First Data 2008 Annual Report Download - page 90

FIRST DATA CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
On a quarterly basis, the Company estimates the fair value of Holdings common stock with the assistance of a third party valuation firm. The Company
relies on the results of a discounted cash flow analysis but also considers the results of a market approach. The discounted cash flow analysis is dependent on
a number of significant management assumptions regarding the expected future financial results of the Company and Holdings as well as upon estimates of an
appropriate cost of capital. A sensitivity analysis is performed in order to establish a narrow range of estimated fair values for the shares of Holdings common
stock. The market approach consists of identifying a set of guideline public companies. Multiples of historical and projected EBITDA determined based on
the guideline companies is applied to Holdings' EBITDA in order to establish a range of estimated fair value for the shares of Holdings common stock. The
Company considers the results of both of these approaches, placing primary reliance on the discounted cash flow analysis. The concluded range of fair values
is also compared to the value determined by the Board of Directors for use in transactions, including stock sales and repurchases. After considering all of
these estimates of fair value, the Company then determines a single estimated fair value of the stock to be used in accounting for share based compensation.
The current stock plan includes performance options that vest based upon Company EBITDA targets for the years 2008 through 2012. These EBITDA
targets have both annual and cumulative components. The Company did not meet the 2008 annual EBITDA target associated with the performance stock
options. In addition, the Company could not conclude it is probable that the annual or cumulative future EBITDA targets associated with the performance
stock options will be met given the current economic conditions. As such, the Company reversed $7.7 million of stock compensation expense in the fourth
quarter 2008 that was recognized in the first three quarters of 2008 which represents the entire accrual and is not planning to recognize expense related to
these options in future periods unless or until attainment of applicable targets is judged to be probable.
Reserve for Merchant Credit Losses and Check Guarantees
With respect to the merchant acquiring business, the Company's merchant customers (or those of its unconsolidated alliances) have the liability for any
charges properly reversed by the cardholder. In the event, however, that the Company is not able to collect such amounts from the merchants due to merchant
fraud, insolvency, bankruptcy or another reason, the Company may be liable for any such reversed charges. The Company's risk in this area primarily relates
to situations where the cardholder has purchased goods or services to be delivered in the future such as airline tickets.
The Company's obligation to stand ready to perform is minimal in relation to the total dollar volume processed. The Company requires cash deposits,
guarantees, letters of credit or other types of collateral from certain merchants to minimize this obligation. Collateral held by the Company is classified within
"Settlement obligations" on the Company's Consolidated Balance Sheets. The amounts of collateral held by the Company and its unconsolidated alliances are
as follows (in millions):
Successor
At December 31, 2008 2007
Cash and cash equivalents collateral $ 730.3 $ 891.5
Collateral in the form of letters of credit 197.3 282.5
Total collateral $ 927.6 $ 1,174.0
The Company also utilizes a number of systems and procedures to manage merchant risk. Despite these efforts, the Company historically has
experienced some level of losses due to merchant defaults.
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