First Data 2007 Annual Report Download - page 196

Chase Paymentech
NOTES TO COMBINED FINANCIAL STATEMENTS – CONTINUED
For the years ended December 31, 2007 and 2006 and
the year ended December 31, 2005 (unaudited)
Depreciation and amortization expense related to property and equipment was $47.4 million, $38.8 million, and $34.4 million for the years ended
December 31, 2007, 2006, and 2005, respectively. For the years ended December 31, 2007 and 2006, software costs of $13.8 million and $11.4 million were
capitalized, respectively.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases office space and certain equipment under operating leases with remaining terms ranging up to eleven years. The office space leases
contain renewal options and generally require the Company to pay certain operating expenses.
Future minimum lease commitments under non-cancelable leases as of December 31, 2007 are as follows (in thousands):
2008 $ 8,645
2009 8,970
2010 9,631
2011 8,990
2012 9,122
Thereafter 33,169
$78,527
The combined statements of income and comprehensive income include rental expense for operating leases of $11.7 million, $9.7 million, and $8.6 million
for the years ended December 31, 2007, 2006, and 2005, respectively.
Guarantees
Under the card brand rules, when a merchant acquirer processes bankcard transactions, it has certain obligations for those transactions. These obligations arise
from disputes between cardholders and merchants due to the cardholders' dissatisfaction with merchandise quality or the merchants' service, which are not
resolved with the merchant. In such cases, the transactions are "charged back" to the respective merchants and the related purchase amounts are refunded to
the cardholders by the card issuer. If the merchant does not fund the refund due to insolvency, bankruptcy or other extraneous reasons, the Company, in
certain circumstances is liable for the full amount of the transaction. This obligation is considered a guarantee under FIN No. 45, Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.
A cardholder generally has until the later of four months from the date of purchase or delivery of products or services to present a chargeback. Management
believes that the maximum exposure for its obligation at any time does not exceed the total amount of bankcard transactions processed for the preceding four-
month period. For the four-month periods from September through December 2007, 2006, and 2005, these amounts were $254.3 billion, $231.5 billion, and
$175.0 billion, respectively.
The Company records a provision for its estimated obligation based upon factors surrounding the credit risk of specific customers, historical credit losses,
current processing volume and other relevant factors. As shown in Note 6, for the years ended December 31, 2007, 2006, and 2005, the Company incurred
aggregate merchant credit losses, net of recoveries, of $9.6 million, $9.0 million, and $9.6 million, respectively, on total processed volumes of $719.1 billion,
$660.6 billion, and $332.1 billion, respectively.
The Company calculates its provision and evaluates the appropriateness of its reserve on a monthly basis. The provision for credit losses is included in
operating expenses on the combined statements of income and comprehensive income. The reserve for this obligation is included in accounts receivable on
the combined balance sheets. The Company believes the recorded reserve approximates the fair value of its contingent obligation.
The Company also requires cash deposits, guarantees and letters of credit from certain merchants to minimize its obligation. As of December 31, 2007 and
2006, the Company held cash deposits of $524.2 million and $651.7 million, respectively, which were classified as merchant deposits on the combined
balance sheets. The Company also held collateral in the form of letters of credit totaling $203.2 million and $192.1 million at December 31, 2007 and 2006,
respectively, and merchant certificates of deposit totaling $51.9 million and $49.0 million at December 31, 2007 and 2006, respectively.
194