-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fw4D5rltVNTdYK/59jo1RUMjBSbs2oiJ6CceXHGwPCsOmANGNHCLvML/NrFvgkC/ 1SjnRefW8KsVC7a50TtspQ== /in/edgar/work/0000771726-00-500026/0000771726-00-500026.txt : 20001115 0000771726-00-500026.hdr.sgml : 20001115 ACCESSION NUMBER: 0000771726-00-500026 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20001114 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AXA FINANCIAL INC CENTRAL INDEX KEY: 0000888002 STANDARD INDUSTRIAL CLASSIFICATION: [6311 ] IRS NUMBER: 133623351 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-11166 FILM NUMBER: 765150 BUSINESS ADDRESS: STREET 1: 1290 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10104 BUSINESS PHONE: 2125541234 MAIL ADDRESS: STREET 1: 1290 AVENUE OF THE AMERICAS CITY: NEW YORK STATE: NY ZIP: 10104 FORMER COMPANY: FORMER CONFORMED NAME: EQUITABLE COMPANIES INC DATE OF NAME CHANGE: 19950721 8-K 1 0001.txt AXF - SALE OF DLJ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report: November 14, 2000 Date of earliest event reported: November 3, 2000 AXA FINANCIAL, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 1-11166 13-3623351 - -------------------------------------------------------------------------------- (State or other jurisdiction of (Commission File Number) (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) (212) 554-1234 -------------------------- (Registrant's telephone number, including area code) None - -------------------------------------------------------------------------------- (Former name or address, if changed since last report) ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On November 3, 2000, AXA Financial, Inc. (the "Registrant") completed the previously announced sale of all of the outstanding shares of common stock of the series designated Donaldson, Lufkin & Jenrette, Inc.--DLJ Common Stock, par value $.10 per share (the "Shares"), of Donaldson, Lufkin & Jenrette, Inc., a Delaware corporation ("DLJ"), owned by it, to Credit Suisse Group, a corporation organized under the laws of Switzerland ("CSG"), as reported in the Registrant's Form 10-Q for the period ended September 30, 2000. The sale was completed pursuant to the Stock Purchase Agreement, dated as of August 30, 2000, among CSG, AXA, The Equitable Life Assurance Society of the United States ("ELAS"), AXA Participations Belgium ("AXA Belgium"), and the Registrant (as amended on October 6, 2000, the "Agreement"). The terms of the Agreement were determined by arm's length negotiations between CSG, AXA, which is the parent company of the Registrant, ELAS, AXA Belgium and the Registrant. According to the terms of the Agreement, the Registrant, together with ELAS, received approximately $2.3 billion in cash and approximately 25 million registered shares, nominal value CHF 20 per share, of CSG in consideration for approximately 88.6 million Shares owned by the Registrant and ELAS. The Stock Purchase Agreement, a copy of which is attached hereto as Exhibit 2.1, is incorporated by reference in this response to Item 2. An amendment to the Stock Purchase Agreement, a copy of which is attached hereto as Exhibit 2.2, is also incorporated by reference in this response to Item 2. Henri Hottinguer, a member of the Supervisory Board of AXA, is a Chairman of the Supervisory Board of Credit Suisse Hottinguer Paris, an indirect subsidiary of CSG. Credit Suisse Hottinguer Paris made two personal loans in the aggregate amount of Euro 657,000 to Denis Duverne, a director of ELAS, in December of 1999. The full amounts of the loans remain outstanding and are subject to interest at the rates of 50 basis points over LIBOR and 55 basis points over LIBOR, respectively. Other than the relationships referred to in the two immediately preceding sentences, there are no material relationships between the Registrant and CSG or any of their respective directors, officers or affiliates. Audited consolidated financial statements and financial statement schedules of the Registrant as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999, reflecting DLJ as a discontinued operation, together with the related Management's Discussion and Analysis of Financial Condition and Results of Operations and the Selected Consolidated Financial Information, are attached hereto as Exhibits 99.1, 99.2, 99.3 and 99.4, respectively. ITEM 5. OTHER EVENTS On November 3, 2000, the Registrant issued a press release announcing that it had completed the sale of the Shares. A copy of that press release is attached hereto as Exhibit 99.5. ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS (c) Exhibits 2 2.1 Stock Purchase Agreement, dated as of August 30, 2000, among CSG, AXA, ELAS, AXA Belgium and the Registrant. 2.2 Letter Amendment, dated as of October 6, 2000, to Stock Purchase Agreement, among CSG, AXA, ELAS, AXA Belgium and the Registrant. 99.1 Audited consolidated financial statements of the Registrant as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999. 99.2 Audited consolidated financial statement schedules of the Registrant. 99.3 Management's Discussion and Analysis of Financial Condition and Results of Operations. 99.4 Selected Consolidated Financial Information. 99.5 Press release, dated November 3, 2000, announcing the completion of the sale of the Shares. 3 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AXA FINANCIAL, INC. Date: November 14, 2000 By: /s/ Kevin R. Byrne --------------------------- Name: Kevin R. Byrne Title: Senior Vice President and Treasurer (Duly Authorized Officer) 4 Exhibit Index Exhibit Exhibit Number Description - ------ ----------- 2.1 Stock Purchase Agreement, dated as of August 30, 2000, among CSG, AXA, ELAS, AXA Belgium and the Registrant. 2.2 Letter Amendment, dated as of October 6, 2000, to Stock Purchase Agreement, among CSG, AXA, ELAS, AXA Belgium and the Registrant. 99.1 Audited consolidated financial statements of the Registrant as of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999. 99.2 Audited consolidated financial statement schedules of the Registrant. 99.3 Management's Discussion and Analysis of Financial Condition and Results of Operations. 99.4 Selected Consolidated Financial Information. 99.5 Press release, dated November 3, 2000, announcing the completion of the sale of the Shares. 5 EX-2.1 2 0002.txt STOCK PURCHASE AGREEMENT CONFORMED COPY ================================================================================ ================================== STOCK PURCHASE AGREEMENT ================================== AMONG CREDIT SUISSE GROUP, AXA, AXA FINANCIAL, INC., THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, AND AXA PARTICIPATIONS BELGIUM DATED AS OF AUGUST 30, 2000 ================================================================================ TABLE OF CONTENTS SECTION PAGE ARTICLE I DEFINITIONS SECTION 1.01 Definitions................................................1 ARTICLE II PURCHASE AND SALE SECTION 2.01 Purchase and Sale of the Shares............................5 SECTION 2.02 Purchase Price.............................................5 SECTION 2.03 Closing....................................................5 SECTION 2.04 Closing Deliveries by the Sellers..........................5 SECTION 2.05 Closing Deliveries by Purchaser............................5 SECTION 2.06 Additional Documents and Actions...........................6 SECTION 2.07 Anti-Dilution Adjustments..................................6 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLERS REGARDING THE SELLERS SECTION 3.01 Organization, Authority and Qualification of the Seller....6 SECTION 3.02 No Conflict................................................6 SECTION 3.03 Valid Issuance; Ownership of the Shares....................7 SECTION 3.04 Absence of Litigation......................................7 SECTION 3.05 Brokers....................................................7 SECTION 3.06 Securities Matters.........................................8 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER SECTION 4.01 Organization and Authority of Purchaser....................8 SECTION 4.02 No Conflict; Required Filings and Consents.................8 SECTION 4.03 Purchaser Shares...........................................9 SECTION 4.04 No Distribution............................................9 SECTION 4.05 Financial Ability..........................................9 SECTION 4.06 Brokers....................................................9 SECTION 4.07 No Transaction or Stamp Tax................................9 SECTION 4.08 Bank Change of Control Statutes...........................10 SECTION 4.09 Derivative Instruments....................................10 SECTION 4.10 Financial Statements......................................10 SECTION 4.11 Absence of Certain Changes or Events......................11 SECTION 4.12 Absence of Litigation.....................................11 ARTICLE V ADDITIONAL AGREEMENTS SECTION 5.01 Voting Agreement..........................................11 SECTION 5.02 No Disposition or Encumbrance of the Seller's Shares......12 SECTION 5.03 Company Board Representation..............................12 SECTION 5.04 Notification of Certain Matters...........................12 SECTION 5.05 Further Action; Reasonable Best Efforts...................12 SECTION 5.06 Public Announcements......................................13 SECTION 5.07 Purchaser Shareholders Meeting............................14 SECTION 5.08 Disposition of Purchaser Shares...........................14 SECTION 5.09 Certain Transactions......................................14 SECTION 5.10 Post-Closing Share Purchase...............................15 SECTION 5.11 1940 Act..................................................16 ARTICLE VI CONDITIONS TO CLOSING SECTION 6.01 Conditions to the Closing.................................16 SECTION 6.02 Conditions to Obligations of the Sellers..................17 SECTION 6.03 Conditions to Obligations of Purchaser....................17 ARTICLE VII TERMINATION AND WAIVER SECTION 7.01 Termination...............................................18 SECTION 7.02 Effect of Termination.....................................19 SECTION 7.03 Waiver....................................................19 ARTICLE VIII GENERAL PROVISIONS SECTION 8.01 Survival of Representations and Warranties................19 SECTION 8.02 Expenses..................................................19 SECTION 8.03 Notices...................................................19 SECTION 8.04 Headings..................................................20 SECTION 8.05 Severability..............................................20 SECTION 8.06 Entire Agreement..........................................21 SECTION 8.07 Assignment................................................21 SECTION 8.08 Parties in Interest.......................................21 SECTION 8.09 Governing Law.............................................21 SECTION 8.10 Waiver of Jury Trial......................................21 SECTION 8.11 Counterparts..............................................21 SECTION 8.12 Specific Performance......................................22 SCHEDULE A Sellers: Share Ownership and Consideration STOCK PURCHASE AGREEMENT, dated as of August 30, 2000 (this "AGREEMENT"), among CREDIT SUISSE GROUP, a Swiss AKTIENGESELLSCHAFT ("PURCHASER"), AXA, a French SOCIETE ANONYME ("AXA"), AXA FINANCIAL, INC., a Delaware corporation ("FINANCIAL"), THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, a New York corporation ("EQUITABLE"), and AXA PARTICIPATIONS BELGIUM, a Belgian corporation (together with each of AXA, Financial and Equitable, a "SELLER" and, collectively, the "SELLERS"), as stockholders of Donaldson, Lufkin & Jenrette, Inc., a Delaware corporation (the "COMPANY"). WHEREAS, each Seller is the record and beneficial owner of the number of shares of common stock, par value $0.10 per share, designated Donaldson, Lufkin & Jenrette, Inc. - DLJ common stock of the Company ("COMMON STOCK") set forth next to such Seller's name on Schedule A hereto (such Seller's "SHARES"); WHEREAS, each Seller wishes to sell to Purchaser, and Purchaser wishes to purchase from each Seller, such Seller's Shares, upon the terms and subject to the conditions set forth herein; and WHEREAS, Purchaser and Diamond Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Purchaser ("MERGER SUB"), are separately entering into an Agreement and Plan of Merger dated as of the date hereof (as amended from time to time, the "MERGER AGREEMENT") with the Company, pursuant to which Merger Sub agrees to commence a cash tender offer (as such tender offer may hereafter be amended from time to time, the "Offer") to acquire all the issued and outstanding shares of Common Stock, for $90 per share of Common Stock, and following the consummation of the Offer and the transactions contemplated by the Merger Agreement, to merge with and into the Company (the "MERGER"). NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants hereinafter set forth, Purchaser and the Sellers hereby agree as follows: ARTICLE I DEFINITIONS SECTION 1.01 DEFINITIONS. (a) For purposes of this Agreement: "ACQUISITION PROPOSAL" means (i) any proposal or offer from any person relating to any direct or indirect acquisition of (A) all or a substantial part of the assets of the Company or of any Material Subsidiary or (B) over 20% of any class of equity securities of the Company or of any of its subsidiary; (ii) any tender offer or exchange offer, as defined pursuant to the Securities Exchange Act of 1934, as amended, that, if consummated, would result in any person beneficially owning 20% or more of any class of equity securities of the Company or any subsidiary of the Company; (iii) any merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company or any Material Subsidiary, other than the transactions contemplated by the Merger Agreement; or (iv) any other transaction the consummation of which would reasonably be expected to impede, 2 interfere with, prevent or materially delay the transactions contemplated by the Merger Agreement. "BUSINESS DAY" means any day on which the principal offices of the Securities and Exchange Commission in Washington, D.C. are open to accept filings, or, in the case of determining a date when any payment is due, any day on which banks are not required or authorized to close in The City of New York or Zurich, Switzerland. "KNOWLEDGE OF PURCHASER " means the knowledge of any executive officer of Purchaser, after due inquiry. "LIEN" means any lien, mortgage, deed or trust, pledge, hypothecation, security interest, encumbrance, claim or charge of any kind, or any conditional sale agreement or other agreement to create any of the foregoing. "MATERIAL ADVERSE EFFECT" means, with respect to a person, an effect, change, event or occurrence that, individually or in the aggregate with other such effects, changes, events or occurrences, is or would reasonably be expected to be materially adverse to the financial condition, business, assets or results of operations of such person and its subsidiaries taken as a whole, other than any change, effect, event or occurrence relating to (i) the United States, European or global economy or United States, European or global securities markets in general, (ii) the Merger Agreement or the transactions contemplated thereby or the announcement thereof, (iii) changes in legal or regulatory conditions that affect in general the businesses in which such person and its subsidiaries are engaged or (iv) the financial services industry in general, and not specifically relating to such person or its subsidiaries. "MATERIAL SUBSIDIARY" shall mean each subsidiary of the Company that is material to the business, financial condition or results of operation of the Company and its subsidiaries taken as a whole. "PERSON" means an individual, corporation, partnership, limited partnership, limited liability company, syndicate, person (including, without limitation, a "person" as defined in Section 13(d)(3) of the Exchange Act), trust, association or entity or government, political subdivision, agency or instrumentality of a government. "PURCHASER SHARE" means a registered share, nominal value CHF 20 per share, of Purchaser. "PURCHASE PRICE BANK ACCOUNT" means, with respect to each Seller, a bank account to be designated by such Seller in a written notice to Purchaser at least five Business Days before the Closing. "SUBSIDIARY" or "SUBSIDIARIES" have the meanings assigned in Rule 1-02 of Regulation S-X of the Securities and Exchange Commission; PROVIDED, HOWEVER, that (x) any investment account advised or managed by such person or one of its subsidiaries or affiliates on behalf of a third party and (y) any partnership, limited liability company, or other similar investment vehicle or entity engaged in the business of making investments of which such person or one of its subsidiaries or affiliates acts as the general partner, managing member, manager, 3 investment advisor, principal underwriter or the equivalent shall not be deemed a subsidiary of such person. "TAXES" shall mean any and all taxes, levies, duties, tariffs, imposts and other similar charges of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Authority or taxing authority or arising as a result of a contractual obligation or other arrangements with respect thereto, including, without limitation: taxes or other similar charges on or with respect to income, franchise, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers' compensation, unemployment compensation or net worth; taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value-added or gains taxes; and customs duties, tariffs and similar charges. (b) the following terms have the following meaning set forth in the Section set forth below: DEFINED TERM LOCATION OF DEFINITION Action ss.3.04 Agreement Preamble AXA Preamble Bank Board Approval ss.5.09(a) Bank Holdings LLC ss.5.09(b) Cash Purchase Price ss.2.02 CBCA ss.4.08(a) Closing ss.2.03 Closing Date ss.2.03 Common Stock Recitals Company Preamble EC Merger Regulation ss.2.03 Equitable Preamble Financial Preamble Fund ss.5.11(b) 4 Governmental Authority ss.3.02(b) HSR Act ss.2.03 Irrevocable Proxy ss.5.01(a) Law ss.3.02(a) Merger Recitals Merger Agreement Recitals Merger Sub Recitals 1940 Act ss.5.11(a) Offer Recitals Purchaser Annual Reports ss.4.10(a) Purchaser Interim Reports ss.4.10(a) Purchaser Reports ss.4.10(a) Purchaser Shareholder Proposal ss.5.07 Purchaser Shareholders Meeting ss.5.07 Purchaser Preamble Requisite Vote ss.4.01 Seller Preamble Shares Recitals State Banking Affiliate ss.4.08(b) UK Bank ss.5.09(b) Winthrop ss.5.09(a) 5 PURCHASE AND SALE SECTION 2.01 PURCHASE AND SALE OF THE SHARES. Upon the terms and subject to the conditions contained in this Agreement, at the Closing, each Seller agrees to sell to Purchaser, and Purchaser agrees to purchase from each Seller, the number of Shares set forth next to such Seller's name on Schedule A hereto. SECTION 2.02 PURCHASE PRICE. The purchase price for each Seller's Shares shall consist of the amount of immediately available United States dollars (such Seller's "CASH PURCHASE PRICE") and the number of Purchaser Shares set forth next to such Seller's name on Schedule A hereto. SECTION 2.03 CLOSING. Subject to the terms and conditions of this Agreement, the sale and purchase of the Sellers' Shares contemplated by this Agreement shall take place at a closing (the "CLOSING") to be held at the offices of Niederer Kraft & Frey, Bahnhofstrasse 13, Zurich, Switzerland at 9:00 A.M. Zurich time on the Business Day following the later to occur of (i) expiration or termination of all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and satisfaction of the Council Regulation (EEC) No. 4064/89 ("EC MERGER REGULATION") and (ii) satisfaction or waiver of all other conditions to the obligations of the parties set forth in Article VI or at such other place or at such other time or on such other date as Financial and Purchaser may mutually agree upon in writing (the date on which the Closing takes place being the "CLOSING DATE"). SECTION 2.04 CLOSING DELIVERIES BY THE SELLERS. At the Closing, each Seller shall deliver or cause to be delivered to Purchaser: (a) stock certificates evidencing the Seller's Shares duly endorsed in blank, or accompanied by stock powers duly executed in blank, in form reasonably satisfactory to Purchaser and with all required stock transfer tax stamps affixed; (b) a receipt for an amount equal to such Seller's Cash Purchase Price and the number of Purchaser Shares received by such Seller; and (c) the certificates and other documents required to be delivered pursuant to Section 6.03. SECTION 2.05 CLOSING DELIVERIES BY PURCHASER. At the Closing, Purchaser shall deliver to each Seller: (a) an amount equal to such Seller's Cash Purchase Price by wire transfer in immediately available funds to such Seller's Purchase Price Bank Account; (b) a certificate representing the number of Purchaser Shares set forth next to such Seller's name on Schedule A hereto; and 6 (c) the certificates and other documents required to be delivered pursuant to Section 6.02. SECTION 2.06 ADDITIONAL DOCUMENTS AND ACTIONS. Each of the parties hereto further agrees to deliver, or cause to be delivered, all documents and take, or cause to be taken, prior to the Closing all actions reasonably necessary under applicable Law to effect the valid issuance and transfer of Purchaser Shares provided for in this Article II. SECTION 2.07 ANTI-DILUTION ADJUSTMENTS. If prior to the Closing Date, Purchaser changes (or establishes a record date for changing) the number of Purchaser Shares issued and outstanding prior to the Closing Date by way of a split, dividend, combination, recapitalization, exchange of shares or similar transaction with respect to the outstanding Purchaser Shares, the number of Purchaser Shares to be received by the Sellers under this Agreement shall be adjusted appropriately to provide to the Sellers the same economic effect as contemplated by this Agreement prior to such split, dividend, combination, recapitalization, exchange of shares or similar transaction. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE SELLERS REGARDING THE SELLERS As an inducement to Purchaser to enter into this Agreement, each Seller hereby represents and warrants to Purchaser as follows: SECTION 3.01 ORGANIZATION, AUTHORITY AND QUALIFICATION OF THE SELLER. Each of the Sellers is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation and has all necessary corporate power and authority to enter into this Agreement, to carry out its obligations hereunder and to consummate the transactions contemplated hereby. Each of the Sellers is duly licensed or qualified to do business and is in good standing in each jurisdiction in which the properties owned or leased by it or the operation of its business makes such licensing or qualification necessary, except to the extent that the failure to be so licensed or qualified would not adversely affect or materially delay the ability of any of the Sellers to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement. The execution and delivery of this Agreement by each of the Sellers, the performance by each of the Sellers of its obligations hereunder and the consummation by each of the Sellers of the transactions contemplated hereby have been duly authorized by all requisite action on the part of each such Seller. This Agreement has been duly executed and delivered by each of the Sellers, and (assuming due authorization, execution and delivery by Purchaser) this Agreement constitutes a legal, valid and binding obligation of each of the Sellers enforceable against it in accordance with its terms. SECTION 3.02 NO CONFLICT. (a) The execution and delivery of this Agreement by each of the Sellers do not, and the performance of this Agreement by each of the Sellers shall not, (i) conflict with or violate the certificate of incorporation, by-laws or equivalent organizational documents of any of the Sellers, (ii) assuming satisfaction of the requirements set forth in Section 3.02(b) below and the accuracy of Purchaser's representations and warranties set 7 forth in Section 4.08, conflict with or violate any United States or non-United States statute, law, ordinance, regulation, rule, code, executive order, injunction, judgment, decree or other order ("LAW") applicable to any of the Sellers or by which any property or asset of any of the Sellers is bound or affected or (iii) result in any breach of, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any property or asset of any of the Sellers pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation, except for any such conflicts, violations, breaches, defaults or other occurrences that would not adversely affect or materially delay the ability of any of the Sellers to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement. (b) Assuming the accuracy of Purchaser's representations and warranties set forth in Section 4.08, the execution and delivery of this Agreement by each of the Sellers do not, and the performance of this Agreement by each of the Sellers shall not, require any consent, approval, authorization or permit of, or filing with or notification to, any United States federal, state, county or local or non-United States government, governmental, regulatory or administrative authority, agency, instrumentality or commission or any court, tribunal, or judicial or arbitral body (a "GOVERNMENTAL AUTHORITY"), except (i) for applicable requirements, if any, of state takeover laws, the pre-merger notification requirements of the HSR Act and the requirements of the EC Merger Regulation and (ii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications would not adversely affect or materially delay the ability of any of the Sellers to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement. SECTION 3.03 VALID ISSUANCE; OWNERSHIP OF THE SHARES. The Shares owned by each Seller are validly issued, fully paid and nonassessable. Each Seller is the record and beneficial owner of, and has good title to, the number of Shares set forth next to such Seller's name on Schedule A hereto. Such Shares are all the equity securities of the Company owned, either of record or beneficially, by such Seller and such Seller does not have any option or other right to acquire any other securities of the Company. The Shares owned by such Seller are owned free and clear of all Liens, other than any Liens created by this Agreement. Except as provided in this Agreement, such Seller has not appointed or granted any proxy, which appointment or grant is still effective, with respect to the Shares owned by such Seller. At the Closing, such Seller shall deliver, and upon such delivery and payment of the Purchase Price therefor, Purchaser shall receive good, valid and marketable title to such Seller's Shares free and clear of any Liens, other than pursuant to this Agreement. SECTION 3.04 ABSENCE OF LITIGATION. As of the date hereof, there is no litigation, suit, claim, action, proceeding or investigation (an "ACTION") pending or, to the knowledge of the Sellers, threatened against any Seller, or any property or asset of any Seller, before any Governmental Authority that seeks to delay or prevent the consummation of the transactions contemplated by this Agreement. SECTION 3.05 BROKERS. Except for Morgan Stanley Dean Witter and Goldman, Sachs & Co., no broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this 8 Agreement based upon arrangements made by or on behalf of any Seller. The Sellers are solely responsible for the fees and expenses of Morgan Stanley Dean Witter and Goldman, Sachs & Co. SECTION 3.06 SECURITIES MATTERS. Each of the Sellers understands that the issuance of Purchaser Shares in accordance with this Agreement is intended to be exempt from the registration requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"), pursuant to Section 4(2) thereof. Each of the Sellers understands and agrees that it may not sell or dispose of any of the Purchaser Shares in the United States other than pursuant to a registered offering or in a transaction exempt from the registration requirements of the Securities Act. The Purchaser Shares are being acquired by each of the Sellers without a view to public distribution thereof, other than in accordance with applicable Law. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER As an inducement to the Sellers to enter into this Agreement, Purchaser hereby represents and warrants to the Sellers as follows: SECTION 4.01 ORGANIZATION AND AUTHORITY OF PURCHASER. Purchaser is an AKTIENGESELLSCHAFT duly organized and validly existing under the laws of Switzerland and has all necessary corporate power and authority to enter into this Agreement, to carry out its obligations hereunder and to consummate the transactions contemplated hereby (subject to obtaining the requisite approval of the Purchaser Shareholder Proposal by the affirmative vote of holders of not less than two-thirds of the Purchaser Shares voting in person or by proxy at the Purchaser Shareholders Meeting (the "REQUISITE VOTE")). The execution and delivery of this Agreement by Purchaser, the performance by Purchaser of its obligations hereunder and the consummation by Purchaser of the transactions contemplated hereby have been duly authorized by all requisite action on the part of Purchaser (subject to obtaining the Requisite Vote). This Agreement has been duly executed and delivered by Purchaser, and (assuming due authorization, execution and delivery by the Sellers) this Agreement constitutes a legal, valid and binding obligation of Purchaser enforceable against Purchaser in accordance with its terms. SECTION 4.02 NO CONFLICT; REQUIRED FILINGS AND CONSENTS. (a) The execution and delivery of this Agreement by Purchaser do not, and the performance of this Agreement by Purchaser shall not, (i) conflict with or violate the articles of association of Purchaser, (ii) assuming satisfaction of the requirements set forth in 4.02(b) below, conflict with or violate any Law applicable to Purchaser or by which any property or asset of Purchaser is bound or affected or (iii) result in any breach of, or constitute a default (or event that with notice or lapse of time or both would become a default) under, or give to others any rights of termination, amendment, acceleration or cancellation of, or result in the creation of a Lien on any property or asset of Purchaser pursuant to, any note, bond, mortgage, indenture, contract agreement, lease, license, permit, franchise or other instrument or obligation, except for any such conflicts, violations, breaches, defaults or other occurrences that would not adversely affect or materially delay the ability of Purchaser to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement. 9 (b) The execution and delivery of this Agreement by Purchaser do not, and the performance of this Agreement by Purchaser shall not, require any consent, approval, authorization or permit of, or filing with, or notification to, any Governmental Authority, except (i) for applicable requirements, if any, of state takeover laws, the HSR Act, the EC Merger Regulation, the Bank Holding Company Act of 1956, as amended, and the regulations thereunder, the banking laws of the State of New York, and the regulations thereunder, and notification to the Swiss Federal Banking Commission, (ii) for those required to be made with self-regulatory organizations and Governmental Authorities regulating brokers, dealers, investment advisors, investment companies, banks, trust companies and insurance companies and (iii) where the failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not adversely affect or materially delay the ability of Purchaser to carry out its obligations under, and to consummate the transactions contemplated by, this Agreement. SECTION 4.03 PURCHASER SHARES. (a) As of August 29, 2000, Purchaser had issued and paid up share capital of CH 5,478,244,360, consisting of 273,912,218 Purchaser Shares. In addition to the issued and paid up share capital, Purchaser has (i) authorized share capital consisting of 11,370,000 unissued Purchaser Shares and (ii) conditional share capital consisting of 18,668,170 unissued Purchaser Shares reserved for any Purchaser option or share plan or any bonds, warrants or other financing related purposes. In the aggregate, these 30,038,170 unissued Purchaser Shares represent the maximum amount of Purchaser Shares that may be issued in the future without further approval from the shareholders of Purchaser. (b) When delivered on the Closing Date, the Purchaser Shares to be so delivered to each Seller pursuant to this Agreement shall be duly authorized, validly issued, fully paid and non-assessable, and no class of Purchaser's share capital is or shall be entitled to preemptive rights with respect to such issuance. On the Closing Date, all such Purchaser Shares shall be duly listed on the Swiss Exchange. At the Closing, Purchaser shall deliver, and on such delivery each Seller shall receive, good, valid and marketable title to the Purchaser Shares delivered to such Seller free and clear of any Liens, other than pursuant to this Agreement. SECTION 4.04 NO DISTRIBUTION. Purchaser is not acquiring the Sellers' Shares with a view to, or for offer or sale in connection with, any distribution thereof. SECTION 4.05 FINANCIAL ABILITY. Purchaser has or will have at the Closing sufficient funds to permit Purchaser to consummate the transactions contemplated hereby. SECTION 4.06 BROKERS. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of Purchaser. SECTION 4.07 NO TRANSACTION OR STAMP TAX. Other than the Swiss federal stamp tax (EMISSIONSABGABE or UMSATZABGABE) which shall be borne by Purchaser, no transaction, stamp or similar taxes are payable by the Sellers in connection with the issuance or delivery of the Purchaser Shares to the Sellers as contemplated under this Agreement. 10 SECTION 4.08 BANK CHANGE OF CONTROL STATUTES. (a) Purchaser is not and does not control, directly or indirectly, an "insured depository institution" within the meaning of the Change in Bank Control Act, 12 U.S.C. ss.1817(j) (the "CBCA"). (b) Purchaser does not control, directly or indirectly, any person which is chartered or licensed under the banking laws of any State of the United States except for Credit Suisse First Boston and Credit Suisse (each such person, a "STATE BANKING AFFILIATE"). (c) As of the date hereof, Purchaser has at least one shareholder that owns more than 5% of the outstanding voting stock of Purchaser. (d) Purchaser has made an effective election as a financial holding company. Purchaser knows of no reason why it would not continue to maintain an effective election as a financial holding company, including, without limitation, any of the effects of the transactions contemplated by this Agreement. After giving effect to the transactions contemplated by this Agreement, Purchaser shall meet all relevant capital requirements of the Swiss banking authorities. SECTION 4.09 DERIVATIVE INSTRUMENTS. Except as would not have a Material Adverse Effect on Purchaser, any swap, forward, future, option or similar arrangement or agreements, whether entered into for the account of Purchaser or for the account of a customer of Purchaser or its subsidiaries, were entered into in the ordinary course of business and, in accordance with prudent business practice and applicable rules, regulations and policies of any governmental or regulatory authority or agency and with the counterparties believed to be financially responsible at the time and are legal, valid and binding obligations of Purchaser or its subsidiaries enforceable in accordance with their terms, and are in full force and effect. Except as would not have a Material Adverse Effect on Purchaser, each of Purchaser and its subsidiaries have duly performed all of its obligations thereunder to the extent that such obligations to perform have accrued, and, to the knowledge of Purchaser, there are no breaches, violations or defaults or allegations or assertions of such by any party thereunder. SECTION 4.10 FINANCIAL STATEMENTS. (a) True and complete copies of (i) the audited consolidated balance sheet of Purchaser for each of the three fiscal years ended as of December 31, 1999, December 31, 1998 and December 31, 1997, and the related audited consolidated income statement and statement of source and application of funds of Purchaser, together with all related notes thereto accompanied by the reports thereon of Purchaser's independent auditors (collectively referred to herein as the "PURCHASER ANNUAL REPORTS") have been made available by Purchaser to the Sellers, and (ii) the unaudited consolidated balance sheet of Purchaser as of June 30, 2000, and the related consolidated profit and loss account of Purchaser, together with all related notes thereto (collectively referred to herein as the "PURCHASER INTERIM REPORTS", and together with the Purchaser Annual Reports, the "PURCHASER REPORTS"), shall be made available by Purchaser to the Sellers within three Business Days from the date of this Agreement. The Purchaser Reports (i) were prepared in accordance with the books of account and other financial records of Purchaser, (ii) present fairly in all material respects the consolidated financial condition and results of operations and all statements of source and application of funds of Purchaser and its subsidiaries as of the respective dates thereof or for the respective periods covered thereby and (iii) have been prepared based on the Swiss accounting 11 rules for banks and the Swiss accounting and reporting recommendations for the insurance business of Purchaser consistently applied during the periods involved except as otherwise noted therein. (b) Except as and to the extent set forth on the consolidated balance sheet of Purchaser as at December 31, 1999, including the notes thereto, or except as otherwise contemplated by this Agreement, neither Purchaser nor any of its subsidiaries has any liability or obligation of any nature (whether accrued, absolute, contingent or otherwise), except for liabilities and obligations incurred in the ordinary course of business consistent with past practice since December 31, 1999 that would not have a Material Adverse Effect on Purchaser. SECTION 4.11 ABSENCE OF CERTAIN CHANGES OR EVENTS. Since December 31, 1999, there has not been any Material Adverse Effect on Purchaser. SECTION 4.12 ABSENCE OF LITIGATION. There is no Action pending or, to the knowledge of Purchaser, threatened against Purchaser or any of its subsidiaries, or any property or asset of Purchaser or any of its subsidiaries, before any Governmental Authority that (a) would have a Material Adverse Effect on Purchaser or (b) as of the date hereof, seeks to materially delay or prevent the consummation of the transactions contemplated by this Agreement. Neither Purchaser nor any of its subsidiaries nor any property or asset of Purchaser or any of its subsidiaries is subject to any continuing order of, consent decree, settlement agreement or similar written agreement with, or, to the knowledge of Purchaser, continuing investigation by, any Governmental Authority, or any order, writ, judgment, injunction, decree, determination or award of any Governmental Authority that would prevent or materially delay consummation of the Offer or the Merger or otherwise prevent or materially delay Purchaser or Purchaser from performing its obligations under this Agreement or would have a Material Adverse Effect on Purchaser. ARTICLE V ADDITIONAL AGREEMENTS SECTION 5.01 VOTING AGREEMENT. (a) Each Seller hereby irrevocably constitutes and appoints Purchaser and each of its officers, from and after the date hereof and until the earlier to occur of the Closing and the termination of this Agreement, as such Seller's attorney, agent and proxy (such constitution and appointment, the "IRREVOCABLE PROXY"), with full power of substitution, to vote such Seller's Shares at any meeting of the stockholders of the Company, however called, and in any action by consent of the stockholders of the Company, (i) against any action, proposal, agreement or transaction that would result in a breach of any covenant, obligation, agreement, representation or warranty of the Company under the Merger Agreement (whether or not theretofore terminated) or of the Sellers contained in this Agreement, and (ii) against any action, agreement, transaction (other than the Merger Agreement or the transactions contemplated thereby) or proposal (including any Acquisition Proposal) that could result in any of the conditions to the Company's obligations under the Merger Agreement (whether or not theretofore terminated) not being fulfilled or that is intended, or could reasonably be expected, to impede, interfere, delay, discourage or adversely affect the Merger Agreement (whether or not theretofore terminated), the Offer, the Merger or this Agreement. 12 (b) THIS PROXY AND POWER OF ATTORNEY ARE IRREVOCABLE AND COUPLED WITH AN INTEREST AND, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, SHALL BE VALID AND BINDING ON ANY PERSON TO WHOM A SELLER MAY TRANSFER ANY OF ITS SHARES IN BREACH OF THIS AGREEMENT. Each Seller hereby revokes all other proxies and powers of attorney with respect to such Seller's Shares that may have heretofore been appointed or granted, and no subsequent proxy or power of attorney shall be given or written consent executed (and if given or executed, shall not be effective) by any Seller with respect thereto. The termination of such other proxies or powers of attorney, and the granting of the Irrevocable Proxy, shall be binding upon the heirs, personal representatives, successors and assigns of such Seller. SECTION 5.02 NO DISPOSITION OR ENCUMBRANCE OF THE SELLER'S SHARES. (a) Each Seller agrees that, except as contemplated by this Agreement, such Seller shall not (i) sell, transfer, tender (including, without limitation, into the Offer), pledge, assign, contribute to the capital of any entity, hypothecate, give or otherwise dispose of, grant a proxy or power of attorney with respect to, deposit into any voting trust, enter into any voting agreement, or create or permit to exist any Liens of any nature whatsoever with respect to, any of such Seller's Shares (or agree or consent to, or offer to do, any of the foregoing), (ii) take any action that would make any representation or warranty of the Sellers herein untrue or incorrect in any material respect or have the effect of preventing or disabling such Seller from performing such Seller's obligations hereunder or (iii) directly or indirectly, initiate, solicit or encourage any person to take actions that could reasonably be expected to lead to the occurrence of any of the foregoing. (b) Each Seller shall promptly advise Purchaser of its receipt of any Acquisition Proposal and any request for information that may reasonably be expected to lead to or is otherwise related to any Acquisition Proposal, the identity of the person making such Acquisition Proposal or request for information, and the terms and conditions of such Acquisition Proposal. SECTION 5.03 COMPANY BOARD REPRESENTATION. Promptly upon the Closing, the Sellers shall cause the directors nominated by the Sellers or who are otherwise affiliated with the Sellers after the Closing to resign from the Board of Directors of the Company and the boards of directors of the Company's subsidiaries. SECTION 5.04 NOTIFICATION OF CERTAIN MATTERS. The Sellers shall give prompt notice to Purchaser, and Purchaser shall give prompt notice to the Sellers, of (a) the occurrence, or non-occurrence, of any event the occurrence, or non-occurrence, of which reasonably could be expected to cause any representation or warranty contained in this Agreement to be untrue or inaccurate in any material respect and (b) any failure of any Seller or Purchaser, as the case may be, to comply with or satisfy any covenant or agreement to be complied with or satisfied by it hereunder; PROVIDED, however, that the delivery of any notice pursuant to this Section 5.04 shall not limit or otherwise affect the remedies available hereunder to the party receiving such notice. SECTION 5.05 FURTHER ACTION; REASONABLE BEST EFFORTS. (a) Upon the terms and subject to the conditions hereof, each of the parties hereto shall (i) make promptly its respective filings, and thereafter make any other required submissions, under the HSR Act and 13 the EC Merger Regulation with respect to the transactions contemplated by this Agreement and (ii) use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, using its reasonable best efforts to obtain all permits, consents, approvals, authorizations, qualifications and orders of Governmental Authorities and parties to contracts with the Company and its subsidiaries as are necessary for the consummation of the transactions contemplated by this Agreement and, in the case of the Sellers, entering into any voting trust or similar arrangements that may be required by applicable Laws to acquire the Purchaser Shares hereunder; PROVIDED that Purchaser will be not required by this Section 5.05 to take any action that will have a Material Adverse Effect on the Company or Purchaser, including, without limitation, entering into any consent decree, hold separate orders or other arrangements that would have a Material Adverse Effect on the Company or Purchaser. In case, at any time after the Closing Date, any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall use their reasonable best efforts to take all such action. (b) Each of the parties hereto agrees to cooperate and use its reasonable best efforts to vigorously contest and resist any Action, including administrative or judicial Action, and to have vacated, lifted, reversed or overturned any decree, judgment, injunction or other order (whether temporary, preliminary or permanent) that is in effect and that restricts, prevents or prohibits consummation of the transactions contemplated by this Agreement, including, without limitation, by vigorously pursuing all available avenues of administrative and judicial appeal. (c) Each of the Sellers agrees to use its reasonable best efforts to cause the Company to comply with its obligations under the Merger Agreement, and Purchaser agrees to, and to cause Merger Sub to, comply with its obligations under the Merger Agreement. SECTION 5.06 PUBLIC ANNOUNCEMENTS. The parties hereto agree that no public release or announcement concerning the transactions contemplated by this Agreement or the Merger Agreement shall be issued by any party without the prior consent (which consent shall not be unreasonably withheld) of Purchaser, in the case of a release or announcement by a Seller or any of its affiliates (other than the Company and the Company's subsidiaries), or Financial, in the case of a release or announcement by, Purchaser or any of its affiliates, except as such release or announcement may be required by Law or the rules or regulations of any United States or non-United States securities exchange, in which case the party required to make the release or announcement shall use its reasonable best efforts to allow the other party reasonable time to comment on such release or announcement in advance of such issuance. Notwithstanding the foregoing, each Seller agrees to permit Purchaser and Merger Sub to publish and disclose in the offer documents filed with the Securities and Exchange Commission with respect to the Offer pursuant to Section 2.01(b) of the Merger Agreement and the proxy statement, if any, to be sent to the Company's stockholders pursuant to Section 7.02 of the Merger Agreement and related filings under the securities laws such Seller's identity and ownership of such Seller's Shares and the nature of its commitments, arrangements and understandings under this Agreement. 14 SECTION 5.07 PURCHASER SHAREHOLDERS MEETING. Purchaser agrees, in accordance with applicable Law and its articles of association, to duly call, give notice of, convene and hold a special meeting of its shareholders as promptly as practicable following the date hereof (the "PURCHASER SHAREHOLDERS Meeting") for the purpose of approving the authorization of the new Purchaser Shares to be issued to the Sellers pursuant to this Agreement and the exclusion of the preemptive rights of all holders of Purchaser share capital in connection with such issuance (the "PURCHASER SHAREHOLDER PROPOSAL"). The Board of Directors of Purchaser agrees to recommend to its shareholders the approval of the Purchaser Shareholder Proposal and make any other disclosure to its shareholders as may be required under applicable Law. SECTION 5.08 DISPOSITION OF PURCHASER SHARES. (a) Purchaser shall use its reasonable best efforts to cause the Purchaser Shares delivered to the Sellers pursuant to Section 2.05(b) to be approved for listing on the Frankfurt Stock Exchange prior to the Closing Date, or if such approval for listing is not obtained prior to the Closing Date, as promptly as practicable thereafter. (b) Purchaser will take such commercially reasonable actions as may be reasonably requested by any Seller in connection with the listing and/or sale by such Seller of all or any portion of the Purchaser Shares owned by such Seller, including, without limitation, (i) entering into customary agreements with, and making customary representations, warranties and covenants to, the underwriters and placement agents designated by such Seller in connection with such sale; (ii) preparing or assisting in the preparation of such prospectuses, offering memoranda and other offering materials as may be reasonably requested by such Seller or such underwriters or placement agents in connection with such sale; and (iii) using all reasonable efforts to cause senior management of Purchaser to participate in "road shows" and meetings with prospective purchasers of the Purchaser Shares; and (iv) paying all reasonable costs and expenses in connection with the foregoing (other than underwriters' commissions and selling discounts). SECTION 5.09 CERTAIN TRANSACTIONS. (a) (i) In the event all the conditions set forth in Article VI have been satisfied or waived and the Banking Board of New York State shall not have consented to, approved or otherwise authorized the change of control of Winthrop Trust Company ("WINTHROP") in connection with the transactions contemplated by this Agreement (such consent, approval or authorization, the "BANK BOARD APPROVAL"), Financial agrees to acquire from the Company as promptly as practicable following satisfaction or waiver of all such conditions, but in any event prior to the Closing Date, all the issued and outstanding capital stock of Winthrop for its book value. Financial further agrees to sell to the Company (or such other entity as Purchaser shall designate), and transfer good, valid and marketable title to (free and clear of any Liens), and Purchaser hereby agrees to acquire, or to cause the Company or any other designee of Purchaser to acquire, all such issued and outstanding capital stock of Winthrop immediately following receipt of the Banking Board Approval for the same consideration paid by Financial pursuant to the immediately preceding sentence. (ii) Financial further agrees that if it acquires Winthrop pursuant to Section 5.09(a)(i), until such time as it transfers ownership of Winthrop to the Company or any other designee of Purchaser, Financial shall cause Winthrop to conduct its business only in the ordinary course in a manner consistent with past practice and in consultation with the Company. 15 Without limiting the generality of the foregoing, Financial shall not permit Winthrop to take any action described in Section 6.01(a) through (n) of the Merger Agreement (without giving effect to any exceptions therein). (b) (i) In the event that DLJ Bank Holdings LLC ("BANK HOLDINGS LLC") is not liquidated pursuant to Section 7.13 of the Merger Agreement, or regulatory approval or expressions of non-objection to Purchaser's acquiring control of Bank Holdings LLC are not received, prior to the satisfaction or waiver of all the conditions set forth in Article VI, Financial agrees to acquire from the Company all the membership or other equity interests in Bank Holdings LLC as promptly as practicable, but in any event prior to the Closing, for its book value. In connection with the foregoing, Purchaser and Financial will cooperate with each other to ensure that the United Kingdom bank subsidiary of Bank Holdings LLC (the "UK BANK") is not required by the applicable regulatory authorities to be transferred with Bank Holdings LLC. If the UK Bank is required to be so transferred, Financial agrees to acquire from the Company all the equity interests in the UK Bank for its book value simultaneously with its acquisition of Bank Holdings LLC. (ii) If Bank Holdings LLC is not liquidated following its acquisition by Financial pursuant to Section 5.09(b)(i), Purchaser hereby agrees to acquire, or to cause the Company or any other designee of Purchaser, to acquire, all the membership interests or other equity interests in Bank Holdings LLC immediately following receipt of the requisite regulatory approvals for such acquisition for the same consideration paid by Financial pursuant to Section 5.09(b)(i)), and if the UK Bank is also acquired by Financial pursuant to Section 5.09(b)(i), Purchaser also hereby agrees to acquire, or to cause the Company or any other designee of Purchaser to acquire, all the equity interests in the UK Bank immediately following receipt of the requisite regulatory approvals for such acquisition for the same consideration paid by Financial pursuant to Section 5.09(b)(i). (iii) Financial further agrees that if it acquires either Bank Holdings LLC or the UK Bank pursuant to Section 5.09(b)(i), until such time as it transfers ownership of such entities to the Company or any other designee of Purchaser, Financial shall cause each such entity to conduct its business only in the ordinary course in a manner consistent with past practice and in consultation with the Company. Without limiting the generality of the foregoing, Financial shall not permit Bank Holdings LLC or the UK Bank to take any action described in Section 6.01(a) through (n) of the Merger Agreement (without giving effect to any exceptions therein). (c) Each of Financial and Purchaser agrees to deliver, or cause to be delivered, all documents (including, without limitation, reasonable and customary purchase and sale agreements) and take, or cause to be taken, all actions reasonably necessary to effect the transactions contemplated by this Section 5.09. SECTION 5.10 POST-CLOSING SHARE PURCHASE. (a) Purchaser agrees to acquire (or cause to be acquired) from the Sellers (pro rata in accordance with their ownership of Purchaser Shares on the Closing Date or as otherwise directed by Financial) on the Business Day immediately following the Closing Date a number of Purchaser Shares having an aggregate value of $1.2 billion, based on the average of the closing prices of Purchaser Shares on the Swiss Exchange on the five consecutive Business Days preceding the Closing Date and on the average 16 of the noon buying rates in New York for cable transfers in Swiss francs as certified for customs purposes by the Federal Reserve Bank of New York on the five consecutive Business Days preceding the Closing Date. On such date, (i) the Sellers shall deliver to Purchaser or its designee, and upon due payment therefor, Purchaser or its designee (as the case may be) shall receive, good, valid and marketable title to such Purchaser Shares, free and clear of any Liens, and (ii) Purchaser shall deliver (or cause to be delivered) to the Sellers (pro rata in accordance with their ownership of Purchaser Shares on the Closing Date or as otherwise directed by Financial) $1.2 billion in immediately available United States dollars. (b) Each of the parties hereto agrees to deliver, or cause to be delivered, all documents (including, without limitation, reasonable and customary purchase and sale agreements) and take, or cause to be taken, all actions reasonably necessary to effect the transactions contemplated by this Section 5.10. SECTION 5.11 1940 ACT. (a) Purchaser and the Sellers have entered into this Agreement in reliance upon the benefits and protections provided by Section 15(f) of the Investment Company Act of 1940, as amended (the "1940 ACT"). Purchaser shall not take any action not contemplated by this Agreement or the Merger Agreement that would have the effect, directly or indirectly, of causing the requirements of any of the provisions of Section 15(f) of the 1940 Act not to be met in respect of this Agreement or the Merger Agreement and the transactions contemplated hereby and thereby, and it shall not fail to take any action if the failure to take such action would have the effect, directly or indirectly, of causing the requirements of any of the provisions of Section 15(f) of the 1940 Act not to be met in respect of this Agreement or the Merger Agreement and the transactions contemplated hereby and thereby. (b) Purchaser shall use its reasonable best efforts to assure, for the three year period following the Closing, that the composition of the Board of Directors or Trustees, as the case may be, of each investment company managed by the Company or its subsidiaries on the date hereof (the "FUND") is in compliance at such times with Section 15(f)(1)(A) of the 1940 Act. (c) For a period of two year after the Closing, there shall not be imposed on any of the Funds that is registered under the 1940 Act an "unfair burden" as a result of the transactions contemplated by this Agreement or the Merger Agreement, or any terms or conditions applicable thereto. (d) Except as otherwise defined in this Section 5.11, the capitalized terms and terms in quotations used in this Section 5.11 shall have the meanings set forth in Sections 15(f), 2(a)(4) or 2(a)(d)(19) of the 1940 Act. ARTICLE VI CONDITIONS TO CLOSING SECTION 6.01 CONDITIONS TO THE CLOSING. The obligations of each party to consummate the transactions contemplated by this Agreement shall be subject to the satisfaction, at or prior to the Closing, of the following conditions: 17 (a) SHAREHOLDER APPROVAL. The shareholders of Purchaser shall have approved the Purchaser Shareholder Proposal by the Requisite Vote; (b) HSR ACT. Any waiting period (and any extension thereof) under the HSR Act applicable to the purchase of the Sellers' Shares contemplated hereby shall have expired or been terminated; (c) EU ANTITRUST. The parties shall have received in respect of the purchase of the Sellers' Shares contemplated hereby the approval of the Commission of the European Union under the EC Merger Regulation that such purchase is compatible with the Common Market; and (d) NO ORDER; COMPLIANCE WITH LAW. (i) No Governmental Authority in the United States or Switzerland shall have enacted, issued, promulgated, enforced or entered any Law (whether temporary, preliminary or permanent) which is then in effect and has the effect of making the acquisition of shares by Purchaser or any affiliate of Purchaser illegal or otherwise restricting or prohibiting consummation of the transactions contemplated by this Agreement or the Merger Agreement and (ii) consummation of the transactions contemplated by this Agreement shall not conflict with or violate any provision of United States Law. SECTION 6.02 CONDITIONS TO OBLIGATIONS OF THE SELLERS. The obligations of the Sellers to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of Purchaser contained in Article IV in this Agreement shall be true and correct as of the Closing with the same force and effect as if made as of the Closing, other than such representations and warranties as are made as of another date, which shall be true and correct as of such date, except, in each case, where the failure of such representation or warranty to be true and correct (without giving effect to any limitation as to "materiality" or "Material Adverse Effect" set forth therein) would not have a Material Adverse Effect on Purchaser, and the Sellers shall have received a certificate to such effect signed by a duly authorized officer of Purchaser; (b) COVENANTS. The covenants and agreements contained in this Agreement to be complied with by Purchaser on or before the Closing shall have been complied with in all material respects, and the Sellers shall have received a certificate to such effect signed by a duly authorized officer of Purchaser; and (c) PURCHASER MATERIAL ADVERSE EFFECT. No Purchaser Material Adverse Effect shall have occurred. SECTION 6.03 CONDITIONS TO OBLIGATIONS OF PURCHASER. The obligations of Purchaser to consummate the transactions contemplated by this Agreement shall be subject to the fulfillment, at or prior to the Closing, of each of the following conditions: (a) REPRESENTATIONS AND WARRANTIES. The representations and warranties (i) of the Sellers contained in Article III of this Agreement shall be true and correct in all material respects as of the Closing with the same force and effect as if made as of the Closing, other than such representations and warranties as are made as of another date, which shall be true and 18 correct in all material respects as of such date, and (ii) of the Company contained in Article IV of the Merger Agreement shall be true and correct as of the Closing with the same force and effect as if made as of the Closing, other than such representations and warranties as are made as of another date, which shall be true and correct as of such date, except in the case of this clause (ii) where the failure to be so true and correct would not have a Material Adverse Effect on the Company (without, in the case of clause (i) and (ii), giving effect to any limitation as to "materiality" or "Material Adverse Effect" set forth therein), and Purchaser shall have received a certificate to such effect signed by a duly authorized officer of each Seller; and (b) COVENANTS. The covenants and agreements contained in this Agreement to be complied with by the Sellers on or before the Closing shall have been complied with in all material respects, and Purchaser shall have received a certificate to such effect signed by a duly authorized officer of each Seller; and (c) COMPANY MATERIAL ADVERSE EFFECT. No Company Material Adverse Effect shall have occurred. ARTICLE VII TERMINATION AND WAIVER SECTION 7.01 TERMINATION. This Agreement may be terminated at any time prior to the Closing: (a) by mutual written consent of each of Financial and Purchaser duly authorized by the Boards of Directors of Financial and Purchaser; or (b) by either Financial or Purchaser if: (i) the Closing shall not have occurred by March 31, 2001 unless the Offer has closed on or before such date; PROVIDED, HOWEVER, that the right to terminate this Agreement under this Section 7.01(b) shall not be available to any party whose failure to fulfill any obligation under this Agreement has each been the cause of, or resulted in, the failure of the Closing to occur on or before such date; or (ii) any Governmental Authority in the United States or Switzerland shall have enacted, issued, promulgated, enforced or entered any injunction, order, decree or ruling (whether temporary, preliminary or permanent) which has become final and nonappealable and has the effect of making the transactions contemplated by this Agreement illegal or otherwise preventing or prohibiting consummation of the transactions contemplated by this Agreement; or (c) by either Purchaser or Financial if the Purchaser Shareholder Proposal shall fail to obtain the Requisite Vote at the Purchaser Shareholders Meeting; or (d) by (i) Purchaser if a Company Material Adverse Effect shall have occurred, or (ii) Financial if a Purchaser Material Adverse Effect shall have occurred; or 19 (e) by either Purchaser or Financial (PROVIDED that the terminating party and, if Financial is the terminating party, the other Sellers are not then in material breach of any representation, warranty, covenant or other agreement contained herein) if there shall have been a material breach of any of the covenants or agreements or any of the representations or warranties set forth in this Agreement on the part of Purchaser, if Financial is the terminating party, or the Sellers, if Purchaser is the terminating party, such that the conditions in Article VI would not be satisfied, which breach is not cured within 15 days following written notice to the breaching party, or which breach, by its nature or timing, cannot be cured prior to the Closing. SECTION 7.02 EFFECT OF TERMINATION. In the event of termination of this Agreement as provided in Section 7.01, this Agreement shall forthwith become void and there shall be no liability on the part of either party hereto except (a) as set forth in Section 8.02 and (b) that nothing herein shall relieve any party from liability for any breach of this Agreement. SECTION 7.03 WAIVER. At any time prior to the Closing, any of the parties hereto may (a) extend the time for the performance of any obligation or other act of any other party hereto, (b) waive any inaccuracies in the representations and warranties of any other party contained herein or in any document delivered pursuant hereto and (c) waive compliance with any agreement of any other party or any condition to its own obligations contained herein. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the party or parties to be bound thereby. ARTICLE VIII GENERAL PROVISIONS SECTION 8.01 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Sellers contained in Article III of this Agreement and the representations and warranties of Purchaser contained in Sections 4.01, 4.02, 4.03, 4.04, 4.05, 4.06, 4.07 and 4.08 shall survive the Closing. The representations and warranties of Purchaser contained in Article IV (except as set forth in the preceding sentence) shall terminate upon the Closing. The liability of the Sellers and Purchaser with respect to their respective representations and warranties shall not be reduced by any investigation made at any time by or on behalf of the other parties. SECTION 8.02 EXPENSES. Except as otherwise specified in this Agreement, all costs and expenses, including, without limitation, fees and disbursements of counsel, financial advisors and accountants, incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, whether or not the Closing shall have occurred. SECTION 8.03 NOTICES. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by telecopy, or by registered or certified mail (postage prepaid, return receipt requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 8.03): 20 (a) if to any of the Sellers: AXA Financial, Inc. 1290 Avenue of the Americas New York, NY 10104 Telecopy: (212) 707-1920 Attention: Stanley B. Tulin Vice-Chairman and Chief Financial Officer with a copy to: Debevoise & Plimpton 875 Third Avenue New York, NY 10022 Telecopy: (212) 909-6836 Attention: Michael W. Blair Gregory V. Gooding (b) if to Purchaser: Credit Suisse Group Paradeplatz 8 P.O. Box 1 CH-8070 Zurich Switzerland Telecopy: (41-1) 210-2120 Attention: David Frick General Counsel with a copy to: Shearman & Sterling 599 Lexington Avenue New York, NY 10022 Telecopy: (212) 848-7179 Attention: David W. Heleniak Clare O'Brien SECTION 8.04 HEADINGS. The descriptive headings contained in this Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 8.05 SEVERABILITY. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not 21 affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby are consummated as originally contemplated to the fullest extent possible. SECTION 8.06 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement among the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and undertakings, both written and oral, among the parties or any of them, with respect to the subject matter hereof. SECTION 8.07 ASSIGNMENT. This Agreement shall not be assigned (whether pursuant to a merger, operation of law or otherwise), except that Purchaser may assign all or any of its rights and obligations under this Agreement to any affiliate, PROVIDED that no such assignment shall relieve Purchaser of its obligations hereunder if such assignee does not perform such obligations. SECTION 8.08 PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any right, benefit or remedy of any nature whatsoever under or by reason of this Agreement. SECTION 8.09 GOVERNING LAW. This Agreement shall be governed by and construed in accordance with, the laws of the State of New York applicable to contracts executed in and to be performed in that State (other than those provisions set forth herein that are required to be governed by Swiss Law). The parties hereto hereby (a) submit to the exclusive jurisdiction of any state or federal court sitting in the Borough of Manhattan of The City of New York solely in respect of the interpretation and enforcement of the provisions of this Agreement brought by any party hereto, and (b) irrevocably waive, and agree not to assert by way. of motion, defense, or otherwise, in any such Action, any claim that it is not subject personally to the jurisdiction of the above-named courts, that its property is exempt or immune from attachment or execution, that the Action is brought in an inconvenient forum, that the venue of the Action is improper, or that this Agreement may not be enforced in or by any of the above-named courts. SECTION 8.10 WAIVER OF JURY TRIAL. Each of the parties hereto hereby waives to the fullest extent permitted by applicable law any right it may have to a trial by jury with respect to any litigation directly or indirectly arising out of, under or in connection with this Agreement. Each of the parties hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce that foregoing waiver and (b) acknowledges that it and the other parties hereto have been induced to enter into this Agreement by, among other things, the mutual waivers and certifications in this Section 8.10. SECTION 8.11 COUNTERPARTS. This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement. 22 SECTION 8.12 SPECIFIC PERFORMANCE. The parties hereto agree that irreparable damage would occur in the event any provision of this Agreement were not performed in accordance with the terms hereof and that the parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. CREDIT SUISSE GROUP By: /s/ Lukas Muhlemann ----------------------------------- Name: Lukas Muhlemann Title: Chief Executive Officer and Chairman of the Board By: /s/ Joseph T. Mclaughlin ----------------------------------- Name: Joseph T. McLaughlin Title: Authorized Signatory AXA FINANCIAL, INC. By: /s/ Stanley B. Tulin ----------------------------------- Name: Stanley B. Tulin Title: Vice Chairman and Chief Financial Officer THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES By: /s/ Stanley B. Tulin ----------------------------------- Name: Stanley B. Tulin Title: Vice Chairman and Chief Financial Officer AXA PARTICIPATIONS BELGIUM By: /s/ Gerard de la Martiniere ----------------------------------- Name: Gerard de la Martiniere Title: Authorized Signatory AXA By: /s/ Gerard de la Martiniere ----------------------------------- Name: Gerard de la Martiniere Title: Group Executive Vice President Finance, Control and Structure SCHEDULE A SELLER'S SHARES OF SELLER'S CASH PURCHASER SHARES TO COMPANY SELLER'S CASH BE RECEIVED BY NAME COMMON STOCK PURCHASE PRICE SELLER - ---- ------------ -------------- ------ AXA 170,000 $4,468,493 48,357 AXA Financial, Inc. 48,646,793 $1,278,693,214 13,837,627 The Equitable Life Assurance Society of the United States 39,961,540 $1,050,399,150 11,367,098 AXA Participations Belgium 1,666,667 $43,808,763 474,085 ----------- ---------- ---------- Total 90,445,000 2,377,369,620 25,727,167 ========== ============= ========== EX-2.2 3 0003.txt AMENDMENT TO STOCK PURCHASE AGREEMENT CREDIT SUISSE GROUP STOCK PURCHASE AGREEMENT LETTER AMENDMENT October 6, 2000 AXA Financial, Inc. 1290 Avenue of the Americas New York, New York 10104 AXA c/o AXA Financial, Inc. 1290 Avenue of the Americas New York, New York 10104 The Equitable Life Assurance Society of the United States c/o AXA Financial, Inc. 1290 Avenue of the Americas New York, New York 10104 AXA Participations Belgium c/o AXA Financial, Inc. 1290 Avenue of the Americas New York, New York 10104 Ladies and Gentlemen: We refer to the Stock Purchase Agreement (the "Stock Purchase Agreement") dated as of August 30, 2000 among Credit Suisse Group, AXA, AXA Financial, Inc., The Equitable Life Assurance Society of the United States and AXA Participations Belgium. Capitalized terms used but not otherwise defined herein shall have the respective meanings given such terms in the Stock Purchase Agreement. 1. Financial and Purchaser hereby agree in accordance with Section 2.03 of the Stock Purchase Agreement that the Closing shall be held on the later to occur of (a) November 3, 2000 and (b) satisfaction or waiver of all other conditions to the obligations of the parties set forth in Article VI of the Stock Purchase Agreement. 2. Each of the parties to this Letter Amendment hereby agrees to amend and restate Section 6.02(a) and (c) of the Stock Purchase Agreement as follows: (a) "(a) Representations and Warranties. The representations and warranties of Purchaser contained in Article IV in this Agreement shall be true and correct as of 5:00 p.m., New York City time, on October 6, 2000 with the same force and effect as if made as of 5:00 p.m., New York City time, on October 6, 2000, other than such representations and warranties as are made as of another date, which shall be true and correct as of such date, except, in each case, where the failure of such representation or warranty to be true and correct (without giving effect to any limitation as to "materiality" or "Material Adverse Effect" set forth therein) would not have a Material Adverse Effect on Purchaser, and the Sellers shall have received a certificate to such effect signed by a duly authorized officer of Purchaser;" and (b) "(c) Purchaser Material Adverse Effect. No Purchaser Material Adverse Effect shall have occurred as of 5:00 p.m., New York City time, on October 6, 2000." 3. Each of the parties to this Letter Amendment hereby further agrees to amend and restate Section 6.03(a) and (c) of the Stock Purchase Agreement as follows: (a) "(a) Representations and Warranties. The representations and warranties (i) of the Sellers contained in Article III of this Agreement shall be true and correct in all material respects as of 5:00 p.m., New York City time, on October 6, 2000 with the same force and effect as if made as of 5:00 p.m., New York City time, on October 6, 2000, other than such representations and warranties as are made as of another date, which shall be true and correct in all material respects as of such date, and (ii) of the Company contained in Article IV of the Merger Agreement shall be true and correct as of 5:00 p.m., New York City time, on October 6, 2000 with the same force and effect as if made as of 5:00 p.m., New York City time, on October 6, 2000, other than such representations and warranties as are made as of another date, which shall be true and correct as of such date, except in the case of this clause (ii) where the failure to be so true and correct would not have a Material Adverse Effect on the Company (without, in the case of clause (i) and (ii), giving effect to any limitation as to "materiality" or "Material Adverse Effect" set forth therein), and Purchaser shall have received a certificate to such effect signed by a duly authorized officer of each Seller;" and (b) "(c) Company Material Adverse Effect. No Company Material Adverse Effect shall have occurred as of 5:00 p.m., New York City time, on October 6, 2000." 4. Purchaser hereby agrees that following commencement of the transfers contemplated by paragraph 3 of the Letter Amendment to the Merger Agreement dated as of the date hereof (the "Merger Agreement Letter Amendment") among Purchaser, Merger Sub and the Company, the amendments set forth in paragraphs 2, 3, and 5 hereof shall become effective, and following such time and its receipt of the certificate described in paragraph 2 of the Merger Agreement Letter Amendment, the conditions set forth in Section 6.03(a)(ii) and (c) of the Stock Purchase Agreement shall be deemed satisfied. 5. Each of the parties to this Letter Amendment hereby agrees to amend and restate Section 7.01(d) of the Stock Purchase Agreement as follows: "(d) by (i) Purchaser if a Company Material Adverse Effect shall have occurred on or prior to 5:00 p.m., New York City time, on October 6, 2000, or (ii) Financial if a Purchaser Material Adverse Effect shall have occurred on or prior to 5:00 p.m., New York City time, on October 6, 2000; or" 6. Each of the parties to this Letter Amendment hereby agrees to amend the Stock Purchase Agreement to add the following: "SECTION 8.13 Equitable Holdings LLC. Notwithstanding anything to the contrary herein, Equitable Holdings LLC, a New York limited liability company and a wholly-owned subsidiary of Equitable, is the registered and beneficial owner of, and has good title to, the number of Shares set forth next to Equitable's name on Schedule A hereto. For purposes of the accuracy of any representation and warranty or compliance with any covenant or agreement of Equitable contained herein, such representation or warranty shall be deemed given by Equitable and Equitable Holdings LLC and such covenant or agreement shall be deemed to be an obligation of Equitable and Equitable Holdings LLC, in each case as applicable in light of the immediately preceding sentence. Notwithstanding anything to the contrary herein, nothing shall relieve Equitable from its obligations under this Agreement without giving effect to this Section 8.13 if Equitable Holdings LLC shall breach any representation, warranty, covenant, or other agreement applicable to it as a result of this Section 8.13." 7. (a) Purchaser will be deemed to consent to, and will cause Merger Sub to consent to, the Company acquiring an assuming all advances, commitments or other extensions of credit of The Equitable Life Assurance Society of the United States or its affiliates (other than the Company and its subsidiaries), as reflected in Schedule A hereto, under the Amended and Restated Equitable Credit Facility dated as of March 1, 1994 among The Equitable Life Assurance Society of the United States, Equitable Variable Life Insurance Company, the Company, DLJ Investment Inc., DLJ Capital Corporation and DLJ Bridge Finance Inc., as amended to the date hereof (the "Equitable Bridge Facility"), by paying to such parties all principal outstanding, and accrued and unpaid interest thereon, and any fees or other similar amounts due as of the date of such payment under the Equitable Bridge Facility or related credit agreements by 10:00 a.m., New York City time, on November 15, 2000; and (b) Purchaser agrees to use its reasonable best efforts to cause the Company to pay such amounts by 10:00 a.m., New York City time, on November 15, 2000 and agrees that thereafter such facility shall terminate and be of no further force and effect or that The Equitable Life Assurance Society of the United States and its affiliates (other than the Company and its subsidiaries) shall cease to be parties to such facility and shall have no further obligations thereunder. This Letter Amendment shall be governed by and construed in accordance with, the laws of the State of New York applicable to contracts executed in and to be performed in that State. CREDIT SUISSE GROUP By: /s/ Richard E. Thornburgh ------------------------------- Name: Richard E. Thornburgh Title: Attorney-in-Fact By: /s/ Joseph T. McLaughlin ------------------------------- Name: Joseph T. McLaughlin Title: Attorney-in-Fact Consented to and acknowledged as of the above date: AXA By: /s/ Gerard de la Martiniere ------------------------------------ Name: Gerard de la Martiniere Title: Chief Financial Officer AXA FINANCIAL, INC. By: /s/ Stanley B. Tulin ------------------------------------ Name: Stanley B. Tulin Title: Vice Chairman and Chief Financial Officer THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES By: /s/ Stanley B. Tulin ------------------------------------ Name: Stanley B. Tulin Title: Vice Chairman and Chief Financial Officer AXA PARTICIPATIONS BELGIUM By: /s/ Gerard de la Martiniere ------------------------------------ Name: Gerard de la Martiniere Title: Attorney-in-Fact Schedule A Loans and Commitments under Equitable Bridge Facility ----------------------------------------------------- ($ millions) Equitable Funding Amount Funded Entity/Industry Date Funded - ---------------------- ---- ------ UIH Funding, Inc. Apr-99 $101.8 Broadband Communications Citation Funding, Inc. Dec-99 65.8 Manufacturing-Steel Castings Tin Funding, Inc. (United Biscuit) Apr-00 125.2 (UK pound loan) Food Formus Funding, Inc. May-00 15.5 Comm.-European wireless CLEC Alfa Laval Funding, Inc. Aug-00 95.9 (EURO loan) Manufacturing-Fluid Separation Commitments as of 9/28/00 Independent Wireless One $85.0 Wireless Communications EX-99.1 4 0004.txt CONSOLIDATED FINANCIAL STATEMENTS Exhibit 99.1 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of AXA Financial, Inc. 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 AXA Financial, Inc. and its subsidiaries ("AXA Financial") at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of AXA Financial'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 auditing standards generally accepted in the United States of America, 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 our opinion. /s/ PricewaterhouseCoopers LLP New York, New York February 1, 2000, except as to Note 8, which is as of November 6, 2000 1 AXA FINANCIAL, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1999 AND 1998
1999 1998 ----------------- ----------------- (IN MILLIONS) ASSETS Investments: Fixed maturities: Available for sale, at estimated fair value............................. $ 18,849.1 $ 19,449.3 Held to maturity, at amortized cost..................................... 253.4 250.9 Mortgage loans on real estate............................................. 3,270.0 2,809.9 Equity real estate........................................................ 1,160.2 1,676.9 Policy loans.............................................................. 2,257.3 2,086.7 Other equity investments.................................................. 673.5 760.9 Other invested assets..................................................... 914.7 809.6 ---------------- ---------------- Total investments..................................................... 27,378.2 27,844.2 Cash and cash equivalents................................................... 796.0 1,286.2 Broker-dealer related receivables........................................... 521.3 325.4 Deferred policy acquisition costs........................................... 4,033.0 3,563.8 Other assets................................................................ 3,350.9 2,729.5 Closed Block assets......................................................... 8,607.3 8,632.4 Separate Accounts assets.................................................... 54,453.9 43,302.3 Net assets of discontinued Investment Banking and Brokerage................. 2,453.2 1,833.1 ---------------- ---------------- TOTAL ASSETS................................................................ $ 101,593.8 $ 89,516.9 ================ ================ LIABILITIES Policyholders' account balances............................................. $ 21,351.4 $ 20,857.5 Future policy benefits and other policyholders liabilities.................. 4,777.6 4,726.4 Broker-dealer related payables.............................................. 319.3 256.8 Short-term and long-term debt............................................... 2,518.7 2,322.4 Other liabilities........................................................... 3,430.4 3,372.4 Closed Block liabilities.................................................... 9,025.0 9,077.0 Separate Accounts liabilities............................................... 54,332.5 43,211.3 ---------------- ---------------- Total liabilities..................................................... 95,754.9 83,823.8 ---------------- ---------------- Commitments and contingencies (Notes 13, 16, 17, 18 and 19) SHAREHOLDERS' EQUITY Series D convertible preferred stock........................................ 239.7 259.8 Stock employee compensation trust........................................... (239.7) (259.8) Common stock, at par value.................................................. 4.5 2.2 Capital in excess of par value.............................................. 3,739.1 3,662.1 Treasury stock.............................................................. (490.8) (247.1) Retained earnings........................................................... 3,008.6 1,926.1 Accumulated other comprehensive (loss) income............................... (422.5) 349.8 ---------------- ---------------- Total shareholders' equity............................................ 5,838.9 5,693.1 ---------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................. $ 101,593.8 $ 89,516.9 ================ ================
See Notes to Consolidated Financial Statements. 2 AXA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF EARNINGS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ----------------- ----------------- ---------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) REVENUES Universal life and investment-type product policy fee income...................................................... $ 1,257.5 $ 1,056.2 $ 950.6 Premiums...................................................... 558.2 588.1 601.5 Net investment income......................................... 2,263.3 2,255.9 2,306.2 Investment (losses) gain, net................................. (202.3) 82.2 (46.5) Commissions, fees and other income............................ 2,018.8 1,389.8 1,095.1 Contribution from the Closed Block............................ 86.4 87.1 102.5 ----------------- ----------------- ----------------- Total revenues.......................................... 5,981.9 5,459.3 5,009.4 ----------------- ----------------- ----------------- BENEFITS AND OTHER DEDUCTIONS Interest credited to policyholders' account balances.......... 1,078.2 1,153.6 1,266.8 Policyholders' benefits....................................... 1,038.6 1,024.7 978.6 Compensation and benefits..................................... 1,012.2 772.0 721.9 Commissions................................................... 564.0 478.0 409.5 Interest expense.............................................. 146.5 162.5 195.7 Amortization of deferred policy acquisition costs............. 314.5 293.5 288.1 Capitalization of deferred policy acquisition costs........... (709.9) (609.1) (508.0) Writedown of deferred policy acquisition costs................ 131.7 - - Rent expense.................................................. 113.9 100.0 101.8 Intangible assets writedown................................... - - 120.9 Other operating costs and expenses............................ 1,316.2 1,068.9 935.0 ----------------- ----------------- ----------------- Total benefits and other deductions..................... 5,005.9 4,444.1 4,510.3 ----------------- ----------------- ----------------- Earnings from continuing operations before Federal income taxes and minority interest.......................... 976.0 1,015.2 499.1 Federal income taxes.......................................... 308.7 338.2 90.9 Minority interest in net income of consolidated subsidiaries.. 199.4 125.2 54.8 ----------------- ----------------- ----------------- Earnings from continuing operations........................... 467.9 551.8 353.4 Earnings (loss) from discontinued operations, net of Federal income taxes: Investment Banking and Brokerage segment.................. 630.1 278.6 294.8 Other..................................................... 28.1 2.7 (87.2) ----------------- ---------------- ---------------- Net Earnings.................................................. $ 1,126.1 $ 833.1 $ 561.0 ================= ================= ================= Per Common Share: Basic: Earnings from continuing operations....................... $ 1.07 $ 1.24 $ .84 Discontinued operations, net of Federal income taxes...... 1.51 .64 .51 ----------------- ----------------- ----------------- Net Earnings.............................................. $ 2.58 $ 1.88 $ 1.35 ================= ================= ================= Diluted: Earnings from continuing operations....................... $ 1.04 $ 1.22 $ .81 Discontinued operations, net of Federal income taxes...... 1.41 .59 .43 ----------------- ----------------- ----------------- Net Earnings.............................................. $ 2.45 $ 1.81 $ 1.24 ================= ================= ================= Cash Dividend Per Common Share.............................. $ .10 $ .10 $ .10 ================= ================= =================
See Notes to Consolidated Financial Statements. 3 AXA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ----------------- ----------------- ----------------- (IN MILLIONS) Series C convertible preferred stock, beginning of year......... $ - $ - $ 24.4 Exchange of Series C convertible preferred stock................ - - (24.4) ----------------- ----------------- ----------------- Series C convertible preferred stock, end of year............... - - - ----------------- ----------------- ----------------- Series D convertible preferred stock, beginning of year......... 259.8 259.8 300.0 Exchange of Series D convertible preferred stock................ (20.1) - (40.2) ----------------- ----------------- ----------------- Series D convertible preferred stock, end of year............... 239.7 259.8 259.8 ----------------- ----------------- ----------------- Stock employee compensation trust, beginning of year............ (259.8) (259.8) (300.0) Exchange of Series D convertible preferred stock in the stock employee compensation trust............................. 20.1 - 40.2 ----------------- ----------------- ----------------- Stock employee compensation trust, end of year.................. (239.7) (259.8) (259.8) ----------------- ----------------- ----------------- Series E convertible preferred stock, beginning of year......... - - 380.2 Exchange of Series E convertible preferred stock................ - - (380.2) ----------------- ----------------- ----------------- Series E convertible preferred stock, end of year............... - - - ----------------- ----------------- ----------------- Common stock, at par value, beginning of year................... 2.2 2.2 1.9 Issuance of common stock........................................ 2.3 - .3 ----------------- ----------------- ----------------- Common stock, at par value, end of year......................... 4.5 2.2 2.2 ----------------- ----------------- ----------------- Capital in excess of par value, beginning of year............... 3,662.1 3,627.5 2,782.2 Additional capital in excess of par value....................... 77.0 34.6 845.3 ----------------- ----------------- ----------------- Capital in excess of par value, end of year..................... 3,739.1 3,662.1 3,627.5 ----------------- ----------------- ----------------- Treasury stock, beginning of year............................... (247.1) - - Purchase of shares for treasury................................. (243.7) (247.1) - ----------------- ----------------- ----------------- Treasury stock, end of year..................................... (490.8) (247.1) - ----------------- ----------------- ----------------- Retained earnings, beginning of year............................ 1,926.1 1,137.4 632.9 Net earnings.................................................... 1,126.1 833.1 561.0 Dividends on preferred stocks................................... - - (15.6) Dividends on common stock....................................... (43.6) (44.4) (40.9) ----------------- ----------------- ----------------- Retained earnings, end of year.................................. 3,008.6 1,926.1 1,137.4 ----------------- ----------------- ----------------- Accumulated other comprehensive income, beginning of year....... 349.8 506.4 166.4 Other comprehensive (loss) income............................... (772.3) (156.6) 340.0 ----------------- ----------------- ----------------- Accumulated other comprehensive (loss) income, end of year...... (422.5) 349.8 506.4 ----------------- ----------------- ----------------- TOTAL SHAREHOLDERS' EQUITY, END OF YEAR......................... $ 5,838.9 $ 5,693.1 $ 5,273.5 ================= ================= ================= COMPREHENSIVE INCOME Net earnings.................................................... $ 1,126.1 $ 833.1 $ 561.0 ----------------- ----------------- ----------------- Change in unrealized (losses) gains, net of reclassification adjustment.................................................... (784.5) (145.6) 344.4 Minimum pension liability adjustment............................ 12.2 (11.0) (4.4) ----------------- ----------------- ----------------- Other comprehensive (loss) income............................... (772.3) (156.6) 340.0 ----------------- ----------------- ----------------- COMPREHENSIVE INCOME............................................ $ 353.8 $ 676.5 $ 901.0 ================= ================= =================
See Notes to Consolidated Financial Statements. 4 AXA FINANCIAL, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ----------------- ----------------- ----------------- (IN MILLIONS) Net earnings.................................................. $ 1,126.1 $ 833.1 $ 561.0 Adjustments to reconcile net earnings to net cash used by operating activities: Interest credited to policyholders' account balances........ 1,078.2 1,153.6 1,266.8 Universal life and investment-type product policy fee income......................................... (1,257.5) (1,056.2) (950.6) Net change in broker-dealer related receivables/payables.............................. (119.9) (17.5) (433.9) Investment (gains) losses, net.............................. (32.7) (122.5) 39.2 Change in deferred policy acquisition costs................. (260.7) (313.2) (219.9) Change in accounts payable and accrued expenses............. 163.4 32.0 (4.1) Change in property and equipment............................ (256.4) (82.4) (9.4) Other, net.................................................. (270.8) 31.7 59.2 ----------------- ----------------- ----------------- Net cash provided by operating activities..................... 169.7 458.6 308.3 ----------------- ----------------- ----------------- Cash flows from investing activities: Maturities and repayments................................... 2,088.2 2,466.5 2,865.0 Sales....................................................... 8,075.2 17,881.2 10,898.8 Purchases................................................... (11,112.1) (19,719.9) (13,731.2) Increase in short-term investments.......................... (179.6) (215.5) (550.9) Decrease in loans to discontinued operations................ - 660.0 420.1 Sale of subsidiaries........................................ - - 261.0 Other, net.................................................. (113.6) (42.0) (542.1) ----------------- ----------------- ----------------- Net cash (used) provided by investing activities.............. (1,241.9) 1,030.3 (379.3) ----------------- ----------------- ----------------- Cash flows from financing activities: Policyholders' account balances: Deposits.................................................. 2,366.2 1,508.1 1,281.7 Withdrawals............................................... (1,765.8) (1,724.6) (1,886.8) Net increase (decrease) in short-term financings............ 378.0 (131.7) 606.3 Additions to long-term debt................................. .4 596.8 32.0 Repayments of long-term debt................................ (71.3) (151.2) (63.9) Payment of obligation to fund accumulated deficit of discontinued operations................................... - (87.2) (83.9) Purchase of treasury stock.................................. (243.7) (247.1) - Other, net.................................................. (81.8) (290.1) (64.8) ----------------- ----------------- ----------------- Net cash provided (used) by financing activities.............. 582.0 (527.0) (179.4) ----------------- ----------------- ----------------- Change in cash and cash equivalents........................... (490.2) 961.9 (250.4) Cash and cash equivalents, beginning of year.................. 1,286.2 324.3 574.7 ----------------- ----------------- ----------------- Cash and Cash Equivalents, End of Year........................ $ 796.0 $ 1,286.2 $ 324.3 ================= ================= ================= Supplemental cash flow information Interest Paid............................................... $ 177.4 $ 196.7 $ 282.0 ================= ================= ================= Income Taxes Paid........................................... $ 70.2 $ 254.3 $ 605.2 ================= ================= =================
See Notes to Consolidated Financial Statements. 5 AXA FINANCIAL, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1) ORGANIZATION AXA Financial, Inc. (the "Holding Company," and collectively with its consolidated subsidiaries, "AXA Financial") is a diversified financial services organization serving a broad spectrum of insurance, asset management and investment banking customers. AXA Financial's financial advisory and insurance product businesses are conducted principally by its life insurance subsidiary, The Equitable Life Assurance Society of the United States ("Equitable Life"), its insurance general agency AXA Network, LLC ("AXA Network") and its broker dealer AXA Advisors, LLC ("AXA Advisors"). AXA Financial's investment management business is conducted principally by Alliance Capital Management L.P. ("Alliance") and its discontinued investment banking and brokerage business was conducted by Donaldson Lufkin & Jenrette, Inc. ("DLJ"). AXA, a French holding company for an international group of insurance and related financial services companies, is the Holding Company's largest shareholder, owning approximately 58.0% at December 31, 1999 (53.0% if all securities convertible into, and options on, common stock were to be converted or exercised). The Financial Advisory/Insurance segment offers a variety of traditional, variable and interest-sensitive life insurance products, annuity products, mutual fund asset management accounts and other investment products to individuals and small groups and provides financial planning services for individuals. 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 Management segment principally includes Alliance. In 1999, Alliance reorganized into Alliance Capital Management Holding L.P. ("Alliance Holding") and Alliance (the "Reorganization"). Alliance Holding's principal asset is its interest in Alliance and it functions as a holding entity through which holders of its publicly traded units own an indirect interest in the operating partnership. AXA Financial exchanged substantially all of its Alliance Holding units for units in Alliance ("Alliance Units"). As a result of the reorganization, AXA Financial was the beneficial owner of approximately 2% of Alliance Holding and 56% of Alliance. 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 also includes institutional Separate Accounts that provide various investment options for large group pension clients, primarily deferred benefit contribution plans, through pooled or single group accounts. Through June 10, 1997, this segment also includes Equitable Real Estate Investment Management, Inc. ("EREIM") which was sold. EREIM provided real estate investment management services, property management services, mortgage servicing and loan asset management, and agricultural investment management. The Investment Banking and Brokerage segment is reflected in these financial statements as discontinued operations. This segment includes DLJ and 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. 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. 6 The accompanying consolidated financial statements include the accounts of the Holding Company; Equitable Life and those of their subsidiaries engaged in insurance related businesses (collectively, the "Insurance Group"); other subsidiaries, principally Alliance, AXA Advisors and, through June 10, 1997, EREIM (see Note 5); and those trusts, partnerships and joint ventures in which AXA Financial 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. 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 "1999," "1998" and "1997" refer to the years ended December 31, 1999, 1998 and 1997, respectively. Certain reclassifications have been made in the amounts presented for prior periods to conform these periods with the 1999 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 includes the Investment Banking and Brokerage segment which is discussed in Note 8. In 1991, management discontinued the business of certain pension operations. Other discontinued operations at December 31, 1999, principally consists of the Group Non-Participating Wind-Up Annuities ("Wind-Up Annuities"), for which a premium deficiency reserve has been established. Management reviews the adequacy of the allowance each quarter and believes the allowance for future losses at December 31, 1999 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 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. AXA Financial 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 AXA Financial's consolidated financial statements. Capitalized internal-use software is amortized on a straight-line basis over the estimated useful life of the software. 7 New Accounting Pronouncements ----------------------------- In December 1999, the staff of the SEC issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements", which is effective fourth quarter 2000. SAB No. 101 deals with revenue recognition issues; its implementation is not expected to have a material impact on AXA Financial's consolidated balance sheet or statement of earnings. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("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. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133," which defers the effective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. AXA Financial expects to adopt SFAS No. 133 effective January 1, 2001. 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. Management currently is assessing the impact of adoption. However, Alliance's adoption of the new requirements is not expected to have a significant impact on AXA Financial's consolidated balance sheet or statement of earnings. Valuation of Investments ------------------------ Fixed maturities identified as available for sale are reported at estimated fair value. Fixed maturities, which AXA Financial 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. 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. Valuation allowances are netted against the asset categories to which they apply. Policy loans are stated at unpaid principal balances. Partnerships and joint venture interests in which AXA Financial has control or a majority economic interest (that is, greater than 50% of the economic return generated by the entity) are consolidated. Those where AXA Financial 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. 8 Equity securities, comprised of common stock held by the Insurance Group and the Holding Company classified as both trading and available for sale securities and non-redeemable preferred stock 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 the Holding Company as well as United States government and agency securities, mortgage-backed securities, futures and forwards transactions are recorded in the consolidated financial statements on a trade date basis. 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 contrac holders are reflected as interest credited to policyholders' account balances. Realized investment gains (losses) are determined by specific identification and are presented as a component of revenue. Changes in the valuation allowances are included in investment gains or losses. Unrealized gains (losses) on trading securities are reflected in net investment income. Unrealized investment gains and losses on fixed maturities and equity securities available for sale held by AXA Financial 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. Other Revenue Recognition ------------------------- Commissions, fees and other income principally include Investment Management advisory and service fees. Investment Management advisory and service fees are recorded as revenue as the related services are performed. Certain investment advisory contracts provide for a performance fee, in addition to or in lieu of a base fee, that is calculated as a percentage of the related investment results over a specified period of time. Performance fees are recorded as revenue at the end of the measurement period. 9 Recognition of Insurance Income and Related Expenses ---------------------------------------------------- Premiums from universal life and investment-type contracts are reported as deposits to policyholders' account balances. Revenues from these contracts consist of amounts assessed during the period against policyholders' account balances for mortality charges, policy administration charges and surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policyholders' account balances. Premiums from participating and non-participating traditional life and annuity policies with life contingencies generally are recognized as income when due. Benefits and expenses are matched with such income so as to result in the recognition of profits over the life of the contracts. This match is accomplished by means of the provision for liabilities for future policy benefits and the deferral and subsequent amortization of policy acquisition costs. For contracts with a single premium or a limited number of premium payments due over a significantly shorter period than the total period over which benefits are provided, premiums are recorded as income when due with any excess profit deferred and recognized in income in a constant relationship to insurance in force or, for annuities, the amount of expected future benefit payments. Premiums from individual health contracts are recognized as income over the period to which the premiums relate in proportion to the amount of insurance protection provided. Deferred Policy Acquisition Costs --------------------------------- The costs of acquiring new business, principally commissions, underwriting, agency and policy issue expenses, all of which vary with and primarily are related to the production of new business, are deferred. DAC is subject to recoverability testing at the time of policy issue and loss recognition testing at the end of each accounting period. For universal life products and investment-type products, DAC is amortized over the expected total life of the contract group 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 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, 1999, the expected investment yield, excluding policy loans, generally ranged from 7.75% grading to 7.5% 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 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. 10 In second quarter 1999, management completed a study of the cash flows and liability characteristics of its insurance product lines as compared to the expected cash flows of the underlying assets. That analysis reflected an assessment of the potential impact on future operating cash flows from current economic conditions and trends, including rising interest rates and securities market volatility and the impact of increasing competitiveness within the insurance marketplace (evidenced, for example, by the proliferation of bonus annuity products) on inforce business. The review indicated that changes to the then-current invested asset allocation strategy were required to reposition assets with greater price volatility away from products with demand liquidity characteristics to support products with lower liquidity needs. To implement these findings, the existing investment portfolio was reallocated, and prospective investment allocation targets were revised. The reallocation of the assets impacted investment results by product, thereby impacting the future gross margin estimates utilized in the amortization of DAC for universal life and investment-type products. The revisions to estimated future gross margins resulted in an after-tax writedown of DAC of $85.6 million (net of a Federal income tax benefit of $46.1 million) or $.20 per basic and $.19 per diluted share for 1999. 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 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 contract holders' 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 8.35% for annuity liabilities. 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. While management believes its disability income ("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. 11 Claim reserves and associated liabilities for individual DI and major medical policies were $948.4 million and $951.7 million at December 31, 1999 and 1998, respectively. Incurred benefits (benefits paid plus changes in claim reserves) and benefits paid for individual DI and major medical are summarized as follows:
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Incurred benefits related to current year.......... $ 150.7 $ 140.1 $ 132.3 Incurred benefits related to prior years........... 64.7 84.2 60.0 ------------- ------------ ------------ Total Incurred Benefits............................ $ 215.4 $ 224.3 $ 192.3 ============= ============ ============ Benefits paid related to current year.............. $ 28.9 $ 17.0 $ 28.8 Benefits paid related to prior years............... 189.8 155.4 146.2 ------------- ------------ ------------ Total Benefits Paid................................ $ 218.7 $ 172.4 $ 175.0 ============= ============ ============
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, 1999, participating policies, including those in the Closed Block, represent approximately 23.0% ($47.0 billion) of directly written life insurance in force, net of amounts ceded. Federal Income Taxes -------------------- The Holding Company and its consolidated subsidiaries file a 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 contract holders, 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 1999, 1998 and 1997, investment results of such Separate Accounts were $6,045.5 million, $4,591.0 million and $3,411.1 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. 12 Employee Stock Option Plans --------------------------- AXA Financial 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 opinion, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeds the option strike price at the grant date. See Note 11 for the pro forma disclosures required by SFAS No. 123, "Accounting for Stock-Based Compensation". 3) INVESTMENTS The following table provides additional information relating to fixed maturities and equity securities.
GROSS GROSS AMORTIZED UNREALIZED UNREALIZED ESTIMATED COST GAINS LOSSES FAIR VALUE --------------- ----------------- ----------------- --------------- (IN MILLIONS) DECEMBER 31, 1999 Fixed Maturities: Available for Sale: Corporate..................... $ 15,049.6 $ 139.5 $ 790.1 $ 14,399.0 Mortgage-backed............... 2,576.1 2.3 88.4 2,490.0 U.S. Treasury, government and agency securities....... 1,218.0 18.9 23.6 1,213.3 States and political subdivisions................ 110.0 1.4 4.9 106.5 Foreign governments........... 361.8 16.2 14.8 363.2 Redeemable preferred stock.... 311.6 1.8 36.3 277.1 ---------------- ---------------- ---------------- ------------- Total Available for Sale.... $ 19,627.1 $ 180.1 $ 958.1 $ 18,849.1 ================= ================= ================= ============== Held to Maturity: Corporate.... $ 253.4 $ 6.6 $ .7 $ 259.3 ================= ================= ================= ============== Equity Securities: Common stock available for sale.................... $ 25.5 $ 1.5 $ 17.8 $ 9.2 Common stock trading securities.................. 14.3 9.1 7.0 16.4 ---------------- ---------------- ---------------- ------------- Total Equity Securities........... $ 39.8 $ 10.6 $ 24.8 $ 25.6 ================ ================ ================ ============= 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, 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: Common stock available for sale............ $ 101.9 $ 118.8 $ 22.4 $ 198.3 ================ ================ ================ =============
13 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, AXA Financial 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 AXA Financial. 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, 1999 and 1998, securities without a readily ascertainable market value having an amortized cost of $3,475.7 million and $3,699.1 million, respectively, had estimated fair values of $3,336.9 million and $3,927.0 million, respectively. The contractual maturity of bonds at December 31, 1999 is shown below:
HELD TO MATURITY AVAILABLE FOR SALE ------------------------------------ ------------------------------------ AMORTIZED ESTIMATED AMORTIZED ESTIMATED COST FAIR VALUE COST FAIR VALUE ----------------- ----------------- ---------------- ----------------- (IN MILLIONS) Due in one year or less......... $ - $ - $ 494.2 $ 492.7 Due in years two through five... 139.8 139.7 3,097.3 3,025.3 Due in years six through ten.... 46.2 47.5 7,222.6 6,837.2 Due after ten years............. 67.4 72.1 5,925.3 5,726.8 Mortgage-backed securities...... - - 2,576.1 2,490.0 ---------------- ---------------- --------------- ---------------- Total........................... $ 253.4 $ 259.3 $ 19,315.5 $ 18,572.0 ================ ================ =============== ================
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, 1999, approximately 14.0% of the $19,568.9 million aggregate amortized cost of bonds held by AXA Financial 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. The carrying values at December 31, 1999 and 1998 were $647.9 million and $562.6 million, respectively. Investment valuation allowances and changes thereto follow:
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Balances, beginning of year........................ $ 230.6 $ 384.5 $ 137.1 Additions charged to income........................ 68.2 86.2 334.6 Deductions for writedowns and asset dispositions............................... (150.2) (240.1) (87.2) ---------------- --------------- ---------------- Balances, End of Year.............................. $ 148.6 $ 230.6 $ 384.5 ================ =============== ================ Balances, end of year comprise: Mortgage loans on real estate.................... $ 27.5 $ 34.3 $ 55.8 Equity real estate............................... 121.1 196.3 328.7 ----------------- ---------------- ----------------- Total.............................................. $ 148.6 $ 230.6 $ 384.5 ================= ================ =================
14 At December 31, 1999, the carrying value of fixed maturities which were non-income producing for the twelve months preceding the consolidated balance sheet date was $152.1 million. 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 $106.0 million and $115.1 million at December 31, 1999 and 1998, 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 $9.5 million, $10.3 million and $17.2 million in 1999, 1998 and 1997, respectively. Gross interest income on these loans included in net investment income aggregated $8.2 million, $8.3 million and $12.7 million in 1999, 1998 and 1997, respectively. Impaired mortgage loans along with the related provision for losses follow:
DECEMBER 31, ---------------------------------------- 1999 1998 ------------------- ------------------- (IN MILLIONS) Impaired mortgage loans with provision for losses.................. $ 142.4 $ 125.4 Impaired mortgage loans without provision for losses............... 2.2 8.6 ------------------ ------------------ Recorded investment in impaired mortgage loans..................... 144.6 134.0 Provision for losses............................................... (23.0) (29.0) ------------------ ------------------ Net Impaired Mortgage Loans........................................ $ 121.6 $ 105.0 ================== ==================
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 1999, 1998 and 1997, respectively, AXA Financial's average recorded investment in impaired mortgage loans was $141.7 million, $161.3 million and $246.9 million. Interest income recognized on these impaired mortgage loans totaled $12.0 million, $12.3 million and $15.2 million ($.0 million, $.9 million and $2.3 million recognized on a cash basis) for 1999, 1998 and 1997, 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, 1999 and 1998, the carrying value of equity real estate held for sale amounted to $382.2 million and $836.2 million, respectively. For 1999, 1998 and 1997, respectively, real estate of $20.5 million, $7.1 million and $152.0 million was acquired in satisfaction of debt. At December 31, 1999 and 1998, AXA Financial owned $443.9 million and $552.3 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 $251.6 million and $374.8 million at December 31, 1999 and 1998, respectively. Depreciation expense on real estate totaled $21.8 million, $30.5 million and $74.9 million for 1999, 1998 and 1997, respectively. 15 4) JOINT VENTURES AND PARTNERSHIPS Summarized combined financial information for real estate joint ventures (25 individual ventures at both December 31, 1999 and 1998) and for limited partnership interests accounted for under the equity method, in which AXA Financial has an investment of $10.0 million or greater and an equity interest of 10% or greater, follows:
DECEMBER 31, ------------------------------------ 1999 1998 ---------------- ----------------- (IN MILLIONS) BALANCE SHEETS Investments in real estate, at depreciated cost........................ $ 861.1 $ 913.7 Investments in securities, generally at estimated fair value........... 678.4 636.9 Cash and cash equivalents.............................................. 68.4 85.9 Other assets........................................................... 239.3 279.8 ---------------- ----------------- Total Assets........................................................... $ 1,847.2 $ 1,916.3 ================ ================= Borrowed funds - third party........................................... $ 354.2 $ 367.1 Borrowed funds - AXA Financial......................................... 28.9 30.1 Other liabilities...................................................... 313.9 197.2 ---------------- ----------------- Total liabilities...................................................... 697.0 594.4 ---------------- ----------------- Partners' capital...................................................... 1,150.2 1,321.9 ---------------- ----------------- Total Liabilities and Partners' Capital................................ $ 1,847.2 $ 1,916.3 ================ ================= Equity in partners' capital included above............................. $ 316.5 $ 365.6 Equity in limited partnership interests not included above and other... 524.1 390.1 ---------------- ----------------- Carrying Value......................................................... $ 840.6 $ 755.7 ================ =================
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) STATEMENTS OF EARNINGS Revenues of real estate joint ventures............. $ 180.5 $ 246.1 $ 310.5 Revenues of other limited partnership interests.... 455.1 128.9 506.3 Interest expense - third party..................... (39.8) (33.3) (91.8) Interest expense - AXA Financial................... (2.5) (2.6) (7.2) Other expenses..................................... (139.0) (197.0) (263.6) ----------------- ---------------- ----------------- Net Earnings....................................... $ 454.3 $ 142.1 $ 454.2 ================= ================ ================= Equity in net earnings included above.............. $ 10.5 $ 44.4 $ 76.7 Equity in net earnings of limited partnership interests not included above..................... 76.0 37.9 69.5 Other.............................................. - - (.9) ----------------- ---------------- ----------------- Total Equity in Net Earnings....................... $ 86.5 $ 82.3 $ 145.3 ================= ================ =================
16 5) NET INVESTMENT INCOME AND INVESTMENT GAINS (LOSSES) The sources of net investment income follow:
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Fixed maturities................................... $ 1,523.1 $ 1,521.4 $ 1,490.5 Mortgage loans on real estate...................... 253.4 235.4 260.8 Equity real estate................................. 250.2 356.1 390.4 Other equity investments........................... 171.4 83.8 157.0 Policy loans....................................... 143.8 144.9 177.0 Other investment income............................ 154.3 181.0 173.8 ----------------- ---------------- ----------------- Gross investment income.......................... 2,496.2 2,522.6 2,649.5 ----------------- ---------------- ----------------- Investment expenses................................ 232.9 266.7 343.3 ----------------- ---------------- ----------------- Net Investment Income.............................. $ 2,263.3 $ 2,255.9 $ 2,306.2 ================= ================ ================= Investment gains (losses) including changes in the valuation allowances follow: 1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Investment (losses) gains, net: Fixed maturities................................. $ (294.7) $ (26.0) $ 89.6 Mortgage loans on real estate.................... (3.3) (10.9) (11.2) Equity real estate............................... (2.4) 74.5 (391.3) Other equity investments......................... 92.6 31.8 14.3 Sale of subsidiaries............................. - (2.6) 252.1 Issuance and sales of Alliance Units............. 5.5 19.8 - Other............................................ - (4.4) - ----------------- ---------------- ----------------- Total Investment (Losses) Gains, Net........... $ (202.3) $ 82.2 $ (46.5) ================= ================ =================
Writedowns of fixed maturities amounted to $223.2 million, $101.6 million and $12.8 million for 1999, 1998 and 1997, respectively, and writedowns of equity real estate amounted to $136.4 million for 1997. In fourth quarter 1997, AXA Financial 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 1999, 1998 and 1997, respectively, proceeds received on sales of fixed maturities classified as available for sale amounted to $7,650.0 million, $16,775.7 million and $10,317.6 million. Gross gains of $75.3 million, $150.7 million and $167.6 million and gross losses of $218.7 million, $97.8 million and $109.0 million, respectively, were realized on these sales. The change in unrealized investment (losses) gains related to fixed maturities classified as available for sale for 1999, 1998 and 1997 amounted to $(1,319.4) million, $(330.0) million and $511.3 million, respectively. On January 1, 1999, investments in publicly-traded common equity securities in the General Account and the Holding Company portfolios within other equity investments amounting to $149.8 million were transferred from available for sale securities to trading securities. As a result of this transfer, unrealized investment gains of $87.3 million ($45.7 million net of related DAC and Federal income taxes) were recognized in the consolidated statements of earnings. Net unrealized holding gains of $2.1 million were included in net investment income in the consolidated statements of earnings for 1999. These trading securities had a carrying value of $16.4 million and cost of $14.3 million at December 31, 1999. 17 For 1999, 1998 and 1997, investment results passed through to certain participating group annuity contracts as interest credited to policyholders' account balances amounted to $131.5 million, $136.9 million and $137.5 million, respectively. In 1997, Equitable Life sold EREIM (other than its interest in Column Financial, Inc.) ("ERE") to Lend Lease Corporation Limited ("Lend Lease"), for $400.0 million and recognized an investment gain of $162.4 million, net of Federal income tax of $87.4 million. 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, the businesses sold reported combined revenues of $91.6 million and combined net earnings of $10.7 million. On June 30, 1997, Alliance reduced the recorded value of goodwill and contracts associated with Alliance's 1996 acquisition of Cursitor Holdings L.P. and Cursitor Holdings Limited (collectively, "Cursitor") by $120.9 million since Cursitor's business fundamentals no longer supported the carrying value of its investment. AXA Financial's earnings from continuing operations 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. 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 follow:
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Balance, beginning of year......................... $ 378.1 $ 523.7 $ 179.3 Changes in unrealized investment (losses) gains.... (1,496.7) (236.5) 543.9 Changes in unrealized investment losses (gains) attributable to: Participating group annuity contracts.......... 24.7 (5.7) 53.2 DAC............................................ 208.6 13.2 (89.0) Deferred Federal income taxes.................. 478.9 83.4 (163.7) ----------------- ---------------- ----------------- Balance, End of Year............................... $ (406.4) $ 378.1 $ 523.7 ================= ================ ================= Balance, end of year comprises: Unrealized investment (losses) gains on: Fixed maturities............................... $ (778.0) $ 541.4 $ 871.4 Other equity investments....................... (16.3) 96.4 33.1 Other, principally Closed Block................ 47.5 112.1 81.9 ----------------- ---------------- ----------------- Total........................................ (746.8) 749.9 986.4 Amounts of unrealized investment losses (gains) attributable to: Participating group annuity contracts........ - (24.7) (19.0) DAC.......................................... 80.8 (127.8) (141.0) Deferred Federal income taxes................ 259.6 (219.3) (302.7) ----------------- ---------------- ----------------- Total.............................................. $ (406.4) $ 378.1 $ 523.7 ================= ================ =================
Changes in unrealized gains (losses) reflect changes in fair value of only those fixed maturities and equity securities classified as available for sale and do not reflect any changes in fair value of policyholders' account balances and future policy benefits. 18 6) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) Accumulated other comprehensive income (loss) represents cumulative gains and losses on items that are not reflected in earnings. The balances for the past three years follow:
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Unrealized (losses) gains on investments........... $ (406.4) $ 378.1 $ 523.7 Minimum pension liability.......................... (16.1) (28.3) (17.3) ----------------- ---------------- ----------------- Total Accumulated Other Comprehensive (Loss) Income...................... $ (422.5) $ 349.8 $ 506.4 ================= ================ =================
The components of other comprehensive income (loss) for the past three years follow:
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Net unrealized (losses) gains on investment securities: Net unrealized (losses) gains arising during the period..................................... $ (1,302.7) $ (178.0) $ 567.0 Adjustment to reclassify (gains) included in net earnings during the period.............. (194.0) (58.5) (23.1) ----------------- ---------------- ----------------- Net unrealized (losses) gains on investment securities....................................... (1,496.7) (236.5) 543.9 Adjustments for policyholder liabilities, DAC and deferred Federal income taxes................ 712.2 90.9 (199.5) ----------------- ---------------- ----------------- Change in unrealized (losses) gains, net of adjustments...................................... (784.5) (145.6) 344.4 Change in minimum pension liability................ 12.2 (11.0) (4.4) ----------------- ---------------- ----------------- Total Other Comprehensive (Loss) Income............ $ (772.3) $ (156.6) $ 340.0 ================= ================ =================
19 7) CLOSED BLOCK Summarized financial information for the Closed Block follows:
DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- (IN MILLIONS) BALANCE SHEETS Fixed Maturities: Available for sale, at estimated fair value (amortized cost, $4,144.8 and $4,149.0)........................................... $ 4,014.0 $ 4,373.2 Mortgage loans on real estate........................................ 1,704.2 1,633.4 Policy loans......................................................... 1,593.9 1,641.2 Cash and other invested assets....................................... 194.4 86.5 Deferred policy acquisitions costs................................... 895.5 676.5 Other assets......................................................... 205.3 221.6 ----------------- ----------------- Total Assets......................................................... $ 8,607.3 $ 8,632.4 ================= ================= Future policy benefits and policyholders' account balances........... $ 9,011.7 $ 9,013.1 Other liabilities.................................................... 13.3 63.9 ----------------- ----------------- Total Liabilities.................................................... $ 9,025.0 $ 9,077.0 ================= =================
----------------- ---------------- ----------------- ----------------- ---------------- ----------------- 1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) STATEMENTS OF EARNINGS Premiums and other revenue......................... $ 619.1 $ 661.7 $ 687.1 Investment income (net of investment expenses of $15.8, $15.5 and $27.0).............. 574.2 569.7 574.9 Investment (losses) gains, net..................... (11.3) .5 (42.4) ----------------- ---------------- ----------------- Total revenues............................... 1,182.0 1,231.9 1,219.6 ----------------- ---------------- ----------------- Policyholders' benefits and dividends.............. 1,024.7 1,082.0 1,066.7 Other operating costs and expenses................. 70.9 62.8 50.4 ----------------- ---------------- ----------------- Total benefits and other deductions.......... 1,095.6 1,144.8 1,117.1 ----------------- ---------------- ----------------- Contribution from the Closed Block................. $ 86.4 $ 87.1 $ 102.5 ================= ================ =================
Impaired mortgage loans along with the related provision for losses follows:
DECEMBER 31, ------------------------------------ 1999 1998 ---------------- ----------------- (IN MILLIONS) Impaired mortgage loans with provision for losses...................... $ 26.8 $ 55.5 Impaired mortgage loans without provision for losses................... 4.5 7.6 ---------------- ----------------- Recorded investment in impaired mortgages.............................. 31.3 63.1 Provision for losses................................................... (4.1) (10.1) ---------------- ----------------- Net Impaired Mortgage Loans............................................ $ 27.2 $ 53.0 ================ =================
During 1999, 1998 and 1997, the Closed Block's average recorded investment in impaired mortgage loans was $37.0 million, $85.5 million and $110.2 million, respectively. Interest income recognized on these impaired mortgage loans totaled $3.3 million, $4.7 million and $9.4 million ($.3 million, $1.5 million and $4.1 million recognized on a cash basis) for 1999, 1998 and 1997, respectively. 20 Valuation allowances amounted to $4.6 million and $11.1 million on mortgage loans on real estate and $24.7 million and $15.4 million on equity real estate at December 31, 1999 and 1998, respectively. Writedowns of fixed maturities amounted to $3.5 million for 1997. Writedowns of equity real estate amounted to $28.8 million for 1997. In fourth quarter 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. Also 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. 8) DISCONTINUED OPERATIONS INVESTMENT BANKING AND BROKERAGE SEGMENT ---------------------------------------- In 2000, AXA Financial sold its majority share holdings in DLJ. As a result of the sale, the Investment Banking and Brokerage segment is reflected as discontinued operations in the financial statements. Operating results for the Investment Banking and Brokerage segment for the years ended December 31, 1999, 1998 and 1997 are included in discontinued operations in the accompanying consolidated statement of earnings. Prior year information in that statement of earnings including earnings per share amounts have been restated to reflect this designation as a discontinued business.
DECEMBER 31, December 31 1999 1998 ------------------ ----------------- (IN MILLIONS) BALANCE SHEETS Securities purchased under resale agreements........................ $ 29,538.1 $ 20,063.8 Investment banking trading account securities, at market value...... 27,982.4 13,195.1 Cash and cash equivalents........................................... 2,020.5 1,049.3 Broker-dealer related receivables................................... 44,998.1 34,264.5 Other assets........................................................ 4,403.2 3,244.6 ----------------- ----------------- Total assets......................................................... 108,942.3 71,817.3 ----------------- ----------------- Securities sold under repurchase agreements......................... 56,474.4 35,775.6 Broker-dealer related payables...................................... 37,207.4 26,161.5 Short-term and long-term debt....................................... 6,518.6 3,997.6 Other liabilities................................................... 5,184.4 3,306.3 Minority interest................................................... 1,104.3 743.2 ----------------- ----------------- Total liabilities.................................................... 106,489.1 69,984.2 ----------------- ----------------- Net Assets........................................................... $ 2,453.2 $ 1,833.1 ================= =================
Revenues from the Investment Banking and Brokerage segment were $7,388.6 million, $5,459.2 million and $4,656.7 million for 1999, 1998 and 1997, respectively. Net earnings from operations of the Investment Banking and Brokerage segment for 1999, 1998 and 1997, were $630.1 million, $278.6 million and $294.8 million, respectively. Federal income taxes related to those amounts were $188.4 million, $134.4 million and 132.9 million for 1999, 1998 and 1997, respectively. 21 Net earnings from Investment Banking and Brokerage segment included a non-cash pre-tax realized gain of $212.3 million related to DLJ's offering of a new class of common stock to track the performance of DLJdirect in 1999. OTHER DISCONTINUED OPERATIONS ----------------------------- Summarized financial information for other discontinued operations follows.
DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- (IN MILLIONS) BALANCE SHEETS Mortgage loans on real estate........................................ $ 454.6 $ 553.9 Equity real estate................................................... 426.6 611.0 Other equity investments............................................. 55.8 115.1 Other invested assets................................................ 87.1 24.9 ----------------- ----------------- Total investments.................................................. 1,024.1 1,304.9 Cash and cash equivalents............................................ 164.5 34.7 Other assets......................................................... 213.0 219.0 ----------------- ----------------- Total Assets......................................................... $ 1,401.6 $ 1,558.6 ================= ================= Policyholders' liabilities........................................... $ 993.3 $ 1,021.7 Allowance for future losses.......................................... 242.2 305.1 Other liabilities.................................................... 166.1 231.8 ----------------- ----------------- Total Liabilities.................................................... $ 1,401.6 $ 1,558.6 ================= =================
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) STATEMENTS OF EARNINGS Investment income (net of investment expenses of $49.3, $63.3 and $97.3).............. $ 98.7 $ 160.4 $ 188.6 Investment (losses) gains, net..................... (13.4) 35.7 (173.7) Policy fees, premiums and other income............. .2 (4.3) .2 ----------------- ---------------- ----------------- Total revenues..................................... 85.5 191.8 15.1 Benefits and other deductions...................... 104.8 141.5 169.5 (Losses charged) earnings credited to allowance for future losses................................ (19.3) 50.3 (154.4) ----------------- ---------------- ----------------- Pre-tax loss from operations....................... - - - Pre-tax earnings from releasing (loss from strengthening) the allowance for future losses........................................... 43.3 4.2 (134.1) Federal income tax (expense) benefit............... (15.2) (1.5) 46.9 ----------------- ---------------- ----------------- Earnings (Loss) from Other Discontinued Operations.. $ 28.1 $ 2.7 $ (87.2) ================= ================ =================
AXA Financial's quarterly process for evaluating the allowance for future losses applies the current period's results of other discontinued operations against the allowance, re-estimates future losses and adjusts the allowance, if appropriate. Additionally, as part of AXA Financial'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 1999 and 1998 and strengthening of allowance in 1997. In fourth quarter 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. Also in fourth quarter 1997, $92.5 million of writedowns on real estate held for production of income were recognized. 22 Benefits and other deductions includes $26.6 million and $53.3 million of interest expense related to amounts borrowed from continuing operations in 1998 and 1997, respectively. Valuation allowances of $1.9 million and $3.0 million on mortgage loans on real estate and $54.8 million and $34.8 million on equity real estate were held at December 31, 1999 and 1998, respectively. Writedowns of equity real estate were $95.7 million in 1997. During 1999, 1998 and 1997, other discontinued operations' average recorded investment in impaired mortgage loans was $13.8 million, $73.3 million and $89.2 million, respectively. Interest income recognized on these impaired mortgage loans totaled $1.7 million, $4.7 million and $6.6 million ($.0 million, $3.4 million and $5.3 million recognized on a cash basis) for 1999, 1998 and 1997, respectively. At December 31, 1999 and 1998, other discontinued operations had real estate acquired in satisfaction of debt with carrying values of $24.1 million and $50.0 million, respectively. 9) SHORT-TERM AND LONG-TERM DEBT Short-term and long-term debt consists of the following:
DECEMBER 31, -------------------------------------- 1999 1998 ----------------- ----------------- (IN MILLIONS) Short-term debt...................................................... $ 592.0 $ 209.4 ----------------- ----------------- Long-term debt: Holding Company: Senior notes, 6.5%, due 2008....................................... 249.3 249.2 Senior notes, 9%, due 2004......................................... 300.0 300.0 Senior exchange notes, 6.75% - 7.30%, due through 2003............. 179.0 214.0 Senior debentures, 7.0%, due 2028.................................. 347.5 347.4 ----------------- ----------------- Total Holding Company.......................................... 1,075.8 1,110.6 ----------------- ----------------- Equitable Life: Surplus notes, 6.95%, due 2005..................................... 399.5 399.4 Surplus notes, 7.70%, due 2015..................................... 199.7 199.7 Other.............................................................. .4 .3 ----------------- ----------------- Total Equitable Life........................................... 599.6 599.4 ----------------- ----------------- Wholly owned and joint venture real estate: Mortgage notes, 5.43% - 9.5%, due through 2017..................... 251.3 392.2 ----------------- ----------------- Alliance:.......................................................... - 10.8 ----------------- ----------------- Total long-term debt................................................. 1,926.7 2,113.0 ----------------- ----------------- Total Short-term and Long-term Debt.................................. $ 2,518.7 $ 2,322.4 ================= =================
Short-term Debt --------------- Equitable Life has a $700.0 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, 1999 range from 5.76% to 8.5%. There were no borrowings outstanding under this bank credit facility at December 31, 1999. Equitable Life has a commercial paper program with an issue limit of $1.0 billion. This program is available for general corporate purposes used to support Equitable Life's liquidity needs and is supported by Equitable Life's existing $700.0 million bank credit facility. At December 31, 1999, there were $166.9 million outstanding under this program. 23 Alliance has a $425.0 million five-year revolving credit facility with a group of commercial banks. Under the facility, the interest rate, at the option of Alliance, is a floating rate generally based upon a defined prime rate, a rate related to the London Interbank Offered Rate ("LIBOR") or the Federal Funds Rate. A facility fee is payable on the total facility. During July 1999, Alliance increased the size of its commercial paper program by $200.0 million from $425.0 million for a total available limit of $625.0 million. Borrowings from the revolving credit facility and the original commercial paper program 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 that require Alliance to, among other things, meet certain financial ratios. At December 31, 1999, Alliance had commercial paper outstanding totaling $384.7 million at an effective interest rate of 5.9%; there were no borrowings outstanding under Alliance's revolving credit facility. In December 1999, Alliance established a $100.0 million extendible commercial notes ("ECN") program to supplement its commercial paper program. ECNs are short-term debt instruments that do not require any back-up liquidity support. At December 31, 1999, there were no outstanding borrowings under the ECN program. 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. At December 31, 1999, AXA Financial is in compliance with all debt covenants. At December 31, 1999 and 1998, respectively, AXA Financial has pledged real estate of $323.6 million and $640.2 million as collateral for certain long-term debt. At December 31, 1999, aggregate maturities of the long-term debt based on required principal payments at maturity for 2000 and the succeeding four years are $38.0 million, $46.0 million, $56.2 million, $76.8 million and $300.0 million, respectively, and $1,448.7 million thereafter. In 1998, the Holding Company completed an offering under its existing shelf registration of $250.0 million 6.5% 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. 10) FEDERAL INCOME TAXES A summary of the Federal income tax expense in the consolidated statements of earnings follows:
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Federal income tax expense (benefit): Current.......................................... $ 152.3 $ 267.3 $ 171.0 Deferred......................................... 156.4 70.9 (80.1) ----------------- ---------------- ----------------- Total.............................................. $ 308.7 $ 338.2 $ 90.9 ================= ================ =================
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 their tax effects follow:
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Expected Federal income tax expense................ $ 341.6 $ 355.3 $ 174.7 Non-taxable minority interest...................... (58.5) (33.2) (38.0) Non-taxable subsidiary gains....................... - (14.1) - Adjustment of tax audit reserves................... 11.7 16.0 (81.7) Other.............................................. 13.9 14.2 35.9 ----------------- ---------------- ----------------- Federal Income Tax Expense......................... $ 308.7 $ 338.2 $ 90.9 ================= ================ =================
24 The components of the net deferred Federal income taxes are as follows:
DECEMBER 31, 1999 December 31, 1998 --------------------------------- --------------------------------- ASSETS LIABILITIES Assets Liabilities --------------- ---------------- --------------- --------------- (IN MILLIONS) Compensation and related benefits...... $ 86.5 $ - $ 117.6 $ - Other.................................. 35.7 - 67.8 - DAC, reserves and reinsurance.......... - 329.6 - 231.4 Investments............................ 155.7 - - 325.8 --------------- ---------------- --------------- --------------- Total.................................. $ 277.9 $ 329.6 $ 185.4 $ 557.2 =============== ================ =============== ===============
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 their tax effects follow:
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) DAC, reserves and reinsurance...................... $ 83.2 $ (7.7) $ 46.2 Investments........................................ 14.3 45.3 (115.6) Compensation and related benefits.................. 24.5 28.6 3.7 Other.............................................. 34.4 4.7 (14.4) ----------------- ---------------- ----------------- Deferred Federal Income Tax Expense (Benefit)................................ $ 156.4 $ 70.9 $ (80.1) ================= ================ =================
The Internal Revenue Service (the "IRS") is in the process of examining AXA Financial's consolidated Federal income tax returns for the years 1992 through 1996. Management believes these audits will have no material adverse effect on AXA Financial's consolidated results of operations. 11) CAPITAL STOCK In September 1999, the Board of Directors declared a two-for-one stock split (the "Stock Split") of the Holding Company's common stock ("Common Stock"). The Stock Split was effected in the form of a 100% stock dividend to shareholders of record on September 27, 1999 and was paid on October 1, 1999. The par value of the Common Stock remains at $0.01 per share. To reflect the par value of Common Stock after the split, an adjustment was made from Capital in excess of par value to Common stock, at par value. In the accompanying consolidated financial statements and footnotes, all Common Stock, per share and option data have been restated for the effect of the Stock Split. The Holding Company is authorized to issue 510 million shares of capital stock, of which 500 million shares are designated as 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, 1999 and 1998, respectively, 433.6 million and 437.6 million shares of Common Stock were outstanding. At December 31, 1999, approximately 51.1 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 16 million shares of its Common Stock from time to time in the open market or through privately negotiated transactions. In September 1998, the Holding Company's Board of Directors increased the number of shares authorized under the stock repurchase program to 30 million. At December 31, 1999, the Holding Company had repurchased 17.1 million shares of Common Stock at a cost of $490.8 million. 25 In 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 23.8 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 AXA Financial's consolidated shareholders' equity as the Series D Preferred Stock is reported as outstanding at fair value on AXA Financial'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, AXA Financial filed a shelf registration statement with the SEC to register approximately 23.8 million shares of AXA Financial's Common Stock issuable upon conversion of shares of the Series D Preferred Stock held by the SECT. In September 1999, the SECT released 4,020 Shares of Series D Preferred Stock which were converted into 1.6 million shares of Common Stock. AXA purchased 146,100 shares directly, the Holding Company purchased 1,356,500 shares in connection with its stock repurchase program while the remaining shares were sold through an agent to the public. The net proceeds of the sale after the repurchase of treasury shares of $7.4 million increased Shareholders' equity. In July 1997, the SECT released 8,040 shares of Series D Preferred Stock which were converted into 3.2 million shares of Common Stock. AXA purchased 1.92 million 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. At December 31, 1999, 1998 and 1997, the Holding Company's Common Stock into which the Series D Preferred Stock can be converted had a market value of $648.7 million, $598.4 million, and $514.4 million, respectively. In accordance with the 1997 Stock Incentive Plan, which is the successor to the 1991 Stock Incentive Plan, the Holding Company can issue options to purchase 32.8 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 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, 1999, 1998 and 1997, respectively, options to purchase 32,012,502 shares, 5,746,504 shares and 13,450,764 shares were available for future grant under the plans. AXA Financial'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 ("RSUs") acquired by DLJ employees (see Note 8). Options are exercisable over a period of up to ten years. DLJ RSUs 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, 1999, .2 million RSUs were forfeited. AXA Financial 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 AXA Financial's Stock Option Incentive Plans' options been determined based on SFAS No. 123's fair value based method, AXA Financial's pro forma net earnings and earnings per share for 1999, 1998 and 1997 would have been:
1999 1998 1997 --------------- --------------- --------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNT) Pro forma Net Earnings.................................... $ 1,063.3 $ 795.1 $ 542.1 Pro forma Earnings Per Share: Basic................................................. $ 2.43 $ 1.79 $ 1.30 Diluted............................................... $ 2.33 $ 1.74 $ 1.19
26 The fair values of options granted after December 31, 1994, used as a basis for the pro forma disclosures above, were estimated as of the grant dates using the Black-Scholes option pricing model. The option pricing assumptions for 1999, 1998 and 1997 follow:
HOLDING COMPANY DLJ ALLIANCE ------------------------------ ------------------------------- ---------------------------------- 1999 1998 1997 1999 1998 1997 1999 1998 1997 --------- ---------- --------- ---------- -------------------- --------- ------------ ----------- Dividend yield........ 0.31% 0.32% 0.48% 0.56% 0.69% 0.86% 8.70% 6.50% 8.00% Expected volatility... 28% 28% 20% 36% 40% 33% 29% 29% 26% Risk-free interest rate................ 5.46% 5.48% 5.99% 5.06% 5.53% 5.96% 5.70 4.40% 5.70% Expected life in years............ 5 5 5 5 5 5 7 7.2 7.2 Weighted average fair value per option at grant-date.......... $10.78 $11.32 $6.13 $17.19 $16.27 $10.81 $3.88 $3.86 $2.18
A summary of the Holding Company, DLJ and Alliance's option plans follows:
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 --------------- ------------- --------------- ------------- ----------------------------- Balance as of January 1, 1997........ 13.4 $10.40 22.2 $14.03 10.0 $ 9.54 Granted................ 6.4 $20.93 6.4 $30.54 2.2 $18.28 Exercised.............. (3.2) $10.13 (.2) $16.01 (1.2) $ 8.06 Forfeited.............. (.8) $11.72 (.2) $13.79 (.4) $10.64 --------------- ------------- --------------- Balance as of December 31, 1997...... 15.8 $14.53 28.2 $17.78 10.6 $11.41 Granted................ 8.6 $33.13 1.5 $38.59 2.8 $26.28 Exercised.............. (2.2) $10.59 (1.4) $14.91 (.9) $ 8.91 Forfeited.............. (.8) $23.51 (.1) $17.31 (.2) $13.14 --------------- ------------- --------------- Balance as of December 31, 1998...... 21.4 $22.00 28.2 $19.04 12.3 $14.92 Granted................ 4.3 $31.70 4.8 $45.23 2.0 $30.18 Exercised.............. (2.4) $13.26 (2.2) $34.61 (1.5) $ 9.51 Forfeited.............. (.6) $24.29 (.1) $15.85 (.3) $17.79 --------------- ------------- --------------- Balance as of December 31, 1999...... 22.7 $24.60 30.7 $23.30 12.5 $17.95 =============== ============= ===============
27 Information about options outstanding and exercisable at December 31, 1999 follows:
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 -------------------- $ 9.06 -$13.88 5.6 4.2 $10.50 10.9 $18.98 $14.25 -$22.63 5.2 7.7 $20.95 - - $25.32 -$34.59 8.2 8.7 $29.08 - - $40.97 -$41.28 3.7 8.6 $41.28 - - ----------------- ------------------ $ 9.06 -$41.28 22.7 7.3 $24.60 10.9 $18.98 ================= ================ =============== ================== ================ DLJ ---------------------- $13.50 -$25.99 20.2 8.4 $14.61 20.6 $16.62 $26.00 -$38.99 4.9 7.8 $33.99 - - $39.00 -$52.875 4.8 9.0 $43.28 - - $53.00 -$76.875 .8 9.7 $57.09 - - ----------------- ------------------ $13.50 -$76.875 30.7 8.4 $23.30 20.6 $16.62 ================= ================ =============== ================== ================ Alliance ---------------------- $ 3.66 -$ 9.81 2.6 3.8 $ 8.31 2.2 $ 8.12 $ 9.88 -$12.56 3.3 5.6 $11.16 2.6 $10.92 $13.75 -$18.47 1.8 7.9 $18.34 .7 $18.34 $18.78 -$26.31 2.8 8.9 $26.16 .6 $26.06 $27.31 -$30.94 2.0 9.9 $30.24 - - ----------------- ------------------ $ 3.66 -$30.94 12.5 7.0 $17.95 6.1 $12.12 ================= ================ =============== ================== ================
28 12) COMPUTATION OF EARNINGS PER SHARE
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Earnings from continuing operations................ $ 467.9 $ 551.8 $ 353.4 Less - dividends on preferred stocks............... - - (15.6) ----------------- ---------------- ----------------- Earnings from continuing operations applicable to common shares - Basic......................... 467.9 551.8 337.8 Add - dividends on convertible preferred stock and interest on convertible subordinated debt, when dilutive.............................. - - 24.5 Less - effect of assumed exercise of options of publicly held subsidiary...................... (4.0) (2.7) (1.6) ----------------- ---------------- ----------------- Earnings from Continuing Operations Applicable to Common Shares - Diluted....................... $ 463.9 $ 549.1 $ 360.7 ================= ================ ================= Weighted average common shares outstanding - Basic.............................. 437.1 443.3 403.3 Add - assumed exercise of stock options............ 5.2 5.5 3.5 Add - assumed conversion of convertible preferred stock.................................. - - 20.8 Add - assumed conversion of convertible subordinated debt................................ - - 17.2 ----------------- ---------------- ----------------- Weighted Average Shares outstanding - Diluted............................ 442.3 448.8 444.8 ================= ================ =================
Shares of the Series D Preferred Stock (or Common Stock issuable on conversion thereof) are not considered 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:
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Direct premiums.................................... $ 420.6 $ 438.8 $ 448.6 Reinsurance assumed................................ 206.7 203.6 198.3 Reinsurance ceded.................................. (69.1) (54.3) (45.4) ----------------- ---------------- ----------------- Premiums........................................... $ 558.2 $ 588.1 $ 601.5 ================= ================ ================= Universal Life and Investment-type Product Policy Fee Income Ceded.......................... $ 69.7 $ 75.7 $ 61.0 ================= ================ ================= Policyholders' Benefits Ceded...................... $ 99.6 $ 85.9 $ 70.6 ================= ================ ================= Interest Credited to Policyholders' Account Balances Ceded................................... $ 38.5 $ 39.5 $ 36.4 ================= ================ =================
29 Since 1997, AXA Financial reinsures on a yearly renewal term basis 90% of the mortality risk on new issues of certain term, universal and variable life products. AXA Financial's retention limit on joint survivorship policies is $15.0 million. All in force business above $5.0 million is reinsured. The Insurance Group also reinsures the entire risk on certain substandard underwriting risks and in certain other cases. For the years ended December 31, 1999 and 1998, respectively, reinsurance recoverables related to insurance contracts outside of the Closed Block amounting to $881.5 million and $810.2 million are included in the consolidated balance sheets in other assets and reinsurance payables related to insurance contracts outside of the Closed Block amounting to $682.5 million and $531.8 million are included in other liabilities. The Insurance Group cedes 100% of its group life and health business to a third party insurer. Premiums ceded totaled $.1 million, $1.3 million and $1.6 million for 1999, 1998 and 1997, respectively. Ceded death and disability benefits totaled $44.7 million, $15.6 million and $4.3 million for 1999, 1998 and 1997, respectively. Insurance liabilities ceded totaled $510.5 million and $560.3 million at December 31, 1999 and 1998, respectively. 14) EMPLOYEE BENEFIT PLANS AXA Financial sponsors qualified and non-qualified defined benefit plans covering substantially all employees (including certain qualified part-time employees), managers and certain agents. 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. AXA Financial'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 (credit) cost for the qualified and non-qualified plans were as follows:
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Service cost....................................... $ 36.7 $ 33.2 $ 32.5 Interest cost on projected benefit obligations..... 131.6 129.2 128.2 Expected return on assets.......................... (189.8) (175.6) (307.6) Net amortization and deferrals..................... 7.5 6.1 166.6 ----------------- ---------------- ----------------- Net Periodic Pension (Credit) Cost................. $ (14.0) $ (7.1) $ 19.7 ================= ================ =================
The plans' projected benefit obligations under the qualified and non-qualified plans was comprised of:
DECEMBER 31, ------------------------------------ 1999 1998 ---------------- ----------------- (IN MILLIONS) Benefit obligations, beginning of year................................. $ 1,933.4 $ 1,801.3 Service cost........................................................... 36.7 33.2 Interest cost.......................................................... 131.6 129.2 Actuarial (gains) losses............................................... (53.3) 108.4 Benefits paid.......................................................... (123.1) (138.7) ---------------- ----------------- Benefit Obligations, End of Year....................................... $ 1,925.3 $ 1,933.4 ================ =================
30 The funded status of the qualified and non-qualified pension plans was as follows:
DECEMBER 31, ------------------------------------ 1999 1998 ---------------- ----------------- (IN MILLIONS) Plan assets at fair value, beginning of year........................... $ 2,083.1 $ 1,867.4 Actual return on plan assets........................................... 369.0 338.9 Contributions.......................................................... .1 - Benefits paid and fees................................................. (108.5) (123.2) ---------------- ----------------- Plan assets at fair value, end of year................................. 2,343.7 2,083.1 Projected benefit obligations.......................................... 1,925.3 1,933.4 ---------------- ----------------- Excess of plan assets over projected benefit obligations............... 418.4 149.7 Unrecognized prior service cost........................................ (5.2) (7.5) Unrecognized net (gain) loss from past experience different from that assumed.................................................... (197.3) 38.7 Unrecognized net asset at transition................................... (.1) 1.5 ---------------- ----------------- Prepaid Pension Cost, Net............................................. $ 215.8 $ 182.4 ================ =================
The prepaid pension cost for pension plans with assets in excess of projected benefit obligations was $412.2 million and $363.9 million and the accrued liability for pension plans with accumulated benefit obligations in excess of plan assets was $196.4 million and $181.5 million at December 31, 1999 and 1998, respectively. The pension plan assets include corporate and government debt securities, equity securities, equity real estate and shares of group trusts managed by Alliance. The discount rate and rate of increase in future compensation levels used in determining the actuarial present value of projected benefit obligations were 8.0% and 6.38%, respectively, at December 31, 1999 and 7.0% and 3.83%, respectively, at December 31, 1998. As of January 1, 1999 and 1998, the expected long-term rate of return on assets for the retirement plan was 10.0% and 10.25%, respectively. AXA Financial recorded, as a reduction of shareholders' equity, an additional minimum pension liability of $16.1 million, $28.3 million and $17.3 million, net of Federal income taxes, at December 31, 1999, 1998 and 1997, respectively, primarily representing the excess of the accumulated benefit obligation of the non-qualified pension plan over the accrued liability. The aggregate accumulated benefit obligation and fair value of plan assets for pension plans with accumulated benefit obligations in excess of plan assets were $325.7 million and $36.3 million, respectively, at December 31, 1999 and $309.7 million and $34.5 million, respectively, at December 31, 1998. 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 $30.2 million, $31.8 million and $33.2 million for 1999, 1998 and 1997, respectively. AXA Financial provides certain medical and life insurance benefits (collectively, "postretirement benefits") for qualifying employees, managers and agents retiring from AXA Financial (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. AXA Financial continues to fund postretirement benefits costs on a pay-as-you-go basis and, for 1999, 1998 and 1997, AXA Financial made estimated postretirement benefits payments of $29.5 million, $28.4 million and $18.7 million, respectively. 31 The following table sets forth the postretirement benefits plan's status, reconciled to amounts recognized in AXA Financial's consolidated financial statements:
1999 1998 1997 ----------------- ---------------- ----------------- (IN MILLIONS) Service cost....................................... $ 4.7 $ 4.6 $ 4.5 Interest cost on accumulated postretirement benefits obligation.............................. 34.4 33.6 34.7 Unrecognized prior service costs................... (7.0) - - Net amortization and deferrals..................... 8.4 .5 1.9 ----------------- ---------------- ----------------- Net Periodic Postretirement Benefits Costs......... $ 40.5 $ 38.7 $ 41.1 ================= ================ =================
DECEMBER 31, ------------------------------------ 1999 1998 ---------------- ----------------- (IN MILLIONS) Accumulated postretirement benefits obligation, beginning of year.............................................................. $ 490.4 $ 490.8 Service cost........................................................... 4.7 4.6 Interest cost.......................................................... 34.4 33.6 Contributions and benefits paid........................................ (29.5) (28.4) Actuarial gains........................................................ (29.0) (10.2) ---------------- ----------------- Accumulated postretirement benefits obligation, end of year............ 471.0 490.4 Unrecognized prior service cost........................................ 26.9 31.8 Unrecognized net loss from past experience different from that assumed and from changes in assumptions.................... (86.0) (121.2) ---------------- ----------------- Accrued Postretirement Benefits Cost................................... $ 411.9 $ 401.0 ================ =================
Since January 1, 1994, costs to AXA Financial 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 7.5% in 1999, gradually declining to 4.75% in the year 2010, and in 1998 was 8.0%, gradually declining to 2.5% in the year 2009. The discount rate used in determining the accumulated postretirement benefits obligation was 8.0% and 7.0% at December 31, 1999 and 1998, respectively. If the health care cost trend rate assumptions were increased by 1%, the accumulated postretirement benefits obligation as of December 31, 1999 would be increased 3.55%. The effect of this change on the sum of the service cost and interest cost would be an increase of 3.91%. If the health care cost trend rate assumptions were decreased by 1% the accumulated postretirement benefits obligation as of December 31, 1999 would be decreased by 4.38%. The effect of this change on the sum of the service cost and interest cost would be a decrease of 4.96%. 32 15) DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS 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, 1999 and 1998, respectively, was $797.3 million and $880.9 million. The average unexpired terms at December 31, 1999 ranged from two months to 5.0 years. At December 31, 1999, the cost of terminating swaps in a loss position was $1.8 million. Equitable Life maintains an interest rate cap program designed to hedge crediting rates on interest-sensitive individual annuities contracts. The outstanding notional amounts at December 31, 1999 of contracts purchased and sold were $7,575.0 million and $875.0 million, respectively. The net premium paid by Equitable Life on these contracts was $51.6 million and is being amortized ratably over the contract periods ranging from 1 to 4 years. Income and expense resulting from this program are reflected as an adjustment to interest credited to policyholders' account balances. Fair Value of Financial Instruments ----------------------------------- AXA Financial 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 AXA Financial'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, 1999 and 1998. 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 AXA Financial'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 AXA Financial. AXA Financial's carrying value of short-term borrowings approximates their estimated fair value. 33 The carrying value and estimated fair value for financial instruments not previously disclosed in Notes 3, 7 and 8 are presented below:
DECEMBER 31, -------------------------------------------------------------------- 1999 1998 --------------------------------- --------------------------------- CARRYING ESTIMATED Carrying Estimated VALUE FAIR VALUE Value Fair Value --------------- ---------------- --------------- --------------- (IN MILLIONS) Consolidated AXA Financial: --------------------------- Mortgage loans on real estate.......... $ 3,270.0 $ 3,239.3 $ 2,809.9 $ 2,961.8 Other limited partnership interests.... 647.9 647.9 562.6 562.6 Policy loans........................... 2,257.3 2,359.5 2,086.7 2,370.7 Policyholders' account balances - investment contracts................. 12,740.4 12,800.5 12,892.0 13,396.0 Long-term debt......................... 1,926.7 1,878.9 2,113.0 2,213.3 Closed Block: ------------- Mortgage loans on real estate.......... $ 1,704.2 $ 1,650.3 $ 1,633.4 $ 1,703.5 Other equity investments............... 36.3 36.3 56.4 56.4 Policy loans........................... 1,593.9 1,712.0 1,641.2 1,929.7 SCNILC liability....................... 22.8 22.5 25.0 25.0 Discontinued Operations: ------------------------ Mortgage loans on real estate.......... $ 454.6 $ 467.0 $ 553.9 $ 599.9 Fixed maturities....................... 85.5 85.5 24.9 24.9 Other equity investments............... 1,488.5 1,488.5 588.9 588.9 Guaranteed interest contracts.......... 33.2 27.5 37.0 34.0 Long-term debt......................... 4,781.7 4,698.7 3,508.1 3,535.3
16) COMMITMENTS AND CONTINGENT LIABILITIES From time to time, AXA Financial has provided certain guarantees or commitments to affiliates, investors and others. At December 31, 1999, these arrangements include commitments by AXA Financial, under certain conditions: to make capital contributions of up to $59.4 million to affiliated real estate joint ventures; and to provide equity financing to certain limited partnerships of $373.8 million under existing loan or loan commitment agreements. Management believes AXA Financial 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. The Insurance Group had $24.9 million of letters of credit outstanding at December 31, 1999. 34 17) LITIGATION Insurance Group Life Insurance and Annuity Sales Cases A number of lawsuits are pending as individual claims and purported class actions against Equitable Life, its subsidiary insurance company and a former insurance subsidiary. 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 different 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, AXA Financial's management believes that the ultimate resolution of these cases should not have a material adverse effect on the financial position of AXA Financial. AXA Financial'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 AXA Financial's results of operations in any particular period. 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, AXA Financial's management believes that the ultimate resolution of this matter should not have a material adverse effect on the financial position of AXA Financial. AXA Financial's management cannot make an estimate of loss, if any, or predict whether or not such matter will have a material adverse effect on AXA Financial's results of operations in any particular period. Agent Health Benefits Case Equitable Life is a defendant in an action, certified as a class action in March 1999, in the United States District Court for the Northern District of California, 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. The class consists 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 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, AXA Financial's management believes that the ultimate resolution of this matter should not have a material adverse effect on the financial position of AXA Financial. AXA Financial's management cannot make an estimate of loss, if any, or predict whether or not such matter will have a material adverse effect on AXA Financial's results of operations in any particular period. 35 Prime Property Fund Case In January 2000, the California Supreme Court denied Equitable Life's petition for review of an October 1999 decision by the California Superior Court of Appeal. Such decision reversed the dismissal by the Supreme Court of Orange County, California of an action which was commenced in 1995 by a real estate developer in connection with a limited partnership formed in 1991 with Equitable Life on behalf of Prime Property Fund ("PPF"). Equitable Life serves as investment manager for PPF, an open-end, commingled real estate separate account of Equitable Life for pension clients. Plaintiff alleges breach of fiduciary duty and other claims principally in connection with PPF's 1995 purchase and subsequent foreclosure of the loan which financed the partnership's property. Plaintiff seeks compensatory and punitive damages. The case has been remanded to the Superior Court for further proceedings. Although the outcome of litigation cannot be predicted with certainty, AXA Financial's management believes that the ultimate resolution of this matter should not have a material adverse effect on the financial position of AXA Financial. AXA Financial's management cannot make an estimate of loss, if any, or predict whether or not this matter will have a material adverse effect on AXA Financial'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 Holding 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. In December 1999, the United States District Court for the Southern District of New York granted the defendants' motion for summary judgment on all claims against all defendants. Later in December 1999, the plaintiffs filed motions for reconsideration of the Court's ruling. These motions are currently pending with the Court. In connection with the Reorganization, Alliance assumed any liabilities which Alliance Holding may have with respect to this action. Alliance and Alliance Holding believe that the allegations in the amended complaint are without merit and intend to vigorously defend against these claims. While the ultimate outcome of this matter cannot be determined at this time, management of Alliance Holding and Alliance do not expect that it will have a material adverse effect on Alliance Holding's or Alliance's results of operations or financial condition. 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 AXA Financial's consolidated financial position or results of operations. Since AXA Financial sold its interest in DLJ to the Credit Suisse Group on November 3, 2000, AXA Financial will no longer disclose in its Notes to the Consolidated Financial Statements legal proceedings and related matters arising out of DLJ's and its subsidiaries' operations. 36 Events Subsequent to the Date of the Independent Accountants Report (Unaudited) - ----------------------------------------------------------------------------- Life Insurance and Annuity Sales Cases Equitable Life is a defendant in a purported class action commenced in March 2000 on behalf of persons who purchased variable annuities from Equitable Life from January 1989 to the present. The complaint alleges various improper sales practices, including misrepresentations in connection with the use of variable annuities in a qualified retirement plan or similar arrangement, charging inflated or hidden fees, and failure to disclose unnecessary tax deferral fees. The plaintiff seeks damages, including punitive damages, in an unspecified amount and attorneys' fees and expenses. In May 2000, Equitable Life removed the case to the United States District Court of Alabama and filed a motion to dismiss the complaint, and plaintiff moved to remand the case to state court. In June 2000, an action was brought against Equitable Life, AXA Advisors and EDI (the defendants) alleging that the defendants engaged in fraudulent and deceptive practices in connection with the marketing and sale of deferred annuity products to fund tax-qualified contributory retirement plans. The named plaintiff purports to act as a private attorney general on behalf of the general public of the State of California and also asserts individual common-law claims. On behalf of the named plaintiff, and in certain instances also on behalf of the general public, the complaint asserts claims for unlawful, unfair or fraudulent business acts and practices and for false or misleading advertising and for fraud, fraudulent concealment and deceit, negligent misrepresentation and negligence. The complaint seeks injunctive relief, restitution for members of the general public of the State of California who have been harmed by defendants' conduct, compensatory and punitive damages on behalf of the named plaintiff, and attorneys' fees, costs and expenses. By order dated October 11, 2000, the District Court denied plaintiff's motion to remand the case to state court and granted defendants' motion to dismiss the action. In October 2000, an action was brought against Equitable Life, AXA Advisors, and EDI (the defendants) by two individuals who purchased Equitable Life deferred annuity products. The action purports to be on behalf of a class consisting of all persons who purchased an individual deferred annuity contract or who received a certificate to a group deferred annuity contract, sold by one of the defendants, which was used to fund a contributory retirement plan or arrangement qualified for favorable income tax treatment; excluded from the class are officers, directors and agents of the defendants. The complaint alleges that the defendants engaged in fraudulent and deceptive practices in connection with the marketing and sale of deferred annuity products to fund tax-qualified contributory retirement plans and seeks injunctive and declaratory relief, an unspecified amount of compensatory and punitive damages, restitution for all members of the class, and an award of attorneys' fees, costs and expenses. In October 2000, the defendants removed the action to the United States District Court for the Eastern District of New York. The defendants' time to respond to the complaint has not yet expired. Agent Health Benefits Case In June 2000, plaintiffs appealed to the Court of Appeals for the Ninth Circuit contesting the District Court's award of legal fees to plaintiffs' counsel in connection with a previously settled count of the complaint unrelated to the health benefit claims. In that appeal, plaintiffs have challenged the District Court's subject matter jurisdiction over the health benefit claims. Briefing has not yet been completed. Prime Property Fund Case In May 2000, the court scheduled a jury trial for February 2001. In August 2000, Equitable Life filed a motion for summary adjudication on plaintiff's claims, based on the purchase and subsequent foreclosure of the loan which financed the partnership's property, for punitive damages. In October 2000, following the issuance of a tentative ruling denying Equitable Life's motion, the Superior Court heard oral argument and took the matter under submission. Also in October 2000, plaintiff filed a motion for leave to file a supplemental complaint to add allegations relating to the post-foreclosure transfer of certain funds from the partnership to Equitable Life. The proposed supplemental complaint alleges, among other things, that such conduct constitutes self-dealing and a breach of fiduciary duty, and seeks compensatory and punitive damages based on such conduct. 37 Alliance Reorganization Case In September 1999, an action was brought on behalf of a purported class of owners of limited partnership units of Alliance Holding challenging the then-proposed reorganization of Alliance Holding. Named defendants include Alliance Holding, Alliance, four Alliance Holding executives and the general partner of Alliance Holding and Alliance. Equitable Life is obligated to indemnify the defendants for losses and expenses arising out of the litigation. Plaintiffs allege inadequate and misleading disclosures, breaches of fiduciary duties, and the improper adoption of an amended partnership agreement by Alliance Holding and seek payment of unspecified money damages and an accounting of all benefits alleged to have been improperly obtained by the defendants. In September 2000, all defendants, except one Alliance Holding executive, filed an answer to the amended complaint denying the material allegations contained therein; in lieu of joining in the answer to the amended complaint, the Alliance Holding executive filed a motion to dismiss in September 2000. In November 2000, the remaining defendants filed a motion to dismiss the amended complaint and their opening brief in support thereto. Although the outcome of litigation cannot be predicted with certainty, particularly in the early stages of an action, AXA Financial's management believes that the ultimate resolution of this litigation should not have a material adverse effect on the consolidated financial position of AXA Financial. AXA Financial'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 AXA Financial's consolidated results of operations in any particular period. Alliance Capital In the Alliance North American Government Income Trust action, a Stipulation and Agreement of Settlement has been signed with the lawyers for the plaintiffs settling this action. Under the Stipulation and Agreement of Settlement, the Operating Partnership will permit shareholders of the fund to invest up to $250 million in Alliance mutual funds free of initial sales charges. On August 3, 2000, the court signed an order approving the Stipulation and Agreement of Settlement. Shareholders of the fund had thirty days from the date the order became final to appeal the order. The order became final on September 6, 2000. Disposal of DLJ Subsequent to the August 30, 2000 announcement of the proposed sale of DLJ, three putative class action lawsuits have been filed in the Delaware Court of Chancery naming AXA Financial as one of the defendants and challenging the proposed sale of DLJ because the transaction does not include the sale of DLJdirect tracking stock. The plaintiffs in these cases purport to represent a class consisting of the holders of DLJdirect tracking stock and their successors in interest, excluding the defendants and any person or entity related to or affiliated with any of the defendants. AXA Financial, DLJ and the DLJ directors are named as defendants. The complaints assert claims for breaches of fiduciary duties, and seek an unspecified amount of compensatory damages and costs and expenses, including attorneys' fees. The plaintiffs in one case unsuccessfully sought a hearing in connection with their motion for an order enjoining the transaction. The parties in these cases have agreed to extend the time for defendants to respond to the complaints. A putative class action lawsuit was filed in New York challenging the proposed sale of DLJ (for omitting the DLJdirect tracking stock) and also alleges claims relating to the initial offering of the DLJdirect tracking stock. The complaint alleges claims for violations of the securities laws, breaches of the fiduciary duties of loyalty, good faith and due care, aiding and abetting such breaches, and breach of contract. The plaintiff purports to represent a class consisting of: all purchasers of DLJdirect tracking stock in the initial public offering and thereafter (with respect to the securities law claims); and all owners of DLJdirect tracking stock who allegedly have been or will be injured by the 38 proposed sale of DLJ (with respect to all other claims). AXA Financial, Equitable Life, AXA S.A., DLJ, Donaldson, Lufkin & Jenrette Securities Corporation, Credit Suisse Group, Diamond Acquisition Corp., and DLJ's directors are named as defendants. The complaint seeks declaratory and injunctive relief, an unspecified amount of damages, and costs and expenses, including attorney's fees. The defendants' time to respond has not yet expired. AXA's Purchase of Holding Company Minority Interest Following the August 30, 2000 announcement of AXA's proposal to purchase the outstanding shares of Holding Company Common Stock that it does not already own, fourteen putative class action lawsuits were commenced in the Delaware Court of Chancery. The Holding Company, AXA, and directors and/or officers of the Holding Company are named as defendants in each of these lawsuits. The various plaintiffs each purport to represent a class consisting of owners of Holding Company Common Stock and their successors in interest, excluding the defendants and any person or entity related to or affiliated with any of the defendants. They challenge the adequacy of the offer announced by AXA and allege that the defendants have engaged or will engage in unfair dealing, overreaching and/or have breached or will breach fiduciary duties owed to the minority shareholders of the Holding Company. The complaints seek declaratory and injunctive relief, an accounting, and unspecified compensatory damages, costs and expenses, including attorneys' fees. A similar lawsuit was filed in the Supreme Court of the State of New York, County of New York, after the filing of the first Delaware action. By agreement, the defendants' time to respond to the complaints in the Delaware and New York actions has been extended indefinitely. Although the outcome of litigation cannot be predicted with certainty, AXA Financial's management believes that the ultimate resolution of the matters described above should not have a material adverse effect on the consolidated financial position of AXA Financial. AXA Financial's management cannot make an estimate of loss, if any, or predict whether or not such litigations will have a material adverse effect on AXA Financial's consolidated results of operations in any particular period. 39 18) LEASES AXA Financial has entered into operating leases for office space and certain other assets, principally information technology equipment and office furniture and equipment. Future minimum payments under noncancelable leases for 2000 and the four successive years are $111.2 million, $93.3 million, $78.3 million, $71.9 million, $66.5 million and $523.7 million thereafter. Minimum future sublease rental income on these noncancelable leases for 2000 and the four successive years is $5.2 million, $4.1 million, $2.8 million, $2.8 million, $2.8 million and $23.8 million thereafter. At December 31, 1999, the minimum future rental income on noncancelable operating leases for wholly owned investments in real estate for 2000 and the four successive years is $120.7 million, $113.5 million, $96.0 million, $79.7 million, $74.1 million and $354.6 million thereafter. 19) RESTRUCTURING COSTS During 1997, AXA Financial restructured certain operations in connection with cost reduction programs and recorded a pre-tax provision of $42.4 million. The amount paid during 1999, associated with cost reduction programs, totaled $15.6 million. At December 31, 1999, the remaining liabilities associated with cost reduction programs was $8.8 million. The 1997 cost reduction program included costs related to employee termination and exit costs. 40 20) INSURANCE GROUP STATUTORY FINANCIAL INFORMATION Equitable Life is restricted as to the amounts it may pay as dividends to the Holding Company. Under the New York Insurance Law, the Superintendent has broad discretion to determine whether the financial condition of a stock life insurance company would support the payment of dividends to its shareholders. For 1999, 1998 and 1997, statutory net income (loss) totaled $547.0 million, $384.4 million and ($351.7) million, respectively. Statutory surplus, capital stock and Asset Valuation Reserve ("AVR") totaled $5,570.6 million and $4,728.0 million at December 31, 1999 and 1998, respectively. In September 1999, $150.0 million in dividends were paid to the Holding Company by Equitable Life, the first such payment since Equitable Life's demutualization in 1992. At December 31, 1999, the Insurance Group, in accordance with various government and state regulations, had $26.8 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 under GAAP are primarily: (a) the 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) external and certain internal costs incurred to obtain or develop internal use computer software during the application development stage is capitalized under GAAP but expensed under SAP; (e) Federal income taxes are generally accrued under SAP based upon revenues and expenses in the Federal income tax return while under GAAP deferred taxes provide for timing differences between recognition of revenues and expenses for financial reporting and income tax purposes; (f) the 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 (g) differences in the accrual methodologies for post-employment and retirement benefit plans. Accounting practices used to prepare statutory financial statements for regulatory filings of stock life insurance companies differ in certain instances from GAAP. The following reconciles the Insurance Group's statutory change in surplus and capital stock and statutory surplus and capital stock determined in accordance with accounting practices prescribed by the New York Insurance Department with net earnings and equity on a GAAP basis. 41
1999 1998 1997 ---------------- --------------- ---------------- (IN MILLIONS) Net change in statutory surplus and capital stock.................................... $ 848.8 $ 709.2 $ 203.6 Change in asset valuation reserves................. (6.3) 111.8 147.1 ---------------- --------------- ---------------- Net change in statutory surplus, capital stock and asset valuation reserves..................... 842.5 821.0 350.7 Adjustments: Future policy benefits and policyholders' account balances............................... (85.0) (189.9) (31.1) DAC.............................................. 263.6 316.5 220.7 Deferred Federal income taxes.................... (161.4) (67.6) 103.1 Valuation of investments......................... 23.2 83.6 46.8 Valuation of investment subsidiary............... (133.6) (419.5) (555.8) Limited risk reinsurance......................... 128.4 83.7 82.3 Dividend paid to the Holding Company............. 150.0 - - Capital contribution............................. (470.8) - - Postretirement benefits.......................... - 54.8 (3.1) Other, net....................................... 248.2 134.7 30.3 GAAP adjustments of Closed Block................. (49.8) (27.1) 3.6 GAAP adjustments of other discontinued operations..................................... 51.3 (82.0) 189.7 ---------------- --------------- ---------------- Net Earnings of the Insurance Group................ $ 806.6 $ 708.2 $ 437.2 ================ =============== ================
DECEMBER 31, ------------------------------------------------------- 1999 1998 1997 ---------------- --------------- ---------------- (IN MILLIONS) Statutory surplus and capital stock................ $ 4,020.5 $ 3,171.7 $ 2,462.5 Asset valuation reserves........................... 1,550.1 1,556.4 1,444.6 ---------------- --------------- ---------------- Statutory surplus, capital stock and asset valuation reserves............................... 5,570.6 4,728.1 3,907.1 Adjustments: Future policy benefits and policyholders' account balances............................... (1,622.0) (1,526.0) (1,336.1) DAC.............................................. 4,033.0 3,563.8 3,236.6 Deferred Federal income taxes.................... (283.9) (346.9) (370.8) Valuation of investments......................... (568.2) 626.9 783.5 Valuation of investment subsidiary............... (1,891.7) (1,758.1) (1,338.6) Limited risk reinsurance......................... (39.6) (168.0) (254.2) Issuance of surplus notes........................ (539.1) (539.1) (539.0) Postretirement benefits.......................... - (262.7) (317.5) Other, net....................................... 544.8 313.4 203.7 GAAP adjustments of Closed Block................. 723.6 795.4 814.3 GAAP adjustments of other discontinued operations..................................... (160.0) (14.2) 71.5 ---------------- --------------- ---------------- Equity of the Insurance Group...................... $ 5,767.5 $ 5,412.6 $ 4,860.5 ================ =============== ================ 42
21) BUSINESS SEGMENT INFORMATION AXA Financial's operations consist of Financial Advisory/Insurance and Investment Management. AXA Financial'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 $75.6 million, $61.8 million and $84.1 million for 1999, 1998 and 1997, respectively, are included in total revenues of the Investment Management segment. These fees, excluding amounts related to discontinued operations of $.5 million, $.5 million and $4.2 million for 1999, 1998 and 1997, respectively, are eliminated in consolidation. The following tables reconcile each segment's revenues and adjusted earnings to total revenues and earnings from continuing operations before Federal income taxes as reported on the consolidated statements of earnings and the segments' assets to total assets on the consolidated balance sheets, respectively.
FINANCIAL ADVISORY/ INVESTMENT CONSOLIDATION/ INSURANCE MANAGEMENT ELIMINATION TOTAL --------------- ---------------- ----------------- -------------------- (IN MILLIONS) 1999 ---- Segment revenues....... $ 4,337.5 $ 1,870.2 $ (32.4) $ 6,175.3 Investment (losses) gains and other................ (198.9) 5.5 - (193.4) --------------- ----------------- ---------------- ----------------- Total Revenues......... $ 4,138.6 $ 1,875.7 $ (32.4) $ 5,981.9 =============== ================= ================ ================= Adjusted pre-tax earnings............. $ 852.9 $ 241.3 $ - $ 1,094.2 Investment (losses) gains net of related DAC and other charges.............. (207.8) 4.5 - (203.3) Non-recurring DAC adjustments.......... (131.7) - - (131.7) Pre-tax minority interest............. - 216.8 - 216.8 --------------- ----------------- ---------------- ----------------- Earnings from Continuing Operations........... $ 513.4 $ 462.6 $ - $ 976.0 =============== ================= ================ ================= Total Assets........... $ 87,213.9 $ 11,902.4 $ 2,477.5 $ 101,593.8 =============== ================= ================ =================
43
Financial Advisory/ Investment Consolidation/ Insurance Management Elimination Total --------------- ---------------- ---------------- -------------------- (In Millions) 1998 ---- Segment revenues....... $ 4,063.6 $ 1,328.7 $ (15.2) $ 5,377.1 Investment gains and other...... 65.0 17.2 - 82.2 --------------- ----------------- ---------------- ----------------- Total Revenues......... $ 4,128.6 $ 1,345.9 $ (15.2) $ 5,459.3 =============== ================= ================ ================= Adjusted pre-tax earnings............. $ 654.0 $ 169.1 $ - $ 823.1 Investment gains (losses), net of related DAC and other charges.............. 41.1 9.5 - 50.6 Pre-tax minority interest............. - 141.5 - 141.5 --------------- ----------------- ---------------- ----------------- Earnings from Continuing Operations........... $ 695.1 $ 320.1 $ - $ 1,015.2 =============== ================= ================ ================= Total Assets........... $ 76,109.4 $ 11,602.5 $ 1,805.0 $ 89,516.9 =============== ================= ================ ================= 1997 ---- Segment revenues....... $ 4,020.9 $ 1,073.5 $ (20.0) $ 5,074.4 Investment (losses) gains and other............ (317.2) 252.2 - (65.0) --------------- ----------------- ---------------- ----------------- Total Revenues......... $ 3,703.7 $ 1,325.7 $ (20.0) $ 5,009.4 =============== ================= ================ ================= Adjusted pre-tax earnings............. $ 469.6 $ 126.3 $ - $ 595.9 Investment (losses) gains, net of related DAC and other charges.............. (291.9) 249.9 - (42.0) Non-recurring costs and expenses......... (41.7) (121.6) - (163.3) Pre-tax minority interest............. - 108.5 - 108.5 --------------- ----------------- ---------------- ----------------- Earnings from Continuing Operations........... $ 136.0 $ 363.1 $ - $ 499.1 =============== ================= ================ ================= Total Assets........... $ 68,225.7 $ 13,124.2 $ 592.4 $ 81,942.3 =============== ================= ================ =================
44 22) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The quarterly results of operations for 1999 and 1998 are summarized below:
THREE MONTHS ENDED ------------------------------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 --------------- --------------- ---------------- ----------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1999 ---- Total Revenues...................... $ 1,442.9 $ 1,477.8 $ 1,483.7 $ 1,577.5 =============== =============== ================ ================= Earnings from Continuing Operations........................ $ 131.7 $ 72.4 $ 146.7 $ 117.1 =============== =============== ================ ================= Net Earnings........................ $ 221.1 $ 381.0 $ 231.6 $ 292.4 =============== =============== ================ ================= Per Common Share: Basic: Earnings from Continuing Operations................... $ .30 $ .17 $ .34 $ .27 =============== =============== ================ ================= Net Earnings................... $ .50 $ .87 $ .53 $ .55 =============== =============== ================ ================= Diluted: Earnings from Continuing Operations................... $ .30 $ .16 $ .33 $ .26 =============== =============== ================ ================= Net Earnings.............. $ .48 $ .83 $ .51 $ .64 =============== =============== ================ ================= 1998 ---- Total Revenues...................... $ 1,419.1 $ 1,387.3 $ 1,299.3 $ 1,353.6 =============== =============== ================ ================= Earnings from Continuing Operations........................ $ 152.2 $ 147.2 $ 125.0 $ 127.4 =============== =============== ================ ================= Net Earnings $ 266.6 $ 248.8 $ 139.8 $ 177.9 =============== =============== ================ ================= Per Common Share: Basic: Earnings from Continuing Operations................... $ .34 $ .33 $ .28 $ .29 =============== =============== ================ ================= Net Earnings................... $ .60 $ .56 $ .32 $ .40 =============== =============== ================ ================= Diluted: Earnings from Continuing Operations................... $ .34 $ .32 $ .28 $ .29 =============== =============== ================ ================= Net Earnings.............. $ .58 $ .53 $ .31 $ .39 =============== =============== ================ =================
45 23) SUBSEQUENT EVENTS (UNAUDITED) During July 2000, Equitable Life transferred, at no gain or loss, all the risk of its directly written DI business for years 1993 and prior to Centre Life Insurance Company, a subsidiary of Zurich Financial Services. The transfer of risk to Centre Life was accomplished through an indemnity reinsurance contract. The cost of the arrangement will be amortized over the expected lives of the contracts reinsured and will not have a significant impact on the results of operations in any specific period. In October 2000, the Board of Directors of the Holding Company, acting upon the unanimous recommendation of a special committee of independent directors, approved an agreement with AXA for the acquisition of the approximately 40% of outstanding Holding Company Common Stock it does not already own. Under the terms of the agreement, the minority shareholders of the Holding Company would receive $35.75 in cash and 0.295 of an AXA American Depositary Share ("ADS") for each Holding Company share. In October 2000, Alliance completed its acquisition of substantially all of the assets and liabilities of Sanford C. Bernstein ("Bernstein") for an aggregate current value of approximately $3.5 billion ($1.48 billion in cash and 40.8 million newly issued Alliance Units). The Holding Company provided Alliance with the cash portion of the consideration by purchasing approximately 32.6 million newly issued Alliance Units for $1.60 billion in June 2000. AXA Financial's consolidated economic interest in Alliance was 52.7% after the transaction closed. On November 3, 2000, AXA Financial sold its 63.0% interest in DLJ to Credit Suisse Group. AXA Financial received $2.33 billion in cash and $4.86 billion (or 25.2 million shares) in Credit Suisse Group common stock. The fair value of the stock consideration was based on the exchange rate and stock price at the time the transaction closed. Credit Suisse Group repurchased $1.18 billion (6.3 million shares) of it's common stock from AXA Financial at closing. AXA Financial estimates the gain on the DLJ sale at $2.35 billion (net of $2.01 billion in taxes, including the $407.0 million recorded in third quarter 2000). 46 EX-99.2 5 0005.txt CONSOLIDATED FINANCIAL STATEMENT SCHEDULES Exhibit 99.2 REPORT OF INDEPENDENT ACCOUNTANTS ON CONSOLIDATED FINANCIAL STATEMENT SCHEDULES To the Board of Directors of AXA Financial, Inc. Our audits of the consolidated financial statements referred to in our report dated February 1, 2000, except as to Note 8, which is as of November 6, 2000, appearing on page 1 of Exhibit 99.1 of this Current Report on Form 8-K also included an audit of the consolidated financial statement schedules appearing on pages 2 to 9 of Exhibit 99.2 of this Current Report on Form 8-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 New York, New York February 1, 2000, except as to Note 8, which is as of November 6, 2000 1 AXA FINANCIAL, INC. SCHEDULE I SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1999
ESTIMATED CARRYING TYPE OF INVESTMENT COST (A) FAIR VALUE VALUE - ------------------ ---------------- ----------------- ----------------- (IN MILLIONS) Fixed maturities: U.S. government, agencies and authorities.............. $ 1,218.0 $ 1,213.3 $ 1,213.3 State, municipalities and political subdivisions....... 110.0 106.5 106.5 Foreign governments.................................... 361.8 363.2 363.2 Public utilities....................................... 1,267.9 1,247.5 1,247.5 All other corporate bonds.............................. 16,611.2 15,900.8 15,894.9 Redeemable preferred stocks............................ 311.6 277.1 277.1 ---------------- ----------------- ----------------- Total fixed maturities................................. 19,880.5 19,108.4 19,102.5 ---------------- ----------------- ----------------- Equity securities: Common stocks: Industrial, miscellaneous and all other............ 39.8 25.6 25.6 Mortgage loans on real estate.......................... 3,270.0 3,239.3 3,270.0 Real estate............................................ 523.6 xxx 523.6 Real estate acquired in satisfaction of debt........... 443.9 xxx 443.9 Real estate joint ventures............................. 192.7 xxx 192.7 Policy loans........................................... 2,257.3 2,359.5 2,257.3 Other limited partnership interests.................... 647.9 647.9 647.9 Other invested assets.................................. 914.7 914.7 914.7 ---------------- ----------------- ----------------- Total Investments...................................... $ 28,170.4 $ 26,295.4 $ 27,378.2 ================ ================= =================
(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. 2 AXA FINANCIAL, INC. SCHEDULE II BALANCE SHEETS (PARENT COMPANY) DECEMBER 31, 1999 AND 1998
1999 1998 ----------------- ---------------- (IN MILLIONS) ASSETS Investment in consolidated subsidiaries................................ $ 7,123.8 $ 6,425.7 Fixed maturities available for sale, at estimated fair value (amortized costs, $245.5 and $446.0)............................... 241.4 447.6 Other invested assets.................................................. 66.5 98.2 ----------------- ---------------- Total investments................................................ 7,431.7 6,971.5 Cash and cash equivalents.............................................. 138.7 36.2 Other assets........................................................... 14.4 15.5 ----------------- ---------------- TOTAL ASSETS........................................................... $ 7,584.8 $ 7,023.2 ================= ================ LIABILITIES Short-term and long-term debt.......................................... $ 1,110.8 $ 1,140.6 Accrued liabilities.................................................... 635.1 189.5 ----------------- ---------------- Total liabilities................................................ 1,745.9 1,330.1 ----------------- ---------------- SHAREHOLDERS' EQUITY Series D convertible preferred stock................................... 239.7 259.8 Stock employee compensation trust...................................... (239.7) (259.8) Common stock, at par value............................................. 4.5 2.2 Capital in excess of par value......................................... 3,739.1 3,662.1 Treasury stock......................................................... (490.8) (247.1) Retained earnings...................................................... 3,008.6 1,926.1 Accumulated comprehensive income....................................... (422.5) 349.8 ----------------- ---------------- Total shareholders' equity....................................... 5,838.9 5,693.1 ----------------- ---------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. $ 7,584.8 $ 7,023.2 ================= ================
The financial information of AXA Financial, Inc. (Parent Company) should be read in conjunction with the Consolidated Financial Statements and Notes contained in Exhibit 99.1 attached hereto. For information regarding Capital Stock see Note 11 of Notes to Consolidated Financial Statements contained in Exhibit 99.1 attached hereto. Effective December 31, 1999, the Holding Company assumed primary liability from Equitable Life for all current and future obligations of its Excess Retirement Plan, Supplemental Executive Retirement Plan and certain other employee benefit plans that provide participants with medical, life insurance and deferred compensation benefits. The amount of liability associated with employee benefits assumed was $676.5 million. In addition, Equitable Life transferred the deferred tax assets totaling $236.8 million related to the assumed employee benefit plans to the Holding Company. 3 AXA FINANCIAL, INC. SCHEDULE II STATEMENTS OF EARNINGS (PARENT COMPANY) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ----------------- ----------------- --------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) REVENUES Equity in earnings from continuing operations............ $ 375.1 $ 563.4 $ 386.5 Net investment income.................................... 32.4 43.0 32.4 Investment gains, net.................................... 126.3 22.8 5.1 ----------------- ----------------- ----------------- Total revenues..................................... 533.8 629.2 424.0 ----------------- ----------------- ----------------- EXPENSES Interest expense......................................... 86.5 77.2 61.9 General and administrative expenses...................... 20.5 19.2 24.6 ----------------- ----------------- ----------------- Total expenses..................................... 107.0 96.4 86.5 ----------------- ----------------- ----------------- Earnings from continuing operations before Federal income taxes .................................. 426.8 532.8 337.5 Federal income tax benefit............................... 41.1 19.0 15.9 ----------------- ----------------- ----------------- Earnings from continuing operations...................... 467.9 551.8 353.4 Earnings (loss) from discontinued operations, net of Federal income taxes: Investment Banking and Brokerage segment............. 630.1 278.6 294.8 Other................................................ 28.1 2.7 (87.2) ----------------- ----------------- ----------------- Net earnings............................................. 1,126.1 833.1 561.0 Dividends on preferred stocks............................ - - 15.6 ----------------- ----------------- ----------------- Net Earnings Applicable to Common Shares................. $ 1,126.1 $ 833.1 $ 545.4 ================= ================= ================= Per Common Share: Basic: Earnings from continuing operations.................. $ 1.07 $ 1.24 $ .84 Discontinued operations, net of Federal income taxes....................................... 1.51 .64 .51 ----------------- ----------------- ----------------- Net Earnings......................................... $ 2.58 $ 1.88 $ 1.35 ================= ================= ================= Diluted: Earnings from continuing operations.................. $ 1.04 $ 1.22 $ .81 Discontinued operations, net of Federal income taxes....................................... 1.41 .59 .43 ----------------- ----------------- ----------------- Net Earnings......................................... $ 2.45 $ 1.81 $ 1.24 ================= ================= ================= Cash Dividend Per Common Share......................... $ .10 $ .10 $ .10 ================= ================= =================
4 AXA FINANCIAL, INC. SCHEDULE II STATEMENTS OF CASH FLOWS (PARENT COMPANY) YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997 ----------------- ----------------- --------------- (DOLLARS IN MILLIONS) Net earnings............................................. $ 1,126.1 $ 833.1 $ 561.0 Adjustments to reconcile net earnings to net cash provided (used) by operating activities: Equity in net earnings of subsidiaries................. (1,033.3) (844.7) (594.1) Dividends from subsidiaries............................ 162.2 11.9 11.7 Investment gains, net.................................. (126.3) (22.8) (5.1) Change in Federal income tax liability................. (3.4) (16.8) (150.0) Other.................................................. 15.7 3.7 12.6 ----------------- ----------------- ----------------- Net cash provided (used) by operating activities......... 141.0 (35.6) (163.9) ----------------- ----------------- ----------------- Cash flows from investing activities: Maturities and repayments.............................. 63.5 160.7 99.1 Sales.................................................. 502.6 711.7 527.9 Purchases.............................................. (379.2) (1,128.5) (524.2) Net change in short-term investments................... (1.3) - 4.1 Other.................................................. 14.2 (12.8) 36.6 ----------------- ----------------- ----------------- Net cash provided (used) by investing activities......... 199.8 (268.9) 143.5 ----------------- ----------------- ----------------- Cash flows from financing activities: Additions to long-term debt............................ - 596.7 - Repayment of short-term debt........................... (30.0) (25.0) (20.0) Dividends paid to shareholders......................... (43.8) (44.6) (46.8) Proceeds from issuance of common stock................. 79.2 30.2 87.2 Purchase of treasury stock............................. (243.7) (247.1) - Other.................................................. - 10.0 (4.5) ----------------- ----------------- ----------------- Net cash (used) provided by financing activities......... (238.3) 320.2 15.9 ----------------- ----------------- ----------------- Change in cash and cash equivalents...................... 102.5 15.7 (4.5) Cash and cash equivalents, beginning of year............. 36.2 20.5 25.0 ----------------- ----------------- ----------------- Cash and Cash Equivalents, End of Year................... $ 138.7 $ 36.2 $ 20.5 ================= ================= ================= Supplemental cash flow information Interest Paid.......................................... $ 85.2 $ 65.9 $ 64.9 ================= ================= ================= Income Taxes Paid...................................... $ 70.2 $ 254.3 $ 330.0 ================= ================= =================
5
AXA FINANCIAL, INC. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION AT AND FOR THE YEAR ENDED DECEMBER 31, 1999 FUTURE POLICY POLICY AMORTIZATION DEFERRED BENEFITS CHARGES (1) POLICYHOLDERS' OF DEFERRED (2) POLICY POLICYHOLDERS' AND OTHER AND NET BENEFITS AND POLICY OTHER ACQUISITION ACCOUNT POLICYHOLDERS' PREMIUM INVESTMENT INTEREST ACQUISITION OPERATING SEGMENT COSTS BALANCE FUNDS REVENUE INCOME CREDITED COST EXPENSE - ------------------------ ------------ ------------- ------------- ---------- -------- ------------ ------------ --------- (IN MILLIONS) Financial Advisory/ Insurance............ $ 4,033.0 $ 21,351.4 $ 4,777.6 $ 1,815.7 $ 2,205.9 $ 2,116.8 $ 446.2 $ 1,062.2 Investment Management........... - - - - 13.4 - - 1,413.1 Consolidation/ Elimination.......... - - - - 44.0 - - (32.4) ------------ ----------------------------- ------------ ------------- ------------- --------- ----------- Total.................. $ 4,033.0 $ 21,351.4 $ 4,777.6 $ 1,815.7 $ 2,263.3 $ 2,116.8 $ 446.2 $ 2,442.9 ============ ============================= ============ ============= ============= ========= =========== (1) Net investment income is based upon specific identification of portfolios within segments. (2) Operating expenses are principally incurred directly by a segment.
6 AXA FINANCIAL, INC. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION AT AND FOR THE YEAR ENDED DECEMBER 31, 1998
FUTURE POLICY POLICY AMORTIZATION DEFERRED BENEFITS CHARGES (1) POLICYHOLDERS' OF DEFERRED (2) POLICY POLICYHOLDERS' AND OTHER AND NET BENEFITS AND POLICY OTHER ACQUISITION ACCOUNT POLICYHOLDERS' PREMIUM INVESTMENT INTEREST ACQUISITION OPERATING SEGMENT COSTS BALANCE FUNDS REVENUE INCOME CREDITED COST EXPENSE - ------------------------ ------------ ------------- ------------- ---------- -------- ------------ ------------ --------- (IN MILLIONS) Financial Advisory/ Insurance............ $ 3,563.8 $ 20,857.7 $ 4,726.4 $ 1,644.3 $ 2,196.2 $ 2,178.2 $ 293.3 $ 962.0 Investment Management........... - - - - 14.9 .1 - 1,025.7 Consolidation/ Elimination.......... - - - - 44.8 - - (15.2) ----------- ---------- ---------- ---------- ---------- ---------- --------- ----------- Total.................. $ 3,563.8 $ 20,857.7 $ 4,726.4 $ 1,644.3 $ 2,255.9 $ 2,178.3 $ 293.3 $ 1,972.5 =========== ========== ========== ========== ========== ========== ========= =========== (1) Net investment income is based upon specific identification of portfolios within segments. (2) Operating expenses are principally incurred directly by a segment.
7
AXA FINANCIAL, INC. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION AT AND FOR THE YEAR ENDED DECEMBER 31, 1997 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) Financial Advisory/Insurance....... $ 1,552.0 $ 2,232.4 $ 2,245.4 $ 287.9 $ 1,034.4 Investment Management.............. .1 16.9 - - 962.6 Consolidation/Elimination.......... - 56.9 - - (20.0) ------------ ---------- ----------- ---------- ----------- Total.............................. $ 1,552.1 $ 2,306.2 $ 2,245.4 $ 287.9 $ 1,977.0 ============ ========== =========== ========== =========== (1) Net investment income is based upon specific identification of portfolios within segments. (2) Operating expenses are principally incurred directly by a segment.
8
AXA FINANCIAL, INC. SCHEDULE IV REINSURANCE (A) AT AND FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 ASSUMED PERCENTAGE CEDED TO FROM OF AMOUNT GROSS OTHER OTHER NET ASSUMED AMOUNT COMPANIES COMPANIES AMOUNT TO NET ----------------- ---------------- ----------------- --------------- --------------- (IN MILLIONS) 1999 Life insurance in force(B)... $ 256,231.0 $ 40,892.0 $ 44,725.0 $ 260,064.0 17.20% ================= ================ ================= =============== Premiums: Life insurance and annuities.................. $ 247.9 $ 42.6 $ 131.9 $ 337.2 39.12% Accident and health.......... 172.8 26.6 74.8 221.0 33.85% ----------------- ---------------- ----------------- --------------- Total Premiums............... $ 420.7 $ 69.2 $ 206.7 $ 558.2 37.03% ================= ================ ================= =============== 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% ================= ================ ================= ===============
(A) Includes amounts related to the discontinued group life and health business. (B) Includes in force business related to the Closed Block. 9 EX-99.3 6 0006.txt DISCUSSION AND ANALYSIS Exhibit 99.3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's discussion and analysis ("MD&A") for AXA Financial which follows should be read in conjunction with the Consolidated Financial Statements and related footnotes included elsewhere in this report. Reports and filings with the SEC made before September 3, 1999 will be found under The Equitable Companies Incorporated's name. DISCONTINUED OPERATIONS - INVESTMENT BANKING AND BROKERAGE On November 3, 2000, AXA Financial sold its 63.0% interest in DLJ to Credit Suisse Group. AXA Financial received $2.33 billion in cash and $4.86 billion (or 25.2 million shares) in Credit Suisse Group common stock. The fair value of the stock consideration was based on the exchange rate and stock price at the time the transaction closed. Credit Suisse Group repurchased $1.18 billion (6.3 million shares) of its common stock from AXA Financial at closing. AXA Financial estimates the gain on the DLJ sale at $2.35 billion (net of $2.01 billion in taxes, including the $407.0 million recorded in third quarter 2000). In connection with the sale of DLJ, AXA Financial began reporting its Investment Banking and Brokerage segment as discontinued operations and reclassified prior years' financial information. The discussion of the discontinued Investment Banking and Brokerage segment can be found on page 17. COMBINED OPERATING RESULTS The combined and segment-level discussions for the Financial Advisory/Insurance and Investment Management segments in this MD&A are presented on an adjusted pre-tax basis, which is a non-GAAP measure. Amounts reported in the GAAP financial statements have been adjusted to exclude realized investment gains/losses, net of related DAC and other charges, and the effect of unusual or non-recurring events and transactions. A reconciliation of adjusted pre-tax earnings to GAAP reported earnings from continuing operations precedes each discussion. A discussion of significant adjustments begins on the next page. The excluded items are important to an understanding of our overall results of operations. The following table presents the results of operations outside of the Closed Block combined on a line-by-line basis with the Closed Block's operating results. The Financial Advisory/Insurance analysis, which begins on page 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 Management discussion begins on page 8. 1
1999 1998 1997 ----------------- ----------------- ----------------- (IN MILLIONS) Operating Results: Policy fee income and premiums............................ $ 2,431.0 $ 2,304.6 $ 2,238.5 Net investment income..................................... 2,832.1 2,825.6 2,881.1 Commissions, fees and other income........................ 2,007.8 1,391.7 1,097.7 ----------------- ----------------- ---------------- Total revenues........................................ 7,270.9 6,521.9 6,217.3 ----------------- ----------------- ---------------- Interest credited to policyholders' account balances...... 1,092.8 1,167.8 1,281.6 Policyholders' benefits................................... 2,048.7 2,092.5 2,030.5 Other operating costs and expenses........................ 2,818.4 2,297.0 2,200.8 ----------------- ----------------- ---------------- Total benefits and other deductions................... 5,959.9 5,557.3 5,512.9 ----------------- ------------------ ---------------- Adjusted pre-tax earnings before minority interest........ 1,311.0 964.6 704.4 Minority interest......................................... (216.8) (141.5) (108.5) ----------------- ----------------- ---------------- Adjusted pre-tax earnings................................. 1,094.2 823.1 595.9 Pre-tax Adjustments: Investment gains (losses), net of related DAC and other charges....................................... (203.3) 50.6 (291.8) Gain on sale of ERE....................................... - - 249.8 Intangible asset writedown................................ - - (120.9) Non-recurring DAC adjustments............................. (131.7) - - Restructuring charges..................................... - - (42.4)) ----------------- ----------------- ---------------- Total pre-tax adjustments............................. (335.0) 50.6 (205.3) Minority interest......................................... 216.8 141.5 108.5 ----------------- ----------------- ---------------- GAAP Reported: Earnings from continuing operations before Federal income taxes and minority interest.............. 976.0 1,015.2 499.1 Federal income taxes...................................... 308.7 338.2 90.9 Minority interest in net income of consolidated subsidiaries............................... 199.4 125.2 54.8 ----------------- ----------------- ---------------- Earnings from continuing operations....................... 467.9 551.8 353.4 Earning (loss) from discontinued operations, net of Federal income taxes: Investment Banking and Brokerage...................... 630.1 278.6 294.8 Other................................................. 28.1 2.7 (87.2) ----------------- ----------------- ---------------- Net Earnings................................................ $ 1,126.1 $ 833.1 $ 561.0 ================= ================= ================
Pre-tax adjustments to GAAP reported earnings in calculating adjusted earnings for 1999 reflect the exclusion of investment losses, net of related DAC and other charges, of $203.3 million. These net investment losses included $294.9 million of writedowns and losses on sales of General Account fixed maturities. The $87.3 million of gains recognized upon reclassification of publicly-traded common equities to a trading portfolio and gains resulting from the exercise of Alliance options partially offset these losses. In addition, the $131.7 million non-recurring DAC adjustments that resulted from the revisions to estimated future gross margins related to the investment asset reallocation in second quarter are excluded from 1999 adjusted results (see Note 2 of Notes to Consolidated Financial Statements contained in Exhibit 99.1 attached hereto). The 1998 pre-tax adjustments reflect the exclusion of $50.6 million of net investment gains (excluding related DAC and other charges and credits totaling $23.9 million). Investment gains on General Account Investment Assets totaled $67.6 million, principally due to gains on sales of equity real estate. An additional $9.5 million resulted from the exercise of Alliance options. 2 Pre-tax adjustments for 1997 included losses of $291.8 million (net of related DAC amortization of $51.0 million) in connection with the real estate sales program. Also excluded were the gain on Equitable Life's sale of ERE, the Alliance writedown of Cursitor-related intangible assets and restructuring costs in connection with cost reduction programs. During fourth quarter 1997, AXA Financial released approximately $82.7 and $14.8 million of tax reserves related to continuing and discontinued operations, respectively, for years prior to 1989. The effect on continuing operations is reflected in Federal income taxes for 1997. See "Discontinued Operations" for a discussion of the significant reserve strengthening actions which affected the results of other discontinued operations in 1997. CONTINUING OPERATIONS 1999 COMPARED TO 1998 - Adjusted pre-tax earnings increased for both segments in 1999 as compared to 1998. The decrease in Federal income taxes reflected the lower GAAP reported earnings for the Financial Advisory/Insurance segment and the change in Alliance's tax status as a private partnership in fourth quarter 1999 which eliminated the 3.5% Federal tax. Minority interest in net income of consolidated subsidiaries increased as a result of higher earnings at Alliance. AXA Financial's economic interest in Alliance's operations declined to 57.2% from 57.7% at December 31, 1999 and 1998, respectively. Revenues increased 11.5% to $7.27 billion in 1999. The $616.1 million higher commissions, fees and other income was principally due to increased business activity within the Investment Management segment. Benefits and other deductions rose 7.2% to $5.96 billion in 1999. The $521.4 million increase in other operating costs and expenses was primarily due to $394.0 million higher expenses in the Investment Management segment principally resulting from higher costs associated with increased revenues at Alliance. 1998 COMPARED TO 1997 - The higher adjusted pre-tax earnings for 1998 reflected increased earnings by both the Financial Advisory/Insurance and Investment Management segments. 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 AXA Financial's ownership interest in Alliance's operations to 57.7% at December 31, 1998 from 57.9% at December 31, 1997. The $304.6 million increase in revenues for 1998 compared to 1997 was attributed primarily to the $294.0 million increase in commissions, fees and other income principally due to increased business activity within the Investment Management segment. Net investment income decreased $55.5 million for 1998 principally due to a $41.4 million decrease for Financial Advisory/Insurance. For 1998, total benefits and other deductions increased $44.4 million from 1997, reflecting increases in other operating costs and expenses of $96.2 million and a $62.0 million increase in policyholders' benefits partially offset by a $113.8 million decrease in interest credited to policyholders. 3 COMBINED OPERATING RESULTS BY SEGMENT Financial Advisory/Insurance. The following table combines the Closed Block amounts with the adjusted operating results outside of the Closed Block on a line-by-line basis:
FINANCIAL ADVISORY/INSURANCE - COMBINED OPERATING RESULTS (IN MILLIONS) 1999 ------------------------------------------- INSURANCE CLOSED 1998 1997 OPERATIONS BLOCK COMBINED Combined Combined ------------- ------------ ------------- ------------- -------------- Operating Results: Universal life and investment-type product policy fee income............ $ 1,253.9 $ - $ 1,253.9 $ 1,056.2 $ 950.5 Premiums............................... 558.2 618.9 1,177.1 1,248.4 1,287.9 Net investment income.................. 2,200.5 574.2 2,774.7 2,765.9 2,807.3 Commissions, fees and other income..... 238.5 (11.1) 227.4 137.9 118.1 Contribution from the Closed Block..... 86.4 (86.4) - - - ------------- ------------ ------------- ------------- ------------- Total revenues..................... 4,337.5 1,095.6 5,433.1 5,208.4 5,163.8 ------------- ------------ ------------- ------------- ------------- Interest credited to policyholders' account balances..................... 1,078.2 14.6 1,092.8 1,167.7 1,281.6 Policyholders' benefits................ 1,038.6 1,010.1 2,048.7 2,092.5 2,030.5 Deferred policy acquisition costs...... (379.3) 65.5 (313.8) (273.2) (127.6) All other operating costs and expenses......................... 1,747.1 5.4 1,752.5 1,567.4 1,509.7 ------------- ------------ ------------- ------------- ------------- Total benefits and other deductions................. 3,484.6 1,095.6 4,580.2 4,554.4 4,694.2 ------------- ------------ ------------- ------------- ------------- Adjusted pre-tax earnings.............. 852.9 - 852.9 654.0 469.6 Pre-tax Adjustments: Investment (losses) gains, net of related DAC and other charges................ (207.8) - (207.8) 41.1 (291.9) Non-recurring DAC adjustments.......... (131.7) - (131.7) - - Restructuring charges.................. - - - - (41.7) ------------- ------------ ------------- ------------- ------------- Total pre-tax adjustments.......... (339.5) - (339.5) 41.1 (333.6) ------------- ------------ ------------- ------------- ------------- GAAP Reported: Earnings from Continuing Operations before Federal Income Taxes ........................ $ 513.4 $ - $ 513.4 $ 695.1 $ 136.0 ============= ============ ============= ============= =============
1999 COMPARED TO 1998 - Adjusted pre-tax earnings rose 30.4% to $852.9 million compared to $654.0 million in 1998, driven by improvements in net interest margins, fee income and insurance spreads, partially offset by higher expenses and DAC amortization. Revenues increased $224.7 million to $5.43 billion in 1999. Higher revenues resulted from policy fee income increases of $197.7 million on variable and interest-sensitive life and annuity products due to higher sales and appreciation and $89.5 million higher commissions, fees and other income principally due to higher mutual fund and investment product sales. These increases were partially offset by $71.3 million lower premiums principally on traditional life and individual health insurance policies. Net investment income increased slightly as higher income on other equity investments, mortgages and cash and cash equivalents was offset by lower income on equity real estate and fixed maturities as well as lower income from the Holding Company Group's investment portfolio. In 1999, total benefits and other deductions increased $25.8 million to $4.58 billion. There was a $185.1 million increase in other operating costs and expenses. The increase was primarily due to increased commissions and other variable expenses due to increased sales volume, higher information technology costs and expenses related to the strategic initiatives in connection with the introduction and repositioning of brands, new products and services, field force restructuring and financial planning/advisory training and higher compensation 4 and benefits. Lower interest expense on lower short-term borrowings partially offset these increases. The $74.9 million decrease in interest credited on policyholders' account balances was primarily due to lower crediting rates in 1999 as compared to 1998. DAC capitalization increased by $86.8 million to $709.8 million primarily related to increased deferrable expenses related to higher sales volume and DAC amortization was $46.2 million higher due principally to reactivity to mortality, General Account investment spread and fee income. The $43.8 million decrease in policyholders' benefits was primarily attributed to lower traditional life insurance mortality and lower reserve increases due to lower renewal premiums. 1998 COMPARED TO 1997 - Adjusted pre-tax 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 $25.3 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 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. SUBSEQUENT EVENT - During July 2000, Equitable Life transferred, at no gain or loss, all the risk of its directly written DI business for years 1993 and prior to Centre Life Insurance Company, a subsidiary of Zurich Financial Services. The transfer of risk to Centre Life Insurance was accomplished through an indemnity reinsurance contract. The cost of the arrangement will be amortized over the expected lives of the contracts reinsured and will not have a significant impact on the results of operations in any specific period. 5 Premiums, Deposits and Mutual Fund Sales - The following table lists sales for major insurance product lines and mutual funds. Premiums and deposits are presented net of internal conversions and are presented gross of reinsurance ceded.
PREMIUMS, DEPOSITS AND MUTUAL FUND SALES (IN MILLIONS) 1999 1998 1997 ----------------- ---------------- ----------------- RETAIL: Annuities First year.............................................. $ 3,276.8 $ 2,863.1 $ 2,491.3 Renewal................................................. 1,812.6 1,707.1 1,600.9 ----------------- ---------------- ---------------- 5,089.4 4,570.2 4,092.2 Life(1) First year.............................................. 407.7 426.1 409.3 Renewal................................................. 2,211.2 2,160.0 2,121.3 ----------------- ---------------- ---------------- 2,618.9 2,586.1 2,530.6 Other(2) First year.............................................. 10.5 11.3 36.4 Renewal................................................. 381.0 398.8 384.8 Mutual fund sales(3).................................... 2,787.0 2,373.2 1,706.7 ----------------- ---------------- ---------------- 3,178.5 2,783.3 2,127.9 ----------------- ---------------- ---------------- ----------------- ---------------- ---------------- Total retail........................................ 10,886.8 9,939.6 8,750.7 ----------------- ---------------- ---------------- WHOLESALE: Annuities First year.............................................. 2,229.6 1,686.8 648.4 Renewal................................................. 43.5 10.5 - ----------------- ---------------- ---------------- Total wholesale..................................... 2,273.1 1,697.3 648.4 ----------------- ---------------- ---------------- Total Premiums, Deposits and Mutual Fund Sales............ $ 13,159.9 $ 11,636.9 $ 9,399.1 ================= ================ ================
(1) Includes variable, interest-sensitive and traditional life products. (2) Includes reinsurance assumed and health insurance. (3) Includes sales through AXA Advisors' brokerage accounts in 1999. First year premiums and deposits for insurance and annuity products for 1999 increased from the prior year's level by $937.3 million primarily due to higher sales of individual annuities by both the retail and wholesale distribution channels, partially offset by an $18.4 million decline in life sales. In fourth quarter 1999, first year life sales increased due to sales of a new series of variable life products introduced in 1999. Renewal premiums and deposits increased by $171.9 million during 1999 over 1998 as increases in the larger block of annuity and variable life business were partially offset by decreases in traditional life policies. First year premiums and deposits for insurance and annuity products for 1998 increased from prior year's level by $1.40 billion primarily due to higher sales of individual annuities. Renewal premiums and deposits increased by $169.4 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 44.9% increase in first year individual annuities premiums and deposits in 1998 over the prior year included a $1.04 billion increase in sales of a line of retirement annuity products sold through expanded wholesale distribution channels over the $648.4 million sold through that distribution channel in 1997. Compared with 1997, sales of annuities by the retail sales associates rose 14.9% to $2.86 billion in 1998. 6 Surrenders and Withdrawals - The following table presents surrender and withdrawal amounts and rates for major insurance product lines. Annuity surrenders and withdrawals are presented net of internal replacements.
SURRENDERS AND WITHDRAWALS (IN MILLIONS) 1999 1998 1997 -------------------------- ------------------------- ----------------------- AMOUNT RATE (1) Amount Rate (1) Amount Rate (1) --------------- ---------- ------------- ----------- ------------ --------- Annuities........................... $ 3,549.3 8.8% $ 2,621.8 8.0% $ 2,404.2 8.8% Variable and interest-sensitive life 612.8 3.8% 1,080.2 7.5%(2) 498.9 3.8% Traditional life.................... 345.8 4.2% 353.1 4.4% 372.9 4.6% -------------- ------------- -------------- Total............................... $ 4,507.9 $ 4,055.1 $ 3,276.0 ============== ============= ============== (1) Surrender rates are based on the average surrenderable future policy benefits and/or policyholders' account balances for the related policies and contracts in force during 1999, 1998 and 1997, respectively. (2) Excluding the single large COLI surrender, the surrender rate would have been 3.6%.
Policy and contract surrenders and withdrawals increased $452.8 million during 1999 compared to 1998. The 1998 total included the first quarter 1998 surrender of $561.8 million related to a single large COLI contract. Since policy loans were outstanding on the surrendered contract, there were no cash outflows. Excluding the effect of this one surrender, the $1.01 billion increase in 1999 over 1998 resulted from higher surrenders and withdrawals due to both the growing size and maturity of the book of annuities and variable and interest-sensitive life business partially offset by the decrease in the traditional life surrender rate. Policy and contract surrenders and withdrawals increased $779.1 million during 1998 compared to 1997 principally due to the COLI surrender mentioned above. Excluding the effect of this one surrender, the remaining $217.3 million increase resulted from higher surrenders and withdrawals in the larger book of individual annuities and variable and interest-sensitive life policies. The persistency of life insurance and annuity products is a critical element of their profitability. As of December 31, 1999, all in force individual life insurance policies (other than individual life term policies without cash values which comprise 8.9% of in force policies) and approximately 96% 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. Trends in surrenders and withdrawals discussed above continue to fall within the range of expected experience underlying the current invested asset allocation strategy. Margins on Insurance and Annuity Products - The segment's results significantly depend on profit margins between investment results from General Account Investment Assets allocated to the products in accordance with AXA Financial's asset/liability management strategy and interest credited on insurance and annuity products. During 1999, margins widened as lower average crediting rates more than offset lower investment yields. In 1999, the crediting rate ranges were: 4.25% to 6.40% for variable and interest-sensitive life insurance; 4.15% to 6.00% for variable deferred annuities; 4.05% to 7.00% for SPDA contracts; and 5.00% for retirement investment accounts. Margins on 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 being invested at higher interest rates, which would help support a gradual increase in new business and renewal interest rates on interest-sensitive products. A sharp, sudden rise in interest rates 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 annuity contracts. At December 31, 1999, the notional amounts of contracts outstanding totaled $7.58 billion, as compared to $8.45 billion at December 31, 1998. 7 If interest rates fall, crediting interest rates and dividends would be adjusted subject to competitive pressures. Only a minority of Equitable Life's insurance policies and annuity 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 90% 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 both December 31, 1999 and 1998, the outstanding notional amount of contracts totaled $2.0 billion. Investment Management. The following table presents the adjusted operating results of the Investment Management segment, which consists principally of the operations of Alliance. Alliance's operations were conducted by Alliance Holding prior to its reorganization in October 1999. For information on the reorganization, see Note 1 of Notes to Consolidated Financial Statements, "Liquidity and Capital Resources-Alliance," and the Alliance Holding Report on Form 10-K for the year ended December 31, 1999.
INVESTMENT MANAGEMENT - OPERATING RESULTS (IN MILLIONS) 1999 1998 1997 ----------------- ----------------- ---------------- Operating Results: Investment advisory and services fees(1).................. $ 1,331.8 $ 953.0 $ 699.0 Distribution revenues..................................... 441.8 301.9 216.9 Other revenues(1)......................................... 96.6 73.8 157.6 ----------------- ----------------- ---------------- Total revenues........................................ 1,870.2 1,328.7 1,073.5 ----------------- ----------------- ---------------- Promotion and servicing................................... 620.7 460.3 312.2 Employee compensation and benefits........................ 508.6 340.9 264.3 All other operating expenses.............................. 282.8 216.9 262.2 ----------------- ----------------- ---------------- Total expenses........................................ 1,412.1 1,018.1 838.7 ----------------- ----------------- ---------------- Adjusted pre-tax earnings before minority interest........ 458.1 310.6 234.8 Minority interest......................................... (216.8) (141.5) (108.5) ----------------- ----------------- ---------------- Adjusted pre-tax earnings................................. 241.3 169.1 126.3 Pre-tax Adjustments: Investment gains (losses), net of DAC..................... 4.5 9.5 .1 Gain on sale of ERE....................................... - - 249.8 Intangible asset writedown................................ - - (120.9) Restructuring charges..................................... - - (.7) ----------------- ----------------- ---------------- Total pre-tax adjustments............................. 4.5 9.5 128.3 Minority interest........................................... 216.8 141.5 108.5 ----------------- ----------------- ---------------- GAAP Reported: Earnings from Continuing Operations before Federal Income Taxes and Minority Interest.............. $ 462.6 $ 320.1 $ 363.1 ================= ================= ================
(1) Includes fees earned by Alliance and, in 1997, EREIM totaling $44.3 million, $61.8 million and $87.4 million in 1999, 1998 and 1997, respectively, for services provided to the Insurance Group and unconsolidated real estate joint ventures. 1999 COMPARED TO 1998 - Adjusted pre-tax earnings for the Investment Management segment increased 42.7% in 1999 to $241.3 million. Total revenues were $1.87 billion, a 40.8% increase over 1998. Investment advisory and service fees at Alliance were $1.33 billion, a $378.8 million increase over the prior year. The 39.7% fee increase was primarily due to increased sales of mutual funds, asset appreciation and higher performance fees related to mutual funds and third party clients, partially offset by lower performance fees from affiliates, notably the Equitable Life General Account. Distribution revenues at Alliance were $139.9 million higher in 1999 than in 1998 principally due to higher average equity mutual fund assets under management due to strong sales and to market appreciation. 8 Expenses for Investment Management increased $394.0 million to $1.41 billion in 1999 as compared to $1.02 billion in 1998. Promotion and servicing expenses at Alliance were $160.4 million higher primarily due to increased distribution plan payments to financial intermediaries resulting from higher average domestic, offshore and cash management assets under management. Other promotion and servicing expense increases were primarily due to $55.1 million higher amortization of deferred sales commissions, higher travel and entertainment costs and higher promotional expenditures related to mutual fund sales initiatives. Alliance's employee compensation and benefits totaled $508.6 million, a 49.2% increase over the prior year. Incentive compensation's increase was principally related to Alliance's higher operating earnings while increased base compensation and commissions were due to increased headcount in the mutual fund and technology areas and to salary increases. The $65.9 million increase in all other operating expenses related principally to higher expenses incurred for the Year 2000 project and other technology initiatives, higher interest on deferred compensation and debt and increased occupancy costs. 1998 COMPARED TO 1997 - Investment Management's adjusted pre-tax 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 Investment 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. SUBSEQUENT EVENTS - The resolution of a class action lawsuit resulted in the recognition of a one-time, non-cash gain of $23.9 million in first quarter 2000. On October 2, 2000, Alliance acquired substantially all of the assets and liabilities of Sanford C. Bernstein Inc. ("Bernstein") for an aggregate current value of approximately $3.5 billion ($1.48 billion in cash and 40.8 million newly issued Alliance Units). The Holding Company provided Alliance with the cash portion of the consideration by purchasing approximately 32.6 million newly issued Alliance Units for $1.60 billion on June 21, 2000. As a result of these transactions, AXA Financial's consolidated economic interest in Alliance was approximately 52.7%. Additionally, the Holding Company has agreed to provide liquidity to former Bernstein shareholders after a two-year lock-out period to allow the 40.8 million private Units to be sold to the Holding Company over the following eight years, but generally not more than 20% of such Units in any one annual period at a then average current price of the publicly traded units. 9 Fees and Assets Under Management. Breakdowns of fees and assets under management follow:
FEES AND ASSETS UNDER MANAGEMENT (IN MILLIONS) AT OR FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------------------- 1999 1998 1997 ----------------- ---------------- ----------------- FEES: Third parties............................................. $ 1,180.5 $ 806.7 $ 629.7 Equitable Life Separate Accounts.......................... 107.6 99.7 88.8 Equitable Life General Account and other.................. 43.7 46.6 74.6 ----------------- ---------------- ---------------- Total Fees................................................ $ 1,331.8 $ 953.0 $ 793.1 ================= ================ ================ ASSETS UNDER MANAGEMENT: Assets by Manager Alliance: Third party............................................. $ 301,366 $ 228,321 $ 165,137 Equitable Life General Account and Holding Company Group 25,475 24,179 24,942 Equitable Life Separate Accounts........................ 41,480 34,159 28,575 ----------------- ---------------- ---------------- Total Alliance............................................ 368,321 286,659 218,654 ----------------- ---------------- ---------------- Equitable Life: Equitable Life (non-Alliance) General Account........... 12,774 14,452 14,469 Equitable Life Separate Accounts - EQ Advisors Trust.... 6,397 3,024 877 Equitable Life real estate related Separate Accounts.... 3,851 4,151 5,546 Equitable Life Separate Accounts - other................ 2,726 1,968 1,541 ----------------- ---------------- ---------------- Total Equitable Life...................................... 25,748 23,595 22,433 ----------------- ---------------- ---------------- Total by Account: Third party(1)......................................... 301,666 228,321 165,137 General Account and other(2)........................... 38,249 38,631 39,411 Separate Accounts....................................... 54,454 43,302 36,539 ----------------- ---------------- ---------------- Total Assets Under Management............................. $ 394,069 $ 310,254 $ 241,087 ================= ================ ================
(1) Includes $2.47 billion, $2.44 billion and $2.13 billion of assets managed on behalf of AXA affiliates at December 31, 1999, 1998 and 1997, 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 AXA Financial not managed by the Investment Subsidiaries, principally policy loans, totaling approximately $4.76 billion, $7.07 billion and $6.31 billion at December 31, 1999, 1998 and 1997, respectively, and mortgages and equity real estate totaling $7.11 billion and $7.38 billion at December 31, 1999 and 1998, respectively. Fees for assets under management increased 39.7% during 1999 from 1998 as a result of the continued growth in assets under management for third parties. Total assets under management increased $83.82 billion, primarily due to $73.05 billion higher third party assets under management at Alliance. The Alliance growth in 1999 was principally due to market appreciation and net sales of mutual funds and other products. Fees for assets under management increased $159.9 million or 20.2% during 1998 from 1997 also as a result of the continued growth in assets under management for third parties. Total third party assets under management increased $63.18 billion 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. 10 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 distribution and non-operating subsidiaries, principally AXA Client Solutions, AXA Advisors, the EQ Asset Trust 1993 ("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. The combined portfolio and its investment results support the insurance and annuity liabilities of Equitable Life's continuing operations. The following table reconciles the consolidated balance sheet asset amounts to General Account Investment Assets.
GENERAL ACCOUNT INVESTMENT ASSET CARRYING VALUES DECEMBER 31, 1999 (IN MILLIONS) GENERAL BALANCE HOLDING ACCOUNT SHEET CLOSED COMPANY INVESTMENT BALANCE SHEET CAPTIONS: TOTAL BLOCK OTHER (1) GROUP (2) ASSETS - ----------------------- ----------------- ----------------- ----------------- ------------- ------------------ Fixed maturities: Available for sale(3)......... $ 18,849.1 $ 4,014.0 $ (75.9) $ 249.5 $ 22,689.5 Held to maturity.............. 253.4 - - 120.2 133.2 Mortgage loans on real estate... 3,270.0 1,704.2 - - 4,974.2 Equity real estate.............. 1,160.2 89.3 (1.7) - 1,251.2 Policy loans.................... 2,257.3 1,593.9 - - 3,851.2 Other equity investments........ 673.5 36.3 .1 2.3 707.4 Other invested assets........... 914.7 .9 265.3 2.0 648.3 ---------------- ----------------- ----------------- ------------- ------------------ Total investments............. 27,378.2 7,438.6 187.8 374.0 34,255.0 Cash and cash equivalents....... 796.0 67.7 123.4 168.0 572.3 Equitable Life debt & other (4). - - 767.0 - (767.0) ---------------- ----------------- ----------------- ------------- ----------------- Total........................... $ 28,174.2 $ 7,506.3 $ 1,078.2 $ 542.0 $ 34,060.3 ================ ================ ================= ============= ==================
(1) Assets listed in the "Other" category principally consist of assets held in portfolios other than the Holding Company Group and the General Account 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 that group's assets, which 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, 1999, the amortized costs of the General Account's available for sale and held to maturity fixed maturity portfolios were $23.59 billion and $133.2 million, respectively, compared with estimated market values of $22.69 billion and $133.2 million, respectively. (4) Includes Equitable Life debt and other miscellaneous assets and liabilities related to General Account Investment Assets and reclassified from various balance sheet lines. 11 ASSET VALUATION ALLOWANCES AND WRITEDOWNS The following table shows asset valuation allowances and additions to and deductions from such allowances for the periods indicated.
GENERAL ACCOUNT INVESTMENT ASSETS VALUATION ALLOWANCES (IN MILLIONS) EQUITY REAL MORTGAGES ESTATE TOTAL ----------------- ---------------- --------------- Balances at January 1, 1998............................... $ 74.3 $ 345.5 $ 419.8 Additions............................................... 22.5 77.3 99.8 Deductions(1)........................................... (51.4) (211.0) (262.4) ----------------- ---------------- --------------- Balances at December 31, 1998............................. 45.4 211.8 257.2 Additions............................................... 7.5 75.6 83.1 Deductions(1)........................................... (20.8) (141.6) (162.4) ----------------- ---------------- --------------- Balances at December 31, 1999............................. $ 32.1 $ 145.8 $ 177.9 ================= ================ ===============
(1) Primarily reflects releases of allowances due to asset dispositions. Writedowns on fixed maturities, principally below investment grade securities, aggregated $226.5 million, $101.6 million and $15.2 million in 1999, 1998 and 1997, respectively. The increases in writedowns on fixed maturities in 1999 and 1998 were primarily attributable to an increased level of defaults in high yield and emerging market securities. Writedowns on equity real estate totaled $165.2 million in 1997; there were no real estate writedowns in 1999 and 1998. The 1997 equity real estate writedowns 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 amortized cost, valuation allowances and net amortized cost of major categories of General Account Investment Assets as of December 31, 1999 and net amortized cost as of December 31, 1998.
GENERAL ACCOUNT INVESTMENT ASSETS (IN MILLIONS) DECEMBER 31, 1999 December 31, 1998 ------------------------------------------------ ---------------------- NET Net AMORTIZED VALUATION AMORTIZED Amortized COST ALLOWANCES COST Cost --------------- ------------- --------------- ---------------------- Fixed maturities(1)...................... $ 23,719.1 $ - $ 23,719.1 $ 22,804.8 Mortgages................................ 5,006.3 (32.1) 4,974.2 4,443.3 Equity real estate....................... 1,397.0 (145.8) 1,251.2 1,774.1 Other equity investments................. 826.2 - 826.2 769.4 Policy loans............................. 3,851.2 - 3,851.2 3,727.9 Cash and short-term investments(2)....... 1,220.6 - 1,220.6 1,597.8 ------------- -------------- --------------- ---------------------- Total.................................... $ 36,020.4 $ (177.9) $ 35,842.5 $ 35,117.3 ============= ============== =============== ======================
(1) Excludes unrealized losses of $896.4 million and unrealized gains of $814.3 million on fixed maturities classified as available for sale at December 31, 1999 and 1998, respectively. (2) Comprises "Cash and cash equivalents" and short-term investments included within the "Other invested assets" caption on the consolidated balance sheet. 12 INVESTMENT RESULTS OF GENERAL ACCOUNT INVESTMENT ASSETS The following table summarizes investment results by asset category for the periods indicated.
INVESTMENT RESULTS BY ASSET CATEGORY (DOLLARS IN MILLIONS) 1999 1998 1997 ----------------------------- ----------------------------- ----------------------------- (1) (1) (1) YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT ------------ --------------- ----------- --------------- ------------ --------------- FIXED MATURITIES: Income...................... 7.95% $ 1,834.9 8.08% $ 1,854.2 8.12% $ 1,842.6 Investment gains(losses).... (1.31)% (294.9) (0.09)% (21.6) 0.42% 94.0 ------------ --------------- ----------- --------------- ------------ --------------- Total....................... 6.64% $ 1,540.0 7.99% $ 1,832.6 8.54% $ 1,936.6 Ending assets(2)............ $ 24,171.2 $ 23,254.5 $ 23,944.9 MORTGAGES: Income...................... 8.66% $ 403.3 9.31% $ 363.8 9.56% $ 387.1 Investment gains(losses).... (0.04)% (1.9) (0.26)% (10.0) (0.49)% (19.1) ------------ --------------- ----------- --------------- ------------ --------------- Total....................... 8.62% $ 401.4 9.05% $ 353.8 9.07% $ 368.0 Ending assets(3)............ $ 5,019.6 $ 4,472.8 $ 4,003.1 EQUITY REAL ESTATE: Income(4)................... 7.38% $ 94.2 8.10% $ 145.2 2.90% $ 73.7 Investment gains(losses).... (1.28)% (16.0) 4.16% 71.3 (16.15)% (432.4) ------------ --------------- ----------- --------------- ------------ --------------- Total....................... 6.10% $ 78.2 12.26% $ 216.5 (13.25)% $ (358.7) Ending assets(4)............ $ 1,014.4 $ 1,398.2 $ 1,970.5 OTHER EQUITY INVESTMENTS: Income...................... 25.94% $ 196.3 10.98% $ 125.1 19.32% $ 198.6 Investment gains(losses).... 13.10% 87.8 2.57% 27.9 1.54% 14.8 ------------ --------------- ----------- --------------- ------------ --------------- Total....................... 39.04% $ 284.1 13.55% $ 153.0 20.86% $ 213.4 Ending assets(5)............ $ 827.8 $ 859.1 $ 1,269.5 POLICY LOANS: Income...................... 6.75% $ 246.8 6.93% $ 249.8 7.25% $ 285.6 Ending assets............... $ 3,851.2 $ 3,727.9 $ 4,123.1 CASH AND SHORT-TERM INVESTMENTS: Income...................... 7.73% $ 74.7 11.03% $ 52.5 6.35% $ 23.0 Ending assets(6)............ $ 1,222.3 $ 1,625.3 $ 327.2 EQUITABLE LIFE DEBT AND OTHER: Interest expense and other. 7.85% $ (50.0) 7.05% $ (48.3) 7.27% $ (43.0) Ending liabilities......... $ (767.0) $ (598.1) $ (647.0) TOTAL: Income(7)................... 8.29% $ 2,800.2 8.26% $ 2,742.3 8.13% $ 2,767.6 Investment gains(losses).... (0.69)% (225.0) 0.21% 67.6 (1.03)% (342.7) ------------ --------------- ----------- --------------- ------------ --------------- Total(8).................... 7.60% $ 2,575.2 8.47% $ 2,809.9 7.10% $ 2,424.9 Ending net assets........... $ 35,339.5 $ 34,739.7 $ 34,991.3
(1) Yields have been calculated on a compound annual effective rate basis using the quarterly average asset carrying values, excluding unrealized gains (losses) in fixed maturities and adjusted for the current year's income, gains (losses) and fees. (2) Fixed maturities investment assets are shown net of securities purchased but not yet paid for of $8.4 million, $4.7 million and $73.3 million, and include accrued income of $413.5 million, $392.4 million and $393.7 million, amounts due from securities sales of $29.4 million, $29.6 million and $17.1 million and other assets of $17.5 million, $31.4 million and $30.1 million at December 31, 1999, 1998 and 1997, respectively. (3) Mortgage investment assets include accrued income of $59.2 million, $56.6 million and $74.3 million and are adjusted for related liability balances of $(13.8) million, $(27.1) million and $(24.2) million at December 31, 1999, 1998 and 1997, respectively. 13 (4) Equity real estate carrying values are shown, and equity real estate yields are calculated, net of third party debt and minority interest of $251.4 million, $381.3 million and $568.0 million at December 31, 1999, 1998 and 1997, respectively. The carrying values include accrued income of $27.8 million, $31.6 million and $35.7 million and are adjusted for related liability balances of $(13.2) million, $(20.3) million and $(101.4) million as of December 31, 1999, 1998 and 1997, 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 $19.1 million, $35.7 million and $52.9 million for 1999, 1998 and 1997, respectively. (5) Other equity investment assets include accrued income and pending trade settlements of $1.6 million, $0.0 million and $0.6 million at December 31, 1999, 1998 and 1997, respectively. (6) Cash and short-term investments are shown net of financing arrangements of $(300.6) million at December 31, 1997 as well as accrued income and cash in transit totaling $1.8 million, $5.6 million and $2.3 million at December 31, 1999, 1998 and 1997, respectively. (7) Total investment income includes non-cash income from amortization, payment-in-kind distributions and undistributed equity earnings of $59.6 million, $52.7 million and $52.8 million for 1999, 1998 and 1997, respectively. Investment income is shown net of depreciation of $22.5 million, $31.5 million and $80.9 million for 1999, 1998 and 1997, respectively. (8) Total yields are shown before deducting investment fees paid to investment advisors. These fees include asset management, acquisition, disposition, accounting and legal fees. If investment fees had been deducted, total yields would have been 7.33%, 8.19% and 6.79% for 1999, 1998 and 1997, respectively. Fixed Maturities. The fixed maturities portfolio consists largely of investment grade corporate debt securities, including significant amounts of U.S. government and agency obligations. Investment income on fixed maturities decreased $19.3 million in 1999 from 1998 due to lower yields. The investment losses in 1999 were due to $226.5 million in writedowns primarily on domestic and emerging market high-yield securities and net losses of $68.4 million on sales. At year end 1999, 76.9% of total fixed maturities were publicly traded; 87.4% of below investment grade securities were publicly traded. At December 31, 1999, AXA Financial held collateralized mortgage obligations ("CMOs") with an amortized cost of $2.45 billion, including $2.04 billion in publicly traded CMOs, $2.66 billion of mortgage pass-through securities, and $1.47 billion of public and private asset-backed securities. Fixed maturities by NAIC rating are shown in the following table.
FIXED MATURITIES BY CREDIT QUALITY (IN MILLIONS) DECEMBER 31, 1999 December 31, 1998 -------------------------------------- ----------------------------------- EQUIVALENT NAIC RATING AGENCY AMORTIZED ESTIMATED Amortized Estimated RATING DESIGNATION COST FAIR VALUE Cost Fair Value - -------------- ---------------------- ------------------ ----------------- ----------------- ----------------- 1-2 Aaa/Aa/A and Baa..... $ 20,561.4 $ 19,973.0 $ 19,588.1 $ 20,712.6 3-6 Ba and lower......... 3,157.7 2,849.7 3,217.7 2,907.5 ------------------ ----------------- ----------------- ----------------- Total Fixed Maturities.............. $ 23,719.1 $ 22,822.7 $ 22,805.8 $ 23,620.1 ================== ================= ================= =================
Management defines problem fixed maturities 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 $154.0 million (0.6% of the total amortized cost of this category) at December 31, 1999 compared to $94.9 million (0.4%) at December 31, 1998 and $31.0 million (0.1%) at December 31, 1997. In 1999, additions to problem fixed maturities were concentrated in domestic high-yield and emerging market securities and were related to an increased level of defaults in these securities during the year. AXA Financial 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 maturities totaled $42.5 million, $13.1 million and $10.5 million for 1999, 1998 and 1997, respectively. The amortized cost of wholly or partially non-accruing problem fixed maturities was $116.1 million, $82.1 million and $28.9 million at December 31, 1999, 1998 and 1997, respectively. 14 Based on its monitoring of fixed maturities, management identifies a class of potential problem fixed maturities. This class includes those fixed maturities not currently classified as problems but for which management has serious doubts as to the issuer's ability 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 was $42.7 million at December 31, 1999, as compared to $74.9 million and $17.9 million at December 31, 1998 and 1997, respectively. Mortgages. At December 31, 1999, the mortgage portfolio included commercial ($3.05 billion), agricultural ($1.96 billion) and residential loans ($0.7 million). In 1999, the $39.5 million investment income increase on mortgages resulted from lower interest rates on a larger asset base. At December 31, 1999, 1998 and 1997, respectively, management identified impaired mortgage loans with carrying values of $148.8 million, $158.0 million and $240.8 million. The provision for losses for these impaired loans was $27.1 million, $39.1 million and $69.2 million at those same respective dates. Income earned on impaired loans in 1999, 1998 and 1997, respectively, was $15.3 million, $17.0 million and $24.6 million, including cash received of $14.8 million, $15.3 million and $23.0 million. Management categorizes commercial mortgages 60 days or more past due and agricultural mortgages 90 days or more past due, as well as all mortgages in the process of foreclosure, as problem mortgages. Based on its monthly monitoring of 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 1999 primarily due to foreclosures.
PROBLEM, POTENTIAL PROBLEM AND RESTRUCTURED MORTGAGES AMORTIZED COST (IN MILLIONS) DECEMBER 31, -------------------------------------------------------- 1999 1998 1997 ----------------- ---------------- ----------------- COMMERCIAL MORTGAGES...................................... $ 3,048.2 $ 2,660.7 $ 2,305.8 Problem commercial mortgages(1)........................... .5 .4 19.3 Potential problem commercial mortgages.................... 120.6 170.7 180.9 Restructured commercial mortgages(2)...................... 130.7 116.4 194.9 AGRICULTURAL MORTGAGES.................................... $ 1,957.4 $ 1,826.9 $ 1,719.2
(1) All problem commercial mortgages were delinquent mortgage loans at December 31, 1999, 1998 and 1997; there were no mortgage loans in process of foreclosure at December 31, 1999, 1998 and 1997. (2) Excludes restructured commercial mortgages of $1.7 million that are shown as problems at December 31, 1997, and excludes $1.2 million, $24.5 million and $57.9 million of restructured commercial mortgages that are shown as potential problems at December 31, 1999, 1998 and 1997, respectively. For 1999, scheduled amortization payments and prepayments received on commercial mortgage loans aggregated $158.1 million. For 1999, $133.8 million of commercial mortgage loan maturity payments were scheduled. Of that total, $50.6 million (37.8%) were paid as due, $63.8 million (47.7%) were granted short-term extensions of up to six months, $18.5 million (13.8%) were foreclosed upon and $0.9 million (0.7%) were extended for a weighted average of 6.8 years at a weighted average interest rate of 9.0%. 15 During 2000, approximately $394.2 million of commercial mortgage principal payments are scheduled, including $377.3 million of payments at maturity on commercial mortgage balloon loans. An additional $649.6 million of commercial mortgage principal payments, including $616.6 million of payments at maturity on commercial mortgage balloon loans, are scheduled for 2001 and 2002. Depending on market conditions and lending practices in future years, some maturing loans may have to be refinanced, restructured or foreclosed upon. During 1999, 1998 and 1997, the amortized cost of new foreclosed commercial mortgages totaled $45.5 million, $40.1 million and $153.5 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 (57.7% of amortized cost) of this portfolio at December 31, 1999. Proceeds from the sale of equity real estate totaled $576.6 million, $1.05 billion and $386.0 million in 1999, 1998 and 1997, respectively, with recognized gains of $50.0 million, $124.1 million and $50.5 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 $126.8 million, $189.8 million and $61.1 million, respectively. In connection with the accelerated real estate 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, 1999, the depreciated cost of continuing operations' held for sale real estate portfolio totaled $619.6 million, excluding related valuation allowances of $145.8 million. Management establishes valuation allowances on individual properties identified as held for sale. The objective is to fully reserve 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. As the equity real estate sales program continues into 2000, 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, 1999, the overall vacancy rate for the General Account's real estate office properties was 6.8%, with a vacancy rate of 5.5% for properties acquired as investment real estate and 17.3% for properties acquired through foreclosure. The national commercial office vacancy rate was 9.6% (as of September 30, 1999) as measured by CB Commercial. Lease rollover rates for office properties for 2000, 2001 and 2002 range from 8.1% to 11.5%. At December 31, 1999, the equity real estate portfolio included $805.5 million depreciated cost of properties acquired as investment real estate (or 57.7% of depreciated cost of equity real estate held) and $591.5 million (42.3%) amortized cost of properties acquired through foreclosure, including in-substance foreclosure. Cumulative writedowns recognized on foreclosed properties were $144.2 million through December 31, 1999. As of December 31, 1999, the carrying value of the equity real estate properties was 62.6% of their original cost. The depreciated cost of foreclosed equity real estate totaled $754.4 million (38.0%) and $955.1 million (29.5%) at year end 1998 and 1997, respectively. 16 Other Equity Investments. Other equity investments consist of LBO, mezzanine, venture capital and other limited partnership interests ($481.0 million or 58.1% of the amortized cost of this portfolio at December 31, 1999), alternative limited partnerships ($193.3 million or 23.4%) and common stock and other equity securities ($153.5 million or 18.5%). Alternative funds utilize trading strategies that may be leveraged. These funds 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 produce 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 General Account. The excess of Separate Accounts assets over Separate Accounts liabilities at December 31, 1999, 1998 and 1997 were $118.7 million, $89.4 million and $231.0 million, respectively. This excess represented an investment by the General Account principally in equity securities. As demonstrated by the market volatility and negative returns experienced in the latter 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, AXA Financial began to reduce its holdings of common stock investments. With the persistence of high price volatility, management believed that publicly-traded common stocks should be actively managed to control risk and generate investment returns. Effective January 1, 1999, all investments in publicly-traded common equity securities in the General Account and Holding Company Group portfolios were designated as "trading securities" for the purpose of classification under SFAS No. 115 and all changes in the investments' fair value are being reported through earnings. DISCONTINUED OPERATIONS Investment Banking and Brokerage Earnings from the discontinued Investment Banking and Brokerage operations included $234.9 million, $40.3 million and $6.7 million of pre-tax gains resulting from transactions in DLJ's common stock for 1999, 1998 and 1997, respectively. In 1999, the gains were primarily due to the $212.3 million gain related to the sale of an approximately 18% interest in DLJdirect's financial performance through the sale of a new class of DLJ common stock in second quarter 1999. The 1998 and 1997 gains, as well as the remaining 1999 gains, were due to the exercise of DLJ stock options and the conversion of RSUs. Other 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, the allowance for future losses was strengthened by $134.1 million. 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. Management'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 annual planning process that 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. 17 Results of Operations. Post-tax earnings of $28.1 million were recognized in 1999 compared to $2.7 million in 1998 and post-tax losses of $(87.2) million in 1997. The allowance for future losses totaled $242.2 million at December 31, 1999. For 1999, the investment assets of the Wind-Up Annuities and GIC operations ("Discontinued Operations Investment Assets") produced investment results totaling $82.3 million, a $79.5 million decrease as compared to 1998 results. Investment income declined $28.8 million to $95.8 million in 1999, as lower income on other equity investments, equity real estate and mortgages more than offset higher income on fixed maturities. In 1999, there were investment losses of $13.5 million as compared to $37.2 million of investment gains in the prior year. In 1999, $18.3 million in losses on equity real estate were recorded compared to gains of $41.2 million in 1998. The 1999 real estate losses resulted as the gains on sales were more than offset by additions to valuation allowances on held for sale properties. Losses on fixed maturities were $13.5 million higher in 1999 principally due to the writedown of two issues. These losses more than offset the $19.1 million of gains on other equity investments as compared to a $3.3 million loss in 1998. Investment income yields were 8.95% in 1999. In 1998, investment results from Discontinued Operations Investment Assets totaled $161.8 million, as compared to $(23.0) million in 1997 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 $26.1 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 decreased to 11.69% from 12.37% in 1997, principally due to lower returns on other equity investments. Interest credited and policyholders' benefits on Wind-Up Annuities and GIC contracts were $96.2 million in 1999, as compared to $99.1 million and $108.0 million in 1998 and 1997, respectively. The weighted average crediting rates were 9.5%, 9.6% and 9.3% in 1999, 1998 and 1997, respectively. No interest expense on intersegment borrowings by discontinued operations from continuing operations was reported in 1999, compared with $26.6 million and $53.3 million in 1998 and 1997, respectively, as such borrowings were repaid in 1998. At year end 1999, $993.3 million 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 contained in Exhibit 99.1 attached hereto. Cash Flow Projections. At December 31, 1999, estimates of annual net cash flows for other discontinued operations in 2000 and 2001 were $218.7 million and $46.2 million, respectively. At December 31, 1998, the projections for 1999 and 2000 were $255.5 million and $16.7 million, respectively. The increase in estimated 2000 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: future estimated annual investment income yields on the existing portfolio of 6.9% to 9.1% in the 1999 projection (compared to 7.8% to 9.7% used in the 1998 projection); use of proceeds from equity real estate sales and other maturing investment assets to pay benefits on Wind-Up Annuities and maturing liabilities, with reinvestment of excess funds; and mortality experience for Wind-Up Annuities based on the 1983 Group Annuity Mortality table with projections for mortality improvements. Discontinued Operations Investment Assets by Asset Category. For information on the asset categories and valuation allowances and writedowns, see Note 8 of Notes to Consolidated Financial Statements contained in Exhibit 99.1 attached hereto. 18 Fixed Maturities - During 1999, discontinued operations began reinvesting excess cash flow in investment grade fixed maturities. At December 31, 1999, the amortized cost of the fixed maturities portfolio totaled $90.2 million. Mortgages - As of December 31, 1999, discontinued operations commercial mortgages totaled $427.9 million (93.7% of amortized cost of the category) and agricultural loans totaled $28.6 million (6.3%). Potential problem commercial mortgages totaled $6.1 million, $20.1 million and $15.4 million in 1999, 1998 and 1997, respectively, while restructured commercial mortgages aggregated $3.4 million, $106.2 million and $198.9 million, respectively. For 1999, scheduled amortization payments and prepayments on commercial mortgage loans aggregated $58.4 million. For 1999, $29.2 million of mortgage loan maturity payments were scheduled, of which $26.4 million (90.4%) were paid as due. During 2000, approximately $96.7 million of commercial mortgage principal payments are scheduled, including $91.5 million of payments at maturity on commercial mortgage balloon loans. An additional $139.2 million of principal payments, including $130.2 million of payments at maturity on commercial mortgage balloon loans, are scheduled from 2001 through 2002. 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 1999, 1998 and 1997, discontinued operations received proceeds from the sale of equity real estate of $52.3 million, $287.9 million and $183.5 million, respectively, and recognized gains of $5.3 million, $41.3 million and $35.4 million, respectively. These gains reflected total writedowns and additions to valuation allowances on properties sold of $14.6 million, $71.7 million and $22.9 million, respectively, at the date of sale. The depreciated cost of discontinued operations' equity real estate properties held for sale at December 31, 1999 was $152.8 million for which allowances of $54.8 million have been established. Other Equity Investments - At December 31, 1999, discontinued operations' other equity investments of $55.6 million consisted primarily of limited partnership interests managed by third parties that invest in a selection of equity and fixed income securities ($49.9 million or 89.7% 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 ($5.7 million or 10.3%). 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 $23.4 million, $25.5 million and $65.2 million in 1999, 1998 and 1997, respectively. These investment results reflected yields of 31.65%, 17.79% and 28.77% for 1999, 1998 and 1997, respectively. YEAR 2000 Following the implementation of Equitable Life's and Alliance's Year 2000 compliance initiatives, no Year 2000 problems were encountered that could have a material adverse effect on the business, financial condition or results of operations of AXA Financial. Through December 31, 1999, Year 2000 compliance project costs were $32.1 million for Equitable Life and $43 million for Alliance. LIQUIDITY AND CAPITAL RESOURCES THE HOLDING COMPANY The Holding Company's Board of Directors declared a two-for-one Stock Split for shareholders of record at the close of business on September 27, 1999. All share and per share amounts have been restated to reflect the effect of this Stock Split. Quarterly dividends following the split were $.025 per share. In September 1999, the Holding Company received a cash dividend of $150.0 million from Equitable Life, the first since Equitable Life's demutualization in 1992. Also in September 1999, the SECT converted 4,020 shares of Series D Convertible Preferred Stock equivalent to 1.6 million shares of Common Stock. The Holding Company, as part of its stock repurchase program, purchased 1,356,500 shares for $37.6 million. Of the remaining shares, AXA, AXA Financial's principal stockholder, purchased 146,100 shares. The remaining shares were sold to the public. As a result of these transactions, the Holding Company's equity increased by $7.4 million, the net proceeds of the sales and repurchases. In February 2000, the Holding Company's Board of Directors approved an increase in the number of authorized shares of Common Stock from 500,000,000 to 2,000,000,000. The increase is subject to shareholder approval, which is expected at the May 2000 annual meeting of shareholders. 19 Under the Board authorized stock repurchase program, the Holding Company repurchased approximately 8.0 million shares of Common Stock at a cost of approximately $243.7 million during 1999, including the aforementioned shares from the SECT. Of the 2.0 million shares of Common Stock originally subject to put options sold in 1998 in connection with the repurchase program, the Holding Company purchased 800,000 shares in 1998 and none during 1999; 1,200,000 of such options expired unexercised during 1999. During the first nine months of 2000, the Holding Company repurchased approximately 3.6 million shares of Common Stock at a cost of approximately $137.7 million, including the August SECT share purchase mentioned below. In fourth quarter 1999, the Holding Company privately placed put options entitling the holder to sell up to 200,000 shares of Common Stock at a specified price on a specified date in third quarter 2000. These options expired unexercised in September 2000. No put options were outstanding at September 30, 2000. 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 is approximately $40.8 million per annum. For further information, see Notes 9 and 11 of Notes to Consolidated Financial Statements contained in Exhibit 99.1 attached hereto. SUBSEQUENT EVENTS - On June 21, 2000, the Holding Company borrowed $1.45 billion from Bank of America N.A. pursuant to a promissory note with an interest rate of 7.06% and maturing on September 22, 2000. The proceeds from the borrowing and available cash were used by the Holding Company to purchase 32.6 million new Alliance Units. Alliance used the cash proceeds primarily to fund the cash portion of the consideration of its fourth quarter acquisition of the assets and liabilities of Bernstein (see "Combined Operating Results by Segment - Investment Management"). In July 2000, the Holding Company issued $480.0 million 7.75% Senior Notes due 2010 under its March 1998 shelf registration. Substantially all of the net proceeds of $472.7 million was used to repay a portion of the $1.45 billion borrowing incurred in connection with the Bernstein acquisition. In September 2000, the Holding Company negotiated a $1.00 billion, 364-day revolving credit facility to replace the Bank of America N.A. promissory note. At September 30, 2000, $1.00 billion was outstanding under the facility with an interest rate of 6.80%. Liquidity Requirements. The Holding Company's cash requirements include debt service, operating expenses, taxes, dividends on its Common Stock and, effective December 31, 1999, certain employee benefits described below. Pre-tax debt service totaled $86.5 million in 1999, while general and administrative expenses were $20.6 million. Since 1992, the Holding Company's Board of Directors has declared quarterly cash dividends of $.025 per share on the outstanding shares of its Common Stock (adjusted for the Stock Split). During 1999, aggregate cash dividends paid on the Holding Company's Common Stock were $43.7 million. Effective December 31, 1999, the Holding Company assumed primary liability from Equitable Life for all current and future obligations of its Excess Retirement Plan, Supplemental Executive Retirement Plan and certain other non-qualified benefit plans that provide participants with medical, life insurance, and deferred compensation benefits. Equitable Life remains secondarily liable. In 1999, Equitable Life paid $52.8 million in benefits on those plans. The estimated benefit payments for 2000 approximate $52.1 million, a portion of which will be reimbursed by certain subsidiaries of the Holding Company other than Equitable Life. Liquidity Sources. At December 31, 1999, the Holding Company held cash and short-term investments and U.S. Treasury securities of approximately $149.4 million and investment grade publicly traded bonds totaling $207.7 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 Equitable Life 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 $77.3 million at December 31, 1999. The assets of the SECT (47,940 and 43,920 shares of the Series D Preferred Stock at December 31, 1999 and September 30, 2000, respectively) will be distributed over time (subject to periodic minimum and maximum requirements) to fund various employee compensation and benefit programs of certain of AXA Financial'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. In August 2000, the SECT converted 4,020 shares of Series D Convertible Preferred Stock equivalent to approximately 1.6 million shares of Common Stock. The Holding Company, as part of its stock repurchase program, purchased all of these shares for $80.0 million. 20 For the first time since the 1992 demutualization, the Holding Company received $150.0 million in dividends from Equitable Life. Through September 30, 2000, Equitable Life paid an additional $250.0 million in shareholder dividends. Under the New York Insurance Law, Equitable Life is permitted to pay shareholder dividends only if it files notice of its intention to declare such a dividend and the amount thereof with the Superintendent and the Superintendent, who by statute has broad discretion in such matters, does not disapprove the distribution. See Note 20 to Notes to Consolidated Financial Statements contained in Exhibit 99.1 attached hereto. Management believes the primary sources of liquidity described above are sufficient to meet the Holding Company's cash requirements for several years. EQUITABLE LIFE The principal sources of Equitable Life 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 Equitable Life 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; shareholders dividends; and operating expenses, including debt service. Equitable Life 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 core insurance and investment management businesses. Equitable Life's 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 Equitable Life's 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 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, 1999, this asset pool included an aggregate of $1.39 billion in highly liquid short-term investments, as compared to $1.59 billion and $816.4 million at December 31, 1998 and 1997, 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 Equitable Life's liquidity needs. Other liquidity sources include dividends and distributions from Alliance. In 1999, Equitable Life received cash distributions from Alliance of $203.5 million as compared to $157.0 million in 1998 and $125.7 million in 1997. 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 Equitable Life's liquidity needs. In addition, in July 1999, the Board of Directors authorized an increase in the limit on Equitable Life's commercial paper program to $1.00 billion from $500.0 million. This program is available for general corporate purposes to support Equitable Life's liquidity needs. In 1999, the Board also authorized increasing Equitable Life's existing $350.0 million bank credit facility to $700.0 million. In June 2000, Equitable Life renewed its $350.0 million bank 5-year credit facility and its $350.0 million 364-day credit facility. These credit facilities support the commercial paper program. At September 30, 2000 and December 31, 1999, respectively, $523.7 million and $166.9 million were outstanding under the commercial paper program; there were no amounts outstanding under the back-up credit facilities. For more information on guarantees, commitments and contingencies, see Notes 13, 16, 17, 18 and 19 of Notes to Consolidated Financial Statements. Factors Affecting Liquidity. Equitable Life's liquidity needs are affected by fluctuations in the level of surrenders and withdrawals previously discussed in "Combined Operating Results by Segment - Financial Advisory/Insurance - Surrenders and Withdrawals". Management believes the Insurance Group has adequate internal sources of funds for its presently anticipated needs. 21 Statutory Capital. Life insurers are subject to certain risk-based capital ("RBC") guidelines which 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 six years, and management believes that Equitable Life's statutory capital, as measured by its year end 1999 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. In February 2000, the Superintendent indicated the New York Insurance Department intends to proceed with implementation of Codification rules, subject to any provisions in New York statutes which conflict with particular points in the Codification rules. It is not possible to predict 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, 1999, $29.1 million (or 0.7%) of the Insurance Group's aggregate statutory capital and surplus (representing 0.5% of statutory capital and surplus and AVR) resulted from surplus relief reinsurance. The level of surplus relief reinsurance was reduced by approximately $81.9 million in 1999. ALLIANCE Alliance's principal sources of liquidity have been cash flows 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 distributions to Unitholders, to fund capital expenditures and for general working capital purposes. On October 29, 1999, Alliance Holding transferred its business to a newly-formed private limited partnership following the reorganization approved by Unitholders at their special meeting on September 22, 1999 and the expiration of the related exchange offer. Separately, Equitable Life and its subsidiaries exchanged substantially all of their public Alliance Holding's Units for limited partnership interests and a general partnership interest in the new private limited partnership. The new partnership is conducting Alliance's business without change in management or employee responsibilities. Alliance Holding's principal asset is its interest in the new partnership, and it is functioning as a holding company through which its Unitholders own an indirect interest in Alliance, the new partnership. As a result of the reorganization and exchange, Equitable Life and its subsidiaries' share of the private partnership's income will not be subject to the 3.5% Federal tax on publicly traded partnerships. In 1999 and 1998, the impact of this Federal tax on Equitable Life and its subsidiaries was approximately $19 million and $18 million, respectively. In July 1999, Alliance entered into a new $200.0 million three-year revolving credit facility, increasing its borrowing capacity under all credit facilities to $725.0 million. Like the existing credit facility, the new credit facility will be used to fund commission payments to financial intermediaries for certain mutual fund sales and for general working capital purposes. At December 31, 1999, Alliance had $384.7 million outstanding under its $425.0 million commercial paper program. Proceeds are being used to fund commission payments and for capital expenditures. There were no amounts outstanding under Alliance's revolving credit facilities. In December 1999, Alliance established a $100.0 million ECN program to supplement its commercial paper program; there were no ECNs outstanding at year end 1999. 22 CONSOLIDATED CASH FLOWS Net cash provided by operating activities was $169.7 million for 1999 as compared to $458.6 million in 1998 and $308.3 million in 1997. Net cash used by investing activities totaled $1.24 billion for 1999 as compared to net cash provided by investing activities of $1.03 billion in 1998 and net cash used by investing activities of $379.3 million in 1997. Investment purchases in 1999 exceeded sales, maturities and repayments by $948.7 million. In 1998, investment sales, maturities and repayments exceeded purchases by $627.8 million. Other discontinued operations repaid $660.0 million of loans from continuing operations during 1998. In 1997, decreases in loans to other discontinued operations totaled $420.1 million. Investment sales, maturities and repayments exceeded purchases by $32.6 million in 1997. Net cash provided by financing activities was $582.0 million in 1999 as compared to net cash used by financing activities of $527.0 million for 1998 and $179.4 million in 1997. Deposits to policyholders' account balances exceeded withdrawals in 1999 by $600.4 million. During 1998, withdrawals from policyholders' account balances exceeded deposits by $216.5 million as compared with $605.1 million in 1997. In 1999 and 1998, respectively, treasury stock purchased totaled $243.7 million and $247.1 million. There were net additions to long-term debt of $445.6 million in 1998 compared to net decreases of $70.9 million and $31.9 million in 1999 and 1997, respectively. The operating, investing and financing activities described above resulted in a decrease in cash and cash equivalents of $490.2 million in 1999 as compared to an increase of $961.9 million in 1998 and a decrease of $250.4 million in 1997. FORWARD-LOOKING STATEMENTS AXA Financial'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 AXA Financial's operations, economic performance and financial condition. Forward-looking statements include, among other things, discussions concerning AXA Financial'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. AXA Financial 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 AXA Financial's other public filings, press releases, oral presentations and discussions. The following discussion highlights some of the more important factors that could cause such differences. MARKET RISK. AXA Financial's businesses are subject to market risks arising from its insurance asset/liability management, investment management and trading activities. Primary market risk exposures exist in the Financial Advisory/Insurance segment and result from interest rate fluctuations, equity price movements and changes in credit quality. The nature of each of these risks is discussed under the caption "Quantitative and Qualitative Disclosures About Market Risk" in the MD&A and in Note 15 of Notes to Consolidated Financial Statements contained in Exhibit 99.3 and 99.1, respectively, attached hereto. Following the sale of its majority shareholdings in DLJ and the sale of $1.18 billion of Credit Suisse Group common stock ("CSG Shares"), AXA Financial holds CSG Shares with a market value approximating $3.69 billion as of November 3, 2000. Any change in the market value of the CSG Shares will affect earnings. 23 STRATEGIC INITIATIVES. AXA Financial 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 AXA Financial a premier provider of financial planning, insurance and investment 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 and the provision of financial planning services under the "AXA" name. Implementation of these strategic initiatives could affect certain historic trends in the Financial Advisory/Insurance segment. Implementation 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. AXA Financial may, from time to time, explore selective acquisition opportunities in its core insurance and investment management businesses. FINANCIAL ADVISORY/INSURANCE. The Insurance Group's future sales of life insurance and annuity products and financial planning services 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 nature and extent of competition and 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 as well as changes resulting from the Gramm-Leach-Bliley Act. The Administration's fiscal year 2001 revenue 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 - Financial Advisory/Insurance" and "Business - Regulation - Federal Initiatives" in the 1999 Form 10-K. The profitability of the Insurance Group depends on a number of factors, including levels of gross operating expenses and the amount which can be deferred as DAC, secular trends and AXA Financial'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 created, and in the future may create, significant volatility in investment income. See "Investment Results of General Account Investment Assets". The ability of AXA Financial to continue its accelerated real estate sales program 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". AXA Financial's DI and group pension businesses produced pre-tax losses in 1995 and 1996. In late 1996, loss recognition studies for the DI and group pension businesses were completed. As a result, $145.0 million of unamortized DAC on DI policies at December 31, 1996 was written off; reserves for directly written DI policies and DI reinsurance assumed were strengthened by $175.0 million; and a Pension Par premium deficiency reserve was established which resulted in a $73.0 million pre-tax charge to results of continuing operations at December 31, 1996. Based on the experience that emerged on these two books of business since 1996, management continues to believe the DI and Pension Par reserves have been calculated on a reasonable basis and are adequate. 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. INVESTMENT 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 and 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 - Investment Management". 24 OTHER 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 a discussion of significant reserve strengthening in 1997 and the assumptions used in making cash flow projections. TECHNOLOGY AND INFORMATION SYSTEMS. AXA Financial'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 retail sales associates, employees and clients, and recording information for accounting and management information purposes. Any significant difficulty associated with the operation of such systems, or any material delay or inability to develop needed system capabilities, could have a material adverse effect on AXA Financial'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. AXA Financial's insurance subsidiaries, like other life and health insurers, are involved in such litigation. While no such lawsuit has resulted in an award or settlement of any material amount against AXA Financial 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" in the 1999 Form 10-K and "Legal Proceedings" in the Form 10-Q for the quarter ended September 30, 2000. FUTURE ACCOUNTING PRONOUNCEMENTS. In the future, new accounting pronouncements may have material effects on AXA Financial's consolidated statements of earnings and shareholders' equity. See Note 2 of Notes to Consolidated Financial Statements contained in Exhibit 99.1 attached hereto 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. In February 2000, the Superintendent indicated the New York Insurance Department intends to proceed with implementation of Codification rules, subject to any provisions in New York statutes which conflict with particular points in the Codification rules. It is not possible to predict 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. The businesses conducted by AXA Financial'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 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. 25 PART II, ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK AXA Financial'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 Investment Management. Alliance's investments are divided into two portfolios: available for sale investments and other investments. Alliance's available for sale portfolio primarily includes equity and fixed income mutual funds and money market investments. The carrying value of money market investments approximates fair value. 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. Other investments include Alliance's hedge fund investments. At December 31, 1999, Alliance's interest rate, equity price and credit quality risks were not material to AXA Financial. For further information, see Alliance Holding's and Alliance's Annual Reports on Form 10-K for the year ended December 31, 1999. Insurance Group. Insurance Group 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 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 Group assets with interest rate risk include fixed maturities and mortgage loans which make up 81.6% 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 that follows shows the impact an immediate 100 basis point increase in interest rates at December 31, 1999 would have on the fair value of fixed maturities and mortgages: 26
INTEREST RATE RISK EXPOSURE (IN MILLIONS) DECEMBER 31, 1999 December 31, 1998 ---------------------------------------- ------------------------------------ FAIR +100 BASIS Fair +100 Basis VALUE POINT CHANGE Value Point Change -------------------- ------------------- ---------------- ------------------- Continuing Operations: Fixed maturities: Fixed rate........................ $ 21,498.2 $ 20,341.1 $ 22,332.6 $ 21,167.6 Floating rate..................... 1,241.2 1,206.1 1,208.5 1,208.5 Mortgage loans...................... 4,889.6 4,700.7 4,665.3 4,482.8 Other Discontinued Operations: Fixed maturities: Fixed rate........................ $ 85.4 $ 81.4 $ 20.2 $ 19.5 Floating rate..................... .1 .1 4.7 4.7 Mortgage loans...................... 467.0 454.2 599.9 580.8 Holding Company Group: Fixed maturities: Fixed rate........................ $ 367.8 $ 355.4 $ 517.2 $ 501.5 Floating rate..................... 7.8 7.7 83.9 83.9
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 various 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. The investment portfolios also have 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, 1999 and 1998:
EQUITY PRICE RISK EXPOSURE (IN MILLIONS) DECEMBER 31, 1999 December 31, 1998 ----------------------------------------- ------------------------------------ FAIR -10% EQUITY Fair -10% Equity VALUE PRICE CHANGE Value Price Change ------------------ --------------------- -------------- --------------------- Insurance Group: Continuing operations............... $ 33.2 $ 29.9 $ 164.4 $ 148.0 Other discontinued operations....... 5.7 5.1 19.3 17.4 Excess of Separate Accounts assets over Separate Accounts liabilities 121.4 109.3 91.0 81.9 Holding Company Group................. $ 2.3 $ 2.1 $ 47.7 $ 42.9
27 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 years end 1999 and 1998, the aggregate carrying value of policyholders' liabilities were $36,134.0 million and $35,618.7 million, respectively, including $12,796.4 million and $12,954.0 million, respectively, of the General Account's investment contracts. The aggregate fair value of those investment contracts at years end 1999 and 1998 were $12,850.5 million and $13,455.0 million, respectively. The impact of a relative 1% decrease in interest rates would be an increase in the fair value of those investment contracts to $12,977.7 million and $13,644.0 million, respectively. 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 Group's operations, including investment decisions, product development and determination of crediting rates. As part of its risk management process, numerous economic scenarios are modeled, including cash flow testing required for insurance regulatory purposes, to determine if existing assets would be sufficient to meet projected liability cash flows. Key variables include policyholder behavior, such as persistency, under differing crediting rate strategies. On the basis of these more comprehensive analyses, management believes there is no material solvency risk to Equitable Life with respect to interest rate movements up or down of 100 basis points from year end 1999 levels or with respect to a 10% drop in equity prices from year end 1999 levels. As more fully described in Note 15 of Notes to Consolidated Financial Statements contained in Exhibit 99.1 attached hereto 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. 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 years end 1999 and 1998, the net market value exposure of the Insurance Group's derivatives was $53.7 million and $71.7 million, respectively. The table that follows 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. 28
INSURANCE GROUP - DERIVATIVE FINANCIAL INSTRUMENTS (IN MILLIONS, EXCEPT FOR WEIGHTED AVERAGE TERM) Weighted Average Notional Term -100 Basis Fair +100 Basis Amount (Years) Point Change Value Point Change --------------- -------------- ----------------- ---------------- ------------------- DECEMBER 31, 1999 Swaps: Floating to fixed rate. $ 92.3 0.35 $ 41.4 $ 9.8 $ (19.5) Fixed to floating rate. 705.0 5.58 (2.1) (1.8) (1.9) Options: Caps................... 7,775.0 3.25 16.0 45.5 103.1 Floors................. 2,000.0 2.28 .8 .2 - --------------- -------------- ----------------- ------------------- ------------------- Total.................... $ 10,572.3 3.20 $ 56.1 $ 53.7 $ 81.7 =============== ============== ================= =================== ================== December 31, 1998 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 =============== ============== ================= =================== ===================
At year end 1999 and 1998, the aggregate fair values of long-term debt issued by Equitable Life and the Holding Company Group were $1.98 billion and $2.40 billion, respectively. The table below shows the potential fair value exposure to an immediate 100 basis point decrease in interest rates from those prevailing at years end 1999 and 1998.
INTEREST RATE RISK EXPOSURE (IN MILLIONS) DECEMBER 31, 1999 December 31, 1998 --------------------------------------- ------------------------------------- FAIR -100 BASIS Fair -100 Basis VALUE POINT CHANGE Value Point Change ------------------ ------------------- ------------------ ------------------ Continuing Operations: Fixed rate........................ $ 583.5 $ 621.4 $ 779.7 $ 828.4 Floating rate..................... 251.4 251.3 251.3 251.3 Other Discontinued Operations: Fixed rate........................ $ - $ - $ 45.1 $ 45.1 Floating rate..................... 101.9 101.9 102.1 102.1 Holding Company Group............... $ 1,043.7 $ 1,116.7 $ 1,218.1 $ 1,311.3
29 EX-99.4 7 0007.txt SELECTED 5 YR. DATA Exhibit 99.4 SELECTED CONSOLIDATED FINANCIAL INFORMATION
AT OR FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------------------------------------- 1999 1998 1997 1996 1995 -------------- ------------- ------------- ------------- ------------- (IN MILLIONS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENTS OF EARNINGS DATA Revenues Universal life and investment-type product policy fee income.............. $ 1,257.5 $ 1,056.2 $ 950.6 $ 874.0 $ 788.2 Premiums................................. 558.2 588.1 601.5 597.6 606.8 Net investment income(1)................. 2,263.3 2,255.9 2,306.2 2,229.1 2,105.6 Investment (losses) gains, net(2)........ (202.3) 82.2 (46.5) (1.5) (6.9) Commissions, fees and other income....... 2,018.8 1,389.8 1,095.1 987.6 834.6 Contribution from the Closed Block(3).... 86.4 87.1 102.5 125.0 143.2 -------------- ------------- ------------- ------------- ------------- Total revenues............................. 5,981.9 5,459.3 5,009.4 4,811.8 4,471.5 Total benefits and other deductions(4)(5)(6) 5,005.9 4,444.1 4,510.3 4,729.3 4,110.2 -------------- ------------- ------------- ------------- ------------- Earnings from continuing operations before Federal income taxes and minority interest........................ 976.0 1,015.2 499.1 82.5 361.3 Federal income tax expense (benefit)(7).... 308.7 338.2 90.9 (5.5) 94.9 Minority interest in net income of consolidated subsidiaries................ 199.4 125.2 54.8 81.7 62.8 -------------- ------------- ------------- ------------- ------------- Earnings from continuing operations before cumulative effect of accounting change........................ 467.9 551.8 353.4 6.3 203.6 Earnings (loss) from discontinued operations, net of Federal income taxes: Investment Banking and Brokerage segment(8).............................. 630.1 278.6 294.8 199.7 161.8 Other discontinued operations(1)(9)(10)(11)................ 28.1 2.7 (87.2) (83.8) - Cumulative effect of accounting changes, net of Federal income taxes.............. - - - (23.1) - -------------- ------------- ------------- ------------- ------------- Net earnings............................... 1,126.1 833.1 561.0 99.1 365.4 Dividends on preferred stocks.............. - - 15.6 26.7 26.7 -------------- ------------- ------------- ------------- ------------- Net Earnings Applicable to Common Shares............................ $ 1,126.1 $ 833.1 $ 545.4 $ 72.4 $ 338.7 ============== ============= ============= ============= ============= Per Common Share*: Basic: Earnings (loss) from Continuing Operations before Cumulative Effect of Accounting Change........... $ 1.07 $ 1.24 $ .84 $ (.06) $ .48 ============== ============ ============= ============= ============= Net Earnings........................... $ 2.58 $ 1.88 $ 1.35 $ .20 $ .92 ============== ============= ============= ============= ============= Diluted: Earnings from Continuing Operations before Cumulative Effect of Accounting Change.................... $ 1.04 $ 1.22 $ .81 $ (.06) $ .48 ============== ============= ============= ============= ============= Net Earnings........................... $ 2.45 $ 1.81 $ 1.24 $ .18 $ .87 ============== ============= ============= ============= ============= Cash Dividends Per Common Share............ $ .10 $ .10 $ .10 $ .10 $ .10 ============== ============= ============= ============= ============= CONSOLIDATED BALANCE SHEETS DATA Total assets(5)(11)........................ $ 101,593.8 $ 89,514.2 $ 81,942.3 $ 74,629.2 $ 70,089.0 Long-term debt............................. 1,926.7 2,113.0 1,838.5 2,500.8 2,893.1 Total liabilities(5)(11)................... 95,754.9 83,821.1 76,668.8 70,641.2 65,980.3 Shareholders' equity....................... 5,838.9 5,693.1 5,273.5 3,988.0 4,108.7
NOTES TO SELECTED CONSOLIDATED FINANCIAL INFORMATION (1) Net investment income and discontinued operations included $26.6 million, $53.3 million, $114.3 million and $154.6 million for 1998, 1997, 1996 and 1995 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 totaling $291.4 million, $187.8 million, $483.8 million, $178.6 million and $197.6 million for 1999, 1998, 1997, 1996 and 1995, 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) 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 contained in Exhibit 99.1 attached hereto. (4) In 1999, revisions to estimated future gross profits used to determine the amortization of DAC for universal life and investment-type products resulted in a writedown of DAC of $131.7 million. In 1996, AXA Financial 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 contained in Exhibit 99.1 attached hereto. (5) Total benefits and other deductions included Corporate interest expense of $102.4 million, $104.2 million, $111.4 million, $122.8 million and $84.9 million for 1999, 1998, 1997, 1996 and 1995, respectively. (6) Total benefits and other deductions included provisions associated with exit and termination costs of $42.4 million, $24.4 million and $32.0 million for 1997, 1996 and 1995, respectively. (7) In 1997, AXA Financial released $97.5 million of tax reserves related to years prior to 1989. (8) Operating results for the Investment Banking and Brokerage segment are included in discontinued operations for 1999, 1998, 1997, 1996 and 1995, respectively. See Note 8 of Notes to Consolidated Financial Statements contained in Exhibit 99.1 attached hereto. (9) Other 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 $50.5 million, $33.2 million, $212.5 million, $36.0 million and $38.2 million for 1999, 1998, 1997, 1996 and 1995, 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. (10) During the 1999, 1998, 1997 and 1996 reviews of the allowance for future losses for other discontinued operations, management released the allowance in 1999 and 1998 and increased the allowance in 1997 and 1996. As a result, net earnings increased by $28.1 million and $2.7 million and decreased by $87.2 million and $83.8 million for 1999, 1998, 1997 and 1996, respectively. Incurred (losses) gains of $(19.3) million, $50.3 million, ($154.4) million, ($23.7) million and ($25.1) million for the years ended December 31, 1999, 1998, 1997, 1996 and 1995, respectively, were credited (charged) to other discontinued operations allowance for future losses. See Note 8 of Notes to Consolidated Financial Statements contained in Exhibit 99.1 attached hereto. (11) Assets and liabilities relating to other discontinued operations are not reflected on the consolidated balance sheets of AXA Financial, except that the net amount due to continuing operations for intersegment loans made to other discontinued operations in excess of continuing operations' obligations to fund other discontinued operations' accumulated deficit is reflected as "Amounts due from discontinued operations" in 1998, 1997, 1996 and 1995. EX-99.5 8 0008.txt PRESS RELEASE News Release AXA FINANCIAL, INC. November 3, 2000 MEDIA CONTACTS: INVESTOR CONTACTS: Barbara Wilkoc Greg Wilcox AXA Financial AXA Financial 212-314-3740 212-314-4040 Jeffrey Tolvin Jad Ariss AXA Financial AXA 212-314-2811 011.331.40.75.47.45 Christophe Dufraux AXA 011.331.40.75.46.74 AXA FINANCIAL ANNOUNCES THE CLOSE OF THE SALE OF DONALDSON, LUFKIN & JENRETTE TO CREDIT SUISSE GROUP NEW YORK - AXA Financial, Inc. announced today the closing of the sale of Donaldson, Lufkin & Jenrette, Inc. to Credit Suisse Group, previously announced on August 30, 2000. According to the terms of the deal, AXA Financial received approximately $2.3 billion in cash and approximately 25 million shares of Credit Suisse Group stock for its approximately 88.6 million shares of DLJ. Also in accordance with the agreement, Credit Suisse will repurchase approximately $1.2 billion of its shares from AXA Financial. ABOUT AXA FINANCIAL AND AXA GROUP AXA Financial, Inc., with approximately $400 billion in assets under management, is one of the world's premier financial service organizations through its strong brands: The Equitable Life Assurance Society, AXA Advisors, Equitable Distributors, Alliance Capital Management and Sanford C. Bernstein. AXA Financial is a member of the global AXA Group. For more information visit www.axa-financial.com. AXA Group is one of the world's largest international insurance and related financial services companies. AXA's operations are diverse geographically, with activities in approximately 60 countries, principally Western Europe, North America and the Asia/Pacific area. In the United States, AXA is represented through its holdings in AXA Financial, Inc. and its subsidiaries: Equitable Life Assurance Society, AXA Advisors, Equitable Distributors, and Alliance Capital Management. AXA has approximately $900 billion in assets under management and $52 billion in market capitalization. The AXA American Depositary Share (ADS) is listed on the NYSE under the ticker symbol AXA, on the Paris Stock Exchange under the same symbol and trades on the SEAQ International in London. For more information, visit www.axa.com. -----END PRIVACY-ENHANCED MESSAGE-----