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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q (Mark One) x
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended June 30, 2004 or o
    
    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  Delaware
(State or Other Jurisdiction of
Incorporation or Organization)200 Carillon Parkway, St. Petersburg, Florida
(Address of Principal Executive Offices)
    
    33-0499007
(IRS Employer
Identification Number)33716-2325
(Zip Code)
 (727) 579-5000
 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 o No x Indicate by checkmark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes x No o At July 31, 2004, the Registrant had outstanding 52,141,234 shares of
Common Stock.




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CATALINA MARKETING CORPORATION INDEX  
 PagePart I.
    
    Financial InformationItem 1.
    
    Financial StatementsUnaudited Condensed Consolidated Statements of Income for the three months ended June 30, 2004 and 2003
    
    
    3Unaudited Condensed Consolidated Balance Sheets at June 30, 2004 and March 31, 2004
    
    
    4Unaudited Condensed Consolidated Statement of Changes in Stockholders Equity and Comprehensive Income
    
    
    5Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2004 and 2003
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    14Item 3.
    

Quantitative and Qualitative Disclosure About Market Risk
    
    
    21Item 4.
    
    Controls and Procedures
    
    
    21Part II.
    
    Other InformationItem 2.
    
    Changes in Securities and Use of Proceeds
    
    
    22Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    22Signatures
    
    
    
    
    23Exhibit Index
    
    
    
    
    24Ex-31.1: 302 Certification of CEOEx-31.2: 302 Certification of CFOEx-32.1: 906 Certification of CEOEx-32.2: 906 Certification of CFO
  2




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##### Table of Contents



Part I. Financial Information References herein to Catalina Marketing, the Company, we, us or our
refer to Catalina Marketing Corporation and its subsidiaries, unless the
context specifically states or implies otherwise. 
 Item 1. Financial Statements CATALINA MARKETING CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
  Three Months Ended June 30,2004
    
    2003Revenues
    
    $
    105,643
    
    
    $
    102,212Costs and expenses:Direct operating expenses
    
    
    41,678
    
    
    
    46,805Selling, general and administrative
    
    
    31,771
    
    
    
    35,619Impairment charge
    
    
    1,609
    
    
    
    Depreciation and amortization
    
    
    12,198
    
    
    
    11,804Total costs and expenses
    
    
    87,256
    
    
    
    94,228Income from operations
    
    
    18,387
    
    
    
    7,984Interest expense
    
    
    (612
    )
    
    
    (529
    )Other income (expenses), net
    
    
    192
    
    
    
    727Income before income taxes
    
    
    17,967
    
    
    
    8,182Provision for income taxes
    
    
    7,041
    
    
    
    3,149Income before cumulative effect of accounting
change
    
    
    10,926
    
    
    
    5,033Cumulative effect of accounting change, net of
$0.6 million tax benefit
    
    
    
    
    
    
    (770
    )Net income
    
    $
    10,926
    
    
    $
    4,263Basic:Net income per common share before cumulative
effect of accounting change
    
    $
    0.21
    
    
    $
    0.10Cumulative effect of accounting change
    
    
    
    
    
    
    (0.02
    )Net income per common share
    
    $
    0.21
    
    
    $
    0.08Weighted average common shares outstanding
    
    
    52,227
    
    
    
    52,536Diluted:Net income per common share before cumulative
effect of accounting change
    
    $
    0.21
    
    
    $
    0.10Cumulative effect of accounting change
    
    
    
    
    
    
    (0.02
    )Net income per common share
    
    $
    0.21
    
    
    $
    0.08Weighted average common shares outstanding
    
    
    52,245
    
    
    
    52,569
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3




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CATALINA MARKETING CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
  June 30,
    
    March 31,2004
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    71,467
    
    
    $
    72,704Accounts receivable, net
    
    
    64,402
    
    
    
    56,963Inventory
    
    
    5,734
    
    
    
    5,836Deferred tax asset
    
    
    8,454
    
    
    
    8,536Prepaid expenses and other current assets
    
    
    15,685
    
    
    
    14,958Total current assets
    
    
    165,742
    
    
    
    158,997Property and equipment:Property and equipment
    
    
    376,808
    
    
    
    381,999Less  accumulated depreciation and amortization
    
    
    (260,189
    )
    
    
    (255,156
    )Property and equipment, net
    
    
    116,619
    
    
    
    126,843Patents, net
    
    
    12,992
    
    
    
    13,472Goodwill
    
    
    83,134
    
    
    
    84,743Other assets
    
    
    2,583
    
    
    
    2,754Total assets
    
    $
    381,070
    
    
    $
    386,809LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    13,789
    
    
    $
    15,372Accrued expenses
    
    
    50,884
    
    
    
    65,778Income taxes payable
    
    
    3,083
    
    
    
    3,127Deferred revenue
    
    
    36,389
    
    
    
    35,730Short-term borrowings
    
    
    36,858
    
    
    
    37,016Total current liabilities
    
    
    141,003
    
    
    
    157,023Long-term deferred tax liability
    
    
    10,104
    
    
    
    9,827Long-term debt
    
    
    29,913
    
    
    
    29,908Other long-term liabilities
    
    
    4,468
    
    
    
    4,475Total liabilities
    
    
    185,488
    
    
    
    201,233Commitments and contingenciesMinority interest
    
    
    914
    
    
    
    914Stockholders Equity:Preferred stock; $0.01 par value; 5,000,000
authorized shares; none issued and outstanding
    
    
    
    
    
    
    Common stock; $0.01 par value; 150,000,000
authorized shares and 52,140,866 and 52,134,462
shares issued and outstanding at
June 30, 2004 and March 31, 2004, respectively
    
    
    521
    
    
    
    521Paid-in capital
    
    
    2,561
    
    
    
    2,485Accumulated other comprehensive loss
    
    
    (1,308
    )
    
    
    (312
    )Retained earnings
    
    
    192,894
    
    
    
    181,968Total stockholders equity
    
    
    194,668
    
    
    
    184,662Total liabilities and stockholders equity
    
    $
    381,070
    
    
    $
    386,809
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4




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CATALINA MARKETING CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS
 EQUITY AND COMPREHENSIVE INCOME
  Par
    
    
    
    
    
    AccumulatedNumber
    
    Value of
    
    
    
    
    
    Other
    
    
    
    
    
    TotalComprehensive
    
    of
    
    Common
    
    Paid-in
    
    Comprehensive
    
    Retained
    
    Stockholders'Income
    
    Shares
    
    Stock
    
    Capital
    
    Loss
    
    Earnings
    
    EquityBALANCE AT MARCH 31, 2004
    
    
    
    
    
    
    52,134
    
    
    $
    521
    
    
    $
    2,485
    
    
    $
    (312
    )
    
    $
    181,968
    
    
    $
    184,662Deferred compensation plan common stock
units and Directors common stock grants
    
    
    
    
    
    
    7
    
    
    
    
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    76Net income
    
    $
    10,926
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,926
    
    
    
    10,926Foreign currency translation adjustment
    
    
    (996
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (996
    )
    
    
    
    
    
    
    (996
    )Comprehensive income
    
    
    9,330
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCE AT JUNE 30, 2004
    
    
    
    
    
    
    52,141
    
    
    $
    521
    
    
    $
    2,561
    
    
    $
    (1,308
    )
    
    $
    192,894
    
    
    $
    194,668
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5




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CATALINA MARKETING CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three Months Ended June 30,2004
    
    2003Net cash provided by operating activities:
    
    $
    1,866
    
    
    $
    17,279Cash flows from investing activities:Capital expenditures
    
    
    (2,141
    )
    
    
    (9,664
    )Cash flows from financing activities:Proceeds from the Corporate Facility, net
    
    
    
    
    
    
    10,000Proceeds from Japan borrowings
    
    
    
    
    
    
    3,963Principal payments on Japan borrowings
    
    
    (698
    )
    
    
    (1,678
    )Repurchases of Company common stock
    
    
    
    
    
    
    (13,307
    )Proceeds from the issuance of common and
subsidiary stock
    
    
    
    
    
    
    714Net cash used in financing activities
    
    
    (698
    )
    
    
    (308
    )Effect of exchange rate changes on cash and cash
equivalents
    
    
    (264
    )
    
    
    (136
    )Net change in cash and cash equivalents
    
    
    (1,237
    )
    
    
    7,171Cash and cash equivalents at end of prior period
    
    
    72,704
    
    
    
    1,715Cash and cash equivalents at end of current period
    
    $
    71,467
    
    
    $
    8,886
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6




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CATALINA MARKETING CORPORATION 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)
 Note 1. Description of the Business and Basis for Presentation Description of the Business.Catalina Marketing Corporation, a Delaware
corporation, and its subsidiaries (the Company), provides behavior-based
communications, developed and distributed for consumer packaged goods
manufacturers, pharmaceutical manufacturers and marketers, and retailers. The
Companys primary business initially was developed to provide consumers with
in-store coupons delivered based upon purchase behavior and distributed
primarily in supermarkets. Today, the Company offers behavior-based,
targeted-marketing services and programs globally through a variety of
distribution channels. These marketing solutions, including discount coupons,
loyalty marketing programs, pharmacist and patient education newsletters,
compliance mailings, pharmacy counter mats, attitudinal research programs,
sampling, advertising, in-store instant-win games and other consumer
communications, are delivered directly to shoppers by various means. By
specifying how a particular consumer transaction will trigger a promotion to
print, manufacturers and retailers can deliver customized incentives and
messages to only the consumers they wish to reach. The Company tracks actual
purchase behavior and primarily uses Universal Product Code-based scanner
technology to target consumers at the checkout counter and National Drug Code
information to trigger delivery of a customized communication to consumers
during pharmacy prescription checkout transactions. The Company is organized and managed by segments, which include the
following operations: Catalina Marketing Services (CMS), Catalina Health
Resource (CHR), the International operations, which includes services similar
to those provided in the United States by CMS (International), Japan
Billboard, a billboard and outdoor media business operated in Japan (Japan
Billboard), Direct Marketing Services (DMS) and Catalina Marketing Research
Solutions (CMRS). The domestic operations of the Company include CMS, CHR,
DMS and CMRS. The international operations of the Company are organized and
managed by country and include International and Japan Billboard. In November
2003, the Company announced its intent to divest of DMS, CMRS and Japan
Billboard which were deemed not to be strategically aligned with the Companys
current core competencies. See further discussion in the Companys Annual
Report on Form 10-K for the fiscal year ended March 31, 2004, filed with the
United States Securities and Exchange Commission (SEC) on July 15, 2004.
Although these segments have been targeted for divestiture by the Company, the
results of operations for these segments are reflected in continuing operations
in our unaudited condensed consolidated financial statements. The Company has
concluded that these businesses do not qualify for held for sale treatment at
June 30, 2004, pursuant to Statement of Financial Accounting Standard (SFAS)
No. 144, Accounting for the Impairment of Long-lived Assets. The Company previously reported the activities of the operating segments
Retail Services and CMRS in Other. Effective April 1, 2004, the Company
restructured the Retail Services and Manufacturer Services units by merging
Retail Services into Manufacturer Services and renaming the segment Catalina
Marketing Services, or CMS. The restructuring was part of the Companys
strategy to optimize its selling and administrative efforts. As a result of the
restructuring, Retail Services is no longer reported as a separate business
segment. Segment information for the three months ended June 30, 2003 for
Retail Services has been reclassified to CMS to reflect the new segment
reporting. CMS serves the needs of domestic consumer product manufacturers, primarily
within the consumer packaged goods industry, and the grocery retail industry.
Using the Catalina Marketing Network®, this operating segment specializes in
behavior-based marketing communications that are delivered at the
point-of-sale. The primary service line of the Catalina Marketing
Network® is
the in-store delivery of promotions at the checkout lane of a retailer,
typically a supermarket. Catalina Marketing links its proprietary software,
computers, central databases and thermal printers with a retailers
point-of-sale controllers and scanners. The network prints customized
promotions at the point-of-sale based on product Universal Product Codes or
other scanned information. The printed promotions are handed to consumers by
the cashier at the end of the shopping transaction. CMS also provides marketing
solutions to retail chains nationwide and supports and maintains the Catalina
Marketing Network®. CHR services allow pharmaceutical and consumer packaged goods
manufacturers, as well as retail pharmacies, to provide consumers with
condition-specific health information and direct-to-patient communications.
CHRs primary product offerings use an in-store, prescription-based targeting
technology to provide targeted, direct-to-patient communications on behalf of
the Companys clients. These communication services include messages and
educational information to healthcare patients at the pharmacy level throughout
the Health Resource Network. The Health Resource Network is a proprietary
software system with built-in targeted response capabilities. 7




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Communications
are primarily delivered to patients based on prescription medications purchased
which are identified by a National Drug Code symbol. Clients are able to use
these communications to provide information on a wide variety of products such
as over-the-
counter medicines, prescription medication and other healthcare remedies
and merchandise. Communications provide clinically appropriate information
while maintaining patient privacy. International operations include in-store electronic targeted marketing
services for consumers in France, Italy, the United Kingdom, Germany and Japan.
The Catalina Marketing Network® operates internationally in a similar manner as
the domestic business and offers a full range of targeted marketing solutions
to consumer packaged goods manufacturers and enjoys relationships with
supermarket, hypermarket and other retailers. Japan Billboard is a wholly owned subsidiary of the Company that operates
a billboard and outdoor media business in Japan. Japan Billboard primarily owns
and rents billboards which are displayed on rooftops or faces of buildings in
locations suitable for advertising. DMS provides services designed to reach consumers in their homes. DMS
analyzes frequent shopper databases and identifies consumer lifestyle changes
to develop strategic programs that meet multiple objectives for both brand
manufacturers and retailers. These targeted direct mail programs are based on
actual purchase behavior or consumer lifestyle changes. DMS provides services
which enable manufacturers and retailers to influence the purchase patterns of
targeted customers based on their actual purchase behavior and history. Clients
use these services to support new product launches and line extensions, build
loyalty to a brand and deliver timely messages to consumers. CMRS provides a wide range of traditional marketing research services,
including tracking studies and other satisfaction surveys, as well as
proprietary research products that take advantage of behavioral data gathered
throughout the Catalina Marketing Network®. Delay in Filing Our Annual Report and Quarterly Financial Results for the
Fiscal Year Ended March 31, 2004.In June 2004, we announced our intent to
delay the filing of our Annual Report on Form 10-K for the fiscal year ended
March 31, 2004. In addition, the Company was unable to file its Quarterly
Report on Form 10-Q for the quarters ended June 30, 2003, September 30, 2003
and December 31, 2003 in a timely manner. As required, Catalina filed
notifications of late filing with the SEC under Rule 12b-25 for these filings.
The Company filed its Annual Report on Form 10-K for fiscal year 2004 on July
15, 2004. The Annual Report on Form 10-K for fiscal year 2004 filing was
delayed because of the significant time and resources required to file the
Companys Annual Report on Form 10-K for fiscal year 2003, which was filed on
May 17, 2004. The Company is filing this Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004 today and expects to file a Quarterly Report on Form 10-Q
for each of the quarters ended September 30, 2003 and December 31, 2003 for the
immediately preceding fiscal year ended March 31, 2004, as soon as practicable.
The unaudited condensed consolidated financial statements included herein
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Companys Annual Report on Form 10-K for the
fiscal year ended March 31, 2004, filed with the SEC on July 15, 2004. In this Form 10-Q for the quarterly period ended June 30, 2004, words such
as today, current or currently, or phrases such as as of the date
hereof or as of the date of this report, refer to the date this Quarterly
Report on Form 10-Q is filed with the SEC. Basis of Presentation.These financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes as required by accounting principles generally accepted
in the United States of America. In the opinion of management, all adjustments,
consisting only of normal recurring accruals, except as disclosed herein,
considered necessary for a fair presentation of the financial position of the
Company as of June 30, 2004, the results of its operations and cash flows for
the three-month periods ended June 30, 2004 and 2003, and the results of its
changes in stockholders equity for the three-month period ended June 30, 2004
have been included. The balance sheet at March 31, 2004 has been derived from the audited
financial statements at that date but does not include all of the information
or notes required by accounting principles generally accepted in the United
States of America for complete financial statements. Operating results for the
three-month period ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the remainder of the year ending March 31,
2005. 8




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The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly owned and majority owned subsidiaries.
All significant intercompany transactions are eliminated in consolidation. In
addition, the unaudited condensed consolidated financial statements include the
accounts of a variable interest entity from
which the Company leases its headquarters facility in St. Petersburg, Florida.
The Company has determined that it is the primary beneficiary of this entity
and, thus, has included the accounts of this entity in its unaudited condensed
consolidated financial statements pursuant to the requirements of the Financial
Accounting Standards Boards (FASB) Interpretation (FIN) No. 46 (revised
2003), Consolidation of Variable Interest EntitiesAn Interpretation of ARB
No. 51. The accounts of the wholly and majority owned foreign subsidiaries
are included on a three-month lag, (i.e., for the three-month periods ended
March 31, 2004 and March 31, 2003), to facilitate the timing of the Companys
closing process. Note 2. Stock Based Compensation The Company applies the recognition and measurement principles of APB
Opinion No. 25 and related interpretations in accounting for its stock-based
employee compensation plans. Additionally, the Company has adopted the
disclosure provisions of SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which amends SFAS No. 123, Accounting
for Stock-Based Compensation. SFAS No. 148 allows for the continued use of
the recognition and measurement principles of APB Opinion No. 25 and related
interpretations in accounting for those plans. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions to stock-based employee compensation. Such
disclosure is not necessarily indicative of the fair value of stock options
that could be granted by the Company in future fiscal years or of the value of
all options currently outstanding. The pro forma results were calculated with
the use of the Black-Scholes option-pricing model. Had compensation expense
for these plans been recognized in accordance 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): Three Months Ended June 30,2004
    
    2003Net income:As reported
    
    $
    10,926
    
    
    $
    4,263Add stock-based employee compensation expense
included in reported net income, net of tax
    
    
    76
    
    
    
    37Deduct total stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax
    
    
    (3,608
    )
    
    
    (1,808
    )Pro forma net income
    
    $
    7,394
    
    
    $
    2,492Basic EPS:As reported
    
    $
    0.21
    
    
    $
    0.08Pro forma
    
    $
    0.14
    
    
    $
    0.05Diluted EPS:As reported
    
    $
    0.21
    
    
    $
    0.08Pro forma
    
    $
    0.14
    
    
    $
    0.05
 Pro forma amounts include approximately $0.4 million related to the
purchase discount offered under the Purchase Plan for the three months ended
June 30, 2003. There were no shares issued under the Purchase Plan for the
three months ended June 30, 2004, and, consequently, no accompanying purchase
discount. During the three months ended June 30, 2003, certain of the Companys
executives left the Company prior to exercising their options and, as a result,
any unexercised options have been forfeited. The pro forma compensation
expense for the first quarter of fiscal year 2004 shown in the table above
includes a reversal of previously reported pro forma compensation expense of
$3.9 million, net of a tax benefit of $2.4 million, related to these forfeited
options. 9




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Note 3. Accounting Standards Adopted During the Three Months Ended June 30,
2004 Revised SFAS No. 132.In December 2003, the FASB issued a revision to
Statement of Financial Accounting Standards No. 132 (SFAS No. 132). This
revision to SFAS No. 132 is intended to improve financial statement disclosures
for defined benefit plans and was initiated in response to concerns raised by
investors and other users of financial statements about the need for greater
transparency of pension information. In particular, the standard requires
that companies provide more details in their interim financial reports about
their net periodic pension expense and amounts expected to be paid to the plan
during the current fiscal year. In fiscal year 2002, the Company implemented a plan to provide healthcare
benefits to certain eligible retirees and active employees and their eligible
dependents. The plan contains no assets, and the Company does not anticipate
making contributions to the plan, other than for current benefit payments.
Benefits are funded from the Companys assets on a current basis. Plan
benefits are subject to co-payments, deductibles, and other limits as defined
by the plan. Benefits paid during the three months ended June 30, 2004 and
2003 were not material. The Companys funding of the cost of healthcare
benefits is at the discretion of management. A detail of net periodic expense
for the three months ended June 30, 2004 and 2003 is as follows: Three Months Ended June 30,2004
    
    2003Service cost
    
    $
    
    
    
    $
    3Interest cost
    
    
    31
    
    
    
    32Amortization of unrecognized prior service costs
    
    
    
    
    
    
    111$
    31
    
    
    $
    146
 The revision to SFAS No. 132 also requires additional disclosures on an
annual basis. The annual disclosures required under SFAS No. 132 as they
related to the Companys postretirement healthcare plan have been provided in
Note 15 to the Companys Consolidated Financial Statements as filed in its
Annual Report on Form 10-K for fiscal year ended March 31, 2004. Note 4. Net Income Per Common Share The following is a reconciliation of the denominator of basic earnings per
share (EPS) to the denominator of diluted EPS (in thousands): Three Months Ended June 30,2004
    
    2003Basic weighted average common shares outstanding
    
    
    52,227
    
    
    
    52,536Dilutive effect of options outstanding
    
    
    18
    
    
    
    33Diluted weighted average common shares
outstanding
    
    
    52,245
    
    
    
    52,569
 Options to purchase 4,097,985 shares of common stock at exercise prices
ranging from $18.13 to $36.82 per share for the three months ended June 30,
2004, and 7,221,272 shares at exercise prices ranging from $18.13 to $36.82 per
share for the three months ended June 30, 2003 were not included in the
computation of diluted EPS for the respective period because their exercise
prices were greater than the average market price of common stock during the
relevant periods. Note 5. Comprehensive Income (in thousands) Three months ended June 30,2004
    
    2003Net income
    
    $
    10,926
    
    
    $
    4,263Other comprehensive loss, net of tax:Currency translation adjustment
    
    
    (996
    )
    
    
    (542
    )Comprehensive Income
    
    $
    9,930
    
    
    $
    3,721
 10




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Note 6. Segment Information The Company is organized and managed by segments, as described in
following table: Segment
    
    Business ActivityCatalina Marketing Services
    
    Provides point-of-sale, printed promotions to
consumers for consumer packaged goods manufacturers and our retail
partners.Catalina Health Resource
    
    Provides point-of-sale printed direct-to-patient
communications for pharmaceutical and consumer packaged goods manufacturers and
retailers.International
    
    Provides services similar to Catalina Marketing
Services in the United Kingdom, France, Italy,
Germany and Japan.Japan Billboard
    
    Provides billboards and outdoor media advertising in
Japan.Direct Marketing Services
    
    Provides direct mail services to consumers homes
for manufacturing and retail clients.Catalina Marketing Research Solutions
    
    Provides traditional marketing research services.Corporate
    
    Provides executive and administrative oversight and
centralized functions such as information
technology, client services and store systems
support.
 The Company previously reported the activities of the operating segments
Retail Services and CMRS in Other. Effective April 1, 2004, the Company
restructured the Retail Services and Manufacturer Services units by merging
Retail Services into Manufacturer Services and renaming the segment Catalina
Marketing Services, or CMS. The restructuring was part of the Companys
strategy to optimize its selling and administrative efforts. As a result of the
restructuring, Retail Services is no longer reported as a separate business
segment. Segment information for the three months ended June 30, 2003 for
Retail Services has been reclassified to CMS to reflect the new segment
reporting. Financial information for each of the Companys reportable segments is
presented in the following tables. Revenues fromExternal
    
    IntersegmentCustomers
    
    RevenuesThree Months Ended June 30,Segments:
    
    2004
    
    2003
    
    2004
    
    2003Catalina Marketing Services
    
    $
    63,398
    
    
    $
    59,599
    
    
    $
    4
    
    
    $
    Catalina Health Resource
    
    
    17,866
    
    
    
    14,466
    
    
    
    
    
    
    
    International
    
    
    14,246
    
    
    
    9,111
    
    
    
    
    
    
    
    Direct Marketing Services
    
    
    5,800
    
    
    
    11,657
    
    
    
    138
    
    
    
    155Japan Billboard
    
    
    2,921
    
    
    
    3,768
    
    
    
    
    
    
    
    Catalina Marketing Research Solutions
    
    
    1,342
    
    
    
    3,576
    
    
    
    40
    
    
    
    191105,573
    
    
    
    102,177
    
    
    
    182
    
    
    
    346Reconciliation of segments
to consolidated amount:Corporate
    
    
    70
    
    
    
    35
    
    
    
    696
    
    
    
    435Eliminations
    
    
    
    
    
    
    
    
    
    
    (878
    )
    
    
    (781
    )$
    105,643
    
    
    $
    102,212
    
    
    $
    
    
    
    $
    
 11




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##### Table of Contents



Net Income (Loss)Three Months Ended June 30,Segments:
    
    2004
    
    2003Catalina Marketing Services
    
    $
    16,133
    
    
    $
    12,836Catalina Health Resource
    
    
    1,074
    
    
    
    (1,997
    )International
    
    
    801
    
    
    
    (1,146
    )Direct Marketing Services
    
    
    (1,819
    )
    
    
    (483
    )Japan Billboard
    
    
    (181
    )
    
    
    (1,138
    )Catalina Marketing Research Solutions
    
    
    (437
    )
    
    
    274Reconciliation of segments to consolidated amount:Corporate
    
    
    (4,645
    )
    
    
    (4,083
    )Consolidated
    
    $
    10,926
    
    
    $
    4,263
 Total AssetsSegments:
    
    June 30, 2004
    
    March 31, 2004Catalina Marketing Services
    
    $
    1,149,055
    
    
    $
    1,514,933Catalina Health Resource
    
    
    65,515
    
    
    
    68,284International
    
    
    95,519
    
    
    
    98,039Direct Marketing Services
    
    
    41,789
    
    
    
    45,788Japan Billboard
    
    
    6,018
    
    
    
    6,654Catalina Marketing Research Solutions
    
    
    7,988
    
    
    
    10,963Reconciliation of segments to consolidated
amount:Eliminations
    
    
    (1,399,771
    )
    
    
    (2,277,109
    )Corporate
    
    
    414,957
    
    
    
    919,257$
    381,070
    
    
    $
    386,809
 Note 7. Impairment Charges and Goodwill The accompanying unaudited condensed consolidated statements of income
reflect an impairment charge of $1.6 million for the three months ended June
30, 2004. In November 2003, the Company announced its intent to divest DMS.
As a result, the Company tested the goodwill of this reporting unit for
impairment during fiscal year 2004, resulting in partial impairment of
goodwill. The Company tested the goodwill at DMS for impairment again during
the three months ended June 30, 2004 due to a further decline in DMS
forecasted cash flows. Based upon this testing, the Company determined that an
additional impairment of goodwill had occurred and recorded an impairment
charge of $1.6 million, reducing the goodwill attributable to this business
unit to $0 as of June 30, 2004. Changes in the carrying amount of goodwill, including the effect of
impairment charges through June 30, 2004, were as follows: CMS
    
    CHR
    
    DMS
    
    International
    
    CMRS
    
    ConsolidatedBalance as of March 31, 2004
    
    $
    20,210
    
    
    $
    36,132
    
    
    $
    1,609
    
    
    $
    24,153
    
    
    $
    2,639
    
    
    $
    84,743Impairment
    
    
    
    
    
    
    
    
    
    
    (1,609
    )
    
    
    
    
    
    
    
    
    
    
    (1,609
    )Balance as of June 30, 2004
    
    $
    20,210
    
    
    $
    36,132
    
    
    $
    
    
    
    $
    24,153
    
    
    $
    2,639
    
    
    $
    83,134
 12




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##### Table of Contents



Note 8. Subsequent Event A sales and use tax audit for the period January 1, 1991 to June 30, 1993
was conducted by a state taxing authority resulting in an assessment of sales
tax on the Companys revenue generated from its electronic marketing delivery
service conducted within that state. We subsequently appealed this assessment
to the relevant state tax tribunal. The tax tribunal held that our electronic
marketing delivery activities were taxable in their entirety. In March 2002,
the states intermediate court of appeals affirmed the decision of the tax
tribunal. We appealed the case to the states supreme court and, in May 2004,
the state supreme court vacated the prior decision, remanded the case back to
the tax tribunal and directed the tax tribunal to apply a different legal test.
In July 2004, the states tax tribunal ruled in favor of the Company; however,
the decision of the states tax tribunal is subject to review by the state
supreme court and is not final. As of the current date, the Company does not
yet know the final outcome of the case. A favorable decision could result in
the reversal of a liability of approximately $4.4 million, which is the amount
of the liability the Company has recognized as of the current date. If an
adverse decision is reached in this case, we do not believe that the tax
assessment will result in a material charge to the Companys financial
statements, however, we may become subject to similar proceedings in other
jurisdictions and additional tax assessments resulting from those proceedings
could be material to the Company. 13




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations The following table includes the revenues, operating profit (loss) and net
income (loss) for each of the Companys significant reportable segments for the
three months ended June 30, 2004 compared with the three months ended June 30,
2003. Dollars are in thousands. The accounts of our wholly and majority owned
foreign subsidiaries are included for the three months ended March 31, which is
the end of their first fiscal quarter. In general, we expect our revenues to be higher during periods of
increased promotional activity by manufacturers. The pattern of promotion
distribution is irregular and may change from period to period depending on
various factors, including the economy, competition, the timing of new product
introductions and the timing of manufacturers promotion planning and
implementation. In addition, this pattern may be affected by seasonal factors
such as holiday-related promotion, seasonal product advertising and annual
budgeting processes affecting when our clients use promotional and
consumer-related expenditure budgets. The seasonality of our international
operations may be different than that of our domestic operations for many
reasons, but the impact of seasonality on our reporting may also be affected by
the difference in fiscal years. These factors, as well as the overall growth in
the number of retailer and manufacturer contracts with the Company, the timing
of growth of the installed store base and access to revenue producing
transactions, may impact our revenues and profits in any particular period. The Company previously reported the activities of the operating segments
Retail Services and CMRS in Other. Effective April 1, 2004, the Company
restructured the Retail Services and Manufacturer Services units by merging
Retail Services into Manufacturer Services and renaming the segment Catalina
Marketing Services, or CMS. The restructuring was part of the Companys
strategy to optimize its selling and administrative efforts. As a result of the
restructuring, Retail Services is no longer reported as a separate business
segment. Segment information for the three months ended June 30, 2003 for
Retail Services has been reclassified to Catalina Marketing Services to reflect
the new segment reporting. See Note 6 to the unaudited condensed consolidated
financial statements included herein, and our Annual Report on Form 10-K for
the fiscal year ended March 31, 2004 for additional segment information.
Results of operations are discussed for each of our significant operating
segments. Three Months Ended June 30,2004
    
    2003RevenuesCatalina Marketing Services
    
    $
    63,402
    
    
    $
    59,599CHR
    
    
    17,866
    
    
    
    14,466International
    
    
    14,246
    
    
    
    9,111DMS
    
    
    5,938
    
    
    
    11,812Japan Billboard
    
    
    2,921
    
    
    
    3,768Catalina Marketing
Research Solutions
    
    
    1,382
    
    
    
    3,767Corporate
    
    
    766
    
    
    
    470Eliminations
    
    
    (878
    )
    
    
    (781
    )Total Revenues
    
    $
    105,643
    
    
    $
    102,212
 Three Months Ended June 30,2004
    
    2003Operating Profit (Loss)Catalina Marketing Services
    
    $
    27,191
    
    
    $
    21,573CHR
    
    
    1,808
    
    
    
    (3,356
    )International
    
    
    2,754
    
    
    
    (454
    )DMS
    
    
    (1,962
    )
    
    
    (813
    )Japan Billboard
    
    
    (154
    )
    
    
    (318
    )Catalina Marketing Research Solutions
    
    
    (734
    )
    
    
    462Corporate
    
    
    (10,516
    )
    
    
    (9,110
    )Total Operating Profit
    
    $
    18,387
    
    
    $
    7,984
 14




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##### Table of Contents



Three Months Ended June 30,2004
    
    2003Net Income (Loss)Catalina Marketing Services
    
    $
    16,133
    
    
    $
    12,836CHR
    
    
    1,074
    
    
    
    (1,997
    )International
    
    
    801
    
    
    
    (1,146
    )DMS
    
    
    (1,819
    )
    
    
    (483
    )Japan Billboard
    
    
    (181
    )
    
    
    (1,138
    )Catalina Marketing Research
Solutions
    
    
    (437
    )
    
    
    274Corporate
    
    
    (4,645
    )
    
    
    (4,083
    )Net Income
    
    $
    10,926
    
    
    $
    4,263
 Consolidated Results of Operations Consolidated revenues increased by $3.4 million to $105.6 million for the
three months ended June 30, 2004 compared with consolidated revenues of $102.2
million the three months ended June 30, 2003. Consolidated operating profit
increased by $10.4 million to $18.4 million for the three months ended June 30,
2004 compared with consolidated operating profit of $8.0 million for the three
months ended June 30, 2003. Consolidated costs and expenses, which includes an
impairment charge of $1.6 million related to DMS, decreased $7.0 million for
the three months ended June 30, 2004 compared with the three months ended June
30, 2003. Consolidated net income for the three months ended June 30, 2004
increased by $6.6 million to $10.9 million compared with $4.3 million for the
three months ended June 30, 2003. See Segment Results below for a discussion of
the comparative period changes. The consolidated provision for income taxes for the three months ended
June 30, 2004 of $7.0 million increased to 39.2% of income before income taxes
compared with the consolidated provision for income taxes for the three months
ended June 30, 2003 of $3.1 million, or 38.5% of income before income taxes.
The Companys effective tax rate for the three months ended June 30, 2004 was
higher than the federal statutory rate primarily due to state and foreign
income taxes and various nondeductible expenses. Segment Results Catalina Marketing Services Revenues for Catalina Marketing Services increased by $3.8 million to
$63.4 million for the three months ended June 30, 2004, compared with revenues
of $59.6 million for the three months ended June 30, 2003. The increase was
primarily attributable to an increase in the volume of paid promotions printed,
partially offset by a decrease in the average price per print, driven by a
change in product mix, and a decline in loyalty card revenues of $0.8 million
primarily due to the sale of the loyalty card business on March 31, 2004. Operating profit for Catalina Marketing Services increased by $5.6 million
to $27.2 million for the three months ended June 30, 2004 compared with
operating profit of $21.6 for the three months ended June 30, 2003. The
increase in operating profit was primarily attributable to the $3.8 million
increase in revenues, a $0.7 million decrease in sales personnel costs and a
$0.5 million decrease in executive administrative costs. These decreased costs
were primarily related to headcount reductions. Net income for Catalina Marketing Services increased by $3.3 million to
$16.1 million for the three months ended June 30, 2004, compared with net
income of $12.8 million for the three months ended June 30, 2003. The increase
was due to the changes in operating profit discussed above. CHR Revenues for CHR increased by $3.4 million to $17.9 million for the three
months ended June 30, 2004, compared with revenues of $14.5 million for the
three months ended June 30. 2003. Increased revenues were primarily
attributable to a shift in the mix of programs sold to higher-priced programs. 15




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##### Table of Contents



Operating profit for CHR increased to $1.8 million for the three months
ended June 30, 2004 compared with an operating loss of $3.4 million for the
three months ended June 30, 2003. The improvement in operating results was
primarily attributable to the $3.4 million increase in revenues, a $1.0 million
decrease in retailer fees and a $0.4 million decrease in executive administrative expenses for the three months ended June
30, 2004 compared with the three months ended June 30, 2003. The decrease in
retailer fees was primarily due to the effect of a more favorable
contract entered into with a retailer during the second quarter of
fiscal year 2004. Net income for CHR increased to $1.1 million for the three months ended
June 30, 2004 compared with a net loss of $2.0 million for the three months
ended June 30, 2003. The improvement was due to the changes in operating
profit discussed above. International Revenues for International increased by $5.1 million to $14.2 million for
the three months ended June 30, 2004, compared with revenues of $9.1 million
for the three months ended June 30. 2003. The increased revenues were
primarily attributable to a $2.1 million increase due to a favorable change in
foreign currency exchange rates, an increase in revenues from manufacturer
promotions, primarily due to activity in Japan, and an increase in retailer
promotions printed in France. Operating profit for International increased to $2.8 million for the three
months ended June 30, 2004 compared with an operating loss of $0.5 million for
the three months ended June 30, 2003. The improvement in operating results was
primarily attributable to the $5.1 million increase in revenues, partially
offset by an increase in direct costs of $1.4 million primarily related to the
sales growth. Selling, general and administrative costs were comparable period
over period, reflecting an improvement from 58% of revenues during the first
quarter of fiscal year 2004 to 39% of revenues during the first quarter of
fiscal year 2005. The improvement in selling, general and administrative
expenses as a percentage of revenues is primarily attributable to the synergies
achieved because of increased retail promotions revenues in France and
cost-cutting measures implemented in Japan during fiscal year 2004. Net income for International increased to $0.8 million for the three
months ended June 30, 2004 compared with a net loss of $1.1 million for the
three months ended June 30, 2003. The improvement was due to the changes in
operating profit discussed above. DMS Revenues for DMS decreased by $5.9 million to $5.9 million for the three
months ended June 30, 2004, compared with revenues of $11.8 million for the
three months ended June 30, 2003. The decrease was primarily attributable to
lower sample mailings as a result of a significant decrease in DMS sales
personnel since the announcement, during the third quarter of fiscal year 2004,
of our intent to divest DMS. Operating loss for DMS of $2.0 million for the three months ended June 30,
2004, includes an impairment charge of $1.6 million to write off the remaining
balance of goodwill. In November 2003, the Company announced its intent to
divest DMS. As a result, the Company tested the goodwill of this reporting
unit for impairment during fiscal year 2004, resulting in partial impairment of
goodwill. The Company tested DMS goodwill for impairment again during the
three months ended June 30, 2004, primarily due to a further decline in DMS
forecasted cash flows. Based upon this testing, the Company determined that an
additional impairment of goodwill had occurred and recorded an impairment
charge of $1.6 million, which is reflected in the accompanying unaudited
condensed consolidated statements of income for the three months ended June 30,
2004. Excluding this impairment charge, operating loss for DMS was $0.4 million
for the three months ended June 30, 2004, compared with an operating loss of
$0.8 million for the three months ended June 30, 2003. This improvement in
operating results was primarily due to the fact that the Company did not
allocate Corporate operating costs to DMS during the three months ended June
30, 2004. Total Corporate costs, excluding taxes, allocated to DMS during the
three months ended June 30, 2003 were $0.6 million. 16




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##### Table of Contents



Net loss for DMS was $1.8 million for the three months ended June 30, 2004
compared with a net loss of $0.5 million for the three months ended June 30,
2003. The increase in net loss was primarily attributable to the change in
operating profit discussed above. Japan Billboard Revenues for Japan Billboard were $2.9 million for the three months ended
June 30, 2004 compared with revenues of $3.8 million for the three months ended
June 30, 2003. Revenues for Japan Billboard continue to decline as a result of
the decline in tobacco advertising spending resulting from the adoption of the
Voluntary Global Tobacco Marketing Initiative (the Initiative) in fiscal year
2002 and the January 2004 Japan Ministry of Health announcement of its intent
to comply with the World Health Organizations international Framework
Convention on Tobacco Control (FCTC), which significantly limits the manner
in which tobacco companies in Japan can market, promote and advertise their
products. For a more detailed description of the Initiative and its effect on
revenues for Japan Billboard, see our Annual Report on Form 10-K for the fiscal
year ended March 31, 2004. Operating loss for Japan Billboard decreased slightly to $0.2 million for
the three months ended June 30, 2004 compared with an operating loss of $0.3
million for the three months ended June 30, 2003. Japan Billboards operating
losses are a reflection of the impact of the Initiative and the FCTC; however
costs and expenses continue to decrease as billboards are taken out of service. Net loss for Japan Billboard was $0.2 million for the three months ended
June 30, 2004 compared with a net loss of $1.1 million for the three months
ended June 30, 2003. The net loss for the three months ended June 30, 2003
includes a $0.8 million charge for the cumulative effect of an accounting
change, net of related taxes, for Japan Billboards future obligation to remove
billboards. For a discussion of this accounting change, see our Annual Report
on Form 10-K for our fiscal year ended March 31, 2004. CMRS Revenues for CMRS were $1.4 million for the three months ended June 30,
2004, compared with revenues of $3.8 million for the three months ended June
30, 2003. In November 2003, we announced our intent to divest CMRS. Since
that announcement, our revenues have declined, primarily due to the resignation
of several key sales personnel. Operating loss for CMRS was $0.7 million for the three months ended June
30, 2004, compared with operating income of $0.5 million for the three months
ended June 30, 2004. The operating loss for the period reflects the decrease
in revenues, net of a reduction in related variable costs and expenses. Net loss for CMRS was $0.4 for the three months ended June 30, 2004
compared with net income of $0.3 million for the three months ended June 30,
2003. Corporate Corporate operating loss and net loss increased by $1.4 million and $0.5
million, respectively, for the three months ended June 30, 2004 compared with
the three months ended June 30, 2003. Operating costs incurred by Corporate
are allocated to the operating segments using methods considered reasonable by
management and which provide management with a realistic measure of utilization
of corporate services by the respective business segments. Operating costs
incurred by Corporate for the three months ended June 30, 2004 decreased by
$0.2 million, before taxes, compared with the three months ended June 30, 2003.
However, the percent of operating costs allocated to the business segments was
lower for the three months ended June 30, 2004 than the comparable period in
the previous year. Accordingly, the Corporate segment reflects increased
operating and net losses for the three months ended June 30, 2004. Foreign Currency Translation and Its Effect on Revenues Consolidated revenues for the three months ended June 30, 2004 were $105.6
million, which includes $17.2 million in revenues from foreign operations. 17




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##### Table of Contents



The local currencies of the countries in which we maintain foreign
operations are the euro, British pound sterling and Japanese yen. These
currencies strengthened against the United States dollar during the three
months ended June 30, 2004. Accordingly, revenues in United States dollars for
our foreign operations would have been 12.5% lower for the period if translated
using the weighted average currency translation rates for the comparable period
in 2003. Liquidity and Capital Resources Our primary sources of liquidity have been cash flows generated from
operations, a credit agreement with a syndicate of commercial banks with a
revolving loan credit facility (the Corporate Facility), various credit
agreements entered into by our Japan subsidiaries (the Japan Credit
Facilities) and the indebtedness under a lease arrangement in the amount of
$29.6 million. See Other Sources of Liquidity for further details. Our
primary liquidity requirements continue to be for working capital, capital
expenditures in the ordinary course of business and the repayment of debt and
lease obligations. Cash flows from operations for the three months ended June
30, 2004 and through the current date have been sufficient to meet our
liquidity needs and, with the expectation that the Corporate Facility will be
refinanced prior to its expiration on August 31, 2004, we believe that cash
flows generated from operations, along with existing credit facilities, will be
sufficient to meet our projected cash requirements for at least the next twelve
months. We have no significant long-term debt other than outstanding installment
payables in Japan and the indebtedness under the lease agreement governing our
headquarters facility. We will continue to invest in sales and marketing, in
our Catalina Marketing Network® and in other support technology and enhanced
systems of reporting and controls. We believe that our ability to generate sufficient amounts of cash gives
us the opportunity to invest in our business as we believe is necessary for
items such as research and development, expansion and development of markets,
investments, acquisitions, share repurchases, legal risks and challenges to our
business model. Our existing cash and cash equivalents, combined with cash
generated from operations and available borrowings under our credit facilities,
should be sufficient to fund our operating activities as well as other
opportunities for the short term and over our forecasted long-range plan of
three years. If during that period or thereafter we are not successful in
generating sufficient cash flows from operations, raising additional capital
when required, or being able to borrow in sufficient amounts, our business
could suffer. Cash Flow Analysis Net cash provided by operating activities was $1.9 million for the three
months ended June 30, 2004 compared with $17.3 million for the three months
ended June 30, 2003. The decrease in net cash provided by operating activities
for the three months ended June 30, 2004 is primarily due to an increase in net
income, entirely offset by a use of cash for working capital. This use of cash
for working capital for the first quarter of fiscal year 2005 was primarily
related to an increase in accounts receivable and a decrease in accrued
expenses. Accounts receivable increased primarily due to an increase in
revenues and the timing of customer collections. Accrued expenses decreased
primarily due to the timing of payroll-related expenditures, and decreases in
professional fees and retailer fees payable. Following is a summary of the
cash flows from operating activities for the three months ended June 30, 2004
and 2003 (in thousands): Three Months Ended June 30,2004
    
    2003Cash Flows from Operating Activities:Net Income
    
    $
    10,926
    
    
    $
    4,263Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation, amortization and impairment charge
    
    
    13,807
    
    
    
    11,805Other non-cash items
    
    
    992
    
    
    
    2,426Changes in operating assets and liabilities:Accounts receivable
    
    
    (7,867
    )
    
    
    7,532Inventory, prepaid expenses and other assets
    
    
    (458
    )
    
    
    (2,930
    )Accounts payable
    
    
    (1,546
    )
    
    
    (5,872
    )Taxes payable
    
    
    17
    
    
    
    (1,687
    )Accrued expenses
    
    
    (14,640
    )
    
    
    (7,015
    )Deferred revenue
    
    
    635
    
    
    
    8,757$
    1,866
    
    
    $
    17,279
 18




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##### Table of Contents



Net cash used in investing activities, which was entirely for capital
expenditures, decreased by $7.6 million to $2.1 million for the three months
ended June 30, 2004 compared with $9.7 million for the three months ended June
30, 2003. Capital expenditure levels vary during the year depending upon the
timing and size of contracts entered into with retailers and the scheduling of
store installations. Net cash used in financing activities was $0.6 million for the three
months ended June 30, 2004 compared with $0.3 million used in financing
activities during the three months ended June 30, 2003. The Company
repurchased common stock during the three months ended June 30, 2003 for $13.3
million. Net bank borrowings for the same period were $12.3 million. Bank
debt transactions were insignificant during the three months ended June 30,
2004, and there were no stock repurchases during the period. Cash and cash equivalents decreased by $1.2 million to $71.5 million for
the three months ended June 30, 2004. Other Sources of Liquidity In addition to our cash flows generated from operations, our access to the
Corporate Facility and Japan Credit Facilities provide additional sources of
liquidity. The Corporate Facility.The Corporate Facility currently provides for a
revolving line of credit up to $30.0 million, which is available to finance
capital expenditures, current operating requirements in our domestic and
European subsidiaries and other investments. Please refer to the Companys
Annual Report on Form 10-K for the fiscal year 2004, for a discussion of the
significant changes and current terms of the Corporate Facility. The Corporate
Facility expires on August 31, 2004 and, currently, there are no borrowings
outstanding. We believe that we will be able to either renegotiate or replace the
Corporate Facility prior to its expiration on August 31, 2004 with terms that
will be at least as favorable as the terms of the current Corporate Facility;
however, there can be no assurances that we will be able to renegotiate terms
that are as favorable to the Company as those of the existing Corporate
Facility. Although we believe that cash generated from operations under
economic conditions similar to those currently existing will be sufficient to
meet our liquidity requirements, failure to renegotiate the terms of or to
replace the Corporate Facility on terms that are at least as favorable to us
could have, in conjunction with other unknown events related to our liquidity
or future business prospects, a material adverse effect on our ability to
provide sufficient cash to fund our operations. The Japan Credit Facilities.The Japan Credit Facilities are available to
finance capital expenditures and current operating requirements of our
operations in Japan. The balance outstanding under the Japan Credit Facilities
as reflected in the accompanying unaudited condensed consolidated balance sheet
of June 30, 2004 was $37.2 million. Please refer to the Companys Annual
Report on Form 10-K for the fiscal year 2004, for a discussion of the
significant terms of the Japan Credit Facilities. The Lease Agreement.The lease agreement governs the $29.6 million of
indebtedness related to our corporate headquarters, in St. Petersburg, Florida.
These borrowings are guaranteed by a lien on our corporate headquarters. The
initial lease term expires in October 2005. At the expiration of the initial
lease term for our building, if all parties agree, the lease may be extended
for as many as three, five-year renewal periods; alternatively, we have an
option to purchase the building for approximately $30.5 million. Please refer
to the Companys Annual Report on Form 10-K for the fiscal year ended March 31,
2004, for a discussion of the current terms of the lease agreement. Capital Requirements There were no significant changes to the Companys contractual cash
obligations or commercial commitments during the quarter ended June 30, 2004 as
compared with the amounts reported in the Companys Annual Report on Form 10-K
for the fiscal year ended March 31, 2004. 19




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Our unaudited condensed consolidated balance sheets include the accounts
of the variable interest entity which owns our headquarters building in St.
Petersburg, Florida. At the expiration of the initial lease term for our
building, if all parties agree, the lease may be extended for as many as three,
five-year renewal periods; alternatively, we have an option to purchase the
building for approximately $30.5 million. The Company also has the option to
purchase the building at any time before the expiration of the initial lease
term in October 2005. In the event we elect to purchase the building, we may
arrange third-party financing for the purchase or, depending upon availability,
utilize cash from operations, either entirely or in combination with long-term
financing. If the lease is not extended and we do not purchase the building,
the building will be sold, at which time we may negotiate a lease with the new
owner. We believe that the ability to renew the lease or purchase the building,
either individually or in some combination thereof, or renegotiation of a lease
in the event of a sale of the building, will allow us to satisfy our obligation
for our headquarters building. Capital Expenditures.The Companys primary capital expenditures are for
store equipment and third-party store installation and upgrade costs, as well
as data processing equipment for the Companys central data processing
facilities. Total store equipment and third-party store installation costs for
the Catalina Marketing Network® typically range from $3,000 to $13,000 per
store. The pace of installations varies depending on the timing of contracts
entered into with retailers and the scheduling of store installations by mutual
agreement. We typically finance our capital expenditures for in-store equipment
with cash generated from operations. Because in-store installations do not
follow a pattern that necessarily coincides with our operating cash flows, we
may finance our capital expenditures for this equipment with proceeds from our
Corporate Facility. Contingent Earnout Payment.In 1999, the Company, through one of its
wholly owned subsidiaries, executed a final deferred contingency earnout
agreement, as amended November 2003, with the former minority partners of the
Catalina Marketing Japan coupon business. The agreement stipulates a potential
earn out payment based on a predetermined formula over the applicable four
consecutive quarters of earnings during a time period ending between 2006 and
2007. We are not able to estimate the amount of this contingent payment which
is based on future earnings; however, the ultimate amount of this payment, if
any, could be material. Sales Tax Assessment A sales and use tax audit for the period January 1, 1991 to June 30, 1993
was conducted by a state taxing authority resulting in an assessment of sales
tax on the Companys revenue generated from its electronic marketing delivery
service conducted within that state. We subsequently appealed this assessment
to the relevant state tax tribunal. The tax tribunal held that our electronic
marketing delivery activities were taxable in their entirety. In March 2002,
the states intermediate court of appeals affirmed the decision of the tax
tribunal. We appealed the case to the states supreme court and, in May 2004,
the state supreme court vacated the prior decision, remanded the case back to
the tax tribunal and directed the tax tribunal to apply a different legal test.
In July 2004, the states tax tribunal ruled in favor of
the Company; however,
the decision of the states tax tribunal is subject to review by the state supreme
court and is not final. As of the current date, the Company does not yet know
the final outcome of the case. A favorable decision could result in the
reversal of a liability of approximately $4.4 million, which is the amount of
the liability the Company has recognized as of the current date. If an adverse
decision is reached in this case, we do not believe that the tax assessment
will result in a material charge to the Companys financial statements,
however, we may become subject to similar proceedings in other jurisdictions
and additional tax assessments resulting from those proceedings could be
material to the Company. Critical Accounting Estimates Please refer to the discussion of the Companys Critical Accounting
Estimates as disclosed in the Companys Annual Report on Form 10-K for the
fiscal year ended March 31, 2004. Forward Looking Statements Certain information included in this Managements Discussion and Analysis
of Financial Condition and Results of Operations, contains forward-looking
statements made in reliance upon the safe harbor provisions of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934. These statements may be identified by the use of words,
such as anticipate, estimates, should, expect, guidance, project,
intend, plan, believe and other words and terms of similar meaning, in
connection with any discussion of the Companys future business, results of
operations, liquidity and operating or financial performance. Such
forward-looking statements involve significant material known and unknown
risks, uncertainties 20




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and other factors which may cause the actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. These risk factors should be considered in connection with any
written or oral forward-looking statement that we or any person acting on our
behalf may issue in this document or otherwise, now or in the future. We
undertake no obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or otherwise.
We cannot assure you that any future results, performance or achievements will
be achieved. For a discussion of certain of these risks, uncertainties and
other factors, see Risk Factors and Part ISpecial Note Regarding
Forward-Looking Statements included in our Annual Report on Form 10-K for
the fiscal year ended March 31, 2004. Further, certain information contained in
this document is a reflection of our intention as of the date of this filing
and is based upon, among other things, the existing regulatory environment,
industry conditions, market conditions and prices, the economy in general and
our assumptions as of such date. We may change our intentions based upon any
changes in such factors, in our assumptions or otherwise. 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk The Companys principal market risks are interest rates on various debt
instruments and foreign exchange rates at the Companys international
subsidiaries. Please refer to the discussion of the Companys Quantitative and
Qualitative Disclosure About Market Risk as disclosed in the Companys Annual
Report on Form 10-K for the fiscal year ended March 31, 2004. There have been
no material changes to the Companys market risk exposure since March 31, 2004. 
 Item 4. Controls and Procedures Disclosure controls and procedures.An evaluation was carried out under
the supervision and with the participation of the Companys management,
including the Principal Executive Officer and the Principal Financial Officer,
of the effectiveness of the Companys disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this report. Based on that evaluation, these officers have
concluded that the Companys disclosure controls and procedures are effective. Changes in internal control over financial reporting.During the first
quarter of fiscal year 2005, there have been no changes in the Companys
internal control over financial reporting or in other factors that have
materially affected, or are reasonably likely to materially affect, the
Companys internal control over financial reporting. 21




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Part II. Other Information 
 Item 2. Changes in Securities and Use of Proceeds. (a) through (d) None. (e) Issuer Purchases of Equity Securities.  The following table sets forth information relating to the Companys
purchase of its equity securities during the three months ended June 30,
2004: (c)
    
    (d)Maximum Number (orTotal Number of
    
    approximate DollarShares (or Units)
    
    Value) of Shares(a)
    
    (b)
    
    Purchased as Part
    
    (or Units) that MayTotal Number of
    
    Average Price Paid
    
    of Publicly
    
    Yet Be PurchasedShares (or Units)
    
    per Share
    
    Announced Plans or
    
    Under the Plans orPeriod (Month of)
    
    Purchased
    
    (or Unit)
    
    Programs
    
    Programs(1)(in thousands)Fiscal 2005April 2004
    
    
    
    
    
    NA
    
    NA
    
    $
    43,993May 2004
    
    
    
    
    
    NA
    
    NA
    
    $
    43,993June 2004
    
    
    
    
    
    NA
    
    NA
    
    $
    43,993
   (1)
    
    In July 2001, we publicly announced authorization from the Companys
Board of Directors to repurchase up to $75.0 million of the Companys
outstanding common stock. In July 2002, we announced that our Board of
Directors had authorized $100.0 million for the repurchase of the
Companys outstanding common stock, which amount included $14.3 million
remaining from the Board of Directors prior authorization in July 2001
and an additional authorization of $85.7 million. The current repurchase
authorization will expire when the total dollar amount authorized by our
Board of Directors for the repurchase of shares has been expended. As
noted in Note 8 to our Consolidated Financial Statements for the fiscal
year ended March 31, 2004 filed on Form 10-K on July 15, 2004, the
Company is currently party to a credit facility which restricts the
repurchase of the Companys shares. 
 Item 6. Exhibits and
Reports on Form 8-K (a) Exhibits. See Exhibit index on page 23 of this quarterly report on
Form 10-Q. (b) Reports on Form 8-K During the
three months ended June 30, 2004, we filed the following Current
Reports on Form 8-K:      None. 22




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CATALINA MARKETING CORPORATION 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, Registrants principal financial officer, thereunto duly
authorized. August 16, 2004
    
    CATALINA MARKETING CORPORATION(Registrant)
 /s/ Christopher W. WolfChristopher W. WolfExecutive Vice President and Chief Financial Officer(Authorized officer of Registrant and principalfinancial officer)
 23




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ExhibitNo.
    
    
    
    Description of Exhibit31.1
    
    
    
    Certification of Chief Executive Officer Pursuant to Exchange Act Rules 13a-15(e)
and 15d-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    
    Certification of Chief Financial Officer Pursuant to Exchange Act Rules 13a-15(e)
and 15d-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 24