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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 September 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
    
    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
(Registrants Telephone Number, Including Area Code) Indicate by checkmark 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o 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 October 31, 2004, the Registrant had outstanding 52,271,994 shares of
Common Stock.




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CATALINA MARKETING CORPORATION INDEX PagePart I.
    
    Financial InformationItem 1.
    
    Financial StatementsUnaudited Condensed Consolidated Statements of Operations
for the three and six months ended September 30, 2004 and 2003
    
    
    4Unaudited Condensed Consolidated Balance Sheets
at September 30, 2004 and March 31, 2004
    
    
    5Unaudited Condensed Consolidated Statement of Changes in Stockholders
Equity and Comprehensive Income for the six months ended
September 30, 2004
    
    
    6Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 2004 and 2003
    
    
    7Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    18Item 3.
    
    Quantitative and Qualitative Disclosure About
Market Risk
    
    
    31Item 4.
    
    Controls and Procedures
    
    
    31Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    32Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    32Item 4.
    

Submission
of Matters to a Vote of Security Holders
    
    
    33Item 6.
    
    Exhibits
    
    
    33Signatures
    
    
    
    
    
    
    34Exhibit Index
    
    
    
    
    
    
    35Ex-10.1 Credit AgreementEx-10.2 Property Purchase And Termination AgreementSection 302 CEO CertificationSection 302 CFO CertificationSection 906 CEO CertificationSection 906 CFO Certification
  2




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##### Table of Contents



Part I. Financial Information SPECIAL NOTE References 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. 3




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##### Table of Contents



Item 1. Financial Statements CATALINA MARKETING CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    103,717
    
    
    $
    107,676
    
    
    $
    200,501
    
    
    $
    194,308Costs and expenses:Direct operating expenses
    
    
    32,713
    
    
    
    35,991
    
    
    
    67,600
    
    
    
    70,692Selling, general and administrative
    
    
    29,331
    
    
    
    31,298
    
    
    
    59,086
    
    
    
    63,374Impairment charges
    
    
    3,298
    
    
    
    
    
    
    
    3,298
    
    
    
    Depreciation and amortization
    
    
    10,698
    
    
    
    11,174
    
    
    
    22,337
    
    
    
    22,533Total costs and expenses
    
    
    76,040
    
    
    
    78,463
    
    
    
    152,321
    
    
    
    156,599Operating income
    
    
    27,677
    
    
    
    29,213
    
    
    
    48,180
    
    
    
    37,709Interest expense
    
    
    (151
    )
    
    
    (609
    )
    
    
    (736
    )
    
    
    (1,087
    )Other income (expenses), net
    
    
    277
    
    
    
    398
    
    
    
    469
    
    
    
    1,125Income from continuing operations
before income taxes
    
    
    27,803
    
    
    
    29,002
    
    
    
    47,913
    
    
    
    37,747Provision for income taxes
    
    
    11,067
    
    
    
    12,465
    
    
    
    18,251
    
    
    
    15,694Income from continuing operations
    
    
    16,736
    
    
    
    16,537
    
    
    
    29,662
    
    
    
    22,053Discontinued operations:Income (loss) from discontinued
operations
    
    
    260
    
    
    
    (27,648
    )
    
    
    (1,740
    )
    
    
    (28,131
    )Gain on dispositions, net
    
    
    3,283
    
    
    
    
    
    
    
    3,283
    
    
    
    Income (loss) from discontinued
operations
    
    
    3,543
    
    
    
    (27,648
    )
    
    
    1,543
    
    
    
    (28,131
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (770
    )Net income (loss)
    
    $
    20,279
    
    
    $
    (11,111
    )
    
    $
    31,205
    
    
    $
    (6,848
    )Basic:Income per common share from
continuing operations
    
    $
    0.32
    
    
    $
    0.32
    
    
    $
    0.57
    
    
    $
    0.43Income (loss) from discontinued
operations
    
    
    0.07
    
    
    
    (0.53
    )
    
    
    0.03
    
    
    
    (0.54
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net income (loss) per common share
    
    $
    0.39
    
    
    $
    (0.21
    )
    
    $
    0.60
    
    
    $
    (0.13
    )Weighted average common shares
outstanding
    
    
    52,231
    
    
    
    52,217
    
    
    
    52,233
    
    
    
    52,375Diluted:Income per common share from
continuing operations
    
    $
    0.32
    
    
    $
    0.32
    
    
    $
    0.57
    
    
    $
    0.43Income (loss) from discontinued
operations
    
    
    0.07
    
    
    
    (0.53
    )
    
    
    0.03
    
    
    
    (0.54
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net income (loss) per common share
    
    $
    0.39
    
    
    $
    (0.21
    )
    
    $
    0.60
    
    
    $
    (0.13
    )Weighted average common shares
outstanding
    
    
    52,311
    
    
    
    52,217
    
    
    
    52,269
    
    
    
    52,375
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4




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CATALINA MARKETING CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
  September 30,
    
    March 31,2004
    
    2004ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    97,345
    
    
    $
    72,704Accounts receivable, net
    
    
    59,195
    
    
    
    56,963Inventory
    
    
    5,740
    
    
    
    5,836Deferred tax asset
    
    
    8,143
    
    
    
    8,536Prepaid expenses and other current assets
    
    
    13,249
    
    
    
    14,958Total current assets
    
    
    183,672
    
    
    
    158,997Property and Equipment:Property and equipment
    
    
    362,271
    
    
    
    381,999Less - accumulated depreciation and amortization
    
    
    (255,523
    )
    
    
    (255,156
    )Property and equipment, net
    
    
    106,748
    
    
    
    126,843Patents, net
    
    
    12,513
    
    
    
    13,472Goodwill
    
    
    80,495
    
    
    
    84,743Other assets
    
    
    2,352
    
    
    
    2,754Total Assets
    
    $
    385,780
    
    
    $
    386,809LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    12,514
    
    
    $
    15,372Accrued expenses
    
    
    52,076
    
    
    
    65,778Income taxes payable
    
    
    10,093
    
    
    
    3,127Deferred revenue
    
    
    30,714
    
    
    

    35,730Short-term borrowings
    
    
    2,844
    
    
    
    37,016Total current liabilities
    
    
    108,241
    
    
    
    157,023Long-term deferred tax liability
    
    
    11,162
    
    
    
    9,827Long-term debt
    
    
    62,660
    
    
    
    29,908Other long-term liabilities
    
    
    3,591
    
    
    
    4,475Total liabilities
    
    
    185,654
    
    
    
    201,233Commitments and contingenciesMinority interest
    
    
    
    
    
    
    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 52,177,734 and 52,134,462 shares issued and
outstanding at
September 30, 2004 and March 31, 2004, respectively
    
    
    522
    
    
    
    521Paid-in capital
    
    
    3,427
    
    
    
    2,485Accumulated other comprehensive loss
    
    
    (1,325
    )
    
    
    (312
    )Retained earnings
    
    
    197,502
    
    
    
    181,968Total stockholders equity
    
    
    200,126
    
    
    
    184,662Total liabilities and stockholders equity
    
    $
    385,780
    
    
    $
    386,809
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5




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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
    
    
    $
    184,662Proceeds from issuance of common stock
    
    
    
    
    
    
    35
    
    
    
    1
    
    
    
    548
    
    
    
    
    
    
    
    
    
    
    
    549Increase in investment in subsidiary,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    237Tax benefit from exercise of non-qualified stock options and disqualified
dispositions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Deferred compensation plan common
stock units and Directors common
stock grants
    
    
    
    
    
    
    9
    
    
    
    
    
    
    
    129
    
    
    
    
    
    
    
    
    
    
    
    129Dividends on common stock ($0.30 per share)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,671
    )
    
    
    (15,671
    )Net income
    
    $
    31,205
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    31,205
    
    
    
    31,205Foreign currency translation adjustment
    
    
    (1,013
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,013
    )
    
    
    
    
    
    
    (1,013
    )Comprehensive income
    
    $
    30,192BALANCE AT SEPTEMBER 30, 2004
    
    
    
    
    
    
    52,178
    
    
    $
    522
    
    
    $
    3,427
    
    
    $
    (1,325
    )
    
    $
    197,502
    
    
    $
    200,126
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6




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CATALINA MARKETING CORPORATION 
 UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Six Months EndedSeptember 30,2004
    
    2003Net cash provided by operating activities:
    
    $
    42,470
    
    
    $
    54,441Cash flows from investing activities:Capital expenditures
    
    
    (6,175
    )
    
    
    (16,125
    )Business acquisition payments
    
    
    
    
    
    
    (22,921
    )Payment for
minority interest - VIE
    
    
    (914
    )
    
    
    Proceeds from the sale of DMS
    
    
    5,000
    
    
    
    Cash used in investing activities
    
    
    (2,089
    )
    
    
    (39,046
    )Cash flows from financing activities:Payments on the Prior Facility, net
    
    
    
    
    
    
    (1,000
    )Proceeds from the Corporate Facility
    
    
    30,000
    
    
    
    Payment on long-term debt  VIE
    
    
    (29,565
    )
    
    
    Proceeds from Japan borrowings
    
    
    1,180
    
    
    
    8,383Principal payments on Japan borrowings
    
    
    (1,818
    )
    
    
    (2,140
    )Repurchases of Company common stock
    
    
    
    
    
    
    (13,307
    )Proceeds from issuance of common and subsidiary stock
    
    
    786
    
    
    
    1,477Cash dividends paid
    
    
    (15,642
    )
    
    
    Financing fees paid
    
    
    (561
    )
    
    
    (600
    )Net cash used in financing activities
    
    
    (15,620
    )
    
    
    (7,187
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (120
    )
    
    
    (758
    )Net change in cash and cash equivalents
    
    
    24,641
    
    
    
    7,450Cash and cash equivalents at end of prior period
    
    
    72,704
    
    
    
    1,715Cash and cash equivalents at end of current period
    
    $
    97,345
    
    
    $
    9,165
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7




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##### 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), provide 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, classified in the accompanying unaudited condensed
consolidated statements of operations as continuing 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), and Catalina Marketing Research Solutions
(CMRS). The domestic operations of the Company include CMS, CHR and CMRS.
The international operations of the Company are organized and managed by
country. The Companys segments, Direct Marketing Services (DMS) and Japan
Billboard, a billboard and outdoor media business operating in Japan (Japan
Billboard), were sold during the second quarter of fiscal year 2005. As such,
they are reported as discontinued operations in the accompanying unaudited
condensed consolidated statements of operations, for all periods presented. In November 2003, the Company announced its intent to divest 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.
Japan Billboard was sold on August 31, 2004 and DMS was sold on September 17,
2004. Although CMRS has been targeted for divestiture by the Company, the
results of its operations are reflected in continuing operations in our
accompanying unaudited condensed consolidated financial statements. The Company
has concluded that CMRS does not qualify for held for sale treatment at
September 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 and six months ended September 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®. 8




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##### Table of Contents



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. 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 to
the domestic CMS business. International offers a full range of targeted marketing
solutions to consumer packaged goods manufacturers and enjoys relationships
with supermarket, hypermarket and other retailers. 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®. Japan Billboard operated a billboard and outdoor media business in Japan.
DMS provided targeted direct mail programs, designed to market to consumers in
their homes. See Note 8 for additional information related to these
discontinued operations. 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. 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 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 September 30, 2004, the results of its operations for the three
and six month periods ended September 30, 2004 and 2003, its cash flows for the
six months ended September 30, 2004 and 2003 and the results of its changes in
stockholders equity for the six month period ended September 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 and six month periods ended September 30, 2004 are not necessarily
indicative of the results that may be expected for the remainder of the fiscal
year ending March 31, 2005. 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 balance sheet at March 31, 2004 includes the accounts of a
variable interest entity from which the Company leased its headquarters
facility in St. Petersburg, Florida. The headquarters facility was purchased by
the Company on August 25, 2004. See Note 10. The accounts of our foreign
subsidiaries are included on a three-month lag, (i.e., for the three- and
six-month periods ended June 30, 2004 and June 30, 2003), to facilitate the
timing of the Companys closing process. 9




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##### Table of Contents



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, (SFAS No. 148), which amends SFAS
No. 123, Accounting for Stock-Based Compensation, (SFAS No. 123). 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 (loss) and
earnings (loss) 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
    
    Six Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss):As reported
    
    $
    20,279
    
    
    $
    (11,111
    )
    
    $
    31,205
    
    
    $
    (6,848
    )Add stock-based employee compensation expense
included in reported net income (loss), net of tax
    
    
    55
    
    
    
    75
    
    
    
    130
    
    
    
    112Deduct total stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax
    
    
    (4,912
    )
    
    
    (3,013
    )
    
    
    (8,519
    )
    
    
    (4,821
    )Pro forma net income (loss)
    
    $
    15,422
    
    
    $
    (14,049
    )
    
    $
    22,816
    
    
    $
    (11,557
    )Basic earnings (loss) per common share:As reported
    
    $
    0.39
    
    
    $
    (0.21
    )
    
    $
    0.60
    
    
    $
    (0.13
    )Pro forma
    
    $
    0.30
    
    
    $
    (0.27
    )
    
    $
    0.44
    
    
    $
    (0.22
    )Diluted earnings (loss) per common share:As reported
    
    $
    0.39
    
    
    $
    (0.21
    )
    
    $
    0.60
    
    
    $
    (0.13
    )Pro forma
    
    $
    0.29
    
    
    $
    (0.27
    )
    
    $
    0.44
    
    
    $
    (0.22
    )Purchase discount offered under the purchase plan
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    387
 Pro forma amounts include approximately $0.4 million related to the
purchase discount offered under the purchase plan for the six months ended
September 30, 2003. There were no shares issued under the purchase plan for the
three and six months ended September 30, 2004, and, consequently, no
accompanying purchase discount. During the six months ended September 30, 2003, certain of the Companys
executives left the Company prior to exercising their options and, as a result,
any unexercised options were forfeited. The pro forma compensation expense for
the three and six months ended September 30, 2003 shown in the table above
includes a reversal of previously reported pro forma compensation expense of
$2.4 million, net of a tax benefit of $1.5 million, and $6.3 million, net of
tax benefit of $3.8 million, respectively, related to these forfeited options. During
the three months ended September 30, 2004, there were options to
purchase 1,757,025
shares issued under the Companys 1999 Stock Award Plan. Note 3. Accounting Standards Adopted During the Six Months Ended September 30,
2004 Revised SFAS No. 132. In December 2003, the FASB issued a revision to
Statement of Financial Accounting Standards No. 132, Employers Disclosures
about Pensions and Other Postretirement Benefits, an amendment of FASB
Statements No. 87, 88, and 106, (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, 10




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##### Table of Contents



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 and six months ended September 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 and six months ended September 30, 2004 and 2003
is as follows: Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Service cost
    
    $
    
    
    
    $
    3
    
    
    $
    
    
    
    $
    6Interest cost
    
    
    31
    
    
    
    32
    
    
    
    62
    
    
    
    64Amortization of unrecognized prior service costs
    
    
    
    
    
    
    111
    
    
    
    
    
    
    
    221$
    31
    
    
    $
    146
    
    
    $
    62
    
    
    $
    291
 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
    
    Six Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Basic weighted average common shares
outstanding
    
    
    52,231
    
    
    
    52,217
    
    
    
    52,233
    
    
    
    52,375Dilutive effect of options outstanding
    
    
    80
    
    
    
    
    
    
    
    36
    
    
    
    Diluted weighted average common
shares outstanding
    
    
    52,311
    
    
    
    52,217
    
    
    
    52,269
    
    
    
    52,375
 Due to the net loss for the three and six months ended September 30, 2003,
the assumed net exercise of stock options were excluded in their entirety for
those periods as the effect would have been anti-dilutive. The following table presents the number of excluded options and related
exercise price ranges for each of the periods presented: Period Presented
    
    Number of Excluded Options
    
    Price RangeThree months ended September 30, 2004
    
    
    3,584,311
    
    
    $
    26.31-$36.82Three months ended September 30, 2003
    
    
    6,565,805
    
    
    $
    15.88-$36.82Six months ended September 30, 2004
    
    
    5,634,492
    
    
    $
    19.92-$36.82Six months ended September 30, 2003
    
    
    6,232,305
    
    
    $
    17.10-$36.82
 11




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##### Table of Contents



Note 5. Comprehensive Income (Loss) (in thousands) Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    20,279
    
    
    $
    (11,111
    )
    
    $
    31,205
    
    
    $
    (6,848
    )Other comprehensive income (loss), net of tax:Currency translation adjustment
    
    
    (18
    )
    
    
    323
    
    
    
    (1,013
    )
    
    
    (219
    )Comprehensive income (loss)
    
    $
    20,261
    
    
    $
    (10,788
    )
    
    $
    30,192
    
    
    $
    (7,067
    )
 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 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.Catalina MarketingResearch 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.Discontinued operations
    
    Includes Japan Billboard and DMS
 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 and six months ended September 30,
2003 for Retail Services has been reclassified to CMS to reflect the new
segment reporting. Segment information previously reported for Japan Billboard
and DMS is now reported as discontinued operations. See Note 8. Financial information for each of the Companys reportable segments is
presented in the following tables (in thousands). Revenues from
    
    
    
    
    
    
    
    
    
    Revenues fromExternal
    
    Intersegment
    
    External
    
    IntersegmentCustomers
    
    Revenues
    
    Customers
    
    RevenuesThree Months Ended September 30,
    
    Six Months Ended September 30,Segments:
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Catalina Marketing Services
    
    $
    66,070
    
    
    $
    71,427
    
    
    $
    
    
    
    $
    
    
    
    $
    129,468
    
    
    $
    131,026
    
    
    $
    4
    
    
    $
    Catalina Health Resource
    
    
    19,180
    
    
    
    19,148
    
    
    
    
    
    
    
    
    
    
    
    37,046
    
    
    
    33,614
    
    
    
    
    
    
    
    International
    
    
    16,892
    
    
    
    13,633
    
    
    
    
    
    
    
    
    
    
    
    31,138
    
    
    
    22,744
    
    
    
    
    
    
    
    Catalina Marketing Research
Solutions
    
    
    1,345
    
    
    
    3,265
    
    
    
    
    
    
    
    89
    
    
    
    2,687
    
    
    
    6,841
    
    
    
    40
    
    
    
    280103,487
    
    
    
    107,473
    
    
    
    
    
    
    
    89
    
    
    
    200,339
    
    
    
    194,225
    
    
    
    44
    
    
    
    280Reconciliation of segments
to consolidated amount:Corporate
    
    
    230
    
    
    
    203
    
    
    
    829
    
    
    
    896
    
    
    
    162
    
    
    
    83
    
    
    
    1,663
    
    
    
    1,486Eliminations
    
    
    
    
    
    
    
    
    
    
    (829
    )
    
    
    (985
    )
    
    
    
    
    
    
    
    
    
    
    (1,707
    )
    
    
    (1,766
    )$
    103,717
    
    
    $
    107,676
    
    
    $
    
    
    
    $
    
    
    
    $
    200,501
    
    
    $
    194,308
    
    
    $
    
    
    
    $
    
 12




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##### Table of Contents



Net Income (Loss)Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,Segments:
    
    2004
    
    2003
    
    2004
    
    2003Catalina Marketing Services
    
    $
    18,896
    
    
    $
    18,870
    
    
    $
    35,029
    
    
    $
    31,706Catalina Health Resource
    
    
    2,774
    
    
    
    2,133
    
    
    
    3,848
    
    
    
    136International
    
    
    2,073
    
    
    
    1,083
    
    
    
    2,874
    
    
    
    (63
    )Catalina Marketing Research Solutions
    
    
    (2,117
    )
    
    
    92
    
    
    
    (2,554
    )
    
    
    36721,626
    
    
    
    22,178
    
    
    
    39,197
    
    
    
    32,146Reconciliation of segments to consolidated amount:Corporate
    
    
    (4,890
    )
    
    
    (5,641
    )
    
    
    (9,535
    )
    
    
    (10,093
    )Discontinued operations
    
    
    3,543
    
    
    
    (27,648
    )
    
    
    1,543
    
    
    
    (28,131
    )Cumulative effect of accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (770
    )Consolidated
    
    $
    20,279
    
    
    $
    (11,111
    )
    
    $
    31,205
    
    
    $
    (6,848
    )
 Total AssetsSegments:
    
    September 30, 2004
    
    March 31, 2004Catalina Marketing Services
    
    $
    1,188,706
    
    
    $
    1,514,933Catalina Health Resource
    
    
    63,244
    
    
    
    68,284International
    
    
    98,054
    
    
    
    98,040Catalina Marketing Research Solutions
    
    
    5,006
    
    
    
    10,963Reconciliation of segments to
consolidated amount:Eliminations
    
    
    (1,358,634
    )
    
    
    (2,279,126
    )Corporate
    
    
    388,728
    
    
    
    919,257Total assets  continuing operations
    
    
    385,104
    
    
    
    332,351Total assets  discontinued operations
    
    
    676
    
    
    
    54,458Consolidated
    
    $
    385,780
    
    
    $
    386,809
 Note 7. Impairment Charges and Goodwill The accompanying unaudited condensed consolidated statements of operations
include impairment charges of $3.3 million for the three and six months ended
September 30, 2004. In November 2003, the Company announced its intent to
divest CMRS. 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 CMRS for impairment again during
the three months ended September 30, 2004 due to a further decline in its
forecasted cash flows. Based upon this testing, the Company determined that an
additional impairment of goodwill had occurred and recorded an impairment
charge of $2.6 million, reducing the goodwill attributable to this business
unit to $0 as of September 30, 2004. The Company also recorded impairment charges, during the three months
ended September 30, 2004, of $0.4 million and $0.3 million at CMRS and
Corporate, respectively, because the estimated fair value of certain
depreciable assets exceeded their carrying value. Goodwill related to DMS of $1.6 million was written off, reducing the
balance to $0, during the three months ended June 30, 2004 and is included in
income (loss) from discontinued operations for the six months ended September
30, 2004. DMS was sold on September 17, 2004. During the first quarter of
fiscal year 2005, the Company did not anticipate its ability to recover
goodwill. Subsequently, in September 2004, the Company sold the business for
an amount in excess of the net book value of the remaining net assets,
resulting in a gain on sale in the second quarter of fiscal year 2005. See
Note 8. 13




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##### Table of Contents



Changes in the carrying amount of goodwill, including the effect of
impairment charges through September 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
    )
    
    
    
    
    
    
    (2,639
    )
    
    
    (4,248
    )Balance as of September 30, 2004
    
    $
    20,210
    
    
    $
    36,132
    
    
    $
    
    
    
    $
    24,153
    
    
    $
    
    
    
    $
    80,495
 The unaudited condensed consolidated financial statements for the six
months ended September 30, 2003 include an impairment charge of $28.0 million
in income (loss) from discontinued operations related to Japan Billboard. For
a discussion of impairment charges related to Japan Billboard, see our Annual
Report on Form 10-K for the fiscal year ended March 31, 2004. Note 8. Discontinued Operations In November 2003, the Company announced its intent to divest DMS, CMRS and
Japan Billboard, which were deemed not to be strategically aligned with the
Companys current core competencies. On August 31, 2004, the Company sold the stock of Japan Billboard for 100
Japanese yen to an employee of the Company who was acting as the local General
Manager of Japan Billboard until the date of the sale. The transaction was
effective as of July 31, 2004. Upon closing of the sale, the Company retained
certain liabilities, the amounts of which are expected to be settled during
fiscal year 2005. Although the loss on disposition could be revised as a
result of a change to these retained liabilities, the Company does not expect a
material change to the amount reported as of September 30, 2004. Discontinued operations information relating to Japan Billboard is as
follows (dollars in thousands): Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    3,732
    
    
    $
    3,559
    
    
    $
    6,653
    
    
    $
    7,327Operating loss
    
    $
    (26
    )
    
    $
    (27,814
    )
    
    $
    (181
    )
    
    $
    (28,132
    )Loss before income tax benefit
    
    $
    (53
    )
    
    $
    (27,873
    )
    
    $
    (233
    )
    
    $
    (28,243
    )Income tax benefit
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    (4
    )Loss from operations
    
    
    (53
    )
    
    
    (27,871
    )
    
    
    (233
    )
    
    
    (28,239
    )Loss on disposition of Japan Billboard,
before income tax benefit
    
    
    (358
    )
    
    
    
    
    
    
    (358
    )
    
    
    Income tax benefit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on disposition of Japan Billboard
    
    
    (358
    )
    
    
    
    
    
    
    (358
    )
    
    
    Loss from Japan Billboard discontinued
operations
    
    $
    (411
    )
    
    $
    (27,871
    )
    
    $
    (591
    )
    
    $
    (28,239
    )
 On September 17, 2004, the Company sold DMS and received cash proceeds of
$5.0 million. The sale is subject to a final purchase price adjustment based
upon the book value of the net assets sold as of September 17, 2004. The
Company expects to finalize this adjustment during fiscal year 2005. Although
the gain on disposition could be revised accordingly, the Company does not
expect a material change to the amount reported as of September 30, 2004. 14




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##### Table of Contents



Discontinued operations information relating to DMS is as follows (dollars
in thousands): Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    4,093
    
    
    $
    10,845
    
    
    $
    10,030
    
    
    $
    22,657Operating income (loss)
    
    $
    521
    
    
    $
    374
    
    
    $
    (1,442
    )
    
    $
    180Income (loss) before income tax provision
    
    $
    521
    
    
    $
    376
    
    
    $
    (1,442
    )
    
    $
    182Income tax provision
    
    
    208
    
    
    
    153
    
    
    
    65
    
    
    
    74Income (loss) from operations
    
    
    313
    
    
    
    223
    
    
    
    (1,507
    )
    
    
    108Gain on disposition of DMS, before
income tax provision
    
    
    3,832
    
    
    
    
    
    
    
    3,832
    
    
    
    Income tax provision
    
    
    191
    
    
    
    
    
    
    
    191
    
    
    
    Gain on disposition of DMS
    
    
    3,641
    
    
    
    
    
    
    
    3,641
    
    
    
    Income from DMS discontinued operations
    
    $
    3,954
    
    
    $
    223
    
    
    $
    2,134
    
    
    $
    108
 Combined discontinued operations information for Japan Billboard and DMS
is as follows (dollars in thousands): Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Revenues
    
    $
    7,825
    
    
    $
    14,404
    
    
    $
    16,683
    
    
    $
    29,984Operating income (loss)
    
    $
    495
    
    
    $
    (27,440
    )
    
    $
    (1,623
    )
    
    $
    (27,952
    )Income (loss) from discontinued operations
before income tax provision
    
    $
    468
    
    
    $
    (27,497
    )
    
    $
    (1,675
    )
    
    $
    (28,061
    )Income tax provision
    
    
    208
    
    
    
    151
    
    
    
    65
    
    
    
    70Income (loss) from operations of discontinued
businesses
    
    
    260
    
    
    
    (27,648
    )
    
    
    (1,740
    )
    
    
    (28,131
    )Gain on dispositions of discontinued
operations, net, before income tax provision
    
    
    3,474
    
    
    
    
    
    
    
    3,474
    
    
    
    Income tax provision
    
    
    191
    
    
    
    
    
    
    
    191
    
    
    
    Gain on dispositions of discontinued
operations, net
    
    
    3,283
    
    
    
    
    
    
    
    3,283
    
    
    
    Income (loss) from discontinued operations
    
    $
    3,543
    
    
    $
    (27,648
    )
    
    $
    1,543
    
    
    $
    (28,131
    )
 Note 9. The August 2004 Credit Facility On August 27, 2004, the Company entered into a new, five-year revolving
credit facility with a group of lenders, led by Bank One, NA, as Agent (the
August 2004 Credit Facility or the Credit Facility). The Credit Facility
provides available borrowings of up to $125.0 million, but has a feature that
allows the Company to increase the revolving credit line to up to $175.0
million, under certain conditions. The Credit Facility also provides, within
the maximum commitment, up to the U.S. dollar equivalent of $50.0 million in
available borrowings in Japanese Yen by Catalina Marketing Japan K.K., $25.0
million for U.S. dollar-only commercial and standby letters of credit, and a
maximum U.S. dollar-only Swing Line (i.e., an overnight facility), as that
term is defined in the Credit Facility, of $10.0 million. The Credit Facility is to
be used for general corporate purposes including, but not limited to,
refinancing of existing indebtedness, share repurchases, capital expenditures
and acquisitions, as such terms are defined in the Credit Facility. 15




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##### Table of Contents



The interest rate on advances under the Credit Facility is based on (a)
the greater of the Prime Rate or the Federal Funds Effective Rate plus one-half
percent or, (b) the Eurocurrency Base Rate, as those terms are defined in the
Credit Facility. A percentage margin, ranging from 0.625% to 1.125% and
determined based upon the Companys Leverage Ratio, as that ratio is defined in
the Credit Facility, is added to the Eurocurrency Base Rate. The Company will pay a quarterly commitment fee ranging from 0.15% to
0.25% of the unused portion of the Credit Facility and determined based upon
the Companys Leverage Ratio, as that ratio is defined in the Credit Facility.
Usual and customary fees are payable for letters of credit that are issued
under the agreement. The Company may, at its option, reduce the maximum
commitment amount of the Credit Facility and generally may prepay any amounts
outstanding without penalty. The Credit Facility is unsecured, with a negative
pledge on all material assets, and is guaranteed by all material U.S.
subsidiaries of the Company. Financing fees paid through September 30, 2004 in conjunction with the
August 2004 Credit Facility were $0.6 million. These fees will be amortized as
interest expense over the term of the Credit Facility. In accordance with the terms of the Credit Facility, the Company provides
customary, ongoing representations, warranties and covenants, and is subject to
quarterly financial covenant compliance. These representations, warranties and
covenants include timely submission of financial statements, compliance with
income tax, pension and other laws, limitations on liens and incurrence of
debt, investments, mergers, consolidations and sales of assets, and limitations
on transactions with affiliates. Financial compliance covenants include
Interest Expense Coverage and Leverage Ratios, as those terms are defined in
the agreement. Events of default under the Credit Facility include, but are
not limited to, failure to make payments of principal, interest or fees within
the applicable cure period, violation of covenants, or a change in control of
the Company. The Company was in compliance with all Credit Facility covenants
as of September 30, 2004. The Company repaid amounts outstanding under the prior Japan credit
facility with proceeds from the August 2004 Credit Facility on the date the
agreement was executed. The total amount borrowed for payment on the prior
Japan credit facility was approximately $31.8 million. In addition, the Company borrowed $30.0 million on the Credit Facility on
September 1, 2004, and used the proceeds to replenish the cash used to purchase
the corporate headquarters facility. See Note 10. Since the Companys
consolidated accounts previously included the accounts of the lessor, the
purchase of the building resulted in the refinancing of debt and purchase of
the lessors equity interest. There was $61.8 million outstanding under the Credit Facility as of
September 30, 2004. Note 10. Purchase of Headquarters Facility and Termination of Related Lease
Agreement Prior to August 25, 2004, the Company leased its corporate headquarters,
in St. Petersburg, Florida, from a variable interest entity (VIE) that was
created in fiscal year 2001 and was partially funded by a third-party financial
institution. The Company accounted for the VIE in accordance with FASBs
Interpretation No. 46 (revised 2003), Consolidation of Variable Interest
Entities  An Interpretation of ARB No. 51. Because the Company was the
primary beneficiary, the Company had been consolidating the accounts of the
VIE. On August 25, 2004, the Company purchased the corporate headquarters
facility for $30.5 million. The lease, which was scheduled to expire in
October 2005, was terminated in conjunction with the purchase.
The accounts of the VIE, which included long-term debt of $29.6 million and
equity of $0.9 million to fund the facility, were liquidated upon the sale of
the facility to the Company and, as such, are no longer consolidated. The
Company also paid certain fees to acquire the facility, such as state transfer
taxes, which were expensed during the three months ended September 30, 2004. Note 11. Share Repurchase Authorization and Share Repurchases On September 1, 2004, the Company announced that its Board of Directors
authorized $100.0 million of funds to be available for the repurchase of the
Companys common stock. This authorization replaces the $44.0 million unused
portion of the previous $100.0 million common stock repurchase program
authorized by the Board of 16




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##### Table of Contents



Directors in July 2002. The Company last purchased
shares in June 2003. Subsequent to June 2003, the Company was precluded
from stock repurchases under the terms of its previous bank credit
facility (Prior Facility). The Prior Facility was replaced on August 27,
2004 by the Credit Facility, and the current Credit Facility no longer
restricts the Company from repurchases of its common stock. During the six months ended September 30, 2003, the Company repurchased
749,200 shares of its common stock for a total of $13.3 million. There were no
repurchases of common stock made by the Company during the six months ended
September 30, 2004. Note 12. Cash Dividend On September 1, 2004, the Company announced that the Board of Directors
declared an annual cash dividend of $0.30 per share to common stockholders of
record as of September 15, 2004. The dividend liability was funded on September
30, 2004 for payment to stockholders on October 1, 2004, and resulted in cash
payments to stockholders of approximately $15.6 million. Note 13. Offer to Purchase Shares of Catalina Health Resource On September 15, 2004, the Company notified holders of common stock and
options to purchase common stock of Catalina Health Resource, (CHR), a
subsidiary in which the Company owns approximately 95% of the outstanding
shares, that it will make a tender offer to purchase the shares of CHR not held
by the Company. The tender offer period will begin on January 3, 2005 and
close on March 31, 2005. Payment for shares tendered under the offer will be
made on or before April 15, 2005. Generally, CHR stockholders that have owned
their shares for a period of at least six months and one day prior to the day
the shares are purchased by the Company are eligible to tender their shares
under this offer. The Company has determined that it will pay $12.50 per share
for those shares tendered in accordance with the terms of the offer. There
were 279,786 shares of CHR outstanding as of September 30, 2004. Accordingly,
the Company estimates a maximum cash outflow of $3.5 million will be paid to
CHR stockholders during the period from January 3, 2005 through April 15, 2005. Note 14. 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s 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. In
October 2004, the states supreme court affirmed the decision of the tax
tribunal. As a result, the Company will reverse a liability related to the
sales tax assessment of approximately $4.4 million, which is the amount
recognized in prior periods, into income during the third quarter of fiscal
year 2005. 17




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations The following tables include the revenues and operating income (loss) for
each of the Companys reportable segments included in continuing operations for
the three and six months ended September 30, 2004 compared with the three and
six months ended September 30, 2003. Net income is presented for the same
periods for our reportable segments and discontinued operations. Discontinued
operations include Japan Billboard and DMS through the date each entity was
divested. See Note 8 to the unaudited condensed consolidated financial
statements included in this Form 10-Q. The accounts of our foreign
subsidiaries are included for the three and six months ended June 30, which is
the end of their second 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 promotions, 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 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. Dollars are in thousands in
the following tables. Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003RevenuesCatalina Marketing Services
    
    $
    66,070
    
    
    $
    71,427
    
    
    $
    129,472
    
    
    $
    131,026CHR
    
    
    19,180
    
    
    
    19,148
    
    
    
    37,046
    
    
    
    33,614International
    
    
    16,892
    
    
    
    13,633
    
    
    
    31,138
    
    
    
    22,744CMRS
    
    
    1,345
    
    
    
    3,354
    
    
    
    2,727
    
    
    
    7,121Corporate
    
    
    1,059
    
    
    
    1,099
    
    
    
    1,825
    
    
    
    1,569Eliminations
    
    
    (829
    )
    
    
    (985
    )
    
    
    (1,707
    )
    
    
    (1,766
    )Total Revenues
    
    $
    103,717
    
    
    $
    107,676
    
    
    $
    200,501
    
    
    $
    194,308
 Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Operating income (loss)Catalina Marketing Services
    
    $
    31,796
    
    
    $
    31,715
    
    
    $
    58,987
    
    
    $
    53,288CHR
    
    
    4,663
    
    
    
    3,585
    
    
    
    6,471
    
    
    
    229International
    
    
    4,439
    
    
    
    2,760
    
    
    
    7,193
    
    
    
    2,306CMRS
    
    
    (3,559
    )
    
    
    159
    
    
    
    (4,293
    )
    
    
    621Corporate
    
    
    (9,662
    )
    
    
    (9,006
    )
    
    
    (20,178
    )
    
    
    (18,735
    )Total operating income
    
    $
    27,677
    
    
    $
    29,213
    
    
    $
    48,180
    
    
    $
    37,709
 18




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##### Table of Contents



Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)Catalina Marketing Services
    
    $
    18,896
    
    
    $
    18,870
    
    
    $
    35,029
    
    
    $
    31,706CHR
    
    
    2,774
    
    
    
    2,133
    
    
    
    3,848
    
    
    
    136International
    
    
    2,073
    
    
    
    1,083
    
    
    
    2,874
    
    
    
    (63
    )CMRS
    
    
    (2,117
    )
    
    
    92
    
    
    
    (2,554
    )
    
    
    367Corporate
    
    
    (4,890
    )
    
    
    (5,641
    )
    
    
    (9,535
    )
    
    
    (10,093
    )Net income from
continuing operations
    
    
    16,736
    
    
    
    16,537
    
    
    
    29,662
    
    
    
    22,053Discontinued operations
    
    
    3,543
    
    
    
    (27,648
    )
    
    
    1,543
    
    
    
    (28,131
    )Cumulative effect of
accounting change
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (770
    )Net income (loss)
    
    $
    20,279
    
    
    $
    (11,111
    )
    
    $
    31,205
    
    
    $
    (6,848
    )
 Three Months Ended September 30, 2004 Compared with the Three Months Ended
September 30, 2003 Consolidated Results of Operations Consolidated revenues decreased to $103.7 million for the three months
ended September 30, 2004 compared with consolidated revenues of $107.7 million
for the three months ended September 30, 2003. Consolidated operating income
was $27.7 million for the three months ended September 30, 2004 compared with
operating income of $29.2 million for the three months ended September 30,
2003. Net income for the three months ended September 30, 2004 was $20.3
million, compared with a net loss of $11.1 million for the three months ended
September 30, 2003. Operating results from continuing operations for the three
months ended September 30, 2004 include impairment charges of $3.3 million. See
Note 7 to the unaudited condensed consolidated financial statements for a
discussion of the impairment charges. See Segment Results below for a
discussion of the comparative period changes. Interest expense decreased by $0.4 million to $0.2 million for the three
months ended September 30, 2004 compared with interest expense of $0.6 million
for the three months ended September 30, 2003. The decrease is primarily
attributable to a refund of interest expense previously paid on the
indebtedness related to the Companys corporate headquarters facility. The consolidated provision for income taxes for the three months ended
September 30, 2004 of $11.1 million decreased to 39.8% of income from
continuing operations before income taxes compared with the consolidated
provision for income taxes for the three months ended September 30, 2003 of
$12.5 million, or 43.0% of income from continuing operations before income
taxes. The Companys effective tax rate for the three months ended September
30, 2004 was lower than the effective tax rate for the three months ended
September 30, 2003 primarily due to a shift in the mix of income to
jurisdictions with lower tax rates and due to a decrease in losses which were
not eligible for a tax benefit in the prior year. Continuing Operations - Segment Results Catalina Marketing Services Revenues for Catalina Marketing Services decreased by $5.3 million to
$66.1 million for the three months ended September 30, 2004, compared with
revenues of $71.4 million for the three months ended September 30, 2003.
CMS revenues were affected by the first full quarter impact of the
significant pull back from a large manufacturer client. In addition,
a decrease of approximately $2.1 million was attributable to a
decline in loyalty card revenues primarily due to the sale of the loyalty card business on
March 31, 2004. The decline in revenues from these factors was partially
offset by an approximate $1.0 million increase from the volume of paid
promotions printed, which includes additional volume generated from the sale of
a new product during the second quarter of fiscal year 2005. 19




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##### Table of Contents



Operating income for CMS increased by $0.1 million to $31.8 million for
the three months ended September 30, 2004, compared with $31.7 million for the
three months ended September 30, 2003. Although revenues
declined, operating income was relatively unchanged for the second quarter of
fiscal year 2005 as compared with the second quarter of fiscal year 2004
primarily due to a $2.2 million reduction in costs allocated from Corporate,
lower loyalty card business related costs and lower sales force and executive
administrative costs, primarily resulting from lower headcount. Net income for Catalina Marketing Services was unchanged at $18.9 million
for both the three months ended September 30, 2004 and the three months
ended September 30, 2003. CHR Revenues for CHR were relatively unchanged at $19.2 million for the three
months ended September 30, 2004 compared with revenues of $19.1 for the three
months ended September 30, 2003, as increases from volume and price were offset
by the effect of a fiscal year 2004 non-comparable item. Revenues increased by
$4.4 million for the three months ended September 30, 2004 as a result of
increases in unit volume and the favorable effect of a shift in mix to
higher-priced programs, but the decrease was offset primarily by the effect of
$4.0 million in revenues deferred from a prior period which were recognized
during the three month period ended September 30, 2003. Operating income for CHR increased to $4.7 million for the three months
ended September 30, 2004, compared with an operating income of $3.6 million for
the three months ended September 30, 2003. The increase in operating income was
primarily due to reductions in personnel and associated costs, which were the
result of the Companys restructuring efforts at CHR that began during fiscal
year 2004 and continued through the second quarter of fiscal year 2005. Net income for CHR for the three months ended September 30, 2004 increased
to $2.8 million, compared with net income of $2.1 million for the three months
ended September 30, 2003, primarily due to the factors affecting operating
results discussed above. International Revenues for International increased by $3.3 million to $16.9 million for
the three months ended September 30, 2004, compared with revenues of $13.6
million for the three months ended September 30, 2003. The increase in
International revenues was primarily due to increased manufacturer promotions
printed in Japan and France, increased revenues from retailer promotions and a
favorable effect from movements in foreign currency exchange rates. International recognized operating income of $4.4 million for the three
months ended September 30, 2004, compared with operating income of $2.8 million
for the three months ended September 30, 2003. The improvement in operating
income was primarily attributable to revenue growth, partially offset by
volume-related direct costs, increased sales personnel costs and charges for
the disposal of obsolete store equipment. Net income for International for the three months ended September 30, 2004
increased to $2.1 million, compared with net income of $1.1 million for the
three months ended September 30, 2003, primarily due to the factors affecting
operating results, discussed above. CMRS Revenues for CMRS were $1.3 million for the three months ended September
30, 2004, compared with revenues of $3.4 million for the three months ended
September 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, whom the Company does not intend to
replace. Operating loss for CMRS was $3.6 for the three months ended September 30,
2004, compared with operating income of $0.2 million for the three months ended
September 30, 2003. The operating loss for the three months ended September
30, 2004 includes an impairment charge of $3.0 million to write off the
remaining balance of goodwill and to write down certain long-lived assets to
estimated fair value. The goodwill was reduced to $0 based on the 20




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Companys
estimate of the fair value of the CMRS business, which was based primarily on
quotes from independent third parties. The fair value of long-lived assets,
primarily computers, was based on the Companys estimate of cash inflow from
the sale of such assets in the used equipment market, less costs to sell. See
Note 7 to the unaudited condensed consolidated
financial statements for a discussion of the impairment charge. In addition to
the effect of the impairment charge, operating results also declined due to the
decrease in revenues, partially offset by decreased personnel costs. Primarily due to the factors affecting operating results, discussed above,
CMRS recorded a net loss of $2.1 million for the three months ended September
30, 2004 compared with net income of $0.1 million for the three months ended
September 30, 2003. Corporate Corporate operating loss increased by $0.7 million for the three months
ended September 30, 2004 compared with the three months ended September 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 before allocations incurred by
Corporate for the three months ended September 30, 2004 decreased by $0.8
million compared with the three months ended September 30, 2003. However, the
percent of operating costs allocated to the business segments was lower for the
three months ended September 30, 2004 than the comparable period in the
previous year. Accordingly, the Corporate segment reflects increased operating
loss for the three months ended September 30, 2004 as compared with the three
months ended September 30, 2003. Net loss for Corporate declined $0.7 million
for the three months ended September 30, 2004 as compared with the three months
ended September 30, 2003 primarily due to lower interest expense and a lower
consolidated effective tax rate, which is reflected as a favorable adjustment
to Corporate, for the three months ended September 30, 2004. Discontinued Operations  Segment Results DMS The Company sold DMS on September 17, 2004. As such, the results of
operations for the periods in fiscal year 2005 and 2004 are reported net of
taxes on one line, Income (loss) from discontinued operations. See further
discussion in Note 8 to the unaudited condensed consolidated financial
statements in this Form 10-Q. Following is a discussion of the changes in
revenues, operating income (loss) and net income (loss) for the quarter ended
September 30, 2004 as compared with September 30, 2003. These results are
included in Note 8. Revenues for DMS decreased by $6.7 million to $4.1 million for the three
months ended September 30, 2004, compared with revenues of $10.8 million for
the three months ended September 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 in November 2003 of our intent to
divest DMS, and due to fewer operating days in the second quarter of fiscal
year 2005 as a result of the sale on September 17, 2004. Operating income for DMS was $0.5 million for the three months ended
September 30, 2004 compared with operating income of $0.4 million for the three
months ended September 30, 2003. Although revenues declined, operating
results improved primarily due to a reduction in personnel costs. Net income for DMS was $4.0 million for the three months ended September
30, 2004, which includes a gain of $3.6 million, net of a tax provision of $0.2
million, recognized upon the sale of the business unit. Net income for DMS for
the three months ended September 30, 2003 was $0.2 million. Japan Billboard The Company sold Japan Billboard on August 31, 2004; however, the
transaction was effective as of July 31, 2004. Historically, the Company has
recognized the results of Japan Billboard, as well as International, on a
three-month lag. For example, the Companys fiscal year begins
April 1st and
ends on the following March 31st. The fiscal year of Japan Billboard begins on
January 1st and ends on the following December 31st. As such, the results of
the second quarter ended September 30 have historically included the results of
Japan Billboard for the three months 21




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##### Table of Contents



ended June 30. However, the Company has
concluded that the sale of the Japan Billboard in August 2004 should not be
deferred for financial reporting. As such, the effect of the sale is included
in the results of the second quarter ended September 30, 2004. The
accompanying unaudited condensed consolidated statements of operations include
the results of Japan Billboard through the month of July 2004. The results of
July 2004 were included to eliminate the lag in
financial reporting and did not have a significant effect on results of
operations for the three and six month periods ended September 30, 2004. The
results of operations for Japan Billboard for the periods in fiscal year 2005 and 2004
have been reported net of tax as income from discontinued operations. See
further discussion in Note 8 to the unaudited condensed consolidated financial
statements in this Form 10-Q. Following is a discussion of the changes in
revenues, operating income (loss) and net income (loss) for the second quarter
of fiscal year 2005 as compared with the second quarter of fiscal year 2004.
These results are included in Note 8. Revenues for Japan Billboard were relatively unchanged at $3.7 million for
the second quarter of fiscal year 2005 compared with $3.6 million for the
second quarter of fiscal year 2004. Operating loss for Japan Billboard was $0.1 million for the second quarter
of fiscal year 2005 compared with an operating loss of $27.8 million for the
second quarter of fiscal year 2004. The operating loss for the second quarter
of fiscal year 2004 includes an impairment charge of $28.0 million to reduce
goodwill. Excluding the impairment charge, operating income at Japan Billboard
was $0.2 million for the second quarter of fiscal year 2004. Operating results
declined during the second quarter of fiscal year 2005 primarily due to
increased costs to dispose of certain billboards. Net loss for Japan Billboard was $0.4 million for the second quarter of
fiscal year 2005, which includes a loss of $0.4 million, net of a tax benefit
of $0, recognized upon the sale of the business unit. Net loss for Japan
Billboard for the second quarter of fiscal year 2004 was $27.9 million, which
includes the $28.0 million goodwill impairment charge. Foreign Currency Translation and Its Effect on Revenues Consolidated revenues for the second quarter of fiscal year 2005 were
$103.7 million, which includes $16.9 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 second
quarter of fiscal year 2005. Accordingly, revenues in United States dollars for
our foreign operations would have been 7.2% lower for the period if translated
using the weighted average currency translation rates for the comparable period
in fiscal year 2004. Six Months Ended September 30, 2004 Compared with the Six Months Ended
September 30, 2003 Consolidated Results of Operations Consolidated revenues increased to $200.5 million for the six months ended
September 30, 2004, compared with consolidated revenues of $194.3 million for
the six months ended September 30, 2003. Consolidated operating income from
continuing operations was $48.2 million for the six months ended September 30,
2004 compared with operating income of $37.7 million for the six months ended
September 30, 2003. Net income for the six months ended September 30, 2004 was
$31.2 million, compared with a net loss of $6.8 million for the six months
ended September 30, 2003. Operating results from continuing operations for the
six months ended September 30, 2004 include impairment charges of $3.3
million. See Note 7 to the unaudited condensed consolidated financial
statements for a discussion of the impairment charges. The consolidated provision for income taxes for the six months ended
September 30, 2004 of $18.3 million decreased to 38.1% of income from
continuing operations before income taxes, compared with the consolidated
provision for income taxes for the six months ended September 30, 2003 of $15.7
million, or 41.6% of income from continuing operations before income taxes.
The Companys effective tax rate for the six months ended September 30, 2004
was lower than the effective tax rate for the six months ended September 30,
2003 primarily due to a shift in the mix of income to jurisdictions with lower
tax rates and due to a decrease in losses which were not eligible for a tax
benefit in the prior year. 22




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##### Table of Contents



Continuing Operations - Segment Results Catalina Marketing Services Revenues for CMS decreased by $1.5 million to $129.5 million for the six
months ended September 30, 2004, compared with revenues of $131.0 million for
the six months ended September 30, 2003. The decrease was primarily
attributable to a $10.3 million decline in revenues from a significant customer
and a $2.9 million decline in loyalty card revenues primarily due to the sale of the loyalty
card business on March 31, 2004. These declines in revenues were almost
completely offset by increased volume of printed promotions. Operating income for CMS increased by $5.7 million to $59.0 million for
the six months ended September 30, 2004, compared with $53.3 million for the
six months ended September 30, 2003. Although revenues declined, operating
income improved for the first six months of fiscal year 2005 as compared with
the first six months of fiscal year 2004 primarily due to a $4.1 million
reduction in costs allocated from Corporate, lower sales force and executive
administrative costs, primarily resulting from lower headcount, and lower
loyalty card business related costs. Net income for CMS increased by $3.3 million to $35.0 million for the six
months ended September 30, 2004, compared with a net income of $31.7 million
for the six months ended September 30, 2003. This increase in net income was
primarily due to the factors affecting operating income, discussed above. CHR Revenues for CHR increased $3.4 million to $37.0 million for the six
months ended September 30, 2004, compared with revenues of $33.6 million for
the six months ended September 30, 2003. Revenues increased by $9.3 million for
the six months ended September 30, 2004 primarily as a result of a shift in the
mix of programs sold to higher-priced programs, partially offset by the effect
of $5.0 million of previously deferred revenues recognized during the
comparable six month period ended September 30, 2003. Operating income for CHR increased to $6.5 million for the six months
ended September 30, 2004, compared with $0.2 million for the six months ended
September 30, 2003. The improvement in operating results was primarily due to
increased revenues, lower retailer fees and lower administrative personnel and
associated costs, partially offset by increased sales commission expenses. In
addition, the prior years results included higher costs for relocation and
severance related to the restructuring at CHR. Net income for CHR for the six months ended September 30, 2004 increased
to $3.9 million, compared with net income of $0.1 million for the six months
ended September 30, 2003, primarily due to the factors affecting operating
income discussed above. International Revenues for International increased by $8.4 million to $31.1 million for
the six months ended September 30, 2004, compared with revenues of $22.7
million for the six months ended September 30, 2003. The increase in
International revenues is primarily due to growth in France, Japan and the U.K.
and the favorable effect of foreign currency movements. Operating income for International was $7.2 million for the six months
ended September 30, 2004, compared with operating income of $2.3 million for
the six months ended September 30, 2003. The improvement was primarily
attributable to revenue growth, partially offset by increased volume-related
direct costs, increased sales personnel costs and charges for the disposal of
obsolete store equipment. Net income for International for the six months ended September 30, 2004
was $2.9 million, compared with a net loss of $0.1 million for the six months
ended September 30, 2003. The change in net income was primarily due to the
factors affecting operating results, discussed above. CMRS 23




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##### Table of Contents



Revenues for CMRS were $2.7 million for the six months ended September 30,
2004, compared with revenues of $7.1 million for the six months ended September
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, whom the Company does not plan
to replace. Operating loss for CMRS was $4.3 million for the six months ended
September 30, 2004, compared with operating income of $0.6 million for the six
months ended September 30, 2003. Net loss for CMRS was $2.6 million for the
six months ended September 30, 2004, compared with net income of $0.4 million
for the six months ended September 30, 2003. Operating results declined due to
the factors discussed above for the second quarter results. Corporate Corporate operating loss increased by $1.4 million for the six months
ended September 30, 2004 compared with the six months ended September 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 before allocations incurred by Corporate
for the six months ended September 30, 2004 decreased by $1.1 million compared
with the six months ended September 30, 2003. However, the percent of
operating costs allocated to the business segments was lower for the six months
ended September 30, 2004 than the comparable period in the previous year.
Although operating loss increased, net loss for Corporate decreased by $0.6
million for the six months ended September 30, 2004 compared with the six
months ended September 30, 2003, primarily due to lower interest expense and a
lower consolidated effective tax rate, which is reflected as a favorable
adjustment to Corporate, for the six months ended September 30, 2004. Discontinued Operations  Segment Results DMS The Company sold DMS on September 17, 2004. See further discussion in
Note 8 to the unaudited condensed consolidated financial statements in this
Form 10-Q. Following is a discussion of the changes in revenues, operating
income (loss) and net income (loss) for the six months ended September 30, 2004
as compared with the six months ended September 30, 2003. These results are
included in Note 8. Revenues for DMS decreased by $12.7 million to $10.0 million for the six
months ended September 30, 2004, compared with revenues of $22.7 million for
the six months ended September 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 in November 2003 of our intent to
divest DMS and, to a lesser degree, due to fewer operating days in the first
six months of fiscal year 2005 as a result of the sale on September 17, 2004. Operating loss for DMS was $1.4 million for the six months ended September
30, 2004 compared with operating income of $0.2 million for the six months
ended September 30, 2003. The decline in operating results was primarily due
to the decrease in revenues, partially offset by lower direct operating and
personnel costs. In addition, the results of the first quarter of fiscal year
2005 include an impairment charge of $1.6 million to reduce
goodwill associated with DMS to
estimated fair value. Net income for DMS was $2.1 million for the six months ended September 30,
2004, which includes a gain of $3.6 million, net of a tax provision of $0.2
million, recognized upon the sale of the business unit. Net income for DMS for
the six months ended September 30, 2003 was $0.1 million. Japan Billboard The Company sold Japan Billboard on August 31, 2004; however, the
transaction was effective as of July 31, 2004. The results of operations for
the periods in fiscal years 2005 and 2004 have been reported net of tax as
Income (loss) from discontinued operations. See further discussion in Note 8
to the unaudited condensed consolidated financial statements in this Form 10-Q.
Following is a discussion of the changes in revenues, operating income (loss) 24




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and net income (loss) for the first six months of fiscal year 2005 as compared
with the first six months of fiscal year 2004. These results are included in
Note 8. Revenues for Japan Billboard were $6.7 million for the first six months of
fiscal year 2005 compared with $7.3 million for the first six months of fiscal
year 2004. Revenues at this business unit continued to decline as a result of
the effect of the Voluntary Global Tobacco Marketing Initiative; see our Annual
Report on Form 10-K for the fiscal year ended March 31, 2004 for a more
detailed description of the initiative. Operating loss for Japan Billboard was $0.2 million for the first six
months of fiscal year 2005 compared with an operating loss of $28.1 million for
the first six months of fiscal year 2004. The operating loss for the first six
months of fiscal year 2004 includes an impairment charge of $28.0 million to
reduce goodwill. Excluding the impairment charge, operating loss for Japan
Billboard was $0.1 million for the first six months fiscal year 2004.
Operating results declined somewhat during the first six months of fiscal year
2005 primarily due to the reduction in revenues, partially offset by direct
costs. Net loss for Japan Billboard was $0.6 million for the first six months of
fiscal year 2005, which includes a loss of $0.4 million, net of a tax benefit
of $0, recognized upon the sale of the business unit. Net loss for Japan
Billboard for the first six months of fiscal year 2004 was $28.2 million, which
includes the $28.0 million goodwill impairment charge. Foreign Currency Translation and Its Effect on Revenues Consolidated revenues for the six months ended September 30, 2004 were
$200.5 million, which includes $31.1 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 six months
ended September 30, 2004. Accordingly, revenues in United States dollars for
our foreign operations would have been 10.2% lower for the period if translated
using the weighted average currency translation rates for the comparable period
in fiscal year 2004. 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, various credit agreements and installment loans
payable entered into by our Japan subsidiaries and the indebtedness under a
lease arrangement in the amount of $29.6 million. On August 27, 2004, we
entered into a new credit agreement with a syndicate of commercial banks (the
August 2004 Credit Facility or Credit Facility), which was used to repay
certain amounts outstanding under credit agreements entered into by our Japan
subsidiaries and to purchase our headquarters building. See Other Sources of
Liquidity for further details. Our primary liquidity requirements are to fund working capital, capital
expenditures in the ordinary course of business and the repayment of debt and
lease obligations. Cash flows from operations for the six months ended
September 30, 2004 and through the current date were sufficient to meet our
liquidity needs. 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. Our long-term debt primarily consists of amounts due under the new August
2004 Credit Facility, discussed below. 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 Facility, 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. 25




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##### Table of Contents



Cash Flow Analysis Net cash provided by operating activities was $42.5 million for the six
months ended September 30, 2004 compared with $54.4 million for the six months
ended September 30, 2003. The decrease in net cash provided by operating
activities for the six months ended September 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 half 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 the timing of
customer billings and collections. Accrued expenses decreased primarily due to
the timing of payroll-related payments, including sales commissions, and a
decrease in accrued professional fees. Following is a summary of the cash flows from
operating activities for the six months ended September 30, 2004 and 2003 (in
thousands): Six Months Ended September 30,2004
    
    2003Cash Flows from Operating Activities:Net income (loss)
    
    $
    31,205
    
    
    $
    (6,848
    )Adjustments to reconcile net income (loss) to net cash
provided by operating activities:Depreciation, amortization and impairment charge
    
    
    28,189
    
    
    
    51,473Other non-cash items
    
    
    486
    
    
    
    2,654Changes in operating assets and liabilities:Accounts receivable
    
    
    (5,530
    )
    
    
    12,475Inventory, prepaid expenses and other assets
    
    
    (1,470
    )
    
    
    (476
    )Accounts payable
    
    
    (2,009
    )
    
    
    (5,321
    )Taxes payable
    
    
    6,830
    
    
    
    (1,205
    )Accrued expenses
    
    
    (13,532
    )
    
    
    (4,761
    )Deferred revenue
    
    
    (1,699
    )
    
    
    6,450$
    42,470
    
    
    $
    54,441
 Net cash used in investing activities decreased to $2.1 million for the
six months ended September 30, 2004 compared with $39.0 million for the six
months ended September 30, 2003. Cash used in investing activities for the six
months ended September 30, 2003 includes $22.9 million of an additional
purchase price payment pursuant to an earnout provision established in prior
years related to Japan Billboard. No similar payment was made in fiscal year
2005. In addition, capital expenditures have declined from $16.1 million for
the six months ended September 30, 2003 to $6.2 million for the six months
ended September 30, 2004. 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. Investing activities for the six months
ended September 30, 2004 also includes cash inflow of $5.0 million for the sale
of DMS on September 17, 2004. Net cash used in financing activities was $15.6 million for the six months
ended September 30, 2004 compared with $7.2 million used in financing
activities during the six months ended September 30, 2003. Cash used in
financing activities for the six months ended September 30, 2004 included a
cash dividend of $0.30 per share on common stock for a total payment of $15.6
million and a net repayment of debt of $0.2 million During the six months
ended September 30, 2003, the Company repurchased common stock for $13.3
million. Net bank borrowings for the same period were $5.2 million. Cash and cash equivalents increased by $24.6 million to $97.3 million for
the six months ended September 30, 2004. Other Sources of Liquidity In addition to our cash flows generated from operations, bank borrowings
provide additional sources of liquidity. 26




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The August 2004 Credit Facility. On August 27, 2004, the Company entered
into a new, five-year revolving credit facility with a group of lenders, led by
Bank One, NA, as Agent (the August 2004 Credit Facility or the Credit
Facility). The Credit Facility provides available borrowings of up to $125.0
million, but has a feature that allows the Company to increase the revolving
credit line to up to $175.0 million, under certain conditions. The Credit
Facility also provides, within the maximum commitment, up to the U.S.
dollar
equivalent of $50.0 million in available borrowings in Japanese Yen by Catalina
Marketing Japan K.K., $25.0 million for U.S. dollar-only commercial and standby
letters of credit, and a maximum U.S. dollar-only Swing Line (i.e., an
overnight facility), as that term is defined in the agreement, of $10.0
million. The Credit Facility is to be used for general corporate purposes
including, but not limited
to, refinancing of existing indebtedness, share repurchases, capital
expenditures and acquisitions, as such terms are defined in the Credit
Facility. The interest rate on advances under the Credit Facility is based on (a)
the greater of the Prime Rate or the Federal Funds Effective Rate plus one-half
percent or, (b) the Eurocurrency Base Rate, as those terms are defined in the
Credit Facility. A percentage margin, ranging from 0.625% to 1.125% and
determined based upon the Companys Leverage Ratio, as that ratio is defined in
the Credit Facility, is added to the Eurocurrency Base Rate. The Company will pay a quarterly commitment fee ranging from 0.15% to
0.25% of the unused portion of the Credit Facility and determined based upon
the Companys Leverage Ratio, as that ratio is defined in the Credit Facility.
Usual and customary fees are payable for letters of credit that are issued
under the agreement. The Company may, at its option, reduce the maximum
commitment amount of the Credit Facility and generally may prepay any amounts
outstanding without penalty. The Credit Facility is unsecured, with a negative
pledge on all material assets, and is guaranteed by all material U.S.
subsidiaries of the Company. Financing fees paid through September 30, 2004 in conjunction with the
August 2004 Credit Facility were $0.6 million. These fees will be amortized as
interest expense over the term of the Credit Facility. In accordance with the terms of the Credit Facility, the Company provides
customary, ongoing representations, warranties and covenants, and is subject to
quarterly financial covenant compliance. These representations, warranties and
covenants include timely submission of financial statements, compliance with
income tax, pension and other laws, limitations on liens and incurrence of
debt, investments, mergers, consolidations and sales of assets, and limitations
on transactions with affiliates. Financial compliance covenants include
Interest Expense Coverage and Leverage Ratios, as those terms are defined in
the agreement. Events of default under the Credit Facility include, but are not
limited to, failure to make payments of principal, interest or fees
within the applicable
cure period, violation of covenants, or a change in control of the Company. The Company repaid certain short-term amounts outstanding under the
Amended Japan Agreement with proceeds from the August 2004 Credit Facility on
the date the agreement was executed. The total amount borrowed for payment on
the Amended Japan Agreement was approximately $31.8 million. In addition, on August 25, 2004, the Company purchased its corporate
headquarters facility located in St. Petersburg, Florida and terminated the
related lease financing agreement that it had entered into in 1999. The
purchase price of the building was $30.5 million and was paid by the Company in
cash. The Company borrowed $30.0 million on the Credit Facility on September 1,
2004, and used the proceeds to replenish the cash used to purchase the
building. The total amount outstanding under the August 2004 Credit Facility as of
September 30, 2004 was $61.8 million. The Corporate Facility (the Prior Facility).The August 2004 Credit
Facility replaced the Companys previously existing $30.0 million revolving
line of credit, or the Prior Facility. The balance outstanding under the Prior
Facility as of September 30, 2003 was $11.0 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 significant terms of the Prior Facility, including
information regarding the extensions of the expiration date and financing fees
paid in conjunction with the extensions. The Prior Facility was repaid in full
on November 25, 2003 and no additional amounts were borrowed from that date
through the date it was replaced by the August 2004 Credit Facility. 27




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##### Table of Contents



We believe that cash generated from operations under economic conditions
similar to those currently existing and amounts available under the August 2004
Credit Facility will be sufficient to meet our liquidity requirements. However,
we cannot assure you that our cash generated from operations or the proceeds
from the new Credit Facility will provide sufficient cash to fund our
operations if unfavorable economic or other events occur that affect us. See
our Annual Report on Form 10-K for our fiscal year ended March 31, 2004 for a
discussion of risk factors relating to our business. The Japan Credit Facilities.The Japan Credit Facilities consisted of
various credit agreements entered into by our Japan subsidiary and included the
Amended Japan Agreement, which provided for a revolving credit facility up to
1.5 billion yen and a term credit facility of up to 2.0 billion yen. The
Amended Japan Agreement was replaced in
conjunction with the August 2004 Credit Facility. The Japan Credit
Facilities also included installment loans, certain amounts of which were
repaid in connection with the sale of the Japan Billboard business. Please
refer to the Companys Annual Report on form 10-K for fiscal year ended March
31, 2004 for a discussion of the significant changes to the Japan Credit
Facilities during fiscal year 2004. The Lease Agreement.The lease agreement governed the $29.6 million of
indebtedness related to our corporate headquarters, in St. Petersburg, Florida,
and was guaranteed by a lien on the building. The initial lease term was set to
expire in October 2005. The facility was purchased for $30.5 million on August
25, 2004, and, as a result, the lease was terminated. Our unaudited condensed consolidated balance sheet as of March 31, 2004
includes the accounts of the variable interest entity which owned our
headquarters facility in St. Petersburg, Florida, on that date. Capital Requirements Our Annual Report on Form 10-K for the fiscal year ended March 31, 2004,
included the following table, which presents the summary of our contractual
cash obligations and commitments as of March 31, 2004. Refer to the Form 10-K
for a description of each of the obligations: Payments Due by PeriodBetween
    
    BetweenBefore
    
    April 1, 2005
    
    April 1, 2007
    
    AfterTotal
    
    March 31, 2005
    
    and March 31, 2007
    
    and March 31, 2009
    
    March 31, 2009Short-term borrowings
    
    $
    37,778
    
    
    $
    37,778
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    
    31,411
    
    
    
    949
    
    
    
    30,462
    
    
    
    
    
    
    
    Postretirement medical
benefit costs
    
    
    1,270
    
    
    
    89
    
    
    
    216
    
    
    
    258
    
    
    
    707Operating leases
    
    
    23,837
    
    
    
    5,147
    
    
    
    8,714
    
    
    
    6,840
    
    
    
    3,136Purchase obligations for
in-store equipment
    
    
    16,552
    
    
    
    5,578
    
    
    
    8,496
    
    
    
    2,478
    
    
    
    Total
    
    $
    110,848
    
    
    $
    49,541
    
    
    $
    47,888
    
    
    $
    9,576
    
    
    $
    3,843
 The following table presents our contractual obligations as of September
30, 2004, and reflects the effect of the amounts borrowed under the August 2004
Credit Facility for the repayment of certain short-term amounts due under the
Japan Credit Facilities and the financing of the purchase of our headquarters
facility, revised amounts due for operating leases, and revised amounts due
under purchase obligations for in-store equipment. Payments Due by PeriodSept 30,
    
    
    
    
    
    Between
    
    Between2004
    
    Before
    
    April 1, 2005
    
    April 1, 2007
    
    AfterTotal
    
    March 31, 2005
    
    and March 31, 2007
    
    and March 31, 2009
    
    March 31, 2009Short-term borrowings
    
    $
    2,863
    
    
    $
    2,863
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    
    67,130
    
    
    
    606
    
    
    
    1,817
    
    
    
    1,817
    
    
    
    62,890Postretirement medical
benefit costs
    
    
    1,270
    
    
    
    89
    
    
    
    216
    
    
    
    258
    
    
    
    707Operating leases
    
    
    19,155
    
    
    
    2,374
    
    
    
    8,189
    
    
    
    6,078
    
    
    
    2,514CHR tender offer
    
    
    3,497
    
    
    
    3,497
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations for
in-store equipment
    
    
    14,694
    
    
    
    2,383
    
    
    
    9,531
    
    
    
    2,780
    
    
    
    Total
    
    $
    108,609
    
    
    $
    11,812
    
    
    $
    19,753
    
    
    $
    10,933
    
    
    $
    66,111
 28




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On September 1, 2004, the Company announced that the Board of Directors
declared an annual cash dividend to common stockholders of $0.30 per share. The
dividend liability was funded on September 30, 2004 for payment to stockholders
on October 1, 2004, and resulted in a use of cash of approximately $15.6
million. On September 15, 2004, the Company notified holders of common stock and
options to purchase common stock of Catalina Health Resource, (CHR), a
subsidiary in which the Company owns approximately 95% of the outstanding
shares, that it will make a tender offer to purchase the shares of CHR not held
by the Company. The tender
offer period will begin on January 3, 2005 and close on March 31, 2005.
Payment for shares tendered under the offer will be made on or before April 15,
2005. Generally, CHR stockholders that have owned their shares for a period of
at least six months and one day prior to the day the shares are purchased by
the Company are eligible to tender their shares under this offer. The Company
has determined that it will pay $12.50 per share for those shares tendered in
accordance with the terms of the offer. There were 279,786 shares of CHR
outstanding as of September 30, 2004. Accordingly, the Company estimates a
maximum cash outflow of $3.5 million will be paid to CHR stockholders during
the period from January 3, 2005 through April 15, 2005. Also on September 1, 2004, the Company announced that its Board of
Directors authorized $100.0 million of funds to be available for the repurchase
of the Companys common stock. This authorization replaces the $44.0 million
unused portion of the previous $100.0 million common stock repurchase program
authorized by the Board of Directors in July 2002. The Company last purchased
shares in June 2003. Subsequent to June 2003, the Company was precluded from
stock repurchases under the terms of its Prior Facility. The Prior Facility
was replaced on August 27, 2004, and the Credit Facility no longer restricts
the Company from repurchases of its common stock. The Company intends to use
cash flows from operations and funds available under the August 2004 Credit
Facility to finance repurchases of its common stock. There were no repurchases
of Company common stock during the six months ended September 30, 2004. 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
August 2004 Credit Facility. Business Acquisition Payments.In May 2003, the Company, through one of
its wholly owned subsidiaries, exercised the call option provided in the Japan
Billboard purchase agreement to acquire the remaining 49% ownership of Japan
Billboard from the minority interest holders. The exercise of this call option
resulted in a net cash payment of $22.9 million in July 2003, based on foreign
exchange rates at the payment date. 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 29




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states supreme court and, in May 2004,
the states 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. In
October 2004, the states supreme court affirmed the decision of the tax
tribunal. As a result, the Company will reverse a liability related
to the sales tax assessment of approximately
$4.4 million, which is the amount recognized in prior periods, into
income during the third quarter of fiscal year 2005. 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. 30




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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, 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 fiscal
quarter to which this report relates, 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. Compliance with Section 404 of the Sarbanes-Oxley Act of 2002.We are
evaluating our internal controls systems in order to allow management to report
on the effectiveness of our internal control over financial reporting and our
registered independent public accounting firm to attest to such report, as
required by Section 404 of the Sarbanes-Oxley Act. We are performing the
system and process evaluation and testing (and implementing any necessary
remediation) required in an effort to comply with the management report and
public accounting firm attestation requirements and continue to incur
additional expenses and devote significant management time towards completing
actions required for managements evaluation. The evaluation and attestation
processes required by Section 404 are new and neither public companies nor
public accounting firms have significant experience in testing or complying
with these requirements. While we have developed and are implementing plans to fully implement the
requirements relating to internal controls and all other aspects of Section 404
in a timely fashion, we cannot be certain as to the timing of completion of our
evaluation, testing and remediation actions or the impact of the same on our
operations since, like 31




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other public companies, we and our registered
independent public accounting firm are undergoing the process for the first
time in a regulatory environment where the standards to assess adequacy of
compliance are under development. We cannot
assure you that there may not be significant deficiencies or material
weaknesses that would be required to be reported as a result of the process. We have also been advised by our registered independent public accounting
firm that if management is unable to timely complete actions required for
managements evaluation according to reasonable timetable, it may not be able
to complete its assessment of our internal control over financial reporting and
attest to managements report, which development may subject us to regulatory
investigations and sanctions and lead to a loss of confidence is our internal
control over financial reporting. Any such action could adversely affect our
financial results and the market price of our common stock. 
 Part II - Other Information 
 Item 1. Legal Proceedings In May 2002, the Company was sued by Expanse Networks, Inc. (Expanse)
for patent infringement in the United States District Court for the Eastern
District of Pennsylvania. Expanse alleged that the Company infringed two
Expanse patents directed to certain specific computer implemented methods for
mathematically processing consumer purchase history data to generate and then
use a consumer profile. This matter was settled in October 2004 with no
material adverse effect on the financial condition or results of operations of
the Company. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. (c) Issuer Repurchases of Equity Securities. The following table sets forth information relating to the Companys
purchase of its equity securities during the three months ended September
30, 2004: (a)
    
    (b)
    
    (c)
    
    (d)Maximum Number (orTotal Number of
    
    approximate DollarShares (or Units)
    
    Value) of SharesPurchased 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 2005July 2004
    
    
    
    
    
    NA
    
    NA
    
    $
    43,993August 2004
    
    
    
    
    
    NA
    
    NA
    
    $
    43,993September 2004
    
    
    
    
    
    NA
    
    NA
    
    $
    100,000
 (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. On September 1, 2004, the Company announced
that its Board of Directors authorized $100.0 million of funds to be available
for the repurchase of the Companys common stock. This authorization replaces
the $44.0 million unused portion of the previous $100.0 million common stock
repurchase program authorized by the Board of Directors in July 2002. The
Company last purchased shares in June 2003. Subsequent to June 2003, the
Company was precluded from stock repurchases under the terms of its previous
bank credit facility until that facility was replaced on August 27, 2004 with
the August 2004 Credit Facility, after which time the Company was no longer
restricted from repurchases of its common stock pursuant to the terms of the
Credit Facility. The Company intends to use cash flows from operations and
funds available under the August 2004 Credit Facility to finance repurchases of
its common stock. There were no repurchases of Company common stock during the
six months ended September 30, 2004. 32




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders (a) The Company held its annual meeting of shareholders on August
19, 2004. (b) The following directors were elected at the annual meeting: Peter T. Tattle
Edward S. (Ned) Dunn, Jr.
Eugene P. Beard The name of each other director whose term of office as a director
continued after the meeting is as follows: Frederick W. Beinecke
L. Dick Buell
Evelyn V. Follit (c) Shareholders voted at the annual meeting, either in person or by
proxy, on the five proposals presented in the Companys definitive proxy
statement. The results of the votes follow: Proposal One:Election of two Class I and one Class III directors - Nominee
    
    Class
    
    Votes For
    
    Votes WithheldPeter T. Tattle
    
    I
    
    
    47,893,839
    
    
    
    541,275Edward S. (Ned) Dunn, Jr.
    
    I
    
    
    47,792,540
    
    
    
    642,574Eugene P. Beard
    
    III
    
    
    47,916,433
    
    
    
    518,681
 Proposal Two:Approve an amendment to the Companys 1999 Stock Award Plan
to provide for the award of restricted stock and performance units to
employees, directors and consultants of the Company - For
    
    Against
    
    Abstain
    
    Broker Non-votes39,402,846
    
    2,306,707
    
    726,710
    
    5,998,851
 Proposal Three:Approve an amendment to the 1999 Stock Award Plan, which
will permit the Company to grant options to the employees of non-corporate
subsidiaries of the Company in addition to corporate subsidiaries - For
    
    Against
    
    Abstain
    
    Broker Non-votes40,345,687
    
    1,781,463
    
    309,113
    
    5,998,851
 Proposal Four:Approve the adoption of the Companys 2004 Employee
Payroll Deduction Purchase Plan - For
    
    Against
    
    Abstain
    
    Broker Non-votes41,938,599
    
    197,582
    
    300,082
    
    5,998,851
 Proposal Five:Ratify and approve the Companys independent registered
certified public accounting firm, PricewaterhouseCoopers LLP, for fiscal year
2005 - For
    
    Against
    
    Abstain
    
    Broker Non-votes48,352,179
    
    51,536
    
    31,399
    
    
 
 Item 6. Exhibits (a) Exhibits. See Exhibit index on page 35 of this Quarterly Report on
Form 10-Q 33




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##### 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. November 9, 2004
    
    CATALINA MARKETING CORPORATION(Registrant)/s/ Christopher W. WolfChristopher W. Wolf
Executive Vice President and Chief Financial Officer
(Authorized officer of Registrant and principal
financial officer)
 34




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##### Table of Contents



ExhibitNo.
    
    Description of Exhibit10.1
    
    Credit Agreement with Bank One10.2
    
    Property Purchase and Termination Agreement10.3
    
    The Amended and Restated 1999 Stock Award Plan. Incorporated by
reference to Appendix I to our Notice of Annual Meeting filed on
Schedule 14a with the Securities and Exchange Commission on July 23,
2004.10.4
    
    The 2004 Employee Payroll Deduction Stock Purchase Plan.
Incorporated by reference to Appendix II to our Notice of Annual
Meeting filed on Schedule 14a with the Securities and Exchange
Commission on July 23, 2004.31.1
    
    Certification of Chief Executive
Officer Pursuant to Exchange Act Rules 13a-14(a)
and 15d-14(a), 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-14(a)
and 15d-14(a), 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
 35