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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_______TO_______
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Commission File Number 333-49749
YOUNG AMERICA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1892816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18671 Lake Drive East, Chanhassen, Minnesota 55317-9383
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (952) 294-6000
YOUNG AMERICA HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-0983697
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
18671 Lake Drive East, Chanhassen, MN 55317-9383
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (612) 294-6000
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrants (1) have filed all reports to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [X]
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All of the outstanding shares of common stock of Young America Corporation are
owned by Young America Holdings, Inc ("Holdings"). The aggregate fair market
value of Holdings voting and non-voting common stock held by non-affiliates of
Holdings as of March 15, 2000, based upon the good faith determination of the
Board of Directors, was approximately $422,000. For purposes of this disclosure,
shares of common stock held by officers and directors of Holdings have been
excluded because such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily conclusive for other purposes. The number
of shares outstanding of Holdings' common stock as of March 15, 2000 was
1,896,935.
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PART I
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements that involve
risk and uncertainties. All statements other than statements of historical facts
included in this Annual Report on Form 10-K, including, without limitation,
statements regarding the future financial position of Young America Holdings,
Inc. ("Holdings") and its wholly owned subsidiaries, Young America Corporation
("Young America" or "YAC", YAC.ECOM, Inc., ("YAC.ECOM"), and SourceOne
Worldwide, Inc. ("SourceOne"), (collectively, the "Company"), business strategy,
budgets, projected costs and plans and objectives of management for future
operations are forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe"
or similar words. Those forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that could cause actual results
to differ materially from those contemplated by the forward-looking statements.
Important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements are discussed
under the heading "Management Discussion and Analysis of Financial Condition and
Results of Operations" in Part II of, and elsewhere in, this Annual Report on
Form 10-K. All subsequent written and oral forward-looking statements
attributable to Young America or Holdings or persons acting on their behalf are
expressly qualified in their entirety by these factors.
ITEM 1. BUSINESS
1997 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
("Recapitalization"), pursuant to which the following transactions occurred:
- - An investor group (the "Investor Group"), comprised of DB Capital Partners,
Inc. ("DBCP") (formerly BT Capital Partners, Inc.), 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 DBCP.
- - 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 the 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 fees and
expenses related to the Recapitalization.
- - Substantially all of the business and assets of Holdings were transferred
to a newly formed subsidiary of Holdings, Young America Corporation, and
Holdings changed its name to Young America Holdings, Inc.
Holdings made an additional payment of $.7 million to the Selling
Stockholders and certain employees of the Company 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 the cumulative excess cash
flow (as defined in the agreements related to the Recapitalization) of the
Company for the four year period ending December 31, 2001 exceeds $93 million,
the Selling Stockholders and certain employees of the Company 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 amount of
$15 million. As a result of the Recapitalization, the Investor Group owns
approximately 93% of the total capital stock of Holdings. For additional
information with respect to the Recapitalization, see Note 4 of Notes to the
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
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Subsequent to the Recapitalization, Holdings refinanced the indebtedness
under the Bridge Facility through the issuance by Young America in a private
placement of $80 million principal amount of 11 5/8 % Series A Senior
Subordinated Notes due 2006 (the "Old Notes"). The Old Notes were subsequently
exchanged for a like aggregate principal amount of Young America's 11 5/8%
Series B Senior Subordinated Notes due 2006 (the "New Notes") registered under
the Securities Act of 1933. The Old Notes were, and the New Notes are,
guaranteed in a senior subordinated basis by Holdings.
Holdings expects to conduct substantially all of its business and
operations through Young America, YAC ECOM, SourceOne 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 New Notes would prohibit Young America from making a business
acquisition, Holdings may make such acquisition directly or through a newly
formed subsidiary of Holdings rather than Young America, YAC ECOM or SourceOne.
GENERAL
The Company provides a wide range of consumer interaction processing ("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 Internet
commerce, telecommunication and mail.
The Company's more than 200 clients include such well-known companies as
Sprint Spectrum, L.P., Anheuser-Busch Companies, Inc., Best Buy Company, General
Mills, Inc., R.J. Reynolds Tobacco Company, Eastman Kodak Company,
Hewlett-Packard Co., Target Corporation, Compaq Computer Corporation, Lexmark
International, Inc., and OfficeMax. 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, warranty registration programs, and
literature distribution. Additionally, the Company's CIP services provide the
crucial "back end" for client's direct marketing and e-commerce initiatives. The
Company's services include (i) receiving and processing orders received via
United States Postal Service ("USPS"), fax, telephone (live operator and
Interactive Voice Response), and the Internet including e-commerce) (ii)
fulfillment (including the warehousing, inventory management, picking and
packing, and delivery of product, premiums, samples, collateral and literature
as well as rebate checks to consumers), (iii) data gathering, analysis and
reporting and (iv) customer service (including receiving and responding to
consumer inquiries). The Company provides numerous other services including
printing, lettershop and sweepstakes management.
CIP services improve the marketing efforts of customer-oriented companies by
identifying and focusing on their most valuable existing and potential
customers. In recent years, the Company has identified a significant, strategic
shift among its clients from traditional "mass marketing" toward target
marketing that utilizes new channels such as the Internet. The Company's CIP
services provide an ideal platform for target marketing and utilization of new
channels.
The Company provides many services to support Internet promotions.
Specifically, the Company can support online continuity, loyalty, premium,
sampling, sweepstakes and rebate programs. Also, the Company supports full-scale
e-commerce initiatives from site development and hosting to secure order capture
and processing to fulfillment, customer care and return processing. Finally, the
Company provides secure access to order information for clients and consumers,
and flexible web-based reporting tools for clients. Because the Company believes
that its clients have found Internet programs to be both effective and
efficient, the Company believes that Internet promotions will grow significantly
in the near term.
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 such 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 targeted promotion fulfillment
services for
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simpler marketing programs but also of integrated, custom-designed CIP services
for large complex marketing programs. Its breadth of services and ability to
integrate such services to support complex marketing programs have distinguished
the Company from the majority of its competitors, most of which offer a narrower
range of services and serve a smaller number of clients. Management believes
that the Company's broad service offering, together with its sophisticated
information systems and quality control processes, has enabled it to become a
leading provider of business-to-consumer CIP services.
In each of the last three fiscal years, the Company managed over 3,200
marketing programs, with between 1,200 and 2,000 programs being processed at any
point in time. As of December 31, 1999, the Company was processing approximately
1,400 client marketing programs. In each of the last three fiscal years, the
Company distributed over 42 million items to its clients' customers. Items
distributed by the Company have ranged from rebate checks to sales literature
and collateral to large and small items of merchandise, premiums and product
samples.
In January, 2000, the Company through its wholly owned subsidiary,
acquired certain assets and liabilities of SourceOne Worldwide, LLC. for
approximately $2.4 million. SourceOne is a marketing services company located in
Denver, Colorado with approximately $5.7 million in revenues in 1999. SourceOne
focuses on business-to-business and business-to-consumer fulfillment. It
provides comprehensive e-commerce services, including WWWeb site development and
hosting), information asset management, worldwide inquiry order fulfillment,
web-based credit card and e-check clearance, customer service, lithographic and
inquiry printing and direct mail. SourceOne's customers include technology,
pharmaceutical and virtual e-business companies. The Company's management
believes this acquisition will help support the Company's strategy to continue
strong revenue growth momentum by broadening service capabilities.
Young America was incorporated in Minnesota in 1997 as a subsidiary of
Holdings, a Minnesota corporation founded in 1972. The Company's principal
office is located at 18671 Lake Drive East, Chanhassen, MN 55317 and its
telephone number is (952) 294-6000.
COMPETITIVE STRENGTHS
The Company attributes its current market position and its existing
opportunities for growth 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 manufacturers, retailers, and consumer service companies.
Young America's basic services include (i) receiving and processing orders via
USPS, fax, telephone (live operator and IVR) and the Internet (including
e-commerce) (ii) fulfillment (including the warehousing, inventory management,
picking and packing, and delivery of product, premiums, samples, collateral and
literature as well as rebate checks to consumers), (iii) data gathering,
analysis and reporting and (iv) customer service (including receiving and
responding to consumer inquiries). 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 or that offer the customers a wide range of options.
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)". The Company also has expertise in managing Internet based
marketing programs such as Frito Lay's www.gosnacks.com, Gillette's
www.theessentials.com, Nestle's www.nescafeusa.com and www.tasterschoiceusa.com,
and Mobil's www.mobile.com. 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 received through multiple channels (including
the Internet, USPS, fax and telecommunications) 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 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.
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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. The
Company 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 and retail businesses. Of the Company's 25 largest clients in
1999, 14 have been clients for more than three 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 program 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.
Sophisticated Information and Telecommunications Systems
In 1996, the Company completed its conversion to a new proprietary software
system, PAL, which increased the Company's ability to process a greater number
and variety of complex marketing programs. The system increases operational
efficiencies and enhances the Company's 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
into the system 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 80 million consumer households. The Company continues to use
this proprietary software as a base for expansion to maximize the complex, wide
breadth of programs that are processed and is the key integration point with the
new technology the Company has added to process Internet programs.
The Company uses advanced telecommunications equipment employing point-to-point
DS3 and T1 lines for networking, The Company also uses ACD software for call
forecasting, routing and accounting, Interactive Voice Response and Outbound
Dialer equipment.
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
number of clients that generate in excess of $1 million of servicing revenue per
year from 1 in 1993 to 18 in 1999. The Company intends to continue to
concentrate on clients that require more complex and/or higher volume marketing
programs.
Management believes that the Company's ability to provide CIP services for
high-volume and/or complex marketing programs has been a significant factor in
its ability to attract large new clients, both from within industries that have
traditionally used the Company's services such as consumer packaged goods and
from industries that have not traditionally used the Company's services such as
computer hardware, computer software, consumer services, telecommunications and
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energy. Recent client additions include Lexmark International, Inc., Airtouch
Cellular, Nabisco, Inc., Juno Online Services, Inc., NEC Corporation, Chumbo
Holdings Corporation, Malt-O-Meal Company, Deluxe Corporation, Bristol-Myers
Squibb Company, Big Idea Productions, Inc., and United States Tobacco Company.
Management believes that there are opportunities to market the Company's
services in additional industries such as 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 then 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 Internet and
electronic data transmission, facsimile, and telephone (including live operator
and Interactive Voice Response). 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 currently upgrading its services in anticipation
of client needs include Internet promotion and e-commerce, online customer
service, Interactive Voice Response capabilities, web-based information
processing and consumer data reporting capabilities. The Company plans to
continue to enhance its operational capabilities, including its sophisticated
computer systems, so that it can meet the demand for increasingly complex CIP
services.
Continue Operational Improvements
The Company continually evaluates and refines its process flows to meet
evolving client needs, to enhance client satisfaction and to reduce costs. 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 with 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 the call center operations by April,
2000, and with respect to the fulfillment operations by the end of September,
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 complete certification will be achieved or maintained over time.
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 Internet
promotion and e-commerce 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:
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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 short-term promotions involving a small number of consumer
purchases and the award of a small gift item such as a t-shirt or a compact disc
to 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. The Company 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.
E-Commerce Fulfillment. The Internet has opened up a new channel through
which both direct-to-consumer and business-to-business clients can sell their
products. As the migration to the Internet and blurring of channels continues
many companies are finding that they do not have the infrastructure or expertise
to manage the "back end" of e-commerce from order processing to fulfillment to
customer care. The Company's integrated CIP services provide this critical "back
end" for clients' e-commerce initiatives.
Direct Mail and Literature Distribution. The Company provides information
asset management, printing, lettershop and delivery of direct mail and sales
literature to and retailers.
Other Programs. The Company also supports a number of other programs
including 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
The Company provides an integrated mix of CIP services that can be
customized to meet client-specific needs for a wide variety of marketing
campaigns. These services include the following:
Inbound Order Processing. The Company offers high-quality, flexible
processing of consumer orders received via a variety of channels including
Internet, mail, facsimile, electronic file transfer, and telephone through its
call centers (both live operator and Interactive Voice Response). 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) import of
data via electronic file transfers or download from Internet sites (vi)
transcription of Interactive Voice Response-captured inbound orders and (vii)
processing and accounting of consumer check and/or credit card transactions for
marketing programs involving consumer payments.
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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, premiums or product
samples. In each of the last three years, the Company issued more than 22
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, the Company assists its clients in
developing the databases necessary to build targeted, effective marketing
campaigns. The Company helps its clients to monitor promotion activity through
standard reports or, in certain cases, by linking directly into the Company'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 80 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, and Internet commerce
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 190
million calls utilizing the Company's Interactive Voice Response capacity. The
Company's use of sophisticated communications technology, integrated with its
consumer information databases, enhances the effectiveness of customer service
personnel in handling consumer inquiries and data-gathering activities.
Recently, the Company enhanced its customer service capabilities to include
online order status for consumers as part of its product offering. With this
service, consumers will be able to check the status of their order online
without requiring interaction with a customer service representative, thereby
increasing customer satisfaction and reducing the interaction cost per inquiry
at the same time.
Printing and Lettershop. The Company's printing services include high-speed
laser and lithographic printing as well as PVC card and digital on-demand
printing.
SALES AND MARKETING
The Company's sales and marketing organization currently consists of a Vice
President of Sales and Business Development, a Vice President of Sales, a
Director of Marketing, two senior account executives, eleven account executives,
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 on
promoting relationships with existing clients that exhibit large revenue
potential , as well as identifying and pursuing new clients either in industries
that utilize a high-volume of CIP services or represent potential new
high-volume users of CIP services on an outsourced basis.
TECHNOLOGY
Young America strives to incorporate technology and automation into every
appropriate 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
9
<PAGE> 10
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 80 million consumer households.
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 2,000 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.
PAL was also built to accommodate the continually changing technology
environment. The Company has taken advantage of such system flexibility by
enhancing the system to provide clients with internet capabilities such as
web-based reporting and self-service customer modules. In addition, PAL's
capacity can be easily increased by adding additional hardware support. Data
stored by the PAL system is protected by frequent backup to redundant off-site
systems maintained by the Company.
Call Center Technology
The Company seeks to employ the most current telecommunications technology
available. It maintains relationships with the three leading U.S.
telecommunications carriers, utilizing advanced toll-free and toll-paid network
services such as automatic number identification (ANI), dialed number
information service (DNIS), routing control service on-line, next-available
agent call processing, network messaging and call prompting and network-based
call transferring applications. The Company also employs automatic call
distributor (ACD) switches with advanced call routing features and computer
telephone integration (CTI) technology. The Company's 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, the 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 $85.4 billion
in 1998. 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 $3.4 billion in 1998,
representing a 18.9% increase over the $2.86 billion reported for 1997. This
category was ranked second among all 13 categories in terms of year-to-year
growth rate. Promo magazine reported that the growth in promotional fulfillment
spending was a result of an increased number of promotions in consumer durables
and computer-related companies in conjunction with continued growth of loyalty
and continuity programs. New Internet business contributed to the growth in the
promotion fulfillment spending, but was not the major driver in 1998.
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<PAGE> 11
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.
WORKFORCE
The Company's workforce is not unionized and consists of approximately 1,000
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 1999, the Company's active workforce varied
from approximately 1,900 to approximately 2,700, 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, 1999:
<TABLE>
<S> <C>
Full-time fixed employees.................................................................... 11.3
Full-time variable employees................................................................. 32.9
Part-time permanent employees................................................................ 10.1
Agency contract employees.................................................................... 19.2
Independent contractors...................................................................... 26.5
------
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 though
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 its relations with employees are good.
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<PAGE> 12
ITEM 2. PROPERTIES
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........ Administrative offices and 161,900 Owned(1) --
warehouse --
capabilities include
inbound and outbound
processing and
customer service
Glencoe, MN.............. Warehouse and Outbound 97,100 Leased September 30, 2002
processing
Mankato, MN.............. Inbound processing and 54,200 Leased June 30, 2001
customer service
Chanhassen, MN........... Corporate Headquarters 40,291 Leased January 31, 2010
Information systems
Applications
Development
Oklahoma City, OK........ Call center 25,000 Leased January 31, 2004
Denver, CO............... Warehouse, outbound 129,835 Leased May 31, 2004
processing, call center
</TABLE>
- ------------
(1) Owned by Holdings and leased to Young America.
The Company believes that its property and equipment are generally
well-maintained and in good condition and that it has or can quickly acquire
sufficient capacity for its current and projected operational and warehousing
needs.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is involved in 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of the outstanding common stock of Young America is owned by Holdings. There
is no established public trading market for Holdings' Class A Common Stock,
Class B Common Stock or Class C Common Stock. At March 15, 2000, there were 15
holders of record of Class A Common Stock , one holder of record of Class B
Common Stock and one holder of record of Class C Common Stock. Holdings has
never declared or paid dividends on its capital stock and does not anticipate
doing so in the foreseeable future. For additional information, see "Security
Ownership of Certain Beneficial Owners and Management" in this Annual Report of
Form 10-K.
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<PAGE> 13
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected financial data as of and for each of
the years in the five-year period ended December 31, 1999. The financial data as
of and for the years ended December 31, 1997, 1998 and 1999 are derived from and
should be read in conjunction with the audited financial statements of Holdings
and the related notes thereto included elsewhere in this Annual Report on Form
10-K. The selected financial data for the years ended December 31, 1995 and 1996
are derived from audited financial statements of Holdings that are not included
herein.
During 1999, the Company revised the presentation of revenues in its
Statements of Operations. The Company had previously reported all billed amounts
that were priced to include a margin element. These revenues included the full
value of rebate payments funded with the Company's working capital and the
amount billed to clients for shipping merchandise and mailing checks. The
Company now presents as revenues (i) service fees for rendering CIP services,
(ii) the margin obtained from using working capital to fund client rebate checks
(referred to in the industry as slippage), and (iii) the margin realized on
postage and freight billings as a result of discounts and presorting or other
postal cost reduction techniques which are available to the Company due to the
large volume of mail and other shipments processed by the company for all of its
clients in the aggregate. Revenues previously reported have been revised to
conform to the 1999 presentation. Such revision had no effect on previously
reported gross profit, net income (loss) or stockholders' deficit.
YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
--------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................... $82,747 $64,595 $70,085 $51,525 $35,633
Cost of revenues............... 55,848 49,434 40,447 31,393 24,920
--------- -------- -------- -------- --------
Gross profit..................... 26,899 15,161 29,638 20,132 10,713
Selling expenses................. 6,021 6,059 5,504 4,610 3,493
General and administrative expenses 9,348 5,798 9,754 7,140 5,949
Compensation charges attributable to
Recapitalization............... -- (43) 17,924 -- --
Reserve for lease obligations -- 850 -- -- --
-------- ---------- -------- -------- --------
Operating income (loss).......... 11,530 2,497 (3,544) 8,382 1,271
Interest expense................. (9,789) (13,095) (1,029) (91) (252)
Interest income.................. 675 666 1,038 201 10
Transaction costs attributable to
Recapitalization............... -- -- (1,967) -- --
Other income (expense)........... (47) (182) -- (60) (15)
-------- -------- -------- -------- --------
Income (loss) before income taxes 2,369 (10,114) (5,502) 8,432 1,014
Provision for income taxes....... 877 (3,742) 423 -- --
-------- --------- -------- -------- --------
Net income (loss)................ $ 1,492 $ (6,372) $ (5,925) $ 8,432 $ 1,014
======== ======== ======== ======== ========
UNAUDITED PRO FORMA INCOME TAX
DATA(A):
Income (loss) before income taxes $ (5,502) $ 8,432 $ 1,014
Provision for (benefit from) income
Taxes.......................... (1,308) 3,120 375
-------- -------- --------
Pro forma net income (loss)...... $ (4,194) $ 5,312 $ 639
======== ======== ========
OTHER FINANCIAL DATA:
EBITDA, as adjusted(b)........... $ 13,494 $ 4,511 $ (1,956) $ 9,578 $ 2,238
EBITDA, as adjusted, margin(c)... 16.3% 7.0% (2.8%) 18.6% 6.3%
Capital expenditures............. $ 1,249 $ 2,374 $ 3,330 $ 1,739 $ 1,061
Depreciation and amortization(d). 1,964 2,014 1,588 1,196 967
Cash interest expense(e)......... 9,353 9,450 981 91 252
Ratio of earnings to fixed
charges(f)....................... 1.2x -- -- 13.1x 2.5x
</TABLE>
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<PAGE> 14
As of December 31,
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents ....... $ 13,633 $ 12,220 $ 17,940 $ 20,573 $ 242
Working Capital ................. 1,643 (40) 11,136 5,823 2,076
Total assets .................... 45,421 45,662 41,742 36,443 20,197
Total debt ...................... 80,000 80,000 80,000 -- --
Redeemable Class A Common Stock . 734 890 7,380 -- --
Stockholders' (deficit) equity .. (64,213) (65,729) (65,057) 12,073 7,847
</TABLE>
(a) For periods ended on or prior to December 31, 1997 this information
reflects the pro forma income tax provision that would have been
provided had the Company been a C corporation, rather than an S
corporation, for income tax purposes.
(b) EBITDA, as adjusted, represents earnings before interest expense, other
income(expense), income taxes, depreciation and amortization. Data for
EBITDA, as adjusted, is included because management understands that
such information is considered by certain investors as an additional
basis on which to evaluate the Company's ability to pay interest, repay
debt and make capital expenditures. EBITDA, as adjusted, does not
reflect deductions for interest, other expense, income taxes,
depreciation and amortization, each of which can significantly affect
the Company's results of operations and liquidity and should be
considered in evaluating the Company's financial performance. EBITDA,
as adjusted, is not intended to represent and should not be considered
more meaningful than, or an alternative to, measures of operating
performance determined in accordance with generally accepted accounting
principles.
(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 write-off of deferred financing
costs of $3.6 million, and a one-time reserve for the termination of
Interactive Voice Response leases of $850, and 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.
14
<PAGE> 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the "Selected
Consolidated Financial Data" and the historical consolidated financial
statements and the related notes thereto included elsewhere in this Annual
Report on Form 10-K. 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 New Notes, the Company is highly leveraged and the
interest expense resulting from the New Notes and other outstanding debt has and
will continue to significantly effect 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.
OVERVIEW
The Company derives its revenues principally from three sources: service
fees, rebate billings and postage and freight billings. Service fees are billed
to clients primarily for (i) order processing (including the handling of mail,
telephone calls, facsimiles and e-mail received from consumers), (ii)
fulfillment (including the delivery of product premiums and samples as well as
rebate checks to consumers), (iii) data gathering, analysis and reporting and
(iv) related customer service (including receiving and responding to consumer
inquiries). As described below, the Company bills clients for the face amount of
rebate checks issued by the Company under certain rebate programs and for
postage and/or freight related to fulfillment of rebate checks and shipments of
merchandise under premium and product sampling programs.
In connection with approximately 34% 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. 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 and is
recognized as revenue by the Company. In those situations where the Company has
not been asked to use its working capital to fund rebate programs, 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 margin associated with 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 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 72% and 66% of processing and servicing
costs in 1998 and 1999, respectively and 68% and 73% of selling, general and
administrative expenses for 1998 and 1999, respectively. The
15
<PAGE> 16
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. The shortage of labor availability in recent
years has been a challenge for the Company and can have an adverse affect on
margins as the wage rates are driven by companies competing for labor resources.
The Company continues to explore staffing options and employment incentive
programs to attract and retain qualified 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, 1999 Compared with the Year Ended December 31, 1998
Revenues. Revenues for the year ended December 31, 1999 increased by $18.2
million, or 28.1% to $82.7 million from $64.6 million for the year ended
December 31, 1998. The increase in revenues was largely attributable to revenues
from new clients and a full year of revenue from clients added in the second
half of 1998, as well as an increase in revenues from other clients. The Company
has seen an increase in revenues from retail and technology-related clients that
run high-value rebate programs and require integrated services, including
inbound order processing, outbound fulfillment of rebate checks, call center
customer services, and data management and reporting services.
Gross Profit. The Company's gross profits increased 77% to $26.9 million for
the year ended December 31, 1999 from $15.1 for the year ended December 31,
1998. As a percentage of revenues, gross profit increased to 32.5% in 1999 from
23.5% in 1998. The increase was a result of the Company's focus to contain costs
and increase productivity while ensuring client pricing was sufficient to obtain
profitability targets established by the Company. In 1999, the Company was able
to process increased revenues without a proportionate increase in semi-variable
costs. This was accomplished in part by realizing full-year cost savings from
initiatives implemented in the second half of 1998 in addition to new
initiatives undertaken in 1999. In the second quarter of 1999, the Company
consolidated some inbound operations from the Mankato, Minnesota location into
the Young America, Minnesota location and developed an outsourcing relationship
to process the inbound mail sortation. In the third quarter of 1999, the Company
consolidated the outbound operations by moving the packaging and warehousing
operations from the Winthrop, Minnesota facility to the Glencoe, Minnesota
facility. The outbound consolidation allowed the Company to develop two outbound
locations that provide full service from inventory receipt and storage through
product packaging and shipping. The consolidation significantly reduced the need
for transportation of inventory between locations and improved the packaging
operational efficiencies.
Operating Income Operating income for the year ended December 31, 1999 was
$11.5 million, a 362% increase over the 1998 operating income of $2.5 million.
As a percentage of revenues, operating income was 13.9% for the twelve months
ended December 31, 1999 as compared to 3.9% for the corresponding period of
1998. The increase in operating income was a result of the increase in gross
profits partially offset by an increase in selling, general and administrative
expenses. Selling, general and administrative expenses increased $3.5 million,
or 29.6% to $15.4 million for the twelve months ended December 31, 1999 from
$11.9 million for the same period in 1998. The increase related primarily to a
$2.5 million increase in bonus, profit sharing, and other labor-related expense.
Interest Expense and Interest Income. Interest expense for the twelve month
period ended December 31, 1999 was $9.8 million, a 25% decrease from the 1998
interest expense of $13.1 million. Interest expense in 1998 included $3.3
million of costs associated with obtaining a senior bridge credit facility (the
"Bridge Facility"), which costs were fully amortized upon repayment of the
Bridge Facility with the proceeds of the Notes. The $9.8 million of interest
expense in 1999 included i) $9.3 million of interest on the Company's New Notes,
ii) $.4 million amortization of deferred financing costs related to issuing the
New Notes, and iii) $.1 million of fees associated with non-usage of the
Company's bank credit facility.
Other Income and Expense. Other expense of $.1 million in 1999 was related
to the loss associated with the disposal of some obsolete computer equipment in
the fourth quarter of 1999. Other expense of $.2 million in 1998 was primarily
16
<PAGE> 17
related to the investigation of a potential acquisition that took place in the
second quarter of 1998 and that was not pursued.
Income Taxes. The Company recorded an income tax provision of $.9 million
for the twelve months ended December 31, 1999 as compared to an income tax
benefit of $3.7 million for the same period in 1998. The increase is a result of
the change in profitability.
Net Income. As a result of the foregoing, the Company recorded net income of
$1.5 million in 1999 as compared to a net loss of $6.4 million in 1998.
The Year Ended December 31, 1998 Compared with the Year Ended December 31, 1997
Revenues. Revenues for the year ended December 31, 1998 decreased $5.5
million or 7.8% to $64.6 million from $70.1 million for the year ended December
31, 1997. The decrease in revenues is largely the result of the absence in 1998
of two large premium programs of one client. This client continues to place
business with the Company, although it did not run a similar program in 1998.
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 replaced most of the servicing revenue from this 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 23.5%
of revenues for the year ended December 31, 1998. Gross profit for the year
ended December 31, 1997 was $29.6 million or 42.3% of revenues. The reduction of
gross profit as a percentage of revenues was primarily the result of increased
expenses associated with added capacities and capabilities in anticipation of
market changes and requirements for technology-based services. The ramp up in
processing capacity was primarily associated with technical improvements in
computer equipment, software and telemarketing systems including Interactive
Voice Response, and 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 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. 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 20.5% of
revenues as compared to $2.5 million in 1998 or 3.9% 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 $6.1 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 of 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 $850,000 to reserve for
these future obligations.
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<PAGE> 18
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.
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 and 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 $3.7million 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 proforma 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.
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 Annual Report in Form
10-K 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, 1999, no amounts were outstanding under the Company's $10.0
million bank revolving credit facility (the "Credit Facility") with Norwest Bank
Minnesota, N.A. ("Norwest"). At such date, the Company had a stockholders'
deficit of $64.2 million, indebtedness of $80.0 million and working capital of
$1.6 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 Corporation issued $80,000 of 11 5/8% Senior Subordinated
Notes due 2006 (the "Notes") (see Note 9 of the Audited Consolidated Financial
Statements). In August, 1998, the Company and YAC filed with the SEC a
registration statement relating to an offer to exchange the Old Notes for an
equal aggregate principal amount of YAC's 11 5/8% Series B Senior Subordinated
Notes due 2006. The New 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
18
<PAGE> 19
result of the Company being an S corporation prior to the Recapitalization. For
the years ended December 31, 1999, 1998 and 1997 net cash provided by (used in)
operating activities were $2.8 million, $.9 million and ($8.7) million,
respectively. In 1999, cash provided by operating activities funded the purchase
of $1.3 million of property and equipment and $.1 million of stock redemption
payments and was the result of increased profitability and changes in working
capital. 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 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 New Notes.
Net cash used in investing activities for the years ended December 31, 1999,
1998 and 1997 were $1.3 million, $2.4 million, and $3.3 million, respectively.
These capital expenditures are principally related to purchases of leasehold
improvements, computer equipment and software, and warehousing and packaging
equipment for 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 2000 will not exceed $4 million. Subsequent to December 31,
1999, the Company used approximately $2.0 million to acquire certain assets and
liabilities of SourceOne, LLC.
Net cash provided by (used in) financing activities for the years
ended December 31, 1999, 1998 and 1997 were $(.1) million, $(4.3) million and
$9.3 million respectively. Cash used in 1999 reflects the redemption of
redeemable common stock. 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. Net cash provided by financing activities in 1997 of $9.3
million reflects $80.0 million of proceeds from the Old Notes and $38.8 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. There
were no shareholder distributions in 1998 or 1999.
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 YAC.
The Credit Facility was last amended on February 25, 2000 (the "Amended
Facility'). The Amended Facility revised the restrictive covenants to allow
capital expenditures of up to $4 million for the fiscal year ending December 31,
2000. The Amended Facility 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 1.00 to 1 for each of the quarters ending March
31, 2000 and June 30, 2000, at not less than 1.10 to 1 for the quarter ending
September 30, 2000, at not less than 1.30 to 1 for the quarter ending December
31, 2000, and at not less than 1.35 to 1 for each of the quarters ending March
31, 2001 and thereafter. The Company was in compliance with all required
covenants as of December 31, 1999. There were no amounts outstanding under the
Amended Facility as of December 31, 1999.
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.
19
<PAGE> 20
The Company's ability to pay principal and interest on the New 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 New 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 New 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
In 1999, the Company completed an internal review of its systems and
operations to assess its Year 2000 readiness in an effort to achieve Year 2000
compliance. The Company completed the assessment and any necessary remediation
prior to January 1, 2000. As a result, the Company did
not experience any significant Year 2000 problems and did not have any
interruption in its operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1999, the Company adopted AICPA Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," issued in March 1998, 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 adoption of SOP
98-1 did not affect the Company's results of operations or financial position.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", effective, as
amended, for years beginning after June 15, 2000. SFAS No. 133 established
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value SFAS No.133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge criteria are met. Special
accounting for qualifying hedges allow a derivative's gains or losses to offset
related results on the hedged item in the income statement and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The Company expects this statement
to have no impact upon adoption.
Effective January 1, 1999, the Company adopted the Financial Accounting
Standards Board 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 adoption of SOP 98-5
did not affect the Company's results of operations or financial position.
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.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is exposed to various market risks, including changes in interest
rates. Market risk is the potential loss arising from adverse changes in market
rates and prices, such as interest rates. The Company does not enter into
derivative or other financial instruments for trading or speculative purposes.
For fixed rate debt, interest changes affect the fair market value but do not
impact earnings or cash flows. At December 31, 1999, the Company had fixed rate
debt of $80 million. Holding other variables constant, a 1% increase in interest
rates would decrease the unrealized fair market value of the fixed rate debt by
approximately $2.4 million.
20
<PAGE> 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YOUNG AMERICA HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
As of December 31, 1999 and 1998
Together With Report of
Independent Public Accountants
I
<PAGE> 22
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) and Subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 1999. 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 auditing standards generally accepted
in the United States. 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. and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 16, 2000
(except with respect
to the matters discussed in Note 9, as
to which the date is February 25, 2000)
II
<PAGE> 23
YOUNG AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................................... $ 13,633 $ 12,220
Trade receivables, net of allowance of $771 and $47, respectively 14,862 16,184
Supplies inventory .............................................. 773 759
Prepaid expenses and other ...................................... 1,275 907
-------- --------
Total current assets ................................ 30,543 30,070
Property, PLANT and Equipment, at cost:
Land and improvements ........................................... 639 639
Building and improvements ....................................... 6,085 5,853
Machinery and equipment ......................................... 2,639 2,578
Transportation equipment ........................................ 159 170
Office furniture and fixtures ................................... 3,147 3,122
Electronic equipment and software ............................... 7,593 7,281
-------- --------
20,262 19,643
Less- Accumulated depreciation .................................. (12,725) (11,391)
-------- --------
7,537 8,252
Deferred financing costs ........................................ 2,677 3,108
Deferred tax asset .............................................. 4,664 4,232
-------- --------
Total assets ........................................ $ 45,421 $ 45,662
======== ========
</TABLE>
III
<PAGE> 24
YOUNG AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current Liabilities:
Noncleared rebate items ................................................... $ 8,705 $ 14,066
Accounts payable .......................................................... 1,725 1,732
Collections due to and advances from clients .............................. 6,823 6,131
Deferred income taxes ..................................................... 2,198 897
Accrued expenses-
Interest ............................................................... 3,514 3,514
Compensation ........................................................... 3,049 1,289
Other .................................................................. 2,886 2,481
--------- ---------
Total current liabilities ..................................... 28,900 30,110
--------- ---------
LONG-TERM DEBT (Note 9) ...................................................... 80,000 80,000
OTHER LONG-TERM LIABILITIES (Note 11) ........................................ -- 391
Commitments and Contingencies (Notes 3, 7 and 8)
REDEEMABLE CLASS A COMMON STOCK, as of December 31, 1999 and 1998, 33,726 and
40,895 shares issued and outstanding, respectively (Note 5)
734 890
Stockholders' Deficit:
Class A Common Stock, par value $1 per share; as of December 31, 1999 and
1998, 3,000,000 shares authorized and 1,255,455 shares issued and
outstanding (Note 5)
1,255 1,255
Class B Common Stock, par value $1 per share; as of December 31, 1999 and
1998, 1,500,000 shares authorized and 442,844 shares issued and
outstanding
443 443
Class C Common Stock, par value $1 per share; as of December 31, 1999 and
1998, 1,500,000 shares authorized; 172,727 shares issued and outstanding
173 173
Additional paid-in capital ................................................ 36,107 36,083
Accumulated deficit ....................................................... (102,191) (103,683)
--------- ---------
Total stockholders' deficit ................................... (64,213) (65,729)
--------- ---------
Total liabilities and stockholders' deficit ................... $ 45,421 $ 45,662
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
IV
<PAGE> 25
YOUNG AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES ................................................ $ 82,747 $ 64,595 $ 70,085
COST OF REVENUES:
Processing and servicing ............................. 55,848 49,434 40,447
-------- -------- --------
Gross profit ............................. 26,899 15,161 29,638
-------- -------- --------
OPERATING EXPENSES:
Selling .............................................. 6,021 6,059 5,504
General and administrative ........................... 9,348 5,798 9,754
Compensation charges attributable to Recapitalization -- (43) 17,924
Reserve for lease obligations (Note 11) .............. -- 850 --
-------- -------- --------
15,369 12,664 33,182
-------- -------- --------
Operating income (loss) .................. 11,530 2,497 (3,544)
-------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense ..................................... (9,789) (13,095) (1,029)
Interest income ...................................... 675 666 1,038
Transaction costs attributable to Recapitalization ... -- -- (1,967)
Other ................................................ (47) (182) --
-------- -------- --------
Other expense ............................ (9,161) (12,611) (1,958)
INCOME (LOSS) BEFORE PROVISION (BENEFIT) FOR INCOME TAXES
2,369 (10,114) (5,502)
PROVISION (BENEFIT) FOR INCOME TAXES .................... 877 (3,742) 423
-------- -------- --------
Net income (loss) ........................ $ 1,492 $ (6,372) $ (5,925)
UNAUDITED PRO FORMA NET LOSS:
Loss before provision (benefit) for income taxes ..... $ (5,502)
Pro forma income tax benefit ......................... (1,308)
--------
Pro forma net loss ....................... $ (4,194)
========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
V
<PAGE> 26
YOUNG AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
Shares Value Shares Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1996 1,920 $ 2 -- $ --
Net loss -- -- -- --
Stock split 1,918,080 1,918 -- --
Distributions to stockholders -- -- -- --
Proceeds from issuance of Common Stock . 1,169,530 1,170 442,884 443
Redemption of Common Stock (1,785,600) (1,786) -- --
Reclassification to Redeemable Class A
Common Stock (339,097) (339) -- --
---------- ---------- ---------- ----------
BALANCE, December 31, 1997 964,833 965 442,884 443
Net loss -- -- -- --
Reclassification from Redeemable Class A
Common Stock 290,622 290 -- --
Final Recapitalization -- -- -- --
---------- ---------- ---------- ----------
BALANCE, December 31, 1998 1,255,455 1,255 442,884 443
Net income -- -- -- --
Distributions to stockholders -- -- -- --
---------- ---------- ---------- ----------
BALANCE, December 31, 1999 1,255,455 $ 1,255 442,884 $ 443
---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
Retained
Class C Additional Earnings
Common Stock Paid-In (Accumulated
Shares Value Capital Deficit) Total
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 -- $ -- $ 315 $ 11,756 $ 12,073
Net loss -- -- -- (5,925) (5,925)
Stock split -- -- -- (1,918) --
Distributions to stockholders -- -- -- (10,412) (10,412)
Proceeds from issuance of Common Stock . 172,727 173 37,043 -- 38,829
Redemption of Common Stock -- -- (293) (90,163) (92,242)
Reclassification to Redeemable Class A
Common Stock -- -- (7,041) -- (7,380)
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1997 172,727 173 30,024 (96,662) (65,057)
Net loss -- -- -- (6,372) (6,372)
Reclassification from Redeemable Class A
Common Stock -- -- 6,059 -- 6,349
Final Recapitalization -- -- -- (649) (649)
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1998 172,727 173 36,083 (103,683) (65,729)
Net income -- -- -- 1,492 1,492
Distributions to stockholders -- -- 24 -- 24
---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1999 172,727 $ 173 $ 36,107 $ (102,191) $ (64,213)
---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
VI
<PAGE> 27
YOUNG AMERICA HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $ 1,492 $ (6,372) $ (5,925)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities-
Depreciation and amortization 2,394 5,660 1,636
Deferred income taxes 870 (3,752) 417
Changes in assets and liabilities:
Trade receivables 1,322 (4,702) (2,950)
Supplies inventory (14) (144) 114
Prepaid expenses and other (368) (389) (159)
Noncleared rebate items (5,361) 9,540 2,267
Accounts payable (7) (599) 125
Collections due to and advances from clients 692 2,583 (7,631)
Accrued expenses 1,774 (877) 3,455
-------- -------- --------
Net cash provided by (used in) operating activities 2,794 948 (8,651)
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,249) (2,374) (3,330)
-------- -------- --------
Net cash used in investing activities (1,249) (2,374) (3,330)
-------- -------- --------
FINANCING ACTIVITIES:
Net repayments of short-term borrowings -- -- --
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)
Proceeds from issuance of Common Stock -- -- 38,829
Redemption of Common Stock -- -- (92,242)
Payments of financing costs -- (3,461) (3,340)
Redemption of Redeemable Class A Common Stock (132) (141) --
Final payment to selling shareholders -- (692) --
-------- -------- --------
Net cash provided by (used in) financing activities (132) (4,294) 9,348
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 1,413 (5,720) (2,633)
CASH AND CASH EQUIVALENTS:
Beginning of year 12,220 17,940 20,573
-------- -------- --------
End of year $ 13,633 $ 12,220 $ 17,940
-------- -------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payment for interest $ 9,353 $ 10,558 $ 5
-------- -------- --------
Income taxes paid $ 7 $ 11 $ 6
-------- -------- --------
</TABLE>
The accompanying notes are an integral art of these
consolidated financial statements.
VII
<PAGE> 28
YOUNG AMERICA HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. THE COMPANY AND NATURE OF BUSINESS:
Young America Holdings, Inc. (Holdings) and its wholly owned subsidiaries, Young
America Corporation (YAC) and YAC.Ecom Incorporated (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).
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
Holdings and its subsidiaries, all of which are wholly owned (collectively
referred to as the Company). All significant intercompany balances and
transactions have been eliminated in the consolidation.
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. The Company invoices clients, at the
time of shipment, for the gross amount of rebate checks issued by the Company.
For the years ended December 31, 1999, 1998 and 1997, approximately 34%, 45% and
38%, respectively, represented the aggregate dollar amount of checks issued
under rebate programs. 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 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.
The Company has historically presented all billed amounts that were priced to
include a margin element in revenue. This revenue included the full value of
rebate payments funded with the Company's working capital and the amount billed
to clients for shipping merchandise and mailing checks. During 1999, the Company
revised its presentation of revenue to represent (i) service fees for rendering
CIP services, (ii) the margin obtained from using working capital to fund client
rebate checks (referred to in the industry as slippage), and (iii) the margin
realized on postage and freight billings as a result of discounts and presorting
or other postal cost reduction techniques which are available to the Company due
to the large volume of mail and other shipment processed by the Company for all
of its clients in the aggregate. Revenue previously presented has been revised
to conform to the 1999 presentation. Such revision had no effect on previously
reported gross profit, net income (loss) or stockholders' deficit.
VII
<PAGE> 29
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>
LONG-LIVED ASSETS
The Company periodically evaluates whether events and circumstances have
occurred which may affect the estimated useful life or the recoverability of the
remaining balance of its long-lived assets. If such events or circumstances were
to indicate that the carrying amount of these assets would not be recoverable,
the Company would estimate the future cash flows expected to result from the use
of the assets and their eventual disposition. If the sum of the expected future
cash flows (undiscounted and without interest charges) were less than the
carrying amount of long-lived assets, the Company would recognize an impairment
loss.
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.
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. Concurrent with the
Recapitalization, Holdings became a taxable C corporation. The unaudited pro
forma net income information in the accompanying consolidated statements of
operations reflects the application of corporate income taxes to the Company's
taxable income at an assumed combined federal and state tax rate of 37% as if
the termination of the Company's status as an S corporation had occurred as of
the beginning of each period presented.
In connection with the conversion from an S corporation to a C corporation,
Holdings began accounting for income taxes under the liability method, whereby
deferred income taxes are recognized at currently enacted income tax rates to
reflect the tax effect of
IX
<PAGE> 30
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 during the year
ended December 31, 1997.
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. Ultimate results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash equivalents, trade receivables (net) and accounts
payable approximate fair market values because of the short maturities 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 $60,000.
RECLASSIFICATIONS
Certain amounts previously reported in the 1998 and 1997 consolidated financial
statements have been reclassified to conform to the 1999 presentation. The
reclassifications had no effect on previously reported net income (loss) or
stockholders' deficit.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted the 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,
"Financial Reporting for Segments of a Business Enterprise," 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).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective, as
amended, for years beginning after June 15, 2000. SFAS No. 133 established
accounting and reporting standards requiring that every derivative instrument,
including certain derivative instruments embedded in other contracts, be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS No. 133 requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge criteria are met. Special
accounting for qualifying hedges allow a derivative's gains or losses to offset
related results on the hedged item in the income statement and requires that a
company must formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. The Company expects this statement
to have no impact upon adoption.
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.
X
<PAGE> 31
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. 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, 1999, 1998 and 1997, the portions of
revenue recognized by the Company as slippage were $8,505, $4,905 and $3,289,
respectively. In those situations where the Company has not been asked to use
its working capital to fund rebate programs, 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 laws 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 laws, it is entitled to retain
slippage amounts in those transactions where the Company funds its client's
rebate program from its own working capital rather than surrendering such
amounts to the State of Minnesota or the State of Oklahoma. There can be no
assurance, however, that the Minnesota or Oklahoma escheat laws will not change
or that the Company's interpretation of the Minnesota or Oklahoma escheat laws
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 slippage amounts to that state, 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. 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). 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
XI
<PAGE> 32
bridge credit facility (the Bridge Facility) provided by affiliates of DB
Capital Partners (DBCP). 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 $1,170 of the escrow was made during 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. Charles D. 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
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 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 their shares of Class A Common
Stock pursuant to a Stock Subscription and Repurchase Agreement. Each of the
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
XII
<PAGE> 33
stockholder, such individual (or his successors) will have the right (within a
specified period of time) to cause Holdings to repurchase his stock.
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 an individual may request an
appraisal of the repurchased shares if he 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 Weil Employment Agreement (see
Note 7) 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.
The Class A Common Stock held by management are recorded as Redeemable Class A
Common Stock (Redeemable Stock) on the accompanying consolidated balance sheets.
At December 31, 1997, these shares were valued at the same per share value
determined at the date of the Recapitalization in November 1997. The estimated
required redemption price of the Redeemable Stock was approximately $550 and
$534 at December 31, 1999 and 1998 based on the current market. Subsequent to
December 31, 1997, the arrangement with Mr. Weil was amended such that Mr. Weil
no longer has the ability to require the Company to redeem his shares (156,221
shares). Future increases in the carrying value of shares subject to redemption
rights will be reported as compensation expense in accordance with APB Opinion
No. 25.
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, DBCP 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.
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 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
underwriter advises Holdings that an offering of all of Mr. Ecklund's or Mr.
Weil's shares, as the case may be, in addition to any other shares that are
proposed to be registered under such registration statement (including shares to
be offered and sold by Holdings), can not be consummated given the then current
market conditions, then Mr. Ecklund's shares would be entitled to be sold before
any shares sold by Holdings or by any other shareholder (including Mr. Weil),
and Mr. Weil's shares would be entitled to be sold before any shares sold by
Holdings or by any other shareholder (other than Mr. Ecklund). If Mr. Ecklund or
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 for Mr. Ecklund and Mr.
Weil 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.
XIII
<PAGE> 34
6. INCOME TAXES:
The income tax provision (benefit) for the years ended December 31 consisted of
the following:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Current $ 7 $ 10
Deferred 870 (3,752)
------- -------
$ 877 $(3,742)
</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, the tax effects of temporary differences
which give rise to a significant portion of deferred tax assets (liabilities)
are as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Slippage $(3,373) $(2,142)
Net operating losses 4,958 4,350
Deferred compensation -- 433
Lease obligation write-off 144 315
Self-insurance reserves 229 215
Other 507 164
------- -------
$ 2,465 $ 3,335
</TABLE>
The Company's current period tax 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.
A reconciliation of income taxes computed at the statutory rates to the reported
income tax provision (benefit) for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Taxes at federal statutory rates $ 806 $(3,439)
State taxes, net of federal benefit 76 (336)
Other (5) 33
------- -------
Provision (benefit) for income taxes $ 877 $(3,742)
</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 is subject to automatic
12-month renewal thereafter unless terminated by either party. 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
18-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
XIV
<PAGE> 35
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 the chief financial officer of YAC. The Andersen
Employment Agreement has a 12-month term, subject to automatic 12-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 Annual
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 12 months and an additional lump-sum severance payment up to
an amount of $210, 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 annual base salary payable in six equal monthly
installments.
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 was
approximately $4,732 during the year ended December 31, 1997. In connection with
the Recapitalization, this plan was terminated.
8. COMMITMENTS AND CONTINGENCIES:
MANAGEMENT AGREEMENT
In connection with the Recapitalization, Holdings and certain investors entered
into a management agreement (the Management Agreement) relating to certain
services to be provided to Holdings in the future by such investors. Under the
Management Agreement, such investors 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 $250. Also in connection with the Recapitalization, Holdings paid
these investors a one-time transaction fee of $1,500 and reimbursed or paid
expenses (including legal and accounting fees and expenses) of approximately
$1,050 incurred by such entities in connection with the Recapitalization.
XV
<PAGE> 36
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>
2000 $6,182
2001 3,296
2002 1,618
2003 888
2004 586
Thereafter 3,338
</TABLE>
Total rent expense was $6,428, $5,163 and $2,640 for the years ended December
31, 1999, 1998 and 1997, respectively.
GUARANTEES
Sweepstakes performance bonds are guaranteed for certain clients based on
certain financial criteria. Holdings had guaranteed approximately $35,044 and
$9,978 in performance bonds for various clients as of December 31, 1999 and
1998, respectively. The Company also obtains an indemnity agreement from these
clients indemnifying the Company from obligations under the performance bonds.
LITIGATION
The Company is exposed to asserted and potential unasserted claims encountered
in the normal course of business. In the opinion of management, based on
consultation with outside legal counsel, the resolution of these matters will
not have a material adverse effect on the Company's financial position.
9. LONG-TERM DEBT:
THE BRIDGE FACILITY
On the Recapitalization Date, Holdings borrowed $80,000 under a Senior Credit
Agreement with Bankers Trust Company as agent from Bankers Trust New York
Corporation, an affiliate of DBCP, as initial lender. 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 $3,300 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 an $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 in 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
XVI
<PAGE> 37
had been in effect for all periods presented. The only substantial asset
retained by Holdings was certain real property which is leased to YAC at cost
for use in its operations.
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Holdings $ -- $ -- $ --
YAC 82,615 64,595 70,085
YAC.Ecom 132 -- --
-------- -------- --------
Consolidated $ 82,747 $ 64,595 $ 70,085
======== ======== ========
Gross profit:
Holdings $ -- $ -- $ --
YAC 26,907 15,161 29,638
YAC.Ecom (8) -- --
-------- -------- --------
Consolidated $ 26,899 $ 15,161 $ 29,638
======== ======== ========
Net income (loss):
Holdings $ -- $ -- $ --
YAC 1,501 (6,372) (5,925)
YAC.Ecom (9) -- --
-------- -------- --------
Consolidated $ 1,492 $ (6,372) $ (5,925)
======== ======== ========
Current assets:
Holdings $ 385 $ 373
YAC 30,060 29,697
YAC.Ecom 98 --
-------- --------
Consolidated $ 30,543 $ 30,070
======== ========
Noncurrent assets:
Holdings $ 2,358 $ 2,512
YAC 12,520 13,080
YAC.Ecom -- --
-------- --------
Consolidated $ 14,878 $ 15,592
======== ========
Current liabilities:
Holdings $ -- $ --
YAC 28,794 30,110
YAC.Ecom 106 --
-------- --------
Consolidated $ 28,900 $ 30,110
======== ========
Noncurrent liabilities:
Holdings $ -- $ --
YAC 80,000 80,391
YAC.Ecom -- --
-------- --------
Consolidated $ 80,000 $ 80,391
======== ========
</TABLE>
XVII
<PAGE> 38
The Notes are not 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>
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
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, 1999.
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 February 25, 2000 (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 Offered 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 or had received waivers for all required covenants as of
December 31, 1999. There were no amounts outstanding under the Credit Facility
as of December 31, 1999.
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 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
XVIII
<PAGE> 39
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>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CIP services $71,182 $56,510 $60,640
Rebate revenues 8,505 4,905 3,289
Postage and freight billings 3,060 3,180 6,156
------- ------- -------
$82,747 $64,595 $70,085
</TABLE>
The Company sells its services to consumer product and consumer service
companies. The Company had one customer that represented greater than 10% of
revenues in 1997, representing 35.8%. There were no customers that represented
greater than 10% of revenues in 1999 or 1998.
11. RESERVE FOR IVR LEASES:
During the first quarter of 1998, the Company entered into operating leases to
increase its interactive voice 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 of 1998, the Company recorded a special
charge of $850 to reserve for these future obligations. This amount was recorded
as a separate component of operating income in the accompanying consolidated
statement of operations and long-term liabilities in the accompanying
consolidated balance sheet. There is $391 remaining in the reserve as of
December 31, 1999.
12. STOCK-BASED COMPENSATION PLAN:
During 1999, the Board of Directors approved the Young America Holdings, Inc.
1999 Stock Option Plan (the Plan). The Plan provides for the issuance of options
at exercise prices equal to the fair market value on the date of grant, covering
up to 338,824 shares of common stock. Certain people are eligible to participate
in the Plan.
A summary of the activity under the Plan during 1999 is presented in the table
below (shares in thousands):
<TABLE>
<CAPTION>
Weighted
Average
Exercise Price per
Shares Price Share
-------- --------- -------------
<S> <C> <C> <C>
Outstanding at beginning of year
-- $ 37.59 $21.76-$65.29
Granted 313,500 37.59 $21.76-$65.29
Forfeited (33,000) 37.59 $21.76-$65.29
-------- --------- -------------
Outstanding at end of year 280,500 $ 37.59 $21.76-$65.29
======== ========= =============
Exercisable at end of year 140,250 $ 21.76 $ 21.76
======== ========= =============
</TABLE>
XIX
<PAGE> 40
The Company does not recognize compensation expense in connection with stock
option grants because stock options are granted at exercisable prices that equal
or exceed the fair market value of the stock at the time the options are
granted. Had compensation expense for the Plan been determined under SFAS No.
123, "Accounting for Stock-Based Compensation," the Company's pro forma net
income would have been as follows:
<TABLE>
<CAPTION>
<S> <C>
Net earnings (loss)
As reported $1,492
======
Pro forma $1,328
======
Weighted average fair value per share of options granted $1.50
======
</TABLE>
To determine compensation cost under the fair value method, the fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model.
Principal assumptions used in applying the Black-Scholes option pricing model
were as follows:
<TABLE>
<CAPTION>
1999
----
<S> <C>
Risk-free interest rate 4.98%
Expected volatility --
Expected life in years 3
</TABLE>
13. SUBSEQUENT EVENTS:
ACQUISITION
During January 2000, the Company, though it's wholly owned subsidary,
SourceOne Worldwide,Inc., acquired certain assets and assumed certain
liabilities of SourceOne Worldwide, LLC for an aggregate purchase of
approximately $2,027. This transaction was accounted for using the purchase
method of accounting. In addition, during 1999, the Company advanced $375 to
SourceOne Worldwide, LLC. These advances are included in prepaid expenses and
other in the accompanying consolidated balance sheet. These advances were
forgiven in conjunction with the acquisition.
XX
<PAGE> 41
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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............................. 55 President, Chief Executive Officer and Director
Glenn McKenzie.............................. 47 Chairman of the Board of Directors
Roger D. Andersen........................... 46 Vice President of Finance, Chief
Financial Officer, Treasurer and
Secretary
J. David Basto.............................. 27 Director
Jay F. Ecklund.............................. 63 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.
GLENN MCKENZIE has been a director of Young America and Holdings since
November 1999. Mr. McKenzie founded Alpha Investments, Inc. in 1991, and has
been a consultant for DBCP since September 1999. Prior to such time, Mr.
McKenzie was an operating affiliate with McCown De Leeuw and Company. Preceding
Alpha Investments, he was a founding general partner of HMA Investments, Inc., a
private investment firm focused on middle market management buyouts. Mr.
McKenzie is a director of Fibermark Inc., Exeter Health Resources, and
Distribution Associates, Inc. Mr. McKenzie has a B.A. degree and an MBA degree
from the University of North Carolina.
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.
J. DAVID BASTO has been a director of Young America and Holdings since
November 1999. Mr. Basto, an Associate at DBCP,
21
<PAGE> 42
joined DBCP's predecessor, BT Capital Partners, Inc, in August 1998. Prior to
joining DBCP, Mr. Basto was an associate at Juno Partners, a private investment
and advisory firm from 1997 to 1998. Mr. Basto was a senior analyst in the
mergers and acquisitions group of Tucker Anthony's investment banking department
from 1994 to 1997. Mr. Basto holds a B.A. degree from the University of
Virginia.
JAY F. ECKLUND was Chairman and Chief Executive Officer of the Company
from 1975 until the consummation of the Recapitalization. Mr. Ecklund has been a
director of Holdings since 1975. Upon the consummation of the Recapitalization,
Mr. Ecklund is entitled to continue as a director of Holdings in accordance with
the terms of the Stockholders' Agreement. Mr. Ecklund is also a director of
Young America.
J. MARK A. MACDONALD has been a Portfolio Manager with the Merchant
Banking Group of OTPPB since 1995. From 1991 to 1995, Mr. MacDonald was a
partner with Enterprise Management Group/Premier Capital where he provided
investment management, corporate development, restructuring and financial and
fiscal advisory services to corporate and other clients. Mr. MacDonald also
serves on the boards of directors of AT&T Canada Inc. 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. McKenzie, MacDonald,
Ecklund, Basto and Weil serve as directors of Young America. Young America has
an executive committee comprised of Messrs. McKenzie, 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. Under the Stockholders' Agreement, DBCP 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, DBCP and OTPPB are entitled to
designate jointly up to three independent directors to the Board of Directors.
Currently Messrs. McKenzie, MacDonald, Ecklund, Basto 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 DBCP
and one director appointed by OTPPB. Currently Messrs. McKenzie, 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. McKenzie, MacDonald and
Weil serve on the Compensation Committee. At such time as DBCP 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.
22
<PAGE> 43
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the years ended December
31, 1999, 1998, and 1997 for the Company's Chief Executive Officer and the
Company's Vice President of Finance and Chief Financial Officer (the "Named
Executive Officers"). No other person serving as an executive officer of the
Company at December 31, 1999 received in excess of $100,000 in total
compensation in 1999.
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 ....................... 1999 $ 315,000 $ 244,125 34,000 $ 897,002 $ 7,283
President and Chief Executive Officer
1998 $ 300,000 -- -- $ 34,120 $ 13,973
1997 $ 264,133 $1,161,000 -- $9,718,082 $ 23,708
Roger D. Andersen ..................... 1999 $ 210,000 $ 81,375 20,000 -- $ 135,557
Vice President of Finance,
Chief Financial Officer,
Secretary and Treasurer (1)
1998 $ 18,314 -- -- -- --
</TABLE>
- ------------
(1) Mr. Andersen's compensation for 1998 reflects compensation from the
date of his hire in November 1998 through the end of the year.
(2) LTIP payments include a payments made to Mr. Weil under the Old
Employment Agreement (as defined below) upon release of the funds in
escrow related to the Recapitalization.
(3) Other compensation includes contributions to defined contribution plans
and payments related to taxable insurance benefits paid on behalf of
Mr. Weil and Mr. Andersen, as well as a $20,000 signing bonus and
$109,855 of relocation expense reimbursement and tax gross-up paid to
Mr. Andersen in 1999.
The following table sets forth information regarding options to acquire
Class C Common Stock granted during 1999 by Holdings to the Named Executive
Officers. The hypothetical present values of stock options granted in 1999 are
calculated under a Black-Scholes model, a mathematical formula used to value
options. The actual amount, if any, realized upon the exercise of stock options
will depend upon the amount by which the market price of Holdings Class C Common
Stock on the date of exercise exceeds the exercise price. There is no assurance
that the hypothetical present values of stock options reflected in this table
will actually be realized.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
Individual Grants
-----------------
Number of % of Total
Securities Options/SARs Exercise Hypothetical
Underlying Granted to or Base Grant Date
Options/SARs Employees in Price Present Value $
Name Granted Fiscal Year ($/Sh) Expiration Date (4)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles Weil 17,000(1) 5.4% $21.76 03/31/2009 $50,150
8,500(2) 2.7% $43.52 03/31/2009 0
8,500(3) 2.7% $65.28 03/31/2009 0
Roger Andersen
10,000(1) 3.2% $21.76 03/31/2009 $29,500
5,000(2) 1.6% $43.52 03/31/2009 0
5,000(3) 1.6% $65.28 03/31/2000 0
</TABLE>
1. These options are currently exercisable.
2. These options become exercisable on November 25, 2000.
3. These options become exercisable on November 25, 2001.
4. The Black-Scholes model used to calculate the hypothetical values of
options for the Class C Common Stock of Holdings at the date of grant
considers a number of factors to estimate the option's present value.
These factors include: (i) the stock's volatility prior to the grant
date; (ii) the exercise period of the option; (iii) interest rates; and
(iv) the stock's expected divided yield. The assumptions used in the
valuation of the options for the Class C Common Stock were: (a) stock
price volatility of 0%; (b) exercise period of 3 years; (c) interest
rate of 4.98% (based on the risk-free interest rate on U.S. Treasury
Strips (stripped of coupon interest) on the date of grant, assuming the
same term to maturity); (d) and dividend yield of 0%.
23
<PAGE> 44
The following table sets forth information regarding the exercise and value
of stock options held by the Named Executive Officers.
AGGREGATED OPTION/SAR EXERCISES IN LAST
FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
at FY-End (#) at FY-End ($)
Shares Acquired on Exercisable/ Exercisable/
Name Exercise (#) Value Realized($) Unexercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Charles D. Weil 0 0 34,000 $.00 (1)
Roger D. Andersen 0 0 20,000 $.00 (1)
</TABLE>
1. On December 31, 1999, the per share exercise price exceeded the fair market
value of the Company's Class C common stock (based on the valuation formula used
by the Company in valuing the Class A Redeemable Common Stock).
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 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 Note 7 of audited consolidated financial
statements.
24
<PAGE> 45
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 has a twelve-month term, 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 annual base salary payable in six equal monthly installments.
EMPLOYEE STOCK OPTION PLAN
In March 1999, Holdings adopted an employee stock option plan (the "Stock
Option Plan") that authorizes the issuance of options to purchase shares of
non-voting Class C Common Stock of Holdings. Pursuant to the Stock Option Plan,
the Compensation Committee is authorized to grant 338,824 options to purchase
Class C Common Stock, representing 15% of the fully-diluted Common Stock of
Holdings, to employees of the Company. The Stock Option Plan is a time vesting
plan with 25% of the options vested on the date of grant and an additional 25%
vesting on each anniversary of the date of grant for the next three years. 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 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 satisfaction of certain personal
performance targets are achieved. 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. Payments totaling $968,000 were made under the plan in respect to the
year 1999, and no payments were made under the plan in respect to the year 1998.
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. Payments of $610,000 were made under the plan in respect to the year
1999, and no payments were made under the plan in respect to the year 1998.
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<PAGE> 46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding capital stock of Young America is owned by Holdings
as of March 15, 2000. The following table sets forth certain information
regarding the beneficial ownership of the Class A Common Stock of Holdings as of
March 15, 2000 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>
DB Capital Partners, Inc.(2) ............ 1,029,445(3) 59.7%
Ontario Teachers' Pension Plan Board(2) . 387,923(4) 30.0
Jay F. Ecklund(2) ....................... 134,400 10.5
Glenn McKenzie(2)(5) .................... 1,029,445(3) 59.7
J. Mark A. MacDonald(2)(6) .............. 387,923(4) 30.0
J. David Basto (2)(5) ................... 1,029,445(3) 59.7
Charles D. Weil(2)(7) ................... 173,221 13.3
Roger D. Andersen(8) .................... 10,000 *
All directors and executive officers as a
Group(5)(6)(9) (6 persons) ............ 1,734,989(3)(4) 98.5
</TABLE>
* Denotes less than 1%
- ------------
(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 DBCP, Messrs. McKenzie and Basto is 130 Liberty Street, New
York, New York 10006; the address of OTPPB and Mr. MacDonald is 5650 Yonge
Street, North York, Ontario Canada M2M 4H5; the address of Messrs. Weil and
Andersen 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. DBCP is the private equity investing arm of,
and a wholly owned subsidiary of, Deutsche Bank Group. It was previously
owned by Bankers Trust Corporation and operated as BT Capital Partners,
Inc.
(3) (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 9,650 shares of Class C Common Stock that are convertible into
Class A Common Stock. If OTPPB were to convert all 172,727 of the shares of
Class C Common Stock its holds into shares of Class A Common Stock, it
would hold approximately 37.9% 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. McKenzie is a consultant for DBCP, Mr. Basto is an Associate of DBCP.
Mr. McKenzie and Mr. Basto disclaims any beneficial ownership of the shares
of Holdings held by DBCP.
(6) Mr. MacDonald is a Portfolio Manager of OTPPB. Mr. MacDonald disclaims any
beneficial ownership of the shares of Holdings held by OTPPB.
(7) Includes 17,000 shares of Class C Common Stock that currently may be
acquired upon exercise of options. Such shares of Class C Common Stock will
be convertible into Class A Common Stock.
(8) Consists of shares of Class C Common Stock that currently may be acquired
upon exercise of options. Such shares of Class C Common stock will be
convertible into Class A Common Stock.
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<PAGE> 47
(9) Includes 27,000 shares of Class C Common Stock that currently may be
acquired upon exercise of options. Such shares of Class C Common Stock will
be convertible into Class A Common Stock.
DESCRIPTION OF CAPITAL STOCK; SBIC RESTRICTIONS ON DBCP
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 1,293,133 shares of Class A Commons 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 Commons 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"), DBCP 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, DBCP 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 DBCP owns a majority of the Common
Stock of Holdings, DBCP owns less than a majority of Holdings' voting stock.
Each share of Class B Common Stock (all of which is held by DBCP) will be
entitled to vote, at the option of DBCP, 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 DBCP or its assignees.
STOCKHOLDERS' AGREEMENT
In connection with consummation of the Recapitalization, Holdings, DBCP,
OTPPB, Jay F. Ecklund and the Management Stockholders (collectively, the
"Stockholders") entered into a stockholders' agreement (the "Stockholders'
Agreement"). The Stockholders' Agreement contains certain restrictions with
respect to the transferability of Holdings' capital stock and contains a grant
by Holdings to the Stockholders of preemptive rights to subscribe for future
issuances of its capital stock and securities convertible or exercisable for
capital stock, subject to certain exceptions. The Stockholders' Agreement also
includes provisions regarding designation of members of the Board of Directors
and other voting arrangements. The Stockholders' Agreement will terminate upon
the earlier of the completion of an Approved Sale 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, DBCP 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, DBCP 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
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<PAGE> 48
Officer of Holdings, one director appointed by DBCP 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 DBCP 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 DBCP'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 DBCP; 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 DBCP 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 DBCP. 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 DBCP approves the sale of all of the capital stock of Holdings or
the sale of all or substantially all of the assets of Holdings (each an
"Approved Sale"), then each other Stockholder shall agree to and comply with the
terms of such sale.
REPURCHASE AGREEMENTS WITH RESPECT TO EMPLOYEE STOCK
Each of the Management Stockholders acquired the shares of Class A Common
Stock held by such Management Stockholder (with respect to each Management
Stockholder, the "Employee Stock") pursuant to a Stock Subscription and
Repurchase Agreement (collectively, the "Employee Stock Agreements") between
such Management Stockholder and Holdings simultaneous with and as part of the
Recapitalization. Each of the Employee Stock Agreements provides that upon the
occurrence of certain events including the death, retirement, permanent
disability, resignation for good reason (such as retirement) or termination
without cause of the Management Stockholder (the "Termination Events"), such
Management Stockholder (or his successors) will have the right (within a
specified period of time) to cause Holdings to repurchase his Employee Stock. In
July 1998, Holdings and Charles D. Weil terminated such right granted to Mr.
Weil. If a Termination Event shall occur with respect to any Management
Stockholder, Holdings has a corresponding 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, 2000, Holdings had repurchased 21,505 shares of stock under such
agreements at a total purchase price of $406,750.
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<PAGE> 49
REGISTRATION RIGHTS AGREEMENT; RIGHTS OF JAY F. ECKLUND
In connection with the Recapitalization, Holdings, DBCP, 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, DBCP 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) entered into an amended and restated Equity Registration
Rights Agreement that grants Mr. Ecklund new demand registration rights
commencing after the fifth anniversary of the Recapitalization and grants Mr.
Weil new demand registration rights if a Termination Event shall occur with
respect to Mr. Weil. Under the amended and restated Equity Registration Rights
Agreement, if Mr. Ecklund or Mr. Weil exercises his demand right with respect to
all of his shares of common stock and any underwriter selected by Mr. Ecklund or
Mr. Weil, as the case may be, advises Holdings that such underwriter cannot sell
all such shares in such offering because such offering would not be large
enough, then Mr. Ecklund and Mr. Weil, as applicable, shall each have the right
to require Holdings to sell in such offering newly issued shares of common stock
representing up to 30% of its shares in any underwritten offering, as the case
may be. In addition, if any such underwriter advises Holdings that an offering
of all of Mr. Ecklund's or Mr. Weil's shares, as the case may be, in addition to
any other shares that are proposed to be registered under such registration
statement (including shares to be offered and sold by Holdings), cannot be
consummated given the then current market conditions, then Mr. Ecklund's shares
would be entitled to be sold before any shares are sold by Holdings or by any
other shareholder (including Mr. Weil) and Mr. Weil's shares would be entitled
to be sold before any shares are sold by Holdings or any other shareholder
(other than Mr. Ecklund). If Mr. Ecklund or Mr. Weil exercises a new demand
registration right at any time, certain shareholders of Holdings would have the
right to purchase Mr. Ecklund's and/or Mr. Weil's shares, as the case may be,
for 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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OFFERING OF THE OLD NOTES
The Company sold the Old Notes to BT Alex Brown ("BTAB"), an affiliate of
DBCP, 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, the Company granted BTAB a discount on the purchase price of the
Old Notes in the amount of $2.4 million.
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 DBCP. 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.
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<PAGE> 50
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. An escrow account in the amount of $6
million was established by the Company under the Recapitalization Agreement for
the benefit of the Investor Group. There were no indemnification claims made
against the account and the total amount of the escrow was paid to the Selling
Stockholders in the second quarter of 1999. Also in connection with the
Recapitalization, Holdings is obligated to make additional payments to its
former majority shareholders subject to Holdings achieving certain targets
defined in the Recapitalization Agreement. To the extent Cumulative Excess Free
Cash Flow (as defined in the Recapitalization Agreement) of the Company for the
four-year period ending December 31, 2001 exceeds $93.0 million, Holdings is
required to make an additional purchase price payment equal to 20% of such
excess, subject to a maximum amount payable of $15.0 million. Under separate
agreements with Mr. Weil, Mr. Stinchfield, Mr. Ferguson and the Selling
Stockholders, a portion of this additional purchase price payment will be
payable to such individuals. Such payments will vary depending on the 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, DBCP and OTPPB entered
into a management agreement (the "Management Agreement") relating to certain
services to be provided to the Company in the future by DBCP and OTPPB. Under
the Management Agreement, DBCP 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 DBCP and OTPPB,
respectively. Such fees were expensed and accrued in 1999 and 1998, but to date,
no payments have been made under this agreement. Also in connection with the
Recapitalization, the Company paid DBCP 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 DBCP 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 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 DBCP, OTPPB and Mr. Ecklund. See Note 5 of the audited consolidated
financial statements.
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<PAGE> 51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this form 10-K:
1. Financial Statements:
The Consolidated Financial Statements, related notes and Report of
Independent Accountants are set forth in Item 8 of this Annual Report on
Form 10-K.
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.
3 Index to Exhibits
3.1 Articles of Incorporation of Young America (incorporated by
reference to Exhibit 3.1 of the Registrant's Registration
Statement on Form S-4(File N. 333-49749)(the "S-4 Registration
Statement").
3.2 Amended and Restated Articles of Incorporation of Holdings
(incorporated by reference to Exhibit 3.2 of the S-4
Registration Statement).
3.3 Bylaws of Young America (incorporated by reference to Exhibit
3.3 of the S-4 Registration Statement).
3.4 Restated Bylaws of Holdings (incorporated by reference to
Exhibit 3.4 of the S-4 Registration Statement).
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 Amercia, Holdings and Marine Midland Bank, as
Trustee (incorporated by reference to Exhibit 4.1 of the S-4
Registration Statement).
4.2 Registration Rights Agreement dated as of February 23, 1998
among Young America Holdings and the Initial Purchaser
(incorporated by reference to Exhibit 4.2 of the S-4
Registration Statement).
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 Trust (the "Ecklund Trusts") and DBCP
(incorporated by reference to Exhibit 10.1 of the S-4
Registration Statement).
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 (incorporated by
reference to Exhibit 10.2 of the S-4 Registration Statement).
10.3 Put Option Agreement dated as of November 25, 1997 between
Holdings and Ecklund (incorporated by reference to Exhibit
10.3 of the S-4 Registration Statement).
10.4 Stock Purchase Agreement dated November 25, 1997 between
Holdings and DBCP (incorporated by reference to Exhibit 10.4
of the S-4 Registration Statement).
10.5 Stock Purchase Agreement dated November 25, 1998 between
Holdings and OTPPB (incorporated by reference to Exhibit 10.5
of the S-4 Registration Statement).
10.6 Stockholders' Agreement dated as of November 25, 1997 among
Holdings, DBCP, OTPPB and Ecklund (incorporated by reference
to Exhibit 10.6 of the S-4 Registration Statement).
10.7 Amended and Restated Registration Rights Agreement dated as of
July 31, 1998 among Holdings, DBCP, OTPPB and Ecklund
(incorporated by reference to Exhibit 10.7 of the S-4
Registration Statement).
10.8 Purchase Agreement dated as of February 18, 1998 among Young
America, Holdings and BTAB (incorporated by reference to
Exhibit 10.8 of the S-4 Registration Statement).
10.9 Management Fee Agreement dated as of November 25, 1997 among
Holdings, DBCP and OTPPB (incorporated by reference to Exhibit
10.9 of the S-4 Registration Statement).
10.10 Stock Subscription and Repurchase Agreement dated November 25,
1997 between Holdings and Charles D. Weil (incorporated by
reference to Exhibit 10.10 of the S-4 Registration Statement).
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<PAGE> 52
10.11 Amendment to Stock Subscription and Repurchase Agreement dated
as of February 23, 1998 between Holdings and Charles D. Weil
(incorporated by reference to exhibit 10.11 of the S-4
Registration Statement).
10.12 Employment Agreement dated November 24, 1997 between Holdings
and Charles D. Weil (incorporated by reference to exhibit
10.13 of the S-4 Registration Statement).
10.13 Voluntary Resignation Agreement dated October 1, 1998 between
Holdings, Young America and L. Joseph Kulas (incorporated by
reference to exhibit 10.15 of the Form 10K for the period
ended December 31, 1998).
10.14 Employment Agreement dated as of December 2, 1998 between
Young America and Roger D. Andersen. (incorporated by
reference to exhibit 10.16 of the Form 10K for the period
ended December 31, 1998).
10.15 1997 Management Recognition, Transition and Equity Bonus Plan
of Holdings dated November 25, 1997 (incorporated by reference
to exhibit 10.15 of the S-4 Registration Statement).
10.16 Credit Agreement dated April 7, 1998 between Young America and
Norwest Bank Minnesota, National Association (incorporated by
reference to exhibit 10.18 of the S-4 Registration Statement).
10.17 First Amendment to Credit Agreement dated November 16, 1998
between Young America and Norwest Bank Minnesota, National
Association (incorporated by reference to exhibit 10.1 of the
Form 10Q/A for the quarter ended September 30, 1998).
10.18 Second Amendment to Credit Agreement dated March 12, 1999.
(incorporated by reference to exhibit 10.21 of the Form 10K
for the period ended December 31, 1998).
10.19 Senior Credit Agreement dated as of November 25, 1997 among
Young America, Holdings , the Lenders names therein and
Bankers Trust Company (incorporated by reference to exhibit
10.26 of the S-4 Registration Statement).
10.20 Non-Competition Agreement dated as of November 25, 1997 among
Holdings, Ecklund and the other individuals listed on the
signature pages thereto (incorporated by reference to exhibit
10.25 of the S-4 Registration Statement).
10.21 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
(incorporated by reference to exhibit 10.28 of the S-4
Registration Statement).
10.22 Young America Holdings, Inc. 1999 Stock Option Plan.
(incorporated by reference to exhibit 10.29 of the Form 10K
for the period ended December 31, 1998).
10.23 Third Amendment to Credit Agreement dated February 25, 2000.
12.1 Statement re: computation of ratios.
21.1 Subsidiaries of the Registrants.
27.1 Financial Data Schedule
4. Form 8-K:
No reports on Form 8-K were filed by the Registrants during the last
quarter of the period covered by this Report on Form 10-K
5. SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
Except for a copy of this Annual Report on Form 10-K, no annual report
to securities holders covering the registrants' last fiscal year or
proxy material will be sent to security holders.
32
<PAGE> 53
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Young America Holdings, Inc
By: /s/ Charles D. Weil
________________________________
Name: Charles D. Weil
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on the 29th day of March , 2000 by the
following persons on behalf of the registrant and in the capacities
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Charles D. Weil
_______________________________________ President, Chief Executive Officer and Director
Charles D. Weil (principal executive officer)
/s/ Roger D. Andersen
_______________________________________ Vice President of Finance, Treasurer, Secretary
Roger D. Andersen and Chief Financial Officer
(principal financial and accounting officer)
/s/ Glenn McKenzie
_______________________________________ Chairman of the Board
Glenn McKenzie
_______________________________________ Director
Jay F. Ecklund
/s/ J. Mark A. MacDonald
_______________________________________ Director
J. Mark A. MacDonald
/s/ J. David Basto
_______________________________________ Director
J. David Basto
</TABLE>
33
<PAGE> 54
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Young America Corporation
By: /s/ Charles D. Weil
________________________________
Name: Charles D. Weil
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed on the 29th day of March , 2000 by the
following persons on behalf of the registrant and in the capacities
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ Charles D. Weil
_______________________________________ President, Chief Executive Officer and Director
Charles D. Weil (principal executive officer)
/s/ Roger D. Andersen
_______________________________________ Vice President of Finance, Treasurer, Secretary
Roger D. Andersen and Chief Financial Officer
(principal financial and accounting officer)
/s/ Glenn McKenzie
_______________________________________ Chairman of the Board
Glenn McKenzie
_______________________________________ Director
Jay F. Ecklund
/s/ J. Mark A. MacDonald
_______________________________________ Director
J. Mark A. MacDonald
/s/ J. David Basto
_______________________________________ Director
J. David Basto
</TABLE>
34
<PAGE> 1
EXHIBIT 10.23
THIRD AMENDMENT TO CREDIT AGREEMENT
This Third Amendment, dated as of February 25, 2000, is
entered into by and between YOUNG AMERICA CORPORATION, a Minnesota corporation
(the "Borrower"), and NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, a national
banking association (the "Bank").
RECITALS
The Borrower and the Bank have entered into a Credit Agreement
dated as of April 6, 1998, as amended by a First Amendment to Credit Agreement
dated as of November 13, 1999, and a Second Amendment to Credit Agreement dated
as of March 12, 1999 (as so amended, the "Credit Agreement").
The Borrower has requested that certain amendments be made to
the Credit Agreement, which the Bank is willing to make pursuant to the terms
and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the
mutual covenants and agreements herein contained it is agreed as follows:
1. Defined Terms. Capitalized terms used in this Third
Amendment which are defined in the Credit Agreement shall have the same meanings
as defined therein, unless otherwise defined herein.
2. Amendment of Section 1.1. Section 1.1 of the Credit
Agreement is hereby amended by adding the following defined terms:
"'Compliance Certificate' means a certificate in
substantially the form of Exhibit B-1 (for monthly reporting ), Exhibit
B-2 (for quarterly reporting) or Exhibit B-3 (for annual reporting), as
is appropriate for the time period and which are attached to the Third
Amendment, or in such other form as the Borrower and the Bank may from
time to time agree upon in writing, executed by the chief financial
officer of the Borrower, stating (i) that any financial statements
delivered therewith have been prepared in accordance with GAAP, subject
(in the case of interim statements) to year-end adjustments and the
omission of footnotes, (ii) whether or not such officer has knowledge
of the occurrence of any Default or Event of Default hereunder not
theretofore reported and remedied and, if so, stating reasonable detail
the facts with respect thereto and (iii) all relevant facts in
reasonable detail to evidence, and the computations as to, whether or
not the Borrower is in compliance with the Financial Covenants."
<PAGE> 2
"'Third Amendment' means the Third Amendment to Credit
Agreement dated as of February 25, 2000, by and between the Borrower
and the Bank."
3. Amendment of Section 2.8(b). Section 2.8(b) of the Credit
Agreement is hereby amended in its entirety to read as follows:
"(b) Non-Usage Fees. The Borrower shall pay the Bank
a non-usage fee at the Non-Usage Rate (as defined herein) for the
calendar year ending December 31, 2000, on the average daily unused
amount of the Commitment Amount, payable monthly on the last day of
each calendar month. Any non-usage fee remaining unpaid on the
Commitment Termination Date shall be due and payable on that date. As
used in this subsection (b), the "Non-Usage Rate" shall mean one-half
of one percent (.500%) per annum; provided that if (i) the Bank has
received financial statements of the Borrower indicating, to the Bank's
satisfaction, compliance with all covenants stated in the Credit
Agreement through December 31, 2000 and (ii) no Default exists on
January 1, 2001, then from January 1, 2001 and thereafter, the
"Non-Usage Rate" shall mean three-eighths of one percent (.375%)."
4. Amendment of Section 5.9. Section 5.9 of the Credit
Agreement is hereby amended in its entirety to read as follows:
"Section 5.9 Interest Coverage Ratio. The Borrower
will at all times maintain its Interest Coverage Ratio, determined at
the end of each calendar quarter designated below, at not less than the
amount set forth below opposite the period in which such calendar
quarter ends:
<TABLE>
<CAPTION>
Quarters Ending Ratio
--------------- -----
<S> <C>
On March 31, 2000 1.00 to 1
On June 30, 2000 1.00 to 1
On September 30, 2000 1.10 to 1
On December 31, 2000 1.30 to 1
March 31, 2001 and thereafter 1.35 to 1"
</TABLE>
4. Amendment of Section 6.12. Section 6.12 of the Credit
Agreement is hereby amended in its entirety to read as follows:
"Section 6.12 Capital Expenditures. For the year
ending December 31, 2000, the Borrower will not make Capital
Expenditures in excess of $4,000,000, regardless of whether such
expenditures are payable currently or in the future. Thereafter,
beginning with the calendar quarter ending on March 31, 2001, the
Borrower will not make Capital Expenditures during any calendar quarter
in excess of $500,000, regardless of whether such expenditures are
payable currently or in the future, provided that any unused portion of
permitted Capital Expenditures for a
-2-
<PAGE> 3
calendar quarter may be expended in the next succeeding calendar
quarter; provided, however, that in no event may Capital Expenditures
exceed $2,000,000 during any calendar year.
5. No Other Changes. Except as explicitly amended by this
Third Amendment, all of the terms and conditions of the Credit Agreement shall
remain in full force and effect and shall apply to any advance or letter of
credit thereunder.
6. Representations and Warranties. The Borrower hereby
represents and warrants to the Bank as follows:
(a) The Borrower has all requisite power and authority to
execute this Third Amendment and to perform all of its obligations hereunder,
and this Third Amendment has been duly executed and delivered by the Borrower
and constitutes the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms.
(b) The execution, delivery and performance by the Borrower of
this Third Amendment has been duly authorized by all necessary corporate action
and does not (i) require any authorization, consent or approval by any
governmental department, commission, board, bureau, agency or instrumentality,
domestic or foreign, (ii) violate any provision of any law, rule or regulation
or of any order, writ, injunction or decree presently in effect, having
applicability to the Borrower, or the articles of incorporation or by-laws of
the Borrower, or (iii) result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Borrower is a party or by which it or its properties may
be bound or affected.
(c) All of the representations and warranties contained in
Article IV of the Credit Agreement are correct on and as of the date hereof as
though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date.
7. References. All references in the Credit Agreement to "this
Agreement" shall be deemed to refer to the Credit Agreement as amended hereby;
and any and all references in the Loan Documents to the Credit Agreement shall
be deemed to refer to the Credit Agreement as amended hereby.
8. No Waiver. The execution of this Third Amendment and any
documents related hereto shall not be deemed to be a waiver of any Default or
Event of Default under the Credit Agreement or breach, default or event of
default under any Loan Document or other document held by the Bank, whether or
not known to the Bank and whether or not existing on the date of this Third
Amendment.
9. Release. The Borrower hereby absolutely and unconditionally
releases and forever discharges the Bank, and any and all participants, parent
corporations, subsidiary corporations, affiliated corporations, insurers,
indemnitors, successors and assigns thereof, together with all of the present
and former directors, officers, agents and employees of any of
-3-
<PAGE> 4
the foregoing, from any and all claims, demands or causes of action of any kind,
nature or description, whether arising in law or equity or upon contract or tort
or under any state or federal law or otherwise, which the Borrower has had, now
has or has made claim to have against any such person for or by reason of any
act, omission, matter, cause or thing whatsoever arising from the beginning of
time to and including the date of this Amendment, whether such claims, demands
and causes of action are matured or unmatured or known or unknown.
10. Costs and Expenses. The Borrower hereby reaffirms its
agreement under the Credit Agreement to pay or reimburse the Bank on demand for
all costs and expenses incurred by the Bank in connection with the Credit
Agreement, the Loan Documents and the other instruments and documents to be
delivered hereunder and thereunder, including the reasonable fees and reasonable
out-of-pocket expenses of counsel for the Bank with respect thereto, whether
paid to outside counsel or reasonably allocated to the Bank by in-house counsel.
Without limiting the generality of the foregoing, the Borrower specifically
agrees to pay all fees and disbursements of counsel to the Bank for the services
performed by such counsel in connection with the preparation of this Third
Amendment and the documents and instruments incidental hereto.
11. Miscellaneous. This Third Amendment may be executed in any
number of counterparts, each of which when so executed and delivered shall be
deemed an original and all of which counterparts, taken together, shall
constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Third
Amendment to be duly executed as of the date first written above.
NORWEST BANK MINNESOTA, YOUNG AMERICA CORPORATION
NATIONAL ASSOCIATION
By /s/ Jeffrey H. Morsman By /s/ Roger D. Andersen
- ------------------------------------ --------------------------------------
Its Corporate Banking Officer Its Vice President Finance and CFO
-4-
<PAGE> 5
MONTHLY COMPLIANCE CERTIFICATE
Date: February 29, 2000
To: Norwest Bank Minnesota, National Association
Structured Finance Division
Norwest Center - 5th Floor
Sixth Street and Marquette Avenue
MAC # N9305-051
Minneapolis, Minnesota 55479
Attention: Jeffrey H. Morsman
Re: Credit Agreement dated as of April 7, 1998
between Young America Corporation and
Norwest Bank Minnesota, National Association
In accordance with the requirements of the above referenced
agreement as subsequently amended (the "Credit Agreement"), attached are the
consolidated financial statements of Young America Corporation (the "Borrower")
as of and for the calendar month and year-to-date periods ended JANUARY 31, 2000
(the "Current Financials"). Capitalized terms used herein but not otherwise
defined shall have the same meanings as the meanings assigned to them in the
Credit Agreement.
I hereby certify that the Current Financials have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis, subject to year-end audit adjustments.
Events of Default. (Check One):
X The undersigned does not have knowledge of the occurrence of a
Default or Event of Default under the Credit Agreement.
___ The undersigned has knowledge of the occurrence of a Default or
Event of Default under the Credit Agreement and attached hereto is a statement
of the facts with respect thereto.
- --------------------------------------------------------------------------------
(page one of two)
<PAGE> 6
Young America Corporation
Attached hereto are all relevant facts in reasonable detail to evidence
the computations of the Financial Covenants referred to above. These
computations were prepared in accordance with generally accepted accounting
principles applied on a basis that is consistent with the accounting practices
reflected in the annual financial statements of the Borrower previously
delivered to you.
Young America Corporation
By _____________________________
Its VICE PRESIDENT FINANCE & CFO
____________________________
- --------------------------------------------------------------------------------
(page two of two)
<PAGE> 7
Exhibit B-2 to
Third Amendment to Credit Agreement
(To be re-typed on Borrower's letterhead)
QUARTERLY COMPLIANCE CERTIFICATE
Date: ____________________
To: Norwest Bank Minnesota, National Association
Structured Finance Division
Norwest Center - 5th Floor
Sixth Street and Marquette Avenue
MAC # N9305-051
Minneapolis, Minnesota 55479
Attention: Jeffrey H. Morsman
Re: Credit Agreement dated as of April 7, 1998
between Young America Corporation and
Norwest Bank Minnesota, National Association
In accordance with the requirements of the above referenced
agreement as subsequently amended (the "Credit Agreement"), attached are the
consolidated financial statements of Young America Corporation (the "Borrower")
as of and for the calendar quarter and year-to-date periods ended
_________________ (the "Current Financials"). Capitalized terms used herein but
not otherwise defined shall have the same meanings as the meanings assigned to
them in the Credit Agreement.
I hereby certify that the Current Financials have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis, subject to year-end audit adjustments.
Events of Default. (Check One):
___ The undersigned does not have knowledge of the occurrence of a
Default or Event of Default under the Credit Agreement.
___ The undersigned has knowledge of the occurrence of a Default or
Event of Default under the Credit Agreement and attached hereto is a statement
of the facts with respect thereto.
- --------------------------------------------------------------------------------
(page one of three)
<PAGE> 8
Young America Corporation
Financial Covenants. I hereby further certify as follows:
1. Interest Coverage Ratio. Pursuant to Section 5.9 of the Credit
Agreement, for the computation period ending on
_______________, the Interest Coverage Ratio of the Borrower
is _______________ to 1.00. The Credit Agreement requires that
such ratio be not less than _______________ to 1.00 as of such
computation date.
<TABLE>
<CAPTION>
Minimum
Interest
Computation Date Coverage Ratio
--------------------------------------------------------- -----------------
<S> <C>
March 31, 2000 1.00
June 30, 2000 1.00
September 30, 2000 1.10
December 31, 2000 1.30
March 31, 2001 and each calendar quarter thereafter 1.35
</TABLE>
2. Capital Expenditures. Pursuant to Section 6.12 of the Credit
Agreement, for the computation period ending on
_______________, the cumulative Capital Expenditures of the
Borrower are_______________. The Credit Agreement requires
that such amount be not more than _______________ as of such
computation date.
<TABLE>
<CAPTION>
Maximum
Cumulative
Capital
Computation Period Expenditures
--------------------------------------------------------- ------------------
<S> <C>
January 1, 2000 through December 31, 2000 $ 4,000,000
January 1, 2001 through March 31, 2001 $ 500,000
January 1, 2001 through June 30, 2001 $ 1,000,000
January 1, 2001 through September 30, 2001 $ 1,500,000
January 1, 2001 through December 31, 2001 $ 2,000,000
</TABLE>
- --------------------------------------------------------------------------------
(page two of three)
<PAGE> 9
Young America Corporation
2. Current Ratio. Pursuant to Section 5.10 of the Credit
Agreement, for the computation date ending on _______________,
the Current Ratio of the Borrower is _______________ to 1.00.
The Credit Agreement requires that such ratio be not less than
_______________ to 1.00 as of such computation date.
<TABLE>
<CAPTION>
Minimum Current
Computation Date Ratio
--------------------------------------------------------- -----------------
<S> <C>
March 31, 2000 and each calendar quarter thereafter 1.10
</TABLE>
Attached hereto are all relevant facts in reasonable detail to evidence
the computations of the Financial Covenants referred to above. These
computations were prepared in accordance with generally accepted accounting
principles applied on a basis that is consistent with the accounting practices
reflected in the annual financial statements of the Borrower previously
delivered to you.
Young America Corporation
By _________________________________
Its _______________________________
- --------------------------------------------------------------------------------
(page three of three)
<PAGE> 10
Exhibit B-3 to
Third Amendment to Credit Agreement
(To be re-typed on Borrower's letterhead)
ANNUAL COMPLIANCE CERTIFICATE
Date: ____________________
To: Norwest Bank Minnesota, National Association
Structured Finance Division
Norwest Center - 5th Floor
Sixth Street and Marquette Avenue
MAC # N9305-051
Minneapolis, Minnesota 55479
Attention: Jeffrey H. Morsman
Re: Credit Agreement dated as of April 7, 1998
between Young America Corporation and
Norwest Bank Minnesota, National Association.
In accordance with the requirements of the above referenced
agreement as subsequently amended (the "Credit Agreement"), attached are the
audited consolidated and consolidating financial statements of Young America
Corporation (the "Borrower") as of and for the calendar year ended
_________________ (the "Current Financials"). Capitalized terms used herein but
not otherwise defined shall have the same meanings as the meanings assigned to
them in the Credit Agreement.
I hereby certify that the Current Financials have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis.
Events of Default. (Check One):
___ The undersigned does not have knowledge of the occurrence of a
Default or Event of Default under the Credit Agreement.
___ The undersigned has knowledge of the occurrence of a Default or
Event of Default under the Credit Agreement and attached hereto is a statement
of the facts with respect thereto.
- --------------------------------------------------------------------------------
(page one of three)
<PAGE> 11
Young America Corporation
Financial Covenants. I hereby further certify as follows:
1. Interest Coverage Ratio. Pursuant to Section 5.9 of the Credit
Agreement, for the computation period ending on
_______________, the Interest Coverage Ratio of the Borrower
is _______________ to 1.00. The Credit Agreement requires that
such ratio be not less than _______________ to 1.00 as of such
computation date.
<TABLE>
<CAPTION>
Minimum
Interest
Coverage Ratio
Computation Date
--------------------------------------------------------- -----------------
<S> <C>
December 31, 2000 1.30
March 31, 2001 and each calendar quarter thereafter 1.35
</TABLE>
2. Current Ratio. Pursuant to Section 5.10 of the Credit
Agreement, for the computation date ending on _______________,
the Current Ratio of the Borrower is _______________ to 1.00.
The Credit Agreement requires that such ratio be not less than
_______________ to 1.00 as of such computation date.
<TABLE>
<CAPTION>
Minimum Current
Computation Date Ratio
--------------------------------------------------------- -----------------
<S> <C>
March 31, 2000 and each calendar quarter thereafter 1.10
</TABLE>
- --------------------------------------------------------------------------------
(page two of three)
<PAGE> 12
Young America Corporation
4. Capital Expenditures. Pursuant to Section 6.12 of the Credit
Agreement, for the computation period ending on
_______________, the cumulative Capital Expenditures of the
Borrower are_______________. The Credit Agreement requires
that such amount be not more than _______________ as of such
computation date.
<TABLE>
<CAPTION>
Maximum
Cumulative
Capital
Computation Period Expenditures
--------------------------------------------------------- ------------------
<S> <C>
January 1, 2000 through December 31, 2000 $ 4,000,000
January 1, 2001 through March 31, 2001 $ 500,000
January 1, 2001 through June 30, 2001 $ 1,000,000
January 1, 2001 through September 30, 2001 $ 1,500,000
January 1, 2001 through December 31, 2001 $ 2,000,000
</TABLE>
Attached hereto are all relevant facts in reasonable detail to evidence
the computations of the Financial Covenants referred to above. These
computations were prepared in accordance with generally accepted accounting
principles applied on a basis that is consistent with the accounting practices
reflected in the annual financial statements of the Borrower previously
delivered to you.
Young America Corporation
By _________________________________
Its _______________________________
- --------------------------------------------------------------------------------
(page three of three)
<PAGE> 1
Exhibit 12.1
The following illustrates the computation of the ratio of earnings to fixed
charges for the years ended December 31,
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Fixed Charges
Interest Expense $ 252 $ 91 $ 981 $ 9,450 $ 9,353
Amortization of deferred financing costs 48 3,645 436
Interest Component of operating leases 442 608 1,080 1,721 2,143
======== ======== ======== ======== ========
II. Total Fixed Charges $ 694 $ 699 $ 2,109 $ 14,816 $ 11,932
======== ======== ======== ======== ========
Earnings
Income before income taxes $ 1,014 $ 8,432 $ (5,502) $(10,114) $ 2,369
Fixed charges 694 699 2,109 14,816 11,932
======== ======== ======== ======== ========
I Total Earnings $ 1,708 $ 9,131 $ (3,393) $ 4,702 $ 14,301
======== ======== ======== ======== ========
Ratio of Earnings to Fixed Charges
(I divided by II) 2.5 13.1 (a) (b) 1.2
======== ======== ======== ======== ========
</TABLE>
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 cash interest expense, amortization of deferred financing costs
and one third of operating lease payments (the portion deemed to be
representative of the interest factor).
(a) Earnings were inadequate to cover fixed charges by $5,502,000.
This shortfall was attributable to the expenses incurred in
connection with the Recapitalization, including compensation
charges of $17,924,000 for bonuses and phantom stock payments
and transaction fees and expenses of $1,967,000.00
(b) Earnings were inadequate to cover fixed charges by
$10,114,000. This shortfall was attributable to a full year
of interest expense on debt incurred with the
Recapitalization, amortization and write-off of deferred
financing costs of $3,645,000 and a one-time reserve for
the termination of Interactive Voice Response leases of
$850,000.
<PAGE> 1
Exhibit 21.1
Subsidiaries of Young America Holdings, Inc.
<TABLE>
<CAPTION>
Name State of Incorporation Doing Business As
---- ---------------------- -----------------
<S> <C> <C>
Young America Corporation Minnesota Young America Corporation
YAC.ECOM Incorporated Minnesota YAC.ECOM Incorporated
SourceOne Worldwide, Inc. Minnesota SourceOne Worldwide, Inc.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001058952
<NAME> YOUNG AMERICA HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,633
<SECURITIES> 0
<RECEIVABLES> 14,862
<ALLOWANCES> 0
<INVENTORY> 773
<CURRENT-ASSETS> 30,543
<PP&E> 20,262
<DEPRECIATION> 12,725
<TOTAL-ASSETS> 45,421
<CURRENT-LIABILITIES> 28,900
<BONDS> 80,000
0
0
<COMMON> 1,871
<OTHER-SE> (66,084)
<TOTAL-LIABILITY-AND-EQUITY> 45,421
<SALES> 0
<TOTAL-REVENUES> 82,747
<CGS> 0
<TOTAL-COSTS> 71,217
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,789
<INCOME-PRETAX> 2,369
<INCOME-TAX> 877
<INCOME-CONTINUING> 1,492
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,492
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
