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-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GdFwTXK+5gaYsjMKKJsm+DhRQnEYVTDtIwSGATwnEVGqzbRFVuVIN/WBPATrSWB+ PN7JOOlglcEM4qFBRBbXkw== 0001193125-07-169573.txt : 20070802 0001193125-07-169573.hdr.sgml : 20070802 20070802171235 ACCESSION NUMBER: 0001193125-07-169573 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20070802 DATE AS OF CHANGE: 20070802 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CATALINA MARKETING CORP/DE CENTRAL INDEX KEY: 0000883977 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-ADVERTISING AGENCIES [7311] IRS NUMBER: 330499007 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11008 FILM NUMBER: 071021321 BUSINESS ADDRESS: STREET 1: 200 CARILLON PARKWAY CITY: ST PETERSBURG STATE: FL ZIP: 33716-1242 BUSINESS PHONE: 7275795000 MAIL ADDRESS: STREET 1: 200 CARILLON PARKWAY CITY: ST PETERSBURG STATE: FL ZIP: 33716-1242 10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2007

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from to

Commission File Number: 1-11008

CATALINA MARKETING CORPORATION

(Exact Name of Registrant as Specified in its Charter)

Delaware

33-0499007

(State or Other Jurisdiction of

Incorporation or Organization)

(IRS Employer

Identification Number)


200 Carillon Parkway, St. Petersburg, Florida		33716-2325
(Address of Principal Executive Offices)		(Zip Code)

(727) 579-5000

(Registrant’s Telephone Number, Including Area Code)

Indicate by 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by checkmark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

Indicate by checkmark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At July 26, 2007, the Registrant had outstanding 47,086,648 shares of common stock.

CATALINA MARKETING CORPORATION

INDEX


			Page
Part I.	Financial Information

	Item 1.	Financial Statements

		Unaudited Condensed Consolidated Statements of Income for the three and six months ended June 30, 2007 and 2006	3

		Unaudited Condensed Consolidated Balance Sheets at June 30, 2007 and December 31, 2006	4

		Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity and Comprehensive Income for the six months ended June 30, 2007	5

		Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006	6

		Notes to Unaudited Condensed Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

	Item 4.	Controls and Procedures	21

Part II.	Other Information

	Item 1.	Legal Proceedings	21

	Item 1A.	Risk Factors	22

	Item 5.	Other Information	22

	Item 6.	Exhibits	22

Signatures			23

Exhibit Index			24

	Exhibit 31.1	Certification of Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 31.2	Certification of Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	Exhibit 32.1	Certification of Chief Executive Officer Pursuant to U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	Exhibit 32.2	Certification of Chief Financial Officer Pursuant to U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	Exhibit 99.1	Updated Risk Factors from the Annual Report on Form 10-KT for the nine months ended December 31, 2006

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Part I. Financial Information

Item 1.

Financial Statements

CATALINA MARKETING CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)


	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Revenues	$	117,163		$	105,167		$	240,964		$	231,080

Costs and expenses:
Direct operating expenses (exclusive of depreciation and amortization shown below)		42,492			34,487			85,188			73,316
Selling, general and administrative expenses		42,128			37,945			80,798			78,767
Transaction costs		10,008			—			11,429			—
Depreciation and amortization		12,789			8,806			24,346			18,112

Total costs and expenses		107,417			81,238			201,761			170,195

Income from operations		9,746			23,929			39,203			60,885

Interest (expense)		(1,538	)		(554	)		(3,010	)		(905	)
Other income (expense), net		890			431			1,872			722

Income before income taxes		9,098			23,806			38,065			60,702

Provision for income taxes		5,414			9,808			16,885			22,692

Net income	$	3,684		$	13,998		$	21,180		$	38,010

Earnings per share:
Basic	$	0.08		$	0.30		$	0.46		$	0.81
Diluted	$	0.08		$	0.30		$	0.45		$	0.81
Weighted average common shares outstanding:
Basic		46,300			46,270			46,194			46,739
Diluted		47,334			46,617			47,033			46,915

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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CATALINA MARKETING CORPORATION

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	June 30, 2007			December 31, 2006
ASSETS
Current Assets:
Cash and cash equivalents	$	62,953		$	62,882
Accounts receivable, net		78,678			81,586
Insurance recovery receivable		—			8,200
Inventory		5,468			5,615
Deferred tax asset		10,066			9,367
Prepaid expenses and other current assets		15,188			10,950

Total current assets		172,353			178,600
Property and equipment:
Property and equipment		488,495			459,150
Less - accumulated depreciation and amortization		(281,039	)		(263,824	)

Property and equipment, net		207,456			195,326

Patents, net		7,965			8,717
Goodwill		83,992			83,992
Other assets		1,775			1,857

Total assets	$	473,541		$	468,492


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	23,388		$	24,967
Income taxes payable		13,808			9,720
Accrued litigation settlement		—			8,200
Accrued expenses		55,873			67,874
Deferred revenue		40,699			36,678

Total current liabilities		133,768			147,439

Long-term deferred tax liability		941			5,605
Long-term debt		106,858			127,710
Other long-term liabilities		5,379			3,567

Total liabilities		246,946			284,321
Commitments and contingencies
Stockholders’ 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 47,035,727 and 46,463,762 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively		470			464
Additional paid-in capital		30,605			11,535
Accumulated other comprehensive income		8,045			5,610
Retained earnings		187,475			166,562

Total stockholders’ equity		226,595			184,171

Total liabilities and stockholders’ equity	$	473,541		$	468,492

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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CATALINA MARKETING CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’

EQUITY AND COMPREHENSIVE INCOME

(in thousands)


	Comprehensive Income		Number of Shares	Par Value of Common Stock		Additional Paid-in Capital		Accumulated Other Comprehensive Income		Retained Earnings			Total Stockholders’ Equity
BALANCE AT DECEMBER 31, 2006			46,464	$	464	$	11,535	$	5,610	$	166,562		$	184,171
Issuance of common stock			572		6		9,131		—		—			9,137
Tax benefit on the exercise of stock options			—		—		661		—		—			661
Deferred compensation plan common stock units and Directors’ common stock grants			—		—		452		—		—			452
Stock based compensation			—		—		8,826		—		—			8,826
Cumulative effect of adopting FIN 48			—		—		—		—		(267	)		(267	)
Net income	$	21,180	—		—		—		—		21,180			21,180
Foreign currency translation adjustment		2,435	—		—		—		2,435		—			2,435

Comprehensive income	$	23,615


BALANCE AT JUNE 30, 2007			47,036	$	470	$	30,605	$	8,045	$	187,475		$	226,595

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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CATALINA MARKETING CORPORATION

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)


	Six Months Ended June 30,
	2007			2006
Cash Flows from Operating Activities:
Net income	$	21,180		$	38,010
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		24,346			18,112
Provision for doubtful accounts		7			65
Amortization of deferred financing fees		80			76
Deferred income taxes		(5,600	)		390
Loss on disposals of equipment		411			483
Stock-based compensation expense		8,826			2,883
Other non-cash operating activities		45			(94	)
Changes in operating assets and liabilities:
Accounts receivable		3,803			(13,542	)
Inventory, prepaid expenses and other assets		(4,082	)		(3,021	)
Accounts payable		(2,105	)		(1,166	)
Taxes payable		5,585			8,571
Accrued expenses		(14,078	)		(5,050	)
Deferred revenue		4,043			(2,205	)

Net cash provided by operating activities		42,461			43,512


Cash Flows from Investing Activities:
Capital expenditures		(33,436	)		(35,019	)
Purchase of patents		(75	)		—

Net cash used in investing activities		(33,511	)		(35,019	)


Cash Flows from Financing Activities:
Proceeds from the Corporate Facility		19,000			100,000
Payments on the Corporate Facility		(37,000	)		(82,000	)
Proceeds from Japan borrowings		—			4,128
Payments on Japan borrowings		(1,669	)		(63	)
Repurchase of Company common stock		—			(39,139	)
Excess tax benefit on the exercise of stock options		661			205
Proceeds from issuance of common stock		9,137			3,809

Net cash used in financing activities		(9,871	)		(13,060	)

Effect of exchange rate changes on cash and cash equivalents		992			491

Net change in cash and cash equivalents		71			(4,076	)
Cash and cash equivalents at end of prior period		62,882			32,556

Cash and cash equivalents at end of current period	$	62,953		$	28,480

See accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

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CATALINA MARKETING CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Description of the Business and Basis for Presentation

Catalina Marketing Corporation, a Delaware corporation, and its subsidiaries, provide behavior-based communications, developed and distributed for consumer packaged goods (“CPG”) manufacturers, pharmaceutical manufacturers and marketers and retailers. Our primary business was developed to provide consumers with in-store coupons delivered based on purchase behavior and distributed primarily in supermarkets. Today, we offer behavior-based, targeted-marketing services and programs globally through a variety of distribution channels. These marketing solutions, including discount coupons, loyalty marketing programs, patient education newsletters, 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 communication to print, manufacturers and retailers can deliver customized communications to only the consumers they wish to reach. We track actual purchase behavior and target consumers at the retail checkout counter and prescription medication users at the pharmacy checkout counters, primarily through the use of Universal Product Code-based scanner technology and National Drug Code information, to deliver customized communications to retail and pharmaceutical consumers.

We are organized and managed by segments, which include the following operations: Catalina Marketing Services (“CMS”), Catalina Health Resource (“CHR”) and Catalina Marketing International (“CMI”).

CMS services domestic retailers and consumer product manufacturers. Using the Catalina Marketing Network^®, this operating segment specializes in behavior-based marketing communications. The primary service line of CMS is the in-store delivery of communications at the checkout counter of a retailer. We link our proprietary software, computers, central databases and printers with a retailer’s point-of-sale controller and scanning equipment. The network prints customized communications at the point-of-sale triggered based on product Universal Product Codes, historical purchase behavior or other scanned information. The printed communications are handed to consumers by the cashier at the end of the shopping transaction.

CHR provides services that assist pharmaceutical and CPG manufacturers, as well as retail pharmacies, in providing consumers with condition-specific health information and direct-to-patient communications. CHR’S primary service offerings employ an in-store, prescription based technology to provide targeted, direct-to-patient communications on behalf of our clients. These communication services include messages and educational information delivered to healthcare patients at pharmacies participating in the Health Resource Network. The Health Resource Network is a proprietary software system with built-in targeted response capabilities. Communications are delivered to consumers based on a variety or combination of factors including demographic data such as age and gender information, transactional data, the National Drug Codes found on all prescription drugs and de-identified prescription history and information. CHR clients are able to use these communications to provide information on a wide variety of products such as over-the-counter medicines, prescription medications and other healthcare remedies and merchandise.

CMI operations include in-store electronic targeted marketing services for consumers in France, Italy, the United Kingdom, Belgium, the Netherlands, Germany, Japan and Switzerland. The Catalina Marketing Network^® operates internationally in a similar manner as the domestic CMS business in offering a full range of targeted marketing solutions to many of the top CPG manufacturers and maintains relationships with major supermarket, hypermarket and other retailers. In addition, in certain European markets, we work with clients using a business model we refer to as “retail centric” in that we derive revenue from the retailers for managing loyalty programs and in-store promotions.

The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-KT for the nine months ended December 31, 2006.

In August 2006, our Board of Directors approved a change in our fiscal year end from March 31st to December 31st. In conjunction with this change, we eliminated the three-month reporting lag previously used for reporting the results of CMI. As of December 31, 2006, all of our consolidated subsidiaries had the same balance sheet date. Beginning January 1, 2007, all subsidiaries have the same fiscal reporting period.

On April 17, 2007, we issued a press release announcing that we had entered into a definitive merger agreement to be acquired by private equity firm Hellman & Friedman Capital Partners VI, L.P. and its related funds (“H&F”) pursuant to which H&F will acquire the Company in an all-cash merger at a price of $32.50 per share, $0.40 per share

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higher than under the terms of the agreement signed on March 8, 2007 with affiliates of ValueAct Capital Master Fund L.P. We have terminated our merger agreement with ValueAct Capital and paid the $8.4 million termination fee as required by the terms of that agreement. Under the terms of the merger agreement with H&F, we have agreed to pay a termination fee of $50.6 million in the event we choose to accept a competing bid prior to the vote of the stockholders with regard to the H&F agreement.

Basis of Presentation. These Unaudited Condensed Consolidated Financial Statements have been prepared in accordance with Accounting Principles Generally Accepted in the United States of America for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, except as disclosed herein, considered necessary for a fair statement of our financial position, the results of our operations and cash flows, and the changes in stockholders’ equity have been included in these Unaudited Condensed Consolidated Financial Statements.

Operating results for the period ended June 30, 2007 are not necessarily indicative of the results that may be expected for the remainder of the year.

The Unaudited Condensed Consolidated Financial Statements include our accounts and the accounts of our wholly owned subsidiaries. All significant intercompany transactions are eliminated in consolidation.

Note 2. Recently Issued Accounting Standards

Recent Accounting Pronouncements – In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”) No. 48 “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement 109”. FIN 48 establishes a single model to address accounting for uncertain tax positions. FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement classification, interest and penalties, accounting in interim periods, disclosure and transition.

We file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities for fiscal years before March 31, 2004. The Company changed its fiscal year end to December 31, as of the nine month period ended December 31, 2006.

We adopted the provisions of FASB Interpretation No. 48 on January 1, 2007. As a result of the implementation of FIN 48, the Company recognized approximately a $4.4 million increase in the liability for unrecognized tax benefits, of which $4.1 million was accounted for as an increase to deferred tax assets and $0.3 million was accounted for as a reduction to retained earnings at January 1, 2007. The beginning amount of unrecognized tax benefits is as follows:


	(in thousands)
Balance at January 1, 2007	$	8,808

Included in the balance at January 1, 2007 are $4.1 million of tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period. The remaining $4.7 million of unrecognized tax benefits, if recognized, would affect the annual effective tax rate.

We recognize interest accrued related to unrecognized tax benefits in income tax expense. We had approximately $1.3 million of interest accrued at January 1, 2007 and recognized approximately $0.1 million in interest during each of the quarters ended June 30, 2007 and 2006 as well as approximately $0.2 million for both the six months ended June 30, 2007 and 2006. We have approximately $1.5 million interest accrued at June 30, 2007.

We estimate that it is reasonably possible that a range of approximately $0.0 to $6.7 million in unrecognized tax benefits could decrease within the next twelve months. The nature of the uncertainty pertains to possible audit settlement or the expiration of the statute of limitations.

- 8 -

Note 3. Net Income Per Common Share

The following is a reconciliation of the denominator of basic earnings per share (“EPS”) to the denominator of diluted EPS (in thousands):


	Three Months Ended June 30,		Six Months Ended June 30,
	2007	2006	2007	2006
Basic weighted average common shares outstanding	46,300	46,270	46,194	46,739
Dilutive effect of outstanding options and restricted stock	1,034	347	839	176

Diluted weighted average common shares outstanding	47,334	46,617	47,033	46,915

The following table presents the number of options and SARs excluded from the calculation of diluted weighted average common shares outstanding, due to their anti-dilutive impact on earnings per share, and the related exercise price ranges for those awards for each of the periods presented:


Period Presented	Number of Excluded Options and SARs	Price Range
Three months ended June 30, 2007	2,744,570	$	24.10-$36.82
Three months ended June 30, 2006	6,060,419	$	19.92-$36.82
Six months ended June 30, 2007	3,110,522	$	24.10-$36.82
Six months ended June 30, 2006	6,680,714	$	18.13-$36.82

In accordance with the contingently issuable shares provision of SFAS 128, 513,636 shares of performance-based restricted stock were not included in the calculation of earnings per share for both the three and six months ended June 30, 2007 because the necessary conditions for vesting have not been satisfied.

Note 4. Comprehensive Income (in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Net income	$	3,684	$	13,998	$	21,180	$	38,010
Other comprehensive income:
Currency translation adjustment		2,091		806		2,435		1,860

Comprehensive Income	$	5,775	$	14,804	$	23,615	$	39,870

Note 5. Segment Information

We are organized and managed by segments, as described in the following table:


Segment		Business Activity
Catalina Marketing Services		Provides point-of-sale, printed communications to consumers for CPG manufacturers and retailers.

Catalina Health Resource		Provides point-of-sale, direct-to-patient communications for pharmaceutical and CPG manufacturers and retailers.

Catalina Marketing International		Provides services similar to Catalina Marketing Services in France, Italy, the United Kingdom, Germany, Japan, Belgium, the Netherlands and Switzerland.

Corporate		Provides executive and administrative oversight and centralized functions such as information technology, accounting, client services, and store systems support.

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Financial information for each of our reportable segments is presented in the following tables (in thousands):


	Revenues from External Customers				Intersegment Revenues						Revenues from External Customers				Intersegment Revenues
	Three Months Ended June 30,										Six Months Ended June 30,
	2007		2006		2007			2006			2007		2006		2007			2006
Segments:
CMS	$	73,772	$	62,227	$	—		$	—		$	151,405	$	140,342	$	—		$	—
CHR		22,959		21,926		—			—			49,701		48,952		—			—
CMI		20,432		21,014		—			—			39,858		41,786		—			—

		117,163		105,167		—			—			240,964		231,080		—			—
Reconciliation of segments to consolidated amount
Corporate		—		—		983			1,044			—		—		1,932			2,078
Eliminations		—		—		(983	)		(1,044	)		—		—		(1,932	)		(2,078	)

	$	117,163	$	105,167	$	—		$	—		$	240,964	$	231,080	$	—		$	—


	Net Income (Loss)
	Three Months Ended June 30,						Six Months Ended June 30,
	2007			2006			2007			2006
Segments:
CMS	$	13,964		$	14,832		$	31,577		$	37,454
CHR		3,999			3,777			10,136			9,311
CMI		1,399			3,139			2,504			5,027
Corporate		(15,678	)		(7,750	)		(23,037	)		(13,782	)

	$	3,684		$	13,998		$	21,180		$	38,010


	Total Assets
	June 30, 2007			December 31, 2006
Segments:
CMS	$	92,217		$	78,185
CHR		114,945			89,869
CMI		158,877			158,852
Reconciliation of segments to consolidated amount:
Eliminations		(210,734	)		(164,438	)
Corporate		318,236			306,024

	$	473,541		$	468,492

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Note 6. Patents

The gross and accumulated amortization balances relating to patents were as follows (in thousands):


	June 30, 2007			December 31, 2006
Purchased Patents	$	23,775		$	23,744
Accumulated amortization		(15,810	)		(15,027	)

Patents, net	$	7,965		$	8,717

Estimated amortization of patents through 2012 as of June 30, 2007 (in thousands):


Fiscal Year	Estimated Amortization
2007 - remainder of current year	$	883
2008		1,655
2009		1,644
2010		1,643
2011		1,260
2012		795

We recognized amortization expense of $0.9 million for both the six months ended June 30, 2007 and 2006 which is included in the Unaudited Condensed Consolidated Statements of Income within Depreciation and Amortization.

Note 7. Long-Term Debt

Our long-term debt of $106.9 million as of June 30, 2007 represents $73.0 million borrowed in the United States under our revolving credit facility as well as $33.9 million borrowed by our Japanese subsidiary.

Note 8. Shareholder Litigation

In March 2007, the Company, its board of directors and ValueAct Capital were named as defendants in a complaint purporting to be a class action, which was filed in The Circuit Court of the Sixth Circuit in and for Pinellas County, Florida alleging claims of breach of fiduciary duty of due care, loyalty and good faith and breach of the duty of candor against the members of our board of directors and ValueAct Capital, and a claim against us for aiding and abetting our board members’ breach of fiduciary duty. On May 17, 2007, H&F was added as a defendant in this action in an amended complaint alleging, among other things, that the compensation to be paid to stockholders in connection with, and the termination fees related to, the transactions is unfair. In addition, the amended complaint alleges that the preliminary proxy statement that we filed in connection with the transactions failed to disclose material information concerning the transactions. ValueAct Capital was voluntarily dismissed as a party to the lawsuit on May 17, 2007. On May 22, 2007, the plaintiff filed a motion for preliminary injunction seeking to enjoin any vote to approve the transactions unless additional disclosures are made to stockholders, as well as a motion seeking expedited discovery concerning the motion for preliminary injunction. The court has not yet ruled on these motions. On June 29, 2007, the parties agreed to extend the defendants’ time to respond to the amended class action complaint. We intend to vigorously defend this lawsuit, however, we cannot currently predict the impact or resolution of this litigation and the resolution of this lawsuit may harm our business, delay, change the terms or result in the termination of the transactions or otherwise have a material adverse impact on our financial condition.

On April 26, 2007, the court granted final approval of the settlement reached by the parties in the consolidated class action pending in the United States District Court for the Middle District of Florida, Tampa captioned In re Catalina Marketing Corporation Securities Litigation. The actions were originally brought on behalf of those who purchased our common stock between January 17, 2002 and August 25, 2003, inclusive. We have reversed the insurance recovery receivable as well as the accrued litigation settlement liability of $8.2 million which was recorded in the last quarter of 2006 as there are no further obligations associated with this action on the part of the Company.

Note 9. Subsequent Events

We expect to incur a charge of approximately $4.3 million during the third quarter of 2007 primarily related to the departure of two senior officers of the Company which was announced on August 2, 2007.

- 11 -

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Business Overview

During the second quarter we remained focused on long-term growth. We have continued to invest in our color printer initiative with the roll out of our next generation of printers, which provide full color, full graphic communications at the point-of-sale for our domestic retail grocery channel. Additionally, we are pursuing opportunities to expand our CMS business into other channels, principally drug-store and mass market retail chains. Accordingly, depreciation and amortization expense continues to increase due to these additional capital expenditures. The timing of depreciation and other expenses associated with the color printer initiative is expected to precede the related anticipated revenue growth, which will continue to impact operating income during 2007.

In conjunction with the change in our fiscal year end, we eliminated the three month reporting lag previously used for reporting the results of CMI. The results for the quarter ended June 30, 2007 include the results for CMI for the same period whereas results for CMI for the quarter ended June 30, 2006 were reported on a three month lag.

Results of Operations

Three Months Ended June 30, 2007 Compared with the Three Months Ended June 30, 2006

The following tables include the revenues and income (loss) from operations for each of our significant reportable segments for the three months ended June 30, 2007 compared with the three months ended June 30, 2006:


	Three Months Ended
	June 30, 2007			June 30, 2006			Dollar Change			Percentage Change
Revenues
CMS	$	73,772		$	62,227		$	11,545		18.6	%
CHR		22,959			21,926			1,033		4.7
CMI		20,432			21,014			(582	)	(2.8	)
Corporate		983			1,044			(61	)	(5.8	)
Eliminations		(983	)		(1,044	)		61		5.8

Total Revenues	$	117,163		$	105,167		$	11,996		11.4	%


	Three Months Ended
	June 30, 2007			June 30, 2006			Dollar Change			Percentage Change
Income (Loss) from Operations
CMS	$	23,467		$	24,901		$	(1,434	)	(5.8	)%
CHR		6,719			6,349			370		5.8
CMI		3,378			5,937			(2,559	)	(43.1	)
Corporate		(23,818	)		(13,258	)		(10,560	)	(79.7	)

Total Income from Operations	$	9,746		$	23,929		$	(14,183	)	(59.3	)%


	Three Months Ended
	June 30, 2007			June 30, 2006			Dollar Change			Percentage Change
Net Income (Loss)
CMS	$	13,964		$	14,832		$	(868	)	(5.9	)%
CHR		3,999			3,777			222		5.9
CMI		1,399			3,139			(1,740	)	(55.4	)
Corporate		(15,678	)		(7,750	)		(7,928	)	(102.3	)

Net Income	$	3,684		$	13,998		$	(10,314	)	(73.7	)%

Consolidated Results of Operations

For the second quarter of 2007, our revenues increased $12.0 million compared with the same period in the prior year to $117.2 million.

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Direct operating expenses increased by approximately $8.0 million to $42.5 million for the three months ended June 30, 2007 as compared with the three months ended June 30, 2006. The increase was due primarily to ink expense associated with the introduction of color printers, field operations and third party expense. These amounts were partially offset by a decrease in paper expense.

Selling, general and administrative (“SG&A”) expenses increased by approximately $4.2 million to $42.1 million in the quarter ended June 30, 2007 versus the prior year quarter. The increase was driven primarily by $1.6 million of increased stock-based compensation expense. Sales force, IT development and executive administrative expenses were also up and were partially offset by lower new business development and finance and accounting expenses.

Transaction costs were approximately $10.0 million in the quarter due to an $8.4 million termination fee paid to ValueAct Capital in April 2007 as required by the terms of the merger agreement as well as approximately $1.6 million of other deal related expenses. We anticipate other substantial fees and closing costs associated with the pending private equity transaction which are expected to be paid in the third quarter.

Depreciation and amortization expense increased $4.0 million in the second quarter of 2007 as compared with the same period in the prior year, primarily as a result of significant capital expenditures associated with our color printer initiative and the installation of additional stores during the last twelve months.

Income from operations for the second quarter of 2007 decreased $14.2 million due to the factors described above.

Interest expense increased $1.0 million for the three months ended June 30, 2007 versus June 30, 2006 due primarily to increased borrowings in the current quarter.

The consolidated effective tax rate increased to 59.5% for the three months ended June 30, 2007 compared with the prior year rate of 41.2%. The increase was primarily related to the $8.4 million termination fee paid to ValueAct Capital and other nondeductible transaction costs. Though expensed for financial statement purposes, such costs are considered “facilitative” to the proposed transaction and thus are not tax deductible.

Catalina Marketing Services

CMS generates revenues primarily by providing in-store, electronic marketing delivery services via the Catalina Marketing Network^{^®}. The amount of revenue recognized is generally based on the total number of communications delivered multiplied by a per-print fee. The delivery of communications is based upon particular triggering transactions that occur at the point of sale (i.e., the checkout counter of a retail store). The success of CMS depends upon, among other factors, the store installation base and the number of transactions accessed by the Catalina Marketing Network^{^®}, the number of communications printed, and the ability to attract and retain CPG manufacturers and retailers to use the targeted communication capabilities offered by our network.

The following table presents the number of stores in which the Catalina Marketing Network^{^®} was installed, the weekly shoppers reach at quarter end and the number of manufacturer promotions printed for the three months ended June 30, 2007 and 2006:


	June 30,
	2007	2006
Retailer stores installed	22,358	21,873
Weekly shopper reach at quarter end (in millions)	260	254
Number of promotions printed (in millions)	767	791

Revenues at CMS increased by $11.5 million, or 18.6%, in the second quarter of 2007 as compared with the same period in the prior year. The increase was due primarily to increases in manufacturing revenue of $9.0 million as well as increased retailer and other revenues of $2.5 million. The higher manufacturing revenue was primarily the result of price increases, due to the rollout of color communications, which were slightly offset by lower print volume.

Direct operating expenses increased by $7.3 million due primarily to ink expense associated with the introduction of color printers. Third party costs, field operations and client services were also higher in the current quarter. These were offset by lower retailer fees and paper expense.

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SG&A expenses increased $2.0 million in the second quarter of 2007 as compared with the same period in the prior year. The increase was driven primarily by increased IT development as well as higher sales force expense associated with increased headcount year over year.

Depreciation and amortization expense increased by $3.7 million, due primarily to capital expenditures associated with our color printer initiative as well as our expansion into Walgreens and K-Mart.

Net income, for CMS, decreased $0.9 million to $14.0 million for the three months ended June 30, 2007 as compared with the same period in the prior year due to the factors described above.

Catalina Health Resource

CHR’s primary service offerings use in-store, prescription-based technology to provide targeted, direct-to-patient communications on behalf of its clients. These communication services include messages and educational information to healthcare patients at retail pharmacies participating in the Health Resource Network. CHR primarily generates revenues by printing messages for pharmaceutical and CPG manufacturers.

Management analyzes the performance of CHR through a review of the pharmacy installation base and revenue producing patient communications as a percent of total communications. These metrics provide a framework for evaluating current performance, as well as acting as a measure of the reach and utilization of the network.

The following table presents the pharmacy installation base and the percent of revenue producing patient communications as of and for the three months ended June 30, 2007 and 2006:

Revenues for CHR increased by $1.0 million, or 4.7%, for the three months ended June 30, 2007, compared with the three months ended June 30, 2006. The increase was attributable to an increase in average price per print which was partially offset by a decrease in the number of revenue-producing newsletters.

Direct operating expenses increased $0.5 million for the three months ended June 30, 2007 as compared with the same period in the prior year. The increase was principally due to higher retailer fees in the current year quarter.

SG&A expenses increased $0.1 million in the second quarter of 2007 to $3.9 million as compared with $3.8 million in the same period in the prior year.

Depreciation and amortization expense was relatively unchanged for the three months ended June 30, 2007 as compared with the same period in the prior year.

Net income, for CHR, increased $0.2 million to $4.0 million for the three months ended June 30, 2007 as compared with the same period in the prior year due to the factors described above.

Catalina Marketing International

CMI provides services for clients that operate in France, Italy, the United Kingdom, Germany, Japan, Belgium, the Netherlands and Switzerland in a similar manner to the services provided by the domestic CMS business. In conjunction with the change in our fiscal year end, we eliminated the three month reporting lag previously used for reporting the results of CMI. The results for the quarter ended June 30, 2007 include the results for CMI for the same period whereas results for CMI for the quarter ended June 30, 2006 were reported on a three month lag.

The following table presents CMI’s retail installation base and the average weekly shoppers reached as of and for the three months ended June 30, 2007 and 2006:


	June 30,
	2007	2006
Retail stores installed	6,967	7,514
Average weekly shoppers reached (in millions)	84	86

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Revenues, as reported, for CMI decreased by $0.6 million, or 2.8%, for the three months ended June 30, 2007, compared with the three months ended June 30, 2006. The decrease was primarily attributable to the previously announced client losses. This decrease was partially offset by a favorable foreign currency exchange rate. Revenues will continue to be affected by the client losses, but we expect increases in other countries to partially offset these losses.

Direct operating expenses, as reported, decreased $0.4 million for the three months ended June 30, 2007 as compared with the same period in the prior year. The decrease was due primarily to lower prints in the current quarter associated with lower revenues.

SG&A expenses, as reported, increased $2.2 million for the three months ended June 30, 2007 as compared with the same period in the prior year. The increase was driven primarily by higher sales force expense of $0.8 million due to increased headcount as well as the effect of foreign currency rate changes of $0.8 million and stock-based compensation of $0.7 million in the current quarter.

Net income, as reported, for CMI decreased $1.7 million to $1.4 million for the three months ended June 30, 2007 as compared with the same period in the prior year due to the factors described above.

Corporate

Expenses for our corporate group (“Corporate”) include costs for procurement, retail store support, information technology, corporate accounting, client services, new business development, marketing, human resources, and executive management. These costs are included in direct operating costs, SG&A expenses, and depreciation and amortization expense in the accompanying unaudited condensed consolidated statements of income included in Item 1 — “Financial Statements” for the three months ended June 30, 2007 and 2006. For purposes of segment reporting, the majority of corporate costs are allocated to the CMS and CHR business segments using methods considered reasonable by management and which provide management with a measure of utilization of corporate services by the respective business segments. Costs that can be directly attributed to the business segments are allocated to that business segment. Costs that are indirectly attributed to the business segments are allocated proportionately based on the business segment’s revenues, number of printed communications, square feet of space used, headcount, or other relevant statistics, depending on the type of cost. For example, the cost to maintain our corporate headquarters is allocated to the domestic business segments based on the estimated square footage each business unit occupies and data communications costs are allocated based upon revenues.

The Corporate net loss increased by $7.9 million for the three months ended June 30, 2007 compared to the three months ended June 30, 2006 and was driven primarily by the $8.4 million termination fee paid to ValueAct Capital in April 2007 as well as $1.6 million in other costs associated with the pending private equity transaction.

Foreign Currency Translation and Its Effect on Revenues

Consolidated revenues for the three months ended June 30, 2007 were $117.2 million, which included $20.4 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 the Japanese yen. The dollar weakened in value against the euro and pound versus prior year rates and resulted in a $1.8 million increase in revenue versus the reported prior year quarter. Revenue in local currency declined 11.5% versus the reported prior year quarter, while revenues of our foreign operations decreased by 2.8% when taking into account the effect of changes in foreign currency exchange rates.

Six Months Ended June 30, 2007 Compared with the Six Months Ended June 30, 2006

The following tables include the revenues and income (loss) from operations for each of our significant reportable segments for the six months ended June 30, 2007 compared with the six months ended June 30, 2006:


	Six Months Ended
	June 30, 2007			June 30, 2006			Dollar Change			Percentage Change
Revenues
CMS	$	151,405		$	140,342		$	11,063		7.9	%
CHR		49,701			48,952			749		1.5
CMI		39,858			41,786			(1,928	)	(4.6	)
Corporate		1,932			2,078			(146	)	(7.0	)
Eliminations		(1,932	)		(2,078	)		146		7.0

Total Revenues	$	240,964		$	231,080		$	9,884		4.3	%

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	Six Months Ended
	June 30, 2007			June 30, 2006			Dollar Change			Percentage Change
Income (Loss) from Operations
CMS	$	53,069		$	62,923		$	(9,854	)	(15.7	)%
CHR		17,034			15,649			1,385		8.9
CMI		6,674			9,607			(2,933	)	(30.5	)
Corporate		(37,574	)		(27,294	)		(10,280	)	(37.7	)

Total Income from Operations	$	39,203		$	60,885		$	(21,682	)	(35.6	)%


	Six Months Ended
	June 30, 2007			June 30, 2006			Dollar Change			Percentage Change
Net Income (Loss)
CMS	$	31,577		$	37,454		$	(5,877	)	(15.7	)%
CHR		10,136			9,311			825		8.9
CMI		2,504			5,027			(2,523	)	(50.2	)
Corporate		(23,037	)		(13,782	)		(9,255	)	(67.2	)

Net Income	$	21,180		$	38,010		$	(16,830	)	(44.3	)%

Consolidated Results of Operations

For the first six months of 2007, our revenues increased $9.9 million compared with the same period in the prior year to $241.0 million.

We adopted the provisions of Statement of Financial Accounting Standard No. 123R, Share-Based Payment, (“SFAS 123R”) on April 1, 2006 for our domestic operations and on January 1, 2006 for our international subsidiaries. The adoption of SFAS 123R in April 2006, which was the beginning of our fiscal year in 2006, resulted in only three months of stock-based compensation expense in the six months ended June 30, 2006, whereas the six months ended June 30, 2007 includes a full six months worth of stock-based compensation expense. This difference resulted in a pretax increase in expense of $5.9 million in the first half of 2007 versus the prior year.

Direct operating expenses increased by approximately $11.9 million to $85.2 million in the six moths ended June 30, 2007 versus the prior year amounts. The increase was due primarily to ink expense associated with our new color printers. This amount was partially offset by lower paper expense as well as lower retailer fees. Stock-based compensation expense was also $0.9 million higher in the first half of 2007 due to two quarters of expense in 2007 versus one quarter in 2006.

SG&A expenses increased by approximately $2.0 million to $80.8 million and included a $5.0 million increase in stock-based compensation expense related to two quarters of expense in 2007 versus one quarter in 2006. This was partially offset by lower executive administrative expense of approximately $3.1 million and reduced new business development expense year over year of approximately $1.5 million.

Transaction Costs were approximately $11.4 million in the first half of 2007 due to the $8.4 million termination fee paid to ValueAct Capital in April 2007 as required by the terms of the merger agreement as well as approximately $3.0 million of other deal related expenses. We anticipate other substantial fees and closing costs associated with the private equity transaction which are expected to be paid in the third quarter.

- 16 -

Depreciation and amortization expense increased $6.2 million in the first half of 2007 as compared with the same period in the prior year, primarily as a result of significant capital expenditures associated with our color printer initiative and the installation of additional stores during the last twelve months.

Income from operations for the first half of 2007 decreased $21.7 million to $39.2 million due to the $8.4 million termination fee, $5.9 million related to an additional quarter of stock-based compensation expense and approximately $3.0 million of other deal related costs in 2007.

Interest expense increased $2.1 million for the six months ended June 30, 2007 versus June 30, 2006 due primarily to increased borrowings in the current year.

The consolidated effective tax rate increased to 44.4% for the six months ended June 30, 2007 compared with the prior year rate of 37.4%. The increase was primarily related to the $8.4 million termination fee paid to ValueAct Capital in April 2007 as required by the terms of the merger agreement and other nondeductible transaction costs of approximately $1.9 million as well as increased stock-based compensation expense associated with the adoption of SFAS 123R in April of 2006.

Catalina Marketing Services


	June 30,
	2007	2006
Retailer stores installed	22,358	21,873
Weekly shopper reach at quarter end (in millions)	260	254
Number of promotions printed (in millions)	1,568	1,739

Revenues at CMS increased by $11.1 million, or 7.9%, in the first half of 2007 as compared with the same period in the prior year. The increase was due primarily to increases in manufacturing revenue of $7.3 million as well as increased retailer and other revenues of $ 3.8 million. The higher manufacturing revenue was primarily the result of price increases associated with the rollout of color communications which were slightly offset by lower print volume.

Direct operating expenses increased by $11.2 million due primarily to ink expense associated with the introduction of color printers. This was partially offset by a reduction in retailer fees of approximately $2.7 million and lower paper expense in the first half of 2007.

SG&A expenses increased $3.8 million in the first half of 2007 as compared with the same period in the prior year including $1.1 million increased stock-based compensation expense associated with two quarters of expense being recognized in 2007 versus one quarter in 2006. Sales force expense also increased in the first half of 2007 due to increased headcount to support our channel expansion and color printing initiatives.

Depreciation and amortization expense increased by $5.9 million, due primarily to capital expenditures associated with our color printer initiative as well as our expansion into Walgreens and K-Mart.

Net income, for CMS, decreased $5.9 million to $31.6 million for the six months ended June 30, 2007 as compared with the same period in the prior year due to the factors described above.

Catalina Health Resource

The following table presents the pharmacy installation base and the percent of revenue producing patient communications as of and for the six months ended June 30, 2007 and 2006:

- 17 -

Revenues for CHR increased by $0.7 million, or 1.5%, for the six months ended June 30, 2007, compared with the six months ended June 30, 2006.

Direct operating expenses increased $0.9 million for the six months ended June 30, 2007 as compared with the same period in the prior year. The increase was principally due to higher retailer fees in the current year.

SG&A expenses decreased $1.5 million in the first half of 2007 as compared with the same period in the prior year. The decrease was driven primarily by lower executive administrative expense of $0.6 million as well as lower marketing and sales force expense of $0.7 million and $0.3 million respectively. These amounts were partially offset by higher stock-based compensation expense of $0.4 million.

Depreciation and amortization expense was relatively unchanged for the six months ended June 30, 2007 as compared with the same period in the prior year.

Net income, for CHR, increased $0.8 million to $10.1 million for the six months ended June 30, 2007 as compared with the same period in the prior year due to the factors described above.

Catalina Marketing International

The following table presents CMI’s retail installation base and the average weekly shoppers reached as of and for the six months ended June 30, 2007 and 2006:


	June 30,
	2007	2006
Retail stores installed	6,967	7,514
Average weekly shoppers reached (in millions)	84	86

Revenues, as reported, for CMI decreased by $1.9 million, or 4.6 %, for the six months ended June 30, 2007, compared with the six months ended June 30, 2006. The decrease was primarily attributable to the previously announced client losses in France. This decrease was partially offset by a favorable foreign currency exchange rate. Revenues will continue to be affected by the client losses, but we expect increases in other countries to partially offset these losses.

Direct operating expenses, as reported, decreased $0.7 million for the six months ended June 30, 2007 as compared with the same period in the prior year. The decrease was due primarily to lower prints in the current quarter associated with lower revenues.

SG&A expenses, as reported, increased $1.3 million for the six months ended June 30, 2007 as compared with the same period in the prior year. The increase was driven primarily by stock-based compensation expense of $1.3 million in the current year.

Depreciation and amortization expense as reported, increased $0.4 million for the six months ended June 30, 2007 as compared with the same period in the prior year due to increased capital expenditures.

Net income, as reported, for CMI decreased $2.5 million to $2.5 million for the six months ended June 30, 2007 as compared with the same period in the prior year due to increased stock-based compensation expense of $1.3 million net of taxes as well as the other factors described above.

Corporate

The Corporate net loss increased $9.3 million for the six months ended June 30, 2007 compared to the six months ended June 30, 2006 due primarily to the $8.4 million termination fee paid to ValueAct Capital and approximately $3.0 million in costs associated with the pending private equity transaction.

- 18 -

Foreign Currency Translation and Its Effect on Revenues

Consolidated revenues for the six months ended June 30, 2007 were $241.0 million, which included $39.9 million in revenues from foreign operations. The local currencies of the countries in which we maintain foreign operations are the euro, British pound sterling, and the Japanese yen. The dollar weakened in value against the euro and pound versus prior year rates and resulted in a $3.5 million increase in revenue versus the reported prior year quarter. Revenue in local currency declined 13.1% versus the reported prior year, while revenues of our foreign operations declined by 4.6% when taking into account the effect of changes in foreign currency exchange rates.

Liquidity and Capital Resources

Our primary sources of liquidity have been cash flows generated from operations and a credit agreement with a syndicate of commercial banks that provides for borrowings in both United States dollars and Japanese yen. See “Other Sources of Liquidity” for further details. Our primary liquidity requirements will be for additional investments in the color printer initiative and other future growth initiatives, working capital, and the repayment of debt. Additional requirements may include dividend payments and repurchases of our common stock. We expect to continue to invest in our Catalina Marketing Network^{^®} and other support technology, new business development, sales and marketing, employee development and retention, and enhanced systems of reporting and controls.

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. As previously announced we have entered into a definitive merger agreement to be acquired by the private equity firm H&F in an all-cash transaction valued at $1.7 billion, including the assumption of approximately $107 million of current indebtedness pursuant to which H&F will acquire by merger 100% of the outstanding equity interests of the Company for $32.50 per share in cash. The completion of this transaction would significantly change our debt structure as well as our liquidity requirements. Additionally, under the terms of the merger agreement with H&F, we have agreed to pay a termination fee of $50.6 million in the event we choose to accept a competing bid prior to the vote of the stockholders with regard to the H&F agreement.

Cash Flow Analysis

Net cash provided by operating activities was $42.5 million for the six months ended June 30, 2007, compared with $43.5 million for the six months ended June 30, 2006. Lower net income of $16.8 million was due primarily to the $8.4 million termination fee paid to ValueAct Capital, increased depreciation expense of $6.0 million associated with increased color printer purchases and higher stock-based compensation expense of $5.9 million which was the result of adopting FASB 123R in April of 2006. This resulted in only one quarter of stock-based compensation expense in the prior year versus two quarters in the current year. These amounts were partially offset by favorable changes in operating assets and liabilities.

Net cash used in investing activities decreased by $1.5 million to $33.5 million for the six months ended June 30, 2007 compared with $35.0 million for the six months ended June 30, 2006. The decrease was attributable to slightly lower capital expenditures for our continued investment in our color printer initiative.

Net cash used in financing activities was $9.9 million for the six months ended June 30, 2007 compared with $13.1 million during the six months ended June 30, 2006. The $3.2 million decrease was due primarily to the repurchases of company common stock of $39.1 million in the first half of 2006 and no repurchases in the first half of 2007. This was offset by $19.7 million of debt repayment in 2007 versus additional borrowings in 2006 of $22.1 million. Proceeds associated with the exercise of stock options were also $5.3 million higher in the first half of 2007.

Overall, as of June 30, 2007, cash and cash equivalents was $63.0 million, an increase of $34.5 million as compared to June 30, 2006.

Other Sources of Liquidity

In addition to our cash flows generated from operations, our access to a revolving credit facility provides an additional source of liquidity. For a discussion of our credit facility, see Note 8 to the Consolidated Financial Statements included in Item 8 of our Annual Report on Form 10-KT for the nine months ended December 31, 2006. We had borrowings of $106.9 million as of June 30, 2007, including $73.0 million borrowed in the United States with an interest rate of 5.8% and $33.9 million borrowed by our Japanese subsidiary with an interest rate of 1.1%.

- 19 -

Capital Requirements

Capital Expenditures. Our primary capital expenditures are for store equipment and third-party store installation and upgrade costs, as well as data processing equipment for our central data processing facilities. Total store equipment and third-party store installation costs for the Catalina Marketing Network^{^®} range from $3,000 to $15,000 per store, depending primarily on the number of lanes in each store. We expect that our cash flow from operations combined with borrowings under our existing revolving credit facility will be sufficient to finance these investments.

Contingent Earnout Payment. As part of the Restructuring and Amendment Agreement executed in 1999 between us and former joint venture partners in our Japanese operations (the “Restructuring Agreement”), we had a contingent obligation to pay these former joint venture partners a final deferred earnout payment based on a predetermined formula calculated using financial results during a consecutive four quarter period commencing June 30, 2006 and ending June 30, 2007. The determination of the applicable four quarter period was contingent upon Japan achieving financial results on certain financial measurements as specified in the Restructuring Agreement. Based on our financial results as of the end of the calculation period on June 30, 2007, we have determined that no further amounts are owed to the former joint venture partners pursuant to the Restructuring Agreement.

Critical Accounting Estimates

Please refer to the discussion of our Critical Accounting Estimates as disclosed in our Annual Report on Form 10-KT for the nine months ended December 31, 2006.

Recent Accounting Pronouncements

See Note 4 of Notes to Financial Statements for a discussion of recent accounting pronouncements, including a discussion of the impact of adopting “FIN 48: Uncertain Tax Positions” on January 1, 2007 as well as the discussion of Accounting Standards Not Yet Adopted as disclosed in our Annual Report on Form 10-KT for the nine months ended December 31, 2006.

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. 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 our 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. 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.

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 Part II – Item 1A – “Risk Factors”.

Important factors that we believe might cause results to differ from any results expressed or implied by these forward-looking statements are discussed in the cautionary statements contained in Exhibit 99.1 to this Form 10-Q, which are incorporated herein by reference. In assessing forward-looking statements contained herein, readers are urged to read carefully all cautionary statements contained in this Form 10-Q.

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Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Our principal market risks are interest rates on our revolving credit facility and foreign exchange rates in our international operations.

Interest Rate Risk

We centrally manage our bank debt and consider investment opportunities and risks, tax consequences and overall financing strategies. Interest on bank debt is payable at interest rates based on the Prime Rate, the Eurodollar Rate or the Federal Funds Rate. We estimate that a 10% change in interest rates would not have had a material effect on our results of operations or financial position for the six month period ended June 30, 2007 and June 30, 2006.

Foreign Operations

Our operations outside of the United States expose us to movements in currency exchange rates, which can be volatile at times. The economic impact of currency exchange rate movements on us is complex because such changes are often linked to variances in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to change our financing and operating strategies.

The aggregate foreign currency exchange transaction effects included in determining consolidated results of operations include a gain of $0.2 million for the six months ended June 30, 2007 and a loss of $0.2 million for the six months ended June 30, 2006. We have not utilized derivative financial instruments to reduce the effect of fluctuating foreign currencies. We estimate that, based upon our net income in local currency for the six months ended June 30, 2007 and 2006, a 10% change in foreign currency exchange rates would not have resulted in a material impact to net income in either six month period. We believe that this quantitative measure has inherent limitations because it does not take into account the impact of macroeconomic factors or changes in either results of operations or our financing and operating strategies.

Item 4.

Controls and Procedures

Disclosure controls and procedures. An evaluation was carried out under the supervision and with the participation of our management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of our “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this quarterly report. Based upon this evaluation, these officers have concluded that our disclosure controls and procedures are effective as of June 30, 2007.

Changes in internal control over financial reporting. During the fiscal quarter to which this report relates, there have been no significant changes in our “internal control over financial reporting” that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1.

Legal Proceedings

Certain current and former directors and former officers of the Company and CHR, and Catalina Marketing, as a nominal defendant, were named in two shareholder derivative actions captioned The Booth Family Trust v. Frank H. Barker, et al., Case No. 20510-NC, formerly pending in the Court of Chancery for the State of Delaware in and for New Castle County, and Craig Deeds v. Frank H. Barker, et al., Case No. 04-000862 formerly pending in the Circuit Court of the Sixth Judicial Circuit in and for Pinellas County, Florida. These shareholder derivative lawsuits alleged that the defendants breached various fiduciary duties based upon the same general set of alleged facts and circumstances as the federal shareholder suits settled by the Company in April, 2007. In June 2007, the Circuit Court in Pinellas County, Florida granted final approval of the settlement reached by the parties and the Court of the Chancery for the State of Delaware in and for New Castle County approved an order of dismissal for the pending lawsuit.

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May 22, 2007, the plaintiff filed a motion for preliminary injunction seeking to enjoin any vote to approve the transactions unless additional disclosures are made to stockholders, as well as a motion seeking expedited discovery concerning the motion for preliminary injunction. The court has not yet ruled on these motions. On June 29, 2007, the parties agreed to extend the defendants’ time to respond to the amended class action complaint. We intend to vigorously defend this lawsuit, however, we cannot currently predict the impact or resolution of this litigation and the resolution of this lawsuit may harm our business, delay, change the terms or result in the termination of the transactions or otherwise have a material adverse impact on our financial condition.

Item 1A.

Risk Factors

In addition to the other information discussed in this quarterly report on Form 10-Q, please consider the risk factors provided in our updated risk factors attached as Exhibit 99.1 which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may adversely affect our business, financial condition or operating results.

Item 5.

Other information

On August 2, 2007, we announced to employees that Tom Buehlmann, Executive Vice President of Catalina Marketing Corporation and President of Catalina Marketing International would be leaving the Company following a transition period expected to be completed by the end of 2007.

Item 6.

Exhibits

See Exhibit index on page 24 of this quarterly report on Form 10-Q.

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CATALINA MARKETING CORPORATION

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, Registrant’s principal financial officer, thereunto duly authorized.


August 2, 2007				CATALINA MARKETING CORPORATION
				(Registrant)

				/s/ Rick P. Frier
				Rick P. Frier
				Executive Vice President and Chief Financial Officer
				(Authorized officer of Registrant and principal financial and accounting officer)

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Exhibit No.		Description of Exhibit
31.1		Certification of Chief Executive Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer Pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), As Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		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 2002

32.2		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

99.1		Updated Risk Factors from the Company’s Annual Report on Form 10-KT for the nine months ended December 31, 2006

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EX-31.1 2 dex311.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

Exhibit 31.1

Certification Pursuant to

Exchange Act Rules 13a-14(a) and 15d-14(a),

As Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, L. Dick Buell, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Catalina Marketing Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 2, 2007


By:		/s/ L. Dick Buell
		Chief Executive Officer and Director

EX-31.2 3 dex312.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification

Exhibit 31.2

Certification Pursuant to

Exchange Act Rules 13a-14(a) and 15d-14(a),

As Adopted Pursuant to

Section 302 of the Sarbanes-Oxley Act of 2002

I, Rick P. Frier, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Catalina Marketing Corporation;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 2, 2007


By:		/s/ Rick P. Frier
		Executive Vice President and Chief Financial Officer

EX-32.1 4 dex321.htm SECTION 906 CEO CERTIFICATION Section 906 CEO Certification

Exhibit 32.1

Certification Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Catalina Marketing Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, L. Dick Buell, Chief Executive Officer and Director of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ L. Dick Buell

L. Dick Buell

Chief Executive Officer and Director (Principal Executive Officer)

August 2, 2007

EX-32.2 5 dex322.htm SECTION 906 CFO CERTIFICATION Section 906 CFO Certification

Exhibit 32.2

Certification Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report of Catalina Marketing Corporation (the “Company”) on Form 10-Q for the period ending June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Rick P. Frier, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:

(1)	The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)	The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

/s/ Rick P. Frier

Rick P. Frier

Executive Vice President and Chief Financial Officer

(Principal Financial and Accounting Officer)

August 2, 2007

EX-99.1 6 dex991.htm UPDATED RISK FACTORS Updated Risk Factors

Exhibit 99.1

Risk Factors Relating to Our Business

Increased competition could reduce the demand for our services, which could have a material adverse effect on our business, financial condition, results of operations and business prospects.

Competition in the promotions and marketing services business is intense and includes many competitors. We compete for CPG and pharmaceutical manufacturer advertising, education and awareness, and consumer promotion budgets with a wide range of media including television, radio, print and direct mail advertising, as well as several alternative in-store and point-of-sale programs and new technologies. While we believe we provide unique, cost-effective targeted marketing services, there are many parameters on which a CPG manufacturer, pharmaceutical manufacturer or retailer may base its decision to allocate advertising or promotional expenditures, and there can be no assurance that our services will continue to compete effectively against other formats or that CPG and pharmaceutical manufacturers and retailers will continue to use our marketing services. We also expect our competitors to continue to improve the performance of their current products or services, to reduce sales prices of their existing products and services and to introduce new products, services or technologies that may offer greater performance and improved pricing. In addition, changes and advances in technology or product offering from competitors and other solutions providers may enable merchants and retail companies to implement or install their own proprietary point-of-sale systems or provide other solutions for the distribution of communications.

A shift in consumer purchasing trends for certain categories of products from traditional retail supermarkets may cause a decrease in the utilization of our services.

Significant retailers including mass marketers and value chains have not installed our networks and/or do not use us for their marketing services for the distribution of point-of-sale communications. Many retailers utilize our competitors and other solutions for such services and some conduct such services in-house or otherwise allocate their marketing dollars to other media outlets and marketing strategies. Mass marketers and value chains have significantly increased their presence in the grocery business and retail industry over the last several years. Many mass marketers and value chains, including Wal-Mart, have not installed our network and are not our clients. As mass marketers and value chains, such as Wal-Mart, increase their presence in the grocery business, the percentage of retail grocery purchases that occur in stores where our networks are installed may decrease. The impact of the increased presence of mass marketers and value chains is particularly pronounced in certain product categories. If consumers continue to shift to alternative shopping channels, like club stores, mass merchandisers and value chains, the ability and effectiveness of the Catalina Marketing Network^® to reach retail shoppers, particularly in certain product categories, may decline. Any such change in shopping behavior could have a material adverse effect on our results of operations or financial condition.

Our business is dependent on the promotional spending of our manufacturer and retail partners, which may be effected by seasonal, economic, regulatory and other factors over which we have no control.

In general, we expect our revenues to be greater during periods of increased promotional activity by manufacturers. As a result, the pattern of promotion distribution can be irregular and may change from period to period depending on various factors, including the economy, competition, the timing of new product introductions and the timing of manufacturers’ promotion planning and implementation. In addition, this pattern may be affected by seasonal factors such as holiday-related promotions and annual budgeting processes affecting when our clients use promotional and consumer-related expenditure budgets. With respect to our Catalina Health Resource, or “CHR,” business, spending by our pharmaceutical manufacturer clients may be impacted by a variety of factors over which we have no control including the rate of introduction of new drugs to the market, the timing of drugs coming off patent protection, regulations relating to prescription drug advertising and direct-to-patient communications and other factors which limit the sale, distribution or application of certain pharmaceutical products. These factors, as well as the overall changes in the number of contracts we have with retailer and manufacturer clients, the timing of changes of the installed store base and access to revenue producing transactions, may impact our revenues and profits in any particular period.

Our success depends on our relationships with retailers and pharmacies that provide access to consumers in their retail locations and we rely on data provided from retailers and pharmacies to trigger and report on the delivery of our services.

We depend on retail stores and pharmacies to provide access to transactions with consumers and allow us to install the Catalina Marketing Network^® and Health Resource Network on their premises. We believe that our relationships with our current retail and pharmacy clients are strong; however, in the past, some retailers and pharmacies

have required us to remove our network from their stores or negotiate significantly different or less advantageous terms in order for us to maintain networks in their stores. Should any of our significant retailers or pharmacy chains reduce in size, cease to exist, not renew our agreements, require us to remove our network equipment or negotiate terms with us which are less advantageous than our current agreements, the ability and effectiveness of the Catalina Marketing Network^® or Health Resource Network to reach retail shoppers and access transactions could be reduced and/or the profitability of our operations could be reduced.

Consolidations between our current retail and pharmacy network partners and companies that do not utilize our networks may decrease the installation base of our networks and reduce the utilization of our services or increase our operating costs. Internationally, certain value chains and mass marketers continue to make acquisitions in the retail industry. Further significant acquisitions and consolidations could have a material impact on our ability to maintain and expand our international operations.

In addition, we rely on data provided by our retailers and pharmacies to trigger and report on the delivery of our services on behalf of our manufacturer clients as well as to provide information for our database, which is used to target transactions based on purchase history. Any change, interruption or inaccuracy of the data provided by our retailers and pharmacies could adversely impact the services we offer to our clients as well as the data we utilize to report on transactions.

We may not succeed in our effort to develop new services or enter new retail channels and achieve future growth.

A key element of our growth strategy is the development and sale of new products, services and technologies and entry into new retail channels. To retain and attract manufacturers, retailers and pharmacies, we believe that we must continue to introduce additional successful services; the development and deployment of which may require significant expenditures. While new products, services and technologies are currently under development, there can be no assurance that we will be able to successfully develop and market them to our clients and retailers. In addition, while we have dedicated significant resources to expanding our Catalina Marketing Services, or “CMS,” business into new retail channels beyond our foundation in the grocery channel, including installations in drug stores and mass merchandisers and pilot tests in convenience stores, there is no guaranty that we will be able to successfully operate in these retail channels, or that we will achieve revenue growth from these channels. Our inability or failure to enter new retail channels, devise new marketing services or to complete the development or implementation of particular services for use on a large scale, or the failure of such services to achieve market acceptance, could adversely affect our ability to achieve a significant part of our growth strategy. The absence of such growth could have a material adverse effect on our business, results of operations and financial condition.

Our enhanced and expanded service offerings have required and may continue to require significant capital expenditures.

We are currently working on the deployment of color ink jet printers in our existing retail grocery network in place of certain of our existing thermal black-and-white printers, and we have pursued and continue to pursue agreements to install our networks in new retail channels, including retail drug stores and mass merchandisers. In addition, we have pursued and continue to pursue other opportunities in new and existing retail channels to deploy color printers. These efforts have required and may continue to require significant capital expenditures. In addition, these efforts differ to some degree from our historical business and, as a result, carry additional risks.

The deployment of color ink jet printers in our existing retail network requires substantial expenditures to acquire and install such printers and, in some instances, will replace existing thermal black-and-white printers that may not have reached the end of their useful lives, and which we plan to redeploy elsewhere. Color printers will require new and additional efforts and potential costs to be incurred by our retailers, including the use and management of additional consumables, such as ink and non-thermal paper, changes in software, network and bandwidth requirements, hardware and wiring and other logistical steps not required by our current network of thermal black-and-white printers. While we are working with Epson America, Inc., the supplier of our new color printers and ink, and other vendors to try to simplify the use, servicing and supply of such printers and the required consumables, we cannot provide assurance that difficulties will not be encountered in installing, using and servicing such printers and the consumables. In addition, while we believe the design of the printers and consumables will operate effectively and efficiently when fully deployed and operated in the field, due to the fact that the printers are highly customized and have not been tested for an extended period of operation, there can be no assurance that the ongoing manufacture and delivery of the printers and consumables will move forward as currently planned, that the printers and consumables will operate in accordance with specifications, that we will experience operating reliability consistent with our current thermal black-and-white printers or that we will not experience a significant number of failures resulting from design, manufacture, operation or other

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causes. Furthermore, while we expect color printing to enhance the effectiveness of our clients’ marketing efforts or increase the redemption rates of incentives printed on our network over an extended period of time, a long term track record verifying such goal has not yet been established. As a result, the deployment of color printers will involve the use of a substantial amount of capital and other expenditures with a risk that difficulties will be encountered in installing and operating them and that they may not gain the acceptance we desire from retailers and our manufacturer clients. Such outcome could have a material adverse effect on our results of operations and financial condition.

The deployment and expansion of our existing CMS and CMI networks in new retail channels and markets that we have not historically served, including the retail drug store market, will require a significant amount of capital and other expenditures. Manufacturer clients using our services for new retail channels may differ, to some extent, from our historical client base due to the nature and quantity of items carried in these retail channels. While we expect the deployment of our network in new retail channels to enhance the effectiveness of our clients’ marketing efforts, a track record verifying such goal has not yet been established. As a result, the deployment of our network in new retail channels will involve the use of a substantial amount of capital and other expenditures with a risk that it may not gain the acceptance we desire from our clients. Such result could have a material adverse effect on our results of operations and financial condition.

Significant anticipated new initiatives will impact our resources and management.

We are currently working on several significant initiatives including the pursuit of new retail channels both domestically and internationally and further international expansion. As a result of these initiatives, subject to the timing and success of these initiatives, we will experience an increased demand on our resources and management.

We are subject to risks which can disrupt our operations, cause loss of data center capacity or interruption of telecommunication links that could adversely affect our business.

Our ability to protect our data centers against damage from fire, power loss, telecommunications failure, hurricanes or other disasters is critical to our future. Although we believe we have taken reasonable precautions to protect our data centers and telecommunication links from events that could interrupt our operations, any damage to our data centers or any failure of our telecommunications links that causes interruptions in our operations could materially adversely affect our ability to meet our clients’ requirements, which could result in a material adverse effect on our results of operations and financial condition.

We are subject to risks associated with the selection, availability and cost of insurance.

We have recently observed rapidly changing conditions in certain areas of the traditional commercial insurance markets, in particular related to property and business interruption insurance for hazards related to severe storms, hurricanes and flooding. Such conditions have and may continue to result in higher premium costs, higher policy deductibles, lower coverage limits and may also result in certain policy exclusions. As a result of the conditions in the insurance markets and the cost and/or availability of insurance, we retain some portion or all of our insurable risks with respect to these hazards. In addition, our headquarters is located in Florida, where insurers are increasingly reluctant to provide flood and other hurricane-related insurance. Any unforeseen or catastrophic losses in excess of insured limits or risks and hazards for which we do not carry insurance may have a material adverse affect on our results of operations or financial condition.

A breach of our network security could result in liability to us and deter customers from using our services.

Our networks may be vulnerable to unauthorized access, computer viruses and other disruptive problems. Any of the foregoing problems could result in liability to us, decrease the confidence of our manufacturer and retail client base and deter customers from using our services. Unauthorized access could jeopardize the security of confidential information related to our company stored in our computer systems. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service, cause us to incur significant costs to remedy the problem and divert management’s attention. We can provide no assurance that the security measures we have implemented will not be circumvented or that any failure of these measures will not have a material adverse effect on our ability to obtain and retain customers. Any of these factors could have a material adverse effect on our business.

Failure to defend our intellectual property rights may harm our competitive position, and litigation to protect our intellectual property rights could be costly.

We hold U.S. and foreign patents on various aspects of our business including the process of promotion and communication distribution, and have applied for additional patents. In addition, we regard certain computer software

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and each service application as proprietary and attempt to protect them through copyright and trade secret laws and internal non-disclosure agreements and similar safeguards. Furthermore, we are working to expand into certain foreign markets where we do not currently hold patent protection or where we have limited patent coverage which may subject us to increased competition in these markets. As a result of the foregoing, certain aspects of our services may not be adequately protected from infringement or copying. There can be no assurance that our patents or trademarks would be upheld if challenged or that competitors might not develop similar or superior processes or services outside the protection of any patents issued to us.

Third parties may infringe or misappropriate our patents or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results. The actions we take to protect our patents and other proprietary rights may not be adequate. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. We cannot provide assurance that we will be able to prevent infringement of our intellectual property rights or misappropriation of our proprietary information. In addition, litigation is time-consuming and expensive to defend and could result in the diversion of our time and resources. Any claims from third parties may also result in limitations on our ability to use the intellectual property subject to these claims.

Intellectual property litigation against us could be costly and could result in the loss of significant rights.

We expect that, as we continue to expand our service offerings and the number of competitors in targeted marketing grows, we may be increasingly subject to intellectual property infringement, unfair competition and related claims against us. Third parties may also seek to invalidate certain of our patents. In addition, competitors and third parties may, in the future, name our clients as defendants in lawsuits, which may cause these clients to terminate their relationships with us. Our efforts to defend these actions may not be successful. Our failure to prevail in this type of litigation could result in our paying monetary damages (which could be trebled if the infringement is found to have been willful); an injunction requiring us to stop offering our services in their current form; our having to redesign our technology and business methods, which could be costly and time-consuming, even where a redesign is feasible; or our having to pay fees to license intellectual property rights, which may result in unanticipated or higher operating costs.

Any third-party claims, with or without merit, could be time consuming, result in costly litigation and damages, cause us to reduce or alter our services, delay or prevent service enhancements or require us to enter into royalty or licensing agreements.

Legislation relating to privacy or consumer protection and changes in government regulations or the interpretation of such regulations could affect our ability to deliver targeted communications and collect data that we use in providing our marketing services, which could negatively affect our ability to satisfy our clients’ needs.

Unfavorable interpretations of existing laws or regulations or the enactment of more stringent legislation related to privacy issues could have a material adverse impact on our marketing services. Any such interpretations or legislation could place restrictions upon the collection and use of information that is currently legally available or the manner in which we collect, manage and store this data or could materially increase our cost of managing or collecting some data. Legislation or industry regulation could also prohibit us from collecting or disseminating certain types of data, coupons, promotions, messages or newsletters, which could adversely affect our ability to meet our clients’ requirements.

With respect to CHR’s Health Resource Network, our ability to provide consumers with condition-specific health information and direct-to-patient communications may be adversely affected by concerns over heath regulatory guidelines, interpretation by the Food and Drug Administration of regulations related to the promotion of pharmaceutical products and laws, regulations and publicity regarding a patient’s right to privacy. Regulatory changes in some jurisdictions have increased manufacturer and retailer sensitivity and selectiveness as to what types of messages they will distribute in these jurisdictions. In addition, changes in the laws and regulations or manner of enforcement of such laws and regulations could negatively impact our business and cause us to change our services or systems. While we are currently working with our manufacturer and retailer clients to find an adequate solution to these concerns, there is no guarantee that we will be able to continue to distribute prints for these clients or that there will not be additional changes in the laws and regulations in these and other jurisdictions that will further impact our operations.

Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors or fraud, or in informing management of all material information in a timely manner.

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Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and internal controls and procedures will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations, misstatements due to error or fraud may occur and may not be detected.

There are inherent uncertainties involved in estimates, judgments and assumptions used in the preparation of financial statements in accordance with U. S. GAAP. Any changes in estimates, judgments and assumptions could have a material adverse effect on our business, financial position and results of operations.

The consolidated and condensed consolidated financial statements included in the periodic reports we file with the SEC are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of financial statements in accordance with U.S. GAAP involves making estimates, judgments and assumptions that affect reported amounts of assets, liabilities, revenues, expenses and income. Estimates, judgments and assumptions are inherently subject to change in the future, and any such changes could result in corresponding changes to the amounts of assets, liabilities, revenues, expenses and income. Any such changes could have a material adverse effect on our financial position and results of operations.

Changes to financial accounting standards may affect our reported results of operations.

A change in accounting standards could have a significant effect on our reported results and may affect our previously reported transactions. New pronouncements and varying interpretations of existing pronouncements have occurred and may occur in the future. Changes to existing accounting rules or the application of existing U. S. GAAP may adversely affect our reported financial results, which could result in a decrease in the value of our stock price.

Risks Related to Shareholder Lawsuit

The Company, certain current directors and officers and H&F are defendants in a stockholder class action lawsuit.

In March 2007, we, our board of directors and ValueAct Capital were named as defendants in a complaint purporting to be a class action, which was filed in The Circuit Court of the Sixth Circuit in and for Pinellas County, Florida alleging claims of breach of fiduciary duty of due care, loyalty and good faith and breach of the duty of candor against the members of our board of directors and ValueAct Capital, and a claim against us for aiding and abetting our board members’ breach of fiduciary duty. On May 17, 2007, H&F was added as a defendant in this action in an amended complaint alleging, among other things, that the compensation to be paid to stockholders in connection with, and the termination fees related to, the transactions is unfair. In addition, the amended complaint alleges that the preliminary proxy statement that we filed in connection with the transactions failed to disclose material information concerning the transactions. ValueAct Capital was voluntarily dismissed as a party to the lawsuit on May 17, 2007. On May 22, 2007, the plaintiff filed a motion for preliminary injunction seeking to enjoin any vote to approve the transactions unless additional disclosures are made to stockholders, as well as a motion seeking expedited discovery concerning the motion for preliminary injunction. The court has not yet ruled on these motions. On June 29, 2007, the parties agreed to extend the defendants’ time to respond to the amended class action complaint. We intend to vigorously defend this lawsuit, however, we cannot currently predict the impact or resolution of this litigation and the resolution of this lawsuit may harm our business, delay, change the terms or result in the termination of the transactions or otherwise have a material adverse impact on our financial condition. In addition, securities lawsuits may result in substantial costs, divert management’s attention and other resources, and have a material and adverse effect on our financial condition and the results of our operations in the future.

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Risks Related to the Acquisition of the Company

The Company entered into a definitive merger agreement to be acquired by the private equity firm Hellman & Friedman Capital Partners VI, L.P.

On March 8, 2007, we entered into a definitive agreement to be acquired by an affiliate of ValueAct Capital whereby ValueAct Capital would acquire by merger 100% of the outstanding equity interests of the company that it does not already own for $32.10 per share in cash. Jeffrey W. Ubben, who has served as a director of Catalina since May 2006, is the co-founder, managing partner and principal owner of ValueAct Capital. Thereafter, on April 17, 2007, we announced that we had entered into a definitive merger agreement to be acquired by the private equity firm H&F in an all-cash transaction valued at $1.7 billion, including the assumption of approximately $136 million of current indebtedness pursuant to which H&F will acquire by merger 100% of the outstanding equity interests of the Company for $32.50 per share in cash. Prior to entering into the merger agreement with H&F, the Company terminated its merger agreement with ValueAct Capital and paid the $8.4 million termination fee as required by the terms of that agreement. Under the terms of the merger agreement with H&F, the Company has agreed to pay a termination fee of $50.6 million in the event it chooses to accept a competing bid prior to the vote of the stockholders with regard to the H&F agreement.

There is no assurance that our shareholders will approve the merger agreement or that other closing conditions will be satisfied. We are subject to several risks as a result of this merger agreement, including the following:

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the occurrence of any event, change or other circumstance that could give rise to the termination of the merger agreement;

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if the proposed merger is not completed, the share price of our common stock may change to the extent that the current market price of our common stock reflects an assumption that the proposed merger will be completed;

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the outcome of any legal proceedings that have been or may be instituted against the Company and others relating to the merger agreement;

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the inability to complete the merger due to the failure to obtain stockholder approval or the failure to satisfy other conditions to consummation of the merger;

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the failure to obtain the necessary financing arrangements set forth in commitment letters received by H&F, Parent or Merger Sub in connection with the merger agreement and the risk that the terms of the financing for the proposed merger may change;

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the failure of the merger to close for any reason;

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the risk that the proposed transaction disrupts current plans and operations and that our management and employees’ attention may be diverted from day-to-day operations;

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the potential difficulties in employee retention as a result of the pending merger;

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the effect of the announcement of the merger on our client and retailer relationships, operating results and business generally;

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the ability to recognize the benefits of the merger;

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the amount of the costs, fees, expenses and charges related to the merger and the actual terms of certain financings that will be obtained for the merger and the risk that certain costs related to the proposed merger, including the fees and/or expenses of our legal, accounting and financial advisors, must be paid even if the proposed merger is not completed;

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under circumstances defined in the merger agreement, we may be required to pay a termination fee of up to $50.6 million and reimburse out-of-pocket fees and expenses incurred with respect to the transactions contemplated by the merger agreement, up to a maximum of $7,500,000, if the merger agreement is terminated;

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a failed merger may result in unfavorable publicity and/or a negative impression of us in the investment community.

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June 30,

Pharmacies installed

% of revenue producing patient communications