-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QK73q4LRHW4JUcoBeRU9rKSxspO29zGIdoe6QM7eY6Hfyy84OzK324flxUlkwyci 6V0NbZZE1lKUt5xOZVnmEw== 0000950144-01-503827.txt : 20010625 0000950144-01-503827.hdr.sgml : 20010625 ACCESSION NUMBER: 0000950144-01-503827 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010331 FILED AS OF DATE: 20010622 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CATALINA MARKETING CORP/DE CENTRAL INDEX KEY: 0000883977 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING AGENCIES [7311] IRS NUMBER: 330499007 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11008 FILM NUMBER: 1665376 BUSINESS ADDRESS: STREET 1: 11300 9TH ST NORTH CITY: ST PETERSBURG STATE: FL ZIP: 33716 BUSINESS PHONE: 8135795000 MAIL ADDRESS: STREET 1: 11300 9TH STREET NORTH CITY: ST PETERSBURG STATE: FL ZIP: 33716-2329 10-K 1 g69758e10-k.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, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO ________ COMMISSION FILE NUMBER: 1-11008 CATALINA MARKETING CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 33-0499007 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 200 CARILLON PARKWAY, ST. PETERSBURG, FLORIDA 33716-2325 (Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (727) 579-5000 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ---------------- Common Stock, $0.01 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of such stock as of April 23, 2001, as reported by the New York Stock Exchange, Inc., was $1,861,829,831. The number of shares of Registrant's common stock, par value $0.01 per share, outstanding as of April 23, 2001, was 55,593,605. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of Registrant's Definitive Proxy Statement for 2001 are incorporated by reference in Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 evolution of the Company's product lines has resulted in a single targeted marketing services organization with interrelated operating groups, which engages consumers to influence their purchase decisions. As of March 31, 2001, the Company employed 1,637 people reporting into 29 offices throughout the United States, Europe and Asia. TARGETED MARKETING SERVICES Catalina Marketing Corporation was founded in 1983 to provide consumers with in-store targeted coupons. Employing data mining technology from the Company's in-store Network (the "Catalina Marketing Network(R)"), Catalina Marketing now offers in-store, online and at-home reach to provide its strategic marketing solutions. These solutions are purchase-based, individually customized communications and promotions for manufacturers and retailers that increase sales through incentives, loyalty programs, sampling and advertising messages. The Company's services enable retailers and manufacturers to impact purchase decisions before, during and after the purchase using a variety of strategic, targeted programs. The primary service line of the Catalina Marketing Network is the in-store delivery of incentives at the checkout lane. Catalina Marketing links its proprietary software, computers, central databases and specially designed thermal printers with a retailer's point-of-sale controllers and scanners. The system prints customized promotion certificates at the point of sale based on product Universal Product Codes ("UPC") or other scanned information. The printed promotions are handed to consumers by the cashier at the end of the shopping transaction. Catalina Marketing contracts with manufacturers and retailers to print promotions and receives a fee for each promotion printed. Catalina Marketing enters into agreements with retail chains to install the Catalina Marketing Network in all or selected stores within the chain, either regionally or nationally. Upon installation, the retailer pays a one-time fee for each installation and generally agrees to use the Network in its store for a minimum of five years. Catalina Marketing pays distribution fees to, and exchanges services with the retailer based on the number of manufacturer promotions printed. The equipment installed in each retail store consists of a thermal printer at each checkout lane linked by a personal computer on premises to the retailer's point-of-sale controller and scanning equipment. Catalina Marketing operates two United States data processing facilities that communicate via modem with the personal computers installed in the stores to send promotional instructions and retrieve performance data. All of the equipment and supplies, including computers, printers and paper, used in a retail installation are purchased through outside sources. While there are currently a few primary suppliers, Catalina Marketing believes that alternate sources of supply are available without material interruptions of the Company's business. The services of the Catalina Marketing Network are driven by proprietary software. The software design is flexible and upgradable, supporting new applications that are developed and implemented on a continuous basis. This flexibility allows the network to expand and evolve as industry or customer requirements change. SERVICES Catalina Marketing offers its core programs and services through the Catalina Marketing Network, which is operated mainly in supermarkets. These targeted marketing solutions, including discount coupons, loyalty marketing programs, sampling, advertising, in-store instant-win games and other incentives, are delivered directly to shoppers based on their actual purchase behavior. By specifying which purchases will "trigger" a promotion to print, manufacturers and retailers can deliver customized incentives and messages to only the 1 4 consumers they wish to reach. An integrated program of applications is designed to reach shoppers before, during and after the purchase. Each application is designed to meet specific objectives of consumer packaged goods manufacturers and supermarket retailers. Loyalty programs allow manufacturers and retailers to target specific households based on 52 weeks of past purchase data. For retailers, loyalty programs include frequent shopper card production and data management. Sampling programs target consumers based on either current purchase behavior or through a household-level database and deliver samples upon request. Samples can be full or trial-sized and delivered in-store or at home. Advertising programs allow manufacturers to reach a captive audience through a toll-free number, announcement or message delivered at the checkout stand. In-store instant-win games are tied-in with the retailer by offering a chance to win instantly at the checkout stand based on products that are purchased. Couponing programs, such as Checkout Coupon(R) and Checkout Direct(R), use patented UPC-based scanner technology to target consumers and distribute coupons at checkout based on actual purchase behavior. Catalina Marketing offers 13 four-week cycles of time on the Catalina Marketing Network each year for more than 650 product categories, such as coffee, baby food and frozen entrees. Exclusive rights to product categories are generally given to the purchasers of specific cycle or cycles in particular product categories, and for national programs, a right of first acceptance to purchase the same cycles in the subsequent year is given to the manufacturer who purchased the earlier cycles. The primary revenue source of the Catalina Marketing Network is a function of total promotions printed based on a promotion charge, with a minimum category fee based on shopper reach of the network and category unit volume. Redemption processing of these promotions is similar to that of traditional manufacturer coupons. Retailers provide discounts to consumers who present the coupons, send redeemed coupons to clearinghouses, and receive reimbursements for the discounts provided and handling fees from the manufacturers. Retail loyalty marketing services offer targeted direct mail marketing services through Market Logic, Inc. ("Market Logic"), acquired in July 1998, and loyalty card production services through the Company's facilities based in Manasquan, New Jersey (formerly Dynamic Controls, Inc. or DCI acquired in January 1999). Retail loyalty marketing services also provides data collection services, data storage services, data mining services and report processing services through the Company's facilities based in St. Petersburg, Florida. Catalina Marketing's core domestic product lines, described above, contributed approximately 74 percent of the Company's revenues in fiscal 2001, 74 percent in fiscal 2000, and 80 percent in fiscal 1999. In the United States as of March 31, 2001, the Catalina Marketing Network was installed in 15,475 retail stores reaching more than 185 million shoppers weekly. The international operations of Catalina Marketing provide in-store electronic marketing services for consumers in Europe and Asia. The Company's current presence in Europe is in the United Kingdom, France, and Italy. In Asia, the Company currently operates in Japan. As of March 31, 2001, the Company had installed its network in nearly 2,200 supermarket retailers in Europe, and its weekly shopper reach was approximately 19.8 million. In Asia, where the Company provides outdoor media services, in addition to in-store electronic marketing services, two of the top five general merchandise stores have partnered with Catalina Marketing, including Jusco and Seiyu, for a weekly shopper reach now totaling nearly 9.8 million in 447 retail outlets as of March 31, 2001. Developing product lines include the services provided by Health Resource Publishing ("HRP"), SuperMarkets Online ("SMO") and Alliance Research ("ARI"). HRP, formed in fiscal 1995, uses an in-store prescription-based targeting technology to provide direct-to-consumer and targeted information services advertising to pharmacy customers based on their individual pharmacy purchases or other related patient information. The Health Resource(R) newsletter is triggered by the National Drug Code found on all prescription drugs. When a prescription is processed, a customized newsletter with prescription information, therapeutically relevant editorial and product advertising material is printed and handed to the customer along with the prescription. On June 1, 2000, the Company, through one of its wholly-owned subsidiaries, acquired 2 5 HealthCare Data Corporation ("HDC"), a company likewise engaged in direct to consumer and targeted information resources advertising to pharmacy customers. The acquisition of HDC, together with the organic growth of the Health Resource Network, enabled HRP to expand its networks to 12,578 pharmacy outlets as of March 31, 2001. SMO, originally tested in fiscal 1996, provides the industry's leading online secure coupon format through its ValuPage(SM) service at www.valupage.com. The ValuPage service was rolled out nationally in January 1998 and makes use of a bar code that, when printed at home and presented at the checkout lane of more than 13,461 participating supermarkets, along with the promoted items, issues redeemable coupons, or "Web Bucks", from in-store printers, which are cash rewards that consumers use to save on their next visit to the store. SMO also offers a ValuPage e-mail service that delivers ValuPage coupons and other consumer packaged goods promotions directly to a shopper's e-mail in-box. ARI, acquired in July 1999, provides research products on consumer attitudes. Research has developed a suite of proprietary techniques for attitudinal research through the application of emerging technologies. These technologies include Interactive Voice Response, which allows consumers to respond to surveys via automated telephone services, and VOCALS(R), which digitally records actual voice responses in telephone surveys. On September 1, 2000, the Company acquired Market Intelligence, Inc. ("MI"), an attitudinal research company, to supplement its internal growth plans and strategies. The business operations of MI have been integrated with ARI, the combination in which are referred to herein as "Research." SALES AND MARKETING The Company has a manufacturer sales force and a retail sales and marketing force, both working on providing the Company's targeted marketing services to its customers. The combined manufacturer and retail sale forces provide a coordinated sales approach to each client in order to offer tailored targeted marketing solutions. Manufacturer Sales Force. The primary focus of the Company's marketing effort is to attract national consumer packaged goods and prescription medication manufacturers to purchase category cycles. The sales and client service force of Catalina Marketing focus on current and prospective customers, and work with them on a consultative basis to develop and implement customized, targeted marketing programs that fit each brand's strategies and objectives. Retail Sales and Marketing Force. Catalina Marketing has two goals for its retail sales and marketing force. The first is to continue expansion of its distribution channel by installing stores and pharmacies in major markets that are not currently part of the Catalina Marketing Network or the Health Resource Network. Expansion of Health Services Marketing is achieved through the addition of new major pharmacy chains. The second is to encourage currently installed retailers to use the Company's full-service retail loyalty marketing services, as well as Network-generated incentives to promote private label brands or high-margin departments. RESEARCH AND DEVELOPMENT The Company's expenditures for research and development are generally for market research, software development, system upgrades and pilot-project execution to create, test and support new applications for the Catalina Marketing Network. Catalina Marketing believes that new service and application development, along with market expansion, are vital to maintain its continued growth. COMPETITION Competition in the marketing services business is intense and includes many competitors. Catalina Marketing competes for manufacturers' advertising and consumer promotion budgets with a wide range of media, including television, radio, print and direct mail advertising, as well as several alternative in-store and point-of-sale programs. Within the coupon industry, the Company competes with various traditional coupon delivery methods that are less expensive per delivered coupon, including free-standing inserts ("FSI"), newspapers, direct mail, magazines and in- or on-product packaging, as well as other "in-store" marketing 3 6 companies that use a variety of coupon, promotion or advertising delivery methods. Catalina Marketing competes for advertising and promotional dollars based on the efficiency of the Catalina Marketing Network, its ability to accurately and effectively target potential customers, the number of shoppers reached, and the general ability to influence consumer buying behavior. EMPLOYEES Catalina Marketing employed 1,637 people as of March 31, 2001, approximately 1,293 which were full-time. No employees are covered by a collective bargaining arrangement. More than 1,450 of the Company's employees are employed in the United States, with approximately 23 percent of the United States employees based in the St. Petersburg, Florida headquarters. PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS Catalina Marketing currently holds 159 United States and foreign patents relating to Catalina Marketing products and services and has patent applications pending. These patents provide a competitive advantage; accordingly the Company will vigorously defend its proprietary rights in all appropriate circumstances. While patent position is important, Catalina Marketing believes its ability to market its services to retailers and manufacturers, and to develop new products, will be the major factors affecting its future performance. Catalina Marketing also believes that product recognition is an important competitive factor in the electronic marketing and promotion industry. Accordingly, the Company promotes its service marks and trademarks in connection with its product and marketing activities. It also regards certain computer software in the Catalina Marketing Network and each additional service application as proprietary and protects such software, as appropriate through copyrights, trade secret laws, non-disclosure agreements and internal security measures. Such methods may not afford complete protection, and there can be no absolute assurance that others will not independently develop such know-how, concepts or ideas. ITEM 2. PROPERTIES In November 2000, the Company moved into its new headquarters facility, which includes its principal administrative, marketing, information technology and product development offices, and is located in 142,857 square feet of leased space in St. Petersburg, Florida. The Company leases an additional 24 sales and support offices across the United States, consisting of approximately 212,000 square feet in the aggregate, and four offices for its foreign operations. The Company believes that the new headquarters facility along with the existing sales and support offices are adequate to meet current requirements and that suitable additional space will be available as needed to accommodate growth of its operations and additional sales and support offices for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Catalina Marketing is involved in certain litigation arising out of the Company's business, including litigation initiated by the Company to protect its intellectual property or to defend itself against claims brought on by others. Additionally, the Company is in the appeals phase in a sales tax case with a state taxing authority. In the opinion of management, the ultimate outcome of this litigation will not have a material adverse effect on the Company's financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 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 2001: March 31, 2001............................................ $36.31 $29.81 December 31, 2000......................................... 40.00 36.00 September 30, 2000........................................ 44.00 33.88 June 30, 2000............................................. 36.10 29.50 Fiscal 2000: March 31, 2000............................................ $37.83 $27.10 December 31, 1999......................................... 40.23 27.25 September 30, 1999........................................ 35.63 24.67 June 30, 1999............................................. 32.48 26.58
Stock prices reflect the effect of the 3-for-1 stock split in Fiscal 2001. B. Stockholders As of March 31, 2001, there were approximately 755 registered holders of shares of Common Stock. C. Dividends The Company has not paid any cash dividends to date, and there are no current plans to pay a cash dividend in the future. 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, ---------------------------------------------------- 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income Statement Data: Revenues.................................. $417,881 $350,922 $264,783 $217,150 $172,143 Costs and expenses: Direct operating expenses.............. 174,237 142,229 110,167 84,191 62,482 Selling, general and administrative.... 106,382 88,247 59,363 56,364 48,379 Depreciation and amortization.......... 43,243 35,175 27,342 23,703 17,939 -------- -------- -------- -------- -------- Total costs and expenses.......... 323,862 265,651 196,872 164,258 128,800 -------- -------- -------- -------- -------- Income from operations.................... 94,019 85,271 67,911 52,892 43,343 Interest income (expense) and other, net.................................... (2,081) (595) (2,334) (963) 1,224 Provision for income taxes................ (34,945) (34,041) (27,969) (19,058) (17,880) Minority interest in losses of subsidiaries........................... 1,142 713 -- -- 554 -------- -------- -------- -------- -------- Net income........................ $ 58,135 $ 51,348 $ 37,608 $ 32,871 $ 27,241 ======== ======== ======== ======== ======== Diluted net income Per common share.......................... $ 1.00 $ .89 $ .66 $ .58 $ .44 Diluted weighted average common shares outstanding............................ 57,919 57,957 57,027 57,078 61,473 Balance sheet data: Cash and cash equivalents................. 7,280 13,765 13,942 18,434 13,698 Property and equipment, net............... 130,425 115,000 87,686 70,513 69,578 Total assets.............................. 388,048 303,752 221,047 157,066 154,696 Long term debt, including current portion................................ 38,764 14,144 6,033 1,731 2,566 Total stockholders' equity................ 211,597 141,045 120,933 90,042 96,938 Other data: U.S. Checkout Coupon stores installed at end of period.......................... 15,475 13,516 12,092 11,164 10,745 International Checkout Coupon stores installed at end of period............. 2,617 2,587 1,935 1,372 941 Health Resource Network pharmacy outlets installed at end of period............. 12,578 6,671 3,861 1,920 1,195 Capital expenditures, net................. 54,190 58,217 39,954 24,250 34,605 Payment for repurchase of common stock.... 15,843 47,603 18,248 50,815 9,467
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Catalina Marketing provides a multi-functional communications network that provides a wide range of strategic targeted marketing solutions for manufacturers and retailers. Catalina Marketing delivers strategic marketing solutions for retailers and manufacturers through a variety of product lines. The evolution of the Company's product lines has resulted in a single targeted marketing services organization with interrelated 6 9 operating groups, which engages consumers to influence purchase decisions. As of March 31, 2001, the Company employed 1,637 people reporting into 29 offices throughout the United States, Europe and Asia. RESULTS OF OPERATIONS Year Ended March 31, 2001 compared to Year Ended March 31, 2000 Revenues were $417.9 million in fiscal 2001, up 19 percent over revenues of $350.9 million in fiscal 2000. The increase in revenues is due to an increase in promotions printed worldwide, expansion of the Health Resource Network, growth in Checkout Direct(R) programs as well as increases in direct mail marketing and other loyalty programs. Additionally, fiscal 2001 includes revenues from HealthCare Data Corporation and Market Intelligence, acquired in June and September 2000, respectively. In the United States, the Catalina Marketing Network was in 15,475 stores at March 31, 2001, which reach approximately 185 million shoppers each week as compared to 13,516 stores reaching approximately 165 million shoppers each week at March 31, 2000. The Health Resource Network was in 12,578 pharmacies on March 31, 2001, including 4,587 acquired in the purchase of HealthCare Data Corporation on June 1, 2000, as compared to 6,671 pharmacies on March 31, 2000. Outside the U.S., the Catalina Marketing Network was in 2,617 stores at March 31, 2001, which reach approximately 30 million shoppers each week as compared to 2,587 stores reaching approximately 35 million shoppers each week at March 31, 2000. In fiscal 2001, the Company installed its Catalina Marketing Network in 1,959 stores (net of deinstallations) in the United States as compared to 1,424 stores in fiscal 2000. Deinstallation activity can and does occur primarily due to the consolidation and business combination of supermarket chains as well as store closures made by retailers in the ordinary course of business. The Company also installed its Health Resource Network in 1,320 pharmacies (net of deinstallations) in fiscal 2001 as compared to 2,810 pharmacies in fiscal 2000. Outside the United States, the Company installed 30 stores (net of deinstallations) in fiscal 2001 as compared to 652 stores (net of deinstallations) in fiscal 2000. Direct operating expenses consist of retailer fees, paper, data line charges, sales commissions, loyalty and direct mail marketing expenses, provision for doubtful accounts, the expenses of operating and maintaining the Catalina Marketing and Health Resource Network (primarily expenses relating to operations personnel and service offices), and the direct expenses associated with operating the outdoor media business in a majority-owned subsidiary in Asia. Direct operating expenses increased in absolute terms to $174.2 million in fiscal 2001 from $142.2 million in fiscal 2000. Direct operating expenses in fiscal 2001 as a percentage of revenues increased to 41.7 percent from 40.5 percent in fiscal 2000. This increase in fiscal 2001 is principally attributable to increased data line charges, an increased provision for doubtful accounts and increased expenses relating to the administration of the Catalina Marketing Network (information technology related costs), as well as higher operating expenses at Market Logic, offset by lower direct operating expenses in connection with revenue associated with the increase in direct marketing and research programs at Alliance Research and in the newsletter production services at Health Resource Publishing. Selling, general and administrative expenses include personnel-related costs of selling and administrative staff, overhead, marketing expenses and new product development expenses. Selling, general and administrative expenses in fiscal 2001 were $106.4 million compared to $88.2 million in fiscal 2000, an increase of 20.6 percent or $18.2 million. As a percentage of revenues, selling, general and administrative expenses increased 0.4 percent in fiscal 2001, to 25.5 percent from 25.1 percent in fiscal 2000. This increase is primarily attributable to increased legal fees initiated by the Company to protect its intellectual properties. Depreciation and amortization increased to $43.2 million for fiscal 2001 from $35.2 million for fiscal 2000. Depreciation increased due to the investment in capital expenditures, during the current and prior periods, associated with new operating units and product lines, data processing equipment and the increase in stores installed. Amortization expense increased due to the increases in goodwill and other intangible assets related to the Company's acquisitions. 7 10 Interest expense and other, net was $2.1 million for fiscal 2001 compared to $0.6 million for fiscal 2000. This increase is primarily attributable to increased long and short term borrowing balances in the Company and its Asian subsidiary. The provision for income taxes increased to $34.9 million, or 38.0 percent of income before income taxes and minority interest, for fiscal 2001 compared to $34.0 million, or 40.2 percent of income before income taxes, for fiscal 2000. The rate decrease is primarily due to the Company's ability to utilize net operating loss carry forwards of a wholly owned foreign subsidiary and lower state taxes. The Company's effective tax rate is higher than the federal statutory income tax rate due to state and foreign income taxes and various nondeductible expenses, primarily the amortization of goodwill related to the Company's acquisitions. Year Ended March 31, 2000 compared to Year Ended March 31, 1999 Revenues were $350.9 million in fiscal 2000, up 32.5 percent over revenues of $264.8 million in fiscal 1999. The increase in revenues is due to an increase in promotions printed worldwide, growth in Checkout Direct(R) programs as well as increases in direct mail marketing and other loyalty programs. Additionally, fiscal 2000 includes revenues from Alliance Research, acquired in July 1999. In the United States, the Catalina Marketing Network was in 13,516 stores at March 31, 2000, which reach approximately 165 million shoppers each week as compared to 12,092 stores reaching approximately 152 million shoppers each week at March 31, 1999. The Health Resource Network was in 6,671 pharmacies at March 31, 2000 as compared to 3,861 pharmacies at March 31, 1999. Outside the U.S., the Catalina Marketing Network was in 2,587 stores at March 31, 2000, which reach approximately 35 million shoppers each week as compared to 1,935 stores reaching approximately 29 million shoppers each week at March 31, 1999. In fiscal 2000, the Company installed its Catalina Marketing Network in 1,424 stores (net of deinstallations) in the United States as compared to 928 stores in fiscal 1999. Deinstallation activity can and does occur primarily due to the consolidation and business combination of supermarket chains as well as store closures made by retailers in the ordinary course of business. The Company also installed its Health Resource Network in 2,810 pharmacies (net of deinstallations) in fiscal 2000 as compared to 1,941 pharmacies in fiscal 1999. Outside the United States, the Company installed 652 stores (net of deinstallations) in fiscal 2000 as compared to 563 stores (net of deinstallations) in fiscal 1999. Direct operating expenses consist of retailer fees, paper, sales commissions, loyalty and direct mail marketing expenses, provision for doubtful accounts, the expenses of operating and maintaining the Catalina Marketing and Health Resource Network, primarily expenses relating to operations personnel and service offices, and the direct expenses associated with operating the outdoor media business in a majority-owned subsidiary in Asia. Direct operating expenses increased in absolute terms to $142.2 million in fiscal 2000 from $110.2 million in fiscal 1999. Direct operating expenses in fiscal 2000 as a percentage of revenues decreased to 40.5 percent from 41.6 percent in fiscal 1999. This decrease in fiscal 2000 is principally attributable to a favorable shift in product mix towards higher margin domestic sales and managing the Network more efficiently, offset by higher direct operating expenses in connection with revenue associated with the increase in direct marketing and research programs at Alliance Research and in the loyalty card production services, as well as higher costs incurred with running the outdoor media business in Japan. Selling, general and administrative expenses include personnel-related costs of selling and administrative staff, overhead, marketing expenses and new product development expenses. Selling, general and administrative expenses in fiscal 2000 were $88.2 million compared to $59.4 million in fiscal 1999, an increase of 48.7 percent or $28.9 million. As a percentage of revenues, selling, general and administrative expenses increased 2.7 percent in fiscal 2000, to 25.1 percent from 22.4 percent in fiscal 1999. This increase is primarily attributable to advertising and marketing expenses relating to new operating units, developing product lines, and legal fees. Depreciation and amortization increased to $35.2 million for fiscal 2000 from $27.3 million for fiscal 1999. Depreciation increased due to the investment in capital expenditures, during the current and prior periods, associated with new operating units and product lines, data processing equipment and the increase in 8 11 stores installed. Amortization expense increased due to the increases in goodwill and other intangible assets related to the Company's acquisitions. Interest expense and other, net was $0.6 million for fiscal 2000 compared to $2.3 million for fiscal 1999. The decrease in expense is principally attributable to the Company writing off its $3.0 million investment in Intelledge Corporation in the second quarter of fiscal 1999. The provision for income taxes increased to $34 million, or 40.2 percent of income before income taxes and minority interest, for fiscal 2000 compared to $28.0 million, or 42.7 percent of income before income taxes, for fiscal 1999. The rate decrease is primarily due to the valuation allowance recorded against the $3.0 million deferred tax benefit for the Intelledge investment write off in the second quarter of fiscal 1999 and to a lesser extent due to the Company's ability to utilize losses of a majority owned foreign subsidiary for income tax purposes in fiscal 2000. The Company's effective tax rate is higher than the federal statutory income tax rate due to state and foreign income taxes, various nondeductible expenses, primarily the amortization of goodwill related to the Company's acquisitions and, in the case of fiscal 1999, the valuation allowance referred to in the previous sentence. QUARTERLY RESULTS The following table presents certain unaudited quarterly results for the last eight quarters (dollars in thousands, except per share data):
THREE MONTHS ENDED ---------------------------------------------------------------------------------- MAR 31, DEC 31, SEPT 30, JUN 30, MAR 31, DEC 31, SEPT 30, JUN 30, 2001 2000 2000 2000 2000 1999 1999 1999 -------- -------- -------- ------- ------- -------- -------- ------- Revenues...................... $113,360 $108,740 $101,837 $93,944 $93,690 $ 97,790 $86,828 $72,614 Direct operating expenses..... 48,812 44,393 41,775 39,257 37,298 39,226 35,537 30,168 Selling, general and administrative.............. 29,580 25,406 26,172 25,224 22,759 22,200 23,480 19,808 Depreciation and amortization................ 11,550 11,240 10,176 10,277 9,549 8,862 8,577 8,187 -------- -------- -------- ------- ------- -------- ------- ------- Income from operations........ 23,418 27,701 23,714 19,186 24,084 27,502 19,234 14,451 Interest expense and other, net......................... (93) (1,283) (42) (663) (354) (31) (9) (201) Provision for income taxes.... (8,865) (10,039) (9,001) (7,040) (9,540) (11,043) (7,728) (5,730) Minority interest in losses of subsidiaries................ 45 446 391 260 223 132 175 183 -------- -------- -------- ------- ------- -------- ------- ------- Net income.................... $ 14,505 $ 16,825 $ 15,062 $11,743 $14,413 $ 16,560 $11,672 $ 8,703 ======== ======== ======== ======= ======= ======== ======= ======= Diluted net income per common share....................... $ .25 $ .29 $ .26 $ .20 $ .25 $ .29 $ .20 $ .15 Diluted weighted average common shares outstanding... 57,584 58,377 58,348 57,480 57,591 57,690 58,098 58,458 U.S. checkout coupon business: Stores at quarter end......... 15,475 15,171 14,772 14,352 13,516 13,020 12,635 12,257 Net stores installed during quarter..................... 304 399 420 839 496 385 378 165 Promotions printed (in millions)............... 856 944 778 763 678 781 722 628 Weekly shopper reach at quarter end (in millions)... 185 194 183 182 165 173 160 161
The Company expects its revenues to be greater during periods of higher promotional activity by manufacturers. The pattern of coupon distribution is irregular and may change from period to period depending on many factors, including the economy, competition, the timing of new product introductions and the timing of manufacturers' promotion planning and implementation. These factors, as well as the overall growth in the number of retailer and manufacturer contracts with the Company, tend to influence the Company's revenues and profits from period to period. 9 12 LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital expenditures are store equipment and third-party store installation costs, as well as data processing equipment for the Company's central data processing facilities. Total store equipment and third-party store installation costs range from $3,000 to $13,000 per store. During fiscal 2001 and fiscal 2000, the Company made net capital expenditures of $54.2 million and $58.2 million, respectively. The pace of installations varies depending on the timing of contracts entered into with retailers and the scheduling of store installations by mutual agreement. Effective September 1, 2000, the Company, through one of its wholly-owned subsidiaries, acquired 100 percent of the outstanding common shares of Market Intelligence, Inc., an attitudinal research company, for approximately $1.0 million in initial cash consideration. The terms of the acquisition provide for additional payments of up to $1.0 million, contingent upon the business unit's performance. Effective June 1, 2000, the Company, through one of its wholly-owned subsidiaries, acquired 100 percent of the outstanding common shares of HealthCare Data Corporation, a company which provides strategic targeted marketing solutions for health-related and pharmaceutical manufacturers and retailers, for $14.2 million in cash, net of cash acquired. Effective July 1, 1999, the Company acquired certain assets and assumed certain liabilities of Alliance Research, an attitudinal research company, for $6.7 million in initial consideration, net of cash and cash equivalents acquired. Terms of the purchase agreement call for the Company to make a series of payments, subject to acceleration provisions and culminating in the first quarter of fiscal 2005, which are contingent upon future operating performance of the business purchased from Alliance Research. Effective April 21, 1999, the Company, through one of its wholly-owned subsidiaries, acquired the technology of its Checkout Prizes(R) application by virtue of a merger transaction between the Company and CompuScan. Initial cash consideration was $9.1 million, net of cash acquired. Terms of the merger agreement called for the Company to make a series of additional payments culminating in the fourth quarter of fiscal 2002. Future payments are based on specified future performance of the associated business activity. Effective January 4, 1999, the Company acquired 100 percent of the outstanding common shares of Dynamic Controls, Inc., which offers card-based loyalty marketing programs for retailers, for $4.6 million in initial cash consideration, net of cash acquired. Terms of the purchase agreement called for the Company to make a series of payments, concluded in the fourth quarter of fiscal 2001. These payments were based upon specified revenue growth. Effective December 30, 1998, the Company purchased from its minority stockholders the remaining ownership of Catalina Marketing of France, Inc. Catalina Marketing of France, Inc. owns substantially all of the outstanding stock of Catalina Marketing de France, S.A., the French operating company. Terms of the purchase agreement call for the Company to make an initial down payment and a series of payments, culminating in the fourth quarter of fiscal 2002, which are contingent upon the future operating performance of Catalina Marketing de France, S.A. Effective July 13, 1998, the Company acquired 100 percent of the outstanding common shares of Market Logic, a full service targeted marketing company that specializes in the development and fulfillment of highly sophisticated, personalized, direct marketing programs for retailers, for $1.7 million in initial cash consideration, net of cash acquired. Terms of the purchase agreement call for the Company to make a series of annual payments, culminating in the first quarter of fiscal 2003 and subject to acceleration provisions, which are contingent upon the future operating performance of Market Logic. On January 4, 2001, the Company entered into an agreement with the Tribune Company, a minority equity investor in Supermarkets Online Holdings, Inc. ("Holdco"), the parent company of Supermarkets Online, Inc. ("SMO"), the Company's internet-based marketing and advertising subsidiary. As a part of this agreement, the Company acquired all of the Holdco common shares held by the Tribune Company, repaid a subordinated convertible note, and terminated a marketing agreement between the Tribune Company and SMO. Total consideration was $10.5 million. The acquisition of the common shares was accounted for using 10 13 the purchase method of accounting for business combinations. The subordinated convertible debt repayment and the marketing services agreement termination has been accounted for as a reduction in long term debt and deferred revenue, respectively (see Note 4). On October 24, 2000, the Company acquired a total of 16 US patents and 12 pending U.S. patent applications together with all foreign rights related to the inventions encompassed by the original patents and patent applications. The purchase price of these patents and patent applications of $17.0 million is being amortized on a straight-line basis over the remaining useful lives of the assets ranging from 9 to 14 years. Additionally, during fiscal 2000 and 2001, investments were made totaling $23.0 million and $28.9 million, respectively, principally representing earnout payments attributable to the aforementioned acquisitions and minority equity investments. On October 25, 1999, the Board of Directors approved an additional $50 million to buy back Company Common Stock (the "1999 authorization"). As of March 31, 2000, $45.9 million was still available under this authorization. During fiscal 2001, the Company purchased 497,200 shares of its Common Stock for $15.8 million. As of March 31, 2001, the Company may repurchase $30.1 million of the Company's common stock under the 1999 authorization. The Company believes working capital generated by operations along with existing credit facilities is sufficient for its overall capital requirements. FORWARD LOOKING STATEMENTS The statements in this Form 10-K may be forward looking, and actual results may differ materially. Statements not based on historical facts involve risks and uncertainties, including, but not limited to, the changing market for promotional activities, especially as it relates to policies and programs of packaged goods manufacturers for the issuance of certain product coupons, the effect of economic and competitive conditions and seasonal variations, the success and timing of growth of the Company's international and other product lines outside its core business, the level and timing of any acquisition activity, actual promotional activities and programs with the Company's customers, the pace of installation of the Company's store network, the timing and success of new services and businesses and the pace of their implementation, and the Company's ability to maintain favorable client relationships. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 11 14 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL INFORMATION
PAGE ---- Report of Independent Certified Public Accountants.......... 13 Consolidated Income Statements, Years ended March 31, 2001, 2000 and 1999............................................. 14 Consolidated Balance Sheets at March 31, 2001 and 2000...... 15 Consolidated Statements of Stockholders' Equity, Years ended March 31, 2001, 2000 and 1999............................. 16 Consolidated Statements of Cash Flows, Years ended March 31, 2001, 2000 and 1999....................................... 17 Notes to the Consolidated Financial Statements.............. 18
12 15 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To Catalina Marketing Corporation: We have audited the accompanying consolidated balance sheets of Catalina Marketing Corporation (a Delaware corporation) and subsidiaries as of March 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Catalina Marketing Corporation and subsidiaries as of March 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN, LLP Tampa, Florida April 19, 2001 13 16 CATALINA MARKETING CORPORATION CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT SHARE DATA)
YEAR ENDED MARCH 31, ------------------------------ 2001 2000 1999 -------- -------- -------- Revenues.................................................... $417,881 $350,922 $264,783 Costs and Expenses: Direct operating expenses................................. 174,237 142,229 110,167 Selling, general and administrative....................... 106,382 88,247 59,363 Depreciation and amortization............................. 43,243 35,175 27,342 -------- -------- -------- Total costs and expenses.......................... 323,862 265,651 196,872 -------- -------- -------- Income From Operations...................................... 94,019 85,271 67,911 Interest Expense and Other, net............................. (2,081) (595) (2,334) -------- -------- -------- Income Before Income Taxes and Minority Interest............ 91,938 84,676 65,577 Provision for Income Taxes.................................. (34,945) (34,041) (27,969) Minority Interest in Losses of Subsidiaries................. 1,142 713 -- -------- -------- -------- Net Income........................................ $ 58,135 $ 51,348 $ 37,608 ======== ======== ======== Diluted: Net Income Per Common Share............................... $ 1.00 $ .89 $ .66 Weighted Average Common Shares Outstanding................ 57,919 57,957 57,027 Basic: Net Income Per Common Share............................... $ 1.04 $ .92 $ .68 Weighted Average Common Shares Outstanding................ 55,767 55,611 55,503
The accompanying Notes are an integral part of these consolidated financial statements. 14 17 CATALINA MARKETING CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, --------------------- 2001 2000 --------- --------- ASSETS Current Assets: Cash and cash equivalents................................. $ 7,280 $ 13,765 Accounts receivable, net.................................. 72,996 59,261 Inventory................................................. 5,222 4,558 Deferred tax asset........................................ 7,893 10,463 Prepaid expenses and other current assets................. 24,637 27,325 --------- --------- Total current assets.............................. 118,028 115,372 --------- --------- Property and equipment: Store equipment........................................... 193,684 177,944 Furniture and office equipment............................ 75,418 55,243 Billboards................................................ 18,094 17,396 Leasehold improvements.................................... 5,758 4,633 --------- --------- 292,954 255,216 Less: accumulated depreciation............................ (162,529) (140,216) --------- --------- Property and equipment, net....................... 130,425 115,000 Purchased intangible assets, net............................ 135,643 70,400 Other assets................................................ 3,952 2,980 --------- --------- Total Assets...................................... $ 388,048 $ 303,752 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable.......................................... $ 18,437 $ 17,862 Taxes payable............................................. 4,259 3,698 Accrued expenses.......................................... 57,585 50,788 Deferred revenue.......................................... 32,924 40,444 Short term borrowings..................................... 15,219 29,493 --------- --------- Total current liabilities......................... 128,424 142,285 --------- --------- Deferred tax liability...................................... 8,968 8,380 Minority interest........................................... 295 1,228 Long term debt.............................................. 38,764 10,814 Commitments and contingencies Stockholders' Equity: Preferred stock; $.01 par value; 5,000,000 authorized shares; none issued and outstanding.................... -- -- Common stock; $.01 par value; 150,000,000 authorized shares; 55,548,864 and 54,602,457 shares issued and outstanding at March 31, 2001 and 2000, respectively... 555 546 Paid-in capital........................................... 14,441 897 Accumulated other comprehensive income (loss)............. (1,050) 86 Retained earnings......................................... 197,651 139,516 --------- --------- Total Stockholders' equity........................ 211,597 141,045 --------- --------- Total Liabilities and Stockholders' equity........ $ 388,048 $ 303,752 ========= =========
The accompanying Notes are an integral part of these consolidated financial statements. 15 18 CATALINA MARKETING CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED PAR OTHER VALUE OF COMPREHENSIVE TOTAL COMPREHENSIVE COMMON PAID-IN INCOME RETAINED STOCKHOLDERS' INCOME STOCK CAPITAL (LOSS) EARNINGS EQUITY ------------- -------- -------- ------------- -------- ------------- BALANCE AT MARCH 31, 1998........................ $552 $ 317 $ (135) $ 89,308 $ 90,042 Proceeds from issuance of 1,144,155 shares of common stock................................. -- 11 4,392 -- -- 4,403 Amortization of option-related compensation.... -- -- 182 -- -- 182 Tax benefit from exercise of non-qualified stock options and disqualified dispositions................................. -- -- 5,792 -- -- 5,792 Repurchase, retirement and cancellation of 1,113,300 common shares...................... -- (11) (10,408) -- (7,829) (18,248) Deferred compensation plan common stock units and Directors' common stock grants........... -- -- 176 -- -- 176 Net income..................................... $37,608 -- -- -- 37,608 37,608 Other comprehensive income..................... 978 -- -- 978 -- 978 ------- Comprehensive income........................... $38,586 -- -- -- -- -- ---- -------- ------- -------- -------- BALANCE AT MARCH 31, 1999........................ $552 $ 451 $ 843 $119,087 $120,933 ==== ======== ======= ======== ======== Proceeds from issuance of 1,168,143 shares of common stock................................. -- 11 8,604 -- -- 8,615 Increase in investment in subsidiary, net of tax.......................................... -- -- 2,241 -- -- 2,241 Tax benefit from exercise of non-qualified stock options and disqualified dispositions................................. -- -- 6,071 -- -- 6,071 Repurchase, retirement and cancellation of 1,614,000 common shares...................... -- (17) (16,667) -- (30,919) (47,603) Deferred compensation plan common stock units and Directors' common stock grants........... -- -- 197 -- -- 197 Net income..................................... $51,348 -- -- -- 51,348 51,348 Other comprehensive loss....................... (757) -- -- (757) -- (757) ------- Comprehensive income........................... $50,591 -- -- -- -- -- ---- -------- ------- -------- -------- BALANCE AT MARCH 31, 2000........................ $546 $ 897 $ 86 $139,516 $141,045 ==== ======== ======= ======== ======== Proceeds from issuance of 1,601,504 shares of common stock................................. -- 15 21,506 -- -- 21,521 Increase in investment in subsidiary, net of tax.......................................... -- -- 1,943 -- -- 1,943 Tax benefit from exercise of non-qualified stock options and disqualified dispositions................................. -- -- 6,506 -- -- 6,506 Repurchase, retirement and cancellation of 497,200 common shares........................ -- (5) (15,838) -- -- (15,843) Deferred compensation plan common stock units and Directors' common stock grants........... -- (1) (573) -- -- (574) Net income..................................... $58,135 -- -- -- 58,135 58,135 Other comprehensive loss....................... (1,136) -- -- (1,136) -- (1,136) ------- Comprehensive income........................... $56,999 -- -- -- -- -- ---- -------- ------- -------- -------- BALANCE AT MARCH 31, 2001........................ $555 $ 14,439 $(1,050) $197,651 $211,597 ==== ======== ======= ======== ========
The accompanying Notes are an integral part of these consolidated financial statements. 16 19 CATALINA MARKETING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEAR ENDED MARCH 31, ------------------------------- 2001 2000 1999 --------- -------- -------- Cash Flows from Operating Activities: Net income................................................ $ 58,135 $ 51,348 $ 37,608 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest...................................... (1,142) (713) -- Depreciation and amortization.......................... 43,243 35,175 27,404 Provision for doubtful accounts........................ 1,027 1,304 1,085 Deferred income taxes.................................. 5,403 1,310 1,707 Other.................................................. (5,602) 197 3,173 Changes in operating assets and liabilities, net of effects from acquisitions: Tax benefit from exercise of non-qualified stock options and disqualified dispositions................ 7,931 6,071 5,792 Accounts receivable.................................... (14,573) (15,721) (23,503) Inventory, prepaid expenses and other assets........... 630 (2,733) (12,003) Accounts payable....................................... 392 2,451 5,379 Taxes payable.......................................... 2,195 1,572 (57) Accrued expenses....................................... 2,729 6,817 5,303 Deferred revenue....................................... (6,459) 12,074 4,973 --------- -------- -------- Net cash provided by operating activities......... 93,909 99,152 56,861 --------- -------- -------- Cash Flows from Investing Activities: Capital expenditures, net................................. (54,190) (58,217) (39,954) Purchase of investments, net of cash acquired............. (71,640) (38,870) (8,982) --------- -------- -------- Net cash used in investing activities............. (125,830) (97,087) (48,936) --------- -------- -------- Cash Flows From Financing Activities: Proceeds from debt obligations............................ 33,235 46,847 23,585 Principal payments on debt obligations.................... (15,678) (16,517) (22,326) Proceeds from issuance of common and subsidiary stock..... 23,808 14,442 4,526 Payment for repurchase of company common stock............ (15,843) (47,603) (18,248) --------- -------- -------- Net cash provided by (used in) financing activities...................................... 25,522 (2,831) (12,463) --------- -------- -------- Net Change in Cash and Cash Equivalents..................... (6,399) (766) (4,538) Effect of Exchange Rate Changes on Cash..................... (86) 589 46 Cash and Cash Equivalents, at beginning of year............. 13,765 13,942 18,434 --------- -------- -------- Cash and Cash Equivalents, at end of year................... $ 7,280 $ 13,765 $ 13,942 ========= ======== ======== Supplemental Schedule of Other Transactions: Cash paid during the year for: Interest.................................................. $ 2,679 $ 862 $ 207 Income taxes.............................................. $ 22,567 $ 19,932 $ 22,702
The accompanying Notes are an integral part of these consolidated financial statements. 17 20 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following summarizes the significant accounting and financial policies of Catalina Marketing Corporation and Subsidiaries (the "Company") which have been followed in preparing the accompanying consolidated financial statements. Description of the Business. The Company provides targeted marketing services. Through its proprietary network, the Company provides consumer and pharmaceutical product manufacturers and retailers with cost-effective methods of delivering promotional incentives and advertising messages directly to consumers based on their purchasing behavior. Additionally, a majority-owned subsidiary of the Company operates an outdoor media business in Asia. As of March 31, 2001, the Company's network was installed in 15,475 retail stores and 12,578 pharmacies throughout the United States and 2,617 retail stores throughout the United Kingdom, France, Italy and Japan. Principles of Consolidation and Preparation. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany transactions are eliminated in consolidation. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires the use of management's estimates. The accounts of the wholly-owned and majority-owned foreign subsidiaries are included for the twelve months ended December 31, which is their fiscal year-end. The Company's investments in non-majority owned companies were accounted for using the cost method. Fair Value of Financial Instruments. The book value of all financial instruments approximates their fair value. Cash and Cash Equivalents. Cash and cash equivalents consist of cash and short-term investments. The short-term investments can be immediately converted to cash and are recorded at their fair market values. Allowance for Doubtful Accounts. The Company records a provision for estimated doubtful accounts as part of direct operating expenses. As of March 31, 2001 and 2000, the allowance for doubtful accounts was $2,433,000 and $1,414,000, respectively. Inventory. Inventory consists primarily of paper used for promotion printing, as well as card processing inventory for loyalty operations. Inventory is stated at the lower of cost, as determined by the first-in, first-out method, or market. Property and Equipment. Property and equipment are stated at cost. Depreciation of store equipment, billboards and furniture and office equipment is computed using the straight-line method based on the estimated useful lives of the related assets, generally three to eight years. Office equipment includes EDP equipment and software bought and developed for internal use. Third party installation costs, net of amounts reimbursed by the retailer, are capitalized and amortized using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining term of the related lease. Maintenance and repair costs are expensed as incurred. Foreign Currency Translation. Balance sheet accounts are translated at exchange rates in effect at the end of the subsidiaries' year and income statement accounts are translated at average exchange rates for the year. Translation gains and losses are included as a separate component of stockholders' equity in accumulated other comprehensive income (loss). Purchased Intangible Assets, net. Purchased intangible assets include purchased patents and other intangibles arising out of the Company's acquisitions. Purchased intangible assets are amortized over their useful lives (ranging from 7 to 40 years) using the straight line method. 18 21 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition and Deferred Revenue. In accordance with coupon industry practice, the Company generally pre-bills manufacturers for purchased category cycles. The purchase of a category cycle gives a manufacturer the exclusive right to have promotions printed for a particular product category during the applicable period. The Company recognizes in-store electronic marketing service revenues as promotions are printed. Amounts collected prior to printing are reflected as deferred revenue until printing occurs. Loyalty services revenue is recognized when the loyalty cards or mailings are shipped. Income Taxes. Provision for income taxes includes federal, state and foreign income taxes. Deferred income taxes are provided for temporary differences between the recognition of income and expenses for financial reporting purposes and income tax purposes. Research and Development. Research and development costs relating to the development and testing of new service applications are expensed as incurred. Net Income Per Common Share. The following is a reconciliation of the denominator of basic and diluted earnings per share (EPS) computations shown on the face of the accompanying consolidated financial statements as restated for the Company's three-for-one stock split (see Note 12) (in thousands):
MARCH 31, ------------------------ 2001 2000 1999 ------ ------ ------ Basic weighted average common shares outstanding............ 55,767 55,611 55,503 Dilutive effect of options outstanding...................... 2,152 2,346 1,524 ------ ------ ------ Diluted weighted average common shares outstanding.......... 57,919 57,957 57,027 ====== ====== ======
As of March 31, 2001, all outstanding common stock options were included in the computation of diluted EPS. As of March 31, 2000, options to purchase 90,900 shares of common stock at a price of $35.63 were outstanding, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common stock. As of March 31, 1999, options to purchase 3,485,400 shares of common stock at prices ranging from $20.54 to $22.00 were outstanding, but were not included in the computation of diluted EPS because the options' exercise price was grater than the average market price of the common stock. Reclassifications. Certain reclassifications to the fiscal year 2000 consolidated financial statements have been made to conform with the current year's presentation. NOTE 2. SUPPLEMENTAL BALANCE SHEET INFORMATION Prepaid expenses and other current assets include (in thousands):
MARCH 31, ----------------- 2001 2000 ------- ------- Prepaid billboard rental.................................... $10,239 $ 9,353 Investments in deferred compensation plan (see Note 8)...... 9,053 10,343 Prepaid marketing costs..................................... 26 2,139 Other....................................................... 5,319 5,490 ------- ------- Total prepaid expenses and other current assets... $24,637 $27,325 ======= =======
19 22 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Purchased intangible assets, net include (dollars in thousands):
MARCH 31, ------------------ USEFUL LIFE 2001 2000 ----------- -------- ------- (IN YEARS) Patent license and retailer relationships in the United Kingdom............................................... 20 $ 12,691 $12,691 Goodwill................................................ 10-40 108,803 54,913 Purchased patents....................................... 7-19 25,578 8,478 Accumulated amortization................................ (11,429) (5,682) -------- ------- Purchased intangible assets, net.............. $135,643 $70,400 ======== =======
Accrued expenses include (in thousands):
MARCH 31, ----------------- 2001 2000 ------- ------- Payroll related............................................. $15,462 $11,127 Deferred compensation plan.................................. 9,080 10,353 Sales commissions........................................... 3,630 4,546 Payments to acquired companies.............................. 15,652 12,083 Accrued operating expenses.................................. 5,482 4,083 Other....................................................... 8,279 8,596 ------- ------- Total accrued expenses............................ $57,585 $50,788 ======= =======
NOTE 3. INCOME TAXES Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax bases of assets and liabilities using the enacted marginal income tax rate in effect for the year in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. 20 23 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Temporary differences for financial statement and income tax purposes result primarily from charges to operations for financial statement reporting purposes which are not currently tax deductible and revenues deferred for financial statement reporting purposes which are currently taxable. The components of the deferred tax asset and liability were as follows (in thousands):
MARCH 31, ----------------- 2001 2000 ------- ------- Deferred Tax Assets: Payroll related........................................... $ 3,490 $ 3,813 Deferred revenue.......................................... 4,224 6,364 Provision for doubtful accounts........................... 905 508 Accrued expenses.......................................... 3,312 3,337 Net operating loss carry-forwards......................... 2,111 3,252 Unconsolidated equity investments......................... 890 883 Other..................................................... 291 157 ------- ------- 15,223 18,314 Valuation allowance....................................... (1,494) (2,173) ------- ------- Net deferred tax asset............................ $13,729 $16,141 ======= ======= Deferred Tax Liabilities: Depreciation and amortization............................. $10,205 $ 8,273 Prepaid expenses.......................................... 3,716 3,938 Investment in consolidated subsidiary..................... -- 1,426 Other..................................................... 883 421 ------- ------- 14,804 14,058 ------- ------- Net deferred tax (liability) asset................ $(1,075) $ 2,083 ======= =======
The net decrease in the valuation allowance of $679,000 during fiscal 2001 was primarily due to the utilization of a portion of the foreign net operating loss ("NOL") carry-forwards. A remaining valuation allowance of $1,494,000 exists as it is more likely than not that deferred tax assets generated by certain foreign subsidiaries and losses of unconsolidated equity investments will not be realized. As of March 31, 2001, the Company had cumulative US federal taxable NOL carry-forwards of $2,884,000, which expire between 2010 and 2015. These NOLs were acquired through various Company acquisitions. In addition, various foreign subsidiaries of the Company had aggregate foreign taxable NOL carry-forwards of $7,050,000. Approximately $735,000 of the foreign NOLs can be carried forward indefinitely, while the remaining $6,315,000 may expire between 2004 and 2006. Approximately $4,050,000 of the foreign pre-tax losses represented by NOLs has already been deducted as a flow-through item in the consolidated U.S. Federal income tax return. 21 24 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The provision for income taxes consisted of the following (in thousands):
MARCH 31, --------------------------- 2001 2000 1999 ------- ------- ------- Current taxes: Federal................................................. $26,761 $28,085 $22,865 State................................................... 2,736 4,291 3,016 Foreign................................................. 45 355 381 ------- ------- ------- 29,542 32,731 26,262 ------- ------- ------- Deferred taxes: Federal................................................. 3,463 2,055 1,423 State................................................... 390 235 131 Foreign................................................. 1,550 (980) 153 ------- ------- ------- 5,403 1,310 1,707 ------- ------- ------- Provision for income taxes...................... $34,945 $34,041 $27,969 ======= ======= =======
The reconciliation of the provision for income taxes based on the U.S. federal statutory income tax rate to the Company's provision for income taxes is as follows (dollars in thousands):
MARCH 31, --------------------------- 2001 2000 1999 ------- ------- ------- Federal statutory rate.................................... 35% 35% 35% Expected federal statutory tax............................ $32,178 $29,637 $22,952 State and foreign income taxes, net of federal benefit.... 3,998 4,394 2,495 Effect of foreign subsidiary losses and their tax rates... (1,997) (786) 753 Amortization of goodwill.................................. 1,652 1,000 366 Loss on unconsolidated equity investment.................. -- (732) 1,050 Other..................................................... (886) 528 353 ------- ------- ------- Provision for income taxes...................... $34,945 $34,041 $27,969 ======= ======= =======
NOTE 4. SHORT TERM BORROWINGS AND LONG TERM DEBT The Company's short term borrowings and long term debt consisted of the following (dollars in thousands):
MARCH 31, ----------------- 2001 2000 ------- ------- Credit Agreement, variable interest rates................... $30,000 $15,000 Short term borrowings with several Japanese banks and financing agents, interest from 1.66% to 3.35% as of March 31 (payable in yen)....................................... 15,219 11,163 Long term debt with several Japanese banks, interest from 2.63% to 6.38% as of March 31, maturing through July 2005 (payable in yen).......................................... 8,764 12,744 Subordinated convertible note with The Tribune Company, interest at 4.5% per annum................................ -- 1,400 ------- ------- Total debt obligations...................................... 53,983 40,307 Less -- short term borrowings..................... 15,219 29,493 ------- ------- Total long term debt.............................. $38,764 $10,814 ======= =======
22 25 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Maturities of long term debt are as follows as of March 31, 2001 (in thousands):
AMOUNT ------- 2003........................................................ $ 4,014 2004........................................................ 33,051 2005........................................................ 1,353 2006........................................................ 346 Thereafter.................................................. -- ------- $38,764 =======
Certain debt held by the Company's Japan subsidiary is guaranteed by certain minority shareholders. On September 25, 2000, the Company entered into a credit agreement (the "Credit Agreement") with a syndicate of commercial banks including Bank One, NA as the Administrative Agent (Bank One), First Union National Bank as the Syndication Agent and Wachovia Bank, NA as the Documentation Agent. The Credit Agreement provides for a revolving loan credit facility of up to $150 million in favor of the Company. The termination date of the revolving loan credit facility is September 25, 2003. Borrowings under the Credit Agreement accrue interest at rates based upon either (i) the British Bankers' Association Interest Settlement Rate (Eurodollar Rate) plus an applicable margin ranging from 50 to 87.5 basis points, or (ii) the higher of 50 basis points over the Federal Funds Rate or Bank One's prime rate of interest. The average interest rate for fiscal 2001 and the year end rate as of March 31, 2001 were 7.08% and 5.99%, respectively. In addition, the Credit Agreement provides for unused facilities fees to accrue at a range of 15 to 22.5 basis points per annum multiplied by the unused portions of the revolving credit and line of credit facilities. The Credit Agreement is guaranteed by several Company subsidiaries and contains certain financial covenants and other terms and conditions. As of March 31, 2001, the Company was in compliance with all such financial covenants. As of March 31, 2000, the Company's borrowings were outstanding under a credit agreement with a syndicate of commercial banks led by Nationsbank, NA ("Nationsbank Agreement"). Availability under the Nationsbank Agreement aggregated to $150 million. The average interest rate for fiscal 2000 and the year-end rate as of March 31, 2000 were 6.42% and 6.48%, respectively. The Nationsbank Agreement expired on September 25, 2000. Effective April 5, 1999, the Tribune Company ("Tribune"), an unrelated entity, made an investment in SuperMarkets Online Holdings, Inc. ("Holdco"), a majority owned subsidiary of the Company. In addition to this equity investment, SuperMarkets Online, Inc. ("SMO"), Holdco's majority owned subsidiary, borrowed $1.4 million from Tribune in exchange for a subordinated convertible note bearing interest at a rate of 4.5 percent per annum. This long term debt obligation was convertible into 500,000 shares of SMO common stock upon certain occurrences including automatic conversion in the event of a qualified public offering in which the aggregate price paid for the common stock offered is at least $25 million. This investment by the Tribune was reacquired by the Company in fiscal 2001 (see Note 10). Interest expense was $2,192,000, $1,294,000, and $651,000 for the years ended March 31, 2001, 2000, and 1999, respectively. NOTE 5. COMMITMENTS AND CONTINGENCIES Rental expense under operating leases was $5,732,000, $4,756,000, and $2,941,000 for the years ended March 31, 2001, 2000 and 1999, respectively. Future minimum rental commitments under operating leases with non-cancelable terms of more than one year (the longest of which expires in 2009) as of March 31, 2001, 23 26 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) are as follows: $5,384,000 in 2002, $4,273,000 in 2003, $3,076,000 in 2004, $2,435,000 in 2005, $22,083,000 in 2006 and $1,969,000 thereafter. As of October 21, 1999, the Company entered into a lease financing agreement ("Lease Agreement") for a new corporate headquarters building in St. Petersburg, Florida. The operating lease term runs through September 2005. The Company has the option to extend the lease term for up to three, five year renewal periods, subject to certain conditions. The Lease Agreement includes a purchase option for the Company that approximates the original cost of the building. The Company occupied the new corporate headquarters building and began making lease payments in November 2000. The present value of the future minimum lease payments for the new facility (included above) based on interest rates as of March 31, 2001, are as follows: $1,686,000 in 2002, $1,595,000 in 2003, $1,508,000 in 2004, $1,426,000 in 2005, $21,394,000 in 2006. The Company is involved in certain litigation arising out of the Company's business, including litigation initiated by the Company to protect its intellectual property or to defend itself against claims brought by others. Additionally, the Company is in the appeals phase in a sales tax case with a state taxing authority. In the opinion of management, the ultimate outcome of this litigation will not have a material adverse effect on the Company's financial statements. NOTE 6. STOCK-BASED COMPENSATION PLANS The Company had a stock option plan, the 1989 Incentive Stock Option Plan (the "1989 Plan"), which expired on April 26, 1999 and was replaced with the 1999 Incentive Stock Option Plan (the "1999 Plan"); a stock grant plan, the Catalina Marketing Corporation 1992 Director Stock Grant Plan (the "Grant Plan"); and an employee stock purchase plan, the Employee Payroll Deduction Stock Purchase Plan (the "Purchase Plan"). 1989 Incentive Stock Option Plan. The 1989 Plan was approved by the Board of Directors in April 1989, and approved by the stockholders in July 1989. Pursuant to the 1989 Plan, 17,250,000 shares of the Company's common stock were reserved for issuance upon the exercise of options granted under the 1989 Plan. Options to purchase an aggregate of 15,940,327 shares were granted, net of cancellations, under the 1989 Plan, of which options to purchase 5,605,693 shares were outstanding on March 31, 2001. The 1989 Plan provided for grants of Incentive Stock Options ("ISOs") to employees (including employee directors). Options granted under the 1989 Plan generally became exercisable at a rate of 25 percent per year (20 percent per year for initial grants to new employees), commencing one year after the date of grant and generally had terms of five to ten years. In 1999, the 1989 Plan was amended to prospectively change the permissible term of newly granted options to up to ten years. Certain options under the 1989 Plan, which have been granted to certain executives of the Company, vest after 8 years and have an accelerated vesting schedule based upon the Company reaching specified earnings per share targets. The exercise price of all ISOs granted under the 1989 Plan was required to be at least equal to the fair market value of the shares on the date of grant. 1999 Incentive Stock Option Plan. The 1999 Plan was approved by the Board of Directors in April 1999 and, approved by the stockholders in July 1999. Pursuant to the 1999 Plan, 4,800,000 shares of the Company's common stock are reserved for issuance upon the exercise of options granted under the 1999 Plan. Options to purchase an aggregate of 3,536,576 shares have been granted, net of cancellations, under the 1999 Plan, of which options to purchase 3,337,196 shares were outstanding on March 31, 2001. The 1999 Plan provides for grants of ISOs to employees (including employee directors). Options granted under the 1999 Plan generally become exercisable at a rate of 25 percent per year (20 percent per year for initial grants to new employees), commencing one year after the date of grant and generally have terms of up to ten years. Certain options under the 1999 Plan, which have been granted to certain executives of the Company, vest after 8 years and provide for accelerated vesting based upon the Company reaching specified 24 27 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) earnings per share targets. The exercise price of all ISOs granted under the 1999 Plan must be at least equal to the fair market value of the shares on the date of grant. Aggregate Stock Option Activity. As of March 31, 2001, options to purchase an aggregate of 10,534,014 shares had been exercised, including options to purchase 60,000 shares granted outside of any plan; options to purchase an aggregate of 8,942,889 shares were outstanding; and 1,263,424 shares remained available for future grants under the 1999 Plan. Of the options outstanding at March 31, 2001 and at March 31, 2000, options to purchase 2,494,183 and 1,169,514 shares respectively, were immediately exercisable, with weighted average exercise prices of $35.64 and $12.82, respectively. Stock option activity for the years ended March 31, 1999, 2000 and 2001 is as follows:
WEIGHTED NUMBER AVERAGE OF SHARES OPTION PRICES ---------- ------------- Options outstanding at March 31, 1998....................... 5,126,910 $10.14 Option activity: Granted................................................... 4,722,420 20.69 Exercised................................................. (1,551,489) 7.91 Canceled or expired....................................... (464,376) 11.43 ---------- ------ Options outstanding at March 31, 1999....................... 7,833,465 16.87 ---------- ------ Option activity: Granted................................................... 1,588,602 29.25 Exercised................................................. (1,233,960) 10.47 Canceled or expired....................................... (183,033) 19.16 ---------- ------ Options outstanding at March 31, 2000....................... 8,005,074 20.26 ---------- ------ Option activity: Granted................................................... 3,065,038 33.13 Exercised................................................. (1,377,900) 16.55 Canceled or expired....................................... (749,323) 24.34 ---------- ------ Options outstanding at March 31, 2001....................... 8,942,889 $24.90 ========== ======
1992 Director Stock Grant Plan. The Grant Plan provides for grants of common stock to non-employee board members. A total of 300,000 shares of the Company's common stock was authorized for issuance under this plan. As of March 31, 2001, 109,596 shares have been granted, net of cancellations leaving 190,404 shares available for future grants under the Grant Plan. Stock granted under the Grant Plan vests ratably in annual installments over each director's remaining term as a director. Employee Stock Purchase Plan. In July 1994, the Purchase Plan was adopted by the Board of Directors and approved by the stockholders. Pursuant to the Purchase Plan, 900,000 shares of the Company's common stock were reserved for issuance. For the years ended March 31, 2001, 2000 and 1999, 59,102, 56,874, and 73,548 shares at a weighted average fair value of $34.09, $26.64, and $16.11 respectively, were issued to employees. Total shares available for future grant total 439,276 as of March 31, 2001. Under the Purchase Plan, employees may purchase Company common stock at 85 percent of the market price on the first or last day of an offering period. The maximum each employee may purchase in an offering period shall not exceed $12,500 in market value of Company common stock. The Company will typically have two six-month offering periods each year. The Purchase Plan qualifies under Section 423 of the Internal Revenue Code of 1986. 25 28 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company accounts for the option, stock grant and stock purchase plans under APB Opinion No. 25, "Accounting for Stock Issued to Employees", under which $293,708, $187,818, and $155,366 for the years ended March 31, 2001, 2000 and 1999, respectively, in compensation expense has been recognized. The Company has adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS No. 123) for disclosure purposes. For SFAS No. 123 purposes, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in fiscal 1999: risk-free interest rates ranging from 4.43 to 5.65 percent depending on the date of grant; expected dividend yield of zero percent; expected life of five to eight years; and expected volatility of 39.99 percent. The assumptions used for grants in fiscal 2000 are: risk-free interest rates ranging from 5.17 to 6.76 percent depending on the date of grant; expected dividend yield of zero percent; expected life of five years to eight years; and expected volatility of 42.17 percent. The assumptions used for grants in fiscal 2001 are: risk-free interest rates ranging from 5.13 to 6.23 percent depending on the date of grant; expected dividend yield of zero percent; expected life of nine years; and expected volatility of 41.67 percent. The fair values of options granted in fiscal 2001, 2000 and 1999 are $54,139,392, $18,999,941, and $37,193,274 respectively, which would be amortized as compensation over the vesting period of the options.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- --------------------------------- OUTSTANDING WEIGHTED AVERAGE EXERCISABLE RANGE OF AS OF REMAINING CONTRACTUAL WEIGHTED AVERAGE AS OF WEIGHTED AVERAGE EXERCISE PRICES MARCH 31, 2001 LIFE (IN YEARS) EXERCISE PRICE MARCH 31, 2001 EXERCISE PRICE - --------------- -------------- --------------------- ---------------- -------------- ---------------- $0.00- $8.00 20,200 0.1 $ 7.71 20,200 $ 7.71 $8.01-$16.00 904,227 1.2 11.14 631,884 11.10 $16.01-$25.00 4,125,689 6.6 21.03 1,627,933 20.75 $25.01-$33.00 3,296,673 9.0 31.77 201,086 29.88 $33.01-$41.00 596,100 9.2 35.11 13,080 35.63 --------- --------- 8,942,889 2,494,183 ========= =========
Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share data):
MARCH 31, --------------------------- 2001 2000 1999 ------- ------- ------- Net Income: As Reported............................................... $58,135 $51,348 $37,608 Pro Forma................................................. 46,013 35,880 31,517 Basic EPS: As Reported............................................... 1.04 .92 .68 Pro Forma................................................. .83 .65 .57 Diluted EPS: As Reported............................................... 1.00 .89 .66 Pro Forma................................................. .79 .62 .55
Pro forma amounts include approximately $525,000, $396,000, and $303,000 related to the purchase discount offered under the Purchase Plan for the years ended March 31, 2001, 2000 and 1999, respectively. NOTE 7. STOCKHOLDER PROTECTION PLAN The Company has adopted a Stockholder Protection Plan. To implement this plan, the Company declared a dividend of one Preferred Share Purchase Right on each outstanding share of the Company's common stock. The dividend distribution was payable to stockholders of record on May 12, 1997. The rights 26 29 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) will be exercisable for fractions of a share of the Company's Series X Junior Participating Preferred Stock only if a person or group acquires 15 percent or more of the Company's common stock or announces or commences a tender offer for 15 percent or more of the common stock, except for certain instances defined in the Stockholder Protection Plan. NOTE 8. SAVINGS PLANS The Company maintains a 401(k) Savings Plan. The Company's contributions during the years ended March 31, 2001, 2000 and 1999 were $1,002,000, $1,047,000 and $840,000 respectively. The Company maintains a non-qualified deferred compensation plan (the "Deferred Compensation Plan"). The Deferred Compensation Plan is designed to permit select employees and directors of the Company to defer a portion of their compensation. The Deferred Compensation Plan allows participants to elect deferral of certain types of compensation, including directors fees, stock grants under the Grant Plan and shares issuable upon the exercise of stock options, into stock units in the Deferred Compensation Plan each of which represents a share of Company common stock, and creates the Catalina Marketing Corporation Deferred Compensation Trust (the "Trust"). Amounts deposited in stock unit accounts are distributed in the form of shares of Company common stock upon a payment event. Through the Trust, investment options such as mutual funds and money market funds are available to participants. The investment in the Deferred Compensation Plan and related liability are included in prepaid expenses and other current assets and accrued expenses in the Company's consolidated balance sheets, respectively. The Company determined all of its Deferred Compensation Plan investments currently held in mutual funds and money market funds are trading securities and as such are reported at fair value. Realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, recognized in net income during the years ended March 31, 2001, 2000 and 1999 were not significant. Stock units are initially recorded at fair value. NOTE 9. SEGMENT INFORMATION The Company operates through individual operating units which share similar economic characteristics, customers, distribution channels, products and services and production processes. As a result, the Company has aggregated its operating units and product lines into a single reporting segment called Targeted Marketing Services. The Company's accounting policies for segments are the same as those described in Note 1. Management evaluates segment performance based on net income/(loss). The Company's results of operations do not include revenue from internal sources in the amounts of $18,953,000, $2,163,000 and $3,026,000 during the years ended March 31, 2001, 2000, and 1999, respectively. Revenue from internal sources is wholly eliminated in the presentation of consolidated results. Revenue and long-lived assets by geographic area are as follows:
FOR THE FISCAL YEAR ENDED MARCH 31, ------------------------------------ 2001 2000 1999 ---------- ---------- ---------- Revenue from external customers United States........................................ $361,787 $298,650 $228,806 Foreign.............................................. 56,094 52,272 35,977 Long lived assets United States........................................ $107,856 $ 88,738 $ 68,932 Foreign.............................................. 25,108 29,242 21,130
27 30 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10. ACQUISITIONS AND OTHER Effective September 1, 2000, the Company, through one of its wholly-owned subsidiaries, acquired 100 percent of the outstanding common shares of Market Intelligence, Inc., an attitudinal research company, for approximately $1.0 million in initial cash consideration. The terms of the acquisition provide for additional payments of up to $1.0 million, contingent upon the business unit's performance. Effective June 1, 2000, the Company, through one of its wholly-owned subsidiaries, acquired 100 percent of the outstanding common shares of HealthCare Data Corporation, a company which provides strategic targeted marketing solutions for health-related and pharmaceutical manufacturers and retailers, for $14.2 million in cash, net of cash acquired. Effective July 1, 1999, the Company acquired certain assets and assumed certain liabilities of Alliance Research, an attitudinal research company, for $6.7 million in initial consideration, net of cash and cash equivalents acquired. Terms of the purchase agreement call for the Company to make a series of payments, subject to acceleration provisions and culminating in the first quarter of fiscal 2005, which are contingent upon future operating performance of the business purchased from Alliance Research. Effective April 21, 1999, the Company, through one of its wholly-owned subsidiaries, acquired the technology of its Checkout Prizes(R) application by virtue of a merger transaction between the Company and CompuScan. Initial cash consideration was $9.1 million, net of cash acquired. Terms of the merger agreement called for the Company to make a series of additional payments culminating in the fourth quarter of fiscal 2002. Future payments are based on specified future performance of the associated business activity. Effective January 4, 1999, the Company acquired 100 percent of the outstanding common shares of Dynamic Controls, Inc., which offers card-based loyalty marketing programs for retailers, for $4.6 million in initial cash consideration, net of cash acquired. Terms of the purchase agreement called for the Company to make a series of payments, concluded in the fourth quarter of fiscal 2001. These payments were based upon specified revenue growth. Effective December 30, 1998, the Company purchased from its minority stockholders the remaining ownership of Catalina Marketing of France, Inc. Catalina Marketing of France, Inc. owns substantially all of the outstanding stock of Catalina Marketing de France, S.A., the French operating company. Terms of the purchase agreement call for the Company to make an initial down payment and a series of payments, culminating in the fourth quarter of fiscal 2002, which are contingent upon the future operating performance of Catalina Marketing de France, S.A. Effective July 13, 1998, the Company acquired 100 percent of the outstanding common shares of Market Logic, a full service targeted marketing company that specializes in the development and fulfillment of highly sophisticated, personalized, direct marketing programs for retailers, for $1.7 million in initial cash consideration, net of cash acquired. Terms of the purchase agreement call for the Company to make a series of annual payments, culminating in the first quarter of fiscal 2003 and subject to acceleration provisions, which are contingent upon the future operating performance of Market Logic. The above referenced acquisitions have been accounted for using the purchase method of accounting for acquisitions and, accordingly, the results of operations of each acquisition have been included in the fiscal 2001, 2000, and 1999 consolidated financial statements since the date of such acquisition. The additional consideration paid or accrued under the earnout provisions of the transactions referenced above totaled $44.0 million and $22.2 million for the years ended March 31, 2001 and 2000, respectively. On January 4, 2001, the Company entered into an agreement with the Tribune Company, a minority equity investor in Supermarkets Online Holdings, Inc. ("Holdco"), the parent company of Supermarkets Online, Inc. ("SMO"), the Company's internet-based marketing and advertising subsidiary. As a part of this agreement, the Company acquired all of the Holdco common shares held by the Tribune Company, repaid a 28 31 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) subordinated convertible note, and terminated a marketing agreement between the Tribune Company and SMO. Total consideration was $10.5 million. The acquisition of the common shares was accounted for using the purchase method of accounting for business combinations. The subordinated convertible debt repayment and the marketing services agreement termination has been accounted for as a reduction in long term debt and deferred revenue, respectively (see Note 4). On October 24, 2000, the Company acquired a total of 16 US patents and 12 pending U.S. patent applications together with all foreign rights related to the inventions encompassed by the original patents and patent applications. The purchase price of these patents and patent applications of $17.0 million is being amortized on a straight-line basis over the remaining useful lives of the assets ranging from 9 to 14 years. NOTE 11. NEWLY ISSUED ACCOUNTING PRONOUNCEMENTS Effect of SFAS No. 133. In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. The implementation of SFAS No. 133 as of April 1, 2001, did not have a material effect on the Company's financial statements. Effect of SAB 101. In December 1999, the SEC staff issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB No. 101). SAB No. 101 provides guidance to SEC registrants on the recognition, presentation, and disclosure of revenue in the financial statements. The implementation of SAB No. 101 as of January 1, 2001, did not have a material effect on the Company's financial statements. NOTE 12. STOCK SPLIT A three-for-one stock split of the Company's outstanding common stock, effected as a stock dividend and an increase in the authorized common shares, was approved by the Company's Board of Directors, and the increase in the authorized common shares was approved by the Company's stockholders at the annual meeting held on July 18, 2000. The stock dividend was paid August 17, 2000 to stockholders of record on July 26, 2000. Holders of common stock received two additional shares of common stock for each share held of record as of July 26, 2000. All applicable references to common stock shares, including the calculations of EPS have been adjusted for all periods shown to reflect the stock split and the increase in authorized shares. 29 32 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information called for by Items 10, 11, 12 and 13 will be contained in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders under the captions "Compensation of Executive Officers and Non-Employee Directors," "Share Ownership of Certain Beneficial Owners and Management" and "Nomination and Election of Directors" and is incorporated herein by reference. The definitive Proxy Statement will be filed with the Commission prior to June 30, 2001. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE ---- (a)1. Financial Statements. The following is a list of the Consolidated Financial Statements included in Item 8 of Part II. Report of Independent Certified Public Accountants.......... 13 Consolidated Income Statements, Years Ended March 31, 2001, 2000, and 1999............................................ 14 Consolidated Balance Sheets at March 31, 2001 and 2000...... 15 Consolidated Statements of Stockholders' Equity, Years Ended March 31, 2001, 2000, and 1999............................ 16 Consolidated Statements of Cash Flows, Years Ended March 31, 2001, 2000, and 1999...................................... 17 Notes to the Consolidated Financial Statements.............. 18 (a)2. Financial Statement Schedules (EDGAR only). All other schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (a)3. Index to Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT ------- ----------------------- *3.3 -- Restated Certificate of Incorporation **3.3.1 -- Certificate of Amendment of Certificate of Incorporation, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 **3.3.2 -- Certificate of Designation, Preferences and Rights setting forth the terms of the Company's Series X Junior Participating Preferred Stock, par value $.01 per share, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 *3.4 -- Restated Bylaws **10.4 -- Amended and Restated 1989 Stock Option Plan, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1994 **10.4.1 -- Second Amended and Restated 1989 Stock Option Plan, a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended June 30, 1997
30 33
EXHIBIT NO. DESCRIPTION OF DOCUMENT ------- ----------------------- **10.4.2 -- Third Amended and Restated 1989 Stock Option Plan, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1999 *10.12 -- Form of Director and Officer Indemnification Agreement **10.18 -- Lease Agreement dated as of June 30, 1993 by and between QP One Corporation, a Minnesota corporation, as landlord, and Registrant, as tenant, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1994 **10.18.1 -- First Amendment dated as of December 20, 1993, to the Lease Agreement dated as of June 30, 1993, by and between QP One Corporation, a Minnesota corporation, as landlord, and Registrant, as tenant, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1994 **10.21 -- 1992 Director Stock Grant Plan, as amended on July 23, 1996, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 **10.22 -- Employee Payroll Deduction Stock Purchase Plan, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1995 **10.24 -- Lease Agreement dated as of September 5, 1996 by and between Interior Design Services, Inc., a Florida corporation, as landlord, and Registrant, as tenant, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 **10.25 -- Stockholder Protection Agreement, dated May 8, 1997, between the Registrant and ChaseMellon Shareholder Services, L.L.C., as rights agent, a copy of which is attached as an exhibit to the Company's Current Report on Form 8-K filed on May 8, 1997 **10.26 -- Credit Agreement dated as of September 30, 1997, by and between the Registrant and NationsBank, National Association, as agent and lender, and the other lenders party thereto, a copy of which is attached as an exhibit to the Company's Report on Form 10Q for the quarter ended September 30, 1997 **10.26.1 -- First amendment dated as of August 12, 1998, to the Credit Agreement dated as of September 30, 1997, by and between the Registrant and NationsBank, National Association, as agent and lender, and other lenders party thereto, a copy of which is attached as an exhibit to the Company's Report on Form 10Q for the quarter ended September 30, 1998 **10.26.2 -- Second Amendment dated as of February 19, 1999, to the Credit Agreement dated as of September 30, 1997, by and between the Registrant and Nationsbank, National Association, as agent and lender, and the other lenders party thereto, a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended September 30, 1999 **10.27 -- 1999 Stock Option Plan, a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended June 30, 1999 **10.28 -- Lease Agreement dated as of October 21, 1999 by and between First Security Bank, National Association, as the owner trustee under Dolphin Realty Trust 1999-1, as lessor, and Catalina Marketing Sales Corporation, as lessee, a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended September 30, 1999 **10.29 -- Participation Agreement dated as of October 21, 1999 among Catalina Marketing Sales Corporation, as lessee; the Registrant, as guarantor; First Security Bank, National Association, as the owner trustee under Dolphin Realty Trust 1999-1, as lessor and borrower; the various banks and other lending institutions and First Union National Bank, as the agent for the lenders, a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended September 30, 1999
31 34
EXHIBIT NO. DESCRIPTION OF DOCUMENT ------- ----------------------- **10.30 -- Purchase and Sale Agreement dated as of October 21, 1999 by and among 200 Carillon, LLC, as seller, Echelon International Corporation, as developer, and Catalina Marketing Sales Corporation, as buyer, a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended September 30, 1999 **10.31 -- Credit Agreement dated as of September 25, 2000, by and between the Registrant and Bank One, NA, as agent and lender, and the other lenders party thereto, a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended September 30, 2000 **10.32 -- Amendment No. 1 To Certain Operative Agreements dated as September 15, 2000, by and between First Security Bank, National Association, as the owner trustee under Dolphin Realty Trust 1999-1, as lessor, and Catalina Marketing Sales Corporation, as lessee a copy of which is attached as an exhibit to the Company's Report on Form 10-Q for the quarter ended September 30, 2000 21 -- List of subsidiaries 23 -- Consent of independent certified public accountants
- --------------- * Incorporated by reference to the Company's Registration Statement on Form S-1 Registration No. 33-45732, originally filed with the Securities and Exchange Commission on February 14, 1992, and declared effective (as amended) on March 26, 1992. ** Previously filed as indicated. 32 35 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ST. PETERSBURG, STATE OF FLORIDA, ON JUNE 19, 2001. CATALINA MARKETING CORPORATION (Registrant) By: /s/ JOSEPH P. PORT ------------------------------------ Joseph P. Port, Executive Vice President and Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ DANIEL D. GRANGER Chairman of the Board, President, June 19, 2001 - ----------------------------------------------------- and Chief Executive Officer Daniel D. Granger /s/ FRANK H. BARKER Director June 19, 2001 - ----------------------------------------------------- Frank H. Barker /s/ FREDERICK W. BEINECKE Director June 19, 2001 - ----------------------------------------------------- Frederick W. Beinecke /s/ PATRICK W. COLLINS Director June 19, 2001 - ----------------------------------------------------- Patrick W. Collins /s/ ANNE MACDONALD Director June 19, 2001 - ----------------------------------------------------- Anne MacDonald /s/ EVELYN FOLLIT Director June 19, 2001 - ----------------------------------------------------- Evelyn Follit /s/ THOMAS W. SMITH Director June 19, 2001 - ----------------------------------------------------- Thomas W. Smith /s/ MICHAEL B. WILSON Director June 19, 2001 - ----------------------------------------------------- Michael B. Wilson /s/ JOSEPH P. PORT Executive Vice President and June 19, 2001 - ----------------------------------------------------- Chief Financial Officer Joseph P. Port
33 -----END PRIVACY-ENHANCED MESSAGE-----