-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AmkqQNRv94XgkNP3NY5o3o9IotQHCTB7GBj/I/qa4fFpmyedFdcUZ02/S//ZR0wA Be+30kq9FaSROZ8P2UOgNA== 0000950123-99-010066.txt : 19991115 0000950123-99-010066.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950123-99-010066 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: YOUNG AMERICA CORP CENTRAL INDEX KEY: 0001058951 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SERVICES, NEC [8900] IRS NUMBER: 411892916 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-49749 FILM NUMBER: 99747129 BUSINESS ADDRESS: STREET 1: 717 FAXON ROAD CITY: YOUNG AMERICA STATE: MN ZIP: 55397 BUSINESS PHONE: 6124671100 MAIL ADDRESS: STREET 1: 717 FAXON ROAD CITY: YOUNG AMERICA STATE: MN ZIP: 55397 FILER: COMPANY DATA: COMPANY CONFORMED NAME: YOUNG AMERICA HOLDINGS INC CENTRAL INDEX KEY: 0001058952 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 410983697 STATE OF INCORPORATION: MN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-49749-01 FILM NUMBER: 99747130 BUSINESS ADDRESS: STREET 1: 717 FAXON ROAD CITY: YOUNG AMERICA STATE: MN ZIP: 55397 BUSINESS PHONE: 6124671100 MAIL ADDRESS: STREET 1: 717 FAXON ROAD CITY: YOUNG AMERICA STATE: MN ZIP: 55397 10-Q 1 YOUNG AMERICA CORPORATION/YOUNG AMERICA HOLDINGS 1 UNITED STATES 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 SEPTEMBER 30, 1999 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______TO_______ -------------------------------- Commission File Number 333-49749 YOUNG AMERICA CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 41-1892816 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 717 FAXON ROAD, YOUNG AMERICA, MINNESOTA 55397-9481 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (612) 467-1102 YOUNG AMERICA HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 41-0983697 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 717 FAXON ROAD, YOUNG AMERICA, MINNESOTA 55397-9481 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (612) 467-1102 Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XX No The number of shares outstanding of the registrant's common stock as of November 10, 1999, was 1,905,895. 2 YOUNG AMERICA HOLDINGS, INC. YOUNG AMERICA CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 1999 INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements a) Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 1999, and 1998 . . . . . 1 b) Consolidated Balance Sheets as of September 30, 1999, and December 31, 1998 . . . . . . . . . . . . . 2 c) Consolidated Statements of Cash Flow For the Nine Months Ended September 30, 1999, and 1998 . . . . . . . . . . 3 d) Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . 9 Item 3. Quantitative and Qualitative Disclosure About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 2. Changes in Securities & Use of Proceeds . . . . . . . . . . . . . . . . . 13 Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . 13 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . 13 Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 13 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements YOUNG AMERICA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, UNAUDITED)
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ---------------------- 1999 1998 1999 1998 --------- --------- ---------- --------- Revenues $ 64,300 $ 53,640 $ 242,774 $ 162,400 Cost of revenues: Rebates, postage and freight 46,368 38,142 180,422 115,603 Processing and servicing 12,548 12,559 41,881 35,941 --------- --------- ---------- ---------- Gross profit 5,384 2,939 20,471 10,856 Operating expenses: Selling 1,449 1,535 4,574 4,455 General and administrative 2,600 1,286 7,014 3,848 --------- --------- ---------- ---------- 4,049 2,821 11,588 8,303 --------- --------- ---------- ---------- Operating income 1,335 118 8,883 2,553 Other income (expense): Interest expense (2,338) (2,379) (7,014) (7,123) Interest income 184 103 505 517 Amortization of deferred financing costs (109) (99) (327) (3,523) Other - (2) 1 (204) --------- --------- ---------- ---------- (2,263) (2,377) (6,835) (10,333) --------- --------- ---------- ---------- Income (loss) before provision for income taxes (928) (2,259) 2,048 (7,780) Provision (Benefit) from income taxes (343) (836) 758 (2,869) --------- --------- ---------- ---------- Net income (loss) $ (585) $ (1,423) $ 1,290 $ (4,911) ========= ========= ========== ==========
1 4 YOUNG AMERICA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS ( IN THOUSANDS, EXCEPT FOR SHARE DATA, UNAUDITED)
September 30 December 31 1999 1998 ------------ ----------- ASSETS Current Assets: Cash and cash equivalents $ 11,907 $ 12,220 Trade receivables, net 14,081 16,184 Supplies inventory 766 759 Prepaid expenses 772 907 ------------ ----------- Total current assets 27,526 30,070 Property and Equipment, at cost: 20,498 19,643 Less accumulated depreciation (12,808) (11,391) ------------ ----------- 7,690 8,252 Deferred Financing Costs 2,780 3,108 Deferred Tax Assets 3,509 4,232 ------------ ----------- TOTAL ASSETS $ 41,505 $ 45,662 ============ =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Noncleared rebate items $ 10,814 $ 14,066 Accounts payable 2,445 1,732 Collections due to and advances from clients 3,774 6,131 Deferred income taxes 896 897 Accrued expenses Interest 1,188 3,514 Compensation 3,028 1,289 Other 2,905 2,481 ------------ ----------- Total current liabilities 25,050 30,110 Senior Subordinated Notes 80,000 80,000 Other Long-Term Liabilities 86 391 Commitments and Contingencies (Note 3) Redeemable Class A Common Stock, 36,759 and 40,894 shares issued and outstanding 800 890 Stockholders' Deficit Class A common stock, par value $1 per share; 3,000,000 shares authorized, 1,255,455 shares issued and outstanding 1,255 1,255 Class B common stock, par value $1 per share; 1,500,000 shares authorized, 442,884 shares issued and outstanding 443 443 Class C common stock, par value $1 per share; 1,500,000 shares authorized, 172,727 shares issued and outstanding 173 173 Additional paid-in capital 36,091 36,083 Retained deficit (102,393) (103,683) ------------ ----------- (64,431) (65,729) ------------ ----------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 41,505 $ 45,662 ============ ===========
2 5
YOUNG AMERICA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, UNAUDITED) Nine Months Ended September 30, ---------------------------------- 1999 1998 ------------ ------------- Operating Activities: Net (loss) income $ 1,290 $ (4,911) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 1,431 1,496 Amortization of deferred financing costs 328 3,523 Deferred income taxes 722 (2,878) Changes in operating assets and liabilities: Trade receivables 2,103 (4,214) Supplies inventory (7) (24) Prepaid expenses 135 (341) Non-cleared rebate items (3,252) 5,914 Accounts payable 713 (335) Collections due to and advances from clients (2,357) 2,377 Accrued expenses (163) (3,835) Other, Net (305) - ---------------- --------------- Net cash provided by operating activities 638 (3,228) ---------------- --------------- Investing Activities Purchases of property and equipment (869) (2,378) ---------------- --------------- Net cash used in investing activities (869) (2,378) ---------------- --------------- Financing Activities: Repayment of Bridge Facility - (80,000) Net Proceeds from senior subordinated debt - 76,539 Proceeds from stock subscriptions - 24 Redemption of common stock (82) (709) Distributions paid to stockholders - - ---------------- --------------- Net cash used in financing activities (82) (4,146) ---------------- --------------- Change in cash and cash equivalents (313) (9,752) Cash and Cash Equivalents: Beginning of period 12,220 17,940 ---------------- --------------- End of period $ 11,907 $ 8,188 ================ =============== Suplemental Disclosures of Cash Flow Information: Cash payment for interest $ 9,340 $ 4,484 ================ =============== Income Taxes Paid $ 35 $ 9 ================ ===============
3 6 YOUNG AMERICA HOLDINGS, INC. Notes to Consolidated Financial Statements (in thousands, except share data - unaudited) ================================================================================ 1. Basis of Presentation - Principles of Consolidation The accompanying consolidated financial statements have been prepared by the Company and include the accounts of Young America Holdings, Inc. ("Holdings"), and its wholly-owned subsidiaries, Young America Corporation ("YAC") and YAC.ECOM, Inc. ("YAC.ECOM") collectively, the "Company". All significant intercompany items have been eliminated. In the opinion of management, all adjustments (which include reclassifications and normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at September 30, 1999, and for all periods presented, have been made. Separate financial statements of YAC and YAC.ECOM have not been presented as management has determined that they would not be material to investors given that (i) they are wholly-owned subsidiaries of Holdings, (ii) YAC holds and represents substantially all of the assets, liabilities, and operations of the consolidated entity, and (iii) Holdings has provided a full and unconditional guarantee of the Notes (as defined below). On February 2, 1999, Holdings caused YAC.ECOM to be incorporated in the State of Minnesota and thereafter Holdings acquired all of the outstanding capital stock of YAC.ECOM. YAC.ECOM provides fulfillment services for consumer product companies through its clients' internet sites. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. It is suggested that the information included in this Form 10-Q be read in conjunction with Management's Discussion and Analysis and the financial statements and notes thereto included in the Young America Holdings, Inc., Annual Report on Form 10-K for the year ended December 31, 1998. 2. DEBT On February 23, 1998, YAC issued $80,000 principal amount of 11 5/8% Senior Subordinated Notes due 2006 (the "Notes"). Interest on the Notes is payable semiannually in arrears on February 15 and August 15 of each year, beginning August 15, 1998. The net proceeds of the offering of the Notes, along with $5,391 in cash, were used to repay, in full, amounts outstanding under a senior bridge credit facility (the "Bridge Facility"). In connection with the repayment of the Bridge Facility, the Company wrote off $3,292 of the deferred financing costs in February 1998. The Notes are unconditionally guaranteed, on an unsecured senior subordinated basis, by Holdings. The guarantee, which is full and unconditional and which is being provided on a joint and several basis with any future subsidiaries of YAC that become guarantors, is a general unsecured obligation of Holdings. YAC.ECOM is not a guarantor of the Notes. The Notes are not redeemable prior to February 15, 2002, except as provided below. On or after such date, the Notes are redeemable, in whole or in part, at the option of YAC at the following redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption set forth below: 2002 . . . . . . . . . . 105.813% 2003 . . . . . . . . . . 103.875 2004 . . . . . . . . . . 101.938 2005 and thereafter . . 100.000%
In addition, at any time on or prior to February 15, 2001, YAC, at its option, may redeem, with the net cash proceeds of one or more equity offerings, up to 35% of the aggregate principal amount of the Notes at a redemption price equal to 111.625% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption; provided that at least 65% of the aggregate principal amount of the Notes remains outstanding immediately following such redemption. Additionally, upon a Change of Control (as defined in the indenture under which the Notes were issued ("Indenture")), each holder of Notes will have the right to require YAC to repurchase such holder's Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date. 4 7 YOUNG AMERICA HOLDINGS, INC. Notes to Consolidated Financial Statements - (Continued) (in thousands, except share data - unaudited) ============================================================================ The Notes are not subject to sinking fund requirements. The Notes and the guarantees of the Notes by Holdings are general unsecured obligations of YAC and Holdings, respectively, and are subordinated in right of payment to all existing and future senior indebtedness of YAC and Holdings, respectively, including YAC's obligations under the Credit Facility referred to hereinafter. The Indenture contains certain covenants with respect to YAC, and any future subsidiaries YAC may form or acquire, that restrict, among other things, the incurrence of additional indebtedness, the payment of dividends and other restricted payments, the creation of certain liens, the use of proceeds from sales of assets and subsidiary stock, and transactions with affiliates. The Indenture also restricts the ability of Holdings and YAC to consolidate or merge with or into, or to transfer all or substantially all of their respective assets to, another entity. The Company has a revolving credit facility ("Credit Facility") with Norwest Bank Minnesota, N.A. ("Norwest"), which provides for borrowings of up to $10,000 based on a borrowing base formula equal to 85% of Eligible Receivables less Noncleared Rebate Items net of cash and cash equivalents (as defined in the Credit Facility), and has a final maturity date of March 31, 2001. The Credit Facility does not have any commitment reductions scheduled before maturity. Borrowings under the Credit Facility will accrue interest, at the option of the Company, at either Norwest's base rate or at an interest rate equal to the London interbank rate for Eurodollar deposits for one, two or three month interest periods plus 2.5%. A fee of .5% per annum is payable with respect to the unused Commitment Amount (as defined in the Credit Facility). The Credit Facility is secured by a first-priority interest in accounts receivable and related general intangibles of YAC. The Credit Facility was amended on November 16, 1998 and March 12, 1999 to revise certain restrictive covenants contained in the original agreement. The Credit Facility currently requires Young America to maintain (i) commencing with the quarter ending December 31, 1999 and for each quarter thereafter, a minimum Interest Coverage Ratio (as defined in the Credit Facility) for the preceding four quarters of 1.35; (ii) a minimum Current Ratio (as defined in the Credit Facility) of 1.10 for each quarter commencing with the quarter ended September 30, 1999; and (iii) for the nine months ended September 30, 1999, a minimum cumulative EBITDA of $9,500. Based on its current operating results and business plans, the Company believes that it will be able to satisfy these requirements. The Credit Facility restricts Young America's capital expenditures to $500 per quarter and cumulative annual capital expenditures to $2,000. In addition, the Credit Facility, contains other covenants that, among other things, restrict acquisitions, investments, dividends, liens and other indebtedness, management fees, disposition of assets, change of voting control and guarantees. 3. CONTINGENCIES Leases The Company has operating leases for warehouse space and equipment. The future minimum payments under these obligations are as follows:
Years ending December 31: 1999.......... $6,445 2000.......... 5,402 2001.......... 2,603 2002.......... 1,034 2003.......... 331
5 8 YOUNG AMERICA HOLDINGS, INC. Notes to Consolidated Financial Statements - (Continued) (in thousands, except share data - unaudited) ================================================================================ Guarantees Sweepstakes performance bonds are guaranteed for certain clients based on certain financial criteria. The Company had guaranteed approximately $34,779 and $9,978 in performance bonds for various clients, as of September 30, 1999, and December 31, 1998, respectively. The Company also obtains an indemnity agreement from these clients indemnifying the Company from obligations under the performance bonds. 4. RECAPITALIZATION Prior to November 25, 1997, all of the capital stock of Holdings (formerly known as Young America Corporation) was owned by Jay F. Ecklund, its then Chairman and Chief Executive Officer, and certain trusts for the benefit of members of his family (the "Selling Shareholders"). On that date, Holdings effected a recapitalization (the "Recapitalization"), pursuant to a recapitalization agreement (the "Recapitalization Agreement") under which substantially all of Holdings' assets and business were transferred to a newly formed subsidiary, Young America Corporation, and Holdings changed its name to Young America Holdings, Inc. The following table presents summarized Statement of Operations information for Holdings, YAC and YAC.ECOM for the three and nine months ended September 30,1999 and September 30, 1998; and summarized Balance Sheet information as of September 30, 1999, and December 31, 1998. The only substantial asset retained by Holdings in the Recapitalization was certain real property, which is leased to YAC, at cost, for use in its operations.
Three Months Ended Nine Months Ended September 30 September 30 1999 1998 1999 1998 ---------- ---------- ---------- ----------- Revenues: Holdings $ - $ - $ - $ - YAC 64,243 53,640 242,705 162,400 YAC.ECOM 57 - 69 ---------- ---------- ---------- ----------- Consolidated $ 64,300 $ 53,640 $ 242,774 $ 162,400 ========== ========== ========== =========== Gross Profit: Holdings $ - $ - $ - $ - YAC 5,393 2,939 20,480 10,856 YAC.ECOM (9) - (9) - ---------- ---------- ---------- ----------- Consolidated $ 5,384 $ 2,939 $ 20,471 $ 10,856 ========== ========== ========== =========== Net (loss) Income: Holdings $ 2 $ 4 $ 6 $ 12 YAC (578) (1,427) 1,293 (4,923) YAC.ECOM (9) - (9) - ---------- ---------- ---------- ----------- Consolidated $ (585) $ (1,423) $ 1,290 $ (4,911) ========== ========== ========== ===========
6 9 YOUNG AMERICA HOLDINGS, INC. Notes to Consolidated Financial Statements - (Continued) (in thousands, except share data - unaudited) ================================================================================
September 30 December 31 1999 1998 ------------ ----------- Current Assets: Holdings $ 383 $ 373 YAC 27,102 29,697 YAC.ECOM 41 - ---------- ----------- Consolidated $ 27,526 $ 30,070 ========== =========== Noncurrent Assets: Holdings $ 2,396 $ 2,512 YAC 11,583 13,080 YAC.ECOM - - ---------- ----------- Consolidated $ 13,979 $ 15,592 ========== =========== Current Liabilities: Holdings $ - $ - YAC 25,007 30,110 YAC.ECOM 43 ---------- ----------- Consolidated $ 25,050 $ 30,110 ========== =========== Noncurrent Liabilities: Holdings $ - $ - YAC 80,086 80,391 YAC.ECOM - - ---------- ----------- Consolidated $ 80,086 $ 80,391 ========== ===========
Pursuant to the terms of the Recapitalization Agreement, Holdings made an additional payment of approximately $692 to the Selling Shareholders and certain employees of the Company during the second quarter of 1998. Such payment was based upon the final determination of total stockholders' equity (as defined in the Recapitalization Agreement) of Holdings as of October 31, 1997, and Holdings profits or losses (as defined) for the period ended on the date of Recapitalization. Also, in connection with the Recapitalization, Holdings is obligated to make additional payments to the former majority shareholders, subject to Holdings achieving certain targets defined in the Recapitalization Agreement. To the extent cumulative excess free cash flow (as defined in the Recapitalization Agreement) of the Company for the four-year period ending December 31, 2001, exceeds $93,000, Holdings is required to make an additional purchase price payment equal to 20% of such excess, subject to a maximum amount payable of $15,000. Under separate agreements with certain employees of the Company and the former majority shareholders, a portion of this additional purchase price payment will be payable to such individuals. Any payments made to management will result in compensation charges in the period the amount becomes determinable. Redeemable Class A Common Stock Redeemable Class A Common Stock has been valued at the same per share price as the per share valuation at the date of the Recapitalization in November 1997. Pursuant to the terms of certain stock repurchase agreements executed by Holdings and its employee-stockholders, the Company exercised its rights to repurchase stock of former employees. In the first quarter of 1999, 4,136 shares of stock were redeemed for a total of $82. In the opinion of management, there has not been any increase in the per share valuation since such date. 7 10 YOUNG AMERICA HOLDINGS, INC. Notes to Consolidated Financial Statements - (Continued) (in thousands, except share data - unaudited) ============================================================================ 5. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for years beginning after June 15, 2000. SFAS No. 133 established accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No.133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allow a derivative's gains or losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company expects this statement to have no impact upon adoption. 6.Segment Reporting: In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company provides consumer interactive processing services for its customers and operates as a single reportable business segment. The Company internally evaluates its business principally by revenue category; however, because of the similar economic characteristics of the operations, including the nature of services and the customer base, those operations have been aggregated following the provisions of SFAS No. 131 for segment reporting purposes. The following is a summary of the composition of revenues by revenue category for the three and nine months ended September 30, 1999, and 1998:
Three Months Ended Nine Months Ended September 30, September 30, ---------------------------- -------------------------- 1999 1998 1999 1998 ---------- ---------- ----------- ----------- CIP services $ 14,983 $ 13,418 $ 53,823 $ 40,723 Rebate revenues 44,360 35,718 173,819 106,341 Postage and freight billings 4,957 4,504 15,132 15,336 ---------- ---------- ----------- ----------- $ 64,300 $ 53,640 $ 242,774 $ 162,400 ========== ========== =========== ===========
8 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues. Revenues were $64.3 million in the third quarter of 1999, an increase of 19.9% over the comparable quarter of 1998. On a year-to-date basis, revenues were $242.8 million, 49.5% greater than the same period of 1998. The increase in revenues in the third quarter was a result of an increase in rebate revenues of $8.6 million and an increase in servicing revenues of $1.6 million. The increase in revenues in the nine months ended September 30, 1999 was a result of (i) an increase in rebate revenues of $67.5 million and (ii) an increase in servicing revenue of $13.1 million. These increases were primarily driven by the increased volume from existing clients and the addition of new clients who conduct high-dollar value rebate programs and require integrated fulfillment and call center servicing. In addition, there was a slight increase in postage and freight revenues ("PFR") of $.5 million for the three month period ended September 30, 1999 compared to the same period in 1998. On a year to date basis PFR revenues were down $.2 million from the same period of 1998. Gross Profit. The Company's gross profit increased to $5.4 million or 8.4% of revenues for the third quarter of 1999 as compared to $2.9 million or 5.5% of revenues for the third quarter of 1998. Gross profits were $20.5 million or 8.4% of revenues in the nine months of 1999 as compared to $10.9 million or 6.7% of revenues for the same period in 1998. The increase in gross profit margin for both the three and nine month periods was primarily the result of the full year effect of the cost saving initiatives implemented in the second half of 1998. These included the consolidation of the Albert Lea, Minnesota and Belle Plaine, Minnesota facilities into the other existing facilities and the consolidation of the Young America, Minnesota call center into the Mankato, Minnesota and Oklahoma City, Oklahoma call centers. The Company has continued to implement additional cost-savings initiatives in 1999 including the consolidation of some inbound operations from the Mankato, Minnesota location into the Young America, Minnesota location, the development of an outsourcing relationship to process inbound mail sortation, and the consolidation of the Winthrop, Minnesota outbound facility into the existing Glencoe, Minnesota facility . Operating Income. Operating income for the third quarter of 1999 increased to $1.3 million from $.1 million for the corresponding period of 1998. As a percentage of revenues, operating income was 2.1% for the quarter ended September 30, 1999 compared with .2% for the corresponding period of 1998. Year to date operating income was $8.9 million or 3.7% of revenues as compared to $2.6 million or 1.6% of revenues for the first nine months of 1998. The increase in the quarter and year-to-date operating income was a result of the increase in gross profits partially offset by an increase in selling, general and administrative expenses. Selling, general and administrative expenses increased $1.2 million and $3.3 million in the three and nine month periods ended September 30, 1999, respectively, compared to the corresponding periods last year. The increases related primarily to i) a $.7 million increase in the reserve for bad debt associated with a potential client bankruptcy ii) expenses related to Year 2000 compliance, and iii) increases in bonus, profit sharing and commissions associated with higher sales and profitability. Interest Expense. For the three and nine month periods ending September 30, 1999, the $2.3 million of interest expense is principally accrued interest on the Company's Senior Subordinated Notes due 2006(the "Notes") with a small amount related to fees associated with non-usage of its bank credit facility. Amortization of deferred financing costs of $.3 million in the first nine months of 1999 decreased by $3.2 million from the same period in 1998. Amortization expenses in the first nine months of 1998 included $3.3 million of costs associated with obtaining a senior bridge credit facility (the "Bridge Facility"), which costs were fully amortized upon repayment of the Bridge Facility with the proceeds of the Notes. Income Taxes. The Company recorded an income tax benefit of $.3 million and an income tax provision of $.8 million for the three and nine months ended September 30, 1999, respectively, as compared to an income tax benefit of $.8 and $2.9 million, respectively, for the corresponding periods in 1998. These increases are a result of a change in profitability. 9 12 Net Income. As a result of the foregoing factors, the Company reported a net loss of $.6 million for the three month period ended September 30, 1999 and net income of $1.3 million for the nine month period ended September 30,1999, as compared to a net loss of $1.4 and $4.9 million, respectively, for the corresponding periods in 1998. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999 no amounts were outstanding under the Company's $10 million credit facility (the "Credit Facility") with Norwest Bank Minnesota, N.A. ("Norwest"), and the Company had a stockholders' deficit of $64.4 million, indebtedness of $80.0 million represented by the Notes and net working capital of $2.5 million. For additional information with respect to the Notes, see Note 2 of the Unaudited Consolidated Financial Statements. The Company has historically financed its operations and capital expenditures principally through the retention of cash flow from operations. The Company also maintains the Credit Facility, which is collateralized by accounts receivable and other assets as detailed below. In addition, the Company operates facilities and technology-related equipment under operating leases with third parties. See Note 3 of the Unaudited Consolidated Financial Statements for a summary of Company commitments under such operating lease agreements. For the nine-month period ended September 30, 1999, the Company's operations generated cash of $.6 million compared to cash utilization of $3.2 million for the same period in 1998. The change in operating cash flow is primarily related to the increased profitability in 1999. The Company's future cash flow from operations will continue to reflect (i) income taxes that the Company is required to pay and (ii) interest that will be incurred on outstanding indebtedness, including the Notes. Net cash used in investing activities for the nine month periods ended September 30, 1999 and 1998 were $.9 million and $2.4 million, respectively. These capital expenditures principally relate to purchases of leasehold improvements and warehousing and packaging equipment related to fulfillment services provided by the Company. The Company's capital expenditure budget for 1999 totals $1.1 million. This budget may be changed by the Company during 1999 based upon the Company's results of operations during the year. The Company anticipates that capital expenditures for 1999 will not exceed $1.5 million. Net cash used in financing activities for the nine months ended September 30, 1999 and 1998 were $.1 million and $4.1 million respectively. Cash used in the first nine months of 1998 reflects the payment of financing costs associated with the placement of the Notes. Pursuant to the terms of the Recapitalization, following December 31, 2001, the Company is obligated to make additional payments, not to exceed $15 million, to the Selling Stockholders and certain employees of the Company, subject to the Company achieving certain performance targets set forth in the agreements relating to the Recapitalization. See Note 4 of the Unaudited Consolidated Financial Statements. The Credit Facility, as amended, provides for borrowings of up to $10.0 million based on a borrowing base formula equal to 85% of Eligible Receivables less Noncleared Rebate Items net of cash and cash equivalents (as defined in the Credit Facility) and has a final maturity date of March 31, 2001. The Credit Facility does not have any commitment reductions scheduled before maturity. Borrowings under the Credit Facility accrue interest, at the option of the Company, at either Norwest's base rate or at an interest rate equal to the London interbank rate for Eurodollar deposits for one, two or three month interest periods plus 2.5%. A fee of .5% per annum is payable with respect to the unused Commitment Amount (as defined in the Credit Facility). The Credit Facility is secured by a first priority interest in accounts receivable and related general intangibles of YAC. The Credit Facility contains restrictive covenants that require the Company to maintain (i) commencing with the quarter ending December 31, 1999 and for each quarter thereafter, a minimum Interest Coverage Ratio (as defined in the Credit Facility) for the preceding four quarters of 1.35; (ii) a minimum Current Ratio (as defined in the Credit Facility) of 1.10 for each quarter commencing with the quarter ended September 30, 1999; and (iii) for the nine months ending September 30, a minimum cumulative EBITDA of $9.5 million. The Credit Facility also limits capital expenditures to $0.5 million per quarter and cumulative annual capital expenditures to $2.0 million. In addition, the Credit Facility contains other covenants that, among other things, restrict acquisitions, investments, dividends, liens and other 10 13 indebtedness, management fees, disposition of assets, change of voting control and guarantees. The Company was in compliance with all required covenants as of September 30, 1999. In compliance with certain state laws, the Company obtains performance bonds in connection with sweepstakes programs it manages on behalf of its clients. The Company is indemnified by its clients for any obligations on those performance bonds, and the cost to the Company of obtaining the performance bonds plus a markup is billed to the clients. As referenced in the Company's report on Form 10-Q for the period ended June 30, 1999, management continues to review the costs and benefits of a potential consolidation or other affiliation with Distribution Associates, Inc. ("DAI"), a third party fulfillment company for direct mail catalogs. DB Capital Partners, Inc. (formerly BT Capital Partners, Inc.), the majority shareholder of the Company, controls a majority of the economic interests of DAI. No assurance can be given as to what form the transaction may take, as to the manner any such transaction may be financed, or that such a transaction will or will not be consummated. The Company continues to evaluate and pursue selective acquisitions that offer a strong strategic fit with the Company's existing core competencies and/or allow it to develop or strengthen partnerships with select clients. The Company's ability to pay principal and interest on the Notes and to satisfy its other debt obligations will depend upon its future operating performance, which performance will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond the control of the Company. The Company's ability to pay principal and interest on the Notes and to satisfy its other debt obligations will also depend upon the future availability of revolving credit borrowings under the Credit Facility or any successor facility. Such availability is or may depend on, among other things, the Company meeting certain specified covenants and borrowing base prerequisites. The Company expects that, based on current and expected levels of operations, its operating cash flow, together with borrowings under the Credit Facility, should be sufficient to meet its operating expenses, to make necessary capital expenditures and to service its debt requirements as they become due, for the next 12 months. The Company also expects to continue to utilize operating leases to finance its needs for facilities and certain equipment. If the Company is unable to service its indebtedness, it will be forced to take actions such as reducing operating expenses, reducing or delaying acquisitions and/or capital expenditures, selling assets, restructuring or refinancing its indebtedness (which could include the Notes), or seeking additional equity capital. There is no assurance that any of these remedies can be effected on satisfactory terms, if at all. Year 2000 Issues As the end of the 20th century approaches, most businesses face the challenge of ensuring that their software and hardware resources, and ultimately the automated processing and business activities that depend on information flow, will continue to function into the 21st century. The "Year 2000 problem", which arises from the use of a two-digit field to identify years in computer software and hardware and the assumption of a single millennium - the 1900's, is expected to cause many business systems to fail or produce inaccurate results. The Company believes it is well positioned to address these issues and bring its systems and business operations into compliance. An enterprise-wide program is currently underway with the goal of achieving Year 2000 compliance. The Company has completed an internal review of its systems and operations. The inventory and assessment of internal information technology and non-IT systems have been inventoried, and the process of remediation, as appropriate, has been completed. The testing of the mission critical systems is in process with the initial test of data, corresponding test scenarios and the critically identified dates completed. Based on the information available to date, the Company does not anticipate any significant readiness problems with respect to its systems. The Company expects contingency plans, where appropriate, to be completed by the end of the year. The Company anticipates that it will incur incremental costs not to exceed $.5 million in total in addressing Year 2000 issues, of which approximately $.2 million has been incurred through September 30, 1999. In an effort to review the systems of its key vendors and suppliers, the Company has sent to them Year 2000 questionnaires and has evaluated the responses. Based on the information received to date, the Company does not expect any significant problems; however, if the Company's telecommunication providers fail to meet their Year 2000 system requirements on a timely basis, the Company's call center operations could be significantly impacted. The Company is using a similar process to evaluate the Year 2000 readiness of its clients. The outcome of the Company's Year 2000 program is subject to a number of 11 14 risks and uncertainties, some of which are beyond its control. Therefore, there can be no assurances that the Company will not incur material costs beyond the above-anticipated costs, or that the Company's business, financial condition, or results of operations will not be significantly impacted due to Year 2000 issues. Forward Looking Statements This report on Form 10-Q contains forward-looking statements that involve risk and uncertainties. All statements other than statements of historical facts included in this report on Form 10-Q, including, without limitation, statements regarding the future financial position of the Company, business strategy, budgets, projected costs and plans and objectives of management for future operations are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe" or similar words. Those forward-looking statements are subject to known and unknown risks, uncertainties and other factors that could cause actual results to differ materially form those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those expressed or implied by these forward-looking statements are discussed under this heading "Management Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report on Form 10-Q and in the other documents and reports filed by the Company with the Securities and Exchange Commission, including the registration statement relating to the Notes. All subsequent written and oral forward-looking statements attributable to Holdings, YAC or YAC.ECOM or persons acting on their behalf are expressly qualified in their entirety by these factors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to various market risks, including changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. The Company does not enter into derivative or other financial instruments for trading or speculative purposes. The Company manages its interest rate by balancing the amount of fixed and variable debt. For fixed rate debt, interest changes affect the fair market value but do not impact earnings or cash flows. Conversely for variable rate debt, interest rate changes generally do not affect the fair market value but do impact future earnings and cash flows, assuming other factors are held constant. At September 30, 1999, the Company had fixed rate debt of $80.0 million and variable rate available borrowings up to $10.0 million under the Credit Facility. 12 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES & USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits as follows. 27. Financial Data Schedule. (b) Reports on Form 8-K None. 13 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. Young America Corporation Date: November 12, 1999 By: /s/ CHARLES D. WEIL ---------------------------- Name: Charles D. Weil Title: President Young America Holdings, Inc. Date: November 12, 1999 By: /s/ CHARLES D. WEIL ---------------------------- Name: Charles D. Weil Title: President 14 EX-27 2 FINANCIAL DATA SCHEDULE
5 0001058952 YOUNG AMERICA HOLDINGS, INC. 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 11,907 0 14,081 0 766 27,526 20,498 12,808 41,505 25,050 80,000 0 0 1,871 (66,302) 41,505 0 242,774 0 222,303 0 0 7,014 2,048 758 1,290 0 0 0 1,290 0 0
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