AB

Business Context and Reporting Period

Company: AllianceBernstein Holding L.P. (formerly Alliance Capital Management Holding L.P.)
Reporting Period: Fiscal Year Ended December 31, 2005
Business Overview: AllianceBernstein is a global investment management firm providing diversified services to institutional, retail, and private clients. The firm operates through four primary segments: Institutional Investment Services, Retail Services, Private Client Services, and Institutional Research Services. Effective February 24, 2006, the firm rebranded from Alliance Capital Management to AllianceBernstein to reflect the integration of the Sanford C. Bernstein business.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 6.4% to $3.25 billion, driven by an 8.4% increase in investment advisory and services fees and an 88.0% increase in "Other revenues" due to gains from asset dispositions.
• Profitability: Net income for AllianceBernstein rose 23.1% to $868.3 million. This improvement was significantly aided by the absence of the $330 million charge recorded in 2003 related to market timing settlements.
• AUM Expansion: Total AUM grew 7.4% to $578.6 billion. Institutional Investment Services AUM grew 15.2%, and Private Client Services AUM grew 17.1%. Retail Services AUM declined 11.3% primarily due to the disposition of cash management services.
• Dispositions: The firm completed the sale of its cash management services to Federated Investors in June 2005, recording a net gain of $11.4 million. It also sold its Indian mutual fund business and South African joint venture interest, recording additional gains.
• Expense Management: Promotion and servicing expenses decreased 17.5% due to the cash management disposition and lower amortization of deferred sales commissions. Employee compensation increased 16.4% due to higher incentive compensation and headcount.

Guidance, Outlook, and Risks

• Outlook: Management expects to continue focusing on building global institutional platforms in Asia-Pacific and expanding in continental Europe. The firm plans to open its first non-U.S. Private Client office in London in 2006 and increase financial advisors by 10.3%.
• Market Timing Litigation: The firm has reserved approximately $30 million for future market timing-related liabilities. While the firm has paid $310 million cumulatively (excluding West Virginia matters), it cannot determine the eventual outcome or impact of remaining litigation, including the West Virginia Attorney General complaint.
• Brokerage Fee Pressure: Institutional Research Services face continued pressure from declining commission rates and the increasing use of electronic trading networks, though volume increases have historically offset rate declines.
• Deferred Sales Commissions: The firm tests its deferred sales commission asset for impairment quarterly. Management determined the asset was not impaired as of December 31, 2005, based on assumptions of 5% fixed income and 8% equity market returns.
• Regulatory Environment: The firm is subject to pervasive global regulation. Violations could result in fines, suspension of business, or revocation of registrations.

Investor Verification Checklist

• Market Timing Reserves: Verify the adequacy of the $30 million reserve for market timing liabilities and monitor developments in the West Virginia litigation.
• Deferred Sales Commission Asset: Review the assumptions used for impairment testing (market returns and redemption rates) given the volatility of financial markets.
• Disposition Gains: Confirm the realization of contingent payments from the sale of cash management services and other dispositions.
• Brokerage Fee Trends: Monitor the impact of declining brokerage commission rates on Institutional Research Services revenue growth.
• Related Party Transactions: Review the volume and terms of transactions with AXA and its subsidiaries, which constitute a significant portion of AUM and revenue.