<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 1999
REGISTRATION NO. 333-49749
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
POST EFFECTIVE AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
YOUNG AMERICA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MINNESOTA 8980 41-1892816
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
717 FAXON ROAD
YOUNG AMERICA, MINNESOTA 55397 (612)467-1100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
YOUNG AMERICA HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
MINNESOTA 8980 41-0983697
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
717 FAXON ROAD
YOUNG AMERICA, MINNESOTA 55397 (612)467-1100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHARLES D. WEIL
CHIEF EXECUTIVE OFFICER
717 FAXON ROAD
YOUNG AMERICA, MINNESOTA 55397 (612)467-1100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
WITH A COPY TO:
JAMES M. LURIE, ESQ.
O'SULLIVAN GRAEV & KARABELL, LLP
30 ROCKEFELLER PLAZA
NEW YORK, NEW YORK 10112
(212) 408-2400
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ------------
------------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE> 2
EXPLANATORY NOTE
THIS REGISTRATION STATEMENT COVERS THE REGISTRATION OF $80,000,000
PRINCIPAL AMOUNT OF 11 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2006 (THE
"NOTES") OF YOUNG AMERICA CORPORATION ("YOUNG AMERICA"), AND THE GUARANTEE
THEREOF BY YOUNG AMERICA HOLDINGS, INC. ("HOLDINGS"), FOR RESALE BY BT ALEX.
BROWN INCORPORATED IN MARKET-MAKING TRANSACTIONS.
<PAGE> 3
YOUNG AMERICA CORPORATION
YOUNG AMERICA HOLDINGS, INC.
CROSS REFERENCE SHEET
PURSUANT TO REGULATION S-K, ITEM 501(b),
Showing Location of Information Required by Items of Form S-4
<TABLE>
<CAPTION>
FORM S-4 LOCATION OR
ITEM NUMBER AND CAPTION CAPTION IN PROSPECTUS
----------------------- ---------------------
<C> <S> <C>
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus..... Facing Page of Registration Statement;
Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus.............................. Inside Front and Outside Back Cover Pages
of Prospectus; Available Information
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information.............. Prospectus Summary; Risk Factors; Selected
Historical Consolidated Financial Data
4. Terms of the Transaction................... Prospectus Summary; Description of the
Notes
5. Pro Forma Financial Information............ *
6. Material Contracts with the Company Being
Acquired................................... *
7. Additional Information Required for
Reoffering by Persons and Parties Deemed to
be Underwriters............................ Plan of Distribution
8. Interests of Named Experts and Counsel..... *
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities................................ *
10. Information With Respect to S-3
Registrants................................ *
11. Incorporation of Certain Information by
Reference.................................. *
12. Information With Respect to S-2 or S-3
Registrants................................ *
13. Incorporation of Certain Information by
Reference.................................. *
14. Information With Respect to Registrants
Other Than S-2 or S-3 Registrants.......... Prospectus Summary; Risk Factors; Selected
Historical Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Experts
15. Information With Respect to S-3 Companies.. *
16. Information With Respect to S-2 or S-3
Companies.................................. *
17. Information With Respect to Companies Other
Than S-2 or S-3 Companies.................. *
18. Information if Proxies, Consents or
Authorization Are to be Solicited.......... *
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited, or
in an Exchange Offer....................... Management; Security Ownership of Certain
Beneficial Owners and Management; Certain
Transactions
</TABLE>
- ---------------
* Not applicable or answer is in the negative.
<PAGE> 4
PROSPECTUS
YOUNG AMERICA CORPORATION
11 5/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2006
We issued $80,000,000 aggregate principal amount of our 11 5/8% Series B
Senior Subordinated Notes due 2006 (the "Notes"), guaranteed by our parent,
Young America Holdings, Inc. ("Holdings"), in exchange for our outstanding
11 5/8% Series A Senior Subordinated Notes due 2006 (the "Old Notes"), also
guaranteed by Holdings. We will pay interest on the Notes semi-annually on
February 15 and August 15 of each year.
The Notes will mature on February 15, 2006. However, we may redeem some or
all of the Notes after February 15, 2002. In addition, we may redeem up to 35%
of the Notes prior to February 15, 2001 with the net proceeds of one or more
public equity offerings. Upon a change of control, each holder of Notes may
require that we repurchase all or any part of the Notes.
The Notes are our general unsecured obligations and are subordinated to all
of our existing and future senior debt. The Notes rank equally with all our
existing and future senior subordinated debt and are senior to all our other
subordinated debt. Young America Holdings, Inc., our parent, has unconditionally
guaranteed the Notes on a senior subordinated basis. As of December 31, 1998, we
and our parent have approximately $0.3 million of senior debt outstanding.
We prepared this Prospectus for use by BT Alex.Brown Incorporated in
connection with offers and sales related to market-making transactions in the
Notes. BT Alex.Brown may act as principal or agent in these market-making
transactions. Such sales will be made at prices related to prevailing market
rates at the time of sale. See "Plan of Distribution."
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR INFORMATION YOU SHOULD CONSIDER
BEFORE INVESTING IN THE NOTES.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
BTALEX.BROWN
APRIL , 1999
<PAGE> 5
FORWARD-LOOKING STATEMENTS
This Prospectus includes forward-looking statements regarding our future
financial position, business strategy, budgets, projected costs and plans and
objectives of management for future operations. Forward-looking statements
generally can be identified by the use of forward-looking terms such as "may",
"will", "expect", "intend", "estimate", "anticipate", "believe", or "continue."
Although we believe that the expectations reflected in such forward-looking
statements are reasonable, those statements are subject to a number of known and
unknown risks, uncertainties and other factors that could cause our actual
results to differ materially from those contemplated by such "forward looking"
statements. Important factors that could cause actual results to be materially
different from the those anticipated in "forward looking" statements are set
forth under the heading "Risk Factors" and throughout this Prospectus.
AVAILABLE INFORMATION
We have filed with the Commission a Registration Statement on Form S-4 with
respect to the Notes. This Prospectus does not contain all of the information
set forth in the Registration Statement. Statements made in this Prospectus
regarding the contents of any contract, agreement or other document are
summaries and we urge you to refer to such contract, agreement or other document
filed as an exhibit to this Registration Statement, for a more complete
description of such contracts, agreements and other documents.
You may inspect the Registration Statement without charge at the Public
Reference Section of the Securities and Exchange Commission (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. You may also obtain copies
of such material 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
a fee. You may also inspect such materials on the Internet at
http://www.sec.gov.
We and our parent, Young America Holdings, Inc. ("Holdings"), are subject
to the informational reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith file reports
and other information with the Commission. Such materials filed by us and our
parent with the Commission may be inspected and copied at the places set forth
above.
Whether or not we are subject to the reporting requirements of the Exchange
Act, we have agreed to deliver to the Trustee and to each holder of the Notes,
within 15 days after it is or would have been required to be filed with the
Commission, annual and quarterly financial statements substantially equivalent
to financial statements that would have been included in reports filed with the
Commission under the Exchange Act, including, with respect to annual information
only, a report thereon by its certified independent public accountant, and, in
each case, together with a management's discussion and analysis of financial
condition and results of operations. We will also make such information
available to securities analysts and prospective investors upon request.
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<PAGE> 6
PROSPECTUS SUMMARY
The following summary highlights selected information from this Prospectus
and may not contain all of the information that is important to you. This
Prospectus includes the specific terms of the Notes, as well as information
regarding our business and detailed financial data. We encourage you to read
this Prospectus in its entirety. Unless otherwise indicated or the context
otherwise requires, "Young America" means Young America Corporation, "Holdings"
or the "Guarantor" means our parent, Young America Holdings, Inc., and the words
"the Company", "we," "our," "ours" and "us" refer to Young America and our
parent, Young America Holdings, Inc.
THE COMPANY
We provide a wide range of consumer interaction processing ("CIP") services
to large consumer product and consumer service companies. The services we have
historically provided include the handling and processing of consumer responses
to client marketing programs (especially rebates and premium programs). Our
clients utilize various marketing programs to establish relationships with their
customers and contract with us 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.
Our more than 200 clients include such well-known companies as Sprint
Corporation, Anheuser-Busch Companies, Inc., General Mills, Inc., R.J. Reynolds
Tobacco Company, Eastman Kodak Company and Hewlett-Packard Co. Our CIP services
provide a link between our 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. We provide a variety of services involved in executing these marketing
programs, including:
- order processing (including the handling of mail, telephone calls,
facsimiles and electronic mail received from consumers),
- fulfillment (including the delivery of product premiums and samples as
well as rebate checks to consumers),
- data gathering, analysis and reporting and
- related customer service (including receiving and responding to consumer
inquiries).
CIP services improve the marketing efforts of consumer-oriented companies
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, we
have identified a trend among our clients toward the targeted marketing
approach, including an increase in the use of consumer promotion programs such
as premium programs and product sampling programs. Because we believe that our
clients have found these programs to be both effective and efficient, we believe
that these trends will continue.
We have also observed a trend among our 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 are designed to provide consumer-oriented
companies with an opportunity to gather information about their customers. We
believe 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 we have enhanced our
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
1
<PAGE> 7
complex marketing programs. We believe that the breadth of our services and our
ability to integrate such services to support complex marketing programs have
distinguished us from the majority of our competitors, most of which offer a
narrower range of services and serve a smaller number of clients. We believe
that our broad service offering, together with our sophisticated information
systems and quality control processes, has enabled us to become a leading
provider of business-to-consumer CIP services.
In each of the last three fiscal years, we managed over 3,500 marketing
programs, with between 1,500 and 2,000 programs being processed at any point in
time. As of December 31, 1998, we were processing approximately 1,800 client
marketing programs. In each of the last three fiscal years, we distributed over
40 million items to our clients' customers. Items distributed by us have ranged
from rebate checks to sales literature to large and small items of merchandise
as premiums and product samples.
For the year ended December 31, 1998, we had revenues of $239.0 million and
EBITDA, as adjusted (as defined) of $4.5 million. Our revenue base is supported
by a high level of repeat business, with over 90% of our revenues for 1998 being
derived from clients from which we also derived revenue in 1997.
Young America was incorporated in Minnesota in 1997 as a subsidiary of
Holdings, a Minnesota corporation founded in 1972. Our principal office is
located at 717 Faxon Road, Young America, Minnesota 55397 and our telephone
number is (612)467-1100.
COMPETITIVE STRENGTHS
We attribute our current market position and our existing opportunities for
growth and a return to profitability to the following competitive strengths.
Breadth of Integrated Services
We are a provider of a broad range of integrated CIP services to large
consumer product and consumer service companies. Our basic services include
- order processing (including the handling of mail, telephone calls,
facsimiles and e-mail received from consumers),
- fulfillment (including the delivery of product premiums and samples as
well as rebate checks to consumers),
- data gathering, analysis and reporting and
- related customer service (including receiving consumer inquiries and
providing follow-up services).
Most of our competitors offer a narrower range of services to a smaller client
base. Our ability to integrate a broad range of services allows us to work with
our clients to custom design efficient processing solutions for all types of
marketing programs, especially complex marketing programs that require a
significant amount of contact with the consumer.
Ability to Process High-Volume and Complex Marketing Programs
We have 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 our 1,500 to 2,000 other current
programs in a timely, courteous and efficient manner. We believe that we have a
reputation for being able to manage high-volume and complex marketing programs
with a high quality of service, and that our reputation contributes to our
recurring revenue base and our ability to attract new clients.
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<PAGE> 8
Strong, Established Client Relationships
We have successfully attracted and built strong relationships with a large
number of major consumer-oriented companies in the United States. We are
currently well-positioned in the packaged goods industry and have expanded our
client base in faster-growing industries, such as high-technology consumer
products. Of our 25 largest clients in 1998, nine have been clients for more
than seven years.
The vast majority of marketing programs we undertake for our clients
involve direct interaction with consumers. It is critical to our clients that
the various services involved in administering their marketing programs be
performed consistently, accurately, courteously and in a timely manner. We
believe that these factors are often key determinants when a consumer-oriented
company awards the administration of its marketing programs. We seek 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 we build into the processing plan for each marketing program we
undertake.
Sophisticated Information Systems
In 1996, we completed our conversion to a new proprietary software system
which has increased our ability to process a greater number and variety of
complex marketing programs. The system increases operational efficiencies and
enhances our ability to track orders through each step of the order-handling
process and to accurately invoice our clients for services we provide. In
addition, the new system has given us the ability to:
- provide a consumer the precise status of any order from the day such
order was received until the day the promotion item is shipped,
- provide real-time information on the status of a program, allowing our
clients to track and judge the effectiveness of on-going promotion
programs,
- acquire, store and quickly retrieve information about consumers and their
individual buying habits, and
- develop a proprietary database of approximately 65 million consumer
households.
The 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. Designed as an open system, its capacity can
be easily increased to meet our future needs by adding additional hardware
support. We believe that no comparable program is used by any of our competitors
and that no similar integrated system can be easily developed or purchased
within the marketplace. We also believe that a competitor would require a
substantial commitment of time and capital to replicate the capabilities of our
system.
Experienced Management Team
Our senior management team has been assembled and developed since the
arrival in July 1993 of our 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. Mr. Weil has recruited a team of experienced executives
from outside the industry in which we compete, each of whom has not only
functional skills but also fresh insights that assist Mr. Weil in executing the
strategic vision for the Company. Industries from which our current executives
have been drawn include retailing, distribution, direct marketing and
teleservices.
RISK FACTORS
See "Risk Factors" for a discussion of risks that you should consider in
evaluating an investment in the Notes. Such risks include the following:
- our high degree of leverage and lack of liquidity
- the restrictive covenants contained in our indebtedness
- the variability of our services
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<PAGE> 9
- the impact of tobacco legislation on promotion marketing
- our dependence on key personnel
- the difficulties in sustaining our growth
- the risks associated with our focus on high-volume and/or complex
marketing programs
- the application of state abandoned property laws
- our vulnerability to an economic downturn
- our reliance on technology and the risk of business interruption
- our dependence on telephone, postal and delivery services
- our dependence on our labor force
- the highly competitive market in which we compete
- our potential Year 2000 risks
- the risks associated with acquisitions we may attempt
- our ability to repurchase the Notes on a change of control
- the concentration of ownership of Holdings' voting stock
- the subordination of the Notes and the Guarantee
- the holding company structure of the Guarantor
- state securities laws restrictions on resale of the Notes
- lack of a public market for the Notes
- risks under fraudulent conveyance statutes
BUSINESS STRATEGY
Focus on Clients with Large Revenue Potential
Since 1993, we have focused 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 we can develop a strategic relationship. We
believe that high-volume and/or complex marketing programs by their scope and
nature allow for higher revenues and improved profit margins. Beginning in 1995,
we began seeking operational efficiencies by reducing the number of simple,
low-volume marketing programs for which we would compete. At the same time, we
upgraded our technology and operational systems in order to better focus on the
needs of clients with large revenue potential for us. As a result, we have
increased our average revenue per client from approximately $307,000 in 1994 to
approximately $1,076,000 in 1998. We intend to continue to concentrate on
clients that require more complex and/or higher volume marketing programs.
We believe that our ability to provide CIP services for high-volume and/or
complex marketing programs has been a significant factor in our ability to
attract large new clients, both from within industries that have traditionally
used our services and from industries that have not traditionally used our
services such as computer hardware, computer software, consumer services,
telecommunications and energy. Recent client additions include Best Buy Co.,
Inc., Bali Company, Target and Intuit Inc. We believe that there are
opportunities to market our services in additional industries such as financial
services and pharmaceuticals.
Custom Design Services
When we evaluate a potential new client program, we perform a comprehensive
review of all steps that we believe are necessary for the successful
implementation of the program. We then review the advantages of each proposed
step with the potential client who determines whether to pursue each proposed
step. Only after such determination by the client do we complete the process
design, cost each step of the process and price our services for a particular
marketing program. Finally, the client determines whether the value of each step
is worth the incremental cost.
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<PAGE> 10
We believe our ability to custom design and implement processes to fit the
specific requirements of a client's program constitutes a competitive advantage
and that this ability enables us to maintain satisfactory margin levels while
achieving high client loyalty. Other benefits derived from our ability to custom
design services include (i) more efficient planning and invoicing of services we
render and (ii) greater ability to reliably estimate the profitability of each
marketing program serviced.
Anticipate Clients' Evolving Needs
We strive to anticipate the needs of our clients and develop new or
enhanced services to meet those needs as they arise rather than merely reacting
to requests from our clients. In anticipation of client needs, we have upgraded
our information processing capabilities and broadened our ability to process
orders to include not only mail but also facsimile, telephone (including live
operator and Interactive Voice Response), Internet and electronic data
transmission. We believe that our experience in managing a wide variety of
marketing programs for a broad range of major, consumer-oriented companies gives
us a competitive advantage in anticipating our clients' needs for new and
enhanced CIP services. Examples of areas in which we are upgrading our services
in anticipation of client needs include:
- enhanced Internet and Interactive Voice Response capabilities,
- full-service credit card payment processing for marketing programs
involving payments by consumers,
- improved information processing and consumer data reporting capabilities,
and
- enhanced teleservice offerings, including predictive outbound calling and
call recording capabilities.
We plan to continue to enhance our operational capabilities, including our
sophisticated computer systems, so that we can meet the demand for increasingly
complex CIP services.
Continue Operational Improvements
We continually evaluate and refine our process flows to meet evolving
client needs, to enhance client satisfaction and to reduce costs. In 1998, we
began the process to become certified to the COPC-2000 Standard. COPC is an
organization that was established to help improve customer satisfaction and
operational performance of customer service providers, including call centers
and fulfillment centers. The COPC-2000 Standard provides both a benchmark and an
improvement methodology for operational performance and is recognized as the
leading standard for excellence in customer service. To become certified to the
COPC-2000 Standard requires a detailed operational audit to ensure that the
customer service provider is compliant to all 32 components of the standard. We
have dedicated staff and resources to implement the processes necessary to gain
the COPC-2000 certification. We expect to achieve certification with respect to
our call center operations by December 31,1999, and with respect to our
fulfillment operations by the end of the second quarter of 2000. We believe the
COPC-2000 certification will strengthen our market position and become a
competitive advantage. There can be no assurance, however, that certification
will be achieved.
Pursue Selective Acquisitions in Related Businesses
We intend to pursue selective acquisitions that offer a strong strategic
fit with our existing core competencies and/or allow us 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 our size.
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<PAGE> 11
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 its former 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 a recapitalization (the
"Recapitalization"), pursuant to which the following transactions occurred:
- An investor group (the "Investor Group"), comprised of BT Capital
Partners, Inc. ("BTCP"), Ontario Teachers' Pension Plan Board ("OTPPB"),
Charles D. Weil, the president and chief executive officer of Holdings,
and 20 other members of management (Mr. Weil and such other participating
members of management, the "Management Stockholders"), purchased newly
issued shares of common stock of Holdings for an aggregate purchase price
of $38.9 million.
- Holdings borrowed $80 million under a senior bridge credit facility (the
"Bridge Facility") provided by affiliates of BTCP.
- The Selling Stockholders rolled over a portion of their equity interest
in Holdings.
- Holdings used the proceeds of the issuance of the shares of common stock
to the Investor Group and borrowings under a Bridge Facility to
(i) repurchase from the Selling Stockholders their remaining equity
interest in Holdings 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 Holdings, and $4.9
million paid pursuant to phantom stock arrangements due in such amounts as
a result of the change in control of Holdings, and
(iii) pay $8.4 million of fees and expenses related to the
Recapitalization.
- Holdings transferred substantially all of its business and assets to
Young America, then a newly formed subsidiary of Holdings, and Holdings
changed its name to Young America Holdings, Inc.
Holdings made an additional payment of $.7 million to the Selling
Stockholders and certain of our employees during the second quarter of 1998
based upon the final determination of the total stockholders equity of Holdings
as of October 31, 1997 and Holdings profit or losses for the period ended on the
Recapitalization Date. In addition, if our cumulative excess cash flow for the
four year period ending December 31, 2001 exceeds $93 million, the Selling
Stockholders and certain of our employees may be entitled to additional payments
(either as additional compensation for shares purchased by Holdings in the
Recapitalization or as additional bonus or phantom stock payments) equal to 20%
of such excess, subject to a maximum additional payment of $15 million. As a
result of the Recapitalization, the Investor Group owns approximately 93% of the
total capital stock of Holdings.
Subsequent to the Recapitalization, Holdings refinanced the indebtedness
under a Bridge Facility through the issuance by Young America in a private
placement of $80 million principal amount of Old Notes. The Old Notes were
subsequently exchanged for a like aggregate principal amount of Notes registered
under the Securities Act of 1933. The Old Notes were, and Notes are, guaranteed
on a senior subordinated basis by Holdings.
Holdings expects to conduct substantially all of its business and
operations through Young America and any future subsidiaries it may form.
However, if the covenants contained in the Young America's bank revolving credit
facility (the "Credit Facility") and/or the Indenture for the Notes would
prohibit Young America from making such an acquisition, Holdings may make such
acquisition directly or though a newly formed subsidiary of Holdings rather than
Young America.
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<PAGE> 12
SUMMARY DESCRIPTION OF THE NOTES
The following summary is qualified in its entirety by the more detailed
information contained under the caption "Description of the Notes."
NOTES OUTSTANDING............... $80,000,000 aggregate principal amount of
11 5/8% Series B Senior Subordinated Notes
due 2006.
MATURITY DATE................... February 15, 2006.
INTEREST PAYMENT DATES.......... February 15 and August 15 of each year.
OPTIONAL REDEMPTION............. Except as described below, we may not redeem
the Notes prior to February 15, 2002.
Thereafter, we may redeem the Notes, in whole
or in part, at our option at the prices
contained herein, plus accrued and unpaid
interest. In addition, at any time prior to
February 15, 2001, we may redeem up to 35% of
the Notes with the net cash proceeds of one
or more equity offerings so long as:
- we pay 111.625% of the principal amount,
plus accrued and unpaid interest, and
- at least 65% of the aggregate principal
amount of the Notes issued remains
outstanding afterwards.
CHANGE OF CONTROL............... If a change of control occurs, you may
require us to repurchase your Notes at a
price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest.
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 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 of Young America's
existing and future senior debt, including
indebtedness under the Credit Facility. The
Notes rank junior to our existing and future
senior debt. The guarantees are general
unsecured obligation of Holdings and the
Subsidiary Guarantors and are subordinated in
right of payment to all their existing and
future senior debt. As of December 31, 1998,
we had approximately $0.3 million of senior
debt outstanding. As of December 31, 1998, we
had no indebtedness subordinated to the Notes
outstanding. See "Capitalization."
CERTAIN COVENANTS............... The Notes are issued under an indenture which
contains certain covenants that, among other
things, limit our ability and the ability of
our Restricted Subsidiaries, to
- incur additional indebtedness
- pay dividends and make other payments
- create certain liens
- use proceeds from sales of our assets
and our subsidiaries stock
- enter into transactions with our
affiliates
- consolidate or merge with another
person
- transfer all or substantially all of
our assets to another person
These covenants are subject to a number of
significant exceptions and qualifications.
For additional information regarding the Notes, see "Description of the
Notes."
7
<PAGE> 13
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables present summary financial data. The summary historical
financial data for the years ended December 31, 1996, 1997 and 1998 come from
the audited financial statements of Holdings included in this Prospectus. The
summary financial data for the years ended December 31, 1994 and 1995 come from
audited financial statements of Holdings that are not included in this
Prospectus.
You should read the financial data below in conjunction with the historical
financial statements and the information included under "Management's Discussion
and Analysis of Financial Condition and Results of Operations," all of which are
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................................. $238,960 $175,297 $135,716 $116,268 $103,758
Cost of Revenues
Rebates, postage and freight....................... 174,365 105,212 84,191 80,635 70,747
Processing and servicing........................... 49,434 40,447 31,393 24,920 20,346
-------- -------- -------- -------- --------
Gross profit......................................... 15,161 29,638 20,132 10,713 12,665
Selling expenses..................................... 6,059 5,504 4,610 3,493 2,927
General and administrative expenses.................. 5,798 9,754 7,140 5,949 6,127
Compensation charges attributable to
Recapitalization................................... (43) 17,924 -- -- --
Reserve for lease obligations........................ 850 -- -- -- --
-------- -------- -------- -------- --------
Operating income (loss).............................. 2,497 (3,544) 8,382 1,271 3,611
Interest expense..................................... (13,095) (1,029) (91) (252) (163)
Interest income...................................... 666 1,038 201 10 28
Transaction costs attributable to Recapitalization... -- (1,967) -- -- --
Other income (expense)............................... (182) -- (60) (15) 30
-------- -------- -------- -------- --------
Income (loss) before income taxes.................... (10,114) (5,502) 8,432 1,014 3,506
Provision for income taxes........................... (3,742) 423 -- -- --
-------- -------- -------- -------- --------
Net income (loss).................................... $ (6,372) $ (5,925) $ 8,432 $ 1,014 $ 3,506
======== ======== ======== ======== ========
UNAUDITED PRO FORMA INCOME TAX DATA:
Income (loss) before income taxes.................... $(10,114) $ (5,502) $ 8,432 $ 1,014 $ 3,506
Provision (benefit) for income taxes(a).............. (3,742) (1,308) 3,120 375 1,297
-------- -------- -------- -------- --------
Pro forma net income (loss).......................... $ (6,372) $ (4,194) $ 5,312 $ 639 $ 2,209
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA, as adjusted(b)............................... $ 4,511 $ (1,956) $ 9,578 $ 2,238 $ 4,561
EBITDA, as adjusted, margin(c)....................... 1.9% (1.1%) 7.1% 1.9% 4.4%
Capital expenditures................................. $ 2,374 $ 3,330 $ 1,739 $ 1,061 $ 1,142
Depreciation and amortization(d)..................... 2,014 1,588 1,196 967 950
Cash interest expense(e)............................. 9,450 981 91 252 163
Ratio of earnings to fixed charges(f)................ -- -- 13.1x 2.5x 9.4x
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1998
------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 12,200
Working capital............................................. (40)
Total assets................................................ 45,662
Total debt.................................................. 80,000
Redeemable Class A Common Stock............................. 890
Stockholders' (deficit) equity.............................. (65,729)
</TABLE>
8
<PAGE> 14
NOTES TO SUMMARY HISTORICAL 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 we been a C
corporation, rather than an S corporation, for income tax purposes.
(b) EBITDA, as adjusted, represents earnings before net 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 our 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 our results of operations and liquidity and should
be considered in evaluating our 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) Excludes amortization of deferred financing costs.
(e) Cash interest expense excludes amortization of deferred financing costs.
(f) 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 years ended
December 31, 1998 and 1997, earnings were inadequate to cover fixed charges
by $10,114 and $5,502, respectively. The shortfall for the year ended
December 31, 1998 was largely attributable to a full year of interest
expense on debt incurred in connection with the Recapitalization,
amortization and the write-off of deferred financing costs of $3,600, and a
one-time reserve for the termination of Interactive Voice Response leases of
$850. The shortfall for the year ended December 31, 1997 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.
9
<PAGE> 15
RISK FACTORS
In addition to other matters described in this Prospectus, you should
carefully consider the specific factors contained below before making an
investment in the Notes.
LEVERAGE AND LIQUIDITY -- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT
OUR FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR OBLIGATIONS UNDER THE
NOTES.
We are highly leveraged, which means we have a large amount of indebtedness
in relation to our stockholders' equity. The table below shows certain important
credit statistics:
<TABLE>
<CAPTION>
AT OR FOR YEAR ENDED
DECEMBER 31, 1998
--------------------
<S> <C>
Total indebtedness.......................................... $80.0 million
Stockholders' deficit....................................... $65.7 million
Ratio of total indebtedness to total capitalization......... 5.28x
Deficiency of earnings to cover fixed charges............... $10.1 million
</TABLE>
We may also incur additional indebtedness from time to time to finance
acquisitions or capital expenditures and other purposes subject to the
restrictions in the Credit Facility and the Indenture. See "Capitalization",
"Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Liquidity and Capital Resources", "Description of Credit Facility"
and "Description of the Notes".
Our high degree of leverage will have important consequences to us,
including the following:
- Our ability 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 favorable terms.
- We will need a substantial portion of our cash flow to pay the principal
and interest on our indebtedness, including indebtedness that we may
incur in the future.
- Payments on our indebtedness will reduce the funds that would otherwise
be available for our operations and future business opportunities.
- A substantial decrease in our net operating cash flows could make it
difficult for us to meet our debt service requirements and force us to
modify our operations.
- We may be more highly leveraged than our competitors, which may place us
at a competitive disadvantage.
- We may be more vulnerable to a downturn in our business or the economy
generally.
- There would be a material adverse effect on our business and financial
condition if we are unable to service our indebtedness or obtain
additional financing, as needed.
Our ability to pay principal and interest on the Notes and to satisfy our
other obligations will depend upon:
- Our future financial and operating performance, which will be affected by
prevailing economic conditions and financial, business and other factors,
certain of which are beyond our control, and
- The future availability of revolving credit borrowings under the Credit
Facility or any successor facility, the availability of which is or may
depend on, among other things, our complying with certain covenants and
meeting certain specified borrowing base prerequisites.
Based on our current and expected levels of operations, we expect our
operating cash flow, together with borrowings under the Credit Facility, should
be sufficient to meet our operating expenses, to make necessary capital
expenditures and to service our debt requirements. If we are unable to service
our indebtedness, we will be forced to take actions such as reducing or delaying
capital expenditures, selling assets, restructuring or refinancing our
indebtedness (which could include the Notes), or seeking additional equity
capital or
10
<PAGE> 16
bankruptcy protection. There is no assurance that any of these remedies can be
effected on satisfactory terms, if at all.
RESTRICTIVE DEBT COVENANTS LIMIT OUR OPERATING AND FINANCING FLEXIBILITY
The Credit Facility and the Indenture impose, and the terms of any future
indebtedness may impose, operating and financing restrictions on us. Such
restrictions affect, and in many respects, limit or prohibit, among other
things, our ability to:
- declare dividends or redeem or repurchase capital stock;
- prepay, redeem or purchase debt, including the Notes;
- incur liens;
- make loans and investments;
- incur additional indebtedness;
- amend or otherwise alter debt and other material agreements;
- engage in mergers, acquisitions and asset sales;
- enter into transactions with our affiliates; and
- alter our business
The Credit Facility also requires us 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) for the quarters ending March 31, 1999 and June 30,
1999, a minimum Current Ratio (as defined in the Credit Facility) of 1.0, and
1.10 for each quarter thereafter; and (iii) for the nine months ending September
30, 1999, a minimum cumulative EBITDA of $9.5 million. Based on our current
operating results and business plans, we believe that we will be able to satisfy
these requirements. The Credit Facility restricts our capital expenditures to
$0.5 million per quarter and cumulative annual capital expenditures to $2.0
million. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidated Capital Resources". We could be left without
sufficient liquidity to conduct our business if we were unable to borrow under
the Credit Facility due to a default or our failure to satisfy the financial
covenants.
OUR CLIENT MIX AND THE SERVICES WE PROVIDE VARY DEPENDING ON CLIENT MARKETING
PROGRAMS
Our business is subject to the needs and the marketing decisions of our
clients. The marketing plans and marketing budgets of our clients change from
year to year. A client may run a major consumer marketing program using our
services one-year and then redirect its marketing efforts and require less of
our services the next. As a result, our revenues from any one client may vary
significantly from year to year. PepsiCo, Inc., for example, increased its use
of our services such that our revenues from business with PepsiCo, Inc.
increased from 2% of our revenues in 1995 to approximately 24.4% for the year
ended December 31, 1997, but decreased to 2.7% in 1998 as a result of
winding-down/termination of the "Pepsi Stuff(R)" program. We could experience a
reduction in business with other significant clients due to period-to-period
fluctuations in such clients' marketing activities or because of our clients'
decisions not to continue to engage our services.
We could also experience a reduction in our earnings if our clients were to
cause a shift away from our 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, our results of operations could be materially
adversely affected.
Our quarterly revenues and operating results 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".
11
<PAGE> 17
We are unable to predict the future marketing plans of our clients or the
marketing plans of the industries in which our clients compete. As a result, we
cannot assure you that our most significant clients will continue to use our
services in any given year or over the long term. As is typical in the industry,
we provide our services pursuant to a formal contract which are either
short-term or subject to cancellation.
IMPACT OF TOBACCO LEGISLATION ON PROMOTION MARKETING
Our tobacco clients collectively accounted for 8.5%, 7.3% and 4.3% of our
revenues in 1996, 1997 and 1998, respectively. National anti-tobacco legislation
could significantly restrict the ability of these clients to market products
through branded premium programs after 1998. We believe that we may be able to
replace lost business by providing different consumer interaction processing
services to our tobacco clients; however, we cannot be assured that we will be
able to replace such lost business.
OUR BUSINESS DEPENDS ON CERTAIN KEY PERSONNEL
Our success depends in large part upon the abilities and continued service
of our executive officers and other key employees, particularly Charles D. Weil,
our President and Chief Executive Officer. Our failure to retain the services of
Mr. Weil or other key personnel could have a material adverse effect on us. We
maintain a $5 million "key man" life insurance policy on the life of Mr. Weil.
We have employment agreements with Mr. Weil and Mr. Roger Andersen, our
Chief Financial Officer. See "Management -- Employment Agreements". In addition,
many of our executive officers (including Mr. Weil) and other key personnel own
the stock of Holdings and are expected to participate in a stock option plan
adopted by Holdings. We believe that employee stock ownership increases the
incentives for those executive officers and key employees to remain with us.
However, neither such employment agreements nor such equity interests ensure the
continued service of Mr. Weil or such executive officers and other key
personnel.
WE MAY NOT SUSTAIN REVENUE GROWTH
We have experienced revenue growth over the past several years and we
expect this trend to continue. Our ability to achieve continued growth depends
on a number of factors, including our ability to:
- retain and expand the provision of our services to existing clients,
- initiate, develop and maintain new client relationships and expand our
marketing operations,
- utilize our existing infrastructure and databases to perform the services
required by our clients in an efficient and timely manner,
- recruit, motivate and retain qualified management and hourly personnel,
and
- maintain the high quality of the services that we provide to our clients.
Our continued growth is expected to place a significant strain on our
management, operations, employees and resources. We cannot assure you that we
will be able to maintain or accelerate our current growth, effectively manage
our expanding operations or achieve planned growth on a timely or profitable
basis. If we are unable to manage growth effectively, our business, results of
operations or financial condition could be materially adversely affected.
OUR BUSINESS WILL BE ADVERSELY AFFECTED IF THE NUMBER OF HIGH-VOLUME AND/OR
COMPLEX MARKETING PROGRAMS DECREASES
In recent years, we have focused on the execution of high-volume and/or
complex marketing programs for our clients. We have
- focused our marketing on existing and prospective clients who have the
potential for generating large revenue for us,
12
<PAGE> 18
- invested substantial time and resources developing a sophisticated
management information system to manage multiple, varying, high-volume
marketing programs, and
- adopted a pricing strategy based on earning margins appropriately
reflecting our ability to execute high-volume and complex marketing
programs.
If the number of complex and/or high-volume marketing programs decreases, our
business could be materially adversely affected. Such a decrease could result
from a change in economic conditions or a change in the marketing strategies of
our clients.
ABANDONED PROPERTY LAWS MAY REQUIRE USE TO SURRENDER UNCLAIMED REBATE PAYMENTS
TO A STATE
Approximately 45% of the aggregate dollar amount of rebate checks we issue
relate to client rebate programs in which we have agreed to fund out of our
working capital the payment of the rebate offered by these clients. We then bill
these clients for the full amount of those rebate checks that we issue to
consumers. However, some consumers never cash these rebate checks. When we have
agreed to fund rebate payments with our working capital, the agreements with our
clients generally provide that we are entitled to retain the amounts paid to us
by our clients even though the consumer never cashes the rebate check. In our
industry this is referred to as "slippage." For the years ended December 31,
1998, 1997 and 1996, the portion of revenues recognized by us as slippage were
$4.9 million, $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 circumstances
holders of unclaimed property (possibly including, under certain interpretations
of such laws, slippage amounts) must surrender that property to the state. We
believe that, because Young America and Holdings are Minnesota corporations with
principal operations and principal places of business located in Minnesota, the
escheat law of Minnesota would govern our right to retain slippage amounts. In
addition, Oklahoma law may govern our right to retain slippage amounts with
respect to operations conducted from our Oklahoma facility. We believe that
Minnesota and Oklahoma law allows us to retain slippage amounts when we are
funding our client's rebate program from our own working capital. However,
- the Minnesota or Oklahoma escheat law may change,
- our interpretation of Minnesota or Oklahoma escheat law may not prevail
in any action by Minnesota or Oklahoma to recover any slippage amounts,
- Minnesota or Oklahoma may seek to require our clients to surrender the
slippage amounts to them, or
- another state may be successful in an action under its escheat laws to
require us to surrender to that state slippage amounts unclaimed by
residents of such state or otherwise.
WE ARE VULNERABLE TO AN ECONOMIC DOWNTURN
Marketing budgets in large companies usually decline during economic
downturns. As a result, the market for our services may also decline during
future periods of economic weakness. Future economic downturns could have a
material adverse affect on our business.
WE MUST CONTINUE TO DEVELOP NEW AND ENHANCED TECHNOLOGY TO REMAIN COMPETITIVE
We have made significant investments in sophisticated and specialized
software and other computer and telecommunications technology. We have also
focused on the application of this technology to provide customized solutions to
meet our clients' needs. We expect that it will be necessary to continue to
select, invest in and develop new and enhanced technology on a timely basis in
order to maintain our competitiveness. Our future success will also depend in
part on our ability to continue to develop technology solutions which keep pace
with evolving industry standards and changing client demands. However, we may
not be successful in anticipating technological changes or in selecting and
developing new and enhanced information technology on a timely basis. Although
we believe that certain of our systems are more advanced than those of our
competitors, our technological advantage arises from the application of
technology that is readily
13
<PAGE> 19
available to our competitors. We cannot assure you that we will be able to
maintain our technological advantages.
THE DISRUPTION OF OUR COMPUTER AND TELEPHONE EQUIPMENT AND SOFTWARE SYSTEMS
WOULD ADVERSELY AFFECT OUR BUSINESS
Our business is highly dependent on our computer and telephone equipment
and software systems. While we maintain 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 our business. While we have
property and business interruption insurance, such insurance may not adequately
compensate us for all losses. See "Business -- Technology".
WE ARE HEAVILY DEPENDENT ON TELEPHONE, POSTAL AND DELIVERY SERVICES
We materially rely on services provided by various local and long distance
telephone companies. A significant increase in the cost of telephone services
that we cannot recover through an increase in the pricing of our services, or
any significant interruption in telephone services, could have a material
adverse affect on our business.
Our business is also materially dependent on the United States Postal
Service and, to a lesser degree, on private delivery companies. Postal and
delivery service rate increases affect the cost of our mailings and shipments to
consumers. We benefit 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 the
elimination of existing discounts, that we cannot recover, through an increase
in our pricing of our services, could have a material adverse affect on our
business. In January, 1999 United States postal rate increases went into affect.
However, we believe that such increase can be recovered through increased
pricing and will not have a material adverse affect on our business.
OUR BUSINESS IS VERY LABOR INTENSIVE
Our success is significantly dependent on our ability to recruit, hire,
train and retain qualified employees and independent contractors. A significant
increase in our employee turnover rate could increase our 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 us to recruit, hire and train qualified personnel at an
accelerated rate. We may not be able to continue to hire, train and retain
sufficient qualified personnel to adequately staff our services in support of
our clients' marketing programs. Because labor costs are a significant portion
of our costs, an increase in wages, costs of employee benefits or employment
taxes not recoverable through an increase in our pricing could have a material
adverse effect on our business, results of operations or financial condition. In
addition, some of our facilities are located in areas with relatively low
unemployment rates, making it more difficult and costly to hire qualified
personnel. See "-- We May Not Sustain Revenue Growth" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
THE MARKET IN WHICH WE COMPETE IS HIGHLY COMPETITIVE
Our industry is highly competitive and fragmented. We expect competition to
persist and to intensify in the future. Our 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 us. Similarly, additional
competitors with greater resources than us may enter our industry. Our
performance and growth could be negatively affected if our existing clients
decide to provide in-house customer service operations that currently are
outsourced or if potential clients retain or increase their in-house customer
service operations. In addition, competitive pressures from current or future
competitors could cause our services to lose market acceptance or result in
significant price erosion. This could result in a material adverse effect upon
our business, results of operations or financial condition. See "Business --
Competition".
14
<PAGE> 20
YEAR 2000 PROBLEM MAY ADVERSELY AFFECT OUR OPERATIONS
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 millenium -- the 1900's, is
expected to cause many business systems to fail or produce inaccurate results.
We have completed an internal review of its systems and operations. Based
on the information available to date, we do not anticipate any significant
readiness problems with respect to our systems. We expect any remediation
efforts to be completed by the end of the third quarter of this year, and
contingency plans, where appropriate, completed by the end of the year. We
anticipate that we will incur incremental costs not to exceed $0.5 million in
total in addressing Year 2000 issues, of which approximately $0.1 million had
been incurred by the end of 1998.
In an effort to review the Year 2000 readiness of our key vendors and
suppliers, we have sent to them Year 2000 questionnaires and we are in the
process of evaluating the responses. Based on the information received to date,
we do not expect any significant Year 2000 problems with our key vendors and
suppliers. However, if our primary telecommunication providers fail to meet
their Year 2000 system requirements on a timely basis, our call center
operations could be significantly impacted which could have a material adverse
effect on us. We are using a similar process to evaluate the systems of our
clients.
The outcome of our Year 2000 program is subject to a number of risks and
uncertainties, some of which are beyond our control. Therefore, we cannot assure
you that we will not incur material costs beyond the above-anticipated costs, or
that our business, financial condition, or results of operations will not be
significantly impacted due to Year 2000 issues.
THERE ARE RISKS ASSOCIATED WITH OUR ACQUISITION STRATEGY
One element of our growth strategy is to pursue strategic acquisitions that
either expand or complement our business. We may not be able to identify
acceptable acquisition candidates or complete any strategic acquisitions on
favorable terms or in a timely manner. Acquisitions involve a number of special
risks, including the diversion of management's attention to the integration of
the operations and personnel of the acquired companies, adverse short-term
effects on our operating results and/or the integration of financial reporting
and other management systems. In addition, we may require additional debt or
equity financing for future acquisitions, which may not be available on
favorable terms, if at all. We may not be able to successfully integrate an
acquired business into our business or operate profitably a business we acquire.
WE MAY NOT HAVE SUFFICIENT RESOURCES TO PURCHASE THE NOTES UPON CHANGE OF
CONTROL
Upon a Change of Control, we must give you the opportunity to sell us your
Notes at 101% of their principal amount plus accrued and unpaid interest, if
any, to the date of purchase. The source of funds for any such purchase will be
our 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, we may not have sufficient funds at the time of any
Change of Control to make any required repurchases of Notes tendered and
restrictions in the Credit Facility or in any future indebtedness incurred by us
may not allow us to make the required repurchases. See "Description of the
Notes -- Change of Control."
The Change of Control provision may not necessarily afford you protection
in the event of a highly leveraged transaction, including a reorganization,
restructuring, merger or other similar transaction involving us that may
adversely affect you. Such transaction also may not involve a shift in voting
power or beneficial ownership, or, even if it does, 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 us to repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
15
<PAGE> 21
THE INTERESTS OF OUR CONTROLLING STOCKHOLDERS MAY CONFLICT WITH YOUR INTERESTS
AS HOLDERS OF THE NOTES
We are a wholly owned subsidiary of Holdings. As a result of the
Recapitalization, the outstanding voting stock of Holdings is owned as follows:
<TABLE>
<S> <C>
- BTCP 45.0%
- OTPPB 29.0%
- The Management Stockholders 15.7%
- Jay F. Ecklund 10.3%
</TABLE>
Under a stockholders' agreement, BTCP is entitled to designate two
directors to Holdings' 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 your interests as holders
of the Notes. Also, under the stockholders' agreement, we may not undertake
certain corporate actions or enter into certain transactions without the consent
of BTCP and/or OTPPB, including our sale and the consummation of an initial
public offering. Thus, if BTCP and/or OTPPB, or their representatives on the
Board of Directors, are unable to reach consensus on matters requiring their
separate approval, our business, results of operations and financial condition
could be materially adversely affected.
BTCP owns interests in two other direct marketing services companies,
Distribution Associates, Inc., a third party fulfillment company for direct mail
catalogs. BTCP may acquire interests in other direct marketing services
companies. No assurance can be given that a merger or other transaction
involving us and/or Holdings and one or more of such BTCP owned companies will
not be considered in the future.
THE NOTES AND THE GUARANTEES ARE JUNIOR TO OUR EXISTING INDEBTEDNESS AND
POSSIBLY OUR FUTURE INDEBTEDNESS
The Notes and the Guarantees are unsecured and subordinated to the prior
payment in full of our Senior Debt and all Guarantor Senior Debt, respectively.
As of December 31, 1998, we had approximately $0.3 million of Senior Debt
outstanding under a commitment for up to $10 million under the Credit Facility
(subject to availability under the terms of the Credit Facility). At such date,
we had no indebtedness subordinated to the Notes outstanding. In the event of
our or Holdings' bankruptcy, liquidation or reorganization our assets and the
assets of Holdings (or any Subsidiary Guarantor that may exist in the future)
will be available to our 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, we 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. Only when
such amount has been paid in full or the default has been cured or waived and
such acceleration has been rescinded will we then be able to pay principal or
premium on the Notes. In addition, if any default occurs with respect to certain
Senior Debt or Guarantor Senior Debt and certain other conditions are satisfied,
we may not make any payments on the Notes for a designated period of time.
Finally, if any judicial proceeding is pending with respect to a payment default
on 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,
we may not make any payment on the Notes.
16
<PAGE> 22
SINCE HOLDINGS HAS NO OTHER OPERATIONS ITS ABILITY TO MAKE PAYMENTS ON ITS
GUARANTEE IS LIMITED
As of the date of this Prospectus, all of the operations of Holdings are
conducted through Young America and Holdings has no material assets other than
the stock of Young America and the title to our corporate headquarters.
Accordingly, the Guarantor's cash flow and, consequently, its ability to service
debt, including the Guarantee, will depend upon our operations.
YOU MAY NEED TO COMPLY WITH BLUE SKY RESTRICTIONS ON RESALE OF NOTES
In order to comply with the securities laws of certain jurisdictions, the
Notes may not be offered or resold by you 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. We do not currently intend to register or qualify the resale of the
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.
AN ACTIVE TRADING MARKET FOR THE NOTES MAY NOT DEVELOP
We do not intend to apply for a listing of the Notes on a securities
exchange or on any automated dealer quotation system. We have been advised by
BTAB that as of the date of this Prospectus, BTAB intends to make a market in
the Notes. BTAB is not obligated to do so, however, and any market-making
activities with respect to the 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. Because BTAB is our
affiliate, BTAB is 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 Notes. Accordingly, BTAB's
ability to make a market in the Notes may, in part, depend on our ability to
maintain a current market-making prospectus.
There can be no assurance as to the liquidity of any market that may
develop for the Notes. If a trading market does not develop or is not
maintained, you may experience difficulty in reselling the Notes or may be
unable to sell them at all. If a market develops for Notes, future trading
prices of the Notes will depend on many factors, including:
- our financial condition results of operations and prospects,
- the market for similar securities,
- prevailing interest rates, and
- other factors, including general economic conditions
Depending on those and other factors, the Notes may trade at a discount from
their principal amount.
FRAUDULENT CONVEYANCE -- STATE AND FEDERAL LAWS MAY PERMIT A COURT TO VOID THE
NOTES AND GUARANTEES UNDER CERTAIN CIRCUMSTANCES
The Notes were issued in exchange for the Old Notes. We loaned and
distributed the proceeds from the sale of the Old Notes to Holdings which used
such amounts to repay amounts outstanding under the Bridge Facility which were
incurred in connection with the Recapitalization. The obligations we incurred
under the Indenture and the Notes and the obligations incurred by Holdings under
the Indenture and its Guarantee may be subject to review under relevant federal
and state fraudulent conveyance and similar laws in a bankruptcy or
reorganization case or lawsuit commenced by or on behalf of our creditors or the
creditor's of Holdings. Under these laws, if a court were to find that, at the
time we or Holdings incurred indebtedness under the Bridge Facility and Holdings
purchased its capital stock pursuant to the Recapitalization or at the time we
issued the Old Notes and Holdings issued its Guarantee of the Old Notes and we
made the loan and distribution to Holdings, we or Holdings, as the case may be:
- incurred such indebtedness with the intent of hindering, delaying or
defrauding present or future creditors, or
- received less than the reasonably equivalent value in consideration for
incurring such indebtedness, and:
17
<PAGE> 23
-- were insolvent or rendered insolvent by reason of such incurrence or
repurchasing such capital stock,
-- were engaged or about to engage in a business or transaction for
which our or Holding's assets constituted unreasonably small capital,
or
-- intended to incur, or did incur, or believed that we or Holdings
would incur, debts beyond our or its ability to pay as they matured
or became due,
then such court might:
- subordinate the Notes or the Guarantee to our or Holdings' presently
existing or future indebtedness,
- void the issuance of the Notes (in our case) or the Guarantee (in the
case of Holdings) and direct the repayment of any amounts paid thereunder
to our or Holdings' creditors, or
- take other actions detrimental to holders of the Notes and the Guarantee.
The measure of insolvency under fraudulent conveyance statutes will vary
depending upon the law of the jurisdiction being applied. However, we or
Holdings generally would be considered insolvent at the time we or Holdings
incurred indebtedness under the Bridge Facility or the Notes or the Guarantee,
as the case may be, if:
- the fair market value (or fair salable value) of our assets or the assets
of Holdings, as applicable, were less than the amount required to pay our
or Holdings' total existing debts and liabilities (including the probable
liability on contingent liabilities) as they become absolute or matured,
or
- we or Holdings were incurring debts beyond our or its ability to pay as
such debts mature.
We cannot predict:
- what standard a court would apply in order to determine whether we or the
Guarantor were "insolvent" as of the date we or the Guarantor incurred
indebtedness under the Bridge Facility or issued the Notes or the
Guarantee, or that regardless of the method of valuation a court would
determine that we or the Guarantor were insolvent on that date, or
- whether a court would not determine that the payments constituted
fraudulent transfers on another ground.
To the extent a court voids the Guarantee as a fraudulent conveyance or
holds it unenforceable for any other reason, holders of the Notes would cease to
have any claim in respect of the Guarantor and would be creditors solely of us.
In such event, the claims of the holders of the Notes against the issuer of an
invalid Guarantee, if any such claims were allowed, would be subject to the
prior payment of all liabilities and preferred stock claims of the Guarantor.
There can be no assurance that, after providing for all prior claims, if any,
there would be sufficient assets to satisfy the claims of the holders of the
Notes relating to any voided portions of the Guarantee, if any such claims were
allowed.
Based upon financial and other information available to us, we believe that
we issued the Old Notes and the Notes and Holdings issued its the Guarantee
thereof for proper purposes and in good faith. We also believe that at the time
we and Holdings incurred indebtedness under the Bridge Facility and at the time
we and Holdings issued the Old Notes and the Notes and the Guarantees thereof,
we and Holdings (1) were not insolvent or rendered insolvent thereby, (2) had
and will have sufficient capital to run our business and (3) were and will be
able to pay our debts as they mature or become due. In reaching these
conclusions, we have relied on various valuations and estimates of future cash
flow that necessarily involved a number of assumptions and choices of
methodology. However, a court may not adopt the assumptions and methodologies we
have chosen or concur with our conclusion as to our and Holdings' solvency.
18
<PAGE> 24
USE OF PROCEEDS
This Prospectus is delivered in connection with the sale of the Notes by
BTAB in market-making transactions. We will not receive any of the proceeds from
such sales.
CAPITALIZATION
The following table sets forth the actual consolidated capitalization of
Holdings at December 31, 1998. This table should be read in conjunction with the
financial statements of Holdings and the related notes thereto and "Selected
Historical Consolidated Financial Data," all included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
--------------------
<S> <C>
Long-term debt (including current portion):
Senior Subordinated Notes................................. $ 80,000
Borrowings under the Credit Facility(1)................... --
--------
Total long-term debt................................... 80,000
Redeemable Class A Common Stock........................ 890
Total stockholders' deficit............................ (65,729)
--------
Total capitalization.............................. $ 15,161
========
</TABLE>
- ---------------
(1) The 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 Credit Facility). The Credit Facility
also provides for up to $1.0 million of letters of credit within that
commitment. As of December 31, 1998, there was one letter of credit with a
face amount of approximately $.0.3 million outstanding under the Credit
Facility out of total availability under the borrowing base formula of
approximately $6.7 million as of December 31, 1998.
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<PAGE> 25
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables present selected financial data. The historical
financial data for the years ended December 31, 1996, 1997 and 1998 come from
the audited financial statements of Holdings included elsewhere in this
Prospectus. The selected financial data for the years ended December 31, 1994
and 1995 come from audited financial statements of Holdings that are not
included in this Prospectus.
You should read the financial data below in conjunction with the historical
financial statements and the information included under "Management's Discussion
and Analysis of Financial Condition and Results of Operations," all included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................. $238,960 $175,297 $135,716 $116,268 $103,758
Cost of Revenues
Rebates, postage and freight............................ 174,365 105,212 84,191 80,635 70,747
Processing and servicing................................ 49,434 40,447 31,393 24,920 20,346
-------- -------- -------- -------- --------
Gross profit.............................................. 15,161 29,638 20,132 10,713 12,665
Selling expenses.......................................... 6,059 5,504 4,610 3,493 2,927
General and administrative expenses....................... 5,798 9,754 7,140 5,949 6,127
Compensation charges attributable to Recapitalization..... (43) 17,924 -- -- --
Reserve for lease obligations............................. 850 -- -- --
-------- -------- -------- -------- --------
Operating income (loss)................................... 2,497 (3,544) 8,382 1,271 3,611
Interest expense.......................................... (13,095) (1,029) (91) (252) (163)
Interest income........................................... 666 1,038 201 10 28
Transaction costs attributable to Recapitalization........ -- (1,967) -- -- --
Other income (expense).................................... (182) -- (60) (15) 30
-------- -------- -------- -------- --------
Income (loss) before income taxes......................... (10,114) (5,502) 8,432 1,014 3,506
Provision for income taxes................................ (3,742) 423 -- -- --
-------- -------- -------- -------- --------
Net income (loss)......................................... $ (6,372) $ (5,925) $ 8,432 $ 1,014 $ 3,506
======== ======== ======== ======== ========
UNAUDITED PRO FORMA INCOME TAX DATA:
Income (loss) before income taxes......................... $(10,114) $ (5,502) $ 8,432 $ 1,014 $ 3,506
Provision for (benefit from) income taxes(a).............. (3,742) (1,308) 3,120 375 1,297
-------- -------- -------- -------- --------
Pro forma net income (loss)............................... $ (6,372) $ (4,194) $ 5,312 $ 639 $ 2,209
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
EBITDA, as adjusted(b).................................... $ 4,511 $ (1,956) $ 9,578 $ 2,238 $ 4,561
EBITDA, as adjusted, margin(c)............................ 1.9% (1.1%) 7.1% 1.9% 4.4%
Capital expenditures...................................... 2,374 $ 3,330 $ 1,739 $ 1,061 $ 1,142
Depreciation and amortization(d).......................... 2,014 1,588 1,196 967 950
Cash interest expense(e).................................. 9,450 981 91 252 163
Ratio of earnings to fixed charges(f)..................... -- -- 13.1x 2.5x 9.4x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 12,220 $ 17,940 $ 20,573 $ 242 $ 296
Working Capital............................................. (40) 11,136 5,823 2,076 2,504
Total assets................................................ 45,662 41,742 36,443 20,197 18,589
Total debt.................................................. 80,000 80,000 -- -- --
Redeemable Class A Common Stock............................. 890 7,380 -- -- --
Stockholders' (deficit) equity.............................. (65,729) (65,057) 12,073 7,847 8,166
</TABLE>
20
<PAGE> 26
NOTES TO SELECTED HISTORICAL 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 net 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) Excludes amortization of deferred financing costs.
(e) Cash interest expense excludes amortization of deferred financing costs.
(f) 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 years ended
December 31, 1998 and 1997, earnings were inadequate to cover fixed charges
by $10,114 and $5,502, respectively. The shortfall for the year ended
December 31, 1998 was largely attributable to a fully year of interest
expense on debt incurred in connection with the Recapitalization,
amortization and the write-off of deferred financing costs of $3,600, and a
one-time reserve for the termination of Interactive Voice Response leases of
$850. The shortfall for the year ended December 31, 1997 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.
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<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following information should be read in conjunction with the "Selected
Historical Consolidated Financial Data" and the historical 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 financing thereof. As a result of the Recapitalization and the issuance
of the Notes, the Company is highly leveraged and the interest expense resulting
from the Notes and other outstanding debt has and will continue to significantly
affect the Company's results of operations. Accordingly, the results of
operations for periods subsequent to the Recapitalization and the financing
thereof will not be directly comparable to prior periods. See "Prospectus
Summary -- The Recapitalization."
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 electronic 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 45% 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 United States Postal Service 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's operating results are 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
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<PAGE> 28
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, 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 in
each of the years ended 1997 and 1998, and 82% and 68% of selling, general and
administrative expenses for 1997 and 1998, respectively. 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.
RESULTS OF OPERATIONS
The Year Ended December 31, 1998 Compared with the Year Ended December 31,
1997
Revenues. Revenues for the year ended December 31, 1998 increased by $63.7
million or 36.3% to $239.0 million from $175.3 million for the year ended
December 31, 1997. The increase in revenues reflected an increase in rebate
revenues of $88.0 million, offset in part by a decrease of postage and freight
revenues of $20.2 million and a decrease in servicing revenues of $4.1 million.
The increase in rebate revenues was largely attributable to the addition of new
clients that conducted high-dollar value rebate programs. The reduction in
postage and freight revenues reflects the absence in 1998 of two large premium
programs of one client that required the shipment of high volumes of premium
items. That same client continues to place business with the Company, although
it did not run a similar program in 1998. Servicing revenues were impacted by
the absence of the same client program. The client ran a large premium program
in 1996 that required the Company's services into the second quarter of 1997,
and then ran a similar program in 1997 that resulted in large volumes of
consumer orders in the third and fourth quarters of 1997. Although the client
did not run a similar program in 1998, the Company has replaced most of the
servicing revenue from that client with programs from other existing and new
clients. Servicing revenue from all other clients increased 37.5%, to $52.8
million in 1998 from $38.4 million in 1997.
Gross Profit. The Company's gross profit declined to $15.2 million or 6.3%
of revenues for the year ended December 31, 1998. Gross profit for the year
ended December 31, 1997 was $29.6 million or 16.9% of revenues. The reduction of
gross profit as a percentage of revenues was the result of (i) a change in the
mix of revenues from higher margin servicing revenues and postage and freight
revenues to lower margin rebate revenues and (ii) increased expenses associated
with added capacities and capabilities in anticipation of market changes and
requirements for technology-based
23
<PAGE> 29
services. The 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 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. In 1998, the Company took measures to reduce expenses as
certain client programs had lower than anticipated levels of consumer
participation and the mix of the expected servicing revenue growth over the next
12 months is not expected to require the levels of capacity the Company had in
certain areas. In the third quarter of 1998, the Company closed the outbound
processing facility in Belle Plaine, Minnesota and the inbound processing
facility in Albert Lea, Minnesota. As a result of the Company's strategy to
enter into short-term leases, the Company did not incur ongoing or termination
expenses under either lease. The operations of these facilities were
consolidated into the Company's other existing facilities during the third
quarter of 1998. In addition, an organizational restructuring was also completed
in the beginning of the third quarter of 1998 that consolidated the majority of
the call center functions from the Young America, Minnesota call center to the
Mankato, Minnesota and Oklahoma City, Oklahoma call centers. The Company has
retained a small amount of call center capacity in Young America, Minnesota to
handle small client jobs and call volume overflow from the Company's other call
center facilities.
Operating Income. Operating income for the year ended December 31, 1998
was $2.5 million as compared to an operating loss of $3.5 million for 1997.
Included in the 1997 operating loss were compensation charges of $17.9 million
attributable to the Recapitalization. Excluding the effect of these compensation
charges, 1997 operating income would have been $14.4 million, or 8.2% of
revenues as compared to $2.5 million in 1998 or 1.0% of revenues. This $11.9
million decrease was due to the decrease in gross profit, which was only
partially offset by a $4.0 million reduction in general and administrative
expenses from $9.8 million in 1997 to $5.8 million in 1998, primarily due to a
$4.8 million decrease in profit sharing and management bonuses. No such profit
sharing and management bonuses were paid in 1998. Excluding the 1997 profit
sharing and management bonus expenses of $4.8 million, general and
administrative expenses in 1998 increased 16.0% over 1997, reflecting increased
fees related to the new ownership and debt structure. Selling expenses increased
from $5.5 million in 1997 to $6.0 million in 1998 reflecting additions to sales
and support staff to service new and more complex client programs.
1998 operating income was also adversely affected by a $850,000 one-time
expense related to the reserve for certain operating leases. During the first
quarter of 1998, the Company entered into operating leases to increase its
Interactive Voice Response capacity. These leases were entered into specifically
to meet the estimated requirements of a new customer. Due to a variety of
factors, the Company made a decision to terminate its relationship with this
customer during the fourth quarter of 1998. As a result, the Company had lease
obligations from which it would receive no future economic benefit. During the
fourth quarter, the Company recorded a special charge of $850 to reserve for
these future obligations.
Interest Expense and Interest Income. Interest expense was $13.1 million
in 1998 as compared to $1.0 million in 1997. This increase principally reflects
a full year of interest expense on indebtedness incurred to finance the
Recapitalization and $3.6 million of amortization of deferred financing costs.
Amortization of deferred financing costs included $3.3 million of costs
associated with obtaining the Bridge Facility, which costs were written off upon
repayment of the Bridge Facility with the proceeds of the Old Notes, and the
partial amortization of costs associated with the issuance of the Old Notes and
New Notes thereafter. Interest expense of $1.0 million in 1997 represents the
interest associated with the Bridge Facility for the period of November 25, 1997
through the end of the year. Interest income was $.7 million in 1998 as compared
to $1.0 million in 1997 due to lower average cash balances in 1998.
24
<PAGE> 30
Other Income and Expense. Other expense of $.2 million in 1998 was
primarily related to the investigation of a potential acquisition that took
place in the second quarter of 1998 that was not pursued. In 1997, the Company
incurred $2.0 million of non-recurring fees and expenses in connection with the
Recapitalization.
Income Taxes. The Company recorded an income tax benefit of $3.7 million
for 1998 as compared to an income tax provision of $.4 million in 1997. Prior to
the Recapitalization, the Company was an S corporation for income tax purposes.
Accordingly, for periods prior to the Recapitalization, the Company did not
accrue income tax expense on its historical financial statements. The statement
of income for 1997 includes pro forma net income (loss) information reflecting a
pro forma benefit for taxes in 1997 of $1.3 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.
Net Income. As a result of the foregoing, the Company's net loss increased
to $6.4 million in 1998 from $5.9 million in 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
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 postage and
freight revenues 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, 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 postage and freight revenues
realized as a result of increased volumes and an increase in the discount that
the Company receives from the United States Postal Service.
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,
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compared with $8.4 million, or 6.2% of revenues, in the prior year. The
operating income margin, excluding the effect of the nonrecurring charges,
increased as the increase in gross profit more than offset increases in selling,
general and administrative expenses. Selling expenses increased by $0.9 million
in part due to commissions on higher revenues and in part due to higher payroll
costs. General and administrative expenses increased $2.6 million because of
increases in contractual and discretionary bonuses, phantom stock arrangements
and profit-sharing, which reflected 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 as
compared to 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.
Other Expense. The Company incurred $2.0 million of non-recurring fees and
expenses in connection with the Recapitalization.
Net Income (loss). As a result of the foregoing, the Company incurred a
net loss of $5.9 million in 1997 as compared to a net income of $8.4 million in
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
At December 31, 1998, no amounts were outstanding under the Company's $10.0
million bank revolving credit facility with Norwest Bank Minnesota, N.A.
("Norwest"), and the Company had a stockholders' deficit of $65.7 million,
indebtedness of $80.0 million and negative working capital of $(.04) million. On
November 25, 1997, the Company completed the Recapitalization (see Note 4 of the
Audited Consolidated Financial Statements). On February 23, 1998, Young America
issued $80,000 principal amount of Old Notes. In August 1998, Young America and
Holdings filed with
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the SEC a registration statement relating to an offer to exchange the Old Notes
for an equal aggregate principal amount of Young America's 11 5/8% Series B
Senior Subordinated Notes due 2006. The Notes are also guaranteed by Holdings on
a senior subordinated basis. The registration statement became effective August
6, 1998, and the exchange offer was completed on September 4, 1998.
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 years ended December 31, 1998, 1997 and 1996 net cash
provided by (used in) operating activities were $.9 million, ($8.7) million and
$25.3 million, respectively. In 1998, cash provided by operating activities was
significantly reduced by the payment of interest on the Bridge Facility and
Notes. The cash usage in 1997 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's 1997 cash flow provided by operations was $11.2 million. The $25.3
million of cash provided by operating activities in 1996 was principally the
result of (i) $8.4 million of net income, (ii) a $4.8 million decrease in the
trade receivables account balance and (iii) a $9.3 million increase in the
collections due to and advances from clients' liability account. The Company's
future cash flow from operations will continue to reflect (i) income taxes that
the Company is required to pay as a C corporation and (ii) interest that will be
incurred on outstanding indebtedness, including the Notes.
Net cash used in investing activities for the years ended December 31,
1998, 1997 and 1996 were $2.4 million, $3.3 million, and $1.7 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. To support the Oklahoma call
center, the Company purchased various equipment and leasehold improvements
aggregating $0.5 million. The Company anticipates that capital expenditures for
1999 will not exceed $2.0 million.
Net cash provided by (used in) financing activities for the years ended
December 31, 1998, 1997 and 1996 were $(4.3) million, $9.3 million and ($3.2)
million, respectively. Cash used in 1998 reflects the payment of financing costs
associated with the placement of the Old Notes and a $.7 million payment to the
Selling Stockholders in connection with the Recapitalization. In addition,
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
"Prospectus Summary -- Recapitalization." Net cash provided by financing
activities in 1997 of $9.3 million reflects $80.0 million of proceeds from the
Old Notes and $38.9 million of proceeds from issuance of common stock to the
Investor Group partially offset by $3.3 million of financing costs associated
with the Notes and Bridge Loan, the $92.2 million purchase of stock from the
Selling Stockholders, and $13.9 million of distribution to shareholders prior to
the Recapitalization. Net cash used in 1996 reflects $2.5 million of net
repayments made on short-term borrowings and $.7 million of distributions paid
to shareholders. There were no shareholder distributions in 1998.
The Credit Facility 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 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%. 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 Young America.
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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) for the quarters ending March 31, 1999 and June 30,
1999, a minimum Current Ratio (as defined in the Credit Facility) of 1.0, and
1.10 for each quarter thereafter; and (iii) for the nine months ending September
30, 1999, a minimum cumulative EBITDA of $9.5 million. 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 $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 indebtedness, management fees, disposition of assets,
change of voting control and guarantees.
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 Credit Facility, to meet its liquidity
needs. The Company also expects to utilize operating leases to finance its needs
for facilities and certain equipment. See Note 8 of Notes to the Consolidated
Financial Statements for a summary of the Company's commitments under operating
leases. The Company believes that the cash flow from operations together with
existing cash and cash equivalents and available borrowings under the 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 Credit
Facility or any successor facility. Such availability is or may depend on, among
other things, the Company meeting certain specified 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. 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
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 millenium -- 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.
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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,
is underway. Remediation may include repair, replacement, or upgrade, with
priorities based on a business risk assessment. Based on the information
available to date, the Company does not anticipate any significant readiness
problems with respect to its systems. The Company expects the remediation
efforts to be completed by the end of the third quarter of this year, and
contingency plans, where appropriate, completed by the end of the year. The
Company anticipates that it will incur incremental costs not to exceed $0.5
million in total in addressing Year 2000 issues, of which approximately $0.1
million had been incurred by the end of 1998.
In an effort to review the Year 2000 readiness of its key vendors and
suppliers, the Company has sent to them Year 2000 questionnaires and is in the
process of evaluating the responses. Based on the information received to date,
the Company does not expect any significant Year 2000 problems with its key
vendors and suppliers. However, if the Company's primary telecommunication
providers fail to meet their Year 2000 system requirements on a timely basis,
the Company's call center operations could be significantly impacted which could
have a material adverse effect on the Company. The Company is using a similar
process to evaluate the systems of its clients.
The outcome of the Company's Year 2000 program is subject to a number of
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.
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 risk 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 December 31, 1998, the Company had a fixed rate debt of $80 million and
variable rate available borrowings up to $10 million under the Credit Facility.
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.
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, 1999. 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
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accounting. The Company has not yet quantified the impact of adopting SFAS 133
and has not yet determined the timing of adoption.
In April 1998, the Financial Accounting Standards Board issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start Up Activities", effective
for fiscal years beginning after December 15, 1998. SOP 98-5 requires the
expensing of start-up activities as incurred, versus capitalizing and expensing
them over a period of time. The Company is currently in the process of assessing
the impact of adopting SOP 98-5 and will adopt this new pronouncement in the
first quarter of 1999.
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 Holdings, Inc. and from the date of incorporation on November
25, 1997, Young America Corporation, its wholly owned subsidiary, provide 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 marketing
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
Sprint Corporation, 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 improves the marketing efforts of consumer-oriented companies 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. 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 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.
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In each of the last three fiscal years, the Company managed over 3,500
marketing programs, with between 1,500 and 2,000 programs processed out at any
point in time. As of December 31, 1998, the Company was processing approximately
1,800 client marketing programs. In each of the last three fiscal years, the
Company distributed over 40 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.
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). 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 require a significant amount of contact with the
consumer.
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 1998, 9 have been
clients for more than seven years.
The vast majority of marketing programs undertaken by the Company for its
clients involve direct interaction with consumers. It is critical to the
Company's clients that the various services involved in administering a client's
marketing programs be performed consistently, accurately, courteously and in a
timely manner. The Company believes that these factors 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.
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Sophisticated Information Systems
In 1996, the Company completed its conversion to a new proprietary software
system which has increased the Company's ability to process a greater number and
variety of complex marketing programs than was previously possible. The 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, 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's information system technology has allowed it to develop a proprietary
database of approximately 65 million unduplicated consumer households.
The 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. Designed as an open system, 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 system.
Experienced Management Team
The Company's senior management team has been assembled and developed since
the arrival in July 1993 of its 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. 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 the 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's focus has been to attract and retain 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
$1,076,000 in 1998. 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,
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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 Best Buy Co. Inc., Bali Company,
Target and Intuit Inc. 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 the advantages of
each proposed step with the potential client who 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 believes its 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
satisfactory margin levels while achieving high client 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. The Company, in anticipation of client
needs, upgraded its information processing capabilities and broadened its
ability to process orders to include not only mail but also facsimile, telephone
(including live operator and Interactive Voice Response), 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 Interactive Voice Response capabilities, (ii) full-service
credit card payment processing for marketing programs involving payments by
consumers (iii) improved information processing and consumer data reporting
capabilities and (iv) enhanced teleservice offerings, including predictive
outbound calling and call recording 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. In
1998, the Company began the process to become certified to the COPC-2000
Standard. COPC is an organization that was established to help improve customer
satisfaction and operational performance of customer service providers,
including call centers and fulfillment centers. The COPC-2000 Standard provides
both a benchmark and an improvement methodology for operational performance and
is recognized as the leading standard for excellence in customer service. To
become certified to the COPC-2000 Standard requires a detailed operational audit
to ensure that the customer service provider is compliant to all 32 components
of the standard. The Company has dedicated staff and resources to implement the
processes necessary to gain the COPC-2000 certification. The Company expects to
achieve certification with respect to its call center operations by December
31,1999, and with respect to fulfillment
34
<PAGE> 40
operations by the end of the second quarter of 2000. The Company believes the
COPC-2000 certification will strengthen its market position and become a
competitive advantage. There can be no assurance, however, that certification
will be achieved.
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, 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, including
their buying behavior and preferences. Young America's rebate processing service
allows clients to cost-effectively fulfill rebate requests with laser-printed,
customized checks and collect consumer data on product-choice. 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 18 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
delivery of sales literature and information requests from interested consumers
and retailers.
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<PAGE> 41
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
Interactive Voice Response) and more recently through its Internet web site and
electronic-mail. The Company has approximately 1,500 post office boxes reserved
for handling incoming mail. Orders can vary from mailed-in submissions under
premium 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 Interactive Voice Response-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 40 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 21 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. The Company's information systems and
technology allows it 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 65 million 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, the Company can 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 30 million live calls annually and an additional 300 million calls
utilizing the Company's Interactive Voice Response capacity. The Company's use
of sophisticated communications technology, integrated with its
36
<PAGE> 42
consumer information databases, enhances the effectiveness of customer service
personnel in handling consumer inquiries and data-gathering activities. See
"-- Technology."
SALES AND MARKETING
The Company's sales and marketing organization currently consists of a Vice
President of Sales and Marketing, two senior account executives and seven
account executives including one focused on selling Interactive Voice Response
services, and a sales support department. 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, 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.
TECHNOLOGY
Young America strives to incorporate technology and automation into every
aspect of its business.
Promotion Administration Leader (PAL)
Young America's proprietary software system ("PAL"), 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 65 million 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 multiple high-end UNIX
servers that house the PAL database and direct and control network data flow
among the Company's approximately 45 servers and approximately 1,900 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.
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<PAGE> 43
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 Interactive Voice Response
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
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 for some of its clients. The system
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.
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, services provided by the
Company can be viewed in the context of overall consumer promotional spending by
its clients. 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 $79.4 billion
in 1997. 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 $2.86 billion in 1997,
representing a 14.4% increase over the $2.5 billion reported for 1996. Promo
magazine reported that two of the features driving the growth in promotional
fulfillment spending were Internet contests and sampling programs plus 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 -- The Market in Which We Compete is Highly Competitive."
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<PAGE> 44
WORKFORCE
The Company's workforce is not unionized and consists of approximately 900
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 1998, the Company's active workforce varied
from approximately 1,700 to approximately 2,500, 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, 1998:
<TABLE>
<S> <C>
Full-time fixed employees................................... 12.4%
Full-time variable employees................................ 31.2%
Part-time permanent employees............................... 7.3%
Agency contract employees................................... 26.0%
Independent contractors..................................... 23.1%
-----
Total workforce........................................ 100.0%
</TABLE>
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. Agency contract employees are obtained through
agreements with independent employment agencies and are used 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.
The Company believes that relations with its employees are good.
FACILITIES
The Company's headquarters and main facility are 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 December 31, 1999
Mankato, MN.......... Inbound processing and 54,200 Leased June 30, 2001
customer service
Winthrop, MN......... Outbound processing 24,000 Leased December 31, 2002
Chanhassen, MN....... Information systems 5,000 Leased January 31, 2000
applications
development
Oklahoma City, OK.... Call center 25,000 Leased January 31, 2004
</TABLE>
- ---------------
(1) Owned by Holdings and leased to Young America.
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<PAGE> 45
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.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of Young America and Holdings 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
Roger D. Andersen............. 45 Vice President of Finance, Chief
Financial Officer, Treasurer and
Secretary
Jay F. Ecklund................ 62 Director
J. Mark A. MacDonald.......... 43 Director
</TABLE>
CHARLES D. WEIL joined the Company in July 1993 as its President and Chief
Operating Officer and became a director of the Company in November, 1997. 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 Learningsmith, Inc.,
Classic Communications, Inc. and Distribution Associates, Inc. He has been a
director of Holdings since the Recapitalization.
ROGER D. ANDERSEN joined the Company in November 1998 as Vice President of
Finance, Chief Financial Officer, Treasurer and Secretary of each of Young
America and Holdings. He was previously Senior Vice President and CFO of
Pepsi-Cola General Bottlers in Chicago from 1996 to 1998. He also held similar
positions with Rollerblade, Inc. from 1992 to 1996, and the International
Division of Tonka Corporation from 1989 to 1991. In addition, Mr. Andersen held
various financial management positions with PepsiCo, Inc., including several
international assignments in Asia and Latin America. Mr. Andersen holds a B.A.
degree from Wheaton College and an MBA from Oregon State University.
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.
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<PAGE> 46
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 MetroNet Communications and Q/Media Services
Corporation. He has been a director of Holdings since the Recapitalization.
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 a stockholders' agreement executed in connection with the
Recapitalization (the "Stockholders' Agreement"). Under the Stockholders'
Agreement BTCP is entitled to designate two directors to Holdings' 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 any
stock option plan adopted by Holdings. 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the formation of the Compensation Committee in February 1998,
Holdings 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, 1998, for the Company's Chief Executive Officer and the Company's former
Vice President of Finance and Chief
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<PAGE> 47
Financial Officer (the "Named Executive Officers"). No other person serving as
an executive officer of the Company at December 31, 1998 received in excess of
$100,000 in total compensation in 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ---------------------
-------------------- OPTIONS LTIP ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS GRANTED PAYOUTS(2) COMPENSATION(3)
- --------------------------- ----------- -------- --------- -------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Charles D. Weil............ 1998 $300,000 -- -- $ 34,120 $13,973
President and Chief 1997 264,133 1,161,000 -- 9,718,082 23,708
Executive Officer
L. Joseph Kulas............ 1998 154,295 -- -- -- 3,178
Former Vice President of 1997 150,000 45,000 -- 260,000 22,058
Finance, Chief Financial
Officer, Secretary and
Treasurer(1)
</TABLE>
- ---------------
(1) Mr. Kulas resigned as an executive officer on December 2, 1998.
(2) LTIP payments include a payment to Mr. Kulas in 1997 made pursuant to the
Company's 1997 Management Recognition, Transition and Equity Bonus Plan and
payments made to Mr. Weil under the Old Employment Agreement (as defined
below) including his sale of the Company bonus.
(3) Other compensation includes contributions to defined contribution plans and
payments related to taxable insurance benefits.
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 December 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
$450,000 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 in 1998.
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
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<PAGE> 48
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. The foregoing amounts
are included in the amounts shown for Mr. Weil in the summary compensation
table. 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."
Roger D. Andersen
Effective December 2, 1998, the Company and Roger D. Andersen entered into
an employment agreement (the "Andersen Employment Agreement") pursuant to which
Mr. Andersen has agreed to serve as Chief Financial Officer of YAC. The Andersen
Employment Agreement expires on December 2, 1999, subject to automatic
twelve-month renewals on each anniversary date thereafter, if not canceled by
either party. Base compensation under the Andersen Employment Agreement is
$210,000 per year, and such amount will increase at a minimum of 3% per year on
the anniversary date of such agreement. The Company will reimburse Mr. Andersen
for expenses related to the relocation of his family to Minnesota. In addition,
Mr. Andersen received a $20,000 signing bonus that was paid in January 1999. Mr.
Andersen is eligible to participate in the Company's Management Incentive Plan,
Profit Sharing Plan and Employee Stock Option Plan. If the Company terminates
Mr. Andersen without cause, he is entitled to receive his base salary for twelve
months and an additional lump sum severance payment up to an amount of $210,000
based on the performance of the Company and Mr. Andersen's years of service with
the Company. If Mr. Andersen terminates his employment for good reason after
three years of continuous employment with the Company, he is entitled to 50% of
his base salary for six months.
Employment Agreement with former Chief Financial Officer
Pursuant to an employment agreement with the Company (the "Kulas Employment
Agreement"), Mr. Kulas served as the Chief Financial Officer of each of Young
America and Holdings. The Kulas Employment Agreement expired on August 1, 1998,
subject to an automatic twelve-month renewal, if not canceled by either party.
Base compensation under the Kulas Employment Agreement was $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. Mr. Kulas
resigned as an executive officer of the Company effective December 2, 1998, and
as an employee of the Company effective December 4, 1998. Pursuant to the terms
of a Voluntary Resignation Agreement (the "Kulas Resignation Agreement"), the
Company repurchased the shares of Class A Common Stock owned by Mr. Kulas at the
original purchase price of $60,000.
Change in Control Agreements
In February 1997, the Company entered into change in control agreements
with four persons currently employed by the Company, including Michael J.
Larson, Barbara K. Spiess, David Q. Ferguson, and Frederick J. Stinchfield (the
"Change in Control Agreements"). Each Change in Control Agreement provided 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 continue the employee's benefits
for the earlier of twelve months or until the employee obtains full time
employment. As of December 31, 1998, the Company had not made any payments under
the Change in Control Agreements. Had a Change in Control (as so defined)
occurred as of December 31, 1998, the minimum aggregate amount payable (in
addition to benefits continuation and without giving effect to withholding
taxes) under change in control agreements
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<PAGE> 49
would have been approximately $0.9 million. Such amount may increase based on
the operating results of the Company.
EMPLOYEE STOCK OPTION PLAN
In March, 1999, Holdings adopted an employee stock option plan (the "Stock
Option Plan") pursuant to which options to purchase up to 338,824 shares of
non-voting Class C Common Stock, representing 15% of the fully-diluted Common
Stock of Holdings, may be granted to eligible employees of the Company.
The Stock Option Plan is a time vesting plan with granted options vesting
over a four year period. The options granted under the Stock Option Plan are not
intended to qualify as "incentive stock options" under the provisions of Section
422 of the Internal Revenue Code of 1986, as amended. The administration of the
Stock Option Plan, the selection of participants and the form and the amounts of
the grants are within the sole discretion of the Compensation Committee.
ANNUAL MANAGEMENT INCENTIVE PLAN
The Company has implemented an implement annual bonus plan (the "Annual
Management Incentive Plan") for certain employees (including Messrs. Weil and
Andersen) 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 Plan) exceeds certain
targets or, in the case of certain eligible employees the achievement of certain
personal performance 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. No
payments in respect to the year 1998 were made under the Plan.
EMPLOYEE 401(K)/PROFIT-SHARING PLAN
The Company sponsors a qualified 401(k)/profit-sharing plan under which
eligible employees (as defined in the plan document) are 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 established annually by the Compensation Committee of the Board of
Directors. No payments in respect to the year 1998 were made under the Plan.
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 (including Mr. Kulas).
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. 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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<PAGE> 50
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 Class A Common Stock of Holdings by (i) each person known by
Holdings to own beneficially more than 5% of the outstanding shares of Class A
Common 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
All directors and executive officers as a
group(5)(6) (4 persons)...................... 1,716,776(3)(4) 97.9
</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 Mr. Weil 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. 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 it holds into shares of Class A Common Stock, it would
hold approximately 37.3% of the outstanding voting capital stock of
Holdings. 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.
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<PAGE> 51
(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. As of March 15, 1999,
there were outstanding 1,293,133 shares of Class A Common Stock of which 37,678
constitute redeemable Class A Common Stock, 442,884 shares of Class B Common
Stock and 172,727 shares of 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 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
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<PAGE> 52
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 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
47
<PAGE> 53
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 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.
As of March 15, 1999, Holdings had repurchased 10,798 shares of stock under
such agreements at a total purchase price of $235,000.
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 Holdings 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
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<PAGE> 54
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 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
Young America sold the Old Notes to BTAB 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 BTAB, Young America granted
BTAB a discount on the purchase price of the Old Notes in the amount of $2.4
million. Young America also 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 agreement relating to the Recapitalization
(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
49
<PAGE> 55
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 the escrow account
established by the Company under the Recapitalization Agreement for the benefit
of The Investor Group 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 Company under the Management Agreement,
Holdings will pay annual fees of $187,500 and $62,500 to BTCP and OTPPB,
respectively. Such fees were expensed and accrued in 1998, but through the date
of this Prospectus, no payments have been made under this agreement. 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. A
total of $91,667 was paid in 1998, with the last payment made in December, 1998.
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."
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<PAGE> 56
DESCRIPTION OF THE NOTES
The Old Notes and the Notes were 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
Notes are identical in all respects to the Old Notes, except that the Notes have
been registered under the Securities Act and, therefore, do not bear legends
restricting their transfer and do not contain provisions providing for the
payment of liquidated damages under certain circumstances, which provisions
terminated when the Old Notes were exchanged for the Notes.
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
Young America Corporation and not its Subsidiaries or Holdings.
The Old Notes were and the Notes are unsecured obligations of the Company,
ranking subordinate in right of payment to all Senior Debt of the Company.
The Notes are 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. The Old Notes and the Notes are 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 are outstanding 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
during the twelve-month period commencing on February 15 of the
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<PAGE> 57
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
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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 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 December 31, 1998, the aggregate amount of Senior Debt was approximately
$0.3 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.
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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.
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"
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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.
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
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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 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
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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 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
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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
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
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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 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.
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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 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%
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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).
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
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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 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,
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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
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'
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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
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
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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.
"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
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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
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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
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
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(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 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
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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.
"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).
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"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 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.
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"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 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
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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).
"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
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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 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;
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(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 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;
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(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;
(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
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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.
"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
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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 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
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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.
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 partnership,
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.
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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 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. If the Notes have been held for more than one year
at the time of disposition, the capital gain or loss will be long-term capital
gain or loss, currently taxable at a maximum rate of 20% for U.S. Holders other
than corporations.
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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 non-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 office of a United States broker (or through a foreign
broker's United States office) will generally 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.
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BOOK-ENTRY; DELIVERY AND FORM
Except as described below Notes (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 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.
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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
This Prospectus has been prepared for use by BTAB in connection with offers
and sales of the New Notes in market-making transactions effected from time to
time. BTAB may act as a principal or agent in such transactions, including as
agent for the counterparty when acting as principal or as agent for both
counterparties, and may receive compensation in the form of discounts and
commissions, including from both counterparties when it acts as agent for both.
Such sales will be made at prevailing market prices at the time of sale, at
prices related thereto or at negotiated prices. The Company will not receive any
of the proceeds of such sales. 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.
See "Certain Transactions."
As of the date of this Prospectus, affiliates of BTAB own 53.9% of the
Common Stock (including 45% of the Voting Stock). See "Security Ownership of
Certain Beneficial Owners and Management." BTAB has informed the Company that it
does not intend to confirm sales of the New Notes to any accounts over which it
exercises discretionary authority without the prior specific written approval of
such transactions by the customer.
The Company has been advised by BTAB that, subject to applicable laws and
regulations, BTAB currently intends to make a market in the New Notes following
completion of the Exchange Offer. However, BTAB is not obligated to do so and
any such market-making may be interrupted or 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. There can be no assurance
that an active trading market will develop or be sustained. See "Risk
Factors -- An Active Trading Market for the Notes May Not Develop."
LEGAL MATTERS
The validity of the Notes and the Guarantees was 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, relied on the
opinion of Kaplan, Strangis and Kaplan, P.A., Minneapolis, Minnesota.
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EXPERTS
The consolidated financial statements of Holdings as of and for the two
years ended December 31, 1998 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 year ended December
31, 1996 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 report of McGladrey &
Pullen, LLP on Holdings' financial statements for the fiscal year ended December
31, 1996 did not contain an adverse opinion or a disclaimer of opinion and was
not qualified or modified as to uncertainty, audit scope or accounting
principles. In connection with the audit of Holdings' financial statements for
the fiscal year 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 year ended
December 31, 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.
83
<PAGE> 89
INDEX TO FINANCIAL STATEMENTS
YOUNG AMERICA HOLDINGS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Report of Independent Public Accountants.................... F-3
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-5
Consolidated Statements of Changes in Stockholders'
(Deficit) Equity.......................................... F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 90
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young America Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Young
America Holdings, Inc. (a Minnesota corporation, formerly Young America
Corporation) as of December 31, 1998 and 1997, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Young
America Holdings, Inc. as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 16, 1999
F-2
<PAGE> 91
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young America Holdings, Inc.:
We have audited the accompanying Young America Holdings, Inc. (formerly
Young America Corporation) statements of operations, stockholders' equity and
cash flows for the year 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 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 financial statements referred to above present fairly,
in all material respects, Young America Holdings, Inc.'s results of its
operations and its cash flows for the year ended December 31, 1996 in conformity
with generally accepted accounting principles.
MCGLADREY & PULLEN, LLP
Minneapolis, Minnesota
February 14, 1997
F-3
<PAGE> 92
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
<TABLE>
<CAPTION>
1998 1997
--------- --------
(AMOUNTS IN
THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 12,220 $ 17,940
Trade receivables, net of allowance as of December 31,
1998 and 1997 of $47 and $45, respectively.............. 16,184 11,482
Supplies inventory........................................ 759 615
Prepaid expenses.......................................... 907 518
--------- --------
Total current assets............................... 30,070 30,555
--------- --------
PROPERTY AND EQUIPMENT, at cost:
Land and improvements..................................... 639 639
Building and improvements................................. 5,853 5,710
Machinery and equipment................................... 2,578 2,228
Transportation equipment.................................. 170 147
Office furniture and fixtures............................. 3,122 2,571
Electronic equipment and software......................... 7,281 6,261
--------- --------
19,643 17,556
Less -- Accumulated depreciation.......................... (11,391) (9,661)
--------- --------
8,252 7,895
Deferred financing costs.................................. 3,108 3,292
Deferred tax asset........................................ 4,232 --
--------- --------
Total assets....................................... $ 45,662 $ 41,742
========= ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Noncleared rebate items................................... $ 14,066 $ 4,526
Accounts payable.......................................... 1,732 2,331
Collections due to and advances from clients.............. 6,131 3,548
Deferred income taxes..................................... 897 417
Accrued expenses --
Interest................................................ 3,514 976
Compensation............................................ 1,289 5,860
Other................................................... 2,481 1,761
--------- --------
Total current liabilities.......................... 30,110 19,419
--------- --------
LONG-TERM DEBT (Note 9)..................................... 80,000 80,000
OTHER LONG-TERM LIABILITIES (Note 11)....................... 391 --
COMMITMENTS AND CONTINGENCIES (Note 8)......................
REDEEMABLE CLASS A COMMON STOCK, as of December 31, 1998 and
1997, 40,894 and 339,096 shares issued and outstanding,
respectively (Note 5)..................................... 890 7,380
STOCKHOLDERS' DEFICIT:
Class A Common Stock, par value $1 per share; as of
December 31, 1998 and 1997, 3,000,000 shares authorized,
and 1,255,455 and 964,833 shares issued and outstanding,
respectively (Note 5)................................... 1,255 965
Class B Common Stock, par value $1 per share; as of
December 31, 1998 and 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, 1998 and 1997, 1,500,000 shares authorized;
172,727 shares issued and outstanding................... 173 173
Additional paid-in capital................................ 36,083 30,024
Retained deficit.......................................... (103,683) (96,662)
--------- --------
Total stockholders' deficit........................ (65,729) (65,057)
--------- --------
Total liabilities and stockholders' deficit........ $ 45,662 $ 41,742
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 93
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES................................................ $238,960 $175,297 $135,716
COST OF REVENUES:
Rebates, postage and freight.......................... 174,365 105,212 84,191
Processing and servicing.............................. 49,434 40,447 31,393
-------- -------- --------
Gross profit....................................... 15,161 29,638 20,132
-------- -------- --------
OPERATING EXPENSES:
Selling............................................... 6,059 5,504 4,610
General and administrative............................ 5,798 9,754 7,140
Compensation charges attributable to
Recapitalization................................... (43) 17,924 --
Reserve for lease obligations (Note 11)................. 850 -- --
-------- -------- --------
12,664 33,182 11,750
-------- -------- --------
Operating (loss) income............................ 2,497 (3,544) 8,382
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense...................................... (13,095) (1,029) (91)
Interest income....................................... 666 1,038 201
Transaction costs attributable to Recapitalization.... -- (1,967) --
Other................................................. (182) -- (60)
-------- -------- --------
Other income (expense)............................. (12,611) (1,958) 50
(LOSS) INCOME BEFORE PROVISION (BENEFIT) FOR INCOME
TAXES................................................. (10,114) (5,502) 8,432
PROVISION (BENEFIT) FOR INCOME TAXES.................... (3,742) 423 --
-------- -------- --------
Net income (loss).................................. $ (6,372) $ (5,925) $ 8,432
======== ======== ========
UNAUDITED PRO FORMA NET (LOSS) INCOME:
Income (loss) before provision (benefit) for income
taxes.............................................. $(10,114) $ (5,502) $ 8,432
Pro forma income tax (benefit) expense................ (3,742) (1,308) 3,120
-------- -------- --------
Pro forma net income (loss)........................ $ (6,372) $ (4,194) $ 5,312
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 94
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
COMMON COMMON COMMON
STOCK STOCK STOCK ADDITIONAL RETAINED
-------------------- --------------- --------------- PAID-IN EARNINGS
SHARES VALUE SHARES VALUE SHARES VALUE CAPITAL (DEFICIT) TOTAL
---------- ------- ------- ----- ------- ----- ---------- --------- --------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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)
Net loss................ -- -- -- -- -- -- -- (6,372) (6,372)
Reclassification from
Redeemable Class A
Common Stock.......... 290,622 290 -- -- -- -- 6,059 -- 6,349
Final
recapitalization...... -- -- -- -- -- -- -- (649) (649)
---------- ------- ------- ---- ------- ---- ------- --------- --------
BALANCE, DECEMBER 31,
1998.................... 1,255,455 $ 1,255 442,884 $443 172,727 $173 $36,083 $(103,683) $(65,729)
========== ======= ======= ==== ======= ==== ======= ========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 95
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)....................................... $ (6,372) $ (5,925) $ 8,432
Adjustments to reconcile net (loss) income to net cash
provided by (used in) operating activities --
Depreciation and amortization........................ 5,660 1,636 1,196
Deferred income taxes................................ (3,752) 417 --
Changes in assets and liabilities:
Trade receivables.................................. (4,702) (2,950) 4,822
Supplies inventory................................. (144) 114 (217)
Prepaid expenses................................... (389) (159) (41)
Noncleared rebate items............................ 9,540 2,267 (1,688)
Accounts payable................................... (599) 125 1,303
Collections due to and advances from clients....... 2,583 (7,631) 9,278
Accrued expenses................................... (1,313) 3,358 2,135
Other, net........................................... 436 97 60
-------- -------- -------
Net cash provided by (used in) operating
activities...................................... 948 (8,651) 25,280
-------- -------- -------
INVESTING ACTIVITIES:
Purchases of property and equipment..................... (2,374) (3,330) (1,735)
-------- -------- -------
Net cash used in investing activities.............. (2,374) (3,330) (1,735)
-------- -------- -------
FINANCING ACTIVITIES:
Net repayments of short-term borrowings................. -- -- (2,494)
Proceeds from issuance of senior subordinated notes..... 80,000 -- --
Proceeds from (repayment of) bridge facility............ (80,000) 80,000 --
Distributions paid to stockholders...................... -- (13,899) (720)
Proceeds from issuance of common stock.................. -- 38,829 --
Redemption of common stock.............................. -- (92,242) --
Payments of financing costs............................. (3,461) (3,340) --
Redemption of Class A common stock...................... (141) -- --
Final payment to selling shareholders................... (692) -- --
-------- -------- -------
Net cash provided by (used in) financing
activities...................................... (4,294) 9,348 (3,214)
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents..................................... (5,720) (2,633) 20,331
CASH AND CASH EQUIVALENTS:
Beginning of year....................................... 17,940 20,573 242
-------- -------- -------
End of year............................................. $ 12,220 $ 17,940 $20,573
======== ======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payment for interest............................... $ 10,558 $ 5 $ 94
======== ======== =======
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Distributions payable at year-end....................... $ -- $ -- $ 3,487
Income taxes paid....................................... $ 11 $ 6 $ --
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 96
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
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 9, 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 9.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Holdings and YAC. 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 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
F-8
<PAGE> 97
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 of 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.
Supplies Inventory
Inventory is stated at the lower of 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
Deferred financing costs are 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.
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
F-9
<PAGE> 98
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Use of Estimates
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The ultimate results could differ from those estimates.
Fair Value of Financial Instruments
The carrying amount of cash equivalents, trade receivables (net) and
accounts payable approximate fair market value because of the short maturity of
these instruments. The Company's Senior Subordinated Notes were recorded at fair
value in connection with the February 23, 1998 offering. The fair value, based
upon market quote activity as of year-end is $40,000.
Reclassifications
Certain amounts previously reported in the 1997 and 1996 consolidated
financial statements have been reclassified to conform to the 1998 presentation.
The reclassifications had no effect on previously reported net income (loss) or
stockholders' deficit.
Comprehensive Income
Effective January 1, 1998, the Company adopted provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This statement established standards for reporting and display of comprehensive
income and its components. Comprehensive income reflects the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from nonowner sources. For the Company, comprehensive income
represents net income as there are no other transactions, events or
circumstances from nonowner sources.
Segment Reporting
In 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information (see Note 10).
F-10
<PAGE> 99
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
New 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, 1999. 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.
In April 1998, the Financial Accounting Standards Board issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities," effective
for fiscal years beginning after December 15, 1998. SOP 98-5 requires the
expensing of start-up activities as incurred, versus capitalizing and expensing
them over a period of time. The Company is currently in the process of assessing
the impact of adopting SOP 98-5 and will adopt this new pronouncement in the
first quarter of 1999.
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, dependence on the services
of the USPS and, to a lesser degree, the services of private delivery services
at cost-effective levels.
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, 1998, 1997 and 1996, the portions of revenue recognized by
the Company as slippage were $3,988, $3,288 and $2,433, 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 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 transactions where the Company funds its client's
rebate program from its own working capital rather than surrendering such
amounts to the
F-11
<PAGE> 100
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
surrender of slippage to either of such states. 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 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.
4. THE RECAPITALIZATION:
On November 25, 1997 (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 was purchased by an
investor group (the Investor Group) including BT Capital Partners, Inc. (BTCP)
F-12
<PAGE> 101
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 herein 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. 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. The
final allocation of the escrow amount will be made in the second quarter of
1999.
Pursuant to the terms of the Recapitalization Agreement, Holdings made an
additional payment of approximately $692 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. The Company had recorded the
compensation expense associated with such payment based on its best estimates at
the end of 1997. 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.
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, the affirmative vote of a
majority of the total number of shares of Class B or Class C Common Stock, as
applicable, is required for the issuance or sale of additional shares of Class B
or Class C Common Stock, respectively, the reclassification cancellation, or
retirement of the Class B or Class C Common Stock, respectively, or any
amendment, waiver or corporate transaction that adversely affects the Class B or
Class C Common Stock, respectively. 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
F-13
<PAGE> 102
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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; or
(v) an Approved Sale (as defined below) has been proposed to the board of
directors of Holdings (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.
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, the Company
and its 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 pursuant to a Stock Subscription and
Repurchase Agreement. Each of the 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, such Management Stockholder (or his successors) will
have the right (within a specified period of time) to cause Holdings to
repurchase his stock. As discussed below, subsequent to December 31, 1997,
Holdings and Mr. Weil terminated such right granted to Mr. Weil.
The repurchase price to be paid by Holdings for any employee stock
repurchased pursuant to the stock agreements will, in most situations, be the
fair market value for such shares (to be determined by the Board of Directors 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 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, 1997, the arrangement with Mr. Weil was amended such that Mr. Weil
will no longer have the ability to require the
F-14
<PAGE> 103
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 adopted an employee stock option plan (the Employee Stock Option
Plan) in March 1999 that will provide for grants of shares of nonvoting Class C
Common Stock. 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 and its senior
stockholders entered into an equity registration rights agreement (the Equity
Registration Rights Agreement). The Equity Registration Rights Agreement grants
the stockholders that are 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 stockholders' 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, as
defined, occurs 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 occurs 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
F-15
<PAGE> 104
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 became operative, the amount
previously classified as Redeemable Class A Common Stock was reclassified to
Stockholders' Deficit. At December 31, 1997, the aggregate value ascribed to the
Redeemable Class A Common Stock for these shares was $6,349. This amount has
been reclassified to stockholders' deficit at December 31, 1998. In addition,
the Company redeemed Class A Common Stock with an aggregate value of $141 in
1998.
6. INCOME TAXES:
The income tax provision (benefit) for the years ended December 31, 1998
and 1997 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------- ----
<S> <C> <C>
Current................................................... $ 10 $ 6
Deferred.................................................. (3,752) 417
------- ----
$(3,742) $423
======= ====
</TABLE>
The provision (benefit) 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, 1998 and 1997, the tax effects of
temporary differences which give rise to a significant portion of deferred tax
assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Slippage............................................... $(2,142) $(1,458)
Net operating losses................................... 4,350 608
Deferred compensation.................................. 433 433
Lease obligation write-off............................. 315 --
Self-insurance reserves................................ 215 175
Depreciation........................................... (173) (207)
Other.................................................. 337 32
------- -------
$ 3,335 $ (417)
======= =======
</TABLE>
The Company's current period net operating loss will be available to offset
future tax liabilities through 2018. 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.
F-16
<PAGE> 105
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation of income taxes computed at the statutory rates to the
reported income tax provision (benefit) for the years ended December 31, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Taxes at federal statutory rates............................ $(3,439) $(1,926)
State taxes, net of federal benefit......................... (336) --
Benefits accruing to former S corporation stockholders...... -- 625
Liability triggered by the Company's change in tax status... -- 928
Nondeductible recapitalization expenses..................... -- 688
Other....................................................... 33 108
------- -------
Provision (benefit) for income taxes........................ $(3,742) $ 423
======= =======
</TABLE>
7. EMPLOYMENT AGREEMENTS AND COMPENSATION MATTERS:
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. Base
compensation under the Weil Employment Agreement is $300 per year and 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. In addition, on January 7, 1998,
Mr. Weil received a bonus of $500 in satisfaction of certain obligations of
Holdings to Mr. Weil. 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.
Effective December 2, 1998, the Company and Roger D. Andersen entered into
an employment agreement (the Andersen Employment Agreement) pursuant to which
Mr. Andersen has agreed to serve as Chief Financial Officer of YAC. The Andersen
Employment Agreement expires on December 2, 1999, subject to automatic
twelve-month renewals on each anniversary date thereafter, if not canceled by
either party. Base compensation under the Andersen Employment Agreement is $210
per year, and such amount will increase at a minimum of 3% per year on the
anniversary date of such agreement. Mr. Andersen is eligible to participate in
the Company's Management Incentive Plan, Profit Sharing Plan and Employee Stock
Option Plan. If the Company terminates Mr. Andersen without cause, he is
entitled to receive his base salary for twelve months and an additional lump-sum
severance payment up to an amount of $210, based on the performance of the
Company and
F-17
<PAGE> 106
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Mr. Andersen's years of service with the Company. If Mr. Andersen terminates his
employment for good reason after three years of continuous employment with the
Company, he is entitled to 50% of his base salary for six months.
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 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 and $298 for the years ended December 31, 1997 and
1996, 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.
8. 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 $187 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.
Leases
The Company has operating leases for warehouse space and equipment. The
approximate future minimum payments under these obligations for the years ending
December 31 are as follows:
<TABLE>
<S> <C>
1999................................................ $6,261
2000................................................ 5,345
2001................................................ 2,320
2002................................................ 846
2003................................................ 324
Thereafter.......................................... 27
</TABLE>
Total rent expense was $5,163, $2,640 and $2,008 for the years ended
December 31, 1998, 1997 and 1996, respectively.
F-18
<PAGE> 107
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Guarantees
Sweepstakes performance bonds are guaranteed for certain clients based on
certain financial criteria. Holdings had guaranteed approximately $9,978 and
$6,200 in performance bonds for various clients as of December 31, 1998 and
1997, respectively. The Company also obtains an indemnity agreement from these
clients indemnifying the Company from obligations under the performance bonds.
9. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Bridge facility........................................ $ -- $80,000
Senior subordinated notes.............................. 80,000 --
------- -------
Total............................................. $80,000 $80,000
======= =======
</TABLE>
The 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). 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,
and the associated deferred financing fees of $3.3 million were written off and
are included in interest expense in the accompanying consolidated statements of
operations.
The Notes Offering
On February 23, 1998, YAC issued $80,000 principal amount of 11 5/8% Series
A Senior Subordinated Notes due in 2006 (the Old Notes). In September 1998,
pursuant to a registration statement file with the Securities and Exchange
Commission, YAC exchanged all of the Old Notes for an equal aggregate principal
amount of Series B Senior Subordinated notes due 2006 (the New Notes, and
together with the Old Notes, the Notes) having substantially the same terms as
the Old Notes. Interest on the Notes is payable semiannually in arrears on
February 15 and August 15 of each year, beginning August 15, 1998. The proceeds
from the issuance of the Old Notes were distributed and loaned by YAC to its
parent, Holdings, and used by Holdings to repay amounts outstanding under the
Bridge Facility.
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 are subordinated to all existing and future senior
indebtedness 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
F-19
<PAGE> 108
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Holdings.............................................. $ -- $ -- $ --
YAC................................................... 238,960 175,297 135,716
-------- -------- --------
Consolidated....................................... $238,960 $175,297 $135,716
======== ======== ========
Gross profit:
Holdings.............................................. $ -- $ -- $ --
YAC................................................... 15,161 29,638 20,132
-------- -------- --------
Consolidated....................................... $ 15,161 $ 29,638 $ 20,132
======== ======== ========
Net income (loss):
Holdings.............................................. $ -- $ -- $ --
YAC................................................... (6,372) (5,925) 8,432
-------- -------- --------
Consolidated....................................... $ (6,372) $ (5,925) $ 8,432
======== ======== ========
Current assets:
Holdings.............................................. $ 373 $ 357 $ --
YAC................................................... 29,697 30,198 30,193
-------- -------- --------
Consolidated....................................... $ 30,070 $ 30,555 $ 30,193
======== ======== ========
Noncurrent assets:
Holdings.............................................. $ 2,512 $ 2,667 $ 2,674
YAC................................................... 13,080 8,520 3,576
-------- -------- --------
Consolidated....................................... $ 15,592 $ 11,187 $ 6,250
======== ======== ========
Current liabilities:
Holdings.............................................. $ -- $ -- $ --
YAC................................................... 30,110 19,419 24,370
-------- -------- --------
Consolidated....................................... $ 30,110 $ 19,419 $ 24,370
======== ======== ========
Noncurrent liabilities:
Holdings.............................................. $ -- $ -- $ --
YAC................................................... 80,391 80,000 --
-------- -------- --------
Consolidated....................................... $ 80,391 $ 80,000 $ --
======== ======== ========
</TABLE>
The Notes are redeemable at the option of YAC prior to February 15, 2002.
Subsequent to that 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>
<CAPTION>
PERCENTAGE
----------
<S> <C>
2002............................................. 105.813%
2003............................................. 103.875
2004............................................. 101.938
2005 and thereafter.............................. 100.000
</TABLE>
F-20
<PAGE> 109
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 YAC and are subordinated in right of payment to
all existing and future senior indebtedness of YAC, including indebtedness under
the New Credit Facility (see below).
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.
The Company was in compliance with all such covenants as of December 31, 1998.
Credit Facility
On April 7, 1998, YAC entered into a revolving credit facility with Norwest
Bank Minnesota, N.A. (Norwest). The facility was amended on November 16, 1998
(the Credit Facility).
Under the Credit Facility, borrowings are available equal to 85% of
eligible receivables, subject to certain terms and conditions. The Credit
Facility provides a $10,000 revolving credit facility, with an imbedded sublimit
of $1,000 available for letters of credit. Borrowings accrue interest at
Norwest's base rate plus 2%. The Credit Facility also provides for an unused
line fee of 1/2 of 1% per annum on any undrawn amounts. The Credit Facility has
a final maturity date of March 31, 2001, and does not require scheduled interim
reductions or payments, although YAC is permitted to make optional prepayments
and commitment reductions.
The Credit Facility is secured by a first priority security interest in the
accounts receivable and related general intangibles of YAC. The Credit Facility
includes certain restrictive covenants including restriction of acquisitions,
investments, dividends and other indebtedness (including capital leases).
Additionally, the Credit Facility contains a cross default provision with the
Notes. The Credit Facility was amended on March 12, 1999 (the Amended Facility).
The Amended Facility provides for borrowings to accrue interest, at the option
of YAC, 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%. The Amended Facility revises the restrictive covenants to
include limitations on capital expenditures, and commencing with the quarter
ending December 31, 1999, requires the Company to maintain its Interest Coverage
Ratio (as defined in the Amended Facility), determined at the end of each
quarter, at not less than 1.35 to 1. The Company was in compliance with all
required covenants as of December 31, 1998. There were no amounts outstanding
under the Credit Facility as of December 31,1998.
10. 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
F-21
<PAGE> 110
YOUNG AMERICA HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 approximate composition of revenues by
revenue category for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CIP services.................................... $ 56,509 $ 60,641 $ 44,832
Rebate revenues................................. 162,844 74,864 59,079
Postage and freight billings.................... 19,607 39,792 31,805
-------- -------- --------
$238,960 $175,297 $135,716
======== ======== ========
</TABLE>
The Company sells its services to consumer product and consumer service
companies. Set forth below is revenue information for the years 1998, 1997 and
1996 for each client that accounted for 5% or more of the Company's total
revenue in each respective year. Client A, B and C may represent different
entities in each year:
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Client A.................................... $52,800 22.1% $42,836 24.4% $28,420 20.9%
Client B.................................... 21,393 9.0 11,572 6.6 11,418 8.4
Client C.................................... 13,607 5.7 9,448 5.4 * *
</TABLE>
- ---------------
* Less than 5% of total revenue.
As of December 31, 1998, three clients individually representing 5% or more
of the Company's total accounts receivable represented approximately $6,489 of
accounts receivable, or 40% of the total accounts receivable balance at that
date. As of December 31, 1997, three clients individually representing 5% or
more of the Company's total accounts receivable represented approximately $2,129
of accounts receivable, or 19% of the total accounts receivable balance at that
date.
11. RESERVE FOR IVR LEASES:
During the first quarter of 1998, the Company entered into operating leases
to increase its interactive vote recording (IVR) capacity. These leases were
entered into specifically to meet the estimated requirements of a new customer.
Due to a variety of factors, the Company made a decision to terminate its
relationship with this customer during the fourth quarter of 1998. As a result,
the Company has lease obligations from which it will receive no future economic
benefit. During the fourth quarter, the Company recorded a special charge of
$850 to reserve for these future obligations. This amount has been recorded as a
separate component of operating income in the accompanying consolidated
statement of operations and is included in current and long-term liabilities in
the accompanying balance sheet.
F-22
<PAGE> 111
- ------------------------------------------------------
- ------------------------------------------------------
WE HAVE NOT AUTHORIZED ANY DEALER, SALESPERSON OR OTHER PERSON TO GIVE ANY
INFORMATION OR REPRESENT ANYTHING TO YOU OTHER THAN THE INFORMATION CONTAINED IN
THIS PROSPECTUS. YOU MUST NOT RELY ON ANY UNAUTHORIZED INFORMATION OR
REPRESENTATIONS. THIS PROSPECTUS DOES NOT OFFER TO SELL OR BUY ANY OF THE
SECURITIES IN ANY JURISDICTION WHERE IT IS UNLAWFUL. THE INFORMATION IN THIS
PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE
TIME OF DELIVERY OF THIS PROSPECTUS OR ANY SALE OF THESE SECURITIES.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information................. i
Prospectus Summary.................... 1
Risk Factors.......................... 10
Use of Proceeds....................... 19
Capitalization........................ 19
Selected Historical Consolidated
Financial Data...................... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business.............................. 31
Management............................ 40
Security Ownership of Certain
Beneficial Owners and Management.... 45
Certain Transactions.................. 49
Description of the Notes.............. 51
Certain Federal Income Tax
Considerations...................... 78
Book-Entry; Delivery and Form......... 81
Plan of Distribution.................. 82
Legal Matters......................... 82
Experts............................... 83
Index to Financial Statements......... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
$80,000,000
11 5/8% SERIES B SENIOR
SUBORDINATED NOTES DUE 2006
YOUNG AMERICA
CORPORATION
- ------------------------------------------------------
PROSPECTUS
- ------------------------------------------------------
BT ALEX.BROWN
April , 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 112
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 302A.521, Subd. 2 of the Minnesota Business Corporation Act (the
"MBCA") requires every Minnesota corporation to indemnify a person made or
threatened to be made a party to a proceeding by reason of the former or present
official capacity of such person with respect to such corporation, against
judgments, penalties, fines, including, without limitation, excise taxes
assessed against such person with respect to an employee benefit plan,
settlements, and reasonable expenses, including attorneys' fees and
disbursements, incurred by such person in connection with such proceeding with
respect to the same acts or omissions if such person (1) has not been
indemnified by another organization or employee benefit plan for the same
judgements, penalties or fines; (2) acted in good faith; (3) received no
improper personal benefit, and statutory procedure has been followed in the case
of any conflict of interest by a director; (4) in the case of a criminal
proceeding, had no reasonable cause to believe the conduct was unlawful; and (5)
in the case of acts or omission occurring in the performance of such person's
official capacity of director, or for a person not a director, in such person's
official capacity as an officer, board committee member or employee, reasonably
believed that the conduct was not opposed to the best interest of the
corporation. In addition, Section 302A.521, Subd. 3, requires, in certain
instances, payment by a corporation, upon written request, of reasonable
expenses incurred by such person in advance of final disposition of such
proceeding. A decision as to the indemnification required under the MBCA by a
corporation with respect to any proceeding is to be made by a disinterested
majority of the board of directors present at a meeting at which a disinterested
quorum is present, or by a designated committee of such board of directors, by
special legal counsel, by the shareholders, or, in a proceeding brought by any
party with respect to an indemnification claim, by a court of competent
jurisdiction.
The Bylaws of Young America and Holdings provide that Young America and
Holdings shall, to the extent authorized under the MBCA, indemnify any directors
or officers of Young America or Holdings, as the case may be, for acts or
omissions covered by Section 302A.521 of the MBCA.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<C> <S>
3.1 Articles of Incorporation of Young America
3.2 Amended and Restated Articles of Incorporation of Holdings
3.3 Bylaws of Young America
3.4 Restated Bylaws of Holdings
4.1 Indenture dated as of February 23, 1998 for the Notes
(including the form of New Note attached as Exhibit B
thereto) among Young America, Holdings and Marine Midland
Bank, as Trustee
4.2 Registration Rights Agreement dated as of February 23, 1998
among Young America, Holdings and the Initial Purchaser
5.1 Opinion of O'Sullivan Graev & Karabell, LLP
5.2 Opinion of Kaplan, Strangis and Kaplan, P.A.
10.1 Recapitalization Agreement dated November 25, 1997 among
Holdings, Jay F. Ecklund ("Ecklund"), John F. Ecklund 1995
Irrevocable Trust, Sheldon McKensie Ecklund 1995 Irrevocable
Trust, John F. Ecklund 1997 Irrevocable Trust, Sheldon
McKensie Ecklund 1997 Irrevocable Trust, Jay F. Ecklund 1997
Irrevocable Annuity Trust (the "Ecklund Trusts") and BTCP
10.2 Escrow Agreement dated as of November 25, 1997 among
Holdings, Ecklund, the Ecklund Trusts and Norwest Bank
Minnesota, National Association, as Escrow Agent
</TABLE>
II-1
<PAGE> 113
<TABLE>
<C> <S>
10.3 Put Option Agreement dated as of November 25, 1997 between
Holdings and Ecklund
10.4 Stock Purchase Agreement dated November 25, 1997 between
Holdings and BTCP
10.5 Stock Purchase Agreement dated November 25, 1997 between
Holdings and OTPPB
10.6 Stockholders' Agreement dated as of November 25, 1997 among
Holdings, BTCP, OTPPB and Ecklund
10.7 Amended and Restated Registration Rights Agreement dated as
of July 31, 1998 among Holdings, BTCP, OTPPB and Ecklund.
10.8 Purchase Agreement dated as of February 18, 1998 among Young
America, Holdings and BTAB
10.9 Management Fee Agreement dated as of November 25, 1997 among
Holdings, BTCP and OTPPB
10.10 Stock Subscription and Repurchase Agreement dated November
25, 1997 between Holdings and Charles D. Weil
10.11 Amendment to Stock Subscription and Repurchase Agreement
dated as of February 23, 1998 between Holdings and Charles
D. Weil
10.12 Stock Subscription and Repurchase Agreement dated November
25, 1997 between Holdings and L. Joseph Kulas
10.13 Employment Agreement dated November 24, 1997 between
Holdings and Charles D. Weil
10.14 Employment Agreement dated August 1, 1996 between Holdings
and L. Joseph Kulas
10.15 1997 Management Recognition, Transition and Equity Bonus
Plan of Holdings dated November 25, 1997
10.16 Change in Control Agreement dated February 21, 1997 between
Holdings and L. Joseph Kulas
10.17 Credit Agreement dated April 7, 1998 between Young America
and Norwest Bank Minnesota, National Association
10.18 Change-in-Control Agreement dated as of February 21, 1997
between Holdings and Frederick H. Stinchfield
10.19 Change-in-Control Agreement dated as of February 21, 1997
between Holdings and David Q. Ferguson
10.20 Change-in-Control Agreement dated as of February 21, 1997
between Holdings and Robert J. Beaudoin
10.21 Change-in-Control Agreement dated as of February 21, 1997
between Holdings and Michael Larson
10.22 Change-in-Control Agreement dated as of February 21, 1997
between Holdings and Barbara Spiess.
10.23 Change-in-Control Agreement dated as of February 21, 1997
between Holdings and Sharon Wagner
10.24 Senior Credit Agreement dated as of November 25, 1997 among
Young America, Holdings, the Lenders names therein and
Bankers Trust Company
10.25 Non-Competition Agreement dated as of November 25, 1997
among Holdings, Ecklund and the other individuals listed on
the signature pages thereto
10.26 Release and Indemnity Agreement dated as of November 21,
1997 among Holdings, Ecklund, the Ecklund Trusts, Albert O.
Foster, Jerome J. Jenko, Thomas O. Moe, and R. Gary St.
Marie
</TABLE>
II-2
<PAGE> 114
<TABLE>
<C> <S>
10.27 Form of Exchange Agent Agreement among Holdings, the Company
and Marine Midland Bank
10.28 Voluntary Resignation Agreement dated October 1, 1998
between Holdings, Young America & L. Joseph Kulas
(Incorporated by reference to Exhibit 10.15 of Young
America's and Holdings' Annual Report on Form 10-K for the
year ended December 31, 1998)
10.29 Employment Agreement dated December 2, 1998 between Young
America & Roger D. Andersen (Incorporated by reference to
Exhibit 10.16 of Young America's and Holdings' Annual Report
on Form 10-K for the year ended December 31, 1998)
10.30 First Amendment to Credit Agreement dated November 16, 1998
between Young America and Norwest Bank Minnesota, National
Association (Incorporated by reference to Exhibit 10.20 of
Young America's and Holdings' Quarterly Report on Form 10-Q
for the Quarter ending September 30, 1998)
10.31 Second Amendment to Credit Agreement dated March 12, 1999
between Young America and Norwest Bank Minnesota, National
Association (Incorporated by reference to Exhibit 10.21 of
Young America Corporation's and Holdings' Annual Report on
Form 10-K for the year ended December 31, 1998)
10.32 Young America Holdings, Inc. 1999 Stock Option Plan.
(Incorporated by reference to Exhibit 10.29 of Young
America's and Holdings Annual Report on Form 10-K for the
year ended December 31, 1998)
12.1 Statement re: computation of ratios (Incorporated by
reference to Young America Corporation 10-K filed on March
31, 1999)
16.1 Letter re Change in Certifying Accountant
21.1 Subsidiaries of the Registrants (Incorporated by reference
to Young America Corporation 10-K filed on March 31, 1999)
23.1 Consent of O'Sullivan Graev & Karabell, LLP (included in
Exhibit 5.1)
*23.2 Consent of Arthur Andersen LLP
*23.3 Consent of McGladrey & Pullen, LLP
23.4 Consent of Kaplan, Strangis and Kaplan, P.A. (included in
Exhibit 5.2)
24.1 Powers of Attorney (included on the signature pages
previously filed)
25.1 Statement of Eligibility and Qualifications under the Trust
Indenture Act of 1939 of Marine Midland Bank as Trustee
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Filed herewith
(b) Financial Statement Schedules:
All schedules are omitted because they are not applicable or the required
information is shown in financial statements or notes thereto.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-3
<PAGE> 115
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrants pursuant to the MBCA, the Act, the
Certificate of Incorporation and Bylaws of Young America or Holdings, or
otherwise, the registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrants of expenses incurred or paid by a director, officer
or controlling person of any registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrants will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrants hereby undertake to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned registrants hereby undertake to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE> 116
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
have duly caused this Post-Effective Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 20th day of
April, 1999.
Young America Corporation
By: /s/ CHARLES D. WEIL
------------------------------------
Name: Charles D. Weil
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to Registration Statement on Form S-4 has been
signed as of the 20th day of April, 1999 by the following persons in the
capacity indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ CHARLES D. WEIL President and Chief Executive Officer
- ----------------------------------------------------- (principal executive officer)
Charles D. Weil
/s/ ROGER D. ANDERSEN Vice President of Finance, Treasurer,
- ----------------------------------------------------- Secretary and Chief Financial Officer
Roger D. Andersen (principal financial and accounting officer)
/s/ ROBERT MARAKOVITS Chairman of the Board
- -----------------------------------------------------
Robert Marakovits
Director
- -----------------------------------------------------
Jay F. Ecklund
* Director
- -----------------------------------------------------
J. Mark A. MacDonald
</TABLE>
*By: /s/ CHARLES D. WEIL
-------------------------------
Attorney-in-Fact
II-5
<PAGE> 117
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrants
have duly caused this Post-Effective Amendment No. 1 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 20th day of
April, 1999.
Young America Holdings, Inc.
By: /s/ CHARLES D. WEIL
------------------------------------
Name: Charles D. Weil
Title: President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment No. 1 to Registration Statement on Form S-4 has been
signed as of the 20th day of April, 1999 by the following persons in the
capacity indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ CHARLES D. WEIL President and Chief Executive Officer
- ----------------------------------------------------- (principal executive officer)
Charles D. Weil
/s/ ROGER D. ANDERSEN Vice President of Finance, Treasurer,
- ----------------------------------------------------- Secretary and Chief Financial Officer
Roger D. Andersen (principal financial and accounting officer)
/s/ ROBERT MARAKOVITS Chairman of the Board
- -----------------------------------------------------
Robert Marakovits
Director
- -----------------------------------------------------
Jay F. Ecklund
* Director
- -----------------------------------------------------
J. Mark A. MacDonald
</TABLE>
*By: /s/ CHARLES D. WEIL
-------------------------------
Attorney-in-Fact
II-6
<PAGE> 118
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
3.1 Articles of Incorporation of Young America
3.2 Amended and Restated Articles of Incorporation of Holdings
3.3 Bylaws of Young America
3.4 Restated Bylaws of Holdings
4.1 Indenture dated as of February 23, 1998 for the Notes
(including the form of New Note attached as Exhibit B
thereto) among Young America, Holdings and Marine Midland
Bank, as Trustee
4.2 Registration Rights Agreement dated as of February 23, 1998
among Young America, Holdings and the Initial Purchaser
5.1 Opinion of O'Sullivan Graev & Karabell, LLP
5.2 Opinion of Kaplan, Strangis and Kaplan, P.A.
10.1 Recapitalization Agreement dated November 25, 1997 among
Holdings, Jay F. Ecklund ("Ecklund"), John F. Ecklund 1995
Irrevocable Trust, Sheldon McKensie Ecklund 1995 Irrevocable
Trust, John F. Ecklund 1997 Irrevocable Trust, Sheldon
McKensie Ecklund 1997 Irrevocable Trust, Jay F. Ecklund 1997
Irrevocable Annuity Trust (the "Ecklund Trusts") and BTCP
10.2 Escrow Agreement dated as of November 25, 1997 among
Holdings, Ecklund, the Ecklund Trusts and Norwest Bank
Minnesota, National Association, as Escrow Agent
10.3 Put Option Agreement dated as of November 25, 1997 between
Holdings and Ecklund
10.4 Stock Purchase Agreement dated November 25, 1997 between
Holdings and BTCP
10.5 Stock Purchase Agreement dated November 25, 1997 between
Holdings and OTPPB
10.6 Stockholders' Agreement dated as of November 25, 1997 among
Holdings, BTCP, OTPPB and Ecklund
10.7 Amended and Restated Registration Rights Agreement dated as
of July 31, 1998 among Holdings, BTCP, OTPPB and Ecklund.
10.8 Purchase Agreement dated as of February 18, 1998 among Young
America, Holdings and BTAB
10.9 Management Fee Agreement dated as of November 25, 1997 among
Holdings, BTCP and OTPPB
10.10 Stock Subscription and Repurchase Agreement dated November
25, 1997 between Holdings and Charles D. Weil
10.11 Amendment to Stock Subscription and Repurchase Agreement
dated as of February 23, 1998 between Holdings and Charles
D. Weil
10.12 Stock Subscription and Repurchase Agreement dated November
25, 1997 between Holdings and L. Joseph Kulas
10.13 Employment Agreement dated November 24, 1997 between Hold-
ings and Charles D. Weil
10.14 Employment Agreement dated August 1, 1996 between Holdings
and L. Joseph Kulas
10.15 1997 Management Recognition, Transition and Equity Bonus
Plan of Holdings dated November 25, 1997
</TABLE>
<PAGE> 119
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.16 Change in Control Agreement dated February 21, 1997 between
Holdings and L. Joseph Kulas
10.17 Credit Agreement dated April 7, 1998 between Young America
and Norwest Bank Minnesota, National Association
10.18 Change-in-Control Agreement dated as of February 21, 1997
between Holdings and Frederick H. Stinchfield
10.19 Change-in-Control Agreement dated as of February 21, 1997
between Holdings and David Q. Ferguson
10.20 Change-in-Control Agreement dated as of February 21, 1997
between Holdings and Robert J. Beaudoin
10.21 Change-in-Control Agreement dated as of February 21, 1997
between Holdings and Michael Larson
10.22 Change-in-Control Agreement dated as of February 21, 1997
between Holdings and Barbara Spiess.
10.23 Change-in-Control Agreement dated as of February 21, 1997
between Holdings and Sharon Wagner
10.24 Senior Credit Agreement dated as of November 25, 1997 among
Young America, Holdings, the Lenders names therein and
Bankers Trust Company
10.25 Non-Competition Agreement dated as of November 25, 1997
among Holdings, Ecklund and the other individuals listed on
the signature pages thereto
10.26 Release and Indemnity Agreement dated as of November 21,
1997 among Holdings, Ecklund, the Ecklund Trusts, Albert O.
Foster, Jerome J. Jenko, Thomas O. Moe, and R. Gary St.
Marie
10.27 Form of Exchange Agent Agreement among Holdings, the Company
and Marine Midland Bank
10.28 Voluntary Resignation Agreement dated October 1, 1998
between Holdings, Young America and L. Joseph Kules
(Incorporated by reference to Exhibit 10.15 of Young
America's and Holdings' Annual Report on Form 10-K for the
year ended December 31, 1998)
10.29 Employment Agreement dated December 2, 1998 between Young
America and Roger D. Andersen (Incorporated by reference to
Exhibit 10.16 of Young America's and Holdings' Annual Report
on Form 10-K for the year ended December 31, 1998)
10.30 First Amendment to Credit Agreement dated November 16, 1998
between Young America and Norwest Bank Minnesota, National
Association (Incorporated by reference to Exhibit 10.20 of
Young America's and Holdings Quarterly Report on Form 10-Q
for the Quarter ending September 30, 1998)
10.31 Second Amendment to Credit Agreement dated March 12, 1999
between Young America and Norwest Bank Minnesota, National
Association (Incorporated by reference to Exhibit 10.21 of
Young America's and Holding's Annual Report on Form 10-K for
the year ended December 31, 1998)
10.32 Young America Holdings, Inc. 1999 Stock Option Plan
(Incorporated by reference to Exhibit 10.29 of Young
America's and Holdings Annual Report on Form 10-K for the
year ended December 31, 1998)
12.1 Statement re: computation of ratios (Incorporated by
reference to Young America Corporation 10-K filed on March
31, 1999)
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
16.1 Letter re Change in Certifying Accountant
21.1 Subsidiaries of the Registrants (Incorporated by reference
to Young America Corporation 10-K filed on March 31, 1999)
23.1 Consent of O'Sullivan Graev & Karabell, LLP (included in
Exhibit 5.1)
*23.2 Consent of Arthur Andersen LLP
*23.3 Consent of McGladrey & Pullen, LLP
23.4 Consent of Kaplan, Strangis and Kaplan, P.A. (included in
Exhibit 5.2)
24.1 Powers of Attorney (included on the signature pages
previously filed)
25.1 Statement of Eligibility and Qualifications under the Trust
Indenture Act of 1939 of Marine Midland Bank as Trustee
27.1 Financial Data Schedule (Incorporated by reference to Young
America Corporation 10-K filed on March 31, 1999)
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports included in this Post Effective Amendment No. 1 to the Company's
previously filed Registration Statement File No. 333-49749.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota
April 20, 1999
<PAGE> 1
Exhibit 23.3
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to incorporation of our report dated February 14, 1997
included in this Post Effective Amendment No. 1 to the Company's previously
filed Registration Statement File No. 333-49749 and to the reference to our Firm
under the caption "Experts" in the Registration Statement.
Minneapolis, Minnesota McGLADREY & PULLEN, LLP
April 19, 1999
