First Data 2009 Annual Report Download - page 150

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 11: Related Party Transactions
Merchant Alliances
A substantial portion of the Company’s business within the Retail and Alliance Services and International
segments is conducted through merchant alliances. Merchant alliances are alliances between the Company and
financial institutions. 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. 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.
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, accounting guidance 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.
Management Agreement
On September 24, 2007 and in connection with the merger, First Data entered into a management agreement
with affiliates of KKR (the “Management Agreement”) pursuant to which KKR will provide management,
consulting, financial and other advisory services to the Company. Pursuant to the Management Agreement, KKR
receives an aggregate annual base management fee of $20 million, which amount increases 5% annually, and
reimbursement of out-of-pocket expenses incurred in connection with the provision of services. The Management
Agreement has an initial term expiring on December 31, 2019, provided that the term will be extended annually
thereafter unless the Company provides prior written notice of its desire not to automatically extend the term.
The Management Agreement provides that KKR is entitled to receive a fee equal to a percentage of the gross
transaction value in connection with certain subsequent financing, acquisition, disposition, merger combination
and change of control transactions, as well as a termination fee based on the net present value of future payment
obligations under the Management Agreement in the event of an initial public offering or under certain other
circumstances. The Management Agreement terminates automatically upon the consummation of an initial public
offering and may be terminated at any time by mutual consent of the Company and KKR. The Management
Agreement also contains customary exculpation and indemnification provisions in favor of KKR and its
affiliates. During 2009, 2008 and the successor 2007 period, the Company incurred $21.3 million, $20.4 million
and $5.3 million, respectively, of management fees. In addition, pursuant to the Management Agreement, the
Company paid KKR transaction fees of $260 million in 2007 for certain services provided in connection with the
merger and related transactions.
Subsequent to the merger, certain members of the Company’s Board of Directors are affiliated with KKR.
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