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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, 2001
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)
200 CARILLON PARKWAY, ST. PETERSBURG, FLORIDA 33716-2325
(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 April 23, 2001,
as reported by the New York Stock Exchange, Inc., was $1,861,829,831. The number
of shares of Registrant's common stock, par value $0.01 per share, outstanding
as of April 23, 2001, was 55,593,605.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Definitive Proxy Statement for 2001 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
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, 2001,
the Company employed 1,637 people reporting into 29 offices throughout the
United States, Europe and Asia.
TARGETED MARKETING SERVICES
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(R)"), 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 service line of the Catalina Marketing Network is the in-store
delivery of incentives at the checkout lane. Catalina Marketing links its
proprietary software, 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 Universal Product Codes ("UPC") 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, and
exchanges services with 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 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
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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 offers 13 four-week cycles of time on the Catalina
Marketing Network each year for more than 650 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, Inc. ("Market Logic"), acquired in July 1998, and
loyalty card production services through the Company's facilities based in
Manasquan, New Jersey (formerly 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 2001,
74 percent in fiscal 2000, and 80 percent in fiscal 1999. In the United States
as of March 31, 2001, the Catalina Marketing Network was installed in 15,475
retail stores reaching more than 185 million shoppers 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, France, and Italy. In Asia,
the Company currently operates in Japan. As of March 31, 2001, the Company had
installed its network in nearly 2,200 supermarket retailers in Europe, and its
weekly shopper reach was approximately 19.8 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 9.8 million in 447 retail outlets as of March 31, 2001.
Developing product lines include the services provided by Health Resource
Publishing ("HRP"), SuperMarkets Online ("SMO") and Alliance Research ("ARI").
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 editorial and product advertising material
is printed and handed to the customer along with the prescription. On June 1,
2000, the Company, through one of its wholly-owned subsidiaries, acquired
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HealthCare Data Corporation ("HDC"), a company likewise engaged in direct to
consumer and targeted information resources advertising to pharmacy customers.
The acquisition of HDC, together with the organic growth of the Health Resource
Network, enabled HRP to expand its networks to 12,578 pharmacy outlets as of
March 31, 2001.
SMO, originally tested in fiscal 1996, provides the industry's leading
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 13,461 participating supermarkets, along with the
promoted items, issues redeemable coupons, or "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.
ARI, acquired in July 1999, provides research products on consumer
attitudes. Research 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. On September 1,
2000, the Company acquired Market Intelligence, Inc. ("MI"), an attitudinal
research company, to supplement its internal growth plans and strategies. The
business operations of MI have been integrated with ARI, the combination in
which are referred to herein as "Research."
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 sales approach to each client in order to offer tailored targeted
marketing solutions.
Manufacturer Sales Force. The primary focus of the Company's marketing
effort is to attract national consumer packaged goods and prescription
medication 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 marketing force. The first is to continue expansion of its
distribution channel by installing stores and pharmacies in major markets that
are not currently part of the Catalina Marketing Network or the Health Resource
Network. Expansion of Health Services Marketing is achieved through the addition
of new major pharmacy chains. 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 ("FSI"),
newspapers, direct mail, magazines and in- or on-product packaging, as well as
other "in-store" marketing
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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.
EMPLOYEES
Catalina Marketing employed 1,637 people as of March 31, 2001,
approximately 1,293 which were full-time. No employees are covered by a
collective bargaining arrangement. More than 1,450 of the Company's employees
are employed in the United States, with approximately 23 percent of the United
States employees based in the St. Petersburg, Florida headquarters.
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
Catalina Marketing currently holds 159 United States and foreign patents
relating to Catalina Marketing products and services and has 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 protects such software, as appropriate through
copyrights, trade secret laws, non-disclosure agreements and internal security
measures. Such methods may not afford complete protection, and there can be no
absolute assurance that others will not independently develop such know-how,
concepts or ideas.
ITEM 2. PROPERTIES
In November 2000, the Company moved into its new headquarters facility,
which includes its principal administrative, marketing, information technology
and product development offices, and is located in 142,857 square feet of leased
space in St. Petersburg, Florida. The Company leases an additional 24 sales and
support offices across the United States, consisting of approximately 212,000
square feet in the aggregate, and four offices for its foreign operations. 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 statements.
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 2001:
March 31, 2001............................................ $36.31 $29.81
December 31, 2000......................................... 40.00 36.00
September 30, 2000........................................ 44.00 33.88
June 30, 2000............................................. 36.10 29.50
Fiscal 2000:
March 31, 2000............................................ $37.83 $27.10
December 31, 1999......................................... 40.23 27.25
September 30, 1999........................................ 35.63 24.67
June 30, 1999............................................. 32.48 26.58
Stock prices reflect the effect of the 3-for-1 stock split in Fiscal 2001.
B. Stockholders
As of March 31, 2001, there were approximately 755 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,
----------------------------------------------------
2001 2000 1999 1998 1997
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income Statement Data:
Revenues.................................. $417,881 $350,922 $264,783 $217,150 $172,143
Costs and expenses:
Direct operating expenses.............. 174,237 142,229 110,167 84,191 62,482
Selling, general and administrative.... 106,382 88,247 59,363 56,364 48,379
Depreciation and amortization.......... 43,243 35,175 27,342 23,703 17,939
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Total costs and expenses.......... 323,862 265,651 196,872 164,258 128,800
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Income from operations.................... 94,019 85,271 67,911 52,892 43,343
Interest income (expense) and other,
net.................................... (2,081) (595) (2,334) (963) 1,224
Provision for income taxes................ (34,945) (34,041) (27,969) (19,058) (17,880)
Minority interest in losses of
subsidiaries........................... 1,142 713 -- -- 554
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Net income........................ $ 58,135 $ 51,348 $ 37,608 $ 32,871 $ 27,241
======== ======== ======== ======== ========
Diluted net income
Per common share.......................... $ 1.00 $ .89 $ .66 $ .58 $ .44
Diluted weighted average common shares
outstanding............................ 57,919 57,957 57,027 57,078 61,473
Balance sheet data:
Cash and cash equivalents................. 7,280 13,765 13,942 18,434 13,698
Property and equipment, net............... 130,425 115,000 87,686 70,513 69,578
Total assets.............................. 388,048 303,752 221,047 157,066 154,696
Long term debt, including current
portion................................ 38,764 14,144 6,033 1,731 2,566
Total stockholders' equity................ 211,597 141,045 120,933 90,042 96,938
Other data:
U.S. Checkout Coupon stores installed at
end of period.......................... 15,475 13,516 12,092 11,164 10,745
International Checkout Coupon stores
installed at end of period............. 2,617 2,587 1,935 1,372 941
Health Resource Network pharmacy outlets
installed at end of period............. 12,578 6,671 3,861 1,920 1,195
Capital expenditures, net................. 54,190 58,217 39,954 24,250 34,605
Payment for repurchase of common stock.... 15,843 47,603 18,248 50,815 9,467
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. 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
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operating groups, which engages consumers to influence purchase decisions. As of
March 31, 2001, the Company employed 1,637 people reporting into 29 offices
throughout the United States, Europe and Asia.
RESULTS OF OPERATIONS
Year Ended March 31, 2001 compared to Year Ended March 31, 2000
Revenues were $417.9 million in fiscal 2001, up 19 percent over revenues of
$350.9 million in fiscal 2000. The increase in revenues is due to an increase in
promotions printed worldwide, expansion of the Health Resource Network, growth
in Checkout Direct(R) programs as well as increases in direct mail marketing and
other loyalty programs. Additionally, fiscal 2001 includes revenues from
HealthCare Data Corporation and Market Intelligence, acquired in June and
September 2000, respectively.
In the United States, the Catalina Marketing Network was in 15,475 stores
at March 31, 2001, which reach approximately 185 million shoppers each week as
compared to 13,516 stores reaching approximately 165 million shoppers each week
at March 31, 2000. The Health Resource Network was in 12,578 pharmacies on March
31, 2001, including 4,587 acquired in the purchase of HealthCare Data
Corporation on June 1, 2000, as compared to 6,671 pharmacies on March 31, 2000.
Outside the U.S., the Catalina Marketing Network was in 2,617 stores at March
31, 2001, which reach approximately 30 million shoppers each week as compared to
2,587 stores reaching approximately 35 million shoppers each week at March 31,
2000. In fiscal 2001, the Company installed its Catalina Marketing Network in
1,959 stores (net of deinstallations) in the United States as compared to 1,424
stores in fiscal 2000. 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 1,320 pharmacies (net of
deinstallations) in fiscal 2001 as compared to 2,810 pharmacies in fiscal 2000.
Outside the United States, the Company installed 30 stores (net of
deinstallations) in fiscal 2001 as compared to 652 stores (net of
deinstallations) in fiscal 2000.
Direct operating expenses consist of retailer fees, paper, data line
charges, 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 $174.2 million in
fiscal 2001 from $142.2 million in fiscal 2000. Direct operating expenses in
fiscal 2001 as a percentage of revenues increased to 41.7 percent from 40.5
percent in fiscal 2000. This increase in fiscal 2001 is principally attributable
to increased data line charges, an increased provision for doubtful accounts and
increased expenses relating to the administration of the Catalina Marketing
Network (information technology related costs), as well as higher operating
expenses at Market Logic, offset by lower direct operating expenses in
connection with revenue associated with the increase in direct marketing and
research programs at Alliance Research and in the newsletter production services
at Health Resource Publishing.
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 2001 were $106.4 million compared to $88.2 million in fiscal 2000, an
increase of 20.6 percent or $18.2 million. As a percentage of revenues, selling,
general and administrative expenses increased 0.4 percent in fiscal 2001, to
25.5 percent from 25.1 percent in fiscal 2000. This increase is primarily
attributable to increased legal fees initiated by the Company to protect its
intellectual properties.
Depreciation and amortization increased to $43.2 million for fiscal 2001
from $35.2 million for fiscal 2000. Depreciation increased due to the investment
in capital expenditures, during the current and prior periods, associated with
new operating units and product lines, data processing equipment and the
increase in stores installed. Amortization expense increased due to the
increases in goodwill and other intangible assets related to the Company's
acquisitions.
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Interest expense and other, net was $2.1 million for fiscal 2001 compared
to $0.6 million for fiscal 2000. This increase is primarily attributable to
increased long and short term borrowing balances in the Company and its Asian
subsidiary.
The provision for income taxes increased to $34.9 million, or 38.0 percent
of income before income taxes and minority interest, for fiscal 2001 compared to
$34.0 million, or 40.2 percent of income before income taxes, for fiscal 2000.
The rate decrease is primarily due to the Company's ability to utilize net
operating loss carry forwards of a wholly owned foreign subsidiary and lower
state taxes. The Company's effective tax rate is higher than the federal
statutory income tax rate due to state and foreign income taxes and various
nondeductible expenses, primarily the amortization of goodwill related to the
Company's acquisitions.
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 million 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, developing product lines, and legal fees.
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
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stores installed. Amortization expense increased due to the increases in
goodwill and other intangible assets related to the Company's acquisitions.
Interest expense and other, net was $0.6 million for fiscal 2000 compared
to $2.3 million 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.
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, JUN 30,
2001 2000 2000 2000 2000 1999 1999 1999
-------- -------- -------- ------- ------- -------- -------- -------
Revenues...................... $113,360 $108,740 $101,837 $93,944 $93,690 $ 97,790 $86,828 $72,614
Direct operating expenses..... 48,812 44,393 41,775 39,257 37,298 39,226 35,537 30,168
Selling, general and
administrative.............. 29,580 25,406 26,172 25,224 22,759 22,200 23,480 19,808
Depreciation and
amortization................ 11,550 11,240 10,176 10,277 9,549 8,862 8,577 8,187
-------- -------- -------- ------- ------- -------- ------- -------
Income from operations........ 23,418 27,701 23,714 19,186 24,084 27,502 19,234 14,451
Interest expense and other,
net......................... (93) (1,283) (42) (663) (354) (31) (9) (201)
Provision for income taxes.... (8,865) (10,039) (9,001) (7,040) (9,540) (11,043) (7,728) (5,730)
Minority interest in losses of
subsidiaries................ 45 446 391 260 223 132 175 183
-------- -------- -------- ------- ------- -------- ------- -------
Net income.................... $ 14,505 $ 16,825 $ 15,062 $11,743 $14,413 $ 16,560 $11,672 $ 8,703
======== ======== ======== ======= ======= ======== ======= =======
Diluted net income per common
share....................... $ .25 $ .29 $ .26 $ .20 $ .25 $ .29 $ .20 $ .15
Diluted weighted average
common shares outstanding... 57,584 58,377 58,348 57,480 57,591 57,690 58,098 58,458
U.S. checkout coupon business:
Stores at quarter end......... 15,475 15,171 14,772 14,352 13,516 13,020 12,635 12,257
Net stores installed during
quarter..................... 304 399 420 839 496 385 378 165
Promotions printed
(in millions)............... 856 944 778 763 678 781 722 628
Weekly shopper reach at
quarter end (in millions)... 185 194 183 182 165 173 160 161
The Company expects its revenues to be greater during 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
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.
9
12
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 2001 and fiscal 2000, the Company made net capital expenditures of
$54.2 million and $58.2 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.
Effective September 1, 2000, the Company, through one of its wholly-owned
subsidiaries, acquired 100 percent of the outstanding common shares of Market
Intelligence, Inc., an attitudinal research company, for approximately $1.0
million in initial cash consideration. The terms of the acquisition provide for
additional payments of up to $1.0 million, contingent upon the business unit's
performance.
Effective June 1, 2000, the Company, through one of its wholly-owned
subsidiaries, acquired 100 percent of the outstanding common shares of
HealthCare Data Corporation, a company which provides strategic targeted
marketing solutions for health-related and pharmaceutical manufacturers and
retailers, for $14.2 million in cash, net of cash acquired.
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, subject to acceleration provisions and culminating in the first
quarter of fiscal 2005, 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 the technology of its Checkout Prizes(R) application by
virtue of a merger transaction between the Company and CompuScan. Initial cash
consideration was $9.1 million, net of cash acquired. Terms of the merger
agreement called for the Company to make a series of additional payments
culminating in the fourth quarter of fiscal 2002. Future payments are based on
specified future performance of the associated business activity.
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 called for
the Company to make a series of payments, concluded in the fourth quarter of
fiscal 2001. These payments were based upon specified 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, culminating in the fourth quarter of fiscal 2002,
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 annual payments,
culminating in the first quarter of fiscal 2003 and subject to acceleration
provisions, which are contingent upon the future operating performance of Market
Logic.
On January 4, 2001, the Company entered into an agreement with the Tribune
Company, a minority equity investor in Supermarkets Online Holdings, Inc.
("Holdco"), the parent company of Supermarkets Online, Inc. ("SMO"), the
Company's internet-based marketing and advertising subsidiary. As a part of this
agreement, the Company acquired all of the Holdco common shares held by the
Tribune Company, repaid a subordinated convertible note, and terminated a
marketing agreement between the Tribune Company and SMO. Total consideration was
$10.5 million. The acquisition of the common shares was accounted for using
10
13
the purchase method of accounting for business combinations. The subordinated
convertible debt repayment and the marketing services agreement termination has
been accounted for as a reduction in long term debt and deferred revenue,
respectively (see Note 4).
On October 24, 2000, the Company acquired a total of 16 US patents and 12
pending U.S. patent applications together with all foreign rights related to the
inventions encompassed by the original patents and patent applications. The
purchase price of these patents and patent applications of $17.0 million is
being amortized on a straight-line basis over the remaining useful lives of the
assets ranging from 9 to 14 years.
Additionally, during fiscal 2000 and 2001, investments were made totaling
$23.0 million and $28.9 million, respectively, principally representing earnout
payments attributable to the aforementioned acquisitions and minority equity
investments.
On October 25, 1999, the Board of Directors approved an additional $50
million to buy back Company Common Stock (the "1999 authorization"). As of March
31, 2000, $45.9 million was still available under this authorization. During
fiscal 2001, the Company purchased 497,200 shares of its Common Stock for $15.8
million. As of March 31, 2001, the Company may repurchase $30.1 million of the
Company's common stock under the 1999 authorization.
The Company believes working capital generated by operations along with
existing credit facilities is sufficient for its overall capital requirements.
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, 2001,
2000 and 1999............................................. 14
Consolidated Balance Sheets at March 31, 2001 and 2000...... 15
Consolidated Statements of Stockholders' Equity, Years ended
March 31, 2001, 2000 and 1999............................. 16
Consolidated Statements of Cash Flows, Years ended March 31,
2001, 2000 and 1999....................................... 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,
2001 and 2000, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
2001. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Catalina Marketing
Corporation and subsidiaries as of March 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended March 31, 2001, in conformity with accounting principles generally
accepted in the United States.
ARTHUR ANDERSEN, LLP
Tampa, Florida
April 19, 2001
13
16
CATALINA MARKETING CORPORATION
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED MARCH 31,
------------------------------
2001 2000 1999
-------- -------- --------
Revenues.................................................... $417,881 $350,922 $264,783
Costs and Expenses:
Direct operating expenses................................. 174,237 142,229 110,167
Selling, general and administrative....................... 106,382 88,247 59,363
Depreciation and amortization............................. 43,243 35,175 27,342
-------- -------- --------
Total costs and expenses.......................... 323,862 265,651 196,872
-------- -------- --------
Income From Operations...................................... 94,019 85,271 67,911
Interest Expense and Other, net............................. (2,081) (595) (2,334)
-------- -------- --------
Income Before Income Taxes and Minority Interest............ 91,938 84,676 65,577
Provision for Income Taxes.................................. (34,945) (34,041) (27,969)
Minority Interest in Losses of Subsidiaries................. 1,142 713 --
-------- -------- --------
Net Income........................................ $ 58,135 $ 51,348 $ 37,608
======== ======== ========
Diluted:
Net Income Per Common Share............................... $ 1.00 $ .89 $ .66
Weighted Average Common Shares Outstanding................ 57,919 57,957 57,027
Basic:
Net Income Per Common Share............................... $ 1.04 $ .92 $ .68
Weighted Average Common Shares Outstanding................ 55,767 55,611 55,503
The accompanying Notes are an integral part of these consolidated financial
statements.
14
17
CATALINA MARKETING CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31,
---------------------
2001 2000
--------- ---------
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 7,280 $ 13,765
Accounts receivable, net.................................. 72,996 59,261
Inventory................................................. 5,222 4,558
Deferred tax asset........................................ 7,893 10,463
Prepaid expenses and other current assets................. 24,637 27,325
--------- ---------
Total current assets.............................. 118,028 115,372
--------- ---------
Property and equipment:
Store equipment........................................... 193,684 177,944
Furniture and office equipment............................ 75,418 55,243
Billboards................................................ 18,094 17,396
Leasehold improvements.................................... 5,758 4,633
--------- ---------
292,954 255,216
Less: accumulated depreciation............................ (162,529) (140,216)
--------- ---------
Property and equipment, net....................... 130,425 115,000
Purchased intangible assets, net............................ 135,643 70,400
Other assets................................................ 3,952 2,980
--------- ---------
Total Assets...................................... $ 388,048 $ 303,752
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................................... $ 18,437 $ 17,862
Taxes payable............................................. 4,259 3,698
Accrued expenses.......................................... 57,585 50,788
Deferred revenue.......................................... 32,924 40,444
Short term borrowings..................................... 15,219 29,493
--------- ---------
Total current liabilities......................... 128,424 142,285
--------- ---------
Deferred tax liability...................................... 8,968 8,380
Minority interest........................................... 295 1,228
Long term debt.............................................. 38,764 10,814
Commitments and contingencies
Stockholders' Equity:
Preferred stock; $.01 par value; 5,000,000 authorized
shares; none issued and outstanding.................... -- --
Common stock; $.01 par value; 150,000,000 authorized
shares; 55,548,864 and 54,602,457 shares issued and
outstanding at March 31, 2001 and 2000, respectively... 555 546
Paid-in capital........................................... 14,441 897
Accumulated other comprehensive income (loss)............. (1,050) 86
Retained earnings......................................... 197,651 139,516
--------- ---------
Total Stockholders' equity........................ 211,597 141,045
--------- ---------
Total Liabilities and Stockholders' equity........ $ 388,048 $ 303,752
========= =========
The accompanying Notes are an integral part of these consolidated financial
statements.
15
18
CATALINA MARKETING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
PAR OTHER
VALUE OF COMPREHENSIVE TOTAL
COMPREHENSIVE COMMON PAID-IN INCOME RETAINED STOCKHOLDERS'
INCOME STOCK CAPITAL (LOSS) EARNINGS EQUITY
------------- -------- -------- ------------- -------- -------------
BALANCE AT MARCH 31, 1998........................ $552 $ 317 $ (135) $ 89,308 $ 90,042
Proceeds from issuance of 1,144,155 shares of
common stock................................. -- 11 4,392 -- -- 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
1,113,300 common shares...................... -- (11) (10,408) -- (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..................... 978 -- -- 978 -- 978
-------
Comprehensive income........................... $38,586 -- -- -- -- --
---- -------- ------- -------- --------
BALANCE AT MARCH 31, 1999........................ $552 $ 451 $ 843 $119,087 $120,933
==== ======== ======= ======== ========
Proceeds from issuance of 1,168,143 shares of
common stock................................. -- 11 8,604 -- -- 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
1,614,000 common shares...................... -- (17) (16,667) -- (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....................... (757) -- -- (757) -- (757)
-------
Comprehensive income........................... $50,591 -- -- -- -- --
---- -------- ------- -------- --------
BALANCE AT MARCH 31, 2000........................ $546 $ 897 $ 86 $139,516 $141,045
==== ======== ======= ======== ========
Proceeds from issuance of 1,601,504 shares of
common stock................................. -- 15 21,506 -- -- 21,521
Increase in investment in subsidiary, net of
tax.......................................... -- -- 1,943 -- -- 1,943
Tax benefit from exercise of non-qualified
stock options and disqualified
dispositions................................. -- -- 6,506 -- -- 6,506
Repurchase, retirement and cancellation of
497,200 common shares........................ -- (5) (15,838) -- -- (15,843)
Deferred compensation plan common stock units
and Directors' common stock grants........... -- (1) (573) -- -- (574)
Net income..................................... $58,135 -- -- -- 58,135 58,135
Other comprehensive loss....................... (1,136) -- -- (1,136) -- (1,136)
-------
Comprehensive income........................... $56,999 -- -- -- -- --
---- -------- ------- -------- --------
BALANCE AT MARCH 31, 2001........................ $555 $ 14,439 $(1,050) $197,651 $211,597
==== ======== ======= ======== ========
The accompanying Notes are an integral part of these consolidated financial
statements.
16
19
CATALINA MARKETING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED MARCH 31,
-------------------------------
2001 2000 1999
--------- -------- --------
Cash Flows from Operating Activities:
Net income................................................ $ 58,135 $ 51,348 $ 37,608
Adjustments to reconcile net income to net cash provided
by operating activities:
Minority interest...................................... (1,142) (713) --
Depreciation and amortization.......................... 43,243 35,175 27,404
Provision for doubtful accounts........................ 1,027 1,304 1,085
Deferred income taxes.................................. 5,403 1,310 1,707
Other.................................................. (5,602) 197 3,173
Changes in operating assets and liabilities, net of
effects from acquisitions:
Tax benefit from exercise of non-qualified stock
options and disqualified dispositions................ 7,931 6,071 5,792
Accounts receivable.................................... (14,573) (15,721) (23,503)
Inventory, prepaid expenses and other assets........... 630 (2,733) (12,003)
Accounts payable....................................... 392 2,451 5,379
Taxes payable.......................................... 2,195 1,572 (57)
Accrued expenses....................................... 2,729 6,817 5,303
Deferred revenue....................................... (6,459) 12,074 4,973
--------- -------- --------
Net cash provided by operating activities......... 93,909 99,152 56,861
--------- -------- --------
Cash Flows from Investing Activities:
Capital expenditures, net................................. (54,190) (58,217) (39,954)
Purchase of investments, net of cash acquired............. (71,640) (38,870) (8,982)
--------- -------- --------
Net cash used in investing activities............. (125,830) (97,087) (48,936)
--------- -------- --------
Cash Flows From Financing Activities:
Proceeds from debt obligations............................ 33,235 46,847 23,585
Principal payments on debt obligations.................... (15,678) (16,517) (22,326)
Proceeds from issuance of common and subsidiary stock..... 23,808 14,442 4,526
Payment for repurchase of company common stock............ (15,843) (47,603) (18,248)
--------- -------- --------
Net cash provided by (used in) financing
activities...................................... 25,522 (2,831) (12,463)
--------- -------- --------
Net Change in Cash and Cash Equivalents..................... (6,399) (766) (4,538)
Effect of Exchange Rate Changes on Cash..................... (86) 589 46
Cash and Cash Equivalents, at beginning of year............. 13,765 13,942 18,434
--------- -------- --------
Cash and Cash Equivalents, at end of year................... $ 7,280 $ 13,765 $ 13,942
========= ======== ========
Supplemental Schedule of Other Transactions:
Cash paid during the year for:
Interest.................................................. $ 2,679 $ 862 $ 207
Income taxes.............................................. $ 22,567 $ 19,932 $ 22,702
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, 2001
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 Asia. As of
March 31, 2001, the Company's network was installed in 15,475 retail stores and
12,578 pharmacies throughout the United States and 2,617 retail stores
throughout the United Kingdom, France, Italy 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
accounting principles generally accepted in the United States requires the use
of management's estimates.
The accounts of the wholly-owned and majority-owned foreign subsidiaries
are included for the twelve months ended December 31, which is their fiscal
year-end. The Company's investments in non-majority owned companies were
accounted for using the cost 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 recorded at their fair market values.
Allowance for Doubtful Accounts. The Company records a provision for
estimated doubtful accounts as part of direct operating expenses. As of March
31, 2001 and 2000, the allowance for doubtful accounts was $2,433,000 and
$1,414,000, 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 in accumulated other comprehensive income (loss).
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. The following is a reconciliation of the
denominator of basic and diluted earnings per share (EPS) computations shown on
the face of the accompanying consolidated financial statements as restated for
the Company's three-for-one stock split (see Note 12) (in thousands):
MARCH 31,
------------------------
2001 2000 1999
------ ------ ------
Basic weighted average common shares outstanding............ 55,767 55,611 55,503
Dilutive effect of options outstanding...................... 2,152 2,346 1,524
------ ------ ------
Diluted weighted average common shares outstanding.......... 57,919 57,957 57,027
====== ====== ======
As of March 31, 2001, all outstanding common stock options were included in
the computation of diluted EPS. As of March 31, 2000, options to purchase 90,900
shares of common stock at a price of $35.63 were outstanding, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common stock. As of March 31,
1999, options to purchase 3,485,400 shares of common stock at prices ranging
from $20.54 to $22.00 were outstanding, but were not included in the computation
of diluted EPS because the options' exercise price was grater than the average
market price of the common stock.
Reclassifications. Certain reclassifications to the fiscal year 2000
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,
-----------------
2001 2000
------- -------
Prepaid billboard rental.................................... $10,239 $ 9,353
Investments in deferred compensation plan (see Note 8)...... 9,053 10,343
Prepaid marketing costs..................................... 26 2,139
Other....................................................... 5,319 5,490
------- -------
Total prepaid expenses and other current assets... $24,637 $27,325
======= =======
19
22
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchased intangible assets, net include (dollars in thousands):
MARCH 31,
------------------
USEFUL LIFE 2001 2000
----------- -------- -------
(IN YEARS)
Patent license and retailer relationships in the United
Kingdom............................................... 20 $ 12,691 $12,691
Goodwill................................................ 10-40 108,803 54,913
Purchased patents....................................... 7-19 25,578 8,478
Accumulated amortization................................ (11,429) (5,682)
-------- -------
Purchased intangible assets, net.............. $135,643 $70,400
======== =======
Accrued expenses include (in thousands):
MARCH 31,
-----------------
2001 2000
------- -------
Payroll related............................................. $15,462 $11,127
Deferred compensation plan.................................. 9,080 10,353
Sales commissions........................................... 3,630 4,546
Payments to acquired companies.............................. 15,652 12,083
Accrued operating expenses.................................. 5,482 4,083
Other....................................................... 8,279 8,596
------- -------
Total accrued expenses............................ $57,585 $50,788
======= =======
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.
20
23
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
-----------------
2001 2000
------- -------
Deferred Tax Assets:
Payroll related........................................... $ 3,490 $ 3,813
Deferred revenue.......................................... 4,224 6,364
Provision for doubtful accounts........................... 905 508
Accrued expenses.......................................... 3,312 3,337
Net operating loss carry-forwards......................... 2,111 3,252
Unconsolidated equity investments......................... 890 883
Other..................................................... 291 157
------- -------
15,223 18,314
Valuation allowance....................................... (1,494) (2,173)
------- -------
Net deferred tax asset............................ $13,729 $16,141
======= =======
Deferred Tax Liabilities:
Depreciation and amortization............................. $10,205 $ 8,273
Prepaid expenses.......................................... 3,716 3,938
Investment in consolidated subsidiary..................... -- 1,426
Other..................................................... 883 421
------- -------
14,804 14,058
------- -------
Net deferred tax (liability) asset................ $(1,075) $ 2,083
======= =======
The net decrease in the valuation allowance of $679,000 during fiscal 2001
was primarily due to the utilization of a portion of the foreign net operating
loss ("NOL") carry-forwards. A remaining valuation allowance of $1,494,000
exists as it is more likely than not that deferred tax assets generated by
certain foreign subsidiaries and losses of unconsolidated equity investments
will not be realized.
As of March 31, 2001, the Company had cumulative US federal taxable NOL
carry-forwards of $2,884,000, which expire between 2010 and 2015. These NOLs
were acquired through various Company acquisitions. In addition, various foreign
subsidiaries of the Company had aggregate foreign taxable NOL carry-forwards of
$7,050,000. Approximately $735,000 of the foreign NOLs can be carried forward
indefinitely, while the remaining $6,315,000 may expire between 2004 and 2006.
Approximately $4,050,000 of the foreign pre-tax losses represented by NOLs has
already been deducted as a flow-through item in the consolidated U.S. Federal
income tax return.
21
24
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes consisted of the following (in thousands):
MARCH 31,
---------------------------
2001 2000 1999
------- ------- -------
Current taxes:
Federal................................................. $26,761 $28,085 $22,865
State................................................... 2,736 4,291 3,016
Foreign................................................. 45 355 381
------- ------- -------
29,542 32,731 26,262
------- ------- -------
Deferred taxes:
Federal................................................. 3,463 2,055 1,423
State................................................... 390 235 131
Foreign................................................. 1,550 (980) 153
------- ------- -------
5,403 1,310 1,707
------- ------- -------
Provision for income taxes...................... $34,945 $34,041 $27,969
======= ======= =======
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,
---------------------------
2001 2000 1999
------- ------- -------
Federal statutory rate.................................... 35% 35% 35%
Expected federal statutory tax............................ $32,178 $29,637 $22,952
State and foreign income taxes, net of federal benefit.... 3,998 4,394 2,495
Effect of foreign subsidiary losses and their tax rates... (1,997) (786) 753
Amortization of goodwill.................................. 1,652 1,000 366
Loss on unconsolidated equity investment.................. -- (732) 1,050
Other..................................................... (886) 528 353
------- ------- -------
Provision for income taxes...................... $34,945 $34,041 $27,969
======= ======= =======
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,
-----------------
2001 2000
------- -------
Credit Agreement, variable interest rates................... $30,000 $15,000
Short term borrowings with several Japanese banks and
financing agents, interest from 1.66% to 3.35% as of March
31 (payable in yen)....................................... 15,219 11,163
Long term debt with several Japanese banks, interest from
2.63% to 6.38% as of March 31, maturing through July 2005
(payable in yen).......................................... 8,764 12,744
Subordinated convertible note with The Tribune Company,
interest at 4.5% per annum................................ -- 1,400
------- -------
Total debt obligations...................................... 53,983 40,307
Less -- short term borrowings..................... 15,219 29,493
------- -------
Total long term debt.............................. $38,764 $10,814
======= =======
22
25
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Maturities of long term debt are as follows as of March 31, 2001 (in
thousands):
AMOUNT
-------
2003........................................................ $ 4,014
2004........................................................ 33,051
2005........................................................ 1,353
2006........................................................ 346
Thereafter.................................................. --
-------
$38,764
=======
Certain debt held by the Company's Japan subsidiary is guaranteed by
certain minority shareholders.
On September 25, 2000, the Company entered into a credit agreement (the
"Credit Agreement") with a syndicate of commercial banks including Bank One, NA
as the Administrative Agent (Bank One), First Union National Bank as the
Syndication Agent and Wachovia Bank, NA as the Documentation Agent.
The Credit Agreement provides for a revolving loan credit facility of up to
$150 million in favor of the Company. The termination date of the revolving loan
credit facility is September 25, 2003.
Borrowings under the Credit Agreement accrue interest at rates based upon
either (i) the British Bankers' Association Interest Settlement Rate (Eurodollar
Rate) plus an applicable margin ranging from 50 to 87.5 basis points, or (ii)
the higher of 50 basis points over the Federal Funds Rate or Bank One's prime
rate of interest. The average interest rate for fiscal 2001 and the year end
rate as of March 31, 2001 were 7.08% and 5.99%, respectively. In addition, the
Credit Agreement provides for unused facilities fees to accrue at a range of 15
to 22.5 basis points per annum multiplied by the unused portions of the
revolving credit and line of credit facilities. The Credit Agreement is
guaranteed by several Company subsidiaries and contains certain financial
covenants and other terms and conditions. As of March 31, 2001, the Company was
in compliance with all such financial covenants.
As of March 31, 2000, the Company's borrowings were outstanding under a
credit agreement with a syndicate of commercial banks led by Nationsbank, NA
("Nationsbank Agreement"). Availability under the Nationsbank Agreement
aggregated to $150 million. The average interest rate for fiscal 2000 and the
year-end rate as of March 31, 2000 were 6.42% and 6.48%, respectively. The
Nationsbank Agreement expired on September 25, 2000.
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 was 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. This investment by the Tribune was reacquired by the Company
in fiscal 2001 (see Note 10).
Interest expense was $2,192,000, $1,294,000, and $651,000 for the years
ended March 31, 2001, 2000, and 1999, respectively.
NOTE 5. COMMITMENTS AND CONTINGENCIES
Rental expense under operating leases was $5,732,000, $4,756,000, and
$2,941,000 for the years ended March 31, 2001, 2000 and 1999, 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, 2001,
23
26
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are as follows: $5,384,000 in 2002, $4,273,000 in 2003, $3,076,000 in 2004,
$2,435,000 in 2005, $22,083,000 in 2006 and $1,969,000 thereafter.
As of October 21, 1999, the Company entered into a lease financing
agreement ("Lease Agreement") for a new corporate headquarters building in St.
Petersburg, Florida. The operating 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 Lease Agreement includes a
purchase option for the Company that approximates the original cost of the
building. The Company occupied the new corporate headquarters building and began
making lease payments in November 2000. The present value of the future minimum
lease payments for the new facility (included above) based on interest rates as
of March 31, 2001, are as follows: $1,686,000 in 2002, $1,595,000 in 2003,
$1,508,000 in 2004, $1,426,000 in 2005, $21,394,000 in 2006.
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 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 statements.
NOTE 6. STOCK-BASED COMPENSATION PLANS
The Company had 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, 17,250,000 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 15,940,327 shares were granted, net of
cancellations, under the 1989 Plan, of which options to purchase 5,605,693
shares were outstanding on March 31, 2001.
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 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, 4,800,000 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 3,536,576 shares have been granted, net of
cancellations, under the 1999 Plan, of which options to purchase 3,337,196
shares were outstanding on March 31, 2001.
The 1999 Plan provides for grants of 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
24
27
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 2001, options to purchase
an aggregate of 10,534,014 shares had been exercised, including options to
purchase 60,000 shares granted outside of any plan; options to purchase an
aggregate of 8,942,889 shares were outstanding; and 1,263,424 shares remained
available for future grants under the 1999 Plan. Of the options outstanding at
March 31, 2001 and at March 31, 2000, options to purchase 2,494,183 and
1,169,514 shares respectively, were immediately exercisable, with weighted
average exercise prices of $35.64 and $12.82, respectively.
Stock option activity for the years ended March 31, 1999, 2000 and 2001 is
as follows:
WEIGHTED
NUMBER AVERAGE
OF SHARES OPTION PRICES
---------- -------------
Options outstanding at March 31, 1998....................... 5,126,910 $10.14
Option activity:
Granted................................................... 4,722,420 20.69
Exercised................................................. (1,551,489) 7.91
Canceled or expired....................................... (464,376) 11.43
---------- ------
Options outstanding at March 31, 1999....................... 7,833,465 16.87
---------- ------
Option activity:
Granted................................................... 1,588,602 29.25
Exercised................................................. (1,233,960) 10.47
Canceled or expired....................................... (183,033) 19.16
---------- ------
Options outstanding at March 31, 2000....................... 8,005,074 20.26
---------- ------
Option activity:
Granted................................................... 3,065,038 33.13
Exercised................................................. (1,377,900) 16.55
Canceled or expired....................................... (749,323) 24.34
---------- ------
Options outstanding at March 31, 2001....................... 8,942,889 $24.90
========== ======
1992 Director Stock Grant Plan. The Grant Plan provides for grants of
common stock to non-employee board members. A total of 300,000 shares of the
Company's common stock was authorized for issuance under this plan. As of March
31, 2001, 109,596 shares have been granted, net of cancellations leaving 190,404
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, 900,000 shares of the Company's common stock were reserved for
issuance. For the years ended March 31, 2001, 2000 and 1999, 59,102, 56,874, and
73,548 shares at a weighted average fair value of $34.09, $26.64, and $16.11
respectively, were issued to employees. Total shares available for future grant
total 439,276 as of March 31, 2001.
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.
25
28
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company accounts for the option, stock grant and stock purchase plans
under APB Opinion No. 25, "Accounting for Stock Issued to Employees", under
which $293,708, $187,818, and $155,366 for the years ended March 31, 2001, 2000
and 1999, respectively, in compensation expense has been recognized. The Company
has adopted Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (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 1999: 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 grant; expected dividend yield of zero percent; expected life of five years
to eight years; and expected volatility of 42.17 percent. The assumptions used
for grants in fiscal 2001 are: risk-free interest rates ranging from 5.13 to
6.23 percent depending on the date of grant; expected dividend yield of zero
percent; expected life of nine years; and expected volatility of 41.67 percent.
The fair values of options granted in fiscal 2001, 2000 and 1999 are
$54,139,392, $18,999,941, and $37,193,274 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 CONTRACTUAL WEIGHTED AVERAGE AS OF WEIGHTED AVERAGE
EXERCISE PRICES MARCH 31, 2001 LIFE (IN YEARS) EXERCISE PRICE MARCH 31, 2001 EXERCISE PRICE
- --------------- -------------- --------------------- ---------------- -------------- ----------------
$0.00- $8.00 20,200 0.1 $ 7.71 20,200 $ 7.71
$8.01-$16.00 904,227 1.2 11.14 631,884 11.10
$16.01-$25.00 4,125,689 6.6 21.03 1,627,933 20.75
$25.01-$33.00 3,296,673 9.0 31.77 201,086 29.88
$33.01-$41.00 596,100 9.2 35.11 13,080 35.63
--------- ---------
8,942,889 2,494,183
========= =========
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,
---------------------------
2001 2000 1999
------- ------- -------
Net Income:
As Reported............................................... $58,135 $51,348 $37,608
Pro Forma................................................. 46,013 35,880 31,517
Basic EPS:
As Reported............................................... 1.04 .92 .68
Pro Forma................................................. .83 .65 .57
Diluted EPS:
As Reported............................................... 1.00 .89 .66
Pro Forma................................................. .79 .62 .55
Pro forma amounts include approximately $525,000, $396,000, and $303,000
related to the purchase discount offered under the Purchase Plan for the years
ended March 31, 2001, 2000 and 1999, 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
26
29
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
The Company maintains a 401(k) Savings Plan. The Company's contributions
during the years ended March 31, 2001, 2000 and 1999 were $1,002,000, $1,047,000
and $840,000 respectively.
The Company maintains 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. The Deferred Compensation Plan allows 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 creates 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 in
the Company's 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 the years ended March 31, 2001, 2000 and 1999 were not
significant. Stock units are initially recorded at fair value.
NOTE 9. SEGMENT INFORMATION
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 called
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). The Company's results of operations do not include
revenue from internal sources in the amounts of $18,953,000, $2,163,000 and
$3,026,000 during the years ended March 31, 2001, 2000, and 1999, respectively.
Revenue from internal sources is wholly eliminated in the presentation of
consolidated results.
Revenue and long-lived assets by geographic area are as follows:
FOR THE FISCAL YEAR ENDED MARCH 31,
------------------------------------
2001 2000 1999
---------- ---------- ----------
Revenue from external customers
United States........................................ $361,787 $298,650 $228,806
Foreign.............................................. 56,094 52,272 35,977
Long lived assets
United States........................................ $107,856 $ 88,738 $ 68,932
Foreign.............................................. 25,108 29,242 21,130
27
30
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10. ACQUISITIONS AND OTHER
Effective September 1, 2000, the Company, through one of its wholly-owned
subsidiaries, acquired 100 percent of the outstanding common shares of Market
Intelligence, Inc., an attitudinal research company, for approximately $1.0
million in initial cash consideration. The terms of the acquisition provide for
additional payments of up to $1.0 million, contingent upon the business unit's
performance.
Effective June 1, 2000, the Company, through one of its wholly-owned
subsidiaries, acquired 100 percent of the outstanding common shares of
HealthCare Data Corporation, a company which provides strategic targeted
marketing solutions for health-related and pharmaceutical manufacturers and
retailers, for $14.2 million in cash, net of cash acquired.
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, subject to acceleration provisions and culminating in the first
quarter of fiscal 2005, 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 the technology of its Checkout Prizes(R) application by
virtue of a merger transaction between the Company and CompuScan. Initial cash
consideration was $9.1 million, net of cash acquired. Terms of the merger
agreement called for the Company to make a series of additional payments
culminating in the fourth quarter of fiscal 2002. Future payments are based on
specified future performance of the associated business activity.
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 called for
the Company to make a series of payments, concluded in the fourth quarter of
fiscal 2001. These payments were based upon specified 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, culminating in the fourth quarter of fiscal 2002,
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 annual payments,
culminating in the first quarter of fiscal 2003 and subject to acceleration
provisions, 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 2001, 2000, and
1999 consolidated financial statements since the date of such acquisition. The
additional consideration paid or accrued under the earnout provisions of the
transactions referenced above totaled $44.0 million and $22.2 million for the
years ended March 31, 2001 and 2000, respectively.
On January 4, 2001, the Company entered into an agreement with the Tribune
Company, a minority equity investor in Supermarkets Online Holdings, Inc.
("Holdco"), the parent company of Supermarkets Online, Inc. ("SMO"), the
Company's internet-based marketing and advertising subsidiary. As a part of this
agreement, the Company acquired all of the Holdco common shares held by the
Tribune Company, repaid a
28
31
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
subordinated convertible note, and terminated a marketing agreement between the
Tribune Company and SMO. Total consideration was $10.5 million. The acquisition
of the common shares was accounted for using the purchase method of accounting
for business combinations. The subordinated convertible debt repayment and the
marketing services agreement termination has been accounted for as a reduction
in long term debt and deferred revenue, respectively (see Note 4).
On October 24, 2000, the Company acquired a total of 16 US patents and 12
pending U.S. patent applications together with all foreign rights related to the
inventions encompassed by the original patents and patent applications. The
purchase price of these patents and patent applications of $17.0 million is
being amortized on a straight-line basis over the remaining useful lives of the
assets ranging from 9 to 14 years.
NOTE 11. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. The
implementation of SFAS No. 133 as of April 1, 2001, did not have a material
effect on the Company's financial statements.
Effect of SAB 101. In December 1999, the SEC staff issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No. 101).
SAB No. 101 provides guidance to SEC registrants on the recognition,
presentation, and disclosure of revenue in the financial statements. The
implementation of SAB No. 101 as of January 1, 2001, did not have a material
effect on the Company's financial statements.
NOTE 12. STOCK SPLIT
A three-for-one stock split of the Company's outstanding common stock,
effected as a stock dividend and an increase in the authorized common shares,
was approved by the Company's Board of Directors, and the increase in the
authorized common shares was approved by the Company's stockholders at the
annual meeting held on July 18, 2000. The stock dividend was paid August 17,
2000 to stockholders of record on July 26, 2000. Holders of common stock
received two additional shares of common stock for each share held of record as
of July 26, 2000. All applicable references to common stock shares, including
the calculations of EPS have been adjusted for all periods shown to reflect the
stock split and the increase in authorized shares.
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, 2001.
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 31, 2001,
2000, and 1999............................................ 14
Consolidated Balance Sheets at March 31, 2001 and 2000...... 15
Consolidated Statements of Stockholders' Equity, Years Ended
March 31, 2001, 2000, and 1999............................ 16
Consolidated Statements of Cash Flows, Years Ended March 31,
2001, 2000, and 1999...................................... 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 10-Q 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
**10.31 -- Credit Agreement dated as of September 25, 2000, by and
between the Registrant and Bank One, NA, as agent and
lender, and the other lenders party thereto, a copy of which
is attached as an exhibit to the Company's Report on Form
10-Q for the quarter ended September 30, 2000
**10.32 -- Amendment No. 1 To Certain Operative Agreements dated as
September 15, 2000, by and between First Security Bank,
National Association, as the owner trustee under Dolphin
Realty Trust 1999-1, as lessor, and Catalina Marketing Sales
Corporation, as lessee a copy of which is attached as an
exhibit to the Company's Report on Form 10-Q for the quarter
ended September 30, 2000
21 -- List of subsidiaries
23 -- Consent of independent certified public accountants
- ---------------
* 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 19, 2001.
CATALINA MARKETING CORPORATION
(Registrant)
By: /s/ JOSEPH P. PORT
------------------------------------
Joseph P. Port,
Executive 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/ DANIEL D. GRANGER Chairman of the Board, President, June 19, 2001
- ----------------------------------------------------- and Chief Executive Officer
Daniel D. Granger
/s/ FRANK H. BARKER Director June 19, 2001
- -----------------------------------------------------
Frank H. Barker
/s/ FREDERICK W. BEINECKE Director June 19, 2001
- -----------------------------------------------------
Frederick W. Beinecke
/s/ PATRICK W. COLLINS Director June 19, 2001
- -----------------------------------------------------
Patrick W. Collins
/s/ ANNE MACDONALD Director June 19, 2001
- -----------------------------------------------------
Anne MacDonald
/s/ EVELYN FOLLIT Director June 19, 2001
- -----------------------------------------------------
Evelyn Follit
/s/ THOMAS W. SMITH Director June 19, 2001
- -----------------------------------------------------
Thomas W. Smith
/s/ MICHAEL B. WILSON Director June 19, 2001
- -----------------------------------------------------
Michael B. Wilson
/s/ JOSEPH P. PORT Executive Vice President and June 19, 2001
- ----------------------------------------------------- Chief Financial Officer
Joseph P. Port
33