First Data 2011 Annual Report Download - page 51

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 represents obligations related to hardware purchases, including purchases of ATMs and
terminals, as well as software licenses, hardware and software maintenance and support, technical consulting services and
telecommunications services.
(f) Other includes obligations related to materials, data, non-technical contract services, facility security, investor management fees,
maintenance and marketing promotions.
As of December 31, 2011, the Company had approximately $399 million of tax contingencies comprised of approximately $373
million reported in long-term income taxes payable in the "Other long-term liabilities" line of the Consolidated Balance Sheets,
including approximately $18 million of income tax liabilities for which Western Union is required to indemnify the Company, and
approximately $26 million recorded as an increase of the Company's deferred tax liability. Timing of tax payments is dependent upon
various factors which cannot be reasonably estimated at this time.
Critical Accounting Policies
Stock-based compensation. The Company has 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 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
stock-based compensation.
During the years ended December 31, 2011, 2010 and 2009, time options and performance options were granted under the stock
plan. The time options and performance options have a contractual term of 10 years. Time options vest equally over a three to five
year period from the date of issuance and performance options vest based upon the Company achieving certain EBITDA targets. The
options also have certain accelerated vesting provisions upon a change in control, a qualified public offering, or certain termination
events. During 2010, the Company modified the terms of its plan and due to the nature of call rights and vesting conditions associated
with the options and awards, the Company will recognize expense associated with the modifications and future grants only upon the
occurrence of certain events. Refer to Note 13 to the Consolidated Financial Statements included in Item 8 of this Form 10-K for
details regarding the Company's stock-based compensation plan.
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,
49