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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_______TO_______
------------------------------
Commission File Number 333-49749
YOUNG AMERICA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MINNESOTA 41-1892816
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes /XX/ No / /
The number of shares outstanding of the registrant's common stock as of
May 13, 1999, was 1,907,825.
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YOUNG AMERICA HOLDINGS, INC.
YOUNG AMERICA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
a) Consolidated Statements of Operations
for the Three Months Ended March 31, 1999 and 1998........................... 1
b) Consolidated Balance Sheets
as of March 31, 1999, and December 31, 1998.................................. 2
c) Consolidated Statements of Cash Flow
For the Three Months Ended March 31, 1999 and 1998........................... 3
d) Notes to Consolidated Financial Statements................................... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................... 9
Item 3. Quantitative and Qualitative Disclosure
About Market Risk...................................................... 12
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................ 12
Item 2. Changes in Securities & Use of Proceeds...................................... 12
Item 3. Defaults Upon Senior Securities.............................................. 12
Item 4. Submission of Matters to a Vote of Security Holders.......................... 12
Item 5. Other Information............................................................ 12
Item 6. Exhibits and Reports on Form 8-K............................................. 12
SIGNATURES..................................................................................... 13
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
YOUNG AMERICA HOLDINGS, INC.
Consolidated Statements of Operations
(in thousands, unaudited)
Three Months Ended
March 31,
------------------------
1999 1998
-------- --------
Revenues $ 96,941 $ 50,630
Cost of revenues:
Rebates, postage and freight 73,551 34,893
Processing and servicing 15,880 11,296
-------- --------
Gross profit 7,510 4,441
Operating expenses:
Selling 1,656 1,424
General and administrative 2,086 1,178
-------- --------
3,742 2,602
-------- --------
Operating income 3,768 1,839
Other income (expense):
Interest expense (2,337) (2,385)
Interest income 185 236
Amortization of deferred financing costs (109) (3,329)
Other income, net 1 (15)
-------- --------
(2,260) (5,493)
-------- --------
Income (loss) before provision for income taxes 1,508 (3,654)
Provision (Benefit) from income taxes 558 (1,352)
-------- --------
Net income (loss) $ 950 $ (2,302)
======== ========
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YOUNG AMERICA HOLDINGS, INC.
Consolidated Balance Sheets
( in thousands, except for share data, unaudited)
March 31 December 31
1999 1998
--------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 19,909 $ 12,220
Trade receivables, net 31,332 16,184
Supplies inventory 613 759
Prepaid expenses 963 907
--------- ---------
Total current assets 52,817 30,070
Property and Equipment, at cost: 19,810 19,643
Less accumulated depreciation (11,846) (11,391)
--------- ---------
7,964 8,252
Deferred Financing Costs 2,999 3,108
Deferred Tax Assets 3,679 4,232
--------- ---------
TOTAL ASSETS $ 67,459 $ 45,662
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Noncleared rebate items $ 29,257 $ 14,066
Accounts payable 2,206 1,732
Collections due to and advances from clients 12,345 6,131
Deferred income taxes 896 897
Accrued expenses
Interest 1,188 3,514
Compensation 2,529 1,289
Other 2,728 2,481
--------- ---------
Total current liabilities 51,149 30,110
Senior Subordinated Notes 80,000 80,000
Other Long-Term Liabilities 281 391
Commitments and Contingencies (Note 3)
Redeemable Class A Common Stock, 36,759 and 40,894 shares
issued and outstanding 800 890
Stockholders' Deficit
Class A common stock, par value $1 per share; 3,000,000 shares authorized,
1,255,455 shares issued and outstanding 1,255 1,255
Class B common stock, par value $1 per share; 1,500,000 shares authorized,
442,884 shares issued and outstanding 443 443
Class C common stock, par value $1 per share; 1,500,000 shares authorized,
172,727 shares issued and outstanding 173 173
Additional paid-in capital 36,091 36,083
Retained deficit (102,733) (103,683)
--------- ---------
(64,771) (65,729)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 67,459 $ 45,662
========= =========
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YOUNG AMERICA HOLDINGS, INC.
Consolidated Statements of Cash Flows
(in thousands, unaudited)
Three Months Ended
March 31,
------------------------
1999 1998
-------- --------
Operating Activities:
Net (loss) income $ 950 $ (2,302)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 468 462
Amortization of deferred financing costs 109 3,329
Deferred income taxes 552 (1,358)
Changes in operating assets and liabilities:
Trade receivables (15,148) (585)
Supplies inventory 146 105
Prepaid expenses (56) (104)
Non-cleared rebate items 15,191 4,534
Accounts payable 474 78
Collections due to and advances from clients 6,214 694
Accrued expenses (839) (4,233)
Other, Net (110) --
-------- --------
Net cash provided by operating activities 7,951 620
-------- --------
Investing Activities
Purchases of property and equipment (180) (1,576)
-------- --------
Net cash used in investing activities (180) (1,576)
-------- --------
Financing Activities:
Repayment of Bridge Facility -- (80,000)
Net Proceeds from senior subordinated debt -- 76,995
Proceeds from stock subscriptions -- 24
Redemption of common stock (82) --
Distributions paid to stockholders -- --
-------- --------
Net cash used in financing activities (82) (2,981)
-------- --------
Change in cash and cash equivalents 7,689 (3,937)
Cash and Cash Equivalents:
Beginning of period 12,220 17,940
======== ========
End of period $ 19,909 $ 14,003
======== ========
Supplemental Disclosures of Cash Flow Information:
Cash payment for interest $ 4,662 $ 2,375
======== ========
Supplemental Schedule of NonCash Financing Activities:
Income Taxes Paid $ 6 $ 6
======== ========
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YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements
(in thousands, except share data - unaudited)
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION - PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements have been prepared by the
Company and include the accounts of Young America Holdings, Inc.
("Holdings"), and its wholly-owned subsidiaries, Young America Corporation
("YAC") and YAC.ECOM, Inc. ("YAC.ECOM"), collectively, the "Company".
All significant intercompany items have been eliminated. In the opinion of
management, all adjustments (which include reclassifications and normal
recurring adjustments) necessary to present fairly the financial position,
results of operations, and cash flows at March 31, 1999, and for all
periods presented, have been made.
On February 2, 1999, Holdings caused YAC.ECOM to be incorporated in the State
of Minnesota and thereafter Holdings acquired all of the outstanding capital
stock of YAC.ECOM. YAC.ECOM intends to provide fulfillment services for
consumer product companies through its clients' internet sites.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
the information included in this Form 10-Q be read in conjunction with
Management's Discussion and Analysis and the financial statements and notes
thereto included in the Young America Holdings, Inc., Annual Report on Form
10-K.
2. DEBT
On February 23, 1998, YAC issued $80,000 of 11 5/8% Senior Subordinated
Notes, due 2006 (the "Notes"). Interest on the Notes is payable semiannually
in arrears on February 15 and August 15 of each year, beginning August 15,
1998. The net proceeds of the offering of the Notes, along with $5,391 in
cash, were used to repay, in full, amounts outstanding under a senior bridge
credit facility (the "Bridge Facility"). In connection with the repayment of
the Bridge Facility, the Company wrote off $3,292 of the deferred financing
costs in February 1998.
The Notes are unconditionally guaranteed, on an unsecured senior subordinated
basis, by Holdings. The guarantee, which is full and unconditional and which
is being provided on a joint and several basis with any future subsidiaries
of YAC that become guarantors, is a general unsecured obligation of Holdings.
YAC.ECOM is not a guarantor of the Notes. Separate financial statements of
YAC and YAC.ECOM have not been presented as management has determined that
they would not be material to investors given that (i) they are wholly-owned
subsidiaries of Holdings, (ii) YAC holds and represents substantially all of
the assets, liabilities, and operations of the consolidated entity, and (iii)
Holdings has provided a full and unconditional guarantee of the Notes. The
Notes are not redeemable prior to February 15, 2002, except as provided
below. On or after such date, the Notes are redeemable, in whole or in part,
at the option of YAC at the following redemption prices set forth herein,
plus accrued and unpaid interest to the date of redemption set forth below:
2002.......................105.813%
2003.......................103.875
2004.......................101.938
2005 and thereafter........100.000%
In addition, at any time on or prior to February 15, 2001, YAC, at its
option, may redeem, with the net cash proceeds of one or more equity
offerings, up to 35% of the aggregate principal amount of the Notes at a
redemption price equal to 111.625% of the principal amount thereof, plus
accrued and unpaid interest thereon, if any, to the date of redemption;
provided that at least 65% of the aggregate principal amount of the Notes
remains outstanding immediately following such redemption. Additionally, upon
a Change of Control (as defined in the indenture under which the Notes were
issued (the "Indenture")), each holder of Notes will have the right to
require YAC to repurchase such holder's Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid interest, if any, to the
repurchase date.
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YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
- --------------------------------------------------------------------------------
The Notes are not subject to sinking-fund requirements. The Notes are general
unsecured obligations of Holdings and YAC and are subordinated in right of
payment to all existing and future senior indebtedness of Holdings and YAC,
including obligations under the Credit Facility referred to hereinafter.
The Indenture contains certain covenants with respect to YAC, and any future
subsidiaries YAC may form or acquire, that restrict, among other things, the
incurrence of additional indebtedness, the payment of dividends and other
restricted payments, the creation of certain liens, the use of proceeds from
sales of assets and subsidiary stock, and transactions with affiliates. The
Indenture also restricts the ability of Holdings and YAC to consolidate or merge
with or into, or to transfer all or substantially all of their respective assets
to another entity.
The Company has a revolving credit facility ("Credit Facility") with Norwest
Bank Minnesota, N.A. ("Norwest"), which provides for borrowings of up to
$10,000, based on a borrowing base formula equal to 85% of Eligible Receivables
less Noncleared Rebate Items net of cash and cash equivalents (as defined in the
Credit Facility), and has a final maturity date of March 31, 2001. The Credit
Facility does not have any commitment reductions scheduled before maturity.
Borrowings under the Credit Facility will accrue interest, at the option of the
Company, at either Norwest's base rate or at an interest rate equal to the
London interbank rate for Eurodollar deposits for one, two or three month
interest periods plus 2.5%. A fee of .5% per annum is payable with respect to
the unused Commitment Amount (as defined in the Credit Facility). The Credit
Facility is secured by a first-priority interest in accounts receivable and
related general intangibles of YAC.
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 $9,500. 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 $500 per quarter and cumulative annual capital expenditures to
$2,000. 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.
3. CONTINGENCIES
Leases
The Company has operating leases for warehouse space and equipment. The
future minimum payments under these obligations are as follows:
Years ending December 31:
1999........... $6,353
2000........... 5,360
2001........... 2,562
2002........... 1,010
2003........... 331
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YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
- --------------------------------------------------------------------------------
Guarantees
Sweepstakes performance bonds are guaranteed for certain clients based on
certain financial criteria. The Company had guaranteed approximately $10,392 and
$9,978 in performance bonds for various clients, as of March 31, 1999, and
December 31, 1998, respectively. The Company also obtains an indemnity agreement
from these clients indemnifying the Company from obligations under the
performance bonds.
4. RECAPITALIZATION
Prior to November 25, 1997, all of the capital stock of Holdings (formerly known
as Young America Corporation) was owned by Jay F. Ecklund, its then Chairman and
Chief Executive Officer, and certain trusts for the benefit of members of his
family (the "Selling Shareholders"). On that date, Holdings effected 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. The following table presents summarized Statement of Operation
information for Holdings, and YAC for the three months ended March 31,1999 and
March 31, 1998; and summarized Balance Sheet information as of March 31, 1999,
and December 31, 1998. The only substantial asset retained by Holdings in the
Recapitalization was certain real property, which is leased to YAC, at cost, for
use in its operations.
Three Months Ended
March 31
1999 1998
------- --------
Revenues:
Holdings $ -- $ --
YAC 96,941 50,630
------- --------
Consolidated $96,941 $ 50,630
======= ========
Gross Profit:
Holdings $ -- $ --
YAC 7,510 4,441
------- --------
Consolidated $ 7,510 $ 4,441
======= ========
Net (loss) Income:
Holdings $ -- $ --
YAC 950 (2,302)
------- --------
Consolidated $ 950 $ (2,302)
======= ========
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YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
- --------------------------------------------------------------------------------
March 31 December 31
1999 1998
------- -----------
Current Assets:
Holdings $ 381 $ 373
YAC 52,436 29,697
------- -------
Consolidated $52,817 $30,070
======= =======
Noncurrent Assets:
Holdings $ 2,474 $ 2,512
YAC 12,168 13,080
------- -------
Consolidated $14,642 $15,592
======= =======
Current Liabilities:
Holdings $ -- $ --
YAC $51,149 $30,110
------- -------
Consolidated $51,149 $30,110
======= =======
Noncurrent Liabilities:
Holdings $ -- $ --
YAC 80,281 80,391
------- -------
Consolidated $80,281 $80,391
======= =======
Pursuant to the terms of the Recapitalization Agreement, Holdings made an
additional payment of approximately $692 to the Selling Shareholders 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
therein) of Holdings as of October 31, 1997, and Holdings profits or losses (as
defined) for the period ended on the date of Recapitalization. Also, in
connection with the Recapitalization, Holdings is obligated to make additional
payments to the former majority shareholders, subject to Holdings achieving
certain targets defined in the Recapitalization Agreement. To the extent
cumulative excess free cash flow (as defined in the Recapitalization Agreement)
of the Company for the four-year period ending December 31, 2001, exceeds
$93,000, Holdings is required to make an additional purchase price payment equal
to 20% of such excess, subject to a maximum amount payable of $15,000. Under
separate agreements with certain 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.
Redeemable Class A Common Stock
Redeemable Class A Common Stock has been valued at the same per share price as
the per share valuation at the date of the Recapitalization in November 1997.
Pursuant to the terms of certain stock repurchase agreements executed by
Holdings and its employee-stockholders, the Company exercised its rights to
repurchase stock of former employees. In the first quarter of 1999, 4,136 shares
of stock were redeemed for a total of $82. In the opinion of management, there
has not been any increase in the per share valuation since such date.
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YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
- --------------------------------------------------------------------------------
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", effective for
years beginning after June 15, 1999. SFAS No. 133 established accounting and
reporting standards requiring that every derivative instrument, including
certain derivative instruments embedded in other contracts, be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No.133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge criteria are met. Special accounting
for qualifying hedges allow a derivative's gains or losses to offset related
results on the hedged item in the income statement and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. 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. During the first quarter of 1999, the Company
adopted SOP 98-5, which had no impact on the financial position of the Company.
6. SEGMENT REPORTING:
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The Company provides consumer interactive
processing services for its customers and operates as a single reportable
business segment. The Company internally evaluates its business principally by
revenue category; however, because of the similar economic characteristics of
the operations, including the nature of services and the customer base, those
operations have been aggregated following the provisions of SFAS No. 131 for
segment reporting purposes.
The following is a summary of the composition of revenues by revenue category
for the three months ended March 31:
1999 1998
------- -------
CIP services $21,004 $13,709
Rebate revenues 70,754 31,242
Postage and freight billings 5,183 5,679
------- -------
$96,941 $50,630
------- -------
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenues. Revenues were $96.9 million in the first quarter of 1999, an increase
of 91.5% over the comparable quarter of 1998. The increase in revenues in the
first quarter was a result of an increase in rebate revenues of $39.5 million
and an increase in servicing revenues of $7.3 million. The increase in rebate
and servicing revenues continues to result from the addition of new clients who
conduct high-dollar value rebate programs funded through the Company and require
integrated fulfillment and call center servicing. The increase of rebate and
servicing revenues was offset in part by a decrease in postage and freight
revenues ("PFR") of $.5 million. The reduction in PFR revenues reflects the
movement from premium-based marketing programs to rebate programs. Servicing
revenue increased 53.2% in the first quarter of 1999 from the same period in
1998. The Company has experienced a large increase in the number of calls
received in the Company's call centers. The first quarter 1999 live operator
volumes in the call center reached record numbers, exceeding first quarter 1998
by 157%. The increase in call volume is, in part, a result of the increased
complexity of the client promotions. Many of the calls received are initiated by
consumers before they send in the offer for processing.
Gross Profit. The Company's gross profit increased to $7.5 million or 7.7% of
revenues for the first quarter of 1999 as compared to $4.4 million, or 8.8% of
revenues for the first quarter of 1998. The increase in gross profit was a
function of increased total revenues. The reduction in gross profit margin was
the result of (i) a change in the mix of revenues as lower margin rebate
revenues increased as a percentage of total revenue and (ii) increased expenses
associated with expanding the capacity to handle the higher volumes in
operations. Inbound operations costs have increased over the past twelve months
as a result of the higher wages required in areas of low unemployment. All of
the Company's inbound operations are located in Minnesota where the unemployment
rate was approximately 2.8% in February 1999 compared to a national average of
4.7%. The Company is exploring options available to help reduce the cost impact
realized as a result of this tight labor market. Among other things, such
options may include outsourcing and/or other inbound processing locations. As
marketing programs become more complex, the cost to process the programs
increases. Due to pricing pressures from the Company's competitors, the increase
in price does not directly correlate with the increase in costs, thus resulting
in an increase in gross profit dollars but a decrease in gross profit as a
percentage of revenues.
Operating Income. Operating income for the first quarter of 1999 increased by
$1.9 million to $3.7 million from $1.8 million for the corresponding period of
1998. As a percentage of revenues, operating income was 3.9% for the quarter
ended March 31, 1999 compared with 3.6% for the corresponding period of 1998.
The increase in operating income was a result of the increase in gross profits
partially offset by an increase in selling, general and administrative expenses.
Selling, general and administrative expenses increased $1.1 million from the
first quarter of 1998. The $1.1 million increase included $.4 million related to
bonus and profit sharing accruals associated with the higher profitability, $.2
million of increased sales commissions associated with higher increased
revenues, and $.1 million of expenses associated with the Year 2000 systems
assessment. Much of the remaining increase was associated with fees relating to
the preparation of regulatory and financial reporting and increased costs
associated with labor and recruitment.
Interest Expense. The first quarter 1999 interest expense of $2.3 million is
principally accrued interest on the Company's Senior Subordinated Notes (the
"Notes") due 2006 with a small amount resulting from fees associated with
non-usage of its bank credit facility. Interest expense in the first quarter of
1998 included interest on a senior bridge credit facility ("Bridge Facility")
through the date of issuance of the Notes (February 23, 1998) and interest on
the Notes thereafter. Amortization of deferred financing costs of $.1 million in
the first quarter of 1999 decreased by $3.2 million from the same period in
1998. Amortization expenses in 1998 included $3.3 million of costs associated
with obtaining the Bridge Facility, which costs were fully amortized upon
repayment of the Bridge Facility with the proceeds of the Notes.
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Income Taxes. The Company recorded an income tax provision of $.6 million for
the first quarter of 1999, compared to an income tax benefit of $1.4 million for
the first quarter of 1998 as a result of increased profitability.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999 no amounts were outstanding under the Company's $10 million
credit facility (the "Credit Facility") with Norwest Bank Minnesota, N.A.
("Norwest"), and the Company had a stockholders' deficit of $64.8 million,
indebtedness of $80.0 million represented by the Notes and net working capital
of $1.7 million. For additional information with respect to the Notes, see Note
2 of the Unaudited Consolidated Financial Statements.
The Company has historically financed its operations and capital expenditures
principally through the retention of cash flow from operations. The Company also
maintains the Credit Facility, which is collateralized by accounts receivable
and other assets as detailed below. In addition, the Company operates facilities
and technology-related equipment under operating leases with third parties. See
Note 3 for a summary of Company commitments under such operating lease
agreements.
For the three-month period ended March 31, 1999, the Company's operations
generated cash of $8.0 million, as compared to $.6 million for the prior year
period. The $8.0 million of cash provided by operating activities in 1999 was
principally the result of $1.0 million of net income and a $6.2 million increase
in the collections due to and advances from clients. The $.6 million of cash
provided by operating activities in 1998 was principally the result of a net
loss of $2.3 million offset by the $3.3 million write-off of deferred financing
costs relating to the repayment of the Bridge Facility. The Company's future
cash flow from operations will continue to reflect (i) income taxes that the
Company is required to pay as a C corporation and (ii) interest that will be
incurred on outstanding indebtedness, including the Notes.
Net cash used in investing activities for the three-month periods ended March
31, 1999 and 1998 were $.2 million and $1.6 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. The Company's capital expenditure budget for 1999 totals $1.1
million. This budget may be changed by the Company during 1999 based upon the
Company's results of operations during the year. The Company anticipates that
capital expenditures for 1999 will not exceed $2.0 million.
Net cash used in financing activities for the three months ended March 31, 1999
and 1998 were $.1 million and $3.0 million respectively. Cash used in the first
quarter of 1998 reflects the payment of financing costs associated with the
placement of the Notes. Pursuant to the terms of the Recapitalization, 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. See Note 4 of the Unaudited
Consolidated Financial Statements.
The Credit Facility, as amended provides for borrowings of up to $10.0 million
based on a borrowing base formula equal to 85% of Eligible Receivables less
Noncleared Rebate Items net of cash and cash equivalents (as defined in the
Credit Facility) and has a final maturity date of March 31, 2001. The Credit
Facility does not have any commitment reductions scheduled before maturity.
Borrowings under the Credit Facility accrue interest, at the option of the
Company, at either Norwest's base rate or at an interest rate equal to the
London interbank rate for Eurodollar deposits for one, two or three month
interest periods plus 2.5%. A fee of .5% per annum is payable with respect to
the unused Commitment Amount (as defined in the Credit Facility) The Credit
Facility is secured by a first priority interest in accounts receivable and
related general intangibles of YAC.
The Credit Facility contains restrictive covenants that require the Company 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, a minimum cumulative EBITDA of $9.5 million.
The Credit Facility also limits capital expenditures to $0.5 million per quarter
and cumulative annual capital expenditures to $2.0 million. In addition, the
Credit Facility contains other
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covenants that, among other things, restrict acquisitions, investments,
dividends, liens and other indebtedness, management fees, disposition of assets,
change of voting control and guarantees. The Company was in compliance with all
required covenants as of March 31, 1999.
In compliance with certain state laws, the Company obtains performance bonds in
connection with sweepstakes programs it manages on behalf of its clients. The
Company is indemnified by its clients for any obligations on those performance
bonds, and the cost to the Company of obtaining the performance bonds plus a
markup is billed to the clients.
Management is reviewing the costs and benefits of a potential consolidation or
other affiliation with Distribution Associates, Inc. ("DAI"), a third party
fulfillment company for direct mail catalogs. BTCP controls a majority of the
economic interests of DAI. No formal discussions have been initiated with DAI's
management concerning any such transaction. No assurance can be given as to what
form the transaction may take, as to the manner any such transaction may be
financed, or that such a transaction will or will not be consummated.
The Company will rely mainly on internally generated funds, and to the extent
necessary, borrowings under the Credit Facility, to meet its liquidity needs.
The Company also expects to continue to utilize operating leases to finance its
needs for facilities and certain equipment. The Company believes that the cash
flow from operations together with existing cash and cash equivalents and
available borrowings under the Credit Facility will be adequate to meet its
liquidity requirements, including interest payments with respect to the Notes,
for the next 12 months.
The Company's ability to pay principal and interest on the Senior Subordinated
Notes and to satisfy its other debt obligations will depend upon its future
operating performance, which performance will be affected by prevailing economic
conditions and financial, business and other factors, certain of which are
beyond the control of the Company. The Company's ability to pay principal and
interest on the Senior Subordinated Notes and to satisfy its other debt
obligations will also depend upon the future availability of revolving credit
borrowings under the Credit Facility or any successor facility. Such
availability is or may depend on, among other things, the Company meeting
certain specified covenants and borrowing base prerequisites. The Company
expects that, based on current and expected levels of operations, its operating
cash flow, together with borrowings under the Credit Facility, should be
sufficient to meet its operating expenses, to make necessary capital
expenditures and to service its debt requirements as they become due. If the
Company is unable to service its indebtedness, it will be forced to take actions
such as reducing operating expenses, reducing or delaying acquisitions and/or
capital expenditures, selling assets, restructuring or refinancing its
indebtedness (which could include the Senior Subordinated 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 millenium--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, to be 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 systems of its key
vendors
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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 problems, however, if the
telecommunication providers fail to meet their Year 2000 system requirements on
a timely basis, the Company's call center operations could be significantly
impacted. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The Company is exposed to various market risks, including changes in interest
rates. Market risk is the potential loss arising from adverse changes in market
rates and prices, such as interest rates. The Company does not enter into
derivative or other financial instruments for trading or speculative purposes.
The Company manages its interest rate 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 March 31, 1999, the Company had fixed rate debt of $80.0 million and variable
rate available borrowings up to $10.0 million under the Credit Facility.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES & USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as follows.
None
(b) Reports on Form 8-K
None
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
Young America Corporation
Date: May 14, 1999 By: /s/ CHARLES D. WEIL
----------------------------
Name: Charles D. Weil
Title: President
Young America Holdings, Inc.
Date: May 14, 1999 By: /s/ CHARLES D. WEIL
----------------------------
Name: Charles D. Weil
Title: President
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