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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
x OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 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
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
- ----------------------------------- ------------------------------------------
Common Stock, Par Value $.01 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
thisForm 10-K.
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 9, 1998, was approximately $4.78
billion.
As of March 9, 1998, 222,401,519 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Apart from information regarding executive officers set forth in Item I.A, the
information required to be furnished pursuant to Part III of this Form 10-K is
set forth in, and incorporated by reference from, the registrant's definitive
proxy statement for the annual meting of stockholders to be held on May 13, 1997
to be filed by the registrant with the Securities and Exchange Commission
pursuant to Regulation 14A not later than 120 days after the year ended December
31, 1997.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I
<S> <C> <C>
Item 1. Business................................................................ 1-1
General................................................................. 1-1
Insurance Operations.................................................... 1-1
Investment Services..................................................... 1-5
Discontinued Operations................................................. 1-9
General Account Investment Portfolio.................................... 1-9
Holding Company Group Investment Portfolio.............................. 1-12
Competition............................................................. 1-12
Regulation.............................................................. 1-13
Principal Shareholder................................................... 1-19
Item 1A. Executive Officers...................................................... 1A-1
Item 2. Properties.............................................................. 2-1
Item 3. Legal Proceedings....................................................... 3-1
Item 4. Submission of Matters to a Vote of Security Holders..................... 4-1
Part II
Item 5 Market for Registrant's Common Equity and Related Stockholder Matters... 5-1
Item 6. Selected Consolidated Financial Information............................. 6-1
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 7-1
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............. 7A-1
Item 8. Financial Statements and Supplementary Data............................. FS-1
Item 9. Changes In and Disagreements With Accountants On Accounting and
Financial Disclosure.................................................. 9-1
Part III
Item 10. Directors and Executive Officers of the Registrant...................... 10-1
Item 11. Executive Compensation.................................................. 11-1
Item 12. Security Ownership of Certain Beneficial Owners and Management.......... 12-1
Item 13. Certain Relationships and Related Transactions.......................... 13-1
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........ 14-1
Signatures ........................................................................ S-1
Index to Exhibits ........................................................................ E-1
</TABLE>
TOC - 1
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Part I, Item 1.
BUSINESS 1
General. The Equitable is a diversified financial services organization serving
a broad spectrum of insurance, investment management and investment banking
customers. It is one of the world's largest investment managers, with total
assets under management of approximately $274.1 billion at December 31, 1997.
The Equitable's insurance business, which comprises Insurance Operations, is
conducted principally by its life insurance subsidiary, Equitable Life. The
Equitable's investment management and investment banking businesses, which
comprise the Investment Services segment, are conducted by Alliance and DLJ. For
additional information on The Equitable's business segments, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations ("M,
D&A") - Combined Results of Continuing Operations by Segment" and Note 21 of
Notes to Consolidated Financial Statements. AXA-UAP ("AXA"), a French holding
company for an international group of insurance and related financial services
companies, is the Holding Company's largest shareholder. See "Principal
Shareholder".
Segment Information
Insurance Operations
General. Insurance Operations accounted for approximately $3.68 billion or 38.1%
of consolidated revenue for the year ended December 31, 1997. It offers a
variety of life insurance and annuity products, mutual funds and other
investment products, as well as association plans. These products are marketed
in all 50 states by a career agency force of over 7,300 agents (except
association plans, which are marketed directly to clients by the Insurance
Group). The Insurance Group's Income Manager series of annuity products, which
was introduced by the career agency force in 1995, is now distributed through
major securities firms, other broker-dealers and banks, as well as the career
agency force. As of December 31, 1997, the Insurance Group had nearly 2.8
million policy or contractholders. Equitable Life, which was established in the
State of New York in 1859, has been among the largest life insurance companies
in the United States for more than 100 years. For additional information on
Insurance Operations, see "M, D&A - Combined Results of Continuing Operations by
Segment - Insurance Operations," Note 21 of Notes to Consolidated Financial
Statements, as well as "Employees and Agents", "Competition" and "Regulation".
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1 As used in this Form 10-K, the term "The Equitable" refers to The Equitable
Companies Incorporated, a Delaware corporation (the "Holding Company"), and
its consolidated subsidiaries including The Equitable Life Assurance Society
of the United States ("Equitable Life"). The term "Holding Company Group"
refers collectively to the Holding Company and its non-operating
subsidiaries, EQ Asset Trust 1993 (the "Trust") and The Equitable Companies
Incorporated Stock Trust (the "SECT"). The term "Insurance Group" refers
collectively to Equitable Life and its wholly owned subsidiary, The
Equitable of Colorado, Inc. ("EOC") and, prior to its merger into Equitable
Life on January 1, 1997, Equitable Variable Life Insurance Company
("EVLICO"). The term "Investment Subsidiaries" refers collectively to The
Equitable's majority owned publicly traded subsidiaries, Alliance Capital
Management L.P. ("Alliance"), and Donaldson, Lufkin & Jenrette, Inc.
("DLJ"), and, prior to June 10, 1997, to Equitable Life's wholly-owned
subsidiary Equitable Real Estate Management, Inc. ("EREIM") together with
its affiliates Equitable Agri-Business, Inc. and EQ Services, Inc.
(collectively referred to herein as "Equitable Real Estate"), and in each
case their respective subsidiaries. The term "General Account" refers to the
assets held in the respective general accounts of Equitable Life, EOC and,
prior to January 1, 1997, EVLICO and all of the investment assets held in
certain of Equitable Life's separate accounts on which the Insurance Group
bears the investment risk. The term "Separate Accounts" refers to the
Separate Account investment assets of Equitable Life and, prior to January
1, 1997, EVLICO, excluding the assets held in those separate accounts on
which the Insurance Group bears the investment risk. The term "General
Account Investment Assets" refers to assets held in the General Account
associated with the Insurance Group's continuing operations (which includes
the Closed Block) and does not include assets held in the General Account
associated with the Insurance Group's discontinued Wind-Up Annuity and
guaranteed interest contract ("GIC") lines of business which are referred to
herein as "Discontinued Operations Investment Assets".
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Equitable Life recently completed a comprehensive review of its organization and
strategy, as a result of which it identified a number of strategic initiatives.
Among the principal initiatives are: making the Financial Fitness Profile(R) the
cornerstone of an expanded and integrated financial planning strategy;
leveraging several successful existing business models developed by certain of
its agents; continuing to expand Equitable Distributors, Inc. ("EDI"), Equitable
Life's wholesale distribution channel, by creating additional selling
relationships with major third-party distributors and by increasing the variety
of product offerings; using information technology as a resource to be
integrated into product, distribution and other business operations to better
meet the needs of Equitable Life's sales force and clients; developing or
sourcing new products and services to permit Equitable Life to offer an even
broader range of financial planning solutions for current and potential
customers; having integrated the retail and wholesale distribution channels,
intensifying the financial planning strategy in the retail sales force, and
taking advantage of synergies between the two channels, and of technological
advances from DLJ and Alliance; implementing a branding strategy intended to
clearly position Equitable Life in the marketplace, continuing a major national
advertising program designed to bring the Equitable and AXA identities closer
together and considering a name change that would unite the Equitable and AXA
brands; and examining and reallocating expenses in a manner consistent with the
development of these strategic initiatives.
During 1997, Equitable Life reorganized certain businesses into more functional
organizations to improve their effectiveness and profitability. The newly
designated Chief Distribution Officer will manage all sales and distribution
efforts, including both the career agency force and the wholesale distribution
channel. In addition, a single executive officer will manage development of all
Equitable Life insurance and annuity products.
Products. The Insurance Group offers a portfolio of products designed to meet
the life insurance, asset accumulation, retirement funding and estate planning
needs of the Insurance Group's customers throughout their financial life-cycles.
These products include individual variable life insurance products and
individual variable annuity products (both tax-qualified and non-qualified).
They offer multiple Separate Account investment options, including bond funds,
domestic and global equity funds, balanced funds, indexed funds, and a series of
asset allocation funds, as well as General Account guaranteed interest options.
The range of investment options creates flexibility in meeting individual
customer needs. Alliance manages most of the assets in the Insurance Group's
Separate Accounts. In 1997, funds managed by unaffiliated managers were added
through a new mutual fund known as EQ Advisors Trust permitting holders of
certain variable contracts to invest the assets supporting their contracts in
mutual funds for which the following serve as investment advisers: Bankers Trust
Company, J.P. Morgan Investment Management Inc., Lazard Freres & Company, LLC,
Massachusetts Financial Services Company, Merrill Lynch Asset Management, L.P.,
Morgan Stanley Asset Management, Inc., Putnam Investment Management, Inc., Rowe
Price-Fleming International, Inc., T. Rowe Price Associates, Inc. and Warburg,
Pincus Counsellors, Inc.
The Income Manager series of retirement products are annuities designed to
provide for both the accumulation and distribution of retirement assets. In
addition to a choice of variable funds, these products offer 10 market value
adjusted fixed rate options which provide a guaranteed interest rate to a fixed
maturity date and a market value adjustment for withdrawals or transfers prior
to such date. Income Manager accumulation products offer a guaranteed minimum
income benefit which, subject to certain restrictions and limitations, provides
a guaranteed minimum life annuity regardless of investment performance. These
distribution products offer the guarantee of a lifetime income similar to
traditional immediate annuities, while giving the annuitant access to cash
values during the early years following retirement.
To fund the pension plans (both defined benefit and defined contribution) of
small to medium-sized employers, the Insurance Group offers annuity products
tailored to the small pension market. These products offer both Separate Account
and General Account investment options.
The continued growth of Separate Account assets remains a strategic objective of
The Equitable. To the extent the investment funds associated with variable life
insurance and variable annuity products are placed in the Separate Accounts
rather than in the General Account, the investment risk (and reward) is
transferred to policyholders while The Equitable earns fee income from managing
Separate Account assets. In addition, variable products, because they involve
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less risk to the Insurance Group than traditional products, require less
capital. Separate Account options also permit policyholders to choose more
personalized investment strategies without affecting the composition of General
Account assets. Over the past five years, Separate Account assets for individual
variable life and variable annuities have increased by $18.11 billion to $24.50
billion at December 31, 1997, including approximately $876.6 million invested
through EQ Advisors Trust.
The Insurance Group also sells traditional whole life insurance, universal life
insurance and term insurance products, and, through its wholly owned
broker-dealer subsidiary EQ Financial Consultants, Inc. ("EQ Financial") mutual
funds. During 1997, the Insurance Group's career agency force sold approximately
$1.71 billion in mutual funds and other investments through EQ Financial. In
addition, the Insurance Group provides its agents with access to a number of
additional insurance products issued by unaffiliated insurers through
EquiSource, Inc., a wholly owned insurance brokerage subsidiary.
The Insurance Group also acts as a retrocessionaire by assuming life and annuity
reinsurance from reinsurers. The Insurance Group also assumes accident, health,
group long-term disability, aviation and space risks by participating in various
reinsurance pools.
From July 1, 1993 through January 1998, new disability income policies were 80%
reinsured through an arrangement with Paul Revere Life Insurance Company ("Paul
Revere"). In February 1998, EquiSource, Inc. entered into an agreement that
permits Equitable Life agents to sell disability income policies issued by
Provident Life and Accident Insurance Company ("Provident") and Equitable Life
stopped underwriting new disability income policies. As a result of an
acquisition in 1996, Provident and Paul Revere are affiliates. Effective
September 15, 1992, the Insurance Group ceased to sell new individual major
medical policies.
The following table summarizes premiums and deposits for Insurance Operations'
products combining amounts for the Closed Block and amounts for operations
outside the Closed Block.
<TABLE>
<CAPTION>
Insurance Operations
Premiums and Deposits
(In Millions)
1997 1996 1995
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<S> <C> <C> <C>
Individual annuities.................... $ 4,548.5 $ 3,342.6 $ 2,847.4
Individual life insurance(1)............ 2,431.1 2,346.7 2,245.8
Other(2)................................ 394.5 398.2 463.6
Group pension........................... 328.7 355.5 354.7
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Total Premiums and Deposits............. $ 7,702.8 $ 6,443.0 $ 5,911.5
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<FN>
(1) Includes variable, interest-sensitive and traditional life products.
(2) Includes reinsurance assumed and health insurance.
</FN>
</TABLE>
Markets. The Insurance Group's targeted customers include middle and upper
income individuals such as professionals, owners of small businesses, employees
of tax-exempt organizations and existing customers. For variable life, the
Insurance Group has targeted certain markets, particularly non-qualified
retirement planning, the estate planning market and the market for business
continuation needs (e.g., the use of variable life insurance to fund buy/sell
agreements and similar arrangements), as well as the middle-to-upper income life
protection markets. The Insurance Group's target markets for variable annuities
include, in addition to the personal retirement savings market, the tax-exempt
markets (particularly retirement plans for educational and non-profit
organizations), corporate pension plans (particularly 401(k) defined
contribution plans covering 25 to 250 employees) and the IRA retirement planning
market. The Insurance Group's Income Manager series of annuity products includes
products designed to address the growing market of those at or near retirement
who need to convert retirement savings into retirement income.
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Demographic studies suggest that, as the post-World War II "baby boom"
generation ages over the next decade, there will be growth in the number of
individuals who management believes are most likely to purchase the Insurance
Group's savings-oriented products. These baby boomers have indicated a strong
need for long-term financial planning services. Those studies also suggest that
over the next 15 years the number of new retirees will grow significantly.
Management believes this growth in the retiree population represents an
opportunity for the Insurance Group's Income Manager products. In addition,
management believes the trend among U.S. employers away from defined benefit
plans (under which the employer makes the investment decisions) toward
employee-directed, defined contribution retirement and savings plans (which
allow employees to choose from a variety of investment options) will continue.
Management believes the range of insurance and annuity products and planning
services offered by the Insurance Group can satisfy the needs of customers in
these target markets for estate planning, and for the planning for and
management of retirement and education funds and other forms of long-term
savings, as well as their traditional insurance protection needs.
In 1997, the Insurance Group collected premiums and deposits from policy or
contractholders in all 50 states, the District of Columbia and Puerto Rico. For
the Insurance Group, the states of New York (13.4%), California (7.5%), New
Jersey (7.5%), Michigan (6.3%), Illinois (6.2%), Pennsylvania (5.9%) and Florida
(5.1%) contributed the greatest amounts of premiums (accounted for on a
statutory basis), and no other state represented more than 5% of the Insurance
Group's statutory premiums. The Insurance Group also issued policies to
individuals who were non-U.S. citizens, but premiums from all non-U.S. citizens
represented less than 1% of the Insurance Group's 1997 aggregate statutory
premiums.
Distribution. Products are distributed primarily through a career agency force
of over 7,300 professionals organized into approximately 75 agencies across the
United States which are owned and managed by the Insurance Group and which
provide agents with training, marketing and sales support. After an initial
training period, agents are compensated by commissions based on product sales
levels and key profitability factors, including persistency. The Insurance Group
sponsors pension and other benefit plans and sales incentive programs for its
agents to focus their sales efforts on the Insurance Group's products. Most of
the Insurance Group's career agents are not prohibited from selling traditional
insurance products offered by other companies. The Equitable's Law Department
maintains a Compliance Group staffed with compliance professionals who, working
together with attorneys and other professionals in the Law Department, review
and approve advertising and sales literature prior to use by the Insurance
Group's agency force and monitor customer complaints.
As of December 31, 1997, nearly all of the Insurance Group's career agents were
licensed to sell variable insurance and annuity products as well as certain
investment products, including mutual funds. The Insurance Group leads the
insurance industry in the number of agents and employees who hold both the
Chartered Life Underwriter (CLU) and Chartered Financial Consultant (ChFC)
designations, which are awarded by The American College, a professional
organization for insurance and financial planning professionals. Management
believes the professionalism of its agency force provides it with a competitive
advantage in the marketing of the Insurance Group's sophisticated insurance
products.
In a continuing effort to enhance the quality of the Insurance Group's agency
force, during 1997 management continued to focus its recruiting efforts on
attracting professionals from fields such as accounting, banking and law.
Management believes the knowledge and experience of these individuals enables
them to add significant value to client service and that recruiting more
experienced individuals has had a positive impact on the retention and
productivity rates of first year agents.
Management's needs-based selling strategy begins with its Financial Fitness
Profile(R). Financial Fitness Profile(R) is designed to make the client's
long-term financial needs the key ingredient of the sales process and is used by
the Insurance Group to identify a client's financial goals and needs in order to
develop a comprehensive financial strategy addressing the client's unique
situation. Management believes its Financial Fitness Profile(R) adds significant
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value to client service and provides an excellent foundation for building
long-term relationships with the Insurance Group's customers. Agents are trained
to use Financial Fitness Profile(R) to maximize this value-added approach. In
1996, the Insurance Group, through its broker-dealer, EQ Financial, also
introduced a program for qualified associates to offer fee-based financial
plans, products and seminars.
During 1996, management made a strategic decision to create its own wholesale
distribution company, EDI, to offer the Income Manager series of products to
securities firms, broker-dealers and banks. EDI currently employs 43 field and
80 home office personnel. A specially designed product series was developed for
EDI during 1996, and EDI began marketing the new series in November 1996 through
a major securities firm and several regional broker-dealer firms. EDI ended 1996
with executed sales agreements with 70 broker-dealers. Agreements were also
reached with two major banks. In 1997, EDI executed sales agreements with 80
additional broker-dealers, including a second major securities firm and four
major banks. In 1997, major securities firms, other broker-dealers and banks
accounted for 48.4% of all Income Manager products sales. Management is
exploring other Equitable products and services that may be offered through EDI.
During 1997, the agency force continued to incorporate the Income Manager series
of products into their sales process. More than 3,000 agents sold an Income
Manager product during 1997.
Equitable Life is continuing to centralize its life insurance processing and
servicing functions in a new National Operations Center in Charlotte, North
Carolina. This will result in the closing of the operations facilities in Des
Moines, Iowa and Fresno, California, and should enhance service to
policyholders, streamline operations and provide cost savings. The transition is
expected to be completed in the second half of 1999.
Insurance Underwriting. The risk selection process is carried out by
underwriters who evaluate policy applications based on information provided by
the applicant and other sources. Specific tests, such as blood analysis, are
used to evaluate policy applications based on the size of the policy, the age of
the applicant and other factors. Underwriting rules and procedures established
by the Insurance Group's underwriting area are designed to produce mortality
results consistent with assumptions used in product pricing while providing for
competitive risk selection.
From May through October of 1997, the Insurance Group put in place a program
under which it cedes 90% of mortality risk on substantially all new variable
life, universal life and term life policies. In addition, the Insurance Group
generally limits risk retention on new policies to a maximum of $5.0 million on
single-life policies, and $15.0 million on second-to-die policies. Automatic
reinsurance arrangements have been negotiated that permit single-life policies
to be written up to $35 million, and second-to-die policies to be written up to
$25 million. A contingent liability exists with respect to reinsurance ceded
should the reinsurers be unable to meet their obligations. Therefore, the
Insurance Group carefully evaluates the financial condition of its reinsurers to
minimize its exposure to significant losses from reinsurer insolvencies. The
Insurance Group is not party to any risk reinsurance arrangement with any
reinsurer pursuant to which the amount of reserves on reinsurance ceded to such
reinsurer equals more than 1% of the total policy reserves of the Insurance
Group (including Separate Accounts).
The Insurance Group also assumes mortality risk as a reinsurer. Mortality risk
through reinsurance assumed is limited to $5.0 million on single-life policies
and on second-to-die policies. For additional information on the Insurance
Group's reinsurance agreements, see Note 12 of Notes to Consolidated Financial
Statements.
Investment Services
General. The Investment Services segment, which in 1997 accounted for
approximately $5.97 billion or 61.7% of consolidated revenues, provides
investment management, investment banking, securities transaction and brokerage
services to both corporate and institutional clients, including the Insurance
Group, and to high net worth individuals. In recent years, rapid growth in sales
of mutual funds to individuals and retail clients has augmented the traditional
focus on institutional markets. This segment also includes the institutional
Separate Accounts, which provide various investment options for group clients
through pooled or single group accounts and which at December 31, 1997 held
assets totaling $12.03 billion. For additional information on the Investment
Subsidiaries, including their respective results of operations, see "M, D&A -
Combined Results of Continuing Operations by Segment - Investment Services" and
"Regulation".
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The Equitable continues to pursue its strategy of increasing third party assets
under management. The Investment Subsidiaries continue to add third party assets
under management, while continuing to provide investment management services to
the Insurance Group. Of the $274.1 billion of assets under management at
December 31, 1997, $216.9 billion (or 79.1%) were managed by the Investment
Subsidiaries for third parties, including $182.3 billion for domestic and
overseas investors, mutual funds, pension funds, endowment funds and, through
the Insurance Group's Separate Accounts, $34.6 billion for insurance and annuity
customers of the Insurance Group. Approximately $87.4 million (1.5%) of the
revenues of the Investment Services segment for the year ended December 31, 1997
consisted of fees earned by the Investment Subsidiaries for investment
management and other services provided to the Insurance Group and to
unconsolidated real estate joint ventures. For additional information on fees
and assets under management, see "M, D&A - Combined Results of Continuing
Operations by Segment - Investment Services - Fees From Assets Under
Management".
Alliance
General - Alliance, one of the nation's largest investment advisors, provides
diversified investment management services to a variety of institutional
clients, including pension funds, endowments and foreign financial institutions,
as well as to individual investors principally through a broad line of mutual
funds. As of December 31, 1997, Alliance had approximately $218.7 billion in
assets under management (including $193.7 billion for third party clients).
Alliance's assets under management at December 31, 1997 consisted of
approximately $133.7 billion from separately managed accounts for institutional
investors and high net worth individuals and approximately $85.0 billion from
mutual fund accounts. Alliance's greatest growth in recent years has been in
products for individual investors, primarily mutual funds, which generate
relatively high management and servicing fees as compared to fees charged to
separately managed accounts. As of December 31, 1997, The Equitable owned a 1%
general partnership interest in Alliance and approximately 56.9% of the units
representing assignments of beneficial ownership of limited partnership
interests in Alliance ("Alliance Units").
Alliance's business can be divided into two broad categories: separately managed
accounts and mutual funds management. Alliance's separately managed account
business consists primarily of the active management of equity and fixed income
accounts for institutional investors and high net worth individuals. Alliance's
mutual fund management services, which developed as a diversification of its
separately managed account business, consist of the management, distribution and
servicing of mutual funds and cash management products, including money market
funds and deposit accounts, and the management of structured products.
Separately Managed Accounts - At December 31, 1997, separately managed accounts
(other than investment companies and deposit accounts) represented approximately
61.1% of Alliance's total assets under management while the fees earned from the
management of those accounts represented approximately 32.2% of Alliance's
revenues for the year ended December 31, 1997. Alliance's separately managed
account business consists primarily of the active management of equity accounts,
balanced (equity and fixed income) accounts and fixed income accounts. Alliance
also provides active management for international (non U.S.) and global
(including U.S.) equity, balanced and fixed income portfolios, asset allocation
and management for private investments, venture capital portfolios, and hedge
fund portfolios. In addition, Alliance provides "passive" management services
for equity, fixed income and international accounts.
As of December 31, 1997, Alliance acted as investment manager for approximately
1,650 separately managed accounts (other than investment companies) which
include corporate employee benefit plans, public employee retirement systems,
endowment funds, foundations, foreign governments and financial and other
institutions and the General and certain of the Separate Accounts of Equitable
Life and its insurance company subsidiary. The General and Separate Accounts of
the Insurance Group are Alliance's largest institutional clients. Alliance's
separately managed accounts are managed pursuant to written investment
management agreements between the clients and Alliance, which are usually
terminable at any time or upon relatively short notice by either party.
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Mutual Funds Management - Alliance also (i) manages The Hudson River Trust which
is one of the funding vehicles for the individual variable life insurance and
annuity products offered by the Insurance Group; (ii) manages and sponsors a
broad range of open and closed-end mutual funds other than The Hudson River
Trust ("Alliance Mutual Funds"); and (iii) provides cash management services
(money market funds and Federally insured deposit accounts) that are marketed to
individual investors through broker-dealers, banks, insurance companies,
registered investment advisors, financial planners and other financial
intermediaries. The assets comprising all Alliance Mutual Funds, The Hudson
River Trust and deposit accounts on December 31, 1997, amounted to approximately
$85.0 billion.
Taxation - Under prior tax law, Alliance, as a partnership, generally was not
subject to Federal income tax. Because Alliance Units are publicly traded,
Alliance would have been treated as a corporation for Federal income tax
purposes commencing January 1, 1998. On August 6, 1997, Alliance announced its
intention to utilize a new option made available under the Taxpayer Relief Act
of 1997 to maintain partnership tax status and pay a 3.5% tax on partnership
gross income, which is estimated to reduce 1998 distributions by Alliance by
approximately 10% from what they would have been under the former tax structure.
Alliance generally is not subject to state and local income taxes, with the
exception of the New York City unincorporated business tax, which is currently
imposed at a rate of 4%. Domestic subsidiaries of Alliance are subject to
Federal, state and local income taxes. Its subsidiaries organized and operating
outside the United States are generally subject to taxes in the foreign
jurisdictions where they are located. On December 30, 1997 Alliance announced
its intention to make an election under Section 754 of the Code to adjust the
tax basis of its assets in connection with sales and exchanges of Alliance Units
in the secondary market after January 1, 1998. Purchasers of Alliance Units on
or after that date will be entitled to claim deductions for their proportionate
share of Alliance's amortizable and depreciable assets. The election will have
no direct effect on Alliance Units held by The Equitable.
For additional information about Alliance, see Alliance's Annual Report on Form
10-K for the year ended December 31, 1997.
Donaldson, Lufkin & Jenrette, Inc.
DLJ is a leading integrated investment and merchant bank that serves
institutional, corporate, governmental and individual clients both domestically
and internationally. DLJ's businesses include securities underwriting, sales and
trading; merchant banking; financial advisory services; investment research;
venture capital; correspondent brokerage services; online interactive brokerage
services; and asset management. On October 30, 1995, DLJ completed an initial
public offering ("IPO") of 10.58 million shares of its common stock and the sale
of $500.0 million aggregate principal amount of its senior notes due November 1,
2005. See Note 6 of Notes to Consolidated Financial Statements for additional
information. At December 31, 1997, The Equitable owned approximately 76.2% of
DLJ's common stock; assuming full vesting of restricted stock units and full
exercise of all outstanding options, The Equitable would own approximately 58.1%
of DLJ's common stock. See "M, D&A Combined Results of Continuing Operations by
Segment - Investment Services".
DLJ conducts its business through three principal operating groups: the Banking
Group, which includes DLJ's Investment Banking, Merchant Banking and Emerging
Markets groups; the Capital Markets Group, consisting of DLJ's Fixed Income,
Institutional Equities and Equity Derivatives Divisions, and Sprout, its venture
capital affiliate, and the Financial Services Group, comprised of the Pershing
Division, the Investment Services Group and the Asset Management Group.
DLJ's Banking Group is a major participant in the raising of capital and the
providing of financial advice to companies throughout the U.S. and has
significantly expanded its activities abroad. Through its Investment Banking
group, DLJ manages and underwrites public offerings of securities, arranges
private placements and provides advisory and other services in connection with
mergers, acquisitions, restructurings and other financial transactions. Its
Merchant Banking group pursues direct investments in a variety of areas through
a number of investment vehicles funded with capital provided primarily by
institutional investors, DLJ and its employees. The Emerging Markets Group
specializes in client advisory services for mergers, acquisitions and financial
restructurings, as well as merchant banking and the underwriting, placement and
trading of equity, debt and derivative securities in Latin America, Asia and
Eastern Europe.
1-7
<PAGE>
The Capital Markets Group encompasses a broad range of activities including
trading, research, origination and distribution of equity and fixed income
securities, private equity investments and venture capital. Its Fixed Income
Division provides institutional clients with research, trading and sales
services for a broad range of taxable fixed income products including high yield
corporate, investment grade corporate, U.S. government and mortgage-backed
securities. The Institutional Equities Division provides institutional clients
with research, trading and sales services in U.S. listed and over the counter
equity securities. In addition, DLJ's Equity Derivatives Division provides a
broad range of equity and index option products. Autranet, Inc. is the oldest
and most successful distributor of research and investment material. Sprout is
one of the oldest and largest groups in the private equity investment and
venture capital industry.
The Financial Services Group provides a broad array of services to individual
investors and the financial intermediaries which represent them. Pershing is a
leading provider of correspondent brokerage services, clearing transactions for
over 600 U.S. brokerage firms which collectively maintain over 1.75 million
client accounts. DLJ's Investment Services Group provides access to DLJ's equity
and fixed income research, trading services and underwriting to a broad mix of
private clients. Through its Asset Management Group, DLJ provides cash
management, investment advisory and trust services primarily to high net worth
individual and institutional investors.
DLJ's principal business activities are, by their nature, highly competitive and
subject to general market conditions, volatile trading markets and fluctuations
in the volume of market activity. Consequently, DLJ's net income and revenues
have been, and are likely to continue to be, subject to wide fluctuations,
reflecting the impact of many factors beyond DLJ's control, including securities
market conditions, the level and volatility of interest rates, competitive
conditions, and the size and timing of transactions.
In 1997, DLJ took steps toward achieving the goal of establishing a strong
international presence. All of DLJ's business groups have planned expansion of
their international activities. The acquisition of the Phoenix Securities Group,
a London-based investment bank, provided the opportunity to enhance DLJ's
international merger and acquisition and leveraged financing capabilities. In
1997, DLJ also acquired London Global Securities, a leading international
securities financing intermediary. In addition to these acquisitions, a new
high-yield group was established in London. An investment banking group is in
the process of being established in Paris, joining DLJ's institutional equity
sales operation, as well as planned investment banking and foreign equity
trading operations in Russia and Germany. DLJ also continued to target selected
areas in the emerging markets of Eastern Europe, Latin America and Asia. The
Merchant Banking Group has also expanded its international efforts, with
significant investments in the U.K., Italy, France, Argentina and Brazil.
For additional information about DLJ, see DLJ's Annual Report on Form 10-K for
the year ended December 31, 1997.
Equitable Real Estate
On June 10, 1997, Equitable Life sold Equitable Real Estate (other than EQ
Services, Inc. and its interest in Column Financial, Inc.) to Lend Lease
Corporation Limited ("Lend Lease"). Equitable Life entered into long-term
advisory agreements whereby subsidiaries of Lend Lease will continue to provide
to Equitable Life's General Account and Separate Accounts substantially the same
services, for substantially the same fees, as provided prior to the sale.
1-8
<PAGE>
Discontinued Operations
In September 1991, The Equitable discontinued the operations of the Wind-Up
Annuity and GIC lines of business, reflecting management's strategic decision to
focus its attention and capital on its core individual insurance and investment
services businesses. Discontinued operations includes Wind-Up Annuity products,
the terms of which were fixed at issue, which were sold to corporate sponsors of
terminating qualified defined benefit plans, and GIC products pursuant to which
Equitable Life is contractually obligated to credit an interest rate which was
set at the date of issue. These contracts have fixed maturity dates on which
funds are to be returned to the contractholder. At December 31, 1997, $1.05
billion of contractholder liabilities were outstanding, of which $29.5 million
were related to GIC products and the balance to Wind-Up Annuities. For
additional information, see Note 7 of Notes to Consolidated Financial Statements
and "M, D&A - Discontinued Operations".
General Account Investment Portfolio
General. The Insurance Group's General Account consists of a diversified
portfolio of investments. The General Account liabilities can be divided into
two primary types, participating and non-participating. For participating
products, the investment results of the underlying assets determine, to a large
extent, the return to the policyholder, and the Insurance Group's profits are
earned from investment management, mortality and other charges. For
non-participating or interest-sensitive products, the Insurance Group's profits
are earned from a positive spread between the investment return and the
crediting or reserve interest rate.
Although all the assets of the General Account of each insurer in the Insurance
Group support all of that insurer's liabilities, the Insurance Group has
developed an asset/liability management approach with separate investment
segments for specific classes of product liabilities, such as insurance, annuity
and group pension. As part of this approach, the Insurance Group develops
investment guidelines for each product line which form the basis for investment
strategies to manage each product's return and liquidity requirements. Specific
investments frequently meet the requirements of, and are acquired by, more than
one investment segment, with each such investment segment holding a pro rata
interest in such investments and the investment return therefrom.
The Closed Block assets are a part of continuing operations and have been
combined in Management's Discussion and Analysis of Financial Condition and
Results of Operations on a line-by-line basis with assets outside of the Closed
Block. In view of the similar asset quality characteristics of the major asset
categories, management believes it is appropriate to discuss the Closed Block
assets and the assets outside of the Closed Block on a combined basis as General
Account Investment Assets. The General Account Investment Assets and the Holding
Company Group investment portfolio are discussed below. For further information
on these portfolios and on Discontinued Operations Investment Assets, see "M,
D&A - Continuing Operations Investment Portfolio" and "Discontinued Operations".
Most individual investments in the portfolios of discontinued operations are
also included in General Account Investment Assets (which include the Closed
Block). For more information on the Closed Block, see Notes 2 and 6 of Notes to
Consolidated Financial Statements.
The following table summarizes General Account Investment Assets by asset
category at December 31, 1997.
<TABLE>
<CAPTION>
General Account Investment Assets
Net Amortized Cost
(Dollars In Millions)
Amount % of Total
----------------- -----------------
<S> <C> <C>
Fixed maturities(1)........................... $ 22,914.5 64.5%
Mortgages..................................... 3,953.0 11.1
Equity real estate............................ 2,891.9 8.2
Other equity investments...................... 1,037.5 2.9
Policy loans.................................. 4,123.1 11.6
Cash and short-term investments(2)............ 607.6 1.7
----------------- -----------------
Total......................................... $ 35,527.6 100.0%
================= =================
<FN>
(1) Excludes unrealized gains of $1.07 billion on fixed maturities classified
as available for sale.
(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>
1-9
<PAGE>
In January 1998 management announced its intention to accelerate the sale of
assets from the continuing and discontinued operations equity real estate
portfolios by disposing of properties having a depreciated cost of approximately
$2.0 billion over the next 12 to15 months. For additional information regarding
the impact of this equity real estate sales program on Equitable Life's results
of operations for the year ended December 31, 1997, see "M, D&A - Consolidated
Results of Operations", "- Continuing Operations Investment Portfolio - Asset
Valuation Allowances and Writedowns", "- General Account Investment Assets", "-
Investment Results of General Account Investment Assets - Equity Real Estate"
and "- Discontinued Operations".
Investment Surveillance. As part of the Insurance Group's investment management
process, management, with the assistance of its investment advisors, constantly
monitors General Account investment performance. This internal review process
culminates with a quarterly review of certain assets by the Insurance Group's
Surveillance Committee which decides whether values of any investments are other
than temporarily impaired, whether specific investments should be classified as
problems, potential problems or restructureds, and whether specific investments
should be put on an interest non-accrual basis.
Description of General Account Investment Assets. For portfolio management
purposes, General Account Investment Assets are divided into four major asset
categories: fixed maturities, mortgages, equity real estate and other equity
investments.
Fixed Maturities. As of December 31, 1997, the fixed maturities category was the
largest asset class of General Account Investment Assets with $22.91 billion in
net amortized cost or 64.5% of total General Account Investment Assets. The
fixed maturities category consists of both investment grade and below investment
grade public and private debt securities, as well as small amounts of redeemable
preferred stock. As of December 31, 1997, publicly traded debt securities
represented 74.0% of the amortized cost of the asset category, and privately
placed debt securities and redeemable preferred stock represented 25.4% and
0.6%, respectively. As of December 31, 1997, 85.0% ($19.49 billion) of the
amortized cost of fixed maturities were rated investment grade (National
Association of Insurance Commissioners ("NAIC") bond rating 1 or 2).
The following table summarizes fixed maturities by remaining average life as of
December 31, 1997.
<TABLE>
<CAPTION>
Fixed Maturity Investments By
Remaining Average Life
(Dollars In Millions)
Amortized
Cost
-----------------
(In Millions)
<S> <C>
Due in one year or less..................... $ 321.8
Due in years two through five............... 4,387.8
Due in years six through ten................ 8,935.9
Due after ten years......................... 4,808.3
Mortgage-backed securities(1)............... 4,460.7
-----------------
Total....................................... $ 22,914.5
=================
<FN>
(1) Includes redeemable preferred stock.
</FN>
</TABLE>
Investment grade fixed maturities (which include redeemable preferred stocks)
include the securities of 1,005 different issuers, with no individual issuer
representing more than 0.9% of investment grade fixed maturities as a whole. The
investment grade fixed maturities are also diversified by industry, with
investments in manufacturing (17.9%), banking (11.5%), finance (9.1%), utilities
(7.8%), and transportation (5.7%) representing the five largest allocations of
investment grade fixed maturities at December 31, 1997. No other industry
represented more than 4.0% of the investment grade fixed maturities portfolio at
that date.
1-10
<PAGE>
Below investment grade fixed maturities (NAIC bond rating 3 through 6 and
redeemable preferred stocks) include the securities of over 372 different
issuers with no individual issuer representing more than 2.8% of below
investment grade fixed maturities as a whole. At December 31, 1997, the five
largest industries represented in these below investment grade fixed maturities
were manufacturing (43.3%), communications (10.0%), finance (5.3%), wholesale
and retail (4.8%) and banking (4.6%). No other industry represented more than
4.5% of this portfolio. The General Account also has interests in below
investment grade fixed maturities through equity interests in a number of high
yield funds. See "Other Equity Investments".
For further information regarding fixed maturities, see "M, D&A - Continuing
Operations Investment Portfolio Investment Results of General Account Investment
Assets - Fixed Maturities".
Mortgages. As of December 31, 1997, measured by amortized cost, commercial
mortgages totaled $2.31 billion (57.3% of the amortized cost of the category),
agricultural loans were $1.72 billion (42.6%) and residential loans were $2.3
million (0.1%). As of December 31, 1997, 100.0% of all commercial mortgage
loans, measured by amortized cost, bore a fixed interest rate.
Commercial Mortgages - Commercial mortgages, substantially all of which are made
on a non-recourse basis, consist primarily of fixed rate first mortgages on
completed properties. As of December 31, 1997, first mortgages (which include
all mortgages where no other lender holds a senior position to Equitable Life)
represented $2.30 billion (99.5%) of the amortized cost of the commercial
mortgage portfolio. There were no construction loans in the category. Valuation
allowances of $74.3 million are held against the portfolio. As of December 31,
1997, there were 304 individual commercial mortgage loans collateralized by
office buildings (amortized cost of $1,037.3 million), retail properties ($640.7
million), hotels ($316.9 million), industrial properties ($154.9 million),
apartment buildings ($145.0 million) and land and other ($11.0 million).
For information regarding the maturity and principal repayment schedule for the
commercial mortgage portfolio as of December 31, 1997, and problem, potential
problem and restructured commercial mortgage loans, see "M, D&A Continuing
Operations Investment Portfolio - General Account Investment Portfolio -
Investment Results of General Account Investment Assets - Mortgages".
Agricultural Mortgages - The agricultural mortgage loans add diversity to the
mortgage loan portfolio. As of December 31, 1997, there were approximately 4,148
outstanding agricultural mortgages with an aggregate amortized cost of $1.72
billion. As of December 31, 1997, 27.2%, 25.9%, 19.5% and 13.9%, of these assets
were collateralized by land used for grain crops, fruit/vine/timber, general
farm purposes and ranch and livestock, respectively, and no other land use
category collateralized more than 10% of these loans. Of the properties
collateralizing these loans, 29.6% were located in California and no more than
10% are located in any other single state.
Equity Real Estate. The $3.2 billion amortized cost of the equity real estate
category consists of office ($2,417.0 million), retail ($332.5 million), and
industrial ($144.0 million) and no other category comprised more than 10% of the
portfolio. Valuation allowances of $345.5 million are held against the
portfolio. Office properties are primarily significant downtown buildings in
major cities. By state, 23%, 15%, and 13% of these properties, measured by
amortized cost, are located in Massachusetts, New York and California,
respectively, and no more than 10% were located in any other state.
For additional information regarding the equity real estate portfolio, including
the effect of management's decision to accelerate the sale of assets from the
equity real estate portfolio, see "M, D&A - Consolidated Results of Operations"
and " - Continuing Operations Investment Portfolio - Investment Results of
General Account Investment Assets - Equity Real Estate" and "- Discontinued
Operations".
1-11
<PAGE>
Other Equity Investments. Other equity investments consist of limited
partnership interests managed by third parties that invest in a selection of
equity and below investment grade fixed income securities and other equity
securities. Though not included in the General Account's other equity
investments discussed above, the excess of Separate Accounts assets over
Separate Accounts liabilities at December 31, 1997 of $231.0 million represented
an investment by the General Account principally in equity securities. See "M,
D&A - Continuing Operations Investment Portfolio - Investment Results of General
Account Investment Assets - Other Equity Investments".
Holding Company Group Investment Portfolio
At December 31, 1997, the Holding Company Group's investment portfolio's $524.0
million carrying value was made up of fixed maturities ($490.6 million or
93.6%), cash and short-term securities ($24.3 million or 4.7%) and other equity
investments ($9.1 million or 1.7%). See "M, D&A - Continuing Operations
Investment Portfolio Holding Company Group Investment Portfolio".
Employees and Agents
As of December 31, 1997, The Equitable had approximately 12,700 employees. Of
these, approximately 4,000 were employed by the Insurance Group and
approximately 8,700 were employed by the Investment Subsidiaries. In addition,
the Insurance Group's career sales force consists of more than 7,300 agents.
Management believes relations with employees and agents are good.
Competition
Insurance and Annuities. There is strong competition among insurance companies
seeking clients for the types of insurance, annuity and group pension products
sold by the Insurance Group. Many other insurance companies offer one or more
products similar to those offered by the Insurance Group and in some cases
through similar marketing techniques. In addition, the Insurance Group competes
with banks and other financial institutions for sales of annuity and, to a
lesser extent, life insurance products and with mutual funds, investment
advisers and other financial entities for the investment of savings dollars.
The principal competitive factors affecting the Insurance Group's business are
price, financial and claims-paying ratings, size, strength and professionalism
of agency force, range of product lines, product quality, reputation and
visibility in the marketplace, quality of service and, with respect to variable
insurance and annuity products, investment management performance. Management
believes the registration of a large majority of its agency force with the
National Association of Securities Dealers, Inc. ("NASD") and the training
provided to agents by the Insurance Group provide the Insurance Group with a
competitive advantage in effectively penetrating and communicating with its
target markets. In the wholesale distribution channels, the Insurance Group's
competitive advantage comes from a strong brand, innovative products and sales
support to retail customers.
Ratings are an important factor in establishing the competitive position of
insurance companies. As of December 31, 1997, the financial strength or
claims-paying rating of Equitable Life was AA- from Standard & Poor's
Corporation (4th highest of 18 ratings), Aa3 from Moody's Investors Service (4th
highest of 19 ratings), A from A.M. Best Company, Inc. (3rd highest of 15
ratings), AA from Fitch Investors Service, L.P. (3rd highest of 18 ratings) and
AA- from Duff & Phelps Credit Rating Co. (4th highest of 18 ratings).
During 1998, management may from time to time explore selective acquisition
opportunities in The Equitable's core insurance and asset management businesses.
1-12
<PAGE>
Investment Fund Management. The investment management industry is highly
competitive and new entrants continually are attracted to it, due in part to
relatively few barriers to entry. Alliance is subject to substantial competition
in all aspects of its business. Pension fund, institutional and corporate assets
are managed by investment management firms, broker-dealers, banks and insurance
companies. Alliance competes with these investment managers primarily on the
basis of the range of investment products offered, the investment performance of
such products and the services provided to clients. Consultants also play a
major role in the selection of managers for pension funds.
Many of the firms competing with Alliance for institutional clients also offer
mutual fund shares and cash management services to individual investors.
Competitiveness in this area is chiefly a function of the investment performance
and range of mutual funds and cash management services offered, the quality in
servicing customer accounts and the capacity to provide financial incentives to
intermediaries through distribution assistance and administrative services
payments funded by "Rule 12b-1" plans and the manager's own resources. Equitable
Life is subject to New York Insurance Law limitations on the amount it may
invest in its Investment Subsidiaries (including Alliance); however, these
limitations do not apply to investments by the Holding Company.
The Insurance Group and the Investment Subsidiaries compete with and are
expected to continue to compete with each other by providing investment
management services, including sponsoring mutual funds and other investment
funds and accounts. For example, Alliance's partnership agreement specifically
allows Equitable Life and its subsidiaries (other than Alliance Capital
Management Corporation, a wholly owned Equitable Life subsidiary) to compete
with Alliance and to seek to develop opportunities that also may be available to
Alliance.
Securities and Investment Banking. DLJ encounters significant competition in all
aspects of the securities business and competes worldwide directly with other
securities firms, both domestic and foreign, a number of which have greater
capital, financial and other resources than DLJ currently has at its disposal.
In addition to competition from firms currently in the securities business,
there has been increasing competition from other sources, such as commercial
banks and investment boutiques. The principal competitive factors influencing
DLJ's business are its professional staff, the firm's reputation in the
marketplace, its existing client relationships, the ability to commit capital to
client transactions and its mix of market capabilities. DLJ's ability to compete
effectively in securities brokerage and investment banking activities will also
be influenced by the adequacy of its capital levels.
Regulation
State Supervision. The Insurance Group is licensed to transact its insurance
business in, and is subject to extensive regulation and supervision by,
insurance regulators in all 50 of the United States, the District of Columbia,
Puerto Rico, the U.S. Virgin Islands and Canada and nine of Canada's twelve
provinces and territories. Equitable Life is domiciled in New York and is
primarily regulated by the Superintendent of the New York Insurance Department.
The extent of state regulation varies, but most jurisdictions have laws and
regulations governing standards of solvency, levels of reserves, permitted types
and concentrations of investments, and business conduct to be maintained by
insurance companies as well as agent licensing, approval of policy forms and,
for certain lines of insurance, approval or filing of rates. The New York
Insurance Law limits sales commissions and certain other marketing expenses that
may be incurred. The Insurance Group is required to file detailed annual
financial statements, prepared on a statutory accounting basis, with supervisory
agencies in each of the jurisdictions in which it does business. Such agencies
may conduct regular examinations of the Insurance Group's operations and
accounts, and make occasional requests for particular information from the
Insurance Group. Effective November 30, 1997, Equitable Life and the New York
Insurance Department (the "NYID") entered into a stipulation concluding the
NYID's regular quinquennial examination of Equitable Life and EVLICO for the
five years ended December 31, 1995. In the stipulation, Equitable Life admitted
certain violations of New York insurance laws and regulations and its failure to
adhere to certain agreements with the NYID, and consented to pay a $450,000
civil penalty in connection therewith. Equitable Life is responding to subpoenas
issued in January 1998 by the Florida Attorney General and the Florida
Department of Insurance requesting, among other things, documents relating to
various sales practices. Management believes that this inquiry will not have a
material adverse effect on The Equitable's financial condition or results of
operations.
1-13
<PAGE>
Holding Company Regulation. Several states, including New York, regulate
transactions between an insurer and its affiliates under insurance holding
company acts. These acts contain certain reporting requirements and restrictions
on transactions such as the transfer of assets, loans or the payment of
dividends between an insurer and its affiliates. Under such laws, transfers of
assets, loans or dividends by Equitable Life to the Holding Company, may be
subject to prior notice or approval depending on the size of such transactions
or payments. Equitable Life has agreed in an undertaking to the NYID that
similar approval requirements also apply to transactions between (i) material
subsidiaries of Equitable Life and (ii) the Holding Company (and certain
affiliates, including AXA). Changes in control (generally presumed at a
threshold of 10% or more of outstanding voting securities) are also regulated by
these laws.
Guaranty Funds. Under insurance guaranty fund laws existing in all states,
insurers doing business in those states can be assessed up to prescribed limits
to protect policyholders of companies which become impaired or insolvent.
Assessments levied against the Insurance Group during each of the past five
years have not been material. While the amount of any future assessments cannot
be predicted with certainty, management believes that assessments with respect
to pending insurance company impairments and insolvencies will not be material
to the financial position of The Equitable.
Statutory Investment Valuation Reserves. Statutory accounting practices require
a life insurer to maintain two reserves, an asset valuation reserve ("AVR") and
an interest maintenance reserve ("IMR") to absorb both realized and unrealized
gains and losses on most of an insurer's invested assets.
AVR requires life insurers to establish statutory reserves for substantially all
invested assets other than policy loans and life insurance subsidiaries. AVR
generally captures all realized and unrealized gains or losses on invested
assets, other than those resulting from changes in interest rates. Each year the
amount of an insurer's AVR will fluctuate as additional gains or losses are
absorbed by the reserve. To adjust for such changes over time, an annual
contribution must be made to AVR equal to a basic contribution plus 20% of the
difference between the reserve objective and the actual AVR. In addition,
voluntary contributions to the AVR are permitted, to the extent that AVR does
not exceed its maximum level. (The basic contribution, reserve objective and
maximum reserve are each determined annually according to the type and quality
of an insurer's assets.) As of December 31, 1997, the reserve objective for the
assets of the Insurance Group was $1.4 billion and the actual AVR was $1.4
billion.
IMR captures the net gains or losses which are realized upon the sale of fixed
income investments and which result from changes in the overall level of
interest rates. These net realized gains or losses are then amortized into
income over the remaining life of each investment sold. IMR applies to all types
of fixed income securities (bonds, preferred stocks, mortgage-backed securities
and mortgage loans).
In 1997, the AVR decreased statutory surplus by $147.0 million and the IMR
decreased statutory surplus by $14.6 million, as compared to an increase of
$48.4 million and a decrease of $22.6 million, respectively, in 1996. The
decrease in statutory surplus caused by the AVR in 1997 primarily was a result
of unrealized gains on subsidiaries largely offset by realized capital losses on
real estate. The decrease caused by the IMR resulted from realized gains due to
changes in interest rates.
Changes in statutory surplus resulting from increases or decreases in AVR and
IMR impact the funds available for shareholder dividends. See "Shareholder
Dividend Restrictions". AVR and IMR are not included in financial statements
prepared in conformity with GAAP. Asset valuation allowances reflected in
consolidated financial statements included herein are established under GAAP.
While the future effect of both AVR and IMR on the Insurance Group's statutory
surplus will depend on the actual composition (both as to type and quality) of
the Insurance Group's assets and gains/losses, management does not expect these
reserves will reduce its statutory surplus to levels that would constrain the
growth of the Insurance Group's operations. See "Regulation Insurance -
Statutory Surplus and Capital".
1-14
<PAGE>
Surplus Relief Reinsurance. The Insurance Group uses surplus relief reinsurance,
which has no GAAP financial reporting effect other than from the associated
expense and risk charge and administrative costs. However, surplus relief
reinsurance does have the effect of increasing current statutory surplus while
reducing future statutory earnings. As of December 31, 1997, $165.2 million
(4.2%) of the Insurance Group's total statutory capital (capital, surplus and
AVR) resulted from surplus relief reinsurance. Management reduced surplus relief
reinsurance by approximately $53.5 million in 1997 and by $498.8 million since
December 31, 1992. Management currently intends to eliminate all surplus relief
reinsurance by December 31, 2000. Such reductions will reduce the amount of the
Insurance Group's statutory surplus on a dollar-for-dollar basis. The ability of
Equitable Life to pay dividends to the Holding Company may be affected by the
reduction of statutory earnings caused by reductions in the levels of surplus
relief reinsurance. See "Shareholder Dividend Restrictions."
Management believes the Insurance Group's surplus relief reinsurance agreements
are in substantial compliance with all applicable regulations.
NAIC Ratios. On the basis of statutory financial statements filed with state
insurance regulators, the NAIC annually calculates a number of financial ratios
to assist state regulators in monitoring the financial condition of insurance
companies. Twelve ratios were calculated based on the 1997 statutory financial
statements. A "usual range" of results for each ratio is used as a benchmark.
Departure from the "usual range" on four or more of the ratios can lead to
inquiries from individual state insurance departments.
For Equitable Life's 1997 statutory financial statements, three ratios fell
outside of the "usual range". These ratios include (i) the ratio of net gain to
total income, (ii) the ratio of investments in affiliates to capital and
surplus, and (iii) the reserving ratio for individual life insurance products.
This result reflects (i) Equitable Life's investment performance in 1997,
including realized and unrealized capital gains and losses, (ii) the fact that
Equitable Life conducts a substantial portion of its business through
subsidiaries, and (iii) the effects of Equitable Life's reinsurance contracts
(see "Surplus Relief Reinsurance"). Based on Equitable Life's statutory
financial statements for 1996, three ratios fell outside of the "usual range"
established by the NAIC. After review, an NAIC examiner team designated
Equitable Life as requiring second priority regulatory attention based upon
investments in affiliates and investment in mortgage loans and real estate, in
each case as reflected in its 1996 statutory financial statements. This
designation advised state regulators to accord high priority to Equitable Life
in the surveillance process. No regulatory action by the NYID or any other state
regulator occurred as a result of this designation.
Management does not expect any 1997 designations accorded to Equitable Life
based on its statutory financial statements to have a material adverse effect on
the business or operations of Equitable Life or to adversely affect its ratings.
Statutory Surplus and Capital. As licensed insurers in each of the 50 states of
the United States, the members of the Insurance Group are subject to the
supervision of the regulators of each such state. Such regulators have the
discretionary authority, in connection with the continual licensing of any
member of the Insurance Group, to limit or prohibit new issuances of business to
policyholders within their jurisdiction when, in their judgment, such regulators
determine that such member is not maintaining adequate statutory surplus or
capital. The Equitable does not believe the current or anticipated levels of
statutory surplus of the Insurance Group present a material risk that any such
regulator would limit the amount of new insurance business the Insurance Group
may issue.
The NAIC has undertaken a comprehensive codification of statutory accounting
practices for life insurers. The resulting changes, once the codification
project has been completed and the new principles adopted and implemented, are
not expected to have a material adverse impact on the Insurance Group's
statutory results and financial position, but may cause a modest reduction in
statutory surplus. A detailed review of the final statutory accounting practices
will be necessary to determine their actual impact. Still subject to NAIC and
AICPA approval, the codification will not become effective prior to January 1,
1999. For additional information concerning Equitable Life's statutory capital,
see "M, D&A - Liquidity and Capital Resources - Insurance Group - Risk-Based
Capital".
1-15
<PAGE>
Risk-Based Capital. Life insurers are subject to risk-based capital ("RBC")
guidelines which provide a method to measure the adjusted capital (statutory
capital and surplus plus AVR and other adjustments) that a life insurance
company should have for regulatory purposes taking into account the risk
characteristics of the company's investments and products. The RBC requirements
establish capital requirements for four categories of risk: asset risk,
insurance risk, interest rate risk and business risk. For each category, the
capital requirement is determined by applying factors to various asset, premium
and reserve items, with the factor being higher for those items with greater
underlying risk and lower for less risky items. The New York Insurance Law gives
the insurance commissioner explicit regulatory authority to require various
actions by, or take various actions against, insurance companies whose adjusted
capital does not meet the minimum acceptable level. Equitable Life was above its
target RBC ratio at year end 1997. Changes in the RBC formula that became
effective for year end 1997 statutory financial statements did not, and other
changes proposed to become effective for year end 1998 are not expected to, have
a material effect on Equitable Life's RBC ratio. For additional information
concerning Equitable Life's RBC, see "M, D&A - Liquidity and Capital Resources -
Insurance Group - Risk-Based Capital".
Shareholder Dividend Restrictions. Since the demutualization, the Holding
Company has not received any dividends from Equitable Life. Under the New York
Insurance Law, Equitable Life would be permitted to pay shareholder dividends to
the Holding Company only if it files notice of its intention to declare such a
dividend and the amount thereof with the New York Superintendent and the New
York Superintendent, who by statute has broad discretion in such matters, does
not disapprove the distribution. See Note 20 of Notes to Consolidated Financial
Statements.
Regulation of Investments. The Insurance Group is subject to state laws and
regulations that require diversification of its investment portfolio and limit
the amount of investments in certain investment categories such as below
investment grade fixed maturities, equity real estate and other equity
investments. Failure to comply with these laws and regulations would cause
investments exceeding regulatory limitations to be treated as non-admitted
assets for purposes of measuring statutory surplus, and, in some instances,
require divestiture. As of December 31, 1997, the Insurance Group's investments
were in substantial compliance with all such regulations.
Federal Initiatives. Although the Federal government generally does not directly
regulate the insurance business, many Federal laws do affect the business in a
variety of ways. There are a number of existing or recently proposed Federal
laws which may significantly affect the Insurance Group, including employee
benefits regulation, removal of barriers preventing banks from engaging in the
insurance and mutual fund businesses, the taxation of insurance companies and
the taxation of insurance products. These initiatives are generally in a
preliminary stage and consequently management cannot assess their potential
impact on the Insurance Group at this time.
The Administration's 1999 budget proposals announced in February 1998 contain
provisions which, if enacted, could have an adverse impact on certain sales in
the non-qualified marketplace and, depending on grandfathering provisions,
surrenders of certain variable insurance products and business-owned life
insurance and could reduce the tax deduction allowed to the Insurance Group for
reserves for annuity contracts. Management cannot predict what other proposals
may be made, what legislation, if any, may be introduced or enacted nor what the
effect of any such legislation might be.
ERISA Considerations. The Insurance Group and the Investment Subsidiaries act as
fiduciaries and are subject to regulation by the Department of Labor ("DOL")
when providing a variety of products and services to employee benefit plans
governed by the Employee Retirement Income Security Act of 1974 ("ERISA").
Severe penalties are imposed by ERISA on fiduciaries which violate ERISA's
prohibited transaction provisions or breach their duties to ERISA-covered plans.
In a case decided by the United States Supreme Court in December, 1993 (John
Hancock Mutual Life Insurance Company v. Harris Trust and Savings Bank) the
Court concluded that an insurance company general account contract that had been
issued to a pension plan should be divided into its guaranteed and nonguaranteed
components and that certain ERISA fiduciary obligations should be applied with
respect to the assets underlying the nonguaranteed components. Although
Equitable Life has not issued contracts identical to the one involved in Harris
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<PAGE>
Trust, some of its policies relating to ERISA-covered plans may be deemed to
have nonguaranteed components subject to the principles announced by the Court.
During 1994, Equitable Life added additional guarantees to certain of these
contracts.
The Supreme Court's opinion did not resolve whether the assets at issue in the
case may be subject to ERISA for some purposes and not others. Prohibited
Transaction Exemption 95-60, granted by the DOL on July 7, 1995, exempted from
the prohibited transaction rules, prospectively and retroactively to January 1,
1975, certain transactions engaged in by insurance company general accounts in
which employee benefit plans have an interest. In August 1996, Congress added
Section 401(c) to ERISA, which required the DOL to issue a final regulation by
December 31, 1997 defining the circumstances in which an insurer will be deemed
to have a safe harbor from ERISA liability for general account contracts that
are not guaranteed benefit contracts issued on or before December 31, 1998.
Thereafter, newly issued general account contracts that are not guaranteed
benefit contracts must comply with the applicable fiduciary provisions of ERISA.
In December 1997 the DOL issued proposed regulations which provide for such a
safe harbor if (i) the decision to purchase the policy is made by an independent
fiduciary, (ii) certain disclosures are made by the insurer prior to entering
into the contract and during the life of the contract, (iii) the insurer
provides certain termination and withdrawal rights and (iv) certain general
prudence standards for the management of the insurer's general account are
followed. The proposed regulations did not define or give guidance as to what
type of contracts would be considered guaranteed benefit contracts. Equitable
Life is continuing to work actively with industry trade groups to persuade the
DOL to give guidance in the final regulation as to what would constitute a
guaranteed contract, or to lessen the onerousness of the proposed regulation.
Equitable Life is also considering the operational changes it must effect and
the potential impact to the overall general account if the proposed regulations
are adopted in final form.
Environmental Considerations. As owners and operators of real property, The
Equitable is subject to extensive Federal, state and local environmental laws
and regulations. Inherent in such ownership and operation is the risk there may
be potential environmental liabilities and costs in connection with any required
remediation of such properties. The Equitable routinely conducts environmental
assessments for real estate being acquired for investment and before taking
title through foreclosure to real property collateralizing mortgages held by The
Equitable. Based on these environmental assessments and compliance with The
Equitable's internal environmental procedures, management believes that any
costs associated with compliance with environmental laws and regulations
regarding such properties would not be material to the consolidated financial
position of The Equitable. Furthermore, although The Equitable and certain of
its subsidiaries hold equity positions in companies that could potentially be
subject to environmental liabilities, management believes, based on its
assessment of the businesses and properties of these companies and the level of
involvement of The Equitable and the subsidiaries in the operation and
management of such companies, any environmental liabilities with respect to
these investments would not be material to the consolidated financial position
of The Equitable.
Securities Laws. The Equitable, and certain policies and contracts offered by
the Insurance Group are subject to regulation under the Federal securities laws
administered by the Securities and Exchange Commission (the "Commission") and
under certain state securities laws. Equitable Life is voluntarily complying
with the Commission's limited inspection and inquiry concerning the marketing
and sales practices associated with variable insurance products. Certain
Separate Accounts of Equitable Life are registered as investment companies under
the Investment Company Act of 1940, as amended (the "Investment Company Act").
Separate Account interests under certain annuity contracts and insurance
policies issued by Equitable Life are also registered under the Securities Act
of 1933, as amended (the "Securities Act"). Equitable Life, EQ Financial, EDI,
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJSC") and certain other
subsidiaries of The Equitable are registered as broker-dealers (collectively the
"Broker-Dealers") under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The Broker-Dealers are subject to extensive regulation (as
discussed below in "Investment Banking" with reference to DLJSC), and are
members of, and subject to regulation by, the NASD and various other self
regulatory organizations ("SROs"). As a result of registration under the
Exchange Act and SRO memberships, the Broker-Dealers are subject to overlapping
schemes of regulation which cover all aspects of their securities business. Such
regulations cover matters including capital requirements, the use and
safekeeping of customers' funds and securities, recordkeeping and reporting
requirements, supervisory and organizational procedures intended to assure
compliance with securities laws and rules of the SROs and to prevent improper
trading on "material nonpublic" information, employee-related matters,
limitations on extensions of credit in securities transactions, and clearance
1-17
<PAGE>
and settlement procedures. A particular focus of the applicable regulations
concerns the relationship between broker-dealers and their customers. As a
result, the Broker-Dealers in some instances may be required to make
"suitability" determinations as to certain customer transactions, are limited in
the amounts that they may charge customers, cannot trade ahead of their
customers and must make certain required disclosures to their customers.
Equitable Life, EQ Financial and certain of the Investment Subsidiaries also are
registered as investment advisors under the Investment Advisers Act of 1940, as
amended (the "Investment Advisers Act"). Many of the investment companies
managed by the Investment Subsidiaries, including a variety of mutual funds and
other pooled investment vehicles, are registered with the Commission under the
Investment Company Act. All aspects of Equitable Life's and the Investment
Subsidiaries' investment advisory activities are subject to various Federal and
state laws and regulations and to the law in those foreign countries in which
they conduct business. Such laws and regulations relate to, among other things,
limitations on the ability of investment advisors to charge performance-based or
non-refundable fees to clients, recordkeeping and reporting requirements,
disclosure requirements, limitations on principal transactions between an
advisor or its affiliates and advisory clients, as well as general anti-fraud
provisions. The failure to comply with such laws may result in possible
sanctions including the suspension of individual employees, limitations on the
activities in which the investment advisor may engage, suspension or revocation
of the investment advisor's registration as an advisor, censure and/or fines.
Investment Banking. DLJ's business and the securities industry in general are
subject to extensive regulation in the United States at both the Federal and
state level as well as by industry SROs. A number of Federal regulatory bodies
are charged with safeguarding the integrity of the securities and other
financial markets and with protecting the interests of customers participating
in those markets. DLJSC is registered as a broker-dealer with the Commission and
in all 50 states and the District of Columbia, as a futures commission merchant
with the Commodities Futures Trading Commission (the "CFTC"), as an investment
advisor with the Commission and in certain states is also designated a primary
dealer in U.S. government securities by the Federal Reserve Bank of New York. It
is also a member of, and subject to regulation by, the NASD, the NYSE, the
Chicago Board of Trade ("CBOT"), the National Futures Association and various
other self-regulatory organizations. Broker-dealers are subject to regulation by
state securities administrators in those states in which they conduct business.
Broker-dealers are also subject to regulations that cover all aspects of the
securities business, including sales and trading practices, use and safekeeping
of customers' funds and securities, capital structure, record-keeping and the
conduct of directors, officers and employees. The Commission, other governmental
regulatory authorities, including state securities commissions, and SROs may
institute administrative or judicial proceedings, which may result in censure,
fine, the issuance of cease-and-desist orders, the suspension or expulsion of a
broker-dealer or member, its officers or employees or other similar
consequences.
DLJ's businesses may be materially affected not only by regulations applicable
to them as a financial market intermediary, but also by regulations of general
application. For example, the volume of DLJ's underwriting, merger and
acquisition and merchant banking businesses in any year could be affected by,
among other things, existing and proposed tax legislation, antitrust policy and
other governmental regulations and policies (including the interest rate
policies of the Federal Reserve Board) and changes in interpretation or
enforcement of existing laws and rules that affect the business and financial
communities. From time to time, various forms of anti-takeover legislation and
legislation that could affect the benefits associated with financing leveraged
transactions with high yield securities have been proposed that, if enacted,
could adversely affect the volume of merger and acquisition and merchant banking
business, which in turn could adversely affect DLJ's underwriting, advisory and
trading revenues related thereto.
1-18
<PAGE>
As a broker-dealer registered with the Commission and a member firm of the NYSE,
DLJSC and certain of its subsidiaries are subject to the capital requirements of
the Commission and of the NYSE. These capital requirements specify minimum
levels of capital, computed in accordance with regulatory requirements ("net
capital"), that Broker-Dealers are required to maintain and also limit the
amount of leverage that Broker-Dealers are able to obtain in their businesses.
As a futures commission merchant, also subject to the capital requirements of
the CFTC and the CBOT. Rule 15c3-1 under the Exchange Act limits the ability of
stockholders of a registered broker-dealer to withdraw excess capital from that
broker-dealer, if such withdrawal would impair the broker-dealer's net capital.
This rule could limit the payment of dividends and the making of loans and
advances to Equitable Life by the other Broker-Dealers and by Broker-Dealers
(other than Equitable Life) to the Holding Company.
DLJSC is also subject to "Risk Assessment Rules" imposed by the Commission and
the CFTC which require, among other things, that certain broker-dealers and
futures commission merchants maintain and preserve certain information, describe
risk management policies and procedures and report on the financial condition of
certain affiliates whose financial and securities activities are reasonably
likely to have a material impact on the financial and operational condition of
the broker-dealer.
In addition to being regulated in the U.S., DLJ's business is subject to
regulation by various foreign governments and regulatory bodies. DLJ has
broker-dealer subsidiaries that are subject to regulation by the Securities and
Futures Authority of the United Kingdom, the Securities and Futures Commission
of Hong Kong and the Ontario Securities Commission.
Additional legislation and regulations, including those relating to the
activities of affiliates of broker-dealers, changes in rules promulgated by the
Commission, the CFTC or other U. S. or foreign governmental regulatory
authorities and SROs or changes in the interpretations or enforcement of
existing laws and rules may adversely affect the manner of operation and
profitability of DLJ.
Year 2000
As a participant in the financial services industry, The Equitable's information
systems are central to, among other things, designing and pricing products,
marketing and selling products and services, processing policyholder and
investor transactions, client recordkeeping, communicating with agents,
employees, affiliates, vendors and clients, and recording information for
accounting, investment and management information purposes. Any significant
unresolved difficulty related to the Year 2000 compliance initiatives could have
a material adverse effect on The Equitable. However, assuming the timely
completion of The Equitable's current plans, and provided third parties' systems
are Year 2000 compliant, the Year 2000 issue should not have a material adverse
impact on The Equitable's business or operations. For more information regarding
The Equitable's Year 2000 compliance efforts, see "M, D&A - Year 2000".
Principal Shareholder
AXA is the largest shareholder of the Holding Company, beneficially owning
(together with certain of its affiliates) at December 31, 1997 58.7% of the
outstanding shares of Common Stock of the Holding Company. All shares of the
Holding Company's Common Stock beneficially owned by AXA have been deposited in
the voting trust referred to below. AXA is the holding company for an
international group of insurance and related financial services companies. AXA's
insurance operations include activities in life insurance, property and casualty
insurance and reinsurance. The insurance operations are diverse geographically,
with activities principally in Western Europe, North America, and the
Asia/Pacific area. AXA is also engaged in asset management, investment banking,
securities trading, brokerage, real estate and other financial services
activities principally in the United States, as well as in Western Europe and
the Asia/Pacific area.
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<PAGE>
AXA acquired its interest in the Holding Company in 1992 upon Equitable Life's
demutualization. As a result of the demutualization and related transactions,
The Equitable is likely to be treated as having undergone an "ownership change"
for purposes of Sections 382 and 383 of the Internal Revenue Code of 1986 (the
"Code"). These sections generally limit the utilization for Federal income tax
purposes of any loss carryforwards and other tax benefits from before the change
to offset the Federal income tax liabilities of The Equitable for years
following the change. Although no assurance can be given because of the
uncertainties involved in applying Sections 382 and 383 to these transactions
and in determining the amount of the loss carryforwards and other tax benefits
that might be available at the time of the ownership change, management believes
it is unlikely these limitations will have a material adverse effect on the
consolidated financial position of The Equitable.
Neither AXA nor any affiliate of AXA has any obligation to provide additional
capital or credit support to The Equitable.
Preemptive Rights. Under a Standstill Agreement entered into by AXA, the Holding
Company and Equitable Life dated as of July 18, 1991 (as amended, the
"Standstill Agreement"), AXA (or any other AXA affiliate designated by it) has
the right to acquire a percentage of each new issuance by the Holding Company of
voting securities or convertible securities equal to the percentage of the total
voting power held by AXA and its affiliates (the "AXA Parties") immediately
prior to the issuance of such voting securities or convertible securities
(assuming, in the case of convertible securities, the conversion, exchange or
exercise at such time of all convertible securities to be issued in such
issuance), except that AXA's preemptive rights do not apply to issuances
pursuant to certain employee benefit plans. AXA's preemptive rights will be in
effect until the AXA Parties own less than 10% of the total voting power
(determined as though all convertible securities owned by any AXA Party had been
converted into voting securities immediately prior to the time of
determination).
Registration Rights. Under the Standstill Agreement, AXA has the right to
require that the Holding Company register under the Securities Act any voting
securities of the Holding Company owned from time to time by any of the AXA
Parties, provided that the Holding Company will not be obligated to file a
registration statement within nine months after the initial effective date of
any registration statement requested to be filed by AXA. AXA also has the right,
subject to certain restrictions, to include such voting and other securities in
most other registrations of securities of the Holding Company under the
Securities Act. The Holding Company has agreed to pay all registration expenses
and all out-of-pocket expenses of the AXA Parties incurred in connection with
the first five registrations requested by AXA and in connection with any other
registrations in which any AXA Party participates. The Holding Company has
agreed to indemnify the AXA Parties and certain related persons against any
losses or liabilities any of them may suffer as a result of any material
misstatements or omissions of fact contained in any registration statement,
except misstatements or omissions contained in written materials provided to the
Holding Company by AXA expressly for use in the registration statement, as to
which AXA has agreed to indemnify the Holding Company against losses or
liabilities.
The registration rights provisions of the Standstill Agreement will be a
continuing obligation of the Holding Company until the AXA Parties are able to
transfer, with respect to each class or series of voting securities of the
Holding Company, all securities of such class or series then owned directly or
indirectly by them in a single transaction pursuant to Rule 144 under the
Securities Act.
Limitations on AXA Acquisitions of Voting Securities. Under Article XI of the
Holding Company's By-Laws ("Article XI"), the AXA Parties are prohibited from
acquiring any voting securities of the Holding Company (including Common Stock)
if, immediately after such acquisition, the percentage of the total voting power
represented by all such voting securities then owned by the AXA Parties would
exceed 90% (the "Threshold Percentage") unless the relevant AXA Party offers to
purchase all shares of Common Stock then outstanding (other than shares owned by
the other AXA Parties) and a special committee of the Holding Company Board
(consisting of directors of the Holding Company other than nominees of AXA or
officers of the Holding Company or any of its subsidiaries) is appointed to
evaluate such offer. Article XI does not require that an offer be made to all
stockholders or that a special committee be appointed if the AXA Parties acquire
or propose to acquire less than the Threshold Percentage.
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<PAGE>
Voting Trust. In connection with AXA's application to the New York
Superintendent for approval of its acquisition of capital stock of the Holding
Company, AXA and the initial Trustees of the Voting Trust (Claude Bebear,
Patrice Garnier and Henri de Clermont-Tonnerre) have entered into a Voting Trust
Agreement dated as of May 12, 1992 (as amended by the First Amendment dated
January 22, 1997, the "Voting Trust Agreement"). The Voting Trust Agreement
requires AXA and certain affiliates to deposit any shares of the Holding
Company's Common Stock and preferred stock held by them in the Voting Trust. The
Voting Trust Agreement also provides (subject to limited exceptions) that in the
event that any AXA Party acquires additional shares of such stock, or any other
stock of the Holding Company having the power to vote in the election of
directors of the Holding Company, it shall promptly deposit such shares in the
Voting Trust. Only AXA Parties and certain other affiliates of AXA may deposit
shares of Holding Company capital stock into the Voting Trust or be holders of
voting trust certificates representing deposited shares. The purpose of the
Voting Trust is to ensure for insurance regulatory purposes that certain
indirect minority shareholders of AXA will not be able to exercise control over
the Holding Company or Equitable Life.
AXA and any other holder of voting trust certificates will remain the beneficial
owner of the shares deposited by it, except that the Trustees will be entitled
to exercise all voting rights attaching to the deposited shares so long as such
shares remain subject to the Voting Trust. In voting the deposited shares, the
Trustees must act to protect the legitimate economic interests of AXA and any
other holders of voting trust certificates (but with a view to ensuring that
certain indirect minority shareholders of AXA do not exercise control over the
Holding Company or Equitable Life). All dividends and distributions (other than
those which are paid in the form of shares required to be deposited in the
Voting Trust) in respect of deposited shares will be paid directly to the
holders of voting trust certificates. If a holder of voting trust certificates
sells or transfers deposited shares to a person which is not an AXA Party and is
not (and does not, in connection with such sale or transfer, become) a holder of
voting trust certificates, the shares sold or transferred will be released from
the Voting Trust. The Voting Trust has an initial term of ten years and is
subject to extension with the prior approval of the New York Superintendent.
1-21
<PAGE>
Part I, Item 1A.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officers' Biographical Information. Set forth below is a description of the
business positions held during at least the past five years by the executive
officers of the Holding Company (other than Messrs. Miller and Hegarty whose
biographical data is incorporated by reference under Item 10 of this report).
Robert E. Garber. Executive Vice President and General Counsel of the Holding
Company and Equitable Life (since September 1994). Mr. Garber also served the
Holding Company and Equitable Life as Senior Vice President and General Counsel
from September 1993 to September 1994 and Equitable Life as Senior Vice
President and Deputy General Counsel from September 1989 to September 1993.
Prior to joining Equitable Life, Mr. Garber was Senior Vice President and
General Counsel (from June 1987 to August 1989) of Irving Trust Company.
Jerome S. Golden. Executive Vice President of the Holding Company and Equitable
Life (since November 1997). Chairman and Chief Executive Officer of Equitable
Distributors, Inc. from February 1995 to December 1997. President, Income
Management Group of Equitable Life from May 1994 to November 1997. Prior to
joining Equitable Life Mr. Golden was a principal in JG Resources, a consulting
concern.
Peter D. Noris. Executive Vice President (since May 1995) and Chief Investment
Officer (since July 1995) of the Holding Company and Equitable Life. Vice
President of Salomon Brothers, Inc., from November 1992 to May 1995. Prior
thereto, Mr. Noris was a Principal of Morgan Stanley & Co., Inc., from October
1984 to November 1992. Director of Alliance; Director of AXA Global Structured
Products; Chairman of the Board and President, EQ Advisors Trust; Trustee,
Hudson River Trust.
Jose S. Suquet. Executive Vice President of the Holding Company (since May 1996)
and Senior Executive Vice President (since February 1998) and Chief Distribution
Officer (since December 1997) of Equitable Life. Mr. Suquet also served
Equitable Life as Executive Vice President (from August 1994 to February 1998)
and Chief Agency Officer (from August 1994 to December 1997). Mr. Suquet joined
Equitable Life as an Agent in 1979, becoming Agency District Manager in 1981 and
becoming Agency Manager of Equitable Life's Miami Agency in 1985, which position
he held until August 1994. Chairman of the Board of Equitable Distributors, Inc.
Stanley B. Tulin. Executive Vice President of the Holding Company (since May
1996) and Vice Chairman and Director (since February 1998) and Chief Financial
Officer (since May 1996) of Equitable Life. Mr. Tulin also served Equitable Life
as Senior Executive Vice President (from May 1996 to February 1998). Mr. Tulin
was a Principal of Coopers & Lybrand LLP from 1988 to 1996, where he was
Chairman of the International Insurance Group.
1A-1
<PAGE>
Part I, Item 2.
PROPERTIES
Equitable Life leases on a long-term basis approximately 550,000 square feet of
office space located at 1290 Avenue of the Americas, New York, New York, which
serves as the Holding Company and Equitable Life's headquarters. Most of
Equitable Life's staff has moved from other Manhattan office locations into its
new headquarters. The relocation is scheduled for completion in 1999. In
addition, Equitable Life leases property both domestically and abroad, the
majority of which houses insurance operations. Management believes its
facilities are adequate for its present needs in all material respects. For
additional information, see Notes 18 and 19 of Notes to Consolidated Financial
Statements.
Equitable Life subleases its office space at 1290 Avenue of the Americas to the
New York City Industrial Development Agency (the "IDA"), and sub-subleases that
space back from the IDA, in connection with the IDA's granting of sales tax
benefits to Equitable Life.
DLJ's principal executive offices are presently located at 277 Park Avenue, New
York, New York and occupy approximately 881,000 square feet under a lease
expiring in 2016. DLJ also leases space at 120 Broadway, New York, New York,
aggregating approximately 94,000 square feet. This lease expires in 2006.
Pershing also leases approximately 440,000 square feet in Jersey City, New
Jersey, under leases which expire at various dates through 2009. DLJ also owns
land and a building with approximately 133,000 square feet in Florham Park, New
Jersey.
DLJ leases an aggregate of approximately 650,000 square feet for its domestic
and international regional offices, the leases for which expire at various dates
through 2014. Other domestic offices are located in Atlanta, Austin, Boston,
Chicago, Dallas, Houston, Jersey City, Los Angeles, Menlo Park, Miami, Oak
Brook, Philadelphia and San Francisco. Its foreign office locations are
Bangalore, Buenos Aires, Geneva, Hong Kong, London, Lugano, Mexico City, Paris,
Sao Paulo and Tokyo. DLJ's principal London-based broker-dealer subsidiary is
located at 99 Bishopsgate and occupies approximately 76,000 square feet under a
lease expiring in 2008. DLJ is in the process of negotiating for an additional
100,000 square feet in London.
DLJ believes that its present facilities are adequate for its current needs.
Alliance's principal executive offices at 1345 Avenue of the Americas, New York,
New York are occupied pursuant to a lease which extends until 2016. Alliance
currently occupies approximately 290,000 square feet at this location. Alliance
also occupies approximately 79,700 square feet at 135 West 50th Street, New
York, New York under leases expiring in 1998 and 1999. Alliance also occupies
approximately 16,800 square feet at 709 Westchester Avenue, White Plains, New
York, under leases expiring in 1999 and 2000, respectively. Alliance and its
subsidiaries occupy approximately 125,000 square feet of space in Secaucus, New
Jersey pursuant to a lease which extends until 2016.
Alliance also leases space in San Francisco, California, Chicago, Illinois,
Greenwich, Connecticut, Minneapolis, Minnesota, and Beechwood, Ohio, and its
subsidiaries lease space in Boston, Massachusetts, London, England, Paris,
France, Tokyo, Japan, Sydney, Australia, Toronto, Canada, Luxembourg, Singapore,
Bahrain, Mumbai, India, New Delhi, India, Johannesburg, South Africa and
Istanbul, Turkey. Joint venture subsidiaries of Alliance have offices in Vienna,
Austria, Sao Paulo, Brazil, Hong Kong, Chennai, India, Seoul, South Korea,
Warsaw, Poland and Moscow, Russia.
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<PAGE>
Part I, Item 3.
LEGAL PROCEEDINGS
The matters set forth in Note 17 of Notes to the Holding Company's Consolidated
Financial Statements for the year ended December 31, 1997 (Item 8 of this
report) are incorporated herein by reference, with the following additional
information.
In Cole, the court on February 17, 1998 granted Equitable Life and EOC's motion
for summary judgment dismissing the remaining claims of breach of contract and
negligent misrepresentation. The court therefore denied plaintiffs' motion to
certify the class. The decision is appealable.
4-1
<PAGE>
Part I, Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of 1997.
5-1
<PAGE>
Part II, Item 5.
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Holding Company's Common Stock is listed on the New York Stock Exchange
which is the principal market for the Holding Company's Common Stock. Its symbol
is EQ. As of March 17, 1998, there were approximately 553,924 record holders of
the Common Stock.
The dividends declared and the high and low reported closing sales prices on the
New York Stock Exchange with respect to the Holding Company's Common Stock for
each quarterly period for the two most recent fiscal years were as follows:
<TABLE>
<CAPTION>
Common Stock Data
First Quarter Second Quarter Third Quarter Fourth Quarter
Price Range and Dividends 1997 1997 1997 1997
- ------------------------------------- ----------------- ------------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C>
High............................... $ 32 1/2 $ 35 1/4 $ 43 11/16 $ 53
Low................................ $ 23 5/8 $ 26 $ 33 1/4 $ 38 5/8
Dividends Declared................. $ .05 $ .05 $ .05 $ .05
First Quarter Second Quarter Third Quarter Fourth Quarter
Price Range and Dividends 1996 1996 1996 1996
- ------------------------------------- ----------------- ------------------- ---------------- -----------------
High............................... $ 26 5/8 $ 25 3/4 $ 26 1/2 $ 26 5/8
Low................................ $ 23 $ 22 3/4 $ 22 1/4 $ 23 1/4
Dividends Declared................. $ .05 $ .05 $ .05 $ .05
</TABLE>
For information on the Holding Company's present and future ability to pay
dividends, see Note 20 of Notes to Consolidated Financial Statements (Item 8 of
this report), "Liquidity and Capital Resources" of Management's Discussion and
Analysis of Financial Condition and Operations (Item 7 of this report), and
"Shareholder Dividend Restrictions" of Business (Item 1 of this report).
6-3
<PAGE>
Part II, Item 6.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
-------------- ------------- ------------- ------------- -------------
(In Millions, Except Per Share Amounts)
<S> <C> <C> <C> <C> <C>
Consolidated Statements of Earnings Data
Revenues
Universal life and investment-type
product policy fee income.............. $ 950.6 $ 874.0 $ 788.2 $ 715.0 $ 644.5
Premiums................................. 601.5 597.6 606.8 625.6 599.1
Net investment income(1)................. 3,991.3 3,336.3 3,047.4 2,838.4 2,715.0
Investment gains, net(2)(3).............. 592.4 599.2 552.3 338.6 526.4
Commissions, fees and other income....... 3,427.8 2,800.5 2,142.4 1,748.4 1,851.5
Contribution from the Closed Block(10)... 102.5 125.0 143.2 137.0 137.9
-------------- ------------- ------------- ------------- -------------
Total revenues............................. 9,666.1 8,332.6 7,280.3 6,403.0 6,474.4
Total benefits and other deductions(4(5)6). 8,563.1 7,816.8 6,635.1 5,856.4 6,098.1
-------------- ------------- ------------- ------------- -------------
Earnings from continuing operations
before Federal income taxes and
minority interest........................ 1,103.0 515.8 645.2 546.6 376.3
Federal income tax expense(7).............. 280.5 137.4 192.3 157.0 111.7
Minority interest in net income of
consolidated subsidiaries................ 174.3 172.4 87.5 68.3 31.9
-------------- ------------- ------------- ------------- -------------
Earnings from continuing operations
before cumulative effect of
accounting change........................ 648.2 206.0 365.4 321.3 232.7
Discontinued operations, net of Federal
income taxes(1)(8)(9).................... (87.2) (83.8) - - -
Cumulative effect of accounting changes,
net of Federal income taxes.............. - (23.1) - (27.1) -
-------------- ------------- ------------- ------------- -------------
Net earnings............................... 561.0 99.1 365.4 294.2 232.7
Dividends on preferred stocks.............. 15.6 26.7 26.7 80.1 65.4
-------------- ------------- ------------- ------------- -------------
Net Earnings Applicable to
Common Shares............................ $ 545.4 $ 72.4 $ 338.7 $ 214.1 $ 167.3
============== ============= ============= ============= =============
Per Common Share(11):
Basic:
Earnings from Continuing Operations
before Cumulative Effect of
Accounting Change.................... $ 3.14 $ .97 $ 1.84 $ 1.68 1.18
============== ============= ============= ============= =============
Net Earnings........................... $ 2.71 $ .39 $ 1.84 $ 1.49 1.18
============== ============= ============= ============= =============
Diluted:
Earnings from Continuing Operations
before Cumulative Effect of
Accounting Change.................... $ 2.86 $ .94 $ 1.75 $ 1.52 1.08
============== ============= ============= ============= =============
Net Earnings........................... $ 2.47 $ .37 $ 1.75 $ 1.37 1.08
============== ============= ============= ============= =============
Cash Dividend Per Common Share............. $ .20 $ .20 $ .20 $ .20 $ .20
============== ============= ============= ============= =============
Consolidated Balance Sheets Data
Total assets(12)........................... $ 151,437.6 $ 128,811.2 $ 113,716.2 $ 94,785.3 $ 100,382.3
Long-term debt and redeemable
preferred stock.......................... 4,344.2 3,920.7 3,852.0 2,925.9 2,927.2
Total liabilities(12)...................... 146,164.1 124,823.2 109,607.5 91,605.2 96,670.9
Shareholders' equity....................... 5,273.5 3,988.0 4,108.7 3,180.1 3,446.5
</TABLE>
6-1
<PAGE>
NOTES TO SELECTED CONSOLIDATED
FINANCIAL INFORMATION
(1) Net investment income and discontinued operations included $53.3 million,
$114.3 million, $154.6 million, $219.7 million and $197.1 million, for the
years ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively,
recognized as investment income by continuing operations and as interest
expense by discontinued operations relating to intersegment loans.
(2) Investment gains, net, included additions to asset valuation allowances
and writedowns of fixed maturities and, in 1997 and 1996, equity real
estate, for continuing operations aggregated $483.8 million, $178.6
million, $197.6 million, $100.5 million and $108.7 million for the years
ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. In the
fourth quarter of 1997, additions to valuation allowances of $227.6
million were recorded related to management's announced accelerated sales
of equity real estate. Additionally, in the fourth quarter of 1997, $132.3
million of writedowns on real estate held for production of income were
recorded. As of January 1, 1996, The Equitable implemented SFAS No. 121
which resulted in the release of valuation allowances of $152.4 million on
equity real estate and recognition of impairment losses of $144.0 million
on real estate held for production of income.
(3) Investment gains, net for the year ended December 31, 1997 included a
pre-tax gain of $252.1 million from the sale of EREIM. Investment gains,
net for the year ended December 31, 1996 included a $79.4 million gain
related to the sale of shares of one investment in the DLJ long-term
corporate development portfolio. Investment gains, net, for the year ended
December 31, 1995 included a $34.7 million gain resulting from the sale of
DLJ common stock. The year ended December 31, 1993 included a $49.3
million gain (before variable compensation and related expenses) related
to the sale of shares of that same investment in the DLJ long-term
corporate development portfolio.
(4) During the fourth quarter of 1996, The Equitable completed experience and
loss recognition studies of participating group annuity contracts and
conversion annuities ("Pension Par") and disability income ("DI")
products. As a result of these studies, $145.0 million of unamortized DI
DAC were written off and reserves were strengthened by $248.0 million for
these lines of business. Consequently, earnings from continuing operations
decreased by $255.5 million ($393.0 million pre-tax). See Note 2 of Notes
to Consolidated Financial Statements.
(5) Total benefits and other deductions included Corporate interest expense of
$127.2 million, $139.6 million, $100.5 million, $50.6 million and $28.4
million for the years ended December 31, 1997, 1996, 1995, 1994 and 1993,
respectively, and interest credited to discontinued operations of $88.2
million and $97.7 million for the years ended December 31, 1994 and 1993,
respectively.
(6) Total benefits and other deductions included provisions associated with
exit and termination costs of $42.4 million, $24.4 million, $39.2 million,
$20.4 million and $96.4 million for the years ended December 31, 1997,
1996, 1995, 1994 and 1993, respectively.
(7) During the fourth quarter of 1997, The Equitable released $97.5 million
of tax reserves related to years prior to 1989.
(8) Discontinued operations, net of Federal income taxes, included additions
to asset valuation allowances and writedowns of fixed maturities and, in
1997 and 1996 equity real estate, aggregated $212.5 million, $36.0
million, $38.2 million, $50.8 million and $53.0 million for the years
ended December 31, 1997, 1996, 1995, 1994 and 1993, respectively. In the
fourth quarter of 1997, additions to valuation allowances of $79.8 million
were recognized related to management's announced accelerated sales of
equity real estate. Additionally, in the fourth quarter of 1997, $92.5
million of writedowns on real estate held for production of income were
recognized. The implementation of SFAS No. 121 as of January 1, 1996
resulted in the 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 for production of income.
6-2
<PAGE>
(9) During the 1997 and 1996 reviews of the allowance for estimated future
losses for discontinued operations, management determined it was necessary
to increase the allowance. As a result, net earnings decreased by $87.2
million and $83.8 million for 1997 and 1996, respectively. Incurred losses
of $154.4 million, $23.7 million, $25.1 million, $21.7 million and $24.7
million for the years ended December 31, 1997, 1996, 1995, 1994 and 1993,
respectively, were charged to discontinued operations allowance for future
losses. See Note 7 of Notes to Consolidated Financial Statements.
(10) The results of the Closed Block are reported on one line in the
consolidated statements of earnings. Total assets and total liabilities,
respectively, include the assets and liabilities of the Closed Block.
See Note 6 of Notes to Consolidated Financial Statements.
(11) In December 1997, The Equitable adopted SFAS No. 128, "Earnings Per
Share," which replaces primary and fully diluted earnings per share
amounts with a presentation of basic and diluted earnings per share.
Earnings per common share for all periods presented reflect new
calculation methodologies. See Notes 2 and 11 of Notes to Consolidated
Financial Statements.
(12) Assets and liabilities relating to discontinued operations are not
reflected on the consolidated balance sheets of The Equitable, except that
as of December 31, 1997, 1996, 1995, 1994 and 1993 the net amount due to
continuing operations for intersegment loans made to discontinued
operations in excess of continuing operations' obligations to fund
discontinued operations' accumulated deficit is reflected as "Amounts due
from discontinued operations".
6-3
<PAGE>
Part II, Item 7.
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.
RESULTS OF OPERATIONS
The following table presents the results of operations outside of the Closed
Block combined on a line-by-line basis with the contribution of the Closed
Block. The Insurance Operations analysis, which begins on page 7-4, likewise
reflects the 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 7-9.
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Policy fee income and premiums.............................. $ 2,238.5 $ 2,195.3 $ 2,146.2
Net investment income....................................... 4,566.2 3,882.9 3,586.3
Investment gains, net....................................... 550.0 593.7 532.1
Commissions, fees and other income.......................... 3,428.5 2,801.6 2,144.6
----------------- ----------------- ----------------
Total revenues........................................ 10,783.2 9,473.5 8,409.2
----------------- ----------------- ----------------
Interest credited to policyholders' account balances........ 1,281.8 1,286.0 1,264.9
Policyholders' benefits..................................... 2,030.5 2,409.1 2,070.5
Other operating costs and expenses.......................... 6,367.9 5,262.6 4,428.6
----------------- ----------------- ----------------
Total benefits and other deductions................... 9,680.2 8,957.7 7,764.0
----------------- ----------------- ----------------
Earnings from continuing operations before
Federal income taxes, minority interest and
cumulative effect of accounting change.................... 1,103.0 515.8 645.2
Federal income taxes........................................ 280.5 137.4 192.3
Minority interest in net income of consolidated
subsidiaries.............................................. 174.3 172.4 87.5
----------------- ----------------- ----------------
Earnings from continuing operations before
cumulative effect of accounting change.................... 648.2 206.0 365.4
Discontinued operations, net of Federal income taxes........ (87.2) (83.8) -
Cumulative effect of accounting change, net of
Federal income taxes...................................... - (23.1) -
----------------- ----------------- ----------------
Net Earnings................................................ $ 561.0 $ 99.1 $ 365.4
================= ================= ================
</TABLE>
The Equitable's results of operations for both continuing and discontinued
operations during 1997 and 1996 were significantly affected by certain actions.
The Equitable announced in January 1998 its intention to accelerate the sale of
assets from the real estate portfolio by disposing of properties with a
depreciated cost of approximately $2 billion over the next 12 to 15 months. In
connection with this program, Equitable Life reclassified $1.5 billion
depreciated cost of continuing and discontinued operations' equity real estate
from "held for the production of income" to "held for sale". Since held for sale
properties are carried at the lower of depreciated cost or estimated fair value,
less disposition costs, the reclassification generated additions to valuation
allowances of $243.0 million for continuing operations in the fourth quarter of
1997. Also, the review of the equity real estate portfolio identified properties
held for the production of income which were impaired as determined under SFAS
No. 121. This resulted in writedowns of $161.1 million for continuing
operations. The total pre-tax impact of these actions was $345.1 million (net of
related DAC amortization of $59.0 million) for continuing operations. In
addition, these real estate actions contributed to a $129.6 million
strengthening of discontinued operations' allowance for future losses in the
7-1
<PAGE>
fourth quarter of 1997. In 1996, the discontinued operations loss allowance was
strengthened by $129.0 million. For further information, see "Discontinued
Operations". During the fourth quarter of 1997, The Equitable released
approximately $97.5 million of tax reserves related to continuing operations for
years prior to 1989. Continuing operations' results for 1996 were impacted by
reserve strengthenings as the result of experience and loss recognition studies
completed for the DI and Pension Par lines of business. These studies resulted
in the decision to increase DI reserves by $175.0 million, write off $145.0
million of unamortized DAC on the DI products and increase Pension Par reserves
by $73.0 million. See "Combined Results of Continuing Operations by Segment -
Insurance Operations - Disability Income and Group Pension Products".
Continuing Operations
1997 Results Compared to 1996 - Compared to 1996, the higher pre-tax results of
continuing operations for 1997 reflected increased earnings for both Investment
Services and Insurance Operations. The $1.31 billion increase in revenues for
1997 compared to 1996 was attributed primarily to a $639.6 million increase in
investment results and to a $626.9 million increase in commissions, fees and
other income principally due to increased business activity within Investment
Services.
Net investment income increased $683.3 million for 1997 principally due to
increases of $580.8 million and $137.1 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 to a larger asset base.
Investment gains decreased by $43.7 million in 1997 from $593.7 million to
$550.0 million. The $252.1 million gross gain recognized on the sale of EREIM
during second quarter 1997 was more than offset by the aforementioned increases
in valuation allowances and writedowns related to equity real estate during the
fourth quarter of 1997. There were investment losses of $342.7 million on
General Account Investment Assets as compared to losses of $35.8 million in
1996. Investment gains at DLJ increased by $33.2 million with higher gains of
$31.5 million on other equity investments and higher dealer and trading gains of
$1.7 million. 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.
For 1997, total benefits and other deductions increased by $722.5 million from
1996, reflecting increases in other operating costs and expenses of $1.11
billion partially offset by a $378.6 million decrease in policyholders' benefits
and a $4.2 million decrease in interest credited to policyholders. The increase
in other operating costs and expenses was attributable to increased costs of
$1.12 billion in Investment Services partially offset by a $14.4 million
decrease in Insurance Operations.
The $143.1 million increase in Federal income taxes was due to the increase in
earnings from continuing operations partially offset by the aforementioned
release of prior years' tax reserves of $97.5 million. Minority interest in net
income of consolidated subsidiaries reflected the effect of Alliance's second
quarter 1997 writedown of the carrying value of the Cursitor intangible assets.
See "Combined Results of Continuing Operations by Segment - Investment
Services".
1996 Results Compared to 1995 - Compared to 1995, the lower pre-tax results from
continuing operations for 1996 reflected the impact on Insurance Operations'
results of the aforementioned 1996 reserve strengthenings totaling $248.0
million and the writeoff of unamortized DAC on the DI business of $145.0
million. Absent these actions, Insurance Operations' pre-tax results would have
increased by $53.3 million in 1996 over 1995. Offsetting the lower Insurance
Operations' results were increased earnings in Investment Services and lower
losses in Corporate and Other of $196.9 million and $13.1 million, respectively.
The decrease in Federal income taxes was attributed to lower pre-tax results of
operations. The increase in minority interest in net income of consolidated
subsidiaries was primarily attributable to increased earnings at both DLJ and
Alliance and a full year's impact in 1996 of DLJ's October 1995 initial public
offering ("IPO").
7-2
<PAGE>
The $1.06 billion increase in revenues for 1996 compared to 1995 was primarily
attributed to Investment Services' $644.7 million higher commissions, fees and
other income due to increased business activity and higher investment results of
$205.4 million, principally at DLJ. Insurance Operations and Corporate and Other
contributed $168.0 million and $38.3 million, respectively, to the year's
revenue growth.
Net investment income increased $296.6 million for 1996 as compared to the prior
year principally due to increases of $159.1 million and $118.3 million,
respectively, for Investment Services and Insurance Operations. The Investment
Services increase was attributable to higher business activity while the
Insurance Operations increase was due to higher overall investment yields on a
larger asset base, including the investment of proceeds received from the
issuance of $600.0 million of Surplus Notes in December 1995.
Investment gains increased by $61.6 million for 1996 from $532.1 million for
1995. Investment gains at DLJ increased by $69.8 million with increased dealer
and trading gains of $70.5 million offset by lower gains of $0.7 million on
other equity investments. The 1996 gains on other equity investments included a
gain of $79.4 million on the sale of the remaining shares of a single corporate
development portfolio investment. 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 losses of $35.8 million on General
Account Investment Assets as compared to losses of $21.5 million in 1995.
For 1996, total benefits and other deductions increased by $1.19 billion from
1995, reflecting increases in other operating expenses of $649.9 million, the DI
DAC writeoff and DI and Pension Par reserve strengthenings of $393.0 million, a
$90.6 million increase in other policyholders' benefits, $39.1 million higher
Corporate interest expense and a $21.1 million increase in interest credited to
policyholders. The increase in other operating expenses was principally
attributable to increased operating costs of $653.3 million in Investment
Services associated with increased business activities. The increase in other
policyholders' benefits primarily was attributable to higher claims experience
on directly written and reinsurance assumed DI policies (before reserve
strengthening) and higher mortality experience on variable and
interest-sensitive and participating life policies, with the impact of the
higher mortality being largely offset by DAC amortization as reflected in other
operating expenses. Higher Corporate interest expense primarily resulted from
the interest on the Surplus Notes issued by Equitable Life in the fourth quarter
of 1995. The $21.1 million increase in interest credited to policyholders for
Insurance Operations primarily was due to small changes in crediting rates
applied to a larger individual life and annuity in force book of business.
Federal Income Taxes
Federal income taxes resulted in an expense of $280.5 million for 1997 as
compared to $137.4 million in 1996 and $192.3 million in 1995, reflecting The
Equitable's earnings pattern over the three year period and the 1997 tax reserve
release mentioned above. See Note 9 of Notes to Consolidated Financial
Statements. At December 31, 1997, The Equitable's deferred income tax account
reflected a net asset of $58.4 million as compared to a net asset of $51.8
million at December 31, 1996. Management believes the $641.5 million gross
deferred tax asset at December 31, 1997 is more likely than not to be fully
realizable and, consequently, no valuation allowance is necessary.
7-3
<PAGE>
Combined Results Of Continuing Operations By Segment
Insurance Operations. The following table presents the combined results from
continuing operations for Insurance Operations:
<TABLE>
<CAPTION>
Insurance Operations
(In Millions)
1997
-------------------------------------------
As Closed 1996 1995
Reported Block Combined Combined Combined
------------- ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Policy fees, premiums and other
income............................... $ 1,667.5 $ 687.1 $ 2,354.6 $ 2,295.1 $ 2,230.8
Net investment income.................. 2,214.5 574.9 2,789.4 2,652.3 2,534.0
Investment losses, net................. (300.3) (42.4) (342.7) (35.9) (21.3)
Contribution from the Closed Block..... 102.5 (102.5) - - -
------------- ------------ -------------- ------------- -------------
Total revenues................... 3,684.2 1,117.1 4,801.3 4,911.5 4,743.5
Total benefits and other deductions.... 3,433.9 1,117.1 4,551.0 4,948.1 4,440.4
------------- ------------ -------------- ------------- -------------
Earnings (Loss) from Continuing
Operations before Federal
Income Taxes, Minority Interest
and Cumulative Effect of
Accounting Change.................... $ 250.3 $ - $ 250.3 $ (36.6) $ 303.1
============= ============ ============== ============= =============
</TABLE>
1997 Results Compared to 1996 - The earnings from continuing operations in
Insurance Operations for 1997 reflected an increase of $286.9 million from the
prior year. Higher net investment income, higher policy fees on variable and
interest-sensitive life and individual annuities contracts, higher DAC
capitalization, lower life insurance mortality and improved DI and group pension
results were offset by higher investment losses, higher policy 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 and the writeoff of DAC in the
fourth quarter of 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 decreased by $110.2 million primarily due to investment results
which decreased by $169.7 million and a $33.4 million decline in premiums offset
by a $76.6 million increase in policy fees and a $16.3 million increase in
commissions, fees and other income. Insurance Operations' $137.1 million
increase in investment income principally was due to $192.1 million higher
overall yields on a larger General Account Investment Asset base, offset by
$61.0 million lower interest received on reduced amounts due from discontinued
operations. Income from other equity investments increased during 1997 by $36.4
million as compared to 1996. Returns on other equity investments have fluctuated
significantly from period to period and there can be no assurance recent
performance will be sustained. There were higher losses on the General Account
investment portfolio in 1997 as compared to 1996 principally due to losses on
equity real estate which totaled $432.4 million, $346.8 million higher than in
1996. The 1997 losses were primarily due to writedowns on real estate held for
the production of income and additions to valuation allowances in the fourth
quarter of 1997 as discussed above. The decrease in premiums principally was due
to lower traditional life and individual health premiums. Policy fee income rose
by $76.6 million to $950.5 million due to higher insurance and annuity account
balances.
Total benefits and other deductions for 1997 decreased $397.1 million from the
1996 total which included reserve strengthenings and a DAC writeoff aggregating
$393.0 million. Excluding the 1996 reserve actions, there was a $4.1 million
decrease in 1997 as compared to 1996 as increases of $203.4 million in other
operating expenses and $44.4 million higher DAC amortization were partially
offset by $117.2 million higher DAC capitalization and a decrease in policy
benefits. The increase in other operating expenses resulted from higher
commissions and variable expenses related to increased sales, $19.4 million
7-4
<PAGE>
higher restructuring costs, higher costs related to the annuity wholesale
distribution channel introduced in the latter part of 1996 and higher costs
associated with litigation. The sales related expense increases were
substantially offset by higher DAC capitalization. The net decrease of $130.6
million in policyholders' benefits, after excluding the effect of the 1996
reserve strengthening, 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.
Disability Income and Group Pension Products
During the competitive market conditions of the 1980s, Equitable Life issued a
large amount of noncancelable individual DI policies with policy terms and
underwriting criteria that were competitive at the time but are more liberal
than those available today. These policies have fixed premiums and are not
cancelable as long as premiums are paid. The majority of the DI policies issued
before 1993 provide for lifetime benefits and many include cost of living riders
and provide benefits which exceed $5,000 per month, while defining disability as
the insured's inability to perform his or her own occupation. Equitable Life
also had assumed reinsurance on a block of DI policies with characteristics
similar to its own pre-1993 policies. During the years 1994 through 1996, DI
providers, including Equitable Life, experienced claims incidence rates higher
than previous industry experience. The Equitable had recognized pre-tax losses
from operations of $72.5 million and $50.6 million in 1996 and 1995,
respectively, for the DI line of business before the fourth quarter 1996 reserve
strengthening.
In light of unfavorable results, in late 1996 a loss recognition study of the DI
business was completed. The study indicated the DAC was not recoverable and the
reserves were not sufficient. Therefore, $145.0 million of unamortized DAC on DI
policies at December 31, 1996 was written off and reserves for directly written
DI policies and DI reinsurance assumed were strengthened by $175.0 million.
Equitable Life had issued Pension Par products designed to provide participating
annuity guarantees and benefit payment services to corporate sponsored pension
plans. Equitable Life has made no new sales of these products in several years.
At December 31, 1996, a significant portion of these contracts either had been
converted into non-participating contracts or effectively were non-participating
because they were unlikely to produce future dividends due to improving
mortality trends and poor investment performance. The group pension business
produced pre-tax losses of $24.9 million and $13.3 million in 1996 and 1995,
respectively, before the fourth quarter 1996 reserve strengthening. Operating
losses incurred in 1996 and 1995 primarily resulted from lower investment
results, particularly related to investment losses on mortgages and equity real
estate and deteriorating mortality experience as evidenced by mortality losses
of $2.4 million and $6.8 million experienced in 1996 and 1995, respectively.
During the fourth quarter of 1996, a loss recognition study was completed which
incorporated management's assumptions at that date. The study's results prompted
management to establish a Pension Par premium deficiency reserve, resulting in a
$73.0 million pre-tax charge to the results of continuing operations at December
31, 1996, principally attributable to improved mortality assumptions.
Based on the experience that emerged on these two books of business during 1997,
management continues to believe the assumptions and estimates used to develop
the 1996 DI and Pension Par reserve strengthenings are reasonable. The
determination of reserves requires making assumptions and estimates covering a
number of factors, including mortality, morbidity and interest rates, claims
experience and lapse rates based on then known facts and circumstances. Such
factors as claim incidence and termination rates can be affected by changes in
the economic, legal and regulatory environments, as well as societal factors
(e.g. work ethic). While management believes the DI and Pension Par reserves
have been calculated on a reasonable basis and are adequate, there can be no
assurance that they will be sufficient to provide for all future liabilities.
7-5
<PAGE>
Beginning February 1998, EquiSource, Inc., an indirect wholly owned subsidiary
of Equitable Life, entered into an agreement that permits Equitable Life's
career agency force to offer DI policies of Provident Life and Accident
Insurance Company ("Provident"). Equitable Life no longer underwrites new DI
policies. As a result of a 1996 acquisition, Paul Revere Life Insurance Company,
which administers Equitable Life's DI business, and Provident are now
affiliates.
1996 Results Compared to 1995 - The loss from continuing operations of $36.6
million in 1996 primarily was due to the $393.0 million of reserve
strengthenings, including the writeoff of unamortized DAC on DI products, in the
fourth quarter of 1996. If the effect of these charges was eliminated, 1996
earnings from continuing operations for Insurance Operations would have totaled
$356.4 million, an increase of $53.3 million over the prior year, reflecting an
increase in earnings in the core life and annuity lines of business, partially
offset by increased losses in the reinsurance, DI and group pension lines of
business.
Total revenues increased by $168.0 million primarily due to a $103.7 million
increase in investment results, an $85.7 million increase in policy fees on
variable and interest-sensitive life and individual annuity contracts and a
$15.3 million increase in commissions, fees and other income, offset by a
decrease of $36.7 million in premiums. The decrease in premiums principally was
due to lower traditional life premiums and lower reinsurance assumed on
individual annuity contracts. Higher investment income attributed to higher
overall investment yields on a larger asset base, which included the net
proceeds from the issuance of the Surplus Notes in December 1995, was partially
offset by higher investment losses in 1996 principally due to lower gains on
fixed maturities.
Excluding the $393.0 million effect of reserve strengthenings and DAC writeoff
in 1996, total benefits and other deductions for 1996 increased by $114.7
million from 1995. Policyholders' benefits before the reserve strengthenings
increased $90.6 million due to higher claims experience on directly written and
reinsurance assumed DI policies and higher mortality in the participating and
variable and interest-sensitive life products, partially offset by favorable
mortality experience on term life insurance. The impact of the higher mortality
in the participating and variable and interest-sensitive life products was
substantially offset by reduced DAC amortization of $51.1 million attributed to
life insurance products. Other operating expenses increased $79.4 million
principally due to higher employee benefit costs related to lower interest rate
assumptions, higher costs associated with building new distribution channels and
new product initiatives, costs related to the consolidation of insurance
operations centers, higher volume related commissions and increasing costs
associated with litigation, partially offset by lower amortization of DAC
principally attributable to the mortality noted above and $21.8 million
principally attributable to estimates of enhanced future annuity gross margins.
7-6
<PAGE>
Premiums and Deposits - The following table lists premiums and deposits,
including universal life and investment-type contract deposits, for the
Insurance Operations' major product lines.
<TABLE>
<CAPTION>
Premiums and Deposits
(In Millions)
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
Individual annuities
First year.............................................. $ 3,276.3 $ 2,132.1 $ 1,756.7
Renewal................................................. 1,272.2 1,210.5 1,090.7
----------------- ---------------- ----------------
4,548.5 3,342.6 2,847.4
Individual life(1)
First year.............................................. 405.6 362.9 356.2
Renewal................................................. 2,025.5 1,983.8 1,889.6
----------------- ---------------- ----------------
2,431.1 2,346.7 2,245.8
Other(2)
First year.............................................. 31.6 29.4 75.7
Renewal................................................. 362.9 368.8 387.9
----------------- ---------------- ----------------
394.5 398.2 463.6
Total first year.......................................... 3,713.5 2,524.4 2,188.6
Total renewal............................................. 3,660.6 3,563.1 3,368.2
----------------- ---------------- ----------------
Total individual insurance and annuity products........... 7,374.1 6,087.5 5,556.8
Total group pension products.............................. 328.7 355.5 354.7
----------------- ---------------- ----------------
Total Premiums and Deposits............................... $ 7,702.8 $ 6,443.0 $ 5,911.5
================= ================ ================
<FN>
(1) Includes variable and interest-sensitive and traditional life products.
(2) Includes reinsurance assumed and health insurance.
</FN>
</TABLE>
First year premiums and deposits for individual insurance and annuity products
in 1997 increased from prior year levels by $1.19 billion due to higher sales of
individual annuities and variable and interest-sensitive life products. Renewal
premiums and deposits for individual insurance and annuity products increased by
$97.5 million during 1997 over the prior year as increases in the larger block
of variable and interest-sensitive life and individual annuity policies were
partially offset by decreases in traditional life policies and other product
lines. The 53.7% increase in first year individual annuities' premiums and
deposits in 1997 over the prior year included $632.6 million from a line of
retirement annuity products sold through complementary distribution channels.
First year individual life premiums and deposits for 1997 included $41.8 million
of premiums and deposits from the sale of two large company-owned life insurance
("COLI") cases.
First year premiums and deposits for individual insurance and annuity products
in 1996 increased from 1995 levels by $335.8 million primarily due to higher
sales of individual annuities offset in part by lower reinsurance assumed on
individual annuity contracts. Renewal premiums and deposits for individual
insurance and annuity products increased by $194.9 million during 1996 over 1995
as increases in the larger block of variable and interest-sensitive life and
individual annuity policies were partially offset by decreases in traditional
life policies and other product lines. The 21.4% increase in first year
individual annuities' premiums and deposits in 1996 over 1995 included $214.8
million from a line of retirement annuity products introduced in 1995 partially
offset by an approximately $148.4 million decrease in premiums related to an
exchange program that offered contractholders of existing SPDA contracts with no
remaining surrender charges an opportunity to exchange their contracts for new
flexible premium variable contracts thereby retaining assets in The Equitable
and establishing new surrender charge scales.
7-7
<PAGE>
The Administration's 1999 budget proposals announced in February 1998 contain
provisions which, if enacted, could have an adverse impact on certain sales in
the non-qualified marketplace and, depending on grandfathering provisions,
surrenders of certain variable insurance products and business-owned life
insurance policies and could reduce the tax deduction allowed to the Insurance
Group for reserves for annuity contracts. Management cannot predict what other
proposals may be made, what legislation, if any, might be introduced or enacted
or what the effect of any such legislation might be.
Surrenders and Withdrawals; Policy Loans - 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)
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
Individual Insurance and Annuities' Product Lines:
Individual annuities...................................... $ 2,540.8 $ 2,277.0 $ 2,186.8
Variable and interest-sensitive life...................... 498.9 521.3 405.0
Traditional life.......................................... 372.9 350.1 340.6
----------------- ---------------- -----------------
Total..................................................... $ 3,412.6 $ 3,148.4 $ 2,932.4
================= ================ ================
</TABLE>
Surrendered traditional and variable and interest-sensitive life insurance
policies represented 4.1%, 4.4% and 4.1% of average surrenderable future policy
benefits and policyholders' account balances for such life insurance contracts
in force during 1997, 1996 and 1995, respectively. Surrendered individual
annuity contracts represented 9.8%, 10.3% and 11.5% of average surrenderable
policyholders' account balances for individual annuity contracts in force during
those same years, respectively.
Policy and contract surrenders and withdrawals increased $264.2 million during
1997 compared to 1996. The $263.8 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. Policy
and contract surrenders and withdrawals increased $216.0 million during 1996
compared to 1995 due to the $116.3 million and $90.2 million increases in the
variable and interest-sensitive life and individual annuities' surrenders and
withdrawals, respectively.
The persistency of life insurance and annuity products is a critical element of
their profitability. As of December 31, 1997, all in force individual life
insurance policies (other than individual life term policies without cash values
which comprise 8.2% of in force policies) and more than 89% of individual
annuity contracts (as measured by reserves) were surrenderable. However, a
surrender charge often applies in the early contract years and declines to zero
over time. Contracts without surrender provisions cannot be terminated prior to
maturity.
Margins on Individual Insurance and Annuity Products - Insurance Operations'
results significantly depend on profit margins between investment results from
General Account Investment Assets and interest credited on individual insurance
and annuity products. During 1997, margins increased due to higher investment
yields. During 1997, the crediting rate ranges were: 4.50% to 6.50% for variable
and interest-sensitive life insurance; 5.45% to 6.20% for variable deferred
annuities; and 5.35% to 7.30% for SPDA contracts; the crediting rate of 5.90%
was used for retirement investment accounts throughout 1997.
Margins on individual insurance and annuity products are affected by interest
rate fluctuations. Rising interest rates result in a decline in the market value
of assets. However, the positive cash flows from renewal premiums, investment
income and maturities of existing assets would make an early disposition of
investment assets to meet operating cash flow requirements unlikely. Rising
interest rates also would result in available cash flows from maturities being
invested at higher interest rates, which would help support a gradual increase
in new business and renewal interest rates on interest-sensitive products. A
sharp, sudden rise in the interest rate environment without a concurrent
7-8
<PAGE>
increase in crediting rates could result in higher surrenders, particularly for
annuities. The effect of such surrenders would be to reduce earnings modestly
over the long term while increasing earnings in the period of the surrenders to
the extent surrender charges were applicable. To protect against sharp increases
in interest rates, Equitable Life maintains an interest rate cap program
designed to hedge crediting rate increases on interest-sensitive individual
annuity contracts. At December 31, 1997, the outstanding notional amounts of
contracts purchased and sold totaled $7.25 billion and $875.0 million,
respectively, as compared to $5.05 billion and $1.18 billion, respectively, at
December 31, 1996.
If interest rates fall, crediting interest rates and dividends would be adjusted
subject to competitive pressures. Only a minority of this segment's policies and
contracts have fixed interest rates locked in at issue. The majority of
contracts are adjustable, having guaranteed minimum rates ranging from
approximately 2.5% to 5.5%. More than 89% of the life policies have a minimum
rate of 4.5% or lower. Should interest rates fall below such policy minimums,
adjustments to life policies' mortality and expense charges could cover the
shortfall in most situations. Lower crediting interest rates and dividends could
result in higher surrenders.
Investment Services. The following table summarizes the results of continuing
operations for Investment Services.
<TABLE>
<CAPTION>
Investment Services
(In Millions)
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
Third party commissions and fees.......................... $ 3,257.4 $ 2,634.8 $ 2,000.6
Affiliate fees............................................ 87.4 140.7 138.9
Net dealer and trading gains, investment results
and other income........................................ 2,623.3 1,764.5 1,550.3
----------------- ---------------- ----------------
Total revenues............................................ 5,968.1 4,540.0 3,689.8
Total costs and expenses.................................. 4,996.8 3,876.8 3,223.5
----------------- ---------------- ----------------
Earnings from Continuing Operations before
Federal Income Taxes, Minority Interest and
Cumulative Effect of Accounting Change.................. $ 971.3 $ 663.2 $ 466.3
================= ================ ================
</TABLE>
Affiliate fees are earned by the Investment Subsidiaries (which included EREIM
through June 10, 1997) principally for investment management and other services
provided to the Insurance Group and unconsolidated real estate joint ventures.
These fees (except those related to discontinued operations and unconsolidated
real estate joint ventures of $8.3 million, $26.8 million and $28.1 million in
1997, 1996 and 1995, respectively) are eliminated as intercompany transactions
in the consolidated statements of earnings included elsewhere herein.
1997 Results Compared to 1996 - For 1997, pre-tax earnings for Investment
Services increased by $308.1 million from the prior year primarily due to the
$249.8 million net gain on the sale of EREIM and higher earnings for DLJ,
partially offset by lower earnings at Alliance reflecting the effect of the
Cursitor intangible asset writedown. See Note 5 of Notes to Consolidated
Financial Statements for further information. Total segment revenues increased
$1.43 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 1997 included the
gain from the sale of EREIM.
Total costs and expenses increased by $1.12 billion for 1997 as compared to 1996
principally reflecting increases in interest, compensation and other expenses at
DLJ due to increased activity and the $120.9 million writedown of Cursitor
intangible assets at Alliance.
1996 Results Compared to 1995 - Investment Services' pre-tax earnings in 1996
were $196.9 million higher than in 1995 with higher earnings at DLJ, Alliance
and Equitable Real Estate. DLJ's revenues rose to $3.49 billion, an increase of
$731.8 million from 1995 largely due to increases in most of DLJ's major areas
of activity. Alliance revenues increased $148.5 million from 1995 to $788.2
million due to higher investment advisory fees resulting from higher assets
under management.
7-9
<PAGE>
Total costs and expenses for Investment Services were $3.88 billion in 1996, an
increase of $653.3 million from 1995, with DLJ accounting for $562.8 million of
the increase, principally reflecting increases in compensation, interest and
other expenses at DLJ due to its increased business activity.
Results By Business Unit - The following table summarizes results of continuing
operations by business unit.
<TABLE>
<CAPTION>
Investment Services
Results of Operations by Business Unit
(In Millions)
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
DLJ(1).................................................... $ 614.9 $ 440.6 $ 271.6
Alliance.................................................. 134.5 198.0 159.3
Equitable Real Estate(2).................................. 14.8 46.2 43.6
Gain on sale of EREIM(3).................................. 249.8 - -
Consolidation/elimination(4)(5)........................... (42.7) (21.6) (8.2)
----------------- ---------------- ----------------
Earnings from Continuing Operations before
Federal Income Taxes, Minority Interest and
Cumulative Effect of Accounting Change(6)............... $ 971.3 $ 663.2 $ 466.3
================= ================ ================
<FN>
(1) Excludes amortization expense on goodwill and intangible assets related to
Equitable Life's 1985 acquisition of DLJ which are included in
consolidation/elimination.
(2) Includes results of operations through June 10, 1997, the date The Equitable
sold EREIM to Lend Lease.
(3) Gain on sale of EREIM is net of $2.3 million related to state income tax.
(4) Includes interest expense of $12.2 million, $12.4 million and $18.6 million
for 1997, 1996 and 1995, respectively, related to intercompany debt issued
by intermediate holding companies payable to Equitable Life.
(5) Includes a gain of $6.7 million for 1997 on issuance of additional DLJ
shares. Also includes a gain of $16.9 million (net of $3.7 million related
to state income tax) in 1996 on the issuance of Alliance Units to third
parties upon the completion of the Cursitor acquisition in the first quarter
of the year. Also includes the $34.7 million of net gain due to the DLJ IPO
during the fourth quarter of 1995.
(6) Pre-tax minority interest related to DLJ was $176.2 million, $131.0 million
and $28.5 million in 1997, 1996 and 1995, respectively, and $57.0 million,
$83.6 million and $64.4 million for Alliance for 1997, 1996 and 1995,
respectively.
</FN>
</TABLE>
DLJ - DLJ's earnings from operations for 1997 were $614.9 million, up $174.3
million from the prior year. Revenues increased $1.15 billion to $4.64 billion
primarily due to $582.6 million higher net investment income, fee increases of
$297.3 million, increased underwriting revenues of $117.5 million and higher
commissions of $116.8 million. DLJ's expenses were $4.03 billion for 1997, up
$977.1 million from the prior year, primarily due to higher interest expense of
$420.0 million, a $369.5 million increase in compensation and commissions, a
$31.3 million increase in rent related expenditures and $30.1 million higher
brokerage and exchange fees.
DLJ's earnings from operations for 1996 were $440.6 million, up $169.0 million
from the prior year. Revenues increased $731.8 million to $3.49 billion
primarily due to increased underwriting revenues of $272.7 million, $162.7
million higher net investment income, higher commissions of $113.1 million, fee
increases of $100.9 million and higher dealer and trading gains of $70.5
million. DLJ's expenses were $3.05 billion for 1996, up $562.8 million from the
prior year, primarily due to a $271.1 million increase in compensation and
commissions, higher interest expense of $52.6 million, a $38.7 million increase
in rent related expenditures and $33.2 million higher brokerage and exchange
fees.
7-10
<PAGE>
During the third quarter of 1995, DLJ provided $28.8 million for a potential
loss with respect to a bridge loan aggregating $150.0 million to a company
experiencing financial difficulties. In April 1997, the bridge loan was repaid
in full and DLJ realized the amounts previously reserved plus interest.
See "Market Risk, Risk Management and Derivative Financial Instruments - Trading
Activities" for DLJ-related information on those topics.
Alliance - Alliance's earnings from operations for 1997 were $134.5 million, a
decrease of $63.5 million from the prior year. Revenues totaled $974.8 million
for 1997, an increase of $186.6 million from 1996, due to increased investment
advisory and service fees. Alliance's costs and expenses increased $250.1
million to $840.3 million for 1997 primarily due to the $120.9 million writedown
of intangible assets related to the Cursitor acquisition, increases in promotion
and servicing expenses of $64.5 million and $48.5 million higher employee
compensation and benefits. Cursitor's assets under management declined from
approximately $10.0 billion at the date of acquisition in 1996 to $3.5 billion
at December 31, 1997.
Alliance's earnings from operations for 1996 were $198.0 million, an increase of
$38.7 million from the prior year. Revenues totaled $788.2 million for 1996, an
increase of $148.5 million from 1995, due to increased investment advisory fees,
from higher assets under management and higher distribution plan fees resulting
from high average equity long-term mutual fund and cash management assets under
management. Alliance's costs and expenses increased $109.8 million to $590.2
million for 1996 primarily due to increases in employee compensation and
benefits and other promotional expenditures.
Fees and Assets Under Management - As the following table illustrates, third
party clients continue to constitute an important source of revenues and
earnings.
<TABLE>
<CAPTION>
Fees and Assets Under Management
(In Millions)
At or for the Years Ended December 31,
-------------------------------------------------------
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
Fees:
Third Party............................................. $ 836.0 $ 740.8 $ 613.0
The Equitable........................................... 74.6 128.8 128.2
----------------- ---------------- -----------------
Total..................................................... $ 910.6 $ 869.6 $ 741.2
================= ================ ================
Assets Under Management:
Third Party:
Unaffiliated third parties(1)......................... $ 182,345 $ 154,914 $ 119,721
Separate Accounts..................................... 34,600 29,870 24,720
The Equitable(2)........................................ 57,139 54,990 50,900
----------------- ---------------- ----------------
Total..................................................... $ 274,084 $ 239,774 $ 195,341
================= ================ ================
<FN>
(1) Includes $2.13 billion and $1.77 billion of assets managed on behalf of AXA
affiliates at December 31, 1997 and 1996, respectively. Third party assets
under management include 100% of the estimated fair value of real estate
owned by joint ventures in which third party clients own an interest.
(2) Includes invested assets of The Equitable not managed by the Investment
Subsidiaries, principally invested assets of subsidiaries and policy loans,
totaling approximately $24.04 billion, $21.75 billion and $17.59 billion at
December 31, 1997, 1996 and 1995, respectively, and mortgages and equity
real estate totaling $8.16 billion at December 31, 1997.
</FN>
</TABLE>
7-11
<PAGE>
Fees for assets under management increased 4.7% during 1997 as compared to 1996
as the continued growth in assets under management for third parties was
partially offset by the reduction in fees resulting from the sale of EREIM.
Total assets under management increased $34.31 billion, primarily due to $34.08
billion higher third party assets under management at Alliance. The Alliance
growth in 1997 was principally due to market appreciation and mutual fund sales,
offset by the decrease in Cursitor assets. In 1996, Alliance's third party
assets under management increased by $34.63 billion primarily due to market
appreciation, the Cursitor and National Mutual Funds Management (North America)
acquisitions in 1996 and net sales of mutual funds. DLJ's assets under
management increased in 1997 by $6.73 billion or 64.3% due to new business in
the Asset Management Group.
CONTINUING OPERATIONS INVESTMENT PORTFOLIO
The continuing operations investment portfolio is composed of the General
Account investment portfolio and investment assets of the Holding Company and
its non-operating subsidiaries, principally the Trust and the SECT (the Holding
Company, the Trust and the SECT, together, the "Holding Company Group"). The
Holding Company Group portfolio is discussed in a separate section following the
discussion of the General Account investment portfolio.
General Account Investment Portfolio
At December 31, 1997, Insurance Operations, including the Closed Block, had
$36.60 billion of General Account Investment Assets to support the insurance and
annuity liabilities of its continuing operations. In view of the similar asset
quality characteristics of the major asset categories, management believes it is
appropriate to discuss the Closed Block assets and the assets outside of the
Closed Block on a combined basis as General Account Investment Assets. The
investment results of General Account Investment Assets and the Holding Company
Group investment assets are reflected in The Equitable's results from continuing
operations; investment results of Discontinued Operations Investment Assets are
reflected in discontinued operations. Most individual investment assets held by
discontinued operations are also held in the General Account investment
portfolio. The following discussion analyzes the results of the major categories
of General Account Investment Assets, including the Closed Block investment
assets.
The following table reconciles the consolidated balance sheet asset amounts to
General Account Investment Assets.
<TABLE>
<CAPTION>
General Account Investment Asset Carrying Values
December 31, 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(3)......... $ 19,978.5 $ 4,231.0 $ (125.0) $ 347.6 $ 23,986.9
Held to maturity.............. 143.0 - - 143.0 -
Trading account securities...... 16,535.7 - 16,535.7 - -
Securities purchased under
resale agreements............. 22,628.8 - 22,628.8 - -
Mortgage loans on real estate... 2,611.4 1,341.6 - - 3,953.0
Equity real estate.............. 2,749.2 135.3 (7.4) - 2,891.9
Policy loans.................... 2,422.9 1,700.2 - - 4,123.1
Other equity investments........ 1,276.5 86.3 316.2 9.1 1,037.5
Other invested assets........... 626.1 99.3 236.8 .6 488.0
---------------- --------------- -------------- ------------- --------------
Total investments............. 68,972.1 7,593.7 39,585.1 500.3 36,480.4
Cash and cash equivalents....... 597.4 (39.0) 415.1 23.7 119.6
---------------- --------------- -------------- ------------- --------------
Total........................... $ 69,569.5 $ 7,554.7 $ 40,000.2 $ 524.0 $ 36,600.0
================ ================ ================ ============= ================
7-12
<PAGE>
<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 General Account Investment Assets.
(2) The "Holding Company Group" category includes the investment portfolio held
by the Holding Company Group. These assets are not managed as part of
General Account Investment Assets. The "Holding Company Group" category is
deducted in arriving at General Account Investment Assets.
(3) Fixed maturities available for sale are reported at estimated fair value.
At December 31, 1997, the amortized cost of the General Account's fixed
maturity portfolio was $22.91 billion compared with an estimated market
value of $23.99 billion.
</FN>
</TABLE>
Asset Valuation Allowances and Writedowns
The following table shows asset valuation allowances and additions to and
deductions from such allowances for the periods indicated.
<TABLE>
<CAPTION>
General Account Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
----------------- ---------------- ---------------
<S> <C> <C> <C>
Balances at January 1, 1996............................... $ 83.9 $ 264.1 $ 348.0
SFAS No. 121 releases(1)................................ - (152.4) (152.4)
Additions............................................... 43.7 95.7 139.4
Deductions(2)........................................... (63.4) (117.0) (180.4)
----------------- ---------------- ---------------
Balances at December 31, 1996............................. 64.2 90.4 154.6
Additions(3)............................................ 46.9 316.3 363.2
Deductions(2)........................................... (36.8) (61.2) (98.0)
----------------- ---------------- ---------------
Balances at December 31, 1997............................. $ 74.3 $ 345.5 $ 419.8
================= ================ ===============
<FN>
(1) As a result of adopting SFAS No. 121, $152.4 million of allowances on assets
held for the production of income were released and impairment losses of
$149.6 million were recognized.
(2) Primarily reflects releases of allowances due to asset dispositions and
writedowns.
(3) Includes $243.0 million of additions to valuation allowances resulting from
management's decision in the fourth quarter of 1997 to accelerate the sale
of equity real estate.
</FN>
</TABLE>
Writedowns on fixed maturities (primarily related to below investment grade
securities) aggregated $15.2 million, $42.7 million and $63.5 million in 1997,
1996 and 1995, respectively. Writedowns on equity real estate subsequent to the
adoption of SFAS No. 121 totaled $165.2 million and $23.7 million in 1997 and
1996, respectively. The 1997 writedowns principally resulted from changes in
assumptions related to real estate holding periods and property cash flows.
7-13
<PAGE>
General Account Investment Assets
The following table shows the major categories of General Account Investment
Assets by amortized cost, valuation allowances and net amortized cost as of
December 31, 1997 and by net amortized cost as of December 31, 1996.
<TABLE>
<CAPTION>
General Account Investment Assets
(Dollars In Millions)
December 31, 1997 December 31, 1996
----------------------------------------------------------------- -------------------------------
% of % of
Net Total Net Net Total Net
Amortized Valuation Amortized Amortized Amortized Amortized
Cost Allowances Cost Cost Cost Cost
--------------- ------------- --------------- -------------- --------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities(1)... $ 22,914.5 $ - $ 22,914.5 64.5% $ 21,711.6 62.2%
Mortgages............. 4,027.3 74.3 3,953.0 11.1 4,513.7 12.9
Equity real estate.... 3,237.4 345.5 2,891.9 8.2 3,518.6 10.1
Other equity
investments......... 1,037.5 - 1,037.5 2.9 955.6 2.7
Policy loans.......... 4,123.1 - 4,123.1 11.6 3,962.0 11.3
Cash and short-term
investments(2)...... 607.6 - 607.6 1.7 277.7 0.8
--------------- ------------- --------------- -------------- --------------- -------------
Total................. $ 35,947.4 $ 419.8 $ 35,527.6 100.0% $ 34,939.2 100.0%
=============== =============== =============== ============== =============== =============
<FN>
(1) Excludes unrealized gains of $1.07 billion and $432.9 million on fixed
maturities classified as available for sale at December 31, 1997 and 1996,
respectively.
(2) Comprises "Cash and cash equivalents" and short-term investments included
within the "Other invested assets" caption on the consolidated balance
sheet.
</FN>
</TABLE>
Management announced in January 1998 plans to accelerate the sales of real
estate properties over the next 12 to 15 months, expecting to dispose of
approximately $2 billion depreciated cost of continuing and discontinued
operations' properties. Management anticipates reductions to the total equity
real estate portfolio will depend on market conditions, the level of mortgage
foreclosures and expenditures required to fund necessary or desired improvements
to properties. It is management's policy not to invest substantial new funds in
equity real estate except to safeguard values in existing investments or to
honor outstanding commitments.
7-14
<PAGE>
Investment Results of General Account Investment Assets
The following table summarizes investment results by General Account Investment
Asset category for the periods indicated.
<TABLE>
<CAPTION>
Investment Results By Asset Category
(Dollars In Millions)
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
(1) (1) (1)
Yield Amount Yield Amount Yield Amount
------------ --------------- ----------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Income...................... 8.01% $ 1,809.6 7.94% $ 1,615.1 8.05% $ 1,447.7
Investment Gains(Losses).... 0.41% 94.0 0.35% 70.0 0.57% 102.0
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 8.42% $ 1,903.6 8.29% $ 1,685.1 8.62% $ 1,549.7
Ending Assets............... $ 22,914.5 $ 21,711.6 $ 19,149.9
Mortgages:
Income...................... 9.23% $ 387.1 8.90% $ 427.1 8.82% $ 460.1
Investment Gains(Losses).... (0.46)% (19.1) (0.72)% (34.3) (0.83)% (43.2)
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 8.77% $ 368.0 8.18% $ 392.8 7.99% $ 416.9
Ending Assets............... $ 3,953.0 $ 4,513.7 $ 5,007.1
Equity Real Estate(2):
Income...................... 2.86% $ 73.7 2.91% $ 88.6 2.59% $ 92.5
Investment Gains(Losses).... (16.79)% (432.4) (2.81)% (85.6) (2.46)% (87.9)
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... (13.93)% $ (358.7) 0.10% $ 3.0 0.13% $ 4.6
Ending Assets............... $ 2,069.8 $ 2,725.5 $ 3,210.5
Other Equity Investments:
Income...................... 18.60% $ 183.7 16.23% $ 147.3 11.20% $ 90.0
Investment Gains(Losses).... 1.50% 14.8 1.56% 14.1 0.93% 7.5
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 20.10% $ 198.5 17.79% $ 161.4 12.13% $ 97.5
Ending Assets............... $ 1,037.5 $ 955.6 $ 764.1
Policy Loans:
Income...................... 7.01% $ 285.6 7.00% $ 272.1 6.95% $ 256.1
Ending Assets............... $ 4,123.1 $ 3,962.0 $ 3,773.6
Cash and Short-term
Investments:
Income...................... 9.08% $ 55.5 9.00% $ 52.9 8.18% $ 72.6
Investment Gains(Losses).... 0.00% 0.0 0.00% 0.0 0.01% 0.1
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 9.08% $ 55.5 9.00% $ 52.9 8.19% $ 72.7
Ending Assets............... $ 607.6 $ 277.7 $ 952.1
Total:
Income(3)................... 7.98% $ 2,795.2 7.76% $ 2,603.1 7.52% $ 2,419.0
Investment Gains(Losses).... (0.98)% (342.7) (0.11)% (35.8) (0.06)% (21.5)
------------ --------------- ----------- --------------- ------------ ---------------
Total(4).................... 7.00% $ 2,452.5 7.65% $ 2,567.3 7.46% $ 2,397.5
Ending Assets............... $ 34,705.5 $ 34,146.1 $ 32,857.3
<FN>
(1) Yields are based on the quarterly average asset carrying values, excluding
unrealized gains (losses) in the fixed maturity asset category.
(2) Equity real estate carrying values are shown, and equity real estate yields
are calculated, net of third party debt and minority interest of $822.1
million, $793.1 million and $919.8 million as of December 31, 1997, 1996 and
1995, 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 $52.9 million,
$56.6 million and $59.3 million for 1997, 1996 and 1995, respectively.
7-15
<PAGE>
(3) Total investment income includes non-cash income from amortization,
payment-in-kind distributions and undistributed equity earnings of $77.3
million, $69.0 million and $72.2 million for 1997, 1996 and 1995,
respectively. Investment income is shown net of depreciation of $80.9
million, $97.0 million and $126.3 million for 1997, 1996 and 1995,
respectively.
(4) Total yields are shown before deducting investment fees paid to its
investment advisors (which include asset management, acquisition,
disposition, accounting and legal fees). If such fees had been deducted,
total yields would have been 6.71%, 7.35% and 7.15% for 1997, 1996 and 1995,
respectively.
</FN>
</TABLE>
Fixed Maturities. Investment income on fixed maturities increased $194.5 million
in 1997 as compared to 1996 reflecting a higher asset base and higher investment
returns available on below investment grade securities. The 1997 investment
gains were due to $109.2 million of gains on sales offset by $15.2 million in
writedowns. The fixed maturities portfolio consists largely of investment grade
corporate debt securities, including significant amounts of U.S. government and
agency obligations. As of year end 1997, 74.5% of fixed maturities were publicly
traded. Of the below investment grade securities (including redeemable preferred
stock and other), 82.9% were publicly traded. Medium grade fixed maturities
(NAIC 3) represented 31.6% of the below investment grade category. Using
external rating agencies or an internal rating system when a public rating does
not exist, the weighted average quality of the General Account public and
private fixed maturity portfolios at December 31, 1997 was A2 and A3,
respectively.
At December 31, 1997, The Equitable held collateralized mortgage obligations
("CMOs") with an amortized cost of $2.46 billion, including $2.35 billion in
publicly traded CMOs, $1.87 billion of mortgage pass-through securities, and
$1.47 billion of public and private asset-backed securities, primarily backed by
home equity, mortgages, airline and other equipment, and credit card
receivables.
At December 31, 1997, the amortized cost of General Account Investment Assets
public and private fixed maturities which were investment grade when acquired
and were subsequently downgraded to below investment grade were $127.7 million
and $230.6 million, respectively.
Summaries of all fixed maturities are shown by NAIC rating in the following
table.
<TABLE>
<CAPTION>
Fixed Maturities
By Credit Quality
(Dollars In Millions)
December 31, 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....... $ 19,488.9 85.0% $ 20,425.3 $ 18,994.8 (1) 87.5% $ 19,334.0
3-6 Ba and lower........... 3,294.9 (2) 14.4 3,395.4 2,575.2 (2) 11.9 2,665.7
--------------- --------- ------------- ----------------- --------- -------------
Subtotal.......................... 22,783.8 99.4 23,820.7 21,570.0 99.4 21,999.7
Redeemable preferred stock
and other....................... 130.7 0.6 166.2 141.6 0.6 144.8
--------------- --------- ------------- ----------------- --------- -------------
Total Fixed Maturities............ $ 22,914.5 100.0% $ 23,986.9 $ 21,711.6 100.0% $ 22,144.5
=============== ========= ============= ================= ========= =============
<FN>
(1) Includes Class B Notes issued by the Trust ("Class B Notes") having an amortized cost of $67.0 million,
eliminated in consolidation.
(2) Includes Class B Notes having an amortized cost of $95.2 million and $100.0 million in 1997 and 1996,
respectively, eliminated in consolidation.
</FN>
</TABLE>
7-16
<PAGE>
Management defines problem securities in the fixed maturity category as
securities (i) as to which principal and/or interest payments are in default or
are to be restructured pursuant to commenced negotiations or (ii) issued by a
company that went into bankruptcy subsequent to the acquisition of such
securities. The amortized cost of problem fixed maturities decreased to $31.0
million (0.1% of the amortized cost of this category) at December 31, 1997 from
$50.6 million (0.2%) at December 31, 1996, principally as assets were written
down or sold.
The Equitable does not accrue interest income on problem fixed maturities unless
management believes the full collection of principal and interest is probable.
Interest not accrued on problem fixed maturity investments totaled $10.5
million, $9.5 million and $11.2 million for 1997, 1996 and 1995, respectively.
The amortized cost of wholly or partially non-accruing problem fixed maturities
was $28.9 million, $45.7 million and $70.8 million at December 31, 1997, 1996
and 1995, respectively.
Based on its monitoring of fixed maturities, management identifies a class of
potential problem fixed maturities, which consists of fixed maturities not
currently classified as problems but for which management has serious doubts as
to the ability of the issuer to comply with the present debt payment terms and
which may result in the security becoming a problem or being restructured. The
decision whether to classify a performing fixed maturity security as a potential
problem involves significant subjective judgments by management as to likely
future industry conditions and developments with respect to the issuer.
<TABLE>
<CAPTION>
Fixed Maturities
Problems, Potential Problems and Restructureds
Amortized Cost
(In Millions)
December 31,
--------------------------------------------------------
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
FIXED MATURITIES.......................................... $ 22,914.5 $ 21,711.6 $ 19,149.9
Problem fixed maturities.................................. 31.0 50.6 70.8
Potential problem fixed maturities........................ 17.9 0.5 43.4
Restructured fixed maturities(1).......................... 1.8 3.4 7.6
<FN>
(1) Excludes restructured fixed maturities of $2.1 million, $2.5 million and
$3.5 million that are shown as problems at December 31, 1997, 1996 and 1995,
respectively, and excludes $9.2 million of restructured fixed maturities
that are shown as potential problems at December 31, 1995.
</FN>
</TABLE>
Mortgages. Mortgages consist of commercial, agricultural and residential loans.
As of December 31, 1997, commercial mortgages totaled $2.31 billion (57.3% of
the amortized cost of the category), agricultural loans were $1.72 billion
(42.6%) and residential loans were $2.3 million (0.1%). In 1997, the investment
income decrease of $40.0 million on mortgages resulted from a declining asset
base, in large part resulting from commercial mortgage loan repayments.
At December 31, 1997 and 1996, respectively, management identified impaired
mortgage loans with a carrying value of $236.6 million and $531.7 million. The
provision for losses for these impaired loans was $68.3 million and $59.3
million at December 31, 1997 and 1996, respectively. Income earned on these
loans in 1997 and 1996, respectively, was $24.6 million and $49.6 million,
including cash received of $23.0 million and $44.6 million.
7-17
<PAGE>
<TABLE>
<CAPTION>
Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(Dollars In Millions)
December 31,
--------------------------------------------------------
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
COMMERCIAL MORTGAGES...................................... $ 2,305.8 $ 2,901.2 $ 3,413.7
Problem commercial mortgages(1)........................... 19.3 11.3 41.3
Potential problem commercial mortgages.................... 180.9 425.7 194.7
Restructured commercial mortgages(2)...................... 194.9 269.3 522.2
AGRICULTURAL MORTGAGES.................................... $ 1,719.2 $ 1,672.7 $ 1,624.1
Problem agricultural mortgages(3)......................... 12.2 5.4 82.9
<FN>
(1) Includes delinquent mortgage loans of $19.3 million, $5.8 million and $41.3
million at December 31, 1997, 1996 and 1995, respectively, and mortgage
loans in process of foreclosure of $5.5 million at December 31, 1996.
(2) Excludes restructured commercial mortgages of $1.7 million and $12.6 million
that are shown as problems at December 31, 1996 and 1995, respectively, and
excludes $57.9 million, $229.5 million and $148.3 million of restructured
commercial mortgages that are shown as potential problems at December 31,
1997, 1996 and 1995, respectively.
(3) Includes delinquent mortgage loans of $10.0 million, $0.3 million and $77.2
million at December 31, 1997, 1996 and 1995, respectively, and mortgage
loans in process of foreclosure of $2.2 million, $5.1 million and $5.7
million, respectively, at the same dates.
</FN>
</TABLE>
The Equitable categorizes mortgages 60 days or more past due, as well as
mortgages in the process of foreclosure, as problem commercial mortgages. The
amortized cost of wholly or partially non-accruing problem commercial mortgages
was $19.3 million, $11.3 million and $38.7 million at December 31, 1997, 1996
and 1995, respectively.
The Equitable categorizes mortgages as impaired under SFAS No. 114's definition
when it believes contractual income and/or contractual principal is not
collectible. Impairment is usually measured based on either a net present value
or collateral value methodology. For loans measured for impairment using the
collateral value method, interest income is recognized on a cash basis. If the
net present value method is used, income is accrued on the net carrying value of
the mortgage.
Based on its monthly monitoring of commercial mortgages, management identifies a
class of potential problem mortgages, which consists of mortgage loans that are
not currently classified as problems but for which management has serious doubts
as to the ability of the borrower to comply with the present loan payment terms
and which may result in the loan becoming a problem or being restructured. The
decision whether to classify a performing mortgage loan as a potential problem
involves significant subjective judgment by management as to likely future
market conditions and developments with respect to the borrower or the
individual mortgaged property. Potential problem commercial mortgages decreased
during 1997 as new potential problems were more than offset by removals due to
improvements and repayments.
7-18
<PAGE>
For 1997, scheduled amortization payments and prepayments received on commercial
mortgage loans aggregated $484.3 million. For 1997, $586.6 million of commercial
mortgage loan maturity payments were scheduled, of which $319.5 million (54.5%)
were paid as due. Of the amount not paid, $133.1 million (22.7%) were extended
for a weighted average of 7.1 years at a weighted average interest rate of 7.5%,
$125.3 million (21.4%) were foreclosed upon, $8.5 million (1.4%) were granted
short-term extensions of up to six months, and the balance of $0.2 million
(0.0%) were delinquent or in default for non-payment of principal.
During 1998, approximately $257.7 million of commercial mortgage principal
payments are scheduled, including $205.8 million of payments at maturity on
commercial mortgage balloon loans. An additional $672.7 million of commercial
mortgage principal payments, including $563.5 million of payments at maturity on
commercial mortgage balloon loans, are scheduled for 1999 and 2000. Depending on
market conditions and lending practices in future years, some maturing loans may
have to be refinanced, restructured or foreclosed upon. During 1997, 1996 and
1995, the amortized cost of foreclosed commercial mortgages totaled $153.5
million, $18.3 million and $103.1 million, respectively.
Equity Real Estate. The equity real estate category consists primarily of
office, retail, industrial, mixed use and other properties. Office properties
constituted the largest component (74.7% of amortized cost) of this portfolio at
December 31, 1997.
During 1997, 1996 and 1995, The Equitable received proceeds from the sale of
equity real estate of $386.0 million, $624.2 million and $587.7 million,
respectively, and recognized gains (losses) of $50.5 million, $30.1 million and
$(0.5) million, respectively. The gains (losses) reflected total writedowns and
additions to valuation allowances on properties sold of $61.1 million, $157.4
million and $47.2 million, respectively, at date of sale.
Management establishes valuation allowances on individual properties identified
as held for sale with the objective of fully reserving for anticipated
shortfalls between depreciated cost and sales proceeds. The depreciated cost of
equity real estate properties held for sale at December 31, 1997 was $1.45
billion for which allowances of $345.5 million have been established. On a
quarterly basis, the valuation allowances on real estate held for sale are
adjusted to reflect changes in market values in relation to depreciated cost.
Since the size of the portfolio of properties held for sale is significantly
larger than in prior periods due to the fourth quarter 1997 action discussed
previously, fluctuations in the related valuation allowances prior to actual
sale could be larger than those experienced in prior periods.
At December 31, 1997, the overall vacancy rate for The Equitable's real estate
office properties was 11.5%, with a vacancy rate of 8.4% for properties acquired
as investment real estate and 21.7% for properties acquired through foreclosure.
The national commercial office vacancy rate was 10.5% (as of September 30, 1997)
as measured by CB Commercial. Lease rollover rates for office properties for
1998, 1999 and 2000 range from 7.6% to 8.9%.
At December 31, 1997, the equity real estate category included $2.28 billion
depreciated cost of properties acquired as investment real estate (or 70.5% of
depreciated cost of equity real estate held) and $0.96 billion (29.5%) amortized
cost of properties acquired through foreclosure (including in-substance
foreclosure). Cumulative writedowns recognized on foreclosed properties were
$226.2 million through December 31, 1997. As of December 31, 1997, the carrying
value of the equity real estate portfolio was 67.6% of its original cost. The
depreciated cost of foreclosed equity real estate totaled $1.03 billion (28.4%)
of depreciated cost and $1.18 billion (26.9%) at year end 1996 and 1995,
respectively.
Other Equity Investments. Other equity investments consist of limited
partnership interests managed by third parties that invest in a selection of
equity and below investment grade fixed maturities ($540.2 million or 52.1% of
amortized cost of this portfolio at December 31, 1997) and other equity
securities ($497.3 million or 47.9%). The limited partnership funds in which the
Insurance Group invests can create significant volatility in investment income
since they are accounted for in accordance with the equity method that treats
increases and decreases in the allocable portion of the estimated fair value of
the underlying partnership assets, whether realized or unrealized, as investment
income or loss to The Equitable. Though not included in the General Account's
other equity investments discussed above, the excess of Separate Accounts assets
over Separate Accounts liabilities at December 31, 1997 of $231.0 million
represented an investment by the General Account principally in equity
securities. Returns on all equity investments are very volatile and there can be
no assurance recent performance will be sustained.
7-19
<PAGE>
Holding Company Group Investment Portfolio
At December 31, 1997, the portfolio's $524.0 million carrying value was made up
of fixed maturities ($490.6 million or 93.6%, $418.1 million with an NAIC 1 or 2
rating and $72.4 million with NAIC 3 through 6 ratings), cash and short-term
investments ($24.3 million or 4.7%) and other equity investments ($9.1 million
or 1.7%).
For 1997, the Holding Company Group investment results decreased by $11.6
million from the 1996 level. This decrease was primarily due to a decrease in
investment income of $8.9 million for 1997 compared to 1996 on the Holding
Company's smaller fixed maturities portfolio.
For 1996, the Holding Company Group investment results increased by $35.2
million from the 1995 level. The 1996 increase was primarily due to an increase
in investment income on Trust assets of $9.6 million, an increase in realized
gains on fixed maturities of $14.4 million and an increase in realized gains on
equity securities of $11.2 million.
DISCONTINUED OPERATIONS
In 1991, management adopted a plan to discontinue the business of certain
pension operations consisting of Wind-Up Annuities and GIC lines of business and
recorded loss provisions based on management's best judgment at that time.
During 1997 and 1996, the loss provisions were strengthened by $134.1 million
and $129.0 million, respectively. The principal factor in the 1997 reserve
strengthening action was the change in projected cash flows for equity real
estate due to management's plan to accelerate the sale of equity real estate.
The primary factors contributing to the 1996 strengthening were changes in
projected cash flows for mortgages and other equity investments due to lower
portfolio balances as the result of higher than anticipated redemptions and
repayments in 1996 and an increase in assumed mortgage defaults as well as an
increase in projected benefit payments due to the expected increase in longevity
of Wind-Up Annuities beneficiaries.
At year end 1997, $1.05 billion of policyholders' liabilities were outstanding,
of which $29.5 million were related to GIC products and the remainder to Wind-Up
Annuities. Payments of maturing GIC contracts and voluntary client withdrawals
totaled $273.1 million and $67.0 million in 1997 and 1996, respectively, with
scheduled payments of maturing GIC contracts of $4.7 million anticipated in
1998. Substantially all of the remaining discontinued operations liabilities at
December 31, 1998 will relate to Wind-Up Annuities.
The Equitable's quarterly process for evaluating the 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.
Additionally, as part of The Equitable's annual planning process which takes
place in the fourth quarter of each year, investment and benefit cash flow
projections are prepared. These projections were utilized in the fourth quarter
evaluation of the adequacy of the loss provisions. 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 the discontinued operations
differ from management's current best estimates underlying the loss provisions,
the difference would be reflected as earnings or loss from discontinued
operations within the consolidated statements of earnings.
Results of Operations. Excluding the current year's reserve strengthenings,
$154.4 million of pre-tax losses were incurred in 1997 compared to $23.7 million
in 1996 and $25.1 million in 1995; these pre-tax losses incurred were charged to
the discontinued operations' loss provisions. The premium deficiency reserve and
loss allowance for Wind-Up Annuities and GIC contracts totaled $259.2 million at
December 31, 1997, including the $134.1 million total of pre-tax reserve
strengthenings during 1997.
7-20
<PAGE>
Discontinued operations' investment income of $188.7 million was $56.8 million
lower than 1996 principally due to a decreased investment asset base. Investment
income in 1996 of $245.4 million was $78.2 million lower than 1995 primarily due
to the absence of a tax settlement which benefited discontinued operations in
1995 and lower investment assets due to net repayments of $1.02 billion of
borrowings from continuing operations by discontinued operations in 1996,
partially offset by higher yield from other equity investments. Net investment
losses were $173.7 million, $18.9 million and $22.9 million in 1997, 1996 and
1995, respectively.
Interest credited on Wind-Up Annuities and GIC contracts was $107.8 million in
1997, down $18.6 million and $53.9 million, from 1996 and 1995, respectively,
primarily due to repayments of amounts due under GIC contracts. The weighted
average crediting rates were 9.3%, 9.2% and 9.2% in 1997, 1996 and 1995,
respectively. The interest expense on intersegment borrowings by the
discontinued operations from continuing operations was $53.3 million in 1997,
down $61.0 million and $101.3 million, respectively, from 1996 and 1995 levels,
due to net repayments.
Amounts due to continuing operations of $660.0 million and $1.08 billion at
December 31, 1997 and 1996, respectively, consisted of intersegment borrowings
by discontinued operations from continuing operations, offset by obligations of
continuing operations to provide assets to fund discontinued operations'
accumulated deficit which totaled $87.2 million and $83.8 million in 1997 and
1996, respectively.
Estimates of annual net cash flows for discontinued operations follow:
Projections at December 31,
---------------------------------
(In Billions)
1996 1997
--------------- ---------------
1997..... $ 0.19 $ -
1998..... 0.02 0.48
1999..... - (0.03)
The increase in projected cash flows for the 1997 projection resulted from a
higher level of assumed real estate sales and the expected settlement of $87.2
million by continuing operations of its obligation to fund the accumulated
deficit of the discontinued operations. The intersegment loan balance at
December 31, 1997 of $660.0 million is expected to be completely repaid during
1998. The weighted average interest rate on intersegment loans in 1997 was 6.62%
as compared to 7.11% in 1996. The projections at December 31, 1997 assumed no
new intersegment loans are made.
Other material assumptions used in the determination of cash flow projections at
December 31, 1997 and 1996 follow:
(i) Future annual investment income projections on the discontinued operations
investment portfolio through maturity or assumed disposition of
substantially all of the existing investment assets ranged in the 1997
projection from 5.9% to 8.5% as compared to 5.4% to 5.9% in the 1996
projections. The increase in the expected yields is primarily attributable
to improved yields on equity real estate following the fourth quarter 1997
writedowns on property held for the production of income. Other equity
investments' earnings in excess of those assumed were treated as timing
differences in the 1997 projection and are expected to reverse in future
cash flows.
(ii) In the 1997 projection, significant sales of equity real estate over the
next 12 to 15 months were assumed, with the proceeds therefrom and from
other maturing Discontinued Operations Investment Assets being used to
repay outstanding borrowings or to pay maturing discontinued operations
liabilities. In the 1996 projections, sales of equity real estate over
time as market conditions improved were assumed. In both projections, the
assumptions underlying the equity real estate cash flow projections were
consistent with the cash flow projections used in the determination of
impairment pursuant to SFAS No. 121.
7-21
<PAGE>
(iii)Mortality experience for Wind-Up Annuities was based on the 1983 GAM
(Group Annuity Mortality table) with projections for future mortality
improvements. In the 1997 projection, the methodology for projecting the
Wind-Up Annuities' cash flows was refined to incorporate asset and
liability cash flow projections beyond the year 2011. In the 1996
projection, only the liability cash flows were explicitly projected beyond
the year 2011, with the assets implicitly assumed to earn 7.5% beyond that
date.
Discontinued Operations Investment Portfolio
In 1997, investment results from Discontinued Operations Investment Assets
totaled $15.5 million, a $213.5 million decline from 1996 due to the $154.8
million higher investment losses principally resulting from the fourth quarter
1997 increases in valuation allowances of $80.2 million and writedowns relating
to equity real estate of $92.5 million and the $58.7 million lower investment
income. The investment income for 1997 reflected decreases of $8.9 million, $8.8
million and $2.4 million for other equity investments, cash and short-term
investments and equity real estate, respectively, and by lower income on the
mortgage loan and fixed maturities portfolios of $33.9 million and $5.1 million,
respectively. A $20.4 million loss on mortgage loans compared to the 1996 gain
of $2.0 million, $131.6 million higher losses on equity real estate and $2.0
million of losses on other equity investments compared to $0.6 million of gains
in 1996 were partially offset by lower investment losses of $1.8 million for
fixed maturities. Investment income yields increased to 9.21% from 8.55% in
1996, principally due to strong returns on other equity investments.
In 1996, investment results from Discontinued Operations Investment Assets
totaled $229.0 million, unchanged from 1995 as the $4.0 million decrease in
investment income offset the $4.0 million lower investment losses. The
investment income for 1996 reflected increases of $22.9 million, $9.7 million
and $1.5 million for other equity investments, equity real estate and cash and
short-term investments, respectively, which were more than offset by lower
income on the mortgage loan and fixed maturities portfolios of $24.7 million and
$13.4 million, respectively. A $2.0 million gain on mortgage loans compared to
the 1995 loss of $8.4 million and lower investment losses of $9.8 million for
fixed maturities were offset by $13.9 million higher losses on equity real
estate and $2.3 million of lower gains on other equity investments. Investment
yields increased to 7.89% from 6.55% in 1995.
The following table shows the major categories of Discontinued Operations
Investment Assets by amortized cost, valuation allowances and net amortized cost
as of December 31, 1997 and by net amortized cost as of December 31, 1996. See
Note 7 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
Discontinued Operations Investment Assets
(Dollars In Millions)
December 31, 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...... $ 36.6 $ - $ 36.6 2.1% $ 43.2 1.7%
Mortgages............. 683.9 28.4 655.5 37.0 1,111.1 44.6
Equity real estate.... 747.5 88.4 659.1 37.3 933.8 37.4
Other equity
investments......... 209.3 - 209.3 11.8 300.5 12.1
Cash and short-term
investments......... 208.8 - 208.8 11.8 105.8 4.2
--------------- ------------- --------------- ------------- --------------- -------------
Total................. $ 1,886.1 $ 116.8 $ 1,769.3 100.0% $ 2,494.4 100.0%
=============== ============== =============== ============= =============== =============
</TABLE>
7-22
<PAGE>
Asset Valuation Allowances and Writedowns
The following table shows asset valuation allowances at the dates indicated.
<TABLE>
<CAPTION>
Discontinued Operations Investment Assets
Valuation Allowances
(In Millions)
Equity Real
Mortgages Estate Total
----------------- ---------------- ---------------
<S> <C> <C> <C>
Balances at January 1, 1996............................... $ 19.2 $ 77.9 $ 97.1
SFAS No. 121 releases(1)................................ - (71.9) (71.9)
Additions............................................... 1.9 20.2 22.1
Deductions.............................................. (12.1) (5.8) (17.9)
----------------- ---------------- ---------------
Balances at December 31, 1996............................. 9.0 20.4 29.4
Additions(2)............................................ 25.5 90.9 116.4
Deductions.............................................. (6.1) (22.9) (29.0)
----------------- ---------------- ---------------
Balances at December 31, 1997............................. $ 28.4 $ 88.4 $ 116.8
================= ================ ===============
<FN>
(1) As a result of adopting SFAS No. 121, $71.9 million of allowances on assets
held for the production of income were released and impairment losses of
$69.8 million were recognized.
(2) Includes $80.2 million of additions to valuation allowances resulting from
management's decision in the fourth quarter of 1997 to accelerate the sales
of equity real estate.
</FN>
</TABLE>
Writedowns on equity real estate subsequent to the adoption of SFAS No. 121
totaled $95.7 million and $12.3 million in 1997 and 1996, respectively. The 1997
writedowns principally resulted from changes to assumptions related to real
estate holding periods and property cash flows.
Investment Assets by Selected Asset Category
Mortgages - As of December 31, 1997, discontinued operations commercial
mortgages totaled $620.5 million (90.7% of amortized cost of the category) and
agricultural loans were $63.4 million (9.3%). The table below shows components
of the mortgage portfolio at the dates indicated.
<TABLE>
<CAPTION>
Discontinued Operations Mortgages
Problems, Potential Problems and Restructureds
Amortized Cost
(Dollars In Millions)
December 31,
--------------------------------------------------------
1997 1996 1995
----------------- ---------------- -----------------
<S> <C> <C> <C>
COMMERCIAL MORTGAGES...................................... $ 620.5 $ 1,038.9 $ 1,379.5
Problem commercial mortgages.............................. 9.7 6.7 33.4
Potential problem commercial mortgages.................... 15.4 29.1 42.0
Restructured commercial mortgages......................... 106.2 198.9 252.6
AGRICULTURAL MORTGAGES.................................... $ 63.4 $ 81.1 $ 109.2
Problem agricultural mortgages............................ 1.3 1.2 2.0
</TABLE>
7-23
<PAGE>
For 1997, scheduled amortization payments and prepayments on commercial mortgage
loans aggregated $246.9 million. For 1997, $207.6 million of mortgage loan
maturity payments were scheduled, of which $182.8 million (88.1%) were paid as
due. During 1998, approximately $95.8 million of commercial mortgage principal
payments are scheduled, including $77.0 million of payments at maturity on
commercial mortgage balloon loans. An additional $160.7 million of principal
payments, including $124.8 million of payments at maturity on commercial
mortgage balloon loans, are scheduled from 1999 through 2000. Depending on the
condition of the real estate market and lending practices in future years, many
maturing loans may have to be refinanced, restructured or foreclosed upon.
Equity Real Estate - During 1997, 1996 and 1995, the discontinued operations
received proceeds from the sale of equity real estate of $183.5 million, $184.3
million and $142.2 million, respectively, and recognized gains of $35.4 million,
$10.9 million and $12.6 million, respectively. These gains reflected total
writedowns and additions to valuation allowances on properties sold of $22.9
million, $16.0 million and $15.2 million, respectively, at date of sale.
Management establishes valuation allowances on individual properties identified
as held for sale with the objective of fully reserving for anticipated
shortfalls between depreciated cost and sales proceeds. The depreciated cost of
discontinued operations' equity real estate properties held for sale at December
31, 1997 was $394.6 million for which allowances of $88.4 million have been
established. (For further information on all asset valuation allowances, see
"Discontinued Operations - Asset Valuation Allowances and Writedowns").
Other Equity Investments - At December 31, 1997, discontinued operations' other
equity investments of $209.3 million consisted primarily of limited partnership
interests managed by third parties that invest in a selection of equity and
fixed income securities ($143.9 million or 68.8% of amortized cost of this
portfolio at that date). Discontinued operations' other equity investments also
included common stocks acquired in connection with limited partnership
investments, as well as other equity investments ($65.4 million or 31.2%).
Returns on other equity investments have been very volatile and there can be no
assurance recent performance will be sustained. Total investment results on
other equity investments were $65.2 million, $76.7 million and $56.1 million in
1997, 1996 and 1995, respectively. These investment results reflected yields of
25.39%, 21.74% and 10.54%, for the years 1997, 1996 and 1995, respectively.
Investment income amounted to $67.2 million, $76.1 million and $53.2 million in
1997, 1996 and 1995, respectively. Investment losses in 1997 were $2.0 million,
compared to investment gains of $0.6 million and $2.9 million in 1996 and 1995,
respectively.
YEAR 2000
Year 2000 compliance efforts have been undertaken by Equitable Life, DLJ and
Alliance. Costs to modify existing applications related to these efforts are
expensed as incurred.
Equitable Life began addressing the Year 2000 issue in 1995 and believes it has
identified those of its systems critical to business operations that are not
Year 2000 compliant. By year end 1998, management expects the work of modifying
or replacing non-compliant systems will substantially be completed and expects a
comprehensive test of its Year 2000 compliance will be performed in the first
half of 1999. The cost of Equitable Life's Year 2000 compliance project is
currently estimated at $30 million through the end of 1999, approximately $16
million of which is expected to be incurred in 1998.
In connection with DLJ's recent expansion, entry into new products and its move
to new corporate headquarters, many of its newer installed communications and
data processing systems are Year 2000 compliant. DLJ has undertaken a project to
identify and modify non-Year 2000 compliant data processing systems in
anticipation of the Year 2000. DLJ expects that most of its significant Year
2000 corrections should be tested and in production by the end of 1998. The cost
of DLJ's Year 2000 compliance project is estimated to be between $80 and $90
million through the end of 1999, approximately $40 million of which had been
incurred through December 31, 1997.
7-24
<PAGE>
Alliance began addressing the Year 2000 compliance issue on an informal basis
several years ago in connection with the replacement or upgrading of certain
computer systems and applications. During 1997, Alliance began a formal Year
2000 initiative, which established a structured and coordinated process to deal
with the Year 2000 issue. Alliance is currently assessing the impact of Year
2000 issues on its domestic and international computer systems and applications.
Currently, management of Alliance expects the required corrections and
modifications for the majority of its significant systems and applications will
be completed and tested by the end of 1998. Full integration testing of these
systems and testing of interfaces with third party vendors will continue through
1999. The total cost of the initiative is currently estimated to be between $30
million and $35 million. This estimate includes between $15 million and $20
million for expenditures related to the replacement of computer systems and
applications which will be capitalized and amortized over future periods.
Equitable Life, DLJ and Alliance continue to seek assurances from third parties
on whose systems and services The Equitable relies to a significant extent that
such third parties' systems are or will be Year 2000 compliant. There can be no
assurance that the systems of such third parties will be Year 2000 compliant or
that any third party's failure to have Year 2000 compliant systems would not
have a material adverse effect on The Equitable's systems and operations.
Any significant unresolved difficulty related to the Year 2000 compliance
initiatives could have a material adverse effect on The Equitable. However,
assuming the timely completion of The Equitable's current plans, and provided
third parties' systems are Year 2000 compliant, the Year 2000 issue should not
have a material adverse impact on The Equitable's business or operations.
LIQUIDITY AND CAPITAL RESOURCES
The Equitable Companies Incorporated
In 1997, the Holding Company redeemed its subordinated debentures and all of the
outstanding shares of two series of its preferred stock while DLJ significantly
increased its long-term borrowings. See Notes 8 and 10 of Notes to Consolidated
Financial Statements.
Liquidity Requirements
The Holding Company's cash requirements include debt service on its senior debt,
operating expenses, taxes and dividends on its Common Stock. Pre-tax debt
service on its senior and subordinated debt was approximately $61.9 million in
1997. The Holding Company's general and administrative expenses for 1997 totaled
$24.6 million.
Since becoming a public company in 1992, the Holding Company's Board of
Directors has declared quarterly cash dividends of $.05 per share on the
outstanding shares of its Common Stock. During 1997, aggregate cash dividends
paid on the Holding Company's Common Stock were $40.9 million.
On February 2, 1998, the Holding Company and four special purpose trusts filed a
shelf registration statement with the SEC, under which the registrants may issue
up to $1.00 billion of senior debt and subordinated debt of the Holding Company,
and preferred securities of the trusts guaranteed by the Holding Company.
Liquidity Sources
At December 31, 1997, the Holding Company held cash and short-term investments
and U.S. Treasury securities of approximately $112.1 million. Other primary
sources of liquidity for the Holding Company include (i) amounts the Holding
Company may receive from its subsidiaries in connection with SECT distributions,
(ii) dividends from DLJ and (iii) dividends, distributions or sales proceeds
from less liquid investment assets. The Holding Company held less liquid
investment assets having an aggregate carrying value of approximately $59.0
million at December 31, 1997. Other potential sources of liquidity for The
Equitable include sales of DLJ common stock held by the Holding Company, the
issuance of additional securities by the Holding Company and dividends from
Equitable Life.
7-25
<PAGE>
The assets of the SECT (the 51,960 remaining shares of the Holding Company's
Series D Convertible Preferred Stock) will be distributed over time (subject to
periodic minimum and maximum requirements) to fund various employee compensation
and benefit programs of certain of The Equitable's subsidiaries. These
subsidiaries will pay the Holding Company an amount equal to any such
distributions. Management expects amounts received by the Holding Company from
its subsidiaries in connection with distributions by the SECT will be a
significant source of funds. The aggregate amount available to the Holding
Company from this source will fluctuate over time with changes in the market
value of The Equitable's Common Stock.
Dividends on DLJ's outstanding common stock paid to the Holding Company in 1997
and 1996 were $11.7 million in both years. Certain of DLJ's existing credit
agreements include dividend covenants but management does not expect these
covenants to materially affect the payment of dividends by DLJ.
In 1996 and prior years, DLJ was included in The Equitable's consolidated tax
group for Federal income tax purposes and DLJ made payments of $267.5 million
and $270.1 million in 1996 and 1995, respectively, under this tax sharing
agreement. Effective January 1, 1997, as a result of the Holding Company's sale
of 85,000 shares of DLJ common stock to AXA in December 1996, DLJ ceased to be
eligible for inclusion in the consolidated tax group. No amounts would be
payable by DLJ to the Holding Company under the tax sharing agreement for
periods after December 31, 1996; however, amounts may continue to be paid with
respect to periods prior to tax deconsolidation. The tax sharing agreement with
DLJ had been a source of liquidity for the Holding Company, although amounts
paid to the Holding Company thereunder may have to be paid to the IRS or, under
certain circumstances, returned to DLJ.
Since the demutualization, the Holding Company has not received any dividends
from Equitable Life. Under the New York Insurance Law, Equitable Life would be
permitted to pay shareholder dividends to the Holding Company only if it files
notice of its intention to declare such a dividend and the amount thereof with
the Superintendent and the Superintendent, who by statute has broad discretion
in such matters, does not disapprove the distribution.
See Note 20 to Notes to Consolidated Financial Statements.
Management believes the primary sources of liquidity described above are
sufficient to meet the Holding Company's cash requirements for several years.
Insurance Group
The Insurance Group's principal cash flow sources are premiums, deposits and
charges on policies and contracts, investment income, repayments of principal
and proceeds from maturities and sales of General Account Investment Assets and
dividends and distributions from subsidiaries.
The liquidity requirements of the Insurance Group principally relate to the
liabilities associated with its various life insurance, annuity and group
pension products in its continuing operations, the liabilities of the
discontinued operations and operating expenses, including debt service. For
information on long-term debt, including the Surplus Notes, see Note 8 of Notes
to Consolidated Financial Statements. Insurance Group liabilities include the
payment of benefits under life insurance, annuity and group pension products, as
well as cash payments in connection with policy surrenders, withdrawals and
loans.
During 1998, management may from time to time explore selective acquisition
opportunities in Equitable Life's core insurance and asset management
businesses.
The liquidity requirements of the Insurance Group are monitored regularly to
match cash inflows with cash requirements. The Insurance Group forecasts its
daily cash needs and periodically reviews its projected sources and uses of
funds, as well as the asset, liability, investment and cash flow assumptions
underlying these projections. Adjustments are periodically made to the Insurance
Group's investment policies with respect to, among other things, the maturity
and risk characteristics of General Account Investment Assets to reflect changes
in the Insurance Group's cash needs and also to reflect changing business and
economic conditions.
7-26
<PAGE>
Sources of Insurance Group Liquidity
The primary source of short-term liquidity to support continuing and
discontinued operations is a pool of highly liquid, high quality, short-term
instruments structured to provide liquidity in excess of the Insurance Group's
expected cash requirements. At December 31, 1997, this asset pool provided the
Insurance Group an aggregate of $816.4 million in highly liquid short-term
investments, as compared to $383.5 million and $1.02 billion at December 31,
1996 and 1995, respectively. In addition, the Insurance Group has available for
its liquidity needs a substantial portfolio of public bonds including U.S.
Treasury and agency securities and other investment grade fixed maturities.
Other sources of liquidity include dividends and distributions from Equitable
Life's Investment Subsidiaries, particularly Alliance. In 1997, Equitable Life
received cash distributions from Alliance of $125.7 million as compared to
$102.3 million in 1996 and $83.8 million in 1995. As a result of the Taxpayer
Relief Act of 1997 signed into law on August 5, 1997, current law provides that
certain publicly traded partnerships such as Alliance have the option to pay a
3.5% tax on gross income while maintaining partnership tax status. Alliance
elected to utilize this option. As a result, 1998 distributions by Alliance are
expected to be lower by an estimated 10% reflecting the effect of this new tax
on Alliance's earnings.
Management believes it has sufficient liquidity in the form of short-term assets
and its bond portfolio together with cash flows from operations and scheduled
maturities of fixed maturities, to satisfy its liquidity needs. Equitable Life
also has a commercial paper program with an issue limit of up to $500.0 million.
This program is available for general corporate purposes to support Equitable
Life's liquidity needs and is supported by Equitable Life's existing $350.0
million bank credit facility, which expires in June 2000. At December 31, 1997,
$50.0 million was outstanding under the commercial paper program; there were no
amounts outstanding under the back-up credit facility. For more information on
guarantees, commitments and contingencies, see Notes 12, 15, 16, 17 and 18 of
Notes to Consolidated Financial Statements.
Factors Affecting Insurance Group Liquidity
The Insurance Group's liquidity needs are affected by fluctuations in the level
of surrenders and withdrawals previously discussed in "Combined Results of
Continuing Operations by Segment - Insurance Operations - Surrenders and
Withdrawals; Policy Loans". Management believes the Insurance Group has adequate
internal sources of funds for its presently anticipated needs.
Risk-Based Capital
Since 1993, life insurers, including Equitable Life, have been subject to
certain risk-based capital ("RBC") guidelines. The RBC guidelines provide a
method to measure the adjusted capital (statutory capital and surplus plus the
Asset Valuation Reserve ("AVR") and other adjustments) that a life insurance
company should have for regulatory purposes, taking into account the risk
characteristics of the company's investments and products. A life insurance
company's RBC ratio will vary over time depending upon many factors, including
its earnings, the mix of assets in its investment portfolio, the nature of the
products it sells and its rate of sales growth, as well as changes in the RBC
formulas required by regulators.
While the RBC guidelines are intended to be a regulatory tool only, and are not
intended as a means to rank insurers generally, comparisons of RBC ratios of
life insurers have become generally available. Equitable Life was above its
target RBC ratio at years end 1996 and 1997. Principally because of the RBC
formula's treatment of Equitable Life's large holdings of subsidiary common
stock (including its interest in Alliance and its 41.8% interest in DLJ), equity
real estate and mortgages, Equitable Life's year end 1997 RBC ratio is expected
to continue to be lower than those of its competitors in the life insurance
industry.
The NAIC has undertaken a comprehensive codification of statutory accounting
practices for life insurers. The resulting changes, once the codification
project has been completed and the new principles adopted and implemented, are
not expected to have a material adverse impact on the Insurance Group's
statutory results and financial position but may cause a modest reduction in
statutory surplus. A detailed review of the final statutory accounting practices
will be necessary to determine their actual impact. Still subject to NAIC and
AICPA approval, the codification will not become effective prior to January 1,
1999.
7-27
<PAGE>
At December 31, 1997, $165.2 million (or 6.7%) of the Insurance Group's
aggregate statutory capital and surplus (representing 4.2% of statutory capital
and surplus and AVR) resulted from surplus relief reinsurance. The level of
surplus relief reinsurance was reduced by approximately $53.5 million in 1997.
Investment Subsidiaries
Alliance's principal sources of liquidity are cash flows from operations,
proceeds from sales of newly issued Alliance Units and borrowings from lending
institutions. In February 1996, approximately 1.8 million Alliance Units and
$21.5 million of notes were issued as partial consideration in the Cursitor
acquisition. In February 1996, Alliance terminated its $100.0 million revolving
credit facility and its $100.0 million commercial paper program, replacing them
with a new $250.0 million, five-year revolving credit facility with a group of
banks. This revolving credit facility provides backup liquidity for commercial
paper issued under Alliance's $250.0 million commercial paper program. The
interest rate is a floating rate generally based on a defined prime rate, a rate
related to LIBOR or the Federal funds rate, at Alliance's option. At December
31, 1997, Alliance had $72.0 million of commercial paper outstanding; there were
no amounts outstanding under its revolving credit facility. As a result of the
continued growth in Alliance's business and the use of the deferred sales charge
options on various Alliance mutual funds, Alliance may require additional
sources of capital from time to time.
DLJ reported total assets as of December 31, 1997 of approximately $70.51
billion. Most of these assets are highly liquid marketable securities and
short-term receivables arising from securities transactions. These assets
include collateralized resale agreements and securities borrowed, both of which
are secured by U.S. Government and agency securities and marketable corporate
debt and equity securities. A relatively small percentage of total assets is
fixed or held for a period longer than one year. A significant portion of DLJ's
borrowings is matched to the interest rate and expected holding period of the
corresponding assets. DLJ monitors overall liquidity by tracking the extent to
which unencumbered marketable assets exceed short-term unsecured borrowing.
DLJ's overall capital needs are continually reviewed to ensure that its capital
base can appropriately support the anticipated needs of its businesses as well
as the regulatory capital requirements of subsidiaries. DLJ has been active in
raising additional long-term financing, including extending the maturity of its
$325.0 million revolving credit facility. At December 31, 1997, DLJ had $200.0
million of medium-term notes outstanding under its $300.0 million offering
program with a weighted average interest rate of 6.48% (or a weighted average
effective interest rate of 6.08% due to interest rate swap transactions). Under
DLJ's $1.00 billion senior or subordinated debt shelf registration, $150.0
million of 6.90% fixed rate notes, $100.0 million of 6.28% LIBOR floating rate
medium-term notes and $350.0 million of LIBOR plus 0.25% global floating rate
notes were outstanding at December 31, 1997.
In January 1998, DLJ issued an initial 3.5 million shares of fixed/adjustable
rate cumulative preferred stock, Series B, with a liquidation preference of $50
per share ($175.0 million aggregate liquidation value) from its December 1997
shelf registration of up to $300.0 million of senior or subordinated debt or
preferred stock. Also, in January 1998, DLJ commenced a $1.00 billion commercial
paper program.
DLJ historically has satisfied its needs for funds primarily from capital
(including long-term debt), internally generated funds, uncommitted lines of
credit, free credit balances in customers' accounts, master notes and
collateralized borrowings primarily consisting of bank loans, repurchase
agreements and securities loaned. Short-term funding generally is obtained at
rates related to Federal funds, LIBOR and money market rates. Other borrowing
costs are negotiated depending upon prevailing market conditions. During the
second quarter of 1997, DLJ replaced several individual credit facilities
aggregating $1.93 billion with a $2.0 billion revolving credit facility, of
which $1.0 billion may be unsecured. There were no borrowings outstanding under
this agreement at December 31, 1997.
Consolidated Cash Flows
Net cash used by operating activities was $4.85 billion for 1997 as compared to
$1.48 billion in 1996. Cash used by operations in 1997 was attributable to the
$5.98 billion net change in trading activities and broker-dealer receivables as
compared to $1.84 billion in 1996 reflecting DLJ's increased level of business
activity.
7-28
<PAGE>
Net cash used by investing activities amounted to $290.7 million for 1997 as
compared to $82.4 million in 1996. In 1997, investment sales, maturities and
repayments exceeded purchases by $121.2 million. Discontinued operations repaid
$420.1 million of loans from continuing operations during 1997. In 1996,
purchases exceeded sales, maturities and repayments by $1.29 billion, as
available funds were invested principally in the fixed maturities category.
Decreases in loans to the discontinued operations totaled $1.02 billion in 1996.
In 1995, purchases exceeded sales, maturities and repayments of investment
assets by $589.1 million.
Net cash provided by financing activities was $4.98 billion in 1997 as compared
to $1.12 billion for 1996. During 1997, withdrawals from policyholders' account
balances exceeded deposits by $605.1 million as compared with $459.8 million in
1996. Short-term financings, principally at DLJ, showed a net increase of $5.16
billion as compared to net increases of $1.12 billion in 1996 while net
additions to long-term debt were higher by $182.5 million from 1996. In 1995,
the $1.22 billion payment by continuing operations to discontinued operations,
$445.4 million in long-term debt repayments principally at DLJ and $70.6 million
of net cash withdrawals from General Account policyholders' account balances
(these amounts exclude Separate Account activity for the Insurance Operations
segment) were offset by $1.35 billion of additions to long-term debt, primarily
due to the issuance of the Surplus Notes and DLJ 6.875% Senior Notes. Net cash
used by financing activities of $1.12 billion in 1996 included a $1.12 billion
net increase in short-term financings principally due to the increase in
business activity at DLJ. Net cash withdrawals from General Account
policyholders' account balances were $459.8 million in 1996. In addition, in
1996, net additions to long-term debt were $372.2 million, down from $903.3
million in 1995.
The operating, investing and financing activities described above resulted in a
decrease in cash and cash equivalents of $157.9 million in 1997 as compared to a
decrease of $445.1 million in 1996 and an increase of $375.1 million in 1995.
MARKET RISK, RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
The Equitable's businesses are subject to market risks arising from its
insurance asset/liability management, asset management and trading activities.
Such risks are evaluated and managed on a decentralized basis. Primary market
risk exposures result from interest rate fluctuations, equity price movements,
changes in credit quality and, additionally at DLJ, foreign currency exchange
exposure. At December 31, 1997, Alliance had no material market risk sensitive
financial instruments.
Other-Than-Trading Activities
Insurance Asset/Liability Management
Insurance Operations' results significantly depend on profit margins between
investment results from General Account Investment Assets and interest credited
on individual insurance and annuity products. Management believes its fixed rate
liabilities should be supported by a portfolio principally composed of fixed
rate investments that can generate predictable, steady rates of return. Although
these assets are purchased for long-term investment, the portfolio management
strategy considers them available for sale in response to changes in market
interest rates, changes in prepayment risk, changes in relative values of asset
sectors and individual securities and loans, changes in credit quality outlook
and other relevant factors. The objective of portfolio management is to maximize
returns, taking into account interest rate and credit risks. The Insurance
Group's asset/liability management discipline includes strategies to minimize
exposure to loss as interest rates and economic and market conditions change. As
a result, the fixed maturity portfolio has modest exposure to call and
prepayment risk and the vast majority of mortgage holdings are fixed rate
mortgages that carry yield maintenance and prepayment provisions.
The Insurance Group's assets with interest rate risk include fixed maturities
and mortgage loans which make up 76.3% of the carrying value of General Account
Investment Assets. As part of its asset/liability management discipline,
quantitative analyses are conducted that model the assets with interest rate
risk assuming various changes in interest rates. The table below shows the
Insurance Group's potential exposure, measured in terms of fair value, to an
immediate 100 basis point increase in interest rates from levels prevailing at
7-29
<PAGE>
December 31, 1997. A 100 basis point fluctuation in interest rates is a
hypothetical rate scenario used to calibrate potential risk and does not
represent management's view of future market changes. While these fair value
measurements provide a representation of interest rate sensitivity of fixed
maturities and mortgage loans, they are based on the Insurance Group's portfolio
exposures at a particular point in time and may not be representative of future
market results. These exposures will change as a result of ongoing portfolio
activities in response to management's assessment of changing market conditions
and available investment opportunities.
<TABLE>
<CAPTION>
Assets with Interest Rate Risk - Fair Value
(In Millions)
At +100 Basis
December 31, 1997 Point Change
------------------------ --------------------
<S> <C> <C>
Continuing Operations:
Fixed maturities:
Fixed rate..................................... $ 22,737.3 $ 21,490.4
Floating rate.................................. 1,249.6 1,249.6
Mortgage loans................................... 4,243.4 4,091.3
Discontinued Operations:
Fixed maturities:
Fixed rate..................................... $ 33.2 $ 32.3
Floating rate.................................. 5.6 5.6
Mortgage loans................................... 779.9 750.7
</TABLE>
The Insurance Group's investment portfolio also has direct holdings of public
and private equity securities. In addition, the Insurance Group is exposed to
equity price risk from the excess of Separate Accounts assets over Separate
Accounts liabilities. The following table shows the Insurance Group's potential
exposure from those equity security investments, measured in terms of fair
value, to an immediate 10% drop in equity prices from those prevailing at
December 31, 1997. A 10% decrease in equity prices is a hypothetical scenario
used to calibrate potential risk and does not represent management's view of
future market changes. The fair value measurements shown are based on the equity
securities portfolio exposures at a particular point in time and these exposures
will change as a result of ongoing portfolio activities in response to
management's assessment of changing market conditions and available investment
opportunities.
<TABLE>
<CAPTION>
Assets with Equity Price Risk - Fair Value
(In Millions)
At -10% Equity
December 31, 1997 Price Change
------------------------ --------------------
<S> <C> <C>
Insurance Group:
Continuing Operations............................ $ 181.9 $ 163.7
Discontinued Operations.......................... 55.3 49.8
Excess of Separate Accounts assets over
Separate Accounts liabilities.................. 232.4 209.2
Holding Company Group.............................. 9.1 8.2
</TABLE>
At year end 1997, the aggregate carrying value of the Insurance Group's
policyholders' liabilities was $36,173.9 million, including $12,648.0 million of
investment contracts. The aggregate fair value of those investment contracts at
year end 1997 was $12,748.0 million. The Insurance Group's potential exposure to
a relative 10% decrease in interest rates is an increase in the fair value of
those investment contracts to $12,817.0 million. Those investment contracts
represent only a portion of the Insurance Group's total policyholders'
liabilities. As such, meaningful assessment of net market risk exposure cannot
be made by comparing the results of the invested assets sensitivity analyses
presented herein to the potential exposure from the policyholders' liabilities
quantified in this paragraph.
7-30
<PAGE>
Asset/liability management is integrated into many aspects of the Insurance
Group's operations, including investment decisions, product development and
determination of crediting rates. As part of its risk management process,
numerous economic scenarios are modeled, including cash flow testing required
for insurance regulatory purposes, to determine if existing assets would be
sufficient to meet projected liability cash flows. Key variables include
policyholder behavior, such as persistency, under differing crediting rate
strategies. On the basis of these more comprehensive analyses, management
believes there is no material solvency risk to Equitable Life with respect to
interest rate movements up or down of 100 basis points from year end 1997 levels
or with respect to a 10% drop in equity prices from year end 1997 levels.
As more fully described in Note 15 of Notes to Consolidated Financial
Statements, the Insurance Group utilizes various derivative financial
instruments to manage its exposure to fluctuations in interest rates, including
interest rate swaps to convert floating rate assets to fixed rate assets,
interest rate caps to hedge crediting rates on interest-sensitive products, and
interest rate futures to hedge a decline in interest rates between receipt of
funds and purchase of appropriate assets. To minimize credit risk exposure
associated with its derivative transactions, each counterparty's credit is
appraised and approved and risk control limits and monitoring procedures are
applied. Credit limits are established and monitored on the basis of potential
exposures which take into consideration current market values and estimates of
potential future movements in market values given potential fluctuations in
market interest rates.
While notional amount is the most commonly used measure of volume in the
derivatives market, it is not used by the Insurance Group as a measure of risk
as the notional amount greatly exceeds the possible credit and market loss that
could arise from such transactions. Mark to market exposure is a point-in-time
measure of the value of a derivative contract in the open market. A positive
value indicates existence of credit risk for the Insurance Group as the
counterparty would owe money to the Insurance Group if the contract were closed.
Alternatively, a negative value indicates the Insurance Group would owe money to
the counterparty if the contract were closed. If there is more than one
derivatives transaction outstanding with a counterparty, a master netting
arrangement exists with the counterparty. In that case, the market risk
represents the net of the positive and negative exposures with the single
counterparty. In management's view, the net potential exposure is the better
measure of credit risk.
At year end 1997, the net market value exposure of the Insurance Group's
derivatives was $59.1 million. The table below shows the interest rate
sensitivity of those derivatives, measured in terms of fair value. These
exposures will change as a result of ongoing portfolio and risk management
activities.
<TABLE>
<CAPTION>
Insurance Group
Derivative Financial Instruments
December 31, 1997
(In Millions, Except for Weighted Average Term)
Fair Value
-------------------------------------------------------------
Weighted
Average
Notional Term -100 Basis At +100 Basis
Amount (Years) Point Change December 31, 1997 Point Change
--------------- -------------- ----------------- ----------------------- ---------------
<S> <C> <C> <C> <C> <C>
Swaps
Floating to fixed rate.. $ 1,038.4 4.55 $ 72.2 $ 39.2 $ 2.4
Fixed to floating rate.. 388.1 1.21 (13.2) (10.2) (5.9)
Options
Caps.................... 7,450.0 3.99 5.9 23.4 66.8
Other options........... 2,000.0 4.28 6.6 1.8 0.5
Futures/Forwards.......... 581.5 0.21 34.4 4.9 (24.7)
--------------- -------------- ----------------- ----------------------- ---------------
Total.................... $ 11,458.0 3.81 $ 105.9 $ 59.1 $ 39.1
=============== ============== ================= ======================= ===============
</TABLE>
7-31
<PAGE>
At year end 1997, the aggregate fair value of long-term debt issued by the
Insurance Group and the Holding Company Group was $2.27 billion. The table below
shows the potential fair value exposure to an immediate 100 basis point decrease
in interest rates from those prevailing at year end 1997.
<TABLE>
<CAPTION>
Long-term Debt - Fair Value
(In Millions)
At -100 Basis
December 31, 1997 Point Change
------------------------ --------------------
<S> <C> <C>
Continuing Operations:
Fixed rate....................................... $ 678.8 $ 730.4
Floating rate.................................... 865.2 865.2
Discontinued Operations:
Floating rate.................................... 102.1 102.1
Holding Company Group.............................. 620.0 648.7
</TABLE>
Trading Activities
Exposure to risk and the ways in which DLJ manages the various types of risks on
a day-to-day basis is critical to its survival and financial success. DLJ
monitors its market and counterparty risk on a daily basis through a number of
control procedures designed to identify and evaluate the various risks to which
DLJ is exposed. DLJ established a Risk Committee comprised of senior
professionals from each of the three operating and key administrative groups.
The Risk Committee's objective is to update risk policies as appropriate and
improve monitoring capabilities throughout DLJ. An independent risk officer
function is designed to oversee this process as well as to monitor adherence by
the various business groups to DLJ's risk policy statements issued by the Risk
Committee.
DLJ has established various committees to assist senior management in managing
risk associated with investment banking and merchant banking transactions. The
objectives of the committees are to review potential clients and engagements,
utilize experience with similar clients and situations, perform credit analyses
for certain commitments and to analyze DLJ's potential role as a principal
investor. DLJ seeks to control the risks associated with its banking activities
by a thorough review by various committees of the details of all transactions
prior to accepting an engagement. Some of the committees which have been formed
are the Fairness and Valuation Opinion Committee, the Private Placement
Committee, the Restructuring Coordinating Committee, the Equity Commitment
Committee, the High-Yield Underwriting Committee, the Bridge Commitment
Committee, the Banking Review Committee, the Finance Committee and the Executive
Committee.
From time to time, DLJ makes investments in certain merchant banking
transactions or other long-term corporate development investments. DLJ's
Merchant Banking Group has established several investment entities, each of
which has formed its own investment committee. These committees make all
investment and disposition decisions with respect to potential and existing
portfolio companies. In addition, senior officers of DLJ meet on a quarterly
basis to review merchant banking and corporate development investments. After a
discussion of the financial and operational aspects of the companies involved,
recommendations regarding carrying values are made for each investment to the
Finance Committee. The Finance Committee then makes a determination of fair
value following a review of such recommendations.
DLJ often acts as principal in customer-related transactions in financial
instruments which expose DLJ to market risks. DLJ also engages in proprietary
trading and arbitrage activities and makes dealer markets in equity securities,
investment-grade corporate debt, high-yield securities, U.S. Government and
agency securities, mortgages and mortgage-backed securities and selected
derivatives. In addition, DLJ's Emerging Markets Group trades a variety of
securities, including Brady Bonds, foreign fixed income securities and options,
and issues structured notes. As such, DLJ may be required to maintain certain
amounts of inventories in order to facilitate customer order flow. DLJ covers
its exposure to market risk by limiting its net long or short position by
selling or buying similar instruments and by utilizing various derivative
financial instruments in the exchange-traded and OTC markets.
7-32
<PAGE>
DLJ manages risk exposure utilizing mechanisms involving various levels of
management. Position limits in trading and inventory accounts are established
and monitored on an ongoing basis. Current and proposed underwriting, corporate
development, merchant banking and other commitments are subject to due diligence
reviews by senior management as well as professionals in the appropriate
business and support units involved.
Trading activities generally result in the creation of inventory positions.
Position and exposure reports are prepared daily by operations staff in each of
the business groups engaged in trading activities for traders, trading managers,
department managers, divisional management and group management personnel. Such
reports are reviewed independently on a daily basis by DLJ's corporate
accounting group. In addition, the corporate accounting group prepares a
consolidated summarized position report indicating both long and short exposure,
along with approved limits, which is distributed to various levels of management
throughout DLJ, including the Chief Executive Officer, and which enables senior
management to control inventory levels and monitor results of the trading
groups. DLJ also reviews and monitors, at various levels of management,
inventory aging, pricing, concentration and securities' ratings.
In addition to position and exposure reports, DLJ produces a daily revenue
report which summarizes the trading, interest, commissions, fees, underwriting
and other revenue items for each of the business groups. Daily revenue is
reviewed for various risk factors and is independently verified by the corporate
accounting group. The daily revenue report is distributed to various levels of
management throughout DLJ, including the Chief Executive Officer, and together
with the position and exposure reports enables senior management to monitor and
control overall activity of the trading groups.
Market Risk
Market risk represents the potential loss DLJ may incur as a result of absolute
and relative price movements in financial instruments due to changes in interest
rates, foreign exchange rates, equity prices, and other factors. DLJ's exposure
to market risk is directly related to its role as financial intermediary in
customer-related transactions and to its proprietary trading and arbitrage
activities. DLJ's primary market risk exposures as of December 31, 1997 include
interest rate risk, foreign currency exchange rate risk and equity price risk.
Interest rate risk results from maintaining inventory positions and trading in
interest rate sensitive financial instruments. DLJ is exposed to interest rate
risk which arises from various sources including changes in the absolute and
relative level of interest rates, interest rate volatility, mortgage prepayment
rates and the shape of the yield curves in various markets. DLJ's investment
grade high-yield corporate bonds, mortgages, equities, derivatives and
convertible debt activities also expose it to the risk of loss related to
changes in credit spreads. Credit spread risk arises from the potential that
changes in an issuer's credit rating affect the value of financial instruments.
DLJ attempts to cover its exposure to interest rate risk by entering into
transactions in U.S. Government securities, options and futures and forward
contracts designed to reduce DLJ's risk profile. Foreign currency exchange rate
risk arises from the possibility that changes in foreign currency exchange rates
or their volatilities will impact the value of financial instruments. The
principal currencies creating foreign currency exchange risk for DLJ at December
31, 1997 were the British Sterling, Turkish Lira and German Deutsche Mark. DLJ
attempts to cover the risk arising from its foreign exchange activities
primarily through the use of options, futures and forward transactions and
currency swaps. Equity price risk results from maintaining inventory positions
and making markets in equity securities. Equity price risk arises from changes
in the level or volatility of equity prices, equity index exposure and equity
index spreads which affect the value of equity securities. DLJ attempts to cover
its exposure to equity price risk by entering into transactions in options and
futures designed to reduce DLJ's risk profile.
Value At Risk
As a result of the SEC's new market risk disclosure rules, DLJ developed a
company-wide Value-at-Risk ("VAR") model late in 1997. This VAR model was not
actively used for risk management in 1997 but some form of VAR is expected to be
used in the future.
7-33
<PAGE>
DLJ's VAR model includes virtually all of DLJ's trading market risk sensitive
instruments and its non-trading market risk sensitive instruments. Non-trading
market risk sensitive instruments are not material and consequently are not
reported separately. DLJ has estimated its VAR using a variance-covariance model
with a confidence interval of 95% and a one day holding period, based on
historical data for one year.
The VAR number is the statistically expected maximum loss on the fair value of
DLJ's market sensitive instruments for 19 out of every 20 trading days. In other
words, on 1 out of every 20 trading days, the loss is statistically expected to
be greater than the VAR number. The model, however, does not state how much
greater.
VAR models are statistical analyses designed to assist in risk management and to
provide senior management with a one probabilistic indicator of risk at the firm
level. VAR numbers should not be interpreted as a predictor of actual results.
DLJ's VAR model has been specifically tailored for its risk management needs and
to its risk profile. The variance-covariance method assigns all market
instruments to their applicable risk categories such as interest rate exposure,
foreign currency exposure, equity exposure, industry type, credit rating,
volatility exposure and country exposure. Correlations and volatilities are
calculated from historical data series for each risk category and used in the
variance-covariance matrix to calculate VAR. DLJ's variance-covariance model
gives equal weight to earlier and later historical data and assumes that market
rate movements over one day are adequately represented by the use of a normal
distribution and therefore does not include certain other non-normal
distributions. Moreover, non-linear market movements are not included.
DLJ's VAR model, in common with all other VAR models, is limited by its
assumptions and qualifications. These limitations include the following: (i) a
daily VAR does not capture the risk inherent in trading positions that cannot be
liquidated or hedged in one day, (ii) VAR is based on historical market data and
assumes that past trading patterns will predict the future, (iii) it is not
possible to perfectly model all inherent market risks, (iv) correlations between
market movements can vary, particularly in times of market stress and (v) the
model's assumption of a normal distribution may not reflect actual market
movements.
DLJ believes that the use of a company-wide VAR analysis is important advance in
its risk management but is aware of the limitations inherent in any statistical
analysis. A VAR model alone is not a sufficient tool to measure and monitor
market risk and, as it has traditionally done, DLJ will continue to use other
risk management measures, such as stress testing, independent review of position
and trading limits and daily revenue reports.
Total company-wide VAR was approximately $10.9 million at December 31, 1997. The
company-wide VAR is less than the sum of the individual components below due to
the benefit of diversification among the risks presented below. The VAR for the
three main components of market risk, expressed in terms of theoretical fair
values at December 31, 1997, is as follows:
(In Millions)
Interest rate risk..................... $ 7.6
Equity risk............................ 7.9
Foreign currency exchange rate risk.... 1.2
Credit Risk
Credit risk related to various financing activities is reduced by the industry
practice of obtaining and maintaining collateral. DLJ monitors its exposure to
counterparty risk on a daily basis through the use of credit exposure
information and the monitoring of collateral values.
All counterparties are reviewed on a periodic basis to establish appropriate
exposure limits for a variety of transactions. As appropriate, specific
transactions are analyzed to determine the amount of potential exposure that
could arise, and the counterparty's credit is reviewed to determine whether it
supports such exposure. In addition to the counterparty's credit status, DLJ
analyzes market movements that could affect exposure levels. DLJ considers four
7-35
<PAGE>
main factors that may affect trades in determining trading limits: the
settlement method; the time it will take for a trade to settle (i.e., the
maturity of the trade); the volatility that could affect the value of the
instruments involved in the trade; and the size of the trade. In addition to
determining trading limits, DLJ actively manages the credit exposure relating to
its trading activities by entering into master netting agreements when feasible;
monitoring the creditworthiness of counterparties and the related trading limits
on an ongoing basis and requesting additional collateral when deemed necessary;
diversifying and limiting exposure to individual counterparties and geographic
locations; and limiting the duration of exposure. In certain cases, DLJ may also
close out transactions or assign them to other counterparties when deemed
necessary or appropriate to mitigate credit risks.
FORWARD-LOOKING STATEMENTS
The Equitable's management has made in this report, and from time to time may
make in its public filings and press releases as well as in oral presentations
and discussions, forward-looking statements concerning The Equitable's
operations, economic performance and financial condition. Forward-looking
statements include, among other things, discussions concerning The Equitable's
potential exposure to market risks, as well as statements expressing
management's expectations, beliefs, estimates, forecasts, projections and
assumptions, as indicated by words such as "believes," "estimates," "intends,"
"anticipates," "expects," "projects," "should," "probably," "risk," "target,"
"goals," "objectives," or similar expressions. The Equitable claims the
protection afforded by the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995, and assumes no duty to
update any forward-looking statement. Forward-looking statements are subject to
risks and uncertainties. Actual results could differ materially from those
anticipated by forward-looking statements due to a number of important factors
including those discussed elsewhere in this report and in The Equitable's other
public filings, press releases, oral presentations and discussions and the
following: (i) the intensity of competition from other financial institutions;
(ii) secular trends and The Equitable's experience with respect to mortality,
morbidity, persistency and claims experience; (iii) The Equitable's ability to
develop, distribute and administer competitive products and services in a
timely, cost-effective manner; (iv) The Equitable's visibility in the market
place and its financial and claims paying ratings; (v) the effect of changes in
laws and regulations affecting The Equitable's businesses, including changes in
tax laws affecting insurance and annuity products; (vi) the volatile nature of
the securities business, the future results of DLJ and Alliance and the
potential losses that could result from DLJ's merchant banking activities as a
result of its capital intensive nature; (vii) market risks related to interest
rates, equity prices, derivatives, foreign currency exchange and credit; (viii)
the volatility of returns from The Equitable's other equity investments; (ix)
The Equitable's ability to develop information technology and management
information systems to support strategic goals while continuing to control costs
and expenses; (x) the costs of defending litigation and the risk of
unanticipated material adverse outcomes in such litigation; (xi) changes in
accounting and reporting practices; (xii) the performance of others on whom The
Equitable relies for distribution, investment management, reinsurance and other
services; (xiii) The Equitable's access to adequate financing to support its
future business and (xiv) the effect of any future acquisitions.
7-36
<PAGE>
Part II, Item 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The matters set forth under the caption "Market Risk, Risk Management and
Derivative Financial Instruments" in Management's Discussion and Analysis of
Financial Condition and Results of Operations (Item 7 of this report) are
incorporated herein by reference.
7A-1
<PAGE>
Part II, Item 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
THE EQUITABLE COMPANIES INCORPORATED
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants............................................................. F-1
Consolidated Financial Statements:
Consolidated Balance Sheets, December 31, 1997 and 1996..................................... F-2
Consolidated Statements of Earnings, Years Ended December 31, 1997, 1996 and 1995........... F-3
Consolidated Statements of Shareholders' Equity, Years Ended December 31, 1997,
1996 and 1995............................................................................. F-4
Consolidated Statements of Cash Flows, Years Ended December 31, 1997, 1996 and 1995......... F-6
Notes to Consolidated Financial Statements.................................................. F-6
Report of Independent Accountants on Financial Statement Schedules............................ F-54
Consolidated Financial Statement Schedules:
Schedule I - Summary of Investments - Other than Investments in Related Parties,
December 31, 1997........................................................................... F-55
Schedule II - Balance Sheets (Parent Company), December 31, 1997 and 1996..................... F-56
Schedule II - Statements of Earnings (Parent Company), Years Ended December 31, 1997,
1996 and 1995............................................................................... F-57
Schedule II - Statements of Cash Flows (Parent Company), Years Ended December 31, 1997,
1996 and 1995............................................................................... F-58
Schedule III - Supplementary Insurance Information, Years Ended December 31, 1997,
1996 and 1995............................................................................... F-59
Schedule IV - Reinsurance, Years Ended December 31, 1997, 1996 and 1995....................... F-62
</TABLE>
FS-1
<PAGE>
February 10, 1998
Report of Independent Accountants
To the Board of Directors and Shareholders of
The Equitable Companies Incorporated
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of The
Equitable Companies Incorporated and its subsidiaries ("The Equitable") at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of The Equitable's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the consolidated financial statements, The Equitable
changed its methods of accounting for long-duration participating life insurance
contracts and long-lived assets in 1996 and for loan impairments in 1995.
/s/ Price Waterhouse, LLP
- --------------------------------
F-1
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 19,978.5 $ 18,556.2
Held to maturity, at amortized cost..................................... 143.0 178.5
Trading account securities, at market value............................... 16,535.7 15,728.1
Securities purchased under resale agreements.............................. 22,628.8 20,492.1
Mortgage loans on real estate............................................. 2,611.4 3,133.0
Equity real estate........................................................ 2,749.2 3,298.4
Policy loans.............................................................. 2,422.9 2,196.1
Other equity investments.................................................. 1,276.5 1,072.4
Other invested assets..................................................... 626.1 134.5
----------------- -----------------
Total investments..................................................... 68,972.1 64,789.3
Cash and cash equivalents................................................... 597.4 755.3
Broker-dealer related receivables........................................... 28,184.3 16,661.7
Deferred policy acquisition costs........................................... 3,237.4 3,106.5
Amounts due from discontinued operations.................................... 572.8 996.2
Other assets................................................................ 4,768.3 4,361.1
Closed Block assets......................................................... 8,566.6 8,495.0
Separate Accounts assets.................................................... 36,538.7 29,646.1
----------------- -----------------
Total Assets................................................................ $ 151,437.6 $ 128,811.2
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 21,578.6 $ 21,863.8
Future policy benefits and other policyholders' liabilities................. 4,553.8 4,416.6
Securities sold under repurchase agreements................................. 36,006.7 29,378.3
Broker-dealer related payables.............................................. 25,941.5 19,497.0
Short-term and long-term debt............................................... 6,210.8 5,379.6
Other liabilities........................................................... 6,492.7 5,598.3
Closed Block liabilities.................................................... 9,073.7 9,091.3
Separate Accounts liabilities............................................... 36,306.3 29,598.3
----------------- -----------------
Total liabilities..................................................... 146,164.1 124,823.2
----------------- -----------------
Commitments and contingencies (Notes 12, 15, 16, 17 and 18)
SHAREHOLDERS' EQUITY
Series C convertible preferred stock........................................ - 24.4
Series D convertible preferred stock........................................ 514.4 294.0
Stock employee compensation trust........................................... (514.4) (294.0)
Series E convertible preferred stock........................................ - 380.2
Common stock, at par value.................................................. 2.2 1.9
Capital in excess of par value.............................................. 3,627.5 2,782.2
Retained earnings........................................................... 1,137.4 632.9
Net unrealized investment gains............................................. 523.7 179.3
Minimum pension liability................................................... (17.3) (12.9)
----------------- -----------------
Total shareholders' equity............................................ 5,273.5 3,988.0
----------------- -----------------
Total Liabilities and Shareholders' Equity.................................. $ 151,437.6 $ 128,811.2
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- ----------------
(In Millions, Except Per Share Amounts)
<S> <C> <C> <C>
REVENUES
Universal life and investment-type product policy fee
income...................................................... $ 950.6 $ 874.0 $ 788.2
Premiums...................................................... 601.5 597.6 606.8
Net investment income......................................... 3,991.3 3,336.3 3,047.4
Investment gains, net......................................... 592.4 599.2 552.3
Commissions, fees and other income............................ 3,427.8 2,800.5 2,142.4
Contribution from the Closed Block............................ 102.5 125.0 143.2
----------------- ----------------- ----------------
Total revenues.......................................... 9,666.1 8,332.6 7,280.3
----------------- ----------------- -----------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances.......... 1,267.0 1,271.1 1,249.2
Policyholders' benefits....................................... 978.6 1,317.7 1,008.6
Other operating costs and expenses............................ 6,317.5 5,228.0 4,377.3
----------------- ----------------- ----------------
Total benefits and other deductions..................... 8,563.1 7,816.8 6,635.1
----------------- ----------------- -----------------
Earnings from continuing operations before Federal
income taxes, minority interest and cumulative
effect of accounting change................................. 1,103.0 515.8 645.2
Federal income taxes.......................................... 280.5 137.4 192.3
Minority interest in net income of consolidated subsidiaries.. 174.3 172.4 87.5
----------------- ----------------- -----------------
Earnings from continuing operations before cumulative
effect of accounting change................................. 648.2 206.0 365.4
Discontinued operations, net of Federal income taxes.......... (87.2) (83.8) -
Cumulative effect of accounting change, net of Federal
income taxes................................................ - (23.1) -
----------------- ----------------- ----------------
Net Earnings.................................................. $ 561.0 $ 99.1 $ 365.4
================= ================= =================
Per Common Share:
Basic:
Earnings from continuing operations before
cumulative effect of accounting change.................. $ 3.14 $ .97 $ 1.84
Discontinued operations, net of Federal income taxes...... (.43) (.46) -
Cumulative effect of accounting change, net of
Federal income taxes.................................... - (.12) -
----------------- ----------------- ----------------
Net Earnings.............................................. $ 2.71 $ .39 $ 1.84
================= ================= =================
Diluted:
Earnings from continuing operations before
cumulative effect of accounting change.................. $ 2.86 $ .94 $ 1.75
Discontinued operations, net of Federal income taxes...... (.39) (.45) -
Cumulative effect of accounting change, net of
Federal income taxes.................................... - (.12) -
----------------- ----------------- ----------------
Net Earnings.............................................. $ 2.47 $ .37 $ 1.75
================= ================= =================
Cash Dividend Per Common Share.............................. $ .20 $ .20 $ .20
================= ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Series C convertible preferred stock, beginning of year....... $ 24.4 $ 24.4 $ 24.4
Exchange of Series C convertible preferred stock.............. (24.4) - -
----------------- ----------------- -----------------
Series C convertible preferred stock, end of year............. - 24.4 24.4
----------------- ----------------- -----------------
Series D convertible preferred stock, beginning of year....... 294.0 286.6 216.4
Exchange of Series D convertible preferred stock.............. (54.8) - -
Change in market value of shares.............................. 275.2 7.4 70.2
----------------- ----------------- -----------------
Series D convertible preferred stock, end of year............. 514.4 294.0 286.6
----------------- ----------------- -----------------
Stock employee compensation trust, beginning of year.......... (294.0) (286.6) (216.4)
Exchange of Series D convertible preferred stock in the
stock employee compensation trust........................... 54.8 - -
Change in market value of shares.............................. (275.2) (7.4) (70.2)
----------------- ----------------- -----------------
Stock employee compensation trust, end of year................ (514.4) (294.0) (286.6)
----------------- ----------------- -----------------
Series E convertible preferred stock, beginning of year....... 380.2 380.2 380.2
Exchange of Series E convertible preferred stock.............. (380.2) - -
----------------- ----------------- -----------------
Series E convertible preferred stock, end of year............. - 380.2 380.2
----------------- ----------------- -----------------
Common stock, at par value, beginning of year................. 1.9 1.8 1.8
Issuance of common stock...................................... .3 .1 -
----------------- ----------------- -----------------
Common stock, at par value, end of year....................... 2.2 1.9 1.8
----------------- ----------------- -----------------
Capital in excess of par value, beginning of year............. 2,782.2 2,753.3 2,730.9
Additional capital in excess of par value..................... 845.3 28.9 22.4
----------------- ----------------- -----------------
Capital in excess of par value, end of year................... 3,627.5 2,782.2 2,753.3
----------------- ----------------- -----------------
Retained earnings, beginning of year.......................... 632.9 597.5 295.6
Net earnings.................................................. 561.0 99.1 365.4
Dividends on preferred stocks................................. (15.6) (26.7) (26.7)
Dividends on common stock..................................... (40.9) (37.0) (36.8)
----------------- ----------------- -----------------
Retained earnings, end of year................................ 1,137.4 632.9 597.5
----------------- ----------------- -----------------
Net unrealized investment gains (losses), beginning of year... 179.3 386.6 (250.1)
Change in unrealized investment gains (losses)................ 344.4 (207.3) 636.7
----------------- ----------------- -----------------
Net unrealized investment gains, end of year.................. 523.7 179.3 386.6
----------------- ----------------- -----------------
Minimum pension liability, beginning of year.................. (12.9) (35.1) (2.7)
Change in minimum pension liability........................... (4.4) 22.2 (32.4)
----------------- ----------------- -----------------
Minimum pension liability, end of year........................ (17.3) (12.9) (35.1)
----------------- ----------------- -----------------
Total Shareholders' Equity, End of Year....................... $ 5,273.5 $ 3,988.0 $ 4,108.7
================= ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Net earnings.................................................. $ 561.0 $ 99.1 $ 365.4
Adjustments to reconcile net earnings to net cash
(used) provided by operating activities:
Interest credited to policyholders' account balances........ 1,267.0 1,271.1 1,249.2
Universal life and investment-type product
policy fee income......................................... (950.6) (874.0) (788.2)
Net change in trading activities and broker-dealer
related receivables/payables.............................. (5,982.4) (1,835.5) (890.8)
(Increase) decrease in matched resale agreements............ (4,622.2) 9.2 (5,462.4)
Increase (decrease) in matched repurchase agreements........ 4,622.2 (9.2) 5,462.4
Investment gains, net of dealer and trading gains........... (155.3) (163.9) (187.4)
Change in clearing association fees and regulatory deposits. 4.3 (381.9) 278.5
Change in accounts payable and accrued expenses............. 749.8 416.6 592.9
Change in Federal income tax payable........................ (352.2) (228.6) 186.7
Other, net.................................................. 11.2 218.8 (11.4)
----------------- ----------------- -----------------
Net cash (used) provided by operating activities.............. (4,847.2) (1,478.3) 794.9
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................... 2,865.0 2,419.3 2,043.5
Sales....................................................... 11,182.2 9,522.8 9,260.7
Purchases................................................... (13,926.0) (13,229.4) (11,893.3)
(Increase) decrease in short-term investments............... (550.9) 452.2 (83.9)
Decrease in loans to discontinued operations................ 420.1 1,017.0 1,226.9
Sale of subsidiaries........................................ 261.0 - -
Other, net.................................................. (542.1) (264.3) (469.4)
----------------- ----------------- -----------------
Net cash (used) provided by investing activities.............. (290.7) (82.4) 84.5
----------------- ----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................. 1,281.7 1,925.4 2,586.5
Withdrawals............................................... (1,886.8) (2,385.2) (2,657.1)
Net increase (decrease) in short-term financings............ 5,163.0 1,118.4 (381.1)
Additions to long-term debt................................. 979.9 717.8 1,348.7
Repayments of long-term debt................................ (425.2) (345.6) (445.4)
Proceeds from issuance of common stock...................... 87.2 - -
Proceeds from sale of DLJ common stock...................... - - 259.8
Payment of obligation to fund accumulated deficit of
discontinued operations................................... (83.9) - (1,215.4)
Other, net.................................................. (135.9) 84.8 (.3)
----------------- ----------------- -----------------
Net cash provided (used) by financing activities.............. 4,980.0 1,115.6 (504.3)
----------------- ----------------- -----------------
Change in cash and cash equivalents........................... (157.9) (445.1) 375.1
Cash and cash equivalents, beginning of year.................. 755.3 1,200.4 825.3
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year........................ $ 597.4 $ 755.3 $ 1,200.4
================= ================= =================
Supplemental cash flow information
Interest Paid............................................... $ 4,211.8 $ 2,998.8 $ 2,842.3
================= ================= =================
Income Taxes Paid (Refunded)................................ $ 605.2 $ 137.0 $ (82.7)
================= ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION
The Equitable Companies Incorporated (the "Holding Company,"
collectively including its consolidated subsidiaries, "The Equitable")
is a diversified financial services organization serving a broad
spectrum of insurance, investment management and investment banking
customers. The Equitable's insurance business is conducted principally
by its life insurance subsidiary, The Equitable Life Assurance Society
of the United States ("Equitable Life"). The Equitable's investment
management and investment banking business, which comprises the
Investment Services segment, is conducted principally by Alliance
Capital Management L.P. ("Alliance") and Donaldson, Lufkin & Jenrette,
Inc. ("DLJ"). AXA-UAP ("AXA"), a French holding company for an
international group of insurance and related financial services
companies, is The Equitable's largest shareholder, owning approximately
58.7% at December 31, 1997 (54.3% if all securities convertible into,
and options on, common stock were to be converted or exercised).
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements are prepared in
conformity with generally accepted accounting principles ("GAAP") which
require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The accompanying consolidated financial statements include the accounts
of the Holding Company; Equitable Life and its wholly owned life
insurance subsidiary (collectively, the "Insurance Group");
non-insurance subsidiaries, principally DLJ, an investment banking and
brokerage subsidiary, Alliance, an investment advisory subsidiary, and,
through June 10, 1997, Equitable Real Estate Investment Management, Inc.
("EREIM"), a real estate investment management subsidiary which was sold
(see Note 5); and those trusts, partnerships and joint ventures in which
The Equitable has control and a majority economic interest. Closed Block
assets and liabilities and results of operations are presented in the
consolidated financial statements as single line items (see Note 6).
Unless specifically stated, all disclosures contained herein supporting
the consolidated financial statements exclude the Closed Block related
amounts.
All significant intercompany transactions and balances have been
eliminated in consolidation other than intercompany transactions and
balances with the Closed Block and discontinued operations (see Note 7).
The years "1997," "1996" and "1995" refer to the years ended December
31, 1997, 1996 and 1995, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform these periods with the 1997 presentation.
Closed Block
As of July 22, 1992, Equitable Life established the Closed Block for the
benefit of certain classes of individual participating policies for
which Equitable Life had a dividend scale payable in 1991 and which were
in force on that date. Assets were allocated to the Closed Block in an
amount which, together with anticipated revenues from policies included
in the Closed Block, was reasonably expected to be sufficient to support
such business, including provision for payment of claims, certain
expenses and taxes, and for continuation of dividend scales payable in
1991, assuming the experience underlying such scales continues.
F-6
<PAGE>
Assets allocated to the Closed Block inure solely to the benefit of the
holders of policies included in the Closed Block and will not revert to
the benefit of the Holding Company. No reallocation, transfer, borrowing
or lending of assets can be made between the Closed Block and other
portions of Equitable Life's General Account, any of its Separate
Accounts or any affiliate of Equitable Life without the approval of the
New York Superintendent of Insurance (the "Superintendent"). Closed
Block assets and liabilities are carried on the same basis as similar
assets and liabilities held in the General Account. The excess of Closed
Block liabilities over Closed Block assets represents the expected
future post-tax contribution from the Closed Block which would be
recognized in income over the period the policies and contracts in the
Closed Block remain in force.
Discontinued Operations
Discontinued operations consist of the business of the former Guaranteed
Interest Contract ("GIC") Segment which includes the Group
Non-Participating Wind-Up Annuities ("Wind-Up Annuities") and the GIC
lines of business. An allowance was established for the premium
deficiency reserve for Wind-Up Annuities and estimated future losses of
the GIC line of business. Management reviews the adequacy of the
allowance each quarter and, during the 1997 and 1996 fourth quarter
reviews, the allowance for future losses was increased. Management
believes the allowance for future losses at December 31, 1997 is
adequate to provide for all future losses; however, the determination of
the allowance 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 the discontinued operations
differ from management's current best estimates and assumptions
underlying the allowance for future losses, the difference would be
reflected in the consolidated statements of earnings in discontinued
operations. In particular, to the extent income, sales proceeds and
holding periods for equity real estate differ from management's previous
assumptions, periodic adjustments to the allowance are likely to result
(see Note 7).
Accounting Changes
In 1997, The Equitable implemented Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings per Share". Basic earnings per
share ("EPS") replaces primary EPS and is computed by dividing income
available to common shareholders by the weighted average number of
common shares outstanding for the period. Diluted EPS is computed
similarly to fully diluted EPS required by Accounting Principles Board
Opinion ("APB") No. 15 except that average market prices are used in the
assumption of Holding Company and subsidiary stock option dilution
versus the higher of the average or end of period market price required
by APB No. 15. Prior periods' EPS have been restated to conform to the
requirements of SFAS No. 128.
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, "Accounting and Reporting by Mutual Life Insurance Enterprises
and by Insurance Enterprises for Certain Long-Duration Participating
Contracts". (See "Deferred Policy Acquisition Costs," "Policyholders'
Account Balances and Future Policy Benefits" and Note 6.)
The Equitable implemented SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," as of
January 1, 1996. SFAS No. 121 requires long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate the carrying value of such assets may
not be recoverable. Effective with SFAS No. 121's adoption, impaired
real estate is written down to fair value with the impairment loss being
included in investment gains (losses), net. Before implementing SFAS No.
121, valuation allowances on real estate held for the production of
income were computed using the forecasted cash flows of the respective
properties discounted at a rate equal to The Equitable's cost of funds.
The adoption of the statement resulted in the release of valuation
allowances of $152.4 million and recognition of impairment losses of
$144.0 million on real estate held for production of income. Real estate
which management has committed to disposing of by sale or abandonment is
F-7
<PAGE>
classified as real estate held for sale. Valuation allowances on real
estate held for sale continue to be computed using the lower of
depreciated cost or estimated fair value, net of disposition costs.
Implementation of the SFAS No. 121 impairment requirements relative to
other assets to be disposed of resulted in a charge for the cumulative
effect of an accounting change of $23.1 million, net of a Federal income
tax benefit of $12.4 million, due to the writedown to fair value of
building improvements relating to facilities vacated in 1996.
In the first quarter of 1995, The Equitable adopted SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". Impaired loans
within SFAS No. 114's scope are to be measured based on the present
value of expected future cash flows discounted at the loan's effective
interest rate, at the loan's observable market price or the fair value
of the collateral if the loan is collateral dependent. The adoption of
this statement did not have a material effect on the level of the
allowances for possible losses or on The Equitable's consolidated
statements of earnings and shareholders' equity.
New Accounting Pronouncements
In January 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 132, "Employers' Disclosures about Pension and Other
Postretirement Benefits," which revises current note disclosure
requirements for employers' pension and other retiree benefits. SFAS No.
132 is effective for fiscal years beginning after December 15, 1997. The
Equitable will adopt the provisions of SFAS No. 132 in the 1998
consolidated financial statements.
In December 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments". SOP
97-3 provides guidance for assessments related to insurance activities
and requirements for disclosure of certain information. SOP 97-3 is
effective for financial statements issued for periods beginning after
December 31, 1998. Restatement of previously issued financial statements
is not required. SOP 97-3 is not expected to have a material impact on
The Equitable's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 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. Management is currently reviewing its definition of business
segments in light of the requirements of SFAS No. 131.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 130 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. The Equitable will adopt
the provisions of SFAS No. 130 in its 1998 consolidated financial
statements.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities".
SFAS No. 125 specifies the accounting and reporting requirements for
transfers of financial assets, the recognition and measurement of
servicing assets and liabilities and extinguishments of liabilities.
SFAS No. 125 is effective for transactions occurring after December 31,
1996 and is to be applied prospectively. In December 1996, the FASB
F-8
<PAGE>
issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125," which defers for one year the
effective date of provisions relating to secured borrowings and
collateral and transfers of financial assets that are part of repurchase
agreements, dollar-roll, securities lending and similar transactions.
Implementation of SFAS No. 125 did not have nor is SFAS No. 127 expected
to have a material impact on The Equitable's consolidated financial
statements.
Valuation of Investments
Fixed maturities identified as available for sale are reported at
estimated fair value. Fixed maturities, which The Equitable has both the
ability and the intent to hold to maturity, are stated principally at
amortized cost. The amortized cost of fixed maturities is adjusted for
impairments in value deemed to be other than temporary.
Trading account securities are reported at market value principally
based on their quoted market prices or on quoted market prices of
comparable instruments.
Securities sold under agreements to repurchase and securities purchased
under agreements to resell are treated as financing arrangements and are
carried at contract amounts reflective of the amounts at which the
securities subsequently will be reacquired or resold as specified in the
respective agreements. Interest is accrued on such contract amounts and
is included in broker-dealer related receivables and payables in the
accompanying consolidated balance sheets. The Equitable takes possession
of the underlying assets purchased under agreements to resell and
obtains additional collateral when the market value falls below the
contract value. Repurchase and resale agreements with the same
counterparty and maturity date that settle through the Federal reserve
system and which are subject to master netting agreements are presented
net in the consolidated financial statements.
Valuation allowances are netted against the asset categories to which
they apply.
Mortgage loans on real estate are stated at unpaid principal balances,
net of unamortized discounts and valuation allowances. Valuation
allowances are based on the present value of expected future cash flows
discounted at the loan's original effective interest rate or the
collateral value if the loan is collateral dependent. However, if
foreclosure is or becomes probable, the measurement method used is
collateral value.
Real estate, including real estate acquired in satisfaction of debt, is
stated at depreciated cost less valuation allowances. At the date of
foreclosure (including in-substance foreclosure), real estate acquired
in satisfaction of debt is valued at estimated fair value. Impaired real
estate is written down to fair value with the impairment loss being
included in investment gains (losses), net. Valuation allowances on real
estate held for sale are computed using the lower of depreciated cost or
current estimated fair value, net of disposition costs. Depreciation is
discontinued on real estate held for sale. Prior to the adoption of SFAS
No. 121, valuation allowances on real estate held for production of
income were computed using the forecasted cash flows of the respective
properties discounted at a rate equal to The Equitable's cost of funds.
Policy loans are stated at unpaid principal balances.
Partnerships and joint venture interests in which The Equitable does not
have control or a majority economic interest are reported on the equity
basis of accounting and are included either with equity real estate or
other equity investments, as appropriate.
Equity securities, comprised of common stock, non-redeemable preferred
stock and DLJ's holdings of long-term corporate development investments,
principally private equity investments, are carried at estimated fair
value and are included in other equity investments.
Short-term investments are stated at amortized cost which approximates
fair value and are included with other invested assets.
F-9
<PAGE>
Cash and cash equivalents includes cash on hand, amounts due from banks
and highly liquid debt instruments purchased with an original maturity
of three months or less.
All securities owned by the Insurance Group and United States government
and agency securities, mortgage-backed securities, futures and forwards
transactions and certain other debt obligations held by DLJ are recorded
in the consolidated financial statements on a trade date basis. All
other securities owned by DLJ are recorded on a settlement date basis
and adjustments are made to a trade date basis, if significant.
Net Investment Income, Investment Gains, Net and Unrealized Investment
Gains (Losses)
Net investment income and realized investment gains (losses)
(collectively, "investment results") related to certain participating
group annuity contracts which are passed through to the contractholders
are reflected as interest credited to policyholders' account balances.
Realized investment gains (losses) are determined by specific
identification and are presented as a component of revenue. Changes in
the valuation allowances are included in investment gains or losses.
Unrealized investment gains (losses) of DLJ are included in revenues as
investment gains or losses in accordance with the accounting principles
applicable to trading portfolios. Unrealized investment gains and losses
on fixed maturities available for sale and equity securities held by The
Equitable, other than those held by DLJ, are accounted for as a separate
component of shareholders' equity, net of related deferred Federal
income taxes, amounts attributable to discontinued operations,
participating group annuity contracts and deferred policy acquisition
costs ("DAC") related to universal life and investment-type products and
participating traditional life contracts.
Recognition of Insurance Income and Related Expenses
Premiums from universal life and investment-type contracts are reported
as deposits to policyholders' account balances. Revenues from these
contracts consist of amounts assessed during the period against
policyholders' account balances for mortality charges, policy
administration charges and surrender charges. Policy benefits and claims
that are charged to expense include benefit claims incurred in the
period in excess of related policyholders' account balances.
Premiums from participating and non-participating traditional life and
annuity policies with life contingencies generally are recognized as
income when due. Benefits and expenses are matched with such income so
as to result in the recognition of profits over the life of the
contracts. This match is accomplished by means of the provision for
liabilities for future policy benefits and the deferral and subsequent
amortization of policy acquisition costs.
For contracts with a single premium or a limited number of premium
payments due over a significantly shorter period than the total period
over which benefits are provided, premiums are recorded as income when
due with any excess profit deferred and recognized in income in a
constant relationship to insurance in force or, for annuities, the
amount of expected future benefit payments.
Premiums from individual health contracts are recognized as income over
the period to which the premiums relate in proportion to the amount of
insurance protection provided.
Deferred Policy Acquisition Costs
The costs of acquiring new business, principally commissions,
underwriting, agency and policy issue expenses, all of which vary with
and primarily are related to the production of new business, are
deferred. DAC is subject to recoverability testing at the time of policy
issue and loss recognition testing at the end of each accounting period.
F-10
<PAGE>
For universal life products and investment-type products, DAC is
amortized over the expected total life of the contract group (periods
ranging from 15 to 35 years and 5 to 17 years, respectively) as a
constant percentage of estimated gross profits arising principally from
investment results, mortality and expense margins and surrender charges
based on historical and anticipated future experience, updated at the
end of each accounting period. The effect on the amortization of DAC of
revisions to estimated gross profits is reflected in earnings in the
period such estimated gross profits are revised. The effect on the DAC
asset that would result from realization of unrealized gains (losses) is
recognized with an offset to unrealized gains (losses) in consolidated
shareholders' equity as of the balance sheet date.
For participating traditional life policies (substantially all of which
are in the Closed Block), DAC is amortized over the expected total life
of the contract group (40 years) as a constant percentage based on the
present value of the estimated gross margin amounts expected to be
realized over the life of the contracts using the expected investment
yield. At December 31, 1997, the expected investment yield, excluding
policy loans, generally ranged from 7.53% grading to 7.92% over a 20
year period. Estimated gross margin includes anticipated premiums and
investment results less claims and administrative expenses, changes in
the net level premium reserve and expected annual policyholder
dividends. The effect on the amortization of DAC of revisions to
estimated gross margins is reflected in earnings in the period such
estimated gross margins are revised. The effect on the DAC asset that
would result from realization of unrealized gains (losses) is recognized
with an offset to unrealized gains (losses) in consolidated
shareholders' equity as of the balance sheet date.
For non-participating traditional life and annuity policies with life
contingencies, DAC is amortized in proportion to anticipated premiums.
Assumptions as to anticipated premiums are estimated at the date of
policy issue and are consistently applied during the life of the
contracts. Deviations from estimated experience are reflected in
earnings in the period such deviations occur. For these contracts, the
amortization periods generally are for the total life of the policy.
For individual health benefit insurance, DAC is amortized over the
expected average life of the contracts (10 years for major medical
policies and 20 years for disability income ("DI") products) in
proportion to anticipated premium revenue at time of issue.
Policyholders' Account Balances and Future Policy Benefits
Policyholders' account balances for universal life and investment-type
contracts are equal to the policy account values. The policy account
values represent an accumulation of gross premium payments plus credited
interest less expense and mortality charges and withdrawals.
For participating traditional life policies, future policy benefit
liabilities are calculated using a net level premium method on the basis
of actuarial assumptions equal to guaranteed mortality and dividend fund
interest rates. The liability for annual dividends represents the
accrual of annual dividends earned. Terminal dividends are accrued in
proportion to gross margins over the life of the contract.
For non-participating traditional life insurance policies, future policy
benefit liabilities are estimated using a net level premium method on
the basis of actuarial assumptions as to mortality, persistency and
interest established at policy issue. Assumptions established at policy
issue as to mortality and persistency are based on the Insurance Group's
experience which, together with interest and expense assumptions,
include a margin for adverse deviation. When the liabilities for future
policy benefits plus the present value of expected future gross premiums
for a product are insufficient to provide for expected future policy
benefits and expenses for that product, DAC is written off and
thereafter, if required, a premium deficiency reserve is established by
a charge to earnings. Benefit liabilities for traditional annuities
during the accumulation period are equal to accumulated contractholders'
fund balances and after annuitization are equal to the present value of
expected future payments. Interest rates used in establishing such
liabilities range from 2.25% to 11.5% for life insurance liabilities and
from 2.25% to 13.5% for annuity liabilities.
F-11
<PAGE>
During the fourth quarter of 1996, a loss recognition study of
participating group annuity contracts and conversion annuities ("Pension
Par") was completed which included management's revised estimate of
assumptions, such as expected mortality and future investment returns.
The study's results prompted management to establish a premium
deficiency reserve which decreased earnings from continuing operations
and net earnings by $47.5 million or $.26 per share ($73.0 million
pre-tax).
Individual health benefit liabilities for active lives are estimated
using the net level premium method and assumptions as to future
morbidity, withdrawals and interest. Benefit liabilities for disabled
lives are estimated using the present value of benefits method and
experience assumptions as to claim terminations, expenses and interest.
During the fourth quarter of 1996, The Equitable completed a loss
recognition study of the DI business which incorporated management's
revised estimates of future experience with regard to morbidity,
investment returns, claims and administration expenses and other
factors. The study indicated DAC was not recoverable and the reserves
were not sufficient. Earnings from continuing operations and net
earnings decreased by $208.0 million or $1.12 per share ($320.0 million
pre-tax) as a result of strengthening DI reserves by $175.0 million and
writing off unamortized DAC of $145.0 million related to DI products
issued prior to July 1993. The determination of DI reserves requires
making assumptions and estimates relating to a variety of factors,
including morbidity and interest rates, claims experience and lapse
rates based on then known facts and circumstances. Such factors as claim
incidence and termination rates can be affected by changes in the
economic, legal and regulatory environments and work ethic. While
management believes its DI reserves have been calculated on a reasonable
basis and are adequate, there can be no assurance reserves will be
sufficient to provide for future liabilities.
Claim reserves and associated liabilities for individual DI and major
medical policies were $886.7 million and $869.4 million at December 31,
1997 and 1996, respectively. Incurred benefits (benefits paid plus
changes in claim reserves) and benefits paid for individual DI and major
medical policies (excluding reserve strengthening in 1996) are
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Incurred benefits related to current year.......... $ 190.2 $ 189.0 $ 176.0
Incurred benefits related to prior years........... 2.1 69.1 67.8
----------------- ---------------- -----------------
Total Incurred Benefits............................ $ 192.3 $ 258.1 $ 243.8
================= ================ =================
Benefits paid related to current year.............. $ 28.8 $ 32.6 $ 37.0
Benefits paid related to prior years............... 146.2 153.3 137.8
----------------- ---------------- -----------------
Total Benefits Paid................................ $ 175.0 $ 185.9 $ 174.8
================= ================ =================
</TABLE>
Policyholders' Dividends
The amount of policyholders' dividends to be paid (including those on
policies included in the Closed Block) is determined annually by
Equitable Life's board of directors. The aggregate amount of
policyholders' dividends is related to actual interest, mortality,
morbidity and expense experience for the year and judgment as to the
appropriate level of statutory surplus to be retained by Equitable Life.
At December 31, 1997, participating policies, including those in the
Closed Block, represent approximately 21.2% ($50.2 billion) of directly
written life insurance in force, net of amounts ceded.
F-12
<PAGE>
Federal Income Taxes
The Holding Company and its consolidated subsidiaries (excluding DLJ)
file a consolidated Federal income tax return. Effective January 1,
1997, The Equitable's ownership of DLJ for tax purposes declined to less
than 80% and, therefore, DLJ will file its own U.S. consolidated Federal
income tax return. For periods prior to January 1, 1997, DLJ was
included in The Equitable's consolidated Federal income tax return.
Current Federal income taxes are charged or credited to operations based
upon amounts estimated to be payable or recoverable as a result of
taxable operations for the current year. Deferred income tax assets and
liabilities are recognized based on the difference between financial
statement carrying amounts and income tax bases of assets and
liabilities using enacted income tax rates and laws.
Separate Accounts
Separate Accounts are established in conformity with the New York State
Insurance Law and generally are not chargeable with liabilities that
arise from any other business of the Insurance Group. Separate Accounts
assets are subject to General Account claims only to the extent the
value of such assets exceeds Separate Accounts liabilities.
Assets and liabilities of the Separate Accounts, representing net
deposits and accumulated net investment earnings less fees, held
primarily for the benefit of contractholders, and for which the
Insurance Group does not bear the investment risk, are shown as separate
captions in the consolidated balance sheets. The Insurance Group bears
the investment risk on assets held in one Separate Account, therefore,
such assets are carried on the same basis as similar assets held in the
General Account portfolio. Assets held in the other Separate Accounts
are carried at quoted market values or, where quoted values are not
available, at estimated fair values as determined by the Insurance
Group.
The investment results of Separate Accounts on which the Insurance Group
does not bear the investment risk are reflected directly in Separate
Accounts liabilities. For 1997, 1996 and 1995, investment results of
such Separate Accounts were $3,411.1 million, $2,970.6 million and
$1,963.2 million, respectively.
Deposits to Separate Accounts are reported as increases in Separate
Accounts liabilities and are not reported in revenues. Mortality, policy
administration and surrender charges on all Separate Accounts are
included in revenues.
Employee Stock Option Plan
The Equitable accounts for its stock option plan in accordance with the
provisions of APB No. 25, "Accounting for Stock Issued to Employees,"
and related interpretations. In accordance with the opinion,
compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price.
See Note 10 for the pro forma disclosures required by SFAS No. 123,
"Accounting for Stock-Based Compensation".
F-13
<PAGE>
3) INVESTMENTS
The following tables provide additional information relating to fixed
maturities and equity securities (excluding trading account securities):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------------- ----------------- ----------------- ----------------
(In Millions)
<S> <C> <C> <C> <C>
December 31, 1997
Fixed Maturities:
Available for Sale:
Corporate..................... $ 14,458.2 $ 785.3 $ 74.7 $ 15,168.8
Mortgage-backed............... 1,712.4 23.6 1.3 1,734.7
U.S. Treasury securities and
U.S. government and
agency securities........... 1,693.1 84.1 .8 1,776.4
States and political
subdivisions................ 673.0 6.8 .1 679.7
Foreign governments........... 442.4 44.8 2.0 485.2
Redeemable preferred stock.... 128.0 6.7 1.0 133.7
---------------- ----------------- ----------------- ----------------
Total Available for Sale.......... $ 19,107.1 $ 951.3 $ 79.9 $ 19,978.5
================ ================= ================= ================
Held to Maturity:
Corporate..................... $ 143.0 $ 21.7 $ .4 $ 164.3
---------------- ----------------- ----------------- ----------------
Total Held to Maturity............ $ 143.0 $ 21.7 $ .4 $ 164.3
================ ================= ================= ================
Equity Securities:
DLJ's long-term corporate
development investments....... $ 323.2 $ 36.0 $ 43.4 $ 315.8
Common stock.................... 418.2 48.7 15.6 451.3
---------------- ----------------- ----------------- ----------------
Total Equity Securities........... $ 741.4 $ 84.7 $ 59.0 $ 767.1
================ ================= ================= ================
December 31, 1996
Fixed Maturities:
Available for Sale:
Corporate..................... $ 13,933.8 $ 454.3 $ 121.4 $ 14,266.7
Mortgage-backed............... 2,052.7 11.4 20.3 2,043.8
U.S. Treasury securities and
U.S. government and
agency securities........... 1,690.9 39.3 19.7 1,710.5
States and political
subdivisions................ 77.0 4.5 - 81.5
Foreign governments........... 302.6 18.0 2.2 318.4
Redeemable preferred stock.... 139.1 3.3 7.1 135.3
---------------- ----------------- ----------------- ----------------
Total Available for Sale.......... $ 18,196.1 $ 530.8 $ 170.7 $ 18,556.2
================ ================= ================= ================
Held to Maturity:
Corporate..................... $ 178.5 $ 18.3 $ 1.7 $ 195.1
---------------- ----------------- ----------------- ----------------
Total Held to Maturity............ $ 178.5 $ 18.3 $ 1.7 $ 195.1
================ ================= ================= ================
Equity Securities:
DLJ's long-term corporate
development investments....... $ 246.3 $ 37.7 $ 79.6 $ 204.4
Common stock.................... 371.7 49.4 20.1 401.0
---------------- ----------------- ----------------- ----------------
Total Equity Securities........... $ 618.0 $ 87.1 $ 99.7 $ 605.4
================ ================= ================= ================
</TABLE>
F-14
<PAGE>
For publicly traded fixed maturities and equity securities, estimated
fair value is determined using quoted market prices. For fixed
maturities without a readily ascertainable market value, The Equitable
has determined an estimated fair value using a discounted cash flow
approach, including provisions for credit risk, generally based on the
assumption such securities will be held to maturity. Estimated fair
values for equity securities, substantially all of which do not have a
readily ascertainable market value, have been determined by The
Equitable. Such estimated fair values do not necessarily represent the
values for which these securities could have been sold at the dates of
the consolidated balance sheets. At December 31, 1997 and 1996,
securities without a readily ascertainable market value having an
amortized cost of $4,248.1 million and $4,375.4 million, respectively,
had estimated fair values of $4,406.1 million and $4,461.1 million,
respectively.
The contractual maturity of bonds at December 31, 1997 is shown below:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
------------------------------------ ------------------------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------------- ----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C> <C>
Due in one year or less......... $ 11.9 $ 11.9 $ 170.0 $ 171.2
Due in years two through five... 13.7 13.9 3,087.4 3,150.2
Due in years six through ten.... 24.5 28.9 6,921.5 7,150.5
Due after ten years............. 92.9 109.6 7,087.8 7,638.2
Mortgage-backed securities...... - - 1,712.4 1,734.7
----------------- ----------------- ---------------- -----------------
Total........................... $ 143.0 $ 164.3 $ 18,979.1 $ 19,844.8
================= ================= ================ =================
</TABLE>
Bonds not due at a single maturity date have been included in the above
table in the year of final maturity. Actual maturities will differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
The Insurance Group's fixed maturity investment portfolio includes
corporate high yield securities consisting of public high yield bonds,
redeemable preferred stocks and directly negotiated debt in leveraged
buyout transactions. The Insurance Group seeks to minimize the higher
than normal credit risks associated with such securities by monitoring
the total investments in any single issuer or total investment in a
particular industry group. Certain of these corporate high yield
securities are classified as other than investment grade by the various
rating agencies, i.e., a rating below Baa or National Association of
Insurance Commissioners ("NAIC") designation of 3 (medium grade), 4 or 5
(below investment grade) or 6 (in or near default). At December 31,
1997, approximately 17.77% of the $19,122.1 million aggregate amortized
cost of bonds held by The Equitable were considered to be other than
investment grade.
In addition to its holdings of corporate high yield securities, the
Insurance Group is an equity investor in limited partnership interests
which primarily invest in securities considered to be other than
investment grade.
Fixed maturity investments with restructured or modified terms are not
material.
F-15
<PAGE>
Investment valuation allowances and changes thereto are shown below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Balances, beginning of year........................ $ 137.1 $ 325.3 $ 284.9
SFAS No. 121 release............................... - (152.4) -
Additions charged to income........................ 334.6 125.0 136.0
Deductions for writedowns and
asset dispositions............................... (87.2) (160.8) (95.6)
----------------- ---------------- -----------------
Balances, End of Year.............................. $ 384.5 $ 137.1 $ 325.3
================= ================ =================
Balances, end of year comprise:
Mortgage loans on real estate.................... $ 55.8 $ 50.4 $ 65.5
Equity real estate............................... 328.7 86.7 259.8
----------------- ---------------- -----------------
Total.............................................. $ 384.5 $ 137.1 $ 325.3
================= ================ =================
</TABLE>
At December 31, 1997, the carrying values of investments held for the
production of income which were non-income producing for the twelve
months preceding the consolidated balance sheet date were $12.6 million
of fixed maturities and $.9 million of mortgage loans on real estate.
The cost of trading account securities at December 31, 1997 and 1996 was
$16,521.9 million and $15,758.3 million, respectively.
At December 31, 1997 and 1996, mortgage loans on real estate with
scheduled payments 60 days (90 days for agricultural mortgages) or more
past due or in foreclosure (collectively, "problem mortgage loans on
real estate") had an amortized cost of $23.4 million (0.9% of total
mortgage loans on real estate) and $12.4 million (0.4% of total mortgage
loans on real estate), respectively.
The payment terms of mortgage loans on real estate may from time to time
be restructured or modified. The investment in restructured mortgage
loans on real estate, based on amortized cost, amounted to $183.4
million and $388.3 million at December 31, 1997 and 1996, respectively.
Gross interest income on restructured mortgage loans on real estate that
would have been recorded in accordance with the original terms of such
loans amounted to $17.2 million, $35.5 million and $52.1 million in
1997, 1996 and 1995, respectively. Gross interest income on these loans
included in net investment income aggregated $12.7 million, $28.2
million and $37.4 million in 1997, 1996 and 1995, respectively.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1996
------------------- -------------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses.................. $ 196.7 $ 340.0
Impaired mortgage loans without provision for losses............... 3.6 122.3
------------------- -------------------
Recorded investment in impaired mortgage loans..................... 200.3 462.3
Provision for losses............................................... (51.8) (46.4)
------------------- -------------------
Net Impaired Mortgage Loans........................................ $ 148.5 $ 415.9
=================== ===================
</TABLE>
F-16
<PAGE>
Impaired mortgage loans without provision for losses are loans where the
fair value of the collateral or the net present value of the expected
future cash flows related to the loan equals or exceeds the recorded
investment. Interest income earned on loans where the collateral value
is used to measure impairment is recorded on a cash basis. Interest
income on loans where the present value method is used to measure
impairment is accrued on the net carrying value amount of the loan at
the interest rate used to discount the cash flows. Changes in the
present value attributable to changes in the amount or timing of
expected cash flows are reported as investment gains or losses.
During 1997, 1996 and 1995, respectively, The Equitable's average
recorded investment in impaired mortgage loans was $246.9 million,
$552.1 million and $429.0 million. Interest income recognized on these
impaired mortgage loans totaled $15.2 million, $38.8 million and $27.9
million ($2.3 million, $17.9 million and $13.4 million recognized on a
cash basis) for 1997, 1996 and 1995, respectively.
The Insurance Group's investment in equity real estate is through direct
ownership and through investments in real estate joint ventures. At
December 31, 1997 and 1996, the carrying value of equity real estate
held for sale amounted to $1,023.5 million and $345.6 million,
respectively. For 1997, 1996 and 1995, respectively, real estate of
$152.0 million, $58.7 million and $35.3 million was acquired in
satisfaction of debt. At December 31, 1997 and 1996, The Equitable owned
$693.3 million and $771.7 million, respectively, of real estate acquired
in satisfaction of debt.
Depreciation of real estate is computed using the straight-line method
over the estimated useful lives of the properties, which generally range
from 40 to 50 years. Accumulated depreciation on real estate was $541.1
million and $587.5 million at December 31, 1997 and 1996, respectively.
Depreciation expense on real estate totaled $74.9 million, $91.8 million
and $121.7 million for 1997, 1996 and 1995, respectively.
F-17
<PAGE>
4) JOINT VENTURES AND PARTNERSHIPS
Summarized combined financial information for real estate joint ventures
(29 and 34 individual ventures as of December 31, 1997 and 1996,
respectively) and for limited partnership interests accounted for under
the equity method, in which The Equitable has an investment of $10.0
million or greater and an equity interest of 10% or greater, is as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---------------- -----------------
(In Millions)
<S> <C> <C>
BALANCE SHEETS
Investments in real estate, at depreciated cost........................ $ 1,700.9 $ 1,883.7
Investments in securities, generally at estimated fair value........... 1,374.8 2,430.6
Cash and cash equivalents.............................................. 105.4 98.0
Other assets........................................................... 584.9 427.0
---------------- -----------------
Total Assets........................................................... $ 3,766.0 $ 4,839.3
================ =================
Borrowed funds - third party........................................... $ 493.4 $ 1,574.3
Borrowed funds - The Equitable......................................... 31.2 137.9
Other liabilities...................................................... 284.0 415.8
---------------- -----------------
Total liabilities...................................................... 808.6 2,128.0
---------------- -----------------
Partners' capital...................................................... 2,957.4 2,711.3
---------------- -----------------
Total Liabilities and Partners' Capital................................ $ 3,766.0 $ 4,839.3
================ =================
Equity in partners' capital included above............................. $ 568.5 $ 806.8
Equity in limited partnership interests not included above............. 331.8 201.8
Other.................................................................. 4.3 9.8
---------------- -----------------
Carrying Value......................................................... $ 904.6 $ 1,018.4
================ =================
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures............. $ 310.5 $ 348.9 $ 463.5
Revenues of other limited partnership interests.... 506.3 386.1 242.3
Interest expense - third party..................... (91.8) (111.0) (135.3)
Interest expense - The Equitable................... (7.2) (30.0) (41.0)
Other expenses..................................... (263.6) (282.5) (397.7)
----------------- ---------------- -----------------
Net Earnings....................................... $ 454.2 $ 311.5 $ 131.8
================= ================ =================
Equity in net earnings included above.............. $ 76.7 $ 73.9 $ 49.1
Equity in net earnings of limited partnership
interests not included above..................... 69.5 35.8 44.8
Other.............................................. (.9) .9 1.0
-----------------
----------------- ---------------- -----------------
Total Equity in Net Earnings....................... $ 145.3 $ 110.6 $ 94.9
================= ================ =================
</TABLE>
F-18
<PAGE>
5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities................................... $ 1,501.2 $ 1,355.0 $ 1,187.7
Trading account securities......................... 1,528.9 1,008.2 794.8
Securities purchased under resale agreements....... 1,861.5 1,484.4 1,343.1
Broker-dealer related receivables.................. 1,082.6 697.4 760.6
Mortgage loans on real estate...................... 260.8 303.0 329.0
Equity real estate................................. 390.4 442.4 560.4
Other equity investments........................... 181.0 144.0 107.1
Policy loans....................................... 177.0 160.3 144.4
Other investment income............................ 211.3 224.0 287.4
----------------- ---------------- -----------------
Gross investment income.......................... 7,194.7 5,818.7 5,514.5
----------------- ---------------- -----------------
Interest expense to finance short-term
trading instruments.............................. 2,859.0 2,132.6 2,019.2
Other investment expenses.......................... 344.4 349.8 447.9
----------------- ---------------- -----------------
Investment expenses.............................. 3,203.4 2,482.4 2,467.1
----------------- ---------------- -----------------
Net Investment Income.............................. $ 3,991.3 $ 3,336.3 $ 3,047.4
================= ================ =================
</TABLE>
Investment gains (losses), net, including changes in the valuation
allowances, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities................................... $ 90.2 $ 63.0 $ 108.0
Mortgage loans on real estate...................... (11.2) (27.3) (40.2)
Equity real estate................................. (391.3) (79.7) (86.6)
Other equity investments........................... 208.8 190.0 172.4
Dealer and trading gains........................... 437.1 435.4 364.9
Issuance and sale of DLJ common stock.............. 6.7 - 34.7
Sale of subsidiaries............................... 252.1 - -
Issuance and sales of Alliance Units............... - 20.6 -
Other.............................................. - (2.8) (.9)
----------------- ---------------- -----------------
Investment Gains, Net.............................. $ 592.4 $ 599.2 $ 552.3
================= ================ =================
</TABLE>
Writedowns of fixed maturities amounted to $12.8 million, $29.9 million
and $61.6 million for 1997, 1996 and 1995, respectively, and writedowns
of equity real estate subsequent to the adoption of SFAS No. 121
amounted to $136.4 million and $23.7 million for 1997 and 1996,
respectively. In the fourth quarter of 1997, The Equitable reclassified
$1,095.4 million depreciated cost of equity real estate from real estate
held for the production of income to real estate held for sale.
Additions to valuation allowances of $227.6 million were recorded upon
these transfers. Additionally in the fourth quarter, $132.3 million of
writedowns on real estate held for production of income were recorded.
For 1997, 1996 and 1995, respectively, proceeds received on sales of
fixed maturities classified as available for sale amounted to $10,317.6
million, $8,549.2 million and $8,242.9 million. Gross gains of $167.6
million, $155.1 million and $212.4 million and gross losses of $109.0
million, $93.0 million and $64.3 million, respectively, were realized on
these sales. The change in unrealized investment gains (losses) related
to fixed maturities classified as available for sale for 1997, 1996 and
1995 amounted to $511.3 million, $(255.9) million and $1,082.9 million,
respectively.
F-19
<PAGE>
Investment gains from other equity investments include gains generated
by DLJ's involvement in long-term corporate development investments of
$194.5 million, $163.0 million and $163.7 million for 1997, 1996 and
1995, respectively.
For 1997, 1996 and 1995, investment results passed through to certain
participating group annuity contracts as interest credited to
policyholders' account balances amounted to $137.5 million, $136.7
million and $131.2 million, respectively.
On June 10, 1997, Equitable Life sold EREIM (other than its interest in
Column Financial, Inc.) ("ERE") 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 ERE 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 years ended December 31, 1996 and 1995,
respectively, the businesses sold reported combined revenues of $91.6
million, $226.1 million and $245.6 million and combined net earnings of
$10.7 million, $30.7 million and $27.9 million. Total combined assets
and liabilities as reported at December 31, 1996 were $171.8 million and
$130.1 million, respectively.
In 1996, Alliance acquired the business of Cursitor-Eaton Asset
Management Company and Cursitor Holdings Limited (collectively,
"Cursitor") for approximately $159.0 million. The purchase price
consisted of $94.3 million in cash, 1.8 million of Alliance's publicly
traded units ("Alliance Units"), 6% notes aggregating $21.5 million
payable ratably over four years, and substantial additional
consideration to be determined at a later date. The excess of the
purchase price, including acquisition costs and minority interest, over
the fair value of Cursitor's net assets acquired resulted in the
recognition of intangible assets consisting of costs assigned to
contracts acquired and goodwill of approximately $122.8 million and
$38.3 million, respectively. 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 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. The remaining balance of intangible assets is being
amortized over its estimated useful life of 20 years. At December 31,
1997, The Equitable's ownership of Alliance Units was approximately
56.9%.
In 1995, DLJ completed the public offering of 10.58 million shares of
its common stock, which included 7.28 million of the Holding Company's
shares in DLJ, priced at $27.00 per share. As a result of the offering,
The Equitable's ownership percentage of common stock was reduced to
80.2%. The Equitable's ownership interest has been and will be further
reduced upon the issuance of common stock after the vesting of
forfeitable restricted stock units acquired by and/or the exercise of
options granted to certain DLJ employees. Proceeds from the offering
totaled approximately $285.7 million of which the Holding Company
received approximately $178.6 million, net of expenses. The Equitable
recognized an investment gain of $34.7 million, net of related expenses,
on this transaction. At December 31, 1997, The Equitable's ownership of
DLJ's shares was 76.2%.
F-20
<PAGE>
Net unrealized investment gains (losses), included in the consolidated
balance sheets as a component of equity and the changes for the
corresponding years, are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year......................... $ 179.3 $ 386.6 $ (250.1)
Changes in unrealized investment gains (losses).... 543.9 (298.7) 1,229.2
Changes in unrealized investment losses
(gains) attributable to:
Participating group annuity contracts.......... 53.2 - (78.1)
DAC............................................ (89.0) 42.3 (216.8)
Deferred Federal income taxes.................. (163.7) 49.1 (297.6)
----------------- ---------------- -----------------
Balance, End of Year............................... $ 523.7 $ 179.3 $ 386.6
================= ================ =================
Balance, end of year comprises:
Unrealized investment gains on:
Fixed maturities............................... $ 871.4 $ 360.1 $ 616.0
Other equity investments....................... 33.1 29.3 32.2
Other, principally Closed Block................ 81.9 53.1 93.0
----------------- ---------------- -----------------
Total........................................ 986.4 442.5 741.2
Amounts of unrealized investment gains
attributable to:
Participating group annuity contracts........ (19.0) (72.2) (72.2)
DAC.......................................... (141.0) (52.0) (94.3)
Deferred Federal income taxes................ (302.7) (139.0) (188.1)
----------------- ---------------- -----------------
Total.............................................. $ 523.7 $ 179.3 $ 386.6
================= ================ =================
</TABLE>
6) CLOSED BLOCK
Summarized financial information for the Closed Block follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Fixed Maturities:
Available for sale, at estimated fair value (amortized cost,
$4,059.4 and $3,820.7)........................................... $ 4,231.0 $ 3,889.5
Mortgage loans on real estate........................................ 1,341.6 1,380.7
Policy loans......................................................... 1,700.2 1,765.9
Cash and other invested assets....................................... 282.7 336.1
DAC.................................................................. 775.2 876.5
Other assets......................................................... 235.9 246.3
----------------- -----------------
Total Assets......................................................... $ 8,566.6 $ 8,495.0
================= =================
</TABLE>
F-21
<PAGE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Liabilities
Future policy benefits and policyholders' account balances........... $ 8,993.2 $ 8,999.7
Other liabilities.................................................... 80.5 91.6
----------------- -----------------
Total Liabilities.................................................... $ 9,073.7 $ 9,091.3
================= =================
</TABLE>
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Revenues
Premiums and other revenue......................... $ 687.1 $ 724.8 $ 753.4
Investment income (net of investment
expenses of $27.0, $27.3 and $26.7).............. 574.9 546.6 538.9
Investment losses, net............................. (42.4) (5.5) (20.2)
----------------- ---------------- -----------------
Total revenues............................... 1,219.6 1,265.9 1,272.1
----------------- ---------------- -----------------
Benefits and Other Deductions
Policyholders' benefits and dividends.............. 1,066.7 1,106.3 1,077.6
Other operating costs and expenses................. 50.4 34.6 51.3
----------------- ---------------- -----------------
Total benefits and other deductions.......... 1,117.1 1,140.9 1,128.9
----------------- ---------------- -----------------
Contribution from the Closed Block................. $ 102.5 $ 125.0 $ 143.2
================= ================ =================
</TABLE>
At December 31, 1997 and 1996, problem mortgage loans on real estate had
an amortized cost of $8.1 million and $4.3 million, respectively, and
mortgage loans on real estate for which the payment terms have been
restructured had an amortized cost of $70.5 million and $114.2 million,
respectively. At December 31, 1996, the restructured mortgage loans on
real estate amount included $.7 million of problem mortgage loans on
real estate.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 109.1 $ 128.1
Impaired mortgage loans without provision for losses................... .6 .6
---------------- -----------------
Recorded investment in impaired mortgages.............................. 109.7 128.7
Provision for losses................................................... (17.4) (12.9)
---------------- -----------------
Net Impaired Mortgage Loans............................................ $ 92.3 $ 115.8
================ =================
</TABLE>
During 1997, 1996 and 1995, the Closed Block's average recorded
investment in impaired mortgage loans was $110.2 million, $153.8 million
and $146.9 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $9.4 million, $10.9 million and $5.9
million ($4.1 million, $4.7 million and $1.3 million recognized on a
cash basis) for 1997, 1996 and 1995, respectively.
F-22
<PAGE>
Valuation allowances amounted to $18.5 million and $13.8 million on
mortgage loans on real estate and $16.8 million and $3.7 million on
equity real estate at December 31, 1997 and 1996, respectively. As of
January 1, 1996, the adoption of SFAS No. 121 resulted in the
recognition of impairment losses of $5.6 million on real estate held for
production of income. Writedowns of fixed maturities amounted to $3.5
million, $12.8 million and $16.8 million for 1997, 1996 and 1995,
respectively and writedowns of equity real estate subsequent to the
adoption of SFAS No. 121 amounted to $28.8 million for 1997.
In the fourth quarter of 1997, $72.9 million depreciated cost of equity
real estate held for production of income was reclassified to equity
real estate held for sale. Additions to valuation allowances of $15.4
million were recorded upon these transfers. Additionally, in the fourth
quarter, $28.8 million of writedowns on real estate held for production
of income were recorded.
Many expenses related to Closed Block operations are charged to
operations outside of the Closed Block; accordingly, the contribution
from the Closed Block does not represent the actual profitability of the
Closed Block operations. Operating costs and expenses outside of the
Closed Block are, therefore, disproportionate to the business outside of
the Closed Block.
7) DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Mortgage loans on real estate........................................ $ 655.5 $ 1,111.1
Equity real estate................................................... 655.6 925.6
Other equity investments............................................. 209.3 300.5
Short-term investments............................................... 102.0 63.2
Other invested assets................................................ 41.9 50.9
----------------- -----------------
Total investments.................................................. 1,664.3 2,451.3
Cash and cash equivalents............................................ 106.8 42.6
Other assets......................................................... 253.9 242.9
----------------- -----------------
Total Assets......................................................... $ 2,025.0 $ 2,736.8
================= =================
Liabilities
Policyholders' liabilities........................................... $ 1,048.3 $ 1,335.9
Allowance for future losses.......................................... 259.2 262.0
Amounts due to continuing operations................................. 572.8 996.2
Other liabilities.................................................... 144.7 142.7
----------------- -----------------
Total Liabilities.................................................... $ 2,025.0 $ 2,736.8
================= =================
</TABLE>
F-23
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Revenues
Investment income (net of investment
expenses of $97.3, $127.5 and $153.1)............ $ 188.6 $ 245.4 $ 323.6
Investment losses, net............................. (173.7) (18.9) (22.9)
Policy fees, premiums and other income............. .2 .2 .7
----------------- ---------------- -----------------
Total revenues..................................... 15.1 226.7 301.4
Benefits and other deductions...................... 169.5 250.4 326.5
Losses charged to allowance for future losses...... (154.4) (23.7) (25.1)
----------------- ---------------- -----------------
Pre-tax loss from operations....................... - - -
Pre-tax loss from strengthening of the
allowance for future losses...................... (134.1) (129.0) -
Federal income tax benefit......................... 46.9 45.2 -
----------------- ---------------- -----------------
Loss from Discontinued Operations.................. $ (87.2) $ (83.8) $ -
================= ================ =================
</TABLE>
The Equitable's quarterly process for evaluating the allowance for
future losses applies the current period's results of the discontinued
operations against the allowance, re-estimates future losses, and
adjusts the allowance, if appropriate. Additionally, as part of The
Equitable's annual planning process which takes place in the fourth
quarter of each year, investment and benefit cash flow projections are
prepared. These updated assumptions and estimates resulted in the need
to strengthen the allowance in 1997 and 1996, respectively.
In the fourth quarter of 1997, $329.9 million depreciated cost of equity
real estate was reclassified from equity real estate held for production
of income to real estate held for sale. Additions to valuation
allowances of $79.8 million were recognized upon these transfers.
Additionally, in the fourth quarter, $92.5 million of writedown on real
estate held for production of income were recognized.
Benefits and other deductions includes $53.3 million, $114.3 million and
$154.6 million of interest expense related to amounts borrowed from
continuing operations in 1997, 1996 and 1995, respectively.
Valuation allowances amounted to $28.4 million and $9.0 million on
mortgage loans on real estate and $88.4 million and $20.4 million on
equity real estate at December 31, 1997 and 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
for production of income. Writedowns of equity real estate subsequent to
the adoption of SFAS No. 121 amounted to $95.7 million and $12.3 million
for 1997 and 1996, respectively.
At December 31, 1997 and 1996, problem mortgage loans on real estate had
amortized costs of $11.0 million and $7.9 million, respectively, and
mortgage loans on real estate for which the payment terms have been
restructured had amortized costs of $109.4 million and $208.1 million,
respectively.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 101.8 $ 83.5
Impaired mortgage loans without provision for losses................... .2 15.0
---------------- -----------------
Recorded investment in impaired mortgages.............................. 102.0 98.5
Provision for losses................................................... (27.3) (8.8)
---------------- -----------------
Net Impaired Mortgage Loans............................................ $ 74.7 $ 89.7
================ =================
</TABLE>
F-24
<PAGE>
During 1997, 1996 and 1995, the discontinued operations' average
recorded investment in impaired mortgage loans was $89.2 million, $134.8
million and $177.4 million, respectively. Interest income recognized on
these impaired mortgage loans totaled $6.6 million, $10.1 million and
$4.5 million ($5.3 million, $7.5 million and $.4 million recognized on a
cash basis) for 1997, 1996 and 1995, respectively.
At December 31, 1997 and 1996, discontinued operations had carrying
values of $156.2 million and $263.0 million, respectively, of real
estate acquired in satisfaction of debt.
8) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1997 1996
----------------- -----------------
(In Millions)
<S> <C> <C>
Short-term debt...................................................... $ 1,866.6 $ 1,458.9
----------------- -----------------
Long-term debt:
Holding Company:
Convertible subordinated debentures, 6.125% due 2024............... - 339.1
Senior notes, 9% due 2004.......................................... 300.0 300.0
Senior exchange notes, 6.75% - 7.30% due through 2003.............. 244.0 269.0
----------------- -----------------
Total Holding Company.......................................... 544.0 908.1
----------------- -----------------
Equitable Life:
6.95% surplus notes scheduled to mature 2005....................... 399.4 399.4
7.70% surplus notes scheduled to mature 2015....................... 199.7 199.6
Other.............................................................. .3 .5
----------------- -----------------
Total Equitable Life........................................... 599.4 599.5
----------------- -----------------
Wholly Owned and Joint Venture Real Estate:
Mortgage notes, 5.87% - 12.00% due through 2006.................... 951.1 968.6
----------------- -----------------
DLJ:
Senior notes, 6.875% due 2005...................................... 497.5 497.2
Medium-term notes, 5.625%-6.9% due through 2016.................... 697.3 249.5
Senior subordinated revolving credit, 6.6875% due 2000............. 325.0 206.5
Global floating rate notes, 5.905% due 2002........................ 347.9 -
Structured notes, due through 2012................................. 123.7 216.2
Subordinated exchange notes, 9.58% due 2003........................ 205.0 205.0
Junior subordinated convertible debentures, 6.1875% due 2001....... 33.5 43.5
Other.............................................................. 1.3 1.9
----------------- -----------------
Total DLJ...................................................... 2,231.2 1,419.8
----------------- -----------------
Alliance:
Other.............................................................. 18.5 24.7
----------------- -----------------
Total long-term debt................................................. 4,344.2 3,920.7
----------------- -----------------
Total Short-term and Long-term Debt.................................. $ 6,210.8 $ 5,379.6
================= =================
</TABLE>
Short-term Debt
Equitable Life has a $350.0 million bank credit facility available to
fund short-term working capital needs and to facilitate the securities
settlement process. The credit facility consists of two types of
borrowing options with varying interest rates and expires in June 2000.
The interest rates are based on external indices dependent on the type
of borrowing and at December 31, 1997 range from 5.88% to 8.50%. There
were no borrowings outstanding under this bank credit facility at
December 31, 1997.
F-25
<PAGE>
Equitable Life has a commercial paper program with an issue limit of
$500.0 million. This program is available for general corporate purposes
used to support Equitable Life's liquidity needs and is supported by
Equitable Life's existing $350.0 million bank credit facility. At
December 31, 1997, $50.0 million was outstanding under this program.
During 1996, Alliance entered into a $250.0 million five-year revolving
credit facility with a group of banks. Under the facility, the interest
rate, at the option of Alliance, is a floating rate generally based upon
a defined prime rate, a rate related to the London Interbank Offered
Rate ("LIBOR") or the Federal funds rate. A facility fee is payable on
the total facility. The revolving credit facility will be used to
provide back-up liquidity for Alliance's $250.0 million commercial paper
program, to fund commission payments to financial intermediaries for the
sale of Class B and C shares under Alliance's mutual fund distribution
system, and for general working capital purposes. At December 31, 1997,
Alliance had $72.0 million in commercial paper outstanding and there
were no borrowings under the revolving credit facility.
In 1997, DLJ replaced its $1,925.0 million committed credit facilities
with a $2,000.0 million revolving credit facility, of which $1,000.0
million may be unsecured. There were no borrowings outstanding under
this agreement at December 31, 1997.
In January 1998, DLJ commenced a $1,000.0 million commercial paper
program. Obligations issued thereunder are exempt from the Securities
and Exchange Commission (the "SEC") registration requirements. The
proceeds from the commercial paper program will be used to satisfy
working capital requirements and general corporate purposes.
DLJ's short-term borrowings are from banks and other financial
institutions and generally are demand obligations, at interest rates
approximating Federal funds rates. Such borrowings generally are used to
finance securities inventories, to facilitate the securities settlement
process and to finance securities purchased by customers on margin. At
December 31, 1997 and 1996, securities owned by DLJ, aggregating $190.5
million and $363.6 million, respectively, were pledged to secure certain
of these borrowings.
DLJ's repurchase agreements and short-term borrowings and the weighted
average interest rates related to those borrowings at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
Weighted Average
Interest Rates At
December 31, December 31,
------------------------------------ -----------------------------
1997 1996 1997 1996
----------------- ----------------- ------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
Securities sold under agreements
to repurchase........................ $ 36,006.7 $ 29,378.3 6.04% 6.08%
Bank loans............................. 988.0 669.0 6.57% 6.89%
Borrowings from other financial
institutions......................... 133.0 197.0 6.21% 6.95%
</TABLE>
Additionally, included in short-term debt at December 31, 1997 and 1996
are $297.4 million and $297.0 million, respectively, of structured notes
with maturities of less than one year.
Long-term Debt
Several of the long-term debt agreements have restrictive covenants
related to the total amount of debt, net tangible assets and other
matters. The Equitable is in compliance with all debt covenants.
On August 4, 1997, the Holding Company redeemed in full $364.2 million
principal amount of its 6.125% convertible subordinated debentures (the
"Subordinated Debentures"). Upon redemption of all Subordinated
Debentures, approximately 14.7 million shares of Common Stock were
issued by the Holding Company.
F-26
<PAGE>
On December 18, 1995, Equitable Life issued, in accordance with Section
1307 of the New York Insurance Law, $400.0 million of surplus notes
having an interest rate of 6.95% scheduled to mature in 2005 and $200.0
million of surplus notes having an interest rate of 7.70% scheduled to
mature in 2015 (together, the "Surplus Notes"). Proceeds from the
issuance of the Surplus Notes were $596.6 million, net of related
issuance costs. Payments of interest on, or principal of, the Surplus
Notes are subject to prior approval by the Superintendent.
In 1997, DLJ established three programs for the offering of debt
securities. The initial program was for the offering of up to $300.0
million medium-term notes due nine months or more from the date of
issuance. The medium-term note program was established under a shelf
registration statement previously filed by DLJ. The notes may bear
interest at fixed or floating rates and may be issued as indexed notes,
dual currency notes, renewable notes, amortizing notes or original issue
discount notes. At December 31, 1997, DLJ had $200.0 million notes
outstanding under this program with a weighted average interest rate of
6.48%. DLJ has entered into interest rate swap transactions to convert
$190.0 million of such fixed rate notes into floating rate notes based
upon LIBOR. At December 31, 1997, the weighted average effective
interest rates on these notes was 6.08%.
An additional program in 1997 was for the offering of up to $1.0 billion
in aggregate principal amount of senior or subordinated debt securities.
In September 1997, DLJ commenced an offering of up to $500.0 million
medium-term notes due nine months or more from the date of issuance. The
notes may bear interest at fixed or floating rates and may be issued as
indexed notes, dual currency notes, renewable notes, amortizing notes or
original issue discount notes. At December 31, 1997 there were $150.0
million notes outstanding under this program at a fixed rate of 6.90%.
In October 1997, DLJ also issued an additional $100.0 million
medium-term notes under this program. These notes mature on October 29,
2007 and bear interest at a floating rate of 6.28% at December 31, 1997
based upon LIBOR. DLJ has entered into an interest rate swap transaction
to convert such notes into fixed rate notes at 6.94%. In addition, in
September 1997, DLJ issued $350.0 million global floating rate notes
under this program. Such notes bear interest at a floating rate equal to
LIBOR plus 0.25% and mature on September 18, 2002. These notes are
redeemable by DLJ in whole or in part on any interest payment date on or
after September 2000.
DLJ's third program in 1997 was for the offering from time to time of up
to $300.0 million of senior subordinated debt securities or preferred
stock. There were no securities issued pursuant to this program at
December 31, 1997.
In 1997, DLJ borrowed an additional $118.5 million under its senior
subordinated revolving credit agreement and extended the maturity
thereon to January 30, 2000. Interest on the senior subordinated
revolving credit agreement is 6.688% and 6.375% at December 31, 1997 and
1996, respectively, and is calculated based on LIBOR.
In February 1996, a shelf registration statement was established which
enabled DLJ to issue from time to time up to $500.0 million in aggregate
public offering price of senior debt securities and/or preferred stock.
On February 15, 1996, DLJ completed an offering under that shelf
registration of $250.0 million aggregate principal amount of its 5.625%
medium-term notes due February 15, 2016. The notes are repayable by DLJ,
in whole or in part, at the option of the holders on February 15, 2001.
In 1996, $43.5 million junior subordinated convertible debentures were
issued by an affiliate of DLJ. The debentures are convertible, in whole
or in part, at the option of the affiliate, into adjustable rate
cumulative redeemable preferred stock of a subsidiary on or after July
31, 1997. In 1997, DLJ converted its $28.8 million aggregate principal
amount of 5% junior subordinated convertible debentures into 685,204
shares of DLJ common stock.
In 1996, DLJ exercised its option and exchanged all 2.05 million shares
of preferred stock outstanding for $205.0 million in aggregate principal
amount of 9.58% subordinated exchange notes due 2003. The notes are
redeemable, in whole or in part, at the option of DLJ at any time.
F-27
<PAGE>
Structured notes are customized financing instruments in which the
amount of interest or principal paid on the debt obligation is linked to
the return on specific cash instruments. The notes, most of which carry
a zero coupon, mature at various dates through 2012.
The Equitable has pledged real estate, mortgage loans, cash and
securities amounting to $1,354.5 million and $1,770.0 million at
December 31, 1997 and 1996, respectively, as collateral for certain
short-term and long-term debt.
At December 31, 1997, aggregate maturities of the long-term debt based
on required principal payments at maturity for 1998 and the succeeding
four years are $598.6 million, $246.2 million, $562.6 million, $98.7
million and $415.9 million, respectively, and $2,423.1 million
thereafter.
9) FEDERAL INCOME TAXES
A summary of the Federal income tax expense in the consolidated
statements of earnings is shown below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Federal income tax expense (benefit):
Current.......................................... $ 488.1 $ 324.4 $ 154.7
Deferred......................................... (207.6) (187.0) 37.6
----------------- ---------------- -----------------
Total.............................................. $ 280.5 $ 137.4 $ 192.3
================= ================ =================
</TABLE>
The Federal income taxes attributable to consolidated operations are
different from the amounts determined by multiplying the earnings before
Federal income taxes and minority interest by the expected Federal
income tax rate of 35%. The sources of the difference and the tax
effects of each are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Expected Federal income tax expense................ $ 386.0 $ 180.5 $ 225.9
Non-taxable minority interest...................... (38.0) (32.9) (28.2)
Adjustment of tax audit reserves................... (81.7) (2.8) 4.1
Other.............................................. 14.2 (7.4) (9.5)
----------------- ---------------- -----------------
Federal Income Tax Expense......................... $ 280.5 $ 137.4 $ 192.3
================= ================ =================
</TABLE>
The components of the net deferred Federal income taxes are as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
--------------------------------- ---------------------------------
Assets Liabilities Assets Liabilities
--------------- ---------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Compensation and related benefits...... $ 577.3 $ - $ 462.6 $ -
Other.................................. 64.2 - 60.8 -
DAC, reserves and reinsurance.......... - 222.8 - 166.0
Investments............................ - 360.3 - 305.6
--------------- ---------------- --------------- ---------------
Total.................................. $ 641.5 $ 583.1 $ 523.4 $ 471.6
=============== ================ =============== ===============
</TABLE>
F-28
<PAGE>
The deferred Federal income taxes impacting operations reflect the net
tax effects of temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes. The sources of these temporary differences
and the tax effects of each are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
DAC, reserves and reinsurance...................... $ 46.2 $ (156.2) $ 63.3
Investments........................................ (136.0) 30.7 24.2
Compensation and related benefits.................. (112.3) (26.5) (68.3)
Other.............................................. (5.5) (35.0) 18.4
----------------- ---------------- -----------------
Deferred Federal Income Tax
(Benefit) Expense................................ $ (207.6) $ (187.0) $ 37.6
================= ================ =================
</TABLE>
At December 31, 1997, The Equitable had net operating loss carryforwards
for tax purposes approximating $88.1 million which expire in 2006 and
2007. These net operating loss carryforwards are based on The
Equitable's Federal income tax returns, which are subject to examination
by the Internal Revenue Service (the "IRS"), and could be substantially
reduced as a result of adjustments to The Equitable's tax returns for
prior years.
The IRS is in the process of examining The Equitable's Federal income
tax returns for the years 1989 through 1991. Management believes these
audits will have no material adverse effect on The Equitable's
consolidated results of operations.
10) CAPITAL STOCK
The Holding Company is authorized to issue 510 million shares of capital
stock, of which 500 million shares are designated as common stock (the
"Common Stock") having a par value of $.01 per share and 10 million
shares are designated as preferred stock having a par value of $1.00 per
share.
At December 31, 1997 and 1996, respectively, 222.2 million and 185.8
million shares of Common Stock were outstanding. At December 31, 1997,
approximately 26.8 million shares of Common Stock were reserved for the
conversion of Series D Convertible Preferred Stock ("Series D Preferred
Stock") and the exercise of employee stock options.
On August 4, 1997, the Holding Company redeemed in full $364.2 million
principal amount of its 6.125% Subordinated Debentures due 2024, and
converted all of the outstanding Series C Convertible Preferred Stock
("Series C Preferred Stock") and Series E Convertible Preferred Stock
("Series E Preferred Stock"). Upon redemption of the Subordinated
Debentures and conversion of the 50,017 shares of Series C and the
822,460 shares of Series E Preferred Stocks, approximately 32.5 million
additional shares of Common Stock were issued by the Holding Company. As
a result of those transactions, shareholders' equity increased by $339.7
million. The Series C Preferred Stock earned an annual cash dividend of
$30 per share, payable quarterly through date of conversion. The Series
E Preferred Stock earned an annual dividend of $30.625 per share,
payable quarterly in shares of Common Stock through date of conversion.
The Holding Company has a Stock Employee Compensation Trust ("SECT") to
fund a portion of its obligations arising from its various employee
compensation and benefits programs. The Holding Company sold 60,000
shares of Series D Preferred Stock, convertible into 11.9 million shares
of the Holding Company's Common Stock, to the SECT in exchange for cash
and a promissory note of $299.9 million, for a total of $300.0 million.
This had no effect on The Equitable's consolidated shareholders' equity
as the Series D Preferred Stock is reported as outstanding at fair value
on The Equitable's consolidated balance sheets but is offset by a
contra-equity account. An increase in consolidated shareholders' equity
results only when shares of Series D Preferred Stock are released from
the SECT. The SECT is required to periodically distribute an amount of
Series D Preferred Stock (or Common Stock issued on conversion thereof)
F-29
<PAGE>
based on a pre-determined formula. In April 1996, The Equitable filed a
shelf registration statement with the SEC to register approximately 11.9
million shares of The Equitable's 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 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. The SECT will terminate
on the date on which all assets of the SECT have been distributed.
In accordance with the 1997 Stock Incentive Plan, which is the successor
Plan to the 1991 Stock Incentive Plan, the Holding Company can issue
options to purchase 16.4 million shares of its Common Stock. However,
the terms and conditions of the options granted under the 1991 Plan
remains the same. The options, which include Incentive Stock Options and
Nonstatutory Stock Options, are issued at the fair market value of the
Holding Company's Common Stock on the date of grant. Under the 1991
Stock Incentive Plan, one-fifth of stock options granted vest and become
exercisable on each of the first five anniversaries of the date such
options were granted. In accordance with the 1997 Stock Incentive Plan,
one-third of stock options granted vest and become exercisable on each
of the first three anniversaries of the date such options were granted.
Options are exercisable up to 10 years from the date of grant. At
December 31, 1997, 1996 and 1995, respectively, options to purchase
6,725,382 shares, 217,139 shares and 359,355 shares were available for
future grant under the plans.
The Equitable's ownership interest in DLJ and Alliance will continue to
be reduced upon the exercise of options granted to certain DLJ and
Alliance employees and the vesting of forfeitable restricted stock units
acquired by DLJ employees. Options are exercisable over a period of up
to ten years. DLJ restricted stock units represent forfeitable rights to
receive approximately 5.2 million shares of DLJ common stock through
February 2000 and were recorded as additional minority interest of
$106.2 million, their fair value at the time of issuance. As of December
31, 1997, .1 million restricted stock units were forfeited.
The Equitable has elected to continue to account for stock-based
compensation using the intrinsic value method prescribed in APB Opinion
No. 25. Had compensation expense for The Equitable's Stock Option
Incentive Plan options been determined based on SFAS No. 123's fair
value based method, The Equitable's pro forma net earnings and earnings
per share for 1997, 1996 and 1995 would have been:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
(In Millions, Except Per Share Amount)
<S> <C> <C> <C>
Net Earnings:
As Reported............................................. $ 561.0 $ 99.1 $ 365.4
Pro Forma............................................... $ 542.1 $ 85.1 $ 362.8
Earnings Per Share:
Basic:
As Reported........................................... $ 2.71 $ .39 $ 1.84
Pro Forma............................................. $ 2.61 $ .31 $ 1.82
Diluted:
As Reported........................................... $ 2.47 $ .37 $ 1.75
Pro Forma............................................. $ 2.37 $ .31 $ 1.73
</TABLE>
F-30
<PAGE>
The fair values of options granted after December 31, 1994, used as a
basis for the above pro forma disclosures, were estimated as of the
dates of grant using the Black-Scholes option pricing model. The option
pricing assumptions for 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Holding Company DLJ Alliance
------------------------------ ------------------------------- ----------------------------------
1997 1996 1995 1997 1996 1995 1997 1996 1995
-------------------- --------- ---------- ---------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend yield.... 0.48% 0.80% 0.96% 0.86% 1.54% 1.85% 8.00% 8.00% 8.00%
Expected volatility 20.00% 20.00% 20.00% 33.00% 25.00% 25.00% 26.00% 23.00% 23.00%
Risk-free interest
rate............ 5.99% 5.92% 6.83% 5.96% 6.07% 5.86% 5.70% 5.80% 6.00%
Expected life..... 5 years 5 years 5 years 5 years 5 years 5 years 7.6 years 7.43 years 7.43 years
Weighted average
grant-date fair
value per option $12.25 $6.94 $5.90 $22.45 $9.35 $7.36 $4.36 $2.69 $2.24
</TABLE>
A summary of the Holding Company, DLJ and Alliance's option plans is as
follows:
<TABLE>
<CAPTION>
Holding Company DLJ Alliance
----------------------------- ----------------------------- -----------------------------
Options Options Options
Outstanding Outstanding Outstanding
Weighted Weighted Weighted
Average Average Average
Shares Exercise Shares Exercise Units Exercise
(In Millions) Price (In Millions) Price (In Millions) Price
--------------- ------------- --------------- ------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1995........ 6.8 $20.31 - 3.8 $15.46
Granted................ .4 $20.27 9.2 $27.00 1.8 $20.54
Exercised.............. (.1) $20.00 - (.5) $11.20
Expired................ (.1) $20.00 - -
Forfeited.............. (.3) $22.24 - (.3) $16.64
--------------- ------------- ---------------
Balance as of
December 31, 1995...... 6.7 $20.27 9.2 $27.00 4.8 $17.72
Granted................ .7 $24.94 2.1 $32.54 .7 $25.12
Exercised.............. (.1) $19.91 - (.4) $13.64
Expired................ - - -
Forfeited.............. (.6) $20.21 (.2) $27.00 (.1) $19.32
--------------- ------------- ---------------
Balance as of
December 31, 1996...... 6.7 $20.79 11.1 $28.06 5.0 $19.07
Granted................ 3.2 $41.85 3.2 $61.07 1.1 $36.56
Exercised.............. (1.6) $20.26 (.1) $32.03 (.6) $16.11
Forfeited.............. (.4) $23.43 (.1) $27.51 (.2) $21.28
--------------- ------------- ---------------
Balance as of
December 31, 1997...... 7.9 $29.05 14.1 $35.56 5.3 $22.82
=============== ============= ===============
</TABLE>
F-31
<PAGE>
Information about options outstanding and exercisable at December 31,
1997 is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------- ------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (In Millions) Life (Years) Price (In Millions) Price
--------------------- ----------------- ---------------- ---------------- ------------------ ----------------
Holding
Company
----------------------
<S> <C> <C> <C> <C> <C>
$18.125 -$27.75 4.8 5.84 $20.94 3.0 $20.41
$28.50 -$45.25 3.1 9.57 $41.84 - -
----------------- ------------------
$18.125 -$45.25 7.9 7.29 $29.05 3.0 $20.41
================= ================ ================ =================== ==============
DLJ
----------------------
$27.00 -$35.99 10.9 8.0 $28.05 4.9 $27.58
$36.00 -$50.99 .8 9.3 $40.04 - -
$51.00 -$76.00 2.4 9.8 $67.77 - -
----------------- -------------------
$27.00 -$76.00 14.1 8.4 $35.56 4.9 $27.58
================= ================ ================ =================== ==============
Alliance
----------------------
$ 6.0625 -$17.75 1.1 3.86 $13.20 1.0 $13.04
$19.375 -$19.75 .8 7.34 $19.39 .3 $19.39
$19.875 -$21.375 1.1 8.28 $20.13 .6 $20.19
$22.25 -$27.50 1.3 9.81 $23.81 .4 $23.29
$36.9375 -$37.5625 1.0 9.95 $36.95 - -
----------------- -------------------
$ 6.0625 -$37.5625 5.3 7.58 $22.82 2.3 $17.43
================= ================ ================ =================== ==============
</TABLE>
F-32
<PAGE>
11) COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions, Except Per Share Amounts)
<S> <C> <C> <C>
Net earnings....................................... $ 561.0 $ 99.1 $ 365.4
Less - dividends on preferred stocks............... (15.6) (26.7) (26.7)
----------------- ---------------- -----------------
Net earnings applicable to common shares -
Basic............................................ 545.4 72.4 338.7
Add - dividends on convertible preferred stock
and interest on convertible subordinated
debt, when dilutive(1)........................... 24.6 - 41.9
Less - effect of assumed exercise of options
of publicly held subsidiaries.................... (20.2) (3.8) (1.1)
----------------- ---------------- -----------------
Net Earnings Applicable to Common Shares -
Diluted.......................................... $ 549.8 $ 68.6 $ 379.5
================= ================ =================
Weighted average common shares outstanding -
Basic............................................ 201.6 185.4 184.1
Add - assumed exercise of stock options............ 1.8 .8 .6
Add - assumed conversion of convertible
preferred stock(1)............................... 10.4 - 17.8
Add - assumed conversion of convertible
subordinated debt(1)............................. 8.6 - 14.7
----------------- ---------------- -----------------
Weighted Average Shares Outstanding -
Diluted.......................................... 222.4 186.2 217.2
================= ================ =================
<FN>
(1) Inclusion in 1996 would be anti-dilutive.
</FN>
</TABLE>
Shares of the Series D Preferred Stock (or Common Stock issuable on
conversion thereof) are not considered to be outstanding in the
computation of weighted average common shares outstanding until the
shares are allocated to fund the obligation for which the SECT was
established.
12) REINSURANCE AGREEMENTS
The Insurance Group assumes and cedes reinsurance with other insurance
companies. The Insurance Group evaluates the financial condition of its
reinsurers to minimize its exposure to significant losses from reinsurer
insolvencies. Ceded reinsurance does not relieve the originating insurer
of liability. The effect of reinsurance (excluding group life and
health) is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Direct premiums.................................... $ 448.6 $ 461.4 $ 474.2
Reinsurance assumed................................ 198.3 177.5 171.3
Reinsurance ceded.................................. (45.4) (41.3) (38.7)
----------------- ---------------- -----------------
Premiums........................................... $ 601.5 $ 597.6 $ 606.8
================= ================ =================
Universal Life and Investment-type Product
Policy Fee Income Ceded.......................... $ 61.0 $ 48.2 $ 44.0
================= ================ =================
Policyholders' Benefits Ceded...................... $ 70.6 $ 54.1 $ 48.9
================= ================ =================
Interest Credited to Policyholders' Account
Balances Ceded................................... $ 36.4 $ 32.3 $ 28.5
================= ================ =================
</TABLE>
F-33
<PAGE>
Effective January 1, 1994, all in force business above $5.0 million was
reinsured. During 1996, The Equitable's retention limit on joint
survivorship policies was increased to $15.0 million. The Insurance
Group also reinsures the entire risk on certain substandard underwriting
risks as well as in certain other cases.
The Insurance Group cedes 100% of its group life and health business to
a third party insurance company. Premiums ceded totaled $1.6 million,
$2.4 million and $260.6 million for 1997, 1996 and 1995, respectively.
Ceded death and disability benefits totaled $4.3 million, $21.2 million
and $188.1 million for 1997, 1996 and 1995, respectively. Insurance
liabilities ceded totaled $593.8 million and $652.4 million at December
31, 1997 and 1996, respectively.
13) EMPLOYEE BENEFIT PLANS
The Equitable sponsors qualified and non-qualified defined benefit plans
covering substantially all employees (including certain qualified
part-time employees), managers and certain agents other than employees
of DLJ. The pension plans are non-contributory. Equitable Life's
benefits are based on a cash balance formula or years of service and
final average earnings, if greater, under certain grandfathering rules
in the plans. Alliance's benefits are based on years of credited
service, average final base salary and primary social security benefits.
The Equitable's funding policy is to make the minimum contribution
required by the Employee Retirement Income Security Act of 1974
("ERISA").
Components of net periodic pension cost (credit) for the qualified and
non-qualified plans are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Service cost....................................... $ 32.5 $ 33.8 $ 30.0
Interest cost on projected benefit obligations..... 128.2 120.8 122.0
Actual return on assets............................ (307.6) (181.4) (309.2)
Net amortization and deferrals..................... 166.6 43.4 155.6
----------------- ---------------- -----------------
Net Periodic Pension Cost (Credit)................. $ 19.7 $ 16.6 $ (1.6)
================= ================ =================
</TABLE>
The funded status of the qualified and non-qualified pension plans is as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---------------- -----------------
(In Millions)
<S> <C> <C>
Actuarial present value of obligations:
Vested............................................................... $ 1,702.6 $ 1,672.2
Non-vested........................................................... 3.9 10.1
---------------- -----------------
Accumulated Benefit Obligation......................................... $ 1,706.5 $ 1,682.3
================ =================
Plan assets at fair value.............................................. $ 1,867.4 $ 1,626.0
Projected benefit obligations.......................................... 1,801.3 1,765.5
---------------- -----------------
Projected benefit obligations (in excess of) or less than plan assets.. 66.1 (139.5)
Unrecognized prior service cost........................................ (9.9) (17.9)
Unrecognized net loss from past experience different
from that assumed.................................................... 95.0 280.0
Unrecognized net asset at transition................................... 3.1 4.7
Additional minimum liability........................................... - (19.3)
---------------- -----------------
Prepaid Pension Cost.................................................. $ 154.3 $ 108.0
================ =================
</TABLE>
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of projected benefit
obligations were 7.25% and 4.07%, respectively, at December 31, 1997 and
7.5% and 4.25%, respectively, at December 31, 1996. As of January 1,
1997 and 1996, the expected long-term rate of return on assets for the
retirement plan was 10.25%.
F-34
<PAGE>
The Equitable recorded, as a reduction of shareholders' equity, an
additional minimum pension liability of $17.3 million and $12.9 million,
net of Federal income taxes, at December 31, 1997 and 1996,
respectively, primarily representing the excess of the accumulated
benefit obligation of the qualified pension plan over the accrued
liability.
The pension plan's assets include corporate and government debt
securities, equity securities, equity real estate and shares of group
trusts managed by Alliance.
Prior to 1987, the qualified plan funded participants' benefits through
the purchase of non-participating annuity contracts from Equitable Life.
Benefit payments under these contracts were approximately $33.2 million,
$34.7 million and $36.4 million for 1997, 1996 and 1995, respectively.
The Equitable provides certain medical and life insurance benefits
(collectively, "postretirement benefits") for qualifying employees,
managers and agents retiring from The Equitable (i) on or after
attaining age 55 who have at least 10 years of service or (ii) on or
after attaining age 65 or (iii) whose jobs have been abolished and who
have attained age 50 with 20 years of service. The life insurance
benefits are related to age and salary at retirement. The costs of
postretirement benefits are recognized in accordance with the provisions
of SFAS No. 106. The Equitable continues to fund postretirement benefits
costs on a pay-as-you-go basis and, for 1997, 1996 and 1995, The
Equitable made estimated postretirement benefits payments of $18.7
million, $18.9 million and $31.1 million, respectively.
The following table sets forth the postretirement benefits plan's
status, reconciled to amounts recognized in The Equitable's consolidated
financial statements:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Service cost....................................... $ 4.5 $ 5.3 $ 4.0
Interest cost on accumulated postretirement
benefits obligation.............................. 34.7 34.6 34.7
Net amortization and deferrals..................... 1.9 2.4 (2.3)
----------------- ---------------- -----------------
Net Periodic Postretirement Benefits Costs......... $ 41.1 $ 42.3 $ 36.4
================= ================ =================
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---------------- -----------------
(In Millions)
<S> <C> <C>
Accumulated postretirement benefits obligation:
Retirees............................................................. $ 388.5 $ 381.8
Fully eligible active plan participants.............................. 45.7 50.7
Other active plan participants....................................... 56.6 60.7
---------------- -----------------
490.8 493.2
Unrecognized prior service cost........................................ 40.3 50.5
Unrecognized net loss from past experience different
from that assumed and from changes in assumptions.................... (140.6) (150.5)
---------------- -----------------
Accrued Postretirement Benefits Cost................................... $ 390.5 $ 393.2
================ =================
</TABLE>
Since January 1, 1994, costs to The Equitable for providing these
medical benefits available to retirees under age 65 are the same as
those offered to active employees and medical benefits will be limited
to 200% of 1993 costs for all participants.
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefits obligation was 8.75% in 1997,
gradually declining to 2.75% in the year 2009 and in 1996 was 9.5%,
gradually declining to 3.5% in the year 2009. The discount rate used in
determining the accumulated postretirement benefits obligation was 7.25%
and 7.50% at December 31, 1997 and 1996, respectively.
F-35
<PAGE>
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefits obligation as of December 31, 1997
would be increased 7%. The effect of this change on the sum of the
service cost and interest cost would be an increase of 8%.
14) BROKER-DEALER NET CAPITAL
DLJ's wholly owned principal subsidiary, Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJSC") is subject to the SEC's Uniform Net
Capital Rule pursuant to rule 153-1 of the Securities Exchange Act of
1934. Under the alternative method permitted by this rule, the required
net capital, as defined, shall not be less than two percent of aggregate
debit balances arising from customer transactions, as defined, or four
percent of segregated funds, as defined, whichever is greater. The New
York Stock Exchange ("NYSE") may also require a member firm to reduce
its business if its net capital is less than four percent of aggregate
debit balances and may prohibit a member firm from expanding its
business and declaring cash dividends if its net capital is less than
five percent of aggregate debit balances. At December 31, 1997, DLJSC's
aggregate net capital of $762.2 million was 16% of aggregate debit
balances and in excess of the minimum requirement by approximately
$654.9 million.
Certain of DLJ's London-based broker-dealer subsidiaries are subject to
the requirements of the Securities and Futures Authority, a
self-regulatory organization established pursuant to the United Kingdom
Financial Services Act of 1998. Other U.S. and foreign broker-dealer
subsidiaries of DLJ are subject to the net capital requirements of their
respective regulatory agencies. At December 31, 1997 and 1996, DLJ and
its broker-dealer subsidiaries were in compliance with all applicable
regulatory capital adequacy requirements.
In accordance with regulations of the SEC and the Commodities Futures
Trading Commission, cash of $13.7 million and $13.2 million and
securities with a market value of $711.0 million and $770.0 million at
December 31, 1997 and 1996, respectively, have been segregated in
special reserve bank accounts for the benefit of DLJ's customers. These
amounts are included in other assets in the consolidated balance sheets.
15) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
Derivatives - DLJ
Substantially all of DLJ's activities related to derivatives are, by
their nature, trading activities which are primarily for the purpose of
customer accommodations. 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
consist of writing over-the-counter ("OTC") options to accommodate its
customer needs, trading in forward contracts in U.S. government and
agency issued or guaranteed securities and in futures contracts on
equity-based indices, interest rate instruments and currencies and
issuing structured products based on emerging market financial
instruments and indices. DLJ's involvement in swap contracts and
commodity derivative instruments is not significant. Although DLJ may
enter into certain derivative instruments to provide an economic hedge
against certain risks, all realized and unrealized gains and losses are
recorded currently in the consolidated statements of earnings.
Changes in unrealized gains or losses as well as realized gains and
losses at settlement on all of DLJ's derivative instruments (options,
forward and futures contracts) are included in the consolidated
statements of earnings in investment gains, net. Related offsetting
amounts are presented as broker-dealer related receivables/payables in
the consolidated balance sheets. Fair value of the options includes the
unamortized premiums which are deferred and are included in
broker-dealer payables in the consolidated balance sheets. Such premiums
are recognized over the life of the option contracts on a straight-line
basis or are recognized through the change in the fair value of the
option in investment gains, net. Cash flows from derivative instruments
are presented as operating activities in the consolidated statements of
cash flows.
F-36
<PAGE>
As part of customer accommodations, DLJ writes option contracts
specifically designed to meet customers' needs. As a writer of OTC
option contracts, DLJ receives a cash premium at the beginning of the
contract period and bears the risk of unfavorable changes in the value
of the financial instruments underlying the options. Options written do
not expose DLJ to credit risk since they obligate DLJ (not its
counterparty) to perform. With respect to the financial instruments
underlying these options, DLJ makes a determination that credit
exposures are appropriate for the particular counterparty with whom
business is conducted. DLJ generally covers the market risk associated
with the options business by purchasing or selling cash or other
derivative financial instruments on a proprietary basis. Such purchases
and sales may include debt and equity securities, futures and forward
contracts and options. DLJ reviews the creditworthiness of the
counterparties of such covering transactions. Future cash requirements
for options written are equal to the fair value of the options. Option
contracts are typically written for a duration of less than thirteen
months and are included in the consolidated balance sheets at fair
value.
The notional (contract) value of the written options were $5.4 billion
and $8.6 billion at December 31, 1997 and 1996, respectively. Such
options contracts are covered by the following financial instruments
which DLJ has purchased or sold on a proprietary basis and are reflected
in the table below at either the underlying contract (notional) amounts
for derivative instruments or at market value for cash instruments:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---------------- -----------------
(In Millions)
<S> <C> <C>
U.S. Government, mortgage-backed securities
and options thereon.................................................. $ 3,773.0 $ 4,679.0
Foreign sovereign debt securities...................................... 73.0 2,460.0
Futures contracts...................................................... 219.0 306.0
Equities and other..................................................... 1,340.0 1,167.0
---------------- -----------------
Total.................................................................. $ 5,405.0 $ 8,612.0
================ =================
</TABLE>
The trading revenues from option writing activity (net of related
interest expense) were approximately $84.9 million, $71.2 million and
$96.0 million for 1997, 1996 and 1995, respectively. The fair value of
options is measured by the unamortized premiums and the intrinsic value
determined from various pricing sources. The average fair value of the
options was approximately $223.3 million and $172.7 million for 1997 and
1996, respectively. The fair value of options was approximately $196.4
million and $241.9 million at December 31, 1997 and 1996, respectively,
and were included as liabilities in the accompanying consolidated
balance sheets.
As part of its trading activities, DLJ enters into forward purchases and
sales contracts for mortgage-backed securities and foreign currencies.
DLJ also enters into futures contracts on equity-based indices, foreign
currencies and other financial instruments as well as options on futures
contracts. Forward and futures contracts are treated as
off-balance-sheet items. Market risk for a forward and future is the
movement of price on the notional value of the contracts. Cash
requirements at inception equal the original margin on futures
contracts. Generally, no cash is required at inception for forward
contracts. The cash requirement at settlement is equal to the notional
value on the contract for a forward contract and the daily changes in
the market value for a futures contract. The performance of forward
contracts is dependent on the financial reliability of the counterparty
and exposes DLJ to credit risk. DLJ monitors credit exposure of forward
contracts by limiting transactions with specific counterparties,
reviewing credit limits and adhering to internally established credit
extension policies. Futures contracts and options on futures contracts
are exchange-traded financial instruments that generally do not
represent exposure to credit risk due to daily cash settlements of the
change in market value with the exchanges. The credit risk with the
futures exchange is limited to the net positive change in the market
value for a single day.
F-37
<PAGE>
The following is a summary of the values of these contracts at December
31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------------ ------------------------------------
Purchases Sales Purchases Sales
----------------- ----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C> <C>
Forward Contracts:
Notional (Contract) Value..... $ 18,366.0 $ 27,028.0 $ 14,070.0 $ 17,917.0
================= ================= ================ =================
Futures Contracts and
Options on Futures
Contracts:
(Market Value)................ $ 988.0 $ 2,767.0 $ 1,420.0 $ 2,774.0
================= ================= ================ =================
</TABLE>
The following is a summary of the values of these contracts included in
the consolidated financial statements at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---------------- -----------------
(In Millions)
<S> <C> <C>
Forward Contracts:
Average fair values included in liabilities during the period........ $ 2.0 $ 10.0
Unrealized gains included in total assets at end of period........... 56.0 44.0
Unrealized losses included in total liabilities at end of period..... 50.0 46.0
Futures Contracts:
Average fair values included in assets during the period............. $ 1.0 $ 2.0
Unrealized gains included in total assets at end of period........... - 6.0
Unrealized losses included in total liabilities at end of period..... 2.0 -
</TABLE>
Net trading gains (losses) on forward contracts were $(5.1) million,
$39.0 million and $149.0 million and net trading gains (losses) on
futures contracts were $(24.0) million, $8.0 million and $(58.0) million
for 1997, 1996 and 1995, respectively.
Average fair values during the period were computed using month-end
averages. The fair values of futures contracts are measured by reference
to quoted market prices. Fair values of forward contracts are estimated
on the basis of dealer quotes, pricing models or quoted prices for
financial instruments with similar characteristics. DLJ generally enters
into futures and forward transactions for periods of 90 days or less.
The remaining maturities for all options, forwards and futures are less
than thirteen months.
Derivatives - Insurance Group
The Insurance Group primarily uses derivatives for asset/liability risk
management and for hedging individual securities. Derivatives mainly are
utilized to reduce the Insurance Group's exposure to interest rate
fluctuations. Accounting for interest rate swap transactions is on an
accrual basis. Gains and losses related to interest rate swap
transactions are amortized as yield adjustments over the remaining life
of the underlying hedged security. Income and expense resulting from
interest rate swap activities are reflected in net investment income.
The notional amount of matched interest rate swaps outstanding at
December 31, 1997 and 1996, respectively, was $1,353.4 million and
$649.9 million. The average unexpired terms at December 31, 1997 ranged
from 1.5 to 3.8 years. At December 31, 1997, the cost of terminating
outstanding matched swaps in a loss position was $10.9 million and the
unrealized gain on outstanding matched swaps in a gain position was
$38.9 million. The Equitable has no intention of terminating these
F-38
<PAGE>
contracts prior to maturity. During 1996 and 1995, net gains of $.2
million and $1.4 million, respectively, were recorded in connection with
interest rate swap activity. Equitable Life has implemented an interest
rate cap program designed to hedge crediting rates on interest-sensitive
individual annuities contracts. The outstanding notional amounts at
December 31, 1997 of contracts purchased and sold were $7,250.0 million
and $875.0 million, respectively. The net premium paid by Equitable Life
on these contracts was $48.5 million and is being amortized ratably over
the contract periods ranging from 1 to 5 years. Income and expense
resulting from this program are reflected as an adjustment to interest
credited to policyholders' account balances.
Financial Instruments with Off-Balance-Sheet Risk
In the normal course of business, DLJ's customer, trading and
correspondent clearance activities involve the execution, settlement and
financing of various securities and financial instrument transactions.
The execution of these transactions includes the purchase and sale
(including "short sales") of securities, the writing of options, and the
purchase and sale of financial futures contracts and forward purchase
and sales contracts for mortgage-backed securities and foreign
currencies. These activities may expose DLJ to off-balance-sheet risk in
the event the customer or counterparty to the transaction is unable to
fulfill its contractual obligations and margin requirements are not
sufficient to fully cover losses. In these situations, DLJ may be
required to purchase or sell financial instruments at prevailing market
prices which may not fully cover the obligations of its customers or
counterparties. DLJ limits this risk by requiring customers and
counterparties to maintain margin collateral that is in compliance with
regulatory and internal guidelines. Additionally, with respect to DLJ's
correspondent clearance activities, introducing correspondent brokers
are required to guarantee the performance of their customers in meeting
contractual obligations.
DLJ's financing and securities settlement activities involve DLJ using
securities as collateral in support of various secured financing
sources. In the event the counterparty does not meet its contracted
obligation to return securities used as collateral, DLJ may be exposed
to the risk of reacquiring the securities at the prevailing market
prices in order to satisfy its obligations. DLJ controls this risk by
monitoring the market value of securities pledged on a daily basis and
by requiring adjustments of collateral levels in the event of excess
market exposure. As of December 31, 1997, DLJ has pledged securities
with a market value of approximately $2,200.0 million as collateral for
securities borrowed with a market value of approximately $2,000.0
million. In accordance with industry practice, the amounts of those
securities borrowed and pledged are not reflected in the consolidated
financial statements.
DLJ's activities include entering into forward contracts which provide
for the future delivery or receipt of securities at a specified price or
yield. Risks arise from the potential inability of counterparties to
perform under the terms of the contracts and from changes in the value
of securities and interest rates. DLJ controls such risks by monitoring
the market value of the securities contracted for on a daily basis and
reviewing the creditworthiness of the counterparties. The settlement of
these transactions is not expected to have a material adverse effect on
The Equitable's consolidated financial statements.
Concentrations of Credit Risk
As a securities broker and dealer, DLJ is engaged in various securities
trading and brokerage activities servicing a diverse group of domestic
and foreign corporations, governments, and institutional and individual
investors. A substantial portion of DLJ's transactions are executed with
and on behalf of institutional investors including other brokers and
dealers, mortgage brokers, commercial banks, U.S. governmental agencies,
mutual funds and other financial institutions and are generally
collateralized. DLJ's exposure to credit risk associated with the
nonperformance of these counterparties in fulfilling their contractual
obligations pursuant to securities transactions can be directly impacted
by volatile securities markets, credit markets and regulatory changes.
Credit risk is the amount of accounting loss DLJ would incur if a
counterparty failed to perform its obligations under contractual terms
and the collateral held, if any, was deemed insufficient. All
counterparties are reviewed on a regular basis to establish appropriate
exposure limits for a variety of transactions. In certain cases,
specific transactions are analyzed to determine the amount of potential
exposure that could arise, and the counterparty's credit is reviewed to
F-39
<PAGE>
determine whether it supports such exposure. In addition to the
counterparty's credit status, DLJ analyzes market movements that could
affect exposure levels. DLJ considers four main factors that may affect
trades in determining trading limits: the settlement method; the time it
will take for a trade to settle (i.e., the maturity of the trade); the
volatility that could affect the value of the securities involved in the
trade; and the size of the trade. In addition to determining trading
limits, DLJ actively manages the credit exposure relating to its trading
activities by entering into master netting agreements when feasible;
monitoring the creditworthiness of counterparties and the related
trading limits on an ongoing basis; requesting additional collateral
when deemed necessary; diversifying and limiting exposure to individual
counterparties and geographic locations; and limiting the duration of
exposure. In certain cases, DLJ may also close out transactions or
assign them to other counterparties when deemed necessary or appropriate
to mitigate credit risks.
DLJ's customer securities activities are transacted on either a cash or
margin basis. In margin transactions, DLJ extends credit to the
customer, subject to various regulatory and internal margin
requirements, collateralized by cash and securities in the customer's
account. DLJ seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in
compliance with various regulatory and internal guidelines. DLJ monitors
required margin levels daily and, pursuant to such guidelines, requires
the customers to deposit additional collateral, or reduce positions,
when necessary.
Fair Value of Financial Instruments
The Equitable defines fair value as the quoted market prices for those
instruments that are actively traded in financial markets. In cases
where quoted market prices are not available, fair values are estimated
using present value or other valuation techniques. The fair value
estimates are made at a specific point in time, based on available
market information and judgments about the financial instrument,
including estimates of the timing and amount of expected future cash
flows and the credit standing of counterparties. Such estimates do not
reflect any premium or discount that could result from offering for sale
at one time The Equitable's entire holdings of a particular financial
instrument, nor do they consider the tax impact of the realization of
unrealized gains or losses. In many cases, the fair value estimates
cannot be substantiated by comparison to independent markets, nor can
the disclosed value be realized in immediate settlement of the
instrument.
Certain financial instruments are excluded, particularly insurance
liabilities other than financial guarantees and investment contracts.
Fair market value of off-balance-sheet financial instruments of the
Insurance Group was not material at December 31, 1997 and 1996.
Fair values for mortgage loans on real estate are estimated by
discounting future contractual cash flows using interest rates at which
loans with similar characteristics and credit quality would be made.
Fair values for foreclosed mortgage loans and problem mortgage loans are
limited to the estimated fair value of the underlying collateral if
lower.
Fair values of policy loans are estimated by discounting the face value
of the loans from the time of the next interest rate review to the
present, at a rate equal to the excess of the current estimated market
rates over the current interest rate charged on the loan.
The estimated fair values for The Equitable's association plan
contracts, supplementary contracts not involving life contingencies
("SCNILC") and annuities certain, which are included in policyholders'
account balances, and guaranteed interest contracts are estimated using
projected cash flows discounted at rates reflecting expected current
offering rates.
The estimated fair values for variable deferred annuities and single
premium deferred annuities ("SPDA"), which are included in
policyholders' account balances, are estimated by discounting the
account value back from the time of the next crediting rate review to
the present, at a rate equal to the excess of current estimated market
rates offered on new policies over the current crediting rates.
F-40
<PAGE>
Fair values for long-term debt is determined using published market
values, where available, or contractual cash flows discounted at market
interest rates. The estimated fair values for non-recourse mortgage debt
are determined by discounting contractual cash flows at a rate which
takes into account the level of current market interest rates and
collateral risk. The estimated fair values for recourse mortgage debt
are determined by discounting contractual cash flows at a rate based
upon current interest rates of other companies with credit ratings
similar to The Equitable. The Equitable's carrying value of short-term
borrowings approximates their estimated fair value.
The following table discloses carrying value and estimated fair value
for financial instruments not otherwise disclosed in Notes 3, 6 and 7:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1997 1996
--------------------------------- ---------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
--------------- ---------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Consolidated Financial Instruments:
Mortgage loans on real estate.......... $ 2,611.4 $ 2,822.8 $ 3,133.0 $ 3,394.6
Other limited partnership interests.... 509.4 509.4 467.0 467.0
Policy loans........................... 2,422.9 2,493.9 2,196.1 2,221.6
Policyholders' account balances -
investment contracts................. 12,611.0 12,714.0 12,908.7 12,992.2
Long-term debt......................... 4,344.2 4,380.4 3,920.7 3,948.9
Closed Block Financial Instruments:
Mortgage loans on real estate.......... 1,341.6 1,420.7 1,380.7 1,425.6
Other equity investments............... 86.3 86.3 105.0 105.0
Policy loans........................... 1,700.2 1,784.2 1,765.9 1,798.0
SCNILC liability....................... 27.6 30.3 30.6 34.9
Discontinued Operations Financial
Instruments:
Mortgage loans on real estate.......... 655.5 779.9 1,111.1 1,220.3
Fixed maturities....................... 38.7 38.7 42.5 42.5
Other equity investments............... 209.3 209.3 300.5 300.5
Guaranteed interest contracts.......... 37.0 34.0 290.7 300.5
Long-term debt......................... 102.0 102.1 102.1 102.2
</TABLE>
16) COMMITMENTS AND CONTINGENT LIABILITIES
The Equitable has provided, from time to time, certain guarantees or
commitments to affiliates, investors and others. These arrangements
include commitments by The Equitable, under certain conditions: to make
capital contributions of up to $202.6 million to affiliated real estate
joint ventures; and to provide equity financing to certain limited
partnerships of $362.1 million at December 31, 1997, under existing loan
or loan commitment agreements. DLJ has outstanding commitments, expiring
on December 31, 1998, to provide financings to third parties in the
total amount of $200.0 million which would be secured by mortgage loans
on real estate properties. At December 31, 1997, there were no amounts
borrowed under this facility. In addition, DLJ enters into commitments
to extend credit in connection with the origination and syndication of
senior debt of non-investment grade borrowers. At December 31, 1997,
unfunded senior loan commitments outstanding amounted to $539.9 million.
F-41
<PAGE>
DLJ has commitments to invest on a side by side basis with merchant
banking partnerships in the amount of $885.6 million at December 31,
1997. Management believes The Equitable will not incur any material
losses as a result of these commitments.
Equitable Life is the obligor under certain structured settlement
agreements which it had entered into with unaffiliated insurance
companies and beneficiaries. To satisfy its obligations under these
agreements, Equitable Life owns single premium annuities issued by
previously wholly owned life insurance subsidiaries. Equitable Life has
directed payment under these annuities to be made directly to the
beneficiaries under the structured settlement agreements. A contingent
liability exists with respect to these agreements should the previously
wholly owned subsidiaries be unable to meet their obligations.
Management believes the satisfaction of those obligations by Equitable
Life is remote.
In the normal course of business, DLJ enters into letters of credit for
the purpose of facilitating certain financing transactions and for
securing various margin requirements. At December 31, 1997, $244.0
million of such letters of credit were outstanding. Additionally, the
Insurance Group had $47.4 million of letters of credit outstanding at
December 31, 1997.
17) LITIGATION
Equitable Life recently agreed to settle, subject to court approval,
previously disclosed cases brought by persons insured under Lifetime
Guaranteed Renewable Major Medical Insurance Policies issued by
Equitable Life (the "Policies") in New York (Golomb et al. v. The
Equitable Life Assurance Society of the United States), Pennsylvania
(Malvin et al. v. The Equitable Life Assurance Society of the United
States), Texas (Bowler et al. v. The Equitable Life Assurance Society of
the United States), Florida (Bachman v. The Equitable Life Assurance
Society of the United States) and California (Fletcher v. The Equitable
Life Assurance Society of the United States). Plaintiffs in these cases
claimed that Equitable Life's method for determining premium increases
breached the terms of certain forms of the Policies and was
misrepresented. Plaintiffs in Bowler and Fletcher also claimed that
Equitable Life misrepresented to policyholders in Texas and California,
respectively, that premium increases had been approved by insurance
departments in those states and determined annual rate increases in a
manner that discriminated against policyholders in those states in
violation of the terms of the Policies, representations to policyholders
and/or state law. The New York trial court dismissed the Golomb action
with prejudice and plaintiffs appealed. In Bowler and Fletcher,
Equitable Life denied the material allegations of the complaints and
filed motions for summary judgment which have been fully briefed. The
Malvin action was stayed indefinitely pending the outcome of proceedings
in Golomb and in Fletcher the magistrate concluded that the case should
be remanded to California state court and Equitable Life appealed that
determination to the district judge. On December 23, 1997, Equitable
Life entered into a settlement agreement, subject to court approval,
which would result in the dismissal with prejudice of each of the five
pending actions and the resolution of all similar claims on a nationwide
basis.
The settlement agreement provides for the creation of a nationwide class
consisting of all persons holding, and paying premiums on, the Policies
at any time since January 1, 1988. An amended complaint will be filed in
the federal district court in Tampa, Florida (where the Florida action
is pending), that would assert claims of the kind previously made in the
cases described above on a nationwide basis, on behalf of policyholders
in the nationwide class, which consists of approximately 127,000 former
and current policyholders. If the settlement is approved, Equitable Life
would pay $14,166,000 in exchange for release of all claims for past
damages on claims of the type described in the five pending actions and
the amended complaint. Costs of administering the settlement and any
attorneys' fees awarded by the court to plaintiffs' counsel would be
deducted from this fund before distribution of the balance to the class.
In addition to this payment, Equitable Life will provide future relief
to current holders of certain forms of the Policies in the form of an
agreement to be embodied in the court's judgment, restricting the
premium increases Equitable Life can seek on these Policies in the
future. The parties estimate the present value of these restrictions at
$23,333,000, before deduction of any attorneys' fees that may be awarded
by the court. The estimate is based on assumptions about future events
that cannot be predicted with certainty and accordingly the actual value
of the future relief may differ. The parties to the settlement shortly
will be asking the court to approve preliminarily the settlement and
settlement class and to permit distribution of notice of the settlement
to policyholders, establish procedures for objections, an opportunity to
F-42
<PAGE>
opt out of the settlements as it affects past damages, and a court
hearing on whether the settlement should be finally approved. Equitable
Life cannot predict whether the settlement will be approved or, if it is
not approved, the outcome of the pending litigations. As noted,
proceedings in Malvin were stayed indefinitely; proceedings in the other
actions have been stayed or deferred to accommodate the settlement
approval process.
A number of lawsuits have been filed against life and health insurers in
the jurisdictions in which Equitable Life and its subsidiaries do
business involving insurers' sales practices, alleged agent misconduct,
alleged failure to properly supervise agents, and other matters. Some of
the lawsuits have resulted in the award of substantial judgments against
other insurers, including material amounts of punitive damages, or in
substantial settlements. In some states, juries have substantial
discretion in awarding punitive damages. Equitable Life, Equitable
Variable Life Insurance Company ("EVLICO," which was merged into
Equitable Life effective January 1, 1997, but whose existence continues
for certain limited purposes, including the defense of litigation) and
The Equitable of Colorado, Inc. ("EOC"), like other life and health
insurers, from time to time are involved in such litigation. Among
litigations pending against Equitable Life, EVLICO and EOC of the type
referred to in this paragraph are the litigations described in the
following seven paragraphs.
An action was instituted on April 6, 1995 against Equitable Life and its
wholly owned subsidiary, EOC, in New York state court, entitled Sidney
C. Cole, et al. v. The Equitable Life Assurance Society of the United
States and The Equitable of Colorado, Inc. The action is brought by the
holders of a joint survivorship whole life policy issued by EOC. The
action purports to be on behalf of a class consisting of all persons who
from January 1, 1984 purchased life insurance policies sold by Equitable
Life and EOC based upon allegedly uniform sales presentations and policy
illustrations. The complaint puts in issue various alleged sales
practices that plaintiffs assert, among other things, misrepresented the
stated number of years that the annual premium would need to be paid.
Plaintiffs seek damages in an unspecified amount, imposition of a
constructive trust, and seek to enjoin Equitable Life and EOC from
engaging in the challenged sales practices. In June 1996, the Court
issued a decision and order dismissing with prejudice plaintiffs' causes
of action for fraud, constructive fraud, breach of fiduciary duty,
negligence, and unjust enrichment, and dismissing without prejudice
plaintiffs' cause of action under the New York State consumer protection
statute. The only remaining causes of action are for breach of contract
and negligent misrepresentation. In April 1997, plaintiffs noticed an
appeal from the court's June 1996 order. Subsequently, Equitable Life
and EOC noticed a cross-appeal from so much of the June 1996 order that
denied their motion to dismiss. Briefing on the appeals is scheduled to
begin on February 23, 1998. In June 1997, plaintiffs filed their
memorandum of law and affidavits in support of their motion for class
certification. That memorandum states that plaintiffs seek to certify a
class solely on their breach of contract claims, and not on their
negligent misrepresentation claim. Plaintiffs' class certification
motion has been fully briefed by the parties and is sub judice. In
August 1997, Equitable Life and EOC moved for summary judgment
dismissing plaintiffs' remaining claims of breach of contract and
negligent misrepresentation. Defendants' summary judgment motion has
been fully briefed by the parties. On January 5, 1998, plaintiffs filed
a note of issue (placing the case on the trial calendar).
On May 21, 1996, an action entitled Elton F. Duncan, III v. The
Equitable Life Assurance Society of the United States was commenced
against Equitable Life in the Civil District Court for the Parish of
Orleans, State of Louisiana. The action originally was brought by an
individual who purchased a whole life policy from Equitable Life in
1989. In September 1997, with leave of the court, plaintiff filed a
second amended petition naming six additional policyholder plaintiffs
and three new sales agent defendants. The sole named individual
defendant in the original petition is also named as a defendant in the
second amended petition. Plaintiffs purport to represent a class
consisting of all persons who purchased whole life or universal life
insurance policies from Equitable Life from January 1, 1981 through July
22, 1992. Plaintiffs allege improper sales practices based on
allegations of misrepresentations concerning one or more of the
following: the number of years that premiums would need to be paid; a
policy's suitability as an investment vehicle; and the extent to which a
policy was a proper replacement policy. Plaintiffs seek damages,
including punitive damages, in an unspecified amount. In October 1997,
Equitable Life filed (i) exceptions to the second amended petition,
asserting deficiencies in pleading of venue and vagueness; and (ii) a
motion to strike certain allegations. On January 23, 1998, the court
heard argument on Equitable Life's exceptions and motion to strike.
Those motions are sub judice. Motion practice regarding discovery
continues.
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<PAGE>
On July 26, 1996, an action entitled Michael Bradley v. Equitable
Variable Life Insurance Company was commenced in New York state court,
Kings County. The action is brought by the holder of a variable life
insurance policy issued by EVLICO. The plaintiff purports to represent a
class consisting of all persons or entities who purchased one or more
life insurance policies issued by EVLICO from January 1, 1980. The
complaint puts at issue various alleged sales practices and alleges
misrepresentations concerning the extent to which the policy was a
proper replacement policy and the number of years that the annual
premium would need to be paid. Plaintiff seeks damages, including
punitive damages, in an unspecified amount and also seeks injunctive
relief prohibiting EVLICO from canceling policies for failure to make
premium payments beyond the alleged stated number of years that the
annual premium would need to be paid. EVLICO answered the complaint,
denying the material allegations. In September 1996, Equitable Life,
EVLICO and EOC made a motion to have this proceeding moved from Kings
County Supreme Court to New York County for joint trial or consolidation
with the Cole action. The motion was denied by the Court in Cole in
January 1997. Plaintiff then moved for certification of a nationwide
class consisting of all persons or entities who, since January 1, 1980,
were sold one or more life insurance products based on
misrepresentations as to the number of years that the annual premium
would need to be paid, and/or who were allegedly induced to purchase
additional policies from EVLICO using the cash value accumulated in
existing policies. Defendants have opposed this motion. Discovery and
briefing regarding plaintiff's motion for class certification are
ongoing.
On December 12, 1996, an action entitled Robert E. Dillon v. The
Equitable Life Assurance Society of the United States and The Equitable
of Colorado, was commenced in the United States District Court for the
Southern District of Florida. The action is brought by an individual who
purchased a joint whole life policy from EOC in 1988. The complaint puts
in issue various alleged sales practices and alleges misrepresentations
concerning the alleged impropriety of replacement policies issued by
Equitable Life and EOC and alleged misrepresentations regarding the
number of years premiums would have to be paid on the defendants'
policies. Plaintiff alleges claims for breach of contract, fraud,
negligent misrepresentation, money had and received, unjust enrichment
and imposition of a constructive trust. Plaintiff purports to represent
two classes of persons. The first is a "contract class," consisting of
all persons who purchased whole or universal life insurance policies
from Equitable Life and EOC and from whom Equitable Life and EOC have
sought additional payments beyond the number of years allegedly promised
by Equitable Life and EOC. The second is a "fraud class," consisting of
all persons with an interest in policies issued by Equitable Life and
EOC at any time since October 1, 1986. Plaintiff seeks damages in an
unspecified amount, and also seeks injunctive relief attaching Equitable
Life's and EOC's profits from their alleged sales practices. In May
1997, plaintiff served a motion for class certification. In July 1997,
the parties submitted to the Court a joint scheduling report, joint
scheduling order and a confidentiality stipulation and order. The Court
signed the latter stipulation, and the others remain sub judice. Further
briefing on plaintiff's class certification motion will await entry of a
scheduling order and further class certification discovery, which has
commenced and is on-going. In January 1998, the judge assigned to the
case recused himself, and the case was reassigned. Defendants are to
serve their answer in February 1998.
On January 3, 1996, an amended complaint was filed in an action entitled
Frank Franze Jr. and George Busher, individually and on behalf of all
others similarly situated v. The Equitable Life Assurance Society of the
United States, and Equitable Variable Life Insurance Company, No.
94-2036 in the United States District Court for the Southern District of
Florida. The action was brought by two individuals who purchased
variable life insurance policies. The plaintiffs purport to represent a
nationwide class consisting of all persons who purchased variable life
insurance policies from Equitable Life and EVLICO since September 30,
1991. The amended complaint alleges that Equitable Life's and EVLICO's
agents were trained not to disclose fully that the product being sold
was life insurance. Plaintiffs allege violations of the Federal
securities laws and seek rescission of the contracts or compensatory
damages and attorneys' fees and expenses. Equitable Life and EVLICO have
answered the amended complaint, denying the material allegations and
asserting certain affirmative defenses. Motion practice regarding
discovery continues.
On January 9, 1997, an action entitled Rosemarie Chaviano, individually
and on behalf of all others similarly situated v. The Equitable Life
Assurance Society of the United States, and Equitable Variable Life
Insurance Company, was filed in Massachusetts state court making claims
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similar to those in the Franze action and alleging violations of the
Massachusetts securities laws. The plaintiff purports to represent all
persons in Massachusetts who purchased variable life insurance contracts
from Equitable Life and EVLICO from January 9, 1993 to the present. The
Massachusetts action seeks rescission of the contracts or compensatory
damages, attorneys' fees, expenses and injunctive relief. Plaintiff
filed an amended complaint in April 1997. In July 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. This motion is scheduled for hearing on February 18,
1998.
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, was filed in Texas state court. The
action was brought by holders of a whole life policy and the beneficiary
under that policy. 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 complaint
puts in issue the allegations that uniform sales presentations,
illustrations, and materials that Equitable Life agents used
misrepresented the stated number of years that premiums would need to be
paid and misrepresented the extent to which the policies at issue were
proper replacement policies. Plaintiffs seek compensatory damages,
attorneys' fees and expenses. In October 1997, Equitable Life served a
general denial of the allegations against it. The same day, the Holding
Company entered a special appearance contesting the court's jurisdiction
over it. In November 1997, Equitable Life filed a plea in abatement,
which, under Texas law, stayed further proceedings in the case because
plaintiffs had not served a demand letter. Plaintiffs served a demand
letter upon Equitable Life and the Holding Company, the response to
which is due 60 days thereafter. Although the outcome of 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 Cole, Duncan, Bradley, Dillon, Franze, Chaviano and
Luther litigations 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 any such
litigation will have a material adverse effect on The Equitable's
results of operations in any particular period.
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
[former] Southern Region of The Equitable from May 16, 1987 to the
present." The 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.
The U.S. Department of Labor ("DOL") is conducting an investigation of
Equitable Life's management of the Prime Property Fund ("PPF"). PPF is
an open-end, commingled real estate separate account of Equitable Life
for pension clients. Equitable Life serves as investment manager in PPF
and retains EREIM as advisor. 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. In early 1995, the DOL commenced a national investigation
of commingled real estate funds with pension investors, including PPF.
The investigation appears to be focused principally on appraisal and
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<PAGE>
valuation procedures in respect of fund properties. The most recent
request from the DOL seems to reflect, at least in part, an interest in
the relationship between the valuations for those properties reflected
in appraisals prepared for local property tax proceedings and the
valuations used by PPF for other purposes. At no time has the DOL made
any specific allegation that Equitable Life or EREIM has acted
improperly and Equitable Life and EREIM believe that any such allegation
would be without foundation. While the outcome of this investigation
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 this investigation will have a material adverse
effect on The Equitable's results of operations in any particular
period.
On July 25, 1995, a Consolidated and Supplemental Class Action Complaint
("Complaint") was filed against Alliance North American Government
Income Trust, Inc. (the "Fund"), Alliance and certain other defendants
affiliated with Alliance, including the Holding Company, alleging
violations of Federal securities laws, fraud and breach of fiduciary
duty in connection with the Fund's investments in Mexican and Argentine
securities. The Complaint, which sought certification of a plaintiff
class of persons who purchased or owned Class A, B or C shares of the
Fund from March 27, 1992 through December 23, 1994, sought an
unspecified amount of damages, costs, attorneys' fees and punitive
damages. The principal allegations are that the Fund purchased debt
securities issued by the Mexican and Argentine governments in amounts
that were not permitted by the Fund's investment objective, and that
there was no shareholder vote to change the investment objective to
permit purchases in such amounts. The Complaint further alleged that the
decline in the value of the Mexican and Argentine securities held by the
Fund caused the Fund's net asset value to decline to the detriment of
the Fund's shareholders. On September 26, 1996, the United States
District Court for the Southern District of New York granted the
defendants' motion to dismiss all counts of the Complaint ("First
Decision"). On October 11, 1996, plaintiffs filed a motion for
reconsideration of the First Decision. On November 25, 1996, the court
denied plaintiffs' motion for reconsideration of the First Decision. On
October 29, 1997, the United States Court of Appeals for the Second
Circuit issued an order granting defendants' motion to strike and
dismissing plaintiffs' appeal of the First Decision. On October 29,
1996, plaintiffs filed a motion for leave to file an amended complaint.
The principal allegations of the proposed amended complaint are that (i)
the Fund failed to hedge against the risks of investing in foreign
securities despite representations that it would do so, (ii) the Fund
did not properly disclose that it planned to invest in mortgage-backed
derivative securities and (iii) two advertisements used by the Fund
misrepresented the risks of investing in the Fund. On July 15, 1997, the
District Court denied plaintiffs' motion for leave to file an amended
complaint and ordered that the case be dismissed ("Second Decision").
The plaintiffs have appealed the Second Decision to the United States
Court of Appeals for the Second Circuit. While the ultimate outcome of
this matter cannot be determined at this time, management of Alliance
does not expect that it will have a material adverse effect on
Alliance's results of operations or financial condition.
On January 26, 1996, a purported purchaser of certain notes and warrants
to purchase shares of common stock of Rickel Home Centers, Inc.
("Rickel") filed a class action complaint against DLJSC and certain
other defendants for unspecified compensatory and punitive damages in
the U. S. District Court for the Southern District of New York. The suit
was brought on behalf of the purchasers of 126,457 units consisting of
$126,457,000 aggregate principal amount of 13 1/2% senior notes due 2001
and 126,457 warrants to purchase shares of common stock of Rickel issued
by Rickel in October 1994. The complaint alleges violations of federal
securities laws and common law fraud against DLJSC, as the underwriter
of the units and as an owner of 7.3% of the common stock of Rickel, Eos
Partners, L.P., and General Electric Capital Corporation, each as owners
of 44.2% of the common stock of Rickel, and members of the board of
directors of Rickel, including a DLJSC managing director. The complaint
seeks to hold DLJSC liable for alleged misstatements and omissions
contained in the prospectus and registration statement filed in
connection with the offering of the units, alleging that the defendants
knew of financial losses and a decline in value of Rickel in the months
prior to the offering and did not disclose such information. The
complaint also alleges that Rickel failed to pay its semi-annual
interest payment due on the units on December 15, 1995, and that Rickel
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<PAGE>
filed a voluntary petition for reorganization pursuant to Chapter 11 of
the Bankruptcy Code on January 10, 1996. DLJSC intends to defend itself
vigorously against all of the allegations contained in the complaint.
Although there can be no assurance, DLJ does not believe that the
outcome of this litigation will have a material adverse effect on its
financial condition. Due to the early stage of this litigation, based on
the information currently available to it, DLJ's management cannot make
an estimate of loss, if any, or predict whether or not such litigation
will have a material adverse effect on DLJ's results of operations in
any particular period.
In October 1995, DLJSC was named as a defendant in a purported class
action filed in a Texas State Court on behalf of the holders of $550.0
million principal amount of subordinated redeemable discount debentures
of National Gypsum Corporation ("NGC") canceled in connection with a
Chapter 11 plan of reorganization for NGC consummated in July 1993. The
named plaintiff in the State Court action also filed an adversary
proceeding in the U.S. Bankruptcy Court for the Northern District of
Texas seeking a declaratory judgment that the confirmed NGC plan of
reorganization does not bar the class action claims. Subsequent to the
consummation of NGC's plan of reorganization, NGC's shares traded for
values substantially in excess of, and in 1995 NGC was acquired for a
value substantially in excess of, the values upon which NGC's plan of
reorganization was based. The two actions arise out of DLJSC's
activities as financial advisor to NGC in the course of NGC's Chapter 11
reorganization proceedings. The class action complaint alleges that the
plan of reorganization submitted by NGC was based upon projections by
NGC and DLJSC which intentionally understated forecasts, and provided
misleading and incorrect information in order to hide NGC's true value
and that defendants breached their fiduciary duties by, among other
things, providing false, misleading or incomplete information to
deliberately understate the value of NGC. The class action complaint
seeks compensatory and punitive damages purportedly sustained by the
class. On October 10, 1997, DLJSC and others were named as defendants in
a new adversary proceeding in the Bankruptcy Court brought by the NGC
Settlement Trust, an entity created by the NGC plan of reorganization to
deal with asbestos-related claims. The Trust's allegations are
substantially similar to the claims in the State Court action. In court
papers dated October 16, 1997, the State Court plaintiff indicated that
he would intervene in the Trust's adversary proceeding. On January 21,
1998, the Bankruptcy Court ruled that the State Court plaintiff's claims
were not barred by the NGC plan of reorganization insofar as they
alleged nondisclosure of certain cost reductions announced by NGC in
October 1993. The Texas State Court action, which had been removed to
the Bankruptcy Court, has been remanded back to the state court, which
remand is being opposed by DLJSC. DLJSC intends to defend itself
vigorously against all of the allegations contained in the complaints.
Although there can be no assurance, DLJ does not believe that the
ultimate outcome of this litigation will have a material adverse effect
on its financial condition. Due to the early stage of such litigation,
based upon the information currently available to it, DLJ's management
cannot make an estimate of loss, if any, or predict whether or not such
litigation will have a material adverse effect on DLJ's results of
operations in any particular period.
In November and December 1995, DLJSC, along with various other parties,
was named as a defendant in a number of purported class actions filed in
the U.S. District Court for the Eastern District of Louisiana. The
complaints allege violations of the federal securities laws arising out
of a public offering in 1994 of $435.0 million of first mortgage notes
of Harrah's Jazz Company and Harrah's Jazz Finance Corp. The complaints
seek to hold DLJSC liable for various alleged misstatements and
omissions contained in the prospectus dated November 9, 1994. On
February 26, 1997, the parties agreed to a settlement of these actions,
subject to the District Court's approval, which was granted on July 31,
1997. The settlement is also subject to approval by the U.S. 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, as provided in 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.
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In addition to 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.
18) LEASES
The Equitable has entered into operating leases for office space and
certain other assets, principally data processing equipment and office
furniture and equipment. Future minimum payments under noncancelable
leases for 1998 and the succeeding four years are $166.3 million, $159.0
million, $137.5 million, $121.7 million, $117.3 million and $1,117.1
million thereafter. Minimum future sub-lease rental income on these
noncancelable leases for 1998 and the succeeding four years are $7.4
million, $6.0 million, $3.9 million, $2.5 million, $.8 million and $2.9
million thereafter.
At December 31, 1997, the minimum future rental income on noncancelable
operating leases for wholly owned investments in real estate for 1998
and the succeeding four years are $247.0 million, $238.1 million, $218.7
million, $197.9 million, $169.1 million and $813.0 million thereafter.
19) OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Compensation costs................................. $ 2,195.9 $ 1,886.6 $ 1,612.0
Commissions........................................ 843.9 692.0 601.6
Short-term debt interest expense................... 1,080.7 667.9 650.7
Long-term debt interest expense.................... 287.1 283.6 226.7
Amortization of policy acquisition costs........... 288.1 406.0 318.6
Capitalization of policy acquisition costs......... (508.0) (391.9) (391.0)
Rent expense, net of sub-lease income.............. 189.8 185.3 167.1
Floor, brokerage and exchange fees................. 231.4 201.3 168.1
Cursitor intangible assets writedown............... 120.9 - -
Other.............................................. 1,587.7 1,297.2 1,023.5
----------------- ---------------- -----------------
Total.............................................. $ 6,317.5 $ 5,228.0 $ 4,377.3
================= ================ =================
</TABLE>
During 1997, 1996 and 1995, The Equitable restructured certain
operations in connection with cost reduction programs and recorded
pre-tax provisions of $42.4 million, $24.4 million and $39.2 million,
respectively. The amounts paid during 1997, associated with cost
reduction programs, totaled $22.8 million. At December 31, 1997, the
liabilities associated with cost reduction programs amounted to $62.0
million. The 1997 cost reduction program includes costs related to
employee termination and exit costs. The 1996 cost reduction program
included restructuring costs related to the consolidation of insurance
operations' service centers. The 1995 cost reduction program included
relocation expenses, including the accelerated amortization of building
improvements associated with the relocation of the home office.
Amortization of DAC in 1996 included a $145.0 million write off of DAC
related to DI contracts.
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<PAGE>
20) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION
Equitable Life is restricted as to the amounts it may pay as dividends
to the Holding Company. Under the New York Insurance Law, the
Superintendent has broad discretion to determine whether the financial
condition of a stock life insurance company would support the payment of
dividends to its shareholders. For 1997, 1996 and 1995, statutory net
loss totaled $351.7 million, $351.1 million and $352.4 million,
respectively. No amounts are expected to be available for dividends from
Equitable Life to the Holding Company in 1998.
At December 31, 1997, the Insurance Group, in accordance with various
government and state regulations, had $19.7 million of securities
deposited with such government or state agencies.
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<PAGE>
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ in certain
instances from GAAP. The following reconciles the Insurance Group's
statutory change in surplus and capital stock and statutory surplus and
capital stock determined in accordance with accounting practices
prescribed by the New York Insurance Department with net earnings and
equity on a GAAP basis.
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Net change in statutory surplus and
capital stock.................................... $ 203.6 $ 56.0 $ 78.1
Change in asset valuation reserves................. 147.1 (48.4) 365.7
----------------- ---------------- -----------------
Net change in statutory surplus, capital stock
and asset valuation reserves..................... 350.7 7.6 443.8
Adjustments:
Future policy benefits and policyholders'
account balances............................... (31.1) (298.5) (66.0)
DAC.............................................. 220.7 (13.3) 73.2
Deferred Federal income taxes.................... 103.1 108.0 (158.1)
Valuation of investments......................... 46.8 289.8 189.1
Valuation of investment subsidiary............... (555.8) (117.7) (188.6)
Limited risk reinsurance......................... 82.3 92.5 416.9
Issuance of surplus notes........................ - - (538.9)
Postretirement benefits.......................... (3.1) 28.9 (26.7)
Other, net....................................... 30.3 12.4 115.1
GAAP adjustments of Closed Block................. 3.6 (9.8) 15.7
GAAP adjustments of discontinued operations...... 189.7 (89.6) 37.3
----------------- ---------------- -----------------
Net Earnings of the Insurance Group................ $ 437.2 $ 10.3 $ 312.8
================= ================ =================
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Statutory surplus and capital stock................ $ 2,462.5 $ 2,258.9 $ 2,202.9
Asset valuation reserves........................... 1,444.6 1,297.5 1,345.9
----------------- ---------------- -----------------
Statutory surplus, capital stock and asset
valuation reserves............................... 3,907.1 3,556.4 3,548.8
Adjustments:
Future policy benefits and policyholders'
account balances............................... (1,336.1) (1,305.0) (1,006.5)
DAC.............................................. 3,236.6 3,104.9 3,075.8
Deferred Federal income taxes.................... (370.8) (306.1) (452.0)
Valuation of investments......................... 783.5 286.8 417.7
Valuation of investment subsidiary............... (1,338.6) (782.8) (665.1)
Limited risk reinsurance......................... (254.2) (336.5) (429.0)
Issuance of surplus notes........................ (539.0) (539.0) (538.9)
Postretirement benefits.......................... (317.5) (314.4) (343.3)
Other, net....................................... 203.7 126.3 4.4
GAAP adjustments of Closed Block................. 814.3 783.7 830.8
GAAP adjustments of discontinued operations...... 71.5 (190.3) (184.6)
----------------- ---------------- -----------------
Equity of the Insurance Group...................... $ 4,860.5 $ 4,084.0 $ 4,258.1
================= ================ =================
</TABLE>
F-50
<PAGE>
21) BUSINESS SEGMENT INFORMATION
The Equitable has two major business segments: Insurance Operations and
Investment Services. The third business segment identified, Corporate
and Other, principally includes operations of the Holding Company and
the EQ Asset Trust 1993 (the "Trust"), and interest expense related to
debt not specific to any business segment. Interest expense related to
debt not specific to any business segment is presented within Corporate
interest expense. Information for all periods is presented on a
comparable basis.
Insurance Operations offers a variety of traditional, variable and
interest-sensitive life insurance products, disability income, annuity
products, mutual fund and other investment products to individuals and
small groups and administers traditional participating group annuity
contracts with conversion features, generally for corporate qualified
pension plans, and association plans which provide full service
retirement programs for individuals affiliated with professional and
trade associations. This segment includes Separate Accounts for
individual insurance and annuity products.
Investment Services provides investment fund management and investment
banking services, primarily to institutional clients. This segment
includes Separate Accounts which provide various investment options for
group clients through pooled or single group accounts.
Intersegment investment advisory and other fees of approximately $81.9
million, $127.5 million and $124.1 million for 1997, 1996 and 1995,
respectively, are included in total revenues of the Investment Services
segment. These fees, excluding amounts related to the discontinued
operations of $5.1 million, $15.7 million and $14.7 million for 1997,
1996 and 1995, respectively, are eliminated in consolidation.
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Revenues
Insurance operations............................... $ 3,684.2 $ 3,770.6 $ 3,614.6
Investment services................................ 5,968.1 4,540.0 3,689.8
Corporate and other................................ 46.1 61.3 23.0
Consolidation/elimination.......................... (32.3) (39.3) (47.1)
----------------- ---------------- -----------------
Total.............................................. $ 9,666.1 $ 8,332.6 $ 7,280.3
================= ================ =================
Earnings (loss) from continuing operations
before Federal income taxes and cumulative
effect of accounting change
Insurance operations............................... $ 250.3 $ (36.6) $ 303.1
Investment services................................ 971.3 663.2 466.3
Corporate and other................................ 10.3 28.3 (23.9)
Consolidation/elimination.......................... (1.7) .5 .2
----------------- ---------------- -----------------
Subtotal..................................... 1,230.2 655.4 745.7
Corporate interest expense......................... (127.2) (139.6) (100.5)
----------------- ---------------- -----------------
Total.............................................. $ 1,103.0 $ 515.8 $ 645.2
================= ================ =================
</TABLE>
F-51
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
---------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Insurance operations................................................... $ 68,305.9 $ 60,464.9
Investment services.................................................... 83,120.3 68,205.3
Corporate and other.................................................... 543.4 774.3
Consolidation/elimination.............................................. (532.0) (633.3)
---------------- -----------------
Total.................................................................. $ 151,437.6 $ 128,811.2
================ =================
</TABLE>
22) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 1997 and 1996, are summarized
below:
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- --------------- ---------------- -----------------
(In Millions, Except Per Share Amounts)
<S> <C> <C> <C> <C>
1997
Total Revenues...................... $ 2,230.5 $ 2,587.0 $ 2,521.1 $ 2,327.5
=============== =============== ================ =================
Earnings from Continuing
Operations before Cumulative
Effect of Accounting Change....... $ 139.3 $ 252.1 $ 186.6 $ 70.2
=============== =============== ================ =================
Net Earnings (Loss)................. $ 136.0 $ 252.7 $ 186.4 $ (14.1)
=============== =============== ================ =================
Net Earnings (Loss) Applicable
to Common Shares.................. $ 129.3 $ 246.1 $ 184.1 $ (14.1)
=============== =============== ================ =================
Per Common Share:
Basic:
Earnings from Continuing
Operations before
Cumulative Effect
of Accounting Change......... $ .71 $ 1.31 $ .87 $ .32
=============== =============== ================ =================
Net Earnings (Loss)............ $ .69 $ 1.32 $ .87 $ (.06)
=============== =============== ================ =================
Diluted:
Earnings from Continuing
Operations before
Cumulative Effect
of Accounting Change......... $ .64 $ 1.13 $ .81 $ .28
=============== =============== ================ =================
Net Earnings (Loss)....... $ .62 $ 1.14 $ .81 $ (.09)
=============== =============== ================ =================
</TABLE>
F-52
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- --------------- ---------------- -----------------
(In Millions, Except Per Share Amounts)
<S> <C> <C> <C> <C>
1996
Total Revenues...................... $ 1,942.9 $ 2,176.1 $ 1,962.1 $ 2,251.5
=============== =============== ================ =================
Earnings (Loss) from Continuing
Operations before Cumulative
Effect of Accounting Change....... $ 109.7 $ 115.7 $ 104.7 $ (124.1)
=============== =============== ================ =================
Net Earnings (Loss)................. $ 86.6 $ 115.7 $ 104.7 $ (207.9)
=============== =============== ================ =================
Net Earnings (Loss) Applicable
to Common Shares.................. $ 79.9 $ 109.1 $ 98.0 $ (214.6)
=============== =============== ================ =================
Per Common Share:
Basic:
Earnings (Loss) from
Continuing Operations
before Cumulative Effect
of Accounting Change......... $ .56 $ .59 $ .53 $ (.71)
=============== =============== ================ =================
Net Earnings (Loss)............ $ .43 $ .59 $ .53 $ (1.15)
=============== =============== ================ =================
Diluted:
Earnings (Loss) from
Continuing Operations
before Cumulative Effect
of Accounting Change......... $ .52 $ .54 $ .49 $ (.71)
=============== =============== ================ =================
Net Earnings (Loss)....... $ .41 $ .54 $ .49 $ (1.16)
=============== =============== ================ =================
</TABLE>
Earnings per share computations for the first three quarters of 1997 and
the four quarters of 1996 have been restated to reflect the adoption of
SFAS No. 128. Net earnings for the three months ended December 31, 1997
includes a charge of $212.0 million related to additions to valuation
allowances on and writeoffs of real estate of $225.2 million, and
reserve strengthening on discontinued operations of $84.3 million offset
by a reversal of prior years tax reserves of $97.5 million. Net earnings
for the three months ended December 31, 1996 includes a charge of $339.3
million related to writeoffs of DAC on DI contracts of $94.3 million,
reserve strengthening on DI business of $113.7 million, Pension Par of
$47.5 million and Discontinued Operations of $83.8 million.
F-53
<PAGE>
Report of Independent Accountants on
Consolidated Financial Statement Schedules
February 10, 1998
To the Board of Directors of
The Equitable Companies Incorporated
Our audits of the consolidated financial statements referred to in our report
dated February 10, 1998 appearing on page F-1 of this Annual Report on Form 10-K
also included an audit of the consolidated financial statement schedules listed
in Item 14 of this Form 10-K. In our opinion, these consolidated financial
statement schedules present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements.
/s/Price Waterhouse, LLP
- ------------------------
F-54
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Estimated Carrying
Type of Investment Cost (A) Fair Value Value
- -------------------- ---------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities:
United States Government and government
agencies and authorities............................. $ 1,693.1 $ 1,776.4 $ 1,776.4
State, municipalities and political subdivisions....... 673.0 679.7 679.7
Foreign governments.................................... 442.4 485.2 485.2
Public utilities....................................... 1,038.8 1,105.5 1,105.5
All other corporate bonds.............................. 15,274.8 15,962.3 15,941.0
Redeemable preferred stocks............................ 128.0 133.7 133.7
----------------- ----------------- ----------------
Total fixed maturities................................. 19,250.1 20,142.8 20,121.5
---------------- ----------------- -----------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............ 741.4 767.1 767.1
Trading account securities............................. 16,521.9 16,535.7 16,535.7
Securities purchased under resale agreement............ 22,628.8 22,628.8 22,628.8
Mortgage loans on real estate.......................... 2,611.4 2,822.8 2,611.4
Real estate............................................ 1,660.7 xxx 1,660.7
Real estate acquired in satisfaction of debt........... 693.3 xxx 693.3
Real estate joint ventures............................. 395.2 xxx 395.2
Policy loans........................................... 2,422.9 2,493.9 2,422.9
Other limited partnership interests.................... 509.4 509.4 509.4
Other invested assets.................................. 626.1 626.1 626.1
---------------- ----------------- -----------------
Total Investments...................................... $ 68,061.2 $ 66,526.6 $ 68,972.1
================ ================= =================
<FN>
(A) Cost for fixed maturities represents original cost, reduced by repayments
and writedowns and adjusted for amortization of premiums or accretion of
discount; for equity securities, cost represents original cost; for other
limited partnership interests, cost represents original cost adjusted for
equity in earnings and distributions
</FN>
</TABLE>
F-55
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE II
BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
----------------- ----------------
(In Millions)
<S> <C> <C>
ASSETS
Investment in consolidated subsidiaries................................ $ 5,613.3 $ 4,695.8
Fixed maturities available for sale, at estimated fair value
(amortized costs,$339.5 and $442.1)................................ 339.5 442.1
Other invested assets.................................................. 59.7 62.1
----------------- ----------------
Total investments................................................ 6,012.5 5,200.0
Cash and cash equivalents.............................................. 20.5 25.0
Other assets........................................................... 13.5 25.6
----------------- ----------------
Total Assets........................................................... $ 6,046.5 $ 5,250.6
================= ================
LIABILITIES
Short-term and long-term debt.......................................... $ 569.0 $ 928.1
Accrued liabilities.................................................... 204.0 334.5
----------------- ----------------
Total liabilities................................................ 773.0 1,262.6
----------------- ----------------
SHAREHOLDERS' EQUITY
Series C convertible preferred stock................................... - 24.4
Series D convertible preferred stock................................... 514.4 294.0
Stock employee compensation trust...................................... (514.4) (294.0)
Series E convertible preferred stock................................... - 380.2
Common stock, at par value............................................. 2.2 1.9
Capital in excess of par value......................................... 3,627.5 2,782.2
Retained earnings...................................................... 1,137.4 632.9
Net unrealized investment gains........................................ 523.7 179.3
Minimum pension liability.............................................. (17.3) (12.9)
----------------- ----------------
Total shareholders' equity....................................... 5,273.5 3,988.0
----------------- ----------------
Total Liabilities and Shareholders' Equity............................. $ 6,046.5 $ 5,250.6
================= ================
</TABLE>
The financial information of The Equitable Companies Incorporated (Parent
Company) should be read in conjunction with the Consolidated Financial
Statements and Notes thereto. For information regarding Capital Stock see Note
10 of Notes to Consolidated Financial Statements.
F-56
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE II
STATEMENTS OF EARNINGS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- ---------------
(In Millions, Except Per Share Amounts)
<S> <C> <C> <C>
REVENUES
Equity in earnings from continuing operations before
cumulative effect of accounting change and
discontinued operations of subsidiaries................ $ 681.3 $ 240.4 $ 396.2
Net investment income.................................... 32.4 30.5 17.1
Investment gains (losses), net........................... 5.1 (.9) 27.9
----------------- ----------------- -----------------
Total revenues..................................... 718.8 270.0 441.2
----------------- ----------------- -----------------
EXPENSES
Interest expense on long-term debt....................... 61.9 72.7 72.6
General and administrative expenses...................... 24.6 16.4 23.9
----------------- ----------------- -----------------
Total expenses..................................... 86.5 89.1 96.5
----------------- ----------------- -----------------
Earnings from continuing operations before
Federal income taxes and cumulative effect
of accounting change................................... 632.3 180.9 344.7
Federal income tax benefit............................... 15.9 25.1 20.7
----------------- ----------------- -----------------
Earnings from continuing operations before
cumulative effect of accounting change................. 648.2 206.0 365.4
Discontinued operations, net of Federal income taxes..... (87.2) (83.8) -
Cumulative effect of accounting change, net of
Federal income taxes................................... - (23.1) -
----------------- ----------------- -----------------
Net earnings............................................. 561.0 99.1 365.4
Dividends on preferred stocks............................ 15.6 26.7 26.7
----------------- ----------------- -----------------
Net Earnings Applicable to Common Shares................. $ 545.4 $ 72.4 $ 338.7
================= ================= =================
Per Common Share:
Basic:
Earnings from continuing operations before
cumulative effect of accounting change............. $ 3.14 $ .97 $ 1.84
Discontinued operations, net of Federal
income taxes....................................... (.43) (.46) -
Cumulative effect of accounting change,
net of Federal income taxes........................ - (.12) -
----------------- ----------------- -----------------
Net Earnings......................................... $ 2.71 $ .39 $ 1.84
================= ================= =================
Diluted:
Earnings from continuing operations before
cumulative effect of accounting change............. $ 2.86 $ .94 $ 1.75
Discontinued operations, net of Federal
income taxes....................................... (.39) (.45) -
Cumulative effect of accounting change,
net of Federal income taxes........................ - (.12) -
----------------- ----------------- -----------------
Net Earnings......................................... $ 2.47 $ .37 $ 1.75
================= ================= =================
Cash Dividend Per Common Share......................... $ .20 $ .20 $ .20
================= ================= =================
</TABLE>
F-57
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE II
STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ----------------- ---------------
(In Millions)
<S> <C> <C> <C>
Net earnings............................................. $ 561.0 $ 99.1 $ 365.4
Adjustments to reconcile net earnings to net
cash (used) provided by operating activities:
Equity in net earnings of subsidiaries................. (594.1) (133.5) (396.2)
Dividends from subsidiaries............................ 11.7 11.7 10.0
Investment (gains) losses, net......................... (5.1) .9 (27.9)
Change in Federal income tax liability................. (150.0) 104.4 141.4
Other.................................................. 12.6 (13.0) 21.4
----------------- ----------------- -----------------
Net cash (used) provided by operating activities......... (163.9) 69.6 114.1
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments.............................. 99.1 79.9 76.7
Sales.................................................. 527.9 232.8 32.3
Purchases.............................................. (524.2) (581.7) (119.3)
Net change in short-term investments................... 4.1 1.9 14.8
Proceeds from sale of DLJ common stock................. - - 181.8
Other.................................................. 36.6 (6.0) 18.9
----------------- ----------------- -----------------
Net cash provided (used) by investing activities......... 143.5 (273.1) 205.2
----------------- ----------------- -----------------
Cash flows from financing activities:
Repayment of long-term debt............................ (20.0) (15.0) -
Dividends paid to shareholders......................... (46.8) (38.2) (46.1)
Proceeds from issuance of common stock................. 87.2 - -
Other.................................................. (4.5) 4.6 (1.5)
----------------- ----------------- -----------------
Net cash provided (used) by financing activities......... 15.9 (48.6) (47.6)
----------------- ----------------- -----------------
Change in cash and cash equivalents...................... (4.5) (252.1) 271.7
Cash and cash equivalents, beginning of year............. 25.0 277.1 5.4
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year................... $ 20.5 $ 25.0 $ 277.1
================= ================= =================
Supplemental cash flow information
Interest Paid.......................................... $ 64.9 $ 70.8 $ 67.8
================= ================= =================
Income Taxes Paid...................................... $ 330.0 $ 147.0 $ -
================= ================= =================
</TABLE>
F-58
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Future Policy Policy
Deferred Benefits Charges (1) Policyholders'
Policy Policyholders' and Other and Net Benefits and
Acquisition Account Policyholders' Premium Investment Interest
Segment Costs Balance Funds Revenue Income Credited
- ------------------------ --------------- -------------- ----------------- --------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Insurance
Operations........... $ 3,236.6 $ 21,579.5 $ 4,553.8 $ 1,552.0 $ 2,214.5 $ 2,244.8
Investment
Services............. - - - .1 1,688.4 -
Corporate and
Other................ - - - - 43.8 -
Corporate Interest
Expense.............. - - - - - -
Consolidation/
Elimination.......... .8 (.9) - - 44.6 .8
--------------- --------------- ----------------- --------------- --------------- ---------------
Total.................. $ 3,237.4 $ 21,578.6 $ 4,553.8 $ 1,552.1 $ 3,991.3 $ 2,245.6
=============== ================ ================= =============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
Amortization
of Deferred (2)
Policy Other
Acquisition Operating
Segment Cost Expense
- ------------------------ ----------------- -----------------
(In Millions)
<S> <C> <C>
Insurance
Operations........... $ 287.3 $ 901.8
Investment
Services............. - 4,996.8
Corporate and
Other................ - 35.8
Corporate Interest
Expense.............. - 127.2
Consolidation/
Elimination.......... .8 (32.2)
----------------- -----------------
Total.................. $ 288.1 $ 6,029.4
================= =================
<FN>
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are incurred directly by a segment, or allocated based on
usage rates maintained by The Equitable.
</FN>
</TABLE>
F-59
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Future Policy Policy
Deferred Benefits Charges (1) Policyholders'
Policy Policyholders' and Other and Net Benefits and
Acquisition Account Policyholders' Premium Investment Interest
Segment Costs Balance Funds Revenue Income Credited
- ------------------------ --------------- --------------- ------------------ --------------- --------------- ----------------
(In Millions)
<S> <C> <C> <C> <C> <C> <C>
Insurance
Operations........... $ 3,104.9 $ 21,865.6 $ 4,416.6 $ 1,471.6 $ 2,105.7 $ 2,587.9
Investment
Services............. - - - - 1,107.6 -
Corporate and
Other................ - - - - 52.7 -
Corporate Interest
Expense.............. - - - - - -
Consolidation/
Elimination.......... 1.6 (1.8) - - 70.3 .9
--------------- --------------- ----------------- --------------- --------------- ---------------
Total.................. $ 3,106.5 $ 21,863.8 $ 4,416.6 $ 1,471.6 $ 3,336.3 $ 2,588.8
=============== =============== ================== =============== =============== ================
</TABLE>
<TABLE>
<CAPTION>
Amortization
of Deferred (2)
Policy Other
Acquisition Operating
Segment Cost Expense
- ------------------------ ---------------- ------------------
(In Millions)
<S> <C> <C>
Insurance
Operations........... $ 405.2 $ 814.1
Investment
Services............. - 3,876.8
Corporate and
Other................ - 33.0
Corporate Interest
Expense.............. - 139.6
Consolidation/
Elimination.......... .8 (41.5)
----------------- -----------------
Total.................. $ 406.0 $ 4,822.0
================= =================
<FN>
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are incurred directly by a segment, or allocated based on
usage rates maintained by The Equitable.
</FN>
</TABLE>
F-60
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Policy Amortization
Charges (1) Policyholders' of Deferred (2)
and Net Benefits and Policy Other
Premium Investment Interest Acquisition Operating
Segment Revenue Income Credited Cost Expense
- ----------------------------------- --------------- --------------- ----------------- ------------------ ---------------
(In Millions)
<S> <C> <C> <C> <C> <C>
Insurance Operations.............. $ 1,395.0 $ 1,995.1 $ 2,256.9 $ 317.8 $ 736.8
Investment Services - 948.5 - - 3,223.5
Corporate and Other............... - 43.3 - - 46.9
Corporate Interest Expense........ - - - - 100.5
Consolidation/Elimination......... - 60.5 .9 .8 (49.0)
--------------- --------------- ----------------- ------------------ ---------------
Total............................. $ 1,395.0 $ 3,047.4 $ 2,257.8 $ 318.6 $ 4,058.7
=============== =============== ================= ================== ===============
<FN>
(1) Net investment income is based upon specific identification of portfolios
within segments.
(2) Operating expenses are incurred directly by a segment, or allocated based on
usage rates maintained by The Equitable.
</FN>
</TABLE>
F-61
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE IV
REINSURANCE (A)
AT AND FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
Assumed Percentage
Ceded to from of Amount
Gross Other Other Net Assumed
Amount Companies Companies Amount to Net
----------------- ---------------- ----------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C> <C>
1997
Life insurance in force(B)... $ 238,336.0 $ 17,004.1 $ 44,708.3 $ 266,040.2 16.81%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 248.9 $ 18.3 $ 124.1 $ 354.7 34.99%
Accident and health.......... 201.3 28.7 74.2 246.8 30.06%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 450.2 $ 47.0 $ 198.3 $ 601.5 32.97%
================= ================ ================= ===============
1996
Life insurance in force(B)... $ 232,704.6 $ 13,696.9 $ 42,046.5 $ 261,054.2 16.10%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 249.2 $ 17.1 $ 107.3 $ 339.4 31.61%
Accident and health.......... 214.6 26.6 70.2 258.2 27.19%
----------------- ---------------- ----------------- ---------------
Total Premiums............... $ 463.8 $ 43.7 $ 177.5 $ 597.6 29.70%
================= ================ ================= ===============
1995
Life insurance in force(B)... $ 226,530.6 $ 12,348.2 $ 38,382.2 $ 252,564.6 15.20%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 244.7 $ 14.3 $ 96.7 $ 327.1 29.56%
Accident and health.......... 490.1 285.0 74.6 279.7 26.67%
================= ================ ================= ===============
Total Premiums............... $ 734.8 $ 299.3 $ 171.3 $ 606.8 28.23%
================= ================ ================= ===============
<FN>
(A) Includes amounts related to the discontinued group life and health business.
(B) Includes in force business related to the Closed Block.
</FN>
</TABLE>
F-62
<PAGE>
Part II, Item 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
9-1
<PAGE>
Part III, Item 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Except for the information concerning executive officers of the Holding Company
set forth in Item 1A of this report, the information called for by Item 10 is
incorporated herein by reference to the section entitled "Election of Directors"
in the Holding Company's definitive proxy statement for the Annual Meeting of
Stockholders to be held on May 13, 1998, to be filed with the Securities and
Exchange Commission by the Holding Company pursuant to Regulation 14A within 120
days after the end of its 1997 fiscal year.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Holding
Company's directors and executive officers, and persons who own more than 10% of
a registered class of the Holding Company's equity securities, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission and the New York Stock Exchange. Directors, executive officers and
greater than 10% shareholders are required by SEC regulations to furnish the
Holding Company with copies of all Section 16(a) forms they file. Based on a
review of such forms and written representations as to the need to file Form 5,
the Holding Company believes that all Section 16(a) filing requirements
applicable to its directors, executive officers and greater than 10% beneficial
owners were complied with for the year ended December 31, 1997, except that, due
to administrative oversight, two Forms 4 were not timely filed to report two
acquisitions of the Holding Company's Common Stock by William McCaffrey through
the exercise of options held by him and the immediate sale for his account of
some of the shares of Common Stock so acquired. Promptly upon awareness of such
oversight, a Form 4 and Form 5 were filed, as appropriate, to report these
transactions.
10-1
<PAGE>
Part III, Item 11.
EXECUTIVE COMPENSATION
The information called for by Item 11 is incorporated herein by reference to the
section entitled "Executive Compensation" in the Holding Company's definitive
proxy statement for the Annual Meeting of Stockholders to be held on May 13,
1998, to be filed with the Securities and Exchange Commission by the Holding
Company pursuant to Regulation 14A within 120 days after the end of its 1997
fiscal year.
11-1
<PAGE>
Part III, Item 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information called for by Item 12 is incorporated herein by reference to the
section entitled "Security Ownership of Certain Beneficial Owners and
Management" in the Holding Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on May 13, 1998, to be filed with the
Securities and Exchange Commission by the Holding Company pursuant to Regulation
14A within 120 days after the end of its 1997 fiscal year.
12-1
<PAGE>
Part III, Item 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is incorporated herein by reference to the
section entitled "Certain Relationships and Related Transactions" in the Holding
Company's definitive proxy statement for the Annual Meeting of Stockholders to
be held on May 13, 1998, to be filed with the Securities and Exchange Commission
by the Holding Company pursuant to Regulation 14A within 120 days after the end
of its 1997 fiscal year.
13-1
<PAGE>
Part IV, Item 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
1. Financial Statements
The financial statements are listed in the Index to Financial Statements
on page FS-1.
2. Consolidated Financial Statement Schedules
The consolidated financial statement schedules are listed in the Index
to Financial Statement Schedules on page FS-1.
3. Exhibits:
The exhibits are listed in the Index to Exhibits which begins on page
(B) Reports on Form 8-K
None.
14-1
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 17, 1998 THE EQUITABLE COMPANIES INCORPORATED
By: /s/Edward D. Miller
---------------------------------------
Name: Edward D. Miller
President and Chief Executive Officer,
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/Claude Bebear Chairman of the Board, Director March 17, 1998
- --------------------------------------------
Claude Bebear
/s/Henri de Castries Vice Chairman of the Board, Director March 17, 1998
- --------------------------------------------
Henri de Castries
/s/Joseph J. Melone Chairman fo the Executive Committee, March 17, 1998
- --------------------------------------------
Joseph J. Melone Director
/s/Edward D. Miller President and Chief Executive Officer, March 17, 1998
- --------------------------------------------
Edward D. Miller Director
/s/Michael Hegarty Senior Executive Vice President and March 17, 1998
- --------------------------------------------
Michael Hegarty Chief Operating Officer, Director
/s/Stanley B. Tulin Executive Vice President and March 17, 1998
- --------------------------------------------
Stanley B. Tulin Chief Financial officer
/s/Alvin H. Fenichel Senior Vice President and Controller March 17, 1998
- --------------------------------------------
Alvin H. Fenichel
/s/ John S. Chalsty Director March 17, 1998
- --------------------------------------------
John S. Chalsty
/s/Francoise Colloc'h Director March 17, 1998
- --------------------------------------------
Francoise Colloc'h
/s/Joseph L. Dionne Director March 17, 1998
- --------------------------------------------
Joseph L. Dionne
/s/William T. Esrey Director March 17, 1998
- --------------------------------------------
William T. Esrey
/s/ Jean-Rene Fourtou Director March 17, 1998
- --------------------------------------------
Jean-Rene Fourtou
/s/Jacques Friedmann Director March 17, 1998
- --------------------------------------------
Jacques Friedmann
/s/Donald J. Greene Director March 17, 1998
- --------------------------------------------
Donald J. Greene
S-1
<PAGE>
/s/Anthony J. Hamilton Director March 17, 1998
- --------------------------------------------
Anthony J. Hamilton
/s/ John T. Hartley Director March 17, 1998
- --------------------------------------------
John T. Hartley
/s/ John H. F. Haskell, Jr. Director March 17, 1998
- --------------------------------------------
John H. F. Haskell, Jr.
/s/Mary R. (Nina) Henderson Director March 17, 1998
- --------------------------------------------
Mary R. (Nina) Henderson
/s/ W. Edwin Jarmain Director March 17, 1998
- --------------------------------------------
W. Edwin Jarmain
/s/Didier Pineau-Valencienne Director March 17, 1998
- --------------------------------------------
Didier Pineau-Valencienne
/s/George J. Sella, Jr. Director March 17, 1998
- --------------------------------------------
George J. Sella, Jr.
/s/ Dave H. Williams Director March 17, 1998
- --------------------------------------------
Dave H. Williams
</TABLE>
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Tag
Number Description Method of Filing Value
- ------------ -------------------------------------------- ------------------------------------------------ ----------
<S> <C> <C> <C>
2 Purchase Agreement dated April 10, Filed as Exhibit 2 to the registrant's
1997, between Equitable Life and Lend Form 10-Q for the quarter ended March 31,
Lease Corporation Limited 1997 and incorporated herein by reference
3.1 Restated Certificate of Incorporation Filed as Exhibit 4.01(a) to the registrant's
of the Holding Company Form S-3 Registration Statement
(No. 33-03224), and incorporated herein
by reference
3.2 Amendment to Restated Certificate of Filed as Exhibit 4.01(g) to the registrant's
Incorporation of the Holding Company Form S-3 Registration Statement
(No. 33-03224), and incorporated herein
by reference
3.3 By-laws of the Holding Company, as Filed as Exhibit 4.02 to the registrant's
amended Form S-3 Registration Statement
(No. 33-03224), and incorporated herein by
by reference
4.1 Form of Certificate for the Holding Filed as Exhibit 4(c) to the registrant's
Company's Common Stock, par value Form S-1 Registration Statement
$.01 per share (No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
4.2 Indenture, dated as of December 1, 1993, Filed as Exhibit 4.02 to the registrant's
from the Holding Company to Chemical Form S-4 Registration Statement
Bank, as Trustee (No. 33-73102), dated December 17, 1993
and incorporated herein by reference
4.3 First Supplemental Indenture, dated Filed as Exhibit 4.03 to the registrant's
December 1, 1993, from the Holding Form S-4 Registration Statement
Company to Chemical Bank, as Trustee (No. 33-73102), dated December 17, 1993
and incorporated herein by reference
4.4 Form of Second Supplemental Indenture Filed as Exhibit 4.04 to the registrant's
Form S-4 Registration Statement
(No. 33-73102), dated December 17, 1993
and incorporated herein by reference
4.5 Form of Third Supplemental Indenture, Filed as Exhibit 4.05 to the registrant's
dated as of December 8, 1994 from the Current Report on Form 8-K dated
Holding Company to Chemical Bank, as December 1, 1994
Trustee
4.6 Certificate of Designations of Cumulative Filed as Exhibit 4.05 to the registrant's
Convertible Preferred Stock, Series D Form S-4 Registration Statement
(No. 33-73102), dated December 17, 1993
and incorporated herein by reference
E-1
<PAGE>
Tag
Number Description Method of Filing Value
- ------------ -------------------------------------------- ------------------------------------------------ ----------
4.7 Subordinated Indenture, dated as of Filed as Exhibit 4.10 to the registrant's
October 22, 1994, between the Holding Current Report on Form 8-K dated
Company and Shawmut Bank Connecticut, December 19, 1994
National Association, as Trustee
4.8 First Supplemental Indenture, dated as of Filed as Exhibit 4.11 to the registrant's
October 22, 1994, between the Holding Current Report on Form 8-K dated
Company and Shawmut Bank Connecticut, December 19, 1994'
National Association, as Trustee
9(a) Voting Trust Agreement dated as of May Filed as Exhibit 9 to the registrant's
12, 1992, among AXA, Claude Bebear, Form S-1 Registration Statement
Patrice Garnier and Henri de Clermont- (No. 33-48115), dated May 26, 1992
Tonnerre and incorporated herein by reference
9B First Amendment dated January 22, 1997 Filed herewith
to the Voting Trust Agreement dated
as of May 12, 1992
10.1 Standstill and Registration Rights Filed as Exhibit 10(c) to Amendment
Agreement, dated as of July 18, 1991, No. 1 to the registrant's Form S-1
as amended, between the Holding Registration Statement (No. 33-48115),
Company. Equitable Life and AXA dated May 26, 1992 and incorporated
herein by reference
10.2 Cooperation Agreement, dated as of July Filed as Exhibit 10(d) to the registrant's
18, 1991, as amended among Equitable Form S-1 Registration Statement
Life, the Holding Company and AXA (No.33-48115), dated May 26, 1992 and
incorporated herein by reference
10.3 Letter Agreement, dated May 12, 1992, Filed as Exhibit 10(e) to the registrant's
among Equitable Life, the Holding Form S-1 Registration Statement
Company and AXA (No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.4+ The Equitable Companies Incorporated Filed as Exhibit 10(f) to the registrant's
1991 Stock Incentive Plan Form S-1 Registration Statement
(No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.5+ The Equitable Companies Incorporated Filed as Exhibit 10.6(b) to the registrant's
1997 Stock Incentive Plan annual report on Form 10-K for the
year ended December 31, 1996 and
incorporated herein by reference
10.6+ The Equitable Life ERISA Excess Filed as Exhibit 10(i) to the registrant's
Benefit Plan Form S-1 Registration Statement
(No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
E-2
<PAGE>
Tag
Number Description Method of Filing Value
- ------------ -------------------------------------------- ------------------------------------------------ ----------
10.7+ The Equitable Life Supplemental Filed as Exhibit 10(j) to the registrant's
Retirement Plan Form S-1 Registration Statement
(No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.8+ The Equitable Life Executive Survivor Filed as Exhibit 10(l) to the registrant's
Benefits Plan Form S-1 Registration Statement
(No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.9+ The Equitable Life Executive Deferred Filed as Exhibit 10(m) to the registrant's
Compensation Plan, Plan A Form S-1 Registration Statement
(No. 33-48115), dated May 26, 1992 and
incorporated herein by reference
10.10+ The Equitable Life Executive Deferred Filed herewith
Compensation Plan, Plan B, second
Amendment and Restatement,
effective January 1, 1996
10.11+ The Equitable Variable Deferred Filed as Exhibit 10.17 to the registrant's
Compensation Plan for Executives annual report on Form 10-K for the year
ended December 31, 1994 and incorporated
herein by reference
10.12 Description of three Amendments to Filed herewith
the Equitable Variable Deferred
Compensation Plan for Executives
10.13+ The Equitable Variable Deferred Filed as Exhibit 10.18 to the registrant's
Compensation Plan for Directors annual report on Form 10-K for the year
ended December 31, 1994 and incorporated
herein by reference
10.14+ The Equitable Stock Purchase Plan for Filed herewith
Employees and Agents, as amended
through August, 1996
10.15 Long-Term Incentive Compensation Plan Filed as Exhibit 10.18(c) to the registrant's
for Senior Officers annual report on Form 10-K for the year
ended December 31, 1995 and incorporated
herein by reference
10.16 Short-Term Incentive Compensation Filed as Exhibit 10.18(d) to the registrant's
Plan for Senior Officers annual report on Form 10-K for the year
ended December 31, 1996 and
incorporated herein breference
10.17+ Long-Term Incentive Compensation Filed as Exhibit 10.18(e) to the registrant's
Plan for Senior Officers annual report on Form 10-K for the year
ended December 31, 1996 and
incorproated herein by reference
E-3
<PAGE>
Tag
Number Description Method of Filing Value
- ------------ -------------------------------------------- ------------------------------------------------ ----------
10.18 Amended and Restated Reinsurance Filed as Exhibit 10(o) to the registrant's
Agreement, dated as of March 29, 1990, Form S-1 Registration Statement
between Equitable Life and First (No.33-48115), dated May 26, 1992 and
Equicor Life Insurance Company incorporated herein by reference
10.19 The Amended and Restated Transfer Filed as Exhibit 19 to the registrant's
Agreement dated as of February 23, 1993, Statement on Schedule 13D dated July 29,
as amended and restated on May 28, 1993, 1993 and incorporated herein by reference
among Alliance,Equitable Capital and
Equitable Investment Corporation
10.20(a) The Equitable Companies Incorporate Filed as Exhibit 10.01 to the registrant's
Stock Trust Agreement, effective as of Form S-4 Registration Statement
December 2, 1993 (No. 33-73102), dated December 17, 1993
and incorporated herein by reference
10.20(b) The First Amendment to The Equitable Filed as Exhibit 10.02 to Post-Effective
Companies Incorporated Stock Trust Amendment No. 1 to the registrant's
Agreement dated as of September 19, Form S-3 Registration Statement
1996 (No. 333-03224), dated May 29, 1997
10.21 Stock Purchase Agreement, dated Filed as Exhibit 10.02 to the registrant's
December 2, 1993, between the Holding Form S-4 Registration Statement
Company and The Chase Manhattan (No. 33-73102), dated December 17, 1993
Bank, N.A. and incorporated herein by reference
10.22 Management Compensation Arrangements Filed herewith
with Messrs. Bebear and de Castries
and Ms. Colloc'h
10.23 Exchange Agreement dated as of Filed as Exhibit 10 to registrant's Form S-4
September 27, 1994, between AXA Registration Statement (No. 33-84462),
and the Holding Company and incorporated herein by reference
10.24(a) Lease, dated as of July 20, 1995, Filed as Exhibit 10.24(a) to the registrant's
between1290 Associates and annual report on Form 10-K for the
Equitable Life year ended December 31, 1996 and
incorporated herein by reference
10.24(b) First Amendment of Lease Agreement, Filed as Exhibit 10.24(b) to the registrant's
dated as of December 28, 1995, annual report on Form 10-K for the
between1290 Associates, L.L.C. year ended December 31, 1996 and
and Equitable Life incorporated herein by reference
10.24(c) Amended and Restated Company Lease Filed as Exhibit 10.24(c) to the registrant's
Agreement (Facility Realty), made annual report on Form 10-K for the
as of May 1, 1996, by and between year ended December 31, 1996 and
Equitable Life and the IDA incorporated herein by reference
E-4
<PAGE>
Tag
Number Description Method of Filing Value
- ------------ -------------------------------------------- ------------------------------------------------ ----------
10.24(d) Amended and Restated Company Lease Filed as Exhibit 10.24(d) to the registrant's
Agreement (Project Property), made and annual report on Form 10-K for the
entered into as of May 1, 1996, by and year ended December 31, 1996 and
between the IDA, Equitable Life and incorporated herein by reference
EVLICO
10.24(e) Second Amendment of Lease, dated as of Filed as Exhibit 10.1 to the registrant's Form
May 1, 1997, between 1290 Partners L.P. 10-Q for the quarter ended June 30, 1997
and Equitable Life and incorporated herein by reference
10.25 Agreement dated April 24, 1996, Filed as Exhibit 10.27 to the registrant's
between Equitable Life and Form 10-Q for the quarter ended March 31,
Mr. Stanley B. Tulin 1997 and incorporated herein by reference
10.26 Agreement dated July 8, 1997 from the Filed as Exhibit 10.2 to the registrant's Form
Holding Company and Equitable Life 10-Q for the quarter ended June 30, 1997
to Mr. Edward D. Miller and incororated herein by reference
10.27 Agreement dated January 6, 1998, Filed herewith
between Equitable Life and
Mr. Michael Hegarty
10.28+ The Equitable Stock Plan for Directors Filed herewith
10.29 Supplemental Retirement Arrangement Filed herewith
for Mr. Joseph J. Melone
21 Subsidiaries of the registrant Filed herewith
24 Powers of Attorney Filed herewith
27 Financial Data Schedule Filed herewith
+ Denotes executive compensation plans and arrangements.
E-4
</TABLE>
FIRST AMENDMENT dated as of January 22, 1997, to the Voting Trust
Agreement (the "Voting Trust Agreement") dated as of May 12, 1992, by and among
AXA, a societe anonyme organized under the laws of France ("AXA"), and each of
the persons designated at the end of the Voting Trust Agreement as Voting
Trustees (collectively, the "Voting Trustees").
W I T N E S S E T H
WHEREAS AXA and the Voting Trustees heretofore entered into the Voting
Trust Agreement relating to the ownership of the common stock of The Equitable
Companies Incorporated, a Delaware corporation (the "Company");
WHEREAS AXA changed its corporate governance structure by replacing its
Conseil d'Administration with a Supervisory Board and an Executive Board;
WHEREAS AXA and the Voting Trustees wish to amend the Voting Trust
Agreement to reflect such corporate governance changes.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and conditions contained herein, the parties hereto agree as follows:
1. Voting Trustees. The Voting Trust Agreement is hereby amended by
deleting clause (i) of the fourth sentence of Section 2(a) of the Voting Trust
Agreement and substituting therefor the following:
"(i) is a member of the Conseil d'Administration of AXA or, if at any
time AXA does not have a Conseil d'Administration, a member of
either the Supervisory Board of AXA or the Executive Board of AXA".
2. Governing Law. This Amendment shall be governed by and construed and
enforced in accordance with the laws of the State of New York without regard to
the principles of conflict of laws, except to the extent that the General
Corporation Law of the State of Delaware is mandatorily applicable to the
subject matter of any provision of this Amendment.
3. Counterparts. This Amendment may be executed in counterparts, each
of which shall be deemed an original, but all of which shall constitute one and
the same instrument.
4. Filing in Registered Office. The Voting Trustees shall file or cause
to be filed this Amendment and any counterpart hereof in the registered office
of the Company in the State of Delaware.
5. Continuing Agreement. Except as expressly set forth in this
Amendment, the Voting Trust Agreement shall continue in full force and effect
and is hereby ratified and confirmed in all respects.
6. Effectiveness. This Amendment is being effectuated by this written
agreement of the parties hereto with the written consent of the Superintendent
of Insurance of the State of New York pursuant to Section 21 of the Voting Trust
Agreement.
IN WITNESS WHEREOF, AXA and each Voting Trustee have executed this
Amendment as of the date first written above.
AXA
by
/s/ Claude Bebear
Name: Claude Bebear
Title: Chairman of the Executive Board
VOTING TRUSTEES
/s/ Claude Bebear
Name: Claude Bebear
/s/ Patrice Garnier
Name: Patrice Garnier
/s/ Henri de Clermont-Tonnerre
Name: Henri de Clermont-Tonnerre
THE EQUITABLE LIFE ASSURANCE
SOCIETY OF THE UNITED STATES ("Equitable")
DEFERRED COMPENSATION PLAN FOR
SELECT GROUP OF MANAGEMENT EMPLOYEES AND AGENTS,
PLAN B, SECOND AMENDMENT AND RESTATEMENT,
EFFECTIVE JANUARY 1, 1996
Section 1. Purpose
The purpose of this Plan is to enhance the financial planning opportunities of
Eligible Employees and Eligible Agents of Equitable by providing them with the
opportunity to defer through a Deferral Agreement Salary, Incentive Compensation
or Commissions respectively or a percentage thereof to a later date pursuant to
the following provisions of the Plan. Further, this Plan shall be viewed as two
separate plans for the purpose of determining the applicability of certain
provisions of the Employee Retirement Income Security Act of 1974, as amended,
to the provisions of the Plan covering Eligible Employees and Eligible Agents
who are considered full-time life insurance salespersons under the Internal
Revenue Code of 1986, as amended ("Code") and the Federal Insurance
Contributions Act.
Section 2. Definitions
(1) Beneficiary - "Beneficiary" means the person or persons designated as
such in Section 7.
(2) Commissions - "Commissions" mean commissions with respect to all forms
of the Equitable's policies and contracts, both individual and group,
and service fees under the 14th Edition or 10th Edition form of Agents'
Agreement or other forms of compensation approved by the Committee.
Effective April 1, 1996 "Commissions" shall also mean commissions with
respect to all forms of Equitable policies and contracts, both
individual and group, and service fees under 14th Edition R forms of
Agents' Agreement, provided, however, that the term Commissions shall
not include renewal commissions earned by an Eligible Agent who is
under a 14th Edition R form of Agents' Agreement, when that Eligible
Agent was under a 14th Edition or 10th Edition form of Agents'
Agreement.
(3) Committee - "Committee" shall mean the Officers Committee on Benefits
Plans or such other committee as may be designated from time to time by
the Board of Directors of Equitable.
(4) Compensation - "Compensation" means an Eligible Employee's Salary and
Incentive Compensation paid or payable during the calendar year.
(5) Date of Distribution - "Date of Distribution" means the date specified
in the Deferral Agreement on which the payments required by this Plan
and the Deferral Agreement are made or commence.
(6) Deferral Account - "Deferral Account" means a record maintained by
Equitable of the Participant's Salary, Incentive Compensation or
Commissions deferred pursuant to the Deferral Agreement, interest
credits, and payments made to the Participant or his or her
Beneficiary. The use of the word "Account" herein does not contemplate
or imply any segregation by Equitable of any monies or other assets,
nor shall it be deemed to mean that any amount credited to the Deferral
Account is the property of the Participant.
(7) Deferral Agreement - "Deferral Agreement" means a written agreement
substantially in the form attached hereto which is entered into, prior
to the beginning of the calendar year for which the Salary, Incentive
Compensation or Commissions that will be deferred is earned, pursuant
to the provisions of this Plan by Equitable and the Eligible Employee
or Eligible Agent and pursuant to which the Eligible Employee or
Eligible Agent becomes a Participant in the Plan. An Eligible Employee
or Eligible Agent may, subject to the approval of the Committee, enter
into a Deferral Agreement after the beginning of the calendar year to
apply to Salary or Commissions to be earned during a subsequent part of
that calendar year.
1
<PAGE>
(8) Deferral Period - "Deferral Period" means the period specified in the
Deferral Agreement, provided, however, that it shall not extend beyond
the Participant's retirement date, except for deferrals by a
Participant who has entered into a 14th Edition R form of agreement,
whose deferral shall not extend beyond a period which ends at the end
of the month of the Eligible Agent's seventy first birthday. To the
extent a particular deferral of a Participant who is an Eligible
Employee exceeds 33-1/3% of that Participant's Compensation in a
calendar year, it shall not, with respect to the excess, extend beyond
36 months. Whether a particular deferral exceeds 33 1/3% of a
Participant's Compensation in a calendar year, shall be made with
reference to the Participant's total compensation deferrals under
Equitable's deferred compensation plans. Retirement hereunder shall
occur on the date a Participant retires under an Equitable retirement
plan or in the case of an Eligible Employee, upon termination of
employment with Equitable before retirement or in the case of a
Participant who is an Eligible Agent who has entered into a 14th
Edition or 10th Edition form of Agents' Agreement, cancellation of the
agent's contract with the Equitable before retirement.
(9) Eligible Agent - "Eligible Agent" means a member of a select group of
highly compensated individuals selected to participate in the Plan by
the Committee who (i) is under a 14th Edition form of Agents Agreement
with the Equitable and is classified as a "full-time life insurance
salesman" for purposes of the Federal Insurance Contributions Act, or
(ii) is an employee agent under a 10th Edition form of Agent's
Agreement. Effective April 1, 1996, the term "Eligible Agent" shall
also mean an individual under a 14th Edition R form of Agents Agreement
with the Equitable and is classified as an independent contractor.
(10) Eligible Employee - "Eligible Employee" means a highly compensated
member of a select group of management employees or agency managers of
Equitable, who is selected to participate in the Plan by the Committee.
(11) Equitable - "Equitable" means The Equitable Life Assurance Society of
the United States, a corporation organized and existing under the laws
of the State of New York, or its successor or successors.
(12) Incentive Compensation - "Incentive Compensation" means the short term
incentive compensation earned during any calendar year under
Equitable's short term incentive compensation program. For Deferral
Agreements entered into in one year, incentive compensation includes
incentive compensation earned in that year but to be determined in the
subsequent year.
(13) Participant - "Participant" means an Eligible Employee or an Eligible
Agent who has filed with the Committee or its designee a completed and
executed Deferral Agreement and is participating in this Plan in
accordance with the provisions of this Plan.
(14) Plan - "Plan" means the Equitable Deferred Compensation Plan for Select
Group of Management Employees and Agents, Plan B, Second Amendment and
Restatement, effective January 1, 1996.
(15) Salary - "Salary" means the base salary earned by an Eligible Employee
for any calendar year before reductions pursuant to this Plan or any
other plan of deferred compensation, including Code sections 401(k),
125 and 129 plans during the Deferral Period.
(16) 14th Edition R form of Agents Agreement - "14th Edition R form of
Agents Agreement" means an agreement entered into by an agent and
Equitable, or an agent operating as if he is under such an agreement,
on or subsequent to such agent's retirement under the Equitable
Retirement Plan.
Section 3. Deferrals of Salary/Incentive Compensation or Commissions
An Eligible Employee may enter into a Deferral Agreement whereby he/she may
defer payment of up to 100% of his/her Salary and/or Incentive Compensation. An
Eligible Agent may enter into a Deferral Agreement whereby he/she may defer 100%
of his or her Commissions, provided, however, that an Eligible Agent who is
classified as an independent contractor and is under a 14th Edition R form of
Agents Agreement shall be subject to a minimum deferral amount of 25% of his or
her Commissions. The Agreement shall determine the period during which the
percentage will be applied to Salary, Incentive Compensation or Commissions to
effect deferrals.
2
<PAGE>
Section 4. Benefit Treatment
Benefits under Equitable's health, disability, life insurance and survivor
income benefit plans in which a Participant participates will be calculated on
the basis of Salary, Incentive Compensation or Commissions as applicable,
unreduced for any deferral(s) under this Plan. Benefits under Equitable's
qualified and non-qualified Retirement and Investment Plans will be based on the
terms of those plans at the time of payment of amounts deferred under this Plan.
Any deferral(s) of Salary or Incentive Compensation under the Executive Deferred
Compensation Plan of the Equitable Life Assurance Society of the United States,
Plan A ("Plan A"), or other Equitable plan which a Participant may have elected
prior to entering into the Deferral Agreement, will take precedence over any
deferral(s) under this Plan. The deferral(s) under this Plan will, however, be
based on Salary, Incentive Compensation or Commissions as applicable, unreduced
by the deferrals under Plan A or other deferral plans.
Further, to the extent that a Participant is precluded from receiving a matching
contribution under the Equitable's Investment Plan for Employees, Managers and
Agents because of the deferral(s) under this Plan, to the extent the Participant
is not participating in Plan A, such Participant will receive his match, to the
extent not made under any other Equitable non-qualified defined contribution
plan, in this Plan. If the Participant is participating in Plan A, the match
will be made in Plan A. In addition, any deferral(s) made under this Plan which
is not considered in calculating a Participant's benefit under the Equitable
Retirement Plan for Employees, Managers and Agents (the "Pension Plan") thus,
causing the benefit under the Pension Plan to be reduced, to the extent not paid
under any other non-qualified defined benefit plan, will be paid under this
Plan. The amount paid under this Plan shall be the difference of what the total
benefit under the Pension Plan would have been had the deferral under this Plan
counted in the calculation of the pension benefit under the Pension Plan and the
actual benefit payable under that plan.
Notwithstanding the immediately foregoing paragraph, no matching contributions
will be made to Eligible Agents who are under a 14th Edition R form of Agents
Agreement.
Section 5. Interest Credits
At the end of each calendar year, amounts credited to the Participant's Deferral
Account under this Plan will be credited with interest. The interest for the
year shall be the amount determined by multiplying the average account balance
for the year by the applicable rate.
In the case of a deferral of Compensation or Commissions, for a period not in
excess of three (3) years, the annual rate of interest applicable to a calendar
year shall be the one (1) year Treasury Bill rate published in the Wall Street
Journal on the last business day of November of that calendar year. For
deferrals which are greater than three (3) years, the annual rate of interest
for a calendar year shall be the five (5) year Treasury Bill rate published in
the Wall Street Journal on the last business day of November of that calendar
year.
Section 6. Distribution
In the event of a termination of the employment of a Participant who is an
Eligible Employee or the cancellation of the contract of a Participant who is an
Eligible Agent under a 14th or 10th Edition form of Agents' Agreement before
retirement, the account balance credited to that Participant's Deferral Account
as of the date of termination will be paid in a single sum to the Participant.
In the case of an Eligible Employee, amounts that cannot be deferred beyond 36
months, and in the case of an Eligible Agent who has elected to defer Commission
for a period of 36 months or less, such amounts and any interest thereon will be
paid in a single sum to the Participant on the Date of Distribution specified in
the Deferral Agreement. Notwithstanding the foregoing, however, a Participant
who (i) is an Eligible Agent under a 14th or 10th Edition form of Agents'
Agreement may elect to commence receiving the amount in the Deferral Account
before the end of a thirty six month period in annual installments not to exceed
the total amount of installments agreed to in the Deferral Agreement and, (ii)
is an Eligible Agent under a 14th Edition R form of Agents Agreement may elect
in the Deferral Agreement to receive payment of the balance in the Deferral
Account on the Date of Distribution, either in a lump sum or in installments,
not to exceed the total amount agreed to in the Deferral Agreement.
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Section 7. Designation of Beneficiary
Each Participant may designate a Beneficiary or Beneficiaries (which Beneficiary
may be an entity other than a natural person) to receive any payments which may
be made following the Participant's death. Such designation may be changed or
canceled at any time without the consent of any such Beneficiary. Any such
designation, change or cancellation must be made in a form approved by the
Committee and shall not be effective until received by the Committee. If no
Beneficiary has been named, or the designated Beneficiary or Beneficiaries shall
have predeceased the Participant, the Beneficiary shall be the Participant's
estate. If a Participant designates more than one Beneficiary, the interests of
such Beneficiaries shall be paid in equal shares, unless the Participant has
designated otherwise.
Section 8. Plan Administration
The Committee is hereby authorized to administer the Plan and establish, adopt,
or revise such rules and regulations as it may deem necessary or advisable for
the administration of the Plan. The Committee shall have discretionary authority
to construe and interpret the Plan and to determine the rights, if any, of
Participants and Beneficiaries under the Plan. The Committee's resolution of any
matter concerning the Plan shall be final and binding upon any Participant and
Beneficiary affected thereby. Members of the Committee shall be eligible to
participate in the Plan while serving as members of the Committee, but a member
of the Committee shall not vote or act upon any matter which relates solely to
such member's interest in the Plan as a Participant.
Section 9. Emergency Benefit
In the event that the Committee, upon written petition of the Participant,
determines, in its sole discretion, that the Participant has suffered an
unforeseeable financial emergency, the Company shall pay to the Participant, as
soon as practicable following such determination, an amount necessary to meet
the emergency, after deducting any and all taxes as may be required pursuant to
Section 16. For purposes of this Plan, an unforseeable financial emergency is an
unexpected need for cash arising from an illness, casualty loss, sudden
financial reversal, or other such unforseeable occurrence. Cash needs arising
from foreseeable events such as the purchase of a house or education expenses
shall not be considered to be the result of an unforseeable financial emergency.
Notwithstanding anything in this Plan to the contrary, a Participant who
receives an Emergency Benefit in any Plan Year shall not be entitled to make any
further deferrals for the remainder of such Plan Year.
Section 10. Amendment and Termination of the Plan
The Board of Directors of Equitable or any other entity authorized by it may at
any time amend, suspend, discontinue or terminate the Plan, provided, however,
that no amendment shall be effective to reduce the amounts credited to a
Participant's Deferral Account to the date of the amendment, suspension,
discontinuance or termination. Written notice of any amendment will be given to
each Participant then participating in the Plan, as soon as practicable after
its effective date. In the event the Plan is terminated, the entire account
balance credited to the Deferral Account as of the effective date of the
termination will be paid in a single sum to the Participant.
Section 11. No Limitation on Corporation Actions
Nothing contained in the Plan shall be construed to prevent the Equitable, from
taking any corporate action which is deemed by it to be appropriate or in its
best interest, whether or not such action would have an adverse effect on the
Plan or any benefits under the Plan. No Participant, Beneficiary or other person
shall have any claim against the Equitable, its subsidiaries and affiliates as a
result of any such action.
Section 12. Participant as Unsecured General Creditor
A Participant shall have no legal or equitable right, interest, or claim in any
specific property or assets of Equitable. Any and all of Equitable's assets
shall be, and remain, the general, unpledged, unrestricted assets of Equitable.
Equitable's obligation under this Plan shall be merely that of an unfunded and
unsecured promise of Equitable to pay money in the future.
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Section 13. Nonassignability
The Participant or any other person shall not have any right to commute, sell,
assign, transfer, pledge, anticipate, mortgage or otherwise encumber,
hypothecate or convey in advance of actual receipt of amounts, if any, payable
hereunder, or any part thereof, or interest therein which are, and all rights to
which are, expressly declared hereby to be unassignable and non-transferable. No
part of the amount payable shall, prior to actual payment, be subject to seizure
or sequestration for the payment of any debts, judgments, alimony or separate
maintenance owed by a Participant or any other person, nor be transferable by
operation of law in the event of a Participant's or any other person's
bankruptcy or insolvency.
Section 14. Employment Not Guaranteed
Nothing contained in this Plan nor any action taken hereunder shall be construed
as a contract of employment or of agency or as giving any Eligible Employee or
Eligible Agent any right to be retained in the employ or as an agent of
Equitable.
Section 15. Obligation to Equitable
If a Participant becomes entitled to a distribution under the Plan, and if at
such time the Participant has outstanding any debt, obligation, or other
liability representing an amount owing to Equitable, then Equitable may to the
extent permitted by law offset such amount owed to it against the amount of
benefits otherwise distributable. Such determination shall be made by the
Committee.
Section 16. Withholding Taxes
The Equitable may make such provisions and take such action as it may deem
necessary or appropriate for the withholding of any taxes which it is required
by any law or regulation of any governmental authority, whether Federal, state
or local, to withhold in connection with any benefits under the Plan, including,
but not limited to, the withholding of appropriate sums from any amount
otherwise payable to the Participant (or his Beneficiary). Each Participant,
however, shall be responsible for the payment of all individual tax liabilities
relating to any such benefits.
Section 17. Severability
If any provision of the Plan is held unenforceable, the remainder of the Plan
shall continue in full force and effect without regard to such unenforceable
provision and shall be applied as though the unenforceable provision were not
contained in the Plan.
Section 18. Applicable Law
This Plan shall be governed and construed in accordance with the laws of the
State of New York.
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DEFERRED COMPENSATION ELECTION FORM - Employees and Agents (Plan B)
In accordance with the Deferred Compensation Plan for a Select Group of
Management Employees and Agents (Plan B), which is hereby incorporated by
reference, I make the following irrevocable elections for the coming year:
Deferral Election
I elect to defer the following percentages or dollar amounts of my compensation:
_________% or $ _______________ from each payment of base salary.
_________% or $ _______________ of my annual IC.
_________% of total Commissions.*
Payout Election
I elect that any amount payable to me pursuant to the Deferred Compensation Plan
be paid as follows:
In one lump sum on _______________
(Insert date or "my retirement date").
In __ annual payments (insert number - maximum 15) beginning on _______________
(insert date or "my retirement date").
Per New York State insurance law, employee deferrals in excess of 33-1/3% of
total compensation for a calendar year must be paid out within 36 months of the
date the deferral is made. I elect to have any deferral in excess of 33-1/3% of
total comp paid out on January 1 of the (select one) ___ first, ___ second, or
___ third following year.
*An Eligible Agent who is under a 14th Edition R Agents Agreement is subject to
a minimum deferral amount of 25% of Commissions.
Beneficiary
In the event of my death, I designate the following person as my beneficiary:
- ---------------------------------------------------------------
Name and relationship
- ---------------------------------------------------------------
Address
Signature
I understand that these elections are binding on me and cannot be changed:
- -------------------- -------------------- --------------------
Name (please print) Social Security Number Organization/Dept.
- ---------------------------------------- --------------------------
Signature Date
- ---------------------------------------- --------------------------
Plan Administrator Signature Date
6
Since its inception, the Variable Deferred Compensation Plan for
Executives (the "Variable Plan") has been amended on three occasions as follows:
Effective June 1, 1995, the Variable Plan was amended to include an
additional Earnings Credit Option known as the International Portfolio.
Effective January 1, 1997, the Variable Plan was amended to permit
participants (i) no later than 12 months prior to the commencement of benefits
under the Retirement Distribution Option, to change the commencement date of
and/or the form in which such benefits will be paid, and (ii) to withdraw all or
a portion of the balance credited to their Distribution Option Accounts at any
time, subject to a forfeiture penalty equal to 10 percent of the amount
withdrawn and a one-year suspension of additional deferrals under the Plan.
Effective January 1, 1998, the Variable Plan was again amended to
include an additional Earnings Credit Option known as the Small Cap Growth Fund.
THE EQUITABLE STOCK PURCHASE PLAN FOR EMPLOYEES AND AGENTS, AS AMENDED
SECTION 1.
PURPOSE
The purpose of The Equitable Stock Purchase Plan for Employees and Agents, as
amended (the "Plan") is to encourage and facilitate stock ownership by Employees
by providing a continued opportunity to purchase Common Stock, through voluntary
after-tax payroll deductions and additional cash contributions. Effective as of
August 1, 1997, or such later date as the Plan Administrator shall determine
(the "Qualified Purchase Effective Date"), the Plan Administrator may elect to
convert the Plan to a qualified employee stock purchase plan under Section 423
of the Code. The effective date of the Plan is October 1, 1995.
SECTION 2.
DEFINITIONS
DEFINITIONS. Whenever used herein, the following terms shall have the
respective meanings set forth below:
a. "Board" means the Board of Directors of the Company.
b. "Cash Contributions" means an Employee's after-tax contributions
pursuant to Section 5.2.
c. "Code" means the Internal Revenue Code of 1986, as amended.
d. "Common Stock" means the common stock, par value $.01, of the
Company.
e. "Company" means The Equitable Companies Incorporated, a Delaware
corporation.
f. "Compensation" means base pay, short-term incentive compensation and
commissions, but excludes any portion of such amounts which are
deferred or are not benefits eligible under the plans or policies
of an Employee's Employer. Without limiting the generality of the
foregoing, Compensation shall exclude nonqualified deferred
compensation, deferred salary reduction contributions under The
Equitable Investment Plan for Employees, Managers and Agents or any
successor 401(k) plan and amounts contributed to a plan under Code
Section 125 pursuant to a salary reduction election.
Notwithstanding the foregoing, for Senior Sales Force Agents
"Compensation" means eligible compensation as determined by the
Plan Administrator.
g. "Custodian" means First Chicago Trust Company, the Company's agent,
or such other entity appointed by the Plan Administrator.
h. "Date of Exercise" means the last trading day of each calendar month
ending during the period commencing on the Qualified Purchase
Effective Date and ending on the last day of the term of the Plan.
i. "Date of Grant" means the date upon which an Option is granted, as
set forth in Section 6.3.
j. "DRIP" means the Company's Dividend Reinvestment and Stock Purchase
Plan.
k. "Employees" means all officers and employees of Equitable, agents
classified as full-time life insurance salespersons by Equitable,
agents classified as senior sales force agents by Equitable
("Senior
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Sales Force Agents") and all officers and employees of any Subsidiary
whose employees are expressly permitted to participate in the Plan by
the Plan Administrator.
l. "Employer" means Equitable and any Subsidiary whose employees are
expressly permitted to participate in the Plan by the Plan
Administrator.
m. "Employer Matching Contributions" means amounts contributed by an
Employer pursuant to Section 5.3.
n "Equitable" means The Equitable Life Assurance Society of the United
States.
o. "Fair Market Value" means, on any date, the closing price of the
Common Stock as reported on the consolidated tape of the New York
Stock Exchange (or on such other recognized quotation system on
which the trading price of the Common Stock is quoted at the
relevant time) on such date. In the event that there are no Common
Stock transactions reported on such tape (or such other system) on
such date, Fair Market Value shall mean the closing price on the
immediately preceding date on which Common Stock transactions were
so reported.
p. "Individual Account" means a separate account maintained by the
Custodian for each participating Employee.
q. "LTD Status" means an Employee who is characterized as being on
long-term disability, as determined in accordance with the
otherwise applicable plans or policies of an Employee's employer.
r. "Nonqualified Stock Purchases" means purchases of Common Stock
pursuant to Section 5, which are not intended to be qualified under
Section 423 of the Code.
s. "Option" means an option granted under Section 6 to a participating
Employee to purchase shares of Common Stock.
t. "Option Price" has the meaning set forth in Section 6.7.
u. "Parent" means any corporation, other than the Company, in an
unbroken chain of corporations ending with the Company if, at the
time of the granting of the Option, each of the corporations other
than the Company owns stock possessing 50% or more of the total
combined voting power of all classes of stock in one of the other
corporations in the chain.
v. "Payroll Contributions" means an Employee's after-tax contributions
of Compensation by payroll deduction pursuant to Section 5.2 or
Section 6.5, as applicable.
w. "Plan Administrator" means the Officers Committee on Benefit Plans
of Equitable.
x. "Plan Year" means a period of twelve months commencing on January 1
and ending on the next December 31.
y. "Purchase Expenses" means all expenses incurred in connection with
the purchase of outstanding shares of Common Stock for delivery
under the Plan pursuant to Section 5.5.
z. "Purchase Funds" means the Transferred Funds or Cash Contributions,
as applicable.
aa. "Qualified Stock Purchases" means purchases of Common Stock
pursuant to the exercise of
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Options granted under Section 6 after the Qualified Purchase
Effective Date, which are intended to be qualified under Section
423 of the Code.
bb. "Severance Status" means an Employee who is characterized as being
on severance, as determined in accordance with the otherwise
applicable plans or policies of an Employee's employer.
cc. "Subsidiary" means each of the Company's direct or indirect
majority-owned subsidiaries.
dd. "Terminating Event" means (i) a participating Employee's termination
of employment for any reason, attaining LTD Status or Severance
Status, Unpaid Leave, becoming ineligible to receive employee
benefits in accordance with the applicable plans or policies of the
Employee's employer, or any other event which causes such Employee
to no longer meet the requirements of Section 4 or, (ii) in the
case of an Employee who is a Senior Sales Force Agent, the
termination of such individual's status as a Senior Sales Force
Agent for any reason (including by reason of death or the
termination of such individual's agents agreement), attaining LTD
status or any other event which causes such individual to no longer
meet the requirements of Section 4.
ee. "Transferred Funds" means the Payroll Contributions and Employer
Matching Contributions made pursuant to Section 5 to an Employee's
Individual Account during the applicable payroll period.
ff. "Unpaid Leave" means an unpaid leave of absence or any leave of
absence that does not meet the requirements of Treasury Regulation
Section 1.421-7(h)(2).
gg. "Withdrawn Shares" means any shares which have been retained in an
Employee's Individual Account for less than six months.
SECTION 3.
ADMINISTRATION
The Plan shall be administered by the Plan Administrator. The Plan
Administrator shall have authority to make rules and regulations for the
administration of the Plan, and its interpretations and decisions with regard
thereto shall be final and conclusive. The Plan Administrator may delegate
responsibility for the day to day operation and administration of the Plan to
any officer or employee or group of officers or employees of the Company or any
of its Subsidiaries.
SECTION 4.
ELIGIBILITY
4.1 GENERAL RULE. Except as otherwise provided herein, all Employees
shall be eligible to participate in the Plan.
4.2 EXCLUSIONS. Notwithstanding the provisions of Section 4.1, any
Employee who (i) is a common law employee and whose customary employment is 20
hours or less per week, (ii) is not a common law employee
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and is not classified by Equitable as a full-time life insurance salesperson or
a Senior Sales Force Agent, (iii) is on LTD Status, (iv) is on an Unpaid Leave,
(v) is on Severance Status, (vi) terminates employment or is terminated for any
reason (including, without limitation, in the case of an Employee who is a
Senior Sales Force Agent, termination of his agents agreement with Equitable for
any reason), (vii) is not eligible to receive employee benefits in accordance
with the applicable plans or policies of the Employee's employer, or (viii) with
respect to eligibility to participate in the Plan under Section 6 after the
Qualified Purchase Effective Date, immediately after an Option is granted, owns
stock (as defined by Sections 423(b)(3) and 424(d) of the Code) possessing five
percent or more of the total combined voting power or value of all classes of
stock of the Company or of a Parent or any Subsidiary, shall not be eligible to
participate in the Plan. Notwithstanding anything to the contrary contained
herein, the Plan Administrator shall have the authority to exclude from
participation, or to establish guidelines with respect to the participation of,
(i) persons subject to Section 16 of the Securities Exchange Act of 1934, as
amended, and (ii) after the Qualified Purchase Effective Date, persons who are
treated as Employees but who are not common law employees, but only to the
extent necessary to comply with the requirements of Section 423 of the Code.
SECTION 5.
NONQUALIFIED STOCK PURCHASES
5.1 PARTICIPATION. An Employee who meets the requirements in Section 4
may participate in the Plan under this Section 5 by enrolling through an
automatic voice response system, completing and forwarding an enrollment form to
the Plan Administrator or its designee, or satisfying such other conditions as
the Plan Administrator shall establish from time to time. Any Eligible Employee
who elects to participate in the Plan must authorize an after-tax payroll
deduction from the Employee's Compensation to be made as of any future payroll
period. Any election to authorize payroll deductions shall be effective no later
than the second payroll period, or such greater or lesser period of time as the
Plan Administrator shall determine, after the date on which the eligible
Employee enrolls through the automatic voice response system or the receipt of
the enrollment form by the Plan Administrator or its designee.
5.2 EMPLOYEE CONTRIBUTIONS. There shall be an Individual Account for each
participating Employee to which shall be credited the amount of any
contributions made by or on behalf of the Employee, and the number of full or
fractional shares of Common Stock that are purchased on such Employee's behalf,
pursuant to the terms of the Plan. An Employee may authorize Payroll
Contributions in terms of whole number percentages, from a minimum of two
percent to a maximum of 15 percent, of the Compensation that the Employee
receives during each payroll period; provided that no Employee shall be entitled
to make Payroll Contributions for any Plan Year in excess of the lesser of (A)
$25,000 and (B) 15 percent of such Employee's Compensation for such Plan Year.
Any Employee who has made Payroll Contributions may also deliver to the
Custodian one or more Cash Contributions, each of which is for a minimum of $100
(or such greater or lesser amount as the Plan Administrator shall determine),
during any payroll period in which such Payroll Contributions are made, by
personal check or other cash equivalent acceptable to the Custodian; provided
that no Employee shall be entitled to make Cash Contributions for
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any Plan Year in excess of $25,000. To the extent permitted by the Plan
Administrator and only if the opportunity to make such contributions will not
cause the Plan to fail to meet the requirements of Section 423 of the Code after
the Qualified Purchase Effective Date, Cash Contributions may continue to be
made pursuant to this Section 5.2 after the Qualified Purchase Effective Date.
Payroll Contributions may continue to be made under this Section 5.2 after the
Qualified Purchase Effective Date solely to the extent, if any, permitted by the
Plan Administrator pursuant to Section 6.5. Notwithstanding the foregoing, in
the event of a participating Employee's Terminating Event, (i) no further
Payroll Contributions or Cash Contributions by such Employee shall be permitted
and (ii) if the participating Employee ceases to be eligible to participate in
the Plan by reason of a termination of employment for any reason (including
retirement or death or, in the case of a Senior Sales Force Agent, termination
of such individual's agents agreement) or becomes ineligible to receive employee
benefits in accordance with the applicable plans or policies of his Employer, no
further Employer Matching Contributions shall be made with respect to such
Employee. Employees on short-term disability may make Payroll Contributions or
Cash Contributions.
5.3 EMPLOYER MATCHING CONTRIBUTIONS. With respect to each Employee who at
any time has made a Payroll Contribution pursuant to Section 5.2 and retains the
shares purchased with such Payroll Contribution in his Individual Account for a
period of at least six months after the date of such Payroll Contribution, the
Employee's Employer shall thereafter make an Employer Matching Contribution,
equal to 15% of the Employee's Payroll Contribution used to purchase such
shares. Such Employer Matching Contribution shall be remitted to the Employee's
Individual Account in accordance with Section 5.4 immediately after the end of
the first payroll period ending after the six-month anniversary of the date on
which such Payroll Contribution was made by the Employee; provided that no
Employer Matching Contribution shall be made if the participating Employee
ceases to be eligible to participate in the Plan by reason of termination of
employment for any reason (including retirement or death or, in the case of a
Senior Sales Force Agent, termination of such individual's agents agreement with
Equitable) or becomes ineligible to receive employee benefits in accordance with
the applicable plans or policies of his Employer. The occurrence of the
Qualified Purchase Effective Date shall not affect the obligations of the
Employer pursuant to this Section 5.3.
5.4 REMITTING OF FUNDS. As soon as practicable, but in no event later
than five business days following the end of each payroll period, for each
participating Employee, each Employer shall remit the Transferred Funds to the
Individual Account of the Employee.
5.5 PURCHASE OF SHARES. As soon as practicable, but not later than five
business days following the receipt of any Purchase Funds, the Custodian shall
place orders with a registered broker-dealer selected by the Custodian, which
broker-dealer shall not be an affiliate of the Company, for the purchase on the
New York Stock Exchange, at the then-quoted market prices, of that number of
whole shares of Common Stock that may be purchased with the Purchase Funds,
provided that the Plan Administrator shall establish reasonable procedures to
address the question of any fractional shares in a manner that assures that no
Purchase Funds remain uninvested beyond the fifth business day following receipt
thereof. The price per share (the "Purchase Price") for Common Stock purchased
for each participating Employee's Individual Account on any given date shall be
the average price of all shares purchased under the Plan on such date. The
Individual Account of a participating Employee shall be credited with that
number of whole and fractional shares which have an aggregate Purchase Price
equal to the Employee's Payroll Contributions,
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Cash Contributions and Employer Matching Contributions included in such Purchase
Funds. The Employee's Individual Account shall be charged for the amount of the
Purchase Funds allocated to such purchase, and the ownership by such Employee of
any such share or shares shall be appropriately evidenced on the books of the
Company or any other entity designated by the Plan Administrator in its sole
discretion.
SECTION 6.
QUALIFIED STOCK PURCHASES
6.1 STOCK TO BE ISSUED. Subject to the provisions of Section 11.3, the
number of shares of Common Stock issuable pursuant to Options under the Plan
shall not exceed 2,000,000. The shares to be delivered pursuant to Options under
the Plan may consist, in whole or in part, of treasury stock or authorized but
unissued Common Stock, not reserved for any other purpose.
6.2 SHAREHOLDER APPROVAL. The Plan will be submitted for the approval of
the Company's shareholders not later than 12 months after the Qualified Purchase
Effective Date. No Options may be granted under this Section 6 prior to such
shareholder approval. If shareholders do not grant such approval, this Section 6
shall be rendered void and without effect, and Employees shall continue to be
eligible to participate herein pursuant to Section 5.
6.3 GRANT OF OPTIONS. Subject to Section 6.2, on or after the Qualified
Purchase Effective Date and continuing while the Plan remains in force, the
Company may offer Options under the Plan to all participating Employees. These
Options may be granted twice each Plan Year on January 1 and July 1 of each year
(or on such other date or dates as shall be determined by the Plan
Administrator). The term of each Option shall end on the last day of the Plan
Year in which the Option is granted (or on such earlier or later date as shall
be determined by the Plan Administrator, but in no event later than the last day
of the twenty-sixth calendar month beginning after the Date of Grant). The
number of whole shares of Common Stock subject to each Option shall be the
lesser of (i) the quotient of (A) the Payroll Contributions authorized by each
participating Employee in accordance with Section 6.5 for the term of the Option
divided by (B) the Option Price for each share of Common Stock purchased
pursuant to such Option, excluding all fractions, or (ii) such maximum number of
shares as may be established by the Plan Administrator.
6.4 PARTICIPATION. An Employee who meets the requirements in Section 4
may participate in the Plan under this Section 6 by enrolling through an
automatic voice response system completing and forwarding an enrollment form to
the Plan Administrator or its designee, or satisfying such other conditions as
the Plan Administrator shall establish from time to time, provided that, subject
to Section 6.2, on the Qualified Purchase Effective Date, an Employee who has
elected to make Payroll Contributions pursuant to Section 5.1 shall
automatically and without any act on his part be enrolled in the Plan under this
Section 6 as of the Qualified Purchase Effective Date. Eligible Employees who
elect to participate in the Plan shall authorize a payroll deduction from the
Employee's Compensation to be made as of any future payroll period. Any election
to authorize payroll deductions shall be effective as of the first Date of
Grant, or such
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other date as the Plan Administrator may determine, commencing after the date on
which the eligible Employee enrolls through the automatic voice response system
or the receipt of the enrollment form by the Plan Administrator or its designee.
6.5 PAYROLL CONTRIBUTIONS. There shall be an Individual Account for each
participating Employee to which shall be credited the amount of any Payroll
Contributions and the number of full or fractional shares of Common Stock that
are purchased by such Employee, pursuant to the terms of the Plan. An Employee
may authorize Payroll Contributions in terms of whole number percentages, from a
minimum of two percent to a maximum of 15 percent, of the Compensation that the
Employee receives during each payroll period; provided that (i) no Employee
shall be entitled to make Payroll Contributions (including any Payroll
Contributions made pursuant to Section 5.2) for any Plan Year in excess of the
lesser of (A) $25,000 and (B) 15 percent of such Employee's Compensation for
such Plan Year and (ii) no Employee shall be permitted to purchase Common Stock
pursuant to Options under the Plan or under any other employee stock purchase
plan of the Company or a Parent or any Subsidiary which is intended to qualify
under Section 423 of the Code, at a rate which exceeds $25,000 in Fair Market
Value (determined at the time the Option is granted) for each calendar year in
which such Option granted to such Employee is outstanding at any time. After the
Qualified Purchase Effective Date, all Payroll Contributions shall be made under
this Section 6.5 and not Section 5.2, except that, to the extent that any
persons who are Employees, but not common law employees, may not participate
under this Section 6.5 and are not excluded from participation under Section
4.2, such Employees may continue to participate as to Payroll Contributions
pursuant to and in accordance with Section 5.2. In the event of a participating
Employee's Terminating Event, (i) no further Payroll Contributions by such
Employee shall be permitted and (ii) his outstanding Options shall terminate.
Employees on short-term disability may make Payroll Contributions.
Notwithstanding anything else contained in the Plan to the contrary, Payroll
Contributions made pursuant to this Section 6.5 may be applied, to the extent
necessary, to satisfy any advances made to avoid the purchase of fractional
shares under Section 5.
6.6 EXERCISE OF OPTIONS. Each participating Employee automatically and
without any act on his part will be deemed to have exercised his Option on each
Date of Exercise to the extent that the balance then in his Individual Account
is sufficient to purchase at the Option Price whole shares of Common Stock. Any
amount in the participating Employee's Individual Account on a Date of Exercise
not applied to the purchase of Common Stock shall continue to be held in such
account and applied as of the earliest subsequent Date of Exercise at which time
such amount can be so applied in accordance with the terms hereof.
6.7 OPTION PRICE. The Option Price per share of Common Stock (the "Option
Price") to be paid by each participating Employee on each exercise of his Option
shall be the lesser of (i) 85% (or such greater percentage as the Board or its
designee may authorize) of the Fair Market Value of a share of Common Stock on
the Date of Grant or (ii) 85% (or such greater percentage as the Board or its
designee may authorize) of the Fair Market Value of a share of Common Stock on
the Date of Exercise.
6.8 HOLDING PERIOD. Any shares of Common Stock acquired pursuant to the
exercise of an Option shall be held and not sold for six months following the
Date of Exercise, and shall be subject to
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such restrictions on withdrawals and transfers as shall be determined by the
Plan Administrator in its sole discretion.
6.9 CANCELED, TERMINATED OR FORFEITED OPTIONS. Any shares of Common Stock
subject to an Option which for any reason is canceled, terminated or otherwise
settled without the issuance of any Common Stock shall again be available for
Options under the Plan.
SECTION 7.
DEDUCTION CHANGES AND PLAN WITHDRAWALS
7.1 DEDUCTION CHANGES. Subject to Section 5.2 or Section 6.5, as
applicable, a participating Employee may increase or decrease his Payroll
Contributions, effective (i) under Section 5, no later than the second payroll
period, or (ii) under Section 6, as of the first Date of Grant, (or such greater
or lesser period as the Plan Administrator shall determine) commencing after the
receipt of proper notice of such change by the Plan Administrator or its
designee. If an Employee ceases to make Payroll Contributions at any time prior
to a Terminating Event, any cash balance then held in his Individual Account
shall automatically be distributed to such Employee as soon as practicable after
the effective date of such cessation.
7.2 WITHDRAWALS. Except as provided in Section 6.8, an Employee may at
any time (subject to such notice requirements as the Plan Administrator may from
time to time prescribe), and for any reason, cease participation in the Plan and
withdraw all or any portion of the shares of Common Stock and cash, if any, in
his Individual Account pursuant to Section 10. The Employee may thereafter
recommence participation in the Plan (i) under Section 5, effective no later
than the second payroll period, or such greater or lesser period of time as the
Plan Administrator shall determine, following the completion of re-enrollment
pursuant to Section 5.1, or (ii) under Section 6, on the first Date of Grant
following completion of re-enrollment pursuant to Section 6.4. Upon an
Employee's Terminating Event, any and all cash held in his Individual Account
shall be distributed to him as soon as practicable thereafter. Without limiting
the generality of the foregoing, upon the termination of an Employee's
employment (including, in the case of a Senior Sales Force Agent, termination of
such individual's agents agreement with Equitable), all shares and any cash held
in his Individual Account shall be distributed to him as soon as practicable
thereafter, except that, the Plan Administrator may delay the distribution of
all or any shares acquired pursuant to the exercise of an Option within six
months of such termination until not later than the six month anniversary of
such termination.
SECTION 8.
REINVESTMENT OF DIVIDENDS
By electing to participate in the Plan, each Employee affirmatively
agrees, with respect to shares held under the Plan, to participate in and be
bound by the terms and conditions of the DRIP. The Individual
8
<PAGE>
Account of each participating Employee shall be credited with the number of
shares of Common Stock purchased through the DRIP with the dividends payable on
the shares otherwise credited to the Employee's Individual Account.
Participating Employees may terminate their participation in the DRIP at any
time by giving notice to the Custodian in accordance with the terms of the DRIP.
SECTION 9.
ISSUANCE OF CERTIFICATES
While maintained by the Custodian, all shares shall be held in the name
of the Custodian or its nominee, or in street name. As soon as practicable after
an event giving rise to a withdrawal or other distribution of shares pursuant to
Sections 7.2 or 10, the shares being withdrawn or otherwise distributed from an
Employee's Individual Account shall be either (i) transferred into a new account
maintained by the Custodian and held in book-entry form in the Employee's name,
or (ii) if the Employee so requests, distributed to such Employee in
certificated form. Such certificates may be registered only in the name of the
Employee. Notwithstanding the foregoing, the Company shall issue certificates to
an Employee upon such Employee's request to the Plan Administrator or its
designee as soon as practicable following such request. If any shares withdrawn
or otherwise distributed to an Employee are Withdrawn Shares, such Employee will
not be eligible for an Employer Matching Contribution with respect to any
Payroll Contributions used to purchase such Withdrawn Shares.
SECTION 10.
WITHDRAWALS AND DISTRIBUTIONS
Except as otherwise expressly provided in Section 6, all or a portion of
the shares of Common Stock allocated to an Employee's Individual Account may be
withdrawn by an Employee at any time. Any withdrawal or other distribution shall
be made in the form of cash or stock, as elected by the Employee. To the extent
of a withdrawal or distribution of an Employee's shares in the form of cash, the
Employee shall receive an amount per share equal to the proceeds received from
the sale of such shares net of his allocable share of any related brokerage fees
and other expenses incurred in connection with the sale of such shares. All
fractional shares shall be paid in cash at the average sale price of such shares
sold on behalf of Employees on the day of such sales.
SECTION 11.
MISCELLANEOUS PROVISIONS
11.1 WITHHOLDING. The Employer or its designee may make such provisions
and take such action as it may deem necessary or appropriate for the withholding
of any taxes which the Employer is required by law or regulation of any
governmental authority, whether Federal, state or local, to withhold in
connection
9
<PAGE>
with Payroll Contributions, the allocation of Employer Matching Contributions
and, to the extent determined by the Plan Administrator, any allocable Purchase
Expenses under the Plan, including, but not limited to, the withholding of
appropriate sums from any amounts otherwise payable to the participating
Employee. Each participating Employee, however, shall be responsible for the
payment of all individual tax liabilities relating to any such amounts.
11.2 RIGHTS NOT TRANSFERABLE. Rights under the Plan are not transferable
by a participating Employee.
11.3 ADJUSTMENTS IN CAPITALIZATION; MERGERS. In the event of any stock
dividend or stock split, recapitalization (including, without limitation, the
payment of an extraordinary dividend), merger, consolidation, combination, spin
off, distribution of assets to shareholders (other than ordinary cash
dividends), exchange of shares, or other similar corporate change, (i) shares
credited to each Employee's Individual Account shall be adjusted in the same
manner as all other outstanding shares of Common Stock in connection with such
event, (ii) the Board or a committee thereof shall determine the kind of shares
which may be acquired under the Plan after such event, and (iii) the aggregate
number of shares of Common Stock available under Section 6.1 or subject to
outstanding Options and the respective exercise prices applicable to outstanding
Options may be appropriately adjusted by the Board or a committee thereof, in
its discretion, and the determination of the Board or a committee thereof shall
be conclusive. Except as otherwise determined by the Board, a merger or a
similar reorganization which the Company does not survive, a liquidation or
distribution of the Company, or a sale of all or substantially all of the assets
of the Company, shall cause the Plan to terminate and all shares of Common
Stock, other securities and cash, if any, in the Individual Accounts of
participating Employees shall be distributed to each Employee pursuant to
Section 10 as soon as practicable unless any surviving entity agrees to assume
the obligations hereunder.
11.4 AMENDMENT OF THE PLAN. The Board or its delegate may at any time, or
from time to time, amend the Plan in any respect; provided that, at any time
after the Plan has been submitted to and approved by the Company's shareholders
pursuant to Section 6.2, approval by the vote of the holders of more than 50% of
the outstanding shares of the Company's stock entitled to vote shall be required
to amend the Plan to (i) change the number of shares of Common Stock reserved
for Options under Section 6.1 of the Plan, (ii) decrease the Option Price below
a price computed in the manner stated in Section 6.7, or (iii) alter the
requirements for eligibility to participate in the Plan under Section 6. No
amendment, modification, or termination of the Plan shall in any manner
adversely affect the rights of any Employee under the Plan, without the consent
of the Employee. The Plan shall terminate at any time at the discretion of the
Board or its delegate. Upon termination of the Plan, all shares of Common Stock
and cash, if any, in the Individual Accounts of participating Employees shall be
distributed to each Employee pursuant to Section 10 as soon as practicable.
11.5 REQUIREMENTS OF LAW. The Company's obligation to deliver Common
Stock under the Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
11.6 CUSTODIAL ARRANGEMENT. All cash and Common Stock allocated to an
Employee's Individual
10
<PAGE>
Account under the Plan shall be held by the Custodian in its capacity as a
custodian for the Employee with respect to such cash and Common Stock. Nothing
contained in the Plan, and no action taken pursuant to the Plan, shall create or
be construed to create a trust of any kind, or a fiduciary relationship between
the Company and its officers or the Board or the Plan Administrator or the
Custodian, on the one hand, and any Employee, the Company or any other person or
entity, on the other hand.
11.7 NO RIGHT TO CONTINUOUS EMPLOYMENT. The Plan and any right to
purchase Common Stock granted hereunder shall not confer upon any Employee any
right with respect to continuance of employment by Equitable or any Subsidiary,
nor shall they restrict or interfere in any way with the right of Equitable or
any Subsidiary by which an Employee is employed to terminate his employment at
any time.
11.8 INDEMNIFICATION. Each person who is or shall have been a member of
the Board or the Plan Administrator shall be indemnified and held harmless by
the Company and each Employer against and from any loss, cost, liability, or
expense that may be imposed upon or reasonably incurred by him in connection
with or resulting from any claim, action, suit, or proceeding to which he may be
made a party or in which he may be involved by reason of any action taken or
failure to act under the Plan (in the absence of bad faith) and against and from
any and all amounts paid by him in settlement thereof, with the Company's
approval, or paid by him in satisfaction of any judgment in any such action,
suit, or proceeding against him, provided he shall give the Company an
opportunity, at its own expense, to handle and defend the same before he
undertakes to handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive and shall be independent of any other
rights of indemnification to which such persons may be entitled under the
Company's Certificate of Incorporation or By-Laws, by contract, as a matter of
law, or otherwise.
11.9 NO LIMITATION ON COMPENSATION. Nothing in the Plan shall be
construed to limit the right of the Company to establish other plans.
11.10 NO CONSTRAINT ON CORPORATE ACTION. Nothing in this Plan shall be
construed (i) to limit, impair or otherwise affect the Company's right or power
to make adjustments, reclassifications, reorganizations or changes of its
capital or business structure, or to merge or consolidate, or dissolve,
liquidate, sell, or transfer all or any part of its business or assets or (ii)
except as provided in Section 11.4, to limit the right or power of the Company
or any of its subsidiaries or affiliates to take any action which such entity
deems to be necessary or appropriate.
11.11 GOVERNING LAW. The Plan shall be construed in accordance with and
governed by the laws of Delaware, without regard to principles of conflict of
laws.
11
Pursuant to an arrangement approved by the Board of Directors of The Equitable
Companies Incorporated ("EQ") on February 19, 1998, the amount Mr. de Castries
will receive from EQ for his services in addition to services as a director of
EQ was increased from $75,000 to $125,000 per annum. Mr. Bebear will continue to
receive from EQ for such services $150,000 per annum as approved by the Board of
Directors on February 14, 1996. Ms. Colloc'h will continue to receive from EQ
for such services $50,000 per annum as approved by the Board of Directors of EQ
on February 20, 1997.
Edward D. Miller
President and Chief Executive Officer
The Equitable Life Assurance Society of the United States
1290 Avenue of the Americas
New York, New York 10104
January 6, 1998
Michael Hegarty
177 Old Briarcliff Road
Briarcliff Manor, NY 10510
Dear Mr. Hegarty:
On behalf of the Board of Directors of The Equitable Life Assurance Society of
the United States, I am delighted to extend to you this offer to become
President and Chief Operating Officer with your election to take place at our
next board meeting after your acceptance of this offer and to be effective on
February 1, 1998.
Your base salary as President and Chief Operating Officer for 1998 will be at a
level of $575,000 per annum payable in approximately equal periodic
installments. We will also pay you a sign on bonus of $250,000 to be paid
promptly after you join the Company. In addition, for services in 1998 we will
pay you a bonus of $1,750,000 in or about February 1999.
You will also be a participant in our Short-Term Incentive Compensation Plan for
Senior Officers. The amounts of your sign on and additional bonuses will be
taken into account in determining the amounts to be paid to you under the
Short-Term Incentive Compensation Plan for 1998.
You will also participate in The Equitable Companies 1997 Stock Incentive Plan.
You will receive a grant of 100,000 stock options at the next meeting of the
Stock Option Committee after you join the Company, and an additional 75,000
options in both February 1999 and February 2000. These options will have a ten
year term and will vest over a three year period at the rate of one-third each
year.
In addition you will participate in our long-term incentive program. Your target
award for the three year period commencing on January 1, 1998, payable in stock,
stock options or a combination of both at the sole discretion of the
Organization and Compensation Committee, will be $750,000.
Mike, I believe this covers the important points that we have previously
discussed. The Board and I are enthusiastic over the prospect of your becoming
our new President and Chief Operating Officer. We look forward to your favorable
response as soon as possible. If you are in agreement with the above terms and
conditions would you kindly sign this letter and return it to my attention.
Sincerely,
- --------------------
/s/ Edward D. Miller
Edward D. Miller
President and Chief Executive Officer
---------------------
ACCEPTED: /s/ Michael Hegarty
Michael Hegarty
SECTION 1.
PURPOSE
1.1 The purpose of THE EQUITABLE STOCK PLAN FOR DIRECTORS (the "Plan") is to
provide Non-Officer Directors of The Equitable Companies Incorporated and/or The
Equitable Life Assurance Society of the United States with compensation in the
form of stock grants or deferred stock units in order to:
(a) enable the Company to recruit, retain and motivate qualified Directors by
providing them with an attractive and competitive compensation program which is
commensurate with the services they perform;
(b) strengthen Directors' long-term commitment to the Company by tying the value
of their overall compensation to the value of the Company's stock, and
(c) enhance the mutuality of interest between Directors and the Company's
shareholders.
SECTION 2.
DEFINITIONS
2.1 Definitions. Whenever used herein, the following terms shall have the
respective meanings set forth below:
(a) "Account" means a deferred Stock account established in the name of and for
the benefit of a Non-Officer Director in accordance with Section 6 of the Plan.
(b) "Affiliate" means any firm, partnership or corporation that directly or
indirectly through one or more intermediaries, controls, is controlled by, or is
under common control with another firm, partnership or corporation.
(c) "Agreement" means a deferral agreement in the form specified by the Company
for purposes of making a deferral election in accordance with Section 5.
(d) "Beneficiary" means the person or persons designated as such in accordance
with Section 5.3.
(e) "Board" means, collectively, the Board(s) of Directors of The Equitable
Companies Incorporated and The Equitable Life Assurance Society of the United
States, as constituted from time to time, provided, however, that where the
context otherwise requires, "Board" shall mean one or the other of such
entities.
(f) "Committee" means the Officers Committee on Benefit Plans, as constituted
from time to time, or such other committee as may be designated from time to
time by the Board.
(g) "Company" means, collectively, The Equitable Companies Incorporated and The
Equitable Life Assurance Society of the United States, provided, however, that
where the context otherwise requires, "Company" shall mean one or the other of
such entities.
(h) "Director" means a member of the Board.
(i) "Employee" means any person employed by the Company and/or its Affiliates on
a regular full-time salaried basis or who is an officer of the Company and/or
its Affiliates.
(j) "Non-Officer Director" means a Director of the Company who is not an
Employee, and shall not include a Director who (a) is employed by AXA-UAP, or an
Affiliate thereof, and (b) does not receive compensation for his services as a
Director.
1
<PAGE>
(k) "Retirement" means termination of the individual's services as a Director on
the Board for reasons other than death.
(l) "Stock" means the common stock of The Equitable Companies Incorporated, par
value $0.01 per share.
SECTION 3.
ADMINISTRATION OF THE PLAN
3.1 Administration. The Committee is hereby authorized to administer the Plan
and establish, adopt, or revise such rules and regulations as it may deem
necessary or advisable for the administration of the Plan. The Committee shall
have discretionary authority to construe and interpret the Plan and to determine
the rights, if any, of Non-Officer Directors and Beneficiaries under the Plan.
The Committee's resolution of any matter concerning the Plan shall be final and
binding upon any Non-Officer Director and Beneficiary affected thereby.
3.2 Compliance with Legal and Exchange Requirements. The Plan, and the granting
of awards and other obligations of the Company under the Plan, shall be subject
to all applicable Federal and State laws, rules and regulations, and to such
approvals by any regulatory or governmental agency as may be required. The
Company, in its discretion, may postpone the granting of awards, the issuance or
delivery of Stock pursuant to any award or any other action permitted or
required under the Plan to enable the Company, with reasonable diligence, to
complete any stock exchange listing or registration or qualification of such
Stock or other required action under any applicable Federal or State law, rule
or regulation, and may require any Non-Officer Director to make such
representations and furnish such information as it may consider appropriate in
connection with the issuance or delivery of Stock in compliance with any such
laws, rules and regulations. The Company shall not be obligated by virtue of any
provision of the Plan to grant any award or to otherwise sell or issue Stock in
violation of any such laws, rules, or regulations.
SECTION 4.
STOCK AWARDS
4.1 Stock Awards. Unless a Non-Officer Director has made an election to defer
the receipt of any Stock awarded under the Plan, each Non-Officer Director shall
receive shares of Stock with a fair market value equal to $30,000 annually, in
whole or fractional shares (except that fractional shares may be distributed in
cash). Awards shall be payable in four equal quarterly installments at the end
of each calendar quarter. The number of full and fractional shares to be awarded
shall be determined based upon the closing price of the Stock as reported by the
consolidated tape of the New York Stock Exchange (or on such other recognized
quotation system on which the trading prices of the Stock are quoted at the
relevant time) on the last day on which Stock transactions were so reported for
the relevant calendar quarter.
4.2 Deferral of Stock Awards. Non-Officer Directors shall be given an option to
defer receipt of all or a part of their Stock awards to be earned during the
year in whole percentages of not less than ten percent. Deferred Stock awards
shall be made to each electing Non-Officer Director in the form of deferred
Stock units credited to his or her Account. The number of deferred Stock units
to be credited to each Non-Officer Director's Account shall equal the number of
whole and fractional shares to which the Non-Officer Director would have been
entitled had he or she not elected to defer the receipt of the quarterly Stock
award. Non-Officer Directors shall at all times be fully vested in the deferred
Stock units credited to their Accounts. Deferred Stock units shall not carry any
voting rights.
2
<PAGE>
SECTION 5.
DEFERRAL ELECTIONS
5.1 Deferral Agreements. A Non-Officer Director who wishes to defer his or her
Stock award(s) must complete an Agreement pursuant to which the Non-Officer
Director shall specify the amount(s) to be deferred, the time and manner in
which his or her Account will be distributed, and any other information which
the Company may reasonably require.
5.2 Execution of Agreements. Except in the case of Non-Officer Directors newly
elected to the Company's Board(s), all Agreements must be executed and filed
with the Company prior to the beginning of the year for which Stock awards are
being deferred. Once made, the Agreement shall remain in effect for subsequent
years, unless amended or revoked in writing by the Non-Officer Director. Each
Non-Officer Director may amend or revoke his or her existing Agreement prior to
the beginning of each year, and may change the time and manner in which his or
her Account will be distributed from time to time, by filing with the Company an
amended Agreement. Any change in the time or manner of distribution, however,
must be made at least twelve full calendar months prior to the date on which the
Non-Officer Director's Account would otherwise have been distributed. If a
Non-Officer Director changes the timing or manner of distributions within twelve
months of his or her distribution date, the change shall not be given effect,
and the Non-Officer Director's elections as in effect immediately prior to the
ineffective change shall prevail.
5.3 Designation of Beneficiary. A Non-Officer Director shall be permitted to
designate a Beneficiary (which Beneficiary may be an entity other than a natural
person) to receive the Account balance in the event of the Non-Officer
Director's death, and the manner in which each Beneficiary's interest will be
distributed. Such designation may be changed or canceled at any time by the
Non-Officer Director, provided, however, that any such designation, change or
cancellation must be made in a form approved by the Committee and shall not be
effective until received by the Committee or its designee. If a Non-Officer
Director designates more than one Beneficiary, the interests of such
Beneficiaries shall be distributed in equal shares, unless the Non-Officer
Director has specifically designated otherwise. If a Non-Officer Director fails
to designate a Beneficiary, or the named Beneficiary is not living at the
Non-Officer Director's death, the Account shall be distributed to the
Non-Officer Director's estate, in a single distribution, as soon as practicable
following the Non-Officer Director's death.
SECTION 6.
DEFERRED STOCK ACCOUNTS
6.1 Maintenance of Accounts. The Company shall establish and maintain a separate
Account for each Non-Officer Director who elects to defer receipt of any Stock
awards, to which shall be credited any deferred Stock units awarded in
accordance with the Plan. Non-Officer Directors' Accounts shall be maintained
for record-keeping purposes only, and shall not be funded with actual shares of
Stock, cash or any other assets.
6.2 Dividend Equivalents. Accounts shall be credited with dividend equivalents
in the form of additional deferred Stock units equal in value to the dividends
the Non-Officer Director would have received if the Non-Officer Director's
Account balance represented actual Stock, rather than deferred Stock units.
Dividend equivalents shall continue to be credited, as appropriate, through the
last day of the calendar month immediately preceding the date on which an
Account is distributed.
6.3 Adjustment in Capitalization. In the event of any Stock dividend or Stock
split, recapitalization (including, without limitation, the payment of an
extraordinary cash dividend), merger, consolidation combination, spin-off,
distribution of assets to shareholders, exchange of shares, or other similar
corporate change or event that affects the Stock such that an adjustment is
required to preserve, or to prevent enlargement of, the benefits or potential
benefits made available under this Plan, then the Committee shall, in such
manner as the Committee shall deem equitable, adjust any or all of the number
and kind of shares which thereafter may be awarded under the Plan and the number
and kinds of deferred Stock units that have been, or may be, credited under the
Plan.
3
<PAGE>
SECTION 7.
DISTRIBUTION OF ACCOUNTS
7.1 Retirement Benefits. Distribution of a Non-Officer Director's Account shall
be made upon the Non-Officer Director's retirement from Board service or, if
later, upon his or her attainment of age 72, as specified by the Non-Officer
Director in the Agreement. The Account shall be distributed, at the Non-Officer
Director's election, in a single distribution, or in five, ten or fifteen annual
installments. At the time of distribution, deferred Stock units credited to the
Non-Officer Director's Account shall be converted to Stock, which shall be
distributed to the Non-Officer Director in kind. Distributions shall commence no
later than January 31 of the year following the year in which the Non-Officer
Director retires or, if applicable, attains age 72, based upon the value of the
Non-Officer Director's Account on the last business day of the prior month. In
the case of installment distributions, the amount of each distribution shall be
determined by dividing the Non-Officer Director's Account balance as of the last
business day of the month preceding the date of distribution by the number of
installments remaining.
7.2 Hardship Distributions. A Non-Officer Director who suffers an unforeseeable
financial hardship, as determined by the Committee, may request an immediate
distribution in kind from his or her Account in an amount necessary to meet the
hardship (including the amount of any taxes applicable to the distribution). An
unforeseeable financial hardship is an unexpected need for cash arising from an
illness, casualty loss, sudden financial reversal, or other unforeseeable event.
Financial needs arising from the purchase of a new home, dependent educational
expenses and other similarly predictable events shall not qualify for hardship
distribution under the Plan. Notwithstanding anything in this Plan to the
contrary, a Non-Officer Director who receives a hardship distribution in any
year shall not be entitled to defer any additional Stock awards for the
remainder of that year.
7.3 Survivor Benefits. In the Agreement, the Non-Officer Director shall specify
the time and manner in which the Account shall be distributed to his or her
Beneficiary in the event of the Non-Officer Director's death prior to
distribution. A Non-Officer Director may choose to have the Account distributed
as soon as practicable following his or her death, or as of the date he or she
would have attained age 72. Distribution to the Beneficiary shall be made in
kind in a single distribution, or in five, ten or fifteen annual installments,
as specified by the Non-Officer Director in the Agreement. If a Non-Officer
Director dies after installment distributions have commenced, any installments
remaining as of the date of death shall be paid to the Beneficiary in the same
manner as they would have been paid to the Non-Officer Director had he or she
survived. Distributions to a Non-Officer Director's estate, however, shall be
made only in a single distribution as soon as practicable following the date of
death.
7.4 Distribution of Fractional Shares. Notwithstanding anything in this Plan to
the contrary, any fractional shares to be distributed from a Non-Officer
Director's Account may be distributed in cash.
SECTION 8.
MISCELLANEOUS
8.1 Amendment and Termination. The Committee may at any time suspend,
discontinue or terminate the Plan, and from time to time may amend or modify the
Plan, provided, however, that unless otherwise required by law, no amendment,
suspension, discontinuance or termination of the Plan shall reduce or in any
manner adversely affect the rights of any Non-Officer Director to any benefits
to which he or she may be entitled based upon the balance of the Non-Officer
Director's Account as of the effective date of the amendment, suspension,
discontinuance or termination.
4
<PAGE>
8.2 Effect of Plan Participation. Participation in the Plan shall not confer
upon a Non-Officer Director any right to continue in service as a Director of
the Company, nor interfere in any way with the Company's right to terminate the
Non-Officer Director's service on the Board at any time or take other action
with respect to the Non-Officer Director without regard to the effect such
action may have on the Non-Officer Director's rights under the Plan. Nothing in
the Plan shall be construed to prevent the Company or any of its Affiliates from
taking any corporate action determined by them to be appropriate or in their
best interest. No Director, Beneficiary or other person shall have any claim
against the Company or its Affiliates as a result of any such action.
8.3 Nontransferability of Accounts. Unless otherwise determined by the
Committee, Non-Officer Directors (and/or their Beneficiaries) shall have no
right to transfer (other than by will or the laws of descent and distribution),
alienate, or otherwise encumber the Non-Officer Director's interest in his or
her Account under the Plan.
8.4 Unfunded Status of Plan. In the case of any Non-Officer Director who elects
to defer any Stock award under the Plan, the Plan is intended to constitute an
unfunded plan of deferred compensation. The Non-Officer Director and his or her
Beneficiary shall have only an unsecured claim against the Company with respect
to any amounts credited to the Non-Officer Director's Account, and such claim
shall not be deemed superior to the claim(s) of any other creditor.
8.5 Withholding Taxes. The Company may make such provisions and take such action
as it may deem necessary or appropriate for the withholding of any taxes which
the Company is required by any law or regulation of any governmental authority,
whether Federal, state or local, to withhold in connection with any
distributions under the Plan, including but not limited to, the withholding of
appropriate sums from any amount otherwise payable to the Non-Officer Director
(or his Beneficiary). Each Non-Officer Director, however, shall be responsible
for the payment of all individual tax liabilities relating to any such benefits.
8.6 Governing Law. The Plan, and all agreements hereunder, shall be construed in
accordance with and governed by the laws of the State of Delaware.
8.7 Severability. If any provision of this Plan is held unenforceable, the
remainder of the Plan shall continue in full force and effect without regard to
such unenforceable provision and shall be applied as though the unenforceable
provision were not contained in the Plan.
8.8 Effective Date. The Plan shall be effective on January 1, 1998, with respect
to services provided by Non-Officer Directors on or after January 1, 1998.
5
Pursuant to an arrangement approved by the Board of Directors of The Equitable
Life Assurance Society of the United States on February 19, 1998, Mr. Melone
will receive under the Supplemental Executive Retirement Plan an additional
annual retirement benefit of $50,867, expressed as a single life annuity, or its
equivalent as a joint and survivor annuity.
<TABLE>
<CAPTION>
State of State of Number of Parent's
Type of Incorp. or Principal Federal Shares Percent of
Subsidiary Domicile Operation Tax ID # Owned Ownership
---------- -------- --------- -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
THE EQUITABLE COMPANIES INCORPORATED *** DE NY 13-3623351
Donaldson, Lufkin & Jenrette, Inc. (Note 1) HCO DE NY 13-1898818 23,404,230 41.92%
See Attached Listing E
The Equitable Life Assurance Society of the U.S. * Insurance NY NY 13-5570651 2,000,000 100.00%
The Equitable of Colorado, Inc. * Insurance CO CO 13-3198083 1,000,000 100.00%
Frontier Trust Company Operating ND ND 45-0373941 1,000 100.00%
Equitable Deal Flow Fund, L.P. Investment DE NY 13-3385076 - -
Equitable Managed Assets, L.P. Investment DE NY 13-3385080 - -
Real Estate Partnership Equities (various) Investment ** - - -
Equitable Holdings, L.L.C. (formerly,
Equitable Holding Corp.) (Note 2) HCO NY NY - - -
See Attached Listing A
EREIM LP Associates (L.P.) Operating NY NY - - -
EML Associates, L.P. Investment NY NY 58-1739531 - -
ACMC, Inc. HCO DE NY 13-2677213 5,000,000 100.00%
Wil-Gro, Inc Investment PA PA 23-2702404 1,000 100.00%
Prime Property Funding, Inc. Operating DE NY 13-3719324 1,000 100.00%
Equitable Underwriting & Sales Agency (Bahamas) Operating Bahamas Bahamas - 5,000 100.00%
Ltd.
STCS, Inc. Investment DE NY 13-3761592 1,000 100.00%
Fox Run, Inc. Investment MA NY 23-2762596 1,000 100.00%
FTM Corp. Investment MD MD 13-3778225 1,000 100.00%
CCMI Corp. Investment MD MD 13-3778224 1,000 100.00%
HVM Corp. Investment MD MD 13-3778222 1,000 100.00%
EVSA, Inc. Investment DE PA 23-2671508 50 100.00%
Equitable BJVS,Inc. Investment CA CA 33-0540198 1,000 100.00%
Equitable Rowes Wharf, Inc. Investment MA MA 04-3272826 1,000 100.00%
Camelback JVS, Inc. Investment AZ AZ 86-0794576 1,000 100.00%
GP/EQ Southwest, Inc. Investment TX TX 75-2624983 100 100.00%
Franconom, Inc. Investment PA PA 23-2352488 50 100.00%
EVLICO, Inc. Investment DE GA 58-2203762 100 100.00%
EVLICO East Ridge, Inc. Investment CA GA 58-2206831 100 100.00%
Equitable Structured Settlement Corp. Operating DE NJ 22-3492811 100 100.00%
ELAS Realty, Inc. Investment DE GA 58-2271596 1,000 100.00%
Equitable Realty Assets Corporation Investment DE GA 58-1538468 10,000 100.00%
Prime Property Funding II, Inc. Operating DE NY Pending 100.00%
Sarasota Prime Hotels, Inc. Investment FL GA 58-2330533 100.00%
ECLL, Inc. Investment MI GA Pending 100.00%
<FN>
Notes: 1. In addition, Equitable Holdings, L.L.C.
*Affiliated Insurer owns 19,230,770 shares (34.45%). In the
aggregate, EQ owns 42,635,000 shares (76.37%)
of Donaldson, Lufkin & Jenrette, Inc..
2. Equitable Holding Corp. was merged into
Equitable Holdings, L.L.C. on Dec. 19, 1997.
3. Collectively, Equitable Life and various of
***All subsidiaries are corporations, except as otherwise noted. its subsidiaries beneficially own 57.02% of
the outstanding limited partnership units
issued by Alliance Capital Management L.P.
Equitable Life directly owns 2,266,288 units
(2.69%); ACMC, Inc. owns 33,471,500 units
1997 Additions/Deletions: (39.69%); and Equitable Capital Management
------------------------- Corp. owns 11,800,000 units and 100,000 Class
- Equitable Variable Life Insurance Co. A units, which convert into 551,395 units
(14.64%). In addition, Alliance Capital
Management Corp. owns a 1% general
partnership interest in Alliance Capital
Management L.P.
</FN>
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
LISTING A:
EQUITABLE HOLDINGS, L.L. State of State of Number of Parent's
Type of Incorp. or Principal Federal Shares Percent of
Subsidiary Domicile Operation Tax ID # Owned Ownership
---------- -------- --------- -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
THE EQUITABLE COMPANIES INCORPORATED
The Equitable Life Assurance Society of the U.S.*
Equitable Holdings, L.L.C. (Note 4)
ELAS Securities Acquisition Corporation Operating DE 13-3049038 500 100.00%
100 Federal Street Realty Corporation Operating MA MA 04-2847619 100 100.00%
100 Federal Street Funding Corporation Operating MA MA 04-2934600 100 100.00%
EQ Financial Consultants, Inc. (f/k/a, Operating DE NY 13-2693569 20,000 100.00%
Equico Securities, Inc.)
Equitable Casualty Insurance Company * Operating VT VT 06-1166226 1,000 100.00%
EquiSource of New York, Inc. Operating NY PA 13-3389662 1,000 100.00%
See Attached Listing B
EREIM LP Corporation Operating DE NY 58-1739521 100 100.00%
EREIM LP Associates (L.P.) Operating NY NY - -
EML Associates, L.P. Investment NY NY 58-1739531 - -
Equitable Investment Corporation HCO NY NY 13-2694412 1,000 100.00%
See Attached Listing C
Equitable JVS, Inc. Investment DE GA 58-1812697 1,000 100.00%
Astor/Broadway Acquisition Corp. Investment NY NY 13-3593692 100 100.00%
Astor Times Square Corp. Investment NY NY 13-3593699 100 100.00%
EJSVS, Inc. Investment DE NJ 58-2169594 1,000 100.00%
Equitable JVS II, Inc. Investment MD MD 52-1877232 1,000 100.00%
Six-Pac G.P., Inc. Investment GA GA 58-1928595 100 100.00%
Equitable Distributors, Inc. (f/k/a, Operating DE NY 13-3550365 1,000 100.00%
Equitable Capital Securities Corp.)
J.M.R. Realty Services, Inc. Operating DE NY 13-3813232 1,000 100.00%
</TABLE>
* Affiliated Insurer
Note 4. Owns 34.45% of Donaldson, Lufkin & Jenrette, Inc.
2
<PAGE>
<TABLE>
<CAPTION>
LISTING B:
EQUISOURCE OF NEW YORK, INC. State of State of Number of Parent's
Type of Incorp. or Principal Federal Shares Percent of
Subsidiary Domicile Operation Tax ID # Owned Ownership
---------- -------- --------- -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
THE EQUITABLE COMPANIES INCORPORATED
The Equitable Life Assurance Society of the U.S.*
Equitable Holdings, L.L.C.
EquiSource of New York, Inc.
EquiSource of Alabama, Inc. Operating AL AL 13-3386851 1,000 100.00%
EquiSource of Arizona, Inc. Operating AZ AZ 13-3389071 1,000 100.00%
EquiSource of Arkansas, Inc. Operating AR AR 13-3404676 1,000 100.00%
EquiSource Insurance Agency of Operating CA CA 13-3404686 1,000 100.00%
California
EquiSource of Colorado, Inc. Operating CO CO 13-3404680 1,000 100.00%
EquiSource of Delaware, Inc. Operating DE DE 13-3386036 1,000 100.00%
EquiSource of Hawaii, Inc. Operating HI HI 13-3425232 1,000 100.00%
EquiSource of Maine, Inc. Operating ME ME 13-3404681 1,000 100.00%
EquiSource Insurance Agency of Operating MA MA 22-2891027 1,000 100.00%
Massachusetts, Inc.
EquiSource of Montana, Inc. Operating MT MT 13-3389063 1,000 100.00%
EquiSource of Nevada, Inc. Operating NV NV 13-3389068 1,000 100.00%
EquiSource of New Mexico, Inc. Operating NM NM 13-3404674 1,000 100.00%
EquiSource of Pennsylvania, Inc. Operating PA PA 13-3389070 1,000 100.00%
EquiSource Business Agency of Utah, Inc. Operating UT UT 13-3404679 1,000 100.00%
EquiSource of Washington, Inc. Operating WA WA 13-3437226 1,000 100.00%
EquiSource of Wyoming, Inc. Operating WY WY 13-3389072 1,000 100.00%
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
LISTING C:
EQUITABLE INVESTMENT CORPORATION State of State of Number of Parent's
Type of Incorp. or Principal Federal Shares Percent of
Subsidiary Domicile Operation Tax ID # Owned Ownership
---------- -------- --------- -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
THE EQUITABLE COMPANIES INCORPORATED
The Equitable Life Assurance Society of the U.S.*
Equitable Holdings, L.L.C.
Equitable Investment Corporation
Equitable Capital Management Corporation Operating DE NY 13-3266813 1,000 100.00%
Equitable Capital Private Income &
Equity Partnership II, L.P. Investment DE NY 13-3544879 - -
Alliance Capital Management Corporation Operating DE NY 13-3633538 100 100.00%
See Attached Listing D
Equitable JV Holding Corp. Operating DE NY 13-3555850 1,000 100.00%
EQ Services, Inc. Operating DE GA 58-1985395 1,000 100.00%
EREIM Managers Corporation Operating DE GA 58-1739529 100 100.00%
ML/EQ Real Estate Portfolio, L.P. Investment DE NY 58-1739523 - -
EML Associates, L.P. Investment NY NY 58-1739531 - -
</TABLE>
1997 Additions/Deletions:
-------------------------
- Equitable Agri-Business, Inc. - Sold to Lend Lease Corp.
- Equitable Real Estate Inv. Mgmt., Inc. &
Subsidiaries - Sold to Lend Lease, Inc.
4
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
ALLIANCE CAPITAL MANAGEMENT CORP. State of State of Number of Parent's
Type of Incorp. or Principal Federal Shares Percent of
Subsidiary Domicile Operation Tax ID # Owned Ownership
---------- -------- --------- -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
THE EQUITABLE COMPANIES INCORPORATED
The Equitable Life Assurance Society of the U.S.*
Equitable Holdings, L.L.C.
Equitable Investment Corporation
Alliance Capital Management Corporation
Alliance Capital Management L.P. Operating DE NY 13-3434400
Albion Alliance L.L.C. Operating DE NY 13-3903734 40.00%
Cursitor Alliance L.L.C. HCO DE MA 22-3424339 92.55%
Cursitor Holdings Ltd. Operating U.K. U.K. - 100.00%
Draycott Partners. Ltd. Operating MA U.K. 98-0116774 100.00%
The London Partnership Ltd. Operating U.K. U.K. - 100.00%
Cursitor Alliance Services Operating U.K. U.K. - 100.00%
Ltd.
Cursitor Management Co. S.A. Operating Lux. Lux. - 100.00%
Cursitor Management Ltd. Operating U.K. U.K. - 100.00%
Cursitor-Eaton Asset Operating NY MA 13-3379955 50.00%
Management Co.
Cursitor Cecogest S.A. Operating France France - 75.00%
Cursitor Courtage SARL Operating France France - 100.00%
Cursitor Gestion S.A. Operating France France - 100.00%
Alliance Capital Management Corp. HCO DE 13-2778645 10 100.00%
of Delaware
Alliance Fund Services, Inc. Operating DE NJ 13-3211780 100 100.00%
Alliance Fund Distributors, Inc. Operating DE NY 13-3191825 100 100.00%
Alliance Capital Oceanic Corp. Operating DE 13-3441277 1,000 100.00%
Alliance Capital Management Operating Brazil Brazil - 99.00%
(Brazil) Ltd.
Alliance Capital Management Operating Aust. Aust. - 12 100.00%
Australia Limited
Meiji - Alliance Capital Corp. Operating DE NY 13-3613617 50,000 50.00%
Alliance Capital (Luxembourg) Operating Lux. Lux. - 3,999 99.98%
S.A.
ACM Fund Services (Espana) Operating Spain Spain - 100.00%
S.L.
Alliance Barra Research Operating DE NY 13-3548918 1,000 100.00%
Institute, Inc.
Alliance Capital Management Operating DE Canada 13-3630460 18,750 100.00%
Canada, Inc.
Alliance Capital Global Operating DE NY 13-3626546 1,000 100.00%
Derivatives Corp.
ACM Fund Services, S.A. Operating Lux. Lux. - 99.00%
Alliance Capital Management Operating DE India 13-3751338 100.00%
(India) Ltd.
Alliance Capital Management Operating Singapore Singapore - 100.00%
(Singapore) Ltd.
ACM CIIC Investment Management Operating Cayman Isl. Cayman Isl. 54.00%
Ltd.
ACM Software Services Ltd. Operating DE NY 13-3910857 100.00%
East Fund Managementberatung Operating Austria Austria - 51.00%
GmbH.
Alliance Capital (Mauritius) Operating Mauritius Mauritius - 100.00%
Private Ltd.
Alliance Capital Asset
Management (India)
Private Ltd. Operating India India - 75.00%
ACSYS Software India Operating India India - 51.00%
Private Ltd.
Alliance Eastern Europe, Inc. Operating DE 13-3802178 100.00%
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
ALLIANCE CAPITAL MANAGEMENT CORP. (CONTINUED) State of State of Number of Parent's
Type of Incorp. or Principal Federal Shares Percent of
Subsidiary Domicile Operation Tax ID # Owned Ownership
---------- -------- --------- -------- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
THE EQUITABLE COMPANIES INCORPORATED
The Equitable Life Assurance Society of the U.S. *
Equitable Holdings, L.L.C.
Equitable Investment Corporation
Alliance Capital Management Corporation
Alliance Capital Management L.P.
Alliance Capital Management Corp.
of Delaware (Cont'd)
Alliance Capital Management Operating DE Singapore 13-3752293 100.00%
(Asia) Ltd.
Alliance Capital Management Operating DE Turkey 13-3802177 100.00%
(Turkey) Ltd.
Alliance Capital Management Operating DE Japan 13-3009358 100 100.00%
(Japan), Inc.
Alliance Capital Limited Operating U.K. U.K. - 250,000 100.00%
Alliance Capital Services Operating U.K. U.K. - 1,000 100.00%
Ltd.
Dimentional Trust Operating U.K. U.K. - 50,000 100.00%
Management Ltd.
Alliance Corporate Finance Operating DE NY 52-1671668 1,000 100.00%
Group Inc.
Equitable Capital Investment DE NY 13-3520268 - -
Diversified Holdings, L.P. I
EC Diversified Holdings Investment DE NY 13-3521917 100 100.00%
Corp. I
Equitable Capital Investment DE NY 13-3546007 - -
Diversified Holdings,
L.P. II
EC Diversified Holdings Investment DE NY 13-3551472 100 100.00%
Corp. II
ECM Fund L.P. I Investment DE NY 13-3674518 - -
ECM Corporation I Investment DE NY 13-3674512 100 100.00%
Equitable Capital Partners, Investment DE NY 13-3486115 - -
L.P.
Equitable Capital Partners
(Retirement Fund), L.P. Investment DE NY 13-3486106 - -
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
AMB Holdings Limited (formerly None Donaldson, Lufkin & 16% South Africa
DLJ Pleiade) Jenrette, Inc.
AML Futures, Inc. 13-2671027 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
AML Futures, S.A. (In None Donaldson, Lufkin & 100% 1,000 Switzerland
Dissolution) Jenrette, Inc.
Autranet International Limited None Autranet, Inc. 100% 200 United Kingdom
(In Dissolution)
Autranet, Inc. 13-2961507 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
Bond Investment Partners, LLC 13-7070202 DLJ Capital Corporation 99% Delaware
Bond Investment Partners, LLC 13-7070202 DLJ Investment, Inc. 1% Delaware
Brewster Property Holding Corp. 13-3745194 DLJ Real Estate, Inc. 100% 200 New York
BSI Acquisitions Corp. 13-3189297 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
Cadogan Nominees Limited None Pershing Limited 100% 150 United Kingdom
Calmco Trustee Services, Inc. 74-2777085 Calmco, Inc. 100% 10,000 Delaware
Calmco, Inc. 13-3860801 DLJ Mortgage Capital, 100% 1,000 Delaware
Inc.
CBJC, Inc. 13-3906717 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
CEC Energy Co., Inc. 13-3351987 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette Securities
Corporation
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- -----------------------------------------------------------------------------------------
<S> <C> <C>
AMB Holdings Limited (formerly Foreign Parent holding company of DLJ African
DLJ Pleiade) Merchant Bank Limited.
AML Futures, Inc. USA Inactive.
AML Futures, S.A. (In Foreign Inactive.
Dissolution)
Autranet International Limited Foreign Inactive.
(In Dissolution)
Autranet, Inc. USA Securities Broker/Dealer.
Bond Investment Partners, LLC USA Holder of NYC Industrial Development
Agency bonds re: 277 Park Avenue.
Bond Investment Partners, LLC USA Holder of NYC Industrial Development
Agency bonds re: 277 Park Avenue.
Brewster Property Holding Corp. USA Owns 58 acres of land (including a
building) in Putnam County, NY.
BSI Acquisitions Corp. USA Holds Investment. (Inactive)
Cadogan Nominees Limited Foreign Facilitates Stock Transfer for
Pershing Limited. (Inactive)
Calmco Trustee Services, Inc. USA Responsible for collection and loss
mitigation of B and C credit
mortgage loans in Deed of Trust
states (in lieu of mortgages).
Calmco, Inc. USA Responsible for collection and loss
mitigation of B and C credit
mortgage loans.
CBJC, Inc. USA Holds monetary judgments.
CEC Energy Co., Inc. USA Sells steam and electricity to the
Virgin Islands Water & Power
Authority under the terms of a
Service Agreement.
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CF Realty, Inc. 13-3873229 DLJ Real Estate Capital 100% 1,000 Delaware
Partners, L.P.
CG Funding, Inc. 13-3873232 DLJ Real Estate Capital 100% 1,000 Delaware
Funding, Inc.
Column Financial, Inc. 58-2061106 DLJ Mortgage Capital, 100% 1,000 Delaware
Inc.
Coram Funding, Inc. 13-3819014 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
DLJ Acceptance Corporation 13-3438856 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ Asset Management, Inc. 13-3859805 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette Securities
Corporation
DLJ Bermuda Partners, Inc. 13-3799776 DLJ Capital Investors, 100% 1,000 Delaware
Inc.
DLJ Bridge Finance, Inc. 13-3433876 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ Capital Associates (VI), Inc. 13-3519751 DLJ Capital Corporation 100% 1,000 Delaware
DLJ Capital Associates VII, Inc. 13-3810628 DLJ Capital Corporation 100% 100 Delaware
DLJ Capital Associates VIII, Inc. Not Available DLJ Capital Corporation 100% 100 Delaware
as of Today
DLJ Capital Corporation 13-2656882 Donaldson, Lufkin & 100% 100 Delaware
Jenrette, Inc.
DLJ Capital Funding, Inc. 13-3901308 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CF Realty, Inc. USA Real Estate Banking Group investment
vehicle.
CG Funding, Inc. USA Real Estate Banking Group
side-by-side investment vehicle.
Column Financial, Inc. USA Mortgage lender.
Coram Funding, Inc. USA Formed to provide bridge financing to
Coram, Inc. a provider of
alternative site infusion.
DLJ Acceptance Corporation USA Assembles Mortgage Collateral for CMO
Trusts.
DLJ Asset Management, Inc. USA Name Saver.
DLJ Bermuda Partners, Inc. USA Inactive.
DLJ Bridge Finance, Inc. USA General Partner of Investment
Partnership providing bridge
financing.
DLJ Capital Associates (VI), Inc. USA General Partner of a Limited
Partnership called DLJ Associates
(VI), L.P. This Partnership is a
partner in Sprout Capital VI, L.P.
DLJ Capital Associates VII, Inc. USA General Partner of a limited
partnership called DLJ Associates
VII, L.P. which is a partner of
Sprout Capital VII, L.P.
DLJ Capital Associates VIII, Inc. USA General Partner of a limited
partnership called DLJ Associates
VIII, L.P. which is a partner of
Sprout Capital VIII, L.P.
DLJ Capital Corporation USA Venture Capital Partnership
Management Company.
DLJ Capital Funding, Inc. USA Conducts bank and corporate loan
syndication and trading.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DLJ Capital Investors, Inc. 13-3805378 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ Capital Management 13-3603831 DLJ Capital Corporation 100% 1,000 Delaware
Corporation
DLJ Capital Trust I 13-7093229 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ Cayman Acquisition Limited None Donaldson, Lufkin & 100% 1 Cayman Islands
Jenrette, Inc.
DLJ Cayman Islands LDC 52-1879918 DLJ Capital Corporation 20% 999 Cayman Islands
DLJ Cayman Islands LDC 52-1879918 Donaldson, Lufkin & 80% 3,996 Cayman Islands
Jenrette, Inc.
DLJ Century, Inc. 13-3717365 DLJ Mortgage Capital, 100% 1,000 Delaware
Inc.
DLJ Clearing Corporation 13-3731408 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ Commercial Mortgage Corp. 13-3956945 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ Cyprus, Inc. Not Available No shares issued to date. Delaware
as of Today
DLJ Diversified Partners, Inc. 13-3907706 DLJ Capital Investors, 100% 1,000 Delaware
Inc.
DLJ Emerging Markets LDC 98-0151723 DLJ Capital Corporation 20% 2,000 Cayman Islands
DLJ Emerging Markets LDC 98-0151723 Donaldson, Lufkin & 80% 8,000 Cayman Islands
Jenrette, Inc.
DLJ Europe, Inc. 13-3860782 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette Securities
Corporation
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
DLJ Capital Investors, Inc. USA Holding company which owns the
companies acting as General
Partner of Merchant Banking
Partnerships.
DLJ Capital Management USA Venture Capital Partnership
Corporation Management Company.
DLJ Capital Trust I USA Funding vehicle for issuance of
Preferred Stock by Donaldson,
Lufkin & Jenrette, Inc.
DLJ Cayman Acquisition Limited Foreign Inactive corporation.
DLJ Cayman Islands LDC Foreign Securities dealer writing derivative
products on foreign securities.
DLJ Cayman Islands LDC Foreign Securities dealer writing derivative
products on foreign securities.
DLJ Century, Inc. USA General Partner of DLJ Century L.P.
which holds the mortgage on
property located in Florida.
DLJ Clearing Corporation USA General Partner owning 1% of Pershing
Trading Company, L.P., a
specialist on regional exchanges
and market maker.
DLJ Commercial Mortgage Corp. USA Issues securities to the public, such
securities which are backed by
mortgage related securities.
DLJ Cyprus, Inc. USA Name Saver (Inactive).
DLJ Diversified Partners, Inc. USA Managing General Partner of DLJ
Diversified Partners, L.P., a
merchant banking investment fund.
DLJ Emerging Markets LDC Foreign Investor in Latin American securities.
DLJ Emerging Markets LDC Foreign Investor in Latin American securities.
DLJ Europe, Inc. USA Holding Company which holds all of
the Non-Voting Class B Shares of
Donaldson, Lufkin & Jenrette
International.
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DLJ Financial Products Limited 13-3957534 Donaldson, Lufkin & 100% 12,000 Bermuda
(formerly DLJ Options Jenrette, Inc.
International Limited)
DLJ First ESC, LLC 13-3790645 DLJ Employees N/A N/A Delaware
DLJ Growth Associates (II), Inc. 13-3695982 DLJ Capital Corporation 100% 1,000 Delaware
DLJ Harbor (Boston) Corp. 13-3160683 DLJ Real Estate, Inc. 100% 1,000 Massachusetts
DLJ Hoffman, Inc. 13-3153908 DLJ Real Estate, Inc. 100% 100 Delaware
DLJ Holdings, Inc. 13-3861189 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ India Advisory Services, 13-3961301 Donaldson, Lufkin & 100% Delaware
L.L.C. Jenrette, Inc.
DLJ International Group Limited 13-3960274 DLJ International, Inc. 100% 28,845,289 United Kingdom
Voting Class A
Shares
DLJ International Group Limited 13-3960274 Donaldson, Lufkin & greater 3,597,000 Class United Kingdom
Jenrette Securities than 99% B Voting Shares
Corporation
DLJ International Group Limited 13-3960274 DLJ Europe, Inc. less 1 Voting Class United Kingdom
than 1% B Share
DLJ International Investment 13-3971622 Donaldson, Lufkin & 100% 1,000 Delaware
Corp. Jenrette, Inc.
DLJ International Services 98-0176015 Donaldson, Lufkin & 100% 100 Cayman Islands
Jenrette, Inc.
DLJ International, Inc. 13-3860788 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
DLJ Financial Products Limited Foreign Securities dealer writing derivative
(formerly DLJ Options products on foreign securities.
International Limited)
DLJ First ESC, LLC USA Employee securities company managed
by DLJ LBO Plans Management
Corporation.
DLJ Growth Associates (II), Inc. USA General Partner formed to hold the
unallocated interests in DLJ
Growth Associates (II), L.P.
DLJ Harbor (Boston) Corp. USA General Partner of Boston Harbor
Partners, Ltd.
DLJ Hoffman, Inc. USA Holds wrap mortgages on Westbury Land
and on Boston Harbor.
DLJ Holdings, Inc. USA Name saver.
DLJ India Advisory Services, USA Formed to be the DLJ India branch
L.L.C. office for Merchant Banking.
DLJ International Group Limited Foreign Designated parent holding company of
the DLJ UK Group.
DLJ International Group Limited Foreign Designated parent holding company of
the DLJ UK Group.
DLJ International Group Limited Foreign Designated parent holding company of
the DLJ UK Group.
DLJ International Investment USA Formed to house DLJ's investment
Corp. banking representative office in
Moscow.
DLJ International Services Foreign Vehicle for internationally mobile
employees.
DLJ International, Inc. USA Holding Company which holds of the
Voting Class A Shares of
Donaldson, Lufkin & Jenrette
International Limited
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DLJ Investment Funding, Inc. 13-3887953 DLJ Capital Investors, 100% 1,000 Delaware
Inc.
DLJ Investment Management Corp. 13-3859861 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette Securities
Corporation
DLJ Investment Partners, Inc. 13-3854261 DLJ Capital Investors, 100% 1,000 Delaware
Inc.
DLJ Investment, Inc. 13-3419317 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ Kansas City Capital, Inc. 13-3697211 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ LBO Plans Management 13-3743225 DLJ Capital Investors, 100% 100 Delaware
Corporation Inc.
DLJ Leasing Company, Inc. 13-3542594 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ Long Term Investment 13-3951926 Donaldson, Lufkin & 100% 1 Voting Class Delaware
Corporation Jenrette, Inc. A Share
DLJ Long Term Investment 13-3951926 Donaldson, Lufkin & 80% 800 Non-Voting Delaware
Corporation Jenrette, Inc. Class B Shares
DLJ Long Term Investment 13-3951926 Donaldson, Lufkin & 20% 195 Non-Voting Delaware
Corporation Jenrette Securities Class B Shares
Corporation
DLJ Long Term Investment 13-3951926 Autranet, Inc. less 5 Non-Voting Delaware
Corporation than 1% Class B Shares
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
DLJ Investment Funding, Inc. USA Invests in investment opportunities
side-by-side with DLJ Investment
Partners, L.P.
DLJ Investment Management Corp. USA Wood, Struthers & Winthrop Investment
Adviser.
DLJ Investment Partners, Inc. USA General Partner of DLJ Investment
Partners, L.P., an investment fund.
DLJ Investment, Inc. USA General Partner in Tenacqo bridge
partnership.
DLJ Kansas City Capital, Inc. USA General Partner of Kansas City
DLJ/Gateway Limited Partnership
which purchases Commercial
Mortgages from the RTC.
DLJ LBO Plans Management USA General Partner of the manager of
Corporation various employees securities
companies formed to permit certain
key employees to coinvest with the
Company in certain long-term investments.
DLJ Leasing Company, Inc. USA Holds certain fixed assets of various
DLJ business groups, said assets
are then leased back to the groups.
DLJ Long Term Investment USA Holds and manages the trademarks and
Corporation trade name of Donaldson, Lufkin &
Jenrette, Inc. and subsidiaries.
DLJ Long Term Investment USA Holds and manages the trademarks and
Corporation trade name of Donaldson, Lufkin &
Jenrette, Inc. and subsidiaries.
DLJ Long Term Investment USA Holds and manages the trademarks and
Corporation trade name of Donaldson, Lufkin &
Jenrette, Inc. and subsidiaries.
DLJ Long Term Investment USA Holds and manages the trademarks and
Corporation trade name of Donaldson, Lufkin &
Jenrette, Inc. and subsidiaries.
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DLJ MB Funding II, Inc. 13-3919500 DLJ Capital Investors, 100% 1,000 Delaware
Inc.
DLJ Merchant Banking Funding, 13-3709041 DLJ Capital Investors, 100% 1,000 Delaware
Inc. Inc.
DLJ Merchant Banking II, Inc. 13-3906244 DLJ Capital Investors, 100% 1,000 Delaware
Inc.
DLJ Merchant Banking, Inc. 13-3644198 DLJ Capital Investors, 100% 100 Delaware
Inc.
DLJ Mortgage Acceptance Corp. 13-3460894 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ Mortgage Capital, Inc. 13-3460798 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ Offshore Management N.V. None DLJ Capital Investors, 100% 6,000 Netherlands
Inc. Antilles
DLJ Phoenix First General 13-3952234 DLJ Phoenix Group Limited 99% 50,999 United Kingdom
Partner Limited
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
DLJ MB Funding II, Inc. USA Invests in debt and equity securities
of business entities subject to
leveraged transactions including
acquisitions, recapitalizations,
restructurings, workouts and other
similar situations side-by-side with
DLJ Merchant Banking Partners II, L.P.
DLJ Merchant Banking Funding, USA Invests in debt and equity securities
Inc. of business entities subject to
leveraged transactions including
acquisitions, recapitalizations,
restructurings, workouts and other
similar situations side-by-side with
DLJ Merchant Banking Partners, L.P.
DLJ Merchant Banking II, Inc. USA Managing General Partner of DLJ
Merchant Banking Partners II,
L.P., an investment fund.
DLJ Merchant Banking, Inc. USA General Partner of a number of
partnerships which manages a
leveraged transaction fund.
DLJ Mortgage Acceptance Corp. USA Issues securities to the public, such
securities which are backed by
mortgage related securities.
DLJ Mortgage Capital, Inc. USA Corporation which trades in whole
loans.
DLJ Offshore Management N.V. Foreign Acts as a General Partner of an
offshore merchant banking
investment partnerships to
establish Cayman Islands residency.
DLJ Phoenix First General Foreign Inactive.
Partner Limited
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DLJ Phoenix First General 13-3952234 DLJ Phoenix Securities less than 1% 1 United Kingdom
Partner Limited Investments Limited
DLJ Phoenix Fund Trustee Limited 13-3952239 DLJ Phoenix Group Limited 50% 1 United Kingdom
DLJ Phoenix Fund Trustee Limited 13-3952239 DLJ Phoenix Securities 50% 1 United Kingdom
Investments Limited
DLJ Phoenix General Partner II 13-3952247 DLJ Phoenix Group Limited 100% 2 United Kingdom
Limited
DLJ Phoenix General Partner 13-3952232 DLJ Phoenix Group Limited 50% 1 United Kingdom
Limited
DLJ Phoenix General Partner 13-3952232 DLJ Phoenix Securities 50% 1 United Kingdom
Limited Investments Limited
DLJ Phoenix Group Limited 13-3952201 DLJ International Group 100% Please see United Kingdom
Limited appendix
DLJ Phoenix Insurance Services 13-3952233 DLJ Phoenix Group Limited 100% 2 United Kingdom
Limited
DLJ Phoenix Media Limited 13-3952237 DLJ Phoenix Group Limited 100% 2 United Kingdom
DLJ Phoenix Private Equity 13-3952209 DLJ Phoenix Group Limited 99% 7,499 United Kingdom
Limited
DLJ Phoenix Private Equity 13-3952209 DLJ Phoenix Securities less than 1% 1 United Kingdom
Limited Investments Limited
DLJ Phoenix Securities (Asia) 13-3952250 DLJ Phoenix Group Limited 50% 1 United Kingdom
Limited
DLJ Phoenix Securities (Asia) 13-3952250 DLJ Phoenix Securities 50% 1 United Kingdom
Limited Investments Limited
DLJ Phoenix Securities Finance 13-3952215 DLJ Phoenix Securities 50% 1 United Kingdom
Limited Investments Limited
DLJ Phoenix Securities Finance 13-3952215 DLJ Phoenix Securities 50% 1 United Kingdom
Limited Limited
DLJ Phoenix Securities 13-3952218 DLJ Phoenix Insurance 100% 1,000 United Kingdom
Investments Limited Services Limited
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
DLJ Phoenix First General Foreign Inactive.
Partner Limited
DLJ Phoenix Fund Trustee Limited Foreign Management Pension Scheme.
DLJ Phoenix Fund Trustee Limited Foreign Management Pension Scheme.
DLJ Phoenix General Partner II Foreign General Partner in Phoenix Equity
Limited Partners II.
DLJ Phoenix General Partner Foreign General Partner in Phoenix
Limited Development Capital Fund.
DLJ Phoenix General Partner Foreign General Partner in Phoenix
Limited Development Capital Fund.
DLJ Phoenix Group Limited Foreign Holding company.
DLJ Phoenix Insurance Services Foreign Inactive.
Limited
DLJ Phoenix Media Limited Foreign Inactive.
DLJ Phoenix Private Equity Foreign Fund manager.
Limited
DLJ Phoenix Private Equity Foreign Fund manager.
Limited
DLJ Phoenix Securities (Asia) Foreign Corporate Finance advisor.
Limited
DLJ Phoenix Securities (Asia) Foreign Corporate Finance advisor.
Limited
DLJ Phoenix Securities Finance Foreign Inactive.
Limited
DLJ Phoenix Securities Finance Foreign Inactive.
Limited
DLJ Phoenix Securities Foreign Nominee Holding Company.
Investments Limited
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DLJ Phoenix Securities Limited 13-3952205 DLJ Phoenix First 100% 20,000 United Kingdom
General Partner Redeemable
Limited Preference
Shares
DLJ Phoenix Securities Limited 13-3952205 DLJ Phoenix Group Limited 99% 874,999 United Kingdom
DLJ Phoenix Securities Limited 13-3952205 DLJ Phoenix Securities less than 1% 1 United Kingdom
Investments Limited
DLJ PSH Limited 13-3952249 DLJ Phoenix Group Limited 100% 2 United Kingdom
DLJ Puerto Rico Realty Corp. 13-3941625 Puerto Rico Hotel OPCO, 100% 1,000 Delaware
L.P.
DLJ Real Estate Capital Funding, 13-3811304 DLJ Capital Investors, 100% 1,000 Delaware
Inc. Inc.
DLJ Real Estate Capital 13-3805375 DLJ Capital Investors, 100% 1,000 Delaware
Partners, Inc. Inc.
DLJ Real Estate Capital, Inc. 13-3811303 DLJ Capital Investors, 100% 1,000 Delaware
Inc.
DLJ Real Estate Exchange 13-3989904 DLJ Capital Investors, 100% 1,000 Delaware
Capital, Inc. Inc.
DLJ Real Estate Mezzanine 13-3910356 DLJ Capital Investors, 100% 1,000 Delaware
Capital, Inc. Inc.
DLJ Real Estate, Inc. 13-2658821 Donaldson, Lufkin & 100% 3,000 Delaware
Jenrette, Inc.
DLJ Realty Services, Inc. 13-2791329 DLJ Real Estate, Inc. 100% 0 Delaware
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
DLJ Phoenix Securities Limited Foreign Corporate finance adviser.
DLJ Phoenix Securities Limited Foreign Corporate finance adviser.
DLJ Phoenix Securities Limited Foreign Corporate finance adviser.
DLJ PSH Limited Foreign Inactive.
DLJ Puerto Rico Realty Corp. USA Holds an investment.
DLJ Real Estate Capital Funding, USA Invests in real estate opportunities
Inc. side-by-side with DLJ Real Estate
Capital Partners, L.P.
DLJ Real Estate Capital USA General Partner of a fund that
Partners, Inc. invests in real estate
opportunities.
DLJ Real Estate Capital, Inc. USA Formed to serve as the General
Partner of DLJ Real Estate
Capital, L.P.
DLJ Real Estate Exchange USA General Partner of DLJ Real Estate
Capital, Inc. Exchange Capital, L.P., which is
the general partner of DLJ Real
Estate Capital Partners, L.P.
DLJ Real Estate Mezzanine USA General Partner of DLJ Real Estate
Capital, Inc. Mezzanine Capital, L.P. which is
the general partner of DLJ Real
Estate Mezzanine Capital Partners,
L.P.
DLJ Real Estate, Inc. USA Holding Company for all Real Estate
Subsidiaries.
DLJ Realty Services, Inc. USA Licensed Corporate Real Estate Broker
involved in mortgage placement and
brokerage activities.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DLJ Romania, Inc. Not Available Donaldson, Lufkin & 100% 1,000 Delaware
as of Today Jenrette, Inc.
DLJ Secureco Holdings, Inc. 13-3714258 DLJ Mortgage Capital, 100% 1,000 Delaware
Inc.
DLJ Senior Debt Finance, Inc. 13-3891131 Donaldson, Lufkin & 100% 100 Delaware
Jenrette, Inc.
DLJ Senior Officers Investment 13-3220934 Donaldson, Lufkin & 100% 100 Delaware
Corporation Jenrette, Inc.
DLJ Services, Inc. 13-3817414 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ South Africa, Inc. 13-3857310 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
DLJ UK Holding Limited 13-3960278 DLJ International Group 100% 1 United Kingdom
Limited
DLJ UK Limited 13-3960277 DLJ International Group 100% 1 United Kingdom
Limited
DLJdirect Holdings Inc. 13-3902239 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette Securities
Corporation
DLJdirect Inc. 13-3902248 DLJdirect Holdings Inc. 100% 1,000 Delaware
DLJMB Mauritius Investment 98-0172641 Please see appendix 100% Please see Mauritius
Company appendix
Donaldson Funding Corporation 13-3810631 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
Donaldson Leasing Corp. 13-3692113 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
DLJ Romania, Inc. USA Formed to act as parent holding
company of DLJ Romania SrL, a
Romanian limited liability company
currently in formation for the purpose
of investing in Romanian fixed income
securities.
DLJ Secureco Holdings, Inc. USA Holding Company.
DLJ Senior Debt Finance, Inc. USA Offers senior credit facilities to
corporate borrowers.
DLJ Senior Officers Investment USA General Partner of DLJ Executive
Corporation Investment Partnership.
DLJ Services, Inc. USA Mortgage servicing agent.
DLJ South Africa, Inc. USA Formed to invest in Pleiade
Investors, LLC, a South African
Investment Banking Firm owned by
New Africa Investment Ltd.
DLJ UK Holding Limited Foreign Parent holding company of Donaldson,
Lufkin & Jenrette International
along with DLJ UK Limited.
DLJ UK Limited Foreign Parent holding company of Donaldson,
Lufkin & Jenrette International
along with DLJ UK Holding Limited.
DLJdirect Holdings Inc. USA Holding Company for DLJdirect
subsidiaries.
DLJdirect Inc. USA Broker/Dealer for DLJdirect clients.
DLJMB Mauritius Investment Foreign Investment vehicle for Merchant
Company Banking Group.
Donaldson Funding Corporation USA Formed for future bridge financing.
Donaldson Leasing Corp. USA Holds certain fixed assets of various
DLJ business groups, said assets
are then leased back to the groups.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Donaldson Lufkin & Jenrette Asia None Donaldson, Lufkin & 99% 299 Hong Kong
Limited Jenrette, Inc.
Donaldson Lufkin & Jenrette Asia None Vincent DeGiaimo 1% 1 Hong Kong
Limited
Donaldson, Lufkin & Jenrette 13-3941845 DLJ Capital Corporation 20% 100,000 Brazil
(Brasil) Ltda.
Donaldson, Lufkin & Jenrette 13-3941845 Donaldson, Lufkin & 80% 400,000 Brazil
(Brasil) Ltda. Jenrette, Inc.
Donaldson, Lufkin & Jenrette 13-3881820 DLJ UK Holding Limited 100% 5,896,977 United Kingdom
International Voting Class B
Shares
Donaldson, Lufkin & Jenrette 13-3881820 DLJ UK Holding Limited greater 284,546,754 United Kingdom
International than 99% Voting Class A
Shares
Donaldson, Lufkin & Jenrette 13-3881820 DLJ UK Limited less 1 Voting Class United Kingdom
International than 1% A Share
Donaldson, Lufkin & Jenrette 13-2741729 Donaldson, Lufkin & 100% 3,000 Delaware
Securities Corporation Jenrette, Inc.
Doskocil Funding, Inc. 13-3951925 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
Equine Technology and Analysis, 13-3246841 Donaldson, Lufkin & 100% 1,000 Delaware
Inc. Jenrette, Inc.
Eterindo Funding, Inc. 13-3972463 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
First Overlap Limited None DLJ Phoenix Group 100% United Kingdom
Limited (through
Trust)
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
Donaldson Lufkin & Jenrette Asia Foreign International Dealer.
Limited
Donaldson Lufkin & Jenrette Asia Foreign International Dealer.
Limited
Donaldson, Lufkin & Jenrette Foreign Represents Donaldson, Lufkin &
(Brasil) Ltda. Jenrette, Inc. and its affiliates
in Brazil.
Donaldson, Lufkin & Jenrette Foreign Represents Donaldson, Lufkin &
(Brasil) Ltda. Jenrette, Inc. and its affiliates
in Brazil.
Donaldson, Lufkin & Jenrette Foreign International Broker/Dealer.
International
Donaldson, Lufkin & Jenrette Foreign International Broker/Dealer.
International
Donaldson, Lufkin & Jenrette Foreign International Broker/Dealer.
International
Donaldson, Lufkin & Jenrette USA Securities Broker/Dealer.
Securities Corporation
Doskocil Funding, Inc. USA Formed to provide bridge financing to
Doskocil, Inc.,a leading
manufacturer of pet supplies.
Equine Technology and Analysis, USA Limited Partner in horse breeding
Inc. partnership.
Eterindo Funding, Inc. USA Formed to facilitate a bridge loan to
Eterindo Wahanatama B.V., a
special purpose finance subsidiary
of PT Eterindo Wahanatama, a
leading Indonesian manufacturer
and distributor of mid-stream
petrochemicals and down-stream
specialty and industrial chemicals
First Overlap Limited Foreign Secretary and 50% shareholder of
Phoenix Guernsey (GP) Limited.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gateway Management, Inc. 13-3732486 DLJ Secureco Holdings, 100% 1,000 Delaware
Inc.
Global Retail Partners Funding, 13-3877298 DLJ Capital Investors, 100% 1,000 Delaware
Inc. Inc.
Global Retail Partners, Inc. 13-3846674 DLJ Capital Investors, 100% 1,000 Delaware
Inc.
Headway GP, Inc. 13-3888736 DLJ Real Estate Capital 100% 1,000 Delaware
Partners, L.P.
Headway RECP, Inc. 13-3888738 DLJ Real Estate Capital 100% 1,000 Delaware
Partners, L.P.
Headway SBS, Inc. 13-3888737 DLJ Real Estate Capital 100% 1,000 Delaware
Funding, Inc.
Heiberg Funding, Inc. 13-3964889 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
Hoboken RECP, Inc. 13-3901762 DLJ Real Estate Capital 100% 1,000 Delaware
Partners, L.P.
Hoboken SBS, Inc. 13-3901763 DLJ Real Estate Capital 100% 1,000 Delaware
Funding, Inc.
HS Funding, Inc. 13-3976402 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
iNautix Technologies, Inc. 13-3902260 DLJdirect Holdings Inc. 100% 1,000 Delaware
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
Gateway Management, Inc. USA General Partner of Gateway Management
Associates which is a real estate
partnership.
Global Retail Partners Funding, USA Invest in early stage retail related
Inc. companies among other types of
retail related companies
side-by-side with Global Retail
Partners, L.P.
Global Retail Partners, Inc. USA Registered Investment Advisor and
general partner of Global Retail
Partners, L.P., a fund organized to
invest in early stage retail related
companies.
Headway GP, Inc. USA Real Estate Banking Group investment
vehicle relating to Headway
Investment Associates, Ltd.
Headway RECP, Inc. USA Real Estate Banking Group investment
vehicle relating to Headway
Investment Associates, Ltd.
Headway SBS, Inc. USA Real Estate Banking Group
side-by-side investment vehicle
relating to Headway Investment
Associates, Ltd.
Heiberg Funding, Inc. USA Provide funding to Pharmaceutical
Fine Chemical S.A., an Italian
pharmaceutical company.
Hoboken RECP, Inc. USA Real Estate Banking Group investment
vehicle relating to Hoboken
investment.
Hoboken SBS, Inc. USA Real Estate Banking Group
side-by-side investment vehicle
relating to Hoboken investment.
HS Funding, Inc. USA Vehicle by which a bridge loan will
be made to Holt Shipping Company,
Inc., a diversified provider of
transportation logistics services.
iNautix Technologies, Inc. USA Provider of technology and consulting
services.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
July Acquisitions, Inc. 13-3902416 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
Laminates Funding, Inc. Not Available DLJ Bridge Finance, Inc. 100% 1,000 Delaware
as of Today
LGS Holdings Limited 13-3979449 Donaldson, Lufkin & 100% 1 Ordinary Share United Kingdom
Jenrette International
LGS Money Brokers 13-3971450 London Global Securities 100% 5,000,000 United Kingdom
Ordinary Shares
London Global Securities 13-3979451 LGS Holdings Limited 100% 60,000,000 United Kingdom
Ordinary
Shares/ 1,000
A Ordinary
Shares
MED Funding, Inc. 13-3981509 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
MIH Funding, Inc. 11-3372867 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
NeTpower Funding, Inc. 11-3372870 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
July Acquisitions, Inc. USA Acquires judgments against properties.
Laminates Funding, Inc. USA Vehicle for funding of bridge loan to
Laminates Acquisition Co., a
Merchant Banking entity formed to
acquire 100% of the common stock of
FMH Holdings, Inc., the 100% owner
of Formica Corporation, the largest
producer of decorative high pressure
laminates.
LGS Holdings Limited Foreign Parent holding company of London
Global Securities.
LGS Money Brokers Foreign Inactive.
London Global Securities Foreign Securities lender.
MED Funding, Inc. USA Vehicle to provide bridge financing
to Medaphis Corporation, a leading
provider of business management
services, systems integration
services and medical software,
primarily to the healthcare
provider market.
MIH Funding, Inc. USA Buy notes of MIH Limited, a British
Virgin Islands Company which owns
pay television assets in South Africa,
Europe, Greece, Cyprus and the Middle East.
NeTpower Funding, Inc. USA Provide bridge funding to NeTpower,
Inc., a manufacturer of computer
workstations.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Orlando GP, Inc. 13-3901271 DLJ Real Estate Capital 100% 1,000 Delaware
Partners, L.P.
Orlando RECP, Inc. 13-3901270 DLJ Real Estate Capital 100% 1,000 Delaware
Partners, L.P.
Orlando SBS, Inc. 13-3892543 DLJ Real Estate Capital 100% 1,000 Delaware
Funding, Inc.
Oxford Funding, Inc. 13-3982540 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
Pershing & Co., Inc. 13-3117481 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
Pershing ICS Nominees Limited None Pershing Limited 100% 2 United Kingdom
Pershing Keen Nominees Ltd. None Pershing Limited 100% 2 United Kingdom
Pershing Limited None DLJ International Group 100% 3,597,500 United Kingdom
Limited
Pershing Nominees Ltd. None Pershing Limited 100% 2 United Kingdom
Pershing Securities Limited None Pershing Limited 100% 1,125,000 United Kingdom
Pershing Trading Company, L.P. 13-3769702 DLJ Clearing Corporation 1% General Partner Delaware
Pershing Trading Company, L.P. 13-3769702 Donaldson, Lufkin & 99% Limited Partner Delaware
Jenrette Securities
Corporation
Phoenix Equity Nominees Limited None DLJ Phoenix Group Limited 100% 2 Ordinary United Kingdom
Shares
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Orlando GP, Inc. USA Real Estate Banking Group investment
vehicle relating to Orlando
investment.
Orlando RECP, Inc. USA Real Estate Banking Group investment
vehicle relating to Orlando
investment.
Orlando SBS, Inc. USA Real Estate Banking Group
side-by-side investment vehicle
relating to Orlando investment.
Oxford Funding, Inc. USA Vehicle to provide bridge financing
to Oxford Health Plans, Inc., a
leading health-maintenance
organization in the Northeast.
Pershing & Co., Inc. USA Inactive.
Pershing ICS Nominees Limited Foreign Inactive.
Pershing Keen Nominees Ltd. Foreign Facilitates Stock Transfers for
Pershing Limited.
Pershing Limited Foreign UK Clearing Broker.
Pershing Nominees Ltd. Foreign Facilitates Stock Transfers for
Pershing Limited.
Pershing Securities Limited Foreign Executes trades on the International
Stock Exchange on behalf of
Pershing Correspondents.
Pershing Trading Company, L.P. USA A specialist on various regional
securities exchanges and a market
maker for over-the-counter
securities.
Pershing Trading Company, L.P. USA A specialist on various regional
securities exchanges and a market
maker for over-the-counter
securities.
Phoenix Equity Nominees Limited Foreign Acts as a nominee of equity interest
in Phoenix Equity Partners II-A
and Phoenix Equity Partners II-B
together with co-investors in
those partnerships.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Phoenix Guernsey (GP) Limited 13-3952253 First Overlap Limited 50% 50 United Kingdom
Phoenix Guernsey (GP) Limited 13-3952253 Second Overlap Limited 50% 50 United Kingdom
Phoenix Securities 13-3952251 DLJ Phoenix Group Limited 100% 12,000 United Kingdom
(International) Limited
PSP Capital Funding, Inc. 13-3920284 DLJ Real Estate Capital 100% 1,000 Delaware
Funding, Inc.
PSP Realty, Inc. 13-3920282 DLJ Real Estate Capital 100% 1,000 Delaware
Partners, L.P.
Puerto Rico Hotel HOLDCO Corp. 13-3923272 DLJ Real Estate Capital 100% 1,000 Delaware
Partners, L.P.
Puerto Rico Hotel OPCO Corp. 13-3923269 DLJ Real Estate Capital 100% 1,000 Delaware
Partners, L.P.
Puerto Rico Hotel SBS Corp. 13-3923271 DLJ Real Estate Capital 100% 1,000 Delaware
Funding, Inc.
REFG Investor Eight, Inc. 13-3904767 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investor Eleven, Inc. 13-3904776 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investor Fifteen, Inc. 13-3904783 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investor Five, Inc. 13-3904760 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investor Four, Inc. 13-3847759 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investor Fourteen, Inc. 13-3904781 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
Phoenix Guernsey (GP) Limited Foreign Inactive.
Phoenix Guernsey (GP) Limited Foreign Inactive.
Phoenix Securities Foreign Inactive.
(International) Limited
PSP Capital Funding, Inc. USA Real Estate Banking Group
side-by-side investment vehicle
relating to Pacific-St. Paul
investment.
PSP Realty, Inc. USA Real Estate Banking Group investment
vehicle relating to Pacific-St.
Paul investment.
Puerto Rico Hotel HOLDCO Corp. USA Real Estate Banking Group investment
vehicle relating to Puerto Rico
Hotel investment.
Puerto Rico Hotel OPCO Corp. USA Real Estate Banking Group investment
vehicle relating to Puerto Rico
Hotel investment.
Puerto Rico Hotel SBS Corp. USA Real Estate Banking Group
side-by-side investment vehicle
relating to Puerto Rico Hotel
investment.
REFG Investor Eight, Inc. USA Holder of mortgages and other
investments.
REFG Investor Eleven, Inc. USA Holder of mortgages and other
investments.
REFG Investor Fifteen, Inc. USA Holder of mortgages and other
investments.
REFG Investor Five, Inc. USA Holder of mortgages and other
investments.
REFG Investor Four, Inc. USA Holder of mortgages and other
investments.
REFG Investor Fourteen, Inc. USA Holder of mortgages and other
investments.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REFG Investor Nine, Inc. 13-3904768 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investor One, Inc. 13-3810633 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investor Seven, Inc. 13-3904766 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investor Six, Inc. 13-3904764 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investor Ten, Inc. 13-3904769 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investor Thirteen, Inc. 13-3904779 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investor Trust Not available REFG Investors One, Inc. 50% Delaware
as of today
REFG Investor Trust Not available REFG Investors Two, Inc. 50% Delaware
as of today
REFG Investor Twelve, Inc. 13-3904778 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investor Two, Inc. 13-3810632 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REFG Investors Three, Inc. 13-3844068 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
REOltor Services, Inc. 74-2769097 Calmco, Inc. 100% 10,000 Texas
SatMex Funding, Inc. 13-3978915 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
Scratch & Sniff Funding, Inc. 13-3981092 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
REFG Investor Nine, Inc. USA Holder of mortgages and other
investments.
REFG Investor One, Inc. USA 50% owner of REFG Investor Trust.
REFG Investor Seven, Inc. USA Holder of mortgages and other
investments.
REFG Investor Six, Inc. USA Holder of mortgages and other
investments.
REFG Investor Ten, Inc. USA Holder of mortgages and other
investments.
REFG Investor Thirteen, Inc. USA Holder of mortgages and other
investments.
REFG Investor Trust USA Passive investor in debt securities.
REFG Investor Trust USA Passive investor in debt securities.
REFG Investor Twelve, Inc. USA Holder of mortgages and other
investments.
REFG Investor Two, Inc. USA 50% owner of REFG Investor Trust.
REFG Investors Three, Inc. USA Formed to buy judgment liens re:
Ginsburg.
REOltor Services, Inc. USA Texas real estate broker for Real
Estate Owned properties held by
Calmco, Inc. and Calmco Trustee
Services, Inc.
SatMex Funding, Inc. USA Vehicle to provide bridge financing
to Satellite Mexicanos, a Mexican
government owned satellite
services company.
Scratch & Sniff Funding, Inc. USA Vehicle to provide bridge financing
to AHC I Acquisition Corp. in
connection with a transaction
involving Arcade, the world leader
in scent sampling and fragrance
and cosmetics sampling.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Seaport General Corporation 13-3194809 DLJ Realty Services, Inc. 100% 100 New York
Second Overlap Limited None DLJ Phoenix Group 100% United Kingdom
Limited (through
Trust)
Secureco Chateau, Inc. 13-3720564 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Deerfield, Inc. 13-3719130 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Grand Park, Inc. 13-3714735 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Greenbriar, Inc. 13-3869249 DLJ Secureco Holdings, 100% 1,000 Delaware
Inc.
Secureco Lodge, Inc. 13-3715328 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Marina, Inc. 13-3715403 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Merit Candlewick, Inc. 13-3720556 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Merit Fund I, Inc. 13-3720558 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
Seaport General Corporation USA General Partner of Seaport Associates.
Second Overlap Limited Foreign First Director and 50% shareholder of
Phoenix Guernsey (GP) Limited.
Secureco Chateau, Inc. USA General Partner of Merit Chateau
Investors L.P. which owns
multifamily residential properties
or the mortgages thereon.
Secureco Deerfield, Inc. USA General Partner of Trinity Secureco
Deerfield Partners L.P. which owns
multifamily residential properties
or the mortgages thereon.
Secureco Grand Park, Inc. USA General Partner of Trinity Secureco
Grand Park Partners L.P. which
owns multifamily residential
properties or the mortgages
thereon.
Secureco Greenbriar, Inc. USA General Partner of Trinity Secureco
Greenbriar Partners, L.P. which
owns multifamily residential
properties or the mortgages
thereon.
Secureco Lodge, Inc. USA General Partner of Trinity Secureco
Lodge Partners L.P. which owns
multifamily residential properties
or the mortgages thereon.
Secureco Marina, Inc. USA General Partner of Trinity Secureco
Marina Partners L.P. which owns
multifamily residential properties
or the mortgages thereon.
Secureco Merit Candlewick, Inc. USA General Partner of Merit Candlewick
Investors L.P. which owns
multifamily residential properties
or the mortgages thereon.
Secureco Merit Fund I, Inc. USA General Partner of Merit Fund I
Limited Partnership which owns
multifamily residential properties
or the mortgages thereon.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Secureco Merit Fund II, Inc. 13-3720566 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Merit Fund III, Inc. 13-3720551 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Merit Fund IV, Inc. 13-3720561 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Merit Fund IX, Inc. 13-3720555 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Merit Fund VI, Inc. 13-3720565 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Merit Fund VIII, Inc. 13-3720554 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Merit Washington Manor, 13-3720550 DLJ Secureco Holdings, 100% 500 Delaware
Inc. Inc.
Secureco Riverside, Inc. 13-3715362 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Rolling Hills, Inc. 13-3732849 DLJ Secureco Holdings, 100% 1,000 Delaware
Inc.
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
Secureco Merit Fund II, Inc. USA General Partner of Merit Fund Two
Limited Partnership which owns
multifamily residential properties
or the mortgages thereon.
Secureco Merit Fund III, Inc. USA General Partner of Merit Fund III
Limited Partnership which owns
multifamily residential properties
or the mortgages thereon.
Secureco Merit Fund IV, Inc. USA General Partner of Merit Fund IV
Limited Partnership which owns
multifamily residential properties
or the mortgages thereon.
Secureco Merit Fund IX, Inc. USA General Partner of Merit Fund IX
Limited Partnership which owns
multifamily residential properties
or the mortgages thereon.
Secureco Merit Fund VI, Inc. USA General Partner of Merit Fund VI
Limited Partnership which owns
multifamily residential properties
or the mortgages thereon.
Secureco Merit Fund VIII, Inc. USA General Partner of Merit Fund VIII
Limited Partnership which owns
multifamily residential properties
or the mortgages thereon.
Secureco Merit Washington Manor, USA General Partner of Merit Washington
Inc. Manor Investors L.P. which owns
multifamily residential properties
or the mortgages thereon.
Secureco Riverside, Inc. USA General Partner of Trinity Secureco
Riverside Partners L.P. which owns
multifamily residential properties
or the mortgages thereon.
Secureco Rolling Hills, Inc. USA General Partner of Trinity Rolling
Hills Partners L.P. which owns
multifamily residential properties
or the mortgages thereon.
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
LISTING E:
DLJ SUBSIDIARIES (CONTINUED)
PERCENT SHARES HELD BY JURISDICTION OF
SUBSIDIARY EMPLOYER ID OWNER AFFILIATE OWNERSHIP OWNER INCORPORATION
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Secureco Tan Crest, Inc. 13-3720553 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Westchester Square, Inc. 13-3720557 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Secureco Worthington, Inc. 13-3719132 DLJ Secureco Holdings, 100% 500 Delaware
Inc.
Snoga, Inc. 13-3036391 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
TBS Funding, Inc. 13-3990901 DLJ Bridge Finance, Inc. 100% 1,000 Delaware
Trinity Group Hearthstone, Inc. 36-3951675 Trinity Holding, Inc. 100% 100 Illinois
Trinity Holding, Inc. 13-3810632 DLJ Mortgage Capital, 100% 100 Delaware
Inc.
UK Investment Plan 1997, Inc. 13-3941938 Donaldson, Lufkin & 100% 1,000 Delaware
Jenrette, Inc.
Winthrop Trust Company 13-3818656 Wood, Struthers & 100% 100 New York
Winthrop Management
Corp.
Wood, Struthers & Winthrop 13-2774791 Donaldson, Lufkin & 100% 1,000 Delaware
Management Corp. Jenrette Securities
Corporation
WSW Capital, Inc. 13-3749620 Wood, Struthers & 100% 1,000 Delaware
Winthrop Management
Corp.
<CAPTION>
SUBSIDIARY USA/FOREIGN BUSINESS ACTIVITY
- --------------------------------------------------------------------------------------
<S> <C> <C>
Secureco Tan Crest, Inc. USA General Partner of Tan Crest
Apartments, Ltd. which owns
multifamily properties or the
mortgages thereon.
Secureco Westchester Square, Inc. USA General Partner of Merit Westchester
Square Investors L.P. which owns
multifamily residential properties
or the mortgages thereon.
Secureco Worthington, Inc. USA General Partner of Trinity Secureco
Worthington Partners L.P. which
owns multifamily residential
properties or the mortgages
thereon.
Snoga, Inc. USA Acts as escrow agent for business
activities of DLJ Bridge Finance,
Inc.
TBS Funding, Inc. USA Funding vehicle for Bridge Loan to be
provided to TBS Shipping Services
Inc., an international shipping
company.
Trinity Group Hearthstone, Inc. USA Property manager for MLG Properties.
Trinity Holding, Inc. USA Holding Company.
UK Investment Plan 1997, Inc. USA Holds a U.K. Investment.
Winthrop Trust Company USA Banking trust company which offers
personal trust services to
high-net-worth individuals.
Wood, Struthers & Winthrop USA Investment Advisor.
Management Corp.
WSW Capital, Inc. USA General Partner in WSW Hedge Fund L.P.
</TABLE>
24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, That the undersigned Director of The Equitable
Companies Incorporated, a Delaware corporation (the "Company"), hereby
constitutes and appoints each of Robert E. Garber, Pauline Sherman, Stuart L.
Faust, Richard V. Silver, Henry Q. Conley and Adam R. Spilka as his true and
lawful attorney-in-fact and agent, with full power of substitution, for him and
in his name, place and stead, in any and all capacities, to sign the Company's
Annual Report on Form 10-K and any or all amendments thereto, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his substitute may
lawfully do or cause to be done by virtue hereof.
/s/Claude Bebear /s/John H. F. Haskell, Jr.
- ----------------------------------- -----------------------------------------
/s/Francoise Colloc'h /s/Michael Hegarty
- ----------------------------------- -----------------------------------------
/s/ John S. Chalsty /s/Mary R. (Nina) Henderson
- ----------------------------------- -----------------------------------------
/s/Joseph L. Dionne /s/W. Edwin Jarmain
- ----------------------------------- -----------------------------------------
/s/William T. Esrey /s/Joseph J. Melone
- ----------------------------------- -----------------------------------------
/s/Jean-Rene Fourtou /s/Edward D. Miller
- ----------------------------------- -----------------------------------------
/s/Jacques Friedmann /s/Didier Pineau-Valencienne
- ----------------------------------- -----------------------------------------
/s/Donald J. Greene /s/George J. Sella, Jr.
- ----------------------------------- -----------------------------------------
/s/Anthony J. Hamilton /s/Dave H. Williams
- ----------------------------------- -----------------------------------------
/s/John T. Hartley
- -----------------------------------
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 19,978,500
<DEBT-CARRYING-VALUE> 143,000
<DEBT-MARKET-VALUE> 164,300
<EQUITIES> 1,276,500
<MORTGAGE> 2,611,400
<REAL-ESTATE> 2,749,200
<TOTAL-INVEST> 68,972,100
<CASH> 597,400
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,237,400
<TOTAL-ASSETS> 151,437,600
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 4,553,800
<POLICY-HOLDER-FUNDS> 21,578,600
<NOTES-PAYABLE> 6,210,800
0
0
<COMMON> 2,200
<OTHER-SE> 5,271,300
<TOTAL-LIABILITY-AND-EQUITY> 151,437,600
1,552,100
<INVESTMENT-INCOME> 3,991,300
<INVESTMENT-GAINS> 592,400
<OTHER-INCOME> 3,530,300
<BENEFITS> 978,600
<UNDERWRITING-AMORTIZATION> 288,100
<UNDERWRITING-OTHER> 6,029,400
<INCOME-PRETAX> 1,103,000
<INCOME-TAX> 280,500
<INCOME-CONTINUING> 648,200
<DISCONTINUED> (87,200)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 561,000
<EPS-PRIMARY> 2.71
<EPS-DILUTED> 2.47
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
