Western Union 2008 Annual Report Download - page 62

WESTERN UNION
2008 Annual Report
6060
Statement of Income reflects charges incurred prior to
the Spin-off from First Data and its affiliates for these
services of $152.4 million for the year ended December 31,
2006. Included in these charges are amounts recognized
for stock-based compensation expense, as well as net
periodic benefit income associated with the Company’s
pension plans.
Included in “Interest income from First Data, net” in
the Consolidated Statement of Income for the year ended
December 31, 2006 was interest income of $37.4 million
earned on notes receivable from First Data subsidiaries
and interest expense of $1.7 million incurred on notes
payable to First Data which were settled in connection
with the Spin-off. Certain of the notes receivable were
euro denominated, and as such, the Company had related
foreign currency swap agreements to mitigate the foreign
exchange impact to the Company on such notes. Included
in “Foreign exchange effect on notes receivable from First
Data, net” in the Consolidated Statement of Income during
the year ended December 31, 2006 are foreign exchange
gains of $10.1 million from the revaluation of these euro
denominated notes receivable and related foreign cur-
rency swap agreements.
During the period from January 1, 2006 through
September 29, 2006, the Company recognized commis-
sion revenues from a First Data subsidiary in connection
with its money order business of $23.6 million. Subsequent
to the Spin-off, the Company continues to recognize com-
mission revenue from this First Data subsidiary.
Other Related Party Transactions
The Company has ownership interests in certain of its
agents accounted for under the equity method of account-
ing. The Company pays these agents, as it does its other
agents, commissions for money transfer and other services
provided on the Company’s behalf. Commissions paid
to these agents for the years ended December 31, 2008,
2007 and 2006 totaled $305.9 million, $256.6 million
and $212.2 million, respectively. For those agents where
an ownership interest was acquired during the year, only
amounts paid subsequent to the investment date have
been reflected as a related party transaction.
6. Commitments and Contingencies
In the normal course of business, Western Union is subject
to claims and litigation. Management of Western Union
believes such matters involving a reasonably possible
chance of loss will not, individually or in the aggregate,
result in a material adverse effect on Western Union’s
financial position, results of operations and cash flows.
Western Union accrues for loss contingencies as they
become probable and estimable.
On September 25, 2008, the Company was served
with a purported class action complaint alleging that
Western Union willfully and negligently violated the Fair
and Accurate Credit Transactions Act of 2003 (“FACTA”)
by providing debit and credit card expiration dates on
electronically printed receipts for transactions initiated
on the Company’s website. On November 12, 2008, the
Company received notification that the class action com-
plaint was voluntarily dismissed.
The Company has $77.0 million in outstanding letters
of credit and bank guarantees at December 31, 2008
with expiration dates through 2015, certain of which con-
tain a one-year renewal option. The letters of credit and
bank guarantees are primarily held in connection with
lease arrangements and certain agent agreements. The
Company expects to renew the letters of credit and bank
guarantees prior to expiration in most circumstances.
Pursuant to the separation and distribution agree-
ment with First Data in connection with the Spin-off (see
Note 1), First Data and the Company are each liable for,
and agreed to perform, all liabilities with respect to their
respective businesses. In addition, the separation and
distribution agreement also provides for cross-indemnities
principally designed to place financial responsibility for the
obligations and liabilities of the Company’s business with
the Company and financial responsibility for the obliga-
tions and liabilities of First Data’s retained businesses with
First Data. The Company also entered into a tax allocation
agreement that sets forth the rights and obligations of First
Data and the Company with respect to taxes imposed on
their respective businesses both prior to and after the
Spin-off as well as potential tax obligations for which the
Company may be liable in conjunction with the Spin-off
(see Note 10).
7. Investment Securities
Investment securities, classified within “Settlement assets”
in the Consolidated Balance Sheets, consist primarily
of high-quality state and municipal debt instruments.
Substantially all of the Company’s investment securities
were marketable securities during all periods presented.
The Company is required to maintain specific high-quality,
investment grade securities and such investments are
restricted to satisfy outstanding settlement obligations
in accordance with applicable state regulations. Western
Union does not hold financial instruments for trading pur-
poses. All investment securities are classified as available-
for-sale and recorded at fair value. Investment securities
are exposed to market risk due to changes in interest
rates and credit risk. Western Union regularly monitors
credit risk and attempts to mitigate its exposure by mak-
ing high-quality investments. At December 31, 2008, the
significant majority of the Company’s investment securities
had credit ratings of “AA-” or better from a major credit
rating agency.
Unrealized gains and losses on available-for-sale secu-
rities are excluded from earnings and presented as a
component of accumulated other comprehensive income
or loss, net of related deferred taxes. Proceeds from the
sale and maturity of available-for-sale securities during
the years ended December 31, 2008, 2007 and 2006
were $2,811.5 million, $177.7 million and $62.6 million,
respectively.
During 2008, the Company increased its investment
securities primarily through the addition of various state
and municipal variable rate demand note securities which
can be put (sold at par) typically on a daily basis with settle-
ment periods ranging from the same day to one week,
but that have maturity dates ranging from 2012 to 2046.
Generally, these securities are used by the Company for