10-K 1 0001.txt CATALINA MARKETING CORPORATION 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, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER: 1-11008 CATALINA MARKETING CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 33-0499007 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 11300 9TH STREET NORTH, ST. PETERSBURG, FLORIDA 33716-2329 (Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (727) 579-5000 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ---------------- Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of such stock as of May 30, 2000, as reported by the New York Stock Exchange, Inc., was $1,483,389,755. The number of shares of Registrant's common stock, par value $0.01 per share, outstanding as of May 30, 2000, was 18,325,425. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of Registrant's Definitive Proxy Statement for 2000 are incorporated by reference in Part III of this report. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- 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 Matters..................................................... 5 Item 6. Selected Financial Data..................................... 6 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 6 Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 11 Item 8. Consolidated Financial Statements and Supplementary Data.... 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 30 PART III Item 10. Directors and Executive Officers of the Registrant.......... 30 Item 11. Executive Compensation...................................... 30 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 30 Item 13. Certain Relationships and Related Transactions.............. 30 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 30
i 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 delivers strategic marketing solutions for retailers and manufacturers through a variety of product lines. The evolution of the Company's product lines has resulted in a single targeted marketing services organization with interrelated operating groups, which engages consumers to influence their purchase decisions. As of March 31, 2000, the Company employed 1,430 people reporting into 27 offices throughout the United States, Europe and Asia. TARGETED MARKETING SERVICES THROUGH THE CATALINA MARKETING NETWORK(R) Catalina Marketing Corporation was founded in 1983 to provide consumers with in-store targeted coupons. Employing data mining technology from the Company's in-store Network (the "Catalina Marketing Network"), Catalina Marketing now offers in-store, online and at-home reach to provide its strategic marketing solutions. These solutions are purchase-based, individually customized communications and promotions for manufacturers and retailers that increase sales through incentives, loyalty programs, sampling and advertising messages. The Company's services enable retailers and manufacturers to impact purchase decisions before, during and after the purchase using a variety of strategic, targeted programs. The primary product line of the Catalina Marketing Network is the in-store delivery of incentives at the checkout lane. Catalina Marketing links its proprietary software, personal computers, central databases and specially designed thermal printers with a retailer's point-of-sale controllers and scanners. The system prints customized promotion certificates at the point of sale based on product Uniform Product Codes (UPCs) or other scanned information. The printed promotions are handed to consumers by the cashier at the end of the shopping transaction. Catalina Marketing contracts with manufacturers and retailers to print promotions and receives a fee for each promotion printed. Catalina Marketing enters into agreements with retail chains to install the Catalina Marketing Network in all or selected stores within the chain, either regionally or nationally. Upon installation, the retailer pays a one-time fee for each installation and generally agrees to use the Network in its store for a minimum of five years. Catalina Marketing pays distribution fees to the retailer based on the number of manufacturer promotions printed. The equipment installed in each retail store consists of a thermal printer at each checkout lane linked by a personal computer on premises to the retailer's point-of-sale controller and scanning equipment. Catalina Marketing operates two United States data processing facilities that communicate via modem with the personal computers installed in the stores to send promotional instructions and retrieve performance data. All of the equipment and supplies, including computers, printers and paper, used in a retail installation are purchased through outside sources. While there are currently a few primary suppliers, Catalina Marketing believes that alternate sources of supply are available without material interruptions of the Company's business. The services of the Catalina Marketing Network are driven by proprietary software. The software design is flexible and upgradable, supporting new applications that are developed and implemented on a continuous basis. This flexibility allows the network to expand and evolve as industry or customer requirements change. SERVICES Catalina Marketing offers its core programs and services through the Catalina Marketing Network, which is operated mainly in supermarkets. These targeted marketing solutions, including discount coupons, loyalty marketing programs, sampling, advertising, in-store instant-win games and other incentives, are delivered 1 4 directly to shoppers based on their actual purchase behavior. By specifying which purchases will "trigger" a promotion to print, manufacturers and retailers can deliver customized incentives and messages to only the consumers they wish to reach. An integrated program of applications is designed to reach shoppers before, during and after the purchase. Each application is designed to meet specific objectives of consumer packaged goods manufacturers and supermarket retailers. Loyalty Programs allow manufacturers and retailers to target specific households based on 52 weeks of past purchase data. For retailers, loyalty programs include frequent shopper card production and data management. Sampling programs target consumers based on either current purchase behavior or through a household-level database and deliver samples upon request. Samples can be full or trial-sized and delivered in-store or at home. Advertising programs allow manufacturers to reach a captive audience through a toll-free number, announcement or message delivered at the checkout stand. In-store instant-win games are tied-in with the retailer by offering a chance to win instantly at the checkout stand based on products that are purchased. Couponing programs, such as Checkout Coupon(R) and Checkout Direct(R), use patented UPC-based scanner technology to target consumers and distribute coupons at checkout based on actual purchase behavior. Catalina Marketing services can offer up to 13 four-week cycles of time on the Catalina Marketing Network each year for more than 500 product categories, such as coffee, baby food and frozen entrees. Exclusive rights to product categories are generally given to the purchasers of specific cycle or cycles in particular product categories, and for national programs, a right of first acceptance to purchase the same cycles in the subsequent year is given to the manufacturer who purchased the earlier cycles. The primary revenue source of the Catalina Marketing Network is a function of total promotions printed based on a promotion charge, with a minimum category fee based on shopper reach of the network and category unit volume. Redemption processing of these promotions is similar to that of traditional manufacturer coupons. Retailers provide discounts to consumers who present the coupons, send redeemed coupons to clearinghouses, and receive reimbursements for the discounts provided and handling fees from the manufacturers. Retail loyalty marketing services offer targeted direct mail marketing services through Market Logic, acquired in July 1998, and loyalty card production services through the Company's facilities based in Manasquan, New Jersey (formally Dynamic Controls, Inc. or DCI acquired in January 1999). Retail loyalty marketing services also provides data collection services, data storage services, data mining services and report processing services through the Company's facilities based in St. Petersburg, Florida. Catalina Marketing's core domestic product lines, described above, contributed approximately 74 percent of the Company's revenues in fiscal 2000, 80 percent in fiscal 1999, and 83 percent in fiscal 1998. As of March 31, 2000, the Catalina Marketing Network was installed in 13,516 United States retail stores reaching more than 165 million shoppers in the United States weekly. The international operations of Catalina Marketing provide in-store electronic marketing services for consumers in Europe and Asia. The Company's current presence in Europe is in the United Kingdom and France. In fiscal 2001, Catalina Marketing will be conducting a test pilot program in Italy with at least two large retailers. In Asia, the Company currently operates in Japan. As of March 31, 2000, the Company had installed its network in more than 2,200 supermarket retailers in Europe, and weekly shopper reach was approximately 27.4 million. In Asia, where the Company provides outdoor media services, in addition to in-store electronic marketing services, two of the top five general merchandise stores have partnered with Catalina Marketing, including Jusco and Seiyu, for a weekly shopper reach now totaling nearly 8.1 million in 376 retail outlets as of March 31, 2000. Developing product lines include Health Resource Publishing ("HRP"), SuperMarkets Online ("SMO") and Alliance Research ("Alliance"). HRP, formed in fiscal 1995, uses an in-store prescription-based targeting technology to provide direct-to-consumer and targeted information services advertising to pharmacy customers based on their individual pharmacy purchases or other related patient information. The Health Resource(R) newsletter is triggered by the National Drug Code found on all prescription drugs. When a prescription is processed, a customized newsletter with prescription information, therapeutically relevant 2 5 editorial and product advertising material is printed and handed to the customer along with the prescription. As of March 31, 2000, the HRP system was installed in 6,671 pharmacy outlets. SMO, originally tested in fiscal 1996, provides the industry's only online secure coupon format through its ValuPage(SM) service at www.valupage.com. The ValuPage service was rolled out nationally in January 1998 and makes use of a bar code that, when printed at home and presented at the checkout lane of more than 11,500 participating supermarkets, along with the promoted items, issues Web Bucks from in-store printers, which are cash rewards that consumers use to save on their next visit to the store. SMO also offers a ValuPage e-mail service that delivers ValuPage coupons and other consumer packaged goods promotions directly to a shopper's e-mail in-box. Alliance acquired in July 1999, provides research products on consumer attitudes. Alliance has developed a suite of proprietary techniques for attitudinal research through the application of emerging technologies. These technologies include Interactive Voice Response, which allows consumers to respond to surveys via automated telephone services, and VOCALS(R), which digitally records actual voice responses in telephone surveys. SALES AND MARKETING The Company has a manufacturer sales force and a retail sales and marketing force, both working on providing the Company's targeted marketing services to its customers. The combined manufacturer and retail sale forces provide a coordinated sale approach to each client in order to offer a tailored targeted marketing solutions. Manufacturer Sales Force. The primary focus of the Company's marketing effort is to attract national consumer packaged goods manufacturers to purchase category cycles. The sales and client service force of Catalina Marketing focus on current and prospective customers, and work with them on a consultative basis to develop and implement customized, targeted marketing programs that fit each brand's strategies and objectives. Retail Sales and Marketing Force. Catalina Marketing has two goals for its retail sales and service force. The first is to continue to expand the Catalina Marketing Network by installing stores in major markets that are not currently part of the Catalina Marketing Network. The second is to encourage currently installed retailers to use the Company's full-service retail loyalty marketing services, as well as Network-generated incentives to promote private label brands or high-margin departments. RESEARCH AND DEVELOPMENT The Company's expenditures for research and development are generally for market research, software development, system upgrades and pilot-project execution to create, test and support new applications for the Catalina Marketing Network. Catalina Marketing believes that new service and application development, along with market expansion, are vital to maintain its continued growth. COMPETITION Competition in the marketing services business is intense and includes many competitors. Catalina Marketing competes for manufacturers' advertising and consumer promotion budgets with a wide range of media, including television, radio, print and direct mail advertising, as well as several alternative in-store and point-of-sale programs. Within the coupon industry, the Company competes with various traditional coupon delivery methods that are less expensive per delivered coupon, including free-standing inserts (FSIs), newspapers, direct mail, magazines and in- or on-product packaging, as well as other "in-store" marketing companies that use a variety of coupon, promotion or advertising delivery methods. Catalina Marketing competes for advertising and promotional dollars based on the efficiency of the Catalina Marketing Network, its ability to accurately and effectively target potential customers, the number of shoppers reached, and the general ability to influence consumer buying behavior. 3 6 EMPLOYEES Catalina Marketing employed 1,430 people as of March 31, 2000, approximately 1,230 which were full-time. No employees are covered by a collective bargaining arrangement. More than 1,200 of the Company's employees are employed in the United States, with approximately 25 percent of the United States employees being based in the St. Petersburg, Florida headquarters. PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS Catalina Marketing currently holds 97 United States and foreign patents on certain aspects of the Catalina Marketing Network and its other services and has several patent applications pending. These patents provide a competitive advantage; accordingly the Company will vigorously defend its proprietary rights in all appropriate circumstances. While patent position is important, Catalina Marketing believes its ability to market its services to retailers and manufacturers, and to develop new products, will be the major factors affecting its future performance. Catalina Marketing also believes that product recognition is an important competitive factor in the electronic marketing and promotion industry. Accordingly, the Company promotes its service marks and trademarks in connection with its product and marketing activities. It also regards certain computer software in the Catalina Marketing Network and each additional service application as proprietary and seeks to protect such software with copyrights, trade secret laws and internal non-disclosure agreements and safeguards. Such methods may not afford complete protection, and there can be no assurance that others will not independently develop such know-how, concepts or ideas. ITEM 2. PROPERTIES The Company's headquarters facility, which includes its principal administrative, marketing, information technology and product development offices, is located in 65,207 square feet of leased space in St. Petersburg, Florida. The Company leases an additional 22 sales and support offices across the United States, consisting of approximately 199,281 square feet in the aggregate, and four offices for its foreign operations. In October 1999, the Company entered into a lease financing agreement for a new headquarters facility in St. Petersburg, Florida. The Company anticipates that it will move into the new 142,857 square foot facility during the third quarter of fiscal 2001. The Company believes that the new headquarters facility along with the existing sales and support offices are adequate to meet current requirements and that suitable additional space will be available as needed to accommodate growth of its operations and additional sales and support offices for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Catalina Marketing is involved in certain litigation arising out of the Company's business, including litigation initiated by the Company to protect its intellectual property or to defend itself against claims brought on by others. Additionally, the Company is in the appeals phase in a sales tax case with a state taxing authority. In the opinion of management, the ultimate outcome of this litigation will not have a material adverse effect on the Company's financial condition, or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 4 7 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 2000: March 31, 2000............................................ $113 1/2 $81 5/16 December 31, 1999......................................... 120 11/16 81 11/16 September 30, 1999........................................ 106 7/8 74 June 30, 1999............................................. 97 7/16 79 3/4 Fiscal 1999: March 31, 1999............................................ $ 85 7/8 $61 5/8 December 31, 1998......................................... 68 3/8 41 1/2 September 30, 1998........................................ 54 15/16 39 1/2 June 30, 1998............................................. 56 42 7/8
B. Stockholders As of March 31, 2000, there were approximately 604 registered holders of shares of Common Stock. C. Dividends The Company has not paid any cash dividends to date, and there are no current plans to pay a cash dividend in the future. 5 8 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA The selected Income Statement Data and Balance Sheet Data set forth below are derived from the audited Consolidated Financial Statements of the Company and the related notes thereto. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.
FISCAL YEAR ENDED MARCH 31, ---------------------------------------------------- 2000 1999 1998 1997 1996 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income Statement Data: Revenues.................................. $350,922 $264,783 $217,150 $172,143 $134,155 Costs and expenses: Direct operating expenses.............. 142,229 110,167 84,191 62,482 47,661 Selling, general and administrative.... 88,247 59,363 56,364 48,379 37,358 Depreciation and amortization.......... 35,175 27,342 23,703 17,939 14,328 -------- -------- -------- -------- -------- Total costs and expenses.......... 265,651 196,872 164,258 128,800 99,347 -------- -------- -------- -------- -------- Income from operations.................... 85,271 67,911 52,892 43,343 34,808 Interest income (expense) and other....... (595) (2,334) (963) 1,224 1,409 Income Taxes.............................. (34,041) (27,969) (19,058) (17,880) (14,855) Minority interest in losses of subsidiaries........................... 713 -- -- 554 666 -------- -------- -------- -------- -------- Net income........................ $ 51,348 $ 37,608 $ 32,871 $ 27,241 $ 22,028 ======== ======== ======== ======== ======== Diluted net income Per common share.......................... $ 2.66 $ 1.98 $ 1.73 $ 1.33 $ 1.11 Diluted weighted average common shares outstanding............................ 19,319 19,009 19,026 20,491 19,922 Balance sheet data: Cash and cash equivalents................. 13,765 13,942 18,434 13,698 25,778 Property and equipment, net............... 115,000 87,686 70,513 69,578 46,253 Total assets.............................. 303,752 221,047 157,066 154,696 114,187 Long term debt (including current portion of long term debt)..................... 14,144 6,033 1,731 2,566 -- Total stockholders' equity................ 141,045 120,933 90,042 96,938 71,222 Other data: U.S. Checkout Coupon stores installed at end of period.......................... 13,516 12,092 11,164 10,745 9,766 International Checkout Coupon stores installed at end of period............. 2,587 1,935 1,372 941 558 Health Resource Publishing pharmacy outlets installed at end of period..... 6,671 3,861 1,920 1,195 237 Capital expenditures, net................. 58,217 39,954 24,250 34,605 23,121
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Catalina Marketing provides a multi-functional communications network that provides a wide range of strategic targeted marketing solutions for manufacturers and retailers. The Company's unique capability is to be able to offer precision targeted marketing in a way in which no other medium, such as television or radio, can perform. Catalina Marketing delivers strategic marketing solutions for retailers and manufacturers 6 9 through a variety of product lines. The evolution of the Company's product lines has resulted in a single targeted marketing services organization with interrelated operating groups, which engages consumers to influence purchase decisions. As of March 31, 2000, the Company employed 1,430 people reporting into 27 offices throughout the United States, Europe and Asia. RESULTS OF OPERATIONS Year Ended March 31, 2000 compared to Year Ended March 31, 1999 Revenues were $350.9 million in fiscal 2000, up 32.5 percent over revenues of $264.8 in fiscal 1999. The increase in revenues is due to an increase in promotions printed worldwide, growth in Checkout Direct(R) programs as well as increases in direct mail marketing and other loyalty programs. Additionally, fiscal 2000 includes revenues from Alliance Research, acquired in July 1999. In the United States, the Catalina Marketing Network was in 13,516 stores at March 31, 2000, which reach approximately 165 million shoppers each week as compared to 12,092 stores reaching approximately 152 million shoppers each week at March 31, 1999. The Health Resource Network was in 6,671 pharmacies at March 31, 2000 as compared to 3,861 pharmacies at March 31, 1999. Outside the U.S., the Catalina Marketing Network was in 2,587 stores at March 31, 2000, which reach approximately 35 million shoppers each week as compared to 1,935 stores reaching approximately 29 million shoppers each week at March 31, 1999. In fiscal 2000, the Company installed its Catalina Marketing Network in 1,424 stores (net of deinstallations) in the United States as compared to 928 stores in fiscal 1999. Deinstallation activity can and does occur primarily due to the consolidation and business combination of supermarket chains as well as store closures made by retailers in the ordinary course of business. The Company also installed its Health Resource Network in 2,810 pharmacies (net of deinstallations) in fiscal 2000 as compared to 1,941 pharmacies in fiscal 1999. Outside the United States, the Company installed 652 stores (net of deinstallations) in fiscal 2000 as compared to 563 stores (net of deinstallations) in fiscal 1999. Direct operating expenses consist of retailer fees, paper, sales commissions, loyalty and direct mail marketing expenses, provision for doubtful accounts, the expenses of operating and maintaining the Catalina Marketing and Health Resource Network, primarily expenses relating to operations personnel and service offices, and the direct expenses associated with operating the outdoor media business in a majority-owned subsidiary in Asia. Direct operating expenses increased in absolute terms to $142.2 million in fiscal 2000 from $110.2 million in fiscal 1999. Direct operating expenses in fiscal 2000 as a percentage of revenues decreased to 40.5 percent from 41.6 percent in fiscal 1999. This decrease in fiscal 2000 is principally attributable to a favorable shift in product mix towards higher margin domestic sales and managing the Network more efficiently, offset by higher direct operating expenses in connection with revenue associated with the increase in direct marketing and research programs at Alliance Research and in the loyalty card production services, as well as higher costs incurred with running the outdoor media business in Japan. Selling, general and administrative expenses include personnel-related costs of selling and administrative staff, overhead, marketing expenses and new product development expenses. Selling, general and administrative expenses in fiscal 2000 were $88.2 million compared to $59.4 million in fiscal 1999, an increase of 48.7 percent or $28.9 million. As a percentage of revenues, selling, general and administrative expenses increased 2.7 percent in fiscal 2000, to 25.1 percent from 22.4 percent in fiscal 1999. This increase is primarily attributable to advertising and marketing expenses relating to new operating units and developing product lines. Depreciation and amortization increased to $35.2 million for fiscal 2000 from $27.3 million for fiscal 1999. Depreciation increased due to the investment in capital expenditures, during the current and prior periods, associated with new operating units and product lines, data processing equipment and the increase in stores installed. Amortization expense increased due to the increases in goodwill and other intangible assets related to the Company's acquisitions. 7 10 Interest income (expense) and other was $0.6 million net expense for fiscal 2000 compared to $2.3 million net expense for fiscal 1999. The decrease in expense is principally attributable to the Company writing off its $3.0 million investment in Intelledge Corporation in the second quarter of fiscal 1999. The provision for income taxes increased to $34 million, or 40.2 percent of income before income taxes and minority interest, for fiscal 2000 compared to $28.0 million, or 42.7 percent of income before income taxes, for fiscal 1999. The rate decrease is primarily due to the valuation allowance recorded against the $3.0 million deferred tax benefit for the Intelledge investment write off in the second quarter of fiscal 1999 and to a lesser extent due to the Company's ability to utilize losses of a majority owned foreign subsidiary for income tax purposes in fiscal 2000. The Company's effective tax rate is higher than the federal statutory income tax rate due to state and foreign income taxes, various nondeductible expenses, primarily the amortization of goodwill related to the Company's acquisitions and, in the case of fiscal 1999, the valuation allowance referred to in the previous sentence. Year Ended March 31, 1999 compared to Year Ended March 31, 1998 Revenues were $264.8 million in fiscal 1999, up 21.9 percent over revenues of $217.1 in fiscal 1998. The increase in revenues is due to both a growth in Checkout Direct(R) programs as well as increases in loyalty and other direct mail marketing programs. Loyalty and direct mail marketing programs include, among others, the revenues added by the acquisition of Market Logic, which was acquired on July 13, 1998 and Dynamic Controls, Inc. ("DCI"), which was acquired on January 4, 1999. In the United States, the Catalina Marketing Network was in 12,092 stores at March 31, 1999, which reach approximately 152 million shoppers each week as compared to 11,164 stores reaching approximately 143 million shoppers each week at March 31, 1998. The Health Resource Network was in 3,861 pharmacies at March 31, 1999 as compared to 1,920 pharmacies at March 31, 1998. Outside the United States, the Catalina Marketing Network was in 1,935 stores at March 31, 1999, which reach approximately 29 million shoppers each week as compared to 1,372 stores reaching approximately 20 million shoppers each week at March 31, 1998. In fiscal 1999, the Company installed its Catalina Marketing Network in 928 stores (net of deinstallations) in the United States as compared to 419 stores in fiscal 1998. Deinstallation activity can and does occur primarily due to the consolidation and business combination of supermarket chains as well as store closures made by retailers in the ordinary course of business. The Company also installed its Health Resource Network in 1,941 pharmacies (net of deinstallations) in fiscal 1999 as compared to 725 pharmacies in fiscal 1998. Outside the United States, the Company installed 563 stores (net of deinstallations) in fiscal 1999 as compared to 731 stores (with respect to continuing operations, net of deinstallations) in fiscal 1998. During fiscal 1998, the Company ceased operations in 300 stores in and around Mexico City. Direct operating expenses consist of retailer fees, paper, sales commissions, loyalty and direct mail marketing expenses, marketing expenses, the expenses of operating and maintaining the Catalina Marketing Network, primarily expenses relating to operations personnel and service offices, provision for doubtful accounts and the direct expenses associated with operating the outdoor media business in a majority-owned subsidiary in Asia. Direct operating expenses increased in absolute terms to $110.2 million in fiscal 1999 from $84.2 million in fiscal 1998. Direct operating expenses in fiscal 1999 as a percentage of revenues increased to 41.6 percent from 38.8 percent in fiscal 1998. This increase in fiscal 1999 is principally attributable to the Company's increase in loyalty and direct marketing programs, including Market Logic and DCI businesses, which by their nature have a higher material cost component of direct costs as a function of revenue than the Company's other core product line services. Selling, general and administrative expenses include personnel-related costs of selling and administrative staff, overhead and new product development expenses. Selling, general and administrative expenses in fiscal 1999 were $59.4 million compared to $56.4 million in fiscal 1998, an increase of 5.3 percent or $3.0 million. The increase relates primarily to administrative expenses of new business ventures and products which were partially offset by the $3.5 million one time expense incurred in the third quarter of fiscal 1998 associated with the shutdown of the Company's Mexican operations. As a percentage of revenues, selling, general and administrative expenses decreased 3.6 percent in fiscal 1999, to 22.4 percent from 26.0 percent in fiscal 1998. 8 11 This decrease is primarily attributable to the $3.5 million charge referred to above. Additionally, the Company was successful in lowering and limiting certain categories of overhead expenses during the fiscal 1999 periods. Depreciation and amortization increased to $27.3 million for fiscal 1999 from $23.7 million for fiscal 1998. Depreciation increased due to the investment in capital expenditures, during the current and prior periods, associated with new operating units and product lines, data processing equipment and the increase in stores installed. Amortization expense increased due to the increases in goodwill and other intangible assets related to the Company's acquisitions. Interest income (expense) and other was $2.3 million net expense for fiscal 1999 compared to $1.0 million net expense for fiscal 1998. The increase in expense is principally attributable to the Company writing off its $3.0 million investment in Intelledge Corporation in the second quarter of fiscal 1999. As a partial offset, the Company incurred interest expense on borrowings from its credit facility during the fiscal 1998 and had no borrowings on this facility in fiscal 1999. The provision for income taxes increased to $28.0 million, or 42.7 percent of income before income taxes, for fiscal 1999 compared to $19.1 million, or 36.7 percent of income before income taxes, for fiscal 1998. The increase is primarily due to the valuation allowance recorded against the $3.0 million deferred tax benefit for the Intelledge investment write off in the second quarter of fiscal 1999 and the $3.1 million tax benefit arising due to the shutdown of the Mexican operations in the third quarter of fiscal 1998. Excluding the effect of the Mexican operations shutdown, the Company's effective tax rate is higher than the federal statutory income tax rate due to state and foreign income taxes, the inability to currently utilize losses of a majority owned foreign subsidiary for tax purposes and, in the case of fiscal 1999, the valuation allowance referred to in the previous sentence. QUARTERLY RESULTS The following table presents certain unaudited quarterly results for the last eight quarters (dollars in thousands, except per share data):
THREE MONTHS ENDED ----------------------------------------------------------------------------------- MAR 31, DEC 31, SEPT 30, JUN 30, MAR 31, DEC 31, SEPT 30, JUNE 30, 2000 1999 1999 1999 1999 1998 1998 1998 ------- -------- --------- ------- -------- ------- -------- -------- Revenues......................... $93,690 $ 97,790 $86,828 $72,614 $75,897 $67,604 $64,448 $56,834 Direct operating expenses........ 37,298 39,226 35,537 30,168 31,140 27,279 28,198 23,550 Selling, general and administrative................. 22,759 22,200 23,480 19,808 16,371 13,665 14,022 15,305 Depreciation and amortization.... 9,549 8,862 8,577 8,187 7,369 6,931 6,638 6,404 ------- -------- ------- ------- ------- ------- ------- ------- Income from operations........... 24,084 27,502 19,234 14,451 21,017 19,729 15,590 11,575 Interest income (expense) and other.......................... (354) (31) (9) (201) 388 199 (2,893) (28) Income taxes..................... (9,540) (11,043) (7,728) (5,730) (8,939) (7,913) (6,308) (4,809) Minority interest in losses of subsidiaries................... 223 132 175 183 -- -- -- -- ------- -------- ------- ------- ------- ------- ------- ------- Net income....................... $14,413 $ 16,560 $11,672 $ 8,703 $12,466 $12,015 $ 6,389 $ 6,738 ======= ======== ======= ======= ======= ======= ======= ======= Diluted net income per common Share.......................... $ .75 $ .86 $ .60 $ .45 $ .65 $ .64 $ .34 $ .35 Diluted weighted average common shares Outstanding............. 19,197 19,230 19,366 19,486 19,165 18,891 18,963 19,033 U.S. checkout coupon business: Stores at quarter end:........... 13,516 13,020 12,635 12,257 12,092 11,814 11,621 11,432 Net stores installed during quarter:....................... 496 385 378 165 278 193 189 268 Promotions printed (in millions):..................... 678 781 722 628 660 664 654 607 Weekly shopper reach at quarter end (in millions):............. 165 173 160 161 152 156 151 153
The Company expects its revenues to fluctuate in accordance with periods of higher promotional activity by manufacturers. The pattern of coupon distribution is irregular and may change from period to period depending on many factors, including the economy, competition, the timing of new product introductions and 9 12 the timing of manufacturers' promotion planning and implementation. These factors, as well as the overall growth in the number of retailer and manufacturer contracts with the Company, tend to influence the Company's revenues and profits from period to period. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital expenditures are store equipment and third-party store installation costs, as well as data processing equipment for the Company's central data processing facilities. Total store equipment and third-party store installation costs range from $3,000 to $13,000 per store. During fiscal 2000 and fiscal 1999, the Company made net capital expenditures of $58.2 million and $39.9 million, respectively. The pace of installations varies depending on the timing of contracts entered into with retailers and the scheduling of store installations by mutual agreement. During fiscal 2000, the Company spent $13.9 million more on store equipment and spent $5.0 million more on data processing equipment and furniture and fixtures compared to fiscal 1999. Effective April 21, 1999, the Company, through one of its wholly owned subsidiaries, acquired one of its vendors, CompuScan, for $9.1 million in initial cash consideration, net of cash acquired, by means of a merger transaction. Terms of the merger agreement call for the Company to make a series of additional payments, which are based on specified future revenue growth targets of the Checkout Prizes product. Effective July 1, 1999, the Company acquired certain assets and assumed certain liabilities of Alliance Research, an attitudinal research company, for $6.7 million in initial consideration, net of cash and cash equivalents acquired. Terms of the purchase agreement call for the Company to make a series of payments, which are contingent upon future operating performance of the business purchased from Alliance Research. Additionally, during fiscal 2000, investments were made totaling approximately $23 million which were comprised of earnout payments attributable to past acquisitions. On October 25, 1999, the Board of Directors approved an additional $50 million to buy back Company Common Stock (the "1999 authorization"). This authorization was added to the remaining authorization of $9.0 million, which was still available under a $50 million repurchase authorization, which had been adopted by the Board of Directors in October 1998 (the "1998 authorization"). During fiscal 2000, the Company purchased 538,000 shares of its Common Stock for $47.6 million. Of the shares repurchased in fiscal 2000, 492,698 shares were purchased under the 1998 authorization for $43.5 million, expending the balance of the 1998 authorization, and the balance of 45,302 shares were purchased under the 1999 authorization for $4.1 million. As of March 31, 2000, authority for the repurchase of $45.9 million is available under the 1999 authorization. The Company believes working capital generated by operations along with existing credit facilities are sufficient for its overall capital requirements. OTHER Year 2000 Readiness Disclosure This year 2000 disclosure is the most current information available and replaces all previous disclosures made by the Company in its filings on Form 10-Q and Form 10-K, and in its Annual Report of shareholders. The year 2000 issue involves the potentially serious risks associated with the inability of existing business systems to appropriately recognize calendar dates beginning in the year 2000. In December 1999, the Company completed its detailed plan to address the issue of transition to the year 2000 and noted no apparent internal business system problems. Additionally, there have been no apparent issues with the Company's retail and manufacturer clients or suppliers in relation to the year 2000 transition. The Company spent approximately $1.4 million on the year 2000 issue. 10 13 FORWARD LOOKING STATEMENTS The statements in this Form 10-K may be forward looking, and actual results may differ materially. Statements not based on historical facts involve risks and uncertainties, including, but not limited to, the changing market for promotional activities, especially as it relates to policies and programs of packaged goods manufacturers for the issuance of certain product coupons, the effect of economic and competitive conditions and seasonal variations, the success and timing of growth of the Company's international and other product lines outside its core business, the level and timing of any acquisition activity, actual promotional activities and programs with the Company's customers, the pace of installation of the Company's store network, the timing and success of new services and businesses and the pace of their implementation, and the Company's ability to maintain favorable client relationships. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 11 14 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL INFORMATION
PAGE ---- Report of Independent Certified Public Accountants.......... 13 Consolidated Income Statements, Years ended March 31, 2000, 1999 and 1998............................................. 14 Consolidated Balance Sheets at March 31, 2000 and 1999...... 15 Consolidated Statements of Stockholders' Equity, Years ended March 31, 2000, 1999 and 1998............................. 16 Consolidated Statements of Cash Flows, Years ended March 31, 2000, 1999 and 1998....................................... 17 Notes to the Consolidated Financial Statements.............. 18
12 15 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To Catalina Marketing Corporation: We have audited the accompanying consolidated balance sheets of Catalina Marketing Corporation (a Delaware corporation) and subsidiaries as of March 31, 2000 and 1999, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Catalina Marketing Corporation and subsidiaries as of March 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2000, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Tampa, Florida April 19, 2000 13 16 CATALINA MARKETING CORPORATION CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED MARCH 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Revenues.................................................... $350,922 $264,783 $217,150 Costs and Expenses: Direct operating expenses................................. 142,229 110,167 84,191 Selling, general and administrative....................... 88,247 59,363 56,364 Depreciation and amortization............................. 35,175 27,342 23,703 -------- -------- -------- Total costs and expenses.......................... 265,651 196,872 164,258 -------- -------- -------- Income From Operations...................................... 85,271 67,911 52,892 Interest Income (Expense) and Other......................... (595) (2,334) (963) -------- -------- -------- Income Before Income Taxes and Minority Interest............ 84,676 65,577 51,929 Income Taxes................................................ (34,041) (27,969) (19,058) Minority Interest in Losses of Subsidiaries................. 713 -- -- -------- -------- -------- Net Income........................................ $ 51,348 $ 37,608 $ 32,871 ======== ======== ======== Diluted: Net Income Per Common Share............................... $ 2.66 $ 1.98 $ 1.73 Weighted Average Common Shares Outstanding................ 19,319 19,009 19,026 Basic: Net Income Per Common Share............................... $ 2.77 $ 2.03 $ 1.78 Weighted Average Common Shares Outstanding................ 18,537 18,501 18,417
The accompanying Notes are an integral part of these consolidated financial statements. 14 17 CATALINA MARKETING CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
MARCH 31, --------------------- 2000 1999 --------- --------- ASSETS Current Assets: Cash and cash equivalents................................... $ 13,765 $ 13,942 Accounts receivable, net.................................... 59,261 44,045 Inventory................................................... 4,558 4,292 Deferred tax asset.......................................... 10,463 8,932 Prepaid expenses and other current assets................... 27,325 24,270 --------- --------- Total current assets.............................. 115,372 95,481 --------- --------- Property and equipment: Store equipment............................................. 177,944 145,442 Furniture and office equipment.............................. 55,243 38,175 Billboards.................................................. 17,396 11,468 Leasehold improvements...................................... 4,633 4,540 --------- --------- 255,216 199,625 Less: accumulated depreciation.............................. (140,216) (111,939) --------- --------- Property and equipment, net....................... 115,000 87,686 Purchased intangible assets, net............................ 70,400 35,628 Other assets................................................ 2,980 2,252 --------- --------- Total Assets...................................... $ 303,752 $ 221,047 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable............................................ $ 17,862 $ 14,149 Taxes payable............................................... 3,698 1,411 Accrued expenses............................................ 50,788 43,286 Deferred revenue............................................ 40,444 27,349 Short term borrowings....................................... 29,493 4,140 --------- --------- Total current liabilities......................... 142,285 90,335 --------- --------- Deferred tax liability...................................... 8,380 5,696 Minority interest........................................... 1,228 -- Long term debt.............................................. 10,814 4,083 Commitments and contingencies Stockholders' Equity: Preferred stock; $.01 par value; 5,000,000 authorized shares; none issued and outstanding....................... -- -- Common stock; $.01 par value; 50,000,000 authorized shares, and 18,200,819 and 18,389,438 shares issued and outstanding at March 31, 2000 and 1999, respectively...... 182 184 Paid-in capital............................................. 1,261 819 Accumulated other comprehensive income...................... 86 843 Retained earnings........................................... 139,516 119,087 --------- --------- Total stockholders' equity........................ 141,045 120,933 --------- --------- Total Liabilities and Stockholders' equity........ $ 303,752 $ 221,047 ========= =========
The accompanying Notes are an integral part of these consolidated financial statements. 15 18 CATALINA MARKETING CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
PAR ACCUMULATED VALUE OF OTHER TOTAL COMPREHENSIVE COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS' INCOME STOCK CAPITAL INCOME EARNINGS STOCK EQUITY ------------- -------- -------- ------------- -------- -------- ------------- BALANCE AT MARCH 31, 1997............. $208 $ 41,770 $ 749 $ 84,214 $(30,003) $ 96,938 Proceeds from issuance of 401,481 shares of common stock............ -- 4 8,739 -- -- -- 8,743 Amortization of option-related compensation...................... -- -- 231 -- -- -- 231 Tax benefit from exercise of non-qualified stock options and disqualified dispositions......... -- -- 2,842 -- -- -- 2,842 Repurchase, retirement and cancellation of treasury stock for 2,800,885 common shares........... -- (28) (53,013) -- (27,777) 30,003 (50,815) Deferred compensation plan common stock units....................... -- -- 116 -- -- -- 116 Net income.......................... $32,871 -- -- -- 32,871 -- 32,871 Other comprehensive loss, net of tax............................... (884) -- -- (884) -- -- (884) ------- Comprehensive income................ $31,987 -- -- -- -- -- -- ---- -------- ----- -------- -------- -------- BALANCE AT MARCH 31, 1998............. $184 $ 685 $(135) $ 89,308 $ -- $ 90,042 ==== ======== ===== ======== ======== ======== Proceeds from issuance of 381,385 shares of common stock............ -- 4 4,399 -- -- -- 4,403 Amortization of option-related compensation...................... -- -- 182 -- -- -- 182 Tax benefit from exercise of non-qualified stock options and disqualified dispositions......... -- -- 5,792 -- -- -- 5,792 Repurchase, retirement and cancellation of 371,100 common shares............................ -- (4) (10,415) -- (7,829) -- (18,248) Deferred compensation plan common stock units and Directors' common stock grants...................... -- -- 176 -- -- -- 176 Net income.......................... $37,608 -- -- -- 37,608 -- 37,608 Other comprehensive income, net of tax............................... 978 -- -- 978 -- -- 978 ------- Comprehensive income................ $38,586 -- -- -- -- -- -- ---- -------- ----- -------- -------- -------- BALANCE AT MARCH 31, 1999............. $184 $ 819 $ 843 $119,087 $ -- $120,933 ==== ======== ===== ======== ======== ======== Proceeds from issuance of 389,381 shares of common stock............ -- 3 8,612 -- -- -- 8,615 Increase in investment in subsidiary, net of tax............ -- -- 2,241 -- -- -- 2,241 Tax benefit from exercise of non-qualified stock options and disqualified dispositions......... -- -- 6,071 -- -- -- 6,071 Repurchase, retirement and cancellation of 538,000 common shares............................ -- (5) (16,679) -- (30,919) -- (47,603) Deferred compensation plan common stock units and Directors' common stock grants...................... -- -- 197 -- -- -- 197 Net income.......................... $51,348 -- -- -- 51,348 51,348 Other comprehensive loss, net of tax............................... (757) -- -- (757) -- -- (757) ------- Comprehensive income................ $50,591 -- -- -- -- -- -- ---- -------- ----- -------- -------- -------- BALANCE AT MARCH 31, 2000............. $182 $ 1,261 $ 86 $139,516 $ -- $141,045 ==== ======== ===== ======== ======== ========
The accompanying Notes are an integral part of these consolidated financial statements. 16 19 CATALINA MARKETING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED MARCH 31, ------------------------------ 2000 1999 1998 -------- -------- -------- Cash Flows from Operating Activities: Net income................................................ $ 51,348 $ 37,608 $ 32,871 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest...................................... (713) -- -- Depreciation and amortization.......................... 35,175 27,404 23,934 Provision for doubtful accounts........................ 1,304 1,085 1,389 Deferred income taxes.................................. 1,310 1,707 (549) Other.................................................. 197 3,173 1,182 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable.................................... (15,721) (23,503) 5,398 Inventory, prepaid expenses and other assets........... (2,733) (12,003) (3,152) Accounts payable....................................... 2,451 5,379 (3,079) Taxes payable.......................................... 1,572 (57) 790 Accrued expenses....................................... 6,817 5,303 2,699 Deferred revenue....................................... 12,074 4,973 8,790 -------- -------- -------- Net cash provided by operating activities......... 93,081 51,069 70,273 -------- -------- -------- Cash Flows From Investing Activities: Capital expenditures, net................................. (58,217) (39,954) (24,250) Purchase of investments, net of cash acquired............. (38,870) (8,982) (2,087) -------- -------- -------- Net cash used in investing activities............. (97,087) (48,936) (26,337) -------- -------- -------- Cash Flows From Financing Activities: Proceeds from debt obligations............................ 46,847 23,585 40,427 Principal payments on debt obligations.................... (16,517) (22,326) (40,487) Proceeds from issuance of common and subsidiary stock..... 14,442 4,526 8,543 Tax benefit from exercise of non-qualified stock options and disqualified dispositions.......................... 6,071 5,792 2,842 Payment for repurchase of company common stock............ (47,603) (18,248) (50,815) -------- -------- -------- Net cash provided by (used in) financing activities...................................... 3,240 (6,671) (39,490) -------- -------- -------- Net Change in Cash and Cash Equivalents..................... (766) (4,538) 4,446 Effect of Exchange Rate Changes on Cash..................... 589 46 290 Cash and Cash Equivalents, at beginning of year............. 13,942 18,434 13,698 -------- -------- -------- Cash and Cash Equivalents, at end of year................... $ 13,765 $ 13,942 $ 18,434 ======== ======== ======== Supplemental Schedule of Other Transactions: Cash paid during the year for: Interest.................................................. $ 862 $ 207 $ 616 Income taxes.............................................. $ 19,932 $ 22,702 $ 17,174
The accompanying Notes are an integral part of these consolidated financial statements. 17 20 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following summarizes the significant accounting and financial policies of Catalina Marketing Corporation and Subsidiaries (the "Company") which have been followed in preparing the accompanying consolidated financial statements. Description of the Business. The Company provides targeted marketing services. Through its proprietary network, the Company provides consumer and pharmaceutical product manufacturers and retailers with cost-effective methods of delivering promotional incentives and advertising messages directly to consumers based on their purchasing behavior. Additionally, a majority-owned subsidiary of the Company operates an outdoor media business in Japan. As of March 31, 2000, the Company's network was installed in 13,516 retail stores and 6,671 pharmacies throughout the United States and 2,587 retail stores throughout the United Kingdom, France and Japan. Principles of Consolidation and Preparation. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany transactions are eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of management's estimates. The accounts of the wholly-owned and majority-owned foreign subsidiaries are included as of December 31, which is their fiscal year end. The Company's investment in a non-majority owned company was accounted for on the equity method. Fair Value of Financial Instruments. The book value of all financial instruments approximates their fair value. Cash and Cash Equivalents. Cash and cash equivalents consist of cash and short-term investments. The short-term investments can be immediately converted to cash and are held at their market value. Allowance for Doubtful Accounts. The Company records a provision for estimated doubtful accounts as part of direct operating expenses. As of March 31, 2000 and 1999, the allowance for doubtful accounts was $1,414,000 and $1,197,000, respectively. Inventory. Inventory consists primarily of paper used for promotion printing, as well as card processing inventory for loyalty operations. Inventory is stated at the lower of cost, as determined by the first-in, first-out method, or market. Property and Equipment. Property and equipment are stated at cost. Depreciation of store equipment, billboards and furniture and office equipment is computed using the straight-line method based on the estimated useful lives of the related assets, generally three to eight years. Office equipment includes EDP equipment and software bought and developed for internal use. Third party installation costs, net of amounts reimbursed by the retailer, are capitalized and amortized using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining term of the related lease. Maintenance and repair costs are expensed as incurred. Foreign Currency Translation. Balance sheet accounts are translated at exchange rates in effect at the end of the subsidiaries' year and income statement accounts are translated at average exchange rates for the year. Translation gains and losses are included as a separate component of stockholders' equity. Purchased Intangible Assets, net. Purchased intangible assets include purchased patents and other intangibles arising out of the Company's acquisitions. Purchased intangible assets are amortized over their useful lives (ranging from 7 to 40 years) using the straight line method. 18 21 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition and Deferred Revenue. In accordance with coupon industry practice, the Company generally pre-bills manufacturers for purchased category cycles. The purchase of a category cycle gives a manufacturer the exclusive right to have promotions printed for a particular product category during the applicable period. The Company recognizes in-store electronic marketing service revenues as promotions are printed. Amounts collected prior to printing are reflected as deferred revenue until printing occurs. Loyalty services revenue is recognized when the loyalty cards or mailings are shipped. Income Taxes. Provision for income taxes includes federal, state and foreign income taxes. Deferred income taxes are provided for temporary differences between the recognition of income and expenses for financial reporting purposes and income tax purposes. Research and Development. Research and development costs relating to the development and testing of new service applications are expensed as incurred. Net Income Per Common Share. In fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). Accordingly, diluted and basic earnings per share (EPS) are shown on the face of the accompanying consolidated income statements. The following is a reconciliation of the denominator of basic EPS to the denominator of diluted EPS (in thousands):
MARCH 31, ------------------------ 2000 1999 1998 ------ ------ ------ Basic weighted average common shares outstanding..... 18,537 18,501 18,417 Dilutive effect of options outstanding............... 782 508 609 ------ ------ ------ Diluted weighted average common shares outstanding... 19,319 19,009 19,026 ====== ====== ======
Options to purchase 30,300 shares of common stock at a price of $106 7/8 per share were outstanding at March 31, 2000, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of common stock. Certain reclassifications to the fiscal year 1999 consolidated financial statements have been made to conform with the current year's presentation. NOTE 2. SUPPLEMENTAL BALANCE SHEET INFORMATION Prepaid expenses and other current assets include (in thousands):
MARCH 31, ----------------- 2000 1999 ------- ------- Prepaid billboard rental.................................... $ 9,353 $ 3,812 Investments in deferred compensation plan................... 10,343 8,011 Prepaid income taxes........................................ -- 4,213 Prepaid marketing costs..................................... 2,139 2,500 Other....................................................... 5,490 5,734 ------- ------- Total prepaid expenses and other current assets... $27,325 $24,270 ======= =======
19 22 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Purchased intangible assets, net include (dollars in thousands):
MARCH 31, ----------------- USEFUL LIFE 2000 1999 ----------- ------- ------- (IN YEARS) Patent license and retailer relationships in the United Kingdom................................................ 20 $12,691 $12,691 Goodwill................................................. 20-40 54,913 25,378 Purchased patents........................................ 7-19 8,478 250 Accumulated amortization................................. (5,682) (2,691) ------- ------- Purchased intangible assets, net............... $70,400 $35,628 ======= =======
Accrued expenses include (in thousands):
MARCH 31, ----------------- 2000 1999 ------- ------- Payroll related............................................. $11,127 $ 7,434 Deferred compensation plan.................................. 10,353 8,338 Sales commissions........................................... 4,546 3,895 Payments to acquired companies.............................. 12,083 11,843 Other....................................................... 12,679 11,776 ------- ------- Total accrued expenses............................ $50,788 $43,286 ======= =======
NOTE 3. INCOME TAXES Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax bases of assets and liabilities using the enacted marginal income tax rate in effect for the year in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. Temporary differences for financial statement and income tax purposes result primarily from charges to operations for financial statement reporting purposes which are not currently tax deductible and revenues deferred for financial statement reporting purposes which are currently taxable. The components of the deferred tax asset and liability were as follows (in thousands):
MARCH 31, ----------------- 2000 1999 ------- ------- Deferred Tax Assets: Payroll related............................................. $ 3,813 $ 3,353 Deferred revenue............................................ 6,364 2,899 Provision for doubtful accounts............................. 508 410 Accrued expenses............................................ 3,337 3,097 Net operating loss carryforwards............................ 3,252 2,540 Unconsolidated equity investments........................... 883 1,699 Other....................................................... 157 -- ------- ------- 18,314 13,998 Valuation allowance......................................... 2,173 3,699 ------- ------- Net deferred tax asset............................ $16,141 $10,299 ======= =======
20 23 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
MARCH 31, ----------------- 2000 1999 ------- ------- Deferred Tax Liabilities: Depreciation and amortization............................... $ 8,273 $ 5,423 Prepaid expenses............................................ 3,938 1,367 Investment in consolidated subsidiary....................... 1,426 -- Other....................................................... 421 273 ------- ------- 14,058 7,063 ------- ------- Net deferred tax asset............................ $ 2,083 $ 3,236 ======= =======
The valuation allowance decreased by $1,526,000 during fiscal 2000 due to the recognition of deferred tax assets previously reduced by a valuation allowance. A remaining valuation allowance of $2,173,000 exists as it is more likely than not that net operating loss carryforwards generated by certain foreign subsidiaries and losses of unconsolidated equity investments will not be realized. As of March 31, 2000, various foreign subsidiaries of the Company had aggregate cumulative net operating loss carryforwards for foreign income tax purposes of approximately $5,300,000, which are subject to various income tax provisions of each respective jurisdiction. The net operating losses expire in the calendar years 2000 through 2004. The provision for income taxes consisted of the following (in thousands):
MARCH 31, --------------------------- 2000 1999 1998 ------- ------- ------- Current taxes: Federal................................................. $28,085 $22,865 $16,696 State................................................... 4,291 3,016 2,033 Foreign................................................. 355 381 878 ------- ------- ------- 32,731 26,262 19,607 ------- ------- ------- Deferred taxes: Federal................................................. 2,055 1,423 377 State................................................... 235 131 77 Foreign................................................. (980) 153 (1,003) ------- ------- ------- 1,310 1,707 (549) ------- ------- ------- Provision for income taxes................................ $34,041 $27,969 $19,058 ======= ======= =======
21 24 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The reconciliation of the provision for income taxes based on the U.S. federal statutory income tax rate to the Company's provision for income taxes is as follows (dollars in thousands):
MARCH 31, ----------------------------- 2000 1999 1998 ------- ------- ------- Federal statutory rate................................ 35% 35% 35% Expected federal statutory tax........................ $29,637 $22,952 $18,175 State and foreign income taxes, net of federal benefit............................................. 4,394 2,495 1,346 Effect of foreign subsidiary losses and their tax rates............................................... (786) 753 1,495 Effect of shutdown of Mexican operation............... -- -- (2,566) Amortization of goodwill.............................. 1,000 366 236 Loss on unconsolidated equity investment.............. (732) 1,050 -- Other................................................. 528 353 372 ------- ------- ------- Provision for income taxes.................. $34,041 $27,969 $19,058 ======= ======= =======
NOTE 4. SHORT TERM BORROWINGS AND LONG TERM DEBT The Company's short term borrowings and long term debt consisted of the following (dollars in thousands):
MARCH 31, ---------------- 2000 1999 ------- ------ Credit Agreement, variable interest rates................... $15,000 $ -- Short term borrowings with several Japanese banks and financing agents, interest from 1.16% to 3.3% as of March 31, 2000, (payable in yen)................................ 11,163 2,190 Long term debt (including current portion of long term debt) with several Japanese banks, interest from 2.63% to 6.38% as of March 31, 2000, maturing through July 2004 (payable in yen)................................................... 12,744 6,033 Subordinated convertible note with the Tribune Company, interest at 4.5% per annum................................ 1,400 -- ------- ------ Total debt obligations...................................... 40,307 8,223 Less -- short term borrowings..................... 29,493 4,140 ------- ------ Total long term debt........................................ $10,814 $4,083 ======= ======
Maturities of long term debt are as follows as of March 31, 2000 (in thousands):
AMOUNT ------- 2001........................................................ $ 3,330 2002........................................................ 3,333 2003........................................................ 3,368 2004........................................................ 2,274 2005........................................................ 439 Thereafter.................................................. 1,400 ------- $14,144 =======
Certain debt held by the Company's Japan subsidiary is guaranteed by certain minority shareholders. On September 30, 1997, the Company entered into a $150 million credit agreement (the "Credit Agreement") with a syndicate of commercial banks led by NationsBank, National Association. The Credit 22 25 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Agreement, as amended on August 12, 1998 and February 19, 1999, makes available (i) a $100 million revolving credit facility expiring September 30, 2000, (ii) a $10 million swing line facility expiring September 30, 2000, and (iii) a $50 million line of credit facility expiring September 26, 2000. Amounts borrowed under the swing line facility reduce the availability under the revolving credit facility. At no time may the aggregate principal balance exceed $150 million under the Credit Agreement. As of March 31, 2000, there was $15 million outstanding under the revolving credit facility. The Credit Agreement provides that borrowings accrue interest on a variable basis at (i) the London Interbank Offering Rate (LIBOR) (adjusted for any reserve requirements in force) plus an applicable margin ranging from 50 to 162.5 basis points, or (ii) the base rate, defined in the Credit Agreement as the greater of (a) the prime rate or (b) 50 basis points plus the federal funds rate as defined in the Credit Agreement. The average interest rate for fiscal 2000 and the year end interest rate as of March 31, 2000 was 6.42% and 6.48%. In addition, the Credit Agreement provides for unused facilities fees to accrue at a range of 12.5 to 37.5 basis points per annum multiplied by the unused portions of the revolving credit and line of credit facilities. The Credit Agreement is secured by the common stock or equivalent of several Company subsidiaries, is guaranteed by several Company subsidiaries, and contains certain financial covenants, some of which include limitations on certain indebtedness, maintenance of a certain fixed charge and leverage ratio and other terms and conditions. As of March 31, 2000 the Company was in compliance with all such financial covenants. Effective April 5, 1999, the Tribune Company ("Tribune"), an unrelated entity, made an investment in SuperMarkets Online Holdings, Inc. ("Holdco"), a majority owned subsidiary of the Company. In addition to this equity investment, SuperMarkets Online, Inc. ("SMO"), Holdco's majority owned subsidiary, borrowed $1.4 million from Tribune in exchange for a subordinated convertible note bearing interest at a rate of 4.5 percent per annum. This long term debt obligation is convertible into 500,000 shares of SMO common stock upon certain occurrences including automatic conversion in the event of a qualified public offering in which the aggregate price paid for the common stock offered is at least $25 million. Interest expense was $1,294,000, $651,000 and $956,000 for the years ended March 31, 2000, 1999 and 1998, respectively. NOTE 5. COMMITMENTS AND CONTINGENCIES Rental expense under operating leases was $4,756,000, $2,941,000 and $2,466,000 for the years ended March 31, 2000, 1999 and 1998, respectively. Future minimum rental commitments under operating leases with non-cancelable terms of more than one year (the longest of which expires in 2009) as of March 31, 2000, are as follows: $4,727,000 in 2001, $4,315,000 in 2002, $2,867,000 in 2003, $2,083,000 in 2004, $985,000 in 2005 and $2,892,000 thereafter. As of October 21, 1999, the Company entered into a lease financing agreement for a new corporate headquarters building in St. Petersburg, Florida. The lease term runs through September 2005. The Company has the option to extend the lease term for up to three, five year renewal periods, subject to certain conditions. The agreement includes a purchase option for the Company that approximates the original cost of the building. The Company anticipates that it will occupy the new corporate headquarters building and begin making lease payments in the third quarter of fiscal 2001. The present value of the future minimum lease payments for the new facility, net of future minimum lease payments for the old corporate headquarters building (included above), as of March 31, 2000, are as follows: $632,000 in 2001, $688,000 in 2002, $609,000 in 2003, $757,000 in 2004, $1,131,000 in 2005, and $15,749,000 thereafter. The Company is involved in certain litigation arising out of the Company's business, including litigation initiated by the Company to protect its intellectual property or to defend itself against claims brought on by others. Additionally, the Company is in the appeals phase in a sales tax case with a state taxing authority. In 23 26 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) the opinion of management, the ultimate outcome of this litigation will not have a material adverse effect on the Company's financial condition, or results of operations. NOTE 6. STOCK-BASED COMPENSATION PLANS The Company has a stock option plan, the 1989 Incentive Stock Option Plan (the "1989 Plan"), which expired on April 26, 1999 and was replaced with the 1999 Incentive Stock Option Plan ("the "1999 Plan"); a stock grant plan, the Catalina Marketing Corporation 1992 Director Stock Grant Plan (the "Grant Plan"); and an employee stock purchase plan, the Employee Payroll Deduction Stock Purchase Plan (the "Purchase Plan"). 1989 Incentive Stock Option Plan. The 1989 Plan was approved by the Board of Directors in April 1989, and approved by the stockholders in July 1989. Pursuant to the 1989 Plan, 5,750,000 shares of the Company's common stock were reserved for issuance upon the exercise of options granted under the 1989 Plan. Options to purchase an aggregate of 5,445,191 shares were granted, net of cancellations, under the 1989 Plan, of which options to purchase 2,380,008 shares were outstanding on March 31, 2000. The 1989 Plan provided for grants of Incentive Stock Options ("ISOs") to employees (including employee directors). Options granted under the 1989 Plan generally became exercisable at a rate of 25 percent per year (20 percent per year for initial grants to new employees), commencing one year after the date of grant and generally had terms of five to ten years. In 1999, the 1989 Plan was amended to prospectively change the permissible term of newly granted options to up to ten years. Certain options under the 1989 Plan, which have been granted to certain executives of the Company, vest after 8 years and have an accelerated vesting schedule based upon the Company reaching specified earnings per share targets. The exercise price of all ISOs granted under the 1989 Plan was required to be at least equal to the fair market value of the shares on the date of grant. 1999 Incentive Stock Option Plan. The 1989 Plan expired on April 26, 1999. The 1999 Plan was approved by the Board of Directors in April 1999 and, approved by the stockholders in July 1999. Pursuant to the 1999 Plan, 1,600,000 shares of the Company's common stock are reserved for issuance upon the exercise of options granted under the 1999 Plan. Options to purchase an aggregate of 278,350 shares have been granted, net of cancellations, under the 1999 Plan, all of which were outstanding on March 31, 2000. The 1999 Plan provides for grants of Incentive Stock Options ("ISOs") to employees (including employee directors). Options granted under the 1999 Plan generally become exercisable at a rate of 25 percent per year (20 percent per year for initial grants to new employees), commencing one year after the date of grant and generally have terms of up to ten years. Certain options under the 1999 Plan, which have been granted to certain executives of the Company, vest after 8 years and provide for accelerated vesting based upon the Company reaching specified earnings per share targets. The exercise price of all ISOs granted under the 1999 Plan must be at least equal to the fair market value of the shares on the date of grant. Aggregate Stock Option Activity. As of March 31, 2000, options to purchase an aggregate of 3,072,038 shares had been exercised, including options to purchase 10,000 shares granted outside of any plan; options to purchase an aggregate of 2,668,358 shares were outstanding, including options to purchase 10,000 shares outside of any plan; and 1,321,650 shares remained available for future grants under the 1999 Plan. Of the options outstanding at March 31, 2000 and at March 31, 1999, options to purchase 389,838 and 450,202 shares respectively, were immediately exercisable, with weighted average exercise prices of $38.45 and $32.34, respectively. 24 27 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Stock option activity for the years ended March 31, 1998, 1999 and 2000 is as follows:
WEIGHTED NUMBER AVERAGE OF SHARES OPTION PRICES --------- ------------- Options outstanding at March 31, 1997....................... 2,135,420 $28.37 Option activity: Granted................................................... 462,220 28.78 Exercised................................................. (549,187) 20.02 Canceled or expired....................................... (339,483) 32.07 --------- ------ Options outstanding at March 31, 1998....................... 1,708,970 30.43 Option activity: Granted................................................... 1,574,140 62.06 Exercised................................................. (517,163) 23.72 Canceled or expired....................................... (154,792) 34.30 --------- ------ Options outstanding at March 31, 1999....................... 2,611,155 50.60 --------- ------ Option activity: Granted................................................... 529,534 87.76 Exercised................................................. (411,320) 31.42 Canceled or expired....................................... (61,011) 57.47 --------- ------ Options outstanding at March 31, 2000....................... 2,668,358 $60.77 ========= ======
1992 Director Stock Grant Plan. The Grant Plan provides for grants of common stock to non-employee board members. A total of 100,000 shares of the Company's stock was authorized for issuance under this plan. As of March 31, 2000, 38,454 shares have been granted and 5,534 shares have been canceled leaving 67,080 shares available for future grants under the Grant Plan. Stock granted under the Grant Plan vests ratably in annual installments over each director's remaining term as a director. Employee Stock Purchase Plan. In July 1994, the Purchase Plan was adopted by the Board of Directors and approved by the stockholders. Pursuant to the Purchase Plan, 300,000 shares of the Company's common stock were reserved for issuance. For the fiscal years ended March 31, 2000, 1999 and 1998, 18,958, 24,516 and 28,709 shares were purchased, respectively. Total shares available for future grant total 166,126 as of March 31, 2000. Under the Purchase Plan, employees may purchase Company common stock at 85 percent of the market price on the first or last day of an offering period. The maximum each employee may purchase in an offering period shall not exceed $12,500 in market value of Company common stock. The Company will typically have two six-month offering periods each year. The Purchase Plan qualifies under Section 423 of the Internal Revenue Code of 1986. The Company accounts for the option, stock grant and stock purchase plans under APB Opinion No. 25, under which $187,818, $155,366 and $155,926 for the fiscal years ended March 31, 2000, 1999 and 1998, respectively, in compensation expense has been recognized. The Company has adopted Statement of Financial Accounting Standards No. 123 (SFAS No. 123) for disclosure purposes. For SFAS No. 123 purposes, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in fiscal 1998: risk-free interest rates ranging from 5.26 to 6.86 percent depending on the date of grant; expected dividend yield of zero percent; expected life of five years; and expected volatility of 33.68 percent. The assumptions used for the grants in fiscal 1999 are: risk-free interest rates ranging from 4.43 to 5.65 percent depending on the date of grant; expected dividend yield of zero percent; expected life of five to eight years; and expected volatility of 39.99 percent. The assumptions used for grants in fiscal 2000 are: risk-free interest rates ranging from 5.17 to 6.76 percent depending on the date of 25 28 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) grant; expected dividend yield of zero percent; expected life of five years to eight years; and expected volatility of 42.17 percent. The fair values of options granted in fiscal 2000, 1999 and 1998 are, $18,999,941, $37,193,274 and $4,877,647 respectively, which would be amortized as compensation over the vesting period of the options.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------- --------------------------------------- OUTSTANDING WEIGHTED AVERAGE EXERCISABLE RANGE OF AS OF REMAINING WEIGHTED AVERAGE AS OF WEIGHTED AVERAGE EXERCISE PRICES MARCH 31, 2000 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 2000 EXERCISE PRICE --------------- ------------------- ------------------- ------------------- ----------------- ------------------- $15.50-$25.00 65,712 1.0 $ 21.96 54,112 $21.72 $25.01-$50.00 504,217 2.0 33.41 205,987 33.67 $50.01-$75.00 1,582,706 7.2 62.30 129,739 53.03 $75.01-$100.00 486,123 9.3 86.62 -- $100.01-$106.87 29,600 9.3 106.87 -- --------- ------- 2,668,358 389,838 ========= =======
Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share data):
MARCH 31, ----------------------------- 2000 1999 1998 ------- --------- ------- Net Income: As Reported............................................. $51,348 $37,608 $32,871 Pro Forma............................................... 35,880 31,517 28,410 Basic EPS: As Reported............................................. 2.77 2.03 1.78 Pro Forma............................................... 1.94 1.70 1.54 Diluted EPS: As Reported............................................. 2.66 1.98 1.73 Pro Forma............................................... 1.86 1.66 1.49
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to April 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Additionally, the pro forma amounts include approximately $396,000, $303,000 and $358,000 related to the purchase discount offered under the Purchase Plan for fiscal 2000, 1999 and 1998, respectively. NOTE 7. STOCKHOLDER PROTECTION PLAN The Company has adopted a Stockholder Protection Plan. To implement this plan, the Company declared a dividend of one Preferred Share Purchase Right on each outstanding share of the Company's common stock. The dividend distribution was payable to stockholders of record on May 12, 1997. The rights will be exercisable for fractions of a share of the Company's Series X Junior Participating Preferred Stock only if a person or group acquires 15 percent or more of the Company's common stock or announces or commences a tender offer for 15 percent or more of the common stock, except for certain instances defined in the Stockholder Protection Plan. NOTE 8. SAVINGS PLANS On June 1, 1992, the Company adopted a 401(k) Savings Plan. The Company's contributions during fiscal 2000, 1999 and 1998 were $1,047,000, $840,000 and $635,000, respectively. 26 29 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) On January 1, 1992, the Company adopted a non-qualified deferred compensation plan (the "Deferred Compensation Plan"). The Deferred Compensation Plan is designed to permit select employees and directors of the Company to defer a portion of their compensation. Effective July 1, 1996, the Deferred Compensation Plan was amended and restated allowing participants to elect deferral of certain types of compensation, including directors fees, stock grants under the Grant Plan and shares issuable upon the exercise of stock options, into stock units in the Deferred Compensation Plan each of which represents a share of Company common stock, and creating the Catalina Marketing Corporation Deferred Compensation Trust (the "Trust"). Amounts deposited in stock unit accounts are distributed in the form of shares of Company common stock upon a payment event. Through the Trust, investment options such as mutual funds and money market funds are available to participants. The investment in the Deferred Compensation Plan and related liability are included in prepaid expenses and other current assets and accrued expenses of the consolidated balance sheets, respectively. The Company determined all of its Deferred Compensation Plan investments currently held in mutual funds and money market funds are trading securities and as such are reported at fair value. Realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, recognized in net income during fiscal 2000, 1999 and 1998 were not significant. Stock units are initially recorded at fair value. NOTE 9. SEGMENT INFORMATION In fiscal 1999 the Company adopted the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). This statement establishes new standards for reporting information about operating segments and related disclosures. All prior period information has been restated to conform to this statement. The Company operates through individual operating units which share similar economic characteristics, customers, distribution channels, products and services and production processes. As a result, the Company has aggregated its operating units and product lines into a single reporting segment of Targeted Marketing Services. The Company's accounting policies for segments are the same as those described in Note 1. Management evaluates segment performance based on net income/(loss). Reportable segment information is as follows:
FOR THE FISCAL YEAR ENDED MARCH 31, ------------------------------------------------------------------------------ 2000 1999 1998 ------------------------ ------------------------ ------------------------ TARGETED TARGETED TARGETED MARKETING MARKETING MARKETING SERVICES ELIMINATIONS SERVICES ELIMINATIONS SERVICES ELIMINATIONS --------- ------------ --------- ------------ --------- ------------ Revenue from external customers............ $350,922 $264,783 $217,150 Revenue from internal sources.............. 2,163 (2,163) 3,026 (3,026) 2,121 (2,121) Net interest income (expense)............ (587) 231 (493) Depreciation and amortization......... 35,175 27,342 23,703 Provision for income taxes................ 34,041 27,969 19,058 Net income............. 51,348 37,608 32,871 Segment assets......... 303,752 221,047 157,066 Expenditures for long lived assets......... 58,821 41,455 23,561
27 30 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenue and long lived assets by geographic area are as follows:
FOR THE FISCAL YEAR ENDED MARCH 31, ------------------------------------ 2000 1999 1998 ---------- ---------- ---------- Revenue from external customers United States........................................ $298,650 $228,806 $187,367 Foreign.............................................. 52,272 35,977 29,783 Long lived assets United States........................................ $ 88,738 $ 68,932 $ 57,758 Foreign.............................................. 29,242 21,130 13,630
NOTE 10. ACQUISITIONS AND OTHER Effective July 1, 1999, the Company acquired certain assets and assumed certain liabilities of Alliance Research, an attitudinal research company, for $6.7 million in initial consideration, net of cash and cash equivalents acquired. Terms of the purchase agreement call for the Company to make a series of payments, which are contingent upon future operating performance of the business purchased from Alliance Research. Effective April 21, 1999, the Company through one of its wholly owned subsidiaries, acquired one of its vendors, CompuScan, the technology for the Checkout Prizes(R) application, for $9.1 million in initial cash consideration, net of cash acquired, by means of a merger transaction. Terms of the merger agreement call for the Company to make a series of additional payments, which are based on specified future revenue growth targets of the Checkout Prizes(R) product. Effective January 4, 1999, the Company acquired 100 percent of the outstanding common shares of Dynamic Controls, Inc., which offers card-based loyalty marketing programs for retailers for $4.6 million in initial cash consideration, net of cash acquired. Terms of the purchase agreement call for the Company to make an initial down payment and a series of payments, which are based upon specified future revenue growth. Effective December 30, 1998, the Company purchased from its minority stockholders the remaining ownership of Catalina Marketing of France, Inc. Catalina Marketing of France, Inc. owns substantially all of the outstanding stock of Catalina Marketing de France, S.A., the French operating company. Terms of the purchase agreement call for the Company to make an initial down payment and a series of payments to the minority stockholders, which are contingent upon the future operating performance of Catalina Marketing de France, S.A. Effective July 13, 1998, the Company acquired 100 percent of the outstanding common shares of Market Logic, a full service targeted marketing company that specializes in the development and fulfillment of highly sophisticated, personalized, direct marketing programs for retailers, for $1.7 million in initial cash consideration, net of cash acquired. Terms of the purchase agreement call for the Company to make a series of payments, which are contingent upon the future operating performance of Market Logic. The above referenced acquisitions have been accounted for using the purchase method of accounting for acquisitions and, accordingly, the results of operations of each acquisition have been included in the fiscal 2000, 1999 and 1998 consolidated financial statements since the date of such acquisition. On April 5, 1999, Tribune invested $5.6 million in a majority owned subsidiary of the Company, Holdco, in exchange for 1,900,000 shares of Holdco's common stock, and also purchased a subordinated convertible note in SMO, Holdco's majority owned subsidiary, in the principal amount of $1.4 million. Holdco through SMO, provides consumers a ValuPage(SM) product or a shopping list of offers which can be accessed by visiting www.valupage.com. 28 31 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11. RELATED PARTY TRANSACTIONS On March 15, 2000, the Company loaned an Executive Officer of the Company $1.1 million for relocation purposes. This amount is included in Accounts Receivable, net, on the March 31, 2000 balance sheet. The loan is payable on demand and interest accrues beginning on September 15, 2000 at 6.5 percent per annum. NOTE 12. EFFECT OF SFAS NO. 133 In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133, as amended, is effective for financial statements relating to fiscal years beginning after June 15, 2000. The Company expects SFAS No. 133 to have no effect on its financial statements. NOTE 13. SUBSEQUENT EVENT (UNAUDITED) On April 27, 2000, the Company announced that its Board of Directors had approved a three-for-one stock split of the outstanding common stock to be effected in the form of a stock dividend. The stock split is contingent on the approval of the stockholders of the Company at the annual meeting on July 18, 2000 of an increase in the authorized common shares. The stock dividend will be payable August 17, 2000, to stockholders of record on July 26, 2000. 29 32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ITEM 11. EXECUTIVE COMPENSATION. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information called for by Items 10, 11, 12 and 13 will be contained in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders under the captions "Compensation of Executive Officers and Non-Employee Directors," "Share Ownership of Certain Beneficial Owners and Management" and "Nomination and Election of Directors" and is incorporated herein by reference. The definitive Proxy Statement will be filed with the Commission prior to June 30, 2000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
PAGE ---- (a)1. Financial Statements. The following is a list of the Consolidated Financial Statements included in Item 8 of Part II. Report of Independent Certified Public Accountants.......... 13 Consolidated Income Statements, Years Ended March 13, 2000, 1999 and 1998............................................. 14 Consolidated Balance Sheets at March 31, 2000 and 1999...... 15 Consolidated Statements of Stockholders' Equity, Years Ended March 31, 2000, 1999 and 1998............................................. 16 Consolidated Statements of Cash Flows, Years Ended March 31, 2000, 1999 and 1998....................................... 17 Notes to the Consolidated Financial Statements.............. 18 (a)2. Financial Statement Schedules (EDGAR only). All other schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (a)3. Index to Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT ------- ----------------------- *3.3 -- Restated Certificate of Incorporation **3.3.1 -- Certificate of Amendment of Certificate of Incorporation, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 **3.3.2 -- Certificate of Designation, Preferences and Rights setting forth the terms of the Company's Series X Junior Participating Preferred Stock, par value $.01 per share, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 *3.4 -- Restated Bylaws **10.4 -- Amended and Restated 1989 Stock Option Plan, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1994 **10.4.1 -- Second Amended and Restated 1989 Stock Option Plan, a copy of which is attached as an exhibit to the Company's Report on Form 10Q for the quarter ended June 30, 1997
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EXHIBIT NO. DESCRIPTION OF DOCUMENT ------- ----------------------- **10.4.2 -- Third Amended and Restated 1989 Stock Option Plan, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1999 *10.12 -- Form of Director and Officer Indemnification Agreement **10.18 -- Lease Agreement dated as of June 30, 1993 by and between QP One Corporation, a Minnesota corporation, as landlord, and Registrant, as tenant, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1994 **10.18.1 -- First Amendment dated as of December 20, 1993, to the Lease Agreement dated as of June 30, 1993, by and between QP One Corporation, a Minnesota corporation, as landlord, and Registrant, as tenant, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1994 **10.21 -- 1992 Director Stock Grant Plan, as amended on July 23, 1996, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 **10.22 -- Employee Payroll Deduction Stock Purchase Plan, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1995 **10.24 -- Lease Agreement dated as of September 5, 1996 by and between Interior Design Services, Inc., a Florida corporation, as landlord, and Registrant, as tenant, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 **10.25 -- Stockholder Protection Agreement, dated May 8, 1997, between the Registrant and ChaseMellon Shareholder Services, L.L.C., as rights agent, a copy of which is attached as an exhibit to the Company's Current Report on Form 8-K filed on May 8, 1997 **10.26 -- Credit Agreement dated as of September 30, 1997, by and between the Registrant and NationsBank, National Association, as agent and lender, and the other lenders party thereto, a copy of which is attached as an exhibit to the Company's Report on Form 10Q for the quarter ended September 30, 1997 **10.26.1 -- First amendment dated as of August 12, 1998, to the Credit Agreement dated as of September 30, 1997, by and between the Registrant and NationsBank, National Association, as agent and lender, and other lenders party thereto, a copy of which is attached as an exhibit to the Company's Report on Form 10Q for the quarter ended September 30, 1998 **10.26.2 -- Second Amendment dated as of February 19, 1999, to the Credit Agreement dated as of September 30, 1997, by and between the Registrant and Nationsbank, National Association, as agent and lender, and the other lenders party thereto, a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended September 30, 1999 **10.27 -- 1999 Stock Option Plan, a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended June 30, 1999 **10.28 -- Lease Agreement dated as of October 21, 1999 by and between First Security Bank, National Association, as the owner trustee under Dolphin Realty Trust 1999-1, as lessor, and Catalina Marketing Sales Corporation, as lessee, a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended September 30, 1999 **10.29 -- Participation Agreement dated as of October 21, 1999 among Catalina Marketing Sales Corporation, as lessee; the Registrant, as guarantor; First Security Bank, National Association, as the owner trustee under Dolphin Realty Trust 1999-1, as lessor and borrower; the various banks and other lending institutions and First Union National Bank, as the agent for the lenders, a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended September 30, 1999
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EXHIBIT NO. DESCRIPTION OF DOCUMENT ------- ----------------------- **10.30 -- Purchase and Sale Agreement dated as of October 21, 1999 by and among 200 Carillon, LLC, as seller, Echelon International Corporation, as developer, and Catalina Marketing Sales Corporation, as buyer, a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended September 30, 1999 21 -- List of subsidiaries 23 -- Consent of independent certified public accountants 27 -- Financial Data Schedule -- (for SEC use only)
--------------- * Incorporated by reference to the Company's Registration Statement on Form S-1 Registration No. 33-45732, originally filed with the Securities and Exchange Commission on February 14, 1992, and declared effective (as amended) on March 26, 1992. ** Previously filed as indicated. 32 35 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ST. PETERSBURG, STATE OF FLORIDA, ON JUNE 16, 2000. CATALINA MARKETING CORPORATION (Registrant) By: /s/ JOSEPH P. PORT ------------------------------------ Joseph P. Port, Senior Vice President and Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ GEORGE W. OFF Chairman of the Board June 16, 2000 ----------------------------------------------------- George W. Off /s/ DANIEL D. GRANGER President, Chief Executive June 16, 2000 ----------------------------------------------------- Officer Daniel D. Granger and Director /s/ FRANK H. BARKER Director June 16, 2000 ----------------------------------------------------- Frank H. Barker /s/ FREDERICK W. BEINECKE Director June 16, 2000 ----------------------------------------------------- Frederick W. Beinecke /s/ PATRICK W. COLLINS Director June 16, 2000 ----------------------------------------------------- Patrick W. Collins /s/ STEPHEN L. D'AGOSTINO Director June 16, 2000 ----------------------------------------------------- Stephen L. D'Agostino /s/ EVELYN FOLLIT Director June 16, 2000 ----------------------------------------------------- Evelyn Follit /s/ THOMAS W. SMITH Director June 16, 2000 ----------------------------------------------------- Thomas W. Smith /s/ MICHAEL B. WILSON Director June 16, 2000 ----------------------------------------------------- Michael B. Wilson /s/ JOSEPH P. PORT Senior Vice President and Chief June 16, 2000 ----------------------------------------------------- Financial Officer Joseph P. Port /s/ CHRISTOPHER W. WOLF Vice President and Treasurer June 16, 2000 ----------------------------------------------------- (Principal Accounting Officer) Christopher W. Wolf
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