[FACING PAGE]
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ]Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended March 31, 1996
Commission File Number: 33-56334
VK/AC Holding, Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-3852549
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Van Kampen American Capital, Inc.
One Parkview Plaza
Oakbrook Terrace, Illinois
Attn: Ronald A. Nyberg, Esq. 60181
(Address of principal executive offices) (Zip Code)
(708) 684-6000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days
X Yes No
As of March 31, 1996 there were 2,316,937 shares of the registrant's
Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and
117,817 shares of the registrant's Class B Common Stock, par value $.01 per
share ("Class B Common Stock"), outstanding. There is no established public
trading market for any class of the registrant's common equity securities.
[PAGE 1]
VK/AC Holding, Inc.
Form 10-Q
For The Quarter Ended March 31, 1996
Index
Page
Part I: Financial Information.......................................... 2
Item 1: Financial Statements
Consolidated Balance Sheets at March 31, 1996 (unaudited)
and December 31, 1995...................................... 2
Consolidated Statements of Income (unaudited) for the
Three Months Ended March 31, 1996 and 1995 ................ 3
Consolidated Statements of Cash Flows (unaudited) for the
Three Months Ended March 31, 1996 and 1995................. 4
Notes to Consolidated Financial Statements (unaudited)........ 5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 7
Part II: Other Information.............................................14
Signatures ...........................................................15
Exhibits ...........................................................16
[PAGE 2]
VK/AC HOLDING, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In 000's except for par value and shares)
3/31/96 12/31/95
Assets (Unaudited)
Cash and Cash Equivalents $ 1,516 $ 7,822
Cash Equivalents Segregated Under Regulation or Collateral Agreement 10,000 10,000
Short-Term Investments - Mutual Funds, at market 26,566 27,489
Receivables 62,554 46,481
Trading Inventory, at market 67,049 71,875
Furniture, Equipment, and Leasehold Improvements, net 24,872 24,836
Deferred Company Funded Distribution Costs, net 279,090 259,822
Deferred Financing Costs, net 12,509 13,012
Excess of Cost over Fair Value of Net Assets Acquired, net 539,688 544,247
Other Assets 22,154 22,270
----------- -----------
Total Assets $ 1,045,998 $ 1,027,854
=========== ===========
Liabilities and Stockholders' Equity
Liabilities
Bank Loans $ 337,700 $ 331,100
Senior Secured Notes 150,000 150,000
Accounts Payable and Accrued Expenses 56,225 85,158
Payable to Trustee 19,010 5,587
Deferred Compensation 24,041 21,957
Deferred Income Taxes 65,834 56,023
----------- -----------
Total Liabilities 652,810 649,825
=========== ===========
Redeemable Common Stock
At redemption value of $200 per share; 155,673 shares outstanding
at March 31, 1996 and December 31, 1995 31,135 31,135
----------- -----------
Stockholders' Equity
Junior Non-Cumulative Participating Preferred Stock, $200 par value,
32,500 shares authorized; 32,500 shares issued and outstanding
at March 31, 1996 and December 31, 1995 6,500 6,500
Class A Common Stock, $.01 par value; 3,250,000 shares authorized,
2,163,792 nonredeemable shares issued, 2,161,264 nonredeemable
shares outstanding at March 31, 1996 and December 31, 1995 22 22
Class B Common Stock, $.01 par value, nonvoting, 3,250,000 shares
authorized; 117,817 shares issued and outstanding at March 31, 1996
and December 31, 1995 1 1
Additional Paid-In Capital 299,292 299,292
Retained Earnings 56,743 41,584
----------- -----------
362,558 347,399
Less Treasury Stock, Class A Common Stock, at cost; 2,528 shares at
March 31, 1996 and December 31, 1995 (505) (505)
----------- -----------
Total Stockholders' Equity 362,053 346,894
----------- -----------
Total Liabilities & Stockholders' Equity $ 1,045,998 $ 1,027,854
=========== ===========
See accompanying notes to consolidated financial statements.
[PAGE 3]
VK/AC HOLDING, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(In 000's except per share data)
For The Quarter Ended
March 31
1996 1995
----------- -----------
Revenues
Investment Advisory Fees $ 71,510 $ 57,211
Distribution of Investment Products 6,895 8,737
Fiduciary Fees 2,323 2,015
Research Services 8,534 7,414
Other Revenue 5,001 1,471
----------- -----------
Total Revenues 94,263 76,848
----------- -----------
Expenses
Compensation and Benefits 26,392 24,493
Amortization of Deferred Company
Funded Distribution Costs 14,625 11,698
Occupancy 9,159 7,463
Marketing and Promotion 7,592 7,837
Other Expenses 10,773 11,518
Reimbursements (13,874) (11,765)
Interest and Acquisition Expenses:
Amortization of Excess of Cost over
Fair Value of Net Assets Acquired 4,475 4,450
Interest Expense 8,905 10,955
Amortization of Deferred Financing Costs 503 503
----------- ----------
Total Expenses 68,550 67,152
----------- ----------
Income Before Taxes 25,713 9,696
Income Tax Provision 10,554 3,828
----------- -----------
Net Income $ 15,159 $ 5,868
=========== ===========
Earnings per share:
Primary:
Net Income Available to Common
Shareholders $ 5.92 $ 1.66
=========== ===========
Assuming Full Dilution:
Net Income Available To Common
Shareholders $ 5.92 $ 1.66
=========== ===========
Weighted Average Common Shares and
Common Share Equivalents:
Primary 2,560 2,565
Assuming Full Dilution 2,560 2,565
See accompanying notes to consolidated financial statements.
[PAGE 4]
VK/AC HOLDING, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In 000's)
For The Quarter Ended
March 31
1996 1995
----------- ------------
Cash Flows from Operating Activities:
Net Income $ 15,159 $ 5,868
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 1,647 1,513
Amortization:
Deferred Company Funded Distribution Costs 14,625 11,698
Excess of Cost over Fair Value of
Net Assets Acquired 4,475 4,450
Deferred Financing Costs 503 503
Gain on Sale of Subsidiary (3,422) --
Net Change in:
Short-Term Investments - Mutual Funds 923 (1,872)
Receivables (16,073) (3,150)
Trading Inventory 4,826 27,801
Other Assets (2,955) (6,142)
Accounts Payable and Accrued Expenses (29,933) (13,570)
Payable to Trustee 13,423 3,046
Deferred Compensation 2,084 (408)
Income Taxes Payable -- 1,941
Deferred Income Taxes 9,811 (2,645)
---------- ----------
Total Adjustments (66) 23,165
---------- ----------
Net Cash Provided by Operating Activities 15,093 29,033
---------- ----------
Cash Flows from Investing Activities:
Proceeds from Sale of Subsidiary 7,577 --
Deferred Company Funded Distribution Costs (33,893) (11,353)
Net Additions of Fixed Assets (1,683) (947)
---------- ----------
Net Cash Used by Investing Activities (27,999) (12,300)
---------- ----------
Cash Flows from Financing Activities:
Proceeds from Borrowings, net 6,600 --
Loan Principal Payments -- (36,300)
Stock Issuance -- 7,010
Purchase of Treasury Stock -- (4,024)
---------- ----------
Net Cash Provided (Used) by Financing Activities 6,600 (33,314)
---------- ----------
Net Decrease in Cash and Cash Equivalents (6,306) (16,581)
Cash and Cash Equivalents:
Beginning of Period 7,822 26,320
---------- ----------
End of Period $ 1,516 $ 9,739
========== ==========
Cash paid for: Income Taxes 449 225
Interest 12,856 14,892
See accompanying notes to consolidated financial statements.
[PAGE 5]
VK/AC HOLDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) March 31, 1996
Note 1 - Basis of Presentation
The consolidated financial statements include the accounts of VK/AC Holding,
Inc. ("VK/AC Holding") and its subsidiaries, Van Kampen American Capital, Inc.
("VKAC"), McCarthy, Crisanti & Maffei, Inc. ("MCM"), and Advantage Capital
Corporation ("Advantage Capital") (VK/AC Holding together with its
subsidiaries, the "Company"). On January 2, 1996, Advantage Capital was
sold to SunAmerica Inc. All material intercompany accounts and
transactions have been eliminated in consolidation.
The consolidated financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and
Exchange Commission with respect to quarterly financial statements. Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. VK/AC Holding's
Annual Report on Form 10-K for the year ended December 31, 1995, filed with
the Securities and Exchange Commission, includes the information and note
disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles and should be
referred to for further information. The Company believes that the
accompanying consolidated financial statements contain all adjustments
(consisting of normal recurring accruals) necessary to present fairly the
Company's consolidated financial position as of March 31, 1996 and December
31, 1995, its consolidated results of operations for the three months ended
March 31, 1996 and 1995, and its consolidated cash flows for the three months
ended March 31, 1996 and 1995.
Primary and fully diluted earnings per share are computed based upon the
weighted average number of shares outstanding during the period, including
shares of redeemable common stock. Net income available to common
stockholders is reduced by the accretion of redeemable common stock to
redemption value.
Note 2 - Redeemable Common Stock
The shares of redeemable common stock are reported on the balance sheets at
redemption value, which is the estimated fair market value of the stock. The
accretion to redemption value has been reflected as a reduction of retained
earnings.
Options to purchase shares of Class A Common Stock were granted to certain
members of management and other employees of the Company pursuant to a stock
option plan, under which 1,762 of such options will vest after 3 years and 150
of such options will vest over a period of time up to five years, 33 1/3% on
each of the third, fourth and fifth anniversaries of the option grant
date.
[PAGE 6]
VK/AC HOLDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited) March 31, 1996
Stock options transactions consisted of the following.
Number of
Options
-----------
Balance, December 31, 1995 365,832
Granted; exercise price $200 1,912
Cancelled (8,509)
-----------
Balance, March 31, 1996 359,235
-----------
As of March 31, 1996, 120,119 options had vested and the Company granted an
aggregate of 3,350 deferred stock units to certain employees.
[PAGE 7]
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
VK/AC Holding, Inc. ("Holding") and Van Kampen American Capital, Inc.
("VKAC"), a wholly-owned subsidiary of Holding, were organized in 1992 to
acquire a company then named The Van Kampen Merritt Companies, Inc. ("VKM")
and certain of its subsidiaries. Effective February 17, 1993, VKAC acquired
VKM and VKM merged with and into VKAC (the "VKM Acquisition").
On December 20, 1994, Holding and VKAC acquired American Capital
Management & Research, Inc. and its subsidiaries (the "AC Acquisition").
American Capital Management & Research, Inc. (together with its subsidiaries,
"American Capital") then merged into VKAC.
Unless the context otherwise requires, the term "Company" as used herein
means Holding and its subsidiaries. The following discussion should be read
in conjunction with the unaudited consolidated financial statements and
related notes found in "Item 1 - Financial Information" and the Company's Form
10-K for the fiscal year ended December 31, 1995, since they contain important
information that may be helpful in evaluating the Company's results of
operations and financial condition.
General
The Company provides a wide variety of investment products and services.
The Company sponsors, markets and provides investment advisory and
administrative services to open end mutual funds ("Mutual Funds") and closed
end funds ("Closed End Funds" and, together with Mutual Funds, the "Funds").
The Company also sponsors and markets unit investment trusts ("UITs") and
monitors and values their portfolios; provides investment advisory services to
insurance companies, pension funds, municipalities, high net worth individuals
and mutual funds sponsored by third parties ("Institutional Accounts"); and
provides research services to institutions, primarily through its wholly-owned
subsidiary, McCarthy, Crisanti & Maffei, Inc. ("MCM"). The Company also has
transfer agency and trust company capabilities through ACCESS Investor
Services, Inc. ("ACCESS") and through Van Kampen American Capital Trust
Company ("VKAC Trust Company"). While complementary, these business areas are
also diverse sources of revenues.
The Company believes that the AC Acquisition has significantly broadened
the Company's product offerings. Prior to the AC Acquisition, 99% of the
Company's total assets under management were invested in fixed income
securities, while American Capital had approximately 56% of its assets
invested in equity securities. As of March 31, 1996, the Company had
approximately 70% of its assets under management invested in fixed income
securities and approximately 30% of its assets under management invested in
equity securities. As a result of such asset class diversification, the
Company has realized improved distribution power and has more stable cash
flows.
As of March 31, 1996, the Company had more than two million investor
accounts and approximately $57.3 billion of assets under management or
supervision and a diverse investment product line with 64 Mutual Funds, 37
Closed End Funds and more than 3,000 UITs sponsored covering domestic,
international and emerging markets in equities and fixed income securities.
[PAGE 8]
The Company distributes its investment products primarily through a
large and diversified network of unaffiliated national and regional
broker-dealers, as well as commercial banks and thrifts, insurance companies
and their affiliated broker-dealers and financial planners (the "Retail
Distribution Firms"). Its relationships include more than 2,400 Retail
Distribution Firms having more than 100,000 sales representatives, although a
relatively small number of Retail Distribution Firms account for a substantial
portion of sales of the Company's products. In addition, the Company has
entered into special distribution arrangements with Smith Barney Inc., PFS
Investments, Inc. and SunAmerica Inc. In order to enhance its coverage and
penetration of the Retail Distribution Firms, the Company has been increasing
its sales and marketing resources over the past several years and expects to
continue doing so.
Investment Advisory Fees represent approximately 76% of the Company's
current revenues. Investment Advisory Fees, generally based upon a percentage
of the assets under management, include revenues for managing the assets of
Funds and Institutional Accounts. Total assets under management at March 31,
1996 were $45.4 billion, compared to $38.9 billion at March 31, 1995.
The Company earns significant revenues from the distribution of its
investment products, the greatest portion of which is attributable to UITs and
the Funds, and from the sale of subscriptions to MCM's electronic information
services. The Company is also reimbursed for providing transfer agency
services to certain of the Funds through ACCESS, for providing daily pricing
and ongoing surveillance services for its UITs and for furnishing accounting,
legal, pricing and shareholder services to certain of the Funds.
Industry sales of bond funds, particularly those that invest in
long-term fixed income tax-exempt municipal securities, are impacted by the
relationship between long-term and short-term interest rates, the strength of
the stock market, and the perception of investors concerning certain proposed
tax regulations and the future direction of interest rates. Based on industry
sales from 1994 to the present, demand for municipal bond funds has decreased
significantly and demand for fixed-income funds in general has slowed. The
Company believes this was due primarily to the combination of certain proposed
federal income tax proposals which may impact the future tax status of
municipal securities, the strength of the stock market, and the general
uncertainty of investors over the future direction of interest rates. The
Company believes that by significantly broadening its product offerings, it
has helped to offset the potential negative impact of declining interest in
its fixed income Funds. In addition, the Company continues to devote
resources to the development of new types of funds and investment products.
However, there can be no assurance that the Company's strategy will be
successful or that changing market conditions will not have a negative impact
on sales of the Company's investment products.
Results of Operations
Income before Interest and Acquisition Expenses and Income Taxes
("Operating Earnings") for the first quarter of 1996 was $39.6 million, $14.0
million or 55% higher than Operating Earnings of $25.6 million for the first
quarter of 1995. Revenues increased by $17.4 million, while operating
expenses grew by $3.4 million.
Investment Advisory Fees for the first quarter of 1996 increased 25% over
the same period of 1995, due primarily to greater assets under management.
Distribution of Investment Products declined by 21%, due to lower acquisition
profit on UITs and the sale in January 1996 of Advantage Capital Corporation
("Advantage Capital"), the Company's retail broker-dealer subsidiary.
Advantage Capital produced approximately $1.7 million of revenue in the first
quarter of 1995, and $0.1 million in the first quarter of 1996. The sale of
Advantage Capital produced a gain of $3.4 million, which is reflected in the
first quarter of 1996's Other Revenue category.
[PAGE 9]
Revenue from Investment Advisory Fees
Investment Advisory Fees were earned from managing the assets of two
sources: the Company sponsored and marketed Funds and third party
Institutional Accounts. The following tables list the Investment Advisory
Fees and the assets under management by source for the quarters ended March
31, 1996 and 1995, respectively.
Quarter 1996
Ended Compared
March 31 To
Investment Advisory Fees (In Millions) 1996 1995 1995
------- ------- --------
Funds:
Open-End:
Equity $ 21.5 $ 16.0 34.4%
Fixed Income 21.4 20.1 6.5
Closed-End:
Equity 0.1 0.1 --
Fixed Income 26.0 18.9 37.6
Institutional Accounts 2.5 2.1 19.0
------- -------
Total $ 71.5 $ 57.2 25.0%
======= =======
Quarter 1996
Ended Compared
March 31 To
Assets Under Management (In Billions) 1996 1995 1995
------- ------- --------
Funds:
Open-End:
Equity $ 14.1 $ 10.4 35.6%
Fixed Income 13.5 13.5 --
Closed-End:
Equity 0.1 0.1 --
Fixed Income 11.8 9.3 26.9
Institutional Accounts 5.9 5.6 5.4
------- -------
Total $ 45.4 $ 38.9 16.7%
======= =======
Investment Advisory Fees earned for managing Company sponsored Funds
were $69.0 million for the first quarter of 1996, $13.9 million or 25.2% more
than the $55.1 million earned during the same period in 1995. This increase
was due primarily to higher levels of Fund assets under management, $39.5
billion at March 31, 1996 compared to $33.3 billion at March 31, 1995, an
18.6% increase. While revenue growth was due primarily to asset growth, the
average fee rate also increased due to significant growth in the Van Kampen
American Capital Prime Rate Income Trust Fund ("Prime Rate Trust"), which has
a higher investment advisory fee rate, and sales of Class B shares, which
generate 12b-1 fees to compensate for Company funded distribution costs.
[PAGE 10]
Open-End equity Fund assets grew nearly 36% in the 12 months ended March
31, 1996. This was due to $0.6 billion of sales (net of redemptions and
exchanges) and market value appreciation of $3.1 billion during that 12-month
period. Accordingly, revenue increased by over 34% in the first quarter of
1996 compared to the first quarter of 1995.
Open-End fixed income Fund assets did not change from March 31, 1995 to
1996. Market value appreciation of $0.6 billion was offset by net
redemptions. As discussed above, the Company believes that uncertainty
regarding the direction of interest rates, as well as certain federal
tax proposals, slowed demand for fixed income investment products including
the Company's fixed income Funds. Revenue increased by approximately 6% in
the first quarter of 1996 compared to the same period in 1995 due to a
greater proportion of B share assets, as discussed above.
Closed-End Fund assets increased approximately 27% in the 12 months
ended March 31, 1996. The Company did not offer any new closed-end funds
during this time; all of the sales of closed-end funds were due to the
continuous offering of the Prime Rate Trust, which sales were $2.6 billion
during this 12-month period. The Prime Rate Trust is not publicly traded but
has periodic tender offers when authorized by its Board of Trustees. The
Prime Rate Trust is an actively managed portfolio consisting of senior bank
debt with assets under management of $4.4 billion at March 31, 1996. This
fund differs from many fixed income funds in that its distribution rates are
variable, and tend to be attractive to investors during periods of volatile
and uncertain interest rates.
Through May 1995, Institutional Accounts consisted primarily of accounts
managed for certain affiliates of Xerox Corporation ("Xerox Life"). However,
during the second quarter of 1995, Xerox Corporation completed the sale of
Xerox Life to General American Life Insurance Company ("General American"),
which resulted in the termination of substantially all of the Xerox Life
accounts effective May 31, 1995. Concurrent with such terminations, the
Company entered into an investment advisory agreement with OakRe Life
Insurance Company ("OakRe"), a subsidiary of Xerox Corporation. At March 31,
1996, assets under management in the OakRe account and remaining Xerox Life
accounts were $2.6 billion, compared to $3.5 billion for the Xerox Life
Accounts at March 31, 1995. Institutional Account assets under management
increased as a result of new accounts and additional sales, as well as market
value increases during 1995. Such increase was partially offset by
redemptions and terminated accounts. Investment Advisory Fees earned for
managing the assets of Institutional Accounts also increased during the first
quarter of 1996 compared to the same period in 1995, due primarily to higher
average assets under management during the first quarter of 1996 and slightly
higher advisory fee rates during this period.
Revenue from the Distribution of Investment Products
Revenue from the Distribution of Investment Products decreased $1.8
million or 21% in the first quarter of 1996, compared to the same period in
1995. This was due in part to lower acquisition profit on UITs as market
conditions in the first quarter of 1996 were not as favorable compared to
1995. In addition, the Company's Advantage Capital subsidiary was sold in
January 1996. This subsidiary produced approximately $1.7 million of revenue
in the first quarter of 1995, and $0.1 million in 1996.
Revenue from Research Services
Research Services revenue increased to $8.5 million for the first
quarter of 1996. This represented growth of $1.1 million over the first
quarter of 1995. This increase resulted primarily from the expansion of MCM's
electronic services through expanded marketing efforts and an increase in the
number of service distributors throughout the United States, Europe and
Asia.
Other Revenue
Other Revenue increased to $5.0 million for the first quarter of 1996, a
$3.5 million increase over the first quarter of 1995. The sale of Advantage
Capital in January, 1996 produced a gain of $3.4 million.
[PAGE 11]
Operating Expenses
Compensation and Benefits expense increased to $26.4 million in the
first quarter of 1996, up $1.9 million or 7.8% from the first quarter of 1995.
This increase resulted principally from annual salary increases and
growth-related personnel additions. The increase was partially offset by the
sale of Advantage Capital which accounted for approximately $1.0 million in
Compensation and Benefits in the first quarter of 1995 but no expense during
1996. In July 1995, ACCESS (which historically had been the transfer agent
for certain of the Company's Mutual Funds) was appointed the transfer agent
for all of the Company's Mutual Funds which necessitated the addition of staff
and other costs which are reimbursable by such Mutual Funds.
Amortization of Deferred Company Funded Distribution Costs was $14.6
million for the first quarter of 1996, $2.9 million more than the same quarter
of 1995. This expense represents the amortization of commissions paid on the
Prime Rate Trust and Class B shares, which utilize the Company funded load
structure. All of the Company's Funds have Class B shares. Because amounts
deferred in prior years have not been fully amortized, this expense tends to
grow each year as amortization of current year additions is added to that of
prior years. The principal reason for the increase in the first quarter of
1996 over the same period of 1995 is sales of the Prime Rate Trust, which
added $62 million of Deferred Company Funded Distribution Costs in 1995,
representing approximately $2.6 million more in amortization expense in
the first quarter of 1996 in comparison to the same period in 1995.
Occupancy expense for the quarter ended March 31, 1996 increased $1.7
million or 23% over the same period in 1995. This was due largely to an
increase in data processing costs related to ACCESS becoming transfer agent
for all of the Company's Mutual Funds, as described above.
Other Expenses of $10.8 million was $0.7 million less in the first
quarter of 1996 than in the same period of 1995. This was principally the
result of lower Fund expenses absorbed by the Company.
Reimbursements for the quarter ended March 31, 1996 were $2.1 million
greater than the corresponding period of 1995. As mentioned above, ACCESS
became the transfer agent for all of the Company's Mutual Funds in the third
quarter of 1995, resulting in increases in compensation and benefits and
occupancy expenses, and correspondingly in reimbursements.
Interest Expense
Interest expense of $8.9 million for the first quarter of 1996 was $2.0
million or 19% less than the first quarter of 1995. As explained further in
"Liquidity and Capital Resources" below, the Company reduced its long-term
debt by $80 million during 1995 as a result of prepayments made out of
internally generated cash flow from operations.
[PAGE 12]
Liquidity and Capital Resources
The Company incurred substantial indebtedness in connection with the VKM
Acquisition and the AC Acquisition. As of March 31, 1996, the Company had
outstanding $440 million of indebtedness (excluding $47.7 million of
collateralized borrowings of VKAC Distributors, its broker-dealer subsidiary),
$150 million in the form of its 9.75% Senior Secured Notes due 2003 (the
"Notes") and $290 million in borrowings pursuant to an Amended and
Restated Credit Agreement, dated as of December 20, 1994 (the "Amended Credit
Agreement"), among Holding as guarantor, VKAC, the banks party thereto,
Chemical Bank as administrative agent, collateral agent and issuing bank, and
Chemical Bank and The Chase Manhattan Bank, N.A., as managing agents.
At the time of the AC Acquisition, $360 million of the
indebtedness under the Amended Credit Agreement was drawn under a $360 million
term loan facility (the "Term Loan Facility") in connection with the financing
of the AC Acquisition, and $100 million was drawn under a $100 million
revolving credit facility (the"Revolving Credit Facility") to refinance the
Company's then outstanding bank debt. The Revolving Credit Facility is
available to meet the ongoing working capital and business needs of the
Company. As of March 31, 1996, $250 million was outstanding under the Term
Loan Facility and $40 million was outstanding under the Revolving Credit
Facility. VKAC's obligations under the Amended Credit Agreement and the Notes
are secured by all of the issued and outstanding capital stock of its
significant subsidiaries, and certain cash and other collateral of VKAC,
including certain stock of certain future subsidiaries. VKAC's obligations
under the Amended Credit Agreement and the Notes are guaranteed by Holding,
which guarantees are secured by a pledge of Holding of all of the outstanding
stock of VKAC and certain other collateral of Holding.
In September 1995, the Company prepaid $35 million under the Term Loan
Facility, and in December 1995 it prepaid an additional $35 million. In March
1996 the Company borrowed $40 million under the Revolving Credit Facility and
prepaid $40 million of the Term Loan Facility. Pursuant to waiver agreements,
the parties to the Amended Credit Agreement agreed to waive the requirement
that any prepayments be applied in reverse order of maturity and permitted
such prepayments to be applied to fully prepay the 1996 and 1997 principal
payments, and to prepay $35 million of the $71.25 million 1998 principal
payment. With respect to the remaining $250 million borrowed under the Term
Loan Facility, the Company must make principal payments of $36.25 million in
1998 and $71.25 million in each year thereafter through the year 2001. All
amounts outstanding under the Revolving Credit Facility will become due upon
the final maturity of the Term Loan Facility. The $150 million aggregate
principal amount of the Notes matures in 2003 with no prior scheduled
mandatory repayments. Interest on outstanding borrowings under the Term Loan
Facility and the Revolving Credit Facility is payable, at the Company's
option, (i) at a rate per annum equal to the higher of 0.25% plus (a) Chemical
Bank's prime rate, (b) the secondary market rate for three-month certificates
of deposit from time to time plus 1.0%, or (c) the federal funds rate from
time to time plus 0.50%, or (ii) at a reserve-adjusted London interbank
offered rate ("LIBOR") for periods of one, two, three, six, nine or twelve
months plus an applicable margin per annum. Pursuant to the provisions of
the Amended Credit Agreement, the margin applicable to LIBOR was reduced
to 1.00% from 1.25% effective April 11, 1996, due to a decrease in the
ratio of debt to earnings as defined in the Amended Credit Agreement.
As of March 31, 1996, the interest rate applicable to outstanding borrowings
under the Amended Credit Agreement was 6.83%.
Prepayments of outstanding indebtedness under the Notes and the Amended
Credit Agreement may be required in certain circumstances, including the sale
by Holding, VKAC or any of its subsidiaries of certain assets, and
certain change of control-related events.
During 1996, VKAC Distributors, VKAC's broker-dealer subsidiary, incurred
certain additional short-term bank loans from The Bank of New York, to fund
the purchase of securities related to the UIT business for VKAC Distributors'
inventories. The $47.7 million outstanding at March 31, 1996 is payable on
demand and bears interest at approximately 1/2% over the federal funds rate.
This loan is secured by VKAC Distributors' trading inventory.
[PAGE 13]
The Amended Credit Agreement and the indenture governing the Notes (The
"Indenture") contain various events of default, including in the case of the
Amended Credit Agreement certain change of control-related events. The
Amended Credit Agreement and the Indenture also contain various affirmative
and negative covenants, including restriction on the ability of the Company to
incur indebtedness, incur liens and other encumbrances, pay dividends or make
other restricted payments, become liable on guarantees and other contingent
obligations, enter into agreements with respect to mergers or consolidations,
sell or transfer assets, make investments or capital expenditures, make
acquisitions, make loans and advances, enter into transactions with
affiliates, create subsidiaries or engage in new types of business, and a
negative pledge with respect to unencumbered assets. With respect to the
Indenture, in the event of a "Change of Control" (as defined in the
Indenture), holders of the Notes can require the Company to repurchase their
Notes at 101% of the outstanding principal amount.
In addition, the Amended Credit Agreement contains covenants requiring the
maintenance of certain financial ratios (including a minimum interest coverage
ratio and a maximum debt to earnings ratio) and net asset value levels, as
well as a limitation on capital expenditures. The financial covenant and
other restrictions set forth in the Amended Credit Agreement and the Indenture
governing the Notes were satisfied during the year ended December 31, 1995 and
quarter ended March 31, 1996.
The Company believes that cash generated from operations and borrowing
resources will be adequate to permit the Company to meet both its debt service
requirements and working capital needs, including the funding of anticipated
levels of future commissions in connection with sales of shares of Closed End
Funds, Mutual Funds and UITs. The Company also anticipates that the letters
of credit and trading inventory financing facilities provided to the Company
by The Bank of New York in connection with the Company's sponsorship of new
UITs and the overnight financing of the Company's trading inventory,
respectively, will remain available. However, no assurance can be given as to
such adequacy of funds or continued availability of such facilities.
Holding is a holding company formed for the purpose of effecting the VKM
Acquisition and has no substantial independent operations. VKAC is a services
company which primarily provides administrative services to its operating
subsidiaries and virtually all of its revenues are derived from such operating
subsidiaries. Payment by VKAC of interest and principal due on the Notes or
under the Amended Credit Agreement, and payment of Holding's obligations under
its guarantees of VKAC's obligations, are dependent upon cash payments from
their subsidiaries. This cash flow is effected through the payment of
dividends and intercompany service charges, as required by the Amended Credit
Agreement.
The Company received approximately $7.8 million in cash from the sale of
Advantage Capital in January 1996, resulting in a pretax gain of $3.4
million.
In March 1996, certain members of senior management entered into letter
agreements with the Company pursuant to which they will each receive a payment
in the event they remain employed by the Company for two years following a
"change in control" of the Company (as defined therein) or, if their
employment earlier terminates after such a change of control, under certain
limited circumstances. The aggregate amount of such payments which may be
made pursuant to such letter agreements would be approximately $7.8 million.
The Company is currently working with Goldman, Sachs & Co. and
Merrill Lynch & Co. with respect to competitive strategies and the future
structure of the Company. Among the strategies under discussion are an
acquisition of or joint venture with other companies in the financial
services industry and a possible private sale of the Company. Separately,
Holding's major stockholders are exploring the possibility of a sale of
a portion of their Holding common stock through a public offering. It is
currently comtemplated that MCM would be distributed to stockholders
of Holding in connection with certain of the strategies being considered.
At this time, no decision with respect to any alternative strategies has
been made.
[PAGE 14]
Part II: OTHER INFORMATION
Item 1: Legal Proceedings. Not applicable.
Item 2: Changes in Securities. Not applicable.
Item 3: Defaults Upon Senior Securities. Not applicable.
Item 4: Submission of Matters to a Vote of Securities Holders. Not
applicable.
Item 5: Other Information. Not applicable.
Item 6: Exhibits and Reports on Form 8-K.
(a) Exhibits. The exhibits required by Item 601 of Regulation S-K and
filed herewith are listed in the Exhibit Index which follows the
signature page and immediately precedes the exhibits filed.
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Registrant during the first quarter ended March 31, 1996
[PAGE 15]
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VK/AC HOLDING, INC.
Date: May 14, 1996 /s/ WILLIAM R. RYBAK
William R. Rybak
Executive Vice President and
Chief Financial Officer
(principal financial officer and
duly authorized officer of
Registrant)
[PAGE 16]
VK/AC HOLDING, INC.
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description
1 None
2 Stock Purchase Agreement between VK/AC Holding, Inc., as Seller, and
SunAmerica Inc., as Buyer, dated as of December 21, 1995.
(incorporated by reference to Exhibit 2.6 to VK/AC Holding, Inc.'s
Form 10-K for the fiscal year ended December 31, 1995, Commission
File No. 33-56334).
3.1 Restated Certificate of Incorporation of CDV Holding, Inc.
(incorporated herein by reference to Exhibit 3.1 to the
Registration Statement on Form S-1 of CDV Acquisition Corporation
and CDV Holding, Inc., Registration No. 33-55676).
3.2 Bylaws of VK/AC Holding, Inc., as amended. (incorporated by reference
to Exhibit 3.2 to VK/AC Holding, Inc.'s Quarterly Report on Form
10-Q for the first quarter ended March 31, 1995, Commission File
No. 33-56334).
3.3 Certificate of Amendment, dated as of December 20, 1994, of The Van
Kampen Merritt Companies, Inc. (incorporated by reference to
Exhibit 3.1 of VK/AC Holding, Inc.'s Report on Form 8-K dated
December 20, 1994, filed with the Commission on January 4, 1995,
Commission File No. 33-56334).
3.4 Certificate of Amendment, dated as of January 19, 1995, of Van
Kampen/American Capital, Inc. (incorporated by reference to Exhibit
3.4 to VK/AC Holding, Inc.'s Form 10-K for the fiscal year ended
December 31, 1994, Commission File No. 33-56334).
3.5 Third Restated Certificate of Incorporation of VKM Holding, Inc.
(incorporated by reference to Exhibit 3.2 of VK/AC Holding, Inc.'s
Report on Form 8-K dated December 20, 1994, filed with the
Commission on January 4, 1995, Commission File No. 33-56334).
4.1 Third Waiver, dated as of March 14, 1996, to the Amended and Restated
Credit Agreement, dated as of December 20, 1995, among Van Kampen
American Capital, Inc., VK/AC Holding, Inc., as guarantor, the
banks named therein, Chemical Bank as Administrative Agent,
Collateral Agent and Issuing Bank and Chemical Bank and The Chase
Manhattan Bank, N.A. as Managing Agents. +
[PAGE 17]
4.2 Deferred Stock Agreement between VK/AC Holding, Inc. and Stephen L.
Boyd, dated December 29, 1995 (including a schedule of additional
Deferred Stock Agreements). (incorporated by reference to Exhibit
4.49 to VK/AC Holding, Inc.'s Form 10-K for the fiscal year ended
December 31, 1995, Commission File No. 33-56334).
4.3 Management Stock Option Agreement between VK/AC Holding, Inc. and
Stephen L. Boyd, dated December 29, 1995 (including a schedule of
additional Management Stock Option Agreements). (incorporated by
reference to Exhibit 4.50 to VK/AC Holding, Inc.'s Form 10-K for
the fiscal year ended December 31, 1995, Commission File No.
33-56334).
4.4 Acknowledgement, Waiver and Agreement between VK/AC Holding, Inc. and
Stephen L. Boyd, dated December 29, 1995 (including a schedule of
additional Acknowledgement, Waiver and Agreements). (incorporated
by reference to Exhibit 4.51 to VK/AC Holding, Inc.'s Form 10-K for
the fiscal year ended December 31, 1995, Commission File No.
33-56334).
4.5 Management Stock Option Agreement between VK/AC Holding, Inc. and
Patrick Zacchea, dated March 4, 1996. (incorporated by reference to
Exhibit 4.52 to VK/AC Holding, Inc.'s Form 10-K for the fiscal year
ended December 31, 1995, Commission File No. 33-56334).
10.1 Retention Letter Agreement between VK/AC Holding, Inc., Van Kampen
American Capital, Inc. and Don G. Powell, dated March 6, 1996.
(including a schedule of additional Retention Letter Agreements).
(incorporated by reference to Exhibit 10.39 to VK/AC Holding,
Inc.'s Form 10-K for the fiscal year ended December 31, 1995,
Commission File No. 33-56334).
10.2 Retention Letter Agreement between VK/AC Holding, Inc., Van Kampen
American Capital, Inc. and Douglas B. Gehrman, dated March 6, 1996.
(incorporated by reference to Exhibit 10.40 to VK/AC Holding,
Inc.'s Form 10-K for the fiscal year ended December 31, 1995,
Commission File No. 33-56334).
11 Statement re computation of per share earnings. +
27 Financial Data Schedule +
+ Filed herewith
[PAGE 18]