First Data 2012 Annual Report Download - page 47

As of December 31, 2012, the Company had approximately $317 million of tax contingencies comprised of approximately $279
million reported in long-term income taxes payable in the “Other long-term liabilities” line of the Consolidated Balance Sheets,
including approximately $4 million of income tax liabilities for which Western Union is required to indemnify the Company, and
approximately $38 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.
In February 2013, as discussed in Note 8 to the Company’ s Consolidated Financial Statements included in Item 8 of this
Form 10-K, FDC issued $785 million aggregate principal amount of 11.25% senior unsecured notes due January 15, 2021. The
proceeds from the offering were used to repurchase FDC’ s outstanding 10.55% senior unsecured notes and pay related fees and
expenses. Additionally, in February 2013, FDC entered into a Joinder Agreement relating to its credit agreement, pursuant to which
FDC incurred $258 million in new term loans maturing on September 24, 2018. The net cash proceeds from the new term loans were
used to repay all of its outstanding term loan borrowings maturing in 2014 and to pay related fees and expenses.
The combined effect of these events did not materially impact the total amount of the Company’ s outstanding obligations but
increased future interest payments and extended the maturity of $0.3 billion of obligations from 2014 to 2018 and $0.8 billion of
obligations from 2015 to 2021.
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.
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variable rate debt and the associated interest rate swaps were calculated using interest rates as of December 31, 2012.
(b) Represents future payments on existing capital leases, including interest expense, through scheduled expiration dates.
(c) Includes future pension plan contributions for all plans in 2013 and future contractual commitments for the United Kingdom
(“U.K.”) plan through 2017 which are subject to change. The amount of pension plan contributions depends upon various
factors that cannot be accurately estimated beyond a one-year time frame other than the U.K. plan.
(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 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.