SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended September 30, 1997 Commission File No. 1-11166
- ---------------------------------------------- ---------------------------------
The Equitable Companies Incorporated
(Exact name of registrant as specified in its charter)
Delaware 13-3623351
- --------------------------------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1290 Avenue of the Americas, New York, New York 10104
- --------------------------------------------------------- ----------------------
(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 November 11, 1997
- ------------------------------------------------- ----------------------------
Common Stock, $.01 par value 222,077,372
Page 1 of 40
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page #
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1: Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996.............................................................. 3
Consolidated Statements of Earnings for the Three Months and Nine
Months Ended September 30, 1997 and 1996....................................... 4
Consolidated Statements of Shareholders' Equity for the Nine Months
Ended September 30, 1997 and 1996.............................................. 6
Consolidated Statements of Cash Flows for the Nine Months Ended
September 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............................................................ 22
PART II OTHER INFORMATION
Item 1: Legal Proceedings................................................................ 39
Item 6: Exhibits and Reports on Form 8-K................................................. 39
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>
September 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 20,848.4 $ 18,556.2
Held to maturity, at amortized cost..................................... 144.6 178.5
Trading account securities, at market value............................... 17,982.6 15,728.1
Securities purchased under resale agreements.............................. 26,585.9 20,492.1
Mortgage loans on real estate............................................. 2,604.7 3,133.0
Equity real estate........................................................ 3,225.8 3,298.4
Policy loans.............................................................. 2,436.8 2,196.1
Other equity investments.................................................. 1,265.2 1,081.9
Other invested assets..................................................... 183.7 125.0
----------------- -----------------
Total investments..................................................... 75,277.7 64,789.3
Cash and cash equivalents................................................... 1,448.9 755.3
Broker-dealer related receivables........................................... 25,256.6 16,661.7
Deferred policy acquisition costs........................................... 3,185.7 3,106.5
Amounts due from discontinued GIC Segment................................... 657.1 996.2
Other assets................................................................ 4,740.4 4,361.1
Closed Block assets......................................................... 8,676.0 8,495.0
Separate Accounts assets.................................................... 36,319.8 29,646.1
----------------- -----------------
Total Assets................................................................ $ 155,562.2 $ 128,811.2
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 21,742.2 $ 21,863.8
Future policy benefits and other policyholders liabilities.................. 4,514.4 4,416.6
Securities sold under repurchase agreements................................. 36,672.4 29,378.3
Broker-dealer related payables.............................................. 27,530.0 19,497.0
Short-term and long-term debt............................................... 8,146.2 5,379.6
Other liabilities........................................................... 6,458.7 5,598.3
Closed Block liabilities.................................................... 9,196.3 9,091.3
Separate Accounts liabilities............................................... 36,117.6 29,598.3
----------------- -----------------
Total liabilities..................................................... 150,377.8 124,823.2
----------------- -----------------
Commitments and contingencies (Note 13)
SHAREHOLDERS' EQUITY
Series C convertible preferred stock........................................ - 24.4
Series D convertible preferred stock........................................ 429.1 294.0
Stock employee compensation trust........................................... (429.1) (294.0)
Series E convertible preferred stock........................................ - 380.2
Common stock, at par value.................................................. 2.2 1.9
Capital in excess of par value.............................................. 3,623.2 2,782.2
Retained earnings........................................................... 1,162.6 632.9
Net unrealized investment gains............................................. 409.3 179.3
Minimum pension liability................................................... (12.9) (12.9)
----------------- -----------------
Total shareholders' equity............................................ 5,184.4 3,988.0
----------------- -----------------
Total Liabilities and Shareholders' Equity.................................. $ 155,562.2 $ 128,811.2
================= =================
See Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
REVENUES
Universal life and investment-type
product policy fee income.......................... $ 240.6 $ 220.7 $ 707.2 $ 651.4
Premiums............................................. 137.2 145.8 430.0 439.2
Net investment income................................ 1,000.1 833.4 2,842.7 2,437.6
Investment gains, net................................ 213.8 91.8 825.9 464.5
Commissions, fees and other income................... 905.8 639.2 2,451.5 2,006.6
Contribution from the Closed Block................... 30.1 35.8 95.6 95.1
--------------- ---------------- --------------- ---------------
Total revenues................................. 2,527.6 1,966.7 7,352.9 6,094.4
--------------- ---------------- --------------- ---------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account
balances........................................... 313.9 316.0 958.5 949.4
Policyholders' benefits.............................. 235.9 270.7 718.3 798.8
Other operating costs and expenses................... 1,611.2 1,175.1 4,609.3 3,690.0
--------------- ---------------- --------------- ---------------
Total benefits and other deductions............ 2,161.0 1,761.8 6,286.1 5,438.2
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
Federal income taxes, minority interest
and cumulative effect of accounting change......... 366.6 204.9 1,066.8 656.2
Federal income taxes................................. 116.5 61.3 376.2 198.2
Minority interest in net income of
consolidated subsidiaries.......................... 63.5 38.9 112.6 127.9
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
cumulative effect of accounting change............. 186.6 104.7 578.0 330.1
Discontinued operations, net of Federal income
taxes.............................................. (.2) - (2.9) -
Cumulative effect of accounting change,
net of Federal income taxes........................ - - - (23.1)
--------------- ---------------- --------------- ---------------
Net Earnings......................................... $ 186.4 $ 104.7 $ 575.1 $ 307.0
=============== ================ =============== ===============
</TABLE>
4
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED) - Continued
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Per Common Share:
Assuming No Dilution:
Earnings from continuing operations before
cumulative effect of accounting change......... $ .83 $ .52 $ 2.79 $ 1.65
Discontinued operations, net of Federal
income taxes................................... - - (.01)
Cumulative effect of accounting change,
net of Federal income taxes.................... - - - (.12)
--------------- ---------------- --------------- ---------------
Net Earnings..................................... $ .83 $ .52 $ 2.78 1.53
=============== ================ =============== ===============
Assuming Full Dilution:
Earnings from continuing operations before
cumulative effect of accounting change......... $ .79 $ .49 $ 2.52 $ 1.54
Discontinued operations, net of Federal
income taxes................................... - - (.01) -
Cumulative effect of accounting change,
net of Federal income taxes.................... - - - (.10)
--------------- ---------------- --------------- ---------------
Net Earnings..................................... $ .79 $ .49 $ 2.51 $ 1.44
=============== ================ =============== ===============
Cash Dividends Per Common Share...................... $ .05 $ .05 $ .15 $ .15
=============== ================ =============== ===============
See Notes to Consolidated Financial Statements.
</TABLE>
5
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Series C convertible preferred stock, beginning of year..................... $ 24.4 $ 24.4
Exchange of Series C convertible preferred stock............................ (24.4) -
----------------- -----------------
Series C convertible preferred stock, end of period......................... - 24.4
----------------- -----------------
Series D convertible preferred stock, beginning of year..................... 294.0 286.6
Exchange of Series D convertible preferred stock............................ (54.8) -
Change in market value of shares............................................ 189.9 20.9
----------------- -----------------
Series D convertible preferred stock, end of period......................... 429.1 307.5
----------------- -----------------
Stock employee compensation trust, beginning of year........................ (294.0) (286.6)
Exchange of Series D convertible preferred stock in the stock employee
compensation trust........................................................ 54.8 -
Change in market value of shares............................................ (189.9) (20.9)
----------------- -----------------
Stock employee compensation trust, end of period............................ (429.1) (307.5)
----------------- -----------------
Series E convertible preferred stock, beginning of year..................... 380.2 380.2
Exchange of Series E convertible preferred stock............................ (380.2) -
----------------- -----------------
Series E convertible preferred stock, end of period......................... - 380.2
----------------- -----------------
Common stock, at par value, beginning of year............................... 1.9 1.8
Issuance of common stock.................................................... .3 -
----------------- -----------------
Common stock, at par value, end of period................................... 2.2 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................................... 841.0 20.8
----------------- -----------------
Capital in excess of par value, end of period............................... 3,623.2 2,774.1
----------------- -----------------
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................................................................ 575.1 307.0
Dividends on preferred stocks............................................... (15.6) (20.0)
Dividends on common stock................................................... (29.8) (27.8)
----------------- -----------------
Retained earnings, end of period............................................ 1,162.6 856.7
----------------- -----------------
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).............................. 230.0 (336.4)
----------------- -----------------
Net unrealized investment gains, end of period.............................. 409.3 50.2
----------------- -----------------
Minimum pension liability, beginning of year and end of period.............. (12.9) (35.1)
----------------- -----------------
Total Shareholders' Equity, End of Period................................... $ 5,184.4 $ 4,052.3
================= =================
See Notes to Consolidated Financial Statements.
</TABLE>
6
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Net earnings................................................................ $ 575.1 $ 307.0
Adjustments to reconcile net earnings to net cash (used) provided by
operating activities:
Interest credited to policyholders' account balances.................... 958.5 949.4
Universal life and investment-type policy fee income.................... (707.2) (651.4)
Net change in trading activities and broker-dealer related
receivables/payables.................................................. (3,777.8) 64.6
(Increase) decrease in matched resale agreements........................ (4,522.5) (1,126.1)
Increase (decrease) in matched repurchase agreements.................... 4,522.5 1,126.1
Investment gains, net of dealer and trading gains....................... (425.1) (98.8)
Changes in clearing association fees and regulatory deposits............ 116.9 (115.5)
Change in accounts payable and accrued expenses......................... 475.6 222.9
Change in Federal income taxes payable.................................. 14.3 (85.8)
Other, net.............................................................. (275.3) (290.5)
----------------- -----------------
Net cash (used) provided by operating activities............................ (3,045.0) 301.9
----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................................. 2,158.6 1,743.3
Sales.................................................................... 8,093.5 7,323.2
Return of capital from joint ventures and limited partnerships............ 48.4 64.3
Purchases................................................................. (10,770.1) (10,227.0)
Decrease in loans to discontinued GIC Segment............................. 336.2 827.0
Sale of subsidiaries...................................................... 261.0 -
Other, net................................................................ (320.7) (121.4)
----------------- -----------------
Net cash used by investing activities....................................... (193.1) (390.6)
----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits................................................................ 1,026.9 1,402.2
Withdrawals............................................................. (1,417.6) (1,839.5)
Net change in short-term financings....................................... 3,652.6 137.1
Additions to long-term debt............................................... 847.7 296.3
Repayments of long-term debt.............................................. (159.8) (307.6)
Proceeds from issuance of common stock.................................... 82.8 -
Other, net................................................................ (100.9) 114.6
----------------- -----------------
Net cash provided (used) by financing activities............................ 3,931.7 (196.9)
----------------- -----------------
Change in cash and cash equivalents......................................... 693.6 (285.6)
Cash and cash equivalents, beginning of year................................ 755.3 1,200.4
----------------- -----------------
Cash and Cash Equivalents, End of Period.................................... $ 1,448.9 $ 914.8
================= =================
Supplemental cash flow information:
Interest Paid............................................................. $ 2,928.4 $ 2,129.9
================= =================
Income Taxes Paid......................................................... $ 338.2 $ 79.1
================= =================
See Notes to Consolidated Financial Statements.
</TABLE>
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 nine months ended September 30, 1997 are not necessarily
indicative of the results to be expected for the full year.
The terms "third quarter 1997" and "third quarter 1996" refer to the three
months ended September 30, 1997 and 1996, respectively. The terms "first
nine months of 1997" and "first nine months of 1996" refer to the nine
months ended September 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. 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 for 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 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 an enterprise to 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 February 1997, the FASB issued SFAS No. 128, "Earnings Per Share". This
statement simplifies the standards for computing earnings per share
("EPS") previously set forth 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 statement of earnings . 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 third
quarter and the first nine months of 1997 been computed on an SFAS No. 128
basis, basic EPS would have been $.87 per share and $2.87 per share,
respectively and diluted EPS would have been $.79 per share and $2.54 per
share, respectively. Basic EPS calculations for the third quarter and the
first nine months of 1996 on an SFAS No. 128 basis would have been $.53
per share and $1.55 per share, respectively. Diluted EPS would not have
been materially different from reported amounts in 1996.
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. This
accounting change, including its impact on the Closed Block, increased
previously reported earnings from continuing operations before cumulative
effect of accounting change by $7.4 million and $14.6 million, net of
Federal income taxes of $4.1 million and $7.9 million ($.04 and $.08 per
share assuming no dilution and $.03 and $.06 per share assuming full
dilution), for the third quarter and first nine months of 1996,
respectively.
3) INVESTMENTS
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
Nine Months Ended
September 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............................................... 99.2 88.7
Deductions for writedowns and asset dispositions.......................... (61.7) (105.2)
--------------- ---------------
Balances, End of Period................................................... $ 174.6 $ 156.4
=============== ===============
Balances, end of period:
Mortgage loans on real estate........................................... $ 51.6 $ 93.3
Equity real estate...................................................... 123.0 63.1
--------------- ---------------
Total..................................................................... $ 174.6 $ 156.4
=============== ===============
</TABLE>
For the third quarter and first nine months of 1997 and 1996, investment
income is shown net of investment expenses (including interest expense to
finance short-term trading instruments) of $826.1 million, $2,355.3
million, $634.9 million and $1,809.0 million, respectively.
As of September 30, 1997 and December 31, 1996, fixed maturities
classified as available for sale had amortized costs of $20,129.6 million
and $18,196.1 million, fixed maturities in the held to maturity portfolio
had estimated fair values of $163.5 million and $195.1 million and trading
account securities had amortized costs of $17,482.6 million and $15,758.3
million, respectively. Other equity investments included equity securities
with carrying values of $750.1 million and $614.9 million and costs of
$732.4 million and $627.5 million, respectively.
For the first nine months of 1997 and of 1996, proceeds received on sales
of fixed maturities classified as available for sale amounted to $7,600.7
million and $6,784.1 million, respectively. Gross gains of $126.4 million
and $94.9 million and gross losses of $95.2 million and $58.8 million were
realized on these sales for the first nine months of 1997 and of 1996,
respectively. Unrealized investment gains related to fixed maturities
classified as available for sale increased by $358.8 million during the
first nine months of 1997, resulting in a balance of $718.8 million at
September 30, 1997.
9
<PAGE>
Impaired mortgage loans along with the related provision for losses
follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses....................... $ 203.0 $ 340.0
Impaired mortgage loans without provision for losses.................... 3.3 122.3
---------------- -----------------
Recorded investment in impaired mortgage loans.......................... 206.3 462.3
Provision for losses.................................................... 47.9 46.4
---------------- -----------------
Net Impaired Mortgage Loans............................................. $ 158.4 $ 415.9
================ =================
</TABLE>
During the first nine months of 1997 and of 1996, respectively, The
Equitable's average recorded investment in impaired mortgage loans was
$307.3 million and $548.7 million. Interest income recognized on these
impaired mortgage loans totaled $13.3 million and $30.9 million ($1.5
million and $13.7 million recognized on a cash basis) for the first nine
months of 1997 and of 1996, respectively.
4) 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 in 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 5.98% and 6.08% at September 30,
1997 and December 31, 1996, respectively.
5) 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 first nine months 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
September 30, 1997, The Equitable owned approximately 57.0% of Alliance
Units.
10
<PAGE>
6) CLOSED BLOCK
Summarized financial information of the Closed Block is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Fixed maturities:
Available for sale, at estimated fair value (amortized cost of
$4,101.5 and $3,820.7)............................................. $ 4,236.7 $ 3,889.5
Mortgage loans on real estate.......................................... 1,393.4 1,380.7
Policy loans........................................................... 1,715.2 1,765.9
Cash and other invested assets......................................... 300.8 336.1
Deferred policy acquisition costs...................................... 794.2 876.5
Other assets........................................................... 235.7 246.3
----------------- -----------------
Total Assets........................................................... $ 8,676.0 $ 8,495.0
================= =================
Liabilities
Future policy benefits and other policyholders' account balances....... $ 8,976.0 $ 8,999.7
Other liabilities...................................................... 220.3 91.6
----------------- -----------------
Total Liabilities...................................................... $ 9,196.3 $ 9,091.3
================= =================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Premiums and other income................ $ 161.4 $ 171.3 $ 510.8 $ 539.1
Investment income (net of investment
expenses of $6.5, $6.9, $21.3 and
$21.0)................................. 145.8 140.2 424.1 408.4
Investment (losses) gains, net........... (.4) (4.6) 5.0 (13.2)
--------------- --------------- --------------- ---------------
Total revenues........................... 306.8 306.9 939.9 934.3
--------------- --------------- --------------- ---------------
Benefits and Other Deductions
Policyholders' benefits and dividends.... 258.7 263.8 795.5 817.9
Other operating costs and expenses....... 18.0 7.3 48.8 21.3
--------------- --------------- --------------- ---------------
Total benefits and other deductions...... 276.7 271.1 844.3 839.2
--------------- --------------- --------------- ---------------
Contribution from the Closed Block....... $ 30.1 $ 35.8 $ 95.6 $ 95.1
=============== =============== =============== ===============
</TABLE>
Investment valuation allowances amounted to $13.6 million and $13.8
million on mortgage loans and $2.7 million and $3.7 million on equity real
estate at September 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.
11
<PAGE>
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 106.0 $ 128.1
Impaired mortgage loans without provision for losses................... .1 .6
----------------- -----------------
Recorded investment in impaired mortgages.............................. 106.1 128.7
Provision for losses................................................... 13.1 12.9
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 93.0 $ 115.8
================= =================
</TABLE>
During the first nine months of 1997 and of 1996, respectively, the Closed
Block's average recorded investment in impaired mortgage loans was $115.0
million and $131.1 million. Interest income recognized on these impaired
mortgage loans totaled $6.7 million and $8.7 million ($2.8 million and
$3.6 million recognized on a cash basis) for the first nine months of 1997
and of 1996, respectively.
7) DISCONTINUED OPERATIONS
Summarized financial information for the GIC Segment is as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Mortgage loans on real estate.......................................... $ 872.1 $ 1,111.1
Equity real estate..................................................... 853.6 925.6
Cash and other invested assets......................................... 242.5 474.0
Other assets........................................................... 214.2 226.1
----------------- -----------------
Total Assets........................................................... $ 2,182.4 $ 2,736.8
================= =================
Liabilities
Policyholders' liabilities............................................. $ 1,094.3 $ 1,335.9
Allowance for future losses............................................ 276.3 262.0
Amounts due to continuing operations................................... 657.1 996.2
Other liabilities...................................................... 154.7 142.7
----------------- -----------------
Total Liabilities...................................................... $ 2,182.4 $ 2,736.8
================= =================
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Investment income (net of investment
expenses of $23.7, $31.8, $73.3
and $96.1)............................. $ 49.9 $ 50.2 $ 128.3 $ 182.4
Investment losses, net................... (.4) (6.2) (4.5) (23.8)
Policy fees, premiums and other
income, net............................ - .1 .1 .2
--------------- --------------- --------------- ---------------
Total revenues........................... 49.5 44.1 123.9 158.8
Benefits and Other Deductions............ 40.8 56.9 131.4 196.2
Earnings credited (losses charged)
to allowance for future losses......... 8.7 (12.8) (7.5) (37.4)
--------------- --------------- --------------- ---------------
Pre-tax loss from operations............. - - - -
Pre-tax loss from strengthening of
the allowance for future losses........ (.4) - (4.5) -
Federal income tax benefit............... .2 - 1.6 -
--------------- --------------- --------------- ---------------
Loss from Discontinued Operations........ $ (.2) $ - $ (2.9) $ -
=============== =============== =============== ===============
</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 September 30, 1997 resulted in
management's decision to strengthen the loss provisions by $.4 million for
third quarter 1997 to $4.5 million, resulting in a post-tax charge of $2.9
million to discontinued operations' results for the nine months ended
September 30, 1997.
Management believes the loss provisions for Wind-Up Annuities and GIC
contracts at September 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 $5.0 million and $9.0 million
on mortgage loans and $19.9 million and $20.4 million on equity real
estate at September 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.
13
<PAGE>
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 75.8 $ 83.5
Impaired mortgage loans without provision for losses................... .3 15.0
----------------- -----------------
Recorded investment in impaired mortgages.............................. 76.1 98.5
Provision for losses................................................... 5.0 8.8
----------------- -----------------
Net Impaired Mortgage Loans............................................ $ 71.1 $ 89.7
================= =================
</TABLE>
During the first nine months of 1997 and of 1996, the GIC Segment's
average recorded investment in impaired mortgage loans was $88.4 million
and $140.9 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $4.6 million and $8.1 million ($3.5
million and $6.0 million recognized on a cash basis) for the first nine
months of 1997 and of 1996, respectively.
Benefits and other deductions included $12.7 million, $42.4 million, $23.3
million and $94.8 million of interest expense related to amounts borrowed
from continuing operations for the third quarter and first nine months of
1997 and of 1996, respectively.
8) 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.
9) CAPITAL STOCK
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. Periodically, the SECT is required to distribute an amount of Series
D Preferred Stock (or Common Stock issued on conversion thereof) based on
a predetermined formula. In April 1996, the Holding Company had registered
with the SEC approximately 11.9 million shares of Common Stock issuable
upon conversion of shares of Series D Preferred Stock held by the SECT. In
July 1997, the SECT released 8,040 shares of 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 sale totaled $54.8
million, increasing shareholders' equity by this amount.
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 the prior dividend payment date through the date of sale. As
a result of those transactions, shareholders' equity increased by $339.7
million.
Supplementary net earnings per share, computed as if the transactions
discussed above had occurred as of January 1, 1997 for the first nine
months of 1997 and as of July 1, 1997 for the third quarter 1997 were
$2.51 and $.80 per share assuming no dilution and $2.49 and $.79 per share
assuming full dilution, respectively.
14
<PAGE>
10) SALE OF SUBSIDIARIES
On June 10, 1997, Equitable Life sold Equitable Real Estate (other than EQ
Services, Inc. and its interest in Column Financial, Inc.) ("EREIM") 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 whereby EREIM
will continue to provide substantially the same services to Equitable
Life's General Account and Separate Accounts, 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.
11) RESTRUCTURING COSTS
During the first nine months 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 nine months of 1997 totaled $19.3 million. At September 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 $65.4 million.
15
<PAGE>
12) COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Net earnings............................. $ 186.4 $ 104.7 $ 575.1 $ 307.0
Less - dividends on preferred stocks..... (2.2) (6.7) (15.6) (20.0)
Less - effect of assumed exercise of
options of publicly held subsidiaries
assuming no dilution................... (8.6) (.9) (18.6) (3.8)
--------------- --------------- --------------- ---------------
Net earnings applicable to common
shares - assuming no dilution.......... 175.6 97.1 540.9 283.2
Add - dividends on convertible
preferred stock and interest on
convertible subordinated debt.......... 3.5 10.5 24.5 31.5
Less - incremental effect of assumed
exercise of options of publicly held
subsidiaries assuming full dilution.... (1.1) - (7.0) -
--------------- --------------- --------------- ---------------
Net Earnings Applicable to Common
Shares - Assuming Full Dilution........ $ 178.0 $ 107.6 $ 558.4 $ 314.7
=============== =============== =============== ===============
Weighted average common shares
outstanding - assuming no
dilution(1)............................ 211.1 185.5 194.8 185.2
Add - assumed exercise of stock
options................................ 2.7 1.3 2.2 1.2
Add - assumed conversion of
convertible preferred stock............ 5.9 17.8 13.9 17.8
Add - assumed conversion of
convertible subordinated debt.......... 4.9 14.7 11.4 14.7
--------------- --------------- --------------- ---------------
Weighted Average Shares
Outstanding - Assuming
Full Dilution.......................... 224.6 219.3 222.3 218.9
=============== =============== =============== ===============
<FN>
(1) The Equitable's stock options were not included because their 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.
13) 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:
On September 12, 1997, the United States District Court for the Northern
District of Alabama, Southern Division, entered an order certifying James
Brown as the representative of a class consisting of "[a]ll
African-Americans who applied but were not hired for, were discouraged
from applying for, or would have applied for the position of Sales Agent
in the absence of the discriminatory practices, and/or procedures in the
Southern Region of The Equitable from May 16, 1987 to the present." The
16
<PAGE>
second amended complaint in James W. Brown, on behalf of others similarly
situated v. The Equitable Life Assurance Society of the United States,
alleges, among other things, that Equitable Life discriminated on the
basis of race against African-American applicants and potential applicants
in hiring individuals as sales agents. Plaintiffs seek a declaratory
judgment and affirmative and negative injunctive relief, including the
payment of back-pay, pension and other compensation. Although the outcome
of any litigation cannot be predicted with certainty, The Equitable's
management believes that the ultimate resolution of this matter should not
have a material adverse effect on the financial position of The Equitable.
The Equitable's management cannot make an estimate of loss, if any, or
predict whether or not such matter will have a material adverse effect on
The Equitable's results of operations in any particular period.
On September 11, 1997, an action entitled Pamela L. and James A. Luther,
individually and as representatives of all people similarly situated v.
The Equitable Life Assurance Society of the United States, The Equitable
Companies Incorporated, and Casey Cammack, individually and as agent for
The Equitable Life Assurance Society of the United States and The
Equitable Companies Incorporated, No. 97-2009B, was filed in Texas state
court. Plaintiffs purport to represent a nationwide class of persons
having an ownership or beneficial interest in whole and universal life
policies issued by Equitable Life from January 1, 1982 through December
31, 1996. Also included in the purported class are persons having an
ownership interest in variable annuities purchased from Equitable Life
from January 1, 1992 to the present. The basis of the complaint is the
allegation that uniform sales presentations, illustrations, and materials
which misrepresented the stated number of years that premiums would need
to be paid were used to sell whole and universal life policies and
variable annuities. The complaint further alleges that Equitable Life
agents misrepresented the extent to which the policies at issue were
proper replacement policies. Plaintiffs seek compensatory damages,
attorneys' fees and expenses. On October 20, 1997, Equitable Life served a
general denial of the allegations. The same day, the Holding Company
entered a special appearance contesting the court's jurisdiction over it.
Although the outcome of any litigation cannot be predicted with certainty,
particularly in the early stages of an action, The Equitable's management
believes that the ultimate resolution of the action should not have a
material adverse effect on the financial position of The Equitable. Due to
the early stage of this matter, The Equitable's management cannot make an
estimate of loss, if any, or predict whether or not such matter will have
a material adverse effect on The Equitable's results of operations in any
particular period.
In Cole, the Court extended the time for filing a Note of Issue (placing
the case on the trial calendar) to January 5, 1998. The Court rescheduled
a conference to schedule a trial date to January 8, 1998. Briefs for
plaintiffs' motion for class certification have been filed with the Court.
A hearing on plaintiffs' motion for class certification will be scheduled
at the discretion of the Court. 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. On August 11, 1997, Equitable Life and EOC moved
for summary judgment dismissing plaintiffs' remaining claims of breach of
contract and negligent misrepresentation. Briefs on Equitable Life and
EOC's motion for summary judgment have been filed with the Court.
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. On September 23, 1997, with leave of the
court, plaintiff filed a second amended petition naming six additional
plaintiffs and three new individual defendant agents. Plaintiffs purport
to represent a class of all persons who purchased whole or universal life
insurance policies from Equitable Life from January 1, 1981 through July
22, 1992. Plaintiffs also allege misrepresentation concerning a policy's
suitability as an investment vehicle. Plaintiffs seek damages in an
unspecified amount. On October 20, 1997, Equitable Life asserted
deficiencies of venue and vagueness in pleading the second amended
complaint and filed a motion to strike certain allegations.
17
<PAGE>
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. Hearings on plaintiff's motion for class certification are not
expected to be held until early in 1998.
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. On July 10, 1997, the parties submitted to
the Court a Joint Scheduling Report, Joint Scheduling Order and a
Stipulation Governing The Confidential Treatment of Discovery Material.
The Court signed the latter stipulation, and the others remain sub judice.
Oral argument is scheduled for January 16, 1998 on Equitable Life and
EOC's motion to dismiss the complaint.
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. On September 12,
1997, plaintiff moved for class certification.
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 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 each of the Bowler, Bachman and Fletcher actions, proceedings have been
stayed, and in the previously reported Golomb action plaintiff's time to
perfect the appeal has been extended, in each instance to permit
settlement discussions. There can be no assurance that these discussions
will result in one or more settlement agreements, or if so what the terms
of any settlement would be.
In connection with the previously reported investigation relating to the
Prime Property Fund ("PPF") by the U.S. Department of Labor ("DOL"), the
DOL has made no specific allegation that Equitable Life or Equitable Real
Estate Investment Management, Inc. ("EREIM") acted improperly and
Equitable Life and EREIM believe that any such allegation would be without
foundation. Equitable Life agreed to indemnify the purchaser of EREIM
(which Equitable Life sold in June 1997) with respect to any fines,
penalties and rebates to clients in connection with this investigation.
While the outcome of this investigation cannot be predicted with
certainty, in the opinion of management, the ultimate resolution of this
matter should not have a material adverse effect on The Equitable's
consolidated financial position or results of operations in any particular
period.
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.
18
<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. The plaintiff in this action
filed a notice of voluntary dismissal without prejudice with regard to
DLJ, which was approved by the Court by order dated October 14, 1997.
On August 15, 1997, DLJ was named a defendant in Robert Orovitz v. Charles
R. Miller, et al., an action in the United Stated District Court of the
Southern District of Texas. The allegations in this action are
substantially similar to the allegations in the Caven action. The
plaintiff in Orovitz filed a notice of voluntary dismissal without
prejudice with regard to DLJ, which was approved by the Court by order
dated October 28, 1997.
On July 15, 1997, in the action relating to the Alliance North American
Government Income Trust, Inc., the District Court denied plaintiffs'
motion for leave to file an amended complaint and ordered that the case be
dismissed (the "Decision"). On October 29, 1997, the United States Court
of Appeals for the Second Circuit dismissed plaintiffs' appeal of the
Decision as premature on the grounds that the District Court failed to
enter a final judgment in respect of the Decision. The Court of Appeals
remanded the case back to the District Court with instructions to enter a
final judgment in respect of the Decision.
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.
14) BUSINESS SEGMENT INFORMATION
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Revenues
Insurance Operations..................... $ 996.5 $ 941.8 $ 2,986.2 $ 2,787.4
Investment Services...................... 1,527.0 1,022.1 4,357.8 3,295.5
Corporate and Other...................... 11.3 12.8 34.5 40.6
Consolidation/elimination................ (7.2) (10.0) (25.6) (29.1)
--------------- --------------- --------------- ---------------
Total.................................... $ 2,527.6 $ 1,966.7 $ 7,352.9 $ 6,094.4
=============== =============== =============== ===============
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 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..................... $ 152.6 $ 99.7 $ 402.1 $ 257.7
Investment Services...................... 240.5 135.5 755.5 487.3
Corporate and Other...................... 4.1 5.6 9.7 15.0
Consolidation/elimination................ (.4) (.4) (1.3) .7
--------------- --------------- --------------- ---------------
Subtotal............................... 396.8 240.4 1,166.0 760.7
Corporate interest expense............... (30.2) (35.5) (99.2) (104.5)
--------------- --------------- --------------- ---------------
Total.................................... $ 366.6 $ 204.9 $ 1,066.8 $ 656.2
=============== =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Insurance Operations................................................... $ 69,483.1 $ 60,464.9
Investment Services.................................................... 85,975.9 68,205.3
Corporate and Other.................................................... 647.5 774.3
Consolidation/elimination.............................................. (544.3) (633.3)
----------------- -----------------
Total.................................................................. $ 155,562.2 $ 128,811.2
================= =================
</TABLE>
20
<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 "third
quarter 1997" and "third quarter 1996" refer to the three months ended September
30, 1997 and 1996, respectively. The terms "first nine months of 1997" and
"first nine months of 1996" refer to the nine months ended September 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
periods noted. 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 23,
likewise includes a table presenting the combined Closed Block amounts on a
line-by-line basis. Management's discussion and analysis addresses the combined
results of operations unless noted otherwise. The Investment Services discussion
begins on page 26.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Consolidated Results of Continuing Operations(1)
Policy fee income and premiums................ $ 539.0 $ 537.3 $ 1,647.5 $ 1,628.7
Net investment income......................... 1,145.9 973.6 3,266.8 2,846.0
Investment gains, net......................... 213.4 87.2 830.9 451.3
Commissions, fees and other income............ 906.0 639.7 2,452.0 2,007.6
--------------- ---------------- --------------- ---------------
Total revenues.............................. 2,804.3 2,237.8 8,197.2 6,933.6
Total benefits and other deductions........... 2,437.7 2,032.9 7,130.4 6,277.4
--------------- ---------------- --------------- ---------------
Earnings from continuing operations before
Federal income taxes, minority interest and
cumulative effect of accounting change...... 366.6 204.9 1,066.8 656.2
Federal income taxes.......................... 116.5 61.3 376.2 198.2
Minority interest in net income of
consolidated subsidiaries................... 63.5 38.9 112.6 127.9
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Cumulative Effect of
Accounting Change........................... $ 186.6 $ 104.7 $ 578.0 $ 330.1
=============== ================ =============== ===============
<FN>
(1) Includes the Closed Block on a line-by-line basis.
</FN>
</TABLE>
21
<PAGE>
Continuing Operations
Compared to the comparable 1996 period, the higher pre-tax results of continuing
operations for the first nine months of 1997 reflected increased earnings for
Investment Services and Insurance Operations. The $1.26 billion increase in
revenues for the first nine months of 1997 compared to the corresponding period
in 1996 was attributed primarily to an $800.4 million increase in investment
results which included the gain on the second quarter 1997 sale of EREIM of
$252.1 million and to a $444.4 million increase in commissions, fees and other
income principally due to increased business activity within Investment
Services.
Net investment income increased $420.8 million for the first nine months of 1997
principally due to increases of $333.2 million and $101.2 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 investment yields, primarily
attributable to other equity investments, as well as due to a larger asset base.
Investment gains increased by $379.6 million for the first nine months of 1997
from $451.3 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 increased by $68.3 million with higher dealer and
trading gains of $35.0 million and higher gains of $33.3 million on other equity
investments. The gains on other equity investments in 1996 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 $20.2
million on General Account Investment Assets as compared to losses of $55.1
million in the first nine months of 1996.
For the first nine months of 1997, total benefits and other deductions increased
by $853.0 million from the comparable period in 1996, reflecting increases in
other operating costs and expenses of $946.8 million and a $9.0 million increase
in interest credited to policyholders partially offset by a $102.8 million
decrease in policyholders' benefits. The increase in other operating costs and
expenses was attributable to increased costs of $794.1 million in Investment
Services and a $153.3 million increase in Insurance Operations primarily due to
increases in DAC amortization and in the provision for employee termination and
exit costs recorded in the second quarter.
The $178.0 million increase in Federal income taxes was due to the increase in
earnings from continuing operations. Minority interest in net income of
consolidated subsidiaries was lower principally due to the effect of Alliance's
second quarter 1997 write down of the carrying value of the Cursitor intangible
assets. See "Combined Results of Continuing Operations by Segment - Investment
Services".
Discontinued Operations
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 September 30, 1997 resulted in
management's decision to strengthen the loss provisions by $0.4 million,
resulting in a year-to-date $4.5 million total increase. The factor contributing
to the net strengthening in the first nine months of 1997 was higher than
anticipated investment losses, principally on other equity investments.
Excluding the effect of the aforementioned reserve strengthening, $7.5 million
of pre-tax losses were incurred and charged to the GIC Segment's allowance for
future losses in the first nine months of 1997 as compared to $37.4 million in
the first nine months of 1996. Investment results declined by $34.8 million in
the first nine months of 1997 as compared to the year earlier period. Net
investment income declined by $54.1 million, principally due to the yield impact
of a significantly reduced GIC Segment Investment Asset base. The reduction in
GIC Segment investments was primarily due to the repayments of approximately
$336.2 million and $1.02 billion of loans from continuing operations during the
first nine months of 1997 and fiscal 1996, respectively. Investment losses
22
<PAGE>
decreased $19.3 million to $4.5 million in the first nine months of 1997. There
were $2.9 million and $0.1 million of gains on mortgage loans and fixed
maturities as compared to $2.7 million and $3.2 million in losses in the first
nine months of 1996, respectively. Lower losses on equity real estate and other
equity investments of $10.0 million and $0.4 million, respectively, were
reported for the first nine months of 1997. Benefits and other deductions
declined by $64.8 million principally due to the aforementioned 1996 loan
repayments resulting in the decrease in interest expense on lower borrowings
from continuing operations.
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)
Nine Months Ended September 30,
------------------------------------------------------------------
1997
------------------------------------------------
As Closed 1996
Reported Block Combined Combined
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
Policy fees, premiums and other income.......... $ 1,218.9 $ 510.8 $ 1,729.7 $ 1,702.4
Net investment income........................... 1,656.6 424.1 2,080.7 1,979.5
Investment gains (losses), net.................. 15.1 5.0 20.1 (55.3)
Contribution from the Closed Block.............. 95.6 (95.6) - -
------------- -------------- ------------- --------------
Total revenues................................ 2,986.2 844.3 3,830.5 3,626.6
Total benefits and other deductions............. 2,584.1 844.3 3,428.4 3,368.9
------------- -------------- ------------- --------------
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change................... $ 402.1 $ - $ 402.1 $ 257.7
============= ============== ============= ==============
</TABLE>
The earnings from continuing operations in Insurance Operations for the first
nine months of 1997 reflected an increase of $144.4 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
established in the second quarter. 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 $203.9 million primarily due to investment results
which increased by $176.6 million, a $55.8 million increase in policy fees and a
$8.5 million increase in commissions, fees and other income, offset by an $37.0
million decline in premiums. The decrease in premiums principally was due to
lower traditional life and individual health premiums. The increase in
investment results reflected improvements in both investment income and in
investment gains/losses. Insurance Operations' $101.2 million increase in
investment income principally was due to $142.0 million higher overall yields on
a larger General Account Investment Asset base, offset by $52.4 million lower
interest received on reduced amounts due from discontinued operations. Income
from other equity investments increased during 1997 by $24.4 million as compared
to 1996. Returns on other equity investments have fluctuated significantly from
period to period. There were gains on the General Account investment portfolio
in 1997 as compared to losses in 1996. Gains of $82.8 million were reported on
fixed maturities, an increase of $39.5 million over the comparable 1996 period.
The General Account's other equity investments produced gains of $9.7 million as
compared to $2.8 million during the first nine months of 1996. Losses on
mortgage loans decreased $50.7 million to $8.5 million, while losses on equity
real estate totaled $63.8 million, $21.8 million higher than in the first nine
months of 1996. Policy fee income rose by $55.8 million to $707.2 million due to
higher insurance and annuity account balances.
23
<PAGE>
Total benefits and other deductions for the first nine months of 1997 rose $59.5
million from the comparable 1996 period as increases of $174.0 million in other
operating expenses and $64.8 million higher DAC amortization were partially
offset by $85.5 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 other operating expenses 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
$102.8 million in policyholders' benefits primarily resulted from a lower
increase in reserves on 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 and higher investment spreads 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 $9.0 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 Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Individual annuities
First year.................................. $ 862.0 $ 488.1 $ 2,255.8 $ 1,560.0
Renewal..................................... 283.6 256.2 968.2 918.0
--------------- ---------------- --------------- ---------------
1,145.6 744.3 3,224.0 2,478.0
Variable and interest-sensitive life
First year recurring........................ 43.8 41.3 141.5 131.4
First year optional......................... 42.8 34.4 159.7 118.9
Renewal..................................... 286.9 268.2 917.1 871.1
--------------- ---------------- --------------- ---------------
373.5 343.9 1,218.3 1,121.4
Traditional life
First year recurring........................ 3.1 4.4 10.4 14.1
First year optional......................... 0.8 1.2 2.7 3.7
Renewal..................................... 192.4 199.7 602.0 623.2
--------------- ---------------- --------------- ---------------
196.3 205.3 615.1 641.0
Other(1)
First year.................................. 4.4 4.2 12.7 22.3
Renewal..................................... 85.5 91.4 267.2 279.3
--------------- ---------------- --------------- ---------------
89.9 95.6 279.9 301.6
Total first year.............................. 956.9 573.6 2,582.8 1,850.4
Total renewal................................. 848.4 815.5 2,754.5 2,691.6
--------------- ---------------- --------------- ---------------
Total individual insurance and
annuity products............................ 1,805.3 1,389.1 5,337.3 4,542.0
Participating group annuities................. 49.9 65.1 144.8 183.5
Conversion annuities.......................... 0.0 0.0 1.5 0.0
Association plans............................. 34.3 37.1 103.0 87.3
--------------- ---------------- --------------- ---------------
Total group pension products.................. 84.2 102.2 249.3 270.8
--------------- ---------------- --------------- ---------------
Total Premiums and Deposits................... $ 1,889.5 $ 1,491.3 $ 5,586.6 $ 4,812.8
=============== ================ =============== ===============
<FN>
(1) Includes health insurance and reinsurance assumed.
</FN>
</TABLE>
24
<PAGE>
First year premiums and deposits for individual insurance and annuity products
for the first nine months of 1997 increased from the prior year's level by
$732.4 million due to higher sales of individual annuities and variable and
interest-sensitive life products. Renewal premiums and deposits increased by
$62.9 million during the first nine months 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 policies and other product lines. Traditional life premiums and deposits
for the first nine months of 1997 decreased from the prior year's comparable
period by $25.9 million due to the decline in the traditional life book of
business. The 44.6% increase in first year individual annuities premiums and
deposits in 1997 over the prior year period included $688.6 million from a
recently introduced 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 nine months of
1997 included $41.0 million of premiums and deposits from the sale of two large
COLI cases. Management believes the strategic positioning of The Equitable's
insurance operations continues to have a positive effect on premium growth.
Particular emphasis will continue to be devoted to the support of The
Equitable's 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, in addition to strong increases in established agent
productivity, are contributing to higher premiums.
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 Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Individual Insurance and Annuities'
Product Lines:
Individual annuities.......................... $ 650.5 $ 507.4 $ 1,814.0 $ 1,706.1
Variable and interest-sensitive life.......... 129.8 99.0 376.3 328.0
Traditional life.............................. 91.4 76.6 288.8 263.1
--------------- ---------------- --------------- ---------------
Total......................................... $ 871.7 $ 683.0 $ 2,479.1 $ 2,297.2
=============== ================ =============== ===============
</TABLE>
Policy and contract surrenders and withdrawals increased $181.9 million during
the first nine months of 1997 compared to the same period in 1996. Surrenders of
variable and interest-sensitive life products increased by $48.3 million due to
the increased size of the book of business. The $107.9 million increase in
individual annuities surrenders was principally due to increased surrenders of
Equi-Vest contracts as favorable market performance increased account values,
consequently increasing surrender amounts with no significant increase in actual
surrender rates. Surrenders and withdrawals in 1996 included $88.0 million paid
in January 1996 for two small pension clients who terminated their contracts.
25
<PAGE>
Investment Services
The following table summarizes the results of operations for Investment
Services.
<TABLE>
<CAPTION>
Investment Services
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Third party commissions and fees.............. $ 867.9 $ 609.3 $ 2,327.0 $ 1,915.8
Affiliate fees................................ 13.7 31.6 72.0 93.7
Other income(1)............................... 645.4 381.2 1,958.8 1,286.0
--------------- ---------------- --------------- ---------------
Total revenues................................ 1,527.0 1,022.1 4,357.8 3,295.5
Total costs and expenses...................... 1,286.5 886.6 3,602.3 2,808.2
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change................. $ 240.5 $ 135.5 $ 755.5 $ 487.3
=============== ================ =============== ===============
<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 10 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 $4.0 billion at
September 30, 1997. At September 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 nine months of 1997, pre-tax earnings for Investment Services
increased by $268.2 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 intangible
assets write down. Total segment revenues increased $1.06 billion principally
due to higher revenues at DLJ. 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. Other income for the three months and nine months ended
September 30, 1997 included a gross gain of $6.7 million on the issuance of
additional DLJ shares. Other income also included a pre-tax gain of $252.1
million from the sale of EREIM in June 1997 and a gross gain of $20.6 million on
the issuance of Alliance Units during the first quarter of 1996 in connection
with the Cursitor transaction.
Total costs and expenses increased by $794.1 million for the first nine months
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.
26
<PAGE>
The following table summarizes results of operations by business unit.
<TABLE>
<CAPTION>
Investment Services
Results of Operations by Business Unit
(In Millions)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Business Unit:
DLJ(1)...................................... $ 176.1 $ 84.6 $ 459.1 $ 329.3
Alliance.................................... 67.4 50.4 58.7 144.5
Equitable Real Estate(2).................... - 10.1 14.8 26.6
Gain on sale of EREIM(3).................... - - 249.8 -
Consolidation/elimination(4)(5)............. (3.0) (9.6) (26.9) (13.1)
--------------- ---------------- --------------- ---------------
Earnings from Continuing Operations
before Federal Income Taxes,
Minority Interest and Cumulative
Effect of Accounting Change(6).............. $ 240.5 $ 135.5 $ 755.5 $ 487.3
=============== ================ =============== ===============
<FN>
(1) Excludes amortization expense of $1.0 million, $0.9 million, $3.1 million
and $1.5 million for the third quarter and first nine months 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 sale of EREIM is net of $2.3 million related state income tax.
(4) Includes interest expense of $3.1 million, $2.8 million, $9.0 million and
$8.9 million related to intercompany debt issued by intermediate holding
companies payable to Equitable Life for the third quarter and first nine
months of 1997 and of 1996, respectively.
(5) Includes a gain of $6.7 million for the three and nine months ended
September 30, 1997 on issuance of additional DLJ shares. Also includes a
gain of $16.9 million (net of $3.7 million related state income tax) for the
nine months ended September 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 $50.7 million, $25.9 million,
$130.6 million and $98.3 million for the third quarter and first nine months
of 1997 and of 1996, respectively, and $28.7 million, $21.2 million, $24.9
million and $61.0 million for Alliance for the same respective periods.
</FN>
</TABLE>
DLJ - DLJ's earnings from operations for the first nine months of 1997 were
$459.1 million, up $129.8 million from the comparable prior year period.
Revenues increased $774.1 million to $3.31 billion primarily due to increased
net investment income of $334.2 million, higher fee income of $223.2 million,
higher commissions of $76.8 million and higher underwriting revenues of $62.8
million. DLJ's expenses were $2.85 billion for the first nine months of 1997, up
$644.3 million from the comparable prior year period primarily due to higher
interest expense of $213.0 million, $273.1 million increase in compensation and
commissions and $31.6 million higher brokerage and exchange fees.
27
<PAGE>
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
futures contracts on equity based indices, interest rate instruments and
currencies, and issuing structured notes. DLJ's involvement in swap contracts
and commodity derivative instruments 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 $51.5 million and $51.2 million for the first nine months of 1997
and of 1996, respectively. Option writing revenues result primarily from the
amortization of option premiums.
The notional value of written options contracts outstanding was approximately
$5.8 billion and $7.5 billion at September 30, 1997 and 1996, respectively. The
overall decrease in the notional value of all options was primarily due to
decreases in customer activity related to foreign sovereign debt securities.
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 $(38.2) million and $(39.7) million
and net trading (losses) gains on futures contracts were $(33.3) million and
$20.9 million for the first nine months of 1997 and of 1996, respectively.
Treated as off-balance-sheet items, the notional contract and market values of
the forward and futures contracts at September 30, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
September 30, 1997 September 30, 1996
---------------------------------- -----------------------------------
Purchases Sales Purchases Sales
--------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Forward Contracts
(Notional Contract Value).............. $ 18,174 $ 29,044 $ 18,610 $ 24,290
=============== =============== =============== ===============
Futures Contracts and Options on
Futures Contracts (Market Value)....... $ 1,724 $ 2,664 $ 2,653 $ 3,546
=============== =============== =============== ===============
</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 September 30, 1997 and 1996, DLJ
had issued long-term structured notes totaling $177.5 million and $216.2 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 earnings from operations for the first nine months of 1997
were $58.7 million, a decrease from the $144.5 million of earnings from the
prior year's comparable period. Revenues totaled $695.5 million for the first
nine months of 1997, an increase of $120.0 million from the comparable period in
1996, primarily due to increased investment advisory and service fees.
Alliance's costs and expenses increased $205.8 million for the nine months ended
September 30, 1997 primarily due to the abovementioned $120.9 million writedown
of intangible assets and to increases of $44.9 million in promotion and
servicing expenses and $31.0 million in employee compensation and benefits.
28
<PAGE>
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 1997 and its revenues
were $91.6 million. Operating expenses totaled $76.8 million in 1997.
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 Nine Months Ended
September 30, September 30,
--------------------------------- ---------------------------------
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Fees:
Third Party................................. $ 204.4 $ 186.5 $ 611.8 $ 537.9
Equitable................................... 12.0 28.6 62.6 84.7
--------------- ---------------- --------------- ---------------
Total......................................... $ 216.4 $ 215.1 $ 674.4 $ 622.6
=============== ================ =============== ===============
Assets Under Management:
Third Party(1).............................. $ 212,478 $ 173,298
Equitable................................... 60,242 54,812
--------------- ---------------
Total......................................... $ 272,720 $ 228,110
=============== ===============
<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 nine months 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 $40.05 billion primarily due to the market appreciation
and mutual fund sales.
Fees received for assets under management by EREIM totaled $0.0 million, $94.1
million, $51.6 million and $153.3 million for the third quarter and first nine
months of 1997 and 1996, respectively, of which $0.0 million, $63.7 million,
$32.0 million and $96.6 million were received from third parties, respectively.
29
<PAGE>
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.
General Account Investment Portfolio
The following table reconciles the consolidated balance sheet asset amounts to
the amounts of General Account Investment Assets.
<TABLE>
<CAPTION>
General Account Investment Assets Carrying Values
September 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.............. $ 20,848.4 $ 4,236.7 $ (127.8) $ 405.8 $ 24,807.1
Held to maturity................ 144.6 - - 144.6 -
Trading account securities........ 17,982.6 - 17,982.6 - -
Securities purchased under
resale agreements............... 26,585.9 - 26,585.9 - -
Mortgage loans on real estate..... 2,604.7 1,393.4 - - 3,998.1
Equity real estate................ 3,225.8 194.7 (17.8) - 3,438.3
Policy loans...................... 2,436.8 1,715.2 - - 4,152.0
Other equity investments.......... 1,265.2 95.4 317.3 9.2 1,034.1
Other invested assets............. 183.7 88.6 146.3 1.2 124.8
---------------- ------------- --------------- -------------- -------------
Total investments............... 75,277.7 7,724.0 44,886.5 560.8 37,554.4
Cash and cash equivalents......... 1,448.9 (79.0) 457.7 68.9 843.3
---------------- ------------- --------------- -------------- -------------
Total............................. $ 76,726.6 $ 7,645.0 $ 45,344.2 $ 629.7 $ 38,397.7
================ ============= =============== ============== =============
<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 $15.0 million and $26.7 million for the
first nine months of 1997 and of 1996, respectively; writedowns on equity real
estate during the first nine months of 1997 were $7.3 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 nine months of
1997 and of 1996.
30
<PAGE>
General Account Investment Assets
Valuation Allowances
(In Millions)
<TABLE>
<CAPTION>
Equity Real
Mortgages Estate Total
--------------- --------------- --------------
<S> <C> <C> <C>
September 30, 1997
Assets Outside of the Closed Block:
Beginning balances............................................ $ 50.4 $ 86.7 $ 137.1
Additions..................................................... 27.7 71.5 99.2
Deductions(1)................................................. (26.5) (35.2) (61.7)
--------------- --------------- --------------
Ending Balances............................................... $ 51.6 $ 123.0 $ 174.6
=============== =============== ==============
Closed Block:
Beginning balances............................................ $ 13.8 $ 3.7 $ 17.5
Additions..................................................... 7.1 0.5 7.6
Deductions(1)................................................. (7.3) (1.5) (8.8)
--------------- --------------- --------------
Ending Balances............................................... $ 13.6 $ 2.7 $ 16.3
=============== =============== ==============
Total:
Beginning balances............................................ $ 64.2 $ 90.4 $ 154.6
Additions..................................................... 34.8 72.0 106.8
Deductions(1)................................................. (33.8) (36.7) (70.5)
--------------- --------------- --------------
Ending Balances............................................... $ 65.2 $ 125.7 $ 190.9
=============== =============== ==============
September 30, 1996
Total:
Beginning balances............................................ $ 83.9 $ 264.1 $ 348.0
SFAS No. 121 release(2)....................................... - (152.4) (152.4)
Additions..................................................... 62.4 42.3 104.7
Deductions(1)................................................. (19.6) (88.4) (108.0)
--------------- --------------- --------------
Ending Balances............................................... $ 126.7 $ 65.6 $ 192.3
=============== =============== ==============
<FN>
(1) Primarily reflected releases of allowances due to asset dispositions and
writedowns.
(2) 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.
</FN>
</TABLE>
31
<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
September 30, 1997 and the net amortized cost at December 31, 1996.
<TABLE>
<CAPTION>
General Account Investment Assets
(Dollars In Millions)
September 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).......... $ 23,942.2 $ - $ 23,942.2 63.8% $ 21,711.6 62.1%
Mortgages.................... 4,063.3 65.2 3,998.1 10.7 4,513.7 12.9
Equity real estate........... 3,564.0 125.7 3,438.3 9.2 3,518.6 10.1
Other equity investments..... 1,034.1 - 1,034.1 2.7 965.1 2.8
Policy loans................. 4,152.0 - 4,152.0 11.0 3,962.0 11.3
Cash and short-term
investments(2)............. 968.1 - 968.1 2.6 277.7 0.8
--------------- ------------- ------------- ------------- ------------- -------------
Total........................ $ 37,723.7 $ 190.9 $ 37,532.8 100.0% $ 34,948.7 100.0%
=============== ============= ============= ============= ============= =============
<FN>
(1) Excludes unrealized gains of $864.9 million and $432.9 million in fixed
maturities classified as available for sale at September 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.
32
<PAGE>
Investment Results of General Account Investment Assets
<TABLE>
<CAPTION>
Investment Results by Asset Category
(Dollars In Millions)
Three Months Ended September 30, Nine Months Ended September 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.............. 7.88% $ 457.7 7.93% $ 408.7 7.93% $ 1,340.1 7.92% $ 1,186.9
Investment
Gains/(Losses).... 0.64% 37.4 0.16% 8.2 0.49% 82.8 0.29% 43.3
---------- ------------- ---------- ------------- --------- -------------- ---------- -------------
Total............... 8.52% $ 495.1 8.09% $ 416.9 8.42% $ 1,422.9 8.21% $ 1,230.2
Ending Assets....... $ 23,942.2 $ 20,927.4 $ 23,942.2 $ 20,927.4
Mortgages:
Income.............. 8.81% $ 90.0 8.89% $ 106.1 9.35% $ 298.5 8.88% $ 324.4
Investment
Gains/(Losses).... (0.54)% (5.5) (0.66)% (7.9) (0.26)% (8.5) (1.62)% (59.2)
---------- ------------- ---------- ------------- --------- -------------- ----------- -------------
Total............... 8.27% $ 84.5 8.23% $ 98.2 9.09% $ 290.0 7.26% $ 265.2
Ending Assets....... $ 3,998.1 $ 4,720.7 $ 3,998.1 $ 4,720.7
Equity Real
Estate (2):
Income.............. 2.55% $ 17.1 2.59% $ 20.0 2.50% $ 50.7 2.78% $ 65.0
Investment
Gains/(Losses).... (7.31)% (49.1) (1.37)% (10.6) (3.15)% (63.8) (1.80)% (42.0)
---------- ------------- ----------- ------------- --------- --------------- ---------- -------------
Total............... (4.76)% $ (32.0) 1.22% $ 9.4 (0.65)% $ (13.1) 0.98% $ 23.0
Ending Assets....... $ 2,602.2 $ 3,069.4 $ 2,602.2 $ 3,069.4
Other Equity
Investments:
Income.............. 25.44% $ 64.6 15.18% $ 35.9 17.66% $ 130.7 15.72% $ 106.3
Investment
Gains/(Losses).... 1.30% 3.3 0.17% .4 1.31% 9.7 0.42% 2.8
---------- ------------- ----------- ------------- --------- -------------- ----------- -------------
Total............... 26.74% $ 67.9 15.35% $ 36.3 18.97% $ 140.4 16.14% $ 109.1
Ending Assets....... $ 1,034.1 $ 930.2 $ 1,034.1 $ 930.2
Policy Loans:
Income.............. 7.02% $ 72.2 7.16% $ 70.1 6.97% $ 212.3 6.98% $ 202.5
Ending Assets....... $ 4,152.0 $ 3,946.1 $ 4,152.0 $ 3,946.1
Cash and Short-term
Investments:
Income.............. 7.21% $ 13.5 10.65% $ 12.1 8.23% $ 37.8 8.62% $ 43.0
Ending Assets....... $ 968.1 $ 379.6 $ 968.1 $ 379.6
Total:
Income.............. 7.97% $ 715.1 7.73% $ 652.9 7.86% $ 2,070.1 7.69% $ 1,928.1
Investment
Gains/(Losses).... (0.16)% (13.9) (0.12)% (9.9) 0.07% 20.2 (0.22)% (55.1)
---------- ------------- ----------- ------------- --------- --------------- ---------- -------------
Total(3)............ 7.81% $ 701.2 7.61% $ 643.0 7.93% $ 2,090.3 7.47% $ 1,873.0
Ending Assets....... $ 36,696.7 $ 33,973.4 $ 36,696.7 $ 33,973.4
<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.
33
<PAGE>
(2) Equity real estate carrying values are shown net of third party debt and
minority interest in real estate of $836.1 million and $838.4 million as of
September 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 $12.4 million, $12.9 million, $38.2 million and $41.2 million for
the three months and the nine months ended September 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 7.54%, 7.33%, 7.65% and 7.20% for the three months and the
nine months ended September 30, 1997 and 1996, respectively.
</FN>
</TABLE>
For the first nine months of 1997, General Account investment results were up
$217.3 million from the year earlier period reflecting higher income on a larger
asset base and investment gains as compared to losses in the prior year period.
On an annualized basis, total investment yield increased to 7.93% from 7.47%.
Investment income increased by $142.0 million or 7.4%, resulting in an increase
in the annualized income yield to 7.86% from 7.69%. 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 $129.1 million in the first nine months of 1997
compared to $134.5 million in the first nine months of 1996.
Total investment results for fixed maturities increased $192.7 million or 15.7%
for the first nine months of 1997 compared to the year earlier period.
Investment income increased by $153.2 million reflecting a higher asset base,
primarily from reinvesting nearly all available funds into fixed maturities.
Investment gains were $82.8 million for the first nine months of 1997 compared
to $43.3 million in 1996. Writedowns on fixed maturities were $15.0 million in
the first nine months of 1997 as compared to $26.7 million in the comparable
period of 1996. Total investment results on mortgages increased by $24.8 million
or 9.4% in the first nine months of 1997 compared to the same period a year ago
largely due to fewer additions to asset valuation allowances. Total investment
results for equity real estate decreased $36.1 million during the first nine
months of 1997 compared to the year earlier period reflecting a $21.8 million
increase in investment losses largely due to higher additions to valuation
allowances and a $14.3 million reduction in investment income primarily due to a
declining asset base. Investment income on other equity investments increased by
$28.7 million and $24.4 million during the three months and the nine months
ended September 30, 1997, respectively, principally reflecting the strong equity
market environment in the third quarter of 1997.
Fixed Maturities. Fixed maturities consist of publicly traded debt securities,
privately placed debt securities and small amounts of redeemable preferred
stock, which represented 75.0%, 24.3% and 0.7%, respectively, of the amortized
cost of this asset category at September 30, 1997.
<TABLE>
<CAPTION>
Fixed Maturities By Credit Quality
(Dollars In Millions)
September 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>
1-2 Aaa/Aa/A and Baa...... $ 20,773.7(1) 86.8% $ 21,477.4 $ 18,994.8(1) 87.5% $ 19,334.0
3-6 Ba and lower.......... 3,005.7(2) 12.5% 3,156.8 2,575.2(2) 11.9 2,665.7
------------ ----------- -------------- ------------ --------- -------------
Subtotal........................ 23,779.4 99.3% 24,634.2 21,570.0 99.4 21,999.7
Redeemable preferred stock
and other..................... 162.8 0.7% 172.9 141.6 0.6 144.8
------------ ----------- -------------- ------------ --------- -------------
Total........................... $ 23,942.2 100.0% $ 24,807.1 $ 21,711.6 100.0% $ 22,144.5
============ =========== ============== ============ ========= =============
<FN>
(1) Includes Class B Notes with an amortized cost of $12.8 million and $67.0 million at September 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>
34
<PAGE>
At September 30, 1997, The Equitable held CMOs with an amortized cost of $2.43
billion, including $2.32 billion in publicly traded CMOs. About 57.7% of the
public CMO holdings were collateralized by GNMA, FNMA and FHLMC securities.
Approximately 34.6% of the public CMO holdings were in PAC bonds. At September
30, 1997, IO strips amounted to $0.3 million at amortized cost. There were no
holdings of PO strips at that date. In addition, at September 30, 1997, The
Equitable held $3.23 billion of mortgage pass-through securities (GNMA, FNMA or
FHLMC securities) and also held $529.9 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)
September 30, December 31,
1997 1996
---------------- -----------------
<S> <C> <C>
FIXED MATURITIES.............................................................. $ 23,942.2 $ 21,711.6
Problem fixed maturities...................................................... 28.7 50.6
Potential problem fixed maturities............................................ 16.7 .5
Restructured fixed maturities(1).............................................. 2.5 3.4
<FN>
(1) Excludes restructured fixed maturities of $2.1 million and $2.5 million that
are shown as problems at September 30, 1997 and December 31, 1996,
respectively. No restructured fixed maturities are shown as potential
problems at September 30, 1997 and December 31, 1996.
</FN>
</TABLE>
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
At September 30, 1997, commercial mortgages totaled $2.36 billion (57.9% of the
amortized cost of the category), agricultural loans were $1.71 billion (42.0%)
and residential loans were $2.6 million (0.1%).
<TABLE>
<CAPTION>
Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(Dollars In Millions)
September 30, December 31,
1997 1996
---------------- -----------------
<S> <C> <C>
COMMERCIAL MORTGAGES.......................................................... $ 2,355.3 $ 2,901.2
Problem commercial mortgages.................................................. 47.3 11.3
Potential problem commercial mortgages........................................ 149.4 425.7
Restructured commercial mortgages(1).......................................... 223.5 269.3
VALUATION ALLOWANCES.......................................................... 65.2 64.2
AGRICULTURAL MORTGAGES........................................................ $ 1,705.4 $ 1,672.7
Problem agricultural mortgages................................................ 17.8 5.4
Potential problem agricultural mortgages...................................... - -
Restructured agricultural mortgages........................................... 1.2 2.0
VALUATION ALLOWANCES.......................................................... - -
<FN>
(1) Excludes restructured commercial mortgages of $38.3 million and $1.7 million
that are shown as problems at September 30, 1997 and December 31, 1996,
respectively, and excludes $27.7 million and $229.5 million of restructured
commercial mortgages that are shown as potential problems at September 30,
1997 and December 31, 1996, respectively.
</FN>
</TABLE>
35
<PAGE>
Problem commercial mortgages increased by $36.0 million from December 31, 1996
to September 30, 1997 as previously identified potential problem loans became
delinquent. Potential problem loans declined as mortgages were reclassified to
performing status or to problem. During the first nine 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 $223.5 million of restructured
mortgages was 9.7%. As a result of these restructurings, the restructured
weighted average coupon rate was 8.5% and the restructured weighted average cash
payment rate was 7.9%. The foregone interest on restructured commercial
mortgages (including restructured commercial mortgages presented as problem or
potential problem commercial mortgages) for the nine months ended September 30,
1997 was $2.1 million.
At September 30, 1997, the $47.3 million of problem commercial mortgages were
all classified as retail type properties. Their distribution by state was: New
York ($43.2 million or 91.3%) and Mississippi ($4.1 million or 8.7%). Potential
problem commercial mortgages were classified by property type as: retail ($108.0
million or 72.3%), industrial ($18.8 million or 12.6%), office ($16.7 million or
11.2%), hotel ($4.4 million or 2.9%) and apartment ($1.5 million or 1.0%). By
state, their distribution was: New York ($58.8 million or 39.4%), Massachusetts
($26.8 million or 17.9%), Puerto Rico ($18.7 million or 12.5%), Pennsylvania
($18.5 million or 12.4%), and Virginia ($16.3 million or 10.9%). No other state
had 5.0% or more of the total.
At September 30, 1997 and 1996, management identified impaired commercial loans
as defined under SFAS No. 114 with a carrying value of $249.7 million and $562.6
million, respectively. The provision for losses for these impaired mortgage
loans was $60.9 million and $111.0 million at September 30, 1997 and 1996,
respectively. Income earned on these loans in the first nine months of 1997 and
of 1996 was $19.9 million and $39.5 million, respectively, including cash
received of $17.6 million and $34.1 million, respectively.
For the first nine months of 1997, scheduled principal amortization payments and
prepayments on commercial mortgage loans received aggregated $319.1 million. In
addition, during the first nine months of 1997, $368.8 million of commercial
mortgage loan maturity payments were scheduled, of which $173.2 million were
paid as due. Of the amount not paid, $125.3 million were foreclosed, $59.9
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 9.7% and $5.8 million were delinquent or in default for non-payment of
principal.
Equity Real Estate. As of September 30, 1997, on the basis of amortized cost,
the equity real estate category included $2.49 billion (or 69.7%) acquired as
investment real estate and $1.08 billion (or 30.3%) acquired through or in lieu
of foreclosure (including in-substance foreclosures).
Real estate properties with amortized costs of $251.8 million and $294.6 million
were sold during the first nine months of 1997 and of 1996, respectively. In the
first nine months of 1997 and 1996, respectively, gains of $13.5 million and
losses of $.2 million were recognized on equity real estate which was sold.
At September 30, 1997 and 1996, respectively, allowances totaling $125.7 million
and $65.6 million were held on properties identified as available for sale with
amortized costs of $510.9 million and $411.4 million.
At September 30, 1997, the vacancy rate for The Equitable's office properties
was 12.4% in total, with a vacancy rate of 9.2% for properties acquired as
investment real estate and 22.1% for properties acquired through foreclosure.
The national commercial office vacancy rate was 11.2% (as of June 30, 1997) as
measured by CB Commercial.
Holding Company Group Investment Portfolio
For the first nine months of 1997, Holding Company Group investment results were
$38.2 million, as compared to $40.6 million in the year earlier period. The
decrease principally was due to lower investment income on the Holding Company's
smaller fixed maturities portfolio.
36
<PAGE>
At September 30, 1997, the Holding Company Group investment portfolio's $629.7
million carrying value was made up of $550.4 million of fixed maturities ($400.5
million with an NAIC 1 rating), $70.1 million of cash and short-term investments
and $9.2 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)
September 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>
1-2 Aaa/Aa/A and Baa.... $ 475.4 86.5% $ 491.7 $ 525.0 80.1% $ 537.8
3-6 Ba and lower........ 74.1 13.5 77.7 130.4 19.9 136.5
------------- --------- ------------- ------------- --------- -------------
Total.......................... $ 549.5 100.0% $ 569.4 $ 655.4 100.0% $ 674.3
============= ========= ============= ============= ========= =============
</TABLE>
At September 30, 1997, the amortized cost of problem fixed maturities was $4.5
million and $8.0 million for restructured fixed maturities. There were no
potential problem fixed maturities at that date.
LIQUIDITY AND CAPITAL RESOURCES
Since becoming a public company in 1992, the Holding Company's Board of
Directors has declared quarterly cash dividends of $0.05 per share on the
outstanding shares of its 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 or shares of Common Stock representing dividends
accrued from July 22, 1997, the prior dividend payment date. As a result of
those transactions, shareholder's equity increased by approximately $339.7
million. Dividends paid in 1997 for the Series C Preferred Stock and Series E
Preferred Stock were $0.7 million and $14.8 million, respectively.
Due to the abovementioned conversions earlier in the quarter, at September 30,
1997, only the Series D Convertible Preferred Stock remains outstanding. The
Series D Preferred Stock increases shareholders' equity only when shares are
released from the SECT. In April 1996, the Holding Company had 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. 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, increasing shareholders'
equity by this amount. At September 30, 1997, the aggregate market value of the
remaining unissued registered securities was $429.1 million, based on the
closing market price on the NYSE.
See Note 9 of Notes to the Consolidated Financial Statements for further
information on the redemptions and the SECT transaction.
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 September 30, 1997, there were no amounts
outstanding under either the commercial paper program or the revolving credit
facility.
37
<PAGE>
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. At September 30, 1997, DLJ had
$200.0 million fixed rate notes outstanding under this shelf registration
statement with a weighted average rate of 6.45%. DLJ has entered into interest
rate swap transactions to convert $190.0 million of such notes into floating
rate notes based upon LIBOR. At September 30, 1997, the weighted average
effective interest rates on these notes was 5.89%. In June 1997, DLJ filed a
shelf registration statement which enables DLJ to issue from time to time up to
$1.0 billion in aggregate principal amount of senior or subordinated debt
securities. In September 1997, DLJ commenced a program under such shelf
registration for the offering of up to $500.0 million medium-term notes due nine
months or more from the date of issuance. At September 30, 1997, there were
$150.0 million notes outstanding under this program at a fixed rate of 6.90%.
Additionally, in September 1997, DLJ issued $350.0 million global floating rate
notes from the $1.0 billion shelf registration statement, bearing interest at a
floating rate equal to LIBOR plus 0.25% and maturing in September 2002. The
notes are redeemable by DLJ in whole or in part on or after September 2000. 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. During the third quarter of 1996, DLJ completed an offering from a shelf
registration of $200.0 million of 8.42% mandatorily redeemable preferred stock,
redeemable in whole or in part, at DLJ's option, on or after August 31, 2001.
To address a possible year end change in its tax status, on June 24, 1997,
Alliance announced plans for a conversion 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 conversion
to a public corporate ownership structure.
Consolidated Cash Flows
The net cash used by operating activities was $3.05 billion for the first nine
months of 1997 compared to net cash provided by operating activities of $301.9
million for the same period in 1996. Cash used by operating activities in 1997
principally was attributable to the $3.78 billion net change in trading
activities and broker-dealer related receivables/payables at DLJ reflecting an
increase in operating assets.
Net cash used by investing activities was $193.1 million for the first nine
months of 1997 as compared to $390.6 million for the same period in 1996. In
1997, investment purchases exceeded sales, maturities, repayments and return of
capital by $469.6 million. The EREIM sale produced net proceeds of approximately
$261.0 million. Discontinued operations reduced its outstanding loans from
continuing operations by $336.2 million during the first nine months of 1997. In
the 1996 period, investment purchases exceeded sales, maturities, repayments and
return of capital by $1.10 billion. Discontinued operations repaid $827.0
million of loans from continuing operations during the first nine months of
1996.
Net cash provided by financing activities was $3.93 billion for the first nine
months of 1997 as compared to net cash used by financing activities of $196.9
million in the first nine months of 1996. Net cash provided by financing
activities during the first nine months of 1997 primarily resulted from a $3.65
billion increase in short-term financings, principally due to net repurchase
agreement activity. There was a net increase of long-term debt of $687.9 million
primarily due to new debt at DLJ. Withdrawals from General Account
policyholders' account balances exceeded deposits by $390.7 million during the
nine months ended September 30, 1997. In the first nine months of 1996,
withdrawals from General Account policyholders' account balances exceeded
deposits by $437.3 million. During the first nine months of 1996, cash provided
by additional long-term debt of $296.3 million and the net increase of 137.1
million in short-term financing, principally at DLJ, was partially offset by the
debt repayments of $307.6 million.
The operating, investing and financing activities described above resulted in an
increase in cash and cash equivalents during the first nine months of 1997 of
$693.6 million to $1.45 billion.
38
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
There have been no 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 13 to the Registrant's
Unaudited Consolidated Financial Statements in Part I of this Form 10-Q for the
quarter ended September 30, 1997.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K
None
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: November 11, 1997 THE EQUITABLE COMPANIES INCORPORATED
By: /s/Stanley B. Tulin
----------------------------------------------
Name: Stanley B. Tulin
Title: Executive Vice President and Chief
Financial Officer
Date: November 11, 1997 /s/Alvin H. Fenichel
----------------------------------------------
Name: Alvin H. Fenichel
Title: Senior Vice President and Controller
40
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 20,848,400
<DEBT-CARRYING-VALUE> 144,600
<DEBT-MARKET-VALUE> 163,500
<EQUITIES> 1,265,200
<MORTGAGE> 2,604,700
<REAL-ESTATE> 3,225,800
<TOTAL-INVEST> 75,277,700
<CASH> 1,448,900
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,185,700
<TOTAL-ASSETS> 155,562,200
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 4,514,400
<POLICY-HOLDER-FUNDS> 21,742,200
<NOTES-PAYABLE> 8,146,200
0
0
<COMMON> 2,200
<OTHER-SE> 5,182,200
<TOTAL-LIABILITY-AND-EQUITY> 155,562,200
1,137,200
<INVESTMENT-INCOME> 2,842,700
<INVESTMENT-GAINS> 825,900
<OTHER-INCOME> 2,547,100
<BENEFITS> 718,300
<UNDERWRITING-AMORTIZATION> 227,900
<UNDERWRITING-OTHER> 4,381,400
<INCOME-PRETAX> 1,066,800
<INCOME-TAX> 376,200
<INCOME-CONTINUING> 578,000
<DISCONTINUED> (2,900)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 575,100
<EPS-PRIMARY> 2.78
<EPS-DILUTED> 2.51
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
