**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **(Mark  One)**                                                                                                                                                                                         |                                                                                          |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|--------|
| ** **                                                                                                                                                                                              |                                                                                          |   |
| **x**                                                                                                                                                                                                   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
| ** **                                                                                                                                                                                              | ** **                                                                                    |   |
| **For the quarterly period ended December 31, 2007**                                                                                                                                                    |
| ** **                                                                                                                                                                                              |
| **OR**                                                                                                                                                                                                  |
| ** **                                                                                                                                                                                              |                                                                                          |   |
| **o**                                                                                                                                                                                                   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                              | ** **                                                                                    |   |
| **For the transition period  from                           to** |
|                                                                                                                                                                                                         |                                                                                               |        |  |

** **

**CommissionFile Number 001-33461**

 

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**SoleraHoldings, Inc.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Delaware**                                                  | ** ** | **20-4552341**                                             |
|---------------------------------------------------------------|------------|------------------------------------------------------------|
| (State or other  jurisdiction of                              |       | (I.R.S. Employer                                           |
| incorporation or  organization)                               |       | Identification No.)                                        |
|                                                          |       |                                                       |
| **6111 Bollinger Canyon Road,  Suite 200**                    | ** ** | ** **                                                 |
| **San Ramon, California 94583**                               | ** ** | **(925) 866-1100**                                         |
| (Address of Principal  Executive Offices, including Zip Code) |       | (Registrant’s Telephone  Number, Including Area Code) |

 

 

Former name, formeraddress and former fiscal year, if changed since last report.

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bysection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days.

Yes  x  No  o

 

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

| Large Accelerated Filer | Accelerated Filer | Non-Accelerated Filer |
|-------------------------|-------------------|-----------------------|
| o                       | o                 | x                     |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes  o  No  x

 

The number of shares outstanding of the issuer’scommon stock, as of February 13, 2008, was 64,805,976.

 

 

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**TABLE OF CONTENTS**

 
| **PART I**  | ** **   | ** **                                                                                                                                    |
|------------------|--------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|             |         |                                                                                                                                          |
|             | Item 1. | Financial Statements  (Unaudited)                                                                                                             |
|             |         |                                                                                                                                          |
|             |         | Condensed  Consolidated Balance Sheets as of December 31, 2007 and June 30,  2007                                                   |
|             |         |                                                                                                                                          |
|             |         | Condensed Consolidated  Statements of Operations for the three months and six months ended December 31,  2007 and December 31, 2006 |
|             |         |                                                                                                                                          |
|             |         | Condensed  Consolidated Statements of Cash Flows for the six months ended December 31,  2007 and December 31, 2006                  |
|             |         |                                                                                                                                          |
|             |         | Notes to Condensed  Consolidated Financial Statements                                                                                         |
|             |         |                                                                                                                                          |
|             | Item 2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                   |
|             | Item 3. | Quantitative and  Qualitative Disclosures About Market Risk                                                                                   |
|             | Item 4. | Controls and  Procedures                                                                                                                      |
|             |         |                                                                                                                                          |
| **PART II** | ** **   |
|             | Item 1.      | Legal Proceedings                                                                                                                             |
|             | Item 1A      | Risk Factors                                                                                                                                  |
|             | Item 2.      | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                                  |
|             | Item 3.      | Defaults Upon Senior  Securities                                                                                                              |
|             | Item 4.      | Submission of  Matters to a Vote of Security Holders                                                                                          |
|             | Item 5.      | Other Information                                                                                                                             |
|             | Item 6. | Exhibits                                                                                                                                      |

 

2

 

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**PART I—FINANCIAL INFORMATION**

 

**Item 1.  FinancialStatements.**

**SOLERAHOLDINGS, INC. AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**AS OFDECEMBER 31, 2007 AND JUNE 30, 2007**

**(Inthousands, except share amounts)**

**(Unaudited)**
| ** **                                                                                                                                                                                     | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-------------------|------------|
| ** **                                                                                                                                                                                     | ** ** | **2007**         | ** ** | **2007**          | ** ** |
| **ASSETS**                                                                                                                                                                                     | ** ** | ** **       | ** ** | ** **        | ** ** |
|                                                                                                                                                                                           |       |             |       |              |       |
| CURRENT ASSETS:                                                                                                                                                                                |       |             |       |              |       |
| Cash and cash  equivalents                                                                                                                                                                     |       | $                | 107,800    |              | $          | 89,868 |   |
| Accounts  receivable — net                                                                                                                                                                |       | 80,872           |       | 85,543            |       |
| Other  receivables                                                                                                                                                                             |       | 10,394           |       | 9,297             |       |
| Other current  assets                                                                                                                                                                          |       | 13,693           |       | 16,901            |       |
| Deferred income  tax assets                                                                                                                                                                    |       | 3,329            |       | 3,248             |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| Total current  assets                                                                                                                                                                          |       | 216,088          |       | 204,857           |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| PROPERTY AND EQUIPMENT — Net                                                                                                                                                              |       | 51,109           |       | 51,485            |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| OTHER ASSETS                                                                                                                                                                                   |       | 15,098           |       | 11,625            |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| LONG TERM DEFERRED INCOME TAX ASSETS                                                                                                                                                           |       | 23,711           |       | 23,835            |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| GOODWILL                                                                                                                                                                                       |       | 614,339          |       | 569,165           |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| INTANGIBLE ASSETS — Net                                                                                                                                                                   |       | 348,183          |       | 362,986           |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| TOTAL                                                                                                                                                                                          |       | $                | 1,268,528  |              | $          | 1,223,953 |   |
|                                                                                                                                                                                           |       |             |       |              |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                                  | ** ** | ** **       | ** ** | ** **        | ** ** |
| ** **                                                                                                                                                                                     | ** ** | ** **       | ** ** | ** **        | ** ** |
| CURRENT LIABILITIES:                                                                                                                                                                           |       |             |       |              |       |
| Accounts payable                                                                                                                                                                               |       | $                | 18,799     |              | $          | 25,571 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                |       | 81,965           |       | 89,240            |       |
| Income taxes  payable                                                                                                                                                                          |       | 7,727            |       | 13,995            |       |
| Deferred income  tax liabilities                                                                                                                                                               |       | 743              |       | 1,076             |       |
| Current portion  of long-term debt                                                                                                                                                             |       | 6,416            |       | 14,140            |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| Total current  liabilities                                                                                                                                                                     |       | 115,650          |       | 144,022           |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| LONG-TERM DEBT                                                                                                                                                                                 |       | 619,674          |       | 599,128           |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| OTHER LIABILITIES                                                                                                                                                                              |       | 37,046           |       | 25,378            |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| LONG-TERM DEFERRED INCOME TAX LIABILITIES                                                                                                                                                      |       | 41,877           |       | 42,922            |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| Total  liabilities                                                                                                                                                                             |       | 814,247          |       | 811,450           |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| MINORITY INTERESTS IN CONSOLIDATED SUBSIDIARIES                                                                                                                                                |       | 12,897           |       | 11,229            |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| STOCKHOLDERS’ EQUITY:                                                                                                                                                                     |       |             |       |              |       |
| Common Shares,  $0.01 par value: 150,000,000 shares authorized; 64,732,323 and  64,813,563 issued and outstanding as of December 31, 2007 and  June 30, 2007, respectively |       | 507,588          |       | 505,939           |       |
| Accumulated  deficit                                                                                                                                                                           |       | (95,892          | )     | (111,687          | )          |
| Accumulated  other comprehensive income                                                                                                                                                        |       | 29,688           |       | 7,022             |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| Total  stockholders’ equity                                                                                                                                                               |       | 441,384          |       | 401,274           |       |
|                                                                                                                                                                                           |       |             |       |              |       |
| TOTAL                                                                                                                                                                                          |       | $                | 1,268,528  |              | $          | 1,223,953 |   |

See notes to condensedconsolidated financial statements.

3

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**SOLERAHOLDINGS, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**FOR THETHREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2007 AND 2006**

**(Inthousands, except per share/unit amounts)**

**(Unaudited)**

 
| ** **                                                                                                                                | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                | ** ** | **2007**                             | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Revenues                                                                                                                                  |       | $                                    | 132,089    |                               | $          | 116,237 |   | $ | 256,271 |   | $ | 227,719 |   |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Cost of  revenues:                                                                                                                        |       |                                 |       |                               |       |   |   |   |   |
| Operating  expenses                                                                                                                       |       | 32,987                               |       | 34,824                             |       | 65,327 |   | 67,534 |   |
| Systems  development and programming costs                                                                                                |       | 16,577                               |       | 15,757                             |       | 32,550 |   | 31,933 |   |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Total cost of  revenues (excluding depreciation and amortization)                                                                         |       | 49,564                               |       | 50,581                             |       | 97,877 |   | 99,467 |   |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Selling, general  and administrative expenses                                                                                             |       | 37,525                               |       | 32,976                             |       | 71,067 |   | 63,866 |   |
| Depreciation and  amortization                                                                                                            |       | 23,447                               |       | 25,879                             |       | 45,853 |   | 51,055 |   |
| Restructuring  charges                                                                                                                    |       | 43                                   |       | (21                                | )          | 1,666 |   | 874 |   |
| Interest expense                                                                                                                          |       | 11,721                               |       | 18,559                             |       | 22,882 |   | 36,416 |   |
| Other (income)  expense — net                                                                                                        |       | (4,610                               | )          | (2,077                             | )          | (5,765 | ) | 2,263 |   |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
|                                                                                                                                      |       | 68,126                               |       | 75,316                             |       | 135,703 |   | 154,474 |   |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Income (loss)  before provision for income taxes and minority interests                                                                   |       | 14,399                               |       | (9,660                             | )          | 22,691 |   | (26,222 | ) |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Income tax  provision                                                                                                                     |       | 2,065                                |       | 1,875                              |       | 4,942 |   | 2,118 |   |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Minority  interest in net income of consolidated subsidiaries                                                                             |       | 1,325                                |       | 442                                |       | 2,886 |   | 1,527 |   |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Net income  (loss)                                                                                                                        |       | 11,009                               |       | (11,977                            | )          | 14,863 |   | (29,867 | ) |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Dividends and  redeemable preferred unit accretion                                                                                        |       | —                               |       | 4,276                              |       | — |   | 8,467 |   |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Net income  (loss) allocable to common stockholders/unitholders                                                                           |       | $                                    | 11,009     |                               | $          | (16,253 | ) | $ | 14,863 |   | $ | (38,334 | ) |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Net income  (loss) allocable to common stockholders/unitholders per share/unit:                                                           |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                                                                     |       | $                                    | 0.17       |                               | $          | (0.56 | ) | $ | 0.24 |   | $ | (1.32 | ) |
| Diluted                                                                                                                                   |       | $                                    | 0.17       |                               | $          | (0.56 | ) | $ | 0.23 |   | $ | (1.32 | ) |
|                                                                                                                                      |       |                                 |       |                               |       |   |   |   |   |
| Weighted-average  shares/units used in the calculation of net income (loss) per share/unit  allocable to common stockholders/unitholders: |       |                                 |       |                               |       |   |   |   |   |
| Basic                                                                                                                                     |       | 63,468                               |       | 29,172                             |       | 63,145 |   | 29,105 |   |
| Diluted                                                                                                                                   |       | 64,551                               |       | 29,172                             |       | 64,497 |   | 29,105 |   |
|                                                                                                                                           |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |

 

See notes to condensedconsolidated financial statements.

4

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**SOLERAHOLDINGS, INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THESIX MONTHS ENDED DECEMBER 31, 2007 AND 2006**

**(In thousands)**

**(Unaudited)**
| ** **                                                                                          | ** ** | **Six  Months Ended  December 31,** | ** **    |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|---------------|
| ** **                                                                                          | ** ** | **2007**                                      | ** **    | **2006** | ** ** |
|                                                                                                |       |                                          |          |   |   |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                              |       |                                          |          |   |   |
| Net income  (loss)                                                                                  |       | $                                             | 14,863        |   | $ |  (29,867 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities:           |       |                                          |          |   |   |
| Depreciation and  amortization                                                                      |       | 45,853                                        |          | 51,055 |   |
| Minority  interests in net income of consolidated subsidiaries                                      |       | 2,886                                         |          | 1,527 |   |
| Provision for  doubtful accounts                                                                    |       | 340                                           |          | 322 |   |
| Stock/unit-based  compensation                                                                      |       | 1,641                                         |          | 342 |   |
| Deferred income  taxes                                                                              |       | (4,226                                        | )             | (14,212 | ) |
| Change in fair value  of financial instrument                                                       |       | (879                                          | )             | 3,649 |   |
| Other                                                                                               |       | 577                                           |          | 486 |   |
| Changes in  operating assets and liabilities — net of effects from acquisition of  businesses: |       |                                          |          |   |   |
| (Increase)  decrease in accounts receivable                                                         |       | 9,750                                         |          | (13,432 | ) |
| Decrease in  other assets                                                                           |       | 2,704                                         |          | 694 |   |
| Increase  (decrease) in accounts payable                                                            |       | (8,091                                        | )             | 10,086 |   |
| Increase  (decrease) in accrued expenses and other liabilities                                      |       | (17,836                                       | )             | 9,643 |   |
| Increase in  accrued interest                                                                       |       | 363                                           |          | 1,710 |   |
| Net cash  provided by operating activities                                                          |       | 47,945                                        |          | 22,003 |   |
|                                                                                                |       |                                          |          |   |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                              |       |                                          |          |   |   |
| Capital  expenditures                                                                               |       | (9,804                                        | )             | (15,483 | ) |
| Final working  capital payment adjustment related to acquisition of CSG                             |       | —                                        |          | (13,167 | ) |
| Acquisitions of  business — net of cash acquired                                               |       | —                                        |          | (1,039 | ) |
| Investment in  joint venture                                                                        |       | (314                                          | )             | — |   |
| Net cash used in  investing activities                                                              |       | (10,118                                       | )             | (29,689 | ) |
|                                                                                                |       |                                          |          |   |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                              |       |                                          |          |   |   |
| Repayments of  long-term debt                                                                       |       | (13,747                                       | )             | (2,024 | ) |
| Proceeds from  issuance of debt                                                                     |       | —                                        |          | 10,603 |   |
| Repayments under  revolving credit facility                                                         |       | (8,548                                        | )             | (4,000 | ) |
| Principal  payment on financed asset acquisition                                                    |       | (2,384                                        | )             | — |   |
| Repurchase of  common shares                                                                        |       | (112                                          | )             | — |   |
| Net cash (used)  provided in financing activities                                                   |       | (24,791                                       | )             | 4,579 |   |
|                                                                                                |       |                                          |          |   |   |
| EFFECT OF  FOREIGN CURRENCY EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                      |       | 4,896                                         |          | 1,268 |   |
|                                                                                                |       |                                          |          |   |   |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                                                            |       | 17,932                                        |          | (1,839 | ) |
|                                                                                                |       |                                          |          |   |   |
| CASH AND CASH  EQUIVALENTS — Beginning of period                                               |       | 89,868                                        |          | 88,826 |   |
|                                                                                                |       |                                          |          |   |   |
| CASH AND CASH  EQUIVALENTS — End of period                                                     |       | $                                             |  107,800 |   | $ |  86,987 |   |
|                                                                                                |       |                                          |          |   |   |
| SUPPLEMENTAL  CASH FOW INFORMATION                                                                  |       |                                          |          |   |   |
| — Dividends and  redeemable preferred unit accretion                                           |       | $                                             |  —  |   | $ |  8,467 |   |
| — Cash paid for  interest                                                                      |       | $                                             | 21,912        |   | $ | 27,639 |   |
| SUPPLEMENTAL  DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:                            |       |                                          |          |   |   |
| — Capital assets  financed                                                                     |       | $                                             |  2,812   |   | $ |  6,926 |   |

 

See notes to condensed consolidated financialstatements.

5

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**SOLERAHOLDINGS, INC. AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(In thousands, exceptper share/unit and share/unit amounts)**

**(Unaudited)**

**1.**                      ORGANIZATION ANDBASIS OF PRESENTATION

 

***Description of Business***   Solera Holdings, Inc. andsubsidiaries (the “Company” or “Solera”) is the leading global provider ofsoftware and services to the automobile insurance claims processing industry.Its software and services help its customers: estimate the costs to repairdamaged vehicles; determine pre-collision fair market values for vehiclesdamaged beyond repair; automate steps of the claims process; outsource steps ofthe claims process that insurance companies have historically performedinternally; and monitor and manage their businesses through data reporting andanalysis. The Company is active in over 50 countries and derives most of itsrevenues from its estimating and workflow software.

 

Solera was formed inMarch 2005. On April 13, 2006, Solera acquired the Claims ServicesGroup (“CSG”), a business unit of Automatic Data Processing, Inc. (“ADP”),for approximately $1.0 billion. Prior to the acquisition of CSG, Solera’soperations consisted primarily of developing its business plan, recruitingpersonnel, providing consulting services, raising capital and identifying andevaluating operating assets for acquisition.

 

Solera accounted for theacquisition of CSG using the purchase method of accounting. As a result, theacquisition of CSG has and will continue to affect the results of operationssignificantly. The Company allocated the aggregate acquisition consideration tothe tangible and intangible assets acquired and liabilities assumed based ontheir respective fair values as of the date of the acquisition. This hasresulted in a significant increase in its annual depreciation and amortizationexpense. In addition, due to the effects of the increased borrowings to financethe CSG acquisition, its interest expense has increased significantly in theperiods following the acquisition.

 

OnMay 16, 2007, the Company completed an initial public offering of sharesof the Company’s common stock. In the initial public offering, the Company sold19,200,000 shares of common stock, and the selling stockholders sold10,987,500 shares of common stock, which include 3,937,500 shares ofcommon stock sold by the selling stockholders pursuant to the underwriters’over-allotment option. In connection with the initial public offering, theCompany amended its corporate status and converted from a Delaware limited liabilitycompany into a Delaware corporation with 150,000,000 authorized shares ofcommon stock, par value $0.01, and 15,000,000 authorized share of preferredstock, par value $0.01. Upon the effectiveness of the conversion, all of theCompany’s outstanding preferred and common units were automatically convertedinto shares of common stock based on their relative rights as set forth in theCompany’s limited liability company agreement. As a result, 31,633,211 commonunits were converted into 31,633,211 shares of common stock, and 204,016.1preferred units were converted into 13,889,974 shares of common stock.

 

***Principles of Consolidation and Basis ofPresentation  *** The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with United States(“U.S.”) generally accepted accounting principles and applicable regulations ofthe Securities and Exchange Commission (“SEC”) and should be read inconjunction with our audited Consolidated Financial Statements for the fiscalyear ended June 30, 2007, included in our Annual Report on Form 10-K filed withthe SEC on September 17, 2007. The Company’s operating results for the threemonths ended December 31, 2007 are not necessarily indicative of the resultsthat may be expected for any future periods.

 

The preparation of the accompanying unauditedcondensed consolidated financial statements requires the use of estimates thataffect the reported amounts of assets, liabilities, revenues, expenses andcontingencies. Estimates are updated on an ongoing basis and are evaluatedbased on historical experience and current circumstances. Changes in facts andcircumstances in the future may give rise to changes in these estimates whichmay cause actual results to differ from current estimates.

 

The unaudited condensedconsolidated financial statements include the accounts of the Company and itssubsidiaries. All significant intercompany accounts and transactions have beeneliminated in consolidation.

 

 

6

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**2.**                      SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

Solera’s significant accounting policies weredescribed in Note 2 to the Company’s audited Consolidated Financial Statementsfor the fiscal year ended June 30, 2007, included in the Company’s AnnualReport on Form 10-K.  As of February 13,2008 these accounting policies have not significantly changed.

 

***Recent AccountingPronouncements—***In June 2006, the Financial AccountingStandards Board (“FASB”) issued FASB Interpretation No. 48,*Accounting for Uncertainty in Income Taxes, anInterpretation of FASB Statement No. 109* (“FIN 48”). FIN 48clarifies the accounting for income taxes by prescribing a minimum recognitionthreshold a tax position is required to meet before being recognized in thefinancial statements and also provides guidance on derecognition, measurement,classification, interest and penalties, accounting in interim periods,disclosure and transition. Effective July 1, 2007, the Company adopted FIN48 which required a $1,027 cumulative credit adjustment to decrease accumulateddeficit. 

 

In September 2006,the FASB issued Statement of Financial Accounting Standards (“SFAS”)No. 157,*Fair Value Measurements*(“SFAS No. 157”). This statement clarifies the definition of fair value,establishes a framework for measuring fair value and expands the disclosures onfair value measurements. SFAS No. 157 is effective for fiscal yearsbeginning after November 15, 2007. The Company is currently evaluating theeffect that the adoption of SFAS No. 157 will have, if any, on itsconsolidated results of operations and financial condition.

 

In February 2007,the FASB issued SFAS No. 159,*The FairValue Option for Financial Assets and Financial Liabilities* (“SFASNo. 159”). SFAS No. 159 permits companies to choose to measurecertain financial instruments and certain other items at fair value. Thestandard requires that unrealized gains and losses on items for which the fairvalue option has been elected be reported in earnings. SFAS No. 159 iseffective for the Company beginning in the first quarter of fiscal year 2009,although earlier adoption is permitted. The Company is currently evaluating theimpact that SFAS No. 159 will have on its consolidated financialstatements.

 

In March 2007, theFASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06-11, *Accounting for Income Tax Benefits of Dividends on Share-Based PaymentAwards*(“EITF No.06-11”).  EITF No. 06-11 requires companies to recognize the income taxbenefit realized from dividends or dividend equivalents that are charged toretained earnings and paid to employees for non-vested equity-classifiedemployee stock-based payment awards as an increase to additional paid-incapital. EITF No. 06-11 is effective for fiscal years beginning afterSeptember 15, 2007. The Company does not expect that EITF No. 06-11will have a material impact on its results of operations or cash flows.

 

In June 2007, the FASB ratified EITF Issue No. 07-3, *Accounting for Nonrefundable Advance Payments forGoods or Services Received for Use in Future Research and Development Activities*(“EITF No. 07-3”). EITF No. 07-3 requires that nonrefundable advancepayments for goods or services that will be used or rendered for futureresearch and development activities be deferred and capitalized and recognizedas an expense as the goods are delivered or the related services are performed.EITF No. 07-3 is effective, on a prospective basis, for fiscal years beginningafter December 15, 2007. The Company is currently evaluating the effect thatthe adoption of EITF No. 07-3 will have on its consolidated results ofoperations and financial condition.

In December 2007, theFASB issued SFAS No. 160, *NoncontrollingInterests in Consolidated Financial Statements, an amendment of ARB 51* (“SFAS No. 160”), which changes theaccounting and reporting for minority interests. Minority interests will berecharacterized as noncontrolling interests and will be reported as a componentof equity separate from the parent’s equity, and purchases or sales of equityinterests that do not result in a change in control will be accounted for asequity transactions. In addition, net income attributable to the noncontrollinginterest will be included in consolidated net income on the face of the incomestatement and, upon a loss of control, the interest sold, as well as anyinterest retained, will be recorded at fair value with any gain or lossrecognized in earnings. SFAS No. 160 is effective for Solera beginningJuly 1, 2009 and will apply prospectively, except for the presentation anddisclosure requirements, which will apply retrospectively. The Company iscurrently assessing the potential impact that adoption of SFAS No. 160will have on its consolidated financial statements. 

 

In December 2007,the FASB issued SFAS No. 141 (revised 2007), *Business Combinations*(“SFAS No. 141(R)”). SFAS No. 141(R)expands the definition of a business combination and requires the fair value ofthe purchase price of an acquisition, including the issuance of equitysecurities, to be determined on the acquisition date. SFAS No. 141(R) alsorequires that all assets, liabilities, contingent considerations, andcontingencies of an acquired business be recorded at fair value at theacquisition date. In addition, SFAS No. 141(R) requires that acquisition costsgenerally be expensed as incurred, restructuring costs generally be expensed inperiods subsequent to the acquisition date, and changes in accounting fordeferred tax asset valuation allowances and acquired income tax uncertaintiesafter the measurement period impact income tax expense. SFAS No. 141 (R) iseffective for fiscal years beginning after December 15, 2008 with earlyadoption prohibited. The company is currently evaluating the effect theimplementation of SFAS No. 141(R) will have on its consolidated financialstatements on future acquisitions.

7

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**3.**                      NET INCOME (LOSS) PERCOMMON SHARE

 

The Company calculates net income (loss) per commonshare/unit in accordance with SFAS No. 128, *EarningsPer Share* (“SFAS No. 128”). Under SFAS No. 128, basic net income(loss) per common share/unit is calculated by dividing net income (loss) by theweighted-average number of common shares/units outstanding during thereporting period excluding shares/units subject to repurchase.

 

Reconciliation of shares/units used in this calculation table of basicand diluted net income (loss) per share/unit for the three and six months endedDecember 31, 2007 and 2006, is as follows (in thousands except for pershare/unit data):

 
| ** **                                                                                                | ** ** | **Three Months Ended**

** December 31,** | ** ** | **Six Months Ended**

** December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2007**                                                 | ** ** | **2006**                                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income  (loss)                                                                                        |       | $                                                        | 11,009     |                                                   | $          | (16,253 | ) | $ | 14,863 |   | $ | (38,334 | ) |
| Weighted-average  number of common shares/units                                                           |       | 64,824                                                   |       | 31,047                                                 |       | 64,819 |   | 31,047 |   |
| Weighted-average  common shares/units subject to repurchase                                               |       | (1,356                                                   | )     | (1,875                                                 | )          | (1,674 | ) | (1,942 | ) |
| Weighted-average  number of common shares/units used to compute basic net income (loss) per  share/unit   |       | 63,468                                                   |       | 29,172                                                 |       | 63,145 |   | 29,105 |   |
| Effect of  dilutive common stock equivalents:                                                             |       |                                                     |       |                                                   |       |   |   |   |   |
| Stock options to  purchase common stock                                                                   |       | —                                                   |       | —                                                 |       | — |   | — |   |
| Restricted  common stock awards                                                                           |       | 1,083                                                    |       | —                                                 |       | 1,352 |   | — |   |
| Weighted-average  number of common shares/units used to compute diluted net income (loss) per  share/unit |       | 64,551                                                   |       | 29,172                                                 |       | 64,497 |   | 29,105 |   |
|                                                                                                      |       |                                                     |       |                                                   |       |   |   |   |   |
| Basic net income  (loss) per share/unit                                                                   |       | $                                                        | 0.17       |                                                   | $          | (0.56 | ) | $ | 0.24 |   | $ | (1.32 | ) |
| Diluted net  income (loss) per share/unit                                                                 |       | $                                                        | 0.17       |                                                   | $          | (0.56 | ) | $ | 0.23 |   | $ | (1.32 | ) |
|                                                                                                           |            |                                                          |            |                                                        |            |  |  |  |  |  |  |  |  |  |  |  |

 

For the three and six months ended December 31, 2007 potential commonstock equivalents of 17,203 and 29,771, respectively, are not included in the dilutednet income per share calculation above, because their effect was antidilutivefor the period. For the three and six months ended December 31, 2006,outstanding redeemable preferred units of 204,239 and nonvested carried commonunits of 1,742,256 have been excluded, as they are antidilutive due to theCompany’s net loss for the period.

 

**4.**                      RESTRUCTURING CHARGES

 

The Company recorded restructuring charges of $43 and $1,666 during thethree and six months ended December 31, 2007, respectively.  For the three months ended December 31, 2007,these charges consisted primarily of one-time termination benefits.  For the six months ended December 31, 2007, thesecharges consisted primarily of one-time termination benefits of $618 and netfacilities consolidation charges of $1,048. One-time termination benefitsrelate to the termination of approximately 17 employees during the six monthsended December 31, 2007. As part of the restructuring, the Company recorded a netone-time adjustment of $2,522 consisting of a non-cash write-off of lease-relatedassets and furniture as a result of the facilities consolidation effort. Therestructuring balance at December 31, 2007 also included $261 in cumulativetranslation adjustments and other restructuring activity. For the three and sixmonths ended December 31, 2006, there was a reversal of $21 and a charge of $874for termination benefits.  The Solerarestructuring initiatives were designed to achieve efficiencies and reducecosts in response to changes in projected demand for certain services. Therestructuring reserves are included in Accrued expenses and other currentliabilities in the condensed consolidated balance sheets. The following tablesummarizes the charges for restructuring and related activities, including paymentsmade and the ending reserve balances by business segment:

 
| ** **                       | ** ** | **Restructuring plan  from acquisition of CSG** | ** ** | **Solera  Restructuring plan** | ** ** | **Total** | ** ** |
|----------------------------------|------------|----------------------------------------------------------------|------------|-------------------------------------|------------|-----------|------------|
| ** **                       | ** ** | **EMEA**                                                       | ** ** | **Americas**                        | ** ** | **EMEA**  | ** ** | **Americas** | ** ** | **EMEA** | ** ** | **Americas** | ** ** | **Total** | ** ** |
|                             |       |                                                           |       |                                |       |      |       |   |   |   |   |   |   |   |   |
| Balance—June 30,  2007 |       | $                                                              | 6          |                                | $          | 180       |       | $ | 4,104 |   | $ | 1,309 |   | $ | 4,110 |   | $ | 1,489 |   | $ | 5,599 |   |
| Additions/adjustments            |       | 1                                                              |       | —                              |       | 402       |       | 4,046 |   | 403 |   | 4,046 |   | 4,449 |   |
| Payments                         |       | —                                                         |       | (9                                  | )          | (1,865    | )          | (2,263 | ) | (1,865 | ) | (2,272 | ) | (4,137 | ) |
| Balance—December  31, 2007  |       | $                                                              | 7          |                                | $          | 171       |       | $ | 2,641 |   | $ | 3,092 |   | $ | 2,648 |   | $ | 3,263 |   | $ | 5,911 |   |

 

The EMEA business segment encompasses the Company’s operations inEurope, the Middle East, Africa and Asia. The Americas business unitencompasses the Company’s operations in North America and Central and SouthAmerica.

 

8

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**5.**                      GOODWILL ANDINTANGIBLE ASSETS — NET

 

Changes ingoodwill during the six month period ended December 31, 2007, by businesssegment are as follows:

 
| ** **                          | ** ** | **EMEA** | ** ** | **Americas** | ** ** | **Total** | ** ** |
|-------------------------------------|------------|----------|------------|--------------|------------|-----------|------------|
|                                |       |     |       |         |       |      |       |
| Balance—June 30,  2007         |       | $        | 478,355    |         | $          | 90,810    |       | $ | 569,165 |   |
| Adjustments                         |       | 78       |       | —       |       | 78        |       |
| Cumulative  translation adjustments |       | 44,480   |       | 616          |       | 45,096    |       |
| Balance—December  31, 2007     |       | $        | 522,913    |         | $          | 91,426    |       | $ | 614,339 |   |

 

Components of intangible assets, excluding goodwill, as of December 31,2007 and June 30, 2007, are as follows:

 
| ** **                         | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|------------------------------------|------------|------------------|------------|--------------|------------|
| ** **                         | ** ** | **2007**         | ** ** | **2007**     | ** ** |
| Intangibles  (excluding goodwill): |       |             |       |         |       |
| Internally  developed software     |       | $                | 24,931     |         | $          | 22,151 |   |
| Customer  relationships            |       | 195,615          |       | 185,946      |       |
| Trademarks                         |       | 15,657           |       | 14,369       |       |
| Software and  database technology  |       | 265,044          |       | 249,347      |       |
|                               |       | 501,247          |       | 471,813      |       |
| Less accumulated  amortization     |       | (153,064         | )          | (108,827     | )          |
| Intangible  assets — net      |       | $                | 348,183    |         | $          | 362,986 |   |

 

Intangible assets(excluding goodwill) have finite lives and, as such, are subject toamortization. The weighted average remaining useful life of the intangibleassets is 11.7 years (2.3 years for internally developed software, 18.5 yearsfor customer relationships, 2.5 years for trademarks and 7.5 years for softwareand database). Internally developed software is amortized on a straight-linebasis. Other intangible assets are amortized on an accelerated basis to reflectthe pattern in which economic benefits of the intangible assets are consumed.Amortization of intangibles totaled $19,174 and $37,356 for the three and sixmonths ended December 31, 2007, respectively, and $21,766 and $43,153 for thethree and six months ended December 31, 2006, respectively. Estimatedamortization expense of the Company’s existing intangible assets for the nextfive fiscal years ended June 30 are as follows:

 
| 2008 (remaining  6 months) |   | $       | 39,500  |   |
|----------------------------|--------|---------|---------|--------|
| 2009                       |   | 65,887  |    |
| 2010                       |   | 54,666  |    |
| 2011                       |   | 42,948  |    |
| 2012                       |   | 32,502  |    |
| Thereafter                 |   | 112,680 |    |
|                       |   |    |    |
| Total                      |   | $       | 348,183 |   |

 

The above useful livesrepresent the Company’s best estimates. However, actual lives may differ fromthese estimates. In addition, the expected future amortization may vary basedon fluctuations in foreign currency exchange rates.

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**6.**                      FINANCIAL INSTRUMENTSAND DERIVATIVES

***FinancialInstruments*** —At December 31, 2007 and June 30, 2007, the carrying amounts of cashequivalents, receivables, accounts payable and other liabilities approximatedtheir fair values because of the short-term maturities of these financialinstruments. The carrying amounts of long-term debt at December 31, 2007 andJune 30, 2007, approximated fair value based on prevailing interest rates.

***Derivatives*** — In the normal course of business, theCompany is exposed to interest rate changes and foreign currency fluctuations.The Company strives to limit these risks through the use of derivatives such asinterest rate swaps and foreign exchange options. Derivatives are not used forspeculative purposes.

 

In February 2006,the Company entered into a foreign currency exchange option (the “FX Option”)that gives the Company the option to call USD $200,000 at a strike price of1.1646 EUR/USD at any time up to February 8, 2011. This FX Option is notdesignated as a hedging instrument. In February 2006, the Company paidapproximately $7,912 for the FX Option. As of December 31, 2007 andJune 30, 2007, the fair value of the FX Option approximated $1,849 and$970, respectively, and was recorded in Other assets in the condensedconsolidated balance sheets. The increase in fair value of approximately $879was recognized in Other (income) expense in the condensed consolidatedstatement of operations, during the six months ended December 31, 2007.

 

In June 2007, the Companyentered into three USD-based interest rate swaps with notional amounts of$50,000, $80,965 and $75,000 with maturities on June 30, 2011 whichrequire the Company to pay fixed rates of 5.445%, 5.418% and 5.445%,respectively, and also entered into three Euro-based interest rate swaps withnotional amounts of € 69,821, € 50,000 and € 60,000 withmaturities on June 30, 2011 which require the Company to pay fixed ratesof 4.603%, 4.679% and 4.685%, respectively. These interest rate swaps aredesignated and documented at the inception of the hedge as cash flow hedges andare evaluated for effectiveness quarterly. The effective portion of the gain orloss on these hedges is reported as a component of Accumulated othercomprehensive income (loss) in stockholders’ equity and reclassified intoearnings when the hedged transaction affects earnings. The ineffective portionon these cash flow hedges is recognized in interest expense. The estimated fairvalue of $9,311 on USD-based swaps and €1,139 ($1,674) on Euro-based swaps wasrecorded in Other liabilities in the consolidated balance sheet as of December31, 2007. The change of $9,637 in the fair value of swaps reflects theeffective portion of loss on these hedges and is reported as a component ofAccumulated other comprehensive income in stockholders’ equity.

 

The estimated fair valuesof the Company’s derivatives were determined based on quoted market prices andmay not be representative of actual values that could have been realized orthat will be realized in the future.

 

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**7.**                      LONG-TERM DEBT

Long-term debt consists of the following:
| ** **                                        | ** ** | **December 31,** | ** ** | **June 30,** | ** ** |
|---------------------------------------------------|------------|------------------|------------|--------------|------------|
| ** **                                        | ** ** | **2007**         | ** ** | **2007**     | ** ** |
| Amended and  restated first lien credit facility: |       |             |       |         |       |
| European  revolver loan, due April 2012           |       | $                | —     |         | $          | 8,073 |   |
| Domestic term  loan, due May 2014                 |       | 219,799          |       | 229,425      |       |
| European term  loan, due May 2014                 |       | 406,291          |       | 375,770      |       |
| Total                                             |       | 626,090          |       | 613,268      |       |
| Less current  portion                             |       | 6,416            |       | 14,140       |       |
| Long-term  portion                                |       | $                | 619,674    |         | $          | 599,128 |   |

 

***SeniorSecured Credit Facilities*** — On May 16, 2007, in conjunction with the closing ofits initial public offering, the Company entered into an Amended and RestatedSenior Credit Facility Agreement with a syndicate of commercial lenders,consisting of a $50,000 Revolving Credit Facility, a $230,000 Domestic TermLoan and a € 280,000 European Term Loan.  As of December 31,2007, the Company had $ 0, $219,799 and $406,291 (€ 276,407) inoutstanding loans under the Revolving Credit Facility, the Domestic Term Loanand the European Term Loan, respectively, with interest rates of 8.00%,7.0625% and 7.00%, respectively. Borrowings under the Amended and RestatedSenior Credit Facility bear interest, to be reset at the Company’s option, at arate determined by the sole lead arranger of the syndicate of commerciallenders equal to (1) the offer rate on dollars based on the BritishBankers’ Association Settlement Rate for deposits or (2) the offer rate onthe Euro from the Banking Federation of the European Union, or (3) in theevent such rates are not available, then the offered quotation rate to firstclass banks in the London inter-bank market or European inter-bank market byCitibank USA Inc. for deposits, respectively, in each case, plus an applicablemargin that varies based upon the Company’s consolidated leverage ratio, asdefined in the agreement. Beginning on June 30, 2007, consecutivequarterly minimum principal payments of $575 and €700 are required for theDomestic Term Loan and European Term Loan, respectively, under the Amended andRestated Senior Credit Facility with the remaining balance due inMay 2014. The Amended and Restated Senior Secured Credit Facility allowsfor voluntary prepayments under specified conditions and requires mandatoryprepayments and commitment reductions upon the occurrence of certain events,including among others, sale of assets, receipt of insurance or condemnationproceeds, excess cash flow and issuances of debt and equity securities.

 

During the three monthsended December 31, 2007 the Company made a voluntary principal prepayment of$8,500 on the Domestic Term Loan and €1,500 on the European Term Loan. Forthe quarter ending December 31, 2007, the quarterly minimum principal payments decreasedto $551 and €693, respectively. The increase in the European term loan balanceis due entirely to foreign currency fluctuations. For the six months endedDecember 31, 2007 the cumulative principal payments on the European term were$4,148 (€2,893).

 

The obligations under theAmended and Restated Senior Credit Facility are secured by substantially all ofthe assets of the Company. The Amended and Restated Senior Credit Facilitycontains certain covenants including, among others, requirements related tofinancial reporting, maintenance of operations, compliance with applicable lawsand regulations, maintenance of interest rate protection and compliance withspecified financial covenants, as well as restrictions related to liens,investments, additional indebtedness, dispositions of assets or subsidiaryinterests, dividends, distributions, issuances of equity securities,transactions with affiliates, capital expenditures and certain other changes inthe business. The Amended and Restated Senior Credit Facility contains aleverage ratio, which is applicable only to the revolving loans and appliesonly if at least $10,000 of revolving loans, including outstanding letters ofcredit, are outstanding for at least 10 days during the prior fiscal quarter.

 

***FutureMinimum Principal Payments***— Future minimum principal payments for the next fivefiscal years ended June 30 are as follows:
| 2008 (remaining  6 months) |   | $       | 3,139   |   |
|----------------------------|--------|---------|---------|--------|
| 2009                       |   | 6,277   |    |
| 2010                       |   | 6,277   |    |
| 2011                       |   | 6,277   |    |
| 2012                       |   | 6,277   |    |
| Thereafter                 |   | 597,843 |    |
|                       |   |    |    |
| Total                      |   | $       | 626,090 |   |

 

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**8.**                      EMPLOYEE BENEFITPLANS

 

***Stock-Based Compensation—***Effective July 1, 2006, the Company adoptedSFAS No. 123 (revised 2004), *Share-Based Payment*(“SFAS 123(R)”) which requires the measurement and recognition of compensationexpense for all stock-based payment awards made to employees and directors,including employee stock options and share awards, based on estimated fairvalues recognized over the requisite service period.

 

The Company adopted SFAS123(R) using the prospective transition method. Under this method, SFAS123(R) is applied to new awards and to awards modified, repurchased orcancelled after the adoption date of July 1, 2006. Compensation cost thatwas previously recorded under Accounting Principles Board (“APB”) OpinionNo. 25 for awards outstanding at the adoption date, such as unvestedoptions, will continue to be recognized as the options vest. Accordingly, forthe three months ended December 31, 2007, stock-based compensation expenseincludes compensation cost related to estimated fair values of awards grantedafter the date of adoption of SFAS 123(R) and compensation costs relatedto unvested awards at the date of adoption based on the intrinsic values aspreviously recorded under APB Opinion No. 25.

 

The fair value of stockand options awards granted after July 1, 2006 is estimated on the grantdate using the Black-Scholes option valuation model. This valuation model forstock-based compensation expense requires the Company to make assumptions andjudgments about the variables used in the calculation including the expectedterm (weighted average period of time that the shares and options granted are expectedto be outstanding), the volatility of the Company’s common shares, an assumedrisk free interest rate and the estimated forfeitures of unvested share awards.No compensation cost is recorded for awards that do not vest. For awardsgranted after July 1, 2006, and valued in accordance with SFAS 123(R), theCompany used the straight-line method for expense attribution. Expectedvolatilities utilized in the model are based on a combination of implied marketvolatilities, historical volatility of the Company’s stock price and otherfactors. The risk-free rate is derived from the U.S. Treasury yield curve ineffect at the time of grant.

 

Stock-based compensation expense of $1,039 and $1,641was recognized in net income for the three and six months ended December 31,2007, respectively, as well as related tax benefits of $375 and $593,respectively. For the three and six months ended December 31, 2006, the Companyrecognized stock-based compensation of $151 and $342, respectively, includingtax related benefits of $55 and $124, respectively.

 

As of December 31, 2007, the total remainingunrecognized compensation cost related to non-vested stock options, andrestricted stock awards amounted to $8,800 which will be amortized over aweighted average period of 3.3 years.

 

The fair value forstock-based awards was estimated at the date of grant with the followingassumptions: a risk-free interest rate of 4.5%; a dividend yield of 0.0%; aweighted average volatility factor of 32.8%; a weighted average expected life of6.1 years; and an exercise price of $16.00, $17.19, and $23.41, per share forthe May, September, and December 2007 grants, respectively.

 

***Restricted Stock—***The Company has a restricted stockprogram under which shares of common stock have been issued to certain keyemployees. These shares are restricted as to transfer and in certaincircumstances must be returned to the Company at the original purchase price.The Company records stock compensation expense relating to the issuance ofrestricted stock over the period during which the transfer restrictions exist,which may be up to five years from the date of grant. The value of theCompany’s restricted stock, based on market prices, is recognized ascompensation expense over the restriction period in accordance to their vestingterms.

 

For the three and six monthsended December 31, 2007, the Company granted the right to purchase 34,400 and39,300 restricted common stock/units, respectively. Summarized informationabout restricted common stock is as follows:

 
| ** **                        | ** ** | **Number of  restricted  common  stock / units** | ** ** | **Purchase price  per common  stock / unit** | ** ** | **Fair value  per common  stock / unit** | ** ** | **Total  compensation  expense to be  recognized  over vesting  period** | ** ** |
|-----------------------------------|------------|-----------------------------------------------------------------|------------|------------------------------------------------------------------|------------|--------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------|------------|
| Outstanding at  June 30, 2007     |       | 980,159                                                         |       |                                                             |       |                                                         |       | $                                                                                       | 7,572      |   |
| Granted                           |       | 39,300                                                          |       | $                                                                | 0.01       |                                                         | $          | 22.62                                                                                   |       | $ | 889 |   |
| Cancellations                     |       | (84,283                                                         | )          | $                                                                | 0.28       |                                                         | $          | 7.41                                                                                    |       | $ | (625 | ) |
| Outstanding at  December 31, 2007 |       | 935,176                                                         |       |                                                             |       |                                                         |       | $                                                                                       | 7,836      |   |

 

12

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During the three and six months ended December 31,2007, the Company recorded $882 and $1,350, respectively,  as an expense related to these rights, withan estimated tax benefit of $319 and $488, respectively. The remaining portionof the expense of $5,504 is expected to be recognized over the weighted averagevesting period of 3.1 years.

 

***Stock Options*****—**Stock options are granted to employees at exerciseprices equal to the fair market value of the Company’s common stock on thedates of grant. Stock options are issued pursuant to a vesting schedule,generally vest ratably over four years and have a term of 10 years.Compensation expense for stock options is recognized over the requisite serviceperiod for each separately vesting portion of the stock option award. Theaggregate fair value of total stock options outstanding at December 31, 2007was $3,781.

 

On December 31, 2007, theCompany granted 90,600 options to its employees to purchase common stock at a$23.41 grant price per share and a fair value of $9.67 per share. Summarizedinformation about stock options outstanding at December 31, 2007 is as follows:

 
| ** **                        | ** ** | **Number of Options** | ** ** | **Weighted   Average Price** | ** ** | **Weighted   Average  Remaining   Contractual   Term   (years)** | ** ** | **Weighted   Average  Fair   Value** | ** ** |
|-----------------------------------|------------|-----------------------|------------|------------------------------|------------|------------------------------------------------------------------|------------|--------------------------------------|------------|
| Outstanding at  June 30, 2007     |       | 423,600               |       | $                            | 16.00      |                                                             | 9.9        |                                 | $          | 2,808 |   |
| Granted                           |       | 128,200               |       | $                            | 21.59      |                                                             | 9.9        |                                 | 1,143      |   |
| Exercised                         |       | —                |       | —                       |       | —                                                           |       | —                               |       |
| Forfeited                         |       | (22,400               | )          | $                            | 18.38      |                                                             | 9.6        |                                 | (170       | ) |
| Outstanding at  December 31, 2007 |       | 529,400               |       | $                            | 17.25      |                                                             | 9.6        |                                 | $          | 3,781 |   |

 

The stock-basedcompensation expense related to stock options included in the net income was$157 and $291 for the three and six months ended December 31, 2007,respectively. The estimated total remaining compensation of $3,296, beforeestimated forfeitures, is expected to be recognized over the remaining vestingperiod of 3.6 years.

 

***Pension Plans  *** The Company’s foreign subsidiaries sponsor variousdefined benefit plans and individual defined benefit arrangements coveringcertain eligible employees. The benefits under these pension plans are based onyears of service and compensation levels. Funding is limited to statutoryrequirements. The measurement date for all defined benefit plans wasJune 30, 2007.

 

The components of net pension expense were as follows:
| ** **                                             | **Three Months Ended  December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|--------------------------------------------------------|------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                             | **2007**                                       | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                   |                                           |       |                                        |       |   |   |   |   |
| Service cost —  benefits earned during the period | $                                              | 826        |                                        | $          | 300 |   | $ | 1,593 |   | $ | 600 |   |
| Interest cost on  projected benefits                   | 921                                            |       | 400                                         |       | 1,578 |   | 800 |   |
| Expected return  on plan assets                        | (845                                           | )          | (300                                        | )          | (1,441 | ) | (700 | ) |
|                                                   | $                                              | 902        |                                        | $          | 400 |   | $ | 1,730 |   | $ | 700 |   |

 

**9.**                      PROVISION FOR INCOMETAXES

The Company recorded an income tax provision of $2,065and $1,875 for the three months ended December 31, 2007 and 2006 and$4,942 and $2,118 for the six months ended December 31, 2007 and 2006,respectively.  The expected tax provisionderived from applying the federal statutory rate to the Company’s income beforeincome taxes for six months ended December 31, 2007, differed from theCompany's recorded income tax provision primarily due to lower foreign incometax rates reducing the effective tax rate, offset by certain withholding taxliabilities and valuation allowances on certain subsidiary losses which do notmeet the more-likely-than not standard of realizability of those deferred taxassets. The Company’s tax provision for the remainder of fiscal year 2008continues to heavily depend on the jurisdictional mix of pretax earnings, ouractual and forecasted profitability, establishment of valuation allowances incertain jurisdictions, and varying jurisdictional income tax rates that are appliedto related earnings.

 

FIN 48 contains a two-step approach to recognizing andmeasuring uncertain tax positions accounted for in accordance with SFAS No.109, “Accounting for Income Taxes.” The first step is to evaluate the taxposition for recognition by determining if the weight of available evidenceindicates that it is more likely than not that the position will be sustainedon audit, including resolution of related appeals or litigation processes, ifany. The second step is to measure the tax benefit as the largest amount thatis more than 50% likely of being realized upon ultimate settlement. The Companyrecorded a $1,027 cumulative credit adjustment to decrease accumulated deficitas a result of the adoption.

 

13

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As of the Company’s FIN 48 adoption date of July 1,2007, the Company had gross unrecognized tax benefits of $8,387. The totalamount of tax benefits, if recognized, that would affect the effective tax rateupon subsequent realization is $234 as a result of valuation allowance, applicationof local tax laws and purchase price accounting.  The Company’s continuing practice is torecognize interest and penalties related to income tax matters as a componentof income tax expense. As of the date of adoption, the Company had accrued $30for interest and penalties related to uncertain tax positions unrecognized taxbenefits.

 

According to the acquisition agreement dated February8, 2006 between ADP and Solera, ADP has indemnified all tax liabilities relatedto the pre-acquisition period (i.e. prior to April 13, 2006), attributable tothe acquired “Claims Services Group”. The Company is liable for any tax assessments for the post-acquisitionperiods for its U.S. and foreign jurisdictions. The Company does not anticipate that the amount of existing unrecognizedtax benefits will significantly increase or decrease within the next 12 months.

 

**10.**               COMPREHENSIVE INCOME(LOSS)

 

The components of comprehensive income for the threemonths ended December 31, 2007 and 2006 are as follows:

 
| ** **                                            | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|-------------------------------------------------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                            | **2007**                                      | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income  (loss)                                    | $                                             | 11,009     |                                        | $          | (16,253 | ) | $ | 14,863 |   | $ | (38,334 | ) |
| Other  Comprehensive income (loss):                   |                                          |       |                                        |       |   |   |   |   |
| Foreign currency  translation adjustments             | 8,386                                         |       | 2,252                                       |       | 32,302 |   | 1,835 |   |
| Unrealized net  gain (loss) on derivative instruments | (4,197                                        | )          | —                                      |       | (9,637 | ) | — |   |
|                                                  |                                          |       |                                        |       |   |   |   |   |
| Comprehensive  income (loss)                          | $                                             | 15,198     |                                        | $          | (14,001 | ) | $ | 37,528 |   | $ | (36,499 | ) |

 

**11.**               SEGMENT ANDGEOGRAPHIC INFORMATION

 

The Company manages itsbusiness operations through two strategic business units. Based upon theinformation reported to the chief operating decision maker,who is the Chief Executive Officer, the Company has two reportable segments:EMEA and Americas. The EMEA business unit encompasses the Company’s operationsin Europe, the Middle East, Africa and Asia. The Americas business unitencompasses the Company’s operations in North America and Central and SouthAmerica. The Company does not allocate certain costs to its reportablesegments. These costs are managed at the corporate level and include costsrelated to financing activities of the Company. The Company evaluates theperformance of its reportable segments based on operating results before incometaxes:

 
| ** **                                               | ** ** | **EMEA** | ** **   | **Americas** | ** ** | **Corporate** | ** ** | **Total** | ** **   |
|----------------------------------------------------------|------------|----------|--------------|--------------|------------|---------------|------------|-----------|--------------|
| **Three  Months Ended December 31, 2006**                |       |     |         |         |       |          |       |      |         |
| Revenues                                                 |       | $        |  68,552 |         | $          |  47,685  |       | $         |  — |   | $ |  116,237 |   |
| Income (loss)  before income taxes and minority interest |       | 10,296   |         | (33          | )     | (19,923       | )          | (9,660    | )            |
| Assets                                                   |       | 885,887  |         | 327,466      |       | 53,130        |       | 1,266,483 |         |
| Capital expenditures                                     |       | 1,502    |         | 7,086        |       | —        |       | 8,588     |         |
| Depreciation and  amortization                           |       | 14,571   |         | 11,308       |       | —        |       | 25,879    |         |
| Interest expense                                         |       | 5        |         | (22          | )     | 18,576        |       | 18,559    |         |
| Other (income)  expense — net                       |       | (1,030   | )            | (82          | )          | (965          | )     | (2,077    | )            |
|                                                          |            |          |              |              |            |               |            |           |              |  |  |  |  |

 
| **Three  Months Ended December 31, 2007**                |   |    |         |    |   |         |    |      |         |
|----------------------------------------------------------|--------|---------|--------------|---------|--------|--------------|---------|-----------|--------------|
| Revenues                                                 |   | $       |  80,878 |    | $      |  51,211 |    | $         |  — |   | $ |  132,089 |   |
| Income (loss)  before income taxes and minority interest |   | 22,463  |         | 8,407   |   | (16,471      | )       | 14,399    |         |
| Assets                                                   |   | 940,292 |         | 311,998 |   | 16,238       |    | 1,268,528 |         |
| Capital  expenditures                                    |   | 2,311   |         | 2,493   |   | —       |    | 4,804     |         |
| Depreciation and  amortization                           |   | 13,949  |         | 9,498   |   | —       |    | 23,447    |         |
| Interest expense                                         |   | 14      |         | 87      |   | 11,620       |    | 11,721    |         |
| Other (income)  expense — net                       |   | (1,543  | )            | (513    | )      | (2,554       | )  | (4,610    | )            |
|                                                          |        |         |              |         |        |              |         |           |              |  |  |  |  |

 

14

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| ** **                                               | ** ** | **EMEA** | ** **    | **Americas** | ** ** | **Corporate** | ** ** | **Total** | ** **   |
|----------------------------------------------------------|------------|----------|---------------|--------------|------------|---------------|------------|-----------|--------------|
| **Six  Months Ended December 31, 2006**                  |       |     |          |         |       |          |       |      |         |
| Revenues                                                 |       | $        |  133,978 |         | $          |  93,741  |       | $         |  — |   | $ |  227,719 |   |
| Income (loss)  before income taxes and minority interest |       | 18,800   |          | 1,996        |       | (47,018       | )          | (26,222   | )            |
| Assets                                                   |       | 885,887  |          | 327,466      |       | 53,130        |       | 1,266,483 |         |
| Capital  expenditures                                    |       | 3,584    |          | 11,899       |       | —        |       | 15,483    |         |
| Depreciation and  amortization                           |       | 28,765   |          | 22,290       |       | —        |       | 51,055    |         |
| Interest expense                                         |       | 8        |          | 90           |       | 36,318        |       | 36,416    |         |
| Other (income)  expense — net                       |       | (1,571   | )             | (260         | )          | 4,094         |       | 2,263     |         |
|                                                          |            |          |               |              |            |               |            |           |              |  |  |  |  |

 
| **Six  Months Ended December 31, 2007**                  |   |    |          |    |   |          |    |      |         |
|----------------------------------------------------------|--------|---------|---------------|---------|--------|---------------|---------|-----------|--------------|
| Revenues                                                 |   | $       |  155,332 |    | $      |  100,939 |    | $         |  — |   | $ | 256,271 |   |
| Income (loss)  before income taxes and minority interest |   | 44,191  |          | 13,135  |   | (34,635       | )       | 22,691    |         |
| Assets                                                   |   | 940,292 |          | 311,998 |   | 16,238        |    | 1,268,528 |         |
| Capital  expenditures                                    |   | 3,805   |          | 5,999   |   | —        |    | 9,804     |         |
| Depreciation and  amortization                           |   | 27,110  |          | 18,743  |   | —        |    | 45,853    |         |
| Interest expense                                         |   | 28      |          | 156     |   | 22,698        |    | 22,882    |         |
| Other (income)  expense — net                       |   | (3,053  | )             | (1,205  | )      | (1,507        | )  | (5,765    | )            |
|                                                          |        |         |               |         |        |               |         |           |              |  |  |  |  |

 

The Company conducts its sales, marketing and customerservice activities throughout the world. Geographic revenue information is based on the location of the customer. No singlecountry other than the United States, the Netherlands, the United Kingdom andGermany accounted for 10% or more of total external revenue or of long-livedassets.

 
| ** **                                  | ** ** | **Europe *** | ** **   | **United   States** | ** ** | **The  Netherlands** | ** ** | **United  Kingdom** | ** ** | **Germany** | ** ** | **All   Other** | ** ** | **Total** | ** ** |
|---------------------------------------------|------------|--------------|--------------|--------------------------|------------|----------------------|------------|---------------------|------------|-------------|------------|----------------------|------------|-----------|------------|
| **Three  Months Ended  December 31, 2006**  |       |         |         |                     |       |                 |       |                |       |        |       |                 |       |      |       |
| Revenues                                    |       | $            | 26,725       |                     | $          | 36,574               |       | $                   | 14,495     |        | $          | 12,232               |       | $         | 11,103     |   | $ | 15,108 |   | $ | 116,237 |   |
| Property and  equipment — net          |       | 3,676        |         | 24,998                   |       | 358                  |       | 6,988               |       | 8,226       |       | 5,215                |       | 49,461    |       |
|                                        |       |         |         |                     |       |                 |       |                |       |        |       |                 |       |      |       |
| **Three  Months Ended   December 31, 2007** |       |         |         |                     |       |                 |       |                |       |        |       |                 |       |      |       |
| Revenues                                    |       | $            |  34,150 |                     | $          |  36,705         |       | $                   | 15,407     |        | $          | 13,550               |       | $         | 12,643     |   | $ | 19,634 |   | $ | 132,089 |   |
| Property and  equipment — net          |       | 4,061        |         | 24,929                   |       | 260                  |       | 8,754               |       | 8,637       |       | 4,468                | ** ** | 51,109    | ** ** |
|                                             |            |              |              |                          |            |                      |            |                     |            |             |            |                      |            |           |            |  |  |  |  |  |  |  |  |

 

 
| ** **                                | ** ** | **Europe *** | ** **   | **United   States** | ** ** | **The  Netherlands** | ** ** | **United  Kingdom** | ** ** | **Germany** | ** ** | **All   Other** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|--------------|--------------|--------------------------|------------|----------------------|------------|---------------------|------------|-------------|------------|----------------------|------------|-----------|------------|
| **Six  Months Ended  December 31, 2006**  |       |         |         |                     |       |                 |       |                |       |        |       |                 |       |      |       |
| Revenues                                  |       | $            | 51,791       |                     | $          | 71,817               |       | $                   | 28,010     |        | $          | 23,539               |       | $         | 22,622     |   | $ | 29,940 |   | $ | 227,719 |   |
| Property and equipment  — net        |       | 3,676        |         | 24,998                   |       | 358                  |       | 6,988               |       | 8,226       |       | 5,215                |       | 49,461    |       |
|                                      |       |         |         |                     |       |                 |       |                |       |        |       |                 |       |      |       |
| **Six  Months Ended   December 31, 2007** |       |         |         |                     |       |                 |       |                |       |        |       |                 |       |      |       |
| Revenues                                  |       | $            |  64,355 |                     | $          |  73,370         |       | $                   | 29,253     |        | $          | 27,278               |       | $         | 24,795     |   | $ | 37,220 |   | $ | 256,271 |   |
| Property and  equipment — net        |       | 4,061        |         | 24,929                   |       | 260                  |       | 8,754               |       | 8,637       |       | 4,468                | ** ** | 51,109    | ** ** |
|                                           |            |              |              |                          |            |                      |            |                     |            |             |            |                      |            |           |            |  |  |  |  |  |  |  |  |

----

*        Excludesthe Netherlands, the United Kingdom and Germany.

 

 

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**CAUTIONARY STATEMENT FOR PURPOSES OFTHE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF1995**

This report contains forward-looking statements withinthe meaning of the federal securities laws. These forward looking statementsare identified by the use of terms and phrases such as “anticipate”, “believe”,“could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”and similar terms and phrases, including references to assumptions. However,these words are not the exclusive means of identifying such statements.  These statements relate to analyses and otherinformation that are based on forecasts of future results and estimates ofamounts not yet determinable. These statements also relate to our futureprospects, developments and business strategies and include, but are notlimited to, statements about: our revenue mix; restructuring plans andpotential restructuring charges, and their impact on our revenues; ouroperating expense growth and operating expenses as a percentage of ourrevenues; stability of our development and programming costs; growth of ourselling, general and administrative expenses; decrease of total depreciationand amortization  expense; decrease ininterest expense; our use of cash and liquidity position going forward; andcash needs to service our debt.  

Actual results could differ materially from thoseprojected, implied or anticipated by our forward-looking statements. Some ofthe factors that could cause actual results to differ include: our reliance ona limited number of customers for a substantial portion of our revenues;unpredictability and volatility of our operating results, which includes thevolatility associated with foreign currency exchange risks; effects ofcompetition on our software and service pricing and our business; effects ofchanges in or violations by us or our customers of government regulations; ourability to increase market share, successfully introduce new software andservices and expand our operations to new geographic locations; time andexpenses associated with customers switching from competitive software andservices to our software and services; rapid technology changes in ourindustry; costs and possible future losses or impairments relating to our 2006acquisition of the Claims Services Group from Automatic DataProcessing, Inc.; our reliance on third-party information for our softwareand services; effects of system failures or security breaches on our businessand reputation; country-specific risks associated with operating in multiplecountries; risks associated with any future acquisitions, joint ventures orsimilar transactions; our ability to obtain additional financing as necessaryto support our operations; use of cash to service our debt; effects on our businessof restrictive covenants in our debt facility; the unpredictability ofintellectual property protection and maintenance; any future changes inmanagement or loss of key personnel; any material adverse impact of current orfuture litigation on our results or business; and risks associated withestablishing and maintaining internal control over financial reporting incompliance with Section 404.  For adiscussion of these and other factors that could impact our operations orfinancial results and cause our results to differ materially from those in theforward looking statements, please see Part II, Item 1A – “Risk Factors” inthis Quarterly Report on Form 10-Q, and please refer to our filings with theSecurities and Exchange Commission, particularly our Final Prospectus relatingto a registered offering of shares filed with the Securities and ExchangeCommission on October 4, 2007.

All forward-looking statements are qualified in theirentirety by this cautionary statement, and we undertake no obligation to reviseor update this Quarterly Report on Form 10-Q to reflect events or circumstancesafter the date hereof.

 

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations.**

 

The following discussionof our financial condition and results of operations should be read inconjunction with the 2007 Consolidated Financial Statements and accompanyingnotes included in our Annual Report on Form 10-K filed with the Securities andExchange Commission (“SEC”) on September 17, 2007. * *Youshould read the following discussion and analysis of our financial conditionand results of operations in conjunction with our condensed consolidatedfinancial statements and the notes to those statements included elsewhere inthis Quarterly Report on Form 10-Q. 

 

**Overviewof the Business**

 

We are the leading globalprovider of software and services to the automobile insurance claims processingindustry. Our customers include more than 900 automobile insurance companies,including each of the ten largest automobile insurance companies in Europe andeach of the ten largest automobile insurance companies in North America. Wealso provide our software and services to over 33,000 collision repairfacilities, 7,000 independent assessors and 3,000 automotive recyclers. Oursoftware and services help our customers: estimate the costs to repair damagedvehicles; determine pre-collision fair market values for vehicles damagedbeyond repair; automate steps of the claims process; outsource steps of theclaims process that insurance companies have historically performed internally;and improve their ability to monitor and manage their businesses through datareporting and analysis. We are active in over fifty countries and derive mostof our revenues from our estimating and workflow software.

 

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**CompanyHistory**

 

Solera Holdings, LLC wasformed in March 2005. On April 13, 2006, subsidiaries of SoleraHoldings, LLC acquired the Claims Services Group (“CSG”), a business unit ofAutomatic Data Processing (“ADP”), for approximately $1.0 billion (the“Acquisition”). Prior to the Acquisition, Solera Holdings, LLC’s operationsconsisted primarily of developing our business plan, recruiting personnel,providing consulting services, raising capital and identifying and evaluatingoperating assets for acquisition.

 

We accounted for theAcquisition using the purchase method of accounting. As a result, theAcquisition has and will continue to affect our results of operationssignificantly. We allocated the aggregate acquisition consideration to thetangible and intangible assets acquired and liabilities assumed based on theirrespective fair values as of the date of the Acquisition, which resulted in anincrease in the accounting bases of some of our assets. This has resulted in asignificant increase in our annual depreciation and amortization expenses. Inaddition, due to the effects of the increased borrowings to finance theAcquisition, our interest expense has increased significantly in the periodsfollowing the Acquisition. As a result, the financial information for periodsbeginning on or after July 1, 2006 is not comparable to the informationprior to this date.

 

Prior to the Acquisition,our business was operated as CSG, a business unit of ADP. As a result, thecombined financial information of CSG, which are included  in our 2007 Annual Report on Form 10-K, ispresented on a carve-out basis and reflects the assets, liabilities, revenuesand expenses that were attributed or allocated to it as a business unit of ADP.The historical financial results in the combined financial statements may notbe indicative of the results that would have been achieved had we operated as astand-alone entity. These combined financial statements include costs forfacilities, functions and services used by CSG at ADP sites that it shared withother ADP business units and costs for certain functions and services performedby centralized ADP organizations and directly charged to CSG based on usage.The combined statements of earnings for CSG include allocations of certainexpenses of ADP, including general corporate overhead, insurance, stockcompensation and pension plans, royalty fees, facilities and other expenses.These allocations were based on a variety of factors.

 

On May 10, 2007, inconnection with our initial public offering, we converted from a limitedliability company into a Delaware corporation, and all of the Class ACommon Units and Class B Preferred Units of Solera Holdings, LLC wereconverted into shares of our common stock.

 

**Segments**

 

We operate our businessusing two reportable segments: EMEA and Americas. Our EMEA segment consists ofour operations in Europe, the Middle East, Africa and Asia. Our Americassegment consists of our operations in North, Central and South America. We donot allocate certain costs to reportable segments. These costs are managed atthe corporate level and include costs related to financing activities of theCompany.

 

17

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The table below sets forth our revenues by regional operating segment andas a percentage of our total revenues for the periods indicated.
|                       | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|----------------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|
| **($’s in millions)** | ** ** | **2007**                                           | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| EMEA                       |       | $                                                  | 80.9       |                                        | 61.2       | % | $ | 68.5 |   | 59.0 | % | $ | 155.3 |   | 60.6 | % | $ | 134.0 |   | 58.8 | % |
| Americas                   |       | 51.2                                               |       | 38.8                                        |       | 47.7 |   | 41.0 |   | 101.0 |   | 39.4 |   | 93.7 |   | 41.2 |   |
| Total                      |       | $                                                  | 132.1      |                                        | 100.0      | % | $ | 116.2 |   | 100.0 | % | $ | 256.3 |   | 100.0 | % | $ | 227.7 |   | 100.0 | % |
|                            |            |                                                    |            |                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

Set forthbelow is our percentage of revenues for the periods presented from each of ourprincipal customer categories:
|                            | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------|------------|
| **($’s in millions)**      |       | **2007**                                           |       | **2006**                                    |       | **2007** |   | **2006** |   |
| Insurance  companies            |       | $                                                  | 54.0       |                                        | 40.9       | % | $ | 47.8 |   | 41.1 | % | $ | 104.1 |   | 40.6 | % | $ | 92.7 |   | 40.7 | % |
| Collision repair  facilities    |       | 49.9                                               |       | 37.7                                        |       | 42.3 |   | 36.5 |   | 96.8 |   | 37.8 |   | 83.4 |   | 36.6 |   |
| Independent  assessors          |       | 13.9                                               |       | 10.5                                        |       | 11.9 |   | 10.2 |   | 27.1 |   | 10.6 |   | 23.8 |   | 10.5 |   |
| Automotive  recyclers and other |       | 14.3                                               |       | 10.9                                        |       | 14.2 |   | 12.2 |   | 28.3 |   | 11.0 |   | 27.8 |   | 12.2 |   |
| Total                           |       | $                                                  | 132.1      |                                        | 100.0      | % | $ | 116.2 |   | 100.0 | % | $ | 256.3 |   | 100.0 | % | $ | 227.7 |   | 100.0 | % |

For the three and six months ended December 31, 2007, the United States,the Netherlands and the United Kingdom were the only countries thatindividually represented more than 10% of total revenues.

The accounting policies for each of oursegments are the same. We evaluate the operating performance of our segmentsbased primarily upon their respective revenues and EBITDA. For the most part,we do not evaluate our costs and expenses on a per segment basis.

**Components of Revenuesand Expenses**

***Revenues***

 

We generate revenues fromthe sale of software and services to our customers pursuant to negotiatedcontracts or pricing agreements. Pricing for our software and services is setforth in these agreements and negotiated with each customer. We generally billour customers monthly under one or more of the following bases:

 

·  price per transaction;

 

·  fixed monthly amount for a prescribed number of transactions;

 

·  fixed monthly subscription rate;

 

·  price per set of services rendered; or

 

·  price per system delivered.

 

Our software and servicesare often sold as packages, without individual pricing for each component. Ourrevenues are reflected net of customer sales allowances, which we estimatebased on both our examination of a subset of customer accounts and historicalexperience.

 

Our core offering is ourestimating and workflow software, which is used by our insurance company,collision repair facility and independent assessor customers and whichrepresents the majority of our revenues. Our salvage and recycling software,business intelligence and consulting services, shared services and otherofferings represent in the aggregate a smaller portion of our revenues. Wecurrently derive an insubstantial portion of our revenues from our sharedservices offerings. We believe that our estimating and workflow software willcontinue to represent a majority of our revenue for the foreseeable future.

 

***Cost of Revenues (excluding depreciation and amortization)***

 

Our costs and expensesapplicable to revenues represent the total of operating expenses and systemsdevelopment and programming costs, which are discussed below.

 

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***Operating Expenses***

 

Our operating expensesinclude: compensation and benefit costs for our operations, databasedevelopment and customer service personnel; other costs related to operations,database development and customer support functions; third-party data androyalty costs; and costs related to computer software and hardware used in thedelivery of our software and services.

 

***Systems Development and Programming Costs***

 

Systems development andprogramming costs include: compensation and benefit costs for our productdevelopment and product management personnel; other costs related to ourproduct development and product management functions; and costs related toexternal software consultants involved in systems development and programmingactivities.

 

***Selling, General and Administrative Expenses***

 

Our selling, general andadministrative expenses include compensation and benefit costs for our sales,marketing, administration and corporate personnel; other costs related to oursales, marketing, administrative and corporate functions; costs related to ourfacilities; and professional and legal fees.

 

***Depreciation and Amortization***

 

Depreciation includesdepreciation attributable to buildings, leasehold improvements, data processingand computer equipment, furniture and fixtures. Amortization includesamortization attributable to software purchases and software developed orobtained for internal use and our intangible assets, the majority of which wereacquired in the Acquisition.

 

***Interest Expense***

 

Interest expense consistsprimarily of payments of interest on our credit facilities and amortization ofrelated debt issuance costs.

 

***Other (Income) Expense-Net***

 

Other (income)expense-net consists of foreign exchange gains and losses on notes receivableand notes payable to affiliates as well as other miscellaneous income andexpense.

 

***Minority Interests in Net Income of Consolidated Subsidiaries***

 

Several of our customersown minority interests in our local operating subsidiaries. Minority interestsin net income of consolidated subsidiaries reflect such customers’proportionate interest in the earnings of such operating subsidiaries.

 

***Income Tax Provision***

 

Prior to our corporatereorganization on May 10, 2007, we were a limited liability company and,therefore, we were not subject to entity-level federal income taxation.However, even as a limited liability company, we incurred income taxes on ouroperations as they were held by taxable entities in the U.S. and in foreignjurisdictions. Prior to our corporate reorganization, our income taxes werepayable by our equity holders at rates applicable to them. Following ourconversion to a Subchapter C corporation, transactions recorded by us aresubject to federal income taxation for which we do not expect a significantimpact to our overall income tax liability. Income taxes have been provided forall items included in the statements of income (loss) included herein,regardless of when such items were reported for tax purposes or when the taxeswere actually paid or refunded.

 

As part of theAcquisition, a portion of the purchase price was allocated to intangible assetsand goodwill. For most jurisdictions in which we operate, the amortizationcharges and impairment charges will not be deductible for income tax purposes.The net deferred tax liability as shown on our balance sheet is primarily theresult of the difference between book and tax basis of the acquired intangibleassets.

 

The expected tax provision derived from applying thefederal statutory rate to Solera’s income before income taxes for six monthsended December 31, 2007, differed from our recorded income tax provisionprimarily due to lower foreign income tax rates reducing the effective taxrate, offset by certain withholding tax liabilities and valuation allowances oncertain subsidiary losses which do not meet the more-likely-than not standardof realizability of those deferred tax assets. Our tax provision for theremainder of fiscal year 2008 continues to heavily depend on the jurisdictionalmix of pretax earnings, our actual and forecasted profitability, establishmentof valuation allowances in certain jurisdictions, and varying jurisdictionalincome tax rates that are applied to related earnings.

 

 

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**FactorsAffecting Our Operating Results**

 

***Overview.  ***The automobile insurance claims processing industry isinfluenced by growth and trends in the automobile insurance industry. Demandfor our software and services is generally related to automobile usage and thepenetration of automobile insurance in our markets. A large portion of ouroperating costs are fixed and we generate a large percentage of our revenuesfrom periodic-and transaction-based fees related to software and ongoing claimsprocessing services.

 

Our operating results areand will be influenced by a variety of factors, including:

 

·  gain and loss of customers;

 

·  pricing pressures;

 

·  expansions into new markets, which requires us to incur costs prior togenerating revenues;

 

·  expenses to develop new software or services;

 

·  restructuring charges related to efficiency initiatives;

 

·  the Acquisition in April 2006, including the debt we incurred; 

 

·  our corporate reorganization and the refinancing transactions; and

 

·  fluctuations in foreign currency exchange rates. 

 

***Foreign currency.  ***During the three months ended December31, 2007, we generated approximately 72% of our revenues and incurred amajority of our costs in currencies other than the U.S. dollar, primarily theEuro. We currently do not hedge our exposure to foreign currency risks. In ourhistorical financial statements, we re-measure our local currency financialresults in U.S. dollars based on average exchange rates prevailing during areporting period or the exchange rate at the end of that period. Thesere-measurements resulted in foreign currency translation adjustments of $8.4million and $32.3 million for the three and six months ended December 31, 2007recorded as a component of Accumulated other comprehensive income inStockholders’ equity.  Foreign currencygains flowing through our consolidated statement of operations for the threeand six months ended December 31, 2007 were $2.9 million and $3.0 million.

 

In February 2006, weentered into a foreign exchange option that gave us the right to call$200.0 million in U.S. dollars at a strike price of €1.1646 per U.S.dollar at any time up to February 8, 2011. We paid approximately$7.9 million for this option. The fair value of this option wasapproximately $1.8 million as of December 31, 2007 and $1.0 millionas of June 30, 2007, and was recorded in Other assets in our condensedconsolidated balance sheet. Increases in fair value of approximately$0.9 million and $0.9 million were recognized in other income in thestatement of operations during the three and six months ended December 31,2007, respectively.

 

***Non-cash charges.  ***On July 25, 2006, November 8,2006 and January 26, 2007, we granted the right to purchase Class Acommon units of Solera Holdings, LLC to certain employees. Under these andother arrangements, we issued an aggregate of 625,429 Class A common unitsto 20 of our employees for $0.2 million in January 2007 and anaggregate of 50,000 Class A common units to two of our employees for$15,000 in February 2007. In May 2007, we issued restricted stockunits covering an aggregate of 304,730 shares and 428,400 stock options tocertain of our employees. We expect to incur a pre-tax, non-cash charge ofapproximately $9.8 million in connection with these issuances, expensedratably over vesting periods of up to 60 months. In September 2007 and December2007 we issued restricted stock units covering an aggregate of 4,900 shares and37,600 stock options and 34,400 shares and 90,600 stock options, respectively,to certain of our employees. We expect to incur a pre-tax, non-cash charge ofapproximately $0.4 million and $1.5 million in connection with September 2007and December 2007 issuances, respectively, expensed ratably over vestingperiods of up to 48 months. During the three and six months ended December 31,2007, we recognized approximately $1.0 million $1.6 million, respectively,as compensation expense.

 

***Restructuring charges*****.*  ***We have incurred restructuring charges(or reversal) in each period presented and also expect to incur additionalrestructuring charges, primarily relating to severance costs, over the nextseveral quarters as we work to improve efficiencies in our business. We arecurrently evaluating several plans that would eliminate redundant personnel ineach of our segments, as well as reduce our need for certain facilities. If allof these plans were to be executed upon, we would expect to incur significantrestructuring charges over the next twelve months. These potential charges,consisting primarily of termination benefits, will significantly reduce ourcash balances. We do not expect reduced revenues or an increase in otherexpenses as a result of any of these restructuring plans.

20

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**Resultsof Operations**

 

The table below sets forth statement of operations data expressed as apercentage of revenues for the periods indicated:

 
| ** **                                                              | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** ** |
|-------------------------------------------------------------------------|-----------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                              | **2007**                                      | ** ** | **2006**                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues                                                                | 100.0                                         | %          | 100.0                                       | %          | 100.0 | % | 100.0 | % |
|                                                                    |                                          |       |                                        |       |   |   |   |   |
| Cost of  revenues:                                                      |                                          |       |                                        |       |   |   |   |   |
| Operating  expenses                                                     | 25.0                                          |       | 30.0                                        |       | 25.5 |   | 29.7 |   |
| Systems  development and programming costs                              | 12.5                                          |       | 13.5                                        |       | 12.7 |   | 14.0 |   |
| Total cost of  revenues (excluding depreciation and amortization)       | 37.5                                          |       | 43.5                                        |       | 38.2 |   | 43.7 |   |
|                                                                    |                                          |       |                                        |       |   |   |   |   |
| Selling, general  & administrative expenses                         | 28.4                                          |       | 28.4                                        |       | 27.7 |   | 28.0 |   |
| Depreciation and  amortization                                          | 17.8                                          |       | 22.3                                        |       | 17.9 |   | 22.4 |   |
| Restructuring  charges                                                  | 0.0                                           |       | 0.0                                         |       | 0.7 |   | 0.4 |   |
| Interest expense                                                        | 8.9                                           |       | 15.9                                        |       | 8.9 |   | 16.0 |   |
| Other (income)  expense - net                                           | (3.5                                          | )          | (1.8                                        | )          | (2.2 | ) | 1.0 |   |
|                                                                    | 51.6                                          |       | 64.8                                        |       | 53.0 |   | 67.8 |   |
|                                                                    |                                          |       |                                        |       |   |   |   |   |
| Income (loss)  before provision for income taxes and minority interests | 10.9                                          |       | (8.3                                        | )          | 8.8 |   | (11.5 | ) |
|                                                                    |                                          |       |                                        |       |   |   |   |   |
| Income tax  provision                                                   | 1.6                                           |       | 1.6                                         |       | 1.9 |   | 0.9 |   |
|                                                                    |                                          |       |                                        |       |   |   |   |   |
| Minority  interest in net income of consolidated subsidiaries           | 1.0                                           |       | 0.4                                         |       | 1.1 |   | 0.7 |   |
|                                                                    |                                          |       |                                        |       |   |   |   |   |
| Net income  (loss)                                                      | 8.3                                           | %          | (10.3%                                      | )          | 5.8 | % | (13.1% | ) |

 

The table belowsets forth statement of operations data, including the amount and percentagechanges for the periods indicated:

 
| ** **                                                                 | ** ** | **Three Months Ended December 31,** | ** ** | **Six Months Ended December 31,** | ** **  |
|----------------------------------------------------------------------------|------------|-----------------------------------------------|------------|---------------------------------------------|-------------|
| **($’s in millions)**                                                 | ** ** | **2007**                                      | ** ** | **2006**                                    | ** **  | **Change** | ** ** | **2007** | ** ** | **2006** | ** ** | **Change** | ** ** |
| ** **                                                                 | ** ** | ** **                                    | ** ** | ** **                                  | **$ ** | ** ** | **%** | ** ** | ** ** | ** ** | ** ** | ** ** | **$ ** | ** ** | **%** | ** ** |
| Revenues                                                                   | $          | 132.1                                         |       | $                                           | 116.2       |   | $ | 15.9 |   | 13.6 | % | $ | 256.3 |   | $ | 227.7 |   | $ | 28.6 |   | 12.5 | % |
|                                                                       |       |                                          |       |                                        |        |   |   |   |   |   |   |   |   |   |   |   |
| Cost of  revenues:                                                         |       |                                          |       |                                        |        |   |   |   |   |   |   |   |   |   |   |   |
| Operating  expenses                                                        | 33.0       |                                          | 34.8       |                                        | (1.8        | ) | (5.3 | )% | 65.3 |   | 67.6 |   | (2.3 | ) | (3.3 | )% |
| Systems  development and programming costs                                 | 16.6       |                                          | 15.8       |                                        | 0.8         |   | 5.2 | % | 32.6 |   | 31.9 |   | 0.7 |   | 1.9 | % |
| Total cost of  revenues (excluding depreciation and amortization)          | 49.6       |                                          | 50.6       |                                        | (1.0        | ) | (2.0 | )% | 97.9 |   | 99.5 |   | (1.6 | ) | (1.6 | )% |
|                                                                       |       |                                          |       |                                        |        |   |   |   |   |   |   |   |   |   |   |   |
| Selling, general  & administrative expenses                            | 37.5       |                                          | 33.0       |                                        | 4.5         |   | 13.8 | % | 71.1 |   | 63.9 |   | 7.2 |   | 11.3 | % |
| Depreciation and  amortization                                             | 23.4       |                                          | 25.9       |                                        | (2.5        | ) | (9.4 | )% | 45.8 |   | 51.0 |   | (5.2 | ) | (10.2 | )% |
| Restructuring  charges                                                     | 0.1        |                                          | —     |                                        | 0.1         |   | 305.6 | % | 1.7 |   | 0.9 |   | 0.8 |   | 90.6 | % |
| Interest expense                                                           | 11.7       |                                          | 18.5       |                                        | (6.8        | ) | (36.8 | )% | 22.9 |   | 36.4 |   | (13.5 | ) | (37.2 | )% |
| Other (income)  expense - net                                              | (4.6       | )                                             | (2.1       | )                                      | (2.5        | ) | (122.0 | )% | (5.8 | ) | 2.3 |   | (8.1 | ) | (354.8 | )% |
|                                                                       | 68.1       |                                          | 75.3       |                                        | (7.2        | ) | (9.5 | )% | 135.7 |   | 154.5 |   | (18.8 | ) | (12.2 | )% |
|                                                                       |       |                                          |       |                                        |        |   |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss) before provision for income taxes and minority interest | 14.4       |                                          | (9.7       | )                                           | 24.1        |   | 249.1 | % | 22.7 |   | (26.3 | ) | 49.0 |   | 186.5 | % |
|                                                                       |       |                                          |       |                                        |        |   |   |   |   |   |   |   |   |   |   |   |
| Income tax  provision                                                      | 2.1        |                                          | 1.9        |                                        | 0.2         |   | 10.1 | % | 4.9 |   | 2.1 |   | 2.8 |   | 133.3 | % |
|                                                                       |       |                                          |       |                                        |        |   |   |   |   |   |   |   |   |   |   |   |
| Minority  interest in net income of consolidated subsidiaries              | 1.3        |                                          | 0.4        |                                        | 0.9         |   | 199.7 | % | 2.9 |   | 1.5 |   | 1.4 |   | 89.0 | % |
|                                                                       |       |                                          |       |                                        |        |   |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss)                                                         | $          | 11.0                                          |       | $                                           | (12.0       | ) | $ | 23.0 |   | 191.9 | %  | $ | 14.9 |   | $ | (29.9 | ) | $ | 44.8 |   | 149.8 | % |

 

21

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***Revenues***

 

Revenues increased $15.9 million and $28.6million for the three and six months ended December 31, 2007 compared to thethree and six months ended December 31, 2006, due to higher revenues in bothour EMEA and Americas segments. The current quarter EMEA revenues increased$12.4 million, or 18.0%, to $80.9 million due to an increase in the value of the Euro andseveral other European currencies versus the U.S. dollar and growth intransaction and subscription revenues in several countries from both existingand new customers. Our six month EMEArevenues increased $21.3 million, or 15.9%, to $155.3 million for the samereasons noted above. The current quarter Americas revenues increased$3.5 million, or 7.4%, to $51.2 million due to growth in transactionand subscription revenues in the U.S., Canada, Brazil and Mexico, partiallyoffset by the prior year’s loss of several significant U.S. insurance customercontracts.  Our six month Americasrevenues increased $7.3 million, or 7.7%, to $101.0 million for the samereasons noted above. Revenue growth for each of our customer categories was asfollows:

 
| **($’s in millions)**      | ** ** | **Three Months Ended December 31, 2007** | ** ** | **Six Months Ended December 31, 2007** | ** ** |
|---------------------------------|------------|---------------------------------------------------------|------------|-------------------------------------------------------|------------|
| ** **                      | ** ** | **Revenue   Growth**                               | ** ** | **Percentage   Change**                          | ** ** | **Revenue   Growth** | ** ** | **Percentage   Change** | ** ** |
| Insurance  companies            |       | $                                                       | 6.2        |                                                  | 13.0       | % | $ | 11.4 |   | 12.3 | % |
| Collision repair  facilities    |       | 7.6                                                     |       | 17.7                                                  | %          | 13.4 |   | 16.1 | % |
| Independent  assessors          |       | 2.0                                                     |       | 17.0                                                  | %          | 3.3 |   | 14.0 | % |
| Automotive  recyclers and other |       | 0.1                                                     |       | 0.9                                                   | %          | 0.5 |   | 1.5 | % |
| Total                           |       | $                                                       | 15.9       |                                                  | 13.6       | % | $ | 28.6 |   | 12.5 | % |

 

***OperatingExpenses***

** **

* *For the three months ended December 31,2007, compared to the same prior year period, operating expenses decreased$1.8 million, or 5.3%, due to a $2.6 million reduction in operatingexpenses in our Americas segment offset by a $0.8 million increase in our EMEAsegment. The lower Americas costs were due to decreases in personnel costs,third party licensing fees, and consulting expenses.  The EMEA increase was primarily due to personnelcosts and licensing fees. 

 

For the six months endedDecember 31, 2007, compared to the same prior year period, operating expensesdecreased $2.3 million, or 3.3%, due to a $1.8 million reduction inoperating expenses in our Americas segment and a $0.5 million reduction in ourEMEA segment. The lower Americas costs were due to decreases in personnel costsand third party licensing fees.  The EMEAdecrease was primarily due to personnel costs. 

 

We continually evaluateour operating costs in order to identify inefficiencies and eliminate unnecessarycosts. We anticipate that, although our operating expenses will continue toincrease, they will decline as a percentage of revenues over the next severalyears.

 

***SystemsDevelopment and Programming Costs***

**  **

 For the three months ended December 31, 2007,systems development and programming costs increased $0.8 million, or 5.2%, due to a $0.7 million increase in costs in our Americas segment. Theincreased costs in our Americas segment were due to an increase in consultingfees and a net increase in personnel costs due to a reduction in the amount ofinternal use software development costs we capitalized.  For the quarter ended December 31, 2007 wecapitalized $0.2 million less for the development of internal use softwarecompared to the second quarter of 2006. 

 

For the six months endedDecember 31, 2007, compared to the same prior year period, systems developmentand programming costs increased $0.7 million, or 1.9 %, due to a$1.1 million increase in costs in our Americas segment offset by a $0.4million decrease in our EMEA segment. The increased costs in our Americassegment were due to an increase in consulting fees of $0.3 million and a netincrease in personnel costs primarily due to a reduction in the amount ofinternal use software development costs we capitalized.  For the six months ended December 31, 2007 wecapitalized $0.6 million less for the development of internal use softwarecompared to the same six month period in 2006. The decreased costs in our EMEAsegment were due to lower personnel costs, an increase in the amount ofinternal use software development costs we capitalized offset by an increase inconsulting fees.

 

Our systems developmentand programming costs fluctuate throughout the year based upon the levels andtiming of product releases. We expect our systems development and programmingcosts to remain relatively stable over the next several quarters.

 

22

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***Selling,General and Administrative Expenses***

** **

* * For the three months ended December 31,2007 selling, general and administrative expenses increased $4.5 million,or 13.8%, due to an increase in costs of $3.5 million in our Corporate segment,an increase in personnel costs of $0.6 million in our Americas segment,and an increase in consulting costs of $0.4 million in our EMEA segment. Theincreased expenses in our Corporate segment were due to a $1.3 million increasein consulting fees for our first year Sarbanes-Oxley efforts, a $0.9 millionincrease in deferred compensation expense, an increase in personnel costs, includingrecruiting fees, of $0.9 million and an increase of $0.4 million inprofessional fees.  

 

For the six months endedDecember 31, 2007, compared to the same prior year period, selling, general andadministrative expenses increased $7.2 million, or 11.3%, due to anincrease in costs of $4.8 million in our Corporate segment and an increase incosts of $2.4 million in our Americas segment. The increase in expenses inour Corporate segment were due to a $1.7 million increase in consulting feesfor our first year Sarbanes-Oxley efforts, a $1.3 million increase in deferredcompensation expense, a $1.2 million increase in personnel costs, includingrecruiting fees, a $0.4 million increase in professional fees, including taxservices and an increase in other administrative fees, including corporateinsurance. The increase in expenses in our Americas segment were primarily dueto a $1.8 million increase in personnel costs, which included temporarypersonnel of $0.7 million primarily related to the migration of customers tonew software and a $0.5 million increase in facilities expenses.

 

We expect these expensesto continue to increase as we incur additional costs associated with being apublic company and as we continue to expand our business into new markets.

 

***Depreciationand Amortization***

**  **

Depreciation andamortization decreased by $2.5 million and $5.2 million for the three andsix months ended December 31, 2007, respectively, compared to the same prioryear periods primarily due to lower intangibles amortization expense resultingfrom the Acquisition. We amortize these intangible assets on an acceleratedbasis to reflect the pattern in which economic benefits of the intangibleassets are consumed. Although we expect to experience significant depreciationand amortization in the future as we amortize intangible assets purchased inthe Acquisition, we anticipate that the amount of total depreciation andamortization expense will continue to decline over the next several years.

 

***RestructuringCharge*****s**

** **

 Restructuring charges of $0.1 million and $1.7million for the three and six months ended December 31, 2007 were incurred as aresult of operational reviews conducted after the Acquisition and relate almostentirely to one-time termination benefits and facilities consolidation costs.We expect to incur additional restructuring charges, relating primarily toseverance costs, over the next several quarters as we work to improveefficiencies in our business.

 

***Interest Expense***

** **

*  * Interest expense decreased$6.8 million and $13.5 million for the three and six month periods endedDecember 31, 2007, respectively, compared to the same prior year periods due tolower borrowings under our credit facilities, which were in part due to therefinancing transactions completed on May 16, 2007 in conjunction with ourinitial public offering. We expect that our annual interest expense willcontinue to decrease as we repay outstanding indebtedness. The decrease ininterest expense may be partially offset by future foreign currency fluctuations.

 

***Other (Income)Expense-Net***

* *

* * Other (Income) increased $2.5 million to($4.6) million from ($2.1) million for the three months ended December 31, 2007compared to the same period last year. This increase was due to foreigncurrency gains. For the six months ended December 31, 2007 compared to the sameperiod last year Other (Income) increased $8.1 million to ($5.8) from $2.3million due to foreign currency gains of $3.0 million, an increase in netrealized and unrealized gains on our derivative instruments and increasedinterest income.

 

***Income TaxProvision***

** **

We recorded an income taxprovision of $2.1 million and $1.9 million for the three months endedDecember 31, 2007 and 2006, respectively. For the six month ended December 31, 2007 and 2006 we recorded an incomeprovision of $4.9 million and $2.1 million, respectively. Factors that impactour income tax provision include (but are not limited to) the mix ofjurisdictional earnings, establishment of valuation allowances in certainjurisdictions, and varying jurisdictional income tax rates that are applied torelated earnings.

23

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**Liquidity and Capital Resources**

Prior to the Acquisition,our predecessor’s principal sources of liquidity were capital contributionsfrom ADP and cash generated from operations. Since the Acquisition, ourprincipal sources of cash have included cash generated from operations and bankborrowings. Our principal uses of cash have included debt service, capitalexpenditures and working capital. We expect that these will remain ourprincipal uses of cash in the future. We expect our cash needs to service debtwill decrease in future periods as a result of the application of proceeds fromthe refinancing transactions completed in conjunction with our initial publicoffering which were used to repay debt.

 

We believe that cash flowfrom operating activities and borrowings under our amended and restated seniorcredit facility will be sufficient to fund currently anticipated workingcapital, planned capital spending and debt service requirements for theforeseeable future, including at least the next twelve months. We regularlyreview acquisition and other strategic opportunities, which may requireadditional debt or equity financing. We currently do not have any pending agreementsor understandings with respect to any acquisition or other strategicopportunity.

 

***Cash and Cash Equivalents***

 

As of December 31, 2007,we had cash and cash equivalents of $107.8 million. We fund ouroperations, working capital and capital expenditures with our cash on hand andshort-term borrowings under our credit facility. Our cash on hand andshort-term borrowings vary significantly based on our cash flows as set forthbelow.

 

***CashFlows***

Thefollowing summarizes our primary sources and uses of cash in the periodspresented:
| ** **                      | ** ** | **Six Months Ended December 31,** | ** ** |
|---------------------------------|------------|--------------------------------------------------|------------|
| **($’s in millions)** | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| Operating activities            |       | $                                                | 47.9       |   | $ | 22.0 |   |
| Investing activities            |       | $                                                | (10.1      | ) | $ | (29.7 | ) |
| Financing activities            |       | $                                                | (24.8      | ) | $ | 4.6 |   |

 

*Operatingactivities.  * Cash provided by operating activities was $47.9 million and$22.0 million during the six months ending December 31, 2007 and 2006,respectively. The increase in cash provided by operating activities for the sixmonths ended December 31, 2007 was primarily the result of a $44.8 millionincrease in net income compared with the six months ended December 31, 2006,offset by reductions in operating assets and liabilities. For the six monthsended December 31, 2007, the non-cash adjustments included reductions indepreciation and amortization and changes in the fair value of a financialinstrument. The change in operating assets and liabilities was a net reductionof $21.8 million from the six months ended December 31, 2006 due primarily toreductions in accrued expenses, accounts payable and accounts receivable.

 

*Investingactivities*.  Cash usedin investing activities forthe six months ending December 31, 2007 and 2006 were $10.1 million and$29.7 million, respectively.  Capitalexpenditures, consisting of computers, computer software, leaseholdimprovements and furniture and fixtures, were $9.8 million and $15.5 million,respectively. During the six months ended December 31, 2006 we made a finalworking capital payment of $13.2 million as part of the Acquisition.

 

*Financingactivities.  * Cash (used by) provided in financing activities for the six monthsending December 31, 2007 and 2006 was ($24.8) million and $4.6 million,respectively.  For the six months endedDecember 31, 2007 we paid $13.7 million and $8.5 million, respectively, on ourlong-term debt and revolving credit facility. During the three months endedDecember 31, 2007 the long-term debt payments included voluntary principalpayments of $8.5 million on the domestic term loan and €1.5 million on theEuropean term loan.

24

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***Amended and Restated Senior Credit Facility***

 

In connection with ourinitial public offering, we entered into an amended and restated senior creditfacility. Our Amended and Restated Senior Credit Facility consists of a$50.0 million revolving credit facility, a $230.0 million domesticterm loan and a €280.0 million European term loan. As of December 31,2007, we had $0.0 million, $219.8 million and $406.3 million(€276.4 million) in outstanding loans under the revolving credit facility,domestic term loan and European term loan, respectively, with interest rates of8.0%, 7.0625% and 7.0%, respectively. The Amended and Restated Senior CreditFacility contains a leverage a ratio covenant, which is applicable only to therevolving loans and applies only if at least $10.0 million of revolvingloans, including outstanding letters of credit, are outstanding for at least 10days during the prior fiscal quarter.

 

In addition, the Amendedand Restated Senior Credit Facility contains covenants restricting us fromundertaking specified corporate actions, including asset dispositions,acquisitions, payment of dividends and other specified payments, changes ofcontrol, incurrence of indebtedness, creation of liens, making loans andinvestments and transactions with affiliates.

 

**Off-BalanceSheet Arrangements**

Our off-balancesheet arrangements consist of our operating leases.

**Inflationand Seasonality**

 

We believe inflation hasnot had a material effect on our financial condition or results of operationsin recent years. Our business does not experience any material level ofseasonality.

 

**CriticalAccounting Policies and Estimates**

 

The accompanyingcondensed consolidated financial statements of Solera Holdings, Inc. havebeen prepared in accordance with generally accepted accounting principles. Thepreparation of these financial statements requires us to make estimates andjudgments that affect the amounts reported in those financial statements. On anongoing basis, we evaluate estimates. We base our estimates on historicalexperiences and assumptions which we believe to be reasonable under thecircumstances. Those estimates form the basis for our judgments that affect theamounts reported in the financial statements. Actual results could differ fromour estimates under different assumptions or conditions. Our significantaccounting policies, which may be affected by our estimates and assumptions,are more fully described in Note 2 to our audited Consolidated FinancialStatements for the fiscal year ended June 30, 2007 and our critical accountingpolicies are more fully described in Part II, Item 7 “Management’s Discussionand Analysis of Financial Condition and Results of Operations” included in ourAnnual Report on Form 10-K filed with the SEC on September 17, 2007. As ofFebruary 13, 2008, there have not been any significant changes in our criticalaccounting policies and estimates.

 

**Recent AccountingPronouncements**

Recent accountingpronouncements are detailed in Note 2 to our condensed consolidated financialstatements of this Quarterly Report on Form 10-Q.

**AvailableInformation**

 

Our internet websiteaddress is www.solerainc.com. Our annual reports on Form 10-K, quarterlyreports on Form 10-Q, current reports on Form 8-K and amendments tothose reports filed or furnished pursuant to Section 13 or 15(d) ofthe Exchange Act will be available free of charge through our website as soonas reasonably practicable after they are electronically filed with, orfurnished to, the Securities and Exchange Commission. Our website and theinformation contained or incorporated therein are not intended to beincorporated into this report.

 

25

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**Item 3.****          ****Quantitative and Qualitative Disclosures About MarketRisk.**

**ForeignCurrency Risk**

 

We conduct operations inmany countries around the world. Our results of operations are subject to bothcurrency transaction risk and currency translation risk. We incur currencytransaction risk when we enter into either a purchase or sale transaction usinga currency other than our functional currency. With respect to currencytranslation risk, our financial condition and results of operations aremeasured and recorded in the relevant domestic currency and then translatedinto U.S. dollars for inclusion in our consolidated financial statements.Exchange rates between these currencies and U.S. dollars have fluctuatedsignificantly over the last few years and may continue to do so in the future.A substantial portion of our revenues and costs are denominated in oreffectively indexed to U.S. dollars, but the majority of our revenues and costsare denominated in Euros, British pounds, Swiss francs, Canadian dollars andother currencies. Historically, we have not undertaken hedging strategies tominimize the effect of currency fluctuations on our results of operations andfinancial condition; however, we may decide this is necessary in the future. Ahypothetical 1% increase or decrease in each of our foreign currencies versusthe U.S. dollar would have resulted in a $0.9 million change to our revenue forthe three month period ended December 31, 2007 and a $3.8 million change torevenue on an annualized basis.

 

 

**InterestRate Risk**

 

We are exposed tointerest rate risks primarily through borrowings under our revolving loanarrangement and term loans. Interest on these borrowings is based upon variableinterest rates. Our weighted-average borrowings outstanding under the revolvingloan arrangement and term loans during the three months ended December 31, 2007was $634.7 million, and the weighted-average interest rate in effect atDecember 31, 2007 was 7.30%. Based on the foregoing, a hypothetical 1% increaseor decrease in interest rates would have resulted in a $1.6 million change toour interest expense for the three month period ended December 31, 2007 and a$6.3 million change to our interest expense on an annualized basis.

 

In June 2007, we enteredinto three USD-based interest rate swaps with notional amounts of$50.0 million, $81.0 million and $75.0 million with maturitieson June 30, 2011, which require us to pay fixed rates of 5.445%, 5.418% and5.445%, respectively, and also entered into three Euro-based interest rateswaps with notional amounts of €69.8 million, €50.0 million, and€60.0 million with maturities on June 30, 2011, which require us to payfixed rates of 4.603%, 4.679%, and 4.685%, respectively. These interest rateswaps are designated and documented at their inception as cash flow hedges andare evaluated for effectiveness quarterly. The effective portion of the gain orloss on these hedges is reported as a component of Accumulated othercomprehensive income/(loss) in stockholders’ equity and reclassified intoearnings when the hedged transaction affects earnings. The ineffective portionon these cash flow hedges is recognized in interest expense. The estimated fairvalue of $9.3 million on U.S. dollar-based swaps and €1.1 million ($1.7million) on Euro-based swaps was recorded in Other liabilities in theconsolidated balance sheet as of December 31, 2007. The change of $9.6 millionin the fair value of swaps, net of tax, reflects the effective portion of losson these hedges and is reported as a component of Accumulated othercomprehensive income in stockholders’ equity.

 

**Item4.  Controls and Procedures.**

We maintain disclosurecontrols and procedures that are designed to ensure that information requiredto be disclosed in reports pursuant to the Exchange Act, is recorded,processed, summarized and reported within the time periods specified underRule 13a-15 of the Exchange Act, and that such information is accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure. Management is responsible for establishing and maintainingadequate internal control over financial reporting.

 

As required byRule 13a-15(b) under the Exchange Act, we carried out an evaluation, underthe supervision and with the participation of our management, including theChief Executive Officer and the Chief Financial Officer, of the effectiveness 

 

of the design andoperation of our disclosure controls and procedures. Based on the foregoing,our Chief Executive Officer and Chief Financial Officer determined thatdisclosure controls and procedures were effective at a reasonable assurancelevel as of the end of the period covered by this Quarterly Report.

 

There has been no changein internal controls over financial reporting during the most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, internal controls over financial reporting.

 

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**PART II—OTHER INFORMATION**

**Item1.  Legal Proceedings.**

As a normal incident ofthe business in which we are engaged, various claims, charges and litigationare asserted or commenced against us. We believe that final judgments, if any,which may be rendered against us in current litigation, are adequately reservedfor, covered by insurance or would not have a material adverse effect on ourfinancial position. We have from time to time been the subject of allegationsthat our repair estimating and total loss software and services producedresults that favored our insurance company customers. In addition, we arecurrently one of the defendants in a putative class action lawsuit allegingthat we have colluded with our insurance company customers to cause theestimates of vehicle fair market value generated by our total loss estimationproducts to be unfairly low. We were recently named as a third partydefendant in a lawsuit by a major insurance company against a PPO which was aformer customer of our predecessor’s medical claims software products. The PPOhas claimed that our predecessor’s failure to properly update its database ledor may have led to errors that caused the insurance company to discount theircharges, resulting in numerous claims against the insurance company. We haveanswered the third party complaint denying all of the third party plaintiff’sallegations. We intend to vigorously defend ourselves against the third party plaintiff’sclaims and believe this third party complaint is without merit.

 

**Item 1A.Risk Factors.**

Investing in ourcommon stock involves a high degree of risk. In addition to the otherinformation set forth in this Quarterly Report on Form 10-Q, you shouldcarefully consider the factors discussed under the heading “Risk Factors” inour Annual Report on Form 10-K filed with the SEC on September 17, 2007, aswell as information in our other public filings, press releases and in our safeharbor statement before making a decision to invest in our common stock. If anyof these risks occur, our business, results of operations and financialcondition may be materially and adversely affected. In that event, the tradingprice of our common stock could decline, and you could lose all or part of yourinvestment. The risks described in the Annual Report on Form 10-K, and theadditional information provided in this Form 10-Q and elsewhere, as describedabove, may not describe every risk facing our Company. Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial also may materially adversely affect our business, financialcondition and/or operating results. 

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.**

 

Not applicable. 

** **

**Item3.  Defaults Upon Senior Securities.**

                                                None.

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**Item4.  Submission of Matters to a Vote ofSecurity Holders**

The Annual Meeting of Stockholders of Solera Holdings,Inc. was held on December 12, 2007 (the “Annual Meeting”). Proxies for theAnnual Meeting were solicited pursuant to our proxy statement underRegulation 14(a) of the Securities Exchange Act of 1934, as amended, filedwith the SEC November 5, 2007 (the “Proxy Statement”). At our AnnualMeeting, the election of five directors of Solera Holdings, Inc. for a term of one year wassubmitted to our stockholders. There was no solicitation in opposition to thefive nominees recommended by our Board of Directors and described in the ProxyStatement. The following table sets forth the name of each director elected atthe meeting and the number of votes for, or withheld from, each nominee: 

 

|                 |         |       |         |         |
|----------------------|--------------|------------|--------------|--------------|
| **Name of Director** |    | **For**    |    | **Withheld** |
| Tony Aquila          |    | 56,700,488 |    | 1,164,839    |
| Philip A. Canfield   |    | 39,651,212 |         | 19,214,115   |
| Roxani Gillespie     |    | 55,827,513 |    | 2,037,814    |
| Stuart J. Yarbrough  |         | 57,199,532 |         | 665,795      |
| Jerrell W. Shelton   |         | 57,199,532 |         | 665,795      |

Garen Staglin and CraigA. Bondy did not stand for re-election at the Annual Meeting and are no longerserving as directors of Solera Holdings, Inc.

**Item5.  Other Information.**

                None.

**Item 6.Exhibits.**
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                    |
|----------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                 |       | Second Amended and Restated Senior Management  Agreement, dated as of January 28, 2008, by and among Solera Holdings, Inc.,  Solera, Inc., Tony Aquila, Anthony Aquila 2007 Annuity Trust dated May 10,  2007, Shelly Renee Aquila and Shelly Renee Aquila 2007 Annuity Trust dated  May 10, 2007. |
| 10.2                 |       | Amended and Restated Securities Purchase Agreement,  dated as of January 28, 2008, by and among Solera Holdings, Inc., Jack  Pearlstein, Ian Z. Pearlstein 2001 Trust and Ivanna V. Pearlstein 2001  Trust.                                                                                   |
| 31.1                 |       | Certification by Tony Aquila, Chief Executive  Officer.                                                                                                                                                                                                                                            |
| 31.2                 |       | Certification by Jack Pearlstein, Chief Financial  Officer.                                                                                                                                                                                                                                        |
| 32.1                 |       | Certification Pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                           |

 

 

 

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.
|       | SOLERA HOLDINGS, INC.                                |
|------------|------------------------------------------------------|
|       |                                                 |
|       | /s/ Tony Aquila                                      |
| ** ** | **Tony Aquila**                                      |
| ** ** | **Chief Executive Officer and President**            |
| ** ** | **(Principal Executive Officer)**                    |
|       |                                                 |
|       |                                                 |
|       | /s/ Jack Pearlstein                                  |
| ** ** | **Jack Pearlstein**                                  |
| ** ** | **Chief Financial Officer, Secretary and Treasurer** |
| ** ** | **(Principal Financial and Accounting Officer)**     |

 

February 13, 2008

 

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