-----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, IVYJD0frgL46U45GFsGD9QOxDVQoJ1oN7HTOnVloocQcvRqMpU1cz3Sj19ntlt4N /PSmknPKQRuHxSptYI2mTg== 0000950144-99-007766.txt : 19990621 0000950144-99-007766.hdr.sgml : 19990621 ACCESSION NUMBER: 0000950144-99-007766 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990618 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: 99648860 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 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM --------------- TO ---------------
COMMISSION FILE NUMBER: 1-11008 CATALINA MARKETING CORPORATION (Exact Name of Registrant as Specified in its Charter) DELAWARE 33-0499007 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification Number) 11300 9TH STREET NORTH, ST. PETERSBURG, 33716-2329 FLORIDA (Zip Code) (Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (727) 579-5000 Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ---------------- Common Stock, $0.01 Par Value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price of such stock as of June 1, 1999, as reported by the New York Stock Exchange, Inc., was $1,648,484,213. The number of shares of Registrant's common stock, par value $0.01 per share, outstanding as of June 1, 1999, was 18,574,470. DOCUMENTS INCORPORATED BY REFERENCE Certain portions of Registrant's Definitive Proxy Statement for 1999 -- are incorporated by reference in Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS FORM 10-K
PAGE NO. ---- PART I Item 1 Business.................................................... 1 Item 2 Properties.................................................. 4 Item 3 Legal Proceedings........................................... 4 Item 4 Submission of Matters to a Vote of Security Holders......... 4 PART II Item 5 Market for Registrant's Common Stock and Related Stockholder 4 Matters..................................................... Item 6 Selected Financial Data..................................... 5 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 5 Item 7A Quantitative and Qualitative Disclosures About Market Risk........................................................ 10 Item 8 Consolidated Financial Statements and Supplementary Data.... 11 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 27 PART III Item 10 Directors and Executive Officers of the Registrant.......... 27 Item 11 Executive Compensation...................................... 27 Item 12 Security Ownership of Certain Beneficial Owners and Management.................................................. 27 Item 13 Certain Relationships and Related Transactions.............. 27 PART IV Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K......................................................... 27
3 PART I ITEM 1. BUSINESS GENERAL Catalina Marketing Corporation ("Catalina Marketing" or the "Company") provides a multi-functional communications network that provides a wide range of strategic targeted marketing solutions for manufacturers and retailers. The Company's unique capability is to be able to offer precision targeted marketing in a way in which no other medium, such as television or radio, can perform. Catalina Marketing Corporation delivers strategic marketing solutions for retailers and manufacturers through a variety of product lines. The evolution of the Company's product lines has resulted in a single Targeted Marketing Services organization with interrelated operating groups, which engages consumers to facilitate their purchase decisions. As of March 31, 1999, the Company employed 1,001 people reporting into 22 offices throughout the United States, Europe and Asia. TARGETED MARKETING SERVICES THROUGH THE CATALINA MARKETING NETWORK(R) Catalina Marketing Corporation was founded in 1983 to provide consumers with in-store targeted coupons. Employing data mining technology from the Company's in-store Network ("the Catalina Marketing Network"), Catalina Marketing now offers in-store, online, and at-home reach to provide its strategic marketing solutions. These solutions are purchase-based, individually customized communications and promotions for manufacturers and retailers that increase sales through incentives, loyalty programs, sampling, and advertising messages. The Company's services enable retailers and manufacturers to impact purchase decisions before, during and after the purchase using a variety of strategic, targeted programs. At present, the primary product line of the Catalina Marketing Network is the in-store delivery of incentives at the checkout. Catalina Marketing links its proprietary software, personal computers, central databases and specially designed thermal printers with a retailer's point-of-sale controllers and scanners. The system prints customized promotion certificates at the point of sale based on product Uniform Product Codes (UPCs) or other scanned information. The printed promotions are handed to consumers by the cashier at the end of the shopping transaction. Catalina Marketing contracts with manufacturers and retailers to print promotions and receives a fee for each promotion printed. Catalina Marketing enters into agreements with retail chains to install the Catalina Marketing Network in all or selected stores within the chain, either regionally or nationally. Upon installation, the retailer pays a one-time fee for each installation and generally agrees to use the Network in its store for a minimum of five years. Catalina Marketing pays distribution fees to the retailer based on the number of manufacturer promotions printed. The equipment installed in each retail store consists of a thermal printer at each checkout lane linked by a personal computer on premises to the retailer's point-of-sale controller and scanning equipment. Catalina Marketing operates two United States data processing facilities that communicate via modem with the personal computers installed in the stores to send promotional instructions and retrieve performance data. All of the equipment and supplies, including computers, printers and paper, used in a retail installation are purchased through outside sources. While there are currently a few primary suppliers, Catalina Marketing believes that alternate sources of supply are available without material interruptions of the Company's business. The services of the Catalina Marketing Network are driven by proprietary software. The software design is flexible and upgradable, supporting new applications that are developed and implemented on a continuous basis. This flexibility allows the network to expand and evolve as industry or customer requirements change. SERVICES Catalina Marketing offers its core programs and services through the Catalina Marketing Network, which is operated mainly in supermarkets. These targeted marketing solutions, including discount coupons, loyalty 1 4 marketing programs, sampling, advertising, in-store instant-win games and other incentives, are delivered directly to shoppers based on their actual purchase behavior. By specifying which purchases will "trigger" a promotion to print, manufacturers and retailers can deliver customized incentives and messages to only the consumers they wish to reach. An integrated program of applications is designed to reach shoppers before, during and after the purchase. Each application is designed to meet specific objectives of consumer packaged goods manufacturers and supermarket retailers. Loyalty Programs allow manufacturers and retailers to target specific households based on 52 weeks of past purchase data. For retailers, loyalty programs include frequent shopper card production and data management. Sampling programs target consumers based on either current purchase behavior or through a household-level database and deliver samples upon request. Samples can be full or trial-sized and delivered in-store or at home. Advertising programs allow manufacturers to reach a captive audience through a toll-free number, announcement or message delivered at the checkout stand. In-store instant-win games are tied-in with the retailer by offering a chance to win instantly at the checkout stand based on products that are purchased. Couponing programs, such as Checkout Coupon(R) and Checkout Direct(R), use patented UPC-based scanner technology to target consumers and distribute coupons at checkout based on actual purchase behavior. Catalina Marketing services can offer up to 13 four-week cycles of time on the network each year for more than 500 product categories, such as coffee, baby food and frozen entrees. Exclusive rights to product categories are generally given to the purchasers of specific cycle or cycles in particular product categories, and for national programs, a right of first acceptance to purchase the same cycles in the subsequent year is given to the manufacturer who purchased the earlier cycles. The primary revenue source of the Catalina Marketing Network is a function of total promotions printed based on a promotion charge, with a minimum category fee based on shopper reach of the network and category unit volume. Redemption processing of these promotions is similar to that of traditional manufacturer coupons. Retailers provide discounts to consumers who present the coupons, send redeemed coupons to clearinghouses, and receive reimbursements for the discounts provided and handling fees from the manufacturers. Loyalty marketing services offer targeted direct mail marketing services through Market Logic, acquired in July 1998, and loyalty card production services through Dynamic Controls Inc. (DCI or DCI Cardmarketing), acquired in January 1999. Catalina Marketing's core domestic product lines, described above, contributed approximately 80 percent of the Company's revenues in fiscal 1999, 83 percent in fiscal 1998, and 89 percent in fiscal 1997. As of March 31, 1999, the Catalina Marketing Network was installed in 12,092 United States supermarkets reaching more than 152 million shoppers in the United States weekly. The international operations of Catalina Marketing provide in-store electronic marketing services for consumers in Europe and Asia. The Company's current presence in Europe is in the United Kingdom and France. In Asia, the Company currently operates in Japan. As of March 31, 1999, Europe had reached more than 1,700 supermarket retailers, and weekly shopper reach was approximately 22 million. In Asia, where the Company provides outdoor media services, in addition to in-store electronic marketing services, two of the top five general merchandise stores have partnered with Catalina Marketing, including Jusco and Seiyu, for a weekly shopper reach now totaling nearly 7 million as of March 31, 1999. Developing product lines include Health Resource Publishing (HRP) and SuperMarkets Online (SMO). Health Resource Publishing, formed in fiscal 1995, uses an in-store prescription-based technology to provide direct-to-consumer advertising to pharmacy customers based on their individual pharmacy purchases or other related patient information. The Health Resource(R) newsletter is triggered by the National Drug Code found on all prescription drugs. When a prescription is processed, a customized newsletter with prescription information, therapeutically relevant editorial and product advertising material is printed and handed to the customer along with the prescription. As of March 31, 1999, the HRP system was installed in 3,861 pharmacy outlets. SuperMarkets Online (SMO), originally tested in fiscal 1996, provides the industry's only online secure coupon format through its ValuPage(SM) service at www.valupage.com. The ValuPage service was rolled 2 5 out nationally in January 1998 and makes use of a bar code that, when printed at home and presented at the checkout lane of more than 9,300 participating supermarkets, along with the promoted items, issues Web Bucks, cash rewards that consumers use to save on their next visit to the store. SMO also offers a ValuPage e-mail service that delivers ValuPage coupons and other consumer packaged goods promotions directly to a shopper's e-mail in-box. SALES AND MARKETING The Company has a manufacturer sales force and a retail sales and marketing force, both working on providing the Company's targeted marketing services to its customers. The combined manufacturer and retail sale forces provide a coordinated sale approach to each client in order to offer a tailored targeted marketing solution. Manufacturer Sales Force: The primary focus of the Company's marketing effort is to attract national consumer packaged goods manufacturers to purchase category cycles. The sales and client service force of Catalina Marketing focus on current and prospective customers, and work with them on a consultative basis to develop and implement customized, targeted marketing programs that fit each brand's strategies and objectives. Retail Sales and Marketing Force: Catalina Marketing has two goals for its retail force. The first is to continue to expand the Catalina Marketing Network by installing stores in major markets that are not currently part of the Catalina Marketing Network. The second is to encourage currently installed retailers to use the Company's full-service loyalty marketing services, as well as Network-generated incentives to promote private label brands or high-margin departments. RESEARCH AND DEVELOPMENT The Company's expenditures for research and development are generally for market research, software development, system upgrades and pilot-project execution to create, test and support new applications for the Catalina Marketing Network. Catalina Marketing believes that new service and application development, along with market expansion, are vital to maintain its continued growth. COMPETITION Catalina Marketing competes for manufacturers' advertising and consumer promotion budgets with a wide range of media, including television, radio, print and direct mail advertising, as well as several alternative in-store and point-of-sale programs. Within the coupon industry, the Company competes with various traditional coupon delivery methods that are less expensive per delivered coupon, including free-standing inserts (FSIs), newspapers, direct mail, magazines and in- or on-product packaging, as well as other "in-store" marketing companies that use a variety of coupon delivery methods. Catalina Marketing competes for promotional dollars based on the efficiency of the Catalina Marketing Network, its ability to accurately and effectively target potential customers, the number of shoppers reached, and the general ability to influence consumer buying behavior. The end result is a lower cost per unit moved rather than number of coupons printed, enabling manufacturers and retailers to meet their strategic objectives. EMPLOYEES Catalina Marketing employed 1,001 people as of March 31, 1999, substantially all of whom were full-time employees, and none of whom were covered by a collective bargaining arrangement. More than 840 are employed in the U.S. Approximately 28 percent of which are employed in the St. Petersburg, Florida headquarters. PATENTS, PROPRIETARY INFORMATION AND TRADEMARKS Catalina Marketing currently holds several United States and foreign patents on certain aspects of the Catalina Marketing Network and has several patent applications pending. These patents provide a competitive 3 6 advantage; accordingly the Company will vigorously defend its proprietary rights in all appropriate circumstances. While patent position is important, Catalina Marketing believes its ability to market its services to retailers and manufacturers, and to develop new products, will be the major factor affecting its future performance. Catalina Marketing also believes that product recognition is an important competitive factor in the electronic marketing and promotion industry. Accordingly, the Company promotes its service marks and trademarks in connection with its product and marketing activities. It also regards certain computer software in the Catalina Marketing Network and each additional service application as proprietary and seeks to protect it with copyrights, trade secret laws and internal non-disclosure agreements and safeguards. Such methods may not afford complete protection, and there can be no assurance that others will not independently develop such know-how, concepts or ideas. ITEM 2. PROPERTIES The Company's headquarters facility, which includes its principal administrative, marketing, information technology and product development offices, is located in 65,207 square feet of leased space in St. Petersburg, Florida. The Company leases an additional 18 sales and support offices across the United States, consisting of approximately 157,000 square feet in the aggregate, and three offices for its foreign operations. The Company believes that its existing facilities are adequate to meet current requirements and that suitable additional space will be available as needed to accommodate growth of its operations and additional sales and support offices for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS Catalina Marketing is involved in certain litigation arising out of the Company's business, including litigation initiated by the Company to protect its intellectual property or to defend itself against claims brought on by others. In the opinion of management of Catalina Marketing, the ultimate outcome of this litigation will not have a material adverse effect on the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS A. MARKET PRICES OF STOCK The Company's Common Stock, par value $0.01 per share ("Common Stock"), is traded on the New York Stock Exchange ("NYSE") under the symbol "POS". The following table sets forth the high and low closing prices as reported by the NYSE for the Common Stock for the quarters ended as follows:
HIGH LOW ---- --- Fiscal 1999: March 31, 1999............................................ $85 7/8 $61 5/8 December 31, 1998......................................... $68 3/8 $41 1/2 September 30, 1998........................................ $54 15/16 $39 1/2 June 30, 1998............................................. $56 $42 7/8 Fiscal 1998: March 31, 1998............................................ $53 9/16 $42 1/16 December 31, 1997......................................... $54 11/16 $44 3/4 September 30, 1997........................................ $53 3/4 $41 1/2 June 30, 1997............................................. $48 1/8 $25 3/8
4 7 B. STOCKHOLDERS As of March 31, 1999, there were approximately 526 registered holders of shares of Common Stock. C. DIVIDENDS The Company has not paid any cash dividends to date, and there are no current plans to pay a cash dividend in the future. ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA The selected Income Statement Data and Balance Sheet Data set forth below are derived from the audited Consolidated Financial Statements of the Company and the related notes thereto. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and Notes to the Consolidated Financial Statements included elsewhere in this Annual Report.
FISCAL YEAR ENDED MARCH 31, ---------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Income Statement Data: Revenues.................................. $264,783 $217,150 $172,143 $134,155 $113,254 Costs and expenses: Direct operating expenses.............. 110,167 84,191 62,482 47,661 41,389 Selling, general and administrative.... 59,363 56,364 48,379 37,358 28,616 Depreciation and amortization.......... 27,342 23,703 17,939 14,328 15,073 -------- -------- -------- -------- -------- Total costs and expenses.................. 196,872 164,258 128,800 99,347 85,078 -------- -------- -------- -------- -------- Income from operations.................... 67,911 52,892 43,343 34,808 28,176 Net income................................ $ 37,608 $ 32,871 $ 27,241 $ 22,028 $ 17,229 Diluted Net Income Per Common Share....... $ 1.98 $ 1.73 $ 1.33 $ 1.11 $ 0.86 Diluted Weighted Average Common Shares Outstanding............................ 19,009 19,026 20,491 19,922 20,128 Other Data: U.S. Checkout Coupon stores installed at end of period.......................... 12,092 11,164 10,745 9,766 9,004 International Checkout Coupon stores installed at end of period............. 1,935 1,372 941 558 168 Capital expenditures, net................. $ 39,954 $ 24,250 $ 34,605 $ 23,121 $ 19,048 Balance Sheet Data: Cash and cash equivalents................. $ 13,942 $ 18,434 $ 13,698 $ 25,778 $ 30,729 Property and equipment, net............... $ 87,686 $ 70,513 $ 69,578 $ 46,253 $ 37,440 Total assets.............................. $221,047 $157,066 $154,696 $114,187 $ 96,556 Long term debt (including current portion of long term debt)..................... $ 1,040 $ 1,340 $ 2,178 -- -- Total stockholders' equity................ $120,933 $ 90,042 $ 96,938 $ 71,222 $ 55,494
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Catalina Marketing Corporation ("Catalina Marketing" or the "Company") provides a multi-functional communications network that provides a wide range of strategic targeted marketing solutions for manufactur- 5 8 ers and retailers. The Company's unique capability is to be able to offer precision targeted marketing in a way in which no other medium, such as television or radio, can perform. Catalina Marketing Corporation delivers strategic marketing solutions for retailers and manufacturers through a variety of product lines. The evolution of the Company's product lines has resulted in a single Targeted Marketing organization with interrelated operating groups, which engages consumers to facilitate purchase decisions. As of March 31, 1999, the Company employed 1,001 people reporting into 22 offices throughout the United States, Europe and Asia. RESULTS OF OPERATIONS Year Ended March 31, 1999 compared to Year Ended March 31, 1998 Revenues were $264.8 million in fiscal 1999, up 21.9 percent over revenues of $217.1 in fiscal 1998. The increase in revenues is due to both a growth in Checkout Direct(R) programs as well as increases in loyalty and other direct mail marketing programs. Loyalty and direct mail marketing programs include, among others, the revenues added by the acquisition of Market Logic, which was acquired on July 13, 1998 and DCI, which was acquired on January 4, 1999. In the United States, the Catalina Marketing Network was in 12,092 stores at March 31, 1999, which reach approximately 152 million shoppers each week as compared to 11,164 stores reaching approximately 143 million shoppers each week at March 31, 1998. The Health Resource Network was in 3,861 pharmacies at March 31, 1999 as compared to 1,920 pharmacies at March 31, 1998. Outside the U.S., the Catalina Marketing Network was in 1,935 stores at March 31, 1999, which reach approximately 29 million shoppers each week as compared to 1,372 stores reaching approximately 20 million shoppers each week at March 31, 1998. In fiscal 1999, the Company installed its Catalina Marketing Network in 928 stores (net of deinstallations) in the United States as compared to 419 stores in fiscal 1998. Deinstallation activity can and does occur primarily due to the consolidation and business combination of supermarket chains as well as store closures made by retailers in the ordinary course of business. The Company also installed its Health Resource Network in 1,941 pharmacies (net of deinstallations) in fiscal 1999 as compared to 725 pharmacies in fiscal 1998. Outside the United States, the Company installed 563 stores (net of deinstallations) in fiscal 1999 as compared to 731 stores (with respect to continuing operations, net of deinstallations) in fiscal 1998. During fiscal 1998, the Company ceased operations in 300 stores in and around Mexico City. Direct operating expenses consist of retailer fees, paper, sales commissions, loyalty and direct mail marketing expenses, marketing expenses, the expenses of operating and maintaining the Catalina Marketing Network, primarily expenses relating to operations personnel and service offices, provision for doubtful accounts and the direct expenses associated with operating the outdoor media business in a majority-owned subsidiary in Asia. Direct operating expenses increased in absolute terms to $110.2 million in fiscal 1999 from $84.2 million in fiscal 1998. Direct operating expenses in fiscal 1999 as a percentage of revenues increased to 41.6 percent from 38.8 percent in fiscal 1998. This increase in fiscal 1999 is principally attributable to the Company's increase in loyalty and direct marketing programs, including Market Logic and DCI businesses, which by their nature have a higher material cost component of direct costs as a function of revenue than the Company's other core product line services. Selling, general and administrative expenses include personnel-related costs of selling and administrative staff, overhead and new product development expenses. Selling, general and administrative expenses in fiscal 1999 were $59.4 million compared to $56.4 million in fiscal 1998, an increase of 5.3 percent or $3.0 million. The increase relates primarily to administrative expenses of new business ventures and products which were partially offset by the $3.5 million one time expense incurred in the third quarter of fiscal 1998 associated with the shutdown of the Company's Mexican operations. As a percentage of revenues, selling, general and administrative expenses decreased 3.6 percent in fiscal 1999, to 22.4 percent from 26.0 percent in fiscal 1998. This decrease is primarily attributable to the $3.5 million charge referred to above. Additionally, the Company was successful in lowering and limiting certain categories of overhead expenses during the fiscal 1999 periods. Depreciation and amortization increased to $27.3 million for fiscal 1999 from $23.7 million for fiscal 1998. Depreciation increased due to the investment in capital expenditures, during the current and prior periods, associated with new operating units and product lines, data processing equipment and the increase in 6 9 stores installed. Amortization expense increased due to the increases in goodwill and other intangible assets related to the Company's acquisitions. Interest income (expense) and other was $2.3 million net expense for fiscal 1999 compared to $1.0 million net expense for fiscal 1998. The increase in expense is principally attributable to the Company writing off its $3.0 million investment in Intelledge Corporation in the second quarter of fiscal 1999. As a partial offset, the Company incurred interest expense on borrowings from its credit facility during the fiscal 1998 and had no borrowings on this facility in fiscal 1999. The provision for income taxes increased to $28.0 million, or 42.7 percent of income before income taxes, for fiscal 1999 compared to $19.1 million, or 36.7 percent of income before income taxes, for fiscal 1998. The increase is primarily due to the valuation allowance recorded against the $3.0 million deferred tax benefit for the Intelledge investment write off in the second quarter of fiscal 1999 and the $3.1 million tax benefit arising due to the shutdown of the Mexican operations in the third quarter of fiscal 1998. Excluding the effect of the Mexican operations shutdown, the Company's effective tax rate is higher than the federal statutory income tax rate due to state and foreign income taxes, the inability to currently utilize losses of a majority owned foreign subsidiary for tax purposes and, in the case of fiscal 1999, the valuation allowance referred to in the previous sentence. Year Ended March 31, 1998 compared to Year Ended March 31, 1997 Revenues were $217.1 million in fiscal 1998, up 26 percent over revenues of $172.1 in fiscal 1997. The increase in revenues is primarily due to a greater distribution of Checkout Coupon incentives worldwide, growth in new programs such as Checkout Direct and, to a lesser extent, revenues added by an acquisition by the Company on October 10, 1996 of a 51 percent interest in an Asian based outdoor media business. In the United States, the Catalina Marketing Network printed 2.56 billion promotions during fiscal 1998, up 10.9 percent compared to 2.31 billion promotions fiscal 1997. In the U.S., the Catalina Marketing Network was in 11,164 stores at March 31, 1998, which reach approximately 143 million shoppers each week as compared to 10,745 stores reaching approximately 144 million shoppers each week at March 31, 1997. The Company believes that the shopper reach statistic, which represents the average of the total transactions observed on the Company's Network for the three week period immediately preceding the fiscal year end period, was lower at March 31, 1998 than the March 31, 1997 level due to the timing of the Easter holiday. Easter occurred on April 10, 1998 as compared to March 30, 1997 in the prior year. As such, the heightened seasonal shopping activity associated with the holiday was captured by the prior year statistic, but is not reflected in the statistic as of March 31, 1998. Had the seasonal activity been reflected in the fiscal 1998 statistic, the Company believes the shopper reach statistic would have been approximately 146 million. The Health Resource Network was in 1,920 pharmacies at March 31, 1998 as compared to 1,195 pharmacies at March 31, 1997. Outside the United States, the Catalina Marketing Network was in 1,372 stores at March 31, 1998, which reach approximately 20 million shoppers each week as compared to 941 stores reaching approximately 18 million shoppers each week at March 31, 1997. In fiscal 1998, the Company installed its Catalina Marketing Network in 419 stores, net of deinstallations, in the U.S. as compared to 979 stores in fiscal 1997. Deinstallation activity can and does occur primarily due to the consolidation and business combination of supermarket chains as well as store closures made by retailers in the ordinary course of business. The Company also installed its Health Resource Network in 725 pharmacies, net of deinstallations, in fiscal 1998 as compared to 958 pharmacies in fiscal 1997. Outside the United States, the Company installed 431 stores, net of deinstallations, in fiscal 1998 as compared to 383 stores in fiscal 1997. During fiscal 1998, the Company ceased operations in 300 stores in and around Mexico City. Direct operating expenses consist of retailer fees, paper, sales commissions and the expenses of operating and maintaining the Catalina Marketing Network, primarily expenses relating to operations personnel and service offices, provision for doubtful accounts and the direct expenses associated with operating the outdoor media business in a majority-owned subsidiary in Asia. The majority owned Asian subsidiary was purchased in October 1996. Direct operating expenses increased in absolute terms to $84.2 million in fiscal 1998 from $62.5 7 10 million in fiscal 1997. Direct operating expenses in fiscal 1998 as a percentage of revenues increased to 38.8 percent from 36.3 percent in fiscal 1997. This increase in fiscal 1998 is principally attributable to the addition of the direct costs associated with running the outdoor media business in Asia. Selling, general and administrative expenses include personnel-related costs of selling and administrative staff, overhead and new product development expenses. Selling, general and administrative expenses in fiscal 1998 were $56.4 million compared to $48.4 million in fiscal 1997, an increase of 16.5 percent or $8.0 million. The increase relates primarily to higher costs associated with a larger sales force, and administrative expenses of new business ventures and products. As a percentage of revenues, selling, general and administrative expenses decreased 2.1 percent in fiscal 1998, to 26.0 percent from 28.1 percent in fiscal 1997. This decrease is due to the outdoor media business in Asia, which typically has a higher percentage of direct costs, as indicated above, and a smaller percentage of selling, general and administrative expenses than the Company's other businesses, as well as the fiscal 1997 period including the electronic clearing business which ceased operations on March 31, 1997. This decrease was partially offset by a $3.5 million one time expense incurred related to the shutdown of the Mexican operations in the third quarter of fiscal 1998. Depreciation and amortization increased to $23.7 million for fiscal 1998 from $17.9 million for fiscal 1997. Depreciation increased due to the increase in fiscal 1997 capital expenditures associated with new business ventures and data processing equipment. Interest income (expense) and other decreased to $1.0 million net expense for fiscal 1998 from $1.2 million net income for fiscal 1997. The decrease is primarily due to the Company incurring interest expense on borrowings from its credit facility during fiscal 1998. The provision for income taxes increased to $19.1 million, or 36.7 percent of income before income taxes and minority interest, for fiscal 1998 compared to $17.9 million, or 40.0 percent of income before income taxes and minority interest, for fiscal 1997. The decrease in the provision as a percent of income before income tax and minority interest for fiscal 1998 is due to a $3.1 million federal and state tax benefit arising from the shutdown of the Mexican operations in fiscal 1998. Excluding the effect of the Mexican operations shutdown, the Company's effective tax rate is higher than the federal statutory income tax rate due to state and foreign income taxes and the inability to currently utilize losses of other majority owned foreign subsidiaries for tax purposes. QUARTERLY RESULTS The following table presents certain unaudited quarterly results for the last eight quarters (dollars in thousands, except per share data):
THREE MONTHS ENDED --------------------------------------------------------------------------------- MAR 31, DEC 31, SEPT 30, JUNE 30, MAR 31, DEC 31, SEPT 30, JUNE 30, 1999 1998 1998 1998 1998 1997 1997 1997 ------- ------- -------- -------- ------- ------- -------- -------- Revenues................................... $75,897 $67,604 $64,448 $56,834 $54,061 $63,703 $52,727 $46,659 Direct operating expenses.................. 31,140 27,279 28,198 23,550 21,999 23,752 20,407 18,033 Selling, general and administrative........ 16,371 13,665 14,022 15,305 12,486 18,561 12,421 12,896 Depreciation and amortization.............. 7,369 6,931 6,638 6,404 6,476 5,613 5,923 5,691 ------- ------- ------- ------- ------- ------- ------- ------- Income from operations..................... 21,017 19,729 15,590 11,575 13,100 15,777 13,976 10,039 Interest income (expense) and other........ 388 199 (2,893) (28) 28 (208) (390) (393) Income taxes............................... (8,939) (7,913) (6,308) (4,809) (5,001) (4,706) (5,342) (4,009) ------- ------- ------- ------- ------- ------- ------- ------- Net income................................. 12,466 12,015 $ 6,389 $ 6,738 $ 8,127 10,863 $ 8,244 $ 5,637 ======= ======= ======= ======= ======= ======= ======= ======= Diluted Net Income Per Common Share $ .65 $ .64 $ .34 $ .35 $ .43 $ .57 $ .43 $ .30 Diluted Weighted Average Common Shares Outstanding.............................. 19,165 18,891 18,963 19,033 19,107 19,118 19,146 19,072 U.S. Checkout Coupon Business: Stores at quarter end:..................... 12,092 11,814 11,621 11,432 11,164 10,979 10,801 10,832 Net stores installed during quarter: 278 193 189 268 185 178 (31) 87 Promotions printed (in millions):.......... 660 664 654 607 543 764 660 597 Weekly shopper reach at quarter end (in millions):............................... 152 156 151 153 143 145 142 147
8 11 The Company expects its revenues to fluctuate in accordance with periods of higher promotional activity by manufacturers. The pattern of coupon distribution, however, is irregular and may change from period to period depending on many factors, including the economy, competition, the timing of new product introductions and the timing of manufacturers' promotion planning and implementation. These factors, as well as the overall growth in the number of retailer and manufacturer contracts with the Company, tend to influence the Company's revenues and profits. LIQUIDITY AND CAPITAL RESOURCES The Company's primary capital expenditures are store equipment and third-party store installation costs, as well as data processing equipment for the Company's central data processing facilities. Total store equipment and third-party store installation costs range from $5,000 to $13,000 per store. During fiscal 1999 and fiscal 1998, the Company made net capital expenditures of $39.9 million and $24.2 million, respectively. The pace of installations varies depending on the timing of contracts entered into with retailers and the scheduling of store installations by mutual agreement. During fiscal 1999, the Company spent $5.6 million more on store equipment and spent $5.8 million more on data processing equipment and furniture and fixtures compared to fiscal 1998. Effective July 13, 1998, the Company acquired 100 percent of the outstanding common shares of Market Logic, a full service targeted marketing company that specializes in the development and fulfillment of highly sophisticated, personalized, direct marketing programs for retailers, for $1.8 million in initial cash consideration, net of cash acquired. Terms of the purchase agreement call for the Company to make a series of payments, which are contingent upon the future operating performance of Market Logic. Effective December 30, 1998, the Company purchased from its minority stockholders the remaining ownership of Catalina Marketing of France, Inc. Catalina Marketing of France, Inc. owns substantially all of the outstanding stock of Catalina Marketing de France, S.A., the French operating company. Terms of the purchase agreement call for the Company to make an initial down payment and a series of payments to the minority stockholders, which are contingent upon the future operating performance of Catalina Marketing de France, S.A. Effective January 4, 1999, the Company acquired 100 percent of the outstanding common shares of Dynamic Controls, Inc., which offers card-based loyalty marketing programs for retailers, for $4.6 million in initial cash consideration, net of cash acquired. Terms of the purchase agreement call for the Company to make an initial down payment and a series of payments, which are based upon specified future revenue growth targets. Effective October 1998, the Board of Directors authorized management to repurchase $50 million of the Company's common stock. This authorization replaced the $30 million repurchase authorization, which had been in place since November 1997. During fiscal 1999, the Company purchased 371,100 shares of its common stock for $18.2 million. Of the shares repurchased in fiscal 1999, 101,000 shares were purchased under the $50 million authorization for $6.5 million, and the balance of 270,100 shares were purchased under the $30 million authorization for $11.7 million. Under the $30 million authorization, a total of 495,100 shares were purchased for $22.6 million. The remaining availability under the $30 million authorization was replaced by the $50 million authorization. As of March 31, 1999, $43.5 million is available for repurchase under the $50 million authorization. The Company believes working capital generated by operations along with existing credit facilities are sufficient for its overall capital requirements. OTHER Year 2000 Readiness Disclosure This year 2000 disclosure is the most current information available and replaces all previous disclosures made by the Company in its filings on Form 10-Q and Form 10-K, and in its Annual Report of shareholders. 9 12 In the next year, many companies will face potentially serious risks associated with the inability of existing business systems to appropriately recognize calendar dates beginning in the year 2000. The Company is aware of the year 2000 issue and the effects it may have on its business systems. In response, the Company has developed a detailed plan to address the issue. This plan includes a campaign which began in fiscal 1998, was revised to consider acquired companies' business systems, and has a goal for completion in October 1999. The plan currently includes spending of approximately $1.5 million for testing and upgrading hardware and software. The Company has spent approximately $1.0 million on the year 2000 issue. Progress towards completion of the plan is within management's expectations to meet the October 1999 goal. In addition, the Company has contacted substantially all of its hardware and software vendors, suppliers and financial institution partners to evaluate their compliance efforts. Those that have been deemed noncompliant have been evaluated and corrective action has been or will be taken to ensure the vendors' year 2000 efforts or lack thereof will not adversely impact the Company's operations. The Company's manufacturer clients and retailers may also encounter year 2000 issues and are in various states of readiness. If these manufacturers or retailers encounter serious problems related to the year 2000 issue, those problems could have a material adverse impact on the operations of the Company. The Company believes the manufacturers and retailers are addressing the year 2000 issue and is closely monitoring the status of their readiness. In the event that the Company's year 2000 compliance efforts are unsuccessful and/or one or more of the Company's critical internal systems are not year 2000 compliant by December 31, 1999, the following could occur, any of which could have a material adverse impact on the operations of the Company: (a) Customer service could deteriorate to the point that a substantial number of the Company's customers move their account relationships to another organization; (b) The Company may be unable to provide manufacturer and retail clients with timely and accurate information about program execution; or (c) The Company may be unable to fulfill various contractual obligations The Company believes substantially all of its internally developed applications and purchased applications used internally will be Year 2000 compliant by October 1, 1999. The Company has therefore focused its efforts on contingency planning for business systems outside of those applications. FORWARD LOOKING STATEMENTS The statements in this Form 10-K may be forward looking, and actual results may differ materially. Statements not based on historical facts involve risks and uncertainties, including, but not limited to, the changing market for promotional activities, especially as it relates to policies and programs of packaged goods manufacturers for the issuance of certain product coupons, the effect of economic and competitive conditions and seasonal variations, the success and timing of growth of the Company's international and other product lines outside its core business, the level and timing of any acquisition activity, actual promotional activities and programs with the Company's customers, the pace of installation of the Company's store network, the timing and success of new services and businesses and the pace of their implementation, and the Company's ability to maintain favorable client relationships. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 10 13 ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL INFORMATION
PAGE ---- Report of Independent Certified Public Accountants.......... 12 Consolidated Income Statements, Years ended March 31, 1999, 1998 and 1997............................................. 13 Consolidated Balance Sheets at March 31, 1999 and 1998...... 14 Consolidated Statements of Stockholders' Equity, Years ended March 31, 1999, 1998 and 1997............................. 15 Consolidated Statements of Cash Flows, Years ended March 31, 1999, 1998 and 1997....................................... 16 Notes to the Consolidated Financial Statements.............. 17
11 14 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To Catalina Marketing Corporation: We have audited the accompanying consolidated balance sheets of Catalina Marketing Corporation (a Delaware corporation) and subsidiaries as of March 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended March 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Catalina Marketing Corporation and subsidiaries as of March 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 1999, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Tampa, Florida April 29, 1999 12 15 CATALINA MARKETING CORPORATION CONSOLIDATED INCOME STATEMENTS (IN THOUSANDS, EXCEPT PER SHARE DATA) YEAR ENDED MARCH 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Revenues.................................................... $264,783 $217,150 $172,143 Costs and Expenses: Direct operating expenses................................. 110,167 84,191 62,482 Selling, general and administrative....................... 59,363 56,364 48,379 Depreciation and amortization............................. 27,342 23,703 17,939 -------- -------- -------- Total costs and expenses.......................... 196,872 164,258 128,800 -------- -------- -------- Income From Operations...................................... 67,911 52,892 43,343 Interest Income (Expense) and Other......................... (2,334) (963) 1,224 -------- -------- -------- Income Before Income Taxes and Minority Interest............ 65,577 51,929 44,567 Income Taxes................................................ 27,969 19,058 17,880 Minority Interest in Losses of Subsidiaries................. -- -- 554 -------- -------- -------- Net Income........................................ $ 37,608 $ 32,871 $ 27,241 ======== ======== ======== Diluted: Net Income Per Common Share............................... $ 1.98 $ 1.73 $ 1.33 Weighted Average Common Shares Outstanding................ 19,009 19,026 20,491 Basic: Net Income Per Common Share............................... $ 2.03 $ 1.78 $ 1.39 Weighted Average Common Shares Outstanding................ 18,501 18,417 19,650
The accompanying Notes are an integral part of these consolidated financial statements. 13 16 CATALINA MARKETING CORPORATION CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
MARCH 31, -------------------- 1999 1998 --------- -------- ASSETS Current Assets: Cash and cash equivalents................................... $ 13,942 $ 18,434 Accounts receivable, net.................................... 44,045 20,251 Inventory................................................... 4,292 2,506 Deferred tax asset.......................................... 8,932 9,666 Prepaid expenses and other current assets................... 24,270 12,710 --------- -------- Total current assets.............................. 95,481 63,567 --------- -------- Property and Equipment: Store equipment............................................. 145,442 125,624 Furniture and office equipment.............................. 38,175 24,743 Billboards.................................................. 11,468 5,654 Leasehold improvements...................................... 4,540 4,165 --------- -------- 199,625 160,186 Less: accumulated depreciation.............................. (111,939) (89,673) --------- -------- Property and equipment, net....................... 87,686 70,513 Purchased intangible assets, net............................ 35,628 19,112 Other assets................................................ 2,252 3,874 --------- -------- Total Assets...................................... $ 221,047 $157,066 ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable............................................ 14,149 $ 8,348 Taxes payable............................................... 1,411 1,380 Accrued expenses............................................ 43,286 26,140 Deferred revenue............................................ 27,349 20,116 Short term borrowings....................................... 7,635 5,537 --------- -------- Total current liabilities......................... 93,830 61,521 --------- -------- Deferred tax liability...................................... 5,696 5,073 Long term debt.............................................. 588 430 Commitments and contingencies............................... Stockholders' Equity: Preferred stock; $.01 par value; 5,000,000 authorized shares; none issued and outstanding....................... -- -- Common stock; $.01 par value; 50,000,000 authorized shares, and 18,389,438 and 18,379,153 shares issued and outstanding at March 31, 1999 and 1998, respectively...... 184 184 Paid-in capital............................................. 819 685 Accumulated other comprehensive income...................... 843 (135) Retained earnings........................................... 119,087 89,308 --------- -------- Total stockholders' equity........................ 120,933 90,042 --------- -------- Total Liabilities and Stockholders' Equity........ $ 221,047 $157,066 ========= ========
The accompanying Notes are an integral part of these consolidated financial statements. 14 17 CATALINA MARKETING CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS)
PAR ACCUMULATED VALUE OF OTHER TOTAL COMPREHENSIVE COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY STOCKHOLDERS' INCOME STOCK CAPITAL INCOME EARNINGS STOCK EQUITY ------------- -------- -------- ------------- -------- -------- ------------- BALANCE AT MARCH 31, 1996......... $205 $ 34,079 $ 501 $ 56,973 $(20,536) $ 71,222 Proceeds from issuance of 266,292 shares of common stock.......... -- 3 4,628 -- -- -- 4,631 Amortization of option-related compensation.................... -- -- 202 -- -- -- 202 Tax benefit from exercise of non- qualified stock options and disqualified dispositions....... -- -- 884 -- -- -- 884 Repurchase of 208,608 shares of common stock.................... -- -- -- -- -- (9,467) (9,467) Deferred compensation plan common stock units..................... -- -- 189 -- -- -- 189 Issuance of 10,865 shares of common stock to replace Catalina Marketing U.K., Ltd. options.... -- -- 157 -- -- -- 157 Issuance of 41,672 shares of common stock in purchase of minority shareholders of Catalina Marketing U.K., Inc.... -- -- 1,631 -- -- -- 1,631 Net income........................ 27,241 -- -- -- 27,241 -- 27,241 Other comprehensive income, net of tax............................. 248 -- -- 248 -- -- 248 ------- Comprehensive income.............. 27,489 -- -- -- -- -- -- ---- -------- ----- -------- -------- -------- BALANCE AT MARCH 31, 1997......... $208 $ 41,770 $ 749 $ 84,214 $(30,003) $ 96,938 ==== ======== ===== ======== ======== ======== Proceeds from issuance of 401,481 shares of common stock.......... -- 4 8,739 -- -- -- 8,743 Amortization of option-related compensation.................... -- -- 231 -- -- -- 231 Tax benefit from exercise of non- qualified stock options and disqualified dispositions....... -- -- 2,842 -- -- -- 2,842 Repurchase, retirement and cancellation of treasury stock for 2,800,885 common shares..... -- (28) (53,013) -- (27,777) 30,003 (50,815) Deferred compensation plan common stock units..................... -- -- 116 -- -- -- 116 Net income........................ 32,871 -- -- -- 32,871 -- 32,871 Other comprehensive loss, net of tax............................. (884) -- -- (884) -- -- (884) ------- Comprehensive income.............. 31,987 -- -- -- -- -- -- ---- -------- ----- -------- -------- -------- BALANCE AT MARCH 31, 1998......... $184 $ 685 $(135) $ 89,308 $ -- $ 90,042 ==== ======== ===== ======== ======== ======== Proceeds from issuance of 381,385 shares of common stock.......... -- 4 4,399 -- -- -- 4,403 Amortization of option-related compensation.................... -- -- 182 -- -- -- 182 Tax benefit from exercise of non- qualified stock options and disqualified dispositions....... -- -- 5,792 -- -- -- 5,792 Repurchase, retirement and cancellation of 371,100 common shares.......................... -- (4) (10,415) -- (7,829) -- (18,248) Deferred compensation plan common stock units and Directors' common stock grants............. -- -- 176 -- -- -- 176 Net income........................ 37,608 -- -- -- 37,608 -- 37,608 Other comprehensive income, net of tax............................. 978 -- -- 978 -- -- 978 ------- Comprehensive income.............. 38,586 -- -- -- -- -- -- ---- -------- ----- -------- -------- -------- BALANCE AT MARCH 31, 1999......... $184 $ 819 $ 843 $119,087 $ -- $120,933 ==== ======== ===== ======== ======== ========
The accompanying Notes are an integral part of these consolidated financial statements. 15 18 CATALINA MARKETING CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
FOR THE YEAR ENDED MARCH 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Cash Flows from Operating Activities: Net income.................................................. $ 37,608 $ 32,871 $ 27,241 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest......................................... -- -- (554) Depreciation and amortization............................. 27,404 23,934 18,264 Provision for doubtful accounts........................... 1,085 1,389 1,197 Deferred income taxes..................................... 1,707 (549) 1,677 Other..................................................... 3,173 1,182 193 Changes in operating assets and liabilities, net of effects from acquisitions: Accounts receivable....................................... (23,503) 5,398 (4,180) Inventory, prepaid expenses and other assets.............. (12,003) (3,152) (3,681) Accounts payable.......................................... 5,379 (3,079) 2,451 Taxes payable............................................. (57) 790 180 Accrued expenses.......................................... 5,303 2,699 4,090 Deferred revenue.......................................... 4,973 8,790 (2,611) -------- -------- -------- Net cash provided by operating activities......... 51,069 70,273 44,267 -------- -------- -------- Cash Flows From Investing Activities: Capital expenditures, net................................... (39,954) (24,250) (34,605) Purchase of investments, net of cash acquired............... (8,982) (2,087) (18,028) -------- -------- -------- Net cash used in investing activities............. (48,936) (26,337) (52,633) -------- -------- -------- Cash Flows From Financing Activities: Proceeds from debt obligations.............................. 23,585 40,427 1,138 Principal payments on debt obligations...................... (22,326) (40,487) (1,458) Proceeds from issuance of common and subsidiary stock....... 4,526 8,543 5,090 Tax benefit from exercise of non-qualified stock options and disqualified dispositions................................. 5,792 2,842 884 Payment for repurchase of company common stock.............. (18,248) (50,815) (9,467) -------- -------- -------- Net cash used in financing activities............. (6,671) (39,490) (3,813) -------- -------- -------- Net Change in Cash and Cash Equivalents..................... (4,538) 4,446 (12,179) Effect of Exchange Rate Changes on Cash..................... 46 290 99 Cash and Cash Equivalents, at beginning of year............. 18,434 13,698 25,778 -------- -------- -------- Cash and Cash Equivalents, at end of year................... $ 13,942 $ 18,434 $ 13,698 ======== ======== ======== Supplemental Schedule of Other Transactions: Cash paid during the year for: Interest.......................................... $ 207 $ 616 $ 70 Income taxes...................................... $ 22,702 $ 17,174 $ 11,463
The accompanying Notes are an integral part of these consolidated financial statements. 16 19 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following summarizes the significant accounting and financial policies of Catalina Marketing Corporation and Subsidiaries (the "Company") which have been followed in preparing the accompanying consolidated financial statements. Certain prior balances have been reclassified to conform with the current year presentation. Description of the Business. The Company provides targeted marketing services. Through its proprietary network, the Company provides consumer and pharmaceutical product manufacturers and retailers with cost-effective methods of delivering promotional incentives and advertising messages directly to consumers based on their purchasing behavior. Additionally, a majority-owned subsidiary of the Company operates an outdoor media business in Japan. As of March 31, 1999, the Company's network was installed in 12,092 retail stores and 3,861 pharmacies throughout the United States and 1,935 retail stores throughout the United Kingdom, France and Japan. Principles of Consolidation and Preparation. The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. All intercompany transactions are eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires the use of management's estimates. The accounts of the wholly-owned and majority-owned foreign subsidiaries are included as of December 31, which is their fiscal year end. The Company's investment in a non-majority owned company was accounted for on the equity method. Fair Value of Financial Instruments. The book value of all financial instruments approximates their fair value. Cash and Cash Equivalents. Cash and cash equivalents consist of cash and short-term investments. The short-term investments can be immediately converted to cash and are held at their market value. Allowance for Doubtful Accounts. The Company records a provision for estimated doubtful accounts as part of direct operating expenses. As of March 31, 1999 and 1998, the allowance for doubtful accounts was $1,197,000 and $703,000, respectively. Inventory. Inventory consists of paper used for promotion printing, as well as card processing inventory for loyalty operations. Inventory is stated at the lower of cost, as determined by the first-in, first-out method, or market. Property and Equipment. Property and equipment are stated at cost. Depreciation of store equipment, billboards and furniture and office equipment is computed using the straight-line method based on the estimated useful lives of the related assets, generally three to eight years. Office equipment includes EDP equipment and software bought and developed for internal use. Third party installation costs, net of amounts reimbursed by the retailer, are capitalized and amortized using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful lives of the assets or the remaining term of the related lease. Maintenance and repair costs are expensed as incurred. Foreign Currency Translation. Balance sheet accounts are translated at exchange rates in effect at the end of the subsidiaries' year and income statement accounts are translated at average exchange rates for the year. Translation gains and losses are included as a separate component of stockholders' equity. 17 20 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Purchased Intangible Assets, net. Purchased intangible assets include purchased patents and other intangibles arising out of the Company's acquisitions. Purchased intangible assets are amortized over their useful lives using the straight line method. Revenue Recognition and Deferred Revenue. In accordance with coupon industry practice, the Company generally pre-bills manufacturers for purchased category cycles. The purchase of a category cycle gives a manufacturer the exclusive right to have promotions printed for a particular product category during the applicable period. The Company recognizes in-store electronic marketing service revenues as promotions are printed. Amounts collected prior to printing are reflected as deferred revenue until printing occurs. Loyalty services revenue is recognized when the loyalty cards or mailings are shipped. Income Taxes. Provision for income taxes includes federal, state and foreign income taxes. Deferred income taxes are provided for temporary differences between the recognition of income and expenses for financial reporting purposes and income tax purposes. Research and Development. Research and development costs relating to the development and testing of new service applications are expensed as incurred. Net Income Per Common Share. In fiscal 1998, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" (SFAS No. 128). Accordingly, diluted and basic earnings per share (EPS) are shown on the face of the accompanying consolidated income statements. The following is a reconciliation of the denominator of basic EPS to the denominator of diluted EPS (in thousands):
MARCH 31, ------------------------ 1999 1998 1997 ------ ------ ------ Basic weighted average common shares outstanding............ 18,501 18,417 19,650 Dilutive effect of options outstanding...................... 508 609 841 ------ ------ ------ Diluted weighted average common shares outstanding.......... 19,009 19,026 20,491 ====== ====== ======
Options to purchase 1,161,800 shares of common stock at prices ranging from $61 5/8 to $66 per share were outstanding at March 31, 1999, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of common stock. NOTE 2: SUPPLEMENTAL BALANCE SHEET INFORMATION Prepaid expenses and other current assets include (in thousands):
MARCH 31, ----------------- 1999 1998 ------- ------- Prepaid billboard rental.................................... $ 3,812 $ 2,223 Investments in deferred compensation plan................... 8,011 6,723 Prepaid income taxes........................................ 4,213 1,608 Prepaid marketing costs..................................... 2,500 -- Other....................................................... 5,734 2,156 ------- ------- Total prepaid expenses and other current assets... $24,270 $12,710 ======= =======
18 21 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Purchased intangible assets, net include (dollars in thousands):
MARCH 31, USEFUL LIFE ----------------- (IN YEARS) 1999 1998 ----------- ------- ------- Patent license and retailer relationships in the United Kingdom................................................... 20 $12,691 $12,691 Goodwill.................................................... 20-40 25,378 7,721 Purchased patents........................................... 7-8 250 150 Accumulated amortization.................................... (2,691) (1,450) ------- ------- Purchased intangible assets, net.................. $35,628 $19,112 ======= =======
Accrued expenses include (in thousands):
MARCH 31, ----------------- 1999 1998 ------- ------- Payroll related............................................. 7,434 $ 6,133 Deferred compensation plan.................................. 8,338 6,927 Sales commissions........................................... 3,895 3,215 Contingent payments on acquisitions......................... 11,843 640 Other....................................................... 11,776 9,225 ------- ------- Total accrued expenses............................ $43,286 $26,140 ======= =======
NOTE 3: INCOME TAXES Deferred income tax assets or liabilities are computed based on the temporary differences between the financial statement and income tax bases of assets and liabilities using the enacted marginal income tax rate in effect for the year in which the differences are expected to reverse. Deferred income tax expenses or credits are based on the changes in the deferred income tax assets or liabilities from period to period. Temporary differences for financial statement and income tax purposes result primarily from charges to operations for financial statement reporting purposes which are not currently tax deductible and revenues deferred for financial statement reporting purposes which are currently taxable. The components of the deferred tax asset and liability were as follows (in thousands):
MARCH 31, ----------------- 1999 1998 ------- ------- DEFERRED TAX ASSETS Payroll related............................................. $ 3,353 $ 3,495 Deferred revenue............................................ 2,899 2,845 Provision for doubtful accounts............................. 410 216 Accrued expenses............................................ 3,097 1,796 Foreign net operating loss carryforwards.................... 2,540 2,725 Unconsolidated equity investments........................... 1,699 522 Other....................................................... -- 1,531 ------- ------- 13,998 13,130 Valuation allowance......................................... 3,699 2,479 ------- ------- Net deferred tax asset...................................... $10,299 $10,651 ------- -------
19 22 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, ----------------- 1999 1998 ------- ------- DEFERRED TAX LIABILITIES Depreciation and amortization............................... $ 5,423 $ 5,051 Prepaid expenses............................................ 1,367 783 Other....................................................... 273 224 ------- ------- $ 7,063 $ 6,058 ------- ------- NET DEFERRED TAX ASSET...................................... $ 3,236 $ 4,593 ======= =======
The valuation allowance increased by $1,220,000 during fiscal 1999, as it is more likely than not that net operating loss carryforwards generated by certain foreign subsidiaries and losses of unconsolidated equity investments will not be realized. As of March 31, 1999, various foreign subsidiaries of the Company had aggregate cumulative net operating loss carryforwards for foreign income tax purposes of approximately $5,500,000, which are subject to various income tax provisions of each respective entity. The net operating losses expire in the calendar years 1999 through 2003. The provision for income taxes consisted of the following (in thousands):
MARCH 31, --------------------------- 1999 1998 1997 ------- ------- ------- Current taxes: Federal................................................. $22,865 $16,696 $13,678 State................................................... 3,016 2,033 1,877 Foreign................................................. 381 878 648 ------- ------- ------- 26,262 19,607 16,203 ------- ------- ------- Deferred taxes: Federal................................................. 1,423 377 1,629 State................................................... 131 77 187 Foreign................................................. 153 (1,003) (139) ------- ------- ------- 1,707 (549) 1,677 ------- ------- ------- Provision for income taxes................................ $27,969 $19,058 $17,880 ======= ======= =======
The reconciliation of the provision for income taxes based on the U.S. federal statutory income tax rate to the Company's provision for income taxes is as follows (dollars in thousands):
MARCH 31, ----------------------------- 1999 1998 1997 ------- ------- ------- Federal statutory rate................................ 35% 35% 35% Expected federal statutory tax........................ 22,952 $18,175 $15,792 State and foreign income taxes, net of federal benefit............................................. 2,495 1,346 1,829 Effect of foreign subsidiary losses and their tax rates............................................... 753 1,495 744 Effect of shutdown of Mexican operation............... -- (2,566) -- Tax free municipal bonds.............................. -- (8) (245) Amortization of goodwill.............................. 366 236 -- Loss on unconsolidated equity investment.............. 1,050 -- -- Other................................................. 353 380 (240) ------- ------- ------- Provision for income taxes.................. $27,969 $19,058 $17,880 ======= ======= =======
20 23 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS NOTE 4: SHORT TERM BORROWINGS AND LONG TERM DEBT As of March 31, 1999 and March 31, 1998, the Company's short term borrowings and long term debt, payable in yen, consisted of the following (dollars in thousands):
MARCH 31, --------------- 1999 1998 ------ ------ Short term borrowings with several Japanese banks and financing agents, interest from 2.625% to 5.55% as of March 31, 1999, maturing through January, 2003............ $7,183 $4,627 Long term debt (including current portion of long term debt) with several Japanese banks, interest from 2.125% to 3.75% as of March 31, 1999, maturing through November, 2003..... $1,040 $1,340
Maturities of long term debt are as follows as of March 31, 1999 (in thousands):
AMOUNT ------ 2000........................................................ $ 452 2001........................................................ 211 2002........................................................ 136 2003........................................................ 136 2004........................................................ 105 ------ $1,040 ======
Certain debt held by the Company's Asian subsidiary is guaranteed by certain minority shareholders. On September 30, 1997 the Company entered into a $150 million credit agreement (the "Credit Agreement") with a syndicate of commercial banks led by NationsBank, National Association with Fleet National Bank as co-agent. The Credit Agreement makes available (i) a $100 million revolving credit facility expiring September 30, 2000, (ii) a $10 million swing line facility expiring September 30, 2000, and (iii) a $50 million line of credit facility expiring September 28, 1999 under which, the Company, at its option, may convert outstanding borrowings upon expiration into a term loan with a maturity of September 29, 2000. The Company may alternatively request, and the lenders have the option to provide, a renewal of the line of credit on a revolving basis for additional periods of up to 364 days each. At no time may the aggregate principal balance exceed $150 million under the Credit Agreement. As of March 31, 1999, there were no borrowings outstanding thereunder. The Credit Agreement provides that borrowings accrue interest on a variable basis at (i) the London Interbank Offering Rate (LIBOR) (adjusted for any reserve requirements in force) plus an applicable margin ranging from 50 to 162.5 basis points, or (ii) the base rate, defined in the Credit Agreement as the greater of (a) the prime rate or (b) 50 basis points plus the federal funds rate as defined in the Credit Agreement. In addition, the Credit Agreement provides for unused facilities fees to accrue at a range of 12.5 to 37.5 basis points per annum multiplied by the unused portions of the revolving credit and line of credit facilities. The Credit Agreement is secured by the common stock or equivalent of several Company subsidiaries, is guaranteed by several Company subsidiaries, and contains certain financial covenants, some of which include limitations on certain indebtedness, maintenance of a certain fixed charge and leverage ratio and other terms and conditions. As of March 31, 1999 the Company is in compliance with all such financial covenants. NOTE 5: COMMITMENTS AND CONTINGENCIES Rental expense under operating leases was $2,941,000, $2,466,000 and $1,622,000 for the years ended March 31, 1999, 1998 and 1997, respectively. Future minimum rental commitments under operating leases 21 24 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS with non-cancelable terms of more than one year (the longest of which expires in 2006) as of March 31, 1999, are as follows: $3,828,000, in 2000, $3,495,000 in 2001, $2,840,000 in 2002, $2,013,000 in 2003, $1,122,000 in 2004, and $355,000 thereafter. The Company is involved in certain litigation arising out of the Company's business, including litigation initiated by the Company to protect its intellectual property or to defend itself against claims brought on by others. In the opinion of management, the ultimate outcome of this litigation will not have a material adverse effect on the Company's financial condition. NOTE 6: STOCK-BASED COMPENSATION PLANS The Company has a stock option plan, the 1989 Incentive Stock Option Plan (the "1989 Plan"); a stock grant plan, the Catalina Marketing Corporation 1992 Director Stock Grant Plan (the "Grant Plan"); and an employee stock purchase plan, the Employee Payroll Deduction Stock Purchase Plan (the "Purchase Plan"). 1989 Incentive Stock Option Plan. The 1989 Plan was approved by the Board of Directors in April 1989, and approved by the stockholders in July 1989. Pursuant to the 1989 Plan, 5,750,000 shares of the Company's common stock are reserved for issuance upon the exercise of options granted under the 1989 Plan. Options to purchase an aggregate of 5,251,873 shares have been granted, net of cancellations, under the 1989 Plan, of which options to purchase 2,601,155 shares were outstanding on March 31, 1999. The 1989 Plan provides for grants of Incentive Stock Options ("ISOs") to employees (including employee directors). Options granted under the 1989 Plan generally become exercisable at a rate of 25 percent per year (20 percent per year for initial grants to new employees), commencing one year after the date of grant and generally have terms of five to ten years. In 1999, the 1989 Plan was amended to change the term to ten years. Certain options under the 1989 Plan, which have been granted to certain executives of the Company, have an accelerated vesting schedule based upon the Company reaching specified earnings per share targets. The exercise price of all ISOs granted under the 1989 Plan must be equal to the fair market value of the shares on the date of grant. The 1989 Plan expired in April 1999. A new plan, the 1999 Incentive Stock Option Plan (the "1999 Plan") was approved by the Board of Directors in April 1999, and is subject to shareholder approval in July 1999 at the Company's annual meeting. Aggregate Stock Option Activity. As of March 31, 1999, options to purchase an aggregate of 2,660,718 shares had been exercised, including options to purchase 10,000 shares granted outside of the 1989 Plan; options to purchase an aggregate of 2,611,155 shares were outstanding, including options to purchase 10,000 shares outside of the 1989 Plan; and 498,127 shares remained available for future grants under the 1989 Plan. Of the options outstanding at March 31, 1999 and at March 31, 1998, options to purchase 450,202 and 602,835 shares respectively, were immediately exercisable, with weighted average exercise prices of $32.34 and $25.76, respectively. 22 25 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Stock option activity for the years ended March 31, 1997, 1998 and 1999 is as follows:
WEIGHTED NUMBER AVERAGE OF SHARES OPTION PRICES --------- ------------- Options outstanding at March 31, 1996....................... 2,029,088 21.48 Option activity: Granted................................................... 653,260 44.02 Exercised................................................. (251,668) 15.93 Canceled or expired....................................... (295,260) 26.29 --------- ----- Options outstanding at March 31, 1997....................... 2,135,420 28.37 Option activity: Granted................................................... 462,220 28.78 Exercised................................................. (549,187) 20.02 Canceled or expired....................................... (339,483) 32.07 --------- ----- Options outstanding at March 31, 1998....................... 1,708,970 30.43 Option activity: Granted................................................... 1,574,140 62.06 Exercised................................................. (517,163) 23.72 Canceled or expired....................................... (154,792) 34.30 --------- ----- Options outstanding at March 31, 1999....................... 2,611,155 50.60 ========= =====
1992 Director Stock Grant Plan. The Grant Plan provides for grants of common stock to non-employee board members. As of March 31, 1999, 34,454 shares have been granted and 5,534 shares have been canceled leaving 71,080 shares available for future grants under the Grant Plan. Stock granted under the Grant Plan vests ratably in annual installments over each director's remaining term as a director. Employee Stock Purchase Plan. In July 1994, the Purchase Plan was adopted by the Board of Directors and approved by the stockholders. Pursuant to the Purchase Plan, 300,000 shares of the Company's common stock were reserved for issuance. For the fiscal years ended March 31, 1999, 1998 and 1997, 24,516, 28,709 and 28,375 shares were purchased, respectively. Under the Purchase Plan, employees may purchase Company common stock at 85 percent of the market price on the first or last day of an offering period. The maximum each employee may purchase in an offering period shall not exceed $12,500 in market value of Company common stock. The Company will typically have two six-month offering periods each year. The Purchase Plan qualifies under Section 423 of the Internal Revenue Code of 1986. The Company accounts for the option and stock purchase plans under APB Opinion No. 25, under which no compensation cost has been recognized. The Company adopted Statement of Financial Accounting Standards No. 123 (SFAS No. 123) for disclosure purposes in fiscal 1997. For SFAS No. 123 purposes, the fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants in fiscal 1997 and 1998: risk-free interest rates ranging from 5.26 to 6.86 percent depending on the date of grant; expected dividend yield of zero percent; expected life of five years; and expected volatility of 33.68 percent. The assumptions used for grants in fiscal 1999 are: risk-free interest rates ranging from 4.43 to 5.65 percent depending on the date of grant; expected dividend yield of zero percent; expected life of five years to eight years; and expected volatility of 39.99 percent. The fair values of 23 26 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS options granted in fiscal 1999, 1998 and 1997 are, $37,193,274, $4,877,647 and $10,289,789 respectively, which would be amortized as compensation over the vesting period of the options.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE - ---------------------------------------------------------------------- --------------------------------- OUTSTANDING WEIGHTED AVERAGE EXERCISABLE RANGE OF AS OF REMAINING WEIGHTED AVERAGE AS OF WEIGHTED AVERAGE EXERCISE PRICES MARCH 31, 1999 CONTRACTUAL LIFE EXERCISE PRICE MARCH 31, 1999 EXERCISE PRICE - --------------- -------------- ---------------- ---------------- -------------- ---------------- $15.50 - $27.62 586,490 2.3 $24.59 262,157 $23.71 $30.50 - $66.00 2,024,665 7.1 $58.14 188,045 $44.36 --------- ------- ------ 2,611,155 450,202 $32.34
Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts (in thousands, except per share data):
MARCH 31, --------------------------- 1999 1998 1997 ------- ------- ------- Net Income: As Reported............................................. $37,608 $32,871 $27,241 Pro Forma............................................... $31,517 $28,410 $24,351 Diluted EPS: As Reported............................................. $ 1.98 $ 1.73 $ 1.33 Pro Forma............................................... $ 1.66 $ 1.49 $ 1.19
Because the SFAS No. 123 method of accounting has not been applied to options granted prior to April 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. Additionally, the pro forma amounts include approximately $303,000, $358,000 and $257,000 related to the purchase discount offered under the Purchase Plan for fiscal 1999, 1998 and 1997, respectively. NOTE 7: STOCKHOLDER PROTECTION PLAN On May 8, 1997, the Company announced that it had adopted a Stockholder Protection Plan. To implement this plan, the Company declared a dividend of one Preferred Share Purchase Right on each outstanding share of the Company's common stock. The dividend distribution was payable to stockholders of record on May 12, 1997. The rights will be exercisable for fractions of a share of the Company's Series X Junior Participating Preferred Stock only if a person or group acquires 15 percent or more of the Company's common stock or announces or commences a tender offer for 15 percent or more of the common stock, except for certain instances defined in the Stockholder Protection Plan. NOTE 8: SAVINGS PLANS On June 1, 1992, the Company adopted a 401(k) Savings Plan. The Company's contributions during fiscal 1999 and 1998 were $840,000 and $635,000, respectively. On January 1, 1992, the Company adopted a non-qualified deferred compensation plan (the "Deferred Compensation Plan"). The Deferred Compensation Plan is designed to permit select employees and directors of the Company to defer a portion of their compensation. Effective July 1, 1996, the Deferred Compensation Plan was amended and restated allowing participants to elect deferral of certain types of compensation, including directors fees, stock grants under the Grant Plan and shares issuable upon the exercise of stock options, into stock units in the Deferred Compensation Plan each of which represents a share of Company common stock) and creating the Catalina Marketing Corporation Deferred Compensation Trust (the "Trust"). Amounts deposited in stock unit accounts are distributed in the form of shares of Company 24 27 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS common stock upon a payment event. Through the Trust, investment options such as mutual funds and money market funds are available to participants. The investment in the Deferred Compensation Plan and related liability are included in prepaid expenses and other current assets and accrued expenses of the consolidated balance sheets, respectively. The Company determined all of its Deferred Compensation Plan investments currently held in mutual funds and money market funds are trading securities and as such are reported at fair value. Realized and unrealized holding gains and losses related to these investments, as well as the offsetting compensation expense, recognized in net income during fiscal 1999, 1998 and 1997 were not significant. Stock units are initially recorded at fair value. NOTE 9: SEGMENT INFORMATION: In fiscal 1999 the Company adopted the provisions of Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). This statement establishes new standards for reporting information about operating segments and related disclosures. All prior period information has been restated to conform to this statement. The Company operates through individual operating units which share similar economic characteristics, customers, distribution channels, products and services and production processes. As a result, the Company has aggregated its operating units and product lines into a single reporting segment of Targeted Marketing Services. The Company's accounting policies for segments are the same as those described in Note 1. Management evaluates segment performance based on net income(loss). Reportable segment information is as follows:
FOR THE FISCAL YEAR ENDED MARCH 31, ------------------------------------------------------------------------------ 1999 1998 1997 ------------------------ ------------------------ ------------------------ TARGETED TARGETED TARGETED MARKETING MARKETING MARKETING SERVICES ELIMINATIONS SERVICES ELIMINATIONS SERVICES ELIMINATIONS --------- ------------ --------- ------------ --------- ------------ Revenue from external customers.................... $264,783 $217,150 $172,143 Revenue from internal sources...................... 3,026 (3,026) 2,121 (2,121) 1,764 (1,764) Net interest income (expense).................... 231 (493) 1,058 Depreciation and amortization................. 27,342 23,703 17,939 Provision for income taxes..... 27,969 19,058 17,880 Net income..................... 37,608 32,871 27,241 Segment assets................. 221,047 157,066 154,696 Expenditures for long lived assets....................... 41,455 23,561 33,516
Revenue and long lived assets by geographic area are as follows:
FOR THE FISCAL YEAR ENDED MARCH 31, ------------------------------------ 1999 1998 1997 ---------- ---------- ---------- Revenue from external customers United States........................................ $228,806 $187,367 $158,105 Foreign.............................................. 35,977 29,783 14,038 Long lived assets United States........................................ $ 68,932 $ 57,758 $ 55,147 Foreign.............................................. 21,130 13,630 15,995
25 28 CATALINA MARKETING CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 10: ACQUISITIONS: Effective July 13, 1998, the Company acquired 100 percent of the outstanding common shares of Market Logic, a full service targeted marketing company that specializes in the development and fulfillment of highly sophisticated, personalized, direct marketing programs for retailers, for $1.8 million in initial cash consideration, net of cash acquired. Terms of the purchase agreement call for the Company to make a series of payments, which are contingent upon the future operating performance of Market Logic. Effective December 30, 1998, the Company purchased from its minority stockholders the remaining ownership of Catalina Marketing of France, Inc. Catalina Marketing of France, Inc. owns substantially all of the outstanding stock of Catalina Marketing de France, S.A., the French operating company. Terms of the purchase agreement call for the Company to make an initial down payment and a series of payments to the minority stockholders, which are contingent upon the future operating performance of Catalina Marketing de France, S.A. Effective January 4, 1999, the Company acquired 100 percent of the outstanding common shares of Dynamic Controls Inc., which offers card-based loyalty marketing programs for retailers for $4.6 million in initial cash consideration, net of cash acquired. Terms of the purchase agreement call for the Company to make an initial down payment and a series of payments, which are based upon specified future revenue growth targets. The above referenced acquisitions have been accounted for using the purchase method of accounting for acquisitions and, accordingly, the results of operations of each acquisition have been included in the fiscal 1999 consolidated financial statements since the date of such acquisition. NOTE 11: SUBSEQUENT EVENT: Effective April 21, 1999, the Company, through one of its wholly owned subsidiaries, entered into a merger agreement with one of its vendors, CompuScan Marketing, Inc. CompuScan Marketing, Inc. provides the intellectual property and backroom processing for the Company's Checkout Prizes product. Effective April 5, 1999 the Tribune Company made an investment in Supermarkets Online. NOTE 12: EFFECT OF SFAS NO. 133: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 is effective for financial statements relating to fiscal years beginning after June 15, 1999. The Company expects SFAS No. 133 to have no effect on its financial statements. 26 29 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ITEM 11. EXECUTIVE COMPENSATION. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information called for by Items 10, 11, 12 and 13 will be contained in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders under the captions "Compensation of Executive Officers and Non-Employee Directors," "Share Ownership of Certain Beneficial Owners and Management" and "Nomination and Election of Directors" and is incorporated herein by reference. The definitive Proxy Statement will be filed with the Commission prior to August 30, 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
PAGE ---- (a)1. Financial Statements. The following is a list of the Consolidated Financial Statements included in Item 8 of Part II. Report of Independent Certified Public Accountants.......... 12 Consolidated Income Statements, Years Ended March 31, 1999, 1998 and 1997............................................... 13 Consolidated Balance Sheets at March 31, 1999 and 1998...... 14 Consolidated Statements of Stockholders' Equity, Years Ended March 31, 1999, 1998 and 1997............................... 15 Consolidated Statements of Cash Flows, Years Ended March 31, 1999, 1998 and 1997......................................... 16 Notes to the Consolidated Financial Statements.............. 17 (a)2. Financial Statement Schedules (EDGAR only). All other schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. (a)3. Index to Exhibits
EXHIBIT NO. DESCRIPTION OF DOCUMENT - --------- ----------------------- *3.3 -- Restated Certificate of Incorporation **3.3.1 -- Certificate of Amendment of Certificate of Incorporation, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 **3.3.2 -- Certificate of Designation, Preferences and Rights setting forth the terms of the Company's Series X Junior Participating Preferred Stock, par value $.01 per share, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 *3.4 -- Restated Bylaws **10.4 -- Amended and Restated 1989 Stock Option Plan, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1994 **10.4.1 -- Second Amended and Restated 1989 Stock Option Plan, a copy of which is attached as an exhibit to the Company's Report on Form 10Q for the quarter ended June 30, 1997
27 30
EXHIBIT NO. DESCRIPTION OF DOCUMENT - --------- ----------------------- 10.4.2 -- Third Amended and Restated 1989 Stock Option Plan *10.12 -- Form of Director and Officer Indemnification Agreement **10.18 -- Lease Agreement dated as of June 30, 1993 by and between QP One Corporation, a Minnesota corporation, as landlord, and Registrant, as tenant, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1994 **10.18.1 -- First Amendment dated as of December 20, 1993, to the Lease Agreement dated as of June 30, 1993, by and between QP One Corporation, a Minnesota corporation, as landlord, and Registrant, as tenant, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1994 **10.21 -- 1992 Director Stock Grant Plan, as amended on July 23, 1996, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 **10.22 -- Employee Payroll Deduction Stock Purchase Plan, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1995 **10.24 -- Lease Agreement dated as of September 5, 1996 by and between Interior Design Services, Inc., a Florida corporation, as landlord, and Registrant, as tenant, a copy of which is attached as an exhibit to the Company's Annual Report on Form 10-K for the year ended March 31, 1997 **10.25 -- Stockholder Protection Agreement, dated May 8, 1997, between the Registrant and ChaseMellon Shareholder Services, L.L.C., as rights agent, a copy of which is attached as an exhibit to the Company's Current Report on Form 8-K filed on May 8, 1997 **10.26 -- Credit Agreement dated as of September 30, 1997, by and between the Registrant and NationsBank, National Association, as agent and lender, and the other lenders party thereto, a copy of which is attached as an exhibit to the Company's Report on Form 10Q for the quarter ended September 30, 1997 **10.26.1 -- First amendment dated as of August 12, 1998, to the Credit Agreement dated as of September 30, 1997, by and between the Registrant and NationsBank, National Association, as agent and lender, and other lenders party thereto, a copy of which is attached as an exhibit to the Company's Report on Form 10Q for the quarter ended September 30, 1998 21 -- List of subsidiaries 23 -- Consent of independent certified public accountants 27 -- Financial Data Schedule -- (for SEC use only)
- --------------- * Incorporated by reference to the Company's Registration Statement on Form S-1 Registration No. 33-45732, originally filed with the Securities and Exchange Commission on February 14, 1992, and declared effective (as amended) on March 26, 1992. ** Previously filed as indicated. 28 31 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ST. PETERSBURG, STATE OF FLORIDA, ON JUNE 18, 1999. CATALINA MARKETING CORPORATION (Registrant) By: /s/ JOSEPH P. PORT ------------------------------------ Joseph P. Port, Senior Vice President and Chief Financial Officer PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ GEORGE W. OFF Chairman of the Board June 18, 1999 - ----------------------------------------------------- George W. Off /s/ DANIEL D. GRANGER President, Chief Executive June 18, 1999 - ----------------------------------------------------- Officer and Director Daniel D. Granger /s/ FRANK H. BARKER Director June 18, 1999 - ----------------------------------------------------- Frank H. Barker /s/ FREDERICK W. BEINECKE Director June 18, 1999 - ----------------------------------------------------- Frederick W. Beinecke /s/ PATRICK W. COLLINS Director June 18, 1999 - ----------------------------------------------------- Patrick W. Collins /s/ STEPHEN L. D'AGOSTINO Director June 18, 1999 - ----------------------------------------------------- Stephen L. D'Agostino /s/ TOMMY D. GREER Chairman Emeritus June 18, 1999 - ----------------------------------------------------- Tommy D. Greer /s/ THOMAS W. SMITH Director June 18, 1999 - ----------------------------------------------------- Thomas W. Smith /s/ MICHAEL B. WILSON Director June 18, 1999 - ----------------------------------------------------- Michael B. Wilson /s/ JOSEPH P. PORT Senior Vice President and Chief June 18, 1999 - ----------------------------------------------------- Financial Officer Joseph P. Port /s/ TAMARA L. ZEPH Corporate Controller (Principal June 18, 1999 - ----------------------------------------------------- Accounting Officer) Tamara L. Zeph
29 EX-10.4.2 2 THIRD AMENDED AND RESTATED 1989 STOCK OPTION PLAN 1 EXHIBIT 10.4.2 THIRD AMENDED AND RESTATED CATALINA MARKETING CORPORATION 1989 STOCK OPTION PLAN*/ 1. PURPOSE. The Plan is intended to provide incentive to key employees and directors of the Corporation and its Subsidiaries, to encourage proprietary interest in the Corporation, and to attract new employees and directors with outstanding qualifications. 2. DEFINITIONS. Whenever the following terms are used in this Plan, they shall have the meaning specified below unless the context clearly indicates otherwise. (a) "Act" shall mean the Securities Act of 1933, as amended. (b) "Administrator" shall mean the Board or the Committee, whichever shall be administering the Plan from time to time in the discretion of the Board, as described in Section 4 of the Plan. (c) "Board" shall mean the Board of Directors of the Corporation. (d) "Cause" in respect of an Optionee shall mean the dishonesty, fraud, misconduct, unauthorized use or disclosure of confidential information or trade secrets, conviction or confession of a crime punishable by law (except misdemeanor violations), or engaging in practices contrary to stock "insider trading" policies of the Corporation, by such Optionee in each case as determined by the Administrator, with such determination to be conclusive and binding on such affected Optionee and all other persons. (e) "Change of Control" shall mean the occurrence of any of the following: (i) the acquisition, directly or indirectly, by any individual or entity or group (as such - ---------- */ Amended and Restated to include revisions adopted January 28, 1992, April 19, 1994, April 30, 1996, April 22, 1997 and February 17, 1999. 2 term is used in Section 13(d)(3) of the Exchange Act) of beneficial ownership (as defined in Rule 13d-3 under the Exchange Act, except that such individual or entity shall be deemed to have beneficial ownership of all shares that any such individual or entity has the right to acquire without the happening or failure to happen of a material condition or contingency, other than the passage of time) of more than 50% of the aggregate outstanding voting power of capital stock of the Corporation in respect of the general power to elect directors; (ii) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board (together with individuals elected to the Board with the approval of at least 66 2/3% of the directors of the Corporation then still in office who were either directors at the beginning of such period, or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority of the Board then in office; and (iii) (A) the Corporation consolidates with or merges into another entity or sells all or substantially all of its assets to any individual or entity, or (B) any corporation consolidates with or merges into the Corporation, which in either event (A) or (B) is pursuant to a transaction in which the holders of the Corporation's voting capital stock in respect of the general power to elect directors immediately prior to such transaction do not own, immediately following such transaction, at least a majority of the voting capital stock in respect of the general power to elect directors of the surviving corporation or the person or entity which owns the assets so sold. (f) "Code" shall mean the Internal Revenue Code of 1986, as amended. (g) "Committee" shall mean the committee appointed by the Board in accordance with Section 4 of the Plan. (h) "Common Stock" shall mean the Common Stock, par value $.01 per share, of the Corporation. (i) "Corporation" shall mean Catalina Marketing Corporation, a Delaware corporation, or any successor hereunder. (j) "Disability" shall mean the condition of an Employee who is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death 3 or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. (k) "Disinterested Person" shall have the meaning assigned to this phrase in Rule 16b-3 of the Securities and Exchange Commission adopted under the Exchange Act. (l) "Employee" shall mean an individual who is employed (within the meaning of Section 3401 of the Code and the regulations thereunder) by the Corporation or a Subsidiary. (m) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. (n) "Exercise Price" shall mean the price per Share of Common Stock, determined by the Administrator, at which an Option may be exercised. (o) "Fair Market Value" shall mean the value of one (1) Share of Common Stock, determined as follows, without regard to any restriction other than a restriction which, by its terms, will never lapse: (1) If the Shares are traded on a nationally recognized exchange or the National Market System (the "NMS") of the National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ"), the closing price as reported for composite transactions on the date of valuation or, if no sales occurred on that date, then the average of the highest bid and lowest ask prices on such exchange or the NMS at the end of the day on such date; (2) If the Shares are not traded on an exchange or the NMS but are otherwise traded over-the-counter, the average of the highest bid and lowest asked prices quoted in the NASDAQ system as of the close of business on the date of valuation, or, if on such day such security is not quoted in the NASDAQ system, the average of the representative bid and asked prices on such date in the domestic over-the-counter market as reported by the National Quotation Bureau, Inc., or any similar successor organization; and (3) If neither (1) nor (2) applies, the fair market value as determined by the Administrator in good faith. Such determination shall be conclusive and binding on all persons. 4 (p) "Good Reason" in respect of an Optionee shall mean the occurrence of any of the following events or conditions following a Change of Control: (1) A change in the Optionee's status, title, position or responsibilities (including reporting responsibilities) that represents a substantial reduction of the status, title, position or responsibilities in respect of the Corporation's business as in effect immediately prior thereto; the assignment to the Optionee of substantial duties or responsibilities that are inconsistent with such status, title, position or responsibilities; or any removal of the Optionee from or failure to reappoint or reelect the Optionee to any of such positions, except in connection with the termination of the Optionee's employment for Cause, for Disability or as a result of his or her death, or by the Optionee other than for Good Reason; (2) A reduction in the Optionee's annual base salary; (3) The Corporation's requiring the Optionee (without the Optionee's consent) to be based at any place outside a 35-mile radius of his or her place of employment prior to a Change of Control, except for reasonably required travel on the Corporation's business that is not materially greater than such travel requirements prior to such Change of Control; (4) The Corporation's failure to (i) continue in effect any material compensation or benefit plan (or a reasonable replacement therefor) in which the Optionee was participating at the time of a Change of Control, including, but not limited to the Plan, or (ii) provide the Optionee with compensation and benefits at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each employee benefit plan, program and practice as in effect immediately prior to a Change of Control ( or an in effect following the Change of Control, if greater); or (5) Any material breach by the Corporation of any provision of the Plan. (q) "Incentive Stock Option" shall mean an option described in Section 422(b) of the Code. 5 (r) "Nonstatutory Stock Option" shall mean an option not described in Section 422(b) or 423(b) of the Code. (s) "Option" shall mean any stock option granted pursuant to the Plan. (t) "Option Profit" shall mean the amount (not less than zero) by which the Fair Market Value of a share of Common Stock subject to a Nonstatutory Stock Option on the date of a Participant's exercise of a Nonstatutory Stock Option exceeds the exercise price of such Nonstatutory Stock Option. (u) "Optionee" shall mean a Participant who has received an Option. (v) "Participant" shall have the meaning assigned to it in Section 5(a) hereof. (w) "Plan" shall mean this Amended and Restated Catalina Marketing Corporation 1989 Stock Option Plan, as it may be amended from time to time. (x) "Purchase Price" shall mean the Exercise Price times the number of Shares with respect to which an Option is exercised. (y) "Retirement" shall mean the voluntary cessation of employment by an Employee at such time as may be specified in the then current personnel policies of the Corporation, in the sole discretion of the Administrator or, in lieu thereof, upon the attainment of age sixty-five (65) and the completion of not less than twenty (20) years of service with the Corporation or a Subsidiary. (z) "Share" shall mean one (1) share of Common Stock, adjusted in accordance with Section 10 of the Plan (if applicable). (aa) "Subsidiary" shall mean any subsidiary corporation as defined in Section 424(f) of the Code. 6 3. EFFECTIVE DATE. The Plan was adopted by the Board effective April 26, 1989, subject to the approval of the Corporation's stockholders pursuant to Section 14 of the Plan, and amended effective January 28, 1992, April 19, 1994, April 30, 1996, April 22, 1997 and February 17, 1999. 4. ADMINISTRATION. The Plan shall be administered, in the discretion of the Board from time to time, by the Board or by the Committee. The Committee shall be appointed by the Board and shall consist of not less than three (3) members of the Board, none of whom shall be eligible to receive Options under the Plan. The Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, however caused, shall be filled by the Board. The Board shall appoint one of the members of the Committee as Chairman. The Administrator shall hold meetings at such times and places as it may determine. Acts of a majority of the Administrator at which a quorum is present, or acts reduced to or approved in writing by a unanimous consent of the members of the Administrator, shall be the valid acts of the Administrator. The Administrator shall from time to time at its discretion select the Employees who are to be granted Options, determine the number of Shares to be subject to Options to be granted to each Optionee and designate such Options as Incentive Stock Options or Nonstatutory Stock Options. A Committee or Board member shall in no event participate in any determination relating to Options held by or to be granted to such Board member. The interpretation and construction by the Administrator of any provisions of the Plan or of any Option granted thereunder shall be final. No member of the Administrator shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted thereunder. If the Common Stock is registered under Section 12 of the Exchange Act, then notwithstanding the first or second sentences of the immediately preceding paragraph, after such registration, selection of officers for participation and decisions concerning the timing, pricing and amount of an Option shall be made solely by the Board, if each member is a Disinterested Person, or by the Committee, each of the members of which is a Disinterested Person. 7 5. PARTICIPATION. (a) Eligibility. The Optionees shall be such Employees (who may be officers, whether or not they are directors) (collectively, "Participants"; individually a "Participant") as the Administrator may select subject to the terms and conditions of Section 5(b) below: (b) Ten-Percent Stockholders. A Participant who owns more than ten percent (10%) of the total combined voting power of all classes of outstanding stock of the Corporation, its parent or any of its Subsidiaries shall not be eligible to receive an Incentive Stock Option unless (i) the Exercise Price of the Shares subject to such Option is at least one hundred ten percent (110%) of the Fair Market Value of such Shares on the date of grant and (ii) in the case of an Incentive Stock Option, such Option by its terms is not exercisable after the expiration of five (5) years from the date of grant. (c) Stock Ownership. For purposes of Section 5(b) above, in determining stock ownership, a Participant shall be considered as owning the stock owned, directly or indirectly, by or for his or her brothers and sisters (by whole or half blood), spouse, ancestors and lineal descendants. Stock owned, directly or indirectly, by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by or for its shareholders, partners or beneficiaries. Stock with respect to which such Participant holds an Option or any other option if (as of the time the Option or such other option is granted) the terms of such Option or other option provide that it will not be treated as an Incentive Stock Option, shall not be counted. (d) Outstanding Stock For purposes of Section 5(b) above, "outstanding stock" shall include all stock actually issued and outstanding immediately after the grant of the Option to the Optionee. "Outstanding stock" shall not include shares authorized for issuance under outstanding Options held by the Optionee or by any other person. 8 6. STOCK. The stock subject to Options granted under the Plan shall be Shares of the Corporation's authorized but unissued or reacquired Common Stock. The aggregate number of Shares which may be issued upon exercise of Options under the Plan shall not exceed two million two hundred fifty thousand (2,250,000).*/ Effective April 22, 1997, subject to stockholder approval, the number of Shares remaining for issuance hereunder has been increased by 1,250,000 Shares. The number of Shares subject to Options outstanding at any time shall not exceed the number of Shares remaining available for issuance under the Plan. In the event that any outstanding Option for any reason expires or is terminated, the Shares allocable to the unexercised portion of such Option or the Shares so reacquired may again be made subject to an Option. The limitations established by this Section 6 shall be subject to adjustment in the manner provided in Section 10 hereof upon the occurrence of an event specified therein. Commencing April 1, 1994, no Person shall receive Options under the Plan relating to in excess of 600,000 Shares**/; provided, however, that any Options granted to an Optionee prior to such date are not affected by this limitation and do not count in determining whether an individual Optionee has received Options in excess of such limitation. - ------------ */ On July 15, 1996, a two-for-one split of the Corporation's Common Stock was effected. Pursuant to Section 10, the number of Shares covered by the Plan as reflected in Section 6 was adjusted to reflect such stock split such that the number of Shares remaining for issuance under the Plan as of July 15, 1996 was doubled. This adjustment is not reflected above. **/ Adjusted to reflect the two-for-one stock split effected July 15, 1996. 9 7. TERMS AND CONDITIONS OF OPTIONS. (a) Stock Option Agreements. Options shall be evidenced by written stock option agreements in such form as the Administrator shall from time to time determine. Such agreements need not be identical but shall comply with and be subject to the terms and conditions set forth below. No Option shall be effective until the applicable stock option agreement is executed by both parties thereto. (b) Optionee's Undertaking. Each Optionee shall agree to remain in the employ or service of the Corporation or a Subsidiary and to render services for a period as shall be determined by the Administrator, from the date of the granting of the Option, but such agreement shall not impose upon the Corporation or its Subsidiaries any obligation to retain the Optionee in their employ or service for any period. (c) Number of Shares. Each Option shall state the number of Shares to which it pertains and shall provide for the adjustment thereof in accordance with the provisions of Section 10 hereof. (d) Exercise Price. Each Option shall state the Exercise Price. The Exercise Price shall not be less than the Fair Market Value on the date of grant and, in the case of an Incentive Stock Option granted to an Optionee described in Section 5(b) hereof, shall not be less than one hundred ten percent (110%) of the Fair Market Value on the date of grant. 10 (e) Medium and Time of Payment. The Purchase Price shall be payable in full in United States dollars upon the exercise of the Option; provided, however, that if the applicable option agreement so provides, or the Administrator, in its sole discretion otherwise approves thereof, the Purchase Price may be paid by the surrender of Shares in good form for transfer, owned by the person exercising the Option and having a Fair Market Value on the date of exercise equal to the Purchase Price, or in any combination of cash and Shares, as long as the sum of the cash so paid and the Fair Market Value of the Shares so surrendered equals the Purchase Price. In the event the Corporation determines that it is required to withhold state or Federal income tax as a result of the exercise of an Option, as a condition to the exercise thereof, an Optionee may be required to make arrangements satisfactory to the Corporation to enable it to satisfy such withholding requirements. Payment of such withholding requirements may be made, in the discretion of the Administrator, (i) in cash, (ii) by delivery of Shares registered in the name of the Optionee, or by the Corporation not issuing such number of Shares subject to the Option, having a Fair Market Value at the time of exercise equal to the amount to be withheld or (iii) any combination of (i) and (ii) above. If the Common Stock is registered under Section 12 of the Exchange Act and if the Optionee is an officer or director of the Corporation subject to Section 16(b) of the Exchange Act, an election under the preceding sentence may only be made during the period beginning on the third business day following the date of release of quarterly and annual summary statements of sales and earnings as provided by Rule 16b-3(e)(3)(iii) of the Securities and Exchange Commission and ending on the twelfth business day following such date. The election need not be made during the ten day window period if counsel to the Corporation determines that compliance with such requirement is unnecessary. If the Corporation is required to register under Section 207.3 of Regulation G of the Board of Governors of the Federal Reserve System (Title 12 Code of Federal Regulations Part 207), then so long as such registration is in effect, the credit extended by the Corporation to an Optionee for the purpose of paying the Purchase Price shall conform to the requirements of such Regulation G. 11 Upon a duly made deferral election by an Optionee eligible to participate under the Corporation's Deferred Compensation Plan, Shares otherwise issuable to the Optionee upon the exercise of a Nonstatutory Stock Option and payment of the Purchase Price by the surrender of Shares in accordance with the first paragraph of this Section 7(e), will not be delivered to the Optionee. In lieu of delivery of such Shares, the Common Stock Account of the Optionee maintained pursuant to the Corporation's Deferred Compensation Plan shall be credited with a number of stock units having a value, calculated pursuant to such plan, equal to the Option Profit associated with the exercised Nonstatutory Stock Option. Such deferral of Option Profit under the Corporation's Deferred Compensation Plan is available to Optionees only if the Shares surrendered in payment of the Purchase Price upon the exercise of a Nonstatutory Stock Option have been held by the Optionee for at least six months. (f) Term and Nontransferability of Options. Each Option shall state the time or times when all or part thereof becomes exercisable; provided, however, that no Option shall become exercisable prior to one (1) year following the grant thereof. No Option shall be exercisable after the expiration of ten (10) years (or less, in the discretion of the Administrator) from the date it was granted, and no Incentive Stock Option granted to an Optionee described in Section 5(b) hereof shall be exercisable after the expiration of five (5) years (or less, in the discretion of the Administrators) from the date it was granted. During the lifetime of the Optionee, the Option shall be exercisable only by the Optionee and shall not be assignable or transferable. In the event of the Optionee's death, the Option shall not be transferable by the Optionee other than by will or the laws of descent and distribution. If the Common Stock is registered under Section 12 of the Exchange Act, all Options granted thereafter to an officer of the Corporation shall be subject to the limitation that such Options shall not be exercised within six months from the date of grant except that this limitation shall not apply in the event the death or Disability of the Optionee occurs prior to the expiration of the six-month period. (g) Cessation of Employment (Except by Death, Disability or Retirement). 12 If an Optionee ceases to be an Employee for any reason other than his or her death, Disability or Retirement, such Optionee shall have the right, subject to the restrictions referred to in Section 7(f) above, to exercise the Option at any time within ninety (90) days (or such shorter period as the Administrator may determine) after cessation of employment, but, except as otherwise provided in the applicable option agreement, only to the extent that, at the date of cessation of employment, the Optionee's right to exercise such Option had accrued pursuant to the terms of the applicable option agreement and had not previously been exercised. The foregoing notwithstanding, a stock option agreement may, in the sole discretion of the Administrator, but need not, provide that the Option shall cease to be exercisable on the date of such cessation if such cessation arises by reason of termination for cause (as defined in the applicable stock option agreement) or if the Optionee upon cessation becomes an employee, director or consultant of a person or entity that the Administrator, in its sole discretion, determines is in direct competition with the Corporation. For purposes of this Section 7(g) the employment relationship shall be treated as continuing intact while the Optionee is on military leave, sick leave or other bona fide leave of absence (to be determined in the sole discretion of the Administrator). The foregoing notwithstanding, employment shall not be deemed to continue beyond the ninetieth (90th) day after the Optionee ceased active employment, unless the Optionee's reemployment rights are guaranteed by statute or by contract. If the Common Stock is registered under Section 12 of the Exchange Act, with respect to any Option held by an officer of the Corporation that was granted within six (6) months of a Change in Control (as hereinafter defined), and notwithstanding the ninety (90)-day exercise period referred to in the first paragraph of this subsection (g), if such Optionee ceases to be an Employee after such Change in Control, such Optionee shall have the right, subject to the restrictions referred to in Section 7(f) above, to exercise such Option at any time during the one month period immediately following the six (6)-month period commencing with the grant of such Option. For the purposes of this Section 7(g), a "Change in Control" shall be deemed to occur upon (i) the sale of all or substantially all of the assets of the Corporation, (ii) any person or group of persons acquiring the ownership or right to vote shares constituting greater than fifty percent (50%) of the outstanding capitalization of the Corporation or (iii) the consummation of a merger or consolidation of the Corporation where the stockholders of the Corporation immediately prior to such merger or consolidation do not own at least fifty percent (50%) of the 13 voting equity (in terms of the right to vote for the election of directors) of the entity which is the surviving entity following such merger or consolidation. (h) Death of Optionee. If an Optionee dies while a Participant, or after ceasing to be a Participant but during the period in which he or she could have exercised the Option under this Section 7, and has not fully exercised the Option, then the Option may be exercised in full, subject to the restrictions referred to in Section 7(f) above, at any time within twelve (12) months (or such shorter period as the Administrator may determine) after the Optionee's death by the executor or administrator of his or her estate or by any person or persons who have acquired the Option directly from the Optionee by bequest or inheritance, but, except as otherwise provided in the applicable option agreement, only to the extent that, at the date or death, the Optionee's right to exercise such Option had accrued and had not been forfeited pursuant to the terms of the applicable option agreement and had not previously been exercised. (i) Disability of Optionee. If an Optionee ceases to be an Employee by reason of Disability, such Optionee shall have the right, subject to the restrictions referred to in Section 7(f) above, to exercise the Option at any time within twelve (12) months (or such shorter period as the Administrator may determine) after such cessation of employment, but, except as provided in the applicable option agreement, only to the extent that, at the date of such cessation of employment, the Optionee's right to exercise such Option had accrued pursuant to the terms of the applicable option agreement and had not previously been exercised. 14 (j) Retirement of Optionee. If an Optionee ceases to be an Employee by reason of Retirement, such Optionee shall have the right, subject to the restrictions referred to in Section 7(f) above, to exercise the Option at any time within ninety (90) days (or such longer or shorter period as the Administrator may determine) after cessation of employment, but only to the extent that, at the date of cessation of employment, the Optionee's right to exercise such Option had accrued pursuant to the terms of the applicable option agreement and had not previously been exercised. (k) Rights as a Stockholder. An Optionee, or a permitted transferee of an Optionee, shall have no rights as a stockholder with respect to any Shares covered by his or her Option until the date of the issuance of a stock certificate for such Shares. After such issuance of a stock certificate for such Shares, the Optionee shall have all rights as a stockholder including, without limitation, the right to vote any such Shares. No adjustment shall be made for dividends (ordinary or extraordinary, whether in cash, securities or other property), distributions or other rights for which the record date is prior to the date such stock certificate is issued, except as provided in Section 10 hereof. (l) Modification, Extension and Renewal of Options. Within the limitations of the Plan, the Administrator may modify an Option, accelerate the rate at which an Option may be exercised or extend or renew outstanding Options. The foregoing notwithstanding, no modification of an Option shall, without the consent of the Optionee, alter or impair any rights or obligations under any Option previously granted. (m) Other Provisions. The stock option agreements authorized under the Plan may contain such other provisions not inconsistent with the terms of the Plan (including, without limitation, restrictions upon the exercise of the Option or the transfer of Shares of stock following exercise of the Option) as the Administrator shall deem advisable. 15 8. LIMITATION ON ANNUAL AWARDS. The aggregate Fair Market Value (determined as of the date an Option is granted) of the stock with respect to which Incentive Stock Options are exercisable for the first time by any Optionee during any calendar year under this Plan and all other plans maintained by the Corporation, its parent or its Subsidiaries, shall not exceed $100,000. 9. TERM OF PLAN. Options may be granted pursuant to the Plan until the expiration of the Plan on April 26, 1999. 10. RECAPITALIZATIONS; CHANGE OF CONTROL. (a) Adjustments in Respect of Recapitalizations. Subject to any required action by stockholders, the number of Shares covered by the Plan as provided in Section 6 hereof, the number of Shares covered by each outstanding Option and the Exercise Price thereof shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a subdivision or consolidation of Shares or the payment of a stock dividend (but only of Common Stock) or any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Corporation. Subject to any required action by stockholders, if the Corporation shall merge with another corporation and the Corporation is the surviving corporation in such merger and under the terms of such merger the shares of Common Stock outstanding immediately prior to the merger remain outstanding and unchanged, each outstanding Option shall continue to apply to the Shares subject thereto and shall also pertain and apply to any additional securities and other property, if any, to which a holder of the number of Shares subject to the Option would have been entitled as a result of the merger. If the Corporation sells all, or substantially all, of its assets, or the Corporation merges (other than a merger of the type described in the immediately preceding sentence) or consolidates with another corporation, this Plan and each Option shall terminate; provided that in such event (i) each Optionee to whom no Option has been tendered by the surviving or acquiring corporation (or the parent corporation of the surviving or acquiring corporation) in accordance with all of the terms of clause (ii) or (iii) immediately below, shall have the 16 right, for a period of at least thirty days, until five days before the effective date of such sale, merger or consolidation, to exercise, in whole or in part, any unexpired Option or Options issued to him or her, without regard to the installment or vesting provisions of any option agreement, or (ii) in its sole and absolute discretion, the surviving or acquiring corporation (or the parent corporation of the surviving or acquiring corporation) may, but shall not be so obligated, (I) tender to all Optionees with then outstanding Options under the Plan an option or options to purchase shares of the surviving or acquiring corporation (or of the parent corporation of the surviving or acquiring corporation), which new option or options contain such terms and provisions as shall be required substantially to preserve the rights and benefits of all Options then held by such Optionees or, (II) grant the choice to all Optionees with then outstanding Options of (A) exercising the Options in full as described in clause (i) above or (B) receiving a replacement Option as set forth in clause (ii)(I), or (iii) if the Common Stock is registered under Section 12 of the Exchange Act, with respect to any Option held by a director or officer of the Corporation that was granted within six (6) months prior to the effectiveness of the proposed sale, merger or consolidation (a "Designated Option"), the surviving or acquiring corporation (or the parent corporation of the surviving or acquiring corporation) shall tender to such Optionee with respect to the Designated Option a new option or options to purchase shares of the surviving or acquiring corporation (or of the parent corporation of the surviving or acquiring corporation), which new option or options contain such terms or provisions as shall be required substantially to preserve the rights and benefits of such Designated Option, provided that if the surviving or acquiring corporation (or its parent) does not tender options to all non-officer and non-director Optionees in accordance with clause (ii) above, then the option or options exchanged for such Designated Option shall permit the Optionee to exercise such substitute option or options in whole or in part, without regard to any installment or vesting provisions, at any time after the expiration of six months from the original date of grant of the Designated Option. A dissolution or liquidation of the Corporation, other than a dissolution or liquidation immediately following a sale of all or substantially all of the assets of the Corporation, which shall be governed by the immediately preceding sentence, shall cause each Option to terminate. In the event an Optionee exercises any unexpired Option or Options prior to the effectiveness of a sale of 17 all or substantially all of the Corporation's assets or a merger or consolidation of the Corporation with another corporation in accordance with clause (i) of this Section 10, such exercise of any Option or Options shall be subject to the consummation of such sale, merger or consolidation. If such sale, merger or consolidation is not consummated, any otherwise unexpired Option or Options shall be deemed to have not been exercised, and the Optionee and the Corporation shall take all steps necessary to achieve this effect including, without limitation, the Optionee delivering to the Corporation the stock certificate representing the Shares issued upon the exercise of the Option, endorsed in favor of the Corporation, and the Corporation returning to the Optionee the consideration representing the Purchase Price paid by the Optionee upon the exercise of the Option. To the extent that the foregoing adjustments relate to securities of the Corporation, such adjustments shall be made by the Administrator, whose determination shall be conclusive and binding on all persons. Except as expressly provided in this Section 10, the Optionee shall have no rights by reason of any subdivision of consolidation of shares of stock of any class, the payment of any stock dividend or any other increase or decrease in the number of shares of stock of any class or by reason of any dissolution, liquidation, merger or consolidation or spin-off of assets or stock of another corporation, and any issue by the Corporation of shares of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or Exercise Price of Shares subject to an Option. The grant of an Option pursuant to the Plan shall not affect in any way the right or power of the Corporation to make adjustments, reclassifications, reorganizations or changes of its capital or business structure, to merge or consolidate or to dissolve, liquidate, sell or transfer all or any part of its business or assets. (b) Acceleration under Certain Circumstances Following a Change of Control. Notwithstanding any other provision of the Plan to the contrary and except as otherwise expressly 18 provided in the applicable stock option agreement, the vesting or similar installment provisions relating to the exercisability of any Option or replacement option tendered to an Optionee pursuant to or as a result of, or relating to, a transaction described in the second paragraph of Section 10(a) hereof shall be accelerated and the Optionee shall have the right, for a period of at least thirty days, to exercise such option in the event the Optionee's employment with or services for the Corporation should terminate within two years following a Change of Control, unless such employment or services are terminated by the Corporation for Cause or by the Optionee voluntarily without Good Reason, or such employment or services are terminated due to the death or Disability of the Optionee. Notwithstanding the foregoing, no Incentive Stock Option shall become exercisable pursuant to the foregoing without the Optionee's consent, if the result would be to cause such option not to be treated as an Incentive Stock Option. 11. SECURITIES LAW REQUIREMENTS. (a) Legality of Issuance. No Shares shall be issued upon the exercise of any Option unless and until the Corporation has determined that: (i) it and the Optionee have taken all actions required to register the offer and sale of the Shares under the Act, or to perfect an exemption from the registration requirements thereof; (ii) any applicable listing requirement of any stock exchange on which the Common Stock is listed has been satisfied; and (iii) any other applicable provision of state or Federal law has been satisfied. 19 (b) Restrictions on Transfer; Representations of Optionee; Legends. Regardless of whether the offering and sale of Shares under the Plan has been registered under the Act or has been registered or qualified under the securities laws of any state, the Corporation may impose restrictions upon the sale, pledge or other transfer of such Shares (including the placement of appropriate legends on stock certificates) if, in the judgment of the Corporation and its counsel, such restrictions are necessary or desirable in order to achieve compliance with the provisions of the Act, the securities laws of any state or any other law. In the event that the sale of Shares under the Plan is not registered under the Act but an exemption is available which requires an investment representation or other representation, each Optionee shall be required to represent that such Shares are being acquired for investment, and not with a view to the sale or distribution thereof, and to make such other representations as are deemed necessary or appropriate by the Corporation and its counsel. Stock certificates evidencing Shares acquired under the Plan pursuant to an unregistered transaction shall bear the following restrictive legend (or similar legend in the discretion of the Administrator) and such other restrictive legends as are required or deemed advisable under the provisions of any applicable law: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION AND MAY NOT BE OFFERED FOR SALE, SOLD, PLEDGED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY IN FORM AND CONTENT TO THE ISSUER THAT SUCH REGISTRATION IS NOT REQUIRED UNDER SUCH ACT." Any determination by the Corporation and its counsel in connection with any of the matters set forth in this Section 11 shall be conclusive and binding on all persons. 20 (c) Registration or Qualification of Securities. The Corporation may, but shall not be obligated to, register or qualify the sale of Shares under the Act or any other applicable law. The Corporation shall not be obligated to take any affirmative action in order to cause the sale of Shares under the Plan to comply with any law. (d) Exchange of Certificates. If, in the opinion of the Corporation and its counsel, any legend placed on a stock certificate representing Shares sold under the Plan is no longer required, the holder of such certificate shall be entitled to exchange such certificate for a certificate representing the same number of Shares but without such legend. 12. AMENDMENT OF THE PLAN. The Board may from time to time, with respect to any Shares at the time not subject to Options, suspend or discontinue the Plan or revise or amend it in any respect whatsoever except that, without the approval of the Corporation's stockholders, no such revision or amendment shall: (a) Materially increase the benefits accruing to Participants under the Plan; (b) Increase the number of Shares which may be issued under the Plan; (c) Change the designation in Section 5 hereof with respect to the classes of persons eligible to receive Options; (d) Upon the registration of the Common Stock under Section 12 of the Exchange Act, modify the Plan such that it fails to meet the requirements of Rule 16b-3 of the Securities and Exchange Commission for the exemption of the acquisition, cancellation, expiration or surrender of Options from the operation of Section 16(b) of the Exchange Act; or (e) Amend this Section 12 to defeat its purpose. 21 13. APPLICATION OF FUNDS. The proceeds received by the Corporation from the sale of Common Stock pursuant to the exercise of an Option will be used for general corporate purposes. 14. APPROVAL OF STOCKHOLDERS. The original adoption of the Plan was subject to approval by the affirmative vote of the holders of a majority of the outstanding shares present and entitled to vote at the first annual meeting of stockholders of the Corporation following the adoption of the Plan, and in no event later than April 26, 1990, which approval was obtained. The amendments to the Plan adopted by the Board on January 28, 1992, April 19, 1994, April 30, 1996 and April 22, 1997, were subject to approval by the affirmative vote of such a majority, which approvals were obtained. The amendments to the Plan adopted by the Board on February 17, 1999 were not subject to approval by the stockholders. Any additional amendment described in paragraphs (a) through (e) of Section 12 shall also be subject to approval by the Corporation's stockholders. 15. EXECUTION. To record the adoption of the Plan by the Board on April 26, 1989, and the amendments described on the first page hereof, the Corporation has caused its authorized officers to affix the corporate name and seal hereto. CATALINA MARKETING CORPORATION By -------------------------------------- George W. Off, Chairman By -------------------------------------- Barry A. Brooks, Secretary [Seal] EX-21 3 LIST OF SUBSIDIARIES 1 ' EXHIBIT 21 CATALINA MARKETING CORPORATION SUBSIDIARIES OF REGISTRANT MARCH 31, 1999 Catalina Marketing Sales Corporation, Catalina Marketing Belgium, S.C.A., a Delaware corporation a Belgian limited partnership Catalina Marketing Retail Sales Corporation, Catalina Marketing of Iberia, Inc., a Delaware corporation a Delaware corporation Catalina Marketing International, Inc., Health Resources Publishing Company, a Delaware corporation a Delaware corporation Catalina Marketing Worldwide, Inc., SuperMarkets Online, Inc. a Delaware corporation a Delaware corporation Catalina Electronic Clearing Services, Inc., SuperMarkets Online Holdings, Inc., a Delaware corporation a Delaware corporation Catalina Marketing of Mexico, Inc., Catalina-Pacific Media, L.L.C., a Delaware corporation a Delaware limited liability company Catalina Marketing of France, Inc., Pacific Media, K.K., a Delaware corporation a Japanese corporation Catalina Marketing de France, S.A., Market Logic, Inc., a French corporation a California corporation Catalina Marketing U.K., Inc., Catalina Marketing Loyalty Holdings, Inc., a Delaware corporation a Delaware corporation Catalina Marketing U.K., Ltd., Dynamic Controls, Inc., a United Kingdom corporation a Delaware corporation Catalina Marketing of Belgium, Inc., a Delaware corporation
EX-23 4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT 1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS As independent certified public accountants, we hereby consent to the incorporation of our report included in this Form 10-K into the Company's previously filed Registration Statement File Nos. 33-46793, 33-77100, 33-82456, 333-07525 and 333-13335. /s/ ARTHUR ANDERSEN LLP Tampa, Florida, June 14, 1999 EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 12-MOS MAR-31-1999 APR-01-1998 MAR-31-1999 13,942 0 44,045 0 4,292 95,481 199,625 111,939 221,047 93,830 588 0 0 184 120,749 221,047 264,783 264,783 110,167 196,872 2,334 0 0 65,577 27,969 37,608 0 0 0 37,608 1.98 2.03
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