First Data 2008 Annual Report Download - page 52

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Cost of services, as a percentage of transaction and processing service fee revenue, increased for pro forma 2007 compared to 2006 as a result of the
items noted above excluding the impact of the accelerated vesting charges which are excluded from the pro forma 2007 period.
Cost of products sold—Cost increased in 2008 compared to the 2007 predecessor and successor periods due to acquisitions and increased terminal sales
within the International segment offset partially by a decrease in costs associated with terminal and software sales due to a decline in sales volumes
domestically. The 2007 predecessor and successor periods had higher costs than 2006 due to costs associated with the sale and leasing of terminals in
international operations offset partially by a decrease in costs associated with the domestic sale and leasing of terminals.
Selling, general and administrative—Selling, general and administrative expenses decreased in 2008 compared to the 2007 predecessor and successor
periods as the result of charges in the predecessor period related to the accelerated vesting of stock options and restricted stock awards and units upon the
change of control due to the merger, lower incentive compensation in 2008, reduced share-based compensation expense in the successor period due to the
Company's new equity compensation plan implemented after the merger as compared to the pre-merger equity compensation plan and professional fees
related to the merger incurred principally in the predecessor period in 2007, mainly reflected within All Other and Corporate. The year ended 2008 also
benefited from reductions in force implemented most significantly in the successor period of 2007 but also in 2008. Costs were higher in 2008 as the result of
the impacts of acquisitions as well as sponsor management fees. Selling, general and administrative expenses decreased in 2008 compared to the 2007 pro
forma period due to the items noted above excluding the impact of the 2007 accelerated vesting charges and the professional fees related to the merger which
are excluded from the pro forma 2007 period. Selling, general and administrative expenses, as a percentage of transaction and processing service fee revenue
decreased for 2008 compared to pro forma 2007 as a result of the items noted above.
The 2007 predecessor period was impacted by merger related costs including legal, accounting, other advisory fees and accelerated vesting of stock
options and restricted stock awards and units upon the change of control. The impact from the accelerated vesting of stock options, restricted stock awards and
restricted stock units was approximately $90 million (including payroll tax impacts of all accelerations). Consulting, legal and other professional service fees
related to the merger were approximately $73 million, all but approximately $3 million of which was incurred in the predecessor period. The majority of the
acceleration of stock options, restricted stock awards and restricted stock units as well as the fees related to the merger were recorded in All Other and
Corporate.
In addition to the items noted above, the 2007 predecessor and successor periods costs increased compared to 2006 due to platform consolidation
expenses related to the International segment, data center consolidation costs in the U.S., and to a lesser extent, an increase in other employee related
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 spin-
off of Western Union. Selling, general and administrative expenses, as a percentage of transaction and processing service fee revenue remained relatively
consistent for pro forma 2007 compared to 2006 as a result of the items noted above.
Depreciation and Amortization—Amortization was higher in the 2008 and 2007 successor periods than in predecessor periods due to identifiable
intangible assets recorded in purchase accounting related to the merger including amortization of customer relationships on an accelerated basis rather than a
straight-line basis. Partially offsetting these increases was a decrease related to the depreciation of fixed assets recorded in purchase accounting related to the
merger. Although the total value of the fixed assets increased from pre-merger book
51