<PAGE> 1
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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 March 31, 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)
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, 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 May
11, 2000, was 1,890,686.
================================================================================
<PAGE> 2
YOUNG AMERICA HOLDINGS, INC.
YOUNG AMERICA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements
a) Consolidated Statements of Operations
for the Three Months Ended March 31, 2000 and 1999..........................................1
b) Consolidated Balance Sheets
as of March 31, 2000, and December 31, 1999.................................................2
c) Consolidated Statements of Cash Flow
For the Three Months Ended March 31, 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..........................................................................12
Item 2. Changes in Securities & Use of Proceeds....................................................12
Item 3. Defaults Upon Senior Securities............................................................12
Item 4. Submission of Matters to a Vote of Security Holders........................................12
Item 5. Other Information..........................................................................12
Item 6. Exhibits and Reports on Form 8-K...........................................................12
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
March 31,
--------------------------------------------
2000 1999
------------------ -----------------
<S> <C> <C>
Revenues $ 24,035 $ 23,390
Cost of revenues:
Processing and servicing 16,214 15,880
------------------ -----------------
Gross profit 7,821 7,510
Operating expenses:
Selling 1,912 1,656
General and administrative 2,885 2,086
------------------ -----------------
4,797 3,742
------------------ -----------------
Operating income 3,024 3,768
Other income (expense):
Interest expense (2,363) (2,337)
Interest income 192 185
Amortization of deferred financing costs (109) (109)
Amortization of goodwill (18) -
Other 5 1
------------------ -----------------
(2,293) (2,260)
------------------ -----------------
Income (loss) before provision for income taxes 731 1,508
Provision (Benefit) from income taxes 271 558
------------------ -----------------
Net income (loss) $ 460 $ 950
================== =================
</TABLE>
1
<PAGE> 4
Young America Holdings, Inc.
Consolidated Balance Sheets
( in thousands, except for share data, unaudited)
<TABLE>
<CAPTION>
March 31 December 31
2000 1999
-------------- ------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 10,376 $ 13,633
Trade receivables, net 19,981 14,862
Supplies inventory 959 773
Prepaid expenses and other 1,317 1,275
-------------- ------------
Total current assets 32,633 30,543
Property and Equipment, at cost: 22,557 20,262
Less accumulated depreciation (13,160) (12,725)
-------------- ------------
9,397 7,537
Deferred Financing Costs 2,562 2,677
Deferred Tax Assets 4,397 4,664
Goodwill (Net) 697 -
-------------- ------------
TOTAL ASSETS $ 49,686 $ 45,421
============== ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Noncleared rebate items $ 16,408 $ 8,705
Accounts payable 2,421 1,725
Collections due to and advances from clients 5,353 6,823
Deferred income taxes 2,198 2,198
Current portion of capital lease obligations 92
Accrued expenses
Interest 1,188 3,514
Compensation 2,272 3,049
Other 2,606 2,886
-------------- ------------
Total current liabilities 32,538 28,900
Senior Subordinated Notes 80,000 80,000
Other Long-Term Liabilities 313 -
Commitments and Contingencies (Note 3)
Redeemable Class A Common Stock, 24,766 and 33,726 shares
issued and outstanding 539 734
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 36,156 36,107
Retained deficit (101,731) (102,191)
-------------- ------------
(63,704) (64,213)
-------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 49,686 $ 45,421
============== ============
</TABLE>
2
<PAGE> 5
Young America Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands, unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
2000 1999
-------------- -------------
<S> <C> <C>
Operating Activities:
Net (loss) income $ 460 $ 950
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 634 577
Deferred income taxes 266 552
Changes in operating assets and liabilities:
Trade receivables (4,334) (15,148)
Supplies inventory (63) 146
Prepaid expenses 20 (56)
Non-cleared rebate items 7,702 15,191
Accounts payable 122 474
Collections due to and advances from clients (1,543) 6,214
Accrued expenses (3,688) (839)
Other, Net (5) (110)
-------------- -------------
Net cash provided by (used in) operating activities (429) 7,951
-------------- -------------
Investing Activities
Acquisition of SourceOne (1,652) -
Purchases of property and equipment (999) (180)
-------------- -------------
Net cash used in investing activities (2,651) (180)
-------------- -------------
Financing Activities:
Repayment of capital lease obligations (31) -
Redemption of common stock (146) (82)
-------------- -------------
Net cash used in financing activities (177) (82)
-------------- -------------
Change in cash and cash equivalents (3,257) 7,689
Cash and Cash Equivalents:
Beginning of period 13,633 12,220
-------------- -------------
End of period $ 10,376 $ 19,909
============== =============
Suplemental Disclosures of Cash Flow Information:
Cash payment for interest $ 4,688 $ 4,662
============== =============
Income Taxes Paid $ 4 $ 6
============== =============
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"), YAC.ECOM, Inc.
("YAC.ECOM"), and SourceOne Worldwide, Inc. ("SourceOne"), (collectively, the
"Company"). All significant intercompany items have been eliminated. In the
opinion of management, all adjustments (which include reclassifications and
normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and cash flows at March 31, 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 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 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 and the
financial statements and notes thereto included in the Young America
Holdings, Inc. Annual Report on Form 10-K for the year ended December 31,
1999.
Revenues and operating results for the three months ended March 31, 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:
2002...............................105.813%
2003...............................103.875
2004...............................101.938
2005 and thereafter................100.000%
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 will have the right to require YAC to repurchase such holder's Notes at
a price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the repurchase date.
The Notes are not subject to sinking-fund requirements. The Notes are general
unsecured obligations of 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 referred to hereinafter.
The Indenture contains certain covenants with respect to YAC, and any future
subsidiaries YAC may form or acquire, that restrict, among other things, the
incurrence of additional indebtedness, the payment of dividends and other
restricted payments, the creation of certain liens, the use of proceeds from
sales of assets and subsidiary stock, and transactions with affiliates. The
Indenture also restricts the ability of Holdings and YAC to consolidate or merge
with or into, or to transfer all or substantially all of their respective assets
to, another entity.
The Company has a revolving credit facility ("Credit Facility") with Norwest
Bank Minnesota, N.A. ("Norwest"), which provides for borrowings of up to
$10,000, based on a borrowing base formula equal to 85% of Eligible Receivables
less Noncleared Rebate Items net of cash and cash equivalents (as defined in the
Credit Facility), and has a final maturity date of March 31, 2001. The Credit
Facility does not have any commitment reductions scheduled before maturity.
Borrowings under the Credit Facility will accrue interest, at the option of the
Company, at either Norwest's base rate or at an interest rate equal to the
London interbank rate for Eurodollar deposits for one, two or three month
interest periods plus 2.5%. A fee of .5% per annum is payable with respect to
the unused Commitment Amount (as defined in the Credit Facility). The Credit
Facility is secured by a first-priority interest in accounts receivable and
related general intangibles of YAC.
5
<PAGE> 8
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
===============================================================================
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 1.0 to 1 for each of the quarters ending March
31, 2000 and June 30, 2000, at not less than 1.1 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 Credit Facility requires Young America to meet
certain restrictive covenants. The Company was in compliance or received waivers
for all such covenants as of March 31, 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 March 31, 2000.
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 office and warehouse space and
equipment. The future minimum payments under these obligations are as
follows:
Years ending December 31:
2000.................$7,102
2001..................4,220
2002..................2,466
2003..................1,604
2004....................919
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 $36,425
and $35,044 in performance bonds for various clients, as of March 31, 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 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 months ended March 31, 2000 and 1999 and as of March 31, 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
March 31
2000 1999
-------------- ---------------
<S> <C> <C>
Revenues:
Holdings $ - $ -
YAC and Subsidiary 23,921 23,390
YAC.ECOM 114 -
-------------- ---------------
Consolidated $ 24,035 $ 23,390
============== ===============
Gross Profit:
Holdings $ - $ -
YAC and Subsidiary 7,804 7,510
YAC.ECOM 17 -
-------------- ---------------
Consolidated $ 7,821 $ 7,510
============== ===============
Net (loss) Income:
Holdings $ 3 $ -
YAC and Subsidiary 447 950
YAC.ECOM 10 -
-------------- ---------------
Consolidated $ 460 $ 950
============== ===============
</TABLE>
7
<PAGE> 10
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
===============================================================================
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
-------------- ---------------
<S> <C> <C>
Current Assets:
Holdings $ 391 $ 385
YAC and Subsidiary 32,164 30,060
YAC.ECOM 78 98
-------------- ---------------
Consolidated $ 32,633 $ 30,543
============== ===============
Noncurrent Assets:
Holdings $ 2,319 $ 2,358
YAC and Subsidiary 14,734 12,520
YAC.ECOM - -
-------------- ---------------
Consolidated $ 17,053 $ 14,878
============== ===============
Current Liabilities:
Holdings $ - $ -
YAC and Subsidiary 32,462 28,794
YAC.ECOM 76 106
-------------- ---------------
Consolidated $ 32,538 $ 28,900
============== ===============
Noncurrent Liabilities:
Holdings $ - $ -
YAC and Subsidiary 80,313 80,000
YAC.ECOM - -
-------------- ---------------
Consolidated $ 80,313 $ 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 months ended March 31:
<TABLE>
<CAPTION>
2000 1999
---------------- -----------------
<S> <C> <C>
CIP services $ 21,088 $ 21,004
Rebate revenues 2,248 1,574
Postage and freight billings 699 812
---------------- -----------------
$ 24,035 $ 23,390
================ =================
</TABLE>
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenues. Revenues were $24.0 million in the first quarter of 2000, an increase
of 2.8% over the comparable quarter of 1999. The increase in revenues in the
first quarter was primarily a result of $1.2 million in addition revenues
generated by SourceOne offset by a decrease in call center revenues compared to
the same period last year. The first quarter 1999 call center revenue was
higher than normal as a result of processing backlog orders.
Gross Profit. The Company's gross profit increased to $7.8 million or 32.5% of
revenues for the first quarter of 2000 as compared to $7.5 million, or 32.1% of
revenues for the first quarter of 1999. The increase in gross profit was a
function of the mix of customers and the type of contractual arrangements with
these customers. Gross profit also increased in part due to operating
efficiencies resulting from the COPC-2000 standards that have been implemented
over the past year. The Company achieved COPC-2000 certification on March 29,
2000 for its three call centers. The COPC-2000 standard provides both a
benchmark and an improvement methodology for operational performance. The
Company is currently pursuing certification for its fulfillment operations and
expects to achieve certification in the third quarter of 2000.
Operating Income. Operating income for the first quarter of 2000 decreased by
$.8 million to $3.0 million from $3.8 million for the corresponding period of
1999. As a percentage of revenues, operating income was 12.6% for the quarter
ended March 31, 2000 compared with 16.1% for the corresponding period of 1999.
. This decrease is primarily attributable to selling, and general and
administrative expenses from SourceOne of $.7 million incurred during the first
quarter of 2000. Most of the remaining decrease in operating income was
associated with increased costs associated with labor and recruitment.
Interest Expense. The first quarter 2000 interest expense of $2.4 million was
consistent with the interest expense recorded in the corresponding period last
year. Interest expense is principally accrued interest on the Company's 11 5/8%
Senior Subordinated Notes due 2006 (the "Notes").
Income Taxes. The Company recorded an income tax provision of $.3 million for
the first quarter of 2000, compared to an income tax provision of $.6 million
for the first quarter of 1999 as a result of decreased profitability.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, no amounts were outstanding under the Company's $10 million
credit facility (the "Credit Facility") with Norwest Bank Minnesota, N.A.
("Norwest"), and the Company had a stockholders' deficit of $63.7 million,
indebtedness of $80.3 million represented by the Notes and long-term capital
leases and net working capital of $.1 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 the retention of cash flow from operations. The Company
also maintains the Credit Facility, which is collateralized by accounts
receivable and other assets as detailed below. In addition, the Company
operates facilities and technology-related equipment under operating leases
with third parties. See Note 4 for a summary of Company commitments under such
operating lease agreements.
For the three-month period ended March 31, 2000, the Company's operations used
cash of $.4 million, as compared to cash generated of $8.0 million for the
prior year period. The $.4 million of cash used by operating activities in 2000
was principally the result of $1.6 million of 1999 bonus and profit sharing
payments made during the first quarter of 2000 and expensed in 1999. The $8.0
million of cash provided by operating activities in 1999 was principally the
result of $1.0 million of net income and a $6.2 million increase in the
collections due and advances from clients. The Company's future cash flow from
operations will continue to reflect (i) income taxes that the Company is
required to pay as a C corporation and (ii) interest that will be incurred on
outstanding indebtedness, including the Notes.
10
<PAGE> 13
Net cash used in investing activities for the three-month periods ended March
31, 2000 and 1999 were $2.7 million and $.2 million, respectively. These
expenditures principally relate to the acquisition of SourceOne for $1.7
million, and purchases of furniture and fixtures and computer equipment needed
for the new corporate headquarters in Chanhassen, Minnesota. The Company's
capital expenditure budget (excluding the assets acquired in the SourceOne
purchase) for 2000 totals $3.4 million. This budget may be changed by the
Company during 2000 based upon the Company's results of operations during the
year. The Company anticipates that capital expenditures for 2000 will not
exceed $4.0 million.
Net cash used in financing activities for the three months ended March 31, 2000
and 1999 were $.2 million and $.1 million respectively.
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 Norwest's base rate or at an interest rate equal to the London interbank
rate for Eurodollar deposits for one, two or three month interest periods plus
2.5%. A fee of .5% per annum is payable with respect to the unused Commitment
Amount (as defined in the Credit Facility) The Credit Facility is secured by a
first priority interest in accounts receivable and related general intangibles
of YAC.
The Credit Facility was amended in February 2000 (the "Amended Facility") 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 1.0 to 1 for each of the quarters ending
March 31, 2000 and June 30, 2000, at not less than 1.1 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. 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. The Credit Facility requires
Young America to maintain certain restrictive covenants. The Company was in
compliance or received waivers for all such covenants as of March 31,2000.
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.
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 Company's ability to pay principal and interest on the Notes and to satisfy
its other debt obligations will depend upon its future operating performance,
which performance will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the control
of the Company. The Company's ability to pay principal and interest on the
Notes and to satisfy its other debt obligations will also depend upon the
future availability of revolving credit borrowings under the Credit Facility or
any successor facility. Such availability is or may depend on, among other
things, the Company meeting certain specified covenants and borrowing base
prerequisites. The Company expects that, based on current and expected levels
of operations, its operating cash flow, together with borrowings under the
Credit Facility, should be sufficient to meet its operating expenses, to make
necessary capital expenditures and to service its debt requirements as they
become due. If the Company is unable to service its indebtedness, it will be
forced to take actions such as reducing operating expenses, reducing or
delaying acquisitions and /or capital expenditures, selling assets,
restructuring or refinancing its indebtedness (which could include the Notes),
or seeking additional equity capital. There is no assurance that any of these
remedies can be effected on satisfactory terms, if at all.
11
<PAGE> 14
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 March 31, 2000, the Company had fixed rate
debt $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 $2.3 million
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES & USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as follows.
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).
12
<PAGE> 15
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 Norwest Bank Waiver dated April 24, 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.
<TABLE>
<S> <C>
Young America Corporation
Date: May 11, 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: May 11, 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)
</TABLE>
14
<PAGE> 1
EXHIBIT 10
[WELLS FARGO LETTERHEAD]
April 24, 2000
Joe Stasney
Young America Corporation
717 Faxon Road
Young America, MN 55397
RE: Waiver of Default
Dear Joe,
Norwest Bank Minnesota, National Association (the "Bank") and Young America
Corporation (the "Borrower") are parties to a certain Credit Agreement dated
April 7, 1998 (the "Agreement") as amended.
Section 5.10 of the Agreement states that the Borrower will maintain a Current
Ratio at not less than 1.10 to 1.00 for the Covenant Computation Date of March
31, 2000. For the Covenant Computation Date of March 31, 2000, the Borrower's
Current Ratio was 1.08 to 1.00, thereby creating an Event of Default under the
Agreement.
We hereby waive the violation of Section 5.10 for the period ending March 31,
2000 as noted in the paragraph above. This waiver is unique and specific. The
Bank does not waive any other portions of the Agreement, nor do they give up any
of the rights and remedies granted to them thereunder.
Very truly yours,
/s/ JEFFREY H. MORSMAN
Jeffrey H. Morsman
Corporate Banking Officer
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001058952
<NAME> YOUNG AMERICA HOLDINGS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 10,376
<SECURITIES> 0
<RECEIVABLES> 19,981
<ALLOWANCES> 0
<INVENTORY> 959
<CURRENT-ASSETS> 32,633
<PP&E> 22,557
<DEPRECIATION> 13,160
<TOTAL-ASSETS> 49,686
<CURRENT-LIABILITIES> 32,538
<BONDS> 80,000
0
0
<COMMON> 1,871
<OTHER-SE> (65,575)
<TOTAL-LIABILITY-AND-EQUITY> 49,686
<SALES> 0
<TOTAL-REVENUES> 24,035
<CGS> 0
<TOTAL-COSTS> 21,011
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 2,472
<INCOME-PRETAX> 731
<INCOME-TAX> 271
<INCOME-CONTINUING> 460
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<EXTRAORDINARY> 0
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<NET-INCOME> 460
<EPS-BASIC> 0
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