Quarterly Report

Quarterly Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-11073

FIRST DATA CORPORATION

(Exact name of registrant as specified in its charter)

www.firstdata.com


DELAWARE		47-0731996
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5565 GLENRIDGE CONNECTOR, N.E., SUITE 2000, ATLANTA, GEORGIA		30342
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (404) 890-2000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.


Class		Outstanding at July 31, 2009
Common Stock, $0.01 par value per share		1,000 shares

INDEX


		PAGE NUMBER
PART I FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited):

	Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008	3

	Consolidated Balance Sheets at June 30, 2009 and December 31, 2008	4

	Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008	5

	Consolidated Statement of Equity for the six months ended June 30, 2009	6

	Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2009 and 2008	7

	Notes to Consolidated Financial Statements	8

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	36

Item 3	Quantitative and Qualitative Disclosures About Market Risk	57

Item 4	Controls and Procedures	57

PART II OTHER INFORMATION

Item 1	Legal Proceedings	58

Item 1A	Risk Factors	58

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3	Defaults Upon Senior Securities	58

Item 4	Submission of Matters to a Vote of Security Holders	58

Item 5	Other Information	58

Item 6	Exhibits	59

PART I. FINANCIAL INFORMATION

ITEM 1.

Financial Statements

FIRST DATA CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(in millions)


	Three months ended June 30,						Six months ended June 30,
	2009			2008			2009			2008
Revenues:
Transaction and processing service fees:
Merchant related services ^(a)	$	709.6		$	700.9		$	1,331.1		$	1,335.8
Check services		84.6			97.1			171.1			197.7
Card services ^(a)		454.2			506.0			924.6			1,014.3
Other services		123.1			139.7			251.5			275.6
Investment income, net		(1.0	)		35.8			4.8			91.8
Product sales and other ^(a)		206.2			214.0			380.2			426.0
Reimbursable debit network fees, postage and other		631.9			510.8			1,221.5			989.6

		2,208.6			2,204.3			4,284.8			4,330.8

Expenses:
Cost of services (exclusive of items shown below)		673.1			709.1			1,387.4			1,430.6
Cost of products sold		80.2			83.4			143.7			154.3
Selling, general and administrative		331.2			355.5			657.7			695.1
Reimbursable debit network fees, postage and other		631.9			510.8			1,221.5			989.6
Depreciation and amortization		365.6			338.8			695.1			657.9
Other operating expenses:
Restructuring, net		8.4			(0.1	)		33.5			(0.1	)
Litigation and regulatory settlements		—			—			(2.7	)		—

		2,090.4			1,997.5			4,136.2			3,927.4

Operating profit		118.2			206.8			148.6			403.4

Interest income		3.1			6.6			6.4			15.6
Interest expense		(449.6	)		(451.1	)		(897.8	)		(968.8	)
Other income (expense)		(3.6	)		6.4			19.7			(36.8	)

		(450.1	)		(438.1	)		(871.7	)		(990.0	)

Loss before income taxes and equity earnings in affiliates		(331.9	)		(231.3	)		(723.1	)		(586.6	)
Income tax benefit		(112.8	)		(69.4	)		(257.6	)		(199.9	)
Equity earnings in affiliates		25.5			41.6			44.0			73.7


Net loss		(193.6	)		(120.3	)		(421.5	)		(313.0	)
Less: Net income attributable to noncontrolling interests		2.3			40.3			5.7			69.3

Net loss attributable to First Data Corporation	$	(195.9	)	$	(160.6	)	$	(427.2	)	$	(382.3	)

⁽ ^a ⁾

Includes processing fees, administrative service fees and other fees charged to merchant alliances accounted for under the equity method of $22.4 million and $43.5 million for the three and six months ended June 30, 2009, respectively, and $55.7 million and $109.2 million for the comparable periods in 2008.

See Notes to Consolidated Financial Statements.

FIRST DATA CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(in millions, except common stock share amounts)


	June 30, 2009			December 31, 2008
ASSETS
Current assets:
Cash and cash equivalents	$	768.0		$	406.3
Accounts receivable, net of allowance for doubtful accounts of $16.4 (2009) and $16.6 (2008)		2,189.5			2,637.2
Settlement assets		8,490.1			7,930.2
Other current assets		482.6			419.8

Total current assets		11,930.2			11,393.5


Property and equipment, net of accumulated depreciation of $387.5 (2009) and $261.1 (2008)		1,083.0			1,087.8
Goodwill		17,113.5			14,861.2
Customer relationships, net of accumulated amortization of $1,337.2 (2009) and $932.1 (2008)		6,411.7			5,987.6
Other intangibles, net of accumulated amortization of $534.1 (2009) and $373.1 (2008)		2,219.7			1,915.6
Investment in affiliates		1,296.6			1,259.6
Long-term settlement assets		479.4			732.7
Other long-term assets		878.1			938.1


Total assets	$	41,412.2		$	38,176.1

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	174.8		$	186.5
Short-term and current portion of long-term borrowings		447.1			497.3
Settlement obligations		9,018.8			8,680.6
Other current liabilities		1,218.6			1,413.6


Total current liabilities		10,859.3			10,778.0


Long-term borrowings		22,185.7			22,075.2
Long-term deferred tax liabilities		1,433.4			1,648.2
Other long-term liabilities		1,172.6			1,272.4


Total liabilities		35,651.0			35,773.8


Commitments and contingencies (See Note 7)

Redeemable noncontrolling interest		193.0			—

First Data Corporation stockholder’s equity:
Common stock, $.01 par value; authorized and issued 1,000 shares (2009 and 2008)		—			—
Additional paid-in capital		7,390.0			7,380.8


Paid-in capital		7,390.0			7,380.8
Accumulated loss		(4,468.1	)		(4,068.0	)
Accumulated other comprehensive loss		(826.6	)		(934.9	)


Total First Data Corporation stockholder’s equity		2,095.3			2,377.9


Noncontrolling interests		3,472.9			24.4


Total equity		5,568.2			2,402.3


Total liabilities and equity	$	41,412.2		$	38,176.1

See Notes to Consolidated Financial Statements.

FIRST DATA CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions)

(Unaudited)


	Six months ended June 30,
	2009			2008
Cash and cash equivalents at beginning of period	$	406.3		$	606.5

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		(421.5	)		(313.0	)
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization (including amortization netted against equity earnings in affiliates and revenues)		741.1			761.9
Charges, net, related to other operating expenses and other income (expense)		13.3			36.7
Other non-cash and non-operating items, net		133.5			(30.0	)
Increase (decrease) in cash, excluding the effects of acquisitions and dispositions, resulting from changes in:
Accounts receivable, current and long-term		541.2			162.9
Other assets, current and long-term		101.8			188.4
Accounts payable and other liabilities, current and long-term		(295.0	)		(225.3	)
Income tax accounts		(301.4	)		(213.8	)

Net cash provided by operating activities		513.0			367.8

CASH FLOWS FROM INVESTING ACTIVITIES
Current period acquisitions, net of cash acquired		(9.9	)		(177.8	)
Payments related to other businesses previously acquired		(13.5	)		(16.7	)
Additions to property and equipment		(89.6	)		(122.6	)
Proceeds from sale of property and equipment		15.4			—
Payments to secure customer service contracts, including outlays for conversion, and capitalized systems development costs		(73.1	)		(77.1	)
Proceeds from the sale of marketable securities		0.2			52.4
Other investing activities		5.8			5.0

Net cash used in investing activities		(164.7	)		(336.8	)

CASH FLOWS FROM FINANCING ACTIVITIES
Short-term borrowings, net		(72.8	)		61.0
Principal payments on long-term debt		(98.1	)		(97.2	)
Contributions from noncontrolling interests		193.0			—
Distributions and dividends paid to noncontrolling interests		(6.6	)		(71.2	)
Purchase of noncontrolling interest		—			(17.6	)
Capital contributed by Parent		—			104.3
Cash dividends		—			(0.9	)

Net cash provided by (used in) financing activities		15.5			(21.6	)

Effect of exchange rate changes on cash and cash equivalents		(2.1	)		39.4

Change in cash and cash equivalents		361.7			48.8

Cash and cash equivalents at end of period	$	768.0		$	655.3

See Notes to Consolidated Financial Statements.

FIRST DATA CORPORATION

CONSOLIDATED STATEMENT OF EQUITY

(Unaudited)

(in millions)


							First Data Corporation Shareholder
	Total			Comprehensive Income (Loss)			Accumulated Loss			Accumulated Other Comprehensive Income (Loss)			Common Shares	Paid-In Capital		Noncontrolling Interests
Balance, December 31, 2008 (as previously reported)	$	2,402.3					$	(4,068.0	)	$	(934.9	)	0.0	$	7,380.8	$	24.4
Adjustment resulting from adoption of new accounting principle		—						27.1			(27.1	)
Acquisitions		4.3															4.3
Contributions		3,444.2															3,444.2
Dividends and distributions paid to noncontrolling interests		(6.6	)														(6.6	)
Comprehensive loss:
Net (loss) income		(421.5	)	$	(421.5	)		(427.2	)								5.7
Other comprehensive income (loss), net of taxes:
Unrealized gains on securities		7.4			7.4						7.4
Unrealized gains on hedging activities		74.0			74.0						74.0
Foreign currency translation adjustment		54.9			54.9						54.0						0.9

Other comprehensive income					136.3

Comprehensive loss				$	(285.2	)

Stock compensation expense and other		9.2													9.2

Balance, June 30, 2009	$	5,568.2					$	(4,468.1	)	$	(826.6	)	0.0	$	7,390.0	$	3,472.9

See Notes to Consolidated Financial Statements.

FIRST DATA CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

(in millions)


	Three months ended June 30,						Six months ended June 30,
	2009			2008			2009			2008
Net loss	$	(193.6	)	$	(120.3	)	$	(421.5	)	$	(313.0	)
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities		18.6			(8.9	)		7.4			(9.6	)
Unrealized gains on hedging activities		35.1			169.7			74.0			0.7
Foreign currency translation adjustment		205.8			59.0			54.9			288.9

Total other comprehensive income, net of tax		259.5			219.8			136.3			280.0

Comprehensive income (loss)		65.9			99.5			(285.2	)		(33.0	)
Less: Comprehensive income attributable to noncontrolling interests		3.6			40.1			6.6			67.2

Comprehensive income (loss) attributable to First Data Corporation	$	62.3		$	59.4		$	(291.8	)	$	(100.2	)

See Notes to Consolidated Financial Statements.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1: Basis of Presentation

The accompanying Consolidated Financial Statements of First Data Corporation (“FDC” or the “Company”) should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Significant accounting policies disclosed therein have not changed.

The accompanying Consolidated Financial Statements are unaudited; however, in the opinion of management, they include all normal recurring adjustments necessary for a fair presentation of the consolidated financial position of the Company at June 30, 2009, the consolidated results of its operations and comprehensive income (loss) for the three and six months ended June 30, 2009 and 2008, the consolidated cash flows for the six months ended June 30, 2009 and 2008 and the consolidated changes in equity for the six months ended June 30, 2009. Results of operations reported for interim periods are not necessarily indicative of results for the entire year due in part to the seasonality of certain business units.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Actual results could differ from these estimates.

Presentation

Effective January 1, 2009, the Company re-aligned the business and began making strategic and operating decisions with regards to assessing performance and allocating resources based on a new segment structure. Results for 2008 have been adjusted to reflect the new structure. Refer to Note 6 for a description of the segments. Other amounts in 2008 have been adjusted to conform to current year presentation, the largest of which was the reclassification of certain expenses from “Cost of services” to “Selling, general, and administrative.”

The Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS No. 160”), effective January 1, 2009, which requires that earnings attributed to noncontrolling interests be reported as part of consolidated earnings and not as a separate component of income or expense. Although the adoption of FAS 160 did not impact the Company’s total provision for income taxes, the Company’s effective tax rate calculation has changed as net income attributable to noncontrolling interests is no longer included as a deduction in the determination of pretax loss. The Company’s Consolidated Statement of Operations for 2008 has been revised to conform to the presentation requirements of SFAS No. 160. In addition, the presentation of transactions related to noncontrolling interests in the Company’s Consolidated Statements of Cash Flows in 2008 has been revised to reclassify such items from “Cash Flows from Operating Activities” and “Cash Flows from Investing Activities” to “Cash Flows from Financing Activities.”

The Company sold its ownership interests in Active Business Services, Ltd (“Active”), reported within the International segment, in July 2008 and Peace Software (“Peace”), reported within the Financial Services segment, in October 2008. Revenue and operating profit associated with Active and Peace are excluded from segment results. The International and Financial Services segment revenue and operating profit were adjusted for 2008 to exclude the results of Active and Peace.

Depreciation and amortization presented as a separate line item on the Company’s Consolidated Statements of Operations does not include amortization of initial payments for new contracts which is recorded as a contra-revenue within “Transaction and processing service fees” of $5.4 million and $10.4 million for the three and six months ended June 30, 2009, respectively, and $1.9 million and $3.4 million for the three and six months ended June 30, 2008, respectively. Also not included is amortization related to equity method investments which is netted within the “Equity earnings in affiliates” line of $18.0 million and $35.6 million for the three and six months ended June 30, 2009, respectively, and $52.8 million and $100.6 million for the three and six months ended June 30, 2008, respectively.

Subsequent Event

On August 10, 2009, the Company launched a registered exchange offer to exchange any and all of its outstanding unregistered unsecured 9 ⁷ / 8 % Senior Cash-Pay Notes due 2015, its outstanding unregistered unsecured 10 ¹¹ / 20 % Senior PIK Notes due 2015 and its outstanding unregistered unsecured 11 ¹ / 4 % Senior Subordinated Notes due 2016 for publicly tradable notes having substantially identical terms and guarantees, except that the exchange notes will be freely tradable. The exchange offer expires on September 4, 2009, unless extended.

The Company evaluated subsequent events through August 13, 2009, the date the financial statements were issued.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Revenue Recognition

The Company recognizes revenues from its processing services as such services are performed. Revenue is recorded net of certain costs such as credit and offline debit interchange fees and assessments charged by credit card associations which totaled $3,013.5 million and $2,164.1 million for the three months ended June 30, 2009 and 2008, respectively and $5,745.8 million and $4,089.2 million for the comparable six-month periods. Debit network fees related to acquired PIN-based debit transactions are recognized in the “Reimbursable debit network fees, postage and other” revenue and expense lines of the Consolidated Statements of Operations. The debit network fees related to acquired PIN-debit transactions charged by debit networks totaled $470.8 million and $327.2 million for the three months ended June 30, 2009 and 2008, respectively and $883.4 million and $613.1 million for the comparable six-month periods. Comparability of the dollar amounts disclosed in this paragraph is impacted by the termination of the Chase Paymentech Solutions alliance on November 1, 2008 and the deconsolidation of the Wells Fargo Merchant Services alliance on December 31, 2008. Information regarding these transactions is included in Note 5 to the Consolidated Financial Statements in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Note 2: Supplemental Financial Information

Supplemental Statement of Operations Information

The following table details the components of “Other income (expense)” on the Consolidated Statements of Operations:


	Three months ended June 30,
(in millions)	2009			2008
Investment losses	$	(0.3	)	$	—
Derivative financial instruments (losses) and gains		(13.6	)		9.4
Divestitures, net		(0.4	)		—
Non-operating foreign currency gains and (losses)		5.2			(3.0	)
Other		5.5			—

Other income (expense)	$	(3.6	)	$	6.4


	Six months ended June 30,
(in millions)	2009			2008
Investment (losses) and gains	$	(0.7	)	$	22.1
Derivative financial instruments losses		(6.9	)		(3.4	)
Divestitures, net		(0.9	)		—
Non-operating foreign currency gains and (losses)		22.7			(55.5	)
Other		5.5			—

Other income (expense)	$	19.7		$	(36.8	)

Supplemental Cash Flow Information

On June 26, 2009, the Company entered into a joint venture with Bank of America, N.A. (“BofA”) as discussed in Note 4 below. The Company’s and BofA’s direct contributions to the alliance consisted of non-cash assets and liabilities.

During the six months ended June 30, 2009 and 2008, the principal amount of the Company’s senior unsecured PIK notes increased by $165.2 million and $123.7 million, respectively, resulting from the “payment” of accrued interest expense.

During the six months ended June 30, 2009 and 2008, the Company entered into capital leases totaling approximately $85 million and $47 million, respectively.

Refer to Note 9 for information concerning the Company’s stock-based compensation plans.

Note 3: Restructuring

Restructuring charges and reversal of restructuring accruals

The Company recorded restructuring charges comprised of severance totaling $10.2 million and $40.2 million for the three and six months ended June 30, 2009, respectively. The Company also recorded charges related to facility closures totaling $0.4 million during first quarter 2009. The restructurings resulted in the termination of employees company wide totaling $0.3 million and $9.8 million in Retail and Alliance Services, $2.4 million and $8.5 million in Financial Services, $4.9 million and $15.7 million in International and $2.6 million and $6.2 million in All Other and Corporate for the three and six months ended June 30, 2009,

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

respectively. The restructurings in the first quarter 2009 resulted from the elimination of a select number of management and other positions as part of the Company’s cost saving initiatives. The second quarter 2009 restructurings resulted from similar actions as in the first quarter in the International segment while domestic restructurings resulted from site consolidations and the elimination of certain information technology positions. Cost savings initiatives are expected to continue into future periods resulting in additional restructuring charges. Partially offsetting the charges were reversals of 2009 and 2008 restructuring accruals of $1.8 million and $7.1 million during the three and six months ended June 30, 2009, respectively, related to the Company’s change in strategy related to global labor sourcing initiatives as well as refining previously recorded estimates.

The following table summarizes the Company’s utilization of restructuring accruals, excluding merger related restructuring charges, for the period from January 1, 2009 through June 30, 2009 (in millions):


	Employee Severance			Facility Closure
Remaining accrual at January 1, 2009	$	11.1			—
Expense provision		40.2		$	0.4
Cash payments and other		(15.7	)		(0.1	)
Changes in estimates		(7.1	)		—

Remaining accrual at June 30, 2009	$	28.5		$	0.3

Note 4: Business Combinations and Acquisitions and Divestitures

On June 26, 2009, BofA and the Company, together with Rockmount Investments, LLC (“Rockmount”), an investment vehicle controlled by a third-party investor, formed a new company, Banc of America Merchant Services, LLC (“BAMS”). BAMS will provide clients with a comprehensive suite of acquiring and processing payment products for credit and debit cards as well as merchant loyalty, prepaid, check and e-commerce solutions.

The Company owns a 48.45% direct voting interest in BAMS and BofA owns a 46.55% direct voting interest. The remaining stake in BAMS is a 5% non-voting interest held by Rockmount. The Company owns a 40% non-controlling interest in Rockmount. The Company’s 48.45% direct voting interest in BAMS, together with its control of the management committee, which governs BAMS, provides the Company with a controlling financial interest in BAMS under the applicable accounting standards and rules and thus BAMS is consolidated by the Company and reported in its Retail and Alliance Services segment. BofA’s 46.55% interest in BAMS is presented as a noncontrolling interest component of total equity.

BofA’s and the Company’s contributions to the newly formed company were principally comprised of merchant acquiring contract rights and relationships and sales forces. The Company’s contribution was most significantly comprised of assets received upon the November 1, 2008 termination of the Chase Paymentech Solutions alliance, though certain other assets were included as well. Rockmount’s contribution was in the form of cash totaling $321.7 million of which $128.7 million represents the cash contributed to Rockmount by the Company for its 40% investment noted above.

Rockmount may, at the sole option of the third-party owning a controlling interest in Rockmount, require that BAMS redeem Rockmount’s interest in BAMS. This option is available during a specified period of time after each of the fourth quarter of 2009 and the first and second quarters of 2010, and upon certain conditions, additional periods thereafter. Rockmount’s interest would be redeemed by BAMS for an amount of cash based on Rockmount’s capital account balance in BAMS immediately prior to the redemption subject to an additional adjustment to be paid or received by the Company and BofA based on the level of BAMS revenues for the trailing 12 month periods ending at the end of the fiscal quarter immediately prior to the exercise or extension of the option. Since Rockmount has the ability to put its interests to BAMS (a consolidated subsidiary of the Company), the Company has classified the 3% non-voting interest attributable to the third-party investor as Redeemable noncontrolling interest in the Consolidated Balance Sheet rather than as Equity. The 2% non-voting interest attributable to the Company is included with the Company’s direct voting interest in balances attributable to the Company in the Consolidated Financial Statements.

The formation of BAMS was accounted for by the Company as a sale of a noncontrolling interest in a subsidiary and a purchase business combination. For the quarter ended June 30, 2009, the Company has not recorded a gain or loss on the transaction due to the preliminary nature of the valuations and allocation of the Company’s assets to BAMS. Additionally, the assets comprising the most significant portion of the Company’s contribution were recently adjusted to fair value in the fourth quarter 2008 in connection with the November 1, 2008 termination of the Chase Paymentech Solutions alliance. Upon finalization of such valuations and allocations, the Company may record a gain or loss through adjustments to additional paid-in capital and noncontrolling interest. The Company does not currently anticipate such adjustments to be material.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The assets contributed to BAMS by the Company continue to be recorded at the Company’s carrying basis, which for the majority of assets was established effective November 1, 2008 as described immediately above net of applicable amortization expense subsequently recognized, and the assets contributed by BofA were recorded at their estimated fair value. The fair value of the BofA contribution to BAMS was determined by estimating the BAMS enterprise value and attributing the appropriate portion of that value to such contribution. To estimate the enterprise value, the Company weighted the results of a discounted cash flow analysis, an analysis of guideline public companies, and an analysis of guideline merged and acquired companies. Each analysis was dependent on a number of significant management assumptions regarding the expected future financial results of BAMS as well as the identification of appropriate guideline companies or transactions. Additionally, the discounted cash flow analysis was dependent on an estimate of an appropriate discount rate. The Company relied in part upon a third party valuation firm in determining the enterprise value of BAMS. The value attributed to the net tangible and identifiable intangible assets contributed by BofA was based on their estimated fair values. The preliminary purchase price allocation resulted in identifiable intangible assets of $1,200 million, which will be amortized over a range preliminarily estimated to be 10 to 20 years, and goodwill of $2,244 million. The Company analyzed the values assigned to similar intangible assets in previous purchase price allocations as well as the values estimated for similar assets during previous impairment tests. For each intangible asset, the Company selected an appropriate multiple of revenue and applied it to the expected future revenue attributable to the asset to estimate its fair value. The Company will perform a valuation of these identifiable intangible assets which will result in an adjustment to the above allocation as well as the amortization periods.

During the first quarter of 2009, the Company acquired one entity, reported within the International segment, and a domestic merchant portfolio.

The aggregate cash paid during the six months ended June 30, 2009 for these acquisitions was approximately $9.1 million, net of cash acquired. The aggregate preliminary purchase price allocation for these acquisitions resulted in $810.0 million in identifiable intangible assets which are being amortized over five to 10 years, trade names of $400.0 million being amortized over 20 years and goodwill of $2,244.2 million.

The pro forma impact of all 2009 acquisitions on net income was not material.

Note 5: Borrowings

Senior secured revolving credit facility

The Company has a $2.0 billion senior secured revolving credit facility with a term through the third quarter of 2013. Up to $500 million of the Company’s $2.0 billion senior secured revolving credit facility is available for letters of credit, of which $39.5 million and $39.7 million of letters of credit were issued under the facility as of June 30, 2009 and December 31, 2008, respectively. The amounts outstanding against this facility were $95.0 million and $18.0 million as of June 30, 2009 and December 31, 2008, respectively.

Since an affiliate of Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008, it has not funded amounts related to its $230.6 million commitment under the Company’s senior secured revolving credit facility and there is no assurance they will participate in any future funding requests or that the Company could obtain replacement loan commitments from other banks. The Company is monitoring the financial stability of other financial institutions that have made commitments under the revolving credit facility, none of which represent more than approximately 15% of the remaining capacity. As of June 30, 2009, $1.6 billion remained available under this facility after considering the amount outstanding above, the letters of credit issued under the facility, and the commitment that is no longer being funded noted above.

Other short-term borrowings

The Company had approximately $519 million and $656 million available under short-term lines of credit and other arrangements with foreign banks and joint venture partners to fund settlement activity, as of June 30, 2009 and December 31, 2008, respectively. Certain of these arrangements are uncommitted (approximately $124 million and $273 million, respectively) but, as of the periods presented, the Company had some borrowings outstanding against them. These arrangements are primarily associated with First Data Deutschland, Cashcard Australia, Ltd., the joint venture with Allied Irish Banks p.l.c., First Data Polska and the Merchant Solutions joint venture and are in various functional currencies, the most significant of which are the euro, Australian dollar and Polish zloty. The amounts outstanding against these arrangements were $102.4 million and $257.3 million as of June 30, 2009 and December 31, 2008, respectively.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Senior secured term loan facility

The terms of the Company’s senior secured term loan facility require the Company to pay equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount. During the three and six months ended June 30, 2009 and 2008, the Company paid $32.2 million and $64.4 million and $32.0 million and $63.9 million, respectively, of principal payments on the senior secured term loan facility in accordance with this provision ($29.7 million and $59.5 million, respectively, related to the U.S. dollar denominated loan and $2.5 million and $4.9 million, respectively, related to the euro denominated loan for the three and six months ended June 30, 2009 and $29.5 million and $58.9 million, respectively, related to the U.S. dollar denominated loan and $2.5 million and $5.0 million, respectively, related to the euro denominated loan for the three and six months ended June 30, 2008).

Senior unsecured PIK notes

The terms of the Company’s senior unsecured PIK (Payment In-Kind) notes require that interest on the notes up to and including September 30, 2011 be paid entirely by increasing the principal amount of the notes or by issuing senior unsecured PIK notes. During the six months ended June 30, 2009, the Company increased the principal amount of these notes by $165.2 million in accordance with this provision. The principal amount was not increased during the three months ended June 30, 2009. During the three and six months ended June 30, 2008, the Company increased the principal amount of these notes by $56.1 million and $123.7 million, respectively.

Note 6: Segment Information

For a detailed discussion of the Company’s principles regarding its operating segments refer to Note 17 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

As discussed in Note 1, the Company began operating under a new segment structure effective January 1, 2009. Segment results for the three and six months ended June 30, 2008 have been revised to reflect the new structure. The most significant changes were check verification, settlement and guarantee services moving from the Financial Services segment into the Retail and Alliance Services segment as well as the Prepaid Services segment moving into the Retail and Alliance Services segment. A summary of the new segments follows:

•

The Retail and Alliance Services segment is comprised of businesses that provide services which facilitate the merchants’ ability to accept credit, debit, stored-value and loyalty cards and checks. The segment’s merchant processing and acquiring services include authorization, transaction capture, settlement, chargeback handling and internet-based transaction processing. Retail and Alliance Services also provides point-of-sale (“POS”) solutions and other equipment necessary to capture merchant transactions. A majority of these services pertain to transactions in which consumer payments to merchants are made through a card association (such as Visa or MasterCard), a debit network, or another payment network (such as Discover). In addition, Retail and Alliance Services provides check verification, settlement and guarantee services and a wide range of open and closed loop stored-value products and processing services. The segment’s largest components of revenue consist of discount fees charged to merchants, processing fees charged to unconsolidated alliances, equity earnings from unconsolidated alliances, selling and leasing of POS devices, fees for check verification, settlement and guarantee services and debit network fees.

•

The Financial Services segment provides issuer card and network solutions and payment management solutions for recurring bill payments. Financial Services also offers services to improve customer communications, billing, online banking and consumer bill payment. Issuer card and network solutions includes credit, retail and debit card processing, debit network services (including the STAR Network) 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 management, transaction authorization and posting, and network switching as well as reimbursable postage.

•

The International segment is comprised of businesses that provide the following services outside of the U.S.: credit, retail, debit and prepaid card processing; merchant acquiring and processing; ATM and POS processing, driving, acquiring and switching services; and card processing software. The largest components of the segment’s revenue are fees for facilitating the merchants’ ability to accept credit, retail and debit cards by authorizing, capturing, and settling merchants’ credit, retail, debit, stored-value and loyalty card transactions as well as for transaction authorization and posting, network switching and account management.

•

The Integrated Payment Systems (“IPS”) segment is principally comprised of operations which deal in the issuance of official checks which are sold by agents that are financial institutions and the issuance of money orders which are sold by agents that are financial institutions and retail businesses. Official checks serve as an alternative to a bank’s own items such as cashiers or bank checks. Money orders serve as a disbursement option for a consumer or business. Revenue is

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

principally earned on invested funds which are pending settlement. The official check and money order businesses are conducted by a subsidiary of the Company, Integrated Payment Systems Inc., which is licensed to offer payment instrument and money transmitter services that fall under state and federal regulations. This segment is in the process of winding down its official check and money order businesses. IPS also offers payment processing services, and such other services will continue after the wind down of the official check and money order businesses.

Although the segments have changed, a detailed discussion regarding the businesses that comprise the Company’s segments, the strategies of the Company and the businesses within the segments, business trends affecting the Company and certain risks inherent in the Company’s business is included in “Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The following table presents the Company’s operating segment results for the three and six months ended June 30, 2009 and 2008:


Three months ended June 30, 2009 (in millions)	Retail and Alliance Services			Financial Services			International		Integrated Payment Systems			All Other and Corporate			Totals
Revenues:
Transaction and processing service fees	$	680.3		$	340.1		$	311.6	$	2.6		$	50.9		$	1,385.5
Investment income, net		1.3			0.2			2.9		(5.3	)		—			(0.9	)
Product sales and other		81.6			37.7			78.0		—			9.1			206.4
Reimbursable debit network fees, postage and other		484.1			154.2			5.1		—			1.2			644.6
Equity earnings in affiliates ^(a)		37.4			—			6.8		—			—			44.2

Total segment reporting revenues	$	1,284.7		$	532.2		$	404.4	$	(2.7	)	$	61.2		$	2,279.8

Internal revenue	$	16.9		$	8.5		$	1.5		—		$	0.1		$	27.0
External revenue		1,267.8			523.7			402.9	$	(2.7	)		61.1			2,252.8
Depreciation and amortization		186.8			110.4			73.2		0.1			18.5			389.0
Operating profit (loss)		122.6			73.5			36.0		(8.4	)		(69.5	)		154.2
Other operating expenses and other income (expense) excluding divestitures		(0.2	)		(2.3	)		2.5		—			(11.6	)		(11.6	)

Three months ended June 30, 2008 (in millions)	Retail and Alliance Services			Financial Services			International		Integrated Payment Systems			All Other and Corporate			Totals
Revenues:
Transaction and processing service fees	$	671.7		$	370.5		$	354.9	$	3.6		$	52.8		$	1,453.5
Investment income, net		5.3			0.9			6.5		23.0			—			35.7
Product sales and other		82.6			10.5			88.9		0.1			26.1			208.2
Reimbursable debit network fees, postage and other		341.9			174.7			7.5		—			1.3			525.4
Equity earnings in affiliates ^(a)		84.0			—			9.5		—			1.0			94.5

Total segment reporting revenues	$	1,185.5		$	556.6		$	467.3	$	26.7		$	81.2		$	2,317.3

Internal revenue	$	18.7		$	9.8		$	1.5		—		$	0.1		$	30.1
External revenue		1,166.8			546.8			465.8	$	26.7			81.1			2,287.2
Depreciation and amortization		222.1			83.8			67.5		—			18.9			392.3
Operating profit (loss)		124.3			92.2			29.7		16.3			(55.0	)		207.5
Other operating expenses and other income (expense) excluding divestitures		0.2			—			—		—			6.2			6.4

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


Six months ended June 30, 2009 (in millions)	Retail and Alliance Services			Financial Services			International			Integrated Payment Systems			All Other and Corporate			Totals
Revenues:
Transaction and processing service fees	$	1,300.4		$	705.1		$	594.7		$	5.3		$	100.7		$	2,706.2
Investment income, net		3.2			0.6			5.9			(4.8	)		—			4.9
Product sales and other		158.3			44.9			150.3			0.1			27.2			380.8
Reimbursable debit network fees, postage and other		910.3			325.8			9.8			—			1.9			1,247.8
Equity earnings in affiliates ^(a)		68.5			—			12.4			—			—			80.9

Total segment reporting revenues	$	2,440.7		$	1,076.4		$	773.1		$	0.6		$	129.8		$	4,420.6

Internal revenue	$	33.6		$	18.2		$	2.7			—		$	0.4		$	54.9
External revenue		2,407.1			1,058.2			770.4		$	0.6			129.4			4,365.7
Depreciation and amortization		374.9			192.8			139.9			0.3			33.2			741.1
Operating profit (loss)		176.8			149.4			42.6			(10.9	)		(135.6	)		222.3
Other operating expenses and other income (expense) excluding divestitures		(6.1	)		(6.8	)		(9.3	)		—			12.0			(10.2	)

Six months ended June 30, 2008 (in millions)	Retail and Alliance Services			Financial Services			International			Integrated Payment Systems			All Other and Corporate			Totals
Revenues:
Transaction and processing service fees	$	1,293.6		$	738.3		$	699.4		$	7.2		$	105.0		$	2,843.5
Investment income, net		13.3			1.5			12.6			64.3			—			91.7
Product sales and other		162.3			18.2			160.7			0.2			73.5			414.9
Reimbursable debit network fees, postage and other		641.5			357.1			16.8			—			2.8			1,018.2
Equity earnings in affiliates ^(a)		155.9			—			16.9			—			2.0			174.8

Total segment reporting revenues	$	2,266.6		$	1,115.1		$	906.4		$	71.7		$	183.3		$	4,543.1

Internal revenue	$	36.0		$	20.3		$	3.4			—		$	0.2		$	59.9
External revenue		2,230.6			1,094.8			903.0		$	71.7			183.1			4,483.2
Depreciation and amortization		436.9			162.9			129.0			0.1			30.6			759.5
Operating profit (loss)		207.6			182.1			49.1			50.3			(82.9	)		406.2
Other operating expenses and other income (expense) excluding divestitures		12.7			—			9.0			—			(58.5	)		(36.8	)

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

A reconciliation of reportable segment amounts to the Company’s consolidated balances is as follows (in millions):


	Three months ended June 30,						Six months ended June 30,
(in millions)	2009			2008			2009			2008
Revenues:
Total reported segments	$	2,218.6		$	2,236.1		$	4,290.8		$	4,359.8
All Other and Corporate		61.2			81.2			129.8			183.3

Subtotal		2,279.8			2,317.3			4,420.6			4,543.1

Divested businesses		—			11.6			—			22.4
Equity earnings in affiliates ^(a)		(44.2	)		(94.5	)		(80.9	)		(174.8	)
Eliminations ^(b)		(27.0	)		(30.1	)		(54.9	)		(59.9	)

Consolidated	$	2,208.6		$	2,204.3		$	4,284.8		$	4,330.8

Loss before income taxes and equity earnings in affiliates:
Total reported segments	$	223.7		$	262.5		$	357.9		$	489.1
All Other and Corporate		(69.5	)		(55.0	)		(135.6	)		(82.9	)

Subtotal		154.2			207.5			222.3			406.2

Divested businesses		(4.4	)		0.5			(4.4	)		1.5
Interest income		3.1			6.6			6.4			15.6
Interest expense		(449.6	)		(451.1	)		(897.8	)		(968.8	)
Net income attributable to noncontrolling interests from segment operations ^(c)		2.3			40.3			5.7			69.3
Equity earnings in affiliates		(25.5	)		(41.6	)		(44.0	)		(73.7	)
Restructuring, net		(8.4	)		0.1			(33.5	)		0.1
Litigation and regulatory settlements		—			—			2.7			—
Other income (expense)		(3.6	)		6.4			19.7			(36.8	)
Eliminations		—			—			(0.2	)		—

Consolidated	$	(331.9	)	$	(231.3	)	$	(723.1	)	$	(586.6	)

^(a)	Excludes equity losses that were recorded in expense and the amortization related to the excess of the investment balance over the Company’s proportionate share of the investee’s net book value.

^(b)	Represents elimination of intersegment revenue.

^(c)	Excludes net income attributable to noncontrolling interests attributable to items excluded from segment operations.

Segment assets are as follows (in millions):


	June 30, 2009		December 31, 2008
Assets:
Retail and Alliance Services	$	24,951.5	$	21,068.9
Financial Services		5,306.2		5,204.0
International		5,839.8		5,741.3
Integrated Payment Systems		3,227.3		4,120.3
All Other and Corporate		2,087.4		2,041.6


Consolidated	$	41,412.2	$	38,176.1

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

A reconciliation of reportable segment depreciation and amortization amounts to the Company’s consolidated balances in the Consolidated Statements of Cash Flows is as follows (in millions):


	Three months ended June 30,				Six months ended June 30,
	2009		2008		2009		2008
Depreciation and Amortization:
Total reported segments	$	370.5	$	373.4	$	707.9	$	728.9
All Other and Corporate		18.5		18.9		33.2		30.6
Divested businesses		—		1.2		—		2.4

Consolidated	$	389.0	$	393.5	$	741.1	$	761.9

Note 7: Commitments and Contingencies

The Company is involved in various legal proceedings. Accruals have been made with respect to these matters, where appropriate, which are reflected in the Company’s consolidated financial statements. The Company may enter into discussions regarding settlement of these matters, and may enter into settlement agreements, if it believes settlement is in the best interest of the Company. The matters discussed below, if decided adversely to or settled by the Company, individually or in the aggregate, may result in liability material to the Company’s financial condition and/or results of operations.

Legal

On July 2, 2004, Pamela Brennan, Terry Crayton, and Darla Martinez filed a class action complaint on behalf of themselves and all others similarly situated against the Company, its subsidiary Concord EFS, Inc., and various financial institutions (“Brennan”). Plaintiffs claim that the defendants violated antitrust laws by conspiring to artificially inflate foreign ATM fees that were ultimately charged to ATM cardholders. Plaintiffs seek a declaratory judgment, injunctive relief, compensatory damages, attorneys’ fees, costs and such other relief as the nature of the case may require or as may seem just and proper to the court. Five similar suits were filed and served in July, August and October 2004 and the Court consolidated all of these ATM interchange cases pending against the defendants in Brennan.

On August 3, 2007, Concord EFS, Inc. filed a motion for summary judgment seeking to dismiss plaintiffs’ per se claims, arguing that there are procompetitive justifications for the ATM interchange. On March 24, 2008, the Court entered an order granting the defendants’ motions for partial summary judgment, finding that the claims raised in this case would need to be addressed under a “Rule of Reason” analysis. On February 2, 2009, the Plaintiffs filed a Second Amended Complaint. On April 6, 2009, the defendants filed a Motion to Dismiss the Second Amended Complaint.

The Company believes the complaints are without merit and intends to vigorously defend them.

Other

In the normal course of business, the Company is subject to claims and litigation, including indemnification obligations to purchasers of former subsidiaries. Management of the Company believes that such matters will not have a material adverse effect on the Company’s results of operations, liquidity or financial condition.

Note 8: Employee Benefit Plans

The following table provides the components of net periodic benefit expense for the Company’s defined benefit pension plans:


	Three months ended June 30,						Six months ended June 30,
(in millions)	2009			2008			2009			2008
Service costs	$	1.9		$	2.7		$	3.8		$	5.5
Interest costs		9.1			10.7			17.7			21.5
Expected return on plan assets		(8.5	)		(11.1	)		(16.5	)		(22.3	)
Amortization		0.9			—			1.7			—

Net periodic benefit expense	$	3.4		$	2.3		$	6.7		$	4.7

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The Company estimates pension plan contributions for 2009 to be approximately $34 million. During the six months ended June 30, 2009, approximately $16 million was contributed to the United Kingdom plan. No contributions were made to the U.S. plan during the six months ended June 30, 2009.

Note 9: Stock Compensation Plans

Total stock-based compensation expense recognized in the Consolidated Statements of Operations resulting from stock options, non-vested restricted stock awards and non-vested restricted stock units was $4.6 and $9.1 million and $6.2 and $10.6 million pretax for the three and six months ended June 30, 2009 and 2008, respectively. Stock-based compensation expense is recognized in the “Selling, general and administrative” line item of the Consolidated Statements of Operations. Stock-based awards granted during the three and six months ended June 30, 2009 were immaterial.

Note 10: Fair Value Measurements

Fair value of financial instruments

Carrying amounts for certain of FDC’s financial instruments (cash and cash equivalents and short-term borrowings) approximate fair value due to their short maturities. Accordingly, these instruments are not presented in the following table. The following table provides the estimated fair values of the remaining financial instruments (in millions):


June 30, 2009	Carrying Value		Fair Value
Financial instruments:
Settlement assets:
Short-term investment securities	$	355.6	$	355.6
Long-term investment securities	$	479.4	$	479.4
Other current assets:
Short-term investment securities	$	7.0	$	7.0
Other long-term assets:
Long-term investment securities	$	26.3	$	26.3
Derivative financial instruments	$	2.8	$	2.8
Other current liabilities:
Derivative financial instruments	$	6.2	$	6.2
Long-term borrowings:
Long-term borrowings	$	22,185.7	$	15,508.2
Other long-term liabilities:
Derivative financial instruments	$	473.5	$	473.5

The estimated fair values of investment securities and derivative financial instruments are described below. Refer to Notes 11 and 12 for additional information regarding the Company’s investment securities and derivative financial instruments, respectively.

The estimated fair market value of long-term borrowings were primarily based on market trading prices. For additional information regarding the Company’s borrowings, refer to Note 5 of these Consolidated Financial Statements as well as Note 10 of the Company’s Consolidated Financial Statements in Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

Concentration of credit risk

The Company’s investment securities are diversified across multiple issuers with no single issuer representing more than 6% of the total carrying value of financial instruments. The Company maintains the financial instruments other than investment securities with various financial institutions. The Company limits its concentration of financial instruments with any one institution to 10% of the aggregate value of the portfolio and limits its derivative financial instruments credit risk by maintaining contracts with counterparties rating “A” or higher. The Company periodically reviews the credit standings of these institutions.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Assets and liabilities measured at fair value on a recurring basis

Financial instruments carried at fair value as of June 30, 2009 and measured at fair value on a recurring basis are classified in the table below according to the fair value hierarchy:


	Fair Value Measurement Using
As of June 30, 2009 (in millions)	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Assets:
Settlement assets:
Student loan auction rate securities	$	—	$	—	$	479.2	$	479.2
Other available-for-sale securities		0.2		2,509.0		—		2,509.2
Other current assets:
Available-for-sale securities		—		7.0		—		7.0
Other long-term assets:
Available-for-sale securities		—		0.6		—		0.6
Foreign currency derivative contracts		—		2.8		—		2.8

Total assets at fair value	$	0.2	$	2,519.4	$	479.2	$	2,998.8


Liabilities:
Other current liabilities:
Interest rate swap contracts	$	—	$	6.2	$	—	$	6.2
Other long-term liabilities:
Interest rate swap contracts		—		467.6		—		467.6
Foreign currency derivative contracts		—		5.9		—		5.9

Total liabilities at fair value	$	—	$	479.7	$	—	$	479.7

Settlement assets – Student loan auction rate securities

As of June 30, 2009, the Company held student loan auction rate securities (“SLARS”) which are long-term debt instruments, issued by student loan trusts, with variable interest rates that historically reset through a periodic Dutch auction process but do not include a put-back option. Due to the collapse of the auction market in 2008, the Company will not be able to readily access liquidity for the SLARS until the auction market successfully resumes, a secondary market is established for long-term investors, or issuers redeem the securities. A failed auction does not represent a default by the issuer of the underlying security. As of June 30, 2009, the majority of the SLARS held by the Company were highly rated (“A3” or higher) and all were collateralized by securitized student loans substantially guaranteed by the U.S. government through the Federal Family Education Loan Program (“FFELP”). The NextStudent Master Trust (“NextStudent”) securities, with a total fair value of $73.6 million, were also collateralized by securitized student loans substantially guaranteed by the U.S. government but were rated “B3” by Moody’s, and “BBB” by Fitch. The investment ratings were considered in determining the fair value of and the estimated credit loss for the NextStudent securities. As a result of the failed auctions, the trusts are required and continue to pay maximum interest rates as defined in the security offering documents which are typically based on either LIBOR or Treasury rates plus a spread.

Due to the lack of observable market activity for the SLARS held by the Company as of June 30, 2009, the Company, with the assistance of a third party valuation firm upon which the Company in part relied, made certain assumptions, primarily relating to estimating both the weighted average life for the securities held by the Company and the impact of the current lack of liquidity on the fair value. At June 30, 2009, the securities were valued based on a probability weighted discounted cash flow analysis. The Company considered each security’s key terms including date of issuance, date of maturity, auction intervals, scheduled auction dates, maximum auction rate, as well as underlying collateral, ratings, and guarantees or insurance. Substantially all SLARS held by the Company have collateral backed by FFELP. The probabilities of auction failure, a successful auction at par or repurchase at par for each future period were then forecasted. The Company assumed that the issuers will continue to pay maximum interest rates on the securities until the event of a successful auction or repurchase, at which point the Company would sell the SLARS at par through the auction. To determine the fair value of each security, the weighted average cash flows for each period were discounted back to present value at the determined discount rate for each security. As of June 30, 2009, cumulative probabilities of principal to be returned for “AAA” were estimated at approximately 45% over a two year period and 80% over a five year period. The probabilities were lower for lower rated securities. The discount rates used in the valuation were a combination of the liquidity risk premium assigned to the security (which ranged from 4% to 5%) plus the treasury strip yield (zero coupon treasury bond) for the individual period for which a cash flow was being discounted. The liquidity risk premium on the SLARS has decreased by 100 basis points from December 31, 2008 due to falling spreads on asset backed securities as well as indications of improved market liquidity. A 100 basis point change in liquidity risk premium would impact the value of the SLARS by approximately $20 million.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The impact of the Company’s judgment in the valuation was significant and, accordingly, the resulting fair value was classified as Level 3 within the fair value hierarchy.


(in millions)	Fair Value Measurement Using Significant Unobservable Inputs (Level 3) Student loan auction rate securities
Beginning balance January 1, 2009	$	492.2
Total gains or losses (realized or unrealized):
Included in other comprehensive income		5.3
Included in investment income, net		—
Purchases, sales, issuances and settlements, net		(18.3	)
Transfers in (out) of Level 3		—

Ending balance June 30, 2009	$	479.2

Settlement assets – Other available-for-sale securities

As of June 30, 2009, the Company held certain investments in primarily short-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 through an independent third party pricing service based on quotations from market-makers in the specific instruments or, where appropriate, other market inputs including interest rates, benchmark yields, reported trades, issuer spreads, two sided markets, benchmark securities, bids, offers, and reference data. In certain instances, amortized cost is considered an appropriate approximation of market value. The Company’s experience with these types of investments and expectations of the current investments held is that they will be satisfied at the current carrying amount. These securities were classified as Level 2.

As of June 30, 2009, the Company held preferred shares issued by the Federal Home Loan Mortgage Corporation (“Freddie Mac”) that are valued using quoted stock prices from the New York Stock Exchange and classified as Level 1.

Other current and long-term assets – Available-for-sale securities

The Company held certain other investments that were classified as available-for-sale and were classified as Level 2.

Derivative financial instruments

The Company uses derivative instruments to mitigate certain risks. The Company’s derivatives are not exchange listed and therefore the fair value is estimated using Bloomberg analytics models that are based on readily observable market inputs. These models reflect the contractual terms of the derivatives, such as notional value and expiration date, as well as market-based observables including interest and foreign currency exchange rates, yield curves and the credit quality of the counterparties. The models also incorporate the Company’s creditworthiness in order to appropriately reflect non-performance risk. Inputs to the derivative pricing models are generally observable and do not contain a high level of subjectivity and, accordingly, the Company’s derivatives were classified within Level 2 of the fair value hierarchy. While the Company believes its estimates result in a reasonable reflection of the fair value of these instruments, the estimated values may not be representative of actual values that could have been realized as of June 30, 2009 or that will be realized in the near future. Refer to Note 12 for additional information regarding the Company’s derivative financial instruments.

Assets and liabilities measured at fair value on a non-recurring basis

During six months ended June 30, 2009, there were no material fair value measurements of assets and liabilities measured on a non-recurring basis.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Note 11: Investment Securities

The principal components of the Company’s investment securities are as follows (in millions):


	Cost ⁽¹⁾		Gross Unrealized Gain		Gross Unrealized (Loss) excluding OTTI ⁽²⁾			OTTI Recognized in OCI ⁽²⁾⁽³⁾			Fair Value ⁽⁴⁾
June 30, 2009
Student loan auction rate securities	$	531.0		—	$	(36.6	)	$	(15.2	)	$	479.2
Corporate bonds		339.3	$	2.4		—			—			341.7
Other securities:
Cost-based investments		25.7		—		—			—			25.7
Other		21.6		0.1		—			—			21.7

Total other		47.3		0.1		—			—			47.4

Totals	$	917.6	$	2.5	$	(36.6	)	$	(15.2	)	$	868.3

December 31, 2008
Student loan auction rate securities	$	505.5		—	$	(13.3	)		—		$	492.2
Corporate bonds		342.1		—		(4.4	)		—			337.7
Other securities:
Cost-based investments		26.9		—		—			—			26.9
Other		37.6		—		—			—			37.6

Total other		64.5		—		—			—			64.5

Totals	$	912.1		—	$	(17.7	)		—		$	894.4

⁽¹⁾	Represents amortized cost for debt securities.

⁽²⁾	“OTTI” refers to other-than-temporary-impairments.

⁽³⁾	Represents the fair value adjustment for debt securities excluding that attributable to credit losses.

⁽⁴⁾	Represents cost for cost-based investments.

Investment securities are a principal component of the Company’s settlement assets and represent the investment of funds received by FDC from the sale of payment instruments (official checks and financial institution money orders) by authorized agents. The Company’s investment securities included in current settlement assets include certain certificates of deposit and corporate bonds. The Company’s long-term settlement assets are comprised of SLARS. The Company received proceeds from the sale of long-term investment securities of $4.0 million and $17.4 million for the three and six months ended June 30, 2009. Sales of these investments resulted in no gains or losses for the three months ended June 30, 2009, and resulted in gross realized pretax gains of $0.1 million for the six months ended June 30, 2009 in the “Investment income, net” line item of the Consolidated Statement of Operations.

Additionally, the Company maintains other investments which include equity securities and shares of a money market fund. These investments are carried at fair value and are included in the “Other current assets” and “Other long-term assets” line items of the Consolidated Balance Sheets. The Company also has investments in non-marketable equity securities and other investments for strategic purposes (collectively referred to as “cost-based investments”) which are included in “Other long-term assets” in the Company’s Consolidated Balance Sheets and are carried at cost. The Company’s cost-based investments are evaluated for impairment upon an indicator of impairment such as events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. At June 30, 2009, no indicators of impairment were present for the Company’s cost-based investments and it was not practicable to estimate the fair value of the investments; accordingly, the investments were not evaluated for impairment. Proceeds from the sale of these investment securities totaled $0.2 million for the six months ended June 30, 2009 while there were no proceeds received for the three months ended June 30, 2009. Realized pretax gains and losses associated with these investments are recognized in the “Other income (expense)” line item of the Consolidated Statements of Operations described in Note 2.

As of June 30, 2009, all of the above noted investments, except cost based investments, were classified as available-for-sale. Unrealized gains and losses on these investments were included as a separate component of OCI, net of any related tax effects. Net unrealized holding gains, net of tax, of $18.6 million and $7.5 million were recorded to OCI for the three and six months ended June 30, 2009, respectively. The Company uses specific identification to determine the cost of a security sold and the amount of gains and losses reclassified out of OCI. Realized pretax gains from the sale of investment securities, principally SLARS, reclassified out of OCI into “Investment income, net” was $0.1 million for the six months ended June 30, 2009. There were no gains or losses recognized on the sale of investment securities for the three months ended June 30, 2009.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents the gross unrealized losses and fair value of the Company’s investments with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2009 (in millions):


June 30, 2009	Less than 12 months					More than 12 months ⁽¹⁾					Total Fair Value		Total Unrealized Losses
June 30, 2009	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value		Total Unrealized Losses
Student loan auction rate securities	$	100.7	$	(17.2	)	$	378.5	$	(34.6	)	$	479.2	$	(51.8	)

December 31, 2008	Less than 12 months					More than 12 months					Total Fair Value		Total Unrealized Losses
December 31, 2008	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Total Fair Value		Total Unrealized Losses
Student loan auction rate securities	$	492.2	$	(13.3	)		—		—		$	492.2	$	(13.3	)
Corporate bonds	$	337.7	$	(4.4	)		—		—		$	337.7	$	(4.4	)

⁽¹⁾	The total unrealized losses classified as more than 12 months at June 30, 2009 was significantly higher than the total unrealized losses classified as less than 12 months at December 31, 2008 due to the cumulative effect adjustment discussed below.

As of June 30, 2009, the Company’s unrealized losses related to the following:

Student loan auction rate securities—The unrealized losses resulted from securities that have decreased in fair value to below their amortized cost primarily due to current lack of liquidity resulting from failure of the auction mechanisms. During 2008, an other-than-temporary-impairment loss of $48.0 million was recognized relating to the SLARS under the then applicable accounting guidance in addition to the unrealized loss reflected in the table directly above. The fair value of the securities declined further during the first quarter of 2009 driven primarily by the valuation of NextStudent securities and, accordingly, the Company recognized additional unrealized loss in OCI during the three months ended March 31, 2009. Effective April 1, 2009, in connection with the adoption of new accounting rules for recognition and presentation of other-than-temporary impairments, the Company performed an assessment of the previously impaired SLARS to determine whether the securities were other-than-temporarily-impaired under the new guidance. The Company does not currently intend to sell the SLARS and does not consider it more likely than not that it will be required to sell the SLARS before the recovery of their amortized cost basis. This determination was based on the projected timing of when certain related settlement liabilities would need to be funded and the Company’s ability to use its revolving credit facility in the event the settlement liabilities needed to be funded before the SLARS were liquid.

The Company believes that the SLARS currently held, with the exception of securities issued by NextStudent, will recover all of their principal value by their maturity date due to the following:

•

the securities are comprised primarily of senior tranches;

•

the securities are backed by collateral that is 97%-98% guaranteed by FFELP with subordinated tranches covering the non-guaranteed portion;

•

the securities have loan to collateral value ratios of 100% or greater for all senior securities and 99% for subordinated securities;

•

the securities have above investment grade credit ratings with the majority of securities rated at “A3” or higher with the exception of NextStudent securities which are rated “BBB” and “B3”.

The Company believes that the NextStudent SLARS may not recover all of their principal value by their maturity date and that it may incur a credit loss on these securities at least equal to the non-guaranteed portion of the underlying collateral. Based on the Company’s qualitative assessment of these and other relevant factors, management has concluded that a credit loss should be recognized for the securities issued by NextStudent and no credit loss should be recognized for all other SLARS. In accordance with the transition guidance prescribed by the new accounting rules, as of April 1, 2009, the Company recognized a cumulative effect adjustment by increasing the opening balance of retained earnings by $27.1 million, net of tax, and recording a corresponding unrealized loss in OCI, on the Consolidated Statement of Equity. The cumulative effect adjustment was equal to the amount of other-than-temporary-impairment, net of the related tax effects, previously recorded in the Statement of Operations for these securities less the three percent credit loss for NextStudent (effectively reversing the effect of $43.3 million recognized as impairment expense in 2008 and not associated with SLARS sold during the first three months of 2009). The amortized cost basis of the securities was increased by the pretax amount of the cumulative effect adjustment. During the three months ended June 30, 2009, the Company reduced the unrealized loss, net of tax, recognized in OCI by $18.6 million due to an increase in fair value of the SLARS during the period. As of the adoption date of the new accounting rules discussed above, total cumulative credit losses of $2.7 million had been recognized in the Statement of Operations on the NextStudent SLARS. During the three months ended June 30, 2009, there were no changes in this credit loss and there were no additional credit losses for any of the SLARS held during that same period.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The following table presents maturity information for the Company’s investments in debt securities at June 30, 2009 (in millions):


	Fair Value
Due within one year	$	342.2
Due after one year through five years		—
Due after five years through 10 years		57.2
Due after 10 years		422.1

Total debt securities	$	821.5

Note 12: Derivative Financial Instruments

Risk Management Objectives and Strategies

The Company is exposed to various financial and market risks, including those related to changes in interest rates and foreign currency exchange rates, that exist as part of its ongoing business operations. The Company utilizes certain derivative financial instruments to enhance its ability to manage these risks.

As of June 30, 2009, the Company uses derivative instruments to mitigate (i) cash flow risks with respect to changes in interest rates (forecasted interest payments on variable rate debt) and foreign exchange rates (forecasted transactions denominated in foreign currency), (ii) to protect the initial net investment in certain foreign subsidiaries and/or affiliates with respect to changes in foreign currency exchange rates and (iii) to protect the Company from foreign currency exposure related to an outsourcing contract with a foreign vendor.

Derivative instruments are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company applies strict policies to manage each of these risks, including prohibition against derivatives trading, derivatives market-making or any other speculative activities. Although certain derivatives do not qualify for hedge accounting, they are entered into for economic hedge purposes and are not considered speculative.

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 Instruments and Hedging Activities

The Company recognizes all derivatives in the “Other long-term assets”, “Other current liabilities” and “Other long-term liabilities” captions in the Consolidated Balance Sheets at their fair values. The Company designated certain of its interest rate swaps as cash flow hedges of forecasted interest rate payments related to its variable rate debt and certain of its cross currency swaps as a foreign currency hedge of its net investment in a foreign subsidiary. Other interest rate swaps, cross currency swaps and forward contracts on various foreign currencies did not qualify or have not been designated as accounting hedges and do not receive hedge accounting treatment.

With respect to derivative instruments that are afforded hedge accounting, the effective portion of changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge is recorded in OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The effective portion of changes in the fair value of a net investment hedge is recorded as part of the cumulative translation adjustment in OCI. Any ineffectiveness is recorded immediately 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 that are designated as cash flow hedges to forecasted transactions and net investment hedges to the underlying investment in a foreign subsidiary or affiliate. The Company formally assesses, both at inception of the hedge and on an ongoing basis, whether the hedge is highly effective in offsetting changes in cash flows or foreign currency exposure of the underlying hedged items. The Company also performs an assessment of the probability of the forecasted transactions on a periodic basis. If it is determined that a derivative ceases to be highly effective during the term of the hedge or if the forecasted transaction is no longer probable, the Company will discontinue hedge accounting prospectively for such derivative.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Credit Risk

The Company is monitoring the financial stability of its derivative counterparties. Certain of these counterparties have received support from the federal government in light of current financial conditions. Although these counterparties remain highly-rated (in the “A” category or higher), their ability to satisfy their commitments may be dependent on receiving continued support from the federal government . The credit risk inherent in these agreements represents the possibility that a loss may occur from the nonperformance of a counterparty to the agreements. The Company performs a review at inception of the hedge, as circumstances warrant, and at least on a quarterly basis of the credit risk of these counterparties. The Company also monitors the concentration of its contracts with individual counterparties. The Company’s exposures are in liquid currencies (primarily in U.S. dollars, euros and Australian dollars), so there is minimal risk that appropriate derivatives to maintain the hedging program would not be available in the future.

DERIVATIVES NOT QUALIFYING FOR HEDGE ACCOUNTING

At June 30, 2009, the Company had certain derivative instruments that functioned as economic hedges but did not qualify or were not designated to qualify for hedge accounting. Such instruments included foreign currency forward contracts to hedge forecasted foreign currency sales and purchases, a cross-currency swap to hedge foreign currency exposure from an intercompany loan, cross-currency swaps to hedge an investment in a foreign subsidiary from fluctuations in foreign currency exchange rates, a foreign exchange rate collar to hedge foreign currency exposure related to an outsourcing contract with a foreign vendor, and interest rate swaps to hedge the interest payments on variable rate debt from fluctuations in interest rates.

During the first quarter of 2009, one of the cash flow hedges of interest payments on the Company’s variable rate debt previously designated to qualify for hedge accounting ceased to be highly effective. As such, the Company did not apply hedge accounting to the discontinued hedge during the first quarter of 2009 and discontinued prospective hedge accounting for the affected derivatives. During the second quarter of 2009, the Company made an election with respect to the duration of the variable LIBOR interest rate payments it was hedging which was inconsistent with the original hedge strategy documented in the accounting designation. Accordingly, the Company had to de-designate the affected interest rate swaps, with $2 billion notional amount, from receiving hedge accounting. The Company was able to re-designate prospectively an interest rate swap with a notional amount of $500 million to continue to receive hedge accounting treatment; however, the other interest rate swaps with $1.5 billion notional amount no longer met the criteria to qualify for hedge accounting primarily due to the significant “off-market” value of the swaps and will not be receiving hedge accounting treatment prospectively. While the derivatives no longer qualify for hedge accounting, they continue to be effective economically in eliminating the variability in interest rate payments on the corresponding portion of the Company’s variable rate debt.

As of June 30, 2009, the notional amounts of the foreign currency forward contracts were 4.3 million Canadian dollars ($3.7 million). The notional amount of the foreign exchange rate collar was approximately 91.9 million Philippine pesos ($1.9 million). The notional amount of the cross-currency swaps was 91.1 million euro (approximately $127.4 million). The notional amount of the interest rate swaps that no longer qualify for hedge accounting was $3.0 billion.

The periodic change in the mark-to-market of the derivative instruments not designated as accounting hedges is recorded immediately in the Consolidated Statements of Operations. For information on the location and amounts of derivative fair values in the Consolidated Balance Sheets and derivative gains and losses in the Consolidated Statements of Operations, see the tabular information presented below.

DERIVATIVES THAT QUALIFY FOR HEDGE ACCOUNTING

Hedge of a Net Investment in a Foreign Operation

As of June 30, 2009, the Company had a cross currency swap that was designated as a hedge of net investments in foreign operations. Since the existing derivative instrument was not at zero fair value at the time of designation, the hedging relationship creates some ineffectiveness which is recognized immediately in the Consolidated Statements of Operations. The effective portion of the change in fair value of the cross currency swap is recognized in the Consolidated Statement of Equity. As of June 30, 2009, the aggregate notional amount of the cross currency swap was 115.0 million Australian dollars (approximately $92.3 million).

For information on the location and amounts of derivative fair values in the Consolidated Balance Sheets and derivative gains and losses in the Consolidated Balance Sheets or in the Consolidated Statements of Operations, see the tabular information presented below.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

Cash Flow Hedges

As of June 30, 2009, the Company had interest rate swaps which were designated as cash flow hedges of the variability in the interest payments on $4.5 billion of the approximate $12.7 billion variable rate senior secured term loan. As discussed above, the Company had additional interest rate swaps with notional amounts totaling $3 billion that ceased to qualify for hedge accounting during the first and second quarters of 2009. The Company also had basis rate swaps that modify the variable rates on $6.0 billion of the $7.5 billion interest rate swaps and that lower the fixed interest rates on those interest rate swaps. The basis swaps pay interest at rates equal to three-month-LIBOR and receive interest at rates equal to one-month-LIBOR plus a fixed spread. One basis swap with a notional amount of $2.0 billion expired on June 24, 2009 and all other basis swaps with a combined notional amount of $4.0 billion expire on September 24, 2010. The Company pays interest on its senior secured term loan facility based on the one-month-LIBOR interest rate index to match the terms of the basis swaps. Ineffectiveness associated with these hedges is recognized immediately in the Consolidated Statements of Operations.

At June 30, 2009, the maximum length of time over which the Company is hedging its exposure is approximately 3.3 years. The effective portion of changes in fair value of the cash flow hedges is recorded temporarily in the Consolidated Statement of Equity as a component of OCI and then recognized in the Consolidated Statements of Operations in the same period or periods during which the payment of variable interest associated with the floating rate debt is recorded in earnings. Any ineffective portions of changes in fair value are recognized in the Consolidated Statements of Operations during the period of change. The Company follows the hypothetical derivative method to measure hedge ineffectiveness. A $2.0 million loss and a $3.8 million loss associated with ineffectiveness were recognized in earnings during the three and six months ended June 30, 2009, respectively, related to the cash flow hedges mostly due to the hedges being off-market at the time of designation. The amount of losses in OCI related to the hedged transactions as of June 30, 2009 that is expected to be reclassified into the Consolidated Statements of Operations within the next 12 months is approximately $158 million.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

FAIR VALUE OF DERIVATIVE INSTRUMENTS

Fair Value of Derivative Instruments in the Consolidated Balance Sheets


	As of June 30, 2009
	Derivative Assets			Derivative Liabilities
(in millions)	Fair Value		Balance Sheet Location	Fair Value			Balance Sheet Location
Derivatives designated as hedging instruments
Interest rate contracts		—		$	(311.0	)	Other long-term liabilities and Other current liabilities
Foreign exchange contracts		—			(2.9	)	Other long-term liabilities

Total derivatives designated as hedging instruments		—			(313.9	)


Derivatives not designated as hedging instruments
Interest rate contracts		—			(162.8	)	Other long-term liabilities and Other current liabilities
Foreign exchange contracts	$	2.8	Other long- term assets		(3.0	)	Other long-term liabilities

Total derivatives not designated as hedging instruments		2.8			(165.8	)

Total Derivatives	$	2.8		$	(479.7	)

Fair Value of Derivative Instruments in the Consolidated Balance Sheets


	As of December 31, 2008
(in millions)	Derivative Assets			Derivative Liabilities
(in millions)	Fair Value		Balance Sheet Location	Fair Value			Balance Sheet Location
Derivatives designated as hedging instruments
Interest rate contracts		—		$	(598.8	)	Other long-term liabilities and Other current liabilities
Foreign exchange contracts	$	8.9	Other long- term assets		—

Total derivatives designated as hedging instruments		8.9			(598.8	)


Derivatives not designated as hedging instruments
Foreign exchange contracts		2.8	Other long- term assets		(2.5	)	Other long-term liabilities

Total derivatives not designated as hedging instruments		2.8			(2.5	)

Total Derivatives	$	11.7		$	(601.3	)

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

The Effect of Derivative Instruments on the Consolidated Statements of Operations

For the three months ended June 30, 2009


(in millions, pretax)	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)			Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)			Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Derivatives in cash flow hedging relationships
Interest rate contracts	$	28.4		$	(27.4	)	Interest expense	$	(2.0	)	Other income (expense)

Derivatives in net investment hedging relationships
Foreign exchange contracts	$	(14.7	)		—				—

	Amount of Gain or (Loss) Recognized in Income on Derivative			Location of Gain or (Loss) recognized in Income on Derivative
Derivatives not designated as hedging instruments
Interest rate contracts	$	(4.8	)		Other income (expense)
Foreign exchange contracts	$	(6.8	)		Other income (expense)

The Effect of Derivative Instruments on the Consolidated Statements of Operations

For the six months ended June 30, 2009


(in millions, pretax)	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)			Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)			Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Derivatives in cash flow hedging relationships
Interest rate contracts	$	65.6		$	(52.4	)	Interest expense	$	(3.8	)	Other income (expense)

Derivatives in net investment hedging relationships
Foreign exchange contracts	$	(12.3	)		—			$	(0.1	)	Other income (expense)

	Amount of Gain or (Loss) Recognized in Income on Derivative			Location of Gain or (Loss) recognized in Income on Derivative
Derivatives not designated as hedging instruments
Interest rate contracts	$	(1.9	)		Other income (expense)
Foreign exchange contracts	$	(1.1	)		Other income (expense)

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)

ACCUMULATED DERIVATIVE GAINS AND LOSSES

The following table summarizes activity in other comprehensive loss for the six months ended June 30, 2009 related to derivative instruments classified as cash flow hedges and net investment hedges held by the Company (in millions, after tax):


	Six months ended June 30, 2009
Accumulated loss included in other comprehensive loss at beginning of the period	$	(339.6	)
Less: Reclassifications into earnings from other comprehensive loss		32.9

		(306.7	)
Net gains in fair value of derivatives ^(a)		34.2

Accumulated loss included in other comprehensive loss at end of the period	$	(272.5	)

^(a)	Gains and losses are included in unrealized gains on hedging activities and in foreign currency translation adjustment on the Consolidated Statement of Equity.

Note 13: Supplemental Guarantor Condensed Consolidating Financial Statements

FDC’s publicly tradable 9.875% senior notes are unconditionally guaranteed by substantially all existing and future, direct and indirect, wholly owned, domestic subsidiaries of FDC other than Integrated Payment Systems Inc. (“Guarantors”). None of the other subsidiaries of FDC, either direct or indirect, guarantee the senior publicly tradable notes (“Non-Guarantors”). The Guarantors also unconditionally guarantee the senior secured revolving credit facility and senior secured term loan facility, senior unsecured cash-pay notes, senior unsecured PIK notes due 2015 and senior subordinated unsecured notes. The publicly tradable 9.875% senior note guarantees are unsecured and rank senior in right of payment to all existing and future subordinated indebtedness of FDC’s guarantor subsidiaries. The publicly tradable 9.875% senior note guarantees rank equally in right of payment with all existing and future senior indebtedness of the guarantor subsidiaries.

The following tables present the results of operations, financial position and cash flows of FDC (“FDC Parent Company”), the Guarantor subsidiaries, the Non-Guarantor subsidiaries and consolidation adjustments for the three and six months ended June 30, 2009 and 2008, and as of June 30, 2009 and December 31, 2008 to arrive at the information for FDC on a consolidated basis.

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


(in millions)	Three months ended June 30, 2009
(in millions)	FDC Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidation Adjustments			Consolidated
Revenues:
Transaction and processing service fees	$	—		$	1,072.9		$	299.8		$	(1.2	)	$	1,371.5
Investment income, net		—			1.5			(2.5	)		—			(1.0	)
Product sales and other		—			141.8			67.9			(3.5	)		206.2
Reimbursable debit network fees, postage and other		—			619.9			12.0			—			631.9

		—			1,836.1			377.2			(4.7	)		2,208.6

Expenses:
Cost of services (exclusive of items shown below)		—			525.1			149.2			(1.2	)		673.1
Cost of products sold		—			60.9			22.8			(3.5	)		80.2
Selling, general and administrative		53.4			197.3			80.5			—			331.2
Reimbursable debit network fees, postage and other		—			619.9			12.0			—			631.9
Depreciation and amortization		1.5			299.9			64.2			—			365.6
Other operating expenses:
Restructuring, net		(0.2	)		8.0			0.6			—			8.4

		54.7			1,711.1			329.3			(4.7	)		2,090.4

Operating (loss) profit		(54.7	)		125.0			47.9			—			118.2

Interest income		1.3			0.2			1.6			—			3.1
Interest expense		(443.4	)		(2.1	)		(4.1	)		—			(449.6	)
Interest (expense) income from intercompany notes		(34.0	)		24.5			9.5			—			—
Other income (expense)		(42.1	)		1.7			36.8			—			(3.6	)
Equity earnings (losses) from consolidated subsidiaries		158.0			(3.8	)		—			(154.2	)		—

		(360.2	)		20.5			43.8			(154.2	)		(450.1	)

(Loss) income before income taxes and equity earnings in affiliates		(414.9	)		145.5			91.7			(154.2	)		(331.9	)
Income tax (benefit) expense		(219.0	)		67.7			38.5			—			(112.8	)
Equity earnings in affiliates		—			25.8			(0.3	)		—			25.5

Net (loss) income		(195.9	)		103.6			52.9			(154.2	)		(193.6	)
Less: Net (loss) income attributable to noncontrolling interests		—			(0.3	)		2.6			—			2.3

Net (loss) income attributable to First Data Corporation	$	(195.9	)	$	103.9		$	50.3		$	(154.2	)	$	(195.9	)

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


(in millions)	Six months ended June 30, 2009
(in millions)	FDC Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidation Adjustments			Consolidated
Revenues:
Transaction and processing service fees	$	—		$	2,106.4		$	574.1		$	(2.2	)	$	2,678.3
Investment income, net		—			4.0			0.8			—			4.8
Product sales and other		—			255.1			131.4			(6.3	)		380.2
Reimbursable debit network fees, postage and other		—			1,197.3			24.2			—			1,221.5

		—			3,562.8			730.5			(8.5	)		4,284.8

Expenses:
Cost of services (exclusive of items shown below)		—			1,064.4			325.2			(2.2	)		1,387.4
Cost of products sold		—			109.6			40.4			(6.3	)		143.7
Selling, general and administrative		106.5			392.7			158.5			—			657.7
Reimbursable debit network fees, postage and other		—			1,197.3			24.2			—			1,221.5
Depreciation and amortization		2.6			564.6			127.9			—			695.1
Other operating expenses:
Restructuring, net		0.9			25.7			6.9			—			33.5
Litigation and regulatory settlements		(2.7	)		—			—			—			(2.7	)

		107.3			3,354.3			683.1			(8.5	)		4,136.2

Operating (loss) profit		(107.3	)		208.5			47.4			—			148.6

Interest income		2.8			0.3			3.3			—			6.4
Interest expense		(885.1	)		(4.1	)		(8.6	)		—			(897.8	)
Interest (expense) income from intercompany notes		(69.2	)		50.6			18.6			—			—
Other income (expense)		7.8			3.0			8.9			—			19.7
Equity earnings (losses) from consolidated subsidiaries		220.0			(20.4	)		—			(199.6	)		—

		(723.7	)		29.4			22.2			(199.6	)		(871.7	)

(Loss) income before income taxes and equity earnings in affiliates		(831.0	)		237.9			69.6			(199.6	)		(723.1	)
Income tax (benefit) expense		(403.8	)		112.4			33.8			—			(257.6	)
Equity earnings in affiliates		—			45.1			(1.1	)		—			44.0

Net (loss) income		(427.2	)		170.6			34.7			(199.6	)		(421.5	)
Less: Net (loss) income attributable to noncontrolling interests		—			(0.1	)		5.8			—			5.7

Net (loss) income attributable to First Data Corporation	$	(427.2	)	$	170.7		$	28.9		$	(199.6	)	$	(427.2	)

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


(in millions)	Three months ended June 30, 2008
(in millions)	FDC Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidation Adjustments			Consolidated
Revenues:
Transaction and processing service fees	$	0.8		$	986.5		$	457.8		$	(1.4	)	$	1,443.7
Investment income, net		—			6.7			29.1			—			35.8
Product sales and other		—			133.5			87.1			(6.6	)		214.0
Reimbursable debit network fees, postage and other		—			483.6			27.2			—			510.8

		0.8			1,610.3			601.2			(8.0	)		2,204.3

Expenses:
Cost of services (exclusive of items shown below)		—			476.6			233.9			(1.4	)		709.1
Cost of products sold		—			54.5			35.5			(6.6	)		83.4
Selling, general and administrative		58.2			196.8			100.5			—			355.5
Reimbursable debit network fees, postage and other		—			483.6			27.2			—			510.8
Depreciation and amortization		1.5			246.6			90.7			—			338.8
Other operating expenses:
Restructuring, net		—			—			(0.1	)		—			(0.1	)

		59.7			1,458.1			487.7			(8.0	)		1,997.5

Operating (loss) profit		(58.9	)		152.2			113.5			—			206.8

Interest income		1.9			0.8			3.9			—			6.6
Interest expense		(441.6	)		(1.9	)		(7.6	)		—			(451.1	)
Interest (expense) income from intercompany notes		(26.4	)		20.5			5.9			—			—
Other income (expense)		39.9			—			(33.5	)		—			6.4
Equity earnings from consolidated subsidiaries		162.7			21.3			—			(184.0	)		—

		(263.5	)		40.7			(31.3	)		(184.0	)		(438.1	)

(Loss) income before income taxes and equity earnings in affiliates		(322.4	)		192.9			82.2			(184.0	)		(231.3	)
Income tax (benefit) expense		(156.2	)		86.4			0.4			—			(69.4	)
Equity earnings in affiliates		5.6			32.4			3.6			—			41.6

Net (loss) income		(160.6	)		138.9			85.4			(184.0	)		(120.3	)
Less: Net income attributable to noncontrolling interests		—			0.2			40.1			—			40.3

Net (loss) income attributable to First Data Corporation	$	(160.6	)	$	138.7		$	45.3		$	(184.0	)	$	(160.6	)

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


(in millions)	Six months ended June 30, 2008
(in millions)	FDC Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidation Adjustments			Consolidated
Revenues:
Transaction and processing service fees	$	1.6		$	1,951.0		$	873.4		$	(2.6	)	$	2,823.4
Investment income, net		—			15.0			76.8			—			91.8
Product sales and other		—			274.7			163.9			(12.6	)		426.0
Reimbursable debit network fees, postage and other		—			940.6			49.0			—			989.6

		1.6			3,181.3			1,163.1			(15.2	)		4,330.8

Expenses:
Cost of services (exclusive of items shown below)		—			969.6			463.6			(2.6	)		1,430.6
Cost of products sold		—			103.4			63.5			(12.6	)		154.3
Selling, general and administrative		114.1			388.6			192.4			—			695.1
Reimbursable debit network fees, postage and other		—			940.6			49.0			—			989.6
Depreciation and amortization		2.9			480.2			174.8			—			657.9
Other operating expenses:
Restructuring, net		—			—			(0.1	)		—			(0.1	)

		117.0			2,882.4			943.2			(15.2	)		3,927.4

Operating (loss) profit		(115.4	)		298.9			219.9			—			403.4

Interest income		5.9			1.8			7.9			—			15.6
Interest expense		(953.1	)		(3.2	)		(12.5	)		—			(968.8	)
Interest (expense) income from intercompany notes		(52.7	)		41.3			11.4			—			—
Other income (expense)		(70.3	)		0.5			33.0			—			(36.8	)
Equity earnings from consolidated subsidiaries		381.1			43.4			—			(424.5	)		—

		(689.1	)		83.8			39.8			(424.5	)		(990.0	)

(Loss) income before income taxes and equity earnings in affiliates		(804.5	)		382.7			259.7			(424.5	)		(586.6	)
Income tax (benefit) expense		(412.9	)		167.2			45.8			—			(199.9	)
Equity earnings in affiliates		9.3			59.7			4.7			—			73.7

Net (loss) income		(382.3	)		275.2			218.6			(424.5	)		(313.0	)
Less: Net income attributable to noncontrolling interests		—			0.4			68.9			—			69.3

Net (loss) income attributable to First Data Corporation	$	(382.3	)	$	274.8		$	149.7		$	(424.5	)	$	(382.3	)

FIRST DATA CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

(Unaudited)


(in millions)	June 30, 2009
(in millions)	FDC Parent Company			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidation Adjustments			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	48.1		$	13.8		$	706.1			—		$	768.0
Accounts receivable, net of allowance for doubtful accounts		18.5			1,530.2			640.8			—			2,189.5
Settlement assets ⁽¹⁾		—			3,192.6			5,297.5			—			8,490.1
Other current assets		109.6			264.0			109.0			—			482.6

Total current assets		176.2			5,000.6			6,753.4			—			11,930.2

Property and equipment, net of accumulated depreciation		27.8			714.6			340.6			—			1,083.0
Goodwill		—			9,125.8			7,987.7			—			17,113.5
Customer relationships, net of accumulated amortization		—			3,535.4			2,876.3			—			6,411.7
Other intangibles, net of accumulated amortization		606.5			833.9			779.3			—			2,219.7
Investment in affiliates		—			1,390.2			35.1		$	(128.7	)		1,296.6
Long-term settlement assets ⁽¹⁾		—			—			479.4			—			479.4
Other long-term assets		609.7			229.7			38.7			—			878.1
Investment in consolidated subsidiaries		28,216.0			5,225.3			—			(33,441.3	)		—

Total assets	$	29,636.2		$	26,055.5		$	19,290.5		$	(33,570.0	)	$	41,412.2

LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	0.7		$	88.4		$	85.7			—		$	174.8
Short-term and current portion of long-term borrowings		247.2			38.5			161.4			—			447.1
Settlement obligations ⁽¹⁾		—			3,192.6			5,826.2			—			9,018.8
Other current liabilities		390.0			608.7			219.9			—			1,218.6

Total current liabilities		637.9			3,928.2			6,293.2			—			10,859.3

Long-term borrowings		22,028.6			59.1			98.0			—			22,185.7
Deferred long-term tax (assets) liabilities		(684.1	)		2,008.9			108.6			—			1,433.4
Intercompany payable (receivable)		2,996.0			(2,388.5	)		(607.5	)		—			—
Intercompany notes		1,496.2			(1,051.1	)		(445.1	)		—			—
Other long-term liabilities		1,066.3			80.8			25.5			—			1,172.6

Total liabilities		27,540.9			2,637.4			5,472.7			—			35,651.0

Redeemable common stock		—			—			321.7		$	(321.7	)		—
Redeemable noncontrolling interests		—			—			—			193.0			193.0


First Data Corporation stockholder’s equity		2,095.3			23,418.1			6,448.6			(29,866.7	)		2,095.3

Noncontrolling interests		—			—			28.7			3,444.2			3,472.9
Equity of consolidated alliance		—			—			7,018.8			(7,018.8	)		—

Total equity		2,095.3			23,418.1			13,496.1			(33,441.3	)		5,568.2

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company