Attached files
Exhibit 99.1
Part I
FINANCIAL INFORMATION
Item 1.
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Financial Statements
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ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(in thousands, except unit amounts)
June 30,
2012
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December 31,
2011
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(unaudited)
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ASSETS
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Cash and cash equivalents
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$ | 482,422 | $ | 638,681 | ||||
Cash and securities segregated, at fair value (cost: $1,154,668 and $1,279,779)
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1,154,720 | 1,279,855 | ||||||
Receivables, net:
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Brokers and dealers
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336,298 | 291,276 | ||||||
Brokerage clients
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868,225 | 782,697 | ||||||
Fees
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241,217 | 265,248 | ||||||
Investments:
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Deferred compensation-related
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150,189 | 176,370 | ||||||
Other
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618,767 | 618,924 | ||||||
Furniture, equipment and leasehold improvements, net
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249,024 | 273,104 | ||||||
Goodwill
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2,954,327 | 2,954,327 | ||||||
Intangible assets, net
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179,648 | 190,000 | ||||||
Deferred sales commissions, net
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95,584 | 59,999 | ||||||
Other assets
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197,384 | 177,908 | ||||||
Total assets
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$ | 7,527,805 | $ | 7,708,389 | ||||
LIABILITIES AND CAPITAL
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Liabilities:
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Payables:
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Brokers and dealers
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$ | 298,553 | $ | 279,655 | ||||
Securities sold not yet purchased
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26,189 | 39,307 | ||||||
Brokerage clients
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1,819,100 | 1,895,972 | ||||||
AllianceBernstein mutual funds
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119,805 | 122,151 | ||||||
Accounts payable and accrued expenses
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382,457 | 362,570 | ||||||
Accrued compensation and benefits
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507,005 | 534,344 | ||||||
Debt
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275,930 | 444,903 | ||||||
Total liabilities
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3,429,039 | 3,678,902 | ||||||
Commitments and contingencies (See Note 8)
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Capital:
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General Partner
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42,911 | 42,632 | ||||||
Limited partners: 277,612,557 and 277,847,588 units issued and outstanding
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4,332,830 | 4,306,760 | ||||||
Capital contributions receivable from General Partner
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(10,831 | ) | (12,135 | ) | ||||
Holding Units held for deferred compensation plans
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(278,500 | ) | (323,382 | ) | ||||
Accumulated other comprehensive income (loss)
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(39,143 | ) | (38,413 | ) | ||||
Partners’ capital attributable to AllianceBernstein Unitholders
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4,047,267 | 3,975,462 | ||||||
Non-controlling interests in consolidated entities
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51,499 | 54,025 | ||||||
Total capital
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4,098,766 | 4,029,487 | ||||||
Total liabilities and capital
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$ | 7,527,805 | $ | 7,708,389 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
1
ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(in thousands, except per unit amounts)
(unaudited)
Three Months Ended June 30,
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Six Months Ended June 30,
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2012
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2011
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2012
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2011
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Revenues:
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Investment advisory and services fees
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$ | 425,843 | $ | 508,323 | $ | 853,403 | $ | 1,023,315 | ||||||||
Bernstein research services
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103,008 | 107,609 | 209,351 | 227,233 | ||||||||||||
Distribution revenues
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95,157 | 92,272 | 184,117 | 181,099 | ||||||||||||
Dividend and interest income
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4,981 | 4,926 | 9,387 | 10,018 | ||||||||||||
Investment gains (losses)
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(10,852 | ) | (13,596 | ) | 20,106 | (12,620 | ) | |||||||||
Other revenues
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24,844 | 29,108 | 49,129 | 55,963 | ||||||||||||
Total revenues
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642,981 | 728,642 | 1,325,493 | 1,485,008 | ||||||||||||
Less: Interest expense
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818 | 648 | 1,521 | 1,624 | ||||||||||||
Net revenues
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642,163 | 727,994 | 1,323,972 | 1,483,384 | ||||||||||||
Expenses:
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Employee compensation and benefits
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272,821 | 326,413 | 575,364 | 665,569 | ||||||||||||
Promotion and servicing:
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Distribution-related payments
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86,120 | 78,557 | 165,989 | 153,313 | ||||||||||||
Amortization of deferred sales commissions
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10,171 | 9,871 | 18,438 | 20,197 | ||||||||||||
Other
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51,775 | 59,773 | 101,509 | 113,460 | ||||||||||||
General and administrative:
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General and administrative
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129,310 | 131,821 | 254,220 | 264,712 | ||||||||||||
Real estate charges
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6,787 | 18 | 16,056 | 36 | ||||||||||||
Interest on borrowings
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892 | 619 | 1,725 | 1,305 | ||||||||||||
Amortization of intangible assets
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5,540 | 5,296 | 10,679 | 10,731 | ||||||||||||
Total expenses
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563,416 | 612,368 | 1,143,980 | 1,229,323 | ||||||||||||
Operating income
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78,747 | 115,626 | 179,992 | 254,061 | ||||||||||||
Income taxes
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5,838 | 8,243 | 12,541 | 18,252 | ||||||||||||
Net income
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72,909 | 107,383 | 167,451 | 235,809 | ||||||||||||
Net (loss) income of consolidated entities attributable to non-controlling interests
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(1,276 | ) | (6,756 | ) | 5,988 | (14,802 | ) | |||||||||
Net income attributable to AllianceBernstein Unitholders
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$ | 74,185 | $ | 114,139 | $ | 161,463 | $ | 250,611 | ||||||||
Net income per AllianceBernstein Unit:
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Basic
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$ | 0.26 | $ | 0.41 | $ | 0.58 | $ | 0.89 | ||||||||
Diluted
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$ | 0.26 | $ | 0.41 | $ | 0.58 | $ | 0.89 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
2
ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income
(in thousands)
(unaudited)
Three Months Ended June 30,
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Six Months Ended June 30,
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2012
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2011
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2012
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2011
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Net income
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$ | 72,909 | $ | 107,383 | $ | 167,451 | $ | 235,809 | ||||||||
Other comprehensive income (loss), before taxes:
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Foreign currency translation adjustments
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(3,886 | ) | 7,047 | (2,011 | ) | 13,304 | ||||||||||
Unrealized gains on investments:
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Unrealized gains arising during period
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65 | 195 | 770 | 588 | ||||||||||||
Less: reclassification adjustment for gains (losses) included in net income
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18 | 1 | 18 | (128 | ) | |||||||||||
Change in unrealized gains on investments
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47 | 194 | 752 | 716 | ||||||||||||
Changes in employee benefit related items:
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Amortization of transition asset
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(36 | ) | (36 | ) | (72 | ) | (72 | ) | ||||||||
Amortization of prior service cost
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27 | 26 | 54 | 53 | ||||||||||||
Recognized actuarial loss
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227 | 116 | 154 | 84 | ||||||||||||
Other comprehensive income (loss), before taxes
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(3,621 | ) | 7,347 | (1,123 | ) | 14,085 | ||||||||||
Income tax benefit (expense)
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767 | (425 | ) | 331 | (689 | ) | ||||||||||
Other comprehensive income (loss), after taxes
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(2,854 | ) | 6,922 | (792 | ) | 13,396 | ||||||||||
Less: Comprehensive income (loss) in consolidated entities attributable to non-controlling interests
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(1,389 | ) | (6,760 | ) | 5,927 | (15,089 | ) | |||||||||
Comprehensive income attributable to AllianceBernstein Unitholders
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$ | 71,444 | $ | 121,065 | $ | 160,732 | $ | 264,294 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
3
ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
Six Months Ended June 30,
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2012
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2011
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Cash flows from operating activities:
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Net income
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$ | 167,451 | $ | 235,809 | ||||
Adjustments to reconcile net income to net cash provided by operating activities:
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Amortization of deferred sales commissions
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18,438 | 20,197 | ||||||
Amortization of non-cash deferred compensation
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7,782 | 83,917 | ||||||
Depreciation and other amortization
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41,209 | 41,762 | ||||||
Unrealized (gains) on deferred compensation-related investments
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(8,819 | ) | (12,340 | ) | ||||
Unrealized (gains) losses on consolidated venture capital fund
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(1,029 | ) | 15,538 | |||||
Unrealized (gains) losses on other investments
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(18,713 | ) | 2,807 | |||||
Real estate asset write-off charge
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1,675 | — | ||||||
Other, net
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2,215 | 1,619 | ||||||
Changes in assets and liabilities:
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Decrease in segregated cash and securities
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125,135 | 94,630 | ||||||
(Increase) decrease in receivables
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(93,109 | ) | 78,665 | |||||
Decrease (increase) in investments
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55,373 | (172,864 | ) | |||||
(Increase) in deferred sales commissions
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(54,023 | ) | (12,405 | ) | ||||
(Increase) in other assets
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(19,918 | ) | (24,478 | ) | ||||
(Decrease) in payables
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(90,281 | ) | (386,548 | ) | ||||
Increase (decrease) in accounts payable and accrued expenses
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4,649 | (2,083 | ) | |||||
Increase in accrued compensation and benefits
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102,500 | 78,146 | ||||||
Net cash provided by operating activities
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240,535 | 42,372 | ||||||
Cash flows from investing activities:
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Purchases of investments
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(96 | ) | (17 | ) | ||||
Proceeds from sales of investments
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118 | 2,481 | ||||||
Additions to furniture, equipment and leasehold improvements, net
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(7,918 | ) | (11,598 | ) | ||||
Purchases of businesses, net of cash acquired
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— | (26,884 | ) | |||||
Net cash used in investing activities
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(7,896 | ) | (36,018 | ) | ||||
Cash flows from financing activities:
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(Repayment) issuance of commercial paper, net
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(169,719 | ) | 89,699 | |||||
Proceeds from bank loans
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— | 15,000 | ||||||
Increase (decrease) in overdrafts payable
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16,750 | (13,652 | ) | |||||
Distributions to General Partner and unitholders
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(134,095 | ) | (270,752 | ) | ||||
Distributions to non-controlling interests in consolidated entities
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(8,453 | ) | (2,925 | ) | ||||
Capital contributions from General Partner
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1,684 | 1,797 | ||||||
Additional investments by Holding from distributions paid to AllianceBernstein consolidated rabbi trust
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3,457 | 1,755 | ||||||
Additional investments by Holding with proceeds from exercise of compensatory options to buy Holding Units
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— | 1,476 | ||||||
Purchases of Holding Units to fund deferred compensation plan awards, net
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(95,143 | ) | (100,828 | ) | ||||
Purchases of AllianceBernstein Units
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(3,000 | ) | (4,297 | ) | ||||
Debt issuance costs
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(1,750 | ) | (69 | ) | ||||
Other
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(21 | ) | (35 | ) | ||||
Net cash used in financing activities
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(390,290 | ) | (282,831 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents
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1,392 | 9,581 | ||||||
Net (decrease) in cash and cash equivalents
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(156,259 | ) | (266,896 | ) | ||||
Cash and cash equivalents as of beginning of the period
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638,681 | 650,191 | ||||||
Cash and cash equivalents as of end of the period
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$ | 482,422 | $ | 383,295 |
See Accompanying Notes to Condensed Consolidated Financial Statements.
4
ALLIANCEBERNSTEIN L.P.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
June 30, 2012
(unaudited)
The words “we” and “our” refer collectively to AllianceBernstein L.P. and its subsidiaries (“AllianceBernstein”), or to their officers and employees. Similarly, the word “company” refers to AllianceBernstein. Cross-references are in italics.
These statements should be read in conjunction with AllianceBernstein’s audited consolidated financial statements included in AllianceBernstein’s Form 10-K for the year ended December 31, 2011.
1.
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Business Description and Organization
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We provide research, diversified investment management and related services globally to a broad range of clients. Our principal services include:
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•
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Institutional Services – servicing our institutional clients, 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, by means of separately-managed accounts, sub-advisory relationships, structured products, collective investment trusts, mutual funds, hedge funds and other investment vehicles.
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Retail Services – servicing our retail clients, primarily by means of retail mutual funds sponsored by AllianceBernstein or an affiliated company, sub-advisory relationships with mutual funds sponsored by third parties, separately-managed account programs sponsored by financial intermediaries worldwide and other investment vehicles.
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Private Client Services – servicing our 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.
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Bernstein Research Services – servicing institutional investors seeking high-quality research, portfolio analysis and brokerage-related services, and issuers of publicly-traded securities seeking equity capital markets services.
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We also provide distribution, shareholder servicing and administrative services to the mutual funds we sponsor.
Our high-quality, in-depth research is the foundation of our business. Our research disciplines include fundamental research, quantitative research, economic research and currency forecasting. In addition, we have created several specialized research initiatives, including research examining global strategic developments that can affect multiple industries and geographies.
We provide a broad range of investment services with expertise in:
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•
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Value equities, generally targeting stocks that are out of favor and considered undervalued;
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Growth equities, generally targeting stocks with under-appreciated growth potential;
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Fixed income securities, including taxable and tax-exempt securities;
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Blend strategies, combining style-pure investment components with systematic rebalancing;
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Passive management, including index and enhanced index strategies;
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Alternative investments, including hedge funds, fund of funds, currency management strategies and private capital (e.g., direct real estate investing); and
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Asset allocation services, including dynamic asset allocation, customized target date funds, target risk funds and other strategies tailored to help clients meet their investment goals.
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We provide these services using various investment disciplines, including market capitalization (e.g., large-, mid- and small-cap equities), term (e.g., long-, intermediate- and short-duration debt securities), and geography (e.g., U.S., international, global and emerging markets), as well as local and regional disciplines in major markets around the world.
As of June 30, 2012, AXA, a société anonyme organized under the laws of France and the holding company for an international group of insurance and related financial services companies, through certain of its subsidiaries (“AXA and its subsidiaries”) owned approximately 1.4% of the issued and outstanding units representing assignments of beneficial ownership of limited partnership interests in AllianceBernstein Holding L.P. (“Holding Units”).
5
As of June 30, 2012, the ownership structure of AllianceBernstein, expressed as a percentage of general and limited partnership interests, was as follows:
AXA and its subsidiaries
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61.0 | % | ||
Holding
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37.5 | |||
Unaffiliated holders
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1.5 | |||
100.0 | % |
AllianceBernstein Corporation (an indirect wholly-owned subsidiary of AXA, “General Partner”) is the general partner of both AllianceBernstein Holding L.P. (“Holding”) and AllianceBernstein. AllianceBernstein Corporation owns 100,000 general partnership units in Holding and a 1% general partnership interest in AllianceBernstein. Including both the general partnership and limited partnership interests in Holding and AllianceBernstein, AXA and its subsidiaries had an approximate 63.5% economic interest in AllianceBernstein as of June 30, 2012.
2.
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Summary of Significant Accounting Policies
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Basis of Presentation
The interim condensed consolidated financial statements of AllianceBernstein included herein have been prepared in accordance with the instructions to Form 10-Q pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the interim results, have been made. The preparation of the condensed consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the interim reporting periods. Actual results could differ from those estimates. The December 31, 2011 condensed consolidated statement of financial condition was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America.
Principles of Consolidation
The condensed consolidated financial statements include AllianceBernstein and its majority-owned and/or controlled subsidiaries. All significant inter-company transactions and balances among the consolidated entities have been eliminated.
Recently Adopted Accounting Pronouncements
In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement. The changes to the existing guidance included how and when the valuation premise of highest and best use applies, the application of premiums and discounts, as well as new required disclosures (included in Note 7). We adopted this standard on January 1, 2012 and there was no material impact on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. An entity can elect to present items of net income and other comprehensive income in one continuous statement or in two separate, but consecutive statements. This standard will not change the items that constitute net income and other comprehensive income, when an item of other comprehensive income must be reclassified to net income or the earnings per unit computation (which will continue to be based on net income). We adopted this standard on January 1, 2012 utilizing the two statement approach and there was no material impact on our consolidated financial statements.
In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. The revised standard is intended to reduce the cost and complexity of the annual goodwill impairment test by providing entities an option to perform a “qualitative” assessment to determine whether further impairment testing is necessary. We adopted this standard on January 1, 2012 and there was no material impact on our consolidated financial statements.
Reclassification and Revision
We reclassified prior period Private Client commissions representing payments to third parties, from employee compensation and benefits expense in the condensed consolidated statements of income to other promotion and servicing expense to conform to the current year’s presentation. In addition, unrealized gains (losses) on other investments, previously included in other adjustments to reconcile net income to net cash provided by operating activities in the condensed consolidated statements of cash flows, is currently shown separately.
6
During the second quarter of 2012, we revised prior period amounts recorded for Holding’s cash distributions to us on unallocated Holding Units held in our consolidated rabbi trust from due to Holding to additional investments by Holding in AllianceBernstein in partners’ capital in the condensed consolidated statements of financial condition. In addition, changes in due to Holding included in cash flows from operating activities in prior periods are now presented as additional investments by Holding in AllianceBernstein included in cash flows from financing activities. As of March 31, 2012, the cumulative impact of the revision on partners' capital in the condensed consolidated statement of financial condition was $8.8 million and the impact of the revision for the full year 2011 in the consolidated statement of cash flows was $5.7 million. Management concluded that the revision did not, individually or in the aggregate, result in a material misstatement of AllianceBernstein's consolidated financial statements for any prior period.
Variable Interest Entities
In accordance with ASU 2009-17, Consolidations (Topic 810) – Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, the determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design, a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance, and whether a company is obligated to absorb losses or receive benefits that could potentially be significant to the entity. The standard also requires ongoing assessments of whether a company is the primary beneficiary of a variable interest entity (“VIE”). The provisions of this standard became effective January 1, 2010. In January 2010, the FASB deferred portions of ASU 2009-17 that relate to asset managers. We determined that all entities for which we are a sponsor and/or investment manager, other than collateralized debt obligations and collateralized loan obligations (collectively “CDOs”), qualify for the scope deferral and will continue to be assessed for consolidation under prior accounting guidance for consolidation of variable interest entities.
As of June 30, 2012, we are the investment manager for five CDOs that meet the definition of a VIE due primarily to the lack of unilateral decision-making authority of the equity holders. The CDOs are alternative investment vehicles created for the sole purpose of issuing collateralized debt instruments that offer investors the opportunity for returns that vary with the risk level of their investment. Our management fee structure for these CDOs will typically include a senior management fee, and may also include subordinated and incentive management fees. We hold no equity interest in any of these CDOs. For each of the CDOs, we evaluated the management fee structure, the current and expected economic performance of the entities and other provisions included in the governing documents of the CDOs that might restrict or guarantee an expected loss or residual return. In accordance with ASC 810, we concluded that our investment management contract does not represent a variable interest in four of the five CDOs. As such, we are not required to consolidate these entities.
For the remaining CDO, we concluded our collateral management agreement represented a variable interest primarily due to the level of subordinated fees. We evaluated whether we possessed both of the following characteristics of a controlling financial interest: (1) the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. We determined that we possessed the decision-making power noted in criteria (1).
In evaluating criteria (2) we considered all facts regarding the design, terms and characteristics of the CDO and concluded that we do not meet the criteria. Our conclusion was based on the following quantitative and qualitative factors: (a) we have no involvement with the CDO beyond providing investment management services, (b) we hold no equity or debt interests in the CDO, (c) we are not a transferor of any of the assets of the CDO, (d) our expected aggregate fees in future periods are insignificant relative to the expected cash flows of the CDO, (e) the variability of our expected fees in relation to the expected cash flows of the CDO is insignificant, (f) our maximum exposure to loss for the CDO is our investment management fee, which is based upon the fair value of the CDO’s assets, (g) the CDO has no recourse against us for any losses sustained in the CDO structure, (h) we have not provided, nor expect to provide, any financial or other support to the CDO, and (i) there are no liquidity arrangements, guarantees and/or other commitments by third parties that would impact our variable interest in the CDO. As such, we do not have a controlling financial interest in the CDO and we should not consolidate the CDO into our consolidated financial statements. The cash, collateral investments (at fair value) and notes payable (at amortized cost) as of June 30, 2012 of this CDO are $6.4 million, $316.3 million and $317.1 million, respectively.
For the entities that meet the scope deferral, management reviews its agreements quarterly and its investments in, and other financial arrangements with, certain entities that hold client assets under management (“AUM”) to determine the variable interest entities that the company is required to consolidate. These entities include certain mutual fund products, hedge funds, structured products, group trusts, collective investment trusts and limited partnerships. We earn investment management fees on client assets under management of these entities, but we derive no other benefit from these assets and cannot use them in our operations.
As of June 30, 2012, we have significant variable interests in certain structured products and hedge funds with approximately $23.6 million in AUM. However, these variable interest entities do not require consolidation because management has determined that we are not the primary beneficiary of the expected losses or expected residual returns of these entities. Our maximum exposure to loss is limited to our investment of $0.1 million in these entities.
7
Fees Receivable, Net
Fees receivable are shown net of allowances. An allowance for doubtful accounts related to investment advisory and services fees is determined through an analysis of the aging of receivables, assessments of collectibility based on historical trends and other qualitative and quantitative factors, including the following: our relationship with the client, the financial health (or ability to pay) of the client, current economic conditions and whether the account is closed or active. The allowance for doubtful accounts is not material to fees receivable.
Investments
Investments include United States Treasury Bills, unconsolidated mutual funds and limited partnership hedge funds we sponsor and manage, various separately-managed portfolios comprised of equity and fixed income securities, exchange-traded options and investments owned by a consolidated venture capital fund in which we own a controlling interest as the general partner and a 10% limited partnership interest.
Investments in United States Treasury Bills, mutual funds, and equity and fixed income securities are classified as either trading or available-for-sale securities. Trading investments are stated at fair value with unrealized gains and losses reported in investment gains and losses on the condensed consolidated statements of income. Available-for-sale investments are stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income in partners’ capital. Realized gains and losses on the sale of investments are reported in investment gains and losses on the condensed consolidated statements of income. Average cost is used to determine the realized gain or loss on investments sold.
We use the equity method of accounting for investments in limited partnership hedge funds. The equity in earnings of our limited partnership hedge fund investments is reported in investment gains and losses on the condensed consolidated statements of income.
The investments owned by our consolidated venture capital fund are generally illiquid and are initially valued at cost. These investments are adjusted to fair value to reflect the occurrence of “significant developments” (i.e., capital transactions or business, economic or market events). Adjustments to fair value are reported in investment gains and losses on the condensed consolidated statements of income. There are two private equity investments that we own directly outside of our consolidated venture capital fund. One of the investments is accounted for using the cost method; the other is accounted for at fair value.
See Note 7 for a description of how we measure the fair value of our investments.
Goodwill
In 2000, AllianceBernstein acquired the business and assets of SCB Inc., an investment research and management company formerly known as Sanford C. Bernstein Inc. (“Bernstein”), and assumed the liabilities of Bernstein (“Bernstein Transaction”). The purchase price consisted of a cash payment of approximately $1.5 billion and 40.8 million newly-issued AllianceBernstein Units. The Bernstein Transaction was accounted for under the purchase method and the cost of the acquisition was allocated on the basis of the estimated fair value of the assets acquired and the liabilities assumed. The excess of the purchase price over the fair value of identifiable assets acquired, net of liabilities assumed, resulted in the recognition of goodwill of approximately $3.0 billion.
As of June 30, 2012, goodwill of $3.0 billion on the condensed consolidated statement of financial condition included $2.8 billion as a result of the Bernstein Transaction and $154 million in regard to various smaller acquisitions. We have determined that AllianceBernstein has only one reporting segment and reporting unit.
We test our goodwill annually, as of September 30, for impairment. As of September 30, 2011, the impairment test indicated that goodwill was not impaired. The carrying value of goodwill is also reviewed if facts and circumstances occur that suggest possible impairment, such as significant declines in assets under management, revenues, earnings or the price of a Holding Unit. During the second quarter of 2012, the Holding Unit price was below our June 30, 2012 book value per unit for most of the quarter and as of the end of the quarter. As a result, we re-performed step one of the goodwill impairment test as of June 30, 2012.
The impairment analysis is a two-step process. The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of AllianceBernstein, the reporting unit, with its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, goodwill is considered not impaired and the second step of the impairment test is not performed. However, if the carrying value of the reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of the reporting unit to the aggregated fair values of its individual assets and liabilities to determine the amount of impairment, if any.
8
During the second quarter of 2012, AllianceBernstein estimated its fair value under both the market approach and income approach. The types of assumptions and methodologies used under both approaches are consistent with those used in impairment tests performed in prior years. Under the market approach, the fair value of the reporting unit was based on its unadjusted market valuation (AllianceBernstein Units outstanding multiplied by the price of a Holding Unit) and adjusted market valuations assuming a control premium and earnings multiples. The price of a publicly-traded AllianceBernstein Holding Unit serves as a reasonable starting point for valuing an AllianceBernstein Unit because each represents the same fractional interest in our underlying business. On an unadjusted basis, AllianceBernstein’s fair value per unit as of June 30, 2012 was $12.69 (the price of a Holding Unit as of that date) as compared to its carrying value, or book value, of $14.62 per unit. Also under the market approach, we assumed a control premium of 20% for the reporting unit, which was determined based on an analysis of control premiums for relevant recent acquisitions, as well as comparable industry earnings multiples applied to our current earnings forecast. A control premium of 15% was sufficient for fair value to exceed carrying value. Under the income approach, the fair value of the reporting unit was based on the present value of estimated future cash flows. Determining estimated fair value using a discounted cash flow valuation technique consists of applying business growth rate assumptions over the estimated life of the goodwill asset and then discounting the resulting expected cash flows using an estimated weighted average cost of capital of market participants to arrive at a present value amount that approximates fair value. In our tests, our discounted expected cash flow model used management’s current five-year business plan, which factored in current market conditions and all material events that had impacted, or that we believed at the time could potentially impact, future expected cash flows and a declining annual growth rate thereafter for three years before using a terminal value growth rate. We ran multiple discounted cash flow analyses under several scenarios. We used a weighted average cost of equity ranging from 7% to 10% as the discount rate. We used a cost of equity rate, as opposed to a cost of capital, due to using net income in our expected cash flow model (as a result of generally distributing 100% of our earnings). The cost of debt is already factored into the net income projections. We used terminal value growth rates ranging from 2% to 4%, and we used our business plan growth rates as a base case and at stressed levels approximately 50% lower, as a result of current economic uncertainty and market dynamics.
Management considered the results of the market approach and income approach analysis performed along with a number of other factors (including current market conditions) and determined that AllianceBernstein’s fair value exceeded its carrying value as of June 30, 2012 by approximately 4% using the market approach, and by more than 10% using the income approach (using the most stressed scenarios). As such, no goodwill impairment existed and the second step of the goodwill impairment test was not required.
As a result of increased economic uncertainty and current market dynamics, determining whether an impairment of the goodwill asset exists is increasingly difficult and requires management to exercise significant judgment. In addition, to the extent that securities valuations are depressed for prolonged periods of time and market conditions stagnate or worsen as a result of global economic and debt fears and the threat of another financial crisis, or if we continue to experience significant net redemptions, our AUM, revenues, profitability and unit price may continue to be adversely affected. Although the price of a Holding Unit is just one factor in the calculation of fair value, if current Holding Unit price levels decline further, reaching the conclusion that fair value exceeds carrying value will, over time, become more difficult. In addition, control premiums, industry earnings multiples and discount rates are impacted by economic conditions. As a result, subsequent impairment tests may be more frequent and be based upon more negative assumptions and future cash flow projections, which may result in an impairment of this asset. Any impairment could reduce materially the recorded amount of goodwill with a corresponding charge to our earnings.
Intangible Assets, Net
Intangible assets consist primarily of costs assigned to acquired investment management contracts of SCB Inc. based on their estimated fair value at the time of acquisition, less accumulated amortization. As of June 30, 2012, intangible assets, net of accumulated amortization, of $179.6 million on the condensed consolidated statement of financial condition was composed of $177.1 million of definite-lived intangible assets subject to amortization, of which $170.8 million relates to the Bernstein Transaction, and $2.5 million of indefinite-lived intangible assets not subject to amortization in regard to a smaller acquisition. Intangible assets are recognized at fair value and are generally amortized on a straight-line basis over their estimated useful life of approximately 20 years. The gross carrying amount of intangible assets totaled $425.0 million as of June 30, 2012 and $424.7 million as of December 31, 2011, and accumulated amortization was $245.4 million as of June 30, 2012 and $234.7 million as of December 31, 2011, resulting in the net carrying amount of intangible assets of $179.6 million as of June 30, 2012 and $190.0 million as of December 31, 2011. Amortization expense was $5.5 million and $5.3 million for the three months ended June 30, 2012 and 2011, respectively, and $10.7 million for the six months ended June 30, 2012 and 2011. Estimated annual amortization expense for each of the next five years is approximately $22 million.
9
We periodically review intangible assets for impairment as events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value exceeds fair value, additional impairment tests are performed to measure the amount of the impairment loss, if any.
Deferred Sales Commissions, Net
We pay commissions to financial intermediaries in connection with the sale of shares of open-end company-sponsored mutual funds sold without a front-end sales charge (“back-end load shares”). These commissions are capitalized as deferred sales commissions and amortized over periods not exceeding five and one-half years for U.S. fund shares and four years for non-U.S. fund shares, the periods of time during which deferred sales commissions are generally recovered. We recover these commissions from distribution services fees received from those funds and from contingent deferred sales commissions (“CDSC”) received from shareholders of those funds upon the redemption of their shares. CDSC cash recoveries are recorded as reductions of unamortized deferred sales commissions when received. Since January 31, 2009, our U.S. mutual funds have not offered back-end load shares to new investors. However, our non-U.S. funds continue to offer back-end load shares.
We periodically review the deferred sales commission asset for impairment as events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value exceeds fair value, additional impairment tests are performed to measure the amount of the impairment loss, if any.
Loss Contingencies
With respect to all significant litigation matters, we consider the likelihood of a negative outcome. If we determine the likelihood of a negative outcome is probable, and the amount of the loss can be reasonably estimated, we record an estimated loss for the expected outcome of the litigation. If the likelihood of a negative outcome is reasonably possible and we are able to determine an estimate of the possible loss or range of loss, we disclose that fact together with the estimate of the possible loss or range of loss. However, it is difficult to predict the outcome or estimate a possible loss or range of loss because litigation is subject to inherent uncertainties, particularly when plaintiffs allege substantial or indeterminate damages, or when the litigation is highly complex or broad in scope. In such cases, we disclose that we are unable to predict the outcome or estimate a possible loss or range of loss.
Revenue Recognition
Investment advisory and services fees, generally calculated as a percentage of AUM, are recorded as revenue as the related services are performed. Certain investment advisory contracts, including those associated with hedge funds or other alternative investments, provide for a performance-based fee, in addition to or in lieu of a base fee, which is calculated as either a percentage of absolute investment results or a percentage of investment results in excess of a stated benchmark over a specified period of time. Performance-based fees are recorded as a component of revenue at the end of each contract’s measurement period.
We calculate AUM using established fair valuation methodologies, including market-based valuation methods and fair valuation methods. Market-based valuation methods include: last sale/settle prices from an exchange for actively-traded listed equities, options and futures; evaluated bid prices from recognized pricing vendors for fixed income, asset-backed or mortgage-backed issues; mid prices from recognized pricing vendors and brokers for credit default swaps; and quoted bids or spreads from pricing vendors and brokers for other derivative products. Fair valuation methods include discounted cash flow models, evaluation of assets versus liabilities or any other methodology that is validated and approved by our Valuation Committee. Fair valuation methods are used only where AUM cannot be valued using market-based valuation methods, such as in the case of private equity or illiquid securities. Investments utilizing fair valuation methods typically make up an insignificant amount of our total AUM. Recent market volatility has not had a significant effect on our ability to acquire market data and, accordingly, our ability to use market-based valuation methods.
The Valuation Committee, which is composed of senior officers and employees, is responsible for overseeing the pricing and valuation of all investments held in client and AllianceBernstein portfolios. The Valuation Committee has adopted a Statement of Pricing Policies describing principles and policies that apply to pricing and valuing investments held in these portfolios. We have also established a Pricing Group, which reports to the Valuation Committee. The Valuation Committee has delegated to the Pricing Group responsibility for overseeing the pricing process for all investments.
Bernstein Research Services revenue consists primarily of brokerage commissions received by Sanford C. Bernstein & Co., LLC (“SCB LLC”) and Sanford C. Bernstein Limited (“SCBL”), each a wholly-owned subsidiary of AllianceBernstein, for research and brokerage-related services provided to institutional investors. Brokerage commissions earned and related expenses are recorded on a trade-date basis.
10
Distribution revenues, shareholder servicing fees (included in other revenues), and dividend and interest income are accrued as earned.
Deferred Compensation Plans
We maintain several unfunded, non-qualified deferred compensation plans under which annual awards to employees are generally made in the fourth quarter.
For awards made before 2009, participants were permitted to allocate their awards: (i) among notional investments in Holding Units, certain of the investment services we provide to our clients and a money market fund or (ii) under limited circumstances, in options to buy Holding Units.
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•
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We made investments in our services that were notionally elected by participants and maintained them in a consolidated rabbi trust or separate custodial account.
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•
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Awards generally vested over four years but could vest more quickly depending on the terms of the individual award, the age of the participant, or the terms of the participant’s employment, separation or retirement agreement. Upon vesting, an award is distributed to the participant unless the participant has made a voluntary long-term election to defer receipt.
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•
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Quarterly cash distributions on unvested Holding Units for which a long-term deferral election has not been made are paid currently to participants. Quarterly cash distributions on notional investments in Holding Units and income credited on notional investments in our investment services or the money market fund for which a long-term deferral election has been made are reinvested and distributed as elected by participants.
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•
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Prior to a fourth quarter 2011 amendment made to all outstanding deferred incentive compensation awards of active employees (discussed below), compensation expense for awards under the plans, including changes in participant account balances resulting from gains and losses on related investments (other than in Holding Units and options to buy Holding Units), was recognized on a straight-line basis over the applicable vesting periods. Mark-to-market gains or losses on investments made to fund deferred compensation obligations (other than in Holding Units and options to buy Holding Units) were, and continue to be, recognized as investment gains (losses) in the condensed consolidated statements of income. In addition, our equity in the earnings of investments in limited partnership hedge funds made to fund deferred compensation obligations was, and continues to be, recognized as investment gains (losses) in the condensed consolidated statements of income.
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Awards in 2010 and 2009 consisted solely of restricted Holding Units and deferred cash. (In 2010, deferred cash was an option available only to certain non-U.S. employees.)
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•
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We engaged in open-market purchases of Holding Units, or purchased newly-issued Holding Units from Holding, that were awarded to participants and held them in a consolidated rabbi trust.
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•
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Upon vesting, awards are distributed to participants unless the participant has made a voluntary long-term election to defer receipt.
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•
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Quarterly cash distributions on vested and unvested Holding Units are paid currently to participants, regardless of whether or not a long-term deferral election has been made.
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•
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Prior to a fourth quarter 2011 amendment made to all outstanding deferred incentive compensation awards of active employees (discussed below), compensation expense for awards under the plans was recognized on a straight-line basis over the applicable vesting periods.
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Awards in 2011 allowed participants to allocate their awards between restricted Holding Units and deferred cash. Participants (except certain members of senior management) generally could allocate up to 50% of their awards to deferred cash, not to exceed a total of $250,000 per award, and had until January 13, 2012 to make their elections. The number of restricted Holding Units issued equaled the remaining dollar value of the award divided by the average of the closing prices of a Holding Unit for the five business day period that commenced on January 13, 2012 and concluded on January 20, 2012.
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•
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We engaged in open-market purchases of Holding Units, or purchased newly-issued Holding Units from Holding, that were awarded to participants and held them in a consolidated rabbi trust.
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•
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Quarterly distributions on vested and unvested Holding Units are paid currently to participants, regardless of whether or not a long-term deferral election has been made.
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•
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Interest on deferred cash is accrued monthly based on our monthly weighted average cost of funds.
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11
During the fourth quarter of 2011, we implemented changes to our employee long-term incentive compensation award program designed to better align the costs of employee compensation and benefits with our current year financial performance, and provide employees with a higher degree of certainty that they will receive the incentive compensation they are awarded. Specifically, we amended all outstanding year-end deferred incentive compensation awards of active employees, so that employees who terminate their employment or are terminated without cause may retain their award, subject to compliance with certain agreements and restrictive covenants set forth in the applicable award agreement, including restrictions on competition and employee and client solicitation, and a claw-back for failing to follow existing risk management policies. Most equity replacement, sign-on or similar deferred compensation awards included in separate employment agreements or arrangements were not amended.
We recognize compensation expense related to equity compensation grants in the financial statements using the fair value method. Fair value of restricted Holding Unit awards is the closing price of a Holding Unit on the grant date; fair value of options is determined using the Black-Scholes option valuation model. Under the fair value method, compensatory expense is measured at the grant date based on the estimated fair value of the award and is recognized over the required service period. Prior to the amendment made to the employee long-term incentive compensation award program in the fourth quarter of 2011, an employee’s service requirement was typically the same as the delivery dates. This amendment eliminated employee service requirements, but did not modify delivery dates contained in the original award agreements.
As a result of this change, we recorded a one-time, non-cash charge of $587.1 million in the fourth quarter of 2011 for all unrecognized deferred incentive compensation on the amended outstanding awards from prior years. In addition, upon approval and communication of the dollar value of the 2011 awards in December 2011, we recorded 100% of the expense associated with our 2011 deferred incentive compensation awards of $159.9 million. In January 2012, 8.7 million restricted Holding Units were issued from the consolidated rabbi trust and we reclassified $130.3 million of the liability to partners’ capital as equity-based awards.
Awards granted in 2011 contained the provisions described above and we expect to include these provisions in deferred incentive compensation awards going forward. Accordingly, our annual incentive compensation expense will reflect 100% of the expense associated with the deferred incentive compensation awarded in each year. This approach to expense recognition will more closely match the economic cost of awarding deferred incentive compensation to the period in which the related service is performed.
Grants of restricted Holding Units and options to buy Holding Units are typically awarded to eligible members of the Board of Directors (“Eligible Directors”) of the General Partner during the second quarter. Restricted Holding Units vest on the third anniversary of the grant date and the options become exercisable ratably over three years. These restricted Holding Units and options are not forfeitable (except if the Eligible Director is terminated for “Cause”, as that term is defined in the applicable award agreement). Due to there being no service requirement, we fully expensed these awards on each grant date.
We fund our restricted Holding Unit awards either by purchasing Holding Units on the open market or purchasing newly-issued Holding Units from Holding, all of which are held in a consolidated rabbi trust until they are distributed to employees upon vesting. In accordance with the AllianceBernstein Partnership Agreement, when Holding issues Holding Units to AllianceBernstein, Holding is required to use the proceeds it receives from AllianceBernstein to purchase the equivalent number of newly-issued AllianceBernstein Units, thus increasing its percentage ownership interest in AllianceBernstein. Holding Units held in the consolidated rabbi trust are corporate assets in the name of the trust and are available to the general creditors of AllianceBernstein.
During the second quarter and the first six months of 2012, we purchased 2.1 million and 6.6 million Holding Units for $28.2 million and $95.1 million, respectively. These amounts reflect open-market purchases of 2.1 million and 6.3 million Holding Units for $27.5 million and $90.6 million, respectively, with the remainder primarily relating to purchases of Holding Units from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards, offset by Holding Units purchased by employees as part of a distribution reinvestment election.
During each of the first and second quarters of 2012, we adopted a plan to repurchase Holding Units pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (“Exchange Act”). A Rule 10b5-1 plan allows a company to repurchase its shares at times when it otherwise might be prevented from doing so because of self-imposed trading blackout periods and because it possesses material non-public information. The broker we selected has the authority under the terms and limitations specified in the plan to repurchase Holding Units on our behalf in accordance with the terms of the plan. Repurchases are subject to SEC regulations as well as certain price, market volume and timing constraints specified in the plan. The plan adopted during the second quarter of 2012 does not specify an aggregate limitation and expires at the close of business on August 2, 2012. We intend to adopt additional Rule 10b5-1 plans so that we can continue to engage in open-market purchases of Holding Units to help fund anticipated obligations under our incentive compensation award program and for other corporate purposes.
12
We granted to employees and Eligible Directors 2.8 million restricted Holding awards during the second quarter of 2012 (2.7 million of which were awarded to Peter Kraus, our Chief Executive Officer, in connection with his extended employment agreement) and 11.9 million restricted Holding Unit awards (including 8.7 million restricted Holding Units granted in January 2012 for 2011 year-end awards) during the first six months of 2012. To fund these awards, we allocated previously repurchased Holding Units that had been held in the consolidated rabbi trust. The 2011 incentive compensation awards allowed most employees to allocate their awards between restricted Holding Units and deferred cash. As a result, 8.7 million restricted Holding Unit awards for the December 2011 awards were issued from the consolidated rabbi trust in January 2012. There were approximately 8.7 million unallocated Holding Units remaining in the consolidated rabbi trust as of June 30, 2012.
Cash Distributions
AllianceBernstein is required to distribute all of its Available Cash Flow, as defined in the Amended and Restated Agreement of Limited Partnership of AllianceBernstein (“AllianceBernstein Partnership Agreement”), to its unitholders and to the General Partner. Available Cash Flow can be summarized as the cash flow received by AllianceBernstein from operations minus such amounts as the General Partner determines, in its sole discretion, should be retained by AllianceBernstein for use in its business, or plus such amounts as the General Partner determines, in its sole discretion, should be released from previously retained cash flow.
The General Partner computes cash flow received from operations by determining the sum of:
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net cash provided by operating activities of AllianceBernstein,
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•
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proceeds from borrowings and from sales or other dispositions of assets in the ordinary course of business, and
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•
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income from investments in marketable securities, liquid investments and other financial instruments that are acquired for investment purposes and that have a value that may be readily established,
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and then subtracting from this amount the sum of:
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payments in respect of the principal of borrowings, and
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•
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amounts expended for the purchase of assets in the ordinary course of business.
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On August 2, 2012, the General Partner declared a distribution of $72.9 million, or $0.26 per AllianceBernstein Unit, representing a distribution of Available Cash Flow for the three months ended June 30, 2012. The General Partner, as a result of its 1% general partnership interest, is entitled to receive 1% of each distribution. The distribution is payable on August 30, 2012 to holders of record on August 13, 2012.
Real Estate Charges
During 2010, we performed a comprehensive review of our real estate requirements in New York in connection with our workforce reductions commencing in 2008. As a result, during 2010 we decided to sub-lease over 380,000 square feet in New York (approximately 75% of this space has been sublet) and largely consolidate our New York-based employees into two office locations from three. We recorded pre-tax real estate charges of $101.7 million in 2010 that reflected the net present value of the difference between the amount of our on-going contractual operating lease obligations for this space and our estimate of current market rental rates ($76.2 million), as well as the write-off of leasehold improvements, furniture and equipment related to this space ($25.5 million). We periodically review our assumptions and estimates used in recording these charges. During 2011, we reduced our real estate liability by $3.5 million as a result of changes in our estimates. During the first quarter of 2012, we recorded pre-tax real estate charges totaling $9.3 million, reflecting $8.8 million resulting from the abandonment of our leased New York City Data Center office space and $0.5 million resulting from a change in estimates relating to our 2010 real estate charge for New York City office space yet to be subleased. The New York City Data Center charge consisted of the net present value of the difference between the amount of on-going contractual operating lease obligations for this space and our estimate of current market rental rates ($7.1 million) and the write-off of leasehold improvements, furniture and equipment related to this space ($1.7 million). During the second quarter of 2012, we recorded pre-tax real estate charges totaling $6.8 million resulting from a change in estimates relating to our 2010 real estate charge for New York City office space yet to be subleased. The following table summarizes the activity in the liability account relating to our New York consolidation for the following periods:
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Six months
ended June 30,
2012
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Twelve months
ended December 31,
2011
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(in thousands)
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Balance as of beginning of period
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$ | 71,164 | $ | 89,793 | ||||
Expense incurred (credit)
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14,380 | (3,506 | ) | |||||
Deferred rent
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4,433 | 2,288 | ||||||
Payments made
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(12,518 | ) | (18,696 | ) | ||||
Interest accretion
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508 | 1,285 | ||||||
Balance as of end of period
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$ | 77,967 | $ | 71,164 |
3.
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Cash and Securities Segregated Under Federal Regulations and Other Requirements
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As of June 30, 2012 and December 31, 2011, $1.1 billion and $1.2 billion, respectively, of United States Treasury Bills were segregated in a special reserve bank custody account for the exclusive benefit of brokerage customers of SCB LLC under Rule 15c3-3 of the Exchange Act.
AllianceBernstein Investments, Inc. (“AllianceBernstein Investments”), an indirect wholly-owned subsidiary of AllianceBernstein and the distributor of company-sponsored mutual funds, maintains several special bank accounts for the exclusive benefit of customers. As of June 30, 2012 and December 31, 2011, $45.2 million and $39.9 million, respectively, of cash were segregated in these bank accounts.
4.
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Net Income Per Unit
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Basic net income per unit is derived by reducing net income for the 1% general partnership interest and dividing the remaining 99% by the basic weighted average number of units outstanding for each period. Diluted net income per unit is derived by reducing net income for the 1% general partnership interest and dividing the remaining 99% by the total of the basic weighted average number of units outstanding and the dilutive unit equivalents resulting from outstanding compensatory options to buy Holding Units as follows:
Three Months Ended June 30,
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Six Months Ended June 30,
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2012
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2011
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2012
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2011
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(in thousands, except per unit amounts)
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Net income attributable to AllianceBernstein Unitholders
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$ | 74,185 | $ | 114,139 | $ | 161,463 | $ | 250,611 | ||||||||
Weighted average units outstanding - basic
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277,820 | 278,005 | 277,833 | 278,047 | ||||||||||||
Dilutive effect of compensatory options to buy Holding Units
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— | 556 | — | 682 | ||||||||||||
Weighted average units outstanding – diluted
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277,820 | 278,561 | 277,833 | 278,729 | ||||||||||||
Basic net income per AllianceBernstein Unit
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$ | 0.26 | $ | 0.41 | $ | 0.58 | $ | 0.89 | ||||||||
Diluted net income per AllianceBernstein Unit
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$ | 0.26 | $ | 0.41 | $ | 0.58 | $ | 0.89 |
For the three months and six months ended June 30, 2012, we excluded 9,036,845 options from the diluted net income per unit computation due to their anti-dilutive effect. For the three months and six months ended June 30, 2011, we excluded 4,408,829 options from the diluted net income per unit computation due to their anti-dilutive effect.
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5.
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Investments
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Investments consist of:
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June 30,
2012
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December 31,
2011
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(in thousands)
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Available-for-sale (primarily seed capital)
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$ | 14,199 | $ | 13,883 | ||||
Trading:
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Deferred compensation-related
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119,072 | 135,832 | ||||||
United States Treasury Bills
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42,994 | 37,998 | ||||||
Seed capital
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318,209 | 278,932 | ||||||
Equities and exchange-traded options
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35,779 | 58,237 | ||||||
Investments in limited partnership hedge funds:
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Deferred compensation-related
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31,117 | 40,538 | ||||||
Seed capital
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114,178 | 123,920 | ||||||
Consolidated private equity fund (10% seed capital)
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55,819 | 58,749 | ||||||
Private equity (seed capital)
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29,252 | 35,726 | ||||||
Other
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8,337 | 11,479 | ||||||
Total investments
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$ | 768,956 | $ | 795,294 |
Total investments related to deferred compensation obligations of $150.2 million and $176.4 million as of June 30, 2012 and December 31, 2011, respectively, consist of company-sponsored mutual funds and hedge funds. We typically made investments in our services that were notionally elected by deferred compensation plan participants and maintain them in a consolidated rabbi trust or separate custodial account. The rabbi trust and custodial account enable us to hold such investments separate from our other assets for the purpose of settling our obligations to participants. The investments held in the rabbi trust and custodial account remain available to the general creditors of AllianceBernstein.
The underlying investments of the hedge funds in which we invest include long and short positions in equity securities, fixed income securities (including various agency and non-agency asset-based securities), currencies, commodities and derivatives (including various swaps and forward contracts). These investments are valued at quoted market prices or, where quoted market prices are not available, are fair valued based on the pricing policies and procedures of the underlying funds.
United States Treasury Bills are held by SCB LLC in its investment account, the majority of which are pledged as collateral with clearing organizations.
We provide seed capital to our investment teams to develop new products and services for our clients.
Trading securities also include long positions in corporate equities and long exchange-traded options traded through our options desk.
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6.
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Derivative Instruments
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We enter into various futures, forwards and swaps to economically hedge certain of our seed money investments. In addition, we have currency forwards that economically hedge certain cash accounts. We do not hold any derivatives designated in a formal hedge relationship under ASC 815-10, Derivatives and Hedging.
The following tables present the notional value and fair value as of June 30, 2012 and December 31, 2011 for derivative instruments not designated as hedging instruments:
Fair Value
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Notional
Value
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Asset
Derivatives
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Liability
Derivatives
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(in thousands)
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June 30, 2012:
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Exchange-traded futures
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$ | 103,157 | $ | 10 | $ | 3,787 | ||||||
Currency forwards
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297,384 | 367 | 940 | |||||||||
Interest rate swaps
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108,455 | 187 | 1,243 | |||||||||
Credit default swaps
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127,445 | 4,543 | 1,526 | |||||||||
Option swaps
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216 | 202 | 137 | |||||||||
Total return swaps
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38,654 | 44 | 520 | |||||||||
Total derivatives
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$ | 675,311 | $ | 5,353 | $ | 8,153 |
Fair Value
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Notional
Value
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Asset
Derivatives
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Liability
Derivatives
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(in thousands)
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December 31, 2011:
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Exchange-traded futures
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$ | 111,447 | $ | 127 | $ | 2,054 | ||||||
Currency forwards
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38,330 | 358 | 227 | |||||||||
Interest rate swaps
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47,640 | 136 | 3,301 | |||||||||
Credit default swaps
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84,215 | 2,962 | 639 | |||||||||
Total return swaps
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38,148 | 38 | 1,038 | |||||||||
Total derivatives
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$ | 319,780 | $ | 3,621 | $ | 7,259 |
As of June 30, 2012 and December 31, 2011, the derivative assets and liabilities are included in both receivables and payables to brokers and dealers on our condensed consolidated statements of financial condition.
The following table presents the gains and losses recognized in investment gains (losses) in the condensed consolidated statements of income:
Three Months Ended June 30,
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Six Months Ended June 30,
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2012
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2011
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2012
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2011
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Exchange-traded futures
|
$ | 8,049 | $ | 431 | $ | (8,548 | ) | $ | (353 | ) | ||||||
Currency forwards
|
1,365 | (355 | ) | 1,184 | (203 | ) | ||||||||||
Interest rate swaps
|
(1,460 | ) | (838 | ) | (723 | ) | (710 | ) | ||||||||
Credit default swaps
|
(752 | ) | (322 | ) | (3,351 | ) | (204 | ) | ||||||||
Options swaps
|
(89 | ) | — | (89 | ) | — | ||||||||||
Total return swaps
|
(133 | ) | (749 | ) | (2,555 | ) | (1,123 | ) | ||||||||
Balance as of end of period
|
$ | 6,980 | $ | (1,833 | ) | $ | (14,082 | ) | $ | (2,593 | ) |
We may be exposed to credit-related losses in the event of nonperformance by counterparties to derivative financial instruments. We take steps to minimize our counterparty exposure through a credit review and approval process. In addition, we executed various collateral arrangements with counterparties to the over-the-counter derivative transactions that require both pledging and accepting collateral in the form of cash. As of June 30, 2012 and December 31, 2011, we held $4.1 million and $4.4 million, respectively, of cash collateral payable to trade counterparties. This obligation to return cash is reported in payables to brokers and dealers in our condensed consolidated statements of financial condition.
Although notional amount is the most commonly used measure of volume in the derivative market, it is not used as a measure of credit risk. Generally, the current credit exposure of our derivative contracts is limited to the net positive estimated fair value of derivative contracts at the reporting date after taking into consideration the existence of netting agreements and any collateral received. A derivative with positive value (a derivative asset) indicates existence of credit risk because the counterparty would owe us if the contract were closed. Alternatively, a derivative contract with negative value (a derivative liability) indicates we would owe money to the counterparty if the contract were closed. Generally, if there is more than one derivative transaction with a single counterparty, a master netting arrangement exists with respect to derivative transactions with that counterparty to provide for aggregate net settlement.
16
Certain of our standardized contracts for over-the-counter derivative transactions (“ISDA Master Agreements”) contain credit risk related contingent provisions related to the counterparties’ credit rating. In some ISDA Master Agreements, if the counterparties’ credit rating (or in some agreements, our AUM) falls below a specified threshold, either a default or a termination event permitting the counterparty to terminate the ISDA Master Agreement would be triggered. In all agreements that provide for collateralization, various levels of collateralization of net liability positions are applicable, depending upon the credit rating of the counterparty. As of June 30, 2012 and December 31, 2011, we delivered $7.0 million and $14.7 million, respectively, of cash collateral into brokerage accounts, which is reported in cash and cash equivalents in our condensed consolidated statements of financial condition.
17
7.
|
Fair Value
|
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. The three broad levels of fair value hierarchy are as follows:
|
•
|
Level 1 – Quoted prices in active markets are available for identical assets or liabilities as of the reported date.
|
|
•
|
Level 2 – Quoted prices in markets that are not active or other pricing inputs that are either directly or indirectly observable as of the reported date.
|
|
•
|
Level 3 – Prices or valuation techniques that are both significant to the fair value measurement and unobservable as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation.
|
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables summarize the valuation of our financial instruments by pricing observability levels as of June 30, 2012 and December 31, 2011:
June 30, 2012
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Money markets
|
$ | 195,810 | $ | — | $ | — | $ | 195,810 | ||||||||
U.S. Treasury bills
|
— | 1,152,472 | — | 1,152,472 | ||||||||||||
U.K. Treasury bills
|
— | 121 | — | 121 | ||||||||||||
Equity securities
|
||||||||||||||||
Growth
|
121,967 | — | — | 121,967 | ||||||||||||
Value
|
38,323 | 82 | — | 38,405 | ||||||||||||
Blend
|
65,441 | — | — | 65,441 | ||||||||||||
Other(1)
|
36,822 | 39 | — | 36,861 | ||||||||||||
Fixed Income securities
|
||||||||||||||||
Taxable(2)
|
207,364 | 516 | — | 207,880 | ||||||||||||
Tax-exempt(3)
|
10,091 | 748 | — | 10,839 | ||||||||||||
Other
|
— | — | — | — | ||||||||||||
Derivatives
|
10 | 5,343 | — | 5,353 | ||||||||||||
Long exchange-traded options
|
5,866 | — | — | 5,866 | ||||||||||||
Private equity
|
8,582 | 8,331 | 57,908 | 74,821 | ||||||||||||
Total assets measured at fair value
|
$ | 690,276 | $ | 1,167,652 | $ | 57,908 | $ | 1,915,836 | ||||||||
Securities sold not yet purchased
|
||||||||||||||||
Short equities – corporate
|
$ | 17,269 | $ | — | $ | — | $ | 17,269 | ||||||||
Short exchange-traded options
|
3,390 | — | — | 3,390 | ||||||||||||
Other
|
5,530 | — | — | 5,530 | ||||||||||||
Derivatives
|
3,787 | 4,366 | — | 8,153 | ||||||||||||
Total liabilities measured at fair value
|
$ | 29,976 | $ | 4,366 | $ | — | $ | 34,342 |
18
December 31, 2011
|
||||||||||||||||
Level 1
|
Level 2
|
Level 3
|
Total
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Money markets
|
$ | 340,548 | $ | — | $ | — | $ | 340,548 | ||||||||
U.S. Treasury bills
|
— | 1,277,944 | — | 1,277,944 | ||||||||||||
U.K. Treasury bills
|
— | 119 | — | 119 | ||||||||||||
Equity securities
|
||||||||||||||||
Growth
|
107,802 | 189 | — | 107,991 | ||||||||||||
Value
|
60,096 | 9 | — | 60,105 | ||||||||||||
Blend
|
118,208 | — | — | 118,208 | ||||||||||||
Other(1)
|
45,583 | — | — | 45,583 | ||||||||||||
Fixed Income securities
|
||||||||||||||||
Taxable(2)
|
110,062 | 14,488 | — | 124,550 | ||||||||||||
Tax-exempt(3)
|
15,366 | 743 | — | 16,109 | ||||||||||||
Other
|
17 | — | — | 17 | ||||||||||||
Derivatives
|
127 | 3,494 | — | 3,621 | ||||||||||||
Long exchange-traded options
|
14,322 | — | — | 14,322 | ||||||||||||
Private equity
|
11,592 | — | 64,466 | 76,058 | ||||||||||||
Total assets measured at fair value
|
$ | 823,723 | $ | 1,296,986 | $ | 64,466 | $ | 2,185,175 | ||||||||
Securities sold not yet purchased
|
||||||||||||||||
Short equities – corporate
|
$ | 34,469 | $ | — | $ | — | $ | 34,469 | ||||||||
Short exchange-traded options
|
3,567 | — | — | 3,567 | ||||||||||||
Other
|
1,271 | — | — | 1,271 | ||||||||||||
Derivatives
|
2,054 | 5,205 | — | 7,259 | ||||||||||||
Total liabilities measured at fair value
|
$ | 41,361 | $ | 5,205 | $ | — | $ | 46,566 |
________________
(1)
|
Primarily long positions in corporate equities traded through our options desk.
|
(2)
|
Primarily corporate and government securities.
|
(3)
|
Primarily municipal bonds.
|
Following is a description of the fair value methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:
|
•
|
Money markets: We invest excess cash in various money market funds that are valued based on quoted prices in active markets; these are included in Level 1 of the valuation hierarchy.
|
|
•
|
Treasury bills: We hold United States Treasury Bills, which are primarily segregated in a special reserve bank custody account as required by Rule 15c3-3 of the Exchange Act. We also hold United Kingdom Treasury Bills. These securities are valued based on quoted yields in secondary markets and are included in Level 2 of the valuation hierarchy.
|
|
•
|
Equity and fixed income securities: Our equity and fixed income securities consist principally of company-sponsored mutual funds with net asset values and various separately-managed portfolios consisting primarily of equity and fixed income securities with quoted prices in active markets, which are included in Level 1 of the valuation hierarchy. In addition, some securities are valued based on observable inputs from recognized pricing vendors, which are included in Level 2 of the valuation hierarchy.
|
|
•
|
Derivatives: We hold exchange-traded futures with counterparties that are included in Level 1 of the valuation hierarchy. In addition, we also hold currency forward contracts, interest rate swaps, credit default swaps and total return swaps with counterparties that are included in Level 2 of the valuation hierarchy.
|
|
•
|
Options: We hold long exchange-traded options that are included in Level 1 of the valuation hierarchy.
|
|
•
|
Private equity: The valuation of non-public private equity investments owned by our consolidated venture capital fund requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity and the long-term nature of such investments. Private equity investments are valued initially at cost. The carrying values of private equity investments are adjusted either up or down from cost to reflect expected exit values as evidenced by financing and sale transactions with third parties, or when determination of a valuation adjustment is confirmed through ongoing review in accordance with our valuation policies and procedures. A variety of factors are reviewed and monitored to assess positive and negative changes in valuation including, but not limited to, current operating performance and future expectations of investee companies, industry valuations of comparable public companies, changes in market outlooks and the third party financing environment over time. In determining valuation adjustments resulting from the investment review process, particular emphasis is placed on current company performance and market conditions. Non-public equity investments are included in Level 3 of the valuation hierarchy because they trade infrequently and, therefore, their fair value is unobservable. Publicly-traded equity investments owned by our consolidated venture capital fund are included in Level 1 of the valuation hierarchy. If they contain trading restrictions, publicly-traded equity investments are included in Level 2 of the valuation hierarchy. One of our private securities went public in the first quarter of 2011 and, due to a trading restriction period, $3.6 million was transferred from a Level 3 classification to a Level 2 classification. During the second quarter of 2011, the trading restriction period for one of our public securities lapsed and, as a result, $20.6 million was transferred from a Level 2 classification to a Level 1 classification. During the third quarter of 2011, the trading restriction period for one of our public securities lapsed and, as a result, $3.7 million was transferred from a Level 2 classification to a Level 1 classification. During the first quarter of 2012, one of our private securities went public and, due to a trading restriction period, $13.5 million was transferred from a Level 3 classification to a Level 2 classification.
|
19
|
•
|
Securities sold not yet purchased: Securities sold not yet purchased, primarily reflecting short positions in equities and exchange-traded options, are included in Level 1 of the valuation hierarchy.
|
The following table summarizes the change in carrying value associated with Level 3 financial instruments carried at fair value:
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2012
|
2011
|
2012
|
2011
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Balance as of beginning of period
|
$ | 58,235 | $ | 60,188 | $ | 64,466 | $ | 59,414 | ||||||||
Transfer (out) in, net
|
— | — | (13,548 | ) | (3,588 | ) | ||||||||||
Purchases
|
1,988 | 2,769 | 3,833 | 7,416 | ||||||||||||
Sales
|
(1,823 | ) | — | (1,823 | ) | (213 | ) | |||||||||
Realized gains (losses), net
|
855 | — | 855 | (2,860 | ) | |||||||||||
Unrealized gains (losses), net
|
(1,347 | ) | (3,433 | ) | 4,125 | (645 | ) | |||||||||
Balance as of end of period
|
$ | 57,908 | $ | 59,524 | $ | 57,908 | $ | 59,524 |
Transfers into and out of all levels of the fair value hierarchy are reflected at end-of-period fair values. Realized and unrealized gains and losses on Level 3 financial instruments are recorded in investment gains and losses in the condensed consolidated statements of income. A majority of the Level 3 investments are private equity investments owned by our consolidated venture capital fund, of which we own 10% and non-controlling interests own 90%.
20
The following table provides quantitative information about Level 3 fair value measurements:
Fair Value
as of June 30,
2012
|
Valuation Technique
|
Unobservable
Input
|
Range
(Weighted
Average)
|
||||||||
(in thousands)
|
|||||||||||
Private Equity:
|
|||||||||||
Technology, Media and Telecommunications
|
$ | 22,400 |
Market comparable companies
|
Revenue multiple
|
3 - 6 | ||||||
Discount rate
|
18 | % | |||||||||
Discount years
|
1 - 2 | ||||||||||
Healthcare and Cleantech
|
$ | 14,871 |
Market comparable companies
|
Revenue multiple
|
0.6 – 84.1 | ||||||
R&D multiple
|
1.3 – 15.2 | ||||||||||
Discount for lack of marketability and risk factors
|
50-60 | % |
The significant unobservable inputs used in the fair value measurement of the reporting entities’ venture capital securities in the technology, media and telecommunications areas are enterprise value to revenue multiples and a discount rate to account for the time until the securities are likely monetized and various risk factors. Significant increases (decreases) in the enterprise value to revenue multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in the discount rate would result in a significantly lower (higher) fair value measurement.
The significant unobservable inputs used in the fair value measurement of the reporting entities’ venture capital securities in the healthcare and cleantech areas are enterprise value to revenue multiples, enterprise value to R&D investment multiples, and a discount for lack of marketability and various risk factors. Significant increases (decreases) in the enterprise value to revenue multiple and enterprise value to R&D investment multiple inputs in isolation would result in a significantly higher (lower) fair value measurement. Significant increases (decreases) in the discount for lack of marketability and various risk factors in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the level of enterprise value to revenue multiple is accompanied by a directionally similar change in the assumption used for the enterprise value to R&D multiple. In addition, a change in the assumption used for the discount for lack of marketability and various risk factors is not correlated to changes in the assumptions used for the enterprise value to revenue multiple or the enterprise value to R&D investment multiple.
We have one private equity investment, which is a venture capital fund (fair value of $19.0 million and unfunded commitment of $18.2 million as of June 30, 2012) investing in communications, consumer, digital media, healthcare and information technology markets. In addition, one of the investments included in our consolidated private equity fund (fair value of $1.6 million and unfunded commitment of $0.3 million as of June 30, 2012) is a venture capital fund investing in clean energy, resource and energy efficiency and other sustainable industries. The fair value of each of these investments has been estimated using the capital account balances provided by the partnerships. The interests in these partnerships cannot be redeemed.
Assets Measured at Fair Value on a Nonrecurring Basis
There were no impairments recognized for goodwill, intangible assets or other long-lived assets as of June 30, 2012.
8.
|
Commitments and Contingencies
|
Legal Proceedings
During the first quarter of 2012, we received a legal letter of claim (the “Letter of Claim”) sent on behalf of a former European pension fund client, alleging that AllianceBernstein Limited (a wholly-owned subsidiary of ours organized in the U.K.) was negligent and failed to meet certain applicable standards of care with respect to the initial investment in and management of a £500 million portfolio of U.S. mortgage-backed securities. The alleged damages range between $177 million and $234 million, plus compound interest on an alleged $125 million of realized losses in the portfolio. We believe that any losses to this client resulted from adverse developments in the U.S. housing and mortgage market that precipitated the financial crisis in 2008 and not any negligence or failure on our part. We believe that we have strong defenses to these claims and will defend them vigorously. It is reasonably possible that we could incur a loss as a result of this matter. Currently, however, we are unable to predict the outcome or estimate a possible loss or range of loss.
21
We are involved in various other matters, including regulatory inquiries, administrative proceedings and litigation, some of which allege significant damages. It is reasonably possible that we could incur some losses pertaining to these other matters; however, we believe that any such losses would be immaterial. Furthermore, although any inquiry, proceeding or litigation has the element of uncertainty, management believes that the outcome of any one of these other matters that is pending or threatened, or all of them combined, will not have a material adverse effect on our results of operations or financial condition.
Other
During 2009, we entered into a subscription agreement under which we committed to invest up to $40 million in a venture capital fund over a six-year period. In December 2011, we sold 12.5% of our funded interest and commitment to an unaffiliated third party for $2.0 million. As of June 30, 2012, we had funded $16.8 million, net of the sales proceeds, of our revised commitment of $35 million.
Also during 2009, we were selected by the U.S. Treasury Department as one of nine pre-qualified investment managers under the Public-Private Investment Program. As part of the program, each investment manager is required to invest a minimum of $20 million in the Public-Private Investment Fund they manage. As of June 30, 2012, we had funded $18.5 million of this commitment.
During 2010, as general partner of the AllianceBernstein U.S. Real Estate L.P. (the “Real Estate Fund”), we committed to invest $25 million in the Real Estate Fund. As of June 30, 2012, we had funded $7.5 million of this commitment.
During the second quarter of 2012, we entered into an investment agreement under which we committed to invest up to $8 million in an oil and gas fund over a three-year period. As of June 30, 2012, we had not funded any of this commitment. In July 2012, we received a capital call of $4.5 million.
9.
|
Qualified Employee Benefit Plans
|
We maintain a qualified profit sharing plan covering U.S. employees and certain foreign employees. Employer contributions are discretionary and generally limited to the maximum amount deductible for federal income tax purposes.
We maintain several defined contribution plans for foreign employees in our subsidiaries in the United Kingdom, Australia, Japan and other locations outside the United States. Employer contributions are generally consistent with regulatory requirements and tax limits. Defined contribution expense for foreign entities was $1.7 million and $1.8 million during the three months ended June 30, 2012 and 2011 and $3.6 million and $3.9 million during the six months ended June 30, 2012 and 2011, respectively.
We maintain a qualified, noncontributory, defined benefit retirement plan (“Retirement Plan”) covering current and former employees who were employed by AllianceBernstein in the United States prior to October 2, 2000. Benefits are based on years of credited service, average final base salary (as defined in the Retirement Plan), and primary Social Security benefits. Service and compensation after December 31, 2008 are not taken into account in determining participants’ retirement benefits.
Our policy is to satisfy our funding obligation for each year in an amount not less than the minimum required by the Employee Retirement Income Security Act of 1974, as amended, and not greater than the maximum amount we can deduct for federal income tax purposes. As of August 2, 2012, we have made no contributions in 2012 to the Retirement Plan and currently intend to contribute approximately $5.9 million to the Retirement Plan later this year. Contribution estimates, which are subject to change, are based on regulatory requirements, future market conditions and assumptions used for actuarial computations of the Retirement Plan’s obligations and assets. Management, at the present time, has not determined the amount, if any, of additional future contributions that may be required.
22
Net expense (benefit) under the Retirement Plan consisted of:
Three Months Ended June 30,
|
Six Months Ended June 30,
|
|||||||||||||||
2012
|
2011
|
2012
|
2011
|
|||||||||||||
(in thousands)
|
||||||||||||||||
Interest cost on projected benefit obligations
|
$ | 1,177 | $ | 1,180 | $ | 2,354 | $ | 2,360 | ||||||||
Expected return on plan assets
|
(1,253 | ) | (1,294 | ) | (2,506 | ) | (2,588 | ) | ||||||||
Recognized actuarial loss
|
217 | 108 | 434 | 216 | ||||||||||||
Amortization of transition asset
|
(36 | ) | (36 | ) | (72 | ) | (72 | ) | ||||||||
Net pension expense (benefit)
|
$ | 105 | $ | (42 | ) | $ | 210 | $ | (84 | ) |
10.
|
Units Outstanding
|
Changes in units outstanding during the six-month period ended June 30, 2012 were as follows:
Outstanding as of December 31, 2011
|
277,847,588 | |||
Options exercised
|
— | |||
Units issued
|
— | |||
Units retired
|
(235,031 | ) | ||
Units forfeited
|
— | |||
Outstanding as of June 30, 2012
|
277,612,557 |
During the first six months of 2012, we purchased 235,031 AllianceBernstein Units in private transactions and retired them.
11.
|
Income Taxes
|
AllianceBernstein is a private partnership for federal income tax purposes and, accordingly, is not subject to federal or state corporate income taxes. However, AllianceBernstein is subject to a 4.0% New York City unincorporated business tax (“UBT”). Domestic corporate subsidiaries of AllianceBernstein, which are subject to federal, state and local income taxes, are generally included in the filing of a consolidated federal income tax return with separate state and local income tax returns being filed. Foreign corporate subsidiaries are generally subject to taxes in the foreign jurisdictions where they are located.
In order to preserve AllianceBernstein’s status as a private partnership for federal income tax purposes, AllianceBernstein Units must not be considered publicly traded. The AllianceBernstein Partnership Agreement provides that all transfers of AllianceBernstein Units must be approved by AXA Equitable and the General Partner; AXA Equitable and the General Partner approve only those transfers permitted pursuant to one or more of the safe harbors contained in relevant treasury regulations. If AllianceBernstein Units were considered readily tradable, AllianceBernstein’s net income would be subject to federal and state corporate income tax, reducing its quarterly distribution to Holding. Furthermore, should AllianceBernstein enter into a substantial new line of business, Holding, by virtue of its ownership of AllianceBernstein, would lose its status as a “grandfathered” publicly-traded partnership and would become subject to corporate income tax, which would reduce materially Holding’s net income and its quarterly distributions to Holding Unitholders.
12.
|
Debt
|
At June 30, 2012 and December 31, 2011, AllianceBernstein had $275.9 million and $444.9 million, respectively, in commercial paper outstanding with weighted average interest rates of approximately 0.5% and 0.2%, respectively. The commercial paper and amounts outstanding under the 2012 Credit Facility described below are short term in nature and, as such, recorded value is estimated to approximate fair value. Average daily borrowings of commercial paper during the first six months of 2012 and the full-year 2011 were $483.2 million and $273.6 million, respectively, with weighted average interest rates of approximately 0.3% and 0.2%, respectively.
On December 9, 2010, AllianceBernstein entered into a committed, unsecured three-year senior revolving credit facility (the “2010 Credit Facility”) with a group of commercial banks and other lenders in an original principal amount of $1.0 billion with SCB LLC as an additional borrower. On January 17, 2012, the 2010 Credit Facility was amended and restated (“2012 Credit Facility”). The principal amount was amended to $900 million from the original principal amount of $1.0 billion. Also, the amendment increased the accordion feature from $250 million to $350 million. In addition, the maturity date of the 2010 Credit Facility was extended from December 9, 2013 to January 17, 2017. There were no other significant changes in terms and conditions included in this amendment. Effective as of July 13, 2012, through the exercise of the commitment increase provisions of the 2012 Credit Facility, the principal amount was increased from $900 million to $1.0 billion. With this increase, the 2012 Credit Facility provides for possible increases in the principal amount by up to an aggregate incremental amount of $250 million (“accordion feature”), any such increase being subject to the consent of the affected lenders.
23
The 2012 Credit Facility is available for AllianceBernstein’s and SCB LLC’s business purposes, including the support of AllianceBernstein’s $1.0 billion commercial paper program. Both AllianceBernstein and SCB LLC can draw directly under the 2012 Credit Facility and management expects to draw on the 2012 Credit Facility from time to time. AllianceBernstein has agreed to guarantee the obligations of SCB LLC under the 2012 Credit Facility.
The 2012 Credit Facility contains affirmative, negative and financial covenants, which are customary for facilities of this type, including, among other things, restrictions on dispositions of assets, restrictions on liens, a minimum interest coverage ratio and a maximum leverage ratio. We are in compliance with these covenants. The 2012 Credit Facility also includes customary events of default (with customary grace periods, as applicable), including provisions under which, upon the occurrence of an event of default, all outstanding loans may be accelerated and/or lender’s commitments may be terminated. Also, under such provisions, upon the occurrence of certain insolvency or bankruptcy related events of default, all amounts payable under the 2012 Credit Facility would automatically become immediately due and payable, and the lender’s commitments would automatically terminate.
Amounts under the 2012 Credit Facility may be borrowed, repaid and re-borrowed by us from time to time until the maturity of the facility. Voluntary prepayments and commitment reductions requested by us are permitted at any time without fee (other than customary breakage costs relating to the prepayment of any drawn loans) upon proper notice and subject to a minimum dollar requirement. Borrowings under the 2012 Credit Facility bear interest at a rate per annum, which will be, at our option, a rate equal to an applicable margin, which is subject to adjustment based on the credit ratings of AllianceBernstein, plus one of the following indexes: London Interbank Offered Rate; a floating base rate; or the Federal Funds rate.
As of June 30, 2012 and December 31, 2011, we had no amounts outstanding under the 2012 Credit Facility. During the first six months of 2012, we did not draw upon the 2012 Credit Facility. During the full-year 2011, $40.0 million was outstanding for one day in February (with an interest rate of 1.3%) resulting in average daily borrowings of $0.1 million under the 2010 Credit Facility.
In addition, SCB LLC has five uncommitted lines of credit with four financial institutions. Two of these lines of credit permit us to borrow up to an aggregate of approximately $200.0 million while three lines have no stated limit. During May 2012, AllianceBernstein was named an additional borrower under a $100.0 million SCB uncommitted line of credit. As of June 30, 2012, there were no loans outstanding. During the second quarter of 2012, $5.0 million was outstanding for one day with an interest rate of 1.4%.
As of June 30, 2012 and December 31, 2011, we had no uncommitted bank loans outstanding. Average daily borrowings of uncommitted bank loans during the first six months of 2012 and full-year 2011 were $19.7 million and $6.4 million, respectively, with weighted average interest rates of approximately 1.2% and 1.3%, respectively.
24
13.
|
Changes in Capital
|
Changes in capital as of June 30, 2012 consisted of:
Partners’ Capital
Attributable to
AllianceBernstein
Unitholders
|
Non-
Controlling
Interests In
Consolidated
Entities
|
Total
Capital
|
||||||||||
(in thousands)
|
||||||||||||
Balance as of December 31, 2011
|
$ | 3,975,462 | $ | 54,025 | $ | 4,029,487 | ||||||
Comprehensive income (loss):
|
||||||||||||
Net income (loss)
|
161,463 | 5,988 | 167,451 | |||||||||
Other comprehensive income (loss), net of tax:
|
||||||||||||
Unrealized gains on investments (net of tax expense of $462)
|
290 | — | 290 | |||||||||
Foreign currency translation adjustment (net of tax benefit of $796)
|
(1,154 | ) | (61 | ) | (1,215 | ) | ||||||
Changes in employee benefit related items (net of tax expense of $3)
|
133 | — | 133 | |||||||||
Comprehensive income (loss)
|
160,732 | 5,927 | 166,659 | |||||||||
Cash distributions to General Partner and unitholders
|
(134,095 | ) | — | (134,095 | ) | |||||||
Capital contributions (distributions)
|
1,684 | (8,453 | ) | (6,769 | ) | |||||||
Purchase of AllianceBernstein Units
|
(3,000 | ) | — | (3,000 | ) | |||||||
Compensation-related transactions
|
46,484 | — | 46,484 | |||||||||
Balance as of June 30, 2012
|
$ | 4,047,267 | $ | 51,499 | $ | 4,098,766 |
Changes in capital as of June 30, 2011 consisted of:
Partners’ Capital
Attributable to
AllianceBernstein
Unitholders
|
Non-
Controlling
Interests In
Consolidated
Entities
|
Total
Capital
|
||||||||||
(in thousands)
|
||||||||||||
Balance as of December 31, 2010
|
$ | 4,370,838 | $ | 124,517 | $ | 4,495,355 | ||||||
Comprehensive income (loss):
|
||||||||||||
Net income (loss)
|
250,611 | (14,802 | ) | 235,809 | ||||||||
Other comprehensive income (loss), net of tax:
|
||||||||||||
Unrealized gains on investments (net of tax expense of $188)
|
494 | 33 | 527 | |||||||||
Foreign currency translation adjustment (net of tax expense of $500)
|
13,123 | (320 | ) | 12,803 | ||||||||
Changes in employee benefit related items (net of tax expense of $1)
|
66 | — | 66 | |||||||||
Comprehensive income (loss)
|
264,294 | (15,089 | ) | 249,205 | ||||||||
Cash distributions to General Partner and unitholders
|
(270,752 | ) | — | (270,752 | ) | |||||||
Capital contributions (distributions)
|
1,797 | (2,925 | ) | (1,128 | ) | |||||||
Purchase of Australian joint venture
|
10,720 | (32,104 | ) | (21,384 | ) | |||||||
Purchase of AllianceBernstein Units
|
(4,297 | ) | — | (4,297 | ) | |||||||
Compensation-related transactions
|
(13,679 | ) | — | (13,679 | ) | |||||||
Balance as of June 30, 2011
|
$ | 4,358,921 | $ | 74,399 | $ | 4,433,320 |
Deferred taxes are not recognized on foreign currency translation adjustments for foreign subsidiaries whose earnings are considered permanently invested outside the United States.
25
14.
|
Acquisitions
|
On October 1, 2010, we acquired SunAmerica’s alternative investment group, an experienced team that manages a portfolio of hedge fund and private equity fund investments. The purchase price of this acquisition, accounted for under ASC 805, Business Combinations, was $49.0 million, consisting of $14.3 million of cash payments, $2.5 million of assumed deferred compensation liabilities and $32.2 million of net contingent consideration payable. The net contingent consideration payable consists of the net present value of three annual payments of $1.5 million to SunAmerica based on its assets under management transferred to us in the acquisition and the net present value of projected revenue sharing payments of $35.5 million based on projected newly-raised assets under management by the acquired group. This contingent consideration payable was offset by $4.1 million of performance-based fees earned in 2010 determined to be pre-acquisition consideration. The excess of the purchase price over the fair value of identifiable assets acquired resulted in the recognition of $46.1 million of goodwill. During 2011 and the first six months of 2012, no adjustments were made to the contingent consideration payable.
During the first quarter of 2011, AXA sold its 50% interest in our consolidated Australian joint venture to an unaffiliated third party as part of a larger transaction. On March 31, 2011, we purchased that 50% interest from the unaffiliated third party for $21.4 million, making our Australian entity an indirect wholly-owned subsidiary. As a result, we eliminated $32.1 million of non-controlling interests in consolidated entities and increased partner’s capital attributable to AllianceBernstein unitholders by $10.7 million.
On May 31, 2011, we acquired Pyrander Capital Management, LLC, an investment management company jointly owned by Caxton Associates L.P. (“Caxton”) and Kurt Feuerman, a Caxton portfolio manager. We hired Mr. Feuerman and members of his team from Caxton, and acquired investment management contracts of the investment vehicles the team managed. The purchase price of this acquisition, accounted for under ASC 805, Business Combinations, was $10.2 million, consisting of $5.5 million of cash payments, $4.4 million payable over the next two years (if Mr. Feuerman remains with AllianceBernstein) and a miscellaneous liability of $0.3 million. The excess of the purchase price over the fair value of identifiable assets acquired resulted in the recognition of $5.7 million of goodwill. We also recorded $2.5 million of indefinite-lived intangible assets relating to the acquired fund’s investment management contracts and $2.0 million of definite-lived intangible assets relating to separately managed account relationships. Mr. Feuerman also received two restricted Holding Unit awards; one with a three-year service condition (the award was amended in December 2011 to eliminate the service condition) and one with a five-year service condition and performance condition (assets under management targets). As a result of the service conditions at the time of the acquisition, for accounting purposes these awards are considered compensation expense, not part of the purchase price. Also, we are contingently liable to pay Caxton an additional $4.4 million if Mr. Feuerman’s five-year service condition and performance condition are met.
On November 30, 2011, we acquired Taiwan International Investment Management Co. (“TIIM”) to expand our business in the Taiwan market. The purchase price of this acquisition, accounted for under ASC 805, Business Combinations, was a cash payment of $15.0 million, net of cash acquired. The valuation of the fair value of assets and liabilities acquired had been determined provisionally as of December 31, 2011. The excess of the purchase price over the current fair value of identifiable net assets acquired resulted in the recognition of $9.8 million of goodwill as of December 31, 2011. The valuation was completed in the first quarter of 2012. As a result, intangible assets relating to customer relationships of $0.3 million were recognized retrospectively as of December 31, 2011 with a corresponding reduction in goodwill.
The 2010 and 2011 acquisitions have not had a significant impact on 2011 or 2012 revenues and earnings. As a result, we have not provided supplemental pro forma information.
15.
|
Accounting Pronouncements
|
In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The amended standard requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. This amendment is not expected to have a material impact on our consolidated financial statements.
26
Report of Independent Registered Public Accounting Firm
To the Board of the General Partner
AllianceBernstein L.P.
We have reviewed the accompanying condensed consolidated statement of financial condition of AllianceBernstein L.P. ("AllianceBernstein") as of June 30, 2012, and the related condensed consolidated statements of income and comprehensive income for the three-month and six-month periods ended June 30, 2012 and 2011, and statement of cash flows for the six-month periods ended June 30, 2012 and 2011. These interim financial statements are the responsibility of the management of AllianceBernstein Corporation, the General Partner.
We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should be made to the accompanying condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statement of financial condition as of December 31, 2011, and the related consolidated statements of income, of changes in partners' capital and comprehensive income, and of cash flows for the year then ended (not presented herein), and in our report dated February 10, 2012, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated statement of financial condition as of December 31, 2011, is fairly stated in all material respects in relation to the consolidated statement of financial condition from which it has been derived.
/s/ PricewaterhouseCoopers LLP
|
|
New York, New York
|
|
August 2, 2012
|
27
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
Executive Overview
After a very strong start to the year, global markets weakened in the second quarter of 2012. Disappointing U.S. economic indicators, rising concerns over European sovereign debt and the effect of the U.S. fiscal cliff, and signs of slowing growth in emerging markets created market volatility that weighed on investment performance and caused investors to once again move away from riskier assets to defensive investments.
In this environment, our large cap equity services, which had outperformed their benchmarks in the first quarter, underperformed in the second quarter and net outflows in these services persisted. Beyond this part of our business, however, we continue to see positive momentum. Second quarter gross sales were up by double-digits year-over-year in each of our Institutions and Retail channels, while redemptions were at multi-year lows, resulting in our firm’s lowest net outflow quarter since the first quarter of 2008. Retail was net flow positive for the second consecutive quarter, driven by ongoing strength in fixed income across all regions. We finished the quarter with an $11.3 billion Institutional pipeline, up 71% from the end of the first quarter largely due to wins across our top-performing fixed income categories.
Our total AUM as of June 30, 2012 was $407.3 billion, down $11.8 billion, or 2.8%, compared to March 31, 2012, and down $53.7 billion, or 11.7%, compared to June 30, 2011. During the second quarter of 2012, AUM decreased as a result of net outflows of $2.8 billion and market depreciation of $9.0 billion. During the twelve-month period ended June 30, 2012, AUM decreased as a result of market depreciation of $10.3 billion and net outflows of $43.6 billion (primarily in the Institutions channel).
Institutional AUM decreased $7.4 billion, or 3.3%, to $214.9 billion during the second quarter of 2012, due to net outflows of $3.7 billion and market depreciation of $3.7 billion. Net outflows decreased to $3.7 billion from $12.9 billion in the first quarter of 2012. Gross sales increased 47% from $3.8 billion during the first quarter of 2012 to $5.6 billion during the second quarter of 2012. Additionally, redemptions and terminations decreased 61% sequentially to $6.0 billion from $15.5 billion, largely driven by the absence of $5.2 billion in outflows we sustained in the first quarter of 2012 as a result of prior period Canadian and Australian asset dispositions by the AXA Group. The pipeline of awarded but unfunded Institutional mandates increased $4.7 billion to $11.3 billion.
Retail AUM increased $0.6 billion, or 0.4%, to $124.8 billion during the second quarter of 2012, due to net inflows of $3.5 billion, partially offset by market depreciation of $2.9 billion. Redemptions and terminations decreased 16% sequentially to $7.0 billion from $8.4 billion. Gross sales decreased 7% from $12.9 billion during the first quarter of 2012 to $11.9 billion during the second quarter of 2012.
Private Client AUM decreased $5.0 billion, or 6.9%, to $67.6 billion during the second quarter of 2012, due to net outflows of $2.6 billion and market depreciation of $2.4 billion. Net outflows increased from $1.5 billion in the first quarter of 2012 due primarily to a sequential decline in gross sales from $1.4 billion to $0.8 billion.
Bernstein Research Services revenue for the second quarter of 2012 was $103.0 million, down $4.6 million, or 4.3%, compared to the second quarter of 2011, as a result of significantly lower market trading volumes across the U.S., Europe and Asia.
Net revenues for the second quarter of 2012 decreased $85.9 million, or 11.8%, to $642.1 million from $728.0 million in the second quarter of 2011. The most significant drivers of the decline were lower base advisory fees of $82.5 million and lower Bernstein Research Service revenues. Operating expenses for the second quarter of 2012 decreased $49.0 million, or 8.0%, to $563.4 million from $612.4 million in the second quarter of 2011 due to a decline in employee compensation and benefits of $53.6 million and a decline in general and administrative expenses of $2.5 million, partially offset by real estate charges of $6.8 million in the current quarter. Operating income for the second quarter of 2012 decreased $36.9 million, or 31.9%, to $78.7 million compared to the second quarter of 2011, while our operating margin declined to 12.5% from 16.8% primarily due to lower revenues and the real estate charge.
We continue to make progress in the growth areas we have targeted in repositioning our business to be more diverse and global. Asset allocation services and our newer, risk-aware equity offerings have attracted net new assets year-to-date, with clients responding well to the services we offer that meet their needs and deliver solid performance. In alternatives, we had the final closing for our first U.S. opportunistic real estate fund during the quarter, with nearly $700 million in capital commitments, and launched a new tail hedge fund, designed to mitigate tail risk in investment portfolios during periods of extreme market stress. In the Defined Contribution space, we recently introduced the first-ever multi-insurer backed Lifetime Income Strategy for United Technologies Corporation employees as the investment default for their defined contribution plan. Finally, we have continued to focus on cost reductions, with particular emphasis on real estate, our largest non-compensation expense item.
28
Ongoing Expense Reduction
Since the fourth quarter of 2008, we consistently have taken steps to reduce our cost structure, including headcount reductions and the consolidation of office locations, in response to declines in our AUM and fee revenues. In an effort to reduce our global real estate footprint, we recently completed a comprehensive review of our worldwide office locations and will begin implementing a space consolidation plan during the third quarter of this year. We expect that the actions we will take going forward to vacate and market space for sublease will result over time in projected non-cash real estate charges of $225 million to $250 million, with the bulk of the charges occurring in the second half of this year. These charges are in addition to the earlier non-cash real estate charges our firm has recorded, and they will not affect our future quarterly distributions. We expect to ultimately realize annual cost savings of $38 million to $43 million once we’ve successfully subleased the vacated space. These projections are based on current market conditions and could change over time as conditions evolve. We believe implementing this plan will prove effective in meaningfully improving our cost structure, even if current weak market conditions persist, and will play an important part in positioning our firm for a stronger future.
Ongoing Strategy for Managing Infrastructure Costs
During the fourth quarter of 2011, we reached an agreement with State Street Corporation (“State Street”) a provider of financial services to institutional investors, to provide investment operations outsourcing services covering more than $300 billion in client assets. State Street will provide a range of services including trade settlement, portfolio administration and reconciliation, derivative operations, client reporting, and performance measurement for our institutional accounts. As a result of this agreement, approximately 100 employees were transitioned from AllianceBernstein to State Street to provide global servicing support. Over a two-year period, certain AllianceBernstein technology platforms will be converted to similar platforms maintained by State Street. Our research and investment management activities were not outsourced.
CEO Employment Contract
On June 21, 2012, Peter S. Kraus, the General Partner, AllianceBernstein and Holding entered into an agreement (the “Extended Employment Agreement”) pursuant to which Mr. Kraus will continue to serve as Chairman of the Board of the General Partner and Chief Executive Officer of the General Partner, AllianceBernstein and Holding from January 2, 2014, the end of the term of his existing employment agreement, until January 2, 2019 (the “Employment Term”), unless the Extended Employment Agreement is terminated in accordance with its terms.
In connection with the signing of the Extended Employment Agreement on June 21, 2012, Mr. Kraus was granted 2,722,052 restricted Holding Units. Subject to accelerated vesting clauses in the Extended Employment Agreement (e.g., immediate vesting upon AXA ceasing to control the management of our business or Holding ceasing to be publicly traded and certain qualifying terminations of employment), Mr. Kraus’s restricted Holding Units will vest ratably on each of the first five anniversaries of December 19, 2013, commencing December 19, 2014, provided, with respect to each installment, Mr. Kraus continues to be our employee on the vesting date. Delivery of all of the restricted Holding Units will be delayed until after the final vesting date on December 19, 2018, subject to acceleration upon termination of employment. Starting on the commencement date of the Extended Employment Agreement, Mr. Kraus will be paid the cash distributions payable with respect to his unvested and vested restricted Holding Units until they are delivered or forfeited. These cash distributions will be paid at the times distributions are made to Holding Unitholders generally.
Mr. Kraus will be paid an annual base salary initially set at $275,000 subject to increase by the Compensation Committee of the Board of Directors.
During the Employment Term, we have no commitment to pay any cash bonuses to Mr. Kraus (with any bonuses being entirely in the discretion of the Board Compensation Committee) or to make any additional equity based awards to him. Consequently, during the Employment Term, the totality of Mr. Kraus’s compensation (other than his salary) will be dependent on the level of cash distributions on the restricted Holding Units granted to him and movements in the trading price of Holding Units, thereby directly aligning Mr. Kraus’s interests with those of other holders of Holding Units.
In connection with the Extended Employment Agreement, we also amended Mr. Kraus’s existing Employment Agreement dated December 19, 2008 (the “Existing Employment Agreement”) to permit him to defer until December 2018 delivery of the final vesting of 544,410 restricted Holding Units under that agreement and to continue to receive distributions on those Units until delivery.
The Extended Employment Agreement and the Amendment to the Existing Employment Agreement were attached as Exhibits 99.01 and Exhibit 99.02, respectively, to the Form 8-K we filed with the SEC on June 21, 2012 and the description of the Amendment set forth herein is qualified in its entirety by reference thereto.
29
On June 26, 2012, we filed a Form 8-K/A to clarify the intent of a provision in the Extended Employment Agreement. Specifically, we clarified that AllianceBernstein shall pay to Mr. Kraus quarterly cash distributions on his unvested and vested restricted Holding Units starting on the commencement date of the Extended Employment Agreement.
The updated Extended Employment Agreement was attached as Exhibit 99.01 to the Form 8-K/A we filed with the SEC on June 26, 2012 and the description set forth herein is qualified in its entirety by reference thereto.
The compensation expense of the Holding Unit award under the Extended Employment Agreement, based on the $12.17 closing price of a Holding Unit on June 21, 2012, will be amortized on a straight-line basis over the next 6.5 years, beginning July 1, 2012.
Assets Under Management
Assets under management by distribution channel were as follows:
As of June 30,
|
||||||||||||||||
2012
|
2011
|
$ Change
|
% Change
|
|||||||||||||
(in billions)
|
||||||||||||||||
Institutions
|
$ | 214.9 | $ | 254.5 | $ | (39.6 | ) | (15.6 | )% | |||||||
Retail
|
124.8 | 129.4 | (4.6 | ) | (3.6 | ) | ||||||||||
Private Client
|
67.6 | 77.1 | (9.5 | ) | (12.3 | ) | ||||||||||
Total
|
$ | 407.3 | $ | 461.0 | $ | (53.7 | ) | (11.7 | ) |
Assets under management by investment service were as follows:
As of June 30,
|
||||||||||||||||
2012
|
2011
|
$ Change
|
% Change
|
|||||||||||||
(in billions)
|
||||||||||||||||
Equity
|
||||||||||||||||
Value:
|
||||||||||||||||
U.S.
|
$ | 23.7 | $ | 33.6 | $ | (9.9 | ) | (29.4 | )% | |||||||
Global & international
|
45.9 | 87.8 | (41.9 | ) | (47.7 | ) | ||||||||||
69.6 | 121.4 | (51.8 | ) | (42.7 | ) | |||||||||||
Growth:
|
||||||||||||||||
U.S.
|
20.6 |