<PAGE>
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, 1999
--------------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------
Commission File No. 1-9818
------------------------------------------------------
ALLIANCE CAPITAL MANAGEMENT L.P.
- --------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3434400
- ------------------------------- -----------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1345 Avenue of the Americas, New York, NY 10105
- --------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(212)969-1000
- --------------------------------------------------------------------------
(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, 1999 was 170,685,329 Units.
<PAGE>
ALLIANCE CAPITAL MANAGEMENT L.P.
Index to Form 10-Q
Part I
FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
Item 1. FINANCIAL STATEMENTS ----
<S> <C>
Condensed Consolidated Statements of Financial Condition 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statements of Changes in
Partners' Capital and Comprehensive Income 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5-7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8-16
</TABLE>
Part II
OTHER INFORMATION
<TABLE>
<S> <C> <C>
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
</TABLE>
<PAGE>
Part I
FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ALLIANCE CAPITAL MANAGEMENT L.P.
Condensed Consolidated Statements of Financial Condition
(in thousands)
<TABLE>
<CAPTION>
ASSETS 3/31/99 12/31/98
---------- ----------
(unaudited)
<S> <C> <C>
Cash and cash equivalents ........................... $ 115,797 $ 75,186
Receivable from brokers and dealers for sale
of shares of Alliance mutual funds ............... 215,411 159,095
Fees receivable:
Alliance mutual funds ............................ 90,417 80,167
Separately managed accounts:
Affiliated clients ............................. 8,671 6,682
Third party clients ............................ 92,179 86,166
Investments, available-for-sale ..................... 194,298 94,743
Furniture, equipment and leasehold improvements, net. 107,381 96,401
Intangible assets, net .............................. 101,180 102,001
Deferred sales commissions, net ..................... 450,407 375,293
Other assets ........................................ 66,962 56,858
---------- ----------
Total assets ..................................... $1,442,703 $1,132,592
---------- ----------
---------- ----------
</TABLE>
LIABILITIES AND PARTNERS' CAPITAL
<TABLE>
<S> <C> <C>
Liabilities:
Payable to Alliance mutual funds for share purchases. $ 301,518 199,316
Accounts payable and accrued expenses................ 230,703 202,980
Accrued compensation and benefits.................... 157,522 106,929
Debt................................................. 292,520 190,210
Minority interests in consolidated subsidiaries...... 1,491 2,884
---------- ----------
Total liabilities.................................. 983,754 702,319
Partners' capital....................................... 458,949 430,273
---------- ----------
Total liabilities and partners' capital............ $1,442,703 $1,132,592
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
1
<PAGE>
ALLIANCE CAPITAL MANAGEMENT L.P.
Condensed Consolidated Statements of Income
(unaudited)
(in thousands, except per Unit amounts)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
3/31/99 3/31/98
-------- --------
<S> <C> <C>
Revenues:
Investment advisory and services fees:
Alliance mutual funds ............................. $194,899 $142,531
Separately managed accounts:
Affiliated clients .............................. 12,723 13,406
Third party clients ............................. 97,796 79,524
Distribution revenues ............................... 93,612 66,181
Shareholder servicing fees .......................... 13,297 8,488
Other revenues ...................................... 7,416 5,887
-------- --------
419,743 316,017
-------- --------
Expenses:
Employee compensation and benefits .................. 118,279 87,827
Promotion and servicing:
Distribution plan payments to
financial intermediaries:
Affiliated ...................................... 25,684 17,454
Third party ..................................... 52,141 39,464
Amortization of deferred sales commissions ........ 34,681 22,847
Other ............................................. 26,803 21,314
General and administrative .......................... 42,336 42,139
Interest ............................................ 3,501 1,967
Amortization of intangible assets ................... 963 881
-------- --------
304,388 233,893
-------- --------
Income before income taxes ............................. 115,355 82,124
Income taxes ........................................ 17,301 13,140
-------- --------
Net income ............................................. $ 98,054 $ 68,984
-------- --------
-------- --------
Net income per Unit:
Basic ............................................... $ 0.57 $ 0.40
-------- --------
-------- --------
Diluted ............................................. $ 0.55 $ 0.39
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
ALLIANCE CAPITAL MANAGEMENT L.P.
Condensed Consolidated Statements of
Changes in Partners' Capital and
Comprehensive Income
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
3/31/99 3/31/98
-------- --------
<S> <C> <C>
Partners' capital - beginning of period................. $430,273 $398,051
Comprehensive income:
Net income....................................... 98,054 68,984
Other comprehensive income:
Unrealized gain on investments, net............ 824 864
Foreign currency translation adjustment, net... 3 -
-------- --------
Comprehensive income................................. 98,881 69,848
Capital contribution received from Alliance Capital
Management Corporation............................. 976 860
Cash distributions to partners....................... (74,048) (70,078)
Proceeds from Unit options exercised................. 2,867 4,521
-------- --------
Partners' capital - end of period....................... $458,949 $403,202
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
ALLIANCE CAPITAL MANAGEMENT L.P.
Condensed Consolidated Statements of Cash Flows
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------------
3/31/99 3/31/98
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ........................................................ $ 98,054 $ 68,984
Adjustments to reconcile net income to net cash provided
from operating activities:
Amortization and depreciation.................................... 40,352 27,618
Other, net....................................................... 4,114 3,477
Changes in assets and liabilities:
(Increase) in receivable from brokers and dealers for sale
of shares of Alliance mutual funds........................... (56,316) (37,144)
(Increase) in fees receivable from Alliance mutual funds,
affiliated clients and third party clients................... (18,252) (20,699)
(Increase) in deferred sales commissions....................... (109,794) (56,346)
(Increase) in other assets..................................... (10,448) (21,502)
Increase in payable to Alliance mutual funds for share
purchases.................................................... 102,202 40,023
Increase in accounts payable and accrued expenses.............. 25,826 30,060
Increase in accrued compensation and benefits, less
deferred compensation....................................... 49,450 39,269
-------- --------
Net cash provided from operating activities............... 125,188 73,740
-------- --------
Cash flows from investing activities:
Purchase of investments............................................ (243,731) (109,008)
Proceeds from sale of investments.................................. 145,003 107,004
Additions to furniture, equipment and leasehold
improvements, net................................................ (15,594) (6,010)
Other.............................................................. (142) -
-------- --------
Net cash used in investing activities..................... (114,464) (8,014)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of debt..................................... 397,967 217,290
Repayment of debt.................................................. (297,375) (189,375)
Cash distributions to partners..................................... (74,048) (70,078)
Cash capital contribution received from Alliance Capital Management
Corporation...................................................... 476 110
Proceeds from Unit options exercised............................... 2,867 4,521
-------- --------
Net cash provided from (used in) financing activities..... 29,887 (37,532)
-------- --------
Effect of exchange rate changes on cash and cash equivalents ......... - -
-------- --------
Net increase in cash and cash equivalents............................. 40,611 28,194
Cash and cash equivalents at beginning of period...................... 75,186 63,761
-------- --------
Cash and cash equivalents at end of period............................ $ 115,797 $ 91,955
-------- --------
-------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
ALLIANCE CAPITAL MANAGEMENT L.P.
Notes to Condensed Consolidated Financial Statements
March 31, 1999
(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, 1999, (b) results of operations for the three months ended March
31, 1999 and 1998 and (c) cash flows for the three months ended March 31,
1999 and 1998, have been made.
Unit and per Unit amounts for all periods prior to the two-for-one Unit
split in 1998 have been restated.
2. RECLASSIFICATION
Certain prior period amounts have been reclassified to conform with the
current period presentation.
3. PROPOSED REORGANIZATION
On April 8, 1999, the Partnership announced a proposed reorganization of
its business that will give Unitholders in the Partnership the choice
between (1) continuing to hold liquid Units of the Partnership listed on
the New York Stock Exchange that are subject to a federal tax on the
Partnership's gross business income and (2) holding a highly illiquid
interest in a new private limited partnership that is not subject to that
tax. The proposed reorganization will require the approval of a majority of
the Partnerships' unaffiliated public Unitholders and certain other
contractual and regulatory approvals. The Partnership expects that the
reorganization and exchange offer will be completed in the third quarter of
1999.
4. 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 period of time estimated by
management of the Partnership during which deferred sales commissions are
expected to be recovered from distribution plan payments received from
those funds and from contingent deferred sales charges received from
shareholders of those funds upon the redemption of their shares. Contingent
deferred sales charges reduce unamortized deferred sales commissions when
received.
5. COMMITMENTS AND CONTINGENCIES
On July 25, 1995, a Consolidated and Supplemental Class Action Complaint
("Original 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. 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 Original
Complaint. On October 29, 1997, the United States Court of Appeals for the
Second Circuit affirmed that decision.
5
<PAGE>
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 failed to hedge against currency risk despite
representations that it would do so, (ii) the Fund did not properly
disclose that it planned to invest in mortgage-backed derivative
securities, and (iii) two advertisements used by the Fund misrepresented
the risks of investing in the Fund. On October 15, 1998, the United States
Court of Appeals for the Second Circuit issued an order granting
plaintiffs' motion to file an amended complaint alleging that the Fund
misrepresented its ability to hedge against currency risk and denying
plaintiffs' motion to file an amended complaint alleging that the Fund did
not properly disclose that it planned to invest in mortgaged-backed
derivative securities and that certain advertisements used by the Fund
misrepresented the risks of investing in the Fund.
The Partnership believes that the allegations in the proposed amended
complaint are without merit and intends to vigorously defend against this
action. 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.
6. 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 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.
7. 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 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
total of the weighted average number of Units outstanding during each
period and the dilutive Unit equivalents resulting from outstanding
employee Unit options.
<TABLE>
<CAPTION>
Three Months Ended
------------------------
3/31/99 3/31/98
-------- --------
( in thousands,
except per Unit amounts)
<S> <C> <C>
Net income......................................... $ 98,054 $ 68,984
-------- --------
-------- --------
Weighted average Units outstanding-
Basic net income per Unit........................ 170,561 169,301
Dilutive effect of employee Unit options........... 5,030 5,210
-------- --------
Weighted average Units outstanding-
Diluted net income per Unit...................... 175,591 174,511
-------- --------
-------- --------
Basic net income per Unit.......................... $ 0.57 $ 0.40
-------- --------
Diluted net income per Unit........................ $ 0.55 $ 0.39
-------- --------
</TABLE>
6
<PAGE>
8. SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest and income taxes were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
------------------------
1999 1998
-------- --------
<S> <C> <C>
Interest .......................................... $2,361 $1,754
Income taxes ...................................... 7,399 3,935
</TABLE>
9. ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, ("SFAS 133")"ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". Under this Statement, an
entity is required to recognize derivative instruments as either assets or
liabilities in the statement of financial condition 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 intends to
adopt this Statement on January 1, 2000 and does not believe that the
adoption of the Statement will have a material effect on its results of
operations, liquidity, or capital resources.
10. CASH DISTRIBUTION
On April 27, 1999, the General Partner declared a distribution of
$93,101,000 or $0.54 per Unit representing the Available Cash Flow (as
defined in the Partnership Agreement) of the Partnership for the three
months ended March 31, 1999. The distribution is payable on May 24, 1999 to
holders of record on May 17, 1999.
7
<PAGE>
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
consist primarily of a broad range of open-end load and closed-end mutual funds
("mutual funds"), variable life insurance and annuity products, including The
Hudson River Trust, cash management products, principally money market funds,
and certain structured products and hedge funds.
The Partnership's revenues are largely dependent on the total value and
composition of assets under its management. Assets under management grew to
$301.4 billion as of March 31, 1999, an increase of 21.5% from March 31, 1998
primarily as a result of market appreciation, good investment performance, and
strong net sales of Alliance mutual funds. Active equity and balanced account
assets under management, which comprise approximately 55% of total assets under
management, grew 29%. Active fixed income account assets under management, which
comprise approximately 35% of total assets under management, increased by 13%.
In the first quarter of 1999, sales of Alliance mutual fund shares, excluding
cash management products, grew 52% to $11.7 billion compared to sales of $7.7
billion in the first quarter of 1998. The increase in mutual fund sales,
principally domestic U.S. equity mutual funds, offset partially by an increase
in mutual fund redemptions, resulted in net mutual fund sales of $6.4 billion,
an increase of 42% from $4.5 billion in the first quarter of 1998.
ASSETS UNDER MANAGEMENT (1):
<TABLE>
<CAPTION>
(Dollars in billions) 3/31/99 3/31/98 $ Change % Change
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alliance mutual funds:
Mutual funds $ 67.8 $ 47.5 $ 20.3 42.7%
Variable products 32.9 27.5 5.4 19.6
Cash management products 26.6 23.2 3.4 14.7
- -------------------------------------------------------------------------------------------
127.3 98.2 29.1 29.6
- -------------------------------------------------------------------------------------------
Separately managed accounts:
Affiliated clients 30.2 29.9 0.3 1.0
Third party clients 143.9 119.9 24.0 20.0
- -------------------------------------------------------------------------------------------
174.1 149.8 24.3 16.2
- -------------------------------------------------------------------------------------------
Total $ 301.4 $ 248.0 $ 53.4 21.5%
- -------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
ASSETS UNDER MANAGEMENT (1):
<TABLE>
<CAPTION>
(Dollars in billions) 3/31/99 3/31/98 % Change
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Active equity & balanced
Domestic $154.0 $115.4 33.4%
Global & international 12.8 13.5 (5.2)
Active fixed income
Domestic 90.2 83.7 7.8
Global & international 14.2 8.8 61.4
Index
Domestic 25.8 23.3 10.7
Global & international 4.4 3.3 33.3
- ---------------------------------------------------------------------------------------
Total $301.4 $248.0 21.5%
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
ASSETS UNDER MANAGEMENT (1):
<TABLE>
<CAPTION>
Three months ended
------------------
(Dollars in billions) 3/31/99 3/31/98 % Change
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alliance mutual funds $121.7 $ 90.3 34.8%
Separately managed accounts:
Affiliated clients 29.8 29.6 0.7
Third party clients 142.7 113.0 26.3
- ---------------------------------------------------------------------------------------
Total $294.2 $232.9 26.3%
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
CHANGES IN ASSETS UNDER MANAGEMENT(1):
<TABLE>
<CAPTION>
(Dollars in billions) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Separately Alliance Separately Alliance
Managed Mutual Managed Mutual
Accounts Funds Total Accounts Funds Total
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, $168.1 $118.6 $286.7 $133.7 $85.0 $218.7
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
New business/sales 1.7 11.7 13.4 3.0 7.7 10.7
Terminations/redemptions (1.2) (5.3) (6.5) (2.0) (3.2) (5.2)
Net cash management sales - 0.1 0.1 - 2.5 2.5
Cash flow (0.2) (0.3) (0.5) 1.5 (0.4) 1.1
Appreciation/(depreciation) 5.7 2.5 8.2 13.6 6.6 20.2
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Net change 6.0 8.7 14.7 16.1 13.2 29.3
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
Balance at March 31, $174.1 $127.3 $301.4 $149.8 $98.2 $248.0
- ----------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 100% of assets under management of unconsolidated joint venture
subsidiaries and affiliates. Includes $1.6 billion mutual fund assets and $0.4
billion separately managed account assets at March 31, 1999 and $0.9 billion
mutual fund assets and $0.4 billion separately managed account assets at March
31, 1998.
Assets under management at March 31, 1999 were $301.4 billion, an increase of
$14.7 billion or 5.1% from December 31, 1998. Alliance mutual fund assets under
management at March 31, 1999 were $127.3 billion, an increase of $8.7 billion or
7.3% from December 31, 1998, due principally to net sales of mutual funds and
variable products of $5.8 billion and $0.6 billion, respectively, and market
appreciation of $2.5 billion. Separately managed account assets under management
at March 31, 1999 for third-party clients and affiliated clients were $174.1
billion, an increase of $6.0 billion or 3.6% from December 31, 1998. This
increase was primarily due to market appreciation of $5.7 billion and net new
client accounts of $1.7 billion, asset additions to affiliated client accounts
of $1.4 billion, offset by net third party client account terminations and asset
withdrawals of $2.8 billion.
9
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
(Dollars in millions) ------------------
except per Unit amounts 3/31/99 3/31/98 % Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $98.1 $69.0 42.2%
Net income per Unit (1):
Basic $0.57 $0.40 42.5
Diluted $0.55 $0.39 41.0
Weighted average number of
Units outstanding (1):
Basic 170.6 169.3 0.8
Diluted 175.6 174.5 0.6%
Pre-tax margin(2): 35.4% 32.9% -
- -------------------------------------------------------------------------------
</TABLE>
(1) Unit and per Unit amounts for all periods prior to the two-for-one Unit
split in 1998 have been restated.
(2) Calculated by netting distribution revenues against total expenses.
Net income for the three months ended March 31, 1999 increased $29.1 million or
42.2% to $98.1 million from net income of $69.0 million for the three months
ended March 31, 1998. The increase was principally due to an increase in
investment advisory and services fees resulting primarily from higher average
assets under management.
REVENUES
<TABLE>
<CAPTION>
Three months ended
------------------
(Dollars in millions) 3/31/99 3/31/98 % Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment advisory and services fees:
Alliance mutual funds $194.9 $142.5 36.8%
Separately managed accounts:
Affiliated clients 12.7 13.4 (5.2)
Third party clients 97.8 79.5 23.0
Distribution revenues 93.6 66.2 41.4
Shareholder servicing fees 13.3 8.5 56.5
Other revenues 7.4 5.9 25.4
- -------------------------------------------------------------------------------
Total $419.7 $316.0 32.8%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
INVESTMENT ADVISORY AND SERVICES FEES
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 the amount of 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, or calculated as a percentage of investment
returns of a portfolio. Accordingly, these fees may increase the volatility of
the Partnership's revenues and earnings and are more likely to be higher in
favorable markets and lower in unfavorable markets. Performance fees increased
to $42.6 million for the three months ended March 31, 1999 from $34.3 million
for the three months ended March 31, 1998.
Investment advisory and services fees from Alliance mutual funds increased by
$52.4 million or 36.8% for the three months, primarily as a result of a 34.8%
increase in average assets under management and an $8.5 million increase in
performance fees from certain hedge funds in the first quarter of 1999.
Investment advisory and services fees from affiliated clients, primarily the
General Accounts of ELAS, decreased by $0.7 million or 5.2% primarily due to a
decrease in performance fees of $1.0 million in the first quarter of 1999.
10
<PAGE>
Investment advisory and services fees from third party clients increased by
$18.3 million or 23.0% for the three months ended March 31, 1999. Third party
client base advisory fees increased $17.6 million or 27.4% principally due to an
increase in average assets under management of 26.3%. The increase in third
party client assets under management was primarily a result of market
appreciation and net new client accounts offset by net third party client
account terminations and asset withdrawals.
DISTRIBUTION REVENUES
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 in reimbursement of distribution expenses it incurs.
Distribution revenues increased 41.4% principally due to higher average mutual
fund assets under management resulting from strong sales of Back-End Load Shares
under the Partnership's mutual fund distribution system (the "System") described
under "Capital Resources and Liquidity", and market appreciation.
SHAREHOLDER SERVICING FEES
The Partnership's subsidiaries, Alliance Fund Services, Inc. and ACM Fund
Services S.A., provide transfer agency services to the Alliance mutual funds.
Shareholder servicing fees increased 56.5%, the result of increases in the
number of mutual fund shareholder accounts serviced and increases in fee rates.
The number of shareholder accounts serviced increased to approximately 4.0
million as of March 31, 1999, compared to 3.4 million as of March 31, 1998.
OTHER REVENUES
Other revenues consist principally of administration and recordkeeping services
provided to the Alliance mutual funds and the General Accounts of ELAS and its
insurance subsidiary. Investment income and changes in value of other
investments are also included in other revenues. Other revenues increased
principally as a result of changes in the market value of the Partnership's
hedge fund investments.
EXPENSES
<TABLE>
<CAPTION>
Three months ended
------------------
(Dollars in millions) 3/31/99 3/31/98 % Change
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Employee compensation and benefits $118.3 $ 87.8 34.7%
Promotion and servicing 139.3 101.1 37.8
General and administrative 42.3 42.1 0.5
Interest 3.5 2.0 75.0
Amortization of intangible assets 0.9 0.9 -
- -------------------------------------------------------------------------------
Total $304.3 $233.9 30.1%
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
EMPLOYEE COMPENSATION AND BENEFITS
Employee compensation and benefits include salaries, commissions, fringe
benefits and incentive compensation based on profitability. Provisions for
future payments to be made under certain deferred compensation arrangements are
also included in employee compensation and benefits expense.
Employee compensation and benefits increased 34.7% for the three months ended
March 31, 1999 primarily as a result of higher incentive compensation due to
increased operating earnings and increased base compensation and commissions.
Base compensation increased principally due to an increase in the number of
employees working in the Partnership's mutual fund and technology areas combined
with salary increases. The Partnership had 2,124 employees at March 31, 1999
compared to 1,739 at March 31, 1998. Commissions increased primarily due to
higher mutual fund sales.
PROMOTION AND SERVICING
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 for the sale of Back-End Load
Shares under the System. See "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.
11
<PAGE>
Promotion and servicing expenses increased 37.8% for the three months ended
March 31, 1999 primarily due to increased distribution plan payments resulting
from higher average domestic mutual fund assets under management, offshore
mutual fund assets under management and cash management assets under management.
An increase in amortization of deferred sales commissions of $11.8 million for
the first quarter of 1999 as a result of higher sales of Back-End Load Shares
(see "Capital Resources and Liquidity") also contributed to the increase in
promotion and servicing expense. Other promotion and servicing expenses
increased primarily as a result of higher travel and entertainment costs and
higher promotional expenditures incurred in connection with mutual fund sales
initiatives.
GENERAL AND ADMINISTRATIVE
General and administrative expenses include technology, professional fees,
occupancy, communications, equipment and similar expenses. General and
administrative expenses increased 0.5% in the first quarter of 1999 due
principally to higher expenses incurred in connection with the Year 2000 project
and other technology initiatives offset by a $10.0 million provision recorded in
March 1998 for the future acquisition of the minority interest in Cursitor
Alliance. See "Capital Resources and Liquidity".
INTEREST
Interest expense is incurred on the Partnership's borrowings and on deferred
compensation owed to employees. Interest expense increased primarily as a result
of higher debt and an increase in deferred compensation liabilities. See
"Capital Resources and Liquidity".
TAXES ON INCOME
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 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. Income tax expense increased primarily as
a result of higher pre-tax income.
CAPITAL RESOURCES AND LIQUIDITY
Partners' capital was $458.9 million at March 31, 1999, an increase of $28.6
million or 6.6% from $430.3 at December 31, 1998.
Cash flow from operations and proceeds from borrowings have been the
Partnership's principal sources of working capital. During the first quarter of
1999, the Partnership's cash and cash equivalents increased by $40.6 million.
Cash inflows included $125.2 million from operations, proceeds from borrowings
net of debt repayments of $100.6 million and $2.9 million of proceeds from
exercises of Unit options. Cash outflows included $74.0 million in distributions
to Unitholders, $15.6 million in capital expenditures and net purchases of
investments of $98.7 million.
Under certain circumstances through February 28, 2006, the Partnership has an
option to purchase the minority interest in Cursitor Alliance LLC ("Cursitor
Alliance"), a subsidiary of the Partnership formed in connection with an
acquisition in 1996, and the holders of the minority interest have an option to
sell the 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 substantial decline in Cursitor Alliance
revenues through March 1998, management of the Partnership estimated that the
Buyout Price for the minority interest will be $10.0 million, which will be
substantially higher than its estimated fair value. Accordingly, the Partnership
recorded a $10.0 million provision for the Buyout Price in the first quarter of
1998.
12
<PAGE>
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 ongoing 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 $109.8 million and $56.3 million for the three
months ended March 31, 1999 and 1998, respectively. 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 has a $425.0 million revolving credit facility with a group of
commercial banks and a $425.0 million commercial paper program. Borrowings under
the facility and the Partnership's commercial paper program may not exceed
$425.0 million in the aggregate. The revolving credit facility will be used to
provide backup 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. At
March 31, 1999, the Partnership had $287.1 million of commercial paper
outstanding, an increase of $102.3 million from December 31, 1998, to fund
commission payments to financial intermediaries and for capital expenditures.
There were no borrowings outstanding under the Partnership's revolving credit
facility.
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, capital expenditures and its other working capital
requirements.
PROPOSED REORGANIZATION
On April 8, 1999, the Partnership announced a proposed reorganization of its
business that will give Unitholders in the Partnership the choice between (1)
continuing to hold liquid Units of the Partnership listed on the New York Stock
Exchange that are subject to a federal tax on the Partnership's gross business
income and (2) holding a highly illiquid interest in a new private limited
partnership that is not subject to that tax. The proposed reorganization will
require the approval of a majority of the Partnerships' unaffiliated public
Unitholders and certain other contractual and regulatory approvals. The
Partnership expects that the reorganization and exchange offer will be completed
in the third quarter of 1999.
YEAR 2000
Many computer systems and applications that process transactions use 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
may be processed as year "1900", which could result in processing inaccuracies
and inoperability at or after the Year 2000. The Partnership utilizes a number
of 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.
13
<PAGE>
The Year 2000 issue is a high priority for the Partnership. During 1997, the
Partnership began a formal Year 2000 initiative, which established a structured
and coordinated process to deal with the Year 2000 issue. As part of its
initiative, the Partnership established a Year 2000 project office to manage the
Year 2000 initiative focusing on both information technology and non-information
technology systems. The Year 2000 project office meets periodically with the
Audit Committee of the Board of Directors and executive management to review the
status of the Year 2000 efforts. The Partnership has also retained the services
of a number of consulting firms which have expertise in advising and assisting
with regard to Year 2000 issues.
By June 30, 1998, the Partnership had completed its inventory and assessment of
its domestic and international computer systems and applications, identified
mission critical systems (those systems where loss of their function would
result in an immediate stoppage or significant impairment to core business
units) and nonmission critical systems and determined which of these systems is
not Year 2000 compliant. All third-party suppliers of mission critical computer
systems and applications have been contacted to verify whether their systems and
applications will be Year 2000 compliant and their responses are being
evaluated. Substantially all of those contacted have responded and approximately
90% have informed the Partnership that their systems and applications are or
will be Year 2000 compliant. The Partnership will seek alternative solutions or
third-party suppliers for all suppliers who do not furnish a satisfactory
response by June 30, 1999. The same process is being performed for nonmission
critical systems with estimated completion by June 30, 1999.
The Partnership has remediated, replaced or retired all of its noncompliant
mission critical systems and applications with the exception of one
portfolio management system, which will be replaced by a Year 2000 compliant
system by August 31, 1999. The same process is being performed for nonmission
critical systems and is estimated to be completed by June 30, 1999.
After each system has been remediated, it is tested with 19XX dates to determine
if it still performs its intended business function correctly. Next, each system
undergoes a simulation test using dates occurring after December 31, 1999.
Inclusive of the replacement and retirement of some of its systems, the
Partnership has completed these testing phases for approximately 98% of mission
critical systems and approximately 89% of nonmission critical systems.
Integrated systems tests will then be conducted to verify that the systems will
continue to work together. Full integration testing of all mission critical and
nonmission critical systems is estimated to be completed by June 30, 1999.
Testing of interfaces with third-party suppliers has begun and will continue
throughout 1999.
The Partnership has completed an inventory of its facilities and related
technology applications and has begun to evaluate and test these systems. The
Partnership anticipates these systems will be fully operable in the Year 2000.
The Partnership has deferred certain other planned information technology
projects until after the Year 2000 initiative is completed. Such delay is not
expected to have a material adverse effect on the Partnership's financial
condition or results of operations.
The Partnership, with the assistance of a consulting firm, is developing Year
2000 specific contingency plans with emphasis on mission critical functions.
These plans seek to provide alternative methods of processing in the event of a
failure that is outside the Partnership's control. The estimated date for the
completion of these plans is June 30, 1999.
The current cost estimate of the Year 2000 initiative ranges from approximately
$40 million to $45 million. These costs consist principally of modification and
testing and costs to develop formal Year 2000 specific contingency plans. These
costs, which will generally be expensed as incurred, will be funded out of cash
flow from the Partnership's operations. Through March 31, 1999, the Partnership
had incurred approximately $28.0 million of costs related to the Year 2000
initiative. At this time, management of the
14
<PAGE>
Partnership believes that the costs associated with resolving the Year 2000
issue will not have a material adverse effect on the Partnership's results of
operations, liquidity or capital resources.
There are many risks associated with Year 2000 issues, including the risk that
the Partnership's computer systems and applications will not operate as intended
and that the systems and applications of third parties will not be Year 2000
compliant. Likewise, there can be no assurance the compliance schedules outlined
above will be met or that the actual costs incurred will not exceed the current
cost estimate. 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 Partnership may be
unable to conduct its normal business operations and to provide its clients with
the required services. In addition, the Partnership may incur unanticipated
expenses, regulatory actions, and legal liabilities. The Partnership cannot
determine which risks, if any, are most reasonably likely to occur or the
effects of any particular failure to be Year 2000 compliant.
Readers are cautioned that forward-looking statements contained in "Year 2000"
should be read in conjunction with the disclosure set forth under
"Forward-Looking Statements". To the fullest extent permitted by law, the
foregoing Year 2000 discussion is a "Year 2000 Readiness Disclosure" within the
meaning of The Year 2000 Information and Readiness Disclosure Act, 15 U.S.C.
Sec. 1 (1998).
COMMITMENTS AND CONTINGENCIES
The Partnership's capital commitments, which consist primarily of operating
leases for office space are generally funded from future operating cash flows.
On July 25, 1995, a Consolidated and Supplemental Class Action Complaint
("Original 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. 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 Original Complaint. On October 29, 1997, the
United States Court of Appeals for the Second Circuit affirmed that 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 failed to hedge against currency risk despite representations that
it would do so, (ii) the Fund did not properly disclose that it planned to
invest in mortgage-backed derivative securities, and (iii) two advertisements
used by the Fund misrepresented the risks of investing in the Fund. On October
15, 1998, the United States Court of Appeals for the Second Circuit issued an
order granting plaintiffs' motion to file an amended complaint alleging that the
Fund misrepresented its ability to hedge against currency risk and denying
plaintiffs' motion to file an amended complaint alleging that the Fund did not
properly disclose that it planned to invest in mortgaged-backed derivative
securities and that certain advertisements used by the Fund misrepresented the
risks of investing in the Fund.
The Partnership believes that the allegations in the proposed amended complaint
are without merit and intends to vigorously defend against this action. 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.
CHANGES IN ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, ("SFAS 133") "ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES". 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
15
<PAGE>
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.
The Partnership's Available Cash Flow and Distributions per Unit for the three
months ended March 31, 1999 and 1998 were as follows:
AVAILABLE CASH FLOW:
<TABLE>
<CAPTION>
Three Months Ended
3/31/99 3/31/98
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Available Cash Flow (in thousands) $93,101 $65,094
Distributions per Unit $0.54 $0.38
- ---------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------
</TABLE>
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, government regulations, including changes in tax rates,
and the risks associated with Year 2000 issues. The Year 2000 issues include
uncertainties regarding among other things, the inability to locate, correct and
successfully test all relevant computer code, the continued availability of
certain resources including personnel and timely and accurate responses and
corrections by third parties. These uncertainties may result in unanticipated
costs associated with Year 2000 issues and failure to meet schedules for Year
2000 compliance. 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
<PAGE>
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, 1998.
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
Alliance Capital Management L.P. ("Partnership") filed
a report on Form 8-K dated April 8, 1999 reporting a
proposed reorganization of the Partnership.
17
<PAGE>
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 14, 1999 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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 115797
<SECURITIES> 194298
<RECEIVABLES> 406678
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 716773
<PP&E> 107381
<DEPRECIATION> 0
<TOTAL-ASSETS> 1442703
<CURRENT-LIABILITIES> 983754
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 458949
<TOTAL-LIABILITY-AND-EQUITY> 1442703
<SALES> 419743
<TOTAL-REVENUES> 419743
<CGS> 0
<TOTAL-COSTS> 299924
<OTHER-EXPENSES> 3501
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 963
<INCOME-PRETAX> 115355
<INCOME-TAX> 17301
<INCOME-CONTINUING> 98054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 98054
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.55
</TABLE>
