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 June 30, 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
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The number of Units representing assignments of beneficial ownership of Limited
Partnership Interests outstanding as of June 30, 1998 was 170,151,303 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 (Loss) 3
Condensed Consolidated Statements of Changes in
Partners' Capital 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-16
Part II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS 17
Item 2. CHANGES IN SECURITIES 17
Item 3. DEFAULTS UPON SENIOR SECURITIES 17
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 17
Item 5. OTHER INFORMATION 17
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 17
1
Part I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ALLIANCE CAPITAL MANAGEMENT L.P.
Condensed Consolidated Statements of Financial Condition
(in thousands)
ASSETS 6/30/98 12/31/97
---------- --------
(unaudited)
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . $ 164,889 $ 63,761
Receivable from brokers and dealers for sale
of shares of Alliance mutual funds. . . . . . . . . . . . . . . . . 112,465 68,701
Fees receivable:
Alliance mutual funds . . . . . . . . . . . . . . . . . . . . . . . 74,385 57,583
Separately managed accounts:
Affiliated clients. . . . . . . . . . . . . . . . . . . . . . . . 5,094 8,357
Third party clients . . . . . . . . . . . . . . . . . . . . . . . 84,258 73,774
Investments, available-for-sale. . . . . . . . . . . . . . . . . . . . 64,635 47,097
Furniture, equipment and leasehold improvements, net . . . . . . . . . 89,226 80,477
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . 95,479 97,398
Deferred sales commissions, net. . . . . . . . . . . . . . . . . . . . 324,721 251,632
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55,766 35,680
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Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,070,918 $784,460
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LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Payable to Alliance mutual funds for share purchases. . . . . . . . $ 162,092 $ 96,995
Accounts payable and accrued expenses . . . . . . . . . . . . . . . 168,942 119,887
Accrued compensation and benefits . . . . . . . . . . . . . . . . . 157,680 74,880
Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162,908 90,416
Minority interests in consolidated subsidiaries . . . . . . . . . . 2,388 4,231
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Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . 654,010 386,409
Partners' capital. . . . . . . . . . . . . . . . . . . . . . . . . . . 416,908 398,051
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Total liabilities and partners' capital . . . . . . . . . . . . . $1,070,918 $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 (Loss)
(unaudited)
(in thousands, except per Unit amounts)
Three Months Ended Six Months Ended
----------------------- -----------------------
6/30/98 6/30/97 6/30/98 6/30/97
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Revenues:
Investment advisory and services fees:
Alliance mutual funds . . . . . . . . . . . . . . . . . . . . . . $145,174 $ 86,747 $287,705 $172,741
Separately managed accounts:
Affiliated clients. . . . . . . . . . . . . . . . . . . . . . . 16,780 13,290 30,186 25,844
Third party clients . . . . . . . . . . . . . . . . . . . . . . 75,845 60,568 155,369 119,030
Distribution plan fees from Alliance mutual funds . . . . . . . . . 75,018 49,306 140,308 96,553
Shareholder servicing and administration fees . . . . . . . . . . . 15,456 13,526 28,600 26,291
Other revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,247 1,899 7,369 4,128
-------- -------- -------- --------
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 333,520 225,336 649,537 444,587
-------- -------- -------- --------
Expenses:
Employee compensation and benefits. . . . . . . . . . . . . . . . . 83,603 62,336 171,430 122,838
Promotion and servicing:
Distribution plan payments to financial intermediaries:
Affiliated. . . . . . . . . . . . . . . . . . . . . . . . . . . 19,272 14,956 36,726 24,041
Third party . . . . . . . . . . . . . . . . . . . . . . . . . . 46,664 25,520 86,128 58,234
Amortization of deferred sales commissions. . . . . . . . . . . . 25,649 17,647 48,496 33,385
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,555 15,044 44,869 29,849
General and administrative. . . . . . . . . . . . . . . . . . . . . 41,258 25,550 83,397 51,296
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,187 619 4,154 1,292
Amortization of intangible assets . . . . . . . . . . . . . . . . . 1,039 2,621 1,920 5,243
Reduction in recorded value of intangible assets. . . . . . . . . . - 120,900 - 120,900
-------- -------- -------- --------
243,227 285,193 477,120 447,078
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Income (loss) before income taxes. . . . . . . . . . . . . . . . . . . 90,293 (59,857) 172,417 (2,491)
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,452 4,265 27,592 8,282
-------- -------- -------- --------
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,841 $(64,122) $144,825 $(10,773)
-------- -------- -------- --------
-------- -------- -------- --------
Net income (loss) per Unit:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.44 $ (0.38) $ 0.85 $ (0.06)
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-------- -------- -------- --------
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.43 $ (0.38) $ 0.82 $ (0.06)
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-------- -------- -------- --------
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.
See accompanying notes to condensed consolidated financial statements.
3
ALLIANCE CAPITAL MANAGEMENT L.P.
Condensed Consolidated Statements of
Changes in Partners' Capital and Comprehensive Income
(unaudited)
(in thousands)
Three Months Ended Six Months Ended
----------------------- -----------------------
6/30/98 6/30/97 6/30/98 6/30/97
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Partners' capital - beginning of period. . . . . . . . . . . . . . . . $403,202 $483,301 $398,051 $476,020
Comprehensive income:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . 75,841 (64,122) 144,825 (10,773)
Unrealized gain on investments. . . . . . . . . . . . . . . . . 21 664 885 646
Foreign currency translation adjustment . . . . . . . . . . . . - 24 - 24
-------- -------- -------- --------
Total comprehensive income. . . . . . . . . . . . . . . . . . . 75,862 (63,434) 145,710 (10,103)
Capital contribution received from Alliance Capital
Management Corporation. . . . . . . . . . . . . . . . . . . . . . 860 898 1,720 1,795
Cash distributions to partners. . . . . . . . . . . . . . . . . . . (65,095) (50,988) (135,173) (101,001)
Proceeds from Unit options exercised. . . . . . . . . . . . . . . . 2,079 2,219 6,600 5,285
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Partners' capital - end of period. . . . . . . . . . . . . . . . . . . $416,908 $371,996 $416,908 $371,996
-------- -------- -------- --------
-------- -------- -------- --------
See accompanying notes to condensed consolidated financial statements.
4
ALLIANCE CAPITAL MANAGEMENT L.P.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
Six Months Ended
------------------------
6/30/98 6/30/97
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Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 144,825 $ (10,773)
Adjustments to reconcile net income (loss) to net cash provided
from operating activities:
Amortization and depreciation . . . . . . . . . . . . . . . . . . 58,295 44,043
Reduction in recorded value of intangible assets. . . . . . . . . - 120,900
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,945 2,362
Changes in assets and liabilities:
(Increase) in receivable from brokers and dealers for sale
of shares of Alliance mutual funds . . . . . . . . . . . . . (43,764) (21,947)
(Increase) in fees receivable from Alliance mutual funds,
affiliated clients and third party clients . . . . . . . . . (24,023) (6,978)
(Increase) in deferred sales commissions. . . . . . . . . . . . (121,585) (64,011)
(Increase) in other assets. . . . . . . . . . . . . . . . . . . (19,987) (6,239)
Increase in payable to Alliance mutual funds for share
purchases. . . . . . . . . . . . . . . . . . . . . . . . . . 65,097 21,737
Increase in accounts payable and accrued expenses . . . . . . . 47,155 4,580
Increase in accrued compensation and benefits, less
deferred compensation . . . . . . . . . . . . . . . . . . . . 79,599 40,106
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Net cash provided from operating activities. . . . . . . . 191,557 123,780
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Cash flows from investing activities:
Purchase of investments . . . . . . . . . . . . . . . . . . . . . . (211,660) (144,390)
Proceeds from sale of investments . . . . . . . . . . . . . . . . . 195,007 163,621
Additions to furniture, equipment and leasehold
improvements, net . . . . . . . . . . . . . . . . . . . . . . . . (16,653) (20,354)
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Net cash used in investing activities . . . . . . . . . . (33,306) (1,123)
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Cash flows from financing activities:
Proceeds from borrowings. . . . . . . . . . . . . . . . . . . . . 434,605 -
Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . (363,375) (5,396)
Distributions to partners . . . . . . . . . . . . . . . . . . . . . (135,173) (101,001)
Capital contribution received from Alliance Capital Management
Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 295
Unit options exercised. . . . . . . . . . . . . . . . . . . . . . . 6,600 5,285
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Net cash used in financing activities . . . . . . . . . . (57,123) (100,817)
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Effect of exchange rate changes on cash and cash equivalents . . . . . - 24
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Net increase in cash and cash equivalents. . . . . . . . . . . . . . . 101,128 21,864
Cash and cash equivalents at beginning of period . . . . . . . . . . . 63,761 57,441
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Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 164,889 $ 79,305
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See accompanying notes to condensed consolidated financial statements.
5
ALLIANCE CAPITAL MANAGEMENT L.P.
Notes to Condensed Consolidated Financial Statements
June 30, 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 June 30, 1998, (b) results of operations for the three and six
months ended June 30, 1998 and 1997 and (c) cash flows for the six months
ended June 30, 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, paid 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 mutual
fund shareholders upon the redemption of their shares. Contingent deferred
sales charges reduce unamortized deferred sales commissions when received.
4. CLASS A LIMITED PARTNERSHIP INTEREST
In connection with the purchase in July 1993 of the business of Equitable
Capital Management Corporation ("ECMC"), a wholly-owned subsidiary of The
Equitable Life Assurance Society of the United States ("ELAS"), the
Partnership issued to ECMC a newly created Class A Limited Partnership
Interest ("Class A Interest") convertible initially into 200,000 Units.
During 1998, the amount of Units issuable upon the conversion of the Class
A Interest was increased by 435,115 Units to 1,537,905 Units. No
additional Units will be issuable upon conversion of the Class A Interest.
The Class A Interest was automatically converted into 1,537,905 Units on
June 30, 1998.
5. INTEREST RATE CAP AGREEMENT
During the second quarter of 1998, the Partnership entered into a
three-year interest rate cap agreement with a major U.S. commercial bank
effective on December 17, 1998. The sole purpose of this agreement is to
reduce the Partnership's exposure to interest rate risk by effectively
placing an interest rate ceiling or "cap" of 6% per annum on interest
payable on up to $100 million of the debt outstanding under the
Partnership's commercial paper program and revolving credit facility.
The $100 million notional principal amount does not represent the
Partnership's exposure to credit risk, but is only a basis to determine the
payment obligation of the counterparty. During the term of the
6
interest rate cap, the Partnership will receive monthly payments from the
major U.S. commercial bank counterparty based on the excess, if any, of the
stated reference rate over 6% times the notional amount. Should the
counterparty fail to perform its obligations under the agreement, the
Partnership's borrowing costs on the first $100 million debt outstanding
could exceed 6%. However, at this time, the Partnership does not have any
reason to believe that the counterparty would fail to perform.
The premium paid to the counterparty in connection with the agreement is
recorded in other assets in the consolidated statement of financial
condition and will be amortized over the three year period for which the
cap is effective.
6. 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 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
7
("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.
7. REDUCTION IN RECORDED VALUE OF INTANGIBLE ASSETS
The Partnership evaluates impairment of its intangible assets by comparing
the undiscounted cash flows expected to be realized from those assets to
their recorded values pursuant to Statement of Financial Accounting
Standards No. 121 (SFAS 121) "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF". If the expected
future cash flows are less than the carrying value of intangible assets,
the Partnership recognizes an impairment loss for the difference between
the carrying amount and the estimated fair value of those intangible
assets.
During the second quarter of 1997, management of the Partnership determined
that the value of the intangible assets recorded in connection with the
1996 acquisition of the assets of Cursitor Holdings, L.P. and the stock of
Cursitor Holdings Limited (collectively "Cursitor") was impaired and
reduced the unamortized value of the intangible assets by $120.9 million.
8. INCOME TAXES
The Partnership is a publicly traded partnership for Federal income tax
purposes and, accordingly, is not subject to Federal or 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.
9. 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 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 Interest during each period. The aggregate
weighted average number of Units outstanding used in computing basic net
income per Unit was 169,914,000 and 168,339,000 for the three months ended
June 30, 1998 and 1997, respectively, and 169,609,000 and 168,139,000 for
six months ended June 30, 1998 and 1997, respectively. The aggregate
weighted average number of Units outstanding used in computing diluted net
income per Unit was 175,358,000 and 170,843,000 for the three months ended
June 30, 1998 and 1997, respectively and 174,949,000 and 170,890,000 for
the six months ended June 30, 1998 and 1997, respectively.
8
10. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes were as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ----------------------
1998 1997 1998 1997
------ ------ ------- ------
Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 764 $ 81 $ 2,518 $ 246
Income taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . 6,246 3,913 10,181 6,566
11. 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. Capitalized internal-use
software is amortized on a straight-line basis over the lesser of the
estimated useful life of the software or six years. The adoption of SOP
98-1 did not have a material impact on the Partnership's consolidated
financial statements.
12. SUBSEQUENT EVENTS
On July 30, 1998, the Board of Directors of the General Partner declared a
distribution of $72,185,000 or $0.42 per Unit representing the Available
Cash Flow (as defined in the Partnership Agreement) of the Partnership for
the three months ended June 30, 1998. The distribution is payable on
August 17, 1998 to holders of record on August 10, 1998.
On July 20, 1998, the Partnership entered into a new $425 million five year
revolving credit facility with a group of commercial banks which replaced
its existing $250 million revolving credit facility. Borrowings under the
facility and the Partnership's commercial paper program may not exceed $425
million in the aggregate. The new revolving credit facility, the terms of
which are generally similar to the old facility, will be used to provide
back up liquidity for commercial paper issued under the Partnership's
commercial paper program, to fund commission payments to financial
intermediaries for the sale of back-end load shares under the Partnership's
mutual fund distribution system and for general working capital purposes.
The new facility contains covenants which require the Partnership to, among
other things, meet certain financial ratios.
9
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 include certain structured products and hedge funds.
ASSETS UNDER MANAGEMENT(1)
(Dollars in billions) 6/30/98 6/30/97 $ Change % Change
- ----------------------------------------------------------------------------------------------------------------------------------
Alliance mutual funds:
Mutual funds $ 53.5 $ 32.5 $21.0 64.6%
Variable products 28.9 20.5 8.4 41.0
Cash management products 24.7 18.7 6.0 32.1
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107.1 71.7 35.4 49.4
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Separately managed accounts:
Active equity & balanced 83.0 61.4 21.6 35.2
Active fixed 44.8 39.2 5.6 14.3
Index 25.5 21.6 3.9 18.1
Asset allocation 2.1 5.4 (3.3) (61.1)
- ----------------------------------------------------------------------------------------------------------------------------------
155.4 127.6 27.8 21.8
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Total $262.5 $199.3 $63.2 31.7%
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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 June 30, 1998.
AVERAGE ASSETS UNDER MANAGEMENT(1)
Three months ended Six months ended
(Dollars in billions) 6/30/98 6/30/97 %Change 6/30/98 6/30/97 % Change
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Alliance mutual funds $101.6 $ 67.9 49.6% $95.7 $ 66.8 43.3%
Separately managed accounts:
Affiliated clients 29.8 27.6 8.0 29.6 27.1 9.2
Third party clients 122.7 94.4 30.0 117.5 94.3 24.6
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Total $254.1 $189.9 33.8% $242.8 $188.2 29.0%
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(1)Includes mutual fund and separately managed account assets under management
of unconsolidated joint venture subsidiaries.
Assets under management at June 30, 1998 were $262.5 billion, an increase of
$63.2 billion or 31.7% from June 30, 1997 and an increase of $43.8 billion or
20.1% from December 31, 1997. Alliance mutual fund assets under management at
June 30, 1998 were $107.1 billion, an increase of $35.4 billion or 49.4% from
June 30, 1997, due principally to market appreciation of $11.3 billion and net
sales of Alliance mutual fund shares of $24.7 billion. Separately managed
account assets under management at June 30, 1998 for third-party clients and
affiliated clients were $155.4 billion, an increase of $27.8 billion or 21.8%
from June 30, 1997. This increase was primarily due to market appreciation of
$27.4 billion and net asset additions to affiliated client accounts of $1.4
billion, offset partially by net third party client account terminations and
asset withdrawals of $1.5 billion, primarily global asset allocation accounts.
10
MATERIAL CHANGES IN RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
(Dollars & Units in millions, Three months ended Six months ended
except per Unit amounts) 6/30/98 6/30/97 % Change 6/30/98 6/30/97 % Change
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Net income (loss) $75.8 $(64.1) 218.3% $144.8 $(10.8) 1,440.7%
Net income (loss) per Unit(1):
Basic $0.44 $(0.38) 215.8 $ 0.85 $(0.06) 1,516.7
Diluted $0.43 $(0.38) 213.2 $ 0.82 $(0.06) 1,466.7
Net income before reduction in value of
intangible assets $75.8 $ 56.8 33.5 $144.8 $110.1 31.5
Net income per Unit before reduction in
value of intangible assets - Diluted(1) $0.43 $ 0.33 30.3 $ 0.82 $ 0.64 28.1
Weighted average number of Units outstanding(1):
Basic 169.9 168.3 1.0 169.6 168.1 0.9
Diluted 175.4 170.8 2.7 174.9 170.9 2.3
Operating margin(2) 27.1% 27.1% -- 26.5% 26.6% --
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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.
(2) Excludes the reduction in recorded value of intangible assets.
REVENUES
Three months ended Six months ended
(Dollars in millions) 6/30/98 6/30/97 % Change 6/30/98 6/30/97 % Change
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Investment advisory and services fees:
Alliance mutual funds $145.2 $ 86.7 67.5% $287.7 $ 172.7 66.6%
Separately managed accounts:
Affiliated clients 16.8 13.3 26.3 30.1 25.8 16.7
Third party clients 75.8 60.6 25.1 155.4 119.1 30.5
Distribution plan fees from Alliance mutual funds 75.0 49.3 52.1 140.3 96.6 45.2
Shareholder servicing and administration fees 15.5 13.5 14.8 28.6 26.3 8.7
Other revenues 5.2 1.9 173.7 7.4 4.1 80.5
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Total revenues $333.5 $225.3 48.0% $649.5 $444.6 46.1%
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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 service fees from Alliance mutual funds increased by
$58.5 million or 67.5% for the three months primarily as a result of a 49.6%
increase in average assets under management. Investment advisory and services
fees from Alliance mutual funds increased by $115.0 million or 66.6% for the six
months primarily as a result of a 43.3% increase in average assets under
management and increases in performance fees from certain hedge funds.
Investment advisory and services fees from affiliated clients, primarily the
General Accounts of ELAS, increased $3.5 million or 26.3% and $4.3 million or
16.7% for the three months and six months ended June 30, 1998, respectively, due
principally to an increase in average assets under management of 8.0% for the
11
three months and 9.2% for the six months ended June 30, 1998, respectively.
Increases in performance fees of $2.3 million for the three months and $2.0
million for the six months also contributed to the increase in revenues.
Investment advisory and services fees from third party clients increased $15.2
million or 25.1% for the three months and $36.3 million or 30.5% for the six
months due principally to higher performance fees and an increase in average
assets under management of 30.0% for the three months and 24.6% for the six
months ended June 30, 1998, respectively. 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. Higher performance fees of $15.2 million, primarily from hedge funds
and certain structured products, also contributed to the increase in revenues
for the six months.
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 52.1% for the three months
and 45.2% for the six months primarily due to higher average assets under
management for domestic equity and offshore fixed income 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
14.8% for the three months and 8.7% for the six months, due to increases in the
number of mutual fund shareholder accounts serviced. At June 30, 1998, the
Partnership's subsidiaries serviced approximately 3.5 million shareholder
accounts.
Other revenues, consisting principally of interest, dividends and commissions,
increased $3.3 million for the three months and six months due principally to
the Partnership's hedge fund investments.
EXPENSES
Three months ended Six months ended
(Dollars in millions) 6/30/98 6/30/97 % Change 6/30/98 6/30/97 % Change
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Employee compensation and benefits $ 83.6 $ 62.3 34.2% $171.4 $122.8 39.6%
Promotion and servicing 115.1 73.2 57.2 216.2 145.6 48.5
General and administrative 41.3 25.6 61.3 83.4 51.3 62.6
Interest 2.2 0.6 266.7 4.2 1.3 223.1
Amortization of intangible assets 1.0 2.6 (61.5) 1.9 5.2 (63.5)
Reduction in recorded value
of intangible assets -- 120.9 (100.0) -- 120.9 (100.0)
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Total expenses $243.2 $285.2 (14.7)% $477.1 $447.1 6.7%
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Employee compensation and benefits increased 34.2% for the three months and
39.6% for the six months primarily as a result of higher incentive compensation,
attributable to higher performance fees and operating earnings, higher
commissions and higher base compensation. The increase in commissions is due
primarily to higher mutual fund sales. Base compensation increased principally
due to an increase in the number of employees from 1,622 at June 30, 1997 to
1,902 at June 30, 1998, resulting primarily from the expansion of the
Partnership's mutual fund servicing capabilities and new technology initiatives.
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
12
servicing expenses increased 57.2% for the three months and 48.5% for the six
months, primarily due to higher distribution plan payments resulting from higher
average offshore, cash management and domestic equity mutual fund assets under
management and increased amortization of deferred sales commissions, due to
increased sales of Back-End Load Shares. Other promotion and servicing expenses
increased due to higher travel and entertainment expenses and higher promotional
expenditures incurred in connection with promotional initiatives for the
Partnership's domestic and offshore mutual funds.
The increase in general and administrative expenses for the six months 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, Euro conversion and other technology related initiatives
contributed to the increase in general and administrative expenses for both the
three and six months ended June 30, 1998.
Interest expense was higher as a result of deferred compensation awarded to
employees during December 1997 and higher debt.
The decrease in amortization of intangible assets was due principally to the
reduction in the recorded value of intangible assets, resulting from the
acquisition of Cursitor Holdings, L.P. and Cursitor Holdings Limited
(collectively "Cursitor"), to estimated fair value at June 30, 1997. The
Partnership recorded a noncash charge of $120.9 million during the second
quarter of 1997 which reflected the impairment of these intangible assets due to
the decline in Cursitor's assets under management and its reduced profitability.
The Partnership is a publicly traded partnership for Federal income tax purposes
and, accordingly, is not subject to Federal or state corporate income taxes.
However, the Partnership is subject to the New York City unincorporated business
tax and, effective January 1, 1998, to a new 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 new 3.5% Federal tax and higher pre-tax income.
CAPITAL RESOURCES AND LIQUIDITY
Partners' capital was $416.9 million at June 30, 1998, an increase of $18.8
million or 4.7% 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 $101.1 million for the six months ended June 30, 1998. Cash
inflows included $191.6 million from operations, proceeds from borrowings net of
debt repayments of $71.2 million and $6.6 million of proceeds from options
exercised under the Partnership's Unit option plans. Cash outflows included
cash distributions to Unitholders of $135.2 million, capital expenditures of
$16.7 million and net purchases of investments of $16.7 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.
13
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. 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 $121.6 million for the six months ended June 30, 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. During
July 1998, the Partnership entered into a new $425 million five year revolving
credit facility with a group of commercial banks. The Partnership also intends
to increase the size of its commercial paper program from $250 million to $425
million. Borrowings from these two sources may not exceed $425 million in the
aggregate. 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 June 30 1998, the Partnership
had commercial paper outstanding totaling $149.9 million and there were no
borrowings outstanding under the Partnership's revolving credit facility.
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 "1900", 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 that will be in use
on January 1, 2000, 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 this issue will not have a material adverse effect on the
Partnership's results of operations, liquidity or capital resources.
14
The European Economic and Monetary Union has established a single currency that
will replace the national currency of certain European countries effective
January 1, 1999. Each participating country's currency also will be legal
tender during a transition period from January 1, 1999 until January 1, 2002,
after which the only currency used by the participating European countries will
be the Euro Currency (the "Euro"). Should the Partnership's significant computer
systems and applications or the systems of its important vendors be unable to
process Euro sensitive information accurately in 1999, the ability of the
Partnership to conduct its operations could be significantly impaired.
The Partnership has established a project team to assess changes that will be
required in connection with the introduction of the Euro. The Partnership's
project team has assessed all systems, including those developed or managed
internally, as well as those provided by vendors, in order to determine the
modifications that will be required in order to process accurately transactions
denominated in Euro after 1998. At this time, management of the Partnership
expects that the required modifications for the introduction of the Euro will be
completed and tested before the end of 1998. The current estimate of the cost
of this initiative ranges from $3 to $4 million. The cost, which consists
principally of modification costs, will be expensed as incurred. At this time,
management of the Partnership believes that the costs associated with resolving
this issue 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.
NEW ACCOUNTING PRONOUNCEMENT
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES" ("SFAS 133"). Under this Statement, an entity is
required to recognize derivative instruments as either assets or liabilities in
the statement of financial position and measure those instruments at fair value.
In addition, any entity that elects to apply hedge accounting is required to
establish at the inception of the hedge the method it will use for assessing
effectiveness of the hedging derivative and the measurement approach for
determining the ineffective aspect of the hedge. This Statement is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999.
Management of the Partnership does not believe that the adoption of the
Statement will have a material effect on its results of operations, liquidity,
or capital resources.
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 Interest based on Units issuable upon
conversion of the Class A 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 Six months ended
6/30/98 6/30/97 6/30/98 6/30/97
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Available Cash Flow (in thousands) $72,185 $54,503 $137,279 $105,492
Distributions Per Unit $ 0.42 $ 0.32 $ 0.80 $ 0.62
- ----------------------------------------------------------------------------------------------------------------------------------
15
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.
16
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.
17
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: August 14, 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
18