First Data 2013 Annual Report Download - page 48

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.
As of December 31, 2013, the Company had approximately $309 million of tax contingencies comprised of approximately $265 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 $44 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.

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.
As of December 31, 2013, time-based options were outstanding under the stock plan. The time options have a contractual term of 10 years. Time
options vest equally over a three to five year period from the date of issuance. The options also have certain accelerated vesting provisions upon a change in
control, a qualified public offering, or certain termination events.
The assumptions used in estimating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve
inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, stock-based
compensation expense could be different in the future.
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.
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