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FIRST DATA CORP
10-K
Annual report pursuant to section 13 and 15(d)
Filed on 03/25/2009
Filed Period 12/31/2008

Table of contents

  • Page 1
    FIRST DATA CORP 10-K Annual report pursuant to section 13 and 15(d) Filed on 03/25/2009 Filed Period 12/31/2008

  • Page 2
    ... FIRST DATA CORPORATION DELAWARE (State of incorporation) 47-0731996 (I.R.S. Employer Identification No.) 6200 SOUTH QUEBEC STREET, GREENWOOD VILLAGE, COLORADO 80111 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (303) 967-8000 Securities...

  • Page 3
    ... in Merchant Link, a full-service ISO and Agent Bank unit and a portion of the employees, which will be operated as part of its Merchant Services segment. For more information regarding the termination of the CPS merchant alliance joint venture and the acquisition of the Company's 49% share, refer...

  • Page 4
    ... network services; output services, such as statement and letter printing, embossing and mailing services; check verification, settlement and guarantee services; remittance processing services; and services facilitating government payments. The credit, debit and retail card processing businesses...

  • Page 5
    ... checks are sold through independent agents, which are financial institutions, and money orders are sold through financial institutions and retail businesses. Operating Locations The Company has domestic and international operations and regional or country offices where sales, customer service...

  • Page 6
    ... to the Company; Equity earnings from unconsolidated alliances; Selling and leasing POS devices; and Debit network fees. Merchant Services provides merchant acquiring and processing services to merchants operating in approximately 3.1 million merchant locations across the U.S. Merchant Services...

  • Page 7
    ... debit network (such as STAR Network) or another payment network (such as Discover) that routes the transactions between the Company and the card issuer. The merchant is a business from which a product or service is purchased by a cardholder. The acquirer (such as the Company or one of its alliances...

  • Page 8
    ... merchant alliance was terminated on November 1, 2008 as discussed above and in Note 4 of the Company's Consolidated Financial Statements in Item 8 of this Form 10-K. Financial Services Segment The Financial Services segment is comprised of: (1) (2) Credit and retail card processing services; Debit...

  • Page 9
    ... card processing; debit network services; check verification, settlement and guarantee services; and other services including output, remittance processing and government services. Revenue and profit growth in these businesses is derived from growing the core business, expanding product offerings...

  • Page 10
    ... funds in the customer's bank account. Revenue related to the STAR Network and debit card and ATM processing services is derived from fees payable under contracts but are driven more by monetary transactions processed rather than by accounts on file. The Company provides services which are driven...

  • Page 11
    Check verification, settlement and guarantee services Check verification, settlement and guarantee services use the Company's proprietary database system to assist merchants in deciding whether accepting checks at the point-of-sale is a reasonable risk, or, further, to guarantee checks presented to ...

  • Page 12
    ... the card associations and payment networks-Visa, MasterCard and Discover-are increasingly offering products and services that compete with the Company's products and services. Financial Services Seasonality Debit processing, STAR Network and check verification, settlement and guarantee revenues and...

  • Page 13
    ... as a percentage of total segment and all other and corporate operating profit, for the predecessor period from January 1, 2007 through September 24, 2007 includes accelerated vesting of stock options and restricted stock awards and units and transaction costs related to the merger of $265.2 million...

  • Page 14
    ... purchase fuel, access cash and pay for repairs while on the road. Transportation companies use the processing system to manage their business daily through the internet or real time via a direct connection to a host. Money Network offers prepaid products to address the needs of employers, employees...

  • Page 15
    ... Services revenue from external customers for the year ended December 31, 2008. Integrated Payment Systems The principle business in the Integrated Payment Systems segment is official check and money order services. The Company is gradually exiting the official check and money order line of business...

  • Page 16
    ... offering their own in-house check services and postal money orders. Integrated Payment Systems Significant Customers No individual customer makes up more than 10% of the Integrated Payment Systems segment revenue. All Other and Corporate The remainder of the Company's business units are grouped...

  • Page 17
    ... a web site, www.sec.gov, which contains reports and other information filed electronically with the SEC by the Company. The Company's Audit Committee Charter, Compensation and Benefits Committee Charter, Nominating and Governance Committee Charter, and Code of Conduct for Senior Financial Officers...

  • Page 18
    .... Various subsidiaries of the Company are also processor level members of numerous debit and electronic benefits transaction ("EBT") networks, such as Star Networks, Inc., Star Processing Inc., First Data Merchant Services Corporation, and Concord Transaction Services, LLC, or are otherwise subject...

  • Page 19
    ... for all U.K. financial services, including banking, but FDRL's license is limited to acting as an insurance intermediary in connection with selling card payment protection insurance to its issuer customers' cardholders. TeleCheck Payment Systems Limited in Australia holds an Australian Financial...

  • Page 20
    ...operate a payment system and provide payment system services to entities operating in India: First Data Resources Australia Limited, OmniPay Limited, First Data Merchant Services Corporation, ValueLink Inc., First Data Global Services Limited and First Data (China) Co. Ltd. Credit Reporting and Debt...

  • Page 21
    ... and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity, and to maintain transaction records. The Company is also subject to certain economic and trade sanctions programs that are administered by the Treasury Department's Office of Foreign...

  • Page 22
    ..., First Data International, financial institutions, merchants and others. Regulation of the payments industry in the U.S. and abroad that is applicable to the Company's customers could impact the Company as well. For example, the Board of Governors of the Federal Reserve System Federal Reserve Board...

  • Page 23
    ...of the Company's information systems and the confidentiality of the customer/consumer information that resides on such systems are critical to the successful operations of the Company's business. The Company has security, backup and recovery systems in place, as well as a business continuity plan to...

  • Page 24
    ...limit the Company's flexibility in operating its business. The indentures governing the Company's senior notes, the Company's senior subordinated notes, and the senior PIK notes of First Data Holdings Inc.; the agreement governing the Company's senior unsecured debt; and the Company's senior secured...

  • Page 25
    ... acquiring new merchant relationships, new and enhanced product and service offerings, cross selling products and services into existing relationships, the shift of consumer spending to increased usage of electronic forms of payment and the strength of the Company's alliance partnerships with banks...

  • Page 26
    ...'s merchants or agents could have a material adverse effect on the Company's business. The Company's cost saving plans are based on assumptions that may prove to be inaccurate which may negatively impact the Company's operating results. The Company is in the process of consolidating its data centers...

  • Page 27
    ... transaction processing services to or through the Company's customers, could have an adverse effect on the Company's business, operating results and financial condition. Changes in card association and debit network fees or products could increase costs or otherwise limit the Company's operations...

  • Page 28
    ... diminish the Company's competitive advantages or restrict it from delivering the Company's services. The Company's trademarks, patents and other intellectual property are important to its future success. The FIRST DATA trademark and trade name and the STAR trademark and trade name are intellectual...

  • Page 29
    ...manages its business with a number of key personnel that do not have employment agreements with the Company. In connection with the appointment of a new Chief Executive Officer concurrent with the closing of the merger, changes have been and may continue to be made to the Company's senior management...

  • Page 30
    ... integration of businesses involves a number of risks. The core risks are in the areas of valuation (negotiating a fair price for the business based on inherently limited diligence) and integration (managing the complex process of integrating the acquired company's people, products, technology and...

  • Page 31
    ...Florida; Houston, Texas; Macon, Georgia; and Chesapeake, Virginia. The principal operations for International are located in Basildon, United Kingdom; Frankfurt, Germany; Athens (Kryoneri), Greece; Sydney, Australia; Vienna, Austria; and Buenos Aires, Argentina. The Company's All Other and Corporate...

  • Page 32
    ... ("DataTreasury") commenced an action in the United States District Court for the Eastern District of Texas (the "Court") against the Company and its wholly owned subsidiaries First Data Merchant Services Corporation, TeleCheck Services, Inc. d/b/a Telecheck International, Inc., and Microbilt...

  • Page 33
    ... plan. In 2007, the Company paid a dividend of $0.03 per share in each of the first three calendar quarters of the year. In 2008, the Company paid two dividends that totaled $1.8 million. The senior secured revolving credit facility, senior secured term loan facility, senior unsecured cash-pay term...

  • Page 34
    ... the date acquired. All results are in millions, or as otherwise noted. As discussed in Note 1 to the Consolidated Financial Statements included in Item 8 of this Form 10-K and in the first quarter 2008, the Company changed to a classified balance sheet presentation. Balance sheet data for 2007 and...

  • Page 35
    ... income from discontinued operations Depreciation and amortization (e) Balance sheet data (at year-end): Total assets Total current assets (including current settlement assets) Total current and long-term settlement assets Assets held for sale and spin-off Total liabilities Total current liabilities...

  • Page 36
    ...merchant transactions include acquired VISA and MasterCard credit and signature debit, PIN-debit, electronic benefits transactions, and processed-only or gateway customer transactions at the point of sale ("POS"). Domestic merchant transactions include 100% of the Chase Paymentech Solutions alliance...

  • Page 37
    ..., Colorado, operates electronic commerce businesses providing services that include merchant transaction processing and acquiring services; credit, retail and debit card issuing and processing services; prepaid card services; official check issuance; and check verification, settlement and guarantee...

  • Page 38
    ... merchant contracts, an equity investment in Merchant Link, a full-service ISO and Agent Bank unit, and a portion of the employees. The new domestic owned and managed business is being operated as part of FDC's Merchant Services segment. First Data will continue to provide transaction processing...

  • Page 39
    ... could have a material adverse effect on the Company's operations and results. Wells Fargo Merchant Services On December 31, 2008, the Company and Wells Fargo & Company ("WFB") extended their merchant alliance joint venture, Wells Fargo Merchant Services, LLC ("WFMS") for five years through December...

  • Page 40
    ... discount merchants. Additionally, credit card issuers have been reducing credit limits and closing accounts and are more selective with regard to whom they issue credit cards. A continuation or acceleration of the economic slowdown could adversely impact future revenues and profits of the Company...

  • Page 41
    ... the operations of WAMU Bank (collectively "Washington Mutual"), one of the Company's largest debit customers, by JPMorgan Chase. The Company received notice from JPMorgan Chase in the first quarter of 2009 that JPMorgan Chase intends to terminate services under certain Washington Mutual agreements...

  • Page 42
    ... new Chief Executive Officer, the Company's chief operating decision maker, was appointed as a result of the merger. In connection with this change in leadership, changes were made to the Company's senior management and organization of the business. Effective January 1, 2008, the Company's new Chief...

  • Page 43
    ... retail money orders. On the closing date, Western Union will assume IPS's role as issuer of the retail money orders. Integrated Payment Systems Inc. will continue to use its licenses to offer payment services that fall under state and federal regulations and the business will continue to operate...

  • Page 44
    ...; debit network services; check verification, settlement and guarantee services; output services, such as statement and letter printing, embossing and mailing services; remittance processing services; and other payment options that support merchants and online retailers, businesses, and government...

  • Page 45
    ...and mid-tier merchants. The Company also provides payment processing, settlement and specialized reporting services for transportation companies and owns and operates ATMs at truck stops. Segment revenues are driven most significantly by the number of transactions. In 2008, the Company purchased the...

  • Page 46
    ... STAR Network and ATM processing), and output services for financial institutions and other organizations offering credit cards, debit cards and retail private label cards to consumers and businesses to manage customer accounts. The segment's largest components of revenue consist of fees for account...

  • Page 47
    ... policies are included in Note 1 of the Company's Consolidated Financial Statements in Item 8 of this Form 10-K. Transaction and processing service fees-Transaction and processing service fee revenue is comprised of fees related to merchant acquiring; check processing; credit, retail and debit card...

  • Page 48
    ...to merchants and processing fees charged to alliances accounted for under the equity method. Merchant discount revenue from credit card and signature debit card transactions acquired from merchants is recorded net of interchange and assessments charged by the credit card associations. Check services...

  • Page 49
    ...31, Pro Forma September 24, 2007 2006 2007 Pro Forma 2007 vs. Historical 2006 (in millions) Revenues: Transaction and processing service fees Investment income, net Product sales and other Reimbursable debit network fees, postage and other Expenses: Cost of services (exclusive of items shown below...

  • Page 50
    ... and processing service fees growth rate by 1 percentage point in 2008 compared to pro forma 2007. These revenues are now included within the Company's revenue but were previously netted within the "Equity earnings in affiliates" line within the Consolidated Statements of Operations, as the alliance...

  • Page 51
    ...organizations ("ISO"), an increase in expenses associated with operating the Company's proportionate share of assets received upon termination of the Chase Paymentech Solutions alliance effective November 1, 2008, global labor sourcing initiatives, consulting expense, data center consolidation costs...

  • Page 52
    ... expenses. The 2007 periods did not have costs that were incurred in 2006 in connection with re-aligning the operating structure of the Company after the spinoff of Western Union. Selling, general and administrative expenses, as a percentage of transaction and processing service fee revenue remained...

  • Page 53
    ... with the Company's proportionate share of assets from the termination of the Chase Paymentech Solutions alliance which was previously netted within the "Equity earnings in affiliates" line within the Consolidated Statements of Operations. Other operating expenses, net Other operating expenses...

  • Page 54
    ... to pre-merger restructuring accruals recorded in purchase accounting as well as items reported in the "Restructuring" line item of the Consolidated Statements of Operations. In the fourth quarter of 2008, the Company recorded goodwill impairment charges as a result of the annual impairment tests...

  • Page 55
    ... of the Company's operating structure related to shared service functions and global technology functions, including data centers, a Company initiative to reduce operating costs to the appropriate level after the spin-off and certain business driven restructurings, the Company recorded restructuring...

  • Page 56
    ... unhedged variable rate debt. Interest expense was lower during the 2007 predecessor period compared to the year ended December 31, 2006 due to lower debt balances than the Company had prior to the debt for debt exchange related to the Western Union spin-off and the repayments of debt in September...

  • Page 57
    ... check business. Divestitures, net-During 2008, the Company recognized a loss related to a divestiture of a business within the International segment. The Company also recognized a loss of $3.8 million resulting from the sale of 12.5% of its membership interest in Wells Fargo Merchant Services, LLC...

  • Page 58
    ... (losses)-For the year ended December 31, 2008 and the 2007 successor period, the net non-operating foreign currency exchange losses related to the mark-to-market of the Company's intercompany loans and the euro-denominated debt issued in connection with the merger. Historically, intercompany loans...

  • Page 59
    ... on the Company's effective tax rate in 2008. Subsequent to the merger and as part of the First Data Holdings, Inc. ("Holdings") consolidated federal group and consolidated, combined or unitary state groups for income tax purposes, the Company has been and continues to be in a tax net operating loss...

  • Page 60
    ... to the termination of the Chase Paymentech Solutions alliance on November 1, 2008. Effective December 31, 2008, the Company sold a portion of it's ownership interest in the merchant alliance with Wells Fargo. The Company now owns less than 50% of the merchant alliance and will begin accounting for...

  • Page 61
    ... making with respect to resource allocation. Corporate operations include administrative and shared service functions such as the executive group, legal, tax, treasury, internal audit, accounting, human resources, information technology and procurement. Costs incurred by Corporate that are directly...

  • Page 62
    ... segment revenue growth rate in 2008 compared to pro forma 2007 was positively impacted by almost 11 percentage points from increased debit network fees, annual fees included in 2008 but not recognized in 2007 due to purchase accounting and the termination of the Chase Paymentech Solutions alliance...

  • Page 63
    ... processing service fee revenue growth rate as the Company generally realizes lower revenues from debit card transactions than from credit card transactions. The spread did not increase in 2008 because of the inclusion of revenue from the Chase Paymentech Solutions merchant contracts for two months...

  • Page 64
    ... merchant contracts received from the termination of the Chase Paymentech Solutions alliance. Effective November 1, 2008, debit network fees associated with the segment's proportionate 49% share of the assets of the joint venture were included within the Company's revenue but were previously netted...

  • Page 65
    ... the first quarter 2007 when the Company bought out a revenue sharing agreement as part of a new, larger relationship with Discover Financial Services LLC ("Discover"). The annual fees and change in pricing noted in the acquiring revenue discussion above also positively impacted the 2008 operating...

  • Page 66
    ...Forma 2007 Historical 2006 Pro Forma 2007 Year ended December 31, (in millions) 2008 Year ended December 31, 2007 Revenues: Transaction and processing service fees Investment income Product sales and other Reimbursable debit network fees, postage and other Total revenue Operating profit Operating...

  • Page 67
    ..., STAR ATM, STAR PIN-debit POS, and ATM and PIN-debit POS gateway transactions. Domestic active card accounts on file include customer accounts that had a balance or any monetary posting or authorization activity during the last month of the quarter. Transaction and processing service fees revenue...

  • Page 68
    ... agreements. Washington Mutual is one of the Company's largest debit customers. This will negatively impact the overall growth in "Transaction and processing service fees revenue" and "Reimbursable postage and other" line items within the Consolidated Statements of Operations during 2009. Check...

  • Page 69
    ...incremental spending on platform consolidation, data center consolidation and global labor sourcing initiatives. Benefiting 2008 were decreases in compensation and other operating expenses resulting from restructurings in the fourth quarter 2007 and other reductions in staff in 2008. Such reductions...

  • Page 70
    ...and PIN-debit POS, POS gateway and ATM transactions. International card accounts on file include bankcard and retail. Summary Segment revenue in 2008 benefited from acquisitions and growth of existing clients. Negatively impacting 2008 was price compression and net lost business. Segment revenue in...

  • Page 71
    FIRST DATA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Transaction and processing service fee revenue Transaction and processing service fees revenue benefited in 2008 due generally to the factors noted above. Acquisitions benefited ...

  • Page 72
    ... business initiatives, platform consolidation costs, expansion into Asia and pricing. Pro Forma Financial Information The following Unaudited Pro Forma Condensed Consolidated Statement of Operations reflects the consolidated results of operations of the Company for the year ended December 31, 2007...

  • Page 73
    ... (in millions) Year ended December 31, 2007 Revenues: Transaction and processing service fees Investment income, net Product sales and other Reimbursable debit network fees, postage and other Expenses: Cost of services (exclusive of items shown below) Cost of products sold Selling, general and...

  • Page 74
    ... Company's new capital structure. The adjustment includes interest expense, amortization of commitment fees and debt issuance costs, and the impact of interest rate swaps associated with the new facilities and notes described in Note 10 of the Consolidated Financial Statements in Item 8 of this Form...

  • Page 75
    ... DATA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (a) No pro forma adjustments have been made to segment revenue in 2007. Accordingly, values represent the sum of predecessor and successor periods. (b) Adjustments to Merchant Services...

  • Page 76
    ...used for general corporate purposes. The Company funded approximately $60 million in 2008 to its operations in the United Kingdom for various operating purposes, expense initiatives and capital investments. The Company plans to fund any cash needs in 2009 within the International segment itself, but...

  • Page 77
    FIRST DATA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) restricted stock in 2007 in conjunction with the merger. Partially offsetting these items were larger uses of cash in 2008 resulting from incentive compensation payments as well ...

  • Page 78
    ... to property and equipment, net Payments to secure customer service contracts, including outlays for conversion, and capitalized systems development costs Proceeds from the sale of marketable securities Dividend received from discontinued operations Cash retained by Western Union Other investing...

  • Page 79
    ... merger, expenditures related to the U.S. data center consolidation and an increase in contract costs. Proceeds from the Sale of Marketable Securities Proceeds from the sale of marketable securities in 2008 as well as the 2007 successor period resulted from the sale of MasterCard shares and, in 2008...

  • Page 80
    ... Source/(use) (in millions) Year ended December 31, 2008 Short-term borrowings, net Principal payments on long-term debt Proceeds from issuance of long-term debt Proceeds from issuance of common stock Capital contributed by Parent Excess tax benefit from share-based payment arrangement Purchase...

  • Page 81
    FIRST DATA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Short-Term Borrowings, net In conjunction with the merger in September 2007, the Company entered into a $2.0 billion senior secured revolving credit facility with a term of six ...

  • Page 82
    ... its parent, First Data Holdings, Inc. ("Holdings") related to the merger. Proceeds during the 2007 predecessor period and during 2006 resulted from stock option exercises and purchases under the Company's employee stock purchase plan. Capital Contributed by Parent During 2008, the Company received...

  • Page 83
    FIRST DATA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) Purchase of Treasury Shares During the predecessor period in 2007, the Company repurchased 11.2 million shares for $335.3 million related to employee benefit plans. During 2006, ...

  • Page 84
    ... domestic merchant contracts, an equity investment in Merchant Link, a full-service ISO and Agent Bank unit, and a portion of the employees. The receipt of the Company's proportionate share of CPS was accounted for as a business combination and was a non-cash transaction. Significant non-cash...

  • Page 85
    FIRST DATA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) 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. Guarantees and Covenants All obligations ...

  • Page 86
    ... Twelve months ended December 31, 2008 Loss from continuing operations Interest expense, net (1) Income tax (benefit) expense Depreciation and amortization EBITDA (13) Stock based compensation (2) Other items (3) Debt repayment gain (4) Official check and money order EBITDA (5) Cost of data center...

  • Page 87
    ... DATA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (4) (5) (6) Gain resulting from the early repayment of long-term debt. Represents an adjustment to exclude the official check and money order businesses from EBITDA due to the Company...

  • Page 88
    ... near-term cost savings applied in presenting Consolidated EBITDA are appropriate to provide additional information to investors about items that will impact the calculation of EBITDA that is used to determine covenant compliance under the agreements governing the Company's senior unsecured debt and...

  • Page 89
    ... Western Union stock options, restricted stock awards and restricted stock units held by FDC personnel) was accelerated and the associated expense recorded in the predecessor financial statements. These stock-based compensation plans were terminated at that time. On October 26, 2007, the Company...

  • Page 90
    ... to these options in future periods unless or until attainment of applicable targets is judged to be probable. Reserve for Merchant Credit Losses and Check Guarantees With respect to the merchant acquiring business, the Company's merchant customers (or those of its unconsolidated alliances) have the...

  • Page 91
    ...in merchant fraud. Merchant credit losses are included in "Cost of services" in the Company's Consolidated Statements of Operations. The following table presents the aggregate merchant credit losses incurred compared to total dollar volumes processed: Successor Period from September 25, 2007 through...

  • Page 92
    FIRST DATA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) The Company establishes an incremental liability (and deferred revenue) for the fair value of the check guarantee. The liability is relieved and revenue is recognized when the ...

  • Page 93
    ... market successfully resumes, a secondary market is established for long-term investors, or issuers redeem the securities. The Company believes that the SLARS held by it will recover substantially all of their principal value by their maturity date due to the Federal Family Education Loan Program...

  • Page 94
    ...term debt securities, including discounted commercial paper, money market funds, certificates of deposit (both domestic and Yankee), and fixed rate corporate bonds. Many of these securities are considered cash equivalents. Prices for these securities are not quoted on active exchanges but are priced...

  • Page 95
    FIRST DATA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) adverse changes in interest rates and foreign currency exchange rates. The Company's objective is to engage in risk management strategies that provide adequate downside protection...

  • Page 96
    ...The Company's accounting policy is to limit the amount of capitalized costs for a given contract to the lesser of the estimated ongoing future cash flows from the contract or the termination fees the Company would receive in the event of early termination of the contract by the customer. The Company...

  • Page 97
    ...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 income streams from these alliances: its share of the alliance's net income...

  • Page 98
    ...the face of the Consolidated Statements of Operations. Subsequent to the merger, certain members of the Company's new Board of Directors are affiliated with KKR. In connection with the consummation of the merger, First Data entered into a management agreement with affiliates of KKR pursuant to which...

  • Page 99
    ...its high degree of leverage; timely, successful and cost-effective consolidation of the Company's processing platforms and data centers; continued growth at rates approximating recent levels for card-based payment transactions and other product markets; successful conversions under service contracts...

  • Page 100
    FIRST DATA CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) (l) (m) (n) (o) (p) (q) (r) attracting and retaining qualified key employees; no unanticipated changes in laws, regulations, credit card association rules or other industry ...

  • Page 101
    ... rates. In February 2007, the Company announced its intent to gradually exit the official check and money order businesses. The continued wind-down of this business resulted in a decrease in its investment portfolio balance as well as a decrease in commissions during the year ended December 31, 2008...

  • Page 102
    ...alliances, the Merchant Services segment holds an ownership interest in several competing merchant acquiring businesses while serving as the electronic processor for those businesses. In order to satisfy state and federal antitrust requirements, the Company actively maintains an antitrust compliance...

  • Page 103
    ...Item 15(a)) First Data Corporation and Subsidiaries: Consolidated Financial Statements: Report of Ernst & Young LLP, Independent Registered Public Accounting Firm Consolidated Statements of Operations for the successor periods for the year ended December 31, 2008 and from September 25, 2007 through...

  • Page 104
    Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of First Data Corporation We have audited the accompanying consolidated balance sheets of First Data Corporation as of December 31, 2008 and 2007, and the related consolidated statements of operations, ...

  • Page 105
    ... 24, 2007 2006 (in millions) Revenues (b): Transaction and processing service fees: Merchant related services (c) Check services Card services Other services Investment income, net Product sales and other Reimbursable debit network fees, postage and other Expenses: Cost of services (exclusive...

  • Page 106
    FIRST DATA CORPORATION CONSOLIDATED BALANCE SHEETS Successor December 31, (in millions, except common stock share amounts) 2008 2007 ASSETS Current assets: Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts of $16.6 (2008) and $14.7 (2007) Settlement assets Other ...

  • Page 107
    ..., net (283.9) (55.2) Payments to secure customer service contracts, including outlays for conversion, and capitalized (163.9) (57.5) systems development costs Proceeds from the sale of marketable securities 74.9 14.1 Dividend received from discontinued operations - - Cash retained by Western Union...

  • Page 108
    ...-term debt Principal payments on long-term debt Proceeds from issuance of common stock Capital contributed by Parent Excess tax benefit from share-based payment arrangement Purchase of treasury shares Cash dividends Net cash (used in) provided by financing activities from continuing operations Net...

  • Page 109
    FIRST DATA CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Retained Earnings Accumulated (Loss) Accumulated Other Comprehensive Income (Loss) Treasury Stock Common Shares Paid-In Capital Shares Cost (in millions, except per share amounts) Predecessor Total Comprehensive Income (Loss)...

  • Page 110
    FIRST DATA CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Continued) Retained Accumulated Treasury Earnings Other Stock Comprehensive Accumulated Comprehensive Common Paid-In Income (Loss) (Loss) Income (Loss) Shares Capital Shares Cost (in millions, except per share amounts) ...

  • Page 111
    ...retail and debit card issuing and processing; official check issuance; and check verification, settlement and guarantee services. On September 24, 2007, the Company was acquired through a merger transaction (the "merger") with an entity controlled by affiliates of Kohlberg Kravis Roberts & Co. ("KKR...

  • Page 112
    ... 24, 2007 merger with an affiliate of KKR. In connection with this change in leadership, changes were made to the Company's senior management and organization of the business. Effective January 1, 2008, the Company's new Chief Executive Officer began making strategic and operating decisions with...

  • Page 113
    ... September 24, 2007 Predecessor Year ended December 31, 2008 Year ended December 31, 2006 Interchange fees and assessments Debit network fees $ 9,186.9 $ 1,351.7 2,129.8 303.1 $ 5,241.9 $ 719.8 6,396.5 810.9 The Company charges processing fees to its merchant alliance joint ventures. In...

  • Page 114
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Revenue from check verification, settlement and guarantee services is recognized at the time of sale less the fair value of the guarantee. The fair value of the guarantee is deferred until the later of the Company ...

  • Page 115
    ... of SFAS No. 160 are discussed below under "New Accounting Pronouncements." Reserve for Merchant Credit Losses and Check Guarantees With respect to the merchant acquiring business, the Company's merchant customers (or those of its unconsolidated alliances) have the liability for any charges properly...

  • Page 116
    ...Consolidated Statements of Operations. The amount of the reserves attributable to entities consolidated by the Company was $20.3 million and $23.4 million at December 31, 2008 and 2007, respectively. The majority of the TeleCheck Services, Inc. ("TeleCheck") business involves the guarantee of checks...

  • Page 117
    ... payments for new contracts, contract renewals and conversion costs associated with customer processing relationships to the extent recoverable through future operations, contractual minimums and/or penalties in the case of early termination. The Company's accounting policy is to limit the amount...

  • Page 118
    ... the Company would receive in the event of early termination of the contract by the customer. The initial payments for new contracts and contract renewals are amortized over the term of the contract as a reduction of the associated revenue (transaction and processing service fees). Conversion costs...

  • Page 119
    ... assets" and "Other long-term assets" line items of the Consolidated Balance Sheets which include equity securities and shares of a money market fund. The specific identification method is used to determine the cost basis of securities sold. At December 31, 2008 and 2007, all of the above noted...

  • Page 120
    ... 1, 2007, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with New Omaha Holdings L.P., a Delaware limited partnership ("Parent"), and Omaha Acquisition Corporation, a Delaware corporation and a subsidiary of Parent ("Sub"). Parent is controlled by affiliates of KKR...

  • Page 121
    ... of Western Union options, restricted stock awards and restricted stock units held by FDC employees was also accelerated upon closing of the merger. The merger was financed by a combination of the following: borrowings under the Company's senior secured credit facilities, senior unsecured term loan...

  • Page 122
    ...31, 2007. Additional actions occurred during first, second, and third quarters of 2008 resulting in the termination of over 500 employees across the organization reflected in purchase accounting. The following table summarizes the Company's utilization of restructuring accruals related to the merger...

  • Page 123
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) million during the predecessor period related to accelerated vesting of all outstanding FDC unvested stock options, restricted stock awards and restricted stock units as well as Western Union unvested stock options, ...

  • Page 124
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Unaudited Pro Forma Condensed Consolidated Statements of Operations Year ended December 31, 2007 2006 (in millions) Revenues: Transaction and processing service fees Investment income, net Product sales and other ...

  • Page 125
    ... (Charge) Integrated Merchant Successor year ended December, 31 2008 Services Financial Services International Prepaid Services Payment Systems All Other and Corporate Divested Totals Restructuring charges Restructuring accrual reversals Impairments Total pretax benefit (charge), net of reversals...

  • Page 126
    ... in 2005 through 2007. 2006 Associated with the realigning of the Company's operating structure related to shared service functions and global technology functions, including data centers, a Company initiative to reduce operating costs to the appropriate level after the spin-off and certain business...

  • Page 127
    ... during 2008 included reversals related to pre-merger restructuring accruals recorded in purchase accounting as well as items reported in the "Restructuring, net" line item of the Consolidated Statements of Operations. Impairments As discussed in Note 1, the Company performed its annual goodwill...

  • Page 128
    ...) Cash 2008: Joint Venture with Allied Irish Banks p.l.c. ("AIB") Money Network Financial, LLC ("Money Network") minority holder buyout Chase Paymentech SolutionsTM Alliance termination (b) Two other acquisitions and merchant portfolio acquisitions 2007: Successor First Data Government Solutions...

  • Page 129
    ... merchant contracts, an equity investment in Merchant Link, a full-service ISO and Agent Bank unit, and a portion of the employees. The new domestic owned and managed business is being operated as part of FDC's Merchant Services segment. First Data will continue to provide transaction processing...

  • Page 130
    ..., Wells Fargo Merchant Services, LLC ("WFMS"), to Wells Fargo & Company ("WFB"), for cash consideration totaling $222 million. This resulted in the Company owning 40% of the merchant alliance. FDC deconsolidated the WFMS balance sheet as of December 31, 2008 and is reflecting its remaining ownership...

  • Page 131
    .... Intelligent Results is reported as part of All Other and Corporate. In March 2007, the Company acquired Instant Cash, a debit card and ATM payment processing service provider for community banks, credit unions, thrifts and non-financial institutions. The purchase price allocation resulted in...

  • Page 132
    ..., a Customer Information System product company that develops advanced software for managing utility billing and customer care. Peace was subsequently divested in October 2008. In December 2006, the Company acquired First Data Cono Sur, a provider of card issuing and merchant acquiring services in...

  • Page 133
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2006 Dispositions In July 2006, the Company sold the majority of its ownership interest in its subsidiaries PPS and IDLogix to five national financial institutions to form Early Warning Services, LLC. Due to Early ...

  • Page 134
    ... Corporate Operations Totals Predecessor January 1, 2007 balance $ 3,399.8 $ 2,676.4 $ Acquisitions 21.0 158.9 Purchase price and allocation adjustments related to prior year (14.8) (3.9) acquisitions Impairment associated with the wind-down of the official check and - - money order business...

  • Page 135
    ... information presented below through October 31, 2008. Total assets and liabilities for 2008 are not included as a result of the termination. On December 31, 2008, the Company and Wells Fargo & Company ("WFB") extended their merchant alliance joint venture, Wells Fargo Merchant Services, LLC...

  • Page 136
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) A summary of unaudited financial information for the merchant alliances and other affiliates accounted for under the equity method of accounting is as follows (in millions): Successor December 31, 2008 2007 Total ...

  • Page 137
    ... paper, short-term variable rate demand notes and other investments. See Note 7 for information concerning the Company's investment securities. The decrease in settlement assets and liabilities in 2008 compared to 2007 is due to the wind down of the IPS official check and money order businesses. FDC...

  • Page 138
    ...)" line item of the Consolidated Statements of Operations. The principal components of investment securities are as follows (in millions): Gross Unrealized Gain Gross Unrealized (Loss) Successor Cost (1) Fair Value December 31, 2008 Student loan auction rate securities (2) Corporate bonds Other...

  • Page 139
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) were rated "AAA" or the equivalent and all had collateral substantially guaranteed by the U.S. government and continued to pay interest in accordance with their respective security agreements. The Company has the ...

  • Page 140
    ... cash-pay notes, senior unsecured PIK notes, senior subordinated unsecured notes and senior secured term loan facility were based on December 31, 2008 market trading prices. Refer to Note 10 for more information related to the Company's borrowings. DERIVATIVE FINANCIAL INSTRUMENTS Risk Management...

  • Page 141
    .... The Company's policy is to minimize its cash flow and net investment exposures related to adverse changes in interest rates and foreign currency exchange rates. The Company's objective is to engage in risk management strategies that provide adequate downside protection. Accounting for Derivative...

  • Page 142
    ... in the Consolidated Statements of Operations. The Company formally documents all relationships between hedging instruments and the underlying hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives...

  • Page 143
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) The costless collar that existed at December 31, 2007 and was used to hedge the anticipated cash flows from the future sale of an equity security was terminated in January 2008 in connection with the sale of the ...

  • Page 144
    ...fixed rate debt in connection with the repurchase of the underlying debt. Additionally, the Company terminated the interest rate swaps associated with the long-term investment portfolio of the official check and money order businesses. These hedges qualified for the short-cut method of accounting as...

  • Page 145
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) FAIR VALUE OF DERIVATIVE INSTRUMENTS The estimated fair value of derivative financial instruments is modeled in Bloomberg software using the Bloomberg reported market data based on midmarket prices and the actual terms...

  • Page 146
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Effect of Derivative Instruments on the Consolidated Statements of Operations For the successor year ended December 31, 2008 Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion...

  • Page 147
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 9: Income Taxes Successor Period from September 25 December 31, through December 31, 2008 2007 Year ended Predecessor Period from Year ended January 1 through December 31, September 24, 2007 2006 (in millions) ...

  • Page 148
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Company's income tax provisions (benefits) consisted of the following components: Successor Year ended December 31, (in millions) 2008 Period from September 25 through December 31, 2007 Period from January 1 ...

  • Page 149
    ... values and the tax bases of the assets and liabilities recognized in various purchase business combinations. As of December 31, 2008, the Company had recorded a valuation allowance of $83.2 million against federal, state and foreign net operating losses. The decrease to the valuation allowance in...

  • Page 150
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) to an increase in the expected future realization of the Company...net operating losses which may not be utilized within the statute of limitations. As of December 31, 2008, the Company had aggregate federal net operating...

  • Page 151
    ... of the Consolidated Statements of Operations. Included in the "Income tax (benefit) expense" line for the year ended December 31, 2008 was approximately $15 million of accrued interest expense (net of related tax benefits). Included for the successor period from September 25, 2007 through December...

  • Page 152
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) $6 million, respectively, of accrued interest expense (net of related tax benefits). The Company had approximately $56 million of interest and penalties accrued at December 31, 2008 which were not included in the ...

  • Page 153
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 10: Borrowings Borrowings consisted of the following at December 31, 2008 and December 31, 2007: (in millions) December 31, 2008 December 31, 2007 Short-term borrowings: Senior secured revolving credit facility ...

  • Page 154
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) An affiliate of Lehman Brothers Holdings Inc. ("Lehman") provides a commitment in the amount of $230.6 million of the Company's $2.0 billion senior secured revolving credit facility. After filing for bankruptcy in ...

  • Page 155
    ... from the debt repurchases were included in the "Other income (expense)" line of the Consolidated Statements of Operations. Senior secured term loan facility In connection with the merger in 2007, the Company entered into a $13.0 billion senior secured term loan facility with a term of seven...

  • Page 156
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) On September 17, 2008, the Company launched a registered exchange offer to exchange the $2.2 billion aggregate principal amount of its 9.875% senior notes due 2015 for publicly tradable notes having substantially ...

  • Page 157
    ... in the merger were capitalized in 2007 as deferred financing costs. The fees included amounts related to the bridge financing facilities as well as fees incurred upon the issuance of the $2.2 billion of senior notes. In June 2008, the Company incurred fees totaling $102.4 million in connection with...

  • Page 158
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) domestic subsidiaries of the Company other than Integrated Payment Systems Inc. The senior secured facilities contain a number of covenants that, among other things, restrict the Company's ability to incur additional ...

  • Page 159
    ... Compensation and benefit liabilities Income taxes payable Minority interest Accrued costs of businesses acquired (including deferred acquisition consideration) Due to unconsolidated merchant alliances (a) Other $ $ Other long-term liabilities: Pension obligations Accrued costs of businesses...

  • Page 160
    ...joint venture, including domestic merchant contracts, an equity investment in Merchant Link, a full-service ISO and Agent Bank unit, and a portion of the employees. The receipt of the Company's proportionate share of CPS was accounted for as a business combination and was a non-cash transaction. 159

  • Page 161
    ... and 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. If the Company has majority ownership and management control over an alliance, then the alliance's financial statements...

  • Page 162
    ... 2008, FDMS terminated the sublease agreement and paid a fee to The Labry Companies of approximately $220,000 pursuant to the sublease agreement. First Data Merchant Services Corporation entered into a direct lease agreement with the landlord for additional space and a longer term as of June 1, 2008...

  • Page 163
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) $589,282 of additional expense incurred in operating the aircraft from September 24, 2007 until the date of purchase that previously had not been reimbursed. In 2008, 2007 and 2006, the Company incurred $290,704, $1,...

  • Page 164
    ...to pay a dividend to repurchase, under certain circumstances, the equity of Parent held by employees, officers and directors that were obtained in connection with the stock compensation plans. The Company paid cash dividends to its parent totaling $1.8 million during 2008. Subsequent to the spin-off...

  • Page 165
    ...in purchase accounting for the merger. Other Stockholders' Equity Transactions In 2007, the Company accelerated vesting of all outstanding stock options, restricted stock awards and restricted stock units as a result of the merger transaction. For information regarding stock compensation plans refer...

  • Page 166
    ...exercise. In connection with a service agreement executed in 2003, the Company issued a warrant to purchase shares of FDC common stock. After adjustment for the Company's spin-off of Western Union, the warrant provided for the purchase of 353,396 shares at a price of $28.30 per share. In conjunction...

  • Page 167
    .... During 2008, Holdings paid $3.8 million to repurchase shares from employees that terminated employment with the Company. Total stock-based compensation expense recognized in the Consolidated Statements of Operations resulting from stock options, non-vested restricted stock awards and non-vested...

  • Page 168
    ... conditions of options granted under the stock plan, as well as the impact of limited liquidity for common stock of a non-publicly traded company. Fair value of stock-The fair value of the stock was $3 per share as of December 31, 2008; however, all options granted in 2008 were done so at points in...

  • Page 169
    ... table sets forth total stock-based compensation expense recognized in the noted line items of the Consolidated Statements of Operations resulting from stock options, non-vested restricted stock awards, non-vested restricted stock units as well as the employee stock purchase plan ("ESPP") (in...

  • Page 170
    ... quarterly purchases of FDC common stock at a 15% discount from the lower of the market price at the beginning or end of the quarter. The fair value of these awards was recognized as compensation expense in the Consolidated Statements of Operations for the year ended December 31, 2006 and in 2007...

  • Page 171
    ... the expected terms listed above. The risk-free rate for ESPP rights was determined by using a 3-month maturity U.S. Treasury bond. The total intrinsic value of stock options exercised during the predecessor periods from January 1, 2007 through September 24, 2007 and for the year ended December 31...

  • Page 172
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Upon the exercise of stock options (or the issuance of restricted stock awards as described below), shares of common stock were issued from treasury stock. The Company maintained a systematic buyback program with its ...

  • Page 173
    ... periods no longer amortize into the Consolidated Statements of Operations as a component of net periodic pension cost for the successor period. Additionally, for its new basis of accounting, the Company elected December 31 as the measurement date for its plans. As such, the adoption of the...

  • Page 174
    ... Company does not have prior year service costs or credits or net transition assets or obligations. The following table provides the components of net periodic benefit cost for the plans: Successor Year ended December 31, (in millions) 2008 Period from September 25 through December 31, 2007 Period...

  • Page 175
    ... of the Company's net cost are as follows: Successor Year ended December 31, 2008 Period from September 25 through December 31, 2007 Predecessor Period from January 1 through September 24, 2007 Year ended December 31, 2006 Discount rate Expected long-term return on plan assets Rate of compensation...

  • Page 176
    ... its Chief Executive Officer. FDC classifies its businesses into five segments: Merchant Services, Financial Services, International, Prepaid Services and Integrated Payment Systems. Management and 2008 Segment Reorganization As discussed in Note 1, the Company started operating under a new segment...

  • Page 177
    ... the STAR Network and ATM processing), and output services for financial institutions and other organizations offering credit cards, debit cards and retail private label cards to consumers and businesses to manage customer accounts. Payment management solutions include check verification, settlement...

  • Page 178
    ... year ended December 31, 2008 (in millions) Merchant Services Financial Services Prepaid International Services Payment Systems All Other and Corporate Totals Revenues: Transaction and processing service fees Investment income, net Product sales and other Reimbursable debit network fees, postage...

  • Page 179
    ... through September 24, 2007 (in millions) Merchant Financial Services Services Prepaid International Services Payment Systems All Other and Corporate Totals Revenues: Transaction and processing service fees Investment income, net Product sales and other Reimbursable debit network fees, postage and...

  • Page 180
    ... 31, 2006 (in millions) Merchant Financial Services Services International Prepaid Services Payment Systems All Other and Corporate Totals Revenues: Transaction and processing service fees Investment income, net Product sales and other Reimbursable debit network fees, postage and other Equity...

  • Page 181
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) A reconciliation of reportable segment amounts to the Company's consolidated balances is as follows (in millions): Successor Period from Year ended September 25 through December 31, December 31, 2008 2007 Predecessor ...

  • Page 182
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Segment assets are as follows (in millions): Successor December 31, 2008 December 31, 2007 Assets: Merchant Services Financial Services International Prepaid Services Integrated Payment Systems All Other and Corporate...

  • Page 183
    ... the STAR Network and ATM processing) and output services for financial institutions and other organizations offering credit cards, debit cards and retail private label cards to consumers and businesses to manage customer accounts. The segment's largest components of revenue will consist of fees for...

  • Page 184
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Note 18: Quarterly Financial Results (Unaudited) Summarized quarterly results for the two years ended December 31, 2008 and 2007, respectively, are as follows (in millions): Successor 2008 by Quarter: First Second ...

  • Page 185
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) In 2004, the Company divested its 64% ownership of NYCE, an electronic funds transfer network. The sale agreement of NYCE contemplated potential adjustments to the sales price which resulted in a charge of $1.6 million...

  • Page 186
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents the summarized results of discontinued operations for the year ended December 31, 2006 (in millions): Year ended December 31, 2006 Revenue Expenses Operating profit Other income (expense) ...

  • Page 187
    ..., 2008 (in millions) Total Assets: Settlement Assets-student loan auction rate securities Settlement Assets-other securities Other assets-available-for-sale securities Foreign exchange contracts Total assets at fair value Other Liabilities: Interest rate contracts Foreign exchange contracts Total...

  • Page 188
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) the U.S. government through the Federal Family Education Loan Program ("FFELP"); and continued to pay interest in accordance with the terms of their respective security agreements. The NextStudent Master Trust ("...

  • Page 189
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Other securities As of December 31, 2008, the Company held certain investments in primarily short-term debt securities, including discounted commercial paper, other money market funds besides those discussed below, ...

  • Page 190
    ... the information for First Data Corporation on a consolidated basis. Successor Year ended December 31, 2008 NonParent (in millions) Company Guarantor Subsidiaries Guarantor Subsidiaries Eliminations Consolidated Revenues: Transaction and processing service fees Investment income, net Product sales...

  • Page 191
    ... 31, 2007 NonParent (in millions) Company Guarantor Subsidiaries Guarantor Subsidiaries Eliminations Consolidated Revenues: Transaction and processing service fees Investment income, net Product sales and other Reimbursable debit network fees, postage and other Expenses: Cost of services (exclusive...

  • Page 192
    ... (in millions) Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated Revenues: Transaction and processing service fees Investment income, net Product sales and other Reimbursable debit network fees, postage and other Expenses: Cost of services (exclusive of items shown...

  • Page 193
    ... (in millions) Guarantor Guarantor Company Subsidiaries Subsidiaries Eliminations Consolidated Revenues: Transaction and processing service fees Investment income, net Product sales and other Reimbursable debit network fees, postage and other Expenses: Cost of services (exclusive of items shown...

  • Page 194
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Successor December 31, 2008 Parent (in millions) Company Guarantor Subsidiaries Non-Guarantor Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents Accounts receivable, net of ...

  • Page 195
    FIRST DATA CORPORATION NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued) Successor December 31, 2007 Parent (in millions) Company Guarantor Subsidiaries NonGuarantor Subsidiaries Eliminations Consolidated ASSETS Current assets: Cash and cash equivalents Accounts receivable, net of ...

  • Page 196
    ... equipment, net Payments to secure customer service contracts, including outlays for conversion, and capitalized systems development costs Proceeds from the sale of marketable securities Other investing activities Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Short-term...

  • Page 197
    ... INVESTING ACTIVITIES Merger with Kohlberg Kravis Roberts & Co, net of cash acquired Current period acquisitions, net of cash acquired Payments related to other businesses previously acquired Additions to property and equipment, net Payments to secure customer service contracts, including outlays...

  • Page 198
    ... to other businesses previously acquired (12.0) (33.9) Additions to property and equipment, net (15.9) (195.4) Payments to secure customer service contracts, including outlays for conversion and (5.0) (106.9) capitalized systems development costs Proceeds from the sale of marketable securities - 11...

  • Page 199
    ... to property and equipment, net Payments to secure customer service contracts, including outlays for conversion and capitalized systems development costs Proceeds from the sale of marketable securities Dividend received from discontinued operations Cash retained by Western Union Other investing...

  • Page 200
    FIRST DATA CORPORATION SCHEDULE II-Valuation and Qualifying Accounts (dollars in millions) Additions Balance Charged at to Costs Charged Beginning and to Other of Period Expenses Accounts Balance at End of Period Description Deductions Year-ended December 31, 2008 deducted from receivables For ...

  • Page 201
    ...31, 2008, to ensure that information the Company is required to disclose in reports that are filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Management's Report on Internal Controls...

  • Page 202
    ... audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of First Data Corporation as of December 31, 2008 and 2007, and the related consolidated statements of operations, cash flows and stockholders' equity for the...

  • Page 203
    .... OTHER INFORMATION On March 23, 2009, the Company's Compensation and Benefits Committee established target bonus amounts for 2009 for the Named Executive Officers of the Company under the First Data Corporation Senior Executive Incentive Plan as set forth in Exhibit 10.24 to this Form 10-K. PART...

  • Page 204
    ...at Compaq Computer Corporation and Hewlett-Packard Company. She holds a B.A. from Rice University. Philip M. Wall has been the Executive Vice President and Chief Financial Officer of the Company since June 2008. Mr. Wall joined First Data in January 2002 as Vice President of Europe card services. In...

  • Page 205
    ... Company has adopted a Code of Ethics for Senior Financial Officers which applies to its Chief Executive Officer, Chief Financial Officer, and Principal Accounting Officer. The Code is available on the Company's web site at www.firstdata.com under "About", "Investor Relations", "Corporate Governance...

  • Page 206
    ... on pay levels for executive officers other than the CEO as well as the design of all compensation and benefit plans. Finally, management is responsible for the administration of First Data's executive compensation programs and policies. EXECUTIVE COMPENSATION PHILOSOPHY First Data's executive...

  • Page 207
    ...The 2007 Stock Incentive Plan for Key Employees of First Data Corporation (the "2007 Equity Plan") facilitates significant equity ownership by executive officers. The 2007 Equity Plan allows for executive officers to purchase shares of stock and receive matching grants of stock options in First Data...

  • Page 208
    ... analyzes this information to ensure First Data's compensation programs enable the Company to attract and retain top executive talent. The 2008 peer group was comprised of the following 20 companies Adobe Systems CA Electronic Arts Fiserv Mastercard Symantec Western Union ADP Computer Sciences...

  • Page 209
    ...were made in 2008 to any named executive officers. In accordance with Internal Revenue Code Section 409A, annual bonuses earned for a fiscal year are paid prior to March 15th of the following year. This allows sufficient time to review company financial performance and conduct individual performance...

  • Page 210
    ... of First Data's equity compensation program is to align long-term compensation opportunities with the interests of First Data's shareholders. Specifically, the purpose of the 2007 Equity Plan is to promote First Data's long-term financial interests and growth by attracting and retaining executives...

  • Page 211
    ... granted. In January 2008, the Committee approved share purchases and option grants for all named executive officers, with the exception of Ms. Patmore. Mr. Yates also received a grant of restricted stock in recognition of his late 2007 promotion to President of First Data International and Mr. Wall...

  • Page 212
    ... whom the Company competes for talent. The Committee reviews the appropriateness of perquisites provided to executive officers on an annual basis. Retirement Plans In 2008, all employees in the U.S., including executive officers, were eligible to participate in the First Data Corporation Incentive...

  • Page 213
    ... the payment of benefits to executive officers upon severance from First Data and/or upon a change of control. In 2008, the plan was amended to comply with IRS Code Section 409A. The Policy is intended to promote uniform treatment of senior executives who are involuntarily terminated other than for...

  • Page 214
    ... gift program and coverage under First Data's medical, dental, life and disability insurance plans. TAX AND ACCOUNTING CONSIDERATIONS During 2008, 162(m) limitations on tax deductibility of compensation did not apply to First Data as the Company's common stock is not registered or publicly traded...

  • Page 215
    ... Company's financial statements during 2008 in accordance with SFAS 123R with respect to all stock options awarded under the 2007 Stock Incentive Plan for Key Employees of First Data Corporation and its Affiliates. See Note 15 to the Consolidated Financial Statements included in Item 8 of this Form...

  • Page 216
    ... the qualified First Data Corporation Retirement Plan for Ms. Patmore and the Defined Benefit Section of the First Data Resources Limited Pension Scheme in the United Kingdom for Mr. Wall and Mr. Yates. During 2008, no executive officer participated in a Nonqualified Deferred Compensation plan. Full...

  • Page 217
    ... reflected in this column are grants of Stock Options made under the 2007 Stock Incentive Plan for Key Employees of First Data Corporation and its Affiliates. Options were granted on a proportional basis to the number of shares purchased by each executive officer. With the exception of Mr. Capellas...

  • Page 218
    ... listed under the "Non-Equity Incentive Plan Compensation" column, were determined by the Compensation and Benefits Committee and were paid prior to March 15, 2009. Equity Awards All stock options granted in 2008 were granted under the 2007 Incentive Plan for Key Employees of First Data Corporation...

  • Page 219
    ... value. All unvested Western Union Equity Awards became fully vested on September 24, 2007. All First Data Holdings Inc. ("Holdings") equity awards were granted under the 2007 Stock Incentive Plan for Key Employees of First Data Corporation and its Affiliates. Option vesting terms are described in...

  • Page 220
    ... First Data Corporation Retirement Plan, a tax-qualified plan. Mr. Wall and Mr. Yates are participants in the Defined Benefit Section of the First Data Resources Limited Pension Scheme, a plan which provides pension benefits to a broad-based group of participants in the United Kingdom. Plan details...

  • Page 221
    ... from First Data. Vested participants who terminate prior to becoming eligible for early retirement may choose to receive an unreduced benefit at age 65 or commencement of benefits as early as age 55 with reductions of 7% per year prior to age 65. The Retirement Plan offers several optional forms of...

  • Page 222
    ...of senior executives who are involuntarily terminated other than for cause or who voluntarily leave the Company for good reason as defined under the 2007 Incentive Plan for Key Employees of First Data Corporation and its Affiliates. Under the Policy, no benefits are provided based solely on a Change...

  • Page 223
    .... First Data Holdings Inc., the Company's parent company, has adopted the 2007 Stock Incentive Plan for Key Employees of First Data Corporation and its Affiliates. The following table contains certain information regarding options, warrants or rights under the plan as of December 31, 2008. Number of...

  • Page 224
    ... directors and executive officers as a group, 3,435,563. No shares are pledged as security. New Omaha Holdings L.P is a limited partnership in which investment funds associated with Kohlberg Kravis Roberts & Co. L.P. and other coinvestors own the limited partner interests. New Omaha Holdings LLC is...

  • Page 225
    ... 2008, FDMS terminated the sublease agreement and paid a fee to The Labry Companies of approximately $220,000 pursuant to the sublease agreement. First Data Merchant Services Corporation entered into a direct lease agreement with the landlord for additional space and a longer term as of June 1, 2008...

  • Page 226
    ... filed with the SEC; offering memorandum, purchase accounting and other accounting and financial reporting consultation and research work billed as audit fees or necessary to comply with the standards of the Public Company Accounting Oversight Board (United States). Audit-Related Fees. Ernst & Young...

  • Page 227
    ... between First Data Corporation and The Western Union Company (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K filed on October 2, 2006, Commission File No. 1-11073). Agreement and Plan of Merger, dated as of April 1, 2007, among New Omaha Holdings L.P., Omaha...

  • Page 228
    ... to Exhibit 10.2 of the Company's Current Report on Form 8-K filed September 28, 2007). First Amendment to the Amended and Restated Senior Unsecured Interim Loan Agreement, dated as of June 19, 2008, among First Data Corporation, Citibank, N.A., as administrative agent, and the Guarantors named...

  • Page 229
    ...Company's Definitive Proxy Statement on Schedule 14A filed April 17, 2007, Commission File No. 1-11073).* Registrant's Senior Executive Incentive Plan, as amended and restated effective January 1, 2009. * Form of Non-Qualified Stock Option Agreement under the First Data 2002 Long-Term Incentive Plan...

  • Page 230
    ... Form of Non-Qualified Stock Option Agreement under the First Data 1992 Long-Term Incentive Plan for employees other than Executive Officers File No. 1-11073). * First Data Corporation Severance/Change in Control Policy, as adopted July 26, 2005 as amended and restated effective September 24, 2007...

  • Page 231
    ...undersigned, thereunto duly authorized. FIRST DATA CORPORATION (Registrant) By: /s/ MICHAEL D. CAPELLAS Michael D. Capellas Chief Executive Officer and Chairman of the Board Date: March 25, 2009 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below...

  • Page 232
    ... between First Data Corporation and The Western Union Company (incorporated by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K filed on October 2, 2006, Commission File No. 1-11073). Agreement and Plan of Merger, dated as of April 1, 2007, among New Omaha Holdings L.P., Omaha...

  • Page 233
    ... by First Data Corporation and New Omaha Holdings Corporation as of September 24, 2007 (incorporated by reference to Exhibit 10.4 of the Company's Current Report on Form 8-K filed September 28, 2007, Commission file No. 1-11073). * Employment Agreement between the Registrant and Edward A. Labry III...

  • Page 234
    ...Company's Definitive Proxy Statement on Schedule 14A filed April 17, 2007, Commission File No. 1-11073).* Registrant's Senior Executive Incentive Plan, as amended and restated effective January 1, 2009. * Form of Non-Qualified Stock Option Agreement under the First Data 2002 Long-Term Incentive Plan...

  • Page 235
    ... Registrant's Annual Report on Form 10-K filed on March 13, 2008, Commission File No. 1-11073). * Amendment No. 1 to the First Data Corporation Severance/Change in Control Policy. Description of Named Executive Officer salary and bonus arrangements for 2009. * Description of First Data Holdings Inc...

  • Page 236
    ...attracting and retaining key executives, and to reward contributions made by the Company's Chief Executive Officer and other senior executive officers in optimizing long-term value to the Company's shareholders by connecting a portion of each such executive's total potential cash compensation to the...

  • Page 237
    ...of whether the individual is an employee of the Company, the duty to act for the Committee hereunder. No officer or employee of the Company shall be liable to any person for any action taken or omitted in connection with the interpretation and administration of the Plan unless attributable to his or...

  • Page 238
    ... the Company or any subsidiary. 9.4 GOVERNING LAW. All questions pertaining to the construction, validity and effect of the Plan shall be determined in accordance with the laws of the State of Delaware. This Plan is intended to comply with the short-term deferral provisions of Internal Revenue Code...

  • Page 239
    ... Data Corporation (the "Company"). WHEREAS, the Company sponsors the First Data Corporation Severance/Change in Control Policy (Executive Committee Level) (the "Plan"); WHEREAS, the Company now desires to amend the Plan to comply with the requirements of Section 409A of the Internal Revenue Code...

  • Page 240
    ...not limited to any contract, tort, or wage and hour claims, and any claims under Title VII, the ADEA, the ADA, ERISA, and other federal, state or local laws. Under the Agreement and Release, the Eligible Executive must also agree not to solicit business similar to any business offered by the Company...

  • Page 241
    ...and Code Section 409A, offset against the Eligible Executive's benefits under this Policy any other severance benefits payable to the Eligible Executive by the Company, the value of unreturned property, and any outstanding loan, debt or other amount the Eligible Executive owes to the Company. 7. New...

  • Page 242
    ... employees" and the identification date, shall be made by the Company in accordance with the provisions of Code Sections 416(i) and 409A. This Amendment No. 1 has been executed on behalf of the Company by a duly authorized officer as of the day and year first above written. FIRST DATA CORPORATION...

  • Page 243
    ... of First Data Corporation (the "Company") approved the following 2009 base salaries and target bonuses for the Company's named executive officers. 2009 2009 Name and Title Base Salary Bonus Target (1) Michael D. Capellas Chairman and Chief Executive Officer Philip M. Wall Executive Vice President...

  • Page 244
    EXHIBIT 12 FIRST DATA CORPORATION COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES Successor Period from September 25 though December 31, 2007 Period from January 1 though September 24, 2007 Predecessor Year ended December 31, Year ended December 31, (in millions) 2008 2006 2005 2004 ...

  • Page 245
    ... Bankcard Investigative Group Inc. Business Office Services, Inc. BUYPASS Inco Corporation BWA Merchant Services Pty. Ltd. Call Interactive Holdings LLC CallTeleservices, Inc. CanPay Holdings, Inc. Cardservice Delaware, Inc. Cardservice International, Inc. Cashcard Australia Limited Cashcard Brand...

  • Page 246
    ... Canada Merchant Solutions ULC First Data Capital, Inc. First Data Card Solutions, Inc. First Data (China) Co., Ltd. First Data CIS First Data Colombia Ltda. First Data Commercial Services Holdings, Inc. First Data Communications Corporation First Data Cono Sur SA First Data Corporation Australia...

  • Page 247
    ... Limited First Data Latin America Inc. First Data Latvia First Data Lietuva First Data Loan Company, Canada First Data (Mauritius) Holding Company First Data Merchant Services Corporation First Data Merchant Services México, S. de R.L. de C.V. First Data Merchant Services Northeast, LLC First Data...

  • Page 248
    ... Rioplatense SA IPS Holdings Inc. IPS Inc. IRS Intelligent Risk Management Solutions GmbH JOT, Inc. Linkpoint International, Inc. LoyaltyCo LLC MAS Inco Corporation MAS Ohio Corporation 4 Australia Australia Ontario Australia Australia United Kingdom Delaware South Africa Texas Romania Delaware...

  • Page 249
    ... LLC SunTrust Merchant Services, LLC SurePay Real Estate Holdings, Inc. TASQ Corporation TASQ Technology, Inc. Technology Solutions International, Inc. TeleCash GmbH & Co. KG TeleCash Management GmbH TeleCash Verwaltungs GmbH Tele-Check New Zealand Limited TeleCheck (Australia) Pty Limited...

  • Page 250
    ..., LLC Unified Merchant Services Unified Network Payment Solutions Unified Partner, Inc. USPI - Canada Inc. ValueLink, LLC Virtual Financial Services, LLC Yclip, LLC Zolter Services Limited 6 Georgia New Zealand Pennsylvania Canada Canada Delaware Georgia California United Kingdom Colorado Delaware...

  • Page 251
    ....1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Michael D. Capellas, Chief Executive Officer of First Data Corporation, certify that: 1. I have reviewed this Annual Report on Form 10-K of First Data Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material...

  • Page 252
    ... 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Philip M. Wall, Chief Financial Officer of First Data Corporation, certify that: 1. I have reviewed this Annual Report on Form 10-K of First Data Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material...

  • Page 253
    ...CHIEF EXECUTIVE OFFICER The certification set forth below is being submitted in connection with the Annual Report of First Data Corporation on Form 10-K for the period ended December 31, 2008 (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange...

  • Page 254
    ...CHIEF FINANCIAL OFFICER The certification set forth below is being submitted in connection with the Annual Report of First Data Corporation on Form 10-K for the period ended December 31, 2008 (the "Report") for the purpose of complying with Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange...