FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-9818
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ALLIANCE CAPITAL MANAGEMENT L.P.
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(Exact name of registrant as specified in its charter)
Delaware 13-3434400
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1345 Avenue of the Americas, New York, NY 10105
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(Address of principal executive offices)
(Zip Code)
(212) 969-1000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of Units representing assignments of beneficial ownership of Limited
Partnership Interests outstanding as of March 31, 1998 was 168,380,806 Units.
ALLIANCE CAPITAL MANAGEMENT L.P.
Index to Form 10-Q
Part I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS Page
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Condensed Consolidated Statements of Financial Condition 2
Condensed Consolidated Statements of Income 3
Condensed Consolidated Statements of Changes in
Partners' Capital 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-14
Part II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 15
Item 2. CHANGES IN SECURITIES 15
Item 3. DEFAULTS UPON SENIOR SECURITIES 15
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 15
Item 5. OTHER INFORMATION 15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 15
1
Part I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ALLIANCE CAPITAL MANAGEMENT L.P.
Condensed Consolidated Statements of Financial Condition
(in thousands)
ASSETS 3/31/98 12/31/97
----------- --------
(unaudited)
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . $ 91,955 $ 63,761
Receivable from brokers and dealers for sale
of shares of Alliance mutual funds . . . . . . . . . . . . . . 105,845 68,701
Fees receivable:
Alliance mutual funds. . . . . . . . . . . . . . . . . . . . . 70,392 57,583
Separately managed accounts:
Affiliated clients . . . . . . . . . . . . . . . . . . . . . 5,130 8,357
Third party clients. . . . . . . . . . . . . . . . . . . . . 84,891 73,774
Investments, available-for-sale. . . . . . . . . . . . . . . . . 49,965 47,097
Furniture, equipment and leasehold improvements, net . . . . . . 82,631 80,477
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . 96,517 97,398
Deferred sales commissions, net. . . . . . . . . . . . . . . . . 285,131 251,632
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 55,791 35,680
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Total assets . . . . . . . . . . . . . . . . . . . . . . . . . $928,248 $784,460
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LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Payable to Alliance mutual funds for share purchases . . . . . $137,018 $ 96,995
Accounts payable and accrued expenses. . . . . . . . . . . . . 151,847 119,887
Accrued compensation and benefits. . . . . . . . . . . . . . . 115,013 74,880
Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118,962 90,416
Minority interests in consolidated subsidiaries. . . . . . . . 2,206 4,231
-------- --------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . 525,046 386,409
Partners' capital. . . . . . . . . . . . . . . . . . . . . . . . 403,202 398,051
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Total liabilities and partners' capital. . . . . . . . . . . $928,248 $784,460
-------- --------
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See accompanying notes to condensed consolidated financial statements.
2
ALLIANCE CAPITAL MANAGEMENT L.P.
Condensed Consolidated Statements of Income
(unaudited)
(in thousands, except per Unit amounts)
Three Months Ended
------------------
3/31/98 3/31/97
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Revenues:
Investment advisory and services fees:
Alliance mutual funds. . . . . . . . . . . . . . . . . . . . $142,531 $ 85,994
Separately managed accounts:
Affiliated clients . . . . . . . . . . . . . . . . . . . . 13,406 12,554
Third party clients. . . . . . . . . . . . . . . . . . . . 79,524 58,462
Distribution plan fees from Alliance mutual funds... . . . . . 65,290 47,247
Shareholder servicing and administration fees. . . . . . . . . 13,144 12,765
Other revenues . . . . . . . . . . . . . . . . . . . . . . . 2,122 2,229
-------- --------
316,017 219,251
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Expenses:
Employee compensation and benefits . . . . . . . . . . . . . . 87,827 60,502
Promotion and servicing:
Distribution plan payments to financial intermediaries:
Affiliated . . . . . . . . . . . . . . . . . . . . . . . . 17,454 9,085
Third party clients. . . . . . . . . . . . . . . . . . . 39,464 32,714
Amortization of deferred sales commissions . . . . . . . . . 22,847 15,738
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,314 14,805
General and administrative.. . . . . . . . . . . . . . . . . . 42,139 25,746
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . 1,967 673
Amortization of intangible assets. . . . . . . . . . . . . . . 881 2,622
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233,893 161,885
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Income before income taxes . . . . . . . . . . . . . . . . . . . 82,124 57,366
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 13,140 4,017
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Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,984 $ 53,349
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Net income per Unit:
Basic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.40 $ 0.31
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Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.39 $ 0.31
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See accompanying notes to condensed consolidated financial statements.
3
ALLIANCE CAPITAL MANAGEMENT L.P.
Condensed Consolidated Statements of
Changes in Partners' Capital
(unaudited)
(in thousands)
Three Months Ended
------------------
3/31/98 3/31/97
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Partners' capital - beginning of period. . . . . . . . . . . . . $398,051 $476,020
Comprehensive income:
Net income . . . . . . . . . . . . . . . . . . . . . . . . 68,984 53,349
Unrealized gain (loss) on investments. . . . . . . . . . . 864 (18)
Foreign currency translation adjustment. . . . . . . . . . - -
-------- --------
Total comprehensive income . . . . . . . . . . . . . . . . 69,848 53,331
Capital contribution received from Alliance Capital
Management Corporation . . . . . . . . . . . . . . . . . . . 860 898
Cash distributions to partners . . . . . . . . . . . . . . . . (70,078) (50,013)
Proceeds from Unit options exercised . . . . . . . . . . . . . 4,521 3,065
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Partners' capital - end of period. . . . . . . . . . . . . . . . $403,202 $483,301
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See accompanying notes to condensed consolidated financial statements.
4
ALLIANCE CAPITAL MANAGEMENT L.P.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Three Months Ended
--------------------
3/31/98 3/31/97
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Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,984 $ 53,349
Adjustments to reconcile net income to net cash provided
from operating activities:
Amortization and depreciation. . . . . . . . . . . . . . . . . 27,618 21,031
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . 3,477 1,522
Changes in assets and liabilities:
(Increase) in receivable from brokers and dealers for sale
of shares of Alliance mutual funds . . . . . . . . . . . . (37,144) (22,937)
(Increase) in fees receivable from Alliance mutual funds,
affiliated clients and third party clients . . . . . . . . (20,699) (5,366)
(Increase) in deferred sales commissions . . . . . . . . . . (56,346) (31,544)
(Increase) in other assets . . . . . . . . . . . . . . . . . (21,502) (966)
Increase in payable to Alliance mutual funds for share
purchases. . . . . . . . . . . . . . . . . . . . . . . . . 40,023 24,654
Increase in accounts payable and accrued expenses. . . . . . 30,060 7,196
Increase in accrued compensation and benefits, less
deferred compensation. . . . . . . . . . . . . . . . . . . 39,269 17,544
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Net cash provided from operating activities. . . . . . . 73,740 64,483
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Cash flows from investing activities:
Purchase of investments. . . . . . . . . . . . . . . . . . . . . (109,008) (45,907)
Proceeds from sale of investments. . . . . . . . . . . . . . . . 107,004 58,027
Additions to furniture, equipment and leasehold
improvements, net. . . . . . . . . . . . . . . . . . . . . . . (6,010) (12,289)
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Net cash used in investing activities. . . . . . . . . . (8,014) (169)
--------- ---------
Cash flows from financing activities:
Proceeds from borrowings . . . . . . . . . . . . . . . . . . . . 217,290 -
Repayment of debt. . . . . . . . . . . . . . . . . . . . . . . . (189,375) (5,387)
Distributions to partners. . . . . . . . . . . . . . . . . . . . (70,078) (50,013)
Capital contribution received from Alliance Capital Management
Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . 110 148
Unit options exercised . . . . . . . . . . . . . . . . . . . . . 4,521 3,065
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Net cash used in financing activities. . . . . . . . . . (37,532) (52,187)
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Effect of exchange rate changes on cash and cash equivalents . . . - -
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Net increase in cash and cash equivalents. . . . . . . . . . . . . 28,194 12,127
Cash and cash equivalents at beginning of period . . . . . . . . . 63,761 57,441
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Cash and cash equivalents at end of period . . . . . . . . . . . . $ 91,955 $ 69,568
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See accompanying notes to condensed consolidated financial statements.
5
ALLIANCE CAPITAL MANAGEMENT L.P.
Notes to Condensed Consolidated Financial Statements
March 31, 1998
(unaudited)
1. BASIS OF PRESENTATION
The unaudited interim condensed consolidated financial statements of
Alliance Capital Management L.P. (the "Partnership") included herein have
been prepared in accordance with the instructions to Form 10-Q pursuant to
the rules and regulations of the Securities and Exchange Commission. In
the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of (a) financial
position at March 31, 1998, (b) results of operations for the three months
ended March 31, 1998 and 1997 and (c) cash flows for the three months ended
March 31, 1998 and 1997, have been made.
Unit and per Unit amounts have been restated to reflect the two-for-one
Unit split announced on February 19, 1998, payable to Unitholders of record
on March 11, 1998.
2. RECLASSIFICATION
Certain prior period amounts have been reclassified to conform to the
current period presentation.
3. DEFERRED SALES COMMISSIONS
Sales commissions paid to financial intermediaries in connection with the
sale of shares of open-end mutual funds managed by the Partnership sold
without a front-end sales charge are capitalized and amortized over periods
not exceeding five and one-half years, the periods of time estimated by
management of the Partnership during which deferred sales commissions are
expected to be recovered from distribution plan payments received from the
mutual funds and contingent deferred sales charges received from
shareholders of the mutual funds upon the redemption of their shares.
Contingent deferred sales charges reduce unamortized deferred sales
commissions when received.
4. COMMITMENTS AND CONTINGENCIES
On February 29, 1996, the Partnership acquired substantially all of the
assets and liabilities of Cursitor Holdings, L.P. ("CHLP") and all of the
outstanding shares of Cursitor Holdings Limited, (collectively "Cursitor").
Cursitor Alliance LLC ("Cursitor Alliance") was formed in connection with
the acquisition and CHLP acquired a minority interest in Cursitor Alliance.
Through February 28, 2006, the Partnership has an option to purchase the
minority interest held by CHLP in Cursitor Alliance, and CHLP has an option
to sell its minority interest to the Partnership for cash, Units, or a
combination thereof with a value of not less than $10.0 million or more
than $37.0 million ("Buyout Price"). The Buyout Price will be determined
based on the amount of global asset allocation investment advisory revenues
earned by Cursitor Alliance during a twelve month period ending on the
February 28th preceding the date either option is exercised. Due to the
continuing decline in Cursitor Alliance revenues, management of the
Partnership believes that the Buyout Price for the minority interest will
be $10.0 million, which will be substantially higher than its fair value.
Accordingly, the Partnership recorded a $10.0 million provision for the
Buyout Price in the first quarter of 1998.
On July 25, 1995, a Consolidated and Supplemental Class Action Complaint
("Complaint") was filed against Alliance North American Government Income
Trust, Inc. (the "Fund"), the Partnership and certain other defendants
affiliated with the Partnership alleging violations of federal securities
laws, fraud and breach of fiduciary duty in connection with the Fund's
investments in Mexican and Argentine securities. The Complaint, which
sought certification of a plaintiff class of persons who purchased or
6
owned Class A, B or C shares of the Fund from March 27, 1992 through
December 23, 1994, sought an unspecified amount of damages, costs,
attorneys' fees and punitive damages. The principal allegations were that
the Fund purchased debt securities issued by the Mexican and Argentine
governments in amounts that were not permitted by the Fund's investment
objective, and that there was no shareholder vote to change the investment
objective to permit purchases in such amounts. The Complaint further
alleged that the decline in the value of the Mexican and Argentine
securities held by the Fund caused the Fund's net asset value to decline to
the detriment of the Fund's shareholders.
On September 26, 1996, the United States District Court for the Southern
District of New York granted the defendants' motion to dismiss all counts
of the Complaint ("First Decision"). On October 11, 1996, plaintiffs filed
a motion for reconsideration of the First Decision. On November 25, 1996,
the District Court denied plaintiffs' motion for reconsideration of the
First Decision. On October 29, 1997, the United States Court of Appeals
for the Second Circuit issued an order granting defendants' motion to
strike and dismissing plaintiffs' appeal of the First Decision.
On October 29, 1996, plaintiffs filed a motion for leave to file an amended
complaint. The principal allegations of the proposed amended complaint are
that (i) the Fund misrepresented its ability to hedge against the risks of
investing in foreign securities, (ii) the Fund did not properly disclose
that it planned to invest in mortgage-backed derivative securities, and
(iii) two advertisements used by the Fund misrepresented the risks of
investing in the Fund. On July 15, 1997, the District Court denied
plaintiffs' motion for leave to file an amended complaint and ordered that
the case be dismissed ("Second Decision"). The plaintiffs have appealed
the Second Decision to the United States Court of Appeals for the Second
Circuit.
While the ultimate outcome of this matter cannot be determined at this
time, management of the Partnership does not expect that it will have a
material adverse effect on the Partnership's results of operations or
financial condition.
5. INCOME TAXES
The Partnership is a publicly traded partnership for Federal income tax
purposes and, accordingly, is not subject to Federal and state corporate
income taxes. However, the Partnership is subject to the New York City
unincorporated business tax and, effective January 1, 1998, to a 3.5%
Federal tax on partnership gross income from the active conduct of a trade
or business. Domestic corporate subsidiaries of the Partnership, which are
subject to Federal, state and local income taxes, file a consolidated
Federal income tax return and separate state and local income tax returns.
Foreign corporate subsidiaries are generally subject to taxes in the
foreign jurisdictions where they are located.
6. NET INCOME PER UNIT
Basic net income per Unit is derived by reducing net income for each period
by 1% for the general partnership interest held by the General Partner and
dividing the remaining 99% by the weighted average number of Units
outstanding and Units issuable upon conversion of the Class A Limited
Partnership Interest during each period. Diluted net income per Unit is
derived by reducing net income for each period by 1% for the general
partnership interest held by the General Partner and dividing the remaining
99% by the weighted average number of Units outstanding, Unit equivalents
and Units issuable upon conversion of the Class A Limited Partnership
Interest during each period. The aggregate weighted average number of
Units outstanding used in computing basic net income per Unit was
169,301,000 and 167,937,000 for the three months ended March 31, 1998 and
1997, respectively. The aggregate weighted average number of Units
outstanding used in computing diluted net income per Unit was 174,511,000
and 171,010,000 for the three months ended March 31, 1998 and 1997,
respectively.
7
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes were as follows (in thousands):
Three Months Ended
March 31,
------------------
1998 1997
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Interest. . . . . . . . . . . $1,754 $ 165
Income taxes. . . . . . . . . 3,935 2,654
8. ACCOUNTING PRONOUNCEMENTS
On January 1, 1998, the Partnership adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), "REPORTING COMPREHENSIVE INCOME"
which establishes the disclosure requirements for reporting
comprehensive income in an entity's financial statements. Total
comprehensive income is reported in the condensed consolidated statements
of changes in partners' capital and includes net income, unrealized gains
and losses on investments and foreign currency translation adjustments.
In March 1998, the AICPA issued Statement of Position 98-1 ("SOP 98-1"),
"ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR
INTERNAL USE". SOP 98-1 requires capitalization of external and certain
internal costs incurred to obtain or develop internal-use computer software
during the application development stage. The Partnership adopted the
provisions of SOP 98-1 effective January 1, 1998. The adoption of SOP 98-1
did not have a material impact on the Partnership's consolidated financial
statements. Prior to adopting SOP 98-1, software development costs were
generally expensed as incurred. Capitalized internal-use software is
amortized on a straight-line basis over the estimated useful life of
the software.
9. SUBSEQUENT EVENT
On April 30, 1998, the Finance Committee of the Board of Directors of the
General Partner declared a distribution of $65,054,000 or $0.38 per Unit
representing the Available Cash Flow (as defined in the Partnership
Agreement) of the Partnership for the three months ended March 31, 1998.
The distribution is payable on May 18, 1998 to holders of record on
May 11, 1998.
8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Alliance Capital Management L.P. (the "Partnership") offers a broad range of
investment management products and services to meet the varied needs and
objectives of individual and institutional investors. The Partnership derives
substantially all of its revenues and net income from fees received for
providing: (a) investment advisory, distribution and related services to the
Alliance mutual funds, (b) investment advisory services to affiliated clients
including The Equitable Life Assurance Society of the United States ("ELAS"), a
wholly-owned subsidiary of The Equitable Companies Incorporated ("Equitable"),
and certain other Equitable affiliates and (c) investment advisory services to
separately managed accounts for unaffiliated institutional investors and high
net-worth individuals ("third party clients"). The Alliance mutual funds
include a broad range of open-end and closed-end mutual funds ("mutual funds"),
variable life insurance and annuity products, including The Hudson River Trust
("HRT"), and cash management products, principally money market funds. Mutual
funds also include structured products and hedge funds.
ASSETS UNDER MANAGEMENT(1)
(Dollars in billions) 3/31/98 3/31/97 $ Change % Change
- --------------------------------------------------------------------------------
Alliance mutual funds:
Mutual funds $ 47.5 $ 28.4 $19.1 67.3%
Cash management products 23.2 19.9 3.3 16.6
Variable products 27.5 17.4 10.1 58.0
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98.2 65.7 32.5 49.5
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Separately managed accounts:
Active equity & balanced 78.3 52.5 25.8 49.1
Active fixed 43.7 38.7 5.0 12.9
Index 25.3 18.9 6.4 33.9
Asset allocation 2.5 6.2 (3.7) (59.7)
- --------------------------------------------------------------------------------
149.8 116.3 33.5 28.8
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Total $248.0 $182.0 $66.0 36.3%
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(1)Includes 100% of the mutual fund and separately managed account assets under
management of unconsolidated joint venture subsidiaries of $0.9 billion and $0.4
billion, respectively, at March 31, 1998.
AVERAGE ASSETS UNDER MANAGEMENT(1)
Three months ended
(Dollars in billions) 3/31/98 3/31/97 % Change
- --------------------------------------------------------------------------------
Alliance mutual funds $ 90.3 $ 65.3 38.3%
Separately managed accounts:
Affiliated clients 29.6 26.7 10.9
Third party clients 113.0 92.9 21.6
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Total $232.9 $184.9 26.0%
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(1)Includes mutual fund and separately managed account assets under management
of unconsolidated joint venture subsidiaries.
Assets under management at March 31, 1998 were $248.0 billion, an increase of
$66.0 billion or 36.3% from March 31, 1997 and an increase of $29.4 billion or
13.4% from December 31, 1997. Alliance mutual fund assets under management at
March 31, 1998 were $98.2 billion, an increase of $32.5 billion or 49.5% from
March 31, 1997, due principally to market appreciation of $15.4 billion and net
sales of Alliance mutual fund shares of $17.5 billion. Separately managed
account assets under management at March 31, 1998 were $149.8 billion, an
increase of $33.5 billion or 28.8% from March 31, 1997. This increase was
primarily due to market appreciation of $35.7 billion and net asset additions to
affiliated client accounts of $2.1 billion, offset partially by net third party
client account terminations and asset withdrawals of $4.7 billion, primarily
global asset allocation accounts.
9
MATERIAL CHANGES IN RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
(Dollars & Units in millions, Three months ended
except per Unit amounts) 3/31/98 3/31/97 % Change
- --------------------------------------------------------------------------------
Net income $69.0 $53.3 29.5%
Net income per Unit(1):
Basic $0.40 $0.31 29.0
Diluted $0.39 $0.31 25.8
Weighted average number of Units outstanding(1):
Basic 169.3 167.9 0.8
Diluted 174.5 171.0 2.0
Operating margin 26.0% 26.2% --
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(1)Unit and per Unit amounts have been restated to reflect the two-for-one Unit
split paid to Unitholders of record as of March 11, 1998.
REVENUES
Three months ended
(Dollars in millions) 3/31/98 3/31/97 % Change
- --------------------------------------------------------------------------------
Investment advisory and services fees:
Alliance mutual funds $142.5 $ 86.0 65.7%
Separately managed accounts:
Affiliated clients 13.4 12.6 6.3
Third party clients 79.5 58.5 35.9
Distribution plan fees from Alliance mutual funds 65.3 47.2 38.3
Shareholder servicing and administration fees 13.2 12.8 3.1
Other revenues 2.1 2.2 (4.5)
- --------------------------------------------------------------------------------
Total revenues $316.0 $219.3 44.1%
- --------------------------------------------------------------------------------
Investment advisory and services fees, the largest component of the
Partnership's revenues, are generally calculated as a small percentage of the
value of assets under management and vary with the type of account managed. Fee
income is therefore affected by changes in assets under management, including
market appreciation or depreciation, the addition of new client accounts or
client contributions of additional assets to existing accounts, withdrawals of
assets from and termination of client accounts, purchases and redemptions of
mutual fund shares, and shifts of assets between accounts or products with
different fee structures. Certain investment advisory agreements provide for
performance fees in addition to a base fee. Performance fees are earned when
investment performance exceeds a contractually agreed upon benchmark and,
accordingly, may increase the volatility of the Partnership's revenues and
earnings.
Investment advisory and services fees from Alliance mutual funds increased by
$56.5 million or 65.7% for the three months primarily as a result of a 38.3%
increase in average assets under management and a $15.8 million increase in
performance fees from certain hedge funds.
Investment advisory and services fees from affiliated clients, primarily the
General Accounts of ELAS, increased $0.8 million or 6.3% due principally to an
increase in average assets under management of 10.9%.
Investment advisory and services fees from third party clients increased $21.0
million or 35.9% due principally to higher performance fees of $13.1 million and
an increase in average assets under management of 21.6%. The increase in third
party client average assets under management was primarily a result of market
appreciation combined with net inflows into actively managed fixed income
accounts offset partially by net terminations and asset withdrawals in global
asset allocation accounts.
The Partnership's subsidiary, Alliance Fund Distributors, Inc. ("AFD"), acts as
distributor of the Alliance mutual funds and receives distribution plan fees
from those funds. Distribution plan fees increased 38.3%
10
primarily due to higher average assets under management for domestic equity and
offshore mutual fund assets under management. The increase in average assets
under management for domestic equity and offshore mutual funds is principally
due to market appreciation and net mutual fund sales, including Back-End Load
Shares under the Partnership's mutual fund distribution system described under
"Capital Resources and Liquidity".
The Partnership's subsidiaries, Alliance Fund Services, Inc. and ACM Fund
Services S.A., provide administrative and transfer agency services to the
Alliance mutual funds. Shareholder servicing and administration fees increased
3.1%, the result of an increase from March 31, 1997 in reimbursements for
accounting and legal services from Alliance mutual funds. At March 31, 1998,
the Partnership's subsidiaries serviced approximately 3.4 million shareholder
accounts.
EXPENSES
Three months ended
(Dollars in millions) 3/31/98 3/31/97 % Change
- --------------------------------------------------------------------------------
Employee compensation and benefits $ 87.8 $ 60.5 45.1%
Promotion and servicing 101.1 72.4 39.6
General and administrative 42.1 25.7 63.8
Interest 2.0 0.7 185.7
Amortization of intangible assets 0.9 2.6 (65.4)
- --------------------------------------------------------------------------------
Total expenses $233.9 $161.9 44.5%
- --------------------------------------------------------------------------------
Employee compensation and benefits increased 45.1% for the three months
primarily as a result of higher incentive compensation, attributable to higher
performance fees and operating earnings, and higher base compensation and
commissions. Base compensation increased principally due to an increase in the
number of employees from 1,520 at March 31, 1997 to 1,739 at March 31, 1998,
resulting from the expansion of the Partnership's mutual fund operations, and
increases to its technology and administrative support operations. The increase
in commissions is due primarily to higher mutual fund sales.
Promotion and servicing expenses include distribution plan payments to financial
intermediaries for distribution of the Partnership's sponsored mutual funds and
cash management services' products and amortization of deferred sales
commissions paid to financial intermediaries under the Partnership's mutual fund
distribution system described under "Capital Resources and Liquidity". Also
included in this expense category are travel and entertainment, advertising,
promotional materials and investment meetings and seminars for financial
intermediaries that distribute the Partnership's mutual fund products.
Promotion and servicing expenses increased 39.6% for the three months, primarily
due to higher distribution plan payments resulting from higher average offshore
and domestic equity mutual fund assets under management and increased
amortization of deferred sales commissions, as a result of higher sales of Back-
End Load Shares. Other promotion and servicing expenses increased due to higher
promotional expenditures incurred in connection with new promotional initiatives
to create greater investor demand for the Partnership's domestic and offshore
mutual funds.
The increase in general and administrative expenses was due principally to a
$10.0 million provision for the future acquisition of the minority interest in
Cursitor Alliance LLC (see "Capital Resources and Liquidity"). Higher systems
consulting expenses incurred in connection with Year 2000 compliance and other
technology related initiatives also contributed to the increase in general and
administrative expenses.
Interest expense was higher as a result of increases in deferred compensation
owed to employees and higher debt.
The decrease in amortization of intangible assets was due principally to the
reduction in the recorded value of the unamortized intangible assets, recorded
in connection with the acquisition of Cursitor Holdings, L.P. and Cursitor
Holdings Limited (collectively "Cursitor"), to estimated fair value at June 30,
1997.
The Partnership is a publicly traded partnership for Federal tax purposes and,
accordingly, is not subject to Federal and state corporate income taxes.
However, the Partnership is subject to the New York City
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unincorporated business tax and, effective January 1, 1998, to a 3.5% Federal
tax on partnership gross income from the active conduct of a trade or business.
Domestic subsidiaries of the Partnership are subject to Federal, state and local
income taxes. Foreign corporate subsidiaries are generally subject to taxes in
the foreign jurisdictions where they are located. Income tax expense increased
primarily as a result of the 3.5% Federal tax on partnership gross income.
CAPITAL RESOURCES AND LIQUIDITY
Partners' capital was $403.2 million at March 31, 1998, an increase of $5.1
million or 1.3% from $398.1 million at December 31, 1997. Cash flow from
operations and proceeds from borrowings have been the Partnership's principal
sources of working capital. The Partnership's cash and cash equivalents
increased by $28.2 million for the three months ended March 31, 1998. Cash
inflows included $73.7 million from operations, proceeds from borrowings net of
debt repayments of $27.9 million and $4.5 million of proceeds from options
exercised under the Partnership's Unit option plans. Cash outflows included
cash distributions to Unitholders of $70.1 million, capital expenditures of $6.0
million and net purchases of investments of $2.0 million.
Through February 28, 2006, the Partnership has an option to purchase the
minority interest held by Cursitor Holdings, L.P. ("CHLP") in Cursitor Alliance
LLC ("Cursitor Alliance"), a subsidiary of the Partnership, and CHLP has an
option to sell its minority interest to the Partnership for cash, Units, or a
combination thereof with a value of not less than $10.0 million or more than
$37.0 million ("Buyout Price"). The Buyout Price will be determined based on
the amount of global asset allocation investment advisory revenues earned by
Cursitor Alliance during a twelve month period ending on the February 28th
preceding the date either option is exercised. Due to the continuing decline in
Cursitor Alliance revenues, management of the Partnership believes that the
Buyout Price for the minority interest will be $10.0 million, which will be
substantially higher than its fair value. Accordingly, the Partnership recorded
a $10.0 million provision for the Buyout Price in the first quarter of 1998.
The Partnership's mutual fund distribution system (the "System") includes a
multi-class share structure. The System permits the Partnership's open-end
mutual funds to offer investors various options for the purchase of mutual
fund shares, including the purchase of Front-End Load Shares and Back-End
Load Shares. The Front-End Load Shares are subject to a conventional
front-end sales charge paid by investors to AFD at the time of sale. AFD in
turn compensates the financial intermediaries distributing the funds from the
front-end sales charge paid by investors. For Back-End Load Shares,
investors do not pay a front-end sales charge although, if there are
redemptions before the expiration of the minimum holding period (which ranges
from one year to four years), investors pay a contingent deferred sales
charge ("CDSC") to AFD. While AFD is obligated to compensate the financial
intermediaries at the time of the purchase of Back-End Load Shares, it
receives higher distribution fees from the funds. Payments made to financial
intermediaries in connection with the sale of Back-End Load Shares under the
System, net of CDSC received, reduced cash flow from operations by
approximately $56.3 million for the three months ended March 31, 1998.
Management of the Partnership believes AFD will recover the payments made to
financial intermediaries for the sale of Back-End Load Shares from the higher
distribution fees and CDSC it receives over periods not exceeding 5 1/2 years.
The Partnership requires financial resources to fund commissions paid to
financial intermediaries for the sale of Back-End Load Shares under the System,
to fund capital expenditures and for general working capital purposes. The
Partnership has $250 million in the aggregate available for borrowings through
its $250 million revolving credit facility and/or its $250 million commercial
paper program. The revolving credit facility provides backup liquidity for
commercial paper issued under the Partnership's commercial paper program and can
be used as a direct source of borrowing. As of March 31 1998, the Partnership
had commercial paper outstanding totaling $105.8 million and there were no
borrowings outstanding under the Partnership's revolving credit facility.
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Many computer systems and applications process transactions using two digit date
fields for the year of a transaction, rather than the full four digits. If
these systems are not modified and replaced, transactions occurring after 1999
would be processed as year "00", which could result in processing inaccuracies
and inoperability by or at the Year 2000. The Partnership utilizes a number of
significant computer systems and applications that it either has developed
internally or licensed from third-party suppliers. In addition, the Partnership
is dependent on third-party suppliers for certain systems applications and for
the electronic receipt of information critical to its business. Should the
Partnership's significant computer systems and applications or the systems of
its important third-party suppliers be unable to process date sensitive
information accurately after 1999, the ability of the Partnership to conduct its
operations and to provide its separate account clients and the Alliance mutual
funds with the required services could be significantly impaired.
The Partnership began to address the Year 2000 issue several years ago in
connection with the replacement or upgrade of certain computer systems and
applications. During 1997, the Partnership began a formal Year 2000 initiative,
which established a structured and coordinated process to deal with the Year
2000 issue. The Partnership has completed its assessment of the Year 2000
issues on its domestic and international computer systems and applications.
Currently, management of the Partnership expects that the required modifications
for the majority of its significant systems and applications will be completed
and tested by the end of 1998. Full integration testing of these systems and
testing of interfaces with third-party suppliers will continue through 1999.
The current estimate of the total cost of this initiative ranges from $35
million to $40 million. These costs consist principally of modification costs
which will be expensed as incurred. At this time, management of the Partnership
believes that the costs associated with resolving these issues will not have a
material adverse effect on the Partnership's results of operations, liquidity or
capital resources.
The Partnership's substantial equity base and access to public and private debt,
at competitive interest rates and other terms, should provide adequate liquidity
for its general business needs. Management of the Partnership believes that cash
flow from operations and the issuance of debt and Units will provide the
Partnership with the financial resources to meet its capital requirements for
mutual fund sales and its other working capital requirements.
CASH DISTRIBUTIONS
The Partnership is required to distribute all of its Available Cash Flow, as
defined in the Partnership Agreement, to the General Partner and Unitholders
(including the holder of the Class A Limited Partnership Interest based on Units
issuable upon conversion of the Class A Limited Partnership Interest). The
Partnership's Available Cash Flow and Distributions per Unit (adjusted for the
two-for-one Unit split) were as follows:
Three months ended
3/31/98 3/31/97
- --------------------------------------------------------------------------------
Available Cash Flow (in thousands) $65,054 $50,988
Distributions Per Unit $ 0.38 $ 0.30
- --------------------------------------------------------------------------------
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FORWARD-LOOKING STATEMENTS
Certain statements provided by the Partnership in this report are "forward-
looking statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are subject to risks,
uncertainties and other factors which could cause actual results to differ
materially from future results expressed or implied by such forward-looking
statements. The most significant of such factors include, but are not limited
to, the following: the performance of financial markets, the investment
performance of the Partnership's sponsored investment products and separately
managed accounts, general economic conditions, future acquisitions, competitive
conditions and government regulations, including changes in tax rates. The
Partnership cautions readers to carefully consider such factors. Further, such
forward-looking statements speak only as of the date on which such statements
are made; the Partnership undertakes no obligation to update any forward-looking
statements to reflect events or circumstances after the date of such statements.
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Part II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There have been no material developments in the legal proceeding
reported in the Alliance Capital Management L.P. Form 10-K for
the year ended December 31, 1997.
Item 2. CHANGES IN SECURITIES
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE
OF SECURITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALLIANCE CAPITAL MANAGEMENT L.P.
Dated: May 13, 1998 By: Alliance Capital Management
Corporation, its General Partner
By: /s/ Robert H. Joseph, Jr.
-------------------------------
Robert H. Joseph, Jr.
Senior Vice President &
Chief Financial Officer
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