##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549
 FORM 10-Q  (Mark One)þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended September 30, 2003 oro
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the Transition Period from ______________ to ______________Commission File Number: 1-11008
   CATALINA MARKETING CORPORATION  Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
    
    33-0499007
(IRS Employer
Identification Number)200 Carillon Parkway, St. Petersburg, Florida
(Address of Principal Executive Offices)
    
    33716-2325
(Zip Code)
 (727) 579-5000
(Registrants Telephone Number, Including Area Code) Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes  o   No  þ Indicate by checkmark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes  þ   No  o At August 31, 2004, the Registrant had outstanding 52,141,234 shares of
Common Stock.




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##### 



CATALINA MARKETING CORPORATION
INDEX TABLE OF CONTENTS
 PagePart I.
    
    Financial InformationItem 1.
    
    Financial StatementsUnaudited Condensed Consolidated Statements of Operation
for the three and six months ended September 30, 2003 and 2002
    
    
    4Unaudited Condensed Consolidated Balance Sheets
at September 30, 2003 and March 31, 2003
    
    
    5Unaudited Condensed Consolidated Statement of Changes in
Stockholders Equity and Comprehensive Loss for the six months ended
September 30, 2003
    
    
    6Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended September 30, 2003 and 2002
    
    
    7Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    8Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    17Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    27Item 4.
    
    Controls and Procedures
    
    
    27Part II.
    
    Other InformationItem 5.
    
    Other Information
    
    
    30Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    30Signatures
    
    
    31Exhibit Index
    
    
    32
  Section 302 Certification of CEOSection 302 Certification of CFOSection 906 Certification of CEOSection 906 Certification of CFO 2




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##### 



Part I.   Financial Information SPECIAL NOTE References herein to Catalina Marketing, the Company, we, us or
our refer to Catalina Marketing Corporation and its subsidiaries unless the
context specifically states or implies otherwise. The Company was unable to
file this report on a timely basis. See Note 1 for additional discussion. For
the most part, we have included in this report information which would have
been required, and related to the periods applicable, had we been able to file
this report on a timely basis. Where specified, however, some information has
been presented as of or with respect to a more recent date, in order to provide
more useful information. For example, see Item 4, Part I (Controls and
Procedures). 3




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##### 



Item 1.   Financial Statements 
 CATALINA MARKETING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATION
(in thousands, except per share data) Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002(As Restated)
    
    
    
    
    
    (As Restated)Revenues
    
    $
    122,079
    
    
    $
    113,510
    
    
    $
    224,291
    
    
    $
    215,843Costs and expenses:Direct operating expenses
    
    
    46,760
    
    
    
    50,278
    
    
    
    93,565
    
    
    
    101,541Selling, general and administrative
    
    
    33,876
    
    
    
    30,827
    
    
    
    69,495
    
    
    
    59,014Impairment charge
    
    
    28,039
    
    
    
    
    
    
    
    28,039
    
    
    
    Depreciation and amortization
    
    
    11,630
    
    
    
    9,920
    
    
    
    23,434
    
    
    
    20,748Total costs and expenses
    
    
    120,305
    
    
    
    91,025
    
    
    
    214,533
    
    
    
    181,303Income from operations
    
    
    1,774
    
    
    
    22,485
    
    
    
    9,758
    
    
    
    34,540Interest expense
    
    
    (662
    )
    
    
    (581
    )
    
    
    (1,191
    )
    
    
    (1,057
    )Other income (expenses), net
    
    
    393
    
    
    
    (1,220
    )
    
    
    1,120
    
    
    
    (1,742
    )Income before income taxes
    
    
    1,505
    
    
    
    20,684
    
    
    
    9,687
    
    
    
    31,741Provision for income taxes
    
    
    12,616
    
    
    
    7,915
    
    
    
    15,765
    
    
    
    12,143Income (loss) before cumulative
effect of accounting change
    
    
    (11,111
    )
    
    
    12,769
    
    
    
    (6,078
    )
    
    
    19,598Cumulative effect of accounting
change, net of $0.6 million tax
benefit
    
    
    
    
    
    
    
    
    
    
    (770
    )
    
    
    Net income (loss)
    
    $
    (11,111
    )
    
    $
    12,769
    
    
    $
    (6,848
    )
    
    $
    19,598Diluted:Net income (loss) per common share
before cumulative effect of
accounting change
    
    $
    (0.21
    )
    
    $
    0.23
    
    
    $
    (0.11
    )
    
    $
    0.35Cumulative effect of accounting
change
    
    
    
    
    
    
    
    
    
    
    (0.02
    )
    
    
    Net income (loss) per common share
    
    $
    (0.21
    )
    
    $
    0.23
    
    
    $
    (0.13
    )
    
    $
    0.35Weighted average common shares
outstanding
    
    
    52,217
    
    
    
    55,543
    
    
    
    52,375
    
    
    
    55,967Basic:Net income (loss) per common share
before cumulative effect of
accounting change
    
    $
    (0.21
    )
    
    $
    0.23
    
    
    $
    (0.11
    )
    
    $
    0.36Cumulative effect of accounting
change
    
    
    
    
    
    
    
    
    
    
    (0.02
    )
    
    
    Net income (loss) per common share
    
    $
    (0.21
    )
    
    $
    0.23
    
    
    $
    (0.13
    )
    
    $
    0.36Weighted average common shares
outstanding
    
    
    52,217
    
    
    
    54,876
    
    
    
    52,375
    
    
    
    55,141
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4




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CATALINA MARKETING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data) September 30,
    
    March 31,2003
    
    2003ASSETSCurrent Assets:Cash and cash equivalents
    
    $
    9,165
    
    
    $
    1,715Accounts receivable, net
    
    
    63,214
    
    
    
    74,849Inventory
    
    
    4,487
    
    
    
    4,921Deferred tax asset
    
    
    11,636
    
    
    
    14,967Prepaid expenses and other current assets
    
    
    17,841
    
    
    
    15,986Total current assets
    
    
    106,343
    
    
    
    112,438Property and Equipment:Property and equipment
    
    
    380,921
    
    
    
    372,036Less  accumulated depreciation and amortization
    
    
    (237,591
    )
    
    
    (223,293
    )Property and equipment, net
    
    
    143,330
    
    
    
    148,743Patents, net
    
    
    14,106
    
    
    
    14,965Goodwill
    
    
    137,298
    
    
    
    142,416Other assets
    
    
    2,678
    
    
    
    3,859Total Assets
    
    $
    403,755
    
    
    $
    422,421LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable
    
    $
    13,213
    
    
    $
    18,328Accrued expenses
    
    
    51,998
    
    
    
    56,405Income taxes payable
    
    
    7,217
    
    
    
    7,868Deferred revenue
    
    
    43,194
    
    
    
    36,295Short-term borrowings
    
    
    24,772
    
    
    
    18,297Total current liabilities
    
    
    140,394
    
    
    
    137,193Long-term deferred tax liability
    
    
    12,530
    
    
    
    15,436Long-term debt
    
    
    48,739
    
    
    
    49,926Other long-term liabilities
    
    
    4,066
    
    
    
    2,957Total liabilities
    
    
    205,729
    
    
    
    205,512Commitments and contingenciesMinority interest
    
    
    914
    
    
    
    914Stockholders Equity:Preferred stock; $0.01 par value; 5,000,000
authorized shares; none issued and outstanding
    
    
    
    
    
    
    Common stock; $0.01 par value; 150,000,000 authorized
shares and 52,135,141 and 52,755,192 shares issued and
outstanding at
September 30, 2003 and March 31, 2003, respectively
    
    
    521
    
    
    
    528Paid-in capital
    
    
    2,128
    
    
    
    1,526Accumulated other comprehensive income
    
    
    70
    
    
    
    289Retained earnings
    
    
    194,393
    
    
    
    213,652Total stockholders equity
    
    
    197,112
    
    
    
    215,995Total liabilities and stockholders equity
    
    $
    403,755
    
    
    $
    422,421
 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 LOSS
(in thousands) Par
    
    
    
    
    
    AccumulatedNumber
    
    Value of
    
    
    
    
    
    Other
    
    
    
    
    
    TotalComprehensive
    
    of
    
    Common
    
    Paid-in
    
    Comprehensive
    
    Retained
    
    Stockholders'Loss
    
    Shares
    
    Stock
    
    Capital
    
    Income
    
    Earnings
    
    EquityBALANCE AT MARCH 31, 2003
    
    
    
    
    
    
    52,755
    
    
    $
    528
    
    
    $
    1,526
    
    
    $
    289
    
    
    $
    213,652
    
    
    $
    215,995Proceeds from issuance of common stock
    
    
    
    
    
    
    89
    
    
    
    1
    
    
    
    1,430
    
    
    
    
    
    
    
    
    
    
    
    1,431Decrease in investment in subsidiary,
net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (183
    )
    
    
    
    
    
    
    
    
    
    
    (183
    )Tax benefit
from exercise of non-qualified stock options and disqualified
dispositions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    271
    
    
    
    
    
    
    
    
    
    
    
    271Repurchase, retirement and
cancellation of common stock
    
    
    
    
    
    
    (749
    )
    
    
    (8
    )
    
    
    (888
    )
    
    
    
    
    
    
    (12,411
    )
    
    
    (13,307
    )Deferred compensation plan common
stock units and Directors common
stock grants
    
    
    
    
    
    
    40
    
    
    
    
    
    
    
    (28
    )
    
    
    
    
    
    
    
    
    
    
    (28
    )Net loss
    
    $
    (6,848
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,848
    )
    
    
    (6,848
    )Foreign currency translation adjustment
    
    
    (219
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (219
    )
    
    
    
    
    
    
    (219
    )Comprehensive loss
    
    $
    (7,067
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BALANCE AT SEPTEMBER 30, 2003
    
    
    
    
    
    
    52,135
    
    
    $
    521
    
    
    $
    2,128
    
    
    $
    70
    
    
    $
    194,393
    
    
    $
    197,112
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6




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CATALINA MARKETING CORPORATION
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands) Six Months EndedSeptember 30,2003
    
    2002(As Restated)Net cash provided by operating activities:
    
    $
    54,441
    
    
    $
    52,190Cash flows from investing activities:Capital expenditures
    
    
    (16,125
    )
    
    
    (12,915
    )Business acquisition payments
    
    
    (22,921
    )
    
    
    (25,430
    )Net cash used in investing activities
    
    
    (39,046
    )
    
    
    (38,345
    )Cash flows from financing activities:Proceeds
from (payments on) the Prior Facility, net
    
    
    (1,000
    )
    
    
    3,000Proceeds from Japan borrowings
    
    
    8,383
    
    
    
    16,447Principal payments on Japan borrowings
    
    
    (2,140
    )
    
    
    (16,285
    )Repurchases of Company common stock
    
    
    (13,307
    )
    
    
    (29,273
    )Proceeds from issuance of common and subsidiary stock
    
    
    1,477
    
    
    
    4,352Financing
fees paid on the Prior Facility
    
    
    (600
    )
    
    
    Other
    
    
    
    
    
    
    (316
    )Net cash used in financing activities
    
    
    (7,187
    )
    
    
    (22,075
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (758
    )
    
    
    (517
    )Net change in cash and cash equivalents
    
    
    7,450
    
    
    
    (8,747
    )Cash and cash equivalents at end of prior period
    
    
    1,715
    
    
    
    13,656Cash and cash equivalents at end of current period
    
    $
    9,165
    
    
    $
    4,909
 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7




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CATALINA MARKETING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) Note 1.   Description of the Business and Basis for Presentation Description of the Business.Catalina Marketing Corporation, a Delaware
corporation, and its subsidiaries (the Company), provides behavior-based
communications, developed and distributed for consumer packaged goods
manufacturers, pharmaceutical manufacturers and marketers, and retailers. The
Companys primary business initially was developed to provide consumers with
in-store coupons delivered based upon purchase behavior and distributed
primarily in supermarkets. Today, the Company offers behavior-based,
targeted-marketing services and programs globally through a variety of
distribution channels. These marketing solutions, including discount coupons,
loyalty marketing programs, pharmacist and patient education newsletters,
compliance mailings, pharmacy counter mats, attitudinal research programs,
sampling, advertising, in-store instant-win games and other consumer
communications, are delivered directly to shoppers by various means. By
specifying how a particular consumer transaction will trigger a promotion to
print, manufacturers and retailers can deliver customized incentives and
messages to only the consumers they wish to reach. The Company tracks actual
purchase behavior and primarily uses Universal Product Code-based scanner
technology to target consumers at the checkout counter and National Drug Code
information to trigger delivery of a customized communication to consumers
during pharmacy prescription checkout transactions. The Company is organized and managed by segments which include the
following operations: Manufacturer Services, Catalina Health Resource (CHR),
the international operations, which includes manufacturer services similar to
those services provided in the United States (International), Retail
Services, Japan Billboard, a billboard and outdoor media business operated in
Japan (Japan Billboard), Direct Marketing Services (DMS) and Catalina
Marketing Research Solutions (CMRS). The domestic operations of the Company
include Manufacturer Services, CHR, Retail Services, DMS and CMRS. The
international operations of the Company are organized and managed by country
and include International and Japan Billboard. In November 2003, the Company
announced its intent to divest of DMS, CMRS and Japan Billboard which were
deemed not to be strategically aligned with the Companys current core
competencies. On August 31, 2004, the Company sold Japan Billboard. See Note
11, Subsequent Events.See further discussion regarding the intended
divestitures in the Companys Annual Report on Form 10-K for the fiscal year
ended March 31, 2004, filed with the United States Securities and Exchange
Commission (SEC) on July 15, 2004. Manufacturer Services serves the needs of domestic consumer product
manufacturers, primarily within the consumer packaged goods industry. Using the
Catalina Marketing Network®, this operating segment specializes in
behavior-based marketing communications that are delivered at the
point-of-sale. The primary service line of the Catalina Marketing Network® is
the in-store delivery of promotions at the checkout lane of a retailer,
typically a supermarket. Catalina Marketing links its proprietary software,
computers, central databases and thermal printers with a retailers
point-of-sale controllers and scanners. The network prints customized
promotions at the point-of-sale based on product Universal Product Codes or
other scanned information. The printed promotions are handed to consumers by
the cashier at the end of the shopping transaction. CHRs services allow pharmaceutical and consumer packaged goods
manufacturers, as well as retail pharmacies, to provide consumers with
condition-specific health information and direct-to-patient communications.
CHRs primary product offerings use an in-store, prescription-based targeting
technology to provide targeted, direct-to-patient communications on behalf of
the Companys clients. These communication services include messages and
educational information to healthcare patients at the pharmacy level throughout
the Health Resource Network. The Health Resource Network is a proprietary
software system with built-in targeted response capabilities. Communications
are primarily delivered to patients based on prescription medications purchased
which are identified by a National Drug Code symbol. Clients are able to use
these communications to provide information on a wide variety of products such
as over-the-counter medicines, prescription medication and other healthcare
remedies and merchandise. Communications provide clinically appropriate
information while maintaining patient privacy. International operations include in-store electronic targeted marketing
services for consumers in France, Italy, the United Kingdom, Germany and Japan.
The Catalina Marketing Network® operates internationally in a similar manner as
the domestic business. International offers a full range of targeted marketing
solutions to consumer packaged goods manufacturers and enjoys relationships
with major supermarket, hypermarket and other retailers. During the second
quarter of fiscal year 2004, the Company expanded its behavior-based targeted
marketing capabilities in Europe by launching a pilot test in Germany. 8




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Japan Billboard is a wholly owned subsidiary of the Company that operates
a billboard and outdoor media business in Japan. Japan Billboard primarily owns
and rents billboards which are displayed on rooftops or faces of buildings in
locations suitable for advertising. On August 31, 2004, the Company sold the
stock of Japan Billboard. See Note 11, Subsequent Events. DMS provides services designed to reach consumers in their homes. DMS
analyzes frequent shopper databases and identifies consumer lifestyle changes
to develop strategic programs that meet multiple objectives for both brand
manufacturers and retailers. These targeted direct mail programs are based on
actual purchase behavior or consumer lifestyle changes. DMS provides services
which enable manufacturers and retailers to influence the purchase patterns of
targeted customers based on their actual purchase behavior and history. Clients
use these services to support new product launches and line extensions, build
loyalty to a brand and deliver timely messages to consumers. The Companys Other segment includes Retail Services and CMRS. Retail
Services provides innovative marketing solutions to retail chains nationwide
and supports and maintains the Catalina Marketing Network® used by Manufacturer
Services. CMRS provides a wide range of traditional marketing research
services, including tracking studies and customer satisfaction surveys, as well
as proprietary research products that take advantage of behavioral data
gathered throughout the Catalina Marketing Network®. Previously Filed Financial Statements for Fiscal Years 2003, 2002 and
2001.We filed our Annual Report on Form 10-K for the fiscal year ended March
31, 2003 on May 17, 2004. In addition to our consolidated financial statements
for the fiscal year ended March 31, 2003, the filing included audited
restatements of our financial statements for the fiscal years ended March 31,
2002 and 2001 and unaudited restatements of information for the quarters ended
June 30, 2002, September 30, 2002 and December 31, 2002. Please refer to such
filing for additional information regarding the background of such restatements
and the content and effect of the changes included in the restated financial
statements. See Note 4 included herein. Delay in Filing Our Annual Report and Quarterly Financial Results for the
Fiscal Year Ended March 31, 2004.In June 2004, we announced our intent to
delay the filing of our Annual Report on Form 10-K for the fiscal year ended
March 31, 2004. In addition, the Company was unable to file its Quarterly
Report on Form 10-Q for the quarters ended June 30, 2003, September 30, 2003
and December 31, 2003, in a timely manner. As required, Catalina filed
notifications of late filing with the SEC under Rule 12b-25 for these filings.
The Company filed its Annual Report on Form 10-K for fiscal year 2004 on July
15, 2004. This filing was delayed because of the significant time and
resources required to file the Companys Annual Report on Form 10-K for fiscal
year 2003, which was filed on May 17, 2004. The Company is filing this Quarterly Report on Form 10-Q for the quarter
ended September 30, 2003 and expects to file a Quarterly Report on Form 10-Q
for the quarter ended December 31, 2003 soon thereafter. The Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003 was filed on August 16, 2004.
This Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 is
delinquent and is being filed after the Companys Annual Report on Form 10-K
for its fiscal year ended March 31, 2004. This filing should not be confused
with any report on Form 10-Q for a quarterly period of the Companys fiscal
year ending March 31, 2005. The unaudited condensed consolidated financial
statements included herein should be read in conjunction with the consolidated
financial statements and notes thereto included in the Companys Annual Report
on Form 10-K for the fiscal year ended March 31, 2003, and the Companys Annual
Report on Form 10-K for the fiscal year ended March 31, 2004. In this Form 10-Q for the quarterly period ended September 30, 2003, words
such as today, current or currently, or phrases such as as of the date
hereof or as of the date of this report, refer to the date this Quarterly
Report on Form 10-Q is filed with the SEC. Basis of Presentation.These financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
of America for interim financial information and the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes as required by accounting principles generally accepted
in the United States. 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, 2003, the results of its operations for the three- and
six-month periods ended September 30, 2003 and 2002, its cash flows for the six
months ended September 30, 2003 and 2002, and the results of its changes in
stockholders equity for the six-month period ended September 30, 2003 have
been included. 9




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##### 



The balance sheet at March 31, 2003 has been derived from the audited
financial statements at that date but does not include all of the information
or notes required by accounting principles generally accepted in the United
States for complete financial statements. Operating results for the three- and
six-month periods ended September 30, 2003 are not necessarily indicative of
the results that were reported for the remainder of the year ended March 31,
2004. The unaudited condensed consolidated financial statements include the
accounts of the Company and its wholly owned and majority owned subsidiaries.
The accounts of the wholly and majority owned foreign subsidiaries are included
on a three-month lag, to facilitate the timing of the Companys closing
process. All significant intercompany transactions are eliminated in
consolidation. In addition, the unaudited condensed consolidated financial
statements include the accounts of a variable interest entity from which the
Company leased its corporate headquarters facility in St. Petersburg, Florida.
The Company has determined that, during the periods covered in this Form 10-Q,
it was the primary beneficiary of this entity and, thus, has included the
accounts of this entity in its unaudited condensed consolidated financial
statements pursuant to the requirements of the Financial Accounting Standards
Boards (FASB) Interpretation (FIN) No. 46 (revised 2003), Consolidation
of Variable Interest EntitiesAn Interpretation of ARB
No. 51. On August 25, 2004, the Companys relationship with this entity was terminated
and, in connection with this termination, the Company purchased the
headquarters facility. See Note 11, Subsequent Events. Note 2.   Stock Based Compensation The Company applies the recognition and measurement principles of APB
Opinion No. 25 and related interpretations in accounting for its stock-based
employee compensation plans. Additionally, the Company has adopted the
disclosure provisions of SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, which amends SFAS No. 123, Accounting
for Stock-Based Compensation. SFAS No. 148 allows for the continued use of
the recognition and measurement principles of APB Opinion No. 25 and related
interpretations in accounting for those plans. The following table illustrates
the effect on net income and earnings per share if the Company had applied the
fair value recognition provisions to stock-based employee compensation. Such
disclosure is not necessarily indicative of the fair value of stock options
that could be granted by the Company in future fiscal years or of the value of
all options currently outstanding. The pro forma results were calculated with
the use of the Black-Scholes option-pricing model. Had compensation expense
for these plans been recognized in accordance with SFAS No. 123, the Companys
net income and earnings per share would have been reduced to the following pro
forma amounts (in thousands, except per share data): Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002(As Restated)
    
    
    
    
    
    (As Restated)Net income (loss):As reported
    
    $
    (11,111
    )
    
    $
    12,769
    
    
    $
    (6,848
    )
    
    $
    19,598Add stock-based employee compensation expense
included in reported net income (loss), net of tax
    
    
    75
    
    
    
    73
    
    
    
    112
    
    
    
    210Deduct total stock-based employee compensation
expense determined under fair value based method
for all awards, net of tax
    
    
    (3,013
    )
    
    
    (5,740
    )
    
    
    (4,821
    )
    
    
    (9,701
    )Pro forma net income (loss)
    
    $
    (14,049
    )
    
    $
    7,102
    
    
    $
    (11,557
    )
    
    $
    10,107Diluted EPS:As reported
    
    $
    (0.21
    )
    
    $
    0.23
    
    
    $
    (0.13
    )
    
    $
    0.35Pro forma
    
    $
    (0.27
    )
    
    $
    0.13
    
    
    $
    (0.22
    )
    
    $
    0.18Basic EPS:As reported
    
    $
    (0.21
    )
    
    $
    0.23
    
    
    $
    (0.13
    )
    
    $
    0.36Pro forma
    
    $
    (0.27
    )
    
    $
    0.13
    
    
    $
    (0.22
    )
    
    $
    0.18Purchase discount offered under the purchase plan
    
    $
    
    
    
    $
    
    
    
    $
    387
    
    
    $
    363
 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 have been 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. 10




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##### 



Note 3.   Accounting Standards Adopted During the Six Months Ended September 30, 2003 SFAS No. 143. On April 1, 2003, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 143, Accounting for Asset Retirement
Obligations, which requires the recognition of the fair value of obligations
associated with the retirement of tangible long-lived assets when there is a
legal obligation to incur such costs. Upon initial recognition of a liability,
the cost is capitalized as part of the related asset and depreciated over the
corresponding assets useful life. Upon adoption, the Company recorded a net increase in property and
equipment of $0.7 million and recognized an asset retirement obligation of $2.1
million for the six months ended September 30, 2003. This resulted in the
recognition of a non-cash charge of $0.8 million, net of an income tax benefit
of $0.6 million, which is reported as a cumulative effect of an accounting
change in the accompanying unaudited condensed consolidated statements of
income. The effect of the adoption of SFAS No. 143 is associated with Japan
Billboards contractual obligation to remove certain billboards upon
termination or cancellation of the related financing agreement. If SFAS No. 143 had been adopted on April 1, 2001, the liabilities
recorded on the Companys consolidated balance sheets would have been $2.0
million, $1.8 million and $2.0 million higher as of April 1, 2001, March 31,
2002 and March 31, 2003, respectively. The pro forma effect of the adoption of
SFAS No. 143 on the results of operations for the three and six months ended
September 30, 2002 was not material. Reconciliation of the beginning and ending amount of asset retirement
obligation is as follows (in thousands): Balance as of April 1, 2003
    
    $
    2,048Liabilities recorded for billboards newly installed
    
    
    39Reduction in liabilities for billboards removed
    
    
    (125
    )Accretion expense
    
    
    21Currency translation adjustment
    
    
    4Balance as of September 30, 2003
    
    $
    1,987
 Note 4.   Restatement of Quarterly Financial Statement Information As discussed in the Companys Annual Report on Form 10-K for fiscal year
2003, in Notes 3 and 18 to the consolidated financial statements included
therein, the Company restated its financial statements for each of the quarters
of fiscal year 2003 to reflect corrections primarily related to the timing of
the recognition of certain revenues and adjustments to costs and expenses. The
following tables compare the restated results of operations of the Company for
the three and six months ended September 30, 2002 with those amounts originally
reported on Form 10-Q for that period (in thousands, except per share
information). 11




---



##### 



Three Months Ended
    
    Six Months EndedSeptember 30, 2002
    
    September 30, 2002As Originally
    
    
    
    
    
    As OriginallyAs Restated
    
    Reported
    
    As Restated
    
    ReportedRevenues
    
    $
    113,510
    
    
    $
    113,163
    
    
    $
    215,843
    
    
    $
    222,234Total cost and expenses
    
    
    91,025
    
    
    
    92,536
    
    
    
    181,303
    
    
    
    184,035Income from operations
    
    
    22,485
    
    
    
    20,627
    
    
    
    34,540
    
    
    
    38,199Interest expense and other, net
    
    
    (1,801
    )
    
    
    (2,222
    )
    
    
    (2,799
    )
    
    
    (2,592
    )Income before income taxes
    
    
    20,684
    
    
    
    18,405
    
    
    
    31,741
    
    
    
    35,607Provision for income taxes
    
    
    7,915
    
    
    
    7,946
    
    
    
    12,143
    
    
    
    14,489Net Income
    
    $
    12,769
    
    
    $
    10,459
    
    
    $
    19,598
    
    
    $
    21,118Diluted earnings per shareNet income per common share
    
    $
    0.23
    
    
    $
    0.19
    
    
    $
    0.35
    
    
    $
    0.38Weighted average common share
outstanding
    
    
    55,543
    
    
    
    55,543
    
    
    
    55,967
    
    
    
    56,309Basic earnings per shareNet income per common share
    
    $
    0.23
    
    
    $
    0.19
    
    
    $
    0.36
    
    
    $
    0.38Weighted average common shares
outstanding
    
    
    54,876
    
    
    
    54,876
    
    
    
    55,141
    
    
    
    55,490
 Six Months EndedSeptember 30, 2002As OriginallyAs Restated
    
    ReportedNet cash provided by operating activities
    
    $
    52,190
    
    
    $
    51,302Net cash used in investing activities
    
    
    (38,345
    )
    
    
    (39,494
    )Net cash used in financing activities
    
    
    (22,075
    )
    
    
    (20,447
    )Effect of exchange rate changes on cash and cash equivalents
    
    
    (517
    )
    
    
    556Net change in cash and cash equivalents
    
    
    (8,747
    )
    
    
    (8,083
    )Cash and cash equivalents at end of prior period
    
    
    13,656
    
    
    
    13,276Cash and cash equivalents at end of current period
    
    $
    4,909
    
    
    $
    5,193
 Note 5.   Net Income Per Common Share The following is a reconciliation of the denominator of basic earnings per
share (EPS) to the denominator of diluted EPS (in thousands): Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2003

    

    2002

    

    2003

    

    2002Basic weighted average common shares
outstanding
    
    
    52,217
    
    
    
    54,876
    
    
    
    52,375
    
    
    
    55,141Dilutive effect of options outstanding
    
    
    
    
    
    
    667
    
    
    
    
    
    
    
    826Diluted weighted average common
shares outstanding
    
    
    52,217
    
    
    
    55,543
    
    
    
    52,375
    
    
    
    55,967
 12




---



##### 



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. Certain options to
purchase shares of common stock were not included in the computation of diluted
EPS for the three and six months ended September 30, 2002 because their
exercise prices were greater than the average market price of common stock
during the relevant periods. 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, 2003
    
    
    6,565,805
    
    
    $
    15.88-$36.82Three months ended September 30, 2002
    
    
    4,487,242
    
    
    $
    30.42-$36.82Six months ended September 30, 2003
    
    
    6,232,305
    
    
    $
    17.10-$36.82Six months ended September 30, 2002
    
    
    4,083,443
    
    
    $
    32.55-$36.82
 Note 6.   Comprehensive Income (Loss) (in thousands): Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002(As Restated)
    
    
    
    
    
    (As Restated)Net income (loss)
    
    $
    (11,111
    )
    
    $
    12,769
    
    
    $
    (6,848
    )
    
    $
    19,598Other comprehensive income (loss), net of tax:Currency translation adjustment
    
    
    323
    
    
    
    (338
    )
    
    
    (219
    )
    
    
    (888
    )Comprehensive income (loss)
    
    $
    (10,788
    )
    
    $
    12,431
    
    
    $
    (7,067
    )
    
    $
    18,710
 Note 7.   Segment Information: The Company is organized and managed by segments, as described in
following table: Segment
    
    Business ActivityManufacturer Services
    
    Provides point-of-sale, printed promotions to
consumers for consumer packaged goods manufacturers.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 Manufacturer Services
in the United Kingdom, France, Italy, Germany and Japan.Japan Billboard
    
    Provides billboards and outdoor media advertising in Japan.Direct Marketing Services
    
    Provides direct mail services to consumers homes
for manufacturing and retail clients.Other
    
    Includes Retail Services, which supports and maintains the
Catalina Marketing Network® and provides marketing
services to retailers, and CMRS, which provides
traditional marketing research services.Corporate
    
    Provides executive and administrative oversight and
centralized functions such as information technology,
client services and store systems support.
 13




---



##### 



Financial information for each of the Companys reportable segments is
presented in the following tables. Amounts for the three and six months ended
September 30, 2002 are as restated (in thousands). Revenues fromExternalCustomers
    
    IntersegmentRevenues
    
    Revenues fromExternalCustomers
    
    IntersegmentRevenuesThree Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,Segments:
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002
    
    2003
    
    2002Manufacturer Services
    
    $
    65,284
    
    
    $
    62,428
    
    
    $
    
    
    
    $
    3
    
    
    $
    118,669
    
    
    $
    116,486
    
    
    $
    
    
    
    $
    43Catalina Health Resource
    
    
    19,148
    
    
    
    16,077
    
    
    
    
    
    
    
    
    
    
    
    33,614
    
    
    
    32,910
    
    
    
    
    
    
    
    International
    
    
    13,633
    
    
    
    6,901
    
    
    
    
    
    
    
    
    
    
    
    22,744
    
    
    
    11,908
    
    
    
    
    
    
    
    Direct Marketing Services
    
    
    10,611
    
    
    
    10,882
    
    
    
    233
    
    
    
    326
    
    
    
    22,268
    
    
    
    20,939
    
    
    
    388
    
    
    
    613Japan Billboard
    
    
    3,559
    
    
    
    4,944
    
    
    
    
    
    
    
    
    
    
    
    7,327
    
    
    
    10,352
    
    
    
    
    
    
    
    Other
    
    
    9,408
    
    
    
    11,913
    
    
    
    89
    
    
    
    73
    
    
    
    19,198
    
    
    
    22,665
    
    
    
    280
    
    
    
    129121,643
    
    
    
    113,145
    
    
    
    322
    
    
    
    402
    
    
    
    223,820
    
    
    
    215,260
    
    
    
    668
    
    
    
    785Reconciliation of segments
to consolidated amount:Corporate
    
    
    436
    
    
    
    365
    
    
    
    663
    
    
    
    357
    
    
    
    471
    
    
    
    583
    
    
    
    1,098
    
    
    
    633Eliminations
    
    
    
    
    
    
    
    
    
    
    (985
    )
    
    
    (759
    )
    
    
    
    
    
    
    
    
    
    
    (1,766
    )
    
    
    (1,418
    )$
    122,079
    
    
    $
    113,510
    
    
    $
    
    
    
    $
    
    
    
    $
    224,291
    
    
    $
    215,843
    
    
    $
    
    
    
    $
    
 Net Income (Loss)Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,Segments:
    
    2003
    
    2002
    
    2003
    
    2002Manufacturer Services
    
    $
    19,563
    
    
    $
    19,292
    
    
    $
    33,428
    
    
    $
    34,599Catalina Health Resource
    
    
    2,133
    
    
    
    (643
    )
    
    
    136
    
    
    
    (1,339
    )International
    
    
    1,083
    
    
    
    (605
    )
    
    
    (63
    )
    
    
    (2,105
    )Direct Marketing Services
    
    
    (102
    )
    
    
    (126
    )
    
    
    (585
    )
    
    
    (1,102
    )Japan Billboard
    
    
    (27,871
    )
    
    
    75
    
    
    
    (29,009
    )
    
    
    323Other
    
    
    (599
    )
    
    
    (1,223
    )
    
    
    (1,353
    )
    
    
    (2,993
    )(5,793
    )
    
    
    16,770
    
    
    
    2,554
    
    
    
    27,383Reconciliation of segments to consolidated amount:Corporate
    
    
    (5,318
    )
    
    
    (4,001
    )
    
    
    (9,402
    )
    
    
    (7,785
    )Consolidated
    
    $
    (11,111
    )
    
    $
    12,769
    
    
    $
    (6,848
    )
    
    $
    19,598
 Total AssetsSegments:
    
    September 30, 2003
    
    March 31, 2003Manufacturer Services
    
    $
    1,178,227
    
    
    $
    1,006,690Catalina Health Resource
    
    
    64,545
    
    
    
    67,786International
    
    
    83,322
    
    
    
    73,643Direct Marketing Services
    
    
    75,361
    
    
    
    72,327Japan Billboard
    
    
    16,516
    
    
    
    22,268Other
    
    
    162,192
    
    
    
    137,422Reconciliation of segments to
consolidated amount:Eliminations
    
    
    (1,960,112
    )
    
    
    (1,618,741
    )Corporate
    
    
    783,704
    
    
    
    661,026$
    403,755
    
    
    $
    422,421
 Note 8.   Stock Repurchases 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. During the
six months ended September 30, 2002, the Company repurchased 923,700 shares of
its common stock for a total of $29.3 million. 14




---



##### 



Note 9.   Impairment Charges and Goodwill 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. Using the purchase method of accounting, this transaction
created additional goodwill of $22.9 million. The Company exercised the call
option to reduce any additional adverse financial impact that would have
resulted from the exercise of a put option available to the minority interest
holders. The purchase price of the 49% minority interest of Japan Billboard was
based on a pre-determined formula of enterprise value based on Japan
Billboards performance during the previous four quarters. Subsequent to the
purchase of the remaining interest of Japan Billboard, the Company determined
that the carrying value of the Japan Billboard business had been impaired
primarily because the factors required to be used in the predetermined purchase
price formula resulted in a purchase price that exceeded the value of the
business in view of the then current market conditions, as described further
below. Furthermore, revenues for Japan Billboard continued to decline due to
the reduction in tobacco advertising spending resulting from the adoption of
the Voluntary Global Tobacco Marketing Initiative (the Initiative) in fiscal
year 2002. Japan Billboards primary client, from which it derived
approximately 75% of its revenues during fiscal year 2003, began to
significantly reduce its advertising expenditures for billboards, as well as
most other media and promotional spending. For a discussion of the Initiative,
see the Companys Annual Report on Form 10-K for the year ended March 31, 2003
as filed with the SEC on May 17, 2004. As a result of these factors, the
carrying value of the Japan Billboard business exceeded the fair value, as
determined using a discounted cash flow model, and, as such, the Company
recognized an impairment charge of $28.0 pursuant to the requirements of SFAS
No. 142 during the three months ended September 30, 2003, which is included in
the accompanying unaudited condensed consolidated statements of operations as
Impairment Charge. On August 31, 2004, the Company sold the stock of Japan Billboard. See Note 11, Subsequent Events. Changes in the carrying amount of goodwill through September 30, 2003,
including the effect of the impairment charge, were as follows: ManufacturerServices
    
    CHR
    
    DMS
    
    International
    
    PMKK
    
    Other
    
    ConsolidatedBalance as of March 31, 2003
    
    $
    20,210
    
    
    $
    36,132
    
    
    $
    30,531
    
    
    $
    24,153
    
    
    $
    7,572
    
    
    $
    23,818
    
    
    $
    142,416Goodwill acquired
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,921
    
    
    
    
    
    
    
    22,921Impairment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (28,039
    )
    
    
    
    
    
    
    (28,039
    )Balance as of September 30, 2003
    
    $
    20,210
    
    
    $
    36,132
    
    
    $
    30,531
    
    
    $
    24,153
    
    
    $
    2,454
    
    
    $
    23,818
    
    
    $
    137,298
 Note 10.    Provision for Income Taxes Consolidated income before income taxes was $1.5 million for the three
months ended September 30, 2003. The provision for income taxes for the same
period was $12.6 million. Consolidated income before income taxes was $9.7
million for the six months ended September 30, 2003, while the provision for
income taxes for the same period was $15.8 million. The disproportion between
income before income taxes and the provision for income taxes for these periods
in fiscal year 2004 was due to the non-deductibility of the impairment charge
of $28.0 million recognized during the three months ended September 30, 2003.
Excluding this impairment charge, the effective tax rate for the three months
ended September 30, 2003 was 42.7% as compared with 38.3% for the three months
ended September 30, 2002. Excluding this impairment charge, the effective tax
rate for the six months ended September 30, 2003 was 41.8% as compared with
38.3% for the six months ended September 30, 2002. The increase in the
effective tax rate was primarily due to an increase in the valuation reserve
against certain foreign deferred tax assets. Note 11.   Subsequent Events The following events occurred subsequent to our most recent filing with
the SEC on August 16, 2004. Such filing was the Companys Form 10-Q for the
quarterly period ended June 30, 2004. New Credit Facility.On August 27, 2004, the Company entered into a
five-year, $125.0 million multi-currency revolving credit facility with lead
arranger J. P. Morgan Securities Inc. Bank of America N.A. serving as the
syndication agent, and Bank One, NA serving as the administrative agent. Under
certain conditions, the Company may increase the revolving credit line up to
$175.0 million. The facility is unsecured and may be used for general
corporate purposes including, but not limited to, refinancing existing debt,
share repurchases and capital expenditures. 15




---



##### 



In conjunction with the execution of the new revolving credit facility,
the Company terminated its previous $30.0 million revolving credit facility
that was due to expire on August 31, 2004, and also terminated the previous 3.5
billion yen Japanese credit facility. An advance of $32.0 million from the new
revolving credit facility was used to repay the balances outstanding under the
Japanese credit facility. Purchase of Corporate Headquarters Facility.On August 25, 2004, the
Company purchased its corporate headquarters facility in St. Petersburg Florida
for $30.5 million in cash and terminated the lease for its headquarters
facility. The Company borrowed $30.0 million from the new revolving credit
facility on September 1, 2004 to replenish the cash used to purchase the
building. Sale of Japan Billboard.On August 31, 2004, the Company sold the stock
of Japan Billboard. The decision to divest this business is part
of the Companys previously announced strategy to focus on proprietary
applications at the point of sale. The Company has not yet determined the gain
or loss on the sale of this business, but does not expect the effect of this
transaction to be material to the operating results or financial position of
the Company. Share Repurchase Authorization.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. The credit facility was replaced on August 27, 2004, and
the Company is no longer restricted from repurchases of its common stock. Cash Dividend.Also 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 will be paid on October 1, 2004 to stockholders
of record as of September 15, 2004. 16




---



##### 



Item 2.   Managements Discussion and Analysis of Financial Condition and Results of Operations The following table includes the revenues, operating profit (loss) and net
income (loss) for each of the Companys significant reportable segments for the
three and six months ended September 30, 2003 compared with the three and six
months ended September 30, 2002. Dollars are in thousands. The accounts of our
wholly and majority owned 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 promotion, seasonal product advertising and annual
budgeting processes affecting when our clients use promotional and
consumer-related expenditure budgets. The seasonality of our international
operations may be different than that of our domestic operations for many
reasons, but the impact of seasonality on our reporting may also be affected by
the difference in fiscal years. These factors, as well as the overall growth in
the number of retailer and manufacturer contracts with the Company, the timing
of growth of the installed store base and access to revenue producing
transactions, may impact our revenues and profits in any particular period. See
Note 7 to the unaudited condensed consolidated financial statements included
herein, and our Annual Report on Form 10-K for the fiscal year ended March 31,
2003 for additional segment information. Results of operations are discussed
for each of our significant operating segments. Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002(As Restated)
    
    
    
    
    
    (As Restated)RevenuesManufacturer Services
    
    $
    65,284
    
    
    $
    62,431
    
    
    $
    118,669
    
    
    $
    116,529CHR
    
    
    19,148
    
    
    
    16,077
    
    
    
    33,614
    
    
    
    32,910International
    
    
    13,633
    
    
    
    6,901
    
    
    
    22,744
    
    
    
    11,908DMS
    
    
    10,844
    
    
    
    11,208
    
    
    
    22,656
    
    
    
    21,552Japan Billboard
    
    
    3,559
    
    
    
    4,944
    
    
    
    7,327
    
    
    
    10,352Other (1)
    
    
    9,497
    
    
    
    11,986
    
    
    
    19,478
    
    
    
    22,794Corporate
    
    
    1,099
    
    
    
    722
    
    
    
    1,569
    
    
    
    1,216Eliminations
    
    
    (985
    )
    
    
    (759
    )
    
    
    (1,766
    )
    
    
    (1,418
    )Total Revenues
    
    $
    122,079
    
    
    $
    113,510
    
    
    $
    224,291
    
    
    $
    215,843
 Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002(As Restated)
    
    
    
    
    
    (As Restated)Operating Profit (Loss)Manufacturer Services
    
    $
    32,880
    
    
    $
    32,422
    
    
    $
    56,182
    
    
    $
    58,146CHR
    
    
    3,585
    
    
    
    (1,080
    )
    
    
    229
    
    
    
    (2,249
    )International
    
    
    2,760
    
    
    
    (418
    )
    
    
    2,306
    
    
    
    (2,171
    )DMS
    
    
    (172
    )
    
    
    (216
    )
    
    
    (985
    )
    
    
    (1,857
    )Japan Billboard
    
    
    (27,814
    )
    
    
    205
    
    
    
    (28,132
    )
    
    
    699Other (1)
    
    
    (1,006
    )
    
    
    (2,054
    )
    
    
    (2,273
    )
    
    
    (5,029
    )Corporate
    
    
    (8,459
    )
    
    
    (6,374
    )
    
    
    (17,569
    )
    
    
    (12,999
    )Total Operating Profit
    
    $
    1,774
    
    
    $
    22,485
    
    
    $
    9,758
    
    
    $
    34,540
 17




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##### 



Three Months Ended
    
    Six Months EndedSeptember 30,
    
    September 30,2003
    
    2002
    
    2003
    
    2002(As Restated)
    
    
    
    
    
    (As Restated)Net Income (Loss)Manufacturer Services
    
    $
    19,563
    
    
    $
    19,292
    
    
    $
    33,428
    
    
    $
    34,599CHR
    
    
    2,133
    
    
    
    (643
    )
    
    
    136
    
    
    
    (1,339
    )International
    
    
    1,083
    
    
    
    (605
    )
    
    
    (63
    )
    
    
    (2,105
    )DMS
    
    
    (102
    )
    
    
    (126
    )
    
    
    (585
    )
    
    
    (1,102
    )Japan Billboard
    
    
    (27,871
    )
    
    
    75
    
    
    
    (29,009
    )
    
    
    323Other (1)
    
    
    (599
    )
    
    
    (1,223
    )
    
    
    (1,353
    )
    
    
    (2,993
    )Corporate
    
    
    (5,318
    )
    
    
    (4,001
    )
    
    
    (9,402
    )
    
    
    (7,785
    )Net Income (Loss)
    
    $
    (11,111
    )
    
    $
    12,769
    
    
    $
    (6,848
    )
    
    $
    19,598
   (1)
    
    Other includes Retail Services and CMRS, which were not significant
operating segments. Three Months Ended September 31, 2003 Compared with the Three Months Ended September 30, 2002 Consolidated Results of Operations Consolidated revenues increased to $122.1 million for the three months
ended September 30, 2003 compared with consolidated revenues of $113.5 million
for the three months ended September 30, 2002. Consolidated operating profit
was $1.8 million for the three months ended September 30, 2003 compared with
operating profit of $22.5 million for the three months ended September 30,
2002. Net loss for the three months ended September 30, 2003 was $11.1 million,
compared with net income of $12.8 million for the three months ended September
30, 2002. Operating results for the three months ended September 30, 2003
include an impairment charge of $28.0 million. See Note 9 to the unaudited
condensed consolidated financial statements for a discussion of the impairment
charge. Excluding the impairment charge, operating profit and net income for
the three months ended September 30, 2003 would have been $29.8 million and
$16.9 million, respectively. See Segment Results below for a discussion of the
comparative period changes. Consolidated income before income taxes was $1.5 million for the three
months ended September 30, 2003. The provision for income taxes for the same
period was $12.6 million. The disproportion between income before income taxes
and the provision for income taxes was due to the non-deductibility of the
impairment charge of $28.0 million recognized during the three months ended
September 30, 2003. Excluding this impairment charge, the effective tax rate
for the three months ended September 30, 2003 was 42.7% as compared with 38.3%
for the three months ended September 30, 2002. The increase in the effective
tax rate was primarily due to an increase in the valuation reserve against
certain foreign deferred tax assets. Segment Results Manufacturer Services Revenues for Manufacturer Services increased by $2.9 million to $65.3
million for the three months ended September 30, 2003, compared with revenues
of $62.4 million for the three months ended September 30, 2002. The increase
was primarily due to an increase in the volume of promotions printed as well as
improved product pricing. Operating profit for Manufacturer Services increased by $0.5 million to
$32.9 million for the three months ended September 30, 2003, compared with
$32.4 million for the three months ended September 30, 2002. The increase in
operating profit was primarily attributable to the increase in revenues,
partially offset by an increase in direct operating costs during the period.
The increase in direct operating costs during the period was primarily due to a
change in the manner in which the Company allocates certain retailer costs
among its segments. Beginning in fiscal year 2004, for the three months ended
September 30, 2003, Manufacturer Services was charged approximately $1.4
million of costs from Retail Services as compensation for intersegment services
provided. Net income for Manufacturer Services increased by $0.3 million to $19.6
million for the three months ended September 30, 2003, compared with a net
income of $19.3 million for the three months ended September 30, 2002. This
increase in net income was primarily due to the factors affecting operating
income, discussed above. 18




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##### 



CHR Revenues for CHR increased $3.0 million to $19.1 million for the three
months ended September 30, 2003, compared with revenues of $16.1 million for
the three months ended September 30, 2002. The increase was primarily due to a
quarter-over-quarter effect of $3.1 million from the recognition of revenues
previously deferred because the necessary revenue recognition criteria had not
been met. Operating profit for CHR increased to $3.6 million for the three months
ended September 30, 2003, compared with an operating loss of $1.1 million for
the three months ended September 30, 2002. The increase in operating profit
was primarily due to (i) the effect of the recognition of revenues
deferred from prior periods,
(ii) a decrease in retailer fees, which was primarily due to the effect of a more favorable contract entered into
with a retailer during the second quarter of fiscal year 2004, and (iii) a
decrease in executive administrative costs, during the three months ended
September 30, 2003. Net income for CHR for the three months ended September 30, 2003 increased
to $2.1 million for the three months ended September 30, 2003, compared with a
net loss of $0.6 million for the three months ended September 30, 2002,
primarily due to the factors affecting operating results, discussed above. International Revenues for International increased by $6.7 million to $13.6 million for
the three months ended September 30, 2003, compared with revenues of $6.9
million for the three months ended September 30, 2002. The increase in
International revenues primarily reflects additional manufacturer and retail
promotions printed in France through a French retailer that was added to the
Catalina Marketing Network during fiscal year 2003. International recognized operating profit of $2.8 million for the three
months ended September 30, 2003, compared with an operating loss of $0.4
million for the three months ended September 30, 2002. The improvement in
operating results was primarily attributable to the increase in revenues, net
of related direct costs, administrative expenses and depreciation expense. Net income for International for the three months ended September 30, 2003
increased to $1.1 million, compared with a net loss of $0.6 million for the
three months ended September 30, 2002, primarily due to the factors affecting
operating results, discussed above. DMS Revenues for DMS decreased $0.4 million to $10.8 million for the three
months ended September 30, 2003, compared with revenues of $11.2 million for
the three months ended September 30, 2002. The decrease in revenues was
primarily attributable to a decline in sales of One-to-One Direct®. One-to-One
Direct®delivered coupons from multiple consumer packaged goods manufacturers,
using data provided by our retailers, to consumers in their home in a single
mailing. The Company suspended the One-to-One Direct®service in December
2003. Although revenues decreased, operating loss and net loss for DMS were
relatively unchanged at $0.2 million and $0.1 million, respectively, for the
three months ended September 30, 2003 and 2002, primarily due to decreased
variable direct costs. Japan Billboard Revenues for Japan Billboard decreased $1.3 million to $3.6 million for
the three months ended September 30, 2003, compared with revenues of $4.9
million for the three months ended September 30, 2002. The decrease in
revenues was the result of the effect of the Initiative, which significantly
limits the manner in which tobacco companies in Japan can market, promote and
advertise their products. For a more detailed description of the Initiative
and its effect on revenues for Japan Billboard, please see Note 9 to the
unaudited condensed consolidated financial statements. Operating loss for Japan Billboard was $27.8 million for the three months
ended September 30, 2003, compared with an operating profit of $0.2 million for
the three months ended September 30, 2002. Net loss for Japan Billboard was
$27.9 million for the three months ended September 30, 2003 compared with net
income of $0.1 million for the three months ended September 30, 2002. The
operating and net losses for Japan Billboard for the three months 19




---



##### 



ended September 30, 2003 include an impairment charge of $28.0 million recognized
during the period. See Note 9 to the unaudited condensed consolidated financial statements. Excluding this
charge, operating results were comparable primarily due to the fact that
decreased revenues were entirely offset by decreased direct costs. On August 31, 2004, the Company sold the stock of Japan Billboard. See
Note 11 to the unaudited condensed consolidated financial statements. Other Segments and Corporate Retail Services and CMRS comprise our Other operating segment. Revenues
for this segment decreased $2.5 million to $9.5 million for the three months
ended September 30, 2003, compared with revenues of $12.0 million for the three
months ended September 30, 2002. Retail Services revenues declined by $2.4
million primarily due to a decrease in loyalty card revenues. On March 31,
2004, the loyalty card business was sold. Operating loss decreased to $1.0 million for the three months ended
September 30, 2003, compared with an operating loss of $2.1 million for the
three months ended September 30, 2002. The decrease in operating loss was
primarily attributable to an intersegment allocation of certain costs from
Retail Services to Manufacturer Services for services provided by Retail
Services. Primarily as a result of the decrease in costs and expenses, net loss for
the Other operating segment decreased to $0.6 million for the three months
ended September 30, 2003, compared with a net loss of $1.2 million for the
three months ended September 30, 2002. The increase in the operating loss for Corporate for the three months
ended September 30, 2003 reflects a decrease in the percent of costs allocated
to operating segments from 79.6% of Corporates operating costs for the three
months ended September 30, 2002 to 72.9% of Corporates operating costs for the
three months ended September 30, 2003. Before allocations, total Corporate
operating costs for the three months ended September 30, 2003 were comparable
with the three months ended September 30, 2002. Foreign Currency Translation and Its Effect on Revenues Consolidated revenues for the three months ended September 30, 2003 were
$122.1 million, which includes $17.2 million in revenues from foreign
operations. The local currencies of the countries in which we maintain foreign
operations are the euro, British pound sterling and Japanese yen. These
currencies strengthened against the United States dollar during the three
months ended September 30, 2003. Accordingly, revenues in United States dollars
for our foreign operations would have been 15.7% lower for the period if
translated using the weighted average currency translation rates for the
comparable period in 2002. Six Months Ended September 30, 2003 Compared with the Six Months Ended September 30, 2002 Consolidated Results of Operations Consolidated revenues increased to $224.3 million for the six months ended
September 30, 2003, compared with consolidated revenues of $215.8 million for
the six months ended September 30, 2002. Consolidated operating profit was
$9.8 million for the six months ended September 30, 2003 compared with
operating profit of $34.5 million for the six months ended September 30, 2002.
Net loss for the six months ended September 30, 2003 was $6.8 million, compared
with net income of $19.6 million for the six months ended September 30, 2002.
Operating results for the six months ended September 30, 2003 includes an
impairment charge of $28.0 million. See Note 9 to the unaudited condensed
consolidated financial statements for a discussion of the impairment charge.
Excluding the impairment charge, operating profit and net income for the six
months ended September 30, 2003 would have been $37.8 million and $21.2
million, respectively. See Segment Results below for a discussion of the
comparative period changes. Consolidated income before income taxes was $9.7 million for the six
months ended September 30, 2003. The provision for income taxes for the same
period was $15.8 million. The disproportion between income before income taxes
and the provision for income taxes was due to the non-deductibility of the
impairment charge of $28.0 million recognized during the period. Excluding
this impairment charge, the effective tax rate for the six months 20




---



##### 



ended September 30, 2003 was 41.8% as compared with 38.3% for the six months ended
September 30, 2002. The increase in the effective tax rate was primarily due to an increase in the valuation
reserve against certain foreign deferred tax assets during the second quarter
of fiscal year 2004. Segment Results Manufacturer Services Revenues for Manufacturer Services increased by $2.2 million to $118.7
million for the six months ended September 30, 2003, compared with revenues of
$116.5 million for the six months ended September 30, 2002. The increase was
primarily attributable to higher average revenues per promotion due to improved
product pricing and a shift in mix to higher margin products, partially offset
by a decline in the volume of promotions. Operating profit for Manufacturer Services decreased by $1.9 million to
$56.2 million for the six months ended September 30, 2003, compared with $58.1
million for the six months ended September 30, 2002. The decrease in operating
profit was primarily attributable to an increase in direct costs resulting from
a change in the manner in which the Company allocates certain retailer costs.
Beginning in fiscal year 2004, for the six months ended September 30, 2003,
Manufacturer Services was charged with approximately $3.0 million of costs from
Retail Services as compensation for intersegment services provided. The
decrease in operating profit due to this additional expense was somewhat offset
by the effect of increased revenues during the six months ended September 30,
2003 as compared with the six months ended September 30, 2002. Net income for Manufacturer Services decreased by $1.2 million to $33.4
million for the six months ended September 30, 2003, compared with a net income
of $34.6 million for the six months ended September 30, 2002. This decrease in
net income was primarily due to the factors affecting operating profit,
discussed above. CHR Revenues for CHR increased $0.7 million to $33.6 million for the six
months ended September 30, 2003, compared with revenues of $32.9 million for
the six months ended September 30, 2002. The increase in revenues was
primarily due to a year-over-year effect of approximately $6.2 million due to
the recognition of revenues deferred from prior years. Such revenue was not
recognized by CHR prior to the first half of fiscal year 2004 because it did
not meet the necessary revenue recognition criteria. The increase in revenues
was partially offset by lower revenues due to a shift in mix to lower-priced
programs. Operating profit for CHR increased to $0.2 million for the six months
ended September 30, 2003, compared with an operating loss of $2.2 million for
the six months ended September 30, 2002. The improvement in operating results
was primarily due to (i) the effect of the recognition of revenues deferred
from prior periods, (ii) a decrease in sales commission expense and (iii) a
decrease in retailer fees, which, in turn, was primarily due to the effect of a
more favorable contract entered into with a retailer during the three months
ended September 30, 2003. Net income for CHR for the six months ended September 30, 2003 increased
by $1.4 million to $0.1 million for the six months ended September 30, 2003,
compared with a net loss of $1.3 million for the six months ended September 30,
2002, primarily due to the factors affecting operating profit, discussed above. International Revenues for International increased by $10.8 million to $22.7 million for
the six months ended September 30, 2003, compared with revenues of $11.9
million for the six months ended September 30, 2002. The increase in
International revenues reflects additional manufacturer and retail promotions
printed in France through a French retailer that was added to the Catalina
Marketing Network during fiscal year 2003. Operating income for International was $2.3 million for the six months
ended September 30, 2003, compared with an operating loss of $2.2 million for
the six months ended September 30, 2002. The improvement was primarily
attributable to the increase in revenues, net of related increases in direct
costs, administrative expenses and depreciation expense. Net loss for International for the six months ended September 30, 2003
decreased to $0.1 million, compared with a net loss of $2.1 million for the six
months ended September 30, 2002, primarily due to the factors affecting
operating results, discussed above. 21




---



##### 



DMS Revenues for DMS increased $1.1 million to $22.7 million for the six
months ended September 30, 2003, compared with revenues of $21.6 million for
the six months ended September 30, 2002. The increase in revenues was
primarily attributable to increases in sales of Sample Logic®. Operating loss for DMS was $1.0 million for the six months ended September
30, 2003, compared with an operating loss of $1.9 million for the six months
ended September 30, 2002. The decrease in operating loss was primarily due to
increased revenues. Net loss for DMS was $0.6 million for the six months ended September 30,
2003, compared with a net loss of $1.1 million for the six months ended
September 30, 2002. Net loss decreased primarily due to the factors discussed
in operating loss, discussed above. Japan Billboard Revenues for Japan Billboard decreased $3.1 million to $7.3 million for
the six months ended September 30, 2003, compared with revenues of $10.4
million for the six months ended September 30, 2002. The decrease in revenues
was the result of the effect of the Initiative, which significantly limits the
manner in which tobacco companies in Japan can market, promote and advertise
their products. Operating loss for Japan Billboard was $28.1 million for the six months
ended September 30, 2003, compared with an operating profit of $0.7 million for
the six months ended September 30, 2002. The operating loss for Japan
Billboard for the six months ended September 30, 2003 includes an impairment
charge of $28.0 million recognized during the period. See Note 9 to the
unaudited condensed consolidated financial statements. Excluding this
impairment charge, the decline in operating results for the six months ended
September 30, 2003 as compared with the six months ended September 30, 2002 is
primarily attributable to the decline in revenues and related direct costs. Net loss for Japan Billboard was $29.0 million for the six months ended
September 30, 2003 compared with net income of $0.3 million for the six months
ended September 30, 2002. In addition to the impairment charge of $28.0
million, the net loss for the six months ended September 30, 2003 includes a
charge in the amount of $0.8 million for the cumulative effect of an accounting
change upon the adoption of SFAS No. 143 and its application in recognition of
asset retirement costs expected to be incurred for the retirement of
billboards. See Note 3 to the unaudited condensed consolidated financial
statements. On August 31, 2004, the Company sold the stock of Japan Billboard. See
Note 11 to the unaudited condensed consolidated financial statements. Other Segments and Corporate Revenues for our Other segment decreased $3.3 million to $19.5 million for
the six months ended September 30, 2003, compared with revenues of $22.8
million for the six months ended September 30, 2002. Retail Services revenues
declined by $4.0 million primarily due to a decrease in loyalty card revenues.
On March 31, 2004, the loyalty card business was sold. Operating loss decreased to $2.3 million for the six months ended
September 30, 2003, compared with an operating loss of $5.0 million for the six
months ended September 30, 2002. The decrease in operating loss was primarily
attributable to an intersegment allocation of certain costs from Retail
Services to Manufacturer Services for services provided by Retail Services. Primarily as a result of the decrease in costs and expenses, net loss for
the Other operating segment decreased to $1.4 million for the six months ended
September 30, 2003, compared with a net loss of $3.0 million for the six months
ended September 30, 2002. The increase in the operating loss for Corporate for the six months ended
September 30, 2003 reflects a decrease in the percentage of costs allocated to
operating segments from 79.4% of Corporates operating costs for the six months
ended September 30, 2002 to 72.8% of Corporates operating costs for the six
months ended September 30, 2003. Before allocations, total Corporate operating
costs for the six months ended September 30, 2003 were comparable with the six
months ended September 30, 2002. 22




---



##### 



Foreign Currency Translation and Its Effect on Revenues Consolidated revenues for the six months ended September 30, 2003 were
$224.3 million, which includes $30.0 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, 2003. Accordingly, revenues in United States dollars for
our foreign operations would have been 15.1% lower for the period if translated
using the weighted average currency translation rates for the comparable period
in 2002. Liquidity and Capital Resources Our primary sources of liquidity have been cash flows generated from
operations, a credit agreement with a syndicate of commercial banks with a
revolving loan credit facility, 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 continue to be for working capital,
capital expenditures in the ordinary course of business and the repayment of
debt and lease obligations. Cash flows from operations for the six months ended
September 30, 2003 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. Cash Flow Analysis Cash provided by operating activities was $54.4 million for the six months
ended September 30, 2003, compared with $52.2 million for the comparable period
in 2002. The increase was primarily attributable to improved net income after
adjustment for the $28.0 million non-cash impairment charge recognized during
the six months ended September 30, 2003, partially offset by a use of cash due
to a change in operating assets. Net cash used in investing activities increased by $0.7 million to $39.0
million for the six months ended September 30, 2003, compared with $38.3
million used in investing activities for the six months ended September 30,
2002. The increase in cash used for investing activities was primarily
attributable to an increase in capital expenditures, partially offset by lower
business acquisition payments. See Capital Requirements  Business Acquisition
Payments. Net cash used in financing activities decreased to $7.2 million for the
six months ended September 30, 2003, compared with $22.1 million used in
financing activities during the six months ended September 30, 2002. The
decrease of $14.9 million is primarily attributable to lower payments for
purchases of the Companys common stock combined with an increase in bank
borrowings, somewhat offset by a decrease in proceeds from the issuance of the
Companys common stock. Cash and cash equivalents increased by $7.5 million for the six months
ended September 30, 2003, compared with a decrease in cash and cash equivalents
of $8.7 million for the six months ended September 30, 2002. 23




---



##### 



Other Sources of Liquidity In addition to our cash flows generated from operations, bank borrowings
provide additional sources of liquidity. 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 up to $125.0
million, but has a feature that allows the Company to increase the revolving
credit line 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 defined. 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. 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 a cure period, violation of
covenants, or a change in control of the Company, as those terms or events of
default are defined in the Credit Facility agreement. The Company repaid the amounts outstanding under the Japan Credit
Facilities with proceeds from the August 2004 Credit Facility on the date the
agreement was executed. The total amount borrowed to repay the Japan Credit
Facilities was approximately $32.0 million. In addition, on August 25, 2004, the Company purchased its corporate
headquarters facility located in St. Petersburg, Florida and terminated the
related synthetic lease financing agreement that it had entered into in 1999.
The purchase price of the building was $30.5 million and was paid 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 after
repayment of the Japan Credit Facilities and the purchase of the headquarters
building, as of September 1, 2004, was approximately $62.0 million. The Corporate Facility.The August 2004 Credit Facility replaced the
Companys previously existing $30.0 million revolving line of credit (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 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. 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. 24




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##### 



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 were replaced
with the August 2004 Credit Facility. The Japan Credit Facilities were
available to finance capital expenditures and current operating requirements of
our operations in Japan. The balance outstanding under the Japan Credit
Facilities as of September 30, 2003 was $32.9 million. Please refer to the
Companys Annual Report on Form 10-K for the fiscal year 2004 for a discussion
of the significant changes to the Japan Credit Facilities during fiscal year
2004. Certain short-term amounts due under the Japan Credit Facilities were
paid using proceeds from the August 2004 Credit Facility. 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. Subsequent to September 30, 2003, the building was
purchased for $30.5 million and refinanced with proceeds from the August 2004
Credit Facility. As a result, the lease was terminated. Our unaudited condensed consolidated balance sheets as of September 30,
2003 include the accounts of the variable interest entity which owned our
headquarters building in St. Petersburg, Florida until August 25, 2004, when
the building was purchased. Capital Requirements There were no significant changes to the Companys contractual cash
obligations or commercial commitments during the quarter ended September 30,
2003 as compared with the amounts reported in the Companys Annual Report on
Form 10-K for the fiscal year ended March 31, 2003, filed with the SEC on May
17, 2004. Net borrowings under the Corporate and Japan credit facilities
increased by $5.3 million during the six months ended September 30, 2003 as
compared with net borrowings at March 31, 2003. 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 on a pro forma
basis as of March 31, 2004, assuming the August 2004 Credit Facility had been
closed on that date, and proceeds available under the August 2004 Credit
Facility were used to pay certain short-term amounts due under the Japan
Agreement and to purchase our headquarters facility. 25




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##### 



Pro Forma Payments Due by PeriodBetween
    
    BetweenPro Forma
    
    Before
    
    April 1, 2005
    
    April 1, 2007
    
    AfterTotal
    
    March 31, 2005
    
    and March 31, 2007
    
    and March 31, 2009
    
    March 31, 2009Short-term borrowings
    
    $
    2,183
    
    
    $
    2,183
    
    
    $
    
    
    
    $
    
    
    
    $
    Long-term debt
    
    
    68,933
    
    
    
    777
    
    
    
    1,897
    
    
    
    1,555
    
    
    
    64,704Postretirement 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
    
    $
    112,775
    
    
    $
    13,774
    
    
    $
    19,323
    
    
    $
    11,131
    
    
    $
    68,547
 In addition to the above contractual commitments, 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 will be paid
on October 1, 2004 to stockholders of record as of September 15, 2004. This is
expected to result in a use of cash of approximately $15.6 million. 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 previous bank credit facility. The
credit facility was replaced on August 27, 2004, and the Company is no longer
restricted 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. 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 states supreme court and, in May 2004,
the state supreme court vacated the prior decision, remanded the case back to
the tax tribunal and directed the tax tribunal to apply a different legal test.
In July 2004, the states tax tribunal ruled in favor of the Company; however,
the decision of the states tax tribunal is subject to review by the state
supreme court and is not final. As of the current date, the Company does not
yet know the final outcome of the case. A favorable decision could result in
the reversal of a liability of approximately $4.4 million, which is the amount
of the liability the Company has recognized as of the current date. If an
adverse decision is reached in this case, we do not believe that the tax
assessment will result in a material charge to the Companys financial
statements; however, we may become subject to similar proceedings in other
jurisdictions, and additional tax assessments resulting from those proceedings
could be material to the Company. Critical Accounting Estimates 26




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##### 



Please refer to the discussion of the Companys Critical Accounting
Estimates as disclosed in the Companys Annual Report on Form 10-K for the
fiscal year ended March 31, 2003. Forward Looking Statements Certain information included in this Managements Discussion and Analysis
of Financial Condition and Results of Operations, contains forward-looking
statements made in reliance upon the safe harbor provisions of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). These statements may be
identified by the use of words, such as anticipate, estimates, should,
expect, guidance, project, intend, plan, believe and other words
and terms of similar meaning, in connection with any discussion of the
Companys future business, results of operations, liquidity and operating or
financial performance. Such forward-looking statements involve significant
material known and unknown risks, uncertainties and other factors which may
cause the actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These risk factors should be
considered in connection with any written or oral forward-looking statement
that we or any person acting on our behalf may issue in this document or
otherwise, now or in the future. We undertake no obligation to publicly update
or revise any forward-looking statement, whether as a result of new
information, future events or otherwise. We cannot assure you that any future
results, performance or achievements will be achieved. For a discussion of
certain of these risks, uncertainties and other factors, see Risk Factors and
Part ISpecial Note Regarding Forward-Looking Statements included in our
Annual Report on Form 10-K for the fiscal year ended March 31, 2004. Further,
certain information contained in this document is a reflection of our intention
as of the date of this filing and is based upon, among other things, the
existing regulatory environment, industry conditions, market conditions and
prices, the economy in general and our assumptions as of such date. We may
change our intentions based upon any changes in such factors, in our
assumptions or otherwise. 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk The Companys principal market risks are interest rates on various debt
instruments and foreign exchange rates at the Companys international
subsidiaries. Please refer to the discussion of the Companys Quantitative and
Qualitative Disclosure About Market Risk as disclosed in the Companys Annual
Report on Form 10-K for the fiscal year ended March 31, 2003. There have been
no material changes to the Companys market risk exposure since March 31, 2003. 
 Item 4. Controls and Procedures The Company performed an evaluation of the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Rule
13a-14(c) under the Exchange Act) as of March 31, 2004. A discussion of the
findings of these evaluations is included in our Annual Report on Form 10-K for
our fiscal year ended March 31, 2004 (filed July 15, 2004). We performed an
additional assessment of the effectiveness of our disclosure controls and
procedures as of June 30, 2004, the end of our first fiscal quarter of 2005,
and reported on such assessment in our Quarterly Report on Form 10-Q filed on
August 16, 2004, with respect to such period. The evaluations as of March 31, 2004 and June 30, 2004 were made under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer. Based upon these evaluations,
our Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures as of March 31, 2004 and June 30, 2004 were
effective to ensure that information required to be disclosed by us in reports
filed or submitted under the Exchange Act is timely recorded, processed,
summarized and reported and include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by us
in reports filed or submitted under the Exchange Act is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. These conclusions are as of March 31, 2004 and as of June 30, 2004
and are subject to our subsequent evaluation, actions and conclusions discussed
below. In addition, we made a number of significant changes in our internal
control over financial reporting that occurred during our fiscal years 2003
and 2004 that have materially affected or are reasonably likely to materially
affect our internal control over financial reporting. These changes are
summarized below. Other than as described below, we made no changes in our
internal controls over financial reporting during the three months ended June
30, 2004 that have materially affected, or are reasonably likely to materially
affect, the Companys internal control over financial reporting. 27




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##### 



We have continued to evaluate the effectiveness and design of our
disclosure controls and procedures in light of subsequent developments with
respect to our financial reporting as further discussed below and the matters
described in Item 9  Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure, in our Annual Report on Form 10-K for our
fiscal year ended March 31, 2004. As part of our ongoing evaluation, in June
2003, our accounting and finance personnel began an extensive effort to analyze
our financial information and related accounting records for our fiscal years
ended March 31, 2003, 2002 and 2001. These efforts, along with efforts
undertaken to position our Chief Executive Officer and our Chief Financial
Officer to satisfy their certification requirements under the
Sarbanes-Oxley Act of 2002 and related rules, identified a number of the items
for review, as described below. In addition, our independent registered
certified public accounting firm, PricewaterhouseCoopers LLP (PwC), in
connection with its audit and review of the Companys internal controls, has
communicated to the Audit Committee of the Companys Board of Directors (the
Audit Committee) and senior management its findings with respect to the
Companys internal control over financial reporting, including certain
material weaknesses and reportable conditions, as defined under standards
established by the American Institute of Certified Public Accountants.
Management, in performing its evaluation, also considered PwCs findings. This
evaluation allowed us and our Chief Executive Officer and our Chief Financial
Officer to make conclusions, as of July 2004, regarding the state of our
disclosure controls and procedures. The evaluation is ongoing and, accordingly,
the Company and our certifying officers may make additional conclusions and
take additional actions, from time to time, as we may deem necessary or
desirable. As a result of the recent audit procedures and our continuing efforts to
evaluate the effectiveness of the design and operation of our disclosure
controls and procedures and our internal controls over financial reporting, we have concluded that the following internal control
deficiencies constituted material weaknesses or significant deficiencies,
during the fiscal years ended and as of March 31, 2004, 2003 and 2002. In
addition, we have identified opportunities to correct these weaknesses and
deficiencies. While a number of these weaknesses and deficiencies were found to
exist in CHR, certain of the accounting principles addressed in our recent
audit activities and other efforts apply to other segments of the Companys
business. We outline these below.  
    
    Deficiencies related to the structure and design of certain financial
information reporting processes. We identified deficiencies in our
accounting processes for the timing of recognition of revenue in CHR.
Specifically, we discovered that in certain instances (i) we recognized
revenue for services in periods prior to the periods in which such
services were performed and (ii) we did not account for certain oral and
written modifications to written agreements in determining the proper
recognition of revenues under such agreements, which resulted in
revenues being recognized during incorrect periods.
    
    Deficiencies related to inadequate or ineffective policies for
documenting transactions. We identified deficiencies in documenting and
accounting for transactions and in connection with our related policies
and practices. Specifically, we identified various transactions in which
we applied policies or procedures in a manner that resulted in us
prematurely recognizing revenue. We discovered instances where some of
our employees failed to follow policies, processes and procedures that
were in place for transactions involving the execution of written
agreements. In addition, we discovered practices of our employees with
respect to which we had not adopted adequate procedures.
    
    Deficiencies related to design of policies and execution of processes
related to accounting for transactions. We identified deficiencies in
accounting for certain aspects of our operations. We discovered
deficiencies in our policies and processes for supporting our accounting
practices relating to transfer pricing and fair value calculations,
verifying account balances and foreign currency translation adjustments;
accounting for property and equipment, goodwill, patents, capitalization
of software development costs, accruals and minority interests; and
determining and disclosing the fair value of stock-based compensation.
    
    Deficiencies related to the internal control environment. As a
result of the deficiencies described above, we concluded that there were
deficiencies in the internal control environment (relating to
accounting, financial reporting and internal controls) during the fiscal
years ended March 31, 2004, 2003 and 2002 which constituted, at times,
material weaknesses and, at other times, significant deficiencies. Under
the supervision of the Audit Committee, we have taken steps to address
these material weaknesses and significant deficiencies as described
below. We continue to emphasize the importance of establishing the
appropriate environment in relation to accounting, financial reporting
and internal control over financial reporting and being vigilant to
identify areas of improvement and to create and implement new policies
and procedures where material weaknesses or significant deficiencies
exist. 28




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##### 



Since May 2003, we have taken a number of steps that we believe will
impact the effectiveness of our internal control over financial reporting
including the following:  
    
    In May 2003, we assigned one of our senior executives to assume
principal oversight responsibility for CHR and its operations for an
interim period, specifically in connection with developing and
implementing appropriate disclosure controls and procedures and internal
controls over financial reporting.
    
    In September 2003, we appointed a new corporate controller of CHR.
    
    In November 2003, we adopted the Catalina Health Resource Selling
Policies and Procedures. These policies and procedures, as well as other
policies adopted by the Company, provide the following:  
    
    We required all participants in CHR programs to execute written
contracts, including amendments to existing contracts, in each case,
in form and substance approved by the Companys Executive Counsel for
Legal Affairs or authorized CHR officers.
    
    We restricted CHR employees from commencing or changing a
program prior to the Company receiving a signed contract or amendment
to an existing contract.
    
    We limited the duration of programs and printing amounts to
limits set forth in signed contracts or amendments to existing
contracts.
    
    We limited deviations from CHR standard contract clauses
without prior approval by CHR authorized officers.  
    
    In November 2003, we established compliance training programs for the
Companys employees related to the policies described above and
contained in the Catalina Health Resource Selling Policies and
Procedures.
    
    In February 2004, we appointed a new president of CHR.
    
    In March 2004, we completed the relocation of our CHR operations
related to finance, database operations, contract administration,
procurement and human resources from our offices located in St. Louis,
Missouri, to our headquarters in St. Petersburg, Florida, in order to
monitor these operations more closely.
    
    We have engaged outside resources to supplement our finance and
accounting departments to support the preparation of financial
statements and reports that are to be filed with the SEC.
    
    We are re-evaluating prior policies and procedures and have
established new policies and procedures for transactions, account
reconciliation procedures and contract management procedures.
    
    In July 2004, we added a financial expert to our Board of Directors
and the Audit Committee as required by the Sarbanes-Oxley Act of 2002. We believe that the steps taken to date have addressed the material
weaknesses and significant deficiencies that affected our disclosure controls
and procedures in fiscal years 2004, 2003 and 2002. We will continue with our
ongoing evaluation and will improve our disclosure controls and procedures as
necessary to assure their effectiveness. The effectiveness of our or any system of disclosure controls and
procedures is subject to certain limitations, including the exercise of
judgment in designing, implementing and evaluating the controls and procedures,
the assumptions used in identifying the likelihood of future events, and the
inability to eliminate misconduct completely. As a result, there can be no
assurance that our disclosure controls and procedures will prevent all errors
or ensure that all material information will be made known to appropriate
management in a timely fashion. In addition, our ability to report our
financial condition could be adversely affected if we are unsuccessful in our
efforts to permanently and effectively remedy weaknesses or deficiencies in our
internal control over financial reporting. The statements contained in paragraph 4(a) of Exhibit 31.1 and Exhibit
31.2 should be considered in light of, and read together with, the information
set forth in this Item 4. 29




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##### 



Part II  Other Information 
 Item 5. Other Information Ernst and Young LLP resigned as the Companys independent certified public
accountants on August 20, 2003, and were subsequently replaced by
PricewaterhouseCoopers LLP. See Item 9, Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure, in our Annual Report on
Form 10-K for the fiscal year ended March 31, 2003. 
 Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits. See Exhibit index on page 32 of this Quarterly Report on Form 10-Q(b)
    
    Reports on Form 8-KDuring the three months ended September 30, 2003, we filed the following Current Reports on Form 8-K:Current Report filed with the Commission on August 14, 2003 (Item 5).
Current Report filed with the Commission on August 26, 2003 (Item 4).
Current Report filed with the Commission on September 15, 2003 (Item 5).
Amendment to Current Report filed with the Commission on September 16, 2003 (Item 4).
Current Report filed with the Commission on September 30, 2003 (Item 5). 30




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##### 



CATALINA MARKETING
CORPORATION 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, Registrants principal financial officer, thereunto duly
authorized. September 14, 2004
    CATALINA MARKETING CORPORATION
(Registrant)/s/ Christopher W. WolfChristopher W. WolfExecutive Vice President and Chief
Financial Officer
(Authorized officer of Registrant and
principal financial  officer) 31




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##### 



ExhibitNo.
    
    Description of Exhibit31.1
    
    Certification of Chief Executive Officer Pursuant to Exchange Act Rules 13a-15(e)
and 15d-15(e), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    Certification of Chief Financial Officer Pursuant to
Exchange Act Rules 13a-15(e)
and 15d-15(e), As Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 200232.1
    
    Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 32