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 June 30, 1997 Commission File No. 1-11166
- --------------------------------------------------------------------------------
The Equitable Companies Incorporated
------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3623351
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 554-1234
--------------------------
None
- --------------------------------------------------------------------------------
(Former name, former address, and former fiscal year if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) been subject to such filing requirements
for the past 90 days.
Yes X No
---- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares Outstanding
Class at August 11, 1997
- --------------------------------------------------------------------------------
Common Stock, $.01 par value 205,836,606
Page 1 of 40
<PAGE>
<TABLE>
<CAPTION>
THE EQUITABLE COMPANIES INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1997
TABLE OF CONTENTS
Page #
------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996......... 3
Consolidated Statements of Earnings for the Three Months and Six
Months Ended June 30, 1997 and 1996............................................ 4
Consolidated Statements of Shareholders' Equity for the Six Months
Ended June 30, 1997 and 1996................................................... 6
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1997 and 1996......................................................... 7
Notes to Consolidated Financial Statements.................................... 8
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................ 19
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................................ 37
Item 4: Submission of Matters to a Vote of Security Holders.............................. 37
Item 6: Exhibits and Reports on Form 8-K................................................. 38
SIGNATURES....................................................................................... 40
</TABLE>
2
<PAGE>
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements.
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------- ----------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 19,289.5 $ 18,556.2
Held to maturity, at amortized cost..................................... 162.0 178.5
Trading account securities, at market value............................... 17,637.3 15,728.1
Securities purchased under resale agreements.............................. 25,722.2 20,492.1
Mortgage loans on real estate............................................. 2,751.0 3,133.0
Equity real estate........................................................ 3,395.6 3,298.4
Policy loans.............................................................. 2,345.3 2,196.1
Other equity investments.................................................. 1,151.4 1,081.9
Other invested assets..................................................... 134.8 125.0
----------------- -----------------
Total investments..................................................... 72,589.1 64,789.3
Cash and cash equivalents................................................... 996.0 755.3
Broker-dealer related receivables........................................... 23,377.2 16,661.7
Deferred policy acquisition costs........................................... 3,241.9 3,106.5
Amounts due from discontinued GIC Segment................................... 808.4 996.2
Other assets................................................................ 5,096.7 4,361.1
Closed Block assets......................................................... 8,504.3 8,495.0
Separate Accounts assets.................................................... 32,642.5 29,646.1
----------------- -----------------
Total Assets................................................................ $ 147,256.1 $ 128,811.2
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 21,832.5 $ 21,863.8
Future policy benefits and other policyholders liabilities.................. 4,505.4 4,416.6
Securities sold under repurchase agreements................................. 36,962.3 29,378.3
Broker-dealer related payables.............................................. 24,517.8 19,497.0
Short-term and long-term debt............................................... 7,619.2 5,379.6
Other liabilities........................................................... 5,810.1 5,598.3
Closed Block liabilities.................................................... 9,048.7 9,091.3
Separate Accounts liabilities............................................... 32,488.3 29,598.3
----------------- -----------------
Total liabilities..................................................... 142,784.3 124,823.2
----------------- -----------------
Commitments and contingencies (Note 12)
SHAREHOLDERS' EQUITY
Series C convertible preferred stock........................................ 24.4 24.4
Series D convertible preferred stock........................................ 397.0 294.0
Stock employee compensation trust........................................... (397.0) (294.0)
Series E convertible preferred stock........................................ 380.2 380.2
Common stock, at par value.................................................. 1.9 1.9
Capital in excess of par value.............................................. 2,815.9 2,782.2
Retained earnings........................................................... 989.5 632.9
Net unrealized investment gains............................................. 272.8 179.3
Minimum pension liability................................................... (12.9) (12.9)
----------------- -----------------
Total shareholders' equity............................................ 4,471.8 3,988.0
----------------- -----------------
Total Liabilities and Shareholders' Equity.................................. $ 147,256.1 $ 128,811.2
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
(In Millions, Except Per Share Amounts)
<S> <C> <C> <C> <C>
REVENUES
Universal life and investment-type
product policy fee income.......................... $ 236.1 $ 217.8 $ 466.6 $ 430.7
Premiums............................................. 141.0 152.4 292.8 293.4
Net investment income................................ 972.7 812.6 1,842.6 1,604.2
Investment gains, net................................ 434.1 202.4 612.1 372.7
Commissions, fees and other income................... 777.2 768.1 1,545.7 1,367.4
Contribution from the Closed Block................... 29.7 27.2 65.5 59.3
--------------- --------------- --------------- --------------
Total revenues................................. 2,590.8 2,180.5 4,825.3 4,127.7
--------------- ---------------- --------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account
balances........................................... 331.7 312.8 644.6 633.4
Policyholders' benefits.............................. 227.5 273.9 482.4 528.1
Other operating costs and expenses................... 1,607.5 1,356.6 2,998.1 2,514.9
--------------- ---------------- --------------- ---------------
Total benefits and other deductions............ 2,166.7 1,943.3 4,125.1 3,676.4
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
Federal income taxes, minority interest
and cumulative effect of accounting change......... 424.1 237.2 700.2 451.3
Federal income taxes................................. 172.3 72.2 259.7 136.9
Minority interest in net (loss) income of
consolidated subsidiaries.......................... (.3) 49.3 49.1 89.0
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
cumulative effect of accounting change............. 252.1 115.7 391.4 225.4
Discontinued operations, net of Federal income
taxes.............................................. .6 - (2.7) -
Cumulative effect of accounting change,
net of Federal income taxes........................ - - - (23.1)
--------------- ---------------- --------------- ---------------
Net Earnings......................................... $ 252.7 $ 115.7 $ 388.7 $ 202.3
=============== ================ =============== ===============
</TABLE>
4
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED) - Continued
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
(In Millions, Except Per Share Amounts)
<S> <C> <C> <C> <C>
Per Common Share:
Assuming No Dilution:
Earnings from continuing operations before
cumulative effect of accounting change......... $ 1.28 $ .58 $ 1.97 $ 1.13
Discontinued operations, net of Federal
income taxes................................... - - (.01) -
Cumulative effect of accounting change,
net of Federal income taxes.................... - - - (.12)
--------------- ---------------- --------------- ---------------
Net Earnings..................................... $ 1.28 $ .58 $ 1.96 1.01
=============== ================ =============== ===============
Assuming Full Dilution:
Earnings from continuing operations before
cumulative effect of accounting change......... $ 1.12 $ .54 $ 1.74 $ 1.05
Discontinued operations, net of Federal
income taxes................................... - - (.01) -
Cumulative effect of accounting change,
net of Federal income taxes.................... - - - (.10)
--------------- ---------------- --------------- ---------------
Net Earnings..................................... $ 1.12 $ .54 $ 1.73 $ .95
=============== ================ =============== ===============
Cash Dividends Per Common Share...................... $ .05 $ .05 $ .10 $ .10
=============== ================ =============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Series C convertible preferred stock, beginning of year and end of period... $ 24.4 $ 24.4
----------------- -----------------
Series D convertible preferred stock, beginning of year..................... 294.0 286.6
Change in market value of shares............................................ 103.0 10.4
----------------- -----------------
Series D convertible preferred stock, end of period......................... 397.0 297.0
----------------- -----------------
Stock employee compensation trust, beginning of year........................ (294.0) (286.6)
Change in market value of shares............................................ (103.0) (10.4)
----------------- -----------------
Stock employee compensation trust, end of period............................ (397.0) (297.0)
----------------- -----------------
Series E convertible preferred stock, beginning of year and end of period... 380.2 380.2
----------------- -----------------
Common stock, at par value, beginning of year and end of period............. 1.9 1.8
----------------- -----------------
Capital in excess of par value, beginning of year as previously reported.... 2,782.2 2,561.1
Cumulative effect on prior years of retroactive restatement for
accounting change......................................................... - 192.2
----------------- -----------------
Capital in excess of par value, beginning of year as restated............... 2,782.2 2,753.3
Additional capital in excess of par value................................... 33.7 13.6
----------------- -----------------
Capital in excess of par value, end of period............................... 2,815.9 2,766.9
----------------- -----------------
Retained earnings, beginning of year as previously reported................. 632.9 590.7
Cumulative effect on prior years of retroactive restatement for
accounting change......................................................... - 6.8
----------------- -----------------
Retained earnings, beginning of year as restated............................ 632.9 597.5
Net earnings................................................................ 388.7 202.3
Dividends on preferred stocks............................................... (13.3) (13.3)
Dividends on common stock................................................... (18.8) (18.5)
----------------- -----------------
Retained earnings, end of period............................................ 989.5 768.0
----------------- -----------------
Net unrealized investment gains, beginning of year as previously reported... 179.3 328.3
Cumulative effect on prior years of retroactive restatement for
accounting change......................................................... - 58.3
----------------- -----------------
Net unrealized investment gains, beginning of year as restated.............. 179.3 386.6
Change in unrealized investment gains (losses).............................. 93.5 (387.6)
----------------- -----------------
Net unrealized investment gains (losses), end of period..................... 272.8 (1.0)
----------------- -----------------
Minimum pension liability, beginning of year and end of period.............. (12.9) (35.1)
----------------- -----------------
Total Shareholders' Equity, End of Period................................... $ 4,471.8 $ 3,905.2
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Net earnings................................................................ $ 388.7 $ 202.3
Adjustments to reconcile net earnings to net cash (used) provided by
operating activities:
Interest credited to policyholders' account balances.................... 644.6 633.4
Universal life and investment-type policy fee income.................... (466.6) (430.7)
Net change in trading activities and broker-dealer related
receivables/payables.................................................. (4,123.7) 380.3
(Increase) decrease in matched resale agreements........................ (4,340.6) (1,904.9)
Increase (decrease) in matched repurchase agreements.................... 4,340.6 1,904.9
Investment gains, net of dealer and trading gains....................... (346.0) (97.6)
Changes in clearing association fees and regulatory deposits............ (31.1) (78.7)
Change in accounts payable and accrued expenses......................... (64.6) (24.7)
Change in Federal income taxes payable.................................. 69.0 (109.7)
Other, net.............................................................. (73.5) (338.8)
----------------- -----------------
Net cash (used) provided by operating activities............................ (4,003.2) 135.8
----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................................. 1,590.5 1,289.4
Sales.................................................................... 5,242.4 5,343.4
Return of capital from joint ventures and limited partnerships............ 30.4 48.5
Purchases................................................................. (7,082.1) (7,443.3)
Decrease in loans to discontinued GIC Segment............................. 185.2 492.5
Sale of subsidiaries...................................................... 261.0 -
Other, net................................................................ (322.8) 367.6
----------------- -----------------
Net cash (used) provided by investing activities............................ (95.4) 98.1
----------------- -----------------
Cash flows from financing activities: Policyholders' account balances:
Deposits................................................................ 858.6 913.9
Withdrawals............................................................. (1,063.6) (1,265.8)
Net change in short-term financings....................................... 4,421.5 (150.1)
Additions to long-term debt............................................... 238.0 252.5
Repayments of long-term debt.............................................. (75.4) (219.9)
Other, net................................................................ (39.8) (58.9)
----------------- -----------------
Net cash provided (used) by financing activities........................... 4,339.3 (528.3)
----------------- -----------------
Change in cash and cash equivalents......................................... 240.7 (294.4)
Cash and cash equivalents, beginning of year................................ 755.3 1,200.4
----------------- -----------------
Cash and Cash Equivalents, End of Period.................................... $ 996.0 $ 906.0
================= =================
Supplemental cash flow information:
Interest Paid............................................................. $ 1,894.3 $ 1,402.8
================= =================
Income Taxes Paid......................................................... $ 168.1 $ 60.9
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The preparation of the accompanying consolidated financial statements in
conformity with GAAP requires management to make estimates and assumptions
(including normal, recurring accruals) that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. These statements should
be read in conjunction with the consolidated financial statements of The
Equitable for the year ended December 31, 1996. The results of operations
for the six months ended June 30, 1997 are not necessarily indicative of
the results to be expected for the full year.
The terms "second quarter 1997" and "second quarter 1996" refer to the
three months ended June 30, 1997 and 1996, respectively. The terms "first
half of 1997" and "first half of 1996" refer to the six months ended June
30, 1997 and 1996, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform those periods with the current presentation.
2) ACCOUNTING CHANGES AND PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". This statement establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. This statement requires that an enterprise classify
items of other comprehensive income by their nature in a financial
statement and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in
the equity section of a statement of financial position. This statement is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". This statement establishes
standards for the way public business enterprises report information about
operating segments in annual and interim financial statements issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. Generally,
financial information will be required to be reported on the basis used by
management for evaluating segment performance and deciding how to allocate
resources to segments. This statement is effective for fiscal years
beginning after December 15, 1997 and need not be applied to interim
reporting in the initial year of adoption. Restatement of comparative
information for earlier periods is required.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share". This
statement simplifies the standards for computing earnings per share
("EPS") previously found in APB Opinion No. 15, "Earnings Per Share".
Basic EPS will replace primary EPS. Basic EPS will be computed by dividing
income available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS will be computed
similarly to the present fully diluted EPS. Dual presentation of basic and
diluted EPS will be required on the face of the income statement. A
reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS
computation is also required. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997; earlier
application is not permitted. Restatement of all prior period EPS data
will be required. Had The Equitable's EPS calculations for the second
quarter and the first half of 1997 been computed on an SFAS No. 128 basis,
basic EPS would have been $1.32 per share and $2.01 per share,
respectively. Diluted EPS would not have been materially different from
reported 1997 amounts. EPS calculations for the second quarter and first
half of 1996 on an SFAS No. 128 basis would not have resulted in amounts
materially different from those reported.
8
<PAGE>
In 1996, The Equitable changed its method of accounting for long-duration
participating life insurance contracts, primarily within the Closed Block,
in accordance with the provisions prescribed by SFAS No. 120. The effect
of this change, including the impact on the Closed Block, was to increase
previously reported second quarter and first half of 1996 earnings from
continuing operations before cumulative effect of accounting change by
$3.9 million and $7.2 million, net of Federal income taxes of $2.0 million
and $3.8 million ($.02 and $.04 per share assuming no dilution and $.02
and $.03 per share assuming full dilution), respectively.
3) FEDERAL INCOME TAXES
Federal income taxes for interim periods have been computed using an
estimated annual effective tax rate. This rate is revised, if necessary,
at the end of each successive interim period to reflect the current
estimate of the annual effective tax rate.
4) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1997 1996
--------------- ---------------
(In Millions)
<S> <C> <C>
Balances, beginning of year............................................... $ 137.1 $ 325.3
SFAS No. 121 release...................................................... - (152.4)
Additions charged to income............................................... 41.5 73.9
Deductions for writedowns and asset dispositions.......................... (46.5) (82.7)
--------------- ---------------
Balances, End of Period................................................... $ 132.1 $ 164.1
=============== ===============
Balances, end of period:
Mortgage loans on real estate........................................... $ 46.9 $ 102.1
Equity real estate...................................................... 85.2 62.0
--------------- ---------------
Total..................................................................... $ 132.1 $ 164.1
=============== ===============
</TABLE>
For the second quarter and first half of 1997 and of 1996, investment
income is shown net of investment expenses (including interest expense to
finance short-term trading instruments) of $836.2 million, $1,529.2
million, $592.2 million and $1,174.1 million, respectively.
As of June 30, 1997 and December 31, 1996, respectively, fixed maturities
classified as available for sale had amortized costs of $18,911.6 million
and $18,196.1 million, fixed maturities in the held to maturity portfolio
had estimated fair values of $179.3 million and $195.1 million and trading
account securities had amortized costs of $17,459.5 million and $15,758.3
million, respectively. Other equity investments included equity securities
with carrying values of $670.7 million and $614.9 million and costs of
$666.2 million and $627.5 million.
For the first half of 1997 and of 1996, proceeds received on sales of
fixed maturities classified as available for sale amounted to $4,999.4
million and $4,971.9 million, respectively. Gross gains of $77.0 million
and $68.6 million and gross losses of $78.5 million and $45.0 million were
realized on these sales for the first half of 1997 and of 1996,
respectively. Unrealized investment gains related to fixed maturities
classified as available for sale increased by $17.9 million in the first
half of 1997, resulting in a balance of $377.9 million at June 30, 1997.
9
<PAGE>
Impaired mortgage loans along with the related provision for losses were
as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses....................... $ 215.1 $ 340.0
Impaired mortgage loans without provision for losses.................... 4.0 122.3
--------------- -----------------
Recorded investment in impaired mortgage loans.......................... 219.1 462.3
Provision for losses.................................................... 43.2 46.4
--------------- -----------------
Net Impaired Mortgage Loans............................................. $ 175.9 $ 415.9
=============== =================
</TABLE>
During the first half of 1997 and of 1996, respectively, The Equitable's
average recorded investment in impaired mortgage loans was $341.1 million
and $541.2 million. Interest income recognized on these impaired mortgage
loans totaled $9.3 million and $20.8 million for the first half of 1997
and of 1996, respectively, including $1.0 million and $7.3 million
recognized on a cash basis.
5) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are treated as financing
transactions and carried at the amounts at which the securities
subsequently will be reacquired per the respective agreements. These
agreements with counterparties were collateralized principally by U.S.
government securities. The weighted average interest rates on securities
sold under repurchase agreements were 5.82% and 6.08% at June 30, 1997 and
December 31, 1996, respectively.
6) ALLIANCE - CURSITOR TRANSACTION
On February 29, 1996, Alliance acquired the business of Cursitor for
approximately $159.0 million. The purchase price consisted of 1.8 million
Alliance Units, $94.3 million in cash, $21.5 million in notes payable
ratably over four years and substantial additional consideration which
will be determined at a later date. The Equitable recognized an investment
gain of $20.6 million as a result of the issuance of Alliance Units in
this transaction.
On June 30, 1997, Alliance reduced the recorded value of goodwill and
contracts associated with Alliance's acquisition of Cursitor by $120.9
million. This charge reflected Alliance's view that Cursitor's continuing
decline in assets under management and its reduced profitability,
resulting from relative investment underperformance, no longer supported
the carrying value of its investment. As a result, The Equitable's
earnings from continuing operations before cumulative effect of accounting
change for the second quarter and first half of 1997 included a charge of
$59.5 million, net of a Federal income tax benefit of $10.0 million and
minority interest of $51.4 million.
In addition to its 1% general partnership interest in Alliance, at June
30, 1997, The Equitable owned approximately 57.1% of Alliance Units.
7) BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Insurance Operations..................... $ 1,008.7 $ 928.8 $ 1,989.7 $ 1,845.6
Investment Services...................... 1,580.3 1,246.1 2,830.8 2,273.4
Corporate and Other...................... 10.4 14.0 23.2 27.8
Consolidation/elimination................ (8.6) (8.4) (18.4) (19.1)
--------------- --------------- --------------- ---------------
Total.................................... $ 2,590.8 $ 2,180.5 $ 4,825.3 $ 4,127.7
=============== =============== =============== ===============
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change
Insurance Operations..................... $ 122.7 $ 73.4 $ 249.5 $ 158.0
Investment Services...................... 333.3 192.3 515.0 351.8
Corporate and Other...................... 2.9 4.3 5.6 9.4
Consolidation/elimination................ (.5) 1.6 (.9) 1.1
--------------- --------------- --------------- ---------------
Subtotal............................... 458.4 271.6 769.2 520.3
Corporate interest expense............... (34.3) (34.4) (69.0) (69.0)
--------------- --------------- --------------- ---------------
Total.................................... $ 424.1 $ 237.2 $ 700.2 $ 451.3
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Insurance Operations................................................... $ 65,113.7 $ 60,464.9
Investment Services.................................................... 82,041.5 68,205.3
Corporate and Other.................................................... 671.6 774.3
Consolidation/elimination.............................................. (570.7) (633.3)
----------------- -----------------
Total.................................................................. $ 147,256.1 $ 128,811.2
================= =================
</TABLE>
8) CLOSED BLOCK
Summarized financial information of the Closed Block is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Fixed maturities:
Available for sale, at estimated fair value (amortized cost of
$3,907.8 and $3,820.7)............................................. $ 3,964.0 $ 3,889.5
Mortgage loans on real estate.......................................... 1,423.4 1,380.7
Policy loans........................................................... 1,733.1 1,765.9
Cash and other invested assets......................................... 287.0 336.1
Deferred policy acquisition costs...................................... 871.2 876.5
Other assets........................................................... 225.6 246.3
----------------- -----------------
Total Assets........................................................... $ 8,504.3 $ 8,495.0
================= =================
Liabilities
Future policy benefits and other policyholders' account balances....... $ 8,965.6 $ 8,999.7
Other liabilities...................................................... 83.1 91.6
----------------- -----------------
Total Liabilities...................................................... $ 9,048.7 $ 9,091.3
================= =================
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Premiums and other income................ $ 174.6 $ 182.9 $ 349.4 $ 367.8
Investment income (net of investment
expenses of $7.7, $7.2, $14.8 and
$14.1)................................. 139.5 131.4 278.3 268.2
Investment gains (losses), net........... 3.1 (4.4) 5.4 (8.6)
--------------- --------------- --------------- ---------------
Total revenues........................... 317.2 309.9 633.1 627.4
--------------- --------------- --------------- ---------------
Benefits and Other Deductions
Policyholders' benefits and dividends.... 265.8 276.1 536.8 554.1
Other operating costs and expenses....... 21.7 6.6 30.8 14.0
--------------- --------------- --------------- ---------------
Total benefits and other deductions...... 287.5 282.7 567.6 568.1
--------------- --------------- --------------- ---------------
Contribution from the Closed Block....... $ 29.7 $ 27.2 $ 65.5 $ 59.3
=============== =============== =============== ===============
</TABLE>
Investment valuation allowances amounted to $14.2 million and $13.8
million on mortgage loans and $2.8 million and $3.7 million on equity real
estate at June 30, 1997 and December 31, 1996, respectively. The adoption
of SFAS No. 121 at January 1, 1996 resulted in the recognition of
impairment losses of $5.6 million on real estate held and used.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 108.4 $ 128.1
Impaired mortgage loans without provision for losses................... .6 .6
----------------- -----------------
Recorded investment in impaired mortgages.............................. 109.0 128.7
Provision for losses................................................... 13.7 12.9
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 95.3 $ 115.8
================= =================
</TABLE>
During the first half of 1997 and of 1996, respectively, the Closed
Block's average recorded investment in impaired mortgage loans was $117.9
million and $143.5 million. Interest income recognized on these impaired
mortgage loans totaled $4.5 million and $5.4 million for the first half of
1997 and of 1996, respectively, including $1.8 million and $2.4 million
recognized on a cash basis.
12
<PAGE>
9) DISCONTINUED OPERATIONS
Summarized financial information for the GIC Segment is as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Mortgage loans on real estate.......................................... $ 919.8 $ 1,111.1
Equity real estate..................................................... 888.0 925.6
Cash and other invested assets......................................... 297.5 474.0
Other assets........................................................... 203.8 226.1
----------------- -----------------
Total Assets........................................................... $ 2,309.1 $ 2,736.8
================= =================
Liabilities
Policyholders liabilities.............................................. $ 1,101.5 $ 1,335.9
Allowance for future losses............................................ 244.9 262.0
Amounts due to continuing operations................................... 808.4 996.2
Other liabilities...................................................... 154.3 142.7
----------------- -----------------
Total Liabilities...................................................... $ 2,309.1 $ 2,736.8
================= =================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Investment income (net of investment
expenses of $24.1, $33.0, $49.6
and $64.3)............................. $ 43.5 $ 60.4 $ 78.4 $ 132.2
Investment gains (losses), net........... 1.0 (6.6) (4.1) (17.6)
Policy fees, premiums and other
income, net............................ - - .1 .1
--------------- --------------- --------------- ---------------
Total revenues........................... 44.5 53.8 74.4 114.7
Benefits and Other Deductions............ 43.4 68.0 90.6 139.3
Earnings credited (losses charged)
to allowance for future losses......... 1.1 (14.2) (16.2) (24.6)
--------------- --------------- --------------- ---------------
Pre-tax loss from operations............. - - - -
Pre-tax earnings from releasing (loss
from strengthening) the allowance
for future losses...................... 1.0 - (4.1) -
Federal income tax (expense) benefit..... (.4) - 1.4 -
--------------- --------------- --------------- ---------------
Earnings (Loss) from Discontinued
Operations............................. $ .6 $ - $ (2.7) $ -
=============== =============== =============== ===============
</TABLE>
The Equitable's quarterly process for evaluating the loss provisions
applies the current period's results of discontinued operations against
the allowance, re-estimates future losses, and adjusts the provisions, if
appropriate. The evaluation performed as of June 30, 1997 resulted in
management's decision to release $1.0 million of the loss provisions,
reducing the reserve strengthening for the six months ended June 30, 1997
to $4.1 million.
13
<PAGE>
Management believes the loss provisions for Wind-Up Annuities and GIC
contracts at June 30, 1997 are adequate to provide for all future losses;
however, the determination of loss provisions continues to involve
numerous estimates and subjective judgments regarding the expected
performance of discontinued operations investment assets. There can be no
assurance the losses provided for will not differ from the losses
ultimately realized. To the extent actual results or future projections of
discontinued operations differ from management's current best estimates
and assumptions underlying the loss provisions, the difference would be
reflected as earnings (loss) from discontinued operations in the
consolidated statements of earnings. In particular, to the extent income,
sales proceeds and holding periods for equity real estate differ from
management's previous assumptions, periodic adjustments to the loss
provisions are likely to result.
Investment valuation allowances amounted to $7.8 million and $9.0 million
on mortgage loans and $13.3 million and $20.4 million on equity real
estate at June 30, 1997 and December 31, 1996, respectively. As of January
1, 1996, the adoption of SFAS No. 121 resulted in a release of existing
valuation allowances of $71.9 million on equity real estate and
recognition of impairment losses of $69.8 million on real estate held and
used.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 79.4 $ 83.5
Impaired mortgage loans without provision for losses................... 1.0 15.0
----------------- -----------------
Recorded investment in impaired mortgages.............................. 80.4 98.5
Provision for losses................................................... 7.8 8.8
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 72.6 $ 89.7
================= =================
</TABLE>
During the first half of 1997 and of 1996, the GIC Segment's average
recorded investment in impaired mortgage loans was $92.6 million and
$136.1 million, respectively. Interest income recognized on these impaired
mortgage loans totaled $3.1 million and $5.0 million for the first half of
1997 and of 1996, respectively, including $2.2 million and $3.8 million
recognized on a cash basis.
Benefits and other deductions included $14.9 million, $29.7 million, $33.9
million and $71.5 million of interest expense related to amounts borrowed
from continuing operations for the second quarter and first half of 1997
and of 1996, respectively.
14
<PAGE>
10) COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Net earnings............................. $ 252.7 $ 115.7 $ 388.7 $ 202.3
Less - dividends on preferred stocks..... (6.6) (6.6) (13.3) (13.3)
Less - effect of assumed exercise of
options of publicly held subsidiaries
assuming no dilution................... (6.8) (1.3) (9.6) (2.8)
--------------- --------------- --------------- ---------------
Net earnings applicable to common
shares - assuming no dilution.......... 239.3 107.8 365.8 186.2
Add - dividends on convertible
preferred stock and interest on
convertible subordinated debt.......... 10.6 10.4 21.0 20.9
Less - incremental effect of assumed
exercise of options of publicly held
subsidiaries assuming full dilution.... (2.2) - (4.3) -
--------------- --------------- --------------- ---------------
Net Earnings Applicable to Common
Shares - Assuming Full Dilution........ $ 247.7 $ 118.2 $ 382.5 $ 207.1
=============== =============== =============== ===============
Weighted average common shares
outstanding - assuming no
dilution(1)............................ 187.0 185.3 186.7 185.1
Add - assumed exercise of stock
options................................ 2.1 1.1 1.9 1.1
Add - assumed conversion of
convertible preferred stock............ 17.8 17.8 17.8 17.8
Add - assumed conversion of
convertible subordinated debt.......... 14.7 14.7 14.7 14.7
--------------- --------------- --------------- ---------------
Weighted Average Shares
Outstanding - Assuming
Full Dilution.......................... 221.6 218.9 221.1 218.7
=============== =============== =============== ===============
<FN>
(1) The Equitable's stock options were not included because their dilutive
effect was less than 3%.
</FN>
</TABLE>
Shares of the Series D Convertible Preferred Stock (or common stock issued
on conversion thereof) are not considered to be outstanding in the
computation of weighted average shares of common stock until the shares
are allocated to fund the obligations for which the SECT was established.
11) RESTRUCTURING COSTS
During the first half of 1997 and of 1996, The Equitable recorded pre-tax
provisions of $42.4 million and $2.6 million, respectively, primarily for
employee termination and exit costs. The amounts paid during the first
half of 1997 totaled $12.0 million. At June 30, 1997, the liabilities
included costs related to employee termination and exit costs, the
termination of operating leases and the consolidation of insurance
operations' service centers and amounted to $72.7 million.
12) LITIGATION
There have been no new material legal proceedings and no material
developments in matters which were previously reported in The Equitable's
Notes to Consolidated Financial Statements for the year ended December 31,
1996, except as follows:
15
<PAGE>
In Bowler, Equitable Life has filed its reply brief, urging summary
judgment on all claims but one. Issues of fact are raised by one
plaintiff's claim (that he was misled by the representation concerning
state approval), and accordingly this claim only could not be resolved on
summary judgment. The summary judgment motion is now under judicial
review.
In Bachman, plaintiff filed its response to the summary judgment motion
and Equitable Life asked permission to file a reply brief in support of
its motion for summary judgment and for oral argument.
In Cole, on April 29, 1997, at a pre-trial conference, the court ordered
that all discovery be completed by October 8, 1997. The Court further
ordered that a Note of Issue (placing the case on the trial calendar) be
filed on or before October 10, 1997, and that on October 14, 1997, the
court would hold a conference to schedule a trial date. The parties have
agreed on a briefing schedule for plaintiffs' motion for class
certification. A hearing on plaintiffs' motion for class certification
will be scheduled, at the discretion of the court, on or after September
12, 1997. The plaintiffs filed their memorandum of law and affidavits in
support of their motion for class certification on June 30, 1997. That
memorandum indicates that plaintiffs seek to certify a class solely on
their breach of contract claim, not their negligent misrepresentation
claim. Discovery as to class certification and as to the merits continues.
In Fletcher, on April 24, 1997, the magistrate granted plaintiffs' remand
motion, and Equitable Life has filed an application with the judge for
reconsideration. Equitable Life's time to answer the complaint has been
extended until 30 days after the court's final resolution of plaintiffs'
remand motion.
In Duncan, plaintiff moved to have the action certified as a nationwide
class action with two plaintiff subgroups: one comprising those alleging
misrepresentations concerning the extent to which their policies were
proper replacement policies, and the other comprising those alleging
misrepresentations concerning the number of years that the annual premium
would need to be paid. Equitable Life will oppose the motion.
Discovery as to class certification has begun.
In Bradley, on March 3, 1997, EVLICO served a notice of appeal of the
court's order denying EVLICO's motion to remove the Bradley action to New
York County and to consolidate or jointly try the Cole and Bradley
actions. The court has scheduled a hearing on plaintiff's motion for class
certification for November 21, 1997. Discovery as to class certification
continues.
In Dillon, on February 24, 1997, Equitable Life and EOC moved to dismiss
the complaint on several grounds. On May 12, 1997, plaintiffs served a
motion for class certification. Discovery as to class certification has
begun.
In Chaviano, plaintiff filed an amended complaint on April 14, 1997. On
July 14, 1997, Equitable Life served a motion to dismiss the amended
complaint or, in the alternative, for summary judgment.
In connection with the previously reported actions relating to Harrah's
Jazz Company and Harrah's Jazz Finance Corp., the parties to these actions
have agreed to a settlement, subject to the approval of the U.S. District
Court for the Eastern District of Louisiana which was granted on July 31,
1997. The settlement is also subject to the approval by the United States
Bankruptcy Court for the Eastern District of Louisiana of proposed
modifications to a confirmed plan of reorganization for Harrah's Jazz
Company and Harrah's Jazz Finance Corp., and the satisfaction or waiver of
all conditions to the effectiveness of the plan. There can be no assurance
of the Bankruptcy Court's approval of the modifications to the plan of
reorganization, or that the conditions to the effectiveness of the plan
will be satisfied or waived. In the opinion of DLJ's management, the
settlement, if approved, will not have a material adverse effect on DLJ's
results of operations or on its consolidated financial condition.
16
<PAGE>
On May 2, 1997, DLJ was named as a defendant in the First Amended
Derivative Complaint in James G. Caven v. Charles R. Miller, et al., an
action in the United States District Court for the Southern District of
Texas. The action is a derivative action allegedly brought on behalf of
Paracelsus Healthcare Corporation ("Paracelsus"), and in turn on behalf of
Champion Healthcare Corporation ("Champion"), in connection with
Champion's merger with Paracelsus on or about August 16, 1996. Other
defendants named in the amended complaint are certain officers and
directors of Champion, Paracelsus, certain officers and directors of
Paracelsus, and Paracelsus' outside auditors. With respect to DLJ, the
amended complaint alleges that DLJ was engaged by Champion to act as its
investment advisor in identifying suitable merger and acquisition
prospects in the healthcare industry, and that DLJ was negligent in
recommending Paracelsus to Champion as a suitable merger partner and in
rendering an opinion to Champion's board of directors that the exchange
ratio of Paracelsus common stock for Champion common stock in the merger
was fair from a financial point of view to holders of Champion common
stock. The amended complaint seeks damages in an unspecified amount,
rescission of the merger, interest, attorney's fees and costs, and other
relief. Due to the early stage of such litigation, based on the
information currently available to it, DLJ's management cannot make an
estimate of loss, if any, or predict whether or not such litigation will
have a material adverse effect on DLJ's results of operations in any
particular period.
On July 15, 1997, in the action relating to the Alliance North American
Government Income Trust, Inc., the court denied plaintiffs' motion for
leave to file an amended complaint and ordered that the case be dismissed.
Plaintiffs have until August 18, 1997 to file an appeal to the Second
Circuit Court of Appeals.
In addition to the matters previously reported and the matters described
above, the Holding Company and its subsidiaries are involved in various
legal actions and proceedings in connection with their businesses. Some of
the actions and proceedings have been brought on behalf of various alleged
classes of claimants and certain of these claimants seek damages of
unspecified amounts. While the ultimate outcome of such matters cannot be
predicted with certainty, in the opinion of management no such matter is
likely to have a material adverse effect on The Equitable's consolidated
financial position or results of operations.
13) SALE OF SUBSIDIARIES
On June 10, 1997, Equitable Life sold Equitable Real Estate ("EREIM")
(other than EQ Services, Inc. and its interest in Column Financial, Inc.)
to Lend Lease Corporation Limited ("Lend Lease"), a publicly traded,
international property and financial services company based in Sydney,
Australia. The total purchase price was $400.0 million and consisted of
$300.0 million in cash and a $100.0 million note maturing in eight years
and bearing interest at the rate of 7.4%, subject to certain adjustments.
The Equitable recognized an investment gain of $162.4 million, net of
Federal income tax of $87.4 million as a result of this transaction.
Equitable Life entered into long-term advisory agreements pursuant to
which EREIM will continue to provide to Equitable Life's General Account
and Separate Accounts substantially the same services, for substantially
the same fees, as provided prior to the sale.
Through June 10, 1997 and the year ended December 31, 1996, respectively,
the businesses sold reported combined revenues of $91.6 million and $226.1
million and combined net earnings of $10.7 million and $30.7 million.
Total combined assets and liabilities as reported at December 31, 1996
were $171.8 million and $130.1 million, respectively.
14) SUBSEQUENT EVENTS
In December 1993, the Holding Company established a SECT to provide a
source of funding for a portion of obligations arising from various
employee compensation and benefits programs of subsidiaries. At that time,
the Holding Company sold 60,000 shares of Series D Preferred Stock to the
SECT. The SECT is required to periodically distribute an amount of Series
D Preferred Stock (or Common Stock issued on conversion thereof) based on
a predetermined formula. In July 1997, 8,040 shares of Series D Preferred
Stock were released from the SECT and were converted into 1.6 million
shares of Common Stock which were sold, resulting in an increase in
shareholders' equity of $54.8 million.
17
<PAGE>
On August 4, 1997, the Holding Company redeemed in full $364.2 million
principal amount of its 6.125% Subordinated Debentures due 2024, 50,017
shares of its Series C and 822,460 shares of its Series E Preferred
Stocks. Upon redemption of all Subordinated Debentures and shares of
Series C and E Preferred Stocks, approximately 32.5 million additional
shares of Common Stock were issued by the Holding Company. Holders of the
Series C and E Preferred Stocks received cash representing dividends
accrued from July 22, 1997, the prior dividend payment date. The Holding
Company paid cash in lieu of any fractional share of Common Stock. As a
result of those transactions, shareholders' equity increased by
approximately $339.6 million.
Supplementary net earnings per share, assuming no dilution and full
dilution, computed as if the transactions discussed above had occurred as
of January 1, 1997 for the first half of 1997 and as of April 1, 1997 for
the second quarter 1997 were $1.72 per share and $1.11 per share,
respectively.
18
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of the consolidated results of operations and financial
condition of The Equitable should be read in conjunction with the Consolidated
Financial Statements and the related Notes to Consolidated Financial Statements
included elsewhere herein, and with the Management's Discussion and Analysis
section included in The Equitable's 1996 Report on Form 10-K. The terms "second
quarter 1997" and "second quarter 1996" refer to the three months ended June 30,
1997 and 1996, respectively. The terms "first half of 1997" and "first half of
1996" refer to the six months ended June 30, 1997 and 1996, respectively.
Closed Block
The contribution from the Closed Block is reported on one line in the
consolidated statements of earnings. The Closed Block includes revenues, benefit
payments, dividends and premium taxes applicable to policies included in the
Closed Block but excludes many costs and expenses associated with operating the
Closed Block and administering the policies included therein. Since many
expenses related to the Closed Block were excluded from the calculation of the
Closed Block contribution, the contribution from the Closed Block does not
represent the actual profitability of the Closed Block.
CONSOLIDATED RESULTS OF OPERATIONS
The following table presents the consolidated results of operations for the
first half of 1997 and of 1996. In this presentation, the contribution of the
Closed Block is combined on a line-by-line basis with the results of operations
outside of the Closed Block. The Insurance Operations analysis, which begins on
page 21, also includes a table presenting the combination of Closed Block
amounts on a line-by-line basis. The Investment Services discussion begins on
page 24. Management's discussion and analysis addresses the combined results of
operations unless noted otherwise.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
(In Millions)
Consolidated Results of Continuing Operations(1)
<S> <C> <C> <C> <C>
Policy fee income and premiums................ $ 551.1 $ 552.8 $ 1,108.5 $ 1,091.4
Net investment income......................... 1,112.2 944.0 2,120.9 1,872.4
Investment gains, net......................... 437.2 198.0 617.5 364.1
Commissions, fees and other income............ 777.8 768.4 1,546.0 1,367.9
--------------- ---------------- --------------- ---------------
Total revenues.............................. 2,878.3 2,463.2 5,392.9 4,695.8
Total benefits and other deductions........... 2,454.2 2,226.0 4,692.7 4,244.5
--------------- ---------------- --------------- ---------------
Earnings from continuing operations
before Federal income taxes,
minority interest and cumulative
effect of accounting change................. 424.1 237.2 700.2 451.3
Federal income taxes.......................... 172.3 72.2 259.7 136.9
Minority interest in net (loss) income of
consolidated subsidiaries................... (.3) 49.3 49.1 89.0
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Cumulative Effect of
Accounting Change........................... $ 252.1 $ 115.7 $ 391.4 $ 225.4
=============== ================ =============== ===============
<FN>
(1) Includes the Closed Block on a line-by-line basis.
</FN>
</TABLE>
19
<PAGE>
Continuing Operations
Compared to the comparable 1996 period, the higher pre-tax results of continuing
operations for the first half of 1997 reflected increased earnings for
Investment Services and Insurance Operations partially offset by higher losses
in the Corporate and Other segment. The increase in Federal income taxes was
attributed to the higher pre-tax results of operations. Minority interest in net
income of consolidated subsidiaries was significantly lower principally due to
the effect of Alliance's write down of the carrying value of intangible assets
associated with the Cursitor acquisition. See "Combined Results of Continuing
Operations by Segment - Investment Services."
The $697.1 million increase in revenues for the first half of 1997 compared to
the corresponding period in 1996 was attributed primarily to a $501.9 million
increase in investment results which included a $252.1 million gross gain on the
sale of EREIM and to a $178.1 million increase in commissions, fees and other
income principally due to increased business activity within Investment
Services.
Net investment income increased $248.5 million for the first half of 1997
principally due to increases of $208.7 million and $42.8 million, respectively,
for Investment Services and Insurance Operations. The Investment Services
increase was attributed to higher business activity while the Insurance
Operations increase was due to higher overall yields on a larger investment
asset base.
Investment gains increased by $253.4 million for the first half of 1997 from
$364.1 million for the same period in 1996. There was a $252.1 million gross
gain recognized on the sale of EREIM during second quarter 1997. Investment
gains at DLJ decreased by $55.6 million with lower dealer and trading gains of
$8.8 million and lower gains of $46.8 million on other equity investments. The
gains on other equity investments in the 1996 period included a gain of $79.4
million on the sale of the remaining shares of a single corporate development
portfolio investment. Also in 1996, a gain of $20.6 million was recognized as a
result of the issuance of Alliance Units to third parties upon completion of the
Cursitor acquisition. There were investment gains of $34.1 million on General
Account Investment Assets as compared to losses of $45.2 million in the first
half of 1996.
For the first half of 1997, total benefits and other deductions increased by
$448.2 million from the comparable period in 1996, reflecting increases in other
operating costs and expenses of $500.0 million and a $11.5 million increase in
interest credited to policyholders partially offset by a $63.3 million decrease
in policyholders' benefits. The increase in other operating costs and expenses
was attributable to increased operating costs of $394.2 million in Investment
Services and a $103.9 million increase in other operating costs and expenses in
Insurance Operations primarily due to increases in DAC amortization and in the
provision for employee termination and exit costs.
Discontinued GIC Segment
The Equitable's quarterly evaluation of the GIC Segment's loss provisions
applies the current period's results of the discontinued operations against the
allowance, re-estimates future losses and adjusts the provisions, if
appropriate. The evaluation performed at June 30, 1997 resulted in management's
decision to release $1.0 million of the loss provisions, reducing the reserve
strengthening for the six months ended June 30, 1997 to $4.1 million. The factor
contributing to the net strengthening in the first half of 1997 was higher than
anticipated investment losses, principally on other equity investments.
Excluding the effect of the aforementioned reserve strengthening, $16.2 million
of pre-tax losses were incurred and charged to the GIC Segment's allowance for
future losses in the first half of 1997 as compared to $24.6 million in the
first half of 1996. Investment results declined by $40.3 million in the first
half of 1997 as compared to the year earlier period. Net investment income
declined by $53.8 million, principally due to lower yield on a significantly
reduced GIC Segment Investment Asset base. The reduction in GIC Segment
investments was primarily due to the repayments of approximately $1.02 billion
of loans from continuing operations during 1996. Investment losses decreased
$13.5 million to $4.1 million in the first half of 1997. There were $1.2 million
of gains on mortgage loans as compared to $2.7 million in losses in the first
half of 1996 and $7.7 million and $2.7 million lower losses on equity real
estate and other equity investments, respectively. Benefits and other deductions
declined by $48.7 million principally due to the aforementioned repayments in
1996 resulting in the decrease in interest expense on lower borrowings from
continuing operations.
20
<PAGE>
COMBINED RESULTS OF CONTINUING OPERATIONS BY SEGMENT
Insurance Operations
The Closed Block is part of Insurance Operations. The following table combines
the Closed Block amounts with the reported results of operations outside of the
Closed Block on a line-by-line basis.
<TABLE>
<CAPTION>
Insurance Operations
(In Millions)
Six Months Ended June 30,
------------------------------------------------------------------
1997
------------------------------------------------
As Closed 1996
Reported Block Combined Combined
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Policy fees, premiums and other income.......... $ 813.3 $ 349.4 $ 1,162.7 $ 1,141.2
Net investment income........................... 1,082.2 278.3 1,360.5 1,317.7
Investment gains (losses), net.................. 28.7 5.4 34.1 (45.2)
Contribution from the Closed Block.............. 65.5 (65.5) - -
------------- -------------- ------------- --------------
Total revenues................................ 1,989.7 567.6 2,557.3 2,413.7
Total benefits and other deductions............. 1,740.2 567.6 2,307.8 2,255.7
------------- -------------- ------------- --------------
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change................... $ 249.5 $ - $ 249.5 $ 158.0
============= ============== ============= ==============
</TABLE>
The earnings from continuing operations in Insurance Operations for the first
half of 1997 reflected an increase of $91.5 million from the year earlier
period. Investment gains in 1997 versus losses in 1996, higher net investment
income, higher policy fees on variable and interest-sensitive life and
individual annuities contracts, lower life insurance mortality and improved DI
and group pension results were offset by higher amortization of deferred
acquisition costs and the provision for employee termination and exit costs. The
improved DI and group pension results reflect the establishment of premium
deficiency reserves in fourth quarter 1996. To the extent periodic results from
these businesses differ from the assumptions used in establishing those
reserves, the resulting earnings (loss) will impact Insurance Operations'
results.
Total revenues increased by $143.6 million primarily due to investment results
which increased by $122.1 million, a $35.9 million increase in policy fees and a
$4.4 million increase in commissions, fees and other income, offset by an $18.8
million decline in premiums. The decrease in premiums principally was due to
lower traditional life and individual health premiums. The increase in Insurance
Operations investment results primarily resulted from investment gains in 1997
as compared to losses in 1996. There were gains of $45.4 million on fixed
maturities, an increase of $10.3 million over the comparable 1996 period and
$6.4 million of gains on the General Account's other equity investments as
compared to $2.4 million during the first half of 1996. Losses on mortgage loans
decreased $48.3 million to $3.0 million, while losses on equity real estate
totaled $14.7 million, $16.7 million lower than in the first half of 1996.
Insurance Operations' $42.8 million increase in investment income principally
was due to $79.8 million higher overall yields on a larger General Account
Investment Asset base, offset by $41.8 million lower interest on lower amounts
due from discontinued operations. Policy fee income rose to $466.6 million due
to higher insurance and annuity account balances.
Total benefits and other deductions for the first half of 1997 rose $52.1
million from the comparable 1996 period as increases of $108.0 million in other
operating expenses and $47.0 million higher DAC amortization were offset by
$51.1 million higher DAC capitalization, the effects of the favorable mortality
experience on variable and interest-sensitive life policies and a decrease in
policy benefits. The increase in operating costs resulted from higher variable
expenses related to increased sales, higher restructuring costs of $39.1 million
and higher costs related to the annuity wholesaler distribution system
implemented in the latter part of 1996. The decrease of $63.3 million in
policyholders' benefits primarily resulted from a lower increase in reserves on
21
<PAGE>
DI business and improved mortality experience on the larger in force book of
business for variable and interest-sensitive life policies. This lower mortality
experience resulted in an increase in the amortization of DAC on variable and
interest-sensitive life policies. Interest credited on policyholders' account
balances in Insurance Operations increased by $11.5 million reflecting
moderately lower crediting rates applied to a larger in force book of business.
Premiums and Deposits - The following table lists premiums and deposits,
including universal life and investment-type contract deposits, for Insurance
Operations' major product lines.
<TABLE>
<CAPTION>
Premiums and Deposits
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Individual annuities
First year.................................. $ 746.5 $ 562.2 $ 1,393.8 $ 1,071.9
Renewal..................................... 344.3 331.7 684.6 661.8
--------------- ---------------- --------------- ---------------
1,090.8 893.9 2,078.4 1,733.7
Variable and interest-sensitive life
First year recurring........................ 45.1 45.2 97.7 90.1
First year optional......................... 57.1 44.3 116.9 84.5
Renewal..................................... 288.9 264.8 630.2 602.9
--------------- ---------------- --------------- ---------------
391.1 354.3 844.8 777.5
Traditional life
First year recurring........................ 3.3 4.8 7.3 9.7
First year optional......................... 0.8 1.2 1.9 2.5
Renewal..................................... 204.2 210.7 409.6 423.5
--------------- ---------------- --------------- ---------------
208.3 216.7 418.8 435.7
Other(1)
First year.................................. 4.3 11.0 8.3 18.1
Renewal..................................... 91.3 98.3 181.7 187.9
--------------- ---------------- --------------- ---------------
95.6 109.3 190.0 206.0
Total first year.............................. 857.1 668.7 1,625.9 1,276.8
Total renewal................................. 928.7 905.5 1,906.1 1,876.1
--------------- ---------------- --------------- ---------------
Total individual insurance and
annuity products............................ 1,785.8 1,574.2 3,532.0 3,152.9
Participating group annuities................. 47.6 57.5 94.9 118.4
Conversion annuities.......................... (0.6) 0.0 1.5 0.0
Association plans............................. 37.3 27.0 68.7 50.2
--------------- ---------------- --------------- ---------------
Total group pension products.................. 84.3 84.5 165.1 168.6
Total Premiums and Deposits................... $ 1,870.1 $ 1,658.7 $ 3,697.1 $ 3,321.5
=============== ================ =============== ===============
<FN>
(1) Includes health insurance and reinsurance assumed.
</FN>
</TABLE>
22
<PAGE>
First year premiums and deposits for individual insurance and annuity products
for the first half of 1997 increased from prior year's level by $349.1 million
primarily due to higher sales of individual annuities and variable and
interest-sensitive life products. Renewal premiums and deposits increased by
$30.0 million during the first half of 1997 over the prior year period as
increases in the larger block of variable and interest-sensitive life and
individual annuities policies were partially offset by decreases in traditional
life and other product lines. Traditional life premiums and deposits for the
first six months of 1997 decreased from the prior year's comparable period by
$16.9 million due to the marketing focus on variable and interest-sensitive
products and the decline in the traditional life book of business. The 30.0%
increase in first year individual annuities premiums and deposits in 1997 over
the prior year period included a $355.9 million increase in sales of a new line
of retirement annuity products sold through both the career agency force and
complementary distribution channels. First year variable and interest-sensitive
life premiums and deposits for the first half of 1997 included $39.8 million of
premiums and deposits from the sale of two large COLI cases. Management believes
the strategic positioning of The Equitable's insurance operations has begun to
have a positive effect on premium growth. Particular emphasis will continue to
be devoted to the support of the new needs based selling approach and the
establishment of consultative financial services as the cornerstone of the sales
process. Changes in agent recruitment and training practices have resulted in
retention and productivity improvements which, management believes, are
contributing to premium results.
Surrenders and Withdrawals - The following table summarizes Insurance
Operations' surrenders and withdrawals, including universal life and
investment-type contract withdrawals, for major individual insurance and
annuities' product lines.
<TABLE>
<CAPTION>
Surrenders and Withdrawals
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Individual Insurance and Annuities'
Product Lines:
Individual annuities.......................... $ 569.1 $ 588.2 $ 1,163.5 $ 1,198.7
Variable and interest-sensitive life.......... 123.3 116.7 246.5 229.0
Traditional life.............................. 91.8 92.9 197.4 186.5
--------------- ---------------- --------------- ---------------
Total......................................... $ 784.2 $ 797.8 $ 1,607.4 $ 1,614.2
=============== ================ =============== ===============
</TABLE>
Policy and contract surrenders and withdrawals decreased $6.8 million during the
first half of 1997 compared to the same period in 1996. Surrenders of variable
and interest-sensitive products increased by $17.5 million due to the increased
size of the book of business. The $35.2 million decrease in individual annuities
surrenders was principally due to decreased surrenders of Equi-Vest contracts.
Surrenders and withdrawals in 1996 included $88.0 million paid in January 1996
for two small pension clients who terminated their contracts.
23
<PAGE>
Investment Services
The following table summarizes the results of operations for Investment
Services.
<TABLE>
<CAPTION>
Investment Services
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Third party commissions and fees.............. $ 735.7 $ 730.1 $ 1,459.1 $ 1,290.8
Affiliate fees................................ 27.6 32.0 58.3 62.1
Other income(1)............................... 817.0 484.0 1,313.4 920.5
--------------- ---------------- --------------- ---------------
Total revenues................................ 1,580.3 1,246.1 2,830.8 2,273.4
Total costs and expenses...................... 1,247.0 1,053.8 2,315.8 1,921.6
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change................. $ 333.3 $ 192.3 $ 515.0 $ 351.8
=============== ================ =============== ===============
<FN>
(1) Includes net dealer and trading gains, investment results and other items.
</FN>
</TABLE>
On June 10, 1997, Equitable Life sold EREIM to Lend Lease for $300.0 million in
cash and a $100.0 million eight year note, subject to certain adjustments.
Equitable Life entered into long-term advisory agreements whereby the businesses
sold will continue to provide services to Equitable Life's General Account and
Separate Accounts. The Equitable recognized a gain on this sale of $249.8
million (net of $2.3 million related state income tax). See Note 13 to
Consolidated Financial Statements for further information. EREIM's results from
operations continue to be included in Investment Services' results up to the
date of sale.
Also during the second quarter 1997, Alliance wrote down the recorded value of
goodwill and contracts associated with its acquisition of Cursitor by $120.9
million. This charge reflected Alliance management's view that Cursitor's
continuing decline in assets under management and its reduced profitability,
resulting from relative investment underperformance, no longer supported
Cursitor's carrying value. Cursitor's assets under management declined from
approximately $10.0 billion at the date of acquisition to $5.1 billion at June
30, 1997. At June 30, 1997, The Equitable owned approximately 58% of Alliance.
The impact of Alliance's charge on The Equitable's net earnings was
approximately $59.5 million.
For the first half of 1997, pre-tax earnings for Investment Services increased
by $163.2 million from the year earlier period primarily due to the gain on the
sale of EREIM and higher earnings for DLJ partially offset by lower earnings at
Alliance reflecting the effect of the abovementioned write down. DLJ's earnings
were higher in 1997 largely due to strong merger and acquisition activity,
private fund capital raising assignments, higher investment banking fees and the
growth in trading volume on most major exchanges. Total segment revenues were up
$557.4 million principally due to higher revenues at DLJ. Other income for the
first half of 1997 included a pre-tax gain of $252.1 million from the sale of
EREIM. Other income for the first half of 1996 included a gross gain of $20.6
million on the issuance of Alliance Units during the first quarter of that year
in connection with the Cursitor transaction.
Total costs and expenses increased by $394.2 million for the first half of 1997
as compared to the comparable period in 1996 principally reflecting increases in
compensation and interest and other expenses at DLJ due to increased activity
and the aforementioned writedown of intangible assets at Alliance of $120.9
million.
24
<PAGE>
The following table summarizes results of operations by business unit.
<TABLE>
<CAPTION>
Investment Services
Pre-tax Results of Operations by Business Unit
(In Millions)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Business Unit:
DLJ(1)...................................... $ 152.0 $ 145.9 $ 283.0 $ 244.7
Alliance.................................... (62.8) 48.0 (8.7) 94.1
Equitable Real Estate(2).................... 8.3 9.0 14.8 16.5
Gain on sale of EREIM(3).................... 249.8 - 249.8 -
Consolidation/elimination(4)(5)............. (14.0) (10.6) (23.9) (3.5)
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change(6).............. $ 333.3 $ 192.3 $ 515.0 $ 351.8
=============== ================ =============== ===============
<FN>
(1) Excludes amortization expense of $1.1 million, $1.0 million, $2.1 million
and $1.9 million for the second quarter and first half of 1997 and of 1996,
respectively, on goodwill and intangible assets related to Equitable Life's
acquisition of DLJ in 1985, which are included in consolidation/elimination.
(2) Includes results of operations through June 10, 1997, the sale date of EREIM
to Lend Lease.
(3) Gain on the sale of EREIM is net of $2.3 million related state income tax.
(4) Includes interest expense of $2.9 million, $2.9 million, $5.9 million and
$6.1 million related to intercompany debt issued by intermediate holding
companies payable to Equitable Life for the second quarter and first half of
1997 and of 1996, respectively.
(5) Includes a gain of $16.9 million (net of $3.7 million related state income
tax) for the six months ended June 30, 1996 on issuance of Alliance Units to
third parties upon the completion of the Cursitor transaction during the first
quarter of 1996.
(6) Pre-tax minority interest related to DLJ was $41.1 million, $42.4 million,
$80.0 million and $72.3 million for the second quarter and first half of 1997
and of 1996, respectively, and $(26.7) million, $20.5 million, $(3.8) million
and $39.8 million for Alliance for the same respective periods.
</FN>
</TABLE>
DLJ - DLJ's earnings from operations for the first half of 1997 were $283.0
million, up $38.3 million from the comparable prior year period. Revenues
increased $275.5 million to $2.04 billion primarily due to increased net
investment income of $209.0 million, higher fee income of $138.1 million, higher
commissions of $27.6 million partially offset by lower underwriting revenues of
$52.5 million and lower gains of $46.7 million on the corporate development
portfolio. DLJ's expenses were $1.76 billion for the first half of 1997, up
$237.2 million from the comparable prior year period primarily due to higher
interest expense of $112.7 million and a $56.8 million increase in compensation
and commissions and $12.1 million higher brokerage and exchange fees.
Substantially all of DLJ's activities related to derivatives are, by their
nature, trading activities which are primarily for the purpose of customer
accommodation. DLJ enters into certain contractual agreements referred to as
derivatives or off-balance-sheet financial instruments involving futures,
forwards and options. DLJ's derivative activities are not as extensive as many
of its competitors. Instead, DLJ's derivative activities consist of writing OTC
options to accommodate its customers' needs, trading in forward contracts in
U.S. government and agency issued or guaranteed securities and engaging in
25
<PAGE>
futures contracts on equity based indices, interest rate instruments and
currencies, and issuing structured notes. DLJ's involvement in swap contracts is
not significant. As a result, DLJ's involvement in derivatives products is
related primarily to revenue generation through the provision of products to its
clients as opposed to hedges against DLJ's own positions.
Options contracts are typically written for a duration of less than thirteen
months. Revenues from these activities (net of related interest expense) were
approximately $42.2 million and $31.9 million for the first half of 1997 and
1996, respectively. Option writing revenues are primarily from the amortization
of option premiums. The increase in revenues primarily resulted from higher
levels of activity, both in size and number of transactions, by DLJ's
institutional customers and favorable market conditions.
The notional value of written options contracts outstanding was approximately
$6.5 billion and $3.5 billion at June 30, 1997 and 1996, respectively. The
overall increase in the notional value of all options was primarily due to
increases in customer activity related to U.S. government obligations. Such
written options contracts are substantially covered by various financial
instruments that DLJ had purchased or sold as principal.
As part of DLJ's trading activities, including trading activities in the related
cash market instruments, DLJ enters into forward and futures contracts primarily
involving securities, foreign currencies, indices and forward rate agreements,
as well as options on futures contracts. Such forward and futures contracts are
entered into as part of DLJ's covering transactions and are generally not used
for speculative purposes.
Net trading losses on forward contracts were $(47.7) million and $(39.1) million
and net trading (losses) gains on futures contracts were $(25.7) million and
$8.5 million for the first six months of 1997 and 1996, respectively.
Treated as off-balance-sheet items, the notional contract and market values of
the forward and futures contracts at June 30, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
June 30, 1997 June 30, 1996
---------------------------------- -----------------------------------
Purchases Sales Purchases Sales
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Forward Contracts
(Notional Contract Value).............. $ 15,622 $ 20,572 $ 17,102 $ 18,446
=============== =============== =============== ===============
Futures Contracts and Options on
Futures Contracts (Market Value)....... $ 2,669 $ 5,668 $ 803 $ 590
=============== =============== =============== ===============
</TABLE>
Structured notes are customized derivative instruments in which the amount of
interest or principal paid on a debt obligation is linked to the return on
specific cash market financial instruments. At June 30, 1997 and 1996, DLJ had
issued long-term structured notes totaling $188.1 million and $143.1 million
outstanding, respectively. DLJ covers its obligations on structured notes
primarily by purchasing and selling the securities to which the value of its
structured notes are linked.
Alliance - Alliance's loss from operations for the first half of 1997 was $8.7
million, a decrease from the $94.1 million of earnings from the prior year's
comparable period. Revenues totaled $445.0 million for the first six months of
1997, an increase of $67.3 million from the comparable period in 1996, due to
increased investment advisory and service fees. Alliance's costs and expenses
increased $170.1 million for the first half of 1997 primarily due to the
abovementioned $120.9 million writedown of intangible assets and to increases of
$19.0 million in employee compensation and benefits.
Equitable Real Estate - This business' earnings from operations included the
results of EREIM through June 10, 1997, the date of sale. Equitable Real
Estate's earnings from operations were $14.8 million for the first six months of
1997, down $1.7 million from the preceding year's comparable period. Revenues
declined $10.4 million to $91.6 million for the first half of 1997 when compared
to the 1996 comparable period. Operating expenses similarly decreased by $8.7
million totaling $76.8 million for the first half of 1997.
26
<PAGE>
Fees From Assets Under Management - As the following table illustrates, third
party clients continued to represent an important source of revenues and
earnings.
<TABLE>
<CAPTION>
Fees and Assets Under Management
(In Millions)
At or For the
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Fees:
Third Party................................. $ 192.2 $ 184.9 $ 396.9 $ 351.4
Equitable................................... 33.4 28.9 61.1 56.1
--------------- ---------------- --------------- ---------------
Total......................................... $ 225.6 $ 213.8 $ 458.0 $ 407.5
=============== ================ =============== ===============
Assets Under Management:
Third Party(1).............................. $ 193,898 $ 167,580
Equitable................................... 57,528 50,058
--------------- ---------------
Total......................................... $ 251,426 $ 217,638
=============== ===============
<FN>
(1) Included Separate Account assets under management, as well as assets managed
on behalf of other AXA affiliates.
</FN>
</TABLE>
Fees from assets under management increased for the first half of 1997 from the
prior year's comparable period principally as a result of growth in assets under
management for third parties. Alliance's third party assets under management
increased by $29.14 billion primarily due to the market appreciation and mutual
fund sales.
For the first half of 1997 and full year 1996, fees received for assets under
management by EREIM totaled $94.1 million and $229.9 million, respectively, of
which $63.7 million and $139.6 million, respectively, were received from third
parties.
CONTINUING OPERATIONS INVESTMENT PORTFOLIO
The continuing operations investment portfolio is composed of the General
Account investment portfolio and investment assets of the Holding Company Group.
The General Account's portfolio is discussed first, followed by a separate
discussion on the Holding Company Group investments.
27
<PAGE>
General Account Investment Portfolio
The following table reconciles the consolidated balance sheet asset amounts to
General Account Investment Asset amounts.
<TABLE>
<CAPTION>
General Account Investment Assets
Carrying Values at June 30, 1997
(In Millions)
General
Balance Holding Account
Sheet Closed Company Investment
Balance Sheet Captions: Total Block Other(1) Group (2) Assets
- ----------------------------------- ---------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Fixed maturities:
Available for sale.............. $ 19,289.5 $ 3,964.0 $ (131.6) $ 401.3 $ 22,983.8
Held to maturity................ 162.0 0.0 0.0 162.0 0.0
Trading account securities........ 17,637.3 0.0 17,637.3 0.0 0.0
Securities purchased under
resale agreements............... 25,722.2 0.0 25,722.2 0.0 0.0
Mortgage loans on real estate..... 2,751.0 1,423.4 0.0 0.0 4,174.4
Equity real estate................ 3,395.6 195.0 (17.8) 0.0 3,608.4
Policy loans...................... 2,345.3 1,733.1 0.0 0.0 4,078.4
Other equity investments.......... 1,151.4 107.4 253.4 7.9 997.5
Other invested assets............. 134.8 87.2 220.1 (3.9) 5.8
---------------- ------------- --------------- -------------- -------------
Total investments............... 72,589.1 7,510.1 43,683.6 567.3 35,848.3
Cash and cash equivalents......... 996.0 (103.8) 328.7 40.3 523.2
---------------- ------------- --------------- -------------- -------------
Total............................. $ 73,585.1 $ 7,406.3 $ 44,012.3 $ 607.6 $ 36,371.5
================ ============= =============== ============== =============
<FN>
(1) Assets listed in the "Other" category principally consist of assets held in
portfolios other than the Holding Company Group and the General Account
(primarily securities held in inventory or for resale by DLJ) which are not
managed as part of General Account Investment Assets and certain
reclassifications and intercompany adjustments. The "Other" category is deducted
in arriving at the General Account Investment Assets.
(2) The Holding Company Group investment assets are not managed as part of
General Account Investment Assets and are deducted in arriving at General
Account Investment Assets.
</FN>
</TABLE>
The General Account Investment Assets presentation set forth in the following
pages includes the Closed Block's investments on a line-by-line basis.
Management believes it is appropriate to discuss the information on a combined
basis in view of the similar asset quality characteristics of major asset
categories in the portfolios.
Writedowns on fixed maturities were $9.0 million and $22.5 million for the first
six months of 1997 and 1996, respectively; writedowns on equity real estate
during the first half of 1997 were $0.2 million. The following table shows asset
valuation allowances and additions to and deductions from such allowances for
mortgages and equity real estate for the first six months of 1997 and 1996.
28
<PAGE>
<TABLE>
<CAPTION>
General Account Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
--------------- --------------- --------------
<S> <C> <C> <C>
June 30, 1997
Assets Outside of the Closed Block:
Beginning balances............................................ $ 50.4 $ 86.7 $ 137.1
Additions..................................................... 20.6 20.9 41.5
Deductions(2)................................................. (24.1) (22.4) (46.5)
--------------- --------------- --------------
Ending Balances............................................... $ 46.9 $ 85.2 $ 132.1
=============== =============== ==============
Closed Block:
Beginning balances............................................ $ 13.8 $ 3.7 $ 17.5
Additions..................................................... 6.4 0.5 6.9
Deductions(2)................................................. (6.0) (1.4) (7.4)
--------------- --------------- --------------
Ending Balances............................................... $ 14.2 $ 2.8 $ 17.0
=============== =============== ==============
Total:
Beginning balances............................................ $ 64.2 $ 90.4 $ 154.6
Additions..................................................... 27.0 21.4 48.4
Deductions(2)................................................. (30.1) (23.8) (53.9)
--------------- --------------- --------------
Ending Balances............................................... $ 61.1 $ 88.0 $ 149.1
=============== =============== ==============
June 30, 1996
Total:
Beginning balances............................................ $ 83.9 $ 264.1 $ 348.0
SFAS No. 121 release(1)....................................... - (152.4) (152.4)
Additions..................................................... 50.1 37.8 87.9
Deductions(2)................................................. (0.5) (84.8) (85.3)
--------------- --------------- --------------
Ending Balances............................................... $ 133.5 $ 64.7 $ 198.2
=============== =============== ==============
<FN>
(1) As a result of the adoption of SFAS No. 121 at January 1, 1996, $152.4
million of allowances on assets held for investment were released and impairment
losses of $149.6 million were recognized on real estate held and used.
(2) Primarily reflected releases of allowances due to asset dispositions and
writedowns.
</FN>
</TABLE>
29
<PAGE>
General Account Investment Assets by Category
The following table shows the amortized cost, valuation allowances and the net
amortized cost of the major categories of General Account Investment Assets at
June 30, 1997 and the net amortized cost at December 31, 1996.
<TABLE>
<CAPTION>
General Account Investment Assets
(Dollars In Millions)
June 30, 1997 December 31, 1996
----------------------------------------------------------- -----------------------------
% of % of
Net Total Net Net Total Net
Amortized Valuation Amortized Amortized Amortized Amortized
Cost Allowances Cost Cost Cost Cost
--------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities(1).......... $ 22,541.3 $ - $ 22,541.3 62.7% $ 21,711.6 62.1%
Mortgages.................... 4,235.5 61.1 4,174.4 11.6 4,513.7 12.9
Equity real estate........... 3,696.4 88.0 3,608.4 10.0 3,518.6 10.1
Other equity investments..... 997.5 - 997.5 2.8 965.1 2.8
Policy loans................. 4,078.4 - 4,078.4 11.4 3,962.0 11.3
Cash and short-term
investments(2)............. 529.0 - 529.0 1.5 277.7 0.8
--------------- ------------- ------------- ------------- ------------- -------------
Total........................ $ 36,078.1 $ 149.1 $ 35,929.0 100.0% $ 34,948.7 100.0%
=============== ============= ============= ============= ============= =============
<FN>
(1) Excludes unrealized gains of $442.5 million and $432.9 million in fixed
maturities classified as available for sale at June 30, 1997 and December 31,
1996, respectively.
(2) Comprised of "Cash and cash equivalents" and short-term investments included
within the "Other invested assets" caption on the consolidated balance sheet.
</FN>
</TABLE>
Management has a policy of not investing substantial new funds in equity real
estate except to safeguard values in existing investments or to honor
outstanding commitments. It is management's continuing objective to reduce the
size of the equity real estate portfolio relative to total assets over the next
several years on an opportunistic basis. Management anticipates that reductions
will depend on real estate market conditions, the level of mortgage foreclosures
and the level of expenditures required to fund necessary or desired improvements
to properties.
30
<PAGE>
Investment Results of General Account Investment Assets
<TABLE>
<CAPTION>
Investment Results by Asset Category
(Dollars In Millions)
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------------- --------------------------------------------------
1997 1996 1997 1996
------------------------ ------------------------ ------------------------ ------------------------
(1) (1) (1) (1)
Yield Amount Yield Amount Yield Amount Yield Amount
---------- ------------- ---------- ------------- ------------------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Income.............. 8.04% $ 446.5 7.92% $ 394.8 8.00% $ 882.4 7.91% $ 778.2
Investment
Gains/(Losses).... 0.25% 14.1 0.19% 9.6 0.42% 45.4 0.36% 35.1
---------- ------------- ---------- ------------- ------------------------ ---------- -------------
Total............... 8.29% $ 460.6 8.11% $ 404.4 8.42% $ 927.8 8.27% $ 813.3
Ending Assets....... $ 22,541.3 $ 20,304.9 $ 22,541.3 $ 20,304.9
Mortgages:
Income.............. 9.76% $ 103.8 8.99% $ 109.7 9.61% $ 208.5 8.87% $ 218.3
Investment
Gains/(Losses).... (0.43)% (4.6) (2.02)% (24.6) (0.14)% (3.0) (2.09)% (51.3)
---------- ------------- ---------- ------------- ------------------------------------ -------------
Total............... 9.33% $ 99.2 6.97% $ 85.1 9.47% $ 205.5 6.78% $ 167.0
Ending Assets....... $ 4,174.4 $ 4,828.1 $ 4,174.4 $ 4,828.1
Equity Real
Estate (2):
Income.............. 2.83% $ 19.4 2.46% $ 19.1 2.46% $ 33.6 2.87% $ 45.0
Investment
Gains/(Losses).... (0.61)% (4.2) (1.63)% (12.7) (1.08)% (14.7) (2.00)% (31.4)
---------- ------------- ----------- ------------- ------------------------------------ -------------
Total............... 2.22% $ 15.2 0.83% $ 6.4 1.38% $ 18.9 0.87% $ 13.6
Ending Assets....... $ 2,771.5 $ 3,100.1 $ 2,771.5 $ 3,100.1
Other Equity
Investments:
Income.............. 18.92% $ 46.1 16.03% $ 38.3 13.61% $ 66.1 15.79% $ 70.4
Investment
Gains/(Losses).... 2.71% 6.6 2.68% 6.4 1.32% 6.4 0.53% 2.4
---------- ------------- ----------- ------------- ------------------------------------ -------------
Total............... 21.63% $ 52.7 18.71% $ 44.7 14.93% $ 72.5 16.32% $ 72.8
Ending Assets....... $ 997.5 $ 961.6 $ 997.5 $ 961.6
Policy Loans:
Income.............. 7.00% $ 71.1 6.95% $ 67.3 6.96% $ 140.1 6.90% $ 132.4
Ending Assets....... $ 4,078.4 $ 3,891.1 $ 4,078.4 $ 3,891.1
Cash and Short-term
Investments:
Income.............. 7.78% $ 11.7 5.00% $ 8.3 9.85% $ 24.3 8.13% $ 30.9
Ending Assets....... $ 529.0 $ 529.0 $ 529.0 $ 529.0
Total:
Income.............. 8.02% $ 698.6 7.63% $ 637.5 7.83% $ 1,355.0 7.68% $ 1,275.2
Investment
Gains/(Losses).... 0.14% 11.9 (0.25)% (21.3) 0.20% 34.1 (0.28)% (45.2)
---------- ------------- ----------- ------------- ------------------------------------ -------------
Total(3)............ 8.16% $ 710.5 7.38% $ 616.2 8.03% $ 1,389.1 7.40% $ 1,230.0
Ending Assets....... $ 35,092.1 $ 33,614.8 $ 35,092.1 $ 33,614.8
<FN>
(1) Yields have been annualized and calculated based on the quarterly average
asset carrying values excluding unrealized gains (losses) in fixed maturities.
Annualized yields are not necessarily indicative of a full year's results.
31
<PAGE>
(2) Equity real estate carrying values are shown net of third party debt and
minority interest in real estate of $836.9 million and $840.6 million as of June
30, 1997 and 1996, respectively. Equity real estate income is shown net of
operating expenses, depreciation, third party interest expense and minority
interest. Third party interest expense and minority interest totaled $12.5
million, $14.0 million, $25.8 million and $28.3 million for the three months and
the six months ended June 30, 1997 and 1996, respectively.
(3) Total yields are shown before deducting investment fees paid to investment
managers (which include asset management, acquisition, disposition, accounting
and legal fees). If such fees had been deducted, total yields would have been
7.86%, 7.11%, 7.74% and 7.13% for the three months and the six months ended June
30, 1997 and 1996, respectively.
</FN>
</TABLE>
For the first half of 1997, General Account investment results were up $159.1
million from the year earlier period reflecting higher income on a higher asset
base and investment gains as compared to losses in the prior period. On an
annualized basis, total investment yield increased to 8.03% from 7.40%.
Investment income increased by $79.8 million or 6.3%, resulting in an increase
in the annualized income yield to 7.83% from 7.68%. Excluding SFAS No. 121
related permanent impairment writedowns of $149.6 million and releases of
valuation allowances totaling $152.4 million relating to equity real estate in
1996, additions to asset valuation allowances and writedowns of fixed maturities
and equity real estate were $57.6 million in the first six months of 1997
compared to $110.4 million in the first half of 1996.
Total investment results for fixed maturities increased $114.5 million or 14.1%
for the first half of 1997 compared to the year earlier period. Investment
income increased by $104.2 million reflecting a higher asset base, primarily
from reinvesting nearly all available funds into fixed maturities. Investment
gains were $45.4 million for the first half of 1997 compared to $35.1 million in
1996. Writedowns on fixed maturities were $9.0 million in the first half of 1997
as compared to $22.5 million in the comparable period of 1996. Total investment
results on mortgages increased by $38.5 million or 23.1% in the first half of
1997 compared to the same period a year ago largely due to fewer additions to
asset valuation allowances. Equity real estate investment results were $5.3
million higher during the first six months of 1997 than the year earlier period
reflecting fewer additions to asset valuation allowances.
Fixed Maturities. Fixed maturities consist of publicly traded debt securities,
privately placed debt securities and small amounts of redeemable preferred
stock, which represented 73.6%, 25.8% and 0.6%, respectively, of the amortized
cost of this asset category at June 30, 1997.
<TABLE>
<CAPTION>
Fixed Maturities By Credit Quality
(Dollars In Millions)
June 30, 1997 December 31, 1996
Rating Agency --------------------------------------- ---------------------------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
------ ---------------------- --------------- --------- ------------- --------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1-2 Aaa/Aa/A and Baa...... $ 19,700.2(1) 87.4% $ 20,015.1 $ 18,994.8(1) 87.5% $ 19,334.0
3-6 Ba and lower.......... 2,697.8(2) 12.0 2,822.3 2,575.2(2) 11.9 2,665.7
------------ ---------- --------------- ------------ ---------- -------------
Subtotal........................ 22,398.0 99.4 22,837.4 21,570.0 99.4 21,999.7
Redeemable preferred stock
and other..................... 143.3 .6 146.4 141.6 .6 144.8
------------ ---------- --------------- ------------ ----------- -------------
Total........................... $ 22,541.3 100.0% $ 22,983.8 $ 21,711.6 100.0% $ 22,144.5
============ ========== =============== ============ =========== =============
<FN>
(1) Includes Class B Notes with an amortized cost of $20.8 million and $67.0
million at June 30, 1997 and December 31, 1996, respectively, eliminated in
consolidation.
(2) Includes Class B Notes with an amortized cost of $100.0 million, eliminated
in consolidation.
</FN>
</TABLE>
32
<PAGE>
At June 30, 1997, The Equitable held CMOs with an amortized cost of $2.39
billion, including $2.28 billion in publicly traded CMOs. About 62.0% of the
public CMO holdings were collateralized by GNMA, FNMA and FHLMC securities.
Approximately 38.5% of the public CMO holdings were in PAC bonds. At June 30,
1997, IO strips amounted to $8.7 million at amortized cost. There were no
holdings of PO strips at that date. In addition, at June 30, 1997, The Equitable
held $2.36 billion of mortgage pass-through securities (GNMA, FNMA or FHLMC
securities) and also held $492.7 million of Aa or higher rated public asset
backed securities, primarily backed by home equity mortgages, airline and other
equipment, and credit card receivables.
<TABLE>
<CAPTION>
Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
June 30, December 31,
1997 1996
--------------- -----------------
<S> <C> <C>
FIXED MATURITIES.............................................................. $ 22,541.3 $ 21,711.6
Problem fixed maturities...................................................... 22.9 50.6
Potential problem fixed maturities............................................ .5 .5
Restructured fixed maturities(1).............................................. 2.9 3.4
<FN>
(1) Excludes restructured fixed maturities of $2.5 million that are shown as
problems at both June 30, 1997 and December 31, 1996; there were no restructured
fixed maturities that are shown as potential problems at June 30, 1997 nor at
December 31, 1996.
</FN>
</TABLE>
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
At June 30, 1997, commercial mortgages totaled $2.52 billion (59.4% of the
amortized cost of the category), agricultural loans were $1.71 billion (40.5%)
and residential loans were $3.1 million (.1%).
<TABLE>
<CAPTION>
Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
June 30, December 31,
1997 1996
--------------- -----------------
<S> <C> <C>
COMMERCIAL MORTGAGES.......................................................... $ 2,518.9 $ 2,901.2
Problem commercial mortgages.................................................. 70.8 11.3
Potential problem commercial mortgages........................................ 141.0 425.7
Restructured commercial mortgages(1).......................................... 233.0 269.3
VALUATION ALLOWANCES.......................................................... 61.1 64.2
AGRICULTURAL MORTGAGES........................................................ $ 1,713.5 $ 1,672.7
Problem agricultural mortgages................................................ 14.7 5.4
Potential problem agricultural mortgages...................................... - -
Restructured agricultural mortgages........................................... 1.2 2.0
VALUATION ALLOWANCES.......................................................... - -
<FN>
(1) Excludes restructured commercial mortgages of $40.0 million and $1.7 million
that are shown as problems at June 30, 1997 and December 31, 1996, respectively,
and excludes $38.3 million and $229.5 million of restructured commercial
mortgages that are shown as potential problems at June 30, 1997 and December 31,
1996, respectively.
</FN>
</TABLE>
33
<PAGE>
Problem commercial mortgages increased by $59.5 million from December 31, 1996
to June 30, 1997 as previously identified potential problems became delinquent.
Potential problem loans declined as mortgages were reclassified to performing
status and problem. During the first six months of 1997, the amortized cost of
foreclosed commercial mortgages totaled $153.5 million with a $1.5 million
reduction in amortized cost required at the time of foreclosure.
The original weighted average coupon rate on the $233.0 million of restructured
mortgages was 9.7%. As a result of these restructurings, the restructured
weighted average coupon rate was 8.6% and the restructured weighted average cash
payment rate was 8.2%. The foregone interest on restructured commercial
mortgages (including restructured commercial mortgages presented as problem or
potential problem commercial mortgages) for the first six months of 1997 was
$1.6 million.
At June 30, 1997, problem commercial mortgages were classified into the
following property types: retail ($69.1 million or 97.6%) and apartment ($1.7
million or 2.4%). Their distribution by state was: New York ($38.3 million or
54.1%), Massachusetts ($26.8 million or 37.9%) and Mississippi ($4.0 million or
5.6%). Potential problem commercial mortgages were classified by property type
as: retail ($86.4 million or 61.3%), industrial ($27.3 million or 19.4%), office
($21.0 million or 14.9%) and hotel ($5.4 million or 3.8%). By state, their
distribution was: New York ($63.9 million or 45.3%), Pennsylvania ($22.7 million
or 16.1%), Puerto Rico ($18.7 million or 13.3%) and Virginia ($16.4 million or
11.6%). No other state had 5.0% or more of the total.
At June 30, 1997 and 1996, management identified impaired commercial loans as
defined under SFAS No. 114 with a carrying value of $269.7 million and $595.8
million, respectively. The provision for losses for these impaired mortgage
loans was $56.9 million and $122.1 million at June 30, 1997 and 1996,
respectively. Income earned on these loans in the first six months of 1997 and
1996 was $13.7 million and $26.1 million, respectively, including cash received
of $12.8 million and $20.9 million, respectively.
For the first six months of 1997, scheduled principal amortization payments and
prepayments on commercial mortgage loans received aggregated $278.4 million. In
addition, during the first six months of 1997, $299.6 million of commercial
mortgage loan maturity payments were scheduled, of which $51.9 million were paid
as due. Of the amount not paid, $125.3 million were foreclosed, $117.8 million
were granted short term extensions of up to six months, $4.6 million were
extended for a weighted average of 3.0 years at a weighted average interest rate
of 9.65% and none were delinquent or in default for non-payment of principal.
Equity Real Estate. As of June 30, 1997, on the basis of amortized cost, the
equity real estate category included $2.62 billion (or 70.8%) acquired as
investment real estate and $1.08 billion (or 29.2%) acquired through or in lieu
of foreclosure (including in-substance foreclosures).
Real estate properties with amortized costs of $130.1 million and $247.0 million
were sold during the first six months of 1997 and 1996, respectively. In the
first half of 1997 and 1996, respectively, gains of $4.4 million and $2.5
million were recognized on equity real estate which was sold.
At June 30, 1997 and 1996, respectively, allowances totaling $88.0 million and
$64.7 million were held on properties identified as available for sale with
amortized costs of $429.1 million and $375.4 million.
At June 30, 1997, the vacancy rate for The Equitable's office properties was
13.1% in total, with a vacancy rate of 9.9% for properties acquired as
investment real estate and 23.1% for properties acquired through foreclosure.
The national commercial office vacancy rate was 11.6% (as of March 31, 1997) as
measured by CB Commercial.
Holding Company Group Investment Portfolio - Continuing Operations
For the first half of 1997, Holding Company Group investment results were $23.2
million, as compared to $27.8 million in the year earlier period. The decrease
principally was due to lower investment income on the Holding Company's smaller
fixed maturities portfolio.
34
<PAGE>
At June 30, 1997, the Holding Company Group investment portfolio's $607.7
million carrying value was made up of $563.3 million of fixed maturities ($396.0
million with an NAIC 1 rating), $36.5 million of cash and short-term investments
and $7.9 million of other equity investments. At December 31, 1996, the
portfolio's carrying value was $705.7 million, which included $657.7 million of
fixed maturities ($444.9 million with an NAIC 1 rating), $40.6 million of cash
and short-term investments and $7.4 million of other equity investments.
<TABLE>
<CAPTION>
Holding Company Group Fixed Maturities
By Credit Quality
(Dollars In Millions)
June 30, 1997 December 31, 1996
Rating Agency --------------------------------------- ----------------------------------------
NAIC Equivalent Amortized % of Estimated Amortized % of Estimated
Rating Designation Cost Total Fair Value Cost Total Fair Value
- ---------- ---------------------- ------------- --------- ------------- ------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
1-2 Aaa/Aa/A and Baa...... $ 472.5 83.9% $ 486.1 $ 525.0 80.1% $ 537.8
3-6 Ba and lower.......... 90.8 16.1 94.6 130.4 19.9 136.5
------------- --------- ------------- ------------- --------- --------------
Total......................... $ 563.3 100.0% $ 580.7 $ 655.4 100.0% $ 674.3
============= ========= ============= ============= ========= ==============
</TABLE>
At June 30, 1997, the amortized cost of problem fixed maturities was $.0
million, $4.5 million for potential problem fixed maturities and $10.2 million
for restructured fixed maturities.
LIQUIDITY AND CAPITAL RESOURCES
Since becoming a public company in 1992, the Holding Company's Board of
Directors has declared quarterly cash dividends of $.05 per share on the
outstanding shares of its Common Stock. At June 30, 1997, the Holding Company
had three series of preferred stock outstanding. The annual dividend rate on the
Series C Preferred Stock was fixed at 6% and dividends amounted to $.8 million
for the first half of 1997. The Series D Preferred Stock will increase
shareholders' equity only when shares are released from the SECT. No shares of
Series D Preferred Stock were released from the SECT during the first half of
1997. The Series E Preferred Stock's dividend rate was fixed at 6.125% and
dividends totaled $12.5 million for the first half of 1997. The Series E
Preferred Stock dividends were payable quarterly in Common Stock.
On August 4, 1997, the Holding Company redeemed all of its outstanding
Subordinated Debentures and all outstanding shares of its Series C and Series E
Preferred Stock. Upon redemption, the Holding Company issued approximately 32.5
million additional shares of its Common Stock. Holders of record of the
Subordinated Debentures were entitled to receive 40.4040 shares of Common Stock
for each $1,000 principal amount of Subordinated Debentures redeemed, along with
cash representing interest accrued from July 22, 1997, the prior interest
payment date. Holders of the Series C and Series E Preferred Stock were entitled
to receive 20.4082 shares of Common Stock for each share of Preferred Stock
redeemed, together with cash representing dividends accrued from July 22, 1997,
the prior dividend payment date. The Holding Company paid cash in lieu of any
fractional share of Common Stock.
In April 1996, the Holding Company registered with the SEC approximately 11.9
million shares of Common Stock issuable upon conversion of shares of the Series
D Preferred Stock held by the SECT. At June 30, 1997, the aggregate market value
of these registered securities was $395.7 million, based on the closing market
price on the NYSE. In July 1997, the SECT released 8,040 shares of the Series D
Preferred Stock which were converted into 1.6 million shares of Common Stock.
AXA purchased 960,000 shares directly while the remaining shares were sold
through an agent to the public. The net proceeds of the sales totaled $54.8
million.
See Note 14 of Notes to the Consolidated Financial Statements for further
information on the redemptions and the SECT transaction.
35
<PAGE>
Equitable Life has a commercial paper program with an issue limit of up to
$500.0 million. This program is available for general corporate purposes and is
supported by Equitable Life's existing $350.0 million bank credit facility,
which expires in June 2000. Equitable Life uses this program from time to time
in its liquidity management. At June 30, 1997, there were no amounts outstanding
under the commercial paper program or the revolving credit facility.
DLJ continues to be active in raising additional capital. In April 1997, DLJ
commenced a program for the offering of up to $300.0 million of medium-term
notes under a shelf registration statement. On April 15, 1997, $10.0 million
aggregate principal amount of variable rate medium-term notes due 2000 were
issued. The interest rate is LIBOR plus 10 basis points with a rate at June 30,
1997 of 5.88125%. On June 18, 1997, DLJ issued an additional $10.0 million
aggregate principal amount of 6.85% medium-term notes due 2002, followed by the
June 30, 1997 issuance of $70.0 million aggregate principal amount of 6.70%
medium-term notes due in 2000. The proceeds of approximately $89.8 million were
used for general corporate purposes. In June 1997, DLJ filed a shelf
registration statement which enables DLJ to issue from time to time up to $1.00
billion in aggregate principal amount of senior or subordinated debt securities.
There were no securities outstanding under this shelf registration statement at
June 30, 1997. On August 8, 1997, DLJ converted its $28.8 million aggregate
principal amount of 5% junior subordinated convertible debentures into 685,204
shares of DLJ common stock.
To address a possible year end change in its tax status, on June 24, 1997,
Alliance announced plans for a change to a public corporate ownership structure
to become effective in December 1997. On August 5, 1997, The Taxpayer Relief Act
of 1997 was signed into law. It included the option for certain publicly traded
partnerships to maintain partnership tax status and pay a 3.5% tax on
partnership gross income. On August 6, 1997, Alliance announced its intention to
utilize this option and remain a publicly traded limited partnership and that it
would not implement the previously announced change to a public corporate
ownership structure.
Consolidated Cash Flows
The net cash used by operating activities was $4.00 billion for the first half
of 1997 compared to net cash provided by operating activities of $135.8 million
for the same period in 1996. Cash used by operating activities in 1997
principally was attributable to the $4.12 billion net change in trading
activities and broker-dealer related receivables/payables at DLJ reflecting an
increase in operating assets. The 1996 cash provided by operations principally
was due to the $380.3 million net change in trading activities and broker-dealer
related receivables/payables at DLJ as its level of business activity continued
to increase, partially offset by the $109.7 million change in Federal income
taxes payable and the $78.7 million change in clearing association fees and
regulatory deposits.
Net cash used by investing activities was $95.4 million for the first half of
1997 as compared to net cash provided by investing activities of $98.1 million
for the same period in 1996. During the first half of 1997, investment purchases
exceeded sales, maturities, repayments and return of capital by $218.8 million.
The EREIM sale produced net proceeds of approximately $261.0 million.
Discontinued operations reduced its outstanding loans from continuing operations
by $185.2 million during the first six months of 1997. In the 1996 period,
investment purchases exceeded sales, maturities, repayments and return of
capital by $762.0 million. The discontinued GIC Segment repaid $492.5 million of
loans from continuing operations during the first half of 1996.
Net cash provided by financing activities was $4.34 billion for the first half
of 1997 as compared to net cash used by financing activities of $528.3 million
in the first half of 1996. Net cash provided by financing activities during the
first six months of 1997 primarily resulted from a $4.42 billion increase in
short-term financings, principally due to net repurchase agreement activity.
There was a net increase of long-term debt of $162.6 million primarily due to
new debt at DLJ. Withdrawals from General Account policyholders' account
balances exceeded deposits by $205.0 million during the six months ended June
30, 1997. In the first half of 1996, withdrawals from General Account
policyholders' account balances exceeded deposits by $351.9 million. During the
first six months of 1996, cash used for the repayment of long-term debt of
$219.9 million and the net decrease of $150.1 million in short-term financing,
principally at DLJ, was partially offset by the net cash proceeds of $247.8
million from DLJ's February 1996 Medium Term Notes offering.
The operating, investing and financing activities described above resulted in an
increase in cash and cash equivalents during the first half of 1997 of $240.7
million to $996.0 million.
36
<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, 1996, except as set forth in Note 12 to the Registrant's
Unaudited Consolidated Financial Statements in Part I of this Form 10-Q for the
quarter ended June 30, 1997.
Item 4. Submission of Matters to a Vote of Security Holders.
At the annual meeting of the Holding Company's shareholders held on May 14,
1997, the 19 nominees listed below were elected as directors of the Holding
Company to hold office until the 1998 annual meeting and until their successors
shall have been elected and qualified. In addition, at such meeting, the Holding
Company's shareholders (i) ratified the appointment of Price Waterhouse LLP as
the Holding Company's independent accountants, (ii) approved a Short-term
Incentive Compensation Plan For Senior Officers, (iii) approved a Long-term
Incentive Compensation Plan For Senior Officers, (iv) approved the Holding
Company's 1997 Stock Incentive Plan, (v) approved an amendment to the Holding
Company's Restated Certificate of Corporation concerning amendment of the
Holding Company's By-Laws and (vi) approved possible purchases by AXA and its
affiliates from time to time of all or a portion of the shares of the Holding
Company's Common Stock to be sold by the SECT.
The number of votes with respect to each of these matters was as follows:
(a) Election of Directors:
Name Votes For Votes Withheld
Claude Bebear 169,433,016 435,457
John S. Chalsty 169,439,529 428,944
Henri de Castries 169,432,328 436,145
Francoise Colloc'h 169,433,386 435,087
Joseph L. Dionne 169,147,499 720,974
William T. Esrey 169,418,291 450,182
Jean-Rene Fourtou 163,569,715 6,298,758
Donald J. Greene 169,437,165 431,308
Anthony J. Hamilton 169,421,517 446,956
John T. Hartley 169,142,689 725,784
John H. F. Haskell, Jr. 169,434,408 434,065
Mary R. (Nina) Henderson 169,429,032 439,441
W. Edwin Jarmain 169,143,331 725,142
Winthrop Knowlton 169,121,239 747,234
Arthur L. Liman 163,530,221 6,338,252
Joseph J. Melone 169,432,266 436,207
Didier Pineau-Valencienne 163,399,366 6,469,107
George J. Sella, Jr. 169,415,168 453,305
Dave H. Williams 163,404,242 6,464,231
(b) Ratification of the Appointment of Price Waterhouse LLP as Independent
Accountants:
Votes For Votes Against Abstentions
169,529,055 166,111 173,307
37
<PAGE>
(c) Approval of the Short-term Incentive Compensation Plan For Senior
Officers:
Votes For Votes Against Abstentions Nonvotes
156,655,111 3,634,195 1,126,843 8,452,324
(d) Approval of the Long-term Incentive Compensation Plan For Senior
Officers:
Votes For Votes Against Abstentions Nonvotes
156,884,946 3,305,931 1,225,272 8,452,324
(e) Approval of the Holding Company's 1997 Stock Incentive Plan:
Votes For Votes Against Abstentions Nonvotes
157,051,930 3,281,843 1,082,376 8,452,324
(f) Approval of an Amendment to the Holding Company's Restated Certificate
of Incorporation Concerning Amendment of the Holding Company's
By-Laws:
Votes For Votes Against Abstentions Nonvotes
156,417,339 3,823,232 1,175,578 8,452,324
(g) Approval of Possible Purchases by AXA and its Affiliates from time to
time of all or a Portion of the Holding Company's Common Stock to be
sold by the SECT:
Votes For Votes Against Abstentions Nonvotes
159,142,512 1,103,668 1,169,969 8,452,324
Item 6. Exhibits and Reports on Form 8-K.
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Exhibits
4.01(a) Restated Certificate of Incorporation of the Registrant, filed as Exhibit
4.01(a)to the Registrant's Form S-3 Registration Statement (No. 333-03224), and
incorporated herein by reference.
4.01(b) Certificate of Designation of Cumulative Convertible Preferred Stock, Series C,
filed as Exhibit 4.01(d) to the Registrant's Form S-3 Registration Statement
(No. 333-03224), and incorporated herein by reference.
4.01(c) Certificate of Designation of Cumulative Convertible Preferred Stock, Series D,
filed as Exhibit 4.01(e) to the Registrant's Form S-3 Registration Statement
(No. 333-03224), and incorporated herein by reference.
4.01(d) Certificate of Designation of Cumulative Convertible Preferred Stock, Series E,
filed as Exhibit 4.01(f) to the Registrant's Form S-3 Registration Statement
(No. 333-03224), and incorporated herein by reference.
38
<PAGE>
4.01(e) Amendment to Restated Certificate of Incorporation of the Registrant,
dated as of May 15, 1997 filed as Exhibit 4.01(g) to the Registrant's Form S-3
Registration Statement (No. 333-03224), and incorporated herein by reference.
4.01(f) Certificate of Elimination, dated July 31, 1997.
4.02 By-Laws of the Registrant, filed as Exhibit 4.02 to the Registrant's Form S-3
(No. 333-03224), and incorporated herein by reference.
10.1 Second Amendment of Lease, dated as of May 1, 1997, between 1290
Partners L.P. and Equitable Life.
10.2 Letter Agreement dated July 8, 1997, from the Holding Company and
Equitable Life to Mr. Edward D. Miller.
Exhibit 27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
A Current Report on Form 8-K was filed July 10, 1997; Item 5
therein discussed (a) the selection of Edward D. Miller as
President and Chief Executive Officer of both the Holding
Company and Equitable Life and his expected election to both
companies' boards of directors, (b) the redemption of
certain debt and preferred stock for Common Stock, (c) the
announcement by Alliance regarding (1) its plans for a
transaction responsive to a potential change in Alliance's
tax status and (2) its taking of a non-recurring non-cash
charge to reduce the recorded value of goodwill and
contracts associated with Alliance's acquisition of Cursitor
and (d) the closing of the previously announced sale of
certain subsidiaries. No financial statements were filed.
39
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, The
Equitable Companies Incorporated has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: August 11, 1997 THE EQUITABLE COMPANIES INCORPORATED
By: /s/Stanley B. Tulin
---------------------------------------------
Name: Stanley B. Tulin
Title: Executive Vice President and Chief
Financial Officer
Date: August 11, 1997 /s/Alvin H. Fenichel
---------------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and Controller
40
CERTIFICATE OF ELIMINATION
OF
THE EQUITABLE COMPANIES INCORPORATED
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
THE EQUITABLE COMPANIES INCORPORATED, a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"Corporation") certifies as follows:
1. The Board of Directors of the Corporation adopted a resolution to the
following effect:
None of the authorized shares of the Cumulative Convertible Preferred
Stock, Series A (the "Series A Stock") and Cumulative Convertible
Preferred Stock, Series B (the "Series B Stock") are outstanding and
none will be issued subject to the certificates of designations
previously filed with respect to the Series A Stock and the Series B
Stock.
2. The Board of Directors of the Corporation adopted a resolution
authorizing the filing of a certificate with the Secretary of State of the State
of Delaware setting forth the above resolution.
3. In accordance with the provisions of Section 151 of the General
Corporation Law of the State of Delaware, the Certificate of Incorporation is
hereby amended to eliminate all matters set forth in the certificates of
designations previously filed with respect to the Series A Stock and Series B
Stock.
IN WITNESS WHEREOF, The Equitable Companies Incorporated has caused this
certificate to be signed by Kevin R. Byrne, Senior Vice President and Treasurer,
on July 31, 1997.
THE EQUITABLE COMPANIES INCORPORATED
By: /s/ Kevin R. Byrne
---------------------------------
Name: Kevin R. Byrne
Title: Senior Vice President and
Treasurer
SECOND AMENDMENT OF LEASE
Agreement, dated as of May 1, 1997, between 1290 PARTNERS L.P., a New York
limited partnership having an office in care of The Victor Capital Group, L.P.,
885 Third Avenue, New York, New York 10022-4802 ("Landlord") and THE EQUITABLE
LIFE ASSURANCE SOCIETY OF THE UNITED STATES, a New York corporation having an of
flee at 1290 Avenue of the Americas, New York, New York 10019 ("Tenant").
WITNESSETH:
WHEREAS, Landlord and Tenant are parties to a Lease, dated as of July 20,
1995 (the "Original Lease"), as amended by a First Amendment of Lease, dated as
of December 28, 1995 (collectively, the "Lease"), whereby Landlord is leasing to
Tenant and Tenant is hiring from Landlord certain space in the building located
at 1290 Avenue of the Americas, New York, New York (the "Building"); and
WHEREAS, Landlord and Tenant desire to further amend the Lease to provide
that Landlord lease to Tenant and Tenant hire from Landlord certain additional
space on the ninth floor of the Building, and for certain other matters as more
particularly set forth herein.
NOW, THEREFORE, Landlord and Tenant agree as follows:
1. Defined Terms. All capitalized terms used herein but not defined shall
have the meanings ascribed to them in the Lease
2. Lease of Additional Space. (a) Landlord hereby leases to Tenant and
Tenant hereby hires from Landlord, subject to the terms and conditions of this
Agreement, the following:
(i) the portion of the ninth floor of the Building, substantially as shown
hatched on the floor plan annexed hereto as Exhibit A (the "A-Space"); and
(ii) the portion of the ninth floor of the Building, substantially as shown
hatched on the floor plan annexed hereto as Exhibit B (the "B-Space"; the
A-Space and the B-Space are collectively called the "Additional Space").
(b) The term of the lease of the A-Space shall commence on the earlier of
(i) the date that Landlord's Initial Work (as defined in Section 5(a) below)
relating to the A-Space is Substantially Complete (as defined in Section 2(h)
below) and (ii) the date Tenant or anyone claiming under or through Tenant
occupies any portion of the A-Space for the performance of Initial Tenant World
(as defined in Section 5(a) below) (the earlier of the dates in clause (i) and
clause (ii) is called the "A-Space Commencement Date"). Landlord and Tenant
anticipate that the A-Space Commencement Date will occur on or about August 8,
1997. If the A-Space Commencement Date, determined under clause (i) above, would
be later than August 8, 1997. then Landlord shall give to Tenant not less than
10 days notice of the date on which Landlord anticipates in good faith that such
space will be delivered to Tenant with Landlord's Initial Work applicable
thereto Substantially Complete; provided, that if, after the giving of such
notice, Landlord believes that the actual delivery date will be later than the
date set forth in such notice, then Landlord shall keep Tenant advised of the
status of such delay and, if the actual delivery date shall be more than 2
Business Days later than the date set forth in such notice, Landlord shall give
to Tenant not less than 2 Business Days prior notice of the actual delivery
date. Landlord shall not be required to give to Tenant any notice hereunder if
(A) the A-Space Commencement Date, determined under clause (i) above, occurs on
or before August 8, 1997 or (B) the A-Space Commencement Date is determined
under clause (ii! above. If the A-Space Commencement Date fails to occur on or
before August 8, 1998 (as such date may be extended to the extent of any Tenant
Delay applicable to the A-Space; as so extended, the "A-Space Outside Date"),
then Tenant may give to Landlord not less than 30 days notice of Tenant's intent
to terminate the lease of the A-Space, which notice must be given by Tenant on
or before the earlier to occur of (x) the date that Landlord delivers the
A-Space to Tenant with Landlord's Initial Work applicable thereto Substantially
Complete and (y) the date that is 30 days after the A-Space Outside Date) (time
of the essence). If Tenant timely gives a termination notice pursuant to the
preceding sentence and Landlord fails, on or before the date set for the
termination of the A-Space in Tenant's notice. to deliver to Tenant the A-Space
with Landlord's Initial Work applicable thereto Substantially Complete, then (1)
the lease of the A-Space pursuant to this Agreement shall terminate on the date
provided therefor in Tenant's termination notice, (2) neither Tenant nor
Landlord shall have any further obligation or liability to the other with
respect to the A-Space (but such termination shall have no effect on the B-Space
or any other space then included or includable in the Premises) and (3) on the
date provided for the termination of the A-Space in Tenant's termination notice,
<PAGE>
Tenant shall pay to Landlord, as Additional Charges hereunder, S199,589.33,
together with interest on such amount at the Prime Rate from the date Landlord
paid to Tenant the amount described in Section 3(b)(i) below to and including
the date of such payment by Tenant.
(c) The term of the lease of the B-Space shall commence on the earlier of
(i) the date that Landlord's Initial Work relating to the B-Space is
Substantially Complete and (ii) the date Tenant or anyone claiming under or
through Tenant occupies any portion of the B-Space for the performance of
Initial Tenant Work (the earlier of the dates in clause (i) and clause (ii) is
called the "B-Space Commencement Date"). Landlord and Tenant anticipate that the
B-Space Commencement Date will occur on or about January 8, 1998. If the B-Space
Commencement Date, determined under clause (i) above, would be later than
January 8, 1998, then Landlord shall give to Tenant not less than 10 days notice
of the date on which Landlord anticipates in good faith that the B-Space will be
delivered to Tenant with Landlord's Initial Work applicable thereto
Substantially Complete; provided, that if, after the giving of such notice,
Landlord believes that the actual delivery date will be later than the date set
forth in such notice, then Landlord shall keep Tenant advised of the status of
such delay and, if the actual delivery date shall be more than 2 Business Days
later than the date set forth in such notice, Landlord shall give to Tenant not
less than 2 Business Days prior notice of the actual delivery date. Landlord
shall not be required to give to Tenant any notice hereunder if (A) the B-Space
Commencement Date, determined under clause (i) above, occurs on or before
January 8, 1998 or (B) the B-Space Commencement Date is determined under clause
(ii) above. If the B-Space Commencement Date fails to occur on or before January
8, 1999 (as such date may be extended to the extent of any Tenant Delay
applicable to the B-Space; as so extended, the "B-Space Outside Date"), then
Tenant may give to Landlord not less than 30 days notice of Tenant's intent to
terminate the lease of the B-Space, which notice must be given by Tenant on or
before the earlier to occur of (x) the date that Landlord delivers the B-Space
to Tenant with Landlord's Initial Work applicable thereto Substantially Complete
and (y) the date that is 30 days after the B-Space Outside Date) (time of the
essence). If Tenant timely gives a termination notice pursuant to the preceding
sentence and Landlord fails, on or before the date set for the termination of
the B-Space in Tenant's notice, to deliver to Tenant the B-Space with Landlord's
Initial Work applicable thereto Substantially Complete, then (1) the lease of
the B-Space pursuant to this Agreement shall terminate on the date provided
therefor in Tenant's termination notice, (2) neither Tenant nor Landlord shall
have any further obligation or liability to the other with respect to the
B-Space (but such termination shall have no effect on the A-Space or any other
space then included or includable in the Premises) and (3) on the date provided
for the termination of the B-Space in Tenant's termination notice, Tenant shall
pay to Landlord, as Additional Charges hereunder, 5182,363.97, together with
interest on such amount at the Prime Rate from the date Landlord paid to Tenant
the amount described in Section 3(b)(i) below to and including the date of such
payment by Tenant.
(d) If, for any reason, including, without limitation, the failure of the
occupants of the Additional Space on the date of this Agreement timely to vacate
any portion of the Additional Space, Landlord shall be unable to deliver
possession of either the A-Space or the B-Space on any date specified in this
Agreement for such delivery, the validity of the Lease and this Agreement shall
not be impaired, nor shall the Term with respect to any portion of the
Additional Space be extended, by reason thereof, and (except to the extent set
forth in Section 5(Y) below) Landlord shall have no liability to Tenant
therefor. Tenant's sole remedy for such failure shall be the termination rights
provided for in Sections 2(b) and 2(c) above. This Section 9(d) shall be an
express provision to the contrary for purposes of Section 023-a of the New York
Real Property Law and any other law of like import now or hereafter in effect.
(e) Tenant and Landlord shall, upon the occurrence thereof: execute, and
deliver instruments in form reasonably satisfactory to Tenant and Landlord
confirming the A-Space Commencement Date and the B-Space Commencement Date, as
applicable: provided, that the failure by any party to execute and deliver any
such instrument shall not affect the occurrence of the A-Space Commencement Date
or the B-Space Commencement Date, as applicable, in accordance with the terms of
this Agreement.
(f) The Additional Space shall be conclusively deemed to contain the
following rentable square feet:
A-Space: 27,090
B-Space: 24,752
<PAGE>
(g) Effective as of (i) the A-Space Commencement Date with respect to the
A-Space and (ii) the B-Space Commencement Date with respect to the B-Space, all
references in the Lease to the "Premises" shall (except to the extent other
terms are provided in this Agreement with respect to such portion of the
Additional Space), be deemed to refer collectively to the Premises demised
pursuant to the Lease, the A-Space (as of the A-Space Commencement Date) and the
B-Space (as of the B-Space Commencement Date), and all references in the Lease
to the "Office Space" shall (except to the extent other terms are provided in
this Agreement with respect to such portion of the Additional Space), be deemed
to refer collectively to the Office Space demised pursuant to the Lease, the
A-Space (as of the A-Space Commencement Date) and the B-Space (as of the B-Space
Commencement Date).
(h) Landlord's Initial Work with respect to any space shall be deemed to be
Substantially Complete on the date upon which such Landlord's Initial Work has
been completed, other than (i) minor details or adjustments, but only if such
details or adjustments shall not interfere in any material respect with Tenant's
ability to (A) prepare any portion of such space for Tenant's initial occupancy
thereof, or (B) thereafter use and occupy the same for the ordinary conduct of
Tenant's intended use of such space (as such intended use is shown on, or
reasonably inferable from, Tenant's then current plans and specifications with
respect to Tenant's initial Alterations therein); provided, that such intended
use is permitted pursuant to Section 1.05 of the Original Lease and (ii) any
part of Landlord's Initial Work if and to the extent the same is not completed
due to Tenant Delay.
3. Terms Applicable to the A-Space. The lease of the A-Space by Tenant
shall he on all of the terms and conditions of the Lease, except that:
(a) the term of the lease of the A-Space shall commence as set forth in
Section 2(b) above;
(b) Landlord shall not be required to perform any work to pay any amount,
to install any fixtures or equipment or to render any services to prepare the
Building or the A-Space for Tenant's use or occupancy, and Tenant shall accept
the A-Space in its "as is" condition on the A-Space Commencement Date; provided,
that (i) within 15 days after the execution and delivery of this Agreement by
Landlord and Tenant, Landlord shall pay to Tenant $381,953.50 which may be used
by Tenant for the payment of brokerage commissions, for the cost of Tenant's
Initial Work in the Additional Space or otherwise, (ii) prior to the A-Space
Commencement Date, Landlord shall Substantially Complete Landlord's Initial Work
with respect to the A-Space, (iii) within a reasonable period after the A-Space
Commencement Date Landlord shall perform Landlord's Additional Work (as defined
in Section 5(a) below) with respect to the A-Space (it being agreed that
Landlord shall use reasonable efforts to complete such Landlord's Additional
Work within a time frame that will not delay Tenant's performance of Tenant's
Initial Work in the A-Space), (iv) within 30 days after the A-Space Commencement
Date, Landlord shall pay to Tenant $1,0,78,314.00 in respect of Tenant's Initial
Work in the A-Space and (v) within 30 days after Tenant first occupies the
A-Space for the ordinary conduct of Tenant's business, Landlord shall pay to
Tenant S199,589.53 which may be used by Tenant for the payment of brokerage
commissions, for the cost of Tenant's Initial Work in the Additional Space or
otherwise;
(c) Fixed Rent with respect to the A-Space shall be payable from and after
the A-Space Commencement Date to and including the Expiration Date at the annual
rate of 51.049,737.50, payable in equal monthly installments of $87,478.13
(appropriately prorated in the case of the first monthly installment if the
A-Space Commencement Date is not the first day of a month) and otherwise at the
times and in the manner set forth in the Lease; provided, that so long as no
default under the Lease beyond applicable notice and grace periods shall exist
at the time such Fixed Rent would otherwise become due and payable. Tenant shall
be entitled to an abatement of the Fixed Rent payable with respect to the
A-Space in respect of the period commencing on the A-Space Commencement Date and
ending on the 300th day after the A-Space Commencement Date (which 300 day
period may be extended in accordance with Section 5(g) below);
(d) from and after the A-Space Commencement Date, Tenant shall pay to
Landlord Tax Payments and Operating Payments with respect to the A-Space at the
times and in the manner set forth in the Lease;
(e) Landlord shall make available to the A-Space electric energy in an
amount not less 8 watts demand load per rentable square foot of the A-Space;
Tenant shall separately pay for electric energy supplied to the A-Space from and
after the A-Space Commencement Date in the manner and at the times set forth in
Article 2 of the Original Lease, and Landlord, at Tenant's expense, shall
install promptly after the A-Space Commencement Date a submeter to measure the
demand for, and consumption of, electricity in the A-Space; provided, that if,
on the A-Space Commencement Date, such submeter has not yet been installed, then
from and after the A-Space Commencement Date, through and including the date
that Landlord installs such submeter. Tenant shall pay for electric energy
<PAGE>
supplied to the A-Space at the rate of $2.00 per annum per rentable square foot
of the A-Space (which amount shall be reduced to $.75 per annum per rentable
square foot during the period of construction of Tenant's initial Alterations to
such space); and
(f) in addition to the condenser water made available to Tenant under
Section 3.01(a) of the Original Lease, Landlord shall provide to Tenant up to
another 10 tons of condenser water, on the terms and conditions set forth in
said Section 3.01(a); provided, that Landlord shall not be required to provide
such additional 10 tons unless Tenant shall utilize same within one year after
the A-Space Commencement Date.
4. Terms Applicable to the B-Space. The lease of the B-Space by Tenant
shall be on all of the terms and conditions of the Lease, except that:
(a) the term of the lease of the B-Space shall commence as set forth in
Section 2(c) above;
(b) Landlord shall not be required to perform any work, to pay any amount,
to install any fixtures or equipment or to render any services to prepare the
Building or the B-Space for Tenant's use or occupancy, and Tenant shall accept
the B-Space in its "as is" condition on the B-Space Commencement Date; provided,
that (i) prior to the B-Space Commencement Date, Landlord shall Substantially
Complete Landlord's Initial Work with respect to the B-Space (ii) within a
reasonable period after the B-Space Commencement Date Landlord shall perform
Landlord's Additional Work with respect to the B-Space; (it being agreed that
Landlord shall use reasonable efforts to complete such Landlord's Additional
Work within a time frame that will not delay Tenant's performance of Tenant's
Initial Work in the B-Space), (iii) within 30 days after the B-Space
Commencement Date, Landlord shall pay to Tenant S995.366.00 in respect of
Tenant's Initial Work in the B-Space and (iv) within 30 days after Tenant first
occupies the B-Space for the ordinary conduct of Tenant's business. Landlord
shall pay to Tenant $182,363.97 which may be used by Tenant for the payment of
brokerage commissions. for the cost of Tenant's Initial Work in the Additional
Space or otherwise;
(c) Fixed Rent with respect to the B-Space shall be payable from and after
the B-Space Commencement Date to and including the Expiration Date at the annual
rate of $959,140.00, payable in equal monthly installments of $79,928.33
(appropriately prorated in the case of the first monthly installment if the
B-Space Commencement Date is not the first day of a month) and otherwise at the
times and in the manner set forth in the Lease; provided. that so long as no
default under the Lease beyond applicable notice and grace periods shall exist
at the time such Fixed Rent would otherwise become due and payable, Tenant shall
be entitled to an abatement of the Fixed Rent payable with respect to the
B-Space in respect of the period commencing on the B-Space Commencement Date and
ending on the 300th day after the B-Space Commencement Date (which 300 day
period may be extended in accordance with Section 5(g) below);
(d) from and after the B-Space Commencement Date, Tenant shall pay to
Landlord Tax Payments and Operating Payments with respect to the B-Space at the
times and in the manner set forth in the Lease;
(e) Landlord shall make available to the B-Space electric energy in an
amount not less than 8 watts demand load per rentable square foot of the
B-Space; Tenant shall separately pay for electric energy supplied to the B-Space
from and after the B-Space Commencement Date in the manner and at the times set
forth in Article 2 of the Original Lease, and Landlord, at Tenant's expense,
shall install, promptly after the B-Space Commencement Date, a submeter to
measure the demand for, and consumption of, electricity in the B-Space;
provided, that if, on the B-Space Commencement Date, such submeter has not yet
been installed, then from and after the B-Space Commencement Date, through and
including the date that Landlord installs such submeter, Tenant shall pay for
electric energy supplied to the B-Space at the rate of $2.00 per annum per
rentable square foot of the B-Space (which amount shall be reduced to S.75 per
annum per rentable square foot during the period of construction of Tenant's
initial Alterations to such space); and
(f) in addition to the condenser water made available to Tenant under
Section 3.01(a) of the Original Lease, Landlord shall provide to Tenant up to
another l0 tons of condenser water, on the terms and conditions set forth in
said Section 3.01(a); provided, that Landlord shall not be required to provide
such additional 10 tons unless Tenant shall utilize same within one year after
the B-Space Commencement Date.
<PAGE>
5. Landlord's Work; Work Allowance. (a) As used in this Agreement:
(i) "Landlord's Initial Work" means, with respect to any space (A) the
demolition of all tenant improvements in such space, including all partitions,
doors, flooring, ceilings, supplemental air conditioning units (leaving in place
all existing overhead air conditioning ductwork), lighting and electrical feeds
and (B) the delivery to Tenant of a Form ACP-5 with respect to such space.
(ii) "Landlord's Additional Work" means, with respect to any space (A) if
and to the extent required in such space, the fireproofing of all structural
members in such space and firestopping treatment at all slab penetrations and
(B) the provision of connection points at all fire alarm floor panels in such
space to the Building's Class E System (collectively, "Landlord's Additional
Work").
(iii) "Initial Tenant Work" means the installation in the Additional Space
of fixtures, improvements and appurtenances attached to or built into the
Additional Space, engineering costs, space planning costs and permit fees, and
shall not include movable partitions, business and trade fixtures, machinery,
equipment, furniture, furnishings and other articles of personal property.
(b) Within a reasonable period of time after the A-Space Commencement Date,
Landlord, at Tenant's expense, shall reprogram the four elevators which! as of
the date of this Agreement, serve exclusively the twelfth through the fifteenth
floors of the Building (the "Dedicated Elevators") to open and close on the
ninth floor of the Building. Tenant acknowledges that Landlord cannot protect
against any other tenant on the ninth floor or any visitors of such tenant
accessing the Dedicated Elevators. Tenant shall reimburse Landlord for the cost
of such reprogramming within 30 days after Landlord gives to Tenant an invoice
therefor, together with reasonable back-up documentation. Landlord shall use
reasonable efforts to complete such reprogramming prior to Tenant's occupancy of
the A-Space for the ordinary conduct of Tenant's business.
(c) Within a reasonable period of time after the A-Space Commencement Date,
Landlord, at Tenant's expense, shall, provided the same is then permissible in
accordance with Laws, partition the elevator lobby serving the ninth floor of
the Building so as to provide Tenant on the ninth floor of the Building
exclusive use of the Dedicated Elevators. Tenant shall reimburse Landlord for
the cost of such partitioning within 30 days after Landlord gives to Tenant an
invoice therefor, together with reasonable back-up documentation. Landlord shall
use reasonable efforts to complete such partitioning prior to Tenant's occupancy
of the B-Space for the ordinary conduct of Tenant's business. Tenant
acknowledges that, upon the partitioning of the elevator lobby on the ninth
floor of the Building, Tenant shall not have the use of any of the passenger
elevators serving such ninth floor other than the Dedicated Elevators.
(d) In performing Landlord's Additional Work and the work described in
Section 5(b) above Landlord shall coordinate the scheduling of such work with
Tenant so as to minimize any interference with Tenant's performance of Initial
Tenant Work; provided, that Landlord shall not be required to use overtime labor
in performing the same.
(e) Tenant shall pay to Landlord a supervision fee in connection with the
performance by Tenant of Initial Tenant Work equal to 6% of the cost of all
Initial Tenant Work. Tenant shall pay to Landlord such supervision fee (which
may be by credit against the Work Allowance) within 30 days after Landlord gives
to Tenant an invoice therefor. Tenant shall provide to Landlord such
documentation as Landlord may reasonably require in order to establish the cost
of Initial Tenant Work.
(f) Tenant shall comply in all respects with Article 4 of the Original
Lease in performing Initial Tenant Work. Without limiting the generality of the
foregoing, Tenant shall, prior to commencing Initial Tenant Work, submit to
Landlord for Landlord's approval in accordance with said Article 4, plans and
specifications in respect of Initial Tenant Work.
(g) If (i) Landlord shall fail to Substantially Complete Landlord's Initial
Work with respect to the A-Space on or before the date that is 20 days after the
day on which Landlord first obtains vacant possession of the A-Space from the
tenant that occupies the A-Space on the date of this Agreement, (ii) Landlord
shall fail to Substantially Complete Landlord's Initial Work with respect to the
B-Space on or before the date that is 20 days after the day on which Landlord
first obtains vacant possession of the B-Space from the tenant that occupies the
B-Space on the date of this Agreement, (iii) Landlord shall fail to reprogram
the Dedicated Elevators to open and close on the ninth floor of the Building on
or before the date that is 7 days after the day on which Landlord first obtains
vacant possession of the A-Space from the tenant that occupies the A-Space on
the date of this Agreement anchor (iv) Landlord shall fail to partition the
elevator bank on the ninth floor of the Building (if required in accordance with
Section 5.01(c) above) on or before the date that is 42 days after the day on
<PAGE>
which Landlord first obtains vacant possession of the A-Space from the tenant
that occupies the A-Space on the date of this Agreement, and if any of the
events described in clauses (i! through (iv) above shall result in any Landlord
Delay with respect to the A-Space or the B-Space (provided, that for purposes of
this Section 5(g). only the circumstances described in clause (i) of the
definition of "Landlord Delay" shall be deemed to give rise to a Landlord Delay,
and no Landlord Delay shall be deemed to result from any circumstance described
in clause (ii) of the definition of "Landlord Delay"), then (A) the 300 day
abatement of Fixed Rent with respect to the A-Space set forth in Section 3(c)
above shall be extended by I day (notwithstanding that more than one of the
events described in clauses (i) through (iv) above may have resulted in such
Landlord Delay) for each day of such Landlord Delay applicable to the A-Space
and (B) the 300 day abatement of Fixed Rent with respect to the B-Space set
forth in Section 4(c) above shall be extended by 1 day (notwithstanding that
more than one of the events described in clauses (i) through (iv) above may have
resulted in such Landlord Delay) for each day of such Landlord Delay applicable
to the B-Space.
6. Further Amendments to Lease. Effective as of the date hereof the Lease
is hereby further amended as follows:
(a) The definition of "Antenna" in Section 11.01 of the Original Lease is
hereby amended to include 3 additional antennas which may be installed,
maintained and operated by Tenant on the roof of the Building in the locations
designated on Exhibit T to the Original Lease and otherwise in compliance with
the terms and conditions of the Original Lease, including, without limitation,
Section 4.03(d) and Article 11 of the Original Lease;
(b) The reference in Section 11.01 of the Original Lease to "Exhibit T1" is
amended to refer to "Exhibit T"; and
(c) Exhibit T to the Original Lease is deleted and there shall be inserted
in lieu thereof a new Exhibit T consisting of the plan of Edwards & Zuck
Communications, Inc., last revised 9/10/96, a copy of which is attached to and
made a part of this Agreement as Exhibit C.
7. Broker. (a) Each party represents to the other that such party has dealt
with no broker other than EREIM (representing Tenant) and Tishman Speyer
Properties, L.P. (representing Landlord) (collectively, the "Brokers") in
connection with the leasing of the Additional Space, and each party shall
indemnify and hold the other harmless from and against all loss, cost, liability
and expense (including, without limitation, reasonable attorneys' fees and
disbursements) arising out of any claim for a commission or other compensation
by any broker other than the Brokers who alleges that it has dealt with the
indemnifying party in connection with the leasing of the Additional Space.
(b) Tenant shall be responsible for any commission or other compensation
due to EREIM in connection with the leasing of the Additional Space, and Tenant
shall indemnify and hold Landlord harmless from and against all loss, cost,
liability and expense (including, without limitation, reasonable attorneys' fees
and disbursements) arising out of any claim for a commission or other
compensation by EREIM in connection with the leasing of the Additional Space.
(c) Landlord shall be responsible for any commission or other compensation
due to Tishman Speyer Properties, Inc. in connection with the leasing of the
Additional Space, and Landlord shall indemnify and hold Tenant harmless from and
against all loss, cost, liability and expense (including, without limitation,
reasonable attorneys' fees and disbursements) arising out of any claim for a
commission or other compensation by Tishman Speyer Properties, Inc. in
connection with the leasing of the Additional Space.
8. No Other Changes. Except as expressly set forth in this Agreement, the
Lease shall remain unmodified and in full force and effect, and the Lease as
modified herein is ratified and confirmed. All references in the Lease to "this
Lease" shall hereafter be deemed to refer to the Lease as amended by this
Agreement.
<PAGE>
9. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which taken
together shall constitute one agreement.
IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Agreement
as of the day and year first above written.
Landlord: 1290 PARTNERS, L.P.,
By: 1290 GP Corp., general partner
By: /s/Andrew Cohen
-------------------------------
Name: Andrew Cohen
Title: Vice President
Tenant: THE EQUITABLE LIFE ASSURANCE SOCIETY
OF THE UNITED STATES.
By: /s/Leon Billis
-----------------------------------
Name: Leon Billis
Title: Senior Vice President
July 8,1997
PRIVATE AND CONFIDENTIAL
Mr. Edward D. Miller
7 Sunset Lane
Garden City, New York 11530
Dear Ed:
On behalf of the Boards of Directors of The Equitable Companies Incorporated and
The Equitable Life Assurance Society of the United States, I am delighted to
extend this offer to succeed me as President and Chief Executive Officer with
your election to take place at our board meetings on July 17, 1997. You would
also be elected to the boards at that meeting.
Your base salary as President and Chief Executive Officer for the remainder of
1997, 1998 and 1999 will be at a level of $800,000 per annum payable in
approximately equal periodic installments. We will also pay you a sign on bonus
of $1,500,000, of which $500,000 will be paid to you upon joining the Company
and the balance of $1,000,000 will be paid in February 1998. In addition, for
services in 1998 we will pay you a bonus of $2,700,000 in February 1999. You
will receive your base salary and bonus payments for the years 1997, 1998 and
1999, provided that before the receipt of any payment your employment has not
been terminated by reason of death, disability or voluntary resignation, or for
Cause. As used in this paragraph, "Cause" means (i) your willful failure (other
than due to physical or mental illness) to perform substantially your duties as
an employee after reasonable notice to you of such failure, (ii) your engaging
in serious misconduct that is injurious to the Company or any of its affiliates,
(iii) your having been convicted of, or entered a plea of nolo contendere to, a
crime that constitutes a felony or (iv) your breach of any written covenant or
agreement with the Company or any of its affiliates not to disclose any
information pertaining to the Company or any of its affiliates. In the event of
your termination of employment by reason of death or disability, a pro rata
amount of your bonus payments will be paid based on the portion of the period
covered by the bonus for which you remained in active service.
In addition, you will also be a participant in our Short-Term Incentive
Compensation Plan for Senior Officers. The amounts of your sign on and
additional bonuses will be taken into account in determining the amounts to be
paid to you under the Short-Term Incentive Compensation Plan for 1997 and 1998.
You will also participate in The Equitable Companies 1997 Stock Incentive Plan
(the "Stock Plan") and you will receive a grant of 300,000 stock options as soon
as possible after joining the Company and an additional 100,000 options in both
September 1998 and September 1999. These options will have a ten year term and
will vest over a three year period at the rate of one-third each year. If your
employment is terminated by the Company other than for Cause as defined in
Section 2.1(f) of the Stock Plan, the options granted prior to termination will
fully vest and may be exercised at any time prior to the earlier of the
expiration of the term of the options or within five years following termination
of employment. In becoming an employee of the Company, you will not thereby be
entering into a written covenant or agreement not to compete with the Company or
any of its affiliates for purposes of the application of Section 2.1(f)(iv) of
the Stock Plan.
In addition you will participate in our long-term incentive program which is
under review at this time. We expect the program to provide for an annual
benefit which is targeted at 80% of base salary to be paid in a combination of
performance shares and options. In lieu of participating in a long-term
incentive program prior to 1998, you will receive a cash payment of $250,000 in
early 1998.
You will also be included in all benefit plans for senior officers of the
Company, including those providing health, retirement, disability and life
insurance benefits. We will also make available to you a car and driver as well
as secretarial support of your choice allowing you to carry out your business in
an efficient manner.
<PAGE>
Ed, I believe this covers the important points that we have previously
discussed. The Boards and I are enthusiastic over the prospect of your becoming
our new Chief Executive Officer. We look forward to your favorable response as
soon as possible. If you are in agreement with the above terms and conditions
would you kindly sign the letter and return it to my attention.
Sincerely,
/s/Joseph J. Melone
- -------------------
Joseph J. Melone
President and Chief Executive Officer
ACCEPTED:
/s/Edward D. Miller
- -------------------
Edward D. Miller
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