AB

Business Context and Reporting Period

Company: Alliance Capital Management L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1999
Business Overview: The Partnership provides investment management products and services, deriving revenue primarily from investment advisory fees, distribution revenues, and shareholder servicing fees for Alliance mutual funds, affiliated clients (including The Equitable Life Assurance Society), and third-party separately managed accounts.

Key Financial Metrics

Note: Debt increased significantly due to commercial paper issuances to fund commission payments for Back-End Load Shares.

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 29.4% year-over-year for the six months ended June 30, 1999. Investment advisory fees from Alliance mutual funds rose 32.4%, and distribution revenues increased 39.7%, driven by a 22.3% increase in total AUM to $321.0 billion.
• Profitability: Net income increased 34.9% to $195.3 million. Pre-tax margins improved from 34.1% to 35.9%.
• Expense Increases: Employee compensation and benefits rose 30.0% due to higher incentive compensation and headcount growth (2,288 employees vs. 1,902). Promotion and servicing expenses increased 34.3% due to higher distribution plan payments and amortization of deferred sales commissions.
• Liquidity and Debt: Debt outstanding increased from $190.2 million at year-end 1998 to $356.3 million at June 30, 1999, primarily due to $352 million in commercial paper outstanding to fund sales commissions. Cash and cash equivalents increased to $88.3 million.

Guidance, Outlook, Risks, and Unusual Items

• Proposed Reorganization: The Partnership announced a plan to offer Unitholders a choice between holding liquid, taxable Units or illiquid interests in a new private partnership not subject to the federal tax on gross business income. Completion is expected in Q4 1999.
• Year 2000 (Y2K) Readiness: The Partnership estimates total Y2K costs between $40 million and $45 million, with approximately $36 million incurred through June 30, 1999. Management believes remediation is substantially complete for mission-critical systems.
• Legal Contingencies:
  • Class Action: An amended complaint regarding the Alliance North American Government Income Trust alleges misrepresentation of currency hedging. Management intends to defend vigorously and does not expect a material adverse effect.
  • General American Funding Agreements: Four Money Market Funds hold $570 million in funding agreements from General American Life Insurance Company. General American announced it could not honor redemption notices in a timely fashion. The Partnership has a reimbursement agreement with ELAS to cover potential drawdowns on letters of credit but does not currently expect a material adverse effect.
• Credit Facilities: On July 21, 1999, the Partnership entered a new $200 million revolving credit facility, increasing total borrowing capacity to $625 million.

Investor Verification Checklist

• Debt Utilization: Verify the sustainability of the $356 million debt load, specifically the reliance on commercial paper to fund deferred sales commission payments.
• Reorganization Approval: Monitor the status of the proposed reorganization and the required approval from unaffiliated public Unitholders.
• General American Exposure: Track the resolution of the $570 million funding agreement issue with General American Life Insurance Company and any potential drawdowns on the letters of credit.
• Y2K Costs: Confirm that final Y2K remediation costs remain within the estimated $40-$45 million range and do not impact liquidity.
• AUM Trends: Assess whether the 22.3% AUM growth is sustainable given market conditions and net sales figures.