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UNITEDSTATESSECURITIESANDEXCHANGECOMMISSIONWashington,DC20549
FORM10-K
ANNUALREPORTPURSUANTTOSECTION13OR15(d)OFTHESECURITIESEXCHANGEACTOF1934
ForthefiscalyearendedDecember31,2008Commissionfilenumber:333-152649
CERIDIANCORPORATION
(Exactnameofregistrantasspecifiedinitscharter)
Delaware41-1981625(Stateorotherjurisdictionof(I.R.S.Employer
incorporationororganization)IdentificationNo.)3311EastOldShakopeeRoadMinneapolis,Minnesota55425
(Addressofprincipalexecutiveoffices,includingzipcode)(952)853-8100(Registrant'stelephonenumber,includingareacode)SecuritiesregisteredpursuanttoSection12(b)oftheAct:NoneSecuritiesregisteredpursuanttoSection12(g)oftheAct:None
Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.
qYes3NoIndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheAct.
3YesqNoIndicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.
qYes3NoIndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405o
fRegulationS-Kisnotcontainedherein,andwillnotbecontained,tothebestofregistrant'sknowledge,indefinitiveproxyofinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K3Indicatebycheckmarkwhethertheregistrantisalargeacceleratedfiler,anacceleratedfiler,anon-acceleratedfiler,orasmallerreportingcompany.Seethedefinitionsof"largeacceleratedfiler,""acceleratedfiler"and"smallerreportingcompany"inRule12b-2oftheExchangeAct.
LargeacceleratedfilerqAcceleratedfiler.
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Non-acceleratedfiler3Smallerreportingcompanyq(Donotcheckifasmallerreportingcompany)
Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).
qYes3NoThereisnopublicmarketfortheregistrant'scommonstock.Theregistranthad50,000sharesofcommonstock,$0.01parvaluepershare,outstandingasofJune30,2008.
TableofContentsCERIDIANCORPORATIONTableofContentsPARTIItem1.Item1A.Item1B.Item2.Item3.Item4.PARTIIBusiness
RiskFactorsUnresolvedStaffCommentsPropertiesLegalProceedingsSubmissionofMatterstoaVoteofSecurityHoldersPage21520202121
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Item5.MarketforRegistrant'sCommonEquity,RelatedStockholderMattersand
IssuerPurchasesofEquitySecurities21Item6.SelectedFinancialData22Item7.Management'sDiscussionandAnalysisofFinancialConditionandResults
ofOperations23Item7A.QuantitativeandQualitativeDisclosuresAboutMarketRisk57Item8.FinancialStatementsandSupplementaryData59Item9.ChangesinandDisagreementswithAccountantsonAccountingand
FinancialDisclosure127Item9A(T).ControlsandProcedures127Item9B.OtherInformation128PARTIIIItem10.Directors,ExecutiveOfficersandCorporateGovernance128Item11.ExecutiveCompensation131Item12.SecurityOwnershipofCertainBeneficialOwnersandManagementand
RelatedStockholderMatters152Item13.CertainRelationshipsandRelatedTransactions,andDirectorIndependence155Item14.PrincipalAccountingFeesandServices158
PARTIVItem15.Exhibits,FinancialStatementSchedules159
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INTRODUCTION
General
Unlessotherwisenoted,referencesto"Ceridian,""ourcompany,""we,""us"and"our"refertoCeridianCorporationanditsdirectandindirectsubsidiaries.ThisreportonForm10-Kcontainsreferencestoyears2008,2007,2006,2005and2004,whichrepresentfiscalyearsendedDecember31,2008,December31,2007,December31,2006,December31,2005andDecember31,2004,respectively.Allofthediscussionandanalysisinthisreportshouldbereadwith,andisqualifiedinitsentiretyby,ourconsolidatedfinancialstatementsandrelatednotes.OnNovember9,2007,affiliatesofThomasH.LeePartners,L.P.("THLPartners"),FidelityNationalFinancial,Inc.("FNF")(together,the"Sponsors")andtheirco-investorsacquiredalltheoutstandingequityofCeridianCorporation.Underthetermsoftheagreement,theSponsorsandtheirco-investors,includingcertainmembersofmanagement,acquiredtheequityofCeridianfor$36.00pershareoratotalpurchasepriceofapproximately$5.3billion.Priortotheacquisition,Ceridian'scommonstockwaslistedontheNewYorkStockExchange(NYSE:CEN).Theacquisition,relatedfinancingandapplicationofproceedstherefromarereferr
edtointhisreportasthe"Transactions."AsaresultoftheTransactions,Ceridianisawholly-ownedsubsidiaryofFoundationHoldings,Inc.,acompanywhosecommonstockis100%ownedbyanintermediateholdingcompany,CeridianIntermediateCorp.CeridianIntermediateissuedcommonstockandcumulativepreferredstock,representingapproximately81%and19%,respectively,ofitsequityvalue.CeridianIntermediate'scommonstockisheldbyitsparent,CeridianHolding,Inc.andthepreferredstockisheldbytheSponsorsandcertainmembersofCeridian'smanagement.TheSponsorsandcertainmembersofourmanagementholdsharesrepresenting100%oftheequityvaluesand100%ofthevotingrightsofCeridianIntermediateandCeridianHolding.
ForwardLookingStatements
ThisreportonForm10-K,particularlyundertheheadings"Business"and"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperation",contains"forward-lookingstatements"withinthemeaningofthefederalsecuritieslaws,whichinvolverisksanduncertainties.Youcanidentifyforward-lookingstatementsbecausetheycontainwordssuchas"believes,""expects,""may,""will,""should,""seeks,""approximately,""intends,""plans,""estimates,"or"anticipates"orsimilarexpressionsthatconcernourstrategy,plansorintentions.Allstatementswemakerelatingtoexpectedcostsavings,marginsgrowth,cashflows,capitalexpenditures,marketandindustrygrowthratesandtrends(includingtrendstowardsoutsourcing),productlineandmarketexpansion,marketshare,operationalimprovements(includingheadcount,
technological,customerserviceandbusinessimprovementinitiatives),retentionrates,demandforourproducts,litigationresults,redemptionofmoneymarketfundsandfinancialresultsareforward-lookingstatements.Inaddition,we,throughourseniormanagement,fromtimetotimemakeforward-lookingpublicstatementsconcerningourexpectedfutureoperationsandperformancesandotherdevelopments.Theseforward-lookingstatementsaresubjecttorisksanduncertaintiesthatmaychangeatanytimeand,therefore,ouractualresultsmaydiffermateriallyfromthosethatweexpected.Wederivemanyofourforward-lookingstatementsfromouroperatingbudgetsandforecasts,whicharebaseduponmanydetailed
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assumptions.Whilewebelievethatourassumptionsarereasonable,wecautionthatitisverydifficulttopredicttheimpactofknownfactors,anditisimpossibleforustoanticipateallfactorsthatcouldaffectouractualresults.Importantfactorsthatcouldcauseactualresultstodiffermateriallyfromourexpectations("cautionarystatements")aredisclosedunderPartI,Item1A,"RiskFactors"andelsewhereinthisreport,including,withoutlimitation,inconjunctionwiththeforward-lookingstatementsincludedinthisreport.Allsubsequentwrittenandoralforward-lookingstatementsattributabletous,orpersonsactingonourbehalf,areexpresslyqualifiedintheirentiretybythecautionarystatements.Themattersreferredtointheforward-lookingstatementscontainedinthisreportmaynotinfactoccur.Accordingly,wecautionyouagainstrelyingonforward-lookingstatements.Weundertakenoobligationtoupdateorreviseanyforward-lookingstatementasaresultofnewinformation,futureeventsorotherwise,exceptasotherwiserequiredbylaw.
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PARTI
Informationregardingthemarketshareandmarketpositionofourbusinessescontainedinthisreportconsistsofourestimatesbasedondataandreportscompiledbyindustryanalystsandonourmanagement'sknowledgeofourbusinessandmarkets.Althoughwebelievethatthethird-partysourcesuponwhichwehavereliedarereliable,wehavenotindependentlyverifiedmarketindustrydataprovidedbythirdparties.Similarly,whilewebelieveourmanagement'sestimateswithrespecttoourindustryarereliable,ourestimateshavenotbeenverifiedbyanyindependentsources.
U.S.dollarsareexpressedinmillions.Weownorhavetherightstovarioustrademarks,tradenamesorservicemarks,includingthefollowing:Ceridian,Comchek,Comdata,andLifeWorks,andvariouslogosusedinassociationwiththeseterms.ThetrademarksAmericanExpress,Discover,MasterCard,Visa,CirrusandMaestroreferredtointhisreportaretheregisteredtrademarksofothers.Also,thenamesofotherthirdpartiesreferencedinthisreport,includingunderdescriptionsofourbusinessandcompetition,maybetrademarksofsuchparties.Item1.Business.
General
Weareaproviderofoutsourcedprocessingandemployeebenefitsservicestoadiversecustomerbaseinawiderangeofindustries.Wehavemarketpositionsinlargemarketsandexpecttobenefitfromthelong-termtrendtowardsoutsourcing.Weoperatethroughthreeprincipalbusinesssegments,HumanResourceSolutions("HRS"),StoredValueSolutions("SVS")andComdata.HRSoffersabroadrangeofhumanresource("HR")outsourcingservicesbuiltaroundacorecapabilityofpayrollprocessing.SVSsellsstoredvaluecardsandprovidescard-basedservicesprimarilytoretailersintheformofgiftcards,creditsforproductreturnsandretailpromotions,aswellascardprocessingforcertainothercardtypes.Comdataisaproviderandprocessorofproprietary,creditanddebitcards,includingfuelcardsande
mployerpaycardsforvariousindustriesintheUnitedStates,includingthetransportationindustry.Comdataalsoprovidesregulatorycomplianceservicestothetransportationindustry.WereferyoutoPartII,Item7ofthisreportforadditionaldescriptionsofourbusiness.CeridianCorporationwasformedonAugust8,2000andisincorporatedinDelaware.Wewereformedasaresultofthespin-offofthehumanresourcesolutionsdivisionandhumanresourcesolutionsandComdatasubsidiariesofArbitron,Inc.OnMarch30,2001,webecameanindependentpubliccompanywhenourpredecessordistributedallofouroutstandingcommonstocktoitsstockholdersinatax-freespin-offtransaction.OnNovember9,2007,wecompletedtheTransactions.Seethe"Introduction"tothisreportforadiscussionoftheTransactions.
Ourprincipalexecutiveofficeislocatedat3311EastOldShakopeeRoad,Minneapolis,Minnesota55425,andourtelephonenumberis(952)8538100.
RecentDevelopments
SeniorNotesExchangeOffersandSecuritiesActRegistration
InconnectionwiththecompletionoftheTransactions,onNovember9,2007,wecompletedaprivateofferingof$1,300.0aggregateprincipal
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amountofseniornotesdue2015.Atthetimeoftheissuance,weenteredintoaregistrationrightsagreementwiththeinitialpurchasersofthenotesinwhichweagreedto,amongotherthings,completeofferstoexchangetheserestrictednotesfornewlyissuednoteshavingidenticalterms,exceptthatthenewnoteswillhavebeenregisteredundertheSecuritiesActof1933,asamended(the"SecuritiesAct"),andwillnotbearlegendsrestrictingtheirtransfer.Inconnectionwiththerequirementsoftheregistrationrightsagreement,onDecember22,2008,ourregistrationstatementonFormS-4registeringthenewnoteswasdeclaredeffectivebytheU.S.SecuritiesandExchangeCommission(the"Commission")andwecommencedtheexchangeoffersonDecember23,2008.TheexchangeoffersexpiredonJanuary23,2009andonJanuary29,2009theexchangeofferswerecompleted.ForfurtherdiscussionoftheexchangeoffersandourpaymentofadditionalinterestonthenoteswithrespecttotheperiodfromNovember9,2008throughthedateofthecompletionoftheexchange,seeNote10,"Financing"andNote21,"SubsequentEvents"toourconsolidatedfinancialstatementsandItem7,"Management'sDiscussionandAnalysisofFinancialConditionandResultsofOperations-LiquidityandCapitalResources"containedinthisreport.AstheresultoftheeffectivenessoftheFormS-4,webecamesubjecttotheperiodicreportingrequirementsoftheSecuritiesExchangeActof1934,asamended(the"ExchangeAct"),fortheremainderofthe2008calendaryear,whichservesasthebasisforourfilingofthisreport.PursuanttotheprovisionsofRule15d-6promulgatedundertheExchangeAct,however,duetothenumberof
recordholdersofournotes,effectiveJanuary1,2009,our
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periodicreportingrequirementshavebeensuspended.WefiledForms15withtheCommissiononJanuary30,2009reflectingthissuspensionanddonotintendtofileanyadditionalperiodicreportswiththeCommissionuntilsuchtime,ifany,theRule15d-6reportingsuspensionisnolongerapplicabletous.
U.S.DepartmentofDefenseContractAshasbeenpreviouslydisclosedbyus,wecurrentlyprovidecustomizedwork-lifeandnon-medicalcounselingservicestoU.S.ArmedServicespersonnelunderacontractwiththeU.S.DepartmentofDefense("USDOD")thatexpiresMarch31,2009.ThisexistingcontractmaybeextendedbytheUSDOD,atitssoleoption,foranadditionalthreemonthperiodendingJune30,2009andasecondadditionalthreemonthperiodendingSeptember30,2009.ThiscontractsucceedsareplacementcontractandseriesofrenewalstoouroriginalcontractwiththeUSDODthatexpiredinearly2006.OnFebruary23,2009,werespondedtotheUSDOD'smostrecentlymodifiedrequestforproposals,orRFP,foranewcontractforserviceswhichwouldcommencefollowingtheexpirationoftheexistingagreement.WecannotpresentlypredictwhentheUSDODwillissueanawardwithrespecttothecontract.Therecanbenoassurancethatwewillbesuccessfulinobtainingtheawardofanewcontractor,ifsuccessful,that
thenewcontractwouldbeawardedoneconomicandothertermsasfavorableasthoseunderwhichwepresentlyprovidesuchservices.FailuretoretainthisbusinessuponsubstantiallysimilartermsaspresentlyexistcouldhaveasignificantimpactontherevenuesofourHRSbusinesssegment.
Segments
Ourbusinesshasthreesegments,HRS,SVSandComdata.WereferyoutoNote18,"SegmentData"toourconsolidatedfinancialstatementsforfinancialinformationaboutourbusinesssegmentsandgeographicareas.ThisinformationmaybefoundinPartII,Item8ofthisreport.
HumanResourceSolutions
HRSoffersabroadrangeofHRoutsourcingsolutionsbuiltaroundacorecapabilityofpayrollprocessing.OurHRoutsourcingsolutionsaredesignedtohelpcompaniesmoreeasilyandeffectivelymanagetheirworkforceandtheinformationintegraltoHRprocesseswhilereducingcostsandenablingthemtofocusontheircorebusinesses.OurhumanresourcemanagementproductsandservicesareprovidedprincipallyintheUnitedStates,CanadaandtheUnitedKingdom.OurinternationalHRSoperationsareprimarilyconductedinCanadathroughCeridianCanada,andintheUnitedKingdomthroughCeridianU.K.HRS'sandU.S.HRS'soperatingunitrevenuesfortheyearendedDecember31,2008,theperiodsNovember10toDecember31,2007,andJanuary1,2007toNovember9,2007,andtheyearendedDecember31,2006werea
sfollows:
SuccessorPredecessorYearEndedDecember31,2008PeriodfromNovember10toDecember31,2007
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PeriodfromJanuary1toNovember9,2007YearEndedDecember31,2006HRSRevenueU.S.HRS$780.5$125.0$698.2$822.4CeridianCanada216.936.5174.5182.6CeridianU.K.92.914.184.294.8TotalHRS$1,090.3$175.6$956.9$1,099.8U.S.HRSRevenueU.S.Payroll$488.1$87.9$471.0$527.1Benefits129.620.9119.5154.0LifeWorks162.816.2107.7141.3Total$780.5$125.0$698.2$822.43
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ProductsandServices
Ourhumanresourcemanagementsolutionsinclude:
payrollprocessing,taxfilingandotherHRservices;
benefitsadministrationservices;and
work-lifeandemployeeassistanceprograms.
U.S.Payroll.OurpayrollprocessingforcustomersintheUnitedStatesconsistsprimarilyofpreparingandfurnishingemployeepayrollchecks,directdepositadvicesandsupportingjournalsandsummaries.Forcertaincustomers,wemayremitcustomerpayrollfundstothecustomer'semployees.Wealsosupplyquarterlyandannualsocialsecurity,Medicareandfederal,stateandlocalincometaxwithholdingreportsandformsthatarerequiredtobefiledbyemployersandemployees.Weprovidehumanresourceinformationsystems(commonlyreferredtoas"HRIS")solutionsthatserveasa"front-end"toourpayrollprocessingsystem,allowingourcustomerstoutilizeacommondatabaseforbothpayrollandotherHRISpurposes.Thisenablesthecustomertocreateasingle
databaseofemployeeinformationforonlineinquiry,updatingandreportinginpayrollandotherareasimportanttohumanresourceadministrationandmanagement,suchasemployeedatatracking,timeandlabormanagement,governmentcompliance,compensationanalysisandbenefitsadministration.WealsoprovideHRISsolutionsthatincorporateopen,industrystandardtechnology,arescalableandcanbeutilizedwithanexistinginterfaceasafront-endforourpayrollprocessingandtaxfilingservices.OurHR/payrollproductsuiteprovidesanintegratedHR/payrollandbenefitssolutionwithoutsourcedpayrollandtaxfilingservicestocustomersprimarilyinthecorporateandenterprisecustomermarkets.Itisprimarilyavailableinahosted"applicationserviceprovider"environmentbutalsocanbemanagedin-houseasaninstalledapplication.Ourhostedsolutionsprovidecustomerswithsecure24/7accesstooursolutionsusinga
standardwebbrowser.OurHR/payrollwebproductisaweb-enabled,fullyhostedintegratedpayrollandhumanresourceadministrationsolution,designedspecificallyforthecorporateandenterprisecustomermarkets.Ceridian'sHR/payrollwebproductalsoincludesintegratedtimemanagementandself-servicefeatures,aswellaswageattachmentsanddisbursements,Internetpayrollmanagementandcustomizationfeatureswithinthecoreproductoffering.WealsoprovideInternetandphone-inpayrollprocessing,taxfiling,unemploymentcompensationmanagementandrelatedservicesforsmallemployerslocatedintheUnitedStatesandCanada.OurSmallBusinessHR/payrollweb-basedsolutionallowscustomerstocompletepayrolltransactionsviatheInternet.TheSmallBusinessHR/payrollproductalsoprovidessmallbusinesseswithaccesstoservicessuchasnewhire
reporting,taxfiling,directdeposit,optionalbenefitsprograms,unemploymentfilingandspecialreportsservicesthatwerepreviouslyonlyavailabletolargercompanies.TaxFiling.OurpayrolltaxfilingservicesforcustomersintheUnitedStatesconsistprimarilyofcollectingfundsforfederal,stateandlocalemploymenttaxesfromcustomersbasedonpayrollinformationprovidedbythecustomers,remittingfundscollectedtotheappropriatetaxingauthorities,filingapplicablereturnsandhandlingrelatedregulatorycorrespondenceandamendments.Ourtaxfilingservicesareprovidednotonlytoemployerswhoutilizeourpayrollprocessingservice,butalsotolocalandregi
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onalpayrollprocessorsanddirectlytoemployersasstandalonetaxservices.OtherHRServices.WealsoprovidecustomerswithanumberofotherHRsolutions.Suchservicesincludetimeandattendance,administrationofpayrollandbenefitfunctions,recruiting,employee/managerself-serviceandhumancapitalmanagementservices.Theseservicesaregenerallydesignedtoautomate,streamlineandintegratecertaintraditionalHRservicestoprovideourcustomerswiththeabilitytofocuslessonadministrationandmoreontheircorebusiness.Benefits.Weprovideemployeehealthandwelfarebenefitsadministrationservicestoourcustomers.Employeehealthandwelfarebenefitsadministrationservicesincludehealthinsuranceportability(i.e.,ConsolidatedOmnibusBudgetReconciliationAct("COBRA")andHealthInsurancePortabilityandAccountabilityActof1996("HIPAA"))complianceservices.Healthandwelfarebenefitsadministrationservicesalsoencompassbenefitsprovidedtoactiveemployees,suchasannualhealthplanenrollment,ongoingemployeeenrollmentandeligibilityservices,tuitionrefundplans,transportationreimbursementundertheTransportationEquityAct,andInternalRevenueCodeSection125plansincludingfully-administeredandself-administeredflexiblespendingaccountsandpremium-onlyplans.4
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Wealsoprovidequalifieddomesticrelationsorderandmedicalsupportorderadministrationtoourcustomers,andadministrationandbenefitsbillingservicesforbenefitsprovidedtoretiredandinactiveemployeesofourcustomers,includingretireehealthcare,disability,survivingdependent,familyleaveandseverancebenefits.LifeWorks.Weprovidecustomersofallsizesandtheiremployeeswithasinglesourceforfullyintegratedwork-lifeandemployeeassistanceprograms.Ourcustomersincludeemployersinboththeprivateandpublicsectors(includingcertainagenciesoftheU.S.government).Servicesaredeliveredthroughonlineaccessandtelephonically,andthroughface-to-facecounselingprovidedbyreferralresources.Theservicesandprogramsweprovidemaybecustomizedtomeetanindividualcustomer'sparticularneeds.Ourportfolioofproductsallowsacustomertochoosethemix,levelandmodeofaccesstoservicesthatbestmeetitsneeds.Theseproductsrangefrom"hightouchtechnology"capabilitiesallowingemployeestoaccessspecificinformationonlinetocomprehensive"person-to-person"consultationandreferralservices.Alsoincludedarespecializedserviceoptions,suchasassistancewithcollegeselection,eldercareassessmentandfacilityreviewservices,andhealthandwellnessservices.Theseservicesaddressemployeeeffectivenessissuesandseektoimproveemployeeretentionandproductivity,reduce
absenteeismandincreaserecruitmentsuccess.Consultantsprovideconfidentialassistance24hoursadaytocustomers'employeestohelpthemaddressissuesrangingfromeverydaymatterstocrisissituations.Supportingtheseconsultantsareresearchandsubjectmatterexpertswhoprovidespecializedexpertiseorreferralsinareassuchasparenting/childcare,eldercare,disabilities,addictiondisorders,mentalhealth,healthandwellness,financial,legal,managerial/supervisoryandeducation/schoolingissues.Wehavealsoenteredintoarrangementswithsomeserviceandproductproviderstoprovideadditionalservicesandexpertisetoourcustomers.HRO.OurHROoperatingunitassumesresponsibilityforourcustomers'entirehumanresourcesdepartment.Wefocusoncompanieswith3,000to15,000employees,providingthemwithacomprehensivesuiteofmodular,fullymanagedHRSproducts.
InternationalOperations.CeridianCanadaprovidespayrollprocessingservices,HRISsolutions,taxfilingservices,work-lifeandemployeeassistanceprogramsandrecruitmentservicestoitsCanadiancustomers.CeridianCanadacollectspayrollandpayrolltaxamountsfromcustomers,remitstaxamountstoapplicablegovernmentalauthoritiesandmakesdirectdepositsofpayrollamountstoemployees'bankaccounts.CeridianU.K.providespayrollprocessingservices,HRISsolutions,HROservices,otherHRservices,work-lifeandemployeeassistanceprogramsandrecruitmentservicesprimarilyintheUnitedKingdom.Wehavebeguntoexpandourinternationalpayrollservicesintoothercountries,principallyinEurope,byengagingpartnerswithinacountrytoprovidethepayrolladministrationandprocessingservicesthatweprovideinthatcountry.Weinturnhavecontractedwithmultinationalcustomers
fortheirinternationalrequirementsanddeliverafullyoutsourcedpayrollservicetothesecustomers.Therearerisksassociatedwithoperatinginternationally,includingthosedescribedinItemIAofthisreport.
Market
Themarketforhumanresourcesolutionscoversacomprehensiverangeofinformationmanagement,humanresourceadministrationandemployeeassistanceproducts,servicesandsoftware.Theseproducts,servicesandsoftwar
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einclude:
transaction-orientedadministrativeservicesandsoftwareproducts,primarilyinareassuchaspayrollprocessing,taxfilingandbenefitsenrollmentandadministration;and
managementsupportservicesandsoftware,primarilyinareassuchasrecruitingandhumancapitalmanagement,humanresource
administration,regulatorycompliance,work-lifeandemployeeassistanceprograms.Webelievethatthemarketforthesesolutionswillcontinuetogrowasorganizationsseektoreducecosts,improveproductivityandaddservicesforemployeesbyoutsourcingadministrativeservicesandfurtherautomatinginternalprocesses.Wealsobelievethedemandforhumanresourcesolutionswillincreaseasorganizationsseekassistanceinmaintainingtheircompliancewiththeincreasingscopeandcomplexityoflawsandregulationsgoverningbusinessesandincreasinglycomplicatedwork-lifeissuesfacedbyemployersandemployees.
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Wegenerallyclassifycustomersinthehumanresourcesolutionsmarketintothreecategoriesbyemployersize,eachofwhichrepresentsadistinctmarketopportunityforus:
TypeofEmployerSmallSizeofEmployer*Fewerthan100employeesTypicalCharacteristicsHumanresourcemanagementneedstendtoberelativelymorepricesensitive,torequirelesscustomizationorflexibilityinproductandserviceofferingsandtoswitchmorereadilyfromoneprovidertoanother.Corporate100to5,000employeesHumanresourcemanagementneedstendtobemorecomplex,andthereforerequiresmoreflexibilityinproductsandservices,greaterintegrationamongdataprocessingsystemsandagreatervarietyofproductsandservices.EnterpriseOver5,000employeesHumanresourcemanagementneedstendtobethemostcomplex,andthereforeoftenrequirethemostcustomizationandflexibilityinproductsandservices,thegre
atestintegrationamongdataprocessingsystemsandthegreatestvarietyofproductsandservices;alsohasthegreatestrelianceontheirintegrallegacysystemsthatincreasesintegrationcomplexityandchallengesoutsourcingandmigrationdecisions.
*ThiscolumnofthetablereflectstheemployersizeofU.S.customers.InCanadaandtheUnitedKingdom,theemployersegmentsizesaretypicallysmaller,althoughthecharacteristicsofsuchsegmentsaresimilarinnature.Webelieve,however,thatwithregardtoanysizeemployer,aproviderofacoretransaction-basedservice,suchaspayrollprocessingortaxfiling,is
affordedopportunitiestocomplementthatcoreservicewithadditionalproductsandservicesthatarenaturaladjunctstothatservice,suchastimeandlabormanagement,healthinsuranceportabilitycomplianceadministration,flexiblespendingaccountadministration,employeeself-service,benefitseligibilityandenrollment,andemployeeassistanceandwork-lifeservices.Webelieveourabilitytowrapvalue-addedservicesaroundacoreserviceorproductinanintegratedmannerwillleadtorevenuegrowthandourabilitytoachievehighermargins.Further,webelievethatcustomersareincreasinglyseekingprovidersthatcantakeresponsibilityforentirehumanresourcemanagementprocesses.TheseHROrelationshipstransferresponsibilityformanagingeachcoreprocessfromtheemployertotheprovider.ThroughHRO,weareabletoprovideourcustomerswithacomprehensivesuiteofmodular,fullymanagedHRSp
roductsandservicesdescribedabove.Byfullymanagingtheproductsandservicesthatwecanotherwiseprovideonastandalonebasisandpresentingasinglefacetoourcustomers'employees,weareabletotransferresponsibilityformanagingeachcoreHRprocessfromtheemployertotheprovider.OurHROservicestodatetypicallyinvolve:
(1)conversionandimplementationconsultingservices;(2)processingandhostingservicesrelatedtopayroll,taxfilingandbenefitsneeds;and(3)administrationofHR,payrollandbenefitsfunctions.CustomerFunds
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managementsoftwareapplications.Apartfrompayrollprocessingandtaxfiling,ourotherhumanresourcesolutionsgenerallycompetewithavarietyofnationalandregionalapplicationsoftwarecompanies,consultingfirms,financialservicescompaniesandhumanresourceservicesproviders.Generally,themarketsfortheseproductsandservicesareevolving.Currently,webelievetheprincipalcompetitivefactorsforusinthehumanresourcesolutionsindustryare:
repeatableandreliabletransactionprocessingwithtimelyandaccurateaccesstodata;
servicingourcustomers;
choiceofservices;
performance;
price;
functionality;
easeandflexibilityofuse;
expertiseinHRprocesses;
integratedplatforms;
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ationalpresenceandprocesstransactionsoriginatingfrom35countriesoutsidetheUnitedStates.SVSisbasedinLouisville,Kentucky.SVS'srevenuefromproductsandservicesfortheyearendedDecember31,2008,theperiodsNovember10toDecember31,2007,andJanuary1,2007toNovember9,2007,andtheyearendedDecember31,2006wereasfollows:
Successor
YearEndedDecember31,2008PeriodfromNovember10toDecember31,2007Revenue$104.7$15.4
Predecessor
PeriodfromJanuary1toNovember9,2007
YearEndedDecember31,2006$154.9$153.8
ProductsandServices
SVSprovides,amongotherservices,storedvaluecardprogramstomajorretailersthatareusedasgiftcards,giftcertificates,creditsforreturnedproductandretailpromotions.Withrespecttostoredvaluecards,SVSprovidestransactionprocessingandreportingservices.Customersmayalsochoosetopurchasecardsalone.SVSalsoprovidesancillarysupportservicesincludingcardinventorymanagementandassistanceindesigningand
supervisingtheproductionofplasticcards.SVSbelievesthatitscards,transactionreliability,cardmaintenance/inventoryprogramsandreportingcapabilityprovidebenefitstoretailersandtheircustomers,includingeaseofuseandcontrolspreviouslydifficulttorealize.In2006,SVSexpandeditsproductofferingthroughtheacquisitionoftheremaininginterestinSASHManagement,L.L.C.d/b/aGiftCardSolutionsandGiftCheckSolutions,amid-marketproviderofgiftcertificatesandgiftcards,andsubstantiallyalloftheassetsofHQGiftCards,LLC,aproviderofmallgiftcardprogrammanagementservices.
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Suppliers
Comdata'scurrentbusinessreliesuponrelationshipswithsuppliersandotherthird-parties,suchasMasterCard,toeffectandsupporttransactions,includingaccesstotheMasterCardnetwork,CirrusATMnetworkandtheMaestropoint-of-saledebitnetwork.TheabilityofComdatatocontinuetoprovidesomeofitsservicesinthemannerinwhichitcurrentlydeliversthemmaybeaffectedbyactionstakenbysuppliersandotherthird-parties,includingMasterCardorothersimilarcardassociations.
Competition
Theprincipalcompetitivefactorsrelevanttotransactionprocessingaremarketingefforts,pricing,reliabilityofcomputerandcommunicationssystemsandtimerequiredtoeffecttransactions.Themajorcreditanddebitcardassociationsandcompanies,suchasVisa,MasterCard,AmericanExpressandDiscover,aresignificantcompetitorsofComdatabecausetheymakecashavailableto,andfacilitatepurchasesoffuelandotherproductsby,holdersoftheircardsonanationwidebasis.Severalothercompaniesalsooffersimilarservices,includingFirstDataCorporation,T-ChekSystems,Inc.,FleetOne,L.L.C.,FleetCorandWrightExpressCorp.Inaddition,
truckstopsoftennegotiatedirectlywithtruckingcompaniesforadirectbillingrelationship.SomeofComdata'scompetitors,suchasTransportationClearingHouse,LLC,anaffiliateofFlyingJ,Inc.,areundercommonownershipwithentitiesthatoperateorfranchisenationwidetruckstopchains.Inaddition,Comdatacompeteswithtruckstopsandotherservicecentersthatoffersimilarproductsandservices.Whilethemajorityofregulatoryservicescontinuetobeperformedbycustomersin-house,severalregionalcompanies,includingThePermitCompany,providepermitservicessimilartothoseprovidedbyComdata.Competitioninthismarketisinfluencedbyprice,theexpertiseofpersonnelandtheeasewithwhichpermitsmaybeorderedandreceived.Inaddition,webelievethattechnologicaladvanceswillimpactthewayregulatoryservicesaredeliveredandmaygiverisetonewcompetitorsorchangethewayth
isserviceisoffered.WebelievethatComdata'scompetitivestrengthsincludeits:
abilitytoprovideservicestotruckingcompaniesanddriversatalargenumberoflocationsinthecontinentalUnitedStatesandCanada;
abilitytoofferavarietyofservices,frequentlytailoredtoanindividualcustomer'sneeds;
proprietarydatabasesregardingfundstransfersandfuelpurchases;
highqualityofcustomerservice;and
long-termrelationshipsandpositivereputationintheindustriesitserves.
Regulation
Manystatesrequirepersonsengagedinthebusinessofmoneytransmissionorthesaleorissuanceofpaymentinstruments,suchastheComchekdraft,toobtainalicensefromtheappropriatestateagency.Comdataislicensedin41statesandissubjecttothevariousstaterequirementstomaintaintheselicenses,includingpostingbonds,periodicreportingandannualexaminations.Comdatabelievesthatitiscurrentlyincompliancein
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allmaterialrespectswiththeregulatoryrequirementsapplicabletoitsbusiness.Thefailuretocomplywiththerequirementsofanyparticularstatecouldsignificantlyadverselyaffectourbusinessinthatstate.
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Item1A.RiskFactors
Ourbusinessfacesrisks.Anyoftherisksanduncertaintiesdiscussedbelow,orelsewhereinthisreportorourotherfilingswiththeCommission,couldhaveamaterialimpactonourbusiness,financialconditionorresultsofoperations.Additionalrisksanduncertaintiesnotpresentlyknowntousorthatwecurrentlybelievetobeimmaterialmayalsoadverselyaffectourbusiness.Ifanyoftherisksanduncertaintiesdevelopsintoactualevents,ourbusiness,financialconditionorresultsofoperationscouldbemateriallyaffected.
Generaleconomicfactorscouldadverselyaffectourfinancialperformanceandotheraspectsofourbusiness.
Generaleconomicconditionsandtrade,monetaryandfiscalpolicesimpactourbusinessandtheindustriesweserve.Sinceatleastasearlyasthethirdquarterof2008,macroeconomicconditionshavedeteriorated.Afurtherorprolongedslowdownintheeconomyorothereconomicconditionsaffectingoverallunemploymentlevels,businessandconsumerspendingandretailstrengthmayadverselyaffectouroperatingresultsby,amongotherthings:(i)decreasingrevenueinourHRSbusinessthroughdecreasedcusto
meremployeecountsoramountsofemployeewageandbonuspayments,diminishedorslowingcustomerordersandtimingofproductinstallationsandreducedspendingonoutsourcingorpressuretorenegotiateexistingcontacts;(ii)decreasingrevenueatComdataastheresultoflowerfuelpricesanddecreasedactivityinthetransportationindustriesandincreasedcreditorbaddebtriskwithrespecttocustomerspurchasingfuelusingaComdatapaymentmethod;and(iii)decreasingrevenueatSVSduetodecreasedactivityintheretailindustry.Additionally,lowerinterestratesandriskassociatedwithcertaininvestmentoptionshavecausedadecreaseinourrevenuefrominterestincustomerfundsheldintrust.Currentglobaleconomicconditionsanduncertaintiesconcerningthepotentialforfailuresorrealignmentsoffinancialinstitutionsandtherelatedimpactonavailablecreditmayalsoadverselyaffectusorourbusinesspartners
andcustomersbyreducingaccesstocapitalorcredit,increasingcostofdebtandlimitingabilitytomanageinterestraterisk,andincreasingtheriskofbankruptcyofpartieswithwhichwedobusiness,includingcreditordebtrelatedcounterparties.Sucheconomicconditionsanduncertaintiesmayalsoadverselyaffectusandourbusinesspartnersandcustomersthroughincreasedinvestmentrelatedrisksbydecreasingliquidityand/orincreasinginvestmentlosses.Inaddition,wearedependentuponvariouslargebankstoexecutepaymenttransactionsaspartofourclientpayrollandtaxservices.
Significantchangesin,ornoncompliancewith,governmentalregulations,proceduresandrequirementscouldhaveamaterialadverseeffectonourbusinessandfinancialperformance.
Changesinortheeliminationofgovernmentalregulationsmayadverselyaffectourrevenueandearningsandthewayinwhichweconductourbusiness.Changesingovernmentalregulationsaredifficulttopredictandcouldbesignificant.Forexample,thetimingandamountofremittancesassociatedwiththeinvestmentofcustomerfunds,areductionintheperiodoftimeweareallowedtoholdremittancesaswellastheamountofsuchremittances,maydecreaseourrevenueandearnings.Asanotherexample,theextentandtypeofbenefitsthatemployersarerequiredtoormaychoosetoprovidetoemployeesand/ortheamountandtypeoffederalorstateta
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improvementswhichcouldadverselyaffectthetimingoreffectivenessandmarginimprovementeffortsinourbusinessandourabilitytosuccessfullycompeteinthemarketsweserve.Inaddition,thecostsassociatedwithimplementingourplans,includingone-timecostsassociatedwithouroperatingimprovementplan,mayexceedanticipatedamountsandwemaynothavesufficientfinancialresourcestofundallofthedesiredornecessaryinvestmentsrequiredinconnectionwithourplans.Theexecutionofourstrategicandoperatingplanswill,tosomeextent,alsobedependentonexternalfactorsthatwecannotcontrol.Inaddition,thesestrategicandoperationalplansneedtocontinuetobeassessedandreassessedtomeetthechallengesandneedsofourbusinessesinorderforustoremaincompetitive.Thefailuretoimplementandexecuteourstrategicandoperatingplansinatimelymanneroratall,realizethecostsavingsorotherbenefitsorimprovementsassociatedwithsuchplans,havefinancialresourcestofundthecostsassociatedwithsuchplansorincurcostsinexcessofanticipatedamounts,orsufficientlyassessandreassesstheseplanscouldadverselyaffectourbusinessorfinancialresults.
Ourindebtednesscouldadverselyaffectouroperationsandrestrictourabilitytopursueourbusinessstrategies.
Ourdebt,includingtherelatedrestrictivecovenantsthatimposeoperatingandfinancialrestrictionsonus,andourotherfinancialobligationscouldhaveimportantconsequencestous,suchas:
increasingourvulnerabilitytogeneraladverseeconomic,competitiveandindustryconditions;
limitingourabilitytoobtainadditionalfinancinginthefutureforworkingcapital,capitalexpenditures,acquisitions,generalcorporatepurposesorotherpurposesonsatisfactorytermsoratall;
requiringustodedicateasubstantialportionofourcashflowfromoperationstothepaymentofourindebtedness,thereby
reducingthefundsavailabletousforoperationsandanyfuturebusinessopportunities;
exposingustotheriskofincreasedinterestratesascertainofourborrowings,includingborrowingsunderourseniorsecuredcreditfacilities,whichareatvariableratesofinterest;
restrictingusfrommakingstrategicacquisitions,causingustomakenon-strategicdivestitures,orlimitingourabilitytoengageinactsthatmaybeinourlong-termbestinterests(includingmergingorconsolidatingwithanotherperson,sellingorotherwisedisposingofallorsubstantiallyallofourassets,redeeming,repurchasingorretiringourcapitalstock,subordinateddebtorcertainotherdebtorincurring
orguaranteeingadditionaldebt);
limitingourplanningflexibilityfor,orabilitytoreactto,changesinourbusinessandtheindustriesinwhichweoperate;and
limitingourabilitytoadjusttochangingmarketconditions.Ifwefailtomakeanyrequiredpaymentunderourindebtednessortocomplywithanyofthefinancialandoperatingcovenantsrelatedthereto,wewillbeindefault.Ourlenderscouldthenvotetoacceleratethematurityoftheindebtednessandforecloseuponourandoursubsidiaries'assets
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securingsuchindebtedness.Othercreditorsmightthenaccelerateotherindebtedness.Ifanyofourcreditorsacceleratethematurityoftheirindebtedness,wemaynothavesufficientassetstosatisfyourobligationsunderourindebtedness.Weandoursubsidiariesmaybeabletoincuradditionalindebtednessinthefuture.Ifweincuradditionaldebtabovethelevelsineffect,therisksassociatedwithourleveragewouldincrease.
Ourresultsofoperationscouldbeadverselyaffectedifwefailtoretainourexistingcustomers,selladditionalproductsandservicestoourexistingcustomers,introduceneworenhancedproductsandservicesandattractandretainnewcustomers.
Ourrevenueandrevenuegrowtharedependentonourabilitytoretaincustomers,sellthemadditionalproductsandservices,introducenewproductsandservicesandattractnewcustomersineachofourbusinesses.Ourabilitytoincreaserevenuewilldependonavarietyoffactors,including:
customerwillingnesstoacceptanypriceincreases;
thequalityandperceivedvalueofourproductandserviceofferingsbyexistingandnewcustomers;
effectivesalesandmarketingefforts;
ourspeedtomarketandavoidanceofdifficultiesordelaysindevelopmentofnewproductsandservicesandthesuccessfulimplementationofproductsandservicesfornewandexistingcustomers;
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requiredouremployees,consultants,customers,andcollaboratorstoenterintoconfidentialityagreements.Ourtrademarkscouldbechallenged,forcingustore-brandourproductsorservices,resultinginlossofbrandrecognitionandrequiringustodevoteresourcestoadvertisingandmarketingnewbrands.Furthermore,litigationmaybenecessarytoenforceourintellectualpropertyrights,toprotectourtradesecretsandtodeterminethevalidityandscopeofourproprietaryrights.Theintellectualpropertylawsandotherstatutoryandcontractualarrangementswecurrentlydependuponmaynotprovidesufficientprotectioninthefuturetopreventtheinfringement,useormisappropriationofourtrademarks,data,technologyandotherproductsandservices.Inaddition,thegrowingneedforglobaldata,alongwithincreasedcompetitionandtechnologicaladvances,putsincreasingpressureonustoshareourintellectualpropertyforclientapplications.Policingunauthorizeduseofintellectualpropertyrightscanbedifficultandexpensive,andadequateremediesmaynotbeavailable.Anyfuturelitigation,regardlessofoutcome,couldresultinsubstantialexpenseanddiversionofresourceswithnoassuranceofsuccessandcouldadverselyaffectourbusiness,resultsofoperationandfinancialcondition.ThefailureofourHRSbusinesstocomplywithapplicablelawscouldresultinsubstantialtaxes,penaltiesandliabilitiesthatcouldadverselyaffectourbusiness.Wearesubjecttovariouslawsandregulations,andourfailuretocomplywithsuchlawsandregulationscouldadverselyaffectourbusiness.For
example,ourHRScustomersremitemployerandemployeetaxfundstoourHRSbusinesses.OurHRSbusinessprocessesthedatareceivedfromitscustomersandremitsthefundsalongwithataxreturntotheappropriatetaxingauthoritieswhendue.Undervariousserviceagreementswithitscustomers,ourHRSbusinessassumesfinancialresponsibilityforthepaymentofthetaxes,penaltiesandliabilitiesassessedagainstitscustomersarisingoutofthefailureofourHRSbusinesstofulfillitsobligationsunderitsagreementswiththesecustomers,unlessthesetaxes,penaltiesorliabilitiesareattributabletothecustomer'sfailuretocomplywiththetermsoftheagreementthecustomerhaswithourHRSbusiness.Thesetaxes,penaltiesandliabilitiescould,insomecases,besubstantialandcouldadverselyaffectitsbusinessandoperatingresults.Additionally,thefailureofourHRSbusinessto
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fulfillitsobligationsunderitscustomeragreementscouldadverselyaffectourreputation,itsrelationshipwithourcustomersanditsabilitytogainnewcustomers.Inaddition,mistakesmayoccurinconnectionwiththisservice.OurHRSbusinessanditscustomersmaybesubjecttopenaltiesimposedbytaxauthoritiesforlatefilingsorunderpaymentoftaxes.AsaresultoftheservicesourBenefitsoperatingunitprovides,itmaybesubjecttopotentiallegalliabilityasaproviderofportabilitycomplianceservices.AsaproviderofCOBRAcomplianceservices,ourBenefitsoperatingunitissubjecttoexcisetaxesandpenaltiesfornoncompliancewithprovisionsofCOBRA.InadditiontotheexcisetaxandpenaltyliabilitiesthatmaybeimposedonourBenefitsoperatingunit,substantialexcisetaxesandpenaltiesmaybeimposedunderCOBRAonourcustomers.Inaddition,asaproviderofHIPAAcomplianceandadministrationservices,ourbenefitservicesbusinessmaybesubjecttopenaltiesundertheEmployeeRetirementIncomeSecurityActof1974("ERISA")fornoncompliancewithvariousprovisionsofHIPAA.Asaresultofwork-lifeandemployeeassistanceprogramscurrentlyprovidedtothefederalgovernment,wearerequiredtocomplywithapplicablefederalcontractingregulations.Non-compliancewithrequiredreportingandperformanceactivitiessubjectsustopenaltiesandlegalliabilitiesimposedbyregulatoryauthorities.
Litigationandgovernmentalinquiries,investigationsandproceedingsmayadverselyaffectourfinancialresults.
Wemaybeadverselyaffectedbyjudgments,settlements,unanticipatedcostsorothereffectsoflegalandadministrativeproceedingsnowpendingorthatmaybeinstitutedinthefuture,orfrominvestigationsbyregulatorybodiesoradministrativeagencies,includingtheCommission.Fromtimetotime,wehavehadinquiriesfromregulatorybodiesandadministrativeagenciesrelatingtotheoperationofourbusiness.Itisourpracticetocooperatewithsuchinquiries.Suchinquiriesmayresultinvariousaudits,reviewsandinvestigations.Anadverseoutcomeofanyinvestigationby,orotherinquiriesfrom,suchbodiesoragenciescouldhaveamaterialadverseeffectonusandresultintheinstitutionofadministrativeorcivil
proceedings,sanctionsandthepaymentoffinesandpenalties,changesinpersonnel,andincreasedreviewandscrutinyofusbyourcustomers,regulatoryauthorities,themediaandothers.Wearealsosubjecttoclaimsandanumberofjudicialandadministrativeproceedingsconsiderednormalinthecourseofourcurrentandpastoperations,includingemployment-relateddisputes,contractdisputes,intellectualpropertydisputes,governmentauditsandproceedings,customerdisputesandtortclaims.Respondingtosuchclaimsmaybedifficultandexpensive,andwemaynotprevail.Insomeproceedings,theclaimantseeksdamagesaswellasotherrelief,which,ifgranted,wouldrequireexpendituresonourpart.Therecanbenocertaintythatwemaynotultimatelyincurchargesinexcessofpresentlyorestablishedfuturefinancialaccrualsorinsurancecoverage,orthatwewouldprevail.Whetherweprevailornot,suchlitigationmayhaveamaterialad
verseeffectonourbusiness,operatingresultsandfinancialcondition.SeeItem3,"LegalProceedings"inthisreportandNote17,"LegalMatters"toourconsolidatedfinancialstatementscontainedinPartII,Item8ofthisreport.
Oursuccessisdependentontheretentionandacquisitionoftalentedpeopleandtheskillsandabilitiesofourmanagementteamandkeypersonnel.
Ourbusinessdependsontheefforts,abilitiesandexpertiseofourseniorexecu
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nginternationaloperations;difficultieswithorinabilitytoengageglobalpartners;absenceofcertainintellectualpropertyandotherlegalrightsinsomecountries;longersalesandpaymentcycles;theburdensofcomplyingwithawidevarietyofforeignlaws;exposuretolegaljurisdictionsthatmaynotrecognizeorinterpretcustomercontractsappropriately;exposuretolocaleconomicandpoliticalconditions;andchangesincurrencyexchangerates.Inaddition,weanticipatethatcustomersandpotentialcustomersmayincreasinglyrequireanddemandthatasinglevendorprovideHRSsolutionsandservicesfortheiremployeesinanumberofcountries.Ifweareunabletoprovidetherequiredservicesonamultinationalbasis,theremaybeanegativeimpactonournewordersandcustomerretention,whichwouldnegativelyimpactrevenueandearnings.Althoughwehaveamultinationalstrategy,additionalinvestmentandeffortsmaybenecessarytoimplementsuchstrategy.
Ourbusinessandresultsofoperationsaredependentonseveralvendors,suppliersandotherthirdparties,thelossofanyofwhomcouldadverselyaffectourconsolidatedresultsofoperations.
Ourbusinessisdependentonanumberofvendors,suppliersandotherthird-parties,thelossofanyofwhomcouldadverselyaffectourconsolidatedresultsofoperations.Inparticular,Comdata'scurrentbusinessreliesuponitsrelationshipswithsuppliersandotherthird-partiessuchasMasterCard,
toeffectandsupporttransactions,includingaccesstotheCirrusATMnetwork,theMaestropoint-of-saledebitnetworkandMasterCard'screditnetwork.TheabilityofComdatatocontinuetoprovidesomeofitsservicesinthemannerinwhichitcurrentlydeliversthemmaybeaffectedbyactionstakenbysuppliersandotherthird-parties,includingMasterCard.AnyadversechangeinComdata'srelationshipwiththesepartiesorComdata'sinabilitytotimelyandeffectivelyestablishalternativestotheserelationshipscouldlikelyadverselyaffectComdata'sbusinessandresultsofoperationsandcouldadverselyaffectourconsolidatedresultsofoperationsaswell.
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Financingactivities1,082.3(1,195.5)(2,097.7)902.2111.498.3818.9OtherFinancialData:Capitalexpenditures(2)$52.7$62.1$8.1$54.0$53.0$64.2$65.8NumberofEmployeesatendofyear8,7769,3239,3239,5389,6339,517Financingactivities1,082.3(1,195.5)(2,097.7)902.2111.498.3818.9OtherFinancialData:Capitalexpenditures(2)$52.7$62.1$8.1$54.0$53.0$64.2$65.8NumberofEmployeesatendof
year8,7769,3239,3239,5389,6339,517(1)YearEndedDecember31,2007amountsrefertothemathematicalcombinationofthe2007SuccessorperiodfromNovember10,2007toDecember31,2007,andthePredecessorperiodfromJanuary1,2007toNovember9,2007;thisisaNon-GAAPpresentation.(2)Capitalexpendituresprimarilyconsistofpropertyandequipmentandsoftwareanddevelopmentcosts.22
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ResultsofOperations
OuraccountingfortheMergerfollowstherequirementsofSFASNo.141,"BusinessCombinations,"andStaffAccountingBulletin("SAB")No.54,"Applicationof"Pushdown"BasisofAccountinginFinancialStatementsofSubsidiariesAcquiredbyPurchase",whichrequirethatpurchaseaccountingtreatmentofthemergerbe"pusheddown,"resultingintheadjustmentofallofournetassetstotheirrespectivefairvaluesasoftheMergerdate.AlthoughwecontinuedasthesamelegalentityaftertheMerger,theapplicationofpushdownaccountingrepresentstheterminationoftheoldaccountingentityandthecreationofanewentity.Asaresult,ourconsolidatedfinancialstatementsfor2007arepresentedfortwoperiods:SuccessorandPredecessor,whichrelatetotheperiodsucceedingtheMergerandperiodprecedingtheMerger,respectively.Wehavepreparedourdiscussionoftheresultsofoperationsbycomparingthetwelvemonthperiodsin2008and2006withthemathematicalcombinationofthe2007SuccessorperiodfromNovember10,2007toDecember31,2007,andthePredecessorperiodfromJanuary1,2007toNovember9,2007.WerefertothetwelvemonthsendedDecember31,2007asthe2007CombinedPeriod.Althoughthispresentationdoesnotcomplywithgenerallyacceptedaccountingprinciples("GAAP"),webelievethecombinationofthe2007periodsp
rovidesameaningfulcomparisontothe2008and2006periods.ThecombinedoperatingresultshavenotbeenpreparedasproformaresultsunderapplicableregulationsandmaynotreflecttheactualresultswewouldhaveachievedabsenttheMerger.Thefollowingtablesetsforththeamountsfromourconsolidatedstatementsofoperationsforboththe2007PredecessorandSuccessorperiodsandarrivesatthecombinedresultsforthetwelvemonthsendedDecember31,2007.
Successor
Predecessor2007Periodfrom
PeriodfromCombinedNovember10to
January1toPeriodDecember31,2007
November9,2007
Revenue$1,644.9$237.0
$1,407.9
Costofrevenue910.2128.2
782.0R&DexpenseSG&Aexpense522.170.8451.3Loss(gain)onderivativeinstruments1.9(0.1)2.0Interestincome(21.4)(3.4)(18.0)Totalcostsandexpenses1,495.8256.21,239.6Incometaxprovision(benefit)66.0(6.8)72.830.74.0
26.7Other(income)expense,net(3.3)6.4
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incometaxes(135.5)149.1(284.6)NM(8.6)9.1Incometaxprovision(benefit)(43.1)66.0(109.1)NM(2.7)4.0Netearnings$(92.4)$83.1(175.5)NM(5.9)
(1)2007amountsrefertothe2007CombinedPeriod;thisisaNon-GAAPpresentation.NMrepresentscomparisonsthatarenotmeaningfultothisanalysis.Consolidatedrevenuedecreased$79.6,or4.8%,to$1,565.3in2008from$1,644.9in2007.RevenueinHRSdecreased$42.2,SVSdecreased$65.6,andComdataincreased$28.2in2008.Therewasanegativerevenueimpactof$90.4in2008incomparisonto2007asaresultofthenetimpactoftheDeferredRevenueAdjustment.TheHRSrevenuedecreasewasprimarilydueadecreaseininterestincomeearnedoninvestedcustomerfunds,theneteffectoftheDeferredRevenueAdjustmentandwrite-downsoncustomerfundinvestments,partiallyoffsetbyincreasedrevenueinourgovernmentLifeWorksbusiness.OurSVSrevenuedecreasewasdrivenbytheeffectsoftheDeferredRevenueAdjustmentpartiallyoffsetbyincreasedrevenueduetogreatertransactionvolumeandtheadditionofnewcustomersthroughinternalgrowth.OurComdatarevenueincreasewasdrivenbyhighercostoffuelinourlocalandlonghaulfleetbusinessesandincreaseduseoftheComdataCardinourlocalfleetbusiness,partiallyoffsetbyadecreaseintransactionsinourlong
haulbusinessduetofuelreductionmeasurestakenbyourcustomersandareductioninshipmentsbyourcustomers.ResultsforourHRS,SVSandComdatasegmentsarediscussedbelowunder"BusinessSegmentResults."
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theadditionofnewcustomersthroughinternalgrowth.Revenuefromretailservicesisgenerallydeferredandrecognizedlargelyoverasix-monthperiodfollowingtheactivationofacard,whichtypicallytakesplaceabouteightmonthsaftertheshipmentofthecardtotheretailer.Cardsdelivereddecreasedbyapproximately13.9%incomparisonof2008over2007andincreased6.1%incomparisonof2007over2006.Transactionsprocessedincreasedapproximately10.3%incomparisonof2008over2007.SVScostofrevenueasapercentofrevenuefor2008increasedto87.9%comparedto87.7%in2007.ThisincreasewasduetothenetnegativeimpactoftheDeferredRevenueAdjustmentandtheDeferredCostAdjustment,partiallyoffsetbymarginimprovementoncardshipmentsandcostreductionefforts.SG&Aexpenseincreased$3.9to$19.8in2008comparedto$15.9in2007.Thisincreasewasprimarilyduetogeneralspendingincreases,higherprofessionalservicefeesandincreasedsellingcostpartiallyoffsetbyloweramortizationexpense.Otherincome,netin2007reflectsa$1.0gainfromthesaleofacustomerportfolio.SVSEBITdecreased$13.4toalossof$9.3in2008comparedtoearningsof$4.1in2007.ThiswasprimarilyduetotheimpactoftheDeferredRevenueAdjustmentandtheDeferredCostAdjustmentpartiallyoffsetbyimproved
cardmarginsandcostreductionefforts.
Comdata
IncreaseAmount(Decrease)%ofRevenue20082007(1)$%20082007(1)
Revenue$370.3$342.128.28.2100.0100.0Costofrevenue166.9127.439.531.045.137.2SG&Aexpense98.394.34.04.226.527.6R&Dexpense4.76.7(2.0)(29.9)1.32.0Lossonderivative
instruments-1.9(1.9)NM-0.6Otherincome,net-(0.2)0.2--(0.1)EBIT$100.4$112.0(11.6)(10.4)27.132.7
(1)2007amountsrefertothe2007CombinedPeriod;thisisaNon-GAAPpresentation.NMrepresentscomparisonsthatarenotmeaningfultothisanalysis.Comdatarevenueincreased$28.2,or8.2%,to$370.3in2008from$342.1in2007.Thisincreasewasdueprimarilytoa$6.8increaseinthelonghaulbusiness,a$17.0increaseinthelocalfleetbusinessanda$4.4increaseinotherservices.Thelonghaulbusinessincreaseresultedfromthe$11.4impactfromhigheraveragecostoffuel,partiallyoffsetbyadecreaseintransactionsontheComdataCarddrivenbyfuelconsumption
reductionmeasurestakenbyourcustomersanddecreasesinlonghaulshipmentsbyourcustomersinthefourthquarterof2008.TheincreaseinthelocalfleetbusinesswaslargelyduetoincreasedutilizationbylocalfleetcustomersoftheComdataCardandotherproductsandservicesaswellasfromthehigheraveragecostoffuel.TheincreaseinotherserviceslargelycamefromincreasedsalesofPC-basedpointofsaleequipmentandpayatthepumpequipmenttofuelingcentersandanincreaseinourregulatorycompliancebusiness.Comdatacostofrevenueasapercentofrevenuefor2008increasedto45.1%comparedto37.2%in2007.Thisincreasewasdueprimarilyto
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increasedamortizationexpenserelatedtotheMerger,aswellasgrowthinrevenuecomingfromalowermarginmarketsegmentandincreasedpayrollrelatedcostsduetoanincreasedsupportofproductlines,increasedtechnologycostsandmeritincreases.SG&Aexpenseincreased$4.0,or4.2%,to$98.3in2008comparedto$94.3in2007.ThiswasprimarilyduetoincreasedamortizationexpenserelatedtotheMerger,higherbaddebtexpenserelatedtothedifficulteconomicclimateandeffectofhigherpriceoffuelonourcustomers,andincreasedsellingexpenseasaresultofhigherrevenue,partiallyoffsetbyreducedallocatedone-timechargesrelatedtoourevaluationofstrategicalternativesfortheCompanypriortotheMerger,proxycostsandexecutiveseparationsin2007andlowerstock-basedcompensationexpense.R&Dexpensedecreased$2.0to$4.7in2008comparedto$6.7in2007.Thatwasprimarilyduetoplannedreductionsinprojectspending.31
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Thenetlossonthedieselfuelpricederivativeinstrumentsin2007was$1.9.Thenetlossfortherespectiveperiodwastheresultoftheincreaseindieselfuelpricesinrelationtothederivativeinstrumentcommodityprice.Inearly2007,weacquireddieselfuelpricederivativeinstrumentscoveringapproximately30%ofouranticipated2007dieselfuelpricerelatedearningsexposure.ComdataEBITdecreased$11.6to$100.4,or27.1%ofrevenuein2008comparedto$112.0,or32.7%ofrevenuein2007.ThedecreaseinEBITwasprimarilyduetohighercostofsalesandincreasedamortizationexpenserelatedtotheMerger,partiallyoffsetbytheincreaseinrevenue,reducedallocatedone-timechargesrelatedtoourevaluationofstrategicalternativesfortheCompanypriortotheMerger,proxycostsandexecutiveseparationsin2007andlowerstock-basedcompensationexpense.
YearEndedDecember31,2007ComparedtoYearEndedDecember31,2006
Overview
Anumberofeventsortransactionsoccurredduringtheperiodscoveredbythisdiscussionthathadasignificanteffectonthecomparisonsofourfinancialconditionandperformance,including:
Merger.UnderthetermsoftheMerger,PredecessorCeridianCorporationstockholdersreceived$36.00incash,withoutinterest,foreachshareofPredecessorCeridianCorporationcommonstockthattheyheldforatotalof$5,305.3.CeridianCorporationcommonstockceasedtradingontheNewYorkStockExchange("NYSE")andhasbeendelistedfromtheNYSE.ThesourcesandusesoffundsinconnectionwiththeMergeraresummarizedbelow:
Sources:Equityinvestment$1,600.0Seniorsecuredcreditfacilities2,250.0
Seniornotes1,300.0CashfromPredecessorCeridianCorporation346.7Totalsources$5,496.7Uses:PaymentconsiderationtopredecessorstockholdersTransactioncosts$5,305.3191.4Totaluses$5,496.7
AccountingforMerger.BeginningonNovember10,2007,weaccountedfortheMergerasapurchaseinaccordancewiththeprovisions
ofSFASNo.141andSABNo.54whichresultedinanewvaluationforourassetsandliabilitiesbaseduponthefairvaluesasofthedateoftheMerger.
ThefollowingsummarizesthepreliminaryallocationofthepurchasepriceoftheMergerbasedonestimatedfairvaluesoftheassetsacquiredandliabilitiesassumedasofNovember10,2007.Weengagedoutsideappraisalfirmstoassistindeterminingthefairvalueofcertainlong-lived,tangibleandidentifiableintangibleassetsandusedtheseappraisalsforthepurchasepriceallocation.Thisallocationwassubjecttofurtherrefinementuntilall
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pertinentinformationwasobtainedfortherestructuringreserveandthefinalvaluationofidentifiableintangibleassets.
PurchasePrice:
FairmarketvalueofCeridianCorporationcommonstock$5,305.3DirectcostsrelatedtotheMerger4.5AggregatePurchasePrice$5,309.8PurchasePriceassigned:Networkingcapital$650.0Property,plantandequipment90.6Goodwill3,537.9Identifiableintangibleassets1,470.3Othernon-currentassets40.1Deferredincometaxes(353.8)Non-currentliabilitiesandother(125.3)
TotalPurchasePriceAssigned$5,309.832
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Stock-BasedCompensationExpense.Allstockoptions,restrictedstockunitsandrestrictedstockawardsoutstandingbeforetheMergerbecamefullyvested.Stock-basedcompensationexpensefortheperiodJanuary1toNovember9,2007was$45.0.
AmortizationExpense.WewillrecognizeanincreaseinamortizationexpensepostMergerasaresultoftherevaluationofassetsthroughtheapplicationofpurchaseaccounting.AmortizationexpensefortheperiodNovember10toDecember31,2007was$18.3.
InterestExpense.WewillrecognizeanincreaseininterestexpensepostMergerasaresultoftheissuanceofdebtinconnectionwiththeMerger.InterestexpensefortheperiodNovember10toDecember31,2007was$50.3.
GeneralExpenses.PriortotheMerger,weincurredthefollowingexpenseswhichweresignificanttothecomparisonoftheperiods:
Expensesof$46.3wereincurredrelatedtotheevaluationofstrategicalternativesfortheCompany,the2007proxyandfeesassociatedwithpre-Mergercostsincurred;
Expensesforseveranceandleaseterminationsof$15.9duetotheexecutionofouroperatingimprovementplan;and
Expensesforexecutiveseparationsof$4.5.
Incometaxmatters.Inthe2007periodaftertheMerger,weincreasedourincometaxbenefitby$3.2asaresultofafavorabletaxratechangeenactedinCanada.Inthe2007periodbeforetheMerger,weincreasedourincometaxprovisionby$5.5fortheexpensesrelatedtotheMergerthatwerenotdeductiblefortaxpurposesandby$4.8foradditionaltaxexpenserelatedtoforeignearningsrepatriation.In2006,theexpirationofthestatuteoflimitat
ionsonaninternationaltaxcontingencyandaCanadiantaxratereductionresultedinareductioninourincometaxexpenseof$8.6and$2.8,respectively.
ConsolidatedResults
IncreaseAmount(Decrease)%ofRevenue2007(1)2006$%2007(1)2006
Revenue$1,644.9$1,565.179.85.1100.0100.0
Costofrevenue910.2852.457.86.855.354.5
SG&Aexpense522.1440.182.018.631.728.1R&Dexpense30.728.62.17.41.91.8Lossonderivativeinstruments1.92.7(0.8)(31.9)0.10.2Otherincome,net(3.3)(10.5)7.268.7(0.2)(0.7)Interestincome(21.4)(13.5)(7.9)58.7(1.3)(0.9)Interestexpense55.66.049.6832.83.40.4
Totalcostsandexpenses1,495.81,305.8190.014.590.983.4
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Earningsbefore
incometaxes149.1259.3(110.2)(42.5)9.116.6Incometaxprovision66.085.7(19.7)(22.9)4.05.5Netearnings$83.1$173.6(90.5)(52.2)5.111.1
(1)2007amountsrefertothe2007CombinedPeriod;thisisaNon-GAAPpresentation.Consolidatedrevenueincreased$79.8,or5.1%,to$1,644.9in2007from$1,565.1in2006.RevenueinHRSincreased$32.7,SVSincreased$16.5,andComdataincreased$30.6in2007.Withinthoseincreases,revenuewasnegativelyaffectedby$24.0duetotheDeferredRevenueAdjustment.33
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TheHRSrevenueincreasewasprimarilyduetohigherinterestincomeoninvestedcustomerfundsresultingfrombothhigherinterestratesandanincreasedcustomerfloatbalance,andgrowthinourcorepayrollbusiness.Theseincreaseswerepartiallyoffsetbythelossofrevenueassociatedwiththesaleofamajorportionofour401(k)recordkeepingandadministrationbusinessinthethirdquarterof2006,awrite-downonaninvestmentwithinourcustomerfunds,lowerrevenueinourgovernmentLifeWorksbusiness,thestrengtheningoftheBritishpoundsterlingandCanadiandollaragainsttheU.S.dollarandtheeffectsoftheDeferredRevenueAdjustment.OurSVSrevenueincreasewasdrivenbyhigherlevelsofretailcardsinuseoffsetbytheeffectsoftheDeferredRevenueAdjustment.OurComdatarevenueincreasewasdrivenbyhighervolumeoftransactionsinourlocalandlonghaulfleetbusinessesandincreasedvolumewithinregulatorycomplianceservices,partiallyoffsetbytheeffectsoftheDeferredRevenueAdjustment.ResultsforourHRS,SVSandComdatasegmentsarediscussedbelowunder"BusinessSegmentResults."Costofrevenueasapercentofrevenueincreasedto55.3%in2007from54.5%in2006.ThiswasdrivenbyanincreaseinSVS'scostofrevenueduetoincreasedvendorcardcosts,increasedtransactionbasedbankfeesinComdataandincreasedpayrollrelatedcostsduetoacquisitions,aswellashigherseveranceandstock-basedcompensationexpensesprimarilyinHRSandinc
reasedamortizationexpenserelatedtotheMerger.Partiallyoffsettingthoseincreasesincostofrevenueasapercentofrevenuewerehigherinvestmentincomewithoutsignificantincrementalcostsonourinvestedcustomerfunds,costcontainmenteffortsinHRSandtheimpactoftheDeferredCostAdjustment.SG&Aexpenseincreased$82.0,or18.6%,to$522.1in2007from$440.1in2006.Thiswasprimarilyduetochargestotaling$46.3forourevaluationofstrategicalternatives,proxy-relatedcosts,andfeesassociatedwithpre-Mergercostsincurred,$19.5inincreasedstock-basedcompensationexpense,$9.9inincreasedseverancechargesandleaseterminationchargespriortotheMergerduetoexecutionofouroperatingimprovementplan,$7.0inincreasedamortizationexpenserelatedtothepurchasepriceallocatedtointangibleassetsasaresultoftheMerger,$4.5in
expensesforexecutiveseparationsandthestrengtheningoftheBritishpoundsterlingandCanadiandollaragainsttheU.S.dollarandhigherpayrollcostsasaresultofmeritincreases.PartiallyoffsettingtheseincreaseswerereducedlitigationexpensesandgeneralspendingreductionsinHRS.R&Dexpenseincreased$2.1or7.4%to$30.7in2007.Thiswasdrivenbynewprojectcostsandincreasedstock-basedcompensationexpense.In2007,thelossonderivativeinstrumentsamountedto$1.9comparedtoalossof$2.7in2006.Thelossinbothperiodsresultedfromanincreaseindieselfuelpricesinrelationtothederivativeinstrumentcommodityprice.Ifdieselfuelpricesarehigherthanthederivativeinstrument,alossresults.Ifdieselfuelpricesarelowerthanthederivativeinstrument,againresults.Otherincome,netfor2007primarilyrelatestothegainonthesaleofmarketablesecurities,asaleofabusinessandsalesofotherassets,partially
offsetbyaforeigncurrencyremeasurementlossduetodebtinCeridianCanadawhichwillberepaidthroughpaymentsfromalegalentitywithafunctionalcurrencyinCanadiandollars.Otherincome,netin2006primarilyrelatestothegainonthesaleofmarketablesecurities,saleofotherassets,andgainfromthesettlementofalawsuit.Interestincomein2007increased$7.9to$21.4comparedto$13.5in2006.Theincreasewasdrivenbyahigheraveragelevelofcashandequivalentsandhigherinterestrates.Interestexpenseincreased$49.6to$55.6in2007comparedto2006asaresultofthedebtissuedinconnectionwiththeMerger.
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Incometaxprovisiondecreased$19.7to$66.0in2007comparedto$85.7in2006.Oureffectivetaxratefor2007was44.3%comparedto33.1%for2006.Theeffectivetaxratefor2007wasunfavorablyimpactedby$5.5forexpensesrelatedtotheMergerthatarenotdeductiblefortaxpurposesandadditionaltaxexpenseof$4.8relatedtoforeignearningsrepatriation.Inaddition,the2007effectivetaxratewasfavorablyimpactedby$3.2oftaxratechangesenactedinCanadawhichreducedournetdeferredincometaxliability.Theeffectivetaxratefor2006wasfavorablyimpactedbytheexpirationofthestatuteoflimitationsonaninternationaltaxcontingencyandaCanadiantaxratereduction.Thestatuteexpirationresultedinan$8.6decreaseinincometaxexpense.TheCanadiantaxratechangeimpactedourdeferredincometaxbalanceandreducedincometaxexpenseby$2.8.
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$31.6forourevaluationofstrategicalternatives,proxy-relatedcosts,feesassociatedwithpre-Mergercostsincurred,$7.8ofincreasedstock-basedcompensationexpense,$4.9ofincreasedseveranceexpenses,$3.1inexpensesforexecutiveseparationsincurredpriortotheMerger,theimpactofthestrengtheningoftheBritishpoundsterlingandtheCanadiandollaragainsttheU.S.dollarandincreasedintangibleamortizationexpenserelatedtotheMerger,partiallyoffsetbygeneralspendingdecreases.SellingexpenseprimarilydecreasedduetoreducedsalesincentiveexpensespartiallyoffsetbyachargeforleaseterminationsrelatingtosalesofficesincurredpriortotheMergerandtheimpactofthestrengtheningoftheBritishpoundsterlingandtheCanadiandollaragainsttheU.S.dollar.R&DexpenseforHRSincreased$0.9,or4.6%,to$22.0in2007comparedto$21.1in2006.Thisincreasewasduetonewprojectcostsandhigherstock-basedcompensationexpense.35
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Otherincome,netfor2007was$2.1andrelatesprimarilytogainsonthesaleofmarketablesecuritiesof$6.2andgainsonthesaleofbusinessesof$2.0partiallyoffsetbya$6.6foreigncurrencyremeasurementlossondebtatCeridianCanadawhichwillberepaidthroughpaymentsfromalegalentitywithafunctionalcurrencyinCanadiandollars.Otherincome,netin2006of$9.6primarilyresultedfromagainof$5.8onthesaleofamajorportionofour401(k)recordingkeepingandadministrationbusinessandgainsonsalesofmarketablesecuritiesandotherassetsof$3.4.HRSEBITdecreased$31.0,or31.5%,to$67.2or5.9%ofrevenuein2007comparedto$98.2or8.9%ofrevenuein2006.Thisdecreasewasprimarilyduetoone-timechargesrelatedtoourevaluationofstrategicalternativesandproxy-relatedcosts,severancechargesandexecutiveseparationsincurredpriortotheMerger,feesassociatedwithpre-Mergercostsincurred,aswellashigherstock-basedcompensationexpense,partiallyoffsetbyanimprovementinoperatingperformanceintheU.S.operationsandCeridianCanada.
SVS
IncreaseAmount(Decrease)%ofRevenue
2007(1)2006$%2007(1)2006
Revenue$170.3$153.816.510.7100.0100.0Costofrevenue149.3122.626.721.887.779.7SG&Aexpense15.913.52.417.89.38.8R&Dexpense2.01.90.15.21.21.2Otherincome,net(1.0)-(1.0)NM(0.5)0.0EBIT$4.1$15.8(11.7)(74.1)2.410.3
(1)2007amountsrefertothe2007CombinedPeriod;thisisaNon-GAAPpresentation.NMrepresentscomparisonsthatarenotmeaningfultothisanalysis.
SVSrevenueincreased$16.5,or10.7%,to$170.3in2007from$153.8in2006.Thisincreasewasprimarilyduetohigherlevelsofretailcardsinuse,greatertransactionvolumeandtheadditionofnewcustomersthroughinternalgrowthandanacquisition,partiallyoffsetbyadecreaseof$15.3fromtheeffectsoftheDeferredRevenueAdjustment.Revenuefromretailservicesisgenerallydeferredandrecognizedlargelyoverasix-monthperiodfollowingtheactivationofacard,whichtypicallytakesplaceabouteightmonthsaftertheshipmentofthecardtotheretailer.Cardsdeliveredincreasedbyapproximately6.1%andtransactionsprocessedincreasedapproximately9.9%incomparisonof2007over2006.SVScostofrevenueasapercentofrevenuefor2007increasedto87.7%comparedto79.7%in2006.Theincreasewasduetoincreasedvendorcardcosts,theentryintoalowermarginmarketsegmentthroughafourthquarter200
6acquisition,higherpayrollcostsrelatedtothefourthquarter2006acquisition,andthelossofarelativelyhighmargincontractinthelegacy"smartcard"electronicbenefitsbusiness,whichwereoffsetbytheeffectsoftheDeferredCostAdjustment.SG&Aexpenseincreased$2.4to$15.9in2007comparedto$13.5in2006.Thisincreasewasprimarilyduetoincreasedstock-basedcompensationexpense,increasedintangibleamortizationexpenserelatedtotheMergerandafourthquarter2006acquisition,partiallyoffsetbyreducedadministrationexpenses.R&Dexpenseincreased$0.1,or5.2%,to$2.0in2007comparedto$1.9in2006pr
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imarilyduetohigherspendingonprojects.Otherincome,netin2007reflectsa$1.0gainfromthesaleofacustomerportfolio.SVSEBITdecreased$11.7to$4.1,or2.4%ofrevenue,in2007comparedto$15.8,or10.3%ofrevenue,in2006.ThiswasprimarilyduetothehighercostofsalesandtheimpactoftheDeferredRevenueAdjustmentandtheDeferredCostAdjustment.36
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Comdata
IncreaseAmount(Decrease)%ofRevenue2007(1)2006$%2007(1)2006Revenue$342.1$311.530.69.8100.0100.0Costofrevenue127.499.827.627.737.232.0SG&Aexpense94.366.527.841.827.621.3R&Dexpense6.75.61.119.62.01.8Lossonderivativeinstruments1.92.7(0.8)(29.6)0.60.9Otherincome,net(0.2)(0.9)0.7(77.8)(0.1)(0.3)EBIT$112.0$137.8(25.8)(18.7)32.744.2
(1)2007amountsrefertothe2007CombinedPeriod;thisisaNon-GAAPpresentation.Comdatarevenueincreased$30.6,or9.8%,to$342.1in2007from$311.5in2006.Thisincreasewasduetoa$7.8increaseinthelonghaulbusinessduetohighervolumeprimarilydrivenbyincreasedtransactionsontheComdataCardandahigheraveragecostoffuel,a$8.4increaseinthelocalfleetbusinessduelargelytoincreasedutilizationbylocalfleetcustomersof
theComdataCardandprivatelabelproductsandservices,anda$7.3increaseinregulatorycomplianceservicesduetotheadditionofnewbusinessthroughanacquisitionthatwascompletedinthefirstquarterof2007andan$8.4increaseinotherservices.Offsettingtheseincreaseswasareductioninrevenueof$1.3duetotheeffectsoftheDeferredRevenueAdjustment.Comdatacostofrevenueasapercentofrevenuefor2007increasedto37.2%comparedto32.0%in2006.Theincreasewasduetosignificantgrowthinrevenuecomingfromalowermarginmarketsegment,increasedtransactionbasedbankfeesandcustomerrebates,increasedpayrollrelatedcostsduetoanacquisitioncompletedinthefirstquarterof2007,increasedintangibleassetamortizationexpenserelatedtotheMergeraswellasthenegativeimpactofthenetresultoftheDeferredRevenueAdjustmentandtheDef
erredCostAdjustment.SG&Aexpenseincreased$27.8,or41.8%,to$94.3in2007comparedto$66.5in2006.Thisincreasewasduetoallocatedchargesprimarilyforourevaluationofstrategicalternatives,proxy-relatedandfeesassociatedwithpre-Mergercostsincurredof$14.7,increasedstock-basedcompensationexpenseof$7.9,increasedintangibleassetamortizationexpenseof$5.8relatedtoacquisitionsinthefirstquarterof2007andtotheMerger,higherpayrollcostsasaresultofmeritincreases,increasedseveranceexpensesincurredpriortotheMergerandincreasedbaddebtexpense,partiallyoffsetbyreducedlegalfeesandlitigationexpenseof$7.8.R&Dexpenseincreased$1.1,or19.6%,to$6.7in2007comparedto$5.6in2006primarilyduetonewprojectspending.Thenetlossonthedieselfuelpricederivativeinstrumentsin2007was$1.9co
mparedto$2.7in2006.Thenetlossesfortherespectiveperiodsaretheresultoftheincreaseindieselfuelpricesinrelationtothederivativeinstrumentcommodityprice.Duringearly2007,weacquireddieselfuelpricederivativeinstrumentscoveringapproximately30%ofouranticipated2007dieselfuelpricerelatedearningsexposure.Duringearly2006,weacquireddieselfuelpricederivativeinstrumentscoveringapproximately80%ofouranticipated2006dieselfuelpricerelatedearningsexposure.Otherincome,netin2007primarilyreflectsa$0.3gainfromthesettlementoflawsuits.Otherincome,netin2006primarilyreflectsa$1.0gainfromthesettlementofalawsuit.
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ComdataEBITdecreased$25.8to$112.0,or32.7%ofrevenue,in2007comparedto$137.8,or44.2%ofrevenue,in2006.Thiswasprimarilyduetohighercostofsales;increasedallocatedone-timechargesrelatedtoevaluationofstrategicalternatives,proxy-relatedcosts,andtheMerger;increasedstock-basedcompensationexpense;andincreasedpayrollrelatedcostsandamortizationrelatedtoacquisitionsandtheMerger;partiallyoffsetbyreducedlegalfeesandlitigationexpense.BalanceSheetsatDecember31,2008and2007
FortheyearendedDecember31,2007,wereclassifiedcustomerfundsandcustomerfundsobligationsthathadbeenpreviouslypresentedoutsideofcurrentassetsandcurrentliabilities,respectively,withintheconsolidatedbalancesheets,tocurrentassetsandcurrentliabilities,respectively,forallperiodspresented.Previouslypresentedamountsreclassifiedwerecustomerfundsof$3,851.8andcustomerfundobligationsof$3,834.8atDecember31,2007.Thisreclassificationhadnoimpactontotalassetsorliabilitiesforanyperiodpresented.
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Ourconsolidatedbalancesheetsreflectoperatingassetsandliabilities,aswellasassetsandliabilitiesrelatedtocustomerfunds.Customerfundsassetsprimarilyarisefromamountsthatourcustomershaveadvancedtoustopaytheiremployees,remittotaxingauthorities,orpayforbenefitsservicestootherthirdparties.Customerfundsobligationsprimarilyrepresentourliabilitytopaytheamountsduetothesethirdpartiesonbehalfofourcustomers.SubstantiallyallourU.S.customerfundsandasignificantportionofourCanadiancustomerfundsareheldintrustaccountsandareinvestedalmostexclusivelyinhigh-qualitycollateralizedshort-terminvestmentsormoneymarketmutualfundsandarenotutilizedinouroperationsexceptthatearningsfromthoseinvestmentsthatareincludedinourrevenue.Asaresultofthefourthquarter2008andtheFebruary20,2009distributionsdiscussedbelow,wehadasofFebruary27,2009,$97.3ofcustomerfundsand$14.5ofcorporatefundsinvestedintheReserveFundmoneymarketfund.InSeptember2008,wehad$670.0ofcustomerfundsand$100.0ofcorporatefundsinvestedintheReserveFund,whichatthetimeofourinvestmentwasaAAAratedmoneymarketfundandasofSeptember15,2008hadover$62,000.0inassets.OnthemorningofSeptember16,2008andatatimewhentheReserveFund'sannouncednetassetvaluewas$1.00pershare,werequestedredemptionofallofoursharesinthef
und.Subsequenttoourrequest,theReserveFundannouncedthatitsnetassetvaluehadfallenbelow$1.00pershare(asaresultoftheReserveFundvaluingatzero$785.0facevalueofdebtissuedbyLehmanBrothersHoldingsInc.whichfiledforbankruptcyprotectiononSeptember15,2008).TheReserveFundinitiallysuspendedredemptionsandthendelayeddistributionspendingitsliquidation.OnDecember3,2008,theBoardofTrusteesoftheReserveFundadoptedaformalPlanofLiquidationandDistributionofAssets.AsaresultofdistributionsmadebytheReserveFundinthefourthquarter2008andonFebruary20,2009,wehavereceivedanaggregateof$572.7ofcustomerfundsand$85.5ofcorporatefunds,orapproximately85.5%ofourtotalReserveFundinvestmentbalanceasofFebruary27,2009.Inconnectionwiththesedistributions,theReserveFundstatedallinvestorswere
treatedthesameregardlessofthetimingoftheiroriginalredemptionrequest.InitsPlanofLiquidationandDistributionofAssets,theReserveFundstatedthatadditionaldistributionswillbemadeastheReserveFundaccumulatescasheitherthroughthematuringoftheReserveFund'sassetsortheirsale,subjecttoaretentionof8.3centspershareforaspecialreservewhichwillbeusedtosatisfydisputedclaimsagainsttheReserveFundandrelatedexpenses.Anyexcessistobedistributedtofundshareholders.BasedupontheReserveFund'sdisclosedholdings,theunderlyinginvestmentsintheReserveFundarescheduledtomaturethroughfiscal2009.Wecannotassureyouwhenwewillrecovertheremainingportionofourinvestedfundsortheexactamountwewillultimatelyrecover.Wewill,however,continuetopursueourcollectionofthesefundsandconsideranyandallavailableremediestorecoverthefullamountofour
investedfunds.Wehavetakenanaggregateassetwrite-downof$11.5inconnectionwithourinvestmentsintheReserveFundasofDecember31,2008.Inaddition,wereclassifiedcashandcashequivalentsof$19.7asshortterminvestmentswithrespecttoourcorporatefundsatDecember31,2008.WedonotexpectthesuspendedordelayeddistributionsbytheReserveFundtoaffectourliquidity.AdditionalinformationoncustomerfundsassetsandliabilitiescanbefoundinNote7,"CustomerFunds."Totalassetsexcludingcustomerfundsdecreased$235.1during2008ascurrentassetsbeforecustomerfundsincreased$11.0andnoncurrentassets
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decreased$246.1.Ourcurrentassetsbeforecustomerfundsincreasewasduetoanincreaseof$86.2incashandequivalents,anincreaseinshortterminvestmentsof$19.7duetoourreclassofourcorporateReserveFundinvestmentsfromcashequivalentsandanincreaseof$55.8inprepaidassetsprimarilyduetoanincreaseindeferredcosts,partiallyoffsetbyadecreaseof$146.4intradeandotherreceivables,net,dueprimarilytolowerfuelpricesattheendof2008ascomparedtotheendof2007andadecreaseintransactionsontheComdataCardinthefourthquarterof2008.Wediscusschangesincashandequivalentsinafollowingsectionofthisdiscussionentitled"CashFlows."ThenoncurrentassetdecreasewaslargelyduetotheamortizationofotherintangibleassetsandadjustmentstogoodwillasaresultofthefinalizingofthepurchasepriceallocationrelatedtotheMerger.Currentliabilitiesbeforecustomerfundobligationsincreased$21.7during2008,duemainlytoanincreaseindeferredrevenueof$111.2partiallyoffsetbyadecreaseindraftsandsettlementspayableof$42.8.TheincreaseindeferredrevenuewaslargelyduetothecustomerbillingssubsequenttotheMergerthatrequiredeferraltreatmentduetoourrevenuerecognitionaccountingpolicy.ThedecreaseindraftsandsettlementspayableoccurredprimarilyatourComdatabusinessduetolowerfuelpricesattheendof2008ascomparedtotheendof2007andadecreaseintransactionsontheComdataCardinthefourthquarterof2008.Noncurrentliabilitiesincreased$52.9primarilyduetoanincreaseinouremployeebenefitplanliabilityduetoadeclineinthevalueofourpensionplanassets,partiallyof
fsetbyadeclineindeferredincometaxes.
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CashFlows
Wehavechangedthepresentationofourstatementsofconsolidatedcashflows.Wehaveincludedthepurchasesofcustomerfundmarketablesecurities,proceedsfromthesaleormaturityofcustomerfundmarketablesecuritiesandthenetincrease(decrease)ofrestrictedcashheldtosatisfycustomerfundobligationswithinthestatementsofconsolidatedcashflowsininvestingactivitiesforallperiodspresented.Additionally,wehaveincludedthenetincrease(decrease)incustomerfundsobligationswithinthestatementsofconsolidatedcashflowsinfinancingactivitiesforallperiodspresented.Thischangeinpresentationhadnoimpactonthenetchangeincashandcashequivalentsorcashflowsfromoperatingactivitiesforanyperiodpresented.
ConsolidatedStatementsofCashFlowsHighlights
SuccessorSuccessor
PredecessorNovember10to
January1to
YearEnded2007
YearEndedDecember31,CombinedDecember31,
November9,December31,2008Period2007
20072006
Investing
activities(1,161.5)841.51,790.8
(949.3)(342.7)Effectofexchangerateoncash(2.3)0.2(1.0)
1.21.4Cashandequivalentsatendofperiod$184.8$98.6$98.6
$457.2$294.7
Operatingactivities$167.7$157.7$(50.7)$208.4$161.7Financingactivities1,082.3(1,195.5)(2,097.7)902.2111.4Netcashflowsprovided(used)$86.2$(196.1)$(358.6)$162.5$(68.2)OperatingActivities
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Cashflowsfromoperatingactivitiesin2008providedcashof$167.7.Thiswasprimarilydrivenbyearningsadjustedfordepreciationandamortizationof$85.0andadecreaseinworkingcapitalof$91.5.Thedecreaseinworkingcapitalwaslargelyduetotheincreaseinourdeferredrevenuebalancesasdiscussedin"-BalanceSheets."Cashflowsfromoperatingactivitiesin2007providedcashof$157.7wasprimarilydrivenbyearningsadjustedfordepreciationandamortizationof$182.5.Cashflowsfromoperatingactivitiesin2006providedcashof$161.7wasdrivenbyearningsadjustedfordepreciationandamortizationof$260.5partiallyoffsetbyapensioncontributionof$75.0.
InvestingActivities
SuccessorSuccessorPredecessorYearEndedDecember31,20082007CombinedPeriodNovember10toDecember31,2007
January1toNovember9,2007YearEndedDecember31,2006Purchaseofcustomerfundsmarketablesecurities$(196.0)$(277.3)$(36.7)$(240.6)$(238.2)Proceedsfromsaleandmaturityof
customerfundsmarketablesecurities1,049.0288.326.9261.4198.5Netchangeinrestrictedcashandotherrestrictedassetsheldtosatisfycustomerfunds(1,938.0)885.41,805.4(920.0)(228.9)Capitalexpenditures(52.7)(62.1)(8.1)(54.0)(53.0)Acquisitionsofinvestments
andbusinesses(4.7)(10.4)-(10.4)(41.1)
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Short-terminvestmentsProceedsfromsalesofbusinessesandassets(19.7)0.6-17.6-3.3-14.3-20.0Netcashflowsprovided(used)$(1,161.5)$841.5$1,790.8$(949.3)$(342.7)
During2008,cashusedforinvestingactivitieswas$1,161.5.Activitywithinourcustomerfundsincludedpurchaseofmarketablesecuritiesof$196.0,proceedsfromsaleandmaturityofmarketablesecuritiesof$1,049.0andanetdecreaseinrestrictedcashandotherrestrictedassetsof
$1,938.0.Ourcapitalexpendituresincluded$28.5forpropertyandequipmentand$24.2fortechnologycosts.Ourexpenditureforshort-terminvestmentsof$19.7wasduetoourreclassofourcorporateReserveFundinvestmentsfromcashequivalents.
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During2007,cashprovidedbyinvestingactivitieswas$841.5.Activitywithinourcustomerfundsincludedpurchaseofmarketablesecuritiesof$277.3,proceedsfromsaleandmaturityofmarketablesecuritiesof$288.3andanetincreaseinrestrictedcashandotherrestrictedassetsof$885.4.Ourcapitalexpendituresincluded$37.1forpropertyandequipmentand$25.0fortechnologycosts.Ourexpendituresforacquisitionsofinvestmentsandbusinesses(netofcashacquired)were$10.4primarilyforoneacquisitioninComdatafor$9.9.Cashinflowsfromsalesofbusinessesandassetsamountedto$17.6primarilyfromsalesofourmarketablesecurities,asaleofpayrollplatforminourHRSbusinesssegmentandreceiptofacontingentpaymentonapriorperiodsale.During2006,cashusedforinvestingactivitieswas$342.7.Activitywithinourcustomerfundsincludedpurchaseofmarketablesecuritiesof$238.2,proceedsfromsaleandmaturityofmarketablesecuritiesof$198.5andanetdecreaseinrestrictedcashandotherrestrictedassetsof$228.9.Ourcapitalexpendituresincluded$30.3forpropertyandequipmentand$22.7fortechnologycosts.Ourexpendituresforacquisitionsofinvestmentsandbusinesses(netofcashacquired)were$41.1fortwoacquisitionsinthefourthquarterof2006.Cashinflowsfromsalesofbusinessesandassetsamountedto$20.0primarilyfrom$11.1relatedtothesaleofthemajorportionofour401(k)recordkeepingandadministrationbusinessinourHRS
businesssegmentinthethirdquarterof2006aswellasthesaleofmarketablesecurities.
FinancingActivities
SuccessorSuccessorPredecessorYearEndedDecember31,20082007CombinedPeriodNovember10to
December31,2007January1toNovember9,2007YearEndedDecember31,2006Increase(decrease)incustomerfundsobligations,net$1,085.0$(896.4)$(1,795.6)$899.2$268.6Revolvingcredit
facilitiesandoverdrafts,net4.4(94.0)-(94.0)(7.5)Repaymentofotherlong-termobligations(3.8)(10.8)(1.7)(9.1)(5.8)Taxbenefitsfromstock-basedcompensation-30.7-30.722.1Proceedsfrom
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stockoptionexercises-75.4-75.4150.8AcquisitionofCeridianCorporation-(5,305.3)(5,305.3)--Repurchaseofcommonstock----(316.8)Proceedsfromdebtissuance-3,550.03,550.0--Paymentofdebtissuancecosts(4.8)(84.8)(84.8)--Paymentofequityissuancecosts-(60.3)(60.3)--Stockissuance1.51,600.01,600.0--Netcashflowsprovided(used)$1,082.3$(1,195.5)$(2,097.7)$902.2$111.4Netcashprovidedbyfinancingactivitiestotaled$1,082.3in2008drivenbyourincreaseinthecustomerfundsobligations,net.Inaddition,weborrowed$4.4relatedtoouroverdraftfacilityintheUnitedKingdom,paiddebtissuancecostsof$4.8andmadeprinciplepaymentsof$2.1oncapitalleasesand$1.7onaroyaltyobligationin2008.Netcashusedforfinancingactivitiestotaled$1,195.5in2007.Weissuedlong-termdebtof$3,550.0andissuedstockfor$1,600.0relatedtothe
Merger.Wepaid$5,305.3fortheacquisitionofCeridianCorporationcommonstock.Werepaidourpre-existingoutstandinglong-termobligationsbeforetheMerger;paid$84.8fordebtissuancecostsassociatedwiththeMerger,paid$60.3forequityissuancecosts,includingapaymentof$55.8totheSponsors,andmadeprincipalpaymentsof$4.4oncapitalleasesand$6.4onaroyaltyobligationduring2007.Thecustomerfundsobligations,net,decreasedof$896.4.Thebenefitoftaxdeductionsinexcessofthatrecognizedonshare-basedcompensationexpenseisclassifiedasafinancingcashflowand,accordingly,$30.7wasreclassifiedfromoperatingactivitiesinaccordancewiththerequirementsofSFAS123R,"Share-BasedPayment."SFAS123RisarevisionofSFAS123,"AccountingforStock-BasedCompensation,"andsupersedesAPBOpinionNo.25,"AccountingforStockIssuedtoEmployees,"andamendsSFAS95,"StatementofCashFlows,"a
nditsrelatedimplementationguidance.Proceedsfromexercisesofstockoptionsandsalesofstocktoemployeesamountedto$75.4.
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Netcashprovidedbyfinancingactivitiesamountedto$111.4in2006.Thecustomerfundobligations,net,increasedby$268.6.Includedinrevolvingcreditfacilitiesandoverdrafts,netwerepaymentsof$29.6onour$250.0revolvingcreditfacilityoffsetbyborrowingsof$27.0onourComdatareceivablessecuritizationfacilitytofundtheacquisitionofHQGiftcards.Wemadeprincipalpaymentsof$4.9oncapitalleasesand$5.8onaguaranteedminimumroyaltyobligationduring2006.Werepurchased13,046,500sharesofourcommonstockfor$316.8ontheopenmarketatanaveragenetpriceof$24.27pershare.Thebenefitoftaxdeductionsinexcessofthatrecognizedonshare-basedcompensationexpenseisclassifiedasafinancingcashflowand,accordingly,$22.1wasreclassifiedfromoperatingactivitiesinaccordancewiththerequirementsofSFAS123R.Proceedsfromexercisesofstockoptionsandsalesofstocktoemployeesamountedto$150.8.Forfurtherinformationonfinancingcashflows,seeNote10,"Financing"andthefollowingsectionofthisdiscussionentitled"LiquidityandCapitalResources."
LiquidityandCapitalResources
Weexpecttomeetourliquidityneeds,includingduringthenext12months,fromexistingcashbalances,cashflowsfromoperationsandborrowingsunderourseniorsecuredcreditfacilities.Weexpecttouseourcashflowsforinterestpayments,capitalexpenditures,investmentsintechnology,potentialacquisitionsofcomplementarybusinessestoourexistingoperations,repaymentorrepurchaseofdebt,andpaymentofdividendsonpreferredstock.Cashbalancesandcashflowsarediscussedunderthesectionofthisdiscussionentitled"CashFlows."Cashflowsfromoperationsareprimarilyinfluencedbythesamefactorsthatinfluencerevenueandexpenseasdiscussedabovein"-ResultsofOperations."AsofDecember31,2008,30,056,997sharesofpreferredstockofCeridianIntermediatewereissuedandoutstandingat$10parvalue.Thispreferred
stockhasa13%cumulativedividendrateandweexpecttofundthepaymentinfutureperiodsattherequestofCeridianIntermediate.AsofDecember31,2008,CeridianIntermediatehadaccumulatedunpaiddividendsof$47.4.AtDecember31,2008,wewereincompliancewiththecovenantsunderourseniorsecuredcreditfacilitiesandtheindenturegoverningourseniornotes.AtDecember31,2008,wehadnoamountsoutstandingonourrevolvingcreditfacility.Weoranyofouraffiliatesmayalso,fromtimetotimedependingonmarketconditionsandprices,contractualrestrictions,ourfinancialliquidityandotherfactors,seektorepurchaseourseniornotesorourtermloansunderourseniorsecuredcreditfacilitiesinopenmarketpurchases,privately
negotiatedpurchasesorotherwise.Theamountsinvolvedinanysuchtransactions,individuallyorintheaggregate,maybematerialandmaybefundedfromavailablecashorfromadditionalborrowings.Wehaveelectedtopayinterestonour$475.0121/4%/13%seniortogglenotesdue2015incashfortheinterestperiodendingMay14,2009.Inordertomitigateaportionofthevariablerateinterestexposureunderourseniorsecuredcreditfacilities,effectiveJanuary20,2009,weenteredintoathree-yearinterestrateswapwithahighlyratedcounterparty.Pursuanttothecontract,wewillreceiveonemonthLIBORandpayafixedinterestrate,resultinginanall-ineffectivefixedrateof4.75%on$250.0o
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SuccessorSeniorSecuredCreditFacilities
AspartofourMergerfinancingweenteredintoseniorsecuredcreditfacilitieswithDeutscheBankAGNewYorkBranch,asadministrativeagentandcollateralagent,DeutscheBankAGCanadaBranch,asCanadiansub-agent,andwithasyndicateoflenders.Thetermsoftheseniorsecuredcreditfacilitiesaresetforthbelow.
Borrowings
Theseniorsecuredcreditfacilitiesprovidefora$2,250.0termloanfacilityanda$300.0revolvingcreditfacility.Thetermloanfacilityconsistsofa$2,140.0termloantoCeridianCorporation("U.S.TermLoan")anda$110.0termloantoCeridianCanadaHoldingsULC("CanadaTermLoan").Therevolvingcreditfacilityiscomposedofa$225.0revolvingloanfacilityavailabletoCeridianCorporation("U.S.Revolver")and$75.0multi-currencyrevolvingloan