UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

ý  ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2004

 

OR

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to              

 

Commission file number 001-09818

 

 

ALLIANCE CAPITAL
MANAGEMENT HOLDING L.P.

(Exact name of registrant as specified in its charter)

 

Delaware		13-3434400
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer 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:

 

Title of Class		Name of each exchange on which registered
units representing assignments of beneficial ownership of limited partnership interests*		New York Stock Exchange

 

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 ý  No o

 

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. ¨

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý  No ¨

 

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 February 1, 2005 was approximately $3,492,503,299.

 

The number of units representing assignments of beneficial ownership of limited partnership interests outstanding as of February 1, 2005 was 80,589,991.*

 

DOCUMENTS INCORPORATED BY REFERENCE

This Form 10-K does not incorporate any document by reference.

 

 

*                                         includes 100,000 units of general partnership interest having economic interests equivalent to the economic interests of the units representing assignments of beneficial ownership of limited partnership interests

 

 

TABLE OF CONTENTS

 

Glossary of Certain Defined Terms
Part I
Item 1.	Business
	General
	Institutional Investment Management Services
	Retail Services
	Private Client Services
	Institutional Research Services
	Custody and Brokerage
	Employees
	Service Marks
	Regulation
	History and Structure
	Competition
	Risk Factors
	Other Information
Item 2.	Properties
Item 3.	Legal Proceedings
Item 4.	Submission of Matters to a Vote of Security Holders
Part II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters
Item 6.	Selected Financial Data
	Alliance Holding
	Alliance Capital
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Alliance Holding
	Alliance Capital
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk
	Alliance Holding
	Alliance Capital
Item 8.	Financial Statements and Supplementary Data
	Alliance Holding
	Alliance Capital
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.	Controls and Procedures
Part III
Item 10.	Directors and Executive Officers of the Registrant
Item 11.	Executive Compensation
Item 12.	Security Ownership of Certain Beneficial Owners and Management
Item 13.	Certain Relationships and Related Transactions
Item 14.	Principal Accountant Fees and Services
Part IV
Item 15.	Exhibits and Financial Statement Schedules
Signatures

 

i

 

GLOSSARY OF CERTAIN DEFINED TERMS

 

“ABIRM” - AllianceBernstein Investment Research and Management, Inc., a wholly-owned subsidiary of Alliance Capital.

 

“ACMC” - Alliance Capital Management Corporation, the general partner of Alliance Capital and Alliance Holding and a wholly-owned subsidiary of AXA Equitable, and, where appropriate, to ACMI, its predecessor.

 

“ACMI” - ACMC, Inc., a wholly-owned subsidiary of AXA Equitable.

 

“Alliance Capital” - Alliance Capital Management L.P., a Delaware limited partnership, which is the operating partnership, and its subsidiaries and, where appropriate, to its predecessors, Alliance Holding and ACMI and their respective subsidiaries.

 

“Alliance Capital Partnership Agreement” - the Amended and Restated Agreement of Limited Partnership of Alliance Capital.

 

“Alliance Capital Units” - units of limited partnership interest in Alliance Capital.

 

“Alliance Holding” - Alliance Capital Management Holding L.P., a Delaware limited partnership formerly known as Alliance Capital Management L.P.

 

“Alliance Holding Partnership Agreement” - the Amended and Restated Agreement of Limited Partnership of Alliance Holding.

 

“Alliance Holding Units” - units representing assignments of beneficial ownership of limited partnership interests in Alliance Holding.

 

“AXA” - a société anonyme organized under the laws of France, AXA is the holding company for an international group of companies and a worldwide leader in financial protection and wealth management.

 

“AXA Equitable” - AXA Equitable Life Insurance Company (formerly known as The Equitable Life Assurance Society of the United States), an indirect wholly-owned subsidiary of AXA Financial, and its subsidiaries other than Alliance Capital and its subsidiaries.

 

“AXA Financial” - AXA Financial, Inc., a wholly-owned subsidiary of AXA.

 

“Bernstein Transaction” – on October 2, 2000, Alliance Capital acquired the business and assets of SCB Inc., formerly known as Sanford C. Bernstein Inc. (“Bernstein”), and assumed the liabilities of the Bernstein business.

 

“ECMC” - ECMC, LLC, a wholly-owned subsidiary of AXA Equitable.

 

“Exchange Act” - the Securities Exchange Act of 1934, as amended.

 

“Investment Advisers Act” - the Investment Advisers Act of 1940, as amended.

 

“Investment Company Act” - the Investment Company Act of 1940, as amended.

 

“Partnerships” - Alliance Capital and Alliance Holding together.

 

“Reorganization” - in October 1999, Alliance Holding reorganized by transferring its business and assets to Alliance Capital, a newly-formed operating partnership, in exchange for all of the Alliance Capital Units.  Since the Reorganization, Alliance Capital has conducted the business formerly conducted by Alliance Holding and Alliance Holding’s activities have consisted of holding Alliance Capital Units and engaging in related activities.

 

“SCB LLC” - Sanford C. Bernstein & Co., LLC, a wholly-owned subsidiary of Alliance Capital.

 

“SCBL” - Sanford C. Bernstein Limited, a wholly-owned subsidiary of Alliance Capital.

 

“SEC” - the United States Securities and Exchange Commission.

 

“Securities Act” - the Securities Act of 1933, as amended.

 

ii

 

PART I

 

Item 1.           Business

 

The words “we” and “our” in this Form 10-K refer collectively to Alliance Holding, Alliance Capital, and their subsidiaries, or to their officers and employees.  Similarly, the word “company” refers to both Alliance Holding and Alliance Capital.  Where the context requires distinguishing between Alliance Holding and Alliance Capital, we identify which of them is being discussed.  Alliance Holding Unitholders own equity in a holding company whose principal source of income and cash flow is attributable to its investment in Alliance Capital.

 

GENERAL

 

Alliance Capital provides diversified investment management and related services globally to a broad range of clients, including:

 

•                  institutional investors, including unaffiliated corporate and public employee pension funds, endowment funds, domestic and foreign institutions and governments and affiliates such as AXA and certain of its insurance company subsidiaries (see “History and Structure” in this Item 1), by means of separately managed accounts, institutional sub-advisory relationships, structured products, group trusts, mutual funds, and other investment vehicles (“Institutional Investment Management Services”);

 

•                  individual investors, primarily by means of retail mutual funds sponsored by Alliance Capital, its subsidiaries and affiliated joint venture companies, sub-advisory relationships in respect of mutual funds sponsored by third parties, “separately managed account programs”, and other investment vehicles (“Retail Services”);

 

•                  private clients, including high-net-worth individuals, trusts and estates, charitable foundations, partnerships, private and family corporations, and other entities, by means of separately managed accounts, hedge funds, mutual funds, and other investment vehicles (“Private Client Services”); and

 

•                  institutional investors desiring institutional research services by means of in-depth research, portfolio strategy, trading, and brokerage-related services (“Institutional Research Services”).

 

We also provide distribution and/or shareholder and administrative services to our sponsored mutual funds.

 

We offer diverse investment services with expertise in both growth and value oriented strategies, the two predominant equity investment styles, blend strategies that combine growth and value, fixed income strategies, including both taxable and tax-exempt securities, balanced strategies that combine equity and fixed income, and passive strategies, including both index and enhanced index portfolios. Our product line includes international, global, and emerging markets services, as well as local and regional services in major markets around the world.

 

As of December 31, 2004, assets across our Institutional Investment Management Services, Retail Services, and Private Client Services were managed by 164 portfolio managers with an average of 14 years of experience in the industry and eight years of experience with our company. Our portfolio managers manage various types of accounts, including separately managed accounts, mutual funds, hedge funds, and other investment vehicles, within each portfolio manager’s investment discipline.

 

We have a broad foundation in fundamental and quantitative research, including comprehensive industry and company coverage from the differing perspectives of growth, value, and fixed income, as well as global economic and currency forecasting skills.

 

We earn revenues by charging fees for managing the investment assets of clients. We generally calculate fees as a percentage of the value of assets under management. Our fees vary with the type of portfolio strategy, the size of account, and the total amount of assets we manage for a particular client. Accordingly, fee income generally increases or decreases as average assets under management increase or decrease. Increases in assets under management generally result from appreciation in the value of client assets and from asset inflows from new and existing clients. Conversely, decreases in assets under management generally result from market depreciation and from client redemptions, terminations, or asset withdrawals.

 

We have reclassified assets under management for December 31, 2004 and prior years by investment service and distribution channel, including the fixed income components of balanced accounts previously reported in equity, to better align publicly reported

 

1

 

assets under management with our internal reporting.  As a result, we reclassified approximately $11 billion in assets under management from equity ($6 billion from growth equity and $5 billion from value equity) to fixed income.  In addition, certain fixed income assets managed for insurance company clients previously reported at cost are now being reported at market value, resulting in approximate increases in fixed income assets under management of between $2 billion and $3 billion at each year end.

 

The following tables summarize our client assets under management by distribution channel and associated revenues:

 

Assets Under Management(1)

 

		December 31,
		2004			2003			2002			2001			2000
		(in millions)
Institutional Investment Management Services(2)		$	311,258		$	267,796		$	210,653		$	238,937		$	235,441
Retail Services		163,552			155,878			137,385			173,449			179,467
Private Client Services		63,954			53,593			40,705			39,886			35,866
Total		$	538,764		$	477,267		$	388,743		$	452,272		$	450,774

 

Revenues(3)

 

		Years Ended December 31,
		2004			2003			2002			2001			2000
		(in thousands)
Institutional Investment Management Services(2)(4)		$	758,832		$	644,441		$	619,398		$	659,667		$	496,082
Retail Services(5)		1,260,397			1,274,368			1,368,220			1,606,609			1,750,520
Private Client Services(4)		628,883			493,903			429,290			398,419			150,482
Institutional Research Services		303,609			267,868			294,910			265,815			56,289
Other		75,211			52,241			30,604			62,388			68,726
Total		$	3,026,932		$	2,732,821		$	2,742,422		$	2,992,898		$	2,522,099

 

(1)                                  Excludes certain non-discretionary client relationships and assets managed by unconsolidated affiliates.

(2)                                  Includes the general and separate accounts of the insurance company subsidiaries of AXA Financial.

(3)                                  Includes revenues of the business we acquired in the Bernstein Transaction beginning with the fourth quarter of 2000.

(4)                                  Includes performance fees, incentive allocations or carried interests we earn for managing hedge funds and certain other investment vehicles.

(5)                                  Includes fees we receive for distributing money market deposit accounts, for which we do not provide investment management services. See “Retail Services” in this Item 1 for information about the sale of our cash management services unit.

 

AXA and its subsidiaries, which include AXA Equitable and MONY Life Insurance Company, represented approximately 20%, 18%, and 18% of our total assets under management at December 31, 2004, 2003, and 2002, respectively.  They also represented approximately 5% of our total revenues for each of 2004, 2003, and 2002. AXA and its subsidiaries, whose assets consist primarily of fixed income investments that are managed as part of our Institutional Investment Management Services and Retail Services, constitute our largest client.

 

INSTITUTIONAL INVESTMENT MANAGEMENT SERVICES

 

AllianceBernstein Institutional Investment Management, our Institutional Investment Management Services division, provides active management of equity accounts (including growth accounts, value accounts, and blend accounts that combine growth and value assets), balanced accounts (including equity and fixed income assets), and fixed income accounts, as well as passive management of index and enhanced index accounts, for institutions such as corporate and public employee pension funds, endowment funds, domestic and foreign institutions, governments and affiliates (including AXA and certain of its insurance company subsidiaries, such as AXA Equitable) by means of separate accounts, sub-advisory relationships, structured products, group trusts, mutual funds and other investment vehicles.

 

2

 

As of December 31, 2004, 2003, and 2002, Institutional Investment Management Services represented approximately 58%, 56%, and 54%, respectively, of our total assets under management. The fees we earn from these services represented approximately 25%, 24%, and 23% of our revenues for 2004, 2003, and 2002, respectively.

 

The following tables summarize our Institutional Investment Management Services assets under management and associated revenues:

 

Institutional Investment Management Services Assets Under Management(1)

(by Investment Service)

 

		December 31,
		2004			2003			2002			2001			2000
		(in millions)
Equity—Growth:
U.S.		$	39,600		$	51,990		$	50,239		$	78,131		$	78,613
Global & International		24,394			16,115			9,720			10,079			9,974
		63,994			68,105			59,959			88,210			88,587
Equity—Value:
U.S.		51,006			45,945			31,767			36,450			34,030
Global & International		68,595			42,876			18,856			16,346			15,173
		119,601			88,821			50,623			52,796			49,203
Fixed Income:
U.S.		77,314			72,752			69,348			63,234			60,543
Global & International		26,166			14,165			10,567			7,291			4,681
		103,480			86,917			79,915			70,525			65,224
Passive:
U.S.		19,297			18,403			16,595			22,457			26,518
Global & International		4,886			5,550			3,561			4,949			5,909
		24,183			23,953			20,156			27,406			32,427
Total:
U.S.		187,217			189,090			167,949			200,272			199,704
Global & International		124,041			78,706			42,704			38,665			35,737
Total		$	311,258		$	267,796		$	210,653		$	238,937		$	235,441

 

(1)                                  Excludes certain non-discretionary client relationships and assets managed by unconsolidated affiliates.

 

3

 

Revenues From Institutional Investment Management Services(1)

(by Investment Service)

 

		Years Ended December 31,
		2004			2003			2002			2001			2000
		(in thousands)
Equity—Growth:
U.S.		$	139,785		$	162,746		$	182,447		$	231,378		$	265,670
Global & International		68,240			42,061			34,326			32,382			33,680
		208,025			204,807			216,773			263,760			299,350
Equity—Value:
U.S.		181,308			169,675			181,548			165,412			41,368
Global & International		219,771			127,726			87,062			93,223			20,312
		401,079			297,401			268,610			258,635			61,680
Fixed Income:
U.S.		110,184			108,348			104,979			109,535			105,724
Global & International		25,668			20,760			14,478			10,238			11,924
		135,852			129,108			119,457			119,773			117,648
Passive:
U.S.		6,942			6,341			6,921			8,488			8,473
Global & International		6,934			6,784			7,637			9,011			8,931
		13,876			13,125			14,558			17,499			17,404
Total:
U.S.		438,219			447,110			475,895			514,813			421,235
Global & International		320,613			197,331			143,503			144,854			74,847
Total		$	758,832		$	644,441		$	619,398		$	659,667		$	496,082

 

(1)                                  Includes revenues of the business acquired in the Bernstein Transaction beginning with the fourth quarter of 2000.

 

We earned approximately 20%, 18%, and 18% of our total firm-wide revenues for 2004, 2003, and 2002, respectively, from institutional equity accounts. We earned approximately 5%, 5%, and 4% of our total firm-wide revenues for 2004, 2003, and 2002, respectively, from institutional fixed income accounts.

 

Institutional Clients

 

Our institutional clients include corporate employee benefit plans, public employee retirement systems, AXA and certain of its insurance company subsidiaries, endowments, foundations, foreign governments, multi-employer pension plans, and financial and other institutions, as well as certain sub-advisory relationships.  We manage approximately 3,384 separate accounts for these clients.

 

As of December 31, 2004, assets under management for corporate employee benefit plans represented approximately 16.3% of our total firm-wide assets under management. 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 26.6% of total firm-wide assets under management as of December 31, 2004.

 

As part of our Institutional Investment Management Services, we manage assets for AXA and its subsidiaries, our largest client.  They accounted for approximately 20%, 19%, and 20% of our total institutional assets under management at December 31, 2004, 2003, and 2002, respectively, and approximately 8%, 10%, and 9% of our total institutional revenues at December 31, 2004, 2003, and 2002, respectively.

 

The institutional assets we manage for AXA and its subsidiaries, along with our nine other largest institutional clients as measured by the assets we manage for them, accounted for approximately 20% of our total firm-wide assets under management at December 31, 2004 and approximately 4% of our total firm-wide revenues for the year ended December 31, 2004. No single institutional

 

4

 

client other than AXA and its subsidiaries accounted for more than approximately 1% of our total firm-wide revenues for the year ended December 31, 2004.

 

Since we have been in business, we have experienced periods when we gained significant numbers of new accounts or amounts of assets under management and periods when we lost significant accounts or assets under management. These shifts result from conditions of financial markets, our investment performance, changes in the investment preferences of clients that result in a shift in assets under management, changes in our reputation as an investment manager, changes in the management or control of a client, and other circumstances.

 

Institutional Investment Management Agreements and Fees

 

We manage each institutional account pursuant to a written investment management agreement between our company and our client. The agreement is usually terminable at any time or upon relatively short notice by either party. In general, our contracts may not be assigned without client consent.

 

We are principally compensated on the basis of management fees calculated as a percentage of assets under management.  We describe our fees in a fee schedule and attach the fee schedule to our client contracts.  The percentage we charge varies with the type of portfolio strategy, the size of the account, and the total amount of assets we manage for a particular client.

 

We charge performance-based fees on approximately 14% of institutional assets under management.  Performance-based fees provide for a relatively low base fee plus an additional fee based on investment performance. Performance-based fee arrangements may become more common in the investment management industry. An increase in performance-based fee arrangements with our clients could create greater fluctuations in revenues.

 

Institutional Marketing

 

Our institutional clients are serviced globally by AllianceBernstein Institutional Investment Management, which deploys two groups of professionals: first, generalist relationship managers who present the entire range of our investment products to our clients and prospects and who act as the primary point of contact with our clients; and second, specialist marketers who support the work of the relationship managers by presenting the specific investment services of our firm (growth, value, blend, fixed income, or balanced) and who work with our clients’ consultants.  This latter group is responsible for marketing our services through symposia, publications, research papers, websites, and conference calls.  Specialist marketing teams are located in New York, London, and Tokyo.  Our generalist relationship managers are based in numerous local offices around the world.

 

RETAIL SERVICES

 

We have managed mutual funds since 1971.  Our Retail Services consist of furnishing investment management and related services to individual investors by means of retail mutual funds (including variable products and cash management services) sponsored by our company, our subsidiaries and affiliated joint venture companies; sub-advisory relationships in respect of mutual funds sponsored by third parties; “separately managed account programs”; and other investment vehicles (“Retail Products”). Among our Retail Products are open-end mutual funds and closed-end mutual funds that are (i) registered as investment companies under the Investment Company Act (“AllianceBernstein Funds”), or (ii) not registered under the Investment Company Act and not publicly offered to United States persons (“ACM Funds”).  Also among these products are retail separately managed account programs, which are sponsored by various registered broker-dealers and generally provide for an all-inclusive fee covering investment management, trade execution, asset allocation, and custodial and administrative services (“Separately Managed Account Programs”).  Retail Services assets under management, which are determined by subtracting applicable liabilities from the value of assets under management (“Net Assets”), at December 31, 2004 amounted to approximately $164 billion. Retail Products are managed by the same investment professionals who manage our institutional and private client accounts. We provide distribution and/or shareholder and administrative services for Retail Products.

 

5

 

The following tables summarize our Retail Services assets under management and associated revenues:

 

Retail Services Assets Under Management(1)(2)

(by Product)

 

		Net Assets(3) as of December 31, 2004
		(in millions)
AllianceBernstein Funds—Open-End:
Equity:
Growth		$	13,242
Value		14,018
Taxable fixed income		7,730
Tax-exempt fixed income		4,167
AllianceBernstein Funds—Closed-End		4,644
ACM Funds (Open- and Closed-End):
Equity:
Growth		6,184
Value		1,289
Taxable fixed income		10,514
Separately Managed Account Programs		9,794
Variable Products
EQ Advisors Trust (sub-advised)		27,662
AllianceBernstein Variable Products Series Fund, Inc.		6,368
AXA Premier VIP (sub-advised)		2,576
Cash management services		28,342
Other
Retail (sub-advised)		13,523
AXA joint venture (Australia; New Zealand)		12,565
Separately managed accounts		934
Total		$	163,552

 

(1)                                  Excludes assets managed by unconsolidated affiliates.

(2)                                  For information about the sale of our cash management services unit, see “Retail Services – Cash Management Services” in this Item 1.

(3)                                  Assets under management, less applicable liabilities.

 

6

 

 Retail Services Assets Under Management(1)(2)

(by Investment Service)

 

		December 31,
		2004			2003			2002			2001			2000
		(in millions)
Equity—Growth:
U.S.		$	33,436		$	32,988		$	28,718		$	56,345		$	74,960
Global & International		14,814			14,754			11,664			20,809			27,764
		48,250			47,742			40,382			77,154			102,724
Equity—Value:
U.S.		32,113			28,384			21,289			20,214			13,245
Global & International		8,600			3,961			1,755			1,177			42
		40,713			32,345			23,044			21,391			13,287
Fixed Income:
U.S.		45,418			48,555			54,923			56,517			49,807
Global & International		23,926			22,775			16,277			14,997			10,561
		69,344			71,330			71,200			71,514			60,368
Passive:
U.S.		4,203			3,584			2,121			2,706			3,035
Global & International		1,042			877			638			684			53
		5,245			4,461			2,759			3,390			3,088
Total:
U.S.		115,170			113,511			107,051			135,782			141,047
Global & International		48,382			42,367			30,334			37,667			38,420
Total		$	163,552		$	155,878		$	137,385		$	173,449		$	179,467

 

(1)                                  Excludes assets managed by unconsolidated affiliates.

(2)                                  For information about the sale of our cash management services unit, see “Retail Services—Cash Management Services” in this Item 1.

 

7

 

Revenues From Retail Services(1)(2)

(by Investment Service)

 

		Years Ended December 31,
		2004(3)			2003			2002			2001			2000
		(in thousands)
Equity—Growth:
U.S.		$	155,413		$	173,268		$	226,935		$	360,241		$	461,436
Global & International		102,005			104,324			121,557			170,504			228,746
		257,418			277,592			348,492			530,745			690,182
Equity—Value:
U.S.		113,986			109,074			104,989			92,750			39,104
Global & International		28,214			13,519			5,914			4,063			2,941
		142,200			122,593			110,903			96,813			42,045
Fixed Income:
U.S.		182,865			209,785			226,073			227,279			207,727
Global & International		141,211			132,952			113,851			110,015			100,778
		324,076			342,737			339,924			337,294			308,505
Passive:
U.S.		1,663			1,253			916			1,296			2,294
Global & International		1,651			1,212			286			236			227
		3,314			2,465			1,202			1,532			2,521
Total:
U.S.		453,927			493,380			558,913			681,566			710,561
Global & International		273,081			252,007			241,608			284,818			332,692
		727,008			745,387			800,521			966,384			1,043,253
Distribution Revenues(4)		445,911			434,705			466,130			543,901			621,622
Shareholder Servicing Fees(4)		87,478			94,276			101,569			96,324			85,645
Total		$	1,260,397		$	1,274,368		$	1,368,220		$	1,606,609		$	1,750,520

 

(1)                                  Includes fees we receive in connection with Separately Managed Account Programs.

(2)                                  Includes fees we receive for distributing money market deposit accounts in connection with which we provide no investment management services. For information about the sale of our cash management services unit, see “Retail Services—Cash Management Services” in this Item 1.

(3)                                  Includes an approximate $70 million reduction in advisory fees charged to AllianceBernstein Funds in connection with the resolution of market timing matters.  For additional information, see “Regulation” in this Item 1.

(4)                                  For a description of distribution revenues and shareholder servicing fees, see “Retail Services—Distribution” in this Item 1.

 

Our Retail Services include sub-advising EQ Advisors Trust (“EQAT”), AXA Premier, AXA Premier VIP, and mutual funds sponsored by AXA Asia Pacific Holdings Limited and its subsidiaries (“AXA Asia Pacific”), which together with AXA and its subsidiaries constitute our largest client.  They accounted for approximately 26%, 24%, and 20% of our total retail assets under management at December 31, 2004, 2003, and 2002, respectively, and approximately 7%, 6%, and 5% of our total retail revenues at December 31, 2004, 2003, and 2002, respectively.

 

Variable Products

 

Variable products are open-end mutual funds designed to fund variable annuity contracts and variable life insurance policies offered by the separate accounts of life insurance companies.  We manage the AllianceBernstein Variable Products Series Fund, Inc. (“ABVPS”), which serves as the investment vehicle for insurance products offered by unaffiliated insurance companies, and we sub-advise EQAT and AXA Premier VIP, each of which is the investment vehicle for insurance products offered by AXA Equitable and its insurance company subsidiary.  At December 31, 2004, the net assets of the portfolios of the Variable Products totaled approximately $37 billion.

 

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Retail Marketing

 

We market a broad complement of Retail Services to individual investors worldwide through ABIRM.  The over-arching goal of these services is to provide disciplined, research-based investments that play a consistent and effective role in an investor’s well-diversified portfolio.  The marketing and sales efforts of ABIRM are designed to communicate the role of each of these services in such a well-planned investment strategy.  Retail Services provide the full range of our investment capabilities, in local and global growth equities, value equities, and fixed income asset classes, as well as style-blended services, and the AllianceBernstein Wealth Strategies series of integrated investment solutions.

 

Retail Distribution

 

We distribute our Retail Products through broker-dealers, insurance sales representatives, banks, registered investment advisers, financial planners and other financial intermediaries. ABIRM, a registered broker-dealer, serves as the principal underwriter and distributor of AllianceBernstein Funds and as a placing or distribution agent for most of ACM Funds. ABIRM employs approximately 110 sales representatives who devote their time exclusively to promoting the sale of Retail Services by financial intermediaries.

 

Our mutual fund distribution system (the “System”) includes a multi-class share structure that permits open-end AllianceBernstein Funds and ACM Funds to offer investors various options for the purchase of mutual fund shares, including both front-end load shares and back-end load shares. For front-end load shares, ABIRM pays sales commissions to the financial intermediaries distributing the funds from the conventional front-end sales charge it receives from investors at the time of the sale. For back-end load shares, ABIRM pays sales commissions to the financial intermediary at the time of purchase and receives higher ongoing distribution services fees from the mutual funds.  In addition, investors who redeem before the expiration of the minimum holding period (which ranges from one year to four years) pay a contingent deferred sales charge (“CDSC”) to ABIRM. We expect to recover deferred sales commissions over periods not exceeding five and one-half years from receipt of CDSC and the higher ongoing distribution services fees we receive from holders of back-end load shares. Payments of sales commissions made to financial intermediaries in connection with the sale of back-end load shares under the System, net of CDSC received of $32.9 million and $37.5 million, totaled approximately $44.6 million and $94.9 million during 2004 and 2003, respectively.

 

The rules of the National Association of Securities Dealers, Inc. (“NASD”) effectively cap the aggregate sales charges received by ABIRM. The cap is 6.25% of cumulative gross sales (plus interest at the prime rate plus 1% per annum) in each share class of the open-end AllianceBernstein Funds.

 

Most open-end AllianceBernstein Funds have adopted a plan under Rule 12b-1 of the Investment Company Act that allows the fund to pay, out of assets of the fund, asset-based sales charges or distribution and service fees for the distribution and sale of its shares (“Rule 12b-1 Fees”). The open-end AllianceBernstein Funds and ACM Funds have entered into agreements with ABIRM under which ABIRM is paid a distribution services fee. ABIRM and the financial intermediaries have entered into selling and distribution agreements for the distribution of AllianceBernstein Funds and ACM Funds pursuant to which ABIRM pays sales commissions. These agreements are terminable by either party upon notice (generally not more than 60 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 ABIRM, in which case ABIRM retains the entire sales charge.

 

In addition to 12b-1 Fees, ABIRM, at its own expense, currently provides additional payments under Distribution Services and Educational Support agreements to firms that sell shares of our funds, a practice sometimes referred to as revenue sharing.  Although the individual components may be higher and the total amount of payments made to each qualifying firm in any given year may vary, the total amount paid to a financial intermediary will generally not exceed the sum of (i) 0.25% of the current year’s fund sales by that firm, and (ii) 0.10% of average daily net sales attributable to that firm over the course of the year.  These sums may be associated with our funds’ status on a financial intermediary’s preferred list of funds or may be otherwise associated with the financial intermediary’s marketing and other support activities, such as client education meetings and training efforts relating to our funds.

 

During 2004, the 10 financial intermediaries responsible for the largest volume of sales of open-end AllianceBernstein Funds and ACM Funds were responsible for 46% of such sales. AXA Advisors, LLC (“AXA Advisors”), a wholly-owned subsidiary of AXA Financial that utilizes members of AXA Equitable’s insurance sales force as its registered representatives, was responsible for approximately 4%, 3%, and 3% of total sales of shares of open-end AllianceBernstein Funds and ACM Funds in 2004, 2003, and 2002, respectively. AXA Advisors is under no obligation to sell a specific amount of fund shares and also sells shares of mutual funds sponsored by affiliates and unaffiliated organizations.

 

Subsidiaries of Merrill Lynch & Co., Inc. (collectively “Merrill Lynch”) were responsible for approximately 6%, 7%, and 12% of open-end AllianceBernstein Fund and ACM Fund sales in 2004, 2003, and 2002, respectively. Citigroup Inc. (and its subsidiaries,

 

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“Citigroup”) was responsible for approximately 7% of open-end AllianceBernstein Fund and ACM Fund sales in 2004, 9% in 2003, and 3% in 2002. Neither Merrill Lynch nor Citigroup is under any obligation to sell a specific amount of AllianceBernstein Fund and ACM 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 AXA Advisors, Merrill Lynch, and Citigroup has in any year since 2000 accounted for more than 10% of our sales of shares of open-end AllianceBernstein Funds and ACM Funds.

 

Many of the financial intermediaries that sell shares of AllianceBernstein Funds and ACM Funds also offer shares of funds we do not manage and frequently offer shares of funds managed by their own affiliates.

 

Based on industry sales data reported by the Investment Company Institute (December 2004), our market share in the U.S. mutual fund industry is 1.16% of total industry assets and we accounted for 0.52% of total open-end industry sales in the U.S. during 2004. The investment performance of the AllianceBernstein Funds is an important factor in the sale of their shares, but there are other factors contributing to sales of mutual fund shares. 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 made to financial intermediaries. We believe that our compensation programs with financial intermediaries are competitive with others in the industry.

 

Under current interpretations of 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 2004, banks and their affiliates accounted for approximately 17% of the sales of shares of open-end AllianceBernstein Funds and Variable Products.

 

Retail Investment Management Agreements and Fees

 

We generally base our fees for our Retail Products on a percentage of average Net Assets. We may also charge performance-based fees. As certain of the AllianceBernstein Funds have grown, we have revised our fee schedules to provide lower incremental fees above certain asset levels. Fees paid by the AllianceBernstein Funds, EQAT, AXA Premier, and AXA Premier VIP are reflected in the investment management agreement and reviewed annually by the boards of directors or trustees, including by a majority of the independent directors or trustees. Increases in fees must be approved by the shareholders. Fees paid by ACM Funds are reflected in investment management agreements that continue until they are terminated.  Increases in fees must generally be approved by the ACM Fund shareholders and/or the relevant regulatory authority depending on the domicile and structure of the fund.  In 2004, we lowered the investment management fees we charge certain ACM Funds. In general, the investment management agreements with the AllianceBernstein Funds, ACM Funds, EQAT, AXA Premier, and AXA Premier VIP provide for termination at any time upon 60 days’ notice.

 

Under each investment management agreement with an AllianceBernstein Fund and ACM Fund, we provide the fund with investment management services, office space and order placement facilities and pay all compensation of directors, trustees, and officers of the AllianceBernstein Fund and ACM Fund when those persons are our affiliates. Each AllianceBernstein Fund and ACM Fund pays all of its other expenses, however, we have agreed to reimburse or waive all, or a portion of, certain expenses of certain funds. We may also agree to reduce our fee or bear certain expenses to limit total fund expenses during an AllianceBernstein Fund’s or ACM Fund’s initial period of operations. During 2004, each AllianceBernstein Fund appointed an independent compliance officer reporting to the independent directors of each AllianceBernstein Fund. The expense of this officer and his staff is borne by Alliance Capital.

 

We reduced certain of the advisory fees we charge to AllianceBernstein Funds in connection with our resolution of market timing matters. See “Regulation” in this Item 1.

 

Cash Management Services

 

On October 28, 2004, Alliance Capital and Federated Investors, Inc. (“Federated”) reached a definitive agreement under which Federated is to acquire our cash management services unit (“Agreement”).  Under the Agreement, up to $24 billion in assets from 22 of our third-party-distributed money market funds will be transitioned into Federated money market funds. The boards of directors at both Federated and ACMC have approved the transaction, but it is still subject to customary closing conditions. This transaction, which is expected to close in phases during the first through third quarters of 2005, includes initial cash payments to us totaling approximately $26 million due at the transaction closing dates, and additional payments consisting of annual contingent purchase price payments payable over five years and a final contingent $10 million payment. The initial closing occured on March 7, 2005. The annual contingent purchase price payments will be calculated as a percentage of revenues, less certain expenses, directly attributed to these assets and certain other assets of our former cash management clients.  Currently, we estimate these payments will total approximately $65 million over five years.  The final contingent $10 million payment is based on comparing

 

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applicable revenues during the fifth year following closing to the revenues generated by those assets prior to the closing.  The amount of capital gain realized upon closing the transaction depends on transaction costs we incur and the initial payments by Federated, some of which would, in certain circumstances, need to be returned to Federated.

 

The transaction does not include the assets of AllianceBernstein Exchange Reserves, an open-end AllianceBernstein Fund, which will continue to be available to investors in other Retail Products.  In addition, we will continue to meet the liquidity needs of clients in our Private Client Services, Separately Managed Account Programs and Institutional Investment Management Services.

 

During 2004, we provided cash management services to individual investors through a product line comprising 22 money market fund portfolios, including two money market portfolios domiciled in the Cayman Islands and in Dublin, Ireland. Net Assets in these products as of December 31, 2004 totaled approximately $28 billion, as set forth in the table below:

 

Money Market Funds

 

		Net Assets(1) as of December 31, 2004
		(in millions)
AllianceBernstein Capital Reserves (two portfolios)		$	12,290
AllianceBernstein Government Reserves (two portfolios)		7,327
AllianceBernstein Institutional Reserves (six portfolios)		5,432
AllianceBernstein Municipal Trust (ten portfolios)		2,236
Non-U.S. Money Market Funds (two portfolios)		1,057
Total		$	28,342

 

(1)                                  Assets under management, less applicable liabilities.

 

Shareholder and Administration Services

 

Alliance Global Investor Services, Inc. (“AGIS”), one of our wholly-owned subsidiaries, provides transfer agency and related services for each open-end AllianceBernstein Fund and provides servicing for each open-end AllianceBernstein Fund’s shareholder accounts. As of December 31, 2004, AGIS employed 258 people. AGIS operates in Secaucus, New Jersey, and San Antonio, Texas. AGIS receives a monthly fee under each of its servicing agreements with the AllianceBernstein Funds. Each servicing agreement must be approved annually by the relevant AllianceBernstein Fund’s board of directors or trustees, including a majority of the independent directors or trustees, and may be terminated by either party without penalty upon 60 days’ notice.

 

Most AllianceBernstein Funds utilize Alliance Capital and AGIS personnel to perform legal, clerical, and accounting services not required to be provided by Alliance Capital. Payments by an AllianceBernstein Fund for these services must be specifically approved in advance by the fund’s board of directors or trustees. Currently, Alliance Capital and AGIS are accruing revenues for providing these services to the AllianceBernstein Funds at the rate of approximately $8.8 million per year.

 

ACM Global Investor Services S.A. (“ACMGIS”), another of our wholly-owned subsidiaries, is the transfer agent of substantially all of the ACM Funds. As of December 31, 2004, ACMGIS employed 57 people. ACMGIS operates in Luxembourg and Singapore and receives a monthly fee for its transfer agency services under services agreements, which may be terminated by either party upon 60 days’ notice.

 

PRIVATE CLIENT SERVICES

 

We provide investment management services to private clients, consisting of high-net-worth individuals, trusts and estates, charitable foundations, partnerships, private and family corporations and other similar entities, by means of separately managed accounts, hedge funds and other investment vehicles. Private clients have been a core client group of Bernstein for over 35 years. The former private client services group of Bernstein, together with the former private client group of Alliance Capital, is now known as the Bernstein Investment Research and Management unit of Alliance Capital (“BIRM”).  BIRM targets households with financial assets of $1 million or more and has a minimum opening account size of $400,000. BIRM’s services consist of customized, tax-sensitive investment planning making available a broad range of investment options.

 

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BIRM’s private client activities are built on a direct sales effort that involves 193 advisors. These financial advisors work with private clients and their tax, legal and other advisors to tailor long-range investment plans to meet each client’s needs. The portfolio created for each private client is intended to maximize after-tax investment returns given a client’s individual investment goals, income requirements, risk tolerance, tax considerations, and any other factors relevant for that client.

 

Revenues from Private Client Services, which represented approximately 21%, 18%, and 16% of our total revenues for the years ended December 31, 2004, 2003, and 2002, respectively, consist primarily of investment management fees earned from managing client assets, generally measured as a percentage of assets under management and, in the case of clients of BIRM, include transaction charges earned by SCB LLC, a registered broker-dealer, for executing trades relating to equity securities under management.  Effective January 1, 2005, we eliminated transaction charges on U.S. equity services for many clients and increased asset-based fees.   The change reduced overall costs for these clients as a group and is expected to reduce our revenues in 2005 by approximately $10 million.

 

As of December 31, 2004, 2003, 2002, Private Client Services represented approximately 12%, 11%, and 10%, respectively, of our total assets under management.

 

The following tables summarize private client assets under management and associated revenues:

 

Private Client Services Assets Under Management

(by Investment Service)

 

		December 31,
		2004			2003			2002			2001			2000
		(in millions)
Equity—Growth:
U.S.		$	7,022		$	5,479		$	3,194		$	2,817		$	1,375
Global & International(1)		4,001			3,065			9			5			—
		11,023			8,544			3,203			2,822			1,375
Equity—Value:
U.S.		22,411			19,681			14,954			17,677			17,372
Global & International		9,874			6,921			6,105			5,711			6,182
		32,285			26,602			21,059			23,388			23,554
Fixed Income:
U.S.		20,465			18,312			16,328			13,650			10,932
Global & International		75			55			48			—			—
		20,540			18,367			16,376			13,650			10,932
Passive:
U.S.		106			80			67			26			5
Global & International		—			—			—			—			—
		106			80			67			26			5
Total:
U.S.		50,004			43,552			34,543			34,170			29,684
Global & International		13,950			10,041			6,162			5,716			6,182
Total		$	63,954		$	53,593		$	40,705		$	39,886		$	35,866

 

(1)                                  The increase in 2003 is due primarily to our classification of approximately $3 billion in international blend portfolios from international value to international growth.

 

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Revenues From Private Client Services(1)

(by Investment Service)

 

		Years Ended December 31,
		2004			2003			2002			2001			2000
		(in thousands)
Equity—Growth:
U.S.		$	83,224		$	56,249		$	43,801		$	23,936		$	25,660
Global & International		39,345			179			37			—			—
		122,569			56,428			43,838			23,936			25,660
Equity—Value:
U.S.		298,797			258,928			240,084			247,982			89,988
Global & International		100,805			85,903			66,648			65,781			17,273
		399,602			344,831			306,732			313,763			107,261
Fixed Income:
U.S.		104,330			90,960			77,039			59,989			17,334
Global & International		248			163			112			—			—
		104,578			91,123			77,151			59,989			17,334
Passive:
U.S.		762			189			236			27			227
Global & International		—			—			—			—			—
		762			189			236			27			227
Total:
U.S.		487,113			406,326			361,160			331,934			133,209
Global & International		140,398			86,245			66,797			65,781			17,273
		627,511			492,571			427,957			397,715			150,482
Distribution Revenues		1,372			1,332			1,333			704			—
Total		$	628,883		$	493,903		$	429,290		$	398,419		$	150,482

 

(1)                                  Includes revenues of the business acquired in the Bernstein Transaction beginning with the fourth quarter of 2000.

 

Private Client Investment Management Agreements and Fees

 

Private client accounts are managed pursuant to a written investment advisory agreement among the client, Alliance Capital and SCB LLC, which usually is terminable at any time or upon relatively short notice by any party. In general, these contracts may not be assigned without the consent of the client. In providing services to private clients, we are compensated on the basis of fees calculated based on the type of portfolio, the size of the account and a percentage of assets under management as well as the transaction charges earned by SCB LLC referred to above. As noted above, effective January 1, 2005, we eliminated transaction charges for U.S. equity services for many private clients and increased asset-based fees.  The aggregate fees we charge for managing hedge funds may be higher than the fees we charge for managing other assets in private client accounts because hedge fund fees provide for performance-based fees, incentive allocations or carried interests.

 

We charge performance-based fees on approximately 5% of private client assets under management.  Performance-based fees provide for a relatively low base fee plus an additional fee based on investment performance. Performance-based fee arrangements may become more common in the investment management industry. An increase in performance-based fee arrangements with our clients could create greater fluctuations in revenues.

 

Private Client Marketing

 

BIRM’s private client financial advisors are dedicated to obtaining and maintaining client relationships. These advisors do not manage money and do not recommend individual stocks or external products. Their goal is to provide investment perspective for clients in order

 

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