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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MARCH 31, 2000
OR
[ ] 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 or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
11300 9TH STREET NORTH, ST. PETERSBURG, FLORIDA 33716-2329
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (727) 579-5000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH
EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the 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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of such stock as of May 30, 2000, as
reported by the New York Stock Exchange, Inc., was $1,483,389,755. The number of
shares of Registrant's common stock, par value $0.01 per share, outstanding as
of May 30, 2000, was 18,325,425.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Definitive Proxy Statement for 2000 are
incorporated by reference in Part III of this report.
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TABLE OF CONTENTS
FORM 10-K
PAGE
NO.
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PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 4
Item 3. Legal Proceedings........................................... 4
Item 4. Submission of Matters to a Vote of Security Holders......... 4
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 5
Item 6. Selected Financial Data..................................... 6
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 6
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 11
Item 8. Consolidated Financial Statements and Supplementary Data.... 12
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 30
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 30
Item 11. Executive Compensation...................................... 30
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 30
Item 13. Certain Relationships and Related Transactions.............. 30
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 30
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PART I
ITEM 1. BUSINESS
GENERAL
Catalina Marketing Corporation ("Catalina Marketing" or the "Company")
provides a multi-functional communications network that provides a wide range of
strategic targeted marketing solutions for manufacturers and retailers. The
Company's unique capability is to be able to offer precision targeted marketing
in a way in which no other medium, such as television or radio, can perform.
Catalina Marketing delivers strategic marketing solutions for retailers and
manufacturers through a variety of product lines. The evolution of the Company's
product lines has resulted in a single targeted marketing services organization
with interrelated operating groups, which engages consumers to influence their
purchase decisions. As of March 31, 2000, the Company employed 1,430 people
reporting into 27 offices throughout the United States, Europe and Asia.
TARGETED MARKETING SERVICES THROUGH THE CATALINA MARKETING NETWORK(R)
Catalina Marketing Corporation was founded in 1983 to provide consumers
with in-store targeted coupons. Employing data mining technology from the
Company's in-store Network (the "Catalina Marketing Network"), Catalina
Marketing now offers in-store, online and at-home reach to provide its strategic
marketing solutions. These solutions are purchase-based, individually customized
communications and promotions for manufacturers and retailers that increase
sales through incentives, loyalty programs, sampling and advertising messages.
The Company's services enable retailers and manufacturers to impact purchase
decisions before, during and after the purchase using a variety of strategic,
targeted programs.
The primary product line of the Catalina Marketing Network is the in-store
delivery of incentives at the checkout lane. Catalina Marketing links its
proprietary software, personal computers, central databases and specially
designed thermal printers with a retailer's point-of-sale controllers and
scanners. The system prints customized promotion certificates at the point of
sale based on product Uniform Product Codes (UPCs) or other scanned information.
The printed promotions are handed to consumers by the cashier at the end of the
shopping transaction. Catalina Marketing contracts with manufacturers and
retailers to print promotions and receives a fee for each promotion printed.
Catalina Marketing enters into agreements with retail chains to install the
Catalina Marketing Network in all or selected stores within the chain, either
regionally or nationally. Upon installation, the retailer pays a one-time fee
for each installation and generally agrees to use the Network in its store for a
minimum of five years. Catalina Marketing pays distribution fees to the retailer
based on the number of manufacturer promotions printed.
The equipment installed in each retail store consists of a thermal printer
at each checkout lane linked by a personal computer on premises to the
retailer's point-of-sale controller and scanning equipment. Catalina Marketing
operates two United States data processing facilities that communicate via modem
with the personal computers installed in the stores to send promotional
instructions and retrieve performance data. All of the equipment and supplies,
including computers, printers and paper, used in a retail installation are
purchased through outside sources. While there are currently a few primary
suppliers, Catalina Marketing believes that alternate sources of supply are
available without material interruptions of the Company's business.
The services of the Catalina Marketing Network are driven by proprietary
software. The software design is flexible and upgradable, supporting new
applications that are developed and implemented on a continuous basis. This
flexibility allows the network to expand and evolve as industry or customer
requirements change.
SERVICES
Catalina Marketing offers its core programs and services through the
Catalina Marketing Network, which is operated mainly in supermarkets. These
targeted marketing solutions, including discount coupons, loyalty marketing
programs, sampling, advertising, in-store instant-win games and other
incentives, are delivered
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directly to shoppers based on their actual purchase behavior. By specifying
which purchases will "trigger" a promotion to print, manufacturers and retailers
can deliver customized incentives and messages to only the consumers they wish
to reach. An integrated program of applications is designed to reach shoppers
before, during and after the purchase.
Each application is designed to meet specific objectives of consumer
packaged goods manufacturers and supermarket retailers. Loyalty Programs allow
manufacturers and retailers to target specific households based on 52 weeks of
past purchase data. For retailers, loyalty programs include frequent shopper
card production and data management. Sampling programs target consumers based on
either current purchase behavior or through a household-level database and
deliver samples upon request. Samples can be full or trial-sized and delivered
in-store or at home. Advertising programs allow manufacturers to reach a captive
audience through a toll-free number, announcement or message delivered at the
checkout stand. In-store instant-win games are tied-in with the retailer by
offering a chance to win instantly at the checkout stand based on products that
are purchased. Couponing programs, such as Checkout Coupon(R) and Checkout
Direct(R), use patented UPC-based scanner technology to target consumers and
distribute coupons at checkout based on actual purchase behavior.
Catalina Marketing services can offer up to 13 four-week cycles of time on
the Catalina Marketing Network each year for more than 500 product categories,
such as coffee, baby food and frozen entrees. Exclusive rights to product
categories are generally given to the purchasers of specific cycle or cycles in
particular product categories, and for national programs, a right of first
acceptance to purchase the same cycles in the subsequent year is given to the
manufacturer who purchased the earlier cycles.
The primary revenue source of the Catalina Marketing Network is a function
of total promotions printed based on a promotion charge, with a minimum category
fee based on shopper reach of the network and category unit volume. Redemption
processing of these promotions is similar to that of traditional manufacturer
coupons. Retailers provide discounts to consumers who present the coupons, send
redeemed coupons to clearinghouses, and receive reimbursements for the discounts
provided and handling fees from the manufacturers.
Retail loyalty marketing services offer targeted direct mail marketing
services through Market Logic, acquired in July 1998, and loyalty card
production services through the Company's facilities based in Manasquan, New
Jersey (formally Dynamic Controls, Inc. or DCI acquired in January 1999). Retail
loyalty marketing services also provides data collection services, data storage
services, data mining services and report processing services through the
Company's facilities based in St. Petersburg, Florida.
Catalina Marketing's core domestic product lines, described above,
contributed approximately 74 percent of the Company's revenues in fiscal 2000,
80 percent in fiscal 1999, and 83 percent in fiscal 1998. As of March 31, 2000,
the Catalina Marketing Network was installed in 13,516 United States retail
stores reaching more than 165 million shoppers in the United States weekly.
The international operations of Catalina Marketing provide in-store
electronic marketing services for consumers in Europe and Asia. The Company's
current presence in Europe is in the United Kingdom and France. In fiscal 2001,
Catalina Marketing will be conducting a test pilot program in Italy with at
least two large retailers. In Asia, the Company currently operates in Japan. As
of March 31, 2000, the Company had installed its network in more than 2,200
supermarket retailers in Europe, and weekly shopper reach was approximately 27.4
million. In Asia, where the Company provides outdoor media services, in addition
to in-store electronic marketing services, two of the top five general
merchandise stores have partnered with Catalina Marketing, including Jusco and
Seiyu, for a weekly shopper reach now totaling nearly 8.1 million in 376 retail
outlets as of March 31, 2000.
Developing product lines include Health Resource Publishing ("HRP"),
SuperMarkets Online ("SMO") and Alliance Research ("Alliance"). HRP, formed in
fiscal 1995, uses an in-store prescription-based targeting technology to provide
direct-to-consumer and targeted information services advertising to pharmacy
customers based on their individual pharmacy purchases or other related patient
information. The Health Resource(R) newsletter is triggered by the National Drug
Code found on all prescription drugs. When a prescription is processed, a
customized newsletter with prescription information, therapeutically relevant
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editorial and product advertising material is printed and handed to the customer
along with the prescription. As of March 31, 2000, the HRP system was installed
in 6,671 pharmacy outlets. SMO, originally tested in fiscal 1996, provides the
industry's only online secure coupon format through its ValuPage(SM) service at
www.valupage.com. The ValuPage service was rolled out nationally in January 1998
and makes use of a bar code that, when printed at home and presented at the
checkout lane of more than 11,500 participating supermarkets, along with the
promoted items, issues Web Bucks from in-store printers, which are cash rewards
that consumers use to save on their next visit to the store. SMO also offers a
ValuPage e-mail service that delivers ValuPage coupons and other consumer
packaged goods promotions directly to a shopper's e-mail in-box. Alliance
acquired in July 1999, provides research products on consumer attitudes.
Alliance has developed a suite of proprietary techniques for attitudinal
research through the application of emerging technologies. These technologies
include Interactive Voice Response, which allows consumers to respond to surveys
via automated telephone services, and VOCALS(R), which digitally records actual
voice responses in telephone surveys.
SALES AND MARKETING
The Company has a manufacturer sales force and a retail sales and marketing
force, both working on providing the Company's targeted marketing services to
its customers. The combined manufacturer and retail sale forces provide a
coordinated sale approach to each client in order to offer a tailored targeted
marketing solutions.
Manufacturer Sales Force. The primary focus of the Company's marketing
effort is to attract national consumer packaged goods manufacturers to purchase
category cycles. The sales and client service force of Catalina Marketing focus
on current and prospective customers, and work with them on a consultative basis
to develop and implement customized, targeted marketing programs that fit each
brand's strategies and objectives.
Retail Sales and Marketing Force. Catalina Marketing has two goals for its
retail sales and service force. The first is to continue to expand the Catalina
Marketing Network by installing stores in major markets that are not currently
part of the Catalina Marketing Network. The second is to encourage currently
installed retailers to use the Company's full-service retail loyalty marketing
services, as well as Network-generated incentives to promote private label
brands or high-margin departments.
RESEARCH AND DEVELOPMENT
The Company's expenditures for research and development are generally for
market research, software development, system upgrades and pilot-project
execution to create, test and support new applications for the Catalina
Marketing Network. Catalina Marketing believes that new service and application
development, along with market expansion, are vital to maintain its continued
growth.
COMPETITION
Competition in the marketing services business is intense and includes many
competitors. Catalina Marketing competes for manufacturers' advertising and
consumer promotion budgets with a wide range of media, including television,
radio, print and direct mail advertising, as well as several alternative
in-store and point-of-sale programs. Within the coupon industry, the Company
competes with various traditional coupon delivery methods that are less
expensive per delivered coupon, including free-standing inserts (FSIs),
newspapers, direct mail, magazines and in- or on-product packaging, as well as
other "in-store" marketing companies that use a variety of coupon, promotion or
advertising delivery methods. Catalina Marketing competes for advertising and
promotional dollars based on the efficiency of the Catalina Marketing Network,
its ability to accurately and effectively target potential customers, the number
of shoppers reached, and the general ability to influence consumer buying
behavior.
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EMPLOYEES
Catalina Marketing employed 1,430 people as of March 31, 2000,
approximately 1,230 which were full-time. No employees are covered by a
collective bargaining arrangement. More than 1,200 of the Company's employees
are employed in the United States, with approximately 25 percent of the United
States employees being based in the St. Petersburg, Florida headquarters.
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
Catalina Marketing currently holds 97 United States and foreign patents on
certain aspects of the Catalina Marketing Network and its other services and has
several patent applications pending. These patents provide a competitive
advantage; accordingly the Company will vigorously defend its proprietary rights
in all appropriate circumstances. While patent position is important, Catalina
Marketing believes its ability to market its services to retailers and
manufacturers, and to develop new products, will be the major factors affecting
its future performance.
Catalina Marketing also believes that product recognition is an important
competitive factor in the electronic marketing and promotion industry.
Accordingly, the Company promotes its service marks and trademarks in connection
with its product and marketing activities. It also regards certain computer
software in the Catalina Marketing Network and each additional service
application as proprietary and seeks to protect such software with copyrights,
trade secret laws and internal non-disclosure agreements and safeguards. Such
methods may not afford complete protection, and there can be no assurance that
others will not independently develop such know-how, concepts or ideas.
ITEM 2. PROPERTIES
The Company's headquarters facility, which includes its principal
administrative, marketing, information technology and product development
offices, is located in 65,207 square feet of leased space in St. Petersburg,
Florida. The Company leases an additional 22 sales and support offices across
the United States, consisting of approximately 199,281 square feet in the
aggregate, and four offices for its foreign operations. In October 1999, the
Company entered into a lease financing agreement for a new headquarters facility
in St. Petersburg, Florida. The Company anticipates that it will move into the
new 142,857 square foot facility during the third quarter of fiscal 2001. The
Company believes that the new headquarters facility along with the existing
sales and support offices are adequate to meet current requirements and that
suitable additional space will be available as needed to accommodate growth of
its operations and additional sales and support offices for the foreseeable
future.
ITEM 3. LEGAL PROCEEDINGS
Catalina Marketing is involved in certain litigation arising out of the
Company's business, including litigation initiated by the Company to protect its
intellectual property or to defend itself against claims brought on by others.
Additionally, the Company is in the appeals phase in a sales tax case with a
state taxing authority. In the opinion of management, the ultimate outcome of
this litigation will not have a material adverse effect on the Company's
financial condition, or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
A. Market Prices of Stock
The Company's Common Stock, par value $0.01 per share ("Common Stock"), is
traded on the New York Stock Exchange ("NYSE") under the symbol "POS". The
following table sets forth the high and low closing prices as reported by the
NYSE for the Common Stock for the quarters ended as follows:
HIGH LOW
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Fiscal 2000:
March 31, 2000............................................ $113 1/2 $81 5/16
December 31, 1999......................................... 120 11/16 81 11/16
September 30, 1999........................................ 106 7/8 74
June 30, 1999............................................. 97 7/16 79 3/4
Fiscal 1999:
March 31, 1999............................................ $ 85 7/8 $61 5/8
December 31, 1998......................................... 68 3/8 41 1/2
September 30, 1998........................................ 54 15/16 39 1/2
June 30, 1998............................................. 56 42 7/8
B. Stockholders
As of March 31, 2000, there were approximately 604 registered holders of
shares of Common Stock.
C. Dividends
The Company has not paid any cash dividends to date, and there are no
current plans to pay a cash dividend in the future.
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ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The selected Income Statement Data and Balance Sheet Data set forth below
are derived from the audited Consolidated Financial Statements of the Company
and the related notes thereto. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements and Notes
to the Consolidated Financial Statements included elsewhere in this Annual
Report.
FISCAL YEAR ENDED MARCH 31,
----------------------------------------------------
2000 1999 1998 1997 1996
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income Statement Data:
Revenues.................................. $350,922 $264,783 $217,150 $172,143 $134,155
Costs and expenses:
Direct operating expenses.............. 142,229 110,167 84,191 62,482 47,661
Selling, general and administrative.... 88,247 59,363 56,364 48,379 37,358
Depreciation and amortization.......... 35,175 27,342 23,703 17,939 14,328
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Total costs and expenses.......... 265,651 196,872 164,258 128,800 99,347
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Income from operations.................... 85,271 67,911 52,892 43,343 34,808
Interest income (expense) and other....... (595) (2,334) (963) 1,224 1,409
Income Taxes.............................. (34,041) (27,969) (19,058) (17,880) (14,855)
Minority interest in losses of
subsidiaries........................... 713 -- -- 554 666
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Net income........................ $ 51,348 $ 37,608 $ 32,871 $ 27,241 $ 22,028
======== ======== ======== ======== ========
Diluted net income
Per common share.......................... $ 2.66 $ 1.98 $ 1.73 $ 1.33 $ 1.11
Diluted weighted average common shares
outstanding............................ 19,319 19,009 19,026 20,491 19,922
Balance sheet data:
Cash and cash equivalents................. 13,765 13,942 18,434 13,698 25,778
Property and equipment, net............... 115,000 87,686 70,513 69,578 46,253
Total assets.............................. 303,752 221,047 157,066 154,696 114,187
Long term debt (including current portion
of long term debt)..................... 14,144 6,033 1,731 2,566 --
Total stockholders' equity................ 141,045 120,933 90,042 96,938 71,222
Other data:
U.S. Checkout Coupon stores installed at
end of period.......................... 13,516 12,092 11,164 10,745 9,766
International Checkout Coupon stores
installed at end of period............. 2,587 1,935 1,372 941 558
Health Resource Publishing pharmacy
outlets installed at end of period..... 6,671 3,861 1,920 1,195 237
Capital expenditures, net................. 58,217 39,954 24,250 34,605 23,121
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Catalina Marketing provides a multi-functional communications network that
provides a wide range of strategic targeted marketing solutions for
manufacturers and retailers. The Company's unique capability is to be able to
offer precision targeted marketing in a way in which no other medium, such as
television or radio, can perform. Catalina Marketing delivers strategic
marketing solutions for retailers and manufacturers
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through a variety of product lines. The evolution of the Company's product lines
has resulted in a single targeted marketing services organization with
interrelated operating groups, which engages consumers to influence purchase
decisions. As of March 31, 2000, the Company employed 1,430 people reporting
into 27 offices throughout the United States, Europe and Asia.
RESULTS OF OPERATIONS
Year Ended March 31, 2000 compared to Year Ended March 31, 1999
Revenues were $350.9 million in fiscal 2000, up 32.5 percent over revenues
of $264.8 in fiscal 1999. The increase in revenues is due to an increase in
promotions printed worldwide, growth in Checkout Direct(R) programs as well as
increases in direct mail marketing and other loyalty programs. Additionally,
fiscal 2000 includes revenues from Alliance Research, acquired in July 1999.
In the United States, the Catalina Marketing Network was in 13,516 stores
at March 31, 2000, which reach approximately 165 million shoppers each week as
compared to 12,092 stores reaching approximately 152 million shoppers each week
at March 31, 1999. The Health Resource Network was in 6,671 pharmacies at March
31, 2000 as compared to 3,861 pharmacies at March 31, 1999. Outside the U.S.,
the Catalina Marketing Network was in 2,587 stores at March 31, 2000, which
reach approximately 35 million shoppers each week as compared to 1,935 stores
reaching approximately 29 million shoppers each week at March 31, 1999. In
fiscal 2000, the Company installed its Catalina Marketing Network in 1,424
stores (net of deinstallations) in the United States as compared to 928 stores
in fiscal 1999. Deinstallation activity can and does occur primarily due to the
consolidation and business combination of supermarket chains as well as store
closures made by retailers in the ordinary course of business. The Company also
installed its Health Resource Network in 2,810 pharmacies (net of
deinstallations) in fiscal 2000 as compared to 1,941 pharmacies in fiscal 1999.
Outside the United States, the Company installed 652 stores (net of
deinstallations) in fiscal 2000 as compared to 563 stores (net of
deinstallations) in fiscal 1999.
Direct operating expenses consist of retailer fees, paper, sales
commissions, loyalty and direct mail 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 $142.2 million in fiscal 2000 from $110.2 million
in fiscal 1999. Direct operating expenses in fiscal 2000 as a percentage of
revenues decreased to 40.5 percent from 41.6 percent in fiscal 1999. This
decrease in fiscal 2000 is principally attributable to a favorable shift in
product mix towards higher margin domestic sales and managing the Network more
efficiently, offset by higher direct operating expenses in connection with
revenue associated with the increase in direct marketing and research programs
at Alliance Research and in the loyalty card production services, as well as
higher costs incurred with running the outdoor media business in Japan.
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 in
fiscal 2000 were $88.2 million compared to $59.4 million in fiscal 1999, an
increase of 48.7 percent or $28.9 million. As a percentage of revenues, selling,
general and administrative expenses increased 2.7 percent in fiscal 2000, to
25.1 percent from 22.4 percent in fiscal 1999. This increase is primarily
attributable to advertising and marketing expenses relating to new operating
units and developing product lines.
Depreciation and amortization increased to $35.2 million for fiscal 2000
from $27.3 million for fiscal 1999. 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 increased due to the
increases in goodwill and other intangible assets related to the Company's
acquisitions.
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Interest income (expense) and other was $0.6 million net expense for fiscal
2000 compared to $2.3 million net expense for fiscal 1999. The decrease in
expense is principally attributable to the Company writing off its $3.0 million
investment in Intelledge Corporation in the second quarter of fiscal 1999.
The provision for income taxes increased to $34 million, or 40.2 percent of
income before income taxes and minority interest, for fiscal 2000 compared to
$28.0 million, or 42.7 percent of income before income taxes, for fiscal 1999.
The rate decrease is primarily due to the valuation allowance recorded against
the $3.0 million deferred tax benefit for the Intelledge investment write off in
the second quarter of fiscal 1999 and to a lesser extent due to the Company's
ability to utilize losses of a majority owned foreign subsidiary for income tax
purposes in fiscal 2000. The Company's effective tax rate is higher than the
federal statutory income tax rate due to state and foreign income taxes, various
nondeductible expenses, primarily the amortization of goodwill related to the
Company's acquisitions and, in the case of fiscal 1999, the valuation allowance
referred to in the previous sentence.
Year Ended March 31, 1999 compared to Year Ended March 31, 1998
Revenues were $264.8 million in fiscal 1999, up 21.9 percent over revenues
of $217.1 in fiscal 1998. The increase in revenues is due to both a growth in
Checkout Direct(R) programs as well as increases in loyalty and other direct
mail marketing programs. Loyalty and direct mail marketing programs include,
among others, the revenues added by the acquisition of Market Logic, which was
acquired on July 13, 1998 and Dynamic Controls, Inc. ("DCI"), which was acquired
on January 4, 1999.
In the United States, the Catalina Marketing Network was in 12,092 stores
at March 31, 1999, which reach approximately 152 million shoppers each week as
compared to 11,164 stores reaching approximately 143 million shoppers each week
at March 31, 1998. The Health Resource Network was in 3,861 pharmacies at March
31, 1999 as compared to 1,920 pharmacies at March 31, 1998. Outside the United
States, the Catalina Marketing Network was in 1,935 stores at March 31, 1999,
which reach approximately 29 million shoppers each week as compared to 1,372
stores reaching approximately 20 million shoppers each week at March 31, 1998.
In fiscal 1999, the Company installed its Catalina Marketing Network in 928
stores (net of deinstallations) in the United States as compared to 419 stores
in fiscal 1998. Deinstallation activity can and does occur primarily due to the
consolidation and business combination of supermarket chains as well as store
closures made by retailers in the ordinary course of business. The Company also
installed its Health Resource Network in 1,941 pharmacies (net of
deinstallations) in fiscal 1999 as compared to 725 pharmacies in fiscal 1998.
Outside the United States, the Company installed 563 stores (net of
deinstallations) in fiscal 1999 as compared to 731 stores (with respect to
continuing operations, net of deinstallations) in fiscal 1998. During fiscal
1998, the Company ceased operations in 300 stores in and around Mexico City.
Direct operating expenses consist of retailer fees, paper, sales
commissions, loyalty and direct mail marketing expenses, marketing expenses, the
expenses of operating and maintaining the Catalina Marketing Network, primarily
expenses relating to operations personnel and service offices, provision for
doubtful accounts 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 $110.2 million in fiscal 1999 from $84.2 million
in fiscal 1998. Direct operating expenses in fiscal 1999 as a percentage of
revenues increased to 41.6 percent from 38.8 percent in fiscal 1998. This
increase in fiscal 1999 is principally attributable to the Company's increase in
loyalty and direct marketing programs, including Market Logic and DCI
businesses, which by their nature have a higher material cost component of
direct costs as a function of revenue than the Company's other core product line
services.
Selling, general and administrative expenses include personnel-related
costs of selling and administrative staff, overhead and new product development
expenses. Selling, general and administrative expenses in fiscal 1999 were $59.4
million compared to $56.4 million in fiscal 1998, an increase of 5.3 percent or
$3.0 million. The increase relates primarily to administrative expenses of new
business ventures and products which were partially offset by the $3.5 million
one time expense incurred in the third quarter of fiscal 1998 associated with
the shutdown of the Company's Mexican operations. As a percentage of revenues,
selling, general and administrative expenses decreased 3.6 percent in fiscal
1999, to 22.4 percent from 26.0 percent in fiscal 1998.
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This decrease is primarily attributable to the $3.5 million charge referred to
above. Additionally, the Company was successful in lowering and limiting certain
categories of overhead expenses during the fiscal 1999 periods.
Depreciation and amortization increased to $27.3 million for fiscal 1999
from $23.7 million for fiscal 1998. 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 increased due to the
increases in goodwill and other intangible assets related to the Company's
acquisitions.
Interest income (expense) and other was $2.3 million net expense for fiscal
1999 compared to $1.0 million net expense for fiscal 1998. The increase in
expense is principally attributable to the Company writing off its $3.0 million
investment in Intelledge Corporation in the second quarter of fiscal 1999. As a
partial offset, the Company incurred interest expense on borrowings from its
credit facility during the fiscal 1998 and had no borrowings on this facility in
fiscal 1999.
The provision for income taxes increased to $28.0 million, or 42.7 percent
of income before income taxes, for fiscal 1999 compared to $19.1 million, or
36.7 percent of income before income taxes, for fiscal 1998. The increase is
primarily due to the valuation allowance recorded against the $3.0 million
deferred tax benefit for the Intelledge investment write off in the second
quarter of fiscal 1999 and the $3.1 million tax benefit arising due to the
shutdown of the Mexican operations in the third quarter of fiscal 1998.
Excluding the effect of the Mexican operations shutdown, the Company's effective
tax rate is higher than the federal statutory income tax rate due to state and
foreign income taxes, the inability to currently utilize losses of a majority
owned foreign subsidiary for tax purposes and, in the case of fiscal 1999, the
valuation allowance referred to in the previous sentence.
QUARTERLY RESULTS
The following table presents certain unaudited quarterly results for the
last eight quarters (dollars in thousands, except per share data):
THREE MONTHS ENDED
-----------------------------------------------------------------------------------
MAR 31, DEC 31, SEPT 30, JUN 30, MAR 31, DEC 31, SEPT 30, JUNE 30,
2000 1999 1999 1999 1999 1998 1998 1998
------- -------- --------- ------- -------- ------- -------- --------
Revenues......................... $93,690 $ 97,790 $86,828 $72,614 $75,897 $67,604 $64,448 $56,834
Direct operating expenses........ 37,298 39,226 35,537 30,168 31,140 27,279 28,198 23,550
Selling, general and
administrative................. 22,759 22,200 23,480 19,808 16,371 13,665 14,022 15,305
Depreciation and amortization.... 9,549 8,862 8,577 8,187 7,369 6,931 6,638 6,404
------- -------- ------- ------- ------- ------- ------- -------
Income from operations........... 24,084 27,502 19,234 14,451 21,017 19,729 15,590 11,575
Interest income (expense) and
other.......................... (354) (31) (9) (201) 388 199 (2,893) (28)
Income taxes..................... (9,540) (11,043) (7,728) (5,730) (8,939) (7,913) (6,308) (4,809)
Minority interest in losses of
subsidiaries................... 223 132 175 183 -- -- -- --
------- -------- ------- ------- ------- ------- ------- -------
Net income....................... $14,413 $ 16,560 $11,672 $ 8,703 $12,466 $12,015 $ 6,389 $ 6,738
======= ======== ======= ======= ======= ======= ======= =======
Diluted net income per common
Share.......................... $ .75 $ .86 $ .60 $ .45 $ .65 $ .64 $ .34 $ .35
Diluted weighted average common
shares Outstanding............. 19,197 19,230 19,366 19,486 19,165 18,891 18,963 19,033
U.S. checkout coupon business:
Stores at quarter end:........... 13,516 13,020 12,635 12,257 12,092 11,814 11,621 11,432
Net stores installed during
quarter:....................... 496 385 378 165 278 193 189 268
Promotions printed (in
millions):..................... 678 781 722 628 660 664 654 607
Weekly shopper reach at quarter
end (in millions):............. 165 173 160 161 152 156 151 153
The Company expects its revenues to fluctuate in accordance with periods of
higher promotional activity by manufacturers. The pattern of coupon distribution
is irregular and may change from period to period depending on many factors,
including the economy, competition, the timing of new product introductions and
9
12
the timing of manufacturers' promotion planning and implementation. These
factors, as well as the overall growth in the number of retailer and
manufacturer contracts with the Company, tend to influence the Company's
revenues and profits from period to period.
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 range from $3,000 to $13,000 per store.
During fiscal 2000 and fiscal 1999, the Company made net capital expenditures of
$58.2 million and $39.9 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 fiscal 2000, the
Company spent $13.9 million more on store equipment and spent $5.0 million more
on data processing equipment and furniture and fixtures compared to fiscal 1999.
Effective April 21, 1999, the Company, through one of its wholly owned
subsidiaries, acquired one of its vendors, CompuScan, for $9.1 million in
initial cash consideration, net of cash acquired, by means of a merger
transaction. Terms of the merger agreement call for the Company to make a series
of additional payments, which are based on specified future revenue growth
targets of the Checkout Prizes product.
Effective July 1, 1999, the Company acquired certain assets and assumed
certain liabilities of Alliance Research, an attitudinal research company, for
$6.7 million in initial consideration, net of cash and cash equivalents
acquired. Terms of the purchase agreement call for the Company to make a series
of payments, which are contingent upon future operating performance of the
business purchased from Alliance Research.
Additionally, during fiscal 2000, investments were made totaling
approximately $23 million which were comprised of earnout payments attributable
to past acquisitions.
On October 25, 1999, the Board of Directors approved an additional $50
million to buy back Company Common Stock (the "1999 authorization"). This
authorization was added to the remaining authorization of $9.0 million, which
was still available under a $50 million repurchase authorization, which had been
adopted by the Board of Directors in October 1998 (the "1998 authorization").
During fiscal 2000, the Company purchased 538,000 shares of its Common Stock for
$47.6 million. Of the shares repurchased in fiscal 2000, 492,698 shares were
purchased under the 1998 authorization for $43.5 million, expending the balance
of the 1998 authorization, and the balance of 45,302 shares were purchased under
the 1999 authorization for $4.1 million. As of March 31, 2000, authority for the
repurchase of $45.9 million is available under the 1999 authorization.
The Company believes working capital generated by operations along with
existing credit facilities are sufficient for its overall capital requirements.
OTHER
Year 2000 Readiness Disclosure
This year 2000 disclosure is the most current information available and
replaces all previous disclosures made by the Company in its filings on Form
10-Q and Form 10-K, and in its Annual Report of shareholders.
The year 2000 issue involves the potentially serious risks associated with
the inability of existing business systems to appropriately recognize calendar
dates beginning in the year 2000. In December 1999, the Company completed its
detailed plan to address the issue of transition to the year 2000 and noted no
apparent internal business system problems. Additionally, there have been no
apparent issues with the Company's retail and manufacturer clients or suppliers
in relation to the year 2000 transition. The Company spent approximately $1.4
million on the year 2000 issue.
10
13
FORWARD LOOKING STATEMENTS
The statements in this Form 10-K 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, the
success and timing of growth of the Company's international and other product
lines outside its core business, the level and timing of any acquisition
activity, actual promotional activities and programs with the Company's
customers, the pace of installation of the Company's store network, the timing
and success of new services and businesses and the pace of their implementation,
and the Company's ability to maintain favorable client relationships.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
11
14
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL INFORMATION
PAGE
----
Report of Independent Certified Public Accountants.......... 13
Consolidated Income Statements, Years ended March 31, 2000,
1999 and 1998............................................. 14
Consolidated Balance Sheets at March 31, 2000 and 1999...... 15
Consolidated Statements of Stockholders' Equity, Years ended
March 31, 2000, 1999 and 1998............................. 16
Consolidated Statements of Cash Flows, Years ended March 31,
2000, 1999 and 1998....................................... 17
Notes to the Consolidated Financial Statements.............. 18
12
15
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To Catalina Marketing Corporation:
We have audited the accompanying consolidated balance sheets of Catalina
Marketing Corporation (a Delaware corporation) and subsidiaries as of March 31,
2000 and 1999, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
2000. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Catalina
Marketing Corporation and subsidiaries as of March 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 2000, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Tampa, Florida
April 19, 2000
13
16
CATALINA MARKETING CORPORATION
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
------------------------------
2000 1999 1998
-------- -------- --------
Revenues.................................................... $350,922 $264,783 $217,150
Costs and Expenses:
Direct operating expenses................................. 142,229 110,167 84,191
Selling, general and administrative....................... 88,247 59,363 56,364
Depreciation and amortization............................. 35,175 27,342 23,703
-------- -------- --------
Total costs and expenses.......................... 265,651 196,872 164,258
-------- -------- --------
Income From Operations...................................... 85,271 67,911 52,892
Interest Income (Expense) and Other......................... (595) (2,334) (963)
-------- -------- --------
Income Before Income Taxes and Minority Interest............ 84,676 65,577 51,929
Income Taxes................................................ (34,041) (27,969) (19,058)
Minority Interest in Losses of Subsidiaries................. 713 -- --
-------- -------- --------
Net Income........................................ $ 51,348 $ 37,608 $ 32,871
======== ======== ========
Diluted:
Net Income Per Common Share............................... $ 2.66 $ 1.98 $ 1.73
Weighted Average Common Shares Outstanding................ 19,319 19,009 19,026
Basic:
Net Income Per Common Share............................... $ 2.77 $ 2.03 $ 1.78
Weighted Average Common Shares Outstanding................ 18,537 18,501 18,417
The accompanying Notes are an integral part of these consolidated financial
statements.
14
17
CATALINA MARKETING CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31,
---------------------
2000 1999
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 13,765 $ 13,942
Accounts receivable, net.................................... 59,261 44,045
Inventory................................................... 4,558 4,292
Deferred tax asset.......................................... 10,463 8,932
Prepaid expenses and other current assets................... 27,325 24,270
--------- ---------
Total current assets.............................. 115,372 95,481
--------- ---------
Property and equipment:
Store equipment............................................. 177,944 145,442
Furniture and office equipment.............................. 55,243 38,175
Billboards.................................................. 17,396 11,468
Leasehold improvements...................................... 4,633 4,540
--------- ---------
255,216 199,625
Less: accumulated depreciation.............................. (140,216) (111,939)
--------- ---------
Property and equipment, net....................... 115,000 87,686
Purchased intangible assets, net............................ 70,400 35,628
Other assets................................................ 2,980 2,252
--------- ---------
Total Assets...................................... $ 303,752 $ 221,047
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ $ 17,862 $ 14,149
Taxes payable............................................... 3,698 1,411
Accrued expenses............................................ 50,788 43,286
Deferred revenue............................................ 40,444 27,349
Short term borrowings....................................... 29,493 4,140
--------- ---------
Total current liabilities......................... 142,285 90,335
--------- ---------
Deferred tax liability...................................... 8,380 5,696
Minority interest........................................... 1,228 --
Long term debt.............................................. 10,814 4,083
Commitments and contingencies
Stockholders' Equity:
Preferred stock; $.01 par value; 5,000,000 authorized
shares; none issued and outstanding....................... -- --
Common stock; $.01 par value; 50,000,000 authorized shares,
and 18,200,819 and 18,389,438 shares issued and
outstanding at March 31, 2000 and 1999, respectively...... 182 184
Paid-in capital............................................. 1,261 819
Accumulated other comprehensive income...................... 86 843
Retained earnings........................................... 139,516 119,087
--------- ---------
Total stockholders' equity........................ 141,045 120,933
--------- ---------
Total Liabilities and Stockholders' equity........ $ 303,752 $ 221,047
========= =========
The accompanying Notes are an integral part of these consolidated financial
statements.
15
18
CATALINA MARKETING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
PAR ACCUMULATED
VALUE OF OTHER TOTAL
COMPREHENSIVE COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
INCOME STOCK CAPITAL INCOME EARNINGS STOCK EQUITY
------------- -------- -------- ------------- -------- -------- -------------
BALANCE AT MARCH 31, 1997............. $208 $ 41,770 $ 749 $ 84,214 $(30,003) $ 96,938
Proceeds from issuance of 401,481
shares of common stock............ -- 4 8,739 -- -- -- 8,743
Amortization of option-related
compensation...................... -- -- 231 -- -- -- 231
Tax benefit from exercise of
non-qualified stock options and
disqualified dispositions......... -- -- 2,842 -- -- -- 2,842
Repurchase, retirement and
cancellation of treasury stock for
2,800,885 common shares........... -- (28) (53,013) -- (27,777) 30,003 (50,815)
Deferred compensation plan common
stock units....................... -- -- 116 -- -- -- 116
Net income.......................... $32,871 -- -- -- 32,871 -- 32,871
Other comprehensive loss, net of
tax............................... (884) -- -- (884) -- -- (884)
-------
Comprehensive income................ $31,987 -- -- -- -- -- --
---- -------- ----- -------- -------- --------
BALANCE AT MARCH 31, 1998............. $184 $ 685 $(135) $ 89,308 $ -- $ 90,042
==== ======== ===== ======== ======== ========
Proceeds from issuance of 381,385
shares of common stock............ -- 4 4,399 -- -- -- 4,403
Amortization of option-related
compensation...................... -- -- 182 -- -- -- 182
Tax benefit from exercise of
non-qualified stock options and
disqualified dispositions......... -- -- 5,792 -- -- -- 5,792
Repurchase, retirement and
cancellation of 371,100 common
shares............................ -- (4) (10,415) -- (7,829) -- (18,248)
Deferred compensation plan common
stock units and Directors' common
stock grants...................... -- -- 176 -- -- -- 176
Net income.......................... $37,608 -- -- -- 37,608 -- 37,608
Other comprehensive income, net of
tax............................... 978 -- -- 978 -- -- 978
-------
Comprehensive income................ $38,586 -- -- -- -- -- --
---- -------- ----- -------- -------- --------
BALANCE AT MARCH 31, 1999............. $184 $ 819 $ 843 $119,087 $ -- $120,933
==== ======== ===== ======== ======== ========
Proceeds from issuance of 389,381
shares of common stock............ -- 3 8,612 -- -- -- 8,615
Increase in investment in
subsidiary, net of tax............ -- -- 2,241 -- -- -- 2,241
Tax benefit from exercise of
non-qualified stock options and
disqualified dispositions......... -- -- 6,071 -- -- -- 6,071
Repurchase, retirement and
cancellation of 538,000 common
shares............................ -- (5) (16,679) -- (30,919) -- (47,603)
Deferred compensation plan common
stock units and Directors' common
stock grants...................... -- -- 197 -- -- -- 197
Net income.......................... $51,348 -- -- -- 51,348 51,348
Other comprehensive loss, net of
tax............................... (757) -- -- (757) -- -- (757)
-------
Comprehensive income................ $50,591 -- -- -- -- -- --
---- -------- ----- -------- -------- --------
BALANCE AT MARCH 31, 2000............. $182 $ 1,261 $ 86 $139,516 $ -- $141,045
==== ======== ===== ======== ======== ========
The accompanying Notes are an integral part of these consolidated financial
statements.
16
19
CATALINA MARKETING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED MARCH 31,
------------------------------
2000 1999 1998
-------- -------- --------
Cash Flows from Operating Activities:
Net income................................................ $ 51,348 $ 37,608 $ 32,871
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest...................................... (713) -- --
Depreciation and amortization.......................... 35,175 27,404 23,934
Provision for doubtful accounts........................ 1,304 1,085 1,389
Deferred income taxes.................................. 1,310 1,707 (549)
Other.................................................. 197 3,173 1,182
Changes in operating assets and liabilities, net of
effects from acquisitions:
Accounts receivable.................................... (15,721) (23,503) 5,398
Inventory, prepaid expenses and other assets........... (2,733) (12,003) (3,152)
Accounts payable....................................... 2,451 5,379 (3,079)
Taxes payable.......................................... 1,572 (57) 790
Accrued expenses....................................... 6,817 5,303 2,699
Deferred revenue....................................... 12,074 4,973 8,790
-------- -------- --------
Net cash provided by operating activities......... 93,081 51,069 70,273
-------- -------- --------
Cash Flows From Investing Activities:
Capital expenditures, net................................. (58,217) (39,954) (24,250)
Purchase of investments, net of cash acquired............. (38,870) (8,982) (2,087)
-------- -------- --------
Net cash used in investing activities............. (97,087) (48,936) (26,337)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from debt obligations............................ 46,847 23,585 40,427
Principal payments on debt obligations.................... (16,517) (22,326) (40,487)
Proceeds from issuance of common and subsidiary stock..... 14,442 4,526 8,543
Tax benefit from exercise of non-qualified stock options
and disqualified dispositions.......................... 6,071 5,792 2,842
Payment for repurchase of company common stock............ (47,603) (18,248) (50,815)
-------- -------- --------
Net cash provided by (used in) financing
activities...................................... 3,240 (6,671) (39,490)
-------- -------- --------
Net Change in Cash and Cash Equivalents..................... (766) (4,538) 4,446
Effect of Exchange Rate Changes on Cash..................... 589 46 290
Cash and Cash Equivalents, at beginning of year............. 13,942 18,434 13,698
-------- -------- --------
Cash and Cash Equivalents, at end of year................... $ 13,765 $ 13,942 $ 18,434
======== ======== ========
Supplemental Schedule of Other Transactions:
Cash paid during the year for:
Interest.................................................. $ 862 $ 207 $ 616
Income taxes.............................................. $ 19,932 $ 22,702 $ 17,174
The accompanying Notes are an integral part of these consolidated financial
statements.
17
20
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following summarizes the significant accounting and financial policies
of Catalina Marketing Corporation and Subsidiaries (the "Company") which have
been followed in preparing the accompanying consolidated financial statements.
Description of the Business. The Company provides targeted marketing
services. Through its proprietary network, the Company provides consumer and
pharmaceutical product manufacturers and retailers with cost-effective methods
of delivering promotional incentives and advertising messages directly to
consumers based on their purchasing behavior. Additionally, a majority-owned
subsidiary of the Company operates an outdoor media business in Japan. As of
March 31, 2000, the Company's network was installed in 13,516 retail stores and
6,671 pharmacies throughout the United States and 2,587 retail stores throughout
the United Kingdom, France and Japan.
Principles of Consolidation and Preparation. The consolidated financial
statements include the accounts of the Company and its wholly-owned and
majority-owned subsidiaries. All intercompany transactions are eliminated in
consolidation. The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of management's
estimates.
The accounts of the wholly-owned and majority-owned foreign subsidiaries
are included as of December 31, which is their fiscal year end. The Company's
investment in a non-majority owned company was accounted for on the equity
method.
Fair Value of Financial Instruments. The book value of all financial
instruments approximates their fair value.
Cash and Cash Equivalents. Cash and cash equivalents consist of cash and
short-term investments. The short-term investments can be immediately converted
to cash and are held at their market value.
Allowance for Doubtful Accounts. The Company records a provision for
estimated doubtful accounts as part of direct operating expenses. As of March
31, 2000 and 1999, the allowance for doubtful accounts was $1,414,000 and
$1,197,000, respectively.
Inventory. Inventory consists primarily of paper used for promotion
printing, as well as card processing inventory for loyalty operations. Inventory
is stated at the lower of cost, as determined by the first-in, first-out method,
or market.
Property and Equipment. Property and equipment are stated at cost.
Depreciation of store equipment, billboards and furniture and office equipment
is computed using the straight-line method based on the estimated useful lives
of the related assets, generally three to eight years. Office equipment includes
EDP equipment and software bought and developed for internal use. Third party
installation costs, net of amounts reimbursed by the retailer, are capitalized
and amortized using the straight-line method over the estimated useful lives of
the related assets. Leasehold improvements are amortized using the straight-line
method over the shorter of the estimated useful lives of the assets or the
remaining term of the related lease. Maintenance and repair costs are expensed
as incurred.
Foreign Currency Translation. Balance sheet accounts are translated at
exchange rates in effect at the end of the subsidiaries' year and income
statement accounts are translated at average exchange rates for the year.
Translation gains and losses are included as a separate component of
stockholders' equity.
Purchased Intangible Assets, net. Purchased intangible assets include
purchased patents and other intangibles arising out of the Company's
acquisitions. Purchased intangible assets are amortized over their useful lives
(ranging from 7 to 40 years) using the straight line method.
18
21
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition and Deferred Revenue. In accordance with coupon
industry practice, the Company generally pre-bills manufacturers for purchased
category cycles. The purchase of a category cycle gives a manufacturer the
exclusive right to have promotions printed for a particular product category
during the applicable period. The Company recognizes in-store electronic
marketing service revenues as promotions are printed. Amounts collected prior to
printing are reflected as deferred revenue until printing occurs. Loyalty
services revenue is recognized when the loyalty cards or mailings are shipped.
Income Taxes. Provision for income taxes includes federal, state and
foreign income taxes. Deferred income taxes are provided for temporary
differences between the recognition of income and expenses for financial
reporting purposes and income tax purposes.
Research and Development. Research and development costs relating to the
development and testing of new service applications are expensed as incurred.
Net Income Per Common Share. In fiscal 1998, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
Accordingly, diluted and basic earnings per share (EPS) are shown on the face of
the accompanying consolidated income statements. The following is a
reconciliation of the denominator of basic EPS to the denominator of diluted EPS
(in thousands):
MARCH 31,
------------------------
2000 1999 1998
------ ------ ------
Basic weighted average common shares outstanding..... 18,537 18,501 18,417
Dilutive effect of options outstanding............... 782 508 609
------ ------ ------
Diluted weighted average common shares outstanding... 19,319 19,009 19,026
====== ====== ======
Options to purchase 30,300 shares of common stock at a price of $106 7/8
per share were outstanding at March 31, 2000, but were not included in the
computation of diluted EPS because the options' exercise price was greater than
the average market price of common stock.
Certain reclassifications to the fiscal year 1999 consolidated financial
statements have been made to conform with the current year's presentation.
NOTE 2. SUPPLEMENTAL BALANCE SHEET INFORMATION
Prepaid expenses and other current assets include (in thousands):
MARCH 31,
-----------------
2000 1999
------- -------
Prepaid billboard rental.................................... $ 9,353 $ 3,812
Investments in deferred compensation plan................... 10,343 8,011
Prepaid income taxes........................................ -- 4,213
Prepaid marketing costs..................................... 2,139 2,500
Other....................................................... 5,490 5,734
------- -------
Total prepaid expenses and other current assets... $27,325 $24,270
======= =======
19
22
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchased intangible assets, net include (dollars in thousands):
MARCH 31,
-----------------
USEFUL LIFE 2000 1999
----------- ------- -------
(IN YEARS)
Patent license and retailer relationships in the United
Kingdom................................................ 20 $12,691 $12,691
Goodwill................................................. 20-40 54,913 25,378
Purchased patents........................................ 7-19 8,478 250
Accumulated amortization................................. (5,682) (2,691)
------- -------
Purchased intangible assets, net............... $70,400 $35,628
======= =======
Accrued expenses include (in thousands):
MARCH 31,
-----------------
2000 1999
------- -------
Payroll related............................................. $11,127 $ 7,434
Deferred compensation plan.................................. 10,353 8,338
Sales commissions........................................... 4,546 3,895
Payments to acquired companies.............................. 12,083 11,843
Other....................................................... 12,679 11,776
------- -------
Total accrued expenses............................ $50,788 $43,286
======= =======
NOTE 3. INCOME TAXES
Deferred income tax assets or liabilities are computed based on the
temporary differences between the financial statement and income tax bases of
assets and liabilities using the enacted marginal income tax rate in effect for
the year in which the differences are expected to reverse. Deferred income tax
expenses or credits are based on the changes in the deferred income tax assets
or liabilities from period to period.
Temporary differences for financial statement and income tax purposes
result primarily from charges to operations for financial statement reporting
purposes which are not currently tax deductible and revenues deferred for
financial statement reporting purposes which are currently taxable. The
components of the deferred tax asset and liability were as follows (in
thousands):
MARCH 31,
-----------------
2000 1999
------- -------
Deferred Tax Assets:
Payroll related............................................. $ 3,813 $ 3,353
Deferred revenue............................................ 6,364 2,899
Provision for doubtful accounts............................. 508 410
Accrued expenses............................................ 3,337 3,097
Net operating loss carryforwards............................ 3,252 2,540
Unconsolidated equity investments........................... 883 1,699
Other....................................................... 157 --
------- -------
18,314 13,998
Valuation allowance......................................... 2,173 3,699
------- -------
Net deferred tax asset............................ $16,141 $10,299
======= =======
20
23
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31,
-----------------
2000 1999
------- -------
Deferred Tax Liabilities:
Depreciation and amortization............................... $ 8,273 $ 5,423
Prepaid expenses............................................ 3,938 1,367
Investment in consolidated subsidiary....................... 1,426 --
Other....................................................... 421 273
------- -------
14,058 7,063
------- -------
Net deferred tax asset............................ $ 2,083 $ 3,236
======= =======
The valuation allowance decreased by $1,526,000 during fiscal 2000 due to
the recognition of deferred tax assets previously reduced by a valuation
allowance. A remaining valuation allowance of $2,173,000 exists as it is more
likely than not that net operating loss carryforwards generated by certain
foreign subsidiaries and losses of unconsolidated equity investments will not be
realized.
As of March 31, 2000, various foreign subsidiaries of the Company had
aggregate cumulative net operating loss carryforwards for foreign income tax
purposes of approximately $5,300,000, which are subject to various income tax
provisions of each respective jurisdiction. The net operating losses expire in
the calendar years 2000 through 2004.
The provision for income taxes consisted of the following (in thousands):
MARCH 31,
---------------------------
2000 1999 1998
------- ------- -------
Current taxes:
Federal................................................. $28,085 $22,865 $16,696
State................................................... 4,291 3,016 2,033
Foreign................................................. 355 381 878
------- ------- -------
32,731 26,262 19,607
------- ------- -------
Deferred taxes:
Federal................................................. 2,055 1,423 377
State................................................... 235 131 77
Foreign................................................. (980) 153 (1,003)
------- ------- -------
1,310 1,707 (549)
------- ------- -------
Provision for income taxes................................ $34,041 $27,969 $19,058
======= ======= =======
21
24
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The reconciliation of the provision for income taxes based on the U.S.
federal statutory income tax rate to the Company's provision for income taxes is
as follows (dollars in thousands):
MARCH 31,
-----------------------------
2000 1999 1998
------- ------- -------
Federal statutory rate................................ 35% 35% 35%
Expected federal statutory tax........................ $29,637 $22,952 $18,175
State and foreign income taxes, net of federal
benefit............................................. 4,394 2,495 1,346
Effect of foreign subsidiary losses and their tax
rates............................................... (786) 753 1,495
Effect of shutdown of Mexican operation............... -- -- (2,566)
Amortization of goodwill.............................. 1,000 366 236
Loss on unconsolidated equity investment.............. (732) 1,050 --
Other................................................. 528 353 372
------- ------- -------
Provision for income taxes.................. $34,041 $27,969 $19,058
======= ======= =======
NOTE 4. SHORT TERM BORROWINGS AND LONG TERM DEBT
The Company's short term borrowings and long term debt consisted of the
following (dollars in thousands):
MARCH 31,
----------------
2000 1999
------- ------
Credit Agreement, variable interest rates................... $15,000 $ --
Short term borrowings with several Japanese banks and
financing agents, interest from 1.16% to 3.3% as of March
31, 2000, (payable in yen)................................ 11,163 2,190
Long term debt (including current portion of long term debt)
with several Japanese banks, interest from 2.63% to 6.38%
as of March 31, 2000, maturing through July 2004 (payable
in yen)................................................... 12,744 6,033
Subordinated convertible note with the Tribune Company,
interest at 4.5% per annum................................ 1,400 --
------- ------
Total debt obligations...................................... 40,307 8,223
Less -- short term borrowings..................... 29,493 4,140
------- ------
Total long term debt........................................ $10,814 $4,083
======= ======
Maturities of long term debt are as follows as of March 31, 2000 (in
thousands):
AMOUNT
-------
2001........................................................ $ 3,330
2002........................................................ 3,333
2003........................................................ 3,368
2004........................................................ 2,274
2005........................................................ 439
Thereafter.................................................. 1,400
-------
$14,144
=======
Certain debt held by the Company's Japan subsidiary is guaranteed by
certain minority shareholders.
On September 30, 1997, the Company entered into a $150 million credit
agreement (the "Credit Agreement") with a syndicate of commercial banks led by
NationsBank, National Association. The Credit
22
25
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Agreement, as amended on August 12, 1998 and February 19, 1999, makes available
(i) a $100 million revolving credit facility expiring September 30, 2000, (ii) a
$10 million swing line facility expiring September 30, 2000, and (iii) a $50
million line of credit facility expiring September 26, 2000. Amounts borrowed
under the swing line facility reduce the availability under the revolving credit
facility. At no time may the aggregate principal balance exceed $150 million
under the Credit Agreement. As of March 31, 2000, there was $15 million
outstanding under the revolving credit facility.
The Credit Agreement provides that borrowings accrue interest on a variable
basis at (i) the London Interbank Offering Rate (LIBOR) (adjusted for any
reserve requirements in force) plus an applicable margin ranging from 50 to
162.5 basis points, or (ii) the base rate, defined in the Credit Agreement as
the greater of (a) the prime rate or (b) 50 basis points plus the federal funds
rate as defined in the Credit Agreement. The average interest rate for fiscal
2000 and the year end interest rate as of March 31, 2000 was 6.42% and 6.48%. In
addition, the Credit Agreement provides for unused facilities fees to accrue at
a range of 12.5 to 37.5 basis points per annum multiplied by the unused portions
of the revolving credit and line of credit facilities. The Credit Agreement is
secured by the common stock or equivalent of several Company subsidiaries, is
guaranteed by several Company subsidiaries, and contains certain financial
covenants, some of which include limitations on certain indebtedness,
maintenance of a certain fixed charge and leverage ratio and other terms and
conditions. As of March 31, 2000 the Company was in compliance with all such
financial covenants.
Effective April 5, 1999, the Tribune Company ("Tribune"), an unrelated
entity, made an investment in SuperMarkets Online Holdings, Inc. ("Holdco"), a
majority owned subsidiary of the Company. In addition to this equity investment,
SuperMarkets Online, Inc. ("SMO"), Holdco's majority owned subsidiary, borrowed
$1.4 million from Tribune in exchange for a subordinated convertible note
bearing interest at a rate of 4.5 percent per annum. This long term debt
obligation is convertible into 500,000 shares of SMO common stock upon certain
occurrences including automatic conversion in the event of a qualified public
offering in which the aggregate price paid for the common stock offered is at
least $25 million.
Interest expense was $1,294,000, $651,000 and $956,000 for the years ended
March 31, 2000, 1999 and 1998, respectively.
NOTE 5. COMMITMENTS AND CONTINGENCIES
Rental expense under operating leases was $4,756,000, $2,941,000 and
$2,466,000 for the years ended March 31, 2000, 1999 and 1998, respectively.
Future minimum rental commitments under operating leases with non-cancelable
terms of more than one year (the longest of which expires in 2009) as of March
31, 2000, are as follows: $4,727,000 in 2001, $4,315,000 in 2002, $2,867,000 in
2003, $2,083,000 in 2004, $985,000 in 2005 and $2,892,000 thereafter.
As of October 21, 1999, the Company entered into a lease financing
agreement for a new corporate headquarters building in St. Petersburg, Florida.
The lease term runs through September 2005. The Company has the option to extend
the lease term for up to three, five year renewal periods, subject to certain
conditions. The agreement includes a purchase option for the Company that
approximates the original cost of the building. The Company anticipates that it
will occupy the new corporate headquarters building and begin making lease
payments in the third quarter of fiscal 2001. The present value of the future
minimum lease payments for the new facility, net of future minimum lease
payments for the old corporate headquarters building (included above), as of
March 31, 2000, are as follows: $632,000 in 2001, $688,000 in 2002, $609,000 in
2003, $757,000 in 2004, $1,131,000 in 2005, and $15,749,000 thereafter.
The Company is involved in certain litigation arising out of the Company's
business, including litigation initiated by the Company to protect its
intellectual property or to defend itself against claims brought on by others.
Additionally, the Company is in the appeals phase in a sales tax case with a
state taxing authority. In
23
26
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the opinion of management, the ultimate outcome of this litigation will not have
a material adverse effect on the Company's financial condition, or results of
operations.
NOTE 6. STOCK-BASED COMPENSATION PLANS
The Company has a stock option plan, the 1989 Incentive Stock Option Plan
(the "1989 Plan"), which expired on April 26, 1999 and was replaced with the
1999 Incentive Stock Option Plan ("the "1999 Plan"); a stock grant plan, the
Catalina Marketing Corporation 1992 Director Stock Grant Plan (the "Grant
Plan"); and an employee stock purchase plan, the Employee Payroll Deduction
Stock Purchase Plan (the "Purchase Plan").
1989 Incentive Stock Option Plan. The 1989 Plan was approved by the Board
of Directors in April 1989, and approved by the stockholders in July 1989.
Pursuant to the 1989 Plan, 5,750,000 shares of the Company's common stock were
reserved for issuance upon the exercise of options granted under the 1989 Plan.
Options to purchase an aggregate of 5,445,191 shares were granted, net of
cancellations, under the 1989 Plan, of which options to purchase 2,380,008
shares were outstanding on March 31, 2000.
The 1989 Plan provided for grants of Incentive Stock Options ("ISOs") to
employees (including employee directors). Options granted under the 1989 Plan
generally became exercisable at a rate of 25 percent per year (20 percent per
year for initial grants to new employees), commencing one year after the date of
grant and generally had terms of five to ten years. In 1999, the 1989 Plan was
amended to prospectively change the permissible term of newly granted options to
up to ten years. Certain options under the 1989 Plan, which have been granted to
certain executives of the Company, vest after 8 years and have an accelerated
vesting schedule based upon the Company reaching specified earnings per share
targets. The exercise price of all ISOs granted under the 1989 Plan was required
to be at least equal to the fair market value of the shares on the date of
grant.
1999 Incentive Stock Option Plan. The 1989 Plan expired on April 26, 1999.
The 1999 Plan was approved by the Board of Directors in April 1999 and, approved
by the stockholders in July 1999. Pursuant to the 1999 Plan, 1,600,000 shares of
the Company's common stock are reserved for issuance upon the exercise of
options granted under the 1999 Plan. Options to purchase an aggregate of 278,350
shares have been granted, net of cancellations, under the 1999 Plan, all of
which were outstanding on March 31, 2000.
The 1999 Plan provides for grants of Incentive Stock Options ("ISOs") to
employees (including employee directors). Options granted under the 1999 Plan
generally become exercisable at a rate of 25 percent per year (20 percent per
year for initial grants to new employees), commencing one year after the date of
grant and generally have terms of up to ten years. Certain options under the
1999 Plan, which have been granted to certain executives of the Company, vest
after 8 years and provide for accelerated vesting based upon the Company
reaching specified earnings per share targets. The exercise price of all ISOs
granted under the 1999 Plan must be at least equal to the fair market value of
the shares on the date of grant.
Aggregate Stock Option Activity. As of March 31, 2000, options to purchase
an aggregate of 3,072,038 shares had been exercised, including options to
purchase 10,000 shares granted outside of any plan; options to purchase an
aggregate of 2,668,358 shares were outstanding, including options to purchase
10,000 shares outside of any plan; and 1,321,650 shares remained available for
future grants under the 1999 Plan. Of the options outstanding at March 31, 2000
and at March 31, 1999, options to purchase 389,838 and 450,202 shares
respectively, were immediately exercisable, with weighted average exercise
prices of $38.45 and $32.34, respectively.
24
27
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity for the years ended March 31, 1998, 1999 and 2000 is
as follows:
WEIGHTED
NUMBER AVERAGE
OF SHARES OPTION PRICES
--------- -------------
Options outstanding at March 31, 1997....................... 2,135,420 $28.37
Option activity:
Granted................................................... 462,220 28.78
Exercised................................................. (549,187) 20.02
Canceled or expired....................................... (339,483) 32.07
--------- ------
Options outstanding at March 31, 1998....................... 1,708,970 30.43
Option activity:
Granted................................................... 1,574,140 62.06
Exercised................................................. (517,163) 23.72
Canceled or expired....................................... (154,792) 34.30
--------- ------
Options outstanding at March 31, 1999....................... 2,611,155 50.60
--------- ------
Option activity:
Granted................................................... 529,534 87.76
Exercised................................................. (411,320) 31.42
Canceled or expired....................................... (61,011) 57.47
--------- ------
Options outstanding at March 31, 2000....................... 2,668,358 $60.77
========= ======
1992 Director Stock Grant Plan. The Grant Plan provides for grants of
common stock to non-employee board members. A total of 100,000 shares of the
Company's stock was authorized for issuance under this plan. As of March 31,
2000, 38,454 shares have been granted and 5,534 shares have been canceled
leaving 67,080 shares available for future grants under the Grant Plan. Stock
granted under the Grant Plan vests ratably in annual installments over each
director's remaining term as a director.
Employee Stock Purchase Plan. In July 1994, the Purchase Plan was adopted
by the Board of Directors and approved by the stockholders. Pursuant to the
Purchase Plan, 300,000 shares of the Company's common stock were reserved for
issuance. For the fiscal years ended March 31, 2000, 1999 and 1998, 18,958,
24,516 and 28,709 shares were purchased, respectively. Total shares available
for future grant total 166,126 as of March 31, 2000.
Under the Purchase Plan, employees may purchase Company common stock at 85
percent of the market price on the first or last day of an offering period. The
maximum each employee may purchase in an offering period shall not exceed
$12,500 in market value of Company common stock. The Company will typically have
two six-month offering periods each year. The Purchase Plan qualifies under
Section 423 of the Internal Revenue Code of 1986.
The Company accounts for the option, stock grant and stock purchase plans
under APB Opinion No. 25, under which $187,818, $155,366 and $155,926 for the
fiscal years ended March 31, 2000, 1999 and 1998, respectively, in compensation
expense has been recognized. The Company has adopted Statement of Financial
Accounting Standards No. 123 (SFAS No. 123) for disclosure purposes. For SFAS
No. 123 purposes, the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option pricing model with the following
assumptions used for grants in fiscal 1998: risk-free interest rates ranging
from 5.26 to 6.86 percent depending on the date of grant; expected dividend
yield of zero percent; expected life of five years; and expected volatility of
33.68 percent. The assumptions used for the grants in fiscal 1999 are: risk-free
interest rates ranging from 4.43 to 5.65 percent depending on the date of grant;
expected dividend yield of zero percent; expected life of five to eight years;
and expected volatility of 39.99 percent. The assumptions used for grants in
fiscal 2000 are: risk-free interest rates ranging from 5.17 to 6.76 percent
depending on the date of
25
28
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
grant; expected dividend yield of zero percent; expected life of five years to
eight years; and expected volatility of 42.17 percent. The fair values of
options granted in fiscal 2000, 1999 and 1998 are, $18,999,941, $37,193,274 and
$4,877,647 respectively, which would be amortized as compensation over the
vesting period of the options.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ---------------------------------------
OUTSTANDING WEIGHTED AVERAGE EXERCISABLE
RANGE OF AS OF REMAINING WEIGHTED AVERAGE AS OF WEIGHTED AVERAGE
EXERCISE PRICES MARCH 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 2000 EXERCISE PRICE
- --------------- ------------------- ------------------- ------------------- ----------------- -------------------
$15.50-$25.00 65,712 1.0 $ 21.96 54,112 $21.72
$25.01-$50.00 504,217 2.0 33.41 205,987 33.67
$50.01-$75.00 1,582,706 7.2 62.30 129,739 53.03
$75.01-$100.00 486,123 9.3 86.62 --
$100.01-$106.87 29,600 9.3 106.87 --
--------- -------
2,668,358 389,838
========= =======
Had compensation cost for these plans been determined consistent with SFAS
No. 123, the Company's net income and earnings per share would have been reduced
to the following pro forma amounts (in thousands, except per share data):
MARCH 31,
-----------------------------
2000 1999 1998
------- --------- -------
Net Income:
As Reported............................................. $51,348 $37,608 $32,871
Pro Forma............................................... 35,880 31,517 28,410
Basic EPS:
As Reported............................................. 2.77 2.03 1.78
Pro Forma............................................... 1.94 1.70 1.54
Diluted EPS:
As Reported............................................. 2.66 1.98 1.73
Pro Forma............................................... 1.86 1.66 1.49
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to April 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Additionally, the pro forma amounts include approximately $396,000, $303,000 and
$358,000 related to the purchase discount offered under the Purchase Plan for
fiscal 2000, 1999 and 1998, respectively.
NOTE 7. STOCKHOLDER PROTECTION PLAN
The Company has adopted a Stockholder Protection Plan. To implement this
plan, the Company declared a dividend of one Preferred Share Purchase Right on
each outstanding share of the Company's common stock. The dividend distribution
was payable to stockholders of record on May 12, 1997. The rights will be
exercisable for fractions of a share of the Company's Series X Junior
Participating Preferred Stock only if a person or group acquires 15 percent or
more of the Company's common stock or announces or commences a tender offer for
15 percent or more of the common stock, except for certain instances defined in
the Stockholder Protection Plan.
NOTE 8. SAVINGS PLANS
On June 1, 1992, the Company adopted a 401(k) Savings Plan. The Company's
contributions during fiscal 2000, 1999 and 1998 were $1,047,000, $840,000 and
$635,000, respectively.
26
29
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On January 1, 1992, the Company adopted a non-qualified deferred
compensation plan (the "Deferred Compensation Plan"). The Deferred Compensation
Plan is designed to permit select employees and directors of the Company to
defer a portion of their compensation. Effective July 1, 1996, the Deferred
Compensation Plan was amended and restated allowing participants to elect
deferral of certain types of compensation, including directors fees, stock
grants under the Grant Plan and shares issuable upon the exercise of stock
options, into stock units in the Deferred Compensation Plan each of which
represents a share of Company common stock, and creating the Catalina Marketing
Corporation Deferred Compensation Trust (the "Trust"). Amounts deposited in
stock unit accounts are distributed in the form of shares of Company common
stock upon a payment event. Through the Trust, investment options such as mutual
funds and money market funds are available to participants.
The investment in the Deferred Compensation Plan and related liability are
included in prepaid expenses and other current assets and accrued expenses of
the consolidated balance sheets, respectively. The Company determined all of its
Deferred Compensation Plan investments currently held in mutual funds and money
market funds are trading securities and as such are reported at fair value.
Realized and unrealized holding gains and losses related to these investments,
as well as the offsetting compensation expense, recognized in net income during
fiscal 2000, 1999 and 1998 were not significant. Stock units are initially
recorded at fair value.
NOTE 9. SEGMENT INFORMATION
In fiscal 1999 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131). This statement establishes new standards
for reporting information about operating segments and related disclosures. All
prior period information has been restated to conform to this statement.
The Company operates through individual operating units which share similar
economic characteristics, customers, distribution channels, products and
services and production processes. As a result, the Company has aggregated its
operating units and product lines into a single reporting segment of Targeted
Marketing Services. The Company's accounting policies for segments are the same
as those described in Note 1. Management evaluates segment performance based on
net income/(loss).
Reportable segment information is as follows:
FOR THE FISCAL YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
TARGETED TARGETED TARGETED
MARKETING MARKETING MARKETING
SERVICES ELIMINATIONS SERVICES ELIMINATIONS SERVICES ELIMINATIONS
--------- ------------ --------- ------------ --------- ------------
Revenue from external
customers............ $350,922 $264,783 $217,150
Revenue from internal
sources.............. 2,163 (2,163) 3,026 (3,026) 2,121 (2,121)
Net interest income
(expense)............ (587) 231 (493)
Depreciation and
amortization......... 35,175 27,342 23,703
Provision for income
taxes................ 34,041 27,969 19,058
Net income............. 51,348 37,608 32,871
Segment assets......... 303,752 221,047 157,066
Expenditures for long
lived assets......... 58,821 41,455 23,561
27
30
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue and long lived assets by geographic area are as follows:
FOR THE FISCAL YEAR ENDED MARCH 31,
------------------------------------
2000 1999 1998
---------- ---------- ----------
Revenue from external customers
United States........................................ $298,650 $228,806 $187,367
Foreign.............................................. 52,272 35,977 29,783
Long lived assets
United States........................................ $ 88,738 $ 68,932 $ 57,758
Foreign.............................................. 29,242 21,130 13,630
NOTE 10. ACQUISITIONS AND OTHER
Effective July 1, 1999, the Company acquired certain assets and assumed
certain liabilities of Alliance Research, an attitudinal research company, for
$6.7 million in initial consideration, net of cash and cash equivalents
acquired. Terms of the purchase agreement call for the Company to make a series
of payments, which are contingent upon future operating performance of the
business purchased from Alliance Research.
Effective April 21, 1999, the Company through one of its wholly owned
subsidiaries, acquired one of its vendors, CompuScan, the technology for the
Checkout Prizes(R) application, for $9.1 million in initial cash consideration,
net of cash acquired, by means of a merger transaction. Terms of the merger
agreement call for the Company to make a series of additional payments, which
are based on specified future revenue growth targets of the Checkout Prizes(R)
product.
Effective January 4, 1999, the Company acquired 100 percent of the
outstanding common shares of Dynamic Controls, Inc., which offers card-based
loyalty marketing programs for retailers for $4.6 million in initial cash
consideration, net of cash acquired. Terms of the purchase agreement call for
the Company to make an initial down payment and a series of payments, which are
based upon specified future revenue growth.
Effective December 30, 1998, the Company purchased from its minority
stockholders the remaining ownership of Catalina Marketing of France, Inc.
Catalina Marketing of France, Inc. owns substantially all of the outstanding
stock of Catalina Marketing de France, S.A., the French operating company. Terms
of the purchase agreement call for the Company to make an initial down payment
and a series of payments to the minority stockholders, which are contingent upon
the future operating performance of Catalina Marketing de France, S.A.
Effective July 13, 1998, the Company acquired 100 percent of the
outstanding common shares of Market Logic, a full service targeted marketing
company that specializes in the development and fulfillment of highly
sophisticated, personalized, direct marketing programs for retailers, for $1.7
million in initial cash consideration, net of cash acquired. Terms of the
purchase agreement call for the Company to make a series of payments, which are
contingent upon the future operating performance of Market Logic.
The above referenced acquisitions have been accounted for using the
purchase method of accounting for acquisitions and, accordingly, the results of
operations of each acquisition have been included in the fiscal 2000, 1999 and
1998 consolidated financial statements since the date of such acquisition.
On April 5, 1999, Tribune invested $5.6 million in a majority owned
subsidiary of the Company, Holdco, in exchange for 1,900,000 shares of Holdco's
common stock, and also purchased a subordinated convertible note in SMO,
Holdco's majority owned subsidiary, in the principal amount of $1.4 million.
Holdco through SMO, provides consumers a ValuPage(SM) product or a shopping list
of offers which can be accessed by visiting www.valupage.com.
28
31
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 11. RELATED PARTY TRANSACTIONS
On March 15, 2000, the Company loaned an Executive Officer of the Company
$1.1 million for relocation purposes. This amount is included in Accounts
Receivable, net, on the March 31, 2000 balance sheet. The loan is payable on
demand and interest accrues beginning on September 15, 2000 at 6.5 percent per
annum.
NOTE 12. 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.
NOTE 13. SUBSEQUENT EVENT (UNAUDITED)
On April 27, 2000, the Company announced that its Board of Directors had
approved a three-for-one stock split of the outstanding common stock to be
effected in the form of a stock dividend. The stock split is contingent on the
approval of the stockholders of the Company at the annual meeting on July 18,
2000 of an increase in the authorized common shares. The stock dividend will be
payable August 17, 2000, to stockholders of record on July 26, 2000.
29
32
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by Items 10, 11, 12 and 13 will be contained in
the Company's definitive Proxy Statement for the Annual Meeting of Stockholders
under the captions "Compensation of Executive Officers and Non-Employee
Directors," "Share Ownership of Certain Beneficial Owners and Management" and
"Nomination and Election of Directors" and is incorporated herein by reference.
The definitive Proxy Statement will be filed with the Commission prior to June
30, 2000.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
PAGE
----
(a)1. Financial Statements. The following is a list of the
Consolidated Financial Statements
included in Item 8 of Part II.
Report of Independent Certified Public Accountants.......... 13
Consolidated Income Statements, Years Ended March 13, 2000,
1999 and 1998............................................. 14
Consolidated Balance Sheets at March 31, 2000 and 1999...... 15
Consolidated Statements of Stockholders' Equity, Years Ended
March 31, 2000,
1999 and 1998............................................. 16
Consolidated Statements of Cash Flows, Years Ended March 31,
2000, 1999 and 1998....................................... 17
Notes to the Consolidated Financial Statements.............. 18
(a)2. Financial Statement Schedules (EDGAR only).
All other schedules are omitted because they are not
applicable or not required, or because the required
information is included in the Consolidated Financial
Statements or notes thereto.
(a)3. Index to Exhibits
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
------- -----------------------
*3.3 -- Restated Certificate of Incorporation
**3.3.1 -- Certificate of Amendment of Certificate of Incorporation, a
copy of which is attached as an exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1997
**3.3.2 -- Certificate of Designation, Preferences and Rights setting
forth the terms of the Company's Series X Junior
Participating Preferred Stock, par value $.01 per share, a
copy of which is attached as an exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1997
*3.4 -- Restated Bylaws
**10.4 -- Amended and Restated 1989 Stock Option Plan, a copy of which
is attached as an exhibit to the Company's Annual Report on
Form 10-K for the year ended March 31, 1994
**10.4.1 -- Second Amended and Restated 1989 Stock Option Plan, a copy
of which is attached as an exhibit to the Company's Report
on Form 10Q for the quarter ended June 30, 1997
30
33
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
------- -----------------------
**10.4.2 -- Third Amended and Restated 1989 Stock Option Plan, a copy of
which is attached as an exhibit to the Company's Annual
Report on Form 10-K for the year ended March 31, 1999
*10.12 -- Form of Director and Officer Indemnification Agreement
**10.18 -- Lease Agreement dated as of June 30, 1993 by and between QP
One Corporation, a Minnesota corporation, as landlord, and
Registrant, as tenant, a copy of which is attached as an
exhibit to the Company's Annual Report on Form 10-K for the
year ended March 31, 1994
**10.18.1 -- First Amendment dated as of December 20, 1993, to the Lease
Agreement dated as of June 30, 1993, by and between QP One
Corporation, a Minnesota corporation, as landlord, and
Registrant, as tenant, a copy of which is attached as an
exhibit to the Company's Annual Report on Form 10-K for the
year ended March 31, 1994
**10.21 -- 1992 Director Stock Grant Plan, as amended on July 23, 1996,
a copy of which is attached as an exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1997
**10.22 -- Employee Payroll Deduction Stock Purchase Plan, a copy of
which is attached as an exhibit to the Company's Annual
Report on Form 10-K for the year ended March 31, 1995
**10.24 -- Lease Agreement dated as of September 5, 1996 by and between
Interior Design Services, Inc., a Florida corporation, as
landlord, and Registrant, as tenant, a copy of which is
attached as an exhibit to the Company's Annual Report on
Form 10-K for the year ended March 31, 1997
**10.25 -- Stockholder Protection Agreement, dated May 8, 1997, between
the Registrant and ChaseMellon Shareholder Services, L.L.C.,
as rights agent, a copy of which is attached as an exhibit
to the Company's Current Report on Form 8-K filed on May 8,
1997
**10.26 -- Credit Agreement dated as of September 30, 1997, by and
between the Registrant and NationsBank, National
Association, as agent and lender, and the other lenders
party thereto, a copy of which is attached as an exhibit to
the Company's Report on Form 10Q for the quarter ended
September 30, 1997
**10.26.1 -- First amendment dated as of August 12, 1998, to the Credit
Agreement dated as of September 30, 1997, by and between the
Registrant and NationsBank, National Association, as agent
and lender, and other lenders party thereto, a copy of which
is attached as an exhibit to the Company's Report on Form
10Q for the quarter ended September 30, 1998
**10.26.2 -- Second Amendment dated as of February 19, 1999, to the
Credit Agreement dated as of September 30, 1997, by and
between the Registrant and Nationsbank, National
Association, as agent and lender, and the other lenders
party thereto, a copy of which is attached as an exhibit to
the Company's Report on Form 10-Q for the quarter ended
September 30, 1999
**10.27 -- 1999 Stock Option Plan, a copy of which is attached as an
exhibit to the Company's Report on Form 10-Q for the quarter
ended June 30, 1999
**10.28 -- Lease Agreement dated as of October 21, 1999 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, a copy of
which is attached as an exhibit to the Company's Report on
Form 10-Q for the quarter ended September 30, 1999
**10.29 -- Participation Agreement dated as of October 21, 1999 among
Catalina Marketing Sales Corporation, as lessee; the
Registrant, as guarantor; First Security Bank, National
Association, as the owner trustee under Dolphin Realty Trust
1999-1, as lessor and borrower; the various banks and other
lending institutions and First Union National Bank, as the
agent for the lenders, a copy of which is attached as an
exhibit to the Company's Report on Form 10-Q for the quarter
ended September 30, 1999
31
34
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
------- -----------------------
**10.30 -- Purchase and Sale Agreement dated as of October 21, 1999 by
and among 200 Carillon, LLC, as seller, Echelon
International Corporation, as developer, and Catalina
Marketing Sales Corporation, as buyer, a copy of which is
attached as an exhibit to the Company's Report on Form 10-Q
for the quarter ended September 30, 1999
21 -- List of subsidiaries
23 -- Consent of independent certified public accountants
27 -- Financial Data Schedule -- (for SEC use only)
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form S-1
Registration No. 33-45732, originally filed with the Securities and Exchange
Commission on February 14, 1992, and declared effective (as amended) on March
26, 1992.
** Previously filed as indicated.
32
35
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ST.
PETERSBURG, STATE OF FLORIDA, ON JUNE 16, 2000.
CATALINA MARKETING CORPORATION
(Registrant)
By: /s/ JOSEPH P. PORT
------------------------------------
Joseph P. Port,
Senior Vice President and
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ GEORGE W. OFF Chairman of the Board June 16, 2000
- -----------------------------------------------------
George W. Off
/s/ DANIEL D. GRANGER President, Chief Executive June 16, 2000
- ----------------------------------------------------- Officer
Daniel D. Granger and Director
/s/ FRANK H. BARKER Director June 16, 2000
- -----------------------------------------------------
Frank H. Barker
/s/ FREDERICK W. BEINECKE Director June 16, 2000
- -----------------------------------------------------
Frederick W. Beinecke
/s/ PATRICK W. COLLINS Director June 16, 2000
- -----------------------------------------------------
Patrick W. Collins
/s/ STEPHEN L. D'AGOSTINO Director June 16, 2000
- -----------------------------------------------------
Stephen L. D'Agostino
/s/ EVELYN FOLLIT Director June 16, 2000
- -----------------------------------------------------
Evelyn Follit
/s/ THOMAS W. SMITH Director June 16, 2000
- -----------------------------------------------------
Thomas W. Smith
/s/ MICHAEL B. WILSON Director June 16, 2000
- -----------------------------------------------------
Michael B. Wilson
/s/ JOSEPH P. PORT Senior Vice President and Chief June 16, 2000
- ----------------------------------------------------- Financial Officer
Joseph P. Port
/s/ CHRISTOPHER W. WOLF Vice President and Treasurer June 16, 2000
- ----------------------------------------------------- (Principal Accounting Officer)
Christopher W. Wolf
33