##### Table of Contents



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, 2003 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  Delaware
    
    33-0499007(State or Other Jurisdiction of
    
    (IRS EmployerIncorporation or Organization)
    
    Identification Number)200 Carillon Parkway, St. Petersburg, Florida
    
    33716-2325(Address of Principal Executive Offices)
    
    (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.




---



INDEX PagePart I. Financial InformationItem 1. Financial StatementsUnaudited Condensed Consolidated Statements of Income for the three months ended June 30, 2003 and 2002
    
    
    3Unaudited Condensed Consolidated Balance Sheets at June 30, 2003 and March 31, 2003
    
    
    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, 2003 and 2002
    
    
    6Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    7Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    15Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    21Part II. Other InformationItem 6. Exhibits and Reports on Form 8-K
    
    
    24Signatures
    
    
    25Exhibit Index
    
    
    26Section 302 Certification of the CEOSection 302 Certification of the CFOSection 906 Certification of the CEOSection 906 Certification of the CFO
  2




---



##### Table of Contents



Part I. Financial Information SPECIAL NOTE 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. The Company was unable to
file this report on a timely basis. See Note 1 for additional discussion. For
the most part, we have included in this report information which would have
been required, and related to the periods applicable, had we been able to file
this report on a timely basis. Where specified, however, some information has
been presented as of or with respect to a more recent date, in order to provide
more useful information. For example, see Item 4, Part I (Controls and
Procedures). 
 Item 1. Financial Statements CATALINA MARKETING CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
  Three Months Ended June 30,2003
    
    2002(As Restated)Revenues
    
    $
    102,212
    
    
    $
    102,333Costs and expenses:Direct operating expenses
    
    
    46,805
    
    
    
    51,263Selling, general and administrative
    
    
    35,619
    
    
    
    28,187Depreciation and amortization
    
    
    11,804
    
    
    
    10,828Total costs and expenses
    
    
    94,228
    
    
    
    90,278Income from operations
    
    
    7,984
    
    
    
    12,055Interest expense
    
    
    (529
    )
    
    
    (476
    )Other income (expenses), net
    
    
    727
    
    
    
    (522
    )Income before income taxes
    
    
    8,182
    
    
    
    11,057Provision for income taxes
    
    
    3,149
    
    
    
    4,228Income before cumulative effect of accounting
change
    
    
    5,033
    
    
    
    6,829Cumulative effect of accounting change, net of
$0.6 million tax benefit
    
    
    (770
    )
    
    
    Net income
    
    $
    4,263
    
    
    $
    6,829Diluted:Net income per common share before cumulative
effect of accounting change
    
    $
    0.10
    
    
    $
    0.12Cumulative effect of accounting change
    
    
    (0.02
    )
    
    
    Net income per common share
    
    $
    0.08
    
    
    $
    0.12Weighted average common shares outstanding
    
    
    52,569
    
    
    
    56,359Basic:Net income per common share before cumulative
effect of accounting change
    
    $
    0.10
    
    
    $
    0.12Cumulative effect of accounting change
    
    
    (0.02
    )
    
    
    Net income per common share
    
    $
    0.08
    
    
    $
    0.12Weighted average common shares outstanding
    
    
    52,536
    
    
    
    55,407
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3




---



##### Table of Contents



CATALINA MARKETING CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
  June 30,
    
    March 31,2003
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    8,886
    
    
    $
    1,715Accounts receivable, net
    
    
    67,427
    
    
    
    74,849Inventory
    
    
    4,910
    

    
    
    4,921Deferred tax asset
    
    
    14,302
    
    
    
    14,967Prepaid expenses and other current assets
    
    
    19,065
    
    
    
    15,986Total current assets
    
    
    114,590
    
    
    
    112,438Property and Equipment:Property and equipment
    
    
    376,016
    
    
    
    372,036Less  accumulated depreciation and amortization
    
    
    (228,890
    )
    
    
    (223,293
    )Property and equipment, net
    
    
    147,126
    
    
    
    148,743Patents, net
    
    
    14,536
    
    
    
    14,965Goodwill
    
    
    142,416
    
    
    
    142,416Other assets
    
    
    3,594
    
    
    
    3,859Total Assets
    
    $
    422,262
    
    
    $
    422,421LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    12,524
    
    
    $
    18,328Accrued expenses
    
    
    50,183
    
    
    
    56,405Income taxes payable
    
    
    6,321
    
    
    
    7,868Deferred revenue
    
    
    45,184
    
    
    
    36,295Short-term borrowings
    
    
    31,113
    
    
    
    18,297Total current liabilities
    
    
    145,325
    
    
    
    137,193Long-term deferred tax liability
    
    
    14,855
    
    
    
    15,436Long-term debt
    
    
    49,414
    
    
    
    49,926Other long-term liabilities
    
    
    4,514
    
    
    
    2,957Total liabilities
    
    
    214,108
    
    
    
    205,512Commitments 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 52,069,899 and 52,755,192
shares issued and outstanding at
June 30, 2003 and March 31, 2003, respectively
    
    
    521
    
    
    
    528Paid-in capital
    
    
    1,468
    
    
    
    1,526Accumulated other comprehensive income (loss)
    
    
    (253
    )
    
    
    289Retained earnings
    
    
    205,504
    
    
    
    213,652Total stockholders equity
    
    
    207,240
    
    
    
    215,995Total liabilities and stockholders equity
    
    $
    422,262
    
    
    $
    422,421
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4




---



##### Table of Contents



CATALINA MARKETING CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS
 EQUITY AND COMPREHENSIVE INCOME
  AccumulatedPar
    
    
    
    
    
    OtherNumber
    
    Value of
    
    
    
    
    
    Comprehensive
    
    
    
    
    
    TotalComprehensive
    
    of
    
    Common
    
    Paid-in
    
    Income
    
    Retained
    
    StockholdersIncome
    
    Shares
    
    Stock
    
    Capital
    
    (Loss)
    
    Earnings
    
    EquityBALANCE AT MARCH 31, 2003
    
    
    
    
    
    
    52,755
    
    
    $
    528
    
    
    $
    1,526
    
    
    $
    289
    
    
    $
    213,652
    
    
    $
    215,995Proceeds from issuance of common stock
    
    
    
    
    
    
    40
    
    
    
    1
    
    
    
    691
    
    
    
    
    
    
    
    
    
    
    
    692Increase in investment in subsidiary,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    22Tax benefit from exercise of non-
qualified stock options and disqualified
dispositions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    271
    
    
    
    
    
    
    
    
    
    
    
    271Repurchase, retirement and
cancellation of common stock
    
    
    
    
    
    
    (749
    )
    
    
    (8
    )
    
    
    (888
    )
    
    
    
    
    
    
    (12,411
    )
    
    
    (13,307
    )Deferred compensation plan common stock
units and Directors common stock grants
    
    
    
    
    
    
    24
    
    

    
    
    
    
    
    (154
    )
    
    
    
    
    
    
    
    
    
    
    (154
    )Net income
    
    $
    4,263
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,263
    
    
    
    4,263Foreign currency translation adjustment
    
    
    (542
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (542
    )
    
    
    
    
    
    
    (542
    )Comprehensive income
    
    $
    3,721
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCE AT JUNE 30, 2003
    
    
    
    
    
    
    52,070
    
    
    $
    521
    
    
    $
    1,468
    
    
    $
    (253
    )
    
    $
    205,504
    
    
    $
    207,240
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5




---



##### Table of Contents



CATALINA MARKETING CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three Months Ended June 30,2003
    
    2002(As Restated)Net cash provided by operating activities:
    
    $
    17,279
    
    
    $
    21,970Cash flows from investing activities:Capital expenditures
    
    
    (9,664
    )
    
    
    (4,229
    )Business acquisition payments
    
    
    
    
    
    
    (4,638
    )Net cash used in investing activities
    
    
    (9,664
    )
    
    
    (8,867
    )Cash flows from financing activities:Proceeds from the Corporate Facility, net
    
    
    10,000
    
    
    
    7,000Proceeds from Japan borrowings
    
    
    3,963
    
    
    
    13,632Principal payments on Japan borrowings
    
    
    (1,678
    )
    
    
    (13,779
    )Repurchases of Company common stock
    
    
    (13,307
    )
    
    
    (27,833
    )Proceeds from issuance of common and
subsidiary stock
    
    
    714
    
    
    
    1,424Other
    
    
    
    
    
    
    (316
    )Net cash used in financing activities
    
    
    (308
    )
    
    
    (19,872
    )Effect of exchange rate changes on cash and cash
equivalents
    
    
    (136
    )
    
    
    118Net change in cash and cash equivalents
    
    
    7,171
    
    
    
    (6,651
    )Cash and cash equivalents at end of prior period
    
    
    1,715
    
    
    
    13,656Cash and cash equivalents at end of current period
    
    $
    8,886
    
    
    $
    7,005
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6




---



##### Table of Contents



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: Manufacturer Services, Catalina Health Resource (CHR),
the international operations, which includes manufacturer services similar to
those services provided in the United States (International), Retail
Services, 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 Manufacturer Services, CHR, Retail Services, 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. Manufacturer Services serves the needs of domestic consumer product
manufacturers, primarily within the consumer packaged goods 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. CHRs 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. 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 and Japan. The
Catalina Marketing Network® operates internationally in a similar manner as the
domestic business. International offers a full range of targeted marketing
solutions to consumer packaged goods manufacturers and enjoys relationships
with major supermarket, hypermarket and other retailers. During the second
quarter of fiscal year 2004, the Company expanded its behavior-based targeted
marketing capabilities in Europe by launching a pilot test in Germany. 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 7




---



##### Table of Contents



buildings in locations suitable for advertising. Advertising is sold
either directly to a broad range of clients across multiple industries or
through advertising agencies. In general, billboards are designed by and
produced under the supervision of Japan Billboard. Upon completion and
installation, the billboards are financed through third-party financing
companies. Japan Billboard is required to make rental payments to building
owners for the space on the rooftops and faces of buildings where the
billboards are installed. Japan Billboard provides the maintenance for its
billboards during the life of the applicable contract which generally ranges
from three to five years. 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. The Companys Other segment includes Retail Services and CMRS. Retail
Services provides innovative marketing solutions to retail chains nationwide
and supports and maintains the Catalina Marketing Network® used by Manufacturer
Services. CMRS provides a wide range of traditional marketing research
services, including tracking studies and customer satisfaction surveys, as well
as proprietary research products that take advantage of behavioral data
gathered throughout the Catalina Marketing Network®. Previously Filed Financial Statements for Fiscal Years 2003, 2002 and
2001.We filed our Annual Report on Form 10-K for the fiscal year ended March
31, 2003 on May 17, 2004. In addition to our consolidated financial statements
for the fiscal year ended March 31, 2003, the filing included audited
restatements of our financial statements for the fiscal years ended March 31,
2002 and 2001 and unaudited restatements of information for the quarters ended
June 30, 2002, September 30, 2002 and December 31, 2002. Please refer to such
filing for additional information regarding the background of such restatements
and the content and effect of the changes included in the restated financial
statements. See Note 4. 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. This 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, 2003 today and expects to file a Quarterly Report on Form 10-Q
for each of the quarters ended December 31, 2003 and September 30, 2003 for
fiscal year 2004 as soon as practical. This Quarterly Report on Form 10-Q for
the quarter ended June 30, 2003 is delinquent and is being filed after the
Companys Annual Report on Form 10-K for its fiscal year ended March 31, 2004.
This filing should not be confused with any report on Form 10-Q for a quarterly
period of the Companys fiscal year ending March 31, 2005. 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, 2003, filed with the SEC on May 17, 2004, and 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, 2003, 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
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. 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,
2003, the results of its operations and cash flows for the three-month periods
ended June 30, 2003 and 2002, and the results of its changes in stockholders
equity for the three-month period ended June 30, 2003 have been included. 8




---



##### Table of Contents



The balance sheet at March 31, 2003 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, 2003 are not necessarily indicative of the
results that were reported for the remainder of the year ended March 31, 2004. 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, 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 30,2003
    
    2002(As Restated)Net income:As reported
    
    $
    4,263
    
    
    $
    6,829Add stock-based employee compensation expense
included in reported net income, net of tax
    
    
    37
    
    
    
    137Deduct total stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax
    
    
    (1,808
    )
    
    
    (3,961
    )Pro forma net income
    
    $
    2,492
    
    
    $
    3,005Diluted EPS:As reported
    
    $
    0.08
    
    
    $
    0.12Pro forma
    
    $
    0.05
    
    
    $
    0.05Basic EPS:As reported
    
    $
    0.08
    
    
    $
    0.12Pro forma
    
    $
    0.05
    
    
    $
    0.05
 Pro forma amounts include $0.4 million related to the purchase discount
offered under the Purchase Plan for each of the three month periods ended June
30, 2003 and 2002. 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




---



##### Table of Contents



Note 3. Accounting Standards Adopted During the Three Months Ended June 30,
2003 SFAS No. 143. On April 1, 2003, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 143, Accounting for Asset Retirement
Obligations, which requires the recognition of the fair value of obligations
associated with the retirement of tangible long-lived assets when there is a
legal obligation to incur such costs. Upon initial recognition of a liability,
the cost is capitalized as part of the related asset and depreciated over the
corresponding assets useful life. Upon adoption, the Company recorded a net increase in property and
equipment of $0.7 million and recognized an asset retirement obligation of $2.1
million for the quarter ended June 30, 2003. This resulted in the recognition
of a non-cash charge of $0.8 million, net of an income tax benefit of $0.6
million, which is reported as a cumulative effect of an accounting change in
the accompanying unaudited condensed consolidated statements of income. The
effect of the adoption of SFAS No. 143 is associated with Japan Billboards
contractual obligation to remove certain billboards upon termination or
cancellation of the related financing agreement. If SFAS No. 143 had been adopted on April 1, 2001, the liabilities
recorded on the Companys consolidated balance sheets would have been $2.0
million, $1.8 million and $2.0 million higher as of April 1, 2001, March 31,
2002 and March 31, 2003, respectively. The pro forma effect of the adoption of
SFAS No. 143 on the results of operations for the three months ended June 30,
2002 was not material. Reconciliation of the beginning and ending amount of asset retirement
obligation is as follows (in thousands): Balance as of April 1, 2003
    
    $
    2,048Liabilities recorded for billboards newly installed
    
    
    18Reduction in liabilities for billboards removed
    
    
    (77
    )Accretion expense
    
    
    11Currency translation adjustment
    
    
    2Balance as of June 30, 2003
    
    $
    2,002
 SFAS No. 150.In May 2003, the FASB issued SFAS No. 150, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. SFAS No. 150 establishes standards for how a company classifies and
measures certain financial instruments with characteristics of both liabilities
and equity in its balance sheet. It requires that a company classify a
financial instrument that is within the standards scope as a liability or as
an asset in some circumstances. Many of those instruments were previously
classified as equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and, for financial instruments
entered into prior to May 31, 2003, it is effective at the beginning of the
first interim period beginning after June 15, 2003. The adoption of this
Statement by the Company did not have a material effect on its operating
results, financial position or cash flows. 10




---



##### Table of Contents



Note 4. Restatement of Quarterly Financial Statement Information As discussed in the Companys Annual Report on Form 10-K for fiscal year
2003, in Notes 3 and 18 to the consolidated financial statements included
therein, the Company restated its financial statements for each of the quarters
for fiscal year 2003 to reflect corrections primarily related to the timing of
the recognition of certain revenues and adjustments to costs and expenses. The following table
compares the restated results of operations of the Company for the three months
ended June 30, 2002 with those amounts originally reported on Form 10-Q for
that period (in thousands, except per share information). Three Months Ended June 30, 2002As OriginallyAs Restated
    
    ReportedRevenues
    
    $
    102,333
    
    
    $
    109,071Total cost and expenses
    
    
    90,278
    
    
    
    91,499Income from operations
    
    
    12,055
    
    
    
    17,572Interest expense and other, net
    
    
    (998
    )
    
    
    (371
    )Income before income taxes
    
    
    11,057
    
    
    
    17,201Provision for income taxes
    
    
    4,228
    
    
    
    6,542Net Income
    
    $
    6,829
    
    
    $
    10,659Diluted earnings per shareNet income per common share
    
    $
    0.12
    
    
    $
    0.19Weighted average common share
outstanding
    
    
    56,359
    
    
    
    56,359Basic earnings per shareNet income per common share
    
    $
    0.12
    
    
    $
    0.19Weighted average common shares
outstanding
    
    
    55,407
    
    
    
    55,407
 Three Months Ended June 30, 2002As OriginallyAs Restated
    
    ReportedNet cash provided by operating activities
    
    $
    21,970
    
    
    $
    22,450Net cash used in investing activities
    
    
    (8,867
    )
    
    
    (8,407
    )Net cash used in financing activities
    
    
    (19,872
    )
    
    
    (19,771
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    118
    
    
    
    (235
    )Net change in cash and cash equivalents
    
    
    (6,651
    )
    
    
    (5,963
    )Cash and cash equivalents at end of prior period
    
    
    13,656
    
    
    
    13,276Cash and cash equivalents at end of current period
    
    $
    7,005
    
    
    $
    7,313
 11




---



##### Table of Contents



Note 5. 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 30,2003
    
    2002Basic weighted average common shares outstanding
    
    
    52,536
    
    
    
    55,407Dilutive effect of options outstanding
    
    
    33
    
    
    
    952Diluted weighted average common shares
outstanding
    
    
    52,569
    
    
    
    56,359
 Options to purchase 7,221,272 shares of common stock at exercise prices
ranging from $18.13 to $36.82 per share for the three months ended June 30,
2003, and 2,057,002 shares at exercise prices ranging from $33.46 to $36.82 per
share for the three months ended June 30, 2002 were not included in the
computation of diluted EPS for each period because their exercise prices were
greater than the average market price of common stock during the relevant
periods. Note 6. Comprehensive Income (in thousands) Three months ended June 30,2003
    
    2002(As Restated)Net income
    
    $
    4,263
    
    
    $
    6,829Other comprehensive income (loss), net of tax:Currency translation adjustment
    
    
    (542
    )
    
    
    550Comprehensive Income
    
    $
    3,721
    
    
    $
    7,379
 Note 7. Segment Information The Company is organized and managed by segments, as described in
following table: Segment
    
    Business ActivityManufacturer Services
    
    Provides point-of-sale, printed promotions to
consumers for clients that produce consumer packaged
goods.Catalina Health Resource
    
    Provides point-of-sale, printed direct-to-patient
communications for pharmaceutical, CPG manufacturers
and retailers.International
    
    Provides services similar to Manufacturer Services
in the United Kingdom, France, Italy 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.Other
    
    Includes Retail Services, which supports and
maintains the Catalina Marketing Network® and
provides marketing services to retailers, and CMRS,
which provides traditional marketing research
services.Corporate
    
    Provides executive and administrative oversight and
centralized functions such as information
technology, client services and store systems
support.
 12




---



##### Table of Contents



Financial information for each of the Companys reportable segments is
presented in the following tables. Amounts for the three months ended June
30, 2002 are as restated (in thousands). IntersegmentRevenues from External Customers
    
    RevenuesThree Months Ended June 30,Segments:
    
    2003
    
    2002
    
    2003
    
    2002Manufacturer Services
    
    $
    53,385
    
    
    $
    54,058
    
    
    $
    
    
    
    $
    40Catalina Health Resource
    
    
    14,466
    
    
    
    16,833
    
    
    
    
    
    
    
    International
    
    
    9,111
    
    
    
    5,007
    
    
    
    
    
    
    
    Direct Marketing Services
    
    
    11,657
    
    
    
    10,057
    
    
    
    155
    
    
    
    287Japan Billboard
    
    
    3,768
    
    
    
    5,408
    
    
    
    
    
    
    
    Other
    
    
    9,790
    
    
    
    10,752
    
    
    
    191
    
    
    
    56102,177
    
    
    
    102,115
    
    
    
    346
    
    
    
    383Reconciliation of segments
to consolidated amount:Corporate
    
    
    35
    
    
    
    218
    
    
    
    435
    
    
    
    276Eliminations
    
    
    
    
    
    
    
    
    
    
    (781
    )
    
    
    (659
    )$
    102,212
    
    
    $
    102,333
    
    
    $
    
    
    
    $
    
 Net Income (Loss)Three Months Ended June 30,Segments:
    
    2003
    
    2002Manufacturer Services
    
    $
    13,865
    
    
    $
    15,307Catalina Health Resource
    
    
    (1,997
    )
    
    
    (696
    )International
    
    
    (1,146
    )
    
    
    (1,500
    )Direct Marketing Services
    
    
    (483
    )
    
    
    (976
    )Japan Billboard
    
    
    (1,138
    )
    
    
    248Other
    
    
    (754
    )
    
    
    (1,770
    )Reconciliation of segments to consolidated
amount:Corporate
    
    
    (4,084
    )
    
    
    (3,784
    )Consolidated
    
    $
    4,263
    
    
    $
    6,829
 Total AssetsSegments:
    
    June 30, 2003
    
    March 31, 2003Manufacturer Services
    
    $
    1,087,545
    
    
    $
    1,006,690Catalina Health Resource
    
    
    66,339
    
    
    
    67,786International
    
    
    78,982
    
    
    
    73,643Direct Marketing Services
    
    
    78,159
    
    
    
    72,327Japan Billboard
    
    
    23,922
    
    
    
    22,268Other
    
    
    148,477
    
    
    
    137,422Reconciliation of segments to
consolidated amount:Eliminations
    
    
    (1,782,209
    )
    
    
    (1,618,741
    )Corporate
    
    
    721,047
    
    
    
    661,026$
    422,262
    
    
    $
    422,421
 13




---



##### Table of Contents



Note 8. Stock Repurchases During the three months ended June 30, 2003, the Company repurchased
749,200 shares of its common stock for a total of $13.3 million. During the
three months ended June 30, 2002, the Company repurchased 867,900 shares of its
common stock for a total of $27.8 million. Note 9. 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 of 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. 14




---



##### 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, 2003 compared with the three months ended June 30,
2002. 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. See
Note 7 to the unaudited condensed consolidated financial statements included
herein, and our Annual Report on Form 10-K for the fiscal year ended March 31,
2003 for additional segment information. Results of operations are discussed
for each of our significant operating segments. Three Months Ended June 30,2003
    
    2002(As Restated)RevenuesManufacturer Services
    
    $
    53,385
    
    
    $
    54,098CHR
    
    
    14,466
    
    
    
    16,833International
    
    
    9,111
    
    
    
    5,007DMS
    
    
    11,812
    
    
    
    10,344Japan Billboard
    
    
    3,768
    
    
    
    5,408Other(1)
    
    
    9,981
    
    
    
    10,808Corporate
    
    
    470
    
    
    
    494Eliminations
    
    
    (781
    )
    
    
    (659
    )Total Revenues
    
    $
    102,212
    
    
    $
    102,333
 Three Months Ended June 30,2003
    
    2002(As Restated)Operating Profit (Loss)Manufacturer Services
    
    $
    23,302
    
    
    $
    25,724CHR
    
    
    (3,356
    )
    
    
    (1,169
    )International
    
    
    (454
    )
    
    
    (1,753
    )DMS
    
    
    (813
    )
    
    
    (1,641
    )Japan Billboard
    
    
    (318
    )
    
    
    494Other(1)
    
    
    (1,267
    )
    
    
    (2,975
    )Corporate
    
    
    (9,110
    )
    
    
    (6,625
    )Total Operating Profit
    
    $
    7,984
    
    
    $
    12,055
 15




---



##### Table of Contents



Three Months Ended June 30,2003
    
    2002(As Restated)Net Income (Loss)Manufacturer Services
    
    $
    13,865
    
    
    $
    15,307CHR
    
    
    (1,997
    )
    
    
    (696
    )International
    
    
    (1,146
    )
    
    
    (1,500
    )DMS
    
    
    (483
    )
    
    
    (976
    )Japan Billboard
    
    
    (1,138
    )
    
    
    248Other(1)
    
    
    (754

    )
    
    
    (1,770
    )Corporate
    
    
    (4,084
    )
    
    
    (3,784
    )Net Income
    
    $
    4,263
    
    
    $
    6,829
 (1) Other includes Retail Services and CMRS, which were not significant
operating segments. Consolidated Results of Operations Consolidated revenues of $102.2 million for the three months ended June
30, 2003 were relatively unchanged as compared with consolidated revenues of
$102.3 million the three months ended June 30, 2002. Consolidated operating
profit decreased $4.1 million to $8.0 million for the three months ended June
30, 2003 compared with consolidated operating profit of $12.1 million for the
three months ended June 30, 2002. Consolidated net income for the three months
ended June 30, 2003 decreased to $4.3 million compared with $6.8 million for
the three months ended June 30, 2002. 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, 2003 of $3.1 million increased to 38.5% of income before income taxes
compared with the consolidated provision for income taxes for the three months
ended June 30, 2002 of $4.2 million, or 38.2% of income before income taxes.
The Companys effective tax rate for the three months ended June 30, 2003 was
higher than the federal statutory rate primarily due to state and foreign
income taxes and various nondeductible expenses. Segment Results Manufacturer Services Revenues for Manufacturer Services decreased by $0.7 million to $53.4
million for the three months ended June 30, 2003, compared with revenues of
$54.1 million for the three months ended June 30, 2002. The decrease was
primarily due to a reduction in the volume of promotions printed. Operating profit for Manufacturer Services decreased by $2.4 million to
$23.3 million for the three months ended June 30, 2003 compared with operating
profit of $25.7 million for the three months ended June 30, 2002. The decrease
in operating profit was primarily due to the decrease in revenues described
above, as well as an increase in certain operating costs. Direct operating
expenses increased $1.0 million for the three months ended June 30, 2003,
compared with the three months ended June 30, 2002, primarily due to a change
in the manner in which the Company allocates certain retailer costs among its
segments. Beginning in fiscal year 2004, for the three months ended June 30,
2003, Manufacturer Services recognized approximately $1.6 million of costs from
Retail Services as compensation for intersegment services provided, partially
offset by a $0.7 million decline in sales commissions. As a result of the combined effect of lower revenues and net increase in
direct costs and expenses, net income for Manufacturer Services decreased by
$1.4 million to $13.9 million for the three months ended June 30, 2003,
compared with net income of $15.3 million for the three months ended June 30,
2002. 16




---



##### Table of Contents



CHR Revenues for CHR decreased by $2.4 million to $14.5 million for the three
months ended June 30, 2003, compared with revenues of $16.8 million for the
three months ended June 30, 2002, primarily due to a reduction in the volume of
revenue generating newsletters delivered. This decrease in revenue generating
newsletters was primarily attributable to a decline in pharmaceutical
manufacturer spending in our Health Resource Network during this period. Operating loss for CHR increased by $2.2 million to $3.4 million for the
three months ended June 30, 2003 compared with an operating loss of $1.2
million for the three months ended June 30, 2002. The increase in operating
loss was primarily due to a decrease in revenues and an increase in
administrative expenses incurred for reorganizing CHRs operational structure,
including severance pay, and was partially offset by lower sales commissions. Net loss for CHR increased by $1.3 million to $2.0 million for the three
months ended June 30, 2003 compared with a net loss of $0.7 million for the
three months ended June 30, 2002. This increase in net loss was primarily due to
the factors affecting operating loss, discussed above. International Revenues for International increased by $4.1 million to $9.1 million for
the three months ended June 30, 2003 compared with revenues of $5.0 million for
the three months ended June 30, 2002. The increase in International revenues
reflects additional manufacturer and retail promotions printed in France
through a French retailer that was added to the Catalina Marketing Network
during fiscal year 2003. Operating loss for International decreased by $1.3 million to $0.5 million
for the three months ended June 30, 2003 compared with an operating loss of
$1.8 million for the three months ended June 30, 2002. The decrease in
operating loss was primarily attributable to the increase in revenues, net of
related direct costs. Net loss for International decreased by $0.4 million to $1.1 million for
the three months ended June 30, 2003 compared with a net loss of $1.5 million
for the three months ended June 30, 2002. DMS Revenues for DMS increased by $1.5 million to $11.8 million for the three
months ended June 30, 2003 compared with revenues of $10.3 million for the
three months ended June 30, 2002. The increase in revenues was primarily
attributable to increases in customer sample mailings. Operating loss for DMS decreased by $0.8 million to $0.8 million for the
three months ended June 30, 2003 compared with an operating loss of $1.6
million for the three months ended June 30, 2002, primarily as a result of the
increase in revenues, net of related direct costs. Net loss for DMS decreased to $0.5 million for the three months ended June
30, 2003 compared with a net loss of $1.0 million for the three months ended
June 30, 2002 primarily due to the factors affecting operating loss discussed
above. Japan Billboard Revenues for Japan Billboard decreased by $1.6 million to $3.8 million for
the three months ended June 30, 2003 compared with revenues of $5.4 million for
the three months ended June 30, 2002. The decrease in revenues was primarily
attributable to a decline in tobacco advertising spending as a result of the
adoption of the Voluntary Global Tobacco Marketing Initiative (the
Initiative) in fiscal year 2002, 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, please see our Annual Report on Form 10-K for the
fiscal year ended March 31, 2004. Operating loss for Japan Billboard was $0.3 million for the three months
ended June 30, 2003, compared with an operating profit of $0.5 million for the
three months ended June 30, 2002. Net loss for Japan Billboard was $1.1 million
for the three months ended June 30, 2003 compared with net income of $0.2
million for the three months ended June 30, 2002. The decrease in operating
results for Japan Billboard for the three months ended June 30, 2003 was
primarily attributable to the effect of the Initiative on its business. Net
income also includes a charge in the amount of 17




---



##### Table of Contents



$0.8 million for the cumulative effect of an accounting change upon the
adoption of SFAS No. 143 and its application in recognition of asset retirement
costs expected to be incurred for the retirement of billboards. See Note 2 to
the unaudited condensed consolidated financial statements. Other Segments and Corporate Other includes Retail Services and CMRS. Revenues for this segment
decreased by $0.8 million to $10.0 million for the three months ended June 30,
2003 compared with revenues of $10.8 million for the three months ended June
30, 2002. Retail Services revenues declined by $1.6 million primarily due to a
decrease in loyalty card revenues. This decrease was partially offset by an
increase in CMRS revenues and other revenues of $0.8 million. Operating loss decreased by $1.7 million to $1.3 million for the three
months ended June 30, 2003 compared with an operating loss of $3.0 million for
the three months ended June 30, 2002. The improvement in operating results was
primarily attributable to an intersegment allocation of certain costs from
Retail Services to Manufacturer Services for services provided by Retail
Services. There was no significant change in costs and expenses for CMRS for
the three months ended June 30, 2003 compared with the three months ended June
30, 2002. Primarily as a result of the decrease in costs and expenses, net loss for
the Other operating segment decreased to $0.8 million for the three months
ended June 30, 2003 compared with a net loss of $1.8 million for the three
months ended June 30, 2002. The increase in the operating loss for Corporate for the three months
ended June 30, 2003 reflects a decrease in the percent of costs allocated to
operating segments from 79.1% of Corporates operating costs for the three
months ended June 30, 2002 to 72.7% of Corporates operating costs for the
three months ended June 30, 2003. Before allocations, total Corporate operating
costs for the three months ended June 30, 2003 were comparable with the three
months ended June 30, 2002. Foreign Currency Translation and Its Effect on Revenues Consolidated revenues for the three months ended June 30, 2003 were $102.2
million, which includes $12.9 million in revenues from foreign operations. 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, 2003. Accordingly, revenues in United States dollars for
our foreign operations would have been 15.9% lower for the period if translated
using the weighted average currency translation rates for the comparable period
in fiscal year 2002. 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 and installment loan payables 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, 2003 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 debt 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, development and expansion 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 18




---



##### Table of Contents



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 Cash provided by operating activities was $17.3 million for the three
months ended June 30, 2003 compared with $22.0 million for the three months
ended June 30, 2002. Net cash used in investing activities increased by $0.8 million to $9.7
million for the three months ended June 30, 2003 compared with $8.9 million
used in investing activities for the three months ended June 30, 2002. Capital
expenditures increased by $5.4 million for the three months ended June 30, 2003
compared with the three months ended June 30, 2002. 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. Cash used for
investing activities for the three months ended June 30, 2002 included $4.6
million for earnout payments related to previous acquisitions accounted for as
purchases. Net cash used in financing activities decreased to $0.3 million for the
three months ended June 30, 2003 compared with $19.9 million used in financing
activities during the three months ended June 30, 2002. The decrease of $19.6
million is primarily attributable to the decrease in the amount of Company
common stock repurchased during the three months ended June 30, 2003, combined
with increased bank borrowings during the three months ended June 30, 2003
compared with the three months ended June 30, 2002. Cash and cash equivalents increased by $7.2 million for the three months
ended June 30, 2003 compared with a decrease in cash and cash equivalents of
$6.7 million for the three months ended June 30, 2002. 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. The balance outstanding under the
Corporate Facility as of June 30, 2003 was $22.0 million. Subsequent to June
30, 2003, the Corporate Facility was amended and restated. 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. The Corporate Facility was
repaid in full on November 25, 2003 and no additional amounts have been
borrowed through the current date. 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 of June 30, 2003 was $29.0 million. Subsequent to June 30, 2003, the Japan
Credit Facilities were amended. Please refer to the Companys Annual Report on
Form 10-K for the fiscal year 2004, for a discussion of the significant changes
to and current 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. The Company is currently in compliance with the
terms of the lease agreement. Please refer to 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, for a discussion of the terms of the lease agreement. 19




---



##### Table of Contents



Capital Requirements There were no significant changes to the Companys contractual cash
obligations or commercial commitments during the quarter ended June 30, 2003
as compared with the amounts reported in the Companys Annual Report on Form
10-K for the fiscal year ended March 31, 2003, filed with the SEC on May 17,
2004. Furthermore, there have not been any material changes to the Companys
contractual cash obligations or commercial commitments since March 31, 2004, as
reported 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. 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 in 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, 2003. 20




---



##### Table of Contents



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, as amended (the Exchange Act). 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 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, 2003. There have been
no material changes to the Companys market risk exposure since March 31, 2003. 
 Item 4. Controls and Procedures The Company performed an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-14(c) under the Exchange Act) as of March 31, 2004. A discussion of the
findings of these evaluations is included in our Annual Report on Form 10-K for
our fiscal year ended March 31, 2004 (filed July 15, 2004). We are in the
process of making an additional assessment of the effectiveness of our
disclosure controls and procedures and internal controls over financial
reporting as of our first fiscal quarter of 2005 ended June 30, 2004, and will
report on such assessment in our Quarterly Report on Form 10-Q to be filed with
respect to such period. The evaluation as of March 31, 2004 was made under the supervision and
with the participation of our management, including our Chief Executive Officer
and Chief Financial Officer. Based upon this evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures as of March 31, 2004 were effective to ensure that information
required to be disclosed by us in reports filed or submitted under the Exchange
Act is timely recorded, processed, summarized and reported and include, without
limitation, controls and procedures designed to ensure that information
required to be disclosed by us in reports filed or submitted under the Exchange
Act is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure. These conclusions are as of March 31,
2004 and are subject to our subsequent evaluation, actions and conclusions
discussed below. In addition, we made a number of significant changes in our
internal control over financial reporting that occurred during our fiscal
years 2003 and 2004 that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting. These changes
are summarized below. Other than as described below, we made no changes in our
internal controls over financial reporting during the three months ended June
30, 2004 that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting. We have continued to evaluate the effectiveness and design of our
disclosure controls and procedures in light of subsequent developments with
respect to our financial reporting as further discussed below and the matters
described in Item 9  Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure, in our Annual 21




---



##### Table of Contents



Report on Form 10-K for our fiscal year ended March 31, 2004. As part of our
ongoing evaluation, in June 2003, our accounting and finance personnel began an
extensive effort to analyze our financial information and related accounting
records for our fiscal years ended March 31, 2003, 2002 and 2001. These
efforts, along with efforts undertaken to position our Chief Executive Officer
and our Chief Financial Officer to satisfy their certification requirements
under the Sarbanes-Oxley Act of 2002 and related rules, identified a number of
the items for review, as described below. In addition, our independent
registered certified public accounting firm, PricewaterhouseCoopers, LLP
(PwC), in connection with its audit and review of the Companys internal
controls, has communicated to the Audit Committee of the Companys Board of
Directors (the Audit Committee) and senior management its findings with
respect to the Companys internal control over financial reporting, including
certain material weaknesses and significant deficiencies, as defined under
standards established by the American Institute of Certified Public
Accountants. Management, in performing its evaluation, also considered PwCs
findings. This evaluation allowed us and our Chief Executive Officer and our
Chief Financial Officer to make conclusions, as of July 2004, regarding the
state of our disclosure controls and procedures. The evaluation is ongoing and,
accordingly, the Company and our certifying officers may make additional
conclusions and take additional actions, from time to time, as we may deem
necessary or desirable. As a result of the recent audit procedures and our continuing efforts to
evaluate the effectiveness of the design and operation of our disclosure
controls and procedures and our internal controls over financial reporting, PwC
has advised us, and we have concluded, that the following internal control
deficiencies constituted material weaknesses or significant deficiencies,
during the fiscal years ended and as of March 31, 2004, 2003 and 2002. In
addition, we have identified opportunities to correct these weaknesses and
deficiencies. While a number of these weaknesses and deficiencies were found to
exist in CHR, certain of the accounting principles addressed in our recent
audit activities and other efforts apply to other segments of the Companys
business. We outline these below.  
    
    Deficiencies related to the structure and design of certain financial
information reporting processes. We identified deficiencies in our
accounting processes for the timing of recognition of revenue in CHR.
Specifically, we discovered that in certain instances (i) we recognized
revenue for services in periods prior to the periods in which such
services were performed and (ii) we did not account for certain oral and
written modifications to written agreements in determining the proper
recognition of revenues under such agreements, which resulted in
revenues being recognized during incorrect periods.
    
    Deficiencies related to inadequate or ineffective policies for
documenting transactions. We identified deficiencies in documenting and
accounting for transactions and in connection with our related policies
and practices. Specifically, we identified various transactions in which
we applied policies or procedures in a manner that resulted in us
prematurely recognizing revenue. We discovered instances where some of
our employees failed to follow policies, processes and procedures that
were in place for transactions involving the execution of written
agreements. In addition, we discovered practices of our employees with
respect to which we had not adopted adequate procedures.
    
    Deficiencies related to design of policies and execution of processes
related to accounting for transactions. We identified deficiencies in
accounting for certain aspects of our operations. We discovered
deficiencies in our policies and processes for supporting our accounting
practices relating to transfer pricing and fair value calculations,
verifying account balances and foreign currency translation adjustments;
accounting for property and equipment, goodwill, patents, capitalization
of software development costs, accruals and minority interests; and
determining and disclosing the fair value of stock-based compensation.
    
    Deficiencies related to the internal control environment. As a
result of the deficiencies described above, we concluded that there were
deficiencies in the internal control environment (relating to
accounting, financial reporting and internal controls) during the fiscal
years ended March 31, 2004, 2003 and 2002 which constituted, at times,
material weaknesses and, at other times, significant deficiencies. Under
the supervision of the Audit Committee, we have taken steps to address
these material weaknesses and significant deficiencies as described
below. We continue to emphasize the importance of establishing the
appropriate environment in relation to accounting, financial reporting
and internal control over financial reporting and being vigilant to
identify areas of improvement and to create and implement new policies
and procedures where material weaknesses or significant deficiencies
exist. Since May 2003, we have taken a number of steps that we believe will
impact the effectiveness of our internal control over financial reporting
including the following: 22




---



##### Table of Contents




    
    In May 2003, we assigned one of our senior executives to assume
principal oversight responsibility for CHR and its operations for an
interim period, specifically in connection with developing and
implementing appropriate disclosure controls and procedures and internal
controls over financial reporting.
    
    In September 2003, we appointed a new corporate controller of CHR.
    
    In November 2003, we adopted the Catalina Health Resource Selling
Policies and Procedures. These policies and procedures, as well as other
policies adopted by the Company, provide the following:  
    
    We required all participants in CHR programs to execute written
contracts, including amendments to existing contracts, in each case,
in form and substance approved by the Companys Executive Counsel for
Legal Affairs or authorized CHR officers.
    
    We restricted CHR employees from commencing or changing a
program prior to the Company receiving a signed contract or amendment
to an existing contract.
    
    We limited the duration of programs and printing amounts to
limits set forth in signed contracts or amendments to existing
contracts.
    
    We limited deviations from CHR standard contract clauses
without prior approval by CHR authorized officers.  
    
    In November 2003, we established compliance training programs for the
Companys employees related to the policies described above and
contained in the Catalina Health Resource Selling Policies and
Procedures.
    
    In February 2004, we appointed a new president of CHR.
    
    In March 2004, we completed the relocation of our CHR operations
related to finance, database operations, contract administration,
procurement and human resources from our offices located in St. Louis,
Missouri, to our headquarters in St. Petersburg, Florida, in order to
monitor these operations more closely.
    
    We have engaged outside resources to supplement our finance and
accounting departments to support the preparation of financial
statements and reports that are to be filed with the SEC.
    
    We are re-evaluating prior policies and procedures and have
established new policies and procedures for transactions, account
reconciliation procedures and contract management procedures.
    
    In July 2004, we added a financial expert to our Board of Directors
and the Audit Committee as required by the Sarbanes-Oxley Act of 2002. We believe that the steps taken to date have addressed the material
weaknesses and significant deficiencies that affected our disclosure controls
and procedures in fiscal years 2004, 2003 and 2002. We will continue with our
ongoing evaluation and will improve our disclosure controls and procedures as
necessary to assure their effectiveness. The effectiveness of our or any system of disclosure controls and
procedures is subject to certain limitations, including the exercise of
judgment in designing, implementing and evaluating the controls and procedures,
the assumptions used in identifying the likelihood of future events, and the
inability to eliminate misconduct completely. As a result, there can be no
assurance that our disclosure controls and procedures will prevent all errors
or ensure that all material information will be made known to appropriate
management in a timely fashion. In addition, our ability to report our
financial condition could be adversely affected if we are unsuccessful in our
efforts to permanently and effectively remedy weaknesses or deficiencies in our
internal control over financial reporting. The statements contained in paragraph 4(a) of Exhibit 31.1 and Exhibit
31.2 should be considered in light of, and read together with, the information
set forth in this Item 4. 23




---



##### Table of Contents



Part II. Other Information 
 Item 6. Exhibits and report on Form 8-K  (a)
    
    Exhibits. See Exhibit index on page 26 of this Quarterly Report on
Form 10-Q(b)
    
    Reports on Form 8-KDuring the three months ended June 30, 2003, we filed the
following Current Reports on Form 8-K:Current Report
filed with the Commission on April 16, 2003 (Item 5). 24




---



##### Table of Contents



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 principal
financial officer)
 25




---



##### Table of Contents



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
 26