SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1997 Commission File No. 1-11166
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The Equitable Companies Incorporated
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(Exact name of registrant as specified in its charter)
Delaware 13-3623351
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
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None
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(Former name, former address, and former fiscal year if changed
since last report.)
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) been subject to such filing requirements
for the past 90 days.
Yes X No
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at August 11, 1997
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Common Stock, $.01 par value 205,836,606
Page 1 of 40
THE EQUITABLE COMPANIES INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
Page #
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PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996......... 3
Consolidated Statements of Earnings for the Three Months and Six
Months Ended June 30, 1997 and 1996............................................ 4
Consolidated Statements of Shareholders' Equity for the Six Months
Ended June 30, 1997 and 1996................................................... 6
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1997 and 1996......................................................... 7
Notes to Consolidated Financial Statements.................................... 8
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 19
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................................ 37
Item 4: Submission of Matters to a Vote of Security Holders.............................. 37
Item 6: Exhibits and Reports on Form 8-K................................................. 38
SIGNATURES....................................................................................... 40
2
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements.
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 30, December 31,
1997 1996
---------------- ----------------
(In Millions)
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 19,289.5 $ 18,556.2
Held to maturity, at amortized cost..................................... 162.0 178.5
Trading account securities, at market value............................... 17,637.3 15,728.1
Securities purchased under resale agreements.............................. 25,722.2 20,492.1
Mortgage loans on real estate............................................. 2,751.0 3,133.0
Equity real estate........................................................ 3,395.6 3,298.4
Policy loans.............................................................. 2,345.3 2,196.1
Other equity investments.................................................. 1,151.4 1,081.9
Other invested assets..................................................... 134.8 125.0
----------------- -----------------
Total investments..................................................... 72,589.1 64,789.3
Cash and cash equivalents................................................... 996.0 755.3
Broker-dealer related receivables........................................... 23,377.2 16,661.7
Deferred policy acquisition costs........................................... 3,241.9 3,106.5
Amounts due from discontinued GIC Segment................................... 808.4 996.2
Other assets................................................................ 5,096.7 4,361.1
Closed Block assets......................................................... 8,504.3 8,495.0
Separate Accounts assets.................................................... 32,642.5 29,646.1
----------------- -----------------
Total Assets................................................................ $ 147,256.1 $ 128,811.2
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 21,832.5 $ 21,863.8
Future policy benefits and other policyholders liabilities.................. 4,505.4 4,416.6
Securities sold under repurchase agreements................................. 36,962.3 29,378.3
Broker-dealer related payables.............................................. 24,517.8 19,497.0
Short-term and long-term debt............................................... 7,619.2 5,379.6
Other liabilities........................................................... 5,810.1 5,598.3
Closed Block liabilities.................................................... 9,048.7 9,091.3
Separate Accounts liabilities............................................... 32,488.3 29,598.3
----------------- -----------------
Total liabilities..................................................... 142,784.3 124,823.2
----------------- -----------------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Series C convertible preferred stock........................................ 24.4 24.4
Series D convertible preferred stock........................................ 397.0 294.0
Stock employee compensation trust........................................... (397.0) (294.0)
Series E convertible preferred stock........................................ 380.2 380.2
Common stock, at par value.................................................. 1.9 1.9
Capital in excess of par value.............................................. 2,815.9 2,782.2
Retained earnings........................................................... 989.5 632.9
Net unrealized investment gains............................................. 272.8 179.3
Minimum pension liability................................................... (12.9) (12.9)
----------------- -----------------
Total shareholders' equity............................................ 4,471.8 3,988.0
----------------- -----------------
Total Liabilities and Shareholders' Equity.................................. $ 147,256.1 $ 128,811.2
================= =================
See Notes to Consolidated Financial Statements.
3
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
(In Millions, Except Per Share Amounts)
REVENUES
Universal life and investment-type
product policy fee income.......................... $ 236.1 $ 217.8 $ 466.6 $ 430.7
Premiums............................................. 141.0 152.4 292.8 293.4
Net investment income................................ 972.7 812.6 1,842.6 1,604.2
Investment gains, net................................ 434.1 202.4 612.1 372.7
Commissions, fees and other income................... 777.2 768.1 1,545.7 1,367.4
Contribution from the Closed Block................... 29.7 27.2 65.5 59.3
--------------- --------------- --------------- --------------
Total revenues................................. 2,590.8 2,180.5 4,825.3 4,127.7
--------------- ---------------- --------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account
balances........................................... 331.7 312.8 644.6 633.4
Policyholders' benefits.............................. 227.5 273.9 482.4 528.1
Other operating costs and expenses................... 1,607.5 1,356.6 2,998.1 2,514.9
--------------- ---------------- --------------- ---------------
Total benefits and other deductions............ 2,166.7 1,943.3 4,125.1 3,676.4
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
Federal income taxes, minority interest
and cumulative effect of accounting change......... 424.1 237.2 700.2 451.3
Federal income taxes................................. 172.3 72.2 259.7 136.9
Minority interest in net (loss) income of
consolidated subsidiaries.......................... (.3) 49.3 49.1 89.0
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
cumulative effect of accounting change............. 252.1 115.7 391.4 225.4
Discontinued operations, net of Federal income
taxes.............................................. .6 - (2.7) -
Cumulative effect of accounting change,
net of Federal income taxes........................ - - - (23.1)
--------------- ---------------- --------------- ---------------
Net Earnings......................................... $ 252.7 $ 115.7 $ 388.7 $ 202.3
=============== ================ =============== ===============
4
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED) - Continued
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
(In Millions, Except Per Share Amounts)
Per Common Share:
Assuming No Dilution:
Earnings from continuing operations before
cumulative effect of accounting change......... $ 1.28 $ .58 $ 1.97 $ 1.13
Discontinued operations, net of Federal
income taxes................................... - - (.01) -
Cumulative effect of accounting change,
net of Federal income taxes.................... - - - (.12)
--------------- ---------------- --------------- ---------------
Net Earnings..................................... $ 1.28 $ .58 $ 1.96 1.01
=============== ================ =============== ===============
Assuming Full Dilution:
Earnings from continuing operations before
cumulative effect of accounting change......... $ 1.12 $ .54 $ 1.74 $ 1.05
Discontinued operations, net of Federal
income taxes................................... - - (.01) -
Cumulative effect of accounting change,
net of Federal income taxes.................... - - - (.10)
--------------- ---------------- --------------- ---------------
Net Earnings..................................... $ 1.12 $ .54 $ 1.73 $ .95
=============== ================ =============== ===============
Cash Dividends Per Common Share...................... $ .05 $ .05 $ .10 $ .10
=============== ================ =============== ===============
See Notes to Consolidated Financial Statements.
5
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
----------------- -----------------
(In Millions)
Series C convertible preferred stock, beginning of year and end of period... $ 24.4 $ 24.4
----------------- -----------------
Series D convertible preferred stock, beginning of year..................... 294.0 286.6
Change in market value of shares............................................ 103.0 10.4
----------------- -----------------
Series D convertible preferred stock, end of period......................... 397.0 297.0
----------------- -----------------
Stock employee compensation trust, beginning of year........................ (294.0) (286.6)
Change in market value of shares............................................ (103.0) (10.4)
----------------- -----------------
Stock employee compensation trust, end of period............................ (397.0) (297.0)
----------------- -----------------
Series E convertible preferred stock, beginning of year and end of period... 380.2 380.2
----------------- -----------------
Common stock, at par value, beginning of year and end of period............. 1.9 1.8
----------------- -----------------
Capital in excess of par value, beginning of year as previously reported.... 2,782.2 2,561.1
Cumulative effect on prior years of retroactive restatement for
accounting change......................................................... - 192.2
----------------- -----------------
Capital in excess of par value, beginning of year as restated............... 2,782.2 2,753.3
Additional capital in excess of par value................................... 33.7 13.6
----------------- -----------------
Capital in excess of par value, end of period............................... 2,815.9 2,766.9
----------------- -----------------
Retained earnings, beginning of year as previously reported................. 632.9 590.7
Cumulative effect on prior years of retroactive restatement for
accounting change......................................................... - 6.8
----------------- -----------------
Retained earnings, beginning of year as restated............................ 632.9 597.5
Net earnings................................................................ 388.7 202.3
Dividends on preferred stocks............................................... (13.3) (13.3)
Dividends on common stock................................................... (18.8) (18.5)
----------------- -----------------
Retained earnings, end of period............................................ 989.5 768.0
----------------- -----------------
Net unrealized investment gains, beginning of year as previously reported... 179.3 328.3
Cumulative effect on prior years of retroactive restatement for
accounting change......................................................... - 58.3
----------------- -----------------
Net unrealized investment gains, beginning of year as restated.............. 179.3 386.6
Change in unrealized investment gains (losses).............................. 93.5 (387.6)
----------------- -----------------
Net unrealized investment gains (losses), end of period..................... 272.8 (1.0)
----------------- -----------------
Minimum pension liability, beginning of year and end of period.............. (12.9) (35.1)
----------------- -----------------
Total Shareholders' Equity, End of Period................................... $ 4,471.8 $ 3,905.2
================= =================
See Notes to Consolidated Financial Statements.
6
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1997 1996
----------------- -----------------
(In Millions)
Net earnings................................................................ $ 388.7 $ 202.3
Adjustments to reconcile net earnings to net cash (used) provided by
operating activities:
Interest credited to policyholders' account balances.................... 644.6 633.4
Universal life and investment-type policy fee income.................... (466.6) (430.7)
Net change in trading activities and broker-dealer related
receivables/payables.................................................. (4,123.7) 380.3
(Increase) decrease in matched resale agreements........................ (4,340.6) (1,904.9)
Increase (decrease) in matched repurchase agreements.................... 4,340.6 1,904.9
Investment gains, net of dealer and trading gains....................... (346.0) (97.6)
Changes in clearing association fees and regulatory deposits............ (31.1) (78.7)
Change in accounts payable and accrued expenses......................... (64.6) (24.7)
Change in Federal income taxes payable.................................. 69.0 (109.7)
Other, net.............................................................. (73.5) (338.8)
----------------- -----------------
Net cash (used) provided by operating activities............................ (4,003.2) 135.8
----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................................. 1,590.5 1,289.4
Sales.................................................................... 5,242.4 5,343.4
Return of capital from joint ventures and limited partnerships............ 30.4 48.5
Purchases................................................................. (7,082.1) (7,443.3)
Decrease in loans to discontinued GIC Segment............................. 185.2 492.5
Sale of subsidiaries...................................................... 261.0 -
Other, net................................................................ (322.8) 367.6
----------------- -----------------
Net cash (used) provided by investing activities............................ (95.4) 98.1
----------------- -----------------
Cash flows from financing activities: Policyholders' account balances:
Deposits................................................................ 858.6 913.9
Withdrawals............................................................. (1,063.6) (1,265.8)
Net change in short-term financings....................................... 4,421.5 (150.1)
Additions to long-term debt............................................... 238.0 252.5
Repayments of long-term debt.............................................. (75.4) (219.9)
Other, net................................................................ (39.8) (58.9)
----------------- -----------------
Net cash provided (used) by financing activities........................... 4,339.3 (528.3)
----------------- -----------------
Change in cash and cash equivalents......................................... 240.7 (294.4)
Cash and cash equivalents, beginning of year................................ 755.3 1,200.4
----------------- -----------------
Cash and Cash Equivalents, End of Period.................................... $ 996.0 $ 906.0
================= =================
Supplemental cash flow information:
Interest Paid............................................................. $ 1,894.3 $ 1,402.8
================= =================
Income Taxes Paid......................................................... $ 168.1 $ 60.9
================= =================
See Notes to Consolidated Financial Statements.
7
THE EQUITABLE COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The preparation of the accompanying consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions
(including normal, recurring accruals) that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. These statements should
be read in conjunction with the consolidated financial statements of The
Equitable for the year ended December 31, 1996. The results of operations
for the six months ended June 30, 1997 are not necessarily indicative of
the results to be expected for the full year.
The terms "second quarter 1997" and "second quarter 1996" refer to the
three months ended June 30, 1997 and 1996, respectively. The terms "first
half of 1997" and "first half of 1996" refer to the six months ended June
30, 1997 and 1996, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the current presentation.
2) ACCOUNTING CHANGES AND PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. This statement requires that an enterprise classify
items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. This statement is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". This statement establishes
standards for the way public business enterprises report information about
operating segments in annual and interim financial statements issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Generally,
financial information will be required to be reported on the basis used by
management for evaluating segment performance and deciding how to allocate
resources to segments. This statement is effective for fiscal years
beginning after December 15, 1997 and need not be applied to interim
reporting in the initial year of adoption. Restatement of comparative
information for earlier periods is required.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share". This
statement simplifies the standards for computing earnings per share
("EPS") previously found in APB Opinion No. 15, "Earnings Per Share".
Basic EPS will replace primary EPS. Basic EPS will be computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS will be computed
similarly to the present fully diluted EPS. Dual presentation of basic and
diluted EPS will be required on the face of the income statement. A
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation is also required. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. Restatement of all prior period EPS data
will be required. Had The Equitable's EPS calculations for the second
quarter and the first half of 1997 been computed on an SFAS No. 128 basis,
basic EPS would have been $1.32 per share and $2.01 per share,
respectively. Diluted EPS would not have been materially different from
reported 1997 amounts. EPS calculations for the second quarter and first
half of 1996 on an SFAS No. 128 basis would not have resulted in amounts
materially different from those reported.
8
In 1996, The Equitable changed its method of accounting for long-duration
participating life insurance contracts, primarily within the Closed Block,
in accordance with the provisions prescribed by SFAS No. 120. The effect
of this change, including the impact on the Closed Block, was to increase
previously reported second quarter and first half of 1996 earnings from
continuing operations before cumulative effect of accounting change by
$3.9 million and $7.2 million, net of Federal income taxes of $2.0 million
and $3.8 million ($.02 and $.04 per share assuming no dilution and $.02
and $.03 per share assuming full dilution), respectively.
3) FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary,
at the end of each successive interim period to reflect the current
estimate of the annual effective tax rate.
4) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
Six Months Ended
June 30,
-----------------------------------
1997 1996
--------------- ---------------
(In Millions)
Balances, beginning of year............................................... $ 137.1 $ 325.3
SFAS No. 121 release...................................................... - (152.4)
Additions charged to income............................................... 41.5 73.9
Deductions for writedowns and asset dispositions.......................... (46.5) (82.7)
--------------- ---------------
Balances, End of Period................................................... $ 132.1 $ 164.1
=============== ===============
Balances, end of period:
Mortgage loans on real estate........................................... $ 46.9 $ 102.1
Equity real estate...................................................... 85.2 62.0
--------------- ---------------
Total..................................................................... $ 132.1 $ 164.1
=============== ===============
For the second quarter and first half of 1997 and of 1996, investment
income is shown net of investment expenses (including interest expense to
finance short-term trading instruments) of $836.2 million, $1,529.2
million, $592.2 million and $1,174.1 million, respectively.
As of June 30, 1997 and December 31, 1996, respectively, fixed maturities
classified as available for sale had amortized costs of $18,911.6 million
and $18,196.1 million, fixed maturities in the held to maturity portfolio
had estimated fair values of $179.3 million and $195.1 million and trading
account securities had amortized costs of $17,459.5 million and $15,758.3
million, respectively. Other equity investments included equity securities
with carrying values of $670.7 million and $614.9 million and costs of
$666.2 million and $627.5 million.
For the first half of 1997 and of 1996, proceeds received on sales of
fixed maturities classified as available for sale amounted to $4,999.4
million and $4,971.9 million, respectively. Gross gains of $77.0 million
and $68.6 million and gross losses of $78.5 million and $45.0 million were
realized on these sales for the first half of 1997 and of 1996,
respectively. Unrealized investment gains related to fixed maturities
classified as available for sale increased by $17.9 million in the first
half of 1997, resulting in a balance of $377.9 million at June 30, 1997.
9
Impaired mortgage loans along with the related provision for losses were
as follows:
June 30, December 31,
1997 1996
--------------- -----------------
(In Millions)
Impaired mortgage loans with provision for losses....................... $ 215.1 $ 340.0
Impaired mortgage loans without provision for losses.................... 4.0 122.3
--------------- -----------------
Recorded investment in impaired mortgage loans.......................... 219.1 462.3
Provision for losses.................................................... 43.2 46.4
--------------- -----------------
Net Impaired Mortgage Loans............................................. $ 175.9 $ 415.9
=============== =================
During the first half of 1997 and of 1996, respectively, The Equitable's
average recorded investment in impaired mortgage loans was $341.1 million
and $541.2 million. Interest income recognized on these impaired mortgage
loans totaled $9.3 million and $20.8 million for the first half of 1997
and of 1996, respectively, including $1.0 million and $7.3 million
recognized on a cash basis.
5) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are treated as financing
transactions and carried at the amounts at which the securities
subsequently will be reacquired per the respective agreements. These
agreements with counterparties were collateralized principally by U.S.
government securities. The weighted average interest rates on securities
sold under repurchase agreements were 5.82% and 6.08% at June 30, 1997 and
December 31, 1996, respectively.
6) ALLIANCE - CURSITOR TRANSACTION
On February 29, 1996, Alliance acquired the business of Cursitor for
approximately $159.0 million. The purchase price consisted of 1.8 million
Alliance Units, $94.3 million in cash, $21.5 million in notes payable
ratably over four years and substantial additional consideration which
will be determined at a later date. The Equitable recognized an investment
gain of $20.6 million as a result of the issuance of Alliance Units in
this transaction.
On June 30, 1997, Alliance reduced the recorded value of goodwill and
contracts associated with Alliance's acquisition of Cursitor by $120.9
million. This charge reflected Alliance's view that Cursitor's continuing
decline in assets under management and its reduced profitability,
resulting from relative investment underperformance, no longer supported
the carrying value of its investment. As a result, The Equitable's
earnings from continuing operations before cumulative effect of accounting
change for the second quarter and first half of 1997 included a charge of
$59.5 million, net of a Federal income tax benefit of $10.0 million and
minority interest of $51.4 million.
In addition to its 1% general partnership interest in Alliance, at June
30, 1997, The Equitable owned approximately 57.1% of Alliance Units.
7) BUSINESS SEGMENT INFORMATION
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
Revenues
Insurance Operations..................... $ 1,008.7 $ 928.8 $ 1,989.7 $ 1,845.6
Investment Services...................... 1,580.3 1,246.1 2,830.8 2,273.4
Corporate and Other...................... 10.4 14.0 23.2 27.8
Consolidation/elimination................ (8.6) (8.4) (18.4) (19.1)
--------------- --------------- --------------- ---------------
Total.................................... $ 2,590.8 $ 2,180.5 $ 4,825.3 $ 4,127.7
=============== =============== =============== ===============
10
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change
Insurance Operations..................... $ 122.7 $ 73.4 $ 249.5 $ 158.0
Investment Services...................... 333.3 192.3 515.0 351.8
Corporate and Other...................... 2.9 4.3 5.6 9.4
Consolidation/elimination................ (.5) 1.6 (.9) 1.1
--------------- --------------- --------------- ---------------
Subtotal............................... 458.4 271.6 769.2 520.3
Corporate interest expense............... (34.3) (34.4) (69.0) (69.0)
--------------- --------------- --------------- ---------------
Total.................................... $ 424.1 $ 237.2 $ 700.2 $ 451.3
=============== =============== =============== ===============
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
Assets
Insurance Operations................................................... $ 65,113.7 $ 60,464.9
Investment Services.................................................... 82,041.5 68,205.3
Corporate and Other.................................................... 671.6 774.3
Consolidation/elimination.............................................. (570.7) (633.3)
----------------- -----------------
Total.................................................................. $ 147,256.1 $ 128,811.2
================= =================
8) CLOSED BLOCK
Summarized financial information of the Closed Block is as follows:
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
Assets
Fixed maturities:
Available for sale, at estimated fair value (amortized cost of
$3,907.8 and $3,820.7)............................................. $ 3,964.0 $ 3,889.5
Mortgage loans on real estate.......................................... 1,423.4 1,380.7
Policy loans........................................................... 1,733.1 1,765.9
Cash and other invested assets......................................... 287.0 336.1
Deferred policy acquisition costs...................................... 871.2 876.5
Other assets........................................................... 225.6 246.3
----------------- -----------------
Total Assets........................................................... $ 8,504.3 $ 8,495.0
================= =================
Liabilities
Future policy benefits and other policyholders' account balances....... $ 8,965.6 $ 8,999.7
Other liabilities...................................................... 83.1 91.6
----------------- -----------------
Total Liabilities...................................................... $ 9,048.7 $ 9,091.3
================= =================
11
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
Revenues
Premiums and other income................ $ 174.6 $ 182.9 $ 349.4 $ 367.8
Investment income (net of investment
expenses of $7.7, $7.2, $14.8 and
$14.1)................................. 139.5 131.4 278.3 268.2
Investment gains (losses), net........... 3.1 (4.4) 5.4 (8.6)
--------------- --------------- --------------- ---------------
Total revenues........................... 317.2 309.9 633.1 627.4
--------------- --------------- --------------- ---------------
Benefits and Other Deductions
Policyholders' benefits and dividends.... 265.8 276.1 536.8 554.1
Other operating costs and expenses....... 21.7 6.6 30.8 14.0
--------------- --------------- --------------- ---------------
Total benefits and other deductions...... 287.5 282.7 567.6 568.1
--------------- --------------- --------------- ---------------
Contribution from the Closed Block....... $ 29.7 $ 27.2 $ 65.5 $ 59.3
=============== =============== =============== ===============
Investment valuation allowances amounted to $14.2 million and $13.8
million on mortgage loans and $2.8 million and $3.7 million on equity real
estate at June 30, 1997 and December 31, 1996, respectively. The adoption
of SFAS No. 121 at January 1, 1996 resulted in the recognition of
impairment losses of $5.6 million on real estate held and used.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
Impaired mortgage loans with provision for losses...................... $ 108.4 $ 128.1
Impaired mortgage loans without provision for losses................... .6 .6
----------------- -----------------
Recorded investment in impaired mortgages.............................. 109.0 128.7
Provision for losses................................................... 13.7 12.9
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 95.3 $ 115.8
================= =================
During the first half of 1997 and of 1996, respectively, the Closed
Block's average recorded investment in impaired mortgage loans was $117.9
million and $143.5 million. Interest income recognized on these impaired
mortgage loans totaled $4.5 million and $5.4 million for the first half of
1997 and of 1996, respectively, including $1.8 million and $2.4 million
recognized on a cash basis.
12
9) DISCONTINUED OPERATIONS
Summarized financial information for the GIC Segment is as follows:
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
Assets
Mortgage loans on real estate.......................................... $ 919.8 $ 1,111.1
Equity real estate..................................................... 888.0 925.6
Cash and other invested assets......................................... 297.5 474.0
Other assets........................................................... 203.8 226.1
----------------- -----------------
Total Assets........................................................... $ 2,309.1 $ 2,736.8
================= =================
Liabilities
Policyholders liabilities.............................................. $ 1,101.5 $ 1,335.9
Allowance for future losses............................................ 244.9 262.0
Amounts due to continuing operations................................... 808.4 996.2
Other liabilities...................................................... 154.3 142.7
----------------- -----------------
Total Liabilities...................................................... $ 2,309.1 $ 2,736.8
================= =================
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
Revenues
Investment income (net of investment
expenses of $24.1, $33.0, $49.6
and $64.3)............................. $ 43.5 $ 60.4 $ 78.4 $ 132.2
Investment gains (losses), net........... 1.0 (6.6) (4.1) (17.6)
Policy fees, premiums and other
income, net............................ - - .1 .1
--------------- --------------- --------------- ---------------
Total revenues........................... 44.5 53.8 74.4 114.7
Benefits and Other Deductions............ 43.4 68.0 90.6 139.3
Earnings credited (losses charged)
to allowance for future losses......... 1.1 (14.2) (16.2) (24.6)
--------------- --------------- --------------- ---------------
Pre-tax loss from operations............. - - - -
Pre-tax earnings from releasing (loss
from strengthening) the allowance
for future losses...................... 1.0 - (4.1) -
Federal income tax (expense) benefit..... (.4) - 1.4 -
--------------- --------------- --------------- ---------------
Earnings (Loss) from Discontinued
Operations............................. $ .6 $ - $ (2.7) $ -
=============== =============== =============== ===============
The Equitable's quarterly process for evaluating the loss provisions
applies the current period's results of discontinued operations against
the allowance, re-estimates future losses, and adjusts the provisions, if
appropriate. The evaluation performed as of June 30, 1997 resulted in
management's decision to release $1.0 million of the loss provisions,
reducing the reserve strengthening for the six months ended June 30, 1997
to $4.1 million.
13
Management believes the loss provisions for Wind-Up Annuities and GIC
contracts at June 30, 1997 are adequate to provide for all future losses;
however, the determination of loss provisions continues to involve
numerous estimates and subjective judgments regarding the expected
performance of discontinued operations investment assets. There can be no
assurance the losses provided for will not differ from the losses
ultimately realized. To the extent actual results or future projections of
discontinued operations differ from management's current best estimates
and assumptions underlying the loss provisions, the difference would be
reflected as earnings (loss) from discontinued operations in the
consolidated statements of earnings. In particular, to the extent income,
sales proceeds and holding periods for equity real estate differ from
management's previous assumptions, periodic adjustments to the loss
provisions are likely to result.
Investment valuation allowances amounted to $7.8 million and $9.0 million
on mortgage loans and $13.3 million and $20.4 million on equity real
estate at June 30, 1997 and December 31, 1996, respectively. As of January
1, 1996, the adoption of SFAS No. 121 resulted in a release of existing
valuation allowances of $71.9 million on equity real estate and
recognition of impairment losses of $69.8 million on real estate held and
used.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
Impaired mortgage loans with provision for losses...................... $ 79.4 $ 83.5
Impaired mortgage loans without provision for losses................... 1.0 15.0
----------------- -----------------
Recorded investment in impaired mortgages.............................. 80.4 98.5
Provision for losses................................................... 7.8 8.8
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 72.6 $ 89.7
================= =================
During the first half of 1997 and of 1996, the GIC Segment's average
recorded investment in impaired mortgage loans was $92.6 million and
$136.1 million, respectively. Interest income recognized on these impaired
mortgage loans totaled $3.1 million and $5.0 million for the first half of
1997 and of 1996, respectively, including $2.2 million and $3.8 million
recognized on a cash basis.
Benefits and other deductions included $14.9 million, $29.7 million, $33.9
million and $71.5 million of interest expense related to amounts borrowed
from continuing operations for the second quarter and first half of 1997
and of 1996, respectively.
14
10) COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
Net earnings............................. $ 252.7 $ 115.7 $ 388.7 $ 202.3
Less - dividends on preferred stocks..... (6.6) (6.6) (13.3) (13.3)
Less - effect of assumed exercise of
options of publicly held subsidiaries
assuming no dilution................... (6.8) (1.3) (9.6) (2.8)
--------------- --------------- --------------- ---------------
Net earnings applicable to common
shares - assuming no dilution.......... 239.3 107.8 365.8 186.2
Add - dividends on convertible
preferred stock and interest on
convertible subordinated debt.......... 10.6 10.4 21.0 20.9
Less - incremental effect of assumed
exercise of options of publicly held
subsidiaries assuming full dilution.... (2.2) - (4.3) -
--------------- --------------- --------------- ---------------
Net Earnings Applicable to Common
Shares - Assuming Full Dilution........ $ 247.7 $ 118.2 $ 382.5 $ 207.1
=============== =============== =============== ===============
Weighted average common shares
outstanding - assuming no
dilution(1)............................ 187.0 185.3 186.7 185.1
Add - assumed exercise of stock
options................................ 2.1 1.1 1.9 1.1
Add - assumed conversion of
convertible preferred stock............ 17.8 17.8 17.8 17.8
Add - assumed conversion of
convertible subordinated debt.......... 14.7 14.7 14.7 14.7
--------------- --------------- --------------- ---------------
Weighted Average Shares
Outstanding - Assuming
Full Dilution.......................... 221.6 218.9 221.1 218.7
=============== =============== =============== ===============
<FN>
(1) The Equitable's stock options were not included because their dilutive
effect was less than 3%.
</FN>
Shares of the Series D Convertible Preferred Stock (or common stock issued
on conversion thereof) are not considered to be outstanding in the
computation of weighted average shares of common stock until the shares
are allocated to fund the obligations for which the SECT was established.
11) RESTRUCTURING COSTS
During the first half of 1997 and of 1996, The Equitable recorded pre-tax
provisions of $42.4 million and $2.6 million, respectively, primarily for
employee termination and exit costs. The amounts paid during the first
half of 1997 totaled $12.0 million. At June 30, 1997, the liabilities
included costs related to employee termination and exit costs, the
termination of operating leases and the consolidation of insurance
operations' service centers and amounted to $72.7 million.
12) LITIGATION
There have been no new material legal proceedings and no material
developments in matters which were previously reported in The Equitable's
Notes to Consolidated Financial Statements for the year ended December 31,
1996, except as follows:
15
In Bowler, Equitable Life has filed its reply brief, urging summary
judgment on all claims but one. Issues of fact are raised by one
plaintiff's claim (that he was misled by the representation concerning
state approval), and accordingly this claim only could not be resolved on
summary judgment. The summary judgment motion is now under judicial
review.
In Bachman, plaintiff filed its response to the summary judgment motion
and Equitable Life asked permission to file a reply brief in support of
its motion for summary judgment and for oral argument.
In Cole, on April 29, 1997, at a pre-trial conference, the court ordered
that all discovery be completed by October 8, 1997. The Court further
ordered that a Note of Issue (placing the case on the trial calendar) be
filed on or before October 10, 1997, and that on October 14, 1997, the
court would hold a conference to schedule a trial date. The parties have
agreed on a briefing schedule for plaintiffs' motion for class
certification. A hearing on plaintiffs' motion for class certification
will be scheduled, at the discretion of the court, on or after September
12, 1997. The plaintiffs filed their memorandum of law and affidavits in
support of their motion for class certification on June 30, 1997. That
memorandum indicates that plaintiffs seek to certify a class solely on
their breach of contract claim, not their negligent misrepresentation
claim. Discovery as to class certification and as to the merits continues.
In Fletcher, on April 24, 1997, the magistrate granted plaintiffs' remand
motion, and Equitable Life has filed an application with the judge for
reconsideration. Equitable Life's time to answer the complaint has been
extended until 30 days after the court's final resolution of plaintiffs'
remand motion.
In Duncan, plaintiff moved to have the action certified as a nationwide
class action with two plaintiff subgroups: one comprising those alleging
misrepresentations concerning the extent to which their policies were
proper replacement policies, and the other comprising those alleging
misrepresentations concerning the number of years that the annual premium
would need to be paid. Equitable Life will oppose the motion.
Discovery as to class certification has begun.
In Bradley, on March 3, 1997, EVLICO served a notice of appeal of the
court's order denying EVLICO's motion to remove the Bradley action to New
York County and to consolidate or jointly try the Cole and Bradley
actions. The court has scheduled a hearing on plaintiff's motion for class
certification for November 21, 1997. Discovery as to class certification
continues.
In Dillon, on February 24, 1997, Equitable Life and EOC moved to dismiss
the complaint on several grounds. On May 12, 1997, plaintiffs served a
motion for class certification. Discovery as to class certification has
begun.
In Chaviano, plaintiff filed an amended complaint on April 14, 1997. On
July 14, 1997, Equitable Life served a motion to dismiss the amended
complaint or, in the alternative, for summary judgment.
In connection with the previously reported actions relating to Harrah's
Jazz Company and Harrah's Jazz Finance Corp., the parties to these actions
have agreed to a settlement, subject to the approval of the U.S. District
Court for the Eastern District of Louisiana which was granted on July 31,
1997. The settlement is also subject to the approval by the United States
Bankruptcy Court for the Eastern District of Louisiana of proposed
modifications to a confirmed plan of reorganization for Harrah's Jazz
Company and Harrah's Jazz Finance Corp., and the satisfaction or waiver of
all conditions to the effectiveness of the plan. There can be no assurance
of the Bankruptcy Court's approval of the modifications to the plan of
reorganization, or that the conditions to the effectiveness of the plan
will be satisfied or waived. In the opinion of DLJ's management, the
settlement, if approved, will not have a material adverse effect on DLJ's
results of operations or on its consolidated financial condition.
16
On May 2, 1997, DLJ was named as a defendant in the First Amended
Derivative Complaint in James G. Caven v. Charles R. Miller, et al., an
action in the United States District Court for the Southern District of
Texas. The action is a derivative action allegedly brought on behalf of
Paracelsus Healthcare Corporation ("Paracelsus"), and in turn on behalf of
Champion Healthcare Corporation ("Champion"), in connection with
Champion's merger with Paracelsus on or about August 16, 1996. Other
defendants named in the amended complaint are certain officers and
directors of Champion, Paracelsus, certain officers and directors of
Paracelsus, and Paracelsus' outside auditors. With respect to DLJ, the
amended complaint alleges that DLJ was engaged by Champion to act as its
investment advisor in identifying suitable merger and acquisition
prospects in the healthcare industry, and that DLJ was negligent in
recommending Paracelsus to Champion as a suitable merger partner and in
rendering an opinion to Champion's board of directors that the exchange
ratio of Paracelsus common stock for Champion common stock in the merger
was fair from a financial point of view to holders of Champion common
stock. The amended complaint seeks damages in an unspecified amount,
rescission of the merger, interest, attorney's fees and costs, and other
relief. Due to the early stage of such litigation, based on the
information currently available to it, DLJ's management cannot make an
estimate of loss, if any, or predict whether or not such litigation will
have a material adverse effect on DLJ's results of operations in any
particular period.
On July 15, 1997, in the action relating to the Alliance North American
Government Income Trust, Inc., the court denied plaintiffs' motion for
leave to file an amended complaint and ordered that the case be dismissed.
Plaintiffs have until August 18, 1997 to file an appeal to the Second
Circuit Court of Appeals.
In addition to the matters previously reported and the matters described
above, the Holding Company and its subsidiaries are involved in various
legal actions and proceedings in connection with their businesses. Some of
the actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot be
predicted with certainty, in the opinion of management no such matter is
likely to have a material adverse effect on The Equitable's consolidated
financial position or results of operations.
13) SALE OF SUBSIDIARIES
On June 10, 1997, Equitable Life sold Equitable Real Estate ("EREIM")
(other than EQ Services, Inc. and its interest in Column Financial, Inc.)
to Lend Lease Corporation Limited ("Lend Lease"), a publicly traded,
international property and financial services company based in Sydney,
Australia. The total purchase price was $400.0 million and consisted of
$300.0 million in cash and a $100.0 million note maturing in eight years
and bearing interest at the rate of 7.4%, subject to certain adjustments.
The Equitable recognized an investment gain of $162.4 million, net of
Federal income tax of $87.4 million as a result of this transaction.
Equitable Life entered into long-term advisory agreements pursuant to
which EREIM will continue to provide to Equitable Life's General Account
and Separate Accounts substantially the same services, for substantially
the same fees, as provided prior to the sale.
Through June 10, 1997 and the year ended December 31, 1996, respectively,
the businesses sold reported combined revenues of $91.6 million and $226.1
million and combined net earnings of $10.7 million and $30.7 million.
Total combined assets and liabilities as reported at December 31, 1996
were $171.8 million and $130.1 million, respectively.
14) SUBSEQUENT EVENTS
In December 1993, the Holding Company established a SECT to provide a
source of funding for a portion of obligations arising from various
employee compensation and benefits programs of subsidiaries. At that time,
the Holding Company sold 60,000 shares of Series D Preferred Stock to the
SECT. The SECT is required to periodically distribute an amount of Series
D Preferred Stock (or Common Stock issued on conversion thereof) based on
a predetermined formula. In July 1997, 8,040 shares of Series D Preferred
Stock were released from the SECT and were converted into 1.6 million
shares of Common Stock which were sold, resulting in an increase in
shareholders' equity of $54.8 million.
17
On August 4, 1997, the Holding Company redeemed in full $364.2 million
principal amount of its 6.125% Subordinated Debentures due 2024, 50,017
shares of its Series C and 822,460 shares of its Series E Preferred
Stocks. Upon redemption of all Subordinated Debentures and shares of
Series C and E Preferred Stocks, approximately 32.5 million additional
shares of Common Stock were issued by the Holding Company. Holders of the
Series C and E Preferred Stocks received cash representing dividends
accrued from July 22, 1997, the prior dividend payment date. The Holding
Company paid cash in lieu of any fractional share of Common Stock. As a
result of those transactions, shareholders' equity increased by
approximately $339.6 million.
Supplementary net earnings per share, assuming no dilution and full
dilution, computed as if the transactions discussed above had occurred as
of January 1, 1997 for the first half of 1997 and as of April 1, 1997 for
the second quarter 1997 were $1.72 per share and $1.11 per share,
respectively.
18
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and financial
condition of The Equitable should be read in conjunction with the Consolidated
Financial Statements and the related Notes to Consolidated Financial Statements
included elsewhere herein, and with the Management's Discussion and Analysis
section included in The Equitable's 1996 Report on Form 10-K. The terms "second
quarter 1997" and "second quarter 1996" refer to the three months ended June 30,
1997 and 1996, respectively. The terms "first half of 1997" and "first half of
1996" refer to the six months ended June 30, 1997 and 1996, respectively.
Closed Block
The contribution from the Closed Block is reported on one line in the
consolidated statements of earnings. The Closed Block includes revenues, benefit
payments, dividends and premium taxes applicable to policies included in the
Closed Block but excludes many costs and expenses associated with operating the
Closed Block and administering the policies included therein. Since many
expenses related to the Closed Block were excluded from the calculation of the
Closed Block contribution, the contribution from the Closed Block does not
represent the actual profitability of the Closed Block.
CONSOLIDATED RESULTS OF OPERATIONS
The following table presents the consolidated results of operations for the
first half of 1997 and of 1996. In this presentation, the contribution of the
Closed Block is combined on a line-by-line basis with the results of operations
outside of the Closed Block. The Insurance Operations analysis, which begins on
page 21, also includes a table presenting the combination of Closed Block
amounts on a line-by-line basis. The Investment Services discussion begins on
page 24. Management's discussion and analysis addresses the combined results of
operations unless noted otherwise.
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
(In Millions)
Consolidated Results of Continuing Operations(1)
Policy fee income and premiums................ $ 551.1 $ 552.8 $ 1,108.5 $ 1,091.4
Net investment income......................... 1,112.2 944.0 2,120.9 1,872.4
Investment gains, net......................... 437.2 198.0 617.5 364.1
Commissions, fees and other income............ 777.8 768.4 1,546.0 1,367.9
--------------- ---------------- --------------- ---------------
Total revenues.............................. 2,878.3 2,463.2 5,392.9 4,695.8
Total benefits and other deductions........... 2,454.2 2,226.0 4,692.7 4,244.5
--------------- ---------------- --------------- ---------------
Earnings from continuing operations
before Federal income taxes,
minority interest and cumulative
effect of accounting change................. 424.1 237.2 700.2 451.3
Federal income taxes.......................... 172.3 72.2 259.7 136.9
Minority interest in net (loss) income of
consolidated subsidiaries................... (.3) 49.3 49.1 89.0
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Cumulative Effect of
Accounting Change........................... $ 252.1 $ 115.7 $ 391.4 $ 225.4
=============== ================ =============== ===============
<FN>
(1) Includes the Closed Block on a line-by-line basis.
</FN>
19
Continuing Operations
Compared to the comparable 1996 period, the higher pre-tax results of continuing
operations for the first half of 1997 reflected increased earnings for
Investment Services and Insurance Operations partially offset by higher losses
in the Corporate and Other segment. The increase in Federal income taxes was
attributed to the higher pre-tax results of operations. Minority interest in net
income of consolidated subsidiaries was significantly lower principally due to
the effect of Alliance's write down of the carrying value of intangible assets
associated with the Cursitor acquisition. See "Combined Results of Continuing
Operations by Segment - Investment Services."
The $697.1 million increase in revenues for the first half of 1997 compared to
the corresponding period in 1996 was attributed primarily to a $501.9 million
increase in investment results which included a $252.1 million gross gain on the
sale of EREIM and to a $178.1 million increase in commissions, fees and other
income principally due to increased business activity within Investment
Services.
Net investment income increased $248.5 million for the first half of 1997
principally due to increases of $208.7 million and $42.8 million, respectively,
for Investment Services and Insurance Operations. The Investment Services
increase was attributed to higher business activity while the Insurance
Operations increase was due to higher overall yields on a larger investment
asset base.
Investment gains increased by $253.4 million for the first half of 1997 from
$364.1 million for the same period in 1996. There was a $252.1 million gross
gain recognized on the sale of EREIM during second quarter 1997. Investment
gains at DLJ decreased by $55.6 million with lower dealer and trading gains of
$8.8 million and lower gains of $46.8 million on other equity investments. The
gains on other equity investments in the 1996 period included a gain of $79.4
million on the sale of the remaining shares of a single corporate development
portfolio investment. Also in 1996, a gain of $20.6 million was recognized as a
result of the issuance of Alliance Units to third parties upon completion of the
Cursitor acquisition. There were investment gains of $34.1 million on General
Account Investment Assets as compared to losses of $45.2 million in the first
half of 1996.
For the first half of 1997, total benefits and other deductions increased by
$448.2 million from the comparable period in 1996, reflecting increases in other
operating costs and expenses of $500.0 million and a $11.5 million increase in
interest credited to policyholders partially offset by a $63.3 million decrease
in policyholders' benefits. The increase in other operating costs and expenses
was attributable to increased operating costs of $394.2 million in Investment
Services and a $103.9 million increase in other operating costs and expenses in
Insurance Operations primarily due to increases in DAC amortization and in the
provision for employee termination and exit costs.
Discontinued GIC Segment
The Equitable's quarterly evaluation of the GIC Segment's loss provisions
applies the current period's results of the discontinued operations against the
allowance, re-estimates future losses and adjusts the provisions, if
appropriate. The evaluation performed at June 30, 1997 resulted in management's
decision to release $1.0 million of the loss provisions, reducing the reserve
strengthening for the six months ended June 30, 1997 to $4.1 million. The factor
contributing to the net strengthening in the first half of 1997 was higher than
anticipated investment losses, principally on other equity investments.
Excluding the effect of the aforementioned reserve strengthening, $16.2 million
of pre-tax losses were incurred and charged to the GIC Segment's allowance for
future losses in the first half of 1997 as compared to $24.6 million in the
first half of 1996. Investment results declined by $40.3 million in the first
half of 1997 as compared to the year earlier period. Net investment income
declined by $53.8 million, principally due to lower yield on a significantly
reduced GIC Segment Investment Asset base. The reduction in GIC Segment
investments was primarily due to the repayments of approximately $1.02 billion
of loans from continuing operations during 1996. Investment losses decreased
$13.5 million to $4.1 million in the first half of 1997. There were $1.2 million
of gains on mortgage loans as compared to $2.7 million in losses in the first
half of 1996 and $7.7 million and $2.7 million lower losses on equity real
estate and other equity investments, respectively. Benefits and other deductions
declined by $48.7 million principally due to the aforementioned repayments in
1996 resulting in the decrease in interest expense on lower borrowings from
continuing operations.
20
COMBINED RESULTS OF CONTINUING OPERATIONS BY SEGMENT
Insurance Operations
The Closed Block is part of Insurance Operations. The following table combines
the Closed Block amounts with the reported results of operations outside of the
Closed Block on a line-by-line basis.
Insurance Operations
(In Millions)
Six Months Ended June 30,
------------------------------------------------------------------
1997
------------------------------------------------
As Closed 1996
Reported Block Combined Combined
------------- -------------- ------------- --------------
Policy fees, premiums and other income.......... $ 813.3 $ 349.4 $ 1,162.7 $ 1,141.2
Net investment income........................... 1,082.2 278.3 1,360.5 1,317.7
Investment gains (losses), net.................. 28.7 5.4 34.1 (45.2)
Contribution from the Closed Block.............. 65.5 (65.5) - -
------------- -------------- ------------- --------------
Total revenues................................ 1,989.7 567.6 2,557.3 2,413.7
Total benefits and other deductions............. 1,740.2 567.6 2,307.8 2,255.7
------------- -------------- ------------- --------------
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change................... $ 249.5 $ - $ 249.5 $ 158.0
============= ============== ============= ==============
The earnings from continuing operations in Insurance Operations for the first
half of 1997 reflected an increase of $91.5 million from the year earlier
period. Investment gains in 1997 versus losses in 1996, higher net investment
income, higher policy fees on variable and interest-sensitive life and
individual annuities contracts, lower life insurance mortality and improved DI
and group pension results were offset by higher amortization of deferred
acquisition costs and the provision for employee termination and exit costs. The
improved DI and group pension results reflect the establishment of premium
deficiency reserves in fourth quarter 1996. To the extent periodic results from
these businesses differ from the assumptions used in establishing those
reserves, the resulting earnings (loss) will impact Insurance Operations'
results.
Total revenues increased by $143.6 million primarily due to investment results
which increased by $122.1 million, a $35.9 million increase in policy fees and a
$4.4 million increase in commissions, fees and other income, offset by an $18.8
million decline in premiums. The decrease in premiums principally was due to
lower traditional life and individual health premiums. The increase in Insurance
Operations investment results primarily resulted from investment gains in 1997
as compared to losses in 1996. There were gains of $45.4 million on fixed
maturities, an increase of $10.3 million over the comparable 1996 period and
$6.4 million of gains on the General Account's other equity investments as
compared to $2.4 million during the first half of 1996. Losses on mortgage loans
decreased $48.3 million to $3.0 million, while losses on equity real estate
totaled $14.7 million, $16.7 million lower than in the first half of 1996.
Insurance Operations' $42.8 million increase in investment income principally
was due to $79.8 million higher overall yields on a larger General Account
Investment Asset base, offset by $41.8 million lower interest on lower amounts
due from discontinued operations. Policy fee income rose to $466.6 million due
to higher insurance and annuity account balances.
Total benefits and other deductions for the first half of 1997 rose $52.1
million from the comparable 1996 period as increases of $108.0 million in other
operating expenses and $47.0 million higher DAC amortization were offset by
$51.1 million higher DAC capitalization, the effects of the favorable mortality
experience on variable and interest-sensitive life policies and a decrease in
policy benefits. The increase in operating costs resulted from higher variable
expenses related to increased sales, higher restructuring costs of $39.1 million
and higher costs related to the annuity wholesaler distribution system
implemented in the latter part of 1996. The decrease of $63.3 million in
policyholders' benefits primarily resulted from a lower increase in reserves on
21
DI business and improved mortality experience on the larger in force book of
business for variable and interest-sensitive life policies. This lower mortality
experience resulted in an increase in the amortization of DAC on variable and
interest-sensitive life policies. Interest credited on policyholders' account
balances in Insurance Operations increased by $11.5 million reflecting
moderately lower crediting rates applied to a larger in force book of business.
Premiums and Deposits - The following table lists premiums and deposits,
including universal life and investment-type contract deposits, for Insurance
Operations' major product lines.
Premiums and Deposits
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
Individual annuities
First year.................................. $ 746.5 $ 562.2 $ 1,393.8 $ 1,071.9
Renewal..................................... 344.3 331.7 684.6 661.8
--------------- ---------------- --------------- ---------------
1,090.8 893.9 2,078.4 1,733.7
Variable and interest-sensitive life
First year recurring........................ 45.1 45.2 97.7 90.1
First year optional......................... 57.1 44.3 116.9 84.5
Renewal..................................... 288.9 264.8 630.2 602.9
--------------- ---------------- --------------- ---------------
391.1 354.3 844.8 777.5
Traditional life
First year recurring........................ 3.3 4.8 7.3 9.7
First year optional......................... 0.8 1.2 1.9 2.5
Renewal..................................... 204.2 210.7 409.6 423.5
--------------- ---------------- --------------- ---------------
208.3 216.7 418.8 435.7
Other(1)
First year.................................. 4.3 11.0 8.3 18.1
Renewal..................................... 91.3 98.3 181.7 187.9
--------------- ---------------- --------------- ---------------
95.6 109.3 190.0 206.0
Total first year.............................. 857.1 668.7 1,625.9 1,276.8
Total renewal................................. 928.7 905.5 1,906.1 1,876.1
--------------- ---------------- --------------- ---------------
Total individual insurance and
annuity products............................ 1,785.8 1,574.2 3,532.0 3,152.9
Participating group annuities................. 47.6 57.5 94.9 118.4
Conversion annuities.......................... (0.6) 0.0 1.5 0.0
Association plans............................. 37.3 27.0 68.7 50.2
--------------- ---------------- --------------- ---------------
Total group pension products.................. 84.3 84.5 165.1 168.6
Total Premiums and Deposits................... $ 1,870.1 $ 1,658.7 $ 3,697.1 $ 3,321.5
=============== ================ =============== ===============
<FN>
(1) Includes health insurance and reinsurance assumed.
</FN>
22
First year premiums and deposits for individual insurance and annuity products
for the first half of 1997 increased from prior year's level by $349.1 million
primarily due to higher sales of individual annuities and variable and
interest-sensitive life products. Renewal premiums and deposits increased by
$30.0 million during the first half of 1997 over the prior year period as
increases in the larger block of variable and interest-sensitive life and
individual annuities policies were partially offset by decreases in traditional
life and other product lines. Traditional life premiums and deposits for the
first six months of 1997 decreased from the prior year's comparable period by
$16.9 million due to the marketing focus on variable and interest-sensitive
products and the decline in the traditional life book of business. The 30.0%
increase in first year individual annuities premiums and deposits in 1997 over
the prior year period included a $355.9 million increase in sales of a new line
of retirement annuity products sold through both the career agency force and
complementary distribution channels. First year variable and interest-sensitive
life premiums and deposits for the first half of 1997 included $39.8 million of
premiums and deposits from the sale of two large COLI cases. Management believes
the strategic positioning of The Equitable's insurance operations has begun to
have a positive effect on premium growth. Particular emphasis will continue to
be devoted to the support of the new needs based selling approach and the
establishment of consultative financial services as the cornerstone of the sales
process. Changes in agent recruitment and training practices have resulted in
retention and productivity improvements which, management believes, are
contributing to premium results.
Surrenders and Withdrawals - The following table summarizes Insurance
Operations' surrenders and withdrawals, including universal life and
investment-type contract withdrawals, for major individual insurance and
annuities' product lines.
Surrenders and Withdrawals
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
Individual Insurance and Annuities'
Product Lines:
Individual annuities.......................... $ 569.1 $ 588.2 $ 1,163.5 $ 1,198.7
Variable and interest-sensitive life.......... 123.3 116.7 246.5 229.0
Traditional life.............................. 91.8 92.9 197.4 186.5
--------------- ---------------- --------------- ---------------
Total......................................... $ 784.2 $ 797.8 $ 1,607.4 $ 1,614.2
=============== ================ =============== ===============
Policy and contract surrenders and withdrawals decreased $6.8 million during the
first half of 1997 compared to the same period in 1996. Surrenders of variable
and interest-sensitive products increased by $17.5 million due to the increased
size of the book of business. The $35.2 million decrease in individual annuities
surrenders was principally due to decreased surrenders of Equi-Vest contracts.
Surrenders and withdrawals in 1996 included $88.0 million paid in January 1996
for two small pension clients who terminated their contracts.
23
Investment Services
The following table summarizes the results of operations for Investment
Services.
Investment Services
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
Third party commissions and fees.............. $ 735.7 $ 730.1 $ 1,459.1 $ 1,290.8
Affiliate fees................................ 27.6 32.0 58.3 62.1
Other income(1)............................... 817.0 484.0 1,313.4 920.5
--------------- ---------------- --------------- ---------------
Total revenues................................ 1,580.3 1,246.1 2,830.8 2,273.4
Total costs and expenses...................... 1,247.0 1,053.8 2,315.8 1,921.6
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change................. $ 333.3 $ 192.3 $ 515.0 $ 351.8
=============== ================ =============== ===============
<FN>
(1) Includes net dealer and trading gains, investment results and other items.
</FN>
On June 10, 1997, Equitable Life sold EREIM to Lend Lease for $300.0 million in
cash and a $100.0 million eight year note, subject to certain adjustments.
Equitable Life entered into long-term advisory agreements whereby the businesses
sold will continue to provide services to Equitable Life's General Account and
Separate Accounts. The Equitable recognized a gain on this sale of $249.8
million (net of $2.3 million related state income tax). See Note 13 to
Consolidated Financial Statements for further information. EREIM's results from
operations continue to be included in Investment Services' results up to the
date of sale.
Also during the second quarter 1997, Alliance wrote down the recorded value of
goodwill and contracts associated with its acquisition of Cursitor by $120.9
million. This charge reflected Alliance management's view that Cursitor's
continuing decline in assets under management and its reduced profitability,
resulting from relative investment underperformance, no longer supported
Cursitor's carrying value. Cursitor's assets under management declined from
approximately $10.0 billion at the date of acquisition to $5.1 billion at June
30, 1997. At June 30, 1997, The Equitable owned approximately 58% of Alliance.
The impact of Alliance's charge on The Equitable's net earnings was
approximately $59.5 million.
For the first half of 1997, pre-tax earnings for Investment Services increased
by $163.2 million from the year earlier period primarily due to the gain on the
sale of EREIM and higher earnings for DLJ partially offset by lower earnings at
Alliance reflecting the effect of the abovementioned write down. DLJ's earnings
were higher in 1997 largely due to strong merger and acquisition activity,
private fund capital raising assignments, higher investment banking fees and the
growth in trading volume on most major exchanges. Total segment revenues were up
$557.4 million principally due to higher revenues at DLJ. Other income for the
first half of 1997 included a pre-tax gain of $252.1 million from the sale of
EREIM. Other income for the first half of 1996 included a gross gain of $20.6
million on the issuance of Alliance Units during the first quarter of that year
in connection with the Cursitor transaction.
Total costs and expenses increased by $394.2 million for the first half of 1997
as compared to the comparable period in 1996 principally reflecting increases in
compensation and interest and other expenses at DLJ due to increased activity
and the aforementioned writedown of intangible assets at Alliance of $120.9
million.
24
The following table summarizes results of operations by business unit.
Investment Services
Pre-tax Results of Operations by Business Unit
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
Business Unit:
DLJ(1)...................................... $ 152.0 $ 145.9 $ 283.0 $ 244.7
Alliance.................................... (62.8) 48.0 (8.7) 94.1
Equitable Real Estate(2).................... 8.3 9.0 14.8 16.5
Gain on sale of EREIM(3).................... 249.8 - 249.8 -
Consolidation/elimination(4)(5)............. (14.0) (10.6) (23.9) (3.5)
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change(6).............. $ 333.3 $ 192.3 $ 515.0 $ 351.8
=============== ================ =============== ===============
<FN>
(1) Excludes amortization expense of $1.1 million, $1.0 million, $2.1 million
and $1.9 million for the second quarter and first half of 1997 and of 1996,
respectively, on goodwill and intangible assets related to Equitable Life's
acquisition of DLJ in 1985, which are included in consolidation/elimination.
(2) Includes results of operations through June 10, 1997, the sale date of EREIM
to Lend Lease.
(3) Gain on the sale of EREIM is net of $2.3 million related state income tax.
(4) Includes interest expense of $2.9 million, $2.9 million, $5.9 million and
$6.1 million related to intercompany debt issued by intermediate holding
companies payable to Equitable Life for the second quarter and first half of
1997 and of 1996, respectively.
(5) Includes a gain of $16.9 million (net of $3.7 million related state income
tax) for the six months ended June 30, 1996 on issuance of Alliance Units to
third parties upon the completion of the Cursitor transaction during the first
quarter of 1996.
(6) Pre-tax minority interest related to DLJ was $41.1 million, $42.4 million,
$80.0 million and $72.3 million for the second quarter and first half of 1997
and of 1996, respectively, and $(26.7) million, $20.5 million, $(3.8) million
and $39.8 million for Alliance for the same respective periods.
</FN>
DLJ - DLJ's earnings from operations for the first half of 1997 were $283.0
million, up $38.3 million from the comparable prior year period. Revenues
increased $275.5 million to $2.04 billion primarily due to increased net
investment income of $209.0 million, higher fee income of $138.1 million, higher
commissions of $27.6 million partially offset by lower underwriting revenues of
$52.5 million and lower gains of $46.7 million on the corporate development
portfolio. DLJ's expenses were $1.76 billion for the first half of 1997, up
$237.2 million from the comparable prior year period primarily due to higher
interest expense of $112.7 million and a $56.8 million increase in compensation
and commissions and $12.1 million higher brokerage and exchange fees.
Substantially all of DLJ's activities related to derivatives are, by their
nature, trading activities which are primarily for the purpose of customer
accommodation. DLJ enters into certain contractual agreements referred to as
derivatives or off-balance-sheet financial instruments involving futures,
forwards and options. DLJ's derivative activities are not as extensive as many
of its competitors. Instead, DLJ's derivative activities consist of writing OTC
options to accommodate its customers' needs, trading in forward contracts in
U.S. government and agency issued or guaranteed securities and engaging in
25
futures contracts on equity based indices, interest rate instruments and
currencies, and issuing structured notes. DLJ's involvement in swap contracts is
not significant. As a result, DLJ's involvement in derivatives products is
related primarily to revenue generation through the provision of products to its
clients as opposed to hedges against DLJ's own positions.
Options contracts are typically written for a duration of less than thirteen
months. Revenues from these activities (net of related interest expense) were
approximately $42.2 million and $31.9 million for the first half of 1997 and
1996, respectively. Option writing revenues are primarily from the amortization
of option premiums. The increase in revenues primarily resulted from higher
levels of activity, both in size and number of transactions, by DLJ's
institutional customers and favorable market conditions.
The notional value of written options contracts outstanding was approximately
$6.5 billion and $3.5 billion at June 30, 1997 and 1996, respectively. The
overall increase in the notional value of all options was primarily due to
increases in customer activity related to U.S. government obligations. Such
written options contracts are substantially covered by various financial
instruments that DLJ had purchased or sold as principal.
As part of DLJ's trading activities, including trading activities in the related
cash market instruments, DLJ enters into forward and futures contracts primarily
involving securities, foreign currencies, indices and forward rate agreements,
as well as options on futures contracts. Such forward and futures contracts are
entered into as part of DLJ's covering transactions and are generally not used
for speculative purposes.
Net trading losses on forward contracts were $(47.7) million and $(39.1) million
and net trading (losses) gains on futures contracts were $(25.7) million and
$8.5 million for the first six months of 1997 and 1996, respectively.
Treated as off-balance-sheet items, the notional contract and market values of
the forward and futures contracts at June 30, 1997 and 1996 were as follows:
June 30, 1997 June 30, 1996
---------------------------------- -----------------------------------
Purchases Sales Purchases Sales
--------------- --------------- --------------- ---------------
(In Millions)
Forward Contracts
(Notional Contract Value).............. $ 15,622 $ 20,572 $ 17,102 $ 18,446
=============== =============== =============== ===============
Futures Contracts and Options on
Futures Contracts (Market Value)....... $ 2,669 $ 5,668 $ 803 $ 590
=============== =============== =============== ===============
Structured notes are customized derivative instruments in which the amount of
interest or principal paid on a debt obligation is linked to the return on
specific cash market financial instruments. At June 30, 1997 and 1996, DLJ had
issued long-term structured notes totaling $188.1 million and $143.1 million
outstanding, respectively. DLJ covers its obligations on structured notes
primarily by purchasing and selling the securities to which the value of its
structured notes are linked.
Alliance - Alliance's loss from operations for the first half of 1997 was $8.7
million, a decrease from the $94.1 million of earnings from the prior year's
comparable period. Revenues totaled $445.0 million for the first six months of
1997, an increase of $67.3 million from the comparable period in 1996, due to
increased investment advisory and service fees. Alliance's costs and expenses
increased $170.1 million for the first half of 1997 primarily due to the
abovementioned $120.9 million writedown of intangible assets and to increases of
$19.0 million in employee compensation and benefits.
Equitable Real Estate - This business' earnings from operations included the
results of EREIM through June 10, 1997, the date of sale. Equitable Real
Estate's earnings from operations were $14.8 million for the first six months of
1997, down $1.7 million from the preceding year's comparable period. Revenues
declined $10.4 million to $91.6 million for the first half of 1997 when compared
to the 1996 comparable period. Operating expenses similarly decreased by $8.7
million totaling $76.8 million for the first half of 1997.
26
Fees From Assets Under Management - As the following table illustrates, third
party clients continued to represent an important source of revenues and
earnings.
Fees and Assets Under Management
(In Millions)
At or For the
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
Fees:
Third Party................................. $ 192.2 $ 184.9 $ 396.9 $ 351.4
Equitable................................... 33.4 28.9 61.1 56.1
--------------- ---------------- --------------- ---------------
Total......................................... $ 225.6 $ 213.8 $ 458.0 $ 407.5
=============== ================ =============== ===============
Assets Under Management:
Third Party(1).............................. $ 193,898 $ 167,580
Equitable................................... 57,528 50,058
--------------- ---------------
Total......................................... $ 251,426 $ 217,638
=============== ===============
<FN>
(1) Included Separate Account assets under management, as well as assets managed
on behalf of other AXA affiliates.
</FN>
Fees from assets under management increased for the first half of 1997 from the
prior year's comparable period principally as a result of growth in assets under
management for third parties. Alliance's third party assets under management
increased by $29.14 billion primarily due to the market appreciation and mutual
fund sales.
For the first half of 1997 and full year 1996, fees received for assets under
management by EREIM totaled $94.1 million and $229.9 million, respectively, of
which $63.7 million and $139.6 million, respectively, were received from third
parties.
CONTINUING OPERATIONS INVESTMENT PORTFOLIO
The continuing operations investment portfolio is composed of the General
Account investment portfolio and investment assets of the Holding Company Group.
The General Account's portfolio is discussed first, followed by a separate
discussion on the Holding Company Group investments.
27
General Account Investment Portfolio
The following table reconciles the consolidated balance sheet asset amounts to
General Account Investment Asset amounts.
General Account Investment Assets
Carrying Values at June 30, 1997
(In Millions)
General
Balance Holding Account
Sheet Closed Company Investment
Balance Sheet Captions: Total Block Other(1) Group (2) Assets
- ----------------------------------- ---------------- ------------- --------------- -------------- -------------
Fixed maturities:
Available for sale.............. $ 19,289.5 $ 3,964.0 $ (131.6) $ 401.3 $ 22,983.8
Held to maturity................ 162.0 0.0 0.0 162.0 0.0
Trading account securities........ 17,637.3 0.0 17,637.3 0.0 0.0
Securities purchased under
resale agreements............... 25,722.2 0.0 25,722.2 0.0 0.0
Mortgage loans on real estate..... 2,751.0 1,423.4 0.0 0.0 4,174.4
Equity real estate................ 3,395.6 195.0 (17.8) 0.0 3,608.4
Policy loans...................... 2,345.3 1,733.1 0.0 0.0 4,078.4
Other equity investments.......... 1,151.4 107.4 253.4 7.9 997.5
Other invested assets............. 134.8 87.2 220.1 (3.9) 5.8
---------------- ------------- --------------- -------------- -------------
Total investments............... 72,589.1 7,510.1 43,683.6 567.3 35,848.3
Cash and cash equivalents......... 996.0 (103.8) 328.7 40.3 523.2
---------------- ------------- --------------- -------------- -------------
Total............................. $ 73,585.1 $ 7,406.3 $ 44,012.3 $ 607.6 $ 36,371.5
================ ============= =============== ============== =============
<FN>
(1) Assets listed in the "Other" category principally consist of assets held in
portfolios other than the Holding Company Group and the General Account
(primarily securities held in inventory or for resale by DLJ) which are not
managed as part of General Account Investment Assets and certain
reclassifications and intercompany adjustments. The "Other" category is deducted
in arriving at the General Account Investment Assets.
(2) The Holding Company Group investment assets are not managed as part of
General Account Investment Assets and are deducted in arriving at General
Account Investment Assets.
</FN>
The General Account Investment Assets presentation set forth in the following
pages includes the Closed Block's investments on a line-by-line basis.
Management believes it is appropriate to discuss the information on a combined
basis in view of the similar asset quality characteristics of major asset
categories in the portfolios.
Writedowns on fixed maturities were $9.0 million and $22.5 million for the first
six months of 1997 and 1996, respectively; writedowns on equity real estate
during the first half of 1997 were $0.2 million. The following table shows asset
valuation allowances and additions to and deductions from such allowances for
mortgages and equity real estate for the first six months of 1997 and 1996.
28
General Account Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
--------------- --------------- --------------
June 30, 1997
Assets Outside of the Closed Block:
Beginning balances............................................ $ 50.4 $ 86.7 $ 137.1
Additions..................................................... 20.6 20.9 41.5
Deductions(2)................................................. (24.1) (22.4) (46.5)
--------------- --------------- --------------
Ending Balances............................................... $ 46.9 $ 85.2 $ 132.1
=============== =============== ==============
Closed Block:
Beginning balances............................................ $ 13.8 $ 3.7 $ 17.5
Additions..................................................... 6.4 0.5 6.9
Deductions(2)................................................. (6.0) (1.4) (7.4)
--------------- --------------- --------------
Ending Balances............................................... $ 14.2 $ 2.8 $ 17.0
=============== =============== ==============
Total:
Beginning balances............................................ $ 64.2 $ 90.4 $ 154.6
Additions..................................................... 27.0 21.4 48.4
Deductions(2)................................................. (30.1) (23.8) (53.9)
--------------- --------------- --------------
Ending Balances............................................... $ 61.1 $ 88.0 $ 149.1
=============== =============== ==============
June 30, 1996
Total:
Beginning balances............................................ $ 83.9 $ 264.1 $ 348.0
SFAS No. 121 release(1)....................................... - (152.4) (152.4)
Additions..................................................... 50.1 37.8 87.9
Deductions(2)................................................. (0.5) (84.8) (85.3)
--------------- --------------- --------------
Ending Balances............................................... $ 133.5 $ 64.7 $ 198.2
=============== =============== ==============
<FN>
(1) As a result of the adoption of SFAS No. 121 at January 1, 1996, $152.4
million of allowances on assets held for investment were released and impairment
losses of $149.6 million were recognized on real estate held and used.
(2) Primarily reflected releases of allowances due to asset dispositions and
writedowns.
</FN>
29
General Account Investment Assets by Category
The following table shows the amortized cost, valuation allowances and the net
amortized cost of the major categories of General Account Investment Assets at
June 30, 1997 and the net amortized cost at December 31, 1996.
General Account Investment Assets
(Dollars In Millions)
June 30, 1997 December 31, 1996
----------------------------------------------------------- -----------------------------
% of % of
Net Total Net Net Total Net
Amortized Valuation Amortized Amortized Amortized Amortized
Cost Allowances Cost Cost Cost Cost
--------------- ------------- ------------- ------------- ------------- -------------
Fixed maturities(1).......... $ 22,541.3 $ - $ 22,541.3 62.7% $ 21,711.6 62.1%
Mortgages.................... 4,235.5 61.1 4,174.4 11.6 4,513.7 12.9
Equity real estate........... 3,696.4 88.0 3,608.4 10.0 3,518.6 10.1
Other equity investments..... 997.5 - 997.5 2.8 965.1 2.8
Policy loans................. 4,078.4 - 4,078.4 11.4 3,962.0 11.3
Cash and short-term
investments(2)............. 529.0 - 529.0 1.5 277.7 0.8
--------------- ------------- ------------- ------------- ------------- -------------
Total........................ $ 36,078.1 $ 149.1 $ 35,929.0 100.0% $ 34,948.7 100.0%
=============== ============= ============= ============= ============= =============
<FN>
(1) Excludes unrealized gains of $442.5 million and $432.9 million in fixed
maturities classified as available for sale at June 30, 1997 and December 31,
1996, respectively.
(2) Comprised of "Cash and cash equivalents" and short-term investments included
within the "Other invested assets" caption on the consolidated balance sheet.
</FN>
Management has a policy of not investing substantial new funds in equity real
estate except to safeguard values in existing investments or to honor
outstanding commitments. It is management's continuing objective to reduce the
size of the equity real estate portfolio relative to total assets over the next
several years on an opportunistic basis. Management anticipates that reductions
will depend on real estate market conditions, the level of mortgage foreclosures
and the level of expenditures required to fund necessary or desired improvements
to properties.
30
Investment Results of General Account Investment Assets
Investment Results by Asset Category
(Dollars In Millions)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------------- --------------------------------------------------
1997 1996 1997 1996
------------------------ ------------------------ ------------------------ ------------------------
(1) (1) (1) (1)
Yield Amount Yield Amount Yield Amount Yield Amount
---------- ------------- ---------- ------------- ------------------------ ---------- -------------
Fixed Maturities:
Income.............. 8.04% $ 446.5 7.92% $ 394.8 8.00% $ 882.4 7.91% $ 778.2
Investment
Gains/(Losses).... 0.25% 14.1 0.19% 9.6 0.42% 45.4 0.36% 35.1
---------- ------------- ---------- ------------- ------------------------ ---------- -------------
Total............... 8.29% $ 460.6 8.11% $ 404.4 8.42% $ 927.8 8.27% $ 813.3
Ending Assets....... $ 22,541.3 $ 20,304.9 $ 22,541.3 $ 20,304.9
Mortgages:
Income.............. 9.76% $ 103.8 8.99% $ 109.7 9.61% $ 208.5 8.87% $ 218.3
Investment
Gains/(Losses).... (0.43)% (4.6) (2.02)% (24.6) (0.14)% (3.0) (2.09)% (51.3)
---------- ------------- ---------- ------------- ------------------------------------ -------------
Total............... 9.33% $ 99.2 6.97% $ 85.1 9.47% $ 205.5 6.78% $ 167.0
Ending Assets....... $ 4,174.4 $ 4,828.1 $ 4,174.4 $ 4,828.1
Equity Real
Estate (2):
Income.............. 2.83% $ 19.4 2.46% $ 19.1 2.46% $ 33.6 2.87% $ 45.0
Investment
Gains/(Losses).... (0.61)% (4.2) (1.63)% (12.7) (1.08)% (14.7) (2.00)% (31.4)
---------- ------------- ----------- ------------- ------------------------------------ -------------
Total............... 2.22% $ 15.2 0.83% $ 6.4 1.38% $ 18.9 0.87% $ 13.6
Ending Assets....... $ 2,771.5 $ 3,100.1 $ 2,771.5 $ 3,100.1
Other Equity
Investments:
Income.............. 18.92% $ 46.1 16.03% $ 38.3 13.61% $ 66.1 15.79% $ 70.4
Investment
Gains/(Losses).... 2.71% 6.6 2.68% 6.4 1.32% 6.4 0.53% 2.4
---------- ------------- ----------- ------------- ------------------------------------ -------------
Total............... 21.63% $ 52.7 18.71% $ 44.7 14.93% $ 72.5 16.32% $ 72.8
Ending Assets....... $ 997.5 $ 961.6 $ 997.5 $ 961.6
Policy Loans:
Income.............. 7.00% $ 71.1 6.95% $ 67.3 6.96% $ 140.1 6.90% $ 132.4
Ending Assets....... $ 4,078.4 $ 3,891.1 $ 4,078.4 $ 3,891.1
Cash and Short-term
Investments:
Income.............. 7.78% $ 11.7 5.00% $ 8.3 9.85% $ 24.3 8.13% $ 30.9
Ending Assets....... $ 529.0 $ 529.0 $ 529.0 $ 529.0
Total:
Income.............. 8.02% $ 698.6 7.63% $ 637.5 7.83% $ 1,355.0 7.68% $ 1,275.2
Investment
Gains/(Losses).... 0.14% 11.9 (0.25)% (21.3) 0.20% 34.1 (0.28)% (45.2)
---------- ------------- ----------- ------------- ------------------------------------ -------------
Total(3)............ 8.16% $ 710.5 7.38% $ 616.2 8.03% $ 1,389.1 7.40% $ 1,230.0
Ending Assets....... $ 35,092.1 $ 33,614.8 $ 35,092.1 $ 33,614.8
<FN>
(1) Yields have been annualized and calculated based on the quarterly average
asset carrying values excluding unrealized gains (losses) in fixed maturities.
Annualized yields are not necessarily indicative of a full year's results.
31
(2) Equity real estate carrying values are shown net of third party debt and
minority interest in real estate of $836.9 million and $840.6 million as of June
30, 1997 and 1996, respectively. Equity real estate income is shown net of
operating expenses, depreciation, third party interest expense and minority
interest. Third party interest expense and minority interest totaled $12.5
million, $14.0 million, $25.8 million and $28.3 million for the three months and
the six months ended June 30, 1997 and 1996, respectively.
(3) Total yields are shown before deducting investment fees paid to investment
managers (which include asset management, acquisition, disposition, accounting
and legal fees). If such fees had been deducted, total yields would have been
7.86%, 7.11%, 7.74% and 7.13% for the three months and the six months ended June
30, 1997 and 1996, respectively.
</FN>
For the first half of 1997, General Account investment results were up $159.1
million from the year earlier period reflecting higher income on a higher asset
base and investment gains as compared to losses in the prior period. On an
annualized basis, total investment yield increased to 8.03% from 7.40%.
Investment income increased by $79.8 million or 6.3%, resulting in an increase
in the annualized income yield to 7.83% from 7.68%. Excluding SFAS No. 121
related permanent impairment writedowns of $149.6 million and releases of
valuation allowances totaling $152.4 million relating to equity real estate in
1996, additions to asset valuation allowances and writedowns of fixed maturities
and equity real estate were $57.6 million in the first six months of 1997
compared to $110.4 million in the first half of 1996.
Total investment results for fixed maturities increased $114.5 million or 14.1%
for the first half of 1997 compared to the year earlier period. Investment
income increased by $104.2 million reflecting a higher asset base, primarily
from reinvesting nearly all available funds into fixed maturities. Investment
gains were $45.4 million for the first half of 1997 compared to $35.1 million in
1996. Writedowns on fixed maturities were $9.0 million in the first half of 1997
as compared to $22.5 million in the comparable period of 1996. Total investment
results on mortgages increased by $38.5 million or 23.1% in the first half of
1997 compared to the same period a year ago largely due to fewer additions to
asset valuation allowances. Equity real estate investment results were $5.3
million higher during the first six months of 1997 than the year earlier period
reflecting fewer additions to asset valuation allowances.
Fixed Maturities. Fixed maturities consist of publicly traded debt securities,
privately placed debt securities and small amounts of redeemable preferred
stock, which represented 73.6%, 25.8% and 0.6%, respectively, of the amortized
cost of this asset category at June 30, 1997.
Fixed Maturities By Credit Quality
(Dollars In Millions)
June 30, 1997 December 31, 1996
Rating Agency --------------------------------------- ---------------------------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
------ ---------------------- --------------- --------- ------------- --------------- ---------- -------------
1-2 Aaa/Aa/A and Baa...... $ 19,700.2(1) 87.4% $ 20,015.1 $ 18,994.8(1) 87.5% $ 19,334.0
3-6 Ba and lower.......... 2,697.8(2) 12.0 2,822.3 2,575.2(2) 11.9 2,665.7
------------ ---------- --------------- ------------ ---------- -------------
Subtotal........................ 22,398.0 99.4 22,837.4 21,570.0 99.4 21,999.7
Redeemable preferred stock
and other..................... 143.3 .6 146.4 141.6 .6 144.8
------------ ---------- --------------- ------------ ----------- -------------
Total........................... $ 22,541.3 100.0% $ 22,983.8 $ 21,711.6 100.0% $ 22,144.5
============ ========== =============== ============ =========== =============
<FN>
(1) Includes Class B Notes with an amortized cost of $20.8 million and $67.0
million at June 30, 1997 and December 31, 1996, respectively, eliminated in
consolidation.
(2) Includes Class B Notes with an amortized cost of $100.0 million, eliminated
in consolidation.
</FN>
32
At June 30, 1997, The Equitable held CMOs with an amortized cost of $2.39
billion, including $2.28 billion in publicly traded CMOs. About 62.0% of the
public CMO holdings were collateralized by GNMA, FNMA and FHLMC securities.
Approximately 38.5% of the public CMO holdings were in PAC bonds. At June 30,
1997, IO strips amounted to $8.7 million at amortized cost. There were no
holdings of PO strips at that date. In addition, at June 30, 1997, The Equitable
held $2.36 billion of mortgage pass-through securities (GNMA, FNMA or FHLMC
securities) and also held $492.7 million of Aa or higher rated public asset
backed securities, primarily backed by home equity mortgages, airline and other
equipment, and credit card receivables.
Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
June 30, December 31,
1997 1996
--------------- -----------------
FIXED MATURITIES.............................................................. $ 22,541.3 $ 21,711.6
Problem fixed maturities...................................................... 22.9 50.6
Potential problem fixed maturities............................................ .5 .5
Restructured fixed maturities(1).............................................. 2.9 3.4
<FN>
(1) Excludes restructured fixed maturities of $2.5 million that are shown as
problems at both June 30, 1997 and December 31, 1996; there were no restructured
fixed maturities that are shown as potential problems at June 30, 1997 nor at
December 31, 1996.
</FN>
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
At June 30, 1997, commercial mortgages totaled $2.52 billion (59.4% of the
amortized cost of the category), agricultural loans were $1.71 billion (40.5%)
and residential loans were $3.1 million (.1%).
Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
June 30, December 31,
1997 1996
--------------- -----------------
COMMERCIAL MORTGAGES.......................................................... $ 2,518.9 $ 2,901.2
Problem commercial mortgages.................................................. 70.8 11.3
Potential problem commercial mortgages........................................ 141.0 425.7
Restructured commercial mortgages(1).......................................... 233.0 269.3
VALUATION ALLOWANCES.......................................................... 61.1 64.2
AGRICULTURAL MORTGAGES........................................................ $ 1,713.5 $ 1,672.7
Problem agricultural mortgages................................................ 14.7 5.4
Potential problem agricultural mortgages...................................... - -
Restructured agricultural mortgages........................................... 1.2 2.0
VALUATION ALLOWANCES.......................................................... - -
<FN>
(1) Excludes restructured commercial mortgages of $40.0 million and $1.7 million
that are shown as problems at June 30, 1997 and December 31, 1996, respectively,
and excludes $38.3 million and $229.5 million of restructured commercial
mortgages that are shown as potential problems at June 30, 1997 and December 31,
1996, respectively.
</FN>
33
Problem commercial mortgages increased by $59.5 million from December 31, 1996
to June 30, 1997 as previously identified potential problems became delinquent.
Potential problem loans declined as mortgages were reclassified to performing
status and problem. During the first six months of 1997, the amortized cost of
foreclosed commercial mortgages totaled $153.5 million with a $1.5 million
reduction in amortized cost required at the time of foreclosure.
The original weighted average coupon rate on the $233.0 million of restructured
mortgages was 9.7%. As a result of these restructurings, the restructured
weighted average coupon rate was 8.6% and the restructured weighted average cash
payment rate was 8.2%. The foregone interest on restructured commercial
mortgages (including restructured commercial mortgages presented as problem or
potential problem commercial mortgages) for the first six months of 1997 was
$1.6 million.
At June 30, 1997, problem commercial mortgages were classified into the
following property types: retail ($69.1 million or 97.6%) and apartment ($1.7
million or 2.4%). Their distribution by state was: New York ($38.3 million or
54.1%), Massachusetts ($26.8 million or 37.9%) and Mississippi ($4.0 million or
5.6%). Potential problem commercial mortgages were classified by property type
as: retail ($86.4 million or 61.3%), industrial ($27.3 million or 19.4%), office
($21.0 million or 14.9%) and hotel ($5.4 million or 3.8%). By state, their
distribution was: New York ($63.9 million or 45.3%), Pennsylvania ($22.7 million
or 16.1%), Puerto Rico ($18.7 million or 13.3%) and Virginia ($16.4 million or
11.6%). No other state had 5.0% or more of the total.
At June 30, 1997 and 1996, management identified impaired commercial loans as
defined under SFAS No. 114 with a carrying value of $269.7 million and $595.8
million, respectively. The provision for losses for these impaired mortgage
loans was $56.9 million and $122.1 million at June 30, 1997 and 1996,
respectively. Income earned on these loans in the first six months of 1997 and
1996 was $13.7 million and $26.1 million, respectively, including cash received
of $12.8 million and $20.9 million, respectively.
For the first six months of 1997, scheduled principal amortization payments and
prepayments on commercial mortgage loans received aggregated $278.4 million. In
addition, during the first six months of 1997, $299.6 million of commercial
mortgage loan maturity payments were scheduled, of which $51.9 million were paid
as due. Of the amount not paid, $125.3 million were foreclosed, $117.8 million
were granted short term extensions of up to six months, $4.6 million were
extended for a weighted average of 3.0 years at a weighted average interest rate
of 9.65% and none were delinquent or in default for non-payment of principal.
Equity Real Estate. As of June 30, 1997, on the basis of amortized cost, the
equity real estate category included $2.62 billion (or 70.8%) acquired as
investment real estate and $1.08 billion (or 29.2%) acquired through or in lieu
of foreclosure (including in-substance foreclosures).
Real estate properties with amortized costs of $130.1 million and $247.0 million
were sold during the first six months of 1997 and 1996, respectively. In the
first half of 1997 and 1996, respectively, gains of $4.4 million and $2.5
million were recognized on equity real estate which was sold.
At June 30, 1997 and 1996, respectively, allowances totaling $88.0 million and
$64.7 million were held on properties identified as available for sale with
amortized costs of $429.1 million and $375.4 million.
At June 30, 1997, the vacancy rate for The Equitable's office properties was
13.1% in total, with a vacancy rate of 9.9% for properties acquired as
investment real estate and 23.1% for properties acquired through foreclosure.
The national commercial office vacancy rate was 11.6% (as of March 31, 1997) as
measured by CB Commercial.
Holding Company Group Investment Portfolio - Continuing Operations
For the first half of 1997, Holding Company Group investment results were $23.2
million, as compared to $27.8 million in the year earlier period. The decrease
principally was due to lower investment income on the Holding Company's smaller
fixed maturities portfolio.
34
At June 30, 1997, the Holding Company Group investment portfolio's $607.7
million carrying value was made up of $563.3 million of fixed maturities ($396.0
million with an NAIC 1 rating), $36.5 million of cash and short-term investments
and $7.9 million of other equity investments. At December 31, 1996, the
portfolio's carrying value was $705.7 million, which included $657.7 million of
fixed maturities ($444.9 million with an NAIC 1 rating), $40.6 million of cash
and short-term investments and $7.4 million of other equity investments.
Holding Company Group Fixed Maturities
By Credit Quality
(Dollars In Millions)
June 30, 1997 December 31, 1996
Rating Agency --------------------------------------- ----------------------------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
- ---------- ---------------------- ------------- --------- ------------- ------------- --------- -------------
1-2 Aaa/Aa/A and Baa...... $ 472.5 83.9% $ 486.1 $ 525.0 80.1% $ 537.8
3-6 Ba and lower.......... 90.8 16.1 94.6 130.4 19.9 136.5
------------- --------- ------------- ------------- --------- --------------
Total......................... $ 563.3 100.0% $ 580.7 $ 655.4 100.0% $ 674.3
============= ========= ============= ============= ========= ==============
At June 30, 1997, the amortized cost of problem fixed maturities was $.0
million, $4.5 million for potential problem fixed maturities and $10.2 million
for restructured fixed maturities.
LIQUIDITY AND CAPITAL RESOURCES
Since becoming a public company in 1992, the Holding Company's Board of
Directors has declared quarterly cash dividends of $.05 per share on the
outstanding shares of its Common Stock. At June 30, 1997, the Holding Company
had three series of preferred stock outstanding. The annual dividend rate on the
Series C Preferred Stock was fixed at 6% and dividends amounted to $.8 million
for the first half of 1997. The Series D Preferred Stock will increase
shareholders' equity only when shares are released from the SECT. No shares of
Series D Preferred Stock were released from the SECT during the first half of
1997. The Series E Preferred Stock's dividend rate was fixed at 6.125% and
dividends totaled $12.5 million for the first half of 1997. The Series E
Preferred Stock dividends were payable quarterly in Common Stock.
On August 4, 1997, the Holding Company redeemed all of its outstanding
Subordinated Debentures and all outstanding shares of its Series C and Series E
Preferred Stock. Upon redemption, the Holding Company issued approximately 32.5
million additional shares of its Common Stock. Holders of record of the
Subordinated Debentures were entitled to receive 40.4040 shares of Common Stock
for each $1,000 principal amount of Subordinated Debentures redeemed, along with
cash representing interest accrued from July 22, 1997, the prior interest
payment date. Holders of the Series C and Series E Preferred Stock were entitled
to receive 20.4082 shares of Common Stock for each share of Preferred Stock
redeemed, together with cash representing dividends accrued from July 22, 1997,
the prior dividend payment date. The Holding Company paid cash in lieu of any
fractional share of Common Stock.
In April 1996, the Holding Company registered with the SEC approximately 11.9
million shares of Common Stock issuable upon conversion of shares of the Series
D Preferred Stock held by the SECT. At June 30, 1997, the aggregate market value
of these registered securities was $395.7 million, based on the closing market
price on the NYSE. In July 1997, the SECT released 8,040 shares of the Series D
Preferred Stock which were converted into 1.6 million shares of Common Stock.
AXA purchased 960,000 shares directly while the remaining shares were sold
through an agent to the public. The net proceeds of the sales totaled $54.8
million.
See Note 14 of Notes to the Consolidated Financial Statements for further
information on the redemptions and the SECT transaction.
35
Equitable Life has a commercial paper program with an issue limit of up to
$500.0 million. This program is available for general corporate purposes and is
supported by Equitable Life's existing $350.0 million bank credit facility,
which expires in June 2000. Equitable Life uses this program from time to time
in its liquidity management. At June 30, 1997, there were no amounts outstanding
under the commercial paper program or the revolving credit facility.
DLJ continues to be active in raising additional capital. In April 1997, DLJ
commenced a program for the offering of up to $300.0 million of medium-term
notes under a shelf registration statement. On April 15, 1997, $10.0 million
aggregate principal amount of variable rate medium-term notes due 2000 were
issued. The interest rate is LIBOR plus 10 basis points with a rate at June 30,
1997 of 5.88125%. On June 18, 1997, DLJ issued an additional $10.0 million
aggregate principal amount of 6.85% medium-term notes due 2002, followed by the
June 30, 1997 issuance of $70.0 million aggregate principal amount of 6.70%
medium-term notes due in 2000. The proceeds of approximately $89.8 million were
used for general corporate purposes. In June 1997, DLJ filed a shelf
registration statement which enables DLJ to issue from time to time up to $1.00
billion in aggregate principal amount of senior or subordinated debt securities.
There were no securities outstanding under this shelf registration statement at
June 30, 1997. On August 8, 1997, DLJ converted its $28.8 million aggregate
principal amount of 5% junior subordinated convertible debentures into 685,204
shares of DLJ common stock.
To address a possible year end change in its tax status, on June 24, 1997,
Alliance announced plans for a change to a public corporate ownership structure
to become effective in December 1997. On August 5, 1997, The Taxpayer Relief Act
of 1997 was signed into law. It included the option for certain publicly traded
partnerships to maintain partnership tax status and pay a 3.5% tax on
partnership gross income. On August 6, 1997, Alliance announced its intention to
utilize this option and remain a publicly traded limited partnership and that it
would not implement the previously announced change to a public corporate
ownership structure.
Consolidated Cash Flows
The net cash used by operating activities was $4.00 billion for the first half
of 1997 compared to net cash provided by operating activities of $135.8 million
for the same period in 1996. Cash used by operating activities in 1997
principally was attributable to the $4.12 billion net change in trading
activities and broker-dealer related receivables/payables at DLJ reflecting an
increase in operating assets. The 1996 cash provided by operations principally
was due to the $380.3 million net change in trading activities and broker-dealer
related receivables/payables at DLJ as its level of business activity continued
to increase, partially offset by the $109.7 million change in Federal income
taxes payable and the $78.7 million change in clearing association fees and
regulatory deposits.
Net cash used by investing activities was $95.4 million for the first half of
1997 as compared to net cash provided by investing activities of $98.1 million
for the same period in 1996. During the first half of 1997, investment purchases
exceeded sales, maturities, repayments and return of capital by $218.8 million.
The EREIM sale produced net proceeds of approximately $261.0 million.
Discontinued operations reduced its outstanding loans from continuing operations
by $185.2 million during the first six months of 1997. In the 1996 period,
investment purchases exceeded sales, maturities, repayments and return of
capital by $762.0 million. The discontinued GIC Segment repaid $492.5 million of
loans from continuing operations during the first half of 1996.
Net cash provided by financing activities was $4.34 billion for the first half
of 1997 as compared to net cash used by financing activities of $528.3 million
in the first half of 1996. Net cash provided by financing activities during the
first six months of 1997 primarily resulted from a $4.42 billion increase in
short-term financings, principally due to net repurchase agreement activity.
There was a net increase of long-term debt of $162.6 million primarily due to
new debt at DLJ. Withdrawals from General Account policyholders' account
balances exceeded deposits by $205.0 million during the six months ended June
30, 1997. In the first half of 1996, withdrawals from General Account
policyholders' account balances exceeded deposits by $351.9 million. During the
first six months of 1996, cash used for the repayment of long-term debt of
$219.9 million and the net decrease of $150.1 million in short-term financing,
principally at DLJ, was partially offset by the net cash proceeds of $247.8
million from DLJ's February 1996 Medium Term Notes offering.
The operating, investing and financing activities described above resulted in an
increase in cash and cash equivalents during the first half of 1997 of $240.7
million to $996.0 million.
36
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There have been no new material legal proceedings and no material developments
in matters which were previously reported in the Registrant's Form 10-K for the
year ended December 31, 1996, except as set forth in Note 12 to the Registrant's
Unaudited Consolidated Financial Statements in Part I of this Form 10-Q for the
quarter ended June 30, 1997.
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of the Holding Company's shareholders held on May 14,
1997, the 19 nominees listed below were elected as directors of the Holding
Company to hold office until the 1998 annual meeting and until their successors
shall have been elected and qualified. In addition, at such meeting, the Holding
Company's shareholders (i) ratified the appointment of Price Waterhouse LLP as
the Holding Company's independent accountants, (ii) approved a Short-term
Incentive Compensation Plan For Senior Officers, (iii) approved a Long-term
Incentive Compensation Plan For Senior Officers, (iv) approved the Holding
Company's 1997 Stock Incentive Plan, (v) approved an amendment to the Holding
Company's Restated Certificate of Corporation concerning amendment of the
Holding Company's By-Laws and (vi) approved possible purchases by AXA and its
affiliates from time to time of all or a portion of the shares of the Holding
Company's Common Stock to be sold by the SECT.
The number of votes with respect to each of these matters was as follows:
(a) Election of Directors:
Name Votes For Votes Withheld
Claude Bebear 169,433,016 435,457
John S. Chalsty 169,439,529 428,944
Henri de Castries 169,432,328 436,145
Francoise Colloc'h 169,433,386 435,087
Joseph L. Dionne 169,147,499 720,974
William T. Esrey 169,418,291 450,182
Jean-Rene Fourtou 163,569,715 6,298,758
Donald J. Greene 169,437,165 431,308
Anthony J. Hamilton 169,421,517 446,956
John T. Hartley 169,142,689 725,784
John H. F. Haskell, Jr. 169,434,408 434,065
Mary R. (Nina) Henderson 169,429,032 439,441
W. Edwin Jarmain 169,143,331 725,142
Winthrop Knowlton 169,121,239 747,234
Arthur L. Liman 163,530,221 6,338,252
Joseph J. Melone 169,432,266 436,207
Didier Pineau-Valencienne 163,399,366 6,469,107
George J. Sella, Jr. 169,415,168 453,305
Dave H. Williams 163,404,242 6,464,231
(b) Ratification of the Appointment of Price Waterhouse LLP as Independent
Accountants:
Votes For Votes Against Abstentions
169,529,055 166,111 173,307
37
(c) Approval of the Short-term Incentive Compensation Plan For Senior
Officers:
Votes For Votes Against Abstentions Nonvotes
156,655,111 3,634,195 1,126,843 8,452,324
(d) Approval of the Long-term Incentive Compensation Plan For Senior
Officers:
Votes For Votes Against Abstentions Nonvotes
156,884,946 3,305,931 1,225,272 8,452,324
(e) Approval of the Holding Company's 1997 Stock Incentive Plan:
Votes For Votes Against Abstentions Nonvotes
157,051,930 3,281,843 1,082,376 8,452,324
(f) Approval of an Amendment to the Holding Company's Restated Certificate
of Incorporation Concerning Amendment of the Holding Company's
By-Laws:
Votes For Votes Against Abstentions Nonvotes
156,417,339 3,823,232 1,175,578 8,452,324
(g) Approval of Possible Purchases by AXA and its Affiliates from time to
time of all or a Portion of the Holding Company's Common Stock to be
sold by the SECT:
Votes For Votes Against Abstentions Nonvotes
159,142,512 1,103,668 1,169,969 8,452,324
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
4.01(a) Restated Certificate of Incorporation of the Registrant, filed as Exhibit
4.01(a)to the Registrant's Form S-3 Registration Statement (No. 333-03224), and
incorporated herein by reference.
4.01(b) Certificate of Designation of Cumulative Convertible Preferred Stock, Series C,
filed as Exhibit 4.01(d) to the Registrant's Form S-3 Registration Statement
(No. 333-03224), and incorporated herein by reference.
4.01(c) Certificate of Designation of Cumulative Convertible Preferred Stock, Series D,
filed as Exhibit 4.01(e) to the Registrant's Form S-3 Registration Statement
(No. 333-03224), and incorporated herein by reference.
4.01(d) Certificate of Designation of Cumulative Convertible Preferred Stock, Series E,
filed as Exhibit 4.01(f) to the Registrant's Form S-3 Registration Statement
(No. 333-03224), and incorporated herein by reference.
38
4.01(e) Amendment to Restated Certificate of Incorporation of the Registrant,
dated as of May 15, 1997 filed as Exhibit 4.01(g) to the Registrant's Form S-3
Registration Statement (No. 333-03224), and incorporated herein by reference.
4.01(f) Certificate of Elimination, dated July 31, 1997.
4.02 By-Laws of the Registrant, filed as Exhibit 4.02 to the Registrant's Form S-3
(No. 333-03224), and incorporated herein by reference.
10.1 Second Amendment of Lease, dated as of May 1, 1997, between 1290
Partners L.P. and Equitable Life.
10.2 Letter Agreement dated July 8, 1997, from the Holding Company and
Equitable Life to Mr. Edward D. Miller.
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed July 10, 1997; Item 5
therein discussed (a) the selection of Edward D. Miller as
President and Chief Executive Officer of both the Holding
Company and Equitable Life and his expected election to both
companies' boards of directors, (b) the redemption of
certain debt and preferred stock for Common Stock, (c) the
announcement by Alliance regarding (1) its plans for a
transaction responsive to a potential change in Alliance's
tax status and (2) its taking of a non-recurring non-cash
charge to reduce the recorded value of goodwill and
contracts associated with Alliance's acquisition of Cursitor
and (d) the closing of the previously announced sale of
certain subsidiaries. No financial statements were filed.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Equitable Companies Incorporated has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: August 11, 1997 THE EQUITABLE COMPANIES INCORPORATED
By: /s/Stanley B. Tulin
---------------------------------------------
Name: Stanley B. Tulin
Title: Executive Vice President and Chief
Financial Officer
Date: August 11, 1997 /s/Alvin H. Fenichel
---------------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and Controller
40