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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 JUNE 30, 2000
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, 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
August 9, 2000, was 1,884,988.
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2
YOUNG AMERICA HOLDINGS, INC.
YOUNG AMERICA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
a) Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 2000 and 1999.....................1
b) Consolidated Balance Sheets
as of June 30, 2000, and December 31, 1999....................................2
c) Consolidated Statements of Cash Flow
For the Six Months Ended June 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 & 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
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2000 1999 2000 1999
-------- -------- -------- --------
Revenues $ 21,416 $ 21,030 $ 45,451 $ 44,420
Cost of revenues:
Processing and servicing 14,571 13,453 30,785 29,333
-------- -------- -------- --------
Gross profit 6,845 7,577 14,666 15,087
Operating expenses:
Selling 1,965 1,469 3,877 3,125
General and administrative 2,943 2,328 5,828 4,414
-------- -------- -------- --------
4,908 3,797 9,705 7,539
-------- -------- -------- --------
Operating income 1,937 3,780 4,961 7,548
Other income (expense):
Interest expense (2,364) (2,339) (4,727) (4,676)
Interest income 140 136 332 321
Amortization of deferred financing costs (109) (109) (218) (218)
Amortization of goodwill (20) (38)
Other (1) - 4 1
-------- -------- -------- --------
(2,354) (2,312) (4,647) (4,572)
-------- -------- -------- --------
Income (loss) before provision for income taxes (417) 1,468 314 2,976
Provision (Benefit) from income taxes (156) 543 115 1,101
-------- -------- -------- --------
Net income (loss) $ (261) $ 925 $ 199 $ 1,875
======== ======== ======== ========
1
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YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA, UNAUDITED)
June 30 December 31
2000 1999
--------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 8,679 $ 13,633
Trade receivables, net 15,567 14,862
Supplies inventory 1,019 773
Prepaid expenses and other 1,258 1,275
--------- -----------
Total current assets 26,523 30,543
Property and Equipment, at cost: 23,454 20,262
Less accumulated depreciation (13,516) (12,725)
--------- -----------
9,938 7,537
Deferred Financing Costs 2,454 2,677
Deferred Tax Assets 4,554 4,664
Goodwill (Net) 722 -
Other Long Term Assets 287 -
--------- -----------
TOTAL ASSETS $ 44,478 $ 45,421
========= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Noncleared rebate items $ 7,449 $ 8,705
Accounts payable 2,102 1,725
Collections due to and advances from clients 6,589 6,823
Deferred income taxes 2,198 2,198
Current portion of long term debt 595 -
Accrued expenses
Interest 3,514 3,514
Compensation 2,395 3,049
Other 2,671 2,886
--------- -----------
Total current liabilities 27,513 28,900
Senior Subordinated Notes 80,000 80,000
Other Long-Term Liabilities 563 -
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 (101,991) (102,191)
--------- -----------
(63,901) (64,213)
--------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 44,478 $ 45,421
========= ===========
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YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
Six Months
Ended
June 30,
------------------------
2000 1999
-------- --------
Operating Activities:
Net (loss) income $ 199 $ 1,875
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,289 1,163
Deferred income taxes 110 1,093
Changes in operating assets and liabilities:
Trade receivables 79 (1,363)
Supplies inventory (123) 314
Prepaid expenses 79 63
Non-cleared rebate items (1,255) (2,034)
Accounts payable (202) 140
Collections due to and advances from clients (305) (1,213)
Accrued expenses (1,174) 1,818
Other, Net 212 (219)
-------- --------
Net cash provided by (used in) operating activities (1,091) 1,637
-------- --------
Investing Activities
Acquisition of SourceOne (1,695) -
Purchases of property and equipment, net (2,068) (424)
-------- --------
Net cash used in investing activities (3,763) (424)
-------- --------
Financing Activities:
Repayment of capital lease obligations (58) -
Increase in other long-term debt 276 -
Redemption of common stock (318) (82)
-------- --------
Net cash used in financing activities (100) (82)
-------- --------
Change in cash and cash equivalents (4,954) 1,131
Cash and Cash Equivalents:
Beginning of period 13,633 12,220
-------- --------
End of period $ 8,679 $ 13,351
======== ========
Suplemental Disclosures of Cash Flow Information:
Cash payment for interest $ 4,725 $ 4,676
======== ========
Income Taxes Paid $ 5 $ 7
======== ========
Assumption of Capital Lease Obligations (see note 2) $ 446 $ -
======== ========
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YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements
(in thousands, except share data - unaudited)
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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 June 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 six months ended June 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.
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YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
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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 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.
5
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YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
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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 (i) 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, and (ii) a minimum Current Ratio of 1.10 (as defined in
the Credit Facility). 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 June 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 June 30, 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 warehouse space and equipment. The
future minimum payments under these obligations are as follows:
Years ending December 31:
2000..........$7,302
2001...........4,688
2002...........2,931
2003...........1,909
2004...........1,014
6
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YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
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Guarantees
Sweepstakes performance bonds are guaranteed for certain clients based on
certain financial criteria. The Company had guaranteed approximately $38,224 and
$35,044 in performance bonds for various clients, as of June 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 June 30, 2000 and 1999 and as of June 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.
Three Months Ended Six Months Ended
June 30 June 30
2000 1999 2000 1999
-------- -------- -------- --------
Revenues:
Holdings $ - $ - $ - $ -
YAC and Subsidiary 21,277 21,030 45,198 44,420
YAC.ECOM 139 - 253 -
-------- -------- -------- --------
Consolidated $ 21,416 $ 21,030 $ 45,451 $ 44,420
======== ======== ======== ========
Gross Profit:
Holdings $ - $ - $ - $ -
YAC and Subsidiary 6,822 7,577 14,626 15,087
YAC.ECOM 23 - 40 -
-------- -------- -------- --------
Consolidated $ 6,845 $ 7,577 $ 14,666 $ 15,087
======== ======== ======== ========
Net (loss) Income:
Holdings $ 4 $ - $ 7 $ -
YAC and Subsidiary (279) 925 168 1,875
YAC.ECOM 14 - 24 -
-------- -------- -------- --------
Consolidated $ (261) $ 925 $ 199 $ 1,875
======== ======== ======== ========
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YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
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June 30 December 31
2000 1999
-------- ---------
Current Assets:
Holdings $ 396 $ 385
YAC and Subsidiary 26,008 30,060
YAC.ECOM 119 98
-------- ---------
Consolidated $26,523 $ 30,543
======== =========
Noncurrent Assets:
Holdings $ 2,280 $ 2,358
YAC and Subsidiary 15,675 12,520
YAC.ECOM - -
-------- ---------
Consolidated $17,955 $ 14,878
======== =========
Current Liabilities:
Holdings $ - $ -
YAC and Subsidiary 27,390 28,794
YAC.ECOM 123 106
-------- ---------
Consolidated $27,513 $ 28,900
======== =========
Noncurrent Liabilities:
Holdings $ - $ -
YAC and Subsidiary 80,563 80,000
YAC.ECOM - -
-------- ---------
Consolidated $80,563 $ 80,000
======== =========
8
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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 June 30, 2000, and 1999:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------- --------------------------------------
2000 1999 2000 1999
---------------- ----------------- ------------ -------------
CIP services $ 18,664 $ 17,836 $ 39,752 $ 38,840
Rebate revenues 2,128 2,430 4,376 4,004
Postage and freight billings 624 764 1,323 1,576
---------------- ----------------- ------------ -------------
$ 21,416 $ 21,030 $ 45,451 $ 44,420
================ ================= ============ =============
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenues. Revenues were $21.4 million in the second quarter of 2000, an increase
of 1.8% over the comparable quarter in 1999. On a year-to-date basis, revenues
were $45.5 million, a 2.3% increase from the same period in 1999. The increase
in revenues in the second quarter and year to date was primarily a result of
$1.2 million and $2.5 million, respectively, in additional revenues generated by
SourceOne offset by a decrease in CIP revenues compared to the same period last
year. The decrease in CIP revenue was the result of a decline in orders
processed from existing YAC clients compared to the same period last year. A
primary reason for the decline in CIP revenues was due to a lower order backlog
at the beginning of 2000, compared to 1999.
Gross Profit. The Company's gross profit for the second quarter of 2000
decreased to $6.8 million or 32.0% of revenues as compared to $7.6 million or
36.0% of revenues for the same period in 1999. Gross profits were $14.7 million
or 32.3% of revenues in the first half of 2000 as compared to $15.1 million or
34.0% of revenues for the same period in 1999. The decline was due to a lower
gross profit margin at SourceOne. Excluding SourceOne, the Company had a gross
margin of 32.6% for the second quarter and 33.1% for the six months ended June
30, 2000. This decrease in gross margin was caused by higher information systems
and technology costs at Young America. These costs increased due to programming
and other investments associated with providing Internet processing capability,
advanced e-reporting for clients and other enhancements to our core service
offerings.
Operating Income. Operating income for the second quarter of 2000 decreased by
$1.8 million to $1.9 million from $3.8 million for the corresponding period of
1999. As a percentage of revenues, operating income was 9.0% for the quarter
ended June 30, 2000 compared with 18.0% for the corresponding period of 1999.
Year to date operating income was $5.0 million or 10.9% of revenues as compared
to $7.5 million or 17.0% of revenues for the first six months of 1999. The
decrease in the quarter and year-to-date operating income is primarily
attributable to selling, and general and administrative expenses from SourceOne
of $1.4 million and the impact of the decreased gross margin. SourceOne expenses
included $.3 million in non-recurring costs in the first six months. The
remaining decrease in operating income was associated with increased recruitment
costs, additions to the sales force and operating expenses related to the new
sales and administrative headquarters in Chanhassen, Minnesota.
Interest Expense. Interest expense of $2.4 million and $4.7 million for the
three and six month periods ended June 30, 2000 was consistent with the interest
expense recorded in the corresponding period last year.
Income Taxes. The Company recorded an income tax benefit of $.2 million and an
income tax provision of $.1 million for the three and six months ended June 30,
2000, respectively, as compared to an income tax provision of $.5 and $1.1
million, respectively, for the corresponding period's in 1999. The decrease in
the tax provision for the six-months ended June 30, 2000 is a result of
decreased profitability.
Net Income. As a result of the foregoing factors, the Company reported a net
loss of $.3 million and net income of $.2 million for the three and six months
ended June 30, 2000, as compared to net income of $.9 million and $1.9 million,
respectively, for the corresponding period's in 1999.
10
13
LIQUIDITY AND CAPITAL RESOURCES
At June 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 $63.9 million, and
indebtedness of $80.6 million represented by the Notes and other long term
financing agreements. The Company had net negative working capital of $1.0
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 for a summary of Company commitments under such operating lease agreements.
For the six-month period ended June 30, 2000, the Company's operations used cash
of $1.1 million compared to cash generated of $1.6 million for the same period
in 1999. The $1.1 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 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 six month periods ended June 30,
2000 and 1999 were $3.8 million and $.4 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 forecast for 2000 totals $3.8 million. The Company anticipates that
capital expenditures for 2000 will not exceed $4.0 million.
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 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 (i)
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, and (ii) a minimum Current Ratio of 1.10
(as defined in the Credit Facility). 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 June 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.
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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. 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 June 30, 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 $1.9 million.
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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).
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 Wells Fargo Bank Waiver dated July 31, 2000.
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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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: August 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: August 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)
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