10-Q 1 y42321e10-q.txt YOUNG AMERICA 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 SEPTEMBER 30, 2000 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM_______TO_______ ------------------------------ Commission File Number 333-49749 YOUNG AMERICA CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 41-1892816 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)

18671 LAKE DRIVE EAST, CHANHASSEN, MINNESOTA 55317-9383 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (952) 294-6000 YOUNG AMERICA HOLDINGS, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 41-0983697 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)

18671 LAKE DRIVE EAST, CHANHASSEN, MINNESOTA 55317-9383 (Address of principal executive office) (Zip Code) Registrant's telephone number, including area code: (952) 294-6000 Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / The number of shares outstanding of the registrant's common stock as of November 9, 2000, was 1,884,988. 2 YOUNG AMERICA HOLDINGS, INC. YOUNG AMERICA CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 INDEX

PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements a) Consolidated Statements of Operations for the Three and ~~Six~~Nine Months Ended ~~June~~September 30, 2000 and 1999....................... 1 b) Consolidated Balance Sheets as of ~~June~~September 30, 2000, and December 31, 1999....................................... 2 c) Consolidated Statements of Cash Flow For the ~~Six~~Nine Months Ended ~~June~~September 30, 2000, and 1999................................ 3 d) Notes to Consolidated Financial Statements............................................ 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................... 10 Item 3. Quantitative and Qualitative Disclosure About Market Risk............................................................ 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................ 13 Item 2. Changes in Securities &and Use of Proceeds...................................... 13 Item 3. Defaults Upon Senior Securities.............................................. 13 Item 4. Submission of Matters to a Vote of Security Holders.......................... 13 Item 5. Other Information............................................................ 13 Item 6. Exhibits and Reports on Form 8-K............................................. 13 SIGNATURES...................................................................................... 14

3 PART I. FINANCIAL INFORMATION Item 1. Financial Statements YOUNG AMERICA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, UNAUDITED)

Three Months Ended ~~Six~~Nine Months Ended ~~June~~September 30, ~~June~~September 30, ------------------------ ------------------------ 2000 1999 2000 1999 -------- -------- -------- -------- Revenues $ 2116,~~416~~755 $ 2117,~~030~~932 $ 4562,~~451~~206 $ 4462,~~420~~352 Cost of revenues: Processing and servicing 1412,~~571~~832 1312,~~453~~548 3043,~~785~~617 2941,~~333~~881 -------- -------- -------- -------- Gross profit 63,~~845~~923 75,~~577~~384 1418,~~666~~589 1520,~~087~~471 Operating expenses: Selling 1,~~965~~738 1,~~469~~449 35,~~877~~615 34,~~125~~574 General and administrative 2,~~943~~471 2,~~328~~600 58,~~828~~299 47,~~414~~014 -------- -------- -------- -------- 4,~~908~~209 34,~~797~~049 913,~~705~~914 711,~~539~~588 -------- -------- -------- -------- Operating income (286) 1,~~937~~335 ~~3,780~~ 4,~~961~~675 78,~~548~~883 Other income (expense): Interest expense (2,~~364~~358) (2,~~339~~338) (47,~~727~~085) (47,~~676~~014) Interest income ~~140~~122 ~~136~~184 ~~332~~454 ~~321~~505 Amortization of deferred financing costs (109) (109) (~~218~~327) (~~218~~327) Amortization of goodwill (2015) -- (3853) -- Other ~~(1)~~-- -- 4 1 -------- -------- -------- -------- (2,~~354~~360) (2,~~312~~263) (47,~~647~~007) (46,~~572~~835) -------- -------- -------- -------- Income (loss) before provision for income taxes (~~417~~2,646) 1(928) (2,~~468~~332) ~~314~~ 2,~~976~~048 Provision (Benefit) from income taxes (~~156~~990) ~~543~~(343) ~~115~~(875) ~~1,101~~758 -------- -------- -------- -------- Net income (loss) $ (~~261~~1,656) $ ~~925~~(585) $ ~~199~~(1,457) $ 1,~~875~~290 ======== ======== ======== ========

1 4 YOUNG AMERICA HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS ( IN THOUSANDS, EXCEPT FOR SHARE DATA, UNAUDITED)

~~June~~September 30 December 31 2000 1999 --------- ----------- ASSETS Current Assets: Cash and cash equivalents $ 84,~~679~~495 $ 13,633 Trade receivables, net 1512,~~567~~857 14,862 Supplies inventory ~~1,019~~806 773 Prepaid expenses and other 1,~~258~~143 1,275 --------- ----------- Total current assets 2619,~~523~~301 30,543 Property and Equipment, at cost: 23,~~454~~980 20,262 Less accumulated depreciation (1314,~~516~~060) (12,725) --------- ----------- 9,~~938~~920 7,537 Deferred Financing Costs 2,~~454~~344 2,677 Deferred Tax Assets 45,~~554~~544 4,664 Goodwill (Net) ~~722~~652 -- Other Long Term Assets ~~287~~269 -- --------- ----------- TOTAL ASSETS $ 4438,~~478~~030 $ 45,421 ========= =========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current Liabilities: Noncleared rebate items $ 76,~~449~~483 $ 8,705 Accounts payable 2,~~102~~403 1,725 Collections due to and advances from clients 65,~~589~~535 6,823 Deferred income taxes 2,198 2,198 Current portion of long term debt ~~595~~312 -- Accrued expenses Interest 31,~~514~~193 3,514 Compensation 2,~~395~~517 3,049 Other 2,~~671~~159 2,886 --------- ----------- Total current liabilities 2722,~~513~~800 28,900 Senior Subordinated Notes 80,000 80,000 Other Long-Term Liabilities ~~563~~485 -- Commitments and Contingencies (Note 3) Redeemable Class A Common Stock, 13,922 and 33,726 shares issued and outstanding 303 734 Stockholders' Deficit Class A common stock, par value $1 per share; 3,000,000 shares authorized, 1,255,455 shares issued and outstanding 1,255 1,255 Class B common stock, par value $1 per share; 1,500,000 shares authorized, 442,884 shares issued and outstanding 443 443 Class C common stock, par value $1 per share; 1,500,000 shares authorized, 172,727 shares issued and outstanding 173 173 Additional paid-in capital 36,219 36,107 Retained deficit (~~101~~103,~~991~~648) (102,191) --------- ----------- (6365,~~901~~558) (64,213) --------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 4438,~~478~~030 $ 45,421 ========= ===========

2 5 YOUNG AMERICA HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS, UNAUDITED)

~~Six~~Nine Months Ended ~~June~~September 30, ------------------------ 2000 1999 -------- -------- Operating Activities: Net (loss) income $ ~~199~~(1,457) $ 1,~~875~~290 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization 1,~~289~~957 1,~~163~~759 Deferred income taxes ~~110~~(880) ~~1,093~~722 Changes in operating assets and liabilities: Trade receivables 792,790 (12,~~363)~~103 Supplies inventory 90 (~~123~~7) ~~314~~ Prepaid expenses 79194 63135 Non-cleared rebate items (12,~~255~~222) (23,~~034~~252) Accounts payable ~~(202)~~98 ~~140~~713 Collections due to and advances from clients (~~305~~1,359) (12,~~213~~357) Accrued expenses (13,~~174~~884) ~~1,818~~(163) Other, Net ~~212~~(53) (~~219~~305) -------- -------- Net cash provided by (used in) operating activities (14,~~091~~726) ~~1,637~~638 -------- -------- Investing Activities Acquisition of SourceOne (1,~~695~~640) -- Purchases of property and equipment, net (2,~~068~~594) (~~424~~869) -------- -------- Net cash used in investing activities (34,~~763~~234) (~~424~~869) -------- -------- Financing Activities: Repayment of capital lease obligations (58136) -- Increase in other long-term debt 276 -- Redemption of common stock (318) (82) -------- -------- Net cash used in financing activities (~~100~~178) (82) -------- -------- Change in cash and cash equivalents (49,~~954~~138) ~~1,131~~(313) Cash and Cash Equivalents: Beginning of period 13,633 12,220 -------- -------- End of period $ 84,~~679~~495 $ 1311,~~351~~907 ======== ======== ~~Suplemental~~Supplemental Disclosures of Cash Flow Information: Cash payment for interest $ 49,~~725~~401 $ 49,~~676~~340 ======== ======== Income Taxes Paid $ 5 $ 735 ======== ======== Assumption of Capital Lease Obligations (see note 2) $ 446 $ -- ======== ========

3 6 YOUNG AMERICA HOLDINGS, INC. Notes to Consolidated Financial Statements (in thousands, except share data - unaudited) 1. BASIS OF PRESENTATION - PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Young America Holdings, Inc. ("Holdings") and its wholly-owned subsidiaries, Young America Corporation ("Young America" or "YAC") and YAC.ECOM, Inc. ("YAC.ECOM"). As used herein, the "Company" refers collectively to Holdings, YAC, YAC.ECOM and YAC's wholly owned subsidiary, SourceOne Worldwide, Inc. ("SourceOne"). All significant intercompany items have been eliminated. In the opinion of management, all adjustments (which include reclassifications and normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows at September 30, 2000, and for all periods presented, have been made. During the fourth quarter of 1999, the Company revised the presentation of revenues in its Statements of Operations. The Company had previously reported all billed amounts that were priced to include a margin element. These revenues included the full value of rebate payments funded with the Company's working capital and the amount billed to clients for shipping merchandise and mailing checks. The Company now presents as revenues (i) service fees for rendering consumer interaction processing ("CIP") services, (ii) the margin obtained from using working capital to fund client rebate checks (referred to in the industry as "slippage"), and (iii) the margin realized on postage and freight billings as a result of discounts and presorting and other postal cost reduction techniques which are available to the Company. Revenues previously reported have been revised to conform to the new presentation. Such revisions had no effect on previously reported gross profit, net income (loss) to stockholders' deficit. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. It is suggested that the information included in this Form 10-Q be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Holding's. Annual Report on Form 10-K for the year ended December 31, 1999. Revenues and operating results for the three and nine months ended September 30, 2000 are not necessarily indicative of the results to be expected for the full year. 2. ACQUISITION OF SOURCEONE WORLDWIDE In January 2000, the Company, through its wholly owned subsidiary, SourceOne, acquired certain assets and assumed certain liabilities of SourceOne Worldwide LLC, for an aggregate purchase price of approximately $2 million. In addition, in conjunction with the acquisition, obligations of $.4 million to the Company were forgiven. SourceOne provides comprehensive business support and marketing services. SourceOne Worldwide LLC had annual revenues of approximately $5.7 million during the year ended December 31, 1999. 4 7 YOUNG AMERICA HOLDINGS, INC. Notes to Consolidated Financial Statements - (Continued) (in thousands, except share data - unaudited) 3. DEBT On February 23, 1998, YAC issued $80,000 of 11 5/8% Senior Subordinated Notes, due 2006 (the "Notes"). Interest on the Notes is payable semiannually in arrears on February 15 and August 15 of each year, beginning August 15, 1998. The Notes are unconditionally guaranteed, on an unsecured senior subordinated basis, by Holdings. The guarantee, which is full and unconditional and which is being provided on a joint and several basis with any future subsidiaries of YAC that become guarantors, is a general unsecured obligation of Holdings. Separate financial statements of YAC have not been presented as management has determined that they would not be material to investors given that (i) YAC is a wholly-owned subsidiary of Holdings, (ii) YAC holds and represents substantially all of the assets, liabilities, and operations of the consolidated entity, and (iii) Holdings has provided a full and unconditional guarantee of the Notes. The Notes are not redeemable prior to February 15, 2002, except as provided below. On or after such date, the Notes are redeemable, in whole or in part, at the option of YAC at the following redemption prices set forth herein, plus accrued and unpaid interest to the date of redemption set forth below: 2002....................... 105.813% 2003....................... 103.875 2004....................... 101.938 2005 and thereafter........ 100.000

In addition, at any time on or prior to February 15, 2001, YAC, at its option, may redeem, with the net cash proceeds of one or more equity offerings, up to 35% of the aggregate principal amount of the Notes at a redemption price equal to 111.625% of the principal amount thereof, plus accrued and unpaid interest thereon, if any, to the date of redemption; provided that at least 65% of the aggregate principal amount of the Notes remains outstanding immediately following such redemption. Additionally, upon a Change of Control (as defined in the indenture under which the Notes were issued (the "Indenture")), each holder of Notes would have the right to require YAC to repurchase such holder's Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date. The Notes are not subject to sinking-fund requirements. The Notes are general unsecured obligations of Holdings and YAC and are subordinated in right of payment to all existing and future senior indebtedness of Holdings and YAC, including obligations under the Credit Facility (as defined below). The Indenture contains certain covenants with respect to YAC, and any future subsidiaries YAC may form or acquire, that restrict, among other things, the incurrence of additional indebtedness, the payment of dividends and other restricted payments, the creation of certain liens, the use of proceeds from sales of assets and subsidiary stock, and transactions with affiliates. The Indenture also restricts the ability of Holdings and YAC to consolidate or merge with or into, or to transfer all or substantially all of their respective assets to, another entity. The Company has a revolving credit facility ("Credit Facility") with Wells Fargo Bank Minnesota, N.A. ("Wells Fargo"), which provides for borrowings of up to $10,000, based on a borrowing base formula equal to 85% of Eligible Receivables less Noncleared Rebate Items net of cash and cash equivalents (as defined in the Credit Facility), and has a final maturity date of March 31, 2001. The Credit Facility does not have any commitment reductions scheduled before maturity. Borrowings under the Credit Facility will accrue interest, at the option of the Company, at either Wells Fargo's base rate or at an interest rate equal to the London interbank rate for Eurodollar deposits for one, two or three month interest periods plus 2.5%. A fee of .5% per annum is payable with respect to the unused Commitment Amount (as defined in the Credit Facility). The Credit Facility is secured by a first-priority interest in accounts receivable and related general intangibles of YAC. The Credit Facility was last amended on August 21, 2000 (the "Amended Facility"). The Amended Facility requires the Company to meet certain restrictive covenants including a minimum interest coverage ratio, a minimum current ratio, and minimum cumulative EBITDA. The Company was in compliance or received waivers for all such covenants as of September 30, 2000. There were no amounts outstanding under the Amended Facility as of September 30, 2000. 5 8 YOUNG AMERICA HOLDINGS, INC. Notes to Consolidated Financial Statements - (Continued) (in thousands, except share data - unaudited) 4. CONTINGENCIES Litigation The Company is exposed to asserted and potential unasserted claims encountered in the normal course of business. The Company does not believe the resolution of existing asserted claims will have a material adverse effect on the Company's financial position. Leases The Company has operating leases for warehouse space and equipment. The future minimum payments under these obligations are as follows: Years ending December 31: 2000........... $7,304 2001........... 4,698 2002........... 2,942 2003........... 1,917 2004........... 1,011

6 9 YOUNG AMERICA HOLDINGS, INC. Notes to Consolidated Financial Statements - (Continued) (in thousands, except share data - unaudited) Guarantees Sweepstakes performance bonds are guaranteed for certain clients based on certain financial criteria. The Company had guaranteed approximately $36,236 and $35,044 in performance bonds for various clients, as of September 30, 2000, and December 31, 1999, respectively. The Company also obtains an indemnity agreement from these clients indemnifying the Company from obligations under the performance bonds. Future Obligations As a result of a recapitalization of the Company in 1997, Holdings is obligated to make additional payments to the former majority shareholders, subject to Holdings achieving certain excess cash flow targets as defined. To the extent cumulative excess free cash flow of the Company for the four-year period ending December 31, 2001, exceeds $93,000, Holdings is required to make an additional purchase price payment equal to 20% of such excess, subject to a maximum amount payable of $15,000. Any portion of theses payments made to management will result in compensation charges in the period the amount becomes determinable. 5. SUPPLEMENTARY FINANCIAL DATA The following condensed financial information presents certain balance sheet and statement of operations data related to the Company's business for the three and six months ended September 30, 2000 and 1999 and as of September 30, 2000 and December 31, 1999. Separate financial statements and other disclosures concerning the issuer have not been presented because management believes that such information is not material.

~~2002.......................105.813%~~Three ~~2003.......................103.~~Months Ended Nine Months Ended September 30 September 30 2000 1999 2000 1999 -------- -------- -------- -------- Revenues: Holdings $ -- $ -- $ -- $ -- YAC and Subsidiary 16,646 17,875 ~~2004~~61,844 62,283 YAC.ECOM 109 57 362 69 -------- -------- -------- -------- Consolidated $ 16,755 $ 17,932 $ 62,206 $ 62,352 ======== ======== ======== ======== Gross Profit: Holdings $ -- $ -- $ -- $ -- YAC and Subsidiary 3,894 5,393 18,520 20,480 YAC.~~.....................101.938~~ECOM ~~2005~~29 (9) 69 (9) -------- -------- -------- -------- Consolidated $ 3,923 $ 5,384 $ 18,589 $ 20,471 ======== ======== ======== ======== Net (loss) Income: Holdings $ 3 $ 2 $ 10 $ 6 YAC and ~~thereafter~~Subsidiary (1,677) (578) (1,509) 1,293 YAC.~~.......100.000%~~ECOM 18 (9) 42 (9) -------- -------- -------- -------- Consolidated $ (1,656) $ (585) $ (1,457) $ 1,290 ======== ======== ======== ========

7 10 YOUNG AMERICA HOLDINGS, INC. Notes to Consolidated Financial Statements - (Continued) (in thousands, except share data - unaudited)

~~Years~~September ~~ending~~30 December 31: 2000~~..........~~ 1999 ------------ ----------- Current Assets: Holdings $7 402 $ 385 YAC and Subsidiary 18,~~302~~847 ~~2001...........4~~30,~~688~~060 ~~2002~~YAC.~~..........~~ECOM 52 98 ------- ------- Consolidated $19,301 $30,543 ======= ======= Noncurrent Assets: Holdings $ 2,~~931~~242 ~~2003~~$ 2,358 YAC and Subsidiary 16,487 12,520 YAC.ECOM -- -- ------- ------- Consolidated $18,729 $14,878 ======= ======= Current Liabilities: Holdings $ -- $ -- YAC and Subsidiary 22,778 28,794 YAC.~~.........1~~ECOM 22 106 ------- ------- Consolidated $22,~~909~~800 ~~2004~~$28,900 ======= ======= Noncurrent Liabilities: Holdings $ -- $ -- YAC and Subsidiary 80,485 80,000 YAC.~~..........1~~ECOM -- -- ------- ------- Consolidated $80,~~014~~485 $80,000 ======= =======

8 11 YOUNG AMERICA HOLDINGS, INC. Notes to Consolidated Financial Statements - (Continued) (in thousands, except share data - unaudited) 6. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for years beginning after June 15, 1999. SFAS No. 133 established accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No.133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. Special accounting for qualifying hedges allow a derivative's gains or losses to offset related results on the hedged item in the income statement and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. During the first quarter of 2000, the Company adopted SFAS No. 133, which had no affect on the results of operations or financial position. 7. SEGMENT REPORTING: In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company provides consumer interactive processing services for its customers and operates as a single reportable business segment. The Company internally evaluates its business principally by revenue category; however, because of the similar economic characteristics of the operations, including the nature of services and the customer base, those operations have been aggregated following the provisions of SFAS No. 131 for segment reporting purposes. The following is a summary of the composition of revenues by revenue category for the three and six months ended September 30, 2000, and 1999:

Three Months Ended ~~Six~~Nine Months Ended ~~June~~September 30, ~~June~~September 30, ~~2000 1999 2000 1999~~ -------- -------- -----~~---~~ -------- ~~Revenues: Holdings $~~ - $ - $ - $ - ~~YAC and Subsidiary 21,277 21,030 45,198 44,420 YAC.ECOM 139~~ - ~~253~~ - -------- ~~--------~~2000 ~~--------~~1999 ~~--------~~2000 ~~Consolidated~~1999 ~~$ 21,416 $ 21,030 $ 45,451 $ 44,420 ======== ======== ======== ======== Gross Profit: Holdings $~~ - $ - $ - $ - ~~YAC and Subsidiary 6,822 7,577 14,626 15,087 YAC.ECOM 23~~ - 40 - -~~-------~~ -------- -------- -------- ~~Consolidated~~CIP $services ~~6,845~~ $ 714,~~577~~888 $ 14,~~666~~983 $ 1554,~~087~~640 ~~======== ======== ======== ======== Net (loss) Income: Holdings~~ $53,823 4Rebate $revenues -1,374 $2,104 75,750 $6,108 -Postage ~~YAC~~ and ~~Subsidiary~~freight ~~(279)~~billings ~~925~~493 ~~168~~845 1,~~875~~816 ~~YAC.ECOM~~2,421 14 - 24 - -----~~---~~ -------- -------- -------- ~~Consolidated~~ $16,755 ~~(261)~~ $17,932 ~~925~~ $62,206 ~~199~~ $ 162,~~875~~352 ======== ======== ======== ========

9 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues. Revenues were $16.8 million in the third quarter of 2000, a decrease of 6.6% over the comparable quarter in 1999. On a year-to-date basis, revenues were $62.2 million, a 0.2% decrease from the same period in 1999. The decrease in revenues in the third quarter and year-to-date was primarily a result of lower rebate and premium revenues partially offset by revenues from SourceOne of $0.9 and $3.3 million respectively. The decrease in rebate revenue is attributed to a shift in promotional strategy by several key clients. Gross Profit. The Company's gross profit for the third quarter of 2000 decreased to $3.9 million or 23.4% of revenues as compared to $5.4 million or 30.0% of revenues for the same period in 1999. Gross profits were $18.6 million or 29.9% of revenues in the first nine months of 2000 as compared to $20.5 million or 32.8% of revenues for the same period in 1999. The decline in gross profit margin was due primarily to a loss at SourceOne where the current revenue base is inadequate to absorb the cost base. Excluding the operations of SourceOne, the Company had a gross margin of 25.6% for the third quarter and 31.1% for the nine months ended September 30, 2000. This decrease in gross margin not attributable to SourceOne was primarily a result of higher information systems and technology costs incurred to provide additional services to the company's clients. These services include providing Internet processing capability, advanced e-reporting for clients and other enhancements to the company's traditional CIP offerings. Gross profit was also reduced by lower postal savings resulting from the decreased revenues. Operating Income. The third quarter 2000 resulted in an operating loss of $0.3 million compared to operating income of $1.9 million during the corresponding period of 1999. Year-to- date operating income was $4.7 million or 7.5% of revenues as compared to $8.9 million or 14.3% of revenues for the first nine months of 1999. The decrease in the quarter and year-to-date operating income is primarily attributable to SourceOne expenses of $0.8 and $1.9 million, respectively. SourceOne expenses included $0.5 million in non-recurring integration costs in the first nine months. Operating income excluding the operations of SourceOne was 10.7% of revenues for the nine months ending September 30,2000, a decrease from 14.2% of revenues for the same period in 1999. The remaining decrease in operating income results from the impact of the decreased gross margin and operating expenses related to the new sales and administrative headquarters in Chanhassen, Minnesota Interest Expense. Interest expense of $2.4 million and $7.1 million for the quarter and nine month period ended September 30, 2000 was consistent with the interest expense recorded in the corresponding period last year. Income Taxes. The Company recorded income tax benefits of $1.0 million and $0.9 million for the three and nine month periods ending September 30, 2000, respectively, as compared to an income tax benefit of $0.3 million and an income tax provision of $0.8 million, respectively, for the corresponding periods in 1999. The decrease in the tax provision is attributed to net losses in the 2000 periods. Net Income. As a result of the foregoing factors, the Company reported net losses of $1.7 million and $1.5 million for the three and nine months ended September 30, 2000, as compared to a net loss of $0.6 million and net income of $1.3 million, respectively, for the corresponding periods in 1999. 10 13 LIQUIDITY AND CAPITAL RESOURCES At September 30, 2000, no amounts were outstanding under the Company's $10 million credit facility (the "Credit Facility") with Wells Fargo Bank Minnesota, N.A. ("Wells Fargo"). The Company had a stockholders' deficit of $65.6 million, and indebtedness of $80.5 million represented by the Notes and other long term financing agreements. The Company had net negative working capital of $3.5 million. For additional information with respect to the Notes, see Note 3 of the Unaudited Consolidated Financial Statements. The Company has historically financed its operations and capital expenditures principally through cash flow from operations. The Company also maintains the Credit Facility, which is collateralized by accounts receivable and other assets as detailed below. In addition, the Company operates facilities and technology-related equipment under operating leases with third parties. See Note 4 of the Unaudited Consolidated Financial Statements for a summary of Company commitments under such operating lease agreements. For the nine month period ended September 30, 2000, the Company's operations used cash of $4.7 million compared to cash generated of $0.6 million for the same period in 1999. The $4.7 million of cash used by operating activities in 2000 was principally the result of timing of cash payments and $1.6 million of 1999 bonus and profit sharing payments made during the first quarter of 2000 and expensed in 1999. The Company's future cash flow from operations will continue to reflect interest that will be incurred on outstanding indebtedness, including the Notes. Net cash used in investing activities for the nine month periods ended September 30, 2000 and 1999 was $4.2 million and $.9 million, respectively. These expenditures principally relate to the acquisition of SourceOne for $1.7 million, purchases of furniture and fixtures and computer equipment needed for the new corporate headquarters in Chanhassen, Minnesota and the investment in new finance and human resource software. The Company's capital expenditure forecast for 2000 totals $3.8 million. The Company will rely mainly on internally generated funds, and to the extent necessary, borrowings under the Credit Facility to meet its liquidity needs. The Company also expects to continue to utilize operating leases to finance facilities and certain equipment expenditures. The Company believes that the cash flow from operations together with existing cash and cash equivalents and available borrowings under the Credit Facility will be adequate to meet its liquidity requirements, including interest payments with respect to the Notes, for the next 12 months. The Credit Facility provides for borrowings of up to $10.0 million based on a borrowing base formula equal to 85% of Eligible Receivables less Noncleared Rebate Items net of cash and cash equivalents (as defined in the Credit Facility) and has a final maturity date of March 31, 2001. The Credit Facility does not have any commitment reductions scheduled before maturity. Borrowings under the Credit Facility accrue interest, at the option of the Company, at either Wells Fargo's base rate or at an interest rate equal to the London interbank rate for Eurodollar deposits for one, two or three month interest periods plus 2.5%. A fee of .5% per annum is payable with respect to the unused Commitment Amount (as defined in the Credit Facility) The Credit Facility is secured by a first priority interest in accounts receivable and related general intangibles of YAC. The Credit Facility was last amended on August 21, 2000 (the "Amended Facility"). The Amended Facility requires the Company to meet certain restrictive covenants including a minimum interest coverage ratio, a minimum current ratio, and minimum cumulative EBITDA. The Company was in compliance or received waivers for all such covenants as of September 30, 2000. In addition, the Credit Facility contains other covenants that, among other things, restrict acquisitions, investments, dividends, liens and other indebtedness, management fees, disposition of assets, change of voting control and guarantees. There were no amounts outstanding under the Amended Facility as of September 30, 2000. In compliance with certain state laws, the Company obtains performance bonds in connection with sweepstakes programs it manages on behalf of its clients. The Company is indemnified by its clients for any obligations on those performance bonds, and the cost to the Company of obtaining the performance bonds plus a markup is billed to the clients. 11 14 The Company's ability to pay principal and interest on the Notes and to satisfy its other debt obligations will depend upon its future operating performance, which performance will be affected by prevailing economic conditions and financial, business and other factors, certain of which are beyond the control of the Company. The Company's ability to pay principal and interest on the Notes and to satisfy its other debt obligations will also depend upon the future availability of revolving credit borrowings under the Credit Facility or any successor facility. Such availability is or may depend on, among other things, the Company meeting certain specified covenants and borrowing base prerequisites. If the Company is unable to service its indebtedness, it will be forced to take actions such as reducing operating expenses, reducing or delaying acquisitions or capital expenditures, selling assets, restructuring or refinancing its indebtedness (which could include the Notes), or seeking additional equity capital. There is no assurance that any of these remedies can be effected on satisfactory terms, if at all. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The Company is exposed to various market risks, including changes in interest rates. Market risk is the potential loss arising from adverse changes in market rates and prices, such as interest rates. The Company does not enter into derivative or other financial instruments for trading or speculative purposes. For fixed rate debt, interest changes affect fair market value but do not impact earnings or cash flows. At September 30, 2000, the Company had fixed rate debt of $80.0 million. Holding other variables constant, a 1% increase or decrease in interest rates would increase or decrease the unrealized fair market value of the fixed rate debt by approximately $1.2 million. 12 15 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits as follows. 3.1 Articles of Incorporation of Young America (incorporated by reference to Exhibit 3.1 of the Registrant's Registration Statement on Form S-4 (File N. 333-49749) (the "S-4 Registration Statement"). 3.2 Amended and Restated Articles of Incorporation of Holdings (incorporated by reference to Exhibit 3.2 of the S-4 Registration Statement). 3.3 Bylaws of Young America (incorporated by reference to Exhibit 3.3 of the S-4 Registration Statement). 3.4 Restated Bylaws of Holdings (incorporated by reference to Exhibit 3.4 of the S-4 Registration Statement). 4.1 Indenture dated as of February 23, 1998 for the Notes (including the form of New Notes attached as Exhibit B thereto) among Young America, Holdings and Marine Midland Bank, as Trustee (incorporated by reference to Exhibit 4.1 of the S-4 Registration Statement). 4.2 Registration Rights Agreement dated as of February 23, 1998 among Young America Holdings and the Initial Purchaser (incorporated by reference to Exhibit 4.2 of the S-4 Registration Statement). 10.0 Fourth Amendment to Credit Agreement between Young America Corporation and Wells Fargo bank, National Association dated August 21, 2000. 10.1 Wells Fargo Bank Waiver dated November 2,2000. 27 Financial Data Schedule b) Reports on Form 8-K - None 13 16 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized. Date: November 9, 2000 By: /s/ CHARLES D. WEIL ---------------------------- Name: Charles D. Weil Title: President By: /s/ ROGER D. ANDERSEN ----------------------------- Name: Roger D. Andersen Title: Vice President of Finance, Treasurer, Secretary and Chief Financial Officer (principal financial officer and principal accounting officer) Young America Holdings, Inc. Date: November 9, 2000 By: /s/ CHARLES D. WEIL ---------------------------- Name: Charles D. Weil Title: President By: /s/ ROGER D. ANDERSEN ----------------------------- Name: Roger D. Andersen Title: Vice President of Finance, Treasurer, Secretary and Chief Financial Officer (principal financial officer and principal accounting officer) 14

June 30 December 31 2000 1999 -------- --------- Current Assets: Holdings $ 396 $ 385 YAC and Subsidiary 26,008 30,060 YAC.ECOM 119 98 -------- --------- Consolidated $26,523 $ 30,543 ======== ========= Noncurrent Assets: Holdings $ 2,280 $ 2,358 YAC and Subsidiary 15,675 12,520 YAC.ECOM - - -------- --------- Consolidated $17,955 $ 14,878 ======== ========= Current Liabilities: Holdings $ - $ - YAC and Subsidiary 27,390 28,794 YAC.ECOM 123 106 -------- --------- Consolidated $27,513 $ 28,900 ======== ========= Noncurrent Liabilities: Holdings $ - $ - YAC and Subsidiary 80,563 80,000 YAC.ECOM - - -------- --------- Consolidated $80,563 $ 80,000 ======== =========

Three Months Ended Six Months Ended June 30, June 30, --------------------------------------- -------------------------------------- 2000 1999 2000 1999 ---------------- ----------------- ------------ ------------- CIP services $ 18,664 $ 17,836 $ 39,752 $ 38,840 Rebate revenues 2,128 2,430 4,376 4,004 Postage and freight billings 624 764 1,323 1,576 ---------------- ----------------- ------------ ------------- $ 21,416 $ 21,030 $ 45,451 $ 44,420 ================ ================= ============ =============

Date: August 9, 2000 By: /s/ CHARLES D. WEIL ---------------------------- Name: Charles D. Weil Title: President By: /s/ ROGER D. ANDERSEN ----------------------------- Name: Roger D. Andersen Title: Vice President of Finance, Treasurer, Secretary and Chief Financial Officer (principal financial officer and principal accounting officer) Young America Holdings, Inc. Date: August 9, 2000 By: /s/ CHARLES D. WEIL ---------------------------- Name: Charles D. Weil Title: President By: /s/ ROGER D. ANDERSEN ----------------------------- Name: Roger D. Andersen Title: Vice President of Finance, Treasurer, Secretary and Chief Financial Officer (principal financial officer and principal accounting officer)

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