SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1999 Commission File No. 0-25280
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The Equitable Life Assurance Society of the United States
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
New York 13-5570651
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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
------------------------------
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 No
X
--- ---
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 November 10, 1999
- -------------------------------------- --------------------------------------
Common Stock, $1.25 par value 2,000,000
Page 1 of 40
<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Page #
------
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
o Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998................................................. 3
o Consolidated Statements of Earnings for the Three Months and
Nine Months Ended September 30, 1999 and 1998..................... 4
o Consolidated Statements of Shareholder's Equity for the Nine
Months Ended September 30, 1999 and 1998.......................... 5
o Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1999 and 1998................................. 6
o Notes to Consolidated Financial Statements........................ 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 17
Item 3: Quantitative and Qualitative Disclosures About Market Risk.......... 37
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................... 38
Item 6: Exhibits and Reports on Form 8-K.................................... 39
SIGNATURES.................................................................. 40
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<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1: UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value................ $ 19,319.3 $ 18,993.7
Held to maturity, at amortized cost........................ 131.2 125.0
Mortgage loans on real estate............................... 3,184.4 2,809.9
Equity real estate.......................................... 1,470.0 1,676.9
Policy loans................................................ 2,209.0 2,086.7
Other equity investments.................................... 660.3 713.3
Investment in and loans to affiliates....................... 1,147.9 928.5
Other invested assets....................................... 1,005.1 808.2
-------------- --------------
Total investments........................................ 29,127.2 28,142.2
Cash and cash equivalents..................................... 448.2 1,245.5
Deferred policy acquisition costs............................. 3,843.4 3,563.8
Other assets.................................................. 3,534.6 3,054.6
Closed Block assets........................................... 8,603.9 8,632.4
Separate Accounts assets...................................... 46,235.4 43,302.3
-------------- --------------
TOTAL ASSETS.................................................. $ 91,792.7 $ 87,940.8
============== ==============
LIABILITIES
Policyholders' account balances............................... $ 21,325.2 $ 20,857.5
Future policy benefits and other policyholders' liabilities... 4,776.2 4,726.4
Short-term and long-term debt................................. 1,482.2 1,181.7
Other liabilities............................................. 3,853.2 3,474.3
Closed Block liabilities...................................... 9,040.6 9,077.0
Separate Accounts liabilities................................. 46,125.0 43,211.3
-------------- --------------
Total liabilities........................................ 86,602.4 82,528.2
-------------- --------------
Commitments and contingencies (Note 11)
SHAREHOLDER'S EQUITY
Common stock, $1.25 par value, 2.0 million shares authorized,
issued and outstanding...................................... 2.5 2.5
Capital in excess of par value................................ 3,117.4 3,110.2
Retained earnings............................................. 2,380.5 1,944.1
Accumulated other comprehensive (loss) income................. (310.1) 355.8
-------------- --------------
Total shareholder's equity............................... 5,190.3 5,412.6
-------------- --------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY.................... $ 91,792.7 $ 87,940.8
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------- ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Universal life and investment-type
product policy fee income............... $ 314.3 $ 270.3 $ 918.8 $ 787.4
Premiums.................................. 140.0 147.1 405.6 436.2
Net investment income..................... 538.5 508.4 1,680.7 1,674.3
Investment (losses) gains, net............ (32.0) (6.7) 22.1 98.9
Commissions, fees and other income........ 527.6 354.5 1,523.9 1,127.5
Contribution from the Closed Block........ 23.7 24.0 65.6 66.4
------------ ------------- ------------- ------------
Total revenues....................... 1,512.1 1,297.6 4,616.7 4,190.7
------------ ------------- ------------- ------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account
balances................................ 267.2 289.3 807.0 872.2
Policyholders' benefits................... 262.0 244.1 756.7 764.5
Other operating costs and expenses........ 656.0 519.2 2,073.5 1,646.7
------------ ------------- ------------- ------------
Total benefits and other deductions.. 1,185.2 1,052.6 3,637.2 3,283.4
------------ ------------- ------------- ------------
Earnings from continuing operations before
Federal income taxes and minority interest 326.9 245.0 979.5 907.3
Federal income taxes...................... 96.6 78.2 255.3 268.9
Minority interest in net income of
consolidated subsidiaries............... 43.8 30.0 127.8 91.8
------------ ------------- ------------- ------------
Earnings from continuing operations....... 186.5 136.8 596.4 546.6
Discontinued operations, net of Federal
income taxes............................ (3.4) .7 (10.0) 2.5
------------ ------------- ------------- ------------
Net Earnings.............................. $ 183.1 $ 137.5 $ 586.4 $ 549.1
============ ============= ============= ============
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
--------------- --------------
(IN MILLIONS)
<S> <C> <C>
SHAREHOLDER'S EQUITY
Common stock, at par value, beginning of year
and end of period........................................... $ 2.5 $ 2.5
--------------- --------------
Capital in excess of par value, beginning of year............. 3,110.2 3,105.8
Additional capital in excess of par value..................... 7.2 4.4
--------------- --------------
Capital in excess of par value, end of period................. 3,117.4 3,110.2
--------------- --------------
Retained earnings, beginning of year.......................... 1,944.1 1,235.9
Net earnings.................................................. 586.4 549.1
Dividend paid to the Holding Company.......................... (150.0) -
--------------- --------------
Retained earnings, end of period.............................. 2,380.5 1,785.0
--------------- --------------
Accumulated other comprehensive income, beginning of year..... 355.8 516.3
Other comprehensive (loss) income............................. (665.9) 3.5
--------------- --------------
Accumulated other comprehensive (loss) income, end of period.. (310.1) 519.8
--------------- --------------
TOTAL SHAREHOLDER'S EQUITY, END OF PERIOD..................... $ 5,190.3 $ 5,417.5
=============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
Net earnings.................................................. $ 586.4 $ 549.1
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Interest credited to policyholders' account balances....... 807.0 872.2
Universal life and investment-type policy fee income....... (918.8) (787.4)
Investment gains........................................... (22.1) (98.9)
Change in Federal income tax payable....................... 141.8 91.3
Other, net................................................. (231.3) (188.2)
-------------- --------------
Net cash provided by operating activities..................... 363.0 438.1
-------------- --------------
Cash flows from investing activities:
Maturities and repayments................................... 1,432.9 1,722.0
Sales....................................................... 6,475.0 13,115.4
Purchases................................................... (9,553.8) (15,006.2)
(Increase) decrease in short-term investments............... (58.6) 65.0
Decrease in loans to discontinued operations................ - 300.0
Other, net.................................................. (167.9) (176.9)
-------------- --------------
Net cash (used) provided by investing activities.............. (1,872.4) 19.3
-------------- --------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................... 1,997.4 1,066.8
Withdrawals................................................ (1,460.6) (1,314.2)
Increase in short-term financings........................... 433.4 313.6
Repayments of long-term debt................................ (11.9) (6.8)
Payment of obligation to fund accumulated deficit of
discontinued operations.................................... - (87.2)
Dividend paid to the Holding Company........................ (150.0) -
Other, net.................................................. (96.2) (63.2)
-------------- --------------
Net cash provided (used) by financing activities.............. 712.1 (91.0)
-------------- --------------
Change in cash and cash equivalents........................... (797.3) 366.4
Cash and cash equivalents, beginning of year.................. 1,245.5 300.5
-------------- --------------
Cash and Cash Equivalents, End of Period...................... $ 448.2 $ 666.9
============== ==============
Supplemental cash flow information:
Interest Paid............................................... $ 63.9 $ 99.7
============== ==============
Income Taxes Paid........................................... $ 27.4 $ 211.0
============== ==============
</TABLE>
See Notes to Consolidated Financial Statements.
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<PAGE>
THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The accompanying consolidated financial statements are prepared in
conformity with GAAP which requires management to make estimates and
assumptions 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 Company for the year
ended December 31, 1998. The results of operations for the nine months
ended September 30, 1999 are not necessarily indicative of the results to
be expected for the full year.
The terms "third quarter 1999" and "third quarter 1998" refer to the three
months ended September 30, 1999 and 1998, respectively. The terms "first
nine months of 1999" and "first nine months of 1998" refer to the nine
months ended September 30, 1999 and 1998, respectively.
Certain reclassifications have been made in the amounts presented for prior
periods to conform those periods with the current presentation.
2) NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133," which amends SFAS No. 133 to defer its effective date
by one year to all fiscal years beginning after June 15, 2000. The Company
expects to adopt SFAS No. 133 effective January 1, 2001.
3) DEFERRED POLICY ACQUISITION COSTS
As part of its asset/liability management process, in second quarter 1999,
management initiated a review of the matching of invested assets to
Insurance product lines given their different liability characteristics and
liquidity requirements. As a result of this review, management reallocated
the current and prospective interests of the various product lines in the
invested assets. These asset reallocations and the related changes in
investment yields by product line, in turn, triggered a review of and
revisions to the estimated future gross profits used to determine the
amortization of DAC for universal life and investment-type products. The
revisions to estimated future gross profits resulted in an after-tax
writedown of DAC of $85.6 million (net of a Federal income tax benefit of
$46.1 million) for the nine months ended September 30, 1999.
4) COMMON STOCK DIVIDEND
In third quarter 1999, the Company paid a cash dividend in the aggregate
amount of $150.0 million to the Holding Company, the Company's then sole
shareholder.
-7-
<PAGE>
5) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------------
1999 1998
------------ ------------
(IN MILLIONS)
<S> <C> <C>
Balances, beginning of year.................................. $ 230.6 $ 384.5
Additions charged to income.................................. 34.5 72.6
Deductions for writedowns and asset dispositions............. (107.7) (173.8)
------------ ------------
Balances, End of Period...................................... $ 157.4 $ 283.3
============ ============
Balances, end of period:
Mortgage loans on real estate.............................. $ 32.3 $ 28.5
Equity real estate......................................... 125.1 254.8
------------ ------------
Total........................................................ $ 157.4 $ 283.3
============ ============
</TABLE>
For the third quarter and first nine months of 1999 and of 1998, investment
income is shown net of investment expenses of $58.3 million, $171.6
million, $63.9 million and $208.5 million, respectively.
As of September 30, 1999 and December 31, 1998, fixed maturities classified
as available for sale had amortized costs of $19,795.8 million and
$18,453.8 million and fixed maturities in the held to maturity portfolio
had estimated fair values of $131.2 million and $125.0 million,
respectively. Other equity investments include equity securities with
carrying values of $24.4 million and $150.6 million and costs of $28.3
million and $58.3 million as of September 30, 1999 and December 31, 1998,
respectively.
On January 1, 1999, investments in publicly-traded common equity securities
in the General Account portfolio within other equity investments amounting
to $102.3 million were transferred from available for sale securities to
trading securities. As a result of this transfer, unrealized investment
gains of $83.3 million ($43.2 million net of related DAC and Federal income
taxes) of decreases were recognized as realized investment gains in the
consolidated statements of earnings. In the third quarter and first nine
months of 1999, net unrealized holding gains of $4.7 million and $3.9
million were included as net investment income in the consolidated
statements of earnings. These trading securities had a carrying value of
$11.5 million and costs of $7.6 million at September 30, 1999.
For the first nine months of 1999 and of 1998, proceeds received on sales
of fixed maturities classified as available for sale amounted to $5,939.0
million and $12,731.1 million, respectively. Gross gains of $49.3 million
and $114.9 million and gross losses of $115.0 million and $72.4 million
were realized on these sales for the first nine months of 1999 and of 1998,
respectively. Unrealized investment gains (losses) related to fixed
maturities classified as available for sale decreased by $1,016.4 million
in the first nine months of 1999, resulting in a balance of $476.6 million
of unrealized investment losses at September 30, 1999.
-8-
<PAGE>
Impaired mortgage loans along with the related provision for losses were as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
----------------- --------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with provision for losses........ $ 158.5 $ 125.4
Impaired mortgage loans without provision for losses..... 10.9 8.6
----------------- --------------
Recorded investment in impaired mortgage loans........... 169.4 134.0
Provision for losses..................................... (27.1) (29.0)
----------------- --------------
Net Impaired Mortgage Loans.............................. $ 142.3 $ 105.0
================= ==============
</TABLE>
During the first nine months of 1999 and of 1998, respectively, the
Company's average recorded investment in impaired mortgage loans was $139.1
million and $177.1 million. Interest income recognized on these impaired
mortgage loans totaled $9.6 million and $9.5 million ($.1 million and $.9
million recognized on a cash basis) for the first nine months of 1999 and
1998, respectively.
6) SALE OF DLJ STOCK
During second quarter 1999, DLJ completed its offering of a new class of
its common stock to track the financial performance of DLJdirect, its
online brokerage business. As a result of this offering, the Company
recorded a non-cash pre-tax realized gain of $95.8 million.
7) CLOSED BLOCK
Summarized financial information for the Closed Block is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Fixed maturities:
Available for sale, at estimated fair value (amortized
cost of $4,009.5 and $4,149.0)......................... $ 3,967.5 $ 4,373.2
Mortgage loans on real estate............................. 1,722.5 1,633.4
Policy loans.............................................. 1,603.1 1,641.2
Cash and other invested assets............................ 295.5 86.5
Deferred policy acquisition costs......................... 840.4 676.5
Other assets.............................................. 174.9 221.6
-------------- --------------
Total Assets.............................................. $ 8,603.9 $ 8,632.4
============== ==============
LIABILITIES
Future policy benefits and other policyholders' account
balances................................................ $ 9,005.5 $ 9,013.1
Other liabilities......................................... 35.1 63.9
-------------- --------------
Total Liabilities......................................... $ 9,040.6 $ 9,077.0
============== ==============
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Premiums and other income......... $ 147.9 $ 155.1 $ 460.3 $ 488.1
Investment income (net of
investment expenses of $3.1,
$4.7, $13.1 and $15.5).......... 142.3 143.3 429.5 425.0
Investment (losses) gains, net.... (6.6) .3 (5.1) (1.6)
------------ ------------ ------------- ------------
Total revenues.................... 283.6 298.7 884.7 911.5
------------ ------------ ------------- ------------
BENEFITS AND OTHER DEDUCTIONS
Policyholders' benefits and
dividends....................... 238.6 252.8 765.5 797.6
Other operating costs and
expenses........................ 21.3 21.9 53.6 47.5
------------ ------------ ------------- ------------
Total benefits and other
deductions...................... 259.9 274.7 819.1 845.1
------------ ------------ ------------- ------------
Contribution from the Closed
Block........................... $ 23.7 $ 24.0 $ 65.6 $ 66.4
============ ============ ============= ============
</TABLE>
Investment valuation allowances amounted to $8.7 million and $11.1 million
on mortgage loans and $13.9 million and $15.4 million on equity real estate
at September 30, 1999 and December 31, 1998, respectively.
Impaired mortgage loans along with the related provision for losses were as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with provision for losses......... $ 39.3 $ 55.5
Impaired mortgage loans without provision for losses...... 4.4 7.6
-------------- --------------
Recorded investment in impaired mortgages................. 43.7 63.1
Provision for losses...................................... (7.7) (10.1)
-------------- --------------
Net Impaired Mortgage Loans............................... $ 36.0 $ 53.0
============== ==============
</TABLE>
During the first nine months of 1999 and of 1998, respectively, the Closed
Block's average recorded investment in impaired mortgage loans was $45.0
million and $97.5 million. Interest income recognized on these impaired
mortgage loans totaled $2.6 million and $4.0 million ($1.5 million
recognized on a cash basis for the first nine months of 1998) for the first
nine months of 1999 and 1998, respectively.
-10-
<PAGE>
8) DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
ASSETS
Mortgage loans on real estate............................. $ 471.9 $ 553.9
Equity real estate........................................ 563.1 611.0
Other equity investments.................................. 66.0 115.1
Other invested assets..................................... 53.9 24.9
-------------- --------------
Total investments....................................... 1,154.9 1,304.9
Cash and cash equivalents................................. 47.9 34.7
Other assets.............................................. 222.0 219.0
-------------- --------------
Total Assets.............................................. $ 1,424.8 $ 1,558.6
============== ==============
LIABILITIES
Policyholders liabilities................................. $ 1,002.5 $ 1,021.7
Allowance for future losses............................... 291.9 305.1
Other liabilities......................................... 130.4 231.8
-------------- --------------
Total Liabilities......................................... $ 1,424.8 $ 1,558.6
============== ==============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
REVENUES
Investment income (net of
investment expenses of $12.8,
$15.8, $38.3 and $53.3)......... $ 30.2 $ 46.3 $ 72.7 $ 124.8
Investment (losses) gains, net.... (6.2) 1.5 (16.7) 34.7
Other income, net................. .1 - .1 (.1)
------------ ------------ ------------- ------------
Total revenues.................... 24.1 47.8 56.1 159.4
BENEFITS AND OTHER DEDUCTIONS..... 26.5 35.3 80.9 109.9
(Losses charged) earnings credited
to allowance for future losses.. (2.4) 12.5 (24.8) 49.5
------------ ------------ ------------- ------------
Pre-tax loss from operations...... - - - -
Pre-tax (loss from strengthening)
earnings from releasing the
allowance for future losses..... (4.6) 1.2 (14.7) 3.9
Federal income tax benefit
(expense)....................... 1.2 (.5) 4.7 (1.4)
------------ ------------ ------------- ------------
(Loss) Earnings from Discontinued
Operations...................... $ (3.4) $ .7 $ (10.0) $ 2.5
============ ============ ============= ============
</TABLE>
The Company's quarterly process for evaluating the allowance for future
losses applies the current period's results of discontinued operations
against the allowance, re-estimates future losses, and adjusts the
allowance, if appropriate. The evaluations performed as of September 30,
1999 and 1998 resulted in management's decision to strengthen the allowance
by $14.7 million and release the allowance by $3.9 million for the nine
months ended September 30, 1999 and 1998, respectively. This resulted in
after-tax losses of $10.0 million for the first nine months of 1999 and
after-tax earnings of $2.5 million for the first nine months of 1998.
-11-
<PAGE>
Management believes the allowance for future losses at September 30, 1999
is adequate to provide for all future losses; however, the determination of
the allowance involves 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
estimates and assumptions underlying the allowance for future losses, the
difference would be reflected in the consolidated statements of earnings in
discontinued operations. 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 allowance
are likely to result.
Investment valuation allowances amounted to $3.6 million and $3.0 million
on mortgage loans and $40.3 million and $34.8 million on equity real estate
at September 30, 1999 and December 31, 1998, respectively.
Impaired mortgage loans along with the related provision for losses were as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
-------------- --------------
(IN MILLIONS)
<S> <C> <C>
Impaired mortgage loans with provision for losses......... $ 11.1 $ 6.7
Impaired mortgage loans without provision for losses...... .4 8.5
-------------- --------------
Recorded investment in impaired mortgages................. 11.5 15.2
Provision for losses...................................... (2.7) (2.1)
-------------- --------------
Net Impaired Mortgage Loans............................... $ 8.8 $ 13.1
============== ==============
</TABLE>
During the first nine months of 1999 and of 1998, discontinued operations'
average recorded investment in impaired mortgage loans was $15.3 million
and $95.0 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $.5 million and $4.6 million ($3.4 million
recognized on a cash basis for the first nine months of 1998) in the first
nine months of 1999 and 1998, respectively.
Benefits and other deductions included $5.8 million and $21.7 million of
interest expense related to amounts borrowed from continuing operations for
the third quarter and first nine months of 1998.
9) 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.
10) RESTRUCTURING COSTS
At September 30, 1999, restructuring 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 $10.3 million. The amounts paid during the first nine months of 1999
totaled $14.1 million.
11) LITIGATION
There have been no new material legal proceedings and no material
developments in specific litigations previously reported in the Company's
Notes to Consolidated Financial Statements for the year ended December 31,
1998, except as follows:
Equitable Life's settlement has become effective with respect to the
previously disclosed cases brought by persons insured under Major Medical
insurance policies. The parties have obtained dismissal of the actions
pending in each of the relevant jurisdictions.
In Rickel, the complaint was dismissed in April 1999 by the Court.
Plaintiff has filed an appeal. Although there can be no assurance, DLJ's
management does not believe that the ultimate outcome of this litigation
will
-12-
<PAGE>
have a material adverse effect on DLJ's consolidated financial condition
or DLJ's results of operations in any particular period.
The Dayton Monetary Associates and Mid-American Waste Systems actions have
been settled without a material adverse effect on DLJ's consolidated
financial condition or results of operation in any particular period.
In November 1998, three purported class actions (Gillet v. Goldman, Sachs &
Co. et al., Prager v. Goldman, Sachs & Co. et al. and Holzman v. Goldman,
Sachs & Co. et al.) were filed in the U.S. District Court for the Southern
District of New York against more than 25 underwriters of initial public
offering securities, including DLJSC. The complaints allege that defendants
conspired to fix the "fee" paid for underwriting initial public offering
securities by setting the underwriters' discount or "spread" at 7%, in
violation of the federal antitrust laws. The complaints seek treble damages
in an unspecified amount and injunctive relief as well as attorneys' fees
and costs. On March 15, 1999, the plaintiffs filed a Consolidated Amended
Complaint captioned In re Public Offering Fee Antitrust Litigation. A
motion by all defendants to dismiss the complaints on several grounds is
pending. Separately, the U.S. Department of Justice has issued a Civil
Investigative Demand to several investment banking firms, including DLJSC,
seeking documents and information relating to "alleged" price-fixing with
respect to underwriting spreads in initial public offerings. The government
has not made any charges against DLJSC or the other investment banking
firms. DLJSC is cooperating with the Justice Department in providing the
requested information and believes that no violation of law by DLJSC has
occurred. Although there can be no assurance, DLJ's management does not
believe that the ultimate outcome of these matters will have a material
adverse effect on DLJ's consolidated financial condition. Based upon the
information currently available to it, DLJ's management cannot predict
whether or not these matters will have a material adverse effect on DLJ's
results of operations in any particular period.
In addition to the matters previously reported and the matters described
above, Equitable Life and its subsidiaries and DLJ 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 Company's
consolidated financial position or results of operations.
-13-
<PAGE>
12) BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
INVESTMENT
INSURANCE SERVICES ELIMINATION TOTAL
------------- -------------- ------------ --------------
(IN MILLIONS)
THREE MONTHS ENDED
SEPTEMBER 30, 1999
--------------------------------
<S> <C> <C> <C> <C>
Segment revenues............... $ 1,064.9 $ 481.7 $ (1.5) $ 1,545.1
Investment (losses) gains and
other........................ (33.7) .7 - (33.0)
------------- -------------- ------------ --------------
Total Revenues................. $ 1,031.2 $ 482.4 $ (1.5) $ 1,512.1
============= ============== ============ ==============
Pre-tax operating earnings..... $ 211.7 $ 95.2 $ - $ 306.9
Investment (losses) gains, net
of related DAC and other
charges...................... (29.6) .6 - (29.0)
Pre-tax minority interest...... - 49.0 - 49.0
------------- -------------- ------------ --------------
Earnings from Continuing
Operations................... $ 182.1 $ 144.8 $ - $ 326.9
============= ============== ============ ==============
THREE MONTHS ENDED
SEPTEMBER 30, 1998
--------------------------------
Segment revenues............... $ 974.2 $ 331.6 $ (1.8) $ 1,304.0
Investment (losses) gains...... (7.1) .7 - (6.4)
------------- -------------- ------------ --------------
Total Revenues................. $ 967.1 $ 332.3 $ (1.8) $ 1,297.6
============= ============== ============ ==============
Pre-tax operating earnings..... $ 165.6 $ 55.0 $ - $ 220.6
Investment (losses) gains net
of related DAC and other
charges...................... (10.0) .5 - (9.5)
Pre-tax minority interest...... - 33.9 - 33.9
------------- -------------- ------------ --------------
Earnings from Continuing
Operations................... $ 155.6 $ 89.4 $ - $ 245.0
============= ============== ============ ==============
</TABLE>
-14-
<PAGE>
<TABLE>
<CAPTION>
INVESTMENT
INSURANCE SERVICES ELIMINATION TOTAL
------------- -------------- ------------ --------------
(IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30, 1999
--------------------------------
<S> <C> <C> <C> <C>
Segment revenues............... $ 3,183.1 $ 1,406.9 $ (4.4) $ 4,585.6
Investment (losses) gains and
other........................ (78.4) 109.5 - 31.1
------------- -------------- ------------ --------------
Total Revenues................. $ 3,104.7 $ 1,516.4 $ (4.4) $ 4,616.7
============= ============== ============ ==============
Pre-tax operating earnings..... $ 659.2 $ 286.6 $ - $ 945.8
Investment (losses) gains, net
of related DAC and other
charges...................... (86.5) 109.0 - 22.5
Non-recurring DAC adjustments.. (131.7) - - (131.7)
Pre-tax minority interest...... - 142.9 - 142.9
------------- -------------- ------------ --------------
Earnings from Continuing
Operations................... $ 441.0 $ 538.5 $ - $ 979.5
============= ============== ============ ==============
NINE MONTHS ENDED
SEPTEMBER 30, 1998
--------------------------------
Segment revenues............... $ 3,027.7 $ 1,068.3 $ (4.5) $ 4,091.5
Investment gains............... 66.9 32.3 - 99.2
------------- -------------- ------------ --------------
Total Revenues................. $ 3,094.6 $ 1,100.6 $ (4.5) $ 4,190.7
============= ============== ============ ==============
Pre-tax operating earnings..... $ 519.7 $ 218.9 $ - $ 738.6
Investment gains, net of
related DAC and other
charges...................... 39.7 24.5 - 64.2
Pre-tax minority interest...... - 104.5 - 104.5
------------- -------------- ------------ --------------
Earnings from Continuing
Operations................... $ 559.4 $ 347.9 $ - $ 907.3
============= ============== ============ ==============
TOTAL ASSETS:
September 30, 1999............. $ 79,814.2 $ 12,159.1 $ (180.6) $ 91,792.7
============= ============== ============ ==============
December 31, 1998.............. $ 75,626.0 $ 12,379.2 $ (64.4) $ 87,940.8
============= ============== ============ ==============
</TABLE>
-15-
<PAGE>
13) COMPREHENSIVE INCOME
The components of comprehensive income (loss) for the third quarters of
1999 and 1998 and the first nine months of 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------ ------------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net earnings...................... $ 183.1 $ 137.5 $ 586.4 $ 549.1
------------ ------------ ------------- ------------
Change in unrealized (losses)
gains, net of reclassification
adjustment...................... (148.8) (35.7) (665.9) 3.5
------------ ------------ ------------- ------------
Other comprehensive (loss)
income.......................... (148.8) (35.7) (665.9) 3.5
------------ ------------ ------------- ------------
Comprehensive Income (Loss)....... $ 34.3 $ 101.8 $ (79.5) $ 552.6
============ ============ ============= ============
</TABLE>
-16-
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated operating results and financial
condition of the Company 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
("MD&A") section included in the Company's 1998 Report on Form 10-K.
BUSINESS
As part of its "branding" strategic initiative, on September 3, 1999, The
Equitable Companies Incorporated, Equitable Life's then sole shareholder and
parent, changed its name to AXA Financial, Inc. (the "Holding Company"). On
September 20, 1999, EQ Financial Consultants, Inc., a broker-dealer subsidiary
of Equitable Life, was merged into a new company, AXA Advisors, LLC ("AXA
Advisors"). Also, on September 21, 1999, AXA Advisors was sold by Equitable Life
to AXA Distribution Holding Corporation ("AXA Distribution"), a wholly-owned
indirect subsidiary of the Holding Company, for $15.3 million. The excess of the
sales price as compared to AXA Advisors' book value has been recorded in
Equitable Life's books as a capital contribution. Equitable Life will continue
to develop and market the "Equitable" brand of life and annuity products, while
AXA Distribution and its subsidiaries begin to assume responsibility for
providing financial advisory services, product distribution and customer
relationship management.
COMBINED OPERATING RESULTS
The combined and segment level discussions in this MD&A are on an operating
basis; amounts reported in the GAAP financial statements have been adjusted to
exclude the effect of unusual or non-recurring events and transactions and to
exclude certain revenue and expense categories. The following table presents the
combined operating results outside of the Closed Block combined on a
line-by-line basis with the contribution of the Closed Block. The Insurance
analysis, which begins on page 20, likewise reflects the Closed Block amounts on
a line-by-line basis. The Investment Services discussion begins on page 23. The
MD&A addresses the combined operating results unless noted otherwise.
-17-
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------ ------------- ------------ -------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Operating Results:
Policy fee income and premiums....... $ 601.7 $ 572.0 $ 1,780.2 $ 1,711.2
Net investment income................ 681.9 651.7 2,104.8 2,099.3
Commissions, fees and other income... 521.4 355.0 1,519.7 1,126.1
------------ ------------- ------------ -------------
Total revenues...................... 1,805.0 1,578.7 5,404.7 4,936.6
Total benefits and other
deductions........................ 1,449.1 1,324.2 4,316.0 4,093.5
------------ ------------- ------------ -------------
Pre-tax operating earnings before
minority interest................... 355.9 254.5 1,088.7 843.1
Minority interest.................... (49.0) (33.9) (142.9) (104.5)
------------ ------------- ------------ -------------
Pre-tax operating earnings........... 306.9 220.6 945.8 738.6
Pre-tax Adjustments:
Investment gains, net of related DAC
and other charges................... (29.0) (9.5) 22.5 64.2
Non-recurring DAC adjustments........ - - (131.7) -
Minority interest.................... 49.0 33.9 142.9 104.5
----------- ----------- ----------- ------------
GAAP Reported:
Earnings from continuing operations
before Federal income taxes and
minority interest................... 326.9 245.0 979.5 907.3
Federal income taxes................. 96.6 78.2 255.3 268.9
Minority interest in net income of
consolidated subsidiaries........... 43.8 30.0 127.8 91.8
------------ ------------- ------------ -------------
Earnings from Continuing Operations.... $ 186.5 $ 136.8 $ 596.4 $ 546.6
============ ============= ============ =============
</TABLE>
-18-
<PAGE>
On a GAAP reported basis, Federal income taxes decreased due to lower Insurance
earnings from continuing operations principally due to the effect of the
non-recurring DAC adjustments in second quarter 1999 (discussed below). Minority
interest in net income of consolidated subsidiaries was higher due to increased
earnings at Alliance.
Adjustments to GAAP reported earnings in the first nine months of 1999 excluded
net investment gains of $22.5 million as compared to $64.2 million in the first
nine months of 1998. The 1999 gains were primarily due to the $95.8 million gain
related to the sale of an approximately 18% interest in DLJdirect's financial
performance through the sale of a new class of DLJ common stock in second
quarter 1999. In addition, $83.5 million of gains were recognized upon
reclassification of publicly-traded common equities to a trading portfolio (see
page 30) and $13.8 million of gains resulted from the exercise of subsidiaries'
options and conversion of DLJ restricted stock units ("RSU"). Losses of $196.8
million on writedowns and sales of General Account fixed maturities partially
offset these 1999 gains. The 1998 gains principally resulted from gains of $63.2
million on General Account Investment Assets and from gross gains of $34.6
million on the exercise of Alliance Unit and DLJ stock options and on RSU
conversions. Also in second quarter 1999, there was a $131.7 million
non-recurring DAC adjustment resulting from the revisions to estimated future
gross profits related to the investment asset reallocation in that quarter (see
Note 3 of Notes to Consolidated Financial Statements found elsewhere herein).
CONTINUING OPERATIONS
Compared to the first nine months of 1998, the higher pre-tax operating earnings
for the first nine months of 1999 resulted from increased earnings in both the
Insurance and Investment Services segments. The $468.1 million increase in
revenues for the first nine months of 1999, from the comparable 1998 period, was
attributed primarily to a $393.6 million increase in commissions, fees and other
income principally due to increased business activity within the Investment
Services segment and to a $69.0 million increase in policy fee income and
premiums in Insurance.
For the first nine months of 1999, total benefits and other deductions increased
by $222.5 million from the comparable period in 1998, reflecting increases in
other operating costs and expenses of $327.6 million partially offset by
decreases in interest credited to policyholders' accounts and policyholder
benefits. The increase in other operating costs and expenses principally
resulted from higher costs associated with increased revenues.
-19-
<PAGE>
COMBINED OPERATING RESULTS BY SEGMENT
INSURANCE
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 - COMBINED OPERATING RESULTS
(IN MILLIONS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------
1999
----------------------------------------
INSURANCE CLOSED 1998
OPERATIONS BLOCK COMBINED COMBINED
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating Results:
Policy fee income and premiums....... $ 1,320.8 $ 459.4 $ 1,780.2 $ 1,711.2
Net investment income................ 1,632.0 429.5 2,061.5 2,050.4
Commissions, fees and other income... 164.7 (4.2) 160.5 111.2
Contribution from the Closed Block... 65.6 (65.6) - -
----------- ----------- ----------- -----------
Total revenues...................... 3,183.1 819.1 4,002.2 3,872.8
Total benefits and other
deductions........................ 2,523.9 819.1 3,343.0 3,353.1
----------- ----------- ----------- -----------
Pre-tax operating earnings............. 659.2 - 659.2 519.7
Pre-tax Adjustments:
Investment gains (losses), net of DAC
and other charges................... (86.5) (86.5) 39.7
Non-recurring DAC adjustments........ (131.7) - (131.7) -
----------- ----------- ----------- -----------
GAAP Reported:
Earnings from Continuing Operations
before Federal Income Taxes and
Minority Interest................... $ 441.0 $ - $ 441.0 $ 559.4
=========== =========== =========== ===========
</TABLE>
For the first nine months of 1999, Insurance pre-tax operating earnings
reflected an increase of $139.5 million from the year earlier period. Higher
policy fees on variable and interest-sensitive life and individual annuities
contracts, higher margins between investment income and interest credited on
policyholders' account balances and improved life insurance mortality margins
all contributed to the improved operating earnings.
Total revenues increased by $129.4 million primarily due to a $69.0 million
increase in policy fee income and premiums, $49.3 million higher commissions,
fees and other income, and an $11.1 million increase in investment income.
Policy fee income rose $127.8 million to $915.2 million due to higher insurance
and annuity account balances while premiums declined $58.8 million to $865.0
million. Net investment income increased slightly as higher income on other
equity investments and mortgages was offset by lower income on fixed maturities
and equity real estate.
Total benefits and other deductions for the first nine months of 1999 decreased
$10.1 million from the comparable 1998 period primarily resulting from a
decrease in interest credited on policyholders' account balances due to lower
crediting rates and lower policyholders' benefits due to lower life insurance
mortality, partially offset by an increase in operating expenses due to the
timing of strategic initiative expenses and higher corporate benefits.
-20-
<PAGE>
Premiums, Deposits and Mutual Fund Sales - The following table lists gross
premiums and deposits, including universal life and investment-type contract
deposits, as well as mutual fund sales for Insurance distribution channels and
major product lines.
PREMIUMS, DEPOSITS AND MUTUAL FUND SALES
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Retail:
Annuities
First year.......................... $ 833.9 $ 724.8 $ 2,553.9 $ 2,262.3
Renewal............................. 407.6 392.5 1,365.1 1,299.0
------------- ------------ ------------- ------------
1,241.5 1,117.3 3,919.0 3,561.3
Life(1)
First year......................... 90.7 107.2 301.5 331.9
Renewal............................. 542.6 535.2 1,671.4 1,623.8
------------- ------------ ------------- ------------
633.3 642.4 1,972.9 1,955.7
Other(2)
First year.......................... 2.9 2.4 8.1 9.2
Renewal............................. 97.0 103.9 280.6 299.4
Mutual fund sales................... 706.1 605.4 2,111.1 1,863.5
------------- ------------ ------------- ------------
806.0 711.7 2,399.8 2,172.1
------------- ------------ ------------- ------------
Total retail....................... 2,680.8 2,471.4 8,291.7 7,689.1
------------- ------------ ------------- ------------
Wholesale:
Annuities
First year.......................... 592.3 464.3 1,503.2 1,202.9
Renewal............................. 14.2 3.4 32.0 6.7
------------- ------------ ------------- ------------
Total wholesale.................... 606.5 467.7 1,535.2 1,209.6
------------- ------------ ------------- ------------
Total Premiums, Deposits
and Mutual Fund Sales............... $ 3,287.3 $ 2,939.1 $ 9,826.9 $ 8,898.7
============= ============ ============= ============
<FN>
(1) Includes variable, interest-sensitive and traditional life products.
(2) Includes health insurance and reinsurance assumed.
</FN>
</TABLE>
First year premiums and deposits for insurance and annuity products for the
first nine months of 1999 increased from prior year levels by $560.4 million
primarily due to higher sales of individual annuities by both the retail and
wholesale distribution channels, partially offset by a $30.4 million decline in
life sales. Renewal premiums and deposits increased by $120.2 million during the
first nine months of 1999 over the prior year period as increases in the larger
block of individual annuities and variable life business were partially offset
by decreases in traditional life policies. During second quarter 1999, a new
series of variable life products began to be introduced which management
believes will result in increased sales beginning in the first quarter of 2000.
-21-
<PAGE>
Surrenders and Withdrawals - The following table presents surrenders and
withdrawals, including universal life and investment-type contract withdrawals,
for major individual insurance and annuity product lines.
SURRENDERS AND WITHDRAWALS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Annuities............................. $ 874.4 $ 626.1 $ 2,704.8 $ 2,067.8
Variable and interest-sensitive life.. 142.7 120.1 458.8 952.5
Traditional life...................... 83.2 83.5 265.5 272.7
------------- ------------ ------------- ------------
Total................................. $ 1,100.3 $ 829.7 $ 3,429.1 $ 3,293.0
============= ============ ============= ============
</TABLE>
Policy and contract surrenders and withdrawals increased $136.1 million during
the first nine months of 1999 compared to the same period in 1998. The prior
year total included the first quarter 1998 surrender of $561.8 million related
to a single large COLI contract. Since there were outstanding policy loans on
the surrendered contract, there were no cash outflows. Excluding the effect of
this one surrender, the $697.9 million increase in the first nine months of 1999
compared to the first nine months of 1998 primarily resulted from $705.1 million
higher surrenders and withdrawals due to the larger book of individual annuities
and variable and interest-sensitive life policies, as well as an increase in the
individual annuities' surrender rate from 8.8% in the first nine months of 1998
to 9.5% in the first nine months of 1999.
-22-
<PAGE>
INVESTMENT SERVICES
The following table summarizes operating results for Investment Services.
INVESTMENT SERVICES - OPERATING RESULTS
(IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
1999 1998 1999 1998
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Operating Results:
Investment advisory and service fees... $ 307.0 $ 230.7 $ 903.7 $ 704.0
Distribution revenues.................. 115.5 79.7 314.3 222.0
Equity in DLJ's earnings............... 36.7 6.4 124.6 92.2
Other revenues......................... 22.5 14.8 64.3 50.1
------------- ------------ ------------- -------------
Total revenues........................ 481.7 331.6 1,406.9 1,068.3
------------- ------------ ------------- -------------
Promotion and servicing................ 156.8 120.9 447.1 337.1
Employee compensation and benefits..... 113.5 81.8 334.5 251.9
All other operating expenses........... 67.2 40.0 195.8 155.9
------------- ------------ ------------- -------------
Total expenses........................ 337.5 242.7 977.4 744.9
------------- ------------ ------------- -------------
Pre-tax earnings before minority
interest............................. 144.2 88.9 429.5 323.4
Minority interest...................... (49.0) (33.9) (142.9) (104.5)
------------- ------------ ------------- -------------
Pre-tax operating earnings............. 95.2 55.0 286.6 218.9
Pre-tax Adjustments:
Investment gains (losses), net of DAC.. .6 .5 109.0 24.5
Minority interest...................... 49.0 33.9 142.9 104.5
------------- ------------ ------------- -------------
GAAP Reported:
Earnings from Continuing Operations
before Federal Income Taxes and
and Minority Interest................. $ 144.8 $ 89.4 $ 538.5 $ 347.9
============= ============ ============= =============
</TABLE>
Investment Services' pre-tax operating earnings for the first nine months of
1999 were $286.6 million, an increase of $67.7 million from the prior year's
comparable period. Revenues totaled $1.41 billion for the first nine months of
1999, an increase of $338.6 million from the comparable period in 1998, due to a
$199.7 million increase in investment advisory and service fees and $92.3
million higher distribution revenues. The increase in investment advisory and
service fees primarily resulted from increases in average assets under
management which were due to market appreciation and to $15.2 million higher
performance fees, primarily from certain hedge funds. The growth in distribution
revenues was principally due to higher average mutual fund assets under
management from strong sales and from market appreciation. DLJ's earnings
contribution for the first nine months of 1999 was $32.4 million higher than in
the 1998 period reflecting record revenue levels for the nine months. Investment
Services' costs and expenses increased $232.5 million for the first nine months
of 1999 primarily due to increases in mutual fund promotional expenditures and
employee compensation and benefits. Promotion and servicing increased 32.6%
primarily due to increased distribution plan payments resulting from higher
average domestic, non-U.S. and cash management mutual fund assets under
management and higher amortization of deferred sales commissions, as well as
higher travel, entertainment and promotional expenses incurred in connection
with mutual fund sales initiatives. Higher compensation and benefits were due to
higher incentive compensation due to the increased operating earnings, increased
base compensation and commissions reflecting increased headcount in the mutual
fund and technology areas and overall salary increases. The 1998 expenses
included a $10.0 million provision for the estimated buyout price of the
minority interest in Cursitor.
-23-
<PAGE>
FEES AND ASSETS UNDER MANAGEMENT
As the following table illustrates, third party clients represent the primary
source of fees from assets under management.
FEES AND ASSETS UNDER MANAGEMENT
(IN MILLIONS)
<TABLE>
<CAPTION>
AT OR FOR THE
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ---------------------------
1999 1998 1999 1998
-------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
FEES:
Third parties......................... $ 329.9 $ 248.2 $ 946.0 $ 743.4
Equitable Life Separate Accounts...... 27.4 23.0 79.2 71.5
Equitable Life General Account and
other............................... 10.6 10.8 32.7 36.0
------------ ----------- ------------ -------------
Total Fees............................ $ 367.9 $ 282.0 $ 1,057.9 $ 850.9
============ =========== ============ =============
ASSETS UNDER MANAGEMENT:
Assets by Manager
Alliance:
Third Party......................... $ 256,423 $ 188,641
Equitable Life General Account
and Holding Company Group.......... 25,299 25,287
Equitable Life Separate Accounts.... 35,552 27,937
------------ -------------
Total................................. 317,274 241,865
------------ -------------
DLJ:
Third Party......................... 32,537 23,828
DLJ Invested Assets................. 20,866 17,317
------------ -------------
Total DLJ............................. 53,403 41,145
------------ -------------
Equitable Life:
Equitable Life (non-Alliance) General
Account............................ 13,047 14,603
Equitable Life Separate
Accounts - EQ Advisors Trust....... 4,838 2,139
Equitable Life real estate related
Separate Accounts.................. 3,825 4,488
Equitable Life Separate Accounts -
other............................... 2,020 1,758
------------ -------------
Total Equitable Life.................. 23,730 22,988
------------ -------------
Total by Account:
Third Party......................... 288,960 212,469
General Account and other........... 59,212 57,207
Separate Accounts................... 46,235 36,322
------------ -------------
Total Assets Under Management......... $ 394,407 $ 305,998
============ =============
</TABLE>
Fees from assets under management increased 24.3% for the first nine months of
1999 from the comparable 1998 period primarily as a result of growth in assets
under management for third parties principally at Alliance. The Alliance growth
in the first nine months of 1999 was primarily due to market appreciation and
net sales of mutual funds and other products. DLJ's third party assets under
management increased in the first nine months of 1999 by $8.2 billion as
compared to December 31, 1998 principally due to new business in its Asset
Management Group and Merchant Banking Funds.
-24-
<PAGE>
GENERAL ACCOUNT INVESTMENT PORTFOLIO
This discussion of the General Account portfolio analyzes the results of major
investment asset categories, including the Closed Block's investments. The
following table reconciles the consolidated balance sheet asset amounts to
General Account Investment Assets.
GENERAL ACCOUNT INVESTMENT ASSET CARRYING VALUES
SEPTEMBER 30, 1999
(IN MILLIONS)
<TABLE>
<CAPTION>
GENERAL
ACCOUNT
BALANCE CLOSED INVESTMENT
BALANCE SHEET CAPTIONS: SHEET BLOCK OTHER ASSETS(1)
- -------------------------------------- ------------ ----------- ------------- ------------
<S> <C> <C> <C> <C>
Fixed maturities:
Available for sale................ $ 19,319.3 $ 3,967.5 $ (81.5) $ 23,368.3
Held to maturity.................. 131.2 - - 131.2
Mortgage loans on real estate....... 3,184.4 1,722.5 - 4,906.9
Equity real estate.................. 1,470.0 99.1 (3.3) 1,572.4
Policy loans........................ 2,209.0 1,603.1 - 3,812.1
Other equity investments............ 660.3 37.6 .1 697.8
Other invested assets............... 2,153.0 .6 1,543.1 610.5
-------------- ----------- ------------- ------------
Total investments................. 29,127.2 7,430.4 1,458.4 35,099.2
Cash and cash equivalents........... 448.2 157.5 157.1 448.6
Equitable Life debt and other(2).... - - 692.4 (692.4)
-------------- ----------- ------------- ------------
Total............................... $ 29,575.4 $ 7,587.9 $ 2,307.9 $ 34,855.4
============== =========== ============= ============
<FN>
(1) General Account Investment Assets are computed by adding the Balance Sheet
and Closed Block and deducting the Other amounts.
(2) Includes Equitable Life debt and other miscellaneous assets and liabilities
related to General Account Investment Assets and reclassified from various
balance sheet lines.
</FN>
</TABLE>
The General Account Investment Assets presentation set forth in the following
pages includes the investments of the Closed Block on a line-by-line basis.
Management believes it is appropriate to discuss the information on a combined
basis.
-25-
<PAGE>
INVESTMENT RESULTS OF GENERAL ACCOUNT INVESTMENT ASSETS
INVESTMENT RESULTS BY ASSET CATEGORY
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------ ------------------------------------------
1999 1998 1999 1998
------------------- --------------------- -------------------- --------------------
(1) (1) (1) (1)
YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT
------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED MATURITIES:
Income.......... 8.01% $ 465.2 8.08% $ 467.4 7.90% $ 1,362.1 8.09% $ 1,394.8
Investment
Gains/(Losses). (0.84)% (47.5) (0.70)% (39.5) (1.17)% (196.8) (0.01)% (2.8)
------- ----------- -------- ------------ -------- ----------- -------- -----------
Total........... 7.17% $ 417.7 7.38% $ 427.9 6.73% $ 1,165.3 8.08% $ 1,392.0
Ending Assets(2) $ 24,337.4 $ 24,169.0 $24,337.4 $24,169.0
MORTGAGES:
Income.......... 8.30% $ 99.3 9.30% $ 90.4 8.71% $ 301.5 9.54% $ 273.8
Investment
Gains/(Losses). (0.07)% (.8) 0.14% 1.3 (0.11)% (3.4) (0.12)% (3.1)
------- ----------- -------- ------------ -------- ----------- --------- -----------
Total........... 8.23% $ 98.5 9.44% $ 91.7 8.60% $ 298.1 9.42% $ 270.7
Ending Assets(3) $ 4,942.3 $ 4,157.9 $ 4,942.3 $ 4,157.9
EQUITY REAL
ESTATE:
Income(4)....... 8.35% $ 27.1 9.25% $ 42.1 7.61% $ 75.3 7.38% $ 104.1
Investment
Gains/(Losses). (0.41)% (1.3) 6.01% 25.9 1.69% 16.2 2.37% 32.3
------- ----------- --------- ------------ -------- ----------- --------- -----------
Total........... 7.94% $ 25.8 15.26% $ 68.0 9.30% $ 91.5 9.75% $ 136.4
Ending Assets(4) $ 1,318.5 $ 1,853.4 $ 1,318.5 $ 1,853.4
OTHER EQUITY
INVESTMENTS:
Income.......... 11.53% $ 23.1 (5.69)% $ (17.1) 26.73% $ 153.3 10.40% $ 97.7
Investment
Gains/(Losses). 5.40% 10.2 1.08% 3.3 17.25% 86.4 4.12% 36.8
------- ----------- --------- ------------ -------- ----------- --------- -----------
Total........... 16.93% $ 33.3 (4.61)% $ (13.8) 43.98% $ 239.7 14.52% $ 134.5
Ending Assets(5) $ 807.2 $ 834.6 $ 807.2 $ 834.6
POLICY LOANS:
Income.......... 6.90% $ 63.3 6.81% $ 60.6 6.77% $ 184.8 6.95% $ 188.1
Ending Assets... $ 3,812.1 $ 3,702.6 $ 3,812.1 $ 3,702.6
CASH AND SHORT-TERM
INVESTMENTS:
Income.......... 7.80% $ 15.8 8.18% $ 5.3 7.38% $ 51.8 13.80% $ 32.4
Ending Assets(6) $ 982.0 $ 382.8 $ 982.0 $ 382.8
EQUITABLE LIFE
DEBT AND OTHER:
Interest expense
and other...... 7.18% $ (11.2) 5.08% $ (10.0) 8.40% $ (38.6) 6.55% $ (34.5)
Ending
Liabilities..... $ (692.4) $ (724.8) $ (692.4) $ (724.8)
TOTAL:
Income(7)....... 8.03% $ 682.6 7.72% $ 638.7 8.28% $ 2,090.2 8.27% $ 2,056.4
Investment
Gains/(Losses). (0.47)% (39.4) (0.11)% (9.0) (0.40)% (97.6) 0.26% 63.2
------- ----------- --------- ------------ -------- ----------- --------- -----------
Total(8)........ 7.56% $ 643.2 7.61% $ 629.7 7.88% $ 1,992.6 8.53% $ 2,119.6
Ending Net Assets $ 35,507.1 $ 34,375.5 $35,507.1 $34,375.5
<FN>
(1) Yields have been calculated on a compound annual effective rate basis using
the quarterly average asset carrying values excluding unrealized gains
(losses) in fixed maturities and adjusted for the current periods' income,
gains and fees. Annualized yields are not necessarily indicative of a full
year's results.
-26-
<PAGE>
(2) Fixed maturities investment assets are shown net of securities purchased
but not yet paid for of $139.0 million and $1,312.3 million, and include
accrued income of $399.0 million and $405.2 million, amounts due from
securities sales of $50.9 million and $695.9 million and other assets of
$19.7 million and $32.5 million as of September 30, 1999 and 1998,
respectively.
(3) Mortgage investment assets include accrued income of $61.2 million and
$54.4 million and are adjusted for related liability balances of $(25.8)
million and $(26.0) million as of September 30, 1999 and 1998,
respectively.
(4) Equity real estate investment assets are shown net of third party debt and
minority interest in real estate of $280.8 million and $396.5 million, and
include accrued income of $28.5 million and $32.4 million and are adjusted
for related liability balances of $(1.6) million and $(24.4) million as of
September 30, 1999 and 1998, 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 $(3.9) million, $(8.9) million, $(15.0) million and $(29.4) million
for the third quarter and first nine months of 1999 and of 1998,
respectively.
(5) Other equity investment assets include adjustment for accrued income and
pending settlements of $1.2 million and $(4.8) million as of September 30,
1999 and 1998, respectively.
(6) Cash and short-term investments are shown net of financing arrangements of
$(107.1) million and $(409.8) million and other adjustments for accrued
income and cash in transit of $30.0 million and $3.0 million as of
September 30, 1999 and 1998, respectively.
(7) Total investment income includes non-cash income from amortization,
payments-in-kind distributions and undistributed equity earnings of $14.2
million, $11.1 million, $47.5 million and $43.0 million for the third
quarters and first nine months of 1999 and of 1998, respectively.
Investment income is shown net of depreciation of $6.2 million, $5.9
million, $16.8 million and $25.3 million for the same respective periods.
(8) Total yields are shown before deducting investment fees paid to its
investment advisors. These fees include asset management, acquisition,
disposition, accounting and legal fees. If investment fees had been
deducted, total yields would have been 7.29% and 7.35%, 7.62% and 8.25% for
the third quarter and the first nine months of 1999 and of 1998,
respectively.
</FN>
</TABLE>
ASSET VALUATION ALLOWANCES AND WRITEDOWNS
The following table shows asset valuation allowances and additions to and
deductions from such allowances for mortgages and equity real estate for the
first nine months of 1999 and 1998.
GENERAL ACCOUNT INVESTMENT ASSETS
VALUATION ALLOWANCES
(IN MILLIONS)
<TABLE>
<CAPTION>
EQUITY REAL
MORTGAGES ESTATE TOTAL
------------- ------------- -----------
<S> <C> <C> <C>
SEPTEMBER 30, 1999
Beginning balances................................. $ 45.4 $ 211.8 $ 257.2
Additions.......................................... 6.8 31.7 38.5
Deductions(1)...................................... (11.2) (104.5) (115.7)
------------- ------------- -----------
Ending Balances.................................... $ 41.0 $ 139.0 $ 180.0
============= ============= ===========
SEPTEMBER 30, 1998
Beginning balances................................. $ 74.3 $ 345.5 $ 419.8
Additions.......................................... 14.5 55.1 69.6
Deductions(1)...................................... (51.3) (122.4) (173.7)
------------- ------------- -----------
Ending Balances.................................... $ 37.5 $ 278.2 $ 315.7
============= ============= ===========
<FN>
(1) Primarily reflected releases of allowances due to asset dispositions and
writedowns.
</FN>
</TABLE>
Writedowns on fixed maturities were $138.2 million and $70.3 million for the
first nine months of 1999 and 1998, respectively, principally on high yield and
emerging market securities.
-27-
<PAGE>
GENERAL ACCOUNT INVESTMENT ASSETS
The following table shows the major categories of General Account Investment
Assets by amortized cost, valuation allowances and net amortized cost at
September 30, 1999 and by net amortized cost at December 31, 1998.
GENERAL ACCOUNT INVESTMENT ASSETS
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
---------------------------------------- -------------------
NET NET
AMORTIZED VALUATION AMORTIZED AMORTIZED
COST ALLOWANCES COST COST
------------- ------------ ------------- -------------------
<S> <C> <C> <C> <C>
Fixed maturities(1)............... $ 24,006.8 $ - $ 24,006.8 $ 22,805.8
Mortgages......................... 4,947.9 (41.0) 4,906.9 4,443.3
Equity real estate................ 1,711.4 (139.0) 1,572.4 1,774.1
Other equity investments.......... 806.0 - 806.0 859.1
Policy loans...................... 3,812.1 3,812.1 3,727.9
Cash and short-term investments... 1,059.1 1,059.1 1,619.7
Corporate debt and other.......... (692.4) (692.4) (598.1)
------------ ------------ ------------- -------------------
Total............................. $ 35,650.9 $ (180.0) $ 35,470.9 $ 34,631.8
============ ============ ============= ===================
<FN>
(1) Excludes unrealized losses of $507.3 million and unrealized gains of $814.3
million in fixed maturities classified as available for sale at September
30, 1999 and December 31, 1998, respectively. At September 30, 1999 and
December 31, 1998, the amortized cost of the available for sale and held to
maturity portfolios was $23.88 billion, $131.2 million, $22.68 billion and
$125.0 million, respectively, compared to estimated market values of $23.37
billion, $131.2 million, $23.49 billion and $125.0 million, respectively.
</FN>
</TABLE>
Fixed Maturities. Fixed maturities consist of publicly-traded debt and privately
placed debt securities and small amounts of redeemable preferred stock, which
represented 75.9%, 22.9% and 1.2%, respectively, of the amortized cost of this
asset category at September 30, 1999. The $196.8 million of investment losses in
the first nine months of 1999 were due to $138.2 million of writedowns primarily
on high yield and emerging market securities and $58.6 million of losses on
sales.
FIXED MATURITIES BY CREDIT QUALITY
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------------------- --------------------------------
RATING AGENCY
NAIC EQUIVALENT AMORTIZED ESTIMATED AMORTIZED ESTIMATED
RATING DESIGNATION COST FAIR VALUE COST FAIR VALUE
- ------------ ------------- -------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
1-2 Aaa/Aa/A and Baa.. $ 20,868.2 $ 20,681.8 $ 19,588.1 $ 20,712.6
3-6 BBa and lower..... 3,138.6 2,817.7 3,217.7 2,907.5
-------------- -------------- ---------------- --------------
Total Fixed Maturities......... $ 24,006.8 $ 23,499.5 $ 22,805.8 $ 23,620.1
============== ============== ================ ==============
</TABLE>
At September 30, 1999, the Company held mortgage pass-through securities with an
amortized cost of $2.72 billion, $2.47 billion of CMOs, including $2.14 billion
in publicly-traded CMOs, and $1.52 billion of public and private asset backed
securities, primarily backed by home equity, mortgage, airline and other
equipment, and credit card receivables.
The amortized cost of problem and potential problem fixed maturities was $119.3
million (0.5% of the amortized cost of this category) and $46.8 million (0.2%)
at September 30, 1999, respectively, compared to $94.9 million (0.4%) and $74.9
million (0.3%) at December 31, 1998, respectively.
-28-
<PAGE>
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
At September 30, 1999, commercial mortgages totaled $2.98 billion (60.2% of the
amortized cost of the category), agricultural loans were $1.97 billion (39.8%)
and residential loans were $0.6 million.
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED MORTGAGES
AMORTIZED COST
(IN MILLIONS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- --------------
<S> <C> <C>
COMMERCIAL MORTGAGES............................................ $ 2,981.5 $ 2,660.7
Problem commercial mortgages(1)................................. 0.5 0.4
Potential problem commercial mortgages.......................... 140.4 170.7
Restructured commercial mortgages(2)............................ 152.7 116.4
AGRICULTURAL MORTGAGES.......................................... $ 1,965.8 $ 1,826.9
Problem agricultural mortgages.................................. 15.3 11.7
<FN>
(1) Includes delinquent mortgage loans of $0.4 million at December 31, 1998.
(2) Excludes $0.9 million and $19.9 million of restructured commercial
mortgages that are shown as potential problems at September 30, 1999 and
December 31, 1998, respectively.
</FN>
</TABLE>
The original weighted average coupon rate on the $152.7 million of restructured
mortgages was 9.0%. As a result of these restructurings, the restructured
weighted average coupon rate was 8.2% and the restructured weighted average cash
payment rate was 8.1%.
At September 30, 1999 and 1998, respectively, management identified impaired
mortgage loans with carrying values of $178.1 million and $161.8 million. The
provisions for losses for these impaired mortgage loans were $34.8 million and
$32.5 million at September 30, 1999 and 1998, respectively. For the first nine
months of 1999 and of 1998, respectively, income accrued on these loans was
$11.6 million and $13.1 million, including cash received of $11.6 million and
$12.9 million.
For the first nine months of 1999, scheduled principal amortization payments and
prepayments on commercial mortgage loans received aggregated $105.0 million. In
addition, $53.2 million of commercial mortgage loan maturity payments were
scheduled, of which $50.5 million were paid as due. Of the amount not paid, $1.6
million were granted short-term extensions; none was in default.
Equity Real Estate. As of September 30, 1999, on the basis of amortized cost,
the equity real estate category included $1.13 billion (66.1%) acquired as
investment real estate and $580.5 million (33.9%) acquired through or in lieu of
foreclosure (including in-substance foreclosures).
During the first nine months of 1999 and 1998, respectively, proceeds from the
sale of equity real estate totaled $257.6 million and $483.2 million, and gains
of $36.9 million and $86.8 million were recognized. The carrying value of the
equity real estate at the date of sale reflected total writedowns and additions
to valuation allowances on the properties taken in periods prior to their sale
of $95.7 million and $122.4 million, respectively.
At September 30, 1999, the vacancy rate for the Company's office properties was
7.3% in total, with a vacancy rate of 6.1% for properties acquired as investment
real estate and 17.5% for properties acquired through foreclosure. The national
commercial office vacancy rate was 9.7% (as of June 30, 1999) as measured by CB
Commercial.
-29-
<PAGE>
Other Equity Investments. Other equity investments consist of private equity,
LBO, mezzanine, venture capital and other limited partnership interests ($466.5
million or 57.8% of the amortized cost of this portfolio at September 30, 1999),
alternative limited partnerships ($198.9 million or 24.6%) and common stock and
other equity securities, including the excess of Separate Account assets over
Separate Account liabilities ($141.8 million or 17.6%). Alternative funds
utilize trading strategies that may be leveraged; they attempt to protect
against market risk through a variety of methods, including short sales,
financial futures, options and other derivative instruments. Effective January
1, 1999, the Company designated all direct investments in publicly-traded common
equity securities in the General Account portfolio as "trading securities" as
defined by SFAS No. 115. Investment gains of $83.5 million were recognized at
that date on the portfolio. The net unrealized holding gains for the first nine
months of 1999 totaling $3.9 million are included in investment income. Other
equity investments can produce significant volatility in investment income since
these investments are accounted for using the estimated fair value of the
underlying assets (or allocable portion thereof, in the case of partnerships),
and increases and decreases in fair value, whether realized or unrealized, on
substantially all of the portfolio are reflected as investment income or loss to
the Company. Returns on all equity investments are very volatile and investment
results for any period are not representative of any other period.
YEAR 2000
Equitable Life, DLJ and Alliance continue their Year 2000 compliance efforts;
related costs are being funded by operating cash flows with costs being expensed
as incurred.
Equitable Life - Equitable Life began addressing the Year 2000 issue in 1995. In
addition to significant internal resources, third parties have been assisting in
renovating and testing computer hardware and software ("computer systems") and
embedded systems and in overall project control. The following process has been
undertaken:
(1) Equitable Life established a Year 2000 project office, which developed a
strategic approach and created broad awareness of the Year 2000 issues at
Equitable Life through meetings with the Audit Committee of the Board of
Directors, the Board of Directors and executive and senior management,
presentations to business areas and articles in employee newsletters.
(2) Corporate-developed computer systems were inventoried and assessed for Year
2000 compliance. Third party providers of computer systems and services,
including embedded systems, were contacted and all have responded.
(3) The renovation or replacement of all corporate-developed computer systems
was completed by June 30, 1999. After renovation or replacement, management
subjects these systems to Year 2000 compliance testing as described in the
following paragraph, and continues to monitor Year 2000 compliance by third
party providers of computer systems, including embedded systems, and
services. All such systems and services, including those considered
mission-critical, have been confirmed as either Year 2000 compliant or the
subject of a satisfactory plan for compliance. With respect to real estate
investment properties owned by Equitable Life and managed by third parties,
substantially all building operation systems (e.g., elevators, escalators,
fire, security and heating, ventilation and air conditioning) have been
confirmed as Year 2000 compliant. Five systems remain to be confirmed (one
system in each of five properties) and management expects that such systems
will be confirmed as Year 2000 compliant by November 30, 1999. Contingency
plans have been developed for each property. Additionally, Equitable Life
has completed the nationwide upgrade of its personal computer workstations
and local area network servers with the latest release of compliant
versions of third party hardware and software.
-30-
<PAGE>
(4) Year 2000 compliance testing is an ongoing three-part process: after a
system has been renovated, it is tested to determine if it still performs
its intended business function correctly; next, it undergoes a simulation
test using dates occurring after December 31, 1999; last, integrated
systems tests are conducted to verify that the systems continue to work
together with the computers' internal clocks set to post December 31, 1999
dates. The first two phases of the process have been completed and all
systems have been confirmed through such testing as Year 2000 compliant.
Integrated systems testing will continue throughout 1999 as needed. All
significant automated data interfaces with third parties have been tested
for Year 2000 compliance, including those with Lend Lease, Alliance, The
Chase Manhattan Bank, Sunguard, Pershing and Computer Science Corporation,
who provide, among other services, material investment management,
accounting, banking, annuity processing and securities clearance services
for Equitable Life's General and certain of its Separate Accounts.
Equitable Life has retained third parties to assist with selective
verification of the Year 2000 renovation of certain systems.
(5) Existing business continuity and disaster recovery plans cover certain
categories of contingencies that could arise as a result of Year 2000
related failures. These plans have been supplemented to address
contingencies unique to the millennium change. Equitable Life retained a
consulting firm to assist with planning for Year 2000 contingencies.
Equitable Life's Year 2000 compliance project is currently estimated to cost $35
million through the end of 1999, of which approximately $31.1 million was
incurred through September 30, 1999. Equitable Life's new computer application
development and procurement have not been subject to any delay caused in whole
or part by Year 2000 efforts that is expected to have a material adverse effect
on the Company's financial condition or results of operations.
Investment Subsidiaries - DLJ and Alliance's Year 2000 related activities and
progress to date are summarized below. For further information, see their
respective filings on Form 10-K for the year ended December 31, 1998.
DLJ - DLJ's plans for preparing for Year 2000 are in writing and address all
mission critical computer systems globally. Such systems have been remediated,
tested and implemented. DLJ has also remediated, implemented and tested all
non-mission critical systems. DLJ has a reasonable basis to believe all
applications, both mainframe and non-mainframe, are Year 2000 compliant. The
post implementation process will ensure continued compliance of the
applications. This process includes redundant vendor testing, correspondent
testing, extended point-to-point testing and integrated systems testing through
year end. Throughout the Year 2000 process, none of DLJ's major technology
projects have been significantly impacted.
DLJ currently estimates its Year 2000 costs at approximately $90 million, with
$89 million incurred through September 30, 1999. DLJ has assessed Year 2000
contingency requirements and has developed a formal contingency plan. The
contingency plan addresses procedures to be implemented in the event of problems
concerning mission-critical systems, electronic interfaces and third parties.
This plan includes written Year 2000 specific contingency plans that will
address DLJ-wide shared services (i.e., communications systems and physical
facilities), as well as its mission critical business units.
Alliance - During 1997, Alliance began a formal Year 2000 initiative, managed by
a Year 2000 project office and focusing on both IT and non-IT systems. Alliance
has retained a number of consulting firms with expertise in advising and
assisting clients with regard to Year 2000 issues. By June 30, 1998, Alliance
had completed an inventory and assessment of its domestic and international
computer systems, identified its mission-critical and non-mission-critical
systems, and determined which of these systems were not Year 2000 compliant. All
third party suppliers of mission-critical systems and services and
non-mission-critical systems were contacted and their responses have been
evaluated. All of those contacted have responded that their systems are or will
be Year 2000 compliant. All mission critical and non-mission critical systems
supplied by third parties have been tested. Alliance expects all testing will be
completed before the end of 1999. Alliance has remediated, replaced or retired
all of its non-compliant mission-critical and non-mission-critical systems and
applications. Alliance has completed the business functionality and the
post-December 31, 1999 testing for all of its mission-critical systems and
non-mission-critical systems. Integrated systems tests were then conducted to
verify that the systems would continue to work together. Full integration
testing of all remediated systems have been completed. Testing of interfaces
with third party suppliers will be completed by the end of the year. Alliance
has completed an inventory of its technical infrastructure and facilities and
has begun to evaluate and test these systems. Alliance expects these systems to
be fully operable in the Year 2000. Certain other planned IT projects have been
deferred until after the Year 2000 initiative is completed. Such delay is not
expected to have a material adverse effect on Alliance's financial condition or
results of operations. Assisted by a consulting firm, Alliance has developed its
-31-
<PAGE>
Year 2000 specific contingency plans with emphasis on mission-critical
functions. These plans seek to provide alternative methods of processing in the
event of a failure that is within or outside of Alliance's control.
Alliance estimates its cost of the Year 2000 initiative will range between $41
million and $45 million. Such costs consist principally of remediation costs and
costs to develop formal Year 2000 specific contingency plans. Through September
30, 1999, Alliance has incurred approximately $41 million of those costs.
Risks - There are many risks associated with Year 2000 issues, including the
risk that the Company's computer systems will not operate as intended. There can
be no assurance that the systems, services and products of third parties will be
Year 2000 compliant. Likewise, there can be no assurance the compliance
schedules outlined above will be met.
Any significant unresolved difficulties related to the Year 2000 compliance
initiatives could result in an interruption in, or a failure of, normal business
activities or operations, or the incurrence of unanticipated expenses related to
resolving such difficulties, regulatory actions, damage to the Company's
franchise, and legal liabilities and, accordingly, could have a material adverse
effect on the Company's business operations and financial results. Due to the
pervasive nature, the external as well as internal interdependencies and the
inherent risks and uncertainties of Year 2000 issues, the Company cannot
determine which risks are most reasonably likely to occur, if any, nor the
effects of any particular failure to be Year 2000 compliant.
The forward-looking statements under "Year 2000" should be read in conjunction
with the disclosure set forth under "Forward-Looking Statements" on page 33. To
the fullest extent permitted by law, the foregoing Year 2000 discussion is a
"Year 2000 Readiness Disclosure" within the meaning of The Year 2000 Information
and Readiness Disclosure Act.
LIQUIDITY AND CAPITAL RESOURCES
In September 1999, Equitable Life paid a cash dividend of $150.0 million to the
Holding Company, the first since Equitable Life's demutualization in 1992.
In July 1999, the Board of Directors authorized an increase in Equitable Life's
commercial paper program to a maximum of $1.00 billion up from $500.0 million.
This program is available for general corporate purposes. The Board also
authorized increasing Equitable Life's existing $350.0 million bank credit
facility to $700.0 million. Equitable Life uses this program from time to time
in its liquidity management. At September 30, 1999, $95.0 million was
outstanding under the commercial paper program; there were no amounts
outstanding under the revolving credit facility.
In late May 1999, DLJ issued a new class of its common stock to track the
financial performance of DLJdirect, its online brokerage business, selling
shares representing an approximately 18% interest in DLJdirect's financial
performance to the public. The offering raised more than $343 million of equity
and resulted in AXA Financial recognizing a non-cash pre-tax gain of $212.3
million ($116.5 million by the Holding Company and $95.8 million by Equitable
Life).
In March 1999, DLJ filed a registration statement with the SEC, establishing a
$2.0 billion shelf of senior or subordinated debt securities or preferred stock.
As of September 30, 1999, $650 million 5 7/8% Senior Notes due 2002 and an
aggregate of $685.2 million medium term notes with various rates and maturities
having been issued. In addition, during the nine months ended September 30,
1999, commercial paper outstanding under DLJ's $1.0 billion commercial paper
program increased from $30.9 million to $253.5 million.
On October 29, 1999 Alliance transferred its business to a newly-formed private
limited partnership in connection with the reorganization approved by
Unitholders at the special meeting of Unitholders on September 22, 1999 and
expiration of the related exchange offer on October 28, 1999. Equitable Life and
its subsidiaries exchanged substantially all of their Alliance Units for limited
partnership interests and a general partnership interest in the new private
limited partnership. The new partnership is conducting Alliance's business
without change in management or employee responsibilities. Alliance's principal
asset is its interest in the new partnership, and it is functioning as a holding
company through which Unitholders own an indirect interest in the new
partnership. Effective October 29, 1999, Alliance changed its name to Alliance
Capital Management Holding L.P. and the new private partnership assumed the name
Alliance Capital Management L.P. (For information about a lawsuit related to
this transaction, and the resolution thereof, see "Legal Proceedings" in Part
II, Item 1 of this Report.) As a result of the reorganization and exchange,
Equitable Life and its subsidiaries share of the private partnership income will
not be subject to the 3.5% Federal tax on publicly traded partnerships.
-32-
<PAGE>
In 1998, the impact of this Federal tax on Equitable Life and its subsidiaries
was approximately $18 million.
In July 1999, Alliance entered into a new $200.0 million three-year revolving
credit facility, increasing its borrowing capacity to $625.0 million. The new
credit facility will be used to fund commission payments to financial
intermediaries for certain mutual fund sales and for general working capital
purposes. At September 30, 1999, Alliance had $398.6 million principal amount
outstanding under its $425.0 million commercial paper program. Proceeds are
being used to fund commission payments and for capital expenditures. There were
no amounts outstanding under Alliance's revolving credit facilities.
The exposure of four money market mutual funds sponsored by Alliance to General
American Life Insurance Company's August 1999 announcement of its inability to
meet substantial demands for surrenders arising from its funding agreement
business had been reported in Equitable Life's Form 10-Q for the quarter ended
June 30, 1999. This matter has been resolved with no material adverse effect on
Alliance's, Equitable Life's or the Holding Company's consolidated financial
positions.
In March 1998, the NAIC approved its Codification project. Equitable Life will
be subject to Codification to the extent and in the form adopted in New York
State, which would require action by both the New York legislature and the New
York Insurance Department. It is not possible to predict whether, in what form,
or when Codification will be adopted in New York, and accordingly it is not
possible to predict the effect of Codification on Equitable Life.
CONSOLIDATED CASH FLOWS
The net cash provided by operating activities was $363.0 million for the first
nine months of 1999 compared to $438.1 million for the first nine months of
1998.
Net cash used by investing activities was $1.87 billion for the first nine
months of 1999 as compared to net cash provided by investing activities of $19.3
million for the same period in 1998. Cash used by investing activities during
the first nine months of 1999 primarily was attributable to the increase in
invested assets as purchases exceeded sales, maturities and repayments by
approximately $1.65 billion. In 1998, investment purchases exceeded sales,
maturities and repayments by $168.8 million. Loans to discontinued operations
were reduced by $300.0 million during the first nine months of 1998.
Net cash provided by financing activities totaled $712.1 million for the first
nine months of 1999 as compared to net cash used by financing operations of
$91.0 million in the first nine months of 1998. Net cash provided by financing
activities during the first nine months of 1999 primarily resulted from deposits
to policyholders' account balances exceeding withdrawals by $536.8 million. Also
during the first nine months of 1999, there was a $433.4 million increase in
short-term financings. In addition, in September 1999, a $150.0 million dividend
was paid to the Holding Company. During the first nine months of 1998,
withdrawals from General Account policyholders' accounts exceeding additions by
$247.4 million and continuing operations made an $87.2 million payment to settle
its obligation to discontinued operations. Short-term financing, principally at
Equitable Life, increased $313.6 million during the 1998 period.
The operating, investing and financing activities described above resulted in a
decrease in cash and cash equivalents during the first nine months of 1999 of
$797.3 million to $448.2 million.
FORWARD-LOOKING STATEMENTS
The Company's management has made in this report, and from time to time may make
in its public filings and press releases as well as in oral presentations and
discussions, forward-looking statements concerning the Company's operations,
economic performance and financial condition. Forward-looking statements
include, among other things, discussions concerning the Company's potential
exposure to market risks, as well as statements expressing management's
expectations, beliefs, estimates, forecasts, projections and assumptions, as
indicated by words such as "believes," "estimates," "intends," "anticipates,"
"expects," "projects," "should," "probably," "risk," "target," "goals,"
"objectives," or similar expressions. The Company claims the protection afforded
by the safe harbor for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995, and assumes no duty to update any
forward-looking statement. Forward-looking statements are based on management's
expectations and beliefs concerning future developments and their potential
effects and are subject to risks and uncertainties. Actual results could
-33-
<PAGE>
differ materially from those anticipated by forward-looking statements due to a
number of important factors including those discussed elsewhere in this report
and in the Company's other public filings, press releases, oral presentations
and discussions. The following discussion highlights some of the more important
factors that could cause such differences.
MARKET RISK. The businesses of the Company and its Investment Subsidiaries are
subject to market risks arising from its insurance asset/liability management,
asset management and trading activities. Primary market risk exposures exist in
the insurance and investment banking segments and result from interest rate
fluctuations, equity price movements, changes in credit quality and, at DLJ,
foreign currency exchange exposure. Returns on equity securities are very
volatile. Effective January 1, 1999, management designated all direct
investments in publicly-traded common equity securities in Equitable Life's
General Account and the Holding Company Group portfolios as "trading securities"
and all subsequent changes in fair value of such investments are being reported
through earnings. Each of these risks is discussed under the captions
"Investment Results of General Account Investment Assets - Other Equity
Investments" and "Market Risk, Risk Management and Derivative Financial
Instruments" as well as in Note 16 of Notes to Consolidated Financial Statements
in the Company's 1998 report on Form 10-K.
YEAR 2000. Equitable Life, DLJ and Alliance continue to address Year 2000
compliance issues. There can be no assurance that compliance schedules will be
met; that the Company's computer systems will operate as intended; that the
systems, services and products of third parties will be Year 2000 compliant or
that cost estimates will be met. Any significant unresolved difficulties related
to the Year 2000 compliance initiatives could result in an interruption in, or a
failure of, normal business activities or operations, or the incurrence of
unanticipated expenses related to resolving such difficulties, regulatory
actions, damage to the Company's franchise, and legal liabilities and,
accordingly, could have a material adverse effect on the Company's business
operations and financial results. See "Year 2000" for a detailed discussion of
the Company's compliance initiatives.
STRATEGIC INITIATIVES. The Company continues to implement strategic initiatives
identified after a comprehensive review of its organization and strategy
conducted in late 1997. These initiatives are designed to make the Company a
premier provider of financial planning, insurance and asset management products
and services. The "branding" initiative, which consists in part of a
reorganization of wholly owned subsidiaries engaged in providing financial
advisory services and distributing relationship-based products and services and
changes to the names of these subsidiaries and the Holding Company, is designed
to separate product manufacturing under the "Equitable" name from product
distribution under the "AXA Advisors" name. On September 21, 1999, EQ Financial,
a subsidiary of Equitable Life, was merged into AXA Advisors and was sold to
another subsidiary of the Holding Company, beginning the process of separating
the product development from product distribution functions. Implementation of
these strategic initiatives is subject to various uncertainties, including those
relating to timing and expense, and the results of the implementation of these
initiatives could be other than what management intends. The Company may, from
time to time, explore selective acquisition opportunities in its core insurance
and asset management businesses.
INSURANCE. The Insurance Group's future sales of life insurance and annuity
products are dependent on numerous factors including successful implementation
of the strategic initiatives referred to above, the intensity of competition
from other insurance companies, banks and other financial institutions, the
strength and professionalism of distribution channels, the continued development
of additional channels, the financial and claims paying ratings of Equitable
Life, its reputation and visibility in the market place, its ability to develop,
distribute and administer competitive products and services in a timely,
cost-effective manner and its investment management performance. In addition,
the markets for products sold by the Insurance Group may be materially affected
by changes in laws and regulations, including changes relating to savings,
retirement funding and taxation. The Administration's year 2000 budget proposals
contain provisions which, if enacted, could have a material adverse impact on
sales of certain insurance products and would adversely affect the taxation of
insurance companies. See "Business - Segment Information - Insurance" and
"Business - Regulation - Federal Initiatives" in the Company's 1998 report on
Form 10-K. In addition, legislation under discussion in Congress contains
provisions which could negatively impact sales of life insurance and annuities,
and other provisions which could beneficially impact sales of qualified plans.
The profitability of Insurance depends on a number of factors, including levels
of operating expenses, secular trends and the Company's mortality, morbidity,
persistency and claims experience, and profit margins between investment results
from General Account Investment Assets and interest credited on individual
insurance and annuity products. The performance of General Account Investment
Assets depends, among other things, on levels of interest rates and the markets
for equity securities and real estate, the need for asset valuation allowances
and writedowns, and the performance of equity investments which have, and in the
future may, create significant volatility in investment income. See "Investment
Results of General Account Investment Assets" in this report and in the 1998
Form 10-K.
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<PAGE>
The ability of the Company to continue its accelerated real estate sales program
during 1999 without incurring net losses will depend on real estate markets for
the remaining properties held for sale and the negotiation of transactions which
confirm management's expectations regarding property values. For further
information, including information concerning the writedown in the fourth
quarter of 1997 in connection with management's decision to accelerate the sale
of certain real estate assets, see "Investment Results of General Account
Investment Assets - Equity Real Estate" in the 1998 Form 10-K. The Company's
disability income ("DI") and group pension businesses produced pre-tax losses in
1995 and 1996. In late 1996, loss recognition studies for the DI and group
pension businesses were completed. As a result, $145.0 million of unamortized
DAC on DI policies at December 31, 1996 was written off; reserves for directly
written DI policies and DI reinsurance assumed were strengthened by $175.0
million; and a Pension Par premium deficiency reserve was established which
resulted in a $73.0 million pre-tax charge to results of continuing operations
at December 31, 1996. Based on the experience that emerged on these two books of
business since 1996, management continues to believe the assumptions and
estimates used to develop the 1996 DI and Pension Par reserve strengthenings are
reasonable. However, there can be no assurance that they will be sufficient to
provide for all future liabilities. Equitable Life no longer underwrites new DI
policies. Equitable Life is exploring its ability to dispose of the DI business
through reinsurance. See "Combined Operating Results by Segment - Insurance" in
the 1998 Form 10-K.
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<PAGE>
INVESTMENT SERVICES. Alliance's revenues are largely dependent on the total
value and composition of assets under its management and are therefore affected
by market appreciation or depreciation, additions and withdrawals of assets,
purchases and redemptions of mutual funds and shifts of assets between accounts
or products with different fee structures. A substantial decline in assets under
management would adversely affect the Company's results of operations. See
"Combined Operating Results by Segment - Investment Services" and "- Fees and
Assets Under Management" in this report and in the 1998 Form 10-K. DLJ's
business activities are subject to various risks, including volatile trading
markets and fluctuations in the volume of market activity. Consequently, DLJ's
net income and revenues have been, and may continue to be, subject to wide
fluctuations, reflecting the impact of many factors beyond DLJ's control,
including securities market conditions, the level and volatility of interest
rates, competitive conditions and the size and timing of transactions. Over the
last several years DLJ's results have been at historically high levels. See
"Combined Operating Results by Segment - Investment Services" in this report and
in the 1998 Form 10-K for a discussion of the negative impact on equity in DLJ's
earnings from emerging markets. Potential losses could result from DLJ's
merchant banking activities as a result of their capital intensive nature.
DISCONTINUED OPERATIONS. The determination of the allowance for future losses
for the discontinued Wind-Up Annuities and GIC lines of business continues to
involve numerous estimates and subjective judgments including those regarding
expected performance of investment assets, ultimate mortality experience and
other factors which affect investment and benefit projections. There can be no
assurance that 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
underlying the allowance, the difference would be reflected as earnings or loss
from discontinued operations within 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 allowance are likely to result. See "Discontinued Operations" in the 1998
Form 10-K for further information including discussion of significant reserve
strengthening in 1997 and 1996 and the assumptions used in making cash flow
projections.
TECHNOLOGY AND INFORMATION SYSTEMS. The Company's information systems are
central to, among other things, designing and pricing products, marketing and
selling products and services, processing policyholder and investor
transactions, client recordkeeping, communicating with agents, employees and
clients, and recording information for accounting and management information
purposes. Any significant difficulty associated with the operation of such
systems, or any material delay or inability to develop needed system
capabilities, could have a material adverse effect on the results of operations
of the Company and its Investment subsidiaries and, ultimately, its ability to
achieve its strategic goals.
LEGAL ENVIRONMENT. A number of lawsuits have been filed against life and health
insurers involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents and other matters. Some of the lawsuits have
resulted in the award of substantial judgments against other insurers, including
material amounts of punitive damages, or in substantial settlements. In some
states, juries have substantial discretion in awarding punitive damages. The
Company, like other life and health insurers, is involved in such litigation.
While no such lawsuit has resulted in an award or settlement of any material
amount against the Company to date, its results of operations and financial
condition could be affected by defense and settlement costs and any unexpected
material adverse outcomes in such litigations as well as in other material
litigations pending against its other subsidiaries and DLJ and its subsidiaries.
In addition, examinations by Federal and state regulators could result in
adverse publicity, sanctions and fines. For further information see "Business -
Regulation" and "Legal Proceedings" in the 1998 Form 10-K and "Legal
Proceedings" in Part II, Item 1 of this report.
FUTURE ACCOUNTING PRONOUNCEMENTS. In the future, new accounting pronouncements
may have material effects on the Company's consolidated statements of earnings
and shareholders' equity. See Note 2 of Notes to Consolidated Financial
Statements in the 1998 Form 10-K for pronouncements issued but not implemented.
In addition, the NAIC approved its Codification project providing regulators and
insurers with uniform statutory guidance, addressing areas where statutory
accounting previously was silent and changing certain existing statutory
positions. Equitable Life will be subject to Codification to the extent and in
the form adopted in New York State, which would require action by both the New
York legislature and the New York Insurance Department. It is not possible to
predict whether, in what form, or when Codification will be adopted in New York,
and accordingly it is not possible to predict the effect of Codification on
Equitable Life.
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<PAGE>
REGULATION AND STATUTORY CAPITAL AND SURPLUS. The businesses conducted by the
Company and its subsidiaries and affiliates are subject to extensive regulation
and supervision by state insurance departments and Federal and state agencies
regulating, among other things, insurance and annuities, securities
transactions, investment banking, investment companies and investment advisors.
Changes in the regulatory environment could have a material impact on operations
and results. The activities of the Insurance Group are subject to the
supervision of the insurance regulators of each of the 50 states. Such
regulators have the discretionary authority, in connection with the continual
licensing of members of the Insurance Group, to limit or prohibit new issuances
of business to policyholders within their jurisdiction when, in their judgment,
such regulators determine that such member is not maintaining adequate statutory
surplus or capital. See "Liquidity and Capital Resources - Insurance" in the
1998 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "MD&A - Combined Operating Results by Segment - Investment
Services."
-37-
<PAGE>
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, 1998, except as described below:
Equitable Life's settlement has become effective with respect to the previously
disclosed cases (Golomb, Malvin, Bowler, Bachman and Fletcher) brought by
persons insured under the Policies. The parties have obtained dismissal of the
actions pending in each of the relevant jurisdictions.
In Bradley, a hearing on plaintiff's motions to compel discovery and for class
certification, and on EVLICO's and EOC's motion for summary judgment, has been
re-scheduled.
In Hallabrin, the parties entered into an agreement settling on an individual
basis, with prejudice, all claims against Equitable Life and EQ Financial. The
court has dismissed all claims against Equitable Life and EQ Financial with
prejudice.
In Greenwald, in April 1999, Equitable Life's motion to dismiss the complaint
was denied without prejudice.
In Hill, in April 1999, Equitable Life and EVLICO filed a motion to dismiss the
complaint.
In Franze, in May 1999, the Magistrate Judge issued a Report and Recommendation
recommending that the District Judge deny Equitable Life's motion for summary
judgment and grant plaintiffs' motion for class certification. In July,
Equitable Life filed Objections to the Report and Recommendation and urged that
the District Judge reject the Magistrate's recommendations and grant Equitable
Life's motion for summary judgment and deny plaintiffs' motion for class
certification.
In Duncan, pursuant to court order, the parties submitted supplemental briefing
in October 1999.
In Rickel, the complaint was dismissed in April 1999 by the Court. Plaintiff has
filed an appeal. Although there can be no assurance, DLJ's management does not
believe that the ultimate outcome of this litigation will have a material
adverse effect on DLJ's consolidated financial condition or DLJ's results of
operations in any particular period.
In National Gypsum, the plaintiffs have filed an appeal.
The Dayton Monetary Associates and Mid-American Waste Systems actions have been
settled without a material adverse effect on DLJ's consolidated financial
condition or results of operation in any particular period.
In November 1998, three purported class actions (Gillet v. Goldman, Sachs & Co.
et al., Prager v. Goldman, Sachs & Co. et al. and Holzman v. Goldman, Sachs &
Co. et al.) were filed in the U.S. District Court for the Southern District of
New York against more than 25 underwriters of initial public offering
securities, including DLJSC. The complaints allege that defendants conspired to
fix the "fee" paid for underwriting initial public offering securities by
setting the underwriters' discount or "spread" at 7%, in violation of the
federal antitrust laws. The complaints seek treble damages in an unspecified
amount and injunctive relief as well as attorneys' fees and costs. On March 15,
1999, the plaintiffs filed a Consolidated Amended Complaint captioned In re
Public Offering Fee Antitrust Litigation. A motion by all defendants to dismiss
the complaints on several grounds is pending. Separately, the U.S. Department of
Justice has issued a Civil Investigative Demand to several investment banking
firms, including DLJSC, seeking documents and information relating to "alleged"
price fixing with respect to underwriting spreads in initial public offerings.
The government has not made any charges against DLJSC or the other investment
banking firms. DLJSC is cooperating with the Justice Department in providing the
requested information and believes that no violation of law by DLJSC has
occurred. Although there can be no assurance, DLJ's management does not believe
that the ultimate outcome of these matters will have a material adverse effect
on DLJ's consolidated financial condition. Based upon the information currently
available to it, DLJ's management cannot predict whether or not these matters
will have a material adverse effect on DLJ's results of operations in any
particular period.
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<PAGE>
In connection with the reorganization of Alliance and the related exchange
offer, on September 29, 1999, a purported class action complaint was filed in
the Court of Chancery of the State of Delaware in and for New Castle County
against Alliance (now named Alliance Capital Management Holding L.P.), Alliance
Capital Management L.P. (the new private partnership formed in connection with
the reorganization), Alliance Capital Management Corporation (the general
partner of both partnerships) and certain other defendants affiliated with
Alliance which sought, among other things, to enjoin the consummation of the
reorganization and related exchange offer and alleged, among other things, the
amended and restated Alliance partnership agreement adversely affected Alliance
Unitholders. On October 29, 1999, the parties to this litigation entered into a
memorandum of understanding setting forth the parties' agreement in principle to
the terms of a proposed settlement of the action. Alliance's management does
not believe that the resolution of this matter will have a material adverse
effect on Alliance's results of operations or financial condition.
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 Company's consolidated financial position or results of operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Equitable Life Assurance Society of the United States has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 10, 1999 THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES
By: /s/Stanley B. Tulin
----------------------------------
Name: Stanley B. Tulin
Title: Vice Chairman and
Chief Financial Officer
Date: November 10, 1999 /s/Alvin H. Fenichel
----------------------------------
Alvin H. Fenichel
Senior Vice President and
Controller
-40-
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 19,319,300
<DEBT-CARRYING-VALUE> 131,200
<DEBT-MARKET-VALUE> 131,200
<EQUITIES> 660,300
<MORTGAGE> 3,184,400
<REAL-ESTATE> 1,470,000
<TOTAL-INVEST> 29,127,200
<CASH> 448,200
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,843,400
<TOTAL-ASSETS> 91,792,700
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 4,776,200
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<NOTES-PAYABLE> 1,482,200
0
0
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1,324,400
<INVESTMENT-INCOME> 1,680,700
<INVESTMENT-GAINS> 22,100
<OTHER-INCOME> 1,589,500
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<UNDERWRITING-AMORTIZATION> 376,600
<UNDERWRITING-OTHER> 1,696,900
<INCOME-PRETAX> 979,500
<INCOME-TAX> 255,300
<INCOME-CONTINUING> 596,400
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<EXTRAORDINARY> 0
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<NET-INCOME> 586,400
<EPS-BASIC> 0
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