10-Q 1 g65139e10-q.txt CATALINA MARKETING CORPORATION 1 =============================================================================== 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 1-11008 CATALINA MARKETING CORPORATION ------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Delaware 33-0499007 ------------------------------ ---------------------- (State of Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 200 Carillon Parkway St. Petersburg, Florida 33716 ---------------------------------------- ---------- (Address of Principal Executive Offices) (Zip Code) (727) 579-5000 ---------------------------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At November 7, 2000, Registrant had outstanding 55,503,608 shares of Common Stock. =============================================================================== 2 CATALINA MARKETING CORPORATION INDEX Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Statements of Income for the three and six month periods ended September 30, 2000 and 1999 3 Condensed Consolidated Balance Sheets at September 30, 2000 and March 31, 2000 4 Condensed Consolidated Statements of Cash Flows for the six month periods ended September 30, 2000 and 1999 5 Notes to Condensed Consolidated Financial Statements 6 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 4. Submission of Matters to a Vote of Security Holders 12 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14 2 3 CATALINA MARKETING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (dollars in thousands, except per share data) (unaudited)
Three Months Ended Six Months Ended September 30, September 30, --------------------- ----------------------- 2000 1999 2000 1999 --------- -------- --------- --------- Revenues $ 101,836 $ 86,828 $ 195,780 $ 159,442 Costs and Expenses: Direct operating expenses 41,776 36,369 81,032 65,705 Selling, general and administrative 26,172 22,648 51,396 43,288 Depreciation and amortization 10,175 8,577 20,452 16,764 --------- -------- --------- --------- Total costs and expenses 78,123 67,594 152,880 125,757 --------- -------- --------- --------- Income From Operations 23,713 19,234 42,900 33,685 Interest Expense, Net and Other (43) (9) (705) (210) --------- -------- --------- --------- Income Before Income Taxes and Minority Interest 23,670 19,225 42,195 33,475 Income Taxes (8,999) (7,728) (16,042) (13,458) Minority Interest in Losses of Subsidiaries 391 175 651 358 --------- -------- --------- --------- Net Income $ 15,062 $ 11,672 $ 26,804 $ 20,375 Diluted: Earnings Per Common Share $ 0.26 $ 0.20 $ 0.46 $ 0.35 Weighted Average Common Shares Outstanding 58,348 58,098 57,901 58,278 Basic: Earnings Per Common Share $ 0.27 $ 0.21 $ 0.48 $ 0.36 Weighted Average Common Shares Outstanding 55,786 55,875 55,586 55,950
The accompanying Notes are an integral part of these consolidated financial statements. 3 4 CATALINA MARKETING CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands)
(unaudited) September 30, March 31, 2000 2000 ------------ --------- ASSETS Current Assets: Cash and cash equivalents $ 4,001 $ 13,765 Accounts receivable, net 65,174 59,261 Deferred tax asset 11,022 10,463 Prepaid expenses and other current assets 29,744 31,883 --------- --------- Total current assets 109,941 115,372 --------- --------- Property and Equipment: Property and equipment 284,009 255,216 Accumulated depreciation and amortization (156,983) (140,216) --------- --------- Property and equipment, net 127,026 115,000 --------- --------- Purchased intangible assets, net 85,385 70,400 Other assets 6,317 2,980 --------- --------- Total Assets $ 328,669 $ 303,752 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable $ 15,949 $ 17,862 Accrued expenses 44,788 54,486 Deferred revenue 46,387 40,444 Short term borrowings 21,288 29,493 --------- --------- Total current liabilities 128,412 142,285 --------- --------- Deferred tax liability 10,177 8,380 Minority interest 592 1,228 Long term debt 8,726 10,814 --------- --------- Commitments and Contingencies Stockholders' Equity: Preferred stock; $0.01 par value; 5,000,000 authorized shares; none issued and outstanding -- -- Common stock; $0.01 par value; 150,000,000 authorized shares and 55,497,709 and 54,602,457 shares issued and outstanding at September 30, 2000 and March 31, 2000, respectively 554 546 Paid-in capital 14,838 897 Accumulated other comprehensive (loss) income (950) 86 Retained earnings 166,320 139,516 --------- --------- Total stockholders' equity 180,762 141,045 --------- --------- Total Liabilities and Stockholders' Equity $ 328,669 $ 303,752 ========= =========
The accompanying Notes are an integral part of these consolidated financial statements. 4 5 CATALINA MARKETING CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited)
Six Months Ended September 30, --------------------- 2000 1999 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 26,804 $ 20,375 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest (651) (358) Depreciation and amortization 20,452 16,764 Tax benefit from exercise of non-qualified options and disqualified dispositions 3,640 4,304 Other 152 6,127 Changes in operating assets and liabilities (2,360) 7,798 -------- -------- Net cash provided by operating activities 48,037 55,010 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net (30,290) (25,641) Purchase of investments, net of cash acquired (28,372) (24,689) -------- -------- Net cash used in investing activities (58,662) (50,330) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings on credit facility (9,509) 10,000 Proceeds from debt obligations 0 13,524 Principal payments on debt obligations (7) (8,764) Proceeds from issuance of common and subsidiary stock 10,731 11,796 Payment for repurchase of company common stock 0 (34,531) -------- -------- Net cash provided by (used in) financing activities 1,215 (7,975) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (9,410) (3,295) Effect of exchange rate changes on cash and cash equivalents (354) (90) CASH AND CASH EQUIVALENTS, at end of prior period 13,765 13,942 ======== ======== CASH AND CASH EQUIVALENTS, at end of current period $ 4,001 $ 10,557 ======== ========
The accompanying Notes are an integral part of these consolidated financial statements. 5 6 CATALINA MARKETING CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1. Condensed Consolidated Financial Statements: In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the financial position of the Company as of September 30, 2000 and March 31, 2000, the results of operations for the three and six months ended September 30, 2000 and 1999 and cash flows for the six month periods ended September 30, 2000 and 1999. The condensed consolidated financial statements include the accounts of the Company and its wholly and majority-owned subsidiaries. The second quarter balances and results of the wholly and majority-owned foreign subsidiaries are included as of September 30, 2000 for the three and six month periods ended September 30, 2000 and 1999, respectively. All material intercompany profits, transactions, and balances have been eliminated. These financial statements, including the condensed consolidated balance sheet as of March 31, 2000, which has been derived from audited financial statements, are presented in accordance with the requirements of Form 10-Q and consequently may not include all disclosures normally required by generally accepted accounting principles or those normally made in the Company's Annual Report on Form 10-K. The accompanying condensed consolidated financial statements and related notes should be read in conjunction with the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2000. A three-for-one stock split of the Company's outstanding common stock, effected as a stock dividend and an increase in the authorized common shares were approved by the Company's Board of Directors, and the increase in the authorized common shares was approved by the Company's stockholders at the annual meeting held on July 18, 2000. The stock dividend was paid August 17, 2000 to stockholders of record on July 26, 2000. Common stockholders received two additional shares of common stock for each registered share as of July 26, 2000. All applicable references to common stock shares, including the calculations of earnings per share have been adjusted for all periods shown to reflect the stock split and the increase in authorized shares. 6 7 Note 2. Net Income Per Common Share: The following is a reconciliation of the denominator of basic earnings per share (EPS) to the denominator of diluted EPS (in thousands):
Three months ended Six months ended September 30, September 30, - ---------------- ----------------- 2000 1999 2000 1999 ------ ------ ------ ------ Basic weighted average common shares outstanding 55,786 55,875 55,586 55,950 Dilutive effect of options outstanding 2,562 2,223 2,315 2,328 ------ ------ ------ ------ Diluted weighted average common shares outstanding 58,348 58,098 57,901 58,278
Options to purchase 71,400 shares of common stock at an exercise price per share of $35 5/8 were outstanding at September 30, 2000, and 361,950 shares of common stock at exercise prices per share ranging from $30 7/16 to $35 5/8 were outstanding at September 30, 1999, but were not included in the computation of diluted EPS for the relevant time period because the options' exercise prices were greater than the average market price of common stock. Note 3. Comprehensive Income:
Three months ended Six months ended September 30, September 30, ---------------------- --------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (in thousands) (in thousands) Net income $ 15,062 $ 11,672 $ 26,804 $ 20,375 Other comprehensive income, net of tax: Currency translation adjustment (725) (695) (1,036) (1,281) -------- -------- -------- -------- Comprehensive Income $ 14,337 $ 10,977 $ 25,768 $ 19,094
Note 4. Credit Facility: On September 25, 2000, the Company entered into a new credit agreement (the Agreement) with a syndicate of commercial banks including Bank One, NA as the Administrative Agent (Bank One), First Union National Bank as the Syndication Agent and Wachovia Bank, N.A. as the Documentation Agent. The Agreement provides for a revolving loan credit facility of up to $150 million in favor of the Company. The termination date of the revolving loan credit facility is September 25, 2003. Borrowings under the Agreement accrue interest at rates based upon either (i) the British Bankers' Association Interest Settlement Rate (Eurodollar Rate) plus an applicable margin 7 8 ranging from 50 to 87.5 basis points, or (ii) the higher of 50 basis points over the Federal Funds Rate or Bank One's prime rate of interest. The Agreement is guaranteed by several Company subsidiaries, and contains certain financial covenants and other terms and conditions. As of September 30, 2000, $7,000,000 was outstanding under the Agreement. Note 5. Acquisitions: Effective June 1, 2000, the Company, through one of its wholly-owned subsidiaries, acquired 100 percent of the outstanding common shares of HealthCare Data Corporation, a company which provides strategic targeted marketing solutions for health-related and pharmaceutical manufacturers and retailers, for $14.2 million in cash, net of cash acquired. The purchase has been accounted for using the purchase method of accounting for acquisition and, accordingly, the results of operations of HealthCare Data Corporation have been included in the fiscal 2001 condensed consolidated financial statements of the Company since the effective date of such acquisition. Effective September 1, 2000, the Company, through one of its wholly-owned subsidiaries, acquired 100% of the outstanding common shares of Market Intelligence, Inc., an attitudinal research company, for approximately $1.0 million. The terms of the acquisition provide for additional payments of up to $1.0 million, contingent upon the business unit's performance. The purchase has been accounted for using the purchase method of accounting and, accordingly, the results of operations of Market Intelligence, Inc., have been included in the fiscal 2001 condensed consolidated financial statements of the Company since the effective date of the acquisition. Note 6. Segment Information (in thousands):
For the Three Months Ended September 30, ------------------------------------------------------- 2000 1999 ------------------------- ------------------------- Targeted Targeted Marketing Marketing Services Eliminations Services Eliminations --------- ------------ --------- ------------ Revenue from external customers $101,836 $ 86,828 Revenue from internal sources 5,670 (5,670) 344 (344) Net income 15,062 11,672
8 9
For the Six Months Ended September 30, ------------------------------------------------------- 2000 1999 ------------------------- ------------------------- Targeted Targeted Marketing Marketing Services Eliminations Services Eliminations --------- ------------ --------- ------------ Revenue from external customers $195,780 $ 159,442 Revenue from internal sources 7,287 (7,287) 654 (654) Net income 26,804 20,375
Note 7. Effect of SFAS No.133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133, as amended, is effective for financial statements relating to fiscal years beginning after June 15, 2000. The Company expects SFAS No. 133 to have no effect on its financial statements. ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS: FISCAL 2001 COMPARED TO FISCAL 2000 The Company's revenues for the second quarter of fiscal 2001 increased 17.3 percent, compared with the same period in fiscal 2000. The increase in revenues is due to an increase in promotions printed worldwide, increases in direct mail marketing programs and the acquisitions of HealthCare Data Corporation and Market Intelligence, Inc., effective June 1, 2000 and September 1, 2000, respectively. In the U.S., the Catalina Marketing Network was in 14,772 stores at September 30, 2000, which reach 183 million shoppers each week as compared to 12,635 stores reaching 160 million shoppers each week at September 30, 1999 and 13,516 stores reaching 165 million shoppers each week at March 31, 2000. The Health Resource Network was in 14,309 pharmacies, including 7,390 acquired in the purchase of HealthCare Data Corporation, at September 30, 2000 as compared to 4,706 pharmacies at September 30, 1999 and 6,671 pharmacies at March 31, 2000. Outside the U.S., the Catalina Marketing Network was in 2,668 stores at September 30, 2000, which reach 36 million shoppers each week as compared to 2,335 stores reaching 34 million shoppers each week at September 30, 1999 and 2,587 stores reaching 35 million shoppers each week at March 31, 2000. 9 10 During the first six months of fiscal 2001 the Company installed its Catalina Marketing Network in 1,256 stores in the U.S., net of deinstallations, as compared to 543 stores in the comparable fiscal 2000 period. Store installations in the first half of fiscal 2001 in the Catalina Marketing Network included 453 PETsMart stores. The Company also installed its Health Resource Network in 248 pharmacies in the first half of fiscal 2001, net of deinstallations, as compared to 845 stores in the comparable fiscal 2000 period. Outside the U.S., the Company installed 98 stores in the first half of fiscal 2001, net of deinstallations, as compared to 400 stores in the comparable fiscal 2000 period. Deinstallation activity occurs primarily through the consolidation of supermarket chains and store closures made by retailers in the ordinary course of business. Direct operating expenses consist of retailer fees, paper, sales commissions, loyalty and direct marketing expenses, provision for doubtful accounts, the expenses of operating and maintaining the Catalina Marketing and Health Resource Network (primarily expenses relating to operations personnel and service offices), and the direct expenses associated with operating the outdoor media business in a majority-owned subsidiary in Asia. Direct operating expenses increased in absolute terms to $41.8 million and $81.0 million for the second quarter and first six months of fiscal 2001, respectively, from $36.4 million and $65.7 million in the comparable periods of fiscal 2000. Direct operating expenses as a percentage of revenues in the second quarter of fiscal 2001 decreased to 41.0 percent from 41.9 percent in the comparable period of fiscal 2000. Direct operating expenses as a percentage of revenues for the six month period ended September 30, 2000 increased to 41.4 percent from 41.2 percent in the comparable period of fiscal 2000. The decrease in direct operating expenses as a percentage of revenues for the second quarter ended September 30, 2000 is principally attributable to improved pricing on printer paper and toner supplies. Selling, general and administrative expenses include personnel-related costs of selling and administrative staff, overhead, marketing expenses and new product development expenses. Selling, general and administrative expenses for the second quarter and first six months of fiscal 2001 were $26.1 million and $51.4 million, respectively, compared to $22.6 million and $43.3 million for the comparable period of fiscal 2000, increases of 15.6 percent and 18.7 percent, respectively. As a percentage of revenues, selling, general and administrative expenses decreased 40 basis points in the second quarter of fiscal 2001, to 25.7 percent from 26.1 percent for the comparable period of fiscal 2000. For the six months ended September 30, 2000, selling, general and administrative expenses decreased 80 basis points to 26.3 percent, from 27.1 percent for the comparable period of fiscal 2000. Depreciation and amortization increased to $10.2 million for the second quarter of fiscal 2001 from $8.6 million for the comparable period in fiscal 2000. Depreciation increased due to the investment in capital expenditures, during the current and prior periods, associated with new operating units and product lines, data processing equipment and the increase in stores installed. Amortization expense also increased due to the increases in goodwill and other intangible assets arising out of the Company's acquisitions. 10 11 Interest expense, net and other increased to $43,000 for the second quarter of fiscal 2001 from $9,000 for the comparable period in fiscal 2000. This increase is primarily attributable to increased short term borrowing balances in the Company and its Asian subsidiary. The provision for income taxes increased to $9.0 million, or 38.0 percent of income before income taxes and minority interest, for the second quarter of fiscal 2001, compared to $7.7 million, or 40.2 percent of income before income taxes and minority interest, for the same period in fiscal 2000. The rate decrease is primarily due to the Company's ability to utilize net operating loss carry forwards of a majority owned foreign subsidiary and lower state taxes. The Company's effective tax rate is higher than the federal statutory income tax rate due to state and foreign income taxes and various nondeductible expenses, primarily the amortization of goodwill related to the Company's acquisitions. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital expenditures are store equipment and third-party store installation costs, as well as data processing equipment for the Company's central data processing facilities. Total store equipment and third-party store installation costs typically range from $3,000 to $13,000 per store. During the first six months of fiscal 2001 and 2000, the Company made capital expenditures of $30.3 million and $25.6 million, respectively. The pace of installations varies depending on the timing of contracts entered into with retailers and the scheduling of store installations by mutual agreement. During the first six months of fiscal 2001, the Company spent $1.6 million more on store equipment compared to the comparable fiscal 2000 period. Effective June 1, 2000, the Company, through one of its wholly owned subsidiaries, acquired 100 percent of the outstanding common shares of HealthCare Data Corporation for $14.2 million, net of cash acquired. Additionally, in the first quarter of fiscal 2001, investments were made totaling $10.5 million which were comprised of earnout payments attributable to past acquisitions. Effective September 1, 2000, the Company acquired 100 percent of the outstanding common shares of Market Intelligence, Inc. for $1.0 million. The Company believes working capital generated by operations along with existing credit facilities are sufficient for its overall capital requirements. Other Forward Looking Statements The statements in this Form 10-Q may be forward looking, and actual results may differ materially. Statements not based on historical facts involve risks and uncertainties, including, but not limited to, the changing market for promotional activities, especially as it relates to policies and programs of packaged goods manufacturers for the issuance of certain product coupons, the effect of economic and competitive conditions and seasonal variations, actual 11 12 promotional activities and programs with the Company's customers, the pace of installation of the Company's store network, the success of new services and businesses and the pace of their implementation, and the Company's ability to maintain favorable client relationships. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not Applicable PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's Annual Meeting of Stockholders was held on July 18, 2000. The following members were elected as Class III members of the Company's Board of Directors for the period ending as of the annual meeting of stockholders in 2003: Daniel D. Granger Michael B. Wilson The terms of the other directors of the Company continued after the meeting. These directors are: Frank H. Barker Patrick W. Collins Frederick W. Beinecke Evelyn V. Follit Thomas W. Smith With regard to the proposal to approve an amendment to the Company's Certificate of Incorporation to increase the number of shares of common stock, $.01 par value per share, which the Company is authorized to issue from 50,000,000 to 150,000,000, 16,019,503 votes were cast in favor, 424,468 were cast against, and there were 90,995 abstentions. Accordingly, the proposal was approved. With regard to the proposal to ratify and approve the Company's independent certified public accountants for fiscal 2001, 16,390,654 votes were cast in favor, 134,422 votes were cast against and there were 9,890 abstentions. Accordingly, the proposal was approved. 12 13 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a. Exhibits 10.31 Credit Agreement dated as of September 25, 2000, by and between the Registrant and Bank One, NA, as agent and lender, and the other lenders party thereto. 10.32 Amendment No. 1 To Certain Operative Agreements dated as September 15, 2000, by and between First Security Bank, National Association, as the owner trustee under Dolphin Realty Trust 1999-1, as lessor, and Catalina Marketing Sales Corporation, as lessee. 15 Acknowledgment Letter 99 Review Report of Independent Certified Public Accountants 27 Financial Data Schedule (SEC use only) b. Reports of Form 8-K None 13 14 CATALINA MARKETING CORPORATION SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, Registrant's principal financial officer, thereunto duly authorized. November 8, 2000 CATALINA MARKETING CORPORATION (Registrant) /s/ Joseph P. Port ---------------------------------- Joseph P. Port Senior Vice President and Chief Financial Officer (Authorized officer of Registrant and principal financial officer) 14