EX-99.3 4 dex993.htm INFORMATION STATEMENT OF THE REGISTRANT DATED SEPTEMBER 14, 2006 Information Statement of the Registrant dated September 14, 2006
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Exhibit 99.3

LOGO

 

Dear First Data Stockholder:

 

I am pleased to inform you that on September 8, 2006, the company’s Board of Directors approved the spin-off of The Western Union Company, a wholly-owned subsidiary that is a leader in the global money transfer business.

 

The spin-off of Western Union is scheduled to occur on September 29, 2006. Holders of record of shares of First Data common stock as of the close of business on September 22, 2006, which will be the record date, will receive one share of Western Union common stock for each share of First Data common stock held. No action is required on your part to receive shares of Western Union. You will not be required to pay anything for the new shares or to surrender any First Data shares. Because Western Union shares will only be maintained in book-entry form, you will not receive a stock certificate representing your interest in Western Union. A book-entry account statement reflecting your ownership of shares of Western Union common stock will be mailed to you, or your brokerage account will be credited for the shares, on or about October 2, 2006.

 

We believe that the separation of Western Union from First Data will provide a better structure for each company to pursue the most appropriate long-term growth opportunities and business strategies by allowing it to focus on its own distinct businesses, opportunities and markets. First Data will continue to provide business customers with leading, innovative electronic commerce and payment solutions, while Western Union will build on its position as the trusted source for consumers around the world to transfer money and pay bills rapidly, reliably and conveniently.

 

Following the spin-off, First Data’s common stock will continue to trade on the New York Stock Exchange under the symbol “FDC.” Western Union common stock has been authorized for listing on the NYSE under the symbol “WU.”

 

We intend for the spin-off to be tax-free for all stockholders. To that end, we have received a favorable ruling from the Internal Revenue Service with respect to the spin-off and, with respect to certain requirements for tax-free treatment on which the Internal Revenue Service will not rule, we expect to receive an opinion of counsel to the effect that such requirements will be satisfied. The spin-off is also subject to other conditions, including necessary regulatory approvals.

 

I encourage you to read the enclosed information statement, which is being provided to all First Data stockholders. It describes the spin-off in detail and contains important business and financial information about Western Union.

 

I look forward to your continued support as a stockholder of First Data. We remain committed to working on your behalf to build long-term stockholder value.

 

Sincerely,

LOGO

Ric Duques

Chairman and Chief Executive Officer

First Data

 

September 14, 2006


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LOGO

 

Dear Western Union Stockholder:

 

It is our great pleasure to welcome you as a stockholder of Western Union.

 

The Western Union Company has roots back to 1851 and first traded on the New York Stock Exchange in 1865. For 150 years, we have been providing innovative services, including creating the universal stock ticker and launching the first United States commercial communications satellite service. We introduced our consumer-to-consumer money transfer service in 1871 and today offer these services under the Western Union, Orlandi Valuta and Vigo brands. We began offering consumer-to-business payment services in 1989 when we introduced Western Union Quick Collect, providing consumers in the United States with convenient walk-in access to our agent network to pay bills in cash.

 

Since First Data acquired us in 1995, we have become a leader in global money transfer, with a vast, diversified distribution network consisting of over 270,000 agent locations in more than 200 countries and territories. We believe that the size and reach of this network, our brand strength, and the convenience and reliability we bring to our consumers have been the key to the growth of our business as well as our strong financial performance.

 

We are very excited about our prospects and believe we will be even better positioned to realize the significant growth opportunities for our business as an independent company. Looking forward, we intend to continue to execute our successful strategies of expanding and diversifying our global distribution, building our brand and enhancing our consumers’ experiences, developing consumer convenience and choice, and exploring new service offerings.

 

Western Union common stock has been authorized for listing on the New York Stock Exchange under the symbol “WU.”

 

We invite you to learn more about our company by reading the enclosed information statement. We thank you in advance for your support as our business begins a new and exciting chapter in its long and successful history.

 

Sincerely,

 

LOGO

LOGO

Christina A. Gold

Jack M. Greenberg

Chief Executive Officer

Non-Executive Chairman

Western Union

Western Union

 

September 14, 2006


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INFORMATION STATEMENT

 

LOGO

 

Common Stock

 

(Par Value $0.01 Per Share)

 

First Data Corporation is providing this information statement to you as a stockholder of First Data in connection with the spin-off of The Western Union Company. The spin-off will consist of a series of transactions by which First Data will contribute its money transfer and consumer payments businesses to Western Union, which we refer to as the contribution, and distribute to its stockholders of record all of the outstanding shares of Western Union common stock, which we refer to as the distribution.

 

First Data expects that the distribution will be made on September 29, 2006 on a pro rata basis to the holders of record of First Data common stock on September 22, 2006, which we refer to as the record date. If you are a holder of record of First Data common stock at the close of business on the record date, you will receive one share of Western Union common stock for each share of First Data common stock you hold on that date. As discussed under “The Spin-Off—Trading of First Data Common Stock After the Record Date and Prior to the Distribution,” if you sell your shares of First Data common stock in the “regular way” market after the record date and prior to the spin-off, you also will be selling your right to receive shares of Western Union common stock in connection with the spin-off. A book-entry account statement reflecting your ownership of shares of Western Union common stock will be mailed to you, or your brokerage account will be credited for the shares, on or about October 2, 2006. Because Western Union shares will only be maintained in book-entry form, you will not receive a stock certificate representing your interest in Western Union.

 

First Data has received a favorable tax ruling from the United States Internal Revenue Service with respect to the spin-off.

 

You will not be required to make any payment for the shares of Western Union common stock that you will receive in connection with the spin-off, nor will you be required to surrender or exchange your shares of First Data common stock or take any other action in order to receive shares of Western Union common stock in connection with the spin-off. No approval by First Data stockholders of the spin-off is required or being sought. You are not being asked for a proxy and you are requested not to send a proxy.

 

There is no current trading market for Western Union common stock. However, we expect that a limited market, commonly known as a “when-issued” trading market, for Western Union common stock will begin on or about September 20, 2006, and we expect that “regular way” trading of Western Union common stock will begin the first day of trading following the spin-off. Western Union common stock has been authorized for listing on the New York Stock Exchange under the symbol “WU.”

 

In reviewing this information statement, you should carefully consider the risks under “ Risk Factors” beginning on page 15 of this information statement.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

 

This information statement is not an offer to sell, or a solicitation of an offer to buy, any securities.

 

The date of this information statement is September 14, 2006.


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TABLE OF CONTENTS

 

SUMMARY

   1

RISK FACTORS

   15

FORWARD-LOOKING STATEMENTS

   29

THE SPIN-OFF

   30

DIVIDEND POLICY

   38

FINANCING

   39

CAPITALIZATION

   41

UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

   42

SELECTED HISTORICAL COMBINED FINANCIAL DATA

   49

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   51

OUR BUSINESS

   77

OUR RELATIONSHIP WITH FIRST DATA AFTER THE SPIN-OFF

   93

OUR MANAGEMENT

   106

EXECUTIVE COMPENSATION

   114

OWNERSHIP OF OUR STOCK

   125

DESCRIPTION OF OUR CAPITAL STOCK

   126

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

   128

CERTAIN ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND BY-LAWS

   129

LIMITATION OF LIABILITY AND INDEMNIFICATION OF OUR DIRECTORS
AND OFFICERS

   132

WHERE YOU CAN FIND MORE INFORMATION

   132

INDEX TO COMBINED FINANCIAL STATEMENTS AND SCHEDULE

   F-1

 

In this information statement, unless the context otherwise requires:

 

    “Western Union,” “we,” “our,” “us” and “our company” refer to The Western Union Company, a Delaware corporation, and its subsidiaries, for all periods following the spin-off; and

 

    “First Data” refers to First Data Corporation, a Delaware corporation, and its subsidiaries, other than, for all periods following the spin-off, Western Union.

 

We describe in this information statement the businesses to be transferred to us by First Data in connection with the spin-off as though the transferred businesses were our business for all historical periods described. However, The Western Union Company is a newly formed entity that has not conducted any operations prior to the spin-off. References in this information statement to the historical assets, liabilities, products, businesses or activities of our businesses are intended to refer to the historical assets, liabilities, products, businesses or activities of the transferred businesses as those businesses were conducted as part of First Data prior to the spin-off. Following the spin-off, we will be an independent, publicly traded company, and First Data will have no continuing stock ownership in us. Our historical combined financial information as part of First Data contained in this information statement is not necessarily indicative of our future financial position, future results of operations or future cash flows, nor does it reflect what our financial position, results of operations or cash flows would have been had we been operated as a stand-alone company during the periods presented.

 

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This information statement is being furnished solely to provide information to First Data stockholders who will receive shares of Western Union common stock in connection with the spin-off. It is not provided as an inducement or encouragement to buy or sell any securities. You should not assume that the information contained in this information statement is accurate as of any date other than the date set forth on the cover. Changes to the information contained in this information statement may occur after that date, and we undertake no obligation to update the information.

 

Trademarks, Service Marks and Trade Names

 

We own or have rights to use the trademarks, service marks and trade names that we use in conjunction with the operation of our business. Some of the more important trademarks and service marks that we own or have rights to use that appear in this information statement include the WESTERN UNION®, VIGOSM, ORLANDI VALUTA®, WESTERN UNION QUICK COLLECT®, SPEEDPAY® and PAYMAP® marks. The trademarks are registered in the United States and other jurisdictions. Each trademark, trade name or service mark of any other company appearing in this information statement is, to our knowledge, owned by such company.

 

Industry Data

 

This information statement includes industry and trade association data, forecasts and information that we have prepared based, in part, upon data, forecasts and information obtained from independent trade associations, industry publications and surveys and other independent sources available to us. Some data also are based on our good faith estimates, which are derived from management’s knowledge of the industry and from independent sources. The primary sources for third-party industry data and forecasts are Aite Group, LLC, or “Aite,” the United Nations, the World Bank and other industry reports and articles. These third-party publications and surveys generally state that the information included therein is believed to have been obtained from sources believed to be reliable, but that the publications and surveys can give no assurance as to the accuracy or completeness of such information. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions on which such data are based. Similarly, we believe our internal research is reliable, even though such research has not been verified by any independent sources.

 

Company Information

 

The Western Union Company was incorporated in Delaware in February 2006. Our principal executive offices are located at 12500 East Belford Avenue, Englewood, Colorado 80112. Our main telephone number is (866) 405-5012.

 

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SUMMARY

 

The following summary contains certain information from this information statement relating to us and the spin-off. It does not contain all the details concerning us or our spin-off from First Data, including information that may be important to you. To understand our business and financial position and the spin-off, you should carefully review this entire information statement.

 

Our Company

 

Western Union, a leader in global money transfer, provides people with fast, reliable and convenient ways to send money around the world, pay bills and purchase money orders. The Western Union brand is globally recognized. Our services are available through a network of over 270,000 agent locations that offer Western Union services in more than 200 countries and territories. Each location in our agent network is capable of providing one or more of our services. As of June 30, 2006, approximately 75% of our locations had experienced money transfer activity in the prior twelve months. Our consumer-to-consumer money transfer service enables people to send money around the world in minutes. Our consumer-to-business service provides consumers with flexible and convenient options for making one-time or recurring payments.

 

In 2005, we generated $4.0 billion in total combined revenues and $927.4 million in combined net income. Demand for our services has steadily increased over the past several years. Our consumer-to-consumer transactions grew at a compound annual growth rate of 21% from 2001 to 2005. We handled 119 million consumer-to-consumer money transfers in 2005, an increase of 23% over 2004. Our 215 million consumer-to-business transactions in 2005 represented a 12% increase over 2004.

 

We believe that brand strength, the size and reach of our global network, convenience and reliability for our consumers have been key to the growth of our business. As we continue to meet the needs of our consumers for fast, reliable and convenient money transfer services, we are also working to enhance our existing services and provide our consumers with broad access to an expanding portfolio of payment and other financial services.

 

The Western Union Business

 

The Western Union business model is straight-forward. Our revenue is principally generated by money transfer and payment transactions. We derive our revenue primarily from two sources. Most of our revenue comes from fees that consumers pay when they send money. In certain consumer money transfer transactions involving different send and receive currencies, we generate revenue based on the difference between the exchange rate set by us to the consumer and the rate at which we or our agents are able to acquire currency.

 

We operate primarily in two business segments.

 

    In our consumer-to-consumer segment we provide our third-party agents with our multi-currency, real-time money transfer processing systems used to originate and pay money transfers. Our agents provide the physical infrastructure and staff required to complete the transfers. We generally pay our agents a commission based on a percentage of revenue. The commission is shared between the agent that initiated the transaction, the “send agent,” and the agent that paid out the transaction, the “receive agent.” For most agents, the costs of providing the physical infrastructure and staff are typically covered by the agent’s primary business (e.g., postal services, banking, check cashing, travel and retail businesses), making the economics of being a Western Union agent attractive to our agents. Western Union’s global reach and loyal consumer base allow us to attract agents we believe to be high quality. We take little credit risk associated with consumer delinquency, because the vast majority of our transactions are initiated in cash.

 

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    In our consumer-to-business segment we offer consumers the option to make consumer-to-business payments electronically over the telephone or the Internet or cash payments in person at an agent location. We process electronic payments using the consumer’s credit card, debit card or bank account. We process cash payments much like we process consumer-to-consumer transactions.

 

Our Strengths

 

We believe our strengths position us to continue as the provider of choice for millions of consumers when they send money. Our strengths include our:

 

Strong relationships with high quality agents and businesses. We interact with millions of consumers around the world primarily through our global agent network. Our agents facilitate the global distribution and convenience that help define our Western Union brand, which in turn helps create demand for our services and helps us to recruit and retain agents. Our agents tend to be established organizations that provide an array of other consumer products and services, including postal services, groceries, banking, check cashing, travel and other daily necessities. Many are open during nontraditional banking hours, such as nights and weekends, making it easier for consumers to use our services. Although our agent contracts are generally for 5 year terms, our top 40 agents globally have been with us an average of more than 12 years; in 2005, these agents generated approximately 50% of our consumer-to-consumer combined revenues.

 

We have strong relationships with a number of businesses and other organizations that receive consumer payments, including utilities, auto finance companies, mortgage servicers, financial service providers and government agencies (all sometimes referred to as “billers”). These relationships are a core component of our consumer-to-business payment services. On average, we have provided bill payment services for our top 20 billers for more than 10 years.

 

Global distribution network. The Western Union®, Orlandi Valuta® and VigoSM agent networks are the foundation of our international presence. Our agent locations include more than 5,000 offering Orlandi Valuta® branded service and approximately 20,000 offering VigoSM branded service, with the remainder offering Western Union branded service. A small number offer service under two or three brands. Our global footprint is based on more than a decade of building relationships with agents worldwide.

 

Success in the consumer-to-consumer money transfer business depends in large part on providing quality service at convenient send and receive locations. Our global network, extending to over 200 countries and territories, provides that convenience. We have emphasized the development of our receive network around the world over the last five years to align the supply of agent locations in the markets that primarily send transactions with those that pay them. Today, we believe we are well-positioned in key receive markets, such as China and India, to meet consumer demand as it evolves with shifts in migration patterns.

 

To complement the convenience offered by our network’s global physical locations, in certain countries we have made our services available through other channels, such as our Internet service, westernunion.com, which allows consumers to send funds through our website, our telephone money transfer service and our direct-to-bank money transfer service, which allows consumers to send money directly to a bank account.

 

Established brands. Our Western Union® brand is built on a foundation of more than a century of history and consumer-focused service. Our consumers have told us that they believe the Western Union brand represents speed, reliability, trust, value and convenience. In the United States, where the brand has existed the longest, there is a very high level of brand awareness among money transfer users. The international expansion of our agent network over the past decade has made the Western Union brand visible today virtually everywhere consumers send and receive money. We are building the level of awareness in Europe and Asia. As people move and travel around the world, they are able to find a well recognized service to send funds to others.

 

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We also offer money transfer services under the Orlandi Valuta® and VigoSM brands. Over the past three years, Western Union branded transactions have grown the fastest of the three brands. Through our Western Union Quick Collect brand, as well as our Speedpay brand, we offer cash-based and electronic consumer-to-business payment services.

 

Our operating results over the past several years have allowed us to invest significantly each year to support our brands. In 2005, we invested more than $270 million to market, advertise and promote our services and our agents made significant additional investments.

 

Consumer relationships. One of our strengths has been our focus on our consumers and offering them fast, reliable money transfer services. Our global loyalty card program, offered for both consumer-to-consumer and consumer-to-business services, is available in a growing number of countries. We launched our Gold Card, the principal feature of the program, in the United States in 2002. As of June 30, 2006, the loyalty program was available in 58 countries and had more than 6.5 million active cards, primarily in the United States. The Gold Card offers consumers faster service at the point-of-sale, rewards such as free telephone time and service enhancements including, on a pilot basis in select markets, remittance protection insurance. On average, a Gold Card consumer initiates more transactions and has a higher rate of retention than a non-carded consumer. In the United States more than 30% of consumer-to-consumer transactions are completed using a Gold Card. We are also seeing increases in usage in Europe and Asia where we began offering the Gold Card in 2004.

 

Operational excellence. An important part of operational excellence is steadfastly reliable technology. Our systems enable us to provide worldwide, multi-currency and real-time money transfer processing with a high degree of reliability. We provide dynamic computer host-to-host interfaces to our agents and billers that enable them to offer money transfer and payment services within their own computer environment. We also provide settlement and reconciliation software to our agents and billers with reporting and analysis tools to help them monitor many aspects of their money transfer business, including transactions, profitability and cash flow. Behind the scenes, our settlement systems facilitate the periodic settlement of accounts between our company and our agents and billers. Our systems and processes enable our agents to pay money transfers in over 120 currencies.

 

Flexibility is another important component of operational excellence. We continue to work to implement consumer focused enhancements to our services. These efforts have resulted in offerings like telephone and Internet services, and money transfers paid directly to a bank account or to a stored-value card.

 

Attractive financial profile. While we expect to incur significant amounts of debt in connection with the spin-off, our significant revenue and net cash flow will provide us with opportunities to invest in our core business growth, in new services and in new markets. In 2005, we generated $4.0 billion in combined revenues and over $1.0 billion in combined net cash provided by operating activities. Our combined revenues have grown at a compound annual growth rate of 15% since 2001.

 

Experienced management team. Our management team is substantially the same team that managed the Western Union business for First Data before the spin-off. Business leaders at the senior management level and below were involved in Western Union’s global expansion and creating and implementing our long-term strategy. Collectively, members of our executive team have an average of 8 years with us or First Data.

 

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Our Strategy

 

We believe that our strengths position us well to continue to pursue global markets and remain focused on our consumers and their needs. To do so, we developed a number of strategies, including:

 

Expand and diversify global distribution. We intend to continue to identify and create opportunities to generate new revenue from our existing distribution channels, including through acquisitions and by equity investments in our agents. We are focused on selectively expanding our agent network and relationships with billers.

 

Our strategy is to align the number of send and receive agent locations in our markets to correspond to the send and receive demands of our consumers in each market. We have focused on building receive networks in countries with large inbound remittance markets, particularly in Latin America, Africa and eastern Europe, as well as key countries like China, India and elsewhere in Asia. This increased presence in receive markets provides immigrants from these countries confidence that money they send home will be delivered to a convenient location they know. In the United States, western Europe and other predominantly send markets, we add agent locations in locales that tend to attract immigrants. While we continue to develop our global network, we expect the majority of our growth in the future to come from existing locations.

 

Today, we offer cash-based bill payment services primarily in the United States, and we offer consumer-to-business payment services to and from other countries served by our agent network. We intend to pursue continued global expansion of cash and electronic consumer-to-business payments services through our existing agent network and other channels.

 

Build our brands and enhance our consumers’ experience. We remain focused on our brands and make sizable investments to build our brands and enhance our consumers’ experience. In each of the last three years, we have spent approximately 7% of our combined revenues on marketing, including advertising, events, loyalty programs and employees dedicated to marketing activities. In addition, in each of the last three years we invested in consumer-to-consumer pricing decreases designed to meet consumer needs, maximize market opportunities and strengthen our overall competitive positioning. Building our brands and enhancing the consumer experience are strategies that are grounded in our global consumer relationship management, or “CRM,” programs, which emphasize building a lifetime relationship with our consumers and their families. The Western Union Gold Card is a key part of this strategy.

 

Develop consumer convenience and choice. We focus our product development strategy on providing money transfer services that meet consumers’ needs for convenience, choice and control. Our Internet service (westernunion.com), Telephone Money Transfer (a service that allows consumers to speak with Western Union operators in a number of languages by phone to send funds), Money Transfer by Phone (a service that allows consumers to speak with Western Union operators in a number of languages by phone from agent locations to send funds), Direct to Bank (a service that allows consumers to send funds directly to a bank account), Account to Cash (a service that allows consumers to debit their bank accounts and send the money through Western Union for payment at any agent location), Home Delivery of remittances (a service that allows funds to be delivered to the recipient rather than picked up at an agent location) and Western Union@ATM (a service that allows consumers to transfer funds to or from an ATM) are all examples of service enhancements that address our consumers’ needs. We intend to continue to develop these types of enhancements, building on insights from our agents and the knowledge we gain from CRM activities.

 

In the United States, we offer consumers the ability to send payments to billers through a variety of channels, including walk-in locations, telephone service, interactive voice response units, or “IVR,” and Internet-based service. In order to pay their bills through these channels, consumers can use various means of payments—checks, credit cards, debit cards or cash. We intend to increase our consumer payments business in the United

 

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States by pursuing existing and emerging electronic payments services and technologies. Equally as important, we plan to expand this business outside the United States in ways that will vary from market to market.

 

Explore new service offerings. Western Union is exploring new ways to bring additional services to our consumers around the world. For example, Western Union International Bank, based in Vienna, Austria, has the ability to establish branches and offer money transfer and other financial services directly to consumers in each of the 25 member states of the European Union. We continue to investigate new services—either offered by our company directly or through third parties—that are meaningful to our large consumer base.

 

Reasons for the Spin-Off

 

First Data and we believe that the spin-off of our business from First Data will provide several opportunities and benefits that are expected to enhance stockholder value, including the following:

 

    providing each company with enhanced business focus on its own distinct business opportunities, markets and challenges;

 

    allowing us greater capital flexibility and direct access to capital markets;

 

    allowing us to link our employees’ compensation more directly with our financial performance;

 

    allowing us the ability to provide our services without being restrained by the conflicts doing so may create with First Data’s clients; and

 

    allowing the investment community to invest separately in each company.

 

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Questions and Answers About the Spin-Off

 

How will the spin-off work?    The spin-off will be accomplished through a series of transactions by which First Data will contribute to us its money transfer and consumer payments businesses, which we refer to as the contribution, and distribute to its stockholders of record all of the outstanding shares of our common stock, which we refer to as the distribution. For additional information on the transactions in the spin-off, see “The Spin-Off—Manner of Effecting the Spin-Off” beginning on page 31.
What other transactions are occurring with the spin-off?   

We expect that in connection with the spin-off, and in consideration for the contribution, we will transfer to First Data:

 

•      approximately $100.0 million in cash, which will be financed through borrowings under the revolving credit facility we expect to enter into on the distribution date;

 

•      notes with an aggregate principal amount of approximately $1.0 billion and a maturity of at least 10 years, which we refer to as the Western Union notes, and which notes First Data expects to exchange with investment banks. The investment banks will subsequently sell the Western Union notes in a private offering; and

 

•      shares of our common stock sufficient to effect the distribution.

 

We will also distribute to First Data approximately $210.0 million in cash from existing cash balances.

 

In addition, two days prior to the distribution date, our subsidiary, First Financial Management Corporation, or FFMC, will pay a dividend to First Data in the form of a promissory note in an aggregate principal amount of approximately $2.4 billion. We expect that FFMC will repay this promissory note on the distribution date or shortly thereafter with borrowings under a 364-day bridge loan facility it will enter into on or shortly after the distribution date.

 

The Western Union Company is considering and, subject to market and other conditions following the spin-off, expects to refinance the amounts borrowed by FFMC under the bridge loan with proceeds from debt The Western Union Company will issue or amounts The Western Union Company will otherwise borrow following the distribution date. However, we do not have any agreements or arrangements with any financial institution or other third parties with respect to any such refinancing and there can be no assurance that The Western Union Company will be able to refinance the borrowings under the FFMC bridge loan. We expect that the Western Union notes and the revolving credit facility we expect to enter into on the distribution date will require us to cause FFMC to guarantee the obligations of The Western Union Company with respect to the Western Union notes and the revolving credit facility if, among other things, indebtedness outstanding under the FFMC bridge loan described above is in excess of a to be determined amount within a specified time period after the distribution date.

 

As a result of the transactions described above, following the spin-off we will have approximately $3.5 billion in combined indebtedness. For

 

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additional information regarding the financing, see “Financing” beginning on page 39.

 

We expect that substantially all of the intercompany note balances in our historical combined balance sheets will be settled in cash as of the date of the spin-off. The net funding for the intercompany notes receivable from First Data was generated from earnings through our international operations and we expect to reinvest these earnings outside of the United States indefinitely. We anticipate that the other intercompany balances owed by First Data to us on the date of the spin-off will be forgiven, which will be treated as a net dividend to First Data for accounting and tax purposes. For additional information on the settlement of these intercompany balances, see “Unaudited Pro Forma Combined Financial Statements” beginning on page 42.

What will our relationship with First Data be after the spin-off?    First Data and Western Union each will be independent, publicly traded companies. However, we will enter into agreements with First Data that will ease our transition into an independent, publicly traded company following the spin-off. These agreements will also allocate responsibility for obligations arising before and after the spin-off, including, among others, obligations relating to our employees and taxes. For example, we will enter into an agreement with Integrated Payment Systems Inc., or “IPS,” a subsidiary of First Data, that will permit us to continue to conduct our money order business. For additional information on our relationship with First Data after the spin-off, see “Our Relationship with First Data After the Spin-Off” beginning on page 93.
When will the spin-off be completed?    First Data expects to complete the spin-off by distributing shares of our common stock on September 29, 2006 to holders of record of First Data common stock on the record date. As discussed under “The Spin-Off—Trading of First Data Common Stock After the Record Date and Prior to the Distribution,” if you sell your shares of First Data common stock in the “regular way” market after the record date and prior to the spin-off, you also will be selling your right to receive shares of our common stock in connection with the spin-off. For additional information on the spin-off, see “The Spin-Off—Results of the Spin-Off” beginning on page 31.
What is the record date for the distribution?    September 22, 2006.
What do I have to do to participate in the distribution?    Nothing. You are not required to take any action to receive shares of our common stock in the spin-off. No vote of First Data stockholders will be taken for the spin-off. If you own shares of First Data common stock as of the close of business on the record date and do not sell those shares in the “regular way” market prior to the spin-off, a book-entry account statement reflecting your ownership of shares of our common stock will be mailed to you, or your brokerage account will be credited for the shares, on or about October 2, 2006. Do not mail in First Data common stock certificates in connection with the spin-off.
How many shares of your common stock will I receive?    First Data will distribute one share of our common stock for each share of First Data common stock you own of record as of the close of business on the record date and do not sell in the “regular way” market prior to the spin-off. Based on approximately 765 million shares of First Data common stock

 

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   that we expect to be outstanding on the record date, First Data will distribute a total of approximately 765 million shares of our common stock. For additional information on the distribution, see “The Spin-Off—Results of the Spin-Off” beginning on page 31.
What is book-entry?    The book-entry system allows registered stockholders to hold their shares without physical stock certificates. We will not issue physical stock certificates, even if requested. For additional information, see “The Spin-Off—Manner of Effecting the Spin-Off” beginning on page 31.
Is the spin-off taxable for United States federal income tax purposes?    First Data has received a private letter ruling from the Internal Revenue Service to the effect that the spin-off will be tax-free to First Data, us and First Data’s stockholders. With respect to certain requirements for tax-free treatment on which the Internal Revenue Service will not rule, First Data expects to receive an opinion of Sidley Austin LLP (or other nationally recognized tax counsel) to the effect that such requirements will be satisfied. See “The Spin-Off—Important Federal Income Tax Consequences” beginning on page 32 for a more detailed discussion of the United States federal income tax consequences of the spin-off to First Data stockholders.
How will the spin-off affect my tax basis in First Data common stock?    Assuming that the spin-off is tax-free to First Data’s stockholders, your tax basis in the First Data common stock held by you immediately prior to the distribution will be allocated between such First Data common stock and our common stock received in the distribution in proportion to the relative fair market values of each on the date of the distribution. See “The Spin-Off—Important Federal Income Tax Consequences” beginning on page 32 for a more detailed description of the effects of the spin-off on your tax basis in First Data common stock and our common stock.
What will happen to First Data stock options, restricted shares and restricted stock units?   

We currently expect that, subject to approval of the First Data compensation and benefits committee, equity compensation awards will be treated as follows:

 

•      Current and former employees and directors of First Data who do not become employees or directors of Western Union will have each of their existing First Data stock options replaced with an adjusted First Data stock option with an adjusted exercise price and a substitute Western Union stock option. Both options, when combined, will preserve the intrinsic value of the existing First Data option, and each will preserve the ratio of the exercise price to the fair market value of the stock subject to the option.

  

•      Each First Data stock option held by a person who is or will be an employee or director of Western Union immediately after the spin-off will be replaced with a substitute option to purchase Western Union common stock that will preserve the intrinsic value of the option and the ratio of the exercise price to the fair market value of the stock.

  

•      Holders of First Data restricted stock who do not become employees or directors of Western Union will receive Western Union restricted stock in connection with the spin-off based on the number of shares of First Data restricted stock they hold.

  

•      The restricted stock awards of persons who are or will be employees or directors of Western Union immediately after the spin-off will be replaced with substitute Western Union restricted stock awards.

 

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•      Current and former employees and directors of First Data who do not become employees or directors of Western Union will have their First Data restricted stock units adjusted to represent both First Data restricted stock units and Western Union restricted stock units. First Data employees and directors who become Western Union employees or directors will have their First Data restricted stock units replaced with substitute Western Union restricted stock units.

  

 

For additional information on the treatment of First Data equity compensation awards, see “Our Relationship with First Data After the Spin-Off—Employee Matters Agreement” beginning on page 99.

Do you intend to pay dividends on your common stock?    It is currently contemplated that following the spin-off, we will pay a cash dividend on our common stock with respect to the first full fiscal quarter following the date the spin-off is completed in an amount to be determined prior to the spin-off. The declaration and amount of future dividends, however, will be determined by our board of directors and will depend on our financial condition, earnings, capital requirements, legal requirements, regulatory constraints, industry practice and any other factors that our board of directors believes are relevant. See “Dividend Policy” on page 38 for additional information on our dividend policy following the spin-off.
Where will I be able to trade your shares of common stock?    There is no current trading market for our common stock. Our common stock has been authorized for listing on the New York Stock Exchange under the symbol “WU.” We expect that a limited market, commonly known as a “when-issued” trading market, for our common stock will begin on or about September 20, 2006. The term “when-issued” means that shares can be traded prior to the time shares are actually available or issued. We expect that on the first trading day following the spin-off, “when-issued” trading in our common stock will end and “regular way” trading will begin. “Regular way” trading refers to trading after a security has been issued and typically involves a transaction that settles on the third full business day following the date of a trade. Shares of our common stock generally will be freely tradable following the spin-off. For additional information regarding the trading of our common stock, see “The Spin-Off—Market for Our Common Stock; Trading of Our Common Stock Prior to the Spin-Off” beginning on page 34.
Will the number of First Data shares I own change as a result of the spin-off?    No. The number of shares of First Data common stock you own will not change as a result of the spin-off.
What will happen to the listing of First Data common stock?    Nothing. First Data common stock will continue to be traded on the New York Stock Exchange under the symbol “FDC.”

 

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Who do I contact for information regarding you and the spin-off?    Before the spin-off, you should direct inquiries relating to the spin-off to:
  

First Data Corporation

6200 South Quebec Street

Greenwood Village, Colorado 80111

Attention: Investor Relations Department

(303) 967-6756

   After the spin-off, you should direct inquiries relating to our common stock to:
  

The Western Union Company

12500 East Belford Avenue

Englewood, Colorado 80112

Attention: Investor Relations Department

(866) 405-5012

   After the spin-off, the transfer agent and registrar for our common stock will be:
  

Wells Fargo Bank, National Association

161 North Concord Exchange

South St. Paul, Minnesota 55075

(651) 450-4064

 

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Summary Historical Data and Unaudited Pro Forma Combined Financial Data

 

The following tables set forth our summary historical data and unaudited pro forma financial data prepared on a combined basis. The historical data present our business as it has historically been operated by First Data. You should read the information set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Combined Financial Statements” and our historical combined financial statements and the notes to those statements included elsewhere in this information statement. The statements of income and cash flow data for the years ended December 31, 2005, 2004 and 2003 and the balance sheet data as of December 31, 2005 and 2004 set forth below are derived from our audited combined financial statements included elsewhere in this information statement. The statements of income and cash flow data for the years ended December 31, 2002 and 2001 and the balance sheet data as of December 31, 2003, 2002 and 2001 set forth below are derived from our unaudited combined financial statements not included in this information statement. The statements of income and cash flow data for the six-month periods ended June 30, 2006 and 2005 and the balance sheet data as of June 30, 2006 set forth below are derived from our unaudited combined financial statements included elsewhere in this information statement. The balance sheet data as of June 30, 2005 set forth below are derived from our unaudited combined financial statements not included in this information statement. The unaudited interim combined financial statements are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 31, 2006. However, in the opinion of management, the unaudited interim combined financial statements include all adjustments (consisting of normal recurring accruals) that are necessary for the fair presentation of the results for the interim periods. See “Index to Combined Financial Statements and Schedule.”

 

Our historical financial, pro forma and other data included in this information statement are not necessarily indicative of our future financial position, future results of operations or future cash flows, nor do they reflect what our financial position, results of operations or cash flows would have been as a stand-alone company during the periods presented.

 

The unaudited pro forma combined financial data are derived from our unaudited pro forma combined financial statements. Our unaudited pro forma combined financial statements are derived from our historical combined financial statements and adjusted to give effect to the following transactions:

 

    The contribution by First Data to us of specified assets related to First Data’s money transfer and consumer payments businesses and the assumption by us of specified liabilities related to such businesses.

 

    The issuance by us to First Data, in partial consideration for the contribution, of 765.2 million shares of our common stock.

 

    The distribution of 765.2 million shares of our common stock to holders of First Data common stock.

 

    The incurrence of $3.5 billion of combined indebtedness in connection with the spin-off and the payment to First Data of $3.5 billion in the form of a combination of cash and our debt securities.

 

    The distribution by us to First Data of $210.0 million in cash from existing cash balances.

 

    The cash settlement of $778.8 million of intercompany notes and related accrued interest of $32.4 million owed by First Data to us and $52.2 million of intercompany notes and related accrued interest of $2.2 million owed by us to First Data, and the payment by us to First Data of $16.8 million to settle certain foreign currency swap agreements with First Data related to certain notes receivable with affiliates on the date of spin-off.

 

   

The forgiveness by us of $153.8 million of intercompany balances owed by First Data to us, and the forgiveness by an affiliate of First Data of an intercompany note owed by us to that affiliate of $11.3

 

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million, which collectively will be treated as a net dividend to First Data for accounting and tax purposes.

 

    Estimated incremental costs associated with operating as a stand-alone company of $60 million annually.

 

The share numbers are based on First Data share numbers as of June 30, 2006, and the dollar and settlement amounts are based on our balances as of June 30, 2006.

 

Our unaudited pro forma combined statements of income do not include adjustments for certain other costs of operating as a stand-alone company which we estimate, subject to the finalization of our plans, to be between $5 million and $15 million annually, including higher corporate branding and global affairs, information technology, procurement and other expenses related to being a stand-alone company.

 

Our unaudited pro forma combined statements of income do not give effect to initial expenses directly attributable to the spin-off because of their non-recurring nature. A significant portion of these non-recurring charges to effect the separation will be incurred by First Data, such as investment banker fees, outside legal and accounting fees relating to the spin-off, office move costs, costs to separate information systems and temporary consulting costs. We will incur separation costs that have a future benefit to our company such as recruiting and relocation expenses associated with hiring key senior management positions new to our company, other employee compensation expenses and temporary labor used to develop ongoing processes. We estimate total non-recurring separation charges that our company will incur, which are not included in our unaudited pro forma combined statements of income, to be approximately $15 million to $25 million. We anticipate that substantially all of these costs will be incurred within 12 months of the spin-off. See “Our Relationship with First Data After the Spin-Off—Separation and Distribution Agreement—Expenses.”

 

The pro forma adjustments are based upon available information and assumptions that management believes are reasonable based on our current plans and expectations; however, such adjustments are subject to change based on the finalization of the terms of the spin-off and the transaction agreements. Additionally, this information is forward looking information and is subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Forward-Looking Statements” and “Our Relationship with First Data After the Spin-Off—Separation and Distribution Agreement” on pages 29 and 93, respectively, for further information.

 

The unaudited pro forma combined statements of income data for the six months ended June 30, 2006 and the year ended December 31, 2005 have been prepared as though the spin-off had occurred as of January 1, 2005. The unaudited pro forma combined balance sheet data as of June 30, 2006 have been prepared as though the spin-off had occurred on June 30, 2006.

 

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Historical Data

 

    Six Months Ended
June 30,
    Years Ended December 31,  
(in millions)   2006     2005     2005     2004     2003     2002     2001  
   

(unaudited)

                     

(unaudited)

   

(unaudited)

 

Statements of Income Data:

             

Revenues (a)

  $ 2,156.6     $ 1,900.4     $ 3,987.9     $ 3,547.6     $ 3,151.6     $ 2,743.4     $ 2,314.4  

Operating expenses (a) (b) (c) (d)

    1,517.5       1,287.8       2,718.7       2,435.5       2,148.6       1,919.9       1,651.0  

Operating income

    639.1       612.6       1,269.2       1,112.1       1,003.0       823.5       663.4  

Other income/(expense), net (e)

    9.6       42.0       74.9       (13.5 )     (40.4 )     (24.2 )     (1.1 )

Net income (b) (c) (d)

    438.7       451.6       927.4       751.6       633.7       494.1       407.9  

Cash Flow Data:

             

Net cash provided by operating activities

    481.9       467.9       1,002.8       930.2       792.8       607.5       526.1  

Dividends to parent company

    —         —         417.2       659.8       324.2       486.8       1,047.3  

Key Indicators (unaudited):

             

Consumer-to-consumer transactions (f)

    69.89       54.09       118.52       96.66       81.04       67.84       55.78  

Consumer-to-business transactions (g)

    120.71       102.30       215.11       192.57       179.39       145.01       113.79  

Growth Rates (unaudited):

             

Revenue

    13 %     12 %     12 %     13 %     15 %     19 %  

Operating income

    4 %     16 %     14 %     11 %     22 %     24 %  

Net income

    (3 )%     24 %     23 %     19 %     28 %     21 %  

Consumer-to-consumer transactions

    29 %     19 %     23 %     19 %     19 %     22 %  

Consumer-to-business transactions

    18 %     7 %     12 %     7 %     24 %     27 %  
    As of June 30,     As of December 31,  
    2006     2005     2005     2004     2003     2002     2001  
   

(unaudited)

               

(unaudited)

   

(unaudited)

   

(unaudited)

 

Balance Sheet Data:

             

Total assets

  $ 4,995.6     $ 3,770.5     $ 4,606.4     $ 3,330.2     $ 3,029.9     $ 2,472.4     $ 2,189.8  

Total liabilities

    1,742.1       1,390.3       1,794.6       1,395.7       1,201.0       1,001.7       846.4  

Net investment in The Western Union Company

    3,253.5       2,380.2       2,811.8       1,934.5       1,828.9       1,470.7       1,343.4  

 

Unaudited Pro Forma Combined Financial Data

 

    

Six Months Ended

June 30,

   Year Ended
December 31,
(in millions, except per share amounts)    2006    2005

Statements of Income Data:

     

Revenues

   $ 2,156.6    $ 3,987.9

Operating expenses (d)

     1,547.5      2,778.7

Net income

     341.1      749.3

Pro forma earnings per share:

     

Basic (h)

   $ 0.45    $ 0.98

Diluted (h)

   $ 0.44    $ 0.96

Pro forma shares outstanding:

     

Basic (h)

     765.2      765.2

Diluted (h)

     776.9      776.9

 

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     As of June 30, 2006      

Balance Sheet Data:

    

Total assets

   $ 4,659.1    

Debt

     3,500.0    

Total liabilities

     5,345.7    

Stockholders’ deficiency

     (686.6 )  

(a) In January 2002, our company adopted Emerging Issues Task Force 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” or “EITF 01-14,” which requires that reimbursements received for “out-of-pocket” expenses be characterized as revenue. The year ended December 31, 2001 has been adjusted for this adoption. Operating expenses include cost of services and selling, general and administrative expenses.
(b) In January 2002, our company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” or “SFAS 142,” which requires that goodwill no longer be amortized effective January 1, 2002. Prior to our adoption of SFAS 142, goodwill was amortized on a straight-line basis over estimated useful lives ranging from 10 to 40 years.
(c) In 2002, our company recorded expenses of $41.0 million related to the settlement of certain class action litigation and regulatory matters.
(d) We adopted SFAS No. 123R, “Share-Based Payment,” or “SFAS 123R,” following the modified prospective method effective January 1, 2006. SFAS 123R requires all stock-based payments to employees to be recognized in the income statement based on their respective grant date fair values over the corresponding service periods and also requires an estimation of forfeitures when calculating compensation expense. Stock-based compensation expense, including the impact of adopting SFAS 123R, was $6.1 million for the six months ended June 30, 2006.
(e) Primarily includes derivative gains and losses, the net foreign exchange effect on notes receivable from affiliates and related foreign currency swaps with First Data, and net interest income due from affiliates. We anticipate volatility with respect to derivative gains and losses until we have redesignated our foreign currency forward contracts by modifying all hedge documentation to allow for cash flow hedge accounting with respect to these and future foreign currency forward positions, which we intend to do as expeditiously as possible. We also anticipate volatility with respect to the revaluation of our euro denominated notes receivable from affiliates and related foreign currency swap agreements with First Data until we have settled our notes receivable from affiliates and related foreign currency swap agreements as part of the spin-off. During the six months ended June 30, 2006 and 2005 and the years ended December 31, 2005, 2004 and 2003, the pre-tax derivative gain (loss) was $(27.2) million, $36.8 million, $45.8 million, $(30.2) million, and $(37.9) million, respectively. During the six months ended June 30, 2006 and 2005 and the years ended December 31, 2005 and 2004, the pre-tax gain (loss) on foreign exchange translation of notes receivable from affiliates and valuation of related foreign currency swap agreements was $(4.1) million, $(9.8) million, $(5.9) million, and $7.5 million, respectively. There was no gain or loss during 2003.
(f) Consumer-to-consumer transactions include consumer-to-consumer money transfer services worldwide. Amounts include Vigo Remittance Corp. transactions since the acquisition date of October 21, 2005.
(g) Consumer-to-business transactions include Quick Collect, Convenience Pay, Speedpay and Equity Accelerator transactions processed by us. Amounts include E Commerce Group, Inc. (Speedpay) transactions since its acquisition in June 2002 and Paymap Inc. (Equity Accelerator and Just-in-Time) transactions since its acquisition in April 2002.
(h) The calculation of pro forma basic earnings per share and shares outstanding is based on the number of shares of First Data common stock outstanding as of June 30, 2006 adjusted for the distribution ratio of one share of our common stock for every share of First Data common stock. The calculation of pro forma diluted earnings per share and shares outstanding for the periods presented is based on the number of shares of First Data common stock outstanding as of June 30, 2006 and diluted shares of common stock outstanding as of June 30, 2006 adjusted for the same distribution ratio. This calculation may not be indicative of the dilutive effect that will actually result from the replacement of First Data stock-based awards held by our employees and employees of First Data or the grant of new stock-based awards. The number of dilutive shares of our common stock that will result from First Data stock options, restricted stock awards and restricted stock units held by our employees will not be determined until immediately after the spin-off. However, we currently expect the number of dilutive shares resulting from the replacement of our employees’ First Data stock options, restricted stock awards and restricted stock units could be greater than one dilutive share of our common stock after the spin-off for each dilutive share of First Data common stock held prior to the spin-off. See “Our Relationship with First Data After the Spin-Off—Employee Matters Agreement” beginning on page 99 for further information.

 

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RISK FACTORS

 

You should carefully consider each of the following risks and all of the other information contained in this information statement. Some of these risks relate principally to our business and the industry in which we operate, while others relate principally to our spin-off from First Data, and other risks relate to the securities markets generally and ownership of our common stock.

 

Our business, financial position, results of operations or liquidity could be adversely affected by any of these risks, and, as a result, the trading price of our common stock could decline.

 

Risks Relating to the Spin-Off

 

We may not realize the potential benefits from the spin-off.

 

We may not realize the potential benefits that we expect from our spin-off from First Data. We have described those anticipated benefits elsewhere in this information statement. See “The Spin-Off—Background and Reasons for the Spin-Off.” In addition, we will incur significant costs, including those described below, which may exceed our estimates, and we will incur some negative effects from our separation from First Data, including loss of access to the financial, managerial and professional resources from which we have benefited in the past.

 

Our historical combined and pro forma financial information are not necessarily indicative of our future financial position, future results of operations or future cash flows nor do they reflect what our financial position, results of operations or cash flows would have been as a stand-alone company during the periods presented.

 

Our historical combined financial information included in this information statement does not reflect what our financial position, results of operations or cash flows would have been as a stand-alone company during the periods presented and is not necessarily indicative of our future financial position, future results of operations or future cash flows. This is primarily a result of the following factors:

 

    Our historical combined financial results reflect allocation of expenses from First Data. Those allocations may be lower than the comparable expenses we would have incurred as a stand-alone company.

 

    Our working capital requirements historically have been satisfied as part of First Data’s corporate-wide cash management policies. Our cost of debt and our capitalization will be significantly different from that reflected in our historical combined financial statements.

 

    Significant changes will occur in our cost structure, financing and business operations as a result of our spin-off from First Data, including the costs for us to establish our operating infrastructure and costs related to being a stand-alone company.

 

The pro forma adjustments are based upon available information and assumptions that we believe are reasonable; however, our assumptions may not prove to be accurate. In addition, our unaudited pro forma combined financial statements do not give effect to certain on-going additional costs that we expect to incur in connection with being a stand-alone company. Nor do the unaudited pro forma combined statements of income give effect to initial separation costs. Accordingly, our unaudited pro forma combined financial statements do not reflect what our financial position or results of operations would have been as a stand-alone company and are not necessarily indicative of our future financial position or future results of operations. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Combined Financial Statements” and our historical combined financial statements and the notes to those statements included elsewhere in this information statement.

 

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We will incur significant expenses to create the infrastructure necessary to operate as a stand-alone company, and we will experience increased on-going costs in connection with being a stand-alone company.

 

We have historically used First Data’s infrastructure to support our business functions, including the telecommunications system supporting our operations and the systems that provide for accounting and financial reporting, accounts payable and receivable processing, procurement and human resource management. The expenses related to establishing and maintaining this infrastructure were spread among all of the First Data businesses. Following the spin-off, we will no longer have access to First Data’s infrastructure, and we will need to establish our own. We expect to incur costs in 2006 to establish the necessary infrastructure. See “Unaudited Pro Forma Combined Financial Statements.”

 

First Data also performs many important corporate functions for us, including treasury, tax administration, accounting, financial reporting, human resources, employee benefits and incentives, legal, procurement and other services. We currently pay First Data for these services on a cost-allocation basis. Following the spin-off, First Data will continue to provide some of these services to us on a transitional basis for a period of up to one year, pursuant to a transition services agreement we will enter into with First Data. For more information regarding the transition services agreement, see “Our Relationship with First Data After the Spin-Off—Transition Services Agreement.” At the end of this transition period, we will need to perform these functions ourselves or hire third parties to perform these functions on our behalf. The costs associated with performing or outsourcing these functions may exceed those charged by First Data when we were part of First Data or during the transition period. A significant increase in the costs of performing or outsourcing these functions could adversely affect our business, financial position and results of operations.

 

Prior to the spin-off, our business benefited from First Data’s purchasing power when procuring goods and services, including telecommunications services, computer hardware and software licenses, office supplies and equipment and travel services. As a stand-alone company, we may be unable to obtain goods and services at comparable prices or on terms as favorable as those obtained prior to the spin-off, which could decrease our overall profitability.

 

If the spin-off does not qualify as a tax-free transaction, you and First Data could be subject to material amounts of taxes and, in certain circumstances, our company could be required to indemnify First Data for material taxes pursuant to indemnification obligations under the tax allocation agreement.

 

First Data has received a private letter ruling from the Internal Revenue Service to the effect that, among other things, the spin-off (including certain related transactions) qualifies as tax-free to First Data, us and First Data stockholders for United States federal income tax purposes under sections 355, 368 and related provisions of the Internal Revenue Code, assuming, among other things, the accuracy of the representations made by First Data with respect to the matters on which the Internal Revenue Service does not rule. Although a private letter ruling from the Internal Revenue Service generally is binding on the Internal Revenue Service, if the factual assumptions or representations made in the private letter ruling request, including those described above, are untrue or incomplete in any material respect, then First Data will not be able to rely on the ruling. Furthermore, the Internal Revenue Service will not rule on whether a distribution such as the spin-off satisfies certain requirements necessary to obtain tax-free treatment under section 355 of the Internal Revenue Code. Rather, the private letter ruling is based upon representations by First Data that those requirements have been satisfied, and any inaccuracy in such representations could invalidate the ruling.

 

The spin-off is conditioned upon First Data’s receipt of an opinion of Sidley Austin LLP, counsel to First Data (or other nationally recognized tax counsel), in form and substance satisfactory to First Data, to the effect that, with respect to the requirements referred to above on which the Internal Revenue Service will not rule, those requirements will be satisfied. The opinion will assume the effectiveness of the Internal Revenue Service private letter ruling as to matters covered by the ruling. The opinion will be based on, among other things, certain assumptions and representations as to factual matters made by First Data and us which, if untrue or incomplete in any material respect, would jeopardize the conclusions reached by counsel in its opinion. The opinion will not be binding on the Internal Revenue Service or the courts, and the Internal Revenue Service or the courts may not agree with the opinion.

 

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Neither First Data nor Western Union is aware of any facts or circumstances that would cause the assumptions or representations relied upon in the private letter ruling or to be relied upon in the opinion of counsel to be untrue or incomplete in any material respect. If, notwithstanding receipt of the private letter ruling and opinion of counsel, the spin-off were determined to be a taxable transaction, each holder of First Data common stock who receives shares of our common stock in connection with the spin-off would generally be treated as receiving a taxable distribution in an amount equal to the fair market value of our common stock received. First Data would recognize taxable gain equal to the excess of the fair market value of the consideration received by First Data in the contribution over First Data’s tax basis in the assets contributed to us in the contribution. See “The Spin-Off—Important Federal Income Tax Consequences” beginning on page 32.

 

With respect to taxes and other liabilities that could be imposed in connection with the spin-off (and certain related transactions) as a result of a final determination that is inconsistent with the anticipated tax consequences, as set forth in the private letter ruling, under the terms of the tax allocation agreement we will enter into with First Data prior to the spin-off, we will be liable to First Data for any such taxes or liabilities attributable solely to actions taken by or with respect to us, one of our affiliates, or any person that, after the spin-off, is an affiliate thereof. See “Our Relationship with First Data After the Spin-Off—Tax Allocation Agreement” beginning on page 101. In addition, we will be liable for 50% of any such taxes or liabilities (i) that would not have been imposed but for the existence of both an action by us and an action by First Data or (ii) where we and First Data each take actions that, standing alone, would have resulted in the imposition of such taxes or liabilities. We may be similarly liable if we breach certain representations or covenants set forth in the tax allocation agreement. If we are required to indemnify First Data for taxes incurred as a result of the spin-off being taxable to First Data, it would have a material adverse effect on our business, financial position and results of operations.

 

Our separation from First Data could have negative consequences on our effective tax rate.

 

Following the spin-off, we will not be able to file a consolidated United States federal income tax return with First Data. As a consequence, following the spin-off, net operating and capital losses, credits and other tax attributes generated by the First Data group will not be available to offset income earned or taxes owed by our consolidated group for United States federal income tax purposes. Any benefits relating to taxes arising from being part of the larger First Data group also may not be available. As a result of these and other inefficiencies, the aggregate amount of United States federal income tax that we pay may increase after the spin-off, and, in addition, we may not be able to realize fully certain of our deferred tax assets.

 

We have accumulated approximately $552.5 million of foreign earnings at December 31, 2005, which were reinvested indefinitely outside the United States primarily through certain First Data international acquisitions. As a result, no provision has been made for United States federal income taxes on those foreign earnings. As a result of the spin-off, the opportunity to use those foreign earnings to fund First Data international acquisitions will no longer exist. In addition, it is likely that First Data will repay those foreign earnings to us for reinvestment in our foreign businesses. At this time, we intend to reinvest those funds in foreign business as investment needs and opportunities arise. If such foreign investment needs and opportunities are not sufficient at some point in the future, we could be required to report incremental United States federal income tax on the excess foreign earnings whether or not actually repatriated. Under such circumstances, our effective tax rate would increase.

 

Under some circumstances, we could be prevented from engaging in strategic or capital raising transactions, and we could be liable to First Data for any resulting adverse tax consequences.

 

Even if the spin-off otherwise qualifies as a tax-free distribution under section 355 of the Internal Revenue Code, the spin-off may result in significant United States federal income tax liabilities to First Data if 50% or more of First Data’s stock or our stock (in each case, by vote or value) is treated as having been acquired, directly or indirectly, by one or more persons as part of a plan (or series of related transactions) that includes the spin-off. For purposes of this test, any acquisitions of First Data stock or our stock, or any understanding, arrangement or substantial negotiations regarding an acquisition of First Data stock or our stock, within two years before or after the spin-off are subject to special scrutiny.

 

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The process for determining whether a change in control prohibited under the foregoing rules has occurred is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case. If a direct or indirect acquisition of First Data stock or our stock resulted in a change in control prohibited under those rules, First Data (but not its stockholders) would recognize taxable gain. Under the tax allocation agreement, we will be required to indemnify First Data against any such tax liabilities attributable solely to actions taken by or with respect to us (including certain of our affiliates). In addition, we will be liable for 50% of any such tax liabilities (i) that would not have been imposed but for the existence of both an action by us and an action by First Data or (ii) where we and First Data each take actions that, standing alone, would have resulted in the imposition of such tax liabilities. We may be similarly liable if we breach certain representations or covenants set forth in the tax allocation agreement. See “Our Relationship with First Data After the Spin-Off—Tax Allocation Agreement” beginning on page 101. As a result, we may be unable to engage in strategic or capital raising transactions that our stockholders might consider favorable, or to structure potential transactions in the manner most favorable to us.

 

Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject following the spin-off. If we are unable to achieve and maintain effective internal controls, our business, financial position and results of operations could be adversely affected.

 

Our financial results previously were included within the consolidated results of First Data, and our reporting and control systems were appropriate for those of subsidiaries of a public company. However, we were not directly subject to reporting and other requirements of the Securities Exchange Act of 1934, as amended, which we refer to as the Exchange Act. As a result of the spin-off, we will be directly subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which will require annual management assessments of the effectiveness of our internal controls over financial reporting and a report by our independent registered public accounting firm addressing these assessments. Furthermore, we will need to compile and submit data for financial service regulators (such as various state banking regulators and European central banks). These reporting and other obligations will place significant demands on our management and administrative and operational resources, including accounting resources. To comply with these requirements, we anticipate that we will need to upgrade our systems, including information technology, implement additional financial and management controls, reporting systems and procedures and hire additional accounting and finance staff. If we are unable to upgrade our financial and management controls, reporting systems, information technology and procedures in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies could be impaired. Any failure to achieve and maintain effective internal controls could have an adverse effect on our business, financial position and results of operations.

 

Following the spin-off, we will have substantial debt obligations that could restrict our operations. In addition, our business, financial position and results of operations could be harmed by adverse rating actions by credit rating agencies.

 

Historically, Western Union has relied on First Data for its capital needs. Following the spin-off, we will have direct access to the capital markets and will need to finance our company’s capital needs. In connection with the spin-off we will incur substantial indebtedness. Giving effect to the debt we will incur in connection with the spin-off, our total combined indebtedness for borrowed money will be approximately $3.5 billion. We may also incur additional substantial indebtedness in the future.

 

Our indebtedness could have adverse consequences, including:

 

    limiting our ability to pay dividends to our stockholders;

 

    increasing our vulnerability to changing economic, regulatory and industry conditions;

 

    limiting our ability to compete and our flexibility in planning for, or reacting to, changes in our business and the industry;

 

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    limiting our ability to borrow additional funds; and

 

    requiring us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for working capital, capital expenditures, acquisitions and other purposes.

 

There would be adverse tax consequences associated with using earnings generated outside the United States to pay the interest and principal on our indebtedness. Accordingly, this portion of our cash flow will be unavailable under normal circumstances to service our debt obligations.

 

It is important to our business to receive and maintain an investment grade long-term credit rating. We have had conversations with each of the major credit ratings agencies about our credit profile. At this time we are targeting to have, following the spin-off, debt with an investment grade rating. If our debt does not receive this rating, if our initial rating is downgraded, or if ratings agencies indicate that a downgrade may occur, our business, financial position and results of operations could be adversely affected and perceptions of our financial strength could be damaged. This could adversely affect our relationships with our agents, particularly those agents that are financial institutions or post offices. In addition, a downgrade or an indication that a downgrade may occur also could result in regulators imposing additional capital and other requirements on us, including imposing restrictions on the ability of our regulated subsidiaries to pay dividends. Also, a downgrade could increase our costs of borrowing money, adversely affecting our business, financial position and results of operations.

 

After the spin-off, our balance sheet as a stand-alone company may not contain sufficient amounts or types of regulatory capital to meet the changing requirements of our various regulators worldwide, which could adversely affect our business, financial position and results of operations.

 

In connection with the spin-off we will incur substantial indebtedness. As a result, our pro forma stockholders’ deficiency as of June 30, 2006 was $(686.6) million. Our regulators likely will expect us, as a stand-alone company, to possess sufficient financial soundness and strength to adequately support our regulated subsidiaries. In addition, although we will not be a bank holding company for purposes of United States law or the law of any other jurisdiction, as a global provider of payments services and in light of the changing regulatory environment in various jurisdictions, we could be subject to new capital requirements introduced or imposed by our regulators that could require us to issue securities that would qualify as Tier 1 regulatory capital under the Basel Committee accords or retain earnings over a period of time. Any of these requirements could adversely affect our business, financial position and results of operations.

 

We may have received better terms from unaffiliated third parties than the terms we receive in our agreements with First Data.

 

The agreements we will enter into with First Data in connection with the spin-off, including the separation and distribution agreement, tax allocation agreement, employee matters agreement, retail money order issuance and management services agreement and transition services agreement, were negotiated in the context of the spin-off while we were still part of First Data and, accordingly, may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. The terms of the agreements we negotiated in the context of the spin-off related to, among other things, the allocation of assets, liabilities, rights and other obligations between First Data and us. We may have received better terms from third parties because among other things, third parties may have competed with each other to win our business. See “Our Relationship with First Data After the Spin-Off.”

 

Regulators may impose conditions in connection with approving the spin-off which may have an adverse effect on our business, financial position and results of operations.

 

The transfer of some of the money transfer and consumer payment businesses to us will require filings to be made with some regulators in and outside of the United States. In some jurisdictions, the regulators will need to

 

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approve aspects of the transfer that occur within, or otherwise affect, their jurisdictions before the transfers or spin-off can take place. In other jurisdictions, regulators will need to be notified after the spin-off. It is possible that one or more approvals may not be given, or may be delayed, or a jurisdiction notified after the fact could raise objections or concerns which could affect our ability to operate in the affected jurisdiction. Regulatory conditions placed on the transfers or the spin-off may have an adverse effect on our business, financial position and results of operations.

 

Risks Relating to Our Business and Industry

 

If we are unable to maintain our agent network, our business, financial position and results of operations would be adversely affected.

 

Most of our revenue is derived through our agent network. Transaction volumes at existing agent locations often increase over time and new agents provide us with additional revenue. If agents decide to leave our network, or if we are unable to sign new agents, our revenue and profit growth rates may be adversely affected. Agent attrition might occur for a number of reasons, including a competitor engaging an agent or an agent’s dissatisfaction with its relationship with us or the revenue derived from that relationship. In addition, agents may generate fewer transactions or less revenue for various reasons, including the appearance of competitors close to our agent locations or increased competition. Because an agent is a third party that engages in a variety of activities in addition to providing our services, it may encounter business difficulties unrelated to its provision of our services, which could cause the agent to reduce its number of locations, hours of operation, or cease doing business altogether.

 

Our business is subject to a wide variety of laws and regulations, especially laws designed to prevent money laundering and terrorist financing. Failure by us or our agents to comply with those laws and regulations could have an adverse effect on our business, financial position and results of operations.

 

As described under “Our Business—Regulation,” our business is subject to a wide range of laws and regulations. These include financial services regulations, consumer disclosure and consumer protection laws, currency control regulations, money transfer and payment instrument licensing regulations, escheat laws and laws covering consumer privacy, data protection and information security. Our services also are subject to an increasingly strict set of legal and regulatory requirements intended to help detect and prevent money laundering, terrorist financing and other illicit activity. For example, certain economic and trade sanctions programs that are administered by the Treasury Department’s Office of Foreign Assets Control prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers, and terrorists or terrorist organizations. As federal and state legislative and regulatory scrutiny and action in these areas increase, we expect that our costs of complying with these requirements will increase, perhaps substantially. Failure to comply with any of these requirements—by either us or our agents (which are third parties, over which we have limited legal and practical control)—could result in the suspension or revocation of a license or registration required to provide money transfer services, the limitation, suspension or termination of services and/or the imposition of civil and criminal penalties, including fines. In addition to those direct costs, a failure by us or our agents to comply with applicable laws and regulations also could seriously damage our reputation and brands, and result in diminished revenue and profit and increased operating costs.

 

In connection with governmental efforts to prevent money laundering and terrorist financing and pursuant to legal obligations and authorizations, Western Union makes information available to United States federal and state, as well as certain foreign, law enforcement agencies. In recent years, government agencies have increased their requests for such information from Western Union and other companies (both financial service providers and others), particularly in connection with efforts to prevent terrorist financing. During the same period, there has also been increased public attention to concerns about consumer privacy, accompanied by legislation and regulations intended to address issues of data protection, information security and privacy. These two policy goals—the prevention of money laundering and terrorist financing and the protection of consumer privacy—may

 

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conflict, and the law in these areas is not consistent or settled. While we believe that Western Union is compliant with its legal responsibilities, the legal, political and business environments in this area are rapidly evolving, and subsequent legislation, regulation, litigation, court rulings or other events could expose Western Union to liability and reputational damage.

 

As noted above, most of our revenue is derived through our agent network. The types of enterprises that are legally authorized to act as our agents vary significantly from one country to another. Changes in the laws affecting the kinds of entities that are permitted to act as money transfer agents (such as changes in requirements for capitalization or ownership) could adversely affect our ability to distribute our services and the cost of providing such services, both by us and our agents. For example, a requirement that a money transfer provider be a bank or other highly regulated financial entity could increase significantly the cost of providing our services in many countries where that requirement does not exist today or could prevent us from offering our services in an affected country. Further, any changes in law that would require us to provide directly the money transfer services to consumers as opposed to through an agent network—effectively changing our business model—could significantly adversely impact our ability to provide our services, and/or the cost of our services, in the relevant jurisdiction.

 

Our fees may be reduced because of regulatory initiatives or proceedings that are either industry wide or specifically targeted at our company. For example, recent initiatives both in the United States and at G-8 summit meetings have focused on lowering international remittance costs. These initiatives may have an adverse impact on our business, financial position and results of operations.

 

Our agents are subject to a variety of regulatory requirements, which differ from jurisdiction to jurisdiction and are subject to change. A material change in the regulatory requirements necessary to offer money transfer services in a jurisdiction important to our business could mean increased costs and/or operational demands on our agents, which could result in the attrition of agents, a decrease in the number of locations at which money transfer services are offered and other negative consequences. The regulatory status of our agents could affect their ability to offer our services. For example, our agents in the United States are considered Money Service Businesses, or “MSBs,” under the Bank Secrecy Act. An increasing number of financial institutions view MSBs, as a class, as higher risk customers for purposes of their anti-money laundering programs. As a result, several financial institutions have terminated their banking relationships with some of our agents and with us. If a significant number of agents are unable to maintain existing or establish new banking relationships, they may not be able to continue to offer our services.

 

Virtually all of the Western Union branded agents offer our services on an exclusive basis—that is, they have agreed by contract not to provide any non-Western Union branded money transfer services. While we believe that these agreements generally are valid and enforceable, changes in laws regulating competition or in the interpretation of those laws could undermine our ability to enforce them in the future. For example, Russia and Ukraine have each enacted laws that effectively prohibit payment service providers, such as money transfer companies, from agreeing to exclusive arrangements with banks in those countries. The inability to enforce our exclusivity rights under our contracts could adversely affect our operations and revenue by, for example, allowing competitors to benefit from the goodwill associated with the Western Union brand at our agent locations.

 

We face competition from global and niche or corridor money transfer providers, United States and international banks, card associations, card-based payments providers and a number of other types of service providers. Our continued growth depends on our ability to compete effectively in the industry.

 

Money transfer and consumer payments are highly competitive industries comprised of players from a variety of financial and non-financial business groups. Our competitors include banks, credit unions, automated teller machine or “ATM” providers and operators, card associations, card-based payments providers such as issuers of e-money, travel cards or stored-value cards, informal remittance systems, web-based services, telephone payment systems (including mobile phone networks), postal organizations, retailers, check cashers,

 

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mail and courier services, currency exchanges and traditional money transfer companies. These services are differentiated by features and functionalities such as speed, convenience, network size, hours of operations, loyalty programs, reliability and price. Our continued growth depends on our ability to compete effectively in these industries. We have made periodic pricing decreases in response to competition and to implement our brand investment strategy, which includes better meeting consumer needs, maximizing market opportunities and strengthening our overall competitive positioning. Net consumer-to-consumer price decreases have been approximately 3% of our annual combined revenues in each of the last two years. In addition, failure to compete on service differentiation could significantly affect our future growth potential and related profitability.

 

Recently, card associations have become more active in promoting stored-value cards and other services that compete with our money transfer and consumer payments businesses. These associations, as well as debit networks, can be effective competitors because of the ubiquity of their brands, their large number of financial institution issuers and their extensive merchant networks. In addition, we offer consumers the option of using credit or debit cards in connection with certain of our services. The card associations and debit networks set the charge, known as an interchange fee, that we as a merchant must pay for accepting their cards. Their association and network rules also categorize transactions or cause us to categorize transactions in a manner that can affect the cost of the transaction to us or the consumer. Changes to interchange fees could increase our costs to accept cards in payment for services, while changes in how our services are categorized could make the use of cards to pay for our services less attractive to the consumer.

 

Many of our agents outside the United States are national post offices. These entities are usually governmental organizations that may enjoy special privileges or protections that could allow them to simultaneously develop their own money transfer businesses. International postal organizations could agree to establish a money transfer network among themselves. Due to the size of these organizations and the number of locations they have, any such network could represent significant competition to us. Because these entities are governmental organizations, they may be able to—or be required to—offer their money transfer services at, near or below their cost of providing such services.

 

Risks associated with operations outside the United States could adversely affect our business, financial position and results of operations.

 

Because an increasing portion of our revenue is generated in currencies other than the United States dollar, we are subject to risks related to changes in currency rates and foreign exchange regulation (such as the ability to repatriate funds to the United States, and the cost of repatriation). We intend to use foreign currency forward contracts to mitigate the risks associated with changes in foreign currency by properly designating future foreign currency forward contracts as hedges as well as redesignating certain existing contracts as hedges as expeditiously as possible. However, these derivative contracts do not eliminate all of the risks related to foreign currency translation.

 

Money transfers to, from or within or between countries may be limited or prohibited by law. At times in the past, we have been required to cease operations in particular countries due to political uncertainties or government restrictions imposed by foreign governments or the United States. Additionally, economic or political instability or natural disasters may make money transfers to, from or within a particular country difficult, such as when banks are closed, when currency devaluation makes exchange rates difficult to manage or when natural disasters or civil unrest makes access to agent locations unsafe. These risks could negatively impact our ability to make payments to or receive payments from international agents or our ability to recoup funds that have been advanced to international agents and could adversely affect our business, financial position and results of operations. In addition, the general state of telecommunications and infrastructure in some lesser developed countries creates operational risks for us and our agents that generally are not present in our operations in the United States and other more developed countries.

 

As noted above, many of our agents outside the United States are post offices, which are usually owned and operated by national governments. These governments may decide to change the terms under which they allow

 

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post offices to offer remittances and other financial services. For example, governments may decide to separate financial service operations from postal operations, or mandate the creation or privatization of a “post bank.” These changes could have an adverse effect on our ability to distribute and offer our services in countries that are material to our business.

 

Interruptions in international migration patterns could adversely affect our business, financial position and results of operations.

 

The money transfer business relies in part on migration patterns, which bring workers into countries with greater economic opportunities than their native countries. A significant portion of money transfers is initiated by immigrants. Changes in immigration laws, such as those currently being considered by the United States Congress, economic development patterns that discourage international migration and political or other events (such as war, terrorism or health emergencies) that would make it more difficult for workers to migrate or work abroad could adversely affect our remittance volume or growth rate and could each have an adverse effect on our business, financial position and results of operations. For example, in the three months ended June 30, 2006, transaction growth in our consumer-to-consumer business, primarily the United States to Mexico and Latin American corridors, and to a lesser extent the domestic money transfer business, was adversely impacted by what we believe is uncertainty created by immigration reform activities in the United States.

 

Unfavorable resolution of tax contingencies could adversely affect our tax expense.

 

All of our operations have been included in the consolidated income tax returns of First Data. Our tax returns and positions are subject to review and audit by federal, state, local and international taxing authorities. An unfavorable outcome to a tax audit could result in higher tax costs, thereby negatively impacting our results of operations. In particular, we currently are in discussions with the Internal Revenue Service pursuant to the Internal Revenue Service’s Advance Pricing Agreement, or “APA,” Program. These discussions relate to certain tax aspects of a 2003 legal restructuring of our international operations. If an APA is negotiated successfully, during its term, generally we will avoid further examination by the Internal Revenue Service of the transfer pricing methods applicable to, and valuations of, the covered transactions. We continue to negotiate with the Internal Revenue Service in the APA process, and while we hope to reach a resolution through the process, there can be no assurances that the APA negotiations will be resolved in a manner acceptable to our company. If not so resolved, the matter would then likely proceed to other forums within the Internal Revenue Service. We have established contingency reserves for material, known tax exposures, including the potential for tax audit adjustments with respect to taxes associated with our foreign business that is the subject of the 2003 legal restructuring and the Internal Revenue Service’s APA Program discussions referenced above. These tax reserves reflect what we believe to be reasonable assumptions as to the likely resolution of the issues involved if subject to judicial review. While we believe that our reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed our related reserve. Regarding the 2003 legal restructuring, we have benefited by having our income from certain foreign-to-foreign money transfer transactions taxed at relatively low foreign tax rates rather than the United States statutory tax rate. The amount of taxes attributable to such rate differential is included in the “Foreign rate differential” line in the effective rate reconciliation in Note 9—“Income Taxes” to our historical combined financial statements and cumulatively totaled $131.6 million through December 31, 2005. Any differences from our positions as recorded in our financial statements upon resolution of these issues will be reflected as a part of the income tax expense in the period during which the issues are resolved. Such resolution could also affect our effective tax rate for future periods.

 

Acquisitions and integrating new businesses create risks and may affect operating results.

 

We occasionally acquire businesses both inside and outside the United States. The acquisition and integration of businesses involve a number of risks. The core risks involve valuation (negotiating a fair price for the business based on inherently limited due diligence) and integration (managing the complex process of integrating the acquired company’s people, products and services, technology and other assets in an effort to

 

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realize the projected value of the acquired company and the projected synergies of the acquisition). In addition, international acquisitions often involve additional or increased risks including, for example:

 

    managing geographically separated organizations, systems and facilities;

 

    integrating personnel with diverse business backgrounds and organizational cultures;

 

    integrating systems that may not have been designed or maintained to the same standards as those in the United States;

 

    complying with foreign regulatory requirements;

 

    fluctuations in currency exchange rates;

 

    enforcement of intellectual property rights in some foreign countries;

 

    difficulty entering new markets due to, among other things, customer acceptance and business knowledge of these new markets; and

 

    general economic and political conditions, including legal and other barriers to cross-border investment in general, or by United States companies in particular.

 

Integrating operations could cause an interruption of, or divert resources from, one or more of our businesses and could result in the loss of key personnel. The diversion of management’s attention and any delays or difficulties encountered in connection with an acquisition and the integration of the acquired company’s operations could have an adverse effect on our business, financial position and results of operations.

 

Our ability to adopt technology in response to changing industry and consumer needs or trends poses a challenge to our business.

 

Our ability to compete in the markets we serve may be threatened by change, including changes in technology, changes with respect to consumer needs, competition and industry standards. We actively seek solutions that respond in a timely manner to new technology-based money transfer services such as Internet, land and mobile phone based money transfer services and prepaid, stored-value and other card-based money transfer services. Failure to respond well to these challenges could adversely impact our business, financial position and results of operations.

 

Western Union has been the subject of class-action litigation, and remains the subject of other litigation as well as consent agreements with or enforcement actions by regulators.

 

Western Union has been the subject of class-action litigation in the United States, alleging that its foreign exchange rate disclosures failed to adequately inform consumers about the revenue that Western Union and its agents derive from international remittances. These suits all have been settled without an admission of liability, and we have made certain changes in our advertising and consumer forms. It is possible that because of changes in law or future litigation or regulatory action, we could be required to modify our disclosures or our practices further. These modifications could be costly to implement, restrict our ability to advertise or promote our services and/or limit the amount of our foreign exchange income.

 

In addition, as a company that provides global financial services primarily to consumers, we could be subject to future class-action or other litigation alleging violations of consumer protection or other laws. We also are subject to claims asserted by consumers based on individual transactions.

 

We are subject to unclaimed or abandoned property (escheat) laws in the United States and abroad which require us to turn over to certain government authorities the property of others held by us that has been unclaimed for a specified period of time, such as unredeemed money transfers. We hold property subject to escheat laws and we have an ongoing program to comply with those laws. In addition, we are subject to audit with regard to our escheatment practices. Any difference between the amounts we have accrued for unclaimed

 

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property and amounts that are claimed by a state or foreign jurisdiction could have a significant impact on our results of operations and cash flows. See “Our Business—Regulation—Escheat Regulations.”

 

Our consumer payments business is subject to various United States federal, state and local laws and regulations, as well as laws and regulations outside the United States. Our United States business is subject to reporting, recordkeeping and anti-money laundering provisions of the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001, and to regulatory oversight and enforcement by the United States Department of Treasury’s Financial Crimes Enforcement Network, or “FinCEN.” In addition, as a money transmitter, we are subject to licensing, regulation and examination by almost all the states and the District of Columbia.

 

Over the past several years, we have entered into a number of consent agreements with federal and state authorities, including FinCEN, the New York State Banking Department, the California Department of Financial Institutions and the Arizona Department of Financial Institutions, relating to the Bank Secrecy Act and anti-money laundering requirements and related consumer identification matters. These agreements required us to pay civil penalties and to take certain measures to enhance our compliance with recordkeeping, reporting, training and agent oversight requirements under applicable state and federal law. The financial services industry and businesses like ours continue to be under significant federal and state regulatory scrutiny with respect to the Bank Secrecy Act and anti-money laundering compliance matters. It is possible that as a result of periodic examinations or otherwise, we could be subject to deficiency findings, fines, criminal penalties, enforcement actions or similar consent agreements in the future that could adversely affect our business, financial position and results of operations.

 

Our ability to remain competitive depends in part on our ability to protect our brands and our other intellectual property rights and to defend ourselves against potential patent infringement claims.

 

The Western Union® brand, consisting of trademark registrations in various countries, is material to our company. The loss of the Western Union trademark or a diminution in the perceived quality associated with the name would harm our business. Similar to the Western Union trademark, the VigoSM service mark and the Orlandi Valuta®, Speedpay®, Western Union Quick Collect® and Paymap® trademarks are important to our company and a loss of the service mark or trademarks or a diminution in the perceived quality associated with these names could harm our business.

 

The laws of certain foreign countries in which we do business either do not recognize intellectual property rights or do not protect them to the same extent as do the laws of the United States. Adverse determinations in judicial or administrative proceedings in the United States or in foreign countries could impair our ability to sell our services or license or protect our intellectual property, which could adversely affect our business, financial position and results of operations.

 

We have been, and in the future may be, subject to claims alleging that our technology or business methods infringe patents owned by others, both in and outside the United States. Unfavorable resolution of these claims could require us to change how we deliver a service, result in significant financial consequences, or both, which could adversely affect our business, financial position and results of operations.

 

Interruptions in our systems may have a significant effect on our business.

 

Our ability to provide reliable service largely depends on the efficient and uninterrupted operation of our computer information systems. Any significant interruptions could harm our business and reputation and result in a loss of consumers. Our systems and operations could be exposed to damage or interruption from fire, natural disaster, power loss, telecommunications failure, terrorism, vendor failure, unauthorized entry and computer viruses or other causes, many of which may be beyond our control. Although we have taken steps to prevent a system failure, our measures may not be successful and we may experience problems other than system failures. We also may experience software defects, development delays, installation difficulties and other systems problems, which would harm our business and reputation and expose us to potential liability which may not be

 

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fully covered by our business interruption insurance. Our data applications may not be sufficient to address technological advances, changing market conditions or other developments.

 

Breaches of our information security policies or safeguards could adversely affect our ability to operate and could damage our reputation, business, financial position and results of operations.

 

We collect, transfer and retain consumer data as part of our business. These activities are subject to laws and regulations in the United States and other jurisdictions in which our services are available. These requirements, which often differ materially among the many jurisdictions, are designed to protect the privacy of consumers’ personal information and to prevent that information from being inappropriately disclosed. We have developed and maintain technical and operational safeguards designed to comply with applicable legal requirements. However, despite those safeguards, it is possible that hackers, employees acting contrary to our policies or others could improperly access our systems or improperly obtain or disclose data about our consumers. Any breach of our security policies or applicable legal requirements resulting in a compromise of consumer data could expose us to regulatory enforcement action, limit our ability to provide services, subject us to litigation and/or damage our reputation.

 

We face credit and fraud risks from our agents and from consumers that could adversely affect our business, financial position and results of operations.

 

The vast majority of our global funds transfer business is conducted through third-party agents that provide our services to consumers at their retail locations. These agents sell our services, collect funds from consumers and are required to pay the proceeds from these transactions to us. As a result, we have credit exposure to our agents. In some countries, our agent networks are comprised of agents that establish subagent relationships; these agents must collect funds from their subagents in order to pay us. We are not insured against credit losses, except in certain circumstances (generally only limited instances and only in the United States) related to agent theft or fraud. If an agent becomes insolvent, files for bankruptcy, commits fraud or otherwise fails to pay money order or money transfer proceeds to us, we must nonetheless pay the money order or complete the money transfer on behalf of the consumer.

 

From time to time, we have made, and may in the future make, short term advances and longer term loans to our agents. These advances and loans generally are secured by settlement funds payable by us to these agents. However, the failure of these borrowing agents to repay these advances and loans constitutes a credit risk to us.

 

We offer consumers the ability to transfer money utilizing their credit or debit card, through various distribution channels such as the Internet or telephone. Because they are not face-to-face transactions, these transactions involve a greater risk of fraud. We apply verification and other tools to help authenticate transactions and protect against fraud. However, these tools may not be successful in protecting us against fraud. As the merchant of these transactions, we are not insured for losses and bear the financial risk of the full amount sent.

 

We have identified a material weakness in the design and operation of our internal control related to compliance with SFAS No. 133.

Based upon an evaluation of our initial documentation of hedging arrangements in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, (“SFAS No. 133”), we have concluded that certain of our foreign exchange forward contracts did not qualify for cash flow hedge accounting since the initial documentation with respect to these instruments did not meet the technical requirements of SFAS No. 133. Accordingly, we previously restated our historical combined financial statements and, as expeditiously as possible, we intend to redesignate the affected derivative instruments as hedges with revised documentation and to account for them as hedging instruments in accordance with SFAS No. 133 so as to remove this source of potential volatility in reported financial results. We believed our initial accounting treatment for the derivative instruments properly reflected the intent and economics of the underlying transactions; however, the interpretations of how to apply SFAS No. 133 and how to adequately provide documentation for such

 

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instruments so as to qualify for hedge accounting are very complex. We have concluded that the way we have documented and accounted for those certain derivative instruments relating to our foreign exchange forward contracts is technically a material weakness in our internal controls. Although we believe that we have identified the problem and taken adequate steps to cause our accounting practices to comply with SFAS No. 133, there can be no assurance that these steps are sufficient to eliminate this material weakness or that additional significant deficiencies or material weaknesses in our internal controls will not be discovered in the future. Any failure to sufficiently address this material weakness, or the identification of additional significant deficiencies or material weaknesses, could have an adverse effect on our business, reputation, financial position and results of operation.

 

Risks Relating to Our Common Stock

 

There has been no prior market for our common stock, the trading price of our common stock may be volatile and you may not be able to sell your shares at or above the initial market price for our common stock following the spin-off.

 

There has been no prior trading market for our common stock. On or about the record date, our common stock will begin to trade on a “when-issued” basis. We have not and will not set the initial price of our common stock; that price will instead be established by the public markets.

 

We cannot predict the price at which our common stock will trade after the spin-off. In fact, the combined trading prices of a share of our common stock and a share of First Data common stock after the spin-off may not equal or exceed the trading price of a share of First Data common stock immediately prior to the spin-off. The price at which our common stock trades likely will fluctuate significantly, particularly until an orderly market develops. Prices for our common stock will be determined in the public markets and may be influenced by many factors, many of which are beyond our control, including:

 

    lack of a trading history;

 

    changes in expectations concerning our future financial performance and the future performance of the money transfer and consumer payments industries in general, including financial estimates and recommendations by securities analysts;

 

    our financial results and differences between our actual financial and operating results and those expected by investors and analysts;

 

    strategic moves by us or our competitors, such as acquisitions or restructurings;

 

    changes in the regulatory environment governing our business;

 

    our capital structure, including the amount of our indebtedness;

 

    general economic, industry and market conditions;

 

    the depth and liquidity of the market for our common stock;

 

    fluctuations in currency exchange rates;

 

    our dividend policy;

 

    investor perceptions of our business and us; and

 

    the impact of the factors referred to elsewhere in “Risk Factors.”

 

For more information, see “The Spin-Off—Market for Our Common Stock; Trading of Our Common Stock Prior to the Spin-Off.”

 

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Substantial sales of our common stock could occur in connection with the spin-off, which could cause our stock price to decline.

 

Shares of our common stock distributed in connection with the spin-off generally may be sold in the public markets immediately following the spin-off. Some First Data stockholders who receive shares of our common stock in connection with the spin-off may sell our shares shortly after the spin-off for any number of reasons. In particular, index funds tied to the Standard & Poor’s 500 Index and other indices hold shares of First Data common stock. To the extent our common stock is not included in these indices, certain of these index funds likely will be required to sell the shares of our common stock they receive in connection with the spin-off. The sale of significant amounts of our common stock, or the perception in the market that this will occur, may lower the market price of our common stock.

 

Certain provisions of our certificate of incorporation and by-laws will make it difficult for stockholders to change the composition of our board of directors and may discourage hostile takeover attempts that some of our stockholders may consider to be beneficial.

 

Certain provisions of our certificate of incorporation and by-laws could have the effect of delaying or preventing changes in control if our board of directors determines that such changes in control are not in the best interests of us and our stockholders. These provisions include, among other things, the following:

 

    a classified board of directors with three-year staggered terms;

 

    the size of the board of directors may be set only by the board of directors;

 

    our board of directors will have the ability to issue shares of preferred stock and to determine the price and other terms, including preferences and voting rights, of those shares without stockholder approval;

 

    stockholder action may be taken only at a special or regular meeting;

 

    stockholders may not call a special meeting of stockholders;

 

    advance notice procedures for nominating candidates to our board of directors or presenting matters at stockholder meetings;

 

    directors may be removed only for cause; and

 

    vacancies on our board of directors may only be filled by our board of directors.

 

While these provisions have the effect of encouraging persons seeking to acquire control of our company to negotiate with our board of directors, they could enable our board of directors to hinder or frustrate a transaction that some, or a majority, of our stockholders might believe to be in their best interests and, in that case, may prevent or discourage attempts to remove and replace incumbent directors. For more information, see “Description of Our Capital Stock” and “Certain Anti-Takeover Effects of Provisions of Our Certificate of Incorporation and By-Laws.”

 

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FORWARD-LOOKING STATEMENTS

 

This information statement and other materials we have filed or will file with the Securities and Exchange Commission (the “SEC”) (as well as information included in our other written or oral statements) contain, or will contain, disclosures which are “forward-looking statements.” Forward-looking statements include all statements that do not relate solely to historical or current facts, and generally can be identified by the use of words such as “may,” “believe,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “could,” “would,” “likely,” “intend” or “continue.” These forward-looking statements address, among other things, the anticipated effects of the spin-off. These forward-looking statements are based on the current plans and expectations of our management and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or those anticipated. These factors include, but are not limited to:

 

    the impact of our spin-off from First Data;

 

    changes in immigration laws, patterns and other factors related to immigrants;

 

    the integration of significant businesses and technologies we acquire and realization of anticipated synergies from these acquisitions;

 

    technological changes, particularly with respect to e-commerce;

 

    our ability to attract and retain qualified key employees;

 

    changes in laws, regulations or industry standards affecting our businesses;

 

    changes in foreign exchange spreads on money transfer transactions;

 

    changes in the political or economic climate in countries in which we operate;

 

    unanticipated developments relating to lawsuits, investigations or similar matters;

 

    catastrophic events;

 

    any material breach of security of any of our systems; and

 

    the other factors described under “Risk Factors.”

 

You are cautioned not to rely unduly on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this information statement or in documents incorporated in this information statement. We assume no obligation to update any forward-looking statements contained in this information statement.

 

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THE SPIN-OFF

 

Background and Reasons for the Spin-Off

 

The board of directors of First Data regularly reviews the various businesses conducted by First Data to ensure that resources are deployed and activities are pursued in the best interests of its stockholders. On January 26, 2006, First Data announced that its board of directors had authorized in principle the distribution of our common stock to First Data’s stockholders in a tax-free spin-off. This authorization is subject to final approval by the First Data board of directors, which approval is subject to, among other things, continued validity of the private letter ruling from the Internal Revenue Service and receipt of an opinion of Sidley Austin LLP, counsel to First Data (or other nationally recognized tax counsel), in each case with respect to the tax-free nature of the spin-off. In making the determination to spin off our businesses, the board of directors of First Data acknowledged that the principal focus of First Data is on serving the financial transaction processing and card-issuing needs of merchants and financial institutions, and that our business, serving the money transfer and payment needs of consumers, did not fit within that focus. The board of directors of First Data recognized that the spin-off would permit us to focus our attention and financial resources on our money transfer and consumer payments businesses.

 

The operating and financial characteristics of our businesses are different from those of First Data’s businesses. The services we provide and consumers we serve are different from the services that First Data provides and the customers it serves. We are focused on enhancing our position as a provider of money transfers and consumer payments. First Data, on the other hand, is focused on enhancing its position as a provider of payment processing services to merchants and financial institutions and a provider of card issuing and related services to financial institutions.

 

In the future, Western Union and First Data expect to face different business challenges. To be successful, we believe we will need to expand and diversify our consumer-to-consumer global distribution network, build our brands, enhance the consumer experience, expand the channels by which consumers can send or receive money and diversify our consumer-to-consumer service offerings, expand into new biller and other business and government relationships and expand the international presence of our consumer-to-business offerings. First Data believes that it will need to acquire new merchant relationships, cross sell products and services into existing relationships and leverage core processing capabilities for future expansion into other markets.

 

First Data and we believe that the spin-off of our businesses from First Data will provide several opportunities and benefits that are expected to enhance stockholder value, including the following:

 

    Business Focus. Each company will be better able to focus its attention and financial resources on its own distinct businesses, opportunities, markets and challenges so that each can pursue the most appropriate long-term growth opportunities and business strategies.

 

    Capital Flexibility. We will be able to invest any excess cash flow into growth initiatives of our business, including continued international expansion, increased investments in the Western Union brand, expansion of our service offerings and acquisitions, rather than having a part of our cash flow reinvested into First Data. In addition, we will have direct access to the public capital markets to allow us to seek to finance our operations and growth without having to compete with other First Data businesses with respect to that financing.

 

    Employee Incentives. We will be able to develop better incentive programs to attract and retain key employees through the use of stock-based and performance-based incentive plans that more directly link their compensation with our financial performance. These programs will be designed to more directly reward employees based on our performance.

 

   

Competition with First Data’s Customer Base. We believe we will benefit from being able to provide our services without being restrained by the conflicts that doing so may create with First Data’s clients.

 

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We are evolving to become a competitor of First Data’s clients, creating channel conflicts that may hinder the success of both businesses. We currently target many of the same consumers that First Data’s financial institution clients target with our offering of money transfers, money orders, payments to businesses and governments, prepaid and other financial services.

 

    Market Recognition. The investment community, including analysts, stockholders and prospective investors in each company, will be better able to evaluate the merits and future prospects of each company, thereby enhancing the likelihood that each company will receive appropriate market recognition of its performance and potential.

 

Manner of Effecting the Spin-Off

 

The general terms and conditions of the spin-off will be set forth in the separation and distribution agreement to be entered into by First Data and us. For a description of the expected terms of that agreement, see “Our Relationship with First Data After the Spin-Off—Separation and Distribution Agreement.”

 

Overview. The spin-off will be accomplished through a series of transactions, pursuant to the terms and conditions of the separation and distribution agreement, by which First Data will contribute to us the subsidiaries that operate its money transfer and consumer payments businesses, as well as related assets, including intellectual property, real estate and First Data’s interest in one of our agents, and distribute to its stockholders of record all of the outstanding shares of our common stock. As discussed under “—Trading of First Data Common Stock After the Record Date and Prior to the Distribution,” if a holder of record of First Data common stock sells those shares in the “regular way” market after the record date and prior to the spin-off, that stockholder also will be selling the right to receive shares of Western Union common stock in the distribution. The distribution will be made in book-entry form on the basis of one share of Western Union common stock for each share of First Data common stock held on the record date of September 22, 2006. First Data will instruct Wells Fargo Bank, National Association, as distribution agent, to record the distribution on the distribution date to the holders of First Data common stock at the close of business on the record date (or their designated transferees). There are no fractional shares of First Data common stock and, accordingly, no fractional shares of Western Union common stock will be distributed. Each share of Western Union common stock that is distributed will be validly issued, fully paid and nonassessable and free of preemptive rights.

 

Book Entry Statements. A book-entry account statement reflecting your ownership of shares of Western Union common stock will be mailed to you, or your brokerage account will be credited for the shares, on or about October 2, 2006. We will not issue physical stock certificates, even if requested.

 

Results of the Spin-Off

 

Following the spin-off, Western Union will be an independent, publicly traded company owning and operating what had previously been First Data’s money transfer and consumer payments businesses. We expect to have approximately 765 million shares of our common stock issued and outstanding immediately following the spin-off based on the distribution ratio described above and the anticipated number of outstanding First Data shares on September 22, 2006, the record date. The actual number of shares to be distributed will be determined based on the number of shares of First Data common stock outstanding on the record date.

 

You will not be required to make any payment for the shares of Western Union common stock you receive, nor will you be required to surrender or exchange your shares of First Data common stock or take any other action in order to receive Western Union common stock. The spin-off will not affect the number of outstanding First Data shares or any rights of First Data stockholders, although it will affect the market value of the outstanding First Data common stock.

 

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Important Federal Income Tax Consequences

 

The following section discusses the material United States federal income tax consequences of the spin-off. This discussion is based on the Internal Revenue Code, Treasury regulations promulgated under the Internal Revenue Code and judicial and administrative interpretations thereof, all as in effect as of the date of this information statement, all of which are subject to change at any time, possibly with retroactive effect. The discussion assumes that the spin-off will be consummated in accordance with the separation and distribution agreement and as further described in this information statement. This is not a complete description of all of the consequences of the spin-off and, in particular, may not address United States federal income tax considerations applicable to holders of First Data common stock subject to special treatment under United States federal income tax law. Holders of First Data common stock subject to special treatment include, for example, financial institutions, dealers in securities, traders in securities who elect to apply a mark-to-market method of accounting, insurance companies, tax-exempt entities, partnerships and other pass-through entities, holders who acquired their shares pursuant to the exercise of an employee stock option or right or otherwise as compensation, and holders who hold First Data common stock as part of a “hedge,” “straddle,” “conversion” or “constructive sale” transaction. In addition, this discussion does not address the United States federal income tax consequences to holders of First Data common stock who are not United States holders or who do not hold First Data common stock as a capital asset. No information is provided in this information statement with respect to the tax consequences of the spin-off under applicable foreign or state or local laws. For purposes of this information statement, a “United States holder” means any beneficial owner of First Data common stock, other than an entity or arrangement treated as a partnership for United States federal income tax purposes, that for United States federal income tax purposes is:

 

    an individual who is a citizen or resident of the United States;

 

    a corporation (or other entity taxable as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States or of any political subdivision thereof;

 

    an estate, the income of which is subject to United States federal income taxation regardless of its source; or

 

    a trust if it (i) is subject to the primary supervision of a court within the United States and one or more United States persons have the authority to control all substantial decisions of the trust or (ii) was in existence on August 20, 1996 and has properly elected under applicable Treasury regulations to be treated as a United States person.

 

Holders of First Data common stock are urged to consult with their tax advisors regarding the tax consequences of the spin-off to them, as applicable, including the effects of United States federal, state and local tax laws, as well as foreign and other tax laws.

 

The Spin-Off

 

First Data has received a private letter ruling from the Internal Revenue Service to the effect that, among other things, the spin-off (including certain related transactions) will be tax-free to First Data, us and First Data stockholders for United States federal income tax purposes under sections 355, 368 and related provisions of the Internal Revenue Code, assuming, among other things, the accuracy of the representations made by First Data with respect to the matters on which the Internal Revenue Service does not rule. Although a private letter ruling from the Internal Revenue Service generally is binding on the Internal Revenue Service, if the factual assumptions or representations made in the private letter ruling request, including those described above, are untrue or incomplete in any material respect, then First Data will not be able to rely on the ruling. Furthermore, the Internal Revenue Service will not rule on whether a distribution such as the spin-off satisfies certain requirements necessary to obtain tax-free treatment under section 355 of the Internal Revenue Code. Rather, the private letter ruling will be based upon representations by First Data that those requirements have been satisfied, and any inaccuracy in such representations could invalidate the private letter ruling.

 

The spin-off is conditioned upon the receipt by First Data of an opinion of Sidley Austin LLP, counsel to First Data (or other nationally recognized tax counsel), in form and substance satisfactory to First Data, to the

 

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effect that, with respect to the requirements referred to above on which the Internal Revenue Service will not rule, those requirements will be satisfied. The opinion will assume the effectiveness of the Internal Revenue Service private letter ruling as to matters covered by the ruling. The opinion will be based on, among other things, certain assumptions and representations as to factual matters made by First Data and us which, if untrue or incomplete in any material respect, would jeopardize the conclusions reached by counsel in its opinion. The opinion will not be binding on the Internal Revenue Service or the courts, and the Internal Revenue Service or the courts may not agree with the opinion.

 

Assuming (i) the continued validity of the private letter ruling from the Internal Revenue Service, (ii) the correctness of counsel’s opinion and (iii) that the distribution of our common stock to First Data stockholders in connection with the spin-off is not otherwise disqualified as tax-free, the material United States federal income tax consequences of the spin-off will be as follows:

 

    neither the contribution nor the distribution will result in any taxable income, gain or loss to First Data;

 

    no taxable income, gain or loss will be recognized by any United States holder solely as the result of the receipt of our common stock in the distribution;

 

    the aggregate tax basis of the First Data common stock and our common stock in the hands of a United States holder immediately after the distribution will be the same as the aggregate tax basis of the First Data common stock held by such holder immediately before the distribution, allocated between the First Data common stock and our common stock in proportion to their relative fair market values on the date of the distribution; and

 

    the holding period of our common stock received by a United States holder will include the holding period of such holder’s First Data common stock, provided that the First Data common stock is held as a capital asset on the date of the distribution.

 

As described above, the private letter ruling is and the opinion will be based, in part, on certain assumptions and representations as to factual matters. If any of those assumptions or representations is untrue or incomplete as of the effective time of the spin-off, the tax consequences of the spin-off could differ materially from those described above. In addition, opinions of counsel neither bind the Internal Revenue Service or any court, nor preclude the Internal Revenue Service from adopting a contrary position.

 

If the spin-off were not to qualify for tax-free treatment under sections 355, 368 and related provisions of the Internal Revenue Code, First Data would recognize taxable gain equal to the excess of the fair market value of the consideration received by First Data in the contribution over First Data’s tax basis in the assets contributed to us in the contribution and, under certain circumstances, we would be required under the tax allocation agreement to indemnify First Data for all or a portion of that liability. See “Our Relationship with First Data After the Spin-Off—Tax Allocation Agreement.” In addition, each United States holder who receives our common stock in the spin-off would be treated as receiving a taxable distribution in an amount equal to the fair market value of our common stock received.

 

First Data may incur some tax cost in connection with the spin-off (as a result of certain intragroup transfers of certain assets, and as a result of certain differences between federal and state tax rules), whether or not the spin-off qualifies for tax-free treatment under sections 355, 368 and related provisions of the Internal Revenue Code.

 

Effect of Certain Acquisitions of First Data Common Stock or Our Common Stock

 

Even if the spin-off otherwise qualifies as a tax-free distribution under section 355 of the Internal Revenue Code, the spin-off may result in significant United States federal income tax liabilities to First Data if 50% or more of First Data stock or our stock (in each case by vote or value) is acquired, directly or indirectly, by one or more persons as part of a plan (or series of related transactions) that includes the spin-off. For purposes of this test, any acquisitions of First Data stock or our stock, or any agreement, understanding, arrangement or substantial negotiations regarding an acquisition of First Data stock or our stock, within two years before or after the spin-off are subject to special scrutiny.

 

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The process for determining whether a change in control prohibited under the foregoing rules has occurred is complex, inherently factual and subject to interpretation of the facts and circumstances of a particular case. If a direct or indirect acquisition of First Data stock or our stock resulted in a change in control prohibited under those rules, First Data (but not its stockholders) would recognize taxable gain as described above.

 

Tax Allocation Agreement

 

Under the tax allocation agreement, we will be required to indemnify First Data against the tax liabilities described above attributable solely to actions taken by or with respect to us (including certain of our affiliates). In addition, we will be liable for 50% of any such tax liabilities (i) that would not have been imposed but for the existence of both an action by us and an action by First Data or (ii) where we and First Data each take actions that, standing alone, would have resulted in the imposition of such tax liabilities. We may be similarly liable if we breach certain representations or covenants set forth in the tax allocation agreement. See “Our Relationship with First Data After the Spin-Off—Tax Allocation Agreement” beginning on page 101.

 

Information Reporting

 

Current Treasury regulations require each holder of First Data common stock who receives our common stock in the distribution to attach to his, her or its federal income tax return for the year in which the spin-off occurs a detailed statement setting forth the data that may be appropriate in order to show the applicability of section 355 of the Internal Revenue Code to the spin-off. First Data will provide the appropriate information to each stockholder of record.

 

The foregoing sets forth the material United States federal income tax consequences of the spin-off under current law. This discussion does not address tax consequences that may vary with, or are contingent on, individual circumstances. Moreover, it does not address any non-income tax or any foreign, state or local tax consequences of the spin-off. Each beneficial owner of First Data common stock is encouraged to consult his, her or its tax advisor as to the particular consequences of the spin-off to the stockholder, including the application of state, local and foreign tax laws, and as to possible prospective or retroactive changes in tax law that might affect the tax consequences described above.

 

Market for Our Common Stock; Trading of Our Common Stock Prior to the Spin-Off

 

There is currently no trading market for our common stock. Our common stock has been authorized for listing on the New York Stock Exchange under the symbol “WU.” We expect that a limited market, commonly known as a “when-issued” trading market, for our common stock will begin on September 20, 2006. The term “when-issued” means that shares can be traded prior to the time shares are available or issued. We expect that on the first trading day following the distribution date, “when-issued” trading in our common stock will end and “regular way” trading will begin. “Regular way” trading refers to trading after a security has been issued and typically involves a transaction that settles on the third full business day following the date of a trade. We have not and will not set the initial price of our common stock; that price will be established by the public markets.

 

We cannot predict the price at which our common stock will trade after the spin-off. In fact, the combined trading prices of a share of our common stock and a share of First Data common stock after the spin-off may not equal or exceed the trading price of a share of First Data common stock immediately prior to the spin-off. The price at which our common stock trades is likely to fluctuate significantly, particularly until an orderly public market develops. Prices for our common stock will be determined in the public markets and may be influenced by many factors, many of which are beyond our control, including:

 

    lack of a trading history;

 

    changes in expectations concerning our future financial performance and the future performance of the money transfer and consumer payments industries in general, including financial estimates and recommendations by securities analysts;

 

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    our financial results and differences between our actual financial and operating results and those expected by investors and analysts;

 

    strategic moves by us or our competitors, such as acquisitions or restructurings;

 

    changes in the regulatory environment governing our business;

 

    our capital structure, including the amount of our indebtedness;

 

    general economic, industry and market conditions;

 

    the depth and liquidity of the market for our common stock;

 

    fluctuations in currency exchange rates;

 

    our dividend policy;

 

    investor perceptions of our business and us; and

 

    the impact of the factors referred to in “Risk Factors.”

 

We have appointed Wells Fargo Bank, National Association to serve as transfer agent and registrar for our common stock.

 

Shares of our common stock distributed to holders of First Data common stock in connection with the spin-off will be transferable under the Securities Act of 1933, as amended, which we refer to as the Securities Act, except for shares received by persons who may be deemed to be our affiliates. Persons who may be deemed to be our affiliates after the spin-off generally include individuals or entities that control, are controlled by or are under common control with us and may include certain of our officers, directors or principal stockholders. After we become a publicly traded company, securities held by our affiliates will be subject to the resale restrictions under the Securities Act. Our affiliates will be permitted to sell shares of our common stock only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act.

 

Trading of First Data Common Stock After the Record Date and Prior to the Distribution

 

Beginning on or shortly before the record date and through the distribution date, there will be two concurrent markets in which to trade First Data common stock: a “regular way” market and an “ex-distribution” market. Shares of First Data common stock that trade on the regular way market will trade with an entitlement to shares of our common stock distributed in connection with the spin-off. Shares that trade on the ex-distribution market will trade without an entitlement to shares of our common stock distributed in connection with the spin-off. Therefore, if you owned shares of First Data common stock at 5:00 p.m., New York City time, on the record date and sell those shares on the regular way market on or prior to the distribution date, you also will be selling your right to receive the shares of our common stock that would have been distributed to you in connection with the spin-off. If you sell those shares of First Data common stock on the ex-distribution market prior to or on the distribution, you will still receive the shares of our common stock that were to be distributed to you pursuant to your ownership of the shares of First Data common stock.

 

Distribution Conditions and Termination

 

We expect that the distribution will be effective, and the spin-off complete, on the distribution date, September 29, 2006, provided that, among other things:

 

    the SEC has declared effective our registration statement on Form 10, of which this information statement is a part, under the Exchange Act and no stop order relating to our Form 10 registration statement is in effect;

 

   

the SEC has declared effective under the Securities Act our registration statement on Form S-1 registering shares of Western Union common stock subject to Western Union stock options to be issued

 

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to current and former employees of subsidiaries of First Data (other than us) who will not become our employees as a result of the adjustment of First Data stock options in the spin-off, which we refer to as the stock options registration statement, and no stop order relating to the stock options registration statement is in effect;

 

    First Data and Western Union have received all permits, registrations and consents required under the securities or blue sky laws of states or other political subdivisions of the United States or of foreign jurisdictions in connection with the distribution;

 

    First Data and Western Union have received all material permits, registrations, clearances and consents from governmental authorities and third persons necessary to effect the spin-off and to permit the operation of our businesses thereafter;

 

    First Data has received a private letter ruling from the Internal Revenue Service (which has not been revoked or modified in any material respect), in form and substance satisfactory to First Data, to the effect that, among other things, the spin-off (including certain related transactions) will be tax-free to First Data, us and First Data stockholders for United States federal income tax purposes under sections 355, 368 and related provisions of the Internal Revenue Code and, with respect to certain requirements necessary to obtain tax-free treatment under section 355 of the Internal Revenue Code on which the Internal Revenue Service will not rule, an opinion of Sidley Austin LLP, counsel to First Data (or other nationally recognized tax counsel), in form and substance satisfactory to First Data, to the effect that such requirements will be satisfied;

 

    the New York Stock Exchange has approved our common stock for listing, subject to official notice of issuance;

 

    our subsidiary, FFMC, has paid a dividend to First Data in the form of a promissory note in an aggregate principal amount of approximately $2.4 billion, which dividend is expected to be paid two days prior to the distribution date;

 

    simultaneously with the payment of such dividend by FFMC, First Data has transferred to FFMC the capital stock of the subsidiary of First Data that owns Vigo;

 

    First Data has completed the contribution to us of the other subsidiaries that own and/or operate our money transfer and consumer payments businesses and related assets and we have assumed the related liabilities and transferred to First Data (i) approximately $100.0 million in cash, which will be financed through borrowings under the revolving credit facility we expect to enter into on the distribution date, (ii) the Western Union notes with an aggregate principal amount of approximately $1.0 billion and (iii) shares of our common stock sufficient to effect the distribution;

 

    we have distributed to First Data approximately $210.0 million in cash from existing cash balances;

 

    we have transferred to First Data the subsidiaries and related assets we own that are not part of our money transfer and consumer payments businesses and First Data has assumed the liabilities associated with such related assets;

 

    all of the conditions under the agreement to effect the exchange by First Data and the investment banks of the Western Union notes for indebtedness of First Data that the investment banks will hold at that time have been satisfied (other than the condition that the spin-off has occurred and other than those which can only be satisfied at the consummation of such exchange);

 

    an independent firm acceptable to First Data, in its sole and absolute discretion, has delivered one or more opinions to the board of directors of each of First Data and Western Union confirming the solvency and financial viability of Western Union and First Data, which opinions will be in form and substance satisfactory to First Data, in its sole and absolute discretion, and shall not have been withdrawn or rescinded;

 

    no order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the spin-off or any of the transactions related thereto, including the transfers of assets and liabilities contemplated by the separation and distribution agreement, is in effect;

 

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    First Data and Western Union have each received credit ratings from the credit rating agencies that are satisfactory to First Data in its sole and absolute discretion; and

 

    no other events or developments shall have occurred that, in the judgment of the board of directors of First Data, in its sole and absolute discretion, would result in the spin-off having a material adverse effect on First Data or its stockholders.

 

The fulfillment of the foregoing conditions will not create any obligation on First Data’s part to effect the distribution, and the board of directors of First Data has reserved the right to amend, modify or abandon the distribution and the related transactions at any time prior to the distribution date. The board of directors of First Data may waive any of these conditions in its sole and absolute discretion.

 

Reason for Furnishing this Information Statement

 

This information statement is being furnished solely to provide information to stockholders of First Data who will receive shares of Western Union common stock in connection with our spin-off. It is not provided as an inducement or encouragement to buy or sell any of our securities. You should not assume that the information contained in this information statement is accurate as of any date other than the date set forth on the cover. Changes to the information contained in this information statement may occur after that date, and we undertake no obligation to update the information.

 

Accounting Treatment

 

The spin-off will be accounted for by First Data on a historical basis, and no gain or loss will be recorded.

 

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DIVIDEND POLICY

 

It is currently contemplated that following the spin-off, we will pay a cash dividend on our common stock with respect to the first full fiscal quarter following the date the spin-off is completed in an amount to be determined prior to the spin-off. However, the declaration and amount of future dividends will be determined by our board of directors and will depend on our financial condition, earnings, capital requirements, legal requirements, regulatory constraints, industry practice and any other factors that our board of directors believes are relevant. In addition, we will be a holding company with no material assets other than the capital stock of our subsidiaries. Accordingly, our ability to pay dividends will be dependent on our receiving dividends from our operating subsidiaries. Many of our operating subsidiaries are highly regulated and may be subject to restrictions on their ability to pay dividends to us.

 

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FINANCING

 

We expect that in connection with the spin-off, and in consideration for the contribution, we will transfer to First Data:

 

    approximately $100.0 million in cash, which will be financed through borrowings under the revolving credit facility we expect to enter into on the distribution date;

 

    the Western Union notes with an aggregate principal amount of approximately $1.0 billion; and

 

    shares of our common stock sufficient to effect the distribution.

 

We will also distribute to First Data approximately $210.0 million in cash from existing cash balances. In addition, two days prior to the distribution date, FFMC will pay a dividend to First Data in the form of a promissory note in an aggregate principal amount of approximately $2.4 billion.

 

The following is a description of some of the anticipated material terms of the revolving credit facility, the FFMC 364-day bridge loan facility and the indenture which will govern the Western Union notes. Negotiation of these agreements is ongoing and subject to the completion of definitive documentation. We cannot assure you that the terms described below will not change or be supplemented.

 

Western Union Notes

 

As noted above, we will transfer to First Data the Western Union notes with an aggregate principal amount of approximately $1.0 billion. First Data has informed us that, shortly after the distribution, it expects to exchange the Western Union notes with investment banks for indebtedness of First Data that the investment banks will hold at that time. First Data expects that, shortly after completion of the expected debt exchange, the investment banks will sell the Western Union notes in a private offering. We will not receive any proceeds from the issuance of the Western Union notes to First Data, their transfer to the investment banks or their subsequent sale by the investment banks.

 

The Western Union notes will have a maturity of at least 10 years from the date of issue. We currently expect that the Western Union notes will be investment grade on the date of issue and will contain customary covenants which are not expected to significantly affect our operations. Such covenants may include limitations or restrictions on the incurrence of significant subsidiary indebtedness, the incurrence of liens and entry into sales and leasebacks, in each case, subject to certain exceptions. We also expect that the Western Union notes will require us to cause FFMC to guarantee the obligations of The Western Union Company with respect to the Western Union notes if, among other things, indebtedness outstanding under the FFMC bridge loan described below is in excess of a to be determined amount within a specified time period after the distribution date.

 

FFMC Bridge Loan

 

FFMC will enter into a 364-day unsecured term loan facility to repay the $2.4 billion promissory note on or shortly after the distribution date. We expect that the bridge loan will contain customary covenants similar to the revolving credit facility for The Western Union Company (described below), including an interest coverage ratio to be determined in negotiations with our lenders. We do not expect any restrictions under FFMC’s bridge loan to significantly affect its operations.

 

The Western Union Company is considering and, subject to market and other conditions following the spin-off, expects to refinance the amounts borrowed by FFMC under the bridge loan with proceeds from debt The Western Union Company will issue or amounts The Western Union Company will otherwise borrow following the distribution date. However, we do not have any agreements or arrangements with any financial institution or other third parties with respect to any such refinancing and there can be no assurance that The Western Union Company will be able to refinance the borrowings under the FFMC bridge loan.

 

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Credit Facility

 

We anticipate that in connection with the spin-off The Western Union Company will enter into a $1.5 billion five-year unsecured revolving credit facility. The revolving credit facility is expected to include a letter of credit subfacility in an amount up to $250 million and a swing line subfacility in an amount up to $150 million and permit borrowings in euros and British pounds sterling up to $250 million. The revolving credit facility is also expected to provide for additional incremental revolving credit or term facilities in an aggregate principal amount of up to an additional $500 million.

 

The borrowings under the revolving credit facility would be available to The Western Union Company to support a commercial paper program and for working capital and other general corporate purposes, including acquisitions. Borrowings under the revolving credit facility will be used to finance the $100.0 million cash payment to First Data in connection with the spin-off.

 

The interest rates for borrowings under the facility will be based on market rates and we expect that the facility will contain customary covenants which are not expected to significantly affect our operations. Such covenants may include limitations or restrictions on the incurrence of significant subsidiary indebtedness, the incurrence of liens and entry into sales and leasebacks, the sale (by merger, consolidation or otherwise) of all or substantially all assets and certain transactions limiting the ability of subsidiaries to pay dividends, in each case, subject to certain exceptions. The revolving credit facility may also require compliance with an interest coverage ratio to be determined in negotiations with our lenders. We also expect that the revolving credit facility will require us to cause FFMC to guarantee the obligations of The Western Union Company under the revolving credit facility if, among other things, indebtedness outstanding under the FFMC bridge loan is in excess of a to be determined amount within a specified time period after the distribution date. The Western Union Company is expected to have the right to prepay borrowings under the revolving credit facility at any time without penalty or premium (except for eurodollar breakage fees, if any).

 

Aggregate Indebtedness

 

As a result of the transactions described above, following the spin-off we will have approximately $3.5 billion in combined indebtedness. First Data has informed us that it determined the amount of indebtedness that we would incur based on estimates of what it believed were the amounts of debt needed to be allocated to us and retained by First Data in order to achieve what it considered to be the desirable credit ratings from the credit rating agencies with respect to Western Union’s and First Data’s debt. The estimate took into account that the expected exchange of the Western Union notes by First Data for indebtedness of First Data held by the investment banks will result in the cancellation of $1.0 billion of First Data indebtedness and assumed that First Data would use the $100.0 million cash payment from us to repay indebtedness of First Data as required by the separation and distribution agreement. Our transfer to First Data of approximately $3.5 billion in the form of cash and our debt securities does not reflect an analysis by First Data of the value of our assets or business.

 

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CAPITALIZATION

 

The following table sets forth our capitalization as of June 30, 2006 on a historical basis and on a pro forma basis to give effect to the pro forma adjustments included in our unaudited pro forma combined financial statements. The pro forma adjustments are based upon available information and assumptions that management believes are reasonable; however, such adjustments are subject to change based on the finalization of the terms of the spin-off and the transaction agreements. In addition, such adjustments are estimates and may not prove to be accurate.

 

You should read this table together with “Selected Historical Combined Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Combined Financial Statements” and our historical combined financial statements and the notes to those statements included elsewhere in this information statement.

 

     As of June 30, 2006  
     Historical     Pro
Forma
 
(in millions, except per share amounts)    (unaudited)  

Liabilities:

    

Debt (a)

   $ —       $ 3,500.0  

Net investment in The Western Union Company (stockholders’ deficiency):

    

Preferred stock, $1.00 par value; 10 shares authorized pro forma; no shares issued and outstanding pro forma

     —         —    

Common stock, $0.01 par value; 2,000 shares authorized pro forma; 765.2 shares issued and outstanding pro forma (b)

     —         7.7  

Capital deficiency (c)

     —         (635.2 )

Net investment in The Western Union Company (c)

     3,312.6       —    

Accumulated other comprehensive loss

     (59.1 )     (59.1 )
                

Total net investment in The Western Union Company (stockholders’ deficiency) (d)

     3,253.5       (686.6 )
                

Total capitalization

   $ 3,253.5     $ 2,813.4  
                

(a) Represents the incurrence of $3.5 billion in combined indebtedness in connection with the spin-off.
(b) Represents the distribution of 765.2 million shares of our common stock to holders of First Data common stock based on the number of shares of First Data common stock outstanding at June 30, 2006.
(c) Represents the elimination of First Data’s net investment in us and the capital deficiency that will result based on the payment to First Data of $3.5 billion in the form of a combination of cash and our debt securities, the forgiveness of certain intercompany balances between First Data and us, and the distribution by us to First Data of $210.0 million in cash from existing cash balances.
(d) Certain of our historical net assets are restricted and are included within the accounts of companies combined in our historical combined financial statements. These restricted net assets do not exceed $60 million.

 

Our ability to issue additional stock will be constrained because the issuance of additional stock might cause the spin-off to be taxable to First Data if 50% or more of our stock (by vote or value) is treated as having been acquired, directly or indirectly, by one or more persons as part of a plan (or series of related transactions) that includes the spin-off. Under the tax allocation agreement we might be required to indemnify First Data against any such tax imposed on First Data as a result of acquisitions of our stock. See “The Spin-Off—Important Federal Income Tax Consequences—Effect of Certain Acquisitions of First Data Common Stock or Our Common Stock” for a more detailed discussion.

 

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UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

The unaudited pro forma combined financial statements of Western Union presented below have been derived from our audited combined financial statements for the year ended December 31, 2005 and from our unaudited combined financial statements for the six months ended June 30, 2006. The pro forma adjustments and notes to the pro forma combined financial statements give effect to the distribution of Western Union common stock by First Data and the other transactions contemplated by the separation and distribution agreement. These unaudited pro forma combined financial statements should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our combined financial statements and the notes to those statements included elsewhere in this information statement.

 

The unaudited pro forma combined statements of income for the year ended December 31, 2005 and the six months ended June 30, 2006 have been prepared as though the spin-off had occurred as of January 1, 2005. The unaudited pro forma combined balance sheet at June 30, 2006 has been prepared as though the spin-off had occurred on June 30, 2006. The pro forma adjustments are based upon available information and assumptions that management believes are reasonable; however, such adjustments are subject to change based on the finalization of the terms of the spin-off and the transaction agreements. See “Our Relationship with First Data After the Spin-off—Separation and Distribution Agreement.” In addition, such adjustments are estimates and may not prove to be accurate.

 

The pro forma adjustments include the following items:

 

    The contribution by First Data to us of specified assets related to First Data’s money transfer and consumer payments businesses and the assumption by us of specified liabilities related to such businesses.

 

    The issuance by us to First Data, in partial consideration for the contribution, of 765.2 million shares of our common stock.

 

    The distribution of 765.2 million shares of our common stock to holders of First Data common stock.

 

    The incurrence of $3.5 billion of combined indebtedness in connection with the spin-off and the payment to First Data of $3.5 billion in the form of a combination of cash and our debt securities.

 

    The distribution by us to First Data of $210.0 million in cash from existing cash balances.

 

    The cash settlement of $778.8 million of intercompany notes and related accrued interest of $32.4 million owed by First Data to us and $52.2 million of intercompany notes and related accrued interest of $2.2 million owed by us to First Data, and the payment by us to First Data of $16.8 million to settle certain foreign currency swap agreements with First Data related to certain notes receivable with affiliates on the date of spin-off.

 

    The forgiveness by us of $153.8 million of intercompany balances owed by First Data to us, and the forgiveness by an affiliate of First Data of an intercompany note owed by us to that affiliate of $11.3 million, which collectively will be treated as a net dividend to First Data for accounting and tax purposes.

 

    Estimated incremental costs associated with operating as a stand-alone company of $60 million annually.

 

The share numbers are based on First Data share numbers as of June 30, 2006, and the dollar and settlement amounts are based on our balances as of June 30, 2006.

 

Our unaudited pro forma combined statements of income do not include adjustments for certain other costs of operating as a stand-alone company which we estimate, subject to the finalization of our plans, to be between $5 million and $15 million annually, including higher corporate branding and global affairs, information technology, procurement and other expenses related to being a stand-alone company.

 

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Our unaudited pro forma combined statements of income do not give effect to initial expenses directly attributable to the spin-off because of their non-recurring nature. A significant portion of these non-recurring charges to effect the separation will be incurred by First Data, such as investment banker fees, outside legal and accounting fees relating to the spin-off, office move costs, costs to separate information systems and temporary consulting costs. We will incur separation costs that have a future benefit to our company such as recruiting and relocation expenses associated with hiring key senior management positions new to our company, other employee compensation expenses and temporary labor used to develop ongoing processes. We estimate total non-recurring separation charges that our company will incur, which are not included in our unaudited pro forma combined statements of income, to be approximately $15 million to $25 million. We anticipate that substantially all of these costs will be incurred within 12 months of the spin-off. See “Our Relationship with First Data After the Spin-Off—Separation and Distribution Agreement—Expenses.”

 

The pro forma adjustments are based upon available information and assumptions that management believes are reasonable based on our current plans and expectations; however, such adjustments are subject to change based on the finalization of the terms of the spin-off and the transaction agreements. Additionally, this information is forward looking information and is subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Forward-Looking Statements” and “Our Relationship with First Data After the Spin-Off—Separation and Distribution Agreement” on pages 29 and 93, respectively, for further information.

 

The unaudited pro forma combined financial statements are for illustrative purposes only and do not reflect what our financial position and results of operations would have been had the spin-off occurred on the dates indicated and are not necessarily indicative of our future financial position and future results of operations.

 

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THE WESTERN UNION COMPANY

Unaudited Pro Forma Combined Statements of Income

Year Ended December 31, 2005

 

     Historical     Pro Forma
Adjustments
    Pro Forma  
(in millions, except per share amounts)                   

Revenues:

      

Transaction fees

   $ 3,354.8     $ —       $ 3,354.8  

Foreign exchange revenue

     531.0       —         531.0  

Commission and other revenues

     102.1       —         102.1  
                        

Total revenues

     3,987.9       —         3,987.9  

Expenses:

      

Cost of services

     2,118.9       —         2,118.9  

Selling, general and administrative

     599.8       60.0 (d)     659.8  
                        

Total expenses

     2,718.7       60.0       2,778.7  
                        

Operating income

     1,269.2       (60.0 )     1,209.2  

Derivative gains/(losses), net

     45.8       —         45.8  

Foreign exchange effect on notes receivable from affiliates, net

     (5.9 )     5.9 (a)     —    

Interest income from affiliates, net

     24.3       (24.3 )(a)     —    

Interest expense

     —         (202.3 )(b)     (202.3 )

Other income, net

     10.7       —         10.7  
                        

Income before income taxes

     1,344.1       (280.7 )     1,063.4  

Provision for income taxes

     416.7       (102.6 )(c)     314.1  
                        

Net income

   $ 927.4     $ (178.1 )   $ 749.3  
                        

Pro forma earnings per share:

      

Basic (e)

       $ 0.98  

Diluted (e)

       $ 0.96  

Pro forma shares outstanding:

      

Basic (e)

         765.2  

Diluted (e)

         776.9  

 

See accompanying notes.

 

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THE WESTERN UNION COMPANY

Unaudited Pro Forma Combined Statements of Income

Six Months Ended June 30, 2006

 

     Historical     Pro Forma
Adjustments
    Pro
Forma
 
(in millions, except per share amounts)       

Revenues:

      

Transaction fees

   $ 1,791.6     $ —       $ 1,791.6  

Foreign exchange revenue

     309.6       —         309.6  

Commission and other revenues

     55.4       —         55.4  
                        

Total revenues

     2,156.6       —         2,156.6  

Expenses:

      

Cost of services

     1,153.4       —         1,153.4  

Selling, general and administrative

     364.1       30.0 (d)     394.1  
                        

Total expenses

     1,517.5       30.0       1,547.5  
                        

Operating income

     639.1       (30.0 )     609.1  

Derivative (losses)/gains, net

     (27.2 )     —         (27.2 )

Foreign exchange effect on notes receivable from affiliates, net

     (4.1 )     4.1 (a)     —    

Interest income from affiliates, net

     23.5       (23.5 )(a)     —    

Interest expense

     —         (101.2 )(b)     (101.2 )

Other income, net

     17.4       —         17.4  
                        

Income before income taxes

     648.7       (150.6 )     498.1  

Provision for income taxes

     210.0       (53.0 )(c)     157.0  
                        

Net income

   $ 438.7     $ (97.6 )   $ 341.1  
                        

Pro forma earnings per share:

      

Basic (e)

       $ 0.45  

Diluted (e)

       $ 0.44  

Pro forma shares outstanding:

      

Basic (e)

         765.2  

Diluted (e)

         776.9  

 

See accompanying notes.

 

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THE WESTERN UNION COMPANY

Unaudited Pro Forma Combined Balance Sheet

As of June 30, 2006

 

 
(in millions, except per share amounts)    Historical     Pro Forma
Adjustments
    Pro
Forma
 

Assets

  

Cash and cash equivalents

   $ 655.8     $ 740.0 (f)   $ 1,185.8  
       (210.0 )(m)  

Settlement assets

     982.1       —         982.1  

Receivables from affiliated companies, net

     167.2      
 
 
(32.4
(153.8
16.8
)(f)
)(g)
(f)
    —    
       2.2 (f)  

Notes receivable from affiliated companies

     778.8       (778.8 )(f)     —    

Property and equipment, net

     89.4       65.5 (h)     154.9  

Goodwill

     1,599.3       —         1,599.3  

Other intangible assets, net

     232.9       —         232.9  

Other assets

     490.1       14.0 (i)     504.1  
                        

Total assets

   $ 4,995.6     $ (336.5 )   $ 4,659.1  
                        

Liabilities and net investment in The Western Union Company (stockholders’ deficiency)

      

Liabilities:

      

Accounts payable and accrued liabilities

   $ 220.5     $ 167.1 (j)   $ 387.6  

Settlement obligations

     980.9       —         980.9  

Pension obligations

     68.9       —         68.9  

Deferred tax liability, net

     269.5       —         269.5  

Notes payable to affiliated companies

     63.5      
 
(52.2
(11.3
)(f)
)(g)
    —    

Other liabilities

     138.8       —         138.8  

Debt

     —         3,500.0 (k)     3,500.0  
                        

Total liabilities

     1,742.1       3,603.6       5,345.7  

Net investment in The Western Union Company (stockholders’ deficiency):

      

Preferred stock, $1.00 par value; 10 shares authorized pro forma; no shares issued and outstanding pro forma

     —         —         —    

Common stock, $0.01 par value; 2,000 shares authorized pro forma; 765.2 shares issued and outstanding pro forma

     —         7.7 (l)     7.7  

Capital deficiency

     —         (635.2 )(m)     (635.2 )

Net investment in The Western Union Company

     3,312.6       (3,312.6 )(m)     —    

Accumulated other comprehensive loss

     (59.1 )     —         (59.1 )
                        

Total net investment in The Western Union Company (stockholders’ deficiency) (n)

     3,253.5       (3,940.1 )     (686.6 )
                        

Total liabilities and net investment in The Western Union Company (stockholders’ deficiency)

   $ 4,995.6     $ (336.5 )   $ 4,659.1  
                        

 

See accompanying notes.

 

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THE WESTERN UNION COMPANY

NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS

 

(a) Represents interest income and expense and fluctuations in foreign exchange during the period on notes receivable due from First Data to us and notes payable due to First Data from us.

 

(b) Reflects the adjustment to record interest expense on $3.5 billion of combined indebtedness to be incurred in connection with the spin-off. Pro forma interest expense was calculated based on an assumed blended interest rate of 5.7% derived by utilizing a ten-year treasury note rate plus an anticipated credit spread for the Western Union notes and a one-month LIBOR rate plus an anticipated credit spread for the revolving credit and FFMC bridge loan facilities. Interest expense also includes estimated amortization on approximately $14.0 million of assumed debt issuance costs. The calculation of interest expense assumes constant debt levels throughout the period; actual interest expense may be higher or lower depending on fluctuations in interest rates and actual credit ratings. A 1/8% change in interest rates would result in a $4.4 million change in annual interest expense.

 

(c) Represents the tax effect of pro forma adjustments using our statutory tax rate of 37.6% for the six months ended June 30, 2006 and 37.5% for the year ended December 31, 2005 for United States transactions, which represent the majority of the pro forma adjustments, and the applicable international tax rate for the international portion of the pro forma adjustments.

 

(d) Represents the estimated incremental costs associated with operating as a stand-alone company ($77 million for the six months ended June 30, 2006 and $129 million for the year ended December 31, 2005, partially offset by the elimination of related 2005 corporate overhead allocated by First Data of $47 million for the six months ended June 30, 2006 and $69 million for the year ended December 31, 2005 resulting in an adjustment to our unaudited pro forma combined statements of income of $30 million for the six months ended June 30, 2006 and $60 million for the year ended December 31, 2005). The estimated costs associated with operating as a stand-alone company include for the six months ended June 30, 2006 and the year ended December 31, 2005:

 

  (i) $49 million and $76 million, respectively, related to staff additions and increases in salaries to replace First Data support, which were calculated based on approved headcounts, expected compensation plans and current market compensation assumptions;

 

  (ii) $10 million and $19 million, respectively, related to corporate governance, including board of directors compensation and expenses, insurance costs, audit fees, annual report and proxy printing and filing fees, stock exchange fees, corporate compliance fees, and tax advisory fees, which were estimated using First Data historical costs, and adjusted for expected variations as applicable, or from insurance premium cost projections received from our insurance broker based on current market conditions;

 

  (iii) $6 million and $13 million, respectively, related to increased depreciation, amortization and maintenance costs in connection with information technology infrastructure investments resulting from the spin-off, which were calculated from a plan approved by management using vendor quotes as a basis;

 

  (iv) $6 million and $12 million, respectively, related to corporate branding and global affairs, including increased costs to our company associated with assuming full support of the First Data/Western Union charitable foundation, other charitable contributions and other consulting costs, which were based on the foundation’s approved operating plans and historical costs of First Data and adjusted for expected variations as applicable;

 

  (v) $2 million and $2 million, respectively, related to the administration of our benefit plans and payroll functions, which were estimated based upon written quotes received from potential providers; and

 

  (vi) $4 million and $7 million, respectively, related to other corporate costs, including ongoing costs associated with treasury, mergers and acquisitions and corporate security activities and increased depreciation relating to additional property and equipment purchases in connection with the spin-off, which were estimated using First Data’s historical costs and adjusted for expected variations as applicable.

 

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     The information provided in the pro forma adjustment described in this footnote is forward looking information based on our current plans and expectations and is subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Forward-Looking Statements” on page 29 for further information.

 

(e) The calculation of pro forma basic earnings per share and shares outstanding is based on the number of shares of First Data common stock outstanding as of June 30, 2006 adjusted for the distribution ratio of one share of our common stock for every share of First Data common stock. The calculation of pro forma diluted earnings per share and shares outstanding for the periods presented is based on the number of shares of First Data common stock outstanding as of June 30, 2006 and diluted shares of common stock outstanding as of June 30, 2006 adjusted for the same distribution ratio. This calculation may not be indicative of the dilutive effect that will actually result from the replacement of First Data stock-based awards held by our employees and employees of First Data or the grant of new stock-based awards. The number of dilutive shares of our common stock that will result from First Data stock options, restricted stock awards and restricted stock units held by our employees will not be determined until immediately after the spin-off. However, we currently expect the number of dilutive shares resulting from the replacement of our employees’ First Data stock options, restricted stock awards and restricted stock units could be greater than one dilutive share of our common stock after the spin-off for each dilutive share of First Data common stock held prior to the spin-off. See “Our Relationship with First Data After the Spin-Off—Employee Matters Agreement” beginning on page 99 for further information.

 

(f) Represents the cash settlement of $778.8 million of intercompany notes and related accrued interest of $32.4 million owed by First Data to us and $52.2 million of intercompany notes and related accrued interest of $2.2 million owed by us to First Data based on balances outstanding at June 30, 2006. We currently plan to invest the net repayments on these notes overseas; however, repatriating these funds to the United States could result in additional taxes. Also represents the payment by us to First Data of $16.8 million to settle certain foreign currency swap agreements with First Data related to certain notes receivable from affiliates on the date of spin-off.

 

(g) Represents the forgiveness by us of $153.8 million of intercompany balances owed by First Data to us, and the forgiveness by an affiliate of First Data of an intercompany note owed by us to that affiliate of $11.3 million, which collectively will be treated as a net dividend to First Data for accounting and tax purposes, based on balances outstanding at June 30, 2006.

 

(h) Represents the contribution by First Data to us of our headquarters in Englewood, Colorado currently occupied by both First Data and us.

 

(i) Represents assumed debt issuance costs of $14.0 million.

 

(j) Represents the reclassification by us of certain tax and employee-related obligations from intercompany liabilities, including $148.2 million of federal, state and international tax liabilities and $18.9 million of accrued employee benefits and related administration costs, property taxes, and other accrued liabilities, which we will retain subsequent to the spin-off.

 

(k) Represents the incurrence of $3.5 billion of combined indebtedness in connection with the spin-off.

 

(l) Represents the distribution of 765.2 million shares of our common stock to holders of First Data common stock.

 

(m) Represents the elimination of First Data’s net investment in us and the capital deficiency that will result based on the payment to First Data of $3.5 billion in the form of a combination of cash and our debt securities, the forgiveness of certain intercompany balances between First Data and us for the items noted in (g), (h) and (j) above, and the distribution by us to First Data of $210.0 million in cash from existing cash balances.

 

(n) Certain of our historical net assets are restricted and are included within the accounts of companies combined in our historical combined financial statements. These restricted net assets do not exceed $60 million.

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA

 

The historical financial data have been prepared on a combined basis from First Data’s consolidated financial statements using the historical results of operations and assets and liabilities of First Data’s businesses and give effect to allocations of expenses from First Data. Our selected historical combined financial data are not necessarily indicative of our future financial position, future results of operations or future cash flows and do not reflect what our financial position, results of operations or cash flows would have been as a stand-alone company during the periods presented.

 

The following tables set forth our selected historical financial data prepared on a combined basis. These tables present our money transfer and consumer payments businesses as they historically have been operated by First Data. You should read the information set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements and the notes to those statements included elsewhere in this information statement. The statements of income and cash flow data for the years ended December 31, 2005, 2004 and 2003 and the balance sheet data as of December 31, 2005 and 2004 set forth below are derived from our audited combined financial statements included elsewhere in this information statement. The statements of income and cash flow data for the years ended December 31, 2002 and 2001 and the balance sheet data as of December 31, 2003, 2002 and 2001 set forth below are derived from our unaudited combined financial statements not included in this information statement. The statements of income and cash flow data for the six-month periods ended June 30, 2006 and 2005 and the balance sheet data as of June 30, 2006 set forth below are derived from our unaudited combined financial statements included elsewhere in this information statement. The balance sheet data as of June 30, 2005 set forth below are derived from our unaudited combined financial statements not included in this information statement. The unaudited interim combined financial statements are not necessarily indicative of the results to be expected for any other interim period or for the year ending December 31, 2006. However, in the opinion of management, the unaudited interim combined financial statements include all adjustments (consisting of normal recurring accruals) that are necessary for the fair presentation of the results for the interim periods.

 

    Six Months Ended
June 30,
  Years Ended December 31,  
        2006           2005       2005   2004     2003     2002     2001  
   

(unaudited)

                 

(unaudited)

   

(unaudited)

 
(in millions)                                    

Statements of Income Data:

             

Revenues (a)

  $ 2,156.6   $ 1,900.4   $ 3,987.9   $ 3,547.6     $ 3,151.6     $ 2,743.4     $ 2,314.4  

Operating expenses (a) (b) (c) (d)

    1,517.5     1,287.8     2,718.7     2,435.5       2,148.6       1,919.9       1,651.0  

Operating income

    639.1     612.6     1,269.2     1,112.1       1,003.0       823.5       663.4  

Other income/(expense), net (e)

    9.6     42.0     74.9     (13.5 )     (40.4 )     (24.2 )     (1.1 )

Income before income taxes (b) (c) (d)

    648.7     654.6     1,344.1     1,098.6       962.6       799.3       662.3  

Net income (b) (c) (d)

    438.7     451.6     927.4     751.6       633.7       494.1       407.9  

Depreciation and amortization (b)

    49.1     39.0     79.5     79.2       78.4       60.2       92.9  

Cash Flow Data:

             

Net cash provided by operating activities

    481.9     467.9     1,002.8     930.2       792.8       607.5       526.1  

Dividends to parent company

    —       —       417.2     659.8       324.2       486.8       1,047.3  

Key Indicators (unaudited):

             

Consumer-to-consumer transactions (f)

    69.89     54.09     118.52     96.66       81.04       67.84       55.78  

Consumer-to-business transactions (g)

    120.71     102.30     215.11     192.57       179.39       145.01       113.79  

 

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    As of June 30,   As of December 31,
    2006   2005   2005   2004   2003   2002   2001
    (unaudited)           (unaudited)   (unaudited)   (unaudited)

Balance Sheet Data:

             

Settlement assets

  $ 982.1   $ 745.7   $ 929.1   $ 716.9   $ 586.4   $ 475.9   $ 445.5

Total assets

    4,995.6     3,770.5     4,606.4     3,330.2     3,029.9     2,472.4     2,189.8

Settlement obligations

    980.9     741.3     926.7     711.0     576.1     463.3     441.2

Total liabilities

    1,742.1     1,390.3     1,794.6     1,395.7     1,201.0     1,001.7     846.4

Net investment in The Western Union Company

    3,253.5     2,380.2     2,811.8     1,934.5     1,828.9     1,470.7     1,343.4

(a) In January 2002, our company adopted Emerging Issues Task Force 01-14, “Income Statement Characterization of Reimbursements Received for ‘Out-of-Pocket’ Expenses Incurred,” or “EITF 01-14,” which requires that reimbursements received for “out-of-pocket” expenses be characterized as revenue. The year ended December 31, 2001 has been adjusted for this adoption. Operating expenses include cost of services and selling, general and administrative expenses.
(b) In January 2002, our company adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” or “SFAS 142,” which requires that goodwill no longer be amortized effective January 1, 2002. Prior to our adoption of SFAS 142, goodwill was amortized on a straight-line basis over estimated useful lives ranging from 10 to 40 years.
(c) In 2002, our company recorded expenses of $41.0 million related to the settlement of certain class action litigation and regulatory matters.
(d) We adopted SFAS No. 123R, “Share-Based Payment,” or “SFAS 123R,” following the modified prospective method effective January 1, 2006. SFAS 123R requires all stock-based payments to employees to be recognized in the income statement based on their respective grant date fair values over the corresponding service periods and also requires an estimation of forfeitures when calculating compensation expense. Stock-based compensation expense, including the impact of adopting SFAS 123R, was $6.1 million for the six months ended June 30, 2006.
(e) Primarily includes derivative gains and losses, the net foreign exchange effect on notes receivable from affiliates and related foreign currency swaps with First Data, and net interest income due from affiliates. We anticipate volatility with respect to derivative gains and losses until we have redesignated our foreign currency forward contracts by modifying all hedge documentation to allow for cash flow hedge accounting with respect to these and future foreign currency forward positions, which we intend to do as expeditiously as possible. We also anticipate volatility with respect to the revaluation of our euro denominated notes receivable from affiliates and related foreign currency swap agreements with First Data until we have settled our notes receivable from affiliates and related foreign currency swap agreements as part of the spin-off. During the six months ended June 30, 2006 and 2005 and the years ended December 31, 2005, 2004 and 2003, the pre-tax derivative gain (loss) was $(27.2) million, $36.8 million, $45.8 million, $(30.2) million, and $(37.9) million, respectively. During the six months ended June 30, 2006 and 2005 and the years ended December 31, 2005 and 2004, the pre-tax gain (loss) on foreign exchange translation of notes receivable from affiliates and valuation of related foreign currency swap agreements was $(4.1) million, $(9.8) million, $(5.9) million, and $7.5 million, respectively. There was no gain or loss during 2003.
(f) Consumer-to-consumer transactions include consumer-to-consumer money transfer services worldwide. Amounts include Vigo Remittance Corp. transactions since the acquisition date of October 21, 2005.
(g) Consumer-to-business transactions include Quick Collect, Convenience Pay, Speedpay and Equity Accelerator transactions processed by us. Amounts include E Commerce Group, Inc. (Speedpay) transactions since its acquisition in June 2002 and Paymap Inc. (Equity Accelerator and Just-in-Time) transactions since its acquisition in April 2002.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion in conjunction with the combined financial statements and the notes to those statements included elsewhere in this information statement. Certain statements contained in the Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this information statement. See “Risk Factors” and “Forward-Looking Statements.”

 

Overview

 

We are a leading provider of money transfer services, operating in two business segments. We provide consumer-to-consumer money transfer services, primarily through a global network of third-party agents using our multi-currency, real-time money transfer processing systems. In most countries, this service is available for both intra-country transfers—that is, money transfers from one location to another in the same country—and internationally—that is, the transfer of funds into or out of a country. We also provide consumer-to-business payment services, which allow consumers to send funds to businesses, government agencies and other organizations that receive consumer payments, including utilities, auto finance companies, mortgage servicers and other financial service providers (all sometimes referred to as “billers”) through our network of third-party agents and various electronic channels. Consumer-to-business payment services are generally available only inside a particular country, although in some instances we provide the ability for consumers to make payments from one country to another. Businesses not considered part of the segments described above are categorized as “Other” and generated approximately 3% of our total combined revenue for the year ended December 31, 2005.

 

The consumer-to-consumer money transfer service is available through an extensive network of agent locations that offer Western Union services around the world. Some of our agent locations only pay and do not send money. In addition to our agent locations, we are expanding the ability of consumers to send money through other channels, such as our Internet site, westernunion.com, and the telephone. Consumer-to-consumer money transfer service is available through the Western Union®, Orlandi Valuta® and VigoSM brands, and includes locations offering any of our three brands.

 

The consumer-to-business service allows consumers to transfer money to a biller. This service is available at many of our Western Union agent locations, and in some instances through the Internet or by telephone. In 2005, substantially all of our consumer-to-business segment revenue was generated from transactions in the United States.

 

Factors that we believe are important to our long-term success include increasing international growth by expanding and diversifying our consumer-to-consumer global distribution network, building our brands, enhancing the consumer experience, expanding the channels by which consumers can send or receive money and diversifying our consumer-to-consumer service offerings, expanding into new biller and other business and government relationships, and expanding the international presence of our consumer-to-business offerings. Significant factors affecting our financial position and results of operations include:

 

   

Transaction volume is the primary generator of revenue in our businesses. Transaction volume in our consumer-to-consumer segment is affected by, among other things, the size of the international migrant population and individual needs to transfer funds in emergency situations. We anticipate the demand for money transfer services will be strong as individuals continue to migrate to countries outside of their countries of origin. As noted elsewhere in this information statement, a reduction in the size of the migrant population, interruptions in migration patterns or reduced employment opportunities including those resulting from any changes in immigration laws, economic development patterns or political

 

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events, could adversely affect our transaction volume. For example, in the three months ended June 30, 2006, transaction growth in our consumer-to-consumer business, primarily the United States to Mexico and Latin American corridors, and to a lesser extent the domestic money transfer business, was adversely impacted by what we believe is uncertainty created by immigration reform activities in the United States. Since the end of the second quarter, we have seen this trend continue, and as uncertainty about immigration reform persists, we anticipate our businesses will continue to be similarly impacted for some period of time.

 

    Revenue is also impacted by prices charged to the consumer, the amount of money sent, and by changes in the exchange rate between foreign currencies, particularly the euro, and the United States dollar. We have made periodic pricing decreases in response to competition and to implement our brand investment strategy, which includes better meeting consumer needs, maximizing market opportunities and strengthening our overall competitive positioning. Net price decreases have been approximately 3% of our annual combined revenues in each of the last two years, a trend that is expected to continue.

 

    We continue to face robust competition in both our consumer-to-consumer and consumer-to-business segments from a variety of money transfer and consumer payment providers. We believe the most significant competitive factors in the consumer-to-consumer segment relate to brand recognition, distribution network, consumer experience and price and in the consumer-to-business segment relate to brand recognition, convenience, variety of payment methods and price.

 

    Regulation of the money transfer industry is increasing. The number and complexity of regulations around the world and the pace at which regulation is changing are factors that pose significant challenges to our business. We continue to implement policies and programs and adapt our business practices and strategies to help us comply with current legal requirements, as well as with new and changing legal requirements affecting particular services, or the conduct of our business in general. Our activities include dedicated compliance personnel, training and monitoring programs, government relations and regulatory outreach efforts and support and guidance to the agent network on compliance programs. These efforts increase our costs of doing business.

 

    We have historically intended to use derivative instruments to mitigate changes in foreign currency exchange rates. We had intended to apply hedge accounting to these derivatives, which produced financial statement results that appeared to be consistent with the economics of these transactions. However, based upon an evaluation of our initial hedge documentation, we determined that our hedge documentation was not adequate at the inception of the derivative agreements to qualify for hedge accounting treatment and accordingly, have previously restated our combined financial statements. As a result, changes in the fair market value of our outstanding derivative instruments, which are impacted primarily by fluctuations in the euro, are currently recognized in our combined statements of income. Had these instruments qualified for hedge accounting treatment, changes to the fair value of our derivative instruments would have been recognized on our combined balance sheets and would not directly impact our net income until such instruments matured. The failure of these instruments to qualify for hedge accounting treatment has resulted in volatility in our net income for the periods presented. For example, during the six months ended June 30, 2006, we had pre-tax derivative losses of $27.2 million, and for the six months ended June 30, 2005 we had pre-tax derivative gains of $36.8 million. In addition, during the year ended December 31, 2005, we had pre-tax derivative gains of $45.8 million, and we had pre-tax derivative losses of $30.2 million and $37.9 million during the years ended December 31, 2004 and 2003, respectively. We anticipate our results will be subject to volatility as a result of this change until we are able to redesignate the affected forward contracts as hedges with revised documentation to allow for hedge accounting treatment, which we intend to do as expeditiously as possible. We also intend to have the appropriate documentation required for future foreign currency forward positions to qualify for hedge accounting treatment.

 

   

We also previously restated our combined financial statements to reflect foreign currency translation adjustments of certain notes receivable from affiliates denominated in euros and changes in the market

 

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value of certain foreign currency swap agreements with First Data in the combined statements of income. These notes and foreign currency swap agreements will be settled in connection with the spin-off.

 

    Our consumer-to-business segment continues to experience a shift in demand from cash-based walk-in payment services to lower margin, higher volume electronic payment services.

 

Significant Financial and Other Highlights

 

Significant financial and other highlights for the year ended December 31, 2005 and the six months ended June 30, 2006 include:

 

    For the year ended December 31, 2005, we generated $3,987.9 million in total combined revenues and $927.4 million in combined net income. This resulted in year-over-year growth of 12% in total combined revenues and 23% in combined net income.

 

    For the six months ended June 30, 2006, we generated $2,156.6 million in total combined revenues and $438.7 million in combined net income.

 

    For the year ended December 31, 2005, we completed 119 million consumer-to-consumer transactions worldwide, an increase of 23% over 2004. Consumer-to-consumer transactions grew 29% in the six months ended June 30, 2006 compared to the same period in 2005. Excluding transactions attributable to Vigo Remittance Corporation, or “Vigo,” consumer-to-consumer transactions increased 21% in 2005 compared to 2004 and 20% for the six months ended June 30, 2006 compared to the same period in 2005.

 

    Consumer-to-business transactions increased 12% from 2004 to 2005 to 215 million transactions, and increased 18% to 121 million transactions in the six months ended June 30, 2006 over the corresponding period in 2005.

 

In October 2005, First Data acquired Vigo, a provider of consumer-to-consumer money transfer services primarily from the United States to Latin America, which First Data will contribute to Western Union as part of the spin-off.

 

Adoption of SFAS 123R

 

We adopted Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” or “SFAS 123R,” following the modified prospective method effective January 1, 2006. SFAS 123R requires all stock-based payments to employees to be recognized in the income statement based on their respective grant date fair values over the corresponding service periods and also requires an estimation of forfeitures when calculating compensation expense. Stock-based compensation expense, including the impact of adopting SFAS 123R, was $6.1 million for the six months ended June 30, 2006.

 

In December 2005, First Data accelerated vesting of all outstanding unvested stock options granted to its officers and employees under its 2002 Long-Term Incentive Plan. The decision to accelerate the vesting of these stock options was made primarily to reduce stock-based compensation expense that otherwise likely would have been recorded in future periods following First Data’s adoption of SFAS 123R. We recognized compensation expense of $1.8 million during the fourth quarter of 2005 related to accelerated vesting.

 

Refer to Note 15—“Stock Compensation Plans” of our historical combined financial statements for a more detailed discussion of First Data’s stock-based compensation plans and the adoption of SFAS 123R.

 

The Separation of Western Union from First Data

 

On January 26, 2006, First Data announced its intention to separate its money transfer and consumer payments businesses into an independent, publicly-traded company through a spin-off of 100% of our stock to

 

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First Data stockholders. The spin-off is intended to be tax-free to First Data’s stockholders and to First Data and Western Union. Completion of the spin-off is expected on September 29, 2006, subject to certain conditions, including necessary regulatory approvals, continued validity of the private letter ruling First Data received from the Internal Revenue Service, receipt of a favorable tax opinion of outside tax counsel and final approval from First Data’s board of directors to complete the spin-off.

 

Basis of Presentation

 

The combined financial statements are comprised of entities included in First Data’s consolidated financial statements and accounting records, principally representing the consumer-to-consumer money transfer and consumer-to-business payment services businesses, and reflect the historical results of operations and the historical basis of assets and liabilities as if such businesses had been combined for all periods presented. All significant intercompany transactions and accounts have been eliminated. The combined statements of income include expense allocations for certain corporate functions historically provided to Western Union by First Data, including treasury, tax, accounting and reporting, mergers and acquisitions, risk management, legal, internal audit, procurement, human resources, investor relations and information technology. If possible, these allocations were made on a specific identification basis. Otherwise, the expenses related to services provided to Western Union by First Data were allocated to Western Union based on the relative percentages, as compared to First Data’s other businesses, of headcount or other appropriate methods depending on the nature of each item of cost to be allocated. Pursuant to a transition services agreement we will enter into with First Data prior to the spin-off, First Data will continue to provide Western Union with certain of these services at prices agreed upon by First Data and Western Union for a period of up to one year from the date of the spin-off. Western Union will arrange to procure other services pursuant to arrangements with third parties. See “Our Relationship with First Data After the Spin-Off” for a description of the transition services agreement. The costs historically allocated to us by First Data for the services it has provided us may not be indicative of the costs we will incur to obtain these services following the spin-off. In addition to the transition services agreement, we will enter into a number of commercial agreements with First Data in connection with the spin-off, many of which are expected to have terms longer than a year. See “Our Relationship with First Data After the Spin-Off—Other Spin-Off Agreements.”

 

Our businesses have used a number of First Data corporate functions as described above to support our business functions. Following completion of the spin-off, we will no longer use those functions (other than those provided under the transition services agreement) and will need to establish our own. We expect to incur initial costs in 2006 to establish the necessary corporate infrastructure.

 

We expect that certain expenses related to being a stand-alone company will be higher in the future than the historical amounts reflected in the combined statements of income. The financial information presented in this document does not reflect what our consolidated financial position, results of operations or cash flows would have been as a stand-alone company during the periods presented and is not necessarily indicative of our future consolidated financial position, results of operations or cash flows.

 

We also have prepared unaudited pro forma combined financial statements to make adjustments for and give effect to the spin-off. See “Unaudited Pro Forma Combined Financial Statements.”

 

New Financing

 

We expect that in connection with the spin-off, we will transfer to First Data approximately $3.5 billion in the form of a combination of cash and our debt securities, which will include a dividend paid to First Data in the form of a promissory note from our subsidiary, FFMC, in an aggregate principal amount of approximately $2.4 billion, the issuance by The Western Union Company to First Data of an aggregate principal amount of approximately $1.0 billion in Western Union notes and a cash payment by Western Union to First Data of

 

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approximately $100.0 million in cash, which will be financed through borrowings under the revolving credit facility we expect to enter into on the distribution date. In addition, we will distribute to First Data approximately $210.0 million in cash from existing cash balances.

 

We expect that FFMC will repay the promissory note on the distribution date or shortly thereafter with borrowings under a 364-day bridge loan facility it will enter into on or shortly after the distribution date. The Western Union Company is considering and, subject to market and other conditions following the spin-off, expects to refinance the amounts borrowed by FFMC under the bridge loan with proceeds from debt The Western Union Company will issue or amounts The Western Union Company will otherwise borrow following the distribution date. However, we do not have any arrangements with any financial institution or other third parties with respect to such debt and there can be no assurance that The Western Union Company will be able to refinance the borrowings under the FFMC bridge loan. We expect that the Western Union notes and the revolving credit facility will require us to cause FFMC to guarantee the obligations of The Western Union Company with respect to the Western Union notes and the revolving credit facility if, among other things, indebtedness outstanding under the FFMC bridge loan described above is in excess of a to be determined amount within a specified time period after the distribution date.

 

We also expect to enter into a $1.5 billion revolving credit facility with certain financial institutions on the distribution date that will be used to finance the $100.0 million cash payment to First Data and for general corporate purposes.

 

While we expect to incur significant amounts of debt in connection with the spin-off, our significant revenue and cash flow will provide us with opportunities to invest in our core business, new services and in new markets.

 

Components of Revenue and Expenses

 

The following briefly describes the components of revenue and expenses as presented in the combined statements of income. Descriptions of our revenue recognition policies are included in Note 2—“Summary of Significant Accounting Policies” of our historical combined financial statements.

 

Transaction fees—Transaction fees are charged to consumers for sending money transfers and consumer-to-business payments. Consumer-to-consumer transaction fees generally vary according to the principal amount of the money transfer and the locations from and to which the funds are sent. Transaction fees represented 84% and 83% of Western Union’s total combined revenues for the year ended December 31, 2005 and for the six months ended June 30, 2006, respectively, and are most reflective of our performance.

 

Foreign exchange revenue—In certain consumer money transfer transactions involving different send and receive currencies, we generate revenue based on the difference between the exchange rate set by us to the consumer and the rate at which we or our agents are able to acquire currency. Foreign exchange revenue growth has historically been driven principally by growth in cross-currency transactions rather than changes to the foreign exchange spread. Foreign exchange revenue represented 13% of Western Union’s total combined revenues for the year ended December 31, 2005 and 14% for the six months ended June 30, 2006.

 

Commission and other revenues—Commission and other revenues represented approximately 3% of our total combined revenue for both the year ended December 31, 2005 and for the six months ended June 30, 2006. Commission and other revenues consist of commissions we receive in connection with the sale of money orders, enrollment fees received when consumers enroll in the Equity Accelerator program (a recurring mortgage payment service program), revenue recorded for reimbursable costs incurred to operate payment services programs and investment income primarily derived from interest generated on money transfer settlement assets as well as realized net gains and losses from such assets.

 

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Cost of services—Cost of services includes the costs directly associated with providing services to consumers, including commissions paid to agents and billers, personnel expenses, software maintenance costs, equipment, telecommunications costs, bank fees, infrastructure costs to provide the resources and materials necessary to offer money transfer and other payment services (including reimbursable costs), depreciation and amortization expense, and other operating expenses.

 

Selling, general and administrative—Selling, general and administrative, or “SG&A,” primarily consists of salaries, wages and related expenses paid to sales and administrative personnel, as well as advertising and promotional costs and other selling and administrative expenses. SG&A also includes allocations of general corporate overhead costs from First Data.

 

Derivative (losses)/gains, net—Derivative gains and losses include realized and unrealized gains and losses associated with certain foreign currency forward contracts that did not qualify as hedges under derivative accounting rules during the periods presented and do not mitigate exposures related to settlement assets and settlement obligations. Fluctuations in foreign currency forward contracts that mitigate exposures related to the settlement activities of our money transfer business, along with the gains and losses on the revaluation of the related settlement assets and obligations, are recorded to operating expenses.

 

Foreign exchange effect on notes receivable from affiliates, net—Certain of the notes receivable from affiliates in our combined balance sheets are repayable in euros, and certain of those euro denominated notes also have foreign currency swap agreements associated with them. These notes receivable are translated based on current exchange rates between the euro and the United States dollar, and changes in fair value of the related foreign currency swap agreements are recorded based on current market valuations. The effect of translation adjustments and recording the foreign currency swaps to market is reflected in our combined statements of income as foreign exchange effect on notes receivable from affiliates.

 

Interest income from affiliates, net—Interest income from affiliates, net consists of interest income earned on notes receivable from affiliates of First Data net of interest expense incurred on notes payable to affiliates of First Data. In connection with the spin-off, all notes receivable and payable are expected to be settled.

 

Results of Operations

 

The following discussion for both combined results of operations and segment results refers to the six months ended June 30, 2006 compared to the same period in 2005, the year ended December 31, 2005 compared to the same period in 2004, and the year ended December 31, 2004 compared to the same period in 2003. Combined results of operations should be read in conjunction with segment results of operations, which provide more detailed discussions concerning certain components of the combined statements of income. All significant intercompany accounts and transactions have been eliminated.

 

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The following table sets forth our combined results of operations for the six months ended June 30, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003.

 

   

Six Months

Ended

June 30,

    % Change     Years Ended December 31,     % Change  
    2006     2005    

YTD 2006

vs. YTD 2005

    2005     2004     2003    

2005

vs. 2004

   

2004

vs. 2003

 
   

(unaudited)

                                     
(in millions)                                          

Revenues:

               

Transaction fees

  $ 1,791.6     $ 1,604.2     12 %   $ 3,354.8     $ 3,006.1     $ 2,679.0     12 %   12 %

Foreign exchange revenue

    309.6       248.6     25 %     531.0       449.6       380.9     18 %   18 %

Commission and other revenues

    55.4       47.6     16 %     102.1       91.9       91.7     11 %    
                                             

Total revenues

    2,156.6       1,900.4     13 %     3,987.9       3,547.6       3,151.6     12 %   13 %
                                             

Expenses:

               

Cost of services

    1,153.4       995.3     16 %     2,118.9       1,859.4       1,618.6     14 %   15 %

Selling, general and administrative

    364.1       292.5     24 %     599.8       576.1       530.0     4 %   9 %
                                             

Total expenses

    1,517.5       1,287.8     18 %     2,718.7       2,435.5       2,148.6     12 %   13 %
                                             

Operating income

    639.1       612.6     4 %     1,269.2       1,112.1       1,003.0     14 %   11 %

Derivative (losses)/gains, net

    (27.2 )     36.8     *       45.8       (30.2 )     (37.9 )   *     20 %

Foreign exchange effect on notes receivable from affiliates, net

    (4.1 )     (9.8 )   *       (5.9 )     7.5       —       *     *  

Interest income from affiliates, net

    23.5       9.2     *       24.3       9.1       —       *     *  

Other income (expense), net

    17.4       5.8     *       10.7       0.1       (2.5 )   *     *  
                                             

Income before income taxes

    648.7       654.6     (1 )%     1,344.1       1,098.6       962.6     22 %   14 %

Provision for income taxes

    210.0       203.0     3 %     416.7       347.0       328.9     20 %   6 %
                                             

Net income

  $ 438.7     $ 451.6     (3 )%   $ 927.4     $ 751.6     $ 633.7     23 %   19 %
                                             

* Calculation not meaningful

 

Revenues overview

 

The following provides highlights of revenue growth while a more detailed discussion is included in “Segment Discussion”:

 

Transaction fees and foreign exchange revenue

 

The majority of transaction fees and foreign exchange revenue are contributed from our consumer-to-consumer segment, which is discussed in greater detail in “Segment Discussion.” Transaction fee and foreign exchange revenue grew 13% in the six months ended June 30, 2006 due to increased money transfers at existing agent locations and, to a lesser extent, new agent locations. Our acquisition of Vigo in October 2005 contributed $68.4 million in transaction fee and foreign exchange revenue to the six months ended June 30, 2006 compared

 

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to no revenue for the first half of 2005. In addition, for the six months ended June 30, 2006, the exchange rates between the euro and the United States dollar resulted in a reduction to revenue of $20.5 million, compared to a benefit to revenue of $20.3 million for the same period in 2005, assuming a constant exchange ratio between the euro and the United States dollar (i.e., as if there was no change in exchange rates from the same periods in the previous year). On a euro adjusted basis, and excluding Vigo, fee and foreign exchange revenue increased 11% for the six months ended June 30, 2006 and June 30, 2005. On a euro-adjusted basis and excluding Vigo, fee revenue grew 9% in the six months ended June 30, 2006 and foreign exchange revenue grew 21% over the prior year period. In the second quarter of 2006, Western Union’s business was adversely impacted by what we believe is uncertainty created by immigration reform activities in the United States.

 

Transaction fee and foreign exchange revenue increased 12% and 13%, respectively, for the years ended December 31, 2005 and 2004. Increased money transfers at existing agent locations and, to a lesser extent, new agent locations contributed to increased consumer-to-consumer transaction volume and fee revenue for the years ended December 31, 2005 and 2004. Vigo contributed $24.2 million of revenue in 2005. Exchange rates between the euro and United States dollar resulted in a negative year over year impact of $1.4 million for the year ended December 31, 2005 compared to a benefit of $73.4 million in 2004. On a euro adjusted basis and excluding Vigo, transaction fee and foreign exchange revenue increased 12% and 11%, respectively, for the years ended December 31, 2005 and 2004. On a euro-adjusted basis and excluding Vigo, fee revenue growth improved from 10% for 2004 over 2003 to 11% in 2005 over 2004 and foreign exchange revenue growth was 13% and 17% in 2004 and 2005, respectively. Consumer-to-business transaction fees increased for the year ended December 31, 2005 compared to 2004 due to increased consumer-to-business payment transactions. For the year ended December 31, 2004 consumer-to-business transaction fees were impacted by a decline in cash-based consumer-to-business payments.

 

Foreign exchange revenue increased for the six months ended June 30, 2006 and the years ended December 31, 2005 and 2004 over each respective previous period due to an increase in cross-currency transactions primarily as a result of strong growth in international consumer-to-consumer transactions and the acquisition of Vigo. Foreign exchange revenue growth generally corresponds to international revenue growth from cross-border transactions, which increased 21% in the first six months of 2006, 23% in 2005 and 22% in 2004, excluding Vigo.

 

Transaction fees and foreign exchange revenue for the six months ended June 30, 2006 were impacted by the seasonal nature of the consumer-to-consumer segment. Consumer-to-consumer segment revenue typically increases sequentially from the first quarter to the fourth quarter each year and declines from the fourth quarter to the first quarter of the following year. This seasonal fluctuation is related to the holiday season in the United States and other countries during the fourth quarter. This trend occurred in 2004 and 2005 and is expected to continue.

 

Commission and other revenues

 

During the six months ended June 30, 2006, commission and other revenues increased as a result of increased money order commissions due to higher investment balances and increased enrollment fees from our Equity Accelerator program.

 

The increase in commission and other revenues for the year ended December 31, 2005 compared to the year ended December 31, 2004 was driven primarily by an increase in money order commissions due to higher investment balances in the money order investment portfolio and more consumers participating in the Equity Accelerator program. Commission and other revenues in 2004 remained consistent with 2003 as increases in money order commissions were offset by lower investment income on money transfer settlement assets and lower enrollment fees from the Equity Accelerator program.

 

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Expenses overview

 

The following provides highlights of expenses:

 

Cost of services

 

Cost of services as a percentage of revenue was 53% and 52% for the six months ended June 30, 2006 and 2005, respectively, and 53%, 52% and 51% the years ended December 31, 2005, 2004 and 2003, respectively.

 

The majority of the increase in cost of services in the six months ended June 30, 2006 compared to the same period in 2005 was attributable to an increase in agent commissions corresponding to revenue growth as well as the October 2005 acquisition of Vigo.

 

The majority of the increase in cost of services for the year ended December 31, 2005 compared to 2004 and 2004 compared to 2003 was attributable to an increase in agent commissions corresponding to the increase in revenue. In addition, an $8.7 million impairment charge was recorded in 2005 due to a change in strategic direction related to Eposs Limited, or “Eposs,” a United Kingdom-based seller of cellular prepaid services. We sold our majority interest in Eposs on April 28, 2006. We also recognized an $8.2 million charge in the fourth quarter of 2005 related to an additional accrual of domestic and international escheatment liabilities as further discussed in Note 12—“Commitments and Contingencies” to our combined financial statements.

 

The year ended December 31, 2005 included lower employee incentive compensation expense compared to 2004 primarily as a result of certain internal performance targets for First Data not being achieved in 2005 whereas all targeted discretionary incentive compensation was paid in 2004. Based on the internal performance targets that have been established in 2006, and the related performance so far, we anticipate recording higher employee incentive compensation accruals in 2006 compared to 2005 when such accruals were lower in anticipation that certain 2005 internal performance targets would not be achieved. If recorded, these accruals in 2006 will negatively impact our results of operations.

 

The increase in cost of services for the year ended December 31, 2004 compared to 2003 was driven by a similar increase in agent commissions as a result of increased revenues as noted above.

 

Selling, general and administrative

 

In line with our strategic objective of building the Western Union brand, marketing related expenditures increased during the six months ended June 30, 2006 over the comparable period in 2005 and were approximately 7% of combined revenue. Contributing to the growth in SG&A for the first half of 2006 were the October 2005 acquisition of Vigo, the accrual of additional expenses related to a consent agreement with the Arizona Department of Financial Institutions, and increased corporate overhead allocations from First Data, including allocated stock compensation in connection with the adoption of SFAS 123R.

 

SG&A expenses increased for the years ended December 31, 2005 and 2004 due to an increase in marketing related expenses over that in the prior years. In each of the last three years, we spent approximately 7% of our combined revenue on marketing, including advertising, events, loyalty programs and employees dedicated to marketing activities.

 

The year ended December 31, 2005 included lower employee incentive compensation expense compared to 2004 primarily as a result of certain internal performance targets for First Data not being achieved in 2005 whereas all targeted discretionary incentive compensation was paid in 2004. Based on the internal performance targets that have been established in 2006, and the related performance so far, we anticipate recording higher employee incentive compensation accruals in 2006 compared to 2005 when such accruals were lower in anticipation that certain 2005 internal performance targets would not be achieved. If recorded, these accruals in 2006 will negatively impact our results of operations.

 

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SG&A expenses increased for the year ended December 31, 2004 compared to December 31, 2003 due to increased marketing related expenses, increased corporate overhead allocations from First Data and increased employee incentive compensation.

 

Derivative (losses)/gains, net

 

Our foreign currency forward contracts that are not held to mitigate foreign exchange rate fluctuations in settlement assets and settlement obligations are held primarily in four currencies, the euro, British pound, Canadian dollar and Swiss franc, and typically have a maturity of one year. Gains and losses are recognized as a result of variations between foreign currency market exchange rates and the forward contract rates. Our euro denominated forward contracts represented approximately 79%, 88% and 87% of the total unrealized gains and losses on these foreign currency forwards as of June 30, 2006 and December 31, 2005 and 2004, respectively. Notional amounts of our euro denominated currency forwards as of June 30, 2006 and December 31, 2005 and 2004 were 261.5 million, 243.0 million and 219.7 million euro, respectively. We anticipate our results will be subject to volatility until we are able to redesignate the affected forward contracts as hedges with revised documentation to allow for hedge accounting treatment, which we intend to do as expeditiously as possible. We also intend to have the appropriate documentation required for future foreign currency forward positions to qualify for hedge accounting treatment.

 

Foreign exchange effect on notes receivable from affiliates, net

 

The revaluation to fair market value of notes receivable from affiliates and the related foreign currency swap arrangements that are denominated in euro benefited income before income taxes in the six months ended June 30, 2006 compared to 2005 by $5.7 million. For the years ended 2005 compared to 2004 and 2004 compared to 2003, these mark-to-market valuations resulted in decreased income before income taxes of $13.4 million and increased income before income taxes of $7.5 million, respectively. Such fluctuations typically correspond to changes in the value of the euro. The fair market value of all notes receivable from affiliates and related foreign currency swap agreements will be settled in cash in connection with the spin-off.

 

Interest income from affiliates, net

 

Interest income from affiliates increased for all periods presented due to increased net affiliate borrowings.

 

Income taxes

 

Our effective tax rates on pretax income were 32.4% and 31.0% for the six months ended June 30, 2006 and 2005, respectively, and 31.0%, 31.6% and 34.2% for the years ended December 31, 2005, 2004 and 2003, respectively. The increase in the effective tax rate in the six months ended June 30, 2006 over the comparable period in 2005 is attributable to certain state tax adjustments that benefited the tax provision in 2005 and the impact of certain non-deductible 2006 foreign exchange losses related to currency swap agreements with First Data. The effective tax rate in 2005 compared to 2004 remained relatively constant but benefited slightly from the state tax adjustments previously noted. The decrease in the effective tax rate in 2004 compared to 2003 resulted from the legal restructuring of our international operations in 2003 only being in place during the latter half of 2003 versus the full year in 2004, resulting in higher foreign income taxed at lower rates for 2004 compared to 2003.

 

To address certain tax aspects of a 2003 legal restructuring of our company’s international operations, First Data initiated discussions with the Internal Revenue Service pursuant to the Internal Revenue Service’s Advance Pricing Agreement, or “APA,” Program. If an APA is negotiated successfully, during its term, our company generally will avoid further examination of the transfer pricing methods applicable to, and valuations of, the covered transactions. We continue to negotiate with the Internal Revenue Service in the APA process, and while we hope to reach a resolution through the process, there can be no assurances that the APA negotiations

 

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will be resolved in a manner acceptable to us. If not so resolved, the matter likely would proceed to other forums within the Internal Revenue Service. We have established contingency reserves for material, known tax exposures, including the potential for tax audit adjustments with respect to taxes associated with our foreign business that is the subject of the 2003 legal restructuring and the Internal Revenue Service’s APA Program discussions referenced above. These tax reserves reflect what we believe to be reasonable assumptions as to the likely resolution of the issues involved if subject to judicial review. While we believe that our reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed our related reserve. Regarding the 2003 legal restructuring, we have benefited by having our income from certain foreign-to-foreign money transfer transactions taxed at relatively low foreign tax rates rather than the United States statutory tax rate. The amount of taxes attributable to such rate differential is included in the “Foreign rate differential” line in the effective rate reconciliation in Note 9—“Income Taxes” to our historical combined financial statements and cumulatively totaled $131.6 million through December 31, 2005. Any differences from our company’s positions as recorded in its financial statements upon resolution of these issues will be reflected as a part of income tax expense in the period during which the issues are resolved. Such resolution could also affect our effective tax rate in future periods.

 

Segment Discussion

 

We manage our business around the consumers we serve and the types of services we offer. Each segment addresses a different combination of consumer groups, distribution networks, and services offered. Our segments are:

 

    Consumer-to-consumer—provides money transfer services between consumers, primarily through a global network of third-party agents using our multi-currency, real-time money transfer processing systems.

 

    Consumer-to-business—focuses on payments from consumers to billers through our networks of third-party agents and various electronic channels. In 2005, substantially all of our consumer-to-business segment revenue was generated from transactions in the United States.

 

The business segment measurements provided to, and evaluated by, our chief operating decision maker are computed in accordance with the following principles:

 

    The accounting policies of the reporting segments are the same as those described in the summary of significant accounting policies.

 

    Segment revenue includes intersegment revenue.

 

    Corporate overhead is allocated to the segments based on a percentage of the segments’ revenue.

 

    Costs incurred to effect the spin-off are not allocated to reporting segments.

 

    Exclude all items not included in operating income.

 

The following table sets forth the different components of segment revenues as a percentage of the combined total for the six months ended June 30, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003.

 

    

Six Months Ended

June 30,

    Years Ended
December 31,
 
     2006     2005     2005     2004     2003  

Consumer-to-consumer

   83 %   82 %   82 %   81 %   78 %

Consumer-to-business

   15 %   16 %   15 %   16 %   19 %

Other

   2 %   2 %   3 %   3 %   3 %
                              

Total

   100 %   100 %   100 %   100 %   100 %
                              

 

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Consumer-to-Consumer Segment

 

The following table sets forth our consumer-to-consumer segment results of operations for the six months ended June 30, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003.

 

    

Six Months
Ended

June 30,

    % Change     Years Ended December 31,     % Change  
     2006     2005    

YTD 2006

vs. YTD 2005

    2005     2004     2003    

2005

vs. 2004

   

2004

vs. 2003

 

(in millions)

  

(unaudited)

                                     

Revenues:

                

Transaction fees

   $ 1,469.4     $ 1,290.0     14 %   $ 2,724.0     $ 2,390.9     $ 2,050.8     14 %   17 %

Foreign exchange revenue

     308.9       248.0     25 %     529.6       448.3       379.7     18 %   18 %

Other revenues

     15.5       11.3     37 %     25.6       22.5       23.4     14 %   (4 )%
                                              

Total revenues

   $ 1,793.8     $ 1,549.3     16 %   $ 3,279.2     $ 2,861.7     $ 2,453.9     15 %   17 %
                                              

Operating income

   $ 516.6     $ 495.0     4 %   $ 1,047.9     $ 886.5     $ 765.2     18 %   16 %

Operating margin

     29 %     32 %       32 %     31 %     31 %    

Key indicators:

                

Consumer-to-consumer transactions (unaudited)

     69.89       54.09     29 %     118.52       96.66       81.04     23 %   19 %

 

Since 2003, international, domestic and Mexico revenue represented approximately 70%, 20% and 10% of our consumer-to-consumer revenue, respectively. The table below sets forth performance indicators for the consumer-to-consumer segment for the six months ended June 30, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003.

 

     Six Months Ended
June 30,
    Years Ended
December 31,
 
     2006     2005     2005     2004     2003  

Consumer-to-consumer transaction growth (a)

          

International (c)

   33 %   24 %   27 %   24 %   25 %

Domestic (d)

   3 %   3 %   5 %   8 %   6 %

Mexico (e)

   49 %   20 %   28 %   16 %   22 %

Consumer-to-consumer revenue growth (b)

          

International

   16 %   18 %   16 %   21 %   25 %

Domestic

   3 %   2 %   4 %   8 %   3 %

Mexico

   45 %   23 %   33 %   6 %   16 %

(a) Transaction growth for the six months ended June 30, 2006, excluding Vigo, was 26% for International, 3% for Domestic and 12% for Mexico. Transaction growth from 2004 to 2005, excluding Vigo, was 26% for International, 5% for Domestic, and 21% for Mexico.
(b) Revenue growth for the six months ended June 30, 2006, excluding Vigo, was 13% for International, 2% for Domestic and 15% for Mexico. Revenue growth from 2004 to 2005, excluding Vigo, was 15% for International, 4% for Domestic, and 27% for Mexico.
(c) Represents transactions between and within foreign countries (excluding Canada and Mexico), transactions originated in the United States or Canada destined for foreign countries and foreign country transactions destined for the United States or Canada. Excludes all transactions between or within the United States and Canada and all transactions to and from Mexico as reflected in (d) and (e) below.
(d) Represents all transactions between and within the United States and Canada.
(e) Represents all transactions to and from Mexico.

 

 

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Transaction fees and foreign exchange revenue

 

Consumer-to-consumer money transfer revenue growth in the six months ended June 30, 2006 over the same period in 2005 was driven by international revenue growth and the acquisition of Vigo, which was completed in the fourth quarter 2005. Vigo contributed $68.4 million in transaction fee and foreign exchange revenue for the six months ended June 30, 2006. In the three months ended June 30, 2006, transaction growth in our consumer-to-consumer business, primarily the United States to Mexico and Latin American corridors, and to a lesser extent the domestic money transfer business, was adversely impacted by what we believe is uncertainty created by immigration reform activities in the United States. Since the end of the second quarter, we have seen this trend continue, and as uncertainty about immigration reform persists, we anticipate our businesses will continue to be similarly impacted for some period of time.

 

International revenue growth in the six months ended June 30, 2006 compared to the same period in 2005 resulted from money transfer transaction growth and the acquisition of Vigo. International money transfer transaction growth in the six months ended June 30, 2006 compared to the prior year period was driven most significantly by growth in the United States and European outbound businesses. The key inbound markets of India and China continue to grow, with transactions in India doubling for the six month period in 2006 compared to the same period in 2005, and a transaction growth rate for the same period of 40% in China. Growth in international intra-country transactions of 94% for the six months ended June 30, 2006, mostly driven by the Philippines and Chile, also contributed to international transaction growth. These intra-country transactions deliver lower average revenue per transaction than cross-border transactions.

 

For the six months ended June 30, 2006, the exchange rates between the euro and the United States dollar resulted in a reduction to consumer-to-consumer revenue of $20.5 million compared to a benefit to revenue of $20.3 million for the same period in 2005, assuming a constant exchange ratio between the euro and the United States dollar (i.e., as if there was no change in exchange rates from the same periods in the previous year). On a euro-adjusted basis, international revenue grew 18% for the six months ended June 30, 2006, compared to 16% in the comparable period in 2005, with Vigo contributing 3% to the 2006 growth rates.

 

The difference between international transaction growth and revenue growth increased by 11 percentage points in the six months ended June 30, 2006 compared to the same period in 2005, with Vigo accounting for approximately 4 percentage points of the increase. The difference was also impacted by the decline in the exchange rate between the euro and the United States dollar, as noted above and strong growth in lower revenue-per-transaction international intra-country transactions.

 

Growth in Mexico money transfer transactions for the six months ended June 30, 2006 compared to the same period in 2005 was driven by the acquisition of Vigo and growth in Western Union branded transactions, partially offset by a decline in Orlandi Valuta branded transactions, primarily in the second quarter of 2006. Revenues from Western Union branded Mexico transactions grew 20% for the six months ended June 30, 2006, compared to 30% for the same period in 2005. The decline in revenue growth was primarily due to what we believe is uncertainty created by immigration reform activities in the United States. Domestic transaction growth rates, including westernunion.com, in the first six months of 2006 over the same period in 2005 were lower from the growth rates observed for the full year 2005 primarily due to the immigration reform factors discussed above.

 

A key driver of our growth continues to be existing agent locations. Our United States and Canada same-store-sales transaction growth, which includes domestic transactions, transactions destined for Mexico and other countries, and westernunion.com, was 14% for both the six month periods ended June 30, 2006 and 2005. Contributing to the increase in total consumer-to-consumer money transfer revenue and transaction growth was the growth in transactions at existing agent locations, the number of agent locations and marketing campaigns promoting Western Union services. In line with our strategic objective of building the Western Union brand, marketing expenditures increased during the first six months of 2006.

 

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Foreign exchange revenue increased for the six months ended June 30, 2006 due to the acquisition of Vigo and an increase in cross-currency transactions.

 

The majority of transaction growth is derived from more mature agent locations as new agent locations typically contribute only marginally to revenue growth in the first few years of their operation. Increased productivity, measured by transactions per location, often is experienced as locations mature. We believe that new agent locations will help drive growth by increasing the number of locations available to send and receive money. We generally refer to locations with more than 50% of transactions being initiated versus paid out as “send locations” and to the balance of locations as “receive locations.” Send locations are the engine that drives consumer-to-consumer revenue. They contribute more transactions per location than receive locations. However, a wide network of receive locations is necessary to build each corridor and help ensure global distribution. The number of send and receive transactions at an agent location can vary significantly due to such factors as customer demographics around the location, immigration patterns, the location’s class of trade, hours of operation, length of time the location has been offering Western Union services, regulatory limitations and competition. Each of the over 270,000 agent locations in our agent network is capable of providing one or more of our services; however not every location completes a transaction in a given period. For example, as of June 30, 2006, approximately 85% of the combined locations in the United States, Canada and Western Europe experienced money transfer activity in the last 12 months. In the developing regions of Asia and other areas where there are predominantly receive locations, approximately 65% of locations experienced money transfer activity in the last 12 months. We periodically review locations to determine whether they remain enabled to complete money transfer transactions.

 

Consumer-to-consumer revenue growth in 2005 was driven by growth in consumer-to-consumer transactions and the acquisition of Vigo in October 2005. International transaction growth benefited from growth in the United States and European outbound businesses and strong growth in China, India and the Philippines, including the Philippines intra-country business. Consumer-to-consumer revenue growth was also impacted by exchange rates. For the year ended December 31, 2005, the exchange rates between the euro and the United States dollar resulted in a year-over-year negative impact to revenue of $1.4 million compared to benefits of $73.4 million and $109.7 million in 2004 and 2003, respectively, assuming a constant exchange ratio (i.e., as if there were no change in exchange rates from the same period in the previous year) between the euro and the United States dollar. Changes in exchange rates primarily impact international revenue. On a euro-adjusted basis, international revenue growth was 16%, 17% and 17% for the years ended December 31, 2005, 2004 and 2003, respectively. Growth in Mexico transactions for the year ended December 31, 2005 was driven by growth in Western Union branded transactions. The lower transaction and revenue growth rates in domestic money transfer for the year ended December 31, 2005 compared to 2004 are not attributable to any specific event. Domestic transaction growth increased from 3% in the first quarter of 2005 to 6% in the third and fourth quarters of 2005.

 

Consumer-to-consumer revenue growth for the year ended December 31, 2004 was driven by growth in the international business. Growth in international transactions resulted from continued strength in the United States outbound business and the performance of the international business outside the United States. The growth from the maturing of existing locations and new international locations also contributed to sustained growth. International revenue and transaction growth rates in 2004 were negatively impacted, although not significantly, by political events, economic conditions and compliance related activity when compared to 2003. Growth in Mexico transactions in 2004 was 16%. We were able to achieve this growth rate in this highly competitive market by implementing next day service offerings, executing marketing programs and offering payment services at over 7,000 Western Union branded and Orlandi Valuta branded locations in Mexico. Domestic transaction growth in 2004 was driven by increased marketing.

 

The difference between international transaction growth and revenue growth increased in 2005 compared to 2004 primarily as a result of the negative currency conversion impact of the euro compared to the benefit in the prior year as noted above, which negatively impacted revenue growth compared to the prior year. Intra-country business is incremental to both transactions and revenue but benefited transaction growth more than revenue

 

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growth. Consumer-to-consumer net pricing decreases, as a percentage of our total revenue, were consistent from 2004 to 2005.

 

Western Union’s United States and Canada same-store-sales transaction growth which includes domestic transactions and westernunion.com, as well as transactions destined for Mexico and other countries, was 15% in 2005 compared to 2004 and 16% in 2004 compared to 2003.

 

Contributing to the increase in consumer-to-consumer revenue and transaction growth in all periods presented were the maturing of existing agent locations, the increased number of agent locations and targeted marketing campaigns promoting Western Union services.

 

Foreign exchange revenue increased in 2005 compared to 2004 and in 2004 compared to 2003 due to an increase in cross-currency transactions. In addition, growth in 2005 was impacted by the acquisition of Vigo.

 

Operating income

 

The consumer-to-consumer segment’s operating income increased for the six months ended June 30, 2006 compared to the same period in 2005 as a result of the items noted in “Transaction Fees and Foreign Exchange Revenue” above. Operating income growth of 4% was adversely impacted by the October 2005 acquisition of Vigo, the accrual of additional expenses related to a consent agreement with the Arizona Department of Financial Institutions, and increased corporate overhead allocations from First Data, including allocated stock compensation in connection with the adoption of SFAS 123R.

 

Consumer-to-consumer operating income increased for the year ended December 31, 2005 versus 2004 and for the year ended December 31, 2004 compared to 2003 due to the increase in revenue. Also benefiting 2005 operating income was significantly lower employee incentive compensation due to a certain First Data performance measure not being met, which positively impacted operating margins in 2005 compared to 2004. Marketing expenses increased in 2005 and 2004, but remained relatively consistent as a percentage of total revenue.

 

Consumer-to-Business Segment

 

The following table sets forth our consumer-to-business segment results of operations for the six months ended June 30, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003.

 

    

Six Months Ended

June 30,

    % Change      Years Ended December 31,     % Change  
    

2006

    2005     YTD 2006
vs. YTD 2005
    2005     2004     2003    

2005

vs. 2004

   

2004

vs. 2003

 
(in millions)    (unaudited)                                      

Revenues:

                

Transaction fees

   $ 297.7     $ 279.8     6 %   $ 565.0     $ 545.4     $ 553.7     4 %   (1 )%

Other revenues

     18.6       16.5     13 %     35.2       30.9       32.4     14 %   (5 )%
                                              

Total revenues

   $ 316.3     $ 296.3     7 %   $ 600.2     $ 576.3     $ 586.1     4 %   (2 )%
                                              

Operating income

   $ 112.2     $ 112.0     %   $ 220.4     $ 219.5     $ 230.0     %   (5 )%

Operating margin

     35 %     38 %       37 %     38 %     39 %    

Key indicators:

                

Consumer-to-business transactions (unaudited)

     120.71       102.30     18 %     215.11       192.57       179.39     12 %   7 %

 

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Transaction fees

 

Strong transaction growth in electronic payments drove transaction fee growth for the six months ended June 30, 2006 versus the same period in 2005, including strong transaction growth of our Speedpay and Equity Accelerator services. The growth rate also benefited, compared to the prior periods, from the Western Union Quick Collect® cash payments service experiencing a slower rate of decline in the first half of 2006 versus the first half of 2005 resulting from new business. In addition, our Convenience Pay® business benefited from the addition of a large new biller in the third quarter of 2005 which had a positive impact to transaction and revenue growth rates for the six months ended June 30, 2006 as compared to the same period in 2005.

 

Transaction fee growth for the year ended December 31, 2005 was driven by growth in our electronic payment services as well as the new Convenience Pay biller relationship and the factors related to Western Union Quick Collect discussed above. Transaction fee revenue decreased for the year ended December 31, 2004 compared to 2003 as a result of a decline in the cash payments business due to the shift in demand from cash-based walk-in payment services to electronic payment services.

 

Operating income

 

Operating income for the six months ended June 30, 2006 was consistent with the same period in 2005 despite growth in electronic-based transactions. The shift to electronic-based products from cash-based products, which have higher operating margins than electronic products, negatively impacted operating income in the six month period in 2006. Operating income in the six months ended June 30, 2006 was also impacted by increased corporate overhead allocations from First Data including allocated stock compensation in connection with the adoption of SFAS No.123R.

 

The same factors impacted the operating income increase from 2004 to 2005. The consumer shift from cash-based walk-in payment services to electronic payment services contributed to the decline in operating income from 2003 to 2004. Recent trends in consumer-to-business operating margins are impacted by the shift from cash-based services to electronic payment services.

 

Other

 

The following table sets forth other results for the six months ended June 30, 2006 and 2005 and for the years ended December 31, 2005, 2004 and 2003.

 

    

Six Months
Ended

June 30,

   % Change     Years Ended December 31,    % Change  
     2006    2005    YTD 2006
vs. YTD 2005
    2005    2004    2003   

2005

vs. 2004

   

2004

vs. 2003

 
(dollars in millions)    (unaudited)                                  

Revenues

   $ 47.4    $ 57.5    (18 )%   $ 113.7    $ 115.6    $ 113.1    (2 )%   2 %

Operating income

     10.3      5.6    *       0.9      6.1      7.8    *     *  

* Calculation not meaningful

 

Revenues

 

Our money order and prepaid services businesses accounted for 70%, 64% and 65% of other revenue in 2005, 2004 and 2003, respectively, and 89% and 67% of other revenue for the six months ended June 30, 2006 and 2005, respectively. These two businesses are the only businesses classified in “Other” with expected recurring revenue. Revenue was driven by the money order business offset by declines in revenue realized by all of the businesses shut down or disposed of described in operating income below.

 

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Operating Income

 

For the six months ended June 30, 2006 and 2005, operating income growth was driven by the money order business and the elimination of operating losses of the businesses shut down or disposed of described below.

 

The decrease in operating income during the year ended December 31, 2005 from the year ended December 31, 2004 was due primarily to a goodwill impairment charge recognized in 2005 of $8.7 million due to a change in strategic direction relating to our majority interest in Eposs. The decrease in operating income during the year ended December 31, 2004 from the year ended December 31, 2003 was due to declines in operating performance of Eposs and our auction payments and messaging businesses. Aggregate operating losses related to these businesses for the years ended December 31, 2005, 2004 and 2003 were $16.2 million, $8.2 million and $1.4 million, respectively.

 

Capital Resources and Liquidity

 

Historically, our source of liquidity was cash generated from our operating activities. Management believes that Western Union’s current level of cash and future cash flows from operating activities are sufficient to meet the needs of its existing business.

 

As an integral part of our business, we receive funds from money transfers and certain other payment processing services sold in advance of settlement with payment recipients. These funds (referred to as “Settlement assets” on our combined balance sheets) are not used to support our operations. However, we do have the opportunity to earn income from investing these funds. We maintain a portion of these settlement assets in highly liquid investments (classified as “Cash and cash equivalents” within “Settlement assets”) to fund settlement obligations.

 

We expect that in connection with the spin-off we will transfer to First Data approximately $3.5 billion in the form of a combination of cash and our debt securities, which will include a dividend paid to First Data in the form of a promissory note from our subsidiary, FFMC, in an aggregate principal amount of approximately $2.4 billion, the issuance by The Western Union Company to First Data of approximately $1.0 billion in Western Union notes and a cash payment by The Western Union Company to First Data of approximately $100.0 million in cash, which will be financed through borrowings under the revolving credit facility we expect to enter into on the distribution date. In addition, we will distribute to First Data approximately $210.0 million in cash from existing cash balances.

 

We expect that FFMC will repay the promissory note on the distribution date or shortly thereafter with borrowings under a bridge loan facility it will enter into on or shortly after distribution date. The Western Union Company is considering and, subject to market and other conditions following the spin-off, expects to refinance the amounts borrowed by FFMC under the bridge loan with proceeds from debt The Western Union Company will issue or amounts The Western Union Company will otherwise borrow following the distribution date. However, we do not have any agreements or arrangements with any financial institution or other third parties with respect to such refinancing and there can be no assurance that The Western Union Company will be able to refinance the borrowings under the FFMC bridge loan. We expect that the Western Union notes and the revolving credit facility will require us to cause FFMC to guarantee the obligations of The Western Union Company with respect to the Western Union notes and the revolving credit facility if, among other things, indebtedness outstanding under the FFMC bridge loan described above is in excess of a to be determined amount within a specified time period after the distribution date.

 

We also expect to enter into a $1.5 billion revolving credit facility with certain financial institutions on the distribution date that will be used to finance the $100.0 million cash payment to First Data and for general corporate purposes.

 

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We generated cash flow from operations in 2005 of $1,002.8 million, issued dividends to First Data of $417.2 million and loaned First Data affiliates $504.7 million. We believe historical cash flow generated from operations provides a reasonable expectation of future cash flows. In addition, we anticipate dividends paid to our stockholders after the spin-off will be significantly less than historical dividends paid to First Data, and we will not make loans to First Data after the spin-off. Considering 2005 pro forma interest expense of $202.3 million, estimated capital expenditures in 2006 of between approximately $200 million and $225 million (excluding capital expenditures relating to the spin-off) and estimated additional costs associated with being a stand-alone company of between $65 million and $75 million annually, our cash flow will provide us with opportunities to invest in our core business growth, new services and new markets. The timing of these investments will be based on specific opportunities. See “Unaudited Pro Forma Combined Financial Statements” beginning on page 42 for further discussion of our pro forma interest expense and incremental costs associated with being a stand-alone company.

 

The following discussion highlights our cash flow activities during the six months ended June 30, 2006 and 2005 and the years ended December 31, 2005, 2004 and 2003.

 

Cash and Cash Equivalents

 

Highly liquid investments (other than those included in Settlement assets) with original maturities of three months or less (that are readily convertible to cash) are considered to be cash equivalents and are stated at cost, which approximates market value. At June 30, 2006, December 31, 2005 and 2004, we held $655.8 million, $510.2 million and $469.7 million in cash and cash equivalents, respectively.

 

At June 30, 2006, December 31, 2005 and 2004, $328.4 million, $187.7 million and $167.8 million, respectively, of our cash and cash equivalents were held outside the United States. We currently plan to invest these funds overseas; however repatriating these funds to the United States could result in additional taxes.

 

Cash Flows from Operating Activities

 

    

Six Months Ended

June 30,

    Years Ended December 31,  
     2006     2005     2005     2004     2003  
Source (use) (in millions)    (unaudited)                    

Net income

   $ 438.7     $ 451.6     $ 927.4     $ 751.6     $ 633.7  

Depreciation and amortization

     49.1       39.0       79.5       79.2       78.4  

Deferred income tax provision

     21.5       18.2       24.9       47.6       63.3  

Realized (gain)/loss on derivative instruments

     (7.9 )     7.7       0.5       23.2       30.8  

Other non-cash items, net

     18.9       8.9       25.8       13.9       18.7  

Increase (decrease) in cash, excluding the effects of acquisitions and dispositions, resulting from changes in:

          

Other assets

     (39.4 )     (9.1 )     (8.8 )     (13.8 )     (27.5 )

Accounts payable and accrued liabilities

     (10.4 )     (14.2 )     (17.9 )     (6.3 )     (11.8 )

Other liabilities

     11.4       (34.2 )     (28.6 )     34.8       7.2  
                                        

Net cash provided by operating activities

   $ 481.9     $ 467.9     $ 1,002.8     $ 930.2     $ 792.8  
                                        

 

Cash provided by operating activities increased during the six months ended June 30, 2006 compared to the six months ended June 30, 2005 despite a decrease in net income during the six months as a result of increases to non-cash expenses, including depreciation and amortization and other non-cash items.

 

Cash provided by operations has historically been driven by net income, and increased in 2005 compared to 2004, and 2004 compared to 2003, primarily due to consumer-to-consumer transaction growth as previously

 

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discussed. Changes in components of working capital are subject to fluctuations based on the timing of cash transactions related to settlements of certain liabilities.

 

Other non-cash items include impairments, bad debt reserves, gains and losses on disposals of fixed assets and other non-cash items.

 

Cash Flows from Investing Activities

 

    

Six Months Ended

June 30,

    Years Ended December 31,  
     2006     2005     2005     2004     2003  
Source (use) (in millions)    (unaudited)                    

Capitalization of contract costs

   $ (79.9 )   $ (3.7 )   $ (22.5 )   $ (7.3 )   $ (57.7 )

Capitalization of software development costs

     (2.0 )     (1.8 )     (7.7 )     (15.7 )     (18.5 )

Purchases of property and equipment

     (32.5 )     (14.2 )     (34.8 )     (26.5 )     (23.6 )

Notes receivable issued to agents

     (140.0 )     (4.4 )     (8.4 )     —         —    

Acquisition of businesses, net of cash acquired, and contingent purchase consideration paid

     —         —         (349.1 )     (28.7 )     (43.7 )

Cash received (paid) on maturity of foreign currency forwards

     7.9       (7.7 )     (0.5 )     (23.2 )     (30.8 )

Purchase of equity method investments

     —         (5.4 )     (5.4 )     (42.0 )     —    
                                        

Net cash used in investing activities

   $ (246.5 )   $ (37.2 )   $ (428.4 )   $ (143.4 )   $ (174.3 )
                                        

 

Capital expenditures

 

Total aggregate payments capitalized for purchases of property and equipment, software development and contract costs were $65.0 million, $49.5 million and $99.8 million in 2005, 2004 and 2003, respectively. Amounts capitalized for contract costs relate to initial payments for new and renewed agent contracts and vary depending on the timing of when contracts are executed or renewed. The decrease in software development costs during 2005 compared to 2004 relates primarily to the timing of internally developed software projects. We estimate that capital expenditures in 2006 will be between approximately $200 million and $225 million, excluding capital expenditures relating to the spin-off. The increase in capital expenditures expected is primarily due to the initiation and renewal of certain large strategic agent contracts in 2006.

 

During the six months ended June 30, 2006, the increased property and equipment cash outflow was driven by the purchase of an office building. Also, in the first quarter of 2006, we executed certain large strategic agent contracts for which initial payments were made which drove the six months ended June 30, increase in capitalized contract costs.

 

Notes receivable issued to agents

 

From time to time, we make advances and loans to agents. In January 2006, we signed a six year agreement with one of our existing agents which included a four year loan of $140.0 million to the agent. The terms of the loan agreement require that a percentage of commissions earned by the agent (39% in 2006, 52% in 2007, 61% in 2008 and 64% in 2009) be withheld by us as repayment of the loan and the agent remains obligated to repay the loan if commissions earned are not sufficient. The loan receivable was recorded in “other assets” in the combined balance sheets as of June 30, 2006. We impute interest on this below market rate note receivable and have recorded this note net of a discount of $45.9 million as of June 30, 2006.

 

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Acquisition of businesses, net of cash acquired, and contingent purchase consideration paid

 

During 2005, First Data acquired 100% of Vigo for $349.1 million, net of cash acquired. In 2004 and 2003, the majority of contingent consideration payments were made by First Data in connection with the acquisitions of Paymap Inc., or “Paymap,” and E Commerce Group, Inc., or “ECG,” made in the second quarter of 2002. First Data will contribute Vigo, Paymap and ECG to us as part of the spin-off.

 

Cash received (paid) on maturity of foreign currency forwards

 

Our foreign currency forward contracts that are not held to mitigate foreign currency exchange rate fluctuations in settlement assets and settlement obligations usually have maturities of one year, and the amounts received or paid on maturity for such contracts are driven primarily by variations in the market foreign exchange rate at the time of maturity and the forward contract rate.

 

Purchase of equity method investments

 

In 2004, we purchased 30% interests in two of our international money transfer agents. The aggregate purchase price paid was $42.0 million, net of $5.4 million of holdback reserves to cover claims arising from the acquisitions. The holdback reserves were paid in the first quarter of 2005.

 

Cash Flows from Financing Activities

 

    

Six Months

Ended

June 30,

    Years Ended December 31,  
     2006     2005     2005     2004     2003  
Source (use) (in millions)    (unaudited)                    

Advances from/(to) affiliated companies

   $ 17.7     $ (282.8 )   $ (153.2 )   $ 250.0     $ (359.0 )

Capital contributed by parent in connection with acquisitions

     —         —         369.2       28.7       44.1  

Proceeds from notes payable issued to affiliated companies

     —         —         400.1       255.0       9.9  

Repayments of notes payable to affiliated companies

     (100.0 )     —         (246.5 )     (255.0 )     —    

Additions to notes receivable from affiliated companies

     (7.5 )     (25.1 )     (504.7 )     (270.7 )     —    

Proceeds from repayments of notes receivable from affiliated companies

     —         —         18.4       —         —    

Dividends to parent company

     —         —         (417.2 )     (659.8 )     (324.2 )
                                        

Net cash provided by (used in) financing activities

   $ (89.8 )   $ (307.9 )   $ (533.9 )   $ (651.8 )   $ (629.2 )
                                        

 

Advances from/(to) affiliated companies

 

As part of First Data, excess cash generated from our domestic operations, not required to meet certain regulatory requirements, is paid periodically to First Data and is reflected as a receivable from affiliated companies. In addition, First Data and its subsidiaries provide a number of services on behalf of our businesses, including shared services, which are reimbursed periodically. The net payable to and receivable from affiliated companies is a function of the timing of cash sweeps to First Data net of any services First Data and its affiliates have provided.

 

Capital contributed by parent in connection with acquisitions

 

In 2005, Western Union received a contribution of capital in connection with the acquisition of Vigo. In 2004 and 2003, First Data contributed capital in connection with contingent consideration payments made by First Data in connection with the acquisitions of Paymap and ECG, both of which will be contributed to Western Union as part of the spin-off.

 

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Notes payable to and receivable from affiliated companies

 

In 2005 and 2004, we made advances to affiliates of First Data in the form of notes of $504.7 million and $270.7 million, respectively, to finance certain international acquisitions made by those First Data affiliates. These notes were funded primarily through cash generated from our international operations and notes payable issued to affiliates of First Data with balances of $153.6 million at December 31, 2005. The notes payable were partially repaid in the first half of 2006. As part of the spin-off, substantially all notes payable and notes receivable to or from affiliates of First Data are expected to be settled in cash.

 

Dividends to parent company

 

In 2005, 2004 and 2003, we paid dividends to First Data from profit generated from operations. The amount of dividends distributed in each year was impacted by the cash balances available as a result of loans made to affiliates.

 

Incremental Costs Associated with Being a Stand-Alone Company

 

Following the spin-off, we will incur recurring costs associated with being a stand-alone company that we did not incur as a part of First Data and are therefore not included in our historical combined financial statements. The following table reflects our annual estimates of such additional costs and variations in cost resulting from our separation from First Data, in each case, as if the spin-off had occurred on January 1, 2005:

 

     (in millions)  

Estimated additional costs of being a stand-alone company as if the spin-off had occurred on January 1, 2005:

  

Staffing additions and related costs to replace First Data support

   $ 76  

Corporate governance

     19  

Information technology

     13  

Corporate branding and global affairs

     12  

Benefits and payroll administration

     2  

Other

     7  
        

Total estimated new costs of being a stand-alone company

     129  

Less: First Data general corporate overhead allocation

     (69 )
        

Estimated incremental costs

   $ 60  
        

 

In addition to the costs noted above, subject to the finalization of our plans, we estimate additional costs of between $5 million and $15 million annually, including higher corporate branding and global affairs, information technology, procurement and other expenses related to being a stand-alone company.

 

Our unaudited pro forma combined statements of income do not give effect to initial expenses directly attributable to the spin-off because of their non-recurring nature. A significant portion of these non-recurring charges to effect the separation will be incurred by First Data, such as investment banker fees, outside legal and accounting fees relating to the spin-off, office move costs, costs to separate information systems and temporary consulting costs. We will incur separation costs that have a future benefit to our company such as recruiting and relocation expenses associated with hiring key senior management positions new to our company, other employee compensation expenses and temporary labor used to develop ongoing processes. We estimate total non-recurring separation charges that our company will incur, which are not included in our unaudited pro forma combined statements of income, to be approximately $15 million to $25 million. We anticipate that substantially all of these costs will be incurred within 12 months of the spin-off. See “Our Relationship with First Data After the Spin-Off—Separation and Distribution Agreement—Expenses.”

 

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Significant Non-cash Transactions

 

During the six months ended June 30, 2006 and the years ended December 31, 2005 and 2004, approximately 244,000, 50,000 and 50,000 shares, respectively, of restricted common stock of First Data were issued to certain Western Union employees in conjunction with First Data’s incentive compensation plans. There were no restricted shares of First Data common stock issued to Western Union employees during 2003.

 

Off-Balance Sheet Arrangements

 

Other than facility and equipment leasing arrangements, we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Pension Plans

 

We have two frozen defined benefit plans that together were underfunded by $69.8 million as of September 30, 2005. In 2005, we did not make a contribution to these plans and we do not intend to contribute to these plans in 2006 since, based on current asset return calculations and minimum funding requirements, no such contribution is required. We do not believe that recently enacted legislation relating to pension plans will have an impact on our funding requirement until at least 2008.

 

Letters of Credit

 

We had $32.8 million in outstanding letters of credit at December 31, 2005 with expiration dates through 2010, certain of which contain a one-year renewal option. The letters of credit are held in connection with lease arrangements and agent settlement agreements. We expect to renew the letters of credit prior to their expiration.

 

Contractual Obligations

 

The following table summarizes our contractual obligations to third parties as of December 31, 2005 and the effect such obligations are expected to have on our liquidity and cash flows in future periods (in millions).

 

     Payments Due by Period
     Total    Less than 1 Year    1–3 Years    4-5 Years    After 5 Years

Notes payable to affiliates (a):

   $ 163.5    $ 163.5    $ —      $ —      $ —  

Operating leases

     99.3      25.1      43.4      7.0      23.8

Purchase obligations (b)

     23.8      14.9      6.2      2.7      —  
                                  
   $ 286.6    $ 203.5    $ 49.6    $ 9.7    $ 23.8
                                  

(a) Expected remaining balances to be paid in full or forgiven at the time of the spin-off.
(b) Many of our contracts contain clauses that allow us to terminate the contract with notice, and with or without a termination penalty. Termination penalties are generally an amount less than the original obligation. Certain contracts also have an automatic renewal clause if we do not provide written notification of our intent to terminate the contract. Obligations under certain contracts are usage-based and are, therefore, estimated in the above amounts. Historically, we have not had any significant defaults of our contractual obligations or incurred significant penalties for termination of our contractual obligations.

 

Critical Accounting Policies

 

Management’s discussion and analysis of results of operations and financial condition is based on our combined financial statements that have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires that management make

 

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estimates and assumptions that affect the amounts reported for revenues, expenses, assets, liabilities and other related disclosures. Actual results may or may not differ from these estimates. We believe that the understanding of certain key accounting policies and estimates are essential in achieving more insight into our operating results and financial condition. These key accounting policies include stock-based compensation, income taxes, derivative financial instruments and capitalized costs.

 

Stock-Based Compensation

 

We adopted SFAS 123R effective January 1, 2006. SFAS 123R requires all stock-based payments to employees to be recognized in the income statement based on their respective grant date fair values over the corresponding service periods and also requires an estimation of forfeitures when calculating compensation expense. We selected the modified-prospective method of adoption and straight-line amortization of compensation cost over the requisite service period. We currently utilize the Black-Scholes option pricing model to measure the fair value of stock options granted to employees and directors. While SFAS No. 123R permits entities to continue to use such a model, the standard also permits the use of a more complex binomial, or “lattice” model. Based upon the type and number of stock options expected to be issued in the future, we have determined that we will continue to use the Black-Scholes model for option valuation. Option-pricing models require us to estimate a number of key valuation inputs including expected volatility, expected dividend yield, expected term and risk-free interest rate. The most subjective estimates are the expected volatility of the underlying stock and the expected term. Accordingly, the fair value of stock options are affected by the assumptions we select. Stock-based compensation expense, including the impact of adopting SFAS 123R, was $6.1 million for the six months ended June 30, 2006.

 

Refer to Note 15—“Stock Compensation Plans” of our historical combined financial statements for a discussion of First Data’s stock-based compensation plans and the adoption of SFAS 123R.

 

Income taxes

 

Income taxes, as reported in our combined financial statements, represent the net amount of income taxes we expect to pay or receive from various taxing jurisdictions in connection with our operations. We provide for income taxes based on amounts that we believe we will ultimately owe. Inherent in the provision for income taxes are estimates and judgments regarding the tax treatment of certain items and the realization of certain offsets and credits. In the event that the ultimate tax treatment of items or the realizations of offsets or credits differ from our estimates, we may be required to significantly change the provision for income taxes recorded in our financial statements.

 

To address certain aspects of a 2003 legal restructuring of our international operations, First Data initiated discussions with the Internal Revenue Service pursuant to the Internal Revenue Service’s APA Program. If an APA is successfully negotiated, we generally will avoid further examination, during the term of the APA, of the transfer pricing methods applicable to, and valuations of, the covered transactions. We continue to negotiate with the Internal Revenue Service in the APA process, and while we hope to reach a resolution through the process, there can be no assurances that the APA negotiations will be resolved in a manner acceptable to us. If not so resolved, the matter would then likely proceed to other forums within the Internal Revenue Service. We have established contingency reserves for material, known tax exposures, including the potential for tax audit adjustments with respect to taxes associated with our foreign business that is the subject of the 2003 legal restructuring and the Internal Revenue Service’s APA Program discussions referenced above. These tax reserves reflect what we believe to be reasonable assumptions as to the likely resolution of the issues involved if subject to judicial review. While we believe that our reserves are adequate to cover reasonably expected tax risks, there can be no assurance that, in all instances, an issue raised by a tax authority will be resolved at a financial cost that does not exceed the Company’s related reserve. Regarding the 2003 legal restructuring, we have benefited by having our income from certain foreign-to-foreign money transfer transactions taxed at relatively low foreign tax rates rather than the United States statutory tax rate. The amount of taxes attributable to such rate differential is

 

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included in the “Foreign rate differential” line in the effective tax rate reconciliation in Note 9—“Income Taxes” to our historical combined financial statements and cumulatively totaled $131.6 million through December 31, 2005. Any differences from our positions as recorded in our financial statements upon resolution of these issues will be reflected as a part of income tax expense in the period during which the issues are resolved. Such resolution could also affect our effective tax rate in future periods.

 

Derivative Financial Instruments

 

We use foreign currency forward contracts to mitigate the risks associated with changes in foreign currency. As required, these instruments are reflected in our combined balance sheets at fair value. Although our intent was for these derivatives to qualify for hedge accounting, during an evaluation of the documentation requirements under applicable derivative accounting rules, we determined that our hedge documentation was not adequate at the inception of the derivative agreements to qualify for hedge accounting. As a result, all increases or decreases in the fair market value of the derivative instruments are recognized in the combined statements of income whereas increases and decreases to such derivatives were previously recognized in accumulated other comprehensive income or loss on our combined balance sheets.

 

We intend to enter into foreign currency forward contracts in the future, which we intend to designate as cash flow hedges. We also intend to redesignate existing forward contracts with revised documentation to allow for hedge accounting treatment for such existing and future foreign currency forward positions, which we intend to do as expeditiously as possible. To the extent these hedges do not qualify as cash flow hedges, or if we cease to believe that forecasted transactions would occur, the changes in the fair value of those derivatives used as hedges would be reflected in earnings. Our company does not believe it is exposed to more than a nominal amount of credit risk with respect to its currency forward contracts, as the counterparties are established, well-capitalized financial institutions. The estimated fair value of our derivative financial instruments is based on market and dealer quotations. Accordingly, these estimated values may not be representative of actual values that could have been realized as of December 31, 2005 or 2004 or that will be realized in the future.

 

Capitalized Costs

 

We capitalize initial payments for new contracts and contract renewals associated with agent contracts and software costs. Capitalization of these costs is subject to strict accounting policy criteria and requires management judgment as to the appropriate time to initiate capitalization.

 

Our accounting policy is to limit the amount of capitalized costs for a given contract to the lesser of the estimated ongoing future cash flows from the contract or the termination fees we would receive in the event of early termination of the contract.

 

We develop software used in providing services. Software development costs are capitalized once technological feasibility of the software has been established. Costs incurred prior to establishing technological feasibility are expensed as incurred. Technological feasibility is established when we have completed all planning, designing, coding and testing activities that are necessary to determine that a product can be produced to meet its design specifications, including functions, features and technical performance requirements. Capitalization of costs ceases when the product is available for general use. Currently unforeseen circumstances in software development could require us to implement alternative plans with respect to a particular effort, which could result in the impairment of previously capitalized software development costs.

 

New Accounting Pronouncement

 

The Financial Accounting Standards Board (“FASB”) has issued interpretation No. 48, “Accounting for Uncertainty in Income Taxes—An Interpretation of FASB Statement No. 109” (“FIN 48”), regarding accounting for, and disclosure of, uncertain tax positions. FIN 48 clarifies the accounting for uncertainty in income taxes

 

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recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact FIN 48 will have on our combined results of operations and financial position.

 

Quantitative and Qualitative Disclosures About Market Risk

 

We are exposed to market risks arising from changes in market rates and prices, including movements in foreign currency, exchange rates and interest rates.

 

Foreign Currency Risk

 

We are exposed to changes in currency rates as a result of our investments in foreign operations and from transactions in currencies other than the United States dollar. A risk management program is in place to manage these risks.

 

We provide money transfer services in more than 200 countries and territories. Foreign exchange risk is managed through the structure of the business and an active risk management process. We settle with the vast majority of our agents in United States dollars or euros. However, in certain circumstances, we settle in the agents’ local currencies. We typically require the agent to obtain local currency to pay recipients. Thus, we generally are not reliant on international currency markets to obtain and pay illiquid currencies. The foreign currency exposure that does exist is limited by the fact that the majority of transactions are paid within 24 hours after they are initiated. In certain consumer money transfer transactions involving different send and receive currencies, we generate revenue based on the difference between the exchange rate set by us to the consumer and the rate at which we or our agents are able to acquire currency helping to further provide protection against currency fluctuations. Our policy is not to speculate in foreign currencies and we promptly buy and sell foreign currencies as necessary to cover our net payables and receivables which are denominated in foreign currencies.

 

We use foreign currency forward exchange contracts to mitigate risks associated with changes in foreign currency exchange rates on transactions denominated primarily in the euro, British Pound, Canadian dollar and Swiss franc. Although historically it has been our intent for these foreign currency forward contracts to qualify as cash flow hedges, during an evaluation of the documentation requirements under applicable derivative accounting rules, we determined that our hedge documentation was not adequate at the inception of the derivative agreements to qualify for hedge accounting. As a result, changes in the fair market value of our outstanding derivative instruments, which are impacted primarily by fluctuations in the euro, are now recognized in our combined statements of income. Previously, changes to the fair value of our derivative instruments were recognized on our combined balance sheets and did not directly impact our net income. This change has resulted in volatility in our net income for the periods presented. For example, during the six months ended June 30, 2006, we had pre-tax derivative losses of $27.2 million, and for the six months ended June 30, 2005 we had pre-tax derivative gains of $36.8 million. In addition, during the year ended December 31, 2005, we had pre-tax derivative gains of $45.8 million, and we had pre-tax derivative losses of $30.2 million and $37.9 million during the years ended December 31, 2004 and 2003, respectively. We anticipate our results will be subject to volatility as a result of this change until we are able to redesignate the affected forward contracts as hedges, with revised documentation to allow for hedge accounting treatment, which we intend to do as expeditiously as possible. We also intend to have the appropriate documentation required for future foreign currency forward positions to qualify for hedge accounting treatment.

 

A hypothetical uniform 10% strengthening or weakening in the value of the United States dollar relative to all the currencies in which our profits are denominated would result in a decrease/increase to pretax income of approximately $16.6 million as of December 31, 2005. There are inherent limitations in the sensitivity analysis presented, primarily due to the assumption that foreign exchange rate movements are linear and instantaneous.

 

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As a result, the analysis is unable to reflect the potential effects of more complex market changes that could arise, which may positively or negatively affect income.

 

Interest Rate Risk

 

Our company is exposed to market risk from changes in interest rates. Our investment securities are primarily fixed rate interest-bearing securities. These investments arise primarily from cash received and invested relating to money transfers and other payment services awaiting redemption. We have classified these investments as available-for-sale. Accordingly, they are carried on our Combined Balance Sheets at fair market value. The interest rate risk is not considered significant to our financial position or results of operations. Our exposure to market risk for changes in interest rates will change based on the terms of the financing and the expected repayment of notes receivable and payable to affiliates in connection with the spin-off. A change in interest rates would likely impact both interest income earned by our company and interest expense incurred by our company. The net impact of a  1/8% increase in interest rates is estimated to reduce net income by approximately $2 million.

 

In order to mitigate the risk from fluctuating interest rates from our debt, we intend to pursue a strategy of balancing fixed and floating rate components.

 

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OUR BUSINESS

 

Overview

 

Western Union, a leader in global money transfer, provides people with fast, reliable and convenient ways to send money around the world, pay bills and purchase money orders. The Western Union® brand is globally recognized. Our services are available through a network of over 270,000 agent locations that offer Western Union services in more than 200 countries and territories. Each location in our agent network is capable of providing one or more of our services. As of June 30, 2006, approximately 75% of our locations had experienced money transfer activity in the prior twelve months. Our consumer-to-consumer money transfer service enables people to send money around the world in minutes. Our consumer-to-business service provides consumers with flexible and convenient options for making one-time or recurring payments.

 

In 2005, we generated $4.0 billion in total combined revenues and $927.4 million in combined net income. Demand for our services has steadily increased over the past several years. Our consumer-to-consumer transactions grew at a compound annual growth rate of 21% from 2001 to 2005. We handled 119 million consumer-to-consumer money transfers in 2005, an increase of 23% over 2004. Our 215 million consumer-to-business transactions in 2005 represented a 12% increase over 2004.

 

We believe that brand strength, the size and reach of our global network, convenience and reliability for our consumers have been key to the growth of our business. As we continue to meet the needs of our consumers for fast, reliable and convenient money transfer services, we are also working to enhance our existing services and provide our consumers with broad access to an expanding portfolio of payment and other financial services.

 

History and Development

 

The Western Union Company has roots back to 1851. It first traded on the New York Stock Exchange in 1865. In 1884, Western Union was one of the original 11 companies included on the first Dow Jones average listing. We have a long history of providing innovative services, including creating the universal stock ticker and launching the first United States commercial communications satellite service. We introduced our consumer-to-consumer money transfer service in 1871. We began offering consumer-to-business payment services in 1989 when we introduced Western Union Quick Collect, providing consumers in the United States with convenient walk-in access to our agent network to pay bills in cash.

 

Since First Data acquired us in 1995, we have become a leader in the development of a formal global remittance market. Today, we offer money transfer services under the Western Union, Orlandi Valuta and Vigo brands in over 200 countries and territories.

 

The Western Union Business

 

The Western Union business model is straight-forward. Our revenue is principally generated by money transfer and payment transactions. We derive our revenue primarily from two sources. Most of our revenue comes from fees that consumers pay when they send money. In certain consumer money transfer transactions involving different send and receive currencies, we generate revenue based on the difference between the exchange rate set by us to the consumer and the rate at which we or our agents are able to acquire currency.

 

In our consumer-to-consumer segment we provide our third-party agents with our multi-currency, real-time money transfer processing systems used to originate and pay money transfers. Our agents provide the physical infrastructure and staff required to complete the transfers. We generally pay our agents a commission based on a percentage of revenue. The commission is shared between the agent that initiated the transaction, the “send agent,” and the agent that paid out the transaction, the “receive agent.” For most agents, the costs of providing the physical infrastructure and staff are typically covered by the agent’s primary business (e.g., postal services, banking, check cashing, travel and retail businesses), making the economics of being a Western Union agent attractive to our agents. Western Union’s global reach and loyal consumer base allow us to attract agents we

 

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believe to be high quality. We take little credit risk associated with consumer delinquency, because the vast majority of our transactions are initiated in cash.

 

In our consumer-to-business segment we offer consumers the option to make consumer-to-business payments electronically over the telephone or the Internet or cash payments in person at an agent location. We process electronic payments using the consumer’s credit card, debit card or bank account. We process cash payments much like we process consumer-to-consumer transactions.

 

Geographic Presence

 

Approximately 80% of our agent locations are outside the United States. Our services are available in almost every country or territory. We have offices in more than 40 countries. In the United States, Costa Rica, Russia and Australia, our offices include customer service centers, where our employees answer operational questions from agents. Other offices, including regional management offices in Denver, Dublin, Miami, Vienna and Hong Kong, provide sales, marketing, data processing and other services. Our employees and members of senior management reflect the global nature of our business; natives of dozens of countries, they speak many languages.

 

Western Union agents include large networks such as post offices, banks and retailers. We have agreements with postal organizations in France, Germany, Spain, Russia, Argentina, Australia, China, India, New Zealand and elsewhere. Our services are offered through banks such as Société Générale, BNP Paribas, Credit Lyonnais, Millennium BCP and the State Bank of India. National and international retailers in the network include Kroger and Publix in the United States and Travelex and DHL International. Many of our agents have multiple locations. Our agents know the markets they serve. They work with our management to develop strategic plans for their markets, and many of our larger agents contribute financial resources to marketing the business.

 

Our Strengths

 

We believe our strengths position us to continue as the provider of choice for millions of consumers when they send money. Our strengths include our:

 

Strong relationships with high quality agents and businesses. We interact with millions of consumers around the world primarily through our global agent network. Our agents facilitate the global distribution and convenience that help define our Western Union brand, which in turn helps create demand for our services and helps us to recruit and retain agents. Our agents tend to be established organizations that provide an array of other consumer products and services, including postal services, groceries, banking, check cashing, travel and other daily necessities. Many are open during nontraditional banking hours, such as nights and weekends, making it easier for consumers to use our services. Although our agent contracts are generally for 5 year terms, our top 40 agents globally have been with us an average of more than 12 years; in 2005, these agents generated approximately 50% of our consumer-to-consumer combined revenue. We occasionally acquire equity interests in certain of our agents to align their long-term interests with ours. Currently we hold minority interests in agents that have a presence in Ireland, the United Kingdom, Spain, Greece and Italy.

 

We have relationships with more than 4,500 businesses and other organizations that receive consumer payments, including utilities, auto finance companies, mortgage servicers, financial service providers and government agencies (all sometimes referred to as “billers”). These relationships are a core component of our consumer-to-business payment services. In 2005, our top 20 billers represented approximately 45% of our consumer-to-business revenue. On average, we have provided our bill payment services to our top 20 billers for more than 10 years.

 

Global distribution network. The Western Union, Orlandi Valuta and Vigo agent networks are the foundation of our international presence. Our agent locations include more than 5,000 offering Orlandi Valuta branded service and approximately 20,000 offering Vigo branded service, with the remainder offering Western

 

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Union branded service. A small number offer service under two or three brands. Our global footprint is based on more than a decade of building relationships with agents worldwide.

 

Success in the consumer-to-consumer money transfer business depends in large part on providing quality service at convenient send and receive locations. Our global network, extending to over 200 countries and territories, provides that convenience. We have emphasized the development of our receive network around the world over the last five years to align the supply of agent locations in the markets that primarily send transactions with those that pay them. Today, we believe we are well-positioned in key receive markets, such as China and India, to meet consumer demand as it evolves with shifts in migration patterns.

 

To complement the convenience offered by our network’s global physical locations, in certain countries we have made our services available through other channels, such as our Internet service, westernunion.com, which allows consumers to send funds through our website, our telephone money transfer service and our direct-to-bank money transfer service, which allows consumers to send money directly to a bank account. For financial information regarding our foreign and United States operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements and the notes to those statements included elsewhere in this information statement.

 

Established brands. Our Western Union® brand is built on a foundation of more than a century of history and consumer-focused service. Our consumers have told us that they believe the Western Union brand represents speed, reliability, trust, value and convenience. In the United States, where the brand has existed the longest, there is a very high level of brand awareness among money transfer users. The international expansion of our agent network over the past decade has made the Western Union brand visible today virtually everywhere consumers send and receive money. We are building the level of awareness in Europe and Asia. As people move and travel around the world, they are able to find a well recognized service to send funds to others.

 

We also offer money transfer services under the Orlandi Valuta® and VigoSM brands. Over the past three years, Western Union branded transactions have grown the fastest of the three brands. Through our Western Union Quick Collect brand, as well as our Speedpay brand, we offer cash-based and electronic consumer-to-business payment services.

 

Our operating results over the past several years have allowed us to invest significantly each year to support our brands. In 2005, we invested more than $270 million to market, advertise and promote our services and our agents made significant additional investments.

 

Consumer relationships. One of our strengths has been our focus on our consumers and offering them fast, reliable money transfer services. Our global loyalty card program, offered for both consumer-to-consumer and consumer-to-business services, is available in a growing number of countries. We launched our Gold Card, the principal feature of the program, in the United States in 2002. As of June 30, 2006, the loyalty program was available in 58 countries and had more than 6.5 million active cards, primarily in the United States. The Gold Card offers consumers faster service at the point-of-sale, rewards such as free telephone time and service enhancements including, on a pilot basis in select markets, remittance protection insurance. On average, a Gold Card consumer initiates more transactions and has a higher rate of retention than a non-carded consumer. In the United States more than 30% of consumer-to-consumer transactions are completed using a Gold Card. We are also seeing increases in usage in Europe and Asia where we began offering the Gold Card in 2004. The global loyalty program is one component of our CRM program designed to support and enhance long-term relationships with our consumers. Consumer databases supplement these efforts by providing insight on consumer preferences so that we can selectively target consumer communications and marketing.

 

Operational excellence. An important part of operational excellence is steadfastly reliable technology. Our systems enable us to provide worldwide, multi-currency and real-time money transfer processing with a high degree of reliability. We provide dynamic computer host-to-host interfaces to our agents and billers that enable them to offer money transfer and payment services within their own computer environment. We also provide settlement and reconciliation software to our agents and billers with reporting and analysis tools to help them

 

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monitor many aspects of their money transfer business, including transactions, profitability and cash flow. Behind the scenes, our settlement systems facilitate the periodic settlement of accounts between our company and our agents and billers. Our systems and processes enable our agents to pay money transfers in over 120 currencies. Many of our agents can also pay in multiple currencies at a single location, a function that is being utilized in a number of locations in the agent network.

 

Flexibility is another important component of operational excellence. We continue to work to implement consumer focused enhancements to our services. These efforts have resulted in offerings like telephone and Internet services, and money transfers paid directly to a bank account or to a stored-value card.

 

Attractive financial profile. While we expect to incur significant interest costs in connection with the debt we will incur as part of the spin-off, our revenue and net cash flow will provide us with opportunities to invest in our core business growth, in new services and in new markets. In 2005, we generated $4.0 billion in combined revenues and over $1.0 billion in combined net cash provided by operating activities. Our combined revenue has grown at a compound annual growth rate of 15% since 2001.

 

Experienced management team. Our management team is substantially the same team that managed the Western Union business for First Data before the spin-off. Business leaders at the senior management level and below were involved in Western Union’s global expansion and creating and implementing our long-term strategy. Collectively, members of our executive team have an average of 8 years with us or First Data.

 

Our Strategy

 

We believe that our strengths position us well to continue to pursue global markets and remain focused on our consumers and their needs. To do so, we developed a number of strategies, including:

 

Expand and diversify global distribution. We are focused on selectively expanding our agent network and relationships with billers. Examples of this strategy and our recent success in implementing it include:

 

    Using existing agent locations to launch new services, such as outbound service from Mexico in 2004, which generated over $10 million of revenue in 2005.

 

    Adding or enhancing services allowing consumers in many countries to send and receive money transfers within the same country. Excluding the United States and Canada, these intra-country transactions generated over $50 million in revenue in 2005.

 

    Launching our Internet service, westernunion.com, outside the United States and Canada, beginning with the United Kingdom in 2004. Our Internet service generated nearly $70 million in revenue in 2005, up 47% from 2004, and is profitable.

 

    Expanding our network in key receive markets, such as China and India. Combined, China and India represented about 3% of our total combined revenue in 2005.

 

We intend to continue to identify and create opportunities to generate new revenue from our existing distribution channels, including through acquisitions and by equity investments in our agents.

 

Our strategy is to align the number of send and receive agent locations in our markets to correspond to the send and receive demands of our consumers in each market. We have focused on building receive networks in countries with large inbound remittance markets, particularly in Latin America, Africa and eastern Europe, as well as key countries like China, India and elsewhere in Asia. This increased presence in receive markets provides immigrants from these countries confidence that money they send home will be delivered to a convenient location they know. In the United States, western Europe and other predominantly send markets, we add agent locations in locales that tend to attract immigrants. While we continue to develop our global network, we expect the majority of our growth in the future to come from existing locations.

 

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Today, we offer cash-based bill payment services primarily in the United States, and we offer consumer-to-business payment services to and from other countries served by our agent network. We intend to pursue continued global expansion of cash and electronic consumer-to-business payments services, through our existing agent network and other channels.

 

Build our brands and enhance our consumers’ experience. We remain focused on our brands and make sizable investments to build our brands and enhance our consumers’ experience. In each of the last three years, we have spent approximately 7% of our combined revenue on marketing, including advertising, events, loyalty programs, and employees dedicated to marketing activities. Building our brands and enhancing the consumer experience are strategies that are grounded in our global CRM programs, which emphasize building a lifetime relationship with our consumers and their families. The Western Union Gold Card is a key part of this strategy. The Gold Card program helps build satisfaction and loyalty by offering consumer recognition, added convenience at the point-of-sale and rewards for multiple transactions. As we continue to introduce the Gold Card in additional countries, we expect to combine the benefits of increased usage with enhanced consumer relationships. In addition, in each of the last three years we have invested in consumer-to-consumer pricing decreases designed to meet consumer needs, maximize market opportunities and strengthen our overall competitive position. Pricing decreases are implemented in selected corridors or zip codes. The impact of each pricing decrease and any offsetting increase in volume is shared with our agents through commissions.

 

Develop consumer convenience and choice. We focus our product development strategy on providing money transfer services that meet consumers’ needs for convenience, choice and control. Our Internet service (westernunion.com), Telephone Money Transfer (a service that allows consumers to speak with Western Union operators in a number of languages by phone to send funds), Money Transfer by Phone (a service that allows consumers to speak with Western Union operators in a number of languages by phone from agent locations to send funds), Direct to Bank (a service that allows consumers to send funds directly to a bank account), Account to Cash (a service that allows consumers to debit their bank accounts and send the money through Western Union for payment at any agent location), Home Delivery of remittances (a service that allows funds to be delivered to the recipient rather than picked up at an agent location) and Western Union@ATM (a service that allows consumers to transfer funds to or from an ATM) are all examples of service enhancements that address our consumers’ needs. We intend to continue to develop these types of enhancements, building on insights from our agents and the knowledge we gain from CRM activities.

 

In the United States, we offer consumers the ability to send payments to billers through a variety of channels, including walk-in locations, telephone service, IVR and Internet-based service. In order to pay their bills through these channels, consumers can use various means of payments—checks, credit cards, debit cards or cash. We intend to increase our consumer payments business in the United States by pursuing existing and emerging electronic payments services and technologies. Equally as important, we plan to expand this business outside the United States, in ways that will vary from market to market.

 

Explore new service offerings. Western Union is exploring new ways to bring additional services to our consumers around the world. For example, Western Union International Bank, based in Vienna, Austria, has the ability to establish branches and offer money transfer and other financial services directly to consumers in each of the 25 member states of the European Union. We continue to investigate new services—either offered by our company directly or through third parties—that are meaningful to our large consumer base.

 

Our Segments

 

We manage our business around the consumers we serve and the type of services we offer. Each segment addresses a different combination of consumer needs, distribution networks and services.

 

    Consumer-to-consumer—provides money transfer services between consumers, primarily through a global network of third-party agents using our multi-currency, real-time money transfer processing systems.

 

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    Consumer-to-business—focuses on payments from consumers to billers through our networks of third-party agents and various electronic channels. In 2005, substantially all of the revenue from this segment was generated from transactions in the United States.

 

Our other businesses not included in these segments include Western Union branded money orders, available through a network of third-party agents, and prepaid services. Prepaid services include a Western Union branded phone card and top-up services for third parties that allow consumers to pay in advance for mobile phone and other services.

 

Consumer-to-Consumer Segment

 

Individual money transfers from one consumer to another are the core of our business, representing 82% of our total combined revenues for 2005. We offer consumers a choice of ways to send money. Although most remittances are sent in cash at one of our hundreds of thousands of agent locations worldwide, in some countries we also offer the ability to send money over the Internet or the telephone, using a credit or debit card or, in some cases, through bank debits (automated clearing house, or “ACH,” withdrawals). Some agent locations also accept credit or debit cards to initiate a transaction. We also offer consumers several options to receive a money transfer. While the vast majority of transfers are paid in cash at agent locations, in some places we offer payments directly to the receiver’s bank account or a stored-value card.

 

Operations

 

Our revenue is derived primarily from transaction fees charged to consumers to transfer money. In certain consumer money transfer transactions involving different send and receive currencies, we generate revenue based on the difference between the exchange rate set by us to the consumer and the rate at which we or our agents are able to acquire currency.

 

In a typical money transfer transaction, a consumer goes to one of our agent locations, completes a form specifying, among other things, the name and address of the recipient, and delivers it, along with the principal amount of the money transfer and the fee, to the agent. This sending agent enters the transaction information into our data processing system and the funds are made available for payment, usually within minutes. The recipient enters any agent location in the designated receiving area or country, presents identification and is paid the transferred amount. Recipients do not pay a fee (although in limited circumstances, a tax may be imposed on the payment of the remittance). We determine the fee paid by the sender, which generally is based on the principal amount of the transaction and the locations from and to which the funds are to be transferred.

 

We maintain three separate multi-currency, real-time money transfer processing systems through which a consumer can transfer money from a location within that system. Money transfer services are available under the Western Union®, Orlandi Valuta® and VigoSM brands, at least one of which is available in each location in the agent network. The development and maintenance of certain of our money transfer processing systems are outsourced to a third party.

 

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Approximately 80% of our consumer-to-consumer transactions involve at least one non-United States location. No individual country outside the United States and Mexico accounted for more than 10% of the segment’s revenue for the six months ended June 30, 2006 or the years ended December 31, 2005, 2004 and 2003. Mexico, shown separately in the table below, accounted for the largest single source of foreign country revenue in the segment. Certain of our agents facilitate a large number of transactions; however, no individual agent accounted for greater than 10% of the segment’s revenue during these periods. The table below presents the geographic components of segment revenue as a percentage of the combined total.

 

           Year Ended December 31,  
     Six Months Ended
June 30, 2006
    2005     2004     2003  

International (a)

   72 %   72 %   71 %   69 %

Domestic (b)

   17 %   19 %   21 %   23 %

Mexico (c)

   11 %   9 %   8 %   8 %

(a) Represents transactions between and within foreign countries (excluding Canada and Mexico), transactions originated in the United States or Canada destined for foreign countries and foreign country transactions destined for the United States or Canada. Excludes all transactions between or within the United States and Canada and all transactions to and from Mexico as reflected in (b) and (c) below.
(b) Represents all transactions between and within the United States and Canada.
(c) Represents all transactions to and from Mexico.

 

Seasonality

 

Consumer-to-consumer segment revenue typically increases sequentially from the first quarter to the fourth quarter each year and declines from the fourth quarter to the first quarter of the following year. This seasonal fluctuation is related to the holiday season in the United States and other countries during the fourth quarter.

 

Services

 

We offer money transfer services worldwide. The different ways consumers can send or receive money include the following:

 

Walk-in money transfer service. Walk-in money transfer service is available at each of our sending agent locations around the world. The majority of Western Union, Orlandi Valuta and Vigo remittances are “will call” transactions, in which cash is collected by the agent and payment (usually cash) is available for pick-up at another agent location in the designated receive country, usually within minutes.

 

Western Union continues to develop new services that enhance consumer convenience and choice and that are customized to meet the needs of consumers in the regions where these services are offered. In the United States, consumers can use a debit card to send transactions from many agent locations. In some United States outbound corridors and in select international corridors, Western Union provides Direct to Bank service, enabling a consumer to send a transaction from an agent location directly to a bank account in another country. In certain countries, Western Union offers payout options through a debit or stored-value card, or through a money order. In a number of countries in Latin America and the Caribbean, Western Union agents offer a bank deposit service, in which the paying agent provides the receiver the option to direct funds to a bank account or to a stored-value card. Vigo also offers Direct to Bank and home delivery service in certain receive countries.

 

Our “Next Day Delivery” option is a money transfer that is available for payment 24 hours after it is sent. This option is available in certain markets for domestic service within the United States, and in select United States outbound and international corridors, including Mexico. The Next Day Delivery service gives our consumers a lower-priced option for money transfers that do not need to be received within minutes. The service still offers the convenience, reliability and ease-of-use that the Western Union brand represents.

 

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Our “Money Transfer by Phone” service is available in select Western Union agent locations in the United States. In a Money Transfer by Phone transaction, the consumer is able to use a telephone in the agent location to speak to a Western Union representative in one of several languages. Typically the sender provides the information necessary to complete the transaction to the Western Union operator on the phone and is given a transaction number, which the sender takes to the agent’s in-store representative to send the funds.

 

Online money transfer service. Our Internet website, westernunion.com, allows consumers to send funds on-line, using a credit or debit card, for pay-out at any of our Western Union branded agent locations around the world. Transaction capability at westernunion.com was launched in the United States in 2000 and in Canada in 2002. Since 2004, Western Union has expanded the service to additional countries outside the United States.

 

Telephone money transfer service. Our Telephone Money Transfer service allows Western Union consumers to send funds by telephone without visiting an agent location. Consumers call a toll-free number in the United States or the United Kingdom and use a debit card or credit card to initiate a transaction. The money transfer is paid at an agent location in the ordinary way.

 

Distribution and Marketing Channels

 

We offer our consumer-to-consumer service through our global network of third-party agents and the other initiation and payment methods discussed above. Western Union provides central operating functions such as transaction correction, marketing support and customer relationship management to our agents.

 

Some of our Western Union agents outside the United States manage subagents. Although these subagents are under contract with our primary agents (and not with Western Union directly), the subagent locations have access to the same technology and services that our agent locations do.

 

Our international agents are able to customize services as appropriate for their geographic markets. In some markets individual agents are independently offering specific services such as stored-value payout options and direct to bank service. Our marketing relies on feedback from our agents and consumers, and our agents also market our services.

 

In February 2005, Western Union International Bank began operations. We chartered the bank in order to adapt to the challenges presented by the growing trend among the member states of the European Union to regulate the money transfer business. Western Union International Bank holds a full credit institution license, allowing it to offer a range of financial services throughout the 25 member states of the European Union. Today, the bank offers retail and online money transfer services in a few countries.

 

Industry Trends

 

We participate in a large and growing market for money transfer. Growth in the money transfer business tends to correlate to immigration and related employment rates worldwide. Therefore, an indicator for future growth is the size of the international migrant population, which to a certain extent follows economic opportunity worldwide. In 2006, the United Nations reported that there were 191 million people living outside their country of origin in 2005. We anticipate that demand for money transfer services will continue to grow as individuals continue to migrate to countries outside of their country of origin.

 

Aite, an independent research and advisory firm, estimated in a January 2005 report that the total value of remittances sent by workers to developed and emerging regions would be $249 billion in 2005 and that this amount would grow annually at a rate of 8% through 2007. These figures were estimated primarily by using balance of payments data reported by the International Monetary Fund, the Inter-American Development Bank, central banks and money transmitters. They do not capture money transfers sent through informal channels and do not measure the size of the intra-country market. The World Bank estimates that unrecorded remittances are at least half as large as recorded remittances.

 

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By comparison, in 2005, consumers transferred $42 billion in consumer-to-consumer transactions through our company in both cross-border and intra-country transactions. Funds transferred through our agent network have increased at a compound annual growth rate of 24% from 2003 to 2005.

 

Another significant trend impacting the money transfer industry is the increase in regulation in recent years. Regulation in the United States and elsewhere focuses, in part, on anti-money laundering and anti-terrorist financing compliance efforts. Regulations require money transfer providers, banks and other financial institutions, to develop systems to monitor and report appropriately on certain transactions. One of the goals of increased regulation is to find ways to move consumers away from informal, unregulated networks into formal and reported channels where transactions can be recorded, monitored and, when required, reported to law enforcement or other public authorities.

 

Competition

 

We face robust competition in the highly-fragmented consumer-to-consumer money transfer industry. We compete with a variety of money transfer service providers, including:

 

    Global money transfer providers—Global money transfer providers allow consumers to send money to a wide variety of locations, in both their home countries and abroad.

 

    Regional money transfer providers—Regional money transfer companies, or “niche” players, provide the same services as global money transfer providers, but focus on a small group of corridors or services within one region, such as North America to the Caribbean, Central or South America, or western Europe to north Africa.

 

    Banks—Banks of all sizes compete with us in a number of ways, including bank wire services and card-based services. We believe that banks often use wire transfer services and other money transfer methods to attract immigrant consumers to open bank accounts.

 

    Informal networks—Informal networks enable people to transfer funds without formal mechanisms, such as receipts, and, often, without compliance with government reporting requirements.

 

    Alternative channels—Alternative channels, including mail and commercial courier services, online money transfer services that allow consumers to send money over the Internet and card-based options, such as ATM cards and stored-value cards, allow consumers to send or receive money.

 

The most significant competitive factors in consumer-to-consumer remittances relate to brand recognition, distribution network, consumer experience and price.

 

For additional details regarding our consumer-to-consumer segment, including financial information regarding our international and United States operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements and the notes to those statements included elsewhere in this information statement.

 

Consumer-to-Business Segment

 

We provide a portfolio of electronic and cash payment options that provide consumers with fast and convenient ways to make one-time or recurring payments. These services facilitate payments to billers. Revenues from this segment represented 15% of our combined revenue for 2005.

 

Operations

 

Our revenue in this segment is derived primarily from transaction fees paid by the consumer or the biller. These fees are typically less than the fees charged in our consumer-to-consumer segment. In order to make an electronic payment, the consumer or biller initiates a transaction over the telephone or the Internet which we

 

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process using the consumer’s credit card, debit card or bank account (processed through the ACH). In order to make a cash payment, the consumer goes to an agent location and makes the payment to the agent. While we continue to pursue international expansion of our offerings in select markets, substantially all of the segment’s 2005 revenue was generated in the United States. No individual biller accounted for greater than 10% of this segment’s revenue during all periods presented.

 

Services

 

Our consumer-to-business services strive to give consumers choices as to the payment type and method of payment, and include the following:

 

Electronic payments. Consumers and billers use our Speedpay service in the United States and the United Kingdom to make consumer payments to a variety of billers using credit cards and debit cards and ACH. Payments are initiated through a number of channels, including biller hosted websites, IVR units and call centers.

 

Our Equity Accelerator service is provided in the mortgage service industry, enabling consumers to make mortgage payments by ACH. It is marketed as a convenient way for homeowners to schedule additional recurring principal payments on their mortgages. Consumers enroll in the service, customize their payment schedule and make payments through one or more bank accounts.

 

Cash payments. Consumers use our Quick Collect service to send guaranteed funds to businesses and government agencies from over 50,000 Western Union agent locations across the United States and Canada, using cash and, in select locations, a debit card. Increasingly, correctional institutions are using the Quick Collect service as a way for relatives to fund the commissary accounts of inmates. This service is also available on our website, and on a limited basis under the Quick Pay name at agent locations outside the United States and Canada. Consumers use our Convenience Pay service to send payments by cash or check from a smaller number of Convenience Pay agent locations primarily to utilities and telecommunication providers. We also offer Quick Cash, a cash disbursement service used by businesses and government agencies to send money to employees or individuals with whom they have accounts or other business relationships.

 

Distribution and Marketing Channels

 

Our electronic payment services are available primarily through IVR and over the Internet, while our cash-based services are available through our agent networks. Billers market our services to consumers in a number of ways, and we market our services directly to consumers using a variety of means, including advertising materials and promotional activities at our agent locations. Consumers can also participate in the Western Union Gold Card program when making cash payments to billers.

 

Industry Trends

 

The consumer-to-business payment industry has evolved with technological innovations that created new methods of processing payments from individuals to businesses. We believe that the United States is in the midst of a trend away from paper checks toward electronic payment methods accessible through multiple technologies. We believe that the market will reward those companies that are able to provide consumers with fast and reliable ways to make payments by the method and through the means of their choice. Historically, the majority of bills in the United States was paid through checks in the mail. In 1989, Western Union began offering an agent-based cash bill payment solution called “Quick Collect,” which provided consumers with a convenient, walk-in, cash-based way to pay their bills. Further innovation in the industry led to the creation of electronic options for consumer payments including telephone and online services. In a February 2005 report, Aite estimated that more than 18 billion bill payments would be made in 2005 in the United States alone.

 

The consumer-to-business payment industry outside the United States is at varying stages of development. In some countries, walk-in cash payments at a biller’s office or through a third party network are widely used, while in other countries electronic payment options are finding ready acceptance by consumers and businesses alike.

 

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Competition

 

We face robust competition in the highly-fragmented consumer-to-business payment industry. Competition in electronic payments includes financial institutions (which may offer bill-payment services in their own name or may “host” payment services operated under the names of their clients), billers offering their own or third-party services to their own customers, and third-party providers of all sizes offering services directly to consumers. In many cases, competitors specialize in a small number of industries. Competitors for cash payments include a biller’s own walk-in locations, or those provided by others, some only on a regional basis, as well as mail and courier services. There is also competition between electronic and cash-based payments methods.

 

The most significant competitive factors in this segment relate to brand recognition, convenience, variety of payment methods and price.

 

For additional details regarding our consumer-to-business segment, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our historical combined financial statements and the notes to those statements included elsewhere in this information statement.

 

Other

 

The remainder of our business units are grouped in the “Other” category, which includes money orders and prepaid services.

 

We sell Western Union branded money orders, issued by IPS, to consumers at non-bank retail locations. IPS pays us a commission based on an investment yield on the outstanding balances in the investment portfolio derived from the money orders sold. To a lesser extent, we also make money on per item fees charged for money order sales. In a money order transaction, a consumer purchases a money order from an agent. The agent selling the money order generally remits the funds collected from the consumer to IPS promptly following the sale date. Agents generally receive no commissions from us on money order sales, but rather are compensated by charging a fee to the consumer for the purchase of the money order.

 

Western Union’s prepaid services market:

 

    a Western Union branded prepaid debit card (issued by a third party);

 

    a Western Union branded telephone card; and

 

    third-party top-up services (that, for example, allow mobile phone users to “top-up” or prepay for mobile service).

 

The Western Union branded prepaid debit card is sold through our agent network and the Internet. Our “top-up” services allow consumers to pre-pay for mobile phone or other services, and otherwise store value with service providers that can be accessed by the consumer in the future. In each of these transactions, the consumer pays a fee that is set by us and recorded as revenue. The agent earns a fixed commission per transaction.

 

Properties and Facilities

 

As of June 30, 2006, we owned or leased 100 domestic and international properties. Following the spin-off, four of our leased properties will be subleased from First Data. Our owned and leased facilities are used for operational, sales and administrative purposes, and are all currently being utilized.

 

     Leased
Facilities
   Owned
Facilities
 

United States Facilities

   35    3 *

International Facilities

   62     

* Of these facilities, two represent our corporate headquarters that will be transferred to us in connection with the spin-off.

 

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Our United States facilities encompass approximately 825,000 square feet. Our international facilities encompass approximately 300,000 square feet, primarily for marketing, sales and management activities, and include our European shared services center in Dublin, Ireland.

 

Our owned facilities will include our corporate headquarters, located in Englewood, Colorado. We believe that our facilities are suitable and adequate for our current business; however, we periodically review our space requirements and may acquire new space to meet the needs of our businesses or consolidate and dispose of or sublet facilities which are no longer required. See “Our Relationship with First Data After the Spin-Off—Subleases.”

 

Intellectual Property

 

The Western Union brand, consisting of trademark registrations in many countries, is material to our company. The loss of the Western Union® trademark or a diminution in the perceived quality associated with the name would harm our growth. The VigoSM service mark and the Orlandi Valuta®, Speedpay®, Western Union Quick Collect® and Paymap® trademarks are also important to our company. We own patents and patent applications covering aspects of our processes and services, but our business is not dependent on them.

 

We have been, and in the future may be, subject to claims and suits alleging that our technology or business methods infringe patents owned by others, both in and out of the United States. Unfavorable resolution of these claims could require us to change how we deliver services, result in significant financial consequences, or both, which could adversely affect our business, financial position and results of operations.

 

Risk Management

 

Our company has a substantial credit risk management department that evaluates and monitors our credit and fraud risks. We are exposed to credit risk related to receivable balances from agents in the money transfer and money order settlement process. We also are exposed to a small amount of credit risk directly from consumer transactions particularly through our online services and electronic consumer-to-business channels, where transactions are originated through means other than cash, and therefore are subject to “chargebacks,” insufficient funds or other collection impediments. The credit risk management team performs a credit investigation before each agent signing and conducts on-going analysis throughout each relationship. As a result, our company’s losses associated with bad debts have been less than 1% of our annual revenue in each of the last three fiscal years.

 

A key component of the Western Union business model is our ability to manage risk associated with conducting financial transactions worldwide. We settle accounts with the majority of our agents in United States dollars and euros. We utilize currency exchange contracts, primarily forward contracts, to mitigate the risks associated with currency fluctuations. Limited foreign currency risk arises with respect to the agent settlement process. The foreign currency exchange risk is limited because the majority of money transfer transactions are paid within 24 hours after they are initiated and agent settlements occur in a few days in most instances.

 

International Investment

 

We expect to receive net cash proceeds on the spin-off date in connection with the settlement of the intercompany note balances with First Data classified as “Notes receivable from affiliated companies” and “Notes payable to affiliated companies” in our historical combined balance sheets. The net funding for these notes was generated through our international operations, and no provision has been made for United States federal and state income taxes on approximately $552.5 million of these foreign earnings as of December 31, 2005, as we expect to reinvest these earnings outside the United States indefinitely. We believe the investment of

 

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these proceeds over a number of years will assist us in executing on our international strategies, including expanding and diversifying global distribution and exploring new service offerings, as follows:

 

    providing the necessary capital to expand our international bank, which has the ability to establish branches and offer money transfer and other financial services directly to consumers in each of the 25 member states of the European Union;

 

    providing us with the ability to acquire companies outside the United States that complement our existing businesses worldwide;

 

    developing new or enhancing existing software to support the expansion of our international agent network;

 

    expanding our international call center operations; and

 

    funding our operating cash requirements outside the United States.

 

The timing of these investments will be based on specific opportunities.

 

Regulation

 

Our operations are subject to a wide range of laws and regulations enacted by the United States, states and localities and other countries. These include financial services regulations, consumer disclosure and consumer protection laws, currency control regulations, money transfer and payment instrument licensing regulations, escheat laws and laws covering consumer privacy, data protection and information security. Our services also are subject to an increasingly strict set of legal and regulatory requirements intended to help detect and prevent money laundering, terrorist financing and other illicit activity. Failure to comply with any of these requirements—by either Western Union or its agents (who are third parties, over which Western Union has limited legal and practical control)—could result in the suspension or revocation of a license or registration required to provide money transfer services, the limitation, suspension or termination of services, and/or the imposition of civil and criminal penalties, including fines. We continue to implement policies and programs and adapt our business practices and strategies to help us comply with current legal standards, as well as with new and changing legal requirements affecting particular services, or the conduct of our business in general. These programs include dedicated compliance personnel, training and monitoring programs, as well as support and guidance to our agent network on compliance programs.

 

Money Transfer and Payment Instrument Licensing and Regulation

 

In the United States, most states license money transfer services providers and issuers of payment instruments. Many states exercise authority over the operations of our services related to money transmission and the sale of payment instruments and, as part of this authority, subject us to periodic examinations. Many states require, among other things, that proceeds from the sales of payment instruments and money transfers be invested in high-quality marketable securities prior to the settlement of the transactions. These licensing laws also may cover matters such as regulatory approval of controlling shareholders, including our company, regulatory approval of agent locations and consumer forms, consumer disclosures and the filing of periodic reports by the licensee, and require the licensee to demonstrate and maintain certain net worth levels. Many states also require money transmitters, issuers of payment instruments, and their agents to comply with federal and/or state anti-money laundering laws and regulations.

 

Our money transfer and money order services are subject to anti-money laundering laws and regulations, including the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001 (collectively, the “BSA”) and similar state laws and regulations. In addition, certain economic and trade sanctions programs that are administered by the Treasury Department’s Office of Foreign Assets Control prohibit or restrict transactions to or from or dealings with specified countries, their governments, and in certain circumstances, their nationals, and with individuals and entities that are specially-designated nationals of those countries, narcotics traffickers, and

 

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terrorists or terrorist organizations. Through our third party agents, we provide limited services to Cuba, Syria, and Sudan pursuant to advisory opinions of, or specific authority granted under licenses from, the United States Department of the Treasury Office of Foreign Assets Control and in territories under the Palestinian Authority. Services in those areas are limited to small dollar amount money transfers in many cases only into these territories to approved individuals. The BSA, among other things, requires money transfer companies and the issuers and sellers of money orders, to develop and implement risk-based anti-money laundering programs, report large cash transactions and suspicious activity, in some cases, to collect and maintain certain information about the sender and receiver, and to maintain transaction records. States impose similar and, in some cases more stringent, requirements. These requirements also apply to our agents. The Treasury Department has interpreted these requirements to include due diligence and risk based monitoring of agents inside and outside the United States.

 

In addition, our money transfer business is subject to some form of regulation in the more than 200 countries and territories in which those services are offered. These regulations may include limitations on what types of entities may offer money transfer services, limitations on the amount of principal that can be moved into or out of a country, limitations on the number of money transfers that may be sent or received by a consumer, agreements on the rates of exchange between currencies, and laws and regulations intended to help detect and prevent money laundering and criminalize money laundering activity.

 

We have developed and are enhancing global compliance programs to monitor and address various aspects of legal and regulatory requirements and developments. Our money transfer network operates through third-party agents in most countries, and our legal and practical ability to control those agents’ compliance activities is limited. To assist in managing and monitoring money laundering risks, we have developed and continue to enhance an anti-money laundering compliance program comprised of policies, procedures, systems and internal controls. At present, we have over 200 employees in a number of our offices around the world dedicated to these efforts.

 

Government agencies both inside and outside the United States may impose new or additional rules on money transfers and sales of payment instruments affecting us or our agents, including regulations that:

 

    prohibit transactions in, to or from certain countries, governments, nationals and individuals and entities;

 

    impose additional identification, reporting or recordkeeping requirements;

 

    limit the entities capable of providing money transfer services and/or the sale of payment instruments, or imposing additional licensing or registration requirements;

 

    impose minimum capital or other financial requirements;

 

    limit or restrict the revenue which may be generated from money transfers, including transaction fees and revenue derived from foreign exchange;

 

    require additional disclosures to consumers; or

 

    limit the number or principal amount of money transfers which may be sent to or from the jurisdiction.

 

Escheat Regulations

 

Our company is subject to unclaimed or abandoned property (escheat) laws in the United States and abroad which require us to turn over to certain government authorities the property of others held by our company that has been unclaimed for a specified period of time. A number of our subsidiaries hold property subject to escheat laws and we have an ongoing program to comply with those laws. We are subject to audit by the states with regard to our escheatment practices.

 

In 2002, Affiliated Computer Services (“ACS”) notified First Data of its intent to audit First Data’s escheatment practices on behalf of 19 states (the “ACS States”). The ACS States subsequently increased to 44 states. The ACS States agreed to allow First Data to conduct an internal examination of its escheatment practices

 

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utilizing third party experts. First Data also entered into Voluntary Disclosure Agreements with four other states (the “VDA States”). Like the ACS States, the VDA States agreed to allow First Data to conduct its own internal review in place of an audit by the states.

 

First Data completed the majority of the internal review in December 2005. As a result of that review and in addition to amounts already recorded, Western Union recognized a $8.2 million pretax charge in the fourth quarter of 2005 for domestic and international escheatment liabilities. Portions of this charge are not scheduled to be remitted until periods beyond 2006.

 

Western Union plans to complete its internal review and discuss the results thereof with the ACS States and the VDA States in 2006. Any difference between the amounts accrued by our company and those claimed by a state or foreign jurisdiction will be reflected in the periods in which any resolutions occur.

 

Privacy and Information Security Regulations

 

Our services are subject to privacy laws and regulations of the United States, states and other countries. United States privacy laws include the federal Gramm-Leach-Bliley Act, which applies directly to a broad range of financial institutions and indirectly to companies that provide services to financial institutions. Laws in other countries include those adopted by the member states of the European Union under Directive 95/46 EC of the European Parliament and of the Council of 24 October 1995, as well as the laws of other countries. In some cases, the laws of a member state may be more restrictive than the Directive and may impose additional duties on companies. Each of these laws restricts the collection, processing, storage, use and disclosure of personal information, requires notice to individuals of privacy practices and provides individuals with certain rights to prevent use and disclosure of protected information. These laws also impose requirements for safeguarding personal information through the issuance of data security standards or guidelines. Certain state laws impose similar privacy obligations, as well as, in certain circumstances, obligations to provide notification to affected individuals, state officers and consumer reporting agencies, as well as businesses and governmental agencies that own data, of security breaches of computer databases that contain personal information.

 

In connection with governmental efforts to prevent money laundering and terrorist financing and pursuant to legal obligations and authorizations, Western Union makes information available to United States federal and state, as well as certain foreign, law enforcement agencies. In recent years, government agencies have increased their requests for such information from Western Union and other companies (both financial service providers and others), particularly in connection with efforts to prevent terrorist financing. During the same period, there has also been increased public attention to concerns about consumer privacy, accompanied by legislation and regulations intended to address issues of data protection, information security and privacy. These two policy goals—the prevention of money laundering and terrorist financing and the protection of consumer privacy—may conflict, and the law in these areas is not consistent or settled. While we believe that Western Union is compliant with its legal responsibilities, the legal, political and business environments in this area are rapidly evolving, and subsequent legislation, regulation, litigation, court rulings or other events could expose Western Union to liability and reputational damage.

 

Banking Regulation

 

Western Union International Bank operates under a banking license granted by the Austrian Financial Market Authority (“FMA”), allowing the bank to offer a range of financial services in the 25 member states of the European Union. The banking license subjects our bank to the Austrian Banking Act and the Austrian Financial Market Authority Act and regulation by the FMA. The bank also is subject to regulation, examination and supervision by the New York State Banking Department (the “Banking Department”), which has regulatory authority over our subsidiary that controls the bank, a limited liability investment company organized under Article XII of the New York Banking Law. An Agreement of Supervision with the Banking Department imposes various regulatory requirements including operational limitations, capital requirements, affiliate transaction

 

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limitations, and notice and reporting requirements. Banking Department approval is required under the Banking Law and the Agreement of Supervision prior to any change in control of the Article XII investment company.

 

Since Western Union International Bank does not, among other things, operate any banking offices in the United States and does not conduct business in the United States except as may be incidental to its activities outside the United States, our company’s affiliation with Western Union International Bank does not cause it to be subject to the provisions of the Bank Holding Company Act.

 

Other

 

Stored-value services offered by Western Union prepaid services are subject to federal and state laws and regulations related to consumer protection, licensing, escheat, money laundering, and payment of wages. These laws are evolving, unclear and sometimes inconsistent, and the extent to which these laws apply to Western Union or its consumers is in flux. We are unable to determine the impact that the clarification of these laws and their future interpretations may have on these services.

 

Legal Proceedings

 

We are party to a variety of legal proceedings that arise in the normal course of our business. While the results of these legal proceedings cannot be predicted with certainty, management believes that the final outcome of these proceedings will not have a material adverse effect on our consolidated results of operations or financial position.

 

Employees and Labor

 

As of June 30, 2006, our businesses employed approximately 4,700 employees. Western Union has two four-year labor contracts (both expiring August 6, 2008) with the Communications Workers of America, AFL-CIO representing approximately 990 employees located primarily in Dallas, Texas; Bridgeton, Missouri and St. Charles, Missouri. Our United States based employees are not otherwise represented by any labor organization.

 

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OUR R ELATIONSHIP WITH FIRST DATA AFTER THE SPIN-OFF

 

General

 

Immediately prior to the spin-off, we will be a wholly-owned subsidiary of First Data. After the spin-off, First Data will not have any ownership interest in our common stock, and we will be an independent, publicly traded company.

 

We will enter into agreements with First Data prior to the spin-off to govern the terms of the spin-off and to define our ongoing relationship following the spin-off, allocating responsibility for obligations arising before and after the spin-off, including obligations with respect to liabilities relating to First Data’s business and to Western Union’s business and obligations with respect to our employees, certain transition services and taxes. We will enter into these agreements with First Data while we are still a wholly-owned subsidiary of First Data and certain terms of these agreements are not necessarily the same as could have been obtained from an independent third party.

 

The following descriptions are summaries of the terms of the agreements we believe to be material. We encourage you to read, in their entirety, each of the agreements when they become available. The terms of these agreements have not yet been finalized; changes, some of which may be material, may be made prior to the spin-off.

 

Transactions Occurring Prior to the Distribution Date

 

Several days prior to the distribution date, we will distribute to First Data approximately $210.0 million in cash from existing cash balances.

 

Two days prior to the distribution date, FFMC will declare and pay to First Data, as its sole stockholder, a dividend in the form of a promissory note of approximately $2.4 billion. Simultaneously with the payment of the dividend by FFMC, First Data will contribute to FFMC the outstanding capital stock of the subsidiary of First Data that owns Vigo.

 

One day prior to the distribution date, FFMC will declare a dividend to First Data of the outstanding capital stock of First Data Commercial Services Holdings, Inc., or FDCS, with a record date as of the close of business on the date it is declared and a payment date of the distribution date. As described below, pursuant to the separation and distribution agreement, prior to the payment of such dividend, FFMC will contribute to FDCS the outstanding capital stock of CESI Holdings, Inc. and Telecheck International, Inc., and other subsidiaries currently owned by FFMC that operate businesses not a part of the money transfer and consumer payments businesses.

 

Separation and Distribution Agreement

 

The separation and distribution agreement will provide, among other things, for the principal corporate transactions required to effect the contribution by First Data of the subsidiaries that operate our businesses, the distribution of our common stock to the holders of record of First Data common stock and certain other agreements governing our relationship with First Data after the spin-off.

 

The Recapitalization, Contribution and Separation. The separation and distribution agreement is expected to provide that, subject to the terms and conditions in the separation and distribution agreement,

 

    First Data will increase the authorized number of shares of our common stock to 2,000,000,000;

 

    FFMC will contribute to FDCS the outstanding capital stock of CESI Holdings, Inc. and Telecheck International, Inc. and other subsidiaries currently owned by FFMC that operate businesses not a part of the money transfer and consumer payments business;

 

    FFMC will distribute to First Data the outstanding capital stock of FDCS and we will transfer to First Data other assets related to the businesses of First Data that are not a part of the money transfer and consumer payments businesses;

 

    First Data will contribute to us the outstanding capital stock of (i) FFMC, (ii) Paymap, (iii) Western Union Services, Inc. and (iv) ECG, as well as certain patents and real estate and First Data’s interest in one of our agents;

 

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    in consideration for the contribution, we will transfer to First Data (i) approximately $100.0 million in cash, which will be financed through borrowings under the revolving credit facility we expect to enter into on the distribution date, (ii) the Western Union notes with an aggregate principal amount of approximately $1.0 billion and (iii) shares of our common stock sufficient to effect the distribution;

 

    First Data will use commercially reasonable efforts to have us released from all financial instruments that are primarily for its benefit and on which we are primarily or secondarily liable and we will use commercially reasonable efforts to have First Data released from all financial instruments that are primarily for our benefit and on which First Data is primarily or secondarily liable;

 

    First Data will pay us $778.8 million to repay intercompany notes and related accrued in