FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1997 ------------------------------------------------- OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------------------------------- Commission File No. 1-9818 ------------------------------------------------------------ ALLIANCE CAPITAL MANAGEMENT L.P. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3434400 - ------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1345 Avenue of the Americas, New York, NY 10105 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (212) 969-1000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --------- ---------- The number of Units representing assignments of beneficial ownership of Limited Partnership Interests outstanding as of June 30, 1997 was 83,687,443 Units.
ALLIANCE CAPITAL MANAGEMENT L.P. Index to Form 10-Q Part I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS Page ---- Condensed Consolidated Statements of Financial Condition 2 Condensed Consolidated Statements of Income (Loss) 3 Condensed Consolidated Statements of Changes in Partners' Capital 4 Condensed Consolidated Statements of Cash Flows 5 Notes to Condensed Consolidated Financial Statements 6-9 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 10-15 Part II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS 16 Item 2. CHANGES IN SECURITIES 16 Item 3. DEFAULTS UPON SENIOR SECURITIES 16 Item 4. SUBMISSION OF MATTERS TO A VOTE OF 16 SECURITY HOLDERS Item 5. OTHER INFORMATION 16 Item 6. EXHIBITS AND REPORTS ON FORM 8-K 16 1
Part I FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS ALLIANCE CAPITAL MANAGEMENT L.P. Condensed Consolidated Statements of Financial Condition (in thousands) <TABLE> <CAPTION> ASSETS 6/30/97 12/31/96 ----------- ----------- (unaudited) <S> <C> <C> Cash and cash equivalents.. . . . . . . . . . . . . . . . . $ 79,305 $ 57,441 Fees receivable: Alliance mutual funds.. . . . . . . . . . . . . . . . . 50,723 46,483 Separately managed accounts: Affiliated clients . . . . . . . . . . . . . . . . 7,130 4,479 Third party clients. . . . . . . . . . . . . . . . 58,426 58,339 Receivable from brokers and dealers for sale of shares of Alliance mutual funds. . . . . . . . . . . 52,923 30,976 Investments, available-for-sale . . . . . . . . . . . . . . 17,381 35,966 Furniture, equipment and leasehold improvements, net. . . . 72,142 57,483 Intangible assets, net. . . . . . . . . . . . . . . . . . . 99,160 234,404 Deferred sales commissions, net . . . . . . . . . . . . . . 205,798 175,172 Other assets. . . . . . . . . . . . . . . . . . . . . . . . 32,274 25,154 ----------- ----------- Total assets. . . . . . . . . . . . . . . . . . . . . . $ 675,262 $ 725,897 ----------- ----------- ----------- ----------- LIABILITIES AND PARTNERS' CAPITAL Liabilities: Accounts payable and accrued expenses . . . . . . . . . $ 108,007 $ 103,427 Payable to Alliance mutual funds for share purchases. . 77,205 55,468 Accrued expenses under employee benefit plans . . . . . 93,294 51,633 Debt . . . . . . . . . . . . . . . . . . . . . . . . 19,096 24,658 Minority interests in consolidated subsidiaries.. . . . 5,664 14,691 ----------- ----------- Total liabilities. . . . . . . . . . . . . . . . . 303,266 249,877 Partners' capital . . . . . . . . . . . . . . . . . . . . . 371,996 476,020 ----------- ----------- Total liabilities and partners' capital. . . . . . $ 675,262 $ 725,897 ----------- ----------- ----------- ----------- </TABLE> See accompanying notes to condensed consolidated financial statements. 2
ALLIANCE CAPITAL MANAGEMENT L.P. Condensed Consolidated Statements of Income (Loss) (unaudited) (in thousands, except per Unit amounts) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------ ------------------------- 6/30/97 6/30/96 6/30/97 6/30/96 --------- --------- --------- ---------- <S> <C> <C> <C> <C> Revenues: Investment advisory and services fees: Alliance mutual funds . . . . . . . . . . . . . . . . . $ 86,747 $ 71,849 $ 172,741 $ 139,673 Separately managed accounts: Affiliated clients . . . . . . . . . . . . . . . . 13,290 11,768 25,844 21,866 Third party clients. . . . . . . . . . . . . . . . 60,568 58,081 119,030 109,202 Distribution plan fees from Alliance mutual funds... . . . . 49,306 40,582 96,553 79,065 Shareholder servicing and administration fees. . . . . . . . 13,526 11,685 26,291 23,151 Other revenues . . . . . . . . . . . . . . . . . . . . . . . 1,899 2,184 4,128 4,808 --------- ---------- ---------- ---------- 225,336 196,149 444,587 377,765 --------- ---------- ---------- ---------- Expenses: Employee compensation and benefits . . . . . . . . . . . . . 62,336 54,152 122,838 103,566 Promotion and servicing: Distribution plan payments to financial intermediaries: Affiliated . . . . . . . . . . . . . . . . . . . . 14,956 7,701 24,041 14,692 Third party. . . . . . . . . . . . . . . . . . . . 25,520 27,604 58,234 54,366 Amortization of deferred sales commissions. . . . . . . 17,647 12,848 33,385 25,366 Other . . . . . . . . . . . . . . . . . . . . . . . . . 15,044 13,179 29,849 24,309 General and administrative.. . . . . . . . . . . . . . . . . 25,550 25,515 51,296 48,955 Interest . . . . . . . . . . . . . . . . . . . . . . . . . 619 472 1,292 714 Amortization of intangible assets. . . . . . . . . . . . . . 2,621 4,181 5,243 7,094 Reduction in recorded value of intangible assets . . . . . . 120,900 - 120,900 - --------- ---------- ---------- ---------- 285,193 145,652 447,078 279,062 --------- ---------- ---------- ---------- Income (loss) before income taxes. . . . . . . . . . . . . . . . (59,857) 50,497 (2,491) 98,703 Income taxes . . . . . . . . . . . . . . . . . . . . . . . . 4,265 3,467 8,282 6,606 --------- ---------- ---------- ---------- Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . $ (64,122) $ 47,030 $ (10,773) $ 92,097 --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Net income (loss) per Unit . . . . . . . . . . . . . . . . . . . $ (0.74) $ 0.55 $ (0.12) $ 1.09 --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- </TABLE> See accompanying notes to condensed consolidated financial statements. 3
ALLIANCE CAPITAL MANAGEMENT L.P. Condensed Consolidated Statements of Changes in Partners' Capital (unaudited) (in thousands) <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------------ ------------------------ 6/30/97 6/30/96 6/30/97 6/30/96 --------- --------- --------- --------- <S> <C> <C> <C> <C> Partners' capital - beginning of period . . . . . . . . . . $ 483,301 $ 455,038 $ 476,020 $ 406,709 Net income (loss) . . . . . . . . . . . . . . . . . . . (64,122) 47,030 (10,773) 92,097 Capital contribution received from Alliance Capital Management Corporation . . . . . . . . . . . . . . 898 898 1,795 1,791 Cash distributions to partners. . . . . . . . . . . . . (50,988) (43,243) (101,001) (84,245) Issuance of Units for acquisition of Cursitor . . . . . -- -- -- 42,816 Proceeds from Unit options exercised. . . . . . . . . . 2,219 751 5,285 1,459 Unrealized gain on investments. . . . . . . . . . . . . 664 126 646 255 Foreign currency translation adjustment . . . . . . . . 24 -- 24 (282) --------- --------- --------- --------- Partners' capital - end of period . . . . . . . . . . . . . $ 371,996 $ 460,600 $ 371,996 $ 460,600 --------- --------- --------- --------- --------- --------- --------- --------- </TABLE> See accompanying notes to condensed consolidated financial statements. 4
ALLIANCE CAPITAL MANAGEMENT L.P. Condensed Consolidated Statements of Cash Flows (unaudited) (in thousands) <TABLE> <CAPTION> Six Months Ended ---------------------------- 6/30/97 6/30/96 -------- -------- <S> <C> <C> Cash flows from operating activities: Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . $(10,773) $ 92,097 Adjustments to reconcile net income (loss) to net cash provided from operating activities: Amortization and depreciation . . . . . . . . . . . . . . . . . . . . 44,043 36,519 Reduction in recorded value of intangible assets. . . . . . . . . . . 120,900 -- Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,362 4,161 Changes in assets and liabilities: (Increase) in fees receivable from Alliance mutual funds, affiliated clients and third party clients. . (6,978) (2,613) (Increase) in receivable from brokers and dealers for sale of shares of Alliance mutual funds. . . . . . . . . . . . . (21,947) (9,935) (Increase) in deferred sales commissions . . . . . . . . . . . . (64,011) (40,934) (Increase) decrease in other assets. . . . . . . . . . . . . . . (6,239) 5,904 Increase in accounts payable and accrued expenses. . . . . . . . 4,580 1,757 Increase in payable to Alliance mutual funds for share purchases . . . . . . . . . . . . . . . . . . . . . . . . . 21,737 7,307 Increase in accrued expenses under employee benefit plans, less deferred compensation . . . . . . . . . . . . . 40,106 28,506 -------- -------- Net cash provided from operating activities. . . . . . 123,780 122,769 -------- -------- Cash flows from investing activities: Proceeds from sale of investments. . . . . . . . . . . . . . . . . . . . . 163,621 70,521 Purchase of investments. . . . . . . . . . . . . . . . . . . . . . . . . . (144,390) (43,754) Acquisitions, net . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (90,576) Additions to furniture, equipment and leasehold improvements, net . . . . . . . . . . . . . . . . . . . . . . . . . . (20,354) (4,682) -------- -------- Net cash used in investing activities. . . . . . . . . (1,123) (68,491) -------- -------- Cash flows from financing activities: Repayment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,396) (30) Distributions to partners. . . . . . . . . . . . . . . . . . . . . . . . . (101,001) (84,245) Capital contribution received from Alliance Capital Management Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 291 Unit options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . 5,285 1,459 -------- -------- Net cash used in financing activities. . . . . . . . . (100,817) (82,525) -------- -------- Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . 24 (273) -------- -------- Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . 21,864 (28,520) Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . 57,441 124,256 -------- -------- Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . $ 79,305 $ 95,736 -------- -------- -------- -------- </TABLE> See accompanying notes to condensed consolidated financial statements. 5
ALLIANCE CAPITAL MANAGEMENT L.P. Notes to Condensed Consolidated Financial Statements June 30, 1997 (unaudited) 1. BASIS OF PRESENTATION The unaudited interim condensed consolidated financial statements of Alliance Capital Management L.P. (the "Partnership") included herein have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of (a) financial position at June 30, 1997, (b) results of operations for the three months and six months ended June 30, 1997 and 1996 and (c) cash flows for the six months ended June 30, 1997 and 1996, have been made. 2. RECLASSIFICATION Certain prior period amounts have been reclassified to conform to the current period presentation. 3. INTANGIBLE ASSETS Intangible assets consist of (in thousands): 6/30/97 12/31/96 ------- -------- Goodwill (net of accumulated amortization of $12,030 and $9,856, respectively) $78,799 $116,721 Contracts of businesses acquired (net of accumulated amortization of $29,838 and $26,768, respectively) 20,361 117,683 ------- -------- $99,160 $234,404 ------- -------- ------- -------- The Partnership evaluates impairment of its intangible assets by comparing the undiscounted cash flows expected to be realized from those assets to their recorded values pursuant to Statement of Financial Accounting Standards No. 121 (SFAS 121 ) "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF". If the expected future cash flows are less than the carrying value of intangible assets, the Partnership recognizes an impairment loss for the difference between the carrying amount and the estimated fair value of those intangible assets. During the second quarter of 1997, management of the Partnership determined that the assets of Cursitor Holdings, L.P. and the stock of Cursitor Holdings Limited (collectively "Cursitor") acquired on February 29, 1996 were impaired and reduced the remaining unamortized recorded value of the intangible assets associated with the Cursitor acquisition by $120.9 million to $20.4 million. This non-cash charge reflects the Partnership's view that the decline in Cursitor's assets under management and its reduced profitability no longer supported the remaining unamortized cost of its investment. 4. DEFERRED SALES COMMISSIONS Sales commissions paid to financial intermediaries in connection with the sale of shares of open-end mutual funds managed by the Partnership sold without a front-end sales charge are capitalized and amortized over periods not exceeding five and one-half years, the periods of time estimated by management of the Partnership during which deferred sales commissions are expected to be recovered from distribution plan payments received from these funds and contingent deferred sales 6
charges received from shareholders of those funds upon the redemption of their shares. Contingent deferred sales charges reduce unamortized deferred sales commissions when received. 5. CONTINGENCIES On July 25, 1995, a Consolidated and Supplemental Class Action Complaint ("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. The Complaint which sought certification of a plaintiff class of persons who purchased or owned Class A, B or C shares of the Fund from March 27, 1992 through December 23, 1994 seeks an unspecified amount of damages, costs, attorneys' fees and punitive damages. The principal allegations are that the Fund purchased debt securities issued by the Mexican and Argentine governments in amounts that were not permitted by the Fund's investment objective, and that there was no shareholder vote to change the investment objective to permit purchases in such amounts. The Complaint further alleges that the decline in the value of the Mexican and Argentine securities held by the Fund caused the Fund's net asset value to decline to the detriment of the Fund's shareholders. On September 26, 1996, the United States District Court for the Southern District of New York granted the defendants' motion to dismiss all counts of the Complaint. On October 11, 1996, plaintiffs filed a motion for reconsideration of the Court's decision granting defendants' motion to dismiss the Complaint. On November 25, 1996, the Court denied plaintiffs' motion for reconsideration. On October 29, 1996, plaintiffs filed a motion for leave to file an amended complaint. The principal allegations of the proposed amended complaint are that the Fund did not properly disclose that it planned to invest in mortgage-backed derivative securities and that two advertisements used by the Fund misrepresented the risks of investing in the Fund. Plaintiffs also reiterated allegations in the Complaint that the Fund failed to hedge against the risks of investing in foreign securities despite representations that it would do so. On July 15, 1997, the Court denied plaintiffs' motion for leave to file an amended complaint and ordered that the case be dismissed. Plaintiffs have until August 18, 1997 to file an appeal to the Second Circuit Court of Appeals. While the ultimate outcome of this matter cannot be determined at this time, management of the Partnership does not expect that it will have a material adverse effect on the Partnership's results of operations or financial condition. 6. INCOME TAXES The Partnership is a publicly traded partnership for Federal income tax purposes and, accordingly, is not currently subject to Federal and state corporate income taxes but is subject to the New York City unincorporated business tax. Domestic corporate subsidiaries of the Partnership, which are subject to Federal, state and local income taxes, file a consolidated Federal income tax return and separate state and local income tax returns. Foreign corporate subsidiaries are generally subject to taxes in the foreign jurisdictions where they are located. 7. NET INCOME PER UNIT Net income per Unit is derived by reducing net income for each period by 1% for the general partnership interest held by the General Partner and dividing the remaining 99% by the weighted average number of Units outstanding, Unit equivalents and Units issuable upon conversion of the Class A Limited Partnership Interest during each period. The aggregate weighted average number of Units outstanding used in computing net income per Unit was 85,422,000 and 84,702,000 for the three months ended June 30, 1997 and 1996, respectively, and 85,444,000 and 83,905,000 for the six months ended June 30, 1997 and 1996, respectively. 7
8. SUPPLEMENTAL CASH FLOW INFORMATION Cash payments for interest and income taxes were as follows (in thousands): Three Months Ended Six Months Ended June 30, June 30, -------------------- -------------------- 1997 1996 1997 1996 ------ ------ ------ ------ Interest . . . . . . $ 81 $ 85 $ 246 $ 251 Income taxes . . . . 3,913 3,636 6,566 6,259 9. ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128 (SFAS 128) "EARNINGS PER SHARE" which will be effective commencing with the Partnership's financial statements for the year ended December 31, 1997. Upon adoption of SFAS 128, the Partnership will present "basic" earnings per Unit and "diluted" earnings per Unit. Basic earnings per Unit will be computed by dividing income available to Unitholders by the weighted average number of Units outstanding for each period. Diluted earnings per Unit will give effect to all Units which may be issuable and have a dilutive effect during each period and will be computed in a manner similar to the Partnership's current computation of earnings per Unit. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130 (SFAS 130) "REPORTING COMPREHENSIVE INCOME". SFAS 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. SFAS 130 requires that an enterprise classify items of other comprehensive income by their nature in a financial statement and display the accumulated balance of other comprehensive income separately in the partners'capital section of the statement of financial position. SFAS 130 is effective for fiscal years beginning after December 15, 1997. The Partnership intends to adopt SFAS 130 and provide the required supplemental disclosures in its 1998 financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131 (SFAS 131) "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". SFAS 131 establishes standards for the way public business enterprises report information about operating segments in their annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Generally, financial information will be required to be reported on the basis used by management for evaluating segment performance and for deciding how to allocate resources to segments. SFAS 131 is effective for fiscal years beginning after December 15, 1997 but need not be applied to interim reporting in the initial year of adoption. The Partnership intends to adopt SFAS 131 and provide the required supplemental disclosures in its 1998 annual report. 10. SUBSEQUENT EVENTS On July 31, 1997, the Board of Directors of the General Partner declared a distribution of $54,457,000 or $0.64 per Unit representing the Available Cash Flow (as defined in the Partnership Agreement) of the Partnership for the three months ended June 30, 1997. The distribution is payable on August 21, 1997 to holders of record on August 14, 1997. Under prior tax law, the exemption from Federal income taxes for certain publicly traded limited 8
partnerships, including the Partnership, would have expired on December 31, 1997. However, the Taxpayer Relief Act of 1997, signed into law on August 5, 1997, includes the option for certain publicly traded partnerships, including the Partnership, to maintain partnership tax status after 1997 and pay a tax of 3.5% of partnership gross income from the active conduct of a trade or business. The Partnership intends to utilize this option and remain a publicly traded partnership. 9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Alliance Capital Management L.P. (the "Partnership") derives substantially all of its revenues and net income (a) from fees for investment advisory, distribution and related services provided to the Alliance mutual funds, and (b) from fees for investment advisory services provided to affiliated clients including The Equitable Life Assurance Society of the United States ("ELAS"), a wholly-owned subsidiary of The Equitable Companies Incorporated ("Equitable"), and certain other ELAS affiliates and to unaffiliated separately managed accounts for institutional investors and high net-worth individuals ("third party clients"). The Alliance mutual funds consist of a broad range of open-end load and closed-end mutual funds ("mutual funds"), variable products including The Hudson River Trust ("HRT"), and cash management products, including money market funds and deposit accounts. The Partnership offers a broad range of investment management products and services to meet the varied needs and objectives of individual and institutional investors. On February 29, 1996, the Partnership acquired substantially all of the assets and liabilities of Cursitor Holdings, L.P. ("CHLP") and all of the outstanding shares of Cursitor Holdings Limited, currently Cursitor Alliance Holdings Limited, (collectively, "Cursitor"). The acquisition was accounted for under the purchase method with the results of Cursitor from the date of acquisition included in the Partnership's condensed consolidated financial statements. Cursitor specializes in providing global asset allocation services to U.S. and non-U.S. institutional investors. Due to Cursitor's poor investment results, Cursitor has experienced significant client account terminations and asset outflows. Cursitor's assets under management aggregated $4.9 billion at July 31, 1997 a decrease of $3.5 billion from $8.4 billion at December 31, 1996. The Partnership evaluates impairment of its intangible assets by comparing the undiscounted cash flows expected to be realized from those assets to their recorded values pursuant to Statement of Financial Accounting Standards No. 121 (SFAS 121) "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF". If the expected future cash flows are less than the carrying value of intangible assets, the Partnership recognizes an impairment loss for the difference between the carrying amount and the estimated fair value of those intangible assets. During the second quarter of 1997, management of the Partnership determined that the Cursitor intangible assets were impaired and reduced the remaining unamortized recorded value of the intangible assets associated with the Cursitor acquisition by $120.9 million to $20.4 million. This non-cash charge reflects the Partnership's view that the decline in Cursitor's assets under management and its reduced profitability no longer supported the remaining unamortized cost of its investment. MATERIAL CHANGES IN RESULTS OF OPERATIONS RESULTS OF OPERATIONS <TABLE> <CAPTION> (Dollars & Units in millions, Three months ended Six months ended except per Unit amounts) 6/30/97 6/30/96 % Change 6/30/97 6/30/96 % Change - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Net income (loss) $(64.1) $47.0 (236.4)% $(10.8) $92.1 (111.7)% Net income (loss) per Unit $(0.74) $0.55 (234.5) $(0.12) $1.09 (111.0) Weighted average number of Units and Unit equivalents outstanding 85.4 84.7 0.8 85.4 83.9 1.8 Operating margin* 27.1% 25.7% 26.6% 26.1% - -------------------------------------------------------------------------------------------------------------------------- </TABLE> *Excludes the reduction in recorded value of intangible assets 10
<TABLE> <CAPTION> ASSETS UNDER MANAGEMENT (Dollars in billions) 6/30/97 6/30/96 $ Change % Change - ---------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Alliance mutual funds: Mutual funds $32.5 $24.9 $7.6 30.5% Cash management products 18.7 16.1 2.6 16.1 Variable products 20.5 14.8 5.7 38.5 - ---------------------------------------------------------------------------------------- 71.7 55.8 15.9 28.5 - ---------------------------------------------------------------------------------------- Separately managed accounts: Active equity & balanced 61.4 49.3 12.1 24.5 Active fixed 39.2 35.7 3.5 9.8 Index 21.6 17.1 4.5 26.3 Asset allocation 5.4 10.3 (4.9) (47.6) - ---------------------------------------------------------------------------------------- 127.6 112.4 15.2 13.5 - ---------------------------------------------------------------------------------------- Total $199.3 $168.2 $31.1 18.5% - ---------------------------------------------------------------------------------------- </TABLE> AVERAGE ASSETS UNDER MANAGEMENT <TABLE> <CAPTION> Three months ended Six months ended (Dollars in billions) 6/30/97 6/30/96 % Change 6/30/97 6/30/96 % Change - -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Alliance mutual funds $67.9 $ 54.7 24.1% $66.8 $ 53.1 25.8% Separately managed accounts: Affiliated clients 27.6 24.5 12.7 27.1 24.1 12.4 Third party clients 94.4 87.5 7.9 94.3 83.5 12.9 - -------------------------------------------------------------------------------------------------------------------- Total $189.9 $166.7 13.9% $188.2 $160.7 17.1% - -------------------------------------------------------------------------------------------------------------------- </TABLE> Assets under management at June 30, 1997 were $199.3 billion, an increase of $31.1 billion or 18.5% from June 30, 1996 and an increase of $16.5 billion or 9.0% from December 31, 1996. Alliance mutual fund assets under management at June 30, 1997 were $71.7 billion, an increase of $15.9 billion or 28.5% from June 30, 1996, due principally to market appreciation of $8.0 billion and net sales of Alliance mutual funds of $7.9 billion. Separately managed account assets under management at June 30, 1997 were $127.6 billion, an increase of $15.2 billion or 13.5% from June 30, 1996. This increase was primarily due to market appreciation of $19.3 billion and net asset additions to affiliated client accounts of $2.6 billion, offset partially by net third party client account terminations and asset withdrawals of $6.8 billion, primarily attributable to the Cursitor accounts. <TABLE> <CAPTION> REVENUES Three months ended Six months ended (Dollars in millions) 6/30/97 6/30/96 % Change 6/30/97 6/30/96 % Change - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Investment advisory and services fees: Alliance mutual funds $86.7 $71.8 20.8% $172.7 $139.6 23.7% Separately managed accounts: Affiliated clients 13.3 11.8 12.7 25.8 21.9 17.8 Third party clients 60.6 58.1 4.3 119.1 109.2 9.1 Distribution plan fees from Alliance mutual funds 49.3 40.6 21.4 96.6 79.1 22.1 Shareholder servicing and administration fees 13.5 11.6 16.4 26.3 23.2 13.4 Other revenues 1.9 2.2 (13.6) 4.1 4.8 (14.6) - -------------------------------------------------------------------------------------------------------------------------- Total revenues $225.3 $196.1 14.9% $444.6 $377.8 17.7% - -------------------------------------------------------------------------------------------------------------------------- </TABLE> Investment advisory and services fees were $160.6 million for the three months ended June 30, 1997, an increase of $18.9 million or 13.3% over the prior year period. In general, the Partnership's investment advisory and services fees are based on the market value of assets under management and vary with the type of account managed. Investment advisory agreements for certain accounts provide for performance fees in addition to a base fee. Performance fees are earned when investment performance exceeds a contractually agreed upon benchmark and, accordingly, may increase the volatility of both the Partnership's revenues and earnings. 11
Investment advisory fees from Alliance mutual funds increased $14.9 million or 20.8% for the three months and $33.1 million or 23.7% for the six months primarily as a result of a 24.1% and 25.8% increase in average assets under management for the three and six months ended June 30, 1997, respectively. Investment advisory fees from affiliated clients, primarily the General Accounts of ELAS, increased $1.5 million or 12.7% for the three months and $3.9 million or 17.8% for the six months due principally to an increase in average assets under management of 12.7% for the three months and 12.4% for the six months ended June 30, 1997, respectively. An increase in performance fees of $0.5 and $1.7 million for the three months and six months ended June 30, 1997, respectively, also contributed to the increase in affiliated client advisory fees. Investment advisory and services fees from third party clients increased $2.5 million or 4.3% for the three months and $9.9 million or 9.1% for the six months due principally to an increase in average assets under management of 7.9% for the three months and 12.9% for the six months ended June 30, 1997, respectively. The increase in third party clients average assets under management is primarily a result of market appreciation offset partially by net third party clients outflows, primarily global asset allocation accounts. A decrease in performance fees of $1.4 million for the three months and $1.2 million for the six months partially offset the increased fees. Distribution plan fees increased primarily due to higher average equity mutual fund and cash management assets under management. The increase in distribution plan fees for equity mutual funds is principally due to market appreciation and net sales of Class B Shares of these funds under the Partnership's mutual fund distribution system described under "Capital Resources and Liquidity". The increase in shareholder servicing and administration fees was primarily due to an increase in the number of mutual fund shareholder accounts serviced by the Partnership's subsidiaries from June 30, 1996. At June 30, 1997, the Partnership's subsidiaries serviced approximately 2.9 million shareholder accounts. <TABLE> <CAPTION> EXPENSES Three months ended Six months ended (Dollars in millions) 6/30/97 6/30/96 % Change 6/30/97 6/30/96 % Change - ------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Employee compensation and benefits $62.3 $54.2 14.9% $122.8 $103.6 18.5% Promotion and servicing 73.2 61.3 19.4 145.6 118.7 22.7 General and administrative 25.6 25.5 0.4 51.3 49.0 4.7 Interest 0.6 0.5 20.0 1.3 0.7 85.7 Amortization of intangible assets 2.6 4.2 (38.1) 5.2 7.1 (26.8) Reduction in recorded value of intangible assets 120.9 - - 120.9 - - - ------------------------------------------------------------------------------------------------------------------------- Total expenses $285.2 $145.7 95.7% $447.1 $279.1 60.2% - ------------------------------------------------------------------------------------------------------------------------- </TABLE> Employee compensation and benefits increased primarily as a result of higher incentive compensation, attributable to increased operating earnings and increased base compensation, principally due to an increase in the number of employees from 1,446 at June 30, 1996 to 1,622 at June 30, 1997 resulting from the expansion of the Partnership's mutual fund operations and its administration and technology departments combined with salary increases. Promotion and servicing expenses include distribution plan payments to financial intermediaries for distribution of the Partnership's sponsored mutual funds and cash management services' products and amortization of deferred sales commissions paid to financial intermediaries under the System. Also included in this expense category are travel and entertainment, advertising, promotional materials and investment meetings and seminars for financial intermediaries that distribute the 12
Partnership's mutual fund products. Promotion and servicing expenses increased primarily due to increased distribution plan payments resulting from higher average cash management and equity mutual fund assets under management. Higher cash management promotional and servicing costs, increased international travel and increased mutual fund advertising also contributed to the increase in promotion and servicing. The increase in general and administrative expenses was due principally to higher systems consulting expenses associated with technology initiatives and higher occupancy costs incurred in connection with the Partnership's expansion of its international operations. The decrease in amortization of intangible assets was due principally to a decrease in amortization of costs assigned to investment management contracts of ACMC, Inc., the predecessor of the Partnership which was acquired by ELAS in 1985. The costs assigned to these contracts were fully amortized as of December 31, 1996. The Partnership recorded a non-cash charge of $120.9 million during the second quarter of 1997 to reduce the remaining unamortized recorded value of the intangible assets associated with the Cursitor acquisition to estimated fair value. This non-cash charge reflects the Partnership's view that the decline in Cursitor's assets under management and its reduced profitability no longer supported the remaining unamortized cost of its investment. The Partnership generally is not subject to Federal, state and local income taxes, with the exception of the New York City unincorporated business tax, which is currently imposed at a rate of 4%. Domestic subsidiaries of the Partnership are subject to Federal, state and local income taxes. Subsidiaries organized and operating outside the United States are generally subject to taxes in the foreign jurisdications where they are located. The provision for income taxes increased for the three and six months primarily as a result of the increase in taxable income of the Partnership and certain of its corporate subsidiaries. Under prior tax law, the exemption from Federal income taxes for certain publicly traded partnerships, including the Partnership, would have expired on December 31, 1997. However, the Taxpayer Relief Act of 1997, signed into law on August 5, 1997, includes the option for certain publicly traded partnerships, including the Partnership, to maintain partnership tax status after 1997 and pay a tax, beginning 1998, of 3.5% of partnership gross income from the active conduct of a trade or business. The Partnership intends to utilize this option and remain a publicly traded partnership. The Partnership estimates that this additional tax will reduce net income and cash distributions by approximately 10% to 12%. CAPITAL RESOURCES AND LIQUIDITY Partners' capital decreased $104.0 million to $372.0 million at June 30, 1997 from $476.0 million at December 31, 1996. The decrease was primarily due to the non-cash charge of $120.9 million to reduce the value of intangible assets associated with the acquisition of Cursitor to estimated fair value. The Partnership's cash and cash equivalents increased by $21.9 million for the six months ended June 30, 1997. Cash inflows included $123.8 million from operations, $19.2 million of proceeds from net sales of investments in Alliance mutual funds and $5.3 million in proceeds from options exercised under the Partnership's Unit Option Plans. Cash outflows included cash distributions to Unitholders of $101.0 million, capital expenditures of $20.4 million and a $5.4 million principal repayment of the notes issued in connection with the Cursitor acquisition. 13
The Partnership acquired Cursitor on February 29, 1996 for approximately $159.0 million. The purchase price consisted of cash payments of $94.3 million, 1,764,115 Units with an aggregate value at February 29, 1996 of $43.2 million, and notes in the aggregate principal amount of $21.5 million ("Notes"). The Notes bear interest at 6% per annum and are payable ratably over the next four years. Acquisition costs of $4.0 million were also incurred. Certain agreements relating to the Cursitor acquisition were amended during the second quarter of 1997. Under certain circumstances, through February 28, 2006, the Partnership has an option to purchase CHLP's minority interest in Cursitor Alliance LLC ("Cursitor Alliance"), a subsidiary formed at the time of the acquisition of Cursitor, and CHLP has an option to sell its minority interest in Cursitor Alliance to the Partnership for cash, Units, or a combination thereof of not less than $10.0 million or more than $37.0 million ("Buyout Price"). The Buyout Price will be determined based on the amount of global asset allocation investment advisory revenues earned by Cursitor Alliance. If either option is exercised, the payment of the Buyout Price will be accounted for as an increase in the Cursitor purchase price. The Partnership's mutual fund distribution system (the "System") includes four distribution options. The System permits the Partnership's open-end mutual funds to offer investors the option of purchasing shares (a) subject to a conventional front-end sales charge ("Class A Shares"), (b) without a front-end sales charge but subject to a contingent deferred sales charge payable by shareholders ("CDSC") and higher distribution fees payable by the funds ("Class B Shares"), (c) without a front-end sales charge and, if the shares are held for at least one year, CDSC combined with higher distribution fees payable by the funds ("Class C Shares") or (d) without a front-end sales charge, CDSC or ongoing distribution fees payable by the funds ("Advisor Class Shares"). During the six months ended June 30, 1997, payments made to financial intermediaries in connection with the sale of Class B and C Shares under the System, net of CDSC received, totaled approximately $64.0 million. As of June 30, 1997, the Partnership had not issued any commercial paper under its $100 million commercial paper program and there were no borrowings outstanding under the Partnership's $250 million five year revolving credit facility. During July 1997, the Partnership borrowed $15.0 million under its revolving credit facility to finance capital requirements for mutual fund sales. The revolving credit facility contains covenants which require the Partnership, among other things, to meet certain financial ratios. The Partnership's strong equity base and access to public and private debt, at competitive interest rates and other terms should provide adequate liquidity for its general business needs. Management of the Partnership believes that cash flow from operations and the issuance of debt and Units will provide the Partnership with the financial resources to take advantage of strategic growth opportunities, to finance capital requirements for mutual fund sales and to meet the Partnership's other capital requirements. 14
CASH DISTRIBUTIONS The Partnership is required to distribute all of its Available Cash Flow, as defined in the Partnership Agreement, to the General Partner and Unitholders (including the holder of the Class A Limited Partnership Interest based on Units issuable upon conversion of the Class A Limited Partnership Interest). The Partnership's Available Cash Flow and Distributions per Unit were as follows (in thousands, except per Unit information): <TABLE> <CAPTION> Three months ended Six months ended 6/30/97 6/30/96 6/30/97 6/30/96 - ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Available Cash Flow (in thousands) $54,457 $44,757 $105,446 $88,000 Distributions Per Unit $ 0.64 $ 0.53 $ 1.24 $ 1.05 - ------------------------------------------------------------------------------------------ </TABLE> FORWARD - LOOKING STATEMENTS Certain statements provided by the Partnership in this report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause actual results to differ materially from future results expressed or implied by such forward-looking statements. The most significant of such factors include, but are not limited to, the following: the performance of financial markets, the investment performance of the Partnership's sponsored investment products and separately managed accounts, general economic conditions, future acquisitions, competitive conditions and government regulations, including changes in tax rates. The Partnership cautions readers to carefully consider such factors. Further, such forward-looking statements speak only as of the date on which such statements are made; the Partnership undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. 15
Part II OTHER INFORMATION Item 1. LEGAL PROCEEDINGS On July 15, 1997 the Court denied plaintiffs' motion for leave to file an amended complaint and dismissed the legal proceeding reported in the Alliance Capital Management L.P. Form 10-K for the year ended December 31, 1996. Plaintiffs have until August 18, 1997 to file an appeal with the Second Circuit Court of Appeals. Item 2. CHANGES IN SECURITIES None. Item 3. DEFAULTS UPON SENIOR SECURITIES None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. Item 5. OTHER INFORMATION None. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits None. (b) Reports on Form 8-K Alliance Capital Management L.P. filed a Report on Form 8-K dated June 26, 1997 with respect to a press release issued on June 24, 1997 announcing a proposed change in structure to address a possible year-end change in its tax status and a non-cash write-down for its Cursitor investment. 16
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLIANCE CAPITAL MANAGEMENT L.P. Dated: August 14, 1997 By: Alliance Capital Management Corporation, its General Partner By: /s/ Robert H. Joseph, Jr. -------------------------------- Robert H. Joseph, Jr. Senior Vice President & Chief Financial Officer 17