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Dividend policy
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We expect to pay cash dividends on our common stock. The declaration and payment of future dividends to holders of our common stock will be at the
discretion of our Board of Directors, and subject to regulatory and other constraints. See Dividend Policy, included elsewhere in this information statement.
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Relationship with ADP
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Prior to the distribution, we will enter into a separation and distribution agreement and several other agreements with ADP to effect the
separation and distribution and provide a framework for our relationship with ADP after the separation. For a discussion of these arrangements, see Our Relationship with ADP Agreements with ADP, included elsewhere in this
information statement.
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Stockholder inquiries
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If you have any questions relating to the distribution, you should contact American Stock Transfer & Trust Company at 1-866-703-9065.
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Risk factors
|
The distribution and ownership of our common stock involve various risks. You should carefully read the Risk Factors beginning on
page 10 of this information statement.
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8
Summary Combined Financial Data
The following table sets forth summary combined financial information from our unaudited combined financial statements as of and for the six months ended
December 31, 2006 and 2005 and our audited combined financial statements as of and for the years ended June 30, 2006, 2005 and 2004. The summary combined financial data presented below should be read in conjunction with our combined
financial statements and the accompanying notes included elsewhere in this information statement and Managements Discussion and Analysis of Financial Condition and Results of Operations.
Our combined financial information may not be indicative of our future performance and does not necessarily reflect what our financial condition and
results of operations would have been had we operated as a separate, stand-alone entity during the periods presented, including many changes that will occur in the operations and capitalization of our company as a result of our separation from ADP.
Results of operations for the six months ended December 31, 2006 are not necessarily indicative of results for the full fiscal year.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended June 30,
|
|
Six Months Ended
December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
|
|
(in millions)
|
|
Net revenues
|
|
$
|
1,933.3
|
|
$
|
1,717.1
|
|
$
|
1,525.8
|
|
$
|
871.4
|
|
$
|
764.7
|
|
Cost of net revenues
|
|
|
1,433.0
|
|
|
1,273.2
|
|
|
1,132.5
|
|
|
675.8
|
|
|
586.9
|
|
Selling, general and administrative expenses
|
|
|
195.9
|
|
|
168.5
|
|
|
142.0
|
|
|
101.6
|
|
|
99.1
|
|
Other expenses, net
|
|
|
1.7
|
|
|
1.5
|
|
|
0.9
|
|
|
1.6
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,630.6
|
|
|
1,443.2
|
|
|
1,275.4
|
|
|
779.0
|
|
|
686.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes
|
|
|
302.7
|
|
|
273.9
|
|
|
250.4
|
|
|
92.4
|
|
|
78.1
|
|
Provision for income taxes
|
|
|
122.2
|
|
|
107.5
|
|
|
104.2
|
|
|
35.9
|
|
|
31.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations
|
|
$
|
180.5
|
|
$
|
166.4
|
|
$
|
146.2
|
|
$
|
56.5
|
|
$
|
46.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
As of December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2006
|
|
2005
|
|
|
|
(in millions)
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|
Balance Sheet and Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
50.1
|
|
$
|
31.6
|
|
$
|
23.6
|
|
$
|
84.8
|
|
$
|
114.8
|
|
Total current assets
|
|
|
1,405.9
|
|
|
1,682.1
|
|
|
429.6
|
|
|
1,440.5
|
|
|
1,557.8
|
|
Property, plant and equipment, net
|
|
|
80.7
|
|
|
75.4
|
|
|
66.5
|
|
|
70.3
|
|
|
77.5
|
|
Total assets
|
|
|
2,134.7
|
|
|
2,422.7
|
|
|
1,034.5
|
|
|
2,139.3
|
|
|
2,309.7
|
|
Total current liabilities
|
|
|
990.3
|
|
|
1,065.3
|
|
|
211.9
|
|
|
1,097.0
|
|
|
1,191.5
|
|
Total liabilities
|
|
|
1,091.5
|
|
|
1,136.2
|
|
|
286.7
|
|
|
1,189.3
|
|
|
1,246.3
|
|
Total Group equity
|
|
|
1,043.2
|
|
|
1,286.5
|
|
|
747.8
|
|
|
950.0
|
|
|
1,063.3
|
9
RISK FACTORS
You should carefully consider each of the following risks and all of the other information set
forth in this information statement. Based on the information currently known to us, we believe that the following information identifies the material risk factors affecting our company in each of the noted risk categories: (i) Risks Relating
to Our Business; (ii) Risks Relating to Our Clearing and Outsourcing Solutions Business; (iii) Risks Relating to Our Separation From ADP; and (iv) Risks Relating to Our Common Stock. However, additional risks and uncertainties not currently
known to us or that we currently believe to be immaterial may also adversely affect our business.
If any of the following risks and
uncertainties develops into actual events, they could have a material adverse effect on our business, financial condition or results of operations. In such case, the trading price of our common stock could decline.
Risks Relating to Our Business
Future
consolidation in the financial services industry could adversely affect our revenues by eliminating some of our existing and potential clients and could make us more dependent on a more limited number of clients.
There has been and continues to be merger, acquisition and consolidation activity in the financial services industry. Mergers or consolidations of
financial institutions in the future could reduce the number of our clients and potential clients. If our clients merge with or are acquired by other entities that are not our clients, or that use fewer of our services, they may discontinue or
reduce the use of our services. For example, one of our large clients has recently been acquired and, as a result, it has notified us that it intends to terminate the Securities Processing Solutions and Clearing and Outsourcing Solutions services
that we provide to it, as of the end of the current fiscal year. However, we will continue to provide this client, and its acquiror (which was an existing client), with proxy distribution and related services. This client generated $39.7 million of
revenues in fiscal 2006 with respect to the services being terminated. The proxy distribution and related services that we will continue to provide to this client and the acquiror generated $32.6 million and $8.6 million of revenue in fiscal 2006
and the six months ended December 31, 2006, respectively. See Unaudited Pro Forma Combined Financial Statements and Managements Discussion and Analysis of Financial Condition and Results of Operations Risks Relating to
Our Business. In addition, it is possible that the larger financial institutions resulting from mergers or consolidations could decide to perform in-house some or all of the services that we currently provide or could provide. Any of these
developments could have a material adverse effect on our business, financial condition and results of operations.
A large percentage of our
revenues is derived from a small number of clients in the financial services industry.
In fiscal 2006, we derived approximately 24%
of our revenues from five clients. Our largest single client accounted for over 5% of our revenues. While these clients generally work with multiple business segments, the loss of business from any of these clients due to client consolidation or
non-renewal of contracts would have an adverse effect on our revenues and results of operations. Moreover, we cannot assure you that we will be able to renew any of our contracts on terms we consider favorable. For example, a client of our Investor
Communication Solutions business segment, that was one of our five largest clients in fiscal 2006, has notified us that it will not renew its contract for account statement processing and distribution services with us, which has already expired.
However, we will continue to provide this client with proxy distribution and related services. This client generated $44.8 million of revenues in fiscal 2006 with respect to the services being terminated. The proxy distribution and related
services that we will continue to provide to this client generated $45.2 million and $13.0 million of revenue in fiscal 2006 and the six months ended December 31, 2006, respectively. See Managements Discussion and Analysis of Financial
Condition and Results of Operations Risks Relating to Our Business.
The financial services industry has experienced increasing
scrutiny by regulatory authorities in recent years, and further changes in legislation or regulations may affect our ability to conduct our business or may reduce our profitability.
The legislative and regulatory environment of the financial services industry has undergone significant change in the past and may undergo further change
in the future. The SEC, the National Association of Securities
10
Dealers (the NASD), various securities exchanges and other U.S. and foreign governmental or regulatory authorities continuously review
legislative and regulatory initiatives and may adopt new or revised laws and regulations. These legislative and regulatory initiatives may affect the way in which we conduct our business and may make our business less profitable. Changes in the
interpretation or enforcement of existing laws and regulations by those entities may also adversely affect our business.
Our Investor
Communication Solutions business generates a large amount of revenue from the distribution of proxy materials. Prior to recent amendments, SEC rules required affirmative written consent from a stockholder before proxy materials could be delivered
electronically to that stockholder. On December 13, 2006, the SEC adopted amendments to its proxy rules that will allow public companies an option to follow a notice and access model of proxy material delivery. The new rules go into
effect on July 1, 2007 and may not be used prior to that date.
Under the new rules, public companies may furnish proxy materials to
stockholders by posting them on an Internet website and providing stockholders with notice of the Internet availability of the proxy materials. The notice will be mailed to stockholders unless they have previously elected to receive proxy materials
via electronic delivery. Stockholders may request that paper copies of the proxy materials be mailed to them and may make a permanent election to receive proxy materials by mail or by e-mail with respect to future proxy solicitations conducted by
the company or other soliciting persons. When a public company chooses to rely on the notice and access model, brokers, banks and similar intermediaries must prepare and send their own notices to their beneficial stockholder customers. A beneficial
stockholder desiring a paper or e-mail copy of the proxy materials must request one from the intermediary.
When it adopted the new rules,
the SEC also proposed further rule amendments that would require companies and soliciting persons to furnish proxy materials to stockholders by posting them on an Internet website and providing stockholders with notice of the Internet availability
of the proxy materials. Companies and soliciting persons could continue to furnish paper copies of the proxy materials to some or all stockholders at the same time that the notice of Internet availability is sent. In addition, stockholders would be
able to continue to request paper copies of proxy materials.
The adopted changes, and the proposed changes, if adopted, will have a
significant effect on our business. For those companies that choose the notice and access option, we will continue to mail notices to those stockholders who have not elected to receive proxy materials electronically. Therefore, the volume of items
to be mailed will most likely remain unchanged. However, the weight of the packages will be less, resulting in lower revenues per distribution. At the same time, some stockholders may elect to continue to receive paper copies of proxy materials.
Certain of these mailings may not receive the benefit of volume discounts, resulting in higher revenues per distribution. We also anticipate deriving additional revenue from the fulfillment services that we expect to provide for individually ordered
paper proxy materials and for the establishment of procedures such as toll-free numbers and websites to accommodate the requests of stockholders to receive paper proxy materials for up to one year after the conclusion of the meeting or corporate
action to which the materials relate. Additionally, we may derive revenue from new services such as the creation of access notices and the creation and maintenance of a new database of stockholders requesting paper proxy materials. We do not at this
time know how many companies will choose the notice and access option, nor do we know how many stockholders will elect to continue to receive paper copies of proxy materials. As a result, we cannot at this time predict the net effect of the
SECs new electronic access rules on our Investor Communication Solutions business.
In addition, the NYSE has convened a Proxy
Working Group to review the NYSEs rules regarding the participation of its brokerage firm members in the proxy voting process. A report issued by the Working Group in June 2006 recommended that the NYSE amend existing rules that allow brokers
to vote in uncontested director elections. The Working Group also recommended that the NYSE increase investor education regarding the proxy voting process, support efforts to improve the ability of issuers to communicate directly with investors and
review our role in the proxy voting process, as well as review the reimbursement of brokers for handling the forwarding of investor materials.
Taken together, the new electronic access rules and the Working Group recommendations could result in dramatic changes to regulations and practices regarding the distribution of proxy materials, proxy voting and
11
stockholder communications. It is unclear how our role in the process will change. Even if we are able to adapt to the changes, our business may nevertheless
suffer. Moreover, if additional modifications to the current regulatory regime are enacted that allow for Internet delivery without notice of additional forms of investor communications, our revenues in the Investor Communication Solutions business
could be adversely affected.
Also, certain of the securities processing services we provide may be deemed to be mission-critical
functions of financial institutions that are regulated by one or more member agencies of the Federal Financial Institutions Examination Council (FFIEC). We are therefore subject to examination by the member agencies of the FFIEC. The
FFIEC conducts periodic reviews of certain of our operations in order to identify existing or potential risks associated with our operations that could adversely affect the financial institutions to which we provide services, evaluates our risk
management systems and controls, and determines our compliance with applicable laws that affect the services we provide to financial institutions. In addition to examining areas such as our management of technology, data integrity, information
confidentiality and service availability, the reviews also assess our financial stability. A sufficiently unfavorable review from the FFIEC could result in our clients not being allowed to use our services, which could have a material adverse effect
on our business, financial condition and results of operations.
Our revenues may decrease due to declines in trading volume, market prices,
liquidity of securities markets or proprietary trading activity.
We generate significant revenues from the transaction
processing fees we earn from our investor communication, securities processing, and clearing and outsourcing services (including the interest income from our margin lending activities and interest earned by investing clients cash). These
revenue sources are substantially dependent on customer trading volumes, market prices and liquidity of securities markets. Over the past several years, the U.S. and foreign securities markets have experienced significant volatility. Sudden sharp or
gradual but sustained declines in market values of securities can result in:
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|
|
|
reduced investor communication activity, including reduced mutual funds communication volumes, reduced mergers and acquisitions activity and reduced proxy activity;
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|
|
|
|
reduced trading activity;
|
|
|
|
|
declines in the market values of securities carried by our clients and clearing correspondents;
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|
|
|
|
the failure of buyers and sellers of securities to fulfill their settlement obligations;
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|
|
|
|
reduced margin loan balances of investors; and
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|
|
|
|
increases in claims and litigation.
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The occurrence of any of these events would likely result in reduced revenues and decreased profitability from our investor communication solutions, securities processing solutions, and clearing and outsourcing solutions activities.
Breaches of our information security policies or safeguards, or those of our outsourced data center services provider, could adversely affect
our ability to operate, could result in the personal or account information of our clients customers being misappropriated, and may cause us to be held liable or suffer harm to our reputation.
We process and transfer the personal and account information of customers of financial institutions. Our clients are subject to laws and regulations in
the United States and other jurisdictions designed to protect the privacy of personal information and to prevent that information from being inappropriately disclosed, and they require that we abide by such laws and regulations in performing our
services for them. We have developed and maintain technical and operational safeguards including encryption, authentication technology and transmission of data over private
12
networks in order to effect secure transmissions of confidential information over computer systems and the Internet. In addition, ADP, as our data center
services provider, has information security safeguards in place. However, despite those safeguards, it is possible that hackers, employees acting contrary to security policies or others could improperly access our systems or improperly obtain or
disclose the personal or account information of our clients customers. Any breach of our security policies or safeguards, or those of our outsourced data center services provider, resulting in the unauthorized use or disclosure of the personal
or account information of our clients customers could limit our ability to provide services, hinder the growth of our business and subject us to litigation or damage our reputation. In addition, we may incur significant costs to protect
against the threat of network or Internet security breaches or to alleviate problems caused by such breaches.
We have recently combined our primary
data center with ADPs data center from whom we will purchase a significant portion of our data center services, including disaster recovery capabilities.
In July 2006, we combined our primary data center with ADPs data center. In connection with the distribution, we will enter into a multi-year data center outsourcing services agreement with ADP pursuant to which
ADP will provide us with data center services consistent with the services provided to us immediately prior to the distribution. The services include hosting the mainframe, midrange, open systems and networks. Additionally, systems engineering,
network engineering, hardware engineering, network operations, data center operations, application change management and data center disaster recovery services will be managed by ADP. As a result, we will purchase a significant portion of our data
center services, including disaster recovery capabilities, from ADP. ADP has not ordinarily provided outsourced data center services. If ADP fails to adequately perform the data center services in the manner necessary to meet our clients
needs, our business, financial condition and results of operations may be harmed. If our agreement with ADP is terminated for any reason, we may not be able to find an alternative data center services provider in a timely manner or on acceptable
financial terms. If we need to build our own information technology infrastructure, we may incur substantial costs and could experience temporary business interruptions. As a result, we may not be able to meet the demands of our clients and, in
turn, our business, financial condition and results of operations may be harmed. In addition, technology service failures could have adverse regulatory consequences for our Clearing and Outsourcing Solutions business. Some of these risks are
anticipated and covered through service level credits, termination rights and indemnification clauses in our data center outsourcing services agreement with ADP. Nevertheless, we may not be adequately protected against all possible losses through
the terms of the agreement.
Any slowdown or failure of our computer or communications systems or those of our outsourced data center services
provider could subject us to liability for losses suffered by our clients or their customers.
Our services depend on our ability to
store, retrieve, process and manage significant databases, and to receive and process transactions and investor communications through a variety of electronic systems and media. Our systems, those of our outsourced data center services provider, or
any other systems with which ours interact could slow down significantly or fail for a variety of reasons, including:
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|
|
|
computer viruses or undetected errors in internal software programs or computer systems;
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|
|
|
|
inability to rapidly monitor all system activity;
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|
|
|
|
inability to effectively resolve any errors in internal software programs or computer systems once they are detected;
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|
|
heavy stress placed on systems during peak times; or
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|
|
power or telecommunications failure, fire, flood or any other natural disaster.
|
While we monitor system loads and performance and implement system upgrades to handle predicted increases in trading volume and volatility, we cannot
assure you that we will be able to accurately predict future volume increases or volatility or that our systems and those of ADP, as our data center services provider, will be able to accommodate these volume increases or volatility without failure
or degradation. Moreover, because we
13
have outsourced our data center operations, the operation and performance of the data center involve factors beyond our control. Any significant degradation
or failure of our computer systems, communications systems or any other systems in the clearing or trading processes could cause the customers of our clients to suffer delays in the execution of their trades. These delays could cause substantial
losses for our clients or their customers and could subject us to claims and losses, including litigation claiming fraud or negligence that could damage our reputation, increase our service costs, cause us to lose revenues and/or divert our
technical resources.
If the operational systems and infrastructure that we depend on fail to keep pace with our anticipated growth, we may
experience operating inefficiencies, client dissatisfaction and lost revenue opportunities.
The growth of our business and
expansion of our client base may place a strain on our management and operations. We believe that our current and anticipated future growth will require the implementation of new and enhanced communications and information systems, the training of
personnel to operate these systems and the expansion and upgrade of core technologies. While many of our systems are designed to accommodate additional growth without redesign or replacement, we may nevertheless need to make significant investments
in additional hardware and software to accommodate growth. In addition, we cannot assure you that we will be able to accurately predict the timing or rate of this growth or expand and upgrade our systems and infrastructure on a timely basis. Because
we utilize the systems of our outsourced data center, we will depend on ADP to keep the processing capacity and speed of the data center in line with the growth of our business.
In addition, with respect to our Clearing and Outsourcing Solutions business, the scope of procedures for assuring compliance with applicable rules and
regulations has changed as the size and complexity of our business has increased. We have implemented and continue to implement formal compliance procedures to respond to these changes. The future operating results of our Clearing and Outsourcing
Solutions business will depend on our ability:
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to improve our systems for operations, financial controls, and communication and information management;
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to refine our compliance procedures and enhance our compliance oversight; and
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|
to recruit, train, manage and retain our employees.
|
Our growth has required and will continue to require increased investments in management personnel and systems, financial systems and controls and office facilities. In the absence of continued revenue growth, the
costs associated with these investments would cause our operating margins to decline from current levels. We cannot assure you that we will be able to manage or continue to manage our recent or future growth successfully. If we fail to manage our
growth, we may experience operating inefficiencies, dissatisfaction among our client base and lost revenue opportunities.
If we are unable to
respond to the demands of our existing and new clients, our ability to reach our revenue goals or maintain our profitability could be diminished.
The global securities industry is characterized by increasingly complex infrastructures and products, new and changing business models and rapid technological changes. Our clients needs and demands for our
products and services evolve with these changes. For example, an increasing number of our clients are from market segments focusing on hedge funds, algorithmic trades and direct access customers who demand increasingly sophisticated products. Our
future success will depend, in part, on our ability to respond to our clients demands for new services, capabilities and technologies on a timely and cost-effective basis, to adapt to technological advancements and changing standards, and to
address our clients increasingly sophisticated requirements.
Intense competition could negatively affect our ability to maintain or
increase our market share and profitability.
The market for our products and services is rapidly evolving and highly competitive.
We compete with a number of firms that provide similar products and services to our market. In addition, we compete with our
14
clients in-house capabilities to perform competitive functions. Some of our competitors may possess significantly greater financial, technical,
marketing and other resources than we do. Some of our competitors may also offer a wider range of services than we do and may enjoy greater name recognition and more extensive client bases than ours. These competitors may be able to respond more
quickly to new or changing opportunities, technologies and client requirements and may be able to undertake more extensive promotional activities, offer more attractive terms to clients and adopt more aggressive pricing policies than we will be able
to offer or adopt. There can be no assurances that we will be able to compete effectively with current or future competitors. If we fail to compete effectively, our market share could decrease and our business, financial condition and results of
operations could be materially harmed.
We may be unable to attract and retain key personnel.
Our continued success depends on our ability to attract and retain senior management and other qualified personnel to conduct our Investor Communication
Solutions, Securities Processing Solutions, and Clearing and Outsourcing Solutions businesses. The market for such specialists is extremely competitive and has grown more so recently due to industry growth. There can be no assurance that we will be
successful in our efforts to recruit and retain the required personnel. If we are unable to attract and retain qualified individuals or our recruiting and retention costs increase significantly, our operations and financial results could be
materially adversely affected.
Our products and services, and the products and services provided to us by third parties, may infringe upon
intellectual property rights of third parties, and any infringement claims could require us to incur substantial costs, distract our management or prevent us from conducting our business.
Although we attempt to avoid infringing upon known proprietary rights of third parties, we are subject to the risk of claims alleging infringement of
third-party proprietary rights. If we infringe upon the rights of third parties, we may be unable to obtain licenses to use those rights on commercially reasonable terms. Additionally, third parties that provide us with products and services that
are integral to the conduct of our business may be subject to similar allegations, which could prevent them from continuing to provide these products and services to us. In either of these events, we would need to undertake substantial reengineering
in order to continue offering our services and we may not succeed in doing so. In addition, any claim of infringement could cause us to incur substantial costs defending the claim, even if the claim is invalid, and could distract our management from
our business. Furthermore, a party making such a claim could secure a judgment that requires us to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from conducting our business.
Acquisitions and integrating such acquisitions create certain risks and may affect operating results.
From time to time, we have been, and expect to continue to be, a business acquiror. The acquisition and integration of businesses involve a number of
risks. The core risks are in the areas of:
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valuation: negotiating a fair price for the business based on inherently limited due diligence reviews; and
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integration: managing the complex process of integrating the acquired companys people, products, technology and other assets so as to realize the projected
value of the acquired company and the synergies projected to be realized in connection with the acquisition.
|
Also, the
process of integrating these businesses may disrupt our business and divert our resources. These risks may arise for a number of reasons including, for example:
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finding suitable businesses to acquire at affordable valuations or on other acceptable terms;
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competition for acquisitions from other potential acquirors;
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borrowing money from lenders or selling equity or debt securities to the public to finance future acquisitions on terms that may be adverse to us;
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15
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incurring unforeseen obligations or liabilities in connection with such acquisitions;
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|
devoting unanticipated financial and management resources to an acquired business;
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|
entering markets where we have minimal prior experience; and
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|
|
experiencing decreases in earnings as a result of non-cash impairment charges.
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In addition, international acquisitions often involve additional or increased risks including, for example:
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|
geographically separated organizations, systems and facilities;
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|
|
integrating personnel with diverse business backgrounds and organizational cultures;
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complying with foreign regulatory requirements;
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|
enforcing intellectual property rights in some foreign countries; and
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|
general economic and political conditions.
|
General economic and political conditions and broad trends in business and finance that are beyond our control may contribute to reduced levels of activity in the securities markets, which could result in lower revenues from our
business operations.
Trading volume, market prices and liquidity are affected by general national and international economic and
political conditions and broad trends in business and finance that result in changes in volume and price levels of securities transactions. These factors include:
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economic, political and market conditions;
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the availability of short-term and long-term funding and capital;
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the level and volatility of interest rates;
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legislative and regulatory changes;
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currency values and inflation; and
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national, state and local taxation levels affecting securities transactions.
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These factors are beyond our control and may contribute to reduced levels of activity in the securities markets. Our revenue has historically been
largely driven by the volume of trading activities of our clients. Our margin lending revenues are also impacted by changes in the trading activities of our correspondents. Accordingly, any significant reduction in activity in the securities markets
would likely result in lower revenues from our business operations.
The financial services business is highly dependent on certain market centers
that may be targets of terrorism.
Our business is dependent on exchanges and market centers being able to process trades. Terrorist
activities in September 2001 caused the U.S. securities markets to close for four days. This impacted our revenue and profitability for that period of time. If future terrorist incidents cause interruption of market activity, our revenues and
profits may be impacted negatively again.
Risks Relating to Our Clearing and Outsourcing Solutions Business
Our existing clearing correspondents may choose to perform their own securities clearing services as their operations grow.
We market our securities clearing services to our existing correspondent clients on the strength of our ability to process transactions and perform
related back-office functions more effectively than these clients could perform these functions themselves. As our correspondent clients operations grow, they often consider the
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option of performing securities clearing functions themselves, in a process referred to in the securities industry as self-clearing. As the
transaction volume of a broker-dealer grows, the cost of implementing the necessary infrastructure for self-clearing may be eventually offset by the elimination of per-transaction processing fees that would otherwise be paid to a clearing firm.
Additionally, performing their own securities clearing services allows self-clearing broker-dealers to retain their customers margin balances, free credit balances and securities for use in margin lending activities. If a significant number of
clearing correspondents or correspondents representing a significant portion of our business terminate their clearing relationship with us to become self-clearing, this could result in a material adverse effect on our business, financial condition
and results of operations.
We have tried to address this potential client loss by offering our operations outsourcing service, which
affords firms an ability to remain or become self-clearing without the necessity of maintaining this infrastructure. However, some firms may nevertheless choose to change to self-clearing operations and not outsource their operations to us, which
could have a material adverse effect on our business, financial condition and results of operations.
Our securities clearing business may be
exposed to risk from our counterparties and third parties.
In the normal course of business, our securities clearing activities
involve execution, settlement and financing of various security clearing transactions for a nationwide client base. With these activities, we may be exposed to risk in the event our clients, other broker-dealers, banks, clearing organizations or
depositories are unable to fulfill contractual obligations.
Our practice of recording security clearing transactions may expose us to off-balance
sheet risk of loss.
We record clients security clearing transactions on a settlement date basis, which is generally three
business days after trade date. We are therefore exposed to off-balance sheet risk of loss on unsettled transactions in the event clients and other counterparties are unable to fulfill contractual obligations.
Our securities clearing business may be subject to liability under our membership agreements with exchanges and clearinghouses.
We are a member of numerous exchanges and clearinghouses. Under the membership agreements, members are generally required to guarantee the performance of
other members. Additionally, if a member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet these shortfalls. To mitigate these performance risks, the exchanges and clearinghouses often require
members to post collateral. We may be subject to liability under these arrangements in case of default of a member of those exchanges or clearinghouses.
Our securities clearing business involvement in options markets subjects us to risks inherent in conducting business in those markets.
We clear options contracts on behalf of our correspondents and their customers. Trading in options contracts is generally more highly leveraged than trading in other types of securities. This additional leverage
increases the risk associated with trading in options contracts, which in turn raises the risk that a correspondent or customer may not be able to fully repay its creditors, including us, if it experiences losses in its options contract trading
business.
Our clearing and outsourcing services could expose us to legal liability for errors in performing clearing or operations outsourcing
services and, in connection with our clearing services, for improper activities of our correspondents.
Any intentional failure
or negligence in properly performing our securities clearing or operations outsourcing services, or any mishandling of funds and securities held by us on behalf of our correspondents and
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their customers could lead to censures, fines or other sanctions by applicable authorities as well as actions in contract or tort brought by parties who are
financially harmed by those failures or mishandlings. Any litigation that arises as a result of our securities clearing or operations outsourcing services could harm our reputation and cause us to incur substantial expenses associated with
litigation and damage awards that could exceed our liability insurance by unknown but significant amounts.
In the past, clearing firms
in the United States have been held liable for failing to take action upon the receipt of customer complaints, failing to know about the suspicious activities of correspondents or their customers under circumstances where they should have known, and
even aiding and abetting, or causing, the improper activities of their correspondents. We cannot assure you that our procedures will be sufficient to properly monitor our correspondents under current laws and regulations or that securities industry
regulators will not enact more restrictive laws or regulations or change their interpretations of current laws and regulations. If we fail to implement proper procedures or fail to adapt our existing procedures to new or more restrictive
regulations, we may be subject to liability that could result in substantial costs to us and distract our management from our business.
Our
Clearing and Outsourcing Solutions business is subject to complex regulations, the violation of which could expose us to interruptions in our business and monetary liability from regulations, clients, competitors and others.
Compliance with applicable laws and regulations is time consuming and personnel-intensive. Changes in these laws and regulations may increase
materially our direct and indirect compliance and other expenses of doing business. The costs of the compliance requirements we face, and the constraints they impose on our operations, could have a material adverse effect on our business, financial
condition and results of operations. For a further discussion of the regulatory framework in which we operate, see Business Regulation. Legal and regulatory actions are inherent in our businesses and could result in financial
losses or harm our businesses.
We may be subject to legal and regulatory actions in the ordinary course of our operations, both
domestically and internationally. Legal and regulatory actions include proceedings relating to aspects of our businesses and operations that are specific to us and proceedings that are typical of the industries and businesses in which we operate.
Substantial legal liability from legal or regulatory actions could have a material financial effect or cause significant reputational harm, which in turn could seriously harm our business prospects.
All aspects of our Clearing and Outsourcing Solutions business are subject to extensive government regulation which may subject us to disciplinary or other action
by regulatory organizations.
The securities industry in the United States is subject to extensive regulation under both federal
and state laws. In addition to these laws, our clearing and outsourcing services must comply with rules and regulations of the SEC, the NASD, various stock exchanges, state securities commissions and other regulatory bodies charged with safeguarding
the integrity of the securities markets and other financial markets and protecting the interests of investors participating in these markets. Broker-dealers are subject to regulations covering all aspects of the securities business, including:
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trade practices among broker-dealers;
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use and safekeeping of investors funds and securities;
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conduct of directors, officers and employees; and
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supervision of investor accounts.
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Our ability to comply with these regulations depends largely on the establishment and maintenance of an
effective compliance system as well as our ability to attract and retain qualified compliance personnel. We could be subject to disciplinary or other actions due to claimed non-compliance with these regulations in the future and even for the claimed
non-compliance of our correspondents with such regulations. If a claim of non-compliance is made by a regulatory authority, the efforts of our management could be diverted to responding to such claim and we could be subject to a range of possible
consequences, including the payment of fines and the suspension of one or more portions of our business. Additionally, some of our securities clearing services contracts include automatic termination provisions which are triggered in the event we
are suspended from any of the national exchanges of which we are a member for failure to comply with the rules or regulations thereof.
In
addition, because our Clearing and Outsourcing Solutions business is heavily regulated, regulatory approval may be required prior to expansion of our business activities. We may not be able to obtain the necessary regulatory approvals for any
desired expansion. Even if approvals are obtained, they may impose restrictions on our business and could require us to incur significant compliance costs or adversely affect the development of business activities in affected markets.
If our securities clearing business does not maintain the capital levels required by regulations, we may be subject to fines, suspension, revocation of
registration or expulsion by regulatory authorities.
Our securities clearing business is subject to stringent rules imposed by the
SEC, the NASD and various other regulatory agencies which require broker-dealers to maintain specific levels of net capital. Net capital is the net worth of a broker-dealer, less deductions for other types of assets including assets not readily
convertible into cash and specified percentages of a broker-dealers securities positions. If we fail to maintain the required net capital, we may be subject to suspension or revocation of registration by the SEC and suspension or expulsion by
the NASD, which, if not cured, could ultimately lead to the liquidation of our Clearing and Outsourcing Solutions business. If the net capital rules are changed or expanded, or if there is an unusually large charge against the net capital of our
Clearing and Outsourcing Solutions business, we might be required to limit or discontinue our securities clearing and margin lending operations that require the intensive use of capital. In addition, our ability to withdraw capital from our Clearing
and Outsourcing Solutions business could be restricted, which in turn could limit our ability to pay dividends, repay debt at the parent company level and redeem or purchase shares of our outstanding stock, if necessary. A large operating loss or
charge against the net capital of our securities clearing business could impede our ability to expand or even maintain our present volume of business.
Procedures and requirements of the USA PATRIOT Act may expose our securities clearing business to significant costs or penalties.
As participants in the financial services industry, our securities clearing business is subject to laws and regulations, including the USA PATRIOT Act of 2001, which require that we know certain information about our
securities clearing services clients and monitor transactions for suspicious financial activities. The cost of complying with the USA PATRIOT Act and related laws and regulations is significant. We may face particular difficulties in identifying our
international clients, gathering the required information about them and monitoring their activities. We face risks that our policies, procedures, technology and personnel directed toward complying with the USA PATRIOT Act are insufficient and that
we could be subject to significant criminal and civil penalties due to noncompliance. Such penalties could have a material adverse effect on our business, financial condition and results of operations.
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Risks Relating to Our Separation from ADP
Our combined historical and pro forma financial information is not necessarily representative of the results we would have achieved as a stand-alone company and
may not be a reliable indicator of our future results.
Our combined historical and pro forma financial information included in this
information statement does not reflect the financial condition, results of operations or cash flows we would have achieved as a stand-alone company during the periods presented or that we may achieve in the future. This is primarily a result of the
following factors:
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our combined historical financial results reflect allocations of corporate expenses from ADP, which allocations may be different than the comparable expenses we
would have actually incurred as a stand-alone company;
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our working capital requirements historically have been satisfied as part of ADPs corporate-wide cash management policies;
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our cost of debt and our capitalization will be different in the future, because our credit rating will be lower than ADPs credit rating;
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significant changes will occur in our cost structure, management, financing and business operations as a result of our separation from ADP, including the
potentially significant costs required for us to establish our new brand and operating infrastructure; and
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our separation from ADP and the creation of our new brand may have an adverse effect on our client and other business relationships.
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We have made adjustments based upon available information and assumptions that we believe are reasonable to reflect these factors, among others, in
our combined historical and pro forma financial information. However, our assumptions may prove not to be accurate, and accordingly, the financial information presented in this information statement should not be assumed to be indicative of what our
financial condition or results of operations actually would have been as a stand-alone company nor to be a reliable indicator of what our financial condition or results of operations actually may be in the future.
For a description of the components of our historical combined financial information and adjustments to our pro forma financial information, see
Managements Discussion and Analysis of Financial Condition and Results of Operations Factors Affecting Comparability of Financial Results Historical ADP Cost Allocations versus Broadridge as a Stand-alone Entity and
our historical combined financial statements and pro forma financial information.
We will experience increased costs after the separation or as
a result of the separation.
We will need to replicate certain facilities, systems, infrastructure and personnel to which we will no
longer have access after our separation from ADP. We will also need to make investments to operate without access to ADPs existing operational and administrative infrastructure. These initiatives will be costly to implement. Due to the scope
and complexity of the underlying projects, the amount of total costs cannot be estimated at this time.
ADP performs many important
corporate functions for our operations, including information technology support, treasury, accounting, financial reporting, tax administration, human resource administration, procurement and other services. We currently pay ADP for these services
on a cost-allocation basis. Following the separation and distribution, ADP will continue to provide some of these services to us on a short-term, transitional basis, for which we will pay ADP fees generally based on the applicable allocable cost of
ADPs services to the Brokerage Services Business prior to the distribution. For more information regarding the transition arrangements, see Our Relationship with ADP Agreements with ADP Transition Services Agreement.
When we begin to operate these functions independently, if we do not have our own adequate systems and business functions in place, or are unable to obtain them from other providers, we may not be able to operate our business effectively or at
comparable costs, and our profitability may decline.
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Prior to the separation, our business benefited from ADPs purchasing power when procuring goods and
services, including office supplies and equipment, travel services, telecommunications, computer software licenses, insurance and benefits. As a stand-alone company, we may be unable to obtain goods and services at comparable prices or on terms as
favorable as those obtained prior to the separation, which could decrease our overall profitability.
As part of the separation from ADP, we will
incur debt with external lenders, which will subject us to various restrictions and could decrease our profitability.
Shortly
prior to the separation, we expect to incur $690.0 million in debt to fund a dividend to ADP and to enter into a revolving credit facility and commercial paper program that will provide $500.0 million of additional borrowing capacity for general
corporate purposes, including working capital requirements. These financing arrangements will contain customary restrictions, covenants and events of default. The terms of these financing arrangements and any future indebtedness will impose various
restrictions and covenants on us that could limit our ability to respond to market conditions, provide for capital investment needs or take advantage of business opportunities. In addition, our financing costs will be higher than they were when we
were a part of ADP. For a more detailed discussion of these borrowings and our liquidity following the separation and distribution, see Managements Discussion and Analysis of Financial Condition and Results of Operations Financial
Condition, Liquidity and Capital Resources New Credit Facility.
We may not have sufficient capital generation ability to meet our
operating and regulatory capital requirements.
As a stand-alone company, we may be required to maintain higher capital ratios than
those maintained by ADP to retain our credit ratings. In addition, we will need to cover volatility associated with variations in our operating, risk-based and regulatory capital requirements, including separation costs and contingent exposures such
as our indemnification obligation to ADP in connection with the tax allocation agreement we are entering into with ADP. See Business Regulation for more information regarding capital requirements.
Our business, financial position and results of operations could be harmed by adverse rating actions by credit rating agencies.
At this time we are targeting to have, following the distribution, long-term debt with an investment grade rating. If our long-term debt does not receive
this rating, if our initial rating is downgraded, or if ratings agencies indicate that a downgrade may occur, our business, financial position and results of operations could be adversely affected and perceptions of our financial strength could be
damaged. This could adversely affect our relationships with our clients. Also, a downgrade could increase our costs of borrowing money, adversely affecting our business, financial position and results of operations.
We are agreeing to certain restrictions to preserve the treatment of the distribution as tax-free to ADP and its stockholders, which will reduce our strategic and
operating flexibility.
The Internal Revenue Service ruling and opinion confirming the tax-free status of the distribution will rely
on certain representations and undertakings from us, and the tax-free status of the distribution could be affected if these representations and undertakings are not correct or are violated. If the distribution fails to qualify for tax-free
treatment, it will be treated as a taxable dividend to ADP stockholders in an amount equal to the fair market value of our stock issued to ADP stockholders. In that event, ADP would be required to recognize a gain equal to the excess of the sum of
the fair market value of our stock on the distribution date and the amount of cash received in the cash distribution over ADPs tax basis in our stock.
In addition, current tax law generally creates a presumption that the distribution would be taxable to ADP, but not to its stockholders, if we or our stockholders were to engage in a transaction that would result in a
50% or greater change by vote or by value in our stock ownership during the two-year period beginning on the
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distribution date, unless it is established that the distribution and the transaction are not part of a plan or series of related transactions to effect such
a change in ownership. In the case of such a 50% or greater change in our stock ownership, tax imposed on ADP in respect of the distribution would be based on the fair market value of our stock on the distribution date over ADPs tax basis in
our stock.
Under the tax allocation agreement that we will enter into with ADP, we will generally be prohibited, except in specified
circumstances, for specified periods of up to 30 months following the distribution, from
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issuing, redeeming or being involved in other significant acquisitions of our equity securities;
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transferring significant amounts of our assets;
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amending our certificate of incorporation or by-laws;
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failing to engage in the active conduct of a trade or business; or
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engaging in certain other actions or transactions that could jeopardize the tax-free status of the distribution.
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See Our Relationship with ADP Agreements with ADP Tax Allocation Agreement.
We are agreeing to indemnify ADP for taxes and related losses resulting from certain actions that may cause the distribution to fail to qualify as a tax-free transaction.
Under the tax allocation agreement that we will enter into with ADP, we will agree generally to indemnify ADP for taxes and related losses it suffers as a
result of the distribution failing to qualify as a tax-free transaction, if the taxes and related losses are attributable to:
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direct or indirect acquisitions of our stock or assets (regardless of whether we consent to such acquisitions);
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negotiations, understandings, agreements or arrangements in respect of such acquisitions; or
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our failure to comply with certain representations and undertakings from us, including the restrictions described in the preceding risk factor.
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See Our Relationship with ADP Agreements with ADP Tax Allocation Agreement. Our indemnity will cover both
corporate level taxes and related losses imposed on ADP in the event of a 50% or greater change in our stock ownership described in the preceding risk factor, as well as taxes and related losses imposed on both ADP and its stockholders if, due to
our representations or undertakings being incorrect or violated, the distribution is determined to be taxable for other reasons.
The
indemnification obligation to ADP for taxes due in the event of a 50% or greater change in our stock ownership could be substantial, and it is unlikely that we would have the resources to satisfy it.
The cost of compliance or failure to comply with the Sarbanes-Oxley Act of 2002 may adversely affect our business.
As a new reporting company under the Securities Exchange Act of 1934, or the Exchange Act, we will be subject to certain provisions of the Sarbanes-Oxley
Act of 2002, which may result in higher compliance costs and may adversely affect our financial results and our ability to attract and retain qualified members of our Board of Directors or qualified executive officers. The Sarbanes-Oxley Act affects
corporate governance, securities disclosure, compliance practices, internal audits, disclosure controls and procedures, and financial reporting and accounting systems. Section 404 of the Sarbanes-Oxley Act, for example, requires companies
subject to the reporting requirements of the U.S. securities laws to conduct a comprehensive evaluation of its and its consolidated subsidiaries internal controls over financial reporting. We will be required to provide our
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Section 404 evaluation beginning with our annual report on Form 10-K for the year ended June 30, 2008. The failure to comply with Section 404,
when we are required to comply, may result in investors losing confidence in the reliability of our financial statements (which may result in a decrease in the trading price of our common stock), prevent us from providing the required financial
information in a timely manner (which could materially and adversely impact our business, our financial condition and the trading price of our common stock), prevent us from otherwise complying with the standards applicable to us as a public company
and subject us to adverse regulatory consequences.
Our separation from ADP could adversely affect our ability to attract and retain clients and
recruit and retain employees.
As a division of ADP, we have marketed our products and services using the ADP brand name
and logo. We believe the association with ADP has provided us with preferred status among our clients and employees due to ADPs:
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globally-recognized brand, which is associated with quality, customer service, trust, integrity and security;
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perceived high-quality products and services; and
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strong capital base and financial strength.
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In connection with the separation and distribution, we will change our corporate name and operate under a new brand name. Without the ADP brand name, we may not be able to maintain or enjoy comparable name recognition
or status under our new brand. Our separation from ADP may adversely affect our ability to attract and retain clients, which could result in the termination of our investor communication, securities processing, and clearing and outsourcing client
relationships.
The ADP brand and our affiliation with ADP have also been key aspects of our recruitment and retention of our
employees. Our separation from ADP could also adversely affect our ability to attract and retain senior management and other key employees.
If we are unable to successfully manage the transition of our business to our new brand, the benefit we offer our clients and employees of having a recognized brand will be reduced, which could have an adverse effect on our revenue and
profitability. We cannot predict the effect that our separation from ADP will have on our clients and our employees.
The continued ownership of ADP
common stock by our executive officers and some of our directors may create, or may create the appearance of, conflicts of interest.
Because of their current or former positions with ADP, substantially all of our executive officers, including our Executive Chairman, Chief Executive Officer and our Chief Operating Officer, and some of our non-employee directors, own ADP
common stock. These holdings in ADP common stock may be significant for some of these persons compared to that persons total assets. Even though our Board of Directors will consist of a majority of directors who are independent from both ADP
and our company, and our executive officers who are currently employees of ADP will cease to be employees of ADP upon consummation of the distribution, ownership of ADP common stock by our directors and officers after the separation may create, or
may create the appearance of, conflicts of interest when these directors and officers are faced with decisions that could have different implications for ADP than they do for us.
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Risks Relating to Our Common Stock
Once our common stock begins trading, substantial sales of common stock may occur, which could cause our stock price to decline.
There is currently no public market for our common stock. On March 22, 2007, in connection with the declaration by the Board of Directors of ADP of
the distribution, our common stock is expected to begin trading publicly on a when issued basis. We have not set an initial price for our common stock. The price for our common stock will be established by the public markets.
The shares of our common stock that ADP distributes to its stockholders generally may be sold immediately in the public market. Because ADP
stockholders did not invest directly in our stock, our business profile may not fit their investment objectives and they may sell our shares following the distribution period. In addition, index funds tied to the Standard & Poors 500
Index, the Russell 1000 Index and other indices hold shares of ADP common stock. To the extent our common stock is not included in these indices, certain of these index funds will likely be required to sell the shares of our common stock that they
receive in the distribution. The sale of significant amounts of our common stock or the perception in the market that this will occur may lower the market price of our common stock.
There has been no previous market for our common stock, and the market price of our shares may fluctuate widely.
We cannot predict the prices at which our common stock may trade after the distribution. Indeed, the combined market prices of our common stock and ADP common stock after the distribution may not equal or exceed the
market value of ADP common stock immediately before the distribution. The market price of our common stock may fluctuate widely, depending upon many factors, some of which may be beyond our control, including:
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changes in expectations concerning our future financial performance and the future performance of the financial services industry in general, including financial
estimates and recommendations by securities analysts;
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the potential that our business profile may not fit the investment objectives of ADP stockholders, causing them to sell our shares after the distribution as
described above;
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differences between our actual financial and operating results and those expected by investors and analysts;
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strategic moves by us or our competitors, such as acquisitions or restructurings;
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changes in the regulatory framework of the financial services industry and regulatory action; and
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changes in general economic or market conditions.
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Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the trading price of our
common stock.
Holders of our common stock may be adversely affected through the issuance of more senior securities or through dilution.
In addition to the new financing arrangements we expect to enter into as part of the separation from ADP, we may need to incur
additional debt or issue equity in order to fund working capital, capital expenditures and product development requirements or to make acquisitions and other investments. If we raise funds through the issuance of debt or equity, any debt securities
or preferred stock issued will have liquidation rights, preferences and privileges senior to those of holders of our common stock. If we raise funds through the issuance of common equity, the issuance will dilute your ownership interest. We cannot
assure you that debt or equity financing will
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be available to us on acceptable terms, if at all. If we are not able to obtain sufficient financing, we may be unable to maintain or grow our business. It
may also be more expensive for us to raise funds through the issuance of additional debt than the cost of raising funds or issuing debt for our business while we were part of ADP.
Provisions in our certificate of incorporation and by-laws and of Delaware law and our tax allocation agreement may prevent or delay an acquisition of our company.
Our certificate of incorporation and by-laws and Delaware law contain provisions that are intended to deter coercive takeover practices and inadequate
takeover bids by making them unacceptably expensive to the raider and to encourage prospective acquirors to negotiate with our Board of Directors rather than to attempt a hostile takeover. These provisions include, among others:
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elimination of the right of our stockholders to act by written consent; and
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the right of our Board of Directors to issue preferred stock without stockholder approval.
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We will not opt out of the protections afforded by Section 203 of the Delaware General Corporation
Law, which provides that a stockholder acquiring more than 15% of our outstanding voting shares (an Interested Stockholder) but less than 85% of such shares may not engage in certain business combinations with us for a period of three
years subsequent to the date on which the stockholder became an Interested Stockholder unless prior to such date, our Board of Directors approves either the business combination or the transaction which resulted in the stockholder becoming an
Interested Stockholder or the business combination is approved by the Board of Directors and by the affirmative vote of at least 66
2
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3
% of the outstanding voting stock that is not owned by the Interested Stockholder.
We believe these
provisions protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition
proposal, and are not intended to make our company immune from takeovers. However, these provisions apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our Board of Directors
determines is not in the best interests of our company and our stockholders.
Under the tax allocation agreement that we will enter
into with ADP, we will generally be prohibited, except in specified circumstances, for specified periods of up to 30 months following the distribution from consenting to certain acquisitions of significant amounts of our stock.
As discussed above, an acquisition or further issuance of our equity securities could trigger a tax to ADP, requiring us under the tax allocation
agreement to indemnify ADP for such tax. This indemnity obligation might discourage, delay or prevent a change of control that you may consider favorable.
We cannot assure you that we will pay any dividends.
Although we expect to pay dividends, there can be no
assurance as to what the amount of dividends will be or that we will have sufficient surplus under Delaware law to be able to pay any dividends. This may result from extraordinary cash expenses, actual expenses exceeding contemplated costs, funding
of capital expenditures, or increases in reserves. If we do not pay dividends, the price of our common stock that you receive in the distribution must appreciate for you to receive a gain on your investment in us. This appreciation may not occur.
See Dividend Policy.
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SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
We have made various forward-looking statements in this
information statement. Examples of such forward-looking statements include:
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statements of our plans, intentions, expectations, objectives or goals, including those relating to the establishment of our new brand, our strategy and our
competitive environment;
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statements estimating the expected costs and other effects of being a separate public company;
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statements about our future economic performance, the performance of financial markets, interest rate variations and economic and political conditions; and
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statements of assumptions underlying such statements.
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The words believe, expect, anticipate, optimistic, intend, plan, aim, will, may, should,
could, would, likely and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. Forward-looking statements are subject to risks and
uncertainties, which could cause actual results to differ materially from such statements. Such factors, some of which are discussed under Risk Factors, include, but are not limited to:
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risks relating to our business;
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changes in the regulatory environment;
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risks relating to the financial services industry;
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our cost structure and capital structure as a stand-alone company, including our ratings and indebtedness;
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our ability to establish our new brand;
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the impact of our separation from ADP on clients, employees and other aspects of our business; and
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risks relating to our common stock.
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We caution you that the foregoing list of factors is not exhaustive. There may also be other risks that we are unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements.
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DISTRIBUTION
General
On August 2, 2006, ADP announced its intention to pursue the disposition of our company through the distribution of our common stock to ADPs stockholders.
On March 9, 2007, the ADP board declared a dividend on ADP common stock consisting of all of the shares of our common stock that ADP will own on the
date of the distribution. These shares will represent 100% of our outstanding common stock immediately prior to the distribution. The dividend will be paid on March 30, 2007, the distribution date, in the amount of one share of our common stock
for every four shares outstanding of ADP common stock as described below to each stockholder on the record date.
Please note that you
will not be required to pay any cash or other consideration for the shares of our common stock distributed to you or to surrender or exchange your shares of ADP common stock to receive the dividend of our common stock.
Reasons for the Distribution
Currently, ADP is
engaged, through its subsidiaries, in three businesses in the United States and around the world:
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employer services, which provides human resources information, payroll processing and benefits administration products and services that assist employers to staff,
manage, pay and retain their employees (the Employer Services Business);
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dealer services, which provides integrated computing solutions to automobile, truck, motorcycle, marine and recreational vehicle dealers (the Dealer Services
Business, and, together with the Employer Services Business, the Retained Businesses); and
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brokerage services, which provides investor communication solutions, securities processing solutions for the financial services industry, and clearing, custody,
financing, securities lending, trade execution and operations outsourcing solutions to broker-dealers (the Brokerage Services Business).
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In 2005, ADPs senior management and board of directors undertook a strategic review of ADPs businesses, including an assessment of the market and growth characteristics of each of its businesses and the
role of each business within ADPs overall business portfolio. Factors considered by ADPs management and board of directors as part of the strategic review included:
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historical revenue growth: While the historical long-term growth performance of the Brokerage Services Business was similar to that of ADPs Retained
Businesses, the Brokerage Services Business experienced higher fluctuations in year-to-year growth when compared to ADPs Employer Services Business;
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level of projected revenue growth: The Retained Businesses are believed to be better positioned to meet ADPs long-term revenue growth objectives, while the
Brokerage Services Business is expected to experience long-term growth more commensurate with our peer firms;
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level of future earnings predictability: The Brokerage Services Business is expected to have a lower degree of earnings predictability than the Retained Businesses
given that: (i) the client base within the financial services market is generally more consolidated than the client base of either of the Retained Businesses; and (ii) regulatory changes within the financial services industry could drive higher
fluctuations in future year-to-year performance comparisons;
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ADP cash deployment: Given ADPs positive cash balance and strong cash flows, ADPs management and board of directors weighed alternatives available to
return excess cash to ADP stockholders; and
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potential benefits and detriments of separating the Brokerage Services Business: ADPs management and board of directors considered the potential benefits and
detriments to the Brokerage Services
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Business that could result from a spin-off, including: (i) potential client reaction to the increased autonomy and flexibility afforded to the Brokerage
Services Business to pursue its growth strategies; (ii) potential client perception of the Brokerage Services Business no longer being part of ADP; (iii) potential perception of employees of the Brokerage Services Business if separated from ADP; and
(iv) the significant management time and effort required to effect the spin-off.
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As a result of this strategic review,
ADPs management and board of directors believe it is in the best interests of ADPs stockholders to separate its Brokerage Services Business from its Retained Businesses in order to maximize stockholder value. ADPs management and
board of directors believe that the separation would allow the creation of a new ADP focused on the Employer Services Business and the Dealer Services Business, which together would be better positioned in managements view to meet ADPs
long-term revenue growth objectives. ADPs management and board of directors also believe that both the Brokerage Services Business and the Retained Businesses would have the opportunity to benefit from the increased fit and focus of a
separation whereby:
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the Brokerage Services Business would have increased autonomy to pursue its strategic initiatives and deploy its capital as the Brokerage Services Business
management team sees fit;
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management of the Retained Businesses would have a sharpened focus on its Employer Services Business and its Dealer Services Business. In part because of the
regulatory nature and market-driven volatility of the Brokerage Services Business, the operational, financial and strategic management of the Brokerage Services Business currently requires similar levels of time and attention from ADPs senior
corporate management as the Employer Services Business and the Dealer Services Business, despite the fact that the Brokerage Services Business represents less than 25% of total ADP revenues;
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a separation would provide greater transparency for investors for the separated businesses; and
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separate, publicly traded equity securities would provide greater alignment of management incentives with stockholder interests.
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The separation would also, in conjunction with the contemplated tax-free distribution of shares representing the Brokerage Services Business to
ADPs stockholders, allow ADP to return excess cash to its stockholders. Subject to a favorable IRS ruling, it is ADPs intention to utilize the one-time proceeds from the dividend being paid by the Brokerage Services Business to ADP to
repurchase shares of ADP common stock through open market purchases, self tenders or other targeted share repurchase transactions during the 12 months following the spin-off.
In determining the appropriate size of the dividend from the Brokerage Services Business to ADP as part of the distribution, ADPs management and
board of directors considered various factors, including:
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the strategic importance of an investment grade credit rating for the Brokerage Services Business;
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the potential credit ratings for the Brokerage Services Business under various debt scenarios;
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the appropriate mix of debt and equity in the capitalization of the Brokerage Services Business, reflecting the amount of leverage we would have if we had been
required to operate as a stand-alone entity prior to the separation; and
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the amount of proceeds that could be distributed tax-free from the Brokerage Services Business to ADP, which depends upon and cannot exceed ADPs tax basis in
the assets it contributes to us prior to the distribution of the Brokerage Services Business.
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Based on their review,
ADPs management and board of directors expect that we will be able to obtain an investment grade credit rating following the separation. ADPs management and board of directors believe that given our experienced management team, position
as a leading global service provider, strong cash flows and targeted investment grade credit rating, we will be able to advance our business goals and strategic growth initiatives notwithstanding the debt that we will incur in connection with the
separation and dividend.
28
The Number of Shares You Will Receive
It is expected that for every four shares of ADP common stock that you own at 5:00 p.m., New York City time on March 23, 2007, the record date, you will
receive one share of our common stock on the distribution date.
It is important to note that if you sell your shares of ADP common
stock between the record date and the distribution date in the regular way market, you will be also selling your right to receive the share dividend in the distribution. Please see the following section Trading Between the
Record Date and Distribution Date.
Trading Between the Record Date and Distribution Date
Beginning on March 22, 2007 and ending on the distribution date, there are expected to be two markets in ADP common stock: a regular way
market and an ex-distribution market. Shares of ADP common stock that trade on the regular way market will trade with an entitlement to shares of our common stock distributed pursuant to the distribution. Shares that trade on the
ex-distribution market will trade without an entitlement to shares of our common stock distributed pursuant to the distribution. Therefore, if you own shares of ADP common stock at 5:00 p.m., New York City time, on the record date and sell those
shares on the regular way market on or prior to the distribution date, you will also be selling the shares of our common stock that would have been distributed to you pursuant to the distribution. If you sell those shares of ADP common stock on the
ex-distribution market on or prior to the distribution date, you will still receive the shares of our common stock that were to be distributed to you pursuant to your ownership of the shares of ADP common stock.
Furthermore, beginning on March 22, 2007 and ending on the distribution date, there is expected to be a when issued trading market in our
common stock. When issued trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The when issued trading market will be a market for shares of our common stock that will be distributed to
ADP stockholders on the distribution date. If you owned shares of ADP common stock at 5:00 p.m., New York City time, on the record date, then you are entitled to shares of our common stock distributed pursuant to the distribution. You may trade this
entitlement to shares of our common stock, without the shares of ADP common stock you own, on the when issued trading market. On the first trading day following the distribution date, when issued trading with respect to our common stock will end and
regular way trading will begin.
When and How You Will Receive the Dividend
ADP will pay the dividend on March 30, 2007 by releasing its shares of our common stock to be distributed in the distribution to American Stock Transfer
& Trust Company, who is our transfer agent. As part of the distribution, we will adopt a book-entry share transfer and registration system for our common stock. This means that instead of receiving physical share certificates, registered holders
of ADP common stock entitled to the distribution will have their shares of our common stock distributed on the date of the distribution credited to book-entry accounts established for them by the transfer agent. The transfer agent will mail an
account statement to each such registered holder stating the number of shares of our common stock credited to the holders account.
For those holders of ADP common stock who hold their shares through a broker, bank or other nominee, the transfer agent will credit the shares of our common stock to the accounts of those nominees who are registered holders, who, in turn,
will credit their customers accounts with our common stock. We and ADP anticipate that brokers, banks and other nominees will generally credit their customers accounts with our common stock on the same day that their accounts are
credited, which is expected to be the distribution date.
The transfer agent will not deliver any fractional shares of our common stock in
connection with the distribution. Instead, the transfer agent will aggregate all fractional shares and sell them on behalf of those holders who otherwise would be entitled to receive a fractional share. We anticipate that these sales will occur
between the record date and the distribution date. Such holders will then receive a cash payment in an amount equal to their pro rata share of the total net proceeds of those sales. Such cash payments will be made to the holders in the same
29
accounts in which the underlying shares are held. If you physically hold ADP stock certificates, your check for any cash that you may be entitled to receive
instead of fractional shares of our common stock will be included together with the account statement in the mailing that the transfer agent expects to send out on the distribution date.
None of ADP, our company or the transfer agent will guarantee any minimum sale price for the fractional shares of our common stock. Neither our company
nor ADP will pay any interest on the proceeds from the sale of fractional shares.
Certain U.S. Federal Income Tax Consequences of the Distribution
The following discussion summarizes certain U.S. federal income tax consequences of the distribution for a beneficial owner of ADP
common stock that holds such common stock as a capital asset for tax purposes. The discussion is of a general nature and does not purport to deal with persons in special tax situations, including, for example, financial institutions, insurance
companies, regulated investment companies, dealers in securities or currencies, traders in securities that elect to use a mark-to-market method of accounting for securities holdings, tax exempt entities, persons holding ADP common stock in a
tax-deferred or tax-advantaged account, or persons holding ADP common stock as a hedge against currency risk, as a position in a straddle, or as part of a hedging or conversion transaction for tax purposes.
This summary applies only to U.S. holders. A U.S. holder is a beneficial owner of ADP common stock that is (i) an
individual U.S. citizen or resident, (ii) a U.S. domestic corporation or other entity taxable as a corporation, or (iii) otherwise subject to U.S. federal income tax on a net income basis in respect of such common stock.
This summary does not address all of the tax considerations that may be relevant to a holder of ADP common stock. In particular, we do not address:
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the U.S. federal income tax consequences applicable to a stockholder of ADP that is treated as a partnership for U.S. federal income tax purposes;
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the U.S. federal income tax consequences applicable to stockholders in, or partners, members or beneficiaries of, an entity that holds ADP common stock;
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the U.S. federal estate, gift or alternative minimum tax consequences of the distribution;
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the tax considerations relevant to U.S. holders whose functional currency is not the U.S. dollar;
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the tax considerations relevant to holders of ADP employee stock options, restricted stock or other compensatory awards; or
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any state, local or foreign tax consequences of the distribution.
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This summary is based on laws, regulations, rulings, interpretations and decisions now in effect, all of which are subject to change, possibly on a retroactive basis. It is not intended to be tax advice.
You should consult your own tax advisor as to all of the tax consequences of the distribution to you in light of your own particular
circumstances, including the consequences arising under state, local and foreign tax laws, as well as possible changes in tax laws that may affect the tax consequences described herein.
General
ADP has requested a ruling
from the Internal Revenue Service to the effect that, based on certain facts, assumptions, representations and undertakings set forth in the ruling, the distribution will qualify as a transaction that is tax-free under Section 355 and other
related provisions of the Internal Revenue Code of 1986, as amended (the Code), and the distribution is conditioned upon the receipt by ADP of such favorable ruling. In addition, the distribution is conditioned upon the receipt by ADP of
a favorable opinion of counsel confirming the distributions tax-free status, which ADP intends to obtain from Paul, Weiss, Rifkind, Wharton & Garrison LLP, its counsel. Except as otherwise noted, it is assumed for purposes of the
following discussion that the distribution will so qualify.
30
Subject to the discussion below relating to the receipt of cash in lieu of fractional shares, if the
distribution qualifies as tax-free, then for U.S. federal income tax purposes:
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no gain or loss will be recognized by, and no amount will be includible in the income of, ADP as a result of the distribution, other than taxes arising out of
foreign and other internal restructurings undertaken in connection with the separation and with respect to any excess loss account or intercompany transaction required to be taken into account under Treasury regulations
relating to consolidated returns;
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no gain or loss will be recognized by, and no amount will be includible in the income of, a U.S. holder solely as a result of the receipt of our common stock in the
distribution;
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the holding period for our common stock received in the distribution will include the period during which the ADP common stock was held; and
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the tax basis of the ADP common stock immediately prior to the distribution will be apportioned between such ADP common stock and the shares of our common stock
received, including any fractional share of our common stock deemed received in the distribution, based upon relative fair market values at the time of the distribution.
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Although an Internal Revenue Service ruling generally is binding on the Internal Revenue Service, if the facts, assumptions, representations or
undertakings set forth in the ruling request are incorrect or violated in any material respect, the ruling may be retroactively modified or revoked by the Internal Revenue Service. An opinion of counsel represents counsels best legal judgment
but is not binding on the Internal Revenue Service or any court. If, on audit, the Internal Revenue Service were successful in asserting the position that the distribution is taxable, the above consequences would not apply and both ADP and its
stockholders could be subject to tax.
If the distribution were taxable to ADP and its stockholders, then:
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ADP would recognize a gain equal to the excess of the sum of the fair market value of our common stock on the date of the distribution and the amount of cash
received in the cash distribution over ADPs tax basis in our common stock;
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each U.S. holder that receives shares of our common stock in the distribution would be treated as if the U.S. holder received a taxable distribution equal to the
full value of the shares of our common stock received, which would be taxed (i) as a dividend to the extent of the U.S. holders pro rata share of ADPs current and accumulated earnings and profits (including the gain to ADP described
in the preceding bullet point), then (ii) as a non-taxable return of capital to the extent of the U.S. holders tax basis in its ADP common stock, and finally (iii) as capital gain with respect to the remaining value;
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an individual U.S. holder would generally be subject to U.S. federal income tax at a maximum rate of 15% with respect to the portion of the distribution that was
treated as a dividend or capital gain, subject to exceptions for certain short-term and hedged positions (including positions held for one year or less, in the case of a capital gain), which could give rise to tax at ordinary income rates; and
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a U.S. holder would not be subject to U.S. federal income tax with respect to the portion of the distribution that was treated as a return of capital, although its
tax basis in its ADP common stock would be thereby reduced.
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If, due to any of our representations or undertakings being
incorrect or violated, the Internal Revenue Service were successful in asserting the position that the distribution is taxable, we could be required to indemnify ADP (including in respect of claims asserted by its stockholders) for the taxes
described above and related losses. In addition, current tax law generally creates a presumption that the distribution would be taxable to ADP, but not to its stockholders, if we or our stockholders were to engage in a transaction that would result
in a 50% or greater change by vote or by value in our stock ownership during the two-year period beginning on the distribution date, unless it is established that the distribution and the transaction are not part of a plan or series of related
transactions to effect
31
such a change in ownership. If the distribution were taxable to ADP due to such a 50% or greater change in our stock ownership, ADP would recognize a gain
equal to the excess of the fair market value of our common stock on the date of the distribution over ADPs tax basis therein and we could be required to indemnify ADP for the tax on such gain and related losses. See Our Relationship with
ADP Agreements with ADP Tax Allocation Agreement.
Cash in Lieu of Fractional Shares
No fractional shares of our common stock will be issued in the distribution. All fractional shares resulting from the distribution will be aggregated and
sold by the transfer agent, and the proceeds will be distributed to the owners of such fractional shares. A holder that receives cash in lieu of a fractional share of our common stock as a part of the distribution will generally recognize capital
gain or loss measured by the difference between the cash received for such fractional share and the holders tax basis in the fractional share determined as described under General above. An individual U.S. holder would
generally be subject to U.S. federal income tax at a maximum rate of 15% with respect to such a capital gain, assuming that the U.S. holder had held all of its ADP common stock for more than one year.
Payments of cash in lieu of a fractional share of our common stock made in connection with the distribution may, under certain circumstances, be subject
to backup withholding unless a holder provides proof of an applicable exemption or a correct taxpayer identification number, and otherwise complies with the requirements of the backup withholding rules. Corporations and non-U.S. holders
will generally be exempt from backup withholding, but may be required to provide a certification to establish their entitlement to the exemption. Backup withholding does not constitute an additional tax, but is merely an advance payment that may be
refunded or credited against a holders U.S. federal income tax liability if the required information is supplied to the Internal Revenue Service.
Information Reporting
Current Treasury regulations require each U.S. holder who receives our common
stock pursuant to the distribution to attach to its U.S. federal income tax return for the year in which the distribution occurs a detailed statement setting forth such data as may be appropriate in order to show the applicability to the
distribution of Section 355 and other related provisions of the Code. ADP will provide to each holder of record of ADP common stock as of the record date appropriate information to be included in such statement.
32
DIVIDEND POLICY
We expect to pay cash dividends on our common stock. However, the declaration and payment of
future dividends to holders of our common stock will be at the discretion of our Board of Directors, and will depend upon many factors, including our financial condition, earnings, capital requirements of our businesses, legal requirements,
regulatory constraints, industry practice and other factors that the Board of Directors deems relevant.
In addition, under
Delaware law, our Board of Directors may declare dividends either out of our surplus, as defined in the relevant Delaware statutes, or if there is no surplus, out of our net profits for the then current and/or immediately preceding fiscal year. The
value of a corporations assets can be measured in a number of ways and may not necessarily equal their book value. The value of our capital may be adjusted from time to time by our Board of Directors but in no event will it be less than the
aggregate par value of our issued stock. Our Board of Directors may base this determination on our financial statements, a fair valuation of our assets or another reasonable method. Our Board of Directors will seek to assure itself that the
statutory requirements will be met before actually declaring dividends.
We are primarily a holding company and as a result, our ability to
pay dividends in the future will depend on receiving dividends from our subsidiaries. Our subsidiaries may be restricted in their ability to pay dividends to our company resulting from regulatory restrictions and restrictive provisions in our
financing arrangements.
As a registered broker-dealer and member of the NASD, our Clearing and Outsourcing Solutions business is subject
to the SECs net capital rule. The net capital rule, which specifies minimum net capital requirements for registered broker-dealers, prohibits payments of dividends if such payment would reduce the broker-dealers net capital below
required levels. The net capital rule also provides that the SEC may restrict any capital withdrawal if such capital withdrawal, together with all other net capital withdrawals during a 30-day period, exceeds 30% of excess net capital and the SEC
concludes that the capital withdrawal may be detrimental to the financial integrity of the broker-dealer. A change in the net capital rule, the imposition of new rules or any unusually large charges against net capital could restrict our ability to
withdraw capital from our Clearing and Outsourcing Solutions business which in turn could limit our ability to pay dividends. See Business Regulation Regulatory Capital Requirements.
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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The unaudited pro forma combined financial statements
presented below have been derived from our audited combined financial statements for the year ended June 30, 2006 and from our unaudited combined financial statements for the six months ended December 31, 2006. The pro forma adjustments and
notes to the pro forma combined financial statements give effect to the distribution of Broadridge common stock by ADP and the other transactions contemplated by the separation and distribution agreement. These unaudited pro forma combined financial
statements should be read in conjunction with Managements Discussion and Analysis of Financial Condition and Results of Operations and our combined financial statements and the notes to those statements included elsewhere in this
information statement.
The unaudited pro forma combined statements of income for the year ended June 30, 2006 and the six months
ended December 31, 2006 have been prepared as though the spin-off had occurred as of July 1, 2005. The unaudited pro forma combined balance sheet at December 31, 2006 has been prepared as though the spin-off had occurred on December 31, 2006.
We will convert to a Delaware corporation, Broadridge Financial Solutions, Inc., just prior to the distribution. The unaudited pro forma combined financial statements presented below give effect to this conversion as though it occurred as of
December 31, 2006. The pro forma adjustments are based upon available information and assumptions that management believes are reasonable. However, such adjustments are subject to change based on the finalization of the terms of the spin-off and the
transaction agreements. See Our Relationship with ADP Agreements with ADP Separation and Distribution Agreement. In addition, such adjustments are estimates and may not prove to be accurate.
The pro forma adjustments include the following items:
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The issuance by us to ADP of 137.9 million shares of our common stock.
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The distribution of 137.9 million shares of our common stock to holders of ADP common stock.
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The assumed incurrence of $690.0 million of combined indebtedness in connection with the spin-off and the payment to ADP of $690.0 million in the form of a cash
dividend.
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The settlement by ADP of $84.4 million of intercompany notes and related accrued interest owed by us to ADP and its affiliates which will be treated as a
contribution of capital from ADP to us for accounting and tax purposes.
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Estimated incremental costs associated with operating as a stand-alone company of $30.0 million annually.
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The elimination of the intercompany trademark royalty fee of $35.0 million currently paid to ADP relating to our usage of the ADP trademark and brand name.
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The elimination of $84.5 million of annual revenues and $47.7 million of annual cost of revenues related to two clients of ours who have notified us that they
intend to terminate certain of our services.
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The share numbers are based on ADP shares outstanding as of December 31,
2006, adjusted to reflect the four to one distribution ratio, and the dollar and settlement amounts are based on our balances as of December 31, 2006. See Managements Discussion and Analysis of Financial Condition and Results of
Operations Quantitative and Qualitative Disclosures about Market Risk.
Our unaudited pro forma combined
statements of income do not include adjustments for certain other costs of operating as a stand-alone company, including higher information technology, procurement and other expenses related to being a stand-alone company. We do not have a
reasonable estimate of these costs at this time as we are finalizing our plans and working to complete certain transition agreements with ADP.
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Our unaudited pro forma combined statements of income do not give effect to initial expenses directly
attributable to the spin-off because of their non-recurring nature. A significant portion of these non-recurring charges to effect the separation will be incurred by ADP, such as investment banker fees, outside legal and accounting fees relating to
the spin-off, costs to separate information systems and temporary consulting costs. We will incur separation costs that have a future benefit to our company such as recruiting and relocation expenses associated with hiring key senior management
positions new to our company, other employee compensation expenses and temporary labor used to develop ongoing processes. We do not have a reasonable estimate of the non-recurring separation costs that we will incur at this time as we are finalizing
our plans and working to complete certain transition agreements with ADP. We anticipate that substantially all of these costs will be incurred within 12 months of the spin-off. See Our Relationship with ADP Agreements with ADP
Separation and Distribution Agreement.
The pro forma adjustments are based upon available information and assumptions that
management believes are reasonable based on our current plans and expectations. However, such adjustments are subject to change based on the finalization of the terms of the spin-off and the transaction agreements. Additionally, this information is
forward-looking information and is subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See Special Note About Forward-Looking Statements and Our Relationship with
ADP Agreements with ADP Separation and Distribution Agreement for further information.
The unaudited pro forma
combined financial statements are for illustrative purposes only and do not reflect what our financial position and results of operations would have been had the spin-off occurred on the dates indicated and are not necessarily indicative of our
future financial position and future results of operations.
35
Unaudited Pro Forma Combined Statements of Earnings
Year Ended June 30, 2006
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Historical
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Pro Forma
Adjustments
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Pro Forma
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(in millions, except per share amounts)
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Revenues:
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Services revenues
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$
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1,876.8
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$
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(84.5
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)(e)
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$
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1,792.3
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Other
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72.7
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72.7
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Total revenues
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1,949.5
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(84.5
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1,865.0
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Interest expense from securities operations
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16.2
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16.2
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Net revenues
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1,933.3
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(84.5
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)
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1,848.8
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Cost of net revenues
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1,433.0
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(47.7
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)(e)
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1,385.3
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Selling, general and administrative expenses
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195.9
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30.0
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(c)
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190.9
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(35.0
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)(d)
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Other expenses, net
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1.7
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42.0
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(a)
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43.7
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1,630.6
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(10.7
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)
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1,619.9
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Earnings from continuing operations before income taxes
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302.7
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(73.8
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)
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|
228.9
|
|
|
Provision (benefit) for income taxes
|
|
|
122.2
|
|
|
|
(28.8
|
)(b)
|
|
|
93.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings from continuing operations
|
|
|
180.5
|
|
|
|
(45.0
|
)
|
|
|
135.5
|
|
|
Loss from discontinued operations, net of benefit for income taxes
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
(13.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
166.7
|
|
|
$
|
(45.0
|
)
|
|
$
|
121.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (f)
|
|
|
|
|
|
|
|
|
|
$
|
0.88
|
|
|
Diluted (f)
|
|
|
|
|
|
|
|
|
|
$
|
0.87
|
|
|
Pro forma shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (f)
|
|
|
|
|
|
|
|
|
|
|
137.9
|
|
|
Diluted (f)
|
|
|
|
|
|
|
|
|
|
|
139.5
|
|
See accompanying notes.
36
Unaudited Pro Forma Combined Statements of Earnings
Six Months Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
Pro Forma
Adjustments
|
|
|
Pro Forma
|
|
|
|
(in millions, except per share amounts)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Services revenues
|
|
$
|
842.9
|
|
$
|
(36.2
|
)(e)
|
|
$
|
806.7
|
|
Other
|
|
|
40.1
|
|
|
|
|
|
|
40.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
883.0
|
|
|
(36.2
|
)
|
|
|
846.8
|
|
Interest expense from securities operations
|
|
|
11.6
|
|
|
|
|
|
|
11.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
|
871.4
|
|
|
(36.2
|
)
|
|
|
835.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of net revenues
|
|
|
675.8
|
|
|
(20.7
|
)(e)
|
|
|
655.1
|
|
Selling, general and administrative expenses
|
|
|
101.6
|
|
|
15.0
|
(c)
|
|
|
96.2
|
|
|
|
|
|
|
|
(20.4
|
)(d)
|
|
|
|
|
Other expenses, net
|
|
|
1.6
|
|
|
21.0
|
(a)
|
|
|
22.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
779.0
|
|
|
(5.1
|
)
|
|
|
773.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes
|
|
|
92.4
|
|
|
(31.1
|
)
|
|
|
61.3
|
|
Provision (benefit) for income taxes
|
|
|
35.9
|
|
|
(12.0
|
)(b)
|
|
|
23.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
56.5
|
|
$
|
(19.1
|
)
|
|
$
|
37.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic (f)
|
|
|
|
|
|
|
|
|
$
|
0.27
|
|
Diluted (f)
|
|
|
|
|
|
|
|
|
$
|
0.27
|
|
Pro forma shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Basic (f)
|
|
|
|
|
|
|
|
|
|
137.9
|
|
Diluted (f)
|
|
|
|
|
|
|
|
|
|
139.5
|
See accompanying notes.
37
Unaudited Pro Forma Combined Balance Sheet
As of December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
Pro Forma
Adjustments
|
|
|
Pro Forma
|
|
|
|
(in millions, except per share amounts)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
84.8
|
|
$
|
|
|
|
$
|
84.8
|
|
Cash and securities segregated for regulatory purposes or deposited with clearing
organizations
|
|
|
40.4
|
|
|
|
|
|
|
40.4
|
|
Accounts receivable, net
|
|
|
344.7
|
|
|
|
|
|
|
344.7
|
|
Securities clearing receivables
|
|
|
924.0
|
|
|
|
|
|
|
924.0
|
|
Other current assets
|
|
|
46.6
|
|
|
|
|
|
|
46.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
1,440.5
|
|
|
|
|
|
|
1,440.5
|
|
Property, plant and equipment, net
|
|
|
70.3
|
|
|
|
|
|
|
70.3
|
|
Other non-current assets
|
|
|
115.3
|
|
|
3.2
|
(h)
|
|
|
118.5
|
|
Goodwill
|
|
|
480.8
|
|
|
|
|
|
|
480.8
|
|
Intangible assets, net
|
|
|
32.4
|
|
|
|
|
|
|
32.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,139.3
|
|
$
|
3.2
|
|
|
$
|
2,142.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Group Equity
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
65.8
|
|
|
|
|
|
$
|
65.8
|
|
Accrued expenses and other current liabilities
|
|
|
153.6
|
|
|
|
|
|
|
153.6
|
|
Securities clearing payables
|
|
|
790.5
|
|
|
|
|
|
|
790.5
|
|
Deferred revenues
|
|
|
2.7
|
|
|
|
|
|
|
2.7
|
|
Notes payable to affiliated parties
|
|
|
84.4
|
|
|
(84.4
|
)(g)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,097.0
|
|
|
(84.4
|
)
|
|
|
1,012.6
|
|
Other non-current liabilities
|
|
|
48.9
|
|
|
|
|
|
|
48.9
|
|
Long-term debt
|
|
|
|
|
|
690.0
|
(i)
|
|
|
690.0
|
|
Deferred revenues
|
|
|
43.4
|
|
|
|
|
|
|
43.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,189.3
|
|
|
605.6
|
|
|
|
1,794.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Group equity:
|
|
|
|
|
|
|
|
|
|
|
|
Parent companys net investment
|
|
|
913.3
|
|
|
(913.3
|
)(k)
|
|
|
|
|
Common stock
|
|
|
|
|
|
1.4
|
(j)
|
|
|
1.4
|
|
Additional paid in capital
|
|
|
|
|
|
309.5
|
(j)
|
|
|
309.5
|
|
Accumulated other comprehensive income
|
|
|
36.7
|
|
|
|
|
|
|
36.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total group equity
|
|
|
950.0
|
|
|
(602.4
|
)
|
|
|
347.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
2,139.3
|
|
$
|
3.2
|
|
|
$
|
2,142.5
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
38
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
|
(a)
|
Reflects the adjustment to record interest expense on $690.0 million of combined indebtedness to be incurred in
connection with the spin-off. Pro forma interest expense was calculated based on an assumed average interest rate of 6%. Interest expense also includes amortization on approximately $3.2 million of debt issuance costs that will be amortized on a
straight-line basis over the term of the debt. The calculation of interest expense assumes constant debt levels throughout the period; actual interest expense may be higher or lower depending on fluctuations in interest rates and actual credit
ratings. A
1
/
8
% change in interest rates would result in a $0.9 million change in annual interest expense.
|
|
(b)
|
Represents the tax effect of pro forma adjustments using the statutory tax rate of 38.5% for the six months ended December 31, 2006 and 39.0% for the year ended June 30, 2006
for U.S. transactions, which represent the majority of the pro forma adjustments, and the applicable international tax rate for the international portion of the pro forma adjustments.
|
|
(c)
|
Represents the estimated incremental costs associated with operating as a stand-alone company of $15.0 million for the six months ended December 31, 2006 and $30.0 million for
the year ended June 30, 2006. The estimated costs associated with operating as a stand-alone company include costs as follows:
|
|
|
(i)
|
$6.8 million for the six months ended December 31, 2006 and $13.5 million for the year ended June 30, 2006 related to staff additions and increases in salaries to replace ADP
support, which were calculated based on approved headcounts, expected compensation plans and current market compensation assumptions. These costs include total compensation and benefits for approximately 65 additional staff and the compensation
structure related to the establishment of a public company executive level management team;
|
|
|
(ii)
|
$4.0 million for the six months ended December 31, 2006 and $8.0 million for the year ended June 30, 2006 related to corporate governance, including insurance costs
(approximately $4.0 million annually), audit fees (approximately $1.5 million annually), board of directors compensation and expenses (approximately $1.0 million annually), as well as annual report and proxy printing and filing fees, stock exchange
fees, corporate compliance fees and tax advisory fees (approximately $1.5 million annually), which were estimated using ADP historical costs, and adjusted for expected variations as applicable, or from insurance premium cost projections received
from our insurance broker based on current market conditions;
|
|
|
(iii)
|
$1.7 million for the six months ended December 31, 2006 and $3.5 million for the year ended June 30, 2006 related to the administration of our benefit plans ($2.5 million
annually) and payroll functions ($1.0 million annually), which were estimated based upon rates quoted by ADP, who will provide these services for us following the separation;
|
|
|
(iv)
|
$1.5 million for the six months ended December 31, 2006 and $3.0 million for the year ended June 30, 2006 related to increased depreciation ($1.2 million annually under the
straight-line depreciation method), amortization ($1.0 million annually) and maintenance costs ($0.8 million annually) in connection with information technology infrastructure investments of $6.6 million resulting from the spin-off, which were
calculated from a plan approved by management using vendor quotes as a basis; and
|
|
|
(v)
|
$1.0 million for the six months ended December 31, 2006 and $2.0 million for the year ended June 30, 2006 related to other corporate costs, including ongoing costs associated
with treasury, mergers and acquisitions and corporate security activities and increased depreciation relating to additional property and equipment purchases of $4.0 million in connection with the distribution, which were estimated using ADPs
historical costs and adjusted for expected variations as applicable.
|
The information provided in the pro forma adjustment
described in this footnote is forward-looking information based on our current plans and expectations and is subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See Special
Note About Forward-Looking Statements for further information.
39
|
(d)
|
Represents the elimination of $20.4 million for the six months ended December 31, 2006 and $35.0 million for the year ended June 30, 2006 for the royalty paid by us to ADP for
the utilization of the ADP trademark and brand. This expense will cease upon completion of the spin-off.
|
|
(e)
|
Represents the elimination of $36.2 million of revenues and $20.7 million of cost of revenues for the six months ended December 31, 2006 and $84.5 million of revenues and $47.7
million of cost of revenues for the year ended June 30, 2006 relating to two clients of ours who have notified us that they intend to terminate certain of our services.
|
|
(f)
|
The calculation of pro forma basic earnings per share and shares outstanding is based on the number of shares of ADP common stock outstanding as of December 31, 2006 adjusted for
the distribution ratio of one share of our common stock for every four shares of ADP common stock. The calculation of pro forma diluted earnings per share and shares outstanding for the periods presented is based on the number of shares of ADP
common stock outstanding as of December 31, 2006 and diluted shares of common stock outstanding as of December 31, 2006 adjusted for the same distribution ratio. This calculation may not be indicative of the dilutive effect that will actually result
from the replacement of ADP stock-based awards held by our employees and employees of ADP or the grant of new stock-based awards. The number of dilutive shares of our common stock that will result from ADP stock options, restricted stock awards and
restricted stock units held by our employees will not be determined until immediately after the spin-off. However, we currently expect the number of dilutive shares resulting from the replacement of our employees ADP stock options, restricted
stock awards and restricted stock units could be greater than one dilutive share of our common stock after the spin-off for every four dilutive shares of ADP common stock held prior to the spin-off. See Our Relationship with ADP
Agreements with ADP Employee Matters Agreement for further information.
|
|
(g)
|
Represents the settlement by ADP of $84.4 million of intercompany notes and related accrued interest owed by us to ADP and its affiliates which will be treated as a contribution of
capital from ADP to us for accounting and tax purposes.
|
|
(h)
|
Represents assumed debt issuance costs of $3.2 million.
|
|
(i)
|
Represents the assumed incurrence of $690.0 million of indebtedness in connection with the spin-off.
|
|
(j)
|
Represents the distribution of 137.9 million shares of our common stock to holders of ADP common stock.
|
|
(k)
|
Represents the elimination of ADPs net investment in us (which includes the settlement of certain intercompany balances between ADP and us described in (g) above) and the
reductions to equity to reflect the expected payment of $690.0 million to ADP which is expected to be funded through the planned incurrence of debt described in (i) above.
|
40
SELECTED COMBINED FINANCIAL DATA
The following table sets forth selected combined financial information from
our unaudited combined financial statements as of and for the six months ended December 31, 2006 and 2005, our audited combined financial statements as of and for the years ended June 30, 2006, 2005 and 2004 and our unaudited combined financial
statements as of and for the years ended June 30, 2003 and 2002.
Our combined financial statements include various adjustments to
amounts in our combined financial statements as a subsidiary of ADP. The summary combined financial data presented below should be read in conjunction with our combined financial statements and the accompanying notes included elsewhere in this
information statement and Managements Discussion and Analysis of Financial Condition and Results of Operations.
Our
combined financial information may not be indicative of our future performance and does not necessarily reflect what our financial condition and results of operations would have been had we operated as a separate, stand-alone entity during the
periods presented, including many changes that will occur in the operations and capitalization of our company as a result of our separation and distribution from ADP.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended June 30,
|
|
Six Months Ended
December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2006
|
|
2005
|
|
|
|
(in millions)
|
|
Net revenues
|
|
$
|
1,933.3
|
|
$
|
1,717.1
|
|
$
|
1,525.8
|
|
$
|
1,424.2
|
|
$
|
1,582.9
|
|
$
|
871.4
|
|
$
|
764.7
|
|
Earnings from continuing operations before income taxes
|
|
|
302.7
|
|
|
273.9
|
|
|
250.4
|
|
|
221.1
|
|
|
315.3
|
|
|
92.4
|
|
|
78.1
|
|
Net earnings from continuing operations after income taxes
|
|
|
180.5
|
|
|
166.4
|
|
|
146.2
|
|
|
110.3
|
|
|
180.9
|
|
|
56.5
|
|
|
46.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
As of December 31,
|
|
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
2006
|
|
2005
|
|
|
|
(in millions)
|
|
|
|
|
|
Balance Sheet and Other Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
50.1
|
|
$
|
31.6
|
|
$
|
23.6
|
|
$
|
44.6
|
|
$
|
32.7
|
|
$
|
84.8
|
|
$
|
114.8
|
|
Total current assets
|
|
|
1,405.9
|
|
|
1,682.1
|
|
|
429.6
|
|
|
458.7
|
|
|
487.8
|
|
|
1,440.5
|
|
|
1,557.8
|
|
Property, plant and equipment, net
|
|
|
80.7
|
|
|
75.4
|
|
|
66.5
|
|
|
57.3
|
|
|
65.0
|
|
|
70.3
|
|
|
77.5
|
|
Total assets
|
|
|
2,134.7
|
|
|
2,422.7
|
|
|
1,034.5
|
|
|
1,018.3
|
|
|
1,005.7
|
|
|
2,139.3
|
|
|
2,309.7
|
|
Total current liabilities
|
|
|
990.3
|
|
|
1,065.3
|
|
|
211.9
|
|
|
254.6
|
|
|
210.4
|
|
|
1,097.0
|
|
|
1,191.5
|
|
Total liabilities
|
|
|
1,091.5
|
|
|
1,136.2
|
|
|
286.7
|
|
|
292.8
|
|
|
226.5
|
|
|
1,189.3
|
|
|
1,246.3
|
|
Total group equity
|
|
|
1,043.2
|
|
|
1,286.5
|
|
|
747.8
|
|
|
725.5
|
|
|
779.2
|
|
|
950.0
|
|
|
1,063.3
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41
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following
information should be read in conjunction with our selected combined financial and operating data and the accompanying combined financial statements and related notes included elsewhere in this information statement. The following discussion may
contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences
include, but are not limited to, those discussed below and elsewhere in this information statement, particularly in Risk Factors and Special Note About Forward-Looking Statements.
Overview
General
We are a leading global provider of investor communication, securities processing,
and clearing and outsourcing solutions to the financial services industry. We offer advanced, integrated systems and services that are dependable, scalable and cost-efficient. Our systems help reduce the need for clients to make significant capital
investments in operations infrastructure, thereby allowing them to increase their focus on core business activities. Our reportable segments are: Investor Communication Solutions, Securities Processing Solutions, and Clearing and Outsourcing
Solutions. A brief description of each segments operations is provided below.
Investor Communication Solutions
A large portion of our Investor Communication Solutions business involves the processing and distribution of proxy
materials to investors in equity securities and mutual funds, as well as the facilitation of related vote processing. ProxyEdge, our innovative electronic proxy delivery and voting solution for institutional investors, helps ensure the participation
of many companies largest stockholders. We provide regulatory reporting, tax reporting and corporate actions/reorganization processing solutions that help our clients meet their regulatory compliance needs. We also provide financial
information distribution and transaction reporting services to both financial institutions and securities issuers. These services include the processing and distribution of account statements and trade confirmations, traditional and personalized
document fulfillment and content management services, and imaging, archival and workflow solutions that enable and enhance our clients communications with investors. All of these services are delivered through physical and electronic means.
Securities Processing Solutions
We offer a suite of advanced, computerized real-time transaction processing services that automate the securities transaction lifecycle, from desktop productivity tools and portfolio management to order capture and
execution, trade confirmation, settlement and accounting. Our services help financial institutions efficiently and cost-effectively consolidate their books and records, focus on their core businesses and manage risk. With multi-currency
capabilities, our Global Processing Solution supports real-time global trading of equity, option, mutual fund and fixed income securities in established and emerging markets.
Clearing and Outsourcing Solutions
Securities clearing and settlement describes the process of matching, recording and processing transaction instructions and then exchanging payment between counterparties. Our securities clearing services enable
clients to utilize our broker-dealer business to finance inventory and margin balances. Our operations outsourcing solutions allow brokers of all sizes to outsource the administrative functions of trade processing to us, from order entry to trade
matching and settlement, while maintaining their ability to finance and capitalize their business.
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Risks Relating to Our Business
Following the distribution, we will begin the transition from being wholly-owned by ADP to being a separate public company. The transition will have
several important effects on our financial condition and results of operations. For example, we will no longer be required to make annual trademark royalty payments to ADP which currently accrue at $35.0 million per year. At the same time, we expect
to incur $30.0 million per year in incremental costs associated with being a stand-alone public company. In addition, in connection with the distribution, we will settle our intercompany indebtedness with ADP without payment, but we will also incur
$690.0 million in new indebtedness and use the proceeds to pay a cash dividend to ADP. As a result, we will pay significantly more in debt service than we have in the past. In connection with our separation from ADP, we will cease to use the ADP
brand name and logo. Instead we will use our new Broadridge brand name and logo. We believe that our association with ADP has benefited us in the past in terms of name recognition and reputation with customers and employees. Although we will need to
establish a reputation with our new name, we do not expect to incur significant incremental expenses for branding and promotion following the separation.
There has been and continues to be merger, acquisition and consolidation activity in the financial services industry. Mergers or consolidations of financial institutions in the future could reduce the number of
our clients and potential clients. If our clients merge with or are acquired by other entities that are not our clients, or that use fewer of our services, they may discontinue or reduce the use of our services. In addition, it is possible
that the larger financial institutions resulting from mergers or consolidations could decide to perform in-house some or all of the services that we currently provide or could provide. Any of these developments could have a material adverse
effect on our business, financial condition and results of operations. One of our large clients has recently been acquired and, as a result, it has notified us that it intends to terminate the Securities Processing Solutions and Clearing and
Outsourcing Solutions services that we provide to it, as of the end of the current fiscal year. However, we will continue to provide this client, and its acquiror (which was an existing client), with proxy distribution and related services. The
client generated $39.7 million of revenues in fiscal 2006 with respect to the services being terminated. The proxy distribution and related services that we will continue to provide to this client and the acquiror generated $32.6 million and $8.6
million of revenue in fiscal 2006 and the six months ended December 31, 2006, respectively. The client has given us notice that it intends to terminate our Securities Processing Solutions and Clearing and Outsourcing Solutions services in order
to utilize the proprietary services of the acquiring firm.
Our revenues are also concentrated. In fiscal 2006, we derived
approximately 24% of our revenues from five clients. Our largest single client accounted for over 5% of our revenues. While these clients generally work with multiple business segments, the loss of business from any of these clients due to
client consolidation or non-renewal of contracts may have an adverse affect on our revenues and results of operations. Moreover, we cannot assure you that we will be able to renew any of our contracts on terms we consider
favorable. However, our business strategy includes selling additional services and products to our existing clients. We have been successful in increasing the volume of business from our existing client base. A client of our Investor
Communication Solutions business segment, that was one of our five largest clients in fiscal 2006, has notified us that it will not renew its contract for account statement processing and distribution services with us, which has already expired.
However, we will continue to provide this client with proxy distribution and related services. In fiscal 2006, this client generated $44.8 million of revenues with respect to the services being terminated. The proxy distribution and related services
that we will continue to provide to this client generated $45.2 million and $13.0 million of revenue in fiscal 2006 and the six months ended December 31, 2006, respectively.
Our Investor Communication Solutions business generates a large amount of revenue from the distribution of proxy materials. Prior to recent amendments,
SEC rules required affirmative written consent from a stockholder before proxy materials could be delivered electronically to that stockholder. On December 13, 2006, the SEC adopted amendments to its proxy rules that will allow public companies
an option to follow a notice and access model of proxy material delivery. The new rules will go into effect on July 1, 2007 and may not be used prior to that date.
Under the new rules, public companies may furnish proxy materials to stockholders by posting them on an Internet website and providing stockholders with
notice of the Internet availability of the proxy materials. The
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notice will be mailed to stockholders unless they have previously elected to receive proxy materials via electronic delivery. Stockholders may request that
paper copies of the proxy materials be mailed to them and may make a permanent election to receive proxy materials by mail or by e-mail with respect to future proxy solicitations conducted by the company or other soliciting persons. When a public
company chooses to rely on the notice and access model, brokers, banks and similar intermediaries must prepare and send their own notices to their beneficial stockholder customers. A beneficial stockholder desiring a paper or e-mail copy of the
proxy materials must request one from the intermediary.
When it adopted the new rules, the SEC also proposed further rule amendments that
would require companies and soliciting persons to furnish proxy materials to stockholders by posting them on an Internet website and providing stockholders with notice of the Internet availability of the proxy materials. Companies and soliciting
persons could continue to furnish paper copies of the proxy materials to some or all stockholders at the same time that the notice of Internet availability is sent. In addition, stockholders would be able to continue to request paper copies of proxy
materials.
The adopted changes, and the proposed changes, if adopted, will have a significant effect on our business. For those companies
that choose the notice and access option, we will continue to mail notices to those stockholders who have not elected to receive proxy materials electronically. Therefore, the volume of items to be mailed will most likely remain unchanged. However,
the weight of the packages will be less, resulting in lower revenues per distribution. At the same time, some stockholders may elect to continue to receive paper copies of proxy materials. Certain of these mailings may not receive the benefit of
volume discounts, resulting in higher revenues per distribution. We also anticipate deriving additional revenue from the fulfillment services that we expect to provide for individually ordered paper proxy materials and for the establishment of
procedures such as toll-free numbers and websites to accommodate the requests of stockholders to receive paper proxy materials for up to one year after the conclusion of the meeting or corporate action to which the materials relate. Additionally, we
may derive revenue from new services such as the creation of access notices and the creation and maintenance of a new database of stockholders requesting paper proxy materials. We do not at this time know how many companies will choose the notice
and access option, nor do we know how many stockholders will elect to continue to receive paper copies of proxy materials. As a result, we cannot at this time predict the net effect of the SECs new electronic access rules on our Investor
Communication Solutions business.
In addition, the NYSE has convened a Proxy Working Group to review the NYSEs rules regarding
the participation of its brokerage firm members in the proxy voting process. A report issued by the Working Group in June 2006 recommended that the NYSE amend existing rules that allow brokers to vote in uncontested director elections. The Working
Group also recommended that the NYSE increase investor education regarding the proxy voting process, support efforts to improve the ability of issuers to communicate directly with investors and review our role in the proxy voting process, as well as
review the reimbursement of brokers for handling the forwarding of investor materials.
Taken together, the new electronic access
rules and the Working Group recommendations could result in dramatic changes to regulations and practices regarding the distribution of proxy materials, proxy voting and stockholder communications. It is unclear how our role in the process will
change. Even if we are able to adapt to the changes, our business may nevertheless suffer. Moreover, if additional modifications to the current regulatory regime are enacted that allow for Internet delivery without notice of additional forms of
investor communications, our revenues in the Investor Communication Solutions business could be adversely affected.
Sources of Revenues and Expenses
Revenues.
We generally receive fee-based revenues by providing services to clients. In the Investor Communication
Solutions segment, we receive a fee for each item processed and/or distributed. In the Securities Processing Solutions segment, we receive a fee per transaction processed, as well as fees for software maintenance and licenses. In the
Clearing and Outsourcing Solutions segment, we typically receive a fee for each transaction that we clear or for which we provide back-office services. We also receive revenues related to
44
interest from customer margin financing, customer short selling activity and uninvested customer balances. In addition, company-wide we occasionally receive
up-front set-up fees in some cases where we are required to perform set-up and implementation activities prior to serving a clients needs.
We have long-term relationships with our clients based on our high levels of service. Our clients include some of the largest financial services firms in the United States. The average client retention for our top 50
clients, which represents 74% of our revenues, is estimated at 10 or more years. For many clients, we provide a variety of services across multiple segments. Our pricing is negotiated for each client and set forth in written agreements that have a
finite duration. Our contracts have staggered termination dates and most are renewed at the end of the term.
Expenses.
Our expenses generally relate to the cost of providing the services to clients in our three business segments. In the Investor Communication Solutions segment, our significant expenses include employee payroll and other labor related costs,
computer hardware, software, telecommunications, the costs of paper, obtaining packaging materials, mail sorting equipment, transportation and distribution costs, and other general overhead items. In the Securities Processing Solutions segment, our
significant expenses include employee payroll and other labor related costs, computer hardware, software, and other general overhead items. In the Clearing and Outsourcing Solutions segment, our significant expenses include employee payroll and
other labor related costs, trade processing costs, interest expense, computer hardware, software programming and updating, telecommunications and general overhead items. We also have company-wide expenses attributable to management compensation and
other selling, general and administrative costs, such as expenses attributable to sales personnel, start-up costs for new business acquisitions and opportunities, and certain facility exit costs.
Factors Affecting Comparability of Financial Results
Our Separation from ADP
On August 2, 2006, ADP announced its intention to pursue the
disposition of our company through the distribution of our common stock to ADPs stockholders as an independent, publicly traded company. We refer to this transaction as the distribution. The distribution is conditioned on a favorable ruling by
the Internal Revenue Service that it will not be a taxable event for stockholders subject to U.S. federal income taxes, the receipt of a favorable opinion of counsel, as well as other regulatory approvals. Immediately following the distribution, ADP
will no longer have a financial investment in us.
Historical ADP Cost Allocations versus Broadridge as a
Stand-alone Entity
Our historical combined financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. These financial statements present the combined financial position and results of operations of the Brokerage Services Business of ADP which is being spun-off to common stockholders of ADP pursuant
to the distribution to form a new stand-alone company. The combined financial statements include allocated costs for facilities, functions and services used by the Brokerage Services Business at shared ADP sites and costs for certain functions and
services performed by centralized ADP organizations and directly charged to the Brokerage Services Business based on usage.
Specifically, these costs were allocated by ADP to us as follows:
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cost of information technology support was allocated based on the usage of information technology systems by Brokerage Services Business in relation to ADPs
total usage;
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travel department costs were allocated based on the estimated percentage of travel directly related to the Brokerage Services Business;
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treasury department costs were allocated based on an estimate of the amount of support staff time and bank service charges that are directly related to the
Brokerage Services Business;
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internal audit department costs were allocated based on the number of hours incurred for the Brokerage Services Business in relation to ADPs total internal
audit hours;
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risk management department costs were allocated based on the estimated percentage of insurance coverage for the Brokerage Services Business in relation to
ADPs total insurance coverage;
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real estate department costs were allocated based on the number of leased facilities for Brokerage Services Business that were managed by the corporate real estate
department in relation to ADPs total leased facilities; and
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all other allocations were based on an estimated percentage of support staff time related to the Brokerage Services Business in comparison to ADP as a whole.
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Our management believes these allocation methods are reasonable. However, it is likely that as a stand-alone entity, our
costs for the same services will be higher, for the following reasons:
Size and influence of ADP.
We generally benefited
from the size of ADP in negotiating many of our overhead costs and were able to leverage the ADP business as a whole, including the Employer Services business from which ADP derives a majority of its total revenues, in obtaining favorable pricing.
ADP is a larger company than we are with extensive resources. As a stand-alone company, we will no longer have this advantage.
Shared corporate overhead.
As the Brokerage Services Business of ADP, our ultimate management was the management of ADP. Moreover, ADP performed all of the public company obligations, including:
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compensation of management and directors;
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corporate investor relations staff, office space and personnel;
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annual meetings of stockholders;
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board of directors and committee meetings;
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Exchange Act annual, quarterly and current report preparation and filing, including reports to stockholders;
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SEC and stock exchange corporate governance compliance, including Sarbanes-Oxley Act Section 404 internal control over financial reporting compliance;
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stock exchange listing fees and transfer agent fees; and
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directors and officers insurance.
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As an independent public company, we will need to provide these services ourselves and bear all of these expenses directly. The historical allocation of ADPs expenses to us may be significantly less than the actual costs we will incur
as an independent company. In addition to public company expenses, other general overhead transactions were handled for us by ADP, such as our payroll services and data center services.
New Financing
In
connection with the separation and distribution, we expect to borrow $690.0 million. These initial borrowings will be used to pay a dividend to ADP and therefore will not directly benefit our business. This new debt is not reflected within the
accompanying combined financial statements appearing elsewhere in this information statement and is significantly more than our $84.4 million of notes payable incurred as of December 31, 2006. Moreover, the notes payable on our balance sheet as
of December 31, 2006 are payable to affiliates with little or no interest charged. The new credit facility will contain arms length interest charges with an unaffiliated financial institution who will judge our creditworthiness without
the benefit of support from ADP. As a result, our interest expense and deferred financing costs will be significantly higher than they were when we were the Brokerage Services Business of ADP. For a description of the new credit facility, see
Financial Condition, Liquidity and Capital Resources New Credit Facility.
Acquisitions
and Divestitures
From time to time, we make acquisitions and divestitures for strategic reasons. In fiscal 2005, we acquired the U.S.
Clearing and BrokerDealer Services businesses of Bank of America Corporation for approximately $344.2 million, net of cash acquired. This acquisition resulted in the creation of our Clearing and Outsourcing
46
Solutions segment which enables us to provide trade execution, clearing and settlement services, asset management, customer financing services, including
margin lending, securities borrowing to facilitate customer short selling activity, and operations outsourcing services for a variety of clearing and custody-related functions.
Seasonality
Our
business has experienced and is expected to continue to experience seasonality due to seasonal patterns in our Investor Communication Solutions segment. Typically, our revenues increase during our fourth fiscal quarter (the second quarter of the
calendar year) as most of our proxy processing and distribution of proxy materials and annual reports take place at that time. The effect of such seasonality makes it difficult to estimate future operating results based on the results of any
specific quarter.
Critical Accounting Policies
The preparation of our financial statements requires management to make estimates, judgments and assumptions that affect reported amounts of assets,
liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates used to prepare the combined financial statements. The estimates are based on historical experience and are believed to be reasonable. Actual amounts
and results could differ from these estimates made by management. Certain accounting policies that require significant management estimates and are deemed critical to our results of operations or financial position are discussed below.
Goodwill.
We review the carrying value of all our goodwill in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, by comparing the carrying value of our reporting units to their fair values. We are required to perform this comparison at least annually or more frequently if circumstances indicate possible impairment. When determining fair value, we
utilize a discounted future cash flow approach using various assumptions, including projections of revenues based on assumed long-term growth rates, estimated costs and appropriate discount rates based on the particular business weighted
average cost of capital. The principal factors used in the discounted cash flow analysis requiring judgment are the projected future operating cash flows, the weighted average cost of capital and the terminal value growth rate assumptions. The
weighted average cost of capital takes into account the relative weights of each component of our consolidated capital structure (equity and debt). Our estimates of long-term growth and costs are based on historical data, various internal estimates
and a variety of external sources, and are developed as part of our routine, long-range planning process. Changes in economic and operating conditions impacting these assumptions could result in goodwill impairments in future periods. We had $480.8
million of goodwill as of December 31, 2006. Given the significance of our goodwill, an adverse change to the fair value could result in an impairment charge, which could be material to our combined earnings. A 10% change in our estimates of
projected future operating cash flows, discount rates or terminal value growth rates used in our calculations of the fair values of the reporting units would have no impact on the reported value of our goodwill.
Income Taxes.
We account for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes, which establishes
financial accounting and reporting standards for the effect of income taxes. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for
the future tax consequences of events that have been recognized in an entitys financial statements or tax returns. Judgment is required in addressing the future tax consequences of events that have been recognized in our financial statements
or tax returns (e.g., realization of deferred tax assets, changes in tax laws or interpretations thereof). In addition, we are subject to the continuous examination of our income tax returns by the Internal Revenue Service and other tax authorities.
A change in the assessment of the outcomes of such matters could materially impact our combined financial statements. As of June 30, 2006, we had estimated foreign net operating loss carry forwards of approximately $28.4 million of which $4.7
million expires in years 2009 through 2012, and $23.7 million which has an indefinite utilization period. In addition, we estimated Federal net operating loss carry forwards of a U.S. subsidiary which is not included in our consolidated tax return
to be approximately $22.9 million as of June 30, 2006. These carry forward losses expire in years 2023 through 2026. Our net operating loss carry forwards resulted in recognition of deferred tax assets of $18.1 million. It is managements
belief that it is more likely than not that these deferred tax assets will not be recognized, therefore a valuation allowance has been recorded to fully offset these assets.
47
Stock-based Compensation
.
SFAS No. 123(R) requires the
measurement of stock-based compensation expense based on the fair value of the award on the date of grant. We determine the fair value of stock options issued by using a binomial option-pricing model. The binomial option-pricing model considers a
range of assumptions related to volatility, dividend yield, risk-free interest rate and employee exercise behavior. Expected volatilities utilized in the binomial option-pricing model are based on a combination of implied market volatilities,
historical volatility of our stock price and other factors. Similarly, the dividend yield is based on historical experience and expected future changes. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of grant.
The binomial option-pricing model also incorporates exercise and forfeiture assumptions based on an analysis of historical data. The expected life of the stock option grants is derived from the output of the binomial model and represents the period
of time that options granted are expected to be outstanding. Determining these assumptions are subjective and complex, and therefore, a change in the assumptions utilized could impact the calculation of the fair value of our stock options. Prior to
July 1, 2005, ADP, our predecessor, followed Accounting Principles Board Opinion 25, Accounting for Stock Issued to Employees (APB No. 25), and related interpretations. Under APB No. 25, no stock-based
compensation expense was recognized related to our stock option program and employee stock purchase plan, as all options granted under the stock option program had an exercise price equal to the market value of the underlying common stock on the
date of grant and with respect to the employee stock purchase plan, the discount did not exceed fifteen percent. A hypothetical change of five percentage points applied to the volatility assumption used to determine the fair value of the fiscal 2006
stock option grants would result in approximately a $2.0 million change in total pretax stock-based compensation expense for the fiscal 2006 grants, which would be amortized over the five year graded vesting period. A hypothetical change of one year
in the expected life assumption used to determine the fair value of the fiscal 2006 stock option grants would result in approximately a $0.5 million change in the pretax stock-based compensation expense for the fiscal 2006 grants, which would be
amortized over the five year graded vesting period. A hypothetical change of one percentage point in the forfeiture rate assumption used for the fiscal 2006 stock option grants would result in approximately a $0.4 million change in the total pretax
stock-based compensation expense for the fiscal 2006 grants, which would be amortized over the five year graded vesting period.
Results of
Operations Analysis of Combined Operations
The following is a discussion of the results of our combined operations for the six
months ended December 31, 2006 and 2005 and the twelve months ended June 30, 2006, 2005 and 2004. For a discussion of the results of our operations by segment, see Results of Operations Analysis of Segment
Results.
Six Months Ended December 31, 2006 Compared to Six Months Ended December 31, 2005
The table below presents combined statement of operations data for the periods indicated and the dollar change and percentage change between periods:
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Six Months Ended
December 31,
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2006
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2005
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Change ($)
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Change (%)
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($ in millions)
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Total net revenues
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$
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871.4
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$
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764.7
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$
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106.7
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14.0
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%
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Cost of net revenues
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675.8
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586.9
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88.9
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15.1
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Selling, general and administrative expenses
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101.6
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99.1
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2.5
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2.5
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Other expenses, net
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1.6
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0.6
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1.0
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166.7
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Total expenses
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779.0
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686.6
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92.4
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13.4
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Earnings from continuing operations before income taxes
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92.4
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78.1
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14.3
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18.3
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Margin
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10.6
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%
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10.2
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%
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0.4
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pts.
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Provision for income taxes
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35.9
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31.5
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4.4
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14.0
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Effective tax rate
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38.9
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%
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40.3
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%
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(1.4
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)pts.
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Net earnings from continuing operations
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