Notes to Condensed Financial Statements
June 30, 2016
(unaudited)
The words “we” and “our” refer collectively to AllianceBernstein Holding L.P. (“AB Holding”) and AllianceBernstein L.P. and its subsidiaries (“AB”), or to their officers and employees. Similarly, the word “company” refers to both AB Holding and AB. Where the context requires distinguishing between AB Holding and AB, we identify which of them is being discussed.
|
|
1.
|
Business Description, Organization and Basis of Presentation
|
Business Description
AB Holding’s principal source of income and cash flow is attributable to its investment in AB limited partnership interests. The condensed financial statements and notes of AB Holding should be read in conjunction with the condensed consolidated financial statements and notes of AB included as an exhibit to this quarterly report on Form 10-Q and with AB Holding’s and AB’s audited financial statements included in AB Holding’s Form 10-K for the year ended
December 31, 2015
.
AB provides research, diversified investment management and related services globally to a broad range of clients. Its principal services include:
|
|
•
|
Institutional Services – servicing its institutional clients, including private and public pension plans, foundations and endowments, insurance companies, central banks and governments worldwide, and affiliates such as AXA and its subsidiaries, by means of separately-managed accounts, sub-advisory relationships, structured products, collective investment trusts, mutual funds, hedge funds and other investment vehicles.
|
|
|
•
|
Retail Services – servicing its retail clients, primarily by means of retail mutual funds sponsored by AB 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.
|
|
|
•
|
Private Wealth Management Services – servicing its private clients, including high-net-worth individuals and families, 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.
|
|
|
•
|
Bernstein Research Services – servicing institutional investors, such as pension fund, hedge fund and mutual fund managers, seeking high-quality fundamental research, quantitative services and brokerage-related services in equities and listed options.
|
AB also provides distribution, shareholder servicing, transfer agency services and administrative services to the mutual funds it sponsors.
AB’s high-quality, in-depth research is the foundation of its business. AB’s research disciplines include economic, fundamental equity, fixed income and quantitative research. In addition, AB has experts focused on multi-asset strategies, wealth management and alternative investments.
AB provides a broad range of investment services with expertise in:
|
|
•
|
Actively-managed equity strategies, with global and regional portfolios across capitalization ranges and investment strategies, including value, growth and core equities;
|
|
|
•
|
Actively-managed traditional and unconstrained fixed income strategies, including taxable and tax-exempt strategies;
|
|
|
•
|
Passive management, including index and enhanced index strategies;
|
|
|
•
|
Alternative investments, including hedge funds, fund of funds and private equity (
e.g.
, direct real estate investing); and
|
|
|
•
|
Multi-asset solutions and services, including dynamic asset allocation, customized target-date funds and target-risk funds.
|
AB’s services span 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 geographic location (
e.g.
, U.S., international, global, emerging markets, regional and local), in major markets around the world.
Organization
As of
June 30, 2016
, AXA, a
société anonyme
organized under the laws of France and the holding company for the AXA Group, a worldwide leader in financial protection, through certain of its subsidiaries (“AXA and its subsidiaries”) owns approximately
1.5%
of the issued and outstanding units representing assignments of beneficial ownership of limited partnership interests in AB Holding (“AB Holding Units”).
As of
June 30, 2016
, the ownership structure of AB, expressed as a percentage of general and limited partnership interests, is as follows:
|
|
|
|
AXA and its subsidiaries
|
63.2
|
%
|
AB Holding
|
35.6
|
|
Unaffiliated holders
|
1.2
|
|
|
100.0
|
%
|
AllianceBernstein Corporation (an indirect wholly-owned subsidiary of AXA, “General Partner”) is the general partner of both AB Holding and AB. AllianceBernstein Corporation owns
100,000
general partnership units in AB Holding and a
1%
general partnership interest in AB. Including both the general partnership and limited partnership interests in AB Holding and AB, AXA and its subsidiaries have an approximate
63.8%
economic interest in AB as of
June 30, 2016
.
Basis of Presentation
The interim condensed financial statements 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 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 financial statements and the reported amounts of revenues and expenses during the interim reporting periods. Actual results could differ from those estimates. The condensed statement of financial condition as of
December 31, 2015
was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
AB Holding records its investment in AB using the equity method of accounting. AB Holding’s investment is increased to reflect its proportionate share of income of AB and decreased to reflect its proportionate share of losses of AB and cash distributions made by AB to its Unitholders. In addition, AB Holding's investment is adjusted to reflect its proportionate share of certain capital transactions of AB.
AB Holding is required to distribute all of its Available Cash Flow, as defined in the Amended and Restated Agreement of Limited Partnership of AB Holding (“AB Holding Partnership Agreement”), to its Unitholders
pro rata
in accordance with their percentage interests in AB Holding. Available Cash Flow is defined as the cash distributions AB Holding receives from AB minus such amounts as the General Partner determines, in its sole discretion, should be retained by AB Holding 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.
On
July 28, 2016
, the General Partner declared a distribution of
$0.40
per unit, representing a distribution of Available Cash Flow for the three months ended
June 30, 2016
. Each general partnership unit in AB Holding is entitled to receive distributions equal to those received by each AB Holding Unit. The distribution is payable on
August 25, 2016
to holders of record at the close of business on
August 8, 2016
.
|
|
3.
|
Long-term Incentive Compensation Plans
|
AB maintains several unfunded, non-qualified long-term incentive compensation plans, under which the company grants awards of restricted AB Holding Units and options to buy AB Holding Units to its employees and members of the Board of Directors, who are not employed by AB or by any of AB’s affiliates (“Eligible Directors”).
AB funds its restricted AB Holding Unit awards either by purchasing AB Holding Units on the open market or purchasing newly-issued AB Holding Units from AB Holding, and then keeping all of these AB Holding Units in a consolidated rabbi trust until delivering them or retiring them. In accordance with the AB Holding Partnership Agreement, when AB purchases newly-issued AB Holding Units from AB Holding, AB Holding is required to use the proceeds it receives from AB to purchase the equivalent number of newly-issued AB Units, thus increasing its percentage ownership interest in AB. AB 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 AB.
During the
second
quarter and first
six
months of
2016
, AB purchased
1.9 million
and
3.8 million
AB Holding Units for
$44.3 million
and
$84.0 million
, respectively (on a trade date basis). These amounts reflect open-market purchases of
1.9 million
and
3.7 million
AB Holding Units for
$43.9 million
and
$82.0 million
, respectively, with the remainder relating to purchases of AB Holding Units from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards. During the
second
quarter and first
six
months of
2015
, AB purchased
0.1 million
and
0.8 million
AB Holding Units for
$4.3 million
and
$21.3 million
, respectively (on a trade date basis). These amounts reflected open-market purchases of
0.1 million
and
0.7 million
AB Holding Units for
$4.0 million
and
$19.0 million
, respectively, with the remainder relating to purchases of AB Holding Units from employees to allow them to fulfill statutory tax withholding requirements at the time of distribution of long-term incentive compensation awards.
Each quarter, AB implements plans to repurchase AB 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 or because it possesses material non-public information. Each broker selected by AB has the authority under the terms and limitations specified in the plan to repurchase AB Holding Units on AB’s behalf in accordance with the terms of the plan. Repurchases are subject to regulations promulgated by the SEC as well as certain price, market volume and timing constraints specified in the plan. The plan adopted during the
second
quarter of
2016
expired at the close of business on July 27, 2016. AB may adopt additional Rule 10b5-1 plans in the future to engage in open-market purchases of AB Holding Units to help fund anticipated obligations under its incentive compensation award program and for other corporate purposes.
During the first
six
months of both
2016
and
2015
, AB granted to employees and Eligible Directors
0.3 million
restricted AB Holding Unit awards. AB used AB Holding Units repurchased during the period and newly-issued AB Holding Units to fund the restricted AB Holding Unit awards.
During the first
six
months of
2016
and
2015
, AB Holding issued
0.1 million
and
0.5 million
AB Holding Units, respectively, upon exercise of options to buy AB Holding Units. AB Holding used the proceeds of
$2.4 million
and
$9.0 million
, respectively, received from employees as payment in cash for the exercise price to purchase the equivalent number of newly-issued AB Units.
Basic net income per unit is derived by dividing net income by the basic weighted average number of units outstanding for each period. Diluted net income per unit is derived by adjusting net income for the assumed dilutive effect of compensatory options (“Net income – diluted”) and dividing by the diluted weighted average number of units outstanding for each period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(in thousands, except per unit amounts)
|
|
|
|
|
|
|
|
|
Net income – basic
|
$
|
39,904
|
|
|
$
|
48,224
|
|
|
$
|
95,451
|
|
|
$
|
93,809
|
|
Additional allocation of equity in net income attributable to AB resulting from assumed dilutive effect of compensatory options
|
193
|
|
|
426
|
|
|
367
|
|
|
785
|
|
Net income – diluted
|
$
|
40,097
|
|
|
$
|
48,650
|
|
|
$
|
95,818
|
|
|
$
|
94,594
|
|
|
|
|
|
|
|
|
|
Weighted average units outstanding – basic
|
97,463
|
|
|
100,577
|
|
|
98,530
|
|
|
100,563
|
|
Dilutive effect of compensatory options
|
650
|
|
|
1,253
|
|
|
534
|
|
|
1,184
|
|
Weighted average units outstanding – diluted
|
98,113
|
|
|
101,830
|
|
|
99,064
|
|
|
101,747
|
|
|
|
|
|
|
|
|
|
Basic net income per unit
|
$
|
0.41
|
|
|
$
|
0.48
|
|
|
$
|
0.97
|
|
|
$
|
0.93
|
|
Diluted net income per unit
|
$
|
0.41
|
|
|
$
|
0.48
|
|
|
$
|
0.97
|
|
|
$
|
0.93
|
|
For the
three and six
months ended
June 30, 2016
, we excluded
2,793,454
and
2,873,106
options, respectively, from the diluted net income computation due to their anti-dilutive effect. For the
three and six
months ended
June 30, 2015
, we excluded
2,383,589
options from the diluted net income computation due to their anti-dilutive effect.
Changes in AB Holding’s investment in AB during the
six
-month period ended
June 30, 2016
are as follows (in thousands):
|
|
|
|
|
Investment in AB as of December 31, 2015
|
$
|
1,589,965
|
|
Equity in net income attributable to AB Unitholders
|
106,621
|
|
Changes in accumulated other comprehensive income (loss)
|
799
|
|
Additional investments with proceeds from exercise of compensatory options to buy AB Holding Units
|
2,377
|
|
Cash distributions received from AB
|
(99,720
|
)
|
Capital contributions from AB
|
(643
|
)
|
AB Holding Units retired
|
(88,453
|
)
|
AB Holding Units issued to fund long-term incentive compensation plans
|
6,922
|
|
Change in AB Holding Units held by AB for long-term incentive compensation plans
|
815
|
|
Investment in AB as of June 30, 2016
|
$
|
1,518,683
|
|
Changes in AB Holding Units outstanding during the
six
-month period ended
June 30, 2016
are as follows:
|
|
|
|
Outstanding as of December 31, 2015
|
100,044,485
|
|
Options exercised
|
139,093
|
|
Units issued
|
323,094
|
|
Units retired
|
(3,972,023
|
)
|
Outstanding as of June 30, 2016
|
96,534,649
|
|
AB Holding is a “grandfathered” publicly-traded partnership (“PTP”) for federal tax purposes and, accordingly, is not subject to federal or state corporate income taxes. However, AB Holding is subject to the
4.0%
New York City unincorporated business tax (“UBT”), net of credits for UBT paid by AB, and to a
3.5%
federal tax on partnership gross income from the active conduct of a trade or business. AB Holding’s partnership gross income is derived from its interest in AB.
AB Holding’s income tax is computed by multiplying certain AB qualifying revenues (primarily U.S. investment advisory fees and brokerage commissions) by AB Holding’s ownership interest in AB, multiplied by the
3.5%
tax rate. AB Holding Units in AB’s consolidated rabbi trust are not treated as outstanding for purposes of calculating AB Holding’s ownership interest in AB.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
|
Six Months Ended
June 30,
|
|
|
|
2016
|
|
2015
|
|
% Change
|
|
2016
|
|
2015
|
|
% Change
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
Net income attributable to AB Unitholders
|
$
|
127,144
|
|
|
$
|
149,094
|
|
|
(14.7
|
)%
|
|
$
|
296,070
|
|
|
$
|
290,563
|
|
|
1.9
|
%
|
Multiplied by: weighted average equity ownership interest
|
35.8
|
%
|
|
36.5
|
%
|
|
|
|
36.0
|
%
|
|
36.5
|
%
|
|
|
Equity in net income attributable to AB Unitholders
|
$
|
45,489
|
|
|
$
|
54,409
|
|
|
(16.4
|
)
|
|
$
|
106,621
|
|
|
$
|
106,025
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AB qualifying revenues
|
$
|
519,565
|
|
|
$
|
565,225
|
|
|
(8.1
|
)
|
|
$
|
1,033,437
|
|
|
$
|
1,109,999
|
|
|
(6.9
|
)
|
Multiplied by: weighted average equity ownership interest for calculating tax
|
29.9
|
%
|
|
30.7
|
%
|
|
|
|
30.3
|
%
|
|
30.9
|
%
|
|
|
Multiplied by: federal tax
|
3.5
|
%
|
|
3.5
|
%
|
|
|
|
3.5
|
%
|
|
3.5
|
%
|
|
|
Federal income taxes
|
5,443
|
|
|
6,077
|
|
|
|
|
10,945
|
|
|
12,004
|
|
|
|
State income taxes
|
142
|
|
|
108
|
|
|
|
|
225
|
|
|
212
|
|
|
|
Total income taxes
|
$
|
5,585
|
|
|
$
|
6,185
|
|
|
(9.7
|
)
|
|
$
|
11,170
|
|
|
$
|
12,216
|
|
|
(8.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
12.3
|
%
|
|
11.4
|
%
|
|
|
|
10.5
|
%
|
|
11.5
|
%
|
|
|
In order to preserve AB Holding’s status as a “grandfathered” PTP for federal income tax purposes, management seeks to ensure that AB Holding does not directly or indirectly (through AB) enter into a substantial new line of business. If AB Holding were to lose its status as a “grandfathered” PTP, it would be subject to corporate income tax, which would reduce materially AB Holding’s net income and its quarterly distributions to AB Holding Unitholders.
|
|
8.
|
Commitments and Contingencies
|
Legal and regulatory matters described below pertain to AB and are included here due to their potential significance to AB Holding’s investment in AB.
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 in excess of amounts already accrued, if any, we disclose that fact together with the estimate of the possible loss or range of loss. However, it is often 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. Such is also the case when the litigation is in its early stages or when the litigation is highly complex or broad in scope. In these cases, we disclose that we are unable to predict the outcome or estimate a possible loss or range of loss.
During the first quarter of 2012, AB received a legal letter of claim (“Letter of Claim”) sent on behalf of Philips Pension Trustees Limited and Philips Electronics U.K. Limited (“Philips”), a former pension fund client, alleging that AllianceBernstein Limited (one of AB’s subsidiaries 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. Philips has alleged damages ranging between
$177 million
and
$234 million
, plus compound interest on an alleged
$125 million
of realized losses in the portfolio. On January 2, 2014, Philips filed a claim form (“Claim”) in the High Court of Justice in London, England, which formally commenced litigation with respect to the allegations in the Letter of Claim.
We believe that any losses to Philips resulted from adverse developments in the U.S. housing and mortgage market that precipitated the financial crisis in 2008 and not from any negligence or other failure or malfeasance on our part. We believe that we have strong defenses to these claims, which were set forth in our October 12, 2012 response to the Letter of Claim and our June 27, 2014 Statement of Defence in response to the Claim, and intend to defend this matter vigorously.
In addition to the Claim
discussed immediately above
, AB is involved in various other matters, including regulatory inquiries, administrative proceedings and litigation, some of which allege significant damages.
In the opinion of AB’s management, an adequate accrual has been made as of
June 30, 2016
to provide for any probable losses regarding any litigation matters for which management can reasonably estimate an amount of loss. It is reasonably possible that AB could incur additional losses pertaining to these matters, but currently management cannot estimate any such additional losses.
Management, after consultation with legal counsel, currently believes that the outcome of any individual matter that is pending or threatened, or all of them combined, will not have a material adverse effect on our results of operations, financial condition or liquidity. However, any inquiry, proceeding or litigation has an element of uncertainty; management cannot determine whether further developments relating to any individual matter that is pending or threatened, or all of them combined, will have a material adverse effect on our results of operations, financial condition or liquidity in any future reporting period.