Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM --------------- TO
---------------
COMMISSION FILE NUMBER: 1-11008
CATALINA MARKETING CORPORATION
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 33-0499007
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
11300 9TH STREET NORTH, ST. PETERSBURG, 33716-2329
FLORIDA (Zip Code)
(Address of Principal Executive Offices)
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
------------------- ----------------
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 June 1, 1999, as
reported by the New York Stock Exchange, Inc., was $1,648,484,213. The number of
shares of Registrant's common stock, par value $0.01 per share, outstanding as
of June 1, 1999, was 18,574,470.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of Registrant's Definitive Proxy Statement for 1999 -- are
incorporated by reference in Part III of this report.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
TABLE OF CONTENTS
FORM 10-K
PAGE
NO.
----
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 4
Matters.....................................................
Item 6 Selected Financial Data..................................... 5
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 5
Item 7A Quantitative and Qualitative Disclosures About Market
Risk........................................................ 10
Item 8 Consolidated Financial Statements and Supplementary Data.... 11
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 27
PART III
Item 10 Directors and Executive Officers of the Registrant.......... 27
Item 11 Executive Compensation...................................... 27
Item 12 Security Ownership of Certain Beneficial Owners and
Management.................................................. 27
Item 13 Certain Relationships and Related Transactions.............. 27
PART IV
Item 14 Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 27
3
PART I
ITEM 1. BUSINESS
GENERAL
Catalina Marketing Corporation ("Catalina Marketing" or the "Company")
provides a multi-functional communications network that provides a wide range of
strategic targeted marketing solutions for manufacturers and retailers. The
Company's unique capability is to be able to offer precision targeted marketing
in a way in which no other medium, such as television or radio, can perform.
Catalina Marketing Corporation delivers strategic marketing solutions for
retailers and manufacturers through a variety of product lines. The evolution of
the Company's product lines has resulted in a single Targeted Marketing Services
organization with interrelated operating groups, which engages consumers to
facilitate their purchase decisions. As of March 31, 1999, the Company employed
1,001 people reporting into 22 offices throughout the United States, Europe and
Asia.
TARGETED MARKETING SERVICES THROUGH THE CATALINA MARKETING NETWORK(R)
Catalina Marketing Corporation was founded in 1983 to provide consumers
with in-store targeted coupons. Employing data mining technology from the
Company's in-store Network ("the Catalina Marketing Network"), Catalina
Marketing now offers in-store, online, and at-home reach to provide its
strategic marketing solutions. These solutions are purchase-based, individually
customized communications and promotions for manufacturers and retailers that
increase sales through incentives, loyalty programs, sampling, and advertising
messages. The Company's services enable retailers and manufacturers to impact
purchase decisions before, during and after the purchase using a variety of
strategic, targeted programs.
At present, the primary product line of the Catalina Marketing Network is
the in-store delivery of incentives at the checkout. Catalina Marketing links
its proprietary software, personal computers, central databases and specially
designed thermal printers with a retailer's point-of-sale controllers and
scanners. The system prints customized promotion certificates at the point of
sale based on product Uniform Product Codes (UPCs) or other scanned information.
The printed promotions are handed to consumers by the cashier at the end of the
shopping transaction. Catalina Marketing contracts with manufacturers and
retailers to print promotions and receives a fee for each promotion printed.
Catalina Marketing enters into agreements with retail chains to install the
Catalina Marketing Network in all or selected stores within the chain, either
regionally or nationally. Upon installation, the retailer pays a one-time fee
for each installation and generally agrees to use the Network in its store for a
minimum of five years. Catalina Marketing pays distribution fees to the retailer
based on the number of manufacturer promotions printed.
The equipment installed in each retail store consists of a thermal printer
at each checkout lane linked by a personal computer on premises to the
retailer's point-of-sale controller and scanning equipment. Catalina Marketing
operates two United States data processing facilities that communicate via modem
with the personal computers installed in the stores to send promotional
instructions and retrieve performance data. All of the equipment and supplies,
including computers, printers and paper, used in a retail installation are
purchased through outside sources. While there are currently a few primary
suppliers, Catalina Marketing believes that alternate sources of supply are
available without material interruptions of the Company's business.
The services of the Catalina Marketing Network are driven by proprietary
software. The software design is flexible and upgradable, supporting new
applications that are developed and implemented on a continuous basis. This
flexibility allows the network to expand and evolve as industry or customer
requirements change.
SERVICES
Catalina Marketing offers its core programs and services through the
Catalina Marketing Network, which is operated mainly in supermarkets. These
targeted marketing solutions, including discount coupons, loyalty
1
4
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 consumers they wish to reach. An integrated program of applications is
designed to reach shoppers before, during and after the purchase.
Each application is designed to meet specific objectives of consumer
packaged goods manufacturers and supermarket retailers. Loyalty Programs allow
manufacturers and retailers to target specific households based on 52 weeks of
past purchase data. For retailers, loyalty programs include frequent shopper
card production and data management. Sampling programs target consumers based on
either current purchase behavior or through a household-level database and
deliver samples upon request. Samples can be full or trial-sized and delivered
in-store or at home. Advertising programs allow manufacturers to reach a captive
audience through a toll-free number, announcement or message delivered at the
checkout stand. In-store instant-win games are tied-in with the retailer by
offering a chance to win instantly at the checkout stand based on products that
are purchased. Couponing programs, such as Checkout Coupon(R) and Checkout
Direct(R), use patented UPC-based scanner technology to target consumers and
distribute coupons at checkout based on actual purchase behavior.
Catalina Marketing services can offer up to 13 four-week cycles of time on
the network each year for more than 500 product categories, such as coffee, baby
food and frozen entrees. Exclusive rights to product categories are generally
given to the purchasers of specific cycle or cycles in particular product
categories, and for national programs, a right of first acceptance to purchase
the same cycles in the subsequent year is given to the manufacturer who
purchased the earlier cycles.
The primary revenue source of the Catalina Marketing Network is a function
of total promotions printed based on a promotion charge, with a minimum category
fee based on shopper reach of the network and category unit volume. Redemption
processing of these promotions is similar to that of traditional manufacturer
coupons. Retailers provide discounts to consumers who present the coupons, send
redeemed coupons to clearinghouses, and receive reimbursements for the discounts
provided and handling fees from the manufacturers.
Loyalty marketing services offer targeted direct mail marketing services
through Market Logic, acquired in July 1998, and loyalty card production
services through Dynamic Controls Inc. (DCI or DCI Cardmarketing), acquired in
January 1999.
Catalina Marketing's core domestic product lines, described above,
contributed approximately 80 percent of the Company's revenues in fiscal 1999,
83 percent in fiscal 1998, and 89 percent in fiscal 1997. As of March 31, 1999,
the Catalina Marketing Network was installed in 12,092 United States
supermarkets reaching more than 152 million shoppers in the United States
weekly.
The international operations of Catalina Marketing provide in-store
electronic marketing services for consumers in Europe and Asia. The Company's
current presence in Europe is in the United Kingdom and France. In Asia, the
Company currently operates in Japan. As of March 31, 1999, Europe had reached
more than 1,700 supermarket retailers, and weekly shopper reach was
approximately 22 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 7
million as of March 31, 1999.
Developing product lines include Health Resource Publishing (HRP) and
SuperMarkets Online (SMO). Health Resource Publishing, formed in fiscal 1995,
uses an in-store prescription-based technology to provide direct-to-consumer
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. As of March
31, 1999, the HRP system was installed in 3,861 pharmacy outlets. SuperMarkets
Online (SMO), originally tested in fiscal 1996, provides the industry's only
online secure coupon format through its ValuPage(SM) service at
www.valupage.com. The ValuPage service was rolled
2
5
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 9,300 participating
supermarkets, along with the promoted items, issues Web Bucks, 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.
SALES AND MARKETING
The Company has a manufacturer sales force and a retail sales and marketing
force, both working on providing the Company's targeted marketing services to
its customers. The combined manufacturer and retail sale forces provide a
coordinated sale approach to each client in order to offer a tailored targeted
marketing solution.
Manufacturer Sales Force: The primary focus of the Company's marketing
effort is to attract national consumer packaged goods manufacturers to purchase
category cycles. The sales and client service force of Catalina Marketing focus
on current and prospective customers, and work with them on a consultative basis
to develop and implement customized, targeted marketing programs that fit each
brand's strategies and objectives.
Retail Sales and Marketing Force: Catalina Marketing has two goals for its
retail force. The first is to continue to expand the Catalina Marketing Network
by installing stores in major markets that are not currently part of the
Catalina Marketing Network. The second is to encourage currently installed
retailers to use the Company's full-service 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
Catalina Marketing competes for manufacturers' advertising and consumer
promotion budgets with a wide range of media, including television, radio, print
and direct mail advertising, as well as several alternative in-store and
point-of-sale programs. Within the coupon industry, the Company competes with
various traditional coupon delivery methods that are less expensive per
delivered coupon, including free-standing inserts (FSIs), newspapers, direct
mail, magazines and in- or on-product packaging, as well as other "in-store"
marketing companies that use a variety of coupon delivery methods. Catalina
Marketing competes for 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. The end result is a lower cost per unit
moved rather than number of coupons printed, enabling manufacturers and
retailers to meet their strategic objectives.
EMPLOYEES
Catalina Marketing employed 1,001 people as of March 31, 1999,
substantially all of whom were full-time employees, and none of whom were
covered by a collective bargaining arrangement. More than 840 are employed in
the U.S. Approximately 28 percent of which are employed in the St. Petersburg,
Florida headquarters.
PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS
Catalina Marketing currently holds several United States and foreign
patents on certain aspects of the Catalina Marketing Network and has several
patent applications pending. These patents provide a competitive
3
6
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 factor affecting
its future performance.
Catalina Marketing also believes that product recognition is an important
competitive factor in the electronic marketing and promotion industry.
Accordingly, the Company promotes its service marks and trademarks in connection
with its product and marketing activities. It also regards certain computer
software in the Catalina Marketing Network and each additional service
application as proprietary and seeks to protect it with copyrights, trade secret
laws and internal non-disclosure agreements and safeguards. Such methods may not
afford complete protection, and there can be no assurance that others will not
independently develop such know-how, concepts or ideas.
ITEM 2. PROPERTIES
The Company's headquarters facility, which includes its principal
administrative, marketing, information technology and product development
offices, is located in 65,207 square feet of leased space in St. Petersburg,
Florida. The Company leases an additional 18 sales and support offices across
the United States, consisting of approximately 157,000 square feet in the
aggregate, and three offices for its foreign operations. The Company believes
that its existing facilities 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.
In the opinion of management of Catalina Marketing, the ultimate outcome of this
litigation will not have a material adverse effect on the Company's financial
condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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
---- ---
Fiscal 1999:
March 31, 1999............................................ $85 7/8 $61 5/8
December 31, 1998......................................... $68 3/8 $41 1/2
September 30, 1998........................................ $54 15/16 $39 1/2
June 30, 1998............................................. $56 $42 7/8
Fiscal 1998:
March 31, 1998............................................ $53 9/16 $42 1/16
December 31, 1997......................................... $54 11/16 $44 3/4
September 30, 1997........................................ $53 3/4 $41 1/2
June 30, 1997............................................. $48 1/8 $25 3/8
4
7
B. STOCKHOLDERS
As of March 31, 1999, there were approximately 526 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.
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,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Income Statement Data:
Revenues.................................. $264,783 $217,150 $172,143 $134,155 $113,254
Costs and expenses:
Direct operating expenses.............. 110,167 84,191 62,482 47,661 41,389
Selling, general and administrative.... 59,363 56,364 48,379 37,358 28,616
Depreciation and amortization.......... 27,342 23,703 17,939 14,328 15,073
-------- -------- -------- -------- --------
Total costs and expenses.................. 196,872 164,258 128,800 99,347 85,078
-------- -------- -------- -------- --------
Income from operations.................... 67,911 52,892 43,343 34,808 28,176
Net income................................ $ 37,608 $ 32,871 $ 27,241 $ 22,028 $ 17,229
Diluted Net Income Per Common Share....... $ 1.98 $ 1.73 $ 1.33 $ 1.11 $ 0.86
Diluted Weighted Average Common Shares
Outstanding............................ 19,009 19,026 20,491 19,922 20,128
Other Data:
U.S. Checkout Coupon stores installed at
end of period.......................... 12,092 11,164 10,745 9,766 9,004
International Checkout Coupon stores
installed at end of period............. 1,935 1,372 941 558 168
Capital expenditures, net................. $ 39,954 $ 24,250 $ 34,605 $ 23,121 $ 19,048
Balance Sheet Data:
Cash and cash equivalents................. $ 13,942 $ 18,434 $ 13,698 $ 25,778 $ 30,729
Property and equipment, net............... $ 87,686 $ 70,513 $ 69,578 $ 46,253 $ 37,440
Total assets.............................. $221,047 $157,066 $154,696 $114,187 $ 96,556
Long term debt (including current portion
of long term debt)..................... $ 1,040 $ 1,340 $ 2,178 -- --
Total stockholders' equity................ $120,933 $ 90,042 $ 96,938 $ 71,222 $ 55,494
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
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 manufactur-
5
8
ers and retailers. The Company's unique capability is to be able to offer
precision targeted marketing in a way in which no other medium, such as
television or radio, can perform. Catalina Marketing Corporation 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 organization with interrelated operating groups, which
engages consumers to facilitate purchase decisions. As of March 31, 1999, the
Company employed 1,001 people reporting into 22 offices throughout the United
States, Europe and Asia.
RESULTS OF OPERATIONS
Year Ended March 31, 1999 compared to Year Ended March 31, 1998
Revenues were $264.8 million in fiscal 1999, up 21.9 percent over revenues
of $217.1 in fiscal 1998. The increase in revenues is due to both a growth in
Checkout Direct(R) programs as well as increases in loyalty and other direct
mail marketing programs. Loyalty and direct mail marketing programs include,
among others, the revenues added by the acquisition of Market Logic, which was
acquired on July 13, 1998 and DCI, which was acquired on January 4, 1999.
In the United States, the Catalina Marketing Network was in 12,092 stores
at March 31, 1999, which reach approximately 152 million shoppers each week as
compared to 11,164 stores reaching approximately 143 million shoppers each week
at March 31, 1998. The Health Resource Network was in 3,861 pharmacies at March
31, 1999 as compared to 1,920 pharmacies at March 31, 1998. Outside the U.S.,
the Catalina Marketing Network was in 1,935 stores at March 31, 1999, which
reach approximately 29 million shoppers each week as compared to 1,372 stores
reaching approximately 20 million shoppers each week at March 31, 1998. In
fiscal 1999, the Company installed its Catalina Marketing Network in 928 stores
(net of deinstallations) in the United States as compared to 419 stores in
fiscal 1998. Deinstallation activity can and does occur primarily due to the
consolidation and business combination of supermarket chains as well as store
closures made by retailers in the ordinary course of business. The Company also
installed its Health Resource Network in 1,941 pharmacies (net of
deinstallations) in fiscal 1999 as compared to 725 pharmacies in fiscal 1998.
Outside the United States, the Company installed 563 stores (net of
deinstallations) in fiscal 1999 as compared to 731 stores (with respect to
continuing operations, net of deinstallations) in fiscal 1998. During fiscal
1998, the Company ceased operations in 300 stores in and around Mexico City.
Direct operating expenses consist of retailer fees, paper, sales
commissions, loyalty and direct mail marketing expenses, marketing expenses, the
expenses of operating and maintaining the Catalina Marketing Network, primarily
expenses relating to operations personnel and service offices, provision for
doubtful accounts and the direct expenses associated with operating the outdoor
media business in a majority-owned subsidiary in Asia. Direct operating expenses
increased in absolute terms to $110.2 million in fiscal 1999 from $84.2 million
in fiscal 1998. Direct operating expenses in fiscal 1999 as a percentage of
revenues increased to 41.6 percent from 38.8 percent in fiscal 1998. This
increase in fiscal 1999 is principally attributable to the Company's increase in
loyalty and direct marketing programs, including Market Logic and DCI
businesses, which by their nature have a higher material cost component of
direct costs as a function of revenue than the Company's other core product line
services.
Selling, general and administrative expenses include personnel-related
costs of selling and administrative staff, overhead and new product development
expenses. Selling, general and administrative expenses in fiscal 1999 were $59.4
million compared to $56.4 million in fiscal 1998, an increase of 5.3 percent or
$3.0 million. The increase relates primarily to administrative expenses of new
business ventures and products which were partially offset by the $3.5 million
one time expense incurred in the third quarter of fiscal 1998 associated with
the shutdown of the Company's Mexican operations. As a percentage of revenues,
selling, general and administrative expenses decreased 3.6 percent in fiscal
1999, to 22.4 percent from 26.0 percent in fiscal 1998. This decrease is
primarily attributable to the $3.5 million charge referred to above.
Additionally, the Company was successful in lowering and limiting certain
categories of overhead expenses during the fiscal 1999 periods.
Depreciation and amortization increased to $27.3 million for fiscal 1999
from $23.7 million for fiscal 1998. Depreciation increased due to the investment
in capital expenditures, during the current and prior periods, associated with
new operating units and product lines, data processing equipment and the
increase in
6
9
stores installed. Amortization expense increased due to the increases in
goodwill and other intangible assets related to the Company's acquisitions.
Interest income (expense) and other was $2.3 million net expense for fiscal
1999 compared to $1.0 million net expense for fiscal 1998. The increase in
expense is principally attributable to the Company writing off its $3.0 million
investment in Intelledge Corporation in the second quarter of fiscal 1999. As a
partial offset, the Company incurred interest expense on borrowings from its
credit facility during the fiscal 1998 and had no borrowings on this facility in
fiscal 1999.
The provision for income taxes increased to $28.0 million, or 42.7 percent
of income before income taxes, for fiscal 1999 compared to $19.1 million, or
36.7 percent of income before income taxes, for fiscal 1998. The increase is
primarily due to the valuation allowance recorded against the $3.0 million
deferred tax benefit for the Intelledge investment write off in the second
quarter of fiscal 1999 and the $3.1 million tax benefit arising due to the
shutdown of the Mexican operations in the third quarter of fiscal 1998.
Excluding the effect of the Mexican operations shutdown, the Company's effective
tax rate is higher than the federal statutory income tax rate due to state and
foreign income taxes, the inability to currently utilize losses of a majority
owned foreign subsidiary for tax purposes and, in the case of fiscal 1999, the
valuation allowance referred to in the previous sentence.
Year Ended March 31, 1998 compared to Year Ended March 31, 1997
Revenues were $217.1 million in fiscal 1998, up 26 percent over revenues of
$172.1 in fiscal 1997. The increase in revenues is primarily due to a greater
distribution of Checkout Coupon incentives worldwide, growth in new programs
such as Checkout Direct and, to a lesser extent, revenues added by an
acquisition by the Company on October 10, 1996 of a 51 percent interest in an
Asian based outdoor media business. In the United States, the Catalina Marketing
Network printed 2.56 billion promotions during fiscal 1998, up 10.9 percent
compared to 2.31 billion promotions fiscal 1997.
In the U.S., the Catalina Marketing Network was in 11,164 stores at March
31, 1998, which reach approximately 143 million shoppers each week as compared
to 10,745 stores reaching approximately 144 million shoppers each week at March
31, 1997. The Company believes that the shopper reach statistic, which
represents the average of the total transactions observed on the Company's
Network for the three week period immediately preceding the fiscal year end
period, was lower at March 31, 1998 than the March 31, 1997 level due to the
timing of the Easter holiday. Easter occurred on April 10, 1998 as compared to
March 30, 1997 in the prior year. As such, the heightened seasonal shopping
activity associated with the holiday was captured by the prior year statistic,
but is not reflected in the statistic as of March 31, 1998. Had the seasonal
activity been reflected in the fiscal 1998 statistic, the Company believes the
shopper reach statistic would have been approximately 146 million.
The Health Resource Network was in 1,920 pharmacies at March 31, 1998 as
compared to 1,195 pharmacies at March 31, 1997. Outside the United States, the
Catalina Marketing Network was in 1,372 stores at March 31, 1998, which reach
approximately 20 million shoppers each week as compared to 941 stores reaching
approximately 18 million shoppers each week at March 31, 1997. In fiscal 1998,
the Company installed its Catalina Marketing Network in 419 stores, net of
deinstallations, in the U.S. as compared to 979 stores in fiscal 1997.
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 725 pharmacies, net of deinstallations, in fiscal
1998 as compared to 958 pharmacies in fiscal 1997. Outside the United States,
the Company installed 431 stores, net of deinstallations, in fiscal 1998 as
compared to 383 stores in fiscal 1997. During fiscal 1998, the Company ceased
operations in 300 stores in and around Mexico City.
Direct operating expenses consist of retailer fees, paper, sales
commissions and the expenses of operating and maintaining the Catalina Marketing
Network, primarily expenses relating to operations personnel and service
offices, provision for doubtful accounts and the direct expenses associated with
operating the outdoor media business in a majority-owned subsidiary in Asia. The
majority owned Asian subsidiary was purchased in October 1996. Direct operating
expenses increased in absolute terms to $84.2 million in fiscal 1998 from $62.5
7
10
million in fiscal 1997. Direct operating expenses in fiscal 1998 as a percentage
of revenues increased to 38.8 percent from 36.3 percent in fiscal 1997. This
increase in fiscal 1998 is principally attributable to the addition of the
direct costs associated with running the outdoor media business in Asia.
Selling, general and administrative expenses include personnel-related
costs of selling and administrative staff, overhead and new product development
expenses. Selling, general and administrative expenses in fiscal 1998 were $56.4
million compared to $48.4 million in fiscal 1997, an increase of 16.5 percent or
$8.0 million. The increase relates primarily to higher costs associated with a
larger sales force, and administrative expenses of new business ventures and
products. As a percentage of revenues, selling, general and administrative
expenses decreased 2.1 percent in fiscal 1998, to 26.0 percent from 28.1 percent
in fiscal 1997. This decrease is due to the outdoor media business in Asia,
which typically has a higher percentage of direct costs, as indicated above, and
a smaller percentage of selling, general and administrative expenses than the
Company's other businesses, as well as the fiscal 1997 period including the
electronic clearing business which ceased operations on March 31, 1997. This
decrease was partially offset by a $3.5 million one time expense incurred
related to the shutdown of the Mexican operations in the third quarter of fiscal
1998.
Depreciation and amortization increased to $23.7 million for fiscal 1998
from $17.9 million for fiscal 1997. Depreciation increased due to the increase
in fiscal 1997 capital expenditures associated with new business ventures and
data processing equipment.
Interest income (expense) and other decreased to $1.0 million net expense
for fiscal 1998 from $1.2 million net income for fiscal 1997. The decrease is
primarily due to the Company incurring interest expense on borrowings from its
credit facility during fiscal 1998.
The provision for income taxes increased to $19.1 million, or 36.7 percent
of income before income taxes and minority interest, for fiscal 1998 compared to
$17.9 million, or 40.0 percent of income before income taxes and minority
interest, for fiscal 1997. The decrease in the provision as a percent of income
before income tax and minority interest for fiscal 1998 is due to a $3.1 million
federal and state tax benefit arising from the shutdown of the Mexican
operations in fiscal 1998. Excluding the effect of the Mexican operations
shutdown, the Company's effective tax rate is higher than the federal statutory
income tax rate due to state and foreign income taxes and the inability to
currently utilize losses of other majority owned foreign subsidiaries for tax
purposes.
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, JUNE 30, MAR 31, DEC 31, SEPT 30, JUNE 30,
1999 1998 1998 1998 1998 1997 1997 1997
------- ------- -------- -------- ------- ------- -------- --------
Revenues................................... $75,897 $67,604 $64,448 $56,834 $54,061 $63,703 $52,727 $46,659
Direct operating expenses.................. 31,140 27,279 28,198 23,550 21,999 23,752 20,407 18,033
Selling, general and administrative........ 16,371 13,665 14,022 15,305 12,486 18,561 12,421 12,896
Depreciation and amortization.............. 7,369 6,931 6,638 6,404 6,476 5,613 5,923 5,691
------- ------- ------- ------- ------- ------- ------- -------
Income from operations..................... 21,017 19,729 15,590 11,575 13,100 15,777 13,976 10,039
Interest income (expense) and other........ 388 199 (2,893) (28) 28 (208) (390) (393)
Income taxes............................... (8,939) (7,913) (6,308) (4,809) (5,001) (4,706) (5,342) (4,009)
------- ------- ------- ------- ------- ------- ------- -------
Net income................................. 12,466 12,015 $ 6,389 $ 6,738 $ 8,127 10,863 $ 8,244 $ 5,637
======= ======= ======= ======= ======= ======= ======= =======
Diluted Net Income Per Common Share $ .65 $ .64 $ .34 $ .35 $ .43 $ .57 $ .43 $ .30
Diluted Weighted Average Common Shares
Outstanding.............................. 19,165 18,891 18,963 19,033 19,107 19,118 19,146 19,072
U.S. Checkout Coupon Business:
Stores at quarter end:..................... 12,092 11,814 11,621 11,432 11,164 10,979 10,801 10,832
Net stores installed during quarter: 278 193 189 268 185 178 (31) 87
Promotions printed (in millions):.......... 660 664 654 607 543 764 660 597
Weekly shopper reach at quarter end (in
millions):............................... 152 156 151 153 143 145 142 147
8
11
The Company expects its revenues to fluctuate in accordance with periods of
higher promotional activity by manufacturers. The pattern of coupon
distribution, however, 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.
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 $5,000 to $13,000 per store.
During fiscal 1999 and fiscal 1998, the Company made net capital expenditures of
$39.9 million and $24.2 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. During fiscal 1999, the
Company spent $5.6 million more on store equipment and spent $5.8 million more
on data processing equipment and furniture and fixtures compared to fiscal 1998.
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 $1.8
million in initial cash consideration, net of cash acquired. Terms of the
purchase agreement call for the Company to make a series of payments, which are
contingent upon the future operating performance of Market Logic.
Effective December 30, 1998, the Company purchased from its minority
stockholders the remaining ownership of Catalina Marketing of France, Inc.
Catalina Marketing of France, Inc. owns substantially all of the outstanding
stock of Catalina Marketing de France, S.A., the French operating company. Terms
of the purchase agreement call for the Company to make an initial down payment
and a series of payments to the minority stockholders, which are contingent upon
the future operating performance of Catalina Marketing de France, S.A.
Effective January 4, 1999, the Company acquired 100 percent of the
outstanding common shares of Dynamic Controls, Inc., which offers card-based
loyalty marketing programs for retailers, for $4.6 million in initial cash
consideration, net of cash acquired. Terms of the purchase agreement call for
the Company to make an initial down payment and a series of payments, which are
based upon specified future revenue growth targets.
Effective October 1998, the Board of Directors authorized management to
repurchase $50 million of the Company's common stock. This authorization
replaced the $30 million repurchase authorization, which had been in place since
November 1997. During fiscal 1999, the Company purchased 371,100 shares of its
common stock for $18.2 million. Of the shares repurchased in fiscal 1999,
101,000 shares were purchased under the $50 million authorization for $6.5
million, and the balance of 270,100 shares were purchased under the $30 million
authorization for $11.7 million. Under the $30 million authorization, a total of
495,100 shares were purchased for $22.6 million. The remaining availability
under the $30 million authorization was replaced by the $50 million
authorization. As of March 31, 1999, $43.5 million is available for repurchase
under the $50 million authorization.
The Company believes working capital generated by operations along with
existing credit facilities are sufficient for its overall capital requirements.
OTHER
Year 2000 Readiness Disclosure
This year 2000 disclosure is the most current information available and
replaces all previous disclosures made by the Company in its filings on Form
10-Q and Form 10-K, and in its Annual Report of shareholders.
9
12
In the next year, many companies will face potentially serious risks
associated with the inability of existing business systems to appropriately
recognize calendar dates beginning in the year 2000. The Company is aware of the
year 2000 issue and the effects it may have on its business systems. In
response, the Company has developed a detailed plan to address the issue. This
plan includes a campaign which began in fiscal 1998, was revised to consider
acquired companies' business systems, and has a goal for completion in October
1999. The plan currently includes spending of approximately $1.5 million for
testing and upgrading hardware and software. The Company has spent approximately
$1.0 million on the year 2000 issue. Progress towards completion of the plan is
within management's expectations to meet the October 1999 goal.
In addition, the Company has contacted substantially all of its hardware
and software vendors, suppliers and financial institution partners to evaluate
their compliance efforts. Those that have been deemed noncompliant have been
evaluated and corrective action has been or will be taken to ensure the vendors'
year 2000 efforts or lack thereof will not adversely impact the Company's
operations.
The Company's manufacturer clients and retailers may also encounter year
2000 issues and are in various states of readiness. If these manufacturers or
retailers encounter serious problems related to the year 2000 issue, those
problems could have a material adverse impact on the operations of the Company.
The Company believes the manufacturers and retailers are addressing the year
2000 issue and is closely monitoring the status of their readiness.
In the event that the Company's year 2000 compliance efforts are
unsuccessful and/or one or more of the Company's critical internal systems are
not year 2000 compliant by December 31, 1999, the following could occur, any of
which could have a material adverse impact on the operations of the Company:
(a) Customer service could deteriorate to the point that a substantial
number of the Company's customers move their account relationships
to another organization;
(b) The Company may be unable to provide manufacturer and retail
clients with timely and accurate information about program
execution; or
(c) The Company may be unable to fulfill various contractual
obligations
The Company believes substantially all of its internally developed
applications and purchased applications used internally will be Year 2000
compliant by October 1, 1999. The Company has therefore focused its efforts on
contingency planning for business systems outside of those applications.
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.
10
13
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL INFORMATION
PAGE
----
Report of Independent Certified Public Accountants.......... 12
Consolidated Income Statements, Years ended March 31, 1999,
1998 and 1997............................................. 13
Consolidated Balance Sheets at March 31, 1999 and 1998...... 14
Consolidated Statements of Stockholders' Equity, Years ended
March 31, 1999, 1998 and 1997............................. 15
Consolidated Statements of Cash Flows, Years ended March 31,
1999, 1998 and 1997....................................... 16
Notes to the Consolidated Financial Statements.............. 17
11
14
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,
1999 and 1998, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended March 31,
1999. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Catalina
Marketing Corporation and subsidiaries as of March 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years in
the period ended March 31, 1999, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Tampa, Florida
April 29, 1999
12
15
CATALINA MARKETING CORPORATION
CONSOLIDATED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31,
------------------------------
1999 1998 1997
-------- -------- --------
Revenues.................................................... $264,783 $217,150 $172,143
Costs and Expenses:
Direct operating expenses................................. 110,167 84,191 62,482
Selling, general and administrative....................... 59,363 56,364 48,379
Depreciation and amortization............................. 27,342 23,703 17,939
-------- -------- --------
Total costs and expenses.......................... 196,872 164,258 128,800
-------- -------- --------
Income From Operations...................................... 67,911 52,892 43,343
Interest Income (Expense) and Other......................... (2,334) (963) 1,224
-------- -------- --------
Income Before Income Taxes and Minority Interest............ 65,577 51,929 44,567
Income Taxes................................................ 27,969 19,058 17,880
Minority Interest in Losses of Subsidiaries................. -- -- 554
-------- -------- --------
Net Income........................................ $ 37,608 $ 32,871 $ 27,241
======== ======== ========
Diluted:
Net Income Per Common Share............................... $ 1.98 $ 1.73 $ 1.33
Weighted Average Common Shares Outstanding................ 19,009 19,026 20,491
Basic:
Net Income Per Common Share............................... $ 2.03 $ 1.78 $ 1.39
Weighted Average Common Shares Outstanding................ 18,501 18,417 19,650
The accompanying Notes are an integral part of these consolidated financial
statements.
13
16
CATALINA MARKETING CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MARCH 31,
--------------------
1999 1998
--------- --------
ASSETS
Current Assets:
Cash and cash equivalents................................... $ 13,942 $ 18,434
Accounts receivable, net.................................... 44,045 20,251
Inventory................................................... 4,292 2,506
Deferred tax asset.......................................... 8,932 9,666
Prepaid expenses and other current assets................... 24,270 12,710
--------- --------
Total current assets.............................. 95,481 63,567
--------- --------
Property and Equipment:
Store equipment............................................. 145,442 125,624
Furniture and office equipment.............................. 38,175 24,743
Billboards.................................................. 11,468 5,654
Leasehold improvements...................................... 4,540 4,165
--------- --------
199,625 160,186
Less: accumulated depreciation.............................. (111,939) (89,673)
--------- --------
Property and equipment, net....................... 87,686 70,513
Purchased intangible assets, net............................ 35,628 19,112
Other assets................................................ 2,252 3,874
--------- --------
Total Assets...................................... $ 221,047 $157,066
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................ 14,149 $ 8,348
Taxes payable............................................... 1,411 1,380
Accrued expenses............................................ 43,286 26,140
Deferred revenue............................................ 27,349 20,116
Short term borrowings....................................... 7,635 5,537
--------- --------
Total current liabilities......................... 93,830 61,521
--------- --------
Deferred tax liability...................................... 5,696 5,073
Long term debt.............................................. 588 430
Commitments and contingencies...............................
Stockholders' Equity:
Preferred stock; $.01 par value; 5,000,000 authorized
shares; none issued and outstanding....................... -- --
Common stock; $.01 par value; 50,000,000 authorized shares,
and 18,389,438 and 18,379,153 shares issued and
outstanding at March 31, 1999 and 1998, respectively...... 184 184
Paid-in capital............................................. 819 685
Accumulated other comprehensive income...................... 843 (135)
Retained earnings........................................... 119,087 89,308
--------- --------
Total stockholders' equity........................ 120,933 90,042
--------- --------
Total Liabilities and Stockholders' Equity........ $ 221,047 $157,066
========= ========
The accompanying Notes are an integral part of these consolidated financial
statements.
14
17
CATALINA MARKETING CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
PAR ACCUMULATED
VALUE OF OTHER TOTAL
COMPREHENSIVE COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS'
INCOME STOCK CAPITAL INCOME EARNINGS STOCK EQUITY
------------- -------- -------- ------------- -------- -------- -------------
BALANCE AT MARCH 31, 1996......... $205 $ 34,079 $ 501 $ 56,973 $(20,536) $ 71,222
Proceeds from issuance of 266,292
shares of common stock.......... -- 3 4,628 -- -- -- 4,631
Amortization of option-related
compensation.................... -- -- 202 -- -- -- 202
Tax benefit from exercise of non-
qualified stock options and
disqualified dispositions....... -- -- 884 -- -- -- 884
Repurchase of 208,608 shares of
common stock.................... -- -- -- -- -- (9,467) (9,467)
Deferred compensation plan common
stock units..................... -- -- 189 -- -- -- 189
Issuance of 10,865 shares of
common stock to replace Catalina
Marketing U.K., Ltd. options.... -- -- 157 -- -- -- 157
Issuance of 41,672 shares of
common stock in purchase of
minority shareholders of
Catalina Marketing U.K., Inc.... -- -- 1,631 -- -- -- 1,631
Net income........................ 27,241 -- -- -- 27,241 -- 27,241
Other comprehensive income, net of
tax............................. 248 -- -- 248 -- -- 248
-------
Comprehensive income.............. 27,489 -- -- -- -- -- --
---- -------- ----- -------- -------- --------
BALANCE AT MARCH 31, 1997......... $208 $ 41,770 $ 749 $ 84,214 $(30,003) $ 96,938
==== ======== ===== ======== ======== ========
Proceeds from issuance of 401,481
shares of common stock.......... -- 4 8,739 -- -- -- 8,743
Amortization of option-related
compensation.................... -- -- 231 -- -- -- 231
Tax benefit from exercise of non-
qualified stock options and
disqualified dispositions....... -- -- 2,842 -- -- -- 2,842
Repurchase, retirement and
cancellation of treasury stock
for 2,800,885 common shares..... -- (28) (53,013) -- (27,777) 30,003 (50,815)
Deferred compensation plan common
stock units..................... -- -- 116 -- -- -- 116
Net income........................ 32,871 -- -- -- 32,871 -- 32,871
Other comprehensive loss, net of
tax............................. (884) -- -- (884) -- -- (884)
-------
Comprehensive income.............. 31,987 -- -- -- -- -- --
---- -------- ----- -------- -------- --------
BALANCE AT MARCH 31, 1998......... $184 $ 685 $(135) $ 89,308 $ -- $ 90,042
==== ======== ===== ======== ======== ========
Proceeds from issuance of 381,385
shares of common stock.......... -- 4 4,399 -- -- -- 4,403
Amortization of option-related
compensation.................... -- -- 182 -- -- -- 182
Tax benefit from exercise of non-
qualified stock options and
disqualified dispositions....... -- -- 5,792 -- -- -- 5,792
Repurchase, retirement and
cancellation of 371,100 common
shares.......................... -- (4) (10,415) -- (7,829) -- (18,248)
Deferred compensation plan common
stock units and Directors'
common stock grants............. -- -- 176 -- -- -- 176
Net income........................ 37,608 -- -- -- 37,608 -- 37,608
Other comprehensive income, net of
tax............................. 978 -- -- 978 -- -- 978
-------
Comprehensive income.............. 38,586 -- -- -- -- -- --
---- -------- ----- -------- -------- --------
BALANCE AT MARCH 31, 1999......... $184 $ 819 $ 843 $119,087 $ -- $120,933
==== ======== ===== ======== ======== ========
The accompanying Notes are an integral part of these consolidated financial
statements.
15
18
CATALINA MARKETING CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED MARCH 31,
------------------------------
1999 1998 1997
-------- -------- --------
Cash Flows from Operating Activities:
Net income.................................................. $ 37,608 $ 32,871 $ 27,241
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest......................................... -- -- (554)
Depreciation and amortization............................. 27,404 23,934 18,264
Provision for doubtful accounts........................... 1,085 1,389 1,197
Deferred income taxes..................................... 1,707 (549) 1,677
Other..................................................... 3,173 1,182 193
Changes in operating assets and liabilities, net of effects
from acquisitions:
Accounts receivable....................................... (23,503) 5,398 (4,180)
Inventory, prepaid expenses and other assets.............. (12,003) (3,152) (3,681)
Accounts payable.......................................... 5,379 (3,079) 2,451
Taxes payable............................................. (57) 790 180
Accrued expenses.......................................... 5,303 2,699 4,090
Deferred revenue.......................................... 4,973 8,790 (2,611)
-------- -------- --------
Net cash provided by operating activities......... 51,069 70,273 44,267
-------- -------- --------
Cash Flows From Investing Activities:
Capital expenditures, net................................... (39,954) (24,250) (34,605)
Purchase of investments, net of cash acquired............... (8,982) (2,087) (18,028)
-------- -------- --------
Net cash used in investing activities............. (48,936) (26,337) (52,633)
-------- -------- --------
Cash Flows From Financing Activities:
Proceeds from debt obligations.............................. 23,585 40,427 1,138
Principal payments on debt obligations...................... (22,326) (40,487) (1,458)
Proceeds from issuance of common and subsidiary stock....... 4,526 8,543 5,090
Tax benefit from exercise of non-qualified stock options and
disqualified dispositions................................. 5,792 2,842 884
Payment for repurchase of company common stock.............. (18,248) (50,815) (9,467)
-------- -------- --------
Net cash used in financing activities............. (6,671) (39,490) (3,813)
-------- -------- --------
Net Change in Cash and Cash Equivalents..................... (4,538) 4,446 (12,179)
Effect of Exchange Rate Changes on Cash..................... 46 290 99
Cash and Cash Equivalents, at beginning of year............. 18,434 13,698 25,778
-------- -------- --------
Cash and Cash Equivalents, at end of year................... $ 13,942 $ 18,434 $ 13,698
======== ======== ========
Supplemental Schedule of Other Transactions:
Cash paid during the year for:
Interest.......................................... $ 207 $ 616 $ 70
Income taxes...................................... $ 22,702 $ 17,174 $ 11,463
The accompanying Notes are an integral part of these consolidated financial
statements.
16
19
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
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.
Certain prior balances have been reclassified to conform with the current year
presentation.
Description of the Business. The Company provides targeted marketing
services. Through its proprietary network, the Company provides consumer and
pharmaceutical product manufacturers and retailers with cost-effective methods
of delivering promotional incentives and advertising messages directly to
consumers based on their purchasing behavior. Additionally, a majority-owned
subsidiary of the Company operates an outdoor media business in Japan. As of
March 31, 1999, the Company's network was installed in 12,092 retail stores and
3,861 pharmacies throughout the United States and 1,935 retail stores throughout
the United Kingdom, France and Japan.
Principles of Consolidation and Preparation. The consolidated financial
statements include the accounts of the Company and its wholly-owned and
majority-owned subsidiaries. All intercompany transactions are eliminated in
consolidation. The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of management's
estimates.
The accounts of the wholly-owned and majority-owned foreign subsidiaries
are included as of December 31, which is their fiscal year end. The Company's
investment in a non-majority owned company was accounted for on the equity
method.
Fair Value of Financial Instruments. The book value of all financial
instruments approximates their fair value.
Cash and Cash Equivalents. Cash and cash equivalents consist of cash and
short-term investments. The short-term investments can be immediately converted
to cash and are held at their market value.
Allowance for Doubtful Accounts. The Company records a provision for
estimated doubtful accounts as part of direct operating expenses. As of March
31, 1999 and 1998, the allowance for doubtful accounts was $1,197,000 and
$703,000, respectively.
Inventory. Inventory consists 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.
17
20
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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
using the straight line method.
Revenue Recognition and Deferred Revenue. In accordance with coupon
industry practice, the Company generally pre-bills manufacturers for purchased
category cycles. The purchase of a category cycle gives a manufacturer the
exclusive right to have promotions printed for a particular product category
during the applicable period. The Company recognizes in-store electronic
marketing service revenues as promotions are printed. Amounts collected prior to
printing are reflected as deferred revenue until printing occurs. Loyalty
services revenue is recognized when the loyalty cards or mailings are shipped.
Income Taxes. Provision for income taxes includes federal, state and
foreign income taxes. Deferred income taxes are provided for temporary
differences between the recognition of income and expenses for financial
reporting purposes and income tax purposes.
Research and Development. Research and development costs relating to the
development and testing of new service applications are expensed as incurred.
Net Income Per Common Share. In fiscal 1998, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128).
Accordingly, diluted and basic earnings per share (EPS) are shown on the face of
the accompanying consolidated income statements. The following is a
reconciliation of the denominator of basic EPS to the denominator of diluted EPS
(in thousands):
MARCH 31,
------------------------
1999 1998 1997
------ ------ ------
Basic weighted average common shares outstanding............ 18,501 18,417 19,650
Dilutive effect of options outstanding...................... 508 609 841
------ ------ ------
Diluted weighted average common shares outstanding.......... 19,009 19,026 20,491
====== ====== ======
Options to purchase 1,161,800 shares of common stock at prices ranging from
$61 5/8 to $66 per share were outstanding at March 31, 1999, but were not
included in the computation of diluted EPS because the options' exercise prices
were greater than the average market price of common stock.
NOTE 2: SUPPLEMENTAL BALANCE SHEET INFORMATION
Prepaid expenses and other current assets include (in thousands):
MARCH 31,
-----------------
1999 1998
------- -------
Prepaid billboard rental.................................... $ 3,812 $ 2,223
Investments in deferred compensation plan................... 8,011 6,723
Prepaid income taxes........................................ 4,213 1,608
Prepaid marketing costs..................................... 2,500 --
Other....................................................... 5,734 2,156
------- -------
Total prepaid expenses and other current assets... $24,270 $12,710
======= =======
18
21
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Purchased intangible assets, net include (dollars in thousands):
MARCH 31,
USEFUL LIFE -----------------
(IN YEARS) 1999 1998
----------- ------- -------
Patent license and retailer relationships in the United
Kingdom................................................... 20 $12,691 $12,691
Goodwill.................................................... 20-40 25,378 7,721
Purchased patents........................................... 7-8 250 150
Accumulated amortization.................................... (2,691) (1,450)
------- -------
Purchased intangible assets, net.................. $35,628 $19,112
======= =======
Accrued expenses include (in thousands):
MARCH 31,
-----------------
1999 1998
------- -------
Payroll related............................................. 7,434 $ 6,133
Deferred compensation plan.................................. 8,338 6,927
Sales commissions........................................... 3,895 3,215
Contingent payments on acquisitions......................... 11,843 640
Other....................................................... 11,776 9,225
------- -------
Total accrued expenses............................ $43,286 $26,140
======= =======
NOTE 3: INCOME TAXES
Deferred income tax assets or liabilities are computed based on the
temporary differences between the financial statement and income tax bases of
assets and liabilities using the enacted marginal income tax rate in effect for
the year in which the differences are expected to reverse. Deferred income tax
expenses or credits are based on the changes in the deferred income tax assets
or liabilities from period to period.
Temporary differences for financial statement and income tax purposes
result primarily from charges to operations for financial statement reporting
purposes which are not currently tax deductible and revenues deferred for
financial statement reporting purposes which are currently taxable. The
components of the deferred tax asset and liability were as follows (in
thousands):
MARCH 31,
-----------------
1999 1998
------- -------
DEFERRED TAX ASSETS
Payroll related............................................. $ 3,353 $ 3,495
Deferred revenue............................................ 2,899 2,845
Provision for doubtful accounts............................. 410 216
Accrued expenses............................................ 3,097 1,796
Foreign net operating loss carryforwards.................... 2,540 2,725
Unconsolidated equity investments........................... 1,699 522
Other....................................................... -- 1,531
------- -------
13,998 13,130
Valuation allowance......................................... 3,699 2,479
------- -------
Net deferred tax asset...................................... $10,299 $10,651
------- -------
19
22
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31,
-----------------
1999 1998
------- -------
DEFERRED TAX LIABILITIES
Depreciation and amortization............................... $ 5,423 $ 5,051
Prepaid expenses............................................ 1,367 783
Other....................................................... 273 224
------- -------
$ 7,063 $ 6,058
------- -------
NET DEFERRED TAX ASSET...................................... $ 3,236 $ 4,593
======= =======
The valuation allowance increased by $1,220,000 during fiscal 1999, as it
is more likely than not that net operating loss carryforwards generated by
certain foreign subsidiaries and losses of unconsolidated equity investments
will not be realized.
As of March 31, 1999, various foreign subsidiaries of the Company had
aggregate cumulative net operating loss carryforwards for foreign income tax
purposes of approximately $5,500,000, which are subject to various income tax
provisions of each respective entity. The net operating losses expire in the
calendar years 1999 through 2003.
The provision for income taxes consisted of the following (in thousands):
MARCH 31,
---------------------------
1999 1998 1997
------- ------- -------
Current taxes:
Federal................................................. $22,865 $16,696 $13,678
State................................................... 3,016 2,033 1,877
Foreign................................................. 381 878 648
------- ------- -------
26,262 19,607 16,203
------- ------- -------
Deferred taxes:
Federal................................................. 1,423 377 1,629
State................................................... 131 77 187
Foreign................................................. 153 (1,003) (139)
------- ------- -------
1,707 (549) 1,677
------- ------- -------
Provision for income taxes................................ $27,969 $19,058 $17,880
======= ======= =======
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,
-----------------------------
1999 1998 1997
------- ------- -------
Federal statutory rate................................ 35% 35% 35%
Expected federal statutory tax........................ 22,952 $18,175 $15,792
State and foreign income taxes, net of federal
benefit............................................. 2,495 1,346 1,829
Effect of foreign subsidiary losses and their tax
rates............................................... 753 1,495 744
Effect of shutdown of Mexican operation............... -- (2,566) --
Tax free municipal bonds.............................. -- (8) (245)
Amortization of goodwill.............................. 366 236 --
Loss on unconsolidated equity investment.............. 1,050 -- --
Other................................................. 353 380 (240)
------- ------- -------
Provision for income taxes.................. $27,969 $19,058 $17,880
======= ======= =======
20
23
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4: SHORT TERM BORROWINGS AND LONG TERM DEBT
As of March 31, 1999 and March 31, 1998, the Company's short term
borrowings and long term debt, payable in yen, consisted of the following
(dollars in thousands):
MARCH 31,
---------------
1999 1998
------ ------
Short term borrowings with several Japanese banks and
financing agents, interest from 2.625% to 5.55% as of
March 31, 1999, maturing through January, 2003............ $7,183 $4,627
Long term debt (including current portion of long term debt)
with several Japanese banks, interest from 2.125% to 3.75%
as of March 31, 1999, maturing through November, 2003..... $1,040 $1,340
Maturities of long term debt are as follows as of March 31, 1999 (in
thousands):
AMOUNT
------
2000........................................................ $ 452
2001........................................................ 211
2002........................................................ 136
2003........................................................ 136
2004........................................................ 105
------
$1,040
======
Certain debt held by the Company's Asian subsidiary is guaranteed by certain
minority shareholders.
On September 30, 1997 the Company entered into a $150 million credit
agreement (the "Credit Agreement") with a syndicate of commercial banks led by
NationsBank, National Association with Fleet National Bank as co-agent. The
Credit Agreement makes available (i) a $100 million revolving credit facility
expiring September 30, 2000, (ii) a $10 million swing line facility expiring
September 30, 2000, and (iii) a $50 million line of credit facility expiring
September 28, 1999 under which, the Company, at its option, may convert
outstanding borrowings upon expiration into a term loan with a maturity of
September 29, 2000. The Company may alternatively request, and the lenders have
the option to provide, a renewal of the line of credit on a revolving basis for
additional periods of up to 364 days each. At no time may the aggregate
principal balance exceed $150 million under the Credit Agreement. As of March
31, 1999, there were no borrowings outstanding thereunder.
The Credit Agreement provides that borrowings accrue interest on a variable
basis at (i) the London Interbank Offering Rate (LIBOR) (adjusted for any
reserve requirements in force) plus an applicable margin ranging from 50 to
162.5 basis points, or (ii) the base rate, defined in the Credit Agreement as
the greater of (a) the prime rate or (b) 50 basis points plus the federal funds
rate as defined in the Credit Agreement. In addition, the Credit Agreement
provides for unused facilities fees to accrue at a range of 12.5 to 37.5 basis
points per annum multiplied by the unused portions of the revolving credit and
line of credit facilities. The Credit Agreement is secured by the common stock
or equivalent of several Company subsidiaries, is guaranteed by several Company
subsidiaries, and contains certain financial covenants, some of which include
limitations on certain indebtedness, maintenance of a certain fixed charge and
leverage ratio and other terms and conditions. As of March 31, 1999 the Company
is in compliance with all such financial covenants.
NOTE 5: COMMITMENTS AND CONTINGENCIES
Rental expense under operating leases was $2,941,000, $2,466,000 and
$1,622,000 for the years ended March 31, 1999, 1998 and 1997, respectively.
Future minimum rental commitments under operating leases
21
24
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
with non-cancelable terms of more than one year (the longest of which expires in
2006) as of March 31, 1999, are as follows: $3,828,000, in 2000, $3,495,000 in
2001, $2,840,000 in 2002, $2,013,000 in 2003, $1,122,000 in 2004, and $355,000
thereafter.
The Company is involved in certain litigation arising out of the Company's
business, including litigation initiated by the Company to protect its
intellectual property or to defend itself against claims brought on by others.
In the opinion of management, the ultimate outcome of this litigation will not
have a material adverse effect on the Company's financial condition.
NOTE 6: STOCK-BASED COMPENSATION PLANS
The Company has a stock option plan, the 1989 Incentive Stock Option Plan
(the "1989 Plan"); a stock grant plan, the Catalina Marketing Corporation 1992
Director Stock Grant Plan (the "Grant Plan"); and an employee stock purchase
plan, the Employee Payroll Deduction Stock Purchase Plan (the "Purchase Plan").
1989 Incentive Stock Option Plan. The 1989 Plan was approved by the Board
of Directors in April 1989, and approved by the stockholders in July 1989.
Pursuant to the 1989 Plan, 5,750,000 shares of the Company's common stock are
reserved for issuance upon the exercise of options granted under the 1989 Plan.
Options to purchase an aggregate of 5,251,873 shares have been granted, net of
cancellations, under the 1989 Plan, of which options to purchase 2,601,155
shares were outstanding on March 31, 1999.
The 1989 Plan provides for grants of Incentive Stock Options ("ISOs") to
employees (including employee directors). Options granted under the 1989 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 five to ten years. In 1999, the 1989 Plan was
amended to change the term to ten years. Certain options under the 1989 Plan,
which have been granted to certain executives of the Company, 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
must be equal to the fair market value of the shares on the date of grant.
The 1989 Plan expired in April 1999. A new plan, the 1999 Incentive Stock
Option Plan (the "1999 Plan") was approved by the Board of Directors in April
1999, and is subject to shareholder approval in July 1999 at the Company's
annual meeting.
Aggregate Stock Option Activity. As of March 31, 1999, options to purchase
an aggregate of 2,660,718 shares had been exercised, including options to
purchase 10,000 shares granted outside of the 1989 Plan; options to purchase an
aggregate of 2,611,155 shares were outstanding, including options to purchase
10,000 shares outside of the 1989 Plan; and 498,127 shares remained available
for future grants under the 1989 Plan. Of the options outstanding at March 31,
1999 and at March 31, 1998, options to purchase 450,202 and 602,835 shares
respectively, were immediately exercisable, with weighted average exercise
prices of $32.34 and $25.76, respectively.
22
25
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Stock option activity for the years ended March 31, 1997, 1998 and 1999 is
as follows:
WEIGHTED
NUMBER AVERAGE
OF SHARES OPTION PRICES
--------- -------------
Options outstanding at March 31, 1996....................... 2,029,088 21.48
Option activity:
Granted................................................... 653,260 44.02
Exercised................................................. (251,668) 15.93
Canceled or expired....................................... (295,260) 26.29
--------- -----
Options outstanding at March 31, 1997....................... 2,135,420 28.37
Option activity:
Granted................................................... 462,220 28.78
Exercised................................................. (549,187) 20.02
Canceled or expired....................................... (339,483) 32.07
--------- -----
Options outstanding at March 31, 1998....................... 1,708,970 30.43
Option activity:
Granted................................................... 1,574,140 62.06
Exercised................................................. (517,163) 23.72
Canceled or expired....................................... (154,792) 34.30
--------- -----
Options outstanding at March 31, 1999....................... 2,611,155 50.60
========= =====
1992 Director Stock Grant Plan. The Grant Plan provides for grants of
common stock to non-employee board members. As of March 31, 1999, 34,454 shares
have been granted and 5,534 shares have been canceled leaving 71,080 shares
available for future grants under the Grant Plan. Stock granted under the Grant
Plan vests ratably in annual installments over each director's remaining term as
a director.
Employee Stock Purchase Plan. In July 1994, the Purchase Plan was adopted
by the Board of Directors and approved by the stockholders. Pursuant to the
Purchase Plan, 300,000 shares of the Company's common stock were reserved for
issuance. For the fiscal years ended March 31, 1999, 1998 and 1997, 24,516,
28,709 and 28,375 shares were purchased, respectively.
Under the Purchase Plan, employees may purchase Company common stock at 85
percent of the market price on the first or last day of an offering period. The
maximum each employee may purchase in an offering period shall not exceed
$12,500 in market value of Company common stock. The Company will typically have
two six-month offering periods each year. The Purchase Plan qualifies under
Section 423 of the Internal Revenue Code of 1986.
The Company accounts for the option and stock purchase plans under APB
Opinion No. 25, under which no compensation cost has been recognized. The
Company adopted Statement of Financial Accounting Standards No. 123 (SFAS No.
123) for disclosure purposes in fiscal 1997. 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 1997 and 1998: risk-free interest rates ranging from 5.26 to
6.86 percent depending on the date of grant; expected dividend yield of zero
percent; expected life of five years; and expected volatility of 33.68 percent.
The assumptions used for grants in fiscal 1999 are: risk-free interest rates
ranging from 4.43 to 5.65 percent depending on the date of grant; expected
dividend yield of zero percent; expected life of five years to eight years; and
expected volatility of 39.99 percent. The fair values of
23
26
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
options granted in fiscal 1999, 1998 and 1997 are, $37,193,274, $4,877,647 and
$10,289,789 respectively, which would be amortized as compensation over the
vesting period of the options.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------------------- ---------------------------------
OUTSTANDING WEIGHTED AVERAGE EXERCISABLE
RANGE OF AS OF REMAINING WEIGHTED AVERAGE AS OF WEIGHTED AVERAGE
EXERCISE PRICES MARCH 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 1999 EXERCISE PRICE
- --------------- -------------- ---------------- ---------------- -------------- ----------------
$15.50 - $27.62 586,490 2.3 $24.59 262,157 $23.71
$30.50 - $66.00 2,024,665 7.1 $58.14 188,045 $44.36
--------- ------- ------
2,611,155 450,202 $32.34
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,
---------------------------
1999 1998 1997
------- ------- -------
Net Income:
As Reported............................................. $37,608 $32,871 $27,241
Pro Forma............................................... $31,517 $28,410 $24,351
Diluted EPS:
As Reported............................................. $ 1.98 $ 1.73 $ 1.33
Pro Forma............................................... $ 1.66 $ 1.49 $ 1.19
Because the SFAS No. 123 method of accounting has not been applied to
options granted prior to April 1, 1995, the resulting pro forma compensation
cost may not be representative of that to be expected in future years.
Additionally, the pro forma amounts include approximately $303,000, $358,000 and
$257,000 related to the purchase discount offered under the Purchase Plan for
fiscal 1999, 1998 and 1997, respectively.
NOTE 7: STOCKHOLDER PROTECTION PLAN
On May 8, 1997, the Company announced that it had adopted a Stockholder
Protection Plan. To implement this plan, the Company declared a dividend of one
Preferred Share Purchase Right on each outstanding share of the Company's common
stock. The dividend distribution was payable to stockholders of record on May
12, 1997. The rights will be exercisable for fractions of a share of the
Company's Series X Junior Participating Preferred Stock only if a person or
group acquires 15 percent or more of the Company's common stock or announces or
commences a tender offer for 15 percent or more of the common stock, except for
certain instances defined in the Stockholder Protection Plan.
NOTE 8: SAVINGS PLANS
On June 1, 1992, the Company adopted a 401(k) Savings Plan. The Company's
contributions during fiscal 1999 and 1998 were $840,000 and $635,000,
respectively.
On January 1, 1992, the Company adopted a non-qualified deferred
compensation plan (the "Deferred Compensation Plan"). The Deferred Compensation
Plan is designed to permit select employees and directors of the Company to
defer a portion of their compensation. Effective July 1, 1996, the Deferred
Compensation Plan was amended and restated allowing participants to elect
deferral of certain types of compensation, including directors fees, stock
grants under the Grant Plan and shares issuable upon the exercise of stock
options, into stock units in the Deferred Compensation Plan each of which
represents a share of Company common stock) and creating the Catalina Marketing
Corporation Deferred Compensation Trust (the "Trust"). Amounts deposited in
stock unit accounts are distributed in the form of shares of Company
24
27
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
common stock upon a payment event. Through the Trust, investment options such as
mutual funds and money market funds are available to participants.
The investment in the Deferred Compensation Plan and related liability are
included in prepaid expenses and other current assets and accrued expenses of
the consolidated balance sheets, respectively. The Company determined all of its
Deferred Compensation Plan investments currently held in mutual funds and money
market funds are trading securities and as such are reported at fair value.
Realized and unrealized holding gains and losses related to these investments,
as well as the offsetting compensation expense, recognized in net income during
fiscal 1999, 1998 and 1997 were not significant. Stock units are initially
recorded at fair value.
NOTE 9: SEGMENT INFORMATION:
In fiscal 1999 the Company adopted the provisions of Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131). This statement establishes new standards
for reporting information about operating segments and related disclosures. All
prior period information has been restated to conform to this statement.
The Company operates through individual operating units which share similar
economic characteristics, customers, distribution channels, products and
services and production processes. As a result, the Company has aggregated its
operating units and product lines into a single reporting segment of Targeted
Marketing Services. The Company's accounting policies for segments are the same
as those described in Note 1. Management evaluates segment performance based on
net income(loss).
Reportable segment information is as follows:
FOR THE FISCAL YEAR ENDED MARCH 31,
------------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ------------------------
TARGETED TARGETED TARGETED
MARKETING MARKETING MARKETING
SERVICES ELIMINATIONS SERVICES ELIMINATIONS SERVICES ELIMINATIONS
--------- ------------ --------- ------------ --------- ------------
Revenue from external
customers.................... $264,783 $217,150 $172,143
Revenue from internal
sources...................... 3,026 (3,026) 2,121 (2,121) 1,764 (1,764)
Net interest income
(expense).................... 231 (493) 1,058
Depreciation and
amortization................. 27,342 23,703 17,939
Provision for income taxes..... 27,969 19,058 17,880
Net income..................... 37,608 32,871 27,241
Segment assets................. 221,047 157,066 154,696
Expenditures for long lived
assets....................... 41,455 23,561 33,516
Revenue and long lived assets by geographic area are as follows:
FOR THE FISCAL YEAR ENDED MARCH 31,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Revenue from external customers
United States........................................ $228,806 $187,367 $158,105
Foreign.............................................. 35,977 29,783 14,038
Long lived assets
United States........................................ $ 68,932 $ 57,758 $ 55,147
Foreign.............................................. 21,130 13,630 15,995
25
28
CATALINA MARKETING CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 10: ACQUISITIONS:
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 $1.8
million in initial cash consideration, net of cash acquired. Terms of the
purchase agreement call for the Company to make a series of payments, which are
contingent upon the future operating performance of Market Logic.
Effective December 30, 1998, the Company purchased from its minority
stockholders the remaining ownership of Catalina Marketing of France, Inc.
Catalina Marketing of France, Inc. owns substantially all of the outstanding
stock of Catalina Marketing de France, S.A., the French operating company. Terms
of the purchase agreement call for the Company to make an initial down payment
and a series of payments to the minority stockholders, which are contingent upon
the future operating performance of Catalina Marketing de France, S.A.
Effective January 4, 1999, the Company acquired 100 percent of the
outstanding common shares of Dynamic Controls Inc., which offers card-based
loyalty marketing programs for retailers for $4.6 million in initial cash
consideration, net of cash acquired. Terms of the purchase agreement call for
the Company to make an initial down payment and a series of payments, which are
based upon specified future revenue growth targets.
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 1999
consolidated financial statements since the date of such acquisition.
NOTE 11: SUBSEQUENT EVENT:
Effective April 21, 1999, the Company, through one of its wholly owned
subsidiaries, entered into a merger agreement with one of its vendors, CompuScan
Marketing, Inc. CompuScan Marketing, Inc. provides the intellectual property and
backroom processing for the Company's Checkout Prizes product.
Effective April 5, 1999 the Tribune Company made an investment in
Supermarkets Online.
NOTE 12: EFFECT OF SFAS NO. 133:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133 is effective for financial
statements relating to fiscal years beginning after June 15, 1999. The Company
expects SFAS No. 133 to have no effect on its financial statements.
26
29
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 August
30, 1999.
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.......... 12
Consolidated Income Statements, Years Ended March 31, 1999,
1998 and 1997............................................... 13
Consolidated Balance Sheets at March 31, 1999 and 1998...... 14
Consolidated Statements of Stockholders' Equity, Years Ended
March 31, 1999, 1998 and 1997............................... 15
Consolidated Statements of Cash Flows, Years Ended March 31,
1999, 1998 and 1997......................................... 16
Notes to the Consolidated Financial Statements.............. 17
(a)2. Financial Statement Schedules (EDGAR only).
All other schedules are omitted because they are not
applicable or not required, or because the required
information is included in the Consolidated Financial
Statements or notes thereto.
(a)3. Index to Exhibits
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- --------- -----------------------
*3.3 -- Restated Certificate of Incorporation
**3.3.1 -- Certificate of Amendment of Certificate of Incorporation, a
copy of which is attached as an exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1997
**3.3.2 -- Certificate of Designation, Preferences and Rights setting
forth the terms of the Company's Series X Junior
Participating Preferred Stock, par value $.01 per share, a
copy of which is attached as an exhibit to the Company's
Annual Report on Form 10-K for the year ended March 31, 1997
*3.4 -- Restated Bylaws
**10.4 -- Amended and Restated 1989 Stock Option Plan, a copy of which
is attached as an exhibit to the Company's Annual Report on
Form 10-K for the year ended March 31, 1994
**10.4.1 -- Second Amended and Restated 1989 Stock Option Plan, a copy
of which is attached as an exhibit to the Company's Report
on Form 10Q for the quarter ended June 30, 1997
27
30
EXHIBIT
NO. DESCRIPTION OF DOCUMENT
- --------- -----------------------
10.4.2 -- Third Amended and Restated 1989 Stock Option Plan
*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
21 -- List of subsidiaries
23 -- Consent of independent certified public accountants
27 -- Financial Data Schedule -- (for SEC use only)
- ---------------
* Incorporated by reference to the Company's Registration Statement on Form S-1
Registration No. 33-45732, originally filed with the Securities and Exchange
Commission on February 14, 1992, and declared effective (as amended) on March
26, 1992.
** Previously filed as indicated.
28
31
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 18, 1999.
CATALINA MARKETING CORPORATION
(Registrant)
By: /s/ JOSEPH P. PORT
------------------------------------
Joseph P. Port,
Senior Vice President and
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ GEORGE W. OFF Chairman of the Board June 18, 1999
- -----------------------------------------------------
George W. Off
/s/ DANIEL D. GRANGER President, Chief Executive June 18, 1999
- ----------------------------------------------------- Officer and Director
Daniel D. Granger
/s/ FRANK H. BARKER Director June 18, 1999
- -----------------------------------------------------
Frank H. Barker
/s/ FREDERICK W. BEINECKE Director June 18, 1999
- -----------------------------------------------------
Frederick W. Beinecke
/s/ PATRICK W. COLLINS Director June 18, 1999
- -----------------------------------------------------
Patrick W. Collins
/s/ STEPHEN L. D'AGOSTINO Director June 18, 1999
- -----------------------------------------------------
Stephen L. D'Agostino
/s/ TOMMY D. GREER Chairman Emeritus June 18, 1999
- -----------------------------------------------------
Tommy D. Greer
/s/ THOMAS W. SMITH Director June 18, 1999
- -----------------------------------------------------
Thomas W. Smith
/s/ MICHAEL B. WILSON Director June 18, 1999
- -----------------------------------------------------
Michael B. Wilson
/s/ JOSEPH P. PORT Senior Vice President and Chief June 18, 1999
- ----------------------------------------------------- Financial Officer
Joseph P. Port
/s/ TAMARA L. ZEPH Corporate Controller (Principal June 18, 1999
- ----------------------------------------------------- Accounting Officer)
Tamara L. Zeph
29