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FILED PURSUANT TO RULE 424(B)(3)
FILE NUMBER 333-49749
PROSPECTUS
YOUNG AMERICA CORPORATION
OFFER TO EXCHANGE UP TO $80,000,000 OF ITS
11 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2006
FOR ANY AND ALL OF ITS OUTSTANDING
11 5/8% SENIOR SUBORDINATED NOTES DUE 2006
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON SEPTEMBER 4, 1998, UNLESS EXTENDED
Young America Corporation ("Young America") hereby offers upon the terms and
subject to the conditions set forth in this Prospectus and the accompanying
Letter of Transmittal (which together constitute the "Exchange Offer") to
exchange $1,000 principal amount of 11 5/8% Series B Senior Subordinated Notes
due 2006 (the "New Notes") of Young America for each $1,000 principal amount of
the issued and outstanding 11 5/8% Senior Subordinated Notes due 2006 (the "Old
Notes," the Old Notes and the New Notes, collectively, the "Notes") of Young
America from the Holders (as defined herein) thereof. As of the date of this
Prospectus, there is $80,000,000 aggregate principal amount of the Old Notes
outstanding. The terms of the New Notes are identical in all material respects
to the Old Notes, except that the New Notes have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and therefore will
not bear legends restricting their transfer and will not contain certain
provisions providing for the payment of additional interest on the Old Notes
under certain circumstances relating to the Registration Rights Agreement (as
defined herein), which provisions will terminate as to all of the Notes upon the
consummation of the Exchange Offer.
Interest on the New Notes will accrue from February 23, 1998 and will be
payable semi-annually in arrears on February 15 and August 15 of each year,
commencing August 15, 1998 at the rate of 11 5/8% per annum. No interest will be
paid on Old Notes that are accepted for exchange.
The New Notes will be redeemable, in whole or in part, at the option of
Young America on or after February 15, 2002, at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, to the date of redemption. In
addition, at any time, or from time to time, on or prior to February 15, 2001,
Young America, at its option, may redeem, with the net cash proceeds of one or
more Equity Offerings (as defined herein), up to 35% of the aggregate principal
amount of the Notes issued under the Indenture (as defined herein), at a
redemption price equal to 111.625% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of redemption; provided that at least
65% of the aggregate principal amount of the Notes issued under the Indenture
remains outstanding immediately following such redemption.
The New Notes will be general unsecured obligations of Young America and
will be subordinated in right of payment to all existing and future Senior Debt
(as defined herein) of Young America, including indebtedness under the New
Credit Facility (as defined herein). The New Notes will rank pari passu in right
of payment with any future senior subordinated indebtedness of Young America and
will rank senior in right of payment to all other subordinated obligations of
Young America. The New Notes will be unconditionally guaranteed (the
"Guarantees") on a senior subordinated basis by Young America's parent, Young
America Holdings, Inc. ("Holdings"), and any future domestic Restricted
Subsidiaries (as defined herein) of Young America having total book equity value
in excess of $1.0 million (the "Subsidiary Guarantors"). The Guarantees will be
general unsecured obligations of Holdings and the Subsidiary Guarantors and will
be subordinated in right of payment to all existing and future Guarantor Senior
Debt (as defined herein). The Guarantees will rank pari passu with any future
senior subordinated indebtedness of Holdings and the Subsidiary Guarantors and
will rank senior in right of payment to all other subordinated obligations of
Holdings and the Subsidiary Guarantors. As of March 31, 1998, Holdings and Young
America had approximately $0.5 million of Senior Debt outstanding (consisting of
obligations under undrawn letters of credit) under a commitment for up to $10.0
million under the New Credit Facility (subject to availability under the terms
of the New Credit Facility, which would have been approximately $8.9 million as
of March 31, 1998), and its pro forma ratio of total debt to total
capitalization was approximately 413%. At such date, no indebtedness
subordinated to the Notes was outstanding. See "Capitalization."
The Old Notes were not registered under the Securities Act in reliance upon
an exemption from the registration requirements thereof. In general, the Old
Notes may not be offered or sold unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act. The New Notes are being offered hereby in order to satisfy
certain obligations of Young America and Holdings contained in the Registration
Rights Agreement. Based on interpretations by the staff of the Securities and
Exchange Commission (the "Commission") set forth in no-action letters issued to
Exxon Capital Holdings Corporation (available May 13, 1989), Morgan Stanley &
Co. Incorporated (available June 5, 1991) and Shearman & Sterling (available
July 2, 1993), Young America and Holdings believe that the New Notes issued
pursuant to the Exchange Offer in exchange for Old Notes may be offered for
resale, resold or otherwise transferred by any holder thereof (other than any
such holder that is an "affiliate" of Young America or Holdings within the
meaning of Rule 405 promulgated under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
holder's business, such holder has no arrangement or understanding with any
person to participate in the distribution of such New Notes and neither such
holder nor any such other person is engaging in or intends to engage in a
distribution of such New Notes. Notwithstanding the foregoing, each
broker-dealer that receives New Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with any resale of New Notes received in
exchange for such Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from Young America). See
"Plan of Distribution."
The Old Notes are designated for trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") market. There is no
established trading market for the New Notes. Young America does not currently
intend to list the New Notes on any securities exchange or to seek approval for
quotation through any automated quotations system. Accordingly, there can be no
assurance as to the development or liquidity of any market for the New Notes.
Young America will not receive any proceeds from the Exchange Offer.
However, pursuant to the terms of the Registration Rights Agreement, Young
America and Holdings will pay all of the expenses incident to the Exchange
Offer. Tenders of Old Notes pursuant to the Exchange Offer may be withdrawn as
provided herein at any time prior to the Expiration Date (as defined herein).
The Exchange Offer is subject to certain customary conditions.
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SEE "RISK FACTORS" BEGINNING ON PAGE 16 FOR A DISCUSSION OF CERTAIN RISKS
THAT SHOULD BE CONSIDERED BY HOLDERS IN CONNECTION WITH THE EXCHANGE OFFER AND
IN EVALUATING AN INVESTMENT IN THE NEW NOTES.
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THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE COMMISSION NOR HAS THE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is August 6, 1998.
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FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED
IN THIS PROSPECTUS, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE
FUTURE FINANCIAL POSITION OF YOUNG AMERICA AND HOLDINGS, 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 "CONTINUE" OR THE NEGATIVE THEREOF OR VARIATIONS THEREON OR SIMILAR
TERMINOLOGY. ALTHOUGH YOUNG AMERICA AND HOLDINGS BELIEVE THAT THE EXPECTATIONS
REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, THEY CAN GIVE NO
ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
EXPECTATIONS OF YOUNG AMERICA AND HOLDINGS ("CAUTIONARY STATEMENTS") ARE
DISCLOSED UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROSPECTUS, INCLUDING,
WITHOUT LIMITATION, IN CONJUNCTION WITH THE FORWARD-LOOKING STATEMENTS INCLUDED
IN THIS PROSPECTUS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO YOUNG AMERICA OR HOLDINGS OR PERSONS ACTING ON THEIR BEHALF, ARE
EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY STATEMENTS.
AVAILABLE INFORMATION
Young America and Holdings have filed with the Commission a Registration
Statement on Form S-4 (together with all amendments, exhibits, schedules and
supplements thereto, the "Registration Statement") under the Securities Act with
respect to the New Notes being offered hereby. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain portions
of which have been omitted pursuant to the rules and regulations promulgated by
the Commission. Statements made in this Prospectus as to the contents of any
contract, agreement or other document referred to are summaries of the material
terms of such contract, agreement or other document. With respect to each such
contract, agreement or other document filed or incorporated by reference as an
exhibit to the Registration Statement, reference is made to such exhibit for a
more complete description of the matter involved, and each such statement is
qualified in its entirety by such reference.
The Registration Statement may be inspected by anyone without charge at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the
Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New York,
New York 10048. Copies of such material may also be obtained at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. Such
materials can also be inspected on the Internet at http://www.sec.gov.
Upon consummation of the Exchange Offer, Young America and Holdings will
become subject to the informational reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith will file reports and other information statements and other
information with the Commission. Such materials filed by Young America and
Holdings with the Commission may be inspected, and copies thereof obtained, at
the places, and in the manner, set forth above.
Young America has agreed that whether or not it is subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, it will deliver to the
Trustee and to each holder of the Notes, within 15 days after it is or would
have been required to file such with the Commission, annual and quarterly
financial statements substantially equivalent to financial statements that would
have been included in reports filed with
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the Commission, if Young America were subject to the requirements of Section 13
or 15(d) of the Exchange Act, including, with respect to annual information
only, a report thereon by its certified independent public accountant as such
would be required in such reports to the Commission, and, in each case, together
with a management's discussion and analysis of financial condition and results
of operations which would be so required. In addition, from and after the
effectiveness of the Exchange Offer Registration Statement (as defined herein)
or the Shelf Registration Statement (as defined herein), as the case may be,
whether or not required by the rules and regulations of the Commission, the
Company will file a copy of all such information and reports with the Commission
for public availability (unless the Commission will not accept such a filing)
and make such information available to securities analysts and prospective
investors upon request. Young America and Holdings will also, for so long as any
Old Notes remain outstanding, make available to each holder of Old Notes in
connection with any sale thereof and to any prospective purchaser of such Old
Notes, the information required by Rule 144A(d)(4) under the Securities Act in
order to permit resales of such Old Notes pursuant to Rule 144A.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information, risk factors and financial
statements, including the related notes, appearing elsewhere in this Prospectus.
Unless otherwise referred to herein or the context otherwise requires,
references to "Young America" shall mean Young America Corporation, a Minnesota
corporation, and references to "Holdings" shall mean Young America Holdings,
Inc., a Minnesota corporation (formerly known as Young America Corporation) and
the parent of Young America. References to the "Company" shall mean Young
America, or where the context requires, its predecessor, Holdings, as
appropriate. See "The Recapitalization." Unless otherwise indicated, all
references to fiscal years in this Prospectus are to the fiscal years ending on
December 31 of each year. Balance sheet data as of December 31, 1997 and March
31, 1998 are presented on a pro forma basis and gave effect to (i) the
reclassification from Redeemable Class A Common Stock to stockholders' equity of
shares of Class A Common Stock owned by Messrs. Ecklund and Weil as a result of
the termination of arrangements between Holdings and such shareholders which
gave such shareholders the right to cause Holdings to repurchase all or a
portion of their common shares and (ii) an additional payment of approximately
$692 to the Selling Stockholders (as defined) and certain other employees made
in the second quarter of 1998. See "Note 1 to the Consolidated Financial
Statements" and "The Recapitalization."
THE COMPANY
Young America is a provider of a wide range of consumer interaction
processing ("CIP") services to large consumer product and consumer service
companies. The Company's more than 200 clients include such well-known companies
as PepsiCo, Inc., Anheuser-Busch Companies, Inc., General Mills, Inc., R.J.
Reynolds Tobacco Company, Eastman Kodak Company and Hewlett-Packard Co. The
Company's CIP services provide a link between its clients and their customers
for numerous types of marketing programs, including rebate programs, purchase
reward or premium programs, sweepstakes, product sampling programs and warranty
registration programs. The Company provides a variety of services involved in
executing these marketing programs, including (i) order processing (including
the handling of mail, telephone calls, facsimiles and e-mail received from
consumers), (ii) fulfillment (including the delivery of product premiums and
samples as well as rebate checks to consumers), (iii) data gathering, analysis
and reporting and (iv) related customer service (including receiving and
responding to consumer inquiries).
CIP services are an important part of the targeted marketing strategies
pursued by consumer-oriented companies that seek to improve their marketing
efforts by identifying and focusing on their most valuable existing and
potential customers. These consumer marketing companies are increasingly
utilizing targeted marketing strategies as opposed to "mass marketing"
approaches such as general market advertising and free-standing insert coupons.
In recent years, the Company has identified a trend among its clients toward the
targeted marketing approach, including an increase in the use of consumer
promotion programs such as premium programs and product sampling programs as a
key element of its clients' marketing strategies. Because the Company believes
that its clients have found these programs to be both effective and efficient,
the Company believes that these trends will continue.
The Company has also observed a trend among its clients toward more complex
marketing programs. Consumer-oriented companies have sought to differentiate
themselves from their competitors by offering more sophisticated marketing
programs, often emphasizing consumer loyalty and repeat purchases, that appeal
to their targeted customers. These complex marketing programs frequently involve
increased consumer interactions that either allow or are designed to provide
consumer-oriented companies with an opportunity to gather information about
their customers. Management believes that spending on CIP services in support of
these more complex marketing programs has outpaced, and will continue to
outpace, the growth of services for simpler marketing programs such as
traditional rebate, premium and sweepstakes programs. Accordingly, over the past
three years the Company has enhanced its capabilities to become a provider not
only of narrowly focused promotion fulfillment services for those simpler
marketing programs but also of integrated, custom-designed CIP services for
large complex marketing programs. Its breadth of services and ability to
integrate such services to support complex marketing programs have distinguished
the Company from the majority of its competitors, most of which offer a narrower
range of services and serve a smaller number of clients. Management believes
that the Company's broad service offering, together with its sophisticated
information
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systems and quality control processes, has enabled it to become a leading
provider of business-to-consumer CIP services.
In each of the last three fiscal years, the Company managed over 4,000
marketing programs, with between 1,500 and 2,000 programs being processed at any
point in time. As of March 31, 1998, the Company was processing approximately
1,550 client marketing programs. In each of the last three fiscal years, the
Company distributed over 60 million items to its clients' customers. Items
distributed by the Company have ranged from rebate checks to sales literature to
large and small items of merchandise as premiums and product samples.
For the three months ended March 31, 1998 and the year ended December 31,
1997, the Company had revenues of $50.6 million and $175.3 million,
respectively, and Pro Forma EBITDA, as adjusted (as defined below) of $2.3
million and $16.8 million, respectively. See "-- Summary Historical and Pro
Forma Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The Company's revenue base is
supported by a high level of repeat business, with over 80% of the Company's
revenues for 1997 being derived from clients from which the Company also derived
revenue in 1996.
Young America was incorporated in Minnesota in 1997 as a subsidiary of
Holdings, a Minnesota corporation founded in 1972. The Company's principal
office is located at 717 Faxon Road, Young America, Minnesota 55397 and its
telephone number is (612)467-1100.
Other than as required by the Registration Rights Agreement, there are no
federal or state regulatory requirements that must be complied with or any
approvals that must be obtained in connection with the Exchange Offer.
RECENT DEVELOPMENTS
Based on preliminary second quarter operating results, the Company expects
that second quarter revenues will exceed the revenues in the second quarter of
1997. Revenue growth, however, was limited by the continued delay of a major
client program and lower than anticipated levels of consumer participation in
certain existing client programs. The Company expects gross profit in the second
quarter of 1998 to be below the gross profit in the second quarter of 1997
primarily due to continuing higher levels of expenses associated with increased
capacities and capabilities in anticipation of market changes and the
requirements of its existing and potential client base principally for
technology-based services. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations -- Three
Months Ended March 31, 1998 Compared With Three Months Ended March 31,
1997 -- Gross Profit." The Company also expects second quarter 1998 gross profit
as a percentage of revenues will be below the second quarter of 1997 primarily
due to a change in the mix of revenues as lower margin rebate revenues increased
at a faster rate than the postage and freight revenues ("PFR") and servicing
revenues. See "Risk Factors -- Variability of Client Mix; Variability of
Services Provided." Other income (expense) in the second quarter of 1998 was
adversely affected by expenses attributable to the investigation of a potential
acquisition which is no longer being pursued. As a result of the foregoing, the
Company expects to record a small operating profit and a net loss for the second
quarter of 1998. Based on preliminary second quarter operating results, the
Company expects the net loss to be approximately $1.2 million compared with net
income of $1.9 million for the same quarter in 1997. Some of the factors
adversely affecting the Company's second quarter operating results are expected
to continue into the fourth quarter of 1998. These factors include (i) the
higher level of expenses that result from the Company increasing its
capabilities and capacities primarily associated with technology based services,
and (ii) continuing delays of the major client program discussed above. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments."
COMPETITIVE STRENGTHS
The Company attributes its current market position and its existing
opportunities for continued growth and profitability to the following
competitive strengths:
Breadth of Integrated Services
Young America is a provider of a broad range of integrated CIP services to
large consumer product and consumer service companies. Young America's basic
services include (i) order processing (including the
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handling of mail, telephone calls, facsimiles and e-mail received from
consumers), (ii) fulfillment (including the delivery of product premiums and
samples as well as rebate checks to consumers), (iii) data gathering, analysis
and reporting and (iv) related customer service (including receiving consumer
inquiries and providing follow-up services). In comparison, most of the
Company's competitors offer a narrower range of services to a smaller client
base. The Company's ability to integrate a broad range of services allows it to
work with its clients to custom design efficient processing solutions for all
types of marketing programs, especially complex marketing programs that involve
a large number of consumer interactions.
Ability to Process High-Volume and Complex Marketing Programs
The Company has demonstrated the expertise necessary to manage complex and
high-volume marketing programs by executing programs such as "Pepsi Stuff(R)",
"Camel Cash(R)", "Bud Gear(R)" and General Mills, Inc.'s "Box Tops for
Education(R)". Complex marketing programs can involve integrating dozens of
custom-designed process steps and coordinating interactive communications with a
client's customers. High-volume programs can involve processing several million
orders and sending out several million items to consumers in a very short period
of time while simultaneously processing the Company's 1,500 to 2,000 other
current programs in a timely, courteous and efficient manner. Management
believes that the Company has earned a reputation for being able to manage
high-volume and complex marketing programs with a high quality of service, and
that the Company's reputation contributes to its recurring revenue base and its
ability to attract new clients.
Strong, Established Client Relationships
The Company has successfully attracted and built strong relationships with
a large number of major consumer-oriented companies in the United States. Young
America is currently well-positioned in the packaged goods industry and has
expanded its client base in faster-growing industries such as high-technology
consumer products. Of the Company's 25 largest clients in 1997, 12 have been
clients for more than eight years.
The vast majority of marketing programs undertaken by the Company for its
clients involve direct interaction with consumers which are the clients'
customers. In these interactions, the Company acts on behalf of its clients and,
for that reason, it is critical to the Company's clients that the various
services involved in administering their marketing programs be performed
consistently, accurately, courteously and in a timely manner. The Company
believes that these measures of quality are often key determinants when a
consumer-oriented company awards the administration of its marketing programs.
The Company seeks to achieve a high level of quality service through careful
analysis and design of the steps involved in delivering the services required
and by the stringent process controls it builds into the processing plan for
each marketing program it undertakes. Management believes that the Company has
strengthened its relationships with its clients by involving them in this
process design.
Sophisticated Information Systems
In 1996, the Company completed its conversion to a new proprietary software
system known as Promotion Administration Leader ("PAL"). Utilizing PAL, the
Company has been able to process a greater number and variety of complex
marketing programs than was possible with the system that PAL replaced. The PAL
system increases operational efficiencies and enhances the Company's ability to
process more complex marketing programs by providing the Company with the
ability to track orders through each step of the order-handling process and to
accurately invoice its clients for services provided by the Company. In
addition, with PAL the Company (i) can give a consumer the precise status of any
order from the day such order was received until the day the promotion item is
shipped, (ii) has the ability to provide real-time information on the status of
a program, allowing the Company's clients to track and judge the effectiveness
of on-going promotion programs and (iii) has the ability to acquire, store and
quickly retrieve information about consumers and their individual buying habits.
The Company has used PAL to develop a proprietary database of approximately 60
million unduplicated consumer households.
The PAL system cost approximately $9.0 million to develop and install
(including hardware acquisition and software development) and required more than
four years to be fully implemented. PAL was designed as an open system and its
capacity can be easily increased to meet the Company's future needs by adding
additional hardware support. Management believes that no comparable program is
used by any of its competitors and that no similar integrated system can be
easily developed or purchased within the
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marketplace. Management believes that a competitor would require a substantial
commitment of time and capital to replicate the capabilities of the PAL system.
Experienced Management Team
The Company's senior management team has been assembled and developed since
the arrival in July 1993 of its current President and Chief Executive Officer,
Charles D. Weil. Prior to 1993, Mr. Weil was President and Chief Operating
Officer of ConAgra Frozen Foods. Mr. Weil has 25 years of experience in the
consumer packaged goods industry with ConAgra and other companies such as
General Mills Inc. and Nestle USA Inc. One of Mr. Weil's priorities since
joining the Company has been to attract and retain clients who require CIP
services to support high-volume and/or complex marketing programs on a recurring
basis. In order to aid him in the execution of this strategy, Mr. Weil has
recruited a team of experienced executives from outside the industry in which
the Company competes, each of whom brings to the Company not only functional
skills but also fresh insights that assist Mr. Weil in executing his strategic
vision for the Company. Industries from which the Company's current executives
have been drawn include retailing, distribution, direct marketing and
teleservices.
RISK FACTORS
See "Risk Factors" for a discussion of risks that should be considered in
evaluating the Exchange Offer and an investment in the Notes. Such risks include
the consequences of failure to exchange the Old Notes for the New Notes, the
necessity to comply with Exchange Offer procedures, blue sky restrictions on
resale of New Notes, the lack of a public market for the New Notes, the
Company's high degree of leverage and lack of liquidity, restrictive covenants
contained in the New Credit Facility and the Indenture, the variability of the
Company's client mix and the variability of services provided by the Company,
the impact of proposed tobacco legislation on promotion marketing, the Company's
dependence on key personnel, difficulties managing growth of the Company, the
risks associated with the Company's focus on high-volume and/or complex
marketing programs, the application of state escheat laws, the Company's
vulnerability to an economic downturn, the Company's reliance on technology and
the risk of business interruption, the Company's dependence on telephone, postal
and delivery service, the Company's dependence on its labor force, the highly
competitive market in which the Company competes, risks generally associated
with acquisitions, the Company's ability to purchase the Notes upon a Change of
Control, the concentration of ownership of the Company and Holdings and the
Stockholders' Agreement, the subordination of the Notes and the Guarantees, the
holding company structure of the Guarantor and the risks under fraudulent
conveyance statutes.
BUSINESS STRATEGY
Focus on Clients with Large Revenue Potential
Since 1993, the Company has focused its strategic plan on attracting and
retaining clients who require CIP services to support high-volume and/or complex
marketing programs on a recurring basis and with which the Company can develop a
strategic relationship. Management believes that high-volume and/or complex
marketing programs by their scope and nature allow for higher revenues and
improved profit margins. Beginning in 1995, the Company began seeking
operational efficiencies by reducing the number of simple, low-volume marketing
programs for which it would compete. At the same time, the Company upgraded its
technology and operational systems in order to better focus on the needs of
clients with large revenue potential for the Company. As a result, the Company
has increased the average revenue per client from approximately $307,000 in 1994
to approximately $746,000 in 1997. The Company intends to continue to
concentrate on clients that require more complex and/or higher volume marketing
programs.
Management believes that the Company's ability to provide CIP services for
high-volume and/or complex marketing programs has been a significant factor in
its ability to attract large new clients, both from within industries that have
traditionally used the Company's services and from industries that have not
traditionally used the Company's services such as computer hardware, computer
software, consumer services, telecommunications and energy. Recent client
additions include 3Com Corporation, Iomega Corporation, Sprint Corporation,
BellSouth Corporation, Mobil Corporation and CUC International Inc. (now known
as Cendant Corporation). Management believes that there are opportunities to
market the Company's services in additional industries such as tourism,
financial services and pharmaceuticals.
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Custom Design Services
When the Company evaluates a potential new client program, it performs a
comprehensive review of all steps that it believes are necessary for the
successful implementation of the program. The Company reviews these steps with
the potential client, and presents each step in the context of the advantages of
adding each such step. The client then determines whether to pursue each
proposed step. Only after such determination by the client does the Company
complete the process design, cost each step of the process and price its
services for a particular marketing program. Finally, the client determines
whether the value of each step is worth the incremental cost.
The Company's ability to custom design and implement processes to fit the
specific requirements of a client's program constitutes a competitive advantage.
Management believes that this ability enables the Company to maintain
mid-to-premium margin levels while achieving high customer loyalty. Other
benefits derived from the Company's ability to custom design services include
(i) more efficient planning and invoicing of services rendered by the Company
and (ii) greater ability to reliably estimate the profitability of each
marketing program serviced.
Anticipate Clients' Evolving Needs
The Company strives to anticipate the needs of its clients and develop new
or enhanced services to meet those needs as they arise rather than merely
reacting to requests from its clients. In recent years, the Company, in
anticipation of client needs, upgraded its information processing capabilities
by developing PAL and broadened its ability to process orders from mail only to
other forms of consumer interaction such as facsimile, telephone (including live
operator and interactive voice response ("IVR")), Internet and electronic data
transmission. Management believes that the Company's experience in managing a
wide variety of marketing programs for a broad range of major, consumer-oriented
companies gives it a competitive advantage in anticipating its clients' needs
for new and enhanced CIP services. Examples of areas in which the Company is
upgrading its services in anticipation of client needs include (i) enhanced
Internet and IVR consumer interaction capabilities, (ii) full-service credit
card payment processing for marketing programs involving payments by consumers
and (iii) improved information processing and consumer data reporting
capabilities. The Company plans to continue to enhance its operational
capabilities, including its sophisticated computer systems, so that it can meet
the demand for increasingly complex CIP services.
Continue Operational Improvements
The Company continually evaluates and refines its process flows to meet
evolving client needs, to enhance client satisfaction and to reduce costs.
During 1996, the Company implemented over 200 process improvements, including
instituting a master schedule for operations, expanding mail sorting
capabilities and automating various data-entry functions in order to further
reduce processing costs. Management estimates that process improvements
implemented in 1996, many of which are expected to provide on-going benefits,
resulted in incremental revenue increases and cost savings for the Company
aggregating approximately $2.4 million in 1997. Management believes such
continual process improvements also help the Company to further distinguish
itself from its competitors by enabling it to offer a range of services and a
level of professionalism not widely available within the industry.
Pursue Selective Acquisitions in Related Businesses
Holdings and the Company intend to 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. Such
acquisitions could include, among others, companies that specialize in
literature fulfillment, Internet order processing or collateral material
fulfillment and such acquisitions, either individually or in the aggregate,
could be substantial relative to the size of the Company.
THE RECAPITALIZATION
Summary of the Recapitalization
The Company experienced substantial growth and large demands on its capital
and operating structures in 1995, 1996 and 1997 including development of
business opportunities that required significant expansion of the Company's
capacity and capabilities. In addition, in recent years, the Company received
numerous inquiries from interested parties seeking to make a strategic
investment in or to acquire the Company. As a
5
<PAGE> 9
result, in February 1997, the Company hired an investment banking firm to assist
it in obtaining and evaluating offers to acquire the Company or otherwise engage
in a strategic transaction with the Company. A group (the "Investor Group") led
by BT Capital Partners, Inc. ("BTCP") and Ontario Teachers' Pension Plan Board
("OTPPB") proposed a transaction that contemplated a recapitalization of the
Company. The Investor Group's offer required continued equity participation by
Mr. Jay F. Ecklund, formerly the Company's controlling shareholder and Chairman
and Chief Executive Officer, and required Mr. Charles D. Weil, the current
President and Chief Executive Officer of Holdings, and 20 other officers and
employees of Holdings (collectively, the "Management Stockholders") to
participate as members of the Investor Group. Following a period of due
diligence and negotiations regarding the terms of the recapitalization and the
equity participation by Mr. Ecklund and the Management Stockholders, on November
25, 1997 (the "Recapitalization Date"), Holdings, Mr. Ecklund, certain trusts
for the benefit of Mr. Ecklund's family (collectively with Mr. Ecklund, the
"Selling Stockholders") and the Investor Group executed definitive agreements
relating to a recapitalization of Holdings (the "Recapitalization") and
management's interest in Holdings and simultaneously consummated the
Recapitalization. As a result of the Recapitalization, approximately 93% of the
capital stock of Holdings is held by the Investor Group.
In the Recapitalization, members of the Investor Group purchased
newly-issued shares of common stock of Holdings ("Common Stock") for an
aggregate purchase price of $38.9 million. BTCP purchased shares of Common Stock
for $22.4 million, OTPPB purchased shares of Common Stock for $12.0 million and
the Management Stockholders collectively purchased shares of Common Stock for
$4.5 million. See "Principal Stockholders." Also in the Recapitalization,
Holdings borrowed $80.0 million under a senior bridge credit facility (the
"Bridge Facility") provided by an affiliate of BTCP. Holdings used the proceeds
of the issuance of shares of Common Stock to the Investor Group and the
borrowings under the Bridge Facility to (i) repurchase outstanding shares of
Common Stock from the Selling Stockholders for an aggregate purchase price of
$92.2 million, (ii) make bonus payments to management of $13.4 million under
plans put in place in contemplation of a change of control of the Company, and
$4.9 million paid pursuant to phantom stock arrangements due in such amounts as
a result of the change of control of the Company in the Recapitalization (see
"Management -- Phantom Stock Agreements" and "-- 1997 Management Recognition,
Transition and Equity Bonus Plan") and (iii) pay certain fees and expenses
related to the Recapitalization. Of the amounts referred to in (i) and (ii)
above, $6.0 million was placed in escrow subject to certain indemnification
provisions of the Recapitalization Agreement, $1.2 million of which has been
recorded by the Company as estimated compensation charges remaining to be paid
related to (ii) above. A portion of those proceeds were also retained by the
Company to pay certain fees and expenses related to the offering of the Notes
and other cash costs triggered by the Recapitalization. Pursuant to the terms of
the Recapitalization Agreement, Holdings made an additional payment of
approximately $692,000 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) of Holdings as of
October 31, 1997 and Holdings' profits or losses (as defined) for the period
ended on the Recapitalization Date. In addition, after December 31, 2001, the
Selling Stockholders and certain employees of the Company may also be entitled
to additional payments (either as additional consideration for shares
repurchased by Holdings in the Recapitalization or as additional bonus or
phantom stock payments) aggregating up to $15.0 million depending upon the level
of Cumulative Excess Free Cash Flow (as defined in the Recapitalization
Agreement) of the Company for the four-year period ending December 31, 2001. See
"Certain Transactions."
Following the Recapitalization, substantially all the assets and business
of Holdings were transferred to a newly-formed subsidiary, and Holdings' name
was changed from Young America Corporation to Young America Holdings, Inc. The
subsidiary's name was changed to Young America Corporation. Holdings expects to
conduct substantially all its business and operations through Young America and
any future subsidiaries it may form. However, if the covenants contained in the
New Credit Facility and/or the Indenture for the Notes would prohibit the
Company from making an acquisition (see "Business Strategy -- Pursue Selective
Acquisitions in Related Businesses" above), Holdings may make such acquisition
directly or through a newly formed subsidiary of Holdings rather than through
the Company.
6
<PAGE> 10
Sources and Uses of Funds
The sources and uses of funds for the Recapitalization are summarized
below:
<TABLE>
<CAPTION>
SOURCES OF FUNDS
---------------- (dollars in millions)
<S> <C>
Cash sources:
Bridge Facility........................................... $ 80.0
Issuance of Common Stock.................................. 38.9
Other sources:
Common Stock retained by Mr. Ecklund(1)................... 2.9
------
Total Sources..................................... $121.8
======
</TABLE>
<TABLE>
<CAPTION>
USES OF FUNDS
-------------
<S> <C>
Cash uses:
Purchase of Common Stock and payments to management(2).... $110.5
Transaction fees and expenses(3).......................... 8.4
Other uses:
Common Stock retained by Mr. Ecklund...................... 2.9
------
Total Uses........................................ $121.8
======
</TABLE>
- ---------------
(1) The indicated amount for the retained Common Stock is based solely on the
price per share paid for the Common Stock purchased by the Investor Group in
the Recapitalization.
(2) Includes $13.4 million of bonuses paid to management under plans put in
place in contemplation of a change of control of the Company, and $4.9
million paid pursuant to phantom stock arrangements due in such amounts as a
result of the change of control of the Company in the Recapitalization. Of
the $110.5 million amount, $6.0 million was placed in escrow subject to
certain indemnification provisions of the Recapitalization Agreement. If the
entire $6.0 million is released free of any indemnification claims, the
Selling Stockholders will receive $4.8 million of such amount, certain
members of management will receive $0.9 million of such amount and the
phantom stockholders will receive $0.3 million.
(3) Includes approximately $3.4 million retained by the Company to pay certain
fees and expenses related to the offering of the Notes and other cash costs
triggered by the Recapitalization.
7
<PAGE> 11
THE EXCHANGE OFFER
REGISTRATION RIGHTS AGREEMENT... The Old Notes were sold by Young America on
February 23, 1998 to BT Alex. Brown
Incorporated (the "Initial Purchaser"), which
resold the Old Notes to qualified
institutional investors in reliance on Rule
144A under the Securities Act. In connection
therewith, Young America, Holdings and the
Initial Purchaser executed and delivered for
the benefit of the holders of the Old Notes a
registration rights agreement (the
"Registration Rights Agreement") providing,
among other things, for the Exchange Offer.
THE EXCHANGE OFFER.............. New Notes are being offered in exchange for a
like principal amount of Old Notes. As of the
date hereof, $80,000,000 aggregate principal
amount of Old Notes are outstanding. Young
America will issue the New Notes to the
Holders of Old Notes who validly tender such
Old Notes promptly following the Expiration
Date. See "Risk Factors -- Consequences of
Failure to Exchange." Young America and
Holdings have not requested, and do not
intend to request, an interpretation by the
staff of the Commission with respect to
whether the New Notes issued pursuant to the
Exchange Offer in exchange for the Old Notes
may be offered for sale, resold or otherwise
transferred by any holder without compliance
with the registration and prospectus delivery
provisions of the Securities Act. Instead,
based on interpretations by the staff of the
Commission set forth in no-action letters
issued to Exxon Capital Holdings Corporation
(available May 13, 1989), Morgan Stanley &
Co. Incorporated (available June 5, 1991) and
Shearman & Sterling (available July 2, 1993),
Young America and Holdings believe that New
Notes issued pursuant to the Exchange Offer
in exchange for Old Notes may be offered for
resale, resold and otherwise transferred by
any holder of such New Notes (other than any
such holder that is an "affiliate" of Young
America or Holdings within the meaning of
Rule 405 promulgated under the Securities
Act) without compliance with the registration
and prospectus delivery provisions of the
Securities Act, provided that such New Notes
are acquired in the ordinary course of such
Holder's business, such Holder has no
arrangement or understanding with any person
to participate in the distribution of such
New Notes and neither such Holder nor any
other such person is engaging in or intends
to engage in a distribution of such New
Notes. Because the Commission has not
considered the Exchange Offer in the context
of a no-action letter, there can be no
assurance that the staff of the Commission
would make a similar determination with
respect to the Exchange Offer. Any Holder who
is an affiliate of Young America or Holdings
or who tenders in the Exchange Offer for the
purpose of participating in a distribution of
the New Notes cannot rely on such
interpretations by the staff of the
Commission and must comply with the
registration and prospectus delivery
requirements of the Securities Act in
connection with a resale transaction.
EXPIRATION DATE................. 5:00 p.m., New York City time, on September
4, 1998, unless the Exchange Offer is
extended as provided herein, in which case
the term "Expiration Date" means the latest
date and time to which the Exchange Offer is
extended.
8
<PAGE> 12
INTEREST........................ Each New Note will bear interest from
February 23, 1998 and will be payable
semi-annually in arrears on February 15 and
August 15 of each year, commencing August 15,
1998 at the rate of 11 5/8% per annum. No
interest will be paid on Old Notes that are
accepted for exchange.
CONDITIONS TO THE EXCHANGE
OFFER........................... The Exchange Offer is subject to certain
customary conditions, which may be waived by
Young America and Holdings. Young America and
Holdings reserve the right to amend,
terminate or extend the Exchange Offer at any
time prior to the Expiration Date upon the
occurrence of any such condition. See "The
Exchange Offer -- Conditions."
PROCEDURES FOR TENDERING OLD
NOTES........................... Each Holder of Old Notes wishing to accept
the Exchange Offer must complete, sign and
date the Letter of Transmittal, or a
facsimile thereof or an Agents Message (as
defined herein) in lieu thereof, in
accordance with the instructions contained
herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile or such Agents Message, together
with the Old Notes and any other required
documentation to the exchange agent (the
"Exchange Agent") at the address set forth
herein. By executing the Letter of
Transmittal or by causing an Agents Message
to be delivered, each Holder will represent
to Young America and Holdings, among other
things, that (i) the New Notes acquired
pursuant to the Exchange Offer by the Holder
and any beneficial owners of Old Notes are
being obtained in the ordinary course of
business of the person receiving such New
Notes, (ii) neither the Holder nor such
beneficial owner has an arrangement or
understanding with any person to participate
in the distribution of such New Notes, (iii)
neither the Holder nor such beneficial owner
nor any such other person is engaging in or
intends to engage in a distribution of such
New Notes and (iv) neither the Holder nor
such beneficial owner is an "affiliate," as
defined under Rule 405 promulgated under the
Securities Act, of the Young America or
Holdings. Each broker-dealer that receives
New Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired
by such broker-dealer as a result of
marketmaking activities or other trading
activities (other than Old Notes acquired
directly from Young America), may participate
in the Exchange Offer but may be deemed an
"underwriter" under the Securities Act and,
therefore, must acknowledge in the Letter of
Transmittal that it will deliver a prospectus
in connection with any resale of such New
Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a
prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. See
"The Exchange Offer -- Procedures for
Tendering" and "Plan of Distribution." The
term "Agents Message" means a message,
transmitted by The Depository Trust Company
("DTC") to and received by the Exchange Agent
and forming a part of a confirmation of the
book-entry tender of Old Notes into the
Exchange Agent's account at DTC, which states
that DTC has received an express
acknowledgement from the tendering
participant, which acknowledgment states that
such participant has received and agrees to
be bound by, and makes the representa-
9
<PAGE> 13
tions and warranties contained in, the Letter
of Transmittal and that Young America may
enforce the Letter of Transmittal against
such participant.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS............. Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other
nominee and who wishes to tender should
contact such registered Holder promptly and
instruct such registered Holder to tender on
such beneficial owner's behalf. If such
beneficial owner wishes to tender on such
beneficial owner's own behalf, such
beneficial owner must, prior to completing
and executing the Letter of Transmittal and
delivering his Old Notes, either make
appropriate arrangements to register
ownership of the Old Notes in such beneficial
owner's name or obtain a properly completed
bond power from the registered Holder. The
transfer of registered ownership may take
considerable time. See "The Exchange
Offer -- Procedures for Tendering."
GUARANTEED DELIVERY
PROCEDURES...................... Holders of Old Notes who wish to tender their
Old Notes and whose Old Notes are not
immediately available or who cannot deliver
their Old Notes, the Letter of Transmittal or
any other documents required by the Letter of
Transmittal to the Exchange Agent prior to
the Expiration Date must tender their Old
Notes according to the guaranteed delivery
procedures set forth in "The Exchange
Offer -- Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS............... Tenders may be withdrawn as provided herein
at any time prior to 5:00 p.m., New York City
time, on the Expiration Date. See "The
Exchange Offer -- Withdrawal of Tenders."
ACCEPTANCE OF OLD NOTES AND
DELIVERY OF NEW NOTES........... Young America will accept for exchange any
and all Old Notes which are properly tendered
in the Exchange Offer prior to 5:00 p.m., New
York City time, on the Expiration Date. The
New Notes issued pursuant to the Exchange
Offer will be delivered promptly following
the Expiration Date. See "The Exchange
Offer -- Terms of the Exchange Offer."
EXCHANGE AGENT.................. Marine Midland Bank is serving as Exchange
Agent in connection with the Exchange Offer.
See "The Exchange Offer -- Exchange Agent."
USE OF PROCEEDS................. There will be no cash proceeds to Young
America from the exchange of Notes pursuant
to the Exchange Offer.
CONSEQUENCES OF FAILURE TO
EXCHANGE........................ Holders of Old Notes who do not exchange
their Old Notes for New Notes pursuant to the
Exchange Offer will continue to be subject to
the restrictions on transfer of such Old
Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes
pursuant to exemptions from, or in
transactions not subject to, the registration
requirements of the Securities Act and
applicable state securities laws. In general,
Old Notes may not be offered or sold unless
registered under the Securities Act, except
pursuant to an exemption from, or in a
transaction not subject to, the Securities
Act and applicable state securities laws.
10
<PAGE> 14
SUMMARY DESCRIPTION OF THE NOTES
The Exchange Offer applies to $80,000,000 aggregate principal amount of Old
Notes. The terms of the New Notes are identical in all material respects to the
Old Notes except that the New Notes have been registered under the Securities
Act and, therefore, will not bear legends restricting their transfer and will
not contain certain provisions providing for the payment of additional interest
on the Old Notes under certain circumstances relating to the Registration Rights
Agreement, which provisions will terminate as to all of the Notes upon the
consummation of the Exchange Offer. The New Notes will evidence the same debt as
the Old Notes and, except as set forth in the immediately preceding sentence,
will be entitled to the benefits of the Indenture, under which both the Old
Notes were, and the New Notes will be, issued. See "Description of Notes."
NOTES OFFERED................... $80,000,000 aggregate principal amount of
11 5/8% Senior Subordinated Notes due 2006.
MATURITY DATE................... February 15, 2006.
INTEREST PAYMENT DATES.......... February 15 and August 15 of each year,
commencing August 15, 1998.
OPTIONAL REDEMPTION............. The Notes are not redeemable at the option of
Young America prior to February 15, 2002,
except as described below. Thereafter, the
Notes are redeemable, in whole or in part, at
the option of Young America at the redemption
prices set forth herein, plus accrued and
unpaid interest, if any, to the date of
redemption. In addition, at any time, and
from time to time, on or prior to February
15, 2001, Young America, at its option, may
use the net cash proceeds of one or more
Equity Offerings (as defined below) to redeem
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 originally issued remains
outstanding immediately following such
redemption. See "Description of the Notes --
Optional Redemption."
CHANGE OF CONTROL............... Upon a Change of Control, each holder of
Notes will have the right to require Young
America 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. See "Description
of the Notes -- Change of Control."
GUARANTEES...................... The Notes are unconditionally guaranteed on a
senior subordinated basis by Holdings and
will be guaranteed on a senior subordinated
basis by any Subsidiary Guarantors organized
by Young America in the future.
RANKING......................... The Notes are general unsecured obligations
of Young America and are subordinated in
right of payment to all existing and future
Senior Debt (as defined below) of Young
America, including indebtedness under the New
Credit Facility. The Notes rank pari passu in
right of payment with any future senior
subordinated indebtedness of the Company and
rank senior in right of payment to all other
subordinated obligations of the Company. The
Guarantees are general unsecured obligations
of Holdings and the Subsidiary Guarantors and
are subordinated in right of payment to all
existing and future Guarantor Senior Debt.
The Guarantees rank pari passu with any
future senior
11
<PAGE> 15
subordinated indebtedness of Holdings and the
Subsidiary Guarantors and rank senior in
right of payment to all other subordinated
obligations of Holdings and the Subsidiary
Guarantors. As of March 31, 1998, the Company
had approximately $0.5 million of Senior Debt
outstanding (consisting of obligations under
undrawn letters of credit) under a commitment
for up to $10.0 million under the New Credit
Facility (subject to availability under the
terms of the New Credit Facility, which would
have been approximately $8.9 million as of
March 31, 1998). At such date, no
indebtedness subordinated to the Notes was
outstanding. See "Capitalization."
CERTAIN COVENANTS............... The indenture under which the Old Notes were,
and the New Notes will be, issued (the
"Indenture") contains certain covenants with
respect to Young America and its Restricted
Subsidiaries (as defined below) 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.
Pursuant to the Indenture, the Company will
be permitted to incur Indebtedness if on the
date of the occurrence of such Indebtedness,
after giving effect to such incurrence, the
Consolidated Fixed Charge Coverage Ratio (as
defined) of the Company is greater than (x)
2.0:1 if the date of such incurrence is on or
prior to March 1, 1999, or (y) 2.5:1, if the
date of such incurrence is after March 1,
1999, subject to the right of the Company to
incur certain Permitted Indebtedness (as
defined). The Indenture also restricts the
ability of Young America and its Restricted
Subsidiaries to consolidate or merge with or
into, or to transfer all or substantially all
of its assets to, another person. See
"Description of the Notes -- Certain
Covenants."
For additional information regarding the Notes, see "Description of the
Notes."
12
<PAGE> 16
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables present summary financial data for each of the years
in the five-year period ended December 31, 1997 and for the three month periods
ended March 31, 1998 and 1997. The summary historical financial data for the
years ended December 31, 1995, 1996 and 1997 are derived from and should be read
in conjunction with the audited financial statements of Holdings and the related
notes thereto included elsewhere in this Prospectus. The summary financial data
for the years ended December 31, 1993 and 1994 are derived from audited
financial statements of Holdings that are not included in this Prospectus. The
summary financial data for the three month periods ended March 31, 1998 and 1997
are derived from the unaudited financial statements of Holdings and the related
notes thereto included elsewhere in this Prospectus. In the opinion of
management of Holdings, the unaudited condensed financial data reflect all
adjustments (which include reclassifications and normal recurring adjustments)
necessary to present fairly the financial position and results of operations for
the unaudited periods. The results of operations for the three months ended
March 31, 1998 are not necessarily indicative of operating results for the full
year. For preliminary capsule information for the quarter ended June 30, 1998,
see "Management Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments."
The unaudited pro forma consolidated statement of operations data for the
year ended December 31, 1997 and the three months ended March 31, 1998 assumes
that the Recapitalization and the offering of the Notes occurred on January 1,
1997. The unaudited pro forma consolidated financial data do not purport to
represent what Holdings' or the Company's results of operations would actually
have been had the Recapitalization and the offering of the Notes in fact
occurred on the assumed date, nor do they project Holdings' and/or the Company's
results of operation for any future period.
The financial data set forth below should be read in conjunction with the
historical financial statements and the related notes thereto, "Unaudited Pro
Forma Consolidated Financial Data," "Selected Historical and Pro Forma
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," all included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------ ----------------------------------------------------------------
PRO PRO
FORMA FORMA
1998 1998 1997 1997 1997 1996 1995 1994 1993
----- ---- ---- ----- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................... $ 50,630 $ 50,630 $ 52,646 $175,297 $175,297 $135,716 $116,268 $103,758 $ 78,414
Cost of Revenues
Rebates, postage and
freight................. 34,893 34,893 32,166 105,212 105,212 84,191 80,635 70,747 52,895
Processing and
servicing............... 11,296 11,296 10,376 40,447 40,447 31,393 24,920 20,346 16,682
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit................ 4,441 4,441 10,104 29,638 29,638 20,132 10,713 12,665 8,837
Selling expenses............ 1,424 1,424 1,393 5,403 5,504 4,610 3,493 2,927 3,244
General and administrative
expenses.................. 1,178 1,178 2,900 8,987 9,754 7,140 5,949 6,127 5,079
Compensation charges
attributable to
Recapitalization.......... -- -- -- -- 17,924 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss)..... 1,839 1,839 5,811 15,248 (3,544) 8,382 1,271 3,611 514
Interest expense............ (2,336) (2,385) -- (9,305) (981) (91) (252) (163) (243)
Amortization of deferred
financing costs........... (94) (3,329) -- (375) (48) -- -- -- --
Interest income............. 236 236 258 1,038 1,038 201 10 28 6
Transaction costs
attributable to
Recapitalization.......... -- -- -- -- (1,967) -- -- -- --
Other income (expense)...... (15) (15) -- -- -- (60) (15) 30 2
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes..................... (370) (3,654) 6,069 6,606 (5,502) 8,432 1,014 3,506 279
Provision for income
taxes..................... (137) (1,352) -- 2,444 423 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)........... $ (233) $ (2,302) $ 6,069 $ 4,162 $ (5,925) $ 8,432 $ 1,014 $ 3,506 $ 279
======== ======== ======== ======== ======== ======== ======== ======== ========
UNAUDITED PRO FORMA INCOME
TAX DATA:
Income (loss) before income
taxes..................... $ 6,069 $ (5,502) $ 8,432 $ 1,014 $ 3,506 $ 279
Provision (benefit) for
income taxes(a)........... 2,246 (1,308) 3,120 375 1,297 103
-------- -------- -------- -------- -------- --------
</TABLE>
13
<PAGE> 17
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------ ----------------------------------------------------------------
PRO PRO
FORMA FORMA
1998 1998 1997 1997 1997 1996 1995 1994 1993
----- ---- ---- ----- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Pro forma net income
(loss).................... $ 3,823 $ (4,194) $ 5,312 $ 639 $ 2,209 $ 176
======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA, as adjusted(b)...... $ 2,301 $ 2,301 $ 6,136 $ 16,836(d) $ (1,956) $ 9,578 $ 2,238 $ 4,561 $ 1,476
EBITDA, as adjusted,
margin(c)................. 4.5% 4.5% 11.7% 9.6% (1.1%) 7.1% 1.9% 4.4% 1.9%
Capital expenditures........ $ 1,576 $ 1,576 $ 492 $ 3,330 $ 3,330 $ 1,739 $ 1,061 $ 1,142 $ 1,084
Depreciation and
amortization(e)........... 462 462 325 1,588 1,588 1,196 967 950 962
Cash interest expense(f).... 2,336 2,385 0 9,305 981 91 252 163 243
Ratio of EBITDA, as
adjusted, to cash interest
expense(g)................ 1.0x 1.0x 1.8x
Ratio of EBITDA, as
adjusted, minus capital
expenditures to cash
interest expense(g)....... 0.3x 0.3x 1.5x
Ratio of earnings to fixed
charges(h)................ -- -- 28.7x 1.6x -- 13.1x 2.5x 9.4x 1.6x
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31,
1998
---------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 14,003
Working capital............................................. 6,716
Total assets................................................ 40,531
Total debt.................................................. 80,000
Pro forma Redeemable Class A Common Stock(i)................ 1,055
Pro forma stockholders' deficit(i).......................... (61,702)
</TABLE>
14
<PAGE> 18
NOTES TO SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(a) For periods ended on or prior to December 31, 1997 reflects the pro forma
income tax provision that would have been provided had the Company been a C
corporation, rather than an S corporation, for income tax purposes.
(b) EBITDA, as adjusted, represents earnings before interest expense, other
income(expense), income taxes, depreciation and amortization. Data for
EBITDA, as adjusted, is included because management understands that such
information is considered by certain investors as an additional basis on
which to evaluate the Company's ability to pay interest, repay debt and make
capital expenditures. EBITDA, as adjusted, does not reflect deductions for
interest, other expense, income taxes, depreciation and amortization, each
of which can significantly affect the Company's results of operations and
liquidity and should be considered in evaluating the Company's financial
performance. EBITDA, as adjusted, is not intended to represent and should
not be considered more meaningful than, or an alternative to, measures of
operating performance determined in accordance with generally accepted
accounting principles. See "Description of the Notes" for the definition of
"Consolidated EBITDA" under the Indenture.
(c) EBITDA, as adjusted, margin represents EBITDA, as adjusted, as a percentage
of revenues.
(d) Pro Forma EBITDA, as adjusted, for the year ended December 31, 1997
represents historical EBITDA, as adjusted, as described in Note (b) above,
adjusted for (i) salary and other benefits provided to the former majority
shareholder no longer being paid, (ii) consulting fees to be paid to the
former majority shareholder (as described in "Certain Transactions"), (iii)
management fees to be charged to Holdings by BTCP and OTPPB (as described in
"Certain Transactions"), (iv) amounts reflected in historical financial
statements for a phantom stock plan which terminated concurrent with the
Recapitalization (the "Phantom Stock Expenses"), (v) severance payments
incurred in connection with the Recapitalization and (vi) compensation
charges attributable to the Recapitalization as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
EBITDA, as adjusted......................................... $ (1,956)
Salary and other benefits provided to former majority
shareholder no longer being paid.......................... 606
Consulting fee to be paid to former majority shareholder.... (100)
Management fee to be charged to the Company by BTCP and
OTPPB for services which will include those which were
previously provided by the former majority shareholder.... (250)
Phantom Stock Expenses...................................... 511
Severance payments incurred in connection with the
Recapitalization.......................................... 101
Compensation charges attributable to the Recapitalization... 17,924
-------------
Pro forma EBITDA, as adjusted............................... $ 16,836
=============
</TABLE>
(e) Excludes amortization of deferred financing costs.
(f) Cash interest expense excludes amortization of deferred financing costs.
(g) For the year ended December 31, 1997, these ratios are not meaningful
because EBITDA, as adjusted was negative for such period. For prior periods,
these ratios are not presented because of the Company's relatively low
amounts of indebtedness.
(h) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed charges
for this purpose include interest expense, amortization of deferred
financing costs and one third of operating lease payments (the portion
deemed to be representative of the interest factor). For the three months
ended March 31, 1998 and the year ended December 31, 1997, earnings were
inadequate to cover fixed charges by $3,654 ($370 on a pro forma basis) and
$5,502 respectively. The shortfall for the three months ended March 31, 1998
(actual) was largely attributable to the write-off of deferred financing
costs relating to the Bridge Facility, and the shortfall for the year ended
December 31, 1997 (actual) was attributable to fees and expenses incurred in
connection with the Recapitalization, including compensation charges of
$17,924 for bonuses and phantom stock payments and transaction fees and
expenses of $1,967.
(i) As further discussed in Note 1 to the Consolidated Financial Statements,
Redeemable Class A Common Stock and stockholders' deficit are presented on a
pro forma basis and gave effect to (i) the reclassification from Redeemable
Class A Common Stock to stockholders' equity of shares of Class A Common
Stock owned by Messrs. Ecklund and Weil as a result of the termination of
arrangements between Holdings and such shareholders which gave such
shareholders the right to cause Holdings to repurchase all or a portion of
their common shares and (ii) an additional payment of approximately $692 to
the Selling Stockholders (as defined) and certain employees made in the
second quarter of 1998. See "Note 1 to the Consolidated Financial
Statements" and "The Recapitalization."
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<PAGE> 19
RISK FACTORS
Prospective purchasers of the Notes should consider carefully the following
matters, as well as the other information contained in this Prospectus before
making a decision to tender their Old Notes in the Exchange Offer or making a
decision to invest in the Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange the Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Old Notes may not be
offered or sold unless registered under the Securities Act, except pursuant to
an exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. The Company does not currently anticipate that
it will register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission set forth in no-action letters
issued to third parties, the Company believes that the New Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold or otherwise transferred by any holder thereof (other than any such
holder that is an "affiliate" of the Company within the meaning of Rule 405
promulgated under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business, such holder
has no arrangement or understanding with any person to participate in the
distribution of such New Notes and neither such holder nor any such other person
is engaging in or intends to engage in a distribution of such New Notes.
Notwithstanding the foregoing, each broker-dealer that receives New Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with any resale of New Notes received in exchange for Old Notes where such Old
Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from Young America). See "Plan of Distribution." However, the ability of any
Holder to resell the New Notes is subject to applicable state securities laws as
described in " -- Blue Sky Restrictions on Resale of New Notes".
NECESSITY TO COMPLY WITH EXCHANGE OFFER PROCEDURES
To participate in the Exchange Offer, and to avoid the restrictions on
transfer of the Old Notes, Holders of Old Notes must transmit a properly
completed Letter of Transmittal (or Agent's Message), including all other
documents required by such Letter of Transmittal, to the Exchange Agent at one
of the addresses set forth below under "The Exchange Offer -- Exchange Agent" on
or prior to the Expiration Date. In addition, either (i) certificates for such
Old Notes must be received by the Exchange Agent along with the Letter of
Transmittal (or Agent's Message) or (ii) a timely confirmation of a book-entry
transfer for such Old Notes, if such procedure is available, into the Exchange
Agent's account at DTC pursuant to the procedure for book-entry transfer
described herein, must be received by the Exchange Agent prior to the Expiration
Date or (iii) the Holder must comply with the guaranteed delivery procedures
described herein. See "The Exchange Offer."
BLUE SKY RESTRICTIONS ON RESALE OF NEW NOTES
In order to comply with the securities laws of certain jurisdictions, the
New Notes may not be offered or resold by any Holder unless they have been
registered or qualified for sale in such jurisdictions or an exemption from
registration or qualification is available and the requirements of such
exemption have been satisfied. Young America does not currently intend to
register or qualify the resale of the New Notes in any such jurisdictions.
However, an exemption is generally available for sales to registered
broker-dealers and certain institutional buyers. Other exemptions under
applicable state securities laws may also be available.
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<PAGE> 20
LACK OF PUBLIC MARKET FOR THE NEW NOTES
The Old Notes are designated for trading in the PORTAL market. The New
Notes will constitute a new class of securities with no established trading
market. The Company does not intend to apply for a listing of the New Notes on a
securities exchange or on any automated dealer quotation system. The Company has
been advised by BT Alex.Brown Incorporated ("BTAB") that BTAB currently intends
to make a market in the New Notes. BTAB is not obligated to do so, however, and
any market-making activities with respect to the New Notes may be discontinued
at any time without notice. In addition, such market-making activity will be
subject to the limits imposed by the Securities Act and the Exchange Act and may
be limited during the Exchange Offer and the pendency of any Shelf Registration
Statement (as defined herein). Because BTAB is an affiliate of the Company,
following consummation of the Exchange Offer, BTAB will be required to deliver a
current "market-making prospectus" and otherwise comply with the registration
requirements of the Securities Act in connection with any secondary market sale
of the New Notes. Accordingly, the ability of BTAB to make a market in the New
Notes may, in part, depend on the ability of the Company to maintain a current
market-making prospectus.
There is currently no established market for the New Notes and there can be
no assurance as to the liquidity of markets that may develop for the New Notes.
If a trading market does not develop or is not maintained, holders of the New
Notes may experience difficulty in reselling the New Notes or may be unable to
sell them at all. If a market develops for the New Notes, future trading prices
of the New Notes will depend on many factors, including among other things, the
Company's financial condition and results of operations. The liquidity of, and
trading market for, the New Notes also may be adversely affected by general
declines in the market for similar securities. Such a decline may adversely
affect such liquidity and trading markets independent of the financial
performance of, and prospects for, the Company. Depending on those and other
factors, the New Notes may trade at a discount from their principal amount.
LEVERAGE AND LIQUIDITY
As a result of the Recapitalization, the Company is highly leveraged. At
March 31, 1998, the Company's indebtedness was approximately $80.0 million, it
had a pro forma stockholders' deficit of $61.7 million and its pro forma ratio
of total debt to total capitalization was approximately 413%. In addition,
subject to the restrictions in the New Credit Facility and the Indenture, Young
America and its subsidiaries may incur additional indebtedness from time to time
to finance acquisitions or capital expenditures or for other purposes. The Notes
are unsecured obligations of Young America, guaranteed on an unsecured senior
subordinated basis by Holdings and the Subsidiary Guarantors. See
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operation -- Liquidity and Capital Resources," "Description of
the New Credit Facility" and "Description of the Notes."
The Company's high degree of leverage may have important consequences for
the Company, including that (i) the ability of the Company to obtain additional
financing, if necessary, for working capital, capital expenditures, acquisitions
or other purposes may be impaired or such financing may not be available on
terms favorable to the Company; (ii) a substantial portion of the Company's cash
flow will be used to pay the Company's interest expense and, in the case of
indebtedness incurred in the future, possibly principal repayments, which will
reduce the funds that would otherwise be available to the Company for its
operations and future business opportunities; on a pro forma basis interest
expense on the Notes represented 55.2% of the Company's EBITDA, as adjusted, for
the year ended December 31, 1997 and 101.0% of the Company's EBITDA, as
adjusted, for the three months ended March 31, 1998; (iii) a substantial
decrease in net operating cash flows of the Company could make it difficult for
the Company to meet its debt service requirements and force it to modify its
operations; (iv) the Company may be more highly leveraged than its competitors,
which may place it at a competitive disadvantage; and (v) the Company's high
degree of leverage may make it more vulnerable to a downturn in its business or
the economy generally. Any inability of the Company to service its indebtedness
or to obtain additional financing, as needed, would have a material adverse
effect on the Company's business.
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<PAGE> 21
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 New Credit
Facility or any successor facility. Such availability is or may depend on, among
other things, the Company meeting certain specified borrowing base
prerequisites. See "Description of New Credit Facility." The Company expects
that, based on current and expected levels of operations, its operating cash
flow, together with borrowings under the New 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. If the
Company is unable to service its indebtedness, it will be forced to take actions
such as 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.
RESTRICTIVE DEBT COVENANTS
The New Credit Facility and the Indenture contain, and the terms of any
future indebtedness of the Company may contain, significant covenants that,
among other things, restrict or may restrict the ability of the Company to (i)
declare dividends or redeem or repurchase capital stock; (ii) prepay, redeem or
purchase debt, including the Notes; (iii) incur liens; (iv) make loans and
investments; (v) incur additional indebtedness; (vi) amend or otherwise alter
debt and other material agreements; (vii) engage in mergers, acquisitions and
asset sales; (viii) enter into transactions with affiliates; and (ix) alter the
business it conducts. In addition, under the New Credit Facility, the Company
will be required to comply with financial covenants with respect to (a) a
minimum interest coverage ratio and (b) a minimum current ratio and, under the
terms of future indebtedness, the Company may be required to comply with other
financial covenants. If the Company were unable to borrow under the New Credit
Facility due to a default or failure to meet certain specified borrowing base
prerequisites for borrowing, it could be left without sufficient liquidity to
conduct its business as currently planned or to make payments of interest on the
Notes.
VARIABILITY OF CLIENT MIX; VARIABILITY OF SERVICES PROVIDED
The Company's business is subject to the needs and the marketing decisions
of its clients. The marketing plans and marketing budgets of the Company's
clients change from year to year. A client may run a major consumer marketing
program utilizing the Company's services during one year and then redirect its
marketing efforts and require significantly reduced levels of the Company's
services during the next. As a result, the revenues the Company derives from any
one client may vary significantly from year to year or from quarter to quarter.
PepsiCo, Inc., for example, increased its use of the Company's services such
that the Company's revenue derived from business with PepsiCo, Inc. increased
from 2% of the Company's revenues in 1995 to approximately 24.4% of the
Company's revenues for the year ended December 31, 1997. The Company expects
that, with the current winding-down of the "Pepsi Stuff(R)" program, PepsiCo,
Inc. will account for significantly less of the Company's revenues during 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Three Months Ended March 31, 1998
Compared With Three Months Ended March 31, 1997." The Company could experience a
reduction in the level of revenues it realizes from business with one or more of
its other significant clients, whether because of period-to-period fluctuations
in such clients' marketing activities or because of one or more decisions by
clients not to continue to engage the Company's services. In addition, the
Company could experience a reduction in the earnings it derives from the
services it provides its clients if the marketing decisions of one or more major
clients were to cause a shift away from the Company's higher margin service
revenues to lower margin rebate or postage and freight revenues. If any such
reduction or change in services provided is not offset by increases in revenues
from other significant clients and/or increases in higher margin service
revenues from other clients or the attraction of new clients, then the Company's
results of operations could be materially adversely affected. Quarterly levels
of revenues and profitability may also be affected by timing and other factors
affecting specific marketing programs. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
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<PAGE> 22
The Company is unable to predict the future marketing plans of its clients
or more generally the marketing plans of the industries in which its clients
compete. As a result, there can be no assurance that the Company's most
significant clients will conduct marketing programs utilizing the Company's
services in any given year or even continue to do business with the Company over
the long term. As is typical in the industry, the Company is often engaged to
provide services without the execution of a formal contract, and the vast
majority of the Company's engagements are either short-term in duration or are
cancelable on specified notice periods by the client.
IMPACT OF PROPOSED TOBACCO LEGISLATION ON PROMOTION MARKETING
Clients operating in the tobacco industry collectively accounted for 8.5%
of the Company's revenues for 1996 and 7.3% of the Company's revenues for the
year ended December 31, 1997. National legislation has been proposed in Congress
that, if enacted, would significantly restrict the ability of companies within
the tobacco industry to market products through branded premium programs after
1998. Management cannot determine whether or when such new legislation will go
into effect. Although management believes that it may be able to replace lost
business by providing different CIP services to the tobacco industry, there can
be no assurance that it will be able to do so.
DEPENDENCE ON KEY PERSONNEL
The success of the Company depends in large part upon the abilities and
continued service of its executive officers and other key employees,
particularly Charles D. Weil, President and Chief Executive Officer of the
Company. There can be no assurance that the Company will be able to retain the
services of such officers and employees. The failure of the Company to retain
the services of Mr. Weil or of other key personnel could have a material adverse
effect on the Company. The Company maintains 'key man' life insurance on the
life of Mr. Weil in the amount of $5 million.
The Company has employment agreements with Mr. Weil and L. Joseph Kulas,
the Chief Financial Officer of the Company. See "Management -- Employment
Agreements." In addition, many of the Company's executive officers (including
Mr. Weil) and other key personnel hold an equity interest in Holdings and are
expected to participate in Holdings' Employee Stock Option Plan (as defined
below; see "Management -- Employee Stock Option Plan"). The Company believes
that such equity interests increase the incentives for those executive officers
and key employees to remain with the Company. However, neither such employment
agreements nor such equity interests ensure the continued service of Mr. Weil or
such executive officers and other key personnel.
DIFFICULTIES OF MANAGING GROWTH
The Company has experienced growth over the past several years and the
Company's management expects that this trend will continue. The ability to
achieve continued growth depends on a number of factors, including the Company's
ability to (i) retain and expand the provision of CIP services to existing
clients, (ii) initiate, develop and maintain new client relationships and expand
its marketing operations, (iii) utilize its existing infrastructure and
databases to perform the services required by its clients in an efficient and
timely manner, (iv) recruit, motivate and retain qualified management and hourly
personnel and (v) maintain the high quality of the services that it provides to
its clients. The Company's continued growth can be expected to place a
significant strain on the Company's management, operations, employees and
resources. There can be no assurance that the Company will be able to maintain
or accelerate its current growth, effectively manage its expanding operations or
achieve planned growth on a timely or profitable basis. If the Company is unable
to manage growth effectively, its business, results of operations or financial
condition could be materially adversely affected.
RISKS ASSOCIATED WITH FOCUS ON HIGH-VOLUME AND/OR COMPLEX MARKETING PROGRAMS
In recent years, the Company has focused on the execution of high-volume
and/or complex marketing programs for its clients. The Company has (i) focused
its marketing efforts on existing and prospective clients that have the
potential for generating large revenue for the Company, (ii) invested
substantial time and
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<PAGE> 23
resources developing a sophisticated management information system to manage
multiple, varying, high-volume marketing programs and (iii) adopted a pricing
strategy in part predicated on earning margins appropriately reflecting its
ability to execute high-volume and complex marketing programs. If adverse
changes in economic conditions or changes in the marketing strategies of the
Company's clients result in a significant reduction in the number of complex
and/or high-volume marketing programs, the Company's business could be
materially adversely affected.
APPLICATION OF STATE ESCHEAT LAWS
In connection with approximately 40% of the aggregate dollar amount of
checks issued under rebate programs for which the Company has provided CIP
services, the Company has entered into arrangements with its clients providing
that the Company would fund from the Company's own working capital the payment
of rebates offered by the Company's clients. The Company, in turn, invoices its
clients for the full amount of those rebate checks that the Company issues to
consumers. When the Company agrees to fund rebate payments with its own working
capital, its contractual arrangements with its clients generally provide that
the Company is entitled to retain amounts paid to it by clients relating to
rebate checks that are never cashed (referred to in the industry as slippage).
For the years ended December 31, 1997, and 1996, the portions of revenues
recognized by the Company as slippage were $3.3 million and $2.4 million,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
The escheat laws of various states provide that under certain circumstance
holders of unclaimed property (possibly including, under certain interpretations
of such laws, slippage amounts) must surrender that property to the state in
question. The Company believes that, because Holdings and Young America are
Minnesota corporations with their principal operations and principal places of
business located in Minnesota, the escheat law of the State of Minnesota would
govern the right of the Company to retain slippage amounts, except that Oklahoma
escheat law may govern the Company's right to retain slippage amounts with
respect to operations conducted from the Company's Oklahoma facility. The
Company also believes that under current Minnesota and Oklahoma escheat law, it
is entitled to retain slippage amounts in those instances where the Company
funds its client's rebate program from its own working capital rather than
surrendering such amounts to the State of Minnesota or the State of Oklahoma.
There can be no assurance, however, that the Minnesota or Oklahoma escheat law
will not change or that the Company's interpretation of the Minnesota or
Oklahoma escheat law would prevail in any action by the State of Minnesota or
the State of Oklahoma to require the Company to surrender to either of such
States any slippage amounts. Further, there can be no assurance that the State
of Minnesota or the State of Oklahoma will not commence action to require one or
more of the Company's clients to surrender slippage amounts to either of such
States. There can also be no assurance that another state will not prevail in an
action under its escheat laws to require the surrender to that state of slippage
amounts whether unclaimed by residents of such state or otherwise.
VULNERABILITY TO ECONOMIC DOWNTURN
Marketing budgets in large companies tend to decline during general
downturns in the economy. As a result, the market for CIP services may also
decline during future periods of economic weakness. There can be no assurance
that future economic downturns will not materially adversely affect the
Company's business.
RELIANCE ON TECHNOLOGY; RISK OF BUSINESS INTERRUPTION
The Company has made significant investments in sophisticated and
specialized software and other computer and telecommunications technology and
has focused on the application of this technology to provide customized
solutions to meet its clients' needs. The Company expects that it will be
necessary to continue to select, invest in and develop new and enhanced
technology on a timely basis in the future in order to maintain its
competitiveness. The Company's future success will also depend in part on its
ability to continue to develop technology solutions which keep pace with
evolving industry standards and changing client demands. There can be no
assurance that the Company will be successful in anticipating technological
changes or in selecting and developing new and enhanced information technology
on a timely basis. Although the Company believes that certain of its systems are
more advanced than those of its competitors, its technological advantage arises
from the application of technology that is readily available to or could legally
be duplicated by its competitors.
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<PAGE> 24
There can be no assurance that any of the technological advantages the Company
may currently enjoy can be maintained.
In addition, the Company's business is highly dependent on its computer and
telephone equipment and software systems and, although the Company maintains
backup systems, the temporary or permanent loss of any such equipment or
systems, through casualty or operating malfunction, could have a material
adverse effect on the Company's business. While the Company maintains property
and business interruption insurance, such insurance may not adequately
compensate the Company for all losses that it may incur. See
"Business -- Technology."
DEPENDENCE ON TELEPHONE, POSTAL AND DELIVERY SERVICE
The Company's business is materially dependent on the service provided by
various local and long distance telephone companies. A significant increase in
the cost of telephone services that is not recoverable through an increase in
the pricing of the Company's services, or any significant interruption in
telephone services, could have a material adverse impact on the Company's
business.
The Company's business is also materially dependent on the services of the
United States Postal Service (the "USPS") and, to a lesser degree, the services
of private delivery services. Postal and delivery service rate increases affect
the cost of the Company's mailings and shipments to consumers. The Company
benefits from discounts from the basic postal rate structure, such as discounts
for bulk mailings and pre-sorting by zip code and carrier routes. Any increase
in postal and other delivery service rates, including through the elimination of
existing discounts, that the Company cannot recover through an increase in the
pricing of the Company's services could have a material adverse impact on the
Company's business. In May 1998, the USPS announced proposed price increases.
The Company believes that any such increase can be recovered through increased
pricing and will not have a material adverse impact on the Company's business.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON LABOR FORCE
The Company's business is very labor intensive. The Company's success is
significantly dependent on its ability to recruit, hire, train and retain
qualified employees and independent contractors. A significant increase in the
Company's employee turnover rate could increase the Company's recruiting and
training costs and decrease operating effectiveness and productivity. Also, the
addition of significant new clients or the implementation of new high-volume
programs may require the Company to recruit, hire and train qualified personnel
at an accelerated rate. There can be no assurance that the Company will be able
to continue to hire, train and retain sufficient qualified personnel to
adequately staff CIP services in support of its clients marketing programs.
Because a significant portion of the Company's operating costs relate to labor
costs, an increase in wages, costs of employee benefits or employment taxes not
recoverable through an increase in the pricing of the Company's services could
have a material adverse effect on the Company's business, results of operations
or financial condition. In addition, certain of the Company's facilities are
located in geographic areas with relatively low unemployment rates, thus
potentially making it more difficult and costly to hire qualified personnel. See
"-- Difficulties of Managing Growth" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
HIGHLY COMPETITIVE MARKET
The market in which the Company competes is highly competitive and
fragmented. The Company expects competition to persist and to intensify in the
future. The Company's competitors include small firms offering specific
promotion fulfillment applications, divisions of larger entities and large
independent firms. A number of competitors have or may develop greater
capabilities and resources than those of the Company. Similarly, there can be no
assurance that additional competitors with greater resources than the Company
will not enter the Company's market. The Company's performance and growth could
be negatively affected if its existing clients decide to provide in-house CIP
services that currently are outsourced or if potential clients retain or
increase their in-house customer service operations. In addition, competitive
pressures from current
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<PAGE> 25
or future competitors could cause the Company's services to lose market
acceptance or result in significant price erosion, with a material adverse
effect upon the Company's business, results of operations or financial
condition. See "Business -- Competition."
RISKS GENERALLY ASSOCIATED WITH ACQUISITIONS
One element of the Company's growth strategy is to pursue strategic
acquisitions that either expand or complement the Company's business. There can
be no assurance that the Company will be able to identify acceptable acquisition
candidates or complete any strategic acquisitions on terms favorable to the
Company or in a timely manner. Acquisitions involve a number of special risks,
including the diversion of management's attention to the assimilation of the
operations and personnel of the acquired companies, adverse short-term effects
on the Company's operating results and/or the integration of financial reporting
and other management systems. In addition, the Company may require additional
debt or equity financings for future acquisitions, which may not be available on
terms favorable to the Company, if at all. There is no assurance that the
Company can successfully integrate an acquired business into the Company's
business or that any acquired business can be operated profitably by the
Company.
PURCHASE OF THE NOTES UPON CHANGE OF CONTROL
Upon a Change of Control, Young America is required to offer to purchase
all outstanding Notes at 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase. The source of funds for any
such purchase will be the Company's available cash or cash generated from
operations or other sources, including borrowings, sales of assets, sales of
equity or funds provided by a new controlling person. However, there can be no
assurance that sufficient funds will be available at the time of any Change of
Control to make any required repurchases of Notes tendered, or that, if
applicable, restrictions in the New Credit Facility or in any future
indebtedness incurred by the Company will allow Young America to make such
required repurchases. See "Description of the Notes -- Change of Control" and
"Description of New Credit Facility."
The Change of Control provision may not necessarily afford the Holders
protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving the
Company that may adversely affect the Holders, because such transaction may not
involve a shift in voting power or beneficial ownership, or, even if they do,
may not involve a shift of the magnitude required under the definition of Change
of Control to trigger such provisions. Except as described under "Description of
the Notes -- Change of Control", the Indenture does not contain provisions that
permit the Holders of the Notes to require the Company to repurchase or redeem
the Notes in the event of a takeover, recapitalization or similar transaction.
CONCENTRATION OF OWNERSHIP OF THE COMPANY; STOCKHOLDERS' AGREEMENT
Young America is a wholly-owned subsidiary of Holdings. As a result of the
Recapitalization, (i) BTCP holds 45.0% of Holdings' outstanding voting
securities (the "Voting Stock"), (ii) OTPPB holds 29.0% of the Voting Stock,
(iii) the Management Stockholders hold 15.7% of the Voting Stock and (iv) Jay F.
Ecklund holds 10.3% of the Voting Stock. Under the Stockholders' Agreement (as
defined in "Principal Stockholders" below), BTCP is entitled to designate two
directors to Holdings' board of directors (the "Board of Directors"), each of
OTPPB and Jay F. Ecklund is entitled to designate one director and Holdings'
chief executive officer serves as a director. In addition, BTCP and OTPPB are
entitled to designate jointly up to three independent directors to the Board of
Directors. Accordingly, BTCP and OTPPB collectively hold a majority of the
Voting Stock and have the power to designate a majority of Holdings' directors
and, upon the occurrence of certain events, BTCP will itself have the power to
designate a majority of Holdings' directors. Circumstances may occur in which
the interests of OTPPB and/or BTCP, as shareholders of Holdings, could be in
conflict with the interests of the holders of the Notes. Also, under the
Stockholders' Agreement a wide range of actions to be taken by the Company will
require separate approval of the holders of a majority of the shares currently
held by OTPPB and the holders of a majority of the shares currently held by
BTCP, including the sale of the Company and the consummation of an initial
public offering. Thus, if those shareholder groups,
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or their representatives on the Board of Directors, are unable to reach
consensus on matters requiring their separate approval, the business, results of
operations and financial condition of the Company could be materially adversely
affected.
BTCP owns interests in two other direct marketing services companies,
National Catalog Corporation, a third party fulfillment company for direct mail
catalogs and Genesis Teleserv Corporation (d/b/a Dakotah Direct), an inbound and
outbound teleservices company, and may acquire interests in other direct
marketing services companies. No assurance can be given that a merger or other
transaction involving the Company and/or Holdings and one or more of such BTCP
owned companies will not be considered in the future.
SUBORDINATION OF NOTES AND THE GUARANTEES; HOLDING COMPANY STRUCTURE OF THE
GUARANTOR
The Notes and the Guarantees will be unsecured and subordinated to the
prior payment in full of all Senior Debt of Young America and all Guarantor
Senior Debt. As of March 31, 1998, the aggregate outstanding principal amount of
all Senior Debt was approximately $0.5 million (consisting of obligations under
undrawn letters of credit) under a commitment for up to $10 million under the
New Credit Facility (subject to availability under the terms of the New Credit
Facility). At such date, no indebtedness subordinated to the Notes was
outstanding. In the event of a bankruptcy, liquidation or reorganization of
Young America, the assets of Young America, Holdings or the Subsidiary
Guarantors will be available to pay obligations on the Notes only after all
Senior Debt or Guarantor Senior Debt, as the case may be, has been paid in full,
and there may not be sufficient assets remaining to pay amounts due on any or
all of the Notes. In addition, Young America may not pay principal or premium,
if any, or interest on the Notes if any Senior Debt or Guarantor Senior Debt is
not paid when due or any other default on any Senior Debt or Guarantor Senior
Debt occurs and the maturity of such Senior Debt or Guarantor Senior Debt is
accelerated in accordance with its terms, unless, in either case, such amount
has been paid in full or the default has been cured or waived and such
acceleration has been rescinded. In addition, if any default occurs with respect
to certain Senior Debt or Guarantor Senior Debt and certain other conditions are
satisfied, Young America may not make any payments on the Notes for a designated
period of time. Finally, if any judicial proceeding is pending with respect to
any such default in payment on any Senior Debt or Guarantor Senior Debt or other
default with respect to certain Senior Debt or Guarantor Senior Debt or if the
maturity of the Notes is accelerated because of a default under the Indenture
and such default constitutes a default with respect to any Senior Debt or
Guarantor Senior Debt, Young America may not make any payment on the Notes.
As of the date of this Prospectus, all of the operations of Holdings are
conducted through the Company and Holdings has no material assets other than the
stock of the Company. Accordingly, the Guarantor's cash flow and, consequently,
its ability to service debt, including the Guarantee, will depend upon the
Company's operations.
FRAUDULENT CONVEYANCE
The net proceeds from the offering of the Old Notes were loaned and
distributed by Young America to Holdings and applied by Holdings to the
repayment of amounts outstanding under the Bridge Facility, which were incurred
in connection with the Recapitalization. Under relevant federal and state
fraudulent conveyance statutes (the "fraudulent conveyance statutes") and laws
relating to distributions to shareholders, the obligations of the Company
incurred under the Indenture and the Notes may be subject to review in a
bankruptcy, reorganization or rehabilitation case or similar proceeding or a
lawsuit by or on behalf of unpaid creditors of the Company. The requirements for
establishing a fraudulent conveyance or revocable transfer vary depending on the
law of the jurisdiction that is being applied. If under relevant fraudulent
conveyance statutes a court were to find that at the time Holdings and Young
America incurred the indebtedness under the Bridge Facility and Holdings
repurchased its capital stock pursuant to the Recapitalization or at the time
Young America incurred the indebtedness under the Notes and made the loan and
distribution to Holdings (i) Holdings or the Company incurred such indebtedness
with the intent of hindering, delaying or defrauding current or future creditors
of the Company, or (ii) (a) Holdings or the Company received less than
reasonably equivalent value or fair consideration for incurring such
indebtedness, repurchasing such capital stock or making such loan and
distribution and (b) Holdings or the Company (A) was insolvent or was rendered
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insolvent by reason of incurring such indebtedness, repurchasing such capital
stock or making such loan and distribution, (B) was engaged or about to engage
in a business or transaction for which its assets constituted unreasonably small
capital, (C) intended to incur, or believed that it would incur, indebtedness
beyond its ability to pay as such indebtedness matured (as all of the foregoing
terms are defined in or interpreted under the applicable fraudulent conveyance
statutes) or (D) was a defendant in an action for money damages, or had a
judgment for money damages docketed against it (if, in either case, the judgment
is unsatisfied after the final judgment), such court could avoid or subordinate
the Notes to presently existing and future indebtedness of the Company and take
other action detrimental to the holders of the Notes, including, under certain
circumstances, invalidating the Notes.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the federal or local law that is being applied in any such
proceeding. Generally, however the Company would be considered insolvent if, at
the time it incurred the indebtedness constituting the Bridge Facility or the
Notes, either (i) the fair market value (or fair salable value) of its assets
were less than the amount required to pay the probable liability on its total
existing debts and liabilities (including contingent liabilities) as they become
absolute and matured or (ii) it were incurring indebtedness beyond its ability
to pay as such indebtedness matures.
A court would likely conclude that the Company did not receive reasonably
equivalent value or fair consideration for incurring its obligations under the
Notes to the extent that the proceeds of the Notes were used to fund a loan and
a distribution to Holdings to allow it to repay the indebtedness under the
Bridge Facility and the Bridge Facility was used to repurchase capital stock of
Holdings from any of the Selling Stockholders. The Company believes that at the
time Holdings entered into the Bridge Facility and at the time Young America
issued the Notes and loaned and distributed the net proceeds to Holdings each
(i) was (a) neither insolvent nor rendered insolvent thereby for purposes of the
foregoing standards, (b) in possession of sufficient capital to meet its
obligations as such obligations mature or become due and to operate its business
effectively and (c) incurring obligations within its ability to pay such
obligations as they mature or become due and (ii) had sufficient assets to
satisfy any probable money judgment against it in any pending action. No
assurance can be given, however, that a court passing on such issues would reach
the same conclusions.
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USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The
Exchange Offer is intended to satisfy certain obligations of Young America and
Holdings under the Registration Rights Agreement with respect to the Old Notes.
In consideration for issuing the New Notes contemplated in this Prospectus, the
Company will receive Old Notes in like principal amount, the form and terms of
which are substantially similar to the form and terms of the New Notes except as
otherwise described herein. The Old Notes surrendered in exchange for New Notes
will be returned to the Company and canceled and cannot be reissued.
Accordingly, the issuance of the New Notes will not result in any increase or
decrease in the indebtedness of the Company.
The net proceeds to the Company from the issuance of the Old Notes (after
deducting the fees and expenses incurred in connection with such offering) were
approximately $77.0 million. An amount equal to $10.0 million of such net
proceeds was loaned by Young America to Holdings and an amount equal to
approximately $67.0 million of such net proceeds, together with approximately
$5.4 million of additional cash, was distributed by Young America to Holdings.
The aggregate amount of such loan and distribution were used to repay the $80.0
million principal amount outstanding under the Bridge Facility, together with
accrued interest thereon. The proceeds from the borrowing under the Bridge
Facility, together with a portion of the proceeds from the issuance of capital
stock of Holdings, were used to repurchase shares of capital stock of Holdings
from the Selling Stockholders in the Recapitalization. See "Prospectus
Summary -- The Recapitalization."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by Young America on February 23, 1998 to the
Initial Purchaser, which resold the Old Notes to qualified institutional
investors in reliance on Rule 144A under the Securities Act. In connection
therewith, Young America, Holdings and the Initial Purchaser entered into the
Registration Rights Agreement, which provides that (i) Young America and
Holdings will file a registration statement with respect to the Exchange Offer
(the "Exchange Offer Registration Statement") with the Commission within 60 days
(the "Target Filing Date") after the date of the original issuance of the Old
Notes (the "Issue Date"), (ii) Young America and Holdings will use their
respective best efforts to cause the registration statement with respect to the
Exchange Offer to be declared effective by the Commission within 135 days after
the Issue Date (the "Target Effectiveness Date"), (iii) Young America and
Holdings will use their respective best efforts to consummate the Exchange Offer
within 160 days after the Issue Date (the "Target Consummation Date") and (iv)
if obligated to file the Shelf Registration Statement, Young America and
Holdings will file the Shelf Registration Statement with the Commission promptly
after such filing obligation arises and to use their respective best efforts to
cause the Shelf Registration Statement to be declared effective by the
Commission on or prior to the Target Effectiveness Date. Promptly after the
effectiveness of the Registration Statement, Young America will offer, pursuant
to this Prospectus, to the Holders of the Old Notes the opportunity to exchange
their Old Notes for a like principal amount of New Notes, to be issued without a
restrictive legend and which may, generally, be reoffered and resold by the
holder without restrictions or limitations under the Securities Act. The term
"Holder" with respect to the Exchange Offer means any person in whose name Old
Notes are registered on the books of the Company or any other person who has
obtained a properly completed bond power from the registered holder.
Young America and Holdings have not requested, and do not intend to
request, an interpretation by the staff of the Commission with respect to
whether the New Notes issued pursuant to the Exchange Offer in exchange for the
Old Notes may be offered for sale, resold or otherwise transferred by any holder
without compliance with the registration and prospectus delivery provisions of
the Securities Act. Instead, based on interpretations by the staff of the
Commission set forth in no-action letters issued to Exxon Capital Holdings
Corporation (available May 13, 1989), Morgan Stanley & Co. Incorporated
(available June 5, 1991) and Shearman & Sterling (available July 2, 1993), Young
America and Holdings believe that New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by any holder of such New Notes (other than any such holder that is
an "affiliate" of Young America or Holdings within the meaning of Rule 405
promulgated under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such Holder's business, such Holder
has no arrangement or understanding with any person to participate in the
distribution of such New Notes and neither such Holder nor any other such person
is engaging in or intends to engage in a distribution of such New Notes. Because
the Commission has not considered the Exchange Offer in the context of a
no-action letter, there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer. Any
Holder who is an affiliate of Young America or Holdings or who tenders in the
Exchange Offer for the purpose of participating in a distribution of the New
Notes cannot rely on such interpretations by the staff of the Commission and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a resale transaction.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a broker-dealer in connection with resales of New Notes
received in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities (other than Old Notes acquired directly from Young America). See
"Plan of Distribution."
If (i) because of any change in law or in currently prevailing
interpretations of the staff of the Commission, the Company is not permitted to
effect the Exchange Offer, (ii) the Exchange Offer is not
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consummated on or prior to the Target Consummation Date, (iii) in certain
circumstances certain holders of unregistered New Notes so request, (iv), the
Holders of not less than a majority in aggregate principal amount of the Old
Notes determine that the interests of the Holders would be materially adversely
affected by consummation of the Exchange Offer or (v) in the case of any Holder
that participates in the Exchange Offer, such Holder does not receive New Notes
on the date of the exchange that may be sold without restriction under state and
federal securities laws (the occurrence of any such event set forth in the
foregoing clauses (i) through (v), a "Shelf Registration Event"), then, in the
case of such events, the Company will deliver to the Holders and the Trustee
notice thereof (the "Shelf Notice") and thereafter Young America and Holdings
shall file the Shelf Registration Statement (as defined herein) pursuant to the
Registration Rights Agreement.
SHELF REGISTRATION.
If a Shelf Registration Event has occurred (and whether or not an Exchange
Offer Registration Statement has been filed with the Commission or has become
effective, or the Exchange Offer has been consummated), then Young America and
Holdings will file the Shelf Registration Statement and comply with the
following terms.
Shelf Registration Statement. Young America and Holdings shall promptly
prepare and file with the Commission a Registration Statement for an offering to
be made on a continuous basis pursuant to Rule 415 covering all of the Old Notes
required to be registered under the Registration Rights Agreement (the "Shelf
Registration Statement"). Young America and Holdings shall use their best
efforts to cause the Shelf Registration Statement to be declared effective under
the Securities Act on or prior to the Target Effectiveness Date, and to keep the
Shelf Registration Statement continuously effective under the Securities Act
until the date which is 24 months from the Issue Date, or such shorter period
ending when all Old Notes covered by the Shelf Registration Statement have been
sold in the manner set forth and as contemplated in the Shelf Registration
Statement (such 24 month or shorter period, the "Effectiveness Period"). In the
event that a Shelf Registration Statement is filed, the Company will provide to
each Holder copies of the prospectus that is a part of the Shelf Registration
Statement, notify each such Holder when the Shelf Registration Statement for the
Old Notes has become effective and take certain other actions as are required to
permit unrestricted resales of the Old Notes. A Holder that sells Old Notes
pursuant to the Shelf Registration Statement will be required to be named as a
selling security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such
Holder (including certain indemnification rights and obligations).
Withdrawal of Stop Orders. If the Shelf Registration Statement ceases to
be effective for any reason at any time during the Effectiveness Period (other
than because of the sale of all of the securities registered thereunder), each
of Young America and Holdings shall use their best efforts to obtain the prompt
withdrawal of any order suspending the effectiveness thereof.
Supplements and Amendments. Young America and Holdings shall promptly
supplement and amend the Shelf Registration Statement if required by the rules,
regulations or instructions applicable to the registration form used for such
Shelf Registration Statement, if required by the Securities Act, or if
reasonably requested by the Holders of a majority in aggregate principal amount
of the Old Notes covered by such Registration Statement or by any underwriter of
such Old Notes.
ADDITIONAL INTEREST
(a) Young America and Holdings have agreed to pay, as liquidated damages,
additional interest on the Notes ("Additional Interest") under the circumstances
and to the extent set forth below (without duplication):
(i) if (A) neither the Exchange Offer Registration Statement nor the
Shelf Registration Statement has been filed on or prior to the Target
Filing Date or (B) notwithstanding that the Company has consummated or will
consummate the Exchange Offer, the Company is required to file a Shelf
Registration Statement and such Shelf Registration Statement is not filed
on or prior to the date required
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by the Registration Rights Agreement, then commencing on the day after
either such required filing date, Additional Interest shall accrue on the
Notes over and above the stated interest at a rate of 0.50% per annum for
the first 90 days immediately following the Target Filing Date, such
Additional Interest rate increasing by an additional 0.50% per annum at the
beginning of each subsequent 90-day period;
(ii) if (A) neither the Exchange Offer Registration Statement nor the
Shelf Registration Statement is declared effective by the Commission on or
prior to the Target Effectiveness Date or (B) notwithstanding that the
Company has consummated or will consummate the Exchange Offer, the Company
is required to file a Shelf Registration Statement and such Shelf
Registration Statement is not declared effective by the Commission on or
prior to the 60th day following the date such Shelf Registration Statement
is filed, then, commencing on the day after either such filing date,
Additional Interest shall be accrued on the Notes included or that should
have been included in such registration statement over and above the stated
interest at a rate of 0.50% per annum for the first 90 days immediately
following the Target Effectiveness Date, such Additional Interest rate
increasing by an additional 0.50% per annum at the beginning of each
subsequent 90-day period; and
(iii) if either (A) Young America and Holdings have not exchanged New
Notes for all Old Notes validly tendered and not withdrawn in accordance
with the terms of the Exchange Offer on or prior to the 45th day after the
Target Effectiveness Date or (B) if applicable, the Shelf Registration
Statement has been declared effective and such Shelf Registration Statement
ceases to be effective at any time during the Effectiveness Period for a
period of 15 consecutive days without being succeeded immediately by an
additional Exchange Offer Registration Statement filed and declared
effective, then Additional Interest shall accrue on the Notes (over and
above any interest otherwise payable on the Notes) at a rate of 0.50% per
annum commencing on (x) the 46th day after the Target Effectiveness Date,
in the case of (A) above, or (y) the day the Shelf Registration Statement
ceases to be effective without being declared effective within 15 business
days thereafter in the case of (B) above, such Additional Interest rate
increasing by an additional 0.50% per annum at the beginning of each
subsequent 90-day period (it being understood and agreed that,
notwithstanding any provision to the contrary, so long as any Note that is
the subject of a Shelf Notice is then covered by an effective Shelf
Registration Statement, no Additional Interest shall accrue on such Note);
provided, however, that the Additional Interest rate on any affected Note may
not exceed at any one time in the aggregate 1.0% per annum; and provided,
further, that (1) upon the filing of the Exchange Offer Registration Statement
or a Shelf Registration Statement (in the case of clause (i) of this paragraph),
(2) upon the effectiveness of the Exchange Offer Registration Statement or the
Shelf Registration Statement (in the case of clause (ii) of this paragraph) or
(3) upon the exchange of New Notes for all Old Notes validly tendered and not
withdrawn (in the case of clause (iii)(A) of this paragraph), or upon the
effectiveness of the Exchange Offer Registration Statement which had ceased to
remain effective (in the case of clause (iii)(B) of this paragraph), Additional
Interest on the affected Notes as a result of such clause (or the relevant
subclause thereof), as the case may be, shall cease to accrue.
Any amounts of Additional Interest due pursuant to clause (i), (ii) or
(iii) above will be payable in cash on the same original interest payment dates
as the Notes.
Holders of Old Notes will be required to make certain representations to
Young America and Holdings (as described in the Registration Rights Agreement)
in order to participate in the Exchange Offer and will be required to deliver
information to be used in connection with the Shelf Registration Statement and
to provide comments on the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Old Notes
included in the Shelf Registration Statement and benefit from the provisions set
forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all of the provisions of the Registration Rights Agreement, a
copy of which has been filed as an exhibit to the Registration Statement of
which this Prospectus forms a part.
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The Old Notes are designated for trading in the PORTAL market. To the
extent Old Notes are tendered and accepted in the Exchange Offer, the principal
amount of outstanding Old Notes will decrease with a resulting decrease in the
liquidity in the market therefor. Following the consummation of the Exchange
Offer, Holders of Old Notes who were eligible to participate in the Exchange
Offer but who did not tender their Old Notes will not be entitled to certain
rights under the Registration Rights Agreement and such Old Notes will continue
to be subject to certain restrictions on transfer. Accordingly, the liquidity of
the market for the Old Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, Young America will accept any and all Old
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time,
on the Expiration Date. Young America will issue $1,000 principal amount of New
Notes in exchange for each $1,000 principal amount of outstanding Old Notes
accepted in the Exchange Offer. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer. However, Old Notes may be tendered only in
integral multiples of $1,000. The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Old Notes being tendered for exchange.
The form and terms of the New Notes will be identical in all material
respects to the form and terms of the Old Notes, except that the New Notes have
been registered under the Securities Act and therefore will not bear legends
restricting their transfer and will not contain certain provisions providing for
the payment of additional interest on the Old Notes under certain circumstances
relating to the Registration Rights Agreement, which provisions will terminate
upon the consummation of the Exchange Offer. The New Notes will evidence the
same debt as the Old Notes and will be entitled to the benefits of the Indenture
under which the Old Notes were, and the New Notes will be, issued.
As of the date of this Prospectus, $80,000,000, aggregate principal amount
of the Old Notes are outstanding. Young America and Holdings have fixed the
close of business on August 4, 1998 as the record date for the Exchange Offer
for purposes of determining the persons to whom this Prospectus, together with
the Letter of Transmittal, will initially be sent. As of such date, there was
one registered Holder of the Old Notes.
Holders of the Old Notes do not have any appraisal or dissenters' rights
under the Minnesota Business Corporation Act (the "MBCA") or the Indenture in
connection with the Exchange Offer. Young America and Holdings intend to conduct
the Exchange Offer in accordance with the applicable requirements of the
Exchange Act and the rules and regulations of the Commission promulgated
thereunder.
Young America shall be deemed to have accepted validly tendered Old Notes
when, as and if it has given oral notice (confirmed in writing) or written
notice thereof to the Exchange Agent. The Exchange Agent will act as agent for
the tendering Holders for the purpose of the exchange of Old Notes.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, any such unaccepted Old Notes will be returned, without expense, to
the tendering Holder thereof as promptly as practicable after the Expiration
Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. Young America and Holdings will pay all charges
and expenses, other than certain applicable taxes, in connection with the
Exchange Offer. See "-- Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
September 4, 1998 unless Young America and Holdings, in their sole discretion,
extend the Exchange Offer, in which case the term "Expiration Date" shall mean
the latest date and time to which the Exchange Offer is extended.
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In order to extend the Exchange Offer, Young America and Holdings will
notify the Exchange Agent of any extension by oral notice (confirmed in writing)
or written notice and will make a public announcement thereof prior to 9:00
a.m., New York City time, on the next business day after each previously
scheduled expiration date.
Young America and Holdings reserve the right, in their sole discretion, (i)
to delay accepting any Old Notes, to extend the Exchange Offer or, if any of the
conditions set forth below under "The Exchange Offer -- Conditions" shall not
have been satisfied, to terminate the Exchange Offer, by giving oral notice
(confirmed in writing) or written notice of such delay, extension or termination
to the Exchange Agent or (ii) to amend the terms of the Exchange Offer in any
manner. Any such delay in acceptance, extension, termination or amendment will
be followed as promptly as practicable by a public announcement thereof. If the
Exchange Offer is amended in a manner determined by Young America and Holdings
to constitute a material change, Young America and Holdings will promptly
disclose such amendment by means of a prospectus supplement that will be
distributed to the registered Holders, and Young America and Holdings will
extend the Exchange Offer for a period of five to 10 business days, depending
upon the significance of the amendment and the manner of disclosure to the
registered Holders, if the Exchange Offer would otherwise expire during such
five-to 10-business-day period.
Without limiting the manner in which Young America and Holdings may choose
to make public announcement of any delay, extension, termination or amendment of
the Exchange Offer, Young America and Holdings shall have no obligation to
publish, advertise or otherwise communicate any such public announcement, other
than by making a timely release to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
The New Notes will accrue interest from February 23, 1998 and such interest
will be payable semi-annually in arrears on February 15 and August 15 of each
year, commencing August 15, 1998 at the rate of 11 5/8% per annum. No interest
will be paid on Old Notes that are accepted for exchange.
PROCEDURES FOR TENDERING
The tender of Old Notes by a holder thereof pursuant to one of the
procedures set forth below and the acceptance thereof by Young America wi11
constitute a binding agreement between such Holder and Young America in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal. This Prospectus, together with the Letter of
Transmittal, will first be sent on or about August 7, 1998 to all Holders of Old
Notes known to Young America and the Exchange Agent.
Only a Holder of the Old Notes may tender such Old Notes in the Exchange
Offer. A Holder who wishes to tender any Old Notes for exchange pursuant to the
Exchange Offer must transmit a properly completed and duly executed Letter of
Transmittal, or a facsimile thereof, including any other required documents, to
the Exchange Agent prior to 5:00 p.m, New York City time, on the Expiration Date
(unless such tender is being effected pursuant to the procedure for book-entry
transfer described below). In addition, either (i) certificates for such Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal or (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Old Notes, if such procedure is available,
into the Exchange Agent's account at DTC (the "Book-Entry Transfer Facility")
pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date or (iii) the Holder
must comply with the guaranteed delivery procedures described below. To be
tendered effectively, the Old Notes, Letter of Transmittal and other required
documents must be received by the Exchange Agent at the address set forth below
under "Exchange Agent" prior to 5:00 p.m., New York City time, on the Expiration
Date.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IF SENT BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, RETURN RECEIPT REQUESTED, BE USED AND PROPER INSURANCE BE
OBTAINED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE DELIVERY TO
THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR OLD
NOTES SHOULD BE SENT TO THE COMPANY.
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Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such beneficial owner's own behalf, such
beneficial owner must, prior to completing and executing the Letter of
Transmittal and delivering such beneficial owner's Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such
beneficial owner's name or obtain a properly completed bond power from the
registered Holder. The transfer of registered ownership may take considerable
time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined herein)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 promulgated under the Exchange Act (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered Holder as such registered Holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by Young America and
Holdings, evidence satisfactory to Young America and Holdings of their authority
to so act must be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of tendered Old Notes will be determined by
Young America and Holdings in their sole discretion, which determination will be
final and binding. Young America and Holdings reserve the absolute right to
reject any and all Old Notes not properly tendered or any Old Notes Young
America's acceptance of which would, in the opinion of counsel for Young America
and Holdings, be unlawful. Young America and Holdings also reserve the right to
waive any defects, irregularities or conditions of tender as to particular Old
Notes. The interpretation by Young America and Holdings of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as Young America and Holdings shall determine. Although Young
America and Holdings intend to notify Holders of defects or irregularities with
respect to tenders of Old Notes, neither Young America, Holdings, the Exchange
Agent nor any other person shall incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such defects or irregularities have been cured or waived. Any Old Notes received
by the Exchange Agent that Young America and Holdings determine are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering Holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
By tendering, each Holder will represent to Young America and Holdings,
among other things, that (i) the New Notes acquired by the Holder and any
beneficial owners of Old Notes pursuant to the Exchange Offer are being obtained
in the ordinary' course of business of the person receiving such New Notes, (ii)
neither the Holder nor such beneficial owner has an arrangement with any person
to participate in the distribution of such New Notes, (iii) neither the Holder
nor such beneficial owner nor any such other person is engaging in or intends to
engage in a distribution of such New Notes and (iv) neither the Holder nor any
such other person is an "affiliate," as defined under Rule 405 promulgated under
the Securities Act, of Young America or Holdings. Each broker-dealer that
receives New Notes for its own account in exchange for Old
31
<PAGE> 35
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities (other than Old Notes
acquired directly from Young America), may participate in the Exchange Offer but
may be deemed an "underwriter" under the Securities Act and, therefore, must
acknowledge in the Letter of Transmittal that it will deliver a prospectus in
connection with any resale of such New Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a broker-dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. See "Plan of Distribution."
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal (or facsimile thereof or
an Agents Message (as defined) in lieu thereof) with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at one of the addresses set forth below
under "-- Exchange Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
The term "Agents Message" means a message transmitted by a Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part of
a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility
has received an express acknowledgment from each of its participants that such
participants have received the Letter of Transmittal and agree to be bound by
the terms thereof and that Holdings may enforce such agreement against such
participants.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate number(s)
of such Old Notes and the principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
New York Stock Exchange trading days after the Expiration Date, the Letter
of Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes, or a Book-Entry Confirmation, and any other
documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Old Notes in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, and all other documents required by the Letter of Transmittal
are received by the Exchange Agent within five New York Stock Exchange
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be
32
<PAGE> 36
withdrawn (including the certificate number or numbers and principal amount of
such Old Notes), (iii) be signed by the Holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the persons
withdrawing the tender and (iv) specify the name in which any such Old Notes are
to be registered, if different from that of the Depositor. If certificates for
Old Notes have been delivered or otherwise identified to the Exchange Agent,
then, prior to the release of such certificates, the withdrawing Holder must
also submit the serial numbers of the particular certificates to be withdrawn
and a signed notice of withdrawal with signatures guaranteed by an Eligible
Institution unless such Holder is an Eligible Institution. If Old Notes have
been tendered pursuant to the procedure for book-entry transfer described above,
any notice of withdrawal must specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and
otherwise comply with the procedures of such facility. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by Young America and Holdings in their sole discretion, which
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly retendered. Properly withdrawn Old Notes may
be retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
Any Old Notes which have been tendered but which are not accepted for
payment due to withdrawal, rejection of tender or termination of the Exchange
Offer will be returned as soon as practicable to the Holder thereof without cost
to such Holder (or, in the case of Old Notes tendered by book-entry transfer
into the Exchange Agent's account at the Book Entry Transfer Facility pursuant
to the book-entry transfer procedures described above, such Old Notes will be
credited to an account maintained with such Book-Entry Transfer Facility for the
Old Notes).
CONDITIONS
Notwithstanding any other term of the Exchange Offer, Young America will
not be required to accept for exchange, or exchange New Notes for, any Old
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) the Exchange Offer shall violate applicable law or any applicable
interpretation of the staff of the Commission; or
(b) any action or proceeding is instituted or threatened in any court
or by any governmental agency that might materially impair the ability of
Young America and Holdings to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to Young America and Holdings; or
(c) any governmental approval has not been obtained, which approval
Young America and Holdings deem necessary for the consummation of the
Exchange Offer.
If Young America and Holdings determine in their sole discretion that any
of the conditions are not satisfied, Young America and/or Holdings, as
appropriate, may (i) refuse to accept any Old Notes and return all tendered Old
Notes to the tendering Holders (or, in the case of Old Notes tendered by
book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer
Facility pursuant to the book-entry transfer procedures described above, such
Old Notes will be credited to an account maintained with such Book-Entry
Transfer Facility), (ii) extend the Exchange Offer and retain all Old Notes
tendered prior to the expiration of the Exchange Offer, subject, however, to the
rights of Holders to withdraw such Old Notes (see "-- Withdrawal of Tenders") or
(iii) waive such unsatisfied conditions with respect to the Exchange Offer and
accept all properly tendered Old Notes which have not been withdrawn. If such
waiver constitutes a material change to the Exchange Offer, Young America and
Holdings will promptly disclose such waiver by means of a prospectus supplement
that will be distributed to the registered Holders, and Young America and
Holdings will extend the Exchange Offer for a period of five to 10 business
days, depending upon the significance of the waiver and the manner of disclosure
to the registered Holders, if the Exchange Offer would otherwise expire during
such five- to 10-business-day period.
33
<PAGE> 37
EXCHANGE AGENT
Marine Midland Bank has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Registered or Certified Mail:
Marine Midland Bank
Corporate Trust Operations
140 Broadway, Level A Window
New York, New York 10005-1180
Facsimile Transmission Number:
(212) 658-2292
Attention: Corporate Trust Operations
(For Eligible Institutions Only)
Confirm by Telephone
(212) 658-5931
By Hand/Overnight Delivery:
Marine Midland Bank
Corporate Trust Operations
140 Broadway, Level A Window
New York, New York
For Information Call: (800) 662-9844 or (212) 658-5931
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by Young America and
Holdings. The principal solicitation is being made by mail; however, additional
solicitation may be made by telegraph, telephone or in person by officers and
regular employees of Young America, Holdings and their affiliates.
Young America and Holdings have not retained any dealer-manager in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. Young America
and Holdings, however, will pay the Exchange Agent reasonable and customary fees
for its services and will reimburse it for its reasonable out-of-pocket expenses
in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by Young America and Holdings. Such expenses include fees and expenses
of the Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
Young America and Holdings will pay all transfer taxes, if any, applicable
to the exchange of Old Notes pursuant to the Exchange Offer. If, however,
certificates representing New Notes or Old Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be issued in
the name of, any person other than the registered Holder of the Old Notes
tendered, or if tendered Old Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of Old Notes pursuant to the
Exchange Offer, then the amount of any such transfer taxes (whether imposed on
the registered Holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal, the amount of such transfer
taxes will be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of the exchange. Accordingly, no gain or loss for accounting purposes will
be recognized. The expenses of the Exchange Offer and the unamortized expenses
related to the issuance of the Old Notes will be amortized over the term of the
New Notes.
34
<PAGE> 38
THE RECAPITALIZATION
The Company experienced substantial growth and large demands on its capital
and operating structures in 1995, 1996 and 1997 including development of
business opportunities that required significant expansion of the Company's
capacity and capabilities. In addition, in recent years, the Company received
numerous inquiries from interested parties seeking to make a strategic
investment in or to acquire the Company. As a result, in February 1997, the
Company hired an investment banking firm to assist it in obtaining and
evaluating offers to acquire the Company or otherwise engage in a strategic
transaction with the Company. The Investor Group proposed a transaction that
contemplated a recapitalization of the Company. The Investor Group's offer
required continued equity participation by Mr. Jay F. Ecklund, formerly the
Company's controlling shareholder and Chairman and Chief Executive Officer, and
required Mr. Charles D. Weil, the current President and Chief Executive Officer
of Holdings, and 20 other officers and employees of Holdings to participate as
members of the Investor Group. Following a period of due diligence and
negotiations regarding the terms of the recapitalization and the equity
participation by Mr. Ecklund and the Management Stockholders, on the
Recapitalization Date Holdings, the Selling Stockholders and the Investor Group
executed definitive agreements relating to the Recapitalization and management's
interest in Holdings and simultaneously consummated the Recapitalization. As a
result of the Recapitalization, approximately 93% of the capital stock of
Holdings is held by the Investor Group.
In the Recapitalization, members of the Investor Group purchased
newly-issued shares of Common Stock for an aggregate purchase price of $38.9
million. BTCP purchased shares of Common Stock for $22.4 million, OTPPB
purchased shares of Common Stock for $12.0 million and the Management
Stockholders collectively purchased shares of Common Stock for $4.5 million. See
"Principal Stockholders." Also in the Recapitalization, Holdings borrowed $80.0
million under the Bridge Facility. Holdings used the proceeds of the issuance of
shares of Common Stock to the Investor Group and the borrowings under the Bridge
Facility to (i) repurchase outstanding shares of Common Stock from the Selling
Stockholders for an aggregate purchase price of $92.2 million, (ii) make bonus
payments to management of $13.4 million under plans put in place in
contemplation of a change of control of the Company, and $4.9 million paid
pursuant to phantom stock arrangements due in such amounts as a result of the
change of control of the Company in the Recapitalization (see
"Management -- Phantom Stock Agreements" and "-- 1997 Management Recognition,
Transition and Equity Bonus Plan") and (iii) pay certain fees and expenses
related to the Recapitalization. Of the amounts referred to in (i) and (ii)
above, $6.0 million was placed in escrow subject to certain indemnification
provisions of the Recapitalization Agreement, $1.2 million of which has been
recorded by the Company as estimated compensation charges remaining to be paid
related to (ii) above. A portion of those proceeds were also retained by the
Company to pay certain fees and expenses related to the offering of the Notes
and other cash costs triggered by the Recapitalization. Pursuant to the terms of
the Recapitalization Agreement, Holdings made an additional payment of
approximately $692,000 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) of Holdings as of
October 31, 1997 and Holdings' profits or losses (as defined) for the period
ended on the Recapitalization Date. In addition, after December 31, 2001, the
Selling Stockholders and certain employees of the Company may also be entitled
to additional payments (either as additional consideration for shares
repurchased by Holdings in the Recapitalization or as additional bonus or
phantom stock payments) aggregating up to $15 million depending upon the level
of Cumulative Excess Free Cash Flow (as defined in the Recapitalization
Agreement) of the Company for the four-year period ending December 31, 2001. See
"Certain Transactions."
In the Recapitalization, (i) BTCP purchased 586,561 newly issued shares of
voting Class A Common Stock and 442,884 newly issued shares of non-voting Class
B Common Stock, (ii) OTPPB purchased 378,273 newly issued shares of voting Class
A Common Stock and 172,727 newly issued shares of non-voting Class C Common
Stock and (iii) the Management Stockholders, who had no prior equity ownership
interest in Holdings, purchased 204,696 newly issued shares of voting Class A
Common Stock. Pursuant to the Recapitalization, Holdings repurchased from the
Selling Stockholders a number of shares of Class A Common Stock such that the
Selling Stockholders continue to hold 134,400 shares of voting Class A Common
Stock, representing 7.0% of Holdings' outstanding Common Stock and 10.3% of the
Voting Stock. BTCP owns 53.6% of the outstanding Common Stock and 45.0% of the
Voting Stock, OTPPB owns 28.7% of the outstanding Common Stock and 29.0% of the
Voting Stock, and the Management Stockholders own 10.7% of the outstanding
Common Stock and 15.7% of the Voting Stock. The Class B Common Stock and the
Class C Common Stock are convertible into Class A Common Stock and, upon the
occurrence of certain events. In addition, the Class B Common Stock will be
entitled, at the option of the holders thereof to vote with the Class A Common
Stock, voting together as a single class, on all matters to be voted on by
Holdings' shareholders. See "Principal Stockholders."
35
<PAGE> 39
CAPITALIZATION
The following table sets forth the actual consolidated capitalization of
Holdings at March 31, 1998. This table should be read in conjunction with the
financial statements of Holdings and the related notes thereto, "Unaudited Pro
Forma Consolidated Financial Data," "Selected Historical and Pro Forma
Consolidated Financial Data" and "Use of Proceeds," all included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
HISTORICAL PRO FORMA(2)
---------- ------------
<S> <C> <C>
Long-term debt (including current portion):
Senior Subordinated Notes................................. $ 80,000 $ 80,000
Borrowings under the New Credit Facility(1)............... -- --
-------- --------
Total long-term debt................................... 80,000 80,000
Redeemable Class A Common Stock........................ 7,380 1,055
Total stockholders' deficit............................ (67,335) (61,702)
-------- --------
Total capitalization.............................. $ 20,045 $ 19,353
======== ========
</TABLE>
- ---------------
(1) The New Credit Facility includes a commitment for up to $10.0 million of
borrowings subject to a borrowing base formula equal to 85% of Eligible
Accounts Receivable (as defined in the New Credit Facility). The New Credit
Facility also provides for up to $1.0 million of letters of credit within
that commitment. As of March 31, 1998, there was one letter of credit with a
face amount of approximately $0.5 million outstanding under the New Credit
Facility out of total availability under the borrowing base formula of
approximately $8.9 million as of March 31, 1998.
(2) As further discussed in Note 1 to the Consolidated Financial Statements
included elsewhere in this Prospectus, Redeemable Class A Common Stock and
stockholders' deficit are presented on a pro forma basis for (i) the
reclassification from Redeemable Class A Common Stock to stockholders'
equity of shares of Class A Common Stock owned by Messrs. Ecklund and Weil
as a result of the termination of arrangements between Holdings and such
shareholders which gave such shareholders the right to cause Holdings to
repurchase all or a portion of their common shares and (ii) an additional
payment of approximately $692 to the Selling Stockholders (as defined) and
certain other persons made in the second quarter of 1998. See "Security
Ownership of Certain Beneficial Owners and Management -- Registration Rights
Agreement; Rights of Jay F. Ecklund" and "The Recapitalization."
36
<PAGE> 40
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following pro forma consolidated financial statements of Holdings,
which include Young America (the "Pro Forma Consolidated Financial Statements"),
include the unaudited pro forma consolidated statements of operations for the
three months ended March 31, 1998 and the year ended December 31, 1997 (the "Pro
Forma Consolidated Statements of Operations").
The Pro Forma Consolidated Statements of Operations are based on the
audited and unaudited statements of operations of Holdings for the year ended
December 31, 1997 and the three months ended March 31, 1998, respectively, and
are adjusted to give effect to (x) the Recapitalization and (y) the offering of
the Notes and the application of the proceeds therefrom as though they had
occurred as of January 1, 1997. The Pro Forma Consolidated Statements of
Operations reflect pro forma adjustments to give effect to (i) the
Recapitalization, (ii) certain changes in the Company's general and
administrative expense structure which were made concurrent with the
Recapitalization with regard to salaries and benefits provided to the former
majority owner who is no longer receiving such payments, and changes in
compensation to be paid to certain employees to reflect the termination,
concurrent with the Recapitalization, of the Company's phantom stock plan,
offset by consulting fees to be paid to the former majority owner and management
fees to be charged by BTCP and OTPPB and (iii) the offering of the Notes and the
application of the proceeds therefrom.
The Pro Forma Consolidated Financial Statements and the accompanying notes
should be read in conjunction with Holdings' historical financial statements and
related notes thereto included elsewhere in this Prospectus.
The Pro Forma Consolidated Financial Statements do not purport to represent
what Holdings' or the Company's results of operations would actually have been
had the Recapitalization and the offering of the Notes in fact occurred on the
assumed date, nor do they project Holdings' and/or the Company's results of
operations for any future period or date.
37
<PAGE> 41
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenues.................................................. $ 50,630 $ -- $ 50,630
Cost of revenues
Rebates, postage and freight............................ 34,893 -- 34,893
Processing and servicing................................ 11,296 -- 11,296
-------- ---------- --------
Gross profit.............................................. 4,441 -- 4,441
-------- ---------- --------
Operating Expenses:
Selling................................................. 1,424 -- 1,424
General and administrative.............................. 1,178 -- 1,178
-------- ---------- --------
2,602 -- 2,602
-------- ---------- --------
Operating income.......................................... 1,839 -- 1,839
-------- ---------- --------
Other income (expense):
Interest expense........................................ (2,385) (1,350)(e) (2,336)
1,399(e)
Amortization of deferred financing costs................ (3,329) (57)(f) (94)
3,292(f)
Interest income......................................... 236 -- 236
Other................................................... (15) -- (15)
-------- ---------- --------
(5,493) 3,284 (2,209)
-------- ---------- --------
(Loss) income before provision for income taxes........... (3,654) 3,284 (370)
Benefit from income taxes................................. (1,352) 1,215(h) (137)
-------- ---------- --------
Net (loss) income......................................... $ (2,302) $ 2,069 $ (233)
======== ========== ========
Other data:
Depreciation and amortization(i)........................ $ 462 $ 462
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Operations.
38
<PAGE> 42
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS (A) PRO FORMA
---------- --------------- ---------
<S> <C> <C> <C>
Revenues.............................................. $175,297 $ -- $175,297
-------- -------- --------
Cost of revenues:
Rebates, postage and freight........................ 105,212 -- 105,212
Processing and servicing............................ 40,447 -- 40,447
-------- -------- --------
Gross Profit.......................................... 29,638 -- 29,638
-------- -------- --------
Operating expenses:
Selling............................................. 5,504 (101)(b) 5,403
General and administrative.......................... 9,754 (767)(c) 8,987
Compensation charges attributable to
Recapitalization................................. 17,924 (17,924)(d) --
-------- -------- --------
33,182 (18,792) 14,390
-------- -------- --------
Operating (loss) income............................... (3,544) 18,792 15,248
-------- -------- --------
Other income (expense):
Interest expense.................................... (981) 976(e) (9,305)
(9,300)(e)
Amortization of deferred financing costs............ (48) 48(f) (375)
(375)(f)
Interest income..................................... 1,038 -- 1,038
Transaction costs attributable to
Recapitalization................................. (1,967) 1,967(g) --
-------- -------- --------
(1,958) (6,684) (8,642)
-------- -------- --------
(Loss) income before provision for income taxes....... (5,502) 12,108 6,606
Provision for income taxes............................ 423 2,021(h) 2,444
-------- -------- --------
Net (loss) income..................................... $ (5,925) $ 10,087 $ 4,162
======== ======== ========
Other data:
Depreciation and amortization(i).................... $ 1,588 $ 1,588
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Statements of Operations.
39
<PAGE> 43
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(a) For the year ended December 31, 1997 the pro forma adjustments do not
reflect a deduction for the deferred financing costs of $3,292 relating to
the Bridge Facility written-off in connection with the offering of the
Notes. Such amount was written-off in the first quarter of 1998. See Note
(f) below.
(b) Reflects the elimination of severance payments incurred in connection with
the Recapitalization.
(c) The net adjustment to general and administrative expenses consists of the
following (in thousands):
<TABLE>
<S> <C>
Salary and other benefits provided to former majority
shareholder no longer being paid.......................... $(606)
Consulting fee to be paid to former majority shareholder.... 100
Management fee to be charged to the Company by BTCP and
OTPPB for services which will include those which were
previously provided by the former majority shareholder.... 250
Amounts reflected in historical financial statements for
phantom stock plan which terminated concurrent with the
Recapitalization.......................................... (511)
-----
Net reduction in general, and administrative expenses....... $(767)
=====
</TABLE>
(d) Reflects the elimination of compensation charges recorded in the historical
financial statements triggered as a result of the Recapitalization,
comprised of (i) $13,368 of management bonuses paid at the Recapitalization
Date, (ii) $4,221 of increases to phantom stock provisions, (iii) $66 of
estimated compensation charges remaining to be paid related to (i) above,
and (iv) $269 of estimated payroll taxes related to all of the above. Does
not reflect (i) the payment of approximately $692 which was paid pursuant to
the terms of the Recapitalization Agreement in the second quarter of 1998 to
Mr. Ecklund, certain trusts for the benefit of the members of Mr. Ecklund's
family and certain employees of the Company or (ii) payments (up to $15,000)
in an amount equal to 20% of Cumulative Excess Free Cash Flow (as defined in
the Recapitalization Agreement) of the Company for the four-year period
ending December 31, 2001 in excess of $93,000, which payments may be made to
the Selling Shareholders (and pursuant to separate agreements among Mr.
Weil, Mr. Stinchfield, Mr. Ferguson and the Selling Stockholders, may be
made, in part, to Mr. Weil, Mr. Stinchfield and Mr. Ferguson).
(e) Reflects (i) interest on the Notes at an interest rate of 11.625% per annum
of $1,350 for the three months ended March 31, 1998, representing additional
interest for the period from January 1, 1998 to the date of issuance
(February 23, 1998), and $9,300 for the year ended December 31, 1997, and
(ii) the elimination of interest recorded in the historical financial
statements attributable to the Bridge Facility of $1,399 and $976 for three
months ended March 31, 1998 and the year ended December 31, 1997,
respectively.
(f) Reflects the amortization of deferred financing costs associated with the
Notes and the elimination of amortization recorded in the historical
financial statements attributable to deferred financing costs associated
with the Bridge Facility.
(g) Reflects certain non-recurring fees and expenses incurred by Holdings in
connection with the Recapitalization.
(h) For the three months ended March 31, 1998, reflects the adjustment to income
before provision for income taxes at an assumed rate of 37%. For the year
ended December 31, 1997, reflects the adjustment to the pro forma income tax
provision to arrive at the amount that would have been provided had the
Company been a C corporation, rather than an S corporation, for income tax
purposes, applied to pro forma income before provision for income taxes at
an assumed tax rate of 37%.
(i) Excludes amortization of deferred financing costs.
40
<PAGE> 44
SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following tables present selected financial data for each of the years
in the five-year period ended December 31, 1997 and for the three month periods
ended March 31, 1998 and 1997. The historical financial data for the years ended
December 31, 1995, 1996 and 1997 are derived from and should be read in
conjunction with the audited financial statements of Holdings and the related
notes thereto included elsewhere in this Prospectus. The selected financial data
for the years ended December 31, 1993 and 1994 are derived from audited
financial statements of Holdings that are not included in this Prospectus. The
selected financial data for the three month periods ended March 31, 1998 and
1997 are derived from the unaudited financial statements of Holdings and the
related notes thereto included elsewhere in this Prospectus. In the opinion of
management of Holdings, the unaudited condensed financial data reflect all
adjustments (which include reclassifications and normal recurring adjustments)
necessary to present fairly the financial position and results of operations for
the unaudited periods. The results of operations for the three months ended
March 31, 1998 are not necessarily indicative of operating results for the full
year. For preliminary capsule information for the quarter ended June 30, 1998,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Recent Developments."
The unaudited pro forma consolidated statement of operations data for the
year ended December 31, 1997 and the three months ended March 31, 1998 assumes
that the Recapitalization and the offering of the Notes occurred on January 1,
1997. The unaudited pro forma consolidated financial data do not purport to
represent what Holdings' or the Company's results of operations would actually
have been had the Recapitalization and the offering of the Notes in fact
occurred on the assumed date, nor do they project Holdings' and/or the Company's
results of operation for any future period.
The financial data set forth below should be read in conjunction with the
historical financial statements and the related notes thereto, "Unaudited Pro
Forma Consolidated Financial Data," "Selected Historical and Pro Forma
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," all included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------ ----------------------------------------------------------------
PRO PRO
FORMA FORMA
1998 1998 1997 1997 1997 1996 1995 1994 1993
----- ---- ---- ----- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................... $ 50,630 $ 50,630 $ 52,646 $175,297 $175,297 $135,716 $116,268 $103,758 $ 78,414
Cost of Revenues
Rebates, postage and
freight................. 34,893 34,893 32,166 105,212 105,212 84,191 80,635 70,747 52,895
Processing and
servicing............... 11,296 11,296 10,376 40,447 40,447 31,393 24,920 20,346 16,682
-------- -------- -------- -------- -------- -------- -------- -------- --------
Gross profit................ 4,441 4,441 10,104 29,638 29,638 20,132 10,713 12,665 8,837
Selling expenses............ 1,424 1,424 1,393 5,403 5,504 4,610 3,493 2,927 3,244
General and administrative
expenses.................. 1,178 1,178 2,900 8,987 9,754 7,140 5,949 6,127 5,079
Compensation charges
attributable to
Recapitalization.......... -- -- -- -- 17,924 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss)..... 1,839 1,839 5,811 15,248 (3,544) 8,382 1,271 3,611 514
Interest expense............ (2,336) (2,385) -- (9,305) (981) (91) (252) (163) (243)
Amortization of deferred
financing costs........... (94) (3,329) -- (375) (48) -- -- -- --
Interest income............. 236 236 258 1,038 1,038 201 10 28 6
Transaction costs
attributable to
Recapitalization.......... -- -- -- -- (1,967) -- -- -- --
Other income (expense)...... (15) (15) -- -- -- (60) (15) 30 2
-------- -------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes..................... (370) (3,654) 6,069 6,606 (5,502) 8,432 1,014 3,506 279
Provision for income
taxes..................... (137) (1,352) -- 2,444 423 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net income (loss)........... $ (233) $ (2,302) $ 6,069 $ 4,162 $ (5,925) $ 8,432 $ 1,014 $ 3,506 $ 279
======== ======== ======== ======== ======== ======== ======== ======== ========
UNAUDITED PRO FORMA INCOME
TAX DATA:
Income (loss) before income
taxes..................... $ 6,069 $ (5,502) $ 8,432 $ 1,014 $ 3,506 $ 279
Provision for (benefit from)
income taxes(a)........... 2,246 (1,308) 3,120 375 1,297 103
-------- -------- -------- -------- -------- --------
Pro forma net income
(loss).................... $ 3,823 $ (4,194) $ 5,312 $ 639 $ 2,209 $ 176
======== ======== ======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA, as adjusted(b)...... $ 2,301 $ 2,301 $ 6,136 $ 16,836(d) $ (1,956) $ 9,578 $ 2,238 $ 4,561 $ 1,476
</TABLE>
41
<PAGE> 45
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------------------ ----------------------------------------------------------------
PRO PRO
FORMA FORMA
1998 1998 1997 1997 1997 1996 1995 1994 1993
----- ---- ---- ----- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
EBITDA, as adjusted,
margin(c)................. 4.5% 4.5% 11.7% 9.6% (1.1%) 7.1% 1.9% 4.4% 1.9%
Capital expenditures........ $ 1,576 $ 1,576 $ 492 $ 3,330 $ 3,330 $ 1,739 $ 1,061 $ 1,142 $ 1,084
Depreciation and
amortization(e)........... 462 462 325 1,588 1,588 1,196 967 950 962
Cash interest expense(f).... 2,336 2,385 0 9,305 981 91 252 163 243
Ratio of EBITDA, as
adjusted, to cash interest
expense(g)................ 1.0x 1.0x 1.8x
Ratio of EBITDA, as
adjusted, minus capital
expenditures to cash
interest expense(g)....... 0.3x 0.3x 1.5x
Ratio of earnings to fixed
charges(h)................ -- -- 28.7x 1.6x -- 13.1x 2.5x 9.4x 1.6x
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
---------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 14,003
Working capital............................................. 6,716
Total assets................................................ 40,531
Total debt.................................................. 80,000
Pro forma Redeemable Class A Common Stock(i)................ 1,055
Pro forma stockholders' deficit(i).......................... (61,702)
</TABLE>
42
<PAGE> 46
NOTES TO SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
(a) For periods ended on or prior to December 31, 1997 reflects the pro forma
income tax provision that would have been provided had the Company been a C
corporation, rather than an S corporation, for income tax purposes.
(b) EBITDA, as adjusted, represents earnings before interest expense, other
income(expense), income taxes, depreciation and amortization. Data for
EBITDA, as adjusted, is included because management understands that such
information is considered by certain investors as an additional basis on
which to evaluate the Company's ability to pay interest, repay debt and make
capital expenditures. EBITDA, as adjusted, does not reflect deductions for
interest, other expense, income taxes, depreciation and amortization, each
of which can significantly affect the Company's results of operations and
liquidity and should be considered in evaluating the Company's financial
performance. EBITDA, as adjusted, is not intended to represent and should
not be considered more meaningful than, or an alternative to, measures of
operating performance determined in accordance with generally accepted
accounting principles. See "Description of the Notes" for the definition of
"Consolidated EBITDA" under the Indenture.
(c) EBITDA, as adjusted, margin represents EBITDA, as adjusted, as a percentage
of revenues.
(d) Pro Forma EBITDA, as adjusted, for the year ended December 31, 1997
represents historical EBITDA, as adjusted, as described in Note (b) above,
adjusted for (i) salary and other benefits provided to the former majority
shareholder no longer being paid, (ii) consulting fees to be paid to the
former majority shareholder (as described in "Certain Transactions"), (iii)
management fees to be charged to Holdings by BTCP and OTPPB (as described in
"Certain Transactions"), (iv) amounts reflected in historical financial
statements for a phantom stock plan which terminated concurrent with the
Recapitalization (the "Phantom Stock Expenses"), (v) severance payments
incurred in connection with the Recapitalization and (vi) compensation
charges attributable to the Recapitalization as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
EBITDA, as adjusted......................................... $ (1,956)
Salary and other benefits provided to former majority
shareholder no longer being paid.......................... 606
Consulting fee to be paid to former majority shareholder.... (100)
Management fee to be charged to the Company by BTCP and
OTPPB for services which will include those which were
previously provided by the former majority shareholder.... (250)
Phantom Stock Expenses...................................... 511
Severance payments incurred in connection with the
Recapitalization.......................................... 101
Compensation charges attributable to the Recapitalization... 17,924
-------------
Pro forma EBITDA, as adjusted............................... $ 16,836
=============
</TABLE>
(e) Excludes amortization of deferred financing costs.
(f) Cash interest expense excludes amortization of deferred financing costs.
(g) For the year ended December 31, 1997, these ratios are not meaningful
because EBITDA, as adjusted was negative for such periods. For prior
periods, these ratios are not presented because of the Company's relatively
low amounts of indebtedness.
(h) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed charges
for this purpose include interest expense, amortization of deferred
financing costs and one third of operating lease payments (the portion
deemed to be representative of the interest factor). For the three months
ended March 31, 1998 and the year ended December 31, 1997, earnings were
inadequate to cover fixed charges by $3,654 ($370 on a pro forma basis) and
$5,502, respectively. The shortfall for the three months ended March 31,
1998 (actual) was largely attributable to the write-off of deferred
financing costs relating to the Bridge Facility, and the shortfall for the
year ended December 31, 1997 (actual) was attributable to fees and expenses
incurred in connection with the Recapitalization, including compensation
charges of $17,924 for bonuses and phantom stock payments and transaction
fees and expenses of $1,967.
(i) As further discussed in Note 1 to the Consolidated Financial Statements,
Redeemable Class A Common Stock and stockholders' deficit are presented on
a pro forma basis for (i) the reclassification from Redeemable Class A
Common Stock to stockholders' equity of shares of Class A Common Stock
owned by Messrs. Ecklund and Weil as a result of the termination of
arrangements between Holdings and such shareholders which gave such
shareholders the right to cause Holdings to repurchase all or a portion of
their common shares and (ii) an additional payment of approximately $692 to
the Selling Stockholders and certain employees made in the second quarter
of 1998. See "Note 1 to the Consolidated Financial Statements" and "The
Recapitalization."
43
<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the "Selected
Historical and Pro Forma Consolidated Financial Data" and the historical and pro
forma consolidated financial statements and the related notes thereto included
elsewhere in this Prospectus. The following discussion and analysis of the
financial condition and results of operations covers periods before completion
of the Recapitalization and the offering of the Old Notes. As a result of the
Recapitalization and the offering of the Old Notes, the Company has entered into
new financing arrangements and has a different capital structure. Accordingly,
the results of operations for periods subsequent to the Recapitalization and the
offering of the Old Notes will not be comparable to prior periods. See
"Prospectus Summary -- The Recapitalization" and "Unaudited Pro Forma
Consolidated Financial Data."
OVERVIEW
The Company derives its revenues principally from three sources: service
fees, rebate billings and postage and freight billings. Service fees are billed
to clients primarily for (i) order processing (including the handling of mail,
telephone calls, facsimiles and e-mail received from consumers), (ii)
fulfillment (including the delivery of product premiums and samples as well as
rebate checks to consumers), (iii) data gathering, analysis and reporting and
(iv) related customer service (including receiving and responding to consumer
inquiries). As described below, the Company bills clients for the face amount of
rebate checks issued by the Company under certain rebate programs and for
postage and/or freight related to fulfillment of rebate checks and shipments of
merchandise under premium and product sampling programs.
In connection with approximately 40% of the aggregate dollar amount of
checks issued under rebate programs for which the Company has provided CIP
services, the Company has entered into contractual arrangements with its clients
providing that the Company would fund from the Company's own working capital the
payment of rebates offered by the clients. In such cases, the face amount of the
rebate checks issued to consumers is then billed to the Company's clients and
recognized as revenue by the Company. As is typical in the industry, a portion
of checks issued to consumers are not cashed, and, under the contractual
arrangements with clients, the Company retains the amount of the uncleared
checks, which the industry refers to as slippage. In those situations where the
Company has not been asked to use its working capital to fund rebate programs,
the Company's revenues will be significantly lower because it will collect only
service fees and charges for postage, and the Company will not retain slippage.
In such circumstances, the Company generally quotes higher service fees for
client-funded rebate programs in order to offset the lack of slippage to be
retained by the Company. Thus, a change in the mix of rebate programs from
Company-funded to client-funded should not have a material impact on the
Company's reported gross profit unless there also occurs a substantial change in
the overall volume of rebate programs handled by the Company for its clients.
The Company recognizes as revenue the amount billed to clients for shipping
merchandise premiums and samples and for mailing rebate checks. Such billings
are generally based upon standard rates which approximate those that would be
charged to such clients by the USPS or other delivery services. The Company
realizes a margin on postage and freight revenues because it pays lower rates to
the delivery services reflecting (i) discounts available to the Company for
performing various sorting and other tasks and (ii) the high-volume of mail and
other shipments sent by the Company for all its clients in the aggregate.
Although the Company is not subject to seasonality, the Company's quarterly
revenues and profitability can be impacted by the timing of its clients'
programs, the availability of client-provided merchandise to fulfill consumer
requests or clients' decisions not to repeat specific marketing programs.
Program timing can affect quarterly revenues and profitability because most of
the marketing programs that the Company supports are short in duration. The
Company's activity level on a particular marketing program is often concentrated
around the consumers' final response date under the program, so that the
Company's revenues from a high-volume program may be concentrated in one or two
quarters. In addition, with premium programs, the volume of consumer requests
can be difficult to predict. To the extent clients have underestimated the
consumer response to their programs and have not provided the Company with
sufficient quantities of merchandise, the Company may not be able to fulfill all
consumer requests in a timely manner. Consequently, the Company may be delayed
in performing a portion of its services and recognizing the related revenue. In
such situations,
44
<PAGE> 48
however, the Company often handles increased consumer inquiry calls to the
Company's call centers and may mail delay card and order acknowledgment
correspondence to consumers. For providing these extra services, the Company
will derive additional revenue and gross profit from service fees.
The marketing programs undertaken by the Company's clients can vary
significantly in timing, size and type, resulting in variations in requirements
for labor, facilities and equipment. The Company seeks flexibility in the way
that it obtains these resources and attempts to increase the variable proportion
of its cost structure. The Company's operations are very labor intensive, with
labor costs representing approximately 66% of processing and servicing costs and
82% of selling, general and administrative expenses for the year ended December
31, 1997. The Company's use of a flexible labor force, including part time and
variable employees and independent contractors, makes its processing and
servicing expense structure more variable. See "Business -- Employees."
The Company also strives to achieve flexibility in its commitments for
facilities and equipment. A premium program that involves receiving, storing and
shipping a large number of merchandise items or items of large size requires
more warehouse space, packaging equipment and sophisticated inventory management
systems than a rebate program that involves mailing rebate checks. The Company
has limited owned real property and attempts to utilize operating leases for
facilities wherever possible. The Company also generally seeks to lease
technology-related equipment under operating leases with flexible options in
order to be able to eliminate or substitute equipment to reduce lease costs
commensurate with needs or to allow the Company to upgrade or change equipment.
To improve pricing for its services, the Company began an effort in 1995 to
identify and evaluate the tasks involved in delivering each of its services, and
the related costs incurred for each task, so as to develop a refined process
model that would capture all tasks and costs. This effort led to improved cost
information for various processing steps and, in addition, identified tasks and
services for which the Company had not previously been billing its clients. The
revenue and gross profit impact from improved costing and additional service
billings began to be realized in 1996. The Company has also instituted a number
of programs, including its People Recognizing Opportunities for Increased Total
Services ("PROFITS") program, an incentive program for the Company's employees
targeted at identifying new or improved methods of processing consumer
interactions that lower costs, bill for all services rendered and improve
consumer and client service.
RECENT DEVELOPMENTS
Based on preliminary second quarter operating results, the Company expects
that second quarter revenues will exceed the revenues in the second quarter of
1997. Revenue growth, however, was limited by the continued delay of a major
client program and lower than anticipated levels of consumer participation in
certain existing client programs. The Company expects gross profit in the second
quarter of 1998 to be below the gross profit in the second quarter of 1997
primarily due to continuing higher levels of expenses associated with increased
capacities and capabilities in anticipation of market changes and the
requirements of its existing and potential client base principally for
technology-based services. See "Results of Operations -- Three Months Ended
March 31, 1998 Compared With Three Months Ended March 31, 1997 -- Gross Profit."
The Company also expects second quarter 1998 gross profit as a percentage of
revenues will be below the second quarter of 1997 primarily due to a change in
the mix of revenues as lower margin rebate revenues increased at a faster rate
than the PFR and servicing revenues. See "Risk Factors -- Variability of Client
Mix; Variability of Services Provided." Other income (expense) in the second
quarter of 1998 was adversely affected by expenses attributable to the
investigation of a potential acquisition which is no longer being pursued. As a
result of the foregoing, the Company expects to record a small operating profit
and a net loss for the second quarter of 1998. Some of the factors adversely
affecting the Company's second quarter operating results are expected to
continue into the fourth quarter of 1998. These factors include (i) the higher
level of expenses that result from the Company increasing its capabilities and
capacities primarily associated with technology based services, and (ii)
continuing delays of the major client program discussed above.
45
<PAGE> 49
Preliminary operating results for the second quarter ended June 30, 1998,
compared to operating results for the second quarter ended June 30, 1997 are set
forth below. Operating results for the three months ended June 30, 1998 are not
necessarily indicative of operating results for the full year.
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Revenues.................................................... $58,131 $39,761
Gross Profit................................................ 3,477 6,051
Operating Income (loss)..................................... 597 2,735
Income (loss) before income taxes........................... (1,866) 2,968
Provision (benefit) for income taxes........................ (681) --
Pro forma provision for income taxes........................ -- 1,098
Net income (loss)........................................... (1,185) 1,870
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 Compared with Three Months Ended March 31,
1997
Revenues. Revenues for the quarter ended March 31, 1998 decreased by $2
million or 3.8% to $50.6 million from $52.6 million for the quarter ended March
31, 1997. The decrease in revenues was comprised of (i) a decrease of PFR
revenues of $12 million and (ii) a decrease in servicing revenues of $3.7
million, offset in part by (iii) an increase in rebate revenues of $13.8
million. PFR and servicing revenues declined in the first quarter of 1998
compared with the first quarter of 1997 because a decline in such revenues from
a single client that conducted high-volume premium programs during 1996 and 1997
more than offset increases in such revenues from other clients. That client ran
a large program in the second half of 1996 that carried over into the first
quarter of 1997 resulting from consumer response that was higher than
forecasted. The same client ran a similar, although relatively smaller program
in 1997, with the 1997 program revenues concentrated in the third and fourth
quarters, resulting in significantly less revenue carrying over to the first
quarter of 1998. While that same client continues to place its business with the
Company, the client has elected not to run a similar large-scale program in
1998. Servicing revenue from other clients increased 42.3%, to $7.6 million in
the first quarter of 1998, from $5.3 million in the same period in 1997. The
increase in rebate revenues was largely attributable to the addition of new
clients that conducted high-dollar value rebate programs in the first quarter of
1998.
Gross Profit. The Company's gross profit declined to $4.4 million or 8.8%
of revenues for the quarter ended March 31, 1998. Gross profit for the quarter
ended March 31, 1997 was $10.1 million or 18.7% of revenues. A significant
portion of the decrease is attributable to a change in the mix of revenues.
Servicing revenues and PFR, which carry higher gross margins, decreased from the
first quarter of 1997, while rebate revenues, which carry lower margins,
increased. In addition, the Company experienced an increase in processing and
servicing costs related to increased processing capacity. This ramp up in
processing capacity was primarily associated with technical improvements along
with capability and capacity advances in computer equipment, software and
telemarketing systems including Interactive Voice Response, and, to a lesser
extent, limited facility expansion related to a new call center in Oklahoma
City. The Company's efforts to expand its processing capabilities and capacity
began in 1996 as part of its emphasis on high-volume programs including new
programs and servicing concepts, which involve significant technology
investment. Approximately $0.5 million of the growth in expenses in 1998 related
to costs incurred in anticipation of a large program processing consumer
responses to a major class action lawsuit that was initially projected to begin
in the first quarter of 1998 but has been delayed. Although the Company has been
able to delay a portion of the expenses related to that program, commitments
relating to those $0.5 million of expenses had already been made prior to the
Company's receiving the notification that the program would be delayed.
Operating Income. Operating income for the quarter ended March 31, 1998
decreased by $4.0 million to $1.8 million from $5.8 million for the same period
in 1997. As a percentage of revenues, operating income was 3.6% in the quarter
ended March 31, 1998 compared with 11% in the same period of 1997. The reduction
in operating income was due to the decrease in gross profit, which was only
partially offset by a reduction in selling, general and administrative expenses.
Selling, general and administrative expenses in the first quarter of 1997
included $1.7 million of expense accruals associated with profit sharing and
management bonuses. No such accruals are included in the first quarter of 1998
reflecting first quarter operating results. On a
46
<PAGE> 50
comparative basis, excluding profit sharing and management bonuses expensed in
the first quarter of 1997, selling, general and administrative expenses in the
first quarter of 1998 remained flat with the same period in 1997.
Interest Expense. Interest expense of $2.4 million represents interest on
a senior bridge credit facility ('Bridge Facility') through the date of issuance
of the Company's Senior Subordinated Notes due 2006 (the 'Notes") and on the
Notes thereafter. Amortization of deferred financing costs includes $3.3 million
of costs associated with obtaining the Bridge Facility, which costs were fully
amortized upon repayment of the Bridge Facility with the proceeds of the Notes,
and the partial amortization of costs associated with the issuance of the Notes.
With no financed debt in the first quarter of 1997, the Company had no interest
expense.
Income Taxes. The Company recorded an income tax benefit of $1.4 million
for the first quarter of 1998. Prior to the Recapitalization, the Company was an
S corporation for income tax purposes. Accordingly, the Company did not accrue
income tax expense on its historical financial statements. The statement of
income for the quarter ended March 31, 1997 includes proforma net income (loss)
information reflecting a pro forma provision for taxes in 1997 of $2.2 million,
calculated at an assumed combined federal and state tax rate of 37% as if the
termination of Holdings' status as an S corporation had occurred as of the
beginning of 1997.
The Year Ended December 31, 1997 Compared with the Year Ended December 31,
1996
Revenues. Revenues for the year ended December 31, 1997 increased by $39.6
million or 29.2% to $175.3 million from $135.7 million for the year ended
December 31, 1996. The increase in revenues was comprised of (i) an increase in
service fees of $15.8 million, (ii) an increase in postage and freight revenues
("PFR") of $8.0 million and (iii) an increase in rebate revenues of $15.8
million. Service fees increased due primarily to (x) an increase in complex
premium programs serviced by the Company that required multiple handling steps
and related customer service (primarily handling consumer inquiries) activity
and (y) new pricing initiatives implemented by the Company in 1996 to better
capture costs and previously unbilled services. A portion of the increase in PFR
and service fees was related to a high-volume premium program run for a single
client that resulted in a $14.4 million increase in revenue derived from that
client. Though that client conducted similar programs during 1996 and 1997,
because the 1996 program ended later in the year and consumer response to the
1996 program was higher than forecasted, resulting in merchandise stock-outs,
revenues for the 1996 program were skewed towards the fourth quarter of 1996 and
into the first quarter of 1997. The rebate revenue increase for the 1997 period
was largely attributable to the addition of several new rebate clients that
conducted high dollar value rebate programs in 1997.
Although revenues for the year ended December 31, 1997 increased compared
with revenues for the prior year, revenues for the fourth quarter of 1997 were
lower than revenues for the same quarter in 1996.
Gross Profit. The Company's gross profit increased to $29.6 million or
16.9% of revenues for the year ended December 31, 1997. Gross profit for the
year ended December 31, 1996 was $20.1 million or 14.8% of revenues. The gross
profit increase of $9.5 million is primarily the result of higher revenue, the
continuation of billing practices better reflecting costs and previously
unbilled services and an increased level of service fees from complex programs.
Such service revenues generally achieve higher gross profit percentages. The
Company also benefitted from higher margins on PFR realized as a result of the
increased volumes and an increase in the discount that the Company receives from
the USPS which became effective in August 1996. The Company also realized
benefits from its PROFITS incentive program.
Although gross profit was up significantly for the year ended December 31,
1997 when compared with gross profit for the prior year, gross profit for the
fourth quarter of 1997 declined significantly from the level for the same period
in the prior year. Fourth quarter gross profit declined by a greater percentage
than revenues because increases in processing and servicing costs, principally
related to expanded computer hardware capacity, more than offset the declines in
variable costs that came with lower volumes.
Operating Income. For the year ended December 31, 1997, the Company
reported an operating loss of $3.5 million because of compensation charges of
$17.9 million for bonuses and phantom stock expenses paid in connection with the
Recapitalization. Excluding the effect of such nonrecurring charges, the Company
would have reported operating income of $14.4 million or 8.2% of revenues,
compared with $8.4 million, or 6.2% of revenues, in the prior year. Operating
income, excluding the effect of the nonrecurring charges, increased
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because the increase in gross profit was only partly offset by increases in
selling, general and administrative expenses. Selling expenses increased by $0.8
million in part due to commissions on higher revenues and in part due to higher
payroll costs. General and administrative expenses, excluding such nonrecurring
charges, increased $2.7 million because of increases in contractual and
discretionary bonuses, phantom stock arrangements and profit-sharing, which
reflect the Company's improved operating performance.
Although operating income, excluding the effect of the nonrecurring
charges, would have been up significantly for the year ended December 31, 1997,
in the fourth quarter of 1997, operating income declined significantly from the
fourth quarter of 1996. Fourth quarter operating income, excluding such
nonrecurring charges, declined by a greater percentage than revenues because the
decline in gross profit was only slightly offset by a decline in selling,
general and administrative expenses. Selling, general and administrative
expenses showed a smaller decline because they are relatively fixed in nature.
Interest Expense and Interest Income. For the years ended December 31,
1997 and 1996, cash interest expense was $1.0 million and $0.1 million,
respectively, while interest income was $1.0 million and $0.2 million,
respectively. The growth in interest income from 1996 to 1997 reflects an
increase in the level of investable funds retained by the Company after making
tax distributions to its shareholders. See "-- Liquidity and Capital Resources."
The higher level of interest expense in 1997 reflects the incurrence of the
indebtedness under the Bridge Facility in connection with the Recapitalization.
Following the Recapitalization, the Company is substantially leveraged. On a pro
forma basis, cash interest expense and amortization of deferred financing costs
for the year ended December 31, 1997 would have been $9.3 million and $0.4
million, respectively, giving effect to the Recapitalization and the offering of
the Notes as of January 1, 1997. See "Unaudited Pro Forma Consolidated Financial
Data." In addition to cash interest expenses incurred on the Bridge Facility and
the Notes, in the first quarter of 1998 interest expense will include a
nonrecurring charge of approximately $3.3 million for the write-off of deferred
financing costs incurred in connection with the Bridge Facility. In part because
of such nonrecurring charge, the Company expects to report a net loss for the
first quarter of 1998.
The Year Ended December 31, 1996 Compared with the Year ended December 31,
1995
Revenues. Revenues for the year ended December 31, 1996 increased by $19.4
million or 16.7% to $135.7 million from $116.3 million for the year ended
December 31, 1995. The increase in revenues resulted from (i) an increase in
service fees of $14.3 million and (ii) an increase in PFR of $9.8 million offset
by (iii) a decrease in rebate revenues of $4.6 million. Service fees increased
primarily due to (x) an increase in complex premium programs serviced, including
an increase in related customer service activity, and (y) new pricing
initiatives implemented during 1996. Much of the increase in service fees and
PFR related to a high-volume program undertaken by a single client that
commenced in 1996, and revenues from that client increased the Company's
revenues by $26.2 million during 1996. The decline in rebate revenue was driven
by a decline in the number of rebate checks issued. The decrease in the number
of rebate checks issued reflects a shift by traditional rebating clients away
from simple rebate programs toward other types of promotion programs.
Gross Profit. The Company's gross profit increased to $20.1 million, or
14.8% of revenues for the year ended December 31, 1996. Gross profit for the
year ended December 31, 1995 was $10.7 million or 9.2% of revenues. The growth
in gross profit of $9.4 million, or 87.9%, is the result of (i) the higher level
of revenues, (ii) the implementation of billing practices better reflecting
costs and previously unbilled services, (iii) an increased volume of higher
margin premium programs, (iv) improved margins on postage and freight and (v)
the elimination of dual computer processing systems costs upon completion of the
implementation of the PAL system. Margins on postage and freight improved as a
result of the increased volumes and an increase in the discount that the Company
received from the USPS which became effective in August 1996.
Operating Income. Operating income for the year ended December 31, 1996
increased by $7.1 million from $1.3 million in the comparable period in the
prior year, to $8.4 million. As a percentage of revenues, operating income was
6.2% for the year ended December 31, 1996 compared with 1.1% for the same period
in 1995. The increase in operating income resulted because the increase in gross
profit was only partly offset by increases in selling, general and
administrative expenses. Selling expenses increased by $1.1 million, reflecting
restructuring and growth in the Company's sales support functions as well as
commissions on higher revenues. General and administrative expenses increased
$1.2 million, as increases in provisions for bonuses, phantom
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stock arrangements and the distribution of profit sharing aggregating $2.4
million more than offset the benefit from a reduction in PAL development costs
of $1.2 million.
Interest Expense and Interest Income. For the years ended December 31,
1996 and 1995, interest expense was $0.1 million and $0.3 million, respectively,
while interest income was $0.2 million and less than $0.1 million, respectively.
The growth in interest income from 1995 to 1996 reflects a generally higher
level of funds available for investment that resulted from the Company's growth
in profitability and funds provided from client advance payments and consumer
remittances. In 1995, the Company incurred $0.3 million of interest expense as a
result of borrowings under the Company's working capital line which were repaid
in full during the second quarter of 1996.
INCOME TAXES
Prior to the Recapitalization, Holdings was an S corporation for income tax
purposes. As an S corporation, Holdings was only liable for U.S. federal income
taxes under certain circumstances and liable for state income taxes in certain
jurisdictions; all other domestic income taxes were the responsibility of
Holdings' stockholders. Concurrently with the Recapitalization, Holdings became
a taxable C corporation. The pro forma net income information in the historical
audited financial statements included elsewhere in this Prospectus reflects the
application of corporate income taxes to the Company's taxable income at an
assumed combined federal and state tax rate of 37% as if the termination of
Holdings' status as an S corporation had occurred as of the beginning of each
period presented. Any tax benefits resulting from bonus payments and phantom
stock payments made to certain members of management of the Company in
connection with the Recapitalization were realized during the period ending on
the day immediately prior to the Recapitalization Date when the Company was an S
corporation. Accordingly, any such tax benefits were realized by the Selling
Stockholders and will not reduce any future tax liability of the Company as a C
corporation.
The conversion from an S corporation to a C corporation resulted in the
Company recording, in the fourth quarter of 1997, a net deferred tax liability
and a corresponding one-time charge to earnings of approximately $0.9 million.
This amount represents management's estimate of differences in the bases of
assets and liabilities for tax and financial reporting purposes.
LIQUIDITY AND CAPITAL RESOURCES
On November 25, 1997 the Company completed the Recapitalization. See
"Prospectus Summary -- The Recapitalization." During the first quarter of 1998,
the Company completed the refinancing of the Bridge Facility through the
issuance by the Old Notes and finalized the new credit facility of $10.0 million
referred to below. As result of the Recapitalization, the Company's total
indebtedness has increased substantially. See "Risk Factors -- Leverage and
Liquidity." At March 31, 1998, no amounts were outstanding under the New Credit
Facility and the Company had a pro forma stockholders' deficit of $61.7 million,
indebtedness of $80.0 million and pro forma net working capital of $6.0 million.
The Company has historically financed its operations and capital
expenditures principally through the retention of cash flow from operations
after payment of distributions to shareholders primarily to permit them to meet
tax obligations as a result of the Company being an S corporation prior to the
Recapitalization. For the three months ended March 31, 1998 and 1997 and the
years ended December 31, 1996 and 1995, the Company's operations generated cash
flows of $0.6 million, $1.8 million, $25.3 million and $2.8 million,
respectively. For the year ended December 31, 1997, the Company used $7.5
million to fund operations. The cash usage was attributable to the expenses
incurred in connection with the Recapitalization, including compensation charges
of $17.9 million for bonuses and phantom stock payments and transaction fees and
expenses of $2.0 million. Excluding the effect of such nonrecurring charges, the
Company generated operating cash flow of $11.2 million. The Company's future
cash flow from operations will continue to reflect (i) income taxes that the
Company will be required to pay as a C corporation and (ii) interest that will
be incurred on outstanding indebtedness, including the Notes. There were no
distributions to shareholders in the first quarter of 1998. Distributions to
shareholders for the three months ended March 31, 1997 and in the years ended
December 31, 1997, 1996 and 1995 were $0.5 million, $13.9 million (including
$7.3 million distributed immediately prior to the Recapitalization), $0.7
million and $2.4 million, respectively.
The Company historically maintained a working capital facility
collateralized by accounts receivable and other assets. This line of credit was
not utilized since mid-1996 and net repayments/(borrowings) under this
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facility for the years ended December 31, 1996 and 1995 were $2.5 million and
($0.6) million, respectively, and the highest balance outstanding was $5.2
million on August 4, 1995. This working capital facility was terminated in
connection with the Recapitalization. The Company has also financed the
acquisition of facilities and technology-related equipment through operating
leases with third parties.
Capital expenditures for the three months ended March 31, 1998 and 1997 and
the years ended December 31, 1997, 1996 and 1995 were $1.6 million,
$0.5 million, $3.3 million, $1.7 million and $1.1 million, respectively. 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 1998 totals $2.6
million. This budget may be changed by the Company during 1998 based upon the
Company's results of operations during the year. The Company recently signed an
operating lease for a new call center facility in Oklahoma. To support the
Oklahoma call center, the Company purchased various equipment and leasehold
improvements aggregating $0.5 million. The Company has also acquired a telephone
switch for the Oklahoma call center with a cost of $0.6 million. Furthermore,
the Company acquired or committed to acquire additional IVR equipment and
computer hardware equipment with an aggregate cost of $5.9 million. The Company
financed and intends to finance the remaining committed amounts for such
telephone switch and equipment through operating leases.
Prior to the Recapitalization, all of the capital stock of the Company was
owned by Jay F. Ecklund, its then Chairman and Chief Executive Officer, and
certain trusts for the benefit of members of his family. Pursuant to the terms
of the agreements relating to the Recapitalization, the Company made a payment
of approximately $692,000 to Mr. Ecklund, such trusts, and certain employees of
the Company during the second quarter of 1998. In addition, following December
31, 2001, the Company is obligated to make additional payments, not to exceed
$15 million, to Mr. Ecklund, such trusts and certain employees of the Company,
subject to the Company achieving certain performance targets set forth in the
Recapitalization Agreement. See "The Recapitalization" and "Certain
Transactions -- Additional Payments Related to the Recapitalization." Under
separate agreements with each of the Management Stockholders, under certain
circumstances described in such agreements, Holdings has an obligation to
repurchase shares of Common Stock owned by Mr. Ecklund or such Management
Stockholder. See "Principal Stockholders -- Put Rights of Jay F. Ecklund" and
"-- Repurchase Agreements with Respect to Employee Stock."
The New Credit Facility provides for borrowings of up to $10.0 million
based on a borrowing base formula equal to 85% of Eligible Receivables (as
defined in the New Credit Facility) and has a final maturity date of March 31,
2001. The New Credit Facility does not have any commitment reductions scheduled
before maturity. Borrowings under the New Credit Facility will accrue interest,
at the option of the Company, at either the bank'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%. The New Credit Facility is secured by a
first priority interest in accounts receivable and related general intangibles
of the Company. See "Description of New Credit Facility."
In compliance with certain state laws, the Company obtains performance
bonds in connection with sweepstakes programs it manages on behalf of 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.
The Company will rely mainly on internally generated funds, and to the
extent necessary, borrowings under the New Credit Facility, to meet its
liquidity needs. The Company also expects to utilize operating leases to finance
its needs for facilities and certain equipment. The Company believes that the
cash flow from operations together with existing cash and cash equivalents and
available borrowings under the New Credit Facility will be adequate to meet its
liquidity requirements, including interest payments with respect to the Notes,
for at least the next 12 months.
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 New Credit
Facility or any
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successor facility. Such availability is or may depend on, among other things,
the Company meeting certain specified borrowing base prerequisites. See
"Description of New Credit Facility." The Company expects that, based on current
and expected levels of operations, its operating cash flow, together with
borrowings under the New 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. If the Company is unable to service its
indebtedness, it will be forced to take actions such as 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
Many computer systems used today may be unable to interpret data correctly
after December 31, 1999 because they allow only two digits to indicate the year
in a date. The Company has been assessing this Year 2000 issue as it relates to
its business, including interactions with vendors, clients, and others. The
Company has formed a Year 2000 committee to coordinate and oversee the project.
Given that the majority of the Company's system initiatives were commenced in
recent years, the Company does not believe that it will be subject to any
significant costs to modify or replace existing software or hardware to address
Year 2000 issues.
RECENT ACCOUNTING PRONOUNCEMENTS
AICPA Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," issued in March 1998,
is effective for fiscal years beginning after December 15, 1998. This statement
provides guidance on accounting for the costs of computer software developed or
obtained for internal use. The Company is currently analyzing the implementation
of SOP 98-1 and does not believe it will have a material impact on the Company's
financial condition or results of operations when the Company adopts it in the
first quarter of 1999.
During June 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"), "Reporting
Comprehensive Income," effective for fiscal years beginning after December 15,
1997. SFAS No. 130 establishes standards for reporting and display in the
financial statements of total net income and the components of all other
nonowner changes in equity, referred to as comprehensive income. The Company
adopted SFAS No. 130 in the first quarter of 1998 and the impact on the
disclosures in the financial statements was not significant.
During June 1997, the Financial Accounting Standards Board released
Statement of Financial Accounting Standards No. 131 ("SFAS No. 131"),
"Disclosures about Segments of an Enterprise and Related Information," effective
for fiscal years beginning after December 15, 1997. SFAS No. 131 requires
disclosure of business geographic segments in the consolidated financial
statements of the Company. The Company adopted SFAS No. 131 in the first quarter
of 1998 and the impact on the disclosures in its financial statements was not
significant.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the periods and years reported. As a result of its
cost based services pricing and the short-term nature of client contracts, the
Company does not anticipate that inflation will have a negative impact on its
operations in the future, other than the impact that inflation may have on the
economy as a whole.
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BUSINESS
GENERAL
Young America is a provider of a wide range of CIP services to large
consumer product and consumer service companies. The services the Company has
historically provided include the handling and processing of consumer responses
to client marketing programs (especially rebates and premium programs). The
Company's clients utilize various programs to establish relationships with their
customers and contract with the Company to handle the interactions. These
communications or interactions take on many forms but are all targeted at
satisfying the client's consumers' needs and requests in a manner that achieves
the highest degree of customer satisfaction. The interactions include inbound
and outbound communications, through mail, tele-communication and electronic
formats.
The Company's more than 200 clients include such well-known companies as
PepsiCo, Inc., Anheuser-Busch Companies, Inc., General Mills, Inc., R.J.
Reynolds Tobacco Company, Eastman Kodak Company and Hewlett-Packard Co. The
Company's CIP services provide a link between its clients and their customers
for numerous types of marketing programs, including rebate programs, purchase
reward or premium programs, sweepstakes, product sampling programs and warranty
registration programs. The Company provides a variety of services involved in
executing these marketing programs, including (i) order processing (including
the handling of mail, telephone calls, facsimiles and e-mail received from
consumers), (ii) fulfillment (including the delivery of product premiums and
samples as well as rebate checks to consumers), (iii) data gathering, analysis
and reporting and (iv) related customer service (including receiving and
responding to consumer inquiries).
CIP services are an important part of the targeted marketing strategies
pursued by consumer-oriented companies that seek to improve their marketing
efforts by identifying and focusing on their most valuable existing and
potential customers. These consumer marketing companies are increasingly
utilizing targeted marketing strategies as opposed to "mass marketing"
approaches such as general market advertising and free-standing insert coupons.
In recent years, the Company has identified a trend among its clients toward the
targeted marketing approach, including an increase in the use of consumer
promotion programs such as premium programs and product sampling programs as a
key element of its clients' marketing strategies. Because the Company believes
that its clients have found these programs to be both effective and efficient,
the Company believes that these trends will continue.
The Company has also observed a trend among its clients toward more complex
marketing programs. Consumer-oriented companies have sought to differentiate
themselves from their competitors by offering more sophisticated marketing
programs, often emphasizing consumer loyalty and repeat purchases, that appeal
to their targeted customers. These complex marketing programs frequently involve
increased consumer interactions that either allow or are designed to provide
consumer-oriented companies with an opportunity to gather information about
their customers. Management believes that spending on CIP services in support of
these more complex marketing programs has outpaced and will continue to outpace
the growth of services for simpler marketing programs such as traditional
rebate, premium and sweepstakes programs. Accordingly, over the past three years
the Company has enhanced its capabilities to become a provider not only of
narrowly focused promotion fulfillment services for those simpler marketing
programs but also of integrated, custom-designed CIP services for large complex
marketing programs. Its breadth of services and ability to integrate such
services to support complex marketing programs have distinguished the Company
from the majority of its competitors, most of which offer a narrower range of
services and serve a smaller number of clients. Management believes that the
Company's broad service offering, together with its sophisticated information
systems and quality control processes, has enabled it to become a leading
provider of business-to-consumer CIP services.
In each of the last three fiscal years, the Company managed over 4,000
marketing programs, with between 1,500 and 2,000 programs processed out at any
point in time. As of March 31, 1998, the Company was processing approximately
1,550 client marketing programs. In each of the last three fiscal years, the
Company distributed over 60 million items to its clients' customers. Items
distributed by the Company have
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ranged from rebate checks to sales literature to large and small items of
merchandise as premiums and product samples.
Young America was incorporated in Minnesota in 1997 as a subsidiary of
Holdings, a Minnesota corporation founded in 1972. The Company's principal
office is located at 717 Faxon Road, Young America, Minnesota 55397 and its
telephone number is (612) 467-1100.
COMPETITIVE STRENGTHS
The Company attributes its current market position and its existing
opportunities for continued growth and profitability to the following
competitive strengths:
Breadth of Integrated Services
Young America is a provider of a broad range of integrated CIP services to
large consumer product and consumer service companies. Young America's basic
services include (i) order processing (including the handling of mail, telephone
calls, facsimiles and e-mail received from consumers), (ii) fulfillment
(including the delivery of product premiums and samples as well as rebate checks
to consumers), (iii) data gathering, analysis and reporting and (iv) related
customer service (including receiving consumer inquiries and providing follow-up
services). In comparison, most of the Company's competitors offer a narrower
range of services to a smaller client base. The Company's ability to integrate a
broad range of services allows it to work with its clients to custom design
efficient processing solutions for all types of marketing programs, especially
complex marketing programs that involve a large number of consumer interactions.
Ability to Process High-Volume and Complex Marketing Programs
The Company has demonstrated the expertise necessary to manage complex and
high-volume marketing programs by executing programs such as "Pepsi Stuff(R)",
"Camel Cash(R)", "Bud Gear(R)" and General Mills, Inc.'s "Box Tops for
Education(R)". Complex marketing programs can involve integrating dozens of
custom-designed process steps and coordinating interactive communications with a
client's customers. High-volume programs can involve processing several million
orders and sending out several million items to consumers in a very short period
of time while simultaneously processing the Company's 1,500 to 2,000 other
current programs in a timely, courteous and efficient manner. Management
believes that the Company has earned a reputation for being able to manage
high-volume and complex marketing programs with a high quality of service and
that the Company's reputation contributes to its recurring revenue base and its
ability to attract new clients.
Strong, Established Client Relationships
The Company has successfully attracted and built strong relationships with
a large number of major consumer-oriented companies in the United States. Young
America is currently well-positioned in the packaged goods industry and has
expanded its client base in faster-growing industries such as high-technology
consumer products. Of the Company's 25 largest clients in 1997, 12 have been
clients for more than eight years.
The vast majority of marketing programs undertaken by the Company for its
clients involve direct interaction with consumers which are the clients'
customers. In these interactions, the Company acts on behalf of its clients and,
for that reason, it is critical to the Company's clients that the various
services involved in administering their marketing programs be performed
consistently, accurately, courteously and in a timely manner. The Company
believes that these measures of quality are often key determinants when a
consumer-oriented company awards the administration of its marketing programs.
The Company seeks to achieve a high level of quality service through careful
analysis and design of the steps involved in delivering the services required
and by the stringent process controls it builds into the processing plan for
each marketing program it undertakes. Management believes that the Company has
strengthened its relationships with its clients by involving them in this
process design.
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Sophisticated Information Systems
In 1996, the Company completed its conversion to a new proprietary software
system known as PAL. Utilizing PAL, the Company has been able to process a
greater number and variety of complex marketing programs than was possible with
the system that PAL replaced. The PAL system increases operational efficiencies
and enhances the Company's ability to process more complex marketing programs by
providing the Company with the ability to track orders through each step of the
order-handling process and to accurately invoice its clients for services
provided by the Company. In addition, with PAL the Company (i) can give a
consumer the precise status of any order from the day such order was received
until the day the promotion item is shipped, (ii) has the ability to provide
real-time information on the status of a program, allowing the Company's clients
to track and judge the effectiveness of on-going promotion programs and (iii)
has the ability to acquire, store and quickly retrieve information about
consumers and their individual buying habits. The Company has used PAL to
develop a proprietary database of approximately 60 million unduplicated consumer
households.
The PAL system cost approximately $9.0 million to develop and install
(including hardware acquisition and software development) and required more than
four years to be fully implemented. PAL was designed as an open system and its
capacity can be easily increased to meet the Company's future needs by adding
additional hardware support. Management believes that no comparable program is
used by any of its competitors and that no similar integrated system can be
easily developed or purchased in the marketplace. Management believes that a
competitor would require a substantial commitment of time and capital to
replicate the capabilities of the PAL system.
Experienced Management Team
The Company's senior management team has been assembled and developed since
the arrival in July 1993 of its current President and Chief Executive Officer,
Charles D. Weil. Prior to 1993, Mr. Weil was President and Chief Operating
Officer of ConAgra Frozen Foods. Mr. Weil has 25 years of experience in the
consumer packaged goods industry with ConAgra and other companies such as
General Mills Inc. and Nestle USA Inc. One of Mr. Weil's priorities since
joining the Company has been to attract and retain clients who require CIP
services to support high-volume and/or complex marketing programs on a recurring
basis. In order to aid him in the execution of this strategy, Mr. Weil has
recruited a team of experienced executives from outside the industry in which
the Company competes, each of whom brings to the Company not only functional
skills but also fresh insights that assist Mr. Weil in executing his strategic
vision for the Company. Industries from which the Company's current executives
have been drawn include retailing, distribution, direct marketing and
teleservices.
BUSINESS STRATEGY
Focus on Clients with Large Revenue Potential
Since 1993, the Company has focused its strategic plan on attracting and
retaining clients who require CIP services to support high-volume and/or complex
marketing programs on a recurring basis and with which the Company can develop a
strategic relationship. Management believes that high-volume and/or complex
marketing programs by their scope and nature allow for higher revenues and
improved profit margins. Beginning in 1995, the Company began seeking
operational efficiencies by reducing the number of simple, low-volume marketing
programs for which it would compete. At the same time, the Company upgraded its
technology and operational systems in order to better focus on the needs of
clients with large revenue potential for the Company. As a result, the Company
has increased the average revenue per client from approximately $307,000 in 1994
to approximately $746,000 in 1997. The Company intends to continue to
concentrate on clients that require more complex and/or higher volume marketing
programs.
Management believes that the Company's ability to provide CIP services for
high-volume and/or complex marketing programs has been a significant factor in
its ability to attract large new clients, both from within industries that have
traditionally used the Company's services and from industries that have not
traditionally used the Company's services such as computer hardware, computer
software, consumer services,
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telecommunications and energy. Recent client additions include 3Com Corporation,
Iomega Corporation, Sprint Corporation, BellSouth Corporation, Mobil Corporation
and CUC International Inc. (now known as Cendant Corporation). Management
believes that there are opportunities to market the Company's services in
additional industries such as tourism, financial services and pharmaceuticals.
Custom Design Services
When the Company evaluates a potential new client program, it performs a
comprehensive review of all steps that it believes are necessary for the
successful implementation of the program. The Company reviews these steps with
the potential client, and presents each step in the context of the advantages of
adding each such step. The client then determines whether to pursue each
proposed step. Only after such determination by the client does the Company
complete the process design, cost each step of the process and price its
services for a particular marketing program. Finally, the client determines
whether the value of each step is worth the incremental cost.
The Company's ability to custom design and implement processes to fit the
specific requirements of a client's program constitutes a competitive advantage.
Management believes that this ability enables the Company to maintain
mid-to-premium margin levels while achieving high customer loyalty. Other
benefits derived from the Company's ability to custom design services include
(i) more efficient planning and invoicing of services rendered by the Company
and (ii) greater ability to reliably estimate the profitability of each
marketing program serviced.
Anticipate Clients' Evolving Needs
The Company strives to anticipate the needs of its clients and develop new
or enhanced services to meet those needs as they arise rather than merely
reacting to requests from its clients. In recent years, the Company, in
anticipation of client needs, upgraded its information processing capabilities
by developing PAL and broadened its ability to process orders from mail only to
other forms of consumer interactions such as facsimile, telephone (including
live operator and IVR), Internet and electronic data transmission. Management
believes that the Company's experience in managing a wide variety of marketing
programs for a broad range of major, consumer-oriented companies gives it a
competitive advantage in anticipating its clients' needs for new and enhanced
CIP services. Examples of areas in which the Company is upgrading its services
in anticipation of client needs include (i) enhanced Internet and IVR consumer
interaction capabilities, (ii) full-service credit card payment processing for
marketing programs involving payments by consumers and (iii) improved
information processing and consumer data reporting capabilities. The Company
plans to continue to enhance its operational capabilities, including its
sophisticated computer systems, so that it can meet the demand for increasingly
complex CIP services.
Continue Operational Improvements
The Company continually evaluates and refines its process flows to meet
evolving client needs, to enhance client satisfaction and to reduce costs.
During 1996, the Company implemented over 200 process improvements, including
instituting a master schedule for operations, expanding mail sorting
capabilities and automating various data-entry functions in order to further
reduce processing costs. Management estimates that process improvements
implemented in 1996, many of which are expected to provide on-going benefits,
resulted in incremental revenue increases and cost savings for the Company
aggregating approximately $2.4 million in 1997. Management believes such
continual process improvements also help the Company to further distinguish
itself from its competitors by enabling it to offer a range of services and a
level of professionalism not widely available within the industry.
Pursue Selective Acquisitions in Related Businesses
Holdings and the Company intend to 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. Such
acquisitions could include, among others, companies that specialize in
literature fulfillment,
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Internet order processing or collateral material fulfillment and such
acquisitions, whether individually or in the aggregate, could be substantial
relative to the size of the Company.
MARKETING PROGRAMS SUPPORTED
The Company provides its CIP services in connection with various marketing
programs being conducted by its clients. Such marketing programs include the
following:
Premium Programs. Premium incentive promotions generally allow consumers
to exchange proofs of purchase for gift items or premiums offered by the
Company's clients in an effort to promote increased sales of their products.
Premium programs range from small short-term promotions involving only a small
number of consumer purchases and the award of a small gift item such as a
t-shirt or a compact disc to large and complex long-term loyalty or continuity
programs involving numerous consumer purchases, premium point systems and the
award of large gift items such as a mountain bike or a leather jacket. The
Company assists its clients in projecting proper inventory levels before a
promotion begins by helping its clients forecast redemption rates. The Company's
packaging experts recommend packaging materials that are both cost-effective and
best suited for the premium items involved in the program, and the Company
handles the shipping of such items to consumers.
Rebate Programs. Rebate offers provide an incentive to consumers to try
new or existing products and services as well as creating an opportunity for
consumer-oriented companies to gather information about consumers and their
behavior and preferences. Young America's rebate processing service lets its
clients cost-effectively fulfill rebate requests with laser-printed, customized
checks and collect additional consumer and product-choice data. The Company
offers a selection of funding options for effective cash management by its
clients.
Sweepstakes Programs. Sweepstakes, games and contests are used to generate
high levels of consumer interest in a highlighted product. The Company has been
engaged in the administration of sweepstakes for over 17 years. The sweepstakes
process is subject to stringent regulatory scrutiny that often necessitates
involvement of third parties other than the client sponsoring the sweepstakes.
The Company, in addition to receiving and processing entries and shipping out
the small number of prizes awarded, provides most of the full range of services
needed to manage sweepstakes and gaming programs, including bonding,
registration, judging, random drawing, affidavits and tax reporting.
Product Sampling Programs. Sampling programs offer clients a way to
promote both new and established products. Young America manages a variety of
sampling programs, including those that involve mailed requests, direct calls or
Internet requests from consumers. At its clients' request, the Company can also
implement sampling programs by sending products to consumers identified from
client-supplied databases. Some clients also use Young America for bulk shipment
of sample products to distribution centers or retailers.
Literature Distribution. Young America provides inventory management and
fulfillment of sales literature and information requests from interested
consumers and retailers.
Other Programs. The Company also supports a number of other programs
including consumer membership or club programs, warranty registration, inventory
management and distribution of in-store promotional materials to retailers,
retailer rebate programs, manufacturer sales incentive programs, and
administration of gift certificate programs.
SERVICES PROVIDED
Young America provides an integrated mix of CIP services that can be
customized to meet client-specific needs for a wide variety of consumer
interaction programs. These services include the following:
Inbound Order Processing. Young America offers high-quality, flexible
processing of orders received from consumers primarily by mail but also via
facsimile, via telephone through its call centers (both live operator and IVR)
and more recently through its Internet web site and e-mail. The Company has
1,500 post office boxes reserved for handling incoming mail. Orders can vary
from mailed-in submissions under premium
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<PAGE> 60
programs (including submission of proofs of purchase in paper or other form) to
simple mailed-in submissions for rebates to telephone requests for literature or
product samples. Specific inbound order processing services performed by the
Company include: (i) receipt and handling of inbound mail submissions, (ii)
checking of received entries and correspondence with consumers to ensure
qualification, (iii) promotion security and fraud detection through address
verification, (iv) data entry processing by key entry and high-speed scanning
technology, (v) transcription of IVR-captured inbound orders and (vi) processing
and accounting of consumer check and/or credit card transactions for marketing
programs involving consumer payments.
Outbound Order Processing (Fulfillment). In each of the last three years,
the Company handled over 60 million outbound units per year through its flexible
order processing systems and procedures. Outbound units vary from rebate checks
to sales literature to small and large items of merchandise representing
premiums in promotional programs or product samples. In each of the last three
years, the Company issued more than 25 million rebate payments, generating
checks utilizing its own internal laser printing capabilities. Merchandise units
are processed through various stages of the Company's handling system, including
product receiving, warehousing, assembly, repackaging and shipment. Merchandise
and paper items are shipped through a U.S. post office located on the Company's
premises, as well as through shippers such as United Parcel Service and various
freight consolidators for certain larger items.
Database Development and Management. By using the various stages of its
CIP activities to gather, process and analyze information about consumers and
their behavior and preferences, Young America assists its clients in developing
the databases necessary to build targeted, effective marketing campaigns. Young
America helps its clients to monitor promotion activity through standard reports
or, in certain cases, by linking directly into Young America's database via
personal computer and modem. More detailed, custom analysis of selected response
data is also available, including analyses of consumer buying patterns and
preferences and marketing program effectiveness. The Company has also developed
its own proprietary database of approximately 60 million unduplicated consumer
households.
Customer Service. Customer service is an integral part of any consumer
interaction program. The Company's consumer affairs group is dedicated to the
professional handling of mail, telephone, facsimile, Internet and e-mail queries
of all types. Using its on-line database (maintained through the PAL system),
the Company can readily determine the status of any consumer order and respond
promptly to any special situations, answer questions about offers, arrange
replacement shipments, and identify the status of a consumer's order or
submission. The Company has the hardware capacity to receive up to 21 million
live calls annually and an additional 75 million calls utilizing the Company's
IVR capacity. The Company's use of sophisticated communications technology,
integrated with consumer information databases maintained on PAL, enhances the
effectiveness of the Company's customer service personnel in handling consumer
inquiries and the Company's data-gathering activities. See "-- Technology."
SALES AND MARKETING
The Company's sales and marketing organization, under its Vice President of
Sales and Marketing, currently consists of a marketing coordinator as well as
two senior account executives and seven account executives, operating in loosely
defined geographic territories. The sales and marketing staff works directly
with clients and potential clients as well as maintaining relationships with
several promotional agencies.
The Company believes that its reputation for high-quality execution of its
broad range of CIP services, particularly with respect to high-volume and/or,
complex marketing programs, enables Young America to obtain new business
opportunities through requests for proposals, client referrals and cross-selling
to existing clients. In addition, consistent with the Company's business
strategies, the sales and marketing group focuses particularly on promoting
relationships with existing clients that exhibit large revenue potential from a
continued high level of activity, as well as identifying and pursuing new
clients either in industries that traditionally have utilized a high-volume of
CIP services or that the Company believes represent potential new high-volume
users of CIP services on an outsourced basis.
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<PAGE> 61
TECHNOLOGY
Young America strives to incorporate technology and automation into every
appropriate aspect of its business.
Promotion Administration Leader (PAL)
Young America's PAL software system, which the Company believes is more
advanced than any information management system utilized by its competitors, is
fully integrated into all stages of the Company's management of a marketing
program, including inbound order processing, outbound order processing and
customer service. PAL enables the Company to monitor individual order processing
and to respond promptly to customer service inquiries. The system also allows
the Company and its clients to measure the results of an ongoing promotion
program. In addition, the Company's clients, either directly or through the
Company's data analysis services, can use the data captured by PAL to refine
their databases of consumer information and to enhance future promotional
activities. The PAL system provides clients with the ability to acquire, store
and quickly retrieve information about individual consumers and their buying
habits. The Company has also used PAL to develop its own database of
approximately 60 million unduplicated consumer households.
The PAL system cost approximately $9 million to develop and install
(including hardware acquisition and software development) and required more than
four years to be fully implemented. PAL utilizes a relational database designed
by Progress Software Corporation ("Progress") and is written in Progress'
fourth-generation programming language in a UNIX environment. PAL was designed
as an open system to be operated within the Company's client/server environment.
The Company's computer system is supported by four mainframe computers that
house the PAL database and direct and control network data flow among the
Company's approximately 30 servers and approximately 1,800 personal computers
("PCs"). The Company purchases or leases its mainframes, servers and PCs from
major computer manufacturers such as Sequent Computer Systems, Inc., Compaq
Computer Corporation and Hewlett-Packard Co.
PAL was designed to grow and adapt with the Company. New features are
continually being written and added to the various existing PAL applications. In
addition, PAL's capacity can be easily increased by adding additional hardware
support. Data stored by the PAL system is protected by frequent backup to
redundant off-site systems maintained by the Company.
Call Center Technology
The Company seeks to employ the most current telecommunications technology
available. It maintains relationships with the three leading U.S.
telecommunications carriers, utilizing advanced toll-free and toll-paid network
services such as automatic number identification (ANI), dialed number
information service (DNIS), routing control service on-line, next-available
agent call processing, network messaging and call prompting and network-based
call transferring applications. The Company also employs automatic call
distributor (ACD) switches with advanced call routing features and computer
telephone integration (CTI) technology. The Company's IVR system uses
text-to-speech and voice recognition technology. The Company's dedicated
fibre-optic links integrate its telecommunication capabilities into a single
company-wide system.
Scanning Capabilities
In order to more effectively capture consumer data, the Company has
introduced form scanning as part of its data input process. Young America's
Intelligent Character Recognition (ICR) system recognizes characters that have
been hand-printed by a person using a pen or pencil, thus greatly reducing the
manual keying of data. ICR provides a cost-effective, alternative processing
option that reduces data input time. The scanning process also allows Young
America to retain forms electronically, resulting in less paperwork and easier
data retrieval.
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INDUSTRY OVERVIEW
The Company is not aware of any industry service or analyst that tracks the
consumer interaction processing industry as such. The Company believes that this
may be because the industry is very fragmented and evolving. The Company
believes that it may be one of only a few companies that characterize themselves
as consumer interaction processors rather than identifying themselves with other
industries, such as teleservices or direct marketing, or positioning themselves
in a specific segment of the CIP industry, such as promotion fulfillment.
Although direct industry data is not available, the Company's provision of
CIP services can be viewed in the context of overall consumer promotional
spending. Levels of spending on consumer promotion activities reflect what the
Company believes is a trend among consumer-oriented companies toward increasing
the proportion of more targeted marketing activities involving interaction with
consumers and reducing the proportion of mass marketing approaches such as
general market advertising and free-standing insert coupons.
According to Promo magazine, expenditures in the United States in 13
categories of consumer promotion reached a total of approximately $71.5 billion
in 1996. In measuring the size of the industry, Promo magazine included
expenditures for premium incentives, point of purchase displays, advertising
specialties (such as logo-identified objects), couponing, specialty printing,
promotional licensing, sponsored events, promotional fulfillment, interactive
marketing (including toll-free number programs and the Internet), research,
promotional agency services, in-store marketing and product sampling. According
to Promo magazine, promotional fulfillment spending, the category management
believes best represents the Company's business, reached $2.5 billion in 1996,
representing an 18.5% increase over the $2.1 billion reported for 1995. Promo
magazine reported that two of the features driving the growth in promotional
fulfillment spending were increased outsourcing of fulfillment services and
increased demand for consumer data collection.
COMPETITION
The market in which the Company competes is highly competitive and
fragmented, including competitors that are small firms offering specific
applications, divisions of large entities and large independent firms. The
Company competes on the basis of quality of service, ability to execute
high-volume and complex programs, price and timeliness of service execution. See
"Risk Factors -- Highly Competitive Market."
WORKFORCE
The Company has a flexible, non-union workforce consisting of full-time
employees supplemented by part-time employees and independent contractors. The
independent contractors work in their homes checking order submissions and
hand-keying data. In 1997, the Company's active workforce varied from
approximately 1,500 to approximately 2,000, depending on the volume of
processing activity.
The following table sets forth the average breakdown of the Company's
workforce for the twelve-month period ended December 31, 1997:
<TABLE>
<S> <C>
Full-time fixed employees................................... 12.2%
Full-time variable employees................................ 25.6
Part-time permanent employees............................... 4.0
Hourly pool employees*...................................... 22.6
Independent contractors..................................... 35.6
-----
Total workforce........................................ 100.0%
</TABLE>
- ---------------
* The Company has entered into an agreement with an independent employment
agency pursuant to which the Company obtains services of hourly pool employees
through such agency, and the Company has contracted with the agency for its
temporary employment needs. Accordingly, by the end of the first quarter of
1998, the Company had no hourly pool employees.
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Full-time fixed employees work full-time, year round. Full-time variable
employees work full shifts on an as-needed basis. Part-time permanent employees
work partial shifts year round. Hourly pool employees comprise a group of
flexible workers who can work on an as-needed basis. Independent contractors
work flexible hours on an as-needed basis from their homes. The Company's
flexible workforce enables it to maintain a significant proportion of its labor
cost as a variable cost while still being able to respond effectively to
variations in processing volumes throughout the year.
FACILITIES
The Company's headquarters and main facility is located in Young America,
Minnesota, where it has the capability of performing substantially all types of
activities involved in rendering its CIP services.
The Company's facilities are as follows:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION FUNCTION SQUARE FOOTAGE OWNED/LEASED LEASE EXPIRATION
- -------- -------- -------------- ------------ ------------------
<S> <C> <C> <C> <C>
Young America, MN........ Corporate offices and 161,900 Owned(1) --
warehouse -
capabilities include
inbound and outbound
processing and
customer service
Glencoe, MN.............. Warehouse 97,100 Leased May 31, 2002
LeCenter, MN............. Warehouse 40,000 Leased November 30, 1998
Belle Plaine, MN......... Outbound processing and 62,000 Leased August 31, 1998
warehouse
Mankato, MN.............. Inbound processing and 54,200 Leased June 30, 2001
customer service
Winthrop, MN............. Outbound processing 24,000 Leased December 31, 1998
Chanhassen, MN........... Information systems 5,000 Leased January 31, 1999
applications
development
Albert Lea, MN........... Inbound processing 11,250 Leased August 31, 1999
Oklahoma City, OK........ Call center 25,000 Leased January 31, 2004
</TABLE>
- ---------------
(1) Owned by Holdings and leased to Young America.
The Company believes that its property and equipment are generally
well-maintained and in good condition and that it has or can quickly acquire
sufficient capacity for its current and projected operational and warehousing
needs.
LEGAL PROCEEDINGS
The Company from time to time is involved in routine litigation incidental
to the conduct of its business. The Company believes that no litigation pending
against it will have a material adverse effect on its financial condition or
results of operations.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers, directors and certain other key personnel of Young
America are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Charles D. Weil.................. 54 President, Chief Executive Officer
and Director
Robert Marakovits................ 39 Chairman of the Board of Directors
L. Joseph Kulas.................. 51 Vice President of Finance, Chief
Financial Officer, Treasurer and
Secretary
David Q. Ferguson................ 44 Vice President of Sales and Senior
Account Executive
Michael J. Larson................ 40 Vice President of Consumer Affairs
Barbara K. Spiess................ 49 Vice President of Human Resources
Frederick H. Stinchfield......... 46 Vice President of Sales and Senior
Account Executive
David C. Terry................... 48 Vice President of Sales and
Marketing
Sharon A. Wagner................. 39 Vice President of Account Management
Jay F. Ecklund................... 61 Director
J. Mark A. MacDonald............. 42 Director
</TABLE>
CHARLES D. WEIL joined the Company in July 1993 as its President and Chief
Operating Officer. Mr. Weil was appointed President and Chief Executive Officer
of each of Young America and Holdings following the consummation of the
Recapitalization. From 1992 until he joined the Company, Mr. Weil was an
independent consultant. From 1991 to 1992 Mr. Weil served as President and Chief
Operating Officer of ConAgra Frozen Foods. Prior to that time he held senior
management positions with Nestle USA, Inc. and General Mills, Inc. Mr. Weil
holds a B.S. degree from Dartmouth College and an M.B.A. from the Amos Tuck
School of Business Administration.
ROBERT MARAKOVITS has been a Managing Director of BTCP since October 1993
and he was a Vice President of BTCP from June 1988 to October 1993. Mr.
Marakovits also serves on the boards of directors of Alliance Entertainment
Corp., Genesis Teleserv Corporation and National Catalog Corporation.
L. JOSEPH KULAS joined the Company in August 1996 and is currently Vice
President of Finance, Chief Financial Officer, Treasurer and Secretary of each
of Young America and Holdings. From 1994 until he joined the Company, Mr. Kulas
was Vice President of Finance of Gage Marketing Group and from 1992 to 1994 he
was Vice President of Finance of USA Direct, a subsidiary of Fingerhut
Companies, Inc. Prior to that time, Mr. Kulas held financial management
positions in several companies and was employed in public accounting. Mr. Kulas
received a B.S. degree in accounting from the University of North Dakota in 1969
and an M.B.A. from Mankato State University in 1984. Mr. Kulas is a certified
public accountant.
DAVID Q. FERGUSON joined the Company in July 1982 as an Account Group
Manager and he has been a Vice President of Sales and a Senior Account Executive
for the Company since 1988. Mr. Ferguson has a B.A. degree from Dartmouth
College.
MICHAEL J. LARSON joined the Company in March 1996 as its Vice President of
Consumer Affairs. From 1994 to 1996 Mr. Larson was Vice President, Direct
Response Sales and Service for NordicTrack, Inc.. From 1993 to 1994 he was Vice
President, Customer Service of Hanover Direct, Inc., and from 1990 to 1993, he
was employed in various officer positions with Express Fulfillment Services,
Inc. Mr. Larson holds a B.A. degree in Social Sciences from the University of
Northern Iowa.
BARBARA J. SPIESS joined the Company in March 1993 as its Manager of
Training and Development. She was named Vice President of Human Resources in
1997. Prior to joining the Company, Ms. Spiess was an independent consultant
specializing in human resources, training and organizational development. She
has
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also worked for May D&F, a division of The May Department Stores Company, where
she was Director of Training and Development. Ms. Spiess has a B.A. in
Journalism/Communications from Drake University.
FREDERICK H. STINCHFIELD joined the Company in 1985 as a sales
representative and he has been a Vice President of Sales and a Senior Account
Executive for the Company since 1988. Mr. Stinchfield has a B.A. degree from the
University of Denver.
DAVID C. TERRY joined the Company in March 1995 as its Vice President of
Sales and Marketing. From 1992 to 1995 Mr. Terry was President and Chief
Executive Officer of Keystone Corporation. Prior to that time he held various
management positions with Business Incentives and Carlson Marketing Group, Inc..
Mr. Terry holds a B.A. degree from Eastern Michigan University.
SHARON A. WAGNER joined the Company in April 1981. Ms. Wagner has held
several managerial positions, including Purchasing and Bidding Manager. She
became Director of Account Management in 1992 and was named Vice President of
Account Management in 1997.
JAY F. ECKLUND was Chairman and Chief Executive Officer of the Company from
1975 until the consummation of the Recapitalization. Mr. Ecklund has been a
director of Holdings since 1975. Upon the consummation of the Recapitalization,
Mr. Ecklund is entitled to continue as a director of Holdings in accordance with
the terms of the Stockholders' Agreement. Mr. Ecklund is also a director of
Young America.
J. MARK A. MACDONALD has been a Portfolio Manager with the Merchant Banking
Group of OTPPB since 1995. From 1991 to 1995, Mr. MacDonald was a partner with
Enterprise Management Group/Premier Capital where he provided investment
management, corporate development, restructuring and financial and fiscal
advisory services to corporate and other clients. Mr. MacDonald also serves on
the boards of directors of Sun Media Corporation, Financial Post, MetroNet
Communications and Q/Media Services Corporation.
In June 1998, the Company's Vice President of Technology and Vice President
of Operations resigned as an officer of the Company. The Company has determined
to have the persons previously reporting to such officer report directly to
Charles D. Weil and not to hire a replacement for such officer.
All of the outstanding capital stock of Young America is owned by Holdings.
Accordingly, each director on the board of directors of Young America is
nominated and elected by Holdings. Currently Messrs. Marakovits, MacDonald,
Ecklund and Weil serve as directors of Young America. Young America has an
executive committee comprised of Messrs. Marakovits, MacDonald and Weil.
The members of Holdings' Board of Directors are nominated pursuant to the
terms of the Stockholders' Agreement. Under the Stockholders' Agreement BTCP is
entitled to designate two directors to the Board of Directors, each of OTPPB and
Jay F. Ecklund is entitled to designate one director and Holdings' chief
executive officer serves as a director. In addition, BTCP and OTPPB are entitled
to designate jointly up to three independent directors to the Board of
Directors. Currently Messrs. Marakovits, MacDonald, Ecklund and Weil serve as
directors of Holdings.
COMMITTEES OF THE BOARD OF DIRECTORS
The Stockholders' Agreement provides for the creation of a three-person
executive committee of Holdings' Board of Directors (the "Executive Committee").
Under the terms of the Stockholders' Agreement, the Executive Committee is to
include the Chief Executive Officer of Holdings, one director appointed by BTCP
and one director appointed by OTPPB. Currently Messrs. Marakovits, MacDonald and
Weil serve on the Executive Committee. In addition, the Board of Directors has a
compensation committee (the "Compensation Committee") that determines
compensation for executive officers of the Company and that will administer the
Company's Employee Stock Option Plan. Currently Messrs. Marakovits, MacDonald
and Weil serve on the Compensation Committee. At such time as BTCP and OTPPB
take action to nominate and elect one or more independent directors to the Board
of Directors, the Board of Directors will create an audit committee (the "Audit
Committee") and will appoint one or more independent directors to such Audit
Committee. The Audit Committee will review the scope and results of audits and
internal accounting controls and all other tasks performed by the independent
public accountants of the Company.
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<PAGE> 66
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the formation of the Compensation Committee in February 1998, the
Company did not have a special committee of the Board of Directors to deal with
compensation issues. Prior to the Recapitalization, as a member of the Board of
Directors, Mr. Ecklund, the former Chief Executive Officer of Holdings, made
final determinations with respect to the compensation of executives of the
Company.
COMPENSATION OF DIRECTORS
The Company may compensate directors for services provided in such capacity
in addition to reimbursing all out-of-pocket expenses incurred by such directors
in connection with travel and other costs associated with attending meetings of
the Board and any committees thereof.
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the year ended December
31, 1997, for the two persons serving as the Company's chief executive officer
during such year, the one other executive officer of the Company and the two
other most highly compensated employees of the Company (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION -----------------------
---------------------- OPTIONS LTIP ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS GRANTED PAYOUTS(4) COMPENSATION(5)
- --------------------------- ----------- --------- ---------- --------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jay F. Ecklund.............. 1997 $546,346 -- -- -- $ 3,123
Chief Executive Officer(1)(2)
Charles D. Weil............. 1997 264,133 $1,161,000 -- $9,718,082 23,708
President and Chief
Executive Officer(1)
L. Joseph Kulas............. 1997 150,000 45,000 -- 260,000 22,058
Vice President of Finance,
Chief Financial Officer,
Secretary and Treasurer
Frederick H.
Stinchfield(2)............ 1997 573,389 -- -- 2,586,913 15,266
David C. Terry(3)........... 1997 151,000 136,000 -- 435,000 22,246
</TABLE>
- ---------------
(1) Mr. Ecklund was the chief executive officer of the Company from 1975 until
November 25, 1997. On November 25, 1997, Mr. Weil became chief executive
officer of the Company.
(2) Includes director's fees received by Mr. Ecklund prior to the
Recapitalization Date and sales commissions earned by Mr. Stinchfield.
(3) The bonus paid to Mr. Terry in 1997 was based upon an annual incentive plan
that pays Mr. Terry a percentage of the Company's year-to-year increase in
service fee revenues.
(4) LTIP payments include payments under a phantom stock agreement entered into
between the Company and Mr. Stinchfield, payments to Messrs. Kulas and Terry
made pursuant to the Company's 1997 Management Recognition, Transition and
Equity Bonus Plan, a payment to Mr. Terry pursuant to a special bonus based
upon the financial performance of the Company during the three-year period
ended December 31, 1997 and payments made to Mr. Weil under the Old
Employment Agreement (as defined below) including his sale of the Company
bonus.
(5) Other compensation includes contributions to defined contribution plans and
payments related to taxable insurance benefits.
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<PAGE> 67
EMPLOYMENT AGREEMENTS
Charles D. Weil
On November 24, 1997, the Company and Charles D. Weil entered into an
employment agreement (the "Weil Employment Agreement") pursuant to which Mr.
Weil has agreed to serve as the President and Chief Executive Officer of each of
Young America and Holdings. The term of the Weil Employment Agreement is
initially three years and expires on November 24, 2000, unless terminated
earlier in accordance with its terms. The Weil Employment Agreement replaced an
earlier agreement between the Company and Mr. Weil (the "Old Employment
Agreement"). Base compensation under the Weil Employment Agreement is $300,000
per year and such amount will increase at a minimum of 5% each calendar year
beginning January 1, 1999. If the Company terminates Mr. Weil's employment
without cause or Mr. Weil terminates his employment for good reason, he is
entitled to receive (i) his base salary for an eighteen-month period following
the effective date of termination and (ii) a pro-rated portion of his annual
incentive bonus under the Company's Annual Management Incentive Plan (as defined
below) as of the date of termination. At March 31, 1998, the amount payable (in
addition to benefits continuation and without giving effect to withholding
taxes) to Mr. Weil pursuant to the foregoing would have been approximately
$500,000 in the aggregate. At such date, no portion of the annual incentive
bonus under such Plan would have been payable based on the Company's operating
results through such date.
During 1997, Mr. Weil participated in a special incentive bonus plan which
was based upon the achievement of certain performance targets for that year. Mr.
Weil was paid $900,000 with respect to such incentive bonus plan in January 1998
and an additional $261,000 pursuant to such incentive bonus plan in March 1998
following the approval of the annual financial statements of the Company by the
Board of Directors. In addition, on January 7, 1998, the Company paid Mr. Weil a
bonus of $500,000 in satisfaction of certain obligations of the Company to Mr.
Weil under the Old Employment Agreement. For 1998 and all subsequent years under
the Weil Employment Agreement, Mr. Weil will participate in the Company's Annual
Management Incentive Plan, as such plan may from time to time be amended.
In connection with the Recapitalization and pursuant to the terms of the
Old Employment Agreement, Mr. Weil received a "Sale of the Company" bonus from
the Company of $9.2 million. In addition, Mr. Weil may be entitled to receive up
to an additional $3.2 million, representing his pro rata portion of post-
Recapitalization payments that may be made to the Selling Stockholders and
Messrs. Weil, Stinchfield and Ferguson under the terms of the Recapitalization
Agreement. See "Certain Transactions -- Additional Payments Related to the
Recapitalization."
L. Joseph Kulas
The Company is a party to an employment agreement with L. Joseph Kulas (the
"Kulas Employment Agreement") pursuant to which Mr. Kulas serves as the Chief
Financial Officer of each of Young America and Holdings. The Kulas Employment
Agreement expires on August 1, 1998, subject to an automatic twelve-month
renewal, if not canceled by either party. Base compensation under the Kulas
Employment Agreement is $150,000 per year, subject to reasonable annual
increases as determined by the Company. During 1997, Mr. Kulas participated in
the Company's management incentive plan for 1997 which was based upon
achievement of performance targets for that year. Mr. Kulas also received a
signing bonus of $1,000 per month during 1997.
Change in Control Agreements
In February 1997, the Company entered into change in control agreements
with seven persons currently employed by the Company, including Michael J.
Larson, L. Joseph Kulas, Barbara K. Spiess, Sharon A. Wagner, David Q. Ferguson,
Robert J. Beaudoin and Frederick J. Stinchfield (the "Change in Control
Agreements"). Each Change in Control Agreement provides that if the applicable
employee is terminated by the Company without cause or such employee leaves the
employ of the Company for good reason following a Change in Control (as defined
in such Change in Control Agreement), the Company will pay to the employee his
or her annual base salary and the total commissions earned for the preceding
twelve-month period and will
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<PAGE> 68
continue the employee's benefits for the earlier of twelve months or until the
employee obtains full time employment (except that in the case of Mr. Kulas, the
Company will pay the amount due under the Kulas Employment Agreement, if
longer). As of the date of this Prospectus, the Company had not made any
payments under the Change in Control Agreements. Had a Change in Control (as so
defined) occurred as of March 31, 1998, the minimum aggregate amount payable (in
addition to benefits continuation and without giving effect to withholding
taxes) under change in control agreements would have been approximately $1.7
million. Such amount may increase based on the operating results of the Company.
EMPLOYEE STOCK OPTION PLAN
As of the date of this Prospectus, the Company has made no grants of stock
options to any of its directors or employees. However, Holdings expects to adopt
an employee stock option plan (the "Employee Stock Option Plan") in the near
future that will provide for grants of shares of non-voting Class C Common Stock
representing approximately 16% of the fully-diluted Common Stock of Holdings.
The administration of the Employee Stock Option Plan, the selection of
participants, and the form and the amounts of the grants will be within the sole
discretion of the Compensation Committee of the Board of Directors.
ANNUAL MANAGEMENT INCENTIVE PLAN
The Company plans to implement annual bonus plans (such annual plans
referred to collectively as the "Annual Management Incentive Plans") for certain
employees (including Messrs. Weil, Kulas and Terry) pursuant to which eligible
members of management will each be entitled to receive predetermined percentages
of their base salaries if the Company's EBITDA (as defined in the Annual
Management Incentive Plans) exceeds certain targets. The terms of the Annual
Management Incentive Plan utilized during any year and the eligible employees
under each plan are within the sole discretion of the Compensation Committee of
the Board of Directors.
EMPLOYEE 401(K)/PROFIT-SHARING PLAN
The Company has historically offered its employees participation in a
qualified 401(k)/profit-sharing plan. The Company intends to continue to offer a
plan under which eligible employees (as defined in the plan document) will be
entitled to share in a bonus pool (with each eligible employee sharing in the
pool pro-rata based upon such employee's base salary) if the Company's EBITDA
exceeds a predetermined target level.
1997 MANAGEMENT RECOGNITION, TRANSITION AND EQUITY BONUS PLAN
On November 25, 1997, Holdings adopted the 1997 Management Recognition,
Transition and Equity Bonus Plan for officers and certain key management
employees, pursuant to which Holdings paid one-time cash bonuses totaling $2.7
million to certain officers and employees of the Company. A portion of the
proceeds of such bonuses was used to purchase Class A Common Stock in connection
with the Recapitalization.
PHANTOM STOCK AGREEMENTS
In December 1991, the Company granted certain rights to each of Frederick
H. Stinchfield and David Q. Ferguson under phantom stock agreements entered into
with such employees of the Company. Such phantom stock agreements provided for
the Company to make payments based on the increase in book value or, in the case
of a sale of the Company, the value paid in such transaction. In connection with
the Recapitalization, Messrs. Stinchfield and Ferguson received payments in
respect of their rights under the phantom stock agreements of $2.4 million and
$2.2 million, respectively. In addition, Messrs. Stinchfield and Ferguson may be
entitled to receive additional payments of up to $499,000 and $446,000,
respectively, representing their pro rata portion of post-Recapitalization
payments that may be made to the Selling Stockholders and Messrs. Weil,
Stinchfield and Ferguson under the terms of the Recapitalization Agreement. See
"Certain Transactions -- Additional Payments Related to the Recapitalization."
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding capital stock of Young America is owned by Holdings.
The following table sets forth certain information regarding the beneficial
ownership of the capital stock of Holdings by (i) each person known by Holdings
to own beneficially more than 5% of the outstanding shares of any class of its
voting capital stock, (ii) each person who is a director of Holdings or Young
America, (iii) each Named Executive Officer and (iv) all directors and executive
officers of Holdings or Young America as a group. Unless otherwise indicated,
each of the stockholders has sole voting and investment power with respect to
the shares beneficially owned.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OF OWNERSHIP OF CLASS A
NAME AND ADDRESS CLASS A COMMON STOCK(1) COMMON STOCK
---------------- ----------------------- --------------------
<S> <C> <C>
BT Capital Partners, Inc.(2)........................ 1,029,445(3) 58.9%
Ontario Teachers' Pension Plan Board(2)............. 396,710(4) 30.0
Jay F. Ecklund(2)................................... 134,400 10.3
Robert Marakovits(2)(5)............................. 1,029,445(3) 58.9
J. Mark A. MacDonald(2)(6).......................... 396,710(4) 30.0
Charles D. Weil(2).................................. 156,221 12.0
L. Joseph Kulas(2).................................. 2,757 *
Frederick H. Stinchfield(2)......................... 4,595 *
David C. Terry(2)................................... 3,217 *
All directors and executive officers as a
group(5)(6) (5 persons)........................... 1,710,804(3)(4) 62.9
* Denotes less than 1%
</TABLE>
- ---------------
(1) The amounts and percentages of capital stock beneficially owned are reported
on the basis of regulations of the Commission governing the determination of
beneficial ownership of securities. Under the rules of the Commission, a
person is deemed to be a "beneficial owner" of a security if that person has
or shares "voting power," which includes the power to vote or to direct the
voting of such security, or "investment power," which includes the power to
dispose of or to direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities of which that person has a
right to acquire beneficial ownership within 60 days. Securities that can be
so acquired are deemed to be outstanding for purposes of computing such
person's ownership percentage, but not for purposes of computing any other
person's percentage. Under these rules, more than one person may be deemed a
beneficial owner of the same securities and a person may be deemed to be a
beneficial owner of securities as to which such person has no economic
interest.
(2) The address of BTCP and Mr. Marakovits is 130 Liberty Street, New York, New
York 10006; the address of OTPPB and Mr. MacDonald is 5650 Yonge Street,
North York, Ontario Canada M2M 4H5; the address of Messrs. Weil, Kulas,
Stinchfield and Terry is 717 Faxon Road, Young America, Minnesota 55397 and
the address of Jay F. Ecklund is Pier 66 Resort & Marina, 2301 Southeast
17th Street, Ft. Lauderdale, Florida 33316. BTCP is the private equity
investing arm of, and a wholly owned subsidiary of, Bankers Trust
Corporation. BTCP is not an obligor on the Notes. See "Risk
Factors -- Concentration of Ownership of the Company; Stockholders
Agreement."
(3) Includes 442,884 shares of Class B Common Stock that are convertible into
Class A Common Stock. The Class B Common Stock generally is not entitled to
vote, however, as described below, upon the occurrence of certain events,
the Class B Common Stock will (except as otherwise required by applicable
law) be entitled to vote with the Class A Common Stock, voting together as a
single class, on all matters to be voted on by Holdings' shareholders.
(4) Includes 18,437 shares of Class C Common Stock that are convertible into
Class A Common Stock. If OTPPB were to convert all 172,727 of the shares of
Class C Common Stock its holds into shares of Class A Common Stock, it would
hold approximately 37.3% of the outstanding voting capital stock of
Holdings.
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However, OTPPB has advised Holdings that OTPPB is prohibited by law from
owning more than 30.0% of the outstanding voting capital stock of any
company.
(5) Mr. Marakovits is a Managing Director of BTCP. Mr. Marakovits disclaims any
beneficial ownership of the shares of Holdings held by BTCP.
(6) Mr. MacDonald is a Portfolio Manager of OTPPB. Mr. MacDonald disclaims any
beneficial ownership of the shares of Holdings held by OTPPB.
DESCRIPTION OF CAPITAL STOCK; SBIC RESTRICTIONS ON BTCP
Young America's capital stock consists of 1,000 shares of common stock, all
of which have been issued and are outstanding and are held of record by
Holdings. Holdings' Common Stock consists of three classes, Class A Common
Stock, Class B Common Stock and Class C Common Stock. Except as set forth below,
the rights of the three classes of Common Stock are the same. Under most
circumstances, only the Class A Common Stock has voting rights, however, (i) the
affirmative vote of a majority of the total number of shares of Class B Common
Stock voting at a meeting at which a quorum is present, voting separately as a
class, is required for the issuance or sale of additional shares of Class B
Common Stock, the reclassification, cancellation or retirement of the Class B
Common Stock or any amendment, waiver or corporate transaction that adversely
affects the Class B Common Stock and (ii) the affirmative vote of a majority of
the total number of shares of Class C Common Stock voting at a meeting at which
a quorum is present, voting separately as a class, is required for the issuance
or sale of additional shares of Class C Common Stock, the reclassification,
cancellation or retirement of the Class C Common Stock or any amendment, waiver
or corporate transaction that adversely affects the Class C Common Stock.
Regulated Holders (as defined in Holdings' Articles of Incorporation) who hold
shares of Class A Common Stock may convert such shares into shares of Class B or
Class C Common Stock at any time. Regulated Holders who hold shares of Class B
Common Stock or Class C Common Stock may convert such shares into shares of
Class A Common Stock at any time such conversion is permitted under law.
As a licensed small business investment company (an "SBIC"), BTCP is
subject to certain restrictions imposed upon SBICs by the regulations
established and enforced by the United States Small Business Administration.
Among these restrictions are certain limitations on the extent to which an SBIC
may exercise control over companies in which it invests. As a result of these
restrictions, unless certain events occur, BTCP may not own or control a
majority of the outstanding voting stock of Holdings or designate 50% or more of
the members of the Board of Directors. Accordingly, while BTCP owns a majority
of the Common Stock of Holdings, BTCP owns less than a majority of Holdings'
Voting Stock. Each share of Class B Common Stock (all of which is held by BTCP)
will be entitled to vote, at the option of BTCP, with the Class A Common Stock,
voting together as a single class, on all matters to be voted on by Holdings'
shareholders (except as otherwise required by applicable law) following the
occurrence of any of the following events: (i) Charles D. Weil shall cease to be
employed by the Company for any reason; (ii) Holdings shall not have completed a
public offering of its Common Stock meeting certain requirements by the fifth
anniversary of the Recapitalization Date; (iii) the Company or the Selling
Stockholders shall default on any of the material terms of the Recapitalization;
(iv) any representation or warranty made by Holdings or the Selling Stockholders
with respect to the Recapitalization shall prove to have been materially false;
(v) an Approved Sale (as defined below) has been proposed to the Board of
Directors and such sale is not approved, for whatever reason, by the Board of
Directors within three days of such proposal; or (vi) other circumstances that
reasonably threaten the investment of BTCP or its assignees.
STOCKHOLDERS' AGREEMENT
In connection with consummation of the Recapitalization, Holdings, BTCP,
OTPPB, Jay F. Ecklund and the Management Stockholders (collectively, the
"Stockholders") entered into a stockholders' agreement (the "Stockholders'
Agreement"). The Stockholders' Agreement contains certain restrictions with
respect to the transferability of Holdings' capital stock and contains a grant
by Holdings to the Stockholders of preemptive rights to subscribe for future
issuances of its capital stock and securities convertible or exercisable for
capital stock, subject to certain exceptions. The Stockholders' Agreement also
includes provisions regarding
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designation of members of the Board of Directors and other voting arrangements.
The Stockholders' Agreement will terminate upon the earlier of the completion of
an Approved Sale or a public offering of Holdings' Common Stock meeting certain
requirements.
The Stockholders' Agreement provides that Holdings' Board of Directors will
consist of at least five but no more than eight directors. Under the
Stockholders' Agreement, BTCP will be entitled to appoint two directors, each of
OTPPB and Jay F. Ecklund will be entitled to appoint one director and Holdings'
Chief Executive Officer of Holdings' will serve as one director. Directors
appointed by any party pursuant to the Stockholders' Agreement may also be
removed by such party with or without cause. In addition, BTCP and OTPPB will be
entitled to designate jointly up to three independent directors. The
Stockholders' Agreement provides for the creation of a three-person executive
committee of the Board of Directors which will include the Chief Executive
Officer of Holdings, one director appointed by BTCP and one director appointed
by OTPPB. The Stockholders' Agreement also provides that all committees of the
Board of Directors will include at least one director appointed by BTCP and at
least one director appointed by OTPPB.
The Stockholders' Agreement provides that certain corporate actions of
Holdings or any subsidiary of Holdings will require the affirmative vote of a
majority of the shares currently held by OTPPB. These actions (with certain
limited exceptions) include (i) mergers, consolidations or recapitalizations,
(ii) public offerings or issuances of capital stock, (iii) repurchases of and
dividends on capital stock, (iv) acquisitions, sales or investments in any
person in excess of $10 million, (v) any dissolution or liquidation, (vi)
amendments to or restatements of the Articles of Incorporation or By-laws of
Holdings, (vii) incurrences of indebtedness or liens in excess of $10 million in
the aggregate or modifications of the terms of any existing indebtedness, (viii)
capital expenditures in excess of $10 million in any one year, (ix) transactions
with affiliates other than at arms-length and (x) any change in the primary
business of the Company. Consistent with BTCP's majority ownership interest in
the Company, the Stockholders' Agreement provides that each of the above
corporate actions will require the affirmative vote of a majority of the shares
currently held by BTCP; provided, however, that with respect to such actions,
there is no minimum amount that must be met to trigger the requirement for such
consent. In addition, Holdings is required to obtain the affirmative vote of a
majority of the shares currently held by BTCP to revise or amend any employment
contract with senior management or to amend, modify or supplement the Employee
Stock Option Plan.
The Stockholders' Agreement provides for certain restrictions on the sale
by the Stockholders of their equity interests in Holdings. Unless a transfer is
to Holdings or an affiliate of the Stockholder, no Stockholder may transfer his
or its capital stock of Holdings without the prior permission of BTCP. In
addition, with respect to any permitted transfer (other than a transfer to an
affiliate) by any particular Stockholder under the Stockholders' Agreement, each
other Stockholder will be permitted to transfer to the proposed transferee his
or its pro rata share of such securities at the price and on the other terms of
the proposed transfer.
The Stockholders' Agreement provides that, subject to certain limitations,
if at any time BTCP approves the sale of all of the capital stock of Holdings or
the sale of all or substantially all of the assets of Holdings (each an
"Approved Sale"), then each other Stockholder shall agree to and comply with the
terms of such sale.
REPURCHASE AGREEMENTS WITH RESPECT TO EMPLOYEE STOCK
Each of the Management Stockholders acquired the shares of Class A Common
Stock held by such Management Stockholder (with respect to each Management
Stockholder, the "Employee Stock") pursuant to a Stock Subscription and
Repurchase Agreement (collectively, the "Employee Stock Agreements") between
such Management Stockholder and Holdings simultaneous with and as part of the
Recapitalization. Each of the Employee Stock Agreements provides that upon the
occurrence of certain events including the death, retirement, permanent
disability, resignation for good reason (such as retirement) or termination
without cause of the Management Stockholder (the "Termination Events"), such
Management Stockholder (or his successors) will have the right (within a
specified period of time) to cause Holdings to repurchase his Employee Stock. In
July 1998, Holdings and Charles D. Weil terminated such right granted to Mr.
Weil. If a Termination Event shall occur, with respect to any Management
Stockholder Holdings has a corresponding
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right to cause the relevant Management Stockholder to sell his Employee Stock to
Holdings. In addition, Holdings has the right to cause a Management Stockholder
to sell his Employee Stock to Holdings upon such Management Stockholder's
termination for cause.
The repurchase price to be paid by Holdings for any Employee Stock
repurchased pursuant to the Employee Stock Agreements will in most situations be
the fair market value for such shares (to be determined by the Board of
Directors if Holdings' shares are not then traded publicly, provided that a
Management Stockholder may request an appraisal of the repurchased shares if
such Management Stockholder disagrees with the valuation placed on such shares
by the Board of Directors). Certain Employee Stock Agreements require the
Management Stockholder to enter into a non-competition agreement with Holdings
or receive the lesser of the fair market value or the original purchase price
for the Employee Stock to be repurchased. The Employee Stock Agreement with Mr.
Weil provides that if Mr. Weil is terminated for cause, Holdings may repurchase
his Employee Stock at the lesser of its fair market value or the original
purchase price for such shares.
REGISTRATION RIGHTS AGREEMENT; RIGHTS OF JAY F. ECKLUND
In connection with the Recapitalization, Holdings, BTCP, OTPPB and Mr.
Ecklund entered into an equity registration rights agreement (the "Equity
Registration Rights Agreement"). The Equity Registration Rights Agreement grants
the Stockholders party thereto demand and incidental registration rights with
respect to shares of capital stock held by them, which rights will be
exercisable at any time after an initial public offering of Holdings' common
stock. In addition, BTCP may cause Holdings to conduct an initial public
offering at any time. OTPPB may cause Holdings to conduct an initial public
offering at any time following the sixth anniversary of the Recapitalization.
The Equity Registration Rights Agreement contains customary terms and provisions
with respect to the registration rights contained therein.
Pursuant to the terms of a put option agreement (the "Put Agreement") dated
November 25, 1997 between the Company and Mr. Ecklund, Mr. Ecklund had the
right, at any time after the fifth anniversary of the date of the Put Agreement,
to cause Holdings to redeem all or any portion of Mr. Ecklund's shares in
Holdings. The price at which such shares would have been sold and purchased
would have been the fair market value thereof, determined either by agreement or
by an appraisal. Holdings was not obligated to redeem Mr. Ecklund's shares if
Holdings was then in default of a payment obligation under any of Holding's
indebtedness for borrowed money or if such redemption would have resulted in a
default under any such indebtedness. As described below, Holdings and Mr.
Ecklund terminated such put rights in July 1998.
In July 1998, Holdings and Mr. Ecklund terminated the Put Agreement and
Holdings and Mr. Weil terminated the rights of Mr. Weil under his Employee Stock
Agreement to cause Holdings to purchase his shares if a Termination Event shall
occur with respect to Mr. Weil. Certain stockholders of Holdings (including Mr.
Ecklund and Mr. Weil) have entered into an amended and restated Equity
Registration Rights Agreement that grants Mr. Ecklund new demand registration
rights commencing after the fifth anniversary of the Recapitalization and grants
Mr. Weil new demand registration rights if a Termination Event shall occur with
respect to Mr. Weil. Under the amended and restated Equity Registration Rights
Agreement, if Mr. Ecklund or Mr. Weil exercises his demand right with respect to
all of his shares of common stock and any underwriter selected by Mr. Ecklund or
Mr. Weil, as the case may be, advises Holdings that such underwriter cannot sell
all such shares in such offering because such offering would not be large
enough, then Mr. Ecklund and Mr. Weil, as applicable, shall each have the right
to require Holdings to sell in such offering newly issued shares of common stock
representing up to 30% of its shares in any underwritten offering, as the case
may be. In addition, if any such underwriter advises Holdings that an offering
of all of Mr. Ecklund's or Mr. Weil's shares, as the case may be, in addition to
any other shares that are proposed to be registered under such registration
statement (including shares to be offered and sold by Holdings), cannot be
consummated given the then current market conditions, then Mr. Ecklund's shares
would be entitled to be sold before any shares are sold by Holdings or by any
other shareholder (including Mr. Weil) and Mr. Weil's shares would be entitled
to be sold before any shares are sold by Holdings or any other shareholder
(other than Mr. Ecklund). If Mr. Ecklund or Mr. Weil exercises a new demand
registration right at any time, certain shareholders of Holdings would have the
right to purchase Mr. Ecklund's and/or Mr. Weil's shares, as the case may be,
for
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their fair market value. As amended and restated, neither Mr. Ecklund nor Mr.
Weil will have any put rights with respect to shares of Holdings held by them.
CERTAIN TRANSACTIONS
OFFERING OF THE OLD NOTES
Subject to the terms and conditions set forth in the Purchase Agreement
dated as of February 18, 1998 among Young America, Holdings and the Initial
Purchaser, the Company sold the Old Notes to the Initial Purchaser who resold
the Old Notes to qualified institutional investors in reliance on Rule 144A
under the Securities Act. In connection with the sale of the Old Notes to the
Initial Purchaser, the Company granted the Initial Purchaser a discount on the
purchase price of the Old Notes in the amount of $2.4 million. The Company has
agreed to indemnify BTAB against certain liabilities, including liabilities
under the Securities Act, and to contribute to payments which BTAB might be
required to make in respect thereof.
BRIDGE FACILITY
In connection with the Recapitalization, Holdings entered into a Senior
Credit Agreement with Bankers Trust Company, as agent ("BTCo"), and Bankers
Trust New York Corporation, as initial lender ("BTNY"), to provide the Bridge
Facility. BTCo and BTNY are affiliates of BTCP. BTNY subsequently assigned a
portion of the indebtedness under the Bridge Facility to other institutional
investors. For arranging and providing the Bridge Facility, BTCo and BTNY
received fees aggregating approximately $2.4 million. Portions of the fees were
paid by BTNY to the other institutional investors to which the indebtedness was
assigned. BTNY received a proportionate share of amounts loaned by Young America
to Holdings that were applied to the repayment of the Bridge Facility based on
the portion of the Bridge Facility which BTNY held as of consummation of the
offering of the Old Notes.
ADDITIONAL PAYMENTS RELATED TO THE RECAPITALIZATION
Pursuant to the terms of the Recapitalization Agreement, Holdings made an
additional payment of approximately $692,000 to the Selling Stockholders 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)
of Holdings as of October 31, 1997 and Holdings' profits or losses (as defined)
for the period ended on the Recapitalization Date. Also in connection with the
Recapitalization, Holdings is obligated to make additional payments to its
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 $93.0 million, Holdings is
required to make an additional purchase price payment equal to 20% of such
excess, subject to a maximum amount payable of $15.0 million. Under separate
agreements with Mr. Weil, Mr. Stinchfield, Mr. Ferguson and the Selling
Stockholders, a portion of this additional purchase price payment will be
payable to such individuals. Such payments will vary depending on the amount of
any indemnification claims against any escrow account established by the Company
for the benefit of new investors and depending on the Cumulative Excess free
Cash Flow of the Company for the four-year period ending December 31, 2001 (or
an earlier date in the case of a sale of the Company). Any payments made to
management will result in compensation charges to the Company in the period the
amount becomes determinable.
MANAGEMENT AGREEMENT AND TRANSACTION EXPENSES
In connection with the Recapitalization, Holdings, BTCP and OTPPB entered
into a management agreement (the "Management Agreement") relating to certain
services to be provided to the Company in the future by BTCP and OTPPB. Under
the Management Agreement, BTCP and OTPPB will provide the Company with, among
other services, financial and strategic planning and management consulting
services throughout the term of the Stockholders' Agreement. In consideration
for the services provided to the
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Company under the Management Agreement, Holdings will pay annual fees of
$187,500 and $62,500 to BTCP and OTPPB, respectively. Also in connection with
the Recapitalization, the Company paid BTCP and OTPPB one-time transaction fees
of $1,125,000 and $375,000, respectively, and reimbursed or paid expenses
(including legal, consulting and accounting fees and expenses) of BTCP and OTPPB
of approximately $1,000,000 and $50,000, respectively, incurred by such entities
in connection with the Recapitalization.
NON-COMPETITION AGREEMENT WITH SELLING STOCKHOLDERS
In connection with the Recapitalization, on November 21, 1997, the Company
entered into a non-competition agreement (the "Non-Competition Agreement") with
the Selling Stockholders. The Non-Competition Agreement provides for customary
restrictions on the Selling Stockholders competing against the Company or
disclosing confidential information with respect to the Company's business for a
period of five-years following the Recapitalization Agreement. In addition, the
Non-Competition Agreement provides that the Company will pay Mr. Ecklund a
consulting fee of $100,000 for providing consulting services to the Company for
the period ending on the first anniversary of the Non-Competition Agreement.
OTHER TRANSACTIONS
The Company is a party to a Release and Indemnity Agreement (the "Release
Agreement") with the following former directors of Holdings: Thomas O. Moe,
Albert O. Foster, Jerome J. Jenko and R. Gary St. Marie. Pursuant to the Release
Agreement, Holdings released and agreed to indemnify the enumerated directors
from claims arising from their past actions as directors of Holdings. Holdings'
Articles of Incorporation release its current directors from liability incurred
for breaches of fiduciary duties, subject to certain exceptions.
Holdings was a party to a Put Option Agreement with Jay F. Ecklund, a
director of Holdings and is a party to the Equity Registration Rights Agreement
with BTCP, OTPPB and Mr. Ecklund. See "Principal Stockholders -- Registration
Rights Agreement; Put Rights of Jay F. Ecklund."
Holdings intends to adopt a stock option plan for key employees of the
Company. See "Management -- Employee Stock Option Plan."
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DESCRIPTION OF NEW CREDIT FACILITY
The Company has entered into a revolving credit facility (the "New Credit
Facility") with Norwest Bank Minnesota, N.A. ("Norwest"). The description below
of the New Credit Facility is subject to, and qualified in its entirety by
reference to, the definitive documentation for the New Credit Facility.
Structure. The New Credit Facility provides, subject to certain terms and
conditions, for a $10.0 million revolving credit facility. A sublimit of $1.0
million is available for letters of credit. Borrowings are available under the
New Credit Facility based on a borrowing base formula equal to 85% of Eligible
Receivables (as defined in the New Credit Facility). The New Credit Facility has
a final scheduled maturity date of March 31, 2001 and does not require scheduled
interim reductions or repayments. Young America is permitted to make optional
prepayments and commitment reductions pursuant to the terms of the New Credit
Facility.
Security. The New Credit Facility is secured by a first priority security
interest in the accounts receivable and related general intangibles of Young
America.
Interest and Fees. Borrowings under the New Credit Facility accrue
interest, at the option of Young America, 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 2.50%. Norwest will also receive
an unused line fee of 3/8 of 1% per annum on the undrawn amount of the New
Credit Facility.
Covenants. The New Credit Facility requires Young America to maintain a
minimum interest coverage ratio (as defined in the New Credit Facility) and a
minimum current ratio (as so defined). In addition, the New Credit Facility
contains other covenants that, among other things, restrict acquisitions,
investments, dividends, liens and other indebtedness (including capital leases),
management fees, dispositions of assets, change of voting control and
guarantees.
Cross Default. The New Credit Facility contains customary events of
default, including cross default with the Notes.
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DESCRIPTION OF THE NOTES
The Old Notes were and the New Notes will be issued under an indenture (the
"Indenture"), dated as of February 23, 1998 by and between the Young America,
Holdings and Marine Midland Bank, as Trustee (the "Trustee"). The terms of the
New Notes are identical in all respects to the Old Notes, except that the New
Notes have been registered under the Securities Act and, therefore, will not
bear legends restricting their transfer and will not contain provisions
providing for the payment of liquidated damages under certain circumstances
relating to the Registration Rights Agreement, which provisions will terminate
upon the consummation of the Exchange Offer.
The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to
all of the provisions of the Indenture, including the definitions of certain
terms therein and those terms made a part of the Indenture by reference to the
TIA as in effect on the date of the Indenture. The definitions of certain
capitalized terms used in the following summary are set forth below under
"-- Certain Definitions." For purposes of this section, references to the
"Company" include only the Company and not its Subsidiaries.
The Old Notes are and the New Notes will be unsecured obligations of the
Company, ranking subordinate in right of payment to all Senior Debt of the
Company.
The Old Notes were and the New Notes will be issued in fully registered
form only, without coupons, in denominations of $1,000 and integral multiples
thereof. Initially, the Trustee will act as Paying Agent and Registrar for the
Notes. The Notes may be presented for registration or transfer and exchange at
the offices of the Registrar, which initially will be the Trustee's corporate
trust office. The Company may change any Paying Agent and Registrar without
notice to holders of the Notes (the "Holders"). The Company will pay principal
(and premium, if any) on the Notes at the Trustee's corporate office in New
York, New York. At the Company's option, interest may be paid at the Trustee's
corporate trust office or by check mailed to the registered address of Holders.
Any Notes that remain outstanding after the completion of the Exchange Offer,
together with the New Notes issued in connection with the Exchange Offer, will
be treated as a single class of securities under the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $125.0 million, of
which $80.0 million in aggregate principal amount were issued in the offering of
the Old Notes, and mature on February 15, 2006. Additional amounts may be issued
from time to time, subject to the limitations set forth under "-- Certain
Covenants -- Limitation on Incurrence of Additional Indebtedness." Interest on
the Notes accrues at the rate of 11 5/8% per annum and is payable semiannually
in cash on February 15 and August 15 of each year commencing on August 15, 1998,
to the persons who are registered Holders at the close of business on the
February 1 and August 1 immediately preceding the applicable interest payment
date. Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from and including the
date of issuance.
The Notes are not be entitled to the benefit of any mandatory sinking fund.
REDEMPTION
Optional Redemption. The Notes are redeemable, at the Company's option, in
whole at any time or in part from time to time, on and after February 15, 2002,
upon not less than 30 nor more than 60 days' notice, at the following redemption
prices (expressed as percentages of the principal amount thereof) if redeemed
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during the twelve-month period commencing on February 15 of the year set forth
below, plus, in each case, accrued and unpaid interest thereon, if any, to the
date of redemption:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002..................................................... 105.813%
2003..................................................... 103.875%
2004..................................................... 101.938%
2005 and thereafter...................................... 100.000%
</TABLE>
Optional Redemption upon Equity Offerings. At any time, or from time to
time, on or prior to February 15, 2001, the Company may, at its option, use the
net cash proceeds of one or more Equity Offerings (as defined below) to redeem
up to 35% of the aggregate principal amount of the Notes issued under the
Indenture 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 principal amount of Notes issued
under the Indenture remains outstanding immediately after any such redemption.
In order to effect the foregoing redemption with the proceeds of any Equity
Offering, the Company shall make such redemption not more than 120 days after
the consummation of any such Equity Offering.
As used in the preceding paragraph, "Equity Offering" means a public or
private offering of Qualified Capital Stock of Holdings or the Company for
aggregate net cash proceeds of at least $10.0 million; provided that, in the
event of an Equity Offering by Holdings, Holdings contributes to the capital of
the Company the portion of the net cash proceeds of such Equity Offering
necessary to pay the aggregate redemption price (plus accrued interest to the
redemption date) of the Notes to be redeemed pursuant to the preceding
paragraph.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes for redemption will be made by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which such Notes are listed or, if such Notes are not then listed on
a national securities exchange, on a pro rata basis, by lot or by such method as
the Trustee shall deem fair and appropriate; provided, however, that no Notes of
a principal amount of $1,000 or less shall be redeemed in part; provided,
further, that if a partial redemption is made with the proceeds of an Equity
Offering, selection of the Notes or portions thereof for redemption shall be
made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as
is practicable (subject to DTC procedures), unless such method is otherwise
prohibited. Notice of redemption shall be mailed by first-class mail at least 30
but not more than 60 days before the redemption date to each Holder of Notes to
be redeemed at its registered address. If any Note is to be redeemed in part
only, the notice of redemption that relates to such Note shall state the portion
of the principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Note. On and after the redemption
date, interest will cease to accrue on Notes or portions thereof called for
redemption as long as the Company has deposited with the Paying Agent funds in
satisfaction of the applicable redemption price pursuant to the Indenture.
SUBORDINATION
The payment of all Obligations on the Notes is subordinated in right of
payment to the prior payment in full in cash or Cash Equivalents of all
Obligations on Senior Debt. Upon any payment or distribution of assets of the
Company of any kind or character, whether in cash, property or securities, to
creditors upon any liquidation, dissolution, winding up, reorganization,
assignment for the benefit of creditors or marshaling of assets of the Company
or in a bankruptcy, reorganization, insolvency, receivership or other similar
proceeding relating to the Company or its property, whether voluntary or
involuntary, all Obligations due or to become due upon all Senior Debt shall
first be paid in full in cash or Cash Equivalents, or such payment duly provided
for to the satisfaction of the holders of Senior Debt, before any payment or
distribution of any kind or character is made on account of any Obligations on
the Notes, or for the acquisition of any of the Notes for cash or property or
otherwise. If any default occurs and is continuing in the payment when due,
whether at
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maturity, upon any redemption, by declaration or otherwise, of any principal of,
interest on, unpaid drawings for letters of credit issued in respect of, or
regularly accruing fees with respect to, any Senior Debt, no payment of any kind
or character shall be made by or on behalf of the Company or any other Person on
its or their behalf with respect to any Obligations on the Notes or to acquire
any of the Notes for cash or property or otherwise.
In addition, if any other event of default occurs and is continuing with
respect to any Designated Senior Debt, as such event of default is defined in
the instrument creating or evidencing such Designated Senior Debt, permitting
the holders of such Designated Senior Debt then outstanding to accelerate the
maturity thereof and if the Representative for the respective issue of
Designated Senior Debt gives written notice of the event of default to the
Trustee (a "Default Notice"), then, unless and until all events of default have
been cured or waived or have ceased to exist or the Trustee receives notice from
the Representative for the respective issue of Designated Senior Debt
terminating the Blockage Period (as defined below), during the 180 days after
the delivery of such Default Notice (the "Blockage Period"), neither the Company
nor any other Person on its behalf shall (x) make any payment of any kind or
character with respect to any Obligations on the Notes or (y) acquire any of the
Notes for cash or property or otherwise. Notwithstanding anything herein to the
contrary, in no event will a Blockage Period extend beyond 180 days from the
date the payment on the Notes was due and only one such Blockage Period may be
commenced within any 360 consecutive days. No event of default which existed or
was continuing on the date of the commencement of any Blockage Period with
respect to the Designated Senior Debt shall be, or be made, the basis for
commencement of a second Blockage Period by the Representative of such
Designated Senior Debt whether or not within a period of 360 consecutive days,
unless such event of default shall have been cured or waived for a period of not
less than 90 consecutive days (it being acknowledged that any subsequent action,
or any breach of any financial covenants for a period commencing after the date
of commencement of such Blockage Period that, in either case, would give rise to
an event of default pursuant to any provisions under which an event of default
previously existed or was continuing shall constitute a new event of default for
this purpose).
By reason of such subordination, in the event of the insolvency of the
Company, creditors of the Company who are not holders of Senior Debt, including
the Holders of the Notes, may recover less, ratably, than holders of Senior
Debt.
At March 31, 1998, the aggregate amount of Senior Debt was approximately
$0.5 million, consisting of obligations under undrawn letters of credit. At such
date, no indebtedness subordinated to the Notes was outstanding.
HOLDINGS GUARANTEE
Holdings has irrevocably and unconditionally guaranteed (the "Holdings
Guarantee"), on a senior subordinated basis, jointly and severally, to each
Holder and the Trustee, the full and prompt performance of all obligations of
the Company under the Indenture and the Notes, including the payment of
principal of and interest on the Notes (all such obligations guaranteed by
Holdings being herein called the "Guaranteed Obligations"). The Holdings
Guarantee is subordinated to Guarantor Senior Debt on the same basis as the
Notes are subordinated to Senior Debt. See also "-- Certain
Covenants -- Additional Guarantees."
The Holdings Guarantee is a continuing guarantee and shall (a) remain in
full force and effect until payment in full of all the Guaranteed Obligations,
(b) be binding upon Holdings and its successors, transferees and assigns and (c)
inure to the benefit of and be enforceable by the Trustee, the Holders and their
successors, transferees and assigns.
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof plus accrued interest to the date of purchase.
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The Indenture provides that, prior to the mailing of the notice referred to
below, but in any event within 30 days following any Change of Control, the
Company covenants to (i) repay in full and terminate all commitments under
Indebtedness under the Credit Agreement and all other Senior Debt the terms of
which require repayment upon a Change of Control or offer to repay in full and
terminate all commitments under all Indebtedness under the Credit Agreement and
all other such Senior Debt and to repay the Indebtedness owed to each lender
which has accepted such offer or (ii) obtain the requisite consents under the
Credit Agreement and all other Senior Debt to permit the repurchase of the Notes
as provided below. The Company shall first comply with the covenant in the
immediately preceding sentence before it shall be required to repurchase Notes
pursuant to the provisions described below. The Company's failure to comply with
the covenant described in the immediately preceding sentence shall constitute an
Event of Default described in clause (iii) and not in clause (ii) under "Events
of Default" below.
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). Holders electing to have a Note purchased pursuant to a Change
of Control Offer will be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, to
the Paying Agent at the address specified in the notice prior to the close of
business on the third business day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing.
Restrictions in the Indenture on the ability of the Company and its
Restricted Subsidiaries to incur additional Indebtedness, to grant liens on its
property, to make Restricted Payments and to make Asset Sales may also make more
difficult or discourage a takeover of the Company, whether favored or opposed by
the management of the Company. Consummation of any such transaction in certain
circumstances may require redemption or repurchase of the Notes, and there can
be no assurance that the Company or the acquiring party will have sufficient
financial resources to effect such redemption or repurchase. Such restrictions
and the restrictions on transactions with Affiliates may, in certain
circumstances, make more difficult or discourage any leveraged buyout of the
Company or any of its Subsidiaries by the management of the Company. While such
restrictions cover a wide variety of arrangements which have traditionally been
used to effect highly leveraged transactions, the Indenture may not afford the
Holders of Notes protection in all circumstances from the adverse aspects of a
highly leveraged transaction, reorganization, restructuring, merger or similar
transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
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CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume, guarantee, acquire, become liable,
contingently or otherwise, with respect to, or otherwise become responsible for
payment of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company or any Subsidiary Guarantor may
incur Indebtedness (including, without limitation, Acquired Indebtedness) and
Restricted Subsidiaries of the Company may incur Acquired Indebtedness, in each
case if on the date of the incurrence of such Indebtedness, after giving effect
to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the
Company is greater than (x) 2.0 to 1.0, if the date of such incurrence is on or
prior to March 1, 1999, or (y) 2.5 to 1.0, if the date of such incurrence is
after March 1, 1999.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions payable in Equity Interests (other than Disqualified Capital
Stock) of the Company) on or in respect of the Company's Equity Interests to
holders of such Equity Interests, (b) purchase, redeem or otherwise acquire or
retire for value any Equity Interests of the Company, (c) make any principal
payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or
retire for value, prior to any scheduled final maturity, scheduled repayment or
scheduled sinking fund payment, any Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes or (d) make any
Investment (other than Permitted Investments) (each of the foregoing actions set
forth in clauses (a), (b) (c) and (d) being referred to as a "Restricted
Payment"), if at the time of such Restricted Payment or immediately after giving
effect thereto, (i) a Default or an Event of Default shall have occurred and be
continuing or (ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant or (iii) the
aggregate amount of Restricted Payments (including such proposed Restricted
Payment) made subsequent to the Issue Date (the amount expended for such
purposes, if other than in cash, being the fair market value of such property as
determined reasonably and in good faith by the Board of Directors of the
Company) shall exceed the sum of: (w) 50% of the cumulative Consolidated Net
Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of
such loss) of the Company earned subsequent to the Issue Date and on or prior to
the date the Restricted Payment occurs (the "Reference Date") (treating such
period as a single accounting period); plus (x) 100% of the aggregate net cash
proceeds received by the Company from any Person (other than a Subsidiary of the
Company) from the issuance and sale subsequent to the Issue Date and on or prior
to the Reference Date of Equity Interests (other than Disqualified Capital
Stock) of the Company; plus (y) without duplication of any amounts included in
clause (iii)(x) above, 100% of the aggregate net cash proceeds of any equity
contribution received by the Company; plus (z) without duplication, the sum of
(1) the aggregate amount returned in cash on or with respect to Investments
(other than Permitted Investments) made subsequent to the Issue Date whether
through interest payments, principal payments, dividends or other distributions
or payments, (2) the net cash proceeds received by the Company or any of its
Restricted Subsidiaries from the disposition of all or any portion of such
Investments (other than to a Subsidiary of the Company) and (3) upon
redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary, the fair
market value of such Subsidiary; provided, however, that the sum of clauses (1),
(2) and (3) above shall not exceed the aggregate amount of all such Investments
made subsequent to the Issue Date.
Notwithstanding the foregoing, the provisions set forth in the immediately
preceding paragraph do not prohibit: (1) the payment of any dividend within 60
days after the date of declaration of such dividend if the dividend would have
been permitted on the date of declaration; (2) if no Default or Event of Default
shall have occurred and be continuing, the acquisition of any Equity Interests
of the Company, either (i) solely in exchange for Equity Interests (other than
Disqualified Capital Stock) of the Company or (ii) through the application of
net proceeds of a substantially concurrent sale for cash (other than to a
Subsidiary of the
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Company) of Equity Interests (other than Disqualified Capital Stock) of the
Company; (3) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any Indebtedness of the Company that is
subordinate or junior in right of payment to the Notes either (i) solely in
exchange for Equity Interests (other than Disqualified Capital Stock) of the
Company, or (ii) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Subsidiary of the Company) of (A)
Equity Interests (other than Disqualified Capital Stock) of the Company or (B)
Refinancing Indebtedness; (4) so long as no Default or Event of Default shall
have occurred and be continuing, payments by the Company to redeem or repurchase
or to enable Holdings to redeem or repurchase Equity Interests of Holdings or
the Company, as the case may be, issued to or on behalf of directors, officers
and employees of the Company or any of its Subsidiaries pursuant to Company
policy with respect to directors, officers and employees of the Company or any
of its Subsidiaries who have died or become disabled or whose employment or
other relationship with the Company or any of its Subsidiaries has been
terminated or pursuant to the terms of employment contracts, other agreements or
employee stock option or stock benefit plans of Holdings, the Company or any of
its Subsidiaries not to exceed $1.0 million in any fiscal year; provided,
however, that if such amount is not used in its entirety within such fiscal
year, the unutilized amount may be utilized solely in the next succeeding fiscal
year; (5) the making of payments by the Company to Holdings to pay operating and
administrative expenses of Holdings, including without limitation, directors'
fees and expenses, legal and audit expenses and corporate franchise and other
taxes, not to exceed $500,000 in any fiscal year; (6) if no Default or Event of
Default shall have occurred and be continuing as a consequence thereof, the
declaration and payment of dividends to holders of any class or series of
Designated Preferred Stock issued after the Issue Date; provided, however, that
for the most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date of issuance of
such Designated Preferred Stock, after giving effect to such issuance on a pro
forma basis, the Company and its Restricted Subsidiaries would have had a
Consolidated Fixed Change Ratio greater than 2.0 to 1.0; (7) payments made or to
be made in connection with the Recapitalization or to Holdings to enable
Holdings to make such payments; (8) the distribution by the Company of the
proceeds of the offering of the Old Notes to Holdings to enable Holdings to
repay the Bridge Facility; and (9) payments to Holdings under a tax sharing
agreement between Holdings and the Company. In determining the aggregate amount
of Restricted Payments made subsequent to the Issue Date in accordance with
clause (iii) of the immediately preceding paragraph, amounts expended pursuant
to clauses (1), (2)(ii), (3)(ii)(A), (4) and (6) shall be included in such
calculation.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an officers' certificate stating that such Restricted
Payment complies with the Indenture and setting forth in reasonable detail the
basis upon which the required calculations were computed, which calculations may
be based upon the Company's latest available internal quarterly financial
statements.
Limitation on Asset Sales. The Company will not, and will not permit any
of its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company or the applicable Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets sold or otherwise disposed of (as determined in good faith
by the Company's Board of Directors), (ii) at least 75% of the consideration
received by the Company or the Restricted Subsidiary, as the case may be, from
such Asset Sale shall be in the form of cash or Cash Equivalents and is received
at the time of such disposition; provided that the amount of (a) any liabilities
(as shown on the Company's or such Restricted Subsidiary's most recent balance
sheet) of the Company or any Restricted Subsidiary (other than liabilities that
are by their terms subordinated to the Notes) that are assumed by the transferee
of any such assets, and (b) any notes or other obligations received by the
Company or any such Restricted Subsidiary from such transferee that are
converted by the Company or such Restricted Subsidiary into cash within 180 days
after such Asset Sale (to the extent of the cash received) shall be deemed to be
cash for the purposes of this provision; and (iii) upon the consummation of an
Asset Sale, the Company shall apply, or cause such Restricted Subsidiary to
apply, the Net Cash Proceeds relating to such Asset Sale within 270 days of
receipt thereof either (A) to prepay any Senior Debt or Guarantor Senior Debt
and, in the case of any Senior Debt under any revolving credit facility, effect
a permanent reduction in the availability under such revolving credit facility,
(B) to make expenditures for Replacement Assets, or (C) a combination of
prepayment and investment permitted by the foregoing clauses (iii)(A) and
(iii)(B). On the 271st day after an Asset Sale or
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such earlier date, if any, as the Board of Directors of the Company or of such
Restricted Subsidiary determines not to apply the Net Cash Proceeds relating to
such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the
next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such
aggregate amount of Net Cash Proceeds which have not been applied on or before
such Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B)
and (iii)(C) of the next preceding sentence (each a "Net Proceeds Offer Amount")
shall be applied by the Company or such Restricted Subsidiary to make an offer
to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer
Payment Date") not less than 30 nor more than 45 days following the applicable
Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis, that
amount of Notes equal to the Net Proceeds Offer Amount at a price equal to 100%
of the principal amount of the Notes to be purchased, plus accrued and unpaid
interest thereon, if any, to the date of purchase; provided, however, that if at
any time any non-cash consideration received by the Company or any Restricted
Subsidiary of the Company, as the case may be, in connection with any Asset Sale
is converted into or sold or otherwise disposed of for cash (other than interest
received with respect to any such non-cash consideration), then such conversion
or disposition shall be deemed to constitute an Asset Sale hereunder and the Net
Cash Proceeds thereof shall be applied in accordance with this covenant. The
Company may defer the Net Proceeds Offer until there is an aggregate unutilized
Net Proceeds Offer Amount equal to or in excess of $5.0 million resulting from
one or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer
Amount, and not just the amount in excess of $5.0 million, shall be applied as
required pursuant to this paragraph). To the extent the aggregate amount of the
Notes tendered pursuant to the Net Proceeds Offer is less than the Net Proceeds
Offer Amount, the Company may use such deficiency for general corporate
purposes. Upon completion of such offer to purchase, the Net Proceeds Offer
Amount shall be reset at zero.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "-- Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such properties and assets of the Company
or its Restricted Subsidiaries deemed to be sold shall be deemed to be Net Cash
Proceeds for purposes of this covenant.
Each Net Proceeds Offer will be mailed to the record Holders as shown on
the register of Holders within 25 days following the Net Proceeds Offer Trigger
Date, with a copy to the Trustee, and shall comply with the procedures set forth
in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may
elect to tender their Notes in whole or in part in integral multiples of $1,000
in exchange for cash. To the extent Holders properly tender Notes in an amount
exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be
purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer
shall remain open for a period of 20 business days or such longer period as may
be required by law.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company will not, and will not cause or permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
permit to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary of the Company to (a) pay dividends or make
any other distributions on or in respect of its Capital Stock; (b) make loans or
advances or to pay any Indebtedness or other obligation owed to the Company or
any other Restricted Subsidiary of the Company; or (c) transfer any of its
property or assets to the Company or any other Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of: (1) applicable law; (2) the Indenture; (3) the Credit Agreement; (4)
customary non-assignment provisions of any contract or any lease governing a
leasehold interest of any Restricted Subsidiary of the Company; (5) any
instrument governing Acquired Indebtedness, which encumbrance or restriction is
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not applicable to any Person, or the properties or assets of any Person, other
than the Person or the properties or assets of the Person so acquired; (6)
agreements existing on the Issue Date to the extent and in the manner such
agreements are in effect on the Issue Date; (7) purchase money obligations for
property acquired in the ordinary course of business that impose restrictions of
the nature discussed in clause (c) above on the property so acquired; (8)
contracts for the sale of assets, including, without limitation, customary
restrictions with respect to a Restricted Subsidiary of the Company pursuant to
an agreement that has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted Subsidiary;
(9) secured Indebtedness otherwise permitted to be incurred pursuant to the
covenants described under "Limitation on Incurrence of Additional Indebtedness"
and "Limitation on Liens" that limit the right of the debtor to dispose of the
assets securing such Indebtedness; (10) customary provisions in joint venture
agreements and other similar agreements entered into in the ordinary course of
business; (11) agreements governing Indebtedness incurred to Refinance the
Indebtedness issued, assumed or incurred pursuant to an agreement referred to in
clauses (1) through (10) above; provided, however, that the provisions relating
to such encumbrance or restriction contained in any such Indebtedness are no
less favorable to the Company in any material respect as determined by the Board
of Directors of the Company in their reasonable and good faith judgment than the
provisions relating to such encumbrance or restriction contained in agreements
referred to in such clauses; or (12) agreements governing Indebtedness permitted
to be incurred pursuant to the "Limitation on Incurrence of Additional
Indebtedness" covenant; provided that the provisions relating to such
encumbrance or restriction contained in such Indebtedness are no less favorable
to the Company in any material respect as determined by the Board of Directors
of the Company in their reasonable and good faith judgment than the provisions
contained in the Credit Agreement as in effect on the Issue Date.
Limitation on Liens. The Company will not, and will not cause or permit
any of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume or permit or suffer to exist any Liens of any kind against or upon any
property or assets of the Company or any of its Restricted Subsidiaries whether
owned on the Issue Date or acquired after the Issue Date, or any proceeds
therefrom, or assign or otherwise convey any right to receive income or profits
therefrom unless (i) in the case of Liens securing Indebtedness that is
expressly subordinate or junior in right of payment to the Notes, the Notes are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens and (ii) in all other cases, the Notes are equally and
ratably secured, except for (A) Liens existing as of the Issue Date to the
extent and in the manner such Liens are in effect on the Issue Date; (B) Liens
securing Senior Debt and Guarantor Senior Debt; (C) Liens securing the Notes and
the Guarantees; (D) Liens in favor of the Company or a Wholly Owned Restricted
Subsidiary of the Company on assets of the Company or any Restricted Subsidiary
of the Company; (E) Liens securing Refinancing Indebtedness which is incurred to
Refinance any Indebtedness which has been secured by a Lien permitted under the
Indenture and which has been incurred in accordance with the provisions of the
Indenture; provided, however, that such Liens (A) are no less favorable to the
Holders and are not more favorable to the lienholders with respect to such Liens
than the Liens in respect of the Indebtedness being Refinanced and (B) do not
extend to or cover any property or assets of the Company or any of its
Restricted Subsidiaries not securing the Indebtedness so Refinanced; and (F)
Permitted Liens.
Prohibition on Incurrence of Senior Subordinated Debt. The Company and the
Guarantors will not incur or suffer to exist Indebtedness that is senior in
right of payment to the Notes or the Guarantees, as the case may be, and
subordinate in right of payment by its terms to any other Indebtedness of the
Company or such Guarantor, as the case may be.
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary of the Company to sell,
assign, transfer, lease, convey or otherwise dispose of) all or substantially
all of the Company's assets (determined on a consolidated basis for the Company
and the Company's Restricted Subsidiaries) whether as an entirety or
substantially as an entirety to any Person unless: (i) either (1) the Company
shall be the surviving or continuing corporation or (2) the Person (if other
than the Company) formed by such consolidation or into which the Company is
merged or the Person which acquires by sale, assignment, transfer, lease,
conveyance or other disposition the properties and assets of the Company and of
the Company's Restricted Subsidiaries
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substantially as an entirety (the "Surviving Entity") (x) shall be a corporation
organized and validly existing under the laws of the United States or any State
thereof or the District of Columbia and (y) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, and premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (ii)
immediately after giving effect to such transaction on a pro forma basis and the
assumption contemplated by clause (i)(2)(y) above (including giving effect to
any Indebtedness and Acquired Indebtedness incurred or anticipated to be
incurred in connection with or in respect of such transaction), the Company or
such Surviving Entity, as the case may be, (1) shall have a Consolidated Net
Worth equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such transaction and (2) shall be able to incur at least
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the "-- Limitation on Incurrence of Additional Indebtedness" covenant; (iii)
immediately before and immediately after giving effect to such transaction and
the assumption contemplated by clause (i)(2)(y) above (including, without
limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred
or anticipated to be incurred and any Lien granted in connection with or in
respect of the transaction), no Default or Event of Default shall have occurred
or be continuing; and (iv) the Company or the Surviving Entity shall have
delivered to the Trustee an officers' certificate and an opinion of counsel,
each stating that such consolidation, merger, sale, assignment, transfer, lease,
conveyance or other disposition and, if a supplemental indenture is required in
connection with such transaction, such supplemental indenture comply with the
applicable provisions of the Indenture and that all conditions precedent in the
Indenture relating to such transaction have been satisfied.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries of the Company the Capital Stock of which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
The Indenture provides that upon any consolidation, combination or merger
or any transfer of all or substantially all of the assets of the Company in
accordance with the foregoing, in which the Company is not the continuing
corporation, the successor Person formed by such consolidation or into which the
Company is merged or to which such conveyance, lease or transfer is made shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture and the Notes with the same effect as if such
surviving entity had been named as such.
Limitations on Transactions with Affiliates. (a) The Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or permit to exist any transaction or series of related transactions
(including, without limitation, the purchase, sale, lease or exchange of any
property or the rendering of any service) with, or for the benefit of, any
Affiliate of the Company (each an "Affiliate Transaction"), other than (x)
Affiliate Transactions permitted under paragraph (b) below and (y) Affiliate
Transactions on terms that are no less favorable to the Company or such
Restricted Subsidiary than those that might reasonably have been obtained in a
comparable transaction at such time on an arm's-length basis from a Person that
is not an Affiliate of the Company or such Restricted Subsidiary. All Affiliate
Transactions (and each series of related Affiliate Transactions which are
similar or part of a common plan) involving aggregate payments or other property
with a fair market value in excess of $1.0 million shall be approved by a
majority of the Disinterested Directors of the Company or such Restricted
Subsidiary, as the case may be, such approval to be evidenced by a Board
Resolution stating that such majority of Disinterested Directors has determined
that such transaction complies with the foregoing provisions. If the Company or
any Restricted Subsidiary of the Company enters into an Affiliate Transaction
(or a series of related Affiliate Transactions related to a common plan) that
involves an aggregate fair market value of more than $7.5 million, or more than
$1.0 million and the Company does not have any Disinterested Directors, the
Company or such Restricted Subsidiary, as the case may be, shall, prior to the
consummation thereof, obtain a favorable opinion as to the fairness of such
transaction or series of related transactions to the Company or the relevant
Restricted
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Subsidiary, as the case may be, from a financial point of view, from an
Independent Financial Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary of the Company as determined in good faith by the Company's Board of
Directors or senior management; (ii) transactions exclusively between or among
the Company and any of its Wholly Owned Restricted Subsidiaries or exclusively
between or among such Wholly Owned Restricted Subsidiaries, provided such
transactions are not otherwise prohibited by the Indenture; (iii) the existence
of or performance by the Company or any Restricted Subsidiary under any
agreement as in effect as of the Issue Date or any amendment thereto or any
replacement agreement therefor or any transaction contemplated thereby
(including pursuant to any amendment thereto or any replacement agreement
therefor) so long as any such amendment or replacement agreement is not more
disadvantageous to the Holders in any material respect than the original
agreement as in effect on the Issue Date; (iv) Restricted Payments permitted by
the Indenture; (v) payment of customary annual management, consulting and
advisory fees and related expenses to the Principals and their Affiliates; (vi)
the payment of all fees and expenses related to the Recapitalization; (vii)
loans to employees of the Company and its Subsidiaries which are approved by the
Board of Directors of the Company in good faith; (viii) the issuance of equity
incentives or equity-based incentives (such as stock appreciation rights) or the
granting or payment of any other compensation or benefit to employees or
officers of the Company or any Subsidiary, provided that none of such employees
or officers are Affiliates of any person owning more than 50% of the issued and
outstanding capital stock (or rights to acquire capital stock) of Holdings (a
"Majority Stockholder") and (ix) employment or consulting agreements or
arrangements entered into with Persons who are not Affiliates of any Majority
Stockholder.
Additional Guarantees. If the Company or any of its Restricted
Subsidiaries transfers or causes to be transferred, in one transaction or a
series of related transactions, any property to any domestic Restricted
Subsidiary that is not a Guarantor, or if the Company or any of its Restricted
Subsidiaries shall organize, acquire or otherwise invest in another domestic
Restricted Subsidiary in any such case having total book equity value in excess
of $1.0 million, then such transferee or acquired or other Restricted Subsidiary
shall (i) execute and deliver to the Trustee a supplemental indenture in form
reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the Notes and the Indenture on terms set forth in the Indenture and (ii)
deliver to the Trustee an opinion of counsel that such supplemental indenture
has been duly authorized, executed and delivered by such Restricted Subsidiary
and constitutes a legal, valid, binding and enforceable obligation of such
Restricted Subsidiary. Thereafter, such Restricted Subsidiary shall be a
Guarantor for all purposes of the Indenture.
Conduct of Business. The Company and its Restricted Subsidiaries will not
engage in any businesses which are not the same, similar or reasonably similar,
ancillary or related to, or a reasonable extension, development or expansion of,
the businesses in which the Company and its Restricted Subsidiaries are engaged
on the Issue Date.
Reports to Holders. The Indenture provides that the Company will deliver
to the Trustee within 15 days after the filing of the same with the Commission,
copies of the quarterly and annual reports and of the information, documents and
other reports, if any, which the Company is required to file with the Commission
pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further
provides that, notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
will file with the Commission, to the extent permitted, and provide the Trustee
and Holders with such annual reports and such information, documents and other
reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will
also comply with the other provisions of TIA sec. 314(a).
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EVENTS OF DEFAULT
The following events are defined in the Indenture as "Events of Default":
(i) the failure to pay interest on any Notes when the same becomes due
and payable and the default continues for a period of 30 days (whether or
not such payment shall be prohibited by the subordination provisions of the
Indenture);
(ii) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds Offer)
(whether or not such payment shall be prohibited by the subordination
provisions of the Indenture);
(iii) a default in the observance or performance of any other covenant
or agreement contained in the Indenture which default continues for a
period of 30 days after written notice specifying the default (and
demanding that such default be remedied) is delivered to the Company by the
Trustee or to the Company and the Trustee by the Holders of at least 25% of
the outstanding principal amount of the Notes (except in the case of a
default with respect to the "Merger, Consolidation and Sale of Assets"
covenant, which will constitute an Event of Default with such notice
requirement but without such passage of time requirement);
(iv) the failure to pay at final maturity (giving effect to any
applicable grace periods and any extensions thereof) the principal amount
of any Indebtedness of the Company or any Restricted Subsidiary of the
Company, or the acceleration of the final stated maturity of any such
Indebtedness if the aggregate principal amount of such Indebtedness,
together with the principal amount of any other such Indebtedness in
default for failure to pay principal at final maturity or which has been
accelerated, aggregates $5.0 million or more at any time;
(v) one or more judgments in an aggregate amount in excess of $5.0
million shall have been rendered against the Company or any of its
Restricted Subsidiaries and such judgments remain undischarged, unpaid or
unstayed for a period of 60 days after such judgment or judgments become
final and non-appealable;
(vi) certain events of bankruptcy affecting the Company, Holdings or
any of its Significant Subsidiaries; or
(vii) any Guarantee ceases to be in full force and effect or is
declared to be null and void and unenforceable or is found to be invalid or
a Guarantor denies its liability under its Guarantee.
If an Event of Default (other than an Event of Default specified in clause
(vi) above with respect to the Company) shall occur and be continuing, the
Trustee or the Holders of at least 25% in principal amount of outstanding Notes
may declare the principal of and accrued interest on all the Notes to be due and
payable by notice in writing to the Company and the Trustee specifying the
respective Event of Default and that it is a "notice of acceleration" (the
"Acceleration Notice"), and the same (i) shall become immediately due and
payable or (ii) if there are any amounts outstanding under the Credit Agreement,
shall become immediately due and payable upon the first to occur of an
acceleration under the Credit Agreement or 5 business days after receipt by the
Company, the Trustee and the Representative under the Credit Agreement and under
each other Designated Senior Debt of such Acceleration Notice. If an Event of
Default specified in clause (vi) above with respect to the Company occurs and is
continuing, then all unpaid principal of, and premium, if any, and accrued and
unpaid interest on all of the outstanding Notes shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (i) if the rescission would not
conflict with any judgment or decree, (ii) if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of the acceleration, (iii) to the extent the payment
of such interest is lawful, interest on overdue installments of interest and
overdue principal, which has become due otherwise
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than by such declaration of acceleration, has been paid, (iv) if the Company has
paid the Trustee its reasonable compensation and reimbursed the Trustee for its
expenses, disbursements, advances and any other amounts due to the Trustee under
the Indenture and (v) in the event of the cure or waiver of an Event of Default
of the type described in clause (vi) of the description above of Events of
Default, the Trustee shall have received an officers' certificate and an opinion
of counsel that such Event of Default has been cured or waived. No such
rescission shall affect any subsequent Default or impair any right consequent
thereto.
The Holders of a majority in principal amount of the Notes may waive any
existing Default or Event of Default under the Indenture, and its consequences,
except a default in the payment of the principal of or interest on any Notes.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture and under the TIA. Subject to the provisions of the
Indenture relating to the duties of the Trustee, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have its
obligations and the obligations of the Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the
Company shall be deemed to have paid and discharged the entire indebtedness
represented by the outstanding Notes, except for (i) the rights of Holders to
receive payments in respect of the principal of, premium, if any, and interest
on the Notes when such payments are due, (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of Notes,
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payments, (iii) the rights, powers, trust, duties and immunities of
the Trustee and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders cash in U.S. dollars, non-callable U.S. government obligations,
or a combination thereof, in such amounts as will be sufficient, in the opinion
of a nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, and interest on the Notes on the stated date for
payment thereof or on the applicable redemption date, as the case may be; (ii)
in the case of Legal Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that (A) the Company has received from, or there has been published
by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of counsel shall
confirm that, the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Legal Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Company shall have delivered to the Trustee
an opinion of counsel in the United States reasonably acceptable to the Trustee
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confirming that the Holders will not recognize income, gain or loss for federal
income tax purposes as a result of such Covenant Defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on the
date of such deposit or insofar as Events of Default from bankruptcy or
insolvency events are concerned, at any time in the period ending on the 91st
day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance
shall not result in a breach or violation of, or constitute a default under the
Indenture or any other material agreement or instrument to which the Company or
any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an
officers' certificate stating that the deposit was not made by the Company with
the intent of preferring the Holders over any other creditors of the Company or
with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Company or others; (vii) the Company shall have delivered to
the Trustee an officers' certificate and an opinion of counsel, each stating
that all conditions precedent provided for or relating to the Legal Defeasance
or the Covenant Defeasance have been complied with; (viii) the Company shall
have delivered to the Trustee an opinion of counsel to the effect that (A) the
trust funds will not be subject to any rights of holders of Senior Debt,
including, without limitation, those arising under the Indenture and (B) after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; and (ix) certain other customary
conditions precedent are satisfied.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (ii)
the Company has paid all other sums payable under the Indenture by the Company;
and (iii) the Company has delivered to the Trustee an officers' certificate and
an opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
MODIFICATION OF THE INDENTURE
From time to time, the Company and the Trustee, without the consent of the
Holders, may amend the Indenture for certain specified purposes, including
curing ambiguities, defects or inconsistencies, so long as such change does not,
in the opinion of the Trustee, adversely affect the rights of any of the Holders
in any material respect. In formulating its opinion on such matters, the Trustee
will be entitled to rely on such evidence as it deems appropriate, including,
without limitation, solely on an opinion of counsel. Other modifications and
amendments of the Indenture may be made with the consent of the Holders of a
majority in principal amount of the then outstanding Notes issued under the
Indenture, except that, without the consent of each Holder affected thereby, no
amendment may: (i) reduce the amount of Notes whose Holders must consent to an
amendment; (ii) reduce the rate of or change or have the effect of changing the
time for payment of interest, including defaulted interest, on any Notes; (iii)
reduce the principal of or change or have the effect of changing the fixed
maturity of any Notes, or change the date on which any Notes may be subject to
redemption or repurchase, or reduce the redemption or repurchase price therefor
(except that provisions affecting the requirement to repurchase Notes following
a Change of Control or certain Asset Sales may be amended by the Company, the
Trustee and the Holders of not less than a majority in aggregate principal
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amount of the Notes then outstanding); (iv) make any Notes payable in money
other than that stated in the Notes; (v) make any change in provisions of the
Indenture protecting the right of each Holder to receive payment of principal of
and interest on such Note on or after the due date thereof or to bring suit to
enforce such payment, or permitting Holders of a majority in principal amount of
Notes to waive Defaults or Events of Default; (vi) modify or change any
provision of the Indenture or the related definitions affecting the
subordination or ranking of the Notes in a manner which adversely affects the
Holders; or (vii) release any Guarantor from any of its obligations under its
Guarantee or the Indenture otherwise than in accordance with the terms of the
Indenture.
GOVERNING LAW
The Indenture, the Notes and the Guarantees are to be governed by, and
construed in accordance with, the laws of the State of New York but without
giving effect to applicable principles of conflicts of law to the extent that
the application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set forth
in the Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it by the Indenture, and use the same
degree of care and skill in its exercise as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations on
the rights of the Trustee, should it become a creditor of the Company, to obtain
payments of claims in certain cases or to realize on certain property received
in respect of any such claim as security or otherwise. Subject to the TIA, the
Trustee will be permitted to engage in other transactions; provided that if the
Trustee acquires any conflicting interest as described in the TIA, it must
eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries existing at the time such Person becomes a Restricted Subsidiary of
the Company or at the time it merges or consolidates with the Company or any of
its Subsidiaries or assumed in connection with the acquisition of assets from
such Person and in each case not incurred by such Person in connection with, or
in anticipation or contemplation of, such Person becoming a Restricted
Subsidiary of the Company or such acquisition, merger or consolidation.
"Affiliate" means, with respect to any specified Person, any other Person
who directly or indirectly through one or more intermediaries controls, or is
controlled by, or is under common control with, such specified Person. The term
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and policies of a Person, whether
through the ownership of voting securities, by contract or otherwise; and the
terms "controlling" and "controlled" have meanings correlative of the foregoing.
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary of the Company in any other Person pursuant to which such
Person shall become a Restricted Subsidiary of the Company or any Restricted
Subsidiary of the Company, or shall be merged with or into the Company or any
Restricted Subsidiary of the Company, or (b) the acquisition by the Company or
any Restricted Subsidiary of the Company of the assets of any Person (other than
a Restricted Subsidiary of the Company) which constitute all or substantially
all of the assets of such Person or comprises any division or line of business
of such Person or any other properties or assets of such Person other than in
the ordinary course of business.
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"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, lease (other than operating leases entered into in the ordinary course
of business), assignment or other transfer for value by the Company or any of
its Restricted Subsidiaries (including any Sale and Leaseback Transaction) to
any Person other than the Company or a Wholly Owned Restricted Subsidiary of the
Company of (a) any Capital Stock of any Restricted Subsidiary of the Company; or
(b) any other property or assets of the Company or any Restricted Subsidiary of
the Company other than in the ordinary course of business; provided, however,
that Asset Sales shall not include (i) a transaction or series of related
transactions for which the Company or its Restricted Subsidiaries receive
aggregate consideration of less than $500,000; (ii) the sale, issuance,
exchange, conveyance or other disposition or transfer of property or assets
(including the issuance or transfer of Capital Stock of Restricted Subsidiaries)
in connection with the acquisition of Replacement Assets (including in
connection with Asset Acquisitions and trade-ins and like-kind exchanges of
property or assets); and (iii) the sale, lease, conveyance, disposition or other
transfer of all or substantially all of the assets of the Company as permitted
under "Merger, Consolidation and Sale of Assets."
"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Bridge Facility" means the $80.0 million senior credit agreement dated
November 25, 1997, among Holdings, the lenders party thereto and Bankers Trust
Company as agent.
"Capitalized Lease Obligation" means, as to any Person, the obligations of
such Person under a lease that are required to be classified and accounted for
as capital lease obligations under GAAP and, for purposes of this definition,
the amount of such obligations at any date shall be the capitalized amount of
such obligations at such date, determined in accordance with GAAP.
"Capital Stock" means (i) with respect to any Person that is a corporation,
any and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of Common Stock and Preferred Stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership or other equity
interests of such Person.
"Cash Equivalents" means (i) marketable direct obligations issued by, or
unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (ii)
marketable direct obligations issued by any state of the United States of
America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Corporation ("S&P") or Moody's
Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more
than one year from the date of creation thereof and, at the time of acquisition,
having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv)
certificates of deposit or bankers' acceptances maturing within one year from
the date of acquisition thereof issued by any bank organized under the laws of
the United States of America or any state thereof or the District of Columbia or
any U.S. branch of a foreign bank having at the date of acquisition thereof
combined capital and surplus of not less than $250,000,000; (v) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clause (i) above entered into with any bank meeting the
qualifications specified in clause (iv) above; and (vi) investments in money
market funds which invest substantially all their assets in securities of the
types described in clauses (i) through (v) above.
"Change of Control" means the occurrence of one or more of the following
events: (i) any sale, lease, exchange or other transfer (in one transaction or a
series of related transactions) of all or substantially all of the assets of the
Company or Holdings to any Person or group of related Persons for purposes of
Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates
thereof (whether or not otherwise in compliance with the provisions of the
Indenture) other than to the Permitted Holders; (ii) the approval by the
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holders of Capital Stock of the Company or Holdings, as the case may be, of any
plan or proposal for the liquidation or dissolution of the Company or Holdings,
as the case may be (whether or not otherwise in compliance with the provisions
of the Indenture); (iii) any Person or Group (other than the Permitted Holders)
shall become the owner, directly or indirectly, beneficially or of record, of
shares representing more than 50% of the aggregate ordinary voting power
represented by the issued and outstanding Capital Stock of the Company or
Holdings; or (iv) the replacement of a majority of the Board of Directors of the
Company or Holdings over a two-year period from the directors who constituted
the Board of Directors of the Company or Holdings, as the case may be, at the
beginning of such period, and such replacement shall not have been approved (x)
in accordance with the Stockholders' Agreement, (y) by the Permitted Holders or
(z) by a vote of at least a majority of the Board of Directors of the Company or
Holdings, as the case may be, then still in office who either were members of
such Board of Directors at the beginning of such period or whose election as a
member of such Board of Directors was previously so approved.
"Common Stock" of any Person means any and all shares, interests or other
participations in, and other equivalents (however designated and whether voting
or non-voting) of such Person's common stock, whether outstanding on the Issue
Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Company" means Young America Corporation, a Minnesota corporation.
"Consolidated EBITDA" means, with respect to any Person, for any period,
the sum (without duplication) of (i) Consolidated Net Income and (ii) to the
extent Consolidated Net Income has been reduced thereby, (A) all income taxes of
such Person and its Restricted Subsidiaries paid or accrued in accordance with
GAAP for such period, (B) Consolidated Interest Expense, (C) fees, expenses or
charges relating to any equity or debt issuances, Asset Acquisitions or
Investments permitted by the terms of the Indenture (whether or not successful),
(D) all payments made under the Recapitalization documents and (E) Consolidated
Non-cash Charges less any non-cash items increasing Consolidated Net Income for
such period, all as determined on a consolidated basis for such Person and its
Restricted Subsidiaries in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, the ratio of Consolidated EBITDA of such Person during the four full
fiscal quarters (the "Four Quarter Period") ending on or prior to the date of
the transaction giving rise to the need to calculate the Consolidated Fixed
Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of
such Person for the Four Quarter Period. In addition to and without limitation
of the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect on a pro
forma basis for the period of such calculation to (i) the incurrence or
repayment of any Indebtedness or the issuance of any Designated Preferred Stock
of such Person or any of its Restricted Subsidiaries (and the application of the
proceeds thereof) giving rise to the need to make such calculation and any
incurrence or repayment of other Indebtedness or the issuance or redemption of
other Designated Preferred Stock (and the application of the proceeds thereof),
other than the incurrence or repayment of Indebtedness in the ordinary course of
business for working capital purposes pursuant to working capital facilities,
occurring during the Four Quarter Period or at any time subsequent to the last
day of the Four Quarter Period and on or prior to the Transaction Date, as if
such incurrence or repayment or issuance or redemption, as the case may be (and
the application of the proceeds thereof), occurred on the first day of the Four
Quarter Period and (ii) any Asset Sales, Asset Acquisitions or the
Recapitalization or any similar transactions (including, without limitation, any
Asset Acquisition giving rise to the need to make such calculation as a result
of such Person or one of its Restricted Subsidiaries (including any Person who
becomes a Restricted Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness and also including
any Consolidated EBITDA (including any pro forma expense and cost reductions
calculated on a basis consistent with Regulation S-X of the Exchange Act)
attributable to the assets which are the subject of the Asset Acquisition or
Asset Sale during the Four Quarter Period) occurring during the Four Quarter
Period or at any time subsequent to the last day of the Four Quarter Period and
on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition
(including the incurrence, assumption or liability for any such Acquired
Indebtedness) occurred on the first day of the Four Quarter Period. If such
Person or any of its Restricted Subsidiaries
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directly or indirectly guarantees Indebtedness of a third Person, the preceding
sentence shall give effect to the incurrence of such guaranteed Indebtedness as
if such Person or any Restricted Subsidiary of such Person had directly incurred
or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating
"Consolidated Fixed Charges" for purposes of determining the denominator (but
not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1)
interest on outstanding Indebtedness determined on a fluctuating basis as of the
Transaction Date and which will continue to be so determined thereafter shall be
deemed to have accrued at a fixed rate per annum equal to the rate of interest
on such Indebtedness in effect on the Transaction Date; and (2) notwithstanding
clause (1) above, interest on Indebtedness determined on a fluctuating basis, to
the extent such interest is covered by agreements relating to Interest Swap
Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to any Person for any
period, the sum, without duplication, of (i) Consolidated Interest Expense, plus
(ii) the product of (x) the amount of all dividend payments (or accruals
therefor) on any series of Preferred Stock of such Person or any Subsidiary of
such Person (other than dividends paid in Qualified Capital Stock or paid to
such Person or any Subsidiary of such Person) during such period times (y) a
fraction, the numerator of which is one and the denominator of which is one
minus the then current effective consolidated federal, state and local tax rate
of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum of, without duplication: (i) the aggregate of all cash and
non-cash interest expense (minus amortization or write-off of deferred financing
costs included in cash or non-cash interest expense and minus interest income)
of such Person and its Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, including without limitation, (a)
any amortization of debt discount, (b) the net costs under Interest Swap
Obligations, (c) all capitalized interest and (d) the interest portion of any
deferred payment obligation; and (ii) the interest component of Capitalized
Lease Obligations of such Person and its Restricted Subsidiaries for such period
as determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any Person, for any
period, the aggregate net income (or loss) of such Person and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided that there shall be excluded therefrom (a) after-tax gains
and losses from Asset Sales or abandonments or reserves relating thereto, (b)
items classified as extraordinary, nonrecurring or unusual gains, losses or
charges, and the related tax effects, each determined in accordance with GAAP,
(c) the net income of any Person acquired in a "pooling of interests"
transaction accrued prior to the date it becomes a Restricted Subsidiary of the
referent Person or is merged or consolidated with the referent Person or any
Restricted Subsidiary of the referent Person, (d) the net income (but not loss)
of any Restricted Subsidiary of the referent Person to the extent that the
declaration of dividends or similar distributions by that Restricted Subsidiary
of that income is restricted by a contract, operation of law or otherwise, (e)
the net income of any Person, other than a Restricted Subsidiary of the referent
Person, except to the extent of cash dividends or distributions paid to the
referent Person or to a Wholly Owned Restricted Subsidiary of the referent
Person by such Person, (f) any restoration to income of any contingency reserve,
except to the extent that provision for such reserve was made out of
Consolidated Net Income accrued at any time following the Issue Date or, for the
purposes of determining the Consolidated Fixed Charge Coverage Ratio, the first
day of the Four Quarter Period in question, (g) income or loss attributable to
discontinued operations (including, without limitation, operations disposed of
during such period whether or not such operations were classified as
discontinued), and (h) in the case of a successor to the referent Person by
consolidation or merger or as a transferee of the referent Person's assets, any
earnings of the successor corporation prior to such consolidation, merger or
transfer of assets.
"Consolidated Net Worth" of any Person means the consolidated stockholders'
equity of such Person, determined on a consolidated basis in accordance with
GAAP, less (without duplication) amounts attributable to Disqualified Capital
Stock of such Person.
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"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses of
such Person and its Restricted Subsidiaries reducing Consolidated Net Income of
such Person and its Restricted Subsidiaries for such period, determined on a
consolidated basis in accordance with GAAP.
"Credit Agreement" means the Credit Agreement to be entered into among the
Company, the lenders party thereto in their capacities as lenders thereunder and
Norwest Bank Minnesota, N.A., as agent, together with the related documents
thereto (including, without limitation, any guarantee agreements and security
documents), in each case as such agreements may be amended (including any
amendment and restatement thereof), supplemented or otherwise modified from time
to time, including any agreement extending the maturity of, refinancing,
replacing or otherwise restructuring (including increasing the amount of
available borrowings thereunder (provided that such increase in borrowings is
permitted by the "Limitation on Incurrence of Additional Indebtedness" covenant
above) or adding Restricted Subsidiaries of the Company as additional borrowers
or guarantors thereunder) all or any portion of the Indebtedness under such
agreement or any successor or replacement agreement and whether by the same or
any other agent, lender or group of lenders.
"Default" means an event or condition the occurrence of which is, or with
the lapse of time or the giving of notice or both would be, an Event of Default.
"Designated Preferred Stock" means Preferred Stock of the Company or any of
its Subsidiaries that is so designated as Designated Preferred Stock, pursuant
to an officers' certificate executed by the principal executive officer and the
principal financial officer of the Company, on the issuance date thereof, the
cash proceeds of which are excluded from the calculation set forth in clause
(iii) of the first paragraph of the "Limitation on Restricted Payments"
covenant.
"Designated Senior Debt" means (i) Indebtedness under or in respect of the
Credit Agreement and (ii) any other Indebtedness constituting Senior Debt which,
at the time of determination, has an aggregate principal amount of at least
$25,000,000 and is specifically designated in the instrument evidencing such
Senior Debt as "Designated Senior Debt" by the Company.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors is required to
deliver a resolution of the Board of Directors under the Indenture, a member of
the Board of Directors who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of
transactions (except arising exclusively as a consequence of such member's
relationship to the Company).
"Disqualified Capital Stock" means that portion of any Capital Stock which,
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable), or upon the happening of any event (other than an
event which would constitute a Change of Control), matures (excluding any
maturity as the result of any optional redemption by the issuer thereof) or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof (except, in each case,
upon the occurrence of a Change of Control) on or prior to the final maturity
date of the Notes.
"Equity Interest" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or
any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the price
which could be negotiated in an arm's-length, free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction. Fair market value
shall be determined by the Board of Directors of the Company acting reasonably
and in good faith and shall be evidenced by a Board Resolution of the Board of
Directors of the Company delivered to the Trustee.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements
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and pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as may be approved by a significant segment of
the accounting profession of the United States, which are in effect as of the
Issue Date.
"Guarantees" means the guarantees of the Company's obligations under the
Indenture and the Notes by (i) Holdings (the "Holdings Guarantee") and (ii) a
Restricted Subsidiary (the "Subsidiary Guarantee").
"Guarantor" means (i) Holdings and (ii) each of the Company's Restricted
Subsidiaries that in the future executes a supplemental indenture in which such
Restricted Subsidiary agrees to be bound by the terms of the Indenture as a
Guarantor (each a "Subsidiary Guarantor"); provided that any Person constituting
a Guarantor as described above shall cease to constitute a Guarantor when its
respective Guarantee is released in accordance with the terms of the Indenture.
"Guarantor Senior Debt" means with respect to any Guarantor, (i) the
principal of, premium, if any, and interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided for in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law) on any Indebtedness of a Guarantor, whether
outstanding on the Issue Date or thereafter created, incurred or assumed,
unless, in the case of any particular Indebtedness, the instrument creating or
evidencing the same or pursuant to which the same is outstanding expressly
provides that such Indebtedness shall not be senior in right of payment to the
Guarantee of such Guarantor. Without limiting the generality of the foregoing,
"Guarantor Senior Debt" shall also include the principal of, premium, if any,
interest (including any interest accruing subsequent to the filing of a petition
of bankruptcy at the rate provided for in the documentation with respect
thereto, whether or not such interest is an allowed claim under applicable law)
on, and all other amounts owing in respect of, (x) all monetary obligations of
every nature of the Company under the Credit Agreement, including, without
limitation, obligations to pay principal and interest, reimbursement obligations
under letters of credit, fees, expenses and indemnities and (y) all Interest
Swap Obligations whether outstanding on the Issue Date or thereafter incurred.
Notwithstanding the foregoing, "Guarantor Senior Debt" shall not include (i) any
Indebtedness of such Guarantor to a Restricted Subsidiary of such Guarantor,
(ii) Indebtedness to, or guaranteed on behalf of, any shareholder, director,
officer or employee of such Guarantor or any Restricted Subsidiary of such
Guarantor (including, without limitation, amounts owed for compensation), (iii)
Indebtedness to trade creditors and other amounts incurred in connection with
obtaining goods, materials or services, other than Capitalized Lease Obligations
and Purchase Money Indebtedness, (iv) Indebtedness represented by Disqualified
Capital Stock, (v) any liability for federal, state, local or other taxes owed
or owing by such Guarantor, (vi) Indebtedness incurred in violation of the
Indenture provisions set forth under "Limitation on Incurrence of Additional
Indebtedness," (vii) Indebtedness which, when incurred and without respect to
any election under Section 1111(b) of Title 11, United States Code, is without
recourse to the Company and (viii) any Indebtedness which is, by its express
terms, subordinated in right of payment to any other Indebtedness of such
Guarantor.
"Holdings" means Young America Holdings, Inc., a Minnesota corporation.
"Indebtedness" means with respect to any Person, without duplication, (i)
all Obligations of such Person for borrowed money, (ii) all Obligations of such
Person evidenced by bonds, debentures, notes or other similar instruments, (iii)
all Capitalized Lease Obligations of such Person, (iv) all Obligations of such
Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable and other accrued liabilities
arising in the ordinary course of business), (v) all Obligations for the
reimbursement of any obligor on any letter of credit, banker's acceptance or
similar credit transaction, (vi) guarantees and other contingent obligations in
respect of Indebtedness referred to in clauses (i) through (v) above and clause
(viii) below, (vii) all Obligations of any other Person of the type referred to
in clauses (i) through (vi) which are secured by any lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of the
Obligation so secured, (viii) all Obligations under currency agreements and
interest swap agreements of such Person and (ix) all Disqualified Capital Stock
issued by such Person with the amount of Indebtedness represented by such
Disqualified Capital Stock being equal to the greater of its voluntary or
involuntary liquidation preference and its maximum
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fixed repurchase price, but excluding accrued dividends, if any. For purposes
hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock
which does not have a fixed repurchase price shall be calculated in accordance
with the terms of such Disqualified Capital Stock as if such Disqualified
Capital Stock were purchased on any date on which Indebtedness shall be required
to be determined pursuant to the Indenture, and if such price is based upon, or
measured by, the fair market value of such Disqualified Capital Stock, such fair
market value shall be determined reasonably and in good faith by the Board of
Directors of the issuer of such Disqualified Capital Stock. Indebtedness shall
not include Obligations in respect of performance or other surety bonds incurred
to the extent required by applicable law in connection with the sweepstakes
management services provided by the Company or any of its Subsidiaries that are
indemnified by the Company's or such Subsidiary's customer. For purposes hereof,
Obligations under operating leases shall not constitute Indebtedness.
"Independent Financial Advisor" means a firm (i) which does not, and whose
directors, officers and employees or Affiliates do not, have a direct or
indirect financial interest in the Company and (ii) which, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person pursuant to
any arrangement with any other Person, whereby, directly or indirectly, such
Person is entitled to receive from time to time periodic payments calculated by
applying either a floating or a fixed rate of interest on a stated notional
amount in exchange for periodic payments made by such other Person calculated by
applying a fixed or a floating rate of interest on the same notional amount and
shall include, without limitation, interest rate swaps, caps, floors, collars
and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect loan
or other extension of credit (including, without limitation, a guarantee) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person. "Investment" shall exclude extensions of trade credit by the
Company and its Restricted Subsidiaries on commercially reasonable terms in
accordance with normal trade practices of the Company or such Restricted
Subsidiary, as the case may be. For the purposes of the "Limitation on
Restricted Payments" covenant, (i) "Investment" shall include and be valued at
the fair market value of the net assets of any Restricted Subsidiary at the time
that such Restricted Subsidiary is designated an Unrestricted Subsidiary and
shall exclude the fair market value of the net assets of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary and (ii) the amount of any Investment shall be the
original cost of such Investment plus the cost of all additional Investments by
the Company or any of its Restricted Subsidiaries, without any adjustments for
increases or decreases in value, or write-ups, write-downs or write-offs with
respect to such Investment, reduced by the payment of dividends or distributions
in connection with such Investment or any other amounts received in respect of
such Investment; provided that no such payment of dividends or distributions or
receipt of any such other amounts shall reduce the amount of any Investment if
such payment of dividends or distributions or receipt of any such amounts would
be included in Consolidated Net Income. If the Company or any Restricted
Subsidiary of the Company sells or otherwise disposes of any Common Stock of any
direct or indirect Restricted Subsidiary of the Company such that, after giving
effect to any such sale or disposition, the Company no longer owns, directly or
indirectly, 100% of the outstanding Common Stock of such Restricted Subsidiary,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Common Stock of such
Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Lien" means any lien, mortgage, deed of trust, pledge, security interest,
charge or encumbrance of any kind (including any conditional sale or other title
retention agreement, any lease in the nature thereof and any agreement to give
any security interest).
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"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in
the form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of cash or Cash Equivalents (other
than the portion of any such deferred payment constituting interest) received by
the Company or any of its Restricted Subsidiaries from such Asset Sale net of
(a) reasonable out-of-pocket expenses and fees relating to such Asset Sale
(including, without limitation, legal, accounting and investment banking fees
and sales commissions), (b) taxes paid or payable after taking into account any
reduction in consolidated tax liability due to available tax credits or
deductions and any tax sharing arrangements, (c) repayment of Indebtedness that
is required to be repaid in connection with such Asset Sale (including in order
to obtain any consent required therefor) and (d) appropriate amounts to be
provided by the Company or any Restricted Subsidiary, as the case may be, as a
reserve, in accordance with GAAP, against any liabilities associated with such
Asset Sale and retained by the Company or any Restricted Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities related to environmental
matters and liabilities under any indemnification obligations associated with
such Asset Sale.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Permitted Holder" mean BT Capital Partners, Inc. and its Affiliates or, in
the case of the Company, Holdings.
"Permitted Indebtedness" means, without duplication, each of the following:
(i) Indebtedness under the Old Notes;
(ii) Indebtedness incurred pursuant to the Credit Agreement in an
aggregate principal amount at any time outstanding not to exceed the
greater of (a) $15.0 million or (b) 85% of accounts receivable of the
Company and its Restricted Subsidiaries, reduced in each case by any
required permanent repayments pursuant to the "Limitation on Asset Sales"
covenant (which are accompanied by a corresponding permanent commitment
reduction) thereunder;
(iii) other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the Issue Date reduced by the amount of any
scheduled amortization payments or mandatory prepayments when actually paid
or permanent reductions thereon;
(iv) Interest Swap Obligations of the Company covering Indebtedness of
the Company or any of its Restricted Subsidiaries and Interest Swap
Obligations of any Restricted Subsidiary of the Company covering
Indebtedness of such Restricted Subsidiary; provided, however, that such
Interest Swap Obligations are entered into to protect the Company and its
Restricted Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligation does not, at the time of
incurrence thereof, exceed the principal amount of the Indebtedness to
which such Interest Swap Obligation relates;
(v) Indebtedness of a Wholly Owned Restricted Subsidiary of the
Company to the Company or to a Wholly Owned Restricted Subsidiary of the
Company for so long as such Indebtedness is held by the Company or a Wholly
Owned Restricted Subsidiary of the Company, in each case subject to no Lien
held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company; provided that if as of any date any Person other
than the Company or a Wholly Owned Restricted Subsidiary of the Company
owns or holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the issuer of such Indebtedness;
(vi) Indebtedness of the Company to a Wholly Owned Restricted
Subsidiary of the Company for so long as such Indebtedness is held by a
Wholly Owned Restricted Subsidiary of the Company, in each case subject to
no Lien; provided that (a) any Indebtedness of the Company to any Wholly
Owned Restricted Subsidiary of the Company is unsecured and subordinated,
pursuant to a written agreement, to the Company's obligations under the
Indenture and the Notes and (b) if as of any date any Person other
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than a Wholly Owned Restricted Subsidiary of the Company owns or holds any
such Indebtedness or any Person holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness not
constituting Permitted Indebtedness by the Company;
(vii) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business; provided, however, that such
Indebtedness is extinguished within two business days of incurrence;
(viii) Indebtedness of the Company or any of its Restricted
Subsidiaries represented by letters of credit for the account of the
Company or such Restricted Subsidiary, as the case may be, in order to
provide security for workers' compensation claims, payment obligations in
connection with self-insurance or similar requirements in the ordinary
course of business;
(ix) Indebtedness represented by Capitalized Lease Obligations and
Purchase Money Indebtedness of the Company and its Restricted Subsidiaries
incurred in the ordinary course of business not to exceed $5.0 million at
any one time outstanding;
(x) Refinancing Indebtedness;
(xi) additional Indebtedness of the Company and its Restricted
Subsidiaries in an aggregate principal amount not to exceed $10.0 million
at any one time outstanding; and
(xii) any Indebtedness deemed to have been incurred pursuant to any of
the agreements entered into in connection with the Recapitalization.
"Permitted Investments" means each of the following:
(i) Investments by the Company or any Restricted Subsidiary of the
Company in any Person that is or will become immediately after such
Investment a Wholly Owned Restricted Subsidiary of the Company or that will
merge or consolidate into the Company or a Wholly Owned Restricted
Subsidiary of the Company;
(ii) Investments in the Company by any Restricted Subsidiary of the
Company; provided that any Indebtedness evidencing such Investment is
unsecured and subordinated, pursuant to a written agreement, to the
Company's obligations under the Notes and the Indenture;
(iii) Investments in cash and Cash Equivalents;
(iv) loans and advances to employees and officers of the Company and
its Restricted Subsidiaries in the ordinary course of business for bona
fide business purposes not in excess of $1.0 million at any one time
outstanding;
(v) Interest Swap Obligations entered into in the ordinary course of
the Company's or its Restricted Subsidiaries' businesses and otherwise in
compliance with the Indenture;
(vi) Investments in Unrestricted Subsidiaries or other entities not to
exceed $5.0 million at any one time outstanding;
(vii) Investments in securities of trade creditors or customers
received pursuant to any plan of reorganization or similar arrangement upon
the bankruptcy or insolvency of such trade creditors or customers;
(viii) Investments made by the Company or its Restricted Subsidiaries
as a result of consideration received in connection with an Asset Sale made
in compliance with the "Limitation on Asset Sales" covenant;
(ix) Investments of a Person or any of its Subsidiaries existing at
the time such Person becomes a Restricted Subsidiary of the Company or at
the time such Person merges or consolidates with the Company or any of its
Restricted Subsidiaries, in either case in compliance with the Indenture;
provided that such Investments were not made by such Person in connection
with, or in anticipation or
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contemplation of, such Person becoming a Restricted Subsidiary of the
Company by such merger or consolidation; and
(x) loans to Holdings to enable Holdings to repay the Bridge Facility
and evidenced by an intercompany note as in effect as of the Issue Date or
as amended in a manner not materially adverse to the Holders.
"Permitted Liens" means the following types of Liens:
(i) Liens for taxes, assessments or governmental charges or claims
either (a) not delinquent or (b) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required pursuant
to GAAP;
(ii) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent or
being contested in good faith, if such reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been made in
respect thereof;
(iii) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance
and other types of social security, including any Lien securing letters of
credit issued in the ordinary course of business consistent with past
practice in connection therewith, or to secure the performance of tenders,
statutory obligations, surety and appeal bonds, bids, leases, government
contracts, performance and return-of-money bonds and other similar
obligations (exclusive of obligations for the payment of borrowed money);
(iv) attachment or judgment Liens not giving rise to an Event of
Default;
(v) easements, rights-of-way, zoning restrictions and other similar
charges or encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the Company
or any of its Restricted Subsidiaries;
(vi) any interest or title of a lessor under any Capitalized Lease
Obligation; provided that such Liens do not extend to any property or
assets which is not leased property subject to such Capitalized Lease
Obligation or another Capitalized Lease Obligation with the same financing
source;
(vii) purchase money Liens to finance property or assets of the
Company or any Restricted Subsidiary of the Company acquired in the
ordinary course of business; provided, however, that (A) the related
Purchase Money Indebtedness shall not exceed the purchase price or the cost
of installation, construction or improvement of such property or assets and
shall not be secured by any property or assets of the Company or any
Restricted Subsidiary of the Company other than the property and assets so
acquired and other property and assets securing other Purchase Money
Indebtedness to the same financing source and (B) the Lien securing such
Indebtedness shall be created within 90 days of such acquisition;
(viii) any (a) interest or title of a lessor or sublessor under any
lease, (b) restriction or encumbrance that the interest or title of such
lessor or sublessor may be subject to (including without limitation ground
leases or other prior leases of the demised premises, mortgages, mechanics
liens, tax liens, and easements), or (c) subordination of the interest of
the lessee or sublessee under such lease to any restrictions or encumbrance
referred to in the preceding clause (b);
(ix) Liens arising from filing UCC financing statements for
precautionary purposes relating solely to true leases of personal property
permitted by the Indenture under which the Company or any of its Restricted
Subsidiaries is a lessee;
(x) Liens in favor of customs and revenue authorities arising as a
matter of law to secure payment of customs duties in connection with the
importation of goods;
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(xi) Liens upon specific items of inventory or other goods and
proceeds of any Person securing such Person's obligations in respect of
bankers' acceptances issued or created for the account of such Person to
facilitate the purchase, shipment or storage of such inventory or other
goods;
(xii) Liens securing obligations (other than obligations representing
Indebtedness for borrowed money) under operating, reciprocal easement or
similar agreements entered into in the ordinary course of business of the
Company and its Restricted Subsidiaries;
(xiii) Liens arising out of consignment or similar arrangements for
the sale of goods entered into by the Company or any Restricted Subsidiary
in the ordinary course of business in accordance with past practices;
(xiv) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(xv) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual, or warranty requirements of the
Company or any of its Restricted Subsidiaries, including rights of offset
and set-off;
(xvi) Liens securing Interest Swap Obligations which Interest Swap
Obligations relate to Indebtedness that is otherwise permitted under the
Indenture;
(xvii) Liens securing Acquired Indebtedness incurred in accordance
with the "Limitation on Incurrence of Additional Indebtedness" covenant;
provided that (A) such Liens secured such Acquired Indebtedness at the time
of and prior to the incurrence of such Acquired Indebtedness by the Company
or a Restricted Subsidiary of the Company and were not granted in
connection with, or in anticipation of, the incurrence of such Acquired
Indebtedness by the Company or a Restricted Subsidiary of the Company and
(B) such Liens do not extend to or cover any property or assets of the
Company or of any of its Restricted Subsidiaries other than the property or
assets that secured the Acquired Indebtedness prior to the time such
Indebtedness became Acquired Indebtedness of the Company or a Restricted
Subsidiary of the Company and are no more favorable to the lienholders than
those securing the Acquired Indebtedness prior to the incurrence of such
Acquired Indebtedness by the Company or a Restricted Subsidiary of the
Company;
(xviii) licenses of patents, trademarks and other intellectual
property rights granted by the Company or any of its Subsidiaries in the
ordinary course of business and not interfering in any material respect
with the ordinary conduct of the business of the Company or any such
Restricted Subsidiary;
(xix) other Liens securing obligations incurred in the ordinary course
of business which obligations or judgments do not exceed $10.0 million in
the aggregate at any one time outstanding pursuant to clause (xi) of the
definition of Permitted Indebtedness; and
(xx) Liens on the assets of the Company or any Subsidiary Guarantor
securing Senior Debt or Guarantor Senior Debt.
"Person" means an individual, partnership, limited liability company,
corporation, unincorporated organization, trust or joint venture, or a
governmental agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person that
has preferential rights to any other Capital Stock of such Person with respect
to dividends or redemptions or upon liquidation.
"Principals" means BT Capital Partners, Inc. and Ontario Teacher's Pension
Plan Board.
"Purchase Money Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries incurred in the normal course of business for the
purpose of financing all or any part of the purchase price, or the cost of
installation, construction or improvement, of property or equipment.
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
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"Recapitalization" means the recapitalization of Holdings.
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
the "Limitation on Incurrence of Additional Indebtedness" covenant (other than
pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (ix) or (xi) of the
definition of Permitted Indebtedness), in each case that does not (1) result in
an increase in the aggregate principal amount of Indebtedness of such Person as
of the date of such proposed Refinancing (plus the amount of any premium
required to be paid under the terms of the instrument governing such
Indebtedness and plus the amount of reasonable expenses incurred by the Company
in connection with such Refinancing) or (2) create Indebtedness with (A) a
Weighted Average Life to Maturity that is less than the Weighted Average Life to
Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier
than the final maturity of the Indebtedness being Refinanced; provided that (x)
if such Indebtedness being Refinanced is Indebtedness of the Company, then such
Refinancing Indebtedness shall be Indebtedness solely of the Company and the
Subsidiary Guarantors, if any, and (y) if such Indebtedness being Refinanced is
subordinate or junior to the Notes, then such Refinancing Indebtedness shall be
subordinate to the Notes at least to the same extent and in the same manner as
the Indebtedness being Refinanced.
"Replacement Assets" means properties or assets (including Capital Stock
and working capital assets) of a kind used or usable in the businesses of the
Company and its Restricted Subsidiaries permitted by the covenant entitled
"Conduct of Business."
"Representative" means the indenture trustee or other trustee, agent or
representative in respect of any Designated Senior Debt; provided that if, and
for so long as, any Designated Senior Debt lacks such a representative, then the
Representative for such Designated Senior Debt shall at all times constitute the
holders of a majority in outstanding principal amount of such Designated Senior
Debt in respect of any Designated Senior Debt.
"Restricted Subsidiary" of any Person means any Subsidiary of such Person
which at the time of determination is not an Unrestricted Subsidiary.
"Sale and Leaseback Transaction" means any direct or indirect arrangement
with any Person or to which any such Person is a party, providing for the
leasing to the Company or a Restricted Subsidiary of any property, whether owned
by the Company or any Restricted Subsidiary at the Issue Date or later acquired,
which has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person from whom funds have been or
are to be advanced by such Person on the security of such Property.
"Senior Debt" means the principal of, premium, if any, and interest
(including any interest accruing subsequent to the filing of a petition of
bankruptcy at the rate provided for in the documentation with respect thereto,
whether or not such interest is an allowed claim under applicable law) on any
Indebtedness of the Company, whether outstanding on the Issue Date or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the Notes. Without limiting the generality
of the foregoing, "Senior Debt" shall also include the principal of, premium, if
any, interest (including any interest accruing subsequent to the filing of a
petition of bankruptcy at the rate provided for in the documentation with
respect thereto, whether or not such interest is an allowed claim under
applicable law) on, and all other amounts owing in respect of, (x) all monetary
obligations of every nature of the Company under the Credit Agreement,
including, without limitation, obligations to pay principal and interest,
reimbursement obligations under letters of credit, fees, expenses and
indemnities and (y) all Interest Swap Obligations whether outstanding on the
Issue Date or thereafter incurred. Notwithstanding the foregoing, "Senior Debt"
shall not include (i) any Indebtedness of the Company to a Subsidiary of the
Company, (ii) Indebtedness to, or guaranteed on behalf of, any shareholder,
director, officer or employee of
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the Company or any Subsidiary of the Company (including, without limitation,
amounts owed for compensation), (iii) Indebtedness to trade creditors and other
amounts incurred in connection with obtaining goods, materials or services, (iv)
Indebtedness represented by Disqualified Capital Stock, (v) any liability for
federal, state, local or other taxes owed or owing by the Company, (vi)
Indebtedness incurred in violation of the Indenture provisions set forth under
"Limitation on Incurrence of Additional Indebtedness," (vii) Indebtedness which,
when incurred and without respect to any election under Section 1111(b) of Title
11, United States Code, is without recourse to the Company and (viii) any
Indebtedness which is, by its express terms, subordinated in right of payment to
any other Indebtedness of the Company.
"Significant Subsidiary", with respect to any Person, means any Restricted
Subsidiary of such Person that satisfies the criteria for a "significant
subsidiary" set forth in Rule 1.02(w) of Regulation S-X under the Securities
Act.
"Subsidiary", with respect to any Person, means (i) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (ii) any
other Person of which at least a majority of the voting interest under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Unrestricted Subsidiary" of any Person means (i) any Subsidiary of such
Person that at the time of determination shall be or continue to be designated
an Unrestricted Subsidiary by the Board of Directors of such Person in the
manner provided below and (ii) any Subsidiary of an Unrestricted Subsidiary. The
Board of Directors may designate any Subsidiary (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary
owns any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided that (x) the Company certifies to the
Trustee that such designation complies with the "Limitation on Restricted
Payments" covenant and (y) each Subsidiary to be so designated and each of its
Subsidiaries has not at the time of designation, and does not thereafter,
create, incur, issue, assume, guarantee or otherwise become directly or
indirectly liable with respect to any Indebtedness pursuant to which the lender
has recourse to any of the assets of the Company or any of its Restricted
Subsidiaries. The Board of Directors may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary only if (x) immediately after giving effect to
such designation, the Company is able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with the
"Limitation on Incurrence of Additional Indebtedness" covenant and (y)
immediately before and immediately after giving effect to such designation, no
Default or Event of Default shall have occurred and be continuing. Any such
designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the Board Resolution giving effect to
such designation and an officers' certificate certifying that such designation
complied with the foregoing provisions.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Indebtedness into (b) the sum of the total of
the products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means any Restricted
Subsidiary of such Person of which all the outstanding securities having
ordinary voting power for the election of directors (other than directors'
qualifying shares or an immaterial amount of shares required to be owned by
other Persons pursuant to applicable law) are owned by such Person or any Wholly
Owned Restricted Subsidiary of such Person.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a discussion of all material United States federal income
tax consequences to U.S. Holders and Non-U.S. Holders of owning and disposing of
the Notes. The terms "U.S. Holder" and "Non-U.S. Holder" refer, respectively, to
persons that are or are not classified as United States persons.
As used herein, the term "United States person" means a holder of a Note
who is a citizen or resident of the United States, or that is a corporation or
other entity taxable as a corporation created or organized in or under the laws
of the United States or any political subdivision thereof, an estate the income
of which is subject to United States federal income taxation regardless of its
source or a trust if (i) a U.S. court is able to exercise primary supervision
over the trust's administration and (ii) one or more U.S. fiduciaries have the
authority to control all of the trust's substantial decisions.
This discussion does not deal with all aspects of United States federal
income taxation that may be relevant to holders of the Notes and does not deal
with tax consequences arising under the laws of any foreign, state or local
jurisdiction. It is, moreover, based upon the provisions of existing law on the
date hereof, including, in particular, the Internal Revenue Code of 1986, as
amended (the "Code"), Treasury regulations promulgated thereunder and other
administrative and judicial interpretations thereof, all of which are subject to
change at any time, with or without retroactive effect. This discussion also
generally assumes that each holder holds the Notes as capital assets and that
any amounts received by a Non-U.S. Holder with respect to the Notes are not
effectively connected with the conduct by such Non-U.S. Holder of a trade or
business in the United States. Each prospective holder is advised to consult its
own tax adviser with respect to current and possible future tax consequences of
acquiring, holding and disposing of the Notes.
U.S. HOLDERS
Interest on the Notes. Interest on a Note will be taxable to a U.S. Holder
as ordinary interest income in accordance with the U.S. Holder's method of tax
accounting at the time that such interest is accrued or (actually or
constructively) received.
Premium and Market Discount. A U.S. Holder of a Note purchased at a
premium (i.e., a cost greater than its principal amount) may elect to amortize
such premium (as an offset to interest income), using a constant-yield method,
over the remaining term of the Note. Special rules apply which may require the
amount of premium and the amortization thereof to be determined with reference
to the optional redemption price and date. A U.S. Holder that elects to amortize
such premium must reduce its tax basis in a Note by the amount of the premium
amortized during the holding period. With respect to a U.S. Holder that does not
elect to amortize bond premium, the amount of bond premium will continue to be
reflected in the U.S. Holder's tax basis. Therefore, a U.S. Holder that does not
elect to amortize such premium will generally be required to treat the premium
as capital loss when the Note matures.
If a U.S. Holder of a Note purchases the Note at an amount that is less
than its principal amount, the Note generally will be considered to bear "market
discount" in the hands of such U.S. Holder. In such case, gain realized by the
U.S. Holder on the sale, exchange, or retirement and unrealized appreciation on
certain nontaxable dispositions of the Note generally will be treated as
ordinary interest income to the extent of the market discount that accrued on
the Note while held by such U.S. Holder and to the extent it has not previously
been included in income (pursuant to an election by the U.S. Holder to include
such market discount in income as it accrues). In addition, the U.S. Holder may
be required to defer the deduction of a portion of the interest paid on any
indebtedness incurred or continued to purchase or carry the Note. In general
terms, market discount on a Note will be treated as accruing ratably over the
term of such Note, or, at the election of the U.S. Holder, under a constant
yield method. However, a U.S. Holder may elect to include market discount in
income on a current basis as it accrues (on either a ratable or constant yield
basis), in lieu of treating a portion of any gain realized on the sale of a Note
as ordinary income. If a U.S. Holder so elects, the interest deduction deferral
rule described above will not apply.
Disposition of the Notes. In general, the U.S. Holder of a Note will
recognize capital gain or loss upon the sale, redemption, retirement or other
disposition of the Note measured by the difference between the
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amount realized (except with respect to market discount and to the extent
attributable to the payment of accrued interest not previously included in
income) and the U.S. Holder's tax basis in the Note. A U.S. Holder's tax basis
in a Note generally will equal the cost of the Note to the U.S. Holder increased
by the amount of market discount, if any, previously taken into income by the
U.S. Holder or decreased by any amortized bond premium and any payments other
than payments of interest made on such Note. Except to the extent characterized
as market discount, the capital gain or loss on such disposition of the Notes
will be mid-term capital gain or loss, currently taxable at a maximum rate of
28%, if the Notes have been held for more than one year at the time of such
disposition and long-term capital gain or loss, currently taxable at a maximum
rate of 20%, if the Notes have been held for more than 18 months at the time of
such disposition.
The Exchange Offer. It is anticipated that the exchange of Old Notes for
New Notes pursuant to the Exchange Offer will not be a taxable event for United
States federal income tax purposes, because under existing Treasury regulations,
the New Notes will not differ materially in kind or extent from the Old Notes.
NON-U.S. HOLDERS
Payments of Interest. A Non-U.S. Holder will not be subject to United
States federal income tax by withholding or otherwise on payments of interest on
a Note (provided that the beneficial owner of the Note fulfills the statement
requirements set forth in applicable Treasury regulations) unless (A) such
Non-U.S. Holder (i) actually or constructively owns 10% or more of the total
combined voting power of all classes of stock of the Company entitled to vote,
(ii) is a controlled foreign corporation related, directly or indirectly, to the
Company through stock ownership, or (iii) is a bank receiving interest described
in Section 881 (c) (3) (A) of the Code or (B) such interest is effectively
connected with the conduct of a trade or business by the Non-U.S. Holder in the
United States.
Gain on Disposition of the Notes. A Non-U.S. Holder will not be subject to
United States federal income tax by withholding or otherwise on any gain
realized upon the disposition of a Note unless (i) in the case of a Non-U.S.
Holder who is an individual, such Non-U.S. Holder is present in the United
States for a period or periods aggregating 183 days or more during the taxable
year of the disposition (in which case such individual may be taxed as a U.S.
Holder in any event) or (ii) the gain is effectively connected with the conduct
of a trade or business by the Non-U.S. Holder in the United States.
Effectively Connected Income. To the extent that interest income or gains
on the disposition of the Notes are effectively connected with the conduct of a
trade or business of the Non-U.S. Holder in the United States, such income will
be subject to United States federal income tax at the same rates generally
applicable to United States persons. Additionally, in the case of a U.S. Holder
which is a corporation, such effectively connected income may be subject to the
United States branch profits tax at the rate of 30% (or lower treaty rate.)
Treaties. A tax treaty between the United States and a country in which a
Non-U.S. Holder is a resident may alter the tax consequences described above.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Interest and payments of proceeds from the disposition by certain
non-corporate holders of Notes may be subject to backup withholding at a rate of
31%. Such a U.S. Holder generally will be subject to backup withholding at a
rate of 31% unless the recipient of such payment supplies an accurate taxpayer
identification number, as well as certain other information, or otherwise
establishes, in the manner prescribed by law, an exemption from backup
withholding. Any amount withheld under backup withholding is allowable as a
credit against the U.S. Holder's federal income tax upon furnishing the required
information to the Internal Revenue Service.
Generally, backup withholding of United States federal income tax at a rate
of 31% and information reporting may apply to payments of principal, interest
and premium (if any) to Non-U.S. Holders that are not "Exempt Recipients" and
that fail to provide certain information as may be required by United States law
and applicable regulations. The payment of the proceeds of the disposition of
Notes to or through the United
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States office of a broker will be subject to information reporting and backup
withholding at a rate of 31% unless the owner certifies its status as a Non-U.S.
Holder under penalties of perjury or otherwise establishes an exemption.
Holders should consult their tax advisors regarding the application of
information reporting and backup withholding in their particular situation and
the availability of an exemption therefrom, and the procedures for obtaining any
such exemption
BOOK-ENTRY; DELIVERY AND FORM
Except as described below New Notes will (and the related guarantees)
initially be represented by one or more permanent global certificates in
definitive, fully registered form (the "Global Notes"). The Global Notes will be
deposited with, or on behalf of, The Depository Trust Company, New York, New
York ("DTC") and registered in the name of a nominee of DTC.
The Global Notes. The Company expects that pursuant to procedures
established by DTC (i) upon the issuance of the Global Notes, DTC or its
custodian will credit, on its internal system, the principal amount of Notes of
the individual beneficial interests represented by such Global Notes to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Notes will be shown on, and the
transfer of such ownership will be effected only through, records maintained by
DTC or its nominee (with respect to interests of participants) and the records
of participants (with respect to interests of persons other than participants).
Ownership of beneficial interests in the Global Notes will be limited to persons
who have accounts with DTC ("participants") or persons who hold interests
through participants. QIBs may hold their interests in the Global Notes directly
through DTC if they are participants in such system, or indirectly through
organizations which are participants in such system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Notes for all purposes
under the Indenture. No beneficial owner of an interest in the Global Notes will
be able to transfer that interest except in accordance with DTC's procedures, in
addition to those provided for under the Indenture with respect to the Notes.
Payments of the principal of, premium (if any), interest (including
Additional Interest) on, the Global Notes will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Notes or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, interest (including Additional Interest) on the
Global Notes, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Notes as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests in
the Global Notes held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held for
the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in the Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange as
described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Notes are credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have
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given such direction. However, if there is an Event of Default under the
Indenture, DTC will exchange the Global Notes for Certificated Securities, which
it will distribute to its participants.
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Notes among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Notes and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be issued
in exchange for the Global Note.
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the Commission set forth in
no-action letters issued to third parties, Young America and Holdings believe
that the New Notes issued pursuant to the Exchange Offer in exchange for Old
Notes may be offered for resale, resold and otherwise transferred by any holder
thereof (other than any such holder that is an "affiliate" of Young America or
Holdings within the meaning of Rule 405 promulgated under the Securities Act)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business, such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Notes and neither such holder nor any such other person is engaging in or
intends to engage in a distribution of such New Notes. Accordingly, any holder
who is an affiliate of Young America or Holdings or any holder using the
Exchange Offer to participate in a distribution of the New Notes will not be
able to rely on such interpretations by the staff to the Commission and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with a resale transaction. Notwithstanding the
foregoing, each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with any resale of New Notes received in exchange
for Old Notes where such Old Notes were acquired as a result of market-making
activities or other trading activities (other than Old Notes acquired directly
from Young America.)
Young America will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker-dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes
102
<PAGE> 106
and any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver, and by delivering, a
prospectus as required, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act.
Young America and Holdings will, pursuant to the terms of the Registration
Rights Agreement, send a reasonable number of additional copies of this
Prospectus and any amendment or supplement to this Prospectus to any
broker-dealer that requests such documents in the Letter of Transmittal. Young
America and Holdings will pay all the expenses incident to the Exchange Offer
(which shall include the expenses of any holder in connection with resales of
the New Notes). Young America and Holdings have agreed to indemnify the Initial
Purchaser and any broker-dealers participating in the Exchange Offer against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the New Notes and the Guarantees offered hereby will be
passed upon for Young America and Holdings by O'Sullivan Graev & Karabell, LLP,
New York, New York. as to matters of Minnesota law, O'Sullivan Graev & Karabell,
LLP, has relied on the opinion of Kaplan, Strangis and Kaplan, P.A.,
Minneapolis, Minnesota.
EXPERTS
The consolidated financial statements of Holdings as of and for the year
ended December 31, 1997 included in this Prospectus have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included herein in reliance upon the authority of said
firm as experts in giving said report.
The financial statements of Holdings as of and for the two years ended
December 31, 1996 and 1995 included in this Prospectus have been audited by
McGladrey & Pullen, LLP, independent auditors, as stated in their report
appearing herein.
In connection with the Recapitalization, on the Recapitalization Date
McGladrey & Pullen, LLP was dismissed and Arthur Andersen LLP was engaged as
Holdings' independent certified public accountant. The decision to change
accountants was approved by the Board of Directors. The reports of McGladrey &
Pullen, LLP on Holdings' financial statements for the two fiscal years ended
December 31, 1996 did not contain an adverse opinion or a disclaimer of opinion
and were not qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with the audits of Holdings' financial statements for
each of the two fiscal years ended December 31, 1996 and for the period January
1, 1997 through the Recapitalization Date, there were no disagreements with
McGladrey & Pullen, LLP on any matters of accounting principles or practices,
financial statement disclosure or auditing scope and procedures which, if not
resolved to the satisfaction of McGladrey & Pullen, LLP, would have caused
McGladrey & Pullen, LLP to make reference to the matter in their report. For the
years ended December 31, 1995 and 1996, and for the period subsequent thereto,
management of Holdings had not consulted with Arthur Andersen LLP regarding the
application of accounting principles, nor the type of audit opinion that might
be rendered on Holdings' financial statements.
103
<PAGE> 107
INDEX TO FINANCIAL STATEMENTS
YOUNG AMERICA HOLDINGS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Unaudited Financial Statements
Consolidated Statements of Operations for the Three Months
Ended March 31, 1998 and 1997.......................... F-2
Consolidated Balance Sheets as of March 31, 1998, and
December 31, 1997...................................... F-3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 1998 and 1997.......................... F-4
Notes to Consolidated Financial Statements................ F-5
Audited Financial Statements
Report of Independent Public Accountants.................. F-10
Report of Independent Public Accountants.................. F-11
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-12
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1996 and 1995....................... F-13
Consolidated Statements of Changes in Stockholders'
(Deficit) Equity....................................... F-14
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1996 and 1995....................... F-15
Notes to Consolidated Financial Statements................ F-16
</TABLE>
F-1
<PAGE> 108
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Revenues.................................................... $50,630 $52,646
Cost of revenues:
Rebates, postage and freight.............................. 34,893 32,166
Processing and servicing.................................. 11,296 10,376
------- -------
Gross profit...................................... 4,441 10,104
------- -------
Operating expenses:
Selling................................................... 1,424 1,393
General and administrative................................ 1,178 2,900
------- -------
2,602 4,293
------- -------
Operating income.................................. 1,839 5,811
------- -------
Other income (expense):
Interest expense.......................................... (2,385) --
Amortization of deferred financing costs.................. (3,329) --
Interest income........................................... 236 258
Other..................................................... (15) --
------- -------
(5,493) 258
------- -------
(Loss) income before benefit from income taxes.............. (3,654) 6,069
Benefit from income taxes................................... (1,352) --
------- -------
Net (loss) income................................. $(2,302) $ 6,069
======= =======
Unaudited pro forma net (loss) income:
(Loss) Income before provision for income taxes........... $ 6,069
Pro forma income tax (benefit) provision.................. 2,246
-------
Pro forma net income (loss)....................... $ 3,823
=======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE> 109
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
MARCH 31,
1998 MARCH 31, DECEMBER 31,
(NOTE 1) 1998 1997
---------- --------- ------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 13,311 $ 14,003 $ 17,940
Trade receivables, net.................................... 12,067 12,067 11,482
Supplies inventory........................................ 510 510 615
Prepaid expenses.......................................... 622 622 518
-------- -------- --------
Total current assets............................... 26,510 27,202 30,555
Property and equipment, at cost............................. 19,132 19,132 17,556
Less accumulated depreciation............................. (10,123) (10,123) (9,661)
-------- -------- --------
9,009 9,009 7,895
Deferred financing costs.................................... 2,968 2,968 3,292
Deferred income taxes....................................... 1,352 1,352 --
-------- -------- --------
TOTAL ASSETS 3$9,839... $ 40,531 $ 41,742
======== ======== ========
LIABILITIES AND STOCKHOLDERS DEFICIT
Current Liabilities:
Non-cleared rebate items.................................... $ 9,060 $ 9,060 $ 4,526
Accounts payable.......................................... 2,409 2,409 2,331
Collections due to and advances from clients.............. 4,242 4,242 3,548
Deferred income taxes..................................... 411 411 417
Accrued expenses
Compensation............................................ 1,720 1,720 5,860
Other................................................... 2,644 2,644 2,737
-------- -------- --------
Total current liabilities.......................... 20,486 20,486 19,419
Bridge facility............................................. -- -- 80,000
Senior subordinated notes (Note 2).......................... 80,000 80,000 --
Commitments and Contingencies (Note 3)
Redeemable Class A Common Stock, 339,096 shares issued and
outstanding (48,475 shares issued and outstanding on a pro
forma basis -- see Note 1)................................ 1,055 7,380 7,380
Stockholders' Deficit:
Class A common stock, par value $1 per share; 3,000,000
shares authorized,
964,834 shares issued and outstanding (1,255,455 shares
issued and outstanding on a pro forma basis -- see Note
1)...................................................... 1,255 965 965
Class B common stock, par value $1 per share; 1,500,000
shares authorized 442,884 shares issued and
outstanding............................................. 443 443 443
Class C common stock, par value $1 per share; 1,500,000
shares authorized, 172,727 shares issued and
outstanding............................................. 173 173 173
Additional paid-in capital................................ 36,083 30,048 30,024
Retained deficit.......................................... (99,656) (98,964) (96,662)
-------- -------- --------
(61,702) (67,335) (65,057)
-------- -------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT........ $ 39,839 $ 40,531 $ 41,742
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 110
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1998 1997
------- -------
<S> <C> <C>
Operating Activities
Net (loss) income......................................... $(2,302) $ 6,069
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization.......................... 462 325
Amortization of deferred financing costs............... 3,329
Deferred income taxes.................................. (1,358) --
Changes in operating assets and liabilities:
Trade receivables.................................... (585) (4,823)
Supplies inventory................................... 105 400
Prepaid expenses..................................... (104) (304)
Non-cleared rebate items............................. 4,534 4,347
Accounts payable..................................... 78 256
Collections due to and advances from clients......... 694 (4,488)
Accrued expenses..................................... (4,233) 78
------- -------
Net cash provided by operating activities............ 620 1,860
------- -------
Investing Activities
Purchases of property and equipment....................... (1,576) (492)
------- -------
Net cash used in investing activities................ (1,576) (492)
------- -------
Financing Activities:
Repayments of Bridge Facility............................. (80,000) --
Proceeds of senior subordinated debt, net of transaction
costs.................................................. 76,995 --
Proceeds from stock subscriptions......................... 24 --
Distributions paid to stockholders........................ -- (516)
------- -------
Net cash used in financing activities................ (2,981) (516)
------- -------
Change in cash and cash equivalents.................. (3,937) 852
Cash and Cash Equivalents:
Beginning of period....................................... 17,940 20,573
------- -------
End of period............................................. $14,003 $21,425
======= =======
Supplemental Disclosures of Cash Flow Information:
Cash payments for interest................................ $ 2,375 $ --
======= =======
Supplemental Schedule of Non-cash Financing Activities:
Distributions payable at period-end....................... $ -- $ 3,387
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 111
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, UNAUDITED)
1. BASIS OF PRESENTATION -- PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared by
Young America Holdings, Inc. ("Holdings") and include the accounts of Holdings
and its wholly-owned subsidiary Young America Corporation ("YAC"), 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 March 31, 1998, and for all
periods presented, have been made.
The accompanying unaudited pro forma consolidated balance sheet gives
effect to the following events which occurred subsequent to March 31, 1998:
(i) the reclassification to Stockholders' Deficit of $2,925 of
Redeemable Class A Common Stock outstanding at March 31, 1998 associated
with the termination of the Put Agreement with Mr. Ecklund discussed in
Note 5 to the consolidated financial statements for the year ended December
31, 1997 included elsewhere in this prospectus (134,400 shares);
(ii) the reclassification to Stockholders' Deficit of $3,400 of
Redeemable Class A Common Stock outstanding at March 31, 1998 associated
with the termination of certain put rights of Mr. Weil in connection with
the revision to Mr. Weil's employment agreement discussed in Note 5 to the
consolidated financial statements for the year ended December 31, 1997
included elsewhere in this prospectus (156,221 shares); and
(iii) the cash payment of $692 to the Selling Shareholders (as defined
below) and certain other persons made in the second quarter of 1998
pursuant to the terms of the Recapitalization Agreement as discussed in
Note 4 to the consolidated financial statements for the year ended December
31, 1997 included elsewhere in this prospectus.
2. DEBT
On February 23, 1998, YAC issued $80,000 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
transferred to Holdings and used to repay, in full, amounts outstanding under
the Bridge Facility. In connection with the repayment of the Bridge Facility,
the Company wrote off the $3,292 of the Deferred Financing Costs reflected on
the December 31, 1997, balance sheet.
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. Separate financial statements of YAC have not been presented as
management has determined that they would not be material to investors given
that YAC is a wholly-owned subsidiary of Holdings, and represents substantially
all of the assets, liabilities, and operations of the consolidated entity, and
that Holdings has provided a full and unconditional guarantee 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:
<TABLE>
<S> <C>
2002............................................... 105.813%
2003............................................... 103.875
2004............................................... 101.938
2005 and thereafter................................ 100.000%
</TABLE>
F-5
<PAGE> 112
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, UNAUDITED)
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),
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.
The Notes are not subject to sinking fund requirements. The Notes are
general unsecured obligations of the Company and are subordinated in right of
payment to all existing and future senior indebtedness of the Company, including
obligations under the New Credit Facility referred to below.
The indenture under which the Notes were issued contains certain covenants
with respect to YAC and any future subsidiaries 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 Company's ability to consolidate or merge with or
into, or to transfer all or substantially all of its assets to another entity.
The Company has recently entered into a new revolving credit facility ("New
Credit Facility") with Norwest Bank Minnesota, N.A. ("Norwest"), which provides
for borrowings of up to $10.0 million based on a borrowing base formula equal to
85% of Eligible Receivables (as defined in the New Credit Facility) and has a
final maturity date of March 31, 2001. The New Credit Facility does not have any
commitment reductions scheduled before maturity. Borrowings under the New 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%. The
New Credit Facility is secured by a first priority interest in accounts
receivable and related general intangibles of YAC.
3. CONTINGENCIES
Leases
The Company has operating leases for warehouse space and equipment. The
approximate future minimum payments under these obligations are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1998........................................... $4,670
1999........................................... $4,770
2000........................................... $3,966
2001........................................... $1,741
2002........................................... $ 731
</TABLE>
Guarantees
Sweepstakes performance bonds are guaranteed for clients based on certain
financial criteria. Holdings had guaranteed approximately $7,600 and $6,200 in
performance bonds for various clients, as of March 31, 1998 and December 31,
1997, respectively.
The Company also obtains an indemnity agreement from these clients
indemnifying the Company from obligations under the performance bonds.
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
F-6
<PAGE> 113
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, UNAUDITED)
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 and YAC for the three months ended March
31, 1998 and on a pro forma basis for the three months ended March 31, 1997 as
if the guarantee structure had been in effect for such period; and summarized
Balance Sheet information as of March 31, 1998 and December 31, 1997. 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.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1998 1997
--------- ------------
<S> <C> <C>
Revenues:
Holdings........................................... $ 72,425 $ --
YAC................................................ 50,630 52,646
Intercompany elimination........................... (72,425) --
-------- -------
Consolidated............................... $ 50,630 $52,646
======== =======
Gross Profit:
Holdings........................................... $ -- $ --
YAC................................................ 4,402 10,104
Intercompany elimination........................... 39 --
-------- -------
Consolidated............................... $ 4,441 $10,104
======== =======
Net (loss) Income:
Holdings........................................... $ -- $ --
YAC................................................ (2,302) 6,069
-------- -------
Consolidated............................... $ (2,302) $ 6,069
======== =======
</TABLE>
F-7
<PAGE> 114
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
Current Assets:
Holdings........................................... $ 400 $ 357
YAC................................................ 26,841 30,198
Intercompany elimination........................... (39) --
-------- -------
Consolidated............................... $ 27,202 $30,555
======== =======
Noncurrent Assets:
Holdings........................................... $ 2,628 $ 2,667
YAC................................................ 20,701 8,520
Intercompany elimination........................... (10,000) --
-------- -------
Consolidated............................... $ 13,329 $11,187
======== =======
Current Liabilities:
Holdings........................................... $ -- $ --
YAC................................................ 20,525 19,419
Intercompany elimination........................... (39) --
-------- -------
Consolidated............................... $ 20,486 $19,419
======== =======
Noncurrent Liabilities:
Holdings........................................... $ 10,000 $ --
YAC................................................ 80,000 80,000
Intercompany elimination........................... (10,000) --
-------- -------
Consolidated............................... $ 80,000 $80,000
======== =======
</TABLE>
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
therein) 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.
Pursuant to the terms of a Put Option Agreement (the "Put Agreement") dated
November 25, 1997 between the Company and Mr. Ecklund, Mr. Ecklund had the right
at any time after the fifth anniversary of the date of the Put Agreement, to
cause Holdings to redeem all or any portion of Mr. Ecklund's shares in Holdings.
The price at which such shares may be sold and purchased shall be the fair
market value thereof, determined either by agreement or by an appraisal.
Holdings is not obligated to redeem Mr. Ecklund's shares if Holdings is then in
default of a payment obligation under any of Holdings' indebtedness for borrowed
money or if such redemption would result in a default under any such
indebtedness. Such Put Agreement was terminated in July 1998. See Note 1.
F-8
<PAGE> 115
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, UNAUDITED)
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.
In the opinion of management, there has not been any change in the per share
valuation since such date.
4. RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," issued in March 1998, is
effective for fiscal year, beginning after December 15, 1998. This statement
provides guidance on accounting for the costs of computer software developed or
obtained for internal use. The Company is currently analyzing the implementation
of SOP 98-1 and does not believe it will have a material impact on the Company's
financial condition or results of operations when the Company adopts it in the
first quarter of 1999.
During June 1997, the Financial Accounting Standards Board released SFAS
No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning
after December 15, 1997. SFAS No. 130 establishes standards for reporting and
display in the financial statements of total net income and the components of
all other nonowner changes in equity, referred to as comprehensive income. The
Company adopted SFAS No. 130 in the first quarter of 1998; Comprehensive income
(loss) is the same amount as reported net income (loss).
During June 1997, the Financial Accounting Standards Board released SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information,"
effective for fiscal years beginning after December 15, 1997. SFAS No. 131
requires disclosure of business and geographic segments in the consolidated
financial statements of the Company. The Company adopted SFAS No. 131 in the
first quarter of 1998 and the impact on the disclosures in its financial
statements was not significant.
F-9
<PAGE> 116
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young America Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Young
America Holdings, Inc. (a Minnesota corporation, formerly Young America
Corporation) as of December 31, 1997, and the related consolidated statements of
operations, stockholders' (deficit) equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Young
America Holdings, Inc. as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
February 6, 1998
F-10
<PAGE> 117
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young America Holdings, Inc.:
We have audited the accompanying balance sheet of Young America Holdings,
Inc. (formerly Young America Corporation) as of December 31, 1996, and the
related statements of operations, stockholders' equity and cash flows for each
of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Young America Holdings, Inc.
as of December 31, 1996, and the results of its operations and its cash flows
for each of the two years in the period then ended in conformity with generally
accepted accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota
February 14, 1997
F-11
<PAGE> 118
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1997 AND 1996
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA HISTORICAL
1997 -------------------
(NOTE 1) 1997 1996
---------- -------- -------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 17,248 $ 17,940 $20,573
Trade receivables, net.................................... 11,482 11,482 8,532
Supplies inventory........................................ 615 615 729
Prepaid expenses.......................................... 518 518 359
-------- -------- -------
Total current assets............................... 29,863 30,555 30,193
Property and Equipment, at cost:
Land and improvements..................................... 639 639 498
Building and improvements................................. 5,710 5,710 4,956
Machinery and equipment................................... 2,228 2,228 1,992
Transportation equipment.................................. 147 147 89
Office furniture and fixtures............................. 2,571 2,571 2,213
Electronic equipment and software......................... 6,261 6,261 4,624
-------- -------- -------
17,556 17,556 14,372
Less accumulated depreciation............................. (9,661) (9,661) (8,217)
-------- -------- -------
7,895 7,895 6,155
Deferred Financing Costs.................................... 3,292 3,292 --
Other Assets................................................ -- -- 95
-------- -------- -------
TOTAL ASSETS....................................... $ 41,050 $ 41,742 $36,443
======== ======== =======
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current Liabilities:
Noncleared rebate items................................... $ 4,526 $ 4,526 $ 2,259
Accounts payable.......................................... 2,331 2,331 2,206
Collections due to and advances from clients.............. 3,548 3,548 11,179
Distributions payable..................................... -- -- 3,487
Deferred income taxes..................................... 417 417 --
Accrued expenses
Compensation............................................ 5,860 5,860 3,889
Other................................................... 2,737 2,737 1,350
-------- -------- -------
Total current liabilities.......................... 19,419 19,419 24,370
Bridge Facility............................................. 80,000 80,000 --
Commitments and Contingencies (Note 9)
Redeemable Class A common stock, 339,096 shares issued and
outstanding (48,475 shares issued and outstanding on a pro
forma basis -- see Note 5)................................ 1,055 7,380 --
Stockholders' (Deficit) Equity:
Class A common stock, par value $1 per share; as of
December 31, 1997 and 1996, 3,000,000 and 20,000 shares
authorized, respectively, and 964,834 and 1,920 shares
issued and outstanding, respectively (1,255,455 shares
issued and outstanding on a pro forma basis -- see Note
5)...................................................... 1,255 965 2
Class B common stock, par value $1 per share; as of
December 31, 1997,
1,500,000 shares authorized and 442,884 shares issued
and outstanding......................................... 443 443 --
Class C common stock, par value $1 per share; as of
December 31, 1997, 1,500,000 shares authorized and
172,727 shares issued and outstanding................... 173 173 --
Additional paid-in capital................................ 36,059 30,024 315
Retained (deficit) earnings............................... (97,354) (96,662) 11,756
-------- -------- -------
(59,424) (65,057) 12,073
-------- -------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT)
EQUITY........................................... $ 41,050 $ 41,742 $36,443
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
<PAGE> 119
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues................................................... $175,297 $135,716 $116,268
Cost of revenues:
Rebates, postage and freight............................. 105,212 84,191 80,635
Processing and servicing................................. 40,447 31,393 24,920
-------- -------- --------
Gross profit.......................................... 29,638 20,132 10,713
-------- -------- --------
Operating expenses:
Selling.................................................. 5,504 4,610 3,493
General and administrative............................... 9,754 7,140 5,949
Compensation charges attributable to Recapitalization.... 17,924 -- --
-------- -------- --------
33,182 11,750 9,442
-------- -------- --------
Operating (loss) income............................... (3,544) 8,382 1,271
-------- -------- --------
Other income (expense):
Interest expense......................................... (981) (91) (252)
Amortization of deferred financing costs................. (48) -- --
Interest income.......................................... 1,038 201 10
Transaction costs attributable to Recapitalization....... (1,967) -- --
Other.................................................... -- (60) (15)
-------- -------- --------
(1,958) 50 (257)
-------- -------- --------
(Loss) income before provision for income taxes............ (5,502) 8,432 1,014
Provision for income taxes................................. 423 -- --
-------- -------- --------
Net (loss) income..................................... $ (5,925) $ 8,432 $ 1,014
======== ======== ========
Unaudited pro forma net (loss) income:
Income (loss) before provision for income taxes.......... $ (5,502) $ 8,432 $ 1,014
Pro forma income tax (benefit) expense................... (1,308) 3,120 375
-------- -------- --------
Pro forma net (loss) income........................... $ (4,194) $ 5,312 $ 639
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE> 120
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
COMMON STOCK COMMON STOCK COMMON STOCK ADDITIONAL RETAINED
-------------------- --------------- --------------- PAID-IN EARNINGS
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL (DEFICIT) TOTAL
---------- ------- ------- ----- ------- ----- ---------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994...... 1,920 $ 2 -- $ -- -- $ -- $ 315 $ 7,849 $ 8,166
Net income.................... -- -- -- -- -- -- -- 1,014 1,014
Distributions to
stockholders................ -- -- -- -- -- -- -- (1,333) (1,333)
---------- ------- ------- ---- ------- ---- ------- -------- --------
Balance, December 31, 1995...... 1,920 2 -- -- -- -- 315 7,530 7,847
Net income.................... -- -- -- -- -- -- -- 8,432 8,432
Distributions to
stockholders................ -- -- -- -- -- -- -- (4,206) (4,206)
---------- ------- ------- ---- ------- ---- ------- -------- --------
Balance, December 31, 1996...... 1,920 2 -- -- -- -- 315 11,756 12,073
Net loss...................... -- -- -- -- -- -- -- (5,925) (5,925)
Stock split................... 1,918,080 1,918 -- -- -- -- -- (1,918) --
Distributions to
stockholders................ -- -- -- -- -- -- -- (10,412) (10,412)
Proceeds from issuance of
common stock................ 1,169,530 1,170 442,884 443 172,727 173 37,043 -- 38,829
Redemption of common stock.... (1,785,600) (1,786) -- -- -- -- (293) (90,163) (92,242)
Reclassification to Redeemable
Class A Common Stock........ (339,097) (339) -- -- -- -- (7,041) -- (7,380)
---------- ------- ------- ---- ------- ---- ------- -------- --------
Balance, December 31, 1997...... 964,833 $ 965 442,884 $443 172,727 $173 $30,024 $(96,662) $(65,057)
========== ======= ======= ==== ======= ==== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE> 121
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income......................................... $ (5,925) $ 8,432 $ 1,014
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities-
Depreciation and amortization.......................... 1,636 1,196 967
Deferred income taxes.................................. 417 -- --
Changes in assets and liabilities:
Trade receivables.................................... (2,950) 4,822 (1,287)
Supplies inventory................................... 114 (217) (182)
Prepaid expenses..................................... (159) (41) (83)
Noncleared rebate items.............................. 2,267 (1,688) 512
Accounts payable..................................... 125 1,303 133
Collections due to and advances from clients......... (7,631) 9,278 964
Accrued expenses..................................... 3,358 2,135 779
Other, net............................................. 97 60 --
-------- ------- -------
Net cash (used in) provided by operating
activities...................................... (8,651) 25,280 2,817
-------- ------- -------
Cash Flows from Investing Activities:
Purchases of property and equipment....................... (3,330) (1,735) (1,076)
-------- ------- -------
Net cash used in investing activities............. (3,330) (1,735) (1,076)
-------- ------- -------
Cash Flows from Financing Activities:
Net (repayments) proceeds of short-term borrowings........ -- (2,494) 594
Proceeds from Bridge Facility............................. 80,000 -- --
Distributions paid to stockholders........................ (13,899) (720) (2,389)
Proceeds from issuance of common stock.................... 38,829 -- --
Redemption of common stock................................ (92,242) -- --
Payments of financing costs............................... (3,340) -- --
-------- ------- -------
Net cash provided by (used in) financing
activities...................................... 9,348 (3,214) (1,795)
-------- ------- -------
Change in cash and cash equivalents............... (2,633) 20,331 (54)
Cash and Cash Equivalents:
Beginning of period....................................... 20,573 242 296
-------- ------- -------
End of period............................................. $ 17,940 $20,573 $ 242
======== ======= =======
Supplemental Disclosures of Cash Flow Information:
Cash payment for interest................................. $ 5 $ 94 $ 216
======== ======= =======
Supplemental Schedule of Noncash Financing Activities:
Distributions payable at year-end......................... $ -- $ 3,487 $ --
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE> 122
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1. THE COMPANY AND NATURE OF BUSINESS
Young America Holdings, Inc. ("Holdings") and, from the date of its
incorporation on November 25, 1997, Young America Corporation ("YAC"), its
wholly owned subsidiary (collectively, the "Company"), provide a wide range of
consumer interaction processing ("CIP") services to consumer product and
consumer service companies. The Company's CIP services provide a link between
consumer-oriented companies and their customers for numerous types of marketing
programs including rebate programs, purchase reward or premium programs,
sweepstakes, product sampling programs and warranty registration programs. The
Company provides a variety of services involved in executing these marketing
programs, including (i) order processing (including the handling of mail,
telephone calls, facsimiles and e-mail received from consumers), (ii)
fulfillment (including the delivery of product premiums and samples as well as
rebate checks to consumers), (iii) data gathering, analysis and reporting and
(iv) related customer service (including receiving and responding to customer
inquiries).
As further discussed in Note 10, YAC has issued $80,000 of senior
subordinated notes which have been guaranteed in full on an unconditional, joint
and several basis by Holdings. Pursuant to applicable reporting requirements,
the accompanying financial statements reflect the consolidated financial
statements of Holdings and YAC, with summarized financial data for YAC
separately disclosed in Note 10.
The accompanying unaudited pro forma consolidated balance sheet gives
effect to the following events which occurred subsequent to December 31, 1997:
(i) the reclassification to Stockholders' Deficit of $2,925 of Redeemable Class
A Common Stock outstanding at December 31, 1997 associated with the
cancellation of the Put Agreement with Mr. Ecklund discussed in Note 5
(134,400 shares);
(ii) the reclassification to Stockholders' Deficit of $3,400 of Redeemable
Class A Common Stock outstanding at December 31, 1997 associated with the
termination of certain put rights of Mr. Weil in connection with the
revision to Mr. Weil's employment agreement discussed in Note 5 (156,221
shares); and
(iii) the cash payment of $692 to the Selling Shareholders and certain employees
made in the second quarter of 1998 pursuant to the terms of the
Recapitalization Agreement as discussed in Note 4.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Holdings and YAC, its wholly-owned subsidiary. All significant intercompany
items have been eliminated.
Revenue Recognition
The Company derives its revenues principally from three sources: service
fees, rebate billings and postage and freight billings. Service fee revenues are
recognized as CIP services are rendered. As described below, the Company
invoices clients, at the time of shipment, for the face amount of rebate checks
issued by the Company under certain rebate programs and for postage and/or
freight related to fulfillment of rebate checks and shipments of merchandise
under premium and product sampling programs.
In connection with approximately 40% of the aggregate dollar amount of
checks issued under rebate programs for which the Company has provided CIP
services, the Company has entered into contractual arrangements with its clients
providing that the Company would fund from the Company's own working capital the
payment of rebates offered by the clients. The Company, in turn, invoices its
clients for the full amount of those rebate checks that the Company issues to
consumers. The Company realizes a margin on
F-16
<PAGE> 123
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
such rebate revenues because when the Company agrees to fund rebate programs
with its own working capital, its contractual arrangements with its clients
generally provide that the Company is entitled to retain amounts paid to it by
clients relating to rebate checks that are never cashed (referred to in the
industry as slippage). Each period, the Company estimates that percentage of
rebate checks issued that are not expected, based upon historical experience, to
be cashed.
The Company recognizes as revenue (at the time of shipment) the amount
billed to clients for shipping merchandise premiums and samples and for mailing
rebate checks. Such billings are generally based upon standard rates which
approximate those that would be charged to such clients by the United States
Postal Service ("USPS") or other delivery services. The Company realizes a
margin on postage and freight billings because it pays lower rates to the
delivery services reflecting (i) discounts available to the Company for
performing various sorting and other tasks and (ii) the high volume of mail and
other shipments sent by the Company for all its clients in the aggregate.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of highly liquid investments
with original maturities of three months or less and are stated at cost which
approximates fair market value. The Company maintains its cash in bank deposit
accounts that, at times, may exceed federally insured limits. The Company has
not experienced any losses in such accounts.
Supplies Inventory
Inventory is stated at the lower of FIFO (first-in, first-out) cost or
market.
Depreciation
Depreciation of property and equipment is computed on the straight-line
method over the following estimated useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Land improvements..................................... 5-15
Buildings and improvements............................ 5-31
Machinery............................................. 3-7
Transportation equipment.............................. 3
Office furniture and fixtures......................... 5
Electronic equipment and software..................... 3-5
</TABLE>
Deferred Financing Costs
Placement fees, legal and other direct costs incurred in connection with
the issuance of debt are capitalized and amortized over the term of the
underlying debt instrument.
Noncleared Rebate Items
Noncleared rebate items represent open and uncleared rebate checks issued
on behalf of clients as of the balance sheet date, less estimated slippage (see
Note 3).
Collections Due and Advances From Clients
Collections due and advances from clients consist of (i) collections from
consumers that are to be ultimately credited to clients based upon contractual
agreements, and (ii) advances received from certain clients.
F-17
<PAGE> 124
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Income Taxes
Prior to the Recapitalization (see Note 4), the Company was an S
corporation for income tax purposes. As an S corporation, the Company was only
liable for U.S. federal income taxes under certain circumstances and liable for
state income taxes in certain jurisdictions; all other domestic income taxes
were the responsibility of the Company's stockholders. Concurrently with the
Recapitalization, Holdings became a taxable C corporation. The unaudited pro
forma net income information in the accompanying consolidated statements of
income reflects the application of corporate income taxes to the Company's
taxable income at an assumed combined federal and state tax rate of 37% as if
the termination of the Company's status as an S corporation had occurred as of
the beginning of each period presented.
In connection with the conversion from an S corporation to a C corporation,
Holdings began accounting for income taxes under the liability method, whereby
deferred income taxes are recognized at currently enacted income tax rates to
reflect the tax effect of temporary differences between the financial reporting
and tax bases of assets and liabilities. As a result thereof, the Company
immediately recognized, by charging to earnings, a deferred income tax liability
of $928 (see Note 7).
Fair Value of Financial Instruments
The carrying amount of cash equivalents, trade receivables (net), accounts
payable, and long-term debt approximate fair value.
Reclassifications
Certain prior period amounts have been reclassified to conform to the
current year presentation.
NOTE 3. SIGNIFICANT RISKS AND UNCERTAINTIES
The Company is subject to a variety of risks and uncertainties during the
normal course of its business, including, but not limited to, a high degree of
customer concentration, the needs, marketing decisions and marketing budgets of
its clients, high levels of competition in a fragmented market, vulnerability to
economic downturns, ability to keep pace with changes in information technology,
availability of qualified labor resources, reliability of service provided by
various local and long distance telephone companies, and dependence on the
services of the USPS and, to a lesser degree, the services of private delivery
services at cost effective levels. In addition, the Company derives a portion of
its revenues from clients in the tobacco industry. National legislation has been
proposed in Congress that, if enacted, may significantly restrict the ability of
companies within the tobacco industry to market products through branded premium
programs after 1998.
Revenues the Company derives from any one client may vary significantly
from period to period as client promotion activities fluctuate.
Set forth below is revenue information for the years 1997, 1996 and 1995
for each client that accounted for 5% or more of the Company's total revenue
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Client A.................................... $42,836 (24.4%) $28,420 (20.9%) *
Client B.................................... $11,572 (6.6%) $11,418 (8.4%) $18,697 (9.2%)
Client C.................................... $ 9,448 (5.4%) * *
Client D.................................... * * $13,885 (11.9%)
Client E.................................... * * $ 6,325 (5.4%)
</TABLE>
* less than 5% of total revenue.
F-18
<PAGE> 125
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
As of December 31, 1997, the three clients each individually representing
5% or more of the Company's total accounts receivable represented approximately
$2,129 of accounts receivable, or 18.7% of the total accounts receivable balance
at that date. As of December 31, 1996, the four clients each individually
representing 5% or more of the Company's total accounts receivable represented
approximately $3,067 of accounts receivable, or 35.9% of the total accounts
receivable balance at that date.
When the Company agrees to fund rebate payments with its own working
capital, its contractual arrangements with its clients generally provide that
the Company is entitled to retain amounts paid to it by clients relating to
rebate checks that are never cashed (referred to in the industry as slippage).
Each period, the Company estimates the percentage of rebate checks issued that
are not expected, based upon historical experience, to be cashed. For the years
ended December 31, 1997, 1996 and 1995, the portions of revenue recognized by
the Company as slippage were $3,288, $2,433 and $2,697, respectively. In those
situations where the Company has not been asked to use its working capital to
fund rebate programs, the Company's revenues will be significantly lower because
it will collect only service fees and charges for postage, and the Company will
not retain slippage. In such circumstances, the Company generally does not
discount its service fees in order to offset the lack of slippage to be retained
by the Company. The escheat laws of various states provide that under certain
circumstances holders of unclaimed property (possibly including, under certain
interpretations of such laws, slippage) must surrender that property to the
state in question. The Company believes that, because Holdings and YAC are
Minnesota corporations with their principal operations and principal places of
business located in Minnesota, the escheat laws of the State of Minnesota would
govern the right of the Company to retain slippage. The Company also believes
that under current Minnesota escheat law, it is entitled to retain slippage
amounts in those transactions where the Company funds its client's rebate
program from its own working capital rather than surrendering such amounts to
the State of Minnesota. There can be no assurance, however, that the Minnesota
escheat law will not change or that the Company's interpretation of the
Minnesota escheat law would prevail in any action by the State of Minnesota to
require the surrender of slippage to the State. There also can be no assurance
that another state will not prevail in an action under its escheat laws to
require the surrender to that state slippage whether unclaimed by residents of
such State or otherwise.
As a result of the Recapitalization transaction discussed in Note 4, the
Company is highly leveraged. The Company's high degree of leverage may have
important consequences for the Company, including that (i) the ability of the
Company to obtain additional financing, if necessary, for working capital,
capital expenditures, acquisitions or other purposes may be impaired, or such
financing may not be available on terms favorable to the Company; (ii) a
substantial portion of the Company's cash flow will be used to pay the Company's
interest expense and, in the cases of indebtedness incurred in the future,
possible principal repayments, which will reduce the funds that would otherwise
be available to the Company for its operations and future business
opportunities; (iii) a substantial decrease in net operating cash flows or an
increase in expenses of the Company could make it difficult for the Company to
meet its debt service requirements and force it to modify its operations; (iv)
the Company may be more highly leveraged than its competitors, which may place
it at a competitive disadvantage; and (v) the Company's high degree of leverage
may make it more vulnerable to a downturn in its business or the economy
generally. Any inability of the Company to service its indebtedness or to obtain
additional financing, as needed, would have a material adverse effect on the
Company's business.
Although the Company is not subject to seasonality, the Company's quarterly
revenues and profitability can be impacted by the timing of its clients'
programs, the availability of client-provided merchandise to fulfill consumer
requests or clients' decisions not to repeat specific marketing programs.
Program timing can affect quarterly revenues and profitability because most of
the marketing programs that the Company supports are short in duration. The
Company's activity level on a particular marketing program is often concentrated
around the consumers' final response date under the program, so that the
Company's revenues from a high-volume program may be concentrated in one or two
quarters. In addition, with premium programs, the volume
F-19
<PAGE> 126
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
of consumer requests can be difficult to predict. To the extent clients have
underestimated the consumer response to their programs and have not provided the
Company with sufficient quantities of merchandise, the Company may not be able
to fulfill all consumer requests in a timely manner. Consequently, the Company
may be delayed in performing a portion of its services and recognizing the
related revenue. In such situations, however, the Company often handles
increased consumer inquiry calls to the Company's call centers and may mail
delay card and order acknowledgment correspondence to consumers. For providing
these extra services, the Company derives additional revenue and gross profit
from service fees.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 4. THE RECAPITALIZATION
Prior to November 25, 1997 (the "Recapitalization Date"), 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
Stockholders"). On the Recapitalization Date, Holdings effected (i) a 1,000 for
1 stock split of its common stock in the form of a stock dividend and (ii) 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. Holdings expects to conduct substantially all its business and
operations through its new subsidiary Young America Corporation and any future
subsidiaries it may form. As a result of the Recapitalization, approximately 93%
of all classes of the combined capital stock of Holdings is held by an investor
group (the "Investor Group") including BT Capital Partners, Inc. ("BTCP") and
Ontario Teachers' Pension Plan Board ("OTPPB"), as well as Charles D. Weil, the
current President and Chief Executive Officer of Holdings, and 20 other members
of management. (Mr. Weil and the other participating members of management are
referred to as the "Management Stockholders").
In the Recapitalization, members of the Investor Group purchased newly
issued shares of the common stock of Holdings (the "Common Stock") for an
aggregate purchase price of $38,852. BTCP purchased shares of Common Stock for
$22,405, OTPPB purchased shares of Common Stock for $11,992 and the Management
Stockholders collectively purchased Common Stock for $4,455. Also in the
Recapitalization, Holdings borrowed $80,000 under a senior bridge credit
facility (the "Bridge Facility") provided by affiliates of BTCP. Holdings used
the proceeds of the issuance of shares of Common Stock to the Investor Group and
the borrowings under the Bridge Facility to (i) repurchase outstanding shares of
Common Stock from the Selling Stockholders for an aggregate purchase price of
$92,242, (ii) make bonus payments to management of $13,368 under plans put in
place in contemplation of a change of control of the Company, and $4,877 paid
pursuant to phantom stock arrangements due in such amounts as a result of the
change of control of the Company in the Recapitalization and (iii) pay certain
fees and expenses related to the Recapitalization. Of the amounts referred to in
(i) and (ii) above, $6,000 was placed in escrow subject to certain
indemnification provisions of the Recapitalization Agreement, $1,170 of which
has been recorded by the Company as estimated compensation charges remaining to
be paid related to (ii) above. A portion of those proceeds were also retained by
Holdings to pay certain fees and expenses related to an anticipated debt
offering (see Note 10) and other cash costs triggered by the Recapitalization.
Immediately prior to the Recapitalization, the Selling Stockholders owned
all of the outstanding capital stock of Holdings. In the Recapitalization, (i)
BTCP purchased 586,561 newly issued shares of voting Class A
F-20
<PAGE> 127
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Common Stock and 442,884 newly issued shares of nonvoting Class B Common Stock,
(ii) OTPPB purchased 378,273 newly issued shares of voting Class A Common Stock
and 172,727 newly issued shares of nonvoting Class C Common Stock, and (iii) the
Management Stockholders, who had no prior equity ownership interest in Holdings,
purchased 204,696 newly issued shares of voting Class A Common Stock. Pursuant
to the Recapitalization, Holdings repurchased from the Selling Stockholders a
number of shares of Class A Common Stock such that the Selling Stockholders
continue to hold 134,400 shares of voting Class A Common Stock, representing 7%
of Holdings' outstanding Common Stock and 10.3% of Holdings outstanding voting
securities (the "Voting Stock"), BTCP owns 53.6% of the outstanding Common Stock
and 45% of the Voting Stock. OTPPB owns 28.7% of the outstanding Common Stock
and 29% of the Voting Stock and the Management Stockholders own 10.7% of the
outstanding Common Stock and 15.7% of the Voting Stock. As described in Note 5,
the Class B Common Stock and the Class C Common Stock are convertible into Class
A Common Stock and, upon the occurrence of certain events, the Class B Common
Stock will be entitled to vote with the Class A Common Stock, voting together as
a single class, on all matters to be voted on by Holdings' shareholders.
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) of
Holdings as of October 31, 1997 and Holdings' profits or losses (as defined) for
the period ended on the Recapitalization Date. 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
Mr. Weil, certain other 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.
NOTE 5. CAPITAL STOCK AND STOCKHOLDERS' AGREEMENTS
The Common Stock consists of three classes: Class A Common Stock, Class B
Common Stock and Class C Common Stock. Except as set forth below, the rights of
the three classes of Common Stock are the same. Under most circumstances, only
the Class A Common Stock has voting rights; however, (i) the affirmative vote of
a majority of the total number of shares of Class B Common Stock voting at a
meeting at which a quorum is present, each voting separately as a class, is
required for the issuance or sale of additional shares of Class B Common Stock,
the reclassification, cancellation, or retirement of the Class B Common Stock or
any amendment, waiver or corporate transaction that adversely affects the Class
B Common Stock and (ii) the affirmative vote of a majority of the total number
of shares of Class C Common Stock voting at a meeting at which a quorum is
present, each voting separately as a class, is required for the issuance or sale
of additional shares of Class C Common Stock, the reclassification, cancellation
or retirement of the Class C Common Stock or any amendment, waiver or corporate
transaction that adversely affects the Class C Common Stock. In addition each
share of Class B Common Stock will be entitled to vote with the Class A Common
Stock, voting together as a single class, on all matters to be voted on by
Holdings' shareholders (except as otherwise required by applicable law)
following the occurrence of any of the following events: (i) Charles D. Weil
shall cease to be employed by the Company for any reason; (ii) Holdings shall
not have completed a public offering of its Common Stock meeting certain
requirements by the fifth anniversary of the Recapitalization Date; (iii) the
Company or the Selling Stockholders shall default on any of the material terms
of the Recapitalization; (iv) any representation or warranty made by Holdings or
the Selling
F-21
<PAGE> 128
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Stockholders with respect to the Recapitalization shall prove to have been
materially false; (v) an Approved Sale (as defined below) has been proposed to
the Board of Directors and such a sale is not approved, for whatever reason, by
the Board of Directors within the three days of such proposal; or (vi) other
circumstances that reasonably threaten the investment of BTCP or its assignees.
Regulated Holders (as defined in Holdings' Articles of Incorporation) who
hold shares of Class A Common Stock may convert such shares into shares of Class
B or Class C Common Stock at any time. Regulated Holders who hold shares of
Class B Common Stock or Class C Common Stock may convert such shares into shares
of Class A Common Stock at any time such conversion is permitted under law.
In connection with the consummation of the Recapitalization, Holdings,
BTCP, OTPPB, Jay F. Ecklund and the Management Stockholders (collectively, the
"Stockholders") entered into a stockholders' agreement (the "Stockholders'
Agreement"). The Stockholders' Agreement contains certain restrictions with
respect to the transferability of Holdings' capital stock and contains a grant
by Holdings to the Stockholders of preemptive rights to subscribe for future
issuances of its capital stock and securities convertible or exercisable for
capital stock, subject to certain exceptions. The Stockholders' Agreement also
includes provisions regarding designation of members of the Board of Directors
and other voting arrangements. The Stockholders' Agreement will terminate upon
the earlier of the completion of an Approved Sale (as defined in the
Stockholders' Agreement) or a public offering of Holdings Common Stock, meeting
certain requirements.
Each of the Management Stockholders acquired the shares of Class A Common
Stock held by such Management Stockholder (with respect to each Management
Stockholder, the "Employee Stock") pursuant to a Stock Subscription and
Repurchase Agreement (collectively, the "Employee Stock Agreements") between
such Management Stockholder and Holdings simultaneous with and as part of the
Recapitalization. Each of the Employee Stock Agreements provides that upon the
occurrence of certain events including the death, retirement, permanent
disability, resignation for good reason (such as retirement) or termination
without cause of the Management Stockholder (the "Termination Events"), such
Management Stockholder (or his successors) will have the right (within a
specified period of time) to cause Holdings to repurchase his Employee Stock. As
discussed below, subsequent to December 31, 1997, Holdings and Mr. Weil
terminated such right granted to Mr. Weil. If a Termination Event shall occur
with respect to any Management Stockholder, Holdings has the right to cause the
relevant Management Stockholder to sell his Employee Stock to Holdings. In
addition, Holdings has the right to cause a Management Stockholder to sell his
Employee Stock to Holdings upon such Management Stockholder's termination for
cause.
The repurchase price to be paid by Holdings for any Employee Stock
repurchased pursuant to the Employee Stock Agreements will, in most situations,
be the fair market value for such shares (to be determined by the board of
directors of Holdings if the shares are not then traded publicly, provided that
a Management Stockholder may request an appraisal of the repurchased shares if
such Management Stockholder disagrees with the valuation placed on such shares
by the Board of Directors). Certain Employee Stock Agreements require the
Management Stockholder to enter into a noncompetition agreement with Holdings or
receive the lesser of the fair market value or the original purchase price for
the Employee Stock to be purchased. The Employee Stock Agreement with Mr. Weil
provides that if Mr. Weil is terminated for cause, Holdings may repurchase his
Employee Stock at the lesser of its fair market value or the original purchase
price for such shares.
At December 31, 1997, there were 204,696 shares of Class A common stock
held by management, including those shares held by Mr. Weil. Since the Company
may be required to redeem these shares in the future, and since such redemption
is outside Holdings' control, these outstanding shares are reported at fair
market value in the accompanying consolidated balance sheet at December 31, 1997
as Redeemable Class A Common Stock. At December 31, 1997, these shares were
valued at the same per share value determined at the date of the
Recapitalization in November 1997. As further discussed below, subsequent to
December 31,
F-22
<PAGE> 129
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
1997, the arrangement with Mr. Weil was amended such that Mr. Weil will no
longer have the ability to require the Company to redeem his shares (156,221
shares). Future changes in the carrying value of shares subject to redemption
rights will be reported as compensation expense in accordance with APB Opinion
No. 25.
Holdings expects to adopt an employee stock option plan (the "Employee
Stock Option Plan") that will provide for grants of shares of nonvoting Class C
Common Stock representing approximately 16% of the fully diluted Common Stock of
Holdings. The administration of the Employee Stock Option Plan, the selection of
participants and the form and the amounts of the grants is within the sole
discretion of the Compensation Committee of the Board of Directors.
In connection with the Recapitalization, Holdings, BTCP, OTPPB and Mr.
Ecklund entered into an equity registration rights agreement (the "Equity
Registration Rights Agreement"). The Equity Registration Rights Agreement grants
the Stockholders party thereto demand and incidental registration rights with
respect to shares of capital stock held by them, which rights will be
exercisable at any time after an initial public offering of Holdings' Common
Stock. In addition, BTCP may cause Holdings to conduct an initial public
offering at any time following the sixth anniversary of the Recapitalization.
The Equity Registration Rights Agreement contains customary terms and provisions
with respect to the registration rights contained therein.
On November 25, 1997, the Company and Mr. Ecklund entered into a Put Option
Agreement (the "Put Agreement"), whereby Mr. Ecklund was granted the right, at
any time after the fifth anniversary of the date of the Put Agreement, to cause
Holdings to redeem at fair market value all or any portion of Mr. Ecklund's
shares in Holdings (134,400 shares having a value of $2,925 at December 31,
1997). Under the Put Agreement, Holdings would not be obligated to redeem Mr.
Ecklund's shares if Holdings is then in default of a payment obligation under
any of Holding's indebtedness for borrowed money or if such redemption would
result in a default under any such indebtedness. Since the Company could be
required to redeem these shares in the future, and since such redemption would
be outside Holdings' control, these outstanding shares are reported at fair
market value in the accompanying consolidated balance sheet at December 31, 1997
as Redeemable Class A Common Stock. At December 31, 1997, these shares were
valued at the same per share value determined at the date of the
Recapitalization in November 1997. Future changes in per share value would cause
the amount classified as Redeemable Class A Common Stock to increase or
decrease, with a corresponding change in Shareholders' Deficit.
In July 1998, Holdings and Mr. Ecklund terminated the Put Agreement and
Holdings and Mr. Weil terminated the rights of Mr. Weil under his Employee Stock
Agreement to cause Holdings to purchase his shares if a Termination Event shall
occur with respect to Mr. Weil. Certain stockholders of Holdings (including Mr.
Ecklund and Mr. Weil) have entered into an amended and restated Equity
Registration Rights Agreement that grants Mr. Ecklund new demand registration
rights commencing after the fifth anniversary of the Recapitalization and grants
Mr. Weil new demand registration rights if a Termination Event shall occur with
respect to Mr. Weil. Under the amended and restated Equity Registration Rights
Agreement, if Mr. Ecklund or Weil exercises his demand right with respect to all
of his shares of Common Stock and any underwriter selected by Mr. Ecklund or Mr.
Weil, as the case may be, advises Holdings that such underwriter cannot sell all
such shares in such offering because such offering would not be large enough
then Mr. Ecklund and Mr. Weil, as applicable, shall each have the right to
require Holdings to sell in such offering newly issued shares of common stock
representing up to 30% of its shares in any underwritten offering, as the case
may be. In addition, if any underwriter advises Holdings that an offering of all
of Mr. Ecklund's or Mr. Weil's shares, as the case may be, in addition to any
other shares that are proposed to be registered under such registration
statement (including shares to be offered and sold by Holdings), can not be
consummated given the then current market conditions, then Mr. Ecklund's shares
would be entitled to be sold before any shares sold by Holdings or by any other
shareholder (including Mr. Weil) and Mr. Weil's shares would be entitled to be
sold before any shares sold by Holdings or by any other shareholder (other than
Mr. Ecklund). If Mr. Ecklund or
F-23
<PAGE> 130
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Mr. Weil exercises a demand registration right at any time, certain shareholders
of Holdings would have the right to purchase Mr. Ecklund's and/or Mr. Weil's
shares, as the case may be, for their fair market value. As amended and
restated, neither Mr. Ecklund nor Mr. Weil will have any put rights with respect
to shares of Holdings held by them.
Accordingly, at the date the new arrangements become operative, the amount
previously classified as Redeemable Class A Common Stock will be reclassified to
Stockholders' Deficit. At December 31, 1997, the aggregate value ascribed to the
Redeemable Class A Common Stock for these shares was $6,325. This amount has
been reclassified to Shareholders' Deficit in the accompanying unaudited pro
forma consolidated balance sheet at December 31, 1997.
NOTE 6. BRIDGE FACILITY
On the Recapitalization Date, Holdings borrowed $80 million under a Senior
Credit Agreement with Bankers Trust Company as agent ("BTCO") from Bankers Trust
New York Corporation ("BTNY"), an affiliate of BTCP, as initial lender (the
"Bridge Facility"). BTNY subsequently assigned a portion of the indebtedness to
other institutional investors. The Bridge Facility bears interest at the rate of
the three month LIBOR plus 6.0% per annum, such amount increasing by 50 basis
points per quarter during which the Bridge Facility is outstanding. Interest
cannot exceed 16% per annum and will accrue on a quarterly basis. Any
outstanding amount under the Bridge Facility at the end of twelve months
following Recapitalization will automatically convert to a term loan required to
be paid in full on the seventh anniversary of the Recapitalization. The
obligations of Holdings under the Bridge Facility are secured by certain
pledges.
For arranging and providing the Bridge Facility, BTCO and BTNY received
fees aggregating $2.4 million. A portion of the fees paid were paid to other
institutional investors to which the indebtedness was assigned.
The Bridge Facility was repaid by Holdings on February 23, 1998 with the
proceeds from the issuance by YAC of senior subordinated notes on that date (see
Note 10).
NOTE 7. INCOME TAXES
The income tax provision for the year ended December 31, 1997 consisted of
the following:
<TABLE>
<S> <C>
Current............................................... $ 6
Deferred.............................................. 417
----
$423
====
</TABLE>
The provision for income taxes includes a deferred component that arose
from (i) the Company's change in tax status discussed in Note 2 and (ii) the
recording of certain items in different periods for financial reporting and
income tax purposes. As of December 31, 1997, the tax effects of temporary
differences which give rise to a significant portion of deferred tax assets
(liabilities) are as follows:
<TABLE>
<S> <C>
Slippage........................................... $(1,458)
Net operating losses............................... 608
Deferred Compensation.............................. 433
Depreciation....................................... (207)
Self insurance reserves............................ 175
Other items........................................ 32
-------
$ (417)
=======
</TABLE>
F-24
<PAGE> 131
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
The Company's current period net operating loss will be available to offset
future tax liabilities through 2017. Based upon the Company's history of prior
operating earnings and its expectations for the future, management of the
Company has determined that it is more likely than not that taxable income will
be sufficient to utilize such attributes in their carryforward periods.
A reconciliation of income taxes computed at the statutory rates to the
reported income tax provision is as follows:
<TABLE>
<S> <C>
Taxes at federal statutory rates................... $(1,926)
Benefits accruing to former S corporation
stockholders..................................... 625
Liability triggered by the Company's change in tax
status........................................... 928
Non-deductible Recapitalization expenses........... 688
Other, net......................................... 108
-------
Provision for income taxes.................... $ 423
=======
</TABLE>
NOTE 8. EMPLOYMENT AGREEMENTS AND COMPENSATION MATTERS
Existing Change in Control Agreements with certain employees provide that
if the employee is terminated without cause or leaves the employment of Holdings
for good reason following a change in control, Holdings will pay to the employee
his or her annual base salary and, if applicable, the total commissions earned
for the preceding twelve month period and will continue the employee's benefits
for twelve months or until the employee obtains full time employment. As of
February 6, 1998, no payments had been made under the Change in Control
Agreements.
On November 24, 1997, Holdings and Mr. Weil entered into an employment
agreement (the "Weil Employment Agreement") pursuant to which Mr. Weil has
agreed to serve as the President and Chief Executive Officer of Holdings. The
term of the Weil Employment Agreement is initially three years and expires on
November 24, 2000, unless terminated earlier in accordance with its terms. The
Weil Employment Agreement replaced an earlier agreement between Holdings and Mr.
Weil (the "Old Employment Agreement"). Base compensation under the Weil
Employment Agreement is $300 per year and such amount will increase at a minimum
of 5% each calendar year beginning January 1, 1999. If Holdings terminates Mr.
Weil's employment without cause or Mr. Weil terminates his employment for good
reason, he is entitled to receive (i) his base salary for an eighteen-month
period following the effective date of termination and (ii) a pro rated portion
of his annual incentive bonus effective as of the date of termination.
During 1997, Mr. Weil participated in a special incentive bonus plan that
was based upon the achievement of certain performance targets for that year. Mr.
Weil was paid $900 with respect to such incentive bonus plan in January 1998 and
an additional $261 in March 1998 (such amounts were accrued as of December 31,
1997) pursuant to such incentive bonus plan following the approval of the annual
financial statements by the board of directors of Holdings (the "Board of
Directors"). In addition, on January 7, 1998, Mr. Weil received a bonus of $500
(which was also accrued as of December 31, 1997) in satisfaction of certain
obligations of Holdings to Mr. Weil under the Old Employment Agreement. For 1998
and all subsequent years under the Weil Employment Agreement, Mr. Weil will
participate in the Company's Annual Management Incentive Plan (discussed below)
as such plan may from time to time be amended.
In connection with the Recapitalization and pursuant to the terms of the
Old Employment Agreement, Mr. Weil received a special bonus from the Company of
$9,218. In addition, Mr. Weil may be entitled to receive up to an additional
$3,216, representing his pro rata portion of post-Recapitalization payments that
may be made to the Selling Stockholders and Messrs. Weil, Stinchfield and
Ferguson under the terms of the Recapitalization Agreement, as described in Note
4.
F-25
<PAGE> 132
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
On November 25, 1997 Holdings adopted the 1997 Management Recognition,
Transition and Equity Bonus Plan for officers and certain key management
employees, pursuant to which Holdings paid $2,650 in cash bonuses to certain
officers and employees of the Company. In connection with the Recapitalization,
the Company also paid a $600 special bonus to an employee pursuant to another
agreement. A portion of the proceeds of such bonuses were used to purchase Class
A Common Stock in connection with the Recapitalization.
The Company plans to implement annual bonus plans (such annual plans
referred to collectively as the "Annual Management Incentive Plans") pursuant to
which eligible members of management will each be entitled to receive
predetermined percentages of their base salaries if the Company's EBITDA exceeds
certain targets. The terms of the Annual Management Incentive Plan utilized
during any year and the eligible employees under each plan is within the sole
discretion of the Compensation Committee of the Board of Directors.
The Company has historically offered its employees participation in a
qualified 401(k)/profit-sharing plan which requires the Company to match
employee contributions up to predetermined limits for qualified employees as
defined by the plan. In addition, the Plan provides for additional employer
contributions which are made at the discretion of the Company's Board of
Directors. The Company intends to continue to offer a plan under which eligible
employees (as defined in the plan document) will be entitled to share in a bonus
pool (with each eligible employee sharing in the pool pro rata based upon such
employee's base salary) if the Company's EBITDA exceeds a predetermined target
level. As of December 31, 1997 and 1996, the Company accrued $1,875 and $940,
respectively, as discretionary profit sharing for the years then ended. Of these
amounts, approximately half was contributed directly to the plan, based upon
eligibility requirements, and the remainder was declared as discretionary
bonuses to employees during each of the respective periods. Each employee
receiving a discretionary bonus had a further option to contribute all or a
portion of such amount into the 401(k) plan.
The Company had a phantom stock bonus plan with two of its employees,
whereby each employee was awarded shares of phantom stock. Under the plan,
additional compensation payments to these employees were triggered by the
occurrence of certain events, as defined in the agreements, including certain
distributions paid to the Company's stockholders, the termination of employment,
or the change in control of the Company. Compensation expenses under this plan
were approximately $4,732, $298, and $142 for the years ended December 31, 1997,
1996 and 1995, respectively. In connection with the Recapitalization, this plan
was terminated, and as of December 31, 1997, the Company had paid substantially
all of its obligations under the plan.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Management Agreement
In connection with the Recapitalization, Holdings, BTCP and OTPPB entered
into a management agreement (the Management Agreement) relating to certain
services to be provided to Holdings in the future by BTCP and OTPPB. Under the
Management Agreement, BTCP and OTPPB will provide Holdings with, among other
services, financial and strategic planning and management consulting services
throughout the term of the Stockholders' Agreement. In consideration for the
services provided to Holdings under the Management Agreement, Holdings will pay
annual fees of $188 and $63 to BTCP and OTPPB, respectively. Also in connection
with the Recapitalization, Holdings paid BTCP and OTPPB one-time transaction
fees of $1,125 and $375, respectively, and reimbursed or paid expenses
(including legal and accounting fees and expenses) of BTCP and OTPPB of
approximately $1,000 and $50, respectively, incurred by such entities in
connection with the Recapitalization.
F-26
<PAGE> 133
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
Leases
The Company has operating leases for warehouse space and equipment. The
approximate future minimum payments under these obligations are as follows:
<TABLE>
<S> <C>
Years ending December 31:
1998............................................... $ 3,784
1999............................................... 3,069
2000............................................... 2,365
2001............................................... 809
2002............................................... 478
Thereafter......................................... 324
-------
$10,829
=======
</TABLE>
The preceding table includes the operating lease commitments related to a
recently established call center in Oklahoma. To support this call center, the
Company has committed or expects to commit to purchase various equipment and
leasehold improvements aggregating $500 and also intends to acquire a telephone
switch with a cost of $600 (such amounts were not included above). Furthermore,
the Company has committed to acquire additional IVR equipment and computer
hardware equipment with an aggregate cost of $5,900 (such amount was not
included above). The Company intends to finance such telephone switch and
equipment items through operating leases.
Total rent expense was $2,640, $2,008, and $1,318 for the years ended
December 31, 1997, 1996, and 1995, respectively.
Guarantees
Sweepstakes performance bonds are guaranteed for certain clients based on
certain financial criteria. Holdings had guaranteed approximately $6,200 and
$7,600 in performance bonds for various clients, as of December 31, 1997 and
1996, respectively. The Company also obtains an indemnity agreement from these
clients indemnifying the Company from obligations under the performance bonds.
Other Contingencies
Holdings is a party to a release and indemnity agreement (the "Release
Agreement") with the following former directors of the Company: Thomas O. Moe,
Albert O. Foster, Jerome J. Jenko and R. Gary St. Marie. Pursuant to the Release
Agreement, Holdings released and agreed to indemnify the enumerated directors
from claims arising from their past actions as directors of the Company.
Holdings' Articles of Incorporation releases its current directors from
liability incurred for breaches of fiduciary duties, subject to certain
exceptions.
Holdings and Young America Corporation have agreed to indemnify BT Alex.
Brown Incorporated, as the Initial Purchaser of the Notes (see Note 10), against
certain liabilities under the Securities Act of 1933.
NOTE 10. SUBSEQUENT EVENTS (UNAUDITED)
The Notes Offering
On February 23, 1998, YAC issued $80,000 in senior subordinated notes (the
"Notes") due in 2006 (the "Offering"). Interest on the Notes will be payable
semiannually in arrears on February 15 and August 15 of each year, beginning
August 15, 1998. The proceeds from the Notes issuance were distributed and
loaned by
F-27
<PAGE> 134
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
YAC to its parent, Holdings, and used by Holdings to repay amounts outstanding
under the Bridge Facility described in Note 6.
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. The guarantees will be subordinated to all existing and future senior
indebtedness of Holdings. YAC is a wholly owned subsidiary of Holdings. Separate
financial statements of YAC have not been presented as management has determined
that they would not be material to investors given that Holdings has provided a
guarantee of the Notes.
In connection with the Recapitalization discussed in Note 4, substantially
all of Holdings' assets and business were transferred to YAC. The following
table presents summarized pro forma financial information for Holdings and YAC
as if the guarantee structure had been in effect for all periods presented. The
only substantial asset retained by Holdings was certain real property which is
leased to YAC, at cost, for use in its operations.
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Holdings............................................. $ -- $ -- $ --
YAC.................................................. 175,297 135,716 116,268
-------- -------- --------
Consolidated...................................... $175,297 $135,716 $116,268
======== ======== ========
GROSS PROFIT
Holdings............................................. $ -- $ -- $ --
YAC 29,638 20,132 10,713
-------- -------- --------
Consolidated...................................... $ 29,638 $ 20,132 $ 10,713
======== ======== ========
NET (LOSS) INCOME
Holdings............................................. $ -- $ -- $ --
YAC.................................................. (5,925) 8,432 1,014
-------- -------- --------
Consolidated...................................... $ (5,925) $ 8,432 $ 1,014
======== ======== ========
CURRENT ASSETS
Holdings............................................. $ 357 $ --
YAC.................................................. 30,198 30,193
-------- --------
Consolidated...................................... $ 30,555 $ 30,193
======== ========
NONCURRENT ASSETS
Holdings............................................. $ 2,667 $ 2,674
YAC.................................................. 8,520 3,576
-------- --------
Consolidated...................................... $ 11,187 $ 6,250
======== ========
CURRENT LIABILITIES
Holdings............................................. $ -- $ --
YAC.................................................. 19,419 24,370
-------- --------
Consolidated...................................... $ 19,419 $ 24,370
======== ========
</TABLE>
F-28
<PAGE> 135
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
NONCURRENT LIABILITIES
Holdings............................................. $ -- $ --
YAC.................................................. 80,000 --
-------- --------
Consolidated...................................... $ 80,000 $ --
======== ========
</TABLE>
The Notes will not be redeemable at the option of YAC prior to February 15,
2002. Subsequent to that, the Notes will be redeemable, in whole or in part, at
the option of the YAC at the following redemption prices set forth herein, plus
accrued and unpaid interest to the date of redemption set forth below:
<TABLE>
<CAPTION>
PERCENTAGE
----------
<S> <C>
2002.............................................. 105.813%
2003.............................................. 103.875
2004.............................................. 101.938
2005 and thereafter............................... 100.000%
</TABLE>
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, 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.
The Notes are not subject to any sinking fund requirement. The Notes are
general unsecured obligations of the Company and will be subordinated in right
of payment to all existing and future senior indebtedness of the Company,
including indebtedness under the New Credit Facility (see below). As of December
31, 1997, on a pro forma basis after giving effect to the Offering and New
Credit Facility, the Company would have approximately $400 of senior
indebtedness outstanding (consisting of obligations under undrawn lines of
credit) and $8,600 of unused availability under the New Credit Facility.
The indenture under which the Notes were issued contains certain covenants
with respect to YAC and any future subsidiaries that will 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 Company's ability to consolidate or merge with or
into, or to transfer all or substantially all of its assets to another entity.
New Credit Facility
On April 7, 1998, YAC entered into a revolving credit facility (the "New
Credit Facility") with Norwest Bank Minnesota, N.A. ("Norwest"). The description
below of the New Credit Facility is subject to, and qualified in its entirety by
reference to, the definitive documentation for the New Credit Facility.
Under the New Credit Facility, borrowings are available equal to 85% of
eligible receivables subject to certain terms and conditions. The New Credit
Facility provides a $10,000 revolving credit facility, with an imbedded sublimit
of $1,000 available for letters of credit and borrowings accrue interest 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
2.50%, at YAC's option. The New Credit Facility also provides for an unused line
fee of 3/8 of 1% per annum on any undrawn amounts. The New Credit Facility has a
final maturity date of
F-29
<PAGE> 136
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
March 31, 2001 and does not require scheduled interim reductions or payments,
although YAC is permitted to make optional prepayments and commitment
reductions.
The New Credit Facility is secured by a first priority security interest in
the accounts receivable and related general intangibles of YAC. In addition,
under the New Credit Facility, YAC is required to comply with financial
convenants with respect to a minimum interest coverage ratio and a minimum
current ratio. The New Credit Facility contains other covenants that restrict
acquisitions, investments, dividends, liens, and other indebtedness (including
capital leases), management fees, disposition of assets, change of voting
control and guarantees.
If the Company were unable to borrow under the New Credit Facility due to a
default or failure to meet certain specified borrowing base prerequisites for
borrowing, it could be left without sufficient liquidity to conduct its business
as currently planned. The New Credit Facility contains a cross default provision
with the Notes.
F-30
<PAGE> 137
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES OR ANY OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF YOUNG AMERICA AND HOLDINGS SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. i
Prospectus Summary.................... 1
Risk Factors.......................... 16
Use of Proceeds....................... 25
The Exchange Offer.................... 26
The Recapitalization.................. 35
Capitalization........................ 36
Unaudited Pro Forma Consolidated
Financial Data...................... 37
Selected Historical and Pro Forma
Consolidated Financial Data......... 41
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 44
Business.............................. 52
Management............................ 61
Security Ownership of Certain
Beneficial Owners and Management.... 66
Certain Transactions.................. 70
Description of the New Credit
Facility............................ 72
Description of the Notes.............. 73
Certain Federal Income Tax
Considerations...................... 99
Book-Entry; Delivery and Form......... 101
Plan of Distribution.................. 102
Legal Matters......................... 103
Experts............................... 103
Index to Financial Statements......... F-1
</TABLE>
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$80,000,000
YOUNG AMERICA
CORPORATION
11 5/8% SERIES B SENIOR SUBORDINATED
NOTES DUE 2006
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PROSPECTUS
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AUGUST 6, 1998
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