<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______TO_______
--------------------------------
Commission File Number 333-49749
YOUNG AMERICA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1892816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 FAXON ROAD, YOUNG AMERICA, MINNESOTA 55397-9481
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (612) 467-1102
YOUNG AMERICA HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-0983697
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
717 FAXON ROAD, YOUNG AMERICA, MINNESOTA 55397-9481
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (612) 467-1102
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes XX No
The number of shares outstanding of the registrant's common stock as of
November 10, 1999, was 1,905,895.
<PAGE> 2
YOUNG AMERICA HOLDINGS, INC.
YOUNG AMERICA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
a) Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 1999, and 1998 . . . . . 1
b) Consolidated Balance Sheets
as of September 30, 1999, and December 31, 1998 . . . . . . . . . . . . . 2
c) Consolidated Statements of Cash Flow
For the Nine Months Ended September 30, 1999, and 1998 . . . . . . . . . . 3
d) Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . 9
Item 3. Quantitative and Qualitative Disclosure
About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 2. Changes in Securities & Use of Proceeds . . . . . . . . . . . . . . . . . 13
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . 13
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . 13
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
1999 1998 1999 1998
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Revenues $ 64,300 $ 53,640 $ 242,774 $ 162,400
Cost of revenues:
Rebates, postage and freight 46,368 38,142 180,422 115,603
Processing and servicing 12,548 12,559 41,881 35,941
--------- --------- ---------- ----------
Gross profit 5,384 2,939 20,471 10,856
Operating expenses:
Selling 1,449 1,535 4,574 4,455
General and administrative 2,600 1,286 7,014 3,848
--------- --------- ---------- ----------
4,049 2,821 11,588 8,303
--------- --------- ---------- ----------
Operating income 1,335 118 8,883 2,553
Other income (expense):
Interest expense (2,338) (2,379) (7,014) (7,123)
Interest income 184 103 505 517
Amortization of deferred financing costs (109) (99) (327) (3,523)
Other - (2) 1 (204)
--------- --------- ---------- ----------
(2,263) (2,377) (6,835) (10,333)
--------- --------- ---------- ----------
Income (loss) before provision for income taxes (928) (2,259) 2,048 (7,780)
Provision (Benefit) from income taxes (343) (836) 758 (2,869)
--------- --------- ---------- ----------
Net income (loss) $ (585) $ (1,423) $ 1,290 $ (4,911)
========= ========= ========== ==========
</TABLE>
1
<PAGE> 4
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
( IN THOUSANDS, EXCEPT FOR SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------ -----------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 11,907 $ 12,220
Trade receivables, net 14,081 16,184
Supplies inventory 766 759
Prepaid expenses 772 907
------------ -----------
Total current assets 27,526 30,070
Property and Equipment, at cost: 20,498 19,643
Less accumulated depreciation (12,808) (11,391)
------------ -----------
7,690 8,252
Deferred Financing Costs 2,780 3,108
Deferred Tax Assets 3,509 4,232
------------ -----------
TOTAL ASSETS $ 41,505 $ 45,662
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Noncleared rebate items $ 10,814 $ 14,066
Accounts payable 2,445 1,732
Collections due to and advances from clients 3,774 6,131
Deferred income taxes 896 897
Accrued expenses
Interest 1,188 3,514
Compensation 3,028 1,289
Other 2,905 2,481
------------ -----------
Total current liabilities 25,050 30,110
Senior Subordinated Notes 80,000 80,000
Other Long-Term Liabilities 86 391
Commitments and Contingencies (Note 3)
Redeemable Class A Common Stock, 36,759 and 40,894 shares
issued and outstanding 800 890
Stockholders' Deficit
Class A common stock, par value $1 per share; 3,000,000 shares authorized,
1,255,455 shares issued and outstanding 1,255 1,255
Class B common stock, par value $1 per share; 1,500,000 shares authorized,
442,884 shares issued and outstanding 443 443
Class C common stock, par value $1 per share; 1,500,000 shares authorized,
172,727 shares issued and outstanding 173 173
Additional paid-in capital 36,091 36,083
Retained deficit (102,393) (103,683)
------------ -----------
(64,431) (65,729)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 41,505 $ 45,662
============ ===========
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
Nine Months Ended
September 30,
----------------------------------
1999 1998
------------ -------------
Operating Activities:
<S> <C> <C>
Net (loss) income $ 1,290 $ (4,911)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,431 1,496
Amortization of deferred financing costs 328 3,523
Deferred income taxes 722 (2,878)
Changes in operating assets and liabilities:
Trade receivables 2,103 (4,214)
Supplies inventory (7) (24)
Prepaid expenses 135 (341)
Non-cleared rebate items (3,252) 5,914
Accounts payable 713 (335)
Collections due to and advances from clients (2,357) 2,377
Accrued expenses (163) (3,835)
Other, Net (305) -
---------------- ---------------
Net cash provided by operating activities 638 (3,228)
---------------- ---------------
Investing Activities
Purchases of property and equipment (869) (2,378)
---------------- ---------------
Net cash used in investing activities (869) (2,378)
---------------- ---------------
Financing Activities:
Repayment of Bridge Facility - (80,000)
Net Proceeds from senior subordinated debt - 76,539
Proceeds from stock subscriptions - 24
Redemption of common stock (82) (709)
Distributions paid to stockholders - -
---------------- ---------------
Net cash used in financing activities (82) (4,146)
---------------- ---------------
Change in cash and cash equivalents (313) (9,752)
Cash and Cash Equivalents:
Beginning of period 12,220 17,940
---------------- ---------------
End of period $ 11,907 $ 8,188
================ ===============
Suplemental Disclosures of Cash Flow Information:
Cash payment for interest $ 9,340 $ 4,484
================ ===============
Income Taxes Paid $ 35 $ 9
================ ===============
</TABLE>
3
<PAGE> 6
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements
(in thousands, except share data - unaudited)
================================================================================
1. Basis of Presentation - Principles of Consolidation
The accompanying consolidated financial statements have been prepared by the
Company and include the accounts of Young America Holdings, Inc.
("Holdings"), and its wholly-owned subsidiaries, Young America Corporation
("YAC") and YAC.ECOM, Inc. ("YAC.ECOM") collectively, the "Company". All
significant intercompany items have been eliminated. In the opinion of
management, all adjustments (which include reclassifications and normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows at September 30, 1999, and for all
periods presented, have been made. Separate financial statements of YAC and
YAC.ECOM have not been presented as management has determined that they
would not be material to investors given that (i) they are wholly-owned
subsidiaries of Holdings, (ii) YAC holds and represents substantially all of
the assets, liabilities, and operations of the consolidated entity, and
(iii) Holdings has provided a full and unconditional guarantee of the Notes
(as defined below).
On February 2, 1999, Holdings caused YAC.ECOM to be incorporated in the
State of Minnesota and thereafter Holdings acquired all of the outstanding
capital stock of YAC.ECOM. YAC.ECOM provides fulfillment services for
consumer product companies through its clients' internet sites.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
the information included in this Form 10-Q be read in conjunction with
Management's Discussion and Analysis and the financial statements and notes
thereto included in the Young America Holdings, Inc., Annual Report on Form
10-K for the year ended December 31, 1998.
2. DEBT
On February 23, 1998, YAC issued $80,000 principal amount of 11 5/8% Senior
Subordinated Notes due 2006 (the "Notes"). Interest on the Notes is
payable semiannually in arrears on February 15 and August 15 of each year,
beginning August 15, 1998. The net proceeds of the offering of the Notes,
along with $5,391 in cash, were used to repay, in full, amounts outstanding
under a senior bridge credit facility (the "Bridge Facility"). In
connection with the repayment of the Bridge Facility, the Company wrote off
$3,292 of the deferred financing costs in February 1998.
The Notes are unconditionally guaranteed, on an unsecured senior
subordinated basis, by Holdings. The guarantee, which is full and
unconditional and which is being provided on a joint and several basis with
any future subsidiaries of YAC that become guarantors, is a general
unsecured obligation of Holdings. YAC.ECOM is not a guarantor of the Notes.
The Notes are not redeemable prior to February 15, 2002, except as provided
below. On or after such date, the Notes are redeemable, in whole or in
part, at the option of YAC at the following redemption prices set forth
herein, plus accrued and unpaid interest to the date of redemption set
forth below:
<TABLE>
<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 (as defined in the indenture under which the Notes
were issued ("Indenture")), each holder of Notes will have the right to
require YAC to repurchase such holder's Notes at a price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest, if any, to
the repurchase date.
4
<PAGE> 7
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
============================================================================
The Notes are not subject to sinking fund requirements. The Notes and the
guarantees of the Notes by Holdings are general unsecured obligations of YAC
and Holdings, respectively, and are subordinated in right of payment to all
existing and future senior indebtedness of YAC and Holdings, respectively,
including YAC's obligations under the Credit Facility referred to hereinafter.
The Indenture contains certain covenants with respect to YAC, and any future
subsidiaries YAC may form or acquire, that restrict, among other things, the
incurrence of additional indebtedness, the payment of dividends and other
restricted payments, the creation of certain liens, the use of proceeds from
sales of assets and subsidiary stock, and transactions with affiliates. The
Indenture also restricts the ability of Holdings and YAC to consolidate or
merge with or into, or to transfer all or substantially all of their
respective assets to, another entity.
The Company has a revolving credit facility ("Credit Facility") with Norwest
Bank Minnesota, N.A. ("Norwest"), which provides for borrowings of up to
$10,000 based on a borrowing base formula equal to 85% of Eligible Receivables
less Noncleared Rebate Items net of cash and cash equivalents (as defined in
the Credit Facility), and has a final maturity date of March 31, 2001. The
Credit Facility does not have any commitment reductions scheduled before
maturity. Borrowings under the Credit Facility will accrue interest, at the
option of the Company, at either Norwest's base rate or at an interest rate
equal to the London interbank rate for Eurodollar deposits for one, two or
three month interest periods plus 2.5%. A fee of .5% per annum is payable with
respect to the unused Commitment Amount (as defined in the Credit Facility).
The Credit Facility is secured by a first-priority interest in accounts
receivable and related general intangibles of YAC.
The Credit Facility was amended on November 16, 1998 and March 12, 1999 to
revise certain restrictive covenants contained in the original agreement. The
Credit Facility currently requires Young America to maintain (i) commencing
with the quarter ending December 31, 1999 and for each quarter thereafter, a
minimum Interest Coverage Ratio (as defined in the Credit Facility) for the
preceding four quarters of 1.35; (ii) a minimum Current Ratio (as defined in
the Credit Facility) of 1.10 for each quarter commencing with the quarter ended
September 30, 1999; and (iii) for the nine months ended September 30, 1999, a
minimum cumulative EBITDA of $9,500. Based on its current operating results
and business plans, the Company believes that it will be able to satisfy these
requirements. The Credit Facility restricts Young America's capital
expenditures to $500 per quarter and cumulative annual capital expenditures to
$2,000. In addition, the Credit Facility, contains other covenants that, among
other things, restrict acquisitions, investments, dividends, liens and other
indebtedness, management fees, disposition of assets, change of voting control
and guarantees.
3. CONTINGENCIES
Leases
The Company has operating leases for warehouse space and equipment. The
future minimum payments under these obligations are as follows:
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999.......... $6,445
2000.......... 5,402
2001.......... 2,603
2002.......... 1,034
2003.......... 331
</TABLE>
5
<PAGE> 8
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
================================================================================
Guarantees
Sweepstakes performance bonds are guaranteed for certain clients based on
certain financial criteria. The Company had guaranteed approximately $34,779
and $9,978 in performance bonds for various clients, as of September 30, 1999,
and December 31, 1998, respectively. The Company also obtains an indemnity
agreement from these clients indemnifying the Company from obligations under
the performance bonds.
4. RECAPITALIZATION
Prior to November 25, 1997, all of the capital stock of Holdings (formerly
known as Young America Corporation) was owned by Jay F. Ecklund, its then
Chairman and Chief Executive Officer, and certain trusts for the benefit of
members of his family (the "Selling Shareholders"). On that date, Holdings
effected a recapitalization (the "Recapitalization"), pursuant to a
recapitalization agreement (the "Recapitalization Agreement") under which
substantially all of Holdings' assets and business were transferred to a newly
formed subsidiary, Young America Corporation, and Holdings changed its name to
Young America Holdings, Inc. The following table presents summarized
Statement of Operations information for Holdings, YAC and YAC.ECOM for the
three and nine months ended September 30,1999 and September 30, 1998; and
summarized Balance Sheet information as of September 30, 1999, and December
31, 1998. The only substantial asset retained by Holdings in the
Recapitalization was certain real property, which is leased to YAC, at cost,
for use in its operations.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1999 1998 1999 1998
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Revenues:
Holdings $ - $ - $ - $ -
YAC 64,243 53,640 242,705 162,400
YAC.ECOM 57 - 69
---------- ---------- ---------- -----------
Consolidated $ 64,300 $ 53,640 $ 242,774 $ 162,400
========== ========== ========== ===========
Gross Profit:
Holdings $ - $ - $ - $ -
YAC 5,393 2,939 20,480 10,856
YAC.ECOM (9) - (9) -
---------- ---------- ---------- -----------
Consolidated $ 5,384 $ 2,939 $ 20,471 $ 10,856
========== ========== ========== ===========
Net (loss) Income:
Holdings $ 2 $ 4 $ 6 $ 12
YAC (578) (1,427) 1,293 (4,923)
YAC.ECOM (9) - (9) -
---------- ---------- ---------- -----------
Consolidated $ (585) $ (1,423) $ 1,290 $ (4,911)
========== ========== ========== ===========
</TABLE>
6
<PAGE> 9
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
================================================================================
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------ -----------
<S> <C> <C>
Current Assets:
Holdings $ 383 $ 373
YAC 27,102 29,697
YAC.ECOM 41 -
---------- -----------
Consolidated $ 27,526 $ 30,070
========== ===========
Noncurrent Assets:
Holdings $ 2,396 $ 2,512
YAC 11,583 13,080
YAC.ECOM - -
---------- -----------
Consolidated $ 13,979 $ 15,592
========== ===========
Current Liabilities:
Holdings $ - $ -
YAC 25,007 30,110
YAC.ECOM 43
---------- -----------
Consolidated $ 25,050 $ 30,110
========== ===========
Noncurrent Liabilities:
Holdings $ - $ -
YAC 80,086 80,391
YAC.ECOM - -
---------- -----------
Consolidated $ 80,086 $ 80,391
========== ===========
</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 in the Recapitalization Agreement) of Holdings as of October 31,
1997, and Holdings profits or losses (as defined) for the period ended on the
date of Recapitalization. Also, in connection with the Recapitalization,
Holdings is obligated to make additional payments to the former majority
shareholders, subject to Holdings achieving certain targets defined in the
Recapitalization Agreement. To the extent cumulative excess free cash flow
(as defined in the Recapitalization Agreement) of the Company for the
four-year period ending December 31, 2001, exceeds $93,000, Holdings is
required to make an additional purchase price payment equal to 20% of such
excess, subject to a maximum amount payable of $15,000. Under separate
agreements with certain employees of the Company and the former majority
shareholders, a portion of this additional purchase price payment will be
payable to such individuals. Any payments made to management will result in
compensation charges in the period the amount becomes determinable.
Redeemable Class A Common Stock
Redeemable Class A Common Stock has been valued at the same per share price as
the per share valuation at the date of the Recapitalization in November 1997.
Pursuant to the terms of certain stock repurchase agreements executed by
Holdings and its employee-stockholders, the Company exercised its rights to
repurchase stock of former employees. In the first quarter of 1999, 4,136
shares of stock were redeemed for a total of $82. In the opinion of
management, there has not been any increase in the per share valuation since
such date.
7
<PAGE> 10
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
============================================================================
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", effective for
years beginning after June 15, 2000. SFAS No. 133 established accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value.
SFAS No.133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge criteria are met. Special
accounting for qualifying hedges allow a derivative's gains or losses to
offset related results on the hedged item in the income statement and requires
that a company must formally document, designate and assess the effectiveness
of transactions that receive hedge accounting. The Company expects this
statement to have no impact upon adoption.
6.Segment Reporting:
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company provides consumer interactive
processing services for its customers and operates as a single reportable
business segment. The Company internally evaluates its business principally by
revenue category; however, because of the similar economic characteristics of
the operations, including the nature of services and the customer base, those
operations have been aggregated following the provisions of SFAS No. 131 for
segment reporting purposes.
The following is a summary of the composition of revenues by revenue category
for the three and nine months ended September 30, 1999, and 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- --------------------------
1999 1998 1999 1998
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
CIP services $ 14,983 $ 13,418 $ 53,823 $ 40,723
Rebate revenues 44,360 35,718 173,819 106,341
Postage and freight billings 4,957 4,504 15,132 15,336
---------- ---------- ----------- -----------
$ 64,300 $ 53,640 $ 242,774 $ 162,400
========== ========== =========== ===========
</TABLE>
8
<PAGE> 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenues. Revenues were $64.3 million in the third quarter of 1999, an
increase of 19.9% over the comparable quarter of 1998. On a year-to-date
basis, revenues were $242.8 million, 49.5% greater than the same period of
1998. The increase in revenues in the third quarter was a result of an
increase in rebate revenues of $8.6 million and an increase in servicing
revenues of $1.6 million. The increase in revenues in the nine months ended
September 30, 1999 was a result of (i) an increase in rebate revenues of $67.5
million and (ii) an increase in servicing revenue of $13.1 million. These
increases were primarily driven by the increased volume from existing clients
and the addition of new clients who conduct high-dollar value rebate programs
and require integrated fulfillment and call center servicing. In addition,
there was a slight increase in postage and freight revenues ("PFR") of $.5
million for the three month period ended September 30, 1999 compared to the
same period in 1998. On a year to date basis PFR revenues were down $.2
million from the same period of 1998.
Gross Profit. The Company's gross profit increased to $5.4 million or 8.4% of
revenues for the third quarter of 1999 as compared to $2.9 million or 5.5% of
revenues for the third quarter of 1998. Gross profits were $20.5 million or
8.4% of revenues in the nine months of 1999 as compared to $10.9 million or
6.7% of revenues for the same period in 1998. The increase in gross profit
margin for both the three and nine month periods was primarily the result of
the full year effect of the cost saving initiatives implemented in the second
half of 1998. These included the consolidation of the Albert Lea, Minnesota and
Belle Plaine, Minnesota facilities into the other existing facilities and the
consolidation of the Young America, Minnesota call center into the Mankato,
Minnesota and Oklahoma City, Oklahoma call centers. The Company has continued
to implement additional cost-savings initiatives in 1999 including the
consolidation of some inbound operations from the Mankato, Minnesota location
into the Young America, Minnesota location, the development of an outsourcing
relationship to process inbound mail sortation, and the consolidation of the
Winthrop, Minnesota outbound facility into the existing Glencoe, Minnesota
facility .
Operating Income. Operating income for the third quarter of 1999 increased to
$1.3 million from $.1 million for the corresponding period of 1998. As a
percentage of revenues, operating income was 2.1% for the quarter ended
September 30, 1999 compared with .2% for the corresponding period of 1998. Year
to date operating income was $8.9 million or 3.7% of revenues as compared to
$2.6 million or 1.6% of revenues for the first nine months of 1998. The
increase in the quarter and year-to-date operating income was a result of the
increase in gross profits partially offset by an increase in selling, general
and administrative expenses. Selling, general and administrative expenses
increased $1.2 million and $3.3 million in the three and nine month periods
ended September 30, 1999, respectively, compared to the corresponding periods
last year. The increases related primarily to i) a $.7 million increase in the
reserve for bad debt associated with a potential client bankruptcy ii)
expenses related to Year 2000 compliance, and iii) increases in bonus, profit
sharing and commissions associated with higher sales and profitability.
Interest Expense. For the three and nine month periods ending September 30,
1999, the $2.3 million of interest expense is principally accrued interest on
the Company's Senior Subordinated Notes due 2006(the "Notes") with a small
amount related to fees associated with non-usage of its bank credit facility.
Amortization of deferred financing costs of $.3 million in the first nine
months of 1999 decreased by $3.2 million from the same period in 1998.
Amortization expenses in the first nine months of 1998 included $3.3 million of
costs associated with obtaining a senior bridge credit facility (the "Bridge
Facility"), which costs were fully amortized upon repayment of the Bridge
Facility with the proceeds of the Notes.
Income Taxes. The Company recorded an income tax benefit of $.3 million and an
income tax provision of $.8 million for the three and nine months ended
September 30, 1999, respectively, as compared to an income tax benefit of $.8
and $2.9 million, respectively, for the corresponding periods in 1998. These
increases are a result of a change in profitability.
9
<PAGE> 12
Net Income. As a result of the foregoing factors, the Company reported a net
loss of $.6 million for the three month period ended September 30, 1999 and net
income of $1.3 million for the nine month period ended September 30,1999, as
compared to a net loss of $1.4 and $4.9 million, respectively, for the
corresponding periods in 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999 no amounts were outstanding under the Company's $10
million credit facility (the "Credit Facility") with Norwest Bank Minnesota,
N.A. ("Norwest"), and the Company had a stockholders' deficit of $64.4 million,
indebtedness of $80.0 million represented by the Notes and net working capital
of $2.5 million. For additional information with respect to the Notes, see
Note 2 of the Unaudited Consolidated Financial Statements.
The Company has historically financed its operations and capital expenditures
principally through the retention of cash flow from operations. The Company
also maintains the Credit Facility, which is collateralized by accounts
receivable and other assets as detailed below. In addition, the Company
operates facilities and technology-related equipment under operating leases
with third parties. See Note 3 of the Unaudited Consolidated Financial
Statements for a summary of Company commitments under such operating lease
agreements.
For the nine-month period ended September 30, 1999, the Company's operations
generated cash of $.6 million compared to cash utilization of $3.2 million for
the same period in 1998. The change in operating cash flow is primarily related
to the increased profitability in 1999. The Company's future cash flow from
operations will continue to reflect (i) income taxes that the Company is
required to pay and (ii) interest that will be incurred on outstanding
indebtedness, including the Notes.
Net cash used in investing activities for the nine month periods ended
September 30, 1999 and 1998 were $.9 million and $2.4 million, respectively.
These capital expenditures principally relate to purchases of leasehold
improvements and warehousing and packaging equipment related to fulfillment
services provided by the Company. The Company's capital expenditure budget
for 1999 totals $1.1 million. This budget may be changed by the Company during
1999 based upon the Company's results of operations during the year. The
Company anticipates that capital expenditures for 1999 will not exceed $1.5
million.
Net cash used in financing activities for the nine months ended September 30,
1999 and 1998 were $.1 million and $4.1 million respectively. Cash used in
the first nine months of 1998 reflects the payment of financing costs
associated with the placement of the Notes. Pursuant to the terms of the
Recapitalization, following December 31, 2001, the Company is obligated to make
additional payments, not to exceed $15 million, to the Selling Stockholders and
certain employees of the Company, subject to the Company achieving certain
performance targets set forth in the agreements relating to the
Recapitalization. See Note 4 of the Unaudited Consolidated Financial
Statements.
The Credit Facility, as amended, provides for borrowings of up to $10.0 million
based on a borrowing base formula equal to 85% of Eligible Receivables less
Noncleared Rebate Items net of cash and cash equivalents (as defined in the
Credit Facility) and has a final maturity date of March 31, 2001. The Credit
Facility does not have any commitment reductions scheduled before maturity.
Borrowings under the Credit Facility accrue interest, at the option of the
Company, at either Norwest's base rate or at an interest rate equal to the
London interbank rate for Eurodollar deposits for one, two or three month
interest periods plus 2.5%. A fee of .5% per annum is payable with respect to
the unused Commitment Amount (as defined in the Credit Facility). The Credit
Facility is secured by a first priority interest in accounts receivable and
related general intangibles of YAC.
The Credit Facility contains restrictive covenants that require the Company to
maintain (i) commencing with the quarter ending December 31, 1999 and for each
quarter thereafter, a minimum Interest Coverage Ratio (as defined in the Credit
Facility) for the preceding four quarters of 1.35; (ii) a minimum Current Ratio
(as defined in the Credit Facility) of 1.10 for each quarter commencing with
the quarter ended September 30, 1999; and (iii) for the nine months ending
September 30, a minimum cumulative EBITDA of $9.5 million. The Credit Facility
also limits capital expenditures to $0.5 million per quarter and cumulative
annual capital expenditures to $2.0 million. In addition, the Credit Facility
contains other covenants that, among other things, restrict acquisitions,
investments, dividends, liens and other
10
<PAGE> 13
indebtedness, management fees, disposition of assets, change of voting control
and guarantees. The Company was in compliance with all required covenants as
of September 30, 1999.
In compliance with certain state laws, the Company obtains performance bonds in
connection with sweepstakes programs it manages on behalf of its clients. The
Company is indemnified by its clients for any obligations on those performance
bonds, and the cost to the Company of obtaining the performance bonds plus a
markup is billed to the clients.
As referenced in the Company's report on Form 10-Q for the period ended June
30, 1999, management continues to review the costs and benefits of a potential
consolidation or other affiliation with Distribution Associates, Inc. ("DAI"),
a third party fulfillment company for direct mail catalogs. DB Capital
Partners, Inc. (formerly BT Capital Partners, Inc.), the majority shareholder
of the Company, controls a majority of the economic interests of DAI. No
assurance can be given as to what form the transaction may take, as to the
manner any such transaction may be financed, or that such a transaction will or
will not be consummated. The Company continues to evaluate and pursue selective
acquisitions that offer a strong strategic fit with the Company's existing core
competencies and/or allow it to develop or strengthen partnerships with select
clients.
The Company's ability to pay principal and interest on the Notes and to satisfy
its other debt obligations will depend upon its future operating performance,
which performance will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the control
of the Company. The Company's ability to pay principal and interest on the
Notes and to satisfy its other debt obligations will also depend upon the
future availability of revolving credit borrowings under the Credit Facility or
any successor facility. Such availability is or may depend on, among other
things, the Company meeting certain specified covenants and borrowing base
prerequisites. The Company expects that, based on current and expected levels
of operations, its operating cash flow, together with borrowings under the
Credit Facility, should be sufficient to meet its operating expenses, to make
necessary capital expenditures and to service its debt requirements as they
become due, for the next 12 months. The Company also expects to continue to
utilize operating leases to finance its needs for facilities and certain
equipment. If the Company is unable to service its indebtedness, it will be
forced to take actions such as reducing operating expenses, reducing or
delaying acquisitions and/or capital expenditures, selling assets,
restructuring or refinancing its indebtedness (which could include the Notes),
or seeking additional equity capital. There is no assurance that any of these
remedies can be effected on satisfactory terms, if at all.
Year 2000 Issues
As the end of the 20th century approaches, most businesses face the challenge
of ensuring that their software and hardware resources, and ultimately the
automated processing and business activities that depend on information flow,
will continue to function into the 21st century. The "Year 2000 problem",
which arises from the use of a two-digit field to identify years in computer
software and hardware and the assumption of a single millennium - the 1900's,
is expected to cause many business systems to fail or produce inaccurate
results. The Company believes it is well positioned to address these issues
and bring its systems and business operations into compliance. An
enterprise-wide program is currently underway with the goal of achieving Year
2000 compliance.
The Company has completed an internal review of its systems and operations.
The inventory and assessment of internal information technology and non-IT
systems have been inventoried, and the process of remediation, as appropriate,
has been completed. The testing of the mission critical systems is in process
with the initial test of data, corresponding test scenarios and the critically
identified dates completed. Based on the information available to date, the
Company does not anticipate any significant readiness problems with respect to
its systems. The Company expects contingency plans, where appropriate, to be
completed by the end of the year. The Company anticipates that it will incur
incremental costs not to exceed $.5 million in total in addressing Year 2000
issues, of which approximately $.2 million has been incurred through September
30, 1999.
In an effort to review the systems of its key vendors and suppliers, the
Company has sent to them Year 2000 questionnaires and has evaluated the
responses. Based on the information received to date, the Company does not
expect any significant problems; however, if the Company's telecommunication
providers fail to meet their Year 2000 system requirements on a timely basis,
the Company's call center operations could be significantly impacted. The
Company is using a similar process to evaluate the Year 2000 readiness of its
clients. The outcome of the Company's Year 2000 program is subject to a number
of
11
<PAGE> 14
risks and uncertainties, some of which are beyond its control. Therefore,
there can be no assurances that the Company will not incur material costs
beyond the above-anticipated costs, or that the Company's business, financial
condition, or results of operations will not be significantly impacted due to
Year 2000 issues.
Forward Looking Statements
This report on Form 10-Q contains forward-looking statements that involve risk
and uncertainties. All statements other than statements of historical facts
included in this report on Form 10-Q, including, without limitation, statements
regarding the future financial position of the Company, business strategy,
budgets, projected costs and plans and objectives of management for future
operations are forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking
terminology such as "may", "will", "expect", "intend", "estimate",
"anticipate", "believe" or similar words. Those forward-looking statements are
subject to known and unknown risks, uncertainties and other factors that could
cause actual results to differ materially form those contemplated by the
forward-looking statements. Important factors that could cause actual results
to differ materially from those expressed or implied by these forward-looking
statements are discussed under this heading "Management Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this report
on Form 10-Q and in the other documents and reports filed by the Company with
the Securities and Exchange Commission, including the registration statement
relating to the Notes. All subsequent written and oral forward-looking
statements attributable to Holdings, YAC or YAC.ECOM or persons acting on their
behalf are expressly qualified in their entirety by these factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in interest
rates. Market risk is the potential loss arising from adverse changes in
market rates and prices, such as interest rates. The Company does not enter
into derivative or other financial instruments for trading or speculative
purposes.
The Company manages its interest rate by balancing the amount of fixed and
variable debt. For fixed rate debt, interest changes affect the fair market
value but do not impact earnings or cash flows. Conversely for variable rate
debt, interest rate changes generally do not affect the fair market value but
do impact future earnings and cash flows, assuming other factors are held
constant. At September 30, 1999, the Company had fixed rate debt of $80.0
million and variable rate available borrowings up to $10.0 million under the
Credit Facility.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES & USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as follows.
27. Financial Data Schedule.
(b) Reports on Form 8-K
None.
13
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Young America Corporation
Date: November 12, 1999 By: /s/ CHARLES D. WEIL
----------------------------
Name: Charles D. Weil
Title: President
Young America Holdings, Inc.
Date: November 12, 1999 By: /s/ CHARLES D. WEIL
----------------------------
Name: Charles D. Weil
Title: President
14
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