First Data 2009 Annual Report Download - page 244

Chase Paymentech
NOTES TO COMBINED FINANCIAL STATEMENTS
For the years ended December 31, 2007 and 2006 and
the year ended December 31, 2005 (unaudited) (Continued)
NOTE 10—DEBT
Pursuant to an asset purchase agreement, the Company was required to pay five annual non-interest bearing
installments of CAD $20.0 million to The Bank of Nova Scotia (Scotiabank), the first of which was paid in
November 2003. The final payment was made in November 2007. The combined balance sheet as of
December 31, 2006 includes this amount as current portion of long-term debt, net of imputed interest (at a rate of
1.75%), of $246 thousand. Related interest expense of $264 thousand, $552 thousand, and $781 thousand, is
included in interest expense in the combined statements of income and comprehensive income for the years
ended December 31, 2007, 2006, and 2005, respectively.
NOTE 11—CASH FLOW HEDGES
The Company’s Canadian operations utilizes derivative financial instruments to enhance its ability to
manage cash flow risks with respect to changes in foreign currency exchange rates. These risks arise from the
Canadian operation’s U.S. dollar-denominated promissory note payable to the Company’s U.S. operations, and
the repayment of such debt. The Company’s derivative instruments consist of short-term foreign currency
forward contracts. In 2005, the maximum term of these forward contracts was three months. Throughout 2006
and 2007, the Company’s strategy has been to hedge its foreign currency risks using contracts that mature within
one month.
The Company designates its forward derivative contracts as cash flow hedges accounted for pursuant to
SFAS 133. Changes in the fair value of the contracts are initially recorded to accumulated other comprehensive
income, and in each reporting period, an amount that offsets the hedged item’s transaction gain or loss is
reclassified to foreign currency exchange on the accompanying combined statements of income and
comprehensive income. The net loss on derivatives for the years ended December 31, 2007, 2006, and 2005, was
$1.8 million, $2.3 million, and $956 thousand, respectively. No contracts were held as of December 31, 2007 or
2006.
The Company formally documents all relationships between hedging instruments and the underlying hedged
items, as well as its risk management objective and strategy for undertaking the hedge transaction. The Company
applies strict policies to manage risks, including prohibition against derivatives trading, derivatives market-
making or any other speculative activities.
The Company’s counterparty in all derivative transactions is JPMorgan Chase. The credit risk inherent in
these agreements represents the possibility that a loss may occur from the nonperformance of the counterparty to
the agreements. The Company believes its risk is minimal. The Company’s exposure is in U.S. dollars, so there is
minimal risk that appropriate derivatives to maintain the hedging program would not be available in the future.
NOTE 12—INCOME TAXES
The components of pretax income excluding minority interest are as follows (in thousands):
For the years ended December 31,
2007 2006 2005
Income before income taxes and minority interest—domestic ............. $638,157 $535,640 $350,123
Income before income taxes and minority interest—foreign ............... 24,893 12,476 (3,413)
Total .......................................................... $663,050 $548,116 $346,710
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