First Data 2008 Annual Report Download - page 89

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
(c) The amount of pension plan contributions depends upon various factors that cannot be accurately estimated beyond a one-year time frame.
(d) Many of the Company's contracts contain clauses that allow the Company 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 the
Company does not provide written notification of its intent to terminate the contract. Obligations under certain contracts are usage-based and are,
therefore, estimated in the above amounts. Historically, the Company has not had any significant defaults of its contractual obligations or incurred
significant penalties for termination of its contractual obligations.
(e) Technology and telecommunications includes obligations related to hardware purchases, which includes purchases of ATMs and terminals, software
licenses, hardware and software maintenance and support, technical consulting services and telecommunications services. The Company anticipates it
will renew approximately $225 million of significant telecommunications contracts that expire during 2009. Payments related to these contracts are
included in the table above through the current expiration date.
(f) Other includes obligations related to materials, data, non-technical contract services, facility security, investor management fees, maintenance and
marketing promotions.
The Company adopted Financial Account Standards Board ("FASB") Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—An
Interpretation of FASB Statement No. 109," in January 2007. At December 31, 2008, the Company had approximately $532 million of tax contingencies
included in long-term income taxes payable in the "Other long-term liabilities" line of the Consolidated Balance Sheets, including approximately $132 million
of income tax liabilities for which Western Union is required to indemnify the Company. Timing of tax payments is dependent upon various factors which
cannot be reasonably estimated at this time.
Critical Accounting Policies
Stock-Based Compensation
Upon the September 24, 2007 close of the merger, the vesting of FDC stock options, restricted stock awards and restricted stock units (including
Western Union stock options, restricted stock awards and restricted stock units held by FDC personnel) was accelerated and the associated expense recorded
in the predecessor financial statements. These stock-based compensation plans were terminated at that time. On October 26, 2007, the Company established a
stock incentive plan for certain management employees of FDC and its affiliates ("stock plan"). This stock plan is at the Holdings level which owns 100% of
FDC's equity interests. The stock plan provides the opportunity for certain management employees to purchase shares in Holdings and then receive a number
of stock options or restricted stock based on a multiple of their investment in such shares. The expense associated with this plan is recorded by FDC. FDC
uses the Black-Scholes option pricing model to measure the fair value of equity-based awards. The Company chose the Black-Scholes model based on the
Company's experience with the model and the determination that the model could be used to provide a reasonable estimate of the fair value of awards with
terms such as those issued by Holdings. Option-pricing models require estimates of a number of key valuation inputs including expected volatility, expected
dividend yield, expected term and risk-free interest rate. Certain of these inputs are more subjective than in previous periods due to FDC being privately held
and thus not having objective historical or public information. The most subjective inputs are the expected term, expected volatility and determination of share
value. The expected term is determined using probability weighted expectations and expected volatility is determined using a selected group of guideline
companies as surrogates for FDC.
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