-----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, LOLUFidyXSk4ic/ifPFIeIeDyFouk1BOQ2VRaoz3WKQ2ng4Zattiq+BiTT1sa8L0 4BJy2kAWydHpTGQYOiAd5A== 0000888002-97-000260.txt : 19970814 0000888002-97-000260.hdr.sgml : 19970814 ACCESSION NUMBER: 0000888002-97-000260 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970813 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EQUITABLE COMPANIES INC CENTRAL INDEX KEY: 0000888002 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 133623351 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11166 FILM NUMBER: 97658664 BUSINESS ADDRESS: STREET 1: 787 SEVENTH AVE CITY: NEW YORK STATE: NY ZIP: 10019 BUSINESS PHONE: 2125541234 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------- FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended June 30, 1997 Commission File No. 1-11166 - -------------------------------------------------------------------------------- The Equitable Companies Incorporated ------------------------------------ (Exact name of registrant as specified in its charter) Delaware 13-3623351 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1290 Avenue of the Americas, New York, New York 10104 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (212) 554-1234 -------------------------- None - -------------------------------------------------------------------------------- (Former name, former address, and former fiscal year if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) been subject to such filing requirements for the past 90 days. Yes X No ---- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Shares Outstanding Class at August 11, 1997 - -------------------------------------------------------------------------------- Common Stock, $.01 par value 205,836,606 Page 1 of 40
THE EQUITABLE COMPANIES INCORPORATED FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1997 TABLE OF CONTENTS Page # ------ PART I FINANCIAL INFORMATION Item 1: Unaudited Consolidated Financial Statements Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996......... 3 Consolidated Statements of Earnings for the Three Months and Six Months Ended June 30, 1997 and 1996............................................ 4 Consolidated Statements of Shareholders' Equity for the Six Months Ended June 30, 1997 and 1996................................................... 6 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996......................................................... 7 Notes to Consolidated Financial Statements.................................... 8 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 19 PART II OTHER INFORMATION Item 1: Legal Proceedings................................................................ 37 Item 4: Submission of Matters to a Vote of Security Holders.............................. 37 Item 6: Exhibits and Reports on Form 8-K................................................. 38 SIGNATURES....................................................................................... 40
2 PART I FINANCIAL INFORMATION Item 1: Unaudited Consolidated Financial Statements. THE EQUITABLE COMPANIES INCORPORATED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30, December 31, 1997 1996 ---------------- ---------------- (In Millions) ASSETS Investments: Fixed maturities: Available for sale, at estimated fair value............................. $ 19,289.5 $ 18,556.2 Held to maturity, at amortized cost..................................... 162.0 178.5 Trading account securities, at market value............................... 17,637.3 15,728.1 Securities purchased under resale agreements.............................. 25,722.2 20,492.1 Mortgage loans on real estate............................................. 2,751.0 3,133.0 Equity real estate........................................................ 3,395.6 3,298.4 Policy loans.............................................................. 2,345.3 2,196.1 Other equity investments.................................................. 1,151.4 1,081.9 Other invested assets..................................................... 134.8 125.0 ----------------- ----------------- Total investments..................................................... 72,589.1 64,789.3 Cash and cash equivalents................................................... 996.0 755.3 Broker-dealer related receivables........................................... 23,377.2 16,661.7 Deferred policy acquisition costs........................................... 3,241.9 3,106.5 Amounts due from discontinued GIC Segment................................... 808.4 996.2 Other assets................................................................ 5,096.7 4,361.1 Closed Block assets......................................................... 8,504.3 8,495.0 Separate Accounts assets.................................................... 32,642.5 29,646.1 ----------------- ----------------- Total Assets................................................................ $ 147,256.1 $ 128,811.2 ================= ================= LIABILITIES Policyholders' account balances............................................. $ 21,832.5 $ 21,863.8 Future policy benefits and other policyholders liabilities.................. 4,505.4 4,416.6 Securities sold under repurchase agreements................................. 36,962.3 29,378.3 Broker-dealer related payables.............................................. 24,517.8 19,497.0 Short-term and long-term debt............................................... 7,619.2 5,379.6 Other liabilities........................................................... 5,810.1 5,598.3 Closed Block liabilities.................................................... 9,048.7 9,091.3 Separate Accounts liabilities............................................... 32,488.3 29,598.3 ----------------- ----------------- Total liabilities..................................................... 142,784.3 124,823.2 ----------------- ----------------- Commitments and contingencies (Note 12) SHAREHOLDERS' EQUITY Series C convertible preferred stock........................................ 24.4 24.4 Series D convertible preferred stock........................................ 397.0 294.0 Stock employee compensation trust........................................... (397.0) (294.0) Series E convertible preferred stock........................................ 380.2 380.2 Common stock, at par value.................................................. 1.9 1.9 Capital in excess of par value.............................................. 2,815.9 2,782.2 Retained earnings........................................................... 989.5 632.9 Net unrealized investment gains............................................. 272.8 179.3 Minimum pension liability................................................... (12.9) (12.9) ----------------- ----------------- Total shareholders' equity............................................ 4,471.8 3,988.0 ----------------- ----------------- Total Liabilities and Shareholders' Equity.................................. $ 147,256.1 $ 128,811.2 ================= =================
See Notes to Consolidated Financial Statements. 3 THE EQUITABLE COMPANIES INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- ---------------- --------------- --------------- (In Millions, Except Per Share Amounts) REVENUES Universal life and investment-type product policy fee income.......................... $ 236.1 $ 217.8 $ 466.6 $ 430.7 Premiums............................................. 141.0 152.4 292.8 293.4 Net investment income................................ 972.7 812.6 1,842.6 1,604.2 Investment gains, net................................ 434.1 202.4 612.1 372.7 Commissions, fees and other income................... 777.2 768.1 1,545.7 1,367.4 Contribution from the Closed Block................... 29.7 27.2 65.5 59.3 --------------- --------------- --------------- -------------- Total revenues................................. 2,590.8 2,180.5 4,825.3 4,127.7 --------------- ---------------- --------------- --------------- BENEFITS AND OTHER DEDUCTIONS Interest credited to policyholders' account balances........................................... 331.7 312.8 644.6 633.4 Policyholders' benefits.............................. 227.5 273.9 482.4 528.1 Other operating costs and expenses................... 1,607.5 1,356.6 2,998.1 2,514.9 --------------- ---------------- --------------- --------------- Total benefits and other deductions............ 2,166.7 1,943.3 4,125.1 3,676.4 --------------- ---------------- --------------- --------------- Earnings from continuing operations before Federal income taxes, minority interest and cumulative effect of accounting change......... 424.1 237.2 700.2 451.3 Federal income taxes................................. 172.3 72.2 259.7 136.9 Minority interest in net (loss) income of consolidated subsidiaries.......................... (.3) 49.3 49.1 89.0 --------------- ---------------- --------------- --------------- Earnings from continuing operations before cumulative effect of accounting change............. 252.1 115.7 391.4 225.4 Discontinued operations, net of Federal income taxes.............................................. .6 - (2.7) - Cumulative effect of accounting change, net of Federal income taxes........................ - - - (23.1) --------------- ---------------- --------------- --------------- Net Earnings......................................... $ 252.7 $ 115.7 $ 388.7 $ 202.3 =============== ================ =============== ===============
4 THE EQUITABLE COMPANIES INCORPORATED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) - Continued
Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- ---------------- --------------- --------------- (In Millions, Except Per Share Amounts) Per Common Share: Assuming No Dilution: Earnings from continuing operations before cumulative effect of accounting change......... $ 1.28 $ .58 $ 1.97 $ 1.13 Discontinued operations, net of Federal income taxes................................... - - (.01) - Cumulative effect of accounting change, net of Federal income taxes.................... - - - (.12) --------------- ---------------- --------------- --------------- Net Earnings..................................... $ 1.28 $ .58 $ 1.96 1.01 =============== ================ =============== =============== Assuming Full Dilution: Earnings from continuing operations before cumulative effect of accounting change......... $ 1.12 $ .54 $ 1.74 $ 1.05 Discontinued operations, net of Federal income taxes................................... - - (.01) - Cumulative effect of accounting change, net of Federal income taxes.................... - - - (.10) --------------- ---------------- --------------- --------------- Net Earnings..................................... $ 1.12 $ .54 $ 1.73 $ .95 =============== ================ =============== =============== Cash Dividends Per Common Share...................... $ .05 $ .05 $ .10 $ .10 =============== ================ =============== ===============
See Notes to Consolidated Financial Statements. 5 THE EQUITABLE COMPANIES INCORPORATED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
1997 1996 ----------------- ----------------- (In Millions) Series C convertible preferred stock, beginning of year and end of period... $ 24.4 $ 24.4 ----------------- ----------------- Series D convertible preferred stock, beginning of year..................... 294.0 286.6 Change in market value of shares............................................ 103.0 10.4 ----------------- ----------------- Series D convertible preferred stock, end of period......................... 397.0 297.0 ----------------- ----------------- Stock employee compensation trust, beginning of year........................ (294.0) (286.6) Change in market value of shares............................................ (103.0) (10.4) ----------------- ----------------- Stock employee compensation trust, end of period............................ (397.0) (297.0) ----------------- ----------------- Series E convertible preferred stock, beginning of year and end of period... 380.2 380.2 ----------------- ----------------- Common stock, at par value, beginning of year and end of period............. 1.9 1.8 ----------------- ----------------- Capital in excess of par value, beginning of year as previously reported.... 2,782.2 2,561.1 Cumulative effect on prior years of retroactive restatement for accounting change......................................................... - 192.2 ----------------- ----------------- Capital in excess of par value, beginning of year as restated............... 2,782.2 2,753.3 Additional capital in excess of par value................................... 33.7 13.6 ----------------- ----------------- Capital in excess of par value, end of period............................... 2,815.9 2,766.9 ----------------- ----------------- Retained earnings, beginning of year as previously reported................. 632.9 590.7 Cumulative effect on prior years of retroactive restatement for accounting change......................................................... - 6.8 ----------------- ----------------- Retained earnings, beginning of year as restated............................ 632.9 597.5 Net earnings................................................................ 388.7 202.3 Dividends on preferred stocks............................................... (13.3) (13.3) Dividends on common stock................................................... (18.8) (18.5) ----------------- ----------------- Retained earnings, end of period............................................ 989.5 768.0 ----------------- ----------------- Net unrealized investment gains, beginning of year as previously reported... 179.3 328.3 Cumulative effect on prior years of retroactive restatement for accounting change......................................................... - 58.3 ----------------- ----------------- Net unrealized investment gains, beginning of year as restated.............. 179.3 386.6 Change in unrealized investment gains (losses).............................. 93.5 (387.6) ----------------- ----------------- Net unrealized investment gains (losses), end of period..................... 272.8 (1.0) ----------------- ----------------- Minimum pension liability, beginning of year and end of period.............. (12.9) (35.1) ----------------- ----------------- Total Shareholders' Equity, End of Period................................... $ 4,471.8 $ 3,905.2 ================= =================
See Notes to Consolidated Financial Statements. 6 THE EQUITABLE COMPANIES INCORPORATED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (UNAUDITED)
1997 1996 ----------------- ----------------- (In Millions) Net earnings................................................................ $ 388.7 $ 202.3 Adjustments to reconcile net earnings to net cash (used) provided by operating activities: Interest credited to policyholders' account balances.................... 644.6 633.4 Universal life and investment-type policy fee income.................... (466.6) (430.7) Net change in trading activities and broker-dealer related receivables/payables.................................................. (4,123.7) 380.3 (Increase) decrease in matched resale agreements........................ (4,340.6) (1,904.9) Increase (decrease) in matched repurchase agreements.................... 4,340.6 1,904.9 Investment gains, net of dealer and trading gains....................... (346.0) (97.6) Changes in clearing association fees and regulatory deposits............ (31.1) (78.7) Change in accounts payable and accrued expenses......................... (64.6) (24.7) Change in Federal income taxes payable.................................. 69.0 (109.7) Other, net.............................................................. (73.5) (338.8) ----------------- ----------------- Net cash (used) provided by operating activities............................ (4,003.2) 135.8 ----------------- ----------------- Cash flows from investing activities: Maturities and repayments................................................. 1,590.5 1,289.4 Sales.................................................................... 5,242.4 5,343.4 Return of capital from joint ventures and limited partnerships............ 30.4 48.5 Purchases................................................................. (7,082.1) (7,443.3) Decrease in loans to discontinued GIC Segment............................. 185.2 492.5 Sale of subsidiaries...................................................... 261.0 - Other, net................................................................ (322.8) 367.6 ----------------- ----------------- Net cash (used) provided by investing activities............................ (95.4) 98.1 ----------------- ----------------- Cash flows from financing activities: Policyholders' account balances: Deposits................................................................ 858.6 913.9 Withdrawals............................................................. (1,063.6) (1,265.8) Net change in short-term financings....................................... 4,421.5 (150.1) Additions to long-term debt............................................... 238.0 252.5 Repayments of long-term debt.............................................. (75.4) (219.9) Other, net................................................................ (39.8) (58.9) ----------------- ----------------- Net cash provided (used) by financing activities........................... 4,339.3 (528.3) ----------------- ----------------- Change in cash and cash equivalents......................................... 240.7 (294.4) Cash and cash equivalents, beginning of year................................ 755.3 1,200.4 ----------------- ----------------- Cash and Cash Equivalents, End of Period.................................... $ 996.0 $ 906.0 ================= ================= Supplemental cash flow information: Interest Paid............................................................. $ 1,894.3 $ 1,402.8 ================= ================= Income Taxes Paid......................................................... $ 168.1 $ 60.9 ================= =================
See Notes to Consolidated Financial Statements. 7 THE EQUITABLE COMPANIES INCORPORATED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1) BASIS OF PRESENTATION The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions (including normal, recurring accruals) that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These statements should be read in conjunction with the consolidated financial statements of The Equitable for the year ended December 31, 1996. The results of operations for the six months ended June 30, 1997 are not necessarily indicative of the results to be expected for the full year. The terms "second quarter 1997" and "second quarter 1996" refer to the three months ended June 30, 1997 and 1996, respectively. The terms "first half of 1997" and "first half of 1996" refer to the six months ended June 30, 1997 and 1996, respectively. Certain reclassifications have been made in the amounts presented for prior periods to conform those periods with the current presentation. 2) ACCOUNTING CHANGES AND PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income". This statement establishes standards for reporting and displaying comprehensive income and its components in a full set of general purpose financial statements. This statement requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. This statement is effective for fiscal years beginning after December 15, 1997. Reclassification of financial statements for earlier periods provided for comparative purposes is required. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information". This statement establishes standards for the way public business enterprises report information about operating segments in annual and interim financial statements issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Generally, financial information will be required to be reported on the basis used by management for evaluating segment performance and deciding how to allocate resources to segments. This statement is effective for fiscal years beginning after December 15, 1997 and need not be applied to interim reporting in the initial year of adoption. Restatement of comparative information for earlier periods is required. In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share". This statement simplifies the standards for computing earnings per share ("EPS") previously found in APB Opinion No. 15, "Earnings Per Share". Basic EPS will replace primary EPS. Basic EPS will be computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS will be computed similarly to the present fully diluted EPS. Dual presentation of basic and diluted EPS will be required on the face of the income statement. A reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation is also required. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997; earlier application is not permitted. Restatement of all prior period EPS data will be required. Had The Equitable's EPS calculations for the second quarter and the first half of 1997 been computed on an SFAS No. 128 basis, basic EPS would have been $1.32 per share and $2.01 per share, respectively. Diluted EPS would not have been materially different from reported 1997 amounts. EPS calculations for the second quarter and first half of 1996 on an SFAS No. 128 basis would not have resulted in amounts materially different from those reported. 8 In 1996, The Equitable changed its method of accounting for long-duration participating life insurance contracts, primarily within the Closed Block, in accordance with the provisions prescribed by SFAS No. 120. The effect of this change, including the impact on the Closed Block, was to increase previously reported second quarter and first half of 1996 earnings from continuing operations before cumulative effect of accounting change by $3.9 million and $7.2 million, net of Federal income taxes of $2.0 million and $3.8 million ($.02 and $.04 per share assuming no dilution and $.02 and $.03 per share assuming full dilution), respectively. 3) FEDERAL INCOME TAXES Federal income taxes for interim periods have been computed using an estimated annual effective tax rate. This rate is revised, if necessary, at the end of each successive interim period to reflect the current estimate of the annual effective tax rate. 4) INVESTMENTS Investment valuation allowances and changes thereto are shown below:
Six Months Ended June 30, ----------------------------------- 1997 1996 --------------- --------------- (In Millions) Balances, beginning of year............................................... $ 137.1 $ 325.3 SFAS No. 121 release...................................................... - (152.4) Additions charged to income............................................... 41.5 73.9 Deductions for writedowns and asset dispositions.......................... (46.5) (82.7) --------------- --------------- Balances, End of Period................................................... $ 132.1 $ 164.1 =============== =============== Balances, end of period: Mortgage loans on real estate........................................... $ 46.9 $ 102.1 Equity real estate...................................................... 85.2 62.0 --------------- --------------- Total..................................................................... $ 132.1 $ 164.1 =============== ===============
For the second quarter and first half of 1997 and of 1996, investment income is shown net of investment expenses (including interest expense to finance short-term trading instruments) of $836.2 million, $1,529.2 million, $592.2 million and $1,174.1 million, respectively. As of June 30, 1997 and December 31, 1996, respectively, fixed maturities classified as available for sale had amortized costs of $18,911.6 million and $18,196.1 million, fixed maturities in the held to maturity portfolio had estimated fair values of $179.3 million and $195.1 million and trading account securities had amortized costs of $17,459.5 million and $15,758.3 million, respectively. Other equity investments included equity securities with carrying values of $670.7 million and $614.9 million and costs of $666.2 million and $627.5 million. For the first half of 1997 and of 1996, proceeds received on sales of fixed maturities classified as available for sale amounted to $4,999.4 million and $4,971.9 million, respectively. Gross gains of $77.0 million and $68.6 million and gross losses of $78.5 million and $45.0 million were realized on these sales for the first half of 1997 and of 1996, respectively. Unrealized investment gains related to fixed maturities classified as available for sale increased by $17.9 million in the first half of 1997, resulting in a balance of $377.9 million at June 30, 1997. 9 Impaired mortgage loans along with the related provision for losses were as follows:
June 30, December 31, 1997 1996 --------------- ----------------- (In Millions) Impaired mortgage loans with provision for losses....................... $ 215.1 $ 340.0 Impaired mortgage loans without provision for losses.................... 4.0 122.3 --------------- ----------------- Recorded investment in impaired mortgage loans.......................... 219.1 462.3 Provision for losses.................................................... 43.2 46.4 --------------- ----------------- Net Impaired Mortgage Loans............................................. $ 175.9 $ 415.9 =============== =================
During the first half of 1997 and of 1996, respectively, The Equitable's average recorded investment in impaired mortgage loans was $341.1 million and $541.2 million. Interest income recognized on these impaired mortgage loans totaled $9.3 million and $20.8 million for the first half of 1997 and of 1996, respectively, including $1.0 million and $7.3 million recognized on a cash basis. 5) SECURITIES SOLD UNDER REPURCHASE AGREEMENTS Securities sold under repurchase agreements are treated as financing transactions and carried at the amounts at which the securities subsequently will be reacquired per the respective agreements. These agreements with counterparties were collateralized principally by U.S. government securities. The weighted average interest rates on securities sold under repurchase agreements were 5.82% and 6.08% at June 30, 1997 and December 31, 1996, respectively. 6) ALLIANCE - CURSITOR TRANSACTION On February 29, 1996, Alliance acquired the business of Cursitor for approximately $159.0 million. The purchase price consisted of 1.8 million Alliance Units, $94.3 million in cash, $21.5 million in notes payable ratably over four years and substantial additional consideration which will be determined at a later date. The Equitable recognized an investment gain of $20.6 million as a result of the issuance of Alliance Units in this transaction. On June 30, 1997, Alliance reduced the recorded value of goodwill and contracts associated with Alliance's acquisition of Cursitor by $120.9 million. This charge reflected Alliance's view that Cursitor's continuing decline in assets under management and its reduced profitability, resulting from relative investment underperformance, no longer supported the carrying value of its investment. As a result, The Equitable's earnings from continuing operations before cumulative effect of accounting change for the second quarter and first half of 1997 included a charge of $59.5 million, net of a Federal income tax benefit of $10.0 million and minority interest of $51.4 million. In addition to its 1% general partnership interest in Alliance, at June 30, 1997, The Equitable owned approximately 57.1% of Alliance Units. 7) BUSINESS SEGMENT INFORMATION
Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- --------------- --------------- --------------- (In Millions) Revenues Insurance Operations..................... $ 1,008.7 $ 928.8 $ 1,989.7 $ 1,845.6 Investment Services...................... 1,580.3 1,246.1 2,830.8 2,273.4 Corporate and Other...................... 10.4 14.0 23.2 27.8 Consolidation/elimination................ (8.6) (8.4) (18.4) (19.1) --------------- --------------- --------------- --------------- Total.................................... $ 2,590.8 $ 2,180.5 $ 4,825.3 $ 4,127.7 =============== =============== =============== ===============
10
Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- --------------- --------------- --------------- (In Millions) Earnings from Continuing Operations before Federal Income Taxes, Minority Interest and Cumulative Effect of Accounting Change Insurance Operations..................... $ 122.7 $ 73.4 $ 249.5 $ 158.0 Investment Services...................... 333.3 192.3 515.0 351.8 Corporate and Other...................... 2.9 4.3 5.6 9.4 Consolidation/elimination................ (.5) 1.6 (.9) 1.1 --------------- --------------- --------------- --------------- Subtotal............................... 458.4 271.6 769.2 520.3 Corporate interest expense............... (34.3) (34.4) (69.0) (69.0) --------------- --------------- --------------- --------------- Total.................................... $ 424.1 $ 237.2 $ 700.2 $ 451.3 =============== =============== =============== ===============
June 30, December 31, 1997 1996 ----------------- ----------------- (In Millions) Assets Insurance Operations................................................... $ 65,113.7 $ 60,464.9 Investment Services.................................................... 82,041.5 68,205.3 Corporate and Other.................................................... 671.6 774.3 Consolidation/elimination.............................................. (570.7) (633.3) ----------------- ----------------- Total.................................................................. $ 147,256.1 $ 128,811.2 ================= =================
8) CLOSED BLOCK Summarized financial information of the Closed Block is as follows:
June 30, December 31, 1997 1996 ----------------- ----------------- (In Millions) Assets Fixed maturities: Available for sale, at estimated fair value (amortized cost of $3,907.8 and $3,820.7)............................................. $ 3,964.0 $ 3,889.5 Mortgage loans on real estate.......................................... 1,423.4 1,380.7 Policy loans........................................................... 1,733.1 1,765.9 Cash and other invested assets......................................... 287.0 336.1 Deferred policy acquisition costs...................................... 871.2 876.5 Other assets........................................................... 225.6 246.3 ----------------- ----------------- Total Assets........................................................... $ 8,504.3 $ 8,495.0 ================= ================= Liabilities Future policy benefits and other policyholders' account balances....... $ 8,965.6 $ 8,999.7 Other liabilities...................................................... 83.1 91.6 ----------------- ----------------- Total Liabilities...................................................... $ 9,048.7 $ 9,091.3 ================= =================
11
Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- --------------- --------------- --------------- (In Millions) Revenues Premiums and other income................ $ 174.6 $ 182.9 $ 349.4 $ 367.8 Investment income (net of investment expenses of $7.7, $7.2, $14.8 and $14.1)................................. 139.5 131.4 278.3 268.2 Investment gains (losses), net........... 3.1 (4.4) 5.4 (8.6) --------------- --------------- --------------- --------------- Total revenues........................... 317.2 309.9 633.1 627.4 --------------- --------------- --------------- --------------- Benefits and Other Deductions Policyholders' benefits and dividends.... 265.8 276.1 536.8 554.1 Other operating costs and expenses....... 21.7 6.6 30.8 14.0 --------------- --------------- --------------- --------------- Total benefits and other deductions...... 287.5 282.7 567.6 568.1 --------------- --------------- --------------- --------------- Contribution from the Closed Block....... $ 29.7 $ 27.2 $ 65.5 $ 59.3 =============== =============== =============== ===============
Investment valuation allowances amounted to $14.2 million and $13.8 million on mortgage loans and $2.8 million and $3.7 million on equity real estate at June 30, 1997 and December 31, 1996, respectively. The adoption of SFAS No. 121 at January 1, 1996 resulted in the recognition of impairment losses of $5.6 million on real estate held and used. Impaired mortgage loans (as defined under SFAS No. 114) along with the related provision for losses were as follows:
June 30, December 31, 1997 1996 ----------------- ----------------- (In Millions) Impaired mortgage loans with provision for losses...................... $ 108.4 $ 128.1 Impaired mortgage loans without provision for losses................... .6 .6 ----------------- ----------------- Recorded investment in impaired mortgages.............................. 109.0 128.7 Provision for losses................................................... 13.7 12.9 ----------------- ----------------- Net Impaired Mortgage Loans............................................ $ 95.3 $ 115.8 ================= =================
During the first half of 1997 and of 1996, respectively, the Closed Block's average recorded investment in impaired mortgage loans was $117.9 million and $143.5 million. Interest income recognized on these impaired mortgage loans totaled $4.5 million and $5.4 million for the first half of 1997 and of 1996, respectively, including $1.8 million and $2.4 million recognized on a cash basis. 12 9) DISCONTINUED OPERATIONS Summarized financial information for the GIC Segment is as follows:
June 30, December 31, 1997 1996 ----------------- ----------------- (In Millions) Assets Mortgage loans on real estate.......................................... $ 919.8 $ 1,111.1 Equity real estate..................................................... 888.0 925.6 Cash and other invested assets......................................... 297.5 474.0 Other assets........................................................... 203.8 226.1 ----------------- ----------------- Total Assets........................................................... $ 2,309.1 $ 2,736.8 ================= ================= Liabilities Policyholders liabilities.............................................. $ 1,101.5 $ 1,335.9 Allowance for future losses............................................ 244.9 262.0 Amounts due to continuing operations................................... 808.4 996.2 Other liabilities...................................................... 154.3 142.7 ----------------- ----------------- Total Liabilities...................................................... $ 2,309.1 $ 2,736.8 ================= =================
Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- --------------- --------------- --------------- (In Millions) Revenues Investment income (net of investment expenses of $24.1, $33.0, $49.6 and $64.3)............................. $ 43.5 $ 60.4 $ 78.4 $ 132.2 Investment gains (losses), net........... 1.0 (6.6) (4.1) (17.6) Policy fees, premiums and other income, net............................ - - .1 .1 --------------- --------------- --------------- --------------- Total revenues........................... 44.5 53.8 74.4 114.7 Benefits and Other Deductions............ 43.4 68.0 90.6 139.3 Earnings credited (losses charged) to allowance for future losses......... 1.1 (14.2) (16.2) (24.6) --------------- --------------- --------------- --------------- Pre-tax loss from operations............. - - - - Pre-tax earnings from releasing (loss from strengthening) the allowance for future losses...................... 1.0 - (4.1) - Federal income tax (expense) benefit..... (.4) - 1.4 - --------------- --------------- --------------- --------------- Earnings (Loss) from Discontinued Operations............................. $ .6 $ - $ (2.7) $ - =============== =============== =============== ===============
The Equitable's quarterly process for evaluating the loss provisions applies the current period's results of discontinued operations against the allowance, re-estimates future losses, and adjusts the provisions, if appropriate. The evaluation performed as of June 30, 1997 resulted in management's decision to release $1.0 million of the loss provisions, reducing the reserve strengthening for the six months ended June 30, 1997 to $4.1 million. 13 Management believes the loss provisions for Wind-Up Annuities and GIC contracts at June 30, 1997 are adequate to provide for all future losses; however, the determination of loss provisions continues to involve numerous estimates and subjective judgments regarding the expected performance of discontinued operations investment assets. There can be no assurance the losses provided for will not differ from the losses ultimately realized. To the extent actual results or future projections of discontinued operations differ from management's current best estimates and assumptions underlying the loss provisions, the difference would be reflected as earnings (loss) from discontinued operations in the consolidated statements of earnings. In particular, to the extent income, sales proceeds and holding periods for equity real estate differ from management's previous assumptions, periodic adjustments to the loss provisions are likely to result. Investment valuation allowances amounted to $7.8 million and $9.0 million on mortgage loans and $13.3 million and $20.4 million on equity real estate at June 30, 1997 and December 31, 1996, respectively. As of January 1, 1996, the adoption of SFAS No. 121 resulted in a release of existing valuation allowances of $71.9 million on equity real estate and recognition of impairment losses of $69.8 million on real estate held and used. Impaired mortgage loans (as defined under SFAS No. 114) along with the related provision for losses were as follows:
June 30, December 31, 1997 1996 ----------------- ----------------- (In Millions) Impaired mortgage loans with provision for losses...................... $ 79.4 $ 83.5 Impaired mortgage loans without provision for losses................... 1.0 15.0 ----------------- ----------------- Recorded investment in impaired mortgages.............................. 80.4 98.5 Provision for losses................................................... 7.8 8.8 ----------------- ----------------- Net Impaired Mortgage Loans............................................ $ 72.6 $ 89.7 ================= =================
During the first half of 1997 and of 1996, the GIC Segment's average recorded investment in impaired mortgage loans was $92.6 million and $136.1 million, respectively. Interest income recognized on these impaired mortgage loans totaled $3.1 million and $5.0 million for the first half of 1997 and of 1996, respectively, including $2.2 million and $3.8 million recognized on a cash basis. Benefits and other deductions included $14.9 million, $29.7 million, $33.9 million and $71.5 million of interest expense related to amounts borrowed from continuing operations for the second quarter and first half of 1997 and of 1996, respectively. 14 10) COMPUTATION OF PER SHARE EARNINGS
Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- --------------- --------------- --------------- (In Millions) Net earnings............................. $ 252.7 $ 115.7 $ 388.7 $ 202.3 Less - dividends on preferred stocks..... (6.6) (6.6) (13.3) (13.3) Less - effect of assumed exercise of options of publicly held subsidiaries assuming no dilution................... (6.8) (1.3) (9.6) (2.8) --------------- --------------- --------------- --------------- Net earnings applicable to common shares - assuming no dilution.......... 239.3 107.8 365.8 186.2 Add - dividends on convertible preferred stock and interest on convertible subordinated debt.......... 10.6 10.4 21.0 20.9 Less - incremental effect of assumed exercise of options of publicly held subsidiaries assuming full dilution.... (2.2) - (4.3) - --------------- --------------- --------------- --------------- Net Earnings Applicable to Common Shares - Assuming Full Dilution........ $ 247.7 $ 118.2 $ 382.5 $ 207.1 =============== =============== =============== =============== Weighted average common shares outstanding - assuming no dilution(1)............................ 187.0 185.3 186.7 185.1 Add - assumed exercise of stock options................................ 2.1 1.1 1.9 1.1 Add - assumed conversion of convertible preferred stock............ 17.8 17.8 17.8 17.8 Add - assumed conversion of convertible subordinated debt.......... 14.7 14.7 14.7 14.7 --------------- --------------- --------------- --------------- Weighted Average Shares Outstanding - Assuming Full Dilution.......................... 221.6 218.9 221.1 218.7 =============== =============== =============== =============== (1) The Equitable's stock options were not included because their dilutive effect was less than 3%.
Shares of the Series D Convertible Preferred Stock (or common stock issued on conversion thereof) are not considered to be outstanding in the computation of weighted average shares of common stock until the shares are allocated to fund the obligations for which the SECT was established. 11) RESTRUCTURING COSTS During the first half of 1997 and of 1996, The Equitable recorded pre-tax provisions of $42.4 million and $2.6 million, respectively, primarily for employee termination and exit costs. The amounts paid during the first half of 1997 totaled $12.0 million. At June 30, 1997, the liabilities included costs related to employee termination and exit costs, the termination of operating leases and the consolidation of insurance operations' service centers and amounted to $72.7 million. 12) LITIGATION There have been no new material legal proceedings and no material developments in matters which were previously reported in The Equitable's Notes to Consolidated Financial Statements for the year ended December 31, 1996, except as follows: 15 In Bowler, Equitable Life has filed its reply brief, urging summary judgment on all claims but one. Issues of fact are raised by one plaintiff's claim (that he was misled by the representation concerning state approval), and accordingly this claim only could not be resolved on summary judgment. The summary judgment motion is now under judicial review. In Bachman, plaintiff filed its response to the summary judgment motion and Equitable Life asked permission to file a reply brief in support of its motion for summary judgment and for oral argument. In Cole, on April 29, 1997, at a pre-trial conference, the court ordered that all discovery be completed by October 8, 1997. The Court further ordered that a Note of Issue (placing the case on the trial calendar) be filed on or before October 10, 1997, and that on October 14, 1997, the court would hold a conference to schedule a trial date. The parties have agreed on a briefing schedule for plaintiffs' motion for class certification. A hearing on plaintiffs' motion for class certification will be scheduled, at the discretion of the court, on or after September 12, 1997. The plaintiffs filed their memorandum of law and affidavits in support of their motion for class certification on June 30, 1997. That memorandum indicates that plaintiffs seek to certify a class solely on their breach of contract claim, not their negligent misrepresentation claim. Discovery as to class certification and as to the merits continues. In Fletcher, on April 24, 1997, the magistrate granted plaintiffs' remand motion, and Equitable Life has filed an application with the judge for reconsideration. Equitable Life's time to answer the complaint has been extended until 30 days after the court's final resolution of plaintiffs' remand motion. In Duncan, plaintiff moved to have the action certified as a nationwide class action with two plaintiff subgroups: one comprising those alleging misrepresentations concerning the extent to which their policies were proper replacement policies, and the other comprising those alleging misrepresentations concerning the number of years that the annual premium would need to be paid. Equitable Life will oppose the motion. Discovery as to class certification has begun. In Bradley, on March 3, 1997, EVLICO served a notice of appeal of the court's order denying EVLICO's motion to remove the Bradley action to New York County and to consolidate or jointly try the Cole and Bradley actions. The court has scheduled a hearing on plaintiff's motion for class certification for November 21, 1997. Discovery as to class certification continues. In Dillon, on February 24, 1997, Equitable Life and EOC moved to dismiss the complaint on several grounds. On May 12, 1997, plaintiffs served a motion for class certification. Discovery as to class certification has begun. In Chaviano, plaintiff filed an amended complaint on April 14, 1997. On July 14, 1997, Equitable Life served a motion to dismiss the amended complaint or, in the alternative, for summary judgment. In connection with the previously reported actions relating to Harrah's Jazz Company and Harrah's Jazz Finance Corp., the parties to these actions have agreed to a settlement, subject to the approval of the U.S. District Court for the Eastern District of Louisiana which was granted on July 31, 1997. The settlement is also subject to the approval by the United States Bankruptcy Court for the Eastern District of Louisiana of proposed modifications to a confirmed plan of reorganization for Harrah's Jazz Company and Harrah's Jazz Finance Corp., and the satisfaction or waiver of all conditions to the effectiveness of the plan. There can be no assurance of the Bankruptcy Court's approval of the modifications to the plan of reorganization, or that the conditions to the effectiveness of the plan will be satisfied or waived. In the opinion of DLJ's management, the settlement, if approved, will not have a material adverse effect on DLJ's results of operations or on its consolidated financial condition. 16 On May 2, 1997, DLJ was named as a defendant in the First Amended Derivative Complaint in James G. Caven v. Charles R. Miller, et al., an action in the United States District Court for the Southern District of Texas. The action is a derivative action allegedly brought on behalf of Paracelsus Healthcare Corporation ("Paracelsus"), and in turn on behalf of Champion Healthcare Corporation ("Champion"), in connection with Champion's merger with Paracelsus on or about August 16, 1996. Other defendants named in the amended complaint are certain officers and directors of Champion, Paracelsus, certain officers and directors of Paracelsus, and Paracelsus' outside auditors. With respect to DLJ, the amended complaint alleges that DLJ was engaged by Champion to act as its investment advisor in identifying suitable merger and acquisition prospects in the healthcare industry, and that DLJ was negligent in recommending Paracelsus to Champion as a suitable merger partner and in rendering an opinion to Champion's board of directors that the exchange ratio of Paracelsus common stock for Champion common stock in the merger was fair from a financial point of view to holders of Champion common stock. The amended complaint seeks damages in an unspecified amount, rescission of the merger, interest, attorney's fees and costs, and other relief. Due to the early stage of such litigation, based on the information currently available to it, DLJ's management cannot make an estimate of loss, if any, or predict whether or not such litigation will have a material adverse effect on DLJ's results of operations in any particular period. On July 15, 1997, in the action relating to the Alliance North American Government Income Trust, Inc., the court denied plaintiffs' motion for leave to file an amended complaint and ordered that the case be dismissed. Plaintiffs have until August 18, 1997 to file an appeal to the Second Circuit Court of Appeals. In addition to the matters previously reported and the matters described above, the Holding Company and its subsidiaries are involved in various legal actions and proceedings in connection with their businesses. Some of the actions and proceedings have been brought on behalf of various alleged classes of claimants and certain of these claimants seek damages of unspecified amounts. While the ultimate outcome of such matters cannot be predicted with certainty, in the opinion of management no such matter is likely to have a material adverse effect on The Equitable's consolidated financial position or results of operations. 13) SALE OF SUBSIDIARIES On June 10, 1997, Equitable Life sold Equitable Real Estate ("EREIM") (other than EQ Services, Inc. and its interest in Column Financial, Inc.) to Lend Lease Corporation Limited ("Lend Lease"), a publicly traded, international property and financial services company based in Sydney, Australia. The total purchase price was $400.0 million and consisted of $300.0 million in cash and a $100.0 million note maturing in eight years and bearing interest at the rate of 7.4%, subject to certain adjustments. The Equitable recognized an investment gain of $162.4 million, net of Federal income tax of $87.4 million as a result of this transaction. Equitable Life entered into long-term advisory agreements pursuant to which EREIM will continue to provide to Equitable Life's General Account and Separate Accounts substantially the same services, for substantially the same fees, as provided prior to the sale. Through June 10, 1997 and the year ended December 31, 1996, respectively, the businesses sold reported combined revenues of $91.6 million and $226.1 million and combined net earnings of $10.7 million and $30.7 million. Total combined assets and liabilities as reported at December 31, 1996 were $171.8 million and $130.1 million, respectively. 14) SUBSEQUENT EVENTS In December 1993, the Holding Company established a SECT to provide a source of funding for a portion of obligations arising from various employee compensation and benefits programs of subsidiaries. At that time, the Holding Company sold 60,000 shares of Series D Preferred Stock to the SECT. The SECT is required to periodically distribute an amount of Series D Preferred Stock (or Common Stock issued on conversion thereof) based on a predetermined formula. In July 1997, 8,040 shares of Series D Preferred Stock were released from the SECT and were converted into 1.6 million shares of Common Stock which were sold, resulting in an increase in shareholders' equity of $54.8 million. 17 On August 4, 1997, the Holding Company redeemed in full $364.2 million principal amount of its 6.125% Subordinated Debentures due 2024, 50,017 shares of its Series C and 822,460 shares of its Series E Preferred Stocks. Upon redemption of all Subordinated Debentures and shares of Series C and E Preferred Stocks, approximately 32.5 million additional shares of Common Stock were issued by the Holding Company. Holders of the Series C and E Preferred Stocks received cash representing dividends accrued from July 22, 1997, the prior dividend payment date. The Holding Company paid cash in lieu of any fractional share of Common Stock. As a result of those transactions, shareholders' equity increased by approximately $339.6 million. Supplementary net earnings per share, assuming no dilution and full dilution, computed as if the transactions discussed above had occurred as of January 1, 1997 for the first half of 1997 and as of April 1, 1997 for the second quarter 1997 were $1.72 per share and $1.11 per share, respectively. 18 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of the consolidated results of operations and financial condition of The Equitable should be read in conjunction with the Consolidated Financial Statements and the related Notes to Consolidated Financial Statements included elsewhere herein, and with the Management's Discussion and Analysis section included in The Equitable's 1996 Report on Form 10-K. The terms "second quarter 1997" and "second quarter 1996" refer to the three months ended June 30, 1997 and 1996, respectively. The terms "first half of 1997" and "first half of 1996" refer to the six months ended June 30, 1997 and 1996, respectively. Closed Block The contribution from the Closed Block is reported on one line in the consolidated statements of earnings. The Closed Block includes revenues, benefit payments, dividends and premium taxes applicable to policies included in the Closed Block but excludes many costs and expenses associated with operating the Closed Block and administering the policies included therein. Since many expenses related to the Closed Block were excluded from the calculation of the Closed Block contribution, the contribution from the Closed Block does not represent the actual profitability of the Closed Block. CONSOLIDATED RESULTS OF OPERATIONS The following table presents the consolidated results of operations for the first half of 1997 and of 1996. In this presentation, the contribution of the Closed Block is combined on a line-by-line basis with the results of operations outside of the Closed Block. The Insurance Operations analysis, which begins on page 21, also includes a table presenting the combination of Closed Block amounts on a line-by-line basis. The Investment Services discussion begins on page 24. Management's discussion and analysis addresses the combined results of operations unless noted otherwise.
Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- ---------------- --------------- --------------- (In Millions) Consolidated Results of Continuing Operations(1) Policy fee income and premiums................ $ 551.1 $ 552.8 $ 1,108.5 $ 1,091.4 Net investment income......................... 1,112.2 944.0 2,120.9 1,872.4 Investment gains, net......................... 437.2 198.0 617.5 364.1 Commissions, fees and other income............ 777.8 768.4 1,546.0 1,367.9 --------------- ---------------- --------------- --------------- Total revenues.............................. 2,878.3 2,463.2 5,392.9 4,695.8 Total benefits and other deductions........... 2,454.2 2,226.0 4,692.7 4,244.5 --------------- ---------------- --------------- --------------- Earnings from continuing operations before Federal income taxes, minority interest and cumulative effect of accounting change................. 424.1 237.2 700.2 451.3 Federal income taxes.......................... 172.3 72.2 259.7 136.9 Minority interest in net (loss) income of consolidated subsidiaries................... (.3) 49.3 49.1 89.0 --------------- ---------------- --------------- --------------- Earnings from Continuing Operations before Cumulative Effect of Accounting Change........................... $ 252.1 $ 115.7 $ 391.4 $ 225.4 =============== ================ =============== =============== (1) Includes the Closed Block on a line-by-line basis.
19 Continuing Operations Compared to the comparable 1996 period, the higher pre-tax results of continuing operations for the first half of 1997 reflected increased earnings for Investment Services and Insurance Operations partially offset by higher losses in the Corporate and Other segment. The increase in Federal income taxes was attributed to the higher pre-tax results of operations. Minority interest in net income of consolidated subsidiaries was significantly lower principally due to the effect of Alliance's write down of the carrying value of intangible assets associated with the Cursitor acquisition. See "Combined Results of Continuing Operations by Segment - Investment Services." The $697.1 million increase in revenues for the first half of 1997 compared to the corresponding period in 1996 was attributed primarily to a $501.9 million increase in investment results which included a $252.1 million gross gain on the sale of EREIM and to a $178.1 million increase in commissions, fees and other income principally due to increased business activity within Investment Services. Net investment income increased $248.5 million for the first half of 1997 principally due to increases of $208.7 million and $42.8 million, respectively, for Investment Services and Insurance Operations. The Investment Services increase was attributed to higher business activity while the Insurance Operations increase was due to higher overall yields on a larger investment asset base. Investment gains increased by $253.4 million for the first half of 1997 from $364.1 million for the same period in 1996. There was a $252.1 million gross gain recognized on the sale of EREIM during second quarter 1997. Investment gains at DLJ decreased by $55.6 million with lower dealer and trading gains of $8.8 million and lower gains of $46.8 million on other equity investments. The gains on other equity investments in the 1996 period included a gain of $79.4 million on the sale of the remaining shares of a single corporate development portfolio investment. Also in 1996, a gain of $20.6 million was recognized as a result of the issuance of Alliance Units to third parties upon completion of the Cursitor acquisition. There were investment gains of $34.1 million on General Account Investment Assets as compared to losses of $45.2 million in the first half of 1996. For the first half of 1997, total benefits and other deductions increased by $448.2 million from the comparable period in 1996, reflecting increases in other operating costs and expenses of $500.0 million and a $11.5 million increase in interest credited to policyholders partially offset by a $63.3 million decrease in policyholders' benefits. The increase in other operating costs and expenses was attributable to increased operating costs of $394.2 million in Investment Services and a $103.9 million increase in other operating costs and expenses in Insurance Operations primarily due to increases in DAC amortization and in the provision for employee termination and exit costs. Discontinued GIC Segment The Equitable's quarterly evaluation of the GIC Segment's loss provisions applies the current period's results of the discontinued operations against the allowance, re-estimates future losses and adjusts the provisions, if appropriate. The evaluation performed at June 30, 1997 resulted in management's decision to release $1.0 million of the loss provisions, reducing the reserve strengthening for the six months ended June 30, 1997 to $4.1 million. The factor contributing to the net strengthening in the first half of 1997 was higher than anticipated investment losses, principally on other equity investments. Excluding the effect of the aforementioned reserve strengthening, $16.2 million of pre-tax losses were incurred and charged to the GIC Segment's allowance for future losses in the first half of 1997 as compared to $24.6 million in the first half of 1996. Investment results declined by $40.3 million in the first half of 1997 as compared to the year earlier period. Net investment income declined by $53.8 million, principally due to lower yield on a significantly reduced GIC Segment Investment Asset base. The reduction in GIC Segment investments was primarily due to the repayments of approximately $1.02 billion of loans from continuing operations during 1996. Investment losses decreased $13.5 million to $4.1 million in the first half of 1997. There were $1.2 million of gains on mortgage loans as compared to $2.7 million in losses in the first half of 1996 and $7.7 million and $2.7 million lower losses on equity real estate and other equity investments, respectively. Benefits and other deductions declined by $48.7 million principally due to the aforementioned repayments in 1996 resulting in the decrease in interest expense on lower borrowings from continuing operations. 20 COMBINED RESULTS OF CONTINUING OPERATIONS BY SEGMENT Insurance Operations The Closed Block is part of Insurance Operations. The following table combines the Closed Block amounts with the reported results of operations outside of the Closed Block on a line-by-line basis.
Insurance Operations (In Millions) Six Months Ended June 30, ------------------------------------------------------------------ 1997 ------------------------------------------------ As Closed 1996 Reported Block Combined Combined ------------- -------------- ------------- -------------- Policy fees, premiums and other income.......... $ 813.3 $ 349.4 $ 1,162.7 $ 1,141.2 Net investment income........................... 1,082.2 278.3 1,360.5 1,317.7 Investment gains (losses), net.................. 28.7 5.4 34.1 (45.2) Contribution from the Closed Block.............. 65.5 (65.5) - - ------------- -------------- ------------- -------------- Total revenues................................ 1,989.7 567.6 2,557.3 2,413.7 Total benefits and other deductions............. 1,740.2 567.6 2,307.8 2,255.7 ------------- -------------- ------------- -------------- Earnings from Continuing Operations before Federal Income Taxes, Minority Interest and Cumulative Effect of Accounting Change................... $ 249.5 $ - $ 249.5 $ 158.0 ============= ============== ============= ==============
The earnings from continuing operations in Insurance Operations for the first half of 1997 reflected an increase of $91.5 million from the year earlier period. Investment gains in 1997 versus losses in 1996, higher net investment income, higher policy fees on variable and interest-sensitive life and individual annuities contracts, lower life insurance mortality and improved DI and group pension results were offset by higher amortization of deferred acquisition costs and the provision for employee termination and exit costs. The improved DI and group pension results reflect the establishment of premium deficiency reserves in fourth quarter 1996. To the extent periodic results from these businesses differ from the assumptions used in establishing those reserves, the resulting earnings (loss) will impact Insurance Operations' results. Total revenues increased by $143.6 million primarily due to investment results which increased by $122.1 million, a $35.9 million increase in policy fees and a $4.4 million increase in commissions, fees and other income, offset by an $18.8 million decline in premiums. The decrease in premiums principally was due to lower traditional life and individual health premiums. The increase in Insurance Operations investment results primarily resulted from investment gains in 1997 as compared to losses in 1996. There were gains of $45.4 million on fixed maturities, an increase of $10.3 million over the comparable 1996 period and $6.4 million of gains on the General Account's other equity investments as compared to $2.4 million during the first half of 1996. Losses on mortgage loans decreased $48.3 million to $3.0 million, while losses on equity real estate totaled $14.7 million, $16.7 million lower than in the first half of 1996. Insurance Operations' $42.8 million increase in investment income principally was due to $79.8 million higher overall yields on a larger General Account Investment Asset base, offset by $41.8 million lower interest on lower amounts due from discontinued operations. Policy fee income rose to $466.6 million due to higher insurance and annuity account balances. Total benefits and other deductions for the first half of 1997 rose $52.1 million from the comparable 1996 period as increases of $108.0 million in other operating expenses and $47.0 million higher DAC amortization were offset by $51.1 million higher DAC capitalization, the effects of the favorable mortality experience on variable and interest-sensitive life policies and a decrease in policy benefits. The increase in operating costs resulted from higher variable expenses related to increased sales, higher restructuring costs of $39.1 million and higher costs related to the annuity wholesaler distribution system implemented in the latter part of 1996. The decrease of $63.3 million in policyholders' benefits primarily resulted from a lower increase in reserves on 21 DI business and improved mortality experience on the larger in force book of business for variable and interest-sensitive life policies. This lower mortality experience resulted in an increase in the amortization of DAC on variable and interest-sensitive life policies. Interest credited on policyholders' account balances in Insurance Operations increased by $11.5 million reflecting moderately lower crediting rates applied to a larger in force book of business. Premiums and Deposits - The following table lists premiums and deposits, including universal life and investment-type contract deposits, for Insurance Operations' major product lines.
Premiums and Deposits (In Millions) Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- ---------------- --------------- --------------- Individual annuities First year.................................. $ 746.5 $ 562.2 $ 1,393.8 $ 1,071.9 Renewal..................................... 344.3 331.7 684.6 661.8 --------------- ---------------- --------------- --------------- 1,090.8 893.9 2,078.4 1,733.7 Variable and interest-sensitive life First year recurring........................ 45.1 45.2 97.7 90.1 First year optional......................... 57.1 44.3 116.9 84.5 Renewal..................................... 288.9 264.8 630.2 602.9 --------------- ---------------- --------------- --------------- 391.1 354.3 844.8 777.5 Traditional life First year recurring........................ 3.3 4.8 7.3 9.7 First year optional......................... 0.8 1.2 1.9 2.5 Renewal..................................... 204.2 210.7 409.6 423.5 --------------- ---------------- --------------- --------------- 208.3 216.7 418.8 435.7 Other(1) First year.................................. 4.3 11.0 8.3 18.1 Renewal..................................... 91.3 98.3 181.7 187.9 --------------- ---------------- --------------- --------------- 95.6 109.3 190.0 206.0 Total first year.............................. 857.1 668.7 1,625.9 1,276.8 Total renewal................................. 928.7 905.5 1,906.1 1,876.1 --------------- ---------------- --------------- --------------- Total individual insurance and annuity products............................ 1,785.8 1,574.2 3,532.0 3,152.9 Participating group annuities................. 47.6 57.5 94.9 118.4 Conversion annuities.......................... (0.6) 0.0 1.5 0.0 Association plans............................. 37.3 27.0 68.7 50.2 --------------- ---------------- --------------- --------------- Total group pension products.................. 84.3 84.5 165.1 168.6 Total Premiums and Deposits................... $ 1,870.1 $ 1,658.7 $ 3,697.1 $ 3,321.5 =============== ================ =============== =============== (1) Includes health insurance and reinsurance assumed.
22 First year premiums and deposits for individual insurance and annuity products for the first half of 1997 increased from prior year's level by $349.1 million primarily due to higher sales of individual annuities and variable and interest-sensitive life products. Renewal premiums and deposits increased by $30.0 million during the first half of 1997 over the prior year period as increases in the larger block of variable and interest-sensitive life and individual annuities policies were partially offset by decreases in traditional life and other product lines. Traditional life premiums and deposits for the first six months of 1997 decreased from the prior year's comparable period by $16.9 million due to the marketing focus on variable and interest-sensitive products and the decline in the traditional life book of business. The 30.0% increase in first year individual annuities premiums and deposits in 1997 over the prior year period included a $355.9 million increase in sales of a new line of retirement annuity products sold through both the career agency force and complementary distribution channels. First year variable and interest-sensitive life premiums and deposits for the first half of 1997 included $39.8 million of premiums and deposits from the sale of two large COLI cases. Management believes the strategic positioning of The Equitable's insurance operations has begun to have a positive effect on premium growth. Particular emphasis will continue to be devoted to the support of the new needs based selling approach and the establishment of consultative financial services as the cornerstone of the sales process. Changes in agent recruitment and training practices have resulted in retention and productivity improvements which, management believes, are contributing to premium results. Surrenders and Withdrawals - The following table summarizes Insurance Operations' surrenders and withdrawals, including universal life and investment-type contract withdrawals, for major individual insurance and annuities' product lines.
Surrenders and Withdrawals (In Millions) Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- ---------------- --------------- --------------- Individual Insurance and Annuities' Product Lines: Individual annuities.......................... $ 569.1 $ 588.2 $ 1,163.5 $ 1,198.7 Variable and interest-sensitive life.......... 123.3 116.7 246.5 229.0 Traditional life.............................. 91.8 92.9 197.4 186.5 --------------- ---------------- --------------- --------------- Total......................................... $ 784.2 $ 797.8 $ 1,607.4 $ 1,614.2 =============== ================ =============== ===============
Policy and contract surrenders and withdrawals decreased $6.8 million during the first half of 1997 compared to the same period in 1996. Surrenders of variable and interest-sensitive products increased by $17.5 million due to the increased size of the book of business. The $35.2 million decrease in individual annuities surrenders was principally due to decreased surrenders of Equi-Vest contracts. Surrenders and withdrawals in 1996 included $88.0 million paid in January 1996 for two small pension clients who terminated their contracts. 23 Investment Services The following table summarizes the results of operations for Investment Services.
Investment Services (In Millions) Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- ---------------- --------------- --------------- Third party commissions and fees.............. $ 735.7 $ 730.1 $ 1,459.1 $ 1,290.8 Affiliate fees................................ 27.6 32.0 58.3 62.1 Other income(1)............................... 817.0 484.0 1,313.4 920.5 --------------- ---------------- --------------- --------------- Total revenues................................ 1,580.3 1,246.1 2,830.8 2,273.4 Total costs and expenses...................... 1,247.0 1,053.8 2,315.8 1,921.6 --------------- ---------------- --------------- --------------- Earnings from Continuing Operations before Federal Income Taxes, Minority Interest and Cumulative Effect of Accounting Change................. $ 333.3 $ 192.3 $ 515.0 $ 351.8 =============== ================ =============== =============== (1) Includes net dealer and trading gains, investment results and other items.
On June 10, 1997, Equitable Life sold EREIM to Lend Lease for $300.0 million in cash and a $100.0 million eight year note, subject to certain adjustments. Equitable Life entered into long-term advisory agreements whereby the businesses sold will continue to provide services to Equitable Life's General Account and Separate Accounts. The Equitable recognized a gain on this sale of $249.8 million (net of $2.3 million related state income tax). See Note 13 to Consolidated Financial Statements for further information. EREIM's results from operations continue to be included in Investment Services' results up to the date of sale. Also during the second quarter 1997, Alliance wrote down the recorded value of goodwill and contracts associated with its acquisition of Cursitor by $120.9 million. This charge reflected Alliance management's view that Cursitor's continuing decline in assets under management and its reduced profitability, resulting from relative investment underperformance, no longer supported Cursitor's carrying value. Cursitor's assets under management declined from approximately $10.0 billion at the date of acquisition to $5.1 billion at June 30, 1997. At June 30, 1997, The Equitable owned approximately 58% of Alliance. The impact of Alliance's charge on The Equitable's net earnings was approximately $59.5 million. For the first half of 1997, pre-tax earnings for Investment Services increased by $163.2 million from the year earlier period primarily due to the gain on the sale of EREIM and higher earnings for DLJ partially offset by lower earnings at Alliance reflecting the effect of the abovementioned write down. DLJ's earnings were higher in 1997 largely due to strong merger and acquisition activity, private fund capital raising assignments, higher investment banking fees and the growth in trading volume on most major exchanges. Total segment revenues were up $557.4 million principally due to higher revenues at DLJ. Other income for the first half of 1997 included a pre-tax gain of $252.1 million from the sale of EREIM. Other income for the first half of 1996 included a gross gain of $20.6 million on the issuance of Alliance Units during the first quarter of that year in connection with the Cursitor transaction. Total costs and expenses increased by $394.2 million for the first half of 1997 as compared to the comparable period in 1996 principally reflecting increases in compensation and interest and other expenses at DLJ due to increased activity and the aforementioned writedown of intangible assets at Alliance of $120.9 million. 24 The following table summarizes results of operations by business unit.
Investment Services Pre-tax Results of Operations by Business Unit (In Millions) Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- ---------------- --------------- --------------- Business Unit: DLJ(1)...................................... $ 152.0 $ 145.9 $ 283.0 $ 244.7 Alliance.................................... (62.8) 48.0 (8.7) 94.1 Equitable Real Estate(2).................... 8.3 9.0 14.8 16.5 Gain on sale of EREIM(3).................... 249.8 - 249.8 - Consolidation/elimination(4)(5)............. (14.0) (10.6) (23.9) (3.5) --------------- ---------------- --------------- --------------- Earnings from Continuing Operations before Federal Income Taxes, Minority Interest and Cumulative Effect of Accounting Change(6).............. $ 333.3 $ 192.3 $ 515.0 $ 351.8 =============== ================ =============== =============== (1) Excludes amortization expense of $1.1 million, $1.0 million, $2.1 million and $1.9 million for the second quarter and first half of 1997 and of 1996, respectively, on goodwill and intangible assets related to Equitable Life's acquisition of DLJ in 1985, which are included in consolidation/elimination. (2) Includes results of operations through June 10, 1997, the sale date of EREIM to Lend Lease. (3) Gain on the sale of EREIM is net of $2.3 million related state income tax. (4) Includes interest expense of $2.9 million, $2.9 million, $5.9 million and $6.1 million related to intercompany debt issued by intermediate holding companies payable to Equitable Life for the second quarter and first half of 1997 and of 1996, respectively. (5) Includes a gain of $16.9 million (net of $3.7 million related state income tax) for the six months ended June 30, 1996 on issuance of Alliance Units to third parties upon the completion of the Cursitor transaction during the first quarter of 1996. (6) Pre-tax minority interest related to DLJ was $41.1 million, $42.4 million, $80.0 million and $72.3 million for the second quarter and first half of 1997 and of 1996, respectively, and $(26.7) million, $20.5 million, $(3.8) million and $39.8 million for Alliance for the same respective periods.
DLJ - DLJ's earnings from operations for the first half of 1997 were $283.0 million, up $38.3 million from the comparable prior year period. Revenues increased $275.5 million to $2.04 billion primarily due to increased net investment income of $209.0 million, higher fee income of $138.1 million, higher commissions of $27.6 million partially offset by lower underwriting revenues of $52.5 million and lower gains of $46.7 million on the corporate development portfolio. DLJ's expenses were $1.76 billion for the first half of 1997, up $237.2 million from the comparable prior year period primarily due to higher interest expense of $112.7 million and a $56.8 million increase in compensation and commissions and $12.1 million higher brokerage and exchange fees. Substantially all of DLJ's activities related to derivatives are, by their nature, trading activities which are primarily for the purpose of customer accommodation. DLJ enters into certain contractual agreements referred to as derivatives or off-balance-sheet financial instruments involving futures, forwards and options. DLJ's derivative activities are not as extensive as many of its competitors. Instead, DLJ's derivative activities consist of writing OTC options to accommodate its customers' needs, trading in forward contracts in U.S. government and agency issued or guaranteed securities and engaging in 25 futures contracts on equity based indices, interest rate instruments and currencies, and issuing structured notes. DLJ's involvement in swap contracts is not significant. As a result, DLJ's involvement in derivatives products is related primarily to revenue generation through the provision of products to its clients as opposed to hedges against DLJ's own positions. Options contracts are typically written for a duration of less than thirteen months. Revenues from these activities (net of related interest expense) were approximately $42.2 million and $31.9 million for the first half of 1997 and 1996, respectively. Option writing revenues are primarily from the amortization of option premiums. The increase in revenues primarily resulted from higher levels of activity, both in size and number of transactions, by DLJ's institutional customers and favorable market conditions. The notional value of written options contracts outstanding was approximately $6.5 billion and $3.5 billion at June 30, 1997 and 1996, respectively. The overall increase in the notional value of all options was primarily due to increases in customer activity related to U.S. government obligations. Such written options contracts are substantially covered by various financial instruments that DLJ had purchased or sold as principal. As part of DLJ's trading activities, including trading activities in the related cash market instruments, DLJ enters into forward and futures contracts primarily involving securities, foreign currencies, indices and forward rate agreements, as well as options on futures contracts. Such forward and futures contracts are entered into as part of DLJ's covering transactions and are generally not used for speculative purposes. Net trading losses on forward contracts were $(47.7) million and $(39.1) million and net trading (losses) gains on futures contracts were $(25.7) million and $8.5 million for the first six months of 1997 and 1996, respectively. Treated as off-balance-sheet items, the notional contract and market values of the forward and futures contracts at June 30, 1997 and 1996 were as follows:
June 30, 1997 June 30, 1996 ---------------------------------- ----------------------------------- Purchases Sales Purchases Sales --------------- --------------- --------------- --------------- (In Millions) Forward Contracts (Notional Contract Value).............. $ 15,622 $ 20,572 $ 17,102 $ 18,446 =============== =============== =============== =============== Futures Contracts and Options on Futures Contracts (Market Value)....... $ 2,669 $ 5,668 $ 803 $ 590 =============== =============== =============== ===============
Structured notes are customized derivative instruments in which the amount of interest or principal paid on a debt obligation is linked to the return on specific cash market financial instruments. At June 30, 1997 and 1996, DLJ had issued long-term structured notes totaling $188.1 million and $143.1 million outstanding, respectively. DLJ covers its obligations on structured notes primarily by purchasing and selling the securities to which the value of its structured notes are linked. Alliance - Alliance's loss from operations for the first half of 1997 was $8.7 million, a decrease from the $94.1 million of earnings from the prior year's comparable period. Revenues totaled $445.0 million for the first six months of 1997, an increase of $67.3 million from the comparable period in 1996, due to increased investment advisory and service fees. Alliance's costs and expenses increased $170.1 million for the first half of 1997 primarily due to the abovementioned $120.9 million writedown of intangible assets and to increases of $19.0 million in employee compensation and benefits. Equitable Real Estate - This business' earnings from operations included the results of EREIM through June 10, 1997, the date of sale. Equitable Real Estate's earnings from operations were $14.8 million for the first six months of 1997, down $1.7 million from the preceding year's comparable period. Revenues declined $10.4 million to $91.6 million for the first half of 1997 when compared to the 1996 comparable period. Operating expenses similarly decreased by $8.7 million totaling $76.8 million for the first half of 1997. 26 Fees From Assets Under Management - As the following table illustrates, third party clients continued to represent an important source of revenues and earnings.
Fees and Assets Under Management (In Millions) At or For the Three Months Ended Six Months Ended June 30, June 30, --------------------------------- --------------------------------- 1997 1996 1997 1996 --------------- ---------------- --------------- --------------- Fees: Third Party................................. $ 192.2 $ 184.9 $ 396.9 $ 351.4 Equitable................................... 33.4 28.9 61.1 56.1 --------------- ---------------- --------------- --------------- Total......................................... $ 225.6 $ 213.8 $ 458.0 $ 407.5 =============== ================ =============== =============== Assets Under Management: Third Party(1).............................. $ 193,898 $ 167,580 Equitable................................... 57,528 50,058 --------------- --------------- Total......................................... $ 251,426 $ 217,638 =============== =============== (1) Included Separate Account assets under management, as well as assets managed on behalf of other AXA affiliates.
Fees from assets under management increased for the first half of 1997 from the prior year's comparable period principally as a result of growth in assets under management for third parties. Alliance's third party assets under management increased by $29.14 billion primarily due to the market appreciation and mutual fund sales. For the first half of 1997 and full year 1996, fees received for assets under management by EREIM totaled $94.1 million and $229.9 million, respectively, of which $63.7 million and $139.6 million, respectively, were received from third parties. CONTINUING OPERATIONS INVESTMENT PORTFOLIO The continuing operations investment portfolio is composed of the General Account investment portfolio and investment assets of the Holding Company Group. The General Account's portfolio is discussed first, followed by a separate discussion on the Holding Company Group investments. 27 General Account Investment Portfolio The following table reconciles the consolidated balance sheet asset amounts to General Account Investment Asset amounts.
General Account Investment Assets Carrying Values at June 30, 1997 (In Millions) General Balance Holding Account Sheet Closed Company Investment Balance Sheet Captions: Total Block Other(1) Group (2) Assets - ----------------------------------- ---------------- ------------- --------------- -------------- ------------- Fixed maturities: Available for sale.............. $ 19,289.5 $ 3,964.0 $ (131.6) $ 401.3 $ 22,983.8 Held to maturity................ 162.0 0.0 0.0 162.0 0.0 Trading account securities........ 17,637.3 0.0 17,637.3 0.0 0.0 Securities purchased under resale agreements............... 25,722.2 0.0 25,722.2 0.0 0.0 Mortgage loans on real estate..... 2,751.0 1,423.4 0.0 0.0 4,174.4 Equity real estate................ 3,395.6 195.0 (17.8) 0.0 3,608.4 Policy loans...................... 2,345.3 1,733.1 0.0 0.0 4,078.4 Other equity investments.......... 1,151.4 107.4 253.4 7.9 997.5 Other invested assets............. 134.8 87.2 220.1 (3.9) 5.8 ---------------- ------------- --------------- -------------- ------------- Total investments............... 72,589.1 7,510.1 43,683.6 567.3 35,848.3 Cash and cash equivalents......... 996.0 (103.8) 328.7 40.3 523.2 ---------------- ------------- --------------- -------------- ------------- Total............................. $ 73,585.1 $ 7,406.3 $ 44,012.3 $ 607.6 $ 36,371.5 ================ ============= =============== ============== ============= (1) Assets listed in the "Other" category principally consist of assets held in portfolios other than the Holding Company Group and the General Account (primarily securities held in inventory or for resale by DLJ) which are not managed as part of General Account Investment Assets and certain reclassifications and intercompany adjustments. The "Other" category is deducted in arriving at the General Account Investment Assets. (2) The Holding Company Group investment assets are not managed as part of General Account Investment Assets and are deducted in arriving at General Account Investment Assets.
The General Account Investment Assets presentation set forth in the following pages includes the Closed Block's investments on a line-by-line basis. Management believes it is appropriate to discuss the information on a combined basis in view of the similar asset quality characteristics of major asset categories in the portfolios. Writedowns on fixed maturities were $9.0 million and $22.5 million for the first six months of 1997 and 1996, respectively; writedowns on equity real estate during the first half of 1997 were $0.2 million. The following table shows asset valuation allowances and additions to and deductions from such allowances for mortgages and equity real estate for the first six months of 1997 and 1996. 28
General Account Investment Assets Valuation Allowances (In Millions) Equity Real Mortgages Estate Total --------------- --------------- -------------- June 30, 1997 Assets Outside of the Closed Block: Beginning balances............................................ $ 50.4 $ 86.7 $ 137.1 Additions..................................................... 20.6 20.9 41.5 Deductions(2)................................................. (24.1) (22.4) (46.5) --------------- --------------- -------------- Ending Balances............................................... $ 46.9 $ 85.2 $ 132.1 =============== =============== ============== Closed Block: Beginning balances............................................ $ 13.8 $ 3.7 $ 17.5 Additions..................................................... 6.4 0.5 6.9 Deductions(2)................................................. (6.0) (1.4) (7.4) --------------- --------------- -------------- Ending Balances............................................... $ 14.2 $ 2.8 $ 17.0 =============== =============== ============== Total: Beginning balances............................................ $ 64.2 $ 90.4 $ 154.6 Additions..................................................... 27.0 21.4 48.4 Deductions(2)................................................. (30.1) (23.8) (53.9) --------------- --------------- -------------- Ending Balances............................................... $ 61.1 $ 88.0 $ 149.1 =============== =============== ============== June 30, 1996 Total: Beginning balances............................................ $ 83.9 $ 264.1 $ 348.0 SFAS No. 121 release(1)....................................... - (152.4) (152.4) Additions..................................................... 50.1 37.8 87.9 Deductions(2)................................................. (0.5) (84.8) (85.3) --------------- --------------- -------------- Ending Balances............................................... $ 133.5 $ 64.7 $ 198.2 =============== =============== ============== (1) As a result of the adoption of SFAS No. 121 at January 1, 1996, $152.4 million of allowances on assets held for investment were released and impairment losses of $149.6 million were recognized on real estate held and used. (2) Primarily reflected releases of allowances due to asset dispositions and writedowns.
29 General Account Investment Assets by Category The following table shows the amortized cost, valuation allowances and the net amortized cost of the major categories of General Account Investment Assets at June 30, 1997 and the net amortized cost at December 31, 1996.
General Account Investment Assets (Dollars In Millions) June 30, 1997 December 31, 1996 ----------------------------------------------------------- ----------------------------- % of % of Net Total Net Net Total Net Amortized Valuation Amortized Amortized Amortized Amortized Cost Allowances Cost Cost Cost Cost --------------- ------------- ------------- ------------- ------------- ------------- Fixed maturities(1).......... $ 22,541.3 $ - $ 22,541.3 62.7% $ 21,711.6 62.1% Mortgages.................... 4,235.5 61.1 4,174.4 11.6 4,513.7 12.9 Equity real estate........... 3,696.4 88.0 3,608.4 10.0 3,518.6 10.1 Other equity investments..... 997.5 - 997.5 2.8 965.1 2.8 Policy loans................. 4,078.4 - 4,078.4 11.4 3,962.0 11.3 Cash and short-term investments(2)............. 529.0 - 529.0 1.5 277.7 0.8 --------------- ------------- ------------- ------------- ------------- ------------- Total........................ $ 36,078.1 $ 149.1 $ 35,929.0 100.0% $ 34,948.7 100.0% =============== ============= ============= ============= ============= ============= (1) Excludes unrealized gains of $442.5 million and $432.9 million in fixed maturities classified as available for sale at June 30, 1997 and December 31, 1996, respectively. (2) Comprised of "Cash and cash equivalents" and short-term investments included within the "Other invested assets" caption on the consolidated balance sheet.
Management has a policy of not investing substantial new funds in equity real estate except to safeguard values in existing investments or to honor outstanding commitments. It is management's continuing objective to reduce the size of the equity real estate portfolio relative to total assets over the next several years on an opportunistic basis. Management anticipates that reductions will depend on real estate market conditions, the level of mortgage foreclosures and the level of expenditures required to fund necessary or desired improvements to properties. 30 Investment Results of General Account Investment Assets
Investment Results by Asset Category (Dollars In Millions) Three Months Ended June 30, Six Months Ended June 30, -------------------------------------------------- -------------------------------------------------- 1997 1996 1997 1996 ------------------------ ------------------------ ------------------------ ------------------------ (1) (1) (1) (1) Yield Amount Yield Amount Yield Amount Yield Amount ---------- ------------- ---------- ------------- ------------------------ ---------- ------------- Fixed Maturities: Income.............. 8.04% $ 446.5 7.92% $ 394.8 8.00% $ 882.4 7.91% $ 778.2 Investment Gains/(Losses).... 0.25% 14.1 0.19% 9.6 0.42% 45.4 0.36% 35.1 ---------- ------------- ---------- ------------- ------------------------ ---------- ------------- Total............... 8.29% $ 460.6 8.11% $ 404.4 8.42% $ 927.8 8.27% $ 813.3 Ending Assets....... $ 22,541.3 $ 20,304.9 $ 22,541.3 $ 20,304.9 Mortgages: Income.............. 9.76% $ 103.8 8.99% $ 109.7 9.61% $ 208.5 8.87% $ 218.3 Investment Gains/(Losses).... (0.43)% (4.6) (2.02)% (24.6) (0.14)% (3.0) (2.09)% (51.3) ---------- ------------- ---------- ------------- ------------------------------------ ------------- Total............... 9.33% $ 99.2 6.97% $ 85.1 9.47% $ 205.5 6.78% $ 167.0 Ending Assets....... $ 4,174.4 $ 4,828.1 $ 4,174.4 $ 4,828.1 Equity Real Estate (2): Income.............. 2.83% $ 19.4 2.46% $ 19.1 2.46% $ 33.6 2.87% $ 45.0 Investment Gains/(Losses).... (0.61)% (4.2) (1.63)% (12.7) (1.08)% (14.7) (2.00)% (31.4) ---------- ------------- ----------- ------------- ------------------------------------ ------------- Total............... 2.22% $ 15.2 0.83% $ 6.4 1.38% $ 18.9 0.87% $ 13.6 Ending Assets....... $ 2,771.5 $ 3,100.1 $ 2,771.5 $ 3,100.1 Other Equity Investments: Income.............. 18.92% $ 46.1 16.03% $ 38.3 13.61% $ 66.1 15.79% $ 70.4 Investment Gains/(Losses).... 2.71% 6.6 2.68% 6.4 1.32% 6.4 0.53% 2.4 ---------- ------------- ----------- ------------- ------------------------------------ ------------- Total............... 21.63% $ 52.7 18.71% $ 44.7 14.93% $ 72.5 16.32% $ 72.8 Ending Assets....... $ 997.5 $ 961.6 $ 997.5 $ 961.6 Policy Loans: Income.............. 7.00% $ 71.1 6.95% $ 67.3 6.96% $ 140.1 6.90% $ 132.4 Ending Assets....... $ 4,078.4 $ 3,891.1 $ 4,078.4 $ 3,891.1 Cash and Short-term Investments: Income.............. 7.78% $ 11.7 5.00% $ 8.3 9.85% $ 24.3 8.13% $ 30.9 Ending Assets....... $ 529.0 $ 529.0 $ 529.0 $ 529.0 Total: Income.............. 8.02% $ 698.6 7.63% $ 637.5 7.83% $ 1,355.0 7.68% $ 1,275.2 Investment Gains/(Losses).... 0.14% 11.9 (0.25)% (21.3) 0.20% 34.1 (0.28)% (45.2) ---------- ------------- ----------- ------------- ------------------------------------ ------------- Total(3)............ 8.16% $ 710.5 7.38% $ 616.2 8.03% $ 1,389.1 7.40% $ 1,230.0 Ending Assets....... $ 35,092.1 $ 33,614.8 $ 35,092.1 $ 33,614.8 (1) Yields have been annualized and calculated based on the quarterly average asset carrying values excluding unrealized gains (losses) in fixed maturities. Annualized yields are not necessarily indicative of a full year's results. 31 (2) Equity real estate carrying values are shown net of third party debt and minority interest in real estate of $836.9 million and $840.6 million as of June 30, 1997 and 1996, respectively. Equity real estate income is shown net of operating expenses, depreciation, third party interest expense and minority interest. Third party interest expense and minority interest totaled $12.5 million, $14.0 million, $25.8 million and $28.3 million for the three months and the six months ended June 30, 1997 and 1996, respectively. (3) Total yields are shown before deducting investment fees paid to investment managers (which include asset management, acquisition, disposition, accounting and legal fees). If such fees had been deducted, total yields would have been 7.86%, 7.11%, 7.74% and 7.13% for the three months and the six months ended June 30, 1997 and 1996, respectively.
For the first half of 1997, General Account investment results were up $159.1 million from the year earlier period reflecting higher income on a higher asset base and investment gains as compared to losses in the prior period. On an annualized basis, total investment yield increased to 8.03% from 7.40%. Investment income increased by $79.8 million or 6.3%, resulting in an increase in the annualized income yield to 7.83% from 7.68%. Excluding SFAS No. 121 related permanent impairment writedowns of $149.6 million and releases of valuation allowances totaling $152.4 million relating to equity real estate in 1996, additions to asset valuation allowances and writedowns of fixed maturities and equity real estate were $57.6 million in the first six months of 1997 compared to $110.4 million in the first half of 1996. Total investment results for fixed maturities increased $114.5 million or 14.1% for the first half of 1997 compared to the year earlier period. Investment income increased by $104.2 million reflecting a higher asset base, primarily from reinvesting nearly all available funds into fixed maturities. Investment gains were $45.4 million for the first half of 1997 compared to $35.1 million in 1996. Writedowns on fixed maturities were $9.0 million in the first half of 1997 as compared to $22.5 million in the comparable period of 1996. Total investment results on mortgages increased by $38.5 million or 23.1% in the first half of 1997 compared to the same period a year ago largely due to fewer additions to asset valuation allowances. Equity real estate investment results were $5.3 million higher during the first six months of 1997 than the year earlier period reflecting fewer additions to asset valuation allowances. Fixed Maturities. Fixed maturities consist of publicly traded debt securities, privately placed debt securities and small amounts of redeemable preferred stock, which represented 73.6%, 25.8% and 0.6%, respectively, of the amortized cost of this asset category at June 30, 1997.
Fixed Maturities By Credit Quality (Dollars In Millions) June 30, 1997 December 31, 1996 Rating Agency --------------------------------------- --------------------------------------- NAIC Equivalent Amortized % of Estimated Amortized % of Estimated Rating Designation Cost Total Fair Value Cost Total Fair Value ------ ---------------------- --------------- --------- ------------- --------------- ---------- ------------- 1-2 Aaa/Aa/A and Baa...... $ 19,700.2(1) 87.4% $ 20,015.1 $ 18,994.8(1) 87.5% $ 19,334.0 3-6 Ba and lower.......... 2,697.8(2) 12.0 2,822.3 2,575.2(2) 11.9 2,665.7 ------------ ---------- --------------- ------------ ---------- ------------- Subtotal........................ 22,398.0 99.4 22,837.4 21,570.0 99.4 21,999.7 Redeemable preferred stock and other..................... 143.3 .6 146.4 141.6 .6 144.8 ------------ ---------- --------------- ------------ ----------- ------------- Total........................... $ 22,541.3 100.0% $ 22,983.8 $ 21,711.6 100.0% $ 22,144.5 ============ ========== =============== ============ =========== ============= (1) Includes Class B Notes with an amortized cost of $20.8 million and $67.0 million at June 30, 1997 and December 31, 1996, respectively, eliminated in consolidation. (2) Includes Class B Notes with an amortized cost of $100.0 million, eliminated in consolidation.
32 At June 30, 1997, The Equitable held CMOs with an amortized cost of $2.39 billion, including $2.28 billion in publicly traded CMOs. About 62.0% of the public CMO holdings were collateralized by GNMA, FNMA and FHLMC securities. Approximately 38.5% of the public CMO holdings were in PAC bonds. At June 30, 1997, IO strips amounted to $8.7 million at amortized cost. There were no holdings of PO strips at that date. In addition, at June 30, 1997, The Equitable held $2.36 billion of mortgage pass-through securities (GNMA, FNMA or FHLMC securities) and also held $492.7 million of Aa or higher rated public asset backed securities, primarily backed by home equity mortgages, airline and other equipment, and credit card receivables.
Fixed Maturities Problems, Potential Problems and Restructureds Amortized Cost (In Millions) June 30, December 31, 1997 1996 --------------- ----------------- FIXED MATURITIES.............................................................. $ 22,541.3 $ 21,711.6 Problem fixed maturities...................................................... 22.9 50.6 Potential problem fixed maturities............................................ .5 .5 Restructured fixed maturities(1).............................................. 2.9 3.4 (1) Excludes restructured fixed maturities of $2.5 million that are shown as problems at both June 30, 1997 and December 31, 1996; there were no restructured fixed maturities that are shown as potential problems at June 30, 1997 nor at December 31, 1996.
Mortgages. Mortgages consist of commercial, agricultural and residential loans. At June 30, 1997, commercial mortgages totaled $2.52 billion (59.4% of the amortized cost of the category), agricultural loans were $1.71 billion (40.5%) and residential loans were $3.1 million (.1%).
Mortgages Problems, Potential Problems and Restructureds Amortized Cost (In Millions) June 30, December 31, 1997 1996 --------------- ----------------- COMMERCIAL MORTGAGES.......................................................... $ 2,518.9 $ 2,901.2 Problem commercial mortgages.................................................. 70.8 11.3 Potential problem commercial mortgages........................................ 141.0 425.7 Restructured commercial mortgages(1).......................................... 233.0 269.3 VALUATION ALLOWANCES.......................................................... 61.1 64.2 AGRICULTURAL MORTGAGES........................................................ $ 1,713.5 $ 1,672.7 Problem agricultural mortgages................................................ 14.7 5.4 Potential problem agricultural mortgages...................................... - - Restructured agricultural mortgages........................................... 1.2 2.0 VALUATION ALLOWANCES.......................................................... - - (1) Excludes restructured commercial mortgages of $40.0 million and $1.7 million that are shown as problems at June 30, 1997 and December 31, 1996, respectively, and excludes $38.3 million and $229.5 million of restructured commercial mortgages that are shown as potential problems at June 30, 1997 and December 31, 1996, respectively.
33 Problem commercial mortgages increased by $59.5 million from December 31, 1996 to June 30, 1997 as previously identified potential problems became delinquent. Potential problem loans declined as mortgages were reclassified to performing status and problem. During the first six months of 1997, the amortized cost of foreclosed commercial mortgages totaled $153.5 million with a $1.5 million reduction in amortized cost required at the time of foreclosure. The original weighted average coupon rate on the $233.0 million of restructured mortgages was 9.7%. As a result of these restructurings, the restructured weighted average coupon rate was 8.6% and the restructured weighted average cash payment rate was 8.2%. The foregone interest on restructured commercial mortgages (including restructured commercial mortgages presented as problem or potential problem commercial mortgages) for the first six months of 1997 was $1.6 million. At June 30, 1997, problem commercial mortgages were classified into the following property types: retail ($69.1 million or 97.6%) and apartment ($1.7 million or 2.4%). Their distribution by state was: New York ($38.3 million or 54.1%), Massachusetts ($26.8 million or 37.9%) and Mississippi ($4.0 million or 5.6%). Potential problem commercial mortgages were classified by property type as: retail ($86.4 million or 61.3%), industrial ($27.3 million or 19.4%), office ($21.0 million or 14.9%) and hotel ($5.4 million or 3.8%). By state, their distribution was: New York ($63.9 million or 45.3%), Pennsylvania ($22.7 million or 16.1%), Puerto Rico ($18.7 million or 13.3%) and Virginia ($16.4 million or 11.6%). No other state had 5.0% or more of the total. At June 30, 1997 and 1996, management identified impaired commercial loans as defined under SFAS No. 114 with a carrying value of $269.7 million and $595.8 million, respectively. The provision for losses for these impaired mortgage loans was $56.9 million and $122.1 million at June 30, 1997 and 1996, respectively. Income earned on these loans in the first six months of 1997 and 1996 was $13.7 million and $26.1 million, respectively, including cash received of $12.8 million and $20.9 million, respectively. For the first six months of 1997, scheduled principal amortization payments and prepayments on commercial mortgage loans received aggregated $278.4 million. In addition, during the first six months of 1997, $299.6 million of commercial mortgage loan maturity payments were scheduled, of which $51.9 million were paid as due. Of the amount not paid, $125.3 million were foreclosed, $117.8 million were granted short term extensions of up to six months, $4.6 million were extended for a weighted average of 3.0 years at a weighted average interest rate of 9.65% and none were delinquent or in default for non-payment of principal. Equity Real Estate. As of June 30, 1997, on the basis of amortized cost, the equity real estate category included $2.62 billion (or 70.8%) acquired as investment real estate and $1.08 billion (or 29.2%) acquired through or in lieu of foreclosure (including in-substance foreclosures). Real estate properties with amortized costs of $130.1 million and $247.0 million were sold during the first six months of 1997 and 1996, respectively. In the first half of 1997 and 1996, respectively, gains of $4.4 million and $2.5 million were recognized on equity real estate which was sold. At June 30, 1997 and 1996, respectively, allowances totaling $88.0 million and $64.7 million were held on properties identified as available for sale with amortized costs of $429.1 million and $375.4 million. At June 30, 1997, the vacancy rate for The Equitable's office properties was 13.1% in total, with a vacancy rate of 9.9% for properties acquired as investment real estate and 23.1% for properties acquired through foreclosure. The national commercial office vacancy rate was 11.6% (as of March 31, 1997) as measured by CB Commercial. Holding Company Group Investment Portfolio - Continuing Operations For the first half of 1997, Holding Company Group investment results were $23.2 million, as compared to $27.8 million in the year earlier period. The decrease principally was due to lower investment income on the Holding Company's smaller fixed maturities portfolio. 34 At June 30, 1997, the Holding Company Group investment portfolio's $607.7 million carrying value was made up of $563.3 million of fixed maturities ($396.0 million with an NAIC 1 rating), $36.5 million of cash and short-term investments and $7.9 million of other equity investments. At December 31, 1996, the portfolio's carrying value was $705.7 million, which included $657.7 million of fixed maturities ($444.9 million with an NAIC 1 rating), $40.6 million of cash and short-term investments and $7.4 million of other equity investments.
Holding Company Group Fixed Maturities By Credit Quality (Dollars In Millions) June 30, 1997 December 31, 1996 Rating Agency --------------------------------------- ---------------------------------------- NAIC Equivalent Amortized % of Estimated Amortized % of Estimated Rating Designation Cost Total Fair Value Cost Total Fair Value - ---------- ---------------------- ------------- --------- ------------- ------------- --------- ------------- 1-2 Aaa/Aa/A and Baa...... $ 472.5 83.9% $ 486.1 $ 525.0 80.1% $ 537.8 3-6 Ba and lower.......... 90.8 16.1 94.6 130.4 19.9 136.5 ------------- --------- ------------- ------------- --------- -------------- Total......................... $ 563.3 100.0% $ 580.7 $ 655.4 100.0% $ 674.3 ============= ========= ============= ============= ========= ==============
At June 30, 1997, the amortized cost of problem fixed maturities was $.0 million, $4.5 million for potential problem fixed maturities and $10.2 million for restructured fixed maturities. LIQUIDITY AND CAPITAL RESOURCES Since becoming a public company in 1992, the Holding Company's Board of Directors has declared quarterly cash dividends of $.05 per share on the outstanding shares of its Common Stock. At June 30, 1997, the Holding Company had three series of preferred stock outstanding. The annual dividend rate on the Series C Preferred Stock was fixed at 6% and dividends amounted to $.8 million for the first half of 1997. The Series D Preferred Stock will increase shareholders' equity only when shares are released from the SECT. No shares of Series D Preferred Stock were released from the SECT during the first half of 1997. The Series E Preferred Stock's dividend rate was fixed at 6.125% and dividends totaled $12.5 million for the first half of 1997. The Series E Preferred Stock dividends were payable quarterly in Common Stock. On August 4, 1997, the Holding Company redeemed all of its outstanding Subordinated Debentures and all outstanding shares of its Series C and Series E Preferred Stock. Upon redemption, the Holding Company issued approximately 32.5 million additional shares of its Common Stock. Holders of record of the Subordinated Debentures were entitled to receive 40.4040 shares of Common Stock for each $1,000 principal amount of Subordinated Debentures redeemed, along with cash representing interest accrued from July 22, 1997, the prior interest payment date. Holders of the Series C and Series E Preferred Stock were entitled to receive 20.4082 shares of Common Stock for each share of Preferred Stock redeemed, together with cash representing dividends accrued from July 22, 1997, the prior dividend payment date. The Holding Company paid cash in lieu of any fractional share of Common Stock. In April 1996, the Holding Company registered with the SEC approximately 11.9 million shares of Common Stock issuable upon conversion of shares of the Series D Preferred Stock held by the SECT. At June 30, 1997, the aggregate market value of these registered securities was $395.7 million, based on the closing market price on the NYSE. In July 1997, the SECT released 8,040 shares of the Series D Preferred Stock which were converted into 1.6 million shares of Common Stock. AXA purchased 960,000 shares directly while the remaining shares were sold through an agent to the public. The net proceeds of the sales totaled $54.8 million. See Note 14 of Notes to the Consolidated Financial Statements for further information on the redemptions and the SECT transaction. 35 Equitable Life has a commercial paper program with an issue limit of up to $500.0 million. This program is available for general corporate purposes and is supported by Equitable Life's existing $350.0 million bank credit facility, which expires in June 2000. Equitable Life uses this program from time to time in its liquidity management. At June 30, 1997, there were no amounts outstanding under the commercial paper program or the revolving credit facility. DLJ continues to be active in raising additional capital. In April 1997, DLJ commenced a program for the offering of up to $300.0 million of medium-term notes under a shelf registration statement. On April 15, 1997, $10.0 million aggregate principal amount of variable rate medium-term notes due 2000 were issued. The interest rate is LIBOR plus 10 basis points with a rate at June 30, 1997 of 5.88125%. On June 18, 1997, DLJ issued an additional $10.0 million aggregate principal amount of 6.85% medium-term notes due 2002, followed by the June 30, 1997 issuance of $70.0 million aggregate principal amount of 6.70% medium-term notes due in 2000. The proceeds of approximately $89.8 million were used for general corporate purposes. In June 1997, DLJ filed a shelf registration statement which enables DLJ to issue from time to time up to $1.00 billion in aggregate principal amount of senior or subordinated debt securities. There were no securities outstanding under this shelf registration statement at June 30, 1997. On August 8, 1997, DLJ converted its $28.8 million aggregate principal amount of 5% junior subordinated convertible debentures into 685,204 shares of DLJ common stock. To address a possible year end change in its tax status, on June 24, 1997, Alliance announced plans for a change to a public corporate ownership structure to become effective in December 1997. On August 5, 1997, The Taxpayer Relief Act of 1997 was signed into law. It included the option for certain publicly traded partnerships to maintain partnership tax status and pay a 3.5% tax on partnership gross income. On August 6, 1997, Alliance announced its intention to utilize this option and remain a publicly traded limited partnership and that it would not implement the previously announced change to a public corporate ownership structure. Consolidated Cash Flows The net cash used by operating activities was $4.00 billion for the first half of 1997 compared to net cash provided by operating activities of $135.8 million for the same period in 1996. Cash used by operating activities in 1997 principally was attributable to the $4.12 billion net change in trading activities and broker-dealer related receivables/payables at DLJ reflecting an increase in operating assets. The 1996 cash provided by operations principally was due to the $380.3 million net change in trading activities and broker-dealer related receivables/payables at DLJ as its level of business activity continued to increase, partially offset by the $109.7 million change in Federal income taxes payable and the $78.7 million change in clearing association fees and regulatory deposits. Net cash used by investing activities was $95.4 million for the first half of 1997 as compared to net cash provided by investing activities of $98.1 million for the same period in 1996. During the first half of 1997, investment purchases exceeded sales, maturities, repayments and return of capital by $218.8 million. The EREIM sale produced net proceeds of approximately $261.0 million. Discontinued operations reduced its outstanding loans from continuing operations by $185.2 million during the first six months of 1997. In the 1996 period, investment purchases exceeded sales, maturities, repayments and return of capital by $762.0 million. The discontinued GIC Segment repaid $492.5 million of loans from continuing operations during the first half of 1996. Net cash provided by financing activities was $4.34 billion for the first half of 1997 as compared to net cash used by financing activities of $528.3 million in the first half of 1996. Net cash provided by financing activities during the first six months of 1997 primarily resulted from a $4.42 billion increase in short-term financings, principally due to net repurchase agreement activity. There was a net increase of long-term debt of $162.6 million primarily due to new debt at DLJ. Withdrawals from General Account policyholders' account balances exceeded deposits by $205.0 million during the six months ended June 30, 1997. In the first half of 1996, withdrawals from General Account policyholders' account balances exceeded deposits by $351.9 million. During the first six months of 1996, cash used for the repayment of long-term debt of $219.9 million and the net decrease of $150.1 million in short-term financing, principally at DLJ, was partially offset by the net cash proceeds of $247.8 million from DLJ's February 1996 Medium Term Notes offering. The operating, investing and financing activities described above resulted in an increase in cash and cash equivalents during the first half of 1997 of $240.7 million to $996.0 million. 36 PART II OTHER INFORMATION Item 1. Legal Proceedings There have been no new material legal proceedings and no material developments in matters which were previously reported in the Registrant's Form 10-K for the year ended December 31, 1996, except as set forth in Note 12 to the Registrant's Unaudited Consolidated Financial Statements in Part I of this Form 10-Q for the quarter ended June 30, 1997. Item 4. Submission of Matters to a Vote of Security Holders. At the annual meeting of the Holding Company's shareholders held on May 14, 1997, the 19 nominees listed below were elected as directors of the Holding Company to hold office until the 1998 annual meeting and until their successors shall have been elected and qualified. In addition, at such meeting, the Holding Company's shareholders (i) ratified the appointment of Price Waterhouse LLP as the Holding Company's independent accountants, (ii) approved a Short-term Incentive Compensation Plan For Senior Officers, (iii) approved a Long-term Incentive Compensation Plan For Senior Officers, (iv) approved the Holding Company's 1997 Stock Incentive Plan, (v) approved an amendment to the Holding Company's Restated Certificate of Corporation concerning amendment of the Holding Company's By-Laws and (vi) approved possible purchases by AXA and its affiliates from time to time of all or a portion of the shares of the Holding Company's Common Stock to be sold by the SECT. The number of votes with respect to each of these matters was as follows: (a) Election of Directors: Name Votes For Votes Withheld Claude Bebear 169,433,016 435,457 John S. Chalsty 169,439,529 428,944 Henri de Castries 169,432,328 436,145 Francoise Colloc'h 169,433,386 435,087 Joseph L. Dionne 169,147,499 720,974 William T. Esrey 169,418,291 450,182 Jean-Rene Fourtou 163,569,715 6,298,758 Donald J. Greene 169,437,165 431,308 Anthony J. Hamilton 169,421,517 446,956 John T. Hartley 169,142,689 725,784 John H. F. Haskell, Jr. 169,434,408 434,065 Mary R. (Nina) Henderson 169,429,032 439,441 W. Edwin Jarmain 169,143,331 725,142 Winthrop Knowlton 169,121,239 747,234 Arthur L. Liman 163,530,221 6,338,252 Joseph J. Melone 169,432,266 436,207 Didier Pineau-Valencienne 163,399,366 6,469,107 George J. Sella, Jr. 169,415,168 453,305 Dave H. Williams 163,404,242 6,464,231 (b) Ratification of the Appointment of Price Waterhouse LLP as Independent Accountants: Votes For Votes Against Abstentions 169,529,055 166,111 173,307 37 (c) Approval of the Short-term Incentive Compensation Plan For Senior Officers: Votes For Votes Against Abstentions Nonvotes 156,655,111 3,634,195 1,126,843 8,452,324 (d) Approval of the Long-term Incentive Compensation Plan For Senior Officers: Votes For Votes Against Abstentions Nonvotes 156,884,946 3,305,931 1,225,272 8,452,324 (e) Approval of the Holding Company's 1997 Stock Incentive Plan: Votes For Votes Against Abstentions Nonvotes 157,051,930 3,281,843 1,082,376 8,452,324 (f) Approval of an Amendment to the Holding Company's Restated Certificate of Incorporation Concerning Amendment of the Holding Company's By-Laws: Votes For Votes Against Abstentions Nonvotes 156,417,339 3,823,232 1,175,578 8,452,324 (g) Approval of Possible Purchases by AXA and its Affiliates from time to time of all or a Portion of the Holding Company's Common Stock to be sold by the SECT: Votes For Votes Against Abstentions Nonvotes 159,142,512 1,103,668 1,169,969 8,452,324 Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits 4.01(a) Restated Certificate of Incorporation of the Registrant, filed as Exhibit 4.01(a)to the Registrant's Form S-3 Registration Statement (No. 333-03224), and incorporated herein by reference. 4.01(b) Certificate of Designation of Cumulative Convertible Preferred Stock, Series C, filed as Exhibit 4.01(d) to the Registrant's Form S-3 Registration Statement (No. 333-03224), and incorporated herein by reference. 4.01(c) Certificate of Designation of Cumulative Convertible Preferred Stock, Series D, filed as Exhibit 4.01(e) to the Registrant's Form S-3 Registration Statement (No. 333-03224), and incorporated herein by reference. 4.01(d) Certificate of Designation of Cumulative Convertible Preferred Stock, Series E, filed as Exhibit 4.01(f) to the Registrant's Form S-3 Registration Statement (No. 333-03224), and incorporated herein by reference. 38 4.01(e) Amendment to Restated Certificate of Incorporation of the Registrant, dated as of May 15, 1997 filed as Exhibit 4.01(g) to the Registrant's Form S-3 Registration Statement (No. 333-03224), and incorporated herein by reference. 4.01(f) Certificate of Elimination, dated July 31, 1997. 4.02 By-Laws of the Registrant, filed as Exhibit 4.02 to the Registrant's Form S-3 (No. 333-03224), and incorporated herein by reference. 10.1 Second Amendment of Lease, dated as of May 1, 1997, between 1290 Partners L.P. and Equitable Life. 10.2 Letter Agreement dated July 8, 1997, from the Holding Company and Equitable Life to Mr. Edward D. Miller. Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K A Current Report on Form 8-K was filed July 10, 1997; Item 5 therein discussed (a) the selection of Edward D. Miller as President and Chief Executive Officer of both the Holding Company and Equitable Life and his expected election to both companies' boards of directors, (b) the redemption of certain debt and preferred stock for Common Stock, (c) the announcement by Alliance regarding (1) its plans for a transaction responsive to a potential change in Alliance's tax status and (2) its taking of a non-recurring non-cash charge to reduce the recorded value of goodwill and contracts associated with Alliance's acquisition of Cursitor and (d) the closing of the previously announced sale of certain subsidiaries. No financial statements were filed. 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, The Equitable Companies Incorporated has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: August 11, 1997 THE EQUITABLE COMPANIES INCORPORATED By: /s/Stanley B. Tulin --------------------------------------------- Name: Stanley B. Tulin Title: Executive Vice President and Chief Financial Officer Date: August 11, 1997 /s/Alvin H. Fenichel --------------------------------------------- Name: Alvin H. Fenichel Title: Senior Vice President and Controller 40 EX-4.01(F) 2 CERTIFICATE OF ELIMINATION CERTIFICATE OF ELIMINATION OF THE EQUITABLE COMPANIES INCORPORATED Pursuant to Section 151 of the General Corporation Law of the State of Delaware THE EQUITABLE COMPANIES INCORPORATED, a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation") certifies as follows: 1. The Board of Directors of the Corporation adopted a resolution to the following effect: None of the authorized shares of the Cumulative Convertible Preferred Stock, Series A (the "Series A Stock") and Cumulative Convertible Preferred Stock, Series B (the "Series B Stock") are outstanding and none will be issued subject to the certificates of designations previously filed with respect to the Series A Stock and the Series B Stock. 2. The Board of Directors of the Corporation adopted a resolution authorizing the filing of a certificate with the Secretary of State of the State of Delaware setting forth the above resolution. 3. In accordance with the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Certificate of Incorporation is hereby amended to eliminate all matters set forth in the certificates of designations previously filed with respect to the Series A Stock and Series B Stock. IN WITNESS WHEREOF, The Equitable Companies Incorporated has caused this certificate to be signed by Kevin R. Byrne, Senior Vice President and Treasurer, on July 31, 1997. THE EQUITABLE COMPANIES INCORPORATED By: /s/ Kevin R. Byrne --------------------------------- Name: Kevin R. Byrne Title: Senior Vice President and Treasurer EX-10.1 3 SECOND AMENDMENT OF LEASE SECOND AMENDMENT OF LEASE Agreement, dated as of May 1, 1997, between 1290 PARTNERS L.P., a New York limited partnership having an office in care of The Victor Capital Group, L.P., 885 Third Avenue, New York, New York 10022-4802 ("Landlord") and THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES, a New York corporation having an of flee at 1290 Avenue of the Americas, New York, New York 10019 ("Tenant"). WITNESSETH: WHEREAS, Landlord and Tenant are parties to a Lease, dated as of July 20, 1995 (the "Original Lease"), as amended by a First Amendment of Lease, dated as of December 28, 1995 (collectively, the "Lease"), whereby Landlord is leasing to Tenant and Tenant is hiring from Landlord certain space in the building located at 1290 Avenue of the Americas, New York, New York (the "Building"); and WHEREAS, Landlord and Tenant desire to further amend the Lease to provide that Landlord lease to Tenant and Tenant hire from Landlord certain additional space on the ninth floor of the Building, and for certain other matters as more particularly set forth herein. NOW, THEREFORE, Landlord and Tenant agree as follows: 1. Defined Terms. All capitalized terms used herein but not defined shall have the meanings ascribed to them in the Lease 2. Lease of Additional Space. (a) Landlord hereby leases to Tenant and Tenant hereby hires from Landlord, subject to the terms and conditions of this Agreement, the following: (i) the portion of the ninth floor of the Building, substantially as shown hatched on the floor plan annexed hereto as Exhibit A (the "A-Space"); and (ii) the portion of the ninth floor of the Building, substantially as shown hatched on the floor plan annexed hereto as Exhibit B (the "B-Space"; the A-Space and the B-Space are collectively called the "Additional Space"). (b) The term of the lease of the A-Space shall commence on the earlier of (i) the date that Landlord's Initial Work (as defined in Section 5(a) below) relating to the A-Space is Substantially Complete (as defined in Section 2(h) below) and (ii) the date Tenant or anyone claiming under or through Tenant occupies any portion of the A-Space for the performance of Initial Tenant World (as defined in Section 5(a) below) (the earlier of the dates in clause (i) and clause (ii) is called the "A-Space Commencement Date"). Landlord and Tenant anticipate that the A-Space Commencement Date will occur on or about August 8, 1997. If the A-Space Commencement Date, determined under clause (i) above, would be later than August 8, 1997. then Landlord shall give to Tenant not less than 10 days notice of the date on which Landlord anticipates in good faith that such space will be delivered to Tenant with Landlord's Initial Work applicable thereto Substantially Complete; provided, that if, after the giving of such notice, Landlord believes that the actual delivery date will be later than the date set forth in such notice, then Landlord shall keep Tenant advised of the status of such delay and, if the actual delivery date shall be more than 2 Business Days later than the date set forth in such notice, Landlord shall give to Tenant not less than 2 Business Days prior notice of the actual delivery date. Landlord shall not be required to give to Tenant any notice hereunder if (A) the A-Space Commencement Date, determined under clause (i) above, occurs on or before August 8, 1997 or (B) the A-Space Commencement Date is determined under clause (ii! above. If the A-Space Commencement Date fails to occur on or before August 8, 1998 (as such date may be extended to the extent of any Tenant Delay applicable to the A-Space; as so extended, the "A-Space Outside Date"), then Tenant may give to Landlord not less than 30 days notice of Tenant's intent to terminate the lease of the A-Space, which notice must be given by Tenant on or before the earlier to occur of (x) the date that Landlord delivers the A-Space to Tenant with Landlord's Initial Work applicable thereto Substantially Complete and (y) the date that is 30 days after the A-Space Outside Date) (time of the essence). If Tenant timely gives a termination notice pursuant to the preceding sentence and Landlord fails, on or before the date set for the termination of the A-Space in Tenant's notice. to deliver to Tenant the A-Space with Landlord's Initial Work applicable thereto Substantially Complete, then (1) the lease of the A-Space pursuant to this Agreement shall terminate on the date provided therefor in Tenant's termination notice, (2) neither Tenant nor Landlord shall have any further obligation or liability to the other with respect to the A-Space (but such termination shall have no effect on the B-Space or any other space then included or includable in the Premises) and (3) on the date provided for the termination of the A-Space in Tenant's termination notice, Tenant shall pay to Landlord, as Additional Charges hereunder, S199,589.33, together with interest on such amount at the Prime Rate from the date Landlord paid to Tenant the amount described in Section 3(b)(i) below to and including the date of such payment by Tenant. (c) The term of the lease of the B-Space shall commence on the earlier of (i) the date that Landlord's Initial Work relating to the B-Space is Substantially Complete and (ii) the date Tenant or anyone claiming under or through Tenant occupies any portion of the B-Space for the performance of Initial Tenant Work (the earlier of the dates in clause (i) and clause (ii) is called the "B-Space Commencement Date"). Landlord and Tenant anticipate that the B-Space Commencement Date will occur on or about January 8, 1998. If the B-Space Commencement Date, determined under clause (i) above, would be later than January 8, 1998, then Landlord shall give to Tenant not less than 10 days notice of the date on which Landlord anticipates in good faith that the B-Space will be delivered to Tenant with Landlord's Initial Work applicable thereto Substantially Complete; provided, that if, after the giving of such notice, Landlord believes that the actual delivery date will be later than the date set forth in such notice, then Landlord shall keep Tenant advised of the status of such delay and, if the actual delivery date shall be more than 2 Business Days later than the date set forth in such notice, Landlord shall give to Tenant not less than 2 Business Days prior notice of the actual delivery date. Landlord shall not be required to give to Tenant any notice hereunder if (A) the B-Space Commencement Date, determined under clause (i) above, occurs on or before January 8, 1998 or (B) the B-Space Commencement Date is determined under clause (ii) above. If the B-Space Commencement Date fails to occur on or before January 8, 1999 (as such date may be extended to the extent of any Tenant Delay applicable to the B-Space; as so extended, the "B-Space Outside Date"), then Tenant may give to Landlord not less than 30 days notice of Tenant's intent to terminate the lease of the B-Space, which notice must be given by Tenant on or before the earlier to occur of (x) the date that Landlord delivers the B-Space to Tenant with Landlord's Initial Work applicable thereto Substantially Complete and (y) the date that is 30 days after the B-Space Outside Date) (time of the essence). If Tenant timely gives a termination notice pursuant to the preceding sentence and Landlord fails, on or before the date set for the termination of the B-Space in Tenant's notice, to deliver to Tenant the B-Space with Landlord's Initial Work applicable thereto Substantially Complete, then (1) the lease of the B-Space pursuant to this Agreement shall terminate on the date provided therefor in Tenant's termination notice, (2) neither Tenant nor Landlord shall have any further obligation or liability to the other with respect to the B-Space (but such termination shall have no effect on the A-Space or any other space then included or includable in the Premises) and (3) on the date provided for the termination of the B-Space in Tenant's termination notice, Tenant shall pay to Landlord, as Additional Charges hereunder, 5182,363.97, together with interest on such amount at the Prime Rate from the date Landlord paid to Tenant the amount described in Section 3(b)(i) below to and including the date of such payment by Tenant. (d) If, for any reason, including, without limitation, the failure of the occupants of the Additional Space on the date of this Agreement timely to vacate any portion of the Additional Space, Landlord shall be unable to deliver possession of either the A-Space or the B-Space on any date specified in this Agreement for such delivery, the validity of the Lease and this Agreement shall not be impaired, nor shall the Term with respect to any portion of the Additional Space be extended, by reason thereof, and (except to the extent set forth in Section 5(Y) below) Landlord shall have no liability to Tenant therefor. Tenant's sole remedy for such failure shall be the termination rights provided for in Sections 2(b) and 2(c) above. This Section 9(d) shall be an express provision to the contrary for purposes of Section 023-a of the New York Real Property Law and any other law of like import now or hereafter in effect. (e) Tenant and Landlord shall, upon the occurrence thereof: execute, and deliver instruments in form reasonably satisfactory to Tenant and Landlord confirming the A-Space Commencement Date and the B-Space Commencement Date, as applicable: provided, that the failure by any party to execute and deliver any such instrument shall not affect the occurrence of the A-Space Commencement Date or the B-Space Commencement Date, as applicable, in accordance with the terms of this Agreement. (f) The Additional Space shall be conclusively deemed to contain the following rentable square feet: A-Space: 27,090 B-Space: 24,752 (g) Effective as of (i) the A-Space Commencement Date with respect to the A-Space and (ii) the B-Space Commencement Date with respect to the B-Space, all references in the Lease to the "Premises" shall (except to the extent other terms are provided in this Agreement with respect to such portion of the Additional Space), be deemed to refer collectively to the Premises demised pursuant to the Lease, the A-Space (as of the A-Space Commencement Date) and the B-Space (as of the B-Space Commencement Date), and all references in the Lease to the "Office Space" shall (except to the extent other terms are provided in this Agreement with respect to such portion of the Additional Space), be deemed to refer collectively to the Office Space demised pursuant to the Lease, the A-Space (as of the A-Space Commencement Date) and the B-Space (as of the B-Space Commencement Date). (h) Landlord's Initial Work with respect to any space shall be deemed to be Substantially Complete on the date upon which such Landlord's Initial Work has been completed, other than (i) minor details or adjustments, but only if such details or adjustments shall not interfere in any material respect with Tenant's ability to (A) prepare any portion of such space for Tenant's initial occupancy thereof, or (B) thereafter use and occupy the same for the ordinary conduct of Tenant's intended use of such space (as such intended use is shown on, or reasonably inferable from, Tenant's then current plans and specifications with respect to Tenant's initial Alterations therein); provided, that such intended use is permitted pursuant to Section 1.05 of the Original Lease and (ii) any part of Landlord's Initial Work if and to the extent the same is not completed due to Tenant Delay. 3. Terms Applicable to the A-Space. The lease of the A-Space by Tenant shall he on all of the terms and conditions of the Lease, except that: (a) the term of the lease of the A-Space shall commence as set forth in Section 2(b) above; (b) Landlord shall not be required to perform any work to pay any amount, to install any fixtures or equipment or to render any services to prepare the Building or the A-Space for Tenant's use or occupancy, and Tenant shall accept the A-Space in its "as is" condition on the A-Space Commencement Date; provided, that (i) within 15 days after the execution and delivery of this Agreement by Landlord and Tenant, Landlord shall pay to Tenant $381,953.50 which may be used by Tenant for the payment of brokerage commissions, for the cost of Tenant's Initial Work in the Additional Space or otherwise, (ii) prior to the A-Space Commencement Date, Landlord shall Substantially Complete Landlord's Initial Work with respect to the A-Space, (iii) within a reasonable period after the A-Space Commencement Date Landlord shall perform Landlord's Additional Work (as defined in Section 5(a) below) with respect to the A-Space (it being agreed that Landlord shall use reasonable efforts to complete such Landlord's Additional Work within a time frame that will not delay Tenant's performance of Tenant's Initial Work in the A-Space), (iv) within 30 days after the A-Space Commencement Date, Landlord shall pay to Tenant $1,0,78,314.00 in respect of Tenant's Initial Work in the A-Space and (v) within 30 days after Tenant first occupies the A-Space for the ordinary conduct of Tenant's business, Landlord shall pay to Tenant S199,589.53 which may be used by Tenant for the payment of brokerage commissions, for the cost of Tenant's Initial Work in the Additional Space or otherwise; (c) Fixed Rent with respect to the A-Space shall be payable from and after the A-Space Commencement Date to and including the Expiration Date at the annual rate of 51.049,737.50, payable in equal monthly installments of $87,478.13 (appropriately prorated in the case of the first monthly installment if the A-Space Commencement Date is not the first day of a month) and otherwise at the times and in the manner set forth in the Lease; provided, that so long as no default under the Lease beyond applicable notice and grace periods shall exist at the time such Fixed Rent would otherwise become due and payable. Tenant shall be entitled to an abatement of the Fixed Rent payable with respect to the A-Space in respect of the period commencing on the A-Space Commencement Date and ending on the 300th day after the A-Space Commencement Date (which 300 day period may be extended in accordance with Section 5(g) below); (d) from and after the A-Space Commencement Date, Tenant shall pay to Landlord Tax Payments and Operating Payments with respect to the A-Space at the times and in the manner set forth in the Lease; (e) Landlord shall make available to the A-Space electric energy in an amount not less 8 watts demand load per rentable square foot of the A-Space; Tenant shall separately pay for electric energy supplied to the A-Space from and after the A-Space Commencement Date in the manner and at the times set forth in Article 2 of the Original Lease, and Landlord, at Tenant's expense, shall install promptly after the A-Space Commencement Date a submeter to measure the demand for, and consumption of, electricity in the A-Space; provided, that if, on the A-Space Commencement Date, such submeter has not yet been installed, then from and after the A-Space Commencement Date, through and including the date that Landlord installs such submeter. Tenant shall pay for electric energy supplied to the A-Space at the rate of $2.00 per annum per rentable square foot of the A-Space (which amount shall be reduced to $.75 per annum per rentable square foot during the period of construction of Tenant's initial Alterations to such space); and (f) in addition to the condenser water made available to Tenant under Section 3.01(a) of the Original Lease, Landlord shall provide to Tenant up to another 10 tons of condenser water, on the terms and conditions set forth in said Section 3.01(a); provided, that Landlord shall not be required to provide such additional 10 tons unless Tenant shall utilize same within one year after the A-Space Commencement Date. 4. Terms Applicable to the B-Space. The lease of the B-Space by Tenant shall be on all of the terms and conditions of the Lease, except that: (a) the term of the lease of the B-Space shall commence as set forth in Section 2(c) above; (b) Landlord shall not be required to perform any work, to pay any amount, to install any fixtures or equipment or to render any services to prepare the Building or the B-Space for Tenant's use or occupancy, and Tenant shall accept the B-Space in its "as is" condition on the B-Space Commencement Date; provided, that (i) prior to the B-Space Commencement Date, Landlord shall Substantially Complete Landlord's Initial Work with respect to the B-Space (ii) within a reasonable period after the B-Space Commencement Date Landlord shall perform Landlord's Additional Work with respect to the B-Space; (it being agreed that Landlord shall use reasonable efforts to complete such Landlord's Additional Work within a time frame that will not delay Tenant's performance of Tenant's Initial Work in the B-Space), (iii) within 30 days after the B-Space Commencement Date, Landlord shall pay to Tenant S995.366.00 in respect of Tenant's Initial Work in the B-Space and (iv) within 30 days after Tenant first occupies the B-Space for the ordinary conduct of Tenant's business. Landlord shall pay to Tenant $182,363.97 which may be used by Tenant for the payment of brokerage commissions. for the cost of Tenant's Initial Work in the Additional Space or otherwise; (c) Fixed Rent with respect to the B-Space shall be payable from and after the B-Space Commencement Date to and including the Expiration Date at the annual rate of $959,140.00, payable in equal monthly installments of $79,928.33 (appropriately prorated in the case of the first monthly installment if the B-Space Commencement Date is not the first day of a month) and otherwise at the times and in the manner set forth in the Lease; provided. that so long as no default under the Lease beyond applicable notice and grace periods shall exist at the time such Fixed Rent would otherwise become due and payable, Tenant shall be entitled to an abatement of the Fixed Rent payable with respect to the B-Space in respect of the period commencing on the B-Space Commencement Date and ending on the 300th day after the B-Space Commencement Date (which 300 day period may be extended in accordance with Section 5(g) below); (d) from and after the B-Space Commencement Date, Tenant shall pay to Landlord Tax Payments and Operating Payments with respect to the B-Space at the times and in the manner set forth in the Lease; (e) Landlord shall make available to the B-Space electric energy in an amount not less than 8 watts demand load per rentable square foot of the B-Space; Tenant shall separately pay for electric energy supplied to the B-Space from and after the B-Space Commencement Date in the manner and at the times set forth in Article 2 of the Original Lease, and Landlord, at Tenant's expense, shall install, promptly after the B-Space Commencement Date, a submeter to measure the demand for, and consumption of, electricity in the B-Space; provided, that if, on the B-Space Commencement Date, such submeter has not yet been installed, then from and after the B-Space Commencement Date, through and including the date that Landlord installs such submeter, Tenant shall pay for electric energy supplied to the B-Space at the rate of $2.00 per annum per rentable square foot of the B-Space (which amount shall be reduced to S.75 per annum per rentable square foot during the period of construction of Tenant's initial Alterations to such space); and (f) in addition to the condenser water made available to Tenant under Section 3.01(a) of the Original Lease, Landlord shall provide to Tenant up to another l0 tons of condenser water, on the terms and conditions set forth in said Section 3.01(a); provided, that Landlord shall not be required to provide such additional 10 tons unless Tenant shall utilize same within one year after the B-Space Commencement Date. 5. Landlord's Work; Work Allowance. (a) As used in this Agreement: (i) "Landlord's Initial Work" means, with respect to any space (A) the demolition of all tenant improvements in such space, including all partitions, doors, flooring, ceilings, supplemental air conditioning units (leaving in place all existing overhead air conditioning ductwork), lighting and electrical feeds and (B) the delivery to Tenant of a Form ACP-5 with respect to such space. (ii) "Landlord's Additional Work" means, with respect to any space (A) if and to the extent required in such space, the fireproofing of all structural members in such space and firestopping treatment at all slab penetrations and (B) the provision of connection points at all fire alarm floor panels in such space to the Building's Class E System (collectively, "Landlord's Additional Work"). (iii) "Initial Tenant Work" means the installation in the Additional Space of fixtures, improvements and appurtenances attached to or built into the Additional Space, engineering costs, space planning costs and permit fees, and shall not include movable partitions, business and trade fixtures, machinery, equipment, furniture, furnishings and other articles of personal property. (b) Within a reasonable period of time after the A-Space Commencement Date, Landlord, at Tenant's expense, shall reprogram the four elevators which! as of the date of this Agreement, serve exclusively the twelfth through the fifteenth floors of the Building (the "Dedicated Elevators") to open and close on the ninth floor of the Building. Tenant acknowledges that Landlord cannot protect against any other tenant on the ninth floor or any visitors of such tenant accessing the Dedicated Elevators. Tenant shall reimburse Landlord for the cost of such reprogramming within 30 days after Landlord gives to Tenant an invoice therefor, together with reasonable back-up documentation. Landlord shall use reasonable efforts to complete such reprogramming prior to Tenant's occupancy of the A-Space for the ordinary conduct of Tenant's business. (c) Within a reasonable period of time after the A-Space Commencement Date, Landlord, at Tenant's expense, shall, provided the same is then permissible in accordance with Laws, partition the elevator lobby serving the ninth floor of the Building so as to provide Tenant on the ninth floor of the Building exclusive use of the Dedicated Elevators. Tenant shall reimburse Landlord for the cost of such partitioning within 30 days after Landlord gives to Tenant an invoice therefor, together with reasonable back-up documentation. Landlord shall use reasonable efforts to complete such partitioning prior to Tenant's occupancy of the B-Space for the ordinary conduct of Tenant's business. Tenant acknowledges that, upon the partitioning of the elevator lobby on the ninth floor of the Building, Tenant shall not have the use of any of the passenger elevators serving such ninth floor other than the Dedicated Elevators. (d) In performing Landlord's Additional Work and the work described in Section 5(b) above Landlord shall coordinate the scheduling of such work with Tenant so as to minimize any interference with Tenant's performance of Initial Tenant Work; provided, that Landlord shall not be required to use overtime labor in performing the same. (e) Tenant shall pay to Landlord a supervision fee in connection with the performance by Tenant of Initial Tenant Work equal to 6% of the cost of all Initial Tenant Work. Tenant shall pay to Landlord such supervision fee (which may be by credit against the Work Allowance) within 30 days after Landlord gives to Tenant an invoice therefor. Tenant shall provide to Landlord such documentation as Landlord may reasonably require in order to establish the cost of Initial Tenant Work. (f) Tenant shall comply in all respects with Article 4 of the Original Lease in performing Initial Tenant Work. Without limiting the generality of the foregoing, Tenant shall, prior to commencing Initial Tenant Work, submit to Landlord for Landlord's approval in accordance with said Article 4, plans and specifications in respect of Initial Tenant Work. (g) If (i) Landlord shall fail to Substantially Complete Landlord's Initial Work with respect to the A-Space on or before the date that is 20 days after the day on which Landlord first obtains vacant possession of the A-Space from the tenant that occupies the A-Space on the date of this Agreement, (ii) Landlord shall fail to Substantially Complete Landlord's Initial Work with respect to the B-Space on or before the date that is 20 days after the day on which Landlord first obtains vacant possession of the B-Space from the tenant that occupies the B-Space on the date of this Agreement, (iii) Landlord shall fail to reprogram the Dedicated Elevators to open and close on the ninth floor of the Building on or before the date that is 7 days after the day on which Landlord first obtains vacant possession of the A-Space from the tenant that occupies the A-Space on the date of this Agreement anchor (iv) Landlord shall fail to partition the elevator bank on the ninth floor of the Building (if required in accordance with Section 5.01(c) above) on or before the date that is 42 days after the day on which Landlord first obtains vacant possession of the A-Space from the tenant that occupies the A-Space on the date of this Agreement, and if any of the events described in clauses (i! through (iv) above shall result in any Landlord Delay with respect to the A-Space or the B-Space (provided, that for purposes of this Section 5(g). only the circumstances described in clause (i) of the definition of "Landlord Delay" shall be deemed to give rise to a Landlord Delay, and no Landlord Delay shall be deemed to result from any circumstance described in clause (ii) of the definition of "Landlord Delay"), then (A) the 300 day abatement of Fixed Rent with respect to the A-Space set forth in Section 3(c) above shall be extended by I day (notwithstanding that more than one of the events described in clauses (i) through (iv) above may have resulted in such Landlord Delay) for each day of such Landlord Delay applicable to the A-Space and (B) the 300 day abatement of Fixed Rent with respect to the B-Space set forth in Section 4(c) above shall be extended by 1 day (notwithstanding that more than one of the events described in clauses (i) through (iv) above may have resulted in such Landlord Delay) for each day of such Landlord Delay applicable to the B-Space. 6. Further Amendments to Lease. Effective as of the date hereof the Lease is hereby further amended as follows: (a) The definition of "Antenna" in Section 11.01 of the Original Lease is hereby amended to include 3 additional antennas which may be installed, maintained and operated by Tenant on the roof of the Building in the locations designated on Exhibit T to the Original Lease and otherwise in compliance with the terms and conditions of the Original Lease, including, without limitation, Section 4.03(d) and Article 11 of the Original Lease; (b) The reference in Section 11.01 of the Original Lease to "Exhibit T1" is amended to refer to "Exhibit T"; and (c) Exhibit T to the Original Lease is deleted and there shall be inserted in lieu thereof a new Exhibit T consisting of the plan of Edwards & Zuck Communications, Inc., last revised 9/10/96, a copy of which is attached to and made a part of this Agreement as Exhibit C. 7. Broker. (a) Each party represents to the other that such party has dealt with no broker other than EREIM (representing Tenant) and Tishman Speyer Properties, L.P. (representing Landlord) (collectively, the "Brokers") in connection with the leasing of the Additional Space, and each party shall indemnify and hold the other harmless from and against all loss, cost, liability and expense (including, without limitation, reasonable attorneys' fees and disbursements) arising out of any claim for a commission or other compensation by any broker other than the Brokers who alleges that it has dealt with the indemnifying party in connection with the leasing of the Additional Space. (b) Tenant shall be responsible for any commission or other compensation due to EREIM in connection with the leasing of the Additional Space, and Tenant shall indemnify and hold Landlord harmless from and against all loss, cost, liability and expense (including, without limitation, reasonable attorneys' fees and disbursements) arising out of any claim for a commission or other compensation by EREIM in connection with the leasing of the Additional Space. (c) Landlord shall be responsible for any commission or other compensation due to Tishman Speyer Properties, Inc. in connection with the leasing of the Additional Space, and Landlord shall indemnify and hold Tenant harmless from and against all loss, cost, liability and expense (including, without limitation, reasonable attorneys' fees and disbursements) arising out of any claim for a commission or other compensation by Tishman Speyer Properties, Inc. in connection with the leasing of the Additional Space. 8. No Other Changes. Except as expressly set forth in this Agreement, the Lease shall remain unmodified and in full force and effect, and the Lease as modified herein is ratified and confirmed. All references in the Lease to "this Lease" shall hereafter be deemed to refer to the Lease as amended by this Agreement. 9. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original and all of which taken together shall constitute one agreement. IN WITNESS WHEREOF, Landlord and Tenant have duly executed this Agreement as of the day and year first above written. Landlord: 1290 PARTNERS, L.P., By: 1290 GP Corp., general partner By: /s/Andrew Cohen ------------------------------- Name: Andrew Cohen Title: Vice President Tenant: THE EQUITABLE LIFE ASSURANCE SOCIETY OF THE UNITED STATES. By: /s/Leon Billis ----------------------------------- Name: Leon Billis Title: Senior Vice President EX-10.2 4 LETTER AGREEMENT July 8,1997 PRIVATE AND CONFIDENTIAL Mr. Edward D. Miller 7 Sunset Lane Garden City, New York 11530 Dear Ed: On behalf of the Boards of Directors of The Equitable Companies Incorporated and The Equitable Life Assurance Society of the United States, I am delighted to extend this offer to succeed me as President and Chief Executive Officer with your election to take place at our board meetings on July 17, 1997. You would also be elected to the boards at that meeting. Your base salary as President and Chief Executive Officer for the remainder of 1997, 1998 and 1999 will be at a level of $800,000 per annum payable in approximately equal periodic installments. We will also pay you a sign on bonus of $1,500,000, of which $500,000 will be paid to you upon joining the Company and the balance of $1,000,000 will be paid in February 1998. In addition, for services in 1998 we will pay you a bonus of $2,700,000 in February 1999. You will receive your base salary and bonus payments for the years 1997, 1998 and 1999, provided that before the receipt of any payment your employment has not been terminated by reason of death, disability or voluntary resignation, or for Cause. As used in this paragraph, "Cause" means (i) your willful failure (other than due to physical or mental illness) to perform substantially your duties as an employee after reasonable notice to you of such failure, (ii) your engaging in serious misconduct that is injurious to the Company or any of its affiliates, (iii) your having been convicted of, or entered a plea of nolo contendere to, a crime that constitutes a felony or (iv) your breach of any written covenant or agreement with the Company or any of its affiliates not to disclose any information pertaining to the Company or any of its affiliates. In the event of your termination of employment by reason of death or disability, a pro rata amount of your bonus payments will be paid based on the portion of the period covered by the bonus for which you remained in active service. In addition, you will also be a participant in our Short-Term Incentive Compensation Plan for Senior Officers. The amounts of your sign on and additional bonuses will be taken into account in determining the amounts to be paid to you under the Short-Term Incentive Compensation Plan for 1997 and 1998. You will also participate in The Equitable Companies 1997 Stock Incentive Plan (the "Stock Plan") and you will receive a grant of 300,000 stock options as soon as possible after joining the Company and an additional 100,000 options in both September 1998 and September 1999. These options will have a ten year term and will vest over a three year period at the rate of one-third each year. If your employment is terminated by the Company other than for Cause as defined in Section 2.1(f) of the Stock Plan, the options granted prior to termination will fully vest and may be exercised at any time prior to the earlier of the expiration of the term of the options or within five years following termination of employment. In becoming an employee of the Company, you will not thereby be entering into a written covenant or agreement not to compete with the Company or any of its affiliates for purposes of the application of Section 2.1(f)(iv) of the Stock Plan. In addition you will participate in our long-term incentive program which is under review at this time. We expect the program to provide for an annual benefit which is targeted at 80% of base salary to be paid in a combination of performance shares and options. In lieu of participating in a long-term incentive program prior to 1998, you will receive a cash payment of $250,000 in early 1998. You will also be included in all benefit plans for senior officers of the Company, including those providing health, retirement, disability and life insurance benefits. We will also make available to you a car and driver as well as secretarial support of your choice allowing you to carry out your business in an efficient manner. Ed, I believe this covers the important points that we have previously discussed. The Boards and I are enthusiastic over the prospect of your becoming our new Chief Executive Officer. We look forward to your favorable response as soon as possible. If you are in agreement with the above terms and conditions would you kindly sign the letter and return it to my attention. Sincerely, /s/Joseph J. Melone - ------------------- Joseph J. Melone President and Chief Executive Officer ACCEPTED: /s/Edward D. Miller - ------------------- Edward D. Miller EX-27 5 EQ 2Q 1997 ARTICLE 7 FDS
7 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 19,289,500 162,000 179,300 1,151,400 2,751,000 3,395,600 72,589,100 996,000 0 3,241,900 147,256,100 0 0 4,505,400 21,832,500 7,619,200 0 404,600 1,900 4,065,300 147,256,100 759,400 1,842,600 612,100 1,611,200 482,400 151,700 2,846,400 700,200 259,700 391,400 (2,700) 0 0 388,700 1.96 1.73 0 0 0 0 0 0 0
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