AB

Business Context and Reporting Period

Company: Alliance Capital Management L.P.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1998
Business Overview: The Partnership provides investment management products and services, deriving revenue primarily from investment advisory fees for Alliance mutual funds, affiliated clients (including The Equitable Life Assurance Society), and third-party separately managed accounts.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 30.3% for the quarter and 40.2% for the nine-month period compared to 1997. This was driven by a 43.9% increase in investment advisory fees from Alliance mutual funds and a 38.6% increase in distribution revenues.
• Profitability Surge: Net income for the nine months ended September 30, 1998, rose 288.3% to $215.1 million compared to $55.4 million in the prior year. This dramatic increase is largely attributable to a $120.9 million non-cash impairment charge on intangible assets recorded in the second quarter of 1997, which did not recur in 1998.
• Expense Increases: Employee compensation and benefits rose 33.4% year-over-year (nine months) due to higher incentive compensation and headcount growth (from 1,600 to 1,943 employees). Promotion and servicing expenses increased 49.3% due to higher distribution plan payments and amortization of deferred sales commissions.
• Assets Under Management (AUM): Total AUM grew 11.3% to $241.9 billion. Alliance mutual fund AUM increased 21.8% to $99.5 billion, while separately managed accounts grew 5.0% to $142.4 billion.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The 1997 comparison period included a $120.9 million reduction in the recorded value of intangible assets related to the Cursitor Holdings acquisition. Additionally, a $10.0 million provision was recorded in Q1 1998 for the future buyout of a minority interest in Cursitor Alliance LLC.
• Legal Proceedings: A class action lawsuit regarding the Alliance North American Government Income Trust was partially reversed by the Court of Appeals on October 15, 1998, allowing plaintiffs to amend their complaint regarding currency risk hedging. Management does not expect a material adverse effect.
• Year 2000 (Y2K) Risk: The Partnership estimates Y2K remediation costs between $40 million and $45 million, with approximately $17 million incurred through Q3 1998. Management believes systems will be compliant by early 1999, though risks regarding third-party compliance remain.
• Acquisition Activity: In November 1998, the Partnership reached an agreement in principle to acquire Whittingdale Holdings Limited (approx. $1.4 billion AUM), expected to close in Q4 1998.
• Liquidity: The Partnership increased its revolving credit facility and commercial paper program to $425 million in aggregate to fund commission payments and working capital. As of September 30, 1998, commercial paper outstanding was $190.7 million.

Investor Verification Checklist

• Quality of Earnings: Verify the sustainability of the 288% net income increase by excluding the one-time $120.9 million impairment charge from the prior year comparison.
• Deferred Sales Commissions: Review the $354.3 million balance of deferred sales commissions and the associated cash flow impact ($180.5 million reduction in operating cash flow for the nine months) related to Back-End Load Shares.
• Y2K Exposure: Assess the progress of the $40-$45 million Y2K remediation project and the reliance on third-party vendors for mission-critical systems.
• Legal Contingency: Monitor the status of the amended complaint in the Alliance North American Government Income Trust litigation regarding currency risk hedging.
• Debt Covenants: Confirm compliance with financial ratios required by the new $425 million revolving credit facility.