretion, determine to be necessary or advisable; and (E) The lapse of such reasonable period of time following the exercise of the Option as the Company may determine, in its absolute discretion, from time to time to be necessary or advisable for reasons of administrative convenience. (6) RIGHTS OF STOCKHOLDERS An Optionee shall not be, nor have any of the rights or provisions of, a stockholder of the Company in respect to any shares which may be purchased upon the exercise of any Option or portion thereof unless and until certificates representing such shares have been issued by the Company to such Optionee. 5 -- AWARDS (a) ELIGIBILITY Any key Employee of the Company or of any corporation which is then an Affiliate shall be eligible to be granted Awards. (b) AWARD PROCEDURE The Committee shall from time to time in its absolute discretion: (1) Select from among the eligible key Employees the Employees to whom Awards shall be granted, determine whether such Awards are to be Restricted Stock Awards or Restricted Unit Awards (or both) and determine the number of shares or units to be covered by such Awards; and (2) Determine the terms and conditions of such Awards, consistent with the Plan. (c) AWARD AGREEMENTS Each Award shall be evidenced by a written agreement, executed by the Grantee and the Company, which shall contain such restrictions, terms and conditions as the Committee may require and (without limiting the generality of the foregoing) such agreements reflecting Restricted Stock Awards may impose an escrow condition and/or require that an appropriate legend be placed on share certificates. (d) RESTRICTED STOCK AWARDS (1) SHARES SUBJECT TO AWARD The shares of stock awards as a Restricted Stock Award may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. Such awarded shares shall be issued in the name of the Grantee and delivered to him or her (or the escrow holder, if any) as soon as reasonably practicable after the Award is made (and after the Grantee has executed the Award agreement and any other documents which the Committee, in its absolute discretion, may require) without the payment of any cash consideration by such Grantee. Unless and until the shares so awarded to the Grantee shall have vested in the manner set forth in Section 5(f) below, such shares shall not be sold, transferred or otherwise disposed of and shall not be pledged or otherwise hypothecated. Except as determined by the Committee pursuant to Section 5(f) hereof, upon the Termination of Employment of the Grantee, all of such shares which are not then vested shall thereupon be forfeited and automatically transferred to and reacquired by the Company at no cost to the Company. The Committee may also impose such other restrictions and conditions on the shares as it deems appropriate. (2) RIGHTS AS STOCKHOLDER (A) Except as provided in subparagraphs (B) and (C) of this section 5(d)(2), upon delivery of the shares of stock awarded to the Grantee (or the escrow holder, if any) as a Restricted Stock Award, the Grantee shall have all the rights of a stockholder with respect to such shares, including the right to vote the shares and receive all dividends, or other distributions paid or made with respect to the shares. (B) In the event that as a result of a stock dividend, stock split, reclassification, recapitalization, combination of shares or the adjustment in capital stock of the Company or otherwise, or as a result of a merger, consolidation, spin-off or other reorganization, the Company's Common Stock shall be increased, reduced or otherwise changed, and by virtue of any such change a Grantee shall in his or her capacity as owner of unvested shares of Restricted Stock which have been awarded to him or her (the "Prior Shares") be entitled to new or additional or different shares of stock or securities (other than rights or warrants to purchase securities); such new or additional or different shares or securities shall thereupon be considered to be unvested Restricted Stock and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan.. (C) If a Grantee receives rights or warrants with respect to any Prior Shares, such rights or warrants may be held or exercised by the Grantee, provided that until such exercise any such rights or warrants and after such exercise any shares or other securities acquired by the exercise of such rights or warrants shall be considered to be unvested Restricted Stock and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan.. (D) The Committee in its absolute discretion at any time may accelerate the vesting of all or any portion of the new or additional shares of stock or securities, rights or warrants to purchase securities or shares or other securities acquired by the exercise of such rights or warrants received or entitled to be received by a Grantee in respect of Prior Shares. (e) RESTRICTED UNIT AWARDS (1) RESTRICTED UNIT ACCOUNT In the case of Restricted Unit Awards, no shares of Company stock shall be issued to the Grantee at the time the Award is made, and no fund shall be set aside by the Company for the payment of any such Award; but rather the Company shall establish and maintain a separate written account for each Grantee and shall record in such account the number of Restricted Units awarded to such Grantee. Whenever the Company pays a cash dividend upon its Common Stock, there shall be credited to each such Grantee's account an amount equal to the cash dividend paid upon one share of Common Stock for each Restricted Unit then in his or her account (hereinafter referred to as "Dividend Equivalents"). (2) PAYMENT OF RESTRICTED UNITS Each Restricted Unit Award agreement shall specify a date or dates on which payment of the value of vested Restricted Units (and Dividend Equivalents with respect to such vested Restricted Units) in the Grantee's account is to be made. As soon as reasonably practicable after the payment date, the Company shall deliver to the Grantee one share of the Company's Common Stock for each vested Restricted Unit credited to his or her account and cash equal to the vested Dividend Equivalents credited to his or her account; provided, however, that the Committee may, in its absolute discretion, elect to pay the Grantee cash or part cash and part Common Stock in lieu of delivering only Common Stock for the vested Restricted Units. If a cash payment is made in lieu of delivering Common Stock, the amount of such cash payment shall (in respect to each vested Restricted Unit for which a cash payment is to be made) be equal to the Fair Market Value of the Company's Common Stock on the payment date. The shares of Common Stock delivered in payment, in whole or in part, of a Restricted Unit may be either previously authorized but unissued shares or issued shares which have then been reacquired by the Company. Payments to be made hereunder shall, if the Grantee is then deceased, be made to the Grantee's estate or others as may be designated in writing by the Grantee, with the approval of the Committee. (3) DEFERRAL OF PAYMENT The Restricted Unit Award agreement may permit a Grantee to request the payment of vested Restricted Units (and Dividend Equivalents with respect to such Restricted Units) be deferred beyond the payment date specified in the agreement. It shall be at the Committee's sole discretion whether or not to permit such deferment and to specify the terms and conditions, which are not inconsistent with the Plan, to be contained in the agreement. In the event of such deferment, the Committee may determine that interest shall be credited annually on the Dividend Equivalents at a rate to be determined by the Committee. The Committee may also determine to compound such interest. (4) ADJUSTMENTS IN CAPITALIZATION The Committee shall make an appropriate adjustment in the number or kind of Restricted Units then credited to the account or accounts of any Grantee due to changes in the Company's outstanding Common Stock by reason of a merger, consolidation, spin-off or other reorganization, recapitalization, reclassification, stock split, stock dividend, or combination of shares and any such adjustment made by the Committee shall be final and binding upon all Grantees, the Company and all other interested persons. (5) NO TRUST FUND Grantees of Restricted Unit Awards shall not have any interest in any fund or specific asset of the Company by reason of such Award. No trust fund shall be created in connection with the Plan or any Restricted Unit Award thereunder, and there shall be no required funding of amounts which may become payable under any such Award. (f) VESTING OF AWARDS Shares awarded as Restricted Stock Awards and units awards as Restricted Unit Awards (including Dividend Equivalents with respect to such Restricted Unit Awards) shall vest at such time or time and on such terms, conditions and performance criteria, as the Committee may determine; provided, however, that (i) no such shares or units shall vest until 12 months from the date of Award and (ii) the vesting of such shares or units shall occur only if the Grantee on the date of the vesting is then and has continuously been an Employee from the date of the Award. In the event of Termination of Employment as a result of the death or Total Disability of a Grantee, the Committee, in its absolute discretion, may determine that the unvested portion of some or all shares awarded to him or her as Restricted Stock Awards and some or all units awarded to him or her as Restricted Unit Awards (including unvested Dividend Equivalents) shall thereupon immediately vest. The Committee may also decide at any time in its absolute discretion and on such terms and conditions as it deems appropriate, to accelerate the vesting of shares awarded as Restricted Stock Awards and units awarded as Restricted Unit Awards (including unvested Dividend Equivalents). 6 -- MISCELLANEOUS PROVISIONS (a) OPTIONS AND AWARDS NOT TRANSFERABLE All rights with respect to an Option or Award shall be available during the lifetime of the Optionee or Grantee only to him or her. No Option or Award may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will, by the laws of descent and distribution, or if permitted by the Committee, to the limited extent provided in the rest of this Section 6(a). Pursuant to such procedures as the Committee may designate from time to time, an Optionee or Grantee may name a beneficiary or beneficiaries to whom any vested but unpaid Option or Award shall be transferred in the event of the death of the Optionee or Grantee. Each beneficiary designation shall revoke all prior designations and shall be effective only if given in a form and manner acceptable to the Committee. A beneficiary designation shall not be effective unless it is a bona fide bequest which is not made for consideration. (b) EMPLOYMENT Nothing in the Plan or in any Option or Award shall confer upon any Employee the right to continue in the employ of the Company or any Affiliate or shall interfere with or restrict in any way the rights of the Company and Affiliates to discharge any Employee at any time for any reason whatsoever, with or without good cause. (c) SATISFACTION OF TAX WITHHOLDING REQUIREMENTS Whenever an Optionee or Grantee is required to pay to the Company an amount required to be withheld under applicable federal and state income tax laws in connection with receipt of shares of the Company's Common Stock upon exercises of Options or Awards, the Committee may, in its absolute discretion, permit the Optionee or Grantee to satisfy such obligation, in whole or in part, by electing to have the Company withhold shares of the Company's Common Stock having a value equal to the amount required to be withheld or by delivering to the Company already-owned shares to satisfy the withholding requirement. The amount of the withholding requirement shall be deemed to include any amount which the Committee agrees may be withheld at the time the election is made, not to exceed the amount determined by using the maximum federal, state and local marginal income tax rates applicable to the Optionee or Grantee with respect to the exercise of the Option or Award on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). The value of the shares to be withheld or delivered will be based on their Fair Market Value on the Tax Date. Such elections will be subject to the following restrictions: (1) the election must be made on or before the Tax Date; (2) the election will be irrevocable; and (3) the election will be subject to the disapproval of the Committee. Each election by an Optionee or Grantee whose transactions in shares of Common Stock are subject to Section 16(b) of the Securities Exchange Act of 1934 will be subject to the following additional restrictions: (1) the election may not be made within six months of the grant of the Option or Award (except that this limitation will not apply in the event the death or disability of the Optionee or Grantee occurs prior to the expiration of the six-month period), and (2) the election must be made either at least six months before the Tax Date or within a ten-day "window period" beginning on the third day following the release of the Company's quarterly or annual summary statement of sales and earnings. (d) EFFECT OF A CHANGE OF CONTROL Notwithstanding the provisions of Sections 5(d)(1) and 5(f), but subject to the provisions of Section 1(o) (regarding Grantees who have incurred a Termination of Employment), immediately upon the occurrence of a Change of Control, each Award (or portion thereof) which is then outstanding but unvested, shall vest. (e) AMENDMENT, SUSPENSION, OR TERMINATION OF THE PLAN The Board or the Committee, each in its sole discretion, may alter, amend or terminate the Plan, or any part thereof, at any time and for any reason. However, only if and to the extent required to maintain the Plan's qualification under Rule 16b-3, any such amendment shall be subject to stockholder approval. In addition, as required by Rule 16b-3, the provisions of Section 7 regarding the formula for determining the amount, exercise price, and timing of Nonemployee Director Options shall in no event be amended more than once every six months, other than to comport with changes in the Code and/or ERISA. (ERISA is not applicable to the Plan.) Neither the amendment, suspension, nor termination of the Plan shall, without the consent of the Optionee or the Grantee, alter or impair any rights or obligations under any Option or Award theretofore granted. No Option or Award may be granted during any period of suspension nor after termination of the Plan, and in no event may any Option intended to be an Incentive Stock Option be granted under this Plan after January 26, 2004. (f) EFFECT UPON OTHER COMPENSATION PLANS The adoption of this Plan shall not affect any other stock option, compensation or incentive plans in effect for the Company or any Affiliate and this Plan shall not preclude the Board from establishing any other forms of incentive or compensation for Employees of the Company or any Affiliates. (g) TITLES Titles are provided herein for convenience only and are not to serve as a basis for interpretation or construction of the Plan. 7 -- NONEMPLOYEE DIRECTORS (a) GRANTING OF OPTIONS (i) For purposes of this Section 7(a), the term "Daily Mean" shall mean the mean between the highest and lowest sale prices of the Company's Common Stock quoted in the New York Stock Exchange Composite Transactions Index for the date in question, as published in The Wall Street Journal. (ii) For purposes of this Section 7(a), the term "Window Period" shall mean the period of ten business days which begins on the third business day following the release of the Company's summary statement of sales and earnings for the immediately preceding fiscal year, and which ends on the twelfth business day following such release. (iii) For purposes of this Section 7(a), the term "Grant Date" shall mean the latest business day during a Window Period on which the Daily Mean for that date equals or most closely approximates the arithmetic mean of all of the Daily Means for all of the business days during the Window Period. (iv) Each Nonemployee Director who is a Nonemployee Director on January 27, 1994 and is such as of the next occurring Grant Date, automatically will receive, as of such Grant Date only, an Option to purchase 1,500 shares of Common Stock.. (v) Each Nonemployee Director who becomes a Nonemployee Director after January 27, 1994 and who is such as of the next occurring Grant Date, automatically will receive, as of such Grant Date only, an Option to purchase 1,500 shares of Common Stock. (vi) Each continuing Nonemployee Director (i.e., a Nonemployee Director who, pursuant to Section 7(a)(iv) or (v), has received an initial grant of an Option to purchase 1,500 shares of Common Stock) automatically will receive, on each subsequent Grant Date on which the Nonemployee Director is such, an Option to purchase 1,500 shares of Common Stock. (b) TERMS OF OPTIONS (1) OPTION AGREEMENT Each Option shall be evidenced by a written stock option agreement which shall be executed by the Optionee and the Company. (2) OPTION PRICE The price of the shares subject to each Option shall be the Fair Market Value for such shares on the date that the Option is granted. (3) EXERCISABILITY Each Option shall be exercisable in full commencing six months after the date that the Option is granted, provided that each Option granted during 1994 shall be exercisable in full commencing six months after the 1994 Annual Meeting of Stockholders. (4) EXPIRATION OF OPTIONS (A) Each Option shall terminate upon the first to occur of the events listed in subparagraph (B) of this Section 7(b)(4). (B) (i) The expiration of ten years and one month from the date the Option was granted, subject to the provisions of clause (v), below; or (ii) The expiration of three months from the date of the Optionee's termination of service as a Director, unless such termination of service results from the Optionee's death, Total Disability or Retirement, subject to the provisions of clause (v) below; (iii) The expiration of three years from the date of the Optionee's termination of service as a Director by reason of Total Disability, subject to the provisions of clause (v) below; (iv) The expiration of three years from the date of the Optionee's Retirement, subject to the provisions of clause (v) below; or (v) The expiration of one year from the date of the Optionee's death, if such death occurs while the Optionee is a Director or within the three-month or three-year period referred to in (ii), (iii) or (iv), above. (5) ADJUSTMENTS IN OUTSTANDING OPTIONS The number of shares and price per share of each Option, and the number of shares subject to each grant provided by this Section 7 shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of Common Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend or any other increase or decrease in the number of issued and outstanding shares of Common Stock effected without receipt of consideration by the Company. If the Company shall be the surviving corporation in any merger or consolidation, each Option shall pertain to and apply to the securities to which a holder of the same number of shares of Common Stock that are subject to that Option would have been entitled. A dissolution or liquidation of the company, or a merger or consolidation in which the Company is not the surviving corporation, shall cause each Option to terminate, unless the agreement of merger or consolidation shall otherwise provide. (6) INCENTIVE STOCK OPTIONS Options shall not be designated as Incentive Stock Options. (7) OTHER TERMS All provisions of the Plan not inconsistent with this Section 7 shall apply to Options granted to Nonemployee Directors; provided, however, that Section 4(c)(4) (relating to the settlement of Options in cash), and Section 5 (relating to Awards) shall be inapplicable with respect to Nonemployee Directors. (c) ADMINISTRATION Notwithstanding the provisions of Section 2, the Committee shall exercise no discretion with respect to interpretation or administration of this Section 7 or of Options granted under this Section 7. Section 7 shall be administered by the Board. The Board shall have the power to construe Section 7, to determine all questions arising thereunder, and to adopt and amend such rules and regulations for the administration of Section 7 as it may deem desirable. The interpretation and construction by the Board of any provision of Section 7 or of any Option granted thereunder shall be final. No member of the Board shall be liable for any action or determination made in good faith with respect to this Section 7 or any Option granted thereunder. The interpretation and construction by the Board of any provision of Section 7 or of any option granted thereunder shall be final. No member of the Board shall be liable for any action or determination made in good faith with respect to this Section 7 or any Option granted thereunder. (d) APPLICATION OF SECTION The provisions of this Section 7 shall be applicable only to Options granted pursuant to this Section 7. EX-10.7 3 Exhibit 10.7 [FORM OF STANDARD (100% OF FAIR MARKET VALUE) OPTION AGREEMENT] THE 1985 STOCK OPTION AND AWARD PLAN OF TRANSAMERICA CORPORATION NONQUALIFIED STOCK OPTION AGREEMENT Transamerica Corporation (the "Company") hereby grants you, [NAME OF EMPLOYEE] (the "Employee"), a nonqualified stock option under the Company's 1985 Stock Option and Award Plan (the "Plan"), to purchase shares of common stock of the Company ("Shares"). The date of this Agreement is [DATE] (the "Grant Date"). In general, the latest date this option will expire is [DATE 10 YEARS AFTER GRANT DATE] (the "Expiration Date"). However, as provided in Appendix A (attached hereto), this option may expire earlier than the Expiration Date. Subject to the provisions of Appendix A and of the Plan, the principal features of this option are as follows: Maximum Number of Shares Purchasable with this Option: [NUMBER A] Purchase Price per Share:$[NUMBER B] Scheduled Vesting Dates: Number of Shares: [DATE 1 YEAR FROM GRANT DATE] [25% OF NUMBER A] [DATE 2 YEARS FROM GRANT DATE] [25% OF NUMBER A] [DATE 3 YEARS FROM GRANT DATE] [25% OF NUMBER A] [DATE 4 YEARS FROM GRANT DATE] [25% OF NUMBER A] Event Triggering Maximum Time to Exercise Termination of Option: After Triggering Event*: Termination of Employment within 1 year of Grant Date None Termination of Employment due to Disability 3 years Termination of Employment due to Retirement 3 years Termination of Employment due to death 1 year Termination of Employment within 1 year after a Change of Control for a reason other than Disability, Retirement or death 1 year All other Terminations of Employment 3 months * However, in no event may this option be exercised after the Expiration Date (except in certain cases of the death of the Employee). Your signature below indicates your agreement and understanding that this option is subject to all of the terms and conditions contained in Appendix A and the Plan. For example, important additional information on vesting and termination of this option is contained in Paragraphs 5 through 8 of Appendix A. ACCORDINGLY, PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS OPTION. TRANSAMERICA CORPORATION EMPLOYEE By ------------------------ ------------------------ Title: [NAME] APPENDIX A TERMS AND CONDITIONS OF NONQUALIFIED STOCK OPTION 1. Grant of Option. The Company hereby grants to the Employee under the Plan, as a separate incentive in connection with his or her employment and not in lieu of any salary or other compensation for his or her services, a nonqualified stock option to purchase, on the terms and conditions set forth in this Agreement and the Plan, all or any part of an aggregate of [NUMBER A] Shares. 2. Exercise Price. The purchase price per Share for this option (the "Exercise Price") shall be $[NUMBER B], which is the Fair Market Value of a Share on the Grant Date. 3. Number of Shares. The number and class of Shares specified in Paragraph 1 above, and/or the Exercise Price, are subject to adjustment by the Committee in the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, distribution or other change in the corporate structure of the Company affecting the Shares (an "Event"). Any such adjustment shall be made by the Committee as constituted immediately prior to the applicable Event (the "Applicable Committee") and shall be designed so that if the Employee (or any beneficiary) exercises this option after an Event, he or she shall receive (upon payment of the Exercise Price for each Share exercised) the securities and any other property (other than regular cash dividends) which the Employee (or beneficiary) would have been entitled to had he or she instead acquired the Shares on the Grant Date and held them through the date of exercise. Notwithstanding the preceding, (a) the number of Shares subject to this option always shall be a whole number, and (b) if the Applicable Committee determines that the delivery of securities or other property (other than Shares) from any such adjustment would create an undue burden or expense, the Employee (or beneficiary) instead shall receive a lump sum cash payment equal to the fair market value (as determined by the Applicable Committee) of such securities or other property. 4. Consideration. Subject to the provisions of Paragraph 14 below, the Employee agrees to remain in the employ of the Company and/or an Affiliate for at least one (1) year after the Grant Date. This option may not be exercised as to any Shares subject thereto unless and until the expiration of such one (1) year period. In the event of the Employee's Termination of Employment for any reason during such one (1) year period, this option shall terminate and all rights hereunder shall cease. 5. Vesting Schedule. Except as otherwise provided in this Agreement, the right to exercise this option will vest as to twenty-five percent (25)% of the Shares specified in Paragraph 1 above on the first anniversary date of the Grant Date, and as to an additional twenty-five percent (25%) on each succeeding anniversary date, until the right to exercise this option shall have vested with respect to one hundred percent (100%) of such Shares. Shares scheduled to vest on any such anniversary date actually will vest only if the Employee has not incurred a Termination of Employment prior to such date. 6. Effect of Change of Control. Notwithstanding any contrary provision of this Agreement, immediately upon the occurrence of a Change of Control prior to the Employee's Termination of Employment, the right to exercise this option shall vest as to one hundred percent (100%) of the Shares subject thereto. 7. Termination of Option. Except as provided in the last sentence of this Paragraph 7, in the event of the Employee's Termination of Employment for any reason other than Retirement, Disability or death, the Employee may, within three (3) months after the date of such Termination, or prior to the Expiration Date, whichever shall first occur, exercise any vested but unexercised portion of this option. In the event of the Employee's Termination of Employment due to Disability, the Employee may, within three (3) years after the date of such Termination, or prior to the Expiration Date, whichever shall first occur, exercise any vested but unexercised portion of this option. In the event of the Employee's Termination of Employment due to Retirement, the Employee may, within three (3) years from the date of such Termination, or prior to the Expiration Date, whichever shall first occur, exercise any vested but unexercised portion of this option. In the event of the Employee's Termination of Employment within one year after a Change of Control for any reason other than Retirement, Disability or death, the Employee may, within one (1) year after the date of such Termination, or prior to the Expiration Date, whichever shall first occur, exercise any vested but unexercised portion of this option. 8. Death of Employee. In the event that the Employee dies while in the employ of the Company and/or an Affiliate or during the three (3) month, three (3) year or one (1) year periods referred to in Paragraph 7 above, the Employee's designated beneficiary, or if no beneficiary survives the Employee, the administrator or executor of the Employee's estate, may, within one (1) year after the date of death, exercise any vested but unexercised portion of the option. Any such transferee must furnish the Company (a) written notice of his or her status as a transferee, (b) evidence satisfactory to the Company to establish the validity of the transfer of this option and compliance with any laws or regulations pertaining to such transfer, and (c) written acceptance of the terms and conditions of this option as set forth in this Agreement. 9. Persons Eligible to Exercise Option. This option shall be exercisable during the Employee's lifetime only by the Employee. The option shall not be transferable by the Employee, except by (a) a valid beneficiary designation made in a form and manner acceptable to the Committee, or (b) will or the applicable laws of descent and distribution. 10. Exercise of Option. This option may be exercised by the person then entitled to do so as to any Shares which may then be purchased (a) by giving written notice of exercise to the Secretary of the Company (or his or her designee), specifying the number of full Shares to be purchased and accompanied by full payment of the Exercise Price (and the amount of any income tax the Company determines is required to be withheld by reason of such exercise), and (b) by giving satisfactory assurances in writing if requested by the Company, signed by the person exercising the option, that the Shares to be purchased upon such exercise are being purchased for investment and not with a view to the distribution thereof. In the absolute discretion of the Committee, the person entitled to exercise the option may elect to satisfy the income tax withholding requirement described in subparagraph (a) above by having the Company withhold Shares or by delivering to the Company already-owned Shares. No partial exercise of this option may be for less than ten (10) Share lots or multiples thereof. 11. Discretion to Pay Appreciation Value. The Committee, in its absolute discretion, may elect (in lieu of accepting the exercise price tendered and delivering the Shares as to which the option has been exercised) to pay the Employee in cash or in Shares, or a combination of cash and Shares, an amount equal to the amount by which the Fair Market Value of the Shares exceeds the exercise price of the option (the "Appreciation Value"). The Committee's election to pay the Appreciation Value pursuant to this paragraph 11 shall be made by giving written notice to the Employee (or other person exercising the option). 12. Suspension of Exercisability. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of the Shares upon any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory authority, is necessary or desirable as a condition of the purchase of Shares hereunder, this option may not be exercised, in whole or in part, unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company. The Company shall make reasonable efforts to meet the requirements of any such state or federal law or securities exchange and to obtain any such consent or approval of any such governmental authority. 13. No Rights of Stockholder. Neither the Employee (nor any beneficiary) shall be or have any of the rights or privileges of a stockholder of the Company in respect of any of the Shares issuable pursuant to the exercise of this option, unless and until certificates representing such Shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Employee (or beneficiary). 14. No Effect on Employment. The Employee's employment with the Company and its Affiliates is on an at-will basis only. Accordingly, subject to any written, express employment contract with the Employee, nothing in this Agreement or the Plan shall confer upon the Employee any right to continue to be employed by the Company or any Affiliate or shall interfere with or restrict in any way the rights of the Company or the Affiliate, which are hereby expressly reserved, to terminate the employment of the Employee at any time for any reason whatsoever, with or without good cause. Such reservation of rights can be modified only in an express written contract executed by a duly authorized officer of the Company or the Affiliate employing the Employee. For purposes of this Agreement, the transfer of employment of the Employee between the Company and any one of its Affiliates (or between Affiliates) shall not be deemed a Termination of Employment. 15. Address for Notices. Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, in care of its Secretary, at 600 Montgomery Street, San Francisco, California 94111, or at such other address as the Company may hereafter designate in writing. 16. Option is Not Transferable. Except as otherwise expressly provided herein, this option and the rights and privileges conferred hereby may not be transferred, pledged, assigned or otherwise hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, pledge, assign, hypothecate or otherwise dispose of this option, or of any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this option and the rights and privileges conferred hereby immediately shall become null and void. 17. Other Benefits. Except as provided below, nothing contained in this Agreement shall affect the Employee's right to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance or other employee welfare plan or program of the Company or any Affiliate. Notwithstanding any contrary provision of this Agreement, in the event that the Employee receives a hardship withdrawal from his or her pre-tax account under the Company's Employees Stock Savings Plan (the "SSP"), this option may not be exercised during the twelve (12) month period following the receipt of such withdrawal, unless the Committee determines that such exercise (or a particular manner of exercise) would not adversely affect the continued tax qualification of the SSP. 18. Maximum Term of Option. Notwithstanding any other provision of this Agreement except Paragraph 8 above relating to the death of the Employee (in which case this option is exercisable to the extent set forth therein), this option is not exercisable after the Expiration Date. 19. Binding Agreement. Subject to the limitation on the transferability of this option contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto. 20. Conditions to Exercise. The Exercise Price for this option must be paid in the legal tender of the United States or, in the Committee's sole discretion, in Shares of equivalent value. Exercise of this option will not be permitted until satisfactory arrangements have been made for the payment of the appropriate amount of withholding taxes (as determined by the Company). 21. Plan Governs. This Agreement is subject to all of the terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Plan, the provisions of the Plan shall govern. Capitalized terms and phrases used and not defined in this Agreement shall have the meaning set forth in the Plan. 22. Committee Authority. The Committee shall have all discretion, power, and authority to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Employee, the Company and all other interested persons, and shall be given the maximum deference permitted by law. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. 23. Captions. The captions provided herein are for convenience only and are not to serve as a basis for the interpretation or construction of this Agreement. 24. Agreement Severable. In the event that any provision in this Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement. 25. Modifications to the Agreement. This Agreement constitutes the entire understanding of the parties on the subjects covered. The Employee expressly warrants that he or she is not executing this Agreement in reliance on any promises, representations, or inducements other than those contained herein. Modifications to this Agreement or the Plan can be made only in an express written contract executed by a duly authorized officer of the Company. EX-10.9 4 Exhibit 10.9 TRANSAMERICA CORPORATION Restricted Stock Agreement Transamerica Corporation (the "Company") hereby grants you, [NAME OF EMPLOYEE] (the "Employee"), a grant of Restricted Stock under the Company's 1985 Stock Option and Award Plan (the "Plan"). The date of this Agreement is [DATE] (the "Grant Date"). Subject to the provisions of Appendix A (attached) and of the Plan, the principal features of this grant are as follows: Total Number of Shares of Restricted Stock: [NUMBER A] Scheduled Vesting Dates: Number of Shares [DATE 1 YEAR FROM GRANT DATE] [____% of NUMBER A] [DATE 2 YEARS FROM GRANT DATE] [____% of NUMBER A] [DATE 3 YEARS FROM GRANT DATE] [____% of NUMBER A] Your signature below indicates your agreement and understanding that this grant is subject to all of the terms and conditions contained in Appendix A and the Plan. For example, important additional information on vesting and forfeiture of the shares covered by this grant is contained in Paragraphs 3 through 6 of Appendix A. PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS AGREEMENT. TRANSAMERICA CORPORATION EMPLOYEE By:___________________________ ______________________________ Title: [NAME] Date: ________________________ Date: ________________________ APPENDIX A TERMS AND CONDITIONS OF RESTRICTED STOCK 1. Grant. The Company hereby grants to the Employee under the Plan for past services and as a separate incentive in connection with his or her employment and not in lieu of any salary or other compensation for his or her services, an award of [NUMBER A] shares of Restricted Stock on the date hereof, subject to all of the terms and conditions in this Agreement and the Plan. 2. Shares Held in Escrow. Unless and until the shares of Restricted Stock shall have vested in the manner set forth in paragraphs 3, 4 or 5, such shares shall be issued in the name of the Employee and held by the Secretary of the Company as escrow agent (the "Escrow Agent"), and shall not be sold, transferred or otherwise disposed of, and shall not be pledged or otherwise hypothecated. The Company may instruct the transfer agent for its Common Stock to place a legend on the certificates representing the Restricted Stock or otherwise note its records as to the restrictions on transfer set forth in this Agreement and the Plan. The certificate or certificates representing such shares shall not be delivered by the Escrow Agent to the Employee unless and until the shares have vested and all other terms and conditions in this Agreement have been satisfied. 3. Vesting Schedule. Except as provided in paragraphs 4 and 5, and subject to paragraph 6, the shares of Restricted Stock awarded by this Agreement shall vest in the Employee, as to ____% of such shares on the first anniversary of the date of this Award, and as to an additional ____% on each succeeding anniversary date, until 100% of such shares shall have been vested. Immediately upon the determination of the Committee that a Change in Control of the Company has occurred, or in the event of the liquidation or dissolution of the Company, the Restricted Stock awarded by this Agreement shall be 100% vested, notwithstanding the provisions of the foregoing paragraph or paragraph 6 of this Agreement. Shares of Restricted Stock shall not vest in the Employee in accordance with any of the provisions of this Agreement unless the Employee shall have been continuously employed by the Company or by one of its Affiliates from the Grant Date until the date such vesting is deemed to have occurred. 4. Acceleration of Vesting upon Death or Disability. In the event of the Employee's Termination of Employment due to his or her death or Total Disability, the balance of unvested shares awarded by this Agreement shall thereupon immediately vest. Such shares shall be deemed to have vested as of the date of the Termination of Employment. 5. Committee Discretion. The Committee, in its absolute discretion, may accelerate the vesting of the balance, or some lesser portion of the balance, of the unvested shares of Restricted Stock at any time. If so accelerated, such shares shall be considered as having vested as of the date specified by the Committee. 6. Forfeiture. Except as provided in paragraphs 4 and 5, and notwithstanding any contrary provision of this Agreement, the balance of the shares of Restricted Stock which have not vested at the time of the Employee's Termination of Employment shall thereupon be forfeited and automatically transferred to and reacquired by the Company at no cost to the Company. The Employee hereby appoints the Escrow Agent with full power of substitution, as the Employee's true and lawful attorney-in-fact with irrevocable power and authority in the name and on behalf of the Employee to take any action and execute all documents and instruments, including, without limitation, stock powers which may be necessary to transfer the certificate or certificates evidencing such unvested shares to the Company upon such Termination of Employment. 7. Death of Employee. Any distribution or delivery to be made to the Employee under this Agreement shall, if the Employee is then deceased, be made to the Employee's designated beneficiary, or if no beneficiary survives the Employee, to the administrator or executor of the Employee's estate. Any designation of a beneficiary by the Employee shall be effective only if such designation is made in a form and manner acceptable to the Committee. Any transferee must furnish the Company with (a) written notice of his or her status as transferee, and (b) evidence satisfactory to the Company to establish the validity of the transfer and compliance with any laws or regulations pertaining to said transfer. 8. Withholding of Taxes. Notwithstanding any contrary provision of this Agreement, no certificate representing Restricted Stock may be released from the escrow established pursuant to paragraph 2 unless and until the Employee shall have delivered to the Company or its designated Affiliate the full amount of any federal, state or local income or other taxes which the Company or such Affiliate may be required by law to withhold with respect to such shares. The Employee may elect to satisfy any such income tax withholding requirement by having the Company withhold shares of Common Stock otherwise deliverable to the Employee or by delivering to the Company already-owned shares of Common Stock, subject to the absolute discretion of the Committee to disallow satisfaction of such withholding by the delivery or withholding of stock. 9. Rights as Stockholder. Neither the Employee nor any person claiming under or through the Employee shall have any of the rights or privileges of a stockholder of the Company in respect of any shares deliverable hereunder unless and until certificates representing such shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Employee or the Escrow Agent. Except as provided in paragraph 11, after such issuance, recordation and delivery, the Employee shall have all the rights of a stockholder of the Company with respect to voting such shares and receipt of dividends and distributions on such shares. 10. No Effect on Employment. The Employee agrees to remain in the employ of the Company and/or an Affiliate for at least one (1) year after the date of this Agreement. Subject to any employment contract with the Employee, the terms of such employment shall be determined from time to time by the Company, or the Affiliate employing the Employee, as the case may be, and the Company, or the Affiliate employing the Employee, as the case may be, shall have the right, which is hereby expressly reserved, to terminate or change the terms of the employment of the Employee at any time for any reason whatsoever, with or without good cause. A leave of absence or an interruption in service (including an interruption during military service) authorized or acknowledged by the Company, or the Affiliate employing the Employee, as the case may be, shall not be deemed a termination of employment for the purposes of this Agreement. Nothing herein contained shall affect the Employee's right to participate in and receive benefits under and in accordance with the then current provisions of any pension, insurance or other employee welfare plan or program of the Company or any Affiliate. 11. Changes in Stock. In the event that as a result of a stock dividend, stock split, reclassification, recapitalization, combination of shares or the adjustment in capital stock of the Company or otherwise, or as a result of a merger, consolidation, spin-off or other reorganization, the Company's Common Stock shall be increased, reduced or otherwise changed, and by virtue of any such change the Employee shall in his or her capacity as owner of unvested shares of Restricted Stock which have been awarded to him or her (the "Prior Shares") be entitled to new or additional or different shares of stock or securities (other than rights or warrants to purchase securities); such new or additional or different shares or securities shall thereupon be considered to be unvested Restricted Stock and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to this Agreement and the Plan. If the Employee receives rights or warrants with respect to any Prior Shares, such rights or warrants may be held or exercised by the Employee, provided that until such exercise any such rights or warrants and after such exercise any shares or other securities acquired by the exercise of such rights or warrants shall be considered to be unvested Restricted Stock and shall be subject to all of the conditions and restrictions which were applicable to the Prior Shares pursuant to the Plan and this Agreement. The Committee in its absolute discretion at any time may accelerate the vesting of all or any portion of such new or additional shares of stock or securities, rights or warrants to purchase securities or shares or other securities acquired by the exercise of such rights or warrants. 12. Address for Notices. Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, in care of its Secretary, at 600 Montgomery Street, San Francisco, California 94111, or at such other address as the Company may hereafter designate in writing. 13. Grant is Not Transferable. Except as provided in Paragraph 7 above, this grant and the rights and privileges conferred hereby shall not be transferred, assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of this grant, or of any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this grant and the rights and privileges conferred hereby immediately shall become null and void. 14. Binding Agreement. Subject to the limitation on the transferability of this grant contained herein, this Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto. 15. Conditions for Issuance of Certificates for Stock. The shares of stock deliverable to the Employee may be either previously authorized but unissued shares or issued shares which have been reacquired by the Company. The Company shall not be required to issue any certificate or certificates for shares of stock hereunder prior to fulfillment of all the following conditions: (a) the admission of such shares to listing on all stock exchanges on which such class of stock is then listed; and (b) the completion of any registration or other qualification of such shares under any State or Federal law or under the rulings or regulations of the Securities and Exchange Commission or any other governmental regulatory body, which the Committee shall, in its absolute discretion, deem necessary or advisable; and (c) the obtaining of any approval or other clearance from any State or Federal governmental agency, which the Committee shall, in its absolute discretion, determine to be necessary or advisable; and (d) the lapse of such reasonable period of time following the date of grant of the Restricted Stock as the Committee may establish from time to time for reasons of administrative convenience. 16. Plan Governs. This Agreement is subject to all terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Plan, the provisions of the Plan shall govern. Capitalized terms used and not defined in this Agreement shall have the meaning set forth in the Plan. 17. Committee Authority. The Committee shall have the power to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith and to interpret or revoke any such rules. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Employee, the Company and all other interested persons. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. In its absolute discretion, the Board may at any time and from time to time exercise any and all rights and duties of the Committee under the Plan and this Agreement. 18. Captions. Captions provided herein are for convenience only and are not to serve as a basis for interpretation or construction of this Agreement. 19. Agreement Severable. In the event that any provision in this Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement. EX-10.19 5 Exhibit 10.19 TRANSAMERICA CORPORATION 1979 STOCK OPTION PLAN (Working Copy Incorporating Amendment Nos. 1-3) TRANSAMERICA CORPORATION 1979 STOCK OPTION PLAN 1. PURPOSE. This 1979 Stock Option Plan (the "Plan") is intended to increase incentive and to encourage stock ownership on the part of selected key employees of Transamerica Corporation (the "Corporation") or of other corporations which are or become subsidiaries of the Corporation. It is also the purpose of the Plan to provide such employees with a proprietary interest, or to increase their proprietary interest, in the Corporation and its subsidiaries, and to encourage them to remain in the employ of the Corporation or of the subsidiaries. Awards under the Plan may be of (i) stock options alone or (ii) stock appreciation rights in conjunction with stock options. It is intended that certain options granted pursuant to the Plan shall constitute incentive stock options ("incentive stock options") within the meaning of section 422A, or successor provisions, of the Internal Revenue Code of 1986, as amended (the "Code"), and that certain options granted pursuant to the Plan shall not constitute incentive stock options ("non-qualified stock options"). The word "subsidiaries" as used in the Plan shall mean corporations in which the Corporation owns, directly or indirectly, 50 percent or more of the voting stock. 2. STOCK. The stock subject to the Plan shall be the shares of the Corporation's authorized but unissued or reacquired common stock of the par value of $1 per share. The aggregate number of shares which may be issued under the Plan shall not exceed 3,000,000 shares, subject to such adjustments as may be required under the provisions of Section 7 hereof. In the event that any outstanding option under the Plan expires or is terminated for any reason, the shares of common stock allocated to the unexercised portion of such option may again become subject to an option under the Plan. A surrender of all or part of an option in connection with the exercise of a stock appreciation right shall not be considered a termination and the shares covered by such option or the surrendered portion may not be reallocated by the Committee. 3. ADMINISTRATION. The Plan shall be administered by a committee appointed by the Board of Directors (the "Committee"). The Committee shall consist of not less than three (3) members of the Board of Directors of the Corporation, each of whom shall be a person who is not eligible to receive or hold options or stock appreciation rights under the Plan, or any other plan of the Corporation or any of its affiliates entitling participants therein to acquire stock, stock options or stock appreciation rights of the Corporation or any of its affiliates, and who has not been so eligible at any time within one (1) year prior to his or her appointment to the Committee. The Committee is authorized, subject to the provisions of the Plan, to establish such rules and regulations as it may deem appropriate for the proper administration of the Plan, and to make such determinations under, and such interpretations of, and to take such steps in connection with, the Plan or the options or stock appreciation rights granted thereunder as it may deem necessary or advisable. The interpretation and construction by the Committee of any provisions of the Plan or any option or stock appreciation right granted pursuant thereto shall be final, binding and conclusive. 4. ELIGIBILITY AND AWARD OF OPTIONS AND STOCK APPRECIATION RIGHTS. The Committee shall have full and final authority in its discretion, at any time and from time to time, to grant or authorize the granting of options to such officers and other key employees of the Corporation or of its subsidiaries, whether or not members of the Board of Directors, as it may select, and for such numbers of shares as it shall designate. The Committee shall have full and final authority in its discretion to determine whether such options shall be incentive stock options and/or non-qualified stock options and to determine whether incentive stock options and non-qualified stock options shall be awarded pursuant to separate grants or in conjunction with each other subject to Section 17 of the Plan. The aggregate fair market value (determined at the time the option is granted) of the stock with respect to which incentive stock options are exercisable for the first time by any officer or other key employee during any calendar year (under all incentive stock option plans of his or her employer corporation and its parent and subsidiary corporations) shall not exceed $100,000. The Committee shall also have full and final authority in its discretion to grant or authorize the granting of stock appreciation rights in connection with any stock option granted under the Plan either at the time of original grant of the option or by subsequent amendment to the related stock option agreement, and to determine whether the payment upon the exercise of a stock appreciation right shall be in cash or shares of common stock or partly in cash and partly in shares. The Committee may authorize, in its discretion, any officer or officers of the Corporation to grant stock appreciation rights to such employees of the Corporation or its subsidiaries (other than employees who also serve as members of the Board of Directors of the Corporation) as the Committee shall recommend and for up to such maximum numbers of shares as the Committee shall recommend. The date on which an option or stock appreciation right shall be granted shall be the date of the Committee's authorization of such grant or such later date as may be determined by the Committee at the time such grant is authorized. Any individual may hold more than one option or stock appreciation right. 5. TERMS AND CONDITIONS OF OPTIONS. Stock options granted pursuant to the Plan shall be evidenced by agreements in such form as the Committee shall from time to time determine, which agreements shall comply with the following terms and conditions: (A) Optionee's Agreement Each optionee shall agree to remain in the employ of the Corporation or of any subsidiary and to render to such employer his or her services for a period of one (1) year from the date of grant of the option, but such agreement shall not impose upon the Corporation or subsidiary any obligation to retain the optionee in its employ for any period. (B) Number of Shares Each option agreement shall state the number of shares to which the option pertains. The number of shares subject to an option shall be reduced on a proportionate basis to the extent that shares under such option are used to calculate the shares or cash to be received upon exercise of a related stock appreciation right. (C) Option Price Each option agreement shall state the option price per share, which shall be not less than 100% of the fair market value of a share of common stock on the date the option is granted. Fair market value shall mean the last quoted per share selling price for shares of the common stock on the relevant date, as quoted in the New York Stock Exchange Composite Transactions Index published in The Wall Street Journal, or if there were no sales on such date, the last quoted selling price on the nearest day after the relevant date, as determined by the Committee. (D) Medium and Time of Payment The option price shall be payable in the legal tender of the United States or, in the discretion of the Committee, in shares of common stock of the Corporation or in a combination of the legal tender of the United States and shares of common stock of the Corporation, upon the exercise of the option. For purposes of calculating payment of the option price, each share of common stock surrendered in payment of such price shall be valued at its fair market value on the date the option is exercised, which fair market value shall be determined in accordance with the provisions of subsection (C) of this Section 5. Upon receipt of payment, the Corporation shall deliver to the optionee (or the person entitled to exercise the option) a certificate or certificates for the shares of common stock to which the option pertains. (E) Term and Exercise of Option Each option shall state the time or times when it becomes exercisable, which shall be determined by the Committee, provided, however, that no option shall become exercisable until one (1) year has elapsed from the date of grant. To the extent that an option has become exercisable, it may be exercised in whole or in such lesser amount as authorized by the option agreement. If exercised in part, the unexercised portion of an option shall continue to be held by the optionee and may thereafter be exercised as herein provided. Notwithstanding any other provision of the Plan except, in the case of non-qualified stock options granted hereunder, clause (v) of subsection (F) of this Section 5 relating to the death of an optionee, no option granted under the Plan shall be exercisable after the expiration of ten (10) years from the date of its grant. (F) Termination of Employment (i)If prior to a date one (1) year from the date the option is granted, an optionee ceases to be employed by the Corporation or its subsidiaries for any reason, his or her option shall immediately terminate. (ii) If on or after one (1) year from the date an option is granted, an optionee ceases to be employed by the Corporation or any of its subsidiaries for any reason other than death or permanent and total disability as determined in accordance with section 22(e)(3), or successor provisions, of the Code, or retirement, such option may be exercised within three (3) months after the date that the optionee ceases to be employed by the Corporation or any of its subsidiaries, but only to the extent such option was exercisable on the date of such cessation of employment. (iii) If on or after one (1) year from the date an option is granted, an optionee ceases to be employed by the Corporation or any of its subsidiaries by reason of permanent and total disability as determined in accordance with section 22(e)(3), or successor provisions, of the Code, such option may be exercised within one (1) year, in the case of an incentive stock option, and three (3) years, in the case of a non-qualified stock option, after the date that the optionee ceases to be employed by the Corporation or any of its subsidiaries, but only to the extent such option was exercisable on the date of such cessation of employment. (iv) If on or after one (1) year from the date an option is granted, an optionee retires from employment with the Corporation or any of its subsidiaries in accordance with the retirement policy of the Corporation or such subsidiary, such option may be exercised within three (3) months, in the case of an incentive stock option, and three (3) years, in the case of a non-qualified stock option, after the date the optionee retires, but only to the extent such option was exercisable on the date of such retirement. (v)If an optionee should die on or after one (1) year from the date an option is granted while in the employ of the Corporation or any subsidiary or within the three (3) month period, one (1) year period or three (3) year period referred to above, whichever is applicable, such option may be exercised to the extent it was exercisable immediately prior to the optionee's death, at any time within one (1) year after the optionee's death, by any person or persons to whom the option is transferred by will or the laws of descent and distribution. No transfer of an option by the optionee by will or by the laws of descent and distribution shall be effective unless the Corporation has been furnished with written notice thereof, and such other evidence as the Committee may deem necessary to establish the validity of the transfer and the acceptance of the transferee or transferees of the terms and conditions of the option, and to establish compliance with any laws or regulations pertaining thereto. (vi) Notwithstanding clause (i) of subsection (F) of this Section 5, if an optionee ceases to be employed by the Corporation or its subsidiaries within one (1) year after a change of control, as defined in Section 19, for any reason other than death or permanent and total disability as determined in accordance with section 22(e)(3), or successor provisions, of the Code, or retirement, such option may be exercised within one (1) year after the date that the optionee ceases to be employed by the Corporation or any of its subsidiaries, but only to the extent such option was exercisable on the date of such cessation of employment. (G) Other Provisions The option agreements authorized under the Plan shall contain such other provisions, including, without limitation, restrictions upon the exercise of the option or any stock appreciation right granted in conjunction therewith or restrictions required by any applicable securities laws, as the Committee shall deem advisable. 6. STOCK APPRECIATION RIGHTS. (A) Grant of Stock Appreciation Rights Stock appreciation rights may be granted by the Committee under the Plan in connection with an option, either at the time of grant or by amendment to the related stock option agreement. Each right shall be subject to the same terms and conditions as the related option and to such additional conditions as the Committee shall determine, shall be exercisable only to the extent the option is exercisable and shall become non-exercisable and be forfeited if and to the extent the related option is exercised. (B) Exercise of Stock Appreciation Rights A stock appreciation right shall entitle the optionee to surrender to the Committee unexercised the related option, or any portion thereof, and to receive from the Corporation in exchange therefor a cash payment and/or shares of common stock having an aggregate fair market value equal to the excess of the fair market value of one share of common stock over the option price per share provided for in the related stock option, multiplied by the number of shares called for by the option, or portion thereof, which is surrendered. The Committee shall have the sole discretion to determine the form in which payment is to be made upon the exercise of a stock appreciation right (i.e., whether in cash, in shares of common stock or partly in cash and partly in shares). In no event will fractional shares be issued but cash will be paid in lieu thereof. Except as otherwise provided in paragraph (C) below, the fair market value of a share of common stock for this purpose shall be the last quoted per share selling price for shares of the common stock on the relevant date, as quoted in the New York Stock Exchange Composite Transactions Index published in The Wall Street Journal, or if there were no sales on such date, the last quote selling price on the nearest day after the relevant date, as determined by the Committee. (C) Window Period Exercises For Cash Notwithstanding the provisions of paragraph (B) above, the Committee shall have the ability, in its discretion, to fix the fair market value of a share of common stock for purposes of determining the amount of cash and the number of shares, if any, to be received upon the exercise of a stock appreciation right during any "window period" (which consists of a period beginning on the third business day following the date of release of quarterly or annual sales and earnings information by the Corporation and ending on the twelfth business day following such release date) for payment wholly or partly in cash at an amount not greater than the highest fair market value, nor less than the lowest fair market value, of a share of common stock during such window period, which fair market value shall be determined for each day during such window period in accordance with paragraph (B) above of this Section 6. (D) Relation to Stock Options Stock appreciation rights shall be exercisable at such time as may be determined by the Committee, provided that a stock appreciation right shall not be exercisable prior to the time the related stock option could be exercised and, except in the event of death or permanent and total disability as determined in accordance with section 105(d)(4), or successor provisions, of the Code, shall not be exercisable for a period of six (6) months from the date of grant of such right. A stock appreciation right may be exercised in whole or in part only upon surrender of a proportionate part of the related stock option by the optionee. (E) Expiration or Termination of Stock Appreciation Rights Each stock appreciation right and all rights and obligations thereunder shall terminate and may no longer be exercised upon the termination or exercise of the related stock option. (F) Shares May be Used Only Once Shares subject to a stock option to which a stock appreciation right is related shall be used not more than once to calculate the cash or shares to be received by the grantee pursuant to an exercise of such stock appreciation right. (G) Effect of Death or Other Termination of Employment In the event that the recipient of a stock appreciation right ceases to be an employee of the Corporation or its subsidiaries for any reason, his or her stock appreciation right shall be exercisable only to the extent and upon the conditions that the related stock option is exercisable under applicable provisions of Section 5(F) hereof. 7. SATISFACTION OF TAX WITHHOLDING REQUIREMENTS. Whenever an optionee or recipient of a stock appreciation right is required to pay to the Corporation an amount required to be withheld under applicable federal and state income tax laws in connection with exercises of non-qualified options or stock appreciation rights, the Committee may, in its discretion, permit the optionee to satisfy such obligation, in whole or in part, by electing to have the Corporation withhold shares of common stock having a value equal to the amount required to be withheld or by delivering to the Corporation already-owned shares to satisfy the withholding requirement. The amount of the withholding requirement shall be deemed to include any amount which the Committee agrees may be withheld at the time the election is made, not to exceed the amount determined by using the maximum federal, state and local marginal income tax rates applicable to the optionee or recipient with respect to the exercise of the option or stock appreciation right on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). The value of the shares to be withheld or delivered will be based on their fair market value as defined in Section 5(C) hereof on the Tax Date. Such elections will be subject to the following restrictions: (1) the election must be made on or before the Tax Date; (2) the election will be irrevocable; and (3) the election will be subject to the disapproval of the Committee. Each election by an optionee or recipient whose transactions in shares of common stock are subject to Section 16(b) of the Securities Exchange Act of 1934 will be subject to the following additional restrictions: (1) the election may not be made within six months of the grant of the option or stock appreciation right (except that this limitation will not apply in the event the death or disability of the optionee or recipient occurs prior to the expiration of the six-month period), and (2) the election must be made either at least six months before the Tax Date or within a ten day "window period" beginning on the third day following the release of the Corporation's quarterly or annual summary statement of sales and earnings. 8. RECAPITALIZATIONS AND REORGANIZATIONS. Subject to any required action by the stockholders of the Corporation, the number of shares of common stock covered by the Plan, and each outstanding option and any related stock appreciation right and the price per share thereof, shall be proportionately adjusted for any increase or decrease in the number of issued and outstanding shares of common stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend. Subject to any required action by the stockholders of the Corporation, if the Corporation shall be the surviving corporation in any merger or consolidation, each outstanding option and stock appreciation right shall pertain to and apply to the securities to which a holder of the same number of shares of common stock that are subject to that option and stock appreciation right would have been entitled. A dissolution or liquidation of the Corporation, or a merger or consolidation in which the Corporation is not the surviving corporation, shall cause each outstanding option and stock appreciation right to terminate, unless the agreement of merger or consolidation shall otherwise provide, provided that each optionee shall in such event have the right immediately prior to such dissolution or liquidation, or merger or consolidation, to exercise his or her option or stock appreciation right in whole or in part, without regard to any installment provisions set forth in the option agreement, if, in the case of an option, the optionee's agreed employment period set forth in Section 5(A) of the Plan shall have then expired and, in the case of a stock appreciation right, the minimum period set forth in Section 6(D) of the Plan shall have then expired. To the extent that the foregoing adjustments relate to stock or securities of the Corporation, such adjustments shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. The grant of an option or stock appreciation right pursuant to the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge or to consolidate or to dissolve, liquidate or sell, or transfer all or any part of its business or assets. 9. NONASSIGNABILITY. No option or stock appreciation right shall be assignable or transferable by an optionee except by will or by the laws of descent and distribution. During the lifetime of an optionee, the option or stock appreciation right shall be exercisable only by the optionee. 10. RIGHTS AS A STOCKHOLDER. An optionee or a transferee of an option shall have no rights as a stockholder with respect to any shares covered by his or her option or stock appreciation right until the date of the issuance of a stock certificate to the optionee for such shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property) or distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 8. 11. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS AND STOCK APPRECIATION RIGHTS. Subject to the terms and conditions and within the limitations of the Plan, the Committee may modify, extend or renew outstanding options and stock appreciation rights granted under the Plan. Furthermore, the Committee may, subject to any applicable provisions of the Plan, upon the cancellation of previously granted higher priced options and stock appreciation rights, regrant options and stock appreciation rights at a lower price. Notwithstanding the foregoing, however, no modification of an option or stock appreciation right or cancellation and regrant of an option or stock appreciation right shall, without the consent of the optionee, alter or impair any rights or obligations under any option or stock appreciation right theretofore granted under the Plan. 12. TERM OF PLAN. The Plan is effective January 18, 1979 (subject to Section 15) and, unless terminated sooner pursuant to Section 13, shall remain in effect until all the shares subject to or which may become subject to the Plan have been issued upon the exercise of options or used to calculate the cash or shares to be received by an optionee pursuant to the exercise of a stock appreciation right. However, no incentive stock option may be granted under the Plan more than ten (10) years after the effective date of the Plan. 13. TERMINATION OR AMENDMENT OF THE PLAN. The Board of Directors of the Corporation or the Committee may from time to time suspend, discontinue or terminate the Plan or revise or amend it in any respect whatsoever; provided, however, that no such action of the Board of Directors or the Committee may, without the approval of the holders of a majority of the outstanding shares of common stock of this Corporation present in person or by proxy and entitled to vote at a meeting duly held: (a) Materially increase the total amount of common stock which may be issued upon the exercise of options or stock appreciation rights granted under the Plan, except as may be effected pursuant to the provisions of Section 8; (b) Materially increase the benefits accruing to optionees under the Plan; or (c) Materially modify the requirements as to eligibility for participation in the Plan. 14. NO OBLIGATION TO EXERCISE OPTION OR STOCK APPRECIATION RIGHT. The granting of an option or stock appreciation right shall impose no obligation upon the optionee or a transferee of the option or stock appreciation right to exercise such option or stock appreciation right. 15. USE OF PROCEEDS. The proceeds received from the sale of shares pursuant to the exercise of options granted under the Plan will be used for general corporate purposes. 16. APPROVAL OF STOCKHOLDERS. Amendments conforming the Plan to section 422A, or successor provisions, of the Code, relating to incentive stock options, shall be subject to approval of such amendments by affirmative vote at the next meeting of stockholders of the Corporation, or any adjournment thereof, of the holders of a majority of the outstanding shares of common stock present in person or by proxy, unless the Committee shall determine, prior to the solicitation of proxies for such meeting, that such approval is not required, necessary or appropriate in order to qualify certain options granted under the Plan as incentive stock options. 17. TANDEM OPTIONS. The Committee is authorized to grant non-qualified stock options and incentive stock options to an optionee in conjunction pursuant to a single grant; provided, however, that no such grant which would result in a tandem option, wherein the exercise of either the non-qualified stock option or the incentive stock option affects the right to exercise the other, shall be made, pursuant to a single grant or by subsequent amendment to an outstanding option, unless and until the Committee shall obtain an opinion of counsel, or shall determine, that neither such grant nor the exercise of any part of such tandem option shall adversely affect the status and federal income tax treatment as an incentive stock option of that portion of such tandem option which is intended to constitute an incentive stock option. 18. SUBSIDIARIES. As used throughout this Plan, the term "subsidiary" means (a) any corporation in which the Corporation owns, directly or indirectly, twenty-five percent or more of the voting stock, or any partnership, limited liability company or other entity in which the Corporation's ownership interest represents, directly or indirectly, twenty-five percent or more of the total ownership interests in such partnership, limited liability company, or entity; or (b) any corporation or any other entity (including, but not limited to, partnerships, joint ventures and limited liability companies) that the Committee, in its sole discretion, determines to be controlling, controlled by, or under common control with the Corporation. 19. CHANGE OF CONTROL. (A) Definition of Change of Control For purposes of the Plan, "change of control" means the occurrence of any of the following: (i)The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (I) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock") or (II) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this clause (i), the following acquisitions shall not constitute, or be deemed to cause, a change in control of the Corporation: (I) any increase in such percentage ownership of a Person to 20% or more resulting solely from any acquisition of shares directly from the Corporation or any acquisition of shares by the Corporation, provided, however, that any subsequent acquisitions of shares by such Person that would add, in the aggregate, 2% or more (measured as of the date of each such subsequent acquisition) to such Person's beneficial ownership or Outstanding Corporation Common Stock or Outstanding Corporation Voting Securities shall be deemed to constitute a change in control of the Corporation, (II) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation or (III) any acquisition by any corporation pursuant to a transaction which complies with subclauses (I), (II) and (III) of clause (iii) below; or (ii) Individuals who, as of the date hereof, constitute the Board of Directors (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board of Directors; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors, or other actual or threatened solicitation of proxies or consents, by or on behalf of a Person other than the Board of Directors; or (iii) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation (a "Business Combination"), in each case, unless, following such Business Combination, (I) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (II) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (III) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) Approval by the stockholders of the Corporation of a complete liquidation or dissolution of the Corporation. Notwithstanding the foregoing, a Change of Control shall not be deemed to have occurred with respect to any option held by any optionee who incurs a termination of employment prior to the event or events which otherwise would have created the occurrence of a Change of Control. (B) Effect of a Change of Control Notwithstanding the provisions of subsection (E) of Section 5, if a change of control, as defined in subsection (A) of Section 19, occurs prior to an optionee's termination of employment, the right to exercise 100% of the shares subject to each option granted to him or her shall accrue on the date on which the change of control occurs. 20. BENEFICIARY DESIGNATIONS. If permitted by the Committee, an optionee under the Plan may name a beneficiary or beneficiaries to whom any vested but unpaid option or stock appreciation right shall be paid in the event of the optionee's death. Each such designation shall revoke all prior designations by the optionee and shall be effective only if given in a form and manner acceptable to the Committee. In the absence of any such designation, any vested benefits remaining unpaid at the optionee's death shall be paid to the optionee's estate and, subject to the terms of the Plan and of the applicable option agreement, any unexercised vested option or stock appreciation right may be exercised by the person empowered to do so under the optionee's will, or the appropriate person under applicable law. The Committee may require appropriate proof from any such other person of his or her right or power to exercise the option or stock appreciation right or any portion thereof. EX-10.20 6 Exhibit 10.20 [Date] [Name] [Title] Transamerica [__________________] [Street Address] [City, State, Zip] Dear [Name]: The Board of Directors (the "Board") of Transamerica Corporation (the "Company") considers it to be in the best interests of its stockholders to foster the continuous employment of key management personnel of the Company and its Subsidiaries (as defined in Subsection 1(ii) below) in the event of a possible change in control of the Company. In order to induce you, in the event of a possible change in control of the Company, to remain in the employ of the Company or its Subsidiaries and to give your continued attention and dedication to your assigned duties without distraction, and in consideration of your agreement to remain in the employ of the Company or its Subsidiaries under circumstances as set forth in Subsection 2(iii) hereof, the Company agrees that (i) in the event your employment is terminated in accordance with Section 3 hereof subsequent to a "change in control of the Company" (as defined in Subsection 2(i) hereof) or a "deemed change in control of the Company" (as defined in Section 1(iii) hereof), you shall receive the severance benefits described in Section 4 hereof, and (ii) regardless of whether or not your employment with the Company or its Subsidiaries is terminated, if you receive a payment or benefit that is subject to the Excise Tax (as defined in Section 5 hereof), you shall receive the gross-up payments described in Section 5 hereof. 1. Term of Agreement. (i) Basic Term and Extensions. This letter agreement (the "Agreement") shall commence on the date hereof and shall continue in effect through December 31, 1997; provided, however, that commencing on January 1, 1998 and on each January 1 thereafter, the term of this Agreement shall automatically be extended for one additional year unless not later than September 30 of the preceding year, the Company shall have given notice that it does not wish to extend this Agreement, in which case this Agreement shall expire as of December 31st of that year; and provided, further, that notwithstanding any such notice by the Company, if a change in control of the Company shall occur during the term of this Agreement, this Agreement shall automatically be extended until the earlier to occur of (A) the expiration of three years beyond the then existing term, or (B) your Normal Retirement Date (as defined in Subsection 3(i) hereof). (ii) Early Termination. This Agreement shall terminate immediately if prior to a change in control of the Company (as defined in Subsection 2(i) hereof) (A) your primary position with the Company or its Subsidiaries changes to one that is not covered by a severance agreement in a form substantially similar to this Agreement, or (B) you are employed by a Subsidiary of the Company and such entity ceases to be a Subsidiary or such Subsidiary (or a principal operating unit of such Subsidiary for which you work) disposes of a majority of its assets or (C) your employment with the Company or its Subsidiaries is terminated. As used throughout this Agreement, the terms "Subsidiary" or "Subsidiaries" shall mean (i) any corporation in which the Company owns, directly or indirectly, twenty-five percent or more of the voting stock, or any partnership, limited liability company or other entity in which the Company's ownership interest represents, directly or indirectly, twenty-five percent or more of the total ownership interests in such partnership, limited liability company, or entity; or (ii) any corporation or any other entity (including, but not limited to, partnerships, joint ventures and limited liability companies) that the Board, in its sole discretion, determines to be in control of, controlled by, or under common control with, the Company. (iii) Special Extension. Notwithstanding the foregoing, if, within 12 months prior to the date on which a change in control of the Company occurs, (A) any of the events described in clauses (A), (B) or (C) of Subsection 1(ii) above occurred or (B) the Company gave notice that it did not intend to extend the term of this Agreement as provided in Subsection 1(i) above, then, if you can reasonably demonstrate tha each of the events described in clauses (A) and (B) of this Subsection (iii) that did occur arose in connection with or in anticipation of a change in control of the Company, (Y) a "deemed change in control of the Company" shall be deemed to have occurred on the date immediately prior to the first to occur of such events and (Z) this Agreement shall automatically be extended until the earlier to occur of (i) the expiration of three years beyond the then existing term or (ii) your Normal Retirement Date. 2. Change in Control Matters. (i) Change in Control. For purposes of this Agreement, a "change in control of the Company" shall occur if any of the following occur: (A) the acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this Subsection (A), the following acquisitions shall not constitute, or be deemed to cause, a change in control of the Company: (i) any increase in such percentage ownership of a Person to 20% or more resulting solely from any acquisition of shares directly from the Company or any acquisition of shares by the Company, provided, however, that any subsequent acquisitions of shares by such Person that would add, in the aggregate, 2% or more (measured as of the date of each such subsequent acquisition) to such Person's beneficial ownership of Outstanding Company Common Stock or Outstanding Company Voting Securities shall be deemed to constitute a change in control of the Company, (ii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iii) any acquisition by any corporation pursuant to a transaction which complies with clauses (i), (ii) and (iii) of Subsection (C) below; or (B) individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's stockholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors, or other actual or threatened solicitation of proxies or consents, by or on behalf of a Person other than the Board; or (C) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Company Common Stock and Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (D) approval by the stockholders of the Company of a complete liquidation or dissolution of the Company. (ii) Deemed Change in Control. A "deemed change in control of the Company" is defined in Subsection 1(iii) hereof. (iii) Potential Change in Control. For purposes of this Agreement, a "potential change in control of the Company" shall occur if (A) the Company enters into an agreement, the consummation of which would result in the occurrence of a change in control of the Company, (B) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a change in control of the Company, or (C) the Board adopts a resolution to the effect that a potential change in control of the Company for purposes of this Agreement has occurred. You agree that, subject to the terms and conditions of this Agreement, in the event of a potential change in control of the Company, you will remain in the employ of the Company or its Subsidiaries during the pendency of any such potential change in control and for a period of one year after the occurrence of a change in control of the Company, unless you terminate for Good Reason pursuant to Section 3 hereof. However, you acknowledge that you are an "at will" employee and nothing in this Agreement shall confer upon you any right to continue in the employ of the Company or its Subsidiaries prior to a change in control of the Company or shall interfere with or restrict in any way the rights of the Company or its Subsidiaries, which are hereby expressly reserved, to discharge you at any time prior to a change in control of the Company for any reason whatsoever, with or without cause. 3. Termination Following Change in Control. If a change in control of the Company shall have occurred, you shall be entitled to the benefits provided in Subsection 4(iii) hereof upon the subsequent termination of your employment with the Company or its Subsidiaries within three years thereafter (or, if applicable, in the case of a deemed change in control of the Company, within three years after the date of such deemed change in control), unless such termination is (A) because of your death or Retirement, (B) by the Company for Cause or Disability, or (C) by you other than for Good Reason. (i) Disability; Retirement. If you become permanently and totally disabled (as defined under the long-term disability plan sponsored by the Company or its Subsidiaries) and are unable to return to the full-time performance of your duties, the Company may terminate your employment for "Disability". Termination by the Company or you of your employment with the Company or its Subsidiaries based on "Retirement" shall mean termination by reason of your retirement at or after your "Normal Retirement Date" under the Retirement Plan for Salaried U.S. Employees of Transamerica Corporation and Affiliates (or any successor thereto). (ii) Cause. Termination by the Company of your employment with the Company or its Subsidiaries for "Cause" shall mean termination upon the willful engaging by you in misconduct which is demonstrably and materially injurious to the Company and its Subsidiaries taken as a whole. No act, or failure to act, on your part shall be considered "willful" unless done, or omitted to be done, by you not in good faith and without reasonable belief that your action or omission was in the best interest of the Company or its Subsidiaries. Notwithstanding the foregoing, you shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to you a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for the purpose (after reasonable notice to you and an opportunity for you, together with your counsel, to be heard before the Board), finding that in the good faith opinion of the Board you were guilty of misconduct a set forth above in this Subsection and specifying the particulars thereof in detail. (iii) Good Reason. You shall be entitled to terminate your employment for Good Reason. For purposes of this Agreement, "Good Reason" shall mean any material breach of this Agreement by the Company or any of the following events which occurs without your express written consent: (A) the assignment to you of any duties inconsistent with, or a substantial alteration in the nature or status of, your responsibilities from those in effect immediately prior to a change in control of the Company or, if applicable, a deemed change in control of the Company; (B) a reduction in your annual base salary as in effect on the date hereof or as the same may be increased from time to time, except for across-the-board salary reductions similarly affecting all executives of the Company and its Subsidiaries and all executives of any person in control of the Company; (C) the Company or its Subsidiaries requiring (i) you to be based other than in the Metropolitan Area where your employment was based prior to a change in control of the Company or, if applicable, a deemed change in control of the Company, or (ii) business travel to an extent substantially inconsistent with your travel obligations in effect prior to a change in control of the Company or, if applicable, a deemed change in control of the Company; (D) (i) the failure by the Company or its Subsidiaries to continue in effect any compensation plan of the Company or its Subsidiaries in which you were participating at the time of a change in control of the Company or, if applicable, a deemed change in control of the Company, including but not limited to both annual and long-term incentive plans, or replacements therefor, which provide competitive levels of compensation, unless an equitable arrangement (embodied in ongoing substitute or alternative plans) has been made with respect to any such plan in connection with the change in control of the Company, or (ii) the failure by the Company or its Subsidiaries to continue your participation therein; (E) (i) the failure by the Company or its Subsidiaries to continue to provide you with benefits of a type and at a level substantially similar to those enjoyed by you under the Company's Employees Stock Savings Plan, Stock Savings Plan Plus, or any of the pension, life insurance, disability, accident or health (including medical, prescription drug and dental) plans of the Company or its Subsidiaries in which you were participating at the time of a change in control of the Company or, if applicable, a deemed change in control of the Company, or (ii) the taking of any action by the Company or its Subsidiaries which would directly or indirectly materially reduce any of such benefits or deprive you of any material fringe benefit or perquisite enjoyed by you at the time of a change in control of the Company or, if applicable, a deemed change in control of the Company, or (iii) the failure by the Company or its Subsidiaries to provide you with the number of paid vacation days to which you are entitled on the basis of years of service with the Company or its Subsidiaries in accordance with the normal vacation policy of the Company or its Subsidiaries as in effect at the time of the change in control of the Company or, if applicable, the deemed change in control of the Company; (F) the failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Subsection 8(i) hereof; or (G) any purported termination of your employment which is not effected pursuant to a Notice of Termination satisfying the requirements of Subsection (iv) below (and, if applicable, Subsection (ii) above); and for purposes of this Agreement, no such purported termination shall be effective. Your right to terminate your employment pursuant to this Subsection (iii) shall not be affected by your incapacity due to physical or mental illness. For purposes of this Subsection 3 (iii), any good faith determination of "Good Reason" made by you shall be conclusive. Anything in this Agreement to the contrary notwithstanding, a termination by you for any reason during the 30-day period immediately following the first anniversary of the date of a change in control of the Company shall be deemed to be a termination for Good Reason for all purposes of this Agreement. (iv) Notice of Termination. Any purported termination of your employment by the Company or its Subsidiaries or by you pursuant to this Section 3 shall be communicated by written Notice of Termination to the other party in accordance with Section 9 hereof. A "Notice of Termination" shall mean a notice which indicates the specific termination provision in this Agreement relied upon and sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of your employment. (v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your employment is terminated for Disability, 30 days after Notice of Termination is given (provided that you shall not have returned to the performance of your duties on a full-time basis during such 30-day period), and (B) if your employment is terminated for any other reason, the date specified in the Notice of Termination (which shall be not less than 30 days from the date such Notice of Termination is given). 4. Compensation Upon Termination or During Disability. (i) Disability. During any period that you fail to perform your duties hereunder as a result of incapacity due to physical or mental illness, you shall continue to receive your full base salary at the rate then in effect unless and until your employment is terminated pursuant to Subsection 3(i) hereof. Thereafter, your benefits shall be determined in accordance with the Company's disability program (without regard to any amendment to such disability program made subsequent to a change in control of the Company and on or prior to the Date of Termination, which amendment adversely affects in any way the computation of benefits thereunder). (ii) Termination for Cause. If your employment by the Company or its Subsidiaries shall be terminated for Cause, the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given and the Company shall have no further obligations to you under this Agreement. (iii) Certain Termination Benefits. If prior to the earlier to occur of (i) the expiration of this Agreement or (ii) the expiration of three years after a change in control of the Company, your employment by the Company or its Subsidiaries shall be terminated (a) by the Company or its Subsidiaries other than for Cause, Retirement or Disability or (b) by you for Good Reason, then you shall be entitled to the benefits provided below: (A) the Company shall pay you your full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given; (B) in lieu of any further salary payments to you for periods subsequent to the Date of Termination, the Company shall pay as severance pay to you, not later than the fifth day following the Date of Termination, a lump sum severance payment (together with the payments provided in Subsections (C), (E) and (F) below, the "Severance Payments") equal to the product of (x) [three, two, one], and (y) your highest target annual cash compensation during the last three fiscal years of the Company immediately preceding the year in which the change in control of the Company occurs; which shall consist of the sum of (I) your annual base salary and (II) your target annual bonus for each such year; provided that, in the event there are fewer than [36, 24, 12] whole or partial months remaining from the Date of Termination to your Normal Retirement Date, the amount provided for in this Subsection (iii)(B) will be reduced by multiplying it by a fraction the numerator of which is the number of whole or partial months so remaining to your Normal Retirement Date and the denominator of which is [36, 24, 12]; provided, however, that if (i) the payment to be made to you pursuant to this Subsection (iii)(B) would result in the application to you of the Excise Tax (as defined in Section 5 hereof), and (ii) a reduction of up to $25,000 in the amount of such payment would result in your not being subject to the application of the Excise Tax, then the Company may withhold, and you shall have no entitlement to receive, such portion of such payment (not in excess of $25,000) as is required to preclude the application of the Excise Tax to you; (C) notwithstanding any provision of the Company's or any Subsidiary's bonus plans, the Company shall pay to you, not later than the fifth day following the Date of Termination, a lump sum amount equal to the sum of (x) any incentive compensation for the fiscal year preceding that in which the Date of Termination occurs but has not yet been paid, which shall be the greater of (I) your target bonus for such fiscal year, or (II) any amount determined prior to your Date of Termination to be due you for such fiscal year, and (y) the product of (I) your target bonus for the fiscal year in which the Date of Termination occurs, and (II) a fraction, the numerator of which is the number of days in the fiscal year in which the Date of Termination occurs through the Date of Termination, and the denominator of which is 365; (D) the Company shall also pay to you as incurred all legal fees and expenses incurred by you as a result of such termination (including all such fees and expenses, if any, incurred in contesting or disputing any such termination or in seeking to obtain or enforce any right or benefit provided by this Agreement); (E) the Company shall arrange to provide you: (i) for a [36, 24, 12]-month period after such termination (or such lesser number of months to your Normal Retirement Date), with life, disability, accident and health (including medical, prescription drug and dental) insurance substantially similar to that which you are receiving at the time of a change in control of the Company, or, if applicable, a deemed change in control of the Company; and (ii) for the period commencing on the date you begin receiving retirement payments under the Company's tax-qualified pension plan, and ending on the date of your death (or if later, the death of your spouse, if any), health (including medical, prescription drug and dental) insurance substantially similar to that which you are receiving at the time of a change in control of the Company, or, if applicable, a deemed change in control of the Company. Benefits otherwise receivable by you pursuant to Clause(E)(i) above shall be reduced to the extent comparable benefits are actually received by you from any other source during the [36, 24, 12]-month period following such termination (or such lesser number of months to your Normal Retirement Date), and any such benefits actually received by you shall be reported by you to the Company; and (F) in addition to the retirement benefits to which you are entitled under the tax qualified and supplemental pension plans of the Company or any of its Subsidiaries in which you participate or any successor plans thereto (the "Pension Plans"), the Company shall pay to you, not later than the fifth day following the Date of Termination, a lump sum amount in cash equal to the actuarial equivalent of the excess of (x) the retirement pension (determined as a single life annuity commencing at your Normal Retirement Date) which you would have accrued under the terms of the Pension Plans (without regard to any amendment to the Pension Plans made subsequent to a change in control of the Company and on or prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if you were fully vested thereunder and had accumulated (after the Date of Termination) [36, 24, 12] additional months of age and benefit service credit (as defined in the Company's tax qualified pension plan) thereunder at your highest annual rate of compensation (annual base salary and target annual bonus) during the 12 months immediately preceding the Date of Termination (but in no event shall you be deemed to have accumulated additional months of age and benefit service credit after your Normal Retirement Date), over (y) the vested retirement pension (determined as a single life annuity commencing at your Normal Retirement Date) which you had then accrued pursuant to the provisions of the Pension Plans. For purposes of clause (x), your highest annual rate of compensation during the 12 months immediately preceding the Date of Termination shall be determined without regard to the amounts payable pursuant to Subsection 4(iii)(B) hereof. For purposes of this Subsection, "actuarial equivalent" shall be determined using the same methods and assumptions utilized under the Pension Plans immediately prior to the change in control of the Company. (iv) No Mitigation. You shall not be required to mitigate the amount of any payment provided for in this Section 4 by seeking other employment or otherwise, nor, except as provided in Subsection 4(iii)(E) above, shall the amount of any payment or benefit provided for in this Section 4 be reduced by any compensation earned by you as the result of employment by another employer or by retirement benefits after the Date of Termination or otherwise. (v) Retirement Benefits. In addition to all other amounts payable to you under this Section 4, you shal be entitled to receive all benefits payable to you under the Pension Plans, and any other plan or agreement relating to retirement benefits. 5. Gross-Up Payments. In the event that you become entitled to any payment or benefit in connection with a change in the ownership or effective control of the Company, or a change in the ownership of a substantial portion of the assets of the Company (including but not limited to payments or benefits that you become entitled to in connection with a "change in control of the Company" as defined in Section 2 hereof), whether payable pursuant to the terms of this Agreement or any other plan (including specifically, but without limitation, the 1995 Performance Stock Option Plan), arrangement or agreement with the Company, any successor to the Company, any person whose actions result in a change in control of the Company, or any corporation ("Affiliate") that is or becomes affiliated with the Company or such person (collectively with the Severance Payments, "Payments"), if any of the Payments will be subject to the tax (the "Excise Tax") imposed by section 4999 of the Code, the Company shall pay to you, not later than the fifth day following each date ("Payment Date") on which you become entitled to receive any Payment (whether payable immediately or at a future date) that will be subject to the Excise Tax (but in no event later than the fifth day following your Date of Termination), an additional amount (collectively, the "Gross-Up Payments") such that the net amount retained by you, after deduction of any Excise Tax on the aggregate Payments received (or that you have become entitled to receive) as of such Payment Date and any federal, state or local income tax and Excise Tax upon the payment provided for by this Section 5, and after taking into account any Gross-Up Payments previously made pursuant to this Section 5, shall be equal to the aggregate Payments received (or that you have become entitled to receive) as of such Payment Date. For purposes of determining whether any Payment will be subject to the Excise Tax and the amount of such Excise Tax, (i) all amounts received in connection with your employment by the Company or one of its Subsidiaries or to be received by you in connection with a change in the ownership or effective control of the Company, or a change in the ownership of a substantial portion of the assets of the Company (including but not limited to payments or benefits that you become entitled to in connection with a "change in control of the Company" as defined in Section 2 hereof) shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) of the Code shall be treated as subject to the Excise Tax, except to the extent that in the written opinion of independent tax counsel selected by the Company's independent auditors and approved by you (which approval shall not be unreasonably withheld) ("Tax Counsel") which opinion shall be obtained at the Company's expense, any such payments or benefits (in whole or in part) do not constitute parachute payments or excess parachute payments (in whole or in part), or represent reasonable compensation for personal services to be rendered or actually rendered before the change in control in excess of the base amount, within the meaning of section 280G(b)(4)(B) of the Code, and (ii) the value of any non-cash benefit or any deferred cash payment included in the Payments shall be determined by the Company's independent auditors in accordance with the principles of section 280G(d)(3) and (4) of the Code. For purposes of determining the amount of each Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in effect during the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation in effect in the state and locality of your residence on the date of payment, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes, but assuming that you have no other deductions or credits available to reduce such taxes. 6. Indemnity and Contest. (a) Additional Gross-Up Payments. If you are required to pay Excise Tax in addition to the amount reimbursed pursuant to Section 5 (any such event hereafter being referred to as a "Loss"), you shall notify the Company and the Company shall pay to you an amount (the "Additional Gross-Up Payment") which, after deduction of all income taxes and additional federal, state and local taxes (including, without limitation, any additional Excise Tax) required to be paid by you in respect of receipt of such amount (assuming, for this purpose, that you are subject to the highest marginal rate of federal income taxation in effect during the calendar year in which the Additional Gross-Up Payment is to be made and state and local income taxes at the highest marginal rates of taxation in effect in the state and locality of your residence on the date of payment, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes, but assuming that you have no other deductions or credits available to reduce such taxes), shall be equal to the sum of (i) the Excise Tax resulting in the Loss, and (ii) the net amount of any interest, penalties or additions to tax payable to any taxing authority (after allowing for the deduction of such amounts, to the extent properly deductible, for federal, state or local income tax purposes) as a result of the Loss. Each Additional Gross-Up Payment by the Company shall be made within 30 days after receipt of a written demand therefor from you accompanied by a written statement describing in reasonable detail the Loss in question, the amount of additional tax, interest, penalties or additions to tax and the calculation of the payment due in respect thereof; provided that, if a contest of the Loss is being conducted pursuant to Subsection 6(b) below, payment shall not be required by the Company until 30 days after the completion or termination of such contest. (b) Contest. If you shall receive a written notification from federal taxing authorities of a proposed Excise Tax for which an amount may be payable by the Company in accordance with this Section 6, then you shall notify the Company of such proposed Excise Tax promptly after receipt of (which notice shall be accompanied by a copy of) such written notification. If (i) within 30 days after receipt by the Company of such notice from you, the Company shall deliver to you a written request that you contest such proposed Excise Tax, which written request shall be accompanied by an opinion (obtained at the Company's expense) of Tax Counsel that there exists substantial authority in support of a favorable outcome of a contest of such proposed Excise Tax, and (ii) the Company shall (A) have fully performed its prior obligations under this Agreement, (B) acknowledge in writing its liability under Subsection 6(a) above to make an Additional Gross-Up Payment in the event that the taxing authority prevails in its position regarding the proposed Excise Tax, and (C) deliver to you in writing an indemnity, satisfactory to you, for any and all expenses that you may incur as a result of contesting such proposed Excise Tax, including, without limitation, indemnification and prompt payment of all costs, expenses, losses, legal and accounting fees and disbursements, bonding fees, penalties and interest so incurred (the "Indemnified Amount"): (1) You may, in your sole discretion, choose to pursue or to forego any and all administrative appeals, proceedings, hearings and conferences with the relevant taxing authorities with respect to such matter (unless and to the extent that pursuance of any such appeal, proceedings, hearing or conference shall be required to secure judicial remedies, in which case you shall pursue the same), but will (unless there shall be a settlement or compromise as permitted in Subsection 6(b)(4) hereof) in good faith contest such proposed Excise Tax in a court of competent jurisdiction selected by the Company, in its sole discretion. (2) You shall be required to appeal an adverse judicial determination only if (A) an appeal is timely requested in writing by the Company, and (B) you are furnished, at the Company's expense, with an opinion of Tax Counsel, to the effect that it is more likely than not that an appellate court would reverse such adverse determination. (3) If the Company shall elect to contest a proposed Excise Tax by paying the tax claimed (including interest, penalties or additions to tax) and seeking a refund, then the Company shall advance to you on an interest-free basis the aggregate amount of such taxes, interest, penalties and additions to tax; provided, however, that if you are required to include in income any amount with respect to such loan or the imputation of interest thereon in any taxable year prior to final determination of the contest, then the Company, within 30 days of written notice thereof by you, shall pay to you an amount which, after deduction of all additional federal, state and local taxes required to be paid by you in respect of the receipt of such amount (assuming, for this purpose, that you are subject to the highest marginal rate of federal income taxation in effect during the calendar year in which the payment is to be made and state and local income taxes at the highest marginal rates of taxation in effect in the state and locality of your residence on the date of payment, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes, but assuming that you have no other deductions or credits available to reduce such taxes), shall be equal to the aggregate additional federal and state income taxes payable by you with respect to such taxable year as a result of such inclusion. If you subsequently receive a refund of any taxes, interest, penalties or additions to tax which were previously advanced to you by the Company pursuant to the preceding sentence, you shall pay to the Company within 60 days of receipt of such refunded taxes, interest, penalties or additions to tax, the amount thereof plus the amount of any interest received by you and fairly attributable thereto (which amount shall be deemed to be in repayment of the loan advanced by the Company to the extent fairly attributable thereto); provided, however, that you may offset the amount of such refund against any amount due and owing by the Company to you pursuant to this Agreement. Upon disallowance of any such refund, the Company shall forgive the amount of the advance fairly attributable thereto (which forgiveness shall be deemed to be in satisfaction of a portion of the Additional Gross-Up Payment due under Subsection 6(a) hereof). (4) If, in the course of contesting any proposed Excise Tax referred to in this Section 6, any taxing authority advises you that it is willing to agree to a settlement with respect to such matter, you shall notify the Company of such settlement proposal. If the settlement proposal is acceptable to the Company, the Company shall so notify you and you shall agree to the settlement proposal; provided, however, that you shall not be obligated to agree to the settlement proposal if you release the Company from any further obligations pursuant to this Section 6 with respect to any further action to be taken by you to contest such proposed Excise Tax and if you agree that the Additional Gross-Up Payment and Indemnified Amount determined under this Section 6 in respect of such proposed Excise Tax that the Company shall be required to pay to you shall not exceed the amount of such payments that would have been required if you had agreed to the settlement proposal. 7. Confidentiality. You acknowledge and agree that as a key manager of the Company or its Subsidiaries, you have and will continue to have access to the Company's or its Subsidiaries' confidential and proprietary information, including, but not limited to, any trade secrets the Company or its Subsidiaries may have. As a condition of your eligibility for the benefits of this Agreement, you agree you shall not during your employment by the Company or its Subsidiaries, or at any time after your employment by the Company or its Subsidiaries ends, directly or indirectly, use or disclose or induce or assist in the use or disclosure of any of the Company's or its Subsidiaries' confidential and/or proprietary information except as may be necessary in the ordinary course of performing your duties as an employee of the Company or its Subsidiaries. Notwithstanding any other provision of this Agreement, your obligations pursuant to this Section 7 shall survive the expiration or termination of this Agreement, for any reason. 8. Successors; Binding Agreement; Etc. (i) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. Failure of the Company to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled pursuant to Sections 4 and 5 hereof if you terminate your employment for Good Reason and a change in control of the Company has occurred, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. (iii) If pursuant to Section 3 hereof you become entitled to the benefits provided in Subsection 4(iii) hereof, you agree that all rights you may then have under the Separation Pay Plan of the Company or any of its Subsidiaries, or any successor plan, shall lapse and you shall have no rights thereunder. (iv) You agree that this Agreement amends and restates that certain letter agreement between you and the Company dated ___________________, 19__. 9. Notice. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. If, as of the date you give any notice under this Agreement, you are then an employee of a Subsidiary of the Company, you shall provide such notice to such Subsidiary, directed to the attention of the Board of Directors of such Subsidiary with a copy to the Secretary of such Subsidiary, as well as to the Company in the manner set forth in this Section 9. 10. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar conditions or provisions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California. 11. Validity. The invalidity or unenforceability of any provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. If this letter correctly sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. TRANSAMERICA CORPORATION [Name] [Title] Agreed to as of _____________, 19__ - ------------------------------------ [Name] EX-10.27 7 Exhibit 10.27 [TANDEM TO $100 OPTION AGREEMENT] TRANSAMERICA CORPORATION TANDEM LIMITED STOCK APPRECIATION RIGHT AGREEMENT In connection with the grant under the Transamerica Corporation 1995 Performance Stock Option Plan (the "Plan") of a nonqualified stock option to purchase shares of common stock of Transamerica Corporation ("Shares") at a purchase price per Share of $100.00 (the "Related Option"), Transamerica Corporation (the "Company") hereby grants you, [NAME OF EMPLOYEE] (the "Employee"), a tandem limited stock appreciation right (a "TLSAR") under the Plan, to surrender all or part of the unexercised portion of the Related Option in exchange for a payment from the Company pursuant to this TLSAR. The date of this Agreement is January 26, 1995 (the "Grant Date"). In general, the latest date this TLSAR will expire is January 25, 2007 (the "Expiration Date"). However, as provided in Appendix A (attached hereto), this TLSAR may expire earlier than the Expiration Date. Subject to the provisions of Appendix A and of the Plan, the principal features of this TLSAR are as follows: Number of Shares to Which this TLSAR Pertains: [NUMBER] Exercise Price per Share: $_________ Scheduled Vesting Date: The date on which a Change of Control occurs. Event Triggering Maximum Time to Exercise Termination of TLSAR After Triggering Event* Termination of Employment (except as shown below) 3 months Termination of Employment due to Disability 3 years Termination of Employment due to Early or Normal Retirement 5 years Termination of Employment due to death 3 years Change of Control 60 days Failure of the Related Option to Vest None Exercise of the Related Option None * However, in no event may this TLSAR be exercised after the Expiration Date (except in certain cases of the death of the Employee). Your signature below indicates your agreement and understanding that this TLSAR is subject to all of the terms and conditions contained in Appendix A and the Plan. For example, important additional information on vesting and termination of this TLSAR is contained in Paragraphs 4 through 6 of Appendix A. ACCORDINGLY, PLEASE BE SURE TO READ ALL OF APPENDIX A, WHICH CONTAINS THE SPECIFIC TERMS AND CONDITIONS OF THIS TLSAR. TRANSAMERICA CORPORATION EMPLOYEE By______________________ ________________________ Title: [NAME] APPENDIX A TERMS AND CONDITIONS OF TANDEM LIMITED STOCK APPRECIATION RIGHTS 1. Grant of TLSAR. The Company hereby grants to the Employee under the Plan, in connection with the grant of the Related Option, and as a separate incentive in connection with his or her employment and not in lieu of any salary or other compensation for his or her services, a TLSAR pertaining to all or any part of an aggregate of [NUMBER] Shares, which TLSAR entitles the Employee to surrender, on the terms and conditions set forth in this Agreement and the Plan, all or part of the Related Option in exchange for a payment from the Company in the amount determined under Paragraph 9 below. 2. Exercise Price. The exercise price per Share for this TLSAR (the "Exercise Price") shall be $[NUMBER], which is equal to the Fair Market Value per Share on the Grant Date. 3. Number of Shares. The number and class of Shares specified in Paragraph 1 above, and/or the Exercise Price, are subject to adjustment by the Committee in the event of any merger, reorganization, consolidation, recapitalization, separation, liquidation, stock dividend, split-up, Share combination, distribution or other change in the corporate structure of the Company affecting the Shares (an "Event"). Any such adjustment shall be made by the Committee as constituted immediately prior to the applicable Event; provided, however, that the number of Shares subject to this TLSAR always shall be a whole number. 4. Vesting Schedule. The right to exercise this TLSAR will vest as to 100% of the Shares subject to the TLSAR upon the occurrence of a Change of Control, provided that (a) vesting will occur only if the Employee is an Executive on the date of the Change of Control, and (b) if the Employee is a Section 16 Person, the right to exercise this TLSAR may not become vested until at least six (6) months after the Grant Date. Notwithstanding clause (b) of the preceding sentence, in the event of the Employee's Termination of Employment due to Normal Retirement, Disability or death, (i) if the right to exercise this TLSAR would have vested within six (6) months after such Termination of Employment (had the Employee not incurred a Termination of Employment), then the right to exercise this TLSAR will vest on the date that such right otherwise would have vested, and (ii) if the right to exercise this TLSAR would have vested more than six (6) months after such Termination of Employment (had the Employee not incurred a Termination of Employment), then the right to exercise a portion of the Shares to which this TLSAR pertains will vest on the date that such right otherwise would have vested, as determined in the discretion of the Committee based on the time elapsed from the Grant Date to the Termination of Employment and the vesting date. 5. Termination of TLSAR. In the event of the Employee's Termination of Employment for any reason other than Early or Normal Retirement, Disability or death, this TLSAR shall immediately terminate, provided that if this TLSAR became vested prior to such Termination of Employment, the Employee may, prior to the Expiration Date and subject to the last two sentences of this Paragraph 5, exercise the TLSAR. In the event of the Employee's Termination of Employment due to Disability, the Employee may, within three (3) years after the date of such Termination, or prior to the Expiration Date, whichever shall first occur, exercise this TLSAR (if then vested). In the event of the Employee's Termination of Employment due to Early or Normal Retirement, the Employee may, within five (5) years from the date of such Termination, or prior to the Expiration Date, whichever shall first occur, exercise this TLSAR (if then vested). In addition, this TLSAR shall terminate on the first to occur of the following: (a) the first date on which the Related Option no longer may become exercisable, (b) the last day of the period of sixty (60) consecutive days which begins on the date of a Change of Control, or (c) upon exercise of the Related Option (but only to the extent provided in the following sentence). For each Share with respect to which the Related Option is exercised, the right to exercise [NUMBER] of the Shares subject to this TLSAR shall immediately terminate, provided that the number of Shares which so terminate shall be rounded to the nearest whole number (or to such number as is appropriate to ensure that the total number of shares covered by this TLSAR does not exceed the number specified in Paragraph 1 above). 6. Death of Employee. In the event that the Employee dies prior to the expiration of this TLSAR in accordance with the provisions of Paragraph 5 above, the Employee's designated beneficiary or beneficiaries, or if no beneficiary survives the Employee, the administrator or executor of the Employee's estate, nevertheless may, within three (3) years after the date of death, exercise any vested but unexercised portion of the TLSAR, but only to the extent that such right was transferred with respect to the Related Option. Any such transferee must furnish the Company (a) written notice of his or her status as a transferee of this TLSAR, (b) evidence satisfactory to the Company to establish the validity of the transfer of this TLSAR and compliance with any laws or regulations pertaining to such transfer, and (c) written acceptance of the terms and conditions of this TLSAR as set forth in this Agreement. 7. Persons Eligible to Exercise TLSAR. This TLSAR shall be exercisable during the Employee's lifetime only by the Employee. This TLSAR is not transferable, except that the Employee may transfer this TLSAR (a) by a valid beneficiary designation made in a form and manner acceptable to the Committee, or (b) by will or the applicable laws of descent and distribution, in which case this TLSAR shall be transferred to the same extent. Any such transfer shall be effective only if the Related Option also is transferred to the same transferee. 8. Notice of Exercise of TLSAR. This TLSAR may be exercised by the person then entitled to do so as to any portion of the TLSAR which may then be exercised by giving written notice of exercise to the Secretary of the Company (or his or her designee) specifying the number of full Shares with respect to which the TLSAR is to be exercised. 9. Payment of TLSAR Amount. Upon exercise of this TLSAR, the Employee shall be entitled to receive payment from the Company in an amount (the "TLSAR Amount") determined by multiplying: (a) The amount by which the Change of Control Value (as defined below) of a Share on the date of exercise exceeds the Exercise Price, times (b) The number of Shares with respect to which the TLSAR is exercised. For this purpose, the "Change of Control Value" of a Share shall mean the greater of (i) the highest Fair Market Value of a Share during the period of 60 consecutive days which ends on the date of a Change of Control, or (ii) the highest price per Share paid in the transaction which gives rise to the Change of Control. 10. Form of Payment of TLSAR Amount. The TLSAR Amount shall be paid in cash, unless the Committee determines that such payment (or portion thereof) would cause a transaction which gives rise to the Change of Control to be ineligible for pooling of interests accounting under APB No. 16, which transaction (but for such payment) otherwise would have been eligible for such accounting treatment, in which case the Committee may determine that the TLSAR Amount shall be paid in Shares of equivalent value. Prior to any payment of the TLSAR Amount, the Company shall deduct or withhold, or require the Employee to remit to the Company, an amount sufficient to satisfy any withholding taxes required to be withheld with respect to the payment. 11. No Rights of Stockholder. Neither the Employee (nor any beneficiary) shall be or have any of the rights or privileges of a stockholder of the Company in respect of any of the Shares issuable pursuant to the exercise of this TLSAR, unless and until certificates representing such Shares shall have been issued, recorded on the records of the Company or its transfer agents or registrars, and delivered to the Employee (or beneficiary). 12. No Effect on Employment. The Employee's employment with the Company and its Affiliates is on an at-will basis only. Accordingly, the terms of the Employee's employment with the Company and its Affiliates shall be determined from time to time by the Company or the Affiliate employing the Employee (as the case may be), and the Company or the Affiliate shall have the right, which is hereby expressly reserved, to terminate or change the terms of the employment of the Employee at any time for any reason whatsoever, with or without good cause. For purposes of this Agreement, the transfer of employment of the Employee between the Company and any one of its Affiliates (or between Affiliates) shall not be deemed a Termination of Employment. 13. Address for Notices. Any notice to be given to the Company under the terms of this Agreement shall be addressed to the Company, in care of its Secretary, at 600 Montgomery Street, San Francisco, California 94111, or at such other address as the Company may hereafter designate in writing. 14. TLSAR is Not Transferable. Except as otherwise provided in Paragraphs 6 and 7 above, this TLSAR and the rights and privileges conferred hereby may not be transferred, pledged, assigned or otherwise hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to sale under execution, attachment or similar process. Upon any attempt to transfer, pledge, assign, hypothecate or otherwise dispose of this TLSAR, or of any right or privilege conferred hereby, or upon any attempted sale under any execution, attachment or similar process, this TLSAR and the rights and privileges conferred hereby immediately shall become null and void. 15. Maximum Term of TLSAR. Notwithstanding any other provision of this Agreement except Paragraph 6 above relating to the death of the Employee (in which case the TLSAR is exercisable to the extent set forth therein), this TLSAR is not exercisable after the Expiration Date. 16. Binding Agreement. This Agreement shall be binding upon and inure to the benefit of the heirs, legatees, legal representatives, successors and assigns of the parties hereto. 17. Conditions to Exercise. Exercise of this TLSAR will not be permitted until arrangements (satisfactory to the Company) have been made by the Employee for the payment of the amount of taxes required (as determined by the Company) to be withheld by reason of such exercise. 18. Plan Governs. This Agreement is subject to all of the terms and provisions of the Plan. In the event of a conflict between one or more provisions of this Agreement and one or more provisions of the Plan, the provisions of the Plan shall govern. Capitalized terms and phrases used and not defined in this Agreement shall have the meaning set forth in the Plan. 19. Committee Authority. The Committee shall have all discretion, power, and authority to interpret the Plan and this Agreement and to adopt such rules for the administration, interpretation and application of the Plan as are consistent therewith. All actions taken and all interpretations and determinations made by the Committee in good faith shall be final and binding upon the Employee, the Company and all other interested persons, and shall be given the maximum deference permitted by law. No member of the Committee shall be personally liable for any action, determination or interpretation made in good faith with respect to the Plan or this Agreement. 20. Captions. The captions provided herein are for convenience only and are not to serve as a basis for the interpretation or construction of this Agreement. 21. Agreement Severable. In the event that any provision in this Agreement shall be held invalid or unenforceable, such provision shall be severable from, and such invalidity or unenforceability shall not be construed to have any effect on, the remaining provisions of this Agreement. EX-10.33 8 Exhibit 10.33 TRANSAMERICA CORPORATION 1998 CORPORATE BONUS PLAN Purpose: To provide a variable pay element that serves as an incentive to achieve planned performance; and To recognize individual contributions to annual operating results and achievement of the Corporation's strategic goals. To complement the Value Added Incentive Plan described in the 1994 proxy statement. Eligibility and Participation: Senior corporate and subsidiary executives selected by the Chief Executive Officer and Corporate Vice Presidents are eligible to participate in the Plan. Individuals will be notified of their participation, target bonuses, the percentage weighting of the components described below, and applicable payout tables in a letter as soon as possible after the Plan has been adopted. Inclusion of any individual as a participant in the Plan will not be a guarantee that any bonus will be paid to that person or that the person's employment will be continued for any period. Individual Bonuses: Individual target bonuses will be a predetermined percentage of 1998 base salary. A percentage of each executive's target bonus will be based on performance achieved in the following areas as appropriate: o The level of Value Added achieved. Value Added is summarized on Exhibit I. Bonuses under this component will be calculated in accordance with the Value Added Incentive Plan, as adopted by stockholders in 1994, under the terms applicable to the 1998 plan year. o The level of Business Unit Financial Performance achieved. Business Unit Financial Performance is described on Exhibit II. o Management's evaluation of accomplishment of Strategic Goals or other management objectives. Actual awards will be calculated after results are known and will take into account performance in the above areas. Bonuses may be further modified to reflect the individual's personal performance. Approval of Plan and Payouts: The Plan is established by, and may be modified or terminated at any time by, the Management Development and Compensation Committee of the Corporation's Board of Directors the "Compensation Committee"). Individual awards under the Plan shall be subject to review and approval by the Compensation Committee. The Compensation Committee reserves the right to modify the formula for individual target bonuses (both as to the components and the percentage mix) for particular individuals and exclude non-recurring items as appropriate. Bonus Committee: The Plan will be administered by the Bonus Committee composed of the Corporation's President and Chief Executive Officer, Executive Vice President (Finn), Executive Vice President and Chief Financial Officer and Director of Compensation. The Bonus Committee is responsible for interpreting the Plan and recommending methods to deal with unforeseen circumstances. Payment of Bonuses: Bonuses will be paid in cash as soon as possible after Value Added and Business Unit Financial Performance for the Corporation and each subsidiary have been determined and bonus recommendations have been approved by the Compensation Committee. Participants must be continuously employed by the Corporation or one of its subsidiaries from January 1 through December 31, 1998 to receive a payout under the Plan. EXHIBIT I Value Added Component Value Added is calculated in the same manner as for the 1998 profit plan and is defined as Adjusted Net Income minus a capital charge, expressed as a percentage of the Corporation's Average Adjusted Equity. The capital charge is determined by multiplying the Corporation's Average Adjusted Equity by the Cost of Equity. Each of these terms is further defined for 1998 as follows: o "Adjusted Net Income" means the Corporation's net income, in accordance with generally accepted accounting principles, as reported for the year, adjusted for (i) cumulative effects of changes in accounting standards, (ii) the economic amount of interest and depreciation (levelized over the life of the equipment) and any economic gains and losses on the disposition of equipment held for lease in lieu of reported interest, depreciation and gains and losses, (iii) amortized bond, equity and other portfolio gains and losses in lieu of realized gains and losses as reported, and (iv) the exclusion of goodwill amortized during the year. o "Adjusted Equity" means the Corporation's reported shareholders' equity, adjusted to exclude (i) preferred stock and (ii) net unrealized gains and losses on marketable equity and debt securities and foreign currency translation adjustments, and to include accumulated goodwill amortization related to assets still owned by the Company. o "Average Adjusted Equity" means the "five-point" quarterly average of the Adjusted Equity, the first point being the preceding year end. o "Cost of Equity" means the Corporation's imputed equity cost based on a formula approved by the Bonus Committee prior to the start of the year. For 1998, the cost of equity will be determined by adding (a) the Corporation's risk premium (the long-term market growth in equity securities over the risk-free rate multiplied by the Corporation's beta) and (b) the trend risk-free rate. EXHIBIT II Business Unit Financial Performance Component Bonuses under the Business Unit Financial Performance Component generally will be based on either (i) Value Added or (ii) actual after-tax operating income, excluding investment gains and losses, compared to the profit plan operating income for the relevant subsidiary or group of subsidiaries. The leverage for below-target and above-target performance will take into account the expected degree of difficulty in achieving target performance level and is not necessarily the same for each organization. The applicable payout table will be communicated to participants as soon as possible after the Plan has been adopted. EX-10.35 9 Exhibit 10.35 AMENDMENT NO. 2 TO THE TRANSAMERICA CORPORATION 1996 STOCK OPTION AND AWARD PLAN TRANSAMERICA CORPORATION, having adopted the Transamerica Corporation 1996 Stock Option and Award Plan (the "Plan") effective as of December 16, 1996, and having amended the Plan on one prior occasion, hereby amends the Plan, effective as of January 2, 1998, as follows: 1. The Plan is hereby amended by adding a new Section 2.12 as follows with all subsequent Sections renumbered accordingly: 2.12 "Early Retirement" means a Termination of Employment by reason of the Employee's early retirement at or after his or her "Early Retirement Date" under the Retirement Plan for Salaried U.S. Employees of Transamerica Corporation and Affiliates (or any successor thereto). 2. The Plan is hereby amended by adding a new Section 2.18 as follows with subsequent Sections renumbered accordingly: 2.18 "Normal Retirement" means a Termination of Employment by reason of the Employee's retirement at or after his or her "Normal Retirement Date" under the Retirement Plan for Salaried U.S. Employees of Transamerica Corporation and Affiliates (or any successor thereto). 3. The Plan is hereby amended by deleting Section 2.24 (defining the term, "Retirement") with subsequent Sections renumbered accordingly. 4. Section 2.26 (defining the term, "Stock Appreciation Right" or "SAR") is hereby amended by adding the phrase, "Early Retirement or Normal" before the word, "Retirement". 5. Section 3.4 is hereby amended by adding the phrase, "Early Retirement or Normal" before the word, "Retirement". 6. The first sentence of Section 4.3 is hereby amended by replacing the phrase, "and the number, class, and price of Shares subject to outstanding Awards," with the phrase, "and the number, class, vesting price and Exercise Price of Shares subject to outstanding Awards,". 7. Section 5.3 is hereby amended in its entirety to read as follows: 5.3 Exercise Price. Except as provided in subparagraphs (a) and (b) of this Section 5.3, the Exercise Price of each Option shall be determined by the Committee in its discretion; provided, however, that such Price shall not be less than 100% of the Fair Market Value of a Share on the Grant Date. Notwithstanding the preceding sentence, in the event that the Corporation or an Affiliate consummates a transaction described in section 424(a) of the Code (e.g., the acquisition of property or stock from an unrelated corporation), persons who become Employees on account of such transaction may be granted Options in substitution for options granted by their former employer, in which case the Committee, in its sole discretion and consistent with section 424(a) of the Code, shall determine the exercise price of such substitute Options. (a) Options with an Exercise Price of $125 per Share, or, if greater, the Fair Market Value per Share on the Grant Date, for 100% of the Shares covered by the Option may be granted to any Employee designated by the Committee. (b) Options with an Exercise Price of $150 per Share for 100% of the Shares covered by the Option shall be granted to any designated Employee. 8. Section 5.4.1 is hereby amended in its entirety as follows: 5.4.1 Each Option shall terminate no later than the first to occur of the following events: (a) The date for termination of the Option set forth in the related Award Agreement; or (b) The expiration of twelve (12) years from the Grant Date (10 years in the case of an Option described in Section 5.3(a) or (b)); or (c) Except as provided in 5.4.1(f), the expiration of three (3) months from the Participant's Termination of Employment for a reason other than his or her death, Disability, Early or Normal Retirement; or (d) The expiration of three (3) years from the date of the Participant's Termination of Employment by reason of Disability; or (e) The expiration of five (5) years from the date of the Participant's Early or Normal Retirement; or (f) The expiration of one (1) year from the date of the Participant's Termination of Employment if the Participant's Termination of Employment occurs within one (1) year after a Change of Control for a reason other than his or her death, Disability, Early or Normal Retirement; or (g) In the case of an Option described in Section 5.3(b) which has not been exercised, the date on which the Option no longer may become exercisable (due to the failure of the conditions of Section 5.5.2(a) and (b) to be met). In addition, an Option (or applicable portion thereof) with respect to which a related tandem SAR has been granted shall terminate upon exercise of the related SAR. 9. Section 5.4.2 is hereby amended by replacing the phrase, "or within the three-month, three-year, five-year or one-year period referred to in Section 5.4.1(c), (d), (e) or (f) (whichever is applicable)" with the phrase, "prior to the expiration of his or her Option in accordance with Section 5.4.1". 10. Section 5.5 is hereby amended in its entirety to read as follows: 5.5 Exercisability of Options. Except as provided in subsections 5.5.1, 5.5.2, 5.5.3 and 5.5.4 of this Section 5.5, Options shall be exercisable at such times and be subject to such restrictions and conditions as the Committee shall determine in its sole discretion. After an Option is granted, the Committee, in its sole discretion, may accelerate the exercisability of such Option (or any portion thereof). 5.5.1 Exercisability of $125 Options. Subject to Section 5.5.3, each Option described in Section 5.3(a) shall become exercisable as to 33-1/3% of the Shares covered by the Option on the third anniversary of the Grant Date, as to an additional 33-1/3% of such Shares on the fourth anniversary of the Grant Date, and as to the remaining Shares on the fifth anniversary of the Grant Date, provided in each case that the Participant remains an Employee on the applicable anniversary (except to the extent provided in Section 5.5.4). 5.5.2 Exercisability of $150 Options. Each Option described in Section 5.3(b) shall become exercisable as to 100% of the Shares covered by the Option on the first date on which both of the following conditions shall have occurred, provided that the Participant remains an Employee on such date (except to the extent provided in Section 5.5.4). (a) the tenth trading day (occurring within a period of 30 consecutive trading days) on which the Fair Market Value of a Share is at least $150, provided that such tenth trading day occurs within five years of the Grant Date, and (b) the Corporation's total stockholder return (as determined by the Committee in its sole discretion) is at or above the median level of stockholder return for a subset of the Standard & Poor's 500 Financial Index during the period from the Grant Date to the tenth trading day referred to in Section 5.5.2(a) and any days thereafter until such median level is attained or, if such period is not at least one year, during the period from such date prior to the Grant Date as will result in a period of at least one year ending on the tenth trading day referred to in Section 5.5.2(a) and any days thereafter until such median level is attained. 5.5.3 Special Rule for Change of Control. Notwithstanding the foregoing, if a Change of Control occurs prior to the Participant's Termination of Employment, the right to exercise 100% of the Shares subject to an Option (other than an Option referred to in Section 5.3(b)), shall accrue on the date that the Change of Control occurs. 5.5.4 Special Rules for Early or Normal Retirement, Disability or Death. Notwithstanding the foregoing, with respect to an Option referred to in Section 5.3(a) or (b), if a Participant incurs a Termination of Employment on account of Early Retirement, Normal Retirement, Disability or death, then subject to Section 5.4 (regarding the expiration and maximum term of Options), the right to exercise a portion of his or her Shares shall accrue on the date that such right otherwise would have accrued. The Committee shall determine such portion on a pro-rata basis, based on the time elapsed from the Grant Date to the date of Normal Retirement, Disability or death and the vesting date. 11. Section 6.4 is hereby amended in its entirety to read as follows: 6.4 Expiration of SARs. Each SAR shall expire upon the date determined by the Committee, in its sole discretion, and set forth in the applicable Award Agreement. Notwithstanding the foregoing, (a) the rules of Section 5.4 (regarding the expiration and maximum term of Options) also shall apply to SARs, and (b) each SAR shall terminate no later than the last day of the period 60 consecutive days which begins on the date of a Change of Control. IN WITNESS WHEREOF, Transamerica Corporation, by its duly authorized Chairman of its Management Development and Compensation Committee, and by its duly authorized officer, has executed this Amendment No. 2 on the date(s) indicated below. TRANSAMERICA CORPORATION Date: ______________, 1997 By _________________________________ Peter V. Ueberroth, Chairman, Management, Development and Compensation Committee Date: ______________, 1997 And By _____________________________ Title: EX-12 10 Exhibit 12 TRANSAMERICA CORPORATION AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (Dollar amounts in millions)
Year Ended December 31, 1997 1996 1995 1994 1993 Fixed charges: Interest and debt expense .................... $ 420.9 $ 396.5 $ 381.5 $ 319.7 $ 269.3 Minority interest charges .................... 42.8 18.8 17.2 3.3 One-third of rental expense ..................................... 36.1 19.0 21.3 26.9 23.5 --------- --------- ---------- ---------- ---------- Total ...................................... $ 499.8 $ 434.3 $ 420.0 $ 349.9 $ 292.8 ========= ========= ========== ========== ========== Earnings: Consolidated operating income from continuing operations .................................. $ 532.0 $ 501.5 $ 390.1 $ 336.9 $ 354.5 Provision for income taxes ....................................... 129.8 160.1 180.9 204.6 75.1 Fixed charges ................................ 499.8 434.3 420.0 349.9 292.8 --------- --------- ---------- ---------- ---------- Total ...................................... $ 1,161.5 $ 1,095.9 $ 991.0 $ 891.4 $ 722.4 ========= ========= ========== ========== ========== Ratio of earnings from con- tinuing operations to fixed charges ................................ 2.32 2.52 2.36 2.55 2.47 ==== ==== ==== ==== ====
EX-13 11 CONSOLIDATED RESULTS TRANSAMERICA'S INCOME from continuing operations for 1997 grew $30.5 million (6%) from 1996. Results in 1997 included $43.3 million of net after tax gains from investment transactions compared to $25.5 million in 1996. Income from continuing operations before investment transactions in 1997 increased $12.7 million (3%) and included a $90 million benefit mainly from the resolution of prior years' tax matters and a $25.8 million after tax provision for loss on the accelerated disposal of equipment and restructuring costs at our leasing business. On June 23, 1997 we sold our branch-based consumer lending operation. In the fourth quarter of 1997 the consumer lending business was reclassified as discontinued operations following management's assessment that the results of the company's new approach to consumer lending did not meet the company's criteria for further investment. Results from the consumer lending segment for prior periods have been reclassified as results from discontinued operations. Income from continuing operations before investment transactions in 1996 included $68.4 million in benefits primarily from the resolution of prior years' tax matters. It also included a $4.5 million after tax benefit from the elimination of various contingencies related to the 1995 sale of assets by the commercial lending operation. Excluding the items discussed above, income from continuing operations before investment transactions for 1997 rose to $424.5 million from $403.1 million, an increase of $21.4 million (5%). The increase was due primarily to higher operating results at the real estate services and commercial lending businesses and lower unallocated interest and other expenses. Lower results at the leasing and life insurance businesses partially offset these increases. Transamerica's income from continuing operations for 1996 increased $111.4 million (29%) from 1995. Results in 1996 included $25.5 million of net after tax gains from investment transactions compared to $34.4 million in 1995. Income from continuing operations before investment transactions in 1996 included the items noted above. Results for 1995 included $30 million of tax benefits included in life insurance and unallocated expenses from the resolution of prior years' tax matters, a $12.2 million after tax benefit from the reversal of a valuation allowance no longer needed, and a $2 million after tax benefit primarily from the settlement of a class action lawsuit involving Franklin Savings Association in which Transamerica was the plaintiff. The favorable effect of these 1995 items was offset in part by a $21.5 million after tax provision for an expected loss on the sale and leaseback of Transamerica Center in downtown Los Angeles, and after tax charges totaling $8.8 million for restructuring the real estate services operations. Excluding the special items from both years, income from continuing operations before investment transactions increased to $403.1 million in 1996 up from $341.8 million in 1995. This $61.3 million (18%) increase was primarily as a result of improved operating results at the life insurance, real estate services, leasing and commercial lending businesses. These positive factors were partially offset by higher unallocated interest and other expenses. ITEMS INCLUDED IN INCOME FROM CONTINUING OPERATIONS:
(Amounts in millions except for per share data) 1997 1996 1995 ------- ------- ------- Income from continuing operations ................................ $ 532.0 $ 501.5 $ 390.1 Gain on investment transactions .................................. (43.3) (25.5) (34.4) ---------- ---------- --------- Income from continuing operations before investment transactions ....................................... 488.7 476.0 355.7 Life insurance-Resolution of prior years' tax matters ............ (4.4) Primarily settlement of a class action lawsuit .... (2.0) Real estate services-Restructuring charges ....................... 8.8 Commercial lending-Reserves no longer required ................... (4.5) (12.2) Leasing-Provision for loss on accelerated disposal of equipment and restructuring costs .......................... 25.8 Unallocated interest & other expenses: Resolution of prior years' tax and other matters .............. (90.0) (68.4) (25.6) Expected loss on sale and leaseback of Transamerica Center (in downtown Los Angeles) ............... 21.5 ---------- ---------- --------- $ 424.5 $ 403.1 $ 341.8 ========== ========== ========= Earnings per share (diluted) ..................................... $ 6.26 $ 5.65 $ 4.62 ========== ========== =========
Page 32 OPERATING INCOME BY BUSINESS SEGMENT
(Amounts in millions except for per share data) 1997 1996 1995 -------- -------- -------- LIFE INSURANCE ................................................... $ 306.4 $ 325.4 $ 290.8 FINANCE Commercial lending ............................................... 92.1 73.2 75.2 Leasing .......................................................... 40.6 80.8 75.1 Amortization of goodwill ......................................... (13.2) (12.6) (12.9) ---------- ---------- -------- Total finance .................................................... 119.5 141.4 137.4 REAL ESTATE SERVICES Real estate services ............................................. 74.0 44.4 18.7 Amortization of goodwill ......................................... (0.1) (0.1) (0.1) ---------- ---------- --------- Total real estate services ...................................... 73.9 44.3 18.6 Unallocated interest and other expenses .......................... (11.1) (35.1) (91.1) ---------- ---------- --------- Income from continuing operations before investment transactions ....................................... 488.7 476.0 355.7 Gain on investment transactions .................................. 43.3 25.5 34.4 ---------- ---------- --------- Income from continuing operations ................................ $ 532.0 $ 501.5 $ 390.1 ========== ========== ========= EARNINGS PER SHARE OF COMMON STOCK-DILUTED Income from continuing operations before investment transactions ....................................... $ 7.22 $ 6.72 $ 4.82 Gain on investment transactions .................................. 0.65 0.38 0.49 ---------- ----------- ---------- Income from continuing operations ................................ $ 7.87 $ 7.10 $ 5.31 ========== =========== ========== Average shares outstanding1 ...................................... 66.8 68.2 70.1 ========== =========== ========== 1. Includes the dilutive effect of stock options.
Page 33 LIFE INSURANCE THE TRANSAMERICA LIFE INSURANCE COMPANIES design, underwrite, distribute and reinsure traditional and investment based life insurance and other financial security products. Our customers include individuals and families who buy life insurance, annuities, mutual funds and long-term care insurance; individuals and businesses who purchase pension, annuity, mutual fund and other investment products; other life insurance companies that buy reinsurance from us; and the U.S. government, for which we process Medicare claims. In 1997 we created an operations division to consolidate our back office operations and focus on improving productivity and service to our customers. We also focused our marketing efforts to help us better understand and meet the needs of our current customers and target new ones more effectively. Investments in new technology are playing a key role in both of these efforts. We have different strategies for adding shareholder value in each of our divisions. In the life insurance products division, to reduce costs and strengthen our traditional agency sales system, we converted 9 of our 20 branch offices to independent agencies and plan to convert the remainder. We are implementing a new compensation program for all agents. We are also expanding our distribution channels for term insurance products, and our mass marketing of both term and universal products to small employers. In the annuities division, we are working to develop stronger marketing programs and to make annuities available through all our distribution channels. We are also investing in new technology to improve the administration and servicing of these products. In asset management, we continue to look for opportunities in targeted segments of the investment and retirement savings markets where we can leverage our investment management expertise without investing significant additional capital. Our reinsurance division continues to introduce new risk management services. These include an initiative to package administrative support with our product consulting activities. The division also continues to expand its international operations. Net income from our life insurance operations decreased by $5.9 million (2%) in 1997 after increasing $29.5 million (10%) in 1996. Net income included net after tax gains from investment transactions totaling $27.3 million in 1997, $14.2 million in 1996, and $19.3 million in 1995. Excluding investment transactions, income from insurance operations decreased $19 million (6%) in 1997 and increased $34.6 million (12%) in 1996. In 1997, results were affected by a $20.1 million after tax charge for a legal settlement related to the sale and performance of certain universal and whole life insurance policies issued by our life insurance operations and a $5 million after tax provision for costs associated with proceedings seeking rescission of reinsurance contracts in connection with business in the personal accident market in London. Income before investment transactions decreased at the life insurance products division in 1997, primarily due to the legal settlement provision and higher claims. At the annuities division, income before investment transactions grew in 1997. Interest rate spreads were favorable, fee income was higher because our variable annuity asset base was larger, and our operating costs were lower. Operating expenses in 1996 were adversely affected by relocation costs for moving portions of the operations to Charlotte, North Carolina and Kansas City, Missouri. The asset management group had slightly higher income before investment transactions in 1997. Interest rate spreads were favorable, and fee income was higher because we were managing more assets. The group's results were reduced by the decision late in 1996 to reduce the scale of the Page 34 capital-intensive structured settlements business. Income before investment transactions was slightly lower at reinsurance in 1997 due to increased claim costs partially offset by growth in policy revenue. Income before investment transactions from our Canadian operations increased in 1997 because of improved persistency, favorable claims experience and higher management fees from growth in the segregated funds business. In the corporate line, income before investment transactions in 1997 decreased primarily due to increased general operating expenses offset in part by higher investment income. In 1996, operating income grew at the insurance products division and asset management group primarily because the asset base of interest-sensitive products grew, and interest rate spreads were maintained. The reinsurance line increased its operating income in 1996 primarily by assuming a higher volume of new in force business. The Canadian line improved its operating income in 1996 through growth in the base of interest-sensitive policies. In annuities, Transamerica benefited from increased interest rate spreads and fee income but experienced a decrease in income before investment transactions compared to 1995 primarily because of relocation costs. Investment transactions for the life insurance operation in 1997 included after tax net gains on the sale of investments of $32.9 million compared to $41.9 million in 1996 and $40.6 million in 1995. The 1996 amount included an after tax gain of $9.1 million 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. Transamerica's consolidated financial statements were not effected. Adjustments to the amortization of deferred policy acquisition costs increased after tax investment gains by $5.8 million in 1997 and reduced after tax investment gains by $21.8 million in 1996 and $6 million in 1995. Investment transactions in 1997, 1996 and 1995 included $11.4 million, $5.9 million and $15.3 million of after tax losses due to downward adjustments in carrying value of certain below investment grade fixed maturity investments. Net investment income for the life insurance companies increased $89.7 million (4%) in 1997 and $105.6 million (5%) in 1996 primarily due to a growing base of invested assets. Premiums and other income increased $126 million (7%) in 1997 and decreased $22.5 million (1%) in 1996. The increase in 1997 was primarily due to growth in traditional life premiums and income on interest sensitive policies. Life insurance benefit costs and expenses grew $257.3 million (8%) in 1997 and $28.7 million (1%) in 1996. The increases were primarily due to the higher interest credited on interest-sensitive policies, unfavorable claims activity, and in 1997 the $20.1 million and $5 million after tax provisions discussed above. Cash provided by operations for 1997 was $988.8 million, an increase of $74.9 million (8%) from 1996. This increase was primarily due to the timing of the settlement of certain receivables and payables, including some at the reinsurance division. We continue to maintain a sufficiently liquid investment portfolio at the life insurance companies to cover operating requirements. The rest of our funds is invested in long term securities. Page 35
LIFE INSURANCE (Amounts in millions) 1997 1996 1995 ----------- ----------- ----------- ASSETS Investments ................................................. $ 31,693.7 $ 28,935.4 $ 27,703.2 Deferred policy acquisition costs ........................... 2,102.6 2,138.2 1,974.2 Other assets ................................................ 7,591.0 5,408.4 5,422.4 ----------- ----------- ----------- $ 41,387.3 $ 36,482.0 $ 35,099.8 =========== =========== =========== LIABILITIES AND EQUITY Policy reserves and related items ........................... $ 30,141.9 $ 28,542.8 $ 27,893.4 Other liabilities ........................................... 6,937.7 4,566.7 3,746.5 Equity* ..................................................... 4,307.7 3,372.5 3,459.9 ----------- ----------- ----------- $ 41,387.3 $ 36,482.0 $ 35,099.8 =========== =========== =========== REVENUES Investment income, net of expenses .......................... $ 2,169.4 $ 2,079.7 $ 1,974.1 Premiums and other income ................................... 1,818.0 1,692.0 1,714.5 Gain on investment transactions ............................. 42.0 21.9 29.6 ----------- ----------- ----------- 4,029.4 3,793.6 3,718.2 EXPENSES Policyholder benefits ....................................... 2,810.9 2,649.7 2,710.4 Commissions and other expenses .............................. 734.9 638.8 549.4 Income taxes ................................................ 149.9 165.5 148.3 ----------- ----------- ----------- 3,695.7 3,454.0 3,408.1 ----------- ----------- ----------- Net income .................................................. $ 333.7 $ 339.6 $ 310.1 =========== =========== =========== SOURCE OF CASH Cash provided by operations ................................. $ 988.8 $ 913.9 $ 543.8 Net receipts from interest-sensitive policies ............... 440.4 991.7 1,527.4 ----------- ----------- ----------- $ 1,429.2 $ 1,905.6 $ 2,071.2 =========== =========== =========== APPLICATION OF CASH Net purchases of investments ................................ $ 1,315.4 $ 1,862.4 $ 1,986.1 Equity transactions ......................................... 56.2 40.0 40.0 Other ....................................................... 57.6 3.2 45.1 ----------- ----------- ----------- $ 1,429.2 $ 1,905.6 $ 2,071.2 =========== =========== =========== *Equity includes net unrealized gains from marking investments to fair value of $1,190.6 million in 1997, $549.8 million in 1996 and $946 million in 1995. See footnote B of the notes to the financial statements for consolidated components of unrealized gains.
Page 36 TRANSAMERICA FINANCE CORPORATION TRANSAMERICA FINANCE CORPORATION, which is a separate Securities and Exchange Commission registrant, includes Transamerica's commercial lending and leasing operations. Transamerica Finance Corporation provides funding for these businesses. Its principal assets are finance receivables and equipment held for lease, which totaled a combined $6.9 billion at December 31, 1997 and $7.1 billion at December 31, 1996. These operations have a high level of liquidity since a significant portion of their assets are finance receivables. Principal cash collections of finance receivables totaled $24 billion in 1997, $18.1 billion in 1996 and $18 billion in 1995. Transamerica Finance Corporation's total notes and loans payable were $6 billion at December 31, 1997 and $9.9 billion at December 31, 1996. Its variable-rate debt totaled $3.5 billion at December 31, 1997 compared to $5.5 billion at December 31, 1996. Transamerica Finance Corporation's ratio of debt to tangible equity was 6.5:1 at December 31, 1997 compared with 6.8:1 at December 31, 1996. From time to time, Transamerica Finance Corporation publicly offers senior or subordinated debt securities. It issued a total of $120 million of public debt in 1997, $688 million in 1996 and $832 million in 1995. Under a shelf registration statement filed in April 1995 with the Securities and Exchange Commission, Transamerica Finance Corporation may offer up to $3 billion of senior or subordinated debt securities with varying terms, of which $1.8 billion had not been issued at December 31, 1997. Page 37 TRANSAMERICA FINANCE CORPORATION
(Amounts in millions) 1997 1996 1995 ----------- ------------ ----------- ASSETS Finance receivables less unearned fees and allowance for losses .......................................................... $ 3,903.3 $ 4,018.4 $ 3,322.1 Net assets of discontinued operations .................................. 40.1 4,326.2 5,334.6 Equipment held for lease ............................................... 2,996.5 3,118.5 2,862.0 Goodwill ............................................................... 423.0 368.1 381.1 Assets held for sale ................................................... 377.8 3.4 4.4 Other assets ........................................................... 984.8 885.0 358.3 ----------- ----------- ----------- $ 8,725.5 $ 12,719.6 $ 12,262.5 =========== =========== =========== LIABILITIES AND EQUITY Notes and loans payable ................................................ $ 6,025.2 $ 9,879.3 $ 9,689.9 Other liabilities ...................................................... 1,397.1 1,087.6 787.3 Equity ................................................................. 1,303.2 1,752.7 1,785.3 ----------- ----------- ----------- $ 8,725.5 $ 12,719.6 $ 12,262.5 =========== ========= =========== REVENUES Finance and leasing revenues ........................................... $ 1,329.5 $ 1,206.5 $ 1,164.6 EXPENSES Operating expenses ..................................................... 490.6 406.0 401.7 Interest ............................................................... 354.4 314.2 307.5 Depreciation on equipment held for lease ............................... 275.8 255.1 236.6 Provision for losses on receivables and assets held for sale ........... 16.2 10.2 (4.0) Income taxes ........................................................... 74.3 81.7 91.0 ----------- ----------- ----------- 1,211.3 1,067.2 1,032.8 ----------- --------- ----------- Income from continuing operations ...................................... $ 118.2 $ 139.3 $ 131.8 =========== =========== =========== SOURCE OF CASH Cash provided by operations ............................................ $ 363.4 $ 495.8 $ 612.8 Finance receivables collected and sold ................................. 24,043.1 18,086.8 18,003.1 Proceeds from sale and cash transactions with discontinued operations ........................................ 4,413.2 1,021.8 Proceeds from debt financing ........................................... 3,401.7 6,784.5 8,281.5 Other .................................................................. 382.5 20.0 ----------- ----------- ----------- $ 32,603.9 $ 26,388.9 $ 26,917.4 =========== =========== =========== APPLICATION OF CASH Additions to equipment held for lease .................................. $ 378.4 $ 391.5 $ 573.3 Finance receivables originated ......................................... 23,262.4 18,765.1 18,125.5 Purchase of finance receivables from Whirlpool Finance Corporation ....................................... 881.9 Payments of notes and loans ............................................ 7,263.5 6,932.9 7,333.6 Cash transactions with discontinued operations ......................... 783.6 Equity transactions .................................................... 817.7 237.9 101.4 Other .................................................................. 61.5 ----------- ----------- ----------- $ 32,603.9 $ 26,388.9 $ 26,917.4 =========== =========== ===========
Page 38 COMMERCIAL LENDING TRANSAMERICA'S COMMERCIAL LENDING operation makes loans to small, medium and large businesses. At the end of 1997 we had net finance receivables owned and serviced of $5 billion in two core businesses: distribution finance and business credit. Our distribution finance operations provide financial services to manufacturers, distributors, resellers, retailers and commercial and consumer end users. We primarily serve companies who sell consumer electronics and appliances, marine products such as boats and personal watercraft, information technology, lawn and garden products, recreational vehicles, furnaces and air conditioners, motorcycles and manufactured housing. Our primary strategy in this business is to provide one source for the financing of goods as they move through the distribution channels from manufacturers to end user. We believe this strategy will help us respond to pricing pressure as new competitors continue to enter this market. The growing market for securitization of receivables (selling receivables to third parties while retaining the servicing of the customer accounts) has enabled new competitors to enter the market using less capital than was previously required. In 1997, we securitized $1.5 billion of floor plan finance receivables which adds additional flexibility to our funding strategies as our receivables portfolio grows. We are pursuing growth opportunities for distribution finance in Europe, in retail financing, and through joint ventures with our customers. In January 1998, the distribution finance operation completed the acquisition of approximately $1.1 billion of net receivables and other assets of the inventory financing, retail financing and international factoring (receivables financing) businesses of Whirlpool Financial Corporation for a total purchase price of $1.3 billion in cash. The acquisition of the inventory finance and most of the international finance assets closed in 1997. The acquisition has given us a stronger presence domestically and a significantly expanded international business base. We have also entered into a long-term strategic alliance with Whirlpool under which we will provide financing service to Whirlpool's dealers and retail customers (through our credit card bank) and factoring services to Whirlpool's international operations. Transamerica business credit provides a variety of financial products for commercial customers. We extend asset-based credit facilities, which are underwritten based on collateral coverage or cash flow characteristics, to middle market companies for business expansion, acquisitions, and financial restructurings. Through our equipment finance and lease division, which was started in 1995, we support our customers' growth by financing an array of fixed assets, including manufacturing, construction and transportation equipment. In late 1996, we began providing short-term equipment loans, leases and revolving credit facilities for venture capital-supported development stage companies, primarily in the life sciences and electronics markets, through our technology finance division. Additionally, Transamerica business credit provides capital for other financial services providers, primarily in the form of loans extended by our financial services funding division, as well as through joint venture arrangements. Net income from our commercial lending operations was $80.9 million in 1997, an increase of $18.3 million (29%) from $62.6 million in 1996. Income before the amortization of goodwill grew $18.9 million (26%) from 1996. Operating results for 1997 included an after tax gain of $5.4 million on the sale and securitization of $1.5 billion of floor plan finance receivables and a $3.2 million tax benefit from tax matters resolved in 1997. In 1996, operating results included a $4.5 million Page 39 benefit primarily from the favorable resolution of disputed issues surrounding the 1995 sale of assets in Puerto Rico. In 1995, operating results included a $12.2 million after tax benefit from reversing a valuation allowance no longer required following the Puerto Rican asset sale and a $4.8 million after tax gain on the sale of a portfolio of consumer rediscount loans. Excluding the above items, commercial lending income from operations before the amortization of goodwill increased $14.8 million (22%) in 1997 and $10.5 million (18%) in 1996. In 1997, higher average net receivables outstanding contributed to the growth in operating income. In 1997, the commercial lending operation announced that it intends to sell its insurance premium finance operation and reclassified those receivables as assets held for sale. In 1996, growth in each of the core businesses led to higher average receivables outstanding and increased operating income. Revenues in 1997 grew $82.7 million (19%) from 1996 as higher average net receivables outstanding more than offset a decline in yield due to increased competition. Revenues in 1997 included an $8.7 million gain on the securitization of floor plan finance receivables. Revenues rose $9.1 million (2%) in 1996 principally due to growth in average net receivables outstanding. Interest expense increased $31.5 million (21%) from 1996 principally due to the higher average debt level needed to support receivables growth. In 1996, interest expense fell $300,000 from 1995 because of the lower average interest rate paid on borrowings, which was partially offset by a higher average debt level due to receivables growth. Operating expenses increased $17 million (11%) in 1997 and $3.6 million (2%) in 1996 primarily because of higher business volume and average net receivables outstanding. The provision for losses on receivables increased in 1997 by $6 million (60%) from 1996, partially due to growth in the average net receivables outstanding. In addition, the provision for losses on receivables decreased $5.9 million (37%) in 1996 from 1995 due to lower credit losses and because reserves were higher in the liquidating portfolio than were ultimately necessary. Credit losses, net of recoveries, as a percentage of average finance receivables outstanding, net of unearned finance charges, were 0.25% in 1997, 0.16% in 1996 and 0.34% in 1995. We have established an allowance for losses equal to 2.24% of net finance receivables outstanding as of December 31, 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 more than 60 days past due. At December 31, 1997, delinquent receivables were $12.7 million (0.35% of receivables outstanding) compared to $17.3 million (0.46% of receivables outstanding) at December 31, 1996. Delinquent receivables declined due to the reclassification of the insurance premium finance receivables to assets held for sale. 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 past due Page 40 amounts are collected. Nonearning receivables were $21.8 million (0.60% of receivables outstanding) at December 31, 1997 compared to $21.4 million (0.56% of receivables outstanding) at December 31, 1996. An increase in nonearning receivables in the core business was partly offset by the reclassification of the insurance premium finance receivables to assets held for sale. Assets held for sale as of December 31, 1997 totaled $281 million. Of the finance receivables held for sale at December 31, 1997, $14.2 million were more than 60 days past due and $7.5 million were classified as nonearning. COMMERCIAL LENDING
(Amounts in millions) 1997 1996 1995 --------- --------- --------- REVENUES Finance charges and related income ................................. $ 515.5 $ 432.8 $ 423.7 EXPENSES Interest ........................................................... 179.9 148.4 148.7 Operating expenses ................................................. 176.9 159.9 156.3 Provision for losses on receivables ................................ 16.2 10.2 16.1 Provision (benefit) for losses on assets held for sale ............. (20.1) Incomes taxes ...................................................... 50.4 41.1 47.5 --------- --------- --------- 423.4 359.6 348.5 --------- --------- --------- Income from operations ............................................. 92.1 73.2 75.2 Amortization of goodwill ........................................... (11.2) (10.6) (10.9) --------- --------- --------- Net income ......................................................... $ 80.9 $ 62.6 $ 64.3 ========= ========= =========
Page 41 LEASING TRANSAMERICA LEASING'S fleet of intermodal transportation equipment is the largest in the world. Intermodal equipment can be carried on ships or railcars or hauled by trucks. We lease this equipment to and manage it for steamship lines, railroads, shippers, distribution companies and motor carriers. In addition to service and term operating leases, we provide structured financing that enables customers to purchase equipment over time, and an equipment matching service in which we manage containers for customers and broker equipment interchanges among them. Most of our intermodal containers are used in international trade, while our chassis, rail trailers and domestic containers are used primarily within North America. We also have an over the road trailer leasing business in Europe. In 1997, utilization rates for our container fleet declined to 79% from 81% in 1996 due primarily to oversupply in the industry. Net income from leasing operations in 1997 declined 51% to $38.6 million. Leasing income before the amortization of goodwill was $40.6 million compared to $80.8 million in 1996. Earnings were reduced by a $25.8 million after tax provision for expected losses on the accelerated disposition of equipment (primarily standard containers) and the restructuring of the operation's field offices to reduce costs. The accelerated disposition is in response to an oversupply of units. Earnings for standard and refrigerated containers were also reduced by lower rental rates, a decline in utilization and decreased gains on the sale of used standard containers. Partially offsetting these declines were improved earnings from tank and domestic containers, chassis and European trailers. All of these lines had more on-hire units than in 1996. Additionally, rail trailers reported higher income due to improved utilization and rental rates and structured finance earnings improved due to a larger portfolio of finance leases. Excluding the impact of the accelerated equipment disposal and restructuring, leasing earnings before the amortization of goodwill were $66.4 million compared to $80.8 million in 1996. In 1996, income from leasing operations rose $5.7 million (8%) from 1995. The increase was primarily due to a larger portfolio of finance leases and lower ownership costs for the rail trailer business attributed to a smaller fleet. Income in 1996 included $4.4 million from the resolution of outstanding tax issues and the tax benefits from entering into structured lease transactions. Partially offsetting these increases were reduced earnings in standard and refrigerated containers and chassis due to lower utilization rates, and lower standard container and chassis rental rates. Revenue increased in 1997 by $32.2 million (4%) primarily because the October 1996 acquisition of Trans Ocean Ltd. increased the size of the fleet of standard, refrigerated and tank containers and chassis by approximately 25%. Revenue also increased as a result of a larger portfolio of finance leases and more on-hire European trailers. Offsetting these increases were the provision for the expected loss due to the accelerated equipment disposal and lower revenues from decreased rental rates and decreased utilization for standard and refrigerated containers resulting primarily from an industry-wide oversupply of equipment. In addition, rail trailer revenues were lower due to a smaller fleet size. Revenues increased in 1996 by $31.7 million (4%) primarily due to a larger on-hire fleet of refrigerated containers, tank containers and European trailers and a larger portfolio of finance leases. Partially offsetting these revenue increases was a decline in standard container revenues due to lower utilization and rental rates and lower gain on used equipment sales. Rail trailer revenues also Page 42 declined because of a smaller fleet and lower gains on used equipment sales. Expenses excluding income taxes increased $89.3 million (14%) in 1997 due to higher ownership and operating costs associated with our larger fleets of standard and refrigerated containers, chassis and European trailers and the provision associated with the restructuring. In 1996, expenses excluding income taxes increased $31.2 million (5%), in line with larger fleets of refrigerated containers, chassis and European trailers. Lower operating expenses from a smaller rail trailer fleet partially offset those higher costs. The combined utilization rate for standard containers, refrigerated containers, domestic containers, tank containers and chassis averaged 79% in 1997 compared to 81% in 1996 and 85% in 1995. Rail trailer utilization was 85% in 1997, 82% in 1996 and 77% in 1995. European trailer utilization was 92% in both 1997 and 1996 and 95% in 1995. In addition to leasing services, we are developing and using technology to provide more and better information to our customers via the internet and offering equipment management services. We are also concentrating on reducing our costs of operations in line with lower margins in an increasingly competitive pricing market for international containers. Our European trailer operation continues to provide opportunities for growth, as we added 5,100 units in 1997, making us one of only two leasing companies to provide equipment throughout Europe. LEASING
(Amounts in millions) 1997 1996 1995 --------- --------- --------- REVENUES Total leasing revenues ........................................ $ 797.8 $ 765.6 $ 733.9 EXPENSES Operating expenses ............................................ 174.1 129.2 126.5 Depreciation on equipment held for lease ...................... 275.8 255.1 236.6 Selling and administrative expenses ........................... 116.7 95.5 95.1 Interest ...................................................... 166.1 163.6 154.0 Income taxes .................................................. 24.5 41.4 46.6 --------- --------- --------- 757.2 684.8 658.8 --------- --------- --------- Income from operations ........................................ 40.6 80.8 75.1 Amortization of goodwill ...................................... (2.0) (2.0) (2.0) --------- --------- --------- Net income .................................................... $ 38.6 $ 78.8 $ 73.1 ========= ========= =========
Page 43 REAL ESTATE SERVICES THIS SEGMENT INCLUDES Transamerica's Real Estate Information Companies as well as certain real estate holdings and other investments. The primary business in Transamerica Real Estate Information Companies is Transamerica Real Estate Tax Service which obtains property tax information and monitors or processes property tax payments on mortgaged properties nationwide. We also operate a flood hazard certification company which determines and guarantees whether a property is located in a flood hazard zone and must therefore carry flood insurance under federal law. Tax service and flood hazard customers include a wide range of lenders from banks and savings and loans to mortgage companies. Transamerica Real Estate Information Companies' third business is Transamerica Intellitech which provides comprehensive public record information packaged with powerful software. Intellitech's products are designed to meet the information needs of realtors, appraisers, lenders, title companies and other users of real estate information. The tax service's primary objective is to enhance and extend its industry leadership. Key to achieving this goal is the completion of a major redesign and automation of its business processes, mirroring a similar successful automation we completed in our flood hazard business. We believe this project will allow Transamerica Real Estate Tax Service to offer a new generation of faster, more accurate and less paper-intensive tax services to its customers. Our outsourcing business, in which we actually administer tax payments for our customers, has become an important new source of revenue for the tax service. We are also working to develop new products and services that leverage our data holdings in all three businesses to increase our sales within the mortgage industry and to customers outside the industry. Net income from the real estate services segment increased $25.2 million (39%) in 1997 and $31 million (92%) in 1996. Net income included net after tax gains from investment transactions of $16 million in 1997, $20.4 million in 1996, and $15.1 million in 1995. Income before investment transactions increased $29.6 million (67%) in 1997, and included $27.4 million of after tax gains on the sale of six real estate properties and higher earnings at the real estate information companies. Income before investment transactions in 1996 increased due to higher tax service revenues as a result of higher mortgage refinancings and home sales and also included gains totaling $5.3 million after tax from the sale of seven real estate properties. Revenues in 1997 increased $59.1 million (17%) because of the gains on real estate sales noted above and increased business at the tax service. Revenues in 1996 increased $103.4 million (41%) because of increased business at the tax service and higher investment income. The funds these businesses require for capital expenditures and working capital are generated by operations. Cash, cash equivalents and accounts receivable are the real estate services' principal sources of liquidity. Page 44 REAL ESTATE SERVICES
(Amounts in millions) 1997 1996 1995 ---------- ---------- --------- ASSETS Cash, cash equivalents and accounts receivable ................. $ 253.1 $ 276.5 $ 102.5 Investments .................................................... 1,288.5 1,036.2 512.2 Land and buildings ............................................. 123.3 163.9 165.9 Other assets ................................................... 69.4 54.9 71.0 ---------- ---------- --------- $ 1,734.3 $ 1,531.5 $ 851.6 ========== ========== ========= LIABILITIES AND EQUITY Loss and future service reserves ............................... $ 180.0 $ 169.4 $ 156.6 Notes and loans payable ........................................ 800.5 810.6 363.2 Other liabilities .............................................. 162.9 101.7 53.7 Equity* ........................................................ 590.9 449.8 278.1 ---------- ---------- --------- $ 1,734.3 $ 1,531.5 $ 851.6 ========== ========== ========= REVENUES Real estate services revenues .................................. $ 390.9 $ 325.6 $ 230.2 Gain on investment transactions ................................ 25.1 31.3 23.3 ---------- ---------- --------- 416.0 356.9 253.5 ---------- ---------- --------- EXPENSES Salaries and other operating expenses .......................... 272.2 260.2 203.4 Income taxes ................................................... 53.8 31.9 16.3 ---------- ---------- --------- 326.0 292.1 219.7 ---------- ---------- --------- Income from operations ......................................... 90.0 64.8 33.8 Amortization of goodwill ....................................... (0.1) (0.1) (0.1) ---------- ---------- --------- Net income ..................................................... $ 89.9 $ 64.7 $ 33.7 ========== ========== ========= SOURCE OF CASH Cash provided by operations .................................... $ 16.5 $ 35.0 $ 13.4 Proceeds from debt financing ................................... 76.3 55.9 31.3 Equity transactions ............................................ 15.3 14.9 Other .......................................................... 89.8 ---------- ---------- --------- $ 182.6 $ 106.2 $ 59.6 ========== ========== ========= APPLICATION OF CASH Net purchases of investments ................................... $ 119.2 $ 35.4 $ 29.6 Payments of notes and loans .................................... 44.0 30.1 10.0 Equity transactions ............................................ 19.4 Other .......................................................... 40.7 20.0 ---------- ---------- --------- $ 182.6 $ 106.2 $ 59.6 ========== ========== ========= *Equity includes net unrealized gains from marking investments to fair value of $342.4 million in 1997, $213.3 million in 1996 and $127.3 million in 1995. See footnote B of the notes to the financial statements for consolidated components of unrealized gains.
Page 45 UNALLOCATED INTEREST AND EXPENSES UNALLOCATED INTEREST and other expenses, after related income taxes, for the last three years were:
(Amounts in millions) 1997 1996 1995 ------ ------ ------ Interest expense $39.5 $46.5 $42.7 Other expense (income) (28.4) (11.4) 48.4 ----- ----- ----- $11.1 $35.1 $91.1 ===== ===== =====
Unallocated interest and other expenses decreased $24 million (68%) in 1997 from 1996. Costs associated with our outstanding Monthly Income Preferred Securities and the Capital Trust Pass-through Securities are included in other expense. Both years included benefits primarily from the satisfactory resolution of prior years' tax matters totaling $90 million in 1997 and $68.4 million in 1996. Excluding these items, unallocated interest and expenses decreased $2.4 million (2%) in 1997. The 1995 results also included a $25.6 million benefit from the satisfactory resolution of prior years' tax matters, a $21.5 million after tax provision for the expected loss on the sale and leaseback of Transamerica Center in downtown Los Angeles, and $6.6 million of after tax income from the May 1995 sale of the investment management subsidiary. Excluding the items above for 1996 and 1995, in 1996 unallocated interest and expenses rose $1.7 million (2%) primarily due to the increased interest expense associated with our higher debt levels. DISCONTINUED OPERATIONS On June 23, 1997, we sold our branch-based consumer lending operation. Gross proceeds from the sale were $3.9 billion, or $1.1 billion after repayment of associated debt. In the fourth quarter of 1997, the consumer lending business was reclassified as discontinued operations following management's assessment that the results of the company's new approach to consumer lending did not meet the company's criteria for further investment. Results for prior periods have been restated. Income from discontinued operations for 1997 was $261.8 million. This income included a $275 million after tax gain as a result of the sale discussed above. This gain was offset in part by an operating loss of $13.2 million. In 1996, we incurred a loss from discontinued operations of $45.2 million. This loss included a $72 million after tax charge for increased loss reserves. Page 46 CORPORATE LIQUIDITY AND CAPITAL REQUIREMENT TRANSAMERICA CORPORATION receives funds from its subsidiaries in the form of dividends, income taxes and interest on loans. We use these funds to pay dividends to our stockholders, purchase shares of our common stock, reinvest in the operations of our subsidiaries and pay corporate interest, expenses and taxes. We reinvest funds in our subsidiaries based on their expected returns, their expected shareholder value added, and their capital needs. We may reinvest by allowing a subsidiary to retain all or a portion of its earnings, or by making capital contributions or loans. Transamerica also borrows funds to finance acquisitions or lend to certain of its subsidiaries to finance their working capital needs. Our subsidiaries are required to maintain prudent financial ratios consistent with other companies in their industries and to retain the capacity through committed credit lines or liquid assets to repay working capital loans from the Corporation. At December 31, 1997, Transamerica and its subsidiaries had short-term borrowings, principally commercial paper, totaling $1.8 billion, supported by a credit agreement with 44 banks. It is our policy to maintain credit line coverage equal to at least 100% of short-term borrowings. At December 31, 1997, we had credit available under this line equal to $3.5 billion, or 195% of these borrowings; credit support equal to 139% of the borrowings was with banks rated AAA/AA or the equivalent by one or more of the major credit rating agencies. In 1991, Transamerica filed a registration statement with the Securities and Exchange Commission under which up to $500 million of debt securities with varying terms may be sold. These securities may be senior or subordinated and, if subordinated, may be convertible into common stock. In November 1996, Transamerica sold $200 million of senior notes bearing interest at 6.75% due in November 2006. Of the remaining $300 million of debt securities available to be sold under the registration statement, $200 million has been designated as Medium Term Notes, Series B, of which none have been sold. Transamerica's commercial paper and senior debt are rated by independent rating agencies. We continue to maintain debt to capital ratios consistent with our current ratings. Transamerica Finance Corporation, a wholly owned subsidiary of Transamerica, also issues debt publicly to fund the commercial lending and leasing operations. In December 1997, a subsidiary of Transamerica securitized $1.3 billion of inventory finance loans. In November 1997, Transamerica Capital III, an affiliate of Transamerica, issued $190 million of noncallable Capital Trust Pass-through Securities maturing November 15, 2037 with a coupon of 7.625%. Proceeds from the issuance of these securities were invested by the affiliate in subordinated debentures issued by Transamerica, bearing interest at 7.625% and maturing on November 15, 2037. Proceeds to Transamerica were used to repay debt and for other corporate purposes. These and the other Capital Trust Pass-through Securities issued in 1996 are shown as minority interest on Transamerica's consolidated balance sheet. In the third quarter of 1997, a subsidiary of Transamerica securitized $227 million of inventory finance loans. In December 1996, a subsidiary of Transamerica closed a $307 million leveraged lease transaction involving the sale and leaseback of 69,000 intermodal shipping containers. In November 1996, Transamerica Finance Corporation issued $200 million of senior notes bearing interest at 6.375% due in November 2001. In November 1996, Transamerica Capital I and II, affiliates of Transamerica, issued $325 million of Capital Trust Pass-through Securities. These in- Page 47 cluded $100 million of 30-year securities maturing December 1, 2026 redeemable beginning in 2006 with a coupon of 7.80% issued by Transamerica Capital I, and $225 million of 30-year, non-callable securities maturing December 1, 2026 with a coupon of 7.65% issued by Transamerica Capital II. The proceeds were invested by the affiliates in subordinated debentures issued by Transamerica, bearing interest at 7.65% and 7.80% and maturing on December 1, 2026. The proceeds to Transamerica were used for general corporate purposes. In January 1998, we completed the acquisition of $1.1 billion of net receivables and other assets of Whirlpool Financial Corporation's inventory finance, retail finance and international factoring businesses for $1.3 billion in cash. The acquisition of the inventory finance and most of the international assets closed in 1997. The acquisition of the retail finance business closed in January 1998. We funded the purchase primarily with short term debt. In June 1997, we sold our branch-based consumer lending operation for $3.9 billion, or $1.1 billion after repayment of associated debt. In October 1996, we acquired Trans Ocean Ltd., a closely held container leasing company, in exchange for approximately 1.6 million shares ($112.7 million) of Transamerica common stock. In May 1995, Transamerica sold the assets of its investment management subsidiary, Criterion Investment Management Company. Proceeds from the sale were $60 million and were used to reduce debt. STOCKHOLDERS' EQUITY TRANSAMERICA'S CAPITAL structure includes debt, common stock, preferred stock, and the Monthly Income Preferred Securities and Capital Trust Pass-through Securities which are classified as minority interest. We continuously strive to minimize our cost of capital while maintaining investment-grade credit ratings. Ratings are very important to our life insurance customers. Our ratings also enable us to borrow at attractive rates, which improves the spreads at our finance businesses. During 1997, we continued to return excess equity capital to stockholders by purchasing the company's common stock. On May 21, 1997, Transamerica's board of directors authorized the purchase of up to 6 million shares of our common stock. On June 27, 1997, we announced the purchase of 3 million shares under this authorization. The shares were purchased from two investment banks for $286.1 million at an average price of $95.35 per share. During 1997, Transamerica purchased a total of 4,082,500 shares (including the 3 million share purchase noted above) at a cost of $391 million (an average price of $95.77 per share). Since we began our share purchase program in May 1993, a total of 21.5 million shares have been acquired through December 31, 1997 at an aggregate purchase price of $1.4 billion. At December 31, 1997, there were outstanding authorizations from the board of directors for the purchase of an additional 1,917,500 shares. In February 1997, we completed the redemption of our outstanding Series D Preferred Stock and our outstanding Dutch Auction Rate Transferable Securities(TM) Preferred Stock. Page 48 INVESTMENT PORTFOLIO TRANSAMERICA'S TOTAL invested assets were $32.4 billion at December 31, 1997, most of which was held by our life insurance companies. Transamerica Investment Services, a wholly owned subsidiary of Transamerica, manages all of Transamerica's securities portfolios. At the end of 1997, total invested assets represented 78% of our insurance assets and 63% of Transamerica's total assets. In 1997 our investment income was $2.2 billion and represented 38% of Transamerica's total revenues. The majority of our invested assets are in fixed maturity securities. We generally make long-term investments primarily in investment-grade corporate bonds and government securities to fund the payment of our life insurance policy liabilities. We use fundamental research and active management, and seek to achieve a balanced bond portfolio that meets our goals for income, security of principal and diversification. At the end of 1997, 94.8% of our fixed maturity investments were rated as "investment grade," with an additional 3.3% rated in the BB category or its equivalent. "Investment grade" is generally defined as any issue rated above Ba by Moody's Investors Service or above BB by Standard & Poor's Corporation. The average yield of the fixed maturity portfolio was 7.8% at December 31, 1997 and 1996 and 8.1% at December 31, 1995. The portfolio yield was maintained in 1997 through the sale of securities which yielded less than the portfolio reinvestment rate. At December 31, 1997, our fixed income portfolio had a total market value of $29.2 billion and an amortized cost of $27 billion, resulting in a net unrealized gain of $2.2 billion. An adjustment for impairment in value reduced the amortized cost of certain fixed maturity investments by $72.9 million at December 31, 1997 and $62.9 million at December 31, 1996. We also have a portfolio of equity securities with an aggregate market value of $1.6 billion at December 31, 1997, $964.8 million in excess of its cost. Our equity investment philosophy is to do our own research on a very select group of high quality companies. Our research is focused on anticipating and understanding long-term change. In addition to our fixed maturity and equity investments, at December 31, 1997 we had $750.2 million invested in mortgage loans and real estate. This amount represented 2.3% of our total investments and 1.5% of our total assets. These additional investments included $682 million in commercial mortgage loans, $73.8 million in real estate investments, $3.9 million in foreclosed real estate and $26.7 million in residential mortgage loans. Problem loans, defined as restructured loans yielding less than 8% and delinquent loans totaled $2.3 million at December 31, 1997 and $8.1 million at December 31, 1996. We have established allowances to cover possible losses from our mortgage loans and real estate investments. These allowances totaled $36.2 million at December 31, 1997 and $42.8 million at December 31, 1996. Transamerica also owns land, buildings and equipment used in its operations, including the Transamerica Pyramid, our corporate headquarters in San Francisco. New long term investments acquired in 1997 totaled $9.7 billion. Of that amount, 98% was in taxable, fixed maturity securities and 2% was invested principally in common and preferred Page 49 stocks, mortgage loans and loans to our life insurance policyholders. The average yield on new fixed maturity securities was 7.1%. During 1997, we committed to or funded $1.1 billion of new private placement securities. MARKET RISK Market risk is the risk of loss that may occur when fluctuations in interest and currency exchange rates and equity and commodity prices change the value of a financial instrument. Both derivative and nonderivative financial instruments have market risk so our risk management extends beyond derivatives to encompass all financial instruments we hold that are sensitive to market risk. Transamerica is primarily exposed to interest rate risk and equity price risk. INTEREST RATE RISK Transamerica's operations are subject to risk from interest rate fluctuations when there is a difference between the amount of our interest earning assets and the amount of our interest bearing liabilities that are prepaid, mature or repriced in specified periods. We manage our exposure to interest rate fluctuations by managing the characteristics of our assets and liabilities so that changes are offset. Our 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. To help achieve these objectives, we use derivative financial instruments including interest rate swaps, floors and swaptions that correlate to instruments recorded on our balance sheet. Page 50 If market interest rates on December 31, 1997 abruptly increased 75 basis points, the fair value of Transamerica's investment portfolio subject to interest rate risk would decrease about $1.5 billion, the fair value of our finance receivables portfolio would decrease approximately $23 million, the fair value of our interest sensitive insurance liabilities would decrease approximately $670 million, the fair value of our debt would decrease approximately $90 million and the fair value of our interest rate swaps, floors and swaptions would decrease approximately $120 million. Conversely, if rates on December 31, 1997 abruptly decreased 75 basis points the fair value of Transamerica's investment portfolio subject to interest rate risk would increase about $1.5 billion, the fair value of our finance receivables portfolio would increase approximately $23 million, the fair value of our interest sensitive insurance liabilities would increase approximately $750 million, the fair value of our debt would increase approximately $90 million and the fair value of our interest rate swaps, floors and swaptions would increase approximately $190 million. We determined these amounts by considering only the impact of the hypothetical interest rate change. Our assets appear to be more interest sensitive than our liabilities. This is because much of our liability portfolio, such as reinsurance contracts and whole life policies, are not considered to be interest sensitive financial instruments for purposes of this disclosure. Also, these analyses do not consider the possible effect a change in economic activity could have in such an environment. Also, in the event of a change of such magnitude, we would likely take action to mitigate our exposure to the negative consequences. Our customers and competitors would also respond to these fluctuations, and regulators or legislators might act in ways we cannot foresee. Because we cannot be certain what specific actions would be taken and their effects, the sensitivity analysis above assumes no significant changes in Transamerica's financial structure. EQUITY PRICE RISK Transamerica is exposed to equity price risk because of our investments in equity securities. Changes in the level or volatility of equity prices affect the value of our equity securities and instruments that derive their value from a particular stock, a group of stocks or a stock index. If the market price of Transamerica's equity investment portfolio as of December 31, 1997, abruptly increased or decreased by 10%, the market value of our equity portfolio would increase or decrease by $161 million. YEAR 2000 ISSUE We have developed a plan to modify our information systems technology to recognize the year 2000 and have begun converting our critical data processing systems. We currently expect the project to be substantially complete by mid-1999 and to cost between $25 million and $35 million which will be expensed as incurred. This estimate includes internal costs, but excludes the costs to upgrade and replace systems in the normal course of business. We do not currently expect this project to have a significant effect on Transamerica's results of operations. As of December 31, 1997, approximately $3.5 million had been expensed. Page 51 CONSOLIDATED BALANCE SHEET
December 31 ................................................................. 1997 1996 --------- --------- ASSETS Investments, principally of life insurance subsidiaries: Fixed maturities ......................................................... $ 29,210.8 $ 26,860.6 Equity securities ........................................................ 1,607.5 1,046.0 Mortgage loans and real estate ........................................... 750.2 745.5 Loans to life insurance policyholders .................................... 451.0 442.6 Short-term investments ................................................... 336.0 164.2 --------- --------- 32,355.5 29,258.9 Finance receivables, of which $2,726.9 in 1997 and $3,202.4 in 1996 matures within one year ................................. 4,333.4 4,391.1 Less unearned fees ($340.8 in 1997 and $286.9 in 1996) and allowance for losses ................................................. 430.1 372.7 --------- --------- 3,903.3 4,018.4 Cash and cash equivalents ................................................... 132.9 440.9 Trade and other accounts receivable ......................................... 2,165.8 1,929.7 Net assets of discontinued operations ....................................... 40.1 4,326.2 Property and equipment, less accumulated depreciation of $1,465.9 in 1997 and $1,256.8 in 1996 Land, buildings and equipment ......................................... 395.4 392.6 Equipment held for lease .............................................. 2,996.5 3,118.5 Deferred policy acquisition costs ........................................... 2,102.6 2,138.2 Separate accounts administered by life insurance subsidiaries ............... 5,494.7 3,527.9 Goodwill, less accumulated amortization of $156.2 in 1997 and $141.6 in 1996 ....................................................... 423.0 368.1 Assets held for sale ........................................................ 377.8 3.4 Other assets ................................................................ 785.3 408.4 --------- --------- $ 51,172.9 $ 49,931.2 =========== =========== (Amounts in millions except for share data) See notes to financial statements
Page 52
December 31 ....................................................................... 1997 1996 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Life insurance policy liabilities ................................................. $ 30,141.9 $ 28,542.8 Notes and loans payable, principally of finance subsidiaries, of which $998.6 in 1997 and $1,241.3 in 1996 matures within one year ........................................................ 6,235.3 10,328.3 Accounts payable and other liabilities ............................................ 2,096.9 1,843.9 Income taxes, of which $1,582.7 in 1997 and $962.3 in 1996 is deferred ............ 1,607.8 1,022.7 Separate account liabilities ...................................................... 5,494.7 3,527.9 Minority interest in capital securities of affiliates ............................. 715.0 525.0 Stockholders' equity: Preferred stock ($100 par value): Authorized-1,200,000 shares; issuable in series Outstanding-Dutch Auction Rate Transferable Securities, 2,250 shares, at liquidation preference of $100,000 per share in 1996 .......... 225.0 Outstanding-Series D, 180,091 shares at liquidation preference of $500 per share in 1996 ..................................... 90.0 Common stock ($1 par value): Authorized-150,000,000 shares Outstanding-62,904,108 in 1997 and 65,968,708 shares in 1996, after deducting 16,834,354 and 13,769,754 shares in treasury in 1997 and 1996 ............................................. 62.9 66.0 Additional paid-in capital ..................................................... 83.0 Retained earnings .............................................................. 3,330.8 2,920.2 Net unrealized gain from investments marked to fair value ...................... 1,533.6 784.4 Foreign currency translation adjustments ....................................... (46.0) (28.0) ----------- ---------- 4,881.3 4,140.6 ----------- ----------- $ 51,172.9 $ 49,931.2 =========== ===========
Page 53 CONSOLIDATED STATEMENT OF INCOME
Year ended December 31 .............................................. 1997 1996 1995 --------- --------- --------- REVENUES Investment income ................................................... $ 2,191.4 $ 2,092.3 $ 1,980.0 Life insurance premiums and related income .......................... 1,818.0 1,692.0 1,714.5 Finance charges and other fees ...................................... 522.5 457.9 436.5 Leasing revenues .................................................... 758.7 689.1 669.5 Real estate and tax service revenues ................................ 302.6 255.7 195.0 Gain on investment transactions ..................................... 67.1 39.2 52.9 Other ............................................................... 66.2 85.5 121.9 ----------- ----------- ----------- 5,726.5 5,311.7 5,170.3 EXPENSES Life insurance benefits ............................................. 2,810.9 2,649.7 2,710.4 Life insurance underwriting, acquisition and other expenses ......... 734.9 638.8 549.4 Leasing operating and maintenance costs ............................. 449.9 384.3 363.1 Interest and debt expense ........................................... 420.9 396.5 381.5 Provision for losses on receivables ................................. 16.2 10.2 (4.0) Other, including administrative and general expenses ................ 631.9 570.6 598.9 ----------- ----------- ----------- 5,064.7 4,650.1 4,599.3 ----------- ----------- ----------- 661.8 661.6 571.0 Income taxes ........................................................ 129.8 160.1 180.9 ----------- ----------- ----------- Income from continuing operations ................................... 532.0 501.5 390.1 Income (loss) from discontinued operations .......................... 261.8 (45.2) 80.4 ----------- ----------- ----------- Net income .......................................................... $ 793.8 $ 456.3 $ 470.5 =========== =========== =========== EARNINGS PER SHARE OF COMMON STOCK Basic: Income from continuing operations ................................ $ 8.12 $ 7.27 $ 5.41 Income (loss) from discontinued operations ....................... 4.05 (0.68) 1.17 ----------- ------------ ----------- Net income .......................................................... $ 12.17 $ 6.59 $ 6.58 =========== ============ =========== Diluted: Income from continuing operations ................................ $ 7.87 $ 7.10 $ 5.31 Income (loss) from discontinued operations ....................... 3.92 (0.66) 1.15 ----------- ------------ ------------ Net income .......................................................... $ 11.79 $ 6.44 $ 6.46 =========== ============ ============ (Amounts in millions except for per share data) See notes to financial statements
Page 54 CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended December 31 ................................................ 1997 1996 1995 --------- --------- --------- OPERATING ACTIVITIES Income from continuing operations ..................................... $ 532.0 $ 501.5 $ 390.1 Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Increase in insurance related liabilities, excluding policyholder balances on interest-sensitive policies ......... 1,108.8 1,042.9 1,272.8 Amortization of policy acquisition costs ........................ 256.3 268.8 191.3 Policy acquisition costs deferred ............................... (467.7) (388.0) (381.8) Depreciation and amortization ................................... 342.0 318.5 302.1 Other ........................................................... (367.9) (329.3) (707.2) ----------- ---------- ----------- Net cash provided by operating activities .......................... 1,403.5 1,414.4 1,067.3 INVESTING ACTIVITIES Finance receivables originated ........................................ (23,262.4) (18,765.1) (18,125.5) Finance receivables collected ......................................... 24,043.1 18,086.8 18,003.1 Purchase of investments ............................................... (10,609.4) (7,990.4) (6,230.8) Sales and maturities of investments ................................... 9,132.8 6,153.8 4,189.7 Purchase of finance receivables from Whirlpool Financial Corporation .............................................. (881.9) Proceeds from the sale of and cash transactions with discontinued operations ............................................ 4,413.2 1,021.8 (783.6) Other ................................................................. (363.4) (77.1) (529.5) ----------- ---------- ----------- Net cash provided (used) by investing activities ................... 2,472.0 (1,570.2) (3,476.6) FINANCING ACTIVITIES Proceeds from debt financing .......................................... 3,370.5 6,852.4 8,476.9 Payments of notes and loans ........................................... (7,398.7) (7,204.6) (7,330.4) Receipts from interest-sensitive policies credited to policyholder account balances ................................... 6,851.6 6,202.7 5,151.4 Return of policyholder balances on interest-sensitive policies ........ (6,411.2) (5,211.0) (3,624.0) Proceeds from sale of capital securities of affiliates ................ 188.6 323.9 Redemption of preferred stock ......................................... (318.8) (0.8) Treasury stock purchases .............................................. (443.5) (330.2) (155.4) Proceeds from issuance of common stock ................................ 108.3 45.6 51.0 Dividends ............................................................. (130.3) (149.2) (155.4) ----------- ----------- ----------- Net cash provided (used) by financing activities ................... (4,183.5) 529.6 2,413.3 ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents ...................... (308.0) 373.8 4.0 Cash and cash equivalents at beginning of year ........................ 440.9 67.1 63.1 ----------- ----------- ----------- Cash and cash equivalents at end of year .............................. $ 132.9 $ 440.9 $ 67.1 =========== =========== =========== (Amounts in millions) See notes to financial statements
Page 55 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Net Unrealized Gain (Loss) from Foreign Additional Investments Currency Preferred Common Paid-In Retained Marked to Translation Stock Stock Capital Earnings Fair Value Adjustments BALANCE AT DECEMBER 31, 1994 ................ $ 315.8 $ 69.4 $ 96.5 $ 2,557.4 $ (265.1) $ (38.2) Net income .................................. 470.5 Dividends declared: On common stock .......................... (137.4) On preferred stock ....................... (18.0) Common stock issued ......................... 1.1 49.9 Treasury stock purchased .................... (2.5) (146.4) (6.5) Redemption of preferred stock ............... (0.8) Other changes ............................... 1,345.0 9.2 --------- ------- ------- --------- --------- ------- BALANCE AT DECEMBER 31, 1995 ................ 315.0 68.0 2,866.0 1,079.9 (29.0) Net income .................................. 456.3 Dividends declared: On common stock .......................... (132.2) On preferred stock ....................... (17.0) Common stock issued ......................... 2.4 155.9 Treasury stock purchased .................... (4.4) (72.9) (252.9) Other changes ............................... (295.5) 1.0 --------- ------- ------- --------- --------- ------- BALANCE AT DECEMBER 31, 1996 ................ 315.0 66.0 83.0 2,920.2 784.4 (28.0) Net income .................................. 793.8 Dividends declared: On common stock .......................... (127.7) On preferred stock ....................... (2.6) Common stock issued ......................... 1.4 106.9 Treasury stock purchased .................... (4.5) (186.1) (252.9) Redemption of preferred stock ............... (315.0) (3.8) Other changes ............................... 749.2 (18.0) ---------- ------- ------- --------- --------- ------- BALANCE AT DECEMBER 31, 1997 ................ $ $ 62.9 $ $ 3,330.8 $ 1,533.6 $ (46.0) ========== ======= ======= ========= ========= ======= (Amounts in millions) See notes to financial statements
Page 56 NOTES TO FINANCIAL STATEMENTS A. SIGNIFICANT ACCOUNTING POLICIES BUSINESS Transamerica Corporation is a financial services organization which engages through its subsidiaries in life insurance, commercial lending, leasing and real estate services. The United States is the primary market for the services offered by most of TransamericaOs subsidiaries except for the leasing business, which operates in the container leasing business worldwide. CONSOLIDATION The consolidated financial statements include the accounts of Transamerica Corporation and its subsidiaries. Certain amounts reported in the consolidated financial statements are based on management estimates. Such amounts may ultimately differ from those estimates. INVESTMENTS Investments in fixed maturities, comprising bonds, notes and redeemable preferred stocks, and investments in equity securities, comprising marketable corporate common and nonredeemable preferred stocks, are carried at fair value. Fair value for actively traded securities is based on quoted market prices. For fixed maturity securities that are not actively traded, fair value is estimated using information obtained from independent pricing services. Changes to the carrying amount of fixed maturity and equity securities are included in stockholders' equity. Realized gains and losses on investment transactions are determined generally on a specific identification basis and reflected in earnings on the trade date. Cost for equity securities is based on the original purchase price. For fixed maturities cost is adjusted for amortization of any discount or premium. CASH AND CASH EQUIVALENTS Cash and cash equivalents include money market funds and marketable securities with original maturities of three months or less except for such securities held by the life insurance operation which are included in short-term investments. DEPRECIATION AND AMORTIZATION Property and equipment, which are stated on the basis of cost, are depreciated by use of the straight-line method over their estimated useful lives. Other intangible assets, principally renewal, referral and other rights incident to businesses acquired, are amortized over estimated future benefit periods ranging from five to 25 years in proportion to acquired gross profits. Goodwill is amortized over periods up to 40 years. INCOME TAXES Transamerica provides deferred taxes based on enacted tax rates in effect on the dates temporary differences between the book and tax bases of assets and liabilities reverse. FINANCE Finance charges are generally recognized as earned on an effective yield method, except that accrual of finance charges is suspended on accounts that become past due contractually in excess of 90 days. Leasing revenues are recognized in the period earned. REAL ESTATE Tax service revenues are recognized as income generally when contracts are executed with a portion of the revenues amortized over the estimated lives of the contracts. Page 57 LIFE INSURANCE The accounts of the life insurance operation have been included in the consolidated financial statements on the basis of generally accepted accounting principles which differ in some respects from those followed in reports to regulatory authorities. Life insurance premiums are generally recognized as earned over the premium-paying periods, with reserves for future benefits established from such premiums on a net-level premium method based upon estimated investment yields, withdrawals, mortality and other assumptions which were appropriate at the time the policies were issued. Premiums and deposits for universal life and other interest-sensitive life insurance products that do not involve significant mortality or morbidity risk are recorded as liabilities. Costs of acquiring new life insurance business, principally commissions and certain variable underwriting and field office expenses, all of which vary with and are primarily related to the production of new business, are deferred. Deferred policy acquisition costs for universal life and other interest-sensitive life insurance products are amortized in proportion to the present value of gross profit. Deferred policy acquisition costs for traditional life insurance products are amortized over the premium-paying period of the related policies in proportion to premium revenue recognized. Although realization of the benefits associated with deferred policy acquisition costs is not assured, management believes it is more likely than not that such amounts will be realized. Adequate provision is made for reported and unreported claims and related expenses. DERIVATIVES Transamerica uses derivative financial instruments to hedge some of its interest rate and foreign exchange rate risks. The cost of each derivative contract is amortized over the life of the contract. The amortization is classified with the results of the underlying hedged item. Certain contracts are designated as hedges of specific assets within the investment portfolio and to the extent those investments are marked to market, the hedge contracts are also marked to market and included as an adjustment to the underlying asset value. Other contracts are designated and accounted for as hedges of certain of Transamerica's liabilities and outstanding indebtedness and are not marked to market. Gains or losses on terminated hedges are deferred and amortized over the remaining life of the hedged item. 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. STOCK BASED COMPENSATION Transamerica accounts for stock based compensation under the provisions of Accounting Principles Board Opinion No. 25. NEW ACCOUNTING STANDARDS In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share. Statement 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the Statement 128 requirements. Page 58 B. FINANCIAL INSTRUMENTS MINORITY INTEREST In November 1997, an affiliate of Transamerica issued $190 million of 7.625% cumulative Capital Trust Pass-through Securities payable November 15, 2037. In November 1996, two affiliates of Transamerica issued $100 million of 7.80% and $225 million of 7.65% cumulative Capital Trust Pass-through Securities payable December 1, 2026. The fair value of these obligations at December 31, 1997 was $531.8 million. The $100 million, 7.80% issue may be redeemed in whole or in part, on or after December 1, 2006. In October 1994, an affiliate of Transamerica issued $200 million of 9.125% cumulative Monthly Income Preferred Securities payable October 25, 2024. The affiliate may redeem the outstanding Monthly Income Preferred Securities, in whole or in part, on or after October 25, 1999. Dividends on the outstanding Monthly Income Preferred Securities are cumulative and payable monthly in arrears. The fair value of these obligations at December 31, 1997 was $211 million. Transamerica has agreed to guarantee to pay in full any accrued and unpaid dividends declared, or the redemption price including accrued and unpaid dividends, if the securities are redeemed by the affiliate for each of the Capital Trust Pass-through Securities issues and the Monthly Income Preferred Securities. Dividends on the Capital Trust Pass-through Securities and Monthly Income Preferred Securities are reported in the consolidated statement of income as a component of other expense. FAIR VALUE OF INVESTMENT CONTRACTS Investment-type contracts are included in life insurance policy liabilities. Fair value of investment-type contracts is estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts. The carrying amounts and estimated fair values of the liabilities for investment-type contracts at December 31, 1997 and 1996 were as follows:
(Amounts in millions) Carrying Estimated Value Fair Value --------- ---------- DECEMBER 31, 1997 Single and flexible premium deferred annuities ...................................................... $ 6,780.0 $ 6,261.7 Single premium immediate annuities ............................................ 4,361.3 5,122.5 Guaranteed investment contracts ...................................................... 3,211.8 3,265.4 Other deposit contracts ........................................... 4,944.9 4,992.9 ----------- ----------- $ 19,298.0 $ 19,642.5 =========== =========== DECEMBER 31, 1996 Single and flexible premium deferred annuities ...................................................... $ 6,962.5 $ 6,400.6 Single premium immediate annuities ............................................ 4,115.0 4,477.0 Guaranteed investment contracts ...................................................... 3,153.8 3,207.3 Other deposit contracts ........................................... 3,894.8 3,913.1 ----------- ----------- $ 18,126.1 $ 17,998.0 =========== ===========
Page 59 INVESTMENTS The cost and fair value of fixed maturities and equity securities at December 31, 1997 and 1996 were as follows:
(Amounts in millions) Gross Gross Unrealized Unrealized Cost Gains Losses Fair Value DECEMBER 31, 1997 U.S. Treasury securities and obligations of U.S. government authorities and agencies ........................... $ 274.5 $ 78.4 $ 352.9 Obligations of states and political subdivisions ..................... 243.6 19.0 262.6 Foreign governments .................................................. 139.7 9.1 $ 1.8 147.0 Corporate securities ................................................. 18,420.5 1,475.0 58.2 19,837.3 Mortgage-backed securities ........................................... 3,798.1 342.8 2.0 4,138.9 Public utilities ..................................................... 4,018.8 340.6 0.8 4,358.6 Redeemable preferred stock ........................................... 95.2 28.0 9.7 113.5 ----------- ---------- -------- -------- Total fixed maturities ............................................... $ 26,990.4 $ 2,292.9 $ 72.5 $ 29,210.8 =========== ========== ======== =========== Equity securities .................................................... $ 642.7 $ 980.6 $ 15.8 $ 1,607.5 =========== ========== ======== =========== December 31, 1996 U.S. Treasury securities and obligations of U.S. government authorities and agencies ........................... $ 289.2 $ 25.1 $ 1.7 $ 312.6 Obligations of states and political subdivisions ..................... 291.9 11.1 0.6 302.4 Foreign governments .................................................. 149.3 6.0 0.5 154.8 Corporate securities ................................................. 14,928.7 805.9 110.8 15,623.8 Mortgage-backed securities ........................................... 5,548.1 252.1 56.3 5,743.9 Public utilities ..................................................... 4,463.8 203.6 35.8 4,631.6 Redeemable preferred stock ........................................... 84.6 13.2 6.3 91.5 ----------- ---------- -------- ----------- Total fixed maturities ............................................... $ 25,755.6 $ 1,317.0 $ 212.0 $ 26,860.6 =========== ========== ======== =========== Equity securities .................................................... $ 446.8 $ 612.7 $ 13.5 $ 1,046.0 =========== ========== ======== =========== The cost and fair value of fixed maturities at December 31, 1997 by contractual maturity, are shown below. (Amounts in millions) Cost Fair Value ----------- ----------- Due in one year or less .................................................. $ 497.0 $ 512.3 Due after one year through five years .................................... 3,949.7 4,094.7 Due after five years through ten years ................................... 6,241.1 6,598.2 Due after ten years ...................................................... 12,504.5 13,866.7 ----------- ----------- 23,192.3 25,071.9 Mortgage-backed securities ............................................... 3,798.1 4,138.9 ----------- ----------- $ 26,990.4 $ 29,210.8 =========== =========== Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Page 60 The carrying values and estimated fair values of investments in mortgage loans on real estate and loans to life insurance policyholders at December 31, 1997 and 1996 were as follows:
(Amounts in millions) Carrying Estimated Value Fair Value --------- ---------- DECEMBER 31, 1997 Mortgage loans on real estate ................................................... $ 684.3 $ 774.6 ======== ======== Loans to life insurance policyholders ........................................... $ 451.0 $ 427.9 ======== ======== DECEMBER 31, 1996 Mortgage loans on real estate ................................................... $ 681.5 $ 770.9 ======== ======== Loans to life insurance policyholders ........................................... $ 442.6 $ 416.4 ======== ========
The fair values for mortgage loans on real estate and policyholder loans are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar loans to borrowers with similar credit ratings.
Loans with similar characteristics are aggregated for calculation purposes. Gain on investment transactions, included in consolidated revenues, comprises: (Amounts in millions) 1997 1996 1995 --------- --------- --------- Net gain on sale of investments ................................... $ 75.7 $ 81.9 $ 85.7 Provision for impairment in value ................................. (17.5) (9.1) (23.6) Amortization of deferred policy acquisition costs ................. 8.9 (33.6) (9.2) --------- --------- --------- $ 67.1 $ 39.2 $ 52.9 ========= ========= =========
Proceeds from sales of fixed maturities and equity securities were $9.1 billion in 1997, $5.9 billion in 1996 and $4 billion in 1995. Gross gains of $198.2 million in 1997, $119.8 million in 1996 and $95 million in 1995, and gross losses of $126 million in 1997, $41.3 million in 1996 and $11.7 million in 1995 were realized on those sales. Transamerica and its subsidiaries use interest rate exchange and other agreements to hedge the interest rate sensitivity of a portion of its fixed maturity investments.
The net unrealized gain included in stockholders' equity as a result of marking the fixed maturities and equity securities to fair value at December 31, 1997 and 1996 were as follows: (Amounts in millions) 1997 1996 --------- --------- Net unrealized gain on fixed maturities ........................................ $ 2,143.0 $ 1,107.3 Net unrealized gain on equity securities ....................................... 964.8 599.2 Net unrealized gain (loss) on derivative instruments which hedge a portion of investments in fixed maturities .................................. 77.4 (2.3) Adjustment to deferred policy acquisition costs ................................ (546.1) (306.6) Adjustment to life insurance policy liabilities ................................ (281.0) (195.0) Deferred income taxes .......................................................... (825.8) (422.4) Other assets ................................................................... 1.3 4.2 ---------- ---------- $ 1,533.6 $ 784.4 ========== ==========
Page 61 NOTES AND LOANS PAYABLE
(Amounts in millions) 1997 1996 --------- --------- TRANSAMERICA FINANCE CORPORATION: Short-term bank loans, commercial paper and current portion of long-term debt ........................................................... $ 890.8 $ 1,229.0 Long-term debt due subsequent to one year: Notes and debentures; interest at 5.76% to 9.85%; maturing through 2011 .................................................... 2,510.6 3,474.4 Notes and debentures; interest at 13.8% to 13.88%; maturity value of $582.8 million; maturing through 2012 .................. 182.4 171.5 Commercial paper and other notes at various interest rates and terms supported by a credit agreement expiring in 2002 ................... 1,793.7 4,109.4 Subordinated notes and debentures; interest at 5.70% to 9.95%; maturing through 2003 .......................................... 433.2 702.5 Loans due to parent company .................................................... 214.5 192.5 ----------- ----------- 6,025.2 9,879.3 PARENT COMPANY AND OTHER SUBSIDIARIES: Short-term bank loans, commercial paper and current portion of long-term debt ........................................................... 107.8 12.3 Long-term debt due subsequent to one year: Notes and debentures, net of discounts; interest at 6.08% to 10%; maturing through 2020 .................................................... 316.8 424.0 Commercial paper and other notes at various interest rates and terms supported by a credit agreement expiring in 2002 ................... 198.2 Notes at variable interest rates; maturing through 1998 ..................... 7.0 Less loans to Transamerica Finance Corporation ................................. (214.5) (192.5) ----------- ----------- 210.1 449.0 ----------- ----------- $ 6,235.3 $ 10,328.3 =========== ===========
The weighted average interest rate on short-term borrowings at December 31, 1997 and 1996 was 5.81% and 5.46%. Assets with a net book value of $347.8 million at December 31, 1997, consisting primarily of land, buildings and equipment, are collateral for certain of the above debt. The aggregate annual maturities for the four years subsequent to December 31, 1998 are $1.2 billion in 1999, $0.5 billion in 2000, $0.6 billion in 2001 and $2 billion in 2002. Under a credit agreement with various banks, Transamerica and its subsidiaries had the ability to borrow up to $3.5 billion with interest at variable rates at December 31, 1997. There were no borrowings outstanding under this credit line at that Page 62 date. This credit agreement, which expires in 2002, requires a fee on the commitment. Transamerica and its subsidiaries use interest rate swap agreements to hedge the interest rate sensitivity of a portion of outstanding indebtedness. Interest payments, net of amounts received from interest rate swap agreements, totaled $548.8 million in 1997, $705 million in 1996 and $696 million in 1995. The estimated fair value of notes and loans payable, using rates currently available for debt with similar terms and maturities, was $6.6 billion at December 31, 1997 and $10.7 billion at December 31, 1996. CONCENTRATION OF RISK AND FAIR VALUE OF RECEIVABLES Transamerica's commercial lending operation engages in the extension of credit to electronics and appliance dealers, retail recreational products dealers, computer stores and others. The majority of these loans is secured by the assets being financed. The risk associated with that credit is subject to economic, competitive and other influences. While a substantial portion of the risk is diversified, certain borrowers are concentrated in one industry or geographic area. The finance receivables portfolio represents lending arrangements with approximately 67,000 customers. At December 31, 1997, the portfolio included 12 customers with individual balances in excess of $20 million. These accounts in total represented 13% of total net finance receivables outstanding at December 31, 1997. The estimated fair values of the fixed rate finance loans and long-term variable rate loans are based on the discounted value of the future cash flows expected to be received using available secondary market prices for securities backed by similar loans after adjustment for differences in loan characteristics. In the absence of readily available market prices, the expected future cash flows are discounted at effective rates currently offered by Transamerica for similar loans. For short-term variable rate loans, which comprise the majority of the loan portfolio, the carrying amount represents a reasonable estimate of fair value.
The carrying amounts and estimated fair values of the finance receivable portfolio at December 31, 1997 and 1996 were as follows: (Amounts in millions) Carrying Estimated Value Fair Value DECEMBER 31, 1997 Fixed rate receivables .............................................. $ 1,248.0 $ 1,275.3 Variable rate receivables ........................................... 2,655.3 2,660.5 ---------- ---------- $ 3,903.3 $ 3,935.8 ========== ========== DECEMBER 31, 1996 Fixed rate receivables .............................................. $ 1,120.6 $ 1,149.9 Variable rate receivables ........................................... 2,897.8 2,897.8 ---------- ---------- $ 4,018.4 $ 4,047.7 ========== ==========
Page 63 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). Transamerica does not use derivative financial instruments for trading or speculative purposes, nor is Transamerica a party to any leveraged derivative contracts. While Transamerica is exposed to credit risk in the event of nonperformance by the other party, the likelihood of nonperformance is considered low due to the high credit rating of the counterparties. At December 31, 1997 and 1996, all of Transamerica's derivative financial instruments were with financial institutions rated A or better by one or more of the major credit rating agencies. ASSET AND LIABILITY HEDGES Interest rate floor agreements purchased by Transamerica provide for the receipt of payments in the event interest rates fall below specified levels. Interest rate floors are intended to mitigate Transamerica's risk of reinvesting the cash flow it receives from calls and redemptions on its investment portfolio at lower interest rates. Transamerica purchases swaptions, which help manage the risk of interest rate fluctuations by providing an option to enter into an interest rate swap in the event of unfavorable interest rate movements. Interest rate swap agreements are intended to help Transamerica to more closely match the cash flow received from its assets to the payments on its liabilities, and generally provide that one party pays interest at a floating rate in relation to movements in an underlying index and the other party pays interest at a fixed rate. At December 31, 1997 and 1996, the unamortized cost of the instruments that hedge assets was $73 million and $76 million, and the fair value of these asset hedges comprised gross obligations to counterparties of $19 million and $17.5 million and gross benefits from counterparties of $169.4 million and $91.2 million. The net unrealized gain (loss) on derivative contracts that hedge assets is included in stockholders' equity. At December 31, 1997 and 1996 the net after tax unrealized gain (loss) included in stockholders' equity from marking asset hedges to fair value was $50.3 million and $(1.5) million. The net present value of the liability hedges offsets changes in the fair value of the hedged liabilities, which are also carried at amortized cost. The fair value of the liability hedges at December 31, 1997 and 1996 were gross obligations of $6.3 million and $29.2 million and gross benefits of $68.6 million and $69.2 million resulting in net benefits from counterparties of $62.3 million and $40 million at December 31, 1997 and December 31, 1996. Page 64 At December 31, 1997 and 1996 derivative hedges comprised: (Dollar amounts in millions)
Weighted Weighted Notional Avg. Fixed Avg. Floating ASSET HEDGES .................................................................... Amount Interest Rate Interest Rate 1997 Interest rate swap agreements -Transamerica receives: Floating rate interest income, pays fixed rate interest expense .............. $ 366.4 6.0% 5.9% ---------- ------- -------- Fixed rate interest income, pays floating rate interest expense .............. $ 275.0 6.5% 5.9% ---------- ------- -------- Floating rate interest income based on one index (5.86%) and pays floating rate interest expense based on another index (4.23%) ............................................................ $ 324.2 ---------- Interest rate floor agreements .................................................. $ 560.5 6.5% ---------- ------- Swaptions ....................................................................... $ 8,401.0 4.3% ---------- ------- S&P call options ................................................................ $ 28.8 ---------- Cross currency swaps and foreign interest rate swaps ............................ $ 62.7 ---------- 1996 Interest rate swap agreements -Transamerica receives: Floating rate interest income, pays fixed rate interest expense .............. $ 308.9 6.8% 6.5% ---------- ------- ------- Fixed rate interest income, pays floating rate interest expense .............. $ 240.0 6.7% 6.4% ---------- ------- ------- Floating rate interest income based on one index (at a weighted average interest rate of 5.9%) and pays floating rate interest expense based on another index (at a weighted average interest rate of 6.6%) ................................................... $ 298.6 ---------- Swaptions ....................................................................... $ 8,427.6 4.5% ---------- ------- Interest rate floor agreements .................................................. $ 560.5 6.5% ---------- ------- Interest rate cap agreements .................................................... $ 10.0 5.5% ---------- ------- S&P call options ................................................................ $ 8.8 ---------- LIABILITY HEDGES 1997 Interest rate swap agreements - Transamerica pays: Floating rate interest expense, receives fixed rate interest income .......... $ 3,452.2 6.3% 5.8% ---------- ------- ------- Fixed rate interest expense, receives floating rate interest income ........ $ 80.5 6.2% 5.8% ---------- ------- ------- Floating rate interest expense based on one index (5.91%) and receives floating rate interest income based on another index (5.80%) ............................................................. $ 289.0 ---------- Swaptions ....................................................................... $ 150.0 7.0% ---------- ------- Cross currency swaps and foreign interest rate swaps ............................ $ 76.0 ---------- 1996 Interest rate swap agreements - Transamerica pays: Floating rate interest expense, receives fixed rate interest income .......... $ 2,662.6 6.4% 5.7% ---------- ------- ------- Fixed rate interest expense, receives floating rate interest income .......... $ 672.1 6.3% 5.5% ---------- ------- ------- Floating rate interest expense based on one index (at a weighted average interest rate of 5.8%) and receives floating rate interest income based on another index (at a weighted average interest rate of 3.7%) ............................................ $ 6.6 ---------- Cross currency swaps and foreign interest rate swaps ............................ $ 116.5 ----------
Page 65 C. INCOME TAXES The provision (benefit) for income taxes on income from continuing operations comprised:
(Amounts in millions) 1997 1996 1995 --------- --------- --------- Federal current ............................... $ (52.2) $ 24.8 $ 24.3 Federal deferred .............................. 153.9 111.0 131.4 State ......................................... 1.7 9.1 8.5 Foreign ....................................... 26.4 15.2 16.7 --------- --------- --------- $ 129.8 $ 160.1 $ 180.9 ========= ========= =========
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the deferred tax assets and liabilities as of December 31, 1997 and 1996 were as follows:
(Amounts in millions) 1997 1996 -------- -------- Deferred tax assets: Allowance for losses ................................................. $ 36.2 $ 30.4 Impairment of investments ............................................ 33.1 36.4 Life insurance policy liabilities .................................... 614.2 575.3 Loss and tax credit carryforwards .................................... 57.0 Other ................................................................ 188.9 250.3 ---------- --------- 872.4 949.4 Deferred tax liabilities: Deferred policy acquisition costs .................................... 783.7 726.1 Accelerated depreciation ............................................. 674.7 614.8 Unrealized gain on marking investments to fair value ................. 825.8 422.4 Discount amortization on notes and loans payable ..................... 76.9 71.6 Other ................................................................ 94.0 76.8 ---------- --------- 2,455.1 1,911.7 ---------- --------- Net deferred tax liability .............................................. $ 1,582.7 $ 962.3 ========== =========
The difference between federal income taxes on income from continuing operations computed at the statutory rate and the provision for income taxes was:
(Amounts in millions) 1997 1996 1995 --------- --------- --------- Federal income taxes at statutory rate ............................ $ 231.6 $ 231.6 $ 199.9 Prior year items .................................................. (80.2) (63.8) (30.0) Tax credits ....................................................... (22.9) (20.8) (13.0) Other ............................................................. 1.3 13.1 24.0 --------- --------- --------- $ 129.8 $ 160.1 $ 180.9 ========= ========= =========
Income tax payments totaled $3.1 million in 1997, $97.5 million in 1996, and $148.3 million in 1995. Pretax income from foreign operations was $66.4 million in 1997, $36.9 million in 1996 and $44.2 million in 1995. Page 66 D. BUSINESS SEGMENT INFORMATION Business segment data, as required by Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information, for each of the years in the three year period ended December 31, 1997 included in the tables on pages 33 to 46 of the Financial Review of this annual report are an integral part of these financial statements.
(Amounts in millions) 1997 1996 1995 ----------- ----------- ----------- REVENUES Life insurance ............................. $ 4,029.4 $ 3,793.6 $ 3,718.2 Commercial lending ......................... 515.5 432.8 423.7 Leasing .................................... 797.8 765.6 733.9 Real estate services ....................... 416.0 356.9 253.5 Other* ..................................... (32.2) (37.2) 41.0 ----------- ----------- ----------- $ 5,726.5 $ 5,311.7 $ 5,170.3 =========== =========== =========== ASSETS Life insurance ............................. $ 41,387.3 $ 36,482.0 Commercial lending ......................... 4,613.2 4,023.5 Leasing .................................... 3,929.4 3,928.5 Real estate services ....................... 1,734.3 1,531.5 Other* ..................................... (491.3) 3,965.7 ----------- ----------- $ 51,172.9 $ 49,931.2 =========== =========== *In 1997 Transamerica completed the sale of its branch-based consumer lending operation. At December 31, 1997 the consumer lending operations were classified as discontinued operations. At December 31, 1997 and 1996 net assets of discontinued operations were $40.1 million and $4,326.2 million. In 1995 Transamerica completed the sale of Criterion Investment Management Company which comprised its asset management operations. For the year ended, December 31, 1995 revenues of the asset management operations were $31.4 million. Other also includes intercompany eliminations.
E. CALCULATION OF EARNINGS PER SHARE OF COMMON STOCK
1997 1996 1995 (Amounts in millions Per-Share Per-Share Per-Share except for per share data) .... Income Shares Amount Income Shares Amount Income Shares Amount Income from continuing operations ................ $532.0 $501.5 $390.1 Preferred dividends ........... (2.6) (17.0) (18.0) Preferred stock purchase premium ........... (3.8) ------ ------ ------ BASIC EPS Income from continuing operations available to common stockholders ........ 525.6 64.7 $8.12 484.5 66.6 $7.27 372.1 68.8 $5.41 Dilutive effects of stock options .................... 2.1 (0.25) 1.6 (0.17) 1.3 (0.10) ------ ----- ---- ----- ---- ----- DILUTED EPS Income from continuing operations available to common stockholders ........ $525.6 66.8 $7.87 $484.5 68.2 $7.10 $372.1 70.1 $5.31 ====== ====== ===== ====== ==== ===== ====== ==== =====
Page 67 F. PENSION PLANS Transamerica Corporation and its subsidiaries have a number of noncontributory defined benefit pension plans covering substantially all employees. Plans covering salaried employees provide pension benefits that are based on the employee's compensation for the highest paid 60 consecutive months during the 120 months before retirement. Transamerica's funding policy is to make contributions as necessary to provide assets sufficient to meet its obligation to plan members in accordance with the requirements of the Employee Retirement Income Security Act of 1974. A summary of the components of net periodic pension cost (benefit) follows:
(Amounts in millions) 1997 1996 1995 --------- --------- --------- Service costs-benefits earned during the period $ 16.7 $ 16.7 $ 14.2 Interest cost on projected benefit obligation .................... 52.7 51.6 52.3 Actual return on plan assets ..................................... (307.8) (164.9) (259.2) Deferral of current gains varying from expected return ........... 230.4 97.4 199.2 Net amortization and deferrals ................................... (10.3) (0.6) 3.8 --------- --------- --------- Total pension cost (benefit) ..................................... $ (18.3) $ 0.2 $ 10.3 ========= ========= =========
The following table sets forth the amounts recognized in the consolidated statement of financial position of the pension plans:
(Amounts in millions) 1997 1996 ---------- ---------- Actuarial present value of benefit obligations: Vested benefit obligation* ..................................................... $ 752.1 $ 710.5 ========== ========== Accumulated benefit obligation ................................................. $ 760.9 $ 719.6 ========== ========== Projected benefit obligation, including effects of future salary increases ..................................................... $ 823.1 $ 779.1 Plan assets at fair value ...................................................... 1,393.3 1,119.4 ---------- ---------- Excess of plan assets over projected benefit obligation ........................ $ 570.2 $ 340.3 ========== ========== The excess of plan assets over projected benefit obligation comprises: Net pension liability ..................................................... $ (6.4) $ (29.1) Unrecognized net gain arising since January 1, 1986 ....................... 586.3 381.7 Unrecognized prior service cost ........................................... (13.2) (16.9) Unrecognized net obligation at January 1, 1986 net of amortization ........ (3.6) (4.8) Adjustment required to recognize minimum liability ........................ 7.1 9.4 ---------- ---------- $ 570.2 $ 340.3 ========== ========== *A portion of the vested benefit obligation is unconditionally guaranteed by Transamerica Occidental Life Insurance Company, a wholly owned subsidiary of Transamerica.
The projected benefit obligation was determined using a weighted average discount rate of 7% and an assumed rate of compensation increase of 5.50%. The expected long-term rate of return on plan assets was 8.25%. During 1997, the company recognized a curtailment gain of $18.8 million as a result of the sale of its branch-based consumer lending operation. Page 68 G. CAPITAL STOCK At December 31, 1997, 5,000,000 shares of preference stock (without par value) were authorized but unissued. At December 31, 1996 Transamerica had outstanding 2,250 shares of Dutch Auction Rate Transferable Securities Preferred Stock (DARTS) ($100 par value, $100,000 liquidation value) in Series A-1, B-1 and C-1 of 750 shares each. In December 1996, Transamerica announced the redemption of all of the outstanding DARTS. The redemption was completed in February 1997. Transamerica also had outstanding 3,601,827 depositary shares at December 31, 1996, each of which represented a 1/20 interest in a share of Series D Preferred Stock ($100 par value, $500 liquidation preference). In February 1997, Transamerica completed the redemption of all its Series D Preferred Stock. In October 1996, Transamerica acquired Trans Ocean Ltd. in exchange for approximately 1.6 million shares ($112.7 million) of Transamerica common stock. H. RETAINED EARNINGS RESTRICTIONS Under certain circumstances, the provisions of loan agreements and statutory requirements place limitations on the amount of funds which can be remitted to Transamerica by its consolidated subsidiaries. Of the net assets of Transamerica's consolidated subsidiaries, as adjusted for intercompany account balances, at December 31, 1997 approximately $4.2 billion is so restricted, and $0.6 billion is free for remittance to Transamerica subject to investment and operating requirements. I. COMMITMENTS AND CONTINGENCIES In connection with the 1993 sale of Transamerica Insurance Group, a subsidiary of Transamerica assumed responsibility by means of a reinsurance agreement for certain assumed treaty reinsurance business written prior to 1986 for which it received assets which are expected to be sufficient to fund the liquidation of the business. Transamerica has collateralized the estimated ultimate obligation of approximately $317.3 million at December 31, 1997 by providing letters of credit aggregating $160 million and by placing certain assets in a trust. At December 31, 1997, the fair value of the assets in the trust was $197.7 million. Additionally, Transamerica agreed to pay up to $89.3 million in adverse loss development on certain paid environmental losses and has provided for these losses. Proceedings seeking rescission of reinsurance contracts in connection with business in the personal accident market in London are currently underway. The ultimate effect on the company is unknown. Substantially all leases of Transamerica and its subsidiaries are operating leases principally for the rental of real estate. Total rental expense amounted to $108.2 million in 1997, $57 million in 1996 and $63.8 million in 1995. Contingent liabilities arising from litigation, income taxes and other matters are not expected to have a material effect on the consolidated financial position or results of operations of Transamerica and subsidiaries. Page 69 J. STOCK OPTIONS Transamerica has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for stock-based compensation because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. At December 31, 1997, under Transamerica's stock option plans, 17,166,052 shares of common stock (18,606,962 shares at December 31, 1996) were reserved principally for sale to key employees of the Corporation and subsidiaries. Except as noted below for the 1995 Performance Stock Option Plan and a portion of the January 1998 grant approved by Transamerica's board of directors, all options granted have 10 year terms and vest and become exercisable ratably over four years. Options were exercised for 1,432,410 shares in 1997, 778,798 shares in 1996, and 1,068,068 shares in 1995, at aggregate option prices of $59.9 million, $31 million and $41.1 million. In January 1998, Transamerica's board of directors approved 3,668,400 options for grant including additional grants under the 1996 plan and, subject to stockholder approval, the 1995 Performance Stock Option Plan and the 1985 Stock Option and Award Plan. Under the terms of these plans 482,500 options were granted at an exercise price of $125, 2,090,000 were granted at an exercise price of $150 and 1,095,900 were granted at an option price equal to market value on the date granted. In April 1995, the stockholders approved the 1995 Performance Stock Option Plan and, under the terms of the Plan, Transamerica has made grants of nonqualified stock options totaling 5 million shares. Transamerica's share price on the date of the initial grant was $50.75. Options for 1,025,000 shares were granted at an exercise price of $60 per share, which vest ratably on the third, fourth and fifth anniversaries of the date of grant. Options for 1,325,000 shares were granted with an exercise price of $82 per share all of which vested in 1997, and options for 2,650,000 shares were granted with an exercise price of $100 per share, of which 2,400,000 vested in 1997 resulting in compensation expense of $4.9 million after tax. Options for 230,000 shares in 1997, 80,000 shares in 1996 and 140,000 shares in 1995 were cancelled due to forfeiture. Forfeited options may be reissued. Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires the information be determined as if Transamerica had accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1997, 1996 and 1995: risk-free interest rate of 6.31%, 5.14% and 7.10%; dividend yields of 2.3%, 2.6% and 3.7%; volatility factors of the expected market price of Transamerica's common stock of 0.185, 0.175 and 0.164; and a weighted-average expected option life of four years. In management's opinion, existing stock option valuation models do not provide an entirely reliable measure of the fair value of nontransferable employee stock options with vesting provisions. Page 70 The following table presents pro forma disclosures as if the estimated fair value of the options is recognized ratably in income from continuing operations over the options' vesting period. (Amounts in millions except for per share data)
1997 1996 1995 -------- -------- -------- Pro forma income from continuing operations* ............................ $ 527.5 $ 496.5 $ 387.6 Pro forma basic earnings per share from continuing operations* .......... $ 8.05 $ 7.20 $ 5.37 Pro forma diluted earnings per share from continuing operations* ........ $ 7.80 $ 7.03 $ 5.27 * As Statement 123 is applicable to options granted subsequent to December 31, 1994, the full effect of its implementation will not be reflected in pro forma disclosures until 1998.
Transamerica's stock option activity and related information for the years ended December 31 follow:
1997 1996 1995 -------- -------- -------- Weighted Weighted Weighted Average Average Average Options Exercise Options Exercise Options Exercise (000's) Price (000's) Price (000's) Price Outstanding-beginning of year .......................... 12,007 $ 66.65 11,616 $ 63.67 6,679 $ 42.95 Granted ............................................. 1,584 87.49 1,635 77.77 7,070 81.63 Exercised ........................................... (1,432) 41.82 (778) 40.91 (1,068) 38.46 Forfeited ........................................... (589) 83.97 (466) 74.34 (1,065) 78.20 Outstanding-end of year ................................ 11,570 $ 71.70 12,007 $ 66.65 11,616 $ 63.67 Exercisable-end of year ................................ 7,568 $ 71.18 4,001 $ 43.65 3,533 $ 40.87 Weighted average fair value of an option granted during the year, excluding the Performance Stock Option Plan ................... $ 17.60 $ 12.73 $ 9.09 Weighted average fair value of an option granted during the year, under the Performance Stock Option Plan ....................... $ 14.41 $ 6.91 $ 1.68 ======= ======= =======
Outstanding and exercisable options at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE Number Range of Outstanding Weighted Avg Weighted Avg Number Weighted Avg Exercise at 12/31/97 Remaining Exercise Exercisable Exercise Prices (000's) Contractual Life Price (000's) Price --------- ----------- ---------------- ------------ ----------- -------- $33-$42 1,210 3.4 years $ 39.06 1,210 $ 39.06 $43-$55 3,064 6.1 51.24 2,214 50.52 $56-$76 2,091 7.8 69.87 394 73.14 $77-$112 5,205 7.8 91.80 3,750 93.53 ------ ----- 11,570 7,568 ====== =====
Page 71 K. DISCONTINUED OPERATIONS On June 23, 1997, Transamerica sold its branch-based consumer lending operation. Gross proceeds from the sale were $3.9 billion, or $1.1 billion after repayment of associated debt. In December 1997, Transamerica decided to exit the consumer lending business entirely. The results of the consumer lending business have been reclassified to discontinued operations and all prior periods have been restated. At December 31, 1997 and 1996, the net assets of the discontinued consumer lending business, included in Transamerica's consolidated balance sheet as net assets of discontinued operations, are summarized as follows:
(Amounts in millions) 1997 1996 ---------- ---------- ASSETS Investments ........................................... $ 126.3 Finance receivables ................................... 3,885.4 Assets held for sale .................................. $ 33.8 83.1 Deferred income taxes ................................. 11.7 111.4 Other assets .......................................... 20.4 175.1 ---------- ---------- Total assets ....................................... 65.9 4,381.3 LIABILITIES Total liabilities .................................. 25.8 55.1 ---------- ---------- Net assets of discontinued operations .............. $ 40.1 $ 4,326.2 ========== ==========
The following results of the discontinued consumer lending business are included in income from discontinued operations:
(Amounts in millions) 1997 1996 1995 --------- --------- --------- Revenues ............................................................ $ 290.4 $ 759.9 $ 782.5 Gain on sale of branch based consumer lending operation ............. 469.0 --------- --------- --------- Total revenues ................................................... 759.4 759.9 782.5 Expenses ............................................................ 310.3 836.4 648.5 --------- --------- --------- Income (loss) before taxes .......................................... 449.1 (76.5) 134.0 Income tax provision (benefit) ...................................... 187.3 (31.3) 53.6 --------- --------- --------- Income (loss) from discontinued operations ....................... $ 261.8 $ (45.2) $ 80.4 ========= ========= =========
Page 72 SUPPLEMENTARY FINANCIAL INFORMATION SELECTED QUARTERLY FINANCIAL DATA
1997 March 31 June 30 September 30 December 31 1997 Total Revenues .......................... $1,372.0 $ 1,432.1 $ 1,423.4 $ 1,499.0 $ 5,726.5 ======== ========= =========== =========== =========== Income from continuing operations . $ 81.0 $ 112.9 $ 148.9 $ 189.2 $ 532.0 Income (loss) from discontinued operations ..................... 275.0 1.1 (14.3) 261.8 -------- --------- ----------- ----------- ----------- Net income ........................ $ 81.0 $ 387.9 $ 150.0 $ 174.9 $ 793.8 ======== ========= =========== =========== =========== Earnings per share of common stock: Basic: Income from continuing operations . $ 1.13 $ 1.70 $ 2.36 $ 3.01 $ 8.12 Income (loss) from discontinued operations ..................... 4.15 0.02 (0.23) 4.05 -------- --------- ----------- ----------- ----------- Net income ........................ $ 1.13 $ 5.85 $ 2.38 $ 2.78 $ 12.17 ======== ========= =========== =========== =========== Diluted: Income from continuing operations . $ 1.10 $ 1.65 $ 2.28 $ 2.90 $ 7.87 Income (loss) from discontinued operations ..................... 4.02 0.02 (0.22) 3.92 -------- --------- ----------- ----------- ----------- Net income ........................ $ 1.10 $ 5.67 $ 2.30 $ 2.68 $ 11.79 ======== ========= =========== =========== =========== High and low sales prices for common shares .............. $91 7/8-77 1/8 $96-78 5/8 $101 5/8-91 3/4 $116 1/2-97 1/8 $116 1/2-77 1/8 1996 March 31 June 30 September 30 December 31 1996 Total Revenues .......................... $1,258.6 $1,269.0 $ 1,438.8 $ 1,345.3 $ 5,311.7 ======== ======== =========== =========== =========== Income from continuing operations . $ 97.5 $ 110.6 $ 179.7 $ 113.7 $ 501.5 Income (loss) from discontinued operations ..................... 17.8 (4.7) (65.8) 7.5 (45.2) -------- -------- ----------- ----------- ----------- Net income ........................ $ 115.3 $ 105.9 $ 113.9 $ 121.2 $ 456.3 ======== ======== =========== =========== =========== Earnings per share of common stock: Basic: Income from continuing operations . $ 1.37 $ 1.59 $ 2.68 $ 1.67 $ 7.27 Income (loss) from discontinued operations ..................... 0.26 (0.07) (1.01) 0.10 (0.68) -------- --------- ----------- ----------- ----------- Net income ........................ $ 1.63 $ 1.52 $ 1.67 $ 1.77 $ 6.59 ======== ========= =========== =========== =========== Income from continuing operations . $ 1.34 $ 1.55 $ 2.62 $ 1.63 $ 7.10 Income (loss) from discontinued operations ..................... 0.25 (0.07) (0.98) 0.11 (0.66) -------- --------- ----------- ----------- ----------- Net income ........................ $ 1.59 $ 1.48 $ 1.64 $ 1.74 $ 6.44 ======== ========= =========== =========== =========== High and low sales prices for common shares .............. $78 7/8-71 $84 1/2-71 3/8 $83-67 $82 3/8-70 $ 84 1/2-67 (Dollar amounts in millions except for share data) Note A. On February 13, 1998 the closing sales price for Transamerica common shares was $108 13/16 and there were 42,500 common stockholders of record.
Page 75 SELECTED ELEVEN-YEAR FINANCIAL DATA
(Dollar amounts in millions except for per share data) 1997 1996 1995 1994 1993 ---------- ---------- ---------- ----------- ----------- EARNINGS Revenues ............................................... $ 5,726.5 $ 5,311.7 $ 5,170.3 $ 4,663.9 $ 4,159.0 Income (loss) from continuing operations ............... $ 532.0 $ 501.5 $ 390.1 $ 336.9 $ 354.5 Basic earnings per share from continuing operations (Note A) .................................. $ 8.12 $ 7.27 $ 5.41 $ 4.21 $ 4.22 Diluted earnings per share from continuing operations (Note B)................................... $ 7.87 $ 7.10 $ 5.31 $ 4.13 $ 4.12 Total assets ........................................... $ 51,172.9 $ 49,931.2 $ 47,952.6 $ 40,299.0 $ 35,956.6 Long-term debt ......................................... $ 5,236.7 $ 9,087.0 $ 9,341.5 $ 7,489.1 $ 5,681.0 Dividends declared (Note C) ............................ $ 2.00 $ 2.00 $ 2.00 $ 2.00 Note A. Basic earnings per share are based on the weighted average number of common shares outstanding in each year after deduction of preferred dividends and, in 1997 and 1994, premium and expenses on the redemption of preferred stock. Note B. Diluted earnings per share are based on the weighted average number of common shares outstanding plus the dilutive effect of common stock options using the treasury stock method in each year after deduction of preferred dividends and, in 1997 and 1994, premiums and expenses on the redemption of preferred stock. Note C. Quarterly dividends per share were 50 cents in 1997 and 1996.
Page 76 and 77 EX-21 12 Exhibit 21 Subsidiaries of Transamerica Corporation Pursuant to section 21(ii) of Item 601 of Regulation S-K, the names of certain of the subsidiaries that, considered in the aggregate at December 31, 1997, did not constitute a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X have been omitted. Indentation indicates a direct subsidiary relationship to the immediately preceding entity. Jurisdiction of Organization Transamerica Capital I Delaware Transamerica Capital II Delaware Transamerica Capital III Delaware Transamerica CBO I, Inc. Delaware Transamerica Delaware, L.P. Delaware Transamerica Finance Corporation Delaware TA Leasing Holding Co., Inc. Delaware Trans Ocean Ltd. Delaware Trans Ocean Container Corp. Delaware Transamerica Leasing Inc. Delaware Transamerica Commercial Finance Corporation, I Delaware BWAC Twelve, Inc. Delaware Transamerica Insurance Finance Corporation Maryland Transamerica Business Credit Corporation Delaware Transamerica Distribution Finance Corporation Delaware Transamerica Inventory Finance Corporation Delaware BWAC Seventeen, Inc. Delaware Transamerica Commercial Finance Canada, Limited Ontario Transamerica Commercial Finance Corporation, Canada Canada Transamerica Commercial Finance France S.A. France Transamerica GmbH Inc. Delaware Transamerica Retail Financial Services Corporation Delaware Transamerica Consumer Finance Holding Company Delaware Metropolitan Mortgage Company Florida Whirlpool Financial National Bank Delaware Transamerica Vendor Financial Services Delaware Transamerica Distribution Finance Corporation de Mexico Mexico Transamerica HomeFirst, Inc. California Transamerica Insurance Corporation of California California Transamerica Occidental Life Insurance Company California Transamerica Life Insurance and Annuity Company N. Carolina Transamerica Assurance Company Colorado Transamerica Life Insurance Company of Canada Canada Transamerica Life Insurance Company of New York New York Transamerica Intellitech, Inc. Delaware Transamerica Investment Services, Inc. Delaware Transamerica Realty Services, Inc. Delaware Transamerica Senior Properties, Inc. Delaware EX-23 13 EXHIBIT-23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 2-80934, 2-83724, 33-3722, 33-12324, 33-13389, 33-18911, 33-26317, 33-38267, 33-43927, 33-55587 and 33-64221 and Form S-3 Nos. 33-32419, 33-37889, 33-41008, 33-55047 and 33-63049) and related Prospectuses, of Transamerica Corporation of our report dated January 23, 1998 with respect to the consolidated financial statements and schedules of Transamerica Corporation included or incorporated by reference in this Annual Report (Form 10-K) for the year ended December 31, 1997. Ernst & Young LLP San Francisco, California March 25, 1998 EX-24 14 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS: Each of the undersigned hereby constitutes and appoints Edgar H. Grubb, Burton E. Broome and Shirley H. Buccieri, and each of them with power to act alone, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign (either manually or electronically through the EDGAR System of the United States Securities and Exchange Commission) the Annual Report on Form 10-K for the year ended December 31, 1997 for Transamerica Corporation and any and all amendments thereto, and to file the same, together with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each such attorney-in-fact full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises hereof, as fully to all intents and purposes as he or she might do or could do in person, hereby ratifying and confirming all that each such attorney-in-fact or his or her substitutes may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned directors of Transamerica Corporation have executed this Power of Attorney effective as of the 19th day of March, 1998. SAMUEL L. GINN FRANK C. HERRINGER - -------------------------- -------------------------- Samuel L. Ginn Frank C. Herringer ROBERT W. MATSCHULLAT GORDON E. MOORE - -------------------------- -------------------------- Robert W. Matschullat Gordon E. Moore TONI REMBE - -------------------------- -------------------------- Toni Rembe Condoleezza Rice CHARLES R. SCHWAB FORREST N. SHUMWAY - -------------------------- -------------------------- Charles R. Schwab Forrest N. Shumway PETER V. UEBERROTH - -------------------------- Peter V. Ueberroth EX-27.1 15 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. Financial Data Schedule
5 1,000,000 Year DEC-31-1997 JAN-01-1997 DEC-31-1997 133 1,607 2,166 0 0 0 3,392 1,466 51,173 0 0 0 0 63 4,818 51,173 0 5,726 0 3,996 0 16 421 662 130 532 262 0 0 794 12.17 11.79
EX-27.2-RESTATED 16 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. Financial Data Schedule
5 1,000,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 82 1,666 2,201 0 0 0 3,519 1,421 49,978 0 0 0 0 63 4,516 49,978 0 4,227 0 3,001 0 10 310 437 94 343 276 0 0 619 9.43 9.14
EX-27.3-RESTATED 17 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. Financial Data Schedule
5 1,000,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 107 1,330 2,265 0 0 0 3,516 1,374 48,795 0 0 0 0 63 3,993 48,795 0 2,804 0 1,990 0 8 212 281 87 194 275 0 0 469 6.98 6.78
EX-27.4-RESTATED 18 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. Financial Data Schedule
5 1,000,000 3-MOS DEC-31-1997 JAN-01-1997 MAR-31-1997 195 1,107 2,175 0 0 0 3,439 1,314 49,957 0 0 0 0 66 3,504 49,957 0 1,372 0 994 0 4 101 117 36 81 0 0 0 81 1.13 1.10
EX-27.5-RESTATED 19 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. Financial Data Schedule
5 1,000,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 441 1,046 1,930 0 0 0 3,511 1,257 49,931 0 0 0 315 66 3,760 49,931 0 5,312 0 3,673 0 10 396 662 160 501 (45) 0 0 456 6.59 6.44
EX-27.6-RESTATED 20 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. Financial Data Schedule
5 1,000,000 9-MOS DEC-31-1996 JAN-01-1996 SEP-30-1996 83 910 1,710 0 0 0 3,279 1,199 48,496 0 0 0 315 65 3,289 48,496 0 3,966 0 2,769 0 8 289 490 102 388 (53) 0 0 335 4.82 4.71
EX-27.7-RESTATED 21 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. Financial Data Schedule
5 1,000,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 85 830 1,611 0 0 0 3,266 1,168 47,221 0 0 0 315 66 3,256 47,221 0 2,527 0 1,834 0 8 193 315 106 208 13 0 0 221 3.15 3.07
EX-27.8-RESTATED 22 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. Financial Data Schedule
5 1,000,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 108 774 1,650 0 0 0 3,248 1,111 47,076 0 0 0 315 68 3,456 47,076 0 1,274 0 891 0 7 97 144 46 97 18 0 0 115 1.63 1.59
EX-27.9-RESTATED 23 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE. Financial Data Schedule
5 1,000,000 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 67 703 2,788 0 0 0 3,255 1,082 47,953 0 0 0 315 68 3,917 47,953 0 5,170 0 3,623 0 (4) 381 571 181 390 80 0 0 470 6.58 6.46
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