First Data 2007 Annual Report Download - page 126

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Successor Predecessor
Period from
September 25
through
December 31,
Period from
January 1
through
September 24, Year Ended December 31,
(in millions) 2007 2007 2006 2005
Income tax (refunds)/payments $ (108.0) $ 56.0 $ 86.0 $ 262.0
Interest paid 547.5 90.5 263.5 183.5
Significant non-cash transactions
In addition to the transactions described below, the Company also issued restricted stock awards and restricted stock units, the details of which are
discussed in Note 15.
During the 2007 successor period, the Company increased the principal amount of its senior unsecured PIK term loan facility by $67.5 million resulting
from interest expense. As discussed in Note 10, interest on this facility is paid entirely by increasing the principal amount of the outstanding loan.
On September 29, 2006, the holder of a warrant originally issued on November 16, 2000 exercised its right to a cashless exercise of the warrant. The
Company issued 359,824 shares of its common stock to the warrant holder in connection with the cashless exercise. The warrant had provided for the
purchase of 3.5 million shares of the Company's common stock at $40.025 before giving effect to the adjustment for the Company's spin-off of The Western
Union Company.
In connection with the spin-off, Western Union transferred $1 billion of Western Union notes to FDC. On September 29, 2006, the Company
exchanged these Western Union notes for FDC debt (commercial paper) held by investment banks.
Note 12: Related Party Transactions
Merchant Alliances
A substantial portion of the Company's business within the Commercial Services and First Data International segments are conducted through merchant
alliances. No directors or officers of the Company have ownership interests in any of the alliances. Certain merchant alliances, as it pertains to investments
accounted for under the equity method, are joint ventures between the Company and financial institutions. The formation of each of these alliances generally
involves the Company and the bank contributing contractual merchant relationships to the alliance and a cash payment from one owner to the other to achieve
the desired ownership percentage for each. The Company and the bank contract a long-term processing service agreement as part of the negotiation process.
This agreement governs the Company's provision of transaction processing services to the alliance. Therefore, the Company has two primary income streams
from these alliances: its share of the alliance's net income (classified as "Equity earnings in affiliates") and the processing fees it charges to the alliance
(classified as "Transaction and processing service fees"). The processing fees are based on transaction volumes and unit pricing as contained in the processing
services agreement negotiated with the alliance partner. Additionally, the Company may have income streams such as from the sale of point-of-sale terminals
and providing debit network services to alliances.
The Company negotiated all agreements with the alliance banks. Therefore, all transactions between the Company and its alliances were conducted at
arm's-length. The revenue associated with these related party transactions are presented on the face of the Consolidated Statements of Income.
If the Company has majority ownership and management control over an alliance, then the alliance's financial statements are consolidated with those of
the Company and the related processing fees are treated as an intercompany transaction and eliminated upon consolidation.
Management Agreement
On September 24, 2007 and in connection with the merger, First Data entered into a management agreement with affiliates of KKR (the "Management
Agreement") pursuant to which KKR will provide management, consulting, financial and other advisory services to the Company. Pursuant to the
Management Agreement, KKR is entitled to receive an aggregate annual management fee of $20 million, which amount will increase 5% annually, and
reimbursement of out-of-pocket expenses incurred in connection with the provision of services. The Management Agreement has an initial term expiring on
December 31, 2019, provided that the term will be extended annually thereafter unless the Company provides prior written notice of its desire not to
automatically extend the term. The Management Agreement shall terminate automatically upon the consummation of an initial public offering and may be
terminated at any time by mutual consent of the Company and KKR. The Management Agreement also contains customary exculpation and indemnification
provisions in favor of KKR and its affiliates. During the successor period from September 25, 2007 through December 31, 2007, the Company incurred $5.3
million of management fees.
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