[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 June 30, 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)
(630) 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 June 30, 1996 there were 2,317,474 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.
VK/AC Holding, Inc.
Form 10-Q
For The Quarter Ended June 30, 1996
Index
Page
Part I: Financial Information.......................................... 2
Item 1: Financial Statements
Consolidated Balance Sheets at June 30, 1996 (unaudited)
and December 31, 1995...................................... 2
Consolidated Statements of Income (unaudited) for the
Three Months Ended June 30, 1996 and 1995 and for
the Six Months Ended June 30, 1996 and 1995................ 3
Consolidated Statements of Cash Flows (unaudited) for the
Six Months Ended June 30, 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..................................... 8
Part II: Other Information.............................................15
Signatures ...........................................................16
Exhibits ...........................................................17
VK/AC HOLDING, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In 000's except for par value and shares)
6/30/96 12/31/95
----------- -----------
Assets (Unaudited)
- ------
Cash and Cash Equivalents $ 1,183 $ 1,585
Cash Equivalents Segregated Under Regulation or Collateral Agreement 10,000 10,000
Short-Term Investments - Mutual Funds, at market 44,391 40,544
Receivables 52,969 41,696
Trading Inventory, at market 75,285 71,875
Furniture, Equipment, and Leasehold Improvements, net 22,452 22,312
Deferred Company Funded Distribution Costs, net 288,038 259,822
Deferred Financing Costs, net 12,006 13,012
Excess of Cost over Fair Value of Net Assets Acquired, net 518,210 526,917
Net Assets of Discontinued Operations 26,433 25,760
Other Assets 7,571 8,583
----------- -----------
Total Assets $ 1,058,538 $ 1,022,106
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities
- -----------
Bank Loans $ 329,100 $ 331,100
Senior Secured Notes 150,000 150,000
Accounts Payable and Accrued Expenses 57,271 76,988
Payable to Affiliates, net 4,880 2,828
Payable to Trustee 11,551 5,587
Deferred Compensation 24,507 21,957
Deferred Income Taxes 74,088 55,617
----------- -----------
Total Liabilities 651,397 644,077
----------- -----------
Redeemable Common Stock
- -----------------------
At redemption value of $295 per share at June 30, 1996 and $200 per share
at December 31, 1995; 156,210 shares outstanding at June 30, 1996;
155,673 shares outstanding at December 31, 1995 46,082 31,135
----------- -----------
Stockholders' Equity
- --------------------
Junior Non-Cumulative Participating Preferred Stock, $200 par value,
32,500 shares authorized; 32,500 shares issued and outstanding
at June 30, 1996 and December 31, 1995 6,500 6,500
Class A Common Stock, $.01 par value; 3,250,000 shares authorized,
2,163,255 nonredeemable shares issued, 2,161,264 nonredeemable
shares outstanding at June 30, 1996; 2,163,792 nonredeemable shares
issued, 2,161,264 nonredeemable shares outstanding at 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 June 30, 1996
and December 31, 1995 1 1
Additional Paid-In Capital 299,185 299,292
Retained Earnings 55,749 41,584
----------- -----------
361,457 347,399
Less Treasury Stock, Class A Common Stock, at cost; 1,991 shares at
June 30, 1996; 2,528 shares at December 31, 1995 (398) (505)
----------- -----------
Total Stockholders' Equity 361,059 346,894
----------- -----------
Total Liabilities & Stockholders' Equity $ 1,058,538 $ 1,022,106
=========== ===========
See accompanying notes to consolidated financial statements.
VK/AC HOLDING, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(In 000's except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
----------------------- -----------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Revenues
- --------
Investment Advisory Fees $ 73,756 $ 61,169 $ 145,266 $ 118,380
Distribution of Investment Products 8,318 7,862 15,111 15,060
Fiduciary Fees 2,251 2,116 4,574 4,131
Other Revenue 1,772 2,483 3,377 4,084
----------- ----------- ----------- -----------
Total Revenues 86,097 73,630 168,328 141,655
----------- ----------- ----------- -----------
Expenses
- --------
Compensation and Benefits 24,901 23,797 48,753 45,321
Amortization of Deferred Company Funded
Distribution Costs 15,618 12,223 30,243 23,921
Occupancy 8,136 7,543 16,787 14,435
Marketing and Promotion 8,812 6,742 16,404 14,480
Other Expenses 7,491 8,982 14,116 15,518
Reimbursements (14,223) (11,968) (28,097) (23,472)
Interest and Acquisition Expenses:
Amortization of Excess of Cost over Fair
Value of Net Assets Acquired 4,278 4,499 8,558 9,016
Interest Expense 8,521 11,038 17,426 21,993
Amortization of Deferred Financing Costs 503 503 1,006 1,006
----------- ----------- ----------- -----------
Total Expenses 64,037 63,359 125,196 122,218
----------- ----------- ----------- -----------
Income From Continuing Operations Before Taxes 22,060 10,271 43,132 19,437
Income Tax Provision 8,994 4,000 17,596 7,635
----------- ----------- ----------- -----------
Income From Continuing Operations 13,066 6,271 25,536 11,802
Discontinued Operations:
Income From Discontinued Operations, net of tax 828 311 1,482 648
Gain on Disposal of Discontinued Operations,
net of tax of $1,387 -- -- 2,035 --
----------- ----------- ----------- -----------
Net Income $ 13,894 $ 6,582 $ 29,053 $ 12,450
=========== =========== =========== ===========
Earnings per share:
Primary:
Net Income (Loss) From Continuing
Operations Available to Common
Shareholders $ (0.70)$ 2.48 $ 4.08 $ 4.01
Income From Discontinued Operations 0.32 0.12 0.57 0.26
Gain on Disposal of Discontinued
Operations -- -- 0.77 --
----------- ----------- ----------- -----------
Net Income (Loss) Available to Common
Shareholders $ (0.38)$ 2.60 $ 5.42 $ 4.27
=========== =========== =========== ===========
Assuming Full Dilution:
Net Income (Loss) From Continuing
Operations Available to Common
Shareholders $ (0.69) 2.48 4.02 4.01
Income From Discontinued Operations 0.31 0.12 0.56 0.26
Gain on Disposal of Discontinued
Operations -- -- 0.77 --
----------- ----------- ----------- -----------
Net Income (Loss) Available to Common
Shareholders $ (0.38)$ 2.60 $ 5.35 $ 4.27
=========== =========== =========== ===========
Weighted Average Common Shares and
Common Share Equivalents: (In 000's)
Primary 2,612 2,536 2,612 2,537
Assuming Full Dilution 2,647 2,536 2,648 2,537
See accompanying notes to consolidated financial statements.
VK/AC HOLDING, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(In 000's)
Six Months
Ended June 30,
---------------------------
1996 1995
----------- -----------
Cash Flows from Operating Activities:
Net Income $ 29,053 $ 12,450
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation 3,045 2,909
Amortization:
Deferred Company Funded Distribution Costs 30,243 23,921
Excess of Cost over Fair Value of Net
Assets Acquired 8,558 9,016
Deferred Financing Costs 1,006 1,006
Gain on Sale of Subsidiary (3,422) --
Net Change in:
Short-Term Investments - Mutual Funds (3,847) (7,431)
Receivables (11,273) (3,098)
Trading Inventory (3,410) 18,366
Net Assets of Discontinued Operations (673) (397)
Other Assets (1,994) (4,330)
Accounts Payable and Accrued Expenses (20,717) (6,965)
Payable to Affiliates, net 2,052 (1,129)
Payable to Trustee 5,964 13,412
Deferred Compensation 2,550 3,512
Deferred Income Taxes 18,471 129
----------- -----------
Total Adjustments 26,553 48,921
----------- -----------
Net Cash Provided by Operating Activities 55,606 61,371
----------- -----------
Cash Flows from Investing Activities:
Proceeds from Sale of Subsidiary 7,577 --
Deferred Company Funded Distribution Costs (58,459) (28,655)
Net Additions of Fixed Assets (3,185) (2,966)
----------- -----------
Net Cash Used by Investing Activities (54,067) (31,621)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from Borrowings, net 13,000 --
Loan Principal Payments (15,000) (48,100)
Stock Issuance -- 9,036
Reissuance of Treasury Stock 59 430
----------- -----------
Net Cash Used by Financing Activities (1,941) (38,634)
----------- -----------
Net Decrease in Cash and Cash Equivalents (402) (8,884)
Cash and Cash Equivalents:
Beginning of Period 1,585 21,328
----------- -----------
End of Period $ 1,183 $ 12,444
=========== ===========
Supplementary Disclosure of Cash Flow Information:
Cash paid for: Income Taxes $ 642 $ 2,151
Interest 18,053 22,440
See accompanying notes to consolidated financial statements.
VK/AC Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 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"). 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 June 30, 1996 and December 31,
1995, its consolidated results of operations for the three months ended June
30, 1996 and 1995, and the six months ended June 30, 1996 and 1995, and its
consolidated cash flows for the six months ended June 30, 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, at June 30, 1996, is based upon the estimated per
share merger consideration to be paid in connection with the Acquisition
as more fully desribed in Note 3. The accretion to redemption value of
$14,887,950 for the six months ended June 30, 1996 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 such options will vest over a period of time up to
five years.
VK/AC Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1996
Stock options transactions consisted of the following:
Number of
Options
---------------
Balance, December 31, 1995 365,832
Granted; exercise price $200 1,912
Exercised (537)
Cancelled (8,906)
---------------
Balance, June 30, 1996 358,301
===============
<FN>
<F1>As of June 30, 1996, 121,652 options had vested and the Company granted an
aggregate of 3,350 deferred stock units to certain employees.
Note 3 - Agreement and Plan of Merger
On June 24, 1996, VK/AC Holding announced it had entered into an Agreement and
Plan of Merger (the "Merger Agreement") with Morgan Stanley Group Inc.
("Morgan Stanley"), MSAM Holdings II, Inc. and MSAM Acquisition Inc., pursuant
to which MSAM Acquisition Inc. will be merged with and into VK/AC Holding and
VK/AC Holding will be the surviving corporation. Following the merger, VK/AC
Holding will be a wholly owned subsidiary of Morgan Stanley.
Subject to a number of conditions being met, it is currently anticipated that
the consummation of the transactions contemplated by the Merger Agreement (the
"Acquisition") will occur by the end of November, 1996. At the closing, MSAM
Acquisition Inc. will pay approximately $740 million (based on VKAC's
long-term debt outstanding as of July 31, 1996) in cash to the stockholders
of VK/AC Holding (excluding certain management stockholders), and to persons
owning options to purchase stock of VK/AC Holding, subject to certain purchase
price adjustments set forth in the Merger Agreement. To the extent that
pre-tax income prior to the closing of the Acquisition permits the repayment
of VKAC's long-term debt, the purchase price for the equity interests in VK/AC
Holding will be increased by the amount of debt repaid. The purchase price
also is subject to certain adjustments based, among other things, on assets
under management of the Company at the time of closing. It is contemplated
that as part of the Acquisition certain officers and directors of the Company
will contribute to MSAM Holdings II, Inc. their existing shares of common
stock of VK/AC Holding in exchange for approximately $25 million of shares
of preferred stock of MSAM Holdings II, Inc. which, in turn, will be
exchangeable into common stock, par value $1.00 per share, of Morgan Stanley
at specified times over a four year period. Such shares of preferred stock
will represent, in the aggregate, 5% of the combined voting power in MSAM
Holdings II, Inc., the remainder of which will be indirectly owned by Morgan
Stanley and its affiliates.
VK/AC Holding, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
June 30, 1996
Note 4 - Discontinued Operations
On January 2, 1996, Advantage Capital, a retail broker-dealer, was sold to
SunAmerica, Inc. The Company currently has no intention of re-entering the
retail broker-dealer business. By agreement with SunAmerica, Inc., the
Federal and state income tax assets and liabilities of Advantage Capital
relating to periods prior to its sale were assumed by VKAC.
On June 4, 1996, by resolution of the Board of Directors, the Company
formalized its intent to dispose of MCM, a registered investment advisor
under the Investment Advisers Act of 1940, through such distribution to
stockholders. Accordingly, the consolidated financial statements of the
Company have been reclassified to report separately the net assets and
operating results of the discontinued operations.
The results of operations for Advantage Capital and MCM for the three months
ended June 30, 1996 and 1995 and the six months ended June 30, 1996 and 1995,
which are classified separately as discontinued operations in the accompanying
consolidated statements of income, are summarized as follows:
Three Months Six Months
Ended June 30 Ended June 30
1996 1995 1996 1995
------------ ------------- ------------ -------------
Revenues $ 9,058 $ 9,946 $ 17,821 $ 19,129
============ ============== ============= ===============
Income Before Income Taxes $ 1,593 $ 511 $ 2,812 $ 1,041
Income Taxes $ 765 $ 200 $ 1,330 $ 393
------------ ------------- ------------ -------------
Net Income $ 828 $ 311 $ 1,482 $ 648
============ ============== ============= ===============
Net assets of discontinued operations consist principally of accounts
receivable and excess of cost over fair value of net assets acquired.
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.
The Company sold Advantage Capital Corporation ("ACC"), its retail
broker-dealer subsidiary, acquired as a result of the AC Acquisition, for $7.6
million in January 1996.
On June 24, 1996, Holding announced it had entered into an Agreement and Plan
of Merger (the "Merger Agreement") with Morgan Stanley Group Inc. ("Morgan
Stanley"), MSAM Holdings II, Inc. and MSAM Acquisition Inc., pursuant to which
MSAM Acquisition Inc. will be merged with and into Holding and Holding will be
the surviving corporation. Following the merger, Holding will be a wholly
owned subsidiary of Morgan Stanley. Subject to a number of conditions being
met, it is currently anticipated that the consummation of the transactions
contemplated by the Merger Agreement (the "Acquisition") will occur by the end
of November 1996. At the closing, MSAM Acquisition Inc. will pay
approximately $740 million (based on VKAC's long-term debt outstanding as of
July 31, 1996) in cash to the stockholders of Holding (excluding certain
management stockholders), and to persons owning options to purchase stock of
Holding, subject to certain purchase price adjustments set forth in the Merger
Agreement. To the extent that pre-tax income prior to the closing of the
Acquisition permits the repayment of VKAC's long term debt, the purchase price
for the equity interests in Holding will be increased by the amount of debt
repaid. The purchase price also is subject to certain adjustments based,
among other things, on assets under management of the Company at the time of
closing. It is contemplated that as part of the Acquisition certain officers
and directors of the Company will contribute to MSAM Holdings II, Inc., their
existing shares of common stock of Holding in exchange for approximately $25
million of shares of preferred stock of MSAM Holdings II, Inc., which, in
turn, will be exchangeable into common stock, par value $1.00 per share, of
Morgan Stanley at specified times over a four year period. Such shares of
preferred stock will represent, in the aggregate, 5% of the combined voting
power in MSAM Holdings II, Inc., the remainder of which will be indirectly
owned by Morgan Stanley and its affiliates.
Holding will engage in certain preparatory transactions prior to the
Acquisition, including the distribution to current stockholders of Holding of
(i) all of Holding's investment in McCarthy, Crisanti & Maffei, Inc. ("MCM"),
a wholly owned subsidiary engaged in the business of distributing research and
financial information, (ii) all of Holding's investment in Hansberger Global
Investors, Inc., a company in which VK/AC Holding made a minority investment
in May 1996, and (iii) certain related cash amounts.
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. MCM's and ACC's financial condition and
results of operations are shown as discontinued operations in the Financial
Information.
Overview
The Company markets and provides investment advisory and administrative
services to open end and closed end funds ("Funds"), unit investment trusts
("UITs") and institutional clients ("Institutional Accounts") which consist of
insurance companies, pension funds, municipalities, high net worth individuals
and mutual funds sponsored by third parties. As of June 30, 1996, the Company
had more than $57 billion of assets under management and/or supervision,
including $35.5 billion in over 100 open end and closed end Funds, $4.9
billion in the Van Kampen American Capital Prime Rate Income Trust ("Prime
Rate Trust"), $5.6 billion in assets managed on behalf of Institutional
Accounts and $11.6 billion in UITs. The Company's total assets under
management rose from $41 billion at June 30, 1995 to $46 billion at June 30,
1996 as a result of increased market values of equity and fixed income
securities during this period and increased sales of Fund shares, particularly
Class B shares of certain open end Funds and the Prime Rate
Trust.
The Company also has transfer agency and trust company capabilities through
ACCESS Investor Services, Inc. ("ACCESS") and through Van Kampen American
Capital Trust Company.
The investment management industry has exhibited rapid growth in recent years,
driven by a combination of favorable stock and bond market performance and
demographic trends. Industry sales of equity funds are affected by stock
market performance and, to a lesser extent, interest rates. A strong stock
market stimulates investment in equity funds; low interest rates also favor
equity investments because of the diminished attractiveness of fixed income
investment alternatives. Industry sales of bond funds, particularly those
that invest in long-term fixed income tax-exempt municipal securities, are
affected 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 attributes this decline primarily to the combination
of certain proposed changes in federal income tax regulations 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 through the AC Acquisition (more than one-third of the
Company's Fund assets under management as of June 30, 1996 were in equity
Funds), it has helped to offset the potential negative impact of declining
interest in its fixed income Funds.
The Company's investment advisory fee revenues, which accounted for 84% of the
Company's total revenues in 1995 and 86% of its total revenues for the quarter
ended June 30, 1996, consist primarily of (i) fees for managing the assets of
the Funds (including ten open end Funds distributed by PFS Investments, Inc.
and advised by the Company (the "Common Sense Funds")), and the Institutional
Accounts, (ii) "12b-1 fees" which arise from the reimbursement of certain
distribution expenses, including reimbursement of commissions paid to
unaffiliated retail distribution firms for selling Class B and Class C shares
of open end Funds and (iii) administrative fees paid by the closed end Funds
and the Prime Rate Trust. The Company's investment advisory fees fluctuate
due to changes in the total value of the assets under management and are
calculated based on daily, weekly or quarterly average balances, depending on
the Fund or Institutional Account. Variations in the level of the assets
under management are due to both net sales (gross sales less redemptions of
Fund shares) and market value changes. Consequently, significant fluctuations
in the prices of securities (e.g., as the result of substantial changes in the
equity and fixed income markets resulting from changes in interest rates,
inflation rates or other economic factors) or the level of redemptions of open
end Funds may affect materially the amount of assets under management and thus
the Company's revenue and profitability.
Revenues from the distribution of the Company's investment products are
primarily derived from (i) the sales charge, less an applicable concession to
dealers, for the sale of UIT units, which is the largest contributor to
distribution revenues, (ii) the net profit realized or net loss incurred to
the extent that the market price of securities deposited by the Company in a
UIT exceeds or is less than the original cost of the securities to the
Company, (iii) the net profit realized or net loss incurred to the extent that
the public offering price of UIT units increases or decreases before the UIT
units are sold, (iv) a portion of the sales charge paid by investors who buy
open end Fund Class A shares and (v) certain concessions and fees that the
Company receives as U.S. distributor for the Govett Family of Funds.
A significant portion of the Company's operating expenses is attributable to
amortization of deferred Company funded distribution costs, which originates
primarily from the commissions and sales expense paid by the Company to
unaffiliated retail distribution firms for selling Class B and Class C shares
of open end Funds, the Prime Rate Trust and most of the closed end Funds.
These up-front expenditures are capitalized and amortized to match, through
straight line amortization, future investment advisory fee revenues derived
from management advisory contracts for these Funds. The amortization periods
for these costs vary from four to ten years, depending upon the Fund type.
Because amounts capitalized in prior years have not been fully amortized, this
expense tends to grow each year as amortization of current year additions to
this expense item is added to that of prior years.
The Company provides daily pricing and ongoing credit surveillance services
for its UITs and certain of the Funds. The Company also furnishes accounting,
legal, pricing, transfer agency and shareholder services to certain of the
Funds and UITs. The Company receives payments from such Funds and UITs equal
to the cost of providing these services, which payments are reflected as
"reimbursements." In July 1995, ACCESS, which had been the transfer agent
for only some of the open end Funds, was appointed the transfer agent for all
of the open end Funds, which resulted in the addition of personnel and the
incurrence of other costs which are reimbursable by the open end
Funds.
Results of Operations
The following tables list the investment advisory fees and assets under
management by source for the three month and six month periods ended June 30,
1996 and 1995:
Three Months 1996 Six Months 1996
Ended June 30 Compared Ended June 30 Compared
Investment Advisory Fees (in millions) 1996 1995 to 1995 1996 1995 to 1995
--------- --------- --------- --------- --------- ---------
Funds:
Open End:
Equity $22.1 $16.7 32% $ 42.9 $ 31.9 34%
Fixed Income 21.9 21.5 2 44.0 42.3 4
Prime Rate Trust 12.7 5.7 123 23.6 10.3 129
Closed End:
Equity 0.1 0.1 -- 0.2 0.2 --
Fixed Income 14.6 14.7 (1) 29.7 29.1 2
Institutional Accounts 2.3 2.5 (8) 4.9 4.6 7
--------- --------- --------- ---------
Total $73.7 $61.2 20% $145.3 $118.4 23%
========= ========= ========= =========
1996
June 30 Compared
Assets Under Management (in billions) 1996 1995 to 1995
--------- --------- ---------
Funds:
Open End:
Equity $14.9 $11.4 31%
Fixed Income 13.2 13.8 (4)
Prime Rate Trust 4.9 2.4 104
Closed End:
Equity 0.1 0.1 --
Fixed Income 7.3 7.3 --
Institutional Accounts 5.6 6.0 (7)
--------- ---------
Total $46.0 $41.0 12%
========= =========
Fund assets under management increased by $5.4 billion or 15% from June 30,
1995 to June 30, 1996, primarily as a result of growth in equity open end Fund
assets and Prime Rate Trust assets. Equity open end Fund assets grew 31%
during the period due to $0.9 billion of net sales and market value
appreciation of $2.6 billion. The Prime Rate Trust accounted for sales of $2.6
billion during the period. Fixed income Fund assets decreased by $0.6 billion
or 4% from June 30, 1995 to June 30, 1996, as a result of net
redemptions.
Institutional Account assets under management decreased by approximately 7%
from June 30,1995 to June 30, 1996 as a result of a reduction in the level of
accounts managed for certain affiliates of Xerox Corporation, partially offset
by new accounts, additional sales to existing accounts and market value
increases.
Income from continuing operations before interest and acquisition expenses and
income taxes ("Operating Earnings") for the second quarter of 1996 was $35.4
million, an increase of $9.1 million or 34% over the corresponding period of
1995. For the six months ended June 30, 1996 Operating Earnings was $70.1
million, $18.7 million or 36% greater than the same period of 1995.
Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995
Revenues increased during the quarter ended June 30, 1996 by $12.5 million or
17% over the same period in 1995, primarily due to an increase in investment
advisory fees. Investment advisory fees increased during the second quarter of
1996 by $12.5 million or 20% over the same period in 1995, due primarily to
greater assets under management, significant growth in the Prime Rate Trust,
which has a higher investment advisory fee rate than the other Funds, and
increased sales of Class B shares of open end Funds, which generate 12b-1 fees
to compensate for Company funded distribution costs. Advisory fees earned for
managing the Common Sense Funds were $6.8 million for the three months ended
June 30, 1996, compared to $5.7 million for the three months ended June 30,
1995.
Total expenses excluding interest and acquisition expenses ("Operating
Expenses") increased during the second quarter of 1996 by $3.4 million to
$50.7 million or 7% over the corresponding period of 1995. Compensation and
benefits expense increased during the second quarter of 1996 by $1.1 million
or 5% over the same period in 1995. Growth in this expense resulted from
annual salary increases and the additional costs of ACCESS personnel to
service the additional open end Funds as discussed above. Amortization of
deferred Company funded distribution costs increased during the second quarter
of 1996 by $3.4 million or 28% over the same period in 1995, due principally
to increased sales of shares of the Prime Rate Trust, which resulted in
approximately $2.7 more in amortization expense for the quarter. Marketing and
promotion expense increased by $2.1 million or 31%, primarily as a result of
higher sales of Funds and UITs, which were $2.0 billion in the second quarter
of 1996 compared to $1.6 billion in the same period of 1995. Other expenses
decreased by $1.5 million or 17%, due to certain nonrecurring expenses in 1995
related to the combination of VKM and American Capital and certain of the
Funds. Reimbursements increased during the second quarter of 1996 by $2.3
million over the same period in 1995, primarily due to higher personnel and
occupancy costs incurred in 1996 as a result of ACCESS being named transfer
agent to all of the open end Funds beginning in July 1995.
Interest and acquisition expenses during the second quarter of 1996 decreased
by $2.7 million compared to the same period in 1995, due largely to a decrease
in interest expense of $2.5 million or 23%, resulting from lower bank
borrowings and lower interest rates. The Company's achievement of certain
financial ratios under its secured credit facility resulted in a reduction of
its effective interest rate beginning in the first quarter of 1996.
Income from continuing operations before taxes for the three months ended June
30, 1996 increased by $11.8 million over the corresponding period in 1995, due
to higher operating income and lower interest and acquisition expenses.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995
Revenues increased during the first six months of 1996 by $26.7 million or 19%
over the same period of 1995, primarily due to an increase in investment
advisory fees. Investment advisory fees increased during the first six months
of 1996 by $26.9 million or 23% over the same period of 1995, due primarily to
greater assets under management, significant growth in the Prime Rate Trust,
which has a higher investment advisory fee rate than the other Funds, and
increased sales of Class B shares of open end Funds, which generate 12b-1 fees
to compensate for Company funded distribution costs. Advisory fees earned for
managing the Common Sense Funds were $13.4 million for the six months ended
June 30, 1996 as compared to $11.0 million for the six months ended June 30,
1995.
Operating Expenses increased during the first six months of 1996 by $8.0
million to $98.2 million or 9% over the corresponding period in 1995.
Compensation and benefits expense increased to $48.8 million for the first six
months of 1996, an 8% increase over the prior year period. This was due
primarily to annual salary increases and the expansion of ACCESS as described
above. Amortization of deferred company funded distribution costs increased
during the first six months of 1996 by $6.3 million or 26% over the same
period of 1995, due principally to increased sales of the Prime Rate Trust,
which resulted in $5.2 million more in amortization expense for the first six
months of 1996. Occupancy expense increased during the first six months of
1996 by $2.4 million or 16% over the same period of 1995, due to increased
data processing costs related to ACCESS. Marketing and promotion expense
increased during the first six months of 1996 by $1.9 million or 13% over the
same period of 1995, related to increased sales of Funds and UITs in the first
six months of 1996 over those of the 1995 period. Other expenses decreased
during the first six months of 1996 by $1.4 million or 9% compared to the same
period of 1995, due to combination-related expenses incurred in 1995 as
discussed above. Reimbursements increased during the first six months of 1996
by $4.6 million or 20% over the same period of 1995, due primarily to
increases in compensation and benefits and occupancy expenses attributable to
ACCESS.
Interest and acquisition expenses decreased during the first six months of
1996 by $5.0 million compared to the same period of 1995, due largely to a
decrease in interest expense of $4.6 million or 21%, resulting from lower bank
borrowings and lower interest rates. The Company's achievement of certain
financial ratios under its secured credit facility resulted in a reduction of
its effective interest rate for the six months ended June 30, 1996.
Income from continuing operations before taxes for the six months ended June
30, 1996 increased by $23.7 million over the corresponding period of 1995, due
to higher operating income and lower interest and acquisition expenses.
Liquidity and Capital Resources
The Company's primary source of liquidity during the first six months of 1996
and 1995 was cash generated from operations, which totaled $76.1 million
(including $7.6 million in cash proceeds from the sale of ACC) and $49.3
million, respectively. Cash from operations permitted the Company to prepay
$70 million of long-term debt in 1995, fund the Company's working capital
needs and finance its capital expenditures, including the funding of deferred
Company funded distribution costs. The Company's cash flow from operations
during 1996 also funded the payment in the first quarter of 1996 of
approximately $20 million in annual employee bonuses earned and accrued during
1995, and the prepayment in the second quarter of 1996 of $15 million of
long-term debt.
The Company incurred substantial indebtedness in connection with the VKM
Acquisition and the AC Acquisition. As of June 30, 1996, the Company had
outstanding $425 million of indebtedness (excluding $54.1 million of
collateralized borrowings of Van Kampen American Capital Distributors, Inc.
("VKAC Distributors"), VKAC's broker-dealer subsidiary), consisting of $150
million in the form of the Company's 9.75% Senior Secured Notes due 2003 (the
"Notes") and $275 million in borrowings pursuant to the Company's secured
credit facility, $250 million of which was outstanding under a term loan
facility and $25 million of which was outstanding under a $100 million
revolving credit facility. The revolving credit facility is available to meet
the ongoing working capital and business needs of the Company.
In 1995, the Company prepaid $70 million under the term loan facility, and in
March 1996 it prepaid an additional $40 million under the term loan facility
with $40 million of borrowings under the revolving credit facility, of which
$10 million was repaid in May 1996 and $5 million was repaid in June 1996.
Pursuant to waiver agreements, the parties to the secured credit facility
agreed to waive the requirement that the above referenced 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 is
required to 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 prepayments.
Prepayments of outstanding indebtedness under the Notes and the secured credit
facility 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.
VKAC's obligations under the secured credit facility and the Notes are secured
by all of the issued and outstanding capital of its significant subsidiaries,
and certain cash and other collateral of VKAC, including certain stock of
certain future subsidiaries. VKAC's obligations under the secured credit
facility and the Notes are also guaranteed by the Company, which guarantees
are secured by a pledge of the Company of all of the outstanding stock of VKAC
and certain other collateral of the Company. The Company's secured credit
facility and the indenture governing the Notes (the "Indenture") contain
various events of default, various affirmative and negative covenants,
including restrictions 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, a negative pledge with
respect to unencumbered assets, and, in the case of the secured credit
facility, certain net worth, leverage and fixed charge coverage restrictions.
Except for the execution of the Merger Agreement, for which the Company has
notified the banks party to the secured credit facility, the financial
covenants and other restrictions set forth in the secured credit facility and
the Indenture governing the Notes were satisfied during the quarter and six
months ended June 30, 1996.
In connection with the consummation of the transactions contemplated by the
Merger Agreement, the Company will be required to repay its indebtedness under
the secured credit facility or obtain a waiver of certain provisions of such
credit facility. With respect to the Indenture, the consummation of the
transactions contemplated by the Merger Agreement will constitute a "Change of
Control" (as defined in the Indenture), which will entitle the holders of the
Notes to require the Company to repurchase their Notes at 101% of their
outstanding principal amount. At this time, the disposition of the Company's
outstanding indebtedness under the secured credit facility upon consummation
of the transactions contemplated by the Merger Agreement has not yet been
determined.
VKAC Distributors also incurs certain additional short-term bank loans to fund
the purchase of securities related to the UIT business for such subsidiary's
inventories. The $54.1 million outstanding at June 30, 1996 is payable on
demand and bears interest at approximately 1/2% over the federal funds rate.
This loan is secured by VKAC Distributors' UIT trading inventory.
The Company believes that cash generated from operations and borrowing
resources will be adequate to permit the Company to meet both its current debt
service requirements and working capital needs in the foreseeable future,
including the funding of anticipated levels of future commissions in
connection with sales of shares of closed end Funds, open end Funds and the
Prime Rate Trust. The Company also anticipates that the letters of credit and
trading inventory financing facilities provided to VKAC Distributors in
connection with its sponsorship of new UITs and the overnight financing of its
trading inventory, respectively, will remain available. However, no assurance
can be given as to the adequacy of such funds or continued availability of
such facilities.
The Company 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 Company's secured credit facility and payment of the Company'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
Company's secured credit facility.
Effect of Hedging Against Market Value Changes in UIT Inventories
The Company's broker-dealer subsidiary, VKAC Distributors, regularly purchases
and holds in inventory for its own account securities to be deposited into
UITs and holds for sale primary and secondary UIT units. These inventory
positions are regularly marked to market, resulting in profit or loss. The
market values of securities and UIT units fluctuate. In addition, in
connection with a primary UIT offering, if securities are sold or deposited
into UITs at a price below VKAC Distributors' cost, VKAC Distributors will
incur a loss with respect to such difference. The Company uses United States
Treasury and municipal bond index futures contracts, which are types of
derivative financial instruments, primarily to hedge against market value
changes in its UIT trading inventory. Although it is the Company's policy to
protect its inventory through hedging, it does not hedge the entire inventory,
nor does hedging provide total protection against market value loss. The
Company's hedging activities with respect to its UIT inventories during the
periods ended June 30, 1996 and 1995 have not had a material impact on the
Company's revenues.
Forward-Looking Statements
This section titled "Management's Discussion and Analysis of Financial
Condition and Results of Operations," contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended, including statements regarding, among other items, (i) cash flow
sufficient to fund the Company's debt service requirements and working capital
needs and (ii) anticipated trends in the Company's business and the investment
management industry. Forward-looking statements are typically identified by
the words "believe," "expect," "anticipate," "intend," "estimate," and similar
expressions. These forward-looking statements are based largely on the
Company's expectations and are subject to a number of risks and uncertainties,
certain of which are beyond the Company's control. Actual results could
differ materially from these forward-looking statements as a result of, among
other things, (i) changes in the investment management industry as a result of
economic or regulatory influences, (ii) changes in the competitive
marketplace, including new products and pricing changes by the Company's
competitors, and (iii) changes resulting from the consummation of the
transactions contemplated by the Merger Agreement. In light of these risks
and uncertainties, there can be no assurance that the forward-looking
information contained herein will in fact transpire. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of their dates. The Company undertakes no obligation to publicly
update or revise any forward-looking statements.
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. A
Written Consent of the majority stockholder of Holding was
executed on June 21, 1996, relating to approval of the sale
of Holding by way of a merger with and into MSAM Acquisition
Inc., an indirect wholly owned subsidiary of Morgan Stanley
Group Inc., on the terms and subject to the conditions set
forth in an Agreement and Plan of Merger, dated as of June
21, 1996, among Holding, Morgan Stanley Group Inc., MSAM
Holdings II, Inc. and MSAM Acquisition Inc.
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 second quarter ended June 30, 1996.
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: August 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)
VK/AC HOLDING, INC.
EXHIBIT INDEX
(Pursuant to Item 601 of Regulation S-K)
Exhibit
Number Description
1 None
2.1 Agreement and Plan of Merger, dated as of June 21, 1996,+
among VK/AC Holding, Inc., Morgan Stanley Group Inc.,
MSAM Holdings II, Inc. and MSAM Acquisition Inc.
2.2 Stock Purchase Agreement, dated as of May 13, 1996, +
between Hansberger Global Investors, Inc., as Seller, and
VK/AC Holding, Inc., as Buyer.
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).
10.1 Subordinated Credit Agreement, dated as of May 13, 1996,+
between Hansberger Global Investors, Inc. and VK/AC
Holding, Inc.
10.2 Shareholders' Agreement, dated as of May 13, 1996, +
between Hansberger Global Investors, Inc. and VK/AC
Holding, Inc.
11 Statement re computation of per share earnings. +
27 Financial Data Schedule +
- --------------------
+ Filed herewith