First Data 2009 Annual Report Download - page 80

FIRST DATA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
At December 31, 2009, the Company had approximately $595 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 $137 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 plan also
allows for the Company to award shares and options to certain management employees. The expense associated
with this plan is recorded by FDC. FDC uses the Black-Scholes option pricing model to measure the fair value of
stock option 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 Holdings 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 Holdings.
On a quarterly basis, the Company estimates the fair value of Holdings common stock. Periodically, a third
party valuation firm provides assistance with certain key assumptions and performs calculations using the
valuation methods discussed below. All key assumptions and valuations were determined by and are the
responsibility of management. 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
following the five years after grant date. These EBITDA targets have both annual and cumulative components.
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