First Data 2008 Annual Report Download - page 161

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the 2007 successor period, the Company increased the principal amount of its senior unsecured PIK term loans by $67.5 million resulting from
the "payment" of accrued interest expense. As discussed in Note 10, interest on this facility up to and including September 30, 2011 is paid entirely by
increasing the principal amount of the outstanding loan. Capital leases into which the Company entered during the successor and predecessor periods in 2007
were immaterial.
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.
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.
Capital leases into which the Company entered during 2006 were immaterial.
Refer to Note 15 for information concerning the Company's stock-based compensation plans.
Note 12: Related Party Transactions
Merchant Alliances
A substantial portion of the Company's business within the Merchant Services and International segments is conducted through merchant alliances.
Certain merchant alliances, as it pertains to investments accounted for under the equity method, are joint ventures between the Company and financial
institutions. No directors or officers of the Company have ownership interests in any of the alliances. 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 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 processing 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 are consolidated with those of
the Company and the related processing fees are treated as an intercompany transaction and eliminated upon consolidation. If the Company does not have a
controlling ownership interest in an alliance, it uses the equity method of accounting to account for its investment in the alliance. As a result, the Company's
consolidated revenues include processing fees charged to alliances accounted for under the equity method.
The Company negotiated all agreements with the alliance banks. Therefore, all transactions between the Company and its alliances were conducted at
arm's length; nevertheless, SFAS No. 57, "Related Party Disclosures," defines a transaction between the Company and an entity for which investments are
accounted for under the equity method by the Company as a related party transaction requiring separate disclosure in the financial statements provided by the
Company. Accordingly, the revenue associated with these related party transactions are presented on the face of the Consolidated Statements of Operations.
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