Western Union 2006 Annual Report Download - page 43

Management’s Discussion and Analysis of Financial Condition and Results of Operations 41
In connection with the spin-off, we transferred to First
Data approximately $3.5 billion in the form of a combination
of cash and our debt securities, which included a dividend
paid to First Data in the form of a promissory note from
our subsidiary, First Financial Management Corporation,
or “FFMC,” in an aggregate principal amount of $2.4 billion,
which we subsequently settled through borrowings under
a bridge loan facility as part of the Distribution, the issuance
of $1.0 billion in Western Union notes, and a cash payment
to First Data of $100.0 million, which was financed through
borrowings under the $1.5 billion revolving credit facility
that we entered into in connection with the spin-off. The
bridge loan was paid off in November 2006 through the
issuance of a combination of fixed and floating rate notes
with maturities ranging between two and 30 years
and commercial paper. The remaining approximately
$602 million reflected as a dividend to First Data in our
consolidated statements of stockholders’ (deficiency)/net
investment in The Western Union Company was comprised
of cash, consideration for an ownership interest held by a
First Data subsidiary in one of our agents which had already
been reflected as part of our company, settlement of net
intercompany receivables (exclusive of certain intercompany
notes as described in the following paragraph), and transfers
of certain liabilities, net of assets.
We also settled certain intercompany notes receivable
and payable with First Data along with related interest and
currency swap agreements associated with these notes
as part of the spin-off. The net settlement of the principal
and related swaps resulted in a net cash inflow to our cash
flows from financing activities of $724.0 million. The net
settlement of interest on these notes receivable and
payable of $40.7 million was reflected in cash flows from
operating activities in our consolidated statement of
cash flows.
A significant portion of the expenses to effect the
separation were incurred by First Data, such as investment
banker fees, outside legal and accounting fees relating
to the spin-off, office move costs, costs to separate
information systems and consulting costs. Western Union
incurred separation costs that have a future benefit to our
company, including stock compensation expense related
to the Distribution, reorganization expenses, and other
items such as recruiting and relocation expenses associated
with hiring key senior management positions new to our
company, and the consulting costs incurred to develop
ongoing processes.
Adoption of SFAS No. 123R
We adopted Statement of Financial Accounting Standards
(“SFAS”) No. 123R, “Share-Based Payment,” (“SFAS
No. 123R”), following the modified prospective method
effective January 1, 2006. SFAS No. 123R requires all
stock-based payments to employees to be recognized in
the income statement based on their respective grant date
fair values over the corresponding service periods and also
requires an estimation of forfeitures when calculating
compensation expense. Stock-based compensation
expense, including stock compensation expense allocated
by First Data prior to the spin-off on September 29, 2006
and the impact of adopting SFAS No. 123R, was
$30.1 million for the year ended December 31, 2006.
In December 2005, First Data accelerated vesting of
all outstanding unvested stock options granted to its officers
and employees under its 2002 Long-Term Incentive Plan.
The decision to accelerate the vesting of these stock options
was made primarily to reduce stock-based compensation
expense that otherwise likely would have been recorded
in future periods following First Data’s adoption of SFAS
No. 123R. We recognized compensation expense of
$1.8 million during the fourth quarter of 2005 related to
accelerated vesting.
Refer to “Note 16 — Stock Compensation Plans” in
our historical consolidated financial statements for a more
detailed discussion of First Data’s and our stock-based
compensation plans and the adoption of SFAS No. 123R.
Basis of Presentation
The financial statements in this Annual Report for periods
ending on or after the Distribution are presented on a
consolidated basis and include the accounts of the Company
and our majority-owned subsidiaries. The financial
statements for the periods presented prior to the Distribution
are presented on a combined basis and represent those
entities that were ultimately transferred to the Company
as part of the spin-off. All significant intercompany accounts
and transactions between our company’s segments have
been eliminated. The historical statements of income
include expense allocations for certain corporate functions
historically provided to Western Union by First Data, including
treasury, tax, accounting and reporting, mergers and
acquisitions, risk management, legal, internal audit,
procurement, human resources, investor relations and
information technology. If possible, these allocations were
made on a specific identification basis. Otherwise, the
expenses related to services provided to Western Union
by First Data were allocated to Western Union based on
the relative percentages, as compared to First Data’s other
businesses, of headcount or other appropriate methods
depending on the nature of each item of cost to be allocated.
Pursuant to a transition services agreement we entered
into with First Data prior to the spin-off, First Data is provid-
ing Western Union with certain of these services at prices
agreed upon by First Data and Western Union for a period
of up to one year from the date of the spin-off. Western
Union has arranged to procure other services pursuant to
arrangements with third parties. The costs historically
allocated to us by First Data for the services it has provided
us may have been lower than the costs we will incur to
obtain these services following the spin-off. In addition to
the transition services agreement, we have entered into
a number of commercial agreements with First Data in
connection with the spin-off, many of which have terms
longer than a year.
We expect that certain expenses related to being a
stand-alone company will be higher in the future than the
historical amounts reflected in the consolidated statements
of income. The financial information presented in this Annual
Report prior to the spin-off date of September 29, 2006
does not reflect what our consolidated financial position,
results of operations or cash flows would have been as a
stand-alone company during the periods presented and is
not necessarily indicative of our future consolidated financial
position, results of operations or cash flows.