1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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
August 12, 1999, was 1,907,825.
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YOUNG AMERICA HOLDINGS, INC.
YOUNG AMERICA CORPORATION
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 1999
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
a) Consolidated Statements of Operations
for the Three and Six Months Ended June 30, 1999, and 1998....................1
b) Consolidated Balance Sheets
as of June 30, 1999, and December 31, 1998....................................2
c) Consolidated Statements of Cash Flow
For the Six Months Ended June 30, 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............................................................13
Item 2. Changes in Securities & Use of Proceeds......................................13
Item 3. Defaults Upon Senior Securities..............................................13
Item 4. Submission of Matters to a Vote of Security Holders..........................13
Item 5. Other Information............................................................13
Item 6. Exhibits and Reports on Form 8-K.............................................13
SIGNATURES.....................................................................................14
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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 Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues $ 81,533 $ 58,130 $ 178,474 $ 108,760
Cost of revenues:
Rebates, postage and freight 60,503 42,568 134,054 77,461
Processing and servicing 13,453 12,086 29,333 23,382
--------- --------- --------- ---------
Gross profit 7,577 3,476 15,087 7,917
Operating expenses:
Selling 1,469 1,496 3,125 2,920
General and administrative 2,328 1,384 4,414 2,562
--------- --------- --------- ---------
3,797 2,880 7,539 5,482
--------- --------- --------- ---------
Operating income 3,780 596 7,548 2,435
Other income (expense):
Interest expense (2,339) (2,359) (4,676) (4,745)
Interest income 136 178 321 414
Amortization of deferred financing costs (109) (94) (218) (3,422)
Other -- (187) 1 (202)
--------- --------- --------- ---------
(2,312) (2,462) (4,572) (7,955)
--------- --------- --------- ---------
Income (loss) before provision for income taxes 1,468 (1,866) 2,976 (5,520)
Provision (Benefit) from income taxes 543 (681) 1,101 (2,033)
--------- --------- --------- ---------
Net income (loss) $ 925 $ (1,185) $ 1,875 $ (3,487)
========= ========= ========= =========
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YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT FOR SHARE DATA, UNAUDITED)
June 30 December 31
1999 1998
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents $ 13,351 $ 12,220
Trade receivables, net 17,547 16,184
Supplies inventory 445 759
Prepaid expenses 844 907
--------- ---------
Total current assets 32,187 30,070
Property and Equipment, at cost: 20,053 19,643
Less accumulated depreciation (12,322) (11,391)
--------- ---------
7,731 8,252
Deferred Financing Costs 2,890 3,108
Deferred Tax Assets 3,138 4,232
--------- ---------
TOTAL ASSETS $ 45,946 $ 45,662
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Noncleared rebate items $ 12,032 $ 14,066
Accounts payable 1,872 1,732
Collections due to and advances from clients 4,918 6,131
Deferred income taxes 896 897
Accrued expenses
Interest 3,514 3,514
Compensation 2,907 1,289
Other 2,681 2,481
--------- ---------
Total current liabilities 28,820 30,110
Senior Subordinated Notes 80,000 80,000
Other Long-Term Liabilities 172 391
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 (101,808) (103,683)
--------- ---------
(63,846) (65,729)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 45,946 $ 45,662
========= =========
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YOUNG AMERICA HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, UNAUDITED)
Six Months Ended
June 30,
-------------------------
1999 1998
-------- --------
Operating Activities:
Net (loss) income $ 1,875 $ (3,487)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 945 966
Amortization of deferred financing costs 218 3,422
Deferred income taxes 1,093 (2,040)
Changes in operating assets and liabilities:
Trade receivables (1,363) (3,728)
Supplies inventory 314 39
Prepaid expenses 63 (396)
Non-cleared rebate items (2,034) 5,960
Accounts payable 140 (352)
Collections due to and advances from clients (1,213) 456
Accrued expenses 1,818 (1,710)
Other, Net (219) --
-------- --------
Net cash provided by operating activities 1,637 (870)
-------- --------
Investing Activities
Purchases of property and equipment (424) (2,151)
-------- --------
Net cash used in investing activities (424) (2,151)
-------- --------
Financing Activities:
Repayment of Bridge Facility -- (80,000)
Net Proceeds from senior subordinated debt -- 76,959
Proceeds from stock subscriptions -- 24
Redemption of common stock (82) (649)
Distributions paid to stockholders -- --
-------- --------
Net cash used in financing activities (82) (3,666)
-------- --------
Change in cash and cash equivalents 1,131 (6,687)
Cash and Cash Equivalents:
Beginning of period 12,220 17,940
-------- --------
End of period $ 13,351 $ 11,253
======== ========
Suplemental Disclosures of Cash Flow Information:
Cash payment for interest $ 4,676 $ 2,410
======== ========
Income Taxes Paid $ 7 $ 7
-------- --------
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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 June 30, 1999, and for all periods
presented, have been made. 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 (as defined
below).
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 for the year ended December 31, 1998.
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. 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 ("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 YAC's 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..........$6,387
2000...........5,389
2001...........2,591
2002...........1,027
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 $10,471 and
$9,978 in performance bonds for various clients, as of June 30, 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 Operations
information for Holdings, YAC and YAC.ECOM for the three and six months ended
June 30,1999 and June 30, 1998; and summarized Balance Sheet information as of
June 30, 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 Six Months Ended
June 30 June 30
1999 1998 1999 1998
--------- --------- --------- ---------
Revenues:
Holdings $ -- $ -- $ -- $ --
YAC 81,521 58,130 178,462 108,760
YAC.ECOM 12 -- 12 --
--------- --------- --------- ---------
Consolidated $ 81,533 $ 58,130 $ 178,474 $ 108,760
========= ========= ========= =========
Gross Profit:
Holdings $ -- $ -- $ -- $ --
YAC 7,577 3,476 15,087 7,917
YAC.ECOM -- -- -- --
--------- --------- --------- ---------
Consolidated $ 7,577 $ 3,476 $ 15,087 $ 7,917
========= ========= ========= =========
Net (loss) Income:
Holdings $ -- $ -- $ -- $ --
YAC 925 (1,185) 1,875 (3,487)
YAC.ECOM -- -- -- --
--------- --------- --------- ---------
Consolidated $ 925 $ (1,185) $ 1,875 $ (3,487)
========= ========= ========= =========
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YOUNG AMERICA HOLDINGS, INC.
Notes to Consolidated Financial Statements - (Continued)
(in thousands, except share data - unaudited)
June 30 December 31
1999 1998
------- -------
Current Assets:
Holdings $ 379 $ 373
YAC 31,764 29,697
YAC.ECOM 44 --
------- -------
Consolidated $32,187 $30,070
======= =======
Noncurrent Assets:
Holdings $ 2,435 $ 2,512
YAC 11,324 13,080
YAC.ECOM -- --
------- -------
Consolidated $13,759 $15,592
======= =======
Current Liabilities:
Holdings $ -- $ --
YAC 28,773 30,110
YAC.ECOM 47
------- -------
Consolidated $28,820 $30,110
======= =======
Noncurrent Liabilities:
Holdings $ -- $ --
YAC 80,172 80,391
YAC.ECOM -- --
------- -------
Consolidated $80,172 $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 in
the Recapitalization Agreement) 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, 2000. 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.
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 and six months ended June 30, 1999, and 1998:
Segment Reporting Three and Six months ended June 30,
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
-------- -------- -------- --------
CIP services $ 17,836 $ 13,596 $ 38,840 $ 27,305
Rebate revenues 58,705 39,381 129,459 70,623
Postage and freight billings 4,992 5,153 10,175 10,832
-------- -------- -------- --------
$ 81,533 $ 58,130 $178,474 $108,760
======== ======== ======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Revenues. Revenues were $81.5 million in the second quarter of 1999, an increase
of 40.3% over the comparable quarter of 1998. On a year-to-date basis, revenues
were $178.5 million, 64.1% greater than the same period of 1998. The increase in
revenues in the second quarter was a result of an increase in rebate revenues of
$19.3 million and an increase in servicing revenues of $4.2 million. The
increase in revenues in the first six months of 1999 was a result of (i) an
increase in rebate revenues of $58.8 million and (ii) an increase in servicing
revenue of $11.5 million. The increase in rebate and servicing revenues was
primarily driven by the increased revenue of existing clients and the addition
of new clients who conduct high-dollar value rebate programs and require
integrated fulfillment and call center servicing. The increase of rebate and
servicing revenues for the three and six month periods ended June 30,1999 was
offset in part by a decrease in postage and freight revenues ("PFR") of $.2 and
$.7 million, respectively, as compared to the prior year periods. The reduction
in PFR revenues reflects the movement from premium-based marketing programs to
rebate programs. Servicing revenue increased 31.2% in the second quarter of 1999
from the same period in 1998 and 42.3% on a year to date basis compared to the
same period of 1998.
Gross Profit. The Company's gross profit increased to $7.6 million or 9.3% of
revenues for the second quarter of 1999 as compared to $3.5 million or 6.0% of
revenues for the second quarter of 1998. Gross profits were $15.1 million or
8.5% of revenues in the first half of 1999 as compared to $7.9 million or 7.3%
of revenues for the same period in 1998. The increase in gross profit was a
function of an increase in total revenues and containment of processing and
servicing costs. In addition, the Company was able to process increased revenues
without a proportionate increase in semi-variable costs. This was accomplished
in part by the implementation of a number of cost-saving initiatives in the
second half of 1998 including the consolidation of the Albert Lea, Minnesota and
Belle Plaine, Minnesota facilities into the other existing facilities and the
consolidation of the Young America, Minnesota call center into the Mankato,
Minnesota and Oklahoma City, Oklahoma call centers. The Company has continued to
implement additional cost-savings initiatives in the second quarter of 1999
including the consolidation of some inbound operations from the Mankato,
Minnesota location into the Young America, Minnesota location and the
development of an outsourcing relationship to process inbound mail sortation.
Operating Income. Operating income for the second quarter of 1999 increased by
$3.2 million to $3.8 million from $.6 million for the corresponding period of
1998. As a percentage of revenues, operating income was 4.6% for the quarter
ended June 30, 1999 compared with 1.0% for the corresponding period of 1998.
Year to date operating income was $7.5 million or 4.2% of revenues as compared
to $2.4 million or 2.2% of revenues for the first six months of 1998. The
increase in the quarter and year-to-date 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 $0.9 million and $2.1 million in the three and six month periods
ended June 30, 1999, respectively, compared to the corresponding periods last
year. The increases related primarily to bonus, profit sharing and commissions
associated with higher sales and profitability.
Interest Expense. For the three and six month periods ending June 30, 1999, the
$2.3 million of interest expense 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.
Amortization of deferred financing costs of $.2 million in the first six months
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 a
senior bridge credit facility (the "Bridge Facility"), which costs were fully
amortized upon repayment of the Bridge Facility with the proceeds of the Notes.
Income Taxes. The Company recorded an income tax provision of $.5 and $1.1
million for the three and six months ended June 30, 1999, respectively, as
compared to an income tax benefit of $.7 and $2.0 million, respectively, for the
corresponding period in 1998. These increases are a result of a change in
profitability.
Net Income. As a result of the foregoing factors, the Company reported net
income of $.9 and $1.9 million for the three and six months ended June 30, 1999,
respectively, as compared to a net loss of $1.2 and $3.5 million, respectively,
for the corresponding period in 1998.
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LIQUIDITY AND CAPITAL RESOURCES
At June 30, 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 $63.8 million,
indebtedness of $80.0 million represented by the Notes and net working capital
of $3.4 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 six-month period ended June 30, 1999, the Company's operations generated
cash of $1.6 million compared to cash utilization of $.9 million for the same
period in 1998. The change in operating cash flow is primarily related to the
increased profitability in 1999. The Company's future cash flow from operations
will continue to reflect (i) income taxes that the Company is required to pay
and (ii) interest that will be incurred on outstanding indebtedness, including
the Notes.
Net cash used in investing activities for the six month periods ended June 30,
1999 and 1998 were $.4 million and $2.2 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 six months ended June 30, 1999 and
1998 were $.1 million and $3.7 million respectively. Cash used in the first six
months 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 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 June 30, 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
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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.
As referenced in the report on Form 10-Q for the period ended March 31, 1999,
management continues to review 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. BT Capital Partners
SBIC, L.P. (formerly BT Capital Partners, Inc.), the majority shareholder of the
Company, 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's ability to pay principal and interest on the Notes and to satisfy
its other debt obligations will depend upon its future operating performance,
which performance will be affected by prevailing economic conditions and
financial, business and other factors, certain of which are beyond the control
of the Company. The Company's ability to pay principal and interest on the Notes
and to satisfy its other debt obligations will also depend upon the future
availability of revolving credit borrowings under the Credit Facility or any
successor facility. Such availability is or may depend on, among other things,
the Company meeting certain specified covenants and borrowing base
prerequisites. The Company expects that, based on current and expected levels of
operations, its operating cash flow, together with borrowings under the Credit
Facility, should be sufficient to meet its operating expenses, to make necessary
capital expenditures and to service its debt requirements as they become due,
for the next 12 months. The Company also expects to continue to utilize
operating leases to finance its needs for facilities and certain equipment. If
the Company is unable to service its indebtedness, it will be forced to take
actions such as reducing operating expenses, reducing or delaying acquisitions
and/or capital expenditures, selling assets, restructuring or refinancing its
indebtedness (which could include the Notes), or seeking additional equity
capital. There is no assurance that any of these remedies can be effected on
satisfactory terms, if at all.
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 1999, 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 $.2 million has
been incurred to date.
In an effort to review the systems of its key vendors and suppliers, the
Company has sent to them Year 2000 questionnaires and has evaluated the
responses. Based on the information received to date, the Company does not
expect any significant problems; however, if the Company's 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 Year 2000 readiness 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.
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FORWARD LOOKING STATEMENTS
This report on Form 10-Q contains forward-looking statements that involve risk
and uncertainties. All statements other than statements of historical facts
included in this report on Form 10-Q, including, without limitation, statements
regarding the future financial position of 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 form 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 this heading "Management Discussion and Analysis of Financial Condition
and Results of Operations", and elsewhere in, this report on Form 10-Q and in
the other documents and reports filed by the Company with the Securities and
Exchange Commission, including the registration statement relating to the
Notes. All subsequent written and oral forward-looking statements attributable
to Holdings, YAC or YAC.ECOM or persons acting on their behalf are expressly
qualified in their entirety by these factors.
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 June 30, 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.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES & USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits as follows.
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: August 12, 1999 By: /s/ CHARLES D. WEIL
----------------------------
Name: Charles D. Weil
Title: President
Young America Holdings, Inc.
Date: August 12, 1999 By: /s/ CHARLES D. WEIL
----------------------------
Name: Charles D. Weil
Title: President
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