First Data 2009 Annual Report Download - page 81

FIRST DATA CORPORATION
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
The Company did not meet the 2009 and 2008 annual EBITDA targets 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. The Company 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. The options also have certain accelerated vesting provisions upon a change in control, an initial public
offering, and certain termination costs.
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
assets” and the obligation to repay the collateral if it is not needed 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):
At December 31, 2009 2008
Cash and cash equivalents collateral ..................................... $721.8 $730.3
Collateral in the form of letters of credit .................................. 123.7 197.3
Total collateral ...................................................... $845.5 $927.6
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.
The Company’s contingent obligation relates to imprecision in its estimates of required collateral. A
provision for this obligation is recorded based primarily on historical experience of credit losses and other
relevant factors such as economic downturns or increases in merchant fraud. Merchant credit losses are included
in “Cost of services” in the Company’s Consolidated Statements of Operations. The following table presents the
aggregate merchant credit losses incurred compared to total dollar volumes processed:
Successor Predecessor
Year ended December 31,
Period from
September 25,
2007
through
December 31,
2007
Period from
January 1,
2007
through
September 24,
20072009 2008
FDC and consolidated and unconsolidated alliances credit
losses (in millions) .............................. $ 93.3 $ 40.4 $ 14.0 $ 33.7
FDC and consolidated alliances credit losses
(in millions) ................................... $ 89.7 $ 35.0 $ 12.0 $ 27.9
Total dollar volume acquired (in billions) .............. $1,259.1 $1,437.9 $443.0 $1,101.5
81