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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, 1998
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
this Form 10-K. x
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 22, 1999, was approximately $6.51
billion.
As of March 22, 1999, 223,796,672 shares of the registrant's Common Stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Apart from information regarding executive officers set forth in Item 1A, 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 meeting of stockholders to be held on May 19,
1999 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, 1998.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I
<S> <C> <C>
Item 1. Business........................................................................ 1-1
General......................................................................... 1-1
Insurance....................................................................... 1-1
Investment Banking.............................................................. 1-6
Asset Management................................................................ 1-8
Discontinued Operations......................................................... 1-10
General Account Investment Portfolio............................................ 1-10
Competition..................................................................... 1-14
Regulation...................................................................... 1-15
Principal Shareholder........................................................... 1-21
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
<PAGE>
Part I, Item 1.
BUSINESS 1
General. The Equitable is a diversified financial services organization offering
a broad spectrum of insurance, investment banking and asset management services.
It is one of the world's largest asset managers, with total assets under
management of approximately $347.5 billion at December 31, 1998. The Equitable's
insurance business, conducted by Equitable Life and its subsidiaries, including
EOC, is reported in the Insurance segment. The Equitable's investment banking
business, conducted by DLJ, is reported in the Investment Banking segment. The
Equitable's asset management business, conducted principally by Alliance, is
reported in the Asset Management segment. The change in the composition of
reportable segments was occasioned by the adoption of SFAS 131; The Equitable
has restated the corresponding items of segment information for earlier periods.
For additional information on The Equitable's business segments, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") - Combined Operating Results by Segment" and Notes 1 and 22
of Notes to Consolidated Financial Statements. Operating results and segment
information are presented on a basis which adjusts amounts as reported in the
GAAP financial statements to exclude the effect of unusual or non-recurring
events and transactions as well as certain revenue and expense categories
management views as not related to the base operations of the particular
business. For additional information relating to these adjustments, see "MD&A -
Combined Operating Results - Adjustments to GAAP Reported Earnings". AXA, a
French holding company for an international group of insurance and related
financial services companies, is the Holding Company's majority shareholder. See
"Principal Shareholder".
Segment Information
Insurance
General. The Insurance segment offers a variety of traditional, variable and
interest-sensitive life insurance products, variable and fixed-interest annuity
products, mutual fund and other investment products to individuals, small
groups, small and medium-size corporations, state and local governments and
not-for-profit organizations. It also 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 and group
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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"), a New York stock life insurance
corporation. 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"), a Delaware limited
partnership, and Donaldson, Lufkin & Jenrette, Inc. ("DLJ"), a Delaware
corporation, and, prior to June 10, 1997, to Equitable Life's wholly-owned
subsidiary Equitable Real Estate Investment 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".
1-1
<PAGE>
insurance and annuity products. The Insurance segment accounted for
approximately $4.06 billion or 37.6% of consolidated revenue for the year ended
December 31, 1998. Insurance segment products are marketed in all 50 states, the
District of Columbia and Puerto Rico by more than 7,400 sales associates and,
through Equitable Distributors, Inc. ("EDI"), one of Equitable Life's
broker-dealer subsidiaries. EDI distributes its products on a wholesale basis
through major securities firms, other broker-dealers and banks. Association
plans are marketed directly to clients by the Insurance Group. As of December
31, 1998, the Insurance Group had more than 3 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, see "MD&A - Combined
Operating Results by Segment - Insurance," Note 22 of Notes to Consolidated
Financial Statements, as well as "Employees and Agents", "Competition" and
"Regulation".
In late 1997, The Equitable conducted a comprehensive review of its organization
and strategy and identified strategic initiatives with the goal of continuing
The Equitable's evolution as a premier provider of financial planning, insurance
and asset management products and services. During 1998, The Equitable continued
its efforts to implement the strategic initiatives. The agency management
structure has been reorganized from four divisions grouped by agency size and
market to 19 geographic regions with common staff and systems infrastructures,
improving sales and service support at the local level. The wholesale
distribution activities of EDI have been expanded to include life insurance
products, in addition to the annuity products it continues to offer. Equitable
Life launched a pilot program in Texas to offer fee-based financial planning and
an asset management account product, each of which is intended to be introduced
more broadly over the next eighteen months. EQ Access was launched, permitting
customers to receive policy and account information on-line. These actions
reflect management's view of products as part of an integrated-life cycle
approach to meeting clients' financial needs.
One of the strategic initiatives involves making optimum use of The Equitable's
family of valuable brands. In February 1999, the Board of Directors of the
Holding Company proposed that the name of the Holding Company be changed to AXA
Financial, Inc. This name is intended to create an overall brand for the Holding
Company that will reflect the broad array of products and services that The
Equitable offers and to embody the positive attributes of a global company with
significant resources. Shareholders of the Holding Company are scheduled to vote
on this name change at the May 19, 1999 annual meeting. If approved, the change
in the Holding Company's name is expected to become effective later in 1999,
concurrent with the introduction of new products and services currently being
developed.
Efforts to use brands more effectively include the creation of a new brand --
AXA Advisors -- for the provision of financial advisory services and the
distribution of other relationship based products and services, as well as
traditional insurance and annuity products. EQ Financial Consultants, Inc. ("EQ
Financial"), a broker-dealer subsidiary of Equitable Life, will be renamed AXA
Advisors, Inc. and will focus on the development and management of customer
relationships. This will separate the insurance and annuity companies, which
will continue under the "Equitable" name, from relationship management, which
will be undertaken by "AXA" named companies.
The name "AXA" and the AXA trademark are owned by Finaxa, AXA's parent. In 1996,
AXA and Finaxa entered into a Licensing Agreement pursuant to which Finaxa
granted AXA a non-exclusive license (the "AXA License") to use the AXA trademark
in certain jurisdictions. The AXA License grants AXA the right, subject to the
prior written approval of Finaxa, to grant sublicenses to companies controlled,
directly or indirectly, by AXA. The AXA License may be terminated upon three
months prior written notice by either party; however, Finaxa may not exercise
its termination right for so long as it is AXA's largest shareholder. The right
to use the name "AXA" will be sublicensed from AXA at no charge to the Holding
Company nor to any subsidiary of the Holding Company. If the AXA License is
terminated, any sublicenses granted would also terminate.
1-2
<PAGE>
In 1998, Equitable Life instituted a number of organizational changes to further
the overall goals of the strategic initiatives. Management is now organized into
the following groups: Client Relationship Group (development and management of
customer relationships, including distribution of products and services), Market
and Product Management Group (development and management of all products and
services sold through all distribution channels), Finance and Risk Management
Group (including actuarial, audit, controller's, investor relations, tax and
treasurers), Investment Management Group, Information Technology Group,
Corporate Development Group (competitive positioning, human resources and
special projects) and a Law Department.
Products. The Insurance Group offers a portfolio of products and services
designed to meet the life insurance, asset accumulation, retirement funding and
estate planning needs of its 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, money market
funds and a series of asset allocation funds, as well as guaranteed interest
options. The range of investment options creates flexibility in meeting
individual customer needs. Alliance currently manages most of the assets in the
Insurance Group's General and Separate Accounts. Consistent with an increasing
market trend to provide customers with investment choices, in 1997 the Insurance
Group introduced a new mutual fund trust known as EQ Advisors Trust permitting
holders of certain variable contracts to invest the assets supporting their
contracts in mutual funds with unaffiliated investment advisors. These
unaffiliated advisors now include: Bankers Trust Company, J.P. Morgan Investment
Management Inc., Lazard Freres & Co., 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., Warburg, Pincus Asset Management, Inc. and
Evergreen Asset Management Corp.
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, during the
accumulation phase, 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 during the accumulation phase. The Income
Manager distribution products offer a lifetime income similar to traditional
immediate annuities, while giving the annuitant access to cash values during the
guaranteed years of the payment period.
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. Generally, with investment funds associated with variable life
insurance and variable annuity products that 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
less risk to the Insurance Group than traditional products, require less
capital. Separate Account options also permit policyholders to choose among a
variety of 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 $26.66 billion to $33.05
billion at December 31, 1998, including approximately $3.1 billion invested
through EQ Advisors Trust.
The Insurance Group also sells traditional whole life insurance, universal life
insurance and term insurance products, and, through EQ Financial, mutual funds
and investment products. During 1998, the Insurance Group's career agency force
sold approximately $2.37 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 of New York, Inc., a wholly owned insurance brokerage
subsidiary, and its subsidiaries and certain affiliates (collectively,
"EquiSource").
1-3
<PAGE>
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 ("DI") policies
issued by Equitable Life were 80% reinsured through an arrangement with Paul
Revere Life Insurance Company ("Paul Revere"). Beginning February 1998,
EquiSource entered into an agreement that permits Equitable Life agents to offer
DI policies of Provident Life and Accident Insurance Company ("Provident") and
Equitable Life stopped underwriting new DI policies. As a result of a 1996
acquisition, Provident and Paul Revere are now affiliates, and they manage
claims incurred under Equitable Life's DI policies. Equitable Life is reviewing
the claims management agreement and is exploring its ability to dispose of the
DI business through reinsurance. Effective September 15, 1992, the Insurance
Group ceased to sell new individual major medical policies.
In light of unfavorable results from its DI business, Equitable Life completed
in late 1996 a loss recognition study. The study indicated that 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. Based on experience that emerged on this book of business during
1997 and 1998, management continues to believe the assumptions and estimates
used to develop the 1996 DI reserve strengthenings are sufficient. For
additional information, see "MD&A - Combined Operating Results by Segment -
Insurance - Disability Income and Group Pension Products."
The following table summarizes premiums and deposits for major Insurance product
lines, combining amounts for the Closed Block and amounts for operations outside
the Closed Block.
<TABLE>
<CAPTION>
Premiums and Deposits
(In Millions)
1998 1997 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
Individual annuities...................................... $ 6,049.6 $ 4,548.5 $ 3,342.6
Individual life(1)........................................ 2,475.7 2,431.1 2,346.7
Other(2).................................................. 383.6 394.5 398.2
Group pension............................................. 369.2 328.7 355.5
----------------- ---------------- -----------------
Total Premiums and Deposits............................... $ 9,278.1 $ 7,702.8 $ 6,443.0
================= ================ =================
<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 affluent and emerging
affluent individuals such as professionals and owners of small businesses, as
well as employees of tax-exempt organizations and existing customers. For
variable life, the Insurance Group has targeted certain markets, particularly
executive benefits, 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 3,000 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.
1-4
<PAGE>
Demographic studies suggest that, as the post-World War II "baby boom"
generation ages over the next decade, there will be a corresponding growth in
the number of individuals in the target market for 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, expanding the
size of the target market for the Insurance Group's accumulation and
distribution products. In addition, 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)
continues. Management has assembled a range of financial products and planning
services designed to 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 1998, 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 (12.8%), California (7.4%), New
Jersey (7.0%), Illinois (5.9%), Michigan (5.7%), Pennsylvania (5.5%) and Florida
(5.3%) 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 1998 aggregate statutory
premiums.
Distribution. Retail distribution of products is accomplished by more than 7,400
sales associates (both career agents and individuals who are actively engaged in
other professions, in addition to offering Insurance segment products) organized
into 19 geographic regions across the United States. The Insurance Group
provides sales associates with training, marketing and sales support. After an
initial training period, sales associates 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 sales associates are not prohibited from
selling traditional insurance products offered by other companies. Equitable
Life'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 and monitor customer complaints. In 1998, Equitable
Life became a member of a voluntary market conduct compliance association. See
"Regulation - Market Conduct".
As of December 31, 1998, 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 sales force provides it with a competitive
advantage in the marketing of the Insurance Group's sophisticated insurance
products. Sales associates are now beginning to receive significant additional
training and licensing which will permit them to offer new products and
services. This succeeds the efforts of the Insurance Group, begun under EQ
Financial, which had introduced in 1996 a program for qualified associates to
offer fee-based financial plans, products and seminars.
In a continuing effort to enhance the quality of the Insurance Group's agency
force, during 1998 management continued its successful recruiting efforts to
attract 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.
1-5
<PAGE>
Management's needs-based selling strategy begins with its Financial Fitness
Profile(R), a sales approach and software package designed to make the client's
long-term financial needs the key ingredient of the sales process. Many members
of the Insurance Group's sales force use Financial Fitness Profile(R) 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 Financial Fitness Profile(R) adds significant value to
client service and provides an excellent foundation for building long-term
relationships with the Insurance Group's customers. In connection with the
offering of new financial planning services, Financial Fitness Profile(R) is
being updated and expanded.
During 1996, EDI, Equitable Life's wholesale distribution company, was created
to offer the Income Manager series of products to securities firms,
broker-dealers and banks. EDI currently employs 51 field and 93 home office
personnel. EDI began marketing Income Manager products in November 1996 through
a major securities firm and several regional broker-dealer firms. By year end
1998, EDI had executed sales agreements with a total of 277 broker-dealers, five
major securities firms and 38 banks. In 1998, major securities firms, other
broker-dealers and banks accounted for 62.9% of all Income Manager products
sales. During 1998, variable life insurance products were first offered through
EDI. Management continues to explore other Equitable products and services that
may be offered through EDI. During 1998, the agency force continued to
incorporate the Income Manager series of products into their sales process.
Equitable Life has centralized its life insurance processing and servicing
functions in a new National Operations Center in Charlotte, North Carolina; has
closed the operations facilities in Des Moines, Iowa and Fresno, California; and
is in the process of closing its service center in New York. These changes are
intended to enhance service to policyholders, streamline operations and provide
cost savings. The transition is expected to be completed in the first 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.
In 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 permit
single-life and second-to-die policies to be written up to $35.0 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 13 of Notes to Consolidated Financial
Statements.
Investment Banking
The Investment Banking segment, which includes DLJ, a leading integrated
investment and merchant bank, 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; securities lending; online interactive brokerage services; and asset
1-6
<PAGE>
management and other advisory services. Investment Banking revenues, which
amounted to $5.42 billion for the year ended December 31, 1998, or 50.1% of The
Equitable's operating revenues, consist primarily of commissions, underwriting
spreads, fees on merger and acquisition, private placement, asset management and
other advisory services, principal transactions (both trading and investment
revenues) and other (primarily dividends and miscellaneous transaction
revenues). At December 31, 1998, after giving effect to July 1998 purchases of
shares of DLJ's common stock by the Holding Company and Equitable Life, The
Equitable owned approximately 72.2% of DLJ's common stock. Assuming full vesting
of restricted stock units and full exercise of all outstanding options,
including those issued in January 1999, The Equitable would own approximately
56.6% of DLJ's common stock. See "MD&A - Combined Operating Results by Segment -
Investment Banking".
In 1998 and prior years, DLJ conducted its business through three principal
operating groups: the Banking Group, the Capital Markets Group, and the
Financial Services Group. DLJ's Banking Group (which includes the Investment
Banking group, the Merchant Banking/Principal Investing group and the Sprout
Group) is a major participant in the raising of capital and the providing of
financial advice to companies throughout the U.S. and in Europe, Asia and Latin
America. Through Investment Banking, DLJ manages and underwrites public
offerings of securities, arranges private placements, originates
investment-grade debt, underwrites and syndicates senior bank debt and provides
advisory and other services in connection with mergers, acquisitions,
restructurings and other financial transactions. Its Merchant Banking/Principal
Investing 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 Sprout Group is Wall
Street's oldest venture capital firm. In 1998, the Banking Group expanded its
capabilities in the technology, telecommunications, and financial services
industries. In addition, significant progress was made in establishing a strong
presence in Europe, Asia and Latin America. New offices were opened in Paris,
Moscow, Buenos Aires and Seoul, and the London office added 80 employees.
The Equities Division of the Capital Markets Group provides domestic and foreign
institutional clients with global research, trading and sales services in U.S.
listed and over-the-counter equities, and foreign equities trading. Autranet is
one of the oldest distributors of research and investment material. The Fixed
Income Division of the Capital Markets Group provides institutional clients with
research, trading and sales services for a broad range of fixed-income products,
and distributes fixed-income securities in connection with offerings
underwritten by DLJ. In addition, DLJ's Equity Derivatives Division provides a
broad range of equity and index option products. In 1998, the division initiated
an aggressive worldwide expansion plan, successfully launching the International
Equities Group, a research, sales and trading operation dedicated to non-U.S.
securities.
The Financial Services Group provides a broad array of services to individual
investors and the financial intermediaries that represent them. Pershing is a
leading provider of correspondent brokerage services, clearing transactions for
financial institutions which collectively maintain over 2.5 million active
customer accounts. Through its Asset Management Group, DLJ provides cash
management, investment advisory and trust services primarily to high net worth
individuals and families. 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. DLJdirect is a leading provider of online discount
brokerage and related investment services, offering customers automated
securities order placement through the Internet and online service providers.
DLJdirect's broad range of investment services is targeted at self-directed,
sophisticated online investors, who on average have higher account balances than
other online 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.
1-7
<PAGE>
In 1998, DLJ continued to make strides toward achieving the goal of establishing
a strong international presence. DLJ launched an international equities business
headquartered in London and opened investment banking offices in Buenos Aires,
Hong Kong, Moscow, Paris and Seoul. The Merchant Banking Group has expanded its
international efforts, with investments in the UK, Italy, France, Argentina and
Brazil. At December 31, 1998 and 1997, total net revenues related to DLJ's
foreign operations were approximately $327.3 million and $371.1 million,
respectively. At December 31, 1998 and 1997, total foreign assets were
approximately $10.9 billion and $8.6 billion, respectively.
In March 1999, DLJ filed a registration statement with the Commission relating
to a proposed initial public offering of a new class of common stock that will
track the performance of DLJdirect, its online brokerage business. In March
1999, DLJ also filed a registration statement with the Commission which enables
it to issue, from time to time, up to $2 billion of senior or subordinated debt
securities or preferred stock and issued $650 million of 5 7/8% Senior Notes due
2002.
For additional information about DLJ, see "MD&A - Combined Operating Results by
Segment - Investment Banking" and DLJ's Annual Report on Form 10-K for the year
ended December 31, 1998.
Asset Management
General. The Asset Management segment, which includes Alliance, one of the
nation's largest investment advisors, provides diversified investment management
services to the Insurance Group and to a variety of institutional clients,
including corporate and public employee pension funds, endowments, foundations
and other domestic and foreign financial institutions, as well as to high
net-worth individuals and, through various investment vehicles, to individual
investors. This segment includes institutional Separate Accounts ($10.3 billion
at December 31, 1998) which provide various investment options for large group
pension clients, primarily defined benefit contribution plans, through pooled or
single group accounts. The segment also includes the results of ERE which
provided real estate investment management services, property management
services, mortgage servicing and loan asset management and agricultural
investment management services, but only through June 10, 1997, the date of
ERE's sale. The Asset Management segment in 1998 accounted for approximately
$1.33 billion or 12.3% of operating revenues. In recent years, rapid growth in
sales of mutual funds to individuals and retail clients has augmented the
traditional focus on institutional markets. For additional information on
Alliance, including its results of operations, see "Regulation" and "MD&A -
Combined Operating Results by Segment - Asset Management".
As of December 31, 1998, Alliance had approximately $286.7 billion in assets
under management (including $262.5 billion for third party clients). Alliance's
assets under management at December 31, 1998 included approximately $168.1
billion from separately managed accounts for institutional investors and high
net worth individuals and approximately $60.7 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, 1998, The Equitable owned a 1% general partnership interest in
Alliance and approximately 56.7% of the units representing assignments of
beneficial ownership of limited partnership interests in Alliance ("Alliance
Units").
Alliance's asset management business can be divided into separately managed
accounts and mutual funds management. Alliance's separately managed accounts
consist primarily of the active management of equity accounts, balanced (equity
and fixed income) accounts and fixed income accounts for institutional investors
and high net worth individuals. Alliance's mutual funds management services,
which developed as a diversification of its institutional investment management
business, consist of the management, distribution and servicing of mutual funds
and cash management products, including money market funds and deposit accounts.
1-8
<PAGE>
Separately Managed Accounts - At December 31, 1998, separately managed accounts
(other than investment companies and deposit accounts) represented approximately
59% of Alliance's total assets under management while the fees earned from the
management of those accounts represented approximately 28% of Alliance's
revenues for the year ended December 31, 1998. 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
portfolios, venture capital portfolios, investment partnership portfolios known
as hedge funds and portfolios that invest in real estate investment trusts. In
addition, Alliance provides "passive" management services for equity, fixed
income and international accounts.
As of December 31, 1998, Alliance acted as investment manager for approximately
1,889 separately managed accounts (other than investment companies) which
include corporate employee benefit plans, public employee retirement systems,
endowments, foundations, foreign governments, multi-employer pension plans 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.
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-end and closed-end mutual funds other than The Hudson River
Trust ("Alliance Mutual Funds"); (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, and
other financial intermediaries; (iv) manages and sponsors certain structured
products and (v) manages and sponsors certain hedge funds. The assets comprising
The Hudson River Trust, all Alliance Mutual Funds and deposit accounts on
December 31, 1998, amounted to approximately $118.6 billion.
Revenues - Asset management revenues consist primarily of investment advisory
and service fees generally based on the value of assets under management.
Certain investment advisory agreements also provide for the payment of
performance fees when investment performance exceeds a contractual benchmark.
Fees charged vary with the type of account managed (mutual fund, institutional
separate account, individual managed account) and the nature of the assets being
managed (money market funds, equities, fixed income investments). The Asset
Management segment also generates distribution plan fees consisting of
reimbursement of mutual fund distribution expenses, and administrative and
transfer agency service fees provided to Alliance mutual funds and money market
funds. Other Asset Management revenues consist primarily of interest, dividends
and commissions on shares of mutual funds sold with conventional front-end sales
charges.
Taxation - On August 6, 1997, Alliance announced its intention to utilize a new
election 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
reduced 1998 distributions by Alliance by approximately 10% from what they would
have been under the former tax structure. Under prior tax law, Alliance, as a
partnership, generally was not subject to Federal income tax. 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 "MD&A - Combined Results of
Operations by Segment - Asset Management" and Alliance's Annual Report on Form
10-K for the year ended December 31, 1998.
1-9
<PAGE>
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.
Assets Under Management and Fees
The Equitable continues to pursue its strategy of increasing third party assets
under management. The Investment Banking and Asset Management segments continue
to add third party assets under management, and provide asset management
services to the Insurance Group. Of the $347.5 billion of assets under
management at December 31, 1998, $294.6 billion (or 83.9%) were managed for
third parties, including $252.7 billion for domestic and overseas investors,
mutual funds, pension funds and endowment funds and $41.9 billion for the
Insurance Group's Separate Accounts, and $52.9 billion principally for the
Insurance Group General Account and invested assets of subsidiaries. Of the
$1,144.0 million of fees for assets under management received for the year ended
December 31, 1998, $1,095.7 million were received from third parties, including
$999.3 million from unaffiliated third parties and $96.4 million in respect of
Separate Accounts, and $48.3 million from the Insurance Group. For additional
information on fees and assets under management, see "MD&A - Combined Operating
Results by Segment Fees and Assets Under Management."
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 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, 1998, $1.02 billion of contractholder liabilities were outstanding,
substantially all of which were related to Wind-Up Annuities. For additional
information, see Note 8 of Notes to Consolidated Financial Statements and "MD&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 such product line'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.
1-10
<PAGE>
The Closed Block assets and results are a part of continuing operations and have
been combined in the MD&A on a line-by-line basis with assets and results
outside of the Closed Block. Management discusses 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 are discussed below.
For further information on these portfolios and on Discontinued Operations
Investment Assets, see "MD&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.
For more information on the Closed Block, see Notes 2 and 7 of Notes to
Consolidated Financial Statements.
The following table summarizes General Account Investment Assets by asset
category at December 31, 1998.
<TABLE>
<CAPTION>
General Account Investment Assets
Net Amortized Cost
(Dollars In Millions)
Amount % of Total
----------------- -----------------
<S> <C> <C>
Fixed maturities(1)......................................................... $ 22,804.8 64.9%
Mortgages................................................................... 4,443.3 12.7
Equity real estate.......................................................... 1,774.1 5.1
Other equity investments.................................................... 769.4 2.2
Policy loans................................................................ 3,727.9 10.6
Cash and short-term investments(2).......................................... 1,597.8 4.5
----------------- -----------------
Total....................................................................... $ 35,117.3 100.0%
================= =================
<FN>
(1) Excludes unrealized gains of $814.3 million 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>
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, 1998, the fixed maturities category was the
largest asset class of General Account Investment Assets with $22.80 billion in
net amortized cost or 64.9% 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, 1998, 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 24.9% and
1.1%, respectively. As of December 31, 1998, 85.1% ($19.40 billion) of the
amortized cost of fixed maturities were rated investment grade (National
Association of Insurance Commissioners ("NAIC") bond rating 1 or 2).
1-11
<PAGE>
The following table summarizes fixed maturities by remaining average life as of
December 31, 1998.
<TABLE>
<CAPTION>
Fixed Maturity Investments By
Remaining Average Life
(In Millions)
Amortized
Cost
-----------------
(In Millions)
<S> <C>
Due in one year or less.................................... $ 433.2
Due in years two through five.............................. 4,985.5
Due in years six through ten............................... 8,466.9
Due after ten years........................................ 4,503.4
Mortgage-backed securities(1).............................. 4,415.8
-----------------
Total...................................................... $ 22,804.8
=================
<FN>
(1) Includes redeemable preferred stock.
</FN>
</TABLE>
Investment grade fixed maturities (which include redeemable preferred stocks)
include the securities of 1,023 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 (24.6%), banking (16.1%), finance (12.7%),
utilities (12.4%), and transportation (7.7%) representing the five largest
allocations of investment grade fixed maturities at December 31, 1998. No other
industry represented more than 4.0% of the investment grade fixed maturities
portfolio at that date.
Below investment grade fixed maturities (NAIC bond rating 3 through 6 and
redeemable preferred stocks) include the securities of over 397 different
issuers with no individual issuer representing more than 2.3% of below
investment grade fixed maturities as a whole. At December 31, 1998, the five
largest industries represented in these below investment grade fixed maturities
were manufacturing (50.0%), communications (8.2%), finance (7.2%),
agriculture/mining/construction (6.7%) and wholesale and retail (5.4%). No other
industry represented more than 4.2% 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 "MD&A - Continuing
Operations Investment Portfolio Investment Results of General Account Investment
Assets - Fixed Maturities".
Mortgages. As of December 31, 1998, measured by amortized cost, commercial
mortgages totaled $2.66 billion (59.3% of the amortized cost of the category),
agricultural loans were $1.83 billion (40.7%) and residential loans were $1.1
million (0.0%). As of December 31, 1998, 98.3% 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, 1998, first mortgages (which include
all mortgages where no other lender holds a senior position to Equitable Life)
represented $2.66 billion (99.9%) of the amortized cost of the commercial
mortgage portfolio. There were no construction or land loans in the category.
Valuation allowances of $45.4 million are held against the portfolio. As of
December 31, 1998, there were 252 individual commercial mortgage loans
collateralized by office buildings (amortized cost of $1,366.0 million), retail
properties ($583.3 million), hotels ($307.0 million), industrial properties
($150.3 million) and apartment buildings ($254.1 million).
1-12
<PAGE>
For information regarding the maturity and principal repayment schedule for the
commercial mortgage portfolio as of December 31, 1998, and problem, potential
problem and restructured commercial mortgage loans, see "MD&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, 1998, there were approximately 4,378
outstanding agricultural mortgages with an aggregate amortized cost of $1.83
billion. As of December 31, 1998, 30.5%, 22.9%, 20.3% and 13.8% 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 8.0% of these loans. Of the properties
collateralizing these loans, 28.0% were located in California and no more than
8.6% are located in any other single state.
Equity Real Estate. The $1.99 billion amortized cost of the equity real estate
category consists of office ($1,290.4 million), retail ($258.0 million), land
and other ($202.0 million) and no other category comprised more than 6.0% of the
portfolio. Valuation allowances of $211.8 million are held against the
portfolio. Office properties are primarily significant downtown buildings in
major cities. Measured by amortized cost, 19.6%, 16.6%, and 14.4% of these
properties are located in New York, California and Massachusetts, respectively,
and no more than 10.5% were located in any other state.
In January 1998, management announced a program to sell a significant portion of
its equity real estate portfolio over the following 12 to 15 months. By year end
1998, proceeds from the sale of equity real estate totaled $1.34 billion. At
December 31, 1998, the remaining held for sale equity real estate portfolio's
depreciated cost for continuing and discontinued operations totaled $1.39
billion, excluding related valuation allowances of $246.6 million. For
additional information regarding the equity real estate portfolio and the impact
of the equity real estate sales program on Equitable Life's results of
operations for the year ended December 31, 1998, see "MD&A Combined Operating
Results" and "Continuing Operations Investment Portfolio - Investment Results of
General Account Investment Assets - Equity Real Estate" and "- Discontinued
Operations".
Other Equity Investments. Other equity investments consist of LBO, mezzanine,
venture capital and other limited partnership interests, alternative limited
partnerships and common stock and other equity securities. Alternative funds
utilize trading strategies that may be leveraged, and attempt to protect against
market risk through a variety of methods, including short sales, financial
futures, options and other derivative instruments. As demonstrated by the market
volatility and negative returns experienced in the second half of 1998, returns
on equity investments are very volatile and investment results for any period
are not representative of any other period. 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, 1998 of $89.4
million represented an investment by the General Account principally in equity
securities. See "MD&A Continuing Operations Investment Portfolio - Investment
Results of General Account Investment Assets - Other Equity Investments".
Commencing in third quarter 1998, in response to a perceived increase in the
price volatility of publicly-traded equity markets, The Equitable began to
reduce its holdings of common stock investments. With the persistence of high
price volatility, The Equitable now believes that publicly-traded common stocks
should be actively managed to control risk and generate investment returns.
Effective January 1, 1999, The Equitable has designated all investments in
publicly-traded equity securities in the General Account and Holding Company
Group portfolios as "trading securities" for the purpose of classification under
SFAS No. 115 and all changes in the investments' fair value will be reported
through earnings.
Holding Company Group
At December 31, 1998, the Holding Company Group held investments with a carrying
value of $670.5 million, made up of fixed maturities ($581.5 million or 86.7%),
cash and short-term securities ($41.3 million or 6.2%) and other equity
investments ($47.7 million or 7.1%). For additional information, see "MD&A -
Liquidity and Capital Resources - The Holding Company" and "- Market Risk, Risk
Management and Derivative Financial Instruments - Other-Than-Trading Activities
- - Insurance".
1-13
<PAGE>
Employees and Agents
As of December 31, 1998, The Equitable had approximately 14,700 employees. Of
these, approximately 4,200 were employed by the Insurance Group and
approximately 10,500 were employed by the Investment Subsidiaries. In addition,
the Insurance Group had more than 7,400 sales associates. Management believes
relations with employees and sales associates are good.
Competition
Insurance. There is strong competition among 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 products 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 the sales 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 nearly all of its agency force with the National
Association of Securities Dealers, Inc. ("NASD") and the training provided to
sales associates by the Insurance Group provide 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, 1998, the financial strength or
claims-paying rating of Equitable Life was AA- from Standard & Poor's
Corporation (4th highest of 22 ratings), Aa3 from Moody's Investors Service (4th
highest of 21 ratings), A from A.M. Best Company, Inc. (3rd highest of 16
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 1999, management may from time to time explore selective acquisition
opportunities in The Equitable's core insurance and asset management businesses.
Asset Management. The investment management industry is highly competitive and
new entrants continually are attracted to it. No single competitor, or any small
group of competitors, is dominant in the industry. 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. Many of these financial
institutions have substantially greater resources than Alliance. Alliance
competes with other 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 range of mutual funds
and cash management services offered, investment performance, quality in
servicing customer accounts and the capacity to provide financial incentives to
financial intermediaries through distribution assistance and administrative
services payments funded by "Rule 12b-1" distribution plans and the manager's
own resources.
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.
1-14
<PAGE>
Investment Banking. DLJ encounters significant competition in all aspects of the
securities business and competes worldwide directly with other domestic and
foreign securities firms, a number of which have greater capital, financial and
other resources than DLJ. 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. As a result of pending
legislative and regulatory initiatives in the United States to remove or relieve
certain restrictions on commercial banks, it is anticipated that competition in
some markets currently dominated by investment banks may increase in the future.
Such competition could also affect DLJ's ability to attract and retain highly
skilled individuals to conduct its various businesses. 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. Equitable Life is in the process of completing its response 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.
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.
1-15
<PAGE>
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, 1998, the reserve objective for the
assets of the Insurance Group was $1.4 billion and the actual AVR was $1.6
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 1998, the AVR decreased statutory surplus by $111.8 million and the IMR
decreased statutory surplus by $10.8 million, as compared to decreases of $147.0
million and $14.6 million, respectively, in 1997. The decrease in statutory
surplus caused by the AVR in 1998 primarily was a result of unrealized gains on
subsidiaries. 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 Statutory Surplus
and Capital".
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, 1998, $111.0 million
(2.3%) of the Insurance Group's total statutory capital (capital, surplus and
AVR) resulted from surplus relief reinsurance. Management reduced surplus relief
reinsurance by approximately $54.2 million in 1998 and by $553.0 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 1998 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 1998
statutory financial statements, no ratios fell outside of the "usual range".
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Statutory Surplus and Capital. As licensed insurers in each of the 50 states of
the United States, 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.
On March 16, 1998, members of the NAIC approved its Codification of Statutory
Accounting Principles ("Codification") project. Codification provides regulators
and insurers with uniform statutory guidance, addressing areas where statutory
accounting previously was silent and changing certain existing statutory
positions. Equitable Life will be subject to Codification to the extent and in
the form adopted in New York State, which would require action by both the New
York legislature and the New York Insurance Department. It is not possible to
predict whether, in what form, or when Codification will be adopted in New York,
and accordingly it is not possible to predict the effect of Codification on
Equitable Life.
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's RBC ratio
has improved in each of the last four years, and management believes that
Equitable Life's statutory capital, as measured by its year end 1998 RBC, is
adequate to support its current business needs and financial ratings.
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 21 of Notes to Consolidated Financial
Statements. In 1999, Equitable Life expects to review with the New York
Insurance Department the potential for paying a dividend to the Holding Company.
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, 1998, 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 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.
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The Administration's year 2000 budget proposals announced in February 1999
contain provisions which, if enacted, could have an adverse impact on sales of
business-owned life insurance and sales of cash value life insurance in
connection with certain employer welfare benefit plans. In addition, certain
provisions would affect the taxation of insurance companies, including a
requirement to capitalize increased percentages of their net premiums to
approximate acquisition costs for certain categories of insurance 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
Trust, some of its policies relating to ERISA-covered plans could be deemed to
have nonguaranteed components subject to the principles announced by the Court.
During 1994 and 1998, 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 and the DOL
has not yet issued final regulations in this matter. In December 1998, Equitable
Life obtained an opinion of outside counsel that its group annuity contracts
were guaranteed benefit contracts and that, as a consequence, its general
account assets underlying these contracts were not plan assets for ERISA
purposes.
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.
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Market Conduct. The Insurance Marketplace Standards Association ("IMSA") is a
voluntary market conduct compliance association whose mission is to improve
standards of ethical market conduct. In 1998, Equitable Life became a member of
IMSA, which required Equitable Life to adopt IMSA's "Principles and Code of
Ethical Market Conduct", and in conformity with IMSA's Assessment Handbook, to
conduct a self-assessment regarding Equitable Life's practices in the marketing
and sales of individually-sold life and annuity products, and to have an
independent IMSA-approved assessor determine that Equitable Life had a
reasonable basis for its findings.
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 has complied voluntarily
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, required
procedures for trading on securities exchanges and in over-the-counter markets,
and procedures for the clearance and settlement of trades. 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
prohibitions. The state securities law requirements applicable to registered
investment advisors are in certain cases more comprehensive than those imposed
under the Federal securities laws. 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 agencies
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
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with the Commodities Futures Trading Commission (the "CFTC"), as an investment
advisor with the Commission and in certain states, and is also designated a
primary dealer in United States 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. See "Regulation - Securities
Laws". 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.
As broker-dealers registered with the Commission and member firms of the NYSE,
DLJSC and certain of its subsidiaries are subject to the capital requirements of
the Commission and of the NYSE and/or NASD. These capital requirements specify
minimum levels of capital, computed in accordance with regulatory requirements
("net capital"), that the Broker-Dealers are required to maintain and also limit
the amount of leverage that the Broker-Dealers are able to obtain in their
businesses. Compliance with regulatory capital requirements could limit those
operations of the Broker-Dealers that require the intensive use of capital, such
as DLJSC's underwriting and trading activities, and the financing of customer
account balances, and also restrict DLJ's ability to pay dividends, pay
interest, repay debt, and redeem or purchase shares of its outstanding capital
stock. A change in such rules, or the imposition of new rules, affecting the
scope, coverage, calculation or amount of capital requirements, or a significant
operating loss or any unusually large charge against capital, would adversely
affect the ability of DLJ to pay dividends or to expand or even maintain present
levels of business. As a futures commission merchant, DLJSC is also subject to
the capital requirements of the CFTC and the CBOT. These requirements include
the provision of certain disclosure documents, prohibitions against trading
ahead of customers and other fraudulent trading practices, provisions as to the
handling of customer funds and reporting and recordkeeping requirements. 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 the Broker-Dealers (other than Equitable
Life) to the Holding Company.
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 United States 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.
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Year 2000
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.
For more information regarding The Equitable's Year 2000 compliance efforts, see
"MD&A - Year 2000".
Principal Shareholder
AXA is the majority shareholder of the Holding Company, beneficially owning
(together with certain of its affiliates) at March 1, 1999, 58.4% 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 and, to a lesser extent, in Africa and South America. 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.
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.
Neither AXA nor any affiliate of AXA has any obligation to provide additional
capital or credit support to The Equitable.
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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.
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 ("AXA Parties") 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.
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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 JSG 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 (since May 1996) and Chief Financial
Officer (since May 1997) of the Holding Company, 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 Co-Chairman of the Insurance Industry
Practice.
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Part I, Item 2.
PROPERTIES
Insurance
Equitable Life leases and proposes to lease on a long-term basis approximately
643,000 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. Equitable Life also leases approximately 152,000 square feet
in Charlotte, North Carolina, under a lease that expires in 2013, for use as of
its National Operations Center. 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 19 and 20 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.
Investment Banking
DLJ's principal executive offices are presently located at 277 Park Avenue, New
York, New York and occupy approximately 1.2 million square feet under a lease
expiring in 2021. DLJ has leased space at 280 Park Avenue, New York, New York,
aggregating approximately 190,000 square feet under a lease expiring at various
dates through 2014. 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 460,000 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 142,000 square feet in Florham Park, New
Jersey.
In addition, DLJ leases an aggregate of approximately 730,000 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,
Moscow, Paris, Sao Paulo, Seoul and Tokyo.
DLJ believes that its present facilities are adequate for its current needs.
Asset Management
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 399,000 square feet at this location. Alliance
also occupies approximately 110,900 square feet at 135 West 50th Street, New
York, New York under leases expiring in 2016. Alliance also occupies
approximately 16,800 square feet at 709 Westchester Avenue, White Plains, New
York, under leases expiring in 2000 and 2004, respectively. Alliance and two of
its subsidiaries occupy approximately 125,000 square feet of space in Secaucus,
New Jersey pursuant to a lease which extends until 2016 and approximately 92,100
square feet of space in San Antonio, Texas pursuant to a lease which extends
until 2009.
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,
Manama, Bahrain, Mumbai, New Delhi, Bangalore and Pune, India, New Delhi, India,
Johannesburg, South Africa and Istanbul, Turkey. Joint venture subsidiaries and
affiliates of Alliance have offices in Vienna, Austria, Sao Paulo, Brazil, Hong
Kong, Chennai, India, Seoul, South Korea, Warsaw, Poland, Moscow, Russia and
Cairo, Egypt.
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Part I, Item 3.
LEGAL PROCEEDINGS
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 eleven paragraphs.
Equitable Life 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. On April 7, 1998,
the Federal district court in Tampa, Florida entered an order preliminarily
approving the settlement agreement relating to the Golomb, Malvin, Bowler,
Bachman and Fletcher cases and conditionally certifying the settlement class.
The order also deems filed an amended complaint that asserts on a nationwide
basis claims of the kind previously made in the five pending cases. In October
1998, the court entered a judgment approving the settlement agreement and, in
November 1998, a member of the national class filed a notice of appeal of the
judgment. In January 1999, the Court of Appeals granted Equitable Life's motion
to dismiss the appeal.
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. The settlement agreement addresses 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. Under the settlement agreement,
Equitable Life will 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 will 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. Pursuant to the settlement, the parties will be making joint
applications to the other courts to dismiss the other actions.
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An action was instituted in April 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 were for
breach of contract and negligent misrepresentation. In April 1997, plaintiffs
noticed an appeal from the court's June 1996 order. In June 1997, plaintiffs
filed their memorandum of law and affidavits in support of their motion for
class certification. In August 1997, Equitable Life and EOC moved for summary
judgment dismissing plaintiffs' remaining claims of breach of contract and
negligent misrepresentation and in February 1998, the court granted Equitable
Life and EOC's motion for summary judgment. The court therefore denied as moot
plaintiffs' motion to certify the class. In April 1998, plaintiffs noticed their
appeal from that decision and from the June 1996 decision, the appeal from which
had been dismissed. Plaintiffs perfected their appeal in January 1999. Oral
argument is scheduled for September 1999.
In May 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. In January 1998, the court heard argument on Equitable Life's
exceptions and motion to strike. Those motions are sub judice. Plaintiffs moved
for class certification in August 1998. Equitable Life opposed that motion and
moved for summary judgment dismissing the amended petition in its entirety;
consideration of this motion has been deferred pending the court's ruling on
plaintiffs' motion for class certification, a hearing on which was concluded in
January 1999. Post-hearing briefing by the parties was concluded in March 1999.
In July 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
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purchase additional policies from EVLICO using the cash value accumulated in
existing policies. Defendants have opposed this motion. In August 1998, EVLICO
and EOC moved for summary judgment on all causes of action. Briefing on the
summary judgment motion and on plaintiff's motion for class certification is
completed, although discovery regarding class certification issues is the
subject of ongoing motion practice. A hearing on plaintiff's motions to compel
discovery and for class certification, and on EVLICO and EOC's motion for
summary judgment, has been scheduled for May 1999.
In January 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 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. The parties
have completed class certification discovery and briefing on plaintiffs' motion
for class certification. A hearing on the motion for class certification has
been scheduled for April 1999. In March 1999, Equitable Life and EVLICO moved
for summary judgment on all causes of action, and briefing continues on this
motion.
In November 1998, an action entitled Harold Hallabrin, et al. v. Alexander
Hamilton Life Insurance Company, et al. was commenced against six life insurance
companies, including Equitable Life, and an individual agent (not affiliated
with Equitable Life) in Michigan state court. The action is brought by the
holders of whole life insurance policies issued by several insurers, including
Equitable Life. The action purports to be on behalf of a class consisting of all
persons who from January 1, 1982 through December 31, 1998 purchased whole life
insurance policies sold by Equitable Life and the other life insurance companies
based upon allegedly uniform sales presentations and policy illustrations.
Plaintiffs allege improper sales practices based on allegations of
misrepresentations concerning the number of years that the premiums would need
to be paid and the extent to which a policy was a proper replacement policy.
Plaintiffs seek compensatory and exemplary damages in an unspecified amount and
to prohibit defendants from canceling policies of putative class members for
failure to make premium payments. In December 1998, Equitable Life removed this
action to the United States District Court for the Eastern District of Michigan.
Plaintiffs subsequently filed a motion to remand the action back to the Michigan
state court. In January 1999, Equitable Life moved to sever the claims against
all other named defendants and the claims of all named plaintiffs who purchased
their policies from insurers other than Equitable Life and its affiliates, and
plaintiffs filed an amended complaint, which among other things, adds additional
defendants, including EQ Financial. Briefing on the motions for remand and
severance is completed. In February 1999, Equitable Life filed a motion to
dismiss plaintiffs' claims.
In January 1999, an action entitled Dr. James H. Greenwald, et al. v. The
Equitable Life Assurance Society of the United States and Stanley L. Harris was
commenced against Equitable Life in Illinois state court. The action is brought
by the holder of and the insured under a whole life policy issued by Equitable
Life. The action purports to be on behalf of a class consisting of all persons
who from January 1, 1982 through January 1999 purchased whole life insurance
policies sold by Equitable Life 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, including punitive damages, in an unspecified amount and injunctive
relief to be determined by the court. Defendants have not yet responded to the
complaint.
In February 1999, an action entitled Dennis Hill, et al. v. Equitable Variable
Life Insurance Company, The Equitable Life Assurance Society of the United
States and Jerry Vucovich was commenced in the Circuit Court of Montgomery
County, Alabama. The action purports to be on behalf of a class consisting of
persons in the State of Alabama who from 1982 to the present purchased life
insurance from Equitable Life and EVLICO based upon allegedly uniform sales
presentations and policy illustrations. The complaint puts at issue various
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sales practices that plaintiffs allege, among other things, misrepresented the
number of years that annual premiums would need to be paid, failed to disclose
the extent to which a policy was a proper replacement policy, and misrepresented
life insurance policies as retirement plans, investments or pension plans.
Plaintiffs seek compensatory and punitive damages in an unspecified amount and
injunctive relief including imposition of a constructive trust and an order
enjoining defendants from continuing their allegedly deceptive sales practices.
Defendants have not yet responded to the complaint.
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, Franze,
Hallabrin, Greenwald and Hill 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.
In three previously disclosed cases, (1) Robert E. Dillon v. The Equitable Life
Assurance Society of the United States and The Equitable of Colorado, (2)
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, and (3) 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, the plaintiffs' claims have been settled on an individual basis
and the related actions have been dismissed.
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. The
court referred the case to mediation, which is pending. 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.
In November 1997, an amended complaint was filed in Peter Fischel, et al. v. The
Equitable Life Assurance Society of the United States alleging, among other
things, that Equitable Life violated ERISA by eliminating certain alternatives
pursuant to which agents of Equitable Life could qualify for health care
coverage. In March 1999, the United States District Court for the Northern
District of California entered an order certifying a class consisting of "[a]ll
current, former and retired Equitable agents, who while associated with
Equitable satisfied [certain alternatives] to qualify for health coverage or
contributions thereto under applicable plans." Plaintiffs allege various causes
of action under ERISA, including claims for enforcement of alleged promises
contained in plan documents and for enforcement of agent bulletins, breach of a
unilateral contract, breach of fiduciary duty and promissory estoppel. The
parties are currently engaged in discovery. 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.
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In July 1995, a Consolidated and Supplemental Class Action Complaint ("Original
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. In September 1996, the
United States District Court for the Southern District of New York granted the
defendants' motion to dismiss all counts of the Original Complaint. In October
1997, the United States Court of Appeals for the Second Circuit affirmed that
decision. In October 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 currency risk 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. In October 1998, the United States Court of Appeals for the Second Circuit
issued an order granting plaintiffs' motion to file an amended complaint
alleging that the Fund misrepresented its ability to hedge against currency risk
and denying plaintiffs' motion to file an amended complaint alleging that the
Fund did not properly disclose that it planned to invest in mortgage-backed
derivative securities and that certain advertisements used by the Fund
misrepresented the risks of investing in the Fund. Alliance believes that the
allegations in the amended complaint, which was filed in February 1999, are
without merit and intends to defend itself vigorously against these claims.
While the ultimate outcome of this matter cannot be determined at this time,
Alliance's management does not expect that it will have a material adverse
effect on Alliance's results of operations or financial condition.
In January 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, against Eos
Partners, L.P., and General Electric Capital Corporation, each as owners of
44.2% of the common stock of Rickel, and against 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 filed a voluntary petition for reorganization pursuant to Chapter 11 of
the Bankruptcy Code on January 10, 1996. In April 1998, DLJSC's motion to
dismiss the complaint as against it was denied, and plaintiff's motion for class
certification was denied. In December 1998, the motion of two other potential
class representatives to intervene in the action was denied. DLJSC intends to
defend itself vigorously against all of the allegations contained in the
complaint. Although there can be no assurance, DLJ's management does not believe
that the ultimate outcome of this litigation will have a material adverse effect
on DLJ's consolidated financial condition. Due to the early stage of this
litigation, based on the information currently available to it, DLJ's management
cannot 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 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
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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. 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. DLJSC appealed the Bankruptcy Court's January
1998 ruling to the U.S. District Court for the Northern District of Texas. On
May 7, 1998, DLJSC and others were named as defendants in a second action filed
in a Texas State Court brought by the NGC Settlement Trust. The allegations of
this second Texas State Court action are substantially similar to those of the
earlier class action pending in the State Court. In an amended order dated
January 5, 1999, the State Court granted the class action plaintiff's motion for
class certification. In an order dated March 1, 1999, the State Court granted
motions for summary judgment filed by DLJSC and the other defendants. The
plaintiffs have indicated that they intend to appeal. DLJSC intends to defend
itself vigorously against all of the allegations contained in the complaints.
Although there can be no assurance, DLJ's management does not believe that the
ultimate outcome of this litigation will have a material adverse effect on DLJ's
consolidated financial condition. Based upon the information currently available
to it, DLJ's management cannot predict whether or not such litigation will have
a material adverse effect on DLJ's results of operations in any particular
period.
In April 1998, DLJSC motions for summary judgment were denied in a litigation
commenced in March 1991 by Dayton Monetary Associates and Charles Davison, who
along with more than 200 other plaintiffs, filed several complaints against
DLJSC and a number of other financial institutions and several individuals in
the U.S. District Court for the Southern District of New York. The plaintiffs
allege that DLJSC and other defendants violated civil provisions of RICO by
inducing plaintiffs to invest over $40 million during the years 1978 through
1982 in The Securities Groups, a number of tax shelter limited partnerships. The
plaintiffs seek recovery of the loss of their entire investment and an
approximately equivalent amount of tax-related damages. Judgment for damages
under RICO are subject to trebling. Discovery is complete. Trial has been
scheduled for May 17, 1999. DLJSC believes that it has meritorious defenses to
the complaints and will continue to contest the suits vigorously. Although there
can be no assurance, DLJ's management does not believe that the ultimate outcome
of this litigation will have a material adverse effect on DLJ's consolidated
financial condition. Based upon the information currently available to it, DLJ's
management cannot predict whether or not such litigation will have a material
adverse effect on DLJ's results of operations in any particular period.
On January 24, 1997, various money management firms and others who allegedly
purchased and/or beneficially owned $116 million aggregate principal amount of
Senior Subordinated Notes issued in May 1994 (the "Notes") by Mid-American Waste
Systems, Inc. ("Mid-American") filed a complaint against DLJSC and a number of
other financial institutions and several former officers and directors of
Mid-American in the Court of Common Pleas, Franklin County, Ohio. The action
seeks rescission, compensatory and punitive damages. The suit alleges violations
of Federal securities laws and the Ohio Securities Act, and common law fraud,
aiding and abetting common law fraud, negligent misrepresentation, breach of
contract, breach of fiduciary duty/acting in concert and negligence. DLJSC was
an underwriter for the initial offering of the Notes. The Notes went into
default in February 1996 and Mid-American filed a voluntary petition for
reorganization pursuant to Chapter 11 of the Bankruptcy Code in January 1997.
The complaint seeks to hold DLJSC liable for various alleged misrepresentations
and omissions contained in the prospectus for the Notes and other filings and
for various oral representations concerning the Notes, which plaintiffs claim
were false and misleading. Fact discovery is complete and expert discovery is
ongoing. Both DLJSC and plaintiffs filed motions for summary judgment, all of
which are pending. Trial is currently scheduled to commence on May 4, 1999.
Other alleged purchasers and/or beneficial owners of an additional $15 million
aggregate principal amount of the Notes issued by Mid-American described above
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above filed two additional lawsuits against DLJSC, both in the U.S. District
Court for the Southern District of Ohio, on April 14, 1997 and December 30,
1997. The allegations are substantially similar to those described above.
Discovery in these actions, consolidated with fact discovery in the Ohio state
court action described above, is still ongoing. No trial date has been set in
either case. On July 31, 1998, DLJSC filed a motion to dismiss the last filed
action for lack of timely service of valid process, which is pending. DLJSC
believes that it has meritorious defenses to all of the allegations contained in
all of the complaints described above and is contesting the suits vigorously.
Although there can be no assurance, DLJ's management does not believe that the
ultimate outcome of this litigation will have a material adverse effect on DLJ's
consolidated financial condition. Based upon information currently available to
it, DLJ's management cannot predict whether or not such litigation will have a
material adverse effect on DLJ's results of operations in any particular period.
On January 20, 1999, the Plan Administrator for the bankruptcy estate of
Mid-American, represented by counsel for plaintiffs in the Ohio state court
action against DLJSC described above, filed another action against DLJSC and
other financial institutions, several individuals and two law firms in the
Supreme Court of the State of New York based on factual allegations similar to
those made in the Ohio state court action. The action seeks compensatory and
punitive damages. The plaintiff alleges claims against DLJSC for breach of
fiduciary duty, aiding and abetting breach of fiduciary duty, professional
malpractice, common law fraud, constructive fraud, aiding and abetting common
law fraud, negligence, negligent misrepresentation and breach of contract. The
complaint alleges that, as an underwriter, DLJSC is liable for alleged
misrepresentations and omissions in the prospectus for the Notes, and that, as
Mid-American's financial advisor after the initial offering, DLJSC allegedly
knew or should have known about and should have disclosed to Mid-American that
Mid-American's financial condition was precarious and that publicly disclosed
documents were false and misleading regarding Mid-American's finances and
operations. No discovery or other proceedings have yet been had in this action.
DLJSC believes that it has meritorious defenses to all of the allegations
contained in the complaint and will contest the suit vigorously. Although there
can be no assurance, DLJ's management does not believe that the ultimate outcome
of this litigation will have a material adverse effect on DLJ's consolidated
financial condition. Due to the early stage of this litigation, based upon
information currently available to it, DLJ's management cannot predict whether
or not such litigation will have a material adverse effect on DLJ's results of
operations in any particular period.
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.
3-7
<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 1998.
4-1
<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 22, 1999, there were approximately 525,000 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 1998 1998 1998 1998
- ------------------------------------- ----------------- ------------------- ---------------- -----------------
<S> <C> <C> <C> <C>
High............................... $ 59 13/16 $ 74 15/16 $ 83 5/16 $ 59 3/4
Low................................ $ 43 1/2 $ 56 7/16 $ 41 3/8 $ 31
Dividends Declared................. $ .05 $ .05 $ .05 $ .05
First Quarter Second Quarter Third Quarter Fourth Quarter
Price Range and Dividends 1997 1997 1997 1997
- ------------------------------------- ----------------- ------------------- ---------------- -----------------
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
</TABLE>
For information on the Holding Company's present and future ability to pay
dividends, see Note 21 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 Results of Operations (Item 7 of this
report), and "Shareholder Dividend Restrictions" of Business (Item 1 of this
report).
5-1
<PAGE>
Part II, Item 6.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At or For the Years Ended December 31,
-----------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------- ------------- ------------- ------------- -------------
(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.............. $ 1,056.2 $ 950.6 $ 874.0 $ 788.2 $ 715.0
Premiums................................. 588.1 601.5 597.6 606.8 625.6
Net investment income(1)................. 4,498.7 3,991.3 3,336.3 3,047.4 2,838.4
Investment gains, net(2)(3).............. 155.8 518.5 557.8 552.3 338.6
Commissions, fees and other income....... 4,532.6 3,501.7 2,841.9 2,142.4 1,748.4
Contribution from the Closed Block(4).... 87.1 102.5 125.0 143.2 137.0
-------------- ------------- ------------- ------------- -------------
Total revenues............................. 10,918.5 9,666.1 8,332.6 7,280.3 6,403.0
Total benefits and other deductions
(5)(6)(7)............................... 9,314.5 8,563.1 7,816.8 6,635.1 5,856.4
-------------- ------------- ------------- ------------- -------------
Earnings from continuing operations
before Federal income taxes and
minority interest........................ 1,604.0 1,103.0 515.8 645.2 546.6
Federal income tax expense(8).............. 527.8 280.5 137.4 192.3 157.0
Minority interest in net income of
consolidated subsidiaries................ 245.8 174.3 172.4 87.5 68.3
-------------- ------------- ------------- ------------- -------------
Earnings from continuing operations
before cumulative effect of
accounting change........................ 830.4 648.2 206.0 365.4 321.3
Discontinued operations, net of Federal
income taxes(1)(9)(10)................... 2.7 (87.2) (83.8) - -
Cumulative effect of accounting changes,
net of Federal income taxes.............. - - (23.1) - (27.1)
-------------- ------------- ------------- ------------- -------------
Net earnings............................... 833.1 561.0 99.1 365.4 294.2
Dividends on preferred stocks.............. - 15.6 26.7 26.7 80.1
-------------- ------------- ------------- ------------- -------------
Net Earnings Applicable to
Common Shares............................ $ 833.1 $ 545.4 $ 72.4 $ 338.7 $ 214.1
============== ============= ============= ============= =============
Per Common Share:
Basic:
Earnings from Continuing Operations
before Cumulative Effect of
Accounting Change.................... $ 3.75 $ 3.14 $ .97 $ 1.84 $ 1.68
============== ============= ============= ============= =============
Net Earnings........................... $ 3.76 $ 2.71 $ .39 $ 1.84 $ 1.49
============== ============= ============= ============= =============
Diluted:
Earnings from Continuing Operations
before Cumulative Effect of
Accounting Change.................... $ 3.61 $ 2.86 $ .94 $ 1.75 $ 1.52
============== ============= ============= ============= =============
Net Earnings........................... $ 3.62 $ 2.47 $ .37 $ 1.75 $ 1.37
============== ============= ============= ============= =============
Cash Dividends Per Common Share............ $ .20 $ .20 $ .20 $ .20 $ .20
============== ============= ============= ============= =============
Consolidated Balance Sheets Data
Total assets(4)(11)........................ $ 159,501.1 $ 151,173.2 $ 128,811.2 $ 113,716.2 $ 94,785.3
Long-term debt............................. 5,474.0 3,946.0 3,920.7 3,852.0 2,925.9
Total liabilities(4)(11)................... 153,808.0 145,899.7 124,823.2 109,607.5 91,605.2
Shareholders' equity....................... 5,693.1 5,273.5 3,988.0 4,108.7 3,180.1
</TABLE>
6-1
<PAGE>
NOTES TO SELECTED CONSOLIDATED
FINANCIAL INFORMATION
(1) Net investment income and discontinued operations included $26.6 million,
$53.3 million, $114.3 million, $154.6 million and $219.7 million for 1998,
1997, 1996, 1995 and 1994, 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 $187.8 million, $483.8
million, $178.6 million, $197.6 million and $100.5 million for 1998, 1997,
1996, 1995 and 1994, respectively. In 1997, additions to valuation
allowances of $227.6 million were recorded related to the accelerated
equity real estate sales program and $132.3 million of writedowns on real
estate held for production of income were recorded. As a result of the
implementation of SFAS No. 121, 1996 results include the release of
valuation allowances of $152.4 million on equity real estate and the
recognition of impairment losses of $144.0 million on real estate held for
production of income.
(3) Investment gains, net for 1997 included a pre-tax gain of $252.1 million
from the sale of ERE. The 1996 results included a $79.4 million gain on
the sale of one investment in the DLJ long-term corporate development
portfolio while 1995 results included a $34.7 million gain resulting from
the sale of DLJ common stock.
(4) 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 7 of Notes to Consolidated Financial Statements.
(5) During 1996, The Equitable wrote off $145.0 million of unamortized DAC on
disability income ("DI") products and strengthened reserves by $248.0
million for the DI and Pension Par lines of business. As a result,
earnings from continuing operations decreased by $255.5 million ($393.0
million pre-tax). See Note 2 of Notes to Consolidated Financial
Statements.
(6) Total benefits and other deductions included Corporate interest expense of
$126.1 million, $127.2 million, $139.6 million, $100.5 million and $50.6
million for 1998, 1997, 1996, 1995 and 1994, respectively, and interest
credited to discontinued operations of $88.2 million for 1994.
(7) Total benefits and other deductions included provisions associated with
exit and termination costs of $42.4 million, $24.4 million, $39.2 million
and $20.4 million for 1997, 1996, 1995 and 1994, respectively.
(8) In 1997, The Equitable released $97.5 million of tax reserves related to
years prior to 1989.
(9) 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, which totaled $33.2 million, $212.5 million,
$36.0 million, $38.2 million and $50.8 million for 1998, 1997, 1996, 1995
and 1994, respectively. In 1997, additions to valuation allowances of
$79.8 million were recognized related to the accelerated equity real
estate sales program and $92.5 million of writedowns on real estate held
for production of income were recognized. The implementation of SFAS No.
121 in 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>
(10) During the 1998, 1997 and 1996 reviews of the allowance for future losses
for discontinued operations, management released the allowance in 1998 and
increased the allowance in 1997 and 1996. As a result, net earnings
increased by $2.7 million and decreased by $87.2 million and $83.8 million
for 1998, 1997 and 1996, respectively. Incurred gains (losses) of $50.3
million, ($154.4) million, ($23.7) million, ($25.1) million and ($21.7)
million for the years ended December 31, 1998, 1997, 1996, 1995 and 1994,
respectively, were credited (charged) to discontinued operations allowance
for future losses. See Note 8 of Notes to Consolidated Financial
Statements.
(11) Assets and liabilities relating to discontinued operations are not
reflected on the consolidated balance sheets of The Equitable, except that
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" in all years presented.
6-3
<PAGE>
Part II, Item 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis ("MD&A") for The Equitable which follows
should be read in conjunction with the Consolidated Financial Statements and
related footnotes included elsewhere in this report.
COMBINED OPERATING RESULTS
In 1998, in accordance with SFAS No. 131, management identified three operating
segments that reflect The Equitable's major businesses: Insurance, Investment
Banking and Asset Management. See Notes 1 and 22 of Notes to Consolidated
Financial Statements for further information.
This MD&A presents pre-tax operating results and segment information on a basis
which adjusts amounts as reported in the GAAP financial statements to exclude
the effect of unusual or non-recurring events and transactions as well as
certain revenue and expense categories management views as not related to the
base operations of the particular business. Management believes this
presentation produces informative data on the operating trends in each business.
A reconciliation of pre-tax operating earnings, as adjusted, to GAAP reported
earnings from continuing operations precedes each discussion. A discussion of
significant adjustments begins on the next page.
The following table presents the combined operating results of operations
outside of the Closed Block combined on a line-by-line basis with the Closed
Block's operating results. The Insurance analysis, which begins on page 7-4,
likewise combines the Closed Block amounts on a line-by-line basis. The MD&A
addresses the combined results of operations unless noted otherwise. The
Investment Banking and Asset Management discussions begin on pages 7-9 and 7-11,
respectively.
7-1
<PAGE>
Combined Operating Results:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Operating Results:
Policy fee income and premiums............................ $ 2,304.6 $ 2,238.5 $ 2,195.3
Net investment income..................................... 5,068.4 4,566.2 3,882.9
Investment gains, net..................................... 33.6 559.7 592.8
Commissions, fees and other income........................ 4,534.0 3,502.4 2,801.6
----------------- ----------------- ----------------
Total revenues........................................ 11,940.6 10,866.8 9,472.6
----------------- ----------------- ----------------
Interest credited to policyholders' account balances...... 1,168.1 1,281.8 1,286.0
Policyholders' benefits................................... 2,092.5 2,030.5 2,161.1
Other operating costs and expenses........................ 7,166.7 6,252.8 5,082.2
----------------- ----------------- ----------------
Total benefits and other deductions................... 10,427.3 9,565.1 8,529.3
----------------- ----------------- ----------------
Pre-tax operating earnings before minority interest....... 1,513.3 1,301.7 943.3
Minority interest......................................... (317.3) (284.7) (214.6)
----------------- ----------------- ----------------
Pre-tax operating earnings................................ 1,196.0 1,017.0 728.7
Pre-tax Adjustments:
Investment gains (losses), net of DAC
and other charges....................................... 90.7 (285.2) (11.1)
Gain on sale of ERE....................................... - 249.8 -
Intangible asset writedown................................ - (120.9) -
Reserve strengthening..................................... - - (393.0)
Restructuring charges..................................... - (42.4) (23.4)
----------------- ----------------- ----------------
Total pre-tax adjustments............................. 90.7 (198.7) (427.5)
Minority interest......................................... 317.3 284.7 214.6
----------------- ----------------- ----------------
GAAP Reported:
Earnings from continuing operations before
Federal income taxes, minority interest and
cumulative effect of accounting change.................. 1,604.0 1,103.0 515.8
Federal income taxes...................................... 527.8 280.5 137.4
Minority interest in net income of consolidated
subsidiaries............................................ 245.8 174.3 172.4
----------------- ----------------- ----------------
Earnings from continuing operations before
cumulative effect of accounting change.................. 830.4 648.2 206.0
Discontinued operations, net of Federal income taxes...... 2.7 (87.2) (83.8)
Cumulative effect of accounting change, net of
Federal income taxes.................................... - - (23.1)
----------------- ----------------- ----------------
Net Earnings................................................ $ 833.1 $ 561.0 $ 99.1
================= ================= ================
</TABLE>
Adjustments to GAAP Reported Earnings
The Equitable's reported net earnings from continuing operations for 1997 and
1996 were significantly affected by certain unusual or non-recurring events and
valuation allowance additions and writeoffs presented above as pre-tax
adjustments, excluded from the analysis of operating results in this MD&A. In
all three years, investment gains (losses), net of DAC and other charges
incorporate Insurance segment investment gains (losses) including the 1997
losses associated with the accelerated real estate sales program (see page
7-18). These investment gain (loss) adjustments also included gains (losses) in
7-2
<PAGE>
each of the three years related to the exercise of options, the conversion of
restricted stock units and other issuances of Alliance Units or DLJ stock. No
adjustments are made for DLJ's trading and other investment gains which remain
in operating earnings. Pre-tax adjustments for 1997 include the gain on the ERE
sale and the writedown of Cursitor-related intangible assets. Adjustments for
both 1997 and 1996 include restructuring costs in connection with cost reduction
programs; there were no such costs in 1998. The 1996 operating results excluded
reserve strengthenings related to the DI and Pension Par lines of business
totaling $393.0 million as described on page 7-5.
During fourth quarter 1997, The Equitable released approximately $97.5 million
of tax reserves related to continuing operations for years prior to 1989. The
effect is included in Federal income taxes for 1997. See "Discontinued
Operations" for a discussion of significant actions which affected discontinued
operations' results in 1997 and 1996.
Continuing Operations
1998 Compared to 1997 - The higher pre-tax operating earnings for 1998 reflected
increased earnings by the Insurance and Asset Management segments and lower
earnings for Investment Banking principally due to the impact of adverse capital
market conditions on DLJ in third quarter 1998. Federal income taxes increased
due to the higher pre-tax results of operations, the 1997 tax reserve release
and the 3.5% Federal tax on partnership gross income from the active conduct of
a trade or business which was imposed on certain publicly traded limited
partnerships, including Alliance, effective January 1, 1998. Minority interest
in net income of consolidated subsidiaries was higher principally due to
increased earnings at Alliance and to reductions in The Equitable's ownership
percentages in DLJ and Alliance to 70.9% and 57.7% at December 31, 1998 from
72.0% and 57.9% at December 31, 1997, respectively.
The $1.07 billion increase in revenues for 1998 compared to 1997 was attributed
primarily to the $1.03 billion increase in commissions, fees and other income
principally due to increased business activity within Investment Banking and
Asset Management. Net investment income increased $502.2 million for 1998 with
increases of $537.0 million and $6.6 million for Investment Banking and Asset
Management, respectively, offset by a $41.4 million decrease for Insurance.
Investment gains decreased by $526.1 million for 1998 principally due to $524.5
million lower gains in Investment Banking.
For 1998, total benefits and other deductions increased $862.2 million from
1997, reflecting increases in other operating costs and expenses of $913.9
million and a $62.0 million increase in policyholders' benefits partially offset
by a $113.7 million decrease in interest credited to policyholders. The increase
in other operating costs and expenses principally resulted from increased
operating costs of $817.8 million in Investment Banking.
1997 Compared to 1996 - Compared to 1996, the higher pre-tax operating earnings
for 1997 reflected increased earnings for the Investment Banking and Insurance
segments, partially offset by lower earnings for Asset Management principally
due to the sale of ERE in June 1997. The $1.39 billion increase in revenues for
1997 compared to 1996 was attributed primarily to a $683.3 million increase in
investment income and to a $700.8 million increase in commissions, fees and
other income principally due to increased business activity within Investment
Banking and Asset Management. Investment gains decreased by $33.1 million in
1997 as lower dealer and trading gains of $72.2 million at DLJ were offset by
higher gains of $31.5 million on other equity investments at DLJ.
For 1997, total benefits and other deductions increased $1.04 billion from 1996,
reflecting increases in other operating costs and expenses of $1.17 billion,
offset by a $130.6 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 primarily attributable to increased costs of
$965.2 million in Investment Banking and $163.6 million in Insurance primarily
due to increased business in both segments and higher DAC reactivity to higher
gross margins.
7-3
<PAGE>
Combined Operating Results By Segment
Insurance. The following table combines the Closed Block amounts with the
operating results of operations outside of the Closed Block on a line-by-line
basis:
<TABLE>
<CAPTION>
Insurance - Combined Operating Results
(In Millions)
1998
-------------------------------------------
Insurance Closed 1997 1996
Operations Block Combined Combined Combined
------------- ------------ ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Operating Results:
Universal life and investment-type
product policy fee income............ $ 1,056.2 $ - $ 1,056.2 $ 950.5 $ 874.0
Premiums............................... 588.1 660.3 1,248.4 1,287.9 1,321.3
Net investment income.................. 2,196.2 569.7 2,765.9 2,807.3 2,676.1
Commissions, fees and other income..... 136.0 1.9 137.9 118.1 94.6
Contribution from the Closed Block..... 87.1 (87.1) - - -
------------- ------------ ------------- ------------- -------------
Total revenues..................... 4,063.6 1,144.8 5,208.4 5,163.8 4,966.0
------------- ------------ ------------- ------------- -------------
Interest credited to policyholders'
account balances..................... 1,153.5 14.2 1,167.7 1,281.6 1,285.7
Policyholders' benefits................ 1,024.7 1,067.8 2,092.5 2,030.5 2,161.1
Deferred policy acquisition costs...... (329.9) 56.7 (273.2) (127.6) (113.8)
All other operating costs
and expenses......................... 1,561.3 6.1 1,567.4 1,509.7 1,332.3
------------- ------------ ------------- ------------- -------------
Total benefits and
other deductions................. 3,409.6 1,144.8 4,554.4 4,694.2 4,665.3
------------- ------------ ------------- ------------- -------------
Pre-tax operating earnings............. 654.0 - 654.0 469.6 300.7
Pre-tax Adjustments:
Investment gains (losses), net of
DAC and other charges................ 41.1 - 41.1 (291.9) (31.0)
Reserve strengthening.................. - - - - (393.0)
Restructuring charges.................. - - - (41.7) (22.3)
------------- ------------ ------------- ------------- -------------
Total pre-tax adjustments.......... 41.1 - 41.1 (333.6) (446.3)
------------- ------------ ------------- ------------- -------------
GAAP Reported:
Earnings (Loss) from Continuing
Operations before Federal
Income Taxes and Cumulative
Effect of Accounting Change.......... $ 695.1 $ - $ 695.1 $ 136.0 $ (145.6)
============= ============ ============= ============= ============
</TABLE>
1998 Compared to 1997 - Insurance operating earnings for 1998 reflected an
increase of $184.4 million from the prior year. Total revenues increased by
$44.6 million primarily due to a $105.7 million increase in policy fees and a
$19.8 million increase in commissions, fees and other income, offset by a $41.4
million decrease in investment income and a $39.5 million decline in premiums.
Policy fee income for 1998 increased to $1.06 billion in 1998 due to higher
insurance and annuity account balances. The decrease in investment income
primarily was due to $27.4 million lower income on General Account Investment
Assets and a $26.7 million decrease in interest income on loans to discontinued
operations in 1998. The decrease in premiums during 1998 principally was due to
lower traditional life and individual health premiums.
Total benefits and other deductions for 1998 declined $139.8 million from 1997.
A $113.9 million decrease in interest credited on policyholders' account
balances resulted from moderately lower crediting rates on slightly lower
General Account balances which more than offset the decline in net investment
income. The decline in policyholders' account balances was primarily due to the
single large company-owned life insurance ("COLI") policy surrendered in the
7-4
<PAGE>
first quarter of 1998. DAC capitalization increased by $101.2 million primarily
related to increased sales volume and DAC amortization was $44.4 million lower
due principally to reactivity to mortality, general account investment spread
and fee income. There were $96.4 million higher commission expenses due to
increased sales, partially offset by a $38.7 million decrease in other general
operating costs principally related to lower interest expense. The $62.0 million
increase in policyholders' benefits primarily resulted from higher death claims
experience on a higher in force book of business.
1997 Compared to 1996 - Operating earnings for 1997 reflected an increase of
$168.9 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 and lower life insurance mortality were partially
offset by higher policy acquisition costs. They also reflect improved DI and
group pension results after the establishment of premium deficiency reserves and
the writeoff of DAC in fourth quarter 1996. Total revenues increased by $197.8
million primarily due to the investment income increase of $131.2 million, a
$76.5 million increase in policy fees and a $23.5 million increase in
commissions, fees and other income partially offset by a $33.4 million decline
in premiums. The increase in investment income principally was due to higher
overall yields on a larger General Account Investment Asset base totaling $192.1
million, offset by a $61.0 million decrease in interest received on lower
intersegment borrowings by discontinued operations. The decrease in premiums
principally was due to lower traditional life and individual health premiums.
The $76.5 million increase in policy fee income was due to higher insurance and
annuity account balances.
Total benefits and other deductions for 1997 increased $28.9 million from 1996
as an increase of $177.4 million in other operating expenses and $102.1 million
higher DAC amortization were partially offset by a $130.6 million decrease in
policy benefits and $115.9 million higher DAC capitalization. The increase in
other operating expenses resulted from higher commissions and variable expenses
related to increased sales, 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 in
policyholders' benefits primarily resulted from a lower increase in reserves on
DI business and improved mortality experience on the larger in force book of
business for variable and interest-sensitive life policies. This lower mortality
experience and higher investment spreads resulted in an increase in the
amortization of DAC on variable and interest-sensitive life policies.
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.
7-5
<PAGE>
Equitable Life had issued Pension Par products designed to provide participating
annuity guarantees and benefit payment services to corporate sponsored pension
plans, but has made no new sales of these products in several years. 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. During fourth quarter 1996, a loss recognition study was
completed which 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 1998
and 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 claims 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.
From July 1, 1993 through January 1998, new disability income policies issued by
Equitable Life were 80% reinsured through an arrangement with Paul Revere Life
Insurance Company ("Paul Revere"). 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") and Equitable Life
stopped underwriting new DI policies. As a result of a 1996 acquisition, Paul
Revere and Provident are now affiliates, and they manage claims incurred under
Equitable Life's DI policies. Equitable Life is reviewing the claims management
agreement and is exploring its ability to dispose of the DI business through
reinsurance.
7-6
<PAGE>
Premiums and Deposits - The following table lists premiums and deposits,
including universal life and investment-type contract deposits, for major
Insurance product lines.
<TABLE>
<CAPTION>
Premiums and Deposits
(In Millions)
1998 1997 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
Individual annuities
First year.............................................. $ 4,701.2 $ 3,276.3 $ 2,132.1
Renewal................................................. 1,348.4 1,272.2 1,210.5
----------------- ---------------- ----------------
6,049.6 4,548.5 3,342.6
Individual life(1)
First year.............................................. 415.5 405.6 362.9
Renewal................................................. 2,060.2 2,025.5 1,983.8
----------------- ---------------- ----------------
2,475.7 2,431.1 2,346.7
Other(2)
First year.............................................. 9.2 31.6 29.4
Renewal................................................. 374.4 362.9 368.8
----------------- ---------------- ----------------
383.6 394.5 398.2
Total
First year.............................................. 5,125.9 3,713.5 2,524.4
Renewal................................................. 3,783.0 3,660.6 3,563.1
----------------- ---------------- ----------------
Individual insurance and annuity products............... 8,908.9 7,374.1 6,087.5
Total group pension products.............................. 369.2 328.7 355.5
----------------- ---------------- ----------------
Total Premiums and Deposits............................... $ 9,278.1 $ 7,702.8 $ 6,443.0
================= ================ ================
<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
for 1998 increased from prior year's level by $1.41 billion primarily due to
higher sales of individual annuities. Renewal premiums and deposits increased by
$122.4 million during 1998 over 1997 as increases in the larger block of
individual annuities and variable and interest-sensitive life policies were
partially offset by decreases in the traditional life product line. The 43.5%
increase in first year individual annuities premiums and deposits in 1998 over
the prior year included a $1.05 billion increase in sales of a line of
retirement annuity products sold through expanded wholesale distribution
channels over the $648.5 million sold through that distribution channel in 1997.
Compared with 1997, sales of individual annuities by the career agency force
rose 14.6% to $3.03 billion in 1998.
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 1996 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. The 53.7% increase in first
year individual annuities' premiums and deposits in 1997 over 1996 included
$632.6 million from a line of retirement annuity products sold through wholesale
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 COLI
cases.
7-7
<PAGE>
Sales of mutual funds and other investments by the career agency force totaled
$2.37 billion in 1998, up from $1.71 billion in 1997 and $1.36 billion in 1996.
Surrenders and Withdrawals - The following table presents surrenders and
withdrawals, including universal life and investment-type contract withdrawals,
for major individual insurance and annuity product lines.
<TABLE>
<CAPTION>
Surrenders and Withdrawals
(In Millions)
1998 1997 1996
----------------- ---------------- ----------------
<S> <C> <C> <C>
Individual Insurance and Annuity Product Lines:
Individual annuities...................................... $ 2,773.1 $ 2,540.8 $ 2,277.0
Variable and interest-sensitive life...................... 1,080.2 498.9 521.3
Traditional life.......................................... 353.1 372.9 350.1
----------------- ---------------- ----------------
Total..................................................... $ 4,206.4 $ 3,412.6 $ 3,148.4
================= ================ ================
</TABLE>
Surrendered traditional and variable and interest-sensitive life insurance
policies represented 6.4%, 4.1% and 4.4% of average surrenderable future policy
benefits and policyholders' account balances for such life insurance contracts
in force during 1998, 1997 and 1996, respectively. Surrendered individual
annuity contracts represented 8.9%, 9.8% and 10.3% of average surrenderable
policyholders' account balances for individual annuity contracts in force during
those same years, respectively.
Policy and contract surrenders and withdrawals increased $793.8 million during
1998 compared to 1997 principally due to the first quarter 1998 surrender of
$561.8 million related to a single large COLI contract. Since there were
outstanding policy loans on the surrendered contract, there were no cash
outflows. Excluding the effect of this one surrender, the remaining $232.0
million increase resulted from higher surrenders and withdrawals in the larger
book of individual annuities and variable and interest-sensitive life policies.
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.
The persistency of life insurance and annuity products is a critical element of
their profitability. As of December 31, 1998, all in force individual life
insurance policies (other than individual life term policies without cash values
which comprise 8.7% of in force policies) and approximately 95% 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 results
significantly depend on profit margins between investment results from General
Account Investment Assets and interest credited on individual insurance and
annuity products. During 1998, margins widened as lower average crediting rates
more than offset lower investment yields. During 1998, the crediting rate ranges
were: 4.50% to 6.50% for variable and interest-sensitive life insurance; 4.50%
to 6.65% for variable deferred annuities; 4.40% to 6.55% for SPDA contracts; and
5.75% to 5.90% for retirement investment accounts.
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 and payments
of principal and interest on 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
7-8
<PAGE>
sharp, sudden rise in the interest rate environment without a concurrent
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, 1998, the notional amounts of contracts
outstanding totaled $8.45 billion, as compared to $7.25 billion at December 31,
1997.
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%. Approximately 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. To protect against interest rate
decreases, Equitable Life maintains interest rate floors; at December 31, 1998
and 1997, the outstanding notional amounts of contracts totaled $2.0 billion in
each of the years.
Investment Banking.
<TABLE>
<CAPTION>
Investment Banking - Operating Results
(In Millions)
1998 1997 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Operating Results:
Commissions, underwritings and fees....................... $ 3,124.1 $ 2,363.1 $ 1,798.9
Net investment income..................................... 2,189.1 1,652.1 1,074.2
Dealer and trading (losses) gains, net.................... (92.8) 363.2 394.0
Other investment gains (losses), net...................... 126.0 194.5 163.0
Other income.............................................. 72.3 76.6 88.0
----------------- ----------------- ----------------
Total revenues........................................ 5,418.7 4,649.5 3,518.1
----------------- ----------------- ----------------
Employee compensation and benefits........................ 2,231.7 1,908.2 1,538.8
Interest expense.......................................... 1,455.9 1,153.2 733.2
Brokerage, clearing and exchange fees..................... 258.6 231.4 201.3
Rent, communications and other equipment.................. 359.7 253.9 213.0
Other expenses............................................ 564.1 505.5 400.7
----------------- ----------------- ----------------
Total expenses........................................ 4,870.0 4,052.2 3,087.0
----------------- ----------------- ----------------
Pre-tax operating earnings before minority interest....... 548.7 597.3 431.1
Minority interest......................................... (175.8) (176.2) (131.0)
----------------- ----------------- ----------------
Pre-tax operating earnings................................ 372.9 421.1 300.1
Pre-tax Adjustments:
Investment gains (losses), net of DAC..................... 40.1 6.6 2.2
Minority interest........................................... 175.8 176.2 131.0
----------------- ----------------- ----------------
GAAP Reported:
Earnings from Continuing Operations before
Federal Income Taxes, Minority Interest and
Cumulative Effect of Accounting Change.................. $ 588.8 $ 603.9 $ 433.3
================= ================= ================
</TABLE>
1998 Compared to 1997 - Pre-tax operating earnings before minority interest for
Investment Banking in 1998 were down $48.6 million from the prior year primarily
as a result of losses in the emerging markets which more than offset increased
profitability in DLJ's other business groups. Revenues increased $769.2 million
due to increases in commissions, underwritings and fee income. Commissions rose
7-9
<PAGE>
23.8% to $854.7 million as a result of increases in DLJ's institutional equities
business, its private client and on-line brokerage service units and its
correspondent services business. Underwriting revenues grew 19.0% to $1.08
billion as DLJ increased its market share in equity, convertible and high-yield
underwriting. Fee income increased 55.3% to $1.19 billion due to increased
merger and acquisition activity. Net investment income rose 32.5% to $2.19
billion as funds were used to finance U.S. government, agency and
mortgage-backed securities. Additionally, there were increases in domestic and
foreign margin balances and higher levels of foreign fixed income securities,
primarily in the emerging markets prior to DLJ's withdrawal from that activity
in the second half of 1998. The dealer and trading loss and the decline in other
investment gains (losses) in 1998 are primarily attributable to markdowns on
DLJ's fixed maturities and to losses incurred in emerging market and high-yield
fixed maturities trading in the latter half of 1998 as global economic problems,
particularly in Japan and in emerging markets including Russia and Asia, led to
a widespread sell-off of these securities worldwide.
Total expenses for Investment Banking increased $817.8 million in 1998. The
employee compensation and benefits increase of $323.5 million resulted from
increased incentive and production-related compensation due to the business
growth described above and to increased headcount as DLJ's businesses continued
to expand globally. This expansion also accounted for the $105.8 million
increase in rent, communications and other equipment. Interest expense for 1998
rose $302.7 million. Most of this increase related to the financing of DLJ's
domestic and foreign stock loan/borrowed business. The $27.2 million increase in
brokerage, clearing and exchange fees resulted from increased share volume and
transaction fees. The $58.6 million increase in other expenses included higher
professional fees, travel and entertainment and other costs resulting from
increased business activity and the costs of DLJ's Year 2000 project.
1997 Compared to 1996 - Investment Banking's 1997 pre-tax operating earnings
before minority interest grew $166.2 million from the preceding year's total,
while total revenues grew $1.13 billion. Fee revenues at DLJ increased $297.3
million in 1997 due to increased merger and acquisition, private placement and
other advisory service activity and to higher fees due to higher assets under
management. Underwriting and commissions revenues increased $150.0 million and
$116.9 million, respectively, due to increases in all of DLJ's related business
areas. Net investment income increased $577.9 million principally due to higher
levels of foreign and domestic fixed income securities, higher yields on
emerging market business and increased customer margin balances.
Total expenses for Investment Banking increased 31.3% in 1997 from 1996. The
$369.4 million increase in employee compensation and benefits was due to higher
incentive compensation based on higher revenues and operating results and to
higher base compensation due to the growth in DLJ's international businesses.
Interest expense increased $420.0 million related to higher fixed income
inventory levels. The $40.9 million increase in rent, communications and other
equipment was due to the full year impact of DLJ's home office relocation and to
expansion in domestic and international offices and personnel. Brokerage,
clearing and exchange fees were $30.1 million higher in 1997 due to increased
share volume, underwriting related expenses and transaction fees. The other
expenses increase of $104.8 million was due to higher data processing,
professional fees, and other costs related to the increased business activity
and costs of the Year 2000 project.
7-10
<PAGE>
Asset Management.
<TABLE>
<CAPTION>
Asset Management - Operating Results
(In Millions)
1998 1997 1996
----------------- ----------------- ----------------
<S> <C> <C> <C>
Operating Results:
Investment advisory and services fees(1).................. $ 953.0 $ 699.0 $ 564.0
Distribution revenues..................................... 301.9 216.9 169.1
Other revenues(1)......................................... 73.8 157.6 284.7
----------------- ----------------- ----------------
Total revenues........................................ 1,328.7 1,073.5 1,017.8
----------------- ----------------- ----------------
Promotion and servicing................................... 460.3 312.2 247.6
Employee compensation and benefits........................ 340.9 264.3 214.9
All other operating expenses.............................. 216.9 262.2 343.8
----------------- ----------------- ----------------
Total expenses........................................ 1,018.1 838.7 806.3
----------------- ----------------- ----------------
Pre-tax operating earnings before minority interest....... 310.6 234.8 211.5
Minority interest......................................... (141.5) (108.5) (83.6)
----------------- ----------------- ----------------
Pre-tax operating earnings................................ 169.1 126.3 127.9
Pre-tax Adjustments:
Investment gains (losses), net of DAC..................... 9.5 .1 17.7
Gain on sale of ERE....................................... - 249.8 -
Intangible asset writedown................................ - (120.9) -
Restructuring charges..................................... - (.7) (1.1)
----------------- ----------------- ----------------
Total pre-tax adjustments............................. 9.5 128.3 16.6
Minority interest........................................... 141.5 108.5 83.6
----------------- ----------------- ----------------
GAAP Reported:
Earnings from Continuing Operations before
Federal Income Taxes, Minority Interest and
Cumulative Effect of Accounting Change.................. $ 320.1 $ 363.1 $ 228.1
================= ================= ================
<FN>
(1) Includes fees earned by Alliance and, in 1997 and 1996,EREIM totaling $61.8
million, $87.4 million and $140.7 million in 1998, 1997 and 1996,
respectively, for services provided to the Insurance Group and
unconsolidated real estate joint ventures.
</FN>
</TABLE>
1998 Compared to 1997 - Asset Management's pre-tax operating earnings before
minority interest for 1998 increased $75.8 million from the prior year. Revenues
totaled $1.33 billion for 1998, an increase of 23.8% from 1997. Alliance's 1998
investment advisory and service fees increased $254.0 million as higher overall
mutual fund sales and market appreciation led to higher average assets under
management. Distribution revenues grew $85.0 million due to higher average
equity mutual fund assets under management and higher average cash assets under
management. Other revenues declined $83.8 million in 1998 as compared to the
prior year principally due to the inclusion of EREIM's $91.6 million of revenues
through its sale date in June 1997.
Total expenses for Asset Management increased $179.4 million during 1998. The
$148.1 million increase in promotion and servicing expenses at Alliance resulted
from higher distribution plan payments resulting from higher average offshore
mutual fund, cash management and domestic equity mutual fund assets under
management. Employee compensation and benefits rose $76.6 million in 1998 as
Alliance's increased operating earnings resulted in higher incentive
compensation and as business expansion led to a 24% increase in headcount from
December 31, 1997. The decline in all other operating expenses principally
resulted from the $76.8 million decrease attributed to the sale of EREIM in June
1997.
7-11
<PAGE>
1997 Compared to 1996 - Pre-tax operating earnings before minority interest for
Asset Management for 1997 decreased $23.3 million from the prior year's total.
Segment revenues increased $55.7 million from 1996. Investment advisory and
service fees at Alliance increased $135.0 million due to higher average assets
under management principally due to market appreciation and to higher
performance fees. Alliance's $47.8 million increase in distribution revenues was
principally due to higher average equity mutual fund assets under management
attributed to strong sales and higher average cash assets under management. The
$127.1 million decrease in other revenues in 1997 was principally due to the
decline in EREIM's revenues from $226.1 million for the full year 1996 to $91.6
million in 1997 through its sale in June of that year.
Total expenses for Asset Management increased $32.4 million in 1997 compared to
1996. Promotion and servicing expenses increased $64.6 million at Alliance due
to higher distribution plan payments resulting from higher average assets under
management and to a $20.7 million increase in amortization of deferred sales
commissions. Alliance's employee compensation and benefits increased $49.4
million due to higher incentive compensation based on increased operating
earnings and to higher base compensation resulting from an increase in the
number of employees. The decrease in all other operating expenses principally
resulted from the $103.1 million attributed to the decrease in EREIM's operating
expenses through June 1997 as compared to a full year's expenses in 1996,
partially offset by increased general and administrative and interest expenses
at Alliance.
Fees and Assets Under Management. Third party clients 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,
-------------------------------------------------------
1998 1997 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
Fees:
Third Party:
Unaffiliated third parties............................ $ 999.3 $ 747.2 $ 679.3
Separate Accounts..................................... 96.4 88.8 61.5
The Equitable........................................... 48.3 74.6 128.8
----------------- ---------------- -----------------
Total..................................................... $ 1,144.0 $ 910.6 $ 869.6
================= ================ ================
Assets Under Management:
Third Party:
Unaffiliated third parties(1)......................... $ 252,707 $ 182,345 $ 154,914
Separate Accounts..................................... 41,878 35,477 29,870
The Equitable(2)........................................ 52,923 56,262 54,990
----------------- ---------------- ----------------
Total..................................................... $ 347,508 $ 274,084 $ 239,774
================= ================ ================
<FN>
(1) Includes $2.44 billion, $2.13 billion and $1.77 billion of assets managed
on behalf of AXA affiliates at December 31, 1998, 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 $21.36 billion, $23.16 billion and $21.75
billion at December 31, 1998, 1997 and 1996, respectively, and mortgages
and equity real estate totaling $7.38 billion and $8.16 billion at
December 31, 1998 and 1997, respectively.
</FN>
</TABLE>
Fees for assets under management increased 25.6% during 1998 from 1997
principally as a result of the continued growth in assets under management for
third parties. Total assets under management increased $73.42 billion, primarily
due to $68.77 billion higher third party assets under management at Alliance.
The Alliance growth in 1998 was principally due to market appreciation,
increased sales of Equitable Separate Account based individual annuity contracts
and net sales of mutual funds and other products. DLJ's assets under management
increased in 1998 by $7.18 billion or 41.7% principally due to new business in
their Asset Management Group.
7-12
<PAGE>
Fees for assets under management increased 4.7% during 1997 from 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 ERE. Total assets
under management at December 31, 1997 increased $34.31 billion from 1996,
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, partially offset by the decrease in Cursitor assets.
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").
GENERAL ACCOUNT INVESTMENT PORTFOLIO
Management discusses the Closed Block assets and the assets outside of the
Closed Block on a combined basis as General Account Investment Assets. These
portfolios and their investment results support the insurance and annuity
liabilities of its continuing operations. 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, 1998
(In Millions)
General
Balance Holding Account
Sheet Closed Company Investment
Total Block Other (1) Group (2) Assets
Balance Sheet Captions:
- -------------------------------- ---------------- ----------------- ----------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Fixed maturities:
Available for sale(3)......... $ 19,449.3 $ 4,373.2 $ (127.2) $ 455.6 $ 23,494.1
Held to maturity.............. 250.9 - - 125.9 125.0
Trading account securities...... 13,195.1 - 13,195.1 - -
Securities purchased under
resale agreements............. 20,063.3 - 20,063.3 - -
Mortgage loans on real estate... 2,809.9 1,633.4 - - 4,443.3
Equity real estate.............. 1,676.9 94.1 (3.1) - 1,774.1
Policy loans.................... 2,086.7 1,641.2 - - 3,727.9
Other equity investments........ 1,234.7 56.4 474.0 47.7 769.4
Other invested assets........... 809.6 (2.9) 263.6 .7 542.4
---------------- ----------------- ----------------- --------------- ----------------
Total investments............. 61,576.4 7,795.4 33,865.7 629.9 34,876.2
Cash and cash equivalents....... 2,335.4 (61.4) 1,178.0 40.6 1,055.4
---------------- ----------------- ----------------- -------------- -----------------
Total........................... $ 63,911.8 $ 7,734.0 $ 35,043.7 $ 670.5 $ 35,931.6
================ ================= ================= ============== =================
<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, 1998, the amortized costs of the General Account's
available for sale and held to maturity fixed maturity portfolios were
$22.68 billion and $125.0 million, respectively, compared with estimated
market values of $23.49 billion and $125.0 million, respectively.
</FN>
</TABLE>
7-13
<PAGE>
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, 1997............................... $ 64.2 $ 90.4 $ 154.6
Additions(1)............................................ 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
Additions............................................... 22.5 77.3 99.8
Deductions(2)........................................... (51.4) (211.0) (262.4)
----------------- ---------------- ---------------
Balances at December 31, 1998............................. $ 45.4 $ 211.8 $ 257.2
================= ================ ===============
<FN>
(1) Includes $243.0 million of additions to valuation allowances resulting
from management's decision in fourth quarter 1997 to accelerate the sale
of equity real estate.
(2) Primarily reflects releases of allowances due to asset dispositions
and writedowns.
</FN>
</TABLE>
Writedowns on fixed maturities (primarily related to below investment grade
securities) aggregated $101.6 million, $15.2 million and $42.7 million in 1998,
1997 and 1996, respectively. Writedowns on equity real estate totaled $165.2
million and $23.7 million in 1997 and 1996, respectively. The 1998 increase in
writedowns on fixed maturities was principally due to an increase in problem
fixed maturities in the second half of 1998. There were no real estate
writedowns in 1998. The equity real estate writedowns in 1997 principally
resulted from changes in assumptions related to real estate holding periods and
property cash flows.
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, 1998 and by net amortized cost as of December 31, 1997.
<TABLE>
<CAPTION>
General Account Investment Assets
(In Millions)
December 31, 1998 December 31, 1997
------------------------------------------------ ----------------------
Net Net
Amortized Valuation Amortized Amortized
Cost Allowances Cost Cost
--------------- ------------- --------------- ----------------------
<S> <C> <C> <C> <C>
Fixed maturities(1)...................... $ 22,804.8 $ - $ 22,804.8 $ 22,914.5
Mortgages................................ 4,488.7 45.4 4,443.3 3,953.0
Equity real estate....................... 1,985.9 211.8 1,774.1 2,637.8
Other equity investments................. 769.4 - 769.4 1,037.5
Policy loans............................. 3,727.9 - 3,727.9 4,123.1
Cash and short-term investments(2)....... 1,597.8 - 1,597.8 607.6
--------------- ------------- --------------- ----------------------
Total.................................... $ 35,374.5 $ 257.2 $ 35,117.3 $ 35,273.5
============== =============== =============== ======================
<FN>
(1) Excludes unrealized gains of $814.3 million and $1.07 billion on fixed
maturities classified as available for sale at December 31, 1998 and 1997,
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>
7-14
<PAGE>
Investment Results of General Account Investment Assets
The following table summarizes investment results by asset category for the
periods indicated.
<TABLE>
<CAPTION>
Investment Results By Asset Category
(Dollars In Millions)
1998 1997 1996
----------------------------- ----------------------------- -----------------------------
(1) (1) (1)
Yield Amount Yield Amount Yield Amount
------------ --------------- ----------- --------------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Fixed Maturities:
Income...................... 7.85% $ 1,839.7 8.01% $ 1,809.6 7.94% $ 1,615.1
Investment gains(losses).... (0.09)% (21.6) 0.41% 94.0 0.35% 70.0
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 7.76% $ 1,818.1 8.42% $ 1,903.6 8.29% $ 1,685.1
Ending assets............... $ 22,804.8 $ 22,914.5 $ 21,711.6
Mortgages:
Income...................... 8.91% $ 363.8 9.23% $ 387.1 8.90% $ 427.1
Investment gains(losses).... (0.24)% (10.0) (0.46)% (19.1) (0.72)% (34.3)
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 8.67% $ 353.8 8.77% $ 368.0 8.18% $ 392.8
Ending assets............... $ 4,443.3 $ 3,953.0 $ 4,513.7
Equity Real Estate(2):
Income...................... 7.85% $ 145.3 2.86% $ 73.7 2.91% $ 88.6
Investment gains(losses).... 3.85% 71.3 (16.79)% (432.4) (2.81)% (85.6)
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 11.70% $ 216.6 (13.93)% $ (358.7) 0.10% $ 3.0
Ending assets............... $ 1,392.8 $ 2,069.8 $ 2,725.5
Other Equity Investments:
Income...................... 9.90% $ 94.0 18.60% $ 183.7 16.23% $ 147.3
Investment gains(losses).... 2.94% 27.9 1.50% 14.8 1.56% 14.1
------------ --------------- ----------- --------------- ------------ ---------------
Total....................... 12.84% $ 121.9 20.10% $ 198.5 17.79% $ 161.4
Ending assets............... $ 769.4 $ 1,037.5 $ 955.6
Policy Loans:
Income...................... 6.63% $ 249.8 7.01% $ 285.6 7.00% $ 272.1
Ending assets............... $ 3,727.9 $ 4,123.1 $ 3,962.0
Cash and Short-term
Investments:
Income...................... 8.75% $ 75.2 9.08% $ 55.5 9.00% $ 52.9
Ending assets............... $ 1,597.8 $ 607.6 $ 277.7
Total:
Income(3)................... 7.92% $ 2,767.8 7.98% $ 2,795.2 7.76% $ 2,603.1
Investment gains(losses).... 0.19% 67.6 (0.98)% (342.7) (0.11)% (35.8)
------------ --------------- ----------- --------------- ------------ ---------------
Total(4).................... 8.11% $ 2,835.4 7.00% $ 2,452.5 7.65% $ 2,567.3
Ending assets............... $ 34,736.0 $ 34,705.5 $ 34,146.1
<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
$381.3 million, $568.0 million and $793.1 million as of December 31, 1998,
1997 and 1996, respectively. Equity real estate income is shown net of
operating expenses, depreciation, third party interest expense and
minority interest. Third party interest expense and minority interest
totaled $35.7 million, $52.9 million and $56.6 million for 1998, 1997 and
1996, respectively.
7-15
<PAGE>
(3) Total investment income includes non-cash income from amortization,
payment-in-kind distributions and undistributed equity earnings of $79.9
million, $77.3 million and $69.0 million for 1998, 1997 and 1996,
respectively. Investment income is shown net of depreciation of $31.5
million, $80.9 million and $97.0 million for 1998, 1997 and 1996,
respectively.
(4) Total yields are shown before deducting investment fees paid to investment
advisors (which include asset management, acquisition, disposition,
accounting and legal fees). If such fees had been deducted, total yields
would have been 7.86%, 6.71% and 7.35% for 1998, 1997 and 1996,
respectively.
</FN>
</TABLE>
Fixed Maturities. Investment income on fixed maturities increased $30.1 million
in 1998 from 1997 due to a larger asset base. The 1998 investment losses were
due to $101.6 million in writedowns on domestic and emerging market high-yield
securities partially offset by $80.0 million of gains on sales. 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 1998, 75% of fixed maturities were publicly traded;
85% of below investment grade securities were also publicly traded. At December
31, 1998, The Equitable held collateralized mortgage obligations ("CMOs") with
an amortized cost of $2.23 billion, including $2.10 billion in publicly traded
CMOs, $1.94 billion of mortgage pass-through securities, and $1.46 billion of
public and private asset-backed securities. Summaries of all fixed maturities
are shown by NAIC rating in the following table.
<TABLE>
<CAPTION>
Fixed Maturities
By Credit Quality
(In Millions)
December 31, 1998 December 31, 1997
-------------------------------------- --------------------------------------
Rating Agency
NAIC Equivalent Amortized Estimated Amortized Estimated
Rating Designation Cost Fair Value Cost Fair Value
- -------------- -------------------------- ------------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
1-2 Aaa/Aa/A and Baa....... $ 19,397.8 $ 20,467.9 $ 19,488.9 $ 20,425.3
3-6 Ba and lower........... 3,161.5 2,859.6 3,294.9 3,395.4
------------------- ----------------- ------------------ -----------------
Subtotal............................... 22,559.3 23,327.5 22,783.8 23,820.7
Redeemable preferred stock
and other............................ 245.5 291.6 130.7 166.2
------------------- ----------------- ------------------ -----------------
Total Fixed Maturities................. $ 22,804.8 $ 23,619.1 $ 22,914.5 $ 23,986.9
=================== ================= ================== =================
</TABLE>
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 was $94.9 million
(0.4% of the amortized cost of this category) at December 31, 1998 compared to
$31.0 million (0.1%) and $50.6 million (0.2%) at December 31, 1997 and 1996,
respectively. In 1998, new problem fixed maturities more than offset assets
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 $13.1
million, $10.5 million and $9.5 million for 1998, 1997 and 1996, respectively.
The amortized cost of wholly or partially non-accruing problem fixed maturities
was $82.1 million, $28.9 million and $45.7 million at December 31, 1998, 1997
and 1996, respectively.
7-16
<PAGE>
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. The
amortized cost of potential problem fixed maturities increased to $74.9 million
at December 31, 1998, up from $17.9 million and $0.5 million at December 31,
1997 and 1996, respectively.
Mortgages. At December 31, 1998, the mortgage portfolio included commercial
($2.66 billion), agricultural ($1.83 billion) and residential loans ($1.1
million). In 1998, the investment income decrease of $23.3 million on mortgages
resulted from lower interest rates on new mortgage investments and commercial
mortgage loan repayments.
At December 31, 1998, 1997 and 1996, respectively, management identified
impaired mortgage loans with carrying values of $192.4 million, $236.6 million
and $531.7 million. The provision for losses for these impaired loans was $39.1
million, $68.3 million and $59.3 million at those same respective dates. Income
earned on impaired loans in 1998, 1997 and 1996, respectively, was $16.6
million, $24.6 million and $49.6 million, including cash received of $15.3
million, $23.0 million and $44.6 million.
The Equitable categorizes mortgages 60 days or more past due, as well as
mortgages in the process of foreclosure, as problem commercial mortgages.
Based on its monthly monitoring of commercial mortgages, management identifies a
class of potential problem mortgages, which consists of mortgage loans 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 judgments by management as to likely future
industry conditions and developments with respect to the borrower or the
individual mortgaged property. Potential problem commercial mortgages decreased
during 1998 primarily due to foreclosures.
<TABLE>
<CAPTION>
Problem, Potential Problem and Restructured Mortgages
Amortized Cost
(In Millions)
December 31,
--------------------------------------------------------
1998 1997 1996
----------------- ---------------- -----------------
<S> <C> <C> <C>
COMMERCIAL MORTGAGES...................................... $ 2,660.7 $ 2,305.8 $ 2,901.2
Problem commercial mortgages(1)........................... .4 19.3 11.3
Potential problem commercial mortgages.................... 170.7 180.9 425.7
Restructured commercial mortgages(2)...................... 116.4 194.9 269.3
AGRICULTURAL MORTGAGES.................................... $ 1,826.9 $ 1,719.2 $ 1,672.7
Problem agricultural mortgages(3)......................... 11.7 12.2 5.4
<FN>
(1) Includes delinquent mortgage loans of $0.4 million, $19.3 million and $5.8
million at December 31, 1998, 1997 and 1996, 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 that are shown
as problems at December 31, 1997, and excludes $24.5 million, $57.9
million and $229.5 million of restructured commercial mortgages that are
shown as potential problems at December 31, 1998, 1997 and 1996,
respectively.
(3) Includes delinquent mortgage loans of $6.4 million and $10.0 million at
December 31, 1998 and 1997, respectively, and mortgage loans in process of
foreclosure of $5.3 million, $2.2 million and $5.1 million at December 31,
1998, 1997 and 1996, respectively.
</FN>
</TABLE>
7-17
<PAGE>
For 1998, scheduled amortization payments and prepayments received on commercial
mortgage loans aggregated $347.4 million. For 1998, $136.8 million of commercial
mortgage loan maturity payments were scheduled, of which $66.8 million (48.8%)
were paid as due. Of the amount not paid, $67.8 million (49.6%) were granted
short-term extensions of up to six months and $2.2 million (1.6%) were extended
for a weighted average of 2.5 years at a weighted average interest rate of 8.0%.
During 1999, approximately $371.4 million of commercial mortgage principal
payments are scheduled, including $315.8 million of payments at maturity on
commercial mortgage balloon loans. An additional $719.3 million of commercial
mortgage principal payments, including $621.0 million of payments at maturity on
commercial mortgage balloon loans, are scheduled for 2000 and 2001. Depending on
market conditions and lending practices in future years, some maturing loans may
have to be refinanced, restructured or foreclosed upon. During 1998, 1997 and
1996, the amortized cost of foreclosed commercial mortgages totaled $40.1
million, $153.5 million and $18.3 million, respectively.
Equity Real Estate. Equity real estate consists primarily of office, retail,
industrial, mixed use and other properties. Office properties constituted the
largest component (65.0% of amortized cost) of this portfolio at December 31,
1998.
During 1998, The Equitable received proceeds from the sale of equity real estate
of $1.05 billion, compared to $386.0 million in 1997 and $624.2 million in 1996,
and recognized gains of $124.1 million, $50.5 million and $30.1 million,
respectively. The carrying value of the equity real estate at date of sale
reflected total writedowns and additions to valuation allowances on the
properties taken in periods prior to their sale of $189.8 million, $61.1 million
and $157.4 million, respectively. In connection with this sales program, at
December 31, 1997, Equitable Life reclassified $1.5 billion depreciated cost of
continuing and discontinued operations' equity real estate from "held for
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 fourth quarter 1997.
Also, during fourth quarter 1997, the review of the equity real estate portfolio
identified properties held for production of income which were impaired,
resulting in writedowns of $161.1 million for continuing operations. The total
pre-tax impact of these 1997 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 fourth quarter 1997. At
December 31, 1998, the remaining held for sale real estate portfolio's
depreciated cost for continuing operations totaled $1.11 billion, excluding
related valuation allowances of $211.8 million.
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. 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 was significantly larger at December 31,
1998 and 1997 than in prior years due to the equity real estate sales program
discussed above, fluctuations in the related valuation allowances prior to
actual sale could be larger than those experienced in prior periods. As the
accelerated equity real estate sales program continues into 1999, management
expects further reductions to this 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.
At December 31, 1998, the overall vacancy rate for The Equitable's real estate
office properties was 7.0%, with a vacancy rate of 5.1% for properties acquired
as investment real estate and 16.0% for properties acquired through foreclosure.
The national commercial office vacancy rate was 9.0% (as of September 30, 1998)
as measured by CB Commercial. Lease rollover rates for office properties for
1999, 2000 and 2001 range from 5.6% to 10.5%.
7-18
<PAGE>
At December 31, 1998, the equity real estate category included $1.23 billion
depreciated cost of properties acquired as investment real estate (or 62.0% of
depreciated cost of equity real estate held) and $0.75 billion (38.0%) amortized
cost of properties acquired through foreclosure, including in-substance
foreclosure. Cumulative writedowns recognized on foreclosed properties were
$182.0 million through December 31, 1998. As of December 31, 1998, the carrying
value of the equity real estate portfolio was 63.7% of its original cost. The
depreciated cost of foreclosed equity real estate totaled $955.1 million (29.5%)
and $1.03 billion (28.4%) at year end 1997 and 1996, respectively.
Other Equity Investments. Other equity investments consist of LBO, mezzanine,
venture capital and other limited partnership interests ($455.5 million or 59.2%
of the amortized cost of this portfolio at December 31, 1998), alternative
limited partnerships ($149.5 million or 19.4%) and common stock and other equity
securities ($164.4 million or 21.4%). Alternative funds utilize trading
strategies that may be leveraged, and attempt to protect against market risk
through a variety of methods, including short sales, financial futures, options
and other derivative instruments. Other equity investments can create
significant volatility in investment income since they predominantly are
accounted for in accordance with the equity method which treats increases and
decreases in the estimated fair value of the underlying assets (or allocable
portion thereof, in the case of partnerships), whether realized or unrealized,
as investment income or loss to The Equitable. Though not reported in General
Account Investment Assets, the excess of Separate Accounts assets over Separate
Accounts liabilities at December 31, 1998 and 1997 of $89.4 million and $231.0
million, respectively, represented an investment by the General Account
principally in equity securities. As demonstrated by the market volatility and
negative returns experienced in the later half of 1998, returns on equity
investments are very volatile and investment results for any period are not
representative of any other period.
Commencing in third quarter 1998, in response to a perceived increase in the
price volatility of publicly-traded equity markets, The Equitable began to
reduce its holdings of common stock investments. With the persistence of high
price volatility, The Equitable now believes that publicly-traded common stocks
should be actively managed to control risk and generate investment returns.
Effective January 1, 1999, The Equitable has designated all investments in
publicly-traded equity securities in the General Account and Holding Company
Group portfolios as "trading securities" for the purpose of classification under
SFAS No. 115 and all changes in the investments' fair value will be reported
through earnings.
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 an allowance for future losses based on management's best judgment at
that time. During 1997 and 1996, the allowance for future losses was
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.
The Equitable's quarterly process for evaluating the allowance for future losses
applies the current period's results of discontinued operations against the
allowance, re-estimates future losses, and adjusts the allowance, if
appropriate. 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 allowance for future losses.
There can be no assurance the losses provided for will not differ from the
losses ultimately realized. To the extent actual results or future projections
of discontinued operations differ from management's current best estimates
underlying the allowance for future losses, the difference would be reflected as
earnings or loss from discontinued operations within the consolidated statements
of earnings. In particular, to the extent income, sales proceeds and holding
periods for equity real estate differ from management's previous assumptions,
periodic adjustments to the allowance are likely to result.
7-19
<PAGE>
Results of Operations. Post-tax earnings of $2.7 million were recognized in 1998
compared to post-tax losses of $(87.2) million in 1997 and $(83.8) million in
1996. The allowance for future losses totaled $305.1 million at December 31,
1998.
Investment income declined $28.2 million to $160.4 million in 1998 principally
due to lower income on other equity investments. Discontinued operations 1997
investment income of $188.6 million was $56.8 million lower than 1996
principally due to a decrease in investment asset base. Net investment gains
totaled $35.7 million in 1998 compared to losses of $173.7 million and $18.9
million in 1997 and 1996, respectively. The gains in 1998 and higher losses in
1997 were both attributable to equity real estate.
Interest credited and policyholders' benefits on Wind-Up Annuities and GIC
contracts were $99.1 million in 1998, as compared to $108.0 million and $126.8
million in 1997 and 1996, respectively, primarily due to repayments of amounts
due under GIC contracts. The weighted average crediting rates were 9.6%, 9.3%
and 9.2% in 1998, 1997 and 1996, respectively. The interest expense on
intersegment borrowings by discontinued operations from continuing operations
was $26.6 million in 1998, down from $53.3 million and $61.0 million in 1997 and
1996, respectively, due to net repayments.
At year end 1998, $1.02 billion of policyholders' liabilities were outstanding,
substantially all of which relate to Wind-Up Annuities. During 1998, the $660.0
million of intersegment borrowings outstanding at December 31, 1997 were repaid.
See Notes 2 and 8 of Notes to Consolidated Financial Statements.
Cash Flow Projections. At December 31, 1998, estimates of annual net cash flows
for discontinued operations in 1999 and 2000 were $255.5 million and $16.7
million, respectively. At December 31, 1997, the projections for 1998 and 1999
were $477.5 million and ($25.1) million, respectively. The increase in estimated
1999 net cash flows was principally due to a higher level of assumed cash flows
resulting from equity real estate sales. Other material assumptions used in
determining these projections included the following: no new intersegment loans
from continuing operations; future estimated annual investment income yields on
the existing portfolio of 7.8% to 9.7% in the 1998 projection (compared to 6.1%
to 8.9% used in the 1997 projection); use of proceeds from equity real estate
sales and other maturing investment assets to pay maturing discontinued
operations liabilities, with reinvestment of excess funds (in 1998, proceeds
were also used to repay intersegment borrowings); and mortality experience for
Wind-Up Annuities based on the 1983 Group Annuity Mortality table with
projections for mortality improvements. The reduction of the equity real estate
portfolio through the accelerated sales program depends upon market conditions,
the level of mortgage foreclosures and expenditures required to fund necessary
or desirable improvements to properties.
Discontinued Operations Investment Portfolio
In 1998, investment results from Discontinued Operations Investment Assets
totaled $186.6 million, a $171.1 million increase from the prior year
principally due to investment gains of $37.2 million as compared to the $173.7
million of investment losses in 1997. The 1997 investment losses resulted from
the fourth quarter 1997 increases in valuation allowances of $80.2 million and
writedowns relating to equity real estate of $92.5 million. This increase in
investment gains (losses) was partially offset by a $39.8 million decrease in
investment income in 1998, principally reflecting a decrease of $38.4 million
for other equity investments. There was a $20.4 million loss on mortgage loans
in 1997 compared to the 1998 gain of $0.3 million and gains of $41.2 million
compared to $151.1 million of losses on equity real estate. Investment income
yields increased to 10.22% from 9.21% in 1997, principally due to strong returns
on equity real estate.
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 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 and $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.
7-20
<PAGE>
Investment Assets by Selected Asset Category
For information on the asset categories and valuation allowances and writedowns,
see Note 8 of Notes to Consolidated Financial Statements.
Mortgages - As of December 31, 1998, discontinued operations commercial
mortgages totaled $511.7 million (91.9% of amortized cost of the category) and
agricultural loans totaled $45.1 million (8.1%). Potential problem commercial
mortgages totaled $20.1 million, $15.4 million and $29.1 million in 1998, 1997
and 1996, respectively, while restructured commercial mortgages aggregated $3.3
million, $106.2 million and $198.9 million, respectively.
For 1998, scheduled amortization payments and prepayments on commercial mortgage
loans aggregated $234.2 million. For 1998, $36.0 million of mortgage loan
maturity payments were scheduled, of which $35.3 million (98.1%) were paid as
due. During 1999, approximately $47.6 million of commercial mortgage principal
payments are scheduled, including $34.0 million of payments at maturity on
commercial mortgage balloon loans. An additional $199.7 million of principal
payments, including $173.3 million of payments at maturity on commercial
mortgage balloon loans, are scheduled from 2000 through 2001. 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 1998, 1997 and 1996, discontinued operations
received proceeds from the sale of equity real estate of $287.9 million, $183.5
million and $184.3 million, respectively, and recognized gains of $41.3 million,
$35.4 million and $10.9 million, respectively. These gains reflected total
writedowns and additions to valuation allowances on properties sold of $71.7
million, $22.9 million and $16.0 million, respectively, at date of sale. The
depreciated cost of discontinued operations' equity real estate properties held
for sale at December 31, 1998 was $289.2 million for which allowances of $34.8
million have been established.
Other Equity Investments - At December 31, 1998, discontinued operations' other
equity investments of $115.1 million consisted primarily of limited partnership
interests managed by third parties that invest in a selection of equity and
fixed income securities ($95.8 million or 83.2% 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 ($19.3 million or 16.8%).
Returns on other equity investments have been very volatile and investment
results for any period are not representative of any other period. Total
investment results on other equity investments were $25.5 million, $65.2 million
and $76.7 million in 1998, 1997 and 1996, respectively. These investment results
reflected yields of 16.30%, 25.39% and 21.74%, for 1998, 1997 and 1996,
respectively.
YEAR 2000
Equitable Life, DLJ and Alliance continue their Year 2000 compliance efforts;
related costs are being funded by operating cash flows with costs being expensed
as incurred.
Equitable Life - Equitable Life began addressing the Year 2000 issue in 1995. In
addition to significant internal resources, third parties have been assisting in
renovating and testing computer hardware and software ("computer systems") and
embedded systems and in overall project control. The following process has been
undertaken:
(1) Equitable Life established a Year 2000 project office, which developed a
strategic approach and created broad awareness of the Year 2000 issues at
Equitable Life through meetings with the Audit Committee of the Board of
Directors and executive and senior management, presentations to business
areas and employee newsletters.
(2) Corporate-developed computer systems were inventoried and assessed for
Year 2000 compliance. Third party providers of computer systems and
services, including embedded systems, were contacted. Of the 94% who have
responded, approximately 67% indicated their systems or services are Year
2000 compliant, approximately 10% have indicated that they will be
compliant, and 17% will be replaced or the function will be eliminated.
Those who have not responded will be replaced or the function will be
eliminated if no response is received by June 30, 1999.
7-21
<PAGE>
(3) The renovation or replacement of mission-critical corporate-developed
computer systems was substantially completed by year end 1998 and
management expects the work of renovating or replacing all non-compliant
corporate-developed systems to be substantially completed by June 30,
1999. After renovation or replacement, the systems are then subjected to
Year 2000 compliance testing as described in the following paragraph.
Management continues to monitor Year 2000 compliance by third party
providers of computer systems, including embedded systems, and services.
Management believes it is on schedule for substantially all such systems
and services, including those considered mission-critical, to be confirmed
as Year 2000 compliant, renovated, replaced or the subject of contingency
plans, by the end of second quarter 1999, except for one investment
accounting system which is scheduled to be replaced by the end of August
1999 and confirmed as Year 2000 compliant by September 30, 1999.
(4) Year 2000 compliance testing is an ongoing three-part process: after a
system has been renovated, it is tested to determine if it still performs
its intended business function correctly; next, it undergoes a simulation
test using dates occurring after December 31, 1999; last, integrated
systems tests are conducted to verify that the systems continue to work
together with the computers' internal clocks set to post December 31, 1999
dates. Management plans to complete the first two phases of testing by
June 30, 1999. Integrated systems testing will continue throughout 1999 as
needed. To date, the testing process has revealed performance issues
related to Equitable Life's replacement general ledger system, which
management believes will be resolved on a timely basis. All significant
automated data interfaces with third parties will also be tested for Year
2000 compliance, including those with Lend Lease, Alliance, The Chase
Manhattan Bank, Sunguard, Pershing and Computer Science Corporation, who
provide, among other services, material investment management, accounting,
banking, annuity processing and securities clearance services for
Equitable Life's General and certain of its Separate Accounts. Equitable
Life has retained third parties to assist with selective verification of
the Year 2000 renovation of certain systems.
(5) Existing business continuity and disaster recovery plans cover certain
categories of contingencies that could arise as a result of Year 2000
related failures. These plans are being supplemented to address
contingencies unique to the millennium change. Management anticipates that
Year 2000 specific contingency plans will be developed by the end of
second quarter 1999. Equitable Life expects to retain third parties to
assist with planning for contingencies.
Equitable Life's Year 2000 compliance project is currently estimated to cost $30
million through the end of 1999, of which approximately $23.4 million was
incurred through 1998. Equitable Life's new computer application development and
procurement have not been subject to any delay caused in whole or part by Year
2000 efforts that is expected to have a material adverse effect on The
Equitable's financial condition or results of operations.
Investment Subsidiaries - DLJ and Alliance's Year 2000 related activities and
progress to date are summarized below. For further information, see their
respective filings on Form 10-K for the year ended December 31, 1998.
DLJ - As a result of DLJ's recent business expansion and headquarters' move,
many of its computer systems are Year 2000 compliant. Year 2000 project plans
have been developed and management oversight groups and project managers monitor
DLJ's decentralized implementation of those plans for its information technology
("IT") and non-IT systems. At December 31, 1998, these systems had been
inventoried and non-compliant mission-critical systems have been targeted first
for remediation. DLJ has retained several major consulting firms with expertise
in advising corporations on Year 2000 issues and their potential impact. The
correspondent clearing business expects to have all non-compliant systems
renovated, tested and returned to production by March 31, 1999. All other
mission-critical systems are expected to complete that process by March 31,
1999, followed by non-mission-critical systems by June 30, 1999. None of DLJ's
other IT projects have been delayed as a result of the Year 2000 project. DLJ
has identified all significant third parties and has received assurances they
are taking the necessary steps to prepare for the Year 2000. Additionally, DLJ
participates in testing sponsored by a securities industry association. To date,
DLJ has achieved successful results in each of the tests in which it has
participated. Testing of internal and external systems will continue throughout
1999 to ensure all remediated systems remain compliant.
7-22
<PAGE>
DLJ currently estimates its Year 2000 costs will range between $85 million and
$90 million, with $77 million incurred through December 31, 1998. While its
correspondent clearance business has a formal general contingency plan which
covers a variety of events, DLJ expects to develop a formal Year 2000 specific
contingency plan by the end of second quarter 1999.
Alliance - During 1997, Alliance began a formal Year 2000 initiative, managed by
a Year 2000 project office and focusing on both IT and non-IT systems. Alliance
has retained a number of consulting firms with expertise in advising and
assisting clients with regard to Year 2000 issues. By June 30, 1998, Alliance
had completed an inventory and assessment of its domestic and international
computer systems, identified its mission-critical and non-mission-critical
systems, and determined which of these systems were not Year 2000 compliant. All
third party suppliers of mission-critical systems and services have been
contacted; substantially all of those contacted have responded. Approximately
76% of the responses indicate their systems are or will be Year 2000 compliant.
Those who have not responded have been contacted a second time. Alliance
estimates this process will be completed by March 31, 1999. The same process is
being performed for non-mission-critical systems with an estimated completion
date of June 30, 1999. Alliance has remediated most of its non-compliant
mission-critical systems and expects the remediation phase for all
mission-critical systems will be completed by February 28, 1999 with the
exception of one portfolio accounting system which will be replaced by a Year
2000 compliant vendor package by August 31, 1999. Remediation of
non-mission-critical systems is expected to be completed by June 30, 1999.
Alliance has completed the business functionality and the post-December 31, 1999
testing for approximately 88% of its mission-critical systems and approximately
75% of its non-mission-critical systems. Full integration testing of all
remediated systems and tests of interfaces with third party suppliers will begin
in first quarter 1999 and continue throughout that year. Alliance is
inventorying, evaluating and testing its technical infrastructure and corporate
facilities and expects them to be fully operable in the Year 2000. Certain other
planned IT projects have been deferred until after the Year 2000 initiative is
completed. Such delay is not expected to have a material adverse effect on
Alliance's financial condition or results of operations. Assisted by a
consulting firm, Alliance is developing formal Year 2000 specific contingency
plans to address situations where mission-critical and non-mission-critical
systems are not remediated as planned by Alliance or third parties.
Alliance estimates its cost of the Year 2000 initiative will range between $40
million and $45 million. Such costs consist principally of remediation costs and
costs to develop formal Year 2000 specific contingency plans. Through December
31, 1998, Alliance has incurred approximately $22 million of those costs.
Risks - There are many risks associated with Year 2000 issues, including the
risk that The Equitable's computer systems will not operate as intended. There
can be no assurance that the systems, services and products of third parties
will be Year 2000 compliant. Likewise, there can be no assurance the compliance
schedules outlined above will be met.
Any significant unresolved difficulties related to the Year 2000 compliance
initiatives could result in an interruption in, or a failure of, normal business
activities or operations, or the incurrence of unanticipated expenses related to
resolving such difficulties, regulatory actions, damage to The Equitable's
franchise, and legal liabilities and, accordingly, could have a material adverse
effect on The Equitable's business operations and financial results. Due to the
pervasive nature, the external as well as internal interdependencies and the
inherent risk and uncertainties of Year 2000 issues, The Equitable cannot
determine which risks are most reasonably likely to occur, if any, nor the
effects of any particular failure to be Year 2000 compliant.
The forward-looking statements under "Year 2000" should be read in conjunction
with the disclosure set forth under "Forward-Looking Statements" on page 7-33.
To the fullest extent permitted by law, the foregoing Year 2000 discussion is a
"Year 2000 Readiness Disclosure" within the meaning of The Year 2000 Information
and Readiness Disclosure Act, 15 U.S.C. Sec. 1 (1998).
7-23
<PAGE>
EURO CURRENCY
On January 1, 1999, conversion rates of the national currencies of eleven
European Union members were fixed against the common currency, called the Euro.
Each participating country's currency is legal tender during a transition period
from January 1, 1999 until January 1, 2002 after which only the Euro will be
used. Alliance had assessed its internally developed and purchased applications
to determine the changes needed to process Euro denominated transactions. The
$2.5 million cost principally related to system modifications was expensed as
incurred. Alliance's systems have been changed to process Euro denominated
transactions. Additional costs associated with the transition period are not
expected to have a material adverse effect on The Equitable's financial results.
LIQUIDITY AND CAPITAL RESOURCES
The Holding Company
In April 1998, the Holding Company completed an offering under its existing
shelf registration of $250.0 million 6 1/2% Senior Notes due 2008 and $350.0
million 7% Senior Debentures due 2028 (together the "1998 Senior Debt"),
resulting in net proceeds of $591.1 million to be used for general corporate
purposes. Pre-tax debt service on the 1998 Senior Debt was approximately $29.9
million in 1998, and will be approximately $40.8 million per annum thereafter.
Under the stock repurchase program authorized by the Board of Directors in 1998,
the Holding Company had repurchased approximately 4.5 million shares of Common
Stock at a cost of $247.1 million at year end 1998. In connection with this
repurchase program, during second quarter 1998 the Holding Company privately
placed put options entitling the holder to sell up to 1 million shares of Common
Stock to the Holding Company at specified prices upon exercise of the options.
The Equitable had purchased an aggregate of 400,000 shares through December 31,
1998; 600,000 of such options remain outstanding and are exerciseable from time
to time during the first half of 1999. See Notes 9 and 11 of Notes to
Consolidated Financial Statements.
Liquidity Requirements. The Holding Company's cash requirements include debt
service, operating expenses, taxes and dividends on its Common Stock. Pre-tax
debt service totaled $77.2 million in 1998, while general and administrative
expenses were $19.2 million. Since 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 1998, aggregate cash dividends
paid on the Holding Company's Common Stock were $44.4 million.
Liquidity Sources. At December 31, 1998, the Holding Company held cash and
short-term investments and U.S. Treasury securities of approximately $185.9
million and investment grade publicly traded bonds totaling $273.5 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
common stock and less liquid investment assets having an aggregate carrying
value of approximately $122.6 million at December 31, 1998. 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.
The assets of the SECT (the 51,960 remaining shares of the Series D 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 an additional 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 Holding Company's Common Stock.
Prior to September 30, 1999, the SECT is required to convert a minimum of an
amount of Series D Convertible Preferred Stock equivalent to approximately
788,000 shares of Common Stock for distribution. However, the amount of Common
Stock distributed may not exceed a maximum value of approximately $252.7
million.
7-24
<PAGE>
Dividends on DLJ's outstanding common stock paid to the Holding Company were
approximately $11.7 million in both 1998 and 1997. 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 July
1998, DLJ sold an aggregate of 5 million shares of newly issued common stock to
the Holding Company (1.8 million shares for $110.0 million), Equitable Life (1.5
million shares for $90.0 million) and AXA (1.7 million shares for $100.0
million).
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 21 to Notes to
Consolidated Financial Statements. In 1999, Equitable Life expects to review
with the New York Insurance Department the potential for paying a dividend to
the Holding Company.
Management believes the primary sources of liquidity described above are
sufficient to meet the Holding Company's cash requirements for several years.
Insurance
The principal sources of Insurance cash flows 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 Insurance liquidity requirements principally relate to the liabilities
associated with its various life insurance, annuity and group pension products
in its continuing operations, the liabilities of discontinued operations and
operating expenses, including debt service. Insurance 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. Management may from time to time explore selective acquisition
opportunities in Equitable Life's core insurance and asset management
businesses.
The Insurance liquidity requirements are regularly monitored to match cash
inflows with cash requirements. Daily cash needs are forecasted and projected
sources and uses of funds, as well as the asset, liability, investment and cash
flow assumptions underlying these projections, are reviewed periodically.
Adjustments are periodically made to the Insurance investment policies with
respect to, among other things, the maturity and risk characteristics of General
Account Investment Assets to reflect changes in the business' cash needs and
also to reflect the changing competitive and economic environment.
Sources of Insurance Liquidity. The primary source of short-term liquidity to
support continuing and discontinued Insurance operations is a pool of highly
liquid, high quality short-term instruments structured to provide liquidity in
excess of the expected cash requirements. At December 31, 1998, this asset pool
included an aggregate of $1.59 billion in highly liquid short-term investments,
as compared to $816.4 million and $383.5 million at December 31, 1997 and 1996,
respectively. In addition, a substantial portfolio of public bonds including
U.S. Treasury and agency securities and other investment grade fixed maturities
is available to meet the Insurance segment's liquidity needs.
Other liquidity sources include dividends and distributions from DLJ and,
particularly Alliance. In 1998, Equitable Life received cash distributions from
Alliance of $157.0 million as compared to $125.7 million in 1997 and $102.3
million in 1996.
Management believes there is 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 Insurance's liquidity needs.
In addition, Equitable Life's commercial paper program has 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 September 2000.
At December 31, 1998, there were no amounts outstanding under the commercial
paper program nor the back-up credit facility. For more information on
guarantees, commitments and contingencies, see Notes 13, 16, 17, 18 and 19 of
Notes to Consolidated Financial Statements.
7-25
<PAGE>
Factors Affecting Insurance Liquidity. The Insurance Group's liquidity needs are
affected by fluctuations in the level of surrenders and withdrawals previously
discussed in "Combined Operating Results by Segment - Insurance Surrenders and
Withdrawals". Management believes the Insurance Group has adequate internal
sources of funds for its presently anticipated needs.
Statutory 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 depends 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.
The RBC guidelines are intended to be a regulatory tool only. Equitable Life's
RBC ratio has improved in each of the last four years, and management believes
that Equitable Life's statutory capital, as measured by its year end 1998 RBC,
is adequate to support its current business needs and financial ratings.
On March 16, 1998, members of the NAIC approved its Codification of Statutory
Accounting Principles ("Codification") project. Codification provides regulators
and insurers with uniform statutory guidance, addressing areas where statutory
accounting previously was silent and changing certain existing statutory
positions. Equitable Life will be subject to Codification to the extent and in
the form adopted in New York State, which would require action by both the New
York legislature and the New York Insurance Department. It is not possible to
predict whether, in what form, or when Codification will be adopted in New York,
and accordingly it is not possible to predict the effect of Codification on
Equitable Life.
At December 31, 1998, $111.0 million (or 3.5%) of the Insurance Group's
aggregate statutory capital and surplus (representing 2.3% of statutory capital
and surplus and AVR) resulted from surplus relief reinsurance. The level of
surplus relief reinsurance was reduced by approximately $54.2 million in 1998.
Alliance
Alliance's principal sources of liquidity have been cash flow from operations
and the issuance, both publicly and privately, of debt and Units. Alliance
requires financial resources to fund commissions paid on certain back-end load
mutual fund sales, to fund capital expenditures and for general working capital
purposes. Alliance has a $425.0 million five-year revolving credit facility and
a $425.0 million commercial paper program. Combined borrowings under the
facility and the commercial paper program may not exceed $425.0 million. At
December 31, 1998, Alliance had $179.5 million of commercial paper outstanding;
there were no amounts outstanding under its revolving credit facility.
DLJ
DLJ reported total assets as of December 31, 1998 of $72.28 billion. DLJ's
assets are highly liquid, including principally securities inventories and
collateralized receivables. Such receivables include 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 borrowings.
DLJ's overall capital needs are continually reviewed to ensure that its capital
base can appropriately support the anticipated needs of its businesses and meet
the regulatory capital requirements of its subsidiaries. DLJ has been active in
raising additional long-term financing, including the $650.0 million of 6 1/2%
senior notes, $450.0 million aggregate principal amount of senior secured notes,
$350.0 million medium-term notes and $250.0 million 6% senior notes issued in
1998. DLJ repaid its $325.0 million senior subordinated revolving credit
agreement and terminated the related facility.
7-26
<PAGE>
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). Also, in January 1998,
DLJ commenced a $1.00 billion commercial paper program. At December 31, 1998,
$30.9 million of notes were outstanding under this 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. DLJ has a $2.8
billion revolving credit facility, of which $1.7 billion may be unsecured. There
were no borrowings outstanding under this agreement at December 31, 1998.
Consolidated Cash Flows
Net cash used by operating activities was $2.33 billion for 1998 as compared to
$4.43 billion in 1997 and $1.48 billion in 1996. Cash used by operations in 1998
was attributable to the $2.92 billion net change in trading activities and
broker-dealer receivables as compared to $5.56 billion in 1997 reflecting DLJ's
increased level of business activity.
Net cash provided by investing activities amounted to $998.4 million for 1998 as
compared to net cash used by investing activities of $290.7 million in 1997 and
$82.4 million in 1996. In 1998, investment sales, maturities and repayments
exceeded purchases by $595.9 million. Discontinued operations repaid $660.0
million of loans from continuing operations during 1998. In 1997, sales,
maturities and repayments exceeded purchases by $121.2 million. Decreases in
loans to discontinued operations totaled $420.1 million in 1997. In 1996,
purchases exceeded sales, maturities and repayments of investment assets by
$1.29 billion.
Net cash provided by financing activities was $3.07 billion in 1998 as compared
to $4.56 billion for 1997 and $1.12 billion in 1996. During 1998, withdrawals
from policyholders' account balances exceeded deposits by $216.5 million as
compared with $605.1 million in 1997. Short-term financings, principally at DLJ,
showed a net increase of $1.50 billion as compared to net increases of $4.87
billion in 1997 while net additions to long-term debt were higher by $1.90
billion in 1998 compared to net increases of $431.0 million in 1997. Net cash
provided by financing activities 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.
The operating, investing and financing activities described above resulted in an
increase in cash and cash equivalents of $1.74 billion in 1998 as compared to
decreases of $157.9 million in 1997 and $445.1 million in 1996.
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 by each business on a decentralized basis.
Primary market risk exposures result from interest rate fluctuations, equity
price movements and changes in credit quality.
Other-Than-Trading Activities
Asset Management. Alliance's investment portfolio primarily includes fixed
income and money market investments that can generate predictable and steady
rates of return. Alliance's management believes its fixed rate liabilities
should be supported by its fixed income, money market and equity investments.
7-27
<PAGE>
Although these assets are purchased for long-term investment, the portfolio
strategy considers them available for sale in response to changes in market
interest rates, equity prices and other relevant factors. The objective is to
maximize its investment returns taking into account interest rate, equity price
and credit risks. At December 31, 1998, Alliance's interest rate, equity price
and credit quality risks were not material to The Equitable. For further
information, see Alliance's Annual Report on Form 10-K for the year ended
December 31, 1998.
Insurance. Insurance 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. Insurance
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.
Insurance assets with interest rate risk include fixed maturities and mortgage
loans which make up 78.1% of the carrying value of General Account Investment
Assets. As part of its asset/liability management, quantitative analyses are
used to model the impact various changes in interest rates have on assets with
interest rate risk. The table below shows the impact an immediate 100 basis
point increase in interest rates at December 31, 1998 would have on the fair
value of fixed maturities and mortgages:
<TABLE>
<CAPTION>
Interest Rate Risk Exposure
(In Millions)
Fair Value At +100 Basis
December 31, 1998 Point Change
------------------------ --------------------
<S> <C> <C>
Continuing Operations:
Fixed maturities:
Fixed rate..................................... $ 22,332.6 $ 21,167.6
Floating rate.................................. 1,208.5 1,208.5
Mortgage loans................................... 4,665.2 4,482.8
Discontinued Operations:
Fixed maturities:
Fixed rate..................................... $ 20.2 $ 19.5
Floating rate.................................. 4.7 4.7
Mortgage loans................................... 600.0 580.8
Holding Company Group:
Fixed maturities:
Fixed rate..................................... $ 517.2 $ 501.5
Floating rate.................................. 83.9 83.9
</TABLE>
A 100 basis point fluctuation in interest rates is a hypothetical rate scenario
used to demonstrate potential risk; it 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 Insurance 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.
7-28
<PAGE>
The Insurance investment portfolio also has direct holdings of public and
private equity securities. In addition, the General Account is exposed to equity
price risk from the excess of Separate Accounts assets over Separate Accounts
liabilities. The following table shows the 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, 1998:
<TABLE>
<CAPTION>
Equity Price Risk Exposure
(In Millions)
Fair Value At -10% Equity
December 31, 1998 Price Change
------------------------ --------------------
<S> <C> <C>
Insurance Group:
Continuing operations............................ $ 164.4 $ 148.0
Discontinued operations.......................... 19.3 17.4
Excess of Separate Accounts assets over
Separate Accounts liabilities.................. 91.0 81.9
Holding Company Group.............................. $ 47.7 $ 42.9
</TABLE>
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.
At year end 1998, the aggregate carrying value of policyholders' liabilities was
$35,618.7 million, including $12,954.0 million of the General Account's
investment contracts. The aggregate fair value of those investment contracts at
year end 1998 was $13,455.0 million. The impact of a relative 1% decrease in
interest rates would be an increase in the fair value of those investment
contracts to $13,644.0 million. Those investment contracts represent only a
portion of 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.
Asset/liability management is integrated into many aspects of the Insurance
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 1998 levels
or with respect to a 10% drop in equity prices from year end 1998 levels.
As more fully described in Note 16 of Notes to Consolidated Financial
Statements, various derivative financial instruments are used to manage exposure
to fluctuations in interest rates, including interest rate swaps to convert
floating rate assets to fixed rate assets, interest rate caps and floors 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.
7-29
<PAGE>
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 1998, the net market value exposure of Insurance derivatives was
$71.7 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 - Derivative Financial Instruments
(In Millions, Except for Weighted Average Term)
Fair Value
-------------------------------------------------------------
Notional
Amount Weighted
at Average
December 31, Term -100 Basis At +100 Basis
1998 (Years) Point Change December 31, 1998 Point Change
--------------- -------------- ----------------- ----------------------- ---------------
<S> <C> <C> <C> <C> <C>
Swaps:
Floating to fixed rate. $ 623.2 5.67 $ 88.0 $ 57.5 $ 28.8
Fixed to floating rate. 257.7 0.93 (9.8) (8.0) (6.2)
Options:
Caps................... 8,650.0 3.89 3.4 14.2 41.4
Floors................. 2,000.0 3.28 22.8 8.0 3.0
--------------- ----------------- ----------------------- ---------------
Total.................... $ 11,530.9 3.81 $ 104.4 $ 71.7 $ 67.0
=============== ============== ================= ======================= ===============
</TABLE>
At year end 1998, the aggregate fair value of long-term debt issued by Equitable
Life and the Holding Company Group was $2.40 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 1998.
<TABLE>
<CAPTION>
Long-term Debt - Fair Value
(In Millions)
At -100 Basis
December 31, 1998 Point Change
------------------------ --------------------
<S> <C> <C>
Continuing Operations:
Fixed rate....................................... $ 779.7 $ 828.4
Floating rate.................................... 251.3 251.3
Discontinued Operations:
Fixed rate....................................... $ 45.1 $ 45.1
Floating rate.................................... 102.1 102.1
Holding Company Group.............................. $ 1,218.1 $ 1,311.3
</TABLE>
7-30
<PAGE>
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 an independent risk oversight function to
oversee risk policies and risk monitoring and management capabilities throughout
DLJ and to coordinate the risk management practices of the various business
groups. This department is assisted by a Risk Committee comprised of senior
professionals from each of the operating and key administrative groups.
DLJ has established various committees to help senior management manage risk
associated with investment banking and merchant banking transactions. These
committees review potential clients and engagements, use experience with similar
clients and situations, analyze credit for certain commitments and analyze DLJ's
potential role as a principal investor. To control the risks associated with its
banking activities, various committees review the details of all transactions
before accepting an engagement.
From time to time, DLJ invests 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 to review merchant banking and corporate
development investments. After discussing the financial and operational aspects
of the companies involved, they recommend carrying values for each investment to
the Finance Committee. Then the Finance Committee reviews such recommendations
and determines fair value.
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. As such, to facilitate customer order flow, DLJ maintains certain
amounts of inventories. 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.
Position limits in trading and inventory accounts are established and monitored
continuously. Current and proposed underwriting, corporate development, merchant
banking and other commitments are subject to due diligence reviews by senior
management and by professionals in the appropriate business and support units
involved.
Trading activities generally result in inventory positions. Each day, position
and exposure reports are prepared by operations staff in each of the business
groups engaged in trading activities for traders, trading managers, department
managers, divisional management and group management. These reports are
independently reviewed by DLJ's corporate accounting group. The corporate
accounting group prepares a consolidated summarized position report listing both
long and short exposure and approved limits. The position report is distributed
to various levels of management throughout DLJ, including the Chief Executive
Officer, and it enables senior management to control inventory levels and
monitor results of the trading groups. DLJ also reviews and monitors inventory
aging, pricing, concentration and securities' ratings.
In addition to position and exposure reports, DLJ produces a daily revenue
report that 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.
7-31
<PAGE>
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. As of December 31, 1998, DLJ's primary market risk exposures include
interest rate risk, credit spread risk and foreign and equity price risk.
Interest rate risk results from maintaining inventory positions and trading in
interest rate sensitive financial instruments. Interest rate risk 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
would affect the value of financial instruments. To cover its exposure to
interest rate risk, DLJ enters into transactions in U.S. government securities,
options and futures and forward contracts designed to reduce DLJ's risk profile.
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. To cover its exposure to equity
price risk, DLJ enters into transactions in options and futures designed to
reduce DLJ's risk profile.
Value At Risk
In 1997, DLJ developed a company-wide Value-at-Risk ("VAR") model. This model
used a variance-covariance approach with a confidence interval of 95% and a
one-day holding period, based on historical data for one year. DLJ has made
changes to the model in the course of 1998. In response to the volatile and
illiquid markets of the third quarter of 1998, which departed markedly from the
normal statistical distributions that underlie the variance-covariance approach,
DLJ has estimated VAR by using an historical simulation model based on two years
of weekly historical data, a 95% confidence interval, and a one-day holding
period. The effect of this change in approach was not material. The VAR number
is the statistically expected maximum loss on the fair value of DLJ's market
sensitive instruments for 19 of 20 trading days. In other words, on 1 out of
every 20 trading days, the loss is expected to be statistically greater than the
VAR number. However, the model, does not indicate how much greater.
VAR models are designed to assist in risk management and to provide senior
management with 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.
DLJ's VAR model includes the following limitations: (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) all inherent market risks
cannot be perfectly modeled and (iv) correlations between market movements can
vary, particularly in times of market stress.
DLJ believes that a company-wide VAR analysis is an important advance in its
risk management but is aware of the limitations inherent in any statistical
analysis. Because a VAR model alone is not a sufficient tool to measure and
monitor market risk, DLJ will continue to use other risk management measures
such as stress testing, independent review of position and trading limits and
daily revenue reports.
7-32
<PAGE>
At December 31, 1998 and 1997, company-wide VAR for trading was approximately
$22.0 million and $11.0 million, respectively, the company-wide VAR for
non-trading market risk sensitive instruments is not separately disclosed
because the amount is not significant. Due to the benefit of diversification,
the company-wide VAR is less than the sum of the individual components. At
December 31, 1998 and 1997, the three main components of market risk, expressed
in terms of theoretical fair values, had the following VAR:
December 31,
--------------------------
1998 1997
------------ ------------
(In Millions)
Trading:
Interest rate risk........................ $ 16 $ 8
Equity risk............................... 11 8
Foreign currency exchange rate risk....... - 1
The increase in value at risk in 1998 over 1997 is due largely to the dramatic
increase in volatility across a broad range of financial instruments.
Credit Risk
Credit risk related to various financing activities is reduced by the industry
practice of obtaining and maintaining collateral. Each day, DLJ monitors its
exposure to counterparty risk through the use of credit exposure information and
the monitoring of collateral values.
To establish appropriate exposure limits for a variety of transactions, all
counterparties are reviewed on a periodic basis. Specific transactions are
analyzed to assess the potential exposure and the counterparty's credit is
reviewed to determine whether it supports such exposure. DLJ also analyzes
market movements that could affect exposure levels. To determine trading limits,
DLJ considers four main factors: 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 by performing the following activities: enters into master
netting agreements when feasible; monitors the creditworthiness of
counterparties and the related trading limits on an ongoing basis and requests
additional collateral when deemed necessary; diversifies and limits exposure to
individual counterparties and geographic locations; and limits the duration of
exposure. To mitigate credit risks, in certain cases, DLJ may also close out
transactions or assign them to other counterparties when deemed necessary or
appropriate.
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 based on
management's expectations and beliefs concerning future developments and their
potential effects and 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. The following discussion highlights some of the
more important factors that could cause such differences.
7-33
<PAGE>
Market Risk. The Equitable's businesses are subject to market risks arising from
its insurance asset/liability management, asset management and trading
activities. Primary market risk exposures exist in the insurance and investment
banking segments and result from interest rate fluctuations, equity price
movements, changes in credit quality and, at DLJ, foreign currency exchange
exposure. The nature of each of these risks is discussed under the caption
"Market Risk, Risk Management and Derivative Financial Instruments" and in Note
16 of Notes to Consolidated Financial Statements.
Year 2000. Equitable Life, DLJ and Alliance continue to address Year 2000
compliance issues. There can be no assurance that compliance schedules will be
met; that The Equitable's computer systems will operate as intended; that the
systems, services and products of third parties will be Year 2000 compliant or
that cost estimates will be met. Any significant unresolved difficulties related
to the Year 2000 compliance initiatives could result in an interruption in, or a
failure of, normal business activities or operations, or the incurrence of
unanticipated expenses related to resolving such difficulties, regulatory
actions, damage to The Equitable's franchise, and legal liabilities and,
accordingly, could have a material adverse effect on The Equitable's business
operations and financial results. See "Year 2000" for a detailed discussion of
The Equitable's compliance initiatives.
Strategic Initiatives. The Equitable continues to implement certain strategic
initiatives identified after a comprehensive review of its organization and
strategy conducted in late 1997. These initiatives are designed to make The
Equitable a premier provider of financial planning, insurance and asset
management products and services. The "branding" initiative, which consists in
part of a reorganization of certain wholly owned subsidiaries and changes to the
names of such subsidiaries and the Holding Company, is designed to separate
product manufacturing under the "Equitable" name from product distribution under
the "AXA" name. Implementation of these strategic initiatives is subject to
various uncertainties, including those relating to timing and expense, and the
results of the implementation of these initiatives could be other than what
management intends. The Equitable may, from time to time, explore selective
acquisition opportunities in its core insurance and asset management businesses.
Insurance. The Insurance Group's future sales of life insurance and annuity
products are dependent on numerous factors including successful implementation
of the strategic initiatives referred to above, the intensity of competition
from other insurance companies, banks and other financial institutions, the
strength and professionalism of distribution channels, the continued development
of additional channels, the financial and claims paying ratings of Equitable
Life, its reputation and visibility in the market place, its ability to develop,
distribute and administer competitive products and services in a timely,
cost-effective manner and its investment management performance. In addition,
the markets for products sold by the Insurance Group may be materially affected
by changes in laws and regulations, including changes relating to savings,
retirement funding and taxation. The Administration's year 2000 budget proposals
contain provisions which, if enacted, could have a material adverse impact on
sales of certain insurance products and would adversely affect the taxation of
insurance companies. See "Business - Segment Information - Insurance" and
"Business - Regulation - Federal Initiatives". The profitability of Insurance
depends on a number of factors, including levels of operating expenses, secular
trends and The Equitable's mortality, morbidity, persistency and claims
experience, and profit margins between investment results from General Account
Investment Assets and interest credited on individual insurance and annuity
products. The performance of General Account Investment Assets depends, among
other things, on levels of interest rates and the markets for equity securities
and real estate, the need for asset valuation allowances and writedowns, and the
performance of equity investments which have, and in the future may, create
significant volatility in investment income. See "Investment Results of General
Account Investment Assets". The ability of The Equitable to continue its
accelerated real estate sales program during 1999 without incurring net losses
will depend on real estate markets for the remaining properties held for sale
and the negotiation of transactions which confirm management's expectations on
property values. For further information, including information concerning the
writedown in the fourth quarter of 1997 in connection with management's decision
to accelerate the sale of certain real estate assets, see "Investment Results of
General Account Investment Assets - Equity Real Estate". The Equitable's
disability income ("DI") and group pension businesses produced pre-tax losses in
7-34
<PAGE>
1995 and 1996. In late 1996, loss recognition studies for the DI and group
pension businesses were completed. As a result, $145.0 million of unamortized
DAC on DI policies at December 31, 1996 was written off; reserves for directly
written DI policies and DI reinsurance assumed were strengthened by $175.0
million; and a Pension Par premium deficiency reserve was established which
resulted in a $73.0 million pre-tax charge to results of continuing operations
at December 31, 1996. Based on the experience that emerged on these two books of
business during 1998 and 1997, management continues to believe the assumptions
and estimates used to develop the 1996 DI and Pension Par reserve strengthenings
are reasonable. However, there can be no assurance that they will be sufficient
to provide for all future liabilities. Equitable Life no longer underwrites new
DI policies. Equitable Life is reviewing the arrangements pursuant to which a
third party manages claims incurred under DI policies previously issued by
Equitable Life and is exploring its ability to dispose of the DI business
through reinsurance. See "Combined Operating Results by Segment - Insurance".
Investment Banking. For the years ended December 31, 1998, 1997 and 1996,
Investment Banking accounted for approximately 36.7%, 54.8% and 84.0%,
respectively, of The Equitable's consolidated earnings from continuing
operations before Federal income taxes, minority interest and cumulative effect
of accounting change. DLJ's business activities 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. These activities are subject to various
risks, including volatile trading markets and fluctuations in the volume of
market activity. Consequently, DLJ's net income and revenues have been, and may
continue to be, subject to wide fluctuations, reflecting the impact of many
factors beyond DLJ's control, including securities market conditions, the level
and volatility of interest rates, competitive conditions and the size and timing
of transactions. Over the last several years DLJ's results have been at
historically high levels. See "Combined Operating Results by Segment -
Investment Banking" for a discussion of the negative impact on DLJ in the second
half of 1998 of global economic problems, particularly in Japan and in emerging
markets including Russia and Asia. Potential losses could result from DLJ's
merchant banking activities as a result of their capital intensive nature.
Asset Management. Alliance's revenues are largely dependent on the total value
and composition of assets under its management and are therefore affected by
market appreciation or depreciation, additions and withdrawals of assets,
purchases and redemptions of mutual funds and shifts of assets between accounts
or products with different fee structures. See "Combined Operating Results by
Segment - Asset Management".
Discontinued Operations. The determination of the allowance for future losses
for the discontinued Wind-Up Annuities and GIC lines of business continues to
involve numerous estimates and subjective judgments including those regarding
expected performance of investment assets, ultimate mortality experience and
other factors which affect investment and benefit projections. There can be no
assurance the losses provided for will not differ from the losses ultimately
realized. To the extent actual results or future projections of discontinued
operations differ from management's current best estimates underlying the
allowance, the difference would be reflected as earnings or loss from
discontinued operations within the consolidated statements of earnings. In
particular, to the extent income, sales proceeds and holding periods for equity
real estate differ from management's previous assumptions, periodic adjustments
to the allowance are likely to result. See "Discontinued Operations" for further
information including discussion of significant reserve strengthening in 1997
and 1996 and the assumptions used in making cash flow projections.
Technology and Information Systems. The 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 and
clients, and recording information for accounting and management information
purposes. Any significant difficulty associated with the operation of such
systems, or any material delay or inability to develop needed system
capabilities, could have a material adverse affect on The Equitable's results of
operations and, ultimately, its ability to achieve its strategic goals.
Legal Environment. A number of lawsuits have been filed against life and health
insurers involving insurers' sales practices, alleged agent misconduct, failure
to properly supervise agents and other matters. Some of the lawsuits have
resulted in the award of substantial judgments against other insurers, including
material amounts of punitive damages, or in substantial settlements. In some
states, juries have substantial discretion in awarding punitive damages. The
Equitable's insurance subsidiaries, like other life and health insurers, are
involved in such litigation. While no such lawsuit has resulted in an award or
7-35
<PAGE>
settlement of any material amount against The Equitable to date, its results of
operations and financial condition could be affected by defense and settlement
costs and any unexpected material adverse outcomes in such litigations as well
as in other material litigations pending against the Holding Company and its
subsidiaries. In addition examinations by Federal and state regulators could
result in adverse publicity, sanctions and fines. For further information see
"Business - Regulation" and "Legal Proceedings".
Future Accounting Pronouncements. In the future, new accounting pronouncements
may have material effects on The Equitable's consolidated statements of earnings
and shareholders' equity. See Note 2 of Notes to Consolidated Financial
Statements for pronouncements issued but not implemented. In addition, members
of the NAIC approved its Codification project providing regulators and insurers
with uniform statutory guidance, addressing areas where statutory accounting
previously was silent and changing certain existing statutory positions.
Equitable Life will be subject to Codification to the extent and in the form
adopted in New York State, which would require action by both the New York
legislature and the New York Insurance Department. It is not possible to predict
whether, in what form, or when Codification will be adopted in New York, and
accordingly it is not possible to predict the effect of Codification on
Equitable Life.
Regulation and Statutory Capital and Surplus . The businesses conducted by The
Equitable's subsidiaries are subject to extensive regulation and supervision by
state insurance departments and Federal and state agencies regulating, among
other things, insurance and annuities, securities transactions, investment
banking, investment companies and investment advisors. Changes in the regulatory
environment could have a material impact on operations and results. The
activities of the Insurance Group are subject to the supervision of the
insurance regulators of each of the 50 states. Such regulators have the
discretionary authority, in connection with the continual licensing of members
of the Insurance Group, to limit or prohibit new issuances of business to
policyholders within their jurisdiction when, in their judgment, such regulators
determine that such member is not maintaining adequate statutory surplus or
capita. See "Liquidity and Capital Resources - Insurance".
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, 1998 and 1997................................................. F-2
Consolidated Statements of Earnings, Years Ended December 31, 1998, 1997 and 1996....................... F-3
Consolidated Statements of Shareholders' Equity, Years Ended December 31, 1998,
1997 and 1996......................................................................................... F-4
Consolidated Statements of Cash Flows, Years Ended December 31, 1998, 1997 and 1996..................... F-5
Notes to Consolidated Financial Statements.............................................................. F-6
Report of Independent Accountants on Financial Statement Schedules........................................ F-53
Consolidated Financial Statement Schedules:
Schedule I - Summary of Investments - Other than Investments in Related Parties,
December 31, 1998....................................................................................... F-54
Schedule II - Balance Sheets (Parent Company), December 31, 1998 and 1997................................. F-55
Schedule II - Statements of Earnings (Parent Company), Years Ended December 31, 1998,
1997 and 1996........................................................................................... F-56
Schedule II - Statements of Cash Flows (Parent Company), Years Ended December 31, 1998,
1997 and 1996........................................................................................... F-57
Schedule III - Supplementary Insurance Information, Years Ended December 31, 1998,
1997 and 1996........................................................................................... F-58
Schedule IV - Reinsurance, Years Ended December 31, 1998, 1997 and 1996................................... F-61
</TABLE>
FS-1
<PAGE>
February 8, 1999
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 comprehensive
income 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, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, 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 method of accounting for long-lived assets in 1996.
/s/PricewaterhouseCoopers LLP
- -----------------------------
F-1
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities:
Available for sale, at estimated fair value............................. $ 19,449.3 $ 19,978.5
Held to maturity, at amortized cost..................................... 250.9 143.0
Trading account securities, at market value............................... 13,195.1 16,535.7
Securities purchased under resale agreements.............................. 20,063.3 22,628.8
Mortgage loans on real estate............................................. 2,809.9 2,611.4
Equity real estate........................................................ 1,676.9 2,495.1
Policy loans.............................................................. 2,086.7 2,422.9
Other equity investments.................................................. 1,234.7 1,276.5
Other invested assets..................................................... 809.6 613.6
----------------- -----------------
Total investments..................................................... 61,576.4 68,705.5
Cash and cash equivalents................................................... 2,335.4 597.4
Broker-dealer related receivables........................................... 34,589.9 28,184.3
Deferred policy acquisition costs........................................... 3,563.8 3,237.4
Amounts due from discontinued operations.................................... 2.7 572.8
Other assets................................................................ 5,498.2 4,770.5
Closed Block assets......................................................... 8,632.4 8,566.6
Separate Accounts assets.................................................... 43,302.3 36,538.7
----------------- -----------------
Total Assets................................................................ $ 159,501.1 $ 151,173.2
================= =================
LIABILITIES
Policyholders' account balances............................................. $ 20,889.7 $ 21,578.6
Future policy benefits and other policyholders' liabilities................. 4,694.2 4,553.8
Securities sold under repurchase agreements................................. 35,775.6 36,006.7
Broker-dealer related payables.............................................. 26,418.3 26,362.6
Short-term and long-term debt............................................... 6,300.1 5,515.2
Other liabilities........................................................... 7,441.8 6,502.8
Closed Block liabilities.................................................... 9,077.0 9,073.7
Separate Accounts liabilities............................................... 43,211.3 36,306.3
----------------- -----------------
Total liabilities..................................................... 153,808.0 145,899.7
----------------- -----------------
Commitments and contingencies (Notes 13, 16, 17, 18 and 19)
SHAREHOLDERS' EQUITY
Series D convertible preferred stock........................................ 598.4 514.4
Stock employee compensation trust........................................... (598.4) (514.4)
Common stock, at par value.................................................. 2.2 2.2
Capital in excess of par value.............................................. 3,662.1 3,627.5
Treasury stock.............................................................. (247.1) -
Retained earnings........................................................... 1,926.1 1,137.4
Accumulated other comprehensive income...................................... 349.8 506.4
----------------- -----------------
Total shareholders' equity............................................ 5,693.1 5,273.5
----------------- -----------------
Total Liabilities and Shareholders' Equity.................................. $ 159,501.1 $ 151,173.2
================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ----------------
(In Millions, Except Per Share Amounts)
<S> <C> <C> <C>
REVENUES
Universal life and investment-type product policy fee
income...................................................... $ 1,056.2 $ 950.6 $ 874.0
Premiums...................................................... 588.1 601.5 597.6
Net investment income......................................... 4,498.7 3,991.3 3,336.3
Investment gains, net......................................... 155.8 518.5 557.8
Commissions, fees and other income............................ 4,532.6 3,501.7 2,841.9
Contribution from the Closed Block............................ 87.1 102.5 125.0
---------------- ----------------- -----------------
Total revenues.......................................... 10,918.5 9,666.1 8,332.6
--------------- - ----------------- -----------------
BENEFITS AND OTHER DEDUCTIONS
Interest credited to policyholders' account balances.......... 1,153.9 1,267.0 1,271.1
Policyholders' benefits....................................... 1,024.7 978.6 1,317.7
Other operating costs and expenses............................ 7,135.9 6,317.5 5,228.0
---------------- ----------------- -----------------
Total benefits and other deductions..................... 9,314.5 8,563.1 7,816.8
----------------- ----------------- -----------------
Earnings from continuing operations before Federal
income taxes, minority interest and cumulative
effect of accounting change................................. 1,604.0 1,103.0 515.8
Federal income taxes.......................................... 527.8 280.5 137.4
Minority interest in net income of consolidated subsidiaries.. 245.8 174.3 172.4
----------------- ----------------- -----------------
Earnings from continuing operations before cumulative
effect of accounting change................................. 830.4 648.2 206.0
Discontinued operations, net of Federal income taxes.......... 2.7 (87.2) (83.8)
Cumulative effect of accounting change, net of Federal
income taxes................................................ - - (23.1)
---------------- ----------------- -----------------
Net Earnings.................................................. $ 833.1 $ 561.0 $ 99.1
================= ================= =================
Per Common Share:
Basic:
Earnings from continuing operations before
cumulative effect of accounting change.................. $ 3.75 $ 3.14 $ .97
Discontinued operations, net of Federal income taxes...... .01 (.43) (.46)
Cumulative effect of accounting change, net of
Federal income taxes.................................... - - (.12)
---------------- ----------------- -----------------
Net Earnings.............................................. $ 3.76 $ 2.71 $ .39
================= ================= =================
Diluted:
Earnings from continuing operations before
cumulative effect of accounting change.................. $ 3.61 $ 2.86 $ .94
Discontinued operations, net of Federal income taxes...... .01 (.39) (.45)
Cumulative effect of accounting change, net of
Federal income taxes.................................... - - (.12)
================= ================= =================
Net Earnings.............................................. $ 3.62 $ 2.47 $ .37
---------------- ----------------- -----------------
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 AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Series C convertible preferred stock, beginning of year......... $ - $ 24.4 $ 24.4
Exchange of Series C convertible preferred stock................ - (24.4) -
----------------- ----------------- -----------------
Series C convertible preferred stock, end of year............... - - 24.4
----------------- ----------------- -----------------
Series D convertible preferred stock, beginning of year......... 514.4 294.0 286.6
Exchange of Series D convertible preferred stock................ - (54.8) -
Change in market value of shares................................ 84.0 275.2 7.4
----------------- ----------------- -----------------
Series D convertible preferred stock, end of year............... 598.4 514.4 294.0
----------------- ----------------- -----------------
Stock employee compensation trust, beginning of year............ (514.4) (294.0) (286.6)
Exchange of Series D convertible preferred stock in the
stock employee compensation trust............................. - 54.8 -
Change in market value of shares................................ (84.0) (275.2) (7.4)
----------------- ----------------- -----------------
Stock employee compensation trust, end of year.................. (598.4) (514.4) (294.0)
----------------- ----------------- -----------------
Series E convertible preferred stock, beginning of year......... - 380.2 380.2
Exchange of Series E convertible preferred stock................ - (380.2) -
----------------- ----------------- -----------------
Series E convertible preferred stock, end of year............... - - 380.2
----------------- ----------------- -----------------
Common stock, at par value, beginning of year................... 2.2 1.9 1.8
Issuance of common stock........................................ - .3 .1
----------------- ----------------- -----------------
Common stock, at par value, end of year......................... 2.2 2.2 1.9
----------------- ----------------- -----------------
Capital in excess of par value, beginning of year............... 3,627.5 2,782.2 2,753.3
Additional capital in excess of par value....................... 34.6 845.3 28.9
----------------- ----------------- -----------------
Capital in excess of par value, end of year..................... 3,662.1 3,627.5 2,782.2
----------------- ----------------- -----------------
Treasury stock, beginning of year............................... - - -
Purchase of shares for treasury................................. (247.1) - -
----------------- ----------------- -----------------
Treasury stock, end of year..................................... (247.1) - -
----------------- ----------------- -----------------
Retained earnings, beginning of year............................ 1,137.4 632.9 597.5
Net earnings.................................................... 833.1 561.0 99.1
Dividends on preferred stocks................................... - (15.6) (26.7)
Dividends on common stock....................................... (44.4) (40.9) (37.0)
----------------- ----------------- -----------------
Retained earnings, end of year.................................. 1,926.1 1,137.4 632.9
----------------- ----------------- -----------------
Accumulated other comprehensive income, beginning of year....... 506.4 166.4 351.5
Other comprehensive income...................................... (156.6) 340.0 (185.1)
----------------- ----------------- -----------------
Accumulated other comprehensive income, end of year............. 349.8 506.4 166.4
----------------- ----------------- -----------------
Total Shareholders' Equity, End of Year......................... $ 5,693.1 $ 5,273.5 $ 3,988.0
================= ================= =================
COMPREHENSIVE INCOME
Net earnings.................................................... $ 833.1 $ 561.0 $ 99.1
----------------- ----------------- -----------------
Change in unrealized gains (losses), net of reclassification
adjustment.................................................... (145.6) 344.4 (207.3)
Minimum pension liability adjustment............................ (11.0) (4.4) 22.2
----------------- ----------------- -----------------
Other comprehensive income...................................... (156.6) 340.0 (185.1)
----------------- ----------------- -----------------
Comprehensive Income............................................ $ 676.5 $ 901.0 $ (86.0)
================= ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
(In Millions)
<S> <C> <C> <C>
Net earnings.................................................. $ 833.1 $ 561.0 $ 99.1
Adjustments to reconcile net earnings to net cash
used by operating activities:
Interest credited to policyholders' account balances........ 1,153.9 1,267.0 1,271.1
Universal life and investment-type product
policy fee income......................................... (1,056.2) (950.6) (874.0)
Net change in trading activities and broker-dealer
related receivables/payables.............................. (2,922.8) (5,561.3) (1,835.5)
Decrease (increase) in matched resale agreements............ 5,463.7 (4,622.2) 9.2
(Decrease) increase in matched repurchase agreements........ (5,463.7) 4,622.2 (9.2)
Investment gains, net of dealer and trading gains........... (248.6) (155.3) (163.9)
Change in clearing association fees and regulatory deposits. (211.1) 4.3 (381.9)
Change in accounts payable and accrued expenses............. 343.0 749.8 416.6
Change in Federal income tax payable........................ 110.5 (352.2) (228.6)
Other, net.................................................. (335.0) 11.2 218.8
----------------- ----------------- -----------------
Net cash used by operating activities......................... (2,333.2) (4,426.1) (1,478.3)
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments................................... 2,466.5 2,865.0 2,419.3
Sales....................................................... 18,196.3 11,182.2 9,522.8
Purchases................................................... (20,066.9) (13,926.0) (13,229.4)
(Increase) decrease in short-term investments............... (215.5) (550.9) 452.2
Decrease in loans to discontinued operations................ 660.0 420.1 1,017.0
Sale of subsidiaries........................................ - 261.0 -
Other, net.................................................. (42.0) (542.1) (264.3)
----------------- ----------------- -----------------
Net cash provided (used) by investing activities.............. 998.4 (290.7) (82.4)
----------------- ----------------- -----------------
Cash flows from financing activities:
Policyholders' account balances:
Deposits.................................................. 1,508.1 1,281.7 1,925.4
Withdrawals............................................... (1,724.6) (1,886.8) (2,385.2)
Net increase in short-term financings....................... 1,495.2 4,865.6 1,118.4
Additions to long-term debt................................. 2,315.0 979.9 717.8
Repayments of long-term debt................................ (413.8) (548.9) (345.6)
Payment of obligation to fund accumulated deficit of
discontinued operations................................... (87.2) (83.9) -
Purchase of treasury stock.................................. (247.1) - -
Other, net.................................................. 227.2 (48.7) 84.8
----------------- ----------------- -----------------
Net cash provided by financing activities..................... 3,072.8 4,558.9 1,115.6
----------------- ----------------- -----------------
Change in cash and cash equivalents........................... 1,738.0 (157.9) (445.1)
Cash and cash equivalents, beginning of year.................. 597.4 755.3 1,200.4
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year........................ $ 2,335.4 $ 597.4 $ 755.3
================= ================= =================
Supplemental cash flow information
Interest Paid............................................... $ 4,749.7 $ 4,211.8 $ 2,998.8
================= ================= =================
Income Taxes Paid........................................... $ 355.6 $ 605.2 $ 137.0
================= ================= =================
</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, asset 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 asset
management and investment banking business is conducted principally by
Alliance Capital Management L.P. ("Alliance") and Donaldson, Lufkin &
Jenrette, Inc. ("DLJ"), respectively. AXA ("AXA"), a French holding
company for an international group of insurance and related financial
services companies, is The Equitable's largest shareholder, owning
approximately 58.5% at December 31, 1998 (53.4% if all securities
convertible into, and options on, common stock were to be converted or
exercised).
The Insurance segment 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. It also 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.
The Investment Banking segment, which includes DLJ, 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.
The Asset Management segment includes Alliance and, through June 10,
1997, Equitable Real Estate Investment Management, Inc. ("EREIM") which
was sold. Alliance provides diversified investment fund 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. This
segment includes institutional Separate Accounts which provide various
investment options for large group pension clients, primarily deferred
benefit contribution plans, through pooled or single group accounts.
EREIM provided real estate investment management services, property
management services, mortgage servicing and loan asset management, and
agricultural investment management.
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, Alliance, and, through June
10, 1997, EREIM (see Note 5); and those trusts, partnerships and joint
ventures in which The Equitable has control and a majority economic
interest. Closed Block assets, liabilities and results of operations are
presented in the consolidated financial statements as single line items
(see Note 7). Unless specifically stated, all other footnote disclosures
contained herein exclude the Closed Block related amounts.
F-6
<PAGE>
All significant intercompany transactions and balances except those with
the Closed Block and discontinued operations (see Note 8) have been
eliminated in consolidation. The years "1998," "1997" and "1996" refer
to the years ended December 31, 1998, 1997 and 1996, respectively.
Certain reclassifications have been made in the amounts presented for
prior periods to conform these periods with the 1998 presentation.
Closed Block
On July 22, 1992, Equitable Life established the Closed Block for the
benefit of certain individual participating policies which were in force
on that date. The assets allocated to the Closed Block, together with
anticipated revenues from policies included in the Closed Block, were
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.
Assets allocated to the Closed Block inure solely to the benefit of the
Closed Block policyholders 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 include the Group Non-Participating Wind-Up
Annuities ("Wind-Up Annuities") and the Guaranteed Interest Contract
("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 believes the allowance for future losses at
December 31, 1998 is adequate to provide for all future losses; however,
the quarterly allowance review 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 8).
Accounting Changes
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information".
SFAS No. 131 establishes standards for public companies to report
information about operating segments in annual and interim financial
statements issued to shareholders. It also specifies related disclosure
requirements for products and services, geographic areas and major
customers. Generally, financial information must be reported using the
basis management uses to make operating decisions and to evaluate
business performance. The Equitable implemented SFAS No. 131 effective
December 31, 1998 and identified three operating segments to reflect its
major businesses: Insurance, Investment Banking and Asset Management.
Prior period comparative segment information has been restated.
F-7
<PAGE>
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use,"
which requires capitalization of external and certain internal costs
incurred to obtain or develop internal-use computer software during the
application development stage. The Equitable applied the provisions of
SOP 98-1 prospectively effective January 1, 1998. The adoption of SOP
98-1 did not have a material impact on The Equitable's consolidated
financial statements. Capitalized internal-use software is amortized on
a straight-line basis over the estimated useful life of the software.
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.
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 intends to sell or abandon is 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. Initial adoption of the impairment
requirements of SFAS No. 121 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.
New Accounting Pronouncements
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage
Loans Held for Sale by a Mortgage Banking Enterprise," which amends
existing accounting and reporting standards for certain activities of
mortgage banking enterprises and other enterprises that conduct
operations that are substantially similar to the primary operations of a
mortgage banking enterprise. This statement is effective for the first
fiscal quarter beginning after December 15, 1998. This statement is not
expected to have a material impact on The Equitable's consolidated
financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain
derivatives embedded in other contracts, and for hedging activities. It
requires all derivatives to be recognized on the balance sheet at fair
value. The accounting for changes in the fair value of a derivative
depends on its intended use. Derivatives not used in hedging activities
must be adjusted to fair value through earnings. Changes in the fair
value of derivatives used in hedging activities will, depending on the
nature of the hedge, either be offset in earnings against the change in
fair value of the hedged item attributable to the risk being hedged or
recognized in other comprehensive income until the hedged item affects
earnings. For all hedging activities, the ineffective portion of a
derivative's change in fair value will be immediately recognized in
earnings.
SFAS No. 133 requires adoption in fiscal years beginning after June 15,
1999 and permits early adoption as of the beginning of any fiscal
quarter following issuance of the statement. Retroactive application to
financial statements of prior periods is prohibited. The Equitable
expects to adopt SFAS No. 133 effective January 1, 2000. Adjustments
resulting from initial adoption of the new requirements will be reported
in a manner similar to the cumulative effect of a change in accounting
principle and will be reflected in net income or accumulated other
comprehensive income based upon existing hedging relationships, if any.
F-8
<PAGE>
Management currently is assessing the impact of adoption. However,
Alliance's adoption is not expected to have a significant impact on The
Equitable's consolidated balance sheet or statement of earnings. Also,
since most of DLJ's derivatives are carried at fair values, The
Equitable's consolidated earnings and financial position are not
expected to be significantly affected by DLJ's adoption of the new
requirements.
In late 1998, the AICPA issued SOP 98-7, "Deposit Accounting: Accounting
for Insurance and Reinsurance Contracts that Do Not Transfer Insurance
Risk". This SOP, effective for fiscal years beginning after June 15,
1999, provides guidance to both the insured and insurer on how to apply
the deposit method of accounting when it is required for insurance and
reinsurance contracts that do not transfer insurance risk. The SOP does
not address or change the requirements as to when deposit accounting
should be applied. SOP 98-7 applies to all entities and all insurance
and reinsurance contracts that do not transfer insurance risk except for
long-duration life and health insurance contracts. This SOP is not
expected to have a material impact on The Equitable's consolidated
financial statements.
In December 1997, the AICPA issued 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.
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 contractual amounts at which the securities subsequently will
be reacquired or resold. 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.
F-9
<PAGE>
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.
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.
DLJ's unrealized investment gains (losses) are included in revenues as
investment gains (losses). Unrealized gains (losses) on non-DLJ
investments in trading securities are reflected in earnings. Unrealized
investment gains and losses on equity securities and fixed maturities
available for sale held by The Equitable, other than those held by DLJ,
are accounted for as a separate component of accumulated comprehensive
income, 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.
F-10
<PAGE>
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.
For universal life products and investment-type products, DAC is
amortized over the expected total life of the contract group (periods
ranging from 25 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 accumulated comprehensive income 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, 1998, the expected investment yield, excluding
policy loans, generally ranged from 7.29% grading to 6.5% 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 accumulated comprehensive income 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,
includes a margin for adverse deviation. When the liabilities for future
F-11
<PAGE>
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.
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 dilutive 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 dilutive 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 Pension Par and 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 $938.6 million and $886.7 million at December 31,
1998 and 1997, 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>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Incurred benefits related to current year.......... $ 202.1 $ 190.2 $ 189.0
Incurred benefits related to prior years........... 22.2 2.1 69.1
----------------- ---------------- -----------------
Total Incurred Benefits............................ $ 224.3 $ 192.3 $ 258.1
================= ================ =================
Benefits paid related to current year.............. $ 17.0 $ 28.8 $ 32.6
Benefits paid related to prior years............... 155.4 146.2 153.3
----------------- ---------------- -----------------
Total Benefits Paid................................ $ 172.4 $ 175.0 $ 185.9
================= ================ =================
</TABLE>
F-12
<PAGE>
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, 1998, participating policies, including those in the
Closed Block, represent approximately 19.9% ($49.3 billion) of directly
written life insurance in force, net of amounts ceded.
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 files 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 1998, 1997 and 1996, investment results of
such Separate Accounts were $4,591.0 million, $3,411.1 million and
$2,970.6 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 Plans
The Equitable accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
In accordance with the Statement, compensation expense is recorded on
the date of grant only if the current market price of the underlying
stock exceeds the option price. See Note 11 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, 1998
Fixed Maturities:
Available for Sale:
Corporate..................... $ 14,747.0 $ 794.6 $ 380.4 $ 15,161.2
Mortgage-backed............... 1,834.5 23.3 .9 1,856.9
U.S. Treasury securities and
U.S. government and
agency securities........... 1,640.1 109.6 1.1 1,748.6
States and political
subdivisions................ 55.0 9.9 - 64.9
Foreign governments........... 363.3 20.9 30.0 354.2
Redeemable preferred stock.... 268.0 7.0 11.5 263.5
---------------- ----------------- ----------------- ----------------
Total Available for Sale.......... $ 18,907.9 $ 965.3 $ 423.9 $ 19,449.3
================ ================= ================= ================
Held to Maturity: Corporate.... $ 250.9 $ 19.6 $ .1 $ 270.4
================ ================= ================= ================
Equity Securities:
DLJ's long-term corporate
development investments....... $ 472.3 $ 74.1 $ 72.6 $ 473.8
Common stock.................... 101.9 118.8 22.4 198.3
---------------- ----------------- ----------------- ----------------
Total Equity Securities........... $ 574.2 $ 192.9 $ 95.0 $ 672.1
================ ================= ================= ================
December 31, 1997
Fixed Maturities:
Available for Sale:
Corporate..................... $ 15,078.4 $ 785.3 $ 74.7 $ 15,789.0
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................ 52.8 6.8 .1 59.5
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
================ ================= ================= ================
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
================ ================= ================= ================
</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
determines 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, 1998 and 1997,
securities without a readily ascertainable market value having an
amortized cost of $4,171.3 million and $4,248.1 million, respectively,
had estimated fair values of $4,400.7 million and $4,406.1 million,
respectively.
The contractual maturity of bonds at December 31, 1998 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......... $ 127.1 $ 127.1 $ 337.3 $ 335.9
Due in years two through five... 8.1 8.3 4,043.0 4,054.9
Due in years six through ten.... 24.5 28.5 6,561.0 6,611.7
Due after ten years............. 91.2 106.5 5,864.1 6,326.4
Mortgage-backed securities...... - - 1,834.5 1,856.9
----------------- ----------------- ---------------- -----------------
Total........................... $ 250.9 $ 270.4 $ 18,639.9 $ 19,185.8
================= ================= ================ =================
</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
concentrations in any single issuer or 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, 1998, approximately 15.0% of the
$18,890.8 million aggregate amortized cost of bonds held by The
Equitable was considered to be other than investment grade.
In addition, 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>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Balances, beginning of year........................ $ 384.5 $ 137.1 $ 325.3
SFAS No. 121 release............................... - - (152.4)
Additions charged to income........................ 86.2 334.6 125.0
Deductions for writedowns and
asset dispositions............................... (240.1) (87.2) (160.8)
----------------- ---------------- -----------------
Balances, End of Year.............................. $ 230.6 $ 384.5 $ 137.1
================= ================ =================
Balances, end of year comprise:
Mortgage loans on real estate.................... $ 34.3 $ 55.8 $ 50.4
Equity real estate............................... 196.3 328.7 86.7
----------------- ---------------- -----------------
Total.............................................. $ 230.6 $ 384.5 $ 137.1
================= ================ =================
</TABLE>
At December 31, 1998, the carrying value of fixed maturities which are
non-income producing for the twelve months preceding the consolidated
balance sheet date was $60.8 million.
The cost of trading account securities at December 31, 1998 and 1997 was
$13,385.6 million and $16,521.9 million, respectively.
At December 31, 1998 and 1997, 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 $7.0 million (0.2% of total
mortgage loans on real estate) and $23.4 million (0.9% 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 $115.1
million and $183.4 million at December 31, 1998 and 1997, 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 $10.3 million, $17.2 million and $35.5 million in
1998, 1997 and 1996, respectively. Gross interest income on these loans
included in net investment income aggregated $8.3 million, $12.7 million
and $28.2 million in 1998, 1997 and 1996, respectively.
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1998 1997
------------------- -------------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses.................. $ 125.4 $ 196.7
Impaired mortgage loans without provision for losses............... 8.6 3.6
------------------- -------------------
Recorded investment in impaired mortgage loans..................... 134.0 200.3
Provision for losses............................................... (29.0) (51.8)
------------------- -------------------
Net Impaired Mortgage Loans........................................ $ 105.0 $ 148.5
=================== ===================
</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 1998, 1997 and 1996, respectively, The Equitable's average
recorded investment in impaired mortgage loans was $161.3 million,
$246.9 million and $552.1 million. Interest income recognized on these
impaired mortgage loans totaled $12.3 million, $15.2 million and $38.8
million ($.9 million, $2.3 million and $17.9 million recognized on a
cash basis) for 1998, 1997 and 1996, 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, 1998 and 1997, the carrying value of equity real estate
held for sale amounted to $836.2 million and $1,023.5 million,
respectively. For 1998, 1997 and 1996, respectively, real estate of $7.1
million, $152.0 million and $58.7 million was acquired in satisfaction
of debt. At December 31, 1998 and 1997, The Equitable owned $552.3
million and $693.3 million, respectively, of real estate acquired in
satisfaction of debt.
Depreciation of real estate held for production of income 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 $374.8 million and $541.1 million at
December 31, 1998 and 1997, respectively. Depreciation expense on real
estate totaled $30.5 million, $74.9 million and $91.8 million for 1998,
1997 and 1996, respectively.
4) JOINT VENTURES AND PARTNERSHIPS
Summarized combined financial information for real estate joint ventures
(25 and 29 individual ventures as of December 31, 1998 and 1997,
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,
------------------------------------
1998 1997
---------------- -----------------
(In Millions)
<S> <C> <C>
BALANCE SHEETS
Investments in real estate, at depreciated cost........................ $ 913.7 $ 1,700.9
Investments in securities, generally at estimated fair value........... 636.9 1,374.8
Cash and cash equivalents.............................................. 85.9 105.4
Other assets........................................................... 279.8 584.9
---------------- -----------------
Total Assets........................................................... $ 1,916.3 $ 3,766.0
================ =================
Borrowed funds - third party........................................... $ 367.1 $ 493.4
Borrowed funds - The Equitable......................................... 30.1 31.2
Other liabilities...................................................... 197.2 284.0
---------------- -----------------
Total liabilities...................................................... 594.4 808.6
---------------- -----------------
Partners' capital...................................................... 1,321.9 2,957.4
---------------- -----------------
Total Liabilities and Partners' Capital................................ $ 1,916.3 $ 3,766.0
================ =================
Equity in partners' capital included above............................. $ 312.9 $ 568.5
Equity in limited partnership interests not included above............. 442.1 331.8
Other.................................................................. .7 4.3
---------------- -----------------
Carrying Value......................................................... $ 755.7 $ 904.6
================ =================
</TABLE>
F-17
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
STATEMENTS OF EARNINGS
Revenues of real estate joint ventures............. $ 246.1 $ 310.5 $ 348.9
Revenues of other limited partnership interests.... 128.9 506.3 386.1
Interest expense - third party..................... (33.3) (91.8) (111.0)
Interest expense - The Equitable................... (2.6) (7.2) (30.0)
Other expenses..................................... (197.0) (263.6) (282.5)
----------------- ---------------- -----------------
Net Earnings....................................... $ 142.1 $ 454.2 $ 311.5
================= ================ =================
Equity in net earnings included above.............. $ 59.6 $ 76.7 $ 73.9
Equity in net earnings of limited partnership
interests not included above..................... 22.7 69.5 35.8
Other.............................................. - (.9) .9
----------------- ---------------- -----------------
Total Equity in Net Earnings....................... $ 82.3 $ 145.3 $ 110.6
================= ================ =================
</TABLE>
5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES)
The sources of net investment income are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities................................... $ 1,534.2 $ 1,501.2 $ 1,355.0
Trading account securities......................... 1,832.0 1,528.9 1,008.2
Securities purchased under resale agreements....... 2,075.7 1,861.5 1,484.4
Broker-dealer related receivables.................. 1,161.2 1,082.6 697.4
Mortgage loans on real estate...................... 235.4 260.8 303.0
Equity real estate................................. 356.1 390.4 442.4
Other equity investments........................... 123.2 181.0 144.0
Policy loans....................................... 144.9 177.0 160.3
Other investment income............................ 348.8 211.3 224.0
----------------- ---------------- -----------------
Gross investment income.......................... 7,811.5 7,194.7 5,818.7
----------------- ---------------- -----------------
Interest expense to finance short-term
trading instruments.............................. 3,045.4 2,859.0 2,132.6
Other investment expenses.......................... 267.4 344.4 349.8
----------------- ---------------- -----------------
Investment expenses.............................. 3,312.8 3,203.4 2,482.4
----------------- ---------------- -----------------
Net Investment Income.............................. $ 4,498.7 $ 3,991.3 $ 3,336.3
================= ================ =================
</TABLE>
F-18
<PAGE>
Investment gains (losses), net, including changes in the valuation
allowances, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Fixed maturities................................... $ (26.0) $ 90.2 $ 63.0
Mortgage loans on real estate...................... (10.9) (11.2) (27.3)
Equity real estate................................. 74.5 (391.3) (79.7)
Other equity investments........................... 157.9 208.8 190.0
Dealer and trading gains........................... (92.8) 363.2 394.0
Issuance and sale of DLJ common stock.............. 40.3 6.7 -
Sale of subsidiaries............................... (2.6) 252.1 -
Issuance and sales of Alliance Units............... 19.8 - 20.6
Other.............................................. (4.4) - (2.8)
----------------- ---------------- -----------------
Investment Gains, Net.............................. $ 155.8 $ 518.5 $ 557.8
================= ================ =================
</TABLE>
Writedowns of fixed maturities amounted to $101.6 million, $12.8 million
and $29.9 million for 1998, 1997 and 1996, respectively, and writedowns
of equity real estate subsequent to the adoption of SFAS No. 121
amounted to $136.4 million for 1997. In the fourth quarter of 1997, The
Equitable reclassified $1,095.4 million depreciated cost of equity real
estate from real estate held for production of income to real estate
held for sale. Additions to valuation allowances of $227.6 million were
recorded upon these transfers. Additionally, in fourth quarter 1997,
$132.3 million of writedowns on real estate held for production of
income were recorded.
For 1998, 1997 and 1996, respectively, proceeds received on sales of
fixed maturities classified as available for sale amounted to $16,775.7
million, $10,317.6 million and $8,549.2 million. Gross gains of $150.7
million, $167.6 million and $155.1 million and gross losses of $97.8
million, $109.0 million and $93.0 million, respectively, were realized
on these sales. The change in unrealized investment gains (losses)
related to fixed maturities classified as available for sale for 1998,
1997 and 1996 amounted to $(330.0) million, $511.3 million and $(255.9)
million, respectively.
Investment gains from other equity investments include gains generated
by DLJ's involvement in long-term corporate development investments of
$126.0 million, $194.5 million and $163.0 million for 1998, 1997 and
1996, respectively.
For 1998, 1997 and 1996, investment results passed through to certain
participating group annuity contracts as interest credited to
policyholders' account balances amounted to $136.9 million, $137.5
million and $136.7 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 which was paid in 1998. 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 continues 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 for the year ended December 31, 1996,
respectively, the businesses sold reported combined revenues of $91.6
million and $226.1 million and combined net earnings of $10.7 million
and $30.7 million.
F-19
<PAGE>
In 1996, Alliance acquired the business of Cursitor Holdings L.P. 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
additional consideration to be determined at a later date but currently
estimated to not exceed $10.0 million. 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,
1998, The Equitable's ownership of Alliance Units was approximately
56.7%.
Net unrealized investment gains (losses), included in the consolidated
balance sheets as a component of accumulated comprehensive income and
the changes for the corresponding years, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Balance, beginning of year......................... $ 523.7 $ 179.3 $ 386.6
Changes in unrealized investment gains (losses).... (236.5) 543.9 (298.7)
Changes in unrealized investment losses
(gains) attributable to:
Participating group annuity contracts.......... (5.7) 53.2 -
DAC............................................ 13.2 (89.0) 42.3
Deferred Federal income taxes.................. 83.4 (163.7) 49.1
----------------- ---------------- -----------------
Balance, End of Year............................... $ 378.1 $ 523.7 $ 179.3
================= ================ =================
Balance, end of year comprises:
Unrealized investment gains on:
Fixed maturities............................... $ 541.4 $ 871.4 $ 360.1
Other equity investments....................... 96.4 33.1 29.3
Other, principally Closed Block................ 112.1 81.9 53.1
----------------- ---------------- -----------------
Total........................................ 749.9 986.4 442.5
Amounts of unrealized investment gains
attributable to:
Participating group annuity contracts........ (24.7) (19.0) (72.2)
DAC.......................................... (127.8) (141.0) (52.0)
Deferred Federal income taxes................ (219.3) (302.7) (139.0)
----------------- ---------------- -----------------
Total.............................................. $ 378.1 $ 523.7 $ 179.3
================= ================ =================
</TABLE>
F-20
<PAGE>
6) ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income represents cumulative gains and
losses on items that are not reflected in earnings. The balances for the
years 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Unrealized gains on investments.................... $ 378.1 $ 523.7 $ 179.3
Minimum pension liability.......................... (28.3) (17.3) (12.9)
----------------- ---------------- -----------------
Total Accumulated Other
Comprehensive Income............................. $ 349.8 $ 506.4 $ 166.4
================= ================ =================
</TABLE>
The components of other comprehensive income for the years 1998, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Net unrealized gains (losses) on investment
securities:
Net unrealized gains (losses) arising during
the period..................................... $ (178.0) $ 567.0 $ (250.9)
Reclassification adjustment for (gains) losses
included in net earnings....................... (58.5) (23.1) (47.8)
----------------- ---------------- -----------------
Net unrealized gains (losses) on investment
securities....................................... (236.5) 543.9 (298.7)
Adjustments for policyholder liabilities, DAC
and deferred Federal income taxes................ 90.9 (199.5) 91.4
----------------- ---------------- -----------------
Change in unrealized gains (losses), net of
reclassification and adjustments................. (145.6) 344.4 (207.3)
Change in minimum pension liability................ (11.0) (4.4) 22.2
----------------- ---------------- -----------------
Total Other Comprehensive Income................... $ (156.6) $ 340.0 $ (185.1)
================= ================ =================
</TABLE>
F-21
<PAGE>
7) CLOSED BLOCK
Summarized financial information for the Closed Block follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Fixed Maturities:
Available for sale, at estimated fair value (amortized cost,
$4,149.0 and $4,059.4)........................................... $ 4,373.2 $ 4,231.0
Mortgage loans on real estate........................................ 1,633.4 1,341.6
Policy loans......................................................... 1,641.2 1,700.2
Cash and other invested assets....................................... 86.5 282.0
DAC.................................................................. 676.5 775.2
Other assets......................................................... 221.6 236.6
----------------- -----------------
Total Assets......................................................... $ 8,632.4 $ 8,566.6
================= =================
Liabilities
Future policy benefits and policyholders' account balances........... $ 9,013.1 $ 8,993.2
Other liabilities.................................................... 63.9 80.5
----------------- -----------------
Total Liabilities.................................................... $ 9,077.0 $ 9,073.7
================= =================
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Revenues
Premiums and other revenue......................... $ 661.7 $ 687.1 $ 724.8
Investment income (net of investment
expenses of $15.5, $27.0 and $27.3).............. 569.7 574.9 546.6
Investment losses, net............................. .5 (42.4) (5.5)
----------------- ---------------- -----------------
Total revenues............................... 1,231.9 1,219.6 1,265.9
----------------- ---------------- -----------------
Benefits and Other Deductions
Policyholders' benefits and dividends.............. 1,082.0 1,066.7 1,106.3
Other operating costs and expenses................. 62.8 50.4 34.6
----------------- ---------------- -----------------
Total benefits and other deductions.......... 1,144.8 1,117.1 1,140.9
----------------- ---------------- -----------------
Contribution from the Closed Block................. $ 87.1 $ 102.5 $ 125.0
================= ================ =================
</TABLE>
At December 31, 1998 and 1997, problem mortgage loans on real estate had
an amortized cost of $5.1 million and $8.1 million, respectively, and
mortgage loans on real estate for which the payment terms have been
restructured had an amortized cost of $26.0 million and $70.5 million,
respectively.
F-22
<PAGE>
Impaired mortgage loans (as defined under SFAS No. 114) along with the
related provision for losses were as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
---------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 55.5 $ 109.1
Impaired mortgage loans without provision for losses................... 7.6 .6
---------------- -----------------
Recorded investment in impaired mortgages.............................. 63.1 109.7
Provision for losses................................................... (10.1) (17.4)
---------------- -----------------
Net Impaired Mortgage Loans............................................ $ 53.0 $ 92.3
================ =================
</TABLE>
During 1998, 1997 and 1996, the Closed Block's average recorded
investment in impaired mortgage loans was $85.5 million, $110.2 million
and $153.8 million, respectively. Interest income recognized on these
impaired mortgage loans totaled $4.7 million, $9.4 million and $10.9
million ($1.5 million, $4.1 million and $4.7 million recognized on a
cash basis) for 1998, 1997 and 1996, respectively.
Valuation allowances amounted to $11.1 million and $18.5 million on
mortgage loans on real estate and $15.4 million and $16.8 million on
equity real estate at December 31, 1998 and 1997, 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 and $12.8 million for 1997 and 1996, respectively. 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 fourth
quarter 1997, $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.
F-23
<PAGE>
8) DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
Assets
Mortgage loans on real estate........................................ $ 553.9 $ 635.2
Equity real estate................................................... 611.0 874.5
Other equity investments............................................. 115.1 209.3
Other invested assets................................................ 24.9 152.4
----------------- -----------------
Total investments.................................................. 1,304.9 1,871.4
Cash and cash equivalents............................................ 34.7 106.8
Other assets......................................................... 219.0 243.8
----------------- -----------------
Total Assets......................................................... $ 1,558.6 $ 2,222.0
================= =================
Liabilities
Policyholders' liabilities........................................... $ 1,021.7 $ 1,048.3
Allowance for future losses.......................................... 305.1 259.2
Amounts due to continuing operations................................. 2.7 572.8
Other liabilities.................................................... 229.1 341.7
----------------- -----------------
Total Liabilities.................................................... $ 1,558.6 $ 2,222.0
================= =================
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Revenues
Investment income (net of investment
expenses of $63.3, $97.3 and $127.5)............. $ 160.4 $ 188.6 $ 245.4
Investment gains (losses), net..................... 35.7 (173.7) (18.9)
Policy fees, premiums and other income............. (4.3) .2 .2
----------------- ---------------- -----------------
Total revenues..................................... 191.8 15.1 226.7
Benefits and other deductions...................... 141.5 169.5 250.4
Earnings added (losses charged) to allowance
for future losses................................ 50.3 (154.4) (23.7)
----------------- ---------------- -----------------
Pre-tax loss from operations....................... - - -
Pre-tax earnings from releasing (loss from
strengthening) of the allowance for future
losses........................................... 4.2 (134.1) (129.0)
Federal income tax (expense) benefit............... (1.5) 46.9 45.2
----------------- ---------------- -----------------
Earnings (Loss) from Discontinued Operations....... $ 2.7 $ (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 a release of allowance in
1998 and strengthening of allowance in 1997 and 1996.
F-24
<PAGE>
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 fourth quarter 1997, $92.5 million of writedowns on
real estate held for production of income were recognized.
Benefits and other deductions includes $26.6 million, $53.3 million and
$114.3 million of interest expense related to amounts borrowed from
continuing operations in 1998, 1997 and 1996, respectively.
Valuation allowances amounted to $3.0 million and $28.4 million on
mortgage loans on real estate and $34.8 million and $88.4 million on
equity real estate at December 31, 1998 and 1997, 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, 1998 and 1997, problem mortgage loans on real estate had
amortized costs of $1.1 million and $11.0 million, respectively, and
mortgage loans on real estate for which the payment terms have been
restructured had amortized costs of $3.5 million and $109.4 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,
------------------------------------
1998 1997
---------------- -----------------
(In Millions)
<S> <C> <C>
Impaired mortgage loans with provision for losses...................... $ 6.7 $ 101.8
Impaired mortgage loans without provision for losses................... 8.5 .2
---------------- -----------------
Recorded investment in impaired mortgages.............................. 15.2 102.0
Provision for losses................................................... (2.1) (27.3)
---------------- -----------------
Net Impaired Mortgage Loans............................................ $ 13.1 $ 74.7
================ =================
</TABLE>
During 1998, 1997 and 1996, the discontinued operations' average
recorded investment in impaired mortgage loans was $73.3 million, $89.2
million and $134.8 million, respectively. Interest income recognized on
these impaired mortgage loans totaled $4.7 million, $6.6 million and
$10.1 million ($3.4 million, $5.3 million and $7.5 million recognized on
a cash basis) for 1998, 1997 and 1996, respectively.
At December 31, 1998 and 1997, discontinued operations had carrying
values of $50.0 million and $156.2 million, respectively, of real estate
acquired in satisfaction of debt.
F-25
<PAGE>
9) SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1997
----------------- -----------------
(In Millions)
<S> <C> <C>
Short-term debt...................................................... $ 826.1 $ 1,569.2
----------------- -----------------
Long-term debt:
Holding Company:
Senior notes, 6.5%, due 2008....................................... 249.2 -
Senior notes, 9%, due 2004......................................... 300.0 300.0
Senior exchange notes, 6.75% - 7.30%, due through 2003............. 214.0 244.0
Senior debentures, 7.0%, due 2028.................................. 347.4 -
----------------- -----------------
Total Holding Company.......................................... 1,110.6 544.0
----------------- -----------------
Equitable Life:
6.95% surplus notes scheduled to mature 2005....................... 399.4 399.4
7.70% surplus notes scheduled to mature 2015....................... 199.7 199.7
Other.............................................................. .3 .3
----------------- -----------------
Total Equitable Life........................................... 599.4 599.4
----------------- -----------------
Wholly Owned and Joint Venture Real Estate:
Mortgage notes, 5.91% - 12.00%, due through 2017................... 392.2 676.6
----------------- -----------------
DLJ:
Senior notes, 6.0%, due 2001....................................... 249.7 -
Senior notes, 6.5%, due 2008....................................... 643.5 -
Senior notes, 6.875%, due 2005..................................... 497.8 497.5
Medium-term notes, 5.625% - 6.9%, due through 2016................. 946.8 697.3
Senior secured notes, Class A-2 and B-1 floating rate due 2005..... 450.0 -
Senior subordinated revolving credit, 6.6875%, due 1998............ - 325.0
Global floating rate notes, 5.98%, due 2002........................ 348.4 347.9
Subordinated exchange notes, 9.58%, due 2003....................... 205.0 205.0
Junior subordinated convertible debentures, 6.6875%, due 2001...... 19.7 33.5
Other.............................................................. .1 1.3
----------------- -----------------
Total DLJ...................................................... 3,361.0 2,107.5
----------------- -----------------
Alliance:
Other.............................................................. 10.8 18.5
----------------- -----------------
Total long-term debt................................................. 5,474.0 3,946.0
----------------- -----------------
Total Short-term and Long-term Debt.................................. $ 6,300.1 $ 5,515.2
================= =================
</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 September
2000. The interest rates are based on external indices dependent on the
type of borrowing and at December 31, 1998 range from 5.23% to 7.75%.
There were no borrowings outstanding under this bank credit facility at
December 31, 1998.
F-26
<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, 1998, there were no borrowings outstanding under this
program.
During July 1998, Alliance entered into a $425.0 million five-year
revolving credit facility with a group of commercial banks which
replaced a $250.0 million revolving credit facility. 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. During September 1998, Alliance
increased the size of its commercial paper program from $250.0 million
to $425.0 million. Borrowings from these two sources may not exceed
$425.0 million in the aggregate. The revolving credit facility provides
backup liquidity for commercial paper issued under Alliance's commercial
paper program and can be used as a direct source of borrowing. The
revolving credit facility contains covenants which require Alliance to,
among other things, meet certain financial ratios. As of December 31,
1998, Alliance had commercial paper outstanding totaling $179.5 million
at an effective interest rate of 5.5% and there were no borrowings
outstanding under Alliance's 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. During the second quarter of 1998, DLJ amended
its $2,000.0 million revolving credit facility to increase the aggregate
commitment of banks thereunder to $2,750.0 million, of which $1,650.0
million may be unsecured. There were no borrowings outstanding under
this agreement at December 31, 1998.
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. At December
31, 1998, DLJ had $30.9 million in commercial paper outstanding.
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, securities owned by DLJ aggregating $190.5 million
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, 1998
and 1997 are as follows:
<TABLE>
<CAPTION>
Weighted Average
Interest Rates at
December 31, December 31,
------------------------------------ -----------------------------
1998 1997 1998 1997
----------------- ----------------- ------------- --------------
(In Millions)
<S> <C> <C> <C> <C>
Securities sold under agreements
to repurchase........................ $ 35,775.6 $ 36,006.7 4.89% 6.04%
Bank loans............................. 391.0 988.0 5.79% 6.57%
Borrowings from other financial
institutions......................... 125.0 133.0 5.72% 6.21%
</TABLE>
F-27
<PAGE>
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.
The Equitable has pledged real estate, mortgage loans, cash and
securities amounting to $640.2 million and $1,354.5 million at December
31, 1998 and 1997, respectively, as collateral for certain short-term
and long-term debt.
At December 31, 1998, aggregate maturities of the long-term debt based
on required principal payments at maturity for 1999 and the succeeding
four years are $453.8 million, $231.9 million, $417.0 million, $416.4
million and $433.2 million, respectively, and $3,657.0 million
thereafter.
In 1998, the Holding Company completed an offering under its existing
shelf registration of $250.0 million 6 1/2% Senior Notes due 2008 and
$350.0 million 7% Senior Debentures due 2028 (together the "1998 Senior
Debt"), resulting in net proceeds of $591.1 million to be used for
general corporate purposes.
In 1997, the Ho1ding 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.
In 1998, DLJ issued $650.0 million of 6.5% Senior Notes that mature in
2008 and $350.0 million Medium-Term Notes with interest ranging from
5.82% - 6.28% that mature at various dates through 2003. DLJ also issued
$250.0 million of 6% Senior Notes that mature in 2001 from the $1.0
billion shelf established in 1997. To convert these fixed rate notes
into floating rate notes based upon the LIBOR, DLJ entered into interest
rate swap transactions. Additionally, DLJ issued Senior Secured and
Senior Subordinated Secured Floating Rate Notes for $200.0 million and
$250.0 million, due March 15, 2005 and September 15, 2005, respectively.
These notes are collateralized by a portfolio of investments, primarily
senior bank debt valued at $441.0 million. Senior bank debt consists of
interests in senior corporate debt, including term loans, revolving
loans and other corporate debt. Also in 1998, DLJ repaid the $325.0
million senior subordinated revolving credit agreement and terminated
the related credit facility.
In 1997, DLJ borrowed an additional $118.5 million under its senior
subordinated revolving credit agreement and extended the maturity date
to January 30, 2000. Interest is based on LIBOR and was 6.6875% at year
end 1997 and 6.375% at year end 1996. DLJ established a $300.0 million
Medium-Term Note program. At year end 1997, $200.0 million was
outstanding with a weighted average interest rate of 6.48%. To convert
$190.0 million of such fixed rate notes into floating rate notes based
upon LIBOR, DLJ entered into interest rate swap transactions. At year
end 1997, the weighted average effective interest rate on these notes
was 6.08%. DLJ also established a $1.0 billion senior subordinated debt
securities shelf registration, under which up to $500.0 million can be
offered as Medium-Term Notes due nine months or more from the date of
issuance. At year end 1997, notes outstanding under this registration
included $150.0 million at a fixed rate of 6.90% and $100.0 million at a
floating rate of 6.28% based upon LIBOR. Using interest rate swaps,
these floating rate notes were converted into fixed rate notes at 6.94%.
In addition, DLJ issued $350.0 million of Global Floating Rate Notes
with interest at a floating rate equal to LIBOR plus 0.25%. These notes
mature in 2002 and can be redeemed by DLJ in whole or in part on any
interest payment date on or after September 2000. DLJ completed a shelf
registration to offer up to $300.0 million of senior or subordinated
debt securities or preferred stock. Also in 1997, DLJ repaid in full
$88.0 million 7.88% Medium-Term Notes plus accrued interest.
F-28
<PAGE>
10) FEDERAL INCOME TAXES
A summary of the Federal income tax expense in the consolidated
statements of earnings is shown below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Federal income tax expense (benefit):
Current.......................................... $ 440.2 $ 488.1 $ 324.4
Deferred......................................... 87.6 (207.6) (187.0)
----------------- ---------------- -----------------
Total.............................................. $ 527.8 $ 280.5 $ 137.4
================= ================ =================
</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>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Expected Federal income tax expense................ $ 561.4 $ 386.0 $ 180.5
Non-taxable minority interest...................... (33.2) (38.0) (32.9)
Adjustment of tax audit reserves................... 16.0 (81.7) (2.8)
Other.............................................. (16.4) 14.2 (7.4)
----------------- ---------------- -----------------
Federal Income Tax Expense......................... $ 527.8 $ 280.5 $ 137.4
================= ================ =================
</TABLE>
The components of the net deferred Federal income taxes are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------------- ---------------------------------
Assets Liabilities Assets Liabilities
--------------- ---------------- --------------- ---------------
(In Millions)
<S> <C> <C> <C> <C>
Compensation and related benefits...... $ 569.4 $ - $ 577.3 $ -
Other.................................. 32.4 - 64.2 -
DAC, reserves and reinsurance.......... - 231.4 - 222.8
Investments............................ - 324.6 - 360.3
--------------- ---------------- --------------- ---------------
Total.................................. $ 601.8 $ 556.0 $ 641.5 $ 583.1
=============== ================ =============== ===============
</TABLE>
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>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
DAC, reserves and reinsurance...................... $ (7.7) $ 46.2 $ (156.2)
Investments........................................ 52.3 (136.0) 30.7
Compensation and related benefits.................. 13.9 (112.3) (26.5)
Other.............................................. 29.1 (5.5) (35.0)
----------------- ---------------- -----------------
Deferred Federal Income Tax
Expense (Benefit)................................ $ 87.6 $ (207.6) $ (187.0)
================= ================ =================
</TABLE>
The Internal Revenue Service (the "IRS") is in the process of examining
The Equitable's consolidated Federal income tax returns for the years
1992 through 1996. Management believes these audits will have no
material adverse effect on The Equitable's consolidated results of
operations.
F-29
<PAGE>
11) 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, 1998 and 1997, respectively, 223.3 million and 222.2
million shares of Common Stock were issued. At December 31, 1998,
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.
In May 1998, the Holding Company's Board of Directors authorized a stock
repurchase program pursuant to which the Holding Company may repurchase
up to 8 million shares of its Common Stock from time to time in the open
market or through privately negotiated transactions. In September, the
Holding Company's Board of Directors increased the number of shares
authorized under the stock repurchase program to 15 million. At December
31, 1998, the Holding Company has repurchased 4.5 million shares of
Common Stock at a cost of $247.1 million.
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.
In December 1993, the Holding Company established a Stock Employee
Compensation Trust ("SECT") to fund a portion of its obligations arising
from its various employee compensation and benefits programs. At that
time, 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) 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
remain 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
F-30
<PAGE>
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, 1998, 1997 and 1996, respectively, options to purchase
2,873,252 shares, 6,725,382 shares and 217,139 shares were available for
future grant under the plans.
The Equitable's ownership interests 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, 1998, .2 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 Plans' 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 1998, 1997 and 1996 would have been:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
(In Millions,
Except Per Share Amount)
<S> <C> <C> <C>
Net Earnings:
As reported............................................. $ 833.1 $ 561.0 $ 99.1
Pro forma............................................... 795.1 542.1 85.1
Earnings Per Share:
Basic:
As reported........................................... $ 3.76 $ 2.71 $ .39
Pro forma............................................. 3.58 2.61 .31
Diluted:
As reported........................................... 3.62 2.47 .37
Pro forma............................................. 3.47 2.37 .31
</TABLE>
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 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Holding Company DLJ Alliance
------------------------------ ------------------------------- ----------------------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
--------- ---------- --------- ---------- -------------------- --------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dividend yield...... 0.32% 0.48% 0.80% 0.69% 0.86% 1.54% 6.50% 8.00% 8.00%
Expected volatility. 28% 20% 20% 40% 33% 25% 29% 26% 23%
Risk-free interest
rate.............. 5.48% 5.99% 5.92% 5.53% 5.96% 6.07% 4.40% 5.70% 5.80%
Expected life
in years.......... 5 5 5 5 5 5 7.2 7.2 7.4
Weighted average
fair value per
option at
grant-date........ $22.64 $12.25 $6.94 $16.27 $10.81 $4.03 $3.86 $2.18 $1.35
</TABLE>
F-31
<PAGE>
A summary of the Holding Company, DLJ and Alliance's option plans is as
follows:
<TABLE>
<CAPTION>
Holding Company DLJ Alliance
----------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price of Price of Price of
Shares Options Shares Options Units Options
(In Millions) Outstanding (In Millions) Outstanding (In Millions) Outstanding
--------------- ------------- --------------- ------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance as of
January 1, 1996........ 6.7 $20.27 18.4 $13.50 9.6 $ 8.86
Granted................ .7 $24.94 4.2 $16.27 1.4 $12.56
Exercised.............. (.1) $19.91 - (.8) $ 6.82
Expired................ - - -
Forfeited.............. (.6) $20.21 (.4) $13.50 (.2) $ 9.66
--------------- ------------- ---------------
Balance as of
December 31, 1996...... 6.7 $20.79 22.2 $14.03 10.0 $ 9.54
Granted................ 3.2 $41.85 6.4 $30.54 2.2 $18.28
Exercised.............. (1.6) $20.26 (.2) $16.01 (1.2) $ 8.06
Forfeited.............. (.4) $23.43 (.2) $13.79 (.4) $10.64
--------------- ------------- ---------------
Balance as of
December 31, 1997...... 7.9 $29.05 28.2 $17.78 10.6 $11.41
Granted................ 4.3 $66.26 1.5 $38.59 2.8 $26.28
Exercised.............. (1.1) $21.18 (1.4) $14.91 (.9) $ 8.91
Forfeited.............. (.4) $47.01 (.1) $17.31 (.2) $13.14
--------------- ------------- ---------------
Balance as of
December 31, 1998...... 10.7 $44.00 28.2 $19.04 12.3 $14.94
=============== ============= ===============
</TABLE>
F-32
<PAGE>
Information about options outstanding and exercisable at December 31,
1998 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 3.7 5.19 $20.97 3.0 $20.33
$28.50 -$45.25 3.0 8.68 $41.79 -
$50.63 -$66.75 2.1 9.21 $52.73 -
$81.94 -$82.56 1.9 9.62 $82.56 -
----------------- -------------------
$18.125 -$82.56 10.7 7.75 $44.00 3.0 $20.33
================= ================ ================ ==================== ===============
DLJ
----------------------
$13.50 -$25.99 22.3 7.1 $14.59 21.4 $15.05
$26.00 -$38.99 5.0 8.8 $33.94 -
$39.00 -$52.875 .9 9.4 $44.65 -
----------------- -------------------
$13.50 -$52.875 28.2 7.5 $19.04 21.4 $15.05
================= ================ ================ ===================== ==============
Alliance
----------------------
$ 3.03 -$ 9.69 3.1 4.5 $ 8.03 2.4 $ 7.57
$ 9.81 -$10.69 2.0 5.3 $10.05 1.6 $10.07
$11.13 -$13.75 2.4 7.5 $11.92 1.0 $11.77
$18.47 -$18.78 2.0 9.0 $18.48 .4 $18.48
$22.50 -$26.31 2.8 9.9 $26.28 - -
----------------- -------------------
$ 3.03 -$26.31 12.3 7.2 $14.94 5.4 $ 9.88
================= ================ ================ ===================== ==============
</TABLE>
F-33
<PAGE>
12) COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions, Except Per Share Amounts)
<S> <C> <C> <C>
Net earnings....................................... $ 833.1 $ 561.0 $ 99.1
Less - dividends on preferred stocks............... - (15.6) (26.7)
----------------- ---------------- -----------------
Net earnings applicable to common shares -
Basic............................................ 833.1 545.4 72.4
Add - dividends on convertible preferred stock
and interest on convertible subordinated
debt, when dilutive(1)........................... - 24.5 -
Less - effect of assumed exercise of options
of publicly held subsidiaries.................... (21.7) (20.2) (3.8)
----------------- ---------------- -----------------
Net Earnings Applicable to Common Shares -
Diluted.......................................... $ 811.4 $ 549.7 $ 68.6
================= ================ =================
Weighted average common shares outstanding -
Basic............................................ 221.6 201.6 185.4
Add - assumed exercise of stock options............ 2.8 1.8 .8
Add - assumed conversion of convertible
preferred stock(1)............................... - 10.4 -
Add - assumed conversion of convertible
subordinated debt(1)............................. - 8.6 -
----------------- ---------------- -----------------
Weighted Average Shares Outstanding -
Diluted.......................................... 224.4 222.4 186.2
================= ================ =================
<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.
13) 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>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Direct premiums.................................... $ 438.8 $ 448.6 $ 461.4
Reinsurance assumed................................ 203.6 198.3 177.5
Reinsurance ceded.................................. (54.3) (45.4) (41.3)
----------------- ---------------- -----------------
Premiums........................................... $ 588.1 $ 601.5 $ 597.6
================= ================ =================
Universal Life and Investment-type Product
Policy Fee Income Ceded.......................... $ 75.7 $ 61.0 $ 48.2
================= ================ =================
Policyholders' Benefits Ceded...................... $ 85.9 $ 70.6 $ 54.1
================= ================ =================
Interest Credited to Policyholders' Account
Balances Ceded................................... $ 39.5 $ 36.4 $ 32.3
================= ================ =================
</TABLE>
F-34
<PAGE>
Beginning in May 1997, The Equitable began reinsuring on a yearly
renewal term basis 90% of the mortality risk on new issues of certain
term, universal and variable life products. During 1996, The Equitable's
retention limit on joint survivorship policies was increased to $15.0
million. Effective January 1, 1994, all in force business above $5.0
million was reinsured. 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 $1.3 million,
$1.6 million and $2.4 million for 1998, 1997 and 1996, respectively.
Ceded death and disability benefits totaled $15.6 million, $4.3 million
and $21.2 million for 1998, 1997 and 1996, respectively. Insurance
liabilities ceded totaled $560.3 million and $593.8 million at December
31, 1998 and 1997, respectively.
14) 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>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Service cost....................................... $ 33.2 $ 32.5 $ 33.8
Interest cost on projected benefit obligations..... 129.2 128.2 120.8
Expected return on assets.......................... (175.6) (307.6) (181.4)
Net amortization and deferrals..................... 6.1 166.6 43.4
----------------- ---------------- -----------------
Net Periodic Pension (Credit) Cost................. $ (7.1) $ 19.7 $ 16.6
================= ================ =================
</TABLE>
The plan's projected benefit obligation under the qualified and
non-qualified plans was comprised of:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
---------------- -----------------
(In Millions)
<S> <C> <C>
Benefit obligation, beginning of year.................................. $ 1,801.3 $ 1,765.5
Service cost........................................................... 33.2 32.5
Interest cost.......................................................... 129.2 128.2
Actuarial (gains) losses............................................... 108.4 (15.5)
Benefits paid.......................................................... (138.7) (109.4)
---------------- -----------------
Benefit Obligation, End of Year........................................ $ 1,933.4 $ 1,801.3
================ =================
</TABLE>
F-35
<PAGE>
The funded status of the qualified and non-qualified pension plans is as
follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
---------------- -----------------
(In Millions)
<S> <C> <C>
Plan assets at fair value, beginning of year........................... $ 1,867.4 $ 1,626.0
Actual return on plan assets........................................... 338.9 307.5
Contributions.......................................................... - 30.0
Benefits paid and fees................................................. (123.2) (96.1)
---------------- -----------------
Plan assets at fair value, end of year................................. 2,083.1 1,867.4
Projected benefit obligations.......................................... 1,933.4 1,801.3
---------------- -----------------
Projected benefit obligations less than plan assets.................... 149.7 66.1
Unrecognized prior service cost........................................ (7.5) (9.9)
Unrecognized net loss from past experience different
from that assumed.................................................... 38.7 95.0
Unrecognized net asset at transition................................... 1.5 3.1
---------------- -----------------
Prepaid Pension Cost.................................................. $ 182.4 $ 154.3
================ =================
</TABLE>
The discount rate and rate of increase in future compensation levels
used in determining the actuarial present value of projected benefit
obligations were 7.0% and 3.83%, respectively, at December 31, 1998 and
7.25% and 4.07%, respectively, at December 31, 1997. As of January 1,
1998 and 1997, the expected long-term rate of return on assets for the
retirement plan was 10.25%.
The Equitable recorded, as a reduction of shareholders' equity, an
additional minimum pension liability of $28.3 million and $17.3 million,
net of Federal income taxes, at December 31, 1998 and 1997,
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 $31.8 million,
$33.2 million and $34.7 million for 1998, 1997 and 1996, 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 1998, 1997 and 1996, The
Equitable made estimated postretirement benefits payments of $28.4
million, $18.7 million and $18.9 million, respectively.
F-36
<PAGE>
The following table sets forth the postretirement benefits plan's
status, reconciled to amounts recognized in The Equitable's consolidated
financial statements:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Service cost....................................... $ 4.6 $ 4.5 $ 5.3
Interest cost on accumulated postretirement
benefits obligation.............................. 33.6 34.7 34.6
Net amortization and deferrals..................... .5 1.9 2.4
----------------- ---------------- -----------------
Net Periodic Postretirement Benefits Costs......... $ 38.7 $ 41.1 $ 42.3
================= ================ =================
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
---------------- -----------------
(In Millions)
<S> <C> <C>
Accumulated postretirement benefits obligation, beginning
of year.............................................................. $ 490.8 $ 388.5
Service cost........................................................... 4.6 4.5
Interest cost.......................................................... 33.6 34.7
Contributions and benefits paid........................................ (28.4) 72.1
Actuarial (gains) losses............................................... (10.2) (9.0)
---------------- -----------------
Accumulated postretirement benefits obligation, end of year............ 490.4 490.8
Unrecognized prior service cost........................................ 31.8 40.3
Unrecognized net loss from past experience different
from that assumed and from changes in assumptions.................... (121.2) (140.6)
---------------- -----------------
Accrued Postretirement Benefits Cost................................... $ 401.0 $ 390.5
================ =================
</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 8.0% in 1998,
gradually declining to 2.5% in the year 2009, and in 1997 was 8.75%,
gradually declining to 2.75% in the year 2009. The discount rate used in
determining the accumulated postretirement benefits obligation was 7.0%
and 7.25% at December 31, 1998 and 1997, respectively.
If the health care cost trend rate assumptions were increased by 1%, the
accumulated postretirement benefits obligation as of December 31, 1998
would be increased 4.83%. The effect of this change on the sum of the
service cost and interest cost would be an increase of 4.57%. If the
health care cost trend rate assumptions were decreased by 1% the
accumulated postretirement benefits obligation as of December 31, 1998
would be decreased by 5.6%. The effect of this change on the sum of the
service cost and interest cost would be a decrease of 5.4%.
15) 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 2% of aggregate debit
balances arising from customer transactions, as defined, or 4% of
segregated funds, as defined, whichever is greater. The New York Stock
Exchange ("NYSE") may also require a member firm to reduce its business
F-37
<PAGE>
if its net capital is less than 4% 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 5% of aggregate debit
balances. At December 31, 1998, DLJSC's aggregate net capital of
$1,200.0 million was 20% of aggregate debit balances and in excess of
the minimum requirement by approximately $1,100.0 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 1986. 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, 1998 and 1997, 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 at December 31, 1997 and
securities with a market value of $883.0 million and $711.0 million at
December 31, 1998 and 1997, 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.
16) 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.
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.
F-38
<PAGE>
Written 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,
------------------------------------
1998 1997
---------------- -----------------
(In Millions)
<S> <C> <C>
U.S. Government, mortgage-backed securities and
options thereon...................................................... $ 3,396.0 $ 3,773.0
Foreign sovereign debt securities...................................... 89.0 73.0
Forward rate agreements................................................ 38.0 -
Futures contracts...................................................... 76.0 219.0
Equities and other..................................................... 1,545.0 1,340.0
---------------- -----------------
Total.................................................................. $ 5,144.0 $ 5,405.0
================ =================
</TABLE>
The trading revenues from option writing activity (net of related
interest expense) were approximately $79.2 million, $84.9 million and
$71.2 million for 1998, 1997 and 1996, 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 $304.3 million and $223.3 million for 1998 and
1997, respectively. The fair value of options was approximately $397.1
million and $196.4 million at December 31, 1998 and 1997, 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.
The following is a summary of the values of these contracts at December
31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
------------------------------------ ------------------------------------
Purchases Sales Purchases Sales
----------------- ----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C> <C>
Forward Contracts:
Notional (Contract) Value..... $ 41,254.0 $ 39,767.0 $ 18,366.0 $ 27,028.0
================= ================= ================ =================
Futures Contracts and
Options on Futures
Contracts:
(Market Value)................ $ 1,184.0 $ 1,607.0 $ 988.0 $ 2,767.0
================= ================= ================ =================
</TABLE>
F-39
<PAGE>
The following is a summary of the values of these contracts included in
the consolidated financial statements at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1998 1997
---------------- -----------------
(In Millions)
<S> <C> <C>
Forward Contracts:
Average fair values included in liabilities during the year.......... $ 2.0 $ 2.0
Unrealized gains included in total assets at end of year............. 263.0 56.0
Unrealized losses included in total liabilities at end of year....... 269.0 50.0
Futures Contracts:
Average fair values included in assets (liabilities) during
the year........................................................... $ (23.0) $ 1.0
Unrealized gains included in total assets at end of year............. 4.0 -
Unrealized losses included in total liabilities at end of year....... 1.0 2.0
</TABLE>
Net trading gains (losses) on forward contracts were $7.0 million,
$(5.1) million and $39.0 million and net trading gains (losses) on
futures contracts were $(86.0) million, $(24.0) million and $8.0 million
for 1998, 1997 and 1996, 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, 1998 and 1997, respectively, was $880.9 million and
$1,353.4 million. The average unexpired terms at December 31, 1998
ranged from 1 month to 4.3 years. At December 31, 1998, the cost of
terminating swaps in a loss position was $8.0 million. 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, 1998 of contracts purchased
and sold were $8,450.0 million and $875.0 million, respectively. The net
premium paid by Equitable Life on these contracts was $54.8 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.
To execute these transactions, DLJ purchases and sells (including "short
sales") securities, writes opt9ions, and purchases and sells forward
contracts for mortgage-backed securities and foreign currencies and
financial futures contracts. 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
F-40
<PAGE>
requirements are9not 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, 1998, DLJ has pledged securities
with a market value of approximately $2,100.0 million as collateral for
securities borrowed with a market value of approximately $2,100.0
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. These transactions 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 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.
F-41
<PAGE>
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, 1998 and 1997.
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.
Fair values for long-term debt are 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.
F-42
<PAGE>
The following table discloses carrying value and estimated fair value
for financial instruments not otherwise disclosed in Notes 3, 7 and 8:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------
1998 1997
--------------------------------- ---------------------------------
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.......... $ 2,809.9 $ 2,961.8 $ 2,611.4 $ 2,822.8
Other limited partnership interests.... 562.6 562.6 509.4 509.4
Policy loans........................... 2,086.7 2,370.7 2,422.9 2,493.9
Policyholders' account balances -
investment contracts................. 12,892.0 13,396.0 12,611.0 12,714.0
Long-term debt......................... 5,474.0 5,608.8 3,946.0 3,981.1
Closed Block Financial Instruments:
Mortgage loans on real estate.......... 1,633.4 1,703.5 1,341.6 1,420.7
Other equity investments............... 56.4 56.4 86.3 86.3
Policy loans........................... 1,641.2 1,929.7 1,700.2 1,784.2
SCNILC liability....................... 25.0 25.0 27.6 30.3
Discontinued Operations Financial
Instruments:
Mortgage loans on real estate.......... 553.9 599.9 655.5 779.9
Fixed maturities....................... 24.9 24.9 38.7 38.7
Other equity investments............... 115.1 115.1 209.3 209.3
Guaranteed interest contracts.......... 37.0 34.0 37.0 34.0
Long-term debt......................... 147.1 139.8 296.4 297.6
</TABLE>
17) 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 $142.9 million to affiliated real estate
joint ventures; and to provide equity financing to certain limited
partnerships of $287.3 million at December 31, 1998, under existing loan
or loan commitment agreements. DLJ has outstanding commitments, expiring
on March 16, 2000, to finance $150.0 million to third parties to be
secured by mortgage loans on real estate properties. At December 31,
1998, unfunded commitments outstanding under this facility amounted to
$74.0 million. In addition, DLJ enters into commitments to extend credit
to non-investment grade borrowers in connection with the origination and
syndication of senior bank debt. At December 31, 1998, unfunded senior
bank loan commitments outstanding were $589.5 million.
DLJ has commitments to invest on a side-by-side basis with merchant
banking partnerships in the amount of $718.0 million at December 31,
1998. 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.
F-43
<PAGE>
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, 1998, $657.5
million of such letters of credit were outstanding. Additionally, the
Insurance Group had $24.7 million of letters of credit outstanding at
December 31, 1998.
18) LITIGATION
Major Medical Insurance Cases
Equitable Life agreed to settle, subject to court approval, previously
disclosed cases involving lifetime guaranteed renewable major medical
insurance policies issued by Equitable Life in five 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. In certain cases plaintiffs also claimed that
Equitable Life misrepresented to policyholders that premium increases
had been approved by insurance departments, and that it determined
annual rate increases in a manner that discriminated against the
policyholders.
In December 1997, Equitable Life entered into a settlement agreement,
subject to court approval, which would result in creation of a
nationwide class consisting of all persons holding, and paying premiums
on, the policies at any time since January 1, 1988 and the dismissal
with prejudice of the pending actions and the resolution of all similar
claims on a nationwide basis. Under the terms of the settlement, which
involves approximately 127,000 former and current policyholders,
Equitable Life would pay $14.2 million in exchange for release of all
claims and will provide future relief to certain current policyholders
by restricting future premium increases, estimated to have a present
value of $23.3 million. This estimate is based upon assumptions about
future events that cannot be predicted with certainty and accordingly
the actual value of the future relief may vary. In October 1998, the
court entered a judgment approving the settlement agreement and, in
November, a member of the national class filed a notice of appeal of the
judgment. In January 1999, the Court of Appeals granted Equitable Life's
motion to dismiss the appeal.
Life Insurance and Annuity Sales Cases
A number of lawsuits are pending as individual claims and purported
class actions against Equitable Life and its subsidiary insurance
companies Equitable Variable Life Insurance Company ("EVLICO," which was
merged into Equitable Life effective January 1, 1997) and The Equitable
of Colorado, Inc. ("EOC"). These actions involve, among other things,
sales of life and annuity products for varying periods from 1980 to the
present, and allege, among other things, sales practice
misrepresentation primarily involving: the number of premium payments
required; the propriety of a product as an investment vehicle; the
propriety of a product as a replacement of an existing policy; and
failure to disclose a product as life insurance. Some actions are in
state courts and others are in U.S. District Courts in varying
jurisdictions, and are in varying stages of discovery and motions for
class certification.
In general, the plaintiffs request an unspecified amount of damages,
punitive damages, enjoinment from the described practices, prohibition
against cancellation of policies for non-payment of premium or other
remedies, as well as attorneys' fees and expenses. Similar actions have
been filed against other life and health insurers and have resulted in
the award of substantial judgments, including material amounts of
punitive damages, or in substantial settlements. 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 these cases 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.
F-44
<PAGE>
Discrimination Case
Equitable Life is a defendant in an action, certified as a class action
in September 1997, in the United States District Court for the Northern
District of Alabama, Southern Division, involving alleged discrimination
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 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.
Alliance Capital
In July 1995, a class action 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 original complaint was dismissed
in 1996; on appeal, the dismissal was affirmed. In October 1996,
plaintiffs filed a motion for leave to file an amended complaint,
alleging the Fund failed to hedge against currency risk despite
representations that it would do so, the Fund did not properly disclose
that it planned to invest in mortgage-backed derivative securities and
two Fund advertisements misrepresented the risks of investing in the
Fund. In October 1998, the U.S. Court of Appeals for the Second Circuit
issued an order granting plaintiffs' motion to file an amended complaint
alleging that the Fund misrepresented its ability to hedge against
currency risk and denying plaintiffs' motion to file an amended
complaint containing the other allegations. Alliance believes that the
allegations in the amended complaint, which was filed in February 1999,
are without merit and intends to defend itself vigorously against these
claims. While the ultimate outcome of this matter cannot be determined
at this time, Alliance's management does not expect that it will have a
material adverse effect on Alliance's results of operations or financial
condition.
DLJSC
DLJSC is a defendant along with certain other parties in a class action
complaint involving the underwriting of units, consisting of notes and
warrants to purchase common shares, of Rickel Home Centers, Inc.
("Rickel"), which filed a voluntary petition for reorganization pursuant
to Chapter 11 of the Bankruptcy Code. The complaint seeks unspecified
compensatory and punitive damages from DLJSC, as an underwriter and as
an owner of 7.3% of the common stock, for alleged violation of Federal
securities laws and common law fraud for alleged misstatements and
omissions contained in the prospectus and registration statement used in
the offering of the units. DLJSC is defending itself vigorously against
all the allegations contained in the complaint. Although there can be no
assurance, DLJ's management does not believe that the ultimate outcome
of this litigation will have a material adverse effect on DLJ's
consolidated financial condition. Due to the early stage of this
litigation, based on the information currently available to it, DLJ's
management cannot predict whether or not such litigation will have a
material adverse effect on DLJ's results of operations in any particular
period.
DLJSC is a defendant in a purported class action filed in a Texas State
Court on behalf of the holders of $550 million principal amount of
subordinated redeemable discount debentures of National Gypsum
Corporation ("NGC"). The debentures were canceled in connection with a
Chapter 11 plan of reorganization for NGC consummated in July 1993. The
litigation seeks compensatory and punitive damages for DLJSC's
activities as financial advisor to NGC in the course of NGC's Chapter 11
proceedings. Trial is expected in early May 1999. DLJSC intends to
defend itself vigorously against all the allegations contained in the
complaint. Although there can be no assurance, DLJ's management does not
believe that the ultimate outcome of this litigation will have a
material adverse effect on DLJ's consolidated financial condition. Based
upon the information currently available to it, DLJ's management cannot
predict whether or not such litigation will have a material adverse
effect on DLJ's results of operations in any particular period.
F-45
<PAGE>
DLJSC is a defendant in a complaint which alleges that DLJSC and a
number of other financial institutions and several individual defendants
violated civil provisions of RICO by inducing plaintiffs to invest over
$40 million in The Securities Groups, a number of tax shelter limited
partnerships, during the years 1978 through 1982. The plaintiffs seek
recovery of the loss of their entire investment and an approximately
equivalent amount of tax-related damages. Judgment for damages under
RICO are subject to trebling. Discovery is complete. Trial has been
scheduled for May 17, 1999. DLJSC believes that it has meritorious
defenses to the complaints and will continue to contest the suits
vigorously. Although there can be no assurance, DLJ's management does
not believe that the ultimate outcome of this litigation will have a
material adverse effect on DLJ's consolidated financial condition. Based
upon the information currently available to it, DLJ's management cannot
predict whether or not such litigation will have a material adverse
effect on DLJ's results of operations in any particular period.
DLJSC is a defendant along with certain other parties in four actions
involving Mid-American Waste Systems, Inc. ("Mid-American"), which filed
a voluntary petition for reorganization pursuant to Chapter 11 of the
Bankruptcy Code in January 1997. Three actions seek rescission,
compensatory and punitive damages for DLJSC's role in underwriting notes
of Mid-American. The other action, filed by the Plan Administrator for
the bankruptcy estate of Mid-American, alleges that DLJSC is liable as
an underwriter for alleged misrepresentations and omissions in the
prospectus for the notes, and liable as financial advisor to
Mid-American for allegedly failing to advise Mid-American about its
financial condition. DLJSC believes that it has meritorious defenses to
the complaints and will continue to contest the suits vigorously.
Although there can be no assurance, DLJ's management does not believe
that the ultimate outcome of this litigation will have a material
adverse effect on DLJ's consolidated financial condition. Based upon
information currently available to it, DLJ's management cannot predict
whether or not such litigation will have a material adverse effect on
DLJ's results of operations in any particular period.
Other Matters
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.
19) 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 1999 and the succeeding four years are $212.3 million, $198.8
million, $176.6 million, $163.8 million, $155.9 million and $2,041.0
million thereafter. Minimum future sublease rental income on these
noncancelable leases for 1999 and the succeeding four years is $7.6
million, $5.6 million, $4.6 million, $2.3 million, $2.3 million and
$25.4 million thereafter.
At December 31, 1998, the minimum future rental income on noncancelable
operating leases for wholly owned investments in real estate for 1999
and the succeeding four years is $189.2 million, $177.0 million, $165.5
million, $145.4 million, $122.8 million and $644.7 million thereafter.
F-46
<PAGE>
20) OTHER OPERATING COSTS AND EXPENSES
Other operating costs and expenses consisted of the following:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ---------------- -----------------
(In Millions)
<S> <C> <C> <C>
Compensation costs................................. $ 2,502.0 $ 2,195.9 $ 1,886.6
Commissions........................................ 979.7 843.9 692.0
Short-term debt interest expense................... 1,315.1 1,080.7 667.9
Long-term debt interest expense.................... 327.4 287.1 283.6
Amortization of policy acquisition costs........... 293.5 288.1 406.0
Capitalization of policy acquisition costs......... (609.1) (508.0) (391.9)
Rent expense, net of sublease income............... 215.6 189.8 185.3
Floor, brokerage and exchange fees................. 258.6 231.4 201.3
Cursitor intangible assets writedown............... - 120.9 -
Other.............................................. 1,853.1 1,587.7 1,297.2
----------------- ---------------- -----------------
Total.............................................. $ 7,135.9 $ 6,317.5 $ 5,228.0
================= ================ =================
</TABLE>
During 1997 and 1996, The Equitable restructured certain operations in
connection with cost reduction programs and recorded pre-tax provisions
of $42.4 million and $24.4 million, respectively. The amounts paid
during 1998, associated with cost reduction programs, totaled $22.6
million. At December 31, 1998, the liabilities associated with cost
reduction programs amounted to $39.4 million. The 1997 cost reduction
program included 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. Amortization
of DAC in 1996 included a $145.0 million writeoff of DAC related to DI
contracts.
21) 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 1998, 1997 and 1996, statutory net
income (loss) totaled $384.4 million, ($351.7) million and ($351.1)
million, respectively. Statutory surplus, capital stock and Asset
Valuation Reserve ("AVR") totaled $4,728.0 million and $3,907.1 million
at December 31, 1998 and 1997, respectively. No dividends have been paid
by Equitable Life to the Holding Company to date.
At December 31, 1998, the Insurance Group, in accordance with various
government and state regulations, had $25.6 million of securities
deposited with such government or state agencies.
The differences between statutory surplus and capital stock determined
in accordance with Statutory Accounting Principles ("SAP") and total
shareholders' equity on a GAAP basis are primarily attributable to: (a)
inclusion in SAP of an AVR intended to stabilize surplus from
fluctuations in the value of the investment portfolio; (b) future policy
benefits and policyholders' account balances under SAP differ from GAAP
due to differences between actuarial assumptions and reserving
methodologies; (c) certain policy acquisition costs are expensed under
SAP but deferred under GAAP and amortized over future periods to achieve
a matching of revenues and expenses; (d) Federal income taxes are
generally accrued under SAP based upon revenues and expenses in the
Federal income tax return while under GAAP deferred taxes are provided
for timing differences between recognition of revenues and expenses for
financial reporting and income tax purposes; (e) valuation of assets
under SAP and GAAP differ due to different investment valuation and
depreciation methodologies, as well as the deferral of interest-related
realized capital gains and losses on fixed income investments; and (f)
differences in the accrual methodologies for post-employment and
retirement benefit plans.
F-47
<PAGE>
22) BUSINESS SEGMENT INFORMATION
The Equitable's operations consist of Insurance, Investment Banking and
Asset Management. The Equitable's management evaluates the performance
of each of these segments independently and allocates resources based on
current and future requirements of each segment. Management evaluates
the performance of each segment based upon operating results adjusted to
exclude the effect of unusual or non-recurring events and transactions
and certain revenue and expense categories not related to the base
operations of the particular business net of minority interest.
Information for all periods is presented on a comparable basis.
Intersegment investment advisory and other fees of approximately $61.8
million, $84.1 million and $129.2 million for 1998, 1997 and 1996,
respectively, are included in total revenues of the Asset Management
segment. These fees, excluding amounts related to discontinued
operations of $.5 million, $4.2 million and $13.3 million for 1998, 1997
and 1996, respectively, are eliminated in consolidation.
F-48
<PAGE>
The following tables reconcile each segment's revenues and operating
earnings to total revenues and earnings from continuing operations
before Federal income taxes and cumulative effect of accounting change
as reported on the consolidated statements of earnings and the segments'
assets to total assets on the consolidated balance sheets, respectively.
<TABLE>
<CAPTION>
Investment Asset
Insurance Banking Management Elimination Total
--------------- ---------------- ----------------- --------------- -----------------
(In Millions)
<S> <C> <C> <C> <C> <C>
1998
Segment revenues....... $ 4,063.6 $ 5,418.7 $ 1,328.7 $ (15.2) $ 10,795.8
Non-DLJ investment
gains (losses)....... 65.0 40.5 17.2 - 122.7
--------------- ---------------- ----------------- --------------- -----------------
Total Revenues......... $ 4,128.6 $ 5,459.2 $ 1,345.9 $ (15.2) $ 10,918.5
=============== ================ ================= =============== =================
Pre-tax operating
earnings............. $ 654.0 $ 372.9 $ 169.1 $ - $ 1,196.0
Investment gains
(losses), net of
DAC and other
charges.............. 41.1 40.1 9.5 - 90.7
Pre-tax minority
interest............. - 175.8 141.5 - 317.3
--------------- ---------------- ----------------- --------------- -----------------
Earnings from
Continuing
Operations........... $ 695.1 $ 588.8 $ 320.1 $ - $ 1,604.0
=============== ================ ================= =============== =================
Total Assets........... $ 76,109.4 $ 71,970.9 $ 11,602.5 $ (181.7) $ 159,501.1
=============== ================ ================= =============== =================
1997
Segment revenues....... $ 4,020.9 $ 4,649.5 $ 1,073.5 $ (20.0) $ 9,723.9
Non-DLJ investment
gains(losses)........ (317.2) 7.2 252.2 - (57.8)
--------------- ---------------- ----------------- --------------- -----------------
Total Revenues......... $ 3,703.7 $ 4,656.7 $ 1,325.7 $ (20.0) $ 9,666.1
=============== ================ ================= =============== =================
Pre-tax operating
earnings............. $ 469.6 $ 421.1 $ 126.3 $ - $ 1,017.0
Investment gains
(losses), net of
DAC and other
charges.............. (291.9) 6.6 249.9 - (35.4)
Non-recurring costs
and expenses......... (41.7) - (121.6) - (163.3)
Pre-tax minority
interest............. - 176.2 108.5 - 284.7
--------------- ---------------- ----------------- --------------- -----------------
Earnings from
Continuing
Operations........... $ 136.0 $ 603.9 $ 363.1 $ - $ 1,103.0
=============== ================ ================= =============== =================
Total Assets........... $ 68,225.7 $ 70,131.7 $ 13,124.2 $ (308.4) $ 151,173.2
=============== ================ ================= =============== =================
</TABLE>
F-49
<PAGE>
<TABLE>
<CAPTION>
Investment Asset
Insurance Banking Management Elimination Total
--------------- ---------------- ----------------- --------------- -----------------
(In Millions)
<S> <C> <C> <C> <C> <C>
1996
Segment revenues....... $ 3,825.1 $ 3,518.1 $ 1,017.8 $ (29.3) $ 8,331.7
Non-DLJ investment
gains(losses)........ (23.1) 2.5 21.5 - .9
--------------- ---------------- ----------------- --------------- -----------------
Total Revenues......... $ 3,802.0 $ 3,520.6 $ 1,039.3 $ (29.3) $ 8,332.6
=============== ================ ================= =============== =================
Pre-tax operating
earnings............. $ 300.7 $ 300.1 $ 127.9 $ - $ 728.7
Investment gains
(losses), net of
DAC and other
charges.............. (31.0) 2.2 17.7 - (11.1)
Reserve strengthening
and DAC writeoff..... (393.0) - - - (393.0)
Non-recurring costs
and expenses......... (22.3) - (1.1) - (23.4)
Pre-tax minority
interest............. - 131.0 83.6 - 214.6
--------------- ---------------- ----------------- --------------- -----------------
Earnings (Loss)
from Continuing
Operations........... $ (145.6) $ 433.3 $ 228.1 $ - $ 515.8
=============== ================ ================= =============== =================
</TABLE>
F-50
<PAGE>
23) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The quarterly results of operations for 1998 and 1997 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>
1998
Total Revenues...................... $ 2,943.8 $ 2,952.5 $ 2,373.6 $ 2,648.6
=============== =============== ================ =================
Earnings from Continuing
Operations before Cumulative
Effect of Accounting Change....... $ 266.1 $ 247.5 $ 139.1 $ 177.7
=============== =============== ================ =================
Net Earnings (Loss)................. $ 266.6 $ 248.8 $ 139.8 $ 177.9
=============== =============== ================ =================
Net Earnings (Loss) Applicable
to Common Shares.................. $ 266.6 $ 248.8 $ 139.8 $ 177.9
=============== =============== ================ =================
Per Common Share:
Basic:
Earnings from Continuing
Operations before
Cumulative Effect of
Accounting Change............ $ 1.20 $ 1.11 $ .63 $ .81
=============== =============== ================ =================
Net Earnings (Loss)............ $ 1.20 $ 1.12 $ .63 $ .81
=============== =============== ================ =================
Diluted:
Earnings from Continuing
Operations................... $ 1.15 $ 1.05 $ .61 $ .79
=============== =============== ================ =================
Net Earnings (Loss)....... $ 1.15 $ 1.06 $ .62 $ .79
=============== =============== ================ =================
</TABLE>
F-51
<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>
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>
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.
F-52
<PAGE>
Report of Independent Accountants on
Consolidated Financial Statement Schedules
February 8, 1999
To the Board of Directors of
The Equitable Companies Incorporated
Our audits of the consolidated financial statements referred to in our report
dated February 8, 1999 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/PricewaterhouseCoopers LLP
- -----------------------------
F-53
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1998
<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............................. $ 1,640.1 $ 1,748.6 $ 1,748.6
State, municipalities and political subdivisions....... 55.0 64.9 64.9
Foreign governments.................................... 363.3 354.2 354.2
Public utilities....................................... 1,103.0 1,187.0 1,187.0
All other corporate bonds.............................. 15,729.4 16,101.5 16,082.0
Redeemable preferred stocks............................ 268.0 263.5 263.5
---------------- ----------------- -----------------
Total fixed maturities................................. 19,158.8 19,719.7 19,700.2
---------------- ----------------- -----------------
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............ 574.2 672.1 672.1
Trading account securities............................. 13,385.6 13,195.1 13,195.1
Securities purchased under resale agreement............ 20,063.3 20,063.3 20,063.3
Mortgage loans on real estate.......................... 2,809.9 2,961.8 2,809.9
Real estate............................................ 931.5 xxx 931.5
Real estate acquired in satisfaction of debt........... 552.3 xxx 552.3
Real estate joint ventures............................. 193.1 xxx 193.1
Policy loans........................................... 2,086.7 2,370.7 2,086.7
Other limited partnership interests.................... 562.6 562.6 562.6
Other invested assets.................................. 809.6 809.6 809.6
---------------- ----------------- -----------------
Total Investments...................................... $ 61,127.6 $ 60,354.9 $ 61,576.4
================ ================= =================
</TABLE>
(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
F-54
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE II
BALANCE SHEETS (PARENT COMPANY)
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
(In Millions)
<S> <C> <C>
ASSETS
Investment in consolidated subsidiaries................................ $ 6,425.7 $ 5,613.3
Fixed maturities available for sale, at estimated fair value
(amortized costs,$446.0 and $339.5)................................ 447.6 339.5
Other invested assets.................................................. 98.2 59.7
----------------- ----------------
Total investments................................................ 6,971.5 6,012.5
Cash and cash equivalents.............................................. 36.2 20.5
Other assets........................................................... 15.5 13.5
----------------- ----------------
Total Assets........................................................... $ 7,023.2 $ 6,046.5
================= ================
LIABILITIES
Short-term and long-term debt.......................................... $ 1,140.6 $ 569.0
Accrued liabilities.................................................... 189.5 204.0
----------------- ----------------
Total liabilities................................................ 1,330.1 773.0
----------------- ----------------
SHAREHOLDERS' EQUITY
Series D convertible preferred stock................................... 598.4 514.4
Stock employee compensation trust...................................... (598.4) (514.4)
Common stock, at par value............................................. 2.2 2.2
Capital in excess of par value......................................... 3,662.1 3,627.5
Treasury stock......................................................... (247.1) -
Retained earnings...................................................... 1,926.1 1,137.4
Accumulated comprehensive income....................................... 349.8 506.4
----------------- ----------------
Total shareholders' equity....................................... 5,693.1 5,273.5
----------------- ----------------
Total Liabilities and Shareholders' Equity............................. $ 7,023.2 $ 6,046.5
================= ================
</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
11 of Notes to Consolidated Financial Statements.
F-55
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE II
STATEMENTS OF EARNINGS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ---------------
(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................ $ 842.0 $ 681.3 $ 240.4
Net investment income.................................... 43.0 32.4 30.5
Investment gains (losses), net........................... 22.8 5.1 (.9)
----------------- ----------------- -----------------
Total revenues..................................... 907.8 718.8 270.0
----------------- ----------------- -----------------
EXPENSES
Interest expense......................................... 77.2 61.9 72.7
General and administrative expenses...................... 19.2 24.6 16.4
----------------- ----------------- -----------------
Total expenses..................................... 96.4 86.5 89.1
----------------- ----------------- -----------------
Earnings from continuing operations before
Federal income taxes and cumulative effect
of accounting change................................... 811.4 632.3 180.9
Federal income tax benefit............................... 19.0 15.9 25.1
----------------- ----------------- -----------------
Earnings from continuing operations before
cumulative effect of accounting change................. 830.4 648.2 206.0
Discontinued operations, net of Federal income taxes..... 2.7 (87.2) (83.8)
Cumulative effect of accounting change, net of
Federal income taxes................................... - - (23.1)
----------------- ----------------- -----------------
Net earnings............................................. 833.1 561.0 99.1
Dividends on preferred stocks............................ - 15.6 26.7
----------------- ----------------- -----------------
Net Earnings Applicable to Common Shares................. $ 833.1 $ 545.4 $ 72.4
================= ================= =================
Per Common Share:
Basic:
Earnings from continuing operations before
cumulative effect of accounting change............. $ 3.75 $ 3.14 $ .97
Discontinued operations, net of Federal
income taxes....................................... .01 (.43) (.46)
Cumulative effect of accounting change,
net of Federal income taxes........................ - - (.12)
----------------- ----------------- -----------------
Net Earnings......................................... $ 3.76 $ 2.71 $ .39
================= ================= =================
Diluted:
Earnings from continuing operations before
cumulative effect of accounting change............. $ 3.61 $ 2.86 $ .94
Discontinued operations, net of Federal
income taxes....................................... .01 (.39) (.45)
Cumulative effect of accounting change,
net of Federal income taxes........................ - - (.12)
----------------- ----------------- -----------------
Net Earnings......................................... $ 3.62 $ 2.47 $ .37
================= ================= =================
Cash Dividend Per Common Share......................... $ .20 $ .20 $ .20
================= ================= =================
</TABLE>
F-56
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE II
STATEMENTS OF CASH FLOWS (PARENT COMPANY)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ---------------
(In Millions)
<S> <C> <C> <C>
Net earnings............................................. $ 833.1 $ 561.0 $ 99.1
Adjustments to reconcile net earnings to net
cash (used) provided by operating activities:
Equity in net earnings of subsidiaries................. (844.7) (594.1) (133.5)
Dividends from subsidiaries............................ 11.9 11.7 11.7
Investment (gains) losses, net......................... (22.8) (5.1) .9
Change in Federal income tax liability................. (16.8) (150.0) 104.4
Other.................................................. 3.7 12.6 (13.0)
----------------- ----------------- -----------------
Net cash (used) provided by operating activities......... (35.6) (163.9) 69.6
----------------- ----------------- -----------------
Cash flows from investing activities:
Maturities and repayments.............................. 160.7 99.1 79.9
Sales.................................................. 711.7 527.9 232.8
Purchases.............................................. (1,128.5) (524.2) (581.7)
Net change in short-term investments................... - 4.1 1.9
Other.................................................. (12.8) 36.6 (6.0)
----------------- ----------------- -----------------
Net cash (used) provided by investing activities......... (268.9) 143.5 (273.1)
----------------- ----------------- -----------------
Cash flows from financing activities:
Additions to long-term debt............................ 596.7 - -
Repayment of short-term debt........................... (25.0) (20.0) (15.0)
Dividends paid to shareholders......................... (44.6) (46.8) (38.2)
Proceeds from issuance of common stock................. 30.2 87.2 -
Purchase of treasury stock............................. (247.1) - -
Other.................................................. 10.0 (4.5) 4.6
----------------- ----------------- -----------------
Net cash provided (used) by financing activities......... 320.2 15.9 (48.6)
----------------- ----------------- -----------------
Change in cash and cash equivalents...................... 15.7 (4.5) (252.1)
Cash and cash equivalents, beginning of year............. 20.5 25.0 277.1
----------------- ----------------- -----------------
Cash and Cash Equivalents, End of Year................... $ 36.2 $ 20.5 $ 25.0
================= ================= =================
Supplemental cash flow information
Interest Paid.......................................... $ 65.9 $ 64.9 $ 70.8
================= ================= =================
Income Taxes Paid...................................... $ 254.3 $ 330.0 $ 147.0
================= ================= =================
</TABLE>
F-57
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
AT AND FOR THE YEAR ENDED DECEMBER 31, 1998
<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.............. $ 3,563.8 $ 20,889.7 $ 4,694.2 $ 1,644.3 $ 2,196.2 $ 2,178.2
Investment
Banking.............. - - - - 2,240.3 .3
Asset Management....... - - - - 14.9 .1
Consolidation/
Elimination.......... - - - - 47.3 -
--------------- ---------------- ----------------- --------------- --------------- ----------------
Total.................. $ 3,563.8 $ 20,889.7 $ 4,694.2 $ 1,644.3 $ 4,498.7 $ 2,178.6
=============== ================================== =============== =============== ================
</TABLE>
<TABLE>
<CAPTION>
Amortization
of Deferred (2)
Policy Other
Acquisition Operating
Segment Cost Expense
- ------------------------ ------------------ -----------------
<S> <C> <C>
Insurance.............. $ 293.3 $ 962.0
Investment
Banking.............. .2 4,869.9
Asset Management....... - 1,025.7
Consolidation/
Elimination.......... - (15.2)
----------------- -----------------
Total.................. $ 293.5 $ 6,842.4
================= =================
<FN>
(1) Net investment income is based upon specific identification of portfolios within segments.
(2) Operating expenses are principally incurred directly by a segment.
</FN>
</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.............. $ 3,236.6 $ 21,579.5 $ 4,553.8 $ 1,552.0 $ 2,232.4 $ 2,245.4
Investment
Banking.............. - - - - 1,685.1 .2
Asset Management....... - - - .1 16.9 -
Consolidation/
Elimination.......... .8 (.9) - - 56.9 -
--------------- ---------------- ----------------- --------------- --------------- ----------------
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
- ------------------------ ----------------- -----------------
<S> <C> <C>
Insurance.............. $ 287.9 $ 1,034.4
Investment
Banking.............. .2 4,052.4
Asset Management....... - 962.6
Consolidation/
Elimination.......... - (20.0)
------------------ ----------------
Total.................. $ 288.1 $ 6,029.4
================== ================
<FN>
(1) Net investment income is based upon specific identification of portfolios within segments.
(2) Operating expenses are principally incurred directly by a segment.
</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>
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............................... $ 1,471.6 $ 2,129.5 $ 2,588.5 $ 405.7 $ 953.4
Investment Banking...................... - 1,106.0 .2 .2 3,086.9
Asset Management........................ - 16.6 .1 .1 811.0
Consolidation/Elimination............... - 84.2 - - (29.3)
--------------- -------------- ------------------ ------------------ ---------------
Total................................... $ 1,471.6 $ 3,336.3 $ 2,588.8 $ 406.0 $ 4,822.0
=============== ============== ================== ================== ===============
<FN>
(1) Net investment income is based upon specific identification of portfolios within segments.
(2) Operating expenses are principally incurred directly by a segment.
</FN>
</TABLE>
F-60
<PAGE>
THE EQUITABLE COMPANIES INCORPORATED
SCHEDULE IV
REINSURANCE (A)
AT AND FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<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>
1998
Life insurance in force(B)... $ 246,910.0 $ 34,471.0 $ 47,957.0 $ 260,396.0 18.42%
================= ================ ================= ===============
Premiums:
Life insurance and
annuities.................. $ 254.6 $ 30.2 $ 122.7 $ 347.1 35.35%
Accident and health.......... 185.5 25.4 80.9 241.0 33.57%
----------------- ---------------- ----------------- --------------- ---------------
Total Premiums............... $ 440.1 $ 55.6 $ 203.6 $ 588.1 34.62%
================= ================ ================= ===============
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%
================= ================ ================= ===============
</TABLE>
(A) Includes amounts related to the discontinued group life and health business.
(B) Includes in force business related to the Closed Block.
F-61
<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 19, 1999, 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 1998 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, 1998.
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 19,
1999, 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 1998
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 19, 1999, 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 1998 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 19, 1999, 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 1998 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
E-1.
(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 30, 1999 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/Henri de Castries Chairman of the Board, Director March 30, 1999
- --------------------------------------------
Henri de Castries
/s/Michael Hegarty Vice Chairman of the Board and March 30, 1999
- --------------------------------------------
Michael Hegarty Chief Operating Officer, Director
/s/Edward D. Miller President and Chief Executive Officer, March 30, 1999
- --------------------------------------------
Edward D. Miller Director
/s/Stanley B. Tulin Executive Vice President and March 30, 1999
- --------------------------------------------
Stanley B. Tulin Chief Financial Officer
/s/Alvin H. Fenichel Senior Vice President and Controller March 30, 1999
- --------------------------------------------
Alvin H. Fenichel
/s/Claude Bebear Director March 30, 1999
- --------------------------------------------
Claude Bebear
Director March 30, 1999
- --------------------------------------------
John S. Chalsty
/s/Francoise Colloc'h Director March 30, 1999
- --------------------------------------------
Francoise Colloc'h
/s/Joseph L. Dionne Director March 30, 1999
- --------------------------------------------
Joseph L. Dionne
/s/Jean-Rene Fourtou Director March 30, 1999
- --------------------------------------------
Jean-Rene Fourtou
/s/Jacques Friedmann Director March 30, 1999
- --------------------------------------------
Jacques Friedmann
/s/Donald J. Greene Director March 30, 1999
- --------------------------------------------
Donald J. Greene
S-1
<PAGE>
<S> <C> <C>
/s/Anthony J. Hamilton Director March 30, 1999
- --------------------------------------------
Anthony J. Hamilton
/s/John T. Hartley Director March 30, 1999
- --------------------------------------------
John T. Hartley
/s/John H. F. Haskell, Jr. Director March 30, 1999
- --------------------------------------------
John H. F. Haskell, Jr.
/s/Nina Henderson Director March 30, 1999
- --------------------------------------------
Nina Henderson
/s/W. Edwin Jarmain Director March 30, 1999
- --------------------------------------------
W. Edwin Jarmain
/s/Didier Pineau-Valencienne Director March 30, 1999
- --------------------------------------------
Didier Pineau-Valencienne
/s/George J. Sella, Jr. Director March 30, 1999
- --------------------------------------------
George J. Sella, Jr.
/s/Peter J. Tobin Director March 30, 1999
- --------------------------------------------
Peter J. Tobin
/s/Dave H. Williams Director March 30, 1999
- --------------------------------------------
Dave H. Williams
</TABLE>
S-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Tag
Number Description Method of Filing Value
- ------------ -------------------------------------------- ------------------------------------------------ ----------
<S> <C> <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 and incorporated
Trustee herein by reference
4.6 Fourth Supplemental Indenture, dated Filed as Exhibit 4.18(a) to the registrant's
April 1, 1998, from The Equitable current report on Form 8-K dated
Companies Incororated to The Chase April 7, 1998 and incorporated herein
Manhattan Bank (formerly known as by reference
Chemical Bank), as Trustee, together
with forms of global Senior Note
and global Senior Indenture
E-1
<PAGE>
Tag
Number Description Method of Filing Value
- ------------ -------------------------------------------- ------------------------------------------------ ----------
4.7 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
4.8 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 and incorporated
National Association, as Trustee herein by reference
4.9 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 and incorporated
National Association, as Trustee herein by reference
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
and Tonnerre incorporated herein by reference
9(b) First Amendment dated January 22, 1997 Filed as Exhibit 9(b) to the registrant's
to the Voting Trust Agreement dated annual report on Form 10-K for the
as of May 12, 1992 year ende December 31, 1997 and
incorporated herein by reference
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 (No. 33-48115),
Life, the Holding Company and AX 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
E-2
<PAGE>
Tag
Number Description Method of Filing Value
- ------------ -------------------------------------------- ------------------------------------------------ ----------
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
10.5(a)+ Description of an Amendment to The Filed as Exhibit 10.30 to the registrant's
Equitable Companies Incorporated Form 10-Q for the quarter ended
1997 Stock Incentive Plan September 30, 1998 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
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 as Exhibit 10.10 to the registrant's
Compensation Plan, Plan B, second annual report on Form 10-K for the year
Amendment and Restatement, ended December 31, 1997 and incorporated
effective January 1, 1996 herein by reference
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 as Exhibit 10.12 to the registrant's
the Equitable Variable Deferred annual report on Form 10-K for the year
Compensation Plan for Executives ended December 31, 1997 and incorporated
herein by reference
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 as Exhibit 10.14 to the registrant's
Employees and Agents, as amended annual report on Form 10-K for the year
through August, 1996 ended December 31, 1997 and incorporated
herein by reference
E-3
<PAGE>
Tag
Number Description Method of Filing Value
- ------------ -------------------------------------------- ------------------------------------------------ ----------
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 by reference
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
incorporated herein by reference
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 (No.33-48115),
between Equitable Life and First 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 and incorporated herein by reference
1993, among Alliance, Equitable Capital
and Equitable Investment Corporation
10.20(a) The Equitable Companies Incorporated 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 as Exhibit 10.22 to the registrant's
with Messrs. Bebear and de Castries annual report on Form 10-K for the year
and Ms. Colloc'h ended December 31, 1997 and incorporated
herein by reference
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
between 1290 Associates and annual report on Form 10-K for the
Equitable Life year ended December 31, 1996 and
incorporated herein by reference
E-4
<PAGE>
Tag
Number Description Method of Filing Value
- ------------ -------------------------------------------- ------------------------------------------------ ----------
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
between 1290 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
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 year ended December 31, 1996 and
and between the IDA, Equitable Life and incorporated herein by reference
and 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 as Exhibit 10.27 to the registrant's
between Equitable Life and annual report on Form 10-K for the year
Mr. Michael Hegarty ended December 31, 1997 and incorporated
herein by reference
10.28+ The Equitable Stock Plan for Directors Filed as Exhibit 10.28 to the registrant's
annual report on Form 10-K for the year
ended December 31, 1997 and incorporated
herein by reference
10.29+ AXA Stock Option Plan Filed herewith
21 Subsidiaries of the registrant Filed herewith
24 Powers of Attorney Filed herewith
27 Financial Data Schedule Filed herewith
E-5
+ Denotes executive compensation plans and arrangements.
</TABLE>
AXA STOCK OPTION PLAN ADOPTED BY
APRIL 20, 1998 EXECUTIVE BOARD OF DIRECTORS
INTERNAL REGULATIONS
The purpose of this memo is to provide details of the following:
- - the terms and conditions under which stock options are granted and the
characteristics of those options
- - the conditions and procedures for exercising options
- - the characteristics of the shares acquired upon exercise of the options.
DEFINITION
A stock option plan is a means by which a company can grant to all or part of
its salaried workforce (or to the salaried workforce of other companies in the
same group) the opportunity to purchase shares for a certain period and at a
price fixed at the time of the grant.
FRENCH LEGAL FRAMEWORK
Stock option plans are regulated, in particular by articles 208-1 to 208-8-1 of
the French law of July 24, 1966 concerning commercial establishments and
articles 174-8 and 174-21 of the French decree of March 23, 1967.
Within the framework of this legislation, the ordinary and extraordinary meeting
of AXA-UAP (hereinafter referred to as AXA) shareholders which took place on May
12, 1997 authorized the executive board of directors to grant stock options to
the salaried workforce of those companies which are related to AXA within the
meaning of Article 208-4 of the French law of July 24, 1966.
The executive board of directors, held on April 20, 1998, crated a stock option
plan with respect to the ordinary shares of AXA ("Shares") and established the
procedures related thereto as well as the list of beneficiaries.
I. GRANTING CONDITIONS AND CHARACTERISTICS OF THE OPTIONS
1/ Characteristics of the options
The creation of the stock option plan herein described as an
irrevocable commitment of AXA to the plan's beneficiaries.
Except in the event of death as described in paragraph II.1 below, the
options may not be sold, transferred, or pledged.
Exercise of the options is at the discretion of the beneficiary.
2/ Life of the options
The options have a ten-year life starting from April 20, 1998. During
this period, the subscription price will not be modified unless the
company carries out a financial transaction likely to influence the
value of the options granted.
Conditions for exercising the options are detailed in paragraph II.
3/ Subscription price
The subscription price of the Shares is FF 629.40 per Share, which
equals 95% of the average closing price of a Share on the Paris Bourse
over the 20 trading days immediately prior to the date of grant, in the
absence of adjustments that may be made pursuant to paragraph I.4
below.
<PAGE>
4/ Adjustments to the subscription price of the Shares and the
number of Shares received upon exercise
If, during the life of the options, AXA completes one of the
transactions described in article 195, paragraphs 5 and 6, and article
196, paragraphs 1 and 3, of the French law of July 24, 1966, the
executive board of directors will adjust the price and number of Shares
with respect to those options not yet exercised, under the conditions
set forth in article 208-5 of the French law of July 24, 1966 and in
articles 174-8 and following of the French decree of March 23, 1967.
II. CONDITIONS AND PROCEDURES FOR EXERCISING THE OPTIONS
1/ Conditions for exercising the options
In order to exercise the options, on the date of exercise the
beneficiary's employment contract must be in force, or the beneficiary
must have ceased working because of early retirement, retirement, or
disability.
Departure from the AXA Group as a result of redundancy, resignation or
termination automatically cancels those options not yet exercised with
effect from the date of notification of such redundancy, resignation or
termination.
In the event of death, the heirs of a beneficiary have a period of six
months, beginning from the date of death, to exercise those options
which were exercisable at the date of death.
The exercise of options may be suspended by AXA for a maximum period of
three months in the event of transactions necessitating the exercise of
rights attached to the Shares.
In addition, in the event of a merger of AXA, the executive board of
directors will determine the consequences of such a transaction on
those options granted but not exercised, in compliance with legal
provisions.
2/ Life of the options
The beneficiaries or their successors may exercise the options granted
to them according to the following schedule:
- - 25% of options granted beginning April 20, 2000;
- - 50% of options granted beginning April 20, 2001;
- - 75% of options granted beginning April 20, 2002;
- - 100% of options granted beginning April 20, 2003.
Those options that have not been exercised by April 19, 2008 will
expire automatically.
3/ Procedures for exercising options
To exercise options, the beneficiary must send a signed copy of the
subscription bulletin (see enclosed) by registered mail with
acknowledgment of receipt to: GIE AXA, Attention of Mr. Patrick de
Botherel, 21 avenue Matignon, 75008 Paris, or to that address specified
in a later notification.
During the month following the receipt of such registered mail, AXA
BANQUE, which administers AXA's stock-option plans will send to the
beneficiary a certificate confirming registration of the shares in the
beneficiaries' name.
III. CHARACTERISTICS OF THE SHARES
Shares acquired under the stock option plan are dividend-bearing from
the first day of the fiscal year during which the options were
exercised, and are entitled to the full dividend paid out for the
fiscal year in question. From the date of their issuance, the Shares
will have the same characteristics as all other outstanding Shares,
subject to, where applicable, the date as from which they earn
dividends.
<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%
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%
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%
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 39,961,540 shares (32.02%). In the
aggregate, EQ owns 88,603,333 shares (71.0%)
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 56.75% of
the outstanding limited partnership units
issued by Alliance Capital Management L.P.
Equitable Life directly owns 4,532,576 units
(2.66%); ACMC, Inc. owns 66,943,000 units
(39.32%); and Equitable Capital Management
Corp. owns 23,600,000 units and 100,000 Class
A units, which convert into 1,537,905 units
(14.77%). 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.C. 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 32.02% 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%
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>
4
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
AMB Holdings Limited None Donaldson, Lufkin 16% South Africa Foreign Parent holding
(formerly DLJ & Jenrette, Inc. company of DLJ
Pleiade) African Merchant
Bank Limited.
AML Futures, S.A. None Donaldson, Lufkin 100% 1,000 Switzerland Foreign Inactive.
(In Dissolution) & Jenrette, Inc.
Autranet None Autranet, Inc. 100% 200 United Kingdom Foreign Inactive.
International
Limited (In
Dissolution)
Autranet, Inc. 13-2961507 Donaldson, Lufkin 100% 1,000 Delaware USA Securities
& Jenrette, Inc. Broker/Dealer.
Bond Investment 13-7070202 DLJ Capital 99% Delaware USA Holder of NYC
Partners, LLC Corporation Industrial
Development Agency
bonds re: 277 Park
Avenue.
Bond Investment 13-7070202 DLJ Investment, 1% Delaware USA Holder of NYC
Partners, LLC Inc. Industrial
Development Agency
bonds re: 277 Park
Avenue.
Brewster Property 13-3745194 DLJ Real Estate, 100% 200 New York USA Owns 58 acres of
Holding Corp. Inc. land (including a
building) in Putnam
County, NY.
Cadogan Nominees None Pershing Limited 100% 150 United Kingdom Foreign Facilitates Stock
Limited Transfer for
Pershing Limited.
(Inactive)
Calmco, Inc. 13-3860801 DLJ Mortgage 100% 1,000 Delaware USA Responsible for
Capital, Inc. collection and loss
mitigation of B and
C credit mortgage
loans.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
AMB Holdings Limited Non-Subsidiary
(formerly DLJ
Pleiade)
AML Futures, S.A. Inactive AMLSA
(In Dissolution)
Autranet Inactive AIL
International
Limited (In
Dissolution)
Autranet, Inc. General A
Purpose
Bond Investment Special BIPLLC
Partners, LLC Purpose
Bond Investment Special BIPLLC
Partners, LLC Purpose
Brewster Property Special BPHC
Holding Corp. Purpose
Cadogan Nominees Special CNL
Limited Purpose
Calmco, Inc. Special
Purpose
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
CBJC, Inc. 13-3906717 Donaldson, Lufkin 100% 1,000 Delaware USA Holds monetary
& Jenrette, Inc. judgments.
CF Realty, Inc. 13-3873229 DLJ Real Estate 100% 1,000 Delaware USA Real Estate Banking
Capital Partners, Group investment
L.P. vehicle.
CG Funding, Inc. 13-3873232 DLJ Real Estate 100% 1,000 Delaware USA Real Estate Banking
Capital Funding, Group side-by-side
Inc. investment vehicle.
Column Financial, 58-2061106 DLJ Mortgage 100% 1,000 Delaware USA Mortgage lender.
Inc. Capital, Inc.
DB Funding, Inc. 13-3998891 DLJ Bridge 100% 1,000 Delaware USA Bridge Finance
Finance, Inc. vehicle to provide
bridge loan to
Diamond Brands
Incorporated, a
leading designer,
manufacturer and
marketer of a broad
range of consumer
products.
DeLite Funding, Inc. 13-4024916 DLJ Bridge 100% 1,000 Delaware USA Bridge Finance
Finance, Inc. vehicle to provide
bridge loan to
DeCrane Aircraft
Holdings, Inc., a
manufacturer of
avionics components
and provider of
avionics systems
integration
services.
DLJ Acceptance 13-3438856 Donaldson, Lufkin 100% 1,000 Delaware USA Assembles Mortgage
Corporation & Jenrette, Inc. Collateral for CMO
Trusts.
DLJ Asset 13-3859805 Donaldson, Lufkin 100% 1,000 Delaware USA Name Saver.
Management, Inc. & Jenrette
Securities
Corporation
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
CBJC, Inc. Special
Purpose
CF Realty, Inc. Non-Subsidiary
CG Funding, Inc. Special
Purpose
Column Financial, General Purpose
Inc.
DB Funding, Inc. Special
Purpose
DeLite Funding, Inc. Special
Purpose
DLJ Acceptance General DLJAC
Corporation Purpose
DLJ Asset Special
Management, Inc. Purpose
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DLJ Australia Not available Donaldson, Lufkin 100% 1,000 Delaware USA Parent holding
Holdings, Inc. as of today & Jenrette, Inc. company of DLJ's
Australian
companies.
DLJ Bridge Finance, 13-3433876 Donaldson, Lufkin 100% 1,000 Delaware USA General Partner of
Inc. & Jenrette, Inc. Investment
Partnership
providing bridge
financing.
DLJ Capital 13-3519751 DLJ Capital 100% 1,000 Delaware USA General Partner of
Associates (VI), Corporation a Limited
Inc. Partnership called
DLJ Associates
(VI), L.P. This
Partnership is a
partner in Sprout
Capital VI, L.P.
DLJ Capital 13-3810628 DLJ Capital 100% 100 Delaware USA General Partner of
Associates VII, Corporation a limited
Inc. partnership called
DLJ Associates
VII, L.P. which is
a partner of Sprout
Capital VII, L.P.
DLJ Capital 13-3995289 DLJ Capital 100% 100 Delaware USA General Partner of
Associates VIII, Corporation a limited
Inc. partnership called
DLJ Associates
VIII, L.P. which is
a partner of Sprout
Capital VIII, L.P.
DLJ Capital 13-2656882 Donaldson, Lufkin 100% 100 Delaware USA Venture Capital
Corporation & Jenrette, Inc. Partnership
Management Company.
DLJ Capital Funding, 13-3901308 Donaldson, Lufkin 100% 1,000 Delaware USA Conducts bank and
Inc. & Jenrette, Inc. corporate loan
syndication and
trading.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
DLJ Australia Special
Holdings, Inc Purpose
DLJ Bridge Finance, General DLJBF
Inc. Purpose
DLJ Capital Special CA6
Associates (VI), Purpose
Inc.
DLJ Capital Special A7
Associates VII, Purpose
Inc.
DLJ Capital Special
Associates VIII, Purpose
Inc.
DLJ Capital General DLJCC
Corporation Purpose
DLJ Capital Funding, General DLJCF
Inc. Purpose
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DLJ Capital 13-3805378 Donaldson, Lufkin 100% 1,000 Delaware USA Holding company
Investors, Inc. & Jenrette, Inc. which owns the
companies acting as
General Partner of
Merchant Banking
Partnerships.
DLJ Capital 13-3603831 DLJ Capital 100% 1,000 Delaware USA Venture Capital
Management Corporation Partnership
Corporation Management Company.
DLJ Capital Trust I 13-7093229 Donaldson, Lufkin 100% 1,000 Delaware USA Funding vehicle for
& Jenrette, Inc. issuance of
Preferred Stock by
Donaldson, Lufkin &
Jenrette, Inc.
DLJ Cayman None Donaldson, Lufkin 100% 1 Cayman Islands Foreign Inactive
Acquisition Limited & Jenrette, Inc. corporation.
DLJ Cayman Islands 52-1879918 DLJ Capital 20% 999 Cayman Islands Foreign Securities dealer
LDC Corporation writing derivative
products on foreign
securities.
DLJ Cayman Islands 52-1879918 Donaldson, Lufkin 80% 3,996 Cayman Islands Foreign Securities dealer
LDC & Jenrette, Inc. writing derivative
products on foreign
securities.
DLJ Clearing 13-3731408 Donaldson, Lufkin 100% 1,000 Delaware USA General Partner
Corporation & Jenrette, Inc. owning 1% of
Pershing Trading
Company, L.P.,
a specialist on
regional
exchanges and
market maker.
DLJ CLO Holdings, 13-4027814 Donaldson, Lufkin 100% 1,000 Delaware USA Parent holding
Inc. & Jenrette, Inc. company of DLJ
Leveraged Loan
Corp. and Managing
member of DLJ
Leveraged Loan
Fund, LLC.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
DLJ Capital General CAPINV
Investors, Inc. Purpose
DLJ Capital General CMC
Management Purpose
Corporation
DLJ Capital Trust I Special
Purpose
DLJ Cayman Inactive
Acquisition Limited
DLJ Cayman Islands General DLJCI
LDC Purpose
DLJ Cayman Islands General DLJCI
LDC Purpose
DLJ Clearing General CLEAR
Corporation Purpose
DLJ CLO Holdings, General
Inc. Purpose
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DLJ Commercial 13-3956945 Donaldson, Lufkin 100% 1,000 Delaware USA Issues securities
Mortgage Corp. & Jenrette, Inc. to the public, such
securities which
are backed by
mortgage related
securities.
DLJ Cyprus, Inc. 13-3995290 Donaldson, Lufkin 100% 1,000 Delaware USA Name Saver
& Jenrette, Inc. (Inactive).
DLJ Diversified 13-3907706 DLJ Capital 100% 1,000 Delaware USA Managing General
Partners, Inc. Investors, Inc. Partner of DLJ
Diversified
Partners, L.P.,
a merchant banking
investment fund.
DLJ Emerging Markets 98-0151723 DLJ Capital 20% 2,000 Cayman Islands Foreign Investor in Latin
LDC Corporation American
securities.
DLJ Emerging Markets 98-0151723 Donaldson, Lufkin 80% 8,000 Cayman Islands Foreign Investor in Latin
LDC & Jenrette, Inc. American
securities.
DLJ Europe, Inc. 13-3860782 Donaldson, Lufkin 100% 1,000 Delaware USA Holding Company
& Jenrette which holds all of
Securities the Non-Voting
Corporation Class B Shares of
Donaldson, Lufkin &
Jenrette
International.
DLJ Financial 13-3957534 Donaldson, Lufkin 100% 12,000 Bermuda Foreign Securities dealer
Products Limited & Jenrette, Inc. writing derivative
(formerly DLJ products on foreign
Options securities.
International
Limited)
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
DLJ Commercial General DCMC
Mortgage Corp. Purpose
DLJ Cyprus, Inc. Inactive
DLJ Diversified General
Partners, Inc. Purpose
DLJ Emerging Markets General EM
LDC Purpose
DLJ Emerging Markets General EM
LDC Purpose
DLJ Europe, Inc. Special
Purpose
DLJ Financial General
Products Limited Purpose
(formerly DLJ
Options
International
Limited)
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DLJ First ESC, LLC 13-3790645 DLJ Employees N/A N/A Delaware USA Employee securities
company managed by
DLJ LBO Plans
Management
Corporation.
DLJ Growth 13-3695982 DLJ Capital 100% 1,000 Delaware USA General Partner
Associates (II), Inc. Corporation formed to hold the
unallocated
interests in DLJ
Growth Associates
(II), L.P.
DLJ Harbor (Boston) 13-3160683 DLJ Real Estate, 100% 1,000 Massachusetts USA General Partner
Corp. Inc. of Boston Harbor
Partners, Ltd.
DLJ Hoffman, Inc. 13-3153908 DLJ Real Estate, 100% 100 Delaware USA Holds wrap
Inc. mortgages on
Westbury Land and
on Boston Harbor.
DLJ Holdings, Inc. 13-3861189 Donaldson, Lufkin 100% 1,000 Delaware USA Name saver.
& Jenrette, Inc.
DLJ India Advisory 13-3961301 Donaldson, Lufkin 100% Delaware USA Formed to be the
Services, L.L.C. & Jenrette, Inc. DLJ India branch
office for Merchant
Banking.
DLJ International 13-3960274 DLJ International, 100% 28,845,289 United Kingdom Foreign Designated parent
Group Limited Inc. Voting Class holding company of
A Shares the DLJ UK Group.
DLJ International 13-3960274 Donaldson, Lufkin >99% 3,597,000 United Kingdom Foreign Designated parent
Group Limited & Jenrette Class B holding company of
Securities Voting Shares the DLJ UK Group.
Corporation
DLJ International 13-3960274 DLJ Europe, Inc. <1% 1 Voting United Kingdom Foreign Designated parent
Group Limited Class B holding company of
Share the DLJ UK Group.
DLJ International 13-3971622 Donaldson, Lufkin 100% 1,000 Delaware USA Formed to house
Investment Corp. & Jenrette, Inc. DLJ's investment
banking
representative
office in Moscow.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
DLJ First ESC, LLC Non-Subsidiary
DLJ Growth Special GAII
Associates (II), Inc. Purpose
DLJ Harbor (Boston) Special HBC
Corp. Purpose
DLJ Hoffman, Inc. Special HOFF
Purpose
DLJ Holdings, Inc. Special
Purpose
DLJ India Advisory Non-Subsidiary
Services, L.L.C.
DLJ International Special UKGL 1
Group Limited Purpose
DLJ International Special 2
Group Limited Purpose
DLJ International Special 3
Group Limited Purpose
DLJ International General
Investment Corp. Purpose
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DLJ International 98-0176015 Donaldson, Lufkin 100% 100 Cayman Islands Foreign Vehicle for
Services & Jenrette, Inc. internationally
mobile employees.
DLJ International, 13-3860788 Donaldson, Lufkin 100% 1,000 Delaware USA Holding Company
Inc. & Jenrette, Inc. holds all of the
Voting Class A
Shares of
Donaldson, Lufkin &
Jenrette
International
Limited.
DLJ Investment 13-3887953 DLJ Capital 100% 1,000 Delaware USA Invests in
Funding, Inc. Investors, Inc. investment
opportunities side-
by-side with DLJ
Investment
Partners, L.P.
DLJ Investment 13-3859861 Donaldson, Lufkin 100% 1,000 Delaware USA Wood, Struthers &
Management Corp. & Jenrette Winthrop Investment
Securities Adviser.
Corporation
DLJ Investment 13-3854261 DLJ Capital 100% 1,000 Delaware USA General Partner of
Partners, Inc. Investors, Inc. DLJ Investment
Partners, L.P.,
an investment
fund.
DLJ Investment, Inc. 13-3419317 Donaldson, Lufkin 100% 1,000 Delaware USA General Partner in
& Jenrette, Inc. Tenacqo bridge
partnership.
DLJ Kansas City 13-3697211 Donaldson, Lufkin 100% 1,000 Delaware USA General Partner of
Capital, Inc. & Jenrette, Inc. Kansas City DLJ/
Gateway Limited
Partnership which
purchases
Commercial
Mortgages from the
RTC.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
DLJ International Special
Services Purpose
DLJ International, Special
Inc. Purpose
DLJ Investment Special
Funding, Inc. Purpose
DLJ Investment Special
Management Corp. Purpose
DLJ Investment Special
Partners, Inc. Purpose
DLJ Investment, Inc. Special INVES
Purpose
DLJ Kansas City Special KCC
Capital, Inc. Purpose
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DLJ LBO Plans 13-3743225 DLJ Capital 100% 100 Delaware USA General Partner of
Management Investors, Inc. 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 Leveraged Loan 13-4027821 DLJ CLO Holdings, 100% 1,000 Delaware USA Formed to acquire
Corp. Inc. and manage a
portfolio side by
side with DLJ
Leveraged Load
Fund, LLC of
Permitted Currency-
denominated
Borrower
Investments
DLJ Leveraged Loan 13-4027826 DLJ CLO Holdings, 100% Not Delaware USA Formed to acquire
Fund, LLC Inc. applicable and manage a
portfolio side by
side with DLJ
Leveraged Loan
Corp. of Permitted
Currency-
denominated
Borrower
Investments
DLJ Long Term 13-3951926 Donaldson, Lufkin 100% 1 Voting Delaware USA Holds and manages
Investment & Jenrette, Inc. Class A Share the trademarks and
Corporation trade name of
Donaldson, Lufkin &
Jenrette, Inc. and
subsidiaries.
DLJ Long Term 13-3951926 Donaldson, Lufkin 80% 800 Delaware USA Holds and manages
Investment & Jenrette, Inc. Non-Voting and trademarks and
Corporation Class B trade name of
Shares Donaldson,Lufkin &
Jenrette, Inc. and
subsidiaries.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
DLJ LBO Plans General LBOPM
Management Purpose
Corporation
DLJ Leveraged Loan Special
Corp. Purpose
DLJ Leveraged Loan Special
Fund, LLC Purpose
DLJ Long Term Special 1
Investment Purpose
Corporation
DLJ Long Term Special 2
Investment Purpose
Corporation
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DLJ Long Term 13-3951926 Donaldson, Lufkin 20% 195 Delaware USA Holds and manages
Investment & Jenrette Non-Voting the trademarks and
Corporation Securities Class B trade name of
Corporation Shares Donaldson, Lufkin &
Jenrette, Inc. and
subsidiaries.
DLJ Long Term 13-3951926 Autranet, Inc. 1% 5 Non-Voting Delaware USA Holds and manages
Investment Class B the trademarks and
Corporation Shares trade name of
Donaldson, Lufkin &
Jenrette, Inc. and
subsidiaries.
DLJ MB Funding II, 13-3919500 DLJ Capital 100% 1,000 Delaware USA Invests in debt and
Inc. Investors, Inc. 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 13-3709041 DLJ Capital 100% 1,000 Delaware USA Invests in debt
Funding, Inc. Investors, Inc. and equity
securities of
business entities
subject to
leveraged
transactions
including
acquisitions,
recapitalizations,
restructurings,
workouts and other
similar situations
side-
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
DLJ Long Term Special 3
Investment Purpose
Corporation
DLJ Long Term Special 4
Investment Purpose
Corporation
DLJ MB Funding II, Special
Inc. Purpose
DLJ Merchant Banking Special MBF
Funding, Inc. Purpose
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
by-side with DLJ
Merchant Banking
Partners, L.P.
DLJ Merchant Banking 13-3906244 DLJ Capital 100% 1,000 Delaware USA Managing General
II, Inc. Investors, Inc. Partner of DLJ
Merchant Banking
Partners II, L.P.,
an investment
fund.
DLJ Merchant 13-3644198 DLJ Capital 100% 100 Delaware USA General Partner of
Banking, Inc. Investors, Inc. a number of
partnerships which
manages a leveraged
transaction fund.
DLJ Mortgage 13-3460894 Donaldson, Lufkin 100% 1,000 Delaware USA Issues securities
Acceptance Corp. & Jenrette, Inc. to the public, such
securities which
are backed by
mortgage related
securities.
DLJ Mortgage 13-3460798 Donaldson, Lufkin 100% 1,000 Delaware USA Corporation which
Capital, Inc. & Jenrette, Inc. trades in whole
loans
DLJ Offshore None DLJ Capital 100% 6,000 Netherlands Foreign Acts as a General
Management N.V. Investors, Inc. Antilles Partner of an
offshore merchant
banking investment
partnerships to
establish Cayman
Islands residency.
DLJ Phoenix First 13-3952234 DLJ Phoenix Group 99% 50,999 United Kingdom Foreign Inactive.
General Partner Limited
Limited
DLJ Phoenix First 13-3952234 DLJ Phoenix <1% 1 United Kingdom Foreign Inactive.
General Partner Securities
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
DLJ Merchant Banking General
II, Inc. Purpose
DLJ Merchant General MB
Banking, Inc. Purpose
DLJ Mortgage General MAC
Acceptance Corp. Purpose
DLJ Mortgage General MC
Capital, Inc. Purpose
DLJ Offshore Special OFFSH
Management N.V. Purpose
DLJ Phoenix First Inactive
General Partner
Limited
DLJ Phoenix First Inactive
General Partner
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Limited Investments
Limited
DLJ Phoenix Fund 13-3952239 DLJ Phoenix Group 50% 1 United Kingdom Foreign Management Pension
Trustee Limited Limited Scheme.
DLJ Phoenix Fund 13-3952239 DLJ Phoenix 50% 1 United Kingdom Foreign Management Pension
Trustee Limited Securities Scheme.
Investments
Limited
DLJ Phoenix General 13-3952247 DLJ Phoenix Group 100% 2 United Kingdom Foreign General Partner in
Partner II Limited Limited Phoenix Equity
Partners II.
DLJ Phoenix General 13-3952232 DLJ Phoenix Group 50% 1 United Kingdom Foreign General Partner in
Partner Limited Limited Phoenix Development
Capital Fund.
DLJ Phoenix General 13-3952232 DLJ Phoenix 50% 1 United Kingdom Foreign General Partner in
Partner Limited Securities Phoenix Development
Investments Capital Fund.
Limited
DLJ Phoenix Group 13-3952201 DLJ International 100% Please see United Kingdom Foreign Holding company.
Limited Group Limited appendix
DLJ Phoenix 13-3952233 DLJ Phoenix Group 100% 2 United Kingdom Foreign Inactive.
Insurance Services Limited
Limited
DLJ Phoenix Media 13-3952237 DLJ Phoenix Group 100% 2 United Kingdom Foreign Inactive.
Limited Limited
DLJ Phoenix Private 13-3952209 DLJ Phoenix Group 99% 7,499 United Kingdom Foreign Fund manager.
Equity Limited Limited
DLJ Phoenix Private 13-3952209 DLJ Phoenix 1% 1 United Kingdom Foreign Fund manager.
Equity Limited Securities
Investments
Limited
DLJ Phoenix 13-3952250 DLJ Phoenix Group 50% 1 United Kingdom Foreign Corporate Finance
Securities (Asia) Limited advisor.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
Limited
DLJ Phoenix Fund Special
Trustee Limited Purpose
DLJ Phoenix Fund Special
Trustee Limited Purpose
DLJ Phoenix General Special
Partner II Limited Purpose
DLJ Phoenix General Special
Partner Limited Purpose
DLJ Phoenix General Special
Partner Limited Purpose
DLJ Phoenix Group Special
Limited Purpose
DLJ Phoenix Inactive
Insurance Services
Limited
DLJ Phoenix Media Inactive
Limited
DLJ Phoenix Private Special
Equity Limited Purpose
DLJ Phoenix Private Special
Equity Limited Purpose
DLJ Phoenix General
Securities (Asia) Purpose
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Limited
DLJ Phoenix 13-3952250 DLJ Phoenix 50% 1 United Kingdom Foreign Corporate Finance
Securities (Asia) Securities advisor.
Limited Investments
Limited
DLJ Phoenix 13-3952215 DLJ Phoenix 50% 1 United Kingdom Foreign Inactive.
Securities Finance Securities
Limited Investments
Limited
DLJ Phoenix 13-3952215 DLJ Phoenix 50% 1 United Kingdom Foreign Inactive.
Securities Finance Securities Limited
Limited
DLJ Phoenix 13-3952218 DLJ Phoenix 100% 1,000 United Kingdom Foreign Nominee Holding
Securities Insurance Company.
Investments Limited Services Limited
DLJ Phoenix 13-3952205 DLJ Phoenix First 100% 20,000 United Kingdom Foreign Corporate finance
Securities Limited General Partner Redeemable adviser.
Limited Preference
Shares
DLJ Phoenix 13-3952205 DLJ Phoenix Group 99% 874,999 United Kingdom Foreign Corporate finance
Securities Limited Limited adviser.
DLJ Phoenix 13-3952205 DLJ Phoenix <1% 1 United Kingdom Foreign Corporate finance
Securities Limited Securities adviser.
Investments
Limited
DLJ PSH Limited 13-3952249 DLJ Phoenix Group 100% 2 United Kingdom Foreign Inactive.
Limited
DLJ Puerto Rico 13-3941625 Puerto Rico Hotel 100% 1,000 Delaware USA Holds an investment
Realty Corp. OPCO, L.P.
DLJ Real Estate 13-3811304 DLJ Capital 100% 1,000 Delaware USA Invests in real
Capital Funding, Inc. Investors, Inc. estate opportunitie
side-by-side with
DLJ Real Estate
Capital
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
Limited
DLJ Phoenix General
Securities (Asia) Purpose
Limited
DLJ Phoenix Inactive
Securities Finance
Limited
DLJ Phoenix Inactive
Securities Finance
Limited
DLJ Phoenix Special
Securities Purpose
Investments Limited
DLJ Phoenix General
Securities Limited Purpose
DLJ Phoenix General
Securities Limited Purpose
DLJ Phoenix General
Securities Limited Purpose
DLJ PSH Limited Inactive
DLJ Puerto Rico Non-Subsidiary
Realty Corp.
DLJ Real Estate Special RECF
Capital Funding, Purpose
Inc.
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Partners, L.P.
DLJ Real Estate 13-3805375 DLJ Capital 100% 1,000 Delaware USA General Partner of
Capital Partners, Investors, Inc. a fund that invests
Inc. in real estate
opportunities.
DLJ Real Estate 13-3811303 DLJ Capital 100% 1,000 Delaware USA Formed to serve as
Capital, Inc. Investors, Inc. the General Partner
of DLJ Real Estate
Capital, L.P.
DLJ Real Estate 13-3989904 DLJ Capital 100% 1,000 Delaware USA General Partner of
Exchange Capital, Investors, Inc. DLJ Real Estate
Inc. Exchange Capital,
L.P., which is the
general partner
of DLJ Real Estate
Capital Partners,
L.P.
DLJ Real Estate 13-3910356 DLJ Capital 100% 1,000 Delaware USA General Partner of
Mezzanine Capital, Investors, Inc. DLJ Real Estate
Inc. Mezzanine Capital,
L.P. which is the
general partner of
DLJ Real Estate
Mezzanine Capital
Partners, L.P.
DLJ Real Estate, Inc. 13-2658821 Donaldson, Lufkin 100% 3,000 Delaware USA Holding Company for
& Jenrette, Inc. all Real Estate
Subsidiaries.
DLJ Realty Services, 13-2791329 DLJ Real Estate, 100% 0 Delaware USA Licensed Corporate
Inc. Inc. Real Estate Broker
involved in
mortgage placement
and brokerage
activities
DLJ Romania II, Inc. 13-3998888 Donaldson, Lufkin 100% 1,000 Delaware USA Nominee Holding
& Jenrette, Inc. Company holding one
percent of the
issued
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
DLJ Real Estate Special DLJRI
Capital Partners, Purpose
Inc.
DLJ Real Estate Special REC
Capital, Inc. Purpose
DLJ Real Estate General
Exchange Capital, Purpose
Inc.
DLJ Real Estate Special
Mezzanine Capital, Purpose
Inc.
DLJ Real Estate, Inc. General DLJRE
Purpose
DLJ Realty Services, General RS
Inc. Purpose
DLJ Romania II, Inc. Special
Purpose
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
shares in DLJ
Romania, Inc.
DLJ Romania, Inc. 13-3993461 Donaldson, Lufkin 99% 999 Delaware USA Formed to act as
& Jenrette, Inc. 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 Romania, Inc. DLJ Romania II, 1% 1
Inc.
DLJ Secureco 13-3714258 DLJ Mortgage 100% 1,000 Delaware USA Holding Company.
Holdings, Inc. Capital, Inc.
DLJ Senior Debt 13-3891131 Donaldson, Lufkin 100% 100 Delaware USA Offers senior credi
Finance, Inc. & Jenrette, Inc. facilities to
corporate borrowers
DLJ Senior Officers 13-3220934 Donaldson, Lufkin 100% 100 Delaware USA General Partner of
Investment & Jenrette, Inc. DLJ Executive
Corporation Investment
Partnership.
DLJ Services, Inc. 13-3817414 Donaldson, Lufkin 100% 1,000 Delaware USA Mortgage servicing
& Jenrette, Inc. agent.
DLJ South Africa, 13-3857310 Donaldson, Lufkin 100% 1,000 Delaware USA Formed to invest in
Inc. & Jenrette, Inc. Pleiade Investors,
LLC, a South
African Investment
Banking Firm owned
by New Africa
Investment Ltd.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
DLJ Romania, Inc. Special 1
Purpose
DLJ Romania, Inc. Special 2
Purpose
DLJ Secureco Special SECHO
Holdings, Inc. Purpose
DLJ Senior Debt General DLJSDF
Finance, Inc. Purpose
DLJ Senior Officers Special SOIC
Investment Purpose
Corporation
DLJ Services, Inc. Special DLJMS
Purpose
DLJ South Africa, Special
Inc. Purpose
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
DLJ UK Holding 13-3960278 DLJ International 100% 1 United Kingdom Foreign Parent holding
Limited Group Limited company of
Donaldson, Lufkin
& Jenrette
International
along with DLJ
UK Limited.
DLJ UK Limited 13-3960277 DLJ International 100% 1 United Kingdom Foreign Parent holding
Group Limited company of
Donaldson, Lufkin
& Jenrette
International
along with
DLJ UK Holding
Limited.
DLJdirect Holdings 13-3902239 Donaldson, Lufkin 100% 1,000 Delaware USA Holding Company for
Inc. & Jenrette DLJdirect
Securities subsidiaries.
Corporation
DLJdirect Inc. 13-3902248 DLJdirect 100% 1,000 Delaware USA Broker/Dealer for
Holdings Inc. DLJdirect clients.
DLJIS Holdings None Donaldson, Lufkin 100% not United Kingdom Foreign Parent Holding
Limited & Jenrette available as Company of
International of today Donaldson, Lufkin &
Jenrette
International
Securities.
DLJIS Limited None Donaldson, Lufkin 100% not United Kingdom Foreign Nominee Holding
& Jenrette available as Company of DLJ
International of today International
Securities.
DLJMB Mauritius 98-0172641 Please see 100% Please see Mauritius Foreign Investment vehicle
Investment Company appendix appendix for Merchant
Banking Group.
Donaldson Funding 13-3810631 DLJ Bridge 100% 1,000 Delaware USA Formed for future
Corporation Finance, Inc. bridge financing.
Donaldson Leasing 13-3692113 Donaldson, Lufkin 100% 1,000 Delaware USA Holds certain fixed
Corp. & Jenrette, Inc. assets of various
DLJ business
groups, said
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
DLJ UK Holding Special UKHL
Limited Purpose
DLJ UK Limited Inactive UKL
DLJdirect Holdings General Orlando
Inc. Purpose
DLJdirect Inc. General
Purpose
DLJIS Holdings Special
Limited Purpose
DLJIS Limited Special
Purpose
DLJMB Mauritius Special MBMS
Investment Company Purpose
Donaldson Funding Special DFC
Corporation Purpose
Donaldson Leasing Special DLC
Corp. Purpose
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
assets are then
leased back to the
groups.
Donaldson Lufkin & None Donaldson, Lufkin 99% 40,000,000 Hong Kong Foreign International
Jenrette Asia Limited & Jenrette, Inc. Dealer.
Donaldson Lufkin & None Vincent DeGiaimo <1% 1 Hong Kong Foreign International
Jenrette Asia Limited Dealer.
Donaldson, Lufkin Not available Donaldson, Lufkin >99% 49,000,000 Hong Kong Foreign Formed to act as
Jenrette Asia as of today & Jenrette, Inc. member of the Hong
Securities Limited Kong Stock
Exchange.
Donaldson, Lufkin Not available PTT Holding Co., <1% 1 Hong Kong Foreign
Jenrette Asia as of today Inc.
Securities Limited
Donaldson, Lufkin & 13-3941845 DLJ Capital 20% 100,000 Brazil Foreign Represents
Jenrette (Brasil) Corporation Donaldson, Lufkin &
Ltda. Jenrette, Inc. and
its affiliates in
Brazil.
Donaldson, Lufkin & 13-3941845 Donaldson, Lufkin 80% 400,000 Brazil Foreign Represents
Jenrette (Brasil) & Jenrette, Inc. Donaldson, Lufkin &
Ltda. Jenrette, Inc. and
its affiliates in
Brazil.
Donaldson, Lufkin & 13-3881820 DLJ UK Holding 100% 5,896,977 United Kingdom Foreign International
Jenrette Limited Voting Class Broker/Dealer.
International B Shares
Donaldson, Lufkin & 13-3881820 DLJ UK Holding >99% 284,546,754 United Kingdom Foreign International
Jenrette Limited Voting Class Broker/Dealer.
International A Shares
Donaldson, Lufkin & 13-3881820 DLJ UK Limited <1% 1 Voting United Kingdom Foreign International
Jenrette Class A Share Broker/Dealer.
International
Donaldson, Lufkin & 13-2741729 Donaldson, Lufkin 100% 3,000 Delaware USA Securities
Jenrette Securities & Jenrette, Inc. Broker/Dealer.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
Donaldson Lufkin & General ASIA
Jenrette Asia Limited Purpose
Donaldson Lufkin & General ASIA
Jenrette Asia Limited Purpose
Donaldson, Lufkin General 1
Jenrette Asia Purpose
Securities Limited
Donaldson, Lufkin 2
Jenrette Asia
Securities Limited
Donaldson, Lufkin & General DLJBRASIL
Jenrette (Brasil) Purpose
Ltda.
Donaldson, Lufkin & General DLJBRASIL
Jenrette (Brasil) Purpose
Ltda.
Donaldson, Lufkin & General 3
Jenrette Purpose
International
Donaldson, Lufkin & General UKLTD 1
Jenrette Purpose
International
Donaldson, Lufkin & General 2
Jenrette Purpose
International
Donaldson, Lufkin & General
Jenrette Securities Purpose
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
Corporation
<S> <C> <C> <C> <C> <C> <C> <C>
Donaldson, Lufkin & None DLJIS Holdings 99% not United Kingdom Foreign U.K. Broker-Dealer.
Jenrette Securities Limited available as
International of today
Donaldson, Lufkin & None DLJIS Limited 1% not United Kingdom Foreign U.K. Broker-Dealer.
Jenrette Securities available as
International of today
EF Investors, Inc. Not Available DLJ Real Estate 100% 1,000 Delaware USA
as of Today Exchange Capital
Partners, L.P.
Equine Technology 13-3246841 Donaldson, Lufkin 100% 1,000 Delaware USA Limited Partner in
and Analysis, Inc. & Jenrette, Inc. horse breeding
partnership.
Fibers Funding, Inc. 13-4008083 DLJ Bridge 100% 1,000 Delaware USA Bridge Finance
Finance, Inc. vehicle to provide
bridge loan to
Trevira B.V., a
specialty polyester
textile manufacturer
in Western Europe.
First Overlap Limited None DLJ Phoenix Group 100% United Kingdom Foreign Secretary and 50%
Limited (through shareholder of
Trust) Phoenix Guernsey
(GP) Limited.
Gateway Management, 13-3732486 DLJ Secureco 100% 1,000 Delaware USA General Partner of
Inc. Holdings, Inc. Gateway Management
Associates which is
a real estate
partnership.
Genesis Funding, Inc. 13-4017395 DLJ Bridge 100% 1,000 Delaware USA Bridge Finance
Finance, Inc. vehicle to provide
bridge loan to
Telewest
Communications PLC,
a major provider of
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
Corporation
Donaldson, Lufkin & General
Jenrette Securities Purpose
International
Donaldson, Lufkin & General
Jenrette Securities Purpose
International
EF Investors, Inc. Special
Purpose
Equine Technology Special
and Analysis, Inc. Purpose
Fibers Funding, Inc. Special
Purpose
First Overlap Limited Inactive
Gateway Management, Special ETA
Inc. Purpose
Genesis Funding, Inc. Special
Purpose
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
telecommunications
in the United
Kingdom.
Global Retail 13-3877298 DLJ Capital 100% 1,000 Delaware USA Invest in early
Partners Funding, Investors, Inc. stage retail related
Inc. companies among
other types of
retail related
companies
side-by-side
with Global Retail
Partners, L.P.
Global Retail 13-3846674 DLJ Capital 100% 1,000 Delaware USA Registered Investmen
Partners, Inc. Investors, Inc. 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. 13-3888736 DLJ Real Estate 100% 1,000 Delaware USA Real Estate Banking
Capital Partners, Group investment
L.P. vehicle relating to
Headway Investment
Associates, Ltd.
Headway RECP, Inc. 13-3888738 DLJ Real Estate 100% 1,000 Delaware USA Real Estate Banking
Capital Partners, Group investment
L.P. vehicle relating to
Headway Investment
Associates, Ltd.
Headway SBS, Inc. 13-3888737 DLJ Real Estate 100% 1,000 Delaware USA Real Estate Banking
Capital Funding, Group side-by-side
Inc. investment vehicle
relating to Headway
Investment
Associates, Ltd.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
Global Retail Special GM
Partners Funding, Purpose
Inc.
Global Retail Special
Partners, Inc. Purpose
Headway GP, Inc. Non-Subsidiary CONCAP
Headway RECP, Inc. Non-Subsidiary
Headway SBS, Inc. Special
Purpose
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Hoboken RECP, Inc. 13-3901762 DLJ Real Estate 100% 1,000 Delaware USA Real Estate Banking
Capital Partners, Group investment
L.P. vehicle relating to
Hoboken investment.
Hoboken SBS, Inc. 13-3901763 DLJ Real Estate 100% 1,000 Delaware USA Real Estate Banking
Capital Funding, Group side-by-side
Inc. investment vehicle
relating to Hoboken
investment.
iNautix 13-3902260 DLJdirect 100% 1,000 Delaware USA Provider of
Technologies, Inc. Holdings Inc. technology and
consulting services.
July Acquisitions, 13-3902416 Donaldson, Lufkin 100% 1,000 Delaware USA Acquires judgments
Inc. & Jenrette, Inc. against properties.
Laminates Funding, 13-3992621 DLJ Bridge 100% 1,000 Delaware USA Vehicle for funding
Inc. Finance, Inc. 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
in the world.
LGS Holdings Limited 13-3979449 Donaldson, Lufkin 100% not United Kingdom Foreign Parent holding
& Jenrette available as company of London
International of today Global Securities.
LGS UK Limited None Donaldson, Lufkin 100% not United Kingdom Foreign Nominee Holding
& Jenrette available as Company of London
International of today Global Securities.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
Hoboken RECP, Inc. Non-Subsidiary HSBS
Hoboken SBS, Inc. Special
Purpose
iNautix General
Technologies, Inc. Purpose
July Acquisitions, Special
Inc. Purpose
Laminates Funding, Special
Inc. Purpose
LGS Holdings Limited Special
Purpose
LGS UK Limited Special
Purpose
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
London Global 13-3979451 LGS Holdings 99% 60,000,000 United Kingdom Foreign Securities lender.
Securities Limited Ordinary
Shares/ 1,
000 A
Ordinary
Shares
London Global 13-3979451 LGS UK Limited 1% 1 Ordinary United Kingdom Foreign Securities lender.
Securities Share
MED Funding, Inc. 13-3981509 DLJ Bridge 100% 1,000 Delaware USA Vehicle to provide
Finance, Inc. bridge financing to
Medaphis
Corporation, a
leading provider of
business management
services, systems
integration services
and medical
software, primarily
to the healthcare
provider market.
NeTpower Funding, 11-3372870 DLJ Bridge 100% 1,000 Delaware USA Provide bridge
Inc. Finance, Inc. funding to NeTpower,
Inc., a manufacturer
of computer
workstations.
New Energy Funding, Not Available DLJ Bridge 100% 1,000 Delaware USA Bridge Finance
Inc. as of today. Finance, Inc. vehicle to provide
bridge loan to New
Energy Ventures,
L.L.C., a leading
national energy
service provider.
Nextera Funding, Inc. 13-4024925 DLJ Bridge 100% 1,000 Delaware USA Vehicle for bridge
Finance, Inc. loan to Nextera
Enterprises LLC, a
provider of
information
technology services.
NPM Holdings, Inc. 13-3998884 DLJ Real Estate 100% 1,000 Delaware USA Parent holding
Capital Partners, company of NPMGP,
Inc.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
London Global General
Securities Purpose
London Global General
Securities Purpose
MED Funding, Inc. Special
Purpose
NeTpower Funding, Special
Inc. Purpose
New Energy Funding, Special
Inc. Purpose
Nextera Funding, Inc.
NPM Holdings, Inc. Special
Purpose
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Inc. Inc.
NPMGP, Inc. 13-3998887 NPM Holdings, Inc. 100% 1,000 Delaware USA General Partner of
New PM Realty Group,
L.P.
Oxford Funding, Inc. 13-3982540 DLJ Bridge 100% 1,000 Delaware USA Vehicle to provide
Finance, Inc. bridge financing to
Oxford Health Plans,
Inc., a leading
health-maintenance
organization in the
Northeast.
Pershing & Co., Inc. 13-3117481 Donaldson, Lufkin 100% 1,000 Delaware USA Inactive.
& Jenrette, Inc.
Pershing ICS None Pershing Limited 100% 2 United Kingdom Foreign Inactive.
Nominees Limited
Pershing Keen None Pershing Limited 100% 2 United Kingdom Foreign Facilitates Stock
Nominees Ltd. Transfers for
Pershing Limited.
Pershing Limited None DLJ International 100% 3,597,500 United Kingdom Foreign UK Clearing Broker.
Group Limited
Pershing Nominees None Pershing Limited 100% 2 United Kingdom Foreign Facilitates Stock
Ltd. Transfers for
Pershing Limited.
Pershing Securities None Pershing Limited 100% 1,125,000 United Kingdom Foreign Executes trades on
Limited the International
Stock Exchange on
behalf of Pershing
Correspondents.
Pershing Trading 13-3769702 DLJ Clearing 1% General Delaware USA A specialist on
Company, L.P. Corporation Partner various regional
securities exchanges
and a market maker
for
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
NPMGP, Inc. General
Purpose
Oxford Funding, Inc. Special
Purpose
Pershing & Co., Inc. Special
Purpose
Pershing ICS General P&CO
Nominees Limited Purpose
Pershing Keen General ICS
Nominees Ltd. Purpose
Pershing Limited General PKN
Purpose
Pershing Nominees General PL
Ltd. Purpose
Pershing Securities General PN
Limited Purpose
Pershing Trading General PSL
Company, L.P. Purpose
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
over-the-counter
securities.
Pershing Trading 13-3769702 Donaldson, Lufkin 99% Limited Delaware USA A specialist on
Company, L.P. & Jenrette Partner various regional
Securities securities exchanges
Corporation and a market maker
for over-the-counter
securities.
Pet Food Funding, 13-4024905 DLJ Bridge 100% 1,000 Delaware USA Bridge Finance
Inc. Finance, Inc. vehicle to provide
bridge loan to Windy
Hill Pet Food
Company, a
manufacturer of pet
food products in the
U.S.
Phoenix Equity None DLJ Phoenix Group 100% 2 Ordinary United Kingdom Foreign Acts as a nominee of
Nominees Limited Limited Shares equity interest in
Phoenix Equity
Partners II-A and
Phoenix Equity
Partners II-B
together with
co-investors
in those
partnerships.
Phoenix Guernsey 13-3952253 First Overlap 50% 50 United Kingdom Foreign Inactive.
(GP) Limited Limited
Phoenix Guernsey 13-3952253 Second Overlap 50% 50 United Kingdom Foreign Inactive.
(GP) Limited Limited
Phoenix Securities 13-3952251 DLJ Phoenix Group 100% 12,000 United Kingdom Foreign Inactive.
(International) Limited
Limited
PSP Capital Funding, 13-3920284 DLJ Real Estate 100% 1,000 Delaware USA Real Estate Banking
Inc. Capital Funding, Group side-by-side
Inc. investment vehicle
relating to
Pacific-St. Paul
investment.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
Pershing Trading General PTC
Company, L.P. Purpose
Pet Food Funding, Special
Inc. Purpose
Phoenix Equity Special
Nominees Limited Purpose
Phoenix Guernsey Inactive
(GP) Limited
Phoenix Guernsey Inactive
(GP) Limited
Phoenix Securities Inactive
(International)
Limited
PSP Capital Funding, General PG
Inc. Purpose
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PSP Realty, Inc. 13-3920282 DLJ Real Estate 100% 1,000 Delaware USA Real Estate Banking
Capital Partners, Group investment
L.P. vehicle relating to
Pacific-St. Paul
investment.
PSTAR Funding, Inc. 13-3995293 DLJ Bridge 100% 1,000 Delaware USA Vehicle for funding
Finance, Inc. of bridge loan to
PRIMESTAR, Inc., the
owner and operator
of the second
largest satellite
business in the
United States,
measured by the
number of
subscribers.
PTT Holding Co., Inc. Not Available Donaldson, Lufkin 100% 1,000 Delaware USA Nominee Shareholder
as of Today & Jenrette, Inc. in Donaldson, Lufkin
& Jenrette Asia
Securities Limited..
Puerto Rico Hotel 13-3923272 DLJ Real Estate 100% 1,000 Delaware USA Real Estate Banking
HOLDCO Corp. Capital Partners, Group investment
L.P. vehicle relating to
Puerto Rico Hotel
investment.
Puerto Rico Hotel 13-3923269 DLJ Real Estate 100% 1,000 Delaware USA Real Estate Banking
OPCO Corp. Capital Partners, Group investment
L.P. vehicle relating to
Puerto Rico Hotel
investment.
Puerto Rico Hotel 13-3923271 DLJ Real Estate 100% 1,000 Delaware USA Real Estate Banking
SBS Corp. Capital Funding, Group side-by-side
Inc. investment vehicle
relating to Puerto
Rico Hotel
investment.
REFG Investor Eight, 13-3904767 Donaldson, Lufkin 100% 1,000 Delaware USA Holder of mortgages
Inc. & Jenrette, Inc. and other
investments.
REFG Investor Five, 13-3904760 Donaldson, Lufkin 100% 1,000 Delaware USA Holder of mortgages
Inc. & Jenrette, Inc. and other
investments.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
PSP Realty, Inc. Non-Subsidiary
PSTAR Funding, Inc.
PTT Holding Co., Inc. Special
Purpose
Puerto Rico Hotel Non-Subsidiary
HOLDCO Corp.
Puerto Rico Hotel Non-Subsidiary
OPCO Corp.
Puerto Rico Hotel Special
SBS Corp. Purpose
REFG Investor Eight, Special
Inc. Purpose
REFG Investor Five,
Inc. Special
Purpose
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
REFG Investor Four, 13-3847759 Donaldson, Lufkin 100% 1,000 Delaware USA Holder of mortgages
Inc. & Jenrette, Inc. and other
investments.
REFG Investor One, 13-3810633 Donaldson, Lufkin 100% 1,000 Delaware USA 50% owner of REFG
Inc. & Jenrette, Inc. Investor Trust.
REFG Investor Seven, 13-3904766 Donaldson, Lufkin 100% 1,000 Delaware USA Holder of mortgages
Inc. & Jenrette, Inc. and other
investments.
REFG Investor Six, 13-3904764 Donaldson, Lufkin 100% 1,000 Delaware USA Holder of mortgages
Inc. & Jenrette, Inc. and other
investments.
REFG Investor Trust None REFG Investors 50% Delaware USA Passive investor in
One, Inc. debt securities.
REFG Investor Trust None REFG Investors 50% Delaware USA Passive investor in
Two, Inc. debt securities.
REFG Investor Two, 13-3810632 Donaldson, Lufkin 100% 1,000 Delaware USA 50% owner of REFG
Inc. & Jenrette, Inc. Investor Trust.
REFG Investors 13-3844068 Donaldson, Lufkin 100% 1,000 Delaware USA Formed to buy
Three, Inc. & Jenrette, Inc. judgment liens re:
Ginsburg.
SatMex Funding, Inc. 13-3978915 DLJ Bridge 100% 1,000 Delaware USA Vehicle to provide
Finance, Inc. bridge financing to
Satellite
Mexicanos, a Mexican
government owned
satellite services
company.
SBL Funding, Inc. 11-3432174 DLJ Bridge 100% 1,000 Delaware USA Vehicle to provide
Finance, Inc. bridge loan to SUN
Brewing Limited, the
largest brewery
group in Russia.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
REFG Investor Four, Special REFG5
Inc. Purpose
REFG Investor One, Special
Inc. Purpose
REFG Investor Seven, Special REFG1
Inc. Purpose
REFG Investor Six, Special
Inc. Purpose
REFG Investor Trust Special
Purpose
REFG Investor Trust Special REFGT
Purpose
REFG Investor Two, Special
Inc. Purpose
REFG Investors Special REFG2
Three, Inc. Purpose
SatMex Funding, Inc. Special
Purpose
SBL Funding, Inc. Special
Purpose
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Scratch & Sniff 13-3981092 DLJ Bridge 100% 1,000 Delaware USA Vehicle to provide
Funding, Inc. Finance, Inc. 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.
Seaport General 13-3194809 DLJ Realty 100% 100 New York USA General Partner of
Corporation Services, Inc. Seaport Associates.
Second Overlap None DLJ Phoenix Group 100% United Kingdom Foreign First Director and
Limited Limited (through 50% shareholder of
Trust) Phoenix Guernsey
(GP) Limited.
Secureco Chateau, 13-3720564 DLJ Secureco 100% 500 Delaware USA General Partner of
Inc. Holdings, Inc. Merit Chateau
Investors L.P. which
owns multifamily
residential
properties or the
mortgages thereon.
Secureco Deerfield, 13-3719130 DLJ Secureco 100% 500 Delaware USA General Partner of
Inc. Holdings, Inc. Trinity Secureco
Deerfield Partners
L.P. which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco Grand Park, 13-3714735 DLJ Secureco 100% 500 Delaware USA General Partner of
Inc. Holdings, Inc. Trinity Secureco
Grand Park Partners
L.P. which owns
multifamily
residential
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
Scratch & Sniff Special
Funding, Inc. Purpose
Seaport General Special
Corporation Purpose
Second Overlap Inactive
Limited
Secureco Chateau, Special SGC
Inc. Purpose
Secureco Deerfield, Special SCHAT
Inc. Purpose
Secureco Grand Park, Special SDEER
Inc. Purpose
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
properties or the
mortgages thereon.
Secureco Greenbriar, 13-3869249 DLJ Secureco 100% 1,000 Delaware USA General Partner of
Inc. Holdings, Inc. Trinity Secureco
Greenbriar Partners,
L.P. which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco Lodge, Inc. 13-3715328 DLJ Secureco 100% 500 Delaware USA General Partner of
Holdings, Inc. Trinity Secureco
Lodge Partners L.P.
which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco Marina, Inc. 13-3715403 DLJ Secureco 100% 500 Delaware USA General Partner of
Holdings, Inc. Trinity Secureco
Marina Partners L.P.
which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco Merit 13-3720556 DLJ Secureco 100% 500 Delaware USA General Partner of
Candlewick, Inc. Holdings, Inc. Merit Candlewick
Investors L.P. which
owns multifamily
residential
properties or the
mortgages thereon.
Secureco Merit Fund 13-3720558 DLJ Secureco 100% 500 Delaware USA General Partner of
I, Inc. Holdings, Inc. Merit Fund I Limited
Partnership which
owns multifamily
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
Secureco Greenbriar, Special SGP
Inc. Purpose
Secureco Lodge, Inc. Special
Purpose
Secureco Marina, Inc. Special SLODG
Purpose
Secureco Merit Special SMAR
Candlewick, Inc. Purpose
Secureco Merit Fund Special SMCAN
I, Inc. Purpose
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
residential
properties or the
mortgages thereon.
Secureco Merit Fund 13-3720566 DLJ Secureco 100% 500 Delaware USA General Partner of
II, Inc. Holdings, Inc. Merit Fund Two
Limited Partnership
which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco Merit Fund 13-3720551 DLJ Secureco 100% 500 Delaware USA General Partner of
III, Inc. Holdings, Inc. Merit Fund III
Limited Partnership
which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco Merit Fund 13-3720561 DLJ Secureco 100% 500 Delaware USA General Partner of
IV, Inc. Holdings, Inc. Merit Fund IV
Limited Partnership
which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco Merit Fund 13-3720555 DLJ Secureco 100% 500 Delaware USA General Partner of
IX, Inc. Holdings, Inc. Merit Fund IX
Limited Partnership
which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco Merit Fund 13-3720565 DLJ Secureco 100% 500 Delaware USA General Partner of
VI, Inc. Holdings, Inc. Merit Fund VI
Limited Partnership
which owns
multifamily
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
Secureco Merit Fund Special SMF1
II, Inc. Purpose
Secureco Merit Fund Special SMF2
III, Inc. Purpose
Secureco Merit Fund Special SMF3
IV, Inc. Purpose
Secureco Merit Fund Special SMF4
IX, Inc. Purpose
Secureco Merit Fund Special SMF5
VI, Inc. Purpose
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
residential
properties or the
mortgages thereon.
Secureco Merit Fund 13-3720554 DLJ Secureco 100% 500 Delaware USA General Partner of
VIII, Inc. Holdings, Inc. Merit Fund VIII
Limited Partnership
which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco Merit 13-3720550 DLJ Secureco 100% 500 Delaware USA General Partner of
Washington Manor, Holdings, Inc. Merit Washington
Inc. Manor Investors L.P.
which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco Riverside, 13-3715362 DLJ Secureco 100% 500 Delaware USA General Partner of
Inc. Holdings, Inc. Trinity Secureco
Riverside Partners
L.P. which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco Rolling 13-3732849 DLJ Secureco 100% 1,000 Delaware USA General Partner of
Hills, Inc. Holdings, Inc. Trinity Rolling
Hills Partners L.P.
which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco Tan Crest, 13-3720553 DLJ Secureco 100% 500 Delaware USA General Partner of
Inc. Holdings, Inc. Tan Crest
Apartments, Ltd.
which owns
multifamily
properties
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
Secureco Merit Fund Special SMF7
VIII, Inc. Purpose
Secureco Merit Special SMF8
Washington Manor, Purpose
Inc.
Secureco Riverside, Special SMWM
Inc. Purpose
Secureco Rolling Special SRIV
Hills, Inc. Purpose
Secureco Tan Crest, Special SRH
Inc. Purpose
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
or the mortgages
thereon.
Secureco Westchester 13-3720557 DLJ Secureco 100% 500 Delaware USA General Partner of
Square, Inc. Holdings, Inc. Merit Westchester
Square Investors
L.P. which owns
multifamily
residential
properties or the
mortgages thereon.
Secureco 13-3719132 DLJ Secureco 100% 500 Delaware USA General Partner of
Worthington, Inc. Holdings, Inc. Trinity Secureco
Worthington Partners
L.P. which owns
multifamily
residential
properties or the
mortgages thereon.
Snoga, Inc. 13-3036391 Donaldson, Lufkin 100% 1,000 Delaware USA Acts as escrow agent
& Jenrette, Inc. for business
activities of DLJ
Bridge Finance, Inc.
TBS Funding, Inc. 13-3990901 DLJ Bridge 100% 1,000 Delaware USA Funding vehicle for
Finance, Inc. Bridge Loan to be
provided to TBS
Shipping Services
Inc., an
international
shipping company.
Trinity Group 36-3951675 Trinity Holding, 100% 100 Illinois USA Property manager for
Hearthstone, Inc. Inc. MLG Properties.
Trinity Holding, Inc. 13-3810632 DLJ Mortgage 100% 100 Delaware USA Holding Company.
Capital, Inc.
True Temper Funding, 13-4024910 DLJ Bridge 100% 1,000 Delaware USA Bridge Finance
Inc. Finance, Inc. vehicle formed to
provide a bridge
loan to True Temper
Sports, Inc., a
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
Secureco Westchester Special STC
Square, Inc. Purpose
Secureco Special SWS
Worthington, Inc. Purpose
Snoga, Inc. Special SWORT
Purpose
TBS Funding, Inc. Special
Purpose
Trinity Group Special SNOGA
Hearthstone, Inc. Purpose
Trinity Holding, Inc. Special TGH
Purpose
True Temper Funding, Special
Inc. Purpose
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
LISTING D:
DLJ SUBSIDIARIES (CONTINUED)
JURISDICTION
OWNER PERCENT SHARES HELD OF USA/ BUSINESS
SUBSIDIARY EMPLOYER ID AFFILIATE OWNERSHIP BY OWNER INCORPORATION FOREIGN ACTIVITY
---------- ----------- --------- --------- -------- ------------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
leading
manufacturer of golf
shafts in the U.S.
UK Investment Plan 13-3941938 Donaldson, Lufkin 100% 1,000 Delaware USA Holds a U.K.
1997, Inc. & Jenrette, Inc. Investment.
Winthrop Trust 13-3818656 Wood, Struthers & 100% 100 New York USA Banking trust
Company Winthrop company which offers
Management Corp. personal trust
services to
high-net-worth
individuals.
Winthrop Trust Not available Wood, Struthers & 100% Island of Foreign Off-shore structure
Company (Jersey) as of today Winthrop Jersey, formed to be of
Limited Management Channel Islands service of London
Corporation Office of ISG.
Wood, Struthers & 13-2774791 Donaldson, Lufkin 100% 1,000 Delaware USA Investment Advisor.
Winthrop Management & Jenrette
Corp. Securities
Corporation
WSW Capital, Inc. 13-3749620 Wood, Struthers & 100% 1,000 Delaware USA General Partner in
Winthrop WSW Hedge Fund L.P.
Management Corp.
<CAPTION>
SUBSIDIARY PURPOSE CT CODE SORT CODE
---------- ------- ------- ---------
<S> <C> <C> <C>
UK Investment Plan Special WHIT
1997, Inc. Purpose
Winthrop Trust General
Company Purpose
Winthrop Trust General
Company (Jersey) Purpose
Limited
Wood, Struthers & General WTC
Winthrop Management Purpose
Corp.
WSW Capital, Inc. General WSWMC
Purpose
</TABLE>
30
<PAGE>
SUBSIDIARIES OF THE PARTNERSHIP
-------------------------------
Alliance Capital Management
Corporation of Delaware
(Delaware)
ACMC, Inc.
(Delaware)
ACM Software Services Ltd.
(Delaware)
Alliance Capital Asset Management
(India) Private Ltd.
(India)
Alliance Capital Management
Australia Limited
(Australia)
Alliance Capital Management
(Asia) Ltd.
(Delaware)
Alliance Capital (Mauritius)
Private Limited
(Mauritius)
Alliance Corporate Finance
Group Incorporated
(Delaware)
Alliance Capital Management
(Brasil) Ltda.
(Brazil)
Alliance Capital Management
(India) Ltd.
(Delaware)
Alliance Capital Management
Canada, Inc.
(Canada)
<PAGE>
-2-
Alliance Capital Management
(Turkey) Ltd.
(Delaware)
Alliance Capital (Luxembourg) S.A.
(Luxembourg)
Alliance Eastern Europe Inc.
(Delaware)
Alliance Capital Global
Derivatives Corporation
(Delaware)
Alliance Barra Research
Institute, Inc.
(Delaware)
Alliance Fund Distributors, Inc.
(Delaware)
Alliance Fund Services, Inc.
(Delaware)
Alliance Capital Oceanic Corporation
(Delaware)
Alliance Capital Management
(Japan) Inc.
(Delaware)
ACM Fund Services, S.A.
(Luxembourg)
ACM Fund Services (Espana) S.L.
(Madrid)
ACSYS Software India Private Limited
(India)
Alliance Capital Limited
(UK)
<PAGE>
-3-
Alliance Capital Services Limited
(UK)
Cursitor Alliance LLC
(Delaware)
Cursitor Cecogest SA
(France)
Cursitor Courtage SARL
(France)
Cursitor-Eaton Asset
Management Company
(New York)
Cursitor Gestion SA
(France)
Cursitor Alliance Holdings Limited
(UK)
Cursitor Management Co. SA
(Luxembourg)
Alliance Asset Allocation Limited
(UK)
Dimensional Trust Management Limited
(UK)
Draycott Partners, Ltd.
(Massachusetts)
Equitable Investment Corporation
(Delaware)
Meiji-Alliance Capital Corporation
(Delaware)
New-Alliance Asset Management
(Asia) Limited
(Hong Kong)
<PAGE>
-4-
ACM New-Alliance (Luxembourg) S.A.
(Luxembourg)
Cursitor Alliance Services Limited
(UK)
East Fund Managementberatung GmbH
(Austria)
East Fund Management (Cyprus) LTD
(Cyprus)
EFM Consultanta Financiara Bucuresti SRL
(Romania)
ACM CIIC Investment Management Limited
(Cayman Islands)
Alliance Capital Management (Singapore) Ltd.
(Singapore)
Alliance Capital Investment Trust Management
Limited K.K.
(Japan)
Alliance-Odyssey Capital Management (Proprietary) Limited
(South Africa)
Alliance-Odyssey Capital Management (Namibia)(Proprietary) Limited
(Namibia)
Alliance Capital Whittingdale Limited
(UK)
ACM Investments Limited
(UK)
Whittingdale Holdings Limited
(UK)
Whittingdale Nominees Limited
(UK)
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.
IN WITNESS THEREOF, the undersigned has hereunto set his hand this
_________ day of February, 1999.
/s/Claude Bebear /s/John T. Hartley
- --------------------------- -------------------------------------------
/s/John S. Chalsty /s/John H. F. Haskell, Jr.
- --------------------------- -------------------------------------------
/s/Francoise Colloc'h /s/Michael Hegarty
- --------------------------- -------------------------------------------
/s/Henri de Castries /s/Nina Henderson
- --------------------------- -------------------------------------------
/s/Joseph L. Dionne /s/W. Edwin Jarmain
- --------------------------- -------------------------------------------
/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/Peter J. Tobin
- --------------------------- -------------------------------------------
/s/Dave H. Williams
-------------------------------------------
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 19,449,300
<DEBT-CARRYING-VALUE> 250,900
<DEBT-MARKET-VALUE> 270,400
<EQUITIES> 1,234,700
<MORTGAGE> 2,809,900
<REAL-ESTATE> 1,676,900
<TOTAL-INVEST> 61,576,400
<CASH> 2,335,400
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 3,563,800
<TOTAL-ASSETS> 159,501,100
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 4,694,200
<POLICY-HOLDER-FUNDS> 20,889,700
<NOTES-PAYABLE> 6,300,100
0
0
<COMMON> 2,200
<OTHER-SE> 5,690,900
<TOTAL-LIABILITY-AND-EQUITY> 159,501,100
1,644,300
<INVESTMENT-INCOME> 4,498,700
<INVESTMENT-GAINS> 155,800
<OTHER-INCOME> 4,619,700
<BENEFITS> 1,024,700
<UNDERWRITING-AMORTIZATION> 293,500
<UNDERWRITING-OTHER> 6,842,400
<INCOME-PRETAX> 1,604,000
<INCOME-TAX> 527,800
<INCOME-CONTINUING> 830,400
<DISCONTINUED> 2,700
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 833,100
<EPS-PRIMARY> 3.76
<EPS-DILUTED> 3.62
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
