<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_______TO_______
------------------------------
Commission File Number 333-49749
YOUNG AMERICA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
MINNESOTA 41-1892816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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)
<TABLE>
<S> <C>
MINNESOTA 41-0983697
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
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
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes /X/ No / /
The number of shares outstanding of the registrant's common stock as of November
9, 2000, was 1,884,988.
<PAGE> 2
YOUNG AMERICA HOLDINGS, INC.
YOUNG AMERICA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
a) Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2000 and 1999....................... 1
b) Consolidated Balance Sheets
as of September 30, 2000, and December 31, 1999....................................... 2
c) Consolidated Statements of Cash Flow
For the Nine Months Ended September 30, 2000, and 1999................................ 3
d) Notes to Consolidated Financial Statements............................................ 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................................... 10
Item 3. Quantitative and Qualitative Disclosure
About Market Risk........................................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 13
Item 2. Changes in Securities and Use of Proceeds.................................... 13
Item 3. Defaults Upon Senior Securities.............................................. 13
Item 4. Submission of Matters to a Vote of Security Holders.......................... 13
Item 5. Other Information............................................................ 13
Item 6. Exhibits and Reports on Form 8-K............................................. 13
SIGNATURES..................................................................................... 14
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 16,755 $ 17,932 $ 62,206 $ 62,352
Cost of revenues:
Processing and servicing 12,832 12,548 43,617 41,881
-------- -------- -------- --------
Gross profit 3,923 5,384 18,589 20,471
Operating expenses:
Selling 1,738 1,449 5,615 4,574
General and administrative 2,471 2,600 8,299 7,014
-------- -------- -------- --------
4,209 4,049 13,914 11,588
-------- -------- -------- --------
Operating income (286) 1,335 4,675 8,883
Other income (expense):
Interest expense (2,358) (2,338) (7,085) (7,014)
Interest income 122 184 454 505
Amortization of deferred financing costs (109) (109) (327) (327)
Amortization of goodwill (15) -- (53) --
Other -- -- 4 1
-------- -------- -------- --------
(2,360) (2,263) (7,007) (6,835)
-------- -------- -------- --------
Income (loss) before provision for income taxes (2,646) (928) (2,332) 2,048
Provision (Benefit) from income taxes (990) (343) (875) 758
-------- -------- -------- --------
Net income (loss) $ (1,656) $ (585) $ (1,457) $ 1,290
======== ======== ======== ========
</TABLE>
1
<PAGE> 4
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
( IN THOUSANDS, EXCEPT FOR SHARE DATA, UNAUDITED)
<TABLE>
<CAPTION>
September December 31
2000 1999
--------- ----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 4,495 $ 13,633
Trade receivables, net 12,857 14,862
Supplies inventory 806 773
Prepaid expenses and other 1,143 1,275
--------- ---------
Total current assets 19,301 30,543
Property and Equipment, at cost: 23,980 20,262
Less accumulated depreciation (14,060) (12,725)
--------- ---------
9,920 7,537
Deferred Financing Costs 2,344 2,677
Deferred Tax Assets 5,544 4,664
Goodwill (Net) 652 --
Other Long Term Assets 269 --
--------- ---------
TOTAL ASSETS $ 38,030 $ 45,421
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Noncleared rebate items $ 6,483 $ 8,705
Accounts payable 2,403 1,725
Collections due to and advances from clients 5,535 6,823
Deferred income taxes 2,198 2,198
Current portion of long term debt 312 --
Accrued expenses
Interest 1,193 3,514
Compensation 2,517 3,049
Other 2,159 2,886
--------- ---------
Total current liabilities 22,800 28,900
Senior Subordinated Notes 80,000 80,000
Other Long-Term Liabilities 485 --
Commitments and Contingencies (Note 3)
Redeemable Class A Common Stock, 13,922 and 33,726 shares
issued and outstanding 303 734
Stockholders' Deficit
Class A common stock, par value $1 per share; 3,000,000 shares authorized,
1,255,455 shares issued and outstanding 1,255 1,255
Class B common stock, par value $1 per share; 1,500,000 shares authorized,
442,884 shares issued and outstanding 443 443
Class C common stock, par value $1 per share; 1,500,000 shares authorized,
172,727 shares issued and outstanding 173 173
Additional paid-in capital 36,219 36,107
Retained deficit (103,648) (102,191)
--------- ---------
(65,558) (64,213)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 38,030 $ 45,421
========= =========
</TABLE>
2
<PAGE> 5
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
------------------------
2000 1999
-------- --------
<S> <C> <C>
Operating Activities:
Net (loss) income $ (1,457) $ 1,290
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,957 1,759
Deferred income taxes (880) 722
Changes in operating assets and liabilities:
Trade receivables 2,790 2,103
Supplies inventory 90 (7)
Prepaid expenses 194 135
Non-cleared rebate items (2,222) (3,252)
Accounts payable 98 713
Collections due to and advances from clients (1,359) (2,357)
Accrued expenses (3,884) (163)
Other, Net (53) (305)
-------- --------
Net cash provided by (used in) operating activities (4,726) 638
-------- --------
Investing Activities
Acquisition of SourceOne (1,640) --
Purchases of property and equipment, net (2,594) (869)
-------- --------
Net cash used in investing activities (4,234) (869)
-------- --------
Financing Activities:
Repayment of capital lease obligations (136) --
Increase in other long-term debt 276 --
Redemption of common stock (318) (82)
-------- --------
Net cash used in financing activities (178) (82)
-------- --------
Change in cash and cash equivalents (9,138) (313)
Cash and Cash Equivalents:
Beginning of period 13,633 12,220
-------- --------
End of period $ 4,495 $ 11,907
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash payment for interest $ 9,401 $ 9,340
======== ========
Income Taxes Paid $ 5 $ 35
======== ========
Assumption of Capital Lease Obligations (see note 2) $ 446 $ --
======== ========
</TABLE>
3
<PAGE> 6
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements
(in thousands, except share data - unaudited)
1. BASIS OF PRESENTATION - PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Young America Holdings, Inc. ("Holdings") and its wholly-owned subsidiaries,
Young America Corporation ("Young America" or "YAC") and YAC.ECOM, Inc.
("YAC.ECOM"). As used herein, the "Company" refers collectively to Holdings,
YAC, YAC.ECOM and YAC's wholly owned subsidiary, SourceOne Worldwide, Inc.
("SourceOne"). All significant intercompany items have been eliminated. In
the opinion of management, all adjustments (which include reclassifications
and normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and cash flows at September 30, 2000, and
for all periods presented, have been made.
During the fourth quarter of 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 consumer interaction processing ("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 and other postal
cost reduction techniques which are available to the Company. Revenues
previously reported have been revised to conform to the new presentation.
Such revisions had no effect on previously reported gross profit, net income
(loss) to stockholders' deficit.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations. It is suggested that the information included in this Form
10-Q be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements
and notes thereto included in the Holding's. Annual Report on Form 10-K for
the year ended December 31, 1999.
Revenues and operating results for the three and nine months ended September
30, 2000 are not necessarily indicative of the results to be expected for the
full year.
2. ACQUISITION OF SOURCEONE WORLDWIDE
In January 2000, the Company, through its wholly owned subsidiary, SourceOne,
acquired certain assets and assumed certain liabilities of SourceOne
Worldwide LLC, for an aggregate purchase price of approximately $2 million.
In addition, in conjunction with the acquisition, obligations of $.4 million
to the Company were forgiven. SourceOne provides comprehensive business
support and marketing services. SourceOne Worldwide LLC had annual revenues
of approximately $5.7 million during the year ended December 31, 1999.
4
<PAGE> 7
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
3. DEBT
On February 23, 1998, YAC issued $80,000 of 11 5/8% Senior Subordinated
Notes, due 2006 (the "Notes"). Interest on the Notes is payable semiannually
in arrears on February 15 and August 15 of each year, beginning August 15,
1998.
The Notes are unconditionally guaranteed, on an unsecured senior subordinated
basis, by Holdings. The guarantee, which is full and unconditional and which
is being provided on a joint and several basis with any future subsidiaries
of YAC that become guarantors, is a general unsecured obligation of Holdings.
Separate financial statements of YAC have not been presented as management
has determined that they would not be material to investors given that (i)
YAC is a wholly-owned subsidiary of Holdings, (ii) YAC holds and represents
substantially all of the assets, liabilities, and operations of the
consolidated entity, and (iii) Holdings has provided a full and unconditional
guarantee of the Notes. The Notes are not redeemable prior to February 15,
2002, except as provided below. On or after such date, the Notes are
redeemable, in whole or in part, at the option of YAC at the following
redemption prices set forth herein, plus accrued and unpaid interest to the
date of redemption set forth below:
<TABLE>
<S> <C>
2002....................... 105.813%
2003....................... 103.875
2004....................... 101.938
2005 and thereafter........ 100.000
</TABLE>
In addition, at any time on or prior to February 15, 2001, YAC, at its option,
may redeem, with the net cash proceeds of one or more equity offerings, up to
35% of the aggregate principal amount of the Notes at a redemption price equal
to 111.625% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption; provided that at least 65% of the
aggregate principal amount of the Notes remains outstanding immediately
following such redemption. Additionally, upon a Change of Control (as defined in
the indenture under which the Notes were issued (the "Indenture")), each holder
of Notes would have the right to require YAC to repurchase such holder's Notes
at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the repurchase date.
The Notes are not subject to sinking-fund requirements. The Notes are general
unsecured obligations of Holdings and YAC and are subordinated in right of
payment to all existing and future senior indebtedness of Holdings and YAC,
including obligations under the Credit Facility (as defined below).
The Indenture contains certain covenants with respect to YAC, and any future
subsidiaries YAC may form or acquire, that restrict, among other things, the
incurrence of additional indebtedness, the payment of dividends and other
restricted payments, the creation of certain liens, the use of proceeds from
sales of assets and subsidiary stock, and transactions with affiliates. The
Indenture also restricts the ability of Holdings and YAC to consolidate or merge
with or into, or to transfer all or substantially all of their respective assets
to, another entity.
The Company has a revolving credit facility ("Credit Facility") with Wells Fargo
Bank Minnesota, N.A. ("Wells Fargo"), which provides for borrowings of up to
$10,000, based on a borrowing base formula equal to 85% of Eligible Receivables
less Noncleared Rebate Items net of cash and cash equivalents (as defined in the
Credit Facility), and has a final maturity date of March 31, 2001. The Credit
Facility does not have any commitment reductions scheduled before maturity.
Borrowings under the Credit Facility will accrue interest, at the option of the
Company, at either Wells Fargo'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 August 21, 2000 (the "Amended
Facility"). The Amended Facility requires the Company to meet certain
restrictive covenants including a minimum interest coverage ratio, a minimum
current ratio, and minimum cumulative EBITDA. The Company was in compliance or
received waivers for all such covenants as of September 30, 2000. There were no
amounts outstanding under the Amended Facility as of September 30, 2000.
5
<PAGE> 8
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
4. CONTINGENCIES
Litigation
The Company is exposed to asserted and potential unasserted claims encountered
in the normal course of business. The Company does not believe the resolution of
existing asserted claims will have a material adverse effect on the Company's
financial position.
Leases
The Company has operating leases for warehouse space and equipment. The
future minimum payments under these obligations are as follows:
Years ending December 31:
<TABLE>
<S> <C>
2000........... $7,304
2001........... 4,698
2002........... 2,942
2003........... 1,917
2004........... 1,011
</TABLE>
6
<PAGE> 9
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
Guarantees
Sweepstakes performance bonds are guaranteed for certain clients based on
certain financial criteria. The Company had guaranteed approximately $36,236 and
$35,044 in performance bonds for various clients, as of September 30, 2000, and
December 31, 1999, respectively. The Company also obtains an indemnity agreement
from these clients indemnifying the Company from obligations under the
performance bonds.
Future Obligations
As a result of a recapitalization of the Company in 1997, Holdings is obligated
to make additional payments to the former majority shareholders, subject to
Holdings achieving certain excess cash flow targets as defined. To the extent
cumulative excess free cash flow 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. Any portion of theses payments made to management will
result in compensation charges in the period the amount becomes determinable.
5. SUPPLEMENTARY FINANCIAL DATA
The following condensed financial information presents certain balance sheet and
statement of operations data related to the Company's business for the three and
six months ended September 30, 2000 and 1999 and as of September 30, 2000 and
December 31, 1999. Separate financial statements and other disclosures
concerning the issuer have not been presented because management believes that
such information is not material.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Holdings $ -- $ -- $ -- $ --
YAC and Subsidiary 16,646 17,875 61,844 62,283
YAC.ECOM 109 57 362 69
-------- -------- -------- --------
Consolidated $ 16,755 $ 17,932 $ 62,206 $ 62,352
======== ======== ======== ========
Gross Profit:
Holdings $ -- $ -- $ -- $ --
YAC and Subsidiary 3,894 5,393 18,520 20,480
YAC.ECOM 29 (9) 69 (9)
-------- -------- -------- --------
Consolidated $ 3,923 $ 5,384 $ 18,589 $ 20,471
======== ======== ======== ========
Net (loss) Income:
Holdings $ 3 $ 2 $ 10 $ 6
YAC and Subsidiary (1,677) (578) (1,509) 1,293
YAC.ECOM 18 (9) 42 (9)
-------- -------- -------- --------
Consolidated $ (1,656) $ (585) $ (1,457) $ 1,290
======== ======== ======== ========
</TABLE>
7
<PAGE> 10
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
------------ -----------
<S> <C> <C>
Current Assets:
Holdings $ 402 $ 385
YAC and Subsidiary 18,847 30,060
YAC.ECOM 52 98
------- -------
Consolidated $19,301 $30,543
======= =======
Noncurrent Assets:
Holdings $ 2,242 $ 2,358
YAC and Subsidiary 16,487 12,520
YAC.ECOM -- --
------- -------
Consolidated $18,729 $14,878
======= =======
Current Liabilities:
Holdings $ -- $ --
YAC and Subsidiary 22,778 28,794
YAC.ECOM 22 106
------- -------
Consolidated $22,800 $28,900
======= =======
Noncurrent Liabilities:
Holdings $ -- $ --
YAC and Subsidiary 80,485 80,000
YAC.ECOM -- --
------- -------
Consolidated $80,485 $80,000
======= =======
</TABLE>
8
<PAGE> 11
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
6. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", effective for
years beginning after June 15, 1999. SFAS No. 133 established accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No.133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge criteria are met. Special accounting
for qualifying hedges allow a derivative's gains or losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. During the first quarter of 2000, the Company
adopted SFAS No. 133, which had no affect on the results of operations or
financial position.
7. SEGMENT REPORTING:
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company provides consumer interactive
processing services for its customers and operates as a single reportable
business segment. The Company internally evaluates its business principally by
revenue category; however, because of the similar economic characteristics of
the operations, including the nature of services and the customer base, those
operations have been aggregated following the provisions of SFAS No. 131 for
segment reporting purposes.
The following is a summary of the composition of revenues by revenue category
for the three and six months ended September 30, 2000, and 1999:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
CIP services $14,888 $14,983 $54,640 $53,823
Rebate revenues 1,374 2,104 5,750 6,108
Postage and freight billings 493 845 1,816 2,421
------- ------- ------- -------
$16,755 $17,932 $62,206 $62,352
======= ======= ======= =======
</TABLE>
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenues. Revenues were $16.8 million in the third quarter of 2000, a decrease
of 6.6% over the comparable quarter in 1999. On a year-to-date basis, revenues
were $62.2 million, a 0.2% decrease from the same period in 1999. The decrease
in revenues in the third quarter and year-to-date was primarily a result of
lower rebate and premium revenues partially offset by revenues from SourceOne of
$0.9 and $3.3 million respectively. The decrease in rebate revenue is attributed
to a shift in promotional strategy by several key clients.
Gross Profit. The Company's gross profit for the third quarter of 2000 decreased
to $3.9 million or 23.4% of revenues as compared to $5.4 million or 30.0% of
revenues for the same period in 1999. Gross profits were $18.6 million or 29.9%
of revenues in the first nine months of 2000 as compared to $20.5 million or
32.8% of revenues for the same period in 1999. The decline in gross profit
margin was due primarily to a loss at SourceOne where the current revenue base
is inadequate to absorb the cost base. Excluding the operations of SourceOne,
the Company had a gross margin of 25.6% for the third quarter and 31.1% for the
nine months ended September 30, 2000. This decrease in gross margin not
attributable to SourceOne was primarily a result of higher information systems
and technology costs incurred to provide additional services to the company's
clients. These services include providing Internet processing capability,
advanced e-reporting for clients and other enhancements to the company's
traditional CIP offerings. Gross profit was also reduced by lower postal
savings resulting from the decreased revenues.
Operating Income. The third quarter 2000 resulted in an operating loss of $0.3
million compared to operating income of $1.9 million during the corresponding
period of 1999. Year-to- date operating income was $4.7 million or 7.5% of
revenues as compared to $8.9 million or 14.3% of revenues for the first
nine months of 1999. The decrease in the quarter and year-to-date operating
income is primarily attributable to SourceOne expenses of $0.8 and $1.9
million, respectively. SourceOne expenses included $0.5 million in non-recurring
integration costs in the first nine months. Operating income excluding the
operations of SourceOne was 10.7% of revenues for the nine months ending
September 30,2000, a decrease from 14.2% of revenues for the same period in
1999. The remaining decrease in operating income results from the impact of the
decreased gross margin and operating expenses related to the new sales and
administrative headquarters in Chanhassen, Minnesota
Interest Expense. Interest expense of $2.4 million and $7.1 million for the
quarter and nine month period ended September 30, 2000 was consistent with the
interest expense recorded in the corresponding period last year.
Income Taxes. The Company recorded income tax benefits of $1.0 million and $0.9
million for the three and nine month periods ending September 30, 2000,
respectively, as compared to an income tax benefit of $0.3 million and an
income tax provision of $0.8 million, respectively, for the corresponding
periods in 1999. The decrease in the tax provision is attributed to net losses
in the 2000 periods.
Net Income. As a result of the foregoing factors, the Company reported net
losses of $1.7 million and $1.5 million for the three and nine months ended
September 30, 2000, as compared to a net loss of $0.6 million and net income of
$1.3 million, respectively, for the corresponding periods in 1999.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, no amounts were outstanding under the Company's $10
million credit facility (the "Credit Facility") with Wells Fargo Bank Minnesota,
N.A. ("Wells Fargo"). The Company had a stockholders' deficit of $65.6 million,
and indebtedness of $80.5 million represented by the Notes and other long term
financing agreements. The Company had net negative working capital of $3.5
million. For additional information with respect to the Notes, see Note 3 of the
Unaudited Consolidated Financial Statements.
The Company has historically financed its operations and capital expenditures
principally through cash flow from operations. The Company also maintains the
Credit Facility, which is collateralized by accounts receivable and other assets
as detailed below. In addition, the Company operates facilities and
technology-related equipment under operating leases with third parties. See Note
4 of the Unaudited Consolidated Financial Statements for a summary of Company
commitments under such operating lease agreements.
For the nine month period ended September 30, 2000, the Company's operations
used cash of $4.7 million compared to cash generated of $0.6 million for the
same period in 1999. The $4.7 million of cash used by operating activities in
2000 was principally the result of timing of cash payments and $1.6 million of
1999 bonus and profit sharing payments made during the first quarter of 2000 and
expensed in 1999. The Company's future cash flow from operations will continue
to reflect interest that will be incurred on outstanding indebtedness, including
the Notes.
Net cash used in investing activities for the nine month periods ended September
30, 2000 and 1999 was $4.2 million and $.9 million, respectively. These
expenditures principally relate to the acquisition of SourceOne for $1.7
million, purchases of furniture and fixtures and computer equipment needed for
the new corporate headquarters in Chanhassen, Minnesota and the investment in
new finance and human resource software. The Company's capital expenditure
forecast for 2000 totals $3.8 million.
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 continue to utilize operating leases to finance
facilities and certain equipment expenditures. 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 the next 12 months.
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 Wells Fargo'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 August 21, 2000 (the "Amended
Facility"). The Amended Facility requires the Company to meet certain
restrictive covenants including a minimum interest coverage ratio, a minimum
current ratio, and minimum cumulative EBITDA. The Company was in compliance or
received waivers for all such covenants as of September 30, 2000. In addition,
the Credit Facility contains other covenants that, among other things, restrict
acquisitions, investments, dividends, liens and other indebtedness, management
fees, disposition of assets, change of voting control and guarantees. There were
no amounts outstanding under the Amended Facility as of September 30, 2000.
In compliance with certain state laws, the Company obtains performance bonds in
connection with sweepstakes programs it manages on behalf of its clients. The
Company is indemnified by its clients for any obligations on those performance
bonds, and the cost to the Company of obtaining the performance bonds plus a
markup is billed to the clients.
11
<PAGE> 14
The Company's ability to pay principal and interest on the Notes and to satisfy
its other debt obligations will depend upon its future operating performance,
which performance will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the control
of the Company. The Company's ability to pay principal and interest on the Notes
and to satisfy its other debt obligations will also depend upon the future
availability of revolving credit borrowings under the Credit Facility or any
successor facility. Such availability is or may depend on, among other things,
the Company meeting certain specified covenants and borrowing base
prerequisites. If the Company is unable to service its indebtedness, it will be
forced to take actions such as reducing operating expenses, reducing or delaying
acquisitions or capital expenditures, selling assets, restructuring or
refinancing its indebtedness (which could include the Notes), or seeking
additional equity capital. There is no assurance that any of these remedies can
be effected on satisfactory terms, if at all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in interest
rates. Market risk is the potential loss arising from adverse changes in market
rates and prices, such as interest rates. The Company does not enter into
derivative or other financial instruments for trading or speculative purposes.
For fixed rate debt, interest changes affect fair market value but do not impact
earnings or cash flows. At September 30, 2000, the Company had fixed rate debt
of $80.0 million. Holding other variables constant, a 1% increase or decrease in
interest rates would increase or decrease the unrealized fair market value of
the fixed rate debt by approximately $1.2 million.
12
<PAGE> 15
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as follows.
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 Notes attached as Exhibit
B thereto) among Young America, 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).
10.0 Fourth Amendment to Credit Agreement between Young
America Corporation and Wells Fargo bank, National
Association dated August 21, 2000.
10.1 Wells Fargo Bank Waiver dated November 2,2000.
27 Financial Data Schedule
b) Reports on Form 8-K - None
13
<PAGE> 16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Date: November 9, 2000 By: /s/ CHARLES D. WEIL
----------------------------
Name: Charles D. Weil
Title: President
By: /s/ ROGER D. ANDERSEN
-----------------------------
Name: Roger D. Andersen
Title: Vice President of Finance, Treasurer,
Secretary and Chief Financial Officer
(principal financial officer and
principal accounting officer)
Young America Holdings, Inc.
Date: November 9, 2000 By: /s/ CHARLES D. WEIL
----------------------------
Name: Charles D. Weil
Title: President
By: /s/ ROGER D. ANDERSEN
-----------------------------
Name: Roger D. Andersen
Title: Vice President of Finance, Treasurer,
Secretary and Chief Financial Officer
(principal financial officer and
principal accounting officer)
14