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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] 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.)
717 Faxon Road, Young America, Minnesota 55397-9481
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (612) 467-1102
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.)
717 Faxon Road, Young America, Minnesota 55397-9481
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (612) 467-1102
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrants (1) have filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) have been subject to such filing requirements for
the past 90 days. Yes [X] No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K [X]
All of the outstanding shares of common stock of Young America Corporation are
owned by Holdings. The aggregate fair market value of Holdings voting and
non-voting common stock held by non-affiliates of Holdings as of March 15, 1999,
based upon the good faith determination of the Board of Directors, was
approximately $500. For purposes of this disclosure, shares of common stock held
by officers and directors of Holdings have been excluded because such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily conclusive for other purposes. The number of shares outstanding of
Holdings' common stock as of March 15, 1999 was 1,908,744.
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PART I
FORWARD-LOOKING STATEMENTS
This Report on Form 10-K contains forward-looking statements that involve risk
and uncertainties. All statements other than statements of historical facts
included in this Annual Report on Form 10-K, including, without limitation,
statements regarding the future financial position of Young America Holdings,
Inc. ("Holdings" and its wholly owned subsidiary Young America Corporation
("Young America" or "YAC", and together with Holdings, the "Company"), business
strategy, budgets, projected costs and plans and objectives of management for
future operations are forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as "may", "will", "expect", "intend", "estimate", "anticipate", "believe"
or similar words. Those forward-looking statements are subject to known and
unknown risks, uncertainties and other factors that could cause actual results
to differ materially from those contemplated by the forward-looking statements.
Important factors that could cause actual results to differ materially from
those expressed or implied by these forward-looking statements are discussed
under the heading "Management Discussion and Analysis of Financial Condition and
Results of Operations" in Part II of, and elsewhere in, this Annual Report on
Form 10-K. All subsequent written and oral forward-looking statements
attributable to Young America or Holdings or persons acting on their behalf are
expressly qualified in their entirety by these factors.
ITEM 1. BUSINESS
1997 RECAPITALIZATION
Prior to November 25, 1997 (the "Recapitalization Date"), all of the
capital stock of Holdings (formerly known as Young America Corporation) was
owned by its former chairman and chief executive officer and certain trusts for
the benefit of members of his family (the "Selling Stockholders"). On the
Recapitalization Date, Holdings effected a recapitalization
("Recapitalization"), pursuant to which the following transactions occurred:
- - An investor group (the "Investor Group"), comprised of BT Capital
Partners, Inc. ("BTCP"), Ontario Teachers' Pension Plan Board ("OTPPB"),
Charles D. Weil, the president and chief executive officer of Holdings,
and 20 other members of management (Mr. Weil and such other participating
members of management, the "Management Stockholders"), purchased newly
issued shares of common stock of Holdings for an aggregate purchase price
of $38.9 million.
- - Holdings borrowed $80 million under a senior bridge credit facility (the
"Bridge Facility") provided by affiliates of BTCP.
- - The Selling Stockholders rolled over a portion of their equity interest in
Holdings.
- - Holdings used the proceeds of the issuance of the shares of common stock
to the Investor Group and borrowings under the Bridge Facility to (i)
repurchase from the Selling Stockholders their remaining equity interest
in Holdings for an aggregate purchase price of $92.2 million, (ii) make
bonus payments to management of $13.4 million under plans put in place in
contemplation of a change of control of Holdings, and $4.9 million paid
pursuant to phantom stock arrangements due in such amounts as a result of
the change in control of Holdings and (iii) pay $8.4 million fees and
expenses related to the Recapitalization.
- - Substantially all of the business and assets of Holdings were transferred
to a newly formed subsidiary of Holdings, Young America Corporation, and
Holdings changed its name to Young America Holdings, Inc.
Holdings made an additional payment of $.7 million to the Selling
Stockholders and certain employees of the Company during the second quarter of
1998 based upon the final determination of the total stockholders equity of
Holdings as of October 31, 1997 and Holdings profit or losses for the period
ended on the Recapitalization Date. In addition, if the cumulative excess cash
flow (as defined in the agreements related to the Recapitalization) of the
Company for the four year period ending December 31, 2001 exceeds $93 million,
the Selling Stockholders and certain employees of the Company may be entitled to
additional payments (either as additional compensation for shares purchased by
Holdings in the Recapitalization or as additional bonus or phantom stock
payments) equal to 20% of such excess, subject to a maximum additional amount of
$15 million. As a result of the Recapitalization, the Investor Group owns
approximately 93% of the total capital stock of Holdings. For additional
information with respect to the Recapitalization, see Note 4 of Notes to the
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
Subsequent to the Recapitalization, Holdings refinanced the indebtedness
under the Bridge Facility through the issuance by Young America in a private
placement of $80 million principal amount of 11 5/8% Series A Senior
Subordinated Notes due 2006 (the "Old Notes"). The Old Notes were subsequently
exchanged for a like aggregate principal amount of Young America's 11 5/8%
Series B
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Senior Subordinated Notes due 2006 (the "New Notes") registered under the
Securities Act of 1933. The Old Notes were, and the New Notes are, guaranteed in
a senior subordinated basis by Holdings.
Holdings expects to conduct substantially all of its business and
operations through Young America and any future subsidiaries it may form.
However, if the covenants contained in the Young America's bank revolving credit
facility (the "Credit Facility") and/or the Indenture for the New Notes would
prohibit Young America from making such an acquisition, Holdings may make such
acquisition directly or through a newly formed subsidiary of Holdings rather
than Young America.
GENERAL
Young America Holdings, Inc. and, from the date of incorporation on
November 25, 1997, Young America Corporation, its wholly owned subsidiary
provide of a wide range of consumer interaction processing ("CIP") services to
large consumer product and consumer service companies. The services the Company
has historically provided include the handling and processing of consumer
responses to client marketing programs (especially rebates and premium
programs). The Company's clients utilize various marketing programs to establish
relationships with their customers and contract with the Company to handle the
interactions. These communications or interactions take on many forms but are
all targeted at satisfying the client's consumers' needs and requests in a
manner that achieves the highest degree of customer satisfaction. The
interactions include inbound and outbound communications, through mail,
tele-communication and electronic formats.
The Company's more than 200 clients include such well-known companies as
Sprint Corporation, Anheuser-Busch Companies, Inc., General Mills, Inc., R.J.
Reynolds Tobacco Company, Eastman Kodak Company and Hewlett-Packard Co. The
Company's CIP services provide a link between its clients and their customers
for numerous types of marketing programs, including rebate programs, purchase
reward or premium programs, sweepstakes, product sampling programs and warranty
registration programs. The Company provides a variety of services involved in
executing these marketing programs, including (i) order processing (including
the handling of mail, telephone calls, facsimiles and e-mail received from
consumers), (ii) fulfillment (including the delivery of product premiums and
samples as well as rebate checks to consumers), (iii) data gathering, analysis
and reporting and (iv) related customer service (including receiving and
responding to consumer inquiries).
CIP services improve the marketing efforts of consumer-oriented companies
by identifying and focusing on their most valuable existing and potential
customers. These consumer marketing companies are increasingly utilizing
targeted marketing strategies as opposed to "mass marketing" approaches such as
general market advertising and free-standing insert coupons. In recent years,
the Company has identified a trend among its clients toward the targeted
marketing approach, including an increase in the use of consumer promotion
programs such as premium programs and product sampling programs. Because the
Company believes that its clients have found these programs to be both effective
and efficient, the Company believes that these trends will continue.
The Company has also observed a trend among its clients toward more
complex marketing programs. Consumer-oriented companies have sought to
differentiate themselves from their competitors by offering more sophisticated
marketing programs, often emphasizing consumer loyalty and repeat purchases,
that appeal to their targeted customers. These complex marketing programs
frequently involve increased consumer interactions that are designed to provide
consumer-oriented companies with an opportunity to gather information about
their customers. Management believes that spending on CIP services in support of
these more complex marketing programs has outpaced and will continue to outpace
the growth of services for simpler marketing programs such as traditional
rebate, premium and sweepstakes programs. Accordingly, over the past three years
the Company has enhanced its capabilities to become a provider not only of
narrowly focused promotion fulfillment services for those simpler marketing
programs but also of integrated, custom-designed CIP services for large complex
marketing programs. Its breadth of services and ability to integrate such
services to support complex marketing programs have distinguished the Company
from the majority of its competitors, most of which offer a narrower range of
services and serve a smaller number of clients. Management believes that the
Company's broad service offering, together with its sophisticated information
systems and quality control processes, has enabled it to become a leading
provider of business-to-consumer CIP services.
In each of the last three fiscal years, the Company managed over 3,500
marketing programs, with between 1,500 and 2,000 programs being processed at any
point in time. As of December 31, 1998, the Company was processing approximately
1,800 client marketing programs. In each of the last three fiscal years, the
Company distributed over 40 million items to its clients' customers. Items
distributed by the Company have ranged from rebate checks to sales literature to
large and small items of merchandise as premiums and product samples.
Young America was incorporated in Minnesota in 1997 as a subsidiary of
Holdings, a Minnesota corporation founded in 1972.
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The Company's principal office is located at 717 Faxon Road, Young America,
Minnesota 55397 and its telephone number is (612) 467-1100.
COMPETITIVE STRENGTHS
The Company attributes its current market position and its existing
opportunities for growth and a return to profitability to the following
competitive strengths:
Breadth of Integrated Services
Young America is a provider of a broad range of integrated CIP services to
large consumer product and consumer service companies. Young America's basic
services include (i) order processing (including the handling of mail, telephone
calls, facsimiles and e-mail received from consumers), (ii) fulfillment
(including the delivery of product premiums and samples as well as rebate checks
to consumers), (iii) data gathering, analysis and reporting and (iv) related
customer service (including receiving consumer inquiries and providing follow-up
services). Most of the Company's competitors offer a narrower range of services
to a smaller client base. The Company's ability to integrate a broad range of
services allows it to work with its clients to custom design efficient
processing solutions for all types of marketing programs, especially complex
marketing programs that require a significant amount of contact with the
consumer.
Ability to Process High-Volume and Complex Marketing Programs
The Company has demonstrated the expertise necessary to manage complex and
high-volume marketing programs by executing programs such as "Pepsi Stuff(R)",
"Camel Cash(R)", "Bud Gear(R)" and General Mills, Inc.'s "Box Tops for
Education(R)". Complex marketing programs can involve integrating dozens of
custom-designed process steps and coordinating interactive communications with a
client's customers. High-volume programs can involve processing several million
orders and sending out several million items to consumers in a very short period
of time while simultaneously processing the Company's 1,500 to 2,000 other
current programs in a timely, courteous and efficient manner. Management
believes that the Company has a reputation for being able to manage high-volume
and complex marketing programs with a high quality of service and that the
Company's reputation contributes to its recurring revenue base and its ability
to attract new clients.
Strong, Established Client Relationships
The Company has successfully attracted and built strong relationships with
a large number of major consumer-oriented companies in the United States. Young
America is currently well-positioned in the packaged goods industry and has
expanded its client base in faster-growing industries such as high-technology
consumer products. Of the Company's 25 largest clients in 1998, 9 have been
clients for more than seven years.
The vast majority of marketing programs undertaken by the Company for its
clients involve direct interaction with consumers. It is critical to the
Company's clients that the various services involved in administering a client's
marketing program be performed consistently, accurately, courteously and in a
timely manner. The Company believes that these factors are often key
determinants when a consumer-oriented company awards the administration of its
marketing programs. The Company seeks to achieve a high level of quality service
through careful analysis and design of the steps involved in delivering the
services required and by the stringent process controls it builds into the
processing plan for each marketing program it undertakes.
Sophisticated Information Systems
In 1996, the Company completed its conversion to a new proprietary
software system which has increased the Company's ability to process a greater
number and variety of complex marketing programs. The system increases
operational efficiencies and enhances the Company's ability to track orders
through each step of the order-handling process and to accurately invoice its
clients for services provided by the Company. In addition, the Company (i) can
give a consumer the precise status of any order from the day such order was
received until the day the promotion item is shipped, (ii) has the ability to
provide real-time information on the status of a program, allowing the Company's
clients to track and judge the effectiveness of on-going promotion programs and
(iii) has the ability to acquire, store and quickly retrieve information about
consumers and their individual buying habits. The Company's information system
technology has allowed it to develop a proprietary database of approximately 65
million consumer households.
The system cost approximately $9.0 million to develop and install
(including hardware acquisition and software development) and required more than
four years to be fully implemented. Designed as an open system, its capacity can
be easily increased to meet the
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Company's future needs by adding additional hardware support. Management
believes that no comparable program is used by any of its competitors and that
no similar integrated system can be easily developed or purchased in the
marketplace. Management believes that a competitor would require a substantial
commitment of time and capital to replicate the capabilities of the Company's
system.
Experienced Management Team
The Company's senior management team has been assembled and developed
since the arrival in July 1993 of its President and Chief Executive Officer,
Charles D. Weil. Prior to 1993, Mr. Weil was President and Chief Operating
Officer of ConAgra Frozen Foods. Mr. Weil has 25 years of experience in the
consumer packaged goods industry with ConAgra and other companies such as
General Mills Inc. and Nestle USA Inc. Mr. Weil has recruited a team of
experienced executives from outside the industry in which the Company competes,
each of whom brings to the Company not only functional skills but also fresh
insights that assist Mr. Weil in executing the strategic vision for the Company.
Industries from which the Company's current executives have been drawn include
retailing, distribution, direct marketing and teleservices.
BUSINESS STRATEGY
Focus on Clients with Large Revenue Potential
Since 1993, the Company's focus has been to attract and retain clients who
require CIP services to support high-volume and/or complex marketing programs on
a recurring basis and with which the Company can develop a strategic
relationship. Management believes that high-volume and/or complex marketing
programs by their scope and nature allow for higher revenues and improved profit
margins. Beginning in 1995, the Company began seeking operational efficiencies
by reducing the number of simple, low-volume marketing programs for which it
would compete. At the same time, the Company upgraded its technology and
operational systems in order to better focus on the needs of clients with large
revenue potential for the Company. As a result, the Company has increased the
average revenue per client from approximately $307,000 in 1994 to approximately
$1,076,000 in 1998. The Company intends to continue to concentrate on clients
that require more complex and/or higher volume marketing programs.
Management believes that the Company's ability to provide CIP services for
high-volume and/or complex marketing programs has been a significant factor in
its ability to attract large new clients, both from within industries that have
traditionally used the Company's services and from industries that have not
traditionally used the Company's services such as computer hardware, computer
software, consumer services, telecommunications and energy. Recent client
additions include Best Buy Co., Inc., Bali Company, Target and Intuit, Inc.
Management believes that there are opportunities to market the Company's
services in additional industries such as financial services and
pharmaceuticals.
Custom Design Services
When the Company evaluates a potential new client program, it performs a
comprehensive review of all steps that it believes are necessary for the
successful implementation of the program. The Company then reviews the
advantages of each proposed step with the potential client who determines
whether to pursue each proposed step. Only after such determination by the
client does the Company complete the process design, cost each step of the
process and price its services for a particular marketing program. Finally, the
client determines whether the value of each step is worth the incremental cost.
The Company believes its ability to custom design and implement processes
to fit the specific requirements of a client's program constitutes a competitive
advantage. Management believes that this ability enables the Company to maintain
satisfactory margin levels while achieving high client loyalty. Other benefits
derived from the Company's ability to custom design services include (i) more
efficient planning and invoicing of services rendered by the Company and (ii)
greater ability to reliably estimate the profitability of each marketing program
serviced.
Anticipate Clients' Evolving Needs
The Company strives to anticipate the needs of its clients and develop new
or enhanced services to meet those needs as they arise rather than merely
reacting to requests from its clients. The Company, in anticipation of client
needs, upgraded its information processing capabilities and broadened its
ability to process orders to include not only mail but also facsimile, telephone
(including live operator and Interactive Voice Response), Internet and
electronic data transmission. Management believes that the Company's experience
in managing a wide variety of marketing programs for a broad range of major,
consumer-oriented companies gives it a competitive advantage in anticipating its
clients' needs for new and enhanced CIP services. Examples of areas in which the
Company is currently upgrading its services in anticipation of client needs
include (i) enhanced Internet and Interactive Voice Response
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capabilities, (ii) full-service credit card payment processing for marketing
programs involving payments by consumers (iii) improved information processing
and consumer data reporting capabilities and (iv) enhanced teleservice offerings
including predictive outbound calling and call recording capabilities.. The
Company plans to continue to enhance its operational capabilities, including its
sophisticated computer systems, so that it can meet the demand for increasingly
complex CIP services.
Continue Operational Improvements
The Company continually evaluates and refines its process flows to meet
evolving client needs, to enhance client satisfaction and to reduce costs. In
1998, the Company began the process to become certified to the COPC-2000
Standard. COPC is an organization that was established to help improve customer
satisfaction and operational performance of customer service providers,
including call centers and fulfillment centers. The COPC-2000 Standard provides
both a benchmark and an improvement methodology for operational performance and
is recognized as the leading standard for excellence in customer service. To
become certified to the COPC-2000 Standard requires a detailed operational audit
to ensure that the customer service provider is compliant to all 32 components
of the standard. The Company has dedicated staff and resources to implement the
processes necessary to gain the COPC-2000 certification. The Company expects to
achieve certification with respect to its call center operations by December
31,1999, and with respect to its fulfillment operations by the end of the second
quarter of 2000. The Company believes the COPC-2000 certification will
strengthen its market position and become a competitive advantage. There can be
no assurance, however, that certification will be achieved.
Pursue Selective Acquisitions in Related Businesses
Holdings and the Company intend to pursue selective acquisitions that
offer a strong strategic fit with the Company's existing core competencies
and/or allow it to develop or strengthen partnerships with select clients. Such
acquisitions could include, among others, companies that specialize in
literature fulfillment, Internet order processing or collateral material
fulfillment and such acquisitions, whether individually or in the aggregate,
could be substantial relative to the size of the Company.
MARKETING PROGRAMS SUPPORTED
The Company provides its CIP services in connection with various marketing
programs being conducted by its clients. Such marketing programs include the
following:
Premium Programs. Premium incentive promotions generally allow consumers
to exchange proofs of purchase for gift items or premiums offered by the
Company's clients in an effort to promote increased sales of their products.
Premium programs range from small short-term promotions involving only a small
number of consumer purchases and the award of a small gift item such as a
t-shirt or a compact disc to large and complex long-term loyalty or continuity
programs involving numerous consumer purchases, premium point systems and the
award of large gift items such as a mountain bike or a leather jacket. The
Company assists its clients in projecting proper inventory levels before a
promotion begins by helping its clients forecast redemption rates. The Company's
packaging experts recommend packaging materials that are both cost-effective and
best suited for the premium items involved in the program, and the Company
handles the shipping of such items to consumers.
Rebate Programs. Rebate offers provide an incentive to consumers to try
new or existing products and services as well as creating an opportunity for
consumer-oriented companies to gather information about consumers including
their buying behavior and preferences. Young America's rebate processing service
allows clients to cost-effectively fulfill rebate requests with laser-printed,
customized checks and collect consumer data on product-choice. The Company
offers a selection of funding options for effective cash management by its
clients.
Sweepstakes Programs. Sweepstakes, games and contests are used to generate
high levels of consumer interest in a highlighted product. The Company has been
engaged in the administration of sweepstakes for over 18 years. The sweepstakes
process is subject to stringent regulatory scrutiny that often necessitates
involvement of third parties other than the client sponsoring the sweepstakes.
The Company, in addition to receiving and processing entries and shipping out
the small number of prizes awarded, provides most of the full range of services
needed to manage sweepstakes and gaming programs, including bonding,
registration, judging, random drawing, affidavits and tax reporting.
Product Sampling Programs. Sampling programs offer clients a way to
promote both new and established products. Young America manages a variety of
sampling programs, including those that involve mailed requests, direct calls or
Internet requests from consumers. At its clients' request, the Company can also
implement sampling programs by sending products to consumers identified from
client-supplied databases. Some clients also use Young America for bulk shipment
of sample products to distribution centers or
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retailers.
Literature Distribution. Young America provides inventory management and
delivery of sales literature and information requests from interested consumers
and retailers.
Other Programs. The Company also supports a number of other programs
including warranty registration, inventory management and distribution of
in-store promotional materials to retailers, retailer rebate programs,
manufacturer sales incentive programs, and administration of gift certificate
programs.
SERVICES PROVIDED
Young America provides an integrated mix of CIP services that can be
customized to meet client-specific needs for a wide variety of marketing
campaigns. These services include the following:
Inbound Order Processing. Young America offers high-quality, flexible
processing of consumer orders received primarily by mail but also via facsimile,
via telephone through its call centers (both live operator and Interactive Voice
Response) and more recently through its Internet web site and e-mail. The
Company has approximately 1,500 post office boxes reserved for handling incoming
mail. Orders can vary from mailed-in submissions under premium programs
(including submission of proofs of purchase in paper or other form) to simple
mailed-in submissions for rebates to telephone requests for literature or
product samples. Specific inbound order processing services performed by the
Company include: (i) receipt and handling of inbound mail submissions, (ii)
checking of received entries and correspondence with consumers to ensure
qualification, (iii) promotion security and fraud detection through address
verification, (iv) data entry processing by key entry and high-speed scanning
technology, (v) transcription of Interactive Voice Response-captured inbound
orders and (vi) processing and accounting of consumer check and/or credit card
transactions for marketing programs involving consumer payments.
Outbound Order Processing (Fulfillment). In each of the last three years,
the Company handled over 40 million outbound units per year through its flexible
order processing systems and procedures. Outbound units vary from rebate checks
to sales literature to small and large items of merchandise representing
premiums in promotional programs or product samples. In each of the last three
years, the Company issued more than 21 million rebate payments, generating
checks utilizing its own internal laser printing capabilities. Merchandise units
are processed through various stages of the Company's handling system, including
product receiving, warehousing, assembly, repackaging and shipment. Merchandise
and paper items are shipped through a U.S. post office located on the Company's
premises, as well as through shippers such as United Parcel Service and various
freight consolidators for certain larger items.
Database Development and Management. The Company's information systems and
technology allows it to gather, process and analyze information about consumers
and their behavior and preferences, Young America assists its clients in
developing the databases necessary to build targeted, effective marketing
campaigns. Young America helps its clients to monitor promotion activity through
standard reports or, in certain cases, by linking directly into Young America's
database via personal computer and modem. More detailed, custom analysis of
selected response data is also available, including analyses of consumer buying
patterns and preferences and marketing program effectiveness. The Company has
also developed its own proprietary database of approximately 65 million consumer
households.
Customer Service. Customer service is an integral part of any consumer
interaction program. The Company's consumer affairs group is dedicated to the
professional handling of mail, telephone, facsimile, Internet and e-mail queries
of all types. Using its on-line database, the Company can determine the status
of any consumer order and respond promptly to any special situations, answer
questions about offers, arrange replacement shipments, and identify the status
of a consumer's order or submission. The Company has the hardware capacity to
receive up to 30 million live calls annually and an additional 300 million calls
utilizing the Company's Interactive Voice Response capacity. The Company's use
of sophisticated communications technology, integrated with its consumer
information databases, enhances the effectiveness of customer service personnel
in handling consumer inquiries and data-gathering activities.
SALES AND MARKETING
The Company's sales and marketing organization currently consists of a
Vice President of Sales and Marketing, two senior account executives, seven
account executives, including one focused on selling Interactive Voice Response
services, and a sales support department. The sales and marketing staff works
directly with clients and potential clients as well as maintaining relationships
with several promotional agencies.
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The Company believes that its reputation for high-quality execution of its
broad range of CIP services, particularly with respect to high-volume and/or
complex marketing programs, enables Young America to obtain new business
opportunities through requests for proposals, client referrals and cross-selling
to existing clients. In addition, the sales and marketing group focuses
particularly on promoting relationships with existing clients that exhibit large
revenue potential from a continued high level of activity, as well as
identifying and pursuing new clients either in industries that traditionally
have utilized a high-volume of CIP services or that the Company believes
represent potential new high-volume users of CIP services on an outsourced
basis.
TECHNOLOGY
Young America strives to incorporate technology and automation into every
appropriate aspect of its business.
Promotion Administration Leader (PAL)
Young America's proprietary software system ("PAL"), which the Company
believes is more advanced than any information management system utilized by its
competitors, is fully integrated into all stages of the Company's management of
a marketing program, including inbound order processing, outbound order
processing and customer service. PAL enables the Company to monitor individual
order processing and to respond promptly to customer service inquiries. The
system also allows the Company and its clients to measure the results of an
ongoing promotion program. In addition, the Company's clients, either directly
or through the Company's data analysis services, can use the data captured by
PAL to refine their databases of consumer information and to enhance future
promotional activities. The PAL system provides clients with the ability to
acquire, store and quickly retrieve information about individual consumers and
their buying habits. The Company has also used PAL to develop its own database
of approximately 65 million consumer households.
The PAL system cost approximately $9 million to develop and install
(including hardware acquisition and software development) and required more than
four years to be fully implemented. PAL utilizes a relational database designed
by Progress Software Corporation ("Progress") and is written in Progress'
fourth-generation programming language in a UNIX environment. PAL was designed
as an open system to be operated within the Company's client/server environment.
The Company's computer system is supported by multiple high-end UNIX
servers that house the PAL database and direct and control network data flow
among the Company's approximately 45 servers and approximately 1,900 personal
computers ("PCs"). The Company purchases or leases its mainframes, servers and
PCs from major computer manufacturers such as Sequent Computer Systems, Inc.,
Compaq Computer Corporation and Hewlett-Packard Co.
PAL was designed to grow and adapt with the Company. New features are
continually being written and added to the various existing PAL applications. In
addition, PAL's capacity can be easily increased by adding additional hardware
support. Data stored by the PAL system is protected by frequent backup to
redundant off-site systems maintained by the Company.
Call Center Technology
The Company seeks to employ the most current telecommunications technology
available. It maintains relationships with the three leading U.S.
telecommunications carriers, utilizing advanced toll-free and toll-paid network
services such as automatic number identification (ANI), dialed number
information service (DNIS), routing control service on-line, next-available
agent call processing, network messaging and call prompting and network-based
call transferring applications. The Company also employs automatic call
distributor (ACD) switches with advanced call routing features and computer
telephone integration (CTI) technology. The Company's Interactive Voice Response
system uses text-to-speech and voice recognition technology. The Company's
dedicated fibre-optic links integrate its telecommunication capabilities into a
single company-wide system.
Scanning Capabilities
The Company has introduced form scanning as part of its data input
process. Young America's Intelligent Character Recognition (ICR) system
recognizes characters that have been hand-printed by a person using a pen or
pencil, thus greatly reducing the manual keying of data for some of its clients.
The system provides a cost-effective, alternative processing option that reduces
data input time. The scanning process also allows Young America to retain forms
electronically, resulting in less paperwork and easier data retrieval.
INDUSTRY OVERVIEW
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The Company is not aware of any industry service or analyst that tracks
the consumer interaction processing industry as such. The Company believes that
this may be because the industry is very fragmented and evolving. The Company
believes that it may be one of only a few companies that characterize themselves
as consumer interaction processors rather than identifying themselves with other
industries, such as teleservices or direct marketing, or positioning themselves
in a specific segment of the CIP industry, such as promotion fulfillment.
Although direct industry data is not available, the services provided by
the Company can be viewed in the context of overall consumer promotional
spending by its clients. Levels of spending on consumer promotion activities
reflect what the Company believes is a trend among consumer-oriented companies
toward increasing the proportion of more targeted marketing activities involving
interaction with consumers and reducing the proportion of mass marketing
approaches such as general market advertising and free-standing insert coupons.
According to Promo magazine, expenditures in the United States in 13
categories of consumer promotion reached a total of approximately $79.4 billion
in 1997. In measuring the size of the industry, Promo magazine included
expenditures for premium incentives, point of purchase displays, advertising
specialties (such as logo-identified objects), couponing, specialty printing,
promotional licensing, sponsored events, promotional fulfillment, interactive
marketing (including toll-free number programs and the Internet), research,
promotional agency services, in-store marketing and product sampling. According
to Promo magazine, promotional fulfillment spending, the category management
believes best represents the Company's business, reached $2.86 billion in 1997,
representing a 14.4% increase over the $2.5 billion reported for 1996. Promo
magazine reported that two of the features driving the growth in promotional
fulfillment spending were internet contests and sampling programs plus consumer
data collection.
COMPETITION
The market in which the Company competes is highly competitive and
fragmented, including competitors that are small firms offering specific
applications, divisions of large entities and large independent firms. The
Company competes on the basis of quality of service, ability to execute
high-volume and complex programs, price and timeliness of service execution.
WORKFORCE
The Company's workforce is not unionized and consists of approximately 900
full-time employees supplemented by part-time employees and independent
contractors. The independent contractors work in their homes checking order
submissions and hand-keying data. In 1998, the Company's active workforce varied
from approximately 1,700 to approximately 2,500, depending on the volume of
processing activity.
The following table sets forth the average breakdown of the Company's
workforce for the twelve-month period ended December 31, 1998:
Full-time fixed employees ........................................... 12.4%
Full-time variable employees ........................................ 31.2
Part-time permanent employees ....................................... 7.3
Agency contract employees ........................................... 26.0
Independent contractors ............................................. 23.1
-----
Total workforce ................................................ 100.0%
- ----------
Full-time fixed employees work full-time, year round. Full-time variable
employees work full shifts on an as-needed basis. Part-time permanent employees
work partial shifts year round. Agency contract employees are obtained though
agreements with independent employment agencies and are used on an as-needed
basis. Independent contractors work flexible hours on an as-needed basis from
their homes. The Company's flexible workforce enables it to maintain a
significant proportion of its labor cost as a variable cost while still being
able to respond effectively to variations in processing volumes throughout the
year.
The Company believes that its relations with employees is good.
ITEM 2. PROPERTIES
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The Company's headquarters and main facility are located in Young America,
Minnesota, where it has the capability of performing substantially all types of
activities involved in rendering its CIP services.
The Company's facilities are as follows:
APPROXIMATE
LOCATION FUNCTION SQUARE FOOTAGE OWNED/LEASED LEASE EXPIRATION
- -------- -------- -------------- ------------ ----------------
Young America, MN....... Corporate offices and 161,900 Owned(1) --
warehouse --
capabilities include
inbound and outbound
processing and
customer service
Glencoe, MN............. Warehouse 97,100 Leased May 31, 2002
LeCenter, MN............ Warehouse 20,000 Leased December 31, 1999
Mankato, MN............. Inbound processing and 54,200 Leased June 30, 2001
customer service
Winthrop, MN............ Outbound processing 24,000 Leased December 31, 2002
Chanhassen, MN.......... Information systems 5,000 Leased January 31, 2000
applications
development
Oklahoma City, OK....... Call center 25,000 Leased January 31, 2004
- ------------
(1) Owned by Holdings and leased to Young America.
The Company believes that its property and equipment are generally
well-maintained and in good condition and that it has or can quickly acquire
sufficient capacity for its current and projected operational and warehousing
needs.
ITEM 3. LEGAL PROCEEDINGS
The Company from time to time is involved in routine litigation incidental to
the conduct of its business. The Company believes that no litigation pending
against it will have a material adverse effect on its financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
All of the outstanding common stock of Young America is owned by Holdings. There
is no established public trading market for Holdings' Class A Common Stock,
Class B Common Stock or Class C Common Stock. At March 15, 1999, there were 20
holders of record of Class A Common Stock , one holder of record of Class B
Common Stock and one holder of record of Class C Common Stock. Holdings has
never declared or paid dividends on its capital stock and does not anticipate
doing so in the foreseeable future. For additional information, see "Security
Ownership of Certain Beneficial Owners and Management"in this Annual Report of
Form 10-K.
Since January 1, 1996, Holdings has issued unregistered securities to
investors and to certain other individuals as set forth below.
- - In November 1997, in connection with the Recapitalization, Holdings issued
an aggregate of 1,169,530 shares of its Class A Common Stock, 442,884
shares of its Class B Common Stock and 172,727 shares of its Class C
Common Stock to the Investor Group for an aggregate purchase price of
$38.9 million. Such issuance was made in reliance upon the exemption from
the registration requirements of the Securities Act of 1933, as amended,
contained in Section 4(2) of the Securities Act.
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- - In February 1998, the Company issued through BT Alex. Brown & Company
("BTAB"), as initial purchaser, $80 million principal amount of Old Notes
for $77.6 million, net of $2.4 million of discount to the initial
purchaser. BTAB resold the Old Notes to qualified institutional buyers in
reliance on Rule 144A under the Securities Act. BTAB is an affiliate of
BTCP.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected financial data for each of the years
in the five-year period ended December 31, 1998. The financial data for the
years ended December 31, 1996, 1997 and 1998 are derived from and should be read
in conjunction with the audited financial statements of Holdings and the related
notes thereto included elsewhere in this Annual Report on Form 10-K. The
selected financial data for the years ended December 31, 1994 and 1995 are
derived from audited financial statements of Holdings that are not included in
this report.
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenues .............................. $ 238,960 $ 175,297 $ 135,716 $ 116,268 $ 103,758
Cost of Revenues
Rebates, postage and freight ........ 174,365 105,212 84,191 80,635 70,747
Processing and servicing ............ 49,434 40,447 31,393 24,920 20,346
--------- --------- --------- --------- ---------
Gross profit .......................... 15,161 29,638 20,132 10,713 12,665
Selling expenses ...................... 6,059 5,504 4,610 3,493 2,927
General and administrative expenses ... 5,798 9,754 7,140 5,949 6,127
Compensation charges attributable to
Recapitalization .................... (43) 17,924 -- -- --
Reserve for lease obligations ......... 850 -- -- -- --
--------- --------- --------- --------- ---------
Operating income (loss) ............... 2,497 (3,544) 8,382 1,271 3,611
Interest expense ...................... (13,095) (1,029) (91) (252) (163)
Interest income ....................... 666 1,038 201 10 28
Transaction costs attributable to
Recapitalization .................... -- (1,967) -- -- --
Other income (expense) ................ (182) -- (60) (15) 30
--------- --------- --------- --------- ---------
Income (loss) before income taxes ..... (10,114) (5,502) 8,432 1,014 3,506
Provision for (benefit from) income
taxes ................................ (3,742) 423 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) ..................... $ (6,372) $ (5,925) $ 8,432 $ 1,014 $ 3,506
========= ========= ========= ========= =========
UNAUDITED PRO FORMA INCOME TAX DATA:
Income (loss) before income taxes ..... $ (10,114) $ (5,502) $ 8,432 $ 1,014 $ 3,506
Provision for (benefit from) income
taxes (a) ........................... (3,742) (1,308) 3,120 375 1,297
--------- --------- --------- --------- ---------
Pro forma net income (loss) ........... $ (6,372) $ (4,194) $ 5,312 $ 639 $ 2,209
========= ========= ========= ========= =========
OTHER FINANCIAL DATA:
EBITDA, as adjusted(b) ................ $ 4,511 $ (1,956) $ 9,578 $ 2,238 $ 4,561
EBITDA, as adjusted, margin(c) ........ 1.9% (1.1%) 7.1% 1.9% 4.4%
Capital expenditures .................. $ 2,374 $ 3,330 $ 1,739 $ 1,061 $ 1,142
Depreciation and amortization(d) ...... 2,014 1,588 1,196 967 950
Cash interest expense(e) .............. 9,450 981 91 252 163
Ratio of earnings to fixed charges(f) . -- -- 13.1x 2.5x 9.4x
As of December 31,
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents ............. $ 12,220 $ 17,940 $ 20,573 $ 242 $ 296
Working Capital ....................... (40) 11,136 5,823 2,076 2,504
Total assets .......................... 45,662 41,742 36,443 20,197 18,589
Total debt ............................ 80,000 80,000 -- -- --
Redeemable Class A Common Stock ....... 890 7,380 -- -- --
Stockholders' (deficit) equity ........ (65,729) (65,057) 12,073 7,847 8,166
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(a) For periods ended on or prior to December 31, 1997 reflects the pro forma
income tax provision that would have been provided had the Company been a
C corporation, rather than an S corporation, for income tax purposes.
(b) EBITDA, as adjusted, represents earnings before net interest
expense, other income(expense), income taxes, depreciation and
amortization. Data for EBITDA, as adjusted, is included because
management understands that such information is considered by certain
investors as an additional basis on which to evaluate the Company's
ability to pay interest, repay debt and make capital expenditures.
EBITDA, as adjusted, does not reflect deductions for interest, other
expense, income taxes, depreciation and amortization, each of which can
significantly affect the Company's results of operations and liquidity
and should be considered in evaluating the Company's financial
performance. EBITDA, as adjusted, is not intended to represent and should
not be considered more meaningful than, or an alternative to, measures of
operating performance determined in accordance with generally accepted
accounting principles.
(c) EBITDA, as adjusted, margin represents EBITDA, as adjusted, as a
percentage of revenues.
(d) Excludes amortization of deferred financing costs.
(e) Cash interest expense excludes amortization of deferred financing costs.
(f) The ratio of earnings to fixed charges has been calculated by dividing
income before income taxes and fixed charges by fixed charges. Fixed
charges for this purpose include interest expense, amortization of
deferred financing costs and one third of operating lease payments (the
portion deemed to be representative of the interest factor). For the years
ended December 31, 1998 and 1997, earnings were inadequate to cover fixed
charges by $10,114 and $5,502, respectively. The shortfall for the year
ended December 31, 1998 was largely attributable to a full year of
interest expense on debt incurred in connection with the Recapitalization,
amortization and write-off of deferred financing costs of $3.6 million,
and a one-time reserve for the termination of Interactive Voice Response
leases of $850, and the shortfall for the year ended December 31, 1997 was
attributable to fees and expenses incurred in connection with the
Recapitalization, including compensation charges of $17,924 for bonuses
and phantom stock payments and transaction fees and expenses of $1,967.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the "Selected
Consolidated Financial Data" and the historical consolidated financial
statements and the related notes thereto included elsewhere in this Annual
Report on Form 10-K. The following discussion and analysis of the financial
condition and results of operations covers periods before completion of the
Recapitalization and the financing thereof. As a result of the Recapitalization
and the issuance of the New Notes, the Company is highly leveraged and the
interest expense resulting from the New Notes and other outstanding debt has and
will continue to significantly effect the Company's results of operations.
Accordingly, the results of operations for periods subsequent to the
Recapitalization and the financing thereof will not be directly comparable to
prior periods.
OVERVIEW
The Company derives its revenues principally from three sources: service
fees, rebate billings and postage and freight billings. Service fees are billed
to clients primarily for (i) order processing (including the handling of mail,
telephone calls, facsimiles and e-mail received from consumers), (ii)
fulfillment (including the delivery of product premiums and samples as well as
rebate checks to consumers), (iii) data gathering, analysis and reporting and
(iv) related customer service (including receiving and responding to consumer
inquiries). As described below, the Company bills clients for the face amount of
rebate checks issued by the Company under certain rebate programs and for
postage and/or freight related to fulfillment of rebate checks and shipments of
merchandise under premium and product sampling programs.
In connection with approximately 45% of the aggregate dollar amount of
checks issued under rebate programs for which the Company has provided CIP
services, the Company has entered into contractual arrangements with its clients
providing that the Company would fund from the Company's own working capital the
payment of rebates offered by the clients. In such cases, the face amount of the
rebate checks issued to consumers is then billed to the Company's clients and
recognized as revenue by the Company. As is typical in the industry, a portion
of checks issued to consumers are not cashed, and, under the contractual
arrangements with clients, the Company retains the amount of the uncleared
checks, which the industry refers to as slippage. In those situations where the
Company has not been asked to use its working capital to fund rebate programs,
the Company's revenues will be significantly lower because it will collect only
service fees and charges for postage, and the Company will not retain slippage.
In such circumstances, the Company generally quotes higher service fees for
client-funded rebate programs in order to offset the lack of slippage to be
retained by the Company. Thus, a change in the mix of rebate programs from
Company-funded to client-funded should not have a material impact on the
Company's reported gross profit unless there also occurs a substantial change in
the overall volume of rebate programs handled by the Company for its clients.
The Company recognizes as revenue the amount billed to clients for
shipping merchandise premiums and samples and for mailing rebate checks. Such
billings are generally based upon standard rates which approximate those that
would be charged to such clients by the United States Postal Service or other
delivery services. The Company realizes a margin on postage and freight revenues
because it pays lower rates to the delivery services reflecting (i) discounts
available to the Company for performing various sorting and other tasks and (ii)
the high-volume of mail and other shipments sent by the Company for all its
clients in the aggregate.
Although the Company's operating results are not subject to seasonality,
the Company's quarterly revenues and profitability can be impacted by the timing
of its clients' programs, the availability of client-provided merchandise to
fulfill consumer requests or clients' decisions not to repeat specific marketing
programs. Program timing can affect quarterly revenues and profitability because
most of the marketing programs that the Company supports are short in duration.
The Company's activity level on a particular marketing program is often
concentrated around the consumers' final response date under the program, so
that the Company's revenues from a high-volume program may be concentrated in
one or two quarters. In addition, with premium programs, the volume of consumer
requests can be difficult to predict. To the extent clients have underestimated
the consumer response to their programs and have not provided the Company with
sufficient quantities of merchandise, the Company may not be able to fulfill all
consumer requests in a timely manner. Consequently, the Company may be delayed
in performing a portion of its services and recognizing the related revenue. In
such situations, however, the Company often handles increased consumer inquiry
calls to the Company's call centers and may mail delay card and order
acknowledgment correspondence to consumers. For providing these extra services,
the Company will derive additional revenue and gross profit from service fees.
The marketing programs undertaken by the Company's clients can vary
significantly in timing, size and type, resulting in variations in requirements
for labor, facilities and equipment. The Company seeks flexibility in the way
that it obtains these resources and attempts to increase the variable proportion
of its cost structure. The Company's operations are very labor intensive, with
labor costs representing approximately 66% of processing and servicing costs in
each of, 1997 and 1998, and 82% and 68% of selling, general and administrative
expenses for 1997 and 1998, respectively. The Company's use of a flexible labor
force, including part time
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and variable employees and independent contractors, makes its processing and
servicing expense structure more variable.
The Company also strives to achieve flexibility in its commitments for
facilities and equipment. A premium program that involves receiving, storing and
shipping a large number of merchandise items or items of large size requires
more warehouse space, packaging equipment and sophisticated inventory management
systems than a rebate program that involves mailing rebate checks. The Company
has limited owned real property and attempts to utilize operating leases for
facilities wherever possible. The Company also generally seeks to lease
technology-related equipment under operating leases with flexible options in
order to be able to eliminate or substitute equipment to reduce lease costs
commensurate with needs or to allow the Company to upgrade or change equipment.
RESULTS OF OPERATIONS
The Year Ended December 31, 1998 Compared with the Year Ended December 31, 1997
Revenues. Revenues for the year ended December 31, 1998 increased by $63.7
million or 36.3% to $239.0 million from $175.3 million for the year ended
December 31, 1997. The increase in revenues reflected an increase in rebate
revenues of $88.0 million, offset in part by a decrease of postage and freight
revenues of $20.2 million and a decrease in servicing revenues of $4.1 million.
The increase in rebate revenues was largely attributable to the addition of new
clients that conducted high-dollar value rebate programs. The reduction in
postage and freight revenues reflects the absence in 1998 of two large premium
programs of one client that required the shipment of high volumes of premium
items. That same client continues to place business with the Company, although
it did not run a similar program in 1998. Servicing revenues were impacted by
the absence of the same client program. The client ran a large premium program
in 1996 that required the Company's services into the second quarter of 1997,
and then ran a similar program in 1997 that resulted in large volumes of
consumer orders in the third and fourth quarters of 1997. Although the client
did not run a similar program in 1998, the Company has replaced most of the
servicing revenue from that client with programs from other existing and new
clients. Servicing revenue from all other clients increased 37.5%, to $52.8
million in 1998 from $38.4 million in 1997.
Gross Profit. The Company's gross profit declined to $15.2 million or 6.3%
of revenues for the year ended December 31, 1998. Gross profit for the year
ended December 31, 1997 was $29.6 million or 16.9% of revenues. The reduction of
gross profit as a percentage of revenues was the result of (i) a change in the
mix of revenues from higher margin servicing revenues and postage and freight
revenues to lower margin rebate revenues and (ii) increased expenses associated
with added capacities and capabilities in anticipation of market changes and
requirements for technology-based services. The ramp up in processing capacity
was primarily associated with technical improvements along with capability and
capacity advances in computer equipment, software and telemarketing systems
including Interactive Voice Response, and, limited facility expansion related to
a new call center in Oklahoma City. The Company's efforts to expand its
processing capabilities and capacity began in 1996 as part of its emphasis on
high-volume programs including new programs and servicing concepts, which
involve significant technology investment. In 1998, the Company took measures to
reduce expenses as certain client programs had lower than anticipated levels of
consumer participation and the mix of the expected servicing revenue growth over
the next 12 months is not expected to require the levels of capacity the Company
had in certain areas. In the third quarter of 1998, the Company closed the
outbound processing facility in Belle Plaine, Minnesota and the inbound
processing facility in Albert Lea, Minnesota. As a result of the Company's
strategy to enter into short-term leases, the Company did not incur ongoing or
termination expenses under either lease. The operations of these facilities were
consolidated into the Company's other existing facilities during the third
quarter of 1998. In addition, an organizational restructuring was also completed
in the beginning of the third quarter of 1998 that consolidated the majority of
the call center functions from the Young America, Minnesota call center to the
Mankato, Minnesota and Oklahoma City, Oklahoma call centers. The Company has
retained a small amount of call center capacity in Young America, Minnesota to
handle small client jobs and call volume overflow from the Company's other call
center facilities.
Operating Income. Operating income for the year ended December 31, 1998
was $2.5 million as compared to an operating loss of $3.5 million for 1997.
Included in the 1997 operating loss were compensation charges of $17.9 million
attributable to the Recapitalization. Excluding the effect of these compensation
charges, 1997 operating income would have been $14.4 million, or 8.2% of
revenues as compared to $2.5 million in 1998 or 1.0% of revenues. This $11.9
million decrease was due to the decrease in gross profit, which was only
partially offset by a $4.0 million reduction in general and administrative
expenses from $9.8 million in 1997 to $5.8 million in 1998 primarily due to a
$4.8 million decrease in profit sharing and management bonuses. No such profit
sharing and management bonuses were paid in 1998. Excluding the 1997 profit
sharing and management bonus expenses of $4.8 million, general and
administrative expenses in 1998 increased 16.0% over 1997, reflecting increased
fees related to the new ownership and debt structure. Selling expenses increased
from $5.5 million in 1997 to $6.0 million in 1998 reflecting additions to sales
and support staff to service new and more complex client programs.
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1998 operating income was also adversely affected by a $850 one-time
expense related to the reserve for certain operating leases. During the first
quarter of 1998, the Company entered into operating leases to increase its
Interactive Voice Response capacity. These leases were entered into specifically
to meet the estimated requirements of a new customer. Due to a variety of
factors, the Company made a decision to terminate its relationship with this
customer during the fourth quarter of 1998. As a result, the Company had lease
obligations from which it would receive no future economic benefit. During the
fourth quarter, the Company recorded a special charge of $850 to reserve for
these future obligations.
Interest Expense and Interest Income. Interest expense was $13.1 million
in 1998 as compared to $1.0 million in 1997. This increase principally reflects
a full year of interest expense on indebtedness incurred to finance the
Recapitalization and $3.6 million of amortization of deferred financing costs.
Amortization of deferred financing costs included $3.3 million of costs
associated with obtaining the Bridge Facility, which costs were written off upon
repayment of the Bridge Facility with the proceeds of the Old Notes, and the
partial amortization of costs associated with the issuance of the Old Notes and
New Notes thereafter. Interest expense of $1.0 million in 1997 represents the
interest associated with the Bridge Facility for the period of November 25, 1997
through the end of the year. Interest income was $.7 million in 1998 as compared
to $1.0 million in 1997 due to lower average cash balances in 1998.
Other Income and Expense. Other expense of $.2 million in 1998 was
primarily related to the investigation of a potential acquisition that took
place in the second quarter of 1998 and that was not pursued. In 1997, the
Company incurred $2.0 million of non-recurring fees and expenses in connection
with the Recapitalization.
Income Taxes. The Company recorded an income tax benefit of $3.7 million
for 1998 as compared to an income tax provision of $.4 million in 1997. Prior to
the Recapitalization, the Company was an S corporation for income tax purposes.
Accordingly, for periods prior to the Recapitalization, the Company did not
accrue income tax expense on its historical financial statements. The statement
of income for 1997 includes proforma net income (loss) information reflecting a
pro forma benefit for taxes in 1997 of $1.3 million, calculated at an assumed
combined federal and state tax rate of 37% as if the termination of Holdings'
status as an S corporation had occurred as of the beginning of 1997.
Net Income. As a result of the foregoing, the Company's net loss increased
to $6.4 million in 1998 from $5.9 million in 1997.
The Year Ended December 31, 1997 Compared with the Year Ended December 31, 1996
Revenues. Revenues for the year ended December 31, 1997 increased by $39.6
million or 29.2% to $175.3 million from $135.7 million for the year ended
December 31, 1996. The increase in revenues was comprised of (i) an increase in
service fees of $15.8 million, (ii) an increase in postage and freight revenues
of $8.0 million and (iii) an increase in rebate revenues of $15.8 million.
Service fees increased due primarily to (x) an increase in complex premium
programs serviced by the Company that required multiple handling steps and
related customer service (primarily handling consumer inquiries) activity and
(y) new pricing initiatives implemented by the Company in 1996 to better capture
costs and previously unbilled services. A portion of the increase in postage and
freight revenues and service fees was related to a high-volume premium program
run for a single client that resulted in a $14.4 million increase in revenue
derived from that client. Though that client conducted similar programs during
1996 and 1997, revenues for the 1996 program were skewed towards the fourth
quarter of 1996 and into the first quarter of 1997. The rebate revenue increase
for the 1997 period was largely attributable to the addition of several new
rebate clients that conducted high dollar value rebate programs in 1997.
Although revenues for the year ended December 31, 1997 increased compared
with revenues for the prior year, revenues for the fourth quarter of 1997 were
lower than revenues for the same quarter in 1996.
Gross Profit. The Company's gross profit increased to $29.6 million or
16.9% of revenues for the year ended December 31, 1997. Gross profit for the
year ended December 31, 1996 was $20.1 million or 14.8% of revenues. The gross
profit increase of $9.5 million is primarily the result of higher revenue, the
continuation of billing practices better reflecting costs and previously
unbilled services and an increased level of service fees from complex programs.
Such service revenues generally achieve higher gross profit percentages. The
Company also benefited from higher margins on postage and freight revenues as a
result of increased volumes and an increase in the discount that the Company
receives from the United States Postal Service.
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Although gross profit was up significantly for the year ended December 31,
1997 when compared with gross profit for the prior year, gross profit for the
fourth quarter of 1997 declined significantly from the level for the same period
in the prior year. Fourth quarter gross profit declined by a greater percentage
than revenues because increases in processing and servicing costs, principally
related to expanded computer hardware capacity, more than offset the declines in
variable costs that came with lower volumes.
Operating Income. For the year ended December 31, 1997, the Company
reported an operating loss of $3.5 million because of compensation charges of
$17.9 million for bonuses and phantom stock expenses paid in connection with the
Recapitalization. Excluding the effect of such nonrecurring charges, the Company
would have reported operating income of $14.4 million or 8.2% of revenues,
compared with $8.4 million, or 6.2% of revenues, in the prior year. The
operating income margin, excluding the effect of the nonrecurring charges,
increased as the increase in gross profit more than offset increases in selling,
general and administrative expenses. Selling expenses increased by $0.9 million
in part due to commissions on higher revenues and in part due to higher payroll
costs. General and administrative expenses increased $2.6 million because of
increases in contractual and discretionary bonuses, phantom stock arrangements
and profit-sharing, which reflected the Company's improved operating
performance.
Although operating income, excluding the effect of the nonrecurring
charges, would have been up significantly for the year ended December 31, 1997,
in the fourth quarter of 1997, operating income declined significantly as
compared to the fourth quarter of 1996. Fourth quarter operating income,
excluding such nonrecurring charges, declined by a greater percentage than
revenues because the decline in gross profit was only slightly offset by a
decline in selling, general and administrative expenses. Selling, general and
administrative expenses showed a smaller decline because they are relatively
fixed in nature.
Interest Expense and Interest Income. For the years ended December 31,
1997 and 1996, cash interest expense was $1.0 million and $0.1 million,
respectively, while interest income was $1.0 million and $0.2 million,
respectively. The growth in interest income from 1996 to 1997 reflects an
increase in the level of investable funds retained by the Company after making
tax distributions to its shareholders. See " --Liquidity and Capital Resources."
The higher level of interest expense in 1997 reflects the incurrence of
indebtedness under the Bridge Facility in connection with the Recapitalization.
Other Expense. The Company incurred $2.0 million of non-recurring fees and
expenses in connection with the Recapitalization.
Net Income (loss). As a result of the foregoing, the Company incurred a
net loss of $5.9 million in 1997 as compared to a net income of $8.4 million in
1996.
INCOME TAXES
Prior to the Recapitalization, Holdings was an S corporation for income
tax purposes. As an S corporation, Holdings was only liable for U.S. federal
income taxes under certain circumstances and liable for state income taxes in
certain jurisdictions; all other domestic income taxes were the responsibility
of Holdings' stockholders. Concurrently with the Recapitalization, Holdings
became a taxable C corporation. The pro forma net income information in the
historical audited financial statements included elsewhere in this Annual Report
in Form 10-K reflects the application of corporate income taxes to the Company's
taxable income at an assumed combined federal and state tax rate of 37% as if
the termination of Holdings' status as an S corporation had occurred as of the
beginning of each period presented. Any tax benefits resulting from bonus
payments and phantom stock payments made to certain members of management of the
Company in connection with the Recapitalization were realized during the period
ending on the day immediately prior to the Recapitalization Date when the
Company was an S corporation. Accordingly, any such tax benefits were realized
by the Selling Stockholders and will not reduce any future tax liability of the
Company as a C corporation.
The conversion from an S corporation to a C corporation resulted in the
Company recording, in the fourth quarter of 1997, a net deferred tax liability
and a corresponding one-time charge to earnings of approximately $0.9 million.
This amount represents management's estimate of differences in the bases of
assets and liabilities for tax and financial reporting purposes.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, no amounts were outstanding under the Company's
$10.0 million bank revolving credit facility (the "Credit Facility") with
Norwest Bank Minnesota, N.A. ("Norwest"), and the Company had a stockholders'
deficit of $65.7 million, indebtedness of $80.0 million and negative working
capital of $(.04) million. On November 25, 1997 the Company completed the
Recapitalization (see Note 4 of the Audited Consolidated Financial Statements).
On February 23, 1998, Young America Corporation issued $80,000 of 11 5/8% Senior
Subordinated Notes due 2006 (the "Old Notes") (see Note 9 of the Audited
Consolidated Financial Statements). In August, 1998, the Company and YAC filed
with the SEC a registration statement relating to an offer to exchange the
17
18
Old Notes for an equal aggregate principal amount of YAC's 11 5/8% Series B
Senior Subordinated Notes due 2006 (the "New Notes"). The New Notes are also
guaranteed by Holdings on a senior subordinated basis. The registration
statement became effective August 6, 1998 and the exchange offer was completed
on September 4, 1998.
The Company has historically financed its operations and capital
expenditures principally through the retention of cash flow from operations
after payment of distributions to shareholders primarily to permit them to meet
tax obligations as a result of the Company being an S corporation prior to the
Recapitalization. For the years ended December 31, 1998, 1997 and 1996 net cash
provided by (used in) operating activities were $.9 million, ($8.7) million and
$25.3 million, respectively. In 1998, cash provided by operating activities was
significantly reduced by the payment of interest on the Bridge Facility and
Notes. The cash usage in 1997 was attributable to the expenses incurred in
connection with the Recapitalization, including compensation charges of $17.9
million for bonuses and phantom stock payments and transaction fees and expenses
of $2. 0 million. Excluding the effect of such nonrecurring charges, the
Company's 1997 cash flow provided by operations was $11.2 million. The $25.3
million of cash provided by operating activities in 1996 was principally the
result of (i) $8.4 million of net income, (ii) a $4.8 million decrease in the
trade receivables account balance and (iii) a $9.3 million increase in the
collections due to and advances from clients liability account. The Company's
future cash flow from operations will continue to reflect (i) income taxes that
the Company is required to pay as a C corporation and (ii) interest that will be
incurred on outstanding indebtedness, including the New Notes.
Net cash used in investing activities for the years ended December 31,
1998, 1997 and 1996 were $2.4 million, $3.3 million, and $1.7 million,
respectively. These capital expenditures principally relate to purchases of
leasehold improvements and warehousing and packaging equipment related to
fulfillment services provided by the Company. To support the Oklahoma call
center, the Company purchased various equipment and leasehold improvements
aggregating $0.5 million. The Company anticipates that capital expenditures for
1999 will not exceed $2.0 million.
Net cash provided by (used in) financing activities for the years ended
December 31, 1998, 1997 and 1996 were $(4.3) million, $9.3 million and ($3.2)
million respectively. Cash used in 1998 reflects the payment of financing costs
associated with the placement of the Old Notes and a $.7 million payment to the
Selling Stockholders in connection with the Recapitalization. In addition,
following December 31, 2001, the Company is obligated to make additional
payments, not to exceed $15 million, to the Selling Stockholders and certain
employees of the Company, subject to the Company achieving certain performance
targets set forth in the agreements relating to the Recapitalization. Net cash
provided by financing activities in 1997 of $9.3 million reflects $80.0 million
of proceeds from the Old Notes and $38.9 million of proceeds from issuance of
common stock to the Investor Group partially offset by $3.3 million of financing
costs associated with the Notes and Bridge Loan, the $92.2 million purchase of
stock from the Selling Stockholders, and $13.9 million of distribution to
shareholders prior to the Recapitalization. Net cash used in 1996 reflects $2.5
million of net repayments made on short-term borrowings and $.7 million of
distributions paid to shareholders. There were no shareholder distributions in
1998.
The Credit Facility provides for borrowings of up to $10.0 million based
on a borrowing base formula equal to 85% of Eligible Receivables less Noncleared
Rebate Items net of cash and cash equivalents (as defined in the Credit
Facility) and has a final maturity date of March 31, 2001. The Credit Facility
does not have any commitment reductions scheduled before maturity. Borrowings
under the Credit Facility accrue interest, at the option of the Company, at
either the bank's base rate or at an interest rate equal to the London interbank
rate for Eurodollar deposits for one, two or three month interest periods plus
2.5%. A fee of .5% per annum is payable with respect to the unused Commitment
Amount (as defined in the Credit Facility) The Credit Facility is secured by a
first priority interest in accounts receivable and related general intangibles
of YAC.
The Credit Facility was amended on November 16, 1998 and March 12, 1999
to revise certain restrictive covenants contained in the original agreement.
The Credit Facility currently requires Young America to maintain (i) commencing
with the quarter ending December 31, 1999 and for each quarter thereafter, a
minimum Interest Coverage Ratio (as defined in the Credit Facility), for the
preceding four quarters of 1.35; (ii) for the quarters ending March 31, 1999
and June 30, 1999, a minimum Current Ratio (as defined in the Credit Facility)
of 1.0, and 1.10 for each quarter thereafter; and (iii) for the nine months
ending September 30, 1999, a minimum cumulative EBITDA of $9.5 million. Based
on its current operating results and business plans, the Company believes that
it will be able to satisfy these requirements. The Credit Facility restricts
Young America's capital expenditures to $0.5 million per quarter and cumulative
annual capital expenditures to $2.0 million. In addition, the Credit Facility,
contains other covenants that, among other things, restrict acquisitions,
investments, dividends, liens and other indebtedness, management fees,
disposition of assets, change of voting control and guarantees.
In compliance with certain state laws, the Company obtains performance
bonds in connection with sweepstakes programs it manages on behalf of clients.
The Company is indemnified by its clients for any obligations on those
performance bonds, and the cost to the Company of obtaining the performance
bonds plus a markup is billed to the clients.
18
19
The Company will rely mainly on internally generated funds, and to the
extent necessary, borrowings under the Credit Facility, to meet its liquidity
needs. The Company also expects to utilize operating leases to finance its needs
for facilities and certain equipment. See Note 8 of Notes to the Consolidated
Financial Statements for a summary of the Company's commitments under operating
leases. The Company believes that the cash flow from operations together with
existing cash and cash equivalents and available borrowings under the Credit
Facility will be adequate to meet its liquidity requirements, including interest
payments with respect to the Notes, for at least the next 12 months.
The Company's ability to pay principal and interest on the New Notes and
to satisfy its other debt obligations will depend upon its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the control
of the Company. The Company's ability to pay principal and interest on the New
Notes and to satisfy its other debt obligations will also depend upon the
future availability of revolving credit borrowings under the Credit Facility or
any successor facility. Such availability is or may depend on, among other
things, the Company meeting certain specified borrowing base prerequisites. The
Company expects that, based on current and expected levels of operations, its
operating cash flow, together with borrowings under the Credit Facility, should
be sufficient to meet its operating expenses, to make necessary capital
expenditures and to service its debt requirements as they become due. If the
Company is unable to service its indebtedness, it will be forced to take
actions such as reducing or delaying acquisitions and/or capital expenditures,
selling assets, restructuring or refinancing its indebtedness (which could
include the New Notes), or seeking additional equity capital. There is no
assurance that any of these remedies can be effected on satisfactory terms, if
at all.
YEAR 2000 ISSUES
As the end of the 20th century approaches, most businesses face the
challenge of ensuring that their software and hardware resources, and ultimately
the automated processing and business activities that depend on information
flow, will continue to function into the 21st century. The "Year 2000 problem",
which arises from the use of a two-digit field to identify years in computer
software and hardware and the assumption of a single millennium - the 1900's, is
expected to cause many business systems to fail or produce inaccurate results.
The Company believes it is well positioned to address these issues and bring its
systems and business operations into compliance. An enterprise-wide program is
currently underway with the goal of achieving Year 2000 compliance.
The Company has completed an internal review of its systems and operations
The inventory and assessment of internal information technology and non-IT
systems have been inventoried, and the process of remediation, as appropriate,
is underway. Remediation may include repair, replacement, or upgrade, with
priorities based on a business risk assessment. Based on the information
available to date, the Company does not anticipate any significant readiness
problems with respect to its systems. The Company expects the remediation
efforts to be completed by the end of the third quarter of this year, and
contingency plans, where appropriate, completed by the end of the year. The
Company anticipates that it will incur incremental costs not to exceed $.5
million in total in addressing Year 2000 issues, of which approximately $.1
million has been incurred to date.
In an effort to review the Year 2000 readiness of its key vendors and
suppliers, the Company has sent to them Year 2000 questionnaires and is in the
process of evaluating the responses. Based on the information received to date,
the Company does not expect any significant Year 2000 problems with its key
vendors and suppliers. However, if the Company's primary
telecommunication providers fail to meet their Year 2000 system requirements on
a timely basis, the Company's call center operations could be significantly
impacted which could have a material adverse effect on the Company. The Company
is using a similar process to evaluate the systems of its clients.
The outcome of the Company's Year 2000 program is subject to a number of
risks and uncertainties, some of which are beyond its control. Therefore, there
can be no assurances that the Company will not incur material costs beyond the
above-anticipated costs, or that the Company's business, financial condition,
or results of operations will not be significantly impacted due to Year 2000
issues.
RECENT ACCOUNTING PRONOUNCEMENTS
AICPA Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," issued in March 1998,
is effective for fiscal years beginning after December 15, 1998. This statement
provides guidance on accounting for the costs of computer software developed or
obtained for internal use. The Company is currently analyzing the implementation
of SOP 98-1 and does not believe it will have a material impact on the Company's
financial condition or results of operations when the Company adopts it in the
first quarter of 1999.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", effective
for years beginning after June 15, 1999. SFAS No. 133 established accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value SFAS
No.133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge criteria are met. Special accounting
for qualifying hedges allow a
19
20
derivative's gains or losses to offset related results on the hedged item in the
income statement and requires that a company must formally document, designate
and assess the effectiveness of transactions that receive hedge accounting. The
Company has not yet quantified the impact of adopting SFAS 133 and has not yet
determined the timing of adoption.
In April 1998, the Financial Accounting Standards Board issued Statement
of Position (SOP) 98-5, "Reporting on the Costs of Start Up Activities",
effective for fiscal years beginning after December 15, 1998. SOP 98-5 requires
the expensing of start-up activities as incurred, versus capitalizing and
expensing them over a period of time. The Company is currently in the process of
assessing the impact of adopting SOP 98-5 and will adopt this new pronouncement
in the first quarter of 1999.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the periods and years reported. As a result of its
cost based services pricing and the short-term nature of client contracts, the
Company does not anticipate that inflation will have a negative impact on its
operations in the future, other than the impact that inflation may have on the
economy as a whole.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in
interest rates. Market risk is the potential loss arising from adverse changes
in market rates and prices, such as interest rates. The Company does not enter
into derivative or other financial instruments for trading or speculative
purposes.
The Company manages its interest rate risk by balancing the amount of
fixed and variable debt. For fixed rate debt, interest changes affect the fair
market value but do not impact earnings or cash flows. Conversely for variable
rate debt, interest rate changes generally do not affect the fair market value
but do impact future earnings and cash flows, assuming other factors are held
constant. At December 31, 1998, the Company had a fixed rate debt of $80
million and variable rate available borrowings up to $10 million under the
Credit Facility.
20
21
Young America Holdings, Inc.
Consolidated Financial Statements
as of December 31, 1998 and 1997
Together With Report of
Independent Public Accountants
22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young America Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Young America
Holdings, Inc. (a Minnesota corporation, formerly Young America Corporation) as
of December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' deficit and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Young America
Holdings, Inc. as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Minneapolis, Minnesota,
February 16, 1999
23
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Young America Holdings, Inc.:
We have audited the accompanying Young America Holdings, Inc. (formerly Young
America Corporation) statements of operations, stockholders' equity and cash
flows for the year ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, Young America Holdings, Inc.'s results of its operations
and its cash flows for the year ended December 31, 1996 in conformity with
generally accepted accounting principles.
McGLADREY & PULLEN, LLP
Minneapolis, Minnesota,
February 14, 1997
24
YOUNG AMERICA HOLDINGS, INC.
Consolidated Balance Sheets
As of December 31
(Amounts in Thousands, Except Share Data)
1998 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,220 $ 17,940
Trade receivables, net of allowance as of December 31, 1998
and 1997 of $47 and $45, respectively 16,184 11,482
Supplies inventory 759 615
Prepaid expenses 907 518
-------- --------
Total current assets 30,070 30,555
-------- --------
PROPERTY AND EQUIPMENT, at cost:
Land and improvements 639 639
Building and improvements 5,853 5,710
Machinery and equipment 2,578 2,228
Transportation equipment 170 147
Office furniture and fixtures 3,122 2,571
Electronic equipment and software 7,281 6,261
-------- --------
19,643 17,556
Less- Accumulated depreciation (11,391) (9,661)
-------- --------
8,252 7,895
Deferred financing costs 3,108 3,292
Deferred tax asset 4,232 --
-------- --------
Total assets $ 45,662 $ 41,742
======== ========
25
YOUNG AMERICA HOLDINGS, INC.
Consolidated Balance Sheets
As of December 31
(Amounts in Thousands, Except Share Data)
(Continued)
1998 1997
--------- --------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Noncleared rebate items $ 14,066 $ 4,526
Accounts payable 1,732 2,331
Collections due to and advances from clients 6,131 3,548
Deferred income taxes 897 417
Accrued expenses-
Interest 3,514 976
Compensation 1,289 5,860
Other 2,481 1,761
--------- --------
Total current liabilities 30,110 19,419
--------- --------
LONG-TERM DEBT (Note 9) 80,000 80,000
OTHER LONG-TERM LIABILITIES (Note 11) 391 --
COMMITMENTS AND CONTINGENCIES (Note 8)
REDEEMABLE CLASS A COMMON STOCK, as of December 31, 1998 and
1997, 40,894 and 339,096 shares issued and outstanding,
respectively (Note 5) 890 7,380
STOCKHOLDERS' DEFICIT:
Class A Common Stock, par value $1 per share; as of
December 31, 1998 and 1997, 3,000,000 shares
authorized, and 1,255,455 and 964,833
shares issued and outstanding, respectively (Note 5) 1,255 965
Class B Common Stock, par value $1 per share; as of
December 31, 1998 and 1997, 1,500,000 shares authorized
and 442,884 shares issued and outstanding 443 443
Class C Common Stock, par value $1 per share; as of
December 31, 1998 and 1997, 1,500,000 shares authorized;
172,727 shares issued and outstanding 173 173
Additional paid-in capital 36,083 30,024
Retained deficit (103,683) (96,662)
--------- --------
Total stockholders' deficit (65,729) (65,057)
--------- --------
Total liabilities and stockholders' deficit $ 45,662 $ 41,742
========= ========
The accompanying notes are an integral part of these consolidated balance
sheets.
26
YOUNG AMERICA HOLDINGS, INC.
Consolidated Statements of Operations
For the Years Ended December 31
(Amounts in Thousands)
1998 1997 1996
--------- --------- ---------
REVENUES $ 238,960 $ 175,297 $ 135,716
COST OF REVENUES:
Rebates, postage and freight 174,365 105,212 84,191
Processing and servicing 49,434 40,447 31,393
--------- --------- ---------
Gross profit 15,161 29,638 20,132
--------- --------- ---------
OPERATING EXPENSES:
Selling 6,059 5,504 4,610
General and administrative 5,798 9,754 7,140
Compensation charges attributable to (43) 17,924 --
Recapitalization
Reserve for lease obligations (Note 11) 850 -- --
--------- --------- ---------
12,664 33,182 11,750
--------- --------- ---------
Operating (loss) income 2,497 (3,544) 8,382
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (13,095) (1,029) (91)
Interest income 666 1,038 201
Transaction costs attributable to -- (1,967) --
Recapitalization
Other (182) -- (60)
--------- --------- ---------
Other income (expense) (12,611) (1,958) 50
(LOSS) INCOME BEFORE PROVISION (BENEFIT) FOR
INCOME TAXES (10,114) (5,502) 8,432
PROVISION (BENEFIT) FOR INCOME TAXES (3,742) 423 --
--------- --------- ---------
Net income (loss) $ (6,372) $ (5,925) $ 8,432
========= ========= =========
UNAUDITED PRO FORMA NET (LOSS) INCOME:
Income (loss) before provision (benefit) for
income taxes $ (10,114) $ (5,502) $ 8,432
Pro forma income tax (benefit) expense (3,742) (1,308) 3,120
--------- --------- ---------
Pro forma net income (loss) $ (6,372) $ (4,194) $ 5,312
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
27
YOUNG AMERICA HOLDINGS, INC.
Consolidated Statements of Stockholders' Deficit
For the Years Ended December 31
(Amounts in Thousands, Except Share Data)
Class A Common Class B Common Class C Common
Stock Stock Stock Additional
------------------------ ------------------ ------------------ Paid-In
Shares Value Shares Value Shares Value Capital
--------- ------- ------- ----- ------- ----- ----------
BALANCE, December 31, 1995 1,920 $ 2 -- $ -- -- $ -- $ 315
Net income -- -- -- -- -- -- --
Distributions to stockholders -- -- -- -- -- -- --
--------- ------- ------- ---- ------- ---- --------
BALANCE, December 31, 1996 1,920 2 -- -- -- -- 315
Net loss -- -- -- -- -- -- --
Stock split 1,918,080 1,918 -- -- -- -- --
Distributions to stockholders -- -- -- -- -- -- --
Proceeds from issuance of
Common Stock 1,169,530 1,170 442,884 443 172,727 173 37,043
Redemption of Common Stock (1,785,600) (1,786) -- -- -- -- (293)
Reclassification to Redeemable
Class A Common Stock (339,097) (339) -- -- -- -- (7,041)
--------- ------- ------- ---- ------- ---- --------
BALANCE, December 31, 1997 964,833 965 442,884 443 172,727 173 30,024
Net loss -- -- -- -- -- -- --
Reclassification from
Redeemable Class A Common
Stock 290,622 290 -- -- -- -- 6,059
Final recapitalization -- -- -- -- -- -- --
--------- ------- ------- ---- ------- ---- --------
BALANCE, December 31, 1998 1,255,455 $ 1,255 442,884 $443 172,727 $173 $ 36,083
========= ======= ======= ==== ======= ==== ========
Retained
Earnings
(Deficit) Total
--------- --------
BALANCE, December 31, 1995 $ 7,530 $ 7,847
Net income 8,432 8,432
Distributions to stockholders (4,206) (4,206)
--------- --------
BALANCE, December 31, 1996 11,756 12,073
Net loss (5,925) (5,925)
Stock split (1,918) --
Distributions to stockholders (10,412) (10,412)
Proceeds from issuance of
Common Stock -- 38,829
Redemption of Common Stock (90,163) (92,242)
Reclassification to Redeemable
Class A Common Stock -- (7,380)
--------- --------
BALANCE, December 31, 1997 (96,662) (65,057)
Net loss (6,372) (6,372)
Reclassification from
Redeemable Class A Common
Stock -- 6,349
Final recapitalization (649) (649)
--------- --------
BALANCE, December 31, 1998 $(103,683) $(65,729)
========= ========
The accompanying notes are an integral part of these consolidated financial
statements.
28
YOUNG AMERICA HOLDINGS, INC.
Consolidated Statements of Cash Flows
For the Years Ended December 31
(Amounts in Thousands)
1998 1997 1996
-------- -------- --------
OPERATING ACTIVITIES:
Net income (loss) $ (6,372) $ (5,925) $ 8,432
Adjustments to reconcile net (loss) income to net cash provided by
(used in) operating activities-
Depreciation and amortization 5,660 1,636 1,196
Deferred income taxes (3,752) 417 --
Changes in assets and liabilities:
Trade receivables (4,702) (2,950) 4,822
Supplies inventory (144) 114 (217)
Prepaid expenses (389) (159) (41)
Noncleared rebate items 9,540 2,267 (1,688)
Accounts payable (599) 125 1,303
Collections due to and advances from clients 2,583 (7,631) 9,278
Accrued expenses (1,313) 3,358 2,135
Other, net 436 97 60
-------- -------- --------
Net cash provided by (used in) operating activities 948 (8,651) 25,280
-------- -------- --------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,374) (3,330) (1,735)
-------- -------- --------
Net cash used in investing activities (2,374) (3,330) (1,735)
-------- -------- --------
FINANCING ACTIVITIES:
Net repayments of short-term borrowings -- -- (2,494)
Proceeds from issuance of senior subordinated notes 80,000 -- --
Proceeds from (repayment of) bridge facility (80,000) 80,000 --
Distributions paid to stockholders -- (13,899) (720)
Proceeds from issuance of common stock -- 38,829 --
Redemption of common stock -- (92,242) --
Payments of financing costs (3,461) (3,340) --
Redemption of Class A common stock (141) -- --
Final payment to selling shareholders (692) -- --
-------- -------- --------
Net cash provided by (used in) financing activities (4,294) 9,348 (3,214)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (5,720) (2,633) 20,331
CASH AND CASH EQUIVALENTS:
Beginning of year 17,940 20,573 242
-------- -------- --------
End of year $ 12,220 $ 17,940 $ 20,573
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payment for interest $ 10,558 $ 5 $ 94
======== ======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Distributions payable at year-end $ -- $ -- $ 3,487
Income taxes paid $ 11 $ 6 $ --
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
(Amounts in Thousands, Except Share Data)
1. THE COMPANY AND NATURE OF BUSINESS:
Young America Holdings, Inc. (Holdings) and, from the date of its incorporation
on November 25, 1997, Young America Corporation (YAC), its wholly owned
subsidiary (collectively, the Company), provide a wide range of consumer
interaction processing (CIP) services to consumer product and consumer service
companies. The Company's CIP services provide a link between consumer-oriented
companies and their customers for numerous types of marketing programs including
rebate programs, purchase reward or premium programs, sweepstakes, product
sampling programs and warranty registration programs. The Company provides a
variety of services involved in executing these marketing programs, including
(i) order processing (including the handling of mail, telephone calls,
facsimiles and e-mail received from consumers), (ii) fulfillment (including the
delivery of product premiums and samples as well as rebate checks to consumers),
(iii) data gathering, analysis and reporting, and (iv) related customer service
(including receiving and responding to customer inquiries).
As further discussed in Note 9, YAC has issued $80,000 of senior subordinated
notes which have been guaranteed in full on an unconditional, joint and several
basis by Holdings. Pursuant to applicable reporting requirements, the
accompanying financial statements reflect the consolidated financial statements
of Holdings and YAC, with summarized financial data for YAC separately disclosed
in Note 9.
2. SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Holdings and YAC. All significant intercompany items have been eliminated.
REVENUE RECOGNITION
The Company derives its revenues principally from three sources: service fees,
rebate billings and postage and freight billings. Service fee revenues are
recognized as CIP services are rendered. As described below, the Company
invoices clients, at the time of shipment, for the face amount of rebate checks
issued by the Company under certain rebate programs and for postage and/or
freight related to fulfillment of rebate checks and shipments of merchandise
under premium and product sampling programs.
In connection with approximately 40% of the aggregate dollar amount of checks
issued under rebate programs for which the Company has provided CIP services,
the Company has entered into contractual arrangements with its clients providing
that the Company would fund from the Company's own working capital the payment
of rebates offered by the clients. The Company, in turn, invoices its clients
for the full amount of those rebate checks that the
30
-2-
Company issues to consumers. The Company realizes a margin on such rebate
revenues because when the Company agrees to fund rebate programs with its own
working capital, its contractual arrangements with its clients generally provide
that the Company is entitled to retain amounts paid to it by clients relating to
rebate checks that are never cashed (referred to in the industry as slippage).
Each period, the Company estimates that percentage of rebate checks issued that
are not expected, based upon historical experience, to be cashed.
The Company recognizes as revenue (at the time of shipment) the amount billed to
clients for shipping merchandise premiums and samples and for mailing rebate
checks. Such billings are generally based upon standard rates which approximate
those that would be charged to such clients by the United States Postal Service
(USPS) or other delivery services. The Company realizes a margin on postage and
freight billings because it pays lower rates to the delivery services reflecting
(i) discounts available to the Company for performing various sorting and other
tasks and (ii) the high volume of mail and other shipments sent by the Company
for all of its clients in the aggregate.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of highly liquid investments with
original maturities of three months or less and are stated at cost, which
approximates fair market value.
SUPPLIES INVENTORY
Inventory is stated at the lower of first-in, first-out cost or market.
DEPRECIATION
Depreciation of property and equipment is computed on the straight-line method
over the following estimated useful lives:
Years
-----
Land improvements 5 - 15
Buildings and improvements 5 - 31
Machinery 3 - 7
Transportation equipment 3
Office furniture and fixtures 5
Electronic equipment and software 3 - 5
DEFERRED FINANCING COSTS
Deferred financing costs are amortized over the term of the underlying debt
instrument.
NONCLEARED REBATE ITEMS
Noncleared rebate items represent open and uncleared rebate checks issued on
behalf of clients as of the balance sheet date, less estimated slippage (see
Note 3).
COLLECTIONS DUE AND ADVANCES FROM CLIENTS
Collections due and advances from clients consist of (i) collections from
consumers that are to be ultimately credited to clients based upon contractual
agreements, and (ii) advances received from certain clients.
31
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INCOME TAXES
Prior to the Recapitalization (see Note 4), the Company was an S corporation for
income tax purposes. As an S corporation, the Company was only liable for U.S.
federal income taxes under certain circumstances and liable for state income
taxes in certain jurisdictions; all other domestic income taxes were the
responsibility of the Company's stockholders. Concurrently with the
Recapitalization, Holdings became a taxable C corporation. The unaudited pro
forma net income information in the accompanying consolidated statements of
income reflects the application of corporate income taxes to the Company's
taxable income at an assumed combined federal and state tax rate of 37% as if
the termination of the Company's status as an S corporation had occurred as of
the beginning of each period presented.
In connection with the conversion from an S corporation to a C corporation,
Holdings began accounting for income taxes under the liability method, whereby
deferred income taxes are recognized at currently enacted income tax rates to
reflect the tax effect of temporary differences between the financial reporting
and tax bases of assets and liabilities. As a result thereof, the Company
immediately recognized, by charging to earnings, a deferred income tax liability
of $928.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. The ultimate results could differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents, trade receivables (net) and accounts
payable approximate fair market value because of the short maturity of these
instruments. The Company's Senior Subordinated Notes were recorded at fair value
in connection with the February 23, 1998 offering. The fair value, based upon
market quote activity as of year-end is $40,000.
RECLASSIFICATIONS
Certain amounts previously reported in the 1997 and 1996 consolidated financial
statements have been reclassified to conform to the 1998 presentation. The
reclassifications had no effect on previously reported net income (loss) or
stockholders' deficit.
COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted provisions of Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This statement established standards for reporting and display of comprehensive
income and its components. Comprehensive income reflects the change in equity of
a business enterprise during a period from transactions and other events and
circumstances from nonowner sources. For the Company, comprehensive income
represents net income as there are no other transactions, events or
circumstances from nonowner sources.
32
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SEGMENT REPORTING
In 1998, the Company adopted SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. SFAS No. 131 also requires
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131 did not affect results of operations or financial
position but did affect the disclosure of segment information (see Note 10).
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective for
years beginning after June 15, 1999. SFAS No. 133 established accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge criteria are met. Special accounting
for qualifying hedges allow a derivative's gains or losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. The Company expects this statement to have no
impact upon adoption.
In April 1998, the Financial Accounting Standards Board issued Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities," effective
for fiscal years beginning after December 15, 1998. SOP 98-5 requires the
expensing of start-up activities as incurred, versus capitalizing and expensing
them over a period of time. The Company is currently in the process of assessing
the impact of adopting SOP 98-5 and will adopt this new pronouncement in the
first quarter of 1999.
3. SIGNIFICANT RISKS AND UNCERTAINTIES:
The Company is subject to a variety of risks and uncertainties during the normal
course of its business including, but not limited to, a high degree of customer
concentration, the needs, marketing decisions and marketing budgets of its
clients, high levels of competition in a fragmented market, vulnerability to
economic downturns, ability to keep pace with changes in information technology,
availability of qualified labor resources, reliability of service provided by
various local and long distance telephone companies, dependence on the services
of the USPS and, to a lesser degree, the services of private delivery services
at cost-effective levels.
When the Company agrees to fund rebate payments with its own working capital,
its contractual arrangements with its clients generally provide that the Company
is entitled to retain amounts paid to it by clients relating to rebate checks
that are never cashed (referred to in the industry as slippage). Each period,
the Company estimates the percentage of rebate checks issued that are not
expected, based upon historical experience, to be cashed. For the years ended
December 31, 1998, 1997 and 1996, the portions of revenue recognized by the
Company as slippage were $3,988, $3,288 and $2,433, respectively. In those
situations where the Company has not been asked to use its working capital to
fund rebate programs, the Company's revenues will be significantly lower because
it will collect only service fees and
33
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charges for postage, and the Company will not retain slippage. In such
circumstances, the Company generally does not discount its service fees in order
to offset the lack of slippage to be retained by the Company.
The escheat laws of various states provide that under certain circumstances
holders of unclaimed property (possibly including, under certain interpretations
of such laws, slippage) must surrender that property to the state in question.
The Company believes that, because Holdings and YAC are Minnesota corporations
with their principal operations and principal places of business located in
Minnesota, the escheat laws of the State of Minnesota would govern the right of
the Company to retain slippage amounts, except that Oklahoma escheat law may
govern the Company's right to retain slippage amounts with respect to operations
conducted from the Company's Oklahoma facility. The Company also believes that
under current Minnesota and Oklahoma escheat law, it is entitled to retain
slippage amounts in those transactions where the Company funds its client's
rebate program from its own working capital rather than surrendering such
amounts to the State of Minnesota or the State of Oklahoma. There can be no
assurance, however, that the Minnesota or Oklahoma escheat law will not change
or that the Company's interpretation of the Minnesota or Oklahoma escheat law
would prevail in any action by the State of Minnesota or the State of Oklahoma
to require the surrender of slippage to either of such states. There also can be
no assurance that another state will not prevail in an action under its escheat
laws to require the surrender to that state slippage, whether unclaimed by
residents of such state or otherwise.
As a result of the Recapitalization transaction discussed in Note 4, the Company
is highly leveraged. The Company's high degree of leverage may have important
consequences for the Company, including that (i) the ability of the Company to
obtain additional financing, if necessary, for working capital, capital
expenditures, acquisitions or other purposes may be impaired, or such financing
may not be available on terms favorable to the Company; (ii) a substantial
portion of the Company's cash flow will be used to pay the Company's interest
expense and, in the cases of indebtedness incurred in the future, possible
principal repayments, which will reduce the funds that would otherwise be
available to the Company for its operations and future business opportunities;
(iii) a substantial decrease in net operating cash flows or an increase in
expenses of the Company could make it difficult for the Company to meet its debt
service requirements and force it to modify its operations; (iv) the Company may
be more highly leveraged than its competitors, which may place it at a
competitive disadvantage; and (v) the Company's high degree of leverage may make
it more vulnerable to a downturn in its business or the economy generally. Any
inability of the Company to service its indebtedness or to obtain additional
financing, as needed, would have a material adverse effect on the Company's
business.
Although the Company is not subject to seasonality, the Company's quarterly
revenues and profitability can be impacted by the timing of its clients'
programs, the availability of client-provided merchandise to fulfill consumer
requests or clients' decisions not to repeat specific marketing programs.
Program timing can affect quarterly revenues and profitability because most of
the marketing programs that the Company supports are short in duration. The
Company's activity level on a particular marketing program is often concentrated
around the consumers' final response date under the program, so that the
Company's revenues from a high-volume program may be concentrated in one or two
quarters. In addition, with premium programs, the volume of consumer requests
can be difficult to predict. To the extent clients have underestimated the
consumer response to their programs and have not provided the Company with
sufficient quantities of merchandise, the Company may not be able to fulfill all
34
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consumer requests in a timely manner. Consequently, the Company may be delayed
in performing a portion of its services and recognizing the related revenue. In
such situations, however, the Company often handles increased consumer inquiry
calls to the Company's call centers and may mail delay card and order
acknowledgment correspondence to consumers. For providing these extra services,
the Company derives additional revenue and gross profit from service fees.
4. THE RECAPITALIZATION:
On November 25, 1997 (the Recapitalization Date), Holdings effected (i) a 1,000
for 1 stock split of its common stock in the form of a stock dividend and (ii) a
recapitalization (the Recapitalization), pursuant to a recapitalization
agreement (the Recapitalization Agreement) under which substantially all of
Holdings' assets and business were transferred to a newly formed subsidiary,
Young America Corporation, and Holdings changed its name to Young America
Holdings, Inc. Holdings expects to conduct substantially all its business and
operations through its new subsidiary Young America Corporation and any future
subsidiaries it may form. As a result of the Recapitalization, approximately 93%
of all classes of the combined capital stock of Holdings was purchased by an
investor group (the Investor Group) including BT Capital Partners, Inc. (BTCP)
and Ontario Teachers' Pension Plan Board (OTPPB), as well as Charles D. Weil,
the current President and Chief Executive Officer of Holdings, and 20 other
members of management (Mr. Weil and the other participating members of
management are referred to herein as the Management Stockholders).
In the Recapitalization, members of the Investor Group purchased newly issued
shares of the common stock of Holdings (the Common Stock) for an aggregate
purchase price of $38,852. Also in the Recapitalization, Holdings borrowed
$80,000 under a senior bridge credit facility (the Bridge Facility) provided by
affiliates of BTCP. Holdings used the proceeds of the issuance of shares of
Common Stock to the Investor Group and the borrowings under the Bridge Facility
to (i) repurchase outstanding shares of Common Stock from the selling
stockholders for an aggregate purchase price of $92,242, (ii) make bonus
payments to management of $13,368 under plans put in place in contemplation of a
change of control of the Company, and $4,877 paid pursuant to phantom stock
arrangements due in such amounts as a result of the change of control of the
Company in the Recapitalization, and (iii) pay certain fees and expenses related
to the Recapitalization. Of the amounts referred to in (i) and (ii) above,
$6,000 was placed in escrow subject to certain indemnification provisions of the
Recapitalization Agreement, $1,170 of which has been recorded by the Company as
estimated compensation charges remaining to be paid related to (ii) above. The
final allocation of the escrow amount will be made in the second quarter of
1999.
Pursuant to the terms of the Recapitalization Agreement, Holdings made an
additional payment of approximately $692 to the selling stockholders and certain
employees of the Company during the second quarter of 1998. Such payment was
based upon the final determination of total stockholders' equity (as defined) of
Holdings as of October 31, 1997, and Holdings' profits or losses (as defined)
for the period ended on the Recapitalization Date. The Company had recorded the
compensation expense associated with such payment based on its best estimates at
the end of 1997. Also in connection with the Recapitalization, Holdings is
obligated to make additional payments to the former majority shareholders
subject to Holdings achieving certain targets defined in the Recapitalization
Agreement. To the extent cumulative excess free cash flow (as defined in the
Recapitalization Agreement) of the Company for the four-year period ending
December 31, 2001 exceeds $93,000, Holdings is required to make an
35
-7-
additional purchase price payment equal to 20% of such excess, subject to a
maximum amount payable of $15,000. Under separate agreements with Mr. Weil,
certain other employees of the Company and the former majority shareholders, a
portion of this additional purchase price payment will be payable to such
individuals. Any payments made to management will result in compensation charges
in the period the amount becomes determinable.
5. CAPITAL STOCK AND STOCKHOLDERS' AGREEMENTS:
The Common Stock consists of three classes: Class A Common Stock, Class B Common
Stock and Class C Common Stock. Except as set forth below, the rights of the
three classes of Common Stock are the same. Under most circumstances, only the
Class A Common Stock has voting rights; however, the affirmative vote of a
majority of the total number of shares of Class B or Class C Common Stock, as
applicable, is required for the issuance or sale of additional shares of Class B
or Class C Common Stock, respectively, the reclassification cancellation, or
retirement of the Class B or Class C Common Stock, respectively, or any
amendment, waiver or corporate transaction that adversely affects the Class B or
Class C Common Stock, respectively. In addition, each share of Class B Common
Stock will be entitled to vote with the Class A Common Stock, voting together as
a single class, on all matters to be voted on by Holdings' shareholders (except
as otherwise required by applicable law) following the occurrence of any of the
following events: (i) Charles D. Weil shall cease to be employed by the Company
for any reason; (ii) Holdings shall not have completed a public offering of its
Common Stock meeting certain requirements by the fifth anniversary of the
Recapitalization Date; (iii) the Company or the Selling Stockholders shall
default on any of the material terms of the Recapitalization; (iv) any
representation or warranty made by Holdings or the selling stockholders with
respect to the Recapitalization shall prove to have been materially false; or
(v) an Approved Sale (as defined below) has been proposed to the board of
directors of Holdings (the Board of Directors) and such a sale is not approved,
for whatever reason, by the Board of Directors within the three days of such
proposal.
Regulated Holders (as defined in Holdings' Articles of Incorporation) who hold
shares of Class A Common Stock may convert such shares into shares of Class B or
Class C Common Stock at any time. Regulated Holders who hold shares of Class B
Common Stock or Class C Common Stock may convert such shares into shares of
Class A Common Stock at any time such conversion is permitted under law.
In connection with the consummation of the Recapitalization, the Company and its
stockholders entered into a stockholders' agreement (the Stockholders'
Agreement). The Stockholders' Agreement contains certain restrictions with
respect to the transferability of Holdings' capital stock and contains a grant
by Holdings to the stockholders of preemptive rights to subscribe for future
issuances of its capital stock and securities convertible or exercisable for
capital stock, subject to certain exceptions. The Stockholders' Agreement also
includes provisions regarding designation of members of the Board of Directors
and other voting arrangements. The Stockholders' Agreement will terminate upon
the earlier of the completion of an Approved Sale (as defined in the
Stockholders' Agreement) or a public offering of Holdings Common Stock, meeting
certain requirements.
Each of the Management Stockholders acquired the shares of Class A Common Stock
held by such Management Stockholder pursuant to a Stock Subscription and
Repurchase Agreement. Each of the agreements provides that upon the occurrence
of certain events including the death, retirement, permanent disability,
resignation for good reason (such as retirement) or
36
-8-
termination without cause of the Management Stockholder, such Management
Stockholder (or his successors) will have the right (within a specified period
of time) to cause Holdings to repurchase his stock. As discussed below,
subsequent to December 31, 1997, Holdings and Mr. Weil terminated such right
granted to Mr. Weil.
The repurchase price to be paid by Holdings for any employee stock repurchased
pursuant to the stock agreements will, in most situations, be the fair market
value for such shares (to be determined by the Board of Directors if the shares
are not then traded publicly, provided that a Management Stockholder may request
an appraisal of the repurchased shares if such Management Stockholder disagrees
with the valuation placed on such shares by the Board of Directors). Certain
employee stock agreements require the Management Stockholder to enter into a
noncompetition agreement with Holdings or receive the lesser of the fair market
value or the original purchase price for the employee stock to be purchased. The
Employee Stock Agreement with Mr. Weil provides that if Mr. Weil is terminated
for cause, Holdings may repurchase his stock at the lesser of its fair market
value or the original purchase price for such shares.
At December 31, 1997, there were 204,696 shares of Class A Common Stock held by
management, including those shares held by Mr. Weil. Since the Company may be
required to redeem these shares in the future, and since such redemption is
outside Holdings' control, these outstanding shares are reported at fair market
value in the accompanying consolidated balance sheet at December 31, 1997 as
Redeemable Class A Common Stock. At December 31, 1997, these shares were valued
at the same per share value determined at the date of the Recapitalization in
November 1997. As further discussed below, subsequent to December 31, 1997, the
arrangement with Mr. Weil was amended such that Mr. Weil will no longer have the
ability to require the Company to redeem his shares (156,221 shares). Future
changes in the carrying value of shares subject to redemption rights will be
reported as compensation expense in accordance with APB Opinion No. 25.
Holdings adopted an employee stock option plan (the Employee Stock Option Plan)
in March 1999 that will provide for grants of shares of nonvoting Class C Common
Stock. The administration of the Employee Stock Option Plan, the selection of
participants and the form and the amounts of the grants is within the sole
discretion of the Compensation Committee of the Board of Directors.
In connection with the Recapitalization, Holdings and its senior stockholders
entered into an equity registration rights agreement (the Equity Registration
Rights Agreement). The Equity Registration Rights Agreement grants the
stockholders that are party thereto demand and incidental registration rights
with respect to shares of capital stock held by them, which rights will be
exercisable at any time after an initial public offering of Holdings' Common
Stock. In addition, BTCP may cause Holdings to conduct an initial public
offering at any time following the sixth anniversary of the Recapitalization.
The Equity Registration Rights Agreement contains customary terms and provisions
with respect to the registration rights contained therein.
On November 25, 1997, the Company and Mr. Ecklund entered into a Put Option
Agreement (the Put Agreement), whereby Mr. Ecklund was granted the right, at any
time after the fifth anniversary of the date of the Put Agreement, to cause
Holdings to redeem at fair market value all or any portion of Mr. Ecklund's
shares in Holdings (134,400 shares having a value of $2,925 at December 31,
1997). Under the Put Agreement, Holdings would not be obligated to redeem
37
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Mr. Ecklund's shares if Holdings is then in default of a payment obligation
under any of Holding's indebtedness for borrowed money or if such redemption
would result in a default under any such indebtedness. Since the Company could
be required to redeem these shares in the future, and since such redemption
would be outside Holdings' control, these outstanding shares are reported at
fair market value in the accompanying consolidated balance sheet at December 31,
1997 as Redeemable Class A Common Stock. At December 31, 1997, these shares were
valued at the same per share value determined at the date of the
Recapitalization in November 1997. Future changes in per share value would cause
the amount classified as Redeemable Class A Common Stock to increase or
decrease, with a corresponding change in stockholders' deficit.
In July 1998, Holdings and Mr. Ecklund terminated the Put Agreement and Holdings
and Mr. Weil terminated the rights of Mr. Weil under his Employee Stock
Agreement to cause Holdings to purchase his shares if a Termination Event, as
defined, occurs with respect to Mr. Weil. Certain stockholders of Holdings
(including Mr. Ecklund and Mr. Weil) have entered into an amended and restated
Equity Registration Rights Agreement that grants Mr. Ecklund new demand
registration rights commencing after the fifth anniversary of the
Recapitalization and grants Mr. Weil new demand registration rights if a
Termination Event occurs with respect to Mr. Weil. Under the amended and
restated Equity Registration Rights Agreement, if Mr. Ecklund or Weil exercises
his demand right with respect to all of his shares of Common Stock, and any
underwriter selected by Mr. Ecklund or Mr. Weil, as the case may be, advises
Holdings that such underwriter cannot sell all such shares in such offering
because such offering would not be large enough, then Mr. Ecklund and Mr. Weil,
as applicable, shall each have the right to require Holdings to sell in such
offering newly issued shares of common stock representing up to 30% of its
shares in any underwritten offering, as the case may be. In addition, if any
underwriter advises Holdings that an offering of all of Mr. Ecklund's or Mr.
Weil's shares, as the case may be, in addition to any other shares that are
proposed to be registered under such registration statement (including shares to
be offered and sold by Holdings), can not be consummated given the then current
market conditions, then Mr. Ecklund's shares would be entitled to be sold before
any shares sold by Holdings or by any other shareholder (including Mr. Weil),
and Mr. Weil's shares would be entitled to be sold before any shares sold by
Holdings or by any other shareholder (other than Mr. Ecklund). If Mr. Ecklund or
Mr. Weil exercises a demand registration right at any time, certain shareholders
of Holdings would have the right to purchase Mr. Ecklund's and/or Mr. Weil's
shares, as the case may be, for their fair market value. As amended and
restated, neither Mr. Ecklund nor Mr. Weil will have any put rights with respect
to shares of Holdings held by them.
Accordingly, at the date the new arrangements became operative, the amount
previously classified as Redeemable Class A Common Stock was reclassified to
Stockholders' Deficit. At December 31, 1997, the aggregate value ascribed to the
Redeemable Class A Common Stock for these shares was $6,349. This amount has
been reclassified to stockholders' deficit at December 31, 1998. In addition,
the Company redeemed Class A Common Stock with an aggregate value of $141 in
1998.
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6. INCOME TAXES:
The income tax provision (benefit) for the years ended December 31, 1998 and
1997 consisted of the following:
1998 1997
------- ----
Current $ 10 $ 6
Deferred (3,752) 417
------- ----
$(3,742) $423
======= ====
The provision (benefit) for income taxes includes a deferred component that
arose from (i) the Company's change in tax status discussed in Note 2 and (ii)
the recording of certain items in different periods for financial reporting and
income tax purposes. As of December 31, 1998 and 1997, the tax effects of
temporary differences which give rise to a significant portion of deferred tax
assets (liabilities) are as follows:
1998 1997
------- -------
Slippage $(2,142) $(1,458)
Net operating losses 4,350 608
Deferred compensation 433 433
Lease obligation write-off 315 --
Self-insurance reserves 215 175
Depreciation (173) (207)
Other 337 32
------- -------
$ 3,335 $ (417)
======= =======
The Company's current period net operating loss will be available to offset
future tax liabilities through 2018. Based upon the Company's history of prior
operating earnings and its expectations for the future, management of the
Company has determined that it is more likely than not that taxable income will
be sufficient to utilize such attributes in their carryforward periods.
39
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A reconciliation of income taxes computed at the statutory rates to the reported
income tax provision (benefit) for the years ended December 31, 1998 and 1997 is
as follows:
1998 1997
------- -------
Taxes at federal statutory rates $(3,439) $(1,926)
State taxes, net of federal benefit (336) --
Benefits accruing to former S corporation
stockholders -- 625
Liability triggered by the Company's
change in tax status -- 928
Nondeductible recapitalization expenses -- 688
Other 33 108
------- -------
Provision (benefit) for income taxes $(3,742) $ 423
======= =======
7. EMPLOYMENT AGREEMENTS AND COMPENSATION MATTERS:
On November 24, 1997, Holdings and Mr. Weil entered into an employment agreement
(the Weil Employment Agreement) pursuant to which Mr. Weil has agreed to serve
as the President and Chief Executive Officer of Holdings. The term of the Weil
Employment Agreement is initially three years and expires on November 24, 2000,
unless terminated earlier in accordance with its terms. Base compensation under
the Weil Employment Agreement is $300 per year and will increase at a minimum of
5% each calendar year beginning January 1, 1999. If Holdings terminates Mr.
Weil's employment without cause or Mr. Weil terminates his employment for good
reason, he is entitled to receive (i) his base salary for an eighteen-month
period following the effective date of termination and (ii) a pro rated portion
of his annual incentive bonus effective as of the date of termination.
During 1997, Mr. Weil participated in a special incentive bonus plan that was
based upon the achievement of certain performance targets for that year. Mr.
Weil was paid $900 with respect to such incentive bonus plan in January 1998 and
an additional $261 in March 1998 (such amounts were accrued as of December 31,
1997) pursuant to such incentive bonus plan following the approval of the annual
financial statements by the Board of Directors. In addition, on January 7, 1998,
Mr. Weil received a bonus of $500 in satisfaction of certain obligations of
Holdings to Mr. Weil. For 1998 and all subsequent years under the Weil
Employment Agreement, Mr. Weil will participate in the Company's Annual
Management Incentive Plan (discussed below) as such plan may from time to time
be amended.
In connection with the Recapitalization and pursuant to the terms of the old
employment agreement, Mr. Weil received a special bonus from the Company of
$9,218. In addition, Mr. Weil may be entitled to receive up to an additional
$3,216, representing his pro rata portion of post-Recapitalization payments that
may be made to the Selling Stockholders and Messrs. Weil, Stinchfield and
Ferguson under the terms of the Recapitalization Agreement, as described in Note
4.
Effective December 2, 1998, the Company and Roger D. Andersen entered into an
employment agreement (the Andersen Employment Agreement) pursuant to which Mr.
Andersen has agreed to serve as Chief Financial Officer of YAC. The Andersen
Employment Agreement expires on December 2, 1999, subject to automatic
twelve-month renewals on each anniversary
40
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date thereafter, if not canceled by either party. Base compensation under the
Andersen Employment Agreement is $210 per year, and such amount will increase at
a minimum of 3% per year on the anniversary date of such agreement. Mr. Andersen
is eligible to participate in the Company's Management Incentive Plan, Profit
Sharing Plan and Employee Stock Option Plan. If the Company terminates Mr.
Andersen without cause, he is entitled to receive his base salary for twelve
months and an additional lump-sum severance payment up to an amount of $210,
based on the performance of the Company and Mr. Andersen's years of service with
the Company. If Mr. Andersen terminates his employment for good reason after
three years of continuous employment with the Company, he is entitled to 50% of
his base salary for six months.
On November 25, 1997, Holdings adopted the 1997 Management Recognition,
Transition and Equity Bonus Plan for officers and certain key management
employees, pursuant to which Holdings paid $2,650 in cash bonuses to certain
officers and employees of the Company. In connection with the Recapitalization,
the Company also paid a $600 special bonus to an employee pursuant to another
agreement. A portion of the proceeds of such bonuses were used to purchase Class
A Common Stock in connection with the Recapitalization.
The Company had a phantom stock bonus plan with two of its employees, whereby
each employee was awarded shares of phantom stock. Under the plan, additional
compensation payments to these employees were triggered by the occurrence of
certain events, as defined in the agreements, including certain distributions
paid to the Company's stockholders, the termination of employment, or the change
in control of the Company. Compensation expenses under this plan were
approximately $4,732 and $298 for the years ended December 31, 1997 and 1996,
respectively. In connection with the Recapitalization, this plan was terminated,
and as of December 31, 1997, the Company had paid substantially all of its
obligations under the plan.
8. COMMITMENTS AND CONTINGENCIES:
MANAGEMENT AGREEMENT
In connection with the Recapitalization, Holdings, BTCP and OTPPB entered into a
management agreement (the Management Agreement) relating to certain services to
be provided to Holdings in the future by BTCP and OTPPB. Under the Management
Agreement, BTCP and OTPPB will provide Holdings with, among other services,
financial and strategic planning and management consulting services throughout
the term of the Stockholders' Agreement. In consideration for the services
provided to Holdings under the Management Agreement, Holdings will pay annual
fees of $187 and $63 to BTCP and OTPPB, respectively. Also in connection with
the Recapitalization, Holdings paid BTCP and OTPPB one-time transaction fees of
$1,125 and $375, respectively, and reimbursed or paid expenses (including legal
and accounting fees and expenses) of BTCP and OTPPB of approximately $1,000 and
$50, respectively, incurred by such entities in connection with the
Recapitalization.
41
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LEASES
The Company has operating leases for warehouse space and equipment. The
approximate future minimum payments under these obligations for the years ending
December 31 are as follows:
1999 $6,261
2000 5,345
2001 2,320
2002 846
2003 324
Thereafter 27
Total rent expense was $5,163, $2,640 and $2,008 for the years ended December
31, 1998, 1997 and 1996, respectively.
GUARANTEES
Sweepstakes performance bonds are guaranteed for certain clients based on
certain financial criteria. Holdings had guaranteed approximately $9,978 and
$6,200 in performance bonds for various clients as of December 31, 1998 and
1997, respectively. The Company also obtains an indemnity agreement from these
clients indemnifying the Company from obligations under the performance bonds.
9. LONG-TERM DEBT:
1998 1997
------- -------
Bridge facility $ -- $80,000
Senior subordinated notes 80,000 --
------- -------
Total $80,000 $80,000
======= =======
THE BRIDGE FACILITY
On the Recapitalization Date, Holdings borrowed $80 million under a Senior
Credit Agreement with Bankers Trust Company as agent (BTCO) from Bankers Trust
New York Corporation (BTNY), an affiliate of BTCP, as initial lender (the Bridge
Facility). The Bridge Facility was repaid by Holdings on February 23, 1998 with
the proceeds from the issuance by YAC of senior subordinated notes on that date,
and the associated deferred financing fees of $3.3 million were written off and
are included in interest expense in the accompanying consolidated statements of
operations.
THE NOTES OFFERING
On February 23, 1998, YAC issued $80,000 principal amount of 11 5/8% Series A
Senior Subordinated Notes due in 2006 (the Old Notes). In September 1998,
pursuant to a registration statement file with the Securities and Exchange
Commission, YAC exchanged all of the Old Notes for an equal aggregate principal
amount of Series B Senior Subordinated notes due 2006 (the New Notes, and
together with the Old Notes, the Notes) having substantially the same terms as
the Old Notes. Interest on the Notes is payable semiannually in arrears on
February 15 and August 15 of each year, beginning August 15, 1998. The proceeds
from the issuance of the
42
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Old Notes were distributed and loaned by YAC to its parent, Holdings, and used
by Holdings to repay amounts outstanding under the Bridge Facility.
The Notes are unconditionally guaranteed on an unsecured senior subordinated
basis by Holdings. The guarantee, which is full and unconditional and which is
being provided on a joint and several basis with any future subsidiaries of YAC
that become guarantors, is a general unsecured obligation of Holdings. The
guarantees are subordinated to all existing and future senior indebtedness of
Holdings. Separate financial statements of YAC have not been presented as
management has determined that they would not be material to investors given
that Holdings has provided a guarantee of the Notes.
In connection with the Recapitalization discussed in Note 4, substantially all
of Holdings' assets and business were transferred to YAC. The following table
presents summarized pro forma financial information for Holdings and YAC as if
the guarantee structure had been in effect for all periods presented. The only
substantial asset retained by Holdings was certain real property which is leased
to YAC at cost for use in its operations.
1998 1997 1996
--------- --------- --------
Revenues:
Holdings $ -- $ -- $ --
YAC 238,960 175,297 135,716
--------- --------- --------
Consolidated $ 238,960 $ 175,297 $135,716
========= ========= ========
Gross profit:
Holdings $ -- $ -- $ --
YAC 15,161 29,638 20,132
--------- --------- --------
Consolidated $ 15,161 $ 29,638 $ 20,132
========= ========= ========
Net income (loss):
Holdings $ -- $ -- $ --
YAC (6,372) (5,925) 8,432
--------- --------- --------
Consolidated $ (6,372) $ (5,925) $ 8,432
========= ========= ========
Current assets:
Holdings $ 373 $ 357 $ --
YAC 29,697 30,198 30,193
--------- --------- --------
Consolidated $ 30,070 $ 30,555 $ 30,193
========= ========= ========
Noncurrent assets:
Holdings $ 2,512 $ 2,667 $ 2,674
YAC 13,080 8,520 3,576
--------- --------- --------
Consolidated $ 15,592 $ 11,187 $ 6,250
========= ========= ========
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Current liabilities:
Holdings $ -- $ -- $ --
YAC 30,110 19,419 24,370
--------- --------- --------
Consolidated $ 30,110 $ 19,419 $ 24,370
========= ========= ========
Noncurrent liabilities:
Holdings $ -- $ -- $ --
YAC 80,391 80,000 --
--------- --------- --------
Consolidated $ 80,391 $ 80,000 $ --
========= ========= ========
The Notes are redeemable at the option of YAC prior to February 15, 2002.
Subsequent to that date, the Notes are redeemable, in whole or in part, at the
option of YAC at the following redemption prices set forth herein, plus accrued
and unpaid interest to the date of redemption set forth below:
Percentage
----------
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, each holder
of Notes will have the right to require YAC to repurchase such holder's Notes at
a price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the repurchase date.
The Notes are not subject to any sinking fund requirement. The Notes are general
unsecured obligations of YAC and are subordinated in right of payment to all
existing and future senior indebtedness of YAC, including indebtedness under the
New Credit Facility (see below).
The indenture under which the Notes were issued contains certain covenants with
respect to YAC and any future subsidiaries that will restrict, among other
things, the incurrence of additional indebtedness, the payment of dividends and
other restricted payments, the creation of certain liens, the use of proceeds
from sales of assets and subsidiary stock, and transactions with affiliates. The
indenture also restricts the Company's ability to consolidate or merge with or
into, or to transfer all or substantially all of its assets to, another entity.
The Company was in compliance with all such covenants as of December 31, 1998.
CREDIT FACILITY
On April 7, 1998, YAC entered into a revolving credit facility with Norwest Bank
Minnesota, N.A. (Norwest). The facility was amended on November 16, 1998 (the
Credit Facility).
Under the Credit Facility, borrowings are available equal to 85% of eligible
receivables, subject to certain terms and conditions. The Credit Facility
provides a $10,000 revolving credit facility,
44
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with an imbedded sublimit of $1,000 available for letters of credit. Borrowings
accrue interest at Norwest's base rate plus 2%. The Credit Facility also
provides for an unused line fee of 1/2 of 1% per annum on any undrawn amounts.
The Credit Facility has a final maturity date of March 31, 2001, and does not
require scheduled interim reductions or payments, although YAC is permitted to
make optional prepayments and commitment reductions.
The Credit Facility is secured by a first priority security interest in the
accounts receivable and related general intangibles of YAC. The Credit Facility
includes certain restrictive covenants including restriction of acquisitions,
investments, dividends and other indebtedness (including capital leases).
Additionally, the Credit Facility contains a cross default provision with the
Notes. The Credit Facility was amended on March 12, 1999 (the Amended Facility).
The Amended Facility provides for borrowings to accrue interest, at the option
of YAC, at either Norwest's base rate or at an interest rate equal to the London
interbank rate for Eurodollar deposits for one, two- or three-month interest
periods plus 2.50%. The Amended Facility revises the restrictive covenants to
include limitations on capital expenditures, and commencing with the quarter
ending December 31, 1999, requires the Company to maintain its Interest Coverage
Ratio (as defined in the Amended Facility), determined at the end of each
quarter, at not less than 1.35 to 1. The Company was in compliance with all
required covenants as of December 31, 1998. There were no amounts outstanding
under the Credit Facility as of December 31,1998.
10. SEGMENT REPORTING:
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company provides consumer interactive
processing services for its customers and operates as a single reportable
business segment. The Company internally evaluates its business principally by
revenue category; however, because of the similar economic characteristics of
the operations, including the nature of services and the customer base, those
operations have been aggregated following the provisions of SFAS No. 131 for
segment reporting purposes.
The following is a summary of the approximate composition of revenues by revenue
category for the years ended December 31:
1998 1997 1996
-------- -------- --------
CIP services $ 56,509 $ 60,641 $ 44,832
Rebate revenues 162,844 74,864 59,079
Postage and freight billings 19,607 39,792 31,805
-------- -------- --------
$238,960 $175,297 $135,716
======== ======== ========
45
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The Company sells its services to consumer product and consumer service
companies. Set forth below is revenue information for the years 1998, 1997 and
1996 for each client that accounted for 5% or more of the Company's total
revenue in each respective year. Client A, B and C may represent different
entities in each year:
1998 1997 1996
------------------- ------------------- -------------------
Client A $52,800 22.1% $42,836 24.4% $28,420 20.9%
Client B 21,393 9.0 11,572 6.6 11,418 8.4
Client C 13,607 5.7 9,448 5.4 * *
* Less than 5% of total revenue.
As of December 31, 1998, three clients individually representing 5% or more of
the Company's total accounts receivable represented approximately $6,489 of
accounts receivable, or 40% of the total accounts receivable balance at that
date. As of December 31, 1997, three clients individually representing 5% or
more of the Company's total accounts receivable represented approximately $2,129
of accounts receivable, or 19% of the total accounts receivable balance at that
date.
11. RESERVE FOR IVR LEASES:
During the first quarter of 1998, the Company entered into operating leases to
increase its interactive vote recording (IVR) capacity. These leases were
entered into specifically to meet the estimated requirements of a new customer.
Due to a variety of factors, the Company made a decision to terminate its
relationship with this customer during the fourth quarter of 1998. As a result,
the Company has lease obligations from which it will receive no future economic
benefit. During the fourth quarter, the Company recorded a special charge of
$850 to reserve for these future obligations. This amount has been recorded as a
separate component of operating income in the accompanying consolidated
statement of operations and is included in current and long-term liabilities in
the accompanying balance sheet.
46
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
21
47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers and directors of Young America and Holdings are as
follows:
NAME AGE POSITION(S)
- ---- --- ----------------------------------
Charles D. Weil................... 54 President, Chief Executive Officer
and Director
Robert Marakovits................. 39 Chairman of the Board of Directors
Roger D. Andersen................. 45 Vice President of Finance, Chief
Financial Officer, Treasurer and
Secretary
Jay F. Ecklund.................... 62 Director
J. Mark A. MacDonald.............. 43 Director
CHARLES D. WEIL joined the Company in July 1993 as its President and Chief
Operating Officer and became a director of the Company in November 1997. Mr.
Weil was appointed President and Chief Executive Officer of each of Young
America and Holdings following the consummation of the Recapitalization. From
1992 until he joined the Company, Mr. Weil was an independent consultant. From
1991 to 1992 Mr. Weil served as President and Chief Operating Officer of ConAgra
Frozen Foods. Prior to that time he held senior management positions with Nestle
USA, Inc. and General Mills, Inc. Mr. Weil holds a B.S. degree from Dartmouth
College and an M.B.A. from the Amos Tuck School of Business Administration.
ROBERT MARAKOVITS has been a Managing Director of BTCP since October 1993
and he was a Vice President of BTCP from June 1988 to October 1993. Mr.
Marakovits also serves on the boards of directors of Learningsmith, Inc.,
Classic communications, Inc. and National Catalog Corporation. He has been a
director of Holdings since the Recapitalization.
ROGER D. ANDERSEN joined the Company in November 1998 as Vice President of
Finance, Chief Financial Officer, Treasurer and Secretary of each of Young
America and Holdings. He was previously Senior Vice President and CFO of
Pepsi-Cola General Bottlers in Chicago from 1996 to 1998. He also held similar
positions with Rollerblade, Inc. from 1992 to 1996, and the International
Division of Tonka Corporation from 1989 to 1991. In addition, Mr. Andersen held
various financial management positions with PepsiCo, Inc., including several
international assignments in Asia and Latin America. Mr. Andersen holds a B.A.
degree from Wheaton College and an MBA from Oregon State University.
JAY F. ECKLUND was Chairman and Chief Executive Officer of the Company
from 1975 until the consummation of the Recapitalization. Mr. Ecklund has been a
director of Holdings since 1975. Upon the consummation of the Recapitalization,
Mr. Ecklund is entitled to continue as a director of Holdings in accordance with
the terms of the Stockholders' Agreement. Mr. Ecklund is also a director of
Young America.
J. MARK A. MACDONALD has been a Portfolio Manager with the Merchant
Banking Group of OTPPB since 1995. From 1991 to 1995, Mr. MacDonald was a
partner with Enterprise Management Group/Premier Capital where he provided
investment management, corporate development, restructuring and financial and
fiscal advisory services to corporate and other clients. Mr. MacDonald also
serves on the boards of directors of MetroNet Communications and Q/Media
Services Corporation. He has been a director of Holdings since the
Recapitalization.
All of the outstanding capital stock of Young America is owned by
Holdings. Accordingly, each director on the board of directors of Young America
is nominated and elected by Holdings. Currently Messrs. Marakovits, MacDonald,
Ecklund and Weil serve as directors of Young America. Young America has an
executive committee comprised of Messrs. Marakovits, MacDonald and Weil.
The members of Holdings' Board of Directors are nominated pursuant to the
terms of a stockholders' agreement executed in
22
48
connection with the Recapitalization. Under the Stockholders' Agreement, BTCP is
entitled to designate two directors to Holdings' Board of Directors, each of
OTPPB and Jay F. Ecklund is entitled to designate one director and Holdings'
chief executive officer serves as a director. In addition, BTCP and OTPPB are
entitled to designate jointly up to three independent directors to the Board of
Directors. Currently Messrs. Marakovits, MacDonald, Ecklund and Weil serve as
directors of Holdings.
COMMITTEES OF THE BOARD OF DIRECTORS
The Stockholders' Agreement provides for the creation of a three-person
executive committee of Holdings' Board of Directors (the "Executive Committee").
Under the terms of the Stockholders' Agreement, the Executive Committee is to
include the Chief Executive Officer of Holdings, one director appointed by BTCP
and one director appointed by OTPPB. Currently Messrs. Marakovits, MacDonald and
Weil serve on the Executive Committee. In addition, the Board of Directors has a
compensation committee (the "Compensation Committee") that determines
compensation for executive officers of the Company and that will administer any
stock option plan adopted by Holdings. Currently Messrs. Marakovits, MacDonald
and Weil serve on the Compensation Committee. At such time as BTCP and OTPPB
take action to nominate and elect one or more independent directors to the Board
of Directors, the Board of Directors will create an audit committee (the "Audit
Committee") and will appoint one or more independent directors to such Audit
Committee. The Audit Committee will review the scope and results of audits and
internal accounting controls and all other tasks performed by the independent
public accountants of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the formation of the Compensation Committee in February 1998,
Holdings did not have a special committee of the Board of Directors to deal with
compensation issues. Prior to the Recapitalization, as a member of the Board of
Directors, Mr. Ecklund, the former Chief Executive Officer of Holdings, made
final determinations with respect to the compensation of executives of the
Company.
COMPENSATION OF DIRECTORS
The Company may compensate directors for services provided in such
capacity in addition to reimbursing all out-of-pocket expenses incurred by such
directors in connection with travel and other costs associated with attending
meetings of the Board and any committees thereof.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation for the year ended
December 31, 1998 for the Company's Chief Executive Officer and the Company's
former Vice President of Finance and Chief Financial Officer (the "Named
Executive Officers"). No other person serving as an executive officer of the
Company at December 31, 1998 received in excess of $100,000 in total
compensation in 1998.
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION OPTIONS LTIP ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS GRANTED PAYOUTS(2) COMPENSATION(3)
- --------------------------- ----------- ------ ----- ------- ---------- ---------------
Charles D. Weil ....................... 1998 $ 300,000 -- -- $ 34,120 $ 13,973
President and Chief Executive Officer 1997 264,133 1,161,000 -- 9,718,082 23,708
L. Joseph Kulas ....................... 1998 154,295 -- -- -- 3,178
FormerVice President of Finance, 1997 150,000 45,000 -- 260,000 22,058
Chief Financial Officer,
Secretary and Treasurer (1)
- ----------
(1) Mr. Kulas resigned as an executive officer on December 2, 1998.
(2) LTIP payments include a payment to Mr. Kulas in 1997 made pursuant to the
Company's 1997 Management Recognition, Transition and Equity Bonus Plan
and payments made to Mr. Weil under the Old Employment Agreement (as
defined below) including his sale of the Company bonus.
23
49
(3) Other compensation includes contributions to defined contribution plans
and payments related to taxable insurance benefits.
EMPLOYMENT AGREEMENTS
Charles D. Weil
On November 24, 1997, the Company and Charles D. Weil entered into an
employment agreement (the "Weil Employment Agreement") pursuant to which Mr.
Weil has agreed to serve as the President and Chief Executive Officer of each of
Young America and Holdings. The term of the Weil Employment Agreement is
initially three years and expires on November 24, 2000, unless terminated
earlier in accordance with its terms. The Weil Employment Agreement replaced an
earlier agreement between the Company and Mr. Weil (the "Old Employment
Agreement"). Base compensation under the Weil Employment Agreement is $300,000
per year and such amount will increase at a minimum of 5% each calendar year
beginning January 1, 1999. If the Company terminates Mr. Weil's employment
without cause or Mr. Weil terminates his employment for good reason, he is
entitled to receive (i) his base salary for an eighteen-month period following
the effective date of termination and (ii) a pro-rated portion of his annual
incentive bonus under the Company's Annual Management Incentive Plan (as defined
below) as of the date of termination. At December 31, 1998, the amount payable
(in addition to benefits continuation and without giving effect to withholding
taxes) to Mr. Weil pursuant to the foregoing would have been approximately
$450,000 in the aggregate. At such date, no portion of the annual incentive
bonus under such Plan would have been payable based on the Company's operating
results in 1998.
During 1997, Mr. Weil participated in a special incentive bonus plan which
was based upon the achievement of certain performance targets for that year. Mr.
Weil was paid $900,000 with respect to such incentive bonus plan in January 1998
and an additional $261,000 pursuant to such incentive bonus plan in March 1998
following the approval of the annual financial statements of the Company by the
Board of Directors. In addition, on January 7, 1998, the Company paid Mr. Weil a
bonus of $500,000 in satisfaction of certain obligations of the Company to Mr.
Weil under the Old Employment Agreement. For 1998 and all subsequent years under
the Weil Employment Agreement, Mr. Weil will participate in the Company's Annual
Management Incentive Plan, as such plan may from time to time be amended.In
connection with the Recapitalization and pursuant to the terms of the Old
Employment Agreement, Mr. Weil received a "Sale of the Company" bonus from the
Company of $9.2 million. The foregoing amounts are included in the amounts shown
for Mr. Weil in the summary compensation table. In addition, Mr. Weil may be
entitled to receive up to an additional $3.2 million, representing his pro rata
portion of post-Recapitalization payments that may be made to the Selling
Stockholders and Messrs. Weil, Stinchfield and Ferguson under the terms of the
Recapitalization Agreement. See Note 7 of audited consolidated financial
statements.
Roger D. Andersen
Effective December 2, 1998 the Company and Roger D. Andersen entered into
an employment agreement (the "Andersen Employment Agreement") pursuant to which
Mr. Andersen has agreed to serve as Chief Financial Officer of YAC. The Andersen
Employment Agreement expires on December 2, 1999, subject to automatic
twelve-month renewals on each anniversary date thereafter, if not canceled by
either party. Base compensation under the Andersen Employment Agreement is $210
per year, and such amount will increase at a minimum of 3% per year on the
anniversary date of such agreement. The Company will reimburse Mr. Andersen for
expenses related to the relocation of his family to Minnesota. In addition, Mr.
Andersen received a $20 signing bonus that was paid in January 1999. Mr.
Andersen is eligible to participate in the Company's Management Incentive Plan,
Profit Sharing Plan and Employee Stock Option Plan. If the Company terminates
Mr. Andersen without cause, he is entitled to receive his base salary for twelve
months and an additional lump sum severance payment up to an amount of $210
based on the performance of the Company and Mr.Andersen's years of service with
the Company. If Mr. Andersen terminates his employment for good reason after
three years of continuous employment with the Company, he is entitled to 50% of
his base salary for six months.
Employment Agreement with former Chief Financial Officers
Pursuant to an employment agreement with the Company, (the "Kulas
Employment Agreement") Mr. Kulas served as the Chief Financial Officer of each
of Young America and Holdings. The Kulas Employment Agreement expired on August
1, 1998, subject to an automatic twelve- month renewal, if not canceled by
either party. Base compensation under the Kulas Employment Agreement was
$150,000 per year, subject to reasonable annual increases as determined by the
Company. During 1997, Mr. Kulas participated in the Company's management
incentive plan for 1997 which was based upon achievement of performance targets
for that year. Mr. Kulas also received a signing bonus of $1,000 per month
during 1997. Mr. Kulas resigned as an executive officer of the Company effective
December 2, 1998, and as an employee of the Company effective December 4, 1998.
Pursuant to the terms of a Voluntary
24
50
Resignation Agreement (the "Kulas Resignation Agreement"), the Company
repurchased the shares of Class A Common Stock owned by Mr. Kulas at the
original purchase price of $60.
Change in Control Agreements
In February 1997, the Company entered into change in control agreements
with four persons currently employed by the Company, including Michael J.
Larson, Barbara K. Spiess, David Q. Ferguson, and Frederick J. Stinchfield (the
"Change in Control Agreements"). Each Change in Control Agreement provided that
if the applicable employee is terminated by the Company without cause or such
employee leaves the employ of the Company for good reason following a Change in
Control (as defined in such Change in Control Agreement), the Company will pay
to the employee his or her annual base salary and the total commissions earned
for the preceding twelve-month period and will continue the employee's benefits
for the earlier of twelve months or until the employee obtains full time
employment. As of December 31, 1998, the Company had not made any payments under
the Change in Control Agreements. Had a Change in Control (as so defined)
occurred as of December 31, 1998, the minimum aggregate amount payable (in
addition to benefits continuation and without giving effect to withholding
taxes) under change in control agreements would have been approximately $.9
million. Such amount may increase based on the operating results of the Company.
EMPLOYEE STOCK OPTION PLAN
In March 1999, Holdings adopted an employee stock option plan (the "Stock
Option Plan") pursuant to which options to purchase up to 338,824 shares of
nonvoting Class C Common Stock, representing 15% of the fully-diluted Common
Stock of Holdings, may be granted to eligible employees of the Company.
The Stock Option Plan is a time vesting plan with granted options vesting
over a four year period. The optionsgranted under the Stock Option Plan are not
intended to qualify as "incentive stock options" under the provisions of Section
422 of the Internal Revenue Code of 1986, as amended. The administration of the
Stock Option Plan, the selection of participants and the form and the amounts of
the grants are within the sole discretion of the Compensation Committee.
ANNUAL MANAGEMENT INCENTIVE PLAN
The Company has implemented an annual bonus plan (the "Annual Management
Incentive Plan") for certain employees (including Messrs. Weil and Andersen)
pursuant to which eligible members of management will each be entitled to
receive predetermined percentages of their base salaries if the Company's EBITDA
(as defined in the Annual Management Incentive Plan) exceeds certain targets,
or, in the case of certain eligible employees, the achievement of certain
personal performance targets. The terms of the Annual Management Incentive Plan
utilized during any year and the eligible employees under each plan are within
the sole discretion of the Compensation Committee of the Board of Directors. No
payments in respect to the year 1998 were made under the Plan.
EMPLOYEE 401(k)/PROFIT-SHARING PLAN
The Company sponsors a qualified 401(k)/profit-sharing plan under which
eligible employees (as defined in the plan document) are entitled to share in a
bonus pool (with each eligible employee sharing in the pool pro-rata based upon
such employee's base salary) if the Company's EBITDA exceeds a predetermined
target level established annually by the Compensation Committee of the Board of
Directors. No payments in respect to the year 1998 were made under the plan.
1997 MANAGEMENT RECOGNITION, TRANSITION AND EQUITY BONUS PLAN
On November 25, 1997, Holdings adopted the 1997 Management Recognition,
Transition and Equity Bonus Plan for officers and certain key management
employees, pursuant to which Holdings paid one-time cash bonuses totaling $2.7
million to certain officers and employees of the Company (including Mr. Kulas).
A portion of the proceeds of such bonuses was used to purchase Class A Common
Stock in connection with the Recapitalization.
PHANTOM STOCK AGREEMENTS
25
51
In December 1991, the Company granted certain rights to each of Frederick
H. Stinchfield and David Q. Ferguson under phantom stock agreements entered into
with such employees. Such phantom stock agreements provided for the Company to
make payments based on the increase in book value or, in the case of a sale of
the Company, the value paid in such transaction. In connection with the
Recapitalization, Messrs. Stinchfield and Ferguson received payments in respect
of their rights under the phantom stock agreements of $2.4 million and $2.2
million, respectively. In addition, Messrs. Stinchfield and Ferguson may be
entitled to receive additional payments of up to $499,000 and $446,000,
respectively, representing their pro rata portion of post-Recapitalization
payments that may be made to the Selling Stockholders and Messrs. Weil,
Stinchfield and Ferguson under the terms of the Recapitalization Agreement. See
"Note 4 of the audited consolidated financial statements".
26
52
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of the outstanding capital stock of Young America is owned by
Holdings. The following table sets forth certain information regarding the
beneficial ownership of the Class A Common Stock of Holdings by (i) each person
known by Holdings to own beneficially more than 5% of the outstanding shares of
Class A Common Stock, (ii) each person who is a director of Holdings or Young
America, (iii) each Named Executive Officer and (iv) all directors and executive
officers of Holdings or Young America as a group. Unless otherwise indicated,
each of the stockholders has sole voting and investment power with respect to
the shares beneficially owned.
PERCENTAGE OF
NUMBER OF SHARES OF OWNERSHIP OF CLASS A
NAME AND ADDRESS CLASS A COMMON STOCK(1) COMMON STOCK
- ---------------- ----------------------- ------------
BT Capital Partners, Inc.(2) ................. 1,029,445(3) 58.9%
Ontario Teachers' Pension Plan Board(2) ...... 396,710(4) 30.0
Jay F. Ecklund(2) ............................ 134,400 10.3
Robert Marakovits(2)(5) ...................... 1,029,445(3) 58.9
J. Mark A. MacDonald(2)(6) ................... 396,710(4) 30.0
Charles D. Weil(2) ........................... 156,221 12.0
All directors and executive officers as a
group(5)(6) (4 persons) .................... 1,716,776(3)(4) 97.9
- ----------
(1) The amounts and percentages of capital stock beneficially owned are
reported on the basis of regulations of the Commission governing the
determination of beneficial ownership of securities. Under the rules of
the Commission, a person is deemed to be a "beneficial owner" of a
security if that person has or shares "voting power," which includes the
power to vote or to direct the voting of such security, or "investment
power," which includes the power to dispose of or to direct the
disposition of such security. A person is also deemed to be a beneficial
owner of any securities of which that person has a right to acquire
beneficial ownership within 60 days. Securities that can be so acquired
are deemed to be outstanding for purposes of computing such person's
ownership percentage, but not for purposes of computing any other person's
percentage. Under these rules, more than one person may be deemed a
beneficial owner of the same securities and a person may be deemed to be a
beneficial owner of securities as to which such person has no economic
interest.
(2) The address of BTCP and Mr. Marakovits is 130 Liberty Street, New York,
New York 10006; the address of OTPPB and Mr. MacDonald is 5650 Yonge
Street, North York, Ontario Canada M2M 4H5; the address of Messr. Weil,
is 717 Faxon Road, Young America, Minnesota 55397 and the address of Jay
F. Ecklund is Pier 66 Resort & Marina, 2301 Southeast 17th Street, Ft.
Lauderdale, Florida 33316. BTCP is the private equity investing arm of,
and a wholly owned subsidiary of, Bankers Trust Corporation.
(3) Includes 442,884 shares of Class B Common Stock that are convertible
into Class A Common Stock. The Class B Common Stock generally is not
entitled to vote; however, as described below, upon the occurrence of
certain events, the Class B Common Stock will (except as otherwise
required by applicable law) be entitled to vote with the Class A Common
Stock, voting together as a single class, on all matters to be voted on by
Holdings' shareholders.
(4) Includes 18,437 shares of Class C Common Stock that are convertible into
Class A Common Stock. If OTPPB were to convert all 172,727 of the shares
of Class C Common Stock its holds into shares of Class A Common Stock, it
would hold approximately 37.3% of the outstanding voting capital stock of
Holdings. However, OTPPB has advised Holdings that OTPPB is prohibited by
law from owning more than 30.0% of the outstanding voting capital stock of
any company.
(5) Mr. Marakovits is a Managing Director of BTCP. Mr. Marakovits disclaims
any beneficial ownership of the shares of Holdings held by BTCP.
(6) Mr. MacDonald is a Portfolio Manager of OTPPB. Mr. MacDonald disclaims any
beneficial ownership of the shares of Holdings held by OTPPB.
DESCRIPTION OF CAPITAL STOCK; SBIC RESTRICTIONS ON BTCP
Young America's capital stock consists of 1,000 shares of common stock,
all of which have been issued and are outstanding and are held of record by
Holdings. Holdings' Common Stock consists of three classes, Class A Common
Stock, Class B Common Stock and Class C Common Stock. As of March 15, 1999,
there were outstanding 1,293,133 shares of Class A Commons Stock of which 37,678
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constitute Redeemable Class A Common Stock, 442,884 shares of Class B Common
Stock, and 172,727 shares of Class C Commons Stock. Except as set forth below,
the rights of the three classes of Common Stock are the same. Under most
circumstances, only the Class A Common Stock has voting rights, however, (i) the
affirmative vote of a majority of the total number of shares of Class B Common
Stock voting at a meeting at which a quorum is present, voting separately as a
class, is required for the issuance or sale of additional shares of Class B
Common Stock, the reclassification, cancellation or retirement of the Class B
Common Stock or any amendment, waiver or corporate transaction that adversely
affects the Class B Common Stock and (ii) the affirmative vote of a majority of
the total number of shares of Class C Common Stock voting at a meeting at which
a quorum is present, voting separately as a class, is required for the issuance
or sale of additional shares of Class C Common Stock, the reclassification,
cancellation or retirement of the Class C Common Stock or any amendment, waiver
or corporate transaction that adversely affects the Class C Common Stock.
Regulated Holders (as defined in Holdings' Articles of Incorporation) who hold
shares of Class A Common Stock may convert such shares into shares of Class B or
Class C Common Stock at any time. Regulated Holders who hold shares of Class B
Common Stock or Class C Common Stock may convert such shares into shares of
Class A Common Stock at any time such conversion is permitted under law.
As a licensed small business investment company (an "SBIC"), BTCP is
subject to certain restrictions imposed upon SBICs by the regulations
established and enforced by the United States Small Business Administration.
Among these restrictions are certain limitations on the extent to which an SBIC
may exercise control over companies in which it invests. As a result of these
restrictions, unless certain events occur, BTCP may not own or control a
majority of the outstanding voting stock of Holdings or designate 50% or more of
the members of the Board of Directors. Accordingly, while BTCP owns a majority
of the Common Stock of Holdings, BTCP owns less than a majority of Holdings'
voting stock. Each share of Class B Common Stock (all of which is held by BTCP)
will be entitled to vote, at the option of BTCP, with the Class A Common Stock,
voting together as a single class, on all matters to be voted on by Holdings'
shareholders (except as otherwise required by applicable law) following the
occurrence of any of the following events: (i) Charles D. Weil shall cease to be
employed by the Company for any reason; (ii) Holdings shall not have completed a
public offering of its Common Stock meeting certain requirements by the fifth
anniversary of the Recapitalization Date; (iii) the Company or the Selling
Stockholders shall default on any of the material terms of the Recapitalization;
(iv) any representation or warranty made by Holdings or the Selling Stockholders
with respect to the Recapitalization shall prove to have been materially false;
(v) an Approved Sale (as defined below) has been proposed to the Board of
Directors and such sale is not approved, for whatever reason, by the Board of
Directors within three days of such proposal; or (vi) other circumstances that
reasonably threaten the investment of BTCP or its assignees.
STOCKHOLDERS' AGREEMENT
In connection with consummation of the Recapitalization, Holdings, BTCP,
OTPPB, Jay F. Ecklund and the Management Stockholders (collectively, the
"Stockholders") entered into a stockholders' agreement (the "Stockholders'
Agreement"). The Stockholders' Agreement contains certain restrictions with
respect to the transferability of Holdings' capital stock and contains a grant
by Holdings to the Stockholders of preemptive rights to subscribe for future
issuances of its capital stock and securities convertible or exercisable for
capital stock, subject to certain exceptions. The Stockholders' Agreement also
includes provisions regarding designation of members of the Board of Directors
and other voting arrangements. The Stockholders' Agreement will terminate upon
the earlier of the completion of an Approved Sale or a public offering of
Holdings' Common Stock meeting certain requirements.
The Stockholders' Agreement provides that Holdings' Board of Directors
will consist of at least five but no more than eight directors. Under the
Stockholders' Agreement, BTCP will be entitled to appoint two directors, each of
OTPPB and Jay F. Ecklund will be entitled to appoint one director and Holdings'
Chief Executive Officer of Holdings' will serve as one director. Directors
appointed by any party pursuant to the Stockholders' Agreement may also be
removed by such party with or without cause. In addition, BTCP and OTPPB will be
entitled to designate jointly up to three independent directors. The
Stockholders' Agreement provides for the creation of a three-person executive
committee of the Board of Directors which will include the Chief Executive
Officer of Holdings, one director appointed by BTCP and one director appointed
by OTPPB. The Stockholders' Agreement also provides that all committees of the
Board of Directors will include at least one director appointed by BTCP and at
least one director appointed by OTPPB.
The Stockholders' Agreement provides that certain corporate actions of
Holdings or any subsidiary of Holdings will require the affirmative vote of a
majority of the shares currently held by OTPPB. These actions (with certain
limited exceptions) include (i) mergers, consolidations or recapitalizations,
(ii) public offerings or issuances of capital stock, (iii) repurchases of and
dividends on capital stock, (iv) acquisitions, sales or investments in any
person in excess of $10 million, (v) any dissolution or liquidation, (vi)
amendments to or restatements of the Articles of Incorporation or By-laws of
Holdings, (vii) incurrences of indebtedness or liens in excess of $10 million in
the aggregate or modifications of the terms of any existing indebtedness, (viii)
capital expenditures in excess
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of $10 million in any one year, (ix) transactions with affiliates other than at
arms-length and (x) any change in the primary business of the Company.
Consistent with BTCP's majority ownership interest in the Company, the
Stockholders' Agreement provides that each of the above corporate actions will
require the affirmative vote of a majority of the shares currently held by BTCP;
provided, however, that with respect to such actions, there is no minimum amount
that must be met to trigger the requirement for such consent. In addition,
Holdings is required to obtain the affirmative vote of a majority of the shares
currently held by BTCP to revise or amend any employment contract with senior
management or to amend, modify or supplement the Employee Stock Option Plan.
The Stockholders' Agreement provides for certain restrictions on the sale
by the Stockholders of their equity interests in Holdings. Unless a transfer is
to Holdings or an affiliate of the Stockholder, no Stockholder may transfer his
or its capital stock of Holdings without the prior permission of BTCP. In
addition, with respect to any permitted transfer (other than a transfer to an
affiliate) by any particular Stockholder under the Stockholders' Agreement, each
other Stockholder will be permitted to transfer to the proposed transferee his
or its pro rata share of such securities at the price and on the other terms of
the proposed transfer.
The Stockholders' Agreement provides that, subject to certain limitations,
if at any time BTCP approves the sale of all of the capital stock of Holdings or
the sale of all or substantially all of the assets of Holdings (each an
"Approved Sale"), then each other Stockholder shall agree to and comply with the
terms of such sale.
REPURCHASE AGREEMENTS WITH RESPECT TO EMPLOYEE STOCK
Each of the Management Stockholders acquired the shares of Class A Common
Stock held by such Management Stockholder (with respect to each Management
Stockholder, the "Employee Stock") pursuant to a Stock Subscription and
Repurchase Agreement (collectively, the "Employee Stock Agreements") between
such Management Stockholder and Holdings simultaneous with and as part of the
Recapitalization. Each of the Employee Stock Agreements provides that upon the
occurrence of certain events including the death, retirement, permanent
disability, resignation for good reason (such as retirement) or termination
without cause of the Management Stockholder (the "Termination Events"), such
Management Stockholder (or his successors) will have the right (within a
specified period of time) to cause Holdings to repurchase his Employee Stock. In
July 1998, Holdings and Charles D. Weil terminated such right granted to Mr.
Weil. If a Termination Event shall occur with respect to any Management
Stockholder, Holdings has a corresponding right to cause the relevant Management
Stockholder to sell his Employee Stock to Holdings. In addition, Holdings has
the right to cause a Management Stockholder to sell his Employee Stock to
Holdings upon such Management Stockholder's termination for cause.
The repurchase price to be paid by Holdings for any Employee Stock
repurchased pursuant to the Employee Stock Agreements will in most situations be
the fair market value for such shares (to be determined by the Board of
Directors if Holdings' shares are not then traded publicly, provided that a
Management Stockholder may request an appraisal of the repurchased shares if
such Management Stockholder disagrees with the valuation placed on such shares
by the Board of Directors). Certain Employee Stock Agreements require the
Management Stockholder to enter into a non-competition agreement with Holdings
or receive the lesser of the fair market value or the original purchase price
for the Employee Stock to be repurchased. The Employee Stock Agreement with Mr.
Weil provides that if Mr. Weil is terminated for cause, Holdings may repurchase
his Employee Stock at the lesser of its fair market value or the original
purchase price for such shares.
As of March 15, 1999, Holdings had repurchased 10,798 shares of stock under such
agreements at a total purchase price of $235,000.
REGISTRATION RIGHTS AGREEMENT; RIGHTS OF JAY F. ECKLUND
In connection with the Recapitalization, Holdings, BTCP, OTPPB and Mr.
Ecklund entered into an equity registration rights agreement (the "Equity
Registration Rights Agreement"). The Equity Registration Rights Agreement grants
the Stockholders party thereto demand and incidental registration rights with
respect to shares of capital stock held by them, which rights will be
exercisable at any time after an initial public offering of Holdings' common
stock. In addition, BTCP may cause Holdings to conduct an initial public
offering at any time. OTPPB may cause Holdings to conduct an initial public
offering at any time following the sixth anniversary of the Recapitalization.
The Equity Registration Rights Agreement contains customary terms and provisions
with respect to the registration rights contained therein.
Pursuant to the terms of a put option agreement (the "Put Agreement")
dated November 25, 1997 between Holdings and Mr. Ecklund, Mr. Ecklund had the
right, at any time after the fifth anniversary of the date of the Put Agreement,
to cause Holdings to redeem all or any portion of Mr. Ecklund's shares in
Holdings. The price at which such shares would have been sold and purchased
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would have been the fair market value thereof, determined either by agreement or
by an appraisal. Holdings was not obligated to redeem Mr. Ecklund's shares if
Holdings was then in default of a payment obligation under any of Holding's
indebtedness for borrowed money or if such redemption would have resulted in a
default under any such indebtedness. As described below, Holdings and Mr.
Ecklund terminated such put rights in July 1998.
In July 1998, Holdings and Mr. Ecklund terminated the Put Agreement and
Holdings and Mr. Weil terminated the rights of Mr. Weil under his Employee Stock
Agreement to cause Holdings to purchase his shares if a Termination Event shall
occur with respect to Mr. Weil. Certain stockholders of Holdings (including Mr.
Ecklund and Mr. Weil) entered into an amended and restated Equity Registration
Rights Agreement that grants Mr. Ecklund new demand registration rights
commencing after the fifth anniversary of the Recapitalization and grants Mr.
Weil new demand registration rights if a Termination Event shall occur with
respect to Mr. Weil. Under the amended and restated Equity Registration Rights
Agreement, if Mr. Ecklund or Mr. Weil exercises his demand right with respect to
all of his shares of common stock and any underwriter selected by Mr. Ecklund or
Mr. Weil, as the case may be, advises Holdings that such underwriter cannot sell
all such shares in such offering because such offering would not be large
enough, then Mr. Ecklund and Mr. Weil, as applicable, shall each have the right
to require Holdings to sell in such offering newly issued shares of common stock
representing up to 30% of its shares in any underwritten offering, as the case
may be. In addition, if any such underwriter advises Holdings that an offering
of all of Mr. Ecklund's or Mr. Weil's shares, as the case may be, in addition to
any other shares that are proposed to be registered under such registration
statement (including shares to be offered and sold by Holdings), cannot be
consummated given the then current market conditions, then Mr. Ecklund's shares
would be entitled to be sold before any shares are sold by Holdings or by any
other shareholder (including Mr. Weil) and Mr. Weil's shares would be entitled
to be sold before any shares are sold by Holdings or any other shareholder
(other than Mr. Ecklund). If Mr. Ecklund or Mr. Weil exercises a new demand
registration right at any time, certain shareholders of Holdings would have the
right to purchase Mr. Ecklund's and/or Mr. Weil's shares, as the case may be,
for their fair market value. As amended and restated, neither Mr. Ecklund nor
Mr. Weil will have any put rights with respect to shares of Holdings held by
them.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OFFERING OF THE OLD NOTES
The Company sold the Old Notes to the BTAB, an affiliate of BTCP, who
resold the Old Notes to qualified institutional investors in reliance on Rule
144A under the Securities Act. In connection with the sale of the Old Notes to
BTAB, the Company granted BTAB a discount on the purchase price of the Old Notes
in the amount of $2.4 million.
BRIDGE FACILITY
In connection with the Recapitalization, Holdings entered into a Senior
Credit Agreement with Bankers Trust Company, as agent ("BTCo"), and Bankers
Trust New York Corporation, as initial lender ("BTNY"), to provide the Bridge
Facility. BTCo and BTNY are affiliates of BTCP. BTNY subsequently assigned a
portion of the indebtedness under the Bridge Facility to other institutional
investors. For arranging and providing the Bridge Facility, BTCo and BTNY
received fees aggregating approximately $2.4 million. Portions of the fees were
paid by BTNY to the other institutional investors to which the indebtedness was
assigned. BTNY received a proportionate share of amounts loaned by Young America
to Holdings that were applied to the repayment of the Bridge Facility based on
the portion of the Bridge Facility which BTNY held as of consummation of the
offering of the Old Notes.
ADDITIONAL PAYMENTS RELATED TO THE RECAPITALIZATION
Pursuant to the terms of the agreement relating to the Recapitalization
(the "Recapitalization Agreement"), Holdings made an additional payment of
approximately $692,000 to the Selling Stockholders and certain employees of the
Company during the second quarter of 1998. Such payment was based upon the final
determination of total stockholders equity (as defined) of Holdings as of
October 31, 1997 and Holdings' profits or losses (as defined) for the period
ended on the Recapitalization Date. Also in connection with the
Recapitalization, Holdings is obligated to make additional payments to its
former majority shareholders subject to Holdings achieving certain targets
defined in the Recapitalization Agreement. To the extent Cumulative Excess Free
Cash Flow (as defined in the Recapitalization Agreement) of the Company for the
four-year period ending December 31, 2001 exceeds $93.0 million, Holdings is
required to make an additional purchase price payment equal to 20% of such
excess, subject to a maximum amount payable of $15.0 million. Under separate
agreements with Mr. Weil, Mr. Stinchfield, Mr. Ferguson and the Selling
Stockholders, a portion of this additional purchase price payment will be
payable to such individuals. Such payments will vary depending on the amount of
any indemnification claims against the escrow account established by the Company
under the Recapitalization Agreement for the benefit
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of the Investor Group and depending on the Cumulative Excess free Cash Flow of
the Company for the four-year period ending December 31, 2001 (or an earlier
date in the case of a sale of the Company). Any payments made to management will
result in compensation charges to the Company in the period the amount becomes
determinable.
MANAGEMENT AGREEMENT AND TRANSACTION EXPENSES
In connection with the Recapitalization, Holdings, BTCP and OTPPB entered
into a management agreement (the "Management Agreement") relating to certain
services to be provided to the Company in the future by BTCP and OTPPB. Under
the Management Agreement, BTCP and OTPPB will provide the Company with, among
other services, financial and strategic planning and management consulting
services throughout the term of the Stockholders' Agreement. In consideration
for the services provided to the Company under the Management Agreement,
Holdings will pay annual fees of $187,500 and $62,500 to BTCP and OTPPB,
respectively. Such fees were expensed and accrued in 1998, but to date, no
payments have been made under this agreement. Also in connection with the
Recapitalization, the Company paid BTCP and OTPPB one-time transaction fees of
$1,125,000 and $375,000, respectively, and reimbursed or paid expenses
(including legal, consulting and accounting fees and expenses) of BTCP and OTPPB
of approximately $1,000,000 and $50,000, respectively, incurred by such entities
in connection with the Recapitalization.
NON-COMPETITION AGREEMENT WITH SELLING STOCKHOLDERS
In connection with the Recapitalization, on November 21, 1997, the Company
entered into a non-competition agreement (the "Non-Competition Agreement") with
the Selling Stockholders. The Non-Competition Agreement provides for customary
restrictions on the Selling Stockholders competing against the Company or
disclosing confidential information with respect to the Company's business for a
period of five-years following the Recapitalization Agreement. In addition, the
Non-Competition Agreement provides that the Company pay Mr. Ecklund a consulting
fee of $100,000 for providing consulting services to the Company for the period
ending on the first anniversary of the Non-Competition Agreement. A total of
$91,667 was paid in 1998, with the last payment made in December 1998.
OTHER TRANSACTIONS
The Company is a party to a Release and Indemnity Agreement (the "Release
Agreement") with the following former directors of Holdings: Thomas O. Moe,
Albert O. Foster, Jerome J. Jenko and R. Gary St. Marie. Pursuant to the Release
Agreement, Holdings released and agreed to indemnify the enumerated directors
from claims arising from their past actions as directors of Holdings. Holdings'
Articles of Incorporation release its current directors from liability incurred
for breaches of fiduciary duties, subject to certain exceptions.
Holdings was a party to a Put Option Agreement with Jay F. Ecklund, a
director of Holdings and is a party to the Equity Registration Rights Agreement
with BTCP, OTPPB and Mr. Ecklund. See Note 5 of the audited consolidated
financial statements.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The following documents are filed as part of this form 10-K:
1. Financial Statements:
A list of the Consolidated Financial Statements, related notes and Reports
of Independent Accountants is set forth in Item 8 of this Annual Report on Form
10-K.
2. Financial Statement Schedules
All schedules are omitted because they are not applicable or the required
information is included in the financial statements or notes thereto.
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3 Index to Exhibits
3.1 Articles of Incorporation of Young America (incorporated by reference
to Exhibit 3.1 of the Registrant's Registration Statement on Form
S-4(File N. 333-49749)(the "S-4 Registration Statement").
3.2 Amended and Restated Articles of Incorporation of Holdings
(incorporated by reference to Exhibit 3.2 of the S-4 Registration
Statement).
3.3 Bylaws of Young America (incorporated by reference to Exhibit 3.3 of
the S-4 Registration Statement).
3.4 Restated Bylaws of Holdings (incorporated by reference to Exhibit 3.4
of the S-4 Registration Statement).
4.1 Indenture dated as of February 23,1998 for the Notes (including the
form of New Note attached as Exhibit B thereto) among Young 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).
10.1 Recapitalization Agreement dated November 25, 1997 among Holdings, Jay
F. Ecklund ("Ecklund"), John F. Ecklund 1995 Irrevocable Trust, Sheldon
McKensie Ecklund 1995 Irrevocable Trust, John F. Ecklund 1997
Irrevocable Trust, Sheldon McKensie Ecklund 1997 Irrevocable Trust, Jay
F. Ecklund 1997 Irrevocable Trust (the "Ecklund Trusts") and BTCP
(incorporated by reference to Exhibit 10.1 of the S-4 Registration
Statement).
10.2 Escrow Agreement dated as of November 25, 1997 among Holdings, Ecklund,
the Ecklund Trusts and Norwest Bank Minnesota, national Association, as
Escrow Agent (incorporated by reference to Exhibit 10.2 of the S-4
Registration Statement).
10.3 Put Option Agreement dated as of November 25, 1997 between Holdings and
Ecklund (incorporated by reference to Exhibit 10.3 of the S-4
Registration Statement).
10.4 Stock Purchase Agreement dated November 25, 1997 between Holdings and
BTCP (incorporated by reference to Exhibit 10.4 of the S-4 Registration
Statement).
10.5 Stock Purchase Agreement dated November 25, 1998 between Holdings and
OTPPB (incorporated by reference to Exhibit 10.5 of the S-4
Registration Statement).
10.6 Stockholders' Agreement dated as of November 25, 1997 among Holdings,
BTCP, OTPPB and Ecklund (incorporated by reference to Exhibit 10.6 of
the S-4 Registration Statement).
10.7 Amended and Restated Registration Rights Agreement dated as of July 31,
1998 among Holdings, BTCP, OTPPB and Ecklund (incorporated by reference
to Exhibit 10.7 of the S-4 Registration Statement).
10.8 Purchase Agreement dated as of February 18, 1998 among Young America,
Holdings and BTAB (incorporated by reference to Exhibit 10.8 of the S-4
Registration Statement).
10.9 Management Fee Agreement dated as of November 25, 1997 among Holdings,
BTCP and OTPPB (incorporated by reference to Exhibit 10.9 of the S-4
Registration Statement).
10.10 Stock Subscription and Repurchase Agreement dated November 25, 1997
between Holdings and Charles D. Weil (incorporated by reference to
Exhibit 10.10 of the S-4 Registration Statement).
10.11 Amendment to Stock Subscription and Repurchase Agreement dated as of
February 23, 1998 between Holdings and Charles D. Weil (incorporated by
reference to exhibit 10.11 of the S-4 Registration Statement).
10.12 Stock Subscription and Repurchase Agreement dated November 25, 1997
between Holdings and L. Joseph Kulas (incorporated by reference to
exhibit 10.12 of the S-4 Registration Statement).
10.13 Employment Agreement dated November 24, 1997 between Holdings and
Charles D. Weil (incorporated by reference to exhibit 10.13 of the S-4
Registration Statement).
10.14 Employment Agreement dated August 1, 1996 between Holdings and L.
Joseph Kulas (incorporated by reference to exhibit 10.14 of the S-4
Registration Statement).
10.15 Voluntary Resignation Agreement dated October 1, 1998 between Holdings,
Young America and L. Joseph Kulas.
10.16 Employment Agreement dated as of December 2, 1998 between Young America
and Roger D. Andersen.
10.17 1997 Management Recognition, Transition and Equity Bonus Plan of
Holdings dated November 25, 1997 (incorporated by reference to exhibit
10.15 of the S-4 Registration Statement).
10.18 Change in Control Agreement dated February 21, 1998 between Holdings
and L. Joseph Kulas (incorporated by reference to exhibit 10.16 of the
S-4 Registration Statement).
10.19 Credit Agreement dated April 7, 1998 between Young America and Norwest
Bank Minnesota, National Association (incorporated by reference to
exhibit 10.18 of the S-4 Registration Statement).
10.20 First Amendment to Credit Agreement dated November 16, 1998 between
Young America and Norwest Bank Minnesota, National Association
(incorporated by reference to exhibit 10.1 of the Form 10Q/A for the
quarter ended September 30, 1998).
10.21 Second Amendment to Credit Agreement dated March 12, 1999.
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'10.22 Change-in-Control Agreement dated as of February 21, 1997 between
Holdings and Frederick H. Stinchfield (incorporated by reference to
exhibit 10.19 of the S-4 Registration Statement).
10.23 Change-in-Control Agreement dated as of February 21, 1997 between
Holdings and David Q. Ferguson (incorporated by reference to exhibit
10.20 of the S-4 Registration Statement).
10.24 Change-in-Control Agreement dated as of February 21, 1997 between
Holdings and Michael Larson (incorporated by reference to exhibit 10.23
of the S-4 Registration Statement).
10.25 Change-in-Control Agreement dated as of February 21, 1997 between
Holdings and Barbara Spiess (incorporated by reference to exhibit 10.24
of the S-4 Registration Statement).
10.26 Senior Credit Agreement dated as of November 25, 1997 among Young
America, Holdings , the Lenders names therein and Bankers Trust Company
(incorporated by reference to exhibit 10.26 of the S-4 Registration
Statement).
10.27 Non-Competition Agreement dated as of November 25, 1997 among Holdings,
Ecklund and the other individuals listed on the signature pages thereto
(incorporated by reference to exhibit 10.25 of the S-4 Registration
Statement).
10.28 Release and Indemnity Agreement dated as of November 21, 1997 among
Holdings, Ecklund, the Ecklund Trusts, Albert O. Foster, Jerome J.
Jenko, Thomas O. Moe, and R. Gary St. Marie (incorporated by reference
to exhibit 10.28 of the S-4 Registration Statement).
10.29 Young America Holdings, Inc. 1999 Stock Option Plan.
12.1 Statement re: computation of ratios.
21.1 Subsidiaries of the Registrants.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of McGladrey & Pullen LLP
27.1 Financial Data Schedule
4. Form 8-K:
No reports on Form 8-K were filed by the Registrants during the last quarter of
the period covered by this Report on Form 10-K.
5. SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT.
Except for a copy of this Annual Report on Form 10-K, no annual report to
securities holders covering the registrants' last fiscal year or proxy material
will be sent to security holders.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Young America Holdings, Inc.
By: /s/ Charles D. Weil
----------------------------
Name: Charles D. Weil
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on the 31st day of March, 1999 by the following persons
on behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Charles D. Weil President, Chief Executive Officer and Director
- ---------------------------- (principal executive officer)
Charles D. Weil
/s/ Roger D. Andersen Vice President of Finance, Treasurer, Secretary
- ---------------------------- and Chief Financial Officer
Roger D. Andersen (principal financial and accounting officer)
/s/ Robert Marakovits Chairman of the Board
- ----------------------------
Robert Marakovits
Director
- ---------------------------
Jay F. Ecklund
/s/ J. Mark A. MacDonald Director
- ---------------------------
J. Mark A. MacDonald
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Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Young America Corporation
By:/s/ Charles D. Weil
--------------------------
Name: Charles D. Weil
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on the 31st day of March, 1999 by the following persons
on behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE
/s/ Charles D. Weil President, Chief Executive Officer and Director
- ---------------------------- (principal executive officer)
Charles D. Weil
/s/ Roger D. Andersen Vice President of Finance, Treasurer, Secretary
- ---------------------------- and Chief Financial Officer
Roger D. Andersen (principal financial and accounting officer)
/s/ Robert Marakovits Chairman of the Board
- ----------------------------
Robert Marakovits
Director
- ---------------------------
Jay F. Ecklund
/s/ J. Mark A. MacDonald Director
- ---------------------------
J. Mark A. MacDonald
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