- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-9818 -------------- ALLIANCE CAPITAL MANAGEMENT L.P. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ----------------------- DELAWARE 13-3434400 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 1345 AVENUE OF THE AMERICAS NEW YORK, N.Y. 10105 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (212) 969-1000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF CLASS WHICH REGISTERED -------------- ------------------------ UNITS REPRESENTING ASSIGNMENTS OF NEW YORK STOCK EXCHANGE BENEFICIAL OWNERSHIP OF LIMITED PARTNERSHIP INTERESTS SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE 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 --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the Units representing assignments of beneficial ownership of limited partnership interests held by non-affiliates of the registrant as of March 1, 1999 was approximately $1,750,009,257. The number of Units representing assignments of beneficial ownership of limited partnership interests outstanding as of March 1, 1999 was 170,567,163 Units. DOCUMENTS INCORPORATED BY REFERENCE Certain pages of the Alliance Capital Management L.P. 1998 Annual Report to Unitholders are incorporated by reference in Part II of this Form 10-K. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
GLOSSARY OF CERTAIN DEFINED TERMS "Partnership" refers to Alliance Capital Management L.P., a Delaware limited partnership, and its subsidiaries and, where appropriate, to its predecessor ACMC and its subsidiaries. "ACMC" refers to ACMC, Inc., a wholly-owned subsidiary of Equitable. "Alliance" refers to Alliance Capital Management Corporation, a wholly-owned subsidiary of Equitable, and, where appropriate, to ACMC, its predecessor. "AXA" refers to AXA, a company organized under the laws of France. "ECI" refers to The Equitable Companies Incorporated. "ECMC" refers to Equitable Capital Management Corporation, a wholly-owned subsidiary of Equitable. "Equitable" refers to The Equitable Life Assurance Society of the United States, a wholly-owned subsidiary of ECI, and its subsidiaries other than the Partnership and its subsidiaries. "General Partner" refers to Alliance in its capacity as general partner of the Partnership, and, where appropriate, to ACMC, its predecessor, in its capacity as general partner of the Partnership. "Investment Advisers Act" refers to the Investment Advisers Act of 1940. "Investment Company Act" refers to the Investment Company Act of 1940. "Units" refer to units representing assignments of beneficial ownership of limited partnership interests in the Partnership. PART I ITEM 1. BUSINESS GENERAL The Partnership was formed in 1987 to succeed to the business of ACMC which began providing investment management services in 1971. On April 21, 1988 the business and substantially all of the operating assets of ACMC were conveyed to the Partnership in exchange for a 1% general partnership interest in the Partnership and approximately 55% of the outstanding Units. In December 1991 ACMC transferred its 1% general partnership interest in the Partnership to Alliance. On February 19, 1998 the Partnership declared a two for one Unit split payable to Unitholders of record on March 11, 1998. No adjustments have been made to the number of Units outstanding or per Unit amounts except in Item 5, Item 6, Item 7, Item 8 and Item 11. As of March 1, 1999 AXA, ECI, Equitable and certain subsidiaries of Equitable were the beneficial owners of 96,613,481 Units or approximately 56.6% of the issued and outstanding Units. As of March 1, 1999 AXA and its subsidiaries owned approximately 58.4% of the issued and outstanding shares of the common stock of ECI. ECI is a public company with shares traded on the New York Stock Exchange, Inc. ("NYSE"). ECI owns all of the shares of Equitable. For insurance regulatory purposes all shares of common stock of ECI beneficially owned by AXA have been deposited into a voting trust. See "Item 12. Security Ownership of Certain Beneficial Owners and Management". 1
AXA, a French company, is the holding company for an international group of insurance and related financial services companies. AXA's insurance operations include activities in life insurance, property and casualty insurance and reinsurance. The insurance operations are diverse geographically with activities principally in Western Europe, North America, the Asia/Pacific area, and, to a lesser extent, in Africa and South America. AXA is also engaged in asset management, investment banking, securities trading, brokerage, real estate and other financial services activities principally in the United States, as well as in Western Europe and the Asia/Pacific area. The Partnership, one of the nation's largest investment advisers, provides diversified investment management services to institutional clients and high net-worth individuals and, through various investment vehicles, to individual investors. The Partnership's separately managed accounts consist primarily of the active management of equity and fixed income accounts for institutional investors and high net-worth individuals. The Partnership's institutional clients include corporate and public employee pension funds, the general and separate accounts of Equitable and its insurance company subsidiary, endowments, foundations, and other domestic and foreign institutions. The Partnership's mutual funds management services, which developed as a diversification of its institutional investment management business, consist of the management, distribution and servicing of mutual funds and cash management products, including money market funds and deposit accounts. The following tables provide a summary of assets under management and associated revenues of the Partnership: Assets Under Management ----------------------- (in millions) <TABLE> <CAPTION> December 31, -------------------------------------------------------------------- 1994 1995 1996 1997 1998 <S> <C> <C> <C> <C> <C> Separately Managed Accounts (1)(4)...... $81,030 $97,275 $119,507 $133,706 $168,121 Mutual Funds Management (4): Alliance Mutual Funds................. 20,595 23,134 27,624 40,376 60,722 Variable Products .................... 8,501 12,292 17,070 23,830 31,364 Cash Management Services (2).......... 9,153 13,820 18,591 20,742 26,452 ------- ------- -------- -------- -------- Total................................... $119,279 $146,521 $182,792 $218,654 $286,659 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Revenues -------------- (in thousands) Years Ended December 31, --------------------------------------------------------------------- 1994 1995 1996 1997 1998 Separately Managed Accounts (1)......... $212,500 $232,132 $280,909 $322,850 $ 373,018 Mutual Funds Management: Alliance Mutual Funds................. 292,040 277,815 327,769 432,520 674,234 Variable Products (3)................. 21,980 29,632 44,967 67,805 93,174 Cash Management Services (2).......... 69,514 91,135 127,265 146,152 174,829 Other.................................... 4,918 8,541 7,607 6,009 8,801 ------- ------- -------- -------- --------- Total.................................... $600,952 $639,255 $788,517 $975,336 $1,324,056 -------- -------- -------- -------- ---------- -------- -------- -------- -------- ---------- </TABLE> (1) Includes the general and separate accounts of Equitable and its insurance company subsidiary. (2) Includes money market deposit accounts brokered by the Partnership for which no investment management services are performed. 2
(3) Net of certain fees paid to Equitable for services rendered by Equitable in marketing the variable annuity insurance and variable life products for which The Hudson River Trust is the funding vehicle. (4) Assets under management exclude certain non-discretionary advisory relationships and reflect 100% of the assets managed by unconsolidated joint venture subsidiaries and affiliates. SEPARATELY MANAGED ACCOUNTS As of December 31, 1996, 1997 and 1998 separately managed accounts for institutional investors and high net-worth individuals (other than investment companies and deposit accounts) represented approximately 65%, 61% and 59%, respectively, of total assets under management by the Partnership. The fees earned from the management of these accounts represented approximately 36%, 33% and 28% of the Partnership's revenues for 1996, 1997 and 1998, respectively. <TABLE> <CAPTION> Separately Managed Accounts Assets Under Management(1) --------------------------------------------------- (in millions) December 31, ---------------------------------------------------------------- 1994 1995 1996 1997 1998 <S> <C> <C> <C> <C> <C> Equity & Balanced: Domestic......................... $30,457 $42,706 $51,292 $61,259 $87,032 International & Global........... 3,828 3,854 10,903 7,883 7,370 Fixed Income: Domestic......................... 31,470 32,553 36,042 39,079 41,911 International & Global........... 2,602 1,891 2,381 2,759 4,030 Passive: Domestic......................... 9,645 12,787 15,478 19,860 23,050 International & Global........... 3,028 3,484 3,411 2,866 4,728 ------- ------- -------- -------- -------- Total.............................. $81,030 $97,275 $119,507 $133,706 $168,121 ------- ------- -------- -------- -------- ------- ------- -------- -------- -------- (1) Includes 100% of the assets managed by unconsolidated joint venture subsidiary and affiliated companies of $432 million at December 31, 1998 and $203 million at December 31, 1997. Revenues From Separately Managed Accounts Management ---------------------------------------------------- (in thousands) Years Ended December 31, ---------------------------------------------------------------- 1994 1995 1996 1997 1998 Investment Services: Equity & Balanced: Domestic......................... $108,645 $132,802 $157,511 $184,200 $238,063 International & Global........... 10,867 10,373 32,453 30,192 16,371 Fixed Income: Domestic......................... 70,217 67,102 65,449 80,600 89,286 International & Global........... 5,180 3,784 5,392 7,007 7,968 Passive: Domestic......................... 6,016 5,919 8,015 9,187 9,911 International & Global........... 4,052 3,870 3,612 3,034 2,997 -------- -------- -------- -------- -------- 204,977 223,850 272,432 314,220 364,596 Service and Other Fees............. 7,523 8,282 8,477 8,630 8,422 -------- -------- -------- -------- -------- Total.............................. $212,500 $232,132 $280,909 $322,850 $373,018 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> 3
INVESTMENT MANAGEMENT SERVICES The Partnership's separately managed accounts consist primarily of the active management of equity accounts, balanced (equity and fixed income) accounts and fixed income accounts for institutional investors and high net-worth individuals. The Partnership also provides active management for international (non-U.S.) and global (including U.S.) equity, balanced and fixed income portfolios, asset allocation portfolios, venture capital portfolios, investment partnership portfolios known as hedge funds and portfolios that invest in real estate investment trusts. The Partnership provides "passive" management services for equity, fixed income and international accounts. As of December 31, 1998 the Partnership's accounts were managed by 135 portfolio managers with an average of 16 years of experience in the industry and 10 years of experience with the Partnership. EQUITY AND BALANCED ACCOUNTS. The Partnership's equity and balanced accounts contributed approximately 24%, 22% and 19% of the Partnership's total revenues for 1996, 1997 and 1998, respectively. Assets under management relating to active equity and balanced accounts grew from approximately $32.8 billion as of December 31, 1993 to approximately $94.4 billion as of December 31, 1998. The Partnership has had a distinct and consistent style of equity investing. The Partnership does not emphasize market timing as an investment tool but instead emphasizes long-term trends and objectives, generally remaining fully invested. The Partnership's equity strategy is to invest in the securities of companies experiencing growing earnings momentum which are known as growth stocks. The result of these investment characteristics is that the Partnership's client portfolios tend to have, as compared to the average of companies comprising the Standard & Poor's Index of 500 Stocks ("S&P 500"), a greater market price volatility, a lower average yield and a higher average price-earnings ratio. The Partnership's principal method of securities evaluation is through fundamental analysis undertaken by its internal staff of full-time research analysts, supplemented by research undertaken by the Partnership's portfolio managers. The Partnership holds frequent investment strategy meetings in which senior management, portfolio managers and research analysts discuss investment strategy. The Partnership's portfolio managers construct and maintain portfolios that adhere to each client's guidelines and conform to the Partnership's current investment strategy. The Partnership's balanced accounts consist of an equity component and a fixed income component. Typically, from 50% to 75% of a balanced account is managed in the same manner as a separate equity account, while the remaining fixed income component is oriented toward capital preservation and income generation. FIXED INCOME ACCOUNTS. The Partnership's fixed income accounts contributed approximately 9%, 9% and 7% of the Partnership's total revenues for 1996, 1997 and 1998, respectively. Assets under management relating to active fixed income accounts increased from approximately $30.8 billion as of December 31, 1993 to approximately $45.9 billion as of December 31, 1998. The Partnership's fixed income management services include conventional actively managed bond portfolios in which portfolio maturity structures, market sector concentrations and other characteristics are actively shifted in anticipation of market changes. Fixed income management services also include managing portfolios which invest in foreign government securities and other foreign debt securities. Sector concentrations and other portfolio characteristics are heavily committed to areas that the Partnership's portfolio managers believe have the best investment values. The Partnership also manages portfolios that are limited to specialized areas of the fixed income markets, such as mortgage-backed securities and high-yield bonds. PASSIVE MANAGEMENT. The Partnership's strategy in passive portfolio management is to provide customized portfolios to meet specialized client needs, such as a portfolio designed to replicate a particular index. The Partnership offers domestic and international indexation strategies, such as portfolios designed to match the performance characteristics of the S&P 500 and the Morgan Stanley Capital International Indices and enhanced indexation strategies designed to add incremental returns to a benchmark. The Partnership also offers a variety of structured fixed income portfolio applications, including immunization (designed to produce a compound rate of return over a specified time, irrespective of interest rate movements), dedication (designed to produce specific cash flows at specific times to fund known liabilities) and indexation (designed to replicate the return of a specified market index or benchmark). As of December 31, 1998 the Partnership managed 4
approximately $27.8 billion in passive portfolios. PRIVATE INVESTING SERVICES. In 1996 the Partnership acquired a minority interest in Albion Alliance LLC ("Albion Alliance") which is its primary vehicle for providing global investing services in respect of private and illiquid securities to institutions and high net-worth individuals. Alliance Corporate Finance Group Incorporated ("ACFG"), a wholly-owned subsidiary of the Partnership, was formed in 1993 when the business of ECMC was acquired to manage investments in private mezzanine financings and private investment limited partnerships. Private mezzanine financings are investments in the subordinated debt and/or preferred stock portions of leveraged transactions (such as leveraged buy-outs and leveraged recapitalizations). Such investments are usually coupled with a contingent interest component or investment in an equity participation, which provide the potential for capital appreciation. Since Albion Alliance is now the Partnership's primary vehicle for providing these types of services, it is not expected that ACFG will manage any new private investments other than for Equitable and its subsidiaries. ACFG manages two private mezzanine investment funds designed for institutional investors, with an aggregate of approximately $199.4 million under management as of December 31, 1998. As of that date Equitable and its insurance company subsidiary had investments of approximately $40.0 million in these funds. STRUCTURED PRODUCTS. The Partnership manages 24 structured products with an aggregate of $8.2 billion in assets as of December 31, 1998. $5.4 billion of these assets are included in mutual fund assets under management and $2.8 billion are included in separately managed assets under management as of December 31, 1998. Structured products consist of securities, typically multiple classes of senior and subordinated debt obligations together with an equity component, issued by a special purpose company. An actively or passively managed portfolio of equity or fixed income securities or other financial products generally backs such securities. A majority of the Partnership's structured product assets are based on a short duration fixed income strategy, including the five "Pegasus" transactions which, as of December 31, 1998, had an aggregate of $4.1 billion in assets under management. The Partnership also manages two collateralized bond obligation funds whose pools of collateral debt securities consist primarily of privately-placed, fixed rate corporate debt securities acquired from Equitable and its affiliates. As of December 31, 1998 these funds had approximately $148.0 million under management. As of that date ECI and its insurance company subsidiaries had investments of approximately $140.0 million in these funds. HEDGE FUNDS. As of December 31, 1998, the Partnership managed hedge funds which had approximately $1.2 billion in assets under management and separately managed hedge accounts which had approximately $0.9 billion in assets under management in four distinct strategies. The Partnership's hedge funds are privately placed domestic and offshore investment vehicles. The portfolios of the hedge funds consist of various types of securities, including equities, domestic and foreign government and other debt securities, convertible securities, warrants, options and futures. The hedge funds take short positions, including the purchase of put options on securities, market indices or futures. The hedge funds employ the use of leverage through securities exposure and borrowings. CLIENTS The approximately 1,889 separately managed accounts for institutions and high net-worth individuals (other than investment companies) for which the Partnership acts as investment manager include corporate employee benefit plans, public employee retirement systems, the general and separate accounts of Equitable and its insurance company subsidiary, endowments, foundations, foreign governments, multi-employer pension plans and financial and other institutions. The general and separate accounts of Equitable and its insurance company subsidiary, the management of which were transferred to the Partnership in 1993 in connection with the acquisition of the business and substantially all of the assets of ECMC, are the Partnership's largest institutional clients. As of December 31, 1998 AXA and the general and separate accounts, including investments made by these accounts in The Hudson River Trust (See "Individual Investor Services - The Hudson River Trust"), represented approximately 22%, 26% and 27% of total assets under management by the Partnership at December 31, 1998, 1997 and 1996, respectively, and approximately 11%, 14% and 13% of the Partnership's total revenues for 1998, 1997 and 1996, respectively. As of December 31, 1998 corporate employee benefit plan accounts represented approximately 12% of total assets 5
under management by the Partnership. Assets under management for other tax-exempt accounts, including public employee benefit funds organized by government agencies and municipalities, endowments, foundations and multi-employer employee benefit plans, represented approximately 33% of total assets under management as of December 31, 1998. The following table lists the Partnership's ten largest institutional clients, ranked in order of size of total assets under management as of December 31, 1998. Since the Partnership's fee schedules vary based on the type of account, the table does not reflect the ten largest revenue generating clients. <TABLE> <CAPTION> Client or Sponsoring Employer Type of Account ----------------------------- --------------- <S> <C> AXA, Equitable and their subsidiaries............. Equity, Fixed Income, Passive, Global Equity, Global Fixed Income North Carolina Retirement System.................. Passive Equity, U.S. Equity, Global Equity Foreign Government Central Bank................... Equity, Global Equity, Fixed Income, Global Fixed Income State Board of Administration of Florida......... Equity, Fixed Income New York State Common Retirement System .......... Equity Frank Russell Trust............................... U.S. Equity BellSouth Corporation............................. Passive Equity Foreign Government Central Bank................... U.S. Fixed Income, Global Fixed Income, U.S. Equity, Global Equity, Asian Equity Nuclear Electric Insurance Ltd.................... Passive Sun America....................................... Equity </TABLE> These institutional clients accounted for approximately 25% of the Partnership's total assets under management at December 31, 1998 and approximately 9% of the Partnership's total revenues for the year ended December 31, 1998 (35% and 15%, respectively, if the investments by the separate accounts of Equitable in The Hudson River Trust were included). No single institutional client other than Equitable and its insurance company subsidiary accounted for more than approximately 1% of the Partnership's total revenues for the year ended December 31, 1998. AXA and the general and separate accounts of Equitable and their insurance company subsidiaries accounted for approximately 12% of the Partnership's total assets under management at December 31, 1998 and approximately 6% of the Partnership's total revenues for the year ended December 31, 1998 (22% and 11%, respectively, if the investments by the separate accounts of Equitable in The Hudson River Trust were included). Since its inception, the Partnership has experienced periods when it gained significant numbers of new accounts or amounts of assets under management and periods when it lost significant accounts or assets under management. These fluctuations result from, among other things, the relative attractiveness of the Partnership's investment style or level of performance under prevailing market conditions, changes in the investment patterns of clients that result in a shift in assets under management and other circumstances such as changes in the management or control of a client. INVESTMENT MANAGEMENT AGREEMENTS AND FEES The Partnership's separately managed accounts are managed pursuant to a written investment management agreement between the client and the Partnership, which usually is terminable at any time or upon relatively short notice by either party. In general, the Partnership's contracts may not be assigned without the consent of the client. In providing investment management services to institutional clients, the Partnership is principally compensated on the basis of fees calculated as a percentage of assets under management. Fees are generally billed quarterly and are calculated on the value of an account at the beginning or end of a quarter or on the average of such values during the quarter. As a result, fluctuations in the amount or value of assets under management are reflected in revenues from management fees within two calendar quarters. Management fees paid on equity and balanced accounts are generally charged in accordance with a fee schedule that ranges from 0.75% (for the first $10 million in assets) to 0.25% (for assets over $60 million) per annum of assets under 6
management. Fees for the management of fixed income portfolios generally are charged in accordance with lower fee schedules, while fees for passive equity portfolios typically are even lower. Fees for the management of hedge funds are higher than the fees charged for equity and balanced accounts and also provide for the payment of performance fees or carried interests to the Partnership. With respect to approximately 5% of assets under management, the Partnership charges performance-based fees, which consist of a relatively low base fee plus an additional fee if investment performance for the account exceeds certain benchmarks. No assurance can be given that such fee arrangements will not become more common in the investment management industry. Utilization of such fee arrangements by the Partnership on a broader basis could create greater fluctuations in the Partnership's revenues. ACFG's fees for corporate finance activities generally involve the payment of a base management fee ranging from 0.10% to .50% of assets under management per annum. In some cases ACFG receives performance fees generally equivalent to 20% of gains in excess of a specified hurdle rate. In connection with the investment advisory services provided to the general and separate accounts of Equitable and its insurance company subsidiary the Partnership provides ancillary accounting, valuation, reporting, treasury and other services. Equitable and its insurance company subsidiary compensate the Partnership for such services. See "Item 13. Certain Relationships and Related Transactions". MARKETING The Partnership's institutional products are marketed by marketing specialists who solicit business for the entire range of the Partnership's institutional account management services. Marketing specialists are dedicated to corporate and insurance plans as well as public retirement systems, multi-employer pension plans and the hedge fund marketplace. The Partnership's institutional marketing structure supports its commitment to provide comprehensive and timely client service. A client service representative is assigned to each institutional account. This individual is available to meet with the client as often as necessary and attends client meetings with the portfolio manager. MUTUAL FUNDS MANAGEMENT The Partnership (i) manages and sponsors a broad range of open-end and closed-end mutual funds other than The Hudson River Trust and markets wrap fee accounts ("Alliance Mutual Funds"), (ii) manages The Hudson River Trust which is one of the funding vehicles for variable annuity insurance and variable life insurance products offered by Equitable and its insurance company subsidiary, and other funds which serve as funding vehicles for variable annuity insurance and variable life insurance products offered by other insurance companies ("Variable Products"), (iii) provides cash management services (money market funds and federally insured deposit accounts) that are marketed to individual investors through broker-dealers, banks, insurance companies and other financial intermediaries, (iv) manages and sponsors certain structured products, and (v) manages and sponsors certain hedge funds. The net assets comprising the Alliance Mutual Funds, Variable Products, money market funds and deposit accounts, structured products and hedge funds on December 31, 1998 amounted to approximately $118.6 billion. The assets of the Alliance Mutual Funds, Variable Products, money market funds, structured products and hedge funds are managed by the same investment professionals who manage the Partnership's accounts of institutional investors and high net-worth individuals. 7
<TABLE> <CAPTION> Revenues From Mutual Funds Management ------------------------------------- (in thousands) Years Ended December 31, --------------------------------------------------------------------- 1994 1995 1996 1997 1998 <S> <C> <C> <C> <C> <C> Alliance Mutual Funds (1): Investment Services.............. $147,661 $147,036 $173,260 $235,613 $389,839 Distribution Revenues............ 120,896 107,012 128,917 167,321 241,948 Shareholder Servicing Fees....... 16,054 16,558 19,156 22,957 36,230 Other Revenues................... 7,429 7,209 6,436 6,629 6,217 -------- -------- -------- -------- -------- 292,040 277,815 327,769 432,520 674,234 -------- -------- -------- -------- -------- Variable Products: Investment Services (2).......... 21,490 29,051 43,901 66,376 91,506 Distribution Revenues............ 91 203 551 772 730 Shareholder Servicing Fees....... 49 12 15 16 18 Other Revenues................... 350 366 500 641 920 -------- -------- -------- -------- -------- 21,980 29,632 44,967 67,805 93,174 -------- -------- -------- -------- -------- Cash Management Services: Investment Services (3).......... 42,018 56,642 74,441 82,770 107,051 Distribution Revenues............ 18,104 23,328 39,481 48,758 59,168 Shareholder Servicing Fees....... 8,398 9,951 12,085 13,354 7,227 Other Revenues................... 994 1,214 1,258 1,270 1,383 -------- -------- -------- -------- -------- 69,514 91,135 127,265 146,152 174,829 -------- -------- -------- -------- -------- Total.............................. $383,534 $398,582 $500,001 $646,477 $942,237 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- </TABLE> (1) Includes fees received by the Partnership in connection with certain structured products, hedge funds and wrap fee accounts. (2) Net of certain fees paid to Equitable for services rendered by Equitable in marketing the variable annuity insurance and variable life products for which The Hudson River Trust is the funding vehicle. (3) Includes fees received by the Partnership in connection with its distribution of money market deposit accounts for which no investment management services are provided. 8
ALLIANCE MUTUAL FUNDS The Partnership has been managing mutual funds since 1971. Since then, the Partnership has sponsored open-end load mutual funds and closed-end mutual funds (i) registered as investment companies under the Investment Company Act ("U.S. Funds"), and (ii) which are not registered under the Investment Company Act and which are not publicly offered to United States persons ("Offshore Funds"). On December 31, 1998 net assets in the Alliance Mutual Funds totaled approximately $60.7 billion. <TABLE> <CAPTION> Net Assets as of December 31, 1998 -------------------- Type of Alliance Mutual Funds (in millions) - ----------------------------- <S> <C> U.S. Funds - Open-End: Equity and Balanced........................... $24,684.0 Taxable Fixed Income.......................... 7,071.6 Tax Exempt Fixed Income....................... 3,055.6 Offshore Funds (Open and Closed-End): Taxable Fixed Income.......................... 13,287.9 Equity and Balanced........................... 2,674.9 Wrap Fee Programs............................... 5,022.3 U.S. Funds - Closed-End......................... 3,534.5 Joint Venture Subsidiaries and Affiliates (1) 1,391.5 --------- Total........................................... $60,722.3 --------- --------- </TABLE> (1) Assets under management exclude certain non-discretionary advisory relationships and reflect 100% of the assets managed by unconsolidated joint venture subsidiaries and affiliates. 9
VARIABLE PRODUCTS The Hudson River Trust is one of the funding vehicles for the variable annuity and variable life insurance products offered by Equitable and its insurance company subsidiary. The Alliance Variable Products Series Fund is a funding vehicle for variable annuity and variable life insurance products offered by other unaffiliated insurance companies. On December 31, 1998 the net assets of the portfolios of the Variable Products totaled approximately $31.4 billion: <TABLE> <CAPTION> Net Assets as of December 31, 1998 -------------------- (in millions) <S> <C> Hudson River Trust: Common Stock Portfolio.................. $12,896.1 Aggressive Stock Portfolio.............. 4,500.8 Growth Investors Portfolio.............. 2,055.1 Balanced Portfolio...................... 1,936.4 Equity Index Portfolio.................. 1,690.6 Global Portfolio........................ 1,408.2 Money Market Portfolio.................. 1,110.0 Growth & Income Portfolio............... 998.3 High Yield Portfolio.................... 612.4 Conservative Investors Portfolio........ 388.1 Quality Bond Portfolio.................. 322.4 Small Cap Growth Portfolio.............. 310.6 International Portfolio................. 212.3 Intermediate Government Portfolio....... 184.3 --------- 28,625.6 Alliance Variable Products Series Fund....... 2,738.4 --------- Total........................................ $31,364.0 --------- --------- </TABLE> DISTRIBUTION. The Alliance Mutual Funds are distributed to individual investors through broker-dealers, insurance sales representatives, banks, registered investment advisers, financial planners and other financial intermediaries. Alliance Fund Distributors, Inc. ("AFD"), a registered broker-dealer and a wholly-owned subsidiary of the Partnership, serves as the principal underwriter and distributor of the U.S. Funds and serves as a placing or distribution agent for most of the Offshore Funds. There are 175 sales representatives who devote their time exclusively to promoting the sale of shares of Alliance Mutual Funds by financial intermediaries. The Partnership maintains a mutual fund distribution system (the "System") which permits open-end Alliance 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 $232.5 million and $150.3 million during 1998 and 1997, 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 rules of the National Association of Securities Dealers, Inc. effectively limit the aggregate of all front-end, deferred and asset-based sales charges paid to AFD with respect to any class of its shares by each open-end U.S. Fund to 6.25% of cumulative gross sales of shares of that class, plus interest at the prime rate plus 1% per annum. 10
The open-end U.S. Funds and Offshore Funds have entered into agreements with AFD under which AFD is paid a distribution services fee. The Partnership uses borrowings and its own resources to finance distribution of open-end Alliance Mutual Fund shares. The selling and distribution agreements between AFD and the financial intermediaries that distribute Alliance Mutual Funds are terminable by either party upon notice (generally of not more than sixty days) and do not obligate the financial intermediary to sell any specific amount of fund shares. A small amount of mutual fund sales is made directly by AFD, in which case AFD retains the entire sales charge. During 1998 the ten financial intermediaries responsible for the largest volume of sales of open-end U.S. Funds and Variable Products were responsible for 64% of such sales. EQ Financial Consultants, Inc. ("EQ Financial"), a wholly-owned subsidiary of Equitable that utilizes members of Equitable's insurance agency sales force as its registered representatives, has entered into a selected dealer agreement with AFD and since 1986 has been responsible for a significant portion of total sales of shares of open-end U.S. Funds and Offshore Funds (of 13%, 7% and 5% in 1996, 1997 and 1998). EQ Financial is under no obligation to sell a specific amount of fund shares and also sells shares of mutual funds sponsored by organizations unaffiliated with Equitable. Subsidiaries of Merrill Lynch & Co., Inc. (collectively "Merrill Lynch") were responsible for approximately 20%, 24% and 26% of open-end Alliance Mutual Fund sales in 1996, 1997 and 1998, respectively. Citigroup Inc. ("Citigroup"), parent company of Salomon Smith Barney (formerly Smith Barney Inc.), was responsible for approximately 9% of open-end Alliance Mutual Fund sales in 1996, 7% in 1997 and 6% in 1998. Neither Merrill Lynch nor Citigroup is under any obligation to sell a specific amount of Alliance Mutual Fund shares and each also sells shares of mutual funds that it sponsors and which are sponsored by unaffiliated organizations. No dealer or agent other than EQ Financial, Merrill Lynch and Citigroup has in any year since 1993 accounted for more than 10% of the sales of open-end Alliance Mutual Funds. Many of the financial intermediaries that sell shares of Alliance Mutual Funds also offer shares of funds not managed by the Partnership and frequently offer shares of funds managed by their own affiliates. Based on industry sales data reported by the Investment Company Institute (January 1999), the Partnership's market share in the U.S. mutual fund industry is 1.18% of total industry assets and the Partnership accounted for 1.30% of total open-end industry sales in the U.S. during 1998. While the performance of the Alliance Mutual Funds is a factor in the sale of their shares, there are other factors contributing to success in the mutual fund management business that are not as important in the institutional account management business. These factors include the level and quality of shareholder services (see "Shareholder and Administration Services" below) and the amounts and types of distribution assistance and administrative services payments. The Partnership believes that its compensation programs with financial intermediaries are competitive with others in the industry. Under current interpretations of the Glass-Steagall Act and other laws and regulations governing depository institutions, banks and certain of their affiliates generally are permitted to act as agent for their customers in connection with the purchase of mutual fund shares and to receive as compensation a portion of the sales charges paid with respect to such purchases. During 1998 banks and their affiliates accounted for approximately 5% of the sales of shares of open-end U.S. Funds and Variable Products. INVESTMENT MANAGEMENT AGREEMENTS AND FEES. Investment management fees from the Alliance Mutual Funds, the Hudson River Trust and the Variable Products vary between .16% and 1.65% per annum of average net assets. As certain of the U.S. Funds have grown, fee schedules have been revised to provide lower incremental fees above certain levels. Fees paid by the U.S. Funds and The Hudson River Trust are fixed annually by negotiation between the Partnership and the board of directors or trustees of each U.S. Fund and The Hudson River Trust, including a majority of the disinterested directors or trustees. Changes in fees must be approved by the shareholders of each U.S. Fund and The Hudson River Trust. In general, the investment management agreements with the U.S. Funds and The Hudson River Trust provide for termination at any time upon 60 days' notice. 11
Under each investment management agreement with a U.S. Fund, the Partnership provides the U.S. Fund with investment management services, office space and order placement facilities and pays all compensation of directors or trustees and officers of the U.S. Fund who are affiliated persons of the Partnership. Each U.S. Fund pays all of its other expenses. If the expenses of a U.S. Fund exceed an expense limit established under the securities laws of any state in which shares of that U.S. Fund are qualified for sale or as prescribed in the U.S. Fund's investment management agreement, the Partnership absorbs such excess through a reduction in the investment management fee. Currently, the Partnership believes that California and South Dakota are the only states to impose such a limit. The expense ratios for the U.S. Funds during their most recent fiscal year ranged from .67% to 4.49%. In connection with newly organized U.S. Funds, the Partnership may also agree to reduce its fee or bear certain expenses to limit expenses during an initial period of operations. CASH MANAGEMENT SERVICES The Partnership provides cash management services to individual investors through a product line comprising 21 money market fund portfolios, including one offshore money market fund domiciled in Cayman and three types of brokered money market deposit accounts. Net assets in these products as of December 31, 1998 totaled approximately $26.5 billion. <TABLE> <CAPTION> Net Assets as of December 31, 1998 ------------- (in millions) <S> <C> Money Market Funds: Alliance Capital Reserves (two portfolios).......... $10,910.7 Alliance Government Reserves (two portfolios)....... 7,173.9 ACM Institutional Reserves (five portfolios)........ 3,854.3 Alliance Municipal Trust (eight portfolios)......... 3,147.9 Alliance Money Market Fund (three portfolios)....... 785.9 ACM International Reserves (one portfolio).......... 58.9 Money Market Deposit Accounts (three products).......... 505.7 Joint Venture Subsidiaries and Affiliates (1)........... 14.8 --------- Total.................................................... $26,452.1 --------- --------- </TABLE> (1) Assets under management exclude certain non-discretionary advisory relationships and reflect 100% of the assets managed by unconsolidated joint venture subsidiaries and affiliates. The Partnership also offers a managed assets program, which provides customers of participating financial intermediaries with a Visa card, access to automated teller machines and check writing privileges. The program is linked to the customer's chosen Alliance money market fund. The program serves to enhance relationships with financial intermediaries and to attract and retain investments in the Alliance money market funds, as well as to generate fee income. Under its investment management agreement with each money market fund, the Partnership is paid an investment management fee equal to 0.50% per annum of the fund's average net assets except for ACM Institutional Reserves which pays a fee between 0.20% and 0.45% of its average net assets. In the case of certain money market funds, the fee is payable at lesser rates with respect to average net assets in excess of $1.25 billion. For distribution and account maintenance services rendered in connection with the sale of money market deposit accounts, the Partnership receives fees from the participating banks that are based on outstanding account balances. Because the money market deposit account programs involve no investment management functions to be performed by the Partnership, the Partnership's costs of maintaining the account programs are less, on a relative basis, than its costs of managing the money market funds. On December 31, 1998 more than 99% of the assets invested in the Partnership's cash management programs were attributable to regional broker-dealers and other financial intermediaries, with the remainder coming directly from the public. On December 31, 1998 more than 500 financial intermediaries offered the Partnership's cash management services. The Partnership's money market fund market share (not including deposit products), as computed based on market data reported by 12
the Investment Company Institute (December 1998), has increased from 1.31% of total money market fund industry assets at the end of 1993 to 1.95% at December 31, 1998. The Partnership makes payments to financial intermediaries for distribution assistance and shareholder servicing and administration. The Partnership's money market funds pay fees to the Partnership at annual rates of up to 0.25% of average daily net assets pursuant to "Rule 12b-1" distribution plans except for Alliance Money Market Fund which pays a fee of up to 0.45% of its average daily net assets. Such payments are supplemented by the Partnership in making payments to financial intermediaries under the distribution assistance and shareholder servicing and administration program. During 1998 such supplemental payments totaled approximately $58.0 million ($49.0 million in 1997). There are 7 employees of the Partnership who devote their time exclusively to marketing the Partnership's cash management services. A principal risk to the Partnership's cash management services business is the acquisition of its participating financial intermediaries by companies that are competitors or that plan to enter the cash management services business. As of December 31, 1998 the five largest participating financial intermediaries were responsible for assets aggregating approximately $21.7 billion, or 82% of the cash management services total. Many of the financial intermediaries whose customers utilize the Partnership's cash management services are broker-dealers whose customer accounts are carried, and whose securities transactions are cleared and settled, by the Pershing Division ("Pershing") of Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ Securities Corporation"), a subsidiary of ECI. Pursuant to an agreement between Pershing and the Partnership, Pershing recommends that certain of its correspondent firms use of the Partnership's money market funds and other cash management products. As of December 31, 1998 DLJ Securities Corporation and these Pershing correspondents were responsible for approximately $18.2 billion or 69% of the Partnership's total cash management assets. Pershing may terminate its agreement with the Partnership on 180 days' notice. If the agreement were terminated, Pershing would be under no obligation to recommend or in any way assist in the sale of the Partnership's cash management products and would be free to recommend or assist in the sale of competitive products. The Partnership's money market funds are investment companies registered under the Investment Company Act and are managed under the supervision of boards of directors or trustees, which include disinterested directors or trustees who must approve investment management agreements and certain other matters. The investment management agreements between the money market funds and the Partnership provide for an expense limitation of 1% per annum or less of average daily net assets. See "Mutual Funds Management - Investment Management Agreements and Fees". SHAREHOLDER AND ADMINISTRATION SERVICES Alliance Fund Services, Inc. ("AFS"), a wholly-owned subsidiary of the Partnership, provides registrar, dividend disbursing and transfer agency related services for each U.S. Fund and provides servicing for each U.S. Fund's shareholder accounts. As of December 31, 1998 AFS employed 301 people. AFS operates out of offices in Secaucus, New Jersey, and San Antonio, Texas. Under each servicing agreement AFS receives a monthly fee. Each servicing agreement must be approved annually by the relevant U.S. Fund's board of directors or trustees, including a majority of the disinterested directors or trustees, and may be terminated by either party without penalty upon 60 days' notice. Most U.S. Funds utilize Partnership personnel to perform legal, clerical and accounting services not required to be provided by the Partnership. Payments by a U.S. Fund for these services must be specifically approved in advance by the U.S. Fund's board of directors or trustees. Currently, the Partnership and AFS are accruing revenues for providing clerical and accounting services to the U.S. Funds and these closed-end funds at the rate of approximately $8.6 million per year. ACM Fund Services S.A. ("ACMFS"), a wholly-owned subsidiary of the Partnership, is the registrar and transfer agent of substantially all of the Offshore Funds. As of December 31, 1998 ACMFS employed 18 people. ACMFS operates out of offices in Luxembourg and receives a monthly fee for its registrar and transfer agency services. Each agreement between ACMFS and an Offshore Fund may be terminated by either party upon 60 days' notice. The Partnership expects to continue to devote substantial resources to shareholder servicing because of its importance in competing for assets invested in mutual funds and cash management services. 13
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. 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 76% have informed the Partnership that their systems and applications are or will be Year 2000 compliant. Those who have not responded have been contacted a second time. The Partnership estimates that this process will be completed by the first quarter of 1999. The same process is being performed for nonmission critical systems with estimated completion by the second quarter of 1999. The Partnership has remediated, replaced or retired most of its noncompliant mission critical systems and applications. The Partnership expects that the remediation phase for all mission critical systems will be complete by February 28, 1999 with the exception of one portfolio accounting system, which will be replaced by a Year 2000 compliant system by August 31, 1999. The same process will be performed for nonmission critical systems and is estimated to be completed by the second quarter of 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 88% of mission critical systems and approximately 75% 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 and testing of interfaces with third-party suppliers will begin in the first quarter of 1999 and will continue throughout 1999. The Partnership is in the process of inventorying, evaluating and testing its technical infrastructure and corporate facilities and expects them to 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 formal Year 2000 specific contingency plans to address situations where mission critical and nonmission critical systems are not remediated as planned by the Partnership or third parties. These plans will be completed by 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 costs and costs to develop formal Year 2000 specific contingency plans. These costs, most of which will be expensed as incurred, will be funded out of cash flow from the Partnership's operations. Through 14
December 31, 1998, the Partnership had incurred approximately $22 million of costs related to the Year 2000 initiative. At this time, management of the 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 nor 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). COMPETITION The financial services industry is highly competitive and new entrants are continually attracted to it. No one or small number of competitors is dominant in the industry. The Partnership is subject to substantial competition in all aspects of its business. Pension fund, institutional and corporate assets are managed by investment management firms, broker-dealers, banks and insurance companies. Many of these financial institutions have substantially greater resources than the Partnership. The Partnership competes with other providers of institutional investment products and services primarily on the basis of the range of investment products offered, the investment performance of such products and the services provided to clients. Based on an annual survey conducted by PENSIONS & INVESTMENTS, as of December 31, 1997 the Partnership was ranked 12th out of 703 managers based on tax-exempt assets under management, 8th out of the 25 largest managers of international index assets, 7th out of the 25 largest managers of domestic equity index funds and 14th out of the 25 largest domestic bond index managers. Many of the firms competing with the Partnership for institutional clients also offer mutual fund shares and cash management services to individual investors. Competitiveness in this area is chiefly a function of the range of mutual funds and cash management services offered, investment performance, quality in servicing customer accounts and the capacity to provide financial incentives to financial intermediaries through distribution assistance and administrative services payments funded by "Rule 12b-1" distribution plans and the investment adviser's own resources. CUSTODY AND BROKERAGE Neither the Partnership nor its subsidiaries maintains custody of client funds or securities, which is maintained by client-designated banks, trust companies, brokerage firms or other custodians. Custody of the assets of Alliance Mutual Funds, The Hudson River Trust and money market funds is maintained by custodian banks and central securities depositories. The Partnership generally has the discretion to select the brokers or dealers to be utilized to execute transactions for client accounts. Broker-dealers affiliated with ECI and Equitable effect transactions for client accounts only if the use of the broker-dealers has been specifically authorized or directed by the client. REGULATION The Partnership, Albion Alliance, ACFG and Alliance are investment advisers registered under the Investment Advisers Act. Each U.S. Fund is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act and the shares of most U.S. Funds are qualified for sale in all states in the United States and the District of Columbia, except for U.S. Funds offered only to residents of a particular state. AFS is registered with the SEC as a transfer agent and AFD is registered with the SEC as a broker-dealer. AFD is subject to minimum net capital requirements 15
($6.4 million at December 31, 1998) imposed by the SEC on registered broker-dealers and had aggregate regulatory net capital of $15.7 million at December 31, 1998. The relationships of Equitable and its insurance company subsidiary with the Partnership are subject to applicable provisions of the New York Insurance Law and regulations. Certain of the investment advisory agreements and ancillary administrative service agreements between Equitable and its insurance company subsidiary and the Partnership are subject to disapproval by the New York Superintendent of Insurance within a prescribed notice period. Under the New York Insurance Law and regulations, the terms of these agreements are to be fair and equitable, charges or fees for services performed are to be reasonable, and certain other standards must be met. Fees must be determined either with reference to fees charged to other clients for similar services or, in certain cases, which include the ancillary service agreements, based on cost reimbursement. The Partnership's assets under management and revenues derived from the general accounts of Equitable and its insurance company subsidiary are directly affected by the investment policies for the general accounts. Among the numerous factors influencing general account investment policies are regulatory factors, such as (i) laws and regulations that require diversification of the investment portfolios and limit the amount of investments in certain investment categories such as below investment grade fixed maturities, equity real estate and equity interests, (ii) statutory investment valuation reserves, and (iii) risk-based capital guidelines for life insurance companies approved by the National Association of Insurance Commissioners. These policies have recently resulted in the shifting of general account assets managed by the Partnership into categories with lower management fees. All aspects of the Partnership's business are subject to various federal and state laws and regulations and to the laws in the foreign countries in which the Partnership's subsidiaries conduct business. These laws and regulations are primarily intended to benefit clients and Alliance Mutual Fund shareholders and generally grant supervisory agencies broad administrative powers, including the power to limit or restrict the carrying on of business for failure to comply with such laws and regulations. In such event, the possible sanctions which may be imposed include the suspension of individual employees, limitations on engaging in business for specific periods, the revocation of the registration as an investment adviser, censures and fines. EMPLOYEES As of December 31, 1998 the Partnership and its subsidiaries employed 2,075 employees, including 257 investment professionals, of whom 135 are portfolio managers, 107 are research analysts and 15 are order placement specialists. The average period of employment of these professionals with the Partnership is approximately 7 years and their average investment experience is approximately 13 years. The Partnership considers its employee relations to be good. SERVICE MARKS The Partnership has registered a number of service marks with the U.S. Patent and Trademark Office, including an "A" design logo and the combination of such logo and the words "Alliance" and "Alliance Capital". Each of these service marks was registered in 1986. ITEM 2. PROPERTIES The Partnership's principal executive offices at 1345 Avenue of the Americas, New York, New York are occupied pursuant to a lease which extends until 2016. The Partnership currently occupies approximately 399,000 square feet at this location. The Partnership also occupies approximately 110,900 square feet at 135 West 50th Street, New York, New York under leases expiring in 2016. The Partnership also occupies approximately 16,800 square feet at 709 Westchester Avenue, White Plains, New York under leases expiring in 2000 and 2004, respectively. The Partnership and its subsidiaries, AFD and AFS, occupy approximately 125,000 square feet of space in Secaucus, New Jersey pursuant to a lease which extends until 2016 and approximately 92,100 square feet of space in San Antonio, Texas pursuant to a lease which extends until 2009. The Partnership also leases space in San Francisco, California; Chicago, Illinois; Greenwich, Connecticut; Minneapolis, Minnesota; and Beechwood, Ohio, and its subsidiaries and affiliates lease space in London, England; Paris, France; Tokyo, Japan; Sydney, Australia; Toronto, Canada; Luxembourg; Singapore; Manama, Bahrain; Mumbai, New Delhi, 16
Bangalore and Pune, India; Johannesburg, South Africa; and Istanbul, Turkey. Joint venture subsidiaries and affiliates of the Partnership have offices in Vienna, Austria; Sao Paolo, Brazil; Hong Kong; Chennai, India; Seoul, Korea; Warsaw, Poland; Moscow, Russia; and Cairo, Egypt. ITEM 3. LEGAL PROCEEDINGS On July 25, 1995, a Consolidated and Supplemental Class Action Complaint ("Original Complaint") was filed against the 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 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 mortgage-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 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to security holders during the fourth quarter of 1998. 17
PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET FOR THE UNITS The Units are traded on the New York Stock Exchange ("NYSE"). The high and low sale prices on the NYSE during each quarter of the Partnership's two most recent fiscal years were as follows: <TABLE> <CAPTION> 1998 High Low ---- ---- ---- <S> <C> <C> First Quarter 27 7/8 18 13/16 Second Quarter 29 23 7/8 Third Quarter 28 19 5/8 Fourth Quarter 27 1/2 19 3/4 <CAPTION> 1997 High Low ---- ---- ---- <S> <C> <C> First Quarter 15 1/8 12 Second Quarter 14 15/16 12 Third Quarter 18 13/16 14 1/2 Fourth Quarter 19 15/16 15 23/32 </TABLE> On February 19, 1998, the Partnership declared a two for one Unit split payable to Unitholders of record on March 11, 1998. The high and low sale prices above have been adjusted to reflect the Unit split to the extent necessary. On March 1, 1999 the closing price of the Units on the NYSE was $25.50 per Unit. As of March 1,1999 there were approximately 1,722 Unitholders of record. 18
CASH DISTRIBUTIONS The Partnership distributes on a quarterly basis all of its Available Cash Flow (as defined in the Partnership Agreement). During its two most recent fiscal years the Partnership made the following distributions of Available Cash Flow: <TABLE> <CAPTION> Quarter During 1998 With Respect to Which a Cash Distribution Was Paid from Amount of Cash Available Cash Flow for Distribution Per that Quarter Unit Payment Date - --------------------------- ---------------- ----------------- <S> <C> <C> First Quarter $ 0.38 May 18, 1998 Second Quarter 0.42 August 18, 1998 Third Quarter 0.39 November 23, 1998 Fourth Quarter 0.43 February 23, 1999 ------ $1.62 ------ ------ <CAPTION> Quarter During 1997 With Respect to Which a Cash Distribution Was Paid from Amount of Cash Available Cash Flow for Distribution Per that Quarter Unit Payment Date - ----------------------------- ------------------ ------------ <S> <C> <C> First Quarter $ 0.30 May 20, 1997 Second Quarter 0.32 August 21, 1997 Third Quarter 0.37 November 28, 1997 Fourth Quarter 0.41 February 24, 1998 ------ $1.40 ------ ------ </TABLE> On February 19, 1998 the Partnership declared a two for one Unit split payable to Unitholders of record on March 11, 1998. The cash distribution per Unit amounts above have been adjusted to reflect the Unit split to the extent necessary. ITEM 6. SELECTED FINANCIAL DATA The Selected Consolidated Financial Data which appears on page 43 of the Alliance Capital Management L.P. 1998 Annual Report to Unitholders is incorporated by reference in this Annual Report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management's Discussion and Analysis of Financial Condition and Results of Operations which appears on pages 44 through 58 of the Alliance Capital Management L.P. 1998 Annual Report to Unitholders is incorporated by reference in this Annual Report on Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The quantitative and qualitative disclosures about market risk contained in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 56 and 57 of the Alliance Capital Management L.P. 1998 Annual Report to Unitholders are incorporated by reference in this Annual Report on Form 10-K. 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of Alliance Capital Management L.P. and subsidiaries and the report thereon by KPMG LLP which appear on pages 59 through 80 of the Alliance Capital Management L.P. 1998 Annual Report to Unitholders are incorporated by reference in this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT GENERAL PARTNER The Partnership's activities are managed and controlled by Alliance as General Partner and Unitholders do not have any rights to manage or control the Partnership. The General Partner has agreed that it will conduct no active business other than managing the Partnership, although it may make certain investments for its own account. The General Partner does not receive any compensation from the Partnership for services rendered to the Partnership as General Partner. The General Partner holds a 1% general partnership interest in the Partnership. As of March 1, 1999 Equitable, ACMC and ECMC, affiliates of the General Partner, held 96,613,481 Units. The General Partner is reimbursed by the Partnership for all expenses incurred by it in carrying out its activities as General Partner, including compensation paid by the General Partner to its directors and officers (to the extent such persons are not compensated directly as employees of the Partnership) and the cost of directors and officers liability insurance obtained by the General Partner. The General Partner was not reimbursed for any such expenses in 1998 except for directors' fees and directors and officers liability insurance. 20
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER The directors and executive officers of the General Partner are as follows: <TABLE> <CAPTION> Name Age Position - ---- --- -------- <S> <C> <C> Dave H. Williams.............. 66 Chairman of the Board and Director Luis Javier Bastida........... 53 Director Donald H. Brydon.............. 53 Director Bruce W. Calvert.............. 52 Director, Vice Chairman and Chief Executive Officer John D. Carifa................ 54 Director, President and Chief Operating Officer Henri de Castries............. 44 Director Kevin C. Dolan................ 45 Director Denis Duverne................. 46 Director Alfred Harrison............... 61 Director and Vice Chairman Herve Hatt.................... 34 Director Michael Hegarty............... 54 Director Benjamin D. Holloway.......... 74 Director Edward D. Miller.............. 58 Director Peter D. Noris................ 43 Director Frank Savage.................. 60 Director Stanley B. Tulin.............. 49 Director Reba W. Williams.............. 62 Director Robert B. Zoellick............ 45 Director David R. Brewer, Jr........... 53 Senior Vice President and General Counsel Robert H. Joseph, Jr.......... 51 Senior Vice President and Chief Financial Officer </TABLE> Mr. Williams joined Alliance in 1977 and has been the Chairman of the Board since that time. He was elected a Director of Equitable on March 21, 1991 and was elected to the ECI Board of Directors in May of 1992. He is also a Senior Executive Vice President of AXA. AXA, ECI and Equitable are parents of the Partnership. Mr. Williams is the husband of Mrs. Reba W. Williams, a Director of Alliance. Mr. Bastida was elected a Director of Alliance in February 1995. He is Chief Financial Officer and a member of the Executive Committee of Banco Bilbao Vizcaya, S.A., ("BBV"). Mr. Bastida has been with BBV since 1976. Previous to that date he worked for General Electric. He is Chairman of Finanzia, the Specialized Finance subsidiary of BBV and of Canal International Holding; and a Director of Privanza, the Private Bank of the same group. Mr. Brydon was elected a Director of Alliance in May 1997. He is Chairman and Chief Executive Officer of AXA Investment Managers S.A. Mr. Brydon was formerly Barclays Group's Deputy Chief Executive of BZW, the investment banking division of Barclays Plc., and was a member of the Executive Committee of Barclays. Before joining BZW, Mr. Brydon was the Chief Executive and Chairman of Barclays de Zoete Wedd Investment Management Ltd. (BZWIM) and had served in various executive capacities within the Barclays organization including Barclays Investment Management Ltd. and Barclays Bank. Mr. Brydon serves as director of Allied Domecq Plc., Nycomed Amersham Plc., Edinburgh UK Index Trust Plc. and Edinburgh Inca Trust. He also serves as a member of the Executive Committee of the UK's Institutional Fund Managers Association. In addition, Mr. Brydon serves as Advisor of British Aerospace Pension Fund Investment Management Ltd. and as Regulatory Officer of IMRO. AXA Investment Managers S.A. is a subsidiary of AXA, a parent of the Partnership. Mr. Calvert joined Alliance in 1973 as an equity portfolio manager and was elected Chief Executive Officer on January 6, 1999. He served as Chief Investment Officer from May 3, 1993 until January 6, 1999. He was elected Vice Chairman on May 3, 1993. From 1986 to 1993 he was an Executive Vice President and from 1981 to 1986 he was a Senior Vice President. He was elected a Director of Alliance in 1992. 21
Mr. Carifa joined Alliance in 1971 and was elected President and Chief Operating Officer on May 3, 1993. He was the Chief Financial Officer from 1973 until 1994. He was an Executive Vice President from 1986 to 1993 and he was a Senior Vice President from 1980 to 1986. He was elected a Director of Alliance in 1992. Mr. de Castries was elected a Director of Alliance in October 1993. He has been Senior Executive Vice President Financial Services and Life Insurance Activities of AXA in the United States, Germany, the United Kingdom and Benelux since 1996. Prior thereto, he was Executive Vice President Financial Services and Life Insurance Activities of AXA from 1993 to 1996, General Secretary of AXA from 1991 to 1993 and Central Director of Finances of AXA from 1989 to 1991. Mr. de Castries is also a Director or Officer of various subsidiaries and affiliates of the AXA Group and a Director of ECI, Equitable and Donaldson Lufkin & Jenrette, Inc. ("DLJ"). Mr. de Castries was elected Vice Chairman of ECI on February 14, 1996 and was elected Chairman of ECI, effective April 1, 1998. AXA, ECI and Equitable are parents of the Partnership. DLJ is a subsidiary of ECI. Mr. Dolan was elected a Director of Alliance in May 1995. He is Chief Executive Officer of AXA Investment Managers Paris, a subsidiary of AXA. Mr. Dolan has been with AXA since 1993. From 1983 to 1993 Mr. Dolan was Deputy General Manager of BFCE. AXA is a parent of the Partnership. Mr. Duverne was elected a Director of Alliance in February 1996. He has been Senior Vice President -International Life of AXA since 1995. Prior to that Mr. Duverne was a member of the Executive Committee in charge of Operations of Banque Colbert from 1992 to 1995. Mr. Duverne was Secretary General of Compagnie Financiere IBI from 1991 to 1992. Mr. Duverne worked for the French Ministry of Finance serving as Deputy Assistant Secretary for Tax Policy from 1988 to 1991 and director of the Corporate Taxes Department from 1986 to 1988. He is also a Director of various subsidiaries of the AXA Group. Mr. Duverne is also a Director of DLJ and Equitable. AXA and Equitable are parents of the Partnership. DLJ and Equitable are subsidiaries of ECI. Mr. Harrison joined Alliance in 1978 and was elected Vice Chairman on May 3, 1993. Mr. Harrison is in charge of the Partnership's Minneapolis office and is a senior portfolio manager. He was an Executive Vice President from 1986 to 1993 and a Senior Vice President from 1978 to 1986. He was elected a Director of Alliance in 1992. Mr. Hatt was elected a Director of Alliance in May 1998. He has been Senior Vice President of AXA since March 1998. From 1992 to 1998 he was a senior engagement manager with McKinsey & Company, the management consultants, in London and in Paris. Mr. Hegarty was elected a Director of Alliance in May 1998. He has been Director and Vice Chairman of ECI since April 1998 and Chief Operating Officer since February 1998. He was Senior Executive Vice President of ECI from January 1998 to April 1998. From 1996 to 1997 he was Vice Chairman of Chase Manhattan Corporation. He has also been a Director and President of Equitable since January 1998 and Chief Operating Officer since February 1998. Prior thereto, he was Vice Chairman (1995-1996) and Senior Executive Vice President (1991-1995) of Chemical Bank, which merged with Chase in 1996. Mr. Hegarty is also a director of DLJ. ECI and Equitable are parents of the Partnership. DLJ is a subsidiary of ECI. Mr. Holloway was elected a Director of Alliance in November 1987. He is a consultant to The Continental Companies. From September 1988 until his retirement in March 1990, Mr. Holloway was a Vice Chairman of Equitable. He served as an Executive Vice President of Equitable from 1979 until 1988. Prior to his retirement he served as a Director and Officer of various Equitable subsidiaries and Mr. Holloway was also a Director of DLJ until March 1990. Mr. Holloway was a Director of Rockefeller Center Properties, Inc. and is a Director Emeritus of The Duke University Management Corporation, Chairman of The Touro National Heritage Trust, a Regent of the Cathedral of St. John the Divine and a Trustee of Duke University (Emeritus) and the American Academy in Rome (Emeritus). Mr. Miller was elected a Director of Alliance in July 1997. He has been a Director, President and Chief Executive Officer of ECI since August 1997. He was President of Equitable from August 1997 to January 1998 and has been Chairman of Equitable since January 1998 and Chief Executive Officer and a Director of Equitable since August 1997. He is also a Senior Executive Vice President of AXA. From 1996 to 1997, he was Senior Vice Chairman of Chase Manhattan Corporation. Prior thereto, he was President of Chemical Bank (which merged with Chase in 1996) from 1994 to 1996 and Vice Chairman from 1991 to 1994. He is also a Director of DLJ, AXA Canada and KeySpan Energy Corporation, formed as a 22
result of the merger of Long Island Lighting Company and Brooklyn Union Gas Co. AXA, ECI and Equitable are parents of the Partnership. DLJ is a subsidiary of ECI. Mr. Noris was elected a Director of Alliance in July 1995. Since 1995 Mr. Noris has been Executive Vice President and Chief Investment Officer of ECI. Since 1995 Mr. Noris has been the Executive Vice President and Chief Investment Officer of Equitable. Prior to that he was Vice President - Investment Strategy for Salomon Brothers from 1992 to 1995. From 1984 to 1992 Mr. Noris was a Principal in the Fixed Income and Equity Divisions of Morgan Stanley Group Inc. ECI and Equitable are parents of the Partnership. Mr. Savage was elected a Director of Alliance in May 1993. He has been Chairman of Alliance Capital Management International, a division of the Partnership, since May 1994. Mr. Savage is a Director of ACFG, a subsidiary of the Partnership, and was Chairman of ACFG from July 1993 to August 1996. Prior to this, he was with ECMC, serving as Vice Chairman from June 1986 to April 1992, and Chairman from April 1992 to July 1993. In addition, Mr. Savage is a Director of Lockheed Martin Corporation, Lyondell Chemical Company and Qualcomm Inc. Mr. Tulin was elected a Director of Alliance in July 1997. He is an Executive Vice President and Chief Financial Officer of ECI and Director, Vice Chairman and Chief Financial Officer of Equitable. Mr. Tulin was elected a Director of DLJ in June 1997. Mr. Tulin was formerly Coopers & Lybrand's Co-Chairman of the Insurance Industry Practice. Before joining Coopers & Lybrand, Mr. Tulin was with Milliman and Robertson and from 1983 to 1988, he served as the consulting actuary to the Rehabilitators of the Baldwin United Corporation Life Company subsidiaries in rehabilitation. Mr. Tulin is a fellow of the Society of Actuaries, a member and Treasurer of the American Academy of Actuaries and a frequent speaker at actuarial and insurance industry conferences. He is a member of the Board of Directors for the Jewish Theological Seminary. ECI and Equitable are parents of the Partnership, and DLJ is a subsidiary of ECI. Mrs. Williams was elected a Director of Alliance in October 1993. She is currently the Director of Special Projects of the Partnership. She serves on the Boards of Directors of the India Liberalisation Fund, The Spain Fund, The Austria Fund, The Southern Africa Fund and The Turkish Growth Fund. Mrs. Williams, who has worked at McKinsey and Company, Inc. and as a securities analyst at Mitchell, Hutchins, Inc., has a Masters in Business Administration and a Ph.D. in Art History. Mrs. Williams is the wife of Mr. Dave H. Williams, Chairman of the Board and a Director of Alliance. Mr. Zoellick was elected a Director of Alliance in February 1997. He is currently the President and CEO of the Center for Strategic and International Studies, an independent non-profit public policy institute with a staff of 180 and a $17 million budget. He served as the John M. Olin Professor in National Security Affairs at the U.S. Naval Academy for 1997 and 1998. From 1993 through 1997, Mr. Zoellick was an Executive Vice President at Fannie Mae, the largest investor in home mortgages in the U.S. Before joining Fannie Mae, he was Deputy Chief of Staff of the White House and Assistant to the President from 1992 to 1993. From 1989 to 1992, Mr. Zoellick was the Counselor of the State Department and later also Under Secretary of State for Economics. He served as the President's personal representative for the 1991 and 1992 G-7 Economic Summits. From 1985 to 1988, Mr. Zoellick served at the Department of Treasury in a number of posts, including Counselor to Secretary James A. Baker III. He serves on the boards of Jones Intercable and Said Holdings and the Advisory Council of Enron Corp. Mr. Zoellick also serves on the boards of several non-profit entities including the Council on Foreign Relations, the German Marshall Fund, the Eurasia Foundation, the European Institute, the American Council on Germany, the National Bureau of Asian Research and the Overseas Development Council. Mr. Brewer joined Alliance in 1987 and has been Senior Vice President and General Counsel since 1991. From 1987 until 1990 Mr. Brewer was Vice President and Assistant General Counsel of Alliance. Mr. Joseph joined Alliance in 1984 and has been Senior Vice President and Chief Financial Officer since December 1994. He was Senior Vice President and Controller from 1989 until January 1994 and Senior Vice President-Finance from January 1994 until December 1994. From 1986 until 1989 Mr. Joseph was Vice President and Controller of Alliance and from 1984 to 1986 Mr. Joseph was a Vice President and the Controller of AFS, a subsidiary of the Partnership. Certain executive officers of Alliance are also directors or trustees and officers of various Alliance Mutual Funds and The Hudson River Trust and are directors and officers of certain of the Partnership's subsidiaries. 23
All directors of the General Partner hold office until the next annual meeting of the stockholder of the General Partner and until their successors are elected and qualified. All officers of the General Partner serve at the discretion of the General Partner's Board of Directors. The General Partner has an Audit Committee composed of its independent directors Mr. Holloway and Mr. Zoellick. The Audit Committee reports to the Board of Directors with respect to the selection and terms of engagement of the Partnership's independent auditors and with respect to the Year 2000 initiative and certain other matters. The Audit Committee also reviews various matters relating to the Partnership's accounting and auditing policies and procedures. The Audit Committee held 4 meetings in 1998. The General Partner has a Board Compensation Committee composed of Messrs. Williams, Holloway and Miller. The Board Compensation Committee is responsible for compensation and compensation related matters, including, but not limited to, responsibility and authority for determining bonuses, contributions and awards under most employee incentive plans or arrangements, amending or terminating such plans or arrangements or any welfare benefit plan or arrangement or adopting any new incentive, fringe benefit or welfare benefit plan or arrangement. The Option Committee, consisting of Mr. Holloway and Mr. Zoellick, is responsible for granting options under the Partnership's Unit Option Plan and 1993 Unit Option Plan. The 1997 Option Committee, consisting of Messrs. Williams, Holloway, Miller and Zoellick, is responsible for granting options under the Partnership's 1997 Long Term Incentive Plan. The Unit Option and Unit Bonus Committee, consisting of Messrs. Holloway and Miller, is responsible for granting awards under the Partnership's Unit Bonus Plan. The Board Compensation Committee, Option Committee, Unit Option and Unit Bonus Committee and 1997 Option Committee consult with a Management Compensation Committee consisting of Messrs. Williams, Calvert, Carifa and Harrison with respect to matters within their authority. The Century Club Plan Committee, consisting of Messrs. Carifa and Michael J. Laughlin, Executive Vice President of the General Partner and Chairman of the Board of AFD, is responsible for granting awards under the Partnership's Century Club Plan. The General Partner pays directors who are not employees of the Partnership, Equitable or any affiliate of Equitable an annual retainer of $18,000 plus $1,000 per meeting attended of the Board of Directors and $500 per meeting of a committee of the Board of Directors not held in conjunction with a Board of Directors meeting. The Partnership reimburses Messrs. Bastida, Brydon, de Castries, Dolan, Duverne, Hatt, Holloway and Zoellick for certain expenses incurred in attending Board of Directors' meetings. Other directors are not entitled to any additional compensation from the General Partner for their services as directors. The Board of Directors meets quarterly. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires the General Partner's directors and executive officers, and persons who own more than 10% of the Units, to file with the SEC and NYSE initial reports of ownership and reports of changes in ownership of Units. To the best of the Partnership's knowledge, during the year ended December 31, 1998 all Section 16(a) filing requirements applicable to its executive officers, directors and 10% beneficial owners were complied with. 24
ITEM 11. EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth all plan and non-plan compensation awarded to, earned by or paid to the Chairman of the Board and each of the four most highly compensated executive officers of the General Partner at the end of 1998 ("Named Executive Officers"): <TABLE> <CAPTION> Long Term Compensation ----------------------------- Annual Compensation Awards Payouts ----------------------------------------- -------------------- --------- ---------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Annual Restricted All other Compen- Stock LTIP Compen- sation Award(s) Options/ Payouts sation Name and Principal Position Year Salary ($) Bonus ($) ($) (1) ($) (#Units) ($ )(1) ($) (2) - --------------------------- ---- ---------- --------- ------- ---------- -------- ------- --------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Dave H. Williams 1998 $ 274,976 $4,500,000 $-------- $ 0 $ 0 $ 0 $ 482,531 Chairman of the Board 1997 274,976 3,000,000 --------- 0 0 0 835,027 1996 263,443 4,000,000 --------- 0 0 0 267,568 John D. Carifa 1998 250,000 5,000,000 --------- 0 500,000 0 1,209,640 President & Chief Operating 1997 250,000 4,000,000 --------- 0 0 0 686,979 Officer 1996 238,461 3,000,000 54,752 0 0 0 426,398 Bruce W. Calvert 1998 250,000 4,500,000 264,273 0 500,000 0 1,208,311 Vice Chairman & 1997 250,000 4,000,000 --------- 0 0 0 687,532 Chief Executive Officer 1996 238,461 3,000,000 --------- 0 0 0 425,101 Robert H. Joseph, Jr. 1998 163,846 591,500 257,798 0 20,000 0 187,737 Senior Vice President & 1997 160,000 494,000 --------- 0 20,000 0 110,335 Chief Financial Officer 1996 157,692 385,000 --------- 0 20,000 0 61,434 David R. Brewer, Jr. 1998 163,846 595,000 199,448 0 20,000 0 187,737 Senior Vice President 1997 157,692 495,500 104,646 0 20,000 0 110,037 & General Counsel 1996 146,538 395,750 --------- 0 20,000 0 62,108 </TABLE> (1) Perquisites and personal benefits are not included in column (e) if the aggregate amount did not exceed the lesser of either $50,000 or 10% of the total annual salary and bonus reported in columns (c) and (d). Column (e) for 1996 includes for Mr. Carifa, among other perquisites and personal benefits, $26,775 representing interest rate subsidies equal to 3% per annum of the outstanding balances of personal loans obtained by Mr. Carifa from commercial banks, the proceeds of which were used to pay withholding tax liabilities related to the vesting of Units acquired in 1988 and $7,500, for personal tax services. Column (e) for 1998 includes for Mr. Calvert, among other perquisites and personal benefits, $247,323 for costs, including housing, cost-of-living adjustment, tax equalization and car allowance, for a temporary assignment in London and $16,950 for personal tax services. Column (e) for 1998 includes for Mr. Joseph among other perquisites and personal benefits, $240,000 representing the dollar value of the difference between the exercise price and fair market value of Units acquired as a result of the exercise of options granted under the Partnership's Unit Option Plan, and $9,000 for personal tax services. 25
(2) Column (e) for 1998 and 1997 includes for Mr. Brewer, among other perquisites and personal benefits, $187,000 and $98,000, respectively, representing the dollar value of the difference between the exercise price and the fair market value of Units acquired as a result of the exercise of options granted under the Partnership's Unit Option Plan and, for 1998, $5,700 for personal tax services. (2) Column (i) includes award amounts vested and earnings credited in 1996, 1997 and 1998 in respect of the Alliance Partners Compensation Plan. Column (i) does not include any amounts in respect of awards made in 1998 in respect of the Alliance Partners Compensation Plan since none of these awards have vested and no earnings have been credited in respect of these awards. Column (i) includes the following amounts for 1998: <TABLE> <CAPTION> Vesting of Awards Earnings Vesting of Awards and Accrued Earnings Profit Accrued and Accrued Earnings Under Alliance Sharing Term Life On Partners Under Capital Partners Plan Insurance Plan Balances Accumulation Plan Compensation Plan Contribution Premiums Total ------------- -------------------- ------------------- ------------ ----------- ----- <S> <C> <C> <C> <C> <C> <C> Dave H. Williams $ 14,258 $ 81,694 $ 342,316 $ 23,000 $ 21,263 $ 482,531 John D. Carifa 5,575 94,224 1,079,929 23,000 6,912 1,209,640 Bruce W. Calvert 4,918 98,306 1,079,929 23,000 2,158 1,208,311 Robert H. Joseph, Jr. 0 0 160,306 23,000 4,431 187,737 David R. Brewer, Jr. 0 0 160,306 23,000 4,431 187,737 </TABLE> 26
OPTION GRANTS IN 1998 The table below shows information regarding grants of options made to the Named Executive Officers under the Partnership's Unit Option Plan, 1993 Unit Option Plan and 1997 Long Term Incentive Plan ("Partnership Option Plans") during 1998. The amounts shown for each of the Named Executive Officers as potential realizable values are based on assumed annualized rates of appreciation of five percent and ten percent over the full ten-year term of the options, which would result in Unit prices of approximately $43.61 and $69.28, respectively. The amounts shown as potential realizable values for all Unitholders represent the corresponding increases in the market value of 170,365,963 outstanding Units held by all Unitholders as of December 31, 1998, which would total approximately $2.9 billion and $7.3 billion, respectively. No gain to the optionees is possible without an increase in Unit price which will benefit all Unitholders proportionately. These potential realizable values are based solely on assumed rates of appreciation required by applicable SEC regulations. Actual gains, if any, on option exercises and Unitholdings are dependent on the future performance of the Partnership's Units. There can be no assurance that the potential realizable values shown in this table will be achieved. <TABLE> <CAPTION> Option Grants In 1998 Potential Realizable Value at Assumed Annual Rates of Unit Price Individual Grants (1) Appreciation for Option Term --------------------------------------------------------------------------------------------------- % of total Number of Options Securities Granted to Underlying Employees in Exercise Options Granted Fiscal Year Price Expiration 5% 10% Name (#) (2) ($/Unit) Date ($) ($) - ----------------------------------------------------------------------------------------------------------------------------- <C> <C> <C> <C> <C> <C> <C> Dave H. Williams 0 N/A N/A N/A N/A N/A John D. Carifa 500,000 18.0% 26.3125 12/10/08 8,274,000 20,968,000 Bruce W. Calvert 500,000 18.0% 26.3125 12/10/08 8,274,000 20,968,000 Robert H. Joseph, Jr. 20,000 0.7% 26.3125 12/10/08 331,000 839,000 David R. Brewer, Jr. 20,000 0.7% 26.3125 12/10/08 331,000 839,000 </TABLE> (1) Options on Units are awarded at the fair market value of Units at the date of award and become exercisable in 20% increments commencing one year from such date if the optionee has not died or terminated employment. Such options lapse at the earliest of ten years after award, three months after the optionee's normal termination of employment or disability, six months after the optionee's death, or at the time of the optionee's termination of employment otherwise than normally. (2) Options in respect of 2,777,000 Units were granted in 1998. 27
AGGREGATED OPTION EXERCISES IN 1998 AND 1998 YEAR-END OPTION VALUES The following table summarizes for each of the Named Executive Officers the number of options exercised during 1998, the aggregate dollar value realized upon exercise, the total number of Units subject to unexercised options held at December 31, 1998, and the aggregate dollar value of in-the-money, unexercised options held at December 31, 1998. Value realized upon exercise is the difference between the fair market value of the underlying Units on the exercise date and the exercise price of the option. Value of unexercised, in-the-money options at fiscal year-end is the difference between its exercise price and the fair market value of the underlying Units on December 31, 1998, which was $25.75 per Unit. These values, have not been, and may never be, realized. The underlying options have not been, and may never be, exercised; and actual gains, if any, on exercise will depend on the value of the Partnership's Units on the date of exercise. There can be no assurance that these values will be realized. <TABLE> <CAPTION> Aggregated Option Exercises In 1998 And December 31, 1998 Option Values Number of Units Value of Unexercised Underlying Unexpired In-the-Money Options Options Value Options at December 31, 1998 at December 31, 1998 ($) (1) Exercised Realized ----------------------------------- ------------------------------------ Name (# Units) ($) Exercisable Unexercisable Exercisable Unexercisable - ------------------------- ----------- --------------- ---------------- ---------------- ----------------- ----------------- <S> <C> <C> <C> <C> <C> <C> Dave H. Williams 0 N/A 0 0 0 0 John D. Carifa 0 N/A 530,000 720,000 8,457,500 3,530,000 Bruce W. Calvert 0 N/A 500,000 700,000 7,975,625 3,208,750 Robert H. Joseph, Jr. 10,880 240,000 119,120 80,000 1,943,495 775,250 David R. Brewer, Jr. 9,192 187,000 158,808 68,000 2,914,919 583,500 - ------------------------- ----------- --------------- ---------------- ---------------- ----------------- ----------------- </TABLE> (1) In-the-Money Options are those where the fair market value of the underlying Units exceeds the exercise price of the option. The Named Executive Officers hold no other options in respect of the Units. COMPENSATION AGREEMENTS WITH CERTAIN EXECUTIVE OFFICERS In connection with Equitable's 1985 acquisition of DLJ, the former parent of ACMC, ACMC entered into employment agreements with Messrs. Williams, Carifa and Calvert. Each agreement provided for deferred compensation payable in stated monthly amounts for ten years commencing at age 65, or earlier in a reduced amount in the event of disability or death, if the individual involved so elects. The right to receive such deferred compensation is vested. Assuming payments commence at age 65, the annual amount of deferred compensation payable for ten years to Messrs. Williams, Carifa and Calvert is $378,900, $522,036, and $434,612, respectively. While the Partnership assumed responsibility for payment of these deferred compensation obligations, ACMC and Alliance are required, subject to certain limitations, to make capital contributions to the Partnership in an amount equal to the payments, and ACMC is also obligated to the employees for the payments. ACMC's obligations to make capital contributions to the Partnership are guaranteed, subject to certain limitations, by Equitable Investment Corporation ("EIC"), a wholly-owned subsidiary of Equitable, the parent of Alliance. CERTAIN EMPLOYEE BENEFIT PLANS RETIREMENT PLAN. The Partnership maintains a qualified, non-contributory, defined benefit retirement plan covering most employees of the Partnership who have completed one year of service and attained age 21. Employer contributions are determined by application of actuarial methods and assumptions to reflect the cost of benefits under the plan. Each participant's benefits are determined under a formula which takes into account years of credited service, the participant's average compensation over prescribed periods and Social Security covered compensation. The maximum annual benefit payable under the plan may not exceed the lesser of $100,000 or 100% of a participant's average aggregate compensation for the three consecutive years in which he received the highest aggregate compensation from the Partnership or such lower limit as may be imposed by the Internal Revenue Code on certain participants by reason of their coverage under another qualified 28
plan maintained by the Partnership. A participant is fully vested after the completion of five years of service. The plan generally provides for payments to or on behalf of each vested employee upon such employee's retirement at the normal retirement age provided under the plan or later, although provision is made for payment of early retirement benefits on an actuarially reduced basis. Normal retirement age under the plan is 65. Death benefits are payable to the surviving spouse of an employee who dies with a vested benefit under the plan. The table below sets forth with respect to the retirement plan the estimated annual straight life annuity benefits payable upon retirement at normal retirement age for employees with the remuneration and years of service indicated. <TABLE> <CAPTION> Estimated Annual Benefits ------------------------------------------------------------------------------------- Average Final Years of Service at Retirement Compensation ------------------------------------------------------------------------------------- 15 20 25 30 35 40 45 <S> <C> <C> <C> <C> <C> <C> <C> $100,000 $19,277 $25,702 $32,128 $38,553 $44,979 $49,979 $54,979 150,000 30,527 40,702 50,878 61,053 71,229 78,729 86,229 200,000 41,777 55,702 69,628 83,553 97,479 100,000 100,000 250,000 53,027 70,702 88,378 100,000 100,000 100,000 100,000 300,000 64,277 85,702 100,000 100,000 100,000 100,000 100,000 </TABLE> Assuming they are employed by the Partnership until age 65, the credited years of service under the plan for Messrs. Williams, Carifa, Calvert, Joseph and Brewer would be 20, 40, 38, 28 and 22, respectively. Compensation on which plan benefits are based includes only base compensation and not bonuses, incentive compensation, profit-sharing plan contributions or deferred compensation. The compensation for calculation of plan benefits for each of these five individuals for 1998 is $160,000, $160,000, $160,000, $160,000 and $160,000, respectively. DLJ EXECUTIVE SUPPLEMENTAL RETIREMENT PROGRAM. In 1983 DLJ adopted an Executive Supplemental Retirement Program under which certain employees of the Partnership deferred a portion of their 1983 compensation in return for which DLJ agreed to pay each of them a specified annual retirement benefit for 15 years beginning at age 65. Benefits are based upon the participant's age and the amount deferred and are calculated to yield an approximate 12.5% annual compound return. In the event of the participant's disability or death, an equal or lesser amount is to be paid to the participant or his beneficiary. After age 55, participants the sum of whose age and years of service equals 80 may elect to have their benefits begin in an actuarially reduced amount before age 65. DLJ has funded its obligation under the Program through the purchase of life insurance policies. The following table shows as to the Named Executive Officers who are participants in the Plan the estimated annual retirement benefit payable at age 65. Each of these individuals is fully vested in the applicable benefit. <TABLE> <CAPTION> Estimated Annual Name Retirement Benefit - ---- ------------------ <S> <C> Dave H. Williams $ 41,825 John D. Carifa 114,597 Bruce W. Calvert 145,036 </TABLE> 29
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT PRINCIPAL SECURITY HOLDERS The Partnership has no information that any person beneficially owns more than 5% of the outstanding Units except (i) Equitable, ACMC and ECMC, wholly-owned subsidiaries of ECI, and (ii) as reported on Amendment No. 5 to Schedule 13D dated September 4, 1997, filed with the SEC by AXA and certain of its affiliates pursuant to the Securities Exchange Act of 1934. The following table and notes have been prepared in reliance upon such filing for the nature of ownership and an explanation of overlapping ownership. <TABLE> <CAPTION> Amount and Nature of Beneficial Name and Address of Ownership Reported on Percent Beneficial Owner Schedule of Class - ------------------- ---------------------- -------- <S> <C> <C> AXA (1)(2)(3)(4) 96,647,111 56.7% 9 place Vendome 75001 Paris France ECI (4) 96,647,111 56.7% 1290 Avenue of the Americas New York, NY 10019 </TABLE> (1) Based on information provided by ECI, at March 1, 1999, AXA and certain of its subsidiaries beneficially owned approximately 58.4% of ECI's outstanding common stock. For insurance regulatory purposes the shares of capital stock of ECI beneficially owned by AXA and its subsidiaries have been deposited into a voting trust ("Voting Trust") which has an initial term of 10 years commencing May 12, 1992. The trustees of the Voting Trust (the "Voting Trustees") are Claude Bebear, Patrice Garnier and Henri de Clermont-Tonnerre, each of whom serves on either the Executive Board (in the case of Mr. Bebear) or Supervisory Board (in the case of Messrs. Garnier and de Clermont-Tonnerre) of AXA. The Voting Trustees have agreed to exercise their voting rights to protect the legitimate economic interests of AXA, but with a view to ensuring that certain minority shareholders of AXA do not exercise control over ECI or certain of its insurance subsidiaries. (2) Based on information provided by AXA, on March 1, 1999, approximately 20.7% of the issued ordinary shares (representing 32.7% of the voting power) of AXA were owned directly and indirectly by Finaxa, a French holding company. As of March 1, 1999, 61.7% of the shares (representing 72.3% of the voting power) of Finaxa were owned by four French mutual insurance companies (the "Mutuelles AXA") (one of which, AXA Assurances I.A.R.D. Mutuelle, owned 35.4% of the shares, representing 41.5% of the voting power), and 22.7% of the shares of Finaxa (representing 13.7% of the voting power) were owned by Paribas, a French bank. Including the ordinary shares owned by Finaxa, on March 1, 1999, the Mutuelles AXA directly or indirectly owned approximately 23.9% of the issued ordinary shares (representing 37.6% of the voting power) of AXA. (3) The Voting Trustees may be deemed to be beneficial owners of all Units beneficially owned by AXA and its subsidiaries. In addition, the Mutuelles AXA, as a group, and Finaxa may be deemed to be beneficial owners of all Units beneficially owned by AXA and its subsidiaries. By virtue of the provisions of the Voting Trust Agreement, AXA may be deemed to have shared voting power with respect to the Units. AXA and its subsidiaries have the power to dispose or direct the disposition of all shares of the capital stock of ECI deposited in the Voting Trust. The Mutuelles AXA, as a group, and Finaxa may be deemed to share the power to vote or to direct the vote and to dispose or to direct the disposition of all the Units beneficially 30
owned by AXA and its subsidiaries. The address of each of AXA and the Voting Trustees is 9 Place Vendome, 75001 Paris, France. The address of Finaxa is 23 avenue Matignon, 75008 Paris, France. The addresses of the Mutuelles AXA are as follows: The address of each of AXA Assurances Vie Mutuelle and AXA Assurances I.A.R.D. Mutuelle is 21 rue de Chateaudun, 75009 Paris, France; the address of AXA Conseil Vie Assurance Mutuelle is Tour Franklin, 100/101 Terrasse Boieldieu, Cedex 11, 92042 Paris La Defense, France; and the address of AXA Courtage Assurance Mutuelle is 26 rue Louis le Grand, 75002 Paris, France. The address of Paribas is 3 rue d'Antin, Paris, France. (4) By reason of their relationship, AXA, the Voting Trustees, the Mutuelles AXA, Finaxa, ECI, Equitable, Equitable Holdings, L.L.C., EIC, ACMC and ECMC may be deemed to share the power to vote or to direct the vote and to dispose or direct the disposition of all or a portion of the 96,613,481 Units. 31
MANAGEMENT The following table sets forth, as of March 1, 1999, the beneficial ownership of Units by each director and each Named Executive Officer of the General Partner and by all directors and executive officers of the General Partner as a group: <TABLE> <CAPTION> Name of Number of Units and Nature of Percent of Beneficial Owner Beneficial Ownership Class ---------------- ---------------------------- ----------- <S> <C> <C> Dave H. Williams (1)(2) 1,868,912 1.1% Luis Javier Bastida 0 * Donald H. Brydon (1) 0 * Bruce W. Calvert (1) (3) 1,550,000 * John D. Carifa(1) (4) 2,205,136 1.3% Henri de Castries (1) 0 * Kevin C. Dolan (1) 0 * Denis Duverne (1) 0 * Alfred Harrison (1) 730,820 * Herve Hatt (1) 0 * Michael Hegarty (1) 0 * Benjamin D. Holloway 11,600 * Edward D. Miller (1) 0 * Peter D. Noris (1) 2,000 * Frank Savage (1) 101,000 * Stanley B. Tulin (1) 0 * Reba W. Williams (1)(5) 1,868,912 * Robert B. Zoellick 600 * David R. Brewer, Jr. (1)(6) 253,808 * Robert H. Joseph, Jr. (1) (7) 147,120 * All Directors and executive officers of the General Partner as a Group (20 persons)(8) 6,870,996 4.0% </TABLE> * Number of Units listed represents less than 1% of the Units outstanding. (1) Excludes Units beneficially owned by AXA, ECI and/or Equitable. Messrs. Williams, Brydon, de Castries, Dolan, Duverne, Hatt, Hegarty, Miller, Noris and Tulin are directors and/or officers of AXA, ECI and/or Equitable. Messrs. Williams, Calvert, Carifa, Harrison, Savage, Brewer, Joseph and Mrs. Reba W. Williams are directors and/or officers of ACMC. (2) Includes 160,000 Units owned by Mrs. Reba W. Williams. (3) Includes 550,000 Units which may be acquired within 60 days under Partnership Option Plans. (4) Includes 590,000 Units which may be acquired within 60 days under Partnership Option Plans. (5) Includes 1,708,912 Units owned by Mr. Dave H. Williams. (6) Includes 162,808 Units which may be acquired within 60 days under Partnership Option Plans. (7) Includes 127,120 Units which may be acquired within 60 days under Partnership Option Plans. (8) Includes 1,429,928 Units which may be acquired within 60 days under Partnership Option Plans. 32
The following tables set forth, as of March 1, 1999, the beneficial ownership of the common stock of ECI, AXA and Finaxa by each director and each Named Executive Officer of the General Partner and by all directors and executive officers of the General Partner as a group: <TABLE> <CAPTION> ECI Common Stock ---------------- Name of Number of Shares and Nature of Percent of Beneficial Owner Beneficial Ownership Class - ---------------- ------------------------------ ---------- <S> <C> <C> Dave H. Williams (1)(2) 100,000 * Luis Javier Bastida 0 * Donald H. Brydon (2) 0 * Bruce W. Calvert (3) 50,000 * John D. Carifa (4) 50,000 * Henri de Castries (2)(5) 13,333 * Kevin C. Dolan (2) 0 * Denis Duverne (2)(6) 10,333 * Alfred Harrison 0 * Herve Hatt (2) 0 * Michael Hegarty (2)(7) 48,228 * Benjamin D. Holloway 108 * Edward D. Miller (2)(8) 142,745 * Peter D. Noris (9) 70,825 * Frank Savage 136 * Stanley B. Tulin (10) 87,437 * Reba W. Williams (1) 100,000 * Robert B. Zoellick 0 * David R. Brewer, Jr. 0 * Robert H. Joseph, Jr. 0 * All Directors and executive officers of the General Partner as a Group (20 Persons) (11) 573,145 * </TABLE> * Number of shares listed represents less than one percent (1%) of the number of shares of Common Stock outstanding. (1) Represents 100,000 shares subject to options held by Mr. Williams, which options Mr. Williams has the right to exercise within 60 days. (2) Excludes shares beneficially owned by AXA. Messrs. Williams, Brydon, de Castries, Dolan, Duverne, Hatt, and Miller are officers of AXA. (3) Represents 50,000 shares subject to options held by Mr. Calvert, which options Mr. Calvert has the right to exercise within 60 days. (4) Represents 50,000 shares subject to options held by Mr. Carifa, which options Mr. Carifa has the right to exercise within 60 days. (5) Represents 13,333 shares subject to options held by Mr. de Castries, which options Mr. de Castries has the right to exercise within 60 days. (6) Includes 8,333 shares subject to options held by Mr. Duverne, which options Mr. Duverne has the right to exercise within 60 days. (7) Includes 48,039 shares subject to options held by Mr. Hegarty, which options Mr. Hegarty has the right to exercise within 60 days. (8) Represents 142,745 shares subject to options held by Mr. Miller, which options Mr. Miller has the right to exercise within 60 days. (9) Represents 70,825 shares subject to options held by Mr. Noris, which options Mr. Noris has the right to exercise within 60 days. (10) Includes 82,819 shares subject to options held by Mr. Tulin, which options Mr. Tulin has the right to exercise within 60 days and 4,000 shares owned jointly by Mr. Tulin and his spouse, Riki P. Tulin. (11) Includes 566,094 shares subject to options, which options my be exercised within 60 days. 33
<TABLE> <CAPTION> AXA Common Stock ---------------- Name of Number of Shares and Nature of Percent of Beneficial Owner Beneficial Ownership Class - ---------------- ------------------------------ ---------- <S> <C> <C> Dave H. Williams (1) 5,000 * Luis Javier Bastida 0 * Donald H. Brydon 0 * Bruce W. Calvert (2) 1,250 * John D. Carifa (3) 1,750 * Henri de Castries (4) 70,188 * Kevin C. Dolan (5) 19,201 * Denis Duverne (6) 11,042 * Alfred Harrison 0 * Herve Hatt 0 * Michael Hegarty 0 * Benjamin D. Holloway 0 * Edward D. Miller 0 * Peter D. Noris (7) 1,250 * Frank Savage 0 * Stanley B. Tulin (8) 3,500 * Reba W. Williams (1) 5,000 * Robert B. Zoellick 0 * David R. Brewer, Jr. 0 * Robert H. Joseph, Jr. 0 * All Directors and executive officers of the General Partner as a Group (20 persons) (9) 113,181 * </TABLE> * Number of shares listed represents less than one percent (1%) of the outstanding AXA common stock. Holdings of AXA American Depositary Shares are expressed as their equivalent in AXA common stock. Each AXA American Depositary Share is equivalent to one-half of a share of AXA Common Stock. (1) Represents 5,000 shares subject to options held by Mr. Williams, which options Mr. Williams has the right to exercise within 60 days. (2) Represents 1,250 shares subject to options held by Mr. Calvert, which options Mr. Calvert has the right to exercise within 60 days. (3) Includes 1,250 shares subject to options held by Mr. Carifa, which options Mr. Carifa has the right to exercise within 60 days. (4) Includes 69,188 shares subject to options held by Mr. de Castries, which options Mr. de Castries has the right to exercise within 60 days. (5) Represents 19,201 shares subject to options held by Mr. Dolan, which options Mr. Dolan has the right to exercise within 60 days. (6) Includes 1,000 shares held jointly with Mr. Duverne's wife, 42 shares owned by Mr. Duverne's children and 10,000 shares subject to options held by Mr. Duverne, which options Mr. Duverne has the right to exercise within 60 days. (7) Represents 1,250 shares subject to options held by Mr. Noris, which options Mr. Noris has the right to exercise within 60 days. (8) Includes 2,500 shares subject to options held by Mr. Tulin, which options Mr. Tulin has the right to exercise within 60 days. (9) Includes 109,639 total options shares subject to options, which options may be exercised within 60 days. 34
<TABLE> <CAPTION> Finaxa Common Stock ------------------- Name of Number of Shares and Nature of Percent of Beneficial Owner Beneficial Ownership Class - ---------------- ------------------------------ ---------- <S> <C> <C> Dave H. Williams 0 * Luis Javier Bastida 0 * Donald H. Brydon 0 * Bruce W. Calvert 0 * John D. Carifa 0 * Henri de Castries (1) 115,000 * Kevin C. Dolan 0 * Denis Duverne 0 * Alfred Harrison 0 * Herve Hatt 0 * Michael Hegarty 0 * Benjamin D. Holloway 0 * Edward D. Miller 0 * Peter D. Noris 0 * Frank Savage 0 * Stanley B. Tulin 0 * Reba W. Williams 0 * Robert B. Zoellick 0 * David R. Brewer, Jr. 0 * Robert H. Joseph, Jr. 0 * All Directors and executive officers of the General Partner as a Group (20 persons) (2) 115,000 * </TABLE> * Number of shares listed represents less than one percent (1%) of the outstanding Finaxa common stock. (1) Represents 115,000 shares subject to options held by Mr. de Castries, which options Mr. de Castries has the right to exercise within 60 days. (2) Represents 115,000 shares subject to options, which options may be exercised within 60 days. 35
The General Partner makes all decisions relating to the management of the Partnership. The General Partner has agreed that it will conduct no business other than managing the Partnership, although it may make certain investments for its own account. Conflicts of interest, however, could arise between the General Partner and the Unitholders. Section 17-403(b) of the Delaware Revised Uniform Limited Partnership Act (the "Delaware Act") states that, except as provided in the Delaware Act or the partnership agreement, a general partner of a limited partnership has the same liabilities to the partnership and to the limited partners as a general partner in a partnership without limited partners. While, under Delaware law, a general partner of a limited partnership is liable as a fiduciary to the other partners, the Agreement of Limited Partnership of Alliance Capital Management L.P. (As Amended and Restated) ("Partnership Agreement") sets forth a more limited standard of liability for the General Partner. The Partnership Agreement provides that the General Partner is not liable for monetary damages to the Partnership for errors in judgment or for breach of fiduciary duty (including breach of any duty of care or loyalty), unless it is established that the General Partner's action or failure to act involved an act or omission undertaken with deliberate intent to cause injury to the Partnership, with reckless disregard for the best interests of the Partnership or with actual bad faith on the part of the General Partner, or constituted actual fraud. Whenever the Partnership Agreement provides that the General Partner is permitted or required to make a decision (i) in its "discretion," the General Partner is entitled to consider only such interests and factors as it desires and has no duty or obligation to consider any interest of or other factors affecting the Partnership or any Unitholder or (ii) in its "good faith" or under another express standard, the General Partner will act under that express standard and will not be subject to any other or different standard imposed by the Partnership Agreement or applicable law. In addition, the Partnership Agreement grants broad rights of indemnification to the General Partner and its directors and affiliates and authorizes the Partnership to enter into indemnification agreements with the directors, officers, partners, employees and agents of the Partnership and its affiliates. The Partnership has granted broad rights of indemnification to officers of the General Partner and employees of the Partnership. In addition, the Partnership assumed indemnification obligations previously extended by Alliance to its directors, officers and employees. The foregoing indemnification provisions are not exclusive, and the Partnership is authorized to enter into additional indemnification arrangements. The Partnership has obtained directors and officers liability insurance. The Partnership Agreement also allows transactions between the Partnership and the General Partner or its affiliates if the transactions are on terms determined by the General Partner to be comparable to (or more favorable to the Partnership than) those that would prevail with any unaffiliated party. The Partnership Agreement provides that those transactions are deemed to meet that standard if such transactions are approved by a majority of those directors of the General Partner who are not directors, officers or employees of any affiliate of the General Partner (other than the Partnership and its subsidiaries) or, if in the reasonable and good faith judgment of the General Partner, the transactions are on terms substantially comparable to (or more favorable to the Partnership than) those that would prevail in a transaction with an unaffiliated party. The Partnership Agreement expressly permits all affiliates of the General Partner (including Equitable and its other subsidiaries) to compete, directly or indirectly, with the Partnership, to engage in any business or other activity and to exploit any opportunity, including those that may be available to the Partnership. AXA, ECI, Equitable and certain of their subsidiaries currently compete with the Partnership. See "Item 13." Certain Relationships and Related Transactions-Competition." The Partnership Agreement further provides that, except to the extent that a decision or action by the General Partner is taken with the specific intent of providing a benefit to an affiliate of the General Partner to the detriment of the Partnership, there is no liability or obligation with respect to, and no challenge of, decisions or actions of the General Partner that would otherwise be subject to claims or other challenges as improperly benefiting affiliates of the General Partner to the detriment of the Partnership or otherwise involving any conflict of interest or breach of a duty of loyalty or similar fiduciary obligation. The fiduciary obligations of general partners is a developing area of the law and it is not clear to what extent the foregoing provisions of the Partnership Agreement are enforceable under Delaware or federal law. 36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS COMPETITION AXA, ECI, Equitable and certain of their direct and indirect subsidiaries provide financial services, some of which are competitive with those offered by the Partnership. The Partnership Agreement specifically allows Equitable and its subsidiaries (other than the General Partner) to compete with the Partnership and to exploit opportunities that may be available to the Partnership. AXA, ECI, Equitable and certain of their subsidiaries have substantially greater financial resources than the Partnership or the General Partner. FINANCIAL SERVICES The Partnership Agreement permits Equitable and its affiliates to provide services to the Partnership on terms comparable to (or more favorable to the Partnership than) those that would prevail in a transaction with an unaffiliated third party. The Partnership believes that its arrangements with Equitable and its affiliates are at least as favorable to the Partnership as could be obtained from an unaffiliated third party, based on its knowledge of and inquiry with respect to comparable arrangements with or between unaffiliated third parties. The Partnership acts as the investment manager for the general and separate accounts of Equitable and its insurance company subsidiary pursuant to investment advisory agreements. During 1998 the Partnership received approximately $62.5 million in fees pursuant to these agreements. In connection with the services provided under these agreements the Partnership provides ancillary accounting, valuation, reporting, treasury and other services under service agreements. During 1998 the Partnership received approximately $8.7 million in fees pursuant to these agreements. Equitable provides certain legal and other services to the Partnership relating to certain insurance and other regulatory aspects of the general and separate accounts of Equitable and its insurance company subsidiary. During 1998 the Partnership paid approximately $1.2 million to Equitable for these services. During 1998 the Partnership paid Equitable approximately $32.0 million for certain services provided by Equitable with respect to the marketing of the variable annuity insurance and variable life insurance products for which The Hudson River Trust is the funding vehicle. Equitable has issued life insurance policies to ACMC on certain employees of the Partnership, the costs of which are borne by ACMC without reimbursement by the Partnership. During 1998 ACMC paid approximately $5.7 million in insurance premiums on these policies. The Partnership and its employees are covered under various insurance policies maintained by Equitable and its subsidiaries. The amount of premiums for these group policies paid by the Partnership to Equitable was approximately $215,000 for 1998. The Partnership provides investment management services to certain employee benefit plans of Equitable and DLJ. Advisory fees from these accounts totaled approximately $6.0 million for 1998 including $2.6 million from the separate accounts of Equitable. In April 1996 the Partnership acquired the United States investing activities and business of National Mutual Funds Management ("NMFM"), a subsidiary of AXA. In connection therewith the Partnership entered into investment management agreements with National Mutual Holdings Limited, the parent of NMFM and a subsidiary of AXA, and various of its subsidiaries (collectively, the "NMH Group"). The NMH Group paid $3.2 million in advisory fees to the Partnership in 1998. EQ Financial was the Partnership's third largest distributor of U.S. Funds in 1998 for which it received sales concessions from the Partnership on sales of $826 million. In 1998 EQ Financial also distributed certain of the Partnership's cash management products. EQ Financial received distribution payments totaling $8.2 million in 1998 for these services. DLJ Securities Corporation and Pershing distribute certain Alliance Mutual Funds and cash management products and receive sales concessions and distribution payments. In addition, the Partnership and Pershing have an agreement pursuant to 37
which Pershing recommends to certain of its correspondent firms the use of the Partnership's cash management products for which Pershing is allocated a portion of the revenues derived by the Partnership from sales through the Pershing correspondents. Amounts paid by the Partnership to DLJ Securities Corporation, Pershing and Wood Struthers & Winthrop Management Corp., a subsidiary of DLJ, in connection with the above distribution services were $74.3 million in 1998. DLJ and its subsidiaries also provide the Partnership with brokerage and various other services, including clearing, investment banking, research, data processing and administrative services. Brokerage, the expense of which is borne by the Partnership's clients, aggregated approximately $112,000 for 1998. During 1998 the Partnership paid $600,000 to DLJ and its subsidiaries for all other services. During 1998 the Partnership reimbursed Equitable in the amount of $3.1 million for rent and the use of certain services and facilities. The Partnership and its subsidiaries provide investment management services to AXA Reinsurance Company, a subsidiary of AXA, and its affiliates, pursuant to discretionary investment advisory agreements. AXA Reinsurance Company and its affiliates paid the Partnership approximately $829,000 during 1998 for such services. The Partnership and its subsidiaries also provide investment management services to AXA World Funds, a Luxembourg fund, pursuant to a sub-advisory agreement between the Partnership and AXA Funds Management SA, a subsidiary of AXA. The Partnership earned $102,000 in management fees during 1998, which fees were paid in full in 1999. OTHER TRANSACTIONS During 1998 the Partnership paid certain legal and other expenses incurred by Equitable and its insurance company subsidiary relating to the general and separate accounts of Equitable and such subsidiary for which it has been or will be fully reimbursed by Equitable. The largest amount of such indebtedness outstanding during 1998 was approximately $81,000 which represents the amount outstanding on September 30, 1998. During 1997 a subsidiary of the Partnership and DLJ Merchant Banking II, Inc. ("DLJMB"), a subsidiary of DLJ, jointly sought opportunities for private equity investments in India. The Partnership's subsidiary incurred expenditures on behalf of the proposed joint venture. DLJMB agreed to reimburse the Partnership's subsidiary for 50% of such expenditures. The Partnership's subsidiary was fully reimbursed for such expenditures in 1998. The largest amount of indebtedness due to the Partnership in respect of such venture was approximately $288,000 which represents the amount outstanding on April 30, 1998. Equitable and its affiliates are not obligated to provide funds to the Partnership, except for ACMC's and the General Partner's obligation to fund certain of the Partnership's deferred compensation and employee benefit plan obligations referred to under "Compensation Agreements with Named Executive Officers". The Partnership Agreement permits Equitable and its affiliates to lend funds to the Partnership at the lender's cost of funds. Mrs. Reba W. Williams, the wife of Dave H. Williams, was employed by the Partnership during 1998 and received compensation in the amount of $100,000. Certain of the hedge funds managed by the Partnership pay a portion of the carried interests or performance fees to certain portfolio managers, research analysts and other investment professionals who are associated with the management of the hedge funds. The Partnership provides investment management services to the hedge funds and is entitled to receive between 75% and 100% of the aggregate carried interests or performance fees paid by such funds. The Partnership received approximately $29.4 million from the hedge funds in 1998 primarily in respect of the performance by the hedge funds in 1997. Mr. Alfred Harrison, a Director and Vice Chairman of the General Partner, received $2,906,098 in 1998 in respect of his association with the hedge funds. ACMC and the General Partner are obligated, subject to certain limitations, to make capital contributions to the Partnership in an amount equal to the payments the Partnership is required to make as deferred compensation under the employment agreements entered into in connection with Equitable's 1985 acquisition of DLJ, as well as obligations of the Partnership to various employees and their beneficiaries under the Partnership's Capital Accumulation Plan. In 1998 ACMC 38
made capital contributions to the Partnership in the amount of $716,000 in respect of these obligations. ACMC's obligations to make these contributions are guaranteed by EIC subject to certain limitations. All tax deductions with respect to these obligations, to the extent funded by ACMC, Alliance or EIC, will be allocated to ACMC or Alliance. ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following is a list of the documents filed as a part of this Annual Report on Form 10-K: <TABLE> <CAPTION> Reference Pages Financial Statements in Annual Report - -------------------- ---------------- <S> <C> Consolidated Statements of Financial Condition December 31, 1998 and 1997................................. 59 Consolidated Statements of Income Years ended December 31, 1998, 1997 and 1996............... 60 Consolidated Statements of Changes in Partners' Capital and Comprehensive Income Years ended December 31 1998, 1997 and 1996................ 61 Consolidated Statements of Cash Flows Years ended December 31, 1998, 1997, and 1996.............. 62 Notes to Consolidated Financial Statements........................ 63 - 79 Independent Auditors' Report...................................... 80 </TABLE> Schedules are omitted because they are not applicable, or the required information is set forth in the financial statements or notes thereto. (b) REPORTS ON FORM 8-K. No report on Form 8-K was filed during the last quarter of 1998. 39
(c) EXHIBITS. The following exhibits required to be filed by Item 601 of Regulation S-K are filed herewith or, in the case of Exhibit 13.10, incorporated by reference herein: <TABLE> <CAPTION> Exhibit Description ------- ----------- <S> <C> 10.102 Unit Option Plan Agreement dated December 10, 1998 with Bruce W. Calvert 10.103 Unit Option Plan Agreement dated December 10, 1998 with John D. Carifa 10.104 Unit Option Plan Agreement dated December 10, 1998 with Robert H. Joseph, Jr. 10.105 Unit Option Plan Agreement dated December 10, 1998 with David R. Brewer, Jr. 10.106 Revolving Credit Agreement dated as of July 20, 1998 among Alliance Capital Management L.P., as Borrower, and the lending institutions listed on Schedule 1 thereto, collectively as Banks, and NationsBank, N.A., The Chase Manhattan Bank, and the Bank of New York, individually as Co-Agents, NationsBank, N.A., as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, and The Bank of New York, as Documentation Agent. 13.10 Pages 43 through 80 of the Alliance Capital Management L.P. 1998 Annual Report to Unitholders 22.10 Subsidiaries of the Registrant 24.9 Consent of KPMG LLP 25.95 Power of Attorney by Luis Javier Bastida 25.96 Power of Attorney by Donald H. Brydon 25.97 Power of Attorney by Henri de Castries 25.98 Power of Attorney by Kevin C. Dolan 25.99 Power of Attorney by Denis Duverne 25.100 Power of Attorney by Alfred Harrison 25.101 Power of Attorney by Herve Hatt 25.102 Power of Attorney by Michael Hegarty 25.103 Power of Attorney by Benjamin D. Holloway 25.104 Power of Attorney by Edward D. Miller 25.105 Power of Attorney by Peter D. Noris 25.106 Power of Attorney by Stanley B. Tulin 25.107 Power of Attorney by Robert B. Zoellick 27.03 Financial Data Schedule </TABLE> 40
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. By: Alliance Capital Management Corporation, General Partner Date: March 30, 1999 By: /S/Dave H. Williams ------------------- Dave H. Williams Chairman Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: March 30, 1999 /s/John D. Carifa ------------------- John D. Carifa President and Chief Operating Officer Date: March 30, 1999 /s/Robert H. Joseph, Jr. ------------------- Robert H. Joseph, Jr. Senior Vice President and Chief Financial Officer 41
Directors /s/Dave H. Williams * - ------------------------------ ----------------------------- Dave H. Williams Michael Hegarty Chairman and Director Director * * - ------------------------------ ----------------------------- Luis Javier Bastida Benjamin D. Holloway Director Director * * - ------------------------------ ----------------------------- Donald H. Brydon Edward D. Miller Director Director /s/Bruce W. Calvert * - ------------------------------ ------------------------------ Bruce W. Calvert Peter D. Noris Director Director /s/John D. Carifa /s/Frank Savage - ------------------------------ ------------------------------ John D. Carifa Frank Savage Director Director * * - ------------------------------ ------------------------------ Henri de Castries Stanley B. Tulin Director Director * /s/Reba W. Williams - ------------------------------ ------------------------------- Kevin C. Dolan Reba W. Williams Director Director * * - ------------------------------ -------------------------------- Denis Duverne Robert B. Zoellick Director Director * *By/s/David R. Brewer, Jr. - ------------------------------ -------------------------------- Alfred Harrison David R. Brewer, Jr. Director (Attorney-in-Fact) * - ------------------------------ Herve Hatt Director 42