UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| | | |
| (Mark One) | | |
| |
| þ | | Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 2009.2010. |
| o | | Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to . |
Commission FileNumber: 1-31950
MONEYGRAM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
| | | |
Delaware | | 16-1690064 |
| (State or other jurisdiction of | | (I.R.S. Employer |
incorporation or organization) | | Identification No.) |
1550 Utica Avenue South, Suite 100,2828 N. Harwood St., 15th Floor
Minneapolis, MinnesotaDallas, Texas
(Address of principal executive offices)
| | 5541675201
(Zip Code) |
Registrant’s telephone number, including area code
(952) 591-3000(214) 999-7552
Securities registered pursuant to Section 12(b) of the Act:
| | | |
Title of each class | | Name of each exchange on which registered |
| |
| Common stock, $0.01 par value | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule12b-2 of the Exchange Act. (Check one):
| | | | | | | |
Large accelerated filer o | | Accelerated filer þ | | Non-accelerated filer o
(Do not check if a smaller reporting company) | | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). Yes o No þ
The market value of common stock held by non-affiliates of the registrant, computed by reference to the last sales price as reported on the New York Stock Exchange as of June 30, 2009,2010, the last business day of the registrant’s most recently completed second fiscal quarter, was $146.2$203.9 million.
82,694,96483,620,522 shares of common stock were outstanding as of March 8, 2010.7, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Part III of this report is incorporated by reference from the registrant’s proxy statement for the 20102011 Annual Meeting.
PART I
Overview
MoneyGram International, Inc. (together with our subsidiaries, “MoneyGram,” the “Company,” “we,” “us” and “our”) is a leading global payment services company. Our major products include global money transfers, bill payment solutions and money orders. We help people and businesses by providing affordable, reliable and convenient payment services.
The MoneyGram® brand is recognized throughout the world. We offer more choices and more control for people separated from friends and family by distance or those with limited bank relationships to meet their financial needs. Our payment services are available at approximately 190,000227,000 agent locations in approximately 190 countries and territories. Our services enable consumers throughout the world to transfer money and pay bills, helping them meet the financial demands of their daily lives. Our payment services also help businesses operate more efficiently and cost-effectively.
Our principal executive offices are located at 2828 N. Harwood Street, Suite 1500, Dallas, Texas 75201, and our telephone number is(214) 999-7552. Our website address iswww.moneygram.com.
History and Development
We conduct our business primarily through our wholly owned subsidiary MoneyGram Payment Systems, Inc. (“MPSI”). Through its predecessor, Travelers Express Company, Inc. (“Travelers Express”), MPSI has been in operation for nearly 70 years. Travelers Express acquired MPSI in 1998, adding the MoneyGram brand to our Company and adding international money transfer services to our payment service offerings. In 2005, we consolidated the operations of Travelers Express with MPSI to eliminate costs of operating the two businesses under separate corporate entities. This completed the transition of our business from the Travelers Express brand to the MoneyGram brand, and we retired the Travelers Express brand.
In 2006, our subsidiary MoneyGram Payment Systems Italy, S.r.l. acquired the assets of Money Express S.r.l., our former super-agent in Italy. We also developed a retail strategy in Western Europe to offer our services through Company-owned retail stores and kiosks in addition to our typical agent model. Our subsidiary in France, MoneyGram France S.A., became a licensed financial institution in September 2006. As of December 31, 2009, we operate 32 Company-owned retail stores or kiosks in France and 33 in Germany. In 2007, we completed the acquisition of PropertyBridge, Inc. (“PropertyBridge”), a provider of electronic payment processing services for the real estate management industry.
In March 2008, we completed a recapitalization pursuant to which we received an infusion of $1.5 billion of gross equity and debt capital.capital (collectively, the “2008 Recapitalization”). The equity component of the recapitalization consisted of the sale to affiliates of Thomas H. Lee Partners, L.P. (“THL”) and affiliates of Goldman, Sachs & Co. (“Goldman Sachs,” and collectively with THL, the “Investors”) in a private placement of 760,000 shares of Series B Participating Convertible Preferred Stock of the Company (the “B Stock”) andSeries B-1 Participating Convertible Preferred Stock of the Company (the “B-1 Stock,” and collectively with the B Stock, the “Series B Stock”) for an aggregate purchase price of $760.0 million. We also paid Goldman Sachs an investment banking advisory fee equal to $7.5 million in the form of 7,500 shares of the B-1 Stock.
As part of the recapitalization,2008 Recapitalization, our wholly owned subsidiary, MoneyGram Payment Systems Worldwide, Inc. (“Worldwide”), issued Goldman Sachs $500.0 million of senior secured second lien notes with a10-year maturity (the “Notes”). We also entered into a senior secured amended and restated credit agreement with JPMorgan Chase Bank, N.A. (“JPMorgan”) as agent for a group of lenders, bringing the total facility to $600.0 million (the “Senior Facility”).million. The amended facility included $350.0 million in two term loan tranches and a $250.0 million revolving credit facility. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — 2008 Recapitalization” for further information regarding the recapitalization.2008 Recapitalization.
In 2008, we completed the acquisition of MoneyCard World Express, S.A. (“MoneyCard”) and Cambios Sol, S.A., two money transfer super-agents located in Spain. Thereafter, we merged Cambios Sol, S.A. into MoneyCard and now maintain MoneyCard as our subsidiary. In 2009, we acquired the French assets of R. Raphaels & Sons PLC
1
(“Raphaels Bank”). In January 2010, we acquired the assets of our agent in the Netherlands, Blue Dolphin Financial Services N.V. Finally, wePLC. We also sold FSMC, Inc. and continued the exit of our ACH Commerce business in 2009. In 2010, we acquired our agent in the Netherlands, Blue Dolphin Financial Services N.V.
1
Recent Developments
On March 7, 2011, we entered into a Recapitalization Agreement (the “Recapitalization Agreement”) with THL, as the holder of all of the B Stock, and Goldman Sachs, as the holder of all of the B-1 Stock. Pursuant to the Recapitalization Agreement, (i) THL will convert all of the shares of B Stock into shares of our common stock in accordance with the Certificate of Designations, Preferences and Rights of Series B Participating Convertible Preferred Stock of MoneyGram International, Inc., (ii) Goldman Sachs will convert all of the shares of B-1 Stock into shares of Series D Participating Convertible Preferred Stock of the Company (the “D Stock”) in accordance with the Certificate of Designations, Preferences and Rights ofSeries B-1 Participating Convertible Preferred Stock of MoneyGram International, Inc., and (iii) THL will receive approximately 28.2 million additional shares of our common stock and $140.8 million in cash, and Goldman Sachs will receive approximately 15,504 additional shares of D Stock (equivalent to approximately 15.5 million shares of our common stock) and $77.5 million in cash (such transactions, collectively, the “2011 Recapitalization”).
The 2011 Recapitalization has been approved unanimously by our board of directors following the recommendation of a special committee of the board of directors comprised of independent and disinterested members of our board of directors, and is subject to various conditions contained in the Recapitalization Agreement, including the approval of the 2011 Recapitalization or any other matter that requires approval under the Recapitalization Agreement (collectively the “Stockholder Approval Matters”) by the affirmative vote of a majority of the outstanding shares of our common stock and B Stock (on an as-converted basis), voting as a single class, and the affirmative vote of a majority of the outstanding shares of our common stock (not including the B Stock or any other stock of the Company held by any Investor), in each case voting on the Stockholder Approval Matters and the Company’s receipt of sufficient financing to consummate the 2011 Recapitalization.
Concurrently with entering into the Recapitalization Agreement, Worldwide and the Company entered into a consent agreement (the “Consent Agreement”) with certain affiliates of Goldman Sachs (the “GS Note Holders”) who are holders of the Notes. Pursuant to the Consent Agreement, the parties thereto have agreed to enter into a supplemental indenture to the indenture governing the Notes that will, among other things, amend the indenture in order to permit the 2011 Recapitalization. In addition, the Company is currently working with certain of its relationship banks to put in place a new senior secured credit facility comprised of a revolver and a term loan, which would refinance the Company’s existing senior secured credit facility and provide the funding for the 2011 Recapitalization.
The foregoing description of the Recapitalization Agreement and the Consent Agreement is not a complete description of all of the parties’ rights and obligations under the Merger Agreement and the Consent Agreement and is qualified in its entirety by reference to the Recapitalization Agreement and the Consent Agreement, which are filed as Exhibit 2.1 and Exhibit 10.1, respectively, to our Current Report onForm 8-K as filed with the SEC on March 9, 2011.
Our Business
Our global money transfer and bill payment services are our primary revenue drivers. Money transfers are transfers of funds between consumers from one location to another. The sender pays a fee based on the transfer amount to be transferred and the location at whichdestination location. The designated recipient may receive the funds are to be received. The transferred funds are made available for payment in cash to the designated recipient at any agent location. In select countries, the designated recipient may also receive the transferred funds via a deposit to the recipient’s bank account, mobile phone account or prepaid card. We typically pay both our “send” and “receive” agents a commission for the transaction.
We provide money transfer services through our worldwide network of agents and through Company-owned retail locations in the United States and Western Europe. We also offer our money transfer services on the Internet via our MoneyGram Online service.service in the United States and through agent websites in Italy, Saudi Arabia and Japan. In Italy, Abu Dhabi and the Philippines, we also offer our money transfer services via mobile phonephone. We also offer our services through kiosks, ATM’s, receive cards and intend to expand our mobile phone money transfer network.direct-to-bank account products in various markets around the world.
2
Our primary bill payment service offering is our ExpressPayment® service, which is offeredwe offer at all of our money transfer agent locations in the United States and at certain agent locations in select Caribbean countries. OurThrough our ExpressPayment service, enables a consumer tocan pay cash for bills at an agent location for bills and obtainsame-day notification of creditpayment to the consumer’s account with their biller.its creditor (a “biller”). Our consumers can also use our ExpressPayment service to load and reload prepaid debit cards. Our ExpressPayment bill payment service is also available for payments to select billers via the Internet atwww.moneygram.com. www.moneygram.com.
We also derive revenue through our money order and official check services. We provide money orders through retail and financial institutions located throughout the United States and Puerto Rico, and we provide official check outsourcing services to financial institutions across the United States. Consumers use our money orders to make bill payments or in lieu of cash or personal checks. Official checks are used by consumers where a payee requires a check drawn on a bank and by financial institutions to pay their own obligations.
During 2010, 2009 2008 and 2007,2008, our 10 largest agents accounted for 50 percent, 48 percent 44 percent and 3644 percent, respectively, of our total company fee and investment revenue and 5354 percent, 53 percent and 53 percent, respectively, of the fee and investment revenue of our Global Funds Transfer segment. Walmart Stores, Inc. (“Walmart”) is our only agent that accounts for more than 10 percent of our total company fee and investment revenue. In 2010, 2009 2008 and 2007,2008, Walmart accounted for 30 percent, 29 percent 26 percent and 2026 percent, respectively, of our total company fee and investment revenue, and 32 percent, 3132 percent and 2931 percent, respectively, of the fee and investment revenue of our Global Funds Transfer segment. Our contract with Walmart in the United States, which runs through January 2013, provides for Walmart’s sale of our money order and money transfer services and real-time, urgent bill payment services at its retail locations on an exclusive basis. The term of our agreement with Walmart runs through January 2013.
Our Segments
During the fourth quarter of 2009, we revised our segment reporting to reflect changes in how we manage our business, review operating performance and allocate resources. We now manage our business primarily through two segments: Global Funds Transfer and Financial Paper Products. Following is a descriptionThe table below presents the components of each segment.our consolidated revenue associated with our segments for the year ended December 31:
| | | | | | | | | | | | | |
| | | 2010 | | | 2009 | | | 2008 | |
| |
| Global Funds Transfer | | | | | | | | | | | | |
| Money transfer | | | 79.4 | % | | | 76.7 | % | | | 68.8 | % |
| Bill payment | | | 10.8 | % | | | 11.6 | % | | | 11.1 | % |
| Financial Paper Products | | | | | | | | | | | | |
| Money order | | | 5.9 | % | | | 6.4 | % | | | 6.8 | % |
| Official check | | | 3.5 | % | | | 4.1 | % | | | 12.0 | % |
| Other | | | 0.4 | % | | | 1.2 | % | | | 1.3 | % |
| | | | | | | | | | | | | |
| Total revenue | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | | | | | |
Additional financial information about our segments and geographic areas appears in Note 16, “Segment Information,” of the Notes to Consolidated Financial Statements.
Global Funds Transfer Segment
The Global Funds Transfer segment is our primary segment, providing money transfer and bill payment services to consumers, who are often “unbanked”unbanked or “underbanked.” “Unbanked consumers”underbanked. Unbanked consumers are those consumers who do not have a traditional relationship with a financial institution. “Underbanked consumers”Underbanked consumers are consumers who, while they may have a savings account with a financial institution, do not have a checking account. Other consumers who use our services are “convenience users”convenience users and “emergency users”emergency users who may have a checking account with a financial institution but prefer to use our services on the basis of convenience or to make emergency payments. We primarily offer services to consumers through third-party agents, including retail chains, independent retailers and financial institutions.
23
In 2009,2010, our Global Funds Transfer segment had total fee and investment revenue of $1,027.9$1,053.3 million. We continue to focus on the growth of our Global Funds Transfer segment outside of the United States. During 2010, 2009 2008 and 2007,2008, operations outside of the United States generated 28 percent, 27 percent 25 percent and 2125 percent, respectively, of our total company fee and investment revenue, and 31 percent of our Global Funds Transfer segment fee and investment revenue in all three years.
The Global Funds Transfer segment is managed as two geographical regions, the Americas and EMEAAP, to coordinate sales, agent management and marketing activities. The Americas region includes the United States, Canada, Mexico, the Caribbean and Latin America (including the Caribbean).America. The EMEAAP region includes Europe, the Middle East, Africa and the Asia Pacific region. In 2009,2010, we added 14,000approximately 37,000 net locations, tobringing our global agent network.network to approximately 227,000.
As of December 31, 2009,2010, we had 66,000approximately 69,400 agent locations in the Americas. WeAmericas, representing a 5 percent increase from December 31, 2009. Our locations in the Americas included approximately 40,000 locations in North America and 29,400 locations in Latin America, including approximately 13,500 locations in Mexico. In Ecuador, we added 3,2001,200 Banco De Guayaquil locations, and we added 700 Canada Post locations to our network, making our money transfer services available to over 6, 300 locations coast to coast across Canada. The addition of agent locations in the United States and Canada were more than offset by numerous agent closures during the year. In Brazil, we added 1,000 Itau Unibanco locations, bringing money transfer services to the bank’s network of nearly 5,000 locations. We also added nearly 1,200600 locations in Mexico Ecuador, Colombia and the Dominican Republic.by increasing our network with Uniteller Financial Services.
In the EMEAAP region, we added 16,600 agent locations in several key markets. Through our agreement with M. Lhuillier Financial Services, Inc., we added 1,200 agent locations in the Philippines. In India, we have relationships with 18 banks and now have more than 22,000 agent locations. The Bank of China offers our services at all of its 200-plus locations in Beijing and is expanding its offering of our services into its full network of 10,000 locations across the mainland. In Saudi Arabia, National Commerce Bank now offers our money transfer services at its 1,400 ATM locations, creating one of the largest money transfer networks in Saudi Arabia. We also significantly expanded our agent locations in Kenya, Ethiopia, Angola, Morocco, Thailand, South Korea, Romania, Cyprus, Sweden and Serbia. As of December 31, 2009,2010, we had 124,000approximately 157,600 agent locations in the EMEAAP region, representing a 1627 percent increase from December 31, 2008.2009. Our locations in the EMEAAP region included approximately 40,900 locations in Western Europe, 38,700 locations in Eastern Europe, 36,200 locations in the Indian subcontinent, 25,700 locations in the Asian Pacific, 12,300 locations in Africa and 3,800 locations in the Middle East. In the EMEAAP region, we added 33,600 agent locations in several markets, which represented a 27 percent increase in EMEAAP agent locations since December 31, 2009. We operate in over 11,000 locations in the Russian Federation primarily through our relationship with State Savings Bank of the Russian Federation (“Sberbank”) with 8,500 agent locations. In India, agent locations grew to 30,000 by adding UAE Exchange and Financial Services Limited and Thomas Cook India-Mumbai during 2010. The Bank of China now offers our services in 3,000 locations. We also expanded our agent locations in Morocco, Moldova, Indonesia, Nigeria, Philippines, Switzerland and Kazakhstan.
We provide Global Funds Transfer products and services utilizing a variety of proprietarypoint-of-sale platforms. Our platforms include AgentConnect®, which is integrated into an agent’spoint-of-sale system, and DeltaWorks® and Delta T3®, which are separate software and stand-alone device platforms. Through our FormFree® service, customers may contact our call center and a representative will collect transaction information over the telephone, entering it directly into our central data processing system. We also operate two customer care centers in the United States, and we contract for additional call center services in Bulgaria and the Dominican Republic.various countries. We provide call center services 24 hours per day, 365 days per year and provide customer service in overapproximately 30 languages.
Money Transfers.Transfers —We derive our money transfer revenues primarily from consumer transaction fees and the management of currency exchange spreads on money transfer transactions involving different “send” and “receive” currencies. We have corridor pricing capabilities that enable us to establish different consumer fees and foreign exchange rates for our money transfer services by location, for a broader segment such as defined ZIP code regions or for a widespread direct marketing area. We strive to maintain our money transfer consumer fees at a price point below our primary competitor and above the niche players in the market.
As of December 31, 2009,2010, we offer money transfers to consumers in a choice of local currency or United States dollarsand/or euros in 136138 countries, (“multi-currency”).which we refer to as multi-currency. Our multi-currency technology allows us to execute our money transfers directly between and among several different currencies. Where implemented, these capabilities allow our agents to settle with us in local currency and allow consumers to know the amount that will be received in the local currency of the receiving country, or in United StatesU.S. dollars or euros in certain countries.
As of December 31, 2009, our agent network consisted of approximately 190,000 money transfer agent locations in approximately 190 countries and territories worldwide. These agent locations are in the following geographic regions: 43,700 locations in Western Europe and the Middle East; 39,500 locations in North America; 26,700 locations in the Indian subcontinent; 26,500 locations in Latin America (including Mexico, which represents 12,900 locations); 25,800 locations in Eastern Europe; 19,800 locations in Asia Pacific; and 8,000 locations in Africa.
Bill Payment Services.Services —We derive our bill payment revenues primarily from transaction fees charged to consumers for each bill payment transaction completed. OurThrough our bill payment services, allow consumers tocan make urgent payments or pay routine bills through our network to certain creditors (“billers”).billers. We maintain relationships with billers in key
3
industries (also referred to as “verticals”). These industries include the credit card, mortgage, auto finance, telecommunications, corrections, satellite, property management, prepaid card and collections industries.
4
Our bill payment services also enable consumers to load and reload prepaid debit cards. Consumers with any Visa ReadyLink®-enabled prepaid card or any NetSpend® prepaid debit card can add funds to their cards at any of our United StatesU.S. agent locations. We also offer our MoneyGram AccountNow® Prepaid Visa card, which participates in the Visa ReadyLink, Interlink® and Plus® networks. The card can be used everywhere Visa is accepted and can be reloaded at any of our United StatesU.S. agent locations.
Our bill payment serviceservices also allowsallow customers to make low-cost, in-person payments of non-urgent utility bills for credit to a biller, typically within two to three days. Through our PropertyBridge service, we offer a complete bill payment solution to the property rental industry, including the ability to electronically accept security deposits and rent payments.
Financial Paper Products Segment
Our Financial Paper Products segment provides money orders to consumers through our retail and financial institution agent locations in the United States and Puerto Rico, and provides official check services for financial institutions in the United States.
In 2009,2010, our Financial Paper Products segment postedgenerated revenues of $122.8$109.5 million. Since early 2008, our investment portfolio has consisted of lower risk, highly liquid, short-term securities that produce a lower rate of return, which has resulted in lower revenues and profit margins in our Financial Paper Products segment.
Money Orders.Orders —We generate revenue from money orders by charging per item and other fees, as well as from the investment of funds underlying outstanding money orders, which generally remain outstanding for fewer than 10ten days. We sell money orders under the MoneyGram brand and on a private label or co-branded basis with certain of our large retail and financial institution agents in the United States.
In 2010, we issued approximately 174.2 million money orders through our network of 57,308 agent and financial institution locations in the United States and Puerto Rico. In 2009, we issued approximately 204.7 million money orders through our network of 61,092 agent and financial institution locations in the United States and Puerto Rico. In 2008, we issued approximately 245.1 million money orders through our network of 73,030 agent and financial institution locations in the United States and Puerto Rico.
Official Check Outsourcing Services.Services —As with money orders, we generate revenue from our official check outsourcing services from per item and other fees and from the investment of funds underlying outstanding official checks, which generally remain outstanding for fewer than 3.53.8 days. In 2009, we restructured our official check business model by reducing the commissions we pay our financial institution customers and increasing per item and other fees. As of December 31, 2009,2010, we provide official check outsourcing services at approximately 14,00012,000 branch locations of more than 1,6001,400 financial institutions. We issued 35.930.3 million and 42.435.9 million of official checks in 20092010 and 2008,2009, respectively.
Product and Infrastructure Development and Enhancements
We focus our product development and enhancements on innovative ways to transfer money and pay bills. We continually seek to provide our customers with added flexibility and convenience to help them meet the financial demands of their daily lives. We also invest in our infrastructure to increase efficiencies and support our strategic initiatives.
In 2009, we began reaching new customers through alternate money transfer delivery channels. We now offer our money transfer services on the Internet via our MoneyGram Online service in the United States and through agent websites in Italy, Saudi Arabia and Japan. In Italy, Abu Dhabi and the Philippines, we also offer our money transfer services via mobile phone and continue to enhance our money transferstransfer services to consumers through key agentsthe addition of kiosks, ATM’s, receive cards anddirect-to-bank account products in the Philippines and Italy.various markets. In January 2010, we launched the MoneyGram iPhonetm application, Mobile Companion, allowing consumers to search for agent locations, including the agent’s address, phone numbers and hours of operation. Mobile Companion also includes the convenience of a fee estimator that allows consumers to determine the fee for a transaction in advance.
We In 2010, we also introduced the convenience ofcash-to-card services through key agents in the Philippines, which allows their customers to collect remittances on a card, which can then be used to pay for purchases at participating stores.
4
We have made enhancements to our MoneyGram Online service and will continue to make further enhancements to provide a better consumer experience and efficiency in completing a transaction for our online customers, as well as more cost-effective transaction processing. We also enhanced our MoneyGram rewards program, and now offer members the ability to receive a text message on their mobile phones informing them that the funds they transferred have been picked up by their receiver. We expanded our MoneyGram Rewards program to Canada, Italy, France, Germany and Spain in 2009, and will continue its international expansion during 2010 and beyond. Total MoneyGram Rewards membership grew 30 percent from 2008.
5
We continue to invest in our infrastructure to provide a better overall consumer and agent experience, reduce our costs and create efficiencies. We have made important infrastructure enhancements to our settlement and commission processing, data management, financial systems and regulatory and compliance reporting. We are continuingcontinue our efforts to enhance our agent on-boarding process, improving our speed to market for new agents.
Sales and Marketing
We have global marketing, product management and strategic partnership teams located in numerous geographies, including the United States, United Kingdom, Italy, Spain, United Arab Emirates, India and China. We employ a strategy of developing products and marketing campaigns that are both global yet also tailored to address our customer base and local needs. We market our products and services through a number of dedicated sales and marketing teams, and we continually assess the effectiveness of our sales and marketing efforts. In the United States, a dedicated sales and marketing team markets our money transfer, money order and bill payment services. Dedicated sales and marketing teams also market our bill payment services directly to billers, including those in key verticals, and market our official check and money order services to financial institutions. In addition, we have sales and marketing teams that focus on strategic alliances and partnerships. Internationally, we have sales and marketing teams located in or near the following regions: Western Europe; Eastern Europe; Asia; Australia; the Middle East; Africa; Canada; Mexico; and Latin America.
Our sales and marketing efforts continue to be supported by aA wide range of consumer advertising methods.marketing methods continue to support our sales efforts. A key component of our advertising and marketing efforts is our global branding. OurWe use a marketing mix to support the global branding is a resultbrand, which includes traditional media and digital and social media, point of significant research and differentiates MoneyGram from other payment services providers. Signage continues to be a key method by which we build global awareness of our brand. We strive to ensure that our signs are displayed prominentlysale materials, MoneyGram-branded signage at our agent locations, a loyalty program and that our signage displays our brand consistently across the markets we serve. We also use traditional media methods to reach our consumers, including television, radiotargeted direct marketing programs and print advertising, as well as advertising our services at communityseasonal campaigns and cultural events throughout the world.sponsorships.
Our MoneyGram Rewards program continuessales teams are organized by geographic area, channel and product. We have dedicated support teams that focus on developing our agent and biller networks to build loyalty and repeat usage with consumers aroundenhance the world. The program includes features such as a discount structure based on a consumer’s usereach of our services,e-mailand/money transfer, bill payment and money order products. Our agent requirements vary depending upon the type of outlet or text message notifications location, and our sales teams continue to work to improve and strengthen our agent partnerships with a goal of providing the sender when the funds are picked up, and a more streamlinedoptimal customer service experience.
Competition
While we are the second largest money transfer company in the world, the market for our money transfer and bill payment services remains very competitive. The market consists of a small number of large competitors and a large number of small, niche competitors. Our competitors include other large money transfer and electronic bill payment providers, banks and nicheperson-to-person money transfer service providers that serve select regions. Our largest competitor in the money transfer market is Western Union, which also competes with our bill payment services and money order businesses. As new technologies for money transfer and bill payment services emerge that allow consumers to send and receive money and to pay bills in a variety of ways, we face increasing competition. These emerging technologies include online payment services, card-based services such as ATM cards and stored-value cards,bank-to-bank money transfers and mobile telephone payment services.
We generally compete for money transfer agents on the basis of value, service, quality, technical and operational differences, price and commission. We compete for money transfer consumers on the basis of number and location of outlets, price, convenience, technology and brand recognition. Due to increased pricing competition, in the first half of 2010 we introduced a $50 price band which allows consumers to send $50 of principal for a $5 fee at most locations, or $4.75 at a Walmart location.
Regulation
Compliance with legal requirementslaws and government regulations is a highly complex and integral part of ourday-to-day operations. Our operations are subject to a wide range of laws and regulations that includeof the United States and other countries, including international,
5
federal and state anti-money laundering laws and regulations; financial services regulations; currency control regulations; anti-bribery laws; regulations of the U.S. Treasury Department’s office of Foreign Assets Control (“OFAC”); money transfer and payment instrument licensing laws; escheatment laws; privacy, laws; data protection and information security laws; and consumer disclosure and consumer protection laws. Failure to comply with any applicable laws and regulations could result in restrictions on our ability to provide our products and services, as well as the potential imposition of civil fines and possibly criminal penalties. See “Risk Factors” for additional discussion regarding potential impacts of failure to comply. We continually monitor and enhance our global compliance programprograms to stay currentcomply with the most recent legal and regulatory changes. During 2009,2010, we increasedcontinued to increase our compliance personnel headcount and mademake investments in our compliance-related technology and infrastructure.
6
Anti-Money Laundering Compliance. Our money transfer services are subject to anti-money laundering laws and regulations of the United States, including the Bank Secrecy Act, as amended by the USA PATRIOT Act, as well as similar state laws and regulations and the anti-money laundering laws and regulations in many of the countries in which we operate, particularly in the European Union. Countries in which we operate may require one or more of the following:
| | |
| | • | reporting of large cash transactions and suspicious activity; |
| | |
| | • | screening of transactions against the government’s watch-lists, including but not limited to, the watch list maintained by the United States Treasury Department’s Office of Foreign Assets Control (“OFAC”);OFAC; |
| | |
| | • | prohibition of transactions in, to or from certain countries, governments, individuals and entities; |
| | |
| | • | limitations on amounts that may be transferred by a consumer or from a jurisdiction at any one time or over specified periods of time, which require the aggregation of information over multiple transactions; |
| | |
| | • | consumer information gathering and reporting requirements; |
| | |
| | • | consumer disclosure requirements, including language requirements and foreign currency restrictions; |
| | |
| | • | notification requirements as to the identity of contracting agents, governmental approval of contracting agents or requirements and limitations on contract terms with our agents; |
| | |
| | • | registration or licensing of the Company or our agents with a state or federal agency in the United States or with the central bank or other proper authority in a foreign country; and |
| | |
| | • | minimum capital or capital adequacy requirements. |
Anti-money laundering regulations are constantly evolving and vary from country to country. We continuously monitor our compliance with anti-money laundering regulations and implement policies and procedures to make our business practices flexible, so we can comply with the most current legal requirements.
��
We offer our money transfer services through third-party agents with whom we contract and do not directly control. As a money services business, the Companywe and itsour agents are required to establish anti-money laundering compliance programs that include: (i) internal policies and controls; (ii) designation of a compliance officer; (iii) ongoing employee training and (iv) an independent review function. We have developed an anti-money laundering training manual available in multiple languages and a program to assist with the education of our agents on the various rules and regulations. We also offer in-person and online training as part of our agent compliance training program and engage in various agent oversight activities.
Money Transfer and Payment Instrument Licensing.Licensing —The majority of states in the United States, states, the District of Columbia, Puerto Rico and the United States Virgin Islands and Guam require us to be licensed to conduct business within their jurisdictions. In November 2009, our primary overseas operating subsidiary, MoneyGram International Ltd, became a licensed payment institution under the European Union Payment Services Directive. Licensing requirements generally include minimum net worth, provision of surety bonds, compliance with operational procedures, agent oversight and the maintenance of reserves or “permissible investments” in an amount equivalent to outstanding payment obligations, as defined by our various regulators. The types of securities that are considered “permissible investments” vary from state to state,across jurisdictions, but generally include cash and cash equivalents, United StatesU.S. government securities and other highly rated debt instruments. Most states and our other regulators require us to file reports on a quarterly or more frequent basis to verify our compliance with their
6
requirements. Many states and other regulators also subject us to periodic examinations and require us and our agents to comply with anti-money laundering and other laws and regulations.
Escheatment Regulations.Regulations —Unclaimed property laws of every state, the District of Columbia, Puerto Rico and the United States Virgin Islands require that we track certain information on all of our payment instruments and money transfers and, if they are unclaimed at the end of an applicable statutory abandonment period, that we remit the proceeds of the unclaimed property to the appropriate jurisdiction. Statutory abandonment periods for payment instruments and money transfers range from three to seven years. Certain foreign jurisdictions also may have unclaimed property laws, though we do not have material amounts subject to any such law.
7
Privacy Regulations.Regulations —In the ordinary course of our business, we collect certain types of data which subjectsthat subject us to certain privacy laws in the United States and abroad. In the United States, we are subject to the Gramm-Leach-Bliley Act of 1999 (the “GLB Act”), which requires that financial institutions have in place policies regarding the collection, processing, storage and disclosure of information considered nonpublic personal information. We are also subject to privacy laws of various states. In addition, we are subject to laws adopted pursuant to the European Union PrivacyUnion’s Data Protection Directive (the “Privacy“Data Protection Directive”). We abide by the United StatesU.S. Department of Commerce’s Safe Harbor framework principles to assist in compliance with the PrivacyData Protection Directive. In some cases, the privacy laws of a European Union member state may be more restrictive than what is required under the PrivacyData Protection Directive and may impose additional duties with which we must comply. We also have confidentiality/information security standards and procedures in place for our business activities and with our third-party vendors and service providers. Privacy and information security laws, both domestically and internationally, evolve regularly and conflicting laws in the various jurisdictions where we do business pose challenges.
Banking Regulations.Regulations —We were recentlyhave been informed by Goldman Sachs that the Company may bewas deemed a controlled subsidiary of a bank holding company under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company“BHC Act”), as a result of Goldman Sachs’ status as a bank holding company and its equity interest in the Company. Affiliates of Goldman Sachs beneficially own all of theCompany’sSeries B-1 Preferred Stock, and may convert thesuch B-1 stockStock into non-voting Series D Preferred Stock (the “D Stock”). WhileAlthough the D Stock is not convertible into common stock of the Company while beneficially owned by Goldman Sachs, the D Stock may be sold or transferred to a third party who may then convert the D Stock into common stock. Goldman Sachs also holds an interest in our senior secured second lien notes issued in connection with the 2008 Recapitalization. As a result of these investments, Goldman Sachs has informed us that the Company may be considered a controlled non-bank subsidiary of Goldman Sachs for U.S. bank regulatory purposes. Companies that are deemed to be subsidiaries of a bank holding company are subject to the Bank Holding CompanyBHC Act, and are thus subject to reporting to,requirements and examination and supervision by the Federal Reserve Board.
Bank holding companies may engage in the business of banking, or activities that are so closely related to banking, or managing andor controlling banks, as well as closely related activities.to be a proper incident thereto. Bank holding companies that are well-capitalized, well-managed and meet certain other conditions, (referred to asmay become “financial holding companies”) are allowed greater operational flexibility.companies.” The Federal Reserve Board has approved Goldman Sachs as a financial holding company, and Goldman Sachs may engage in additional activities that are deemed financial in nature suchor incidental or complementary to financial activities as securitieslong as it meets these qualifications, and insurance activities and certain merchant banking activities.do not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally. The Federal Reserve Board, together with the U.S. Treasury Department, may periodically announce additional permissible activities for financial holding companies.
TheWe believe our current businesses that we conduct are permissible activities for subsidiaries of financial holding companies under U.S. law, and wecompanies. We do not expect the limitations described aboveon the nonbank activities of financial holding companies to adversely affectlimit our current operations.business activities. It is possible, however, that these restrictions might limit our ability to enter other businesses thatin which we may wish to engage in at some time in the future. It is also possibleIn addition, the new Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the regulations required to be enacted to implement such act, and other laws or regulations that these laws may be amendedadopted in the future, or new laws or regulations adopted, thatcould adversely affect us and the scope of our ability to engage in our currentactivities, whether or additional businesses.
In addition,not we are a subsidiary of a financial holding company. These new laws and regulations could also affect the ways our counterparties are generally required to do business with their customers, which may affect us, including potentially increased transaction and compliance costs.
We continue to discuss alternatives with Goldman Sachs and our respective advisers in an effort to address being deemed a holding company subsidiary under the BHC Act. We believe that falls outthe ultimate result will depend upon a number of compliance with the well-managed, well-capitalized and other requirements applicable to financial holding companies must enter into an agreement withfactors, including the Federal Reserve BoardReserve’s consideration of the requirements for us to rectifybe deemed no longer “controlled” by Goldman Sachs for purposes of the situation. The Federal Reserve Board may refuse to allow the financial holding company, including its subsidiaries, to engage in activities that are permissible for financial holding companies but not permissible for bank holding companies. Consequently,BHC Act, market conditions, Goldman Sachs’ non-compliance withinvestment considerations, and the requirements applicablepotential regulatory effects of the BHC Act and the Dodd-Frank Act. These considerations may change from time to financial holding companies could have an impact ontime, and we can provide no assurance as to the Company.timing or terms of any potential resolution of these “control” issues under the BHC Act.
78
Recent Federal Legislation in the United States— The Dodd-Frank Act was signed into law on July 21, 2010. While the Dodd-Frank Act will likely impose additional regulatory requirements upon us, it is difficult to gauge the impact on our business because many provisions of the Dodd-Frank Act require the adoption of rules and further studies. The Dodd-Frank Act creates a new Bureau of Consumer Financial Protection (the “Bureau”), which issues and enforces consumer protection initiatives governing financial products and services, including money transfer services, in the United States. We have been in discussionswill be required to provide enhanced disclosures to our money transfer customers, which may require us to modify our systems. In addition, we may be held liable for the failure of our agents to comply with Goldman Sachs regarding this matter, and Goldman Sachsthe Dodd-Frank Act. The enhanced disclosure requirements and the Company are each evaluating various alternatives pursuant to which the Company would notextent of vicarious liability will be deemeddetermined by rules to be a subsidiary of a bank holding company and thus not subject toissued by the Bank Holding Company Act. There can be no assurance of any particular outcome of such evaluations.Bureau when it becomes operational on or about July 21, 2011.
Other.Other — We sell our MoneyGram-branded prepaid card in the United States, in addition to loading prepaid cards of other card issuers through our ExpressPayment system. Prepaid card services are generally subject to federal and state laws and regulations, including laws related to consumer protection, licensing, escheat, anti-money laundering and the payment of wages. These laws are evolving, unclear and sometimes inconsistent. The extent to which these laws are applicable to us is uncertain and we are currently unable to determine the impact that any future clarification, changes or interpretation of these laws will have on our services.
Clearing and Cash Management Bank Relationships
Our business involves the movement of money. On average, we move over $1.0 billion daily to settle our payment instruments and make related settlements with our agents and financial institutions. We generally receive a similar amount on a daily basis from our agents and financial institutions in connection with our payment service obligations. We move money through a network of clearing and cash management banks, and our relationships with these clearing banks and cash management banks are a critical component of our ability to move funds on a global and timely basis.
We rely on two banks to clear our retail money orders. We currently have eight official check clearing banks. We believe these relationships provide sufficient capacity for our money order and official check outsourcing services.
We maintain contractual relationships with a variety of domestic and international cash management banks for automated clearing house (“ACH”) and wire transfer services for the movement of consumer funds and agent settlements. There are a limited number of international cash management banks with a network large enough to manage cash settlements for our entire agent base. During 2009,In addition, some large international banks have opted not to bank money service businesses. As a result, we convertedalso utilize regional or country-based banking partners in addition to a new primary internationallarge cash management banking relationship. This relationship and our other banking relationships provide us with cash management services that are sufficient for our needs.
We rely on two banks to clear our retail money orders. We entered into a new five-year agreement with our secondary money order clearing bank in early 2009, and are in the process of negotiating a new agreement with our primary money order clearing bank. We currently have five official check clearing banks. We believe these relationships provide sufficient capacity for our money order and official check outsourcing services.
Intellectual Property
The MoneyGram brand is important to our business. We have registered our MoneyGram trademark in the United States and a majority of the other countries where we do business. We maintain a portfolio of other trademarks that are also important to our business, including our ExpressPayment, globe with arrows logo, MoneyGram Rewards, The Power is in Your Hands®, The Power to Change the Way You Send Money®, FormFree and AgentConnect marks. In addition, we maintain a portfolio of MoneyGram branded domain names.
We rely on a combination of patent, trademark and copyright laws, and trade secret protection and confidentiality or license agreements to protect our proprietary rights in products, services, know-how and information. IntellectualWe believe the intellectual property rights in processing equipment, computer systems, software and business processes held by us and our subsidiaries provide us with a competitive advantage. Even though not all of these assets are protectable,We believe we take appropriate measures to protect our intellectual property.property to the extent such intellectual property can be protected.
9
We own United StatesU.S. and foreign patents related to our money order and money transfer technology. Our United States patents have in the past given us competitive advantages in the marketplace, including a number of patents for automated money order dispensing systems and printing techniques, many of which have expired. We also have patent applications pending in the United StatesU.S. that relate to our money transfer, money order PrimeLink and bill payment technologies and business methods. We anticipate that these applications, if granted, could give us continued competitive advantages in the marketplace. However, our competitors also actively patent their technology and business processes.
8
Employees
As of December 31, 2009,2010, we had approximately 1,8061,570 full-time employees in the United States and 591722 full-time employees outside of the United States. In addition, we engage contractors to support various aspects of our business. None of our employees in the United States are represented by a labor union. We consider our employee relations to be good.
Executive Officers of the Registrant
In September 2009, the Board of Directors announced that Pamela H. Patsley assumed the role of Chief Executive Officer, succeeding Anthony P. Ryan, who had assumed the role in January 2009. Ms. Patsley will continue her role as the Chairman of the Board as appointed in January 2009. In December 2009, we announced the January 2010 departure of Jeffrey R. Woods, who assumed the role of Executive Vice President and Chief Financial Officer following the departure of David J. Parrin in the first quarter of 2009. Steven Piano was named as Executive Vice President of Human Resources in August 2009, following the departure of Cindy Stemper in May 2009. Timothy C. Everett assumed the role of Executive Vice President, General Counsel and Corporate Secretary in January 2010, following the retirement of Teresa H. Johnson in September 2009. In September 2009, Mary A. Dutra departed from her role as Executive Vice President, Global Payment Processing and Settlement. Mubashar Hameed, Chief Information Officer, and Jeffrey R. Woods, Executive Vice President and Chief Financial Officer, departed in January 2010. The Company isIn April 2010, Nigel Lee became Executive Vice President of EMEAAP, following the departure of John Hempsey that same month. Also in the process of identifying aApril 2010, J. Lucas Wimer became Executive Vice President, Operations and Technology. James E. Shields joined us as Executive Vice President and Chief Financial Officer in July 2010. In February 2011, Juan Agualimpia became Executive Vice President and a Head of OperationsChief Marketing Officer and Technology.Rebecca L. Lobsinger became Vice President, Controller and Chief Accounting Officer. Following is information regarding our executive officers:
Pamela H. Patsley, age 53,54, has served as Chairman and Chief Executive Officer since September 2009. Ms. Patsley was appointed Executive Chairman in January 2009. Ms. Patsley also serves on the boards of directors of Texas Instruments, Inc. and Dr. Pepper Snapple Group, Inc. Ms. Patsley previously served as Senior Executive Vice President of First Data Corporation, a global payment processing company, from March 2000 to October 2007, and President of First Data International from May 2002 to October 2007. From 1991 to 2000, Ms. Patsley served as President and Chief Executive Officer of Paymentech, Inc., prior to its acquisition by First Data Corporation. Ms. Patsley also served as Chief Financial Officer of First USA, Inc.
Jean C. BensonJuan Agualimpia, age 42,48, has served as Executive Vice President, Chief Marketing Officer since February 2011. Mr. Agualimpia previously served as Senior Vice President Controller since May 2007. Ms. Benson previously servedand Chief Marketing Officer from March 2010 to February 2011. From March 2009 to March 2010, Mr. Agualimpia engaged in marketing project consulting. Mr. Agualimpia has 20 years of leadership experience in marketing, brand management, customer relationship management and product development, including as Vice President Controllerand General Manager for the Art & Coloring Global Business Unit of Newell Rubbermaid from August 20012005 to May 2007. From 1994 to 2001, Ms. Benson was with Metris Companies, Inc., a financial products and services company, serving as Corporate Controller and Executive Vice President of Finance from 1996 to 2001. From 1990 to 1994, Ms. Benson was an auditor with the accounting firm Deloitte & Touche LLP.
Daniel J. Collins, age 46, has served as Senior Vice President, Treasurer since August 2008. Mr. Collins previously served as Vice President, Audit from June 2004 to August 2008. From 2000 to 2004, Mr. Collins served as Controller of the investment firm of RBC Wealth Management. From 1997 to 2000, Mr. Collins served as Division CFO, Consumer Products for U.S. Bank. Prior to that, Mr. Collins spent four years with the accounting firm PricewaterhouseCoopers LLP and six years with the accounting firm Ernst & Young, LLP, most recently as senior manager.March 2009.
Timothy C. Everett,age 47,48, has served as Executive Vice President, General Counsel and Corporate Secretary since January 2010. Mr. Everett previously served as Vice President and Secretary of Kimberly-Clark Corporation, a multi-national consumer product company, from 2003 to 2009. Prior to that, Mr. Everett served in various roles of increasing responsibility at Kimberly-Clark from 1993 to 2003. From 1990 to 1993, Mr. Everett was an associate with the global law firm, Akin, Gump, Strauss, Hauer & Feld, LLP. From 1984 to 1987, Mr. Everett was an auditor with the accounting firm Ernst & Young, LLP.
John HempseyNigel Lee, age 57,45, has served as Executive Vice President of EMEAAP since December 2009. From May 2003April 2010. Prior to December 2009,joining MoneyGram, Mr. HempseyLee was president of First Data Asia Pacific, a role he held since 2005. Previously, Mr. Lee served as Chief Executive Officerregional vice president, financial services for EDS in Hong Kong. He has also held a variety of the Company’s subsidiary, MoneyGram International Ltd. From 2001 to 2003,senior executive positions including CIO and Head of Strategy for Australian Home Loans, which is Australia’s largest non-bank retail lender. Mr. Hempsey servedLee began his career as a non-executive board member of Travelex Group Limited, a payment services company. From 1982 to 2001, Mr. Hempsey wasmanagement consultant with Thomas Cook Global Financial Services prior its acquisition by Travelex Group, serving most recently as Chief Executive Officer. From 1974 to 1982, Mr. Hempsey was with the accounting firms KPMG LLP and Ernst & Young LLP.Accenture, formerly Andersen Consulting.
910
TheodoreRebecca L. HillLobsinger, age 47,36, has served as Senior Vice President, Global Services and General Manager, Financial Paper Products since February 2010. From 2008 to February 2010, Mr. Hill served as Vice President, Global ServicesController and General Manager, Financial Paper Products.Chief Accounting Officer since February 2011. From 2007 to 2008, Mr. HillSeptember 2005 until February 2011, Ms. Lobsinger served as Vice President, Global ServicesAssistant Controller and from 2000 to 2007December 2004 through September 2005, Ms. Lobsinger served as Vice President, Customer Setupthe manager of financial standards and Support. Mr. Hill had served as Senior Director, Customer Setup and Support from 1999 to 2000, Director, Global Client Services from 1995 to 1999 and Manager, Control Operations from 1989 to 1995. From 1984 to 1989, Mr. Hillreporting for the Company. Through November 2004, Ms. Lobsinger was an auditor with Sears, Roebuck & Co.the accounting firm PricewaterhouseCoopers LLP.
Daniel J. O’Malley, age 45,46, has served as Executive Vice President of the Americas since December 2009. From April 2007 to December 2009, Mr. O’Malley served as Senior Vice President, Global Payment Systems/President Americas. Mr. O’Malley previously served as Vice President, Global Payment Systems/Americas from April 2003 to April 2007, Vice President, Customer Service from June 1999 to April 2003, Director, Operations from 1996 to 1999, Regulatory Project Manager from 1995 to 1996, Manager of the Southeast Processing Center from 1989 to 1995 and Coordinator of the Southeast Processing Center from 1988 to 1989. Prior to joining the Company, Mr. O’Malley held various operations positions at NCNB National Bank and Southeast Bank N.A. from 1983 to 1988.
Steven Piano, age 44,45, has served as Executive Vice President, Human Resources since August 2009. From January 2008 to August 2009, Mr. Piano served as Global Lead Human Resource Partner with National Grid, a multi-national utility company. From 1996 to January 2008, Mr. Piano held a variety of human resources positions with First Data Corporation, a global electronic payment processing company, serving most recently as Senior Vice President — First Data International. From 1987 to 1996, Mr. Piano held human resources positions with Citibank, Dun & Bradstreet — Nielsen Media Research and Lehman Brothers.
James E. Shields, age 49, has served as Executive Vice President and Chief Financial Officer since July 2010. From 2009 until July 2010, Mr. Shields engaged in independent financial consulting. During 2008, Mr. Shields served as senior vice president finance and treasurer for Royal Caribbean Cruise Lines. From 2005 to 2008, he served as vice president and treasurer of Celanese Corporation, a $6 billion chemical company with worldwide operations. Prior to that, Mr. Shields was vice president and chief financial officer for consumer markets at Qwest Communications International Inc.
J. Lucas Wimer, age 45, has served as Executive Vice President, Operations and Technology since April 2010. From January 2008 to April 2010, Mr. Wimer was a principal at THL Partners, where he was responsible for business transformation programs across the THL portfolio. From September 2003 to December 2007, he led infrastructure development for Capital One. From 1996 to 2003, Mr. Wimer provided management consulting, global project and practice leadership in performance measurement, cost reduction, merger integration and restructuring to the financial services industry for IBM Business Consulting Services, formerly PricewaterhouseCoopers.
Available Information
Our principal executive offices are located at 1550 Utica Avenue South, Minneapolis, Minnesota 55416 and our telephone number is(952) 591-3000. Our website address is www.moneygram.com. We make our reports onForms 10-K,10-Q and8-K, Section 16 reports on Forms 3, 4 and 5, and all amendments to those reports, available electronically free of charge in the Investor Relations section of our website(www.moneygram.com) as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission (the “SEC”). Our principal executive offices are located at 2828 N. Harwood Street, Dallas, Texas 75201, and our telephone number is(214) 999-7552.
Item 1A. RISK FACTORS
Various risks and uncertainties could affect our business. Any of the risks described below or elsewhere in this Annual Report onForm 10-K or our other filings with the SEC could have a material impact on our business, financial condition or results of operations.
11
RISK FACTORS
Our increasedsubstantial debt service and preferred stock obligations, significant debt covenant requirements and our credit rating could impair our financial condition and adversely affect our ability to operate and grow our business.
We have substantial debt service and preferred stock obligations. Our indebtedness could adversely affect our ability to operate our business and could have an adverse impact on our stockholders, including:
| | |
| | • | our ability to obtain additional financing in the future may be impaired; |
| |
| | • | a significant portion of our cash flowflows from operations must be dedicated to the payment of interest and principal on our debt, which reduces the funds available to us for our operations, acquisitions, product development or other corporate initiatives; |
| |
| | • | our debt agreements contain financial and restrictive covenants whichthat could significantly impact our ability to operate our business and any failure to comply with them may result in an event of default, which could have a material adverse effect on us; |
| |
| | • | our level of indebtedness increases our vulnerability to generalchanging economic, downturnsregulatory and adverse industry conditions; |
10
| | |
| | • | our debt service obligations could limit our flexibility in planning for, or reacting to, changes in our business and the industry; |
| |
| | • | our debt service obligations could place us at a competitive disadvantage to our competitors who have less leverage relative to their overall capital structures; |
• our debt service obligations may affect our ability to attract or retain agents on favorable terms;
| | |
| | • | our ability to pay cash dividends to the holders of our common stock is significantly restricted, and no such dividends are contemplated for at least the next 12 months; andrestricted; |
| |
| | • | payment of cash dividends to the holders of the preferred stock in the future could reduce the funds available to us for our operations, acquisitions, product development or other corporate initiatives.initiatives; and |
|
| • | we may be required to pay significant fees to obtain the necessary consents from holders of our debt to amend or reduce our debt and/or preferred stock. |
Our credit rating is non-investment grade. Together with our level of leverage, this rating adversely affects our ability to obtain additional financing and increases our cost of borrowing. A non-investment grade rating may also affect our ability to attract and retain certain customers.
Our recapitalizationproposed 2011 Recapitalization is subject to a number of conditions beyond our control. Failure to complete the 2011 Recapitalization could adversely affect our stock price and our future business and financial results.
Our proposed 2011 Recapitalization is subject to a number of conditions beyond our control that may prevent, delay or otherwise materially adversely affect the completion of the 2011 Recapitalization, including the approval of the Stockholder Approval Matters by the affirmative vote of a majority of the outstanding shares of our common stock and B Stock (on an as-converted basis), voting as a single class, and the affirmative vote of a majority of the outstanding shares of our common stock (not including the B Stock or any other stock of the Company held by any Investor), in each case voting on the Stockholder Approval Matters, and the Company’s receipt of sufficient financing to consummate the 2011 Recapitalization. We cannot predict whether and when these conditions will be satisfied. We will also incur significant transaction costs whether or not the 2011 Recapitalization is completed. Any failure to complete the 2011 Recapitalization could have a material adverse effect on our stock price and our future business and financial results.
12
Our Series B Stock significantly diluteddilutes the interests of the common stockholders and grants other important rights to the Investors.
The Series B Stock issued to the Investors is convertible into shares of common stock or common equivalent stock at the price of $2.50 per common share (subject to anti-dilution rights), giving the Investors an initial equity interest in us of approximately 79 percent.percent (assuming conversion). Dividends payable on the Series B Stock have been accrued since inception. If we continue to accrue dividends in lieu of paying in cash, the ownership interest of the Investors will substantially increase and continue to dilute the interests of the common stockholders. With the accrual of dividends, the Investors had an equity interest of 8284 percent (assuming conversion) as of December 31, 2009.2010.
The holders of the B Stock vote as a class with the common stock and have a number of votes equal to the number of shares of common stock issuable if all outstanding shares of B Stock were converted into common stock plus the number of shares of common stock issuable if all outstanding shares of B-1 Stock were converted into Series D Participating Convertible Preferred Stock and subsequently converted into common stock. As a result, holders of the B Stock are able to determine the outcome of matters put to a stockholder vote, including the ability to elect our directors, determine our corporate and management policies, including compensation of our executives, and determine, without the consent of our other stockholders, the outcome of any corporate action submitted to our stockholders for approval, including potential mergers, acquisitions, asset sales and other significant corporate transactions. This concentration of ownership may discourage, delay or prevent a change in control of our Company, which could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our Company and might reduce our share price. THL also has sufficient voting power to amend our organizational documents. We cannot provide assurance that the interests of the Investors will coincide with the interests of other holders of our common stock.
In view of their significant ownership stake in the Company, THL, as holdersa holder of the B Stock, has appointed four members to our Board of Directors andDirectors. Goldman Sachs, as holdersa holder of the B-1 Stock, has the right to appoint a director to our Board of Directors. Goldman Sachs has not exercised this right, but has appointed two observers towho attend meetings of our Board of Directors. The size of our Board has been set at nine directors, threefour of which are independent. Our Certificate of Incorporation provides that, as long as the Investors have a right to designate directors to our Board, Goldman Sachs shall have the right to designate one director who shall have one vote and THL shall have the right to designate two to four directors who shall each have equal votes and who shall have such number of votes equal to the number of directors as is proportionate to the Investors’ common stock ownership, calculated on a fully converted basis assuming the conversion of all shares of Series B Stock into common stock, minus the one vote of the director designated by Goldman Sachs. Therefore, each director designated by THL will have multiple votes and each other director will have one vote.
11
Sustained financial market illiquidity, or illiquidity at our clearing, cash management and custodial financial institutions, could adversely affect our business, financial condition and results of operations.
The global capital and credit markets continue to experience illiquidity. As a result, we mayWe face certain risks.risks in the event of a sustained deterioration of financial market liquidity, as well as in the event of sustained deterioration in the liquidity, or failure, of our clearing, cash management and custodial financial institutions. In particular:
| | |
| | • | We may be unable to liquidate short-term investments, including those heldaccess funds in money market funds that we needour investment portfolio on a timely basis to settle our payment instruments, pay money transfers and make related settlements to agents. Any resulting need to access other sources of liquidity or short-term borrowing would increase our costs. Any delay or inability to settle our payment instruments, pay money transfers or make related settlements with our agents could adversely impact our business, financial condition and results of operations. |
| |
| | • | BanksClearing and cash management banks upon which we rely to conduct our official check, money order and money transfer businesses could fail.fail or experience sustained deterioration in liquidity. This could lead to our inability to accessclear our payment service instruments and move fundsand/or on a global and timely basis as required to credit losses for ussettle our obligations and could adversely impact our ability to conduct our official check, money order and money transfer businesses.collect partner receivables. |
13
| | |
| | • | Our revolving credit facility with a consortium of banks is one source of funding for corporate transactions and liquidity needs. If any of the banks participating in our credit facility were unable or unwilling to fulfill its lending commitment to us, our short-term liquidity and ability to engage in corporate transactions such as acquisitions could be adversely affected. |
| |
| | • | We may be unable to borrow from financial institutions or institutional investors on favorable terms, which could adversely impact our ability to pursue our growth strategy and fund key strategic initiatives, such as product development and acquisitions. |
If current levels of market illiquidity worsen,financial liquidity deteriorates, there can be no assurance we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.
Continued weakness in economic conditions, in both the United States and global markets, could adversely affect our business, financial condition and results of operations.
Our money transfer business relies in part on the overall strength of global economic conditions as well as international migration patterns. Consumer money transfer transactions and migration patterns are affected by, among other things, employment opportunities and overall economic conditions. Our customers tend to have employment in industries such as construction, manufacturing and retail that tend to be cyclical and more significantly impacted by weak economic conditions than other industries. This may result in reduced job opportunities for our customers in the United States or other countries that are important to our business, which could adversely affect our results of operations. In addition, increases in employment opportunities may lag other elements of any economic recovery.
Our agents or billers may have reduced sales or business as a result of weak economic conditions. As a result, our agents could reduce their numbers of locations or hours of operation, or cease doing business altogether. Our billers may have fewer customers making payments to them, particularly billers in those industries that may be more affected by an economic downturn such as the automobile, mortgage and retail industries.
If general market softness in the United States or other national economies important to the Company’s business were to continue for an extended period of time or deteriorate further, the Company’s results of operations could be adversely impacted. Additionally, if our consumer transactions decline or migration patterns shift due to deteriorating economic conditions, we may be unable to timely and effectively reduce our operating costs or take other actions in response, which could adversely affect our results of operations.
A material slow down or complete disruption in international migration patterns could adversely affect our business, financial condition and results of operations.
The money transfer business relies in part on migration patterns, as individuals move from their native countries to countries with greater economic opportunities or a more stable political environment. A significant portion of money transfer transactions are initiated by immigrants or refugees sending money back to their native countries. Changes in immigration laws that discourage international migration and political or other events (such as war,
12
terrorism or health emergencies) that make it more difficult for individuals to migrate or work abroad could adversely affect our money transfer remittance volume or growth rate. Sustained weakness in global economic conditions could reduce economic opportunities for migrant workers and result in reduced or disrupted international migration patterns. Reduced or disrupted international migration patterns, particularly in the United States or Europe, are likely to reduce money transfer transaction volumes and therefore have an adverse effect on our results of operations.
If we lose key agents or are unable to maintain our Global Funds Transfer agent or biller networks, our business, financial condition and results of operations could be adversely affected.
Revenue from our money transfer and urgent bill payment services is derived from transactions conducted through our retail agent and biller networks. Many of our high volume agents are in the check cashing industry. There are risks associated with the check cashing industry that could cause this agent base to decline. We may not be able to retain all of our current retail agents or billers for other reasons, as the competition for retail agents and billers is intense. If agents or billers decide to leave our agent network, or if we are unable to add new agents or billers to our network, our revenue would decline.
14
Larger agents and billers in our Global Funds Transfer segment are increasingly demanding financial concessions and more information technology customization. The development, equipment and capital necessary to meet these demands could require substantial expenditures and there can be no assurance that we will have the available capital after paying dividends to the Investors and servicing our debt, or that we will be allowed to make such expenditures under the terms of our debt agreements. If we wereare unable to meet these demands, we could lose customers and our business, financial condition and results of operations would be adversely affected.
A substantial portion of our transaction volume is generated by a limited number of key agents. During 20092010 and 2008,2009, our 10 largest agents accounted for 4851 percent and 4448 percent, respectively, of our total company fee and investment revenue and 5355 percent and 53 percent, respectively, of the fee and investment revenue of our Global Funds Transfer segment. In 20092010 and 2008,2009, our largest agent, Walmart, accounted for 2930 percent and 2629 percent, respectively, of our total company fee and investment revenue and 3233 percent and 3132 percent, respectively, of the fee and investment revenue of our Global Funds Transfer segment. The term of our agreement with Walmart runs through January 2013. If any of our key agents weredo not to renew their contracts with us, or if such agents were to reduce the number of their locations, or cease doing business, we might not be able to replace the volume of business conducted through these agents, and our business, financial condition and results of operations would be adversely affected.
Litigation or investigations involving MoneyGram or our agents, which could result in material settlements, fines or penalties, may adversely affect our business, financial condition and results of operations.
We are currently the subject of an informal SEC inquiry and stockholder litigation, including a securities class action lawsuit and one lawsuit under ERISA. While we believe the suits are without merit and intend to vigorously defend against such claims, the outcome of the lawsuits cannot be predicted at this time. The cost to defend the stockholder and ERISA litigation could be substantial, regardless of the outcome. In addition, we have been, and in the future may be, subject to allegations and complaints that individuals or entities have used our money transfer services for fraud-induced money transfers which may result in fines, settlements and litigation expenses. We also are the subject from time to time of litigation related to our business. The outcome of such allegations, complaints, claims and litigation cannot always be predicted, although we vigorously defend against them.
Regulatory and judicial proceedings and potential adverse developments in connection with ongoing stockholder litigation may adversely affect our business, financial condition and results of operations. There may also be adverse publicity associated with lawsuits and investigations that could decrease agent and customer acceptance of our services. Additionally, our business has been in the past, and may be in the future, the subject of class action lawsuits, regulatory actions and investigations and other general litigation. The outcome of class action lawsuits, regulatory actions and investigations is difficult to assess or quantify. Plaintiffs or regulatory agencies in these lawsuits, actions or investigations may seek recovery of very large or indeterminate amounts, and the magnitude of these actions may remain unknown for substantial periods of time. The cost to defend or settle future lawsuits or investigations may be significant.
13
We have been served with subpoenas to produce documents and testify before the Grand Jury in the Middle District of Pennsylvania with regard to our U.S. and Canadian agents, as well as certain transactions involving such agents, fraud complaint data, and our consumer anti-fraud program. In addition, we have received civil investigative demands from a working group of nine state attorney generals who have initiated an investigation into whether the Company has taken adequate steps to prevent consumer fraud. The Company continues to cooperate fully with these investigations, but is unable to predict the outcome or the possible loss, or range of loss, if any, associated with the resolution of these matters.
We face credit risks from our retail agents and official check financial institution customers.
The vast majority of our Global Funds Transfer segment is conducted through independent agents that provide our products and services to consumers at their business locations. Our agents receive the proceeds from the sale of our payment instruments and money transfers and we must then collect these funds from the agents. If an agent becomes insolvent, files for bankruptcy, commits fraud or otherwise fails to remit money order or money transfer proceeds to us, we must nonetheless pay the money order or complete the money transfer on behalf of the consumer. Moreover, we have made, and may make in the future, secured or unsecured loans to retail agents under limited circumstances or allow agents to retain our funds for a period of time before remitting them to us. As of December 31, 2009,2010, we had credit exposure to our agents of approximately $436.4$594.0 million in the aggregate spread across over 14,00015,000 agents, of which fivethree owed us in excess of $15.0 million.
15
Our official checks outsourcing business is conducted through financial institutions. Our official check financial institution customers issue official checks and money orders and remit to us the face amounts of those instruments the day after they are issued. MoneyGram is liable for payment on all of those instruments except cashier’s checks. As of December 31, 2009,2010, we had credit exposure to our official check financial institution customers of approximately $482.0$375.7 million in the aggregate spread across 1,7001,400 financial institutions, of which one owed us in excess of $15.0 million.
We monitor the creditworthiness of our agents and official check financial institution customers on an ongoing basis. There can be no assurance that the models and approaches we use to assess and monitor agentthe creditworthiness of our agents and official check financial institution customer creditworthinesscustomers will be sufficiently predictive, and we may be unable to detect and take steps to timely mitigate an increased credit risk.
In the event of an agent bankruptcy, we would generally be in the position of creditor, possibly with limited security or financial guarantees of performance, and we would therefore be at risk of a reduced recovery. We are not insured against credit losses, except in circumstances of agent theft or fraud. Significant credit losses could have a material adverse effect on our business, financial condition and results of operations and financial condition.operations.
We face fraud risks that could adversely affect our business, financial condition and results of operations.
Criminals are using increasingly sophisticated methods to engage in illegal activities such as paper instrument counterfeiting, fraud and identity theft. As we make more of our services available over the Internet and other unmanned media, we subject ourselves to new types of consumer fraud risk because requirements relating to customer authentication are more complex with Internet services. Certain former retail agents have also engaged in fraud against consumers or us, and existing agents could engage in fraud against consumers or us. We use a variety of tools to protect against fraud; however, these tools may not always be successful. Allegations of fraud may result in fines, settlements and litigation expenses.
The industry has come under increasing scrutiny from federal, state and local regulators in connection with the potential for consumer fraud. Negative economic conditions may result in increased agent or consumer fraud. If consumer fraud levels involving our services were to rise, it could lead to regulatory intervention and reputational and financial damage. This, in turn, could lead to government enforcement actions and investigations, reduce the use and acceptance of our services or increase our compliance costs and thereby have a material adverse impact on our business, financial condition and results of operations.
An inability of the Company or its agents to maintain adequate banking relationships may adversely affect our business, financial condition and results of operations.
We rely on domestic and international banks for international cash management, ACH and wire transfer services to pay money transfers and settle with our agents. We also rely on domestic banks to provide clearing, processing and settlement functions for our paper-based instruments, including official checks and money orders. The Company’s relationships with these banks are a critical component of our ability to conduct our official check, money order and money transfer businesses. An inability on our part to maintain existing or establish new banking relationships sufficient to enable us to conduct our official check, money order and money transfer businesses could adversely affect our business, financial condition and results of operations and financial condition.operations. There can be no assurance that the Company will be able to establish and maintain adequate banking relationships.
14
We rely on a primary international banking relationship for international cash management, ACH and wire transfer services. Should we not be successful in maintaining a sufficient relationship with one of the limited number of large international banks that provide these services, we would be required to establish a global network of banks to provide us with these services. This could alter the pattern of settlement with our agents and result in our agent receivables and agent payables being outstanding for longer periods than the current remittance schedule, therebypotentially adversely impacting our cash flow and revenue.flow. Maintaining a global network of banks, if necessary, may also increase our overall costs for banking services.
16
We and our agents are considered Money Service Businesses in the United States under the Bank Secrecy Act. The federal banking regulators are increasingly taking the stance that Money Service Businesses, as a class, are high risk. As a result, several financial institutions, which look to the federal regulators for guidance, have terminated their banking relationships with some of our agents. If our agents are unable to maintain existing or establish new banking relationships, they may not be able to continue to offer our services, which could adversely affect our business, financial condition and results of operations.
We may be unable to operate our official check and money order businesses profitably as a result of historically low interest rates and our revised pricing strategies.if we are not successful in retaining those partners that we wish to retain.
Our revenues in the official check business are generated primarily by the investment of funds we receive from the sale of official checks. In turn, we pay commissions to our official check financial institution customers based on the outstanding balance produced by that customer’s sale of official checks, calculated at a rate based on short-term variable financial indices, such as the federal funds rate. Fluctuations in interest rates affect the revenue produced by our investment portfolio and the commissions that we pay our official check financial institution customers. There can be no assurance that interest rate fluctuations in our investments will align with the commission rates we pay to our official check financial institution customers. Both our investment revenue and the commissions we pay decrease when interest rates decline and increase when interest rates rise. However, because our commission rates reset more frequently than the rates earned on our investments, changes in investment revenue will lag changes in commission rates. A rising interest rate environment typically has a negative impact on our investment margin. In the past our investments included long-term and medium-term fixed income securities, a portion of which were asset-backed securities. Our investment portfolio now focuses on highly liquid, short-term securities that produce a lower rate of return. As a result, weWe have reduced the commissionscommission rate we pay to our official check financial institution customers, and have implemented,and/or and in some cases increased, per-item and other fees for our official check and money order services. Despite these changes, there can be no assurance thatDue to the historically low interest rate environment, our official check business will operate profitably. Further, ourfinancial institution customers have been receiving low or no commission payments from the issuance of payment service instruments. Our official check financial institution customers have a right to terminate their agreements with us if they do not accept these pricing changes. As a result of the pricing changes, historically low interest rate environment and we have numerous agreements with these customers that will expire in 2010 and may not be renewed. Therecontractual rights, there can be no assurance that we will retain those official check financial institution customers and money order agents that we wish to retain.
Earnings If we are not successful in retaining those customers and agents that we wish to retain, and we are unable to proportionally reduce our fixed costs associated with the official check and money order businesses, our business, are generated in part by the investmentfinancial condition and results of funds we receive from the sale of money orders. As a result of the composition of our investment portfolio, we earn a lower rate of return on the investment of funds we receive from the sale of money orders. The continued success of our money order business is dependent on our ability to increase money order fees paid to us by our agents.operations could be adversely affected.
Failure to maintain sufficient capital could adversely affect our business, financial condition and results of operations.
If we do not have sufficient capital, we may not be able to pursue our growth strategy and fund key strategic initiatives, such as product development and acquisitions. WeFurther, we may not be able to meet new capital requirements introduced or required by our regulators. Given the leveraged nature of the Company and the significant restrictive covenants in our debt agreements, there can be no assurance that we will have access to sufficient capital. Failure to have such access could materially impact our business, financial condition and results of operations.
15
Failure to attract and retain key employees could have a material adverse effect on our business, financial condition and results of operations.
Our success depends to a large extent upon our ability to attract and retain key employees. We are in a periodThe loss of significant change inservices of one or more members of our executive management team including vacancies of key positions, and we may face uncertainties in implementingcould harm our business strategies and goals as a result.future development. A failure to attract and retain key personnel could also have a material adverse effect on our business, financial condition, results of operations and cash flows.
If we fail to successfully develop and timely introduce new and enhanced products and services or if we make substantial investments in an unsuccessful new product, service or infrastructure change, our business, prospects, financial condition and results of operations could be adversely affected.
Our future growth will depend, in part, on our ability to continue to develop and successfully introduce new and enhanced methods of providing money transfer, money order, official check, bill payment and related services that keep pace with competitive introductions, technological changes and the demands and preferences of our agents, financial institution customers and consumers. Many of our competitors offer electronic payment mechanisms, including Internet-based and cellular phone payment services, that could be substituted for traditional forms of payment, such as the money order, bill payment and money transfer services that we offer. If these alternative payment mechanisms become widely substituted for our current products and services, and we do not develop and offer similar alternative payment mechanisms successfully and on a timely basis, our business and prospects could be adversely affected. Additionally, weWe may make future investments or enter into strategic alliances to develop new technologies and services or to implement infrastructure change to further our strategic objectives, strengthen our existing businesses and remain competitive. Such investments and strategic alliances, however, are inherently risky and we cannot guarantee that such investments or strategic alliances will be successfulsuccessful. If such investments and ifstrategic alliances are not successful, will notthey could have a material adverse effect on our business, financial condition and results of operations.
17
If we are unable to adequately protect our brand and the intellectual property rights related to our existing and any new or enhanced products and services, or if we are unable to avoid infringing on the rights of others, our business, prospects, financial condition and results of operations could be adversely affected.
The MoneyGram® brand is important to our business. We utilize trademark registrations in various countries and other tools to protect our brand. Our business would be harmed if we were unable to adequately protect our brand and the value of our brand werewas to decrease as a result.
We rely on a combination of patent, trademark and copyright laws, trade secret protection and confidentiality and license agreements to protect the intellectual property rights related to our products and services. We also investigate the intellectual property rights of third parties to prevent our infringement of those rights. We may be subject to claims of third parties that we infringe their intellectual property rights or have misappropriated other proprietary rights. We may be required to spend resources to defend any such claims or to protect and police our own rights. Some of our intellectual property rights may not be protected by intellectual property laws, particularly in foreign jurisdictions. The loss of our intellectual property protection, the inability to secure or enforce intellectual property protection or to successfully defend against claims of intellectual property infringement could harm our business prospects, financial condition and prospects.results of operation.
We face intense competition, and if we are unable to continue to compete effectively, our business, financial condition and results of operations would be adversely affected.
The markets in which we compete are highly competitive, and we face a variety of competitors across our businesses, in particular our largest competitor, The Western Union Company. In addition, new competitors or alliances among established companies may emerge. Further, some of our competitors have larger and more established customer bases and substantially greater financial, marketing and other resources than we have. With respect to our money transfer, urgent bill payment and money order businesses, our primary competition comes from our largest competitor. We cannot anticipate every effect that actions taken by our competitors will have on our business, or the money transfer and bill payment industry in general.
Money transfer, money order and bill payment services within our Global Funds Transfer segment compete in a concentrated industry, with a small number of large competitors and a large number of small, niche competitors. We also compete with banks and nicheperson-to-person money transfer service providers. The electronic bill payment services within our Global Funds Transfer segment compete in a highly fragmentedconsumer-to-business payment
16
industry. Competitors in the electronic payments area include financial institutions, third parties that host financial institution and bill payment services, third parties that offer payment services directly to consumers and billers offering their own bill payment services.
18
Our official check business competes primarily with financial institutions that have developed internal processing capabilities or services similar to ours and do not outsource official check services. Financial institutions could also offer competing official check outsourcing services to our existing and prospective official check customers.
There can be no assurance that growth in consumer money transfer transactions, bill payment transactions and other payment products will continue. In addition, consolidation among payment services companies has occurred and could continue. If we are unable to continue to grow our existing products, while also growing newly developed and acquired products, we will be unable to compete effectively in the changing marketplace, and our business, financial condition and results of operations would be adversely affected.
MoneyGram and our agents are subject to a number of risks relating to United StatesU.S. and international regulatory requirements, which could result in material settlements, fines or penalties or changes in our or their business operations that may adversely affect our business, financial condition and results of operations.
Our business is subject to a wide range of laws and regulations whichthat vary from country to country. The money transfer business is subject to a variety of regulations aimed at the prevention of money laundering and terrorism. We are subject to United StatesU.S. federal anti-money laundering laws, including the Bank Secrecy Act and the requirements of the OFAC, which prohibit us from transmitting money to specified countries or on behalf of prohibited individuals. Additionally, we are subject to the anti-money laundering laws in many countries where we operate, particularly in the European Union. We are also subject to financial services regulations, money transfer and payment instrument licensing regulations, consumer protection laws, currency control regulations, escheat laws, as well as privacy and data protection laws. Many of the laws to which we are subject are evolving, unclear and inconsistent across various jurisdictions, making compliance challenging.
In connection with the regulatory requirements to which we are subject, there has been increased public attention regarding prevention of money laundering, terrorist financing and the corporate use and disclosure of personal information, accompanied by legislation and regulations intended to strengthen anti-money laundering, data protection, information security and consumer privacy. While we believe that we are compliant with our regulatory responsibilities, the legal, political and business environments in these particular areas are evolving, inconsistent across various jurisdictions, and often unclear, which increases our operating compliance costs and our legal risks. Subsequent legislation, regulation, litigation, court rulings or other events could expose us to increased program costs, liability and reputational damage.
In particular, we are subject to regulations imposed by the Foreign Corrupt Practices Act (the “FCPA”) in the United States and similar anti-bribery laws in other jurisdictions. We are also subject to reporting, recordkeeping and anti-money laundering provisions in many jurisdictions, including the Bank Secrecy Act in the United States, as amended by the USA PATRIOT Act of 2001. Because of the scope of our global operations, we experience a higher risk associated with the FCPA and similar anti-bribery laws than many companies. We are also subject to regulatory oversight and enforcement by the U.S. Department of the Treasury Financial Crimes Enforcement Network, or “FinCEN.” Any determination that we have violated these laws could have an adverse effect on our business, financial position and results of operations.
Changes in laws, regulations or other industry practices and standards may increase our costs of operations and may disrupt our business as we develop new business and compliance models. For example, the European Union’s Payment Services Directive (“PSD”) has created a new framework of licensing and other regulations for our business operations in the European Union and imposes a number of new requirements on our business, including greater potential liability on us for the conduct of our agents and the commission of third party fraud utilizing our services. We have modified our business operations in the European Union in 2009 and 2010 in light of PSD and will likely experience increasedadditional costs of operating in the European Union.Union to address PSD compliance. In the event we fail to comply with the PSD, our business, financial positioncondition and results of operations may be adversely impacted. Additionally, the United States and other countries periodically consider initiatives designed to lower costs of international remittances which, if implemented, may adversely impact our business, financial positioncondition and results of operations.
19
Changes in laws, regulations or other industry practices and standards, or interpretations of legal or regulatory requirements may reduce the market for or value of our products or services or render our products or services less profitable or obsolete and have an adverse effect on our results of operations. Changes in the laws affecting the kinds of entities that are permitted to act as money transfer agents (such as changes in requirements for capitalization or ownership) could adversely effectaffect our ability to distribute our services and the cost of providing such services, both by us and our agents. Many of our high volume agents are in the check cashing industry. Any regulatory action that adversely affects check cashers could also cause this portion of our agent base to decline. If onerous regulatory requirements were imposed on our agents, the requirements could lead to a loss of agents, which, in turn, could lead to a loss of retail business.
Any intentional or negligent violation by us of the laws and regulations set forth above could lead to significant fines or penalties and could limit our ability to conduct business in some jurisdictions. Regulators in the United States and other jurisdictions are showing a greater inclination than they have in the past to hold money services businesses like ours to higher standards of agent training and monitoring for possible violations of laws and regulations by agents. Our systems, employees and processes may not be sufficient to detect and prevent an intentional or negligent violation of the laws and regulations set forth above by our agents, which could also lead to us being subject to significant fines or penalties. In addition to those direct costs, a failure by us or our agents to comply with applicable
17
laws and regulations also could seriously damage our reputation and brands and result in diminished revenue and profit and increased operating costs.
Failure by us or our agents to comply with the laws and regulatory requirements of applicable regulatory authorities could result in, among other things, revocation of required licenses or registrations, loss of approved status, termination of contracts with banks or retail representatives, administrative enforcement actions and fines, class action lawsuits, cease and desist orders and civil and criminal liability. The occurrence of one or more of these events could have a material adverse effect on our business, financial condition and results of operations.
We conduct money transfer transactions through agents in some regions that are politically volatile or, in a limited number of cases, are subject to certain OFAC restrictions.
We conduct money transfer transactions through agents in some regions that are politically volatile or, in a limited number of cases, are subject to certain OFAC restrictions. While we have instituted policies and procedures to protect against violations of law, it is possible that our money transfer service or other products could be used by wrong-doers in contravention of United StatesU.S. law or regulations. This could result in increased compliance costs, regulatory inquiries, suspension or revocation of required licenses or registrations, seizure or forfeiture of assets and the imposition of civil and criminal fees and penalties. In addition to monetary fines or penalties that we could incur, we could be subject to reputational harm that could have a material adverse effect on our business, financial condition and results of operations.
A material breach of security of our systems could adversely affect our business.
We obtain, transmit and store confidential customer information in connection with certain of our services. Any significant security breaches in our computer networks, databases or facilities could harm our business and reputation, cause inquiries and fines or penalties from regulatory or governmental authorities and cause a loss of customers. We rely on a variety of technologies to provide security for our systems. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments, including improper acts by third parties, may result in a compromise or breach of the security measures we use to protect our systems. We may be required to expend significant capital and other resources to protect against these security breaches or to alleviate problems caused by these breaches. Third-party contractors also may experience security breaches involving the storage and transmission of our data. If users gain improper access to our or our contractor’s systems or databases, they may be able to steal, publish, delete or modify confidential customer information. A security breach could expose us to monetary liability, lead to reputational harm and make our customers less confident in our services.
20
OurBecause our business is particularly dependent on the efficient and uninterrupted operation of our computer network systems and data centers.centers, disruptions to these systems and data centers could adversely affect our business, financial condition and results of operations.
Our ability to provide reliable service largely depends on the efficient and uninterrupted operation of our computer network systems and data centers. Our business involves the movement of large sums of money and the management of data necessary to do so. The success of our business particularly depends upon the efficient and error-free handling of transactions and data. We rely on the ability of our employees and our internal systems and processes to process these transactions in an efficient, uninterrupted and error-free manner.
In the event of a breakdown, catastrophic event (such as fire, natural disaster, power loss, telecommunications failure or physical break-in), security breach, improper operation, improper action by our employees, agents, customer financial institutions or third party vendors or any other event impacting our systems or processes or our vendors’ systems or processes, we could suffer financial loss, loss of customers, regulatory sanctions and damage to our reputation. The measures we have enacted, such as the implementation of disaster recovery plans and redundant computer systems, may not be successful. We may also experience problems other than system failures, including software defects, development delays and installation difficulties, which would harm our business and reputation and expose us to potential liability and increased operating expenses. Certain of our agent contracts, including our contract with Walmart, contain service level standards pertaining to the operation of our system, and give the agent a right to collect damages and in extreme situations a right of termination for system downtime exceeding agreed upon service levels. If we experience significant system interruptions or system failures, our business interruption insurance may not be adequate to compensate us for all losses or damages that we may incur.
18
If we are unable to effectively operate and scale our technology to match our business growth, our business, financial condition and results of operations could be adversely affected.
Our ability to continue to provide our services to a growing number of agents and consumers, as well as to enhance our existing services and offer new services, is dependent on our information technology systems. If we are unable to effectively manage the technology associated with our business, we could experience increased costs, reductions in system availability and loss of agents or consumers. Any failure of our systems in scalability, reliability and functionality could adversely impact our business, financial condition and results of operations.
The operation of retail locations and acquisition orstart-up of businesses create risks and may adversely affect our operating results.
We operate Company-owned retail locations for the sale of our products and services. After substantial capital investment to open retail locations, it is uncertain whether these locations will be profitable. We may be subject to additional laws and regulations that are triggered by our ownership of retail locations and our employment of individuals who staff our retail locations. There are also certain risks inherent in operating any retail location, including theft, personal injury and property damage and long-term lease obligations.
We may, from time to time, acquire or start up businesses both inside and outside of the United States. The acquisition and integration of businesses involve a number of risks. We may not be able to successfully integrate businesses that we acquire or open, including their facilities, personnel, financial systems, distribution, operations and general operating procedures. If we fail to successfully integrate acquisitions, we could experience increased costs and other operating inefficiencies, which could have an adverse effect on our results of operations. The diversion of capital and management’s attention from our core business that results from acquiring or opening new businesses could adversely affect our business, financial condition and results of operations.
21
There are a number of risks associated with our international sales and operations that could adversely affect our business.
We provide money transfer services between and among approximately 190 countries and territories and continue to expand in various international markets. Our ability to grow in international markets and our future results could be harmed by a number of factors, including:
| | |
| | • | changes in political and economic conditions and potential instability in certain regions, including in particular the recent civil unrest, terrorism and political turmoil in North Africa, the Middle East and other regions; |
| | |
| | • | restrictions on money transfers to, from and between certain countries; |
| | |
| • | money control and repatriation issues; |
| | |
| | • | changes in regulatory requirements or in foreign policy, including the adoption of domestic or foreign laws, regulations and interpretations detrimental to our business; |
| | |
| | • | possible increased costs and additional regulatory burdens imposed on our business; |
| | |
| | • | burdens of complying with a wide variety of laws and regulations; |
| | |
| | • | possible fraud ofor theft losses, and lack of compliance by international representatives in foreign legal jurisdictions where collection and legal enforcement may be difficult or costly; |
| | |
| | • | reduced protection for our intellectual property rights; |
| | |
| | • | unfavorable tax rules or trade barriers; |
| | |
| | • | inability to secure, train or monitor international agents; and |
| | |
| | • | failure to successfully manage our exposure to foreign currency exchange rates, in particular with respect to the euro. |
UnfavorableChanges in tax laws and unfavorable outcomes of tax positions we take could adversely affect our tax expense.
We file tax returns and take positions with respect to federal, state, local and international taxation, including positions that relate to our 2007 and 2008 net security losses, and our tax returns and tax positions are subject to review and audit by taxing authorities. An unfavorable outcome of a tax review or audit could result in higher tax expense, which could adversely affect our results of operations and cash flows. We establish reserves for material,
19
known tax exposures. While we believe our reserves are adequate to cover material, known tax exposures, there can be no assurance that an actual taxation event would not exceed our reserves.
BecauseAs a deemed subsidiary of a holding company regulated under the BHC Act, we may be deemedare subject to besupervision, regulation and regular examination by the Federal Reserve.
The Federal Reserve supervises and regulates all bank holding companies and financial holding companies, along with their subsidiaries. The new Dodd-Frank Act requires regular examinations of subsidiaries of bank and financial holding companies and their subsidiaries in the same manner as if they were depository institutions. As a subsidiary of a holding company regulated under the BHC Act, we are required to provide information and reports for use by the Federal Reserve under the BHC Act. The Dodd-Frank Act also increases the regulation and supervision of large bank and financial holding company under the Bank Holding Company Act, wecompanies, such as Goldman Sachs, and their subsidiaries, which may be limitedadversely affect us as a deemed subsidiary of Goldman Sachs.
Changes in our ability to engage in other businesses.laws and regulations could adversely affect us.
Because Goldman Sachs isThe Dodd-Frank Act, as well as the regulations required by that Act, and other laws or regulations that may be adopted in the future, could adversely affect us and the scope of our activities, and could adversely affect our operations, results of operations and financial condition, whether or not we are a registeredsubsidiary of a bank holding company or a financial holding company.
22
The recent Dodd-Frank Act increases the Federal Reserve Board has the authority to examine and supervise its operations,regulation of financial services companies generally, including the operations of its controlled subsidiaries. We may be deemed a controlled subsidiary of Goldman Sachs. As Goldman Sachs has been approvednon-bank financial companies supervised by the Federal Reserve BoardReserve.
The Dodd-Frank Act increases the regulation and oversight of the financial services industry. The Dodd-Frank Act addresses, among other things, systemic risk, capital adequacy, deposit insurance assessments, consumer financial protection, interchange fees, derivatives, lending limits, thrift charters, changes among the bank regulatory agencies, and the ability to conduct business with holding company affiliates. Many of the provisions of the Dodd-Frank Act require studies and regulations. The Dodd-Frank Act requires enforcement by various governmental agencies, including the new Bureau. The new legislation and implementing regulations may increase our costs of compliance, and may require changes in the way we conduct business. We cannot predict the effects of this broad legislation or the regulations to be adopted pursuant to the Dodd-Frank Act.
We will be subject to various provisions of the Consumer Financial Protection Act of 2010 adopted as part of the Dodd-Frank Act, which will result in a new regulator with new and expanded compliance requirements, which is likely to increase our costs.
The Dodd-Frank Act establishes the Bureau, which will affect our business, even if we are not deemed a subsidiary of a bank or financial holding companycompany. Money transmitters such as the Company will be required to provide additional consumer information and becausedisclosures. The Bureau is charged with studying and drafting standards to address existing prices and fees at locations where our services are offered and adopt error resolution standards. The Bureau and the regulations it will adopt are likely to necessitate operational changes and additional costs, but we may be deemed to be an indirect subsidiary of Goldman Sachs,cannot predict its effects upon us or our ability to engage in other businesses may be limited to those permissible for a financial holding company.business at this time.
Failure to maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business.
We are required to certify and report on our compliance with the requirements of Section 404 of the Sarbanes-Oxley Act, which requires annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm addressing the effectiveness of our internal control over financial reporting. If we fail to maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404. In order to achieve effective internal controls we may need to enhance our accounting systems or processes, which could increase our cost of doing business. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business.
We have significant overhang of salable convertible preferred stock relative to float.the public float of our common stock.
The trading market for our common stock was first established in June 2004. The float in that market now consists of approximately 82,300,00083,400,000 shares out of a total of 82,515,11983,620,522 shares issued and outstanding as of December 31, 2009.2010. The Series B Stock issued to the Investors is convertible into shares of common stock or common equivalent stock at the price of $2.50 per common share, subject to anti-dilution rights. UnderPursuant to the Registration Rights Agreement entered into between the Company and the Investors at the closing of the recapitalization,2008 Recapitalization, on December 14, 2010, we filed a registration statement onForm S-3 with the SEC that permits the offer and sale by the Investors and other parties may require us to register for sale publicly (at times largely of their choosing) all of the Series B Stock that they hold, as well as any common stock or Series D Participating Convertible Preferred Stock into which theB-1 Stock may be converted. The registration statement also permits the Company to offer and sell up to $500 million of its common stock, preferred stock, debt securities or any combination of these, from time to time, subject to market conditions and the Company’s capital needs. Sales of a substantial number of shares of our common stock, or the perception that significant sales could occur (particularly if sales are concentrated in time or amount), may depress the trading price of our common stock.
23
An agreement among the Investors and Walmart could prevent an acquisition of the Company.
Effective through March 17, 2010, the Investors and Walmart have an agreement that, among other things, prevents the Investors, without the prior written consent of Walmart, from voting in favor of, consenting to or selling or transferring their equity securities in a manner that would result in a change of control of the Company. The Investors collectively have a majority of the voting stock of the Company and Walmart, whose interests may differ from our stockholders’ interests, could prevent the Investors from agreeing to a sale of the Company under certain circumstances.
Our capital structure, charter documents and Delaware law contain provisions that could delay or prevent an acquisition of the Company, which could inhibit your ability to receive a premium on your investment from a possible sale of the Company.
Our current capital structure and certaincharter documents contain provisions of our charter documentsthat may discourage third parties from seeking to acquire the Company. The holders of the B Stock would vote as a class with the common stockholders on any proposed business combinationThese provisions and would control the outcome. These matters and certainspecific provisions of Delaware law relating to business combinations with interested stockholders may have the effect of delaying, deterring or
20
preventing a merger or change in control of the Company. Some of these mattersprovisions may discourage a future acquisition of the Company even if common stockholders would receive an attractive value for their shares or if a significant number of our common stockholders believed such a proposed transaction to be in their best interests. As a result, stockholders who desire to participate in such a transaction may not have the opportunity to do so.
If we cannot meet the New York Stock Exchange (“NYSE”) continued listing requirements, the NYSE may delist our common stock.
Our common stock is currently listed on the NYSE. The NYSE requires us to maintain an average closing price of our common stock of $1.00 per share or higher over 30 consecutive trading days as well as to maintain average market capitalization and stockholders’ equity of at least $75 million.
If we are unable to maintain compliance with the NYSE criteria for continued listing, our common stock would be subject to delisting. A delisting of our common stock could negatively impact us by, among other things, reducing the liquidity and market price of our common stock; reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; decreasing the amount of news and analyst coverage for the Company; and limiting our ability to issue additional securities or obtain additional financing in the future.
24
| |
| Item 1B. | UNRESOLVED SEC COMMENTS |
None.
| | | | | | | | | | | | | |
Location | | Use | | Segment(s) Using Space | | Square Feet | | Lease Expiration |
| |
Minneapolis, MNDallas, TX | | Corporate Headquarters | | Both | | | 168,21134,921 | | | | 6/30/2021 | |
| Minneapolis, MN | | Global Operations Center | | Both | | | 153,592 | | | | 12/31/2015 | |
| Brooklyn Center, MN | | Global Operations Center | | Both | | | 75,000 | | | | 1/31/2012 | |
Brooklyn Center, MN | | Global Operations Center | | Both | | | 44,026 | | | | 1/31/20124/30/2015 | |
| Lakewood, CO | | Call Center | | Global Funds Transfer | | | 114,240 | | | | 3/31/20122015 | |
Information concerning our material properties, all of which are leased, including location, use, approximate area in square feet and lease terms, is set forth above. Per lease terms, we will be adding 12,000 square feet to our corporate headquarters in Dallas in 2012. Not included in the above table is approximately 14,600 square feet in Minneapolis, Minnesota that has been sublet. We also have a number of other smaller office locations in Arkansas, California, Florida, New York, France, Germany, Italy, Spain and the United Kingdom, as well as small sales and marketing offices in Australia, China, Greece, Hong Kong, India, Italy, the Netherlands, Nigeria, Russia, South Africa, Spain, Ukraine, and United Arab Emirates.Emirates, and Switzerland. We believe that our properties are sufficient to meet our current and projected needs.
| |
| Item 3. | LEGAL PROCEEDINGS |
We areLegal Proceedings — The Company is involved in various claims, litigationslitigation and government inquiries that arise from time to time in the ordinary course of ourthe Company’s business. All of these matters are subject to uncertainties and outcomes that are not predictable with certainty. We accrueThe Company accrues for these matters as any resulting losses become probable and can be reasonably estimated. Further, we maintainthe Company maintains insurance coverage for many claims and litigationslitigation alleged. Management does not believe that after final disposition any of these matters is likely to have a material adverse impact on ourthe Company’s financial position.condition, results of operations and cash flows.
Federal Securities Class Actions —The As previously disclosed, on March 9, 2010, the Company and certain of its present and former officers and directors are defendants inentered into a Settlement Agreement, subject to final approval of the court, to settle a consolidated class action case originally filed on October 3, 2008 in the United States District Court for the District of Minnesota captionedIn re MoneyGram International, Inc. Securities LitigationLitigation.. The Consolidated Complaint was filed on October 3, 2008, and alleges against each defendant violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) andRule 10b-5 under the Exchange Act and alleges against Company officers violations of Section 20(a) of the Exchange Act. The Consolidated Complaint alleges failure to adequately disclose, in a timely manner, the nature and risks of the Company’s investments, as well as unrealized losses and
21
other-than-temporary impairments related to certain of the Company’s investments. The Consolidated Complaint seeks recovery of losses incurred by stockholder class members in connection with their purchases of the Company’s securities. On February 24, 2010, the parties entered into a non-binding Memorandum of Understanding pursuant to which the parties agreed, subject to final approval of the parties and the court, to settle this actionsettlement provides for a cash payment of $80$80.0 million, all but $20$20.0 million of which would be paid by the Company’s insurance carriers. On March 9, 2010, the parties entered intoAt a Settlement Agreement to settle the casehearing on terms consistent with the Memorandum of Understanding. On March 10,June 18, 2010, the Court issued an Order that preliminarily approveda final order and judgment approving the settlement. The parties will seeksettlement became effective on July 26, 2010, when the time to appeal the Court’s final approvalorder and judgment expired without any appeal having been filed. The Company paid $20.0 million into an escrow account in March 2010 and the insurance carrier paid $60.0 million in April 2010, resulting in full settlement of the settlement at a hearing currently set for June 18, 2010.Company’s liability in this matter.
25
Minnesota Stockholder Derivative Claims — Certain of the Company’s present and former officers and directors arewere defendants in a consolidated shareholderstockholder derivative action in the United States District Court for the District of Minnesota captionedIn re MoneyGram International, Inc. Derivative Litigation. The Consolidated Complaint in this Action,action, which was filed on November 18, 2009 and arisesarose out of the same matters at issue in the securities class action, allegesalleged claims on behalf of the Company for, among other things, breach of fiduciary duties, unjust enrichment, abuse of control, and gross mismanagement. On February 24, 2010, the parties entered into a non-binding Memorandum of Understanding pursuant to which they agreed, subject to final approval of the parties and the court, to settle this action. TheOn March 31, 2010, the parties entered into a Stipulation of Settlement agreeing to settle the case on terms largely consistent with the Memorandum of UnderstandingUnderstanding. On April 1, 2010, the Court issued an Order that preliminarily approved the settlement, providing for notice to stockholders and scheduled a hearing on the settlement for June 18, 2010. The Stipulation of Settlement provides for changes to MoneyGram’sthe Company’s business, corporate governance and internal controls, some of which have already been implemented in whole or in part in connection with MoneyGram’s recent recapitalization.part. The Company also agreed to pay attorney fees and expenses to the plaintiff’s counsel in the amount of $1.3 million, with $1.0 million to be paid by the Company’s insurance carriers. The MemorandumOn June 21, 2010, the Court denied an objection to the settlement filed by a MoneyGram shareholder, Russell L. Berney, and issued a final order and judgment approving the settlement. On July 20, 2010, Mr. Berney filed a notice of Understanding is subject to negotiation and execution of definitive settlement documents containing usual and customary settlement terms, notice to shareholders, and approvalappeal of the Court.final order and judgment in the United States Court of Appeals for the Eighth Circuit. On October 5, 2010, the Company entered into a Settlement Agreement to settle the claims brought individually by Mr. Berney in this proceeding and the California Action discussed below.
ERISA Class Action —On April 22, 2008, Delilah Morrison, on behalf of herself and all other MoneyGram 401(k) Plan participants, brought an action in the United States District Court for the District of Minnesota. The complaint allegesalleged claims under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including claims that the defendants breached fiduciary duties by failing to manage the plan’s investment in Company stock, and by continuing to offer Company stock as an investment option when the stock was no longer a prudent investment. The complaint also allegesalleged that defendants failed to provide complete and accurate information regarding Company stock sufficient to advise plan participants of the risks involved with investing in Company stock and breached fiduciary duties by failing to avoid conflicts of interests and to properly monitor the performance of plan fiduciaries and fiduciary appointees. Finally, the complaint allegesalleged that to the extent that the Company is not a fiduciary, it iswas liable for knowingly participating in the fiduciary breaches as alleged. On August 7, 2008, plaintiff amended the complaint to add an additional plaintiff, name additional defendants and additional allegations. For relief, the complaint seekssought damages based on what the most profitable alternatives to Company stock would have yielded, unspecified equitable relief, costs and attorneys’ fees. On March 25, 2009, the Court granted in part and denied in part defendants’ motion to dismiss. On April 30, 2010, plaintiffs filed a motion for class certification, which defendants opposed in a brief filed May 28, 2010. On June 8, 2010, defendants filed a motion for partial summary judgment. Both motions were scheduled for hearing before the Court on October 22, 2010. On October 13, 2010, the Company entered into a Settlement Agreement which provides for a cash payment of $4.5 million, all but approximately $0.7 million of which was paid by the Company’s insurance carrier. The Court issued a final judgment and order approving the Settlement Agreement in October 2010.
26
California Action — On January 22, 2008, Russell L. Berney filed a complaint in Los Angeles Superior Court against the Company and its officers and directors, Thomas H. Lee Partners, L.P., and PropertyBridge, Inc. and two of its officers, alleging false and negligent misrepresentation, violations of California securities laws and unfair business practices with regard to disclosure of the Company’s investments. The complaint also allegesalleged derivative claims against the Company’s Board of Directors relating to the Board’s oversight of disclosure of the Company’s investments and with regard to the Company’s negotiations with Thomas H. Lee Partners, L.P. and Euronet Worldwide, Inc. The complaint seekssought monetary damages, disgorgement, restitution or rescission of stock purchases, rescission of agreements with third parties, constructive trust and declaratory and injunctive relief, as well as attorneys’ fees and costs. In July 2008, an amended complaint was filed asserting an additional claim for declaratory relief. In September 2009, an amended complaint was filed alleging additional facts and naming additional defendants. The Company’s previously disclosed settlement in the Minnesota Stockholder Derivative Litigation and the Minnesota District Court’s April 1, 2010 Order preliminarily approving the settlement in the Minnesota Stockholder Derivative Litigation contain provisions enjoining MoneyGram stockholders from commencing or continuing to prosecute any litigation involving the claims to be settled in that case. On April 5, 2010, the California court stayed proceedings in this action pending the settlement hearing in the Minnesota Stockholder Derivative Litigation. The final order and judgment issued in connection with the Minnesota Stockholder Derivative Litigation on June 21, 2010 enjoined Mr. Berney from prosecuting the derivative claims alleged in the California Action that were settled in the Minnesota Stockholder Action. On October 5, 2010, the Company entered into a Settlement Agreement to settle the claims brought individually by Mr. Berney against the Company and the defendants. The Court issued a final judgment and order approving the Settlement Agreement in October 2010.
SEC InquiryPatent Action — — By letter dated February 4, 2008, the Company received notice from the Securities and Exchange Commission (“SEC”) that it is conducting an informal, non-public inquiry relating to the Company’s financial statements, reporting and disclosures related to the Company’s investment portfolio and offers and negotiations to sell the Company or its assets. The SEC’s notice states that it has not determined that any violations of the securities
22
laws have occurred. On February 11, 2008 and November 5, 2008, the Company received additional letters from the SEC requesting certain information. The Company cooperated with the SEC on a voluntary basis.
Other Matters — On September 25, 2009, the United States District Court for the Western District of Texas, Austin returned a jury verdict in a patent suit brought against the Company by Western Union awardingon May 11, 2007, styledWestern Union v. MoneyGram Payment Systems, Inc., alleging patent infringement and seeking damages and an injunction. The District Court awarded $16.5 million to Western Union. The Company hasMoneyGram appealed the verdict. In connection with its agreement withverdict, and on December 7, 2010 the Court of Appeals for the Federal Trade Commission (“FTC”)Circuit ruled in favor of MoneyGram, reversing the District Court’s ruling on the grounds of obviousness of the three underlying patents that were the subject of the appeal. The District Court proceeding also involved a fourth patent, as to which no appeal was sought. The liability on that particular patent is expected to be approximately $150,000 subject to a review by the District Court. Western Union filed a petition for a re-hearing before the same panel of appellate judges or the entire appellate court “en banc”, which petition was denied by the Company is making enhancementsAppellate Court on February 11, 2011.
Other Matters —Moneygram has been served with subpoenas to itsproduce documents and testify before the Grand Jury in the Middle District of Pennsylvania. The subpoenas seek information related to MoneyGram’s U.S. and Canadian agents, as well as certain transactions involving such agents, fraud complaint data, and MoneyGram’s consumer anti-fraud program during the period from 2004 to 2009. In addition, FinCEN has requested information concerning MoneyGram’s reporting of fraudulent transactions during this period. MoneyGram has provided the information requested pursuant to the subpoenas and continues to provide documents relating to its agents and the investigation. In November 2010, MoneyGram met with the Assistant U.S. Attorney for the Middle District of Pennsylvania (“AUSA”) and representatives of FinCEN to discuss the investigation. MoneyGram is in the process of providing additional information and scheduling a follow up meeting with the AUSA and FinCEN. No claims have been made against MoneyGram at this time.
Moneygram has paid $18.0 million into an FTC-administered fund to refund consumersalso received Civil Investigative Demands from a working group of nine state attorneys general who have been victimized through third-partyinitiated an investigation into whether the Company has taken adequate steps to prevent consumer fraud. The Company is continuingCivil Investigative Demands seek information and documents relating to the Company’s procedures to prevent fraudulent transfers and consumer complaint information. MoneyGram continues to cooperate fully with a government entitythe states in a separate matter involving complaints that certain individuals or entities maythis matter. No claims have used our money transfer services for fraud-induced money transfers.been made against MoneyGram at this time.
Due to the early stages of these other matters, we are unable to predict the outcome or the possible loss, or range of loss, if any, associated with these matters.
27
PART II
Item 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange under the symbol MGI. No dividends on our common stock were declared by our Board of Directors in 20092010 or 2008.2009. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Mezzanine Equity and Stockholders’ Deficit” and Note 1312 —Stockholders’ Deficitof the Notes to Consolidated Financial Statements. As of March 8, 2010,7, 2011, there were 13,91913,339 stockholders of record of our common stock.
The high and low sales prices for our common stock for fiscal 20092010 and 20082009 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | 2010 | | 2009 |
| Fiscal Quarter | | High | | Low | | High | | Low | | High | | Low | | High | | Low |
| | |
| First | | $ | 1.55 | | | $ | 1.00 | | | $ | 14.27 | | | $ | 1.57 | | | $ | 3.91 | | | $ | 2.53 | | | $ | 1.55 | | | $ | 1.00 | |
| Second | | $ | 1.78 | | | $ | 1.08 | | | $ | 2.03 | | | $ | 0.90 | | | $ | 4.01 | | | $ | 2.34 | | | $ | 1.78 | | | $ | 1.08 | |
| Third | | $ | 3.29 | | | $ | 1.83 | | | $ | 1.94 | | | $ | 0.98 | | | $ | 2.90 | | | $ | 1.99 | | | $ | 3.29 | | | $ | 1.83 | |
| Fourth | | $ | 3.25 | | | $ | 2.19 | | | $ | 1.60 | | | $ | 0.85 | | | $ | 2.94 | | | $ | 2.25 | | | $ | 3.25 | | | $ | 2.19 | |
The Board of Directors has authorized the repurchase of a total of 12,000,000 shares. These authorizations wereshares, as announced publicly in our press releases issued on November 18, 2004, August 18, 2005 and May 9, 2007. The repurchase authorization is effective until such time as the Company has repurchased 12,000,000 common shares. Shares of MoneyGram common stock tendered to the Company in connection with the exercise of stock options or vesting of restricted stock are not considered repurchased shares under the terms of the repurchase authorization. As of December 31, 2009,2010, we have repurchased 6,795,000 shares of our common stock under this authorization and have remaining authorization to repurchase up to 5,205,000 shares. The Company has not repurchased any shares since July 2007, other than in connection with employees’ exercise of stock options. However, the2007. The Company may consider repurchasing shares fromtime-to-time, subject to limitations in our debt agreements.
We completed a recapitalization on March 25, 2008, as described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, as well as Note 2 —Recapitalization of the Notes to Consolidated Financial Statements. The terms of our debt agreements place significant limitations on the amount of restricted payments we may make, including dividends on our common stock. With certain exceptions, we may only make restricted payments in an aggregate amount not to exceed $25.0 million, subject to an incrementalbuild-up based on our consolidated net income in future periods. As a result, our ability to declare or pay dividends or distributions to the stockholders of the Company’s common stock is materially limited at this time. No dividends were paid on our common stock in 2010 and 2009.
2328
STOCKHOLDER RETURN PERFORMANCE
The following graph compares the cumulative total return from December 31, 20042005 to December 31, 20092010 for our common stock, our peer group index of payment services companies and the S&P 500 Index. The peer group index of payment services companies consists of: Euronet Worldwide Inc., Fidelity National Information Services, Inc., Fiserv, Inc., Global Payments Inc., MasterCard, Inc., Online Resources Corporation, Total System Services, Inc., Visa, Inc. and The Western Union Company (the “Peer Group Index”). We changed our peer group in 2009 to delete CSG Systems International, Inc., DST Systems, Inc. and Jack Henry & Associates, Inc. and to add MasterCard, Inc. and Visa, Inc. We believe the new peer group represents a more relevant group of companies in the global remittance market thatin which we participate in.participate. The graph assumes the investment of $100 in each of our common stock, our peer group indexesPeer Group Index and the S&P 500 Index on December 31, 2004,2005, and the reinvestment of all dividends as and when distributed.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG MONEYGRAM INTERNATIONAL, INC.,
S&P 500 INDEX AND PEER GROUP INDEX
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/2004 | | 12/2005 | | 12/2006 | | 12/2007 | | 12/2008 | | 12/2009 |
| |
| MONEYGRAM INTERNATIONAL, INC. | | | 100 | | | | 123.73 | | | | 149.60 | | | | 74.01 | | | | 4.91 | | | | 13.87 | |
| S&P 500 INDEX | | | 100 | | | | 104.91 | | | | 121.48 | | | | 128.16 | | | | 80.74 | | | | 102.11 | |
| OLD PEER GROUP INDEX | | | 100 | | | | 109.24 | | | | 125.51 | | | | 136.30 | | | | 83.68 | | | | 112.65 | |
| NEW PEER GROUP INDEX | | | 100 | | | | 108.57 | | | | 127.08 | | | | 158.25 | | | | 99.61 | | | | 157.65 | |
24
| |
Item 6. * | SELECTED FINANCIAL DATA$100 Invested on 12/31/05 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31. |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 12/2005 | | 12/2006 | | 12/2007 | | 12/2008 | | 12/2009 | | 12/2010 |
| |
| MONEYGRAM INTERNATIONAL, INC | | | 100 | | | | 120.90 | | | | 59.81 | | | | 3.97 | | | | 11.21 | | | | 10.55 | |
| S&P 500 INDEX | | | 100 | | | | 115.80 | | | | 122.16 | | | | 76.96 | | | | 97.33 | | | | 111.99 | |
| PEER GROUP INDEX | | | 100 | | | | 117.05 | | | | 145.76 | | | | 91.74 | | | | 145.21 | | | | 132.64 | |
29
Item 6. SELECTED FINANCIAL DATA
The following table presents our selected consolidated financial data for the periods indicated. The information set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and Notes thereto. For the basis of presentation of the information set forth below, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Basis of Presentation.”
| | | | | | | | | | | | | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | 2005 | | | |
|
| (Dollars and shares in thousands, except per share data) | | | | | | | | | | | | | | | | | |
| |
Operating Results | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | | | | | | | | | | | | | | | | | | | | | |
| Global Funds Transfer segment | | $ | 1,027,850 | | | $ | 1,013,154 | | | $ | 858,702 | | | $ | 671,459 | | | $ | 507,359 | | | |
| Financial Paper Products segment | | | 122,783 | | | | 238,192 | | | | 470,126 | | | | 472,239 | | | | 447,674 | | | |
| Other | | | 21,269 | | | | (324,228 | ) | | | (1,171,291 | ) | | | 15,861 | | | | 16,203 | | | |
| |
| |
| Total revenue | | | 1,171,902 | | | | 927,118 | | | | 157,537 | | | | 1,159,559 | | | | 971,236 | | | |
| Commissions expense | | | (498,467 | ) | | | (604,609 | ) | | | (663,908 | ) | | | (563,659 | ) | | | (470,472 | ) | | |
| |
| |
Net revenue (losses) (1) | | | 673,435 | | | | 322,509 | | | | (506,371 | ) | | | 595,900 | | | | 500,764 | | | |
| |
| |
| Expenses | | | (695,757 | ) | | | (659,700 | ) | | | (486,896 | ) | | | (419,127 | ) | | | (354,388 | ) | | |
| |
| |
(Loss) income from continuing operations before income taxes (2) | | | (22,322 | ) | | | (337,191 | ) | | | (993,267 | ) | | | 176,773 | | | | 146,376 | | | |
| Income tax (benefit) expense | | | (20,416 | ) | | | (75,806 | ) | | | 78,481 | | | | 52,719 | | | | 34,170 | | | |
| |
| |
| Net (loss) income from continuing operations | | $ | (1,906 | ) | | $ | (261,385 | ) | | $ | (1,071,748 | ) | | $ | 124,054 | | | $ | 112,206 | | | |
| |
| |
| (Loss) earnings per common share: | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (1.48 | ) | | $ | (4.19 | ) | | $ | (12.94 | ) | | $ | 1.47 | | | $ | 1.32 | | | |
| Diluted | | | (1.48 | ) | | | (4.19 | ) | | | (12.94 | ) | | | 1.45 | | | | 1.30 | | | |
| Weighted-average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 82,499 | | | | 82,456 | | | | 82,818 | | | | 84,294 | | | | 84,675 | | | |
| Diluted | | | 82,499 | | | | 82,456 | | | | 82,818 | | | | 85,818 | | | | 85,970 | | | |
Financial Position | | | | | | | | | | | | | | | | | | | | | | |
Excess (shortfall) of assets over payment service obligations (3) | | $ | 313,335 | | | $ | 391,031 | | | $ | (551,812 | ) | | $ | 358,924 | | | $ | 366,037 | | | |
Substantially restricted assets (3) | | | 5,156,789 | | | | 5,829,030 | | | | 7,210,658 | | | | 8,568,713 | | | | 8,525,346 | | | |
| Total assets | | | 5,929,663 | | | | 6,642,296 | | | | 7,935,011 | | | | 9,276,137 | | | | 9,175,164 | | | |
| Payment service obligations | | | 4,843,454 | | | | 5,437,999 | | | | 7,762,470 | | | | 8,209,789 | | | | 8,159,309 | | | |
| Long-term debt | | | 796,791 | | | | 978,881 | | | | 345,000 | | | | 150,000 | | | | 150,000 | | | |
Mezzanine equity (4) | | | 864,328 | | | | 742,212 | | | | — | | | | — | | | | — | | | |
| Stockholders’ (deficit) equity | | | (883,013 | ) | | | (781,736 | ) | | | (488,517 | ) | | | 669,063 | | | | 624,129 | | | |
Other Selected Data | | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | $ | 38,258 | | | $ | 40,357 | | | $ | 71,142 | | | $ | 81,033 | | | $ | 47,359 | | | |
| Depreciation and amortization | | $ | 57,091 | | | $ | 56,672 | | | $ | 51,979 | | | $ | 38,978 | | | $ | 32,465 | | | |
| Cash dividends declared per share | | $ | — | | | $ | — | | | $ | 0.20 | | | $ | 0.17 | | | $ | 0.07 | | | |
Average investable balances (5) | | $ | 4,246,507 | | | $ | 4,866,339 | | | $ | 6,346,442 | | | $ | 6,333,115 | | | $ | 6,726,790 | | | |
Net investment margin (6) | | | 0.75 | % | | | 1.23 | % | | | 2.28 | % | | | 2.31 | % | | | 1.91 | % | | |
| Approximate number of countries and territories served | | | 190 | | | | 190 | | | | 180 | | | | 170 | | | | 170 | | | |
Number of money order locations (7) | | | 49,000 | | | | 59,000 | | | | 59,000 | | | | 55,000 | | | | 53,000 | | | |
Number of money transfer locations (7) | | | 190,000 | | | | 176,000 | | | | 143,000 | | | | 110,000 | | | | 89,000 | | | |
| |
| |
| | | | | | | | | | | | | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, | | 2010 | | | 2009 | | | 2008 | | | 2007 | | | 2006 | | | |
|
| (Dollars and shares in thousands, except per share data) | | | | | | | | | | | | | | | | | |
| |
Operating Results | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | | | | | | | | | | | | | | | | | | | | | |
| Global Funds Transfer segment | | $ | 1,053,281 | | | $ | 1,025,449 | | | $ | 1,015,929 | | | $ | 861,403 | | | $ | 672,366 | | | |
| Financial Paper Products segment | | | 109,515 | | | | 122,783 | | | | 238,193 | | | | 470,127 | | | | 472,239 | | | |
| Other | | | 3,857 | | | | 13,479 | | | | 16,459 | | | | 18,463 | | | | 18,671 | | | |
| |
| |
| Total revenue | | | 1,166,653 | | | | 1,161,711 | | | | 1,270,581 | | | | 1,349,993 | | | | 1,163,276 | | | |
| Total operating expenses | | | 1,008,255 | | | | 1,086,313 | | | | 1,151,760 | | | | 1,139,749 | | | | 974,858 | | | |
| |
| |
| Operating income | | | 158,398 | | | | 75,398 | | | | 118,821 | | | | 210,244 | | | | 188,418 | | | |
Total other expense, net(1) | | | 100,018 | | | | 97,720 | | | | 456,012 | | | | 1,203,512 | | | | 11,646 | | | |
| |
| |
Income (loss) from continuing operations before income taxes(2) | | | 58,380 | | | | (22,322 | ) | | | (337,191 | ) | | | (993,268 | ) | | | 176,772 | | | |
| |
| |
| Income tax expense (benefit) | | | 14,579 | | | | (20,416 | ) | | | (75,806 | ) | | | 78,481 | | | | 52,719 | | | |
| |
| |
| Income (loss) from continuing operations | | $ | 43,801 | | | $ | (1,906 | ) | | $ | (261,385 | ) | | $ | (1,071,749 | ) | | $ | 124,053 | | | |
| |
| |
| (Loss) earnings per common share: | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ | (1.10 | ) | | $ | (1.48 | ) | | $ | (4.19 | ) | | $ | (12.94 | ) | | $ | 1.47 | | | |
| Diluted | | $ | (1.10 | ) | | | (1.48 | ) | | | (4.19 | ) | | | (12.94 | ) | | | 1.45 | | | |
| Weighted-average shares outstanding: | | | | | | | | | | | | | | | | | | | | | | |
| Basic | | | 83,186 | | | | 82,499 | | | | 82,456 | | | | 82,818 | | | | 84,294 | | | |
| Diluted | | | 83,186 | | | | 82,499 | | | | 82,456 | | | | 82,818 | | | | 85,818 | | | |
Financial Position | | | | | | | | | | | | | | | | | | | | | | |
Excess (shortfall) of assets over payment service obligations(3) | | $ | 230,229 | | | $ | 313,335 | | | $ | 391,031 | | | $ | (551,812 | ) | | $ | 358,924 | | | |
Substantially restricted assets(3) | | | 4,414,965 | | | | 5,156,789 | | | | 5,829,030 | | | | 7,210,658 | | | | 8,568,713 | | | |
| Total assets | | | 5,115,736 | | | | 5,929,663 | | | | 6,642,296 | | | | 7,935,011 | | | | 9,276,137 | | | |
| Payment service obligations | | | 4,184,736 | | | | 4,843,454 | | | | 5,437,999 | | | | 7,762,470 | | | | 8,209,789 | | | |
| Long-term debt | | | 639,946 | | | | 796,791 | | | | 978,881 | | | | 345,000 | | | | 150,000 | | | |
Mezzanine equity(4) | | | 999,353 | | | | 864,328 | | | | 742,212 | | | | — | | | | — | | | |
| Stockholders’ (deficit) equity | | | (942,482 | ) | | | (883,013 | ) | | | (781,736 | ) | | | (488,517 | ) | | | 669,063 | | | |
Other Selected Data | | | | | | | | | | | | | | | | | | | | | | |
| Capital expenditures | | $ | 43,025 | | | $ | 38,258 | | | $ | 40,357 | | | $ | 71,142 | | | $ | 81,033 | | | |
| Depreciation and amortization | | $ | 48,074 | | | $ | 57,091 | | | $ | 56,672 | | | $ | 51,979 | | | $ | 38,978 | | | |
| Cash dividends declared per share | | $ | — | | | $ | — | | | $ | — | | | $ | 0.20 | | | $ | 0.17 | | | |
Average investable balances(5) | | $ | 3,684,317 | | | $ | 4,246,507 | | | $ | 4,866,339 | | | $ | 6,346,442 | | | $ | 6,333,115 | | | |
Net investment margin(6) | | | 0.56 | % | | | 0.75 | % | | | 1.23 | % | | | 2.28 | % | | | 2.31 | % | | |
| Approximate number of countries and territories served | | | 190 | | | | 190 | | | | 190 | | | | 180 | | | | 170 | | | |
Number of money order locations(7) | | | 46,000 | | | | 49,000 | | | | 59,000 | | | | 59,000 | | | | 55,000 | | | |
Number of money transfer locations(7) | | | 227,000 | | | | 190,000 | | | | 176,000 | | | | 143,000 | | | | 110,000 | | | |
| |
| |
| | |
| (1) | | Net revenueTotal other expense, net for 2008 includes net securities losses of $340.7 million from the realignment of the investment portfolio in the first quarter of 2008,other-than-temporary impairments and declines in the value of our trading investments. Net lossesTotal other expense, net for 2007 includes net losses of $1.2 billion relatesrelated toother-than-temporary impairments in the Company’s investment portfolio. |
2530
| | |
| (2) | | Income from continuing operations before income taxes for 2010 includes a $16.4 million gain related to the reversal of a patent lawsuit; $1.8 million of legal accruals related primarily to shareholder litigation; $1.8 million of asset impairments and $5.9 million of expense related to our global transformation initiative. Loss from continuing operations before income taxes for 2009 includes $54.8 million of legal reserves relating to securities litigation, stockholder derivative claims, a patent lawsuit and a settlement with the FTC; $18.3 million of goodwill intangibleand asset and corporate airplane impairments and a $14.3 million net curtailment gain on our benefit plans. Loss from continuing operations before income taxes for 2008 includes a $29.7 million net loss on the termination of swaps, a $26.5 million gain from put options on our trading investments, a $16.0 million non-cash valuation loss from changes in the fair value of embedded derivatives on our Series B Stock and a goodwill impairment of $8.8 million related to a component of our Other results for segment reporting purposes.discontinued business. Loss from continuing operations before income taxes for 2007 includes a goodwill impairment of $6.4 million related to a component of our Other results for segment reporting purposes.discontinued business. |
| | |
| (3) | | Assets in excess of payment service obligations are substantially restricted assets less payment service obligations as calculated in Note 32 —Summary of Significant Accounting Policiesof the Notes to Consolidated Financial Statements. Substantially restricted assets are composed of cash and cash equivalents, receivables and investments. |
| | |
| (4) | | Mezzanine Equity relates to our Series B Stock issued in the recapitalization described in Note 2 —Recapitalizationof the Notes to Consolidated Financial Statements.Stock. See Note 1211 —Mezzanine Equityof the Notes to Consolidated Financial Statements for the terms of the Series B Stock. |
| | |
| (5) | | Investable balances are composed of cash and cash equivalents and all classes of investments. |
| | |
| (6) | | Net investment margin is determined as net investment revenue (investment revenue less investment commissions) divided by daily average investable balances. |
| | |
| (7) | | Includes 27,000, 28,000, 30,000, 18,000 16,000, and 16,000 locations in 2010, 2009, 2008, 2007 2006 and 2005,2006, respectively, that offer both money order and money transfer services. |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes. This discussion contains forward-looking statements that involve risks and uncertainties. MoneyGram’s actual results could differ materially from those anticipated due to various factors discussed below under “Cautionary Statements Regarding Forward-Looking Statements,Statements” and under the caption “Risk Factors” in Part I,1, Item 1A under the caption “Risk Factors” and elsewhere inof this Annual Report onForm 10-K.
Basis of Presentation
The financial statements in this Annual Report onForm 10-K are presented on a consolidated basis and include the accounts of the Company and our subsidiaries. See Note 32 —Summary of Significant Accounting Policiesof the Notes to the Consolidated Financial Statements for further information regarding consolidation. References to “MoneyGram,” the “Company,” “we,” “us” and “our” are to MoneyGram International, Inc. and its subsidiaries and consolidated entities. Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
ComponentsDuring the fourth quarter of Net Revenue — Our2010, the Company revised the presentation of its Consolidated Statements of Income (Loss) as a result of an internal review to enhance our external reporting and management reporting. As a result of this review, the Company will no longer present net revenue, consistspreviously measured as total revenue less total commissions expense, as this measure was not found to be a meaningful metric internally or to our external users. The Company will continue to separately disclose “Commissions expense.” In addition, the Company has created an operating income measure consistent with management reporting and to more clearly delineate operating and non-operating items. As a result, certain items are now presented below the operating income line based on management’s assessment of feetheir nature as non-operating, including securities (gains) losses, interest expense and other revenue, investment revenue(gains) losses related to cash flow hedges. The securities (gains) losses and net securities$2.4 million of gains and $2.8 million of losses less feerelated to historical cash flow hedges for the year ended December 31, 2009 and investment commissions expense. We generate net revenue primarily by charging transaction fees2008, respectively, were previously presented in revenue. All prior periods have been reclassified to conform to this new presentation.
31
As further described in Note 2 —Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements, the Company has corrected the presentation of certain investments in time deposits and certificates of deposit in the 2009 and 2008 consolidated financial statements, reflecting the fact that these investments have original maturities in excess of third-party agent commissions, managing foreign currency exchange and managing our investments to provide returns in excess of commissions paid to financial institution customers.three months but no greater than thirteen months.
We deriveFee and other revenue primarily through service fees charged to consumers and through our investments. — Fee and other revenue consists of transaction fees, foreign exchange revenue and miscellaneous revenue. Transaction fees are fees earned on money transfer, money order, bill payment and official check transactions. Money transfer transaction fees vary based on the principal amount of the transaction, the originating location and the receiving location. Money order, and bill payment and official check transaction fees are fixed per transaction. Foreign exchange revenue is derived from the management of currency exchange spreads on money transfer transactions involving different “send” and “receive” currencies. Miscellaneous revenue primarily consists of processing fees on rebate checks and controlled disbursements, service charges on aged outstanding money orders and money order dispenser fees.
26
Investment revenue — Investment revenue consists of interest and dividends generated through the investment of cash balances received primarily from the sale of official checks, money orders and other payment instruments. These cash balances are available to us for investment until the payment instrument is presented for payment. Investment revenue varies depending on the level of investment balances and the yield on our investments. Investment balances vary based on the number of payment instruments sold, the principal amount of those payment instruments and the length of time that passes until the instruments are presented for payment.
Net securities gainsFee and losses consist of realized gains and losses from the sale, call or maturity of investments,other-than-temporary impairments of investments and unrealized gains and losses on trading investments and related put options.
other commissions expense — We incur fee commissions primarily on our money transfer products. In a money transfer transaction, both the agent initiating the transaction and the agent disbursing the funds receive a commission that is generally based on a percentage of the fee charged to the consumer. We generally do not pay commissions to agents on the sale of money orders. In certain limited circumstances for large agents, we may pay a fixed commission amount based on money order volumes transacted by that agent. FeeOther commissions expense also includes the amortization of capitalized agent signing bonus payments.
Investment commissions expense — Investment commissions consist of amounts paid to financial institution customers based on short-term interest rate indices times the average outstanding cash balances of official checks sold by that financial institution. Through the second quarter of 2008, investment commissions expense included costs associated with interest rate swaps and the sale of receivables program.swaps. We historically used interest rate swaps to convert a portion of our variable rate commission payments to fixed rate payments, which hedged the interest rate risk associated with the variable rate commissions paid to our financial institution customers. In connection with the interest rate swaps, we paid a fixed amount to a counterparty and received a variable rate payment in return. To the extent that the fixed rate exceeded the variable rate, we incurred an expense related to the swap; if the variable rate exceeded the fixed rate, we recognized income related to the swap. In connection with the restructuring of the official check business in 2008, we terminated certain financial institution customer relationships. As a result, we terminated the swaps related to commission payments in June 2008. See further discussion of the termination of these swaps in Note 76 —Derivative Financial Instrumentsof the Notes to Consolidated Financial Statements. Under our sale of receivables program, we historically sold certain of our agent receivables at a discount to accelerate our cash flow, with the discount recorded in investment commissions. In January 2008, we terminated our sale of receivables program and ceased selling receivables by March 2008. See further discussion on our sale of receivables program in Note 3 —Summary of Significant Accounting Policies — Sale of Receivablesof the Notes to Consolidated Financial Statements.
Discontinued Operations — During 2007, we paid $3.3 million in connection with the settlement of a contingency arising from the Sale and Purchase Agreement related to the continued operations of Game Financial Corporation with one casino. We recognized a loss from discontinued operations of $0.3 million in 2007 in the Consolidated Statements of Loss, representing the recognition of a deferred tax asset valuation allowance partially offset by the reversal of the remaining liability for contingencies that expired. The following discussion of our results of operations is focused on our continuing businesses.
Segment Reporting Changes — During the fourth quarter of 2009, we revised our segment reporting to reflect changes in how we manage our business, review operating performance and allocate resources. We now manage our business primarily through two reporting segments: Global Funds Transfer, which is composed of the money transfer and bill payment products, and Financial Paper Products, which is composed of the official check and money order products. Prior year results have been revised for comparative purposes. See theSegment Performancesection for further discussion of our reporting segments.
2732
RESULTS OF OPERATIONS
Table 1 — Results of Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | 2009
| | 2008
| | 2009
| | 2008
| | | | | | | | | 2010
| | 2009
| | 2010
| | 2009
| |
| | | | | | | | | vs.
| | vs.
| | vs.
| | vs.
| | | | | | | | | vs.
| | vs.
| | vs.
| | vs.
| |
| YEAR ENDED DECEMBER 31, | | 2009 | | 2008 | | 2007 | | 2008 | | 2007 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 | |
| | | | |
| | | | | | | | | ($) | | ($) | | (%) | | (%) | | | | | | | | | ($) | | ($) | | (%) | | (%) | |
| (Amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| |
| Revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | $ | 1,130,893 | | | $ | 1,105,676 | | | $ | 949,059 | | | $ | 25,217 | | | $ | 156,617 | | | | 2 | % | | | 17 | % | | $ | 1,145,312 | | | $ | 1,128,492 | | | $ | 1,108,451 | | | $ | 16,820 | | | $ | 20,041 | | | | 1 | % | | | 2 | % |
| Investment revenue | | | 33,219 | | | | 162,130 | | | | 398,234 | | | | (128,911 | ) | | | (236,104 | ) | | | (80 | )% | | | (59 | )% | | | 21,341 | | | | 33,219 | | | | 162,130 | | | | (11,878 | ) | | | (128,911 | ) | | | (36 | )% | | | (80 | )% |
| Net securities gains (losses) | | | 7,790 | | | | (340,688 | ) | | | (1,189,756 | ) | | | 348,478 | | | | 849,068 | | | | NM | | | | NM | | |
| | | Total revenue | | | 1,171,902 | | | | 927,118 | | | | 157,537 | | | | 244,784 | | | | 769,581 | | | | 26 | % | | | 489 | % | | | 1,166,653 | | | | 1,161,711 | | | | 1,270,581 | | | | 4,942 | | | | (108,870 | ) | | | 0 | % | | | (9 | )% |
| Fee commissions expense | | | 497,105 | | | | 502,317 | | | | 410,301 | | | | (5,212 | ) | | | 92,016 | | | | (1 | )% | | | 22 | % | |
| | | |
| | | |
| Expenses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fee and other commissions expense | | | | 500,759 | | | | 497,105 | | | | 502,317 | | | | 3,654 | | | | (5,212 | ) | | | 1 | % | | | (1 | )% |
| Investment commissions expense | | | 1,362 | | | | 102,292 | | | | 253,607 | | | | (100,930 | ) | | | (151,315 | ) | | | (99 | )% | | | (60 | )% | | | 737 | | | | 1,362 | | | | 102,292 | | | | (625 | ) | | | (100,930 | ) | | | (46 | )% | | | (99 | )% |
| | | Total commissions expense | | | 498,467 | | | | 604,609 | | | | 663,908 | | | | (106,142 | ) | | | (59,299 | ) | | | (18 | )% | | | (9 | )% | | | 501,496 | | | | 498,467 | | | | 604,609 | | | | 3,029 | | | | (106,142 | ) | | | 1 | % | | | (18 | )% |
| | |
| | |
| Net revenue (losses) | | | 673,435 | | | | 322,509 | | | | (506,371 | ) | | | 350,926 | | | | 828,880 | | | | 109 | % | | | NM | | |
| | |
| | |
| Expenses: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Compensation and benefits | | | 199,053 | | | | 224,580 | | | | 188,092 | | | | (25,527 | ) | | | 36,488 | | | | (11 | )% | | | 19 | % | | | 226,422 | | | | 199,053 | | | | 224,580 | | | | 27,369 | | | | (25,527 | ) | | | 14 | % | | | (11 | )% |
| Transaction and operations support | | | 284,277 | | | | 219,905 | | | | 191,066 | | | | 64,372 | | | | 28,839 | | | | 29 | % | | | 15 | % | | | 185,782 | | | | 284,277 | | | | 219,905 | | | | (98,495 | ) | | | 64,372 | | | | (35 | )% | | | 29 | % |
| Occupancy, equipment and supplies | | | 47,425 | | | | 45,994 | | | | 44,704 | | | | 1,431 | | | | 1,290 | | | | 3 | % | | | 3 | % | | | 46,481 | | | | 47,425 | | | | 45,994 | | | | (944 | ) | | | 1,431 | | | | (2 | )% | | | 3 | % |
| Interest expense | | | 107,911 | | | | 95,020 | | | | 11,055 | | | | 12,891 | | | | 83,965 | | | | 14 | % | | | 760 | % | |
| Depreciation and amortization | | | 57,091 | | | | 56,672 | | | | 51,979 | | | | 419 | | | | 4,693 | | | | 1 | % | | | 9 | % | | | 48,074 | | | | 57,091 | | | | 56,672 | | | | (9,017 | ) | | | 419 | | | | (16 | )% | | | 1 | % |
| Valuation loss on embedded derivatives | | | — | | | | 16,030 | | | | — | | | | (16,030 | ) | | | 16,030 | | | | NM | | | | NM | | |
| Debt extinguishment loss | | | — | | | | 1,499 | | | | — | | | | (1,499 | ) | | | 1,499 | | | | NM | | | | NM | | |
| | | Total expenses | | | 695,757 | | | | 659,700 | | | | 486,896 | | | | 36,057 | | | | 172,804 | | | | 5 | % | | | 35 | % | |
| Total operating expenses | | | | 1,008,255 | | | | 1,086,313 | | | | 1,151,760 | | | | (78,058 | ) | | | (65,447 | ) | | | (7 | )% | | | (6 | )% |
| | | Loss from continuing operations before income taxes | | | (22,322 | ) | | | (337,191 | ) | | | (993,267 | ) | | | 314,869 | | | | 656,076 | | | | 93 | % | | | 66 | % | |
| Income tax (benefit) expense | | | (20,416 | ) | | | (75,806 | ) | | | 78,481 | | | | 55,390 | | | | (154,287 | ) | | | 73 | % | | | NM | | |
| Operating income | | | | 158,398 | | | | 75,398 | | | | 118,821 | | | | 83,000 | | | | (43,423 | ) | | | 110 | % | | | (37 | )% |
| | | Loss from continuing operations | | $ | (1,906 | ) | | $ | (261,385 | ) | | $ | (1,071,748 | ) | | $ | 259,479 | | | $ | 810,363 | | | | 99 | % | | | 76 | % | |
| Other expense (income) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net securities (gains) losses | | | | (2,115 | ) | | | (7,790 | ) | | | 340,688 | | | | 5,675 | | | | (348,478 | ) | | | NM | | | | NM | |
| Interest expense | | | | 102,133 | | | | 107,911 | | | | 95,020 | | | | (5,778 | ) | | | 12,891 | | | | (5 | )% | | | 14 | % |
| Other | | | | — | | | | (2,401 | ) | | | 20,304 | | | | 2,401 | | | | (22,705 | ) | | | NM | | | | NM | |
| | | Total other expense, net | | | | 100,018 | | | | 97,720 | | | | 456,012 | | | | 2,298 | | | | (358,292 | ) | | | 2 | % | | | (79 | )% |
| | | |
| | | |
| Income (loss) before income taxes | | | | 58,380 | | | | (22,322 | ) | | | (337,191 | ) | | | 80,702 | | | | 314,869 | | | | NM | | | | NM | |
| | | |
| | | |
| Income tax expense (benefit) | | | | 14,579 | | | | (20,416 | ) | | | (75,806 | ) | | | 34,995 | | | | 55,390 | | | | NM | | | | NM | |
| | | |
| | | |
| Net income (loss) | | | $ | 43,801 | | | $ | (1,906 | ) | | $ | (261,385 | ) | | $ | 45,707 | | | $ | 259,479 | | | | NM | | | | NM | |
| | | |
| | | |
NM = Not meaningful
Following is a summary of our operating results from continuing operations in 2010 as compared to 2009:
| | |
| | • | FeeTotal fee and other revenue increased 2$16.8 million, or 1 percent, in 2010 due to $1,130.9 millionan increase in 2009 from $1,105.7 million in 2008, driven primarily by money transfer transaction volumefee and other revenue, partially offset by lower revenue from bill payment products and the Financial Paper Products segment, as well as the impact of certain businesses and products that were discontinued in 2009. Volume growth of 6 percent. As compared to growth of 189 percent drove the increase in 2008, money transfer fee and other revenue, partially offset by lower average money transfer fees per transaction volume growth was lower in 2009 due primarily to the economic recession$50 price band introduced in the United States earlier in 2010 and our growing volume base.the lower euro exchange rate. See further discussion under Table 2 —Fee and Other Revenue and Commissions Expense. |
| | |
| | • | Investment revenue decreased $128.9$11.9 million, or 8036 percent, in 20092010 due to lower yields earned on our investment portfolio and a decline in average investable balances from the termination of certain official check financial institution customers and money order agents. |
|
| • | Net securities gains in 2009 reflect a $7.6 million net gain from the call of two trading investments and the reversal of the related put options. Valuation gains of $4.3 million on the put option related to the remaininginvestment balances. |
2833
| | |
| | trading investment were partially offset by $4.1 million ofother-than-temporary impairments of other asset-backed securities. This is compared to net securities losses of $340.7 million recorded in 2008 from the realignment of the portfolio,other-than-temporary impairments of other asset-backed securities and unrealized losses on our trading investments, partially offset by valuation gains from the receipt of put options relating to our trading investments. |
| | |
| | • | Total commissions expense decreased $106.1increased $3.0 million, or 181 percent, in 2009. The decline in the federal funds rate and lower average investable balances reduced investment commissions expense2010 due to money transfer volume growth, partially offset by $73.2 million. In addition, investment commissions expense for 2008 included a $27.7 million net loss from the termination of interest rate swaps related to the official check business. Fee commissions expense decreased $5.2 million from lower average commission rates, the decline in the euro exchange rate, lower average commission rates and lower signing bonus amortization, partially offset by an increase in fee commissions from money transfer transaction volume growth.expense related to the Financial Paper Products segment and bill payment products. |
| | |
| | • | Interest expense increased to $107.9Total operating expenses decreased $78.1 million, or 7 percent, in 2010. Expenses in 2009 from $95.0 million in 2008 due to higher average outstanding debt as a result of the recapitalization completed in the first quarter of 2008, partially offset by the repayment of $186.9 million of debt in 2009. |
|
| • | Expenses increased $36.1 million, or 5 percent, in 2009 compared to 2008, primarily driven by:included $54.8 million of legal reserves relating to securities litigation, stockholder derivative claims, a patent lawsuit and a settlement with the Federal Trade Commission; a $12.9goodwill and asset impairments of $18.3 million; $15.0 million increase in interest expense; a $10.5 million increase in stock-based compensation; and a $9.5 million increase in professional fees. These increases were offset byof incremental provision for loss, primarily from the closure of an international agent; a $14.3 million net curtailment gain on our benefit plans, a $12.3 million decrease in executive severance and related costs and a $7.1 million decrease in incentive compensation. Expenses in 2009 also include $18.3 million of goodwill, intangible asset and corporate airplane impairments, as compared to $8.8 million of goodwill impairments in 2008. In addition, 2008 included a $16.0 million non-cash valuation loss on embedded derivatives in our preferred stock and $9.5plans; $6.4 million of costs related to the recapitalization and restructuringimplementation of the official check business.European Union Payment Services Directive; and $4.4 million of executive severance and related costs. Expenses in 2010 included a $16.4 million reversal of a patent lawsuit accrual, $5.9 million of costs associated with our global transformation initiative and $1.8 million of asset impairments. In 2010, employee stock-based compensation increased $11.2 million, marketing costs increased $6.9 million and incentive compensation increased $1.6 million, while depreciation and amortization expense decreased $9.0 million. |
| | |
| | • | A significant amountNet securities gains of our internationally originated transactions$2.1 million in 2010 reflect a $2.4 million net gain from the call of a trading investment, partially offset by $0.3 million ofother-than-temporary impairments on other asset-backed securities. This is compared to net securities gains of $7.8 million in 2009, which reflected a $7.6 million net gain from the call of two trading investments and settlements with international agents are conductedvaluation gains of $4.3 million on the put option related to the remaining trading investment, partially offset by $4.1 million ofother-than-temporary impairments on other asset-backed securities. |
| | |
| • | Interest expense decreased 5 percent to $102.1 million in 2010 from $107.9 million in 2009, reflecting lower outstanding debt balances due to repayments of debt, partially offset by the euro. In addition, operating expenses for most$8.6 million pro-rata write-off of our international subsidiaries are denominateddeferred financing costs and debt discount related to the $165.0 million of debt prepayments during 2010. |
| | |
| • | We had income tax expense of $14.6 million on pre-tax income of $58.4 million in the euro. During2010, reflecting a release of $11.9 million of valuation allowances on U.S. deferred tax assets primarily due to reversals and payments of 2009 the average euro to United States dollar exchange rate decreased to 1.39 from 1.47 in 2008. legal reserves. |
| | |
| • | The decline in the euro exchange rate (net of hedging activities) reduceddecreased total revenue by $10.9 million, commissions expense by $7.6$18.1 million and total expenses by $4.9$15.1 million, for a net benefitdecrease to our operating resultsincome before income taxes of $1.6$3.0 million. |
|
| • | In 2009, we recognized a tax benefit of $20.4 million on a pre-tax loss of $22.3 million, reflecting the net reversal of valuation allowances on deferred tax assets relating to net securities losses in 2008 and 2007. |
Following is a summary of significant actions taken by the Company and economic conditions during the year that impacted our operating results in 2009:2010:
Global Economic Conditions — Throughout 2009,2010, worldwide economic conditions remainedcontinued to remain weak, as evidenced by growinghigh unemployment rates, government assistance to citizens and businesses on a global basis, continued declines in asset values, restricted lending activity and low consumer confidence, among other factors. Historically, the money remittance industry has generally been resilient during times of economic softness as money transfers are deemed essential to many, with the funds used by the receiving party for food, housing and other basic needs. However, given the global reach and extent of the current economic recession, the growth of money transfer volumes and the average principal of money transfers were adversely impactedcontinued to fluctuate by corridor and country in 2009.2010. In addition, bill payment products available in the United States are not as resilient as money transfers given the more discretionary nature of some items paid for by consumers using these products. Accordingly, the volume of bill payment transactions wascontinued to be adversely impacted in 2009,2010, particularly in the auto, housing and credit card sectors. While there have been some indicators of moderation and improvement throughout 2010, particularly in December 2009 and early 2010,the United States, we continue to have limited visibility into the future and believe growth rates will continue to be hampered in 2010.2011.
34
Interest Rate Environment — Interest rates remained at historical lowslow through 2009.2010. Interest rates affect our business in several ways, but primarily through investment revenue, investment commission expense and interest expense. First, the majority of our investment portfolio (including cash and cash equivalents)equivalents and all classes of investments) is floating rate, causing investment revenue to decrease when rates decline and increase when rates rise. Second, the commissions
29
we pay to our financial institution customers are variable rate, and primarily based on the effective federal funds rate. Accordingly, our investment commissions expense decreases when rates decline and increases when rates rise. As discussed in “Results of Operations — Table 3 —Net Investment Revenue Analysis,” our net investment margin is based on the spread between the yield earned on our investment portfolio and the commission rates paid to our financial institution customers. In a declining interest rate environment, our net investment margin will typically be benefited, while an increasing interest rate environment will typically have a negative impact on our net investment margin. This is due to the lag between when changes in interest rates impact the two components of the net investment margin, with commission rates resetting faster than our investment portfolio. In the current environment, the federal funds rate is so low that most of our financial institution customers are in a “negative” commission position, in that we do not owe any commissions to our customers. While the vast majority of our contracts require the financial institution customers to pay us for the negative commission amount, we have opted at this time to impose certain per-item and other fees rather than require payment. We continue to monitor the negative commissions and may decide to pursue payment at a future date.are reviewing our current fee structure for possible changes. Finally, our Senior Facilitysenior facility is floating rate debt, and accordingly, our interest expense will decrease in a declining rate environment and increase when rates rise.
Money Transfer Pricing — In the first half of 2010, we introduced a $50 price band that allows consumers to send $50 of principal for a $5 fee at most locations, or a $4.75 fee at a Walmart location. In the fourth quarter of 2010, we increased advertising for our domestic business and, in particular, promoted the new $50 price band to every MoneyGram location across the United States. As discussed further in Table 7 —Global Funds Transfer Segment, the $50 price band impacted revenue growth during the year. As we expect the $50 price band to be a long-term change in our pricing, we anticipate revenue growth will continue to be impacted.
Official Check Restructuring and Repricing — In the first quarter of 2008, we initiated the restructuring of our official check business by changing the commission structure and exiting certain large customer relationships, particularly our top 10 financial institution customers. As of December 31, 2009,2010, approximately $1.9$2.1 billion of balances for the top 10 customers have run off,run-off, with the remaining balances expected to run off over the next 24 monthsrun-off as these customers cease issuing new official checks and old issuances are presented to us for payment. Effective June 1,The run-off of these balances reduced our investment revenue in 2010. In 2008, for most customers and July 1, 2008 for our remaining customers, we reduced the commission rate paid to the majority of our official check financial institution customers. Thiscustomers to reflect the impact of the realigned investment portfolio on the profitability of this product. The repricing results in an average contractual payout rate of the effective federal funds rate less approximately 85 basis points.points, and reduced our investment commissions expense. See Table 3 —Net Investment Revenue Analysis for further discussion on the impact of our official check restructuring and repricing initiative.
Money Order Repricing and Review — In the fourth quarter of 2008, we initiated the first phase of a repricing initiative for our money order product sold through retail agent locations. This initiative increases the per-item fee we receive for our money orders and reflects the impact of the realigned investment portfolio on the profitability of this product. A broader second phase of repricing was initiated in the second quarter of 2009. In addition, we continue to review our credit exposure to our agents and may terminate or otherwise revise our relationship with certain agents. As anticipated, money order volumes in 2009 and 2010 declined from these initiatives. AsWhile we continuedo not expect any further decline in money order volume due to our repricing initiatives, we do anticipate further market declines as consumers migrate to other payment products and review efforts, we expect volumesas consumer prices increase due to further decline fromagents passing along fee increases and changes in the attrition of money order customers.general economic environment.
Global Transformation Initiative — In the second quarter of 2010, we announced that we were implementing a global transformation initiative to realign our management and operations with the changing global market and streamline operations to promote a more efficient and scalable cost structure. The initiative will include organizational changes, relocation of certain operations and investment in technology, among other items. Based upon preliminary estimates, the Company anticipates incurring $45 million to $50 million of cash outlays in future phases to generate annual pre-tax cost savings of $25 million to $30 million when fully implemented in 2012. In connection with the first phase of this initiative, we recorded $5.9 million of expenses during 2010, with $3.0 million included in the “Compensation and benefits” line, $1.3 million included in the “Transactions and operations support” line and $1.6 million included in the “Occupancy, equipment and supplies” line in our Consolidated Statements of Income (Loss).
35
Table 2 — Fee and Other Revenue and Fee Commissions Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | 2009
| | 2008
| | | | | | | | 2010
| | 2009
|
| | | | | | | | | vs.
| | vs.
| | | | | | | | vs.
| | vs.
|
| YEAR ENDED DECEMBER 31, | | 2009 | | 2008 | | 2007 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 | | 2009 | | 2008 |
| | (Amounts in thousands) | | | | | | | | | | | | | | | | | | | | |
| |
| Fee and other revenue | | $ | 1,130,893 | | | $ | 1,105,676 | | | $ | 949,059 | | | | 2 | % | | | 17 | % | | $ | 1,145,312 | | | $ | 1,128,492 | | | $ | 1,108,451 | | | | 1 | % | | | 2 | % |
| Fee commissions expense | | | (497,105 | ) | | | (502,317 | ) | | | (410,301 | ) | | | 1 | % | | | (22 | )% | |
| Fee commissions expense as a % of fee and other revenue | | | 44.0 | % | | | 45.4 | % | | | 43.2 | % | | | | | | | |
| Fee and other commissions expense | | | | 500,759 | | | | 497,105 | | | | 502,317 | | | | 1 | % | | | (1 | )% |
| Fee and other commissions expense as a % of fee and other revenue | | | | 43.7 | % | | | 44.1 | % | | | 45.3 | % | | | | | | |
In 2010, fee and other revenue increased $16.8 million, or 1 percent, compared to 2009. Fee and other revenue consistsin 2009 included $8.3 million of fees onincremental revenue from discontinued businesses and products, as well as $1.3 million of early agent termination fees. Money transfer revenue drove a net increase of $35.8 million, partially offset by an $8.1 million decrease in bill payment fee and other revenue and a $5.0 million decrease in money order fee and other revenue. Money transfer transaction volume growth of 9 percent drove $77.4 million of incremental revenue, while changes in corridor mix increased revenue $2.4 million. Fee and other revenue decreased $18.1 million from the lower euro exchange rate and $24.6 million from lower average money transfer billfees due primarily to the introduction of the $50 price band in the United States. Foreign exchange revenue of $113.2 million in 2010 increased $4.3 million from 2009. Bill payment money orderrevenue decreased from lower average fees per transaction due to industry mix and official check transactions. lower volumes. See Table 7 —Global Funds Transfer Segmentand Table 8 —Financial Paper Products Segmentfor further information regarding fee and other revenue.
In 2009, fee and other revenue increased $25.2$20.0 million, or 2 percent, compared to 2008, driven by money transfer transaction volume growth, partially offset by lower average money transfer fees, the decline in the euro exchange rate and a $6.6 million reduction in bill payment revenue. Money transfer transaction volume increased 6 percent, generating incremental revenue of $53.3$54.5 million. Average money transfer fees declined from lower average principal per transaction and corridor mix, reducing revenue by $20.7$15.8 million. The decline in the euro exchange rate net of hedging activities, reduced revenue by $10.9$16.2 million in 2009. In addition, money order and official check fee and other revenue increased $9.3 million and $5.6 million, respectively, primarily due to our repricing initiatives. Also, 2009 fee and other revenue declined $6.1$5.9 million from 2008 due to discontinued businesses and products. Fee and other revenue for 2009 includes $108.9 million of foreign exchange revenue, a decrease of $1.8 million from 2008.
In 2008,2010, fee and other revenuecommissions expense increased $156.6$3.7 million, or 171 percent, compared to 2007, primarily driven by growth in money transfer. Money transfer fee and other revenue grew 19 percent in 2008, whilefrom 2009 as money transfer transaction volume increased 18 percent. Money transfer transaction volume growth resulteddrove incremental expense of $23.7 million, partially offset by a $7.4 million benefit from the lower euro exchange rate, a $5.4 million decrease in incremental feeexpense as certain historical signing bonuses were fully amortized or written off in the prior year and
30
other revenue of $131.8 a $1.2 million in 2008, whilebenefit from lower average money transfer fees declinedcommission rates. Money order commissions expense decreased $1.3 million due to volume, bill payment fee commissions decreased $2.6 million from lower principal per transactionvolumes and corridoraverage fees due to industry mix reducing revenueand the run-off of products and businesses discontinued in 2009 benefited commissions expense by $12.1 million in 2008. The increase in the euro exchange rate, net of hedging activities, increased fee and other revenue by $20.7 million in 2008. Bill payment transaction volume growth of 13 percent in 2008 increased fee and other revenue by $19.1$1.1 million.
Fee commissions expense consists primarily of fees paid to our third-party agents for the money transfer and bill payment services. In 2009, fee and other commissions expense decreased $5.2 million, or 1 percent, from 2008 due to lower average money transfer commission rates, the decline in the euro exchange rate, lower bill payment volumes and lower signing bonus amortization, partially offset by money transfer volume growth. Incremental fee commissions of $16.1 million resulting from money transfer transaction volume growth was significantly offset by a decrease of $7.7 million from lower average commission rates and $7.6 million from the decline in the euro exchange rate, net of hedging activities.rate. Bill payment volume declines reduced commissions expense by $3.8 million and signing bonus amortization decreased by $2.0 million as certain historical signing bonuses were fully amortized in the third quarter of 2009.
36
In 2008, fee commissions expense increased $92.0 million, or 22 percent, compared to 2007. Higher money transfer transaction volumes increased fee commissions expense $54.4 million, while higher average commissions per transaction, primarily from higher commissions paid to Walmart from new contract pricing, increased commissions $4.0 million. Amortization of signing bonuses increased $11.4 million in 2008 from the signing of several large agents in 2007 and one large agent in the first quarter of 2008. The change in the euro exchange rate, net of hedging activities, increased fee commissions expense by $8.8 million. Bill payment fee commissions expense increased $11.3 million due to volume and $3.2 million due to rate.
Table 3 — Net Investment Revenue Analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | 2009
| | 2008
| | | | | | | | | 2010
| | 2009
| |
| | | | | | | | | vs.
| | vs.
| | | | | | | | | vs.
| | vs.
| |
| YEAR ENDED DECEMBER 31, | | 2009 | | 2008 | | 2007 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | 2009 | | 2008 | |
| | | | | |
| (Amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | |
| |
| Investment revenue | | $ | 33,219 | | | $ | 162,130 | | | $ | 398,234 | | | | (80 | )% | | | (59 | )% | | $ | 21,341 | | | $ | 33,219 | | | $ | 162,130 | | | | (36 | )% | | | (80 | )% |
Investment commissions expense (1) | | | (1,362 | ) | | | (102,292 | ) | | | (253,607 | ) | | | 99 | % | | | 60 | % | | | (737 | ) | | | (1,362 | ) | | | (102,292 | ) | | | 46 | % | | | 99 | % |
| | | Net investment revenue | | $ | 31,857 | | | $ | 59,838 | | | $ | 144,627 | | | | (47 | )% | | | (59 | )% | | $ | 20,604 | | | $ | 31,857 | | | $ | 59,838 | | | | (35 | )% | | | (47 | )% |
| | | Average balances: | | | | | | | | | | | | | | | | | | | | | |
Average balances(1): | | | | | | | | | | | | | | | | | | | | | |
| Cash equivalents and investments | | $ | 4,246,507 | | | $ | 4,866,339 | | | $ | 6,346,442 | | | | (13 | )% | | | (23 | )% | | $ | 3,684,317 | | | $ | 4,246,507 | | | $ | 4,866,339 | | | | (13 | )% | | | (13 | )% |
Payment service obligations (2) | | | 3,048,100 | | | | 3,923,989 | | | | 4,796,257 | | | | (22 | )% | | | (18 | )% | | | 2,659,171 | | | | 3,048,100 | | | | 3,923,989 | | | | (13 | )% | | | (22 | )% |
Average yields earned and rates paid (3): | | | | | | | | | | | | | | | | | | | | | |
Average yields earned and rates paid(2): | | | | | | | | | | | | | | | | | | | | | |
| Investment yield | | | 0.78 | % | | | 3.33 | % | | | 6.27 | % | | | | | | | | | | | 0.58 | % | | | 0.78 | % | | | 3.33 | % | | | | | | | | |
| Investment commission rate | | | 0.04 | % | | | 2.61 | % | | | 5.29 | % | | | | | | | | | | | 0.03 | % | | | 0.04 | % | | | 2.61 | % | | | | | | | | |
Net investment margin | | | 0.75 | % | | | 1.23 | % | | | 2.28 | % | | | | | | | | | | | 0.56 | % | | | 0.75 | % | | | 1.23 | % | | | | | | | | |
| | |
| (1) | | Investment commissions expense includes payments made toThe average balances in the table reflect financial institution customers based on short-term interest rate indices times the outstanding balances of official checks sold by that financial institution. Through the second quarter of 2008, investment commissions expense also included costs associated with swaps and the sale of receivables program. See further discussion of the termination of swaps in Note 7 —Derivative Financial Instruments,and the termination of the sale of receivables program in Note 3 —Summary of Significant Accounting Policiesof the Notes to Consolidated Financial Statements.only. |
| |
| (2) | | Commissions are paid to financial institution customers based on average outstanding balances generated by the sale of official checks only. The average balance in the table reflects only the payment service obligations for which commissions are paid and does not include the average balance of the sold receivables ($3.7 million and $349.9 million for 2008 and 2007, respectively) as these are not recorded in the Consolidated Balance Sheets. |
|
(3) | | Average yields/rates are calculated by dividing the applicable amount of “Net investment revenue” by the applicable amount shown in the “Average balances” section. The “Net investment margin” is calculated by dividing “Net investment revenue” by the “Cash equivalents and investments” average balance. |
31
Investment revenue consistsin 2010 decreased $11.9 million, or 36 percent, compared to 2009. Lower yields earned on our investment portfolio drove $7.5 million of interest and dividends generated through the decrease, while $4.4 million of the decrease relates to lower average investment of cash balances received from the salerun-off of certain official checks, money orders and other payment instruments. check financial institution customers terminated in prior periods.
Investment revenue in 2009 decreased $128.9 million, or 80 percent, compared to 2008 due to lower yields earned on our investment portfolio and a decline in average investableinvestment balances from the termination of certain official check financial institution customers. Lower interest ratesyields earned on cash and cash equivalentsour investment balances resulted in a decrease of $110.0 million from 2008, while the decline in average investableinvestment balances resulted in a decrease of $20.7 million. Investment revenue in 2008 also included a $10.0 million recovery of a security that was fully impaired in 2007.
In 2008, investment revenueInvestment commissions expense in 2010 decreased $236.1$0.6 million, or 5946 percent, compared to 2007 due2009 from lower rates implemented in the second phase of our repricing initiative in the second quarter of 2009 and lower average investment balances. Due to lower yields earned onthe continued low federal funds rate, most of our realigned investment portfolio and the decrease in average investable balances from the termination of certain official check financial institution customers andcontinue to be in a “negative” commission position as of December 31, 2010, meaning we do not owe any commissions to our customers. While the terminationmajority of our sale of receivables program. Withcontracts require that the realignment completed infinancial institution customers pay us for the first quarter of 2008, our portfolio now primarily consists of lower yielding cash equivalentsnegative commission amounts, we have opted at this time to impose certain per-item and government securities. Lower interest rates earned on cash and cash equivalents resulted in a decrease of $134.0 million from 2007, while the decline in average investable balances resulted in a decrease of $92.9 million. Also negatively impacting investment revenue in 2008 is the applicationother fees rather than require payment of the cost recovery method of accountingnegative commission amounts. We continue to monitor the negative commissions and assess our current fee structure for investments classified as “Other asset-backed securities.” Under cost recovery, interest proceeds are deemed to be recoveries of principal, with no recognition as investment revenue until the principal of the related security is fully recovered. See Note 6 —Investment Portfolioof the Notes to the Consolidated Financial Statements forpossible further information related to the investment portfolio and the application of the cost recovery method. During 2008, we received interest proceeds of $26.9 million from our other asset-backed securities, with $10.7 million applied to reduce the book value of the related securities. The remaining $16.2 million of interest proceeds was recognized as investment revenue in 2008, including $10.0 million related to the recovery of a security that was fully impaired in 2007.changes.
Investment commissionscommission expense includes payments made to financial institution customers based on their average outstanding balances generated by the sale of official checks times short-term interest rate indices. Investment commission expensein 2009 decreased $100.9 million, or 99 percent, compared to 2008. The decline in the federal funds rate and our repricing initiatives resulted in a decrease of $49.7 million, while lower average investableinvestment balances resulted in a decrease of $23.4 million. In addition, investment commissions expense for 2008 included a $27.7 million net loss from the termination of interest rate swaps as a result of the termination of certain official check customers in 2008. See Note 76 —Derivative Financial Instrumentsof the Notes to the Consolidated Financial Statements for further information regarding the interest rate swaps. The federal funds rate has been so low during 2009 that most of our financial institution customers are in
As a “negative” commission position, meaning we do not owe any commissions to our customers. While the majority of our contracts require that the financial institution customers pay us for the negative commission amount, we have opted at this time to impose certain per-item and other fees rather than require paymentresult of the negative commission amount. We continue to monitorfactors discussed above, the negative commissions and may decide to require payment of negative commissions at a future date.
In 2008, investment commissions expense decreased $151.3 million, or 60 percent, compared to 2007. Lower commission rates from the official check repricing and the decline in the effective federal funds rate decreased commissions by $120.0 million, while lower average investable balances decreased commissions by $35.8 million. In addition, the termination of the sales of receivable program in the first quarter of 2008 reduced commissions expense by $20.2 million. See Note 3 —Summary of Significant Accounting Policiesof the Notes to the Consolidated Financial Statements for further information on the sale of receivables program. Partially offsetting these benefits is the $27.7 million loss from the termination of interest rate swaps related to the official check business.
Net investment revenue decreased 47 percent in 2009 compared to 2008, reflecting the lower interest rate environment and lower average investable balances discussed above. The net investment margin of 0.75 percent for 2009 decreased 48 basis points from 1.23 percent in 2008, reflecting these same factors. Net investment revenue decreased 59 percent in 2008 as compared to 2007, reflecting the lower yields from the realigned portfolio, lower average investable balances and the termination loss on swaps, partially offset by the official check repricing initiative and the decline in the effective federal funds rate. The net investment margin decreased 105 basis0.19 percentage points from 2007 to 1.23 percent for 2008 as a result of the same factors.in 2010 and 0.48 percentage points in 2009.
3237
Table 4 — Net Securities Gains (Losses)
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 2009
| | | 2008
| |
| | | | | | | | | | | | vs.
| | | vs.
| |
| YEAR ENDED DECEMBER 31, | | 2009 | | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | |
| (Amounts in thousands) | | | | | | | | | | | | | | | |
| |
| Gross realized gains | | $ | — | | | $ | 34,200 | | | $ | 5,611 | | | $ | (34,200 | ) | | $ | 28,589 | |
| Gross realized losses | | | (2 | ) | | | (290,498 | ) | | | (1,962 | ) | | | 290,496 | | | | (288,536 | ) |
Other-than-temporary impairments | | | (4,069 | ) | | | (70,274 | ) | | | (1,193,210 | ) | | | 66,204 | | | | 1,122,936 | |
| |
| |
Net securities losses fromavailable-for-sale investments | | | (4,071 | ) | | | (326,572 | ) | | | (1,189,561 | ) | | | 322,500 | | | | 862,989 | |
| Unrealized gains (losses) from trading investments and related put options | | | 4,304 | | | | (14,116 | ) | | | (195 | ) | | | 18,421 | | | | (13,921 | ) |
| Realized gains from trading investments and related put options | | | 7,557 | | | | — | | | | — | | | | 7,557 | | | | — | |
| |
| |
| Net securities gains (losses) | | $ | 7,790 | | | $ | (340,688 | ) | | $ | (1,189,756 | ) | | $ | 348,478 | | | $ | 849,068 | |
| |
| |
Net securities gains of $7.8 million for 2009 primarily reflects a $7.6 million net gain from the call of two trading investments in 2009. We recorded a valuation gain of $4.3 million on the put option related to the remaining trading investment, reflecting the passage of time.Other-than-temporary impairments on our other asset-backed securities were $4.1 million from continued declines in the fair value.
Net securities losses for 2008 reflect $256.3 million of net realized losses from the realignment of the investment portfolio in the first quarter of 2008, $70.3 million ofother-than-temporary impairments on our other asset-backed securities and $40.6 million of unrealized losses from our trading investments, partially offset by a $26.5 million unrealized gain from put options received in the fourth quarter of 2008 related to the trading investments. Theother-than-temporary impairments and unrealized losses were the result of continued deterioration in the mortgage markets, as well as continued illiquidity and uncertainty in the broader markets in 2008. The recapitalization completed on March 25, 2008 included funds to cover these losses. In December 2008, two of our three auction rate securities classified as trading investments had the embedded preferred put option exercised. As a result, one trading security converted to a perpetual preferred stock and the collateral of the other security was replaced with perpetual preferred stock. These actions resulted in a decline in fair value as preferred stock is viewed as less liquid and the discretionary income streams as more uncertain. In the fourth quarter of 2008, we opted into a buy-back program sponsored by the trading firm that sold us all of our trading investments. Under this program, we received the right to require the trading firm to redeem our trading investments at full par value beginning in June 2010 (the “put options”). The initial fair value and subsequent remeasurements are recognized as unrealized gains (losses) from trading investments. In general, the fair value of these put options should offset any realized and unrealized losses from our trading securities as they provide a known cash flow stream in the future, subject to the creditworthiness of the broker issuing the put options. See Note 6 —Investment Portfolioof the Notes to the Consolidated Financial Statements for further information regarding these put options.
We had net securities losses of $1.2 billion in 2007, reflectingother-than-temporary impairments recorded in December 2007 as a result of the substantial market deterioration and our decision to realign the investment portfolio. See Note 6 —Investment Portfolioof the Notes to the Consolidated Financial Statements for further discussion.
Expenses
The following discussion relates to operating expenses, excluding commissions expense, as presented in Table 1 —Results of Operations.
Compensation and benefits — Compensation and benefits includes salaries and benefits, management incentive programs and other employee related costs. Compensation and benefits increased $27.4 million, or 14 percent, in 2010 compared to 2009. Included in 2009 was a $14.3 million net curtailment gain on benefit plans, partially offset by $3.9 million of executive severance costs. The remaining increase in 2010 primarily relates to a $11.2 million increase in stock-based compensation from grants made in 2010 and the second half of 2009 in connection with executive hires, $3.0 million of severance associated with restructuring initiatives and a $1.6 million increase in incentive compensation from higher participation levels, which increased the compensation base as compared to the prior year, partially offset by lower sales incentives accruals. As reflected in each of the amounts discussed above, the decrease in the euro exchange rate decreased compensation and benefits expense by $2.8 million in 2010.
Compensation and benefits decreased $25.5 million, or 11 percent, in 2009 compared to 2008 primarily from a $14.3 million net curtailment gain on benefit plans, a $12.3 million decrease in executive severance and related costs, a $7.1 million decrease in incentive compensation from accruing annual incentives at a
33
lower tier and a $2.0 million decrease from the suspension of the discretionary profit sharing plan. Stock-based compensation increased $10.5 million fromdue to option grants awarded in 2009, grants, partially offset by lower expense from historical grants that vested in the first quarter of 2009 and executive forfeitures. As reflected in each of the amounts discussed above, the changedecrease in the euro exchange rate net of hedging activities, decreased compensation and benefits by approximately $2.1 million in 2009.
Compensation and benefits increased $36.5 million, or 19 percent, in 2008 compared to 2007, primarily from a $19.5 million increase in executive severance and related costs, an $8.5 million increase from a 2 percent increase in headcount supporting the growth in the money transfer business and an $8.5 million increase in incentive compensation. Severance includes $16.5 million of costs related to our former chief executive officer. Salaries and benefits increased $8.5 million due to higher headcount. Incentive compensation increased $10.9 million from higher headcount and achieving a higher incentive tier than the prior year, partially offset by a $2.4 million decrease in stock-based compensation expense as no long-term stock-based incentives were offered during 2008 and several large stock-based awards were forfeited during the year due to terminations. As reflected in each of the amounts discussed above, the change in the euro exchange rate, net of hedging activities, increased compensation and benefits by approximately $2.7 million in 2008.
Transaction and operations support — Transaction and operations support expense includes marketing, professional fees and other outside services, telecommunications and agent forms related to our products. Transaction and operations support costs decreased $98.5 million, or 35 percent, in 2010 compared to 2009. Expenses in 2009 included $54.8 million of legal reserves relating to securities litigation, a patent lawsuit and a settlement with the Federal Trade Commission, $18.3 million of goodwill and asset impairments, an incremental provision for loss of $15.0 million primarily related to the closure of an international agent and consultant fees of $6.4 million related to the implementation of the European Union Payment Services Directive. Expenses in 2010 benefited from a $16.4 million reversal of legal reserves related to a patent lawsuit and a $4.8 million reduction in expenses related to telecommunications and agent forms and supplies due to cost savings initiatives. Partially offsetting these benefits was $6.9 million of incremental marketing costs to support transaction and agent growth, asset impairments of $1.8 million, $1.4 million of incremental licensing fees from international growth and $1.3 million of restructuring and related costs. As reflected in each of the amounts discussed above, the decline in the euro exchange rate decreased transactions and operations support expense by $3.1 million in 2010. In addition, the impact of foreign exchange rate movements on our foreign denominated assets and liabilities, or revaluation, generated $2.5 million of incremental expense in 2010.
38
Transaction and operations support costs increased $64.4 million, or 29 percent, in 2009 compared to 2008. We recorded $54.8 million of legal reserves in 2009 relating toof $20.3 million for securities litigation and stockholder derivative claims, a patent lawsuit and$18.0 million for a settlement with the Federal Trade Commission.Commission and $16.5 million for a patent lawsuit. Asset impairments oftotaling $18.3 million were recorded in 2009, reflecting an increase of $9.5 million over 2008. TheImpairments in 2009 impairments include a $7.0 million impairment charge related to the decision to sell our airplane, a $5.2 million impairment of goodwill and other assets from the decision to discontinue certain bill payment products and the sale of a non-core business and a $3.6$6.1 million impairment of goodwill and intangible assets and a $2.5 million impairment of goodwill related to our money order product fromdue to continued declines in that business. Professional fees increased by $9.5 million in 2009, primarily due to litigation fees and the implementation of the European Union Payment Services Directive. Our provision for agent receivables increased by $9.0 million, primarily from the closure of an international agent during the year. As our agent base and transaction volumes continue to grow, we expect that provision for loss will increase; however, we expect this growth to be much slower than agent base and transaction growth due to our underwriting and credit monitoring processes. Marketing costs decreased $12.7 million in 2009 from controlled spending, partially offset by higher costs from agent location growth. In addition, expense in 2008 reflected $9.5 million of costs related to the recapitalization2008 Recapitalization and restructuring of the official check business were recorded in 2008.business. As reflected in each of the amounts discussed above, the changedecrease in the euro exchange rate net of hedging activities, decreased transaction and operations support expense by approximately $1.7 million in 2009.
Transaction and operations support expense increased $28.8 million, or 15 percent, in 2008 compared to 2007. The recapitalization and restructuring of the official check business drove professional fees of $9.5 million in 2008. In addition, professional fees increased $5.1 million in 2008 for costs relating to the growth of the business and various business analyses initiated during the year. In the fourth quarter of 2008, we recognized a goodwill impairment charge of $8.8 million related to our decision to wind down our external ACH Commerce business. Costs related to agent forms and supplies increased $2.8 million from our transaction and agent base growth. Our provision for loss increased $4.6 million in 2008 due to expected increases in uncollectible receivables from agent growth and the impact of current economic conditions. Marketing costs decreased $3.6 million in 2008 from controlled spending, partially offset by higher costs from agent location growth and a new marketing campaign to enhance our brand positioning. As reflected in each of the amounts discussed above, the change in the euro exchange rate, net of hedging activities, increased transaction and operations support by approximately $1.9 million in 2008.
Occupancy, equipment and supplies — Occupancy, equipment and supplies expense includes facilities rent and maintenance costs, software and equipment maintenance costs, freight and delivery costs and supplies. Expenses in 2010 decreased $0.9 million, or 2 percent, compared to 2009 due to lower delivery, postage and freight costs from controlled spending and the timing of agent roll-outs, partially offset by $1.6 million of facility cease-use and related charges associated with restructuring activities. As reflected in the amounts discussed above, the decrease in the euro exchange rate decreased occupancy, equipment and supplies expense by $0.6 million in 2010.
Occupancy, equipment and supplies increased $1.4 million, or 3 percent, in 2009 compared to 2008. Software maintenance and office rent increased $2.3 million and $1.5 million, respectively, to support the growth of the business. The timing of the roll out of new agent locations and controlled spending resulted in a $2.8 million reduction of agent costs. As reflected in each of the amounts discussed above, the changedecrease in the euro exchange rate net of hedging activities, decreased occupancy, equipment and supplies expense by approximately $0.4 million in 2009.
34
Occupancy, equipment and supplies expense increased $1.3 million, or 3 percent, in 2008 compared to 2007 from higher rent, software maintenance and building operating costs, partially offset by lower freight and supplies expense. Office rent increased $1.3 million in 2008 due to the expansion of our retail locations and normal annual increases under our lease agreements. Software maintenance expense increased $0.9 million in 2008 primarily from purchased licenses to support our growth. Additionally, disposal of fixed assets, building operating costs, maintenance and higher property taxes increased our expenses by $1.6 million. Partially offsetting these increases is a $2.2 million decline in freight and supplies expense due to lower shipments from the timing of the roll out of new agents.
Interest expense — Interest expense increased to $107.9 million in 2009 from $95.0 million in 2008 due to higher average outstanding debt as a result of the recapitalization completed in the first quarter of 2008, partially offset by the repayment of $186.9 million of debt in 2009. In addition, interest expense in 2009 includes $2.7 million of expense from the write-off of a pro-rata portion of deferred financing costs and unamortized discount on Tranche B of our Senior Facility in connection with the repayment of debt in December 2009. Based on our outstanding debt balances and interest rates in effect at December 31, 2009 and the expectation that we will continue to pay all interest in cash, our interest expense will be approximately $87.0 million in 2010. This amount would be reduced by any prepayments of debt we may make in 2010.
Interest expense increased to $95.0 million in 2008 from $11.1 million in 2007 due to higher average outstanding debt resulting from the recapitalization, amortization of additional deferred financing costs related to the new debt, amortization of the debt discount on the Senior Facility and a $2.0 million net loss from the termination of interest rate swaps relating to our floating rate debt in the second quarter of 2008. Interest expense on our variable rate Senior Facility benefited from the declining interest rate environment.
Depreciation and amortization — Depreciation and amortization expense includes depreciation on point of sale equipment, agent signage, computer hardware and software, capitalized software development costs, office furniture, equipment and leasehold improvements and amortization of intangible assets. Depreciation and amortization decreased $9.0 million, or 16 percent, in 2010 compared to 2009, primarily from lower depreciation expense on point of sale equipment, computer hardware and other equipment, signs and amortization of capitalized software. As reflected in the amounts discussed above, the decrease in the euro exchange rate decreased depreciation and amortization expense by $0.5 million in 2010.
Depreciation and amortization was flat in 2009 compared to 2008 as a $3.2 million increase in depreciation from capital investments in point of sale equipment, purchased software and other fixed assets to support the growth of the business was mostly offset by a $2.8 million decrease in amortization of capitalized software, intangible assets and other assets. As reflected in each of the amounts discussed above, the changedecrease in the euro exchange rate net of hedging activities, decreased depreciation and amortization expense by approximately $0.6 million in 2009.
Depreciation and amortization increased $4.7 million, or 9 percent, in 2008 compared to 2007. Our investment in agent equipment and signage, in connection with network growth, increased depreciation expense by $3.3 million, while our investment in computer hardware and capitalized software to enhance our support functions increased depreciation expense by $0.3 million. Amortization of leasehold improvements increased by $0.9 million primarily from build-outs at our main offices to support headcount additions and update aging facilities. As reflected in each of the amounts discussed above, the change in the euro exchange rate, increased depreciation and amortization by approximately $0.7 million in 2008.
We are developingimplemented a new system to provide improved connections between our agents and our marketing, sales, customer service and support functions. The new system and associated processes are intendedin the third quarter of 2010 to increase the flexibility of our back office and improve operating efficiencies. In 20092010 and 2008,2009, we capitalized software costs of approximately $2.9$8.4 million and $3.8$4.3 million, respectively, related to this project that will impact futuresystem. In connection with our global transformation initiative, we plan to make further investments in our infrastructure to enhance operating efficiencies and support our continued growth. As a result of these investments, depreciation and amortization.amortization expense may increase in the future.
39
Other Expense (Income)
Table 4 — Net Securities (Gains) Losses
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 2010
| | | 2009
| |
| | | | | | | | | | | | vs.
| | | vs.
| |
| YEAR ENDED DECEMBER 31, | | 2010 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | |
| (Amounts in thousands) | | | | | | | | | | | | | | | |
| |
Realized gains fromavailable-for-sale investments | | $ | — | | | $ | — | | | $ | (34,200 | ) | | $ | — | | | $ | 34,200 | |
Realized losses fromavailable-for-sale investments | | | — | | | | 2 | | | | 290,498 | | | | (2 | ) | | | (290,496 | ) |
Other-than-temporary impairments fromavailable-for-sale investments | | | 334 | | | | 4,069 | | | | 70,274 | | | | (3,735 | ) | | | (66,205 | ) |
| Valuation (gains) losses on trading investments and related put options | | | — | | | | (4,304 | ) | | | 14,116 | | | | 4,304 | | | | (18,420 | ) |
| Realized gains from trading investments and related put options | | | (2,449 | ) | | | (7,557 | ) | | | — | | | | 5,108 | | | | (7,557 | ) |
| |
| |
| Net securities (gains) losses | | $ | (2,115 | ) | | $ | (7,790 | ) | | $ | 340,688 | | | $ | 5,675 | | | $ | (348,478 | ) |
| |
| |
Net securities gains of $2.1 million in 2010 reflect a $2.4 million realized gain from the call of a trading investment, net of the reversal of the related put option, partially offset by $0.3 million ofother-than-temporary impairments related to other asset-backed securities.
Net securities gains of $7.8 million in 2009 reflect a $7.6 million net realized gain from the call of two trading investments, net of the reversal of the related put options. Valuation gains of $4.3 million on the put option related to the remaining trading investment were partially offset by $4.1 million ofother-than-temporary impairments related to other asset-backed securities.
Net securities losses of $340.7 million in 2008 reflect $256.3 million of net realized losses from the realignment of our investment portfolio in the first quarter of 2008, $70.3 million ofother-than-temporary impairments related to other asset-backed securities and $40.6 million of unrealized losses from our trading investments, partially offset by a $26.5 million unrealized gain from put options received in the fourth quarter of 2008 related to the trading investments. Theother-than-temporary impairments and unrealized losses were the result of continued deterioration in the mortgage markets, as well as continued illiquidity and uncertainty in the broader markets in 2008. Our 2008 Recapitalization, which was completed on March 25, 2008, included funds to cover these losses.
Interest expense — Interest expense decreased to $102.1 million in 2010 from $107.9 million in 2009, reflecting lower outstanding debt balances, partially offset by $8.6 million of pro rata write-offs of deferred financing costs and debt discount related to the $165.0 million of debt prepayments in 2010. In 2009, we recorded a $2.7 million pro rata write-off of deferred financing costs and debt discount in connection with the prepayment of $185.0 million of debt in 2009. Based on our outstanding debt balances and interest rates in effect at December 31, 2010 and the expectation that we will continue to pay all interest in cash, our interest expense will be approximately $75.0 million in 2011. This amount would be reduced by any prepayments of debt we may make in 2011.
Interest expense increased to $107.9 million in 2009 from $95.0 million in 2008 due to higher average outstanding debt as a result of the recapitalization completed in the first quarter of 2008, partially offset by the payment of $186.9 million of debt in 2009. In addition, interest expense in 2009 includes $2.7 million of expense from the write-off of a pro-rata portion of deferred financing costs and debt discount in connection with the prepayment of debt in December 2009.
Income taxes — We had income tax expense of $14.6 million on pre-tax income of $58.4 million in 2010, primarily reflecting a release of $11.9 million of valuation allowances on deferred tax assets related to the U.S. jurisdiction. Reversals and payments of 2009 legal reserves reduced the tax base on which loss carryovers can be utilized and the corresponding release of valuation allowances.
40
We had a tax benefit of $20.4 million in 2009, primarily reflecting a release of $17.6 million of valuation allowances on realized deferred tax assets.assets related to the U.S. jurisdiction. Our pre-tax net loss of $22.3 million, when adjusted for our estimated book to tax differences, resultsresulted in taxable income, allowingwhich allowed us to release some valuation allowances on our tax loss carryovers. The book to tax differences includedinclude impairments on securities and other assets as well asand accruals related to separated employees, litigation and unrealized foreign exchange losses.
In 2008, we had a $75.8 million tax benefit, primarily reflecting the recognition of a $90.5 million benefit in the fourth quarter of 2008 upon the completion of an evaluation of the technical merits of tax positions with respect to part of the net securities losses in 2008 and 2007. The $90.5 million benefit relates to the amount of tax carry-back we were able to utilize to recover tax payments made for fiscal 2005 through 2007. We had tax expense of
35
$78.5 million in 2007 on a pre-tax loss of $993.3 million, reflecting the tax treatment of the $1.2 billion of investment losses incurred in 2007.
As of December 31, 2010, our net deferred tax liability position of $4.3 million reflects $544.8 million of gross deferred tax assets, $63.3 million of gross deferred tax liabilities and a $485.8 million valuation allowance. Essentially all of our deferred tax assets relate to the U.S. jurisdiction. In 2007, we determined it was appropriate to establish a valuation allowance for thea significant portion of our gross deferred tax assets relatingas we did not believe that we had sufficient positive evidence to overcome the full basis difference on our asset-backed securities. In 2008 and 2009, we continuedsignificant negative evidence of a three year cumulative loss. We continue to believe that it wasis appropriate to maintain a full valuation allowance for the deferred tax assets related to the full basis difference on these securities and our tax attributes. Essentially alla significant portion of our deferred tax assets relatedue to the U.S. jurisdiction, where we are in a net deferred tax liability position, and we do not believe we have sufficient positive evidence to overcome thesignificant negative evidence. Changes in facts and circumstances in the future may cause us to record additional tax benefits as further deferred tax valuation allowances are released and carry-forwards are utilized. We continue to evaluate additional available tax positions related to the net securities losses in prior years.
Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA
We believe that EBITDA (earnings before interest, taxes, depreciation and amortization, including agent signing bonus amortization) and Adjusted EBITDA (EBITDA adjusted for significant items) provide useful information to investors because they are an indicator of the strength and performance of ongoing business operations, including our ability to service debt and fund capital expenditures, acquisitions and operations. These calculations are commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare the operating performance and value of companies within our industry. In addition, our debt agreements require compliance with financial measures similar to Adjusted EBITDA. Finally, EBITDA and Adjusted EBITDA are financial measures used by management in reviewing results of operations, forecasting, assessing cash flow and capital, allocating resources and establishing employee incentive programs.
41
Although we believe the EBITDA and Adjusted EBITDA enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an exclusive alternative to accompanying GAAP financial measures. The following table is a reconciliation of these non-GAAP financial measures to the related GAAP financial measures.
Table 5 — EBITDA and Adjusted EBITDA
| | | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, | | 2010 | | | 2009 | | | 2008 | |
| | |
| (Amounts in thousands) | | | | | | | | | |
| |
| Income (loss) before income taxes | | $ | 58,380 | | | $ | (22,322 | ) | | $ | (337,191 | ) |
| Interest expense | | | 102,133 | | | | 107,911 | | | | 95,020 | |
| Depreciation and amortization | | | 48,074 | | | | 57,091 | | | | 56,672 | |
| Amortization of agent signing bonuses | | | 29,247 | | | | 35,280 | | | | 37,261 | |
| |
| |
| EBITDA | | | 237,834 | | | | 177,960 | | | | (148,238 | ) |
| Significant items impacting EBITDA: | | | | | | | | | | | | |
| Net securities (gains) losses | | | (2,115 | ) | | | (7,790 | ) | | | 340,688 | |
| Gain on security previously priced at zero | | | — | | | | — | | | | (10,456 | ) |
| Severance and related costs | | | (346 | ) | | | 4,353 | | | | 16,653 | |
| Restructuring and reorganization costs | | | 5,853 | | | | — | | | | — | |
| Asset impairment charges | | | 1,829 | | | | 18,329 | | | | 8,809 | |
| Stock-based compensation expense | | | 26,011 | | | | 14,152 | | | | 3,691 | |
| Net curtailment (gain) loss on benefit plans | | | — | | | | (14,339 | ) | | | 1,000 | |
| Legal accruals | | | (14,572 | ) | | | 54,750 | | | | — | |
| Valuation loss on embedded derivatives | | | — | | | | — | | | | 16,030 | |
| Transaction costs related to the 2008 Recapitalization | | | — | | | | — | | | | 7,733 | |
| Debt extinguishment loss | | | — | | | | — | | | | 1,499 | |
| Valuation loss on interest rate swaps | | | | | | | | | | | 27,735 | |
| |
| |
| Adjusted EBITDA | | $ | 254,494 | | | $ | 247,415 | | | $ | 265,144 | |
| |
| |
For 2010, EBITDA increased $59.9 million, or 34 percent, to $237.8 million from $178.0 million in 2009, reflecting lower legal accruals and asset impairment charges and the benefits of cost savings initiatives, partially offset by higher stock-based compensation and a net curtailment gain recorded in 2009. Adjusted EBITDA for 2010 increased $7.1 million, or 3 percent, to $254.5 million from $247.4 million in 2009, primarily due to money transfer growth and cost savings initiatives.
For 2009, EBITDA increased $326.2 million to $178.0 million as compared to negative EBITDA of $148.2 million in 2008. EBITDA in 2008 was negatively impacted by $340.1 million of net securities losses incurred during the realignment of our investment portfolio and the continued credit market deterioration, valuation losses on embedded derivatives and interest rate swaps, expenses related to our 2008 Recapitalization and executive severance and related costs. EBITDA in 2009 was negatively impacted by $54.8 million of legal accruals, higher stock-based compensation and asset impairment charges, partially offset by a $14.3 million net curtailment gain on benefit plans. Adjusted EBITDA for 2009 decreased $17.7 million, or 7 percent, to $247.4 million from $265.1 million in 2008, primarily due to lower investment revenue from the realignment of our investment portfolio and the run-off of investment balances from the official check restructuring, partially offset by money transfer growth.
42
Segment Performance
Our reporting segments are primarily organized based on the nature of products and services offered and the type of consumer served. During the fourth quarter of 2009, we revised our segment reporting to reflect changes in how weWe primarily manage our business review operating performance and allocate resources. We now manage our business primarily through two reporting segments, Global Funds Transfer and Financial Paper Products. The Global Funds Transfer segment provides global money transfers and bill payment services to consumers through a network of agents and, in select markets, company-operated locations. The Financial Paper Products segment provides money orders to consumers through our retail and financial institution locations in the United States and Puerto Rico, and provides official check services to financial institutions in the United States. Businesses whichthat are not operated within these segments are categorized as “Other,” and primarily relate to discontinued products and businesses. Prior year results have been revised for comparative purposes.Segment pre-tax operating income and segment operating margin are used to review operating performance and allocate resources.
The Global Funds Transfer segment is managed as two geographical regions or operating segments, the Americas and EMEAAP, to coordinate sales, agent management and marketing activities. The Americas region includes the United States, Canada, Mexico, the Caribbean and Latin America (including the Caribbean).America. The EMEAAP region includes Europe, the Middle East, Africa and the Asia Pacific region. We monitor performance and allocate resources at both a regional and reporting segment level. As the two regions routinely interact in completing money transfer transactions and share systems, processes and licenses, we view the Global Funds Transfer segment as one global network. The nature of the consumers and products offered is the same for each region, and the regions utilize the same agent network, systems and support functions. In addition, the regions have similar regulatory requirements and economic characteristics. Accordingly, we aggregate the two regionsoperating segments into one reporting segment.
Segment accounting policies are the same as those described in Note 32 —Summary of Significant Accounting Policiesin the Notes to the Consolidated Financial Statements. We manage our investment portfolio on a consolidated level, with no specific investment security assigned to a particular segment. However, investment revenue is allocated to each segment based on the average investableinvestment balances generated by that segment’s sale of payment instruments during the period. Net securities gains (losses)(gains) losses are not allocated to the segments as the investment portfolio is managed at a consolidated level. While the derivatives portfolio is also managed on a consolidated level, each derivative instrument is utilized in a manner that can be identified to a particular segment. Interest rate swaps historically used to hedge variable rate commissions were identified with the official check product in the Financial Paper Products segment, while forward foreign exchange contracts are identified with the money transfer product in the Global Funds Transfer segment. Any interest rate swaps related to our credit agreements are not allocated to the segments.
Also excluded from operating income for Global Funds Transfer and Financial Paper Products are interest and other expenses related to our credit agreements, items related to our preferred stock, operating income from businesses categorized as “Other,” certain pension and benefit obligation expenses, director deferred compensation plan expenses, executive severance and related costs, and certain legal and corporate costs not related to the performance of the segments and restructuring and related costs. Unallocated expenses in 2010 include $5.9 million of costs associated with our global transformation initiative and $1.8 million of asset impairments, in addition to other corporate costs of $7.4 million not allocated to the segments.
43
Unallocated expenses in 2009 include $20.3 million of legal reserves related to securities litigation and stockholder derivative claims, a net curtailment gain on benefit plans of $14.3 million, $7.0 million of asset impairments and $4.4 million of executive severance and related costs, in addition to other net corporate costs of $13.0 million not allocated to the segments. Unallocated expenses in 2008 include $16.7 million of executive
36
severance and related costs and $7.7 million of transaction costs related to the recapitalization in addition to other net corporate costs of $9.3$12.9 million not allocated to the segments. Following is a reconciliation of segment operating income to the consolidated operating results:
Table 56 — Segment Information
| | | | | | | | | | | | | | | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | | |
| (Amounts in thousands) | | | | | | | | | | | | | | |
| |
| Operating income: | | | | | | | | | | | | | | | | | | | | | | | | |
| Global Funds Transfer | | $ | 85,047 | | | $ | 139,428 | | | $ | 127,308 | | | $ | 139,314 | | | $ | 82,647 | | | $ | 142,203 | |
| Financial Paper Products | | | 27,372 | | | | 30,169 | | | | 93,283 | | | | 36,508 | | | | 27,372 | | | | 30,169 | |
| Other | | | (4,316 | ) | | | (19,883 | ) | | | (11,374 | ) | | | (2,367 | ) | | | (4,316 | ) | | | (19,883 | ) |
| | | Total segment operating income | | | 108,103 | | | | 149,714 | | | | 209,217 | | | | 173,455 | | | | 105,703 | | | | 152,489 | |
| Net securities gains (losses) | | | 7,790 | | | | (340,688 | ) | | | (1,189,756 | ) | |
| Net securities (gains) losses | | | | (2,115 | ) | | | (7,790 | ) | | | 340,688 | |
| Interest expense | | | (107,911 | ) | | | (95,020 | ) | | | (11,055 | ) | | | 102,133 | | | | 107,911 | | | | 95,020 | |
| Debt extinguishment loss | | | — | | | | (1,499 | ) | | | — | | |
| Valuation loss on embedded derivatives | | | — | | | | (16,030 | ) | | | — | | |
| Other unallocated | | | (30,304 | ) | | | (33,668 | ) | | | (1,673 | ) | |
| Other | | | | — | | | | (2,401 | ) | | | 20,304 | |
| Other unallocated expenses | | | | 15,057 | | | | 30,305 | | | | 33,668 | |
| | | Loss from continuing operations before income taxes | | $ | (22,322 | ) | | $ | (337,191 | ) | | $ | (993,267 | ) | |
| Income (loss) before income taxes | | | $ | 58,380 | | | $ | (22,322 | ) | | $ | (337,191 | ) |
| |
Table 67 — Global Funds Transfer Segment
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | 2009
| | 2008
| | | | | | | | | 2010
| | 2009
| |
| | | | | | | | | vs.
| | vs.
| | | | | | | | | vs.
| | vs.
| |
| YEAR ENDED DECEMBER 31, | | 2009 | | 2008 | | 2007 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | 2009 | | 2008 | |
| | | | | |
| (Amounts in thousands) | | | | | | | | | | | | | | | | | | | | | | |
| |
| Money transfer revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | $ | 893,076 | | | $ | 870,074 | | | $ | 731,390 | | | | 3 | % | | | 19 | % | | $ | 926,489 | | | $ | 890,675 | | | $ | 872,849 | | | | 4 | % | | | 2 | % |
| Investment revenue | | | 163 | | | | 1,873 | | | | 5,190 | | | | (91 | )% | | | (64 | )% | | | 244 | | | | 163 | | | | 1,873 | | | | 50 | % | | | (91 | )% |
| | | Total money transfer revenue | | | 893,239 | | | | 871,947 | | | | 736,580 | | | | 2 | % | | | 18 | % | | | 926,733 | | | | 890,838 | | | | 874,722 | | | | 4 | % | | | 2 | % |
| Bill payment revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | | 134,535 | | | | 141,169 | | | | 122,087 | | | | (5 | )% | | | 16 | % | | | 126,467 | | | | 134,535 | | | | 141,169 | | | | (6 | )% | | | (5 | )% |
| Investment revenue | | | 76 | | | | 38 | | | | 35 | | | | 100 | % | | | 9 | % | | | 81 | | | | 76 | | | | 38 | | | | 7 | % | | | 100 | % |
| | | Total bill payment revenue | | | 134,611 | | | | 141,207 | | | | 122,122 | | | | (5 | )% | | | 16 | % | | | 126,548 | | | | 134,611 | | | | 141,207 | | | | (6 | )% | | | (5 | )% |
| Total Global Funds Transfer revenue: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | | 1,027,611 | | | | 1,011,243 | | | | 853,477 | | | | 2 | % | | | 18 | % | | | 1,052,956 | | | | 1,025,210 | | | | 1,014,018 | | | | 3 | % | | | 1 | % |
| Investment revenue | | | 239 | | | | 1,911 | | | | 5,225 | | | | (87 | )% | | | (63 | )% | | | 325 | | | | 239 | | | | 1,911 | | | | 36 | % | | | (87 | )% |
| | | Total Global Funds Transfer revenue | | | 1,027,850 | | | | 1,013,154 | | | | 858,702 | | | | 1 | % | | | 18 | % | | | 1,053,281 | | | | 1,025,449 | | | | 1,015,929 | | | | 3 | % | | | 1 | % |
| | | Commissions expense | | | (488,116 | ) | | | (491,932 | ) | | | (399,081 | ) | | | 1 | % | | | (23 | )% | | $ | 496,645 | | | $ | 488,116 | | | $ | 491,932 | | | | 2 | % | | | (1 | )% |
| | |
| | |
| Net revenue | | $ | 539,734 | | | $ | 521,222 | | | $ | 459,621 | | | | 4 | % | | | 13 | % | |
| | |
| | |
| Operating income | | $ | 85,047 | | | $ | 139,428 | | | $ | 127,308 | | | | (39 | )% | | | 10 | % | | $ | 139,314 | | | $ | 82,647 | | | $ | 142,203 | | | | 69 | % | | | (42 | )% |
| Operating margin | | | 8.3 | % | | | 13.8 | % | | | 14.8 | % | | | | | | | | | | | 13.2 | % | | | 8.1 | % | | | 14.0 | % | | | | | | | | |
20092010 Compared to 20082009
Total revenue forin the Global Funds Transfer segment consists primarily of fees on money transfers and bill payment transactions. For 2010, Global Funds Transfer total revenue increased $27.8 million, or 3 percent, driven by money transfer volume growth, partially offset by a decline in bill payment revenue.
44
Money transfer fee and other revenue increased $35.8 million, or 4 percent, driven by transaction volume growth of 9 percent and favorable corridor mix, partially offset by lower average money transfer fees from the introduction of the $50 price band in the United States and the lower euro exchange rate. Money transfer transaction volume growth generated incremental revenue of $77.4 million, while changes in corridor mix increased revenue another $2.4 million. Lower average money transfer fees decreased fee and other revenue by $24.6 million, while the lower euro exchange rate decreased revenue by $18.1 million. In addition, money transfer fee and other revenue in 2009 included $1.3 million of early termination fees.
Transactions and the related fee revenue are viewed as originating from the send side of a transaction. Accordingly, discussion of transactions by geographic location refers to the region originating a transaction. Money transfer transactions originating outside of the United States increased 15 percent over the prior year. Excluding Spain, transactions originating outside of the United States increased 18 percent over the prior year. Transactions sent from Spain decreased 4 percent for the full year, but increased in the fourth quarter of 2010 as compared to the fourth quarter of 2009. Money transfer transactions originating in the United States, excluding transactions sent to Mexico, increased 8 percent due primarily to an 11 percent increase inintra-United States remittances. Transactions sent to Mexico declined 2 percent from the impact of the United States recession on our consumers, but improved during the last half of the year. Mexico represented approximately 9 percent of our total transactions in 2010, compared to approximately 10 percent in 2009.
Our money transfer agent base expanded 20 percent to approximately 227,000 locations in 2010, primarily due to expansion in markets outside the United States. At December 31, 2010, the Americas had approximately 69,400 locations, with 40,000 locations in North America and 29,400 locations in Latin America (including 13,500 locations in Mexico). At December 31, 2010, EMEAAP had approximately 157,600 locations located in the following regions: 40,900 locations in Western Europe, 38,700 locations in Eastern Europe, 36,200 locations in the Indian subcontinent, 25,700 locations in Asia Pacific, 12,300 locations in Africa and 3,800 locations in the Middle East.
Bill payment fee and other revenue decreased $8.1 million, or 6 percent. Lower average fees from changes in industry mix and lower volumes decreased revenue by $5.3 million and $2.8 million, respectively. Bill payment transaction volume decreased 1 percent, reflecting a change in transaction mix as we continue to grow in new emerging verticals that generate lower revenue per transaction than our traditional verticals. Due to economic conditions in the United States, volumes in our traditional verticals, such as auto and mortgage, continue to be negatively impacted.
Commissions expense consists primarily of fees paid to our third-party agents for money transfer and bill payment services, as well as the amortization of capitalized agent signing bonuses. In 2010, Global Funds Transfer commissions expense increased $8.5 million due primarily to $23.7 million of incremental expense from money transfer volume growth, partially offset by a $7.4 million decrease from the decline in the euro exchange rate and a $1.2 million decrease due to lower average money transfer commission rates. Bill payment commissions expense decreased $2.9 million from lower volumes and lower average fees per transaction, partially offset by incremental expense of $0.3 million from higher average commission rates related to biller incentives. Signing bonus expense decreased $2.9 million as certain historical signing bonuses were fully amortized or written off in the prior year
The operating margin for the Global Funds Transfer segment increased to 13.2 percent in 2010 from 8.1 percent in 2009. Included in the 2010 operating margin is a $16.4 million benefit from a legal accrual reversal in 2010. In 2009, the operating margin included $34.5 million of legal reserves related to a patent lawsuit and a settlement agreement with the Federal Trade Commission, an incremental $15.0 million provision for loss in 2009 from the closure of an agent and a $3.2 million goodwill impairment charge related to a discontinued bill payment product. After considering these items, the 2010 margin benefited from the money transfer volume growth, partially offset by lower bill payment revenue.
45
2009 Compared to 2008
For 2009, Global Funds Transfer total revenue increased $14.7$9.5 million, or 1 percent, due primarily to money transfer fee revenue growth, partially offset by lower bill payment revenue and lower investment revenue.
37
Investment revenue decreased $1.7 million due to lower yields earned on our investment portfolio. See Table 3 —Net Investment Revenue Analysisfor further information regarding average investableinvestment balances and yields on the consolidated investment portfolio.
Money transfer fee and other revenue grew $23.0$17.8 million, or 32 percent, from 2008, driven by money transfer transaction volume growth, partially offset by lower average money transfer fees and the decline in the euro exchange rate. Money transfer transaction volume increased 6 percent, generating incremental revenue of $53.3$54.5 million. Volume growth in 2009 was lower in 2009 compared tothan the prior year, reflecting the slowing economic conditions in 2009 and a growing volume base. Average money transfer fees declined from lower principal per transaction and corridor mix, reducing revenue by $20.7$15.8 million. The decline in the euro exchange rate, net of hedging activities, reduced revenue by $10.9$16.2 million in 2009.
Through the third quarter of 2009, pricing on money transfers remained stable. During the fourth quarter of 2009, we implemented a low-fee promotion with our largest agent, reducing the average fee per transaction. We expect the competitive environment to remain high and potentially intensify in various geographic locations, which could impact our pricing in the future. We continue to evaluate the price-volume dynamic and will make further changes where deemed appropriate. In January 2008, we launched our MoneyGram Rewards loyalty program in the United States, which providesprovided tiered discounts on transaction fees to our repeat consumers, less paperwork and notifications to the sender when the funds are received, among other features. In 2009, we rolled out MoneyGram Rewards in Canada, France, Germany, Spain and certain agent locations in Italy. Our MoneyGram Rewards program has positively impacted our transaction volumes, with membership in the program up 30 percent as of December 31, 2009 compared to 2008 and transaction volumes from members up 34 percent. We plan to launch the program in additional European markets in 2010.
Transactions and the related fee revenue are viewed as originating from the send side of a transaction. Accordingly, discussion of transactions by geographic location refers to the region originating a transaction. Money transfer transactions originated in the Americas increased 6 percent. Transactions originating in the United States, excluding transactions sent to Mexico, increased 9 percent due primarily tointra-United States remittances. Canada and Latin America saw transaction growth of 15 percent and 9 percent, respectively, from agent network growth. Transactions sent to Mexico declined 9 percent, reflecting the impact of the United States recession on our consumers. Mexico represented approximately 10 percent of our total transactions in 2009 as compared to 12 percent in 2008. Transactions originated in EMEAAP increased 6 percent despite a negative 9 percentage point impact from volume declines in Spain. EMEAAP transactions accounted for 24 percent of our volume in 2009 and 2008. The fastest growing regions in 2009 were South East and Central Africa, the Philippines and South Asia, which all had double-digit growth. The Middle East saw transaction growth of 9 percent, driven by send transactions from, and agent signings and renewals in, the United Arab Emirates. Our France retail business saw transaction growth of 155 percent, while the United Kingdom saw transaction growth of 6 percent primarily from sends to India and Eastern Europe, as well as growth from our three largest agents in the United Kingdom. Greece had transaction growth of 14 percent through its receive markets in Eastern Europe. Spain had volume declines of 24 percent from local economic conditions.
The money transfer agent base expanded 8 percent to approximately 190,000 locations in 2009, primarily due to expansion in the international markets. At December 31, 2009, the Americas had 66,000 locations, with 39,500 locations in North AmericaBill payment fee and 26,500 locations in Latin America (including 12,900 locations in Mexico). At December 31, 2009, EMEAAP had 124,000 locations, with 39,600 locations in Western Europe, 26,700 locations in the Indian subcontinent, 25,800 locations in Eastern Europe, 19,800 locations in Asia Pacific, 8,000 locations in Africa and 4,100 locations in the Middle East.
Bill paymentother revenue decreased $6.6 million, or 5 percent, from 2008 from a 4 percent decrease in transaction volume. Lower bill payment volumes reduced revenue by $4.9 million, reflecting the departure of a large biller in the third quarter of 2008 and the impact of economic conditions on our bill payment customers. In addition, lower principal per transaction and biller vertical mix reduced revenue by $1.7 million in 2009.
Commissions expense consists primarily of fees paid to our third-party agents for the money transfer and bill payment services, including the amortization of capitalized agent signing bonuses. Commissions expense for 2009 decreased $3.8 million, primarily from lower commission rates and the decline in the euro exchange rate, partially
38
offset by growth in money transfer transaction volume. Money transfer transaction volume growth resulted in incremental commissions expense of $16.1 million, while lower commission rates and the decline in the euro exchange rate, net of hedging activities, reduced commissions expense by $7.7 million and $6.9 million, respectively. Bill payment fee commissions expense decreased $3.8 million due to volume declines, partially offset by a $0.6 million increase due to higher average rates. Commissions expense in 2009 also decreased by $2.5 million primarily from lower signing bonus amortization as certain historical signing bonuses were fully amortized in the third quarter of 2009.
46
The operating margin of 8.38.1 percent for 2009 decreased from 13.814.0 percent in 2008, due primarily to $34.5 million of legal reserves related to a patent lawsuit and a settlement agreement with the Federal Trade Commission, a $5.2 million increase in stock-based compensation, a $7.1 million increase in provision for loss and a $3.2 million charge to impair goodwill impairment related to discontinued bill payment product offerings, partially offset by the higher fee revenue as discussed above.
Table 8 — Financial Paper Products Segment
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 2010
| | | 2009
| |
| | | | | | | | | | | | vs.
| | | vs.
| |
| YEAR ENDED DECEMBER 31, | | 2010 | | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | |
| (Amounts in thousands) | | | | | | | | | | | | | | | |
| |
| Money order revenue: | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | $ | 64,342 | | | $ | 69,296 | | | $ | 59,955 | | | | (7 | )% | | | 16 | % |
| Investment revenue | | | 3,951 | | | | 5,584 | | | | 26,357 | | | | (29 | )% | | | (79 | )% |
| |
| |
| Total money order revenue | | | 68,293 | | | | 74,880 | | | | 86,312 | | | | (9 | )% | | | (13 | )% |
| Official check revenue: | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | | 25,696 | | | | 23,690 | | | | 18,061 | | | | 8 | % | | | 31 | % |
| Investment revenue | | | 15,526 | | | | 24,213 | | | | 133,820 | | | | (36 | )% | | | (82 | )% |
| |
| |
| Total official check revenue | | | 41,222 | | | | 47,903 | | | | 151,881 | | | | (14 | )% | | | (68 | )% |
| Total Financial Paper Products revenue: | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | | 90,038 | | | | 92,986 | | | | 78,016 | | | | (3 | )% | | | 19 | % |
| Investment revenue | | | 19,477 | | | | 29,797 | | | | 160,177 | | | | (35 | )% | | | (81 | )% |
| |
| |
| Total Financial Paper Products revenue | | | 109,515 | | | | 122,783 | | | | 238,193 | | | | (11 | )% | | | (48 | )% |
| |
| |
| Commissions expense | | $ | 3,931 | | | $ | 8,295 | | | $ | 110,310 | | | | (53 | )% | | | (92 | )% |
| Operating income | | $ | 36,508 | | | $ | 27,372 | | | $ | 30,169 | | | | 33 | % | | | (9 | )% |
| Operating margin | | | 33.3 | % | | | 22.3 | % | | | 12.7 | % | | | | | | | | |
20082010 Compared to 20072009
For 2008, Global Funds TransferTotal revenue increased $154.5in the Financial Paper Products segment consists of per-item fees charged to our financial institution customers and retail agents and investment revenue. In 2010, total revenue decreased $13.3 million, or 1811 percent, compared to 2007. Fee and other revenue increased $157.8 million, or 18 percent, driven by the growth in money transfer and bill payment transaction volume, partially offset byprimarily from a $3.3$10.3 million decrease in investment revenue fromdue to lower yields earned on our investment portfolio and a decline in the realigned portfolio.average investment balances from the run-off of certain official check financial institution customers terminated in prior periods. See Table 3 —Net Investment Revenue Analysisfor further information.
Money transferorder fee and other revenue grew $138.7decreased $5.0 million or 19due to a 15 percent decline in 2008, while money transfer transactionvolumes. Money order volume increased 18 percent. Money transfer transaction volume growth resulted in incrementaldeclines are consistent with 2009 and are attributed to the anticipated attrition of agents from repricing initiatives, the continued migration by consumers to other payment methods, consumer pricing increases as agents pass along fee increases and the general economic environment. Official check fee and other revenue of $131.8 million in 2008, while average money transfer fees reduced revenue by $11.6increased $2.0 million from lower principal per transaction and corridor mix. The increase in2009 due to our official check repricing initiatives, partially offset by the euro exchange rate, netrun-off of hedging activities, increased revenue by $20.2 million in 2008. The money transfer growth in 2008 was a result of our network expansion and continued targeted pricing initiatives to provide a strong consumer value proposition, supported by targeted marketing efforts. For money transfer, our Americas transactions increased 19 percent in 2008, while EMEAAP transactions increased 16 percent in 2008. Transaction volume to Mexico grew 2 percent in 2008 compared to 8 percent in 2007, reflecting slowing growth from the economic conditions in the United States. Mexico represented 12 percent of our total transactions in 2008 compared to 13 percent in 2007. Bill payment transaction volume growth of 13 percent from network expansion increased revenue by $18.8 million, while higher average fees from higher principal per transaction and vertical mix increased revenue by $0.3 million in 2008.official check financial institution customers.
Commissions expense increased $92.9 million, or 23 percent, from 2007, primarily drivenin the Financial Paper Products segment includes payments made to financial institution customers based on amounts generated by higherthe sale of official checks times short-term interest rate indices, payments on money transferorder transactions and bill payment transaction volume, higher commission rates, amortization of signing bonusesbonuses. Commissions expense decreased $4.4 million, or 53 percent, due primarily to lower money order agent rebates from our repricing initiatives and increases in the euro exchange rate. Higher money transfer transaction volumes increased fee commissions expense by $54.4 million, while higher average commissions per transaction, primarily from Walmart, increased commissions by $4.0 million. The extension of the current agreement with Walmart, our largest agent, through January 2013 includes certain commission increases over the term of the contract. The Walmart commission rate increased one percent effective March 25, 2008, but is not scheduled to increase again until 2011. Amortization oflower signing bonuses increased $11.6 million in 2008bonus amortization, as well as lower investment balances resulting from the signingrun-off of several large agents in 2007 and one large agent in the first quarterofficial check financial institution customers. See Table 3 —Net Investment Revenue Analysisfor further discussion of 2008. The change in the euro exchange rate increased feeinvestment commissions expense by $8.8 million. Bill payment commissions expense increased $11.3 million due to volume growth and $3.2 million due to higher average rates.
Operating income of $139.4 million in 2008 increased from operating income of $127.3 million in 2007, reflecting a higher growth of fee revenue compared to commissions expense growth and investment revenue declines.expense.
3947
Table 7 —The operating margin for the Financial Paper Products Segment
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | 2009
| | | 2008
| |
| | | | | | | | | | | | vs.
| | | vs.
| |
| YEAR ENDED DECEMBER 31, | | 2009 | | | 2008 | | | 2007 | | | 2008 | | | 2007 | |
| | |
| (Amounts in thousands) | | | | | | | | | | | | | | | |
| |
| Money order revenue: | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | $ | 69,296 | | | $ | 59,954 | | | $ | 62,520 | | | | 16 | % | | | (4 | )% |
| Investment revenue | | | 5,584 | | | | 26,357 | | | | 92,871 | | | | (79 | )% | | | (72 | )% |
| |
| |
| Total money order revenue | | | 74,880 | | | | 86,311 | | | | 155,391 | | | | (13 | )% | | | (44 | )% |
| Official check revenue: | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | | 23,690 | | | | 18,061 | | | | 15,055 | | | | 31 | % | | | 20 | % |
| Investment revenue | | | 24,213 | | | | 133,820 | | | | 299,680 | | | | (82 | )% | | | (55 | )% |
| |
| |
| Total official check and payment processing revenue | | | 47,903 | | | | 151,881 | | | | 314,735 | | | | (68 | )% | | | (52 | )% |
| Total Financial Paper Products revenue: | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | | 92,986 | | | | 78,015 | | | | 77,575 | | | | 19 | % | | | 1 | % |
| Investment revenue | | | 29,797 | | | | 160,177 | | | | 392,551 | | | | (81 | )% | | | (59 | )% |
| |
| |
| Total Financial Paper Products revenue | | | 122,783 | | | | 238,192 | | | | 470,126 | | | | (48 | )% | | | (49 | )% |
| |
| |
| Commissions expense | | | (8,295 | ) | | | (110,310 | ) | | | (262,684 | ) | | | 92 | % | | | 58 | % |
| |
| |
| Net revenue | | $ | 114,488 | | | $ | 127,882 | | | $ | 207,442 | | | | (10 | )% | | | (38 | )% |
| |
| |
| Operating income | | $ | 27,372 | | | $ | 30,169 | | | $ | 93,283 | | | | (9 | )% | | | (68 | )% |
| Operating margin | | | 22.3 | % | | | 12.7 | % | | | 19.8 | % | | | | | | | | |
segment increased to 33.3 percent in 2010 from 22.3 percent in 2009, reflecting $6.1 million of goodwill and asset impairment charges in 2009 related to our money order business and lower commissions, partially offset by lower investment revenue in 2010.
2009 Compared to 2008
Total revenue for the Financial Paper Products segment consists of investment revenue and per-item fees charged to our financial institution customers and retail agents. For 2009, Financial Paper Products total revenue decreased $115.4 million, or 48 percent, due primarily to a $130.4 million, or 81 percent, decrease in investment revenue from lower yields earned on our realigned investment portfolio and a decline in average investableinvestment balances from the termination of certain official check financial institution customers. See Table 3 —Net Investment Revenue Analysisfor further information. This decrease was partially offset by a $15.0 million increase in fee and other revenue for money order and official check products, primarily due to our repricing initiatives. Beginning in the fourth quarter of 2008, we implemented a phased repricing initiative for money order, which includes remittance schedule changes focused on reducing our credit exposure and had an emphasis on agents that sell only our money order product. During 2009, money order volumes declined 17 percent. This decline is attributed to the anticipated attrition of agents due to the repricing initiative, consumer pricing increases as agents pass along fee increases, the continued migration to other payment methods and the general economic environment.
Commissions expense includes payments made to financial institution customers based on official check and money order average investable balance times short-term interest rate indices. Commissions expense decreased $102.0 million, or 92 percent, from 2008. Commissions expense for 2008 included a $27.7 million net loss due to the termination of interest rate swaps related to the official check business. See Note 76 —Derivative Financial Instrumentsof the Notes to Consolidated Financial Statements for further information. Investment commissions paid to financial institution customers decreased in 2009 from the decline in the federal funds rate and lower investment balances upon which commissions were paid. See Table 3 —Net Investment Revenue Analysisfor further information.
OperatingThe operating margin increased to 22.3 percent in 2009 from 12.7 percent in 2008, reflecting the growth in fee revenue from repricing initiatives, the $27.7 million loss from the termination of swaps in 2008 and lower commissions expense from the decline in the federal funds rate and lower investment balances.
40
2008 Compared to 2007
For 2008, total Financial Paper Products revenue decreased $231.9 million, or 49 percent, due primarily to a $232.4 million decline in investment revenue from lower yields earned on our realigned investment portfolio and the decrease in our investment balances from the termination of official check financial institution customers and the termination of our sale of receivables program. See Table 3 —Net Investment Revenue Analysisfor further information.
For 2008 and 2007, commissions expense includes costs associated with interest rate swaps used to hedge our variable rate commission payments and costs related to the sale of receivables program which was terminated in the first quarter of 2008. In 2008, commissions expense decreased $152.4 million, or 58 percent, due primarily to lower average investable balances, lower commission rates from the official check repricing and the decline in the effective federal funds rate. See Table 3 —Net Investment Revenue Analysisfor further information. In addition, commissions expense in 2007 included $22.3 million of expense related to the sale of receivables program, while minimal expense was incurred in 2008 as the program was terminated in the first quarter of 2008. Partially offsetting these benefits is a $27.7 million net loss resulting from the termination of interest rate swaps related to the official check business. See Note 7 —Derivative Financial Instrumentsof the Notes to Consolidated Financial Statements for further information regarding the terminations of the interest rate swaps.
Operating income for 2008 of $30.2 million decreased from operating income of $93.3 million in 2007 reflecting the decrease in revenue. The net investment margin of 1.20 percent in 2008 as compared to 2.21 percent in 2007 reflects the lower yields on our realigned portfolio, partially offset by lower commission rates from the repricing initiatives and the declining federal funds rate. As the lower commission rates did not go into effect until the second half of 2008, the lower yields on the portfolio offset the benefits of the repricing initiatives.
Trends Expected to Impact 20102011
The discussion of trends expected to impact 2010our business in 2011 is based on information presently available and contains certain assumptions regarding future economic conditions. Differences in actual economic conditions during 20102011 compared with our assumptions could have a material impact on our results. See “Cautionary Statements Regarding Forward-Looking Statements” and Part I, Item 1A,Risk Factors of this Annual Report onForm 10-K for additional factors that could cause results to differ materially from those contemplated by the following forward-looking statements.
Throughout 2009,2010, global economic conditions remained weak. We cannot predict the duration or extent of the severity of these economic conditions, nor the extent to which these conditions could negatively affect our business, operating results or financial condition. While the money remittance industry has generally been resilient during times of economic softness, the current global economic conditions have continued to adversely impact the demand for money remittances. Given the global economic uncertainty, we have less visibility to the future and believe growth rates could continue to be impacted by slow economic conditions. In addition, bill payment products available in the United States have not been as resilient as money transfers given the more discretionary nature of items paid for by consumers using these products.transfers.
While there is great uncertainty around when the global economy and the remittance industry, will begin to improve, the World Bank, a key source of industry analysis for developing countries, is projecting flat to modestfive percent remittance growth in 2010. This is consistent with our expectations for modest money transfer volume growth.2011. Our growth has historically exceeded the World Bank projections. We expect thisour growth to be driven by agent expansion and increasing productivity in our existing agent locations through marketing support, customer acquisition and new product innovation. We anticipate money transfer revenue growth to be lower than transaction growth through the first quarter of 2011 due to the lower average fees resulting from the $50 price band that was introduced in the first half of 2010. We anticipate that the $50 price band will be a long-term change in our pricing. We believe there is increased competitive pressure in the remittance industry and although we have not seen significant pricing pressure outside of the $50 price band, we will continue to proactively manage our pricing efforts. We believe all of these efforts will not only help to counteract the effects of the current global economic conditions, but position us for enhanced market share and strong growth when the economy begins to recover.
48
For our Financial Paper Products segment, we expect the decline in overall paper-based transactions to continue in 2010. Given2011. As a result of the currentpricing initiatives undertaken in prior years, we have reduced the commission rates paid to our official check financial institution customers and instituted certain per item and other fees for both the official check and money order services. In addition, the historically low interest rate environment we expecthas resulted in low or no commissions being paid to our net investment margin to decline as our cash and cash equivalents will likely reset to lower rates. As described earlier, the effective federal funds rate was so low throughout 2009 that commissions to most of ourofficial check financial institution customers were negative duringcustomers. As a result, we anticipate that the year. While we expect the effective federal funds rate to remain at their current historic lows throughout 2010, weFinancial Paper Products segment will experience some financial institution and agent attrition in 2011. We do not expect any benefit to commission expense in 2010 to offset the likely decline in investment yields. Anybelieve that an increase in interest rates in 20102011 will also negativelyhave a significant impact to our investment margin due toas the lagging impactinterest rates earned on the substantial portion of rising rates on our investment portfolio.portfolio reset on a frequent basis and our pricing initiatives have helped to mitigate interest rate risk.
41
We continue to see a trend among state, federal and international regulators toward enhanced scrutiny of anti-money laundering compliance, as well as consumer fraud prevention and education. In addition, we created a new licensed entity in connection with the November 2009 adoption of the European Union’s Payment Services Directive, which provides for a new licensing and regulatory framework for our services in the European Union. As we continue to add staffrevise our processes and enhance our technology systems to meet regulatory trends, our operating expenses for compliance will likelymay increase.
As we implement the second phase of our global transformation initiative in 2011, we anticipate that our operating expenses will increase in the short-term as up-front expenditures will be required to achieve the expected long-term cost savings. Based on current plans for the second phase, we anticipate incurring cash outlays of up to $22.0 million in 2011 related to restructuring, reorganization and technology investment activities. Up to $15.0 million of these cash outlays are anticipated to be recognized as an expense in 2011, with the remaining portion capitalized as internally-developed software and amortized over future periods.
Acquisition and Disposal Activity
Acquisition and disposal activity is set forth in Note 43 —AcquisitionAcquisitions and Disposal ActivityDisposalsof the Notes to Consolidated Financial Statements.
2008 Recapitalization
On March 25, 2008, we completed a series of transactions pursuant to which we received an infusion of $1.5 billion of gross equity and debt capital to support the long-term needs of the business and provide necessary capital due to the investment portfolio losses in late 2007 and the first quarter of 2008 (the “recapitalization”“2008 Recapitalization”). The net proceeds of the recapitalization2008 Recapitalization were used to invest in cash equivalents to supplement our unrestricted assets and to repay $100.0 million on our revolving credit facility. Following areFor the key terms of the equity and debt capital issued.
Equity Capital — The equity component of the recapitalization consisted of the private placement of 760,000 shares, in aggregate, of B Stock and shares of non-voting B-1 Stock to affiliates of THL and affiliates of Goldman Sachs, respectively, for an aggregate purchase price of $760.0 million. After the issuance of the Series B Stock, the Investors had an equity interest of approximately 79 percent; this equity interest has increased to 82 percent as of December 31, 2009 from the accrual of dividends during the year. In connection with the recapitalization, we also paid Goldman Sachs an investment banking advisory fee equal to $7.5 million in the form of 7,500 shares of B-1 Stock. Seeissued, see Note 1211 —Mezzanine Equityof the Notes to the Consolidated Financial Statements for further information regarding the Series B Stock.
Debt Capital and Note 9 — Our wholly owned subsidiary, Worldwide, entered into a Senior Facility of $600.0 million with various lenders and JPMorgan as Administrative Agent for the lenders. At the time of the recapitalization, the Senior Facility was composed of a $100.0 million tranche A term loan (“Tranche A”), a $250.0 million tranche B term loan (“Tranche B”) and a $250.0 million revolving credit facility. Tranche B was issued at a discount of 93.5 percent, for a $16.3 million discount. Worldwide also issued $500.0 million of Notes maturing in March 2018 to Goldman Sachs. See Note 10 —Debtof the Notes to the Consolidated Financial StatementsStatements.
Recent Developments
On March 7, 2011, we entered into a Recapitalization Agreement with THL and Goldman Sachs pursuant to which (i) THL will convert all of the shares of B Stock into shares of our common stock in accordance with the Certificate of Designations, Preferences and Rights of Series B Participating Convertible Preferred Stock of MoneyGram International, Inc., (ii) Goldman Sachs will convert all of the shares of B-1 Stock into shares of D Stock in accordance with the Certificate of Designations, Preferences and Rights of Series B-1 Participating Convertible Preferred Stock of MoneyGram International, Inc., and (iii) THL will receive approximately 28.2 million additional shares of our common stock and $140.8 million in cash, and Goldman Sachs will receive approximately 15,504 additional shares of D Stock (equivalent to approximately 15.5 million shares of our common stock) and $77.5 million in cash (such transactions, collectively, the “2011 Recapitalization”). Concurrently with entering into the Recapitalization Agreement, Worldwide and the Company entered into a Consent Agreement with the GS Note Holders in which the parties thereto have agreed to enter into a supplemental indenture to the indenture governing the Notes that will, among other things, amend the indenture in order to permit the 2011 Recapitalization. See “Business-Recent Developments” in this Form 10-K for further information regarding the Senior Facility2011 Recapitalization, the Recapitalization Agreement and the Notes.Consent Agreement.
49
LIQUIDITY AND CAPITAL RESOURCES
We have various resources available to us for purposes of managing liquidity and capital needs, including our cash, cash equivalents, investments,investment portfolio, credit facilities and letters of credit. We refer to our cash and cash equivalents, short-term investments, trading investments and related put options andavailable-for-sale investments collectively as our “investment portfolio.” We utilize the assets in excess of payment service obligations measure shown below in various liquidity and capital assessments. While assets in excess of payment service obligations, as defined, is a capital measure, it also serves as the foundation for various liquidity analyses.
42
Table 89 — Assets in Excess of Payment Service Obligations
| | | | | | | | | | |
| | | December 31,
| | December 31,
| | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | | 2010 | | 2009 | |
| | | | | |
| |
| Cash and cash equivalents (substantially restricted) | | $ | 3,776,824 | | | $ | 4,077,381 | | | $ | 2,865,941 | | | $ | 3,376,824 | |
| Receivables, net (substantially restricted) | | | 1,054,381 | | | | 1,264,885 | | | | 982,319 | | | | 1,054,381 | |
| Short-term investments (substantially restricted) | | | | 405,769 | | | | 400,000 | |
| Trading investments and related put options (substantially restricted) | | | 26,951 | | | | 47,990 | | | | — | | | | 26,951 | |
Available-for-sale investments (substantially restricted) | | | 298,633 | | | | 438,774 | | | | 160,936 | | | | 298,633 | |
| | | | | | 5,156,789 | | | | 5,829,030 | | | | 4,414,965 | | | | 5,156,789 | |
| Payment service obligations | | | (4,843,454 | ) | | | (5,437,999 | ) | | | (4,184,736 | ) | | | (4,843,454 | ) |
| | | Assets in excess of payment service obligations | | $ | 313,335 | | | $ | 391,031 | | | $ | 230,229 | | | $ | 313,335 | |
| |
Liquidity
Our primary sources of liquidity include cash flows generated by the sale of our payment instruments, our cash and cash equivalent and short-term investment balances, proceeds from our investment portfolio and credit capacity under our credit facilities and proceeds from our investment portfolio.facilities. Our primary operating liquidity needs relate to the settlement of payment service obligations to our agents and financial institution customers, as well as general operating expenses.
To meet our payment service obligations at all times, we must have sufficient highly liquid assets and be able to move funds globally on a timely basis. On average, we pay over $1.0 billion a day to settle our payment service obligations. We generally receive a similar amount on a daily basis for the principal amount of our payment instruments sold and the related fees. We use the incoming funds from sales of new payment instruments to settle our payment service obligations for previously sold payment instruments. This pattern of cash flows allows us to settle our payment service obligations through on-going cash generation rather than liquidating investments or utilizing our revolving credit facility. We have historically generated, and expect to continue generating, sufficient cash flows from daily operations to fund ongoing operational needs.
The timely remittance of funds by our agents and financial institution customers is an important component of our liquidity and allows for the pattern of cash flows described above. If the timing of the remittance of funds were to deteriorate, it would alter our pattern of cash flows and could require us to liquidate investments or utilize our revolving credit facility to settle payment service obligations. To manage this risk, we closely monitor the remittance patterns of our agents and financial institution customers and act quickly if we detect deterioration or alternationalteration in remittance timing or patterns. If deemed appropriate, we have the ability to deactivate an agent’s equipment at any time, thereby preventing the initiation or issuance of further money transfers and money orders. See “Enterprise Risk Management— Credit Risk” for further discussion of this risk and our mitigation efforts.
We also seek to maintain liquidity beyond our operating needs to provide a cushion through the normal fluctuations in our payment service assets and obligations and to invest in the infrastructure and growth of our business. While the assets in excess of payment service obligations, as shown in Table 8,9, would be available to us for our general operating needs and investment in the Company, we consider a portion of our assets in excess of payment service obligations as additional assurance that regulatory and contractual requirements are maintained. We believe we have sufficient assets and liquidity to operate and grow our business for the next 12 months. Should our liquidity needs exceed our operating cash flows, we believe that our external financing sources, including availability under our Senior Facility,senior facility, will be sufficient to meet any liquidity needs.
50
Cash and Cash Equivalents and Short-term Investments —To ensure we maintain adequate liquidity to meet our operating needs at all times, we keep a significant portion of our investment portfolio in cash and cash equivalents and short-term investments at financial institutions rated Aa3 or better by Moody’s Investor Service (“Moody’s”) and AA- or better by Standard & Poors (“S&P&P”), and in United StatesU.S. government money market funds rated Aaa by Moody’s and AAA by S&P. As of December 31, 2009,2010, cash and equivalents and short-term investments totaled $3.8$3.3 billion, representing 9295 percent of our total investment portfolio. Cash equivalents consistedand short-term investments consist of time deposits, certificates of deposit and money market funds that invest in United States government and government agency securities.securities, time deposits and certificates of deposit.
Clearing and Cash Management Banks —We move and receive money through a network of clearing and cash management banks. The relationships with these clearing banks and cash management banks are a critical
43
component of our ability to move monies on a global and timely basis. We have agreements with nine clearing banks that provide clearing and processing functions for official checks, money orders and other draft instruments. We have eight official check clearing banks, of which threefive banks are currently operating under post-termination arrangements of their contracts. The remaining fivethree active banks provide sufficient capacity for our official check business. We rely on two banks to clear our retail money orders and believe that these banks provide sufficient capacity for that business. One clearing bank contract has financial covenants that include the maintenance of total cash, cash equivalents, receivables and investments in an amount at least equal to total outstanding payment service obligations, as well as the maintenance of a minimum 103 percent ratio of total assets held at that bank to instruments estimated to clear through that bank. Financial covenants related to special purpose entities (“SPEs”) include the maintenance of specified ratios of greater than 100 percent of cash, cash equivalents and investments held in the SPE to outstanding payment instruments issued by the related financial institution.
We also maintain contractual relationships with a variety of domestic and international cash management banks for ACH and wire transfer services forused in the movement of consumer funds and agent settlements. There are a limited number of international cash management banks with a network large enough to manage cash settlements for our entire agent base. In addition,base, and some of these large international banks have opted not to bank money service businesses. As a result, in addition to utilizing a large cash management bank, we also utilize regional or country-based banking partners. We do not anticipate that these in-country relationships will affect our liquidity or timing of remittances.partners in addition to large cash management banks.
Special Purpose Entities —For certain of our financial institution customers, we established individual SPEs upon the origination of our relationship. Along with operational processes and certain financial covenants, these SPEs provide the financial institutions with additional assurance of our ability to clear their official checks. Under these relationships, the cash, cash equivalents, investmentsinvestment portfolio assets and payment service obligations related to the financial institution customer are all held by the SPE. In most cases, the fair value of the cash, cash equivalents and investmentsinvestment portfolio must be maintained in excess of the payment service obligations. As the related financial institution customer sells our payment service instruments, the principal amount of the instrument and any fees are paid into the SPE. As payment service instruments issued by the financial institution customer are presented for payment, the cash and cash equivalents within the SPE are used to settle the instrument. As a result, cash and cash equivalents within SPEs are generally not available for use outside of the SPE. We remain liable to satisfy the obligations, both contractually and under the Uniform Commercial Code, as the issuer and drawer of the official checks regardless of the existence of the SPEs. Accordingly, we consolidate all of the assets and liabilities of these SPEs in our Consolidated Balance Sheets, with the individual assets and liabilities of the SPEs classified in a manner similar to our other assets and liabilities. Under limited circumstances, the financial institution customers that are beneficiaries of the SPEs have the right to either demand liquidation of the assets in the SPEs or to replace us as the administrator of the SPE. Such limited circumstances consist of material, and in most cases continued, failure to uphold our warranties and obligations pursuant to the underlying agreements with the financial institutions.
The combined SPEs hold 32 percent of our $4.1$3.4 billion portfolio as of December 31, 2009,2010, as compared to 63 percent at December 31, 2008.2009. As the SPEs relate to financial institution customers we terminated in connection with the restructuring of theour official check business, we expect the SPEs to continue to decline as a percentpercentage of our portfolio as the outstanding instruments related to the financial institutions roll-off.
51
Credit Facilities —Our credit facilities consist of a senior facility and second lien notes. See Note 9— Debtof the Senior Facility andNotes to the Notes.Consolidated Financial Statements for further information. During 2009,2010, we repaid $186.9$165.0 million of outstanding Tranche B debt under our senior facility. Combined with previous debt repayments, we have repaid $351.9 million of our outstanding debt since January 1, 2009, including the repayment of the full $145.0 million balance on our revolving credit line, a $40.0$205.0 million prepaymentof prepayments on Tranche B debt and $1.9 million of scheduled quarterly principal payments on
44
Tranche B.B debt. We continue to evaluate further reductions of our outstanding debt ahead of scheduled maturities. Following is a summary of our outstanding debt at December 31:
Table 910 — Schedule of Credit Facilities
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Interest Rate
| | Facility
| | Outstanding | | 2010
| | | Interest Rate
| | Facility
| | Outstanding | | 2011
| |
| (Amounts in thousands) | | for 2009 | | Size | | 2009 | | 2008 | | Interest (1) | | | for 2010 | | Size | | 2010 | | 2009 | | Interest | |
| | | | | |
| |
| Tranche A, due 2013 | | | 5.75 | % | | $ | 100,000 | | | $ | 100,000 | | | $ | 100,000 | | | $ | 5,750 | | | | 5.75 | % | | $ | 100,000 | | | $ | 100,000 | | | $ | 100,000 | | | $ | 5,750 | |
| Tranche B, net of unamortized discount, due 2013 | | | 7.25 | % | | | 250,000 | | | | 196,791 | | | | 233,881 | | | | 14,953 | | | | 7.25 | % | | | 250,000 | | | | 39,946 | | | | 196,791 | | | | 2,991 | |
| Revolving credit facility, due 2013 | | | 5.75 | % | | | 250,000 | | | | — | | | | 145,000 | | | | — | | | | 5.75 | % | | | 250,000 | | | | — | | | | — | | | | — | |
| | | First lien senior secured debt | | | | | | | 600,000 | | | | 296,791 | | | | 478,881 | | | | 20,703 | | | | | | | | 600,000 | | | | 139,946 | | | | 296,791 | | | | 8,741 | |
| Second lien notes, due 2018 | | | 13.25 | % | | | 500,000 | | | | 500,000 | | | | 500,000 | | | | 66,250 | | | | 13.25 | % | | | 500,000 | | | | 500,000 | | | | 500,000 | | | | 66,250 | |
| | | Total debt | | | | | | $ | 1,100,000 | | | $ | 796,791 | | | $ | 978,881 | | | $ | 86,953 | | | | | | | $ | 1,100,000 | | | $ | 639,946 | | | $ | 796,791 | | | $ | 74,991 | |
| |
| | |
| (1) | | Reflects the interest that will be paid in 20102011 using the rates in effect on December 31, 2009,2010, assuming no prepayments of principal and the continued payment of interest on the Notes.second lien notes. |
TheOur revolving credit facility has $234.5$243.2 million of borrowing capacity as of December 31, 2009, reflecting $15.52010, net of $6.8 million of standbyoutstanding letters of credit issued under the facility.issued. Amounts outstanding under the revolving creditsenior facility and Tranche A are due upon maturity in 2013. As a result of the $40.0 million prepayment of Tranche B in December 2009,our debt prepayments, there are no mandatory principal payments are duerequired on Tranche B until maturity in 2013. We may elect an interest rate for the Senior Facilitysenior facility at each reset period based on either the United States prime bank rate or the Eurodollar rate, with a minimum rate of 250 basis points set for the Eurodollar option. The interest rate election may be made individually for each term loan and each draw under the revolving credit facility. For the revolving credit facility and Tranche A, the interest rate is either the United States prime bank rate plus 250 basis points or the Eurodollar rate plus 350 basis points. In addition, we incur fees of 50 basis points on the daily unused availability under the revolving credit facility. The interest rate for Tranche B can be set at either the United States prime bank rate plus 400 basis points or the Eurodollar rate plus 500 basis points. Through 2009 and as of the date of this filing, our interest rates have been set based on the United States prime bank rate.
The Notes matureAmounts outstanding under the second lien notes are due upon maturity in 2018, with principal due in full at that time.2018. The interest rate on the Notessecond lien notes is 13.25 percent per year. Prior to March 25, 2011, we have the option to capitalize interest at a rate of 15.25 percent. If interest is capitalized, 0.50 percent of the interest is payable in cash and 14.75 percent is capitalized into the outstanding principal balance. We elected to payhave paid the interest on the second lien notes through December 31, 2009,2010, and we anticipate that we will continue to pay the interest on the Notes for the foreseeable future.second lien notes that is due March 25, 2011.
Our borrowingcredit facilities contain various financial and non-financial covenants. A violation of these covenants could negatively impact our liquidity by restricting our ability to borrow under the revolving credit facilityand/or causing acceleration of amounts due under the credit facilities. The financial covenants in our credit facilities measure leverage, interest coverage and liquidity. Leverage is measured through a senior secured debt ratio calculated as consolidated indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”), adjusted for certain items such as net securities gains (losses),(gains) losses, stock-based compensation expense, certain legal settlements and asset impairments, among other items (“adjusted EBITDA”). This measure is similar, but not identical, to the measure discussed under Table 5 —EBITDA and Adjusted EBITDA. Interest coverage is calculated as adjusted EBITDA to net cash interest expense. Liquidity is measured as assets in excess of payment service obligations, as shown in Table 8,9, adjusted for various exclusions. We are in compliance with all financial covenants as of December 31, 2009.2010.
52
The terms of our credit facilities also place restrictions on certain types of payments we may make, including dividends to our preferred and common stockholders, acquisitions and the funding of foreign subsidiaries, among others. We do not anticipate these restrictions to limit our ability to grow the business either domestically or internationally. In addition, we may only make dividend payments to common stockholders subject to an incrementalbuild-up based on our
45
consolidated net income in future periods. No dividends were paid on our common stock in 20092010, and we do not anticipate declaring any dividends on our common stock during 2010.2011.
Equity Registration Rights Agreement —The Company and the Investors also entered into a Registration Rights Agreement (the “Equity Registration Rights Agreement”) on March 25, 2008, with respect to the Series B Stock and D Stock, and the common stock owned by the Investors and their affiliates (collectively, the “Registrable Securities”). Under the terms of the Equity Registration Rights Agreement, we are required, after a specified holding period, to use our reasonable best efforts to promptly file with the SEC a shelf registration statement relating to the offer and sale of the Registrable Securities. We are obligated to keep such shelf registration statement continuously effective under the Securities Act of 1933, as amended (the “Securities Act”), until the earlier of (1) the date as of which all of the Registrable Securities have been sold, (2) the date as of which each of the holders of the Registrable Securities is permitted to sell its Registrable Securities without registration pursuant to Rule 144 under the Securities Act and (3) fifteen years. The holders of the Registrable Securities are also entitled to five demand registrations and unlimited piggyback registrations during the term of the Equity Registration Rights Agreement. On December 14, 2010, we filed a shelf registration statement onForm S-3 with the SEC which would permit the offer and sale of the Registrable Securities, as required by the terms of the Equity Registration Rights Agreement. The registration statement also would permit the Company to offer and sell up to $500 million of its common stock, preferred stock, debt securities or any combination of these, from time to time, subject to market conditions and the Company’s capital needs. The registration statement is subject to review by the SEC and has not yet been declared effective by the SEC.
Credit Ratings —As of December 31, 20092010 our credit ratings from Moody’s, Standard & PoorsS&P and Fitch Ratings (“Fitch”) were B1, B+ and B+, respectively, with a negativestable outlook assigned by the three credit rating agencies. Our credit facilities, regulatory capital requirements and other obligations are not impacted by the level of our credit ratings. However, higher credit ratings could increase our ability to attract capital, minimize our weighted average cost of capital and obtain more favorable terms with our lenders, agents and clearing and cash management banks.
Mezzanine Equity —Our Series B Stock pays a cash dividend of 10 percent. At the Company’s option, we may accrue dividends at a rate of 12.5 percent through March 25, 2013 and 15.0 percent thereafter. We have accrued dividends in 2008 and 2009, and anticipate accruing dividends for at leastfrom the next 12 months.issuance of Series B Stock through December 31, 2010.
Contractual and Regulatory Capital
Regulatory Capital Requirements —We have capital requirements relating to government regulations in the United States and other countries where we operate. Such regulations typically require us to maintain certain assets in a defined ratio to our payment service obligations. In the United States, throughThrough our wholly owned subsidiary and licensed entity, MPSI, we are regulated in the United States by various state agencies that generally require us to maintain a pool of liquid assets and investments with a rating of A or higher in an amount generally equal to the regulatory payment service obligation measure, as defined by theeach state, for our regulated payment instruments, namely teller checks, agent checks, money orders and money transfers. The regulatory requirements do not require us to specify individual assets held to meet our payment service obligations, nor are we required to deposit specific assets into a trust, escrow or other special account. Rather, we must maintain a pool of liquid assets. Provided we maintain a total pool of liquid assets sufficient to meet the regulatory and contractual requirements, we are able to withdraw, deposit or sell our individual liquid assets at will, with nowithout prior notice, or penalty or limitations.
53
The regulatory requirements in the United States are similar to our internal measure of assets in excess of payment service obligations set forth in Table 89 —Assets in Excess of Payment Service Obligations. The regulatory payment service assets measure varies by state, but in all cases excludes investments rated below A-.state. The most restrictive states may also exclude assets held at banks that do not belong to a national insurance program, varying amounts of accounts receivable balancesand/or assets held in one of the SPEs. The regulatory payment service obligation measure varies by state, but in all cases is substantially lower than our payment service obligations as disclosed in the Consolidated Balance Sheets as we are not regulated by state agencies for payment service obligations resulting from outstanding cashier’s checks or for amounts payable to agents and brokers. All states require MPSI to maintain positive net worth, with one state also requiring MPSI to maintain positive tangible net worth of $100.0 million.
We are also subject to regulatory requirements in various countries outside of the United States, which typically results in needing to either prefund agent settlements or hold minimum required levels of cash within the applicable country. The most material of these requirements is in the United Kingdom, where our licensed entity, MoneyGram International Limited, is required to maintain a cash and cash equivalent balance equivalentequal to outstanding payment instruments issued in the European community. This amount will fluctuate based on our level of activity within the European Community, and is likely to increase over time as our business expands in that region. Assets used to meet these regulatory requirements support our payment service obligations, but are not available to satisfy other liquidity needs. As of December 31, 2009,2010, we had approximately $35.0$50.2 million of cash deployed internationallyoutside of the United States to meet regulatory requirements.
We were in compliance with all financial regulatory requirements as of December 31, 2009.2010. We believe that our liquidity and capital resources will remain sufficient to ensure on-going compliance with all financial regulatory requirements.
Investment PortfolioAvailable-for-sale Investments —Our investment portfolio is composed of $298.6includes $160.9 million ofavailable-for-sale investments and $27.0 millionas of trading investments and related put options.Available-for-sale investments consist of $276.5 million ofDecember 31, 2010. United States government agency residential mortgage-backed securities and United States government agency debentures as well as $22.1compose $137.2 million of ouravailable-for-sale investments, while other asset-backed securities.securities compose the remaining $23.7 million. In completing our recapitalization,2008 Recapitalization in 2008, we contemplated that our other asset-backed securities and trading investments might decline further in value. Accordingly, the capital raised assumed a zero value for these securities. As a result, further unrealized losses and impairments on these securities are already funded and would not cause us to seek additional capital or financing.
46
Other Funding Sources and Requirements
Contractual Obligations — The following table includes aggregated information about the Company’s contractual obligations that impact itsour liquidity and capital needs. The table includes information about payments due under specified contractual obligations, aggregated by type of contractual obligation.
Table 1011 — Contractual Obligations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments due by period | | | Payments due by period | |
| | | | | Less than
| | | | | | More than
| | | | | Less than
| | | | | | More than
| |
| (Amounts in thousands) | | Total | | 1 year | | 1-3 years | | 4-5 years | | 5 years | | | Total | | 1 year | | 1-3 years | | 4-5 years | | 5 years | |
| | | | | |
| |
| Debt, including interest payments | | $ | 1,424,484 | | | $ | 88,743 | | | $ | 177,430 | | | $ | 443,919 | | | $ | 714,392 | | | $ | 1,143,444 | | | $ | 76,473 | | | $ | 286,328 | | | $ | 132,500 | | | $ | 648,142 | |
| Operating leases | | | 48,022 | | | | 12,231 | | | | 24,816 | | | | 10,237 | | | | 738 | | | | 47,683 | | | | 11,782 | | | | 22,940 | | | | 7,482 | | | | 5,479 | |
| Other obligations | | | 384 | | | | 384 | | | | — | | | | — | | | | — | | | | 300 | | | | 300 | | | | — | | | | — | | | | — | |
| | | Total contractual cash obligations | | $ | 1,472,890 | | | $ | 101,358 | | | $ | 202,246 | | | $ | 454,156 | | | $ | 715,130 | | | $ | 1,191,427 | | | $ | 88,555 | | | $ | 309,268 | | | $ | 139,982 | | | $ | 653,621 | |
| |
54
Debt consists of amounts outstanding under our Senior Facilitysenior facility and the Notessecond lien notes at December 31, 2010, as shown in Table 910 —Schedule of Credit Facilitiesas well as related interest payments, facility fees and annual commitment fees. Included in our. Our Consolidated Balance Sheet at December 31, 2009 is $796.82010 includes $639.9 million of debt, net of unamortized discounts of $9.5$1.3 million, and less than $0.1 million of accrued interest on the debt. The above table reflects the principal and interest that will be paid through the maturity of the debt using the rates in effect on December 31, 20092010, and assuming no prepayments of principal and the continued payment of interest on the Notes.second lien notes. Operating leases consist of various leases for buildings and equipment used in our business. Other obligations are unfunded capital commitments related to our limited partnership interests included in “Other asset-backed securities” in our investment portfolio. We have other commitments as described further below that are not included in Table 1011 as the timingand/or amount of payments are difficult to estimate.
The Company’s Series B Stock has a cash dividend rate of 10 percent. At the Company’s option, dividends may be accrued through March 25, 2013 at a rate of 12.5 percent in lieu of paying a cash dividend. Due to restrictions in our debt agreements, we elected to accrue the dividends in 20092010 and expect that dividends will be accrued for at least the next 12 months. While no dividends have been declared as of December 31, 2009,2010, we have accrued dividends of $110.3$125.0 million in our Consolidated Balance Sheets as accumulated and unpaid dividends are included in the redemption price of the Series B Stock regardless of whether dividends have been declared.
We have a funded, noncontributory pension plan that is frozen to both future benefit accruals and new participants. Our funding policy has historically been to contribute the minimum contribution required by applicable regulations. We were not required to, and did not make, a contributionmade contributions of $3.1 million to the fundeddefined benefit pension plan during 2009.2010. We anticipate a minimum contribution of $3.0up to $7.9 million to the pension plan trust in 2010.2011. We also have certain unfunded pension and postretirement plans that require benefit payments over extended periods of time. During 2009,2010, we paid benefits totaling $4.3$5.4 million related to these unfunded plans. Benefit payments under these unfunded plans are expected to be $2.6$4.6 million in 2010.2011. Expected contributions and benefit payments under these plans are not included in the above table as it is difficult to estimate the timing and amount of benefit payments and required contributions beyond the next 12 months. See “Critical Accounting Policies Note 10— Pension Obligations”Pensions and Other Benefitsof the Notes to the Consolidated Financial Statements for further discussion of these plans.information.
As of December 31, 2009,2010, the liability for unrecognized tax benefits is $10.7was $10.2 million. As there is a high degree of uncertainty regarding the timing of potential future cash outflows associated with liabilities, relating to this liability, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid.
47
In limited circumstances, we may grant minimum commission guarantees as an incentive to new or renewing agents for a specified period of time at a contractually specified amount. Under the guarantees, we will pay to the agent the difference between the contractually specified minimum commission and the actual commissions earned by the agent. As of December 31, 2009,2010, the minimum commission guarantees had a maximum payment of $7.9$2.2 million over a weighted average remaining term of 1.31.7 years. The maximum payment is calculated as the contractually guaranteed minimum commission times the remaining term of the contract and, therefore, assumes that the agent generates no money transfer transactions during the remainder of its contract. As of December 31, 2009,2010, the liability for minimum commission guarantees is $0.6$0.3 million. Minimum commission guarantees are not reflected in the table above.
55
Analysis of Cash Flows
Table 1112 — Cash Flows from Operating Activities
| | | | | | | | | | | | | | | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | | |
| (Amounts in thousands) | | | | | | | | | | | | | | |
| |
| Net loss | | $ | (1,906 | ) | | $ | (261,385 | ) | | $ | (1,071,997 | ) | |
| Total adjustments to reconcile net loss | | | 158,909 | | | | 341,740 | | | | 1,301,410 | | |
| Net income (loss) | | | $ | 43,801 | | | $ | (1,906 | ) | | $ | (261,385 | ) |
| Total adjustments to reconcile net income (loss) | | | | 72,398 | | | | 158,909 | | | | 341,740 | |
| | | Net cash provided by continuing operating activities before changes in payment service assets and obligations | | | 157,003 | | | | 80,355 | | | | 229,413 | | |
| Net cash provided by operating activities before changes in payment service assets and obligations | | | | 116,199 | | | | 157,003 | | | | 80,355 | |
| | | Change in cash and cash equivalents (substantially restricted) | | | 300,557 | | | | (2,524,402 | ) | | | (563,779 | ) | | | 510,883 | | | | 700,557 | | | | (2,524,402 | ) |
| Change in trading investments and related put options, net (substantially restricted) | | | 32,900 | | | | — | | | | 83,200 | | | | 29,400 | | | | 32,900 | | | | — | |
| Change in receivables, net (substantially restricted) | | | 186,619 | | | | 128,752 | | | | 342,681 | | | | 63,037 | | | | 186,619 | | | | 128,752 | |
| Change in payment service obligations | | | (594,545 | ) | | | (2,324,486 | ) | | | (447,319 | ) | | | (658,782 | ) | | | (594,545 | ) | | | (2,324,486 | ) |
| | | Net change in payment service assets and obligations | | | (74,469 | ) | | | (4,720,136 | ) | | | (585,217 | ) | | | (55,462 | ) | | | 325,531 | | | | (4,720,136 | ) |
| | | Net cash provided by (used in) continuing operating activities | | $ | 82,534 | | | $ | (4,639,781 | ) | | $ | (355,804 | ) | | $ | 60,737 | | | $ | 482,534 | | | $ | (4,639,781 | ) |
| |
Table 1112 summarizes the net cash flows from operating activities. Operating activities provided net cash of $82.5$60.7 million in 2010. Cash generated from our operations was primarily used to pay $165.0 million of principal and $83.5 million of interest on our debt, $40.2 million of capital expenditures, $27.2 million for signing bonuses and normal operating expenditures. These expenditures were offset by proceeds of $141.0 million from the maturity ofavailable-for-sale investments and $29.4 million from a trading security that was called, all of which was reinvested in cash equivalents. We received an income tax refund of $3.8 million during 2010 and made income tax payments of $3.9 million.
Operating activities provided net cash of $482.5 million in 2009. In addition to normal operating expenses, cash generated from operations was used to pay $186.9 million of principal and $94.4 million of principal and interest respectively, on our debt, $37.9 million of capital expenditures and $22.2 million for signing bonuses to new agents.bonuses. We received an income tax refund of $43.5 million during 2009 and did not make anymade income tax payments.payments of $2.2 million. We also reinvested $141.0 million and $32.9 million of proceeds from ouravailable-for-sale investments and trading investments, respectively, into cash and cash equivalents during 2009.
Operating activities used net cash of $4.6 billion in 2008. Besides normal operating activities, cash provided by continuing operations was used to pay $84.0 million of interest on our debt, $57.7 million for signing bonuses to new agents and $29.7 million to terminate our interest rate swaps. We also received an income tax refund of $24.7 million during 2008 and did not make any tax payments. During 2008, we used $4.7 billion of proceeds from the sale and normal maturity ofavailable-for-sale securities and the recapitalization2008 Recapitalization to invest in cash equivalents and settle payment service obligations for instruments sold by departing official check financial institution customers in connection with the official check restructuring.
Operating activities in 2007 used net cash of $355.8 million. Our payment service assets and obligations used $585.2 million of cash due to the normal fluctuations in the timing of settlements of outstanding payment service instruments and the receipt of collected funds from our agents, partially offset by proceeds from the sale of a trading investment for $83.2 million. Besides normal operating activities, cash provided by continuing operations was used to pay $33.1 million for signing bonuses to new agents, $16.0 million of income taxes and $11.6 million of interest on our debt.
To understand the cash flow activity of our core business, the cash flows from operating activities relating to the payment service assets and obligations should be reviewed in conjunction with the cash flows from investing activities related to our investment portfolio.short-term investments andavailable-for-sale investments.
4856
Table 1213 — Cash Flows from Investing Activities
| | | | | | | | | | | | | | | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | | |
| (Amounts in thousands) | | | | | | | | | | | | | | |
| |
| Net investment activity | | $ | 140,999 | | | $ | 3,389,331 | | | $ | 318,716 | | | $ | 135,216 | | | $ | (259,001 | ) | | $ | 3,389,331 | |
| Purchases of property and equipment | | | (37,948 | ) | | | (38,470 | ) | | | (70,457 | ) | | | (40,191 | ) | | | (37,948 | ) | | | (38,470 | ) |
| Cash paid for acquisitions, net of cash acquired | | | (3,210 | ) | | | (2,928 | ) | | | (29,212 | ) | | | (330 | ) | | | (3,210 | ) | | | (2,928 | ) |
| Proceeds from disposal of property and equipment | | | | 7,537 | | | | — | | | | — | |
| Proceeds from sale of business | | | 4,500 | | | | — | | | | — | | | | — | | | | 4,500 | | | | — | |
| | | Net cash provided by investing activities | | $ | 104,341 | | | $ | 3,347,933 | | | $ | 219,047 | | |
| Net cash provided by (used in) investing activities | | | $ | 102,232 | | | $ | (295,659 | ) | | $ | 3,347,933 | |
| |
Table 1213 summarizes the net cash flows from investing activities, primarily consisting of activity within our investment portfolio.related to short-term investments andavailable-for-sale investments. Investing activities provided cash of $104.3$102.2 million during 2010, primarily from proceeds of $141.0 million from the maturity ofavailable-for-sale investments. Investing activities used cash of $295.7. million in 2009. For 2009, investing activities relate primarily tofrom the purchase of $400.0 million of short-term investments, or time deposits and certificates of deposits with maturities greater than three months but no longer than twelve months, partially offset by $141.0 million of proceeds from the maturity ofavailable-for-sale investments. For 2008, investing activities relate primarily to $2.9 billion of proceeds from the realignment of the investment portfolio and $493.3 million of proceeds from the normal maturity ofavailable-for-sale investments. These proceeds in both 2009 and 2008 were reinvested in cash and cash equivalents. NetProceeds from net investment activity in 2007 represents $1.1 billion of proceeds from normal maturities and sales of investments, of which $758.9 million was reinvested into the long-term portfolio. The excess proceeds of $318.7 million in 2007for all years presented were reinvested in cash and cash equivalents.
Other investing activity consisted of capital expenditures of $40.2 million, $37.9 million and $38.5 million for 2010, 2009 and $70.5 million for 2009, 2008, and 2007, respectively, for agent equipment, signage and infrastructure to support the growth of the business and development of software related to our continued investment in technology platforms to support the money transfer platformgrowth of the business and compliance activities.enhance operating efficiencies. Included in the Consolidated Balance Sheets under “Accounts payable and other liabilities” and “Property and equipment” is $1.2$3.9 million of property and equipment received by the Company, but not paid as of December 31, 2009.2010. These amounts were paid in January 2010.2011. We expect our total capital expenditures in 20102011 to range from approximately $40.0$43.0 million to $65.0$51.0 million as we continue to invest in our technology infrastructure and agent network to support future growth, enhance operating efficiencies and address regulatory trends.
In 2010, we generated $7.5 million of proceeds from the sale of the corporate airplane and paid $0.3 million for the acquisition of Blue Dolphin net of cash acquired. In 2009, we received proceeds of $4.5 million from the sale of FSMC, Inc. and paid $3.2 million in connection with the acquisition of Raphaels Bank. In 2008, we acquired two of our super-agents in Spain, MoneyCard and Cambios Sol, for $2.9 million (net of cash acquired of $5.5 million). In 2007, we acquired PropertyBridge for $28.1 million and also paid the remaining $1.1 million of purchase price for ACH Commerce, which was to be paid upon the second anniversary of the acquisition.
Table 1314 — Cash Flows from Financing Activities
| | | | | | | | | | | | | | | | | | | | | | | | | |
| YEAR ENDED DECEMBER 31, | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | | |
| (Amounts in thousands) | | | | | | | | | | | | | | |
| |
| Net proceeds from the issuance of debt | | $ | — | | | $ | 685,945 | | | $ | — | | | $ | — | | | $ | — | | | $ | 685,945 | |
| Payment on debt | | | (41,875 | ) | | | (1,875 | ) | | | — | | | | (165,000 | ) | | | (41,875 | ) | | | (1,875 | ) |
| Net (payments on) proceeds from credit facilities | | | (145,000 | ) | | | (100,000 | ) | | | 195,000 | | |
| Payments on credit facilities | | | | — | | | | (145,000 | ) | | | (100,000 | ) |
| Net proceeds from the issuance of preferred stock | | | — | | | | 707,778 | | | | — | | | | — | | | | — | | | | 707,778 | |
| Proceeds and tax benefit from exercise of stock options | | | — | | | | — | | | | 7,674 | | |
| Purchase of treasury stock | | | — | | | | — | | | | (45,992 | ) | |
| Cash dividends paid | | | — | | | | — | | | | (16,625 | ) | |
| Proceeds from exercise of stock options | | | | 2,031 | | | | — | | | | — | |
| | | Net cash (used in) provided by financing activities | | $ | (186,875 | ) | | $ | 1,291,848 | | | $ | 140,057 | | | $ | (162,969 | ) | | $ | (186,875 | ) | | $ | 1,291,848 | |
| |
57
Table 1314 summarizes the net cash flows from financing activities. In 2010, financing activities used $165.0 million of cash for prepayments on Tranche B of our senior facility, and provided $2.0 million of cash from the exercise of stock options. In 2009, we made payments totaling $145.0 million to pay down our revolving credit facility andin full. We also made payments oftotaling $41.9 million on Tranche B of our senior facility, consisting of a $40.0 million prepayment and $1.9 million of mandatory quarterly payments. In 2008, financing activities generated $1.4 billion of cash from the recapitalization,2008 Recapitalization, net of $100.0 million of related transaction costs. From these proceeds, we paid $101.9 million toward the Senior Facility;senior facility; the remaining proceeds were invested in cash and cash equivalents as shown in Table 1112 —Cash Flows from Operating Activities. In 2007, we borrowed $195.0 million under our Senior Facility. There were no proceeds received from the exercise of options or release of restricted stock, purchases of treasury stock or payment of dividends in 2009 and 2008. We generated $7.7 million of proceeds in 2007 from the exercise of stock options and release of restricted stock, including related tax benefits of
49
$1.1 million. We purchased $46.0 million of treasury stock during 2007 and paid dividends on our common stock of $16.6 million.
Mezzanine Equity and Stockholders’ Deficit
Mezzanine Equity — See Note 1211 —Mezzanine Equityof the Notes to the Consolidated Financial Statements for information regarding the mezzanine equity.
Stockholders’ Deficit — On May 9, 2007, our Board of Directors approved a 5,000,000 share increase in our current authorization to purchase shares of common stock, for abringing our total authorization ofto 12,000,000 shares. In 2007, we repurchased 1,620,000 shares of our common stock under this authorization at an average cost of $28.39 per share. We suspended the buyback program in the fourth quarter of 2007. As of December 31, 2009,2010, we had repurchased a total of 6,795,000 shares of our common stock under this authorization and have remaining authorization to purchase up to 5,205,000 shares.
Under the terms of the equity instruments and debt issued in connection with the recapitalization,2008 Recapitalization, we are limited in our ability to pay dividends on our common stock. No dividends were paid on our common stock in 20092010 and we do not anticipate declaring any dividends on our common stock during 2010.
Off-Balance Sheet Arrangements
Through December 31, 2007, we had an agreement to sell undivided percentage ownership interests in certain receivables, primarily from our money order agents, in an amount not to exceed $400.0 million. These receivables were sold to commercial paper conduits (trusts) sponsored by a financial institution and represented a small percentage of the total assets in these conduits. Our rights and obligations were limited to the receivables transferred, and were accounted for as sales. As a result, the assets and liabilities associated with these conduits, including our sold receivables, were not recorded or included in our financial statements. The business purpose of this agreement was to accelerate cash flow for investment. The receivables were sold at a discount based upon short-term interest rates. In December 2007, we decided to cease selling receivables through a gradual reduction in the balances sold each period. In January 2008, we terminated the facility. The agreement included a 5 percent holdback provision of the purchase price of the receivables and is included in the Consolidated Statements of Loss in “Investment commissions expense.” There was no expense recorded in 2009 related to the sales of receivable, while expenses totaled $0.2 million and $23.3 million during 2008 and 2007, respectively.2011.
ENTERPRISE RISK MANAGEMENT
Risk is an inherent part of any business. Our most prominent risk exposures are credit, interest rate, foreign currency exchange and operational risk. See Part 1, Item 1A “Risk Factors”“Risk Factors” for a description of the principal risks to our business. Appropriately managing risk is important to the success of our business, and the extent to which we properly and effectively manage each of the various types of risk is critical to our financial condition and profitability. Our risk management objective is to monitor and control risk exposures to produce steady earnings growth and long-term economic value.
Management implements policies approved by our Board of Directors that cover our investment, capital, credit and foreign currency policiespractices and strategies. The Board receives periodic reports regarding each of these areas and approves significant changes to policy and strategy. An Asset/Liability Committee, composed of senior management, routinely reviews investment and risk management strategies and results. A Credit Committee, composed of senior management, routinely reviews credit exposure to our agents.
Following is a discussion of the strategies we use to manage and mitigate the risks we have deemed most critical to our business. While containing forward-looking statements related to risks and uncertainties, this discussion and related analyses are not predictions of future events. MoneyGram’s actual results could differ materially from those anticipated due to various factors discussed under “Cautionary Statements Regarding Forward-Looking Statements.”Statements’’ and under “Risk Factors” in Part 1, Item 1A of this Annual Report on Form 10-K.
50
Credit Risk
Credit risk, or the potential risk that we may not collect amounts owed to us, affects our business primarily through receivables, investments and derivative financial instruments. In addition, the concentration of our cash, cash equivalents and investments at large financial institutions exposes us to credit risk.
58
Financial Institution RiskInvestment Portfolio — Credit risk from our investment portfolio relates to the risk that we may be unable to collect the interest or principal owed to us under the legal terms of the various securities. Our cash, cash equivalents and investments are concentratedprimary exposure to credit risk arises through the concentration of a large amount of our investment portfolio at a few large financial institutions. These institutions (“financial institution risk”), as well as a concentration in securities issued by, or collateralized by, U.S. government agencies. We manage credit risk related to our investment portfolio by investing in short-term assets and in issuers with strong credit ratings. Our investment policy permits the investment of funds only in cash, cash equivalents, short-term investments and securities issued by U.S. government agencies with a maturity of 13 months or less.
The financial institutions holding significant portions of our investment portfolio act as custodians for our asset accounts, serve as counterparties to our foreign currency transactions and conduct cash transfers on our behalf for the purpose of clearing our payment instruments and related agent receivables and agent payables. Through certain check clearing agreements and other contracts, we are required to utilize several of these financial institutions; in certain cases, we are required to maintain pre-defined levels of cash, cash equivalents and investments at these financial institutions overnight.institutions. As a result of the credit market crisis, several financial institutions have faced capital and liquidity issues whichthat led them to restrict credit exposure. This has led certain financial institutions to require that we maintain pre-defined levels of cash, cash equivalents and investments at these financial institutions overnight, with no restrictions to our usage of the assets during the day. While the credit market crisis and recession affected all financial institutions, those institutions holding our assets are well capitalized, and there have been no significant concerns as to their ability to honor all obligations related to our holdings.
We manage financial institution risk by entering into clearing and cash management agreements primarily with only major financial institutions, and regularly monitoring the credit ratings of these financial institutions. Our financial institution risk is further mitigated as the majority of our cash equivalents and investments held by these institutions are invested in securities issued by United StatesU.S. government agencies or money market instruments collateralized by United StatesU.S. government agencies, which have the implicit or explicit guarantee of the United StatesU.S. government depending upon the issuing agency. Our non-interest bearing cash held at our domestic clearing and cash management banks iswas covered under the Temporary Liquidity Guarantee Program (“TLGP”) through December 31, 2010 as those banks opted in tointo the program. The Federal Deposit Insurance Corporation (“FDIC”) has created the TLGP program to strengthen confidence and encourage liquidity in the banking system by guaranteeing newly issued senior unsecured debt of banks, thrifts and certain holding companies, and providing full coverage of non-interest bearing deposit transaction accounts, regardless of dollar amount. In addition, official checks issued by our financial institution customers arewere treated as deposits under the TLGP. Components
The TLGP expired on December 31, 2010, but has been replaced by provisions in the recently passed Dodd-Frank Act, which amend the Federal Deposit Insurance Act (“FDI Act”) to provide unlimited FDIC insurance on non-interest bearing accounts through December 31, 2012. In addition to cash in non-interest bearing accounts, the final rule’s definition of TLGP have been extended into 2010. non-interest bearing transaction accounts encompasses “official checks” issued by insured depository institutions. Official checks, such as cashier checks and money orders issued by insured depository institutions, are “deposits” as defined under the FDI Act. The payee of the official check is the insured party. The legislation will also allow banks to begin paying interest on demand deposit accounts beginning on July 21, 2011. However, this alternative does not provide unlimited insurance coverage.
With respect to our credit union customers, our credit exposure is partially mitigated by National Credit Union Administration insurance. However, as our credit union customers arewere not insured by a TLGP-equivalent program, we have required certain credit union customers to provide us with larger balances on depositand/or to issue cashier’s checks only. While the value of these assets are not at risk in a disruption or collapse of a counterparty financial institution, the delay in accessing our assets could adversely affect our liquidity and potentially our earnings depending upon the severity of the delay and corrective actions we may need to take. Corrective actions could include draws upon our Senior Facilitysenior facility to provide short-term liquidity until our assets are released, reimbursements of costs or payment of penalties to our agents and higher banking fees to transition banking relationships in a short timeframe.
59
At December 31, 2009, we held $1.7 billion, or 41 percentThe concentration in U.S. government agencies includes agencies placed under conservatorship by the U.S. government in 2008 and extended unlimited lines of credit from the U.S. Treasury. The implicit guarantee of the U.S. government and its actions to date support our belief that the U.S. government will honor the obligations of its agencies if the agencies are unable to do so themselves.
The following table shows categories of our investment portfolio held within and outside of the United States, with each section progressing from the Company’s perceived lowest to highest credit risk. All but $23.7 million of the investment portfolio is invested in cash, accounts at 11cash equivalents, short-term investments and investments issued or collateralized by U.S. government agencies. Approximately 95 percent of the portfolio is invested in cash, cash equivalents and short-term investments, with 92 percent invested in financial institutions with a rating of BBB or better, time deposits at twolocated within the United States. Cash and cash equivalents held in financial institutions outside of the United States is placed to comply with a rating of AAlocal requirements or better and a certificate of deposit at one financial institution with a rating of AA or better. We held another $1.9 billion, or 47 percent offor operating use by our international entities. At December 31, 2010, our investment portfolio in cash equivalents collateralized by securities issued by United States government agencies at eight financial institutions. Our trading andavailable-for-sale investments totaling $325.6 million, or 8 percent of our investment portfolio, are held at threewas distributed among 55 financial institutions with a ratingas shown below. To prevent duplication in counts, the number of AA or better. The remaining $171.7 million, or 4 percent, offinancial institutions holding our investment portfolio is composed of cash and cash equivalents held at foreign banks for use by our international subsidiaries and branches or to comply with local requirements.shown on an incremental basis.
| | | | | | | | | | | | | |
| | | Number of
| | | | | | Percent of
| |
| | | Financial
| | | | | | Investment
| |
| | | Institutions | | | Amount | | | Portfolio | |
| | |
| (Amounts in thousands) | | | | | | | | | |
| |
| Cash equivalents collateralized by securities issued by U.S. government agencies | | | 6 | | | $ | 1,818,137 | | | | 53 | % |
Available-for-sale investments issued or collateralized by U.S. government agencies | | | N/A | | | | 137,226 | | | | 4 | % |
Cash, cash equivalents and short-term investments at institutions
rated AA | | | 5 | | | | 1,243,820 | | | | 36 | % |
Cash, cash equivalents and short-term investments at institutions
rated A | | | 4 | | | | 106,432 | | | | 3 | % |
Cash, cash equivalents and short-term investments at institutions
rated BBB | | | 2 | | | | 409 | | | | — | |
Cash, cash equivalents and short-term investments at institutions
rated below BBB | | | 9 | | | | 13,592 | | | | — | |
| Other asset-backed securities | | | N/A | | | | 23,710 | | | | 1 | % |
| |
| |
| Investment portfolio held within the United States | | | 26 | | | | 3,343,326 | | | | 97 | % |
| |
| |
| Cash held on-hand at owned retail locations | | | N/A | | | | 8,512 | | | | — | |
| Cash, cash equivalents and short-term investments held at institutions rated AA | | | 1 | | | | 15,480 | | | | 1 | % |
Cash, cash equivalents and short-term investments at institutions
rated A | | | 10 | | | | 45,813 | | | | 1 | % |
Cash, cash equivalents and short-term investments at institutions
rated below A | | | 18 | | | | 19,515 | | | | 1 | % |
| |
| |
| Investment portfolio held outside the United States | | | 29 | | | | 89,320 | | | | 3 | % |
| |
| |
| Total investment portfolio | | | 55 | | | $ | 3,432,646 | | | | 100 | % |
| |
| |
60
Receivables — Credit risk related to receivables is the risk that we are unable to collect the funds owed to us by our agents and financial institution customers who have collected the principal amount and fees associated with the sale of our payment instruments from the consumer on our behalf. Substantially all of the business conducted by our Global Funds Transfer segment is conducted through independent agents, while the business conducted by the Financial Paper Products segment is conducted through both independent financial institution customers and agents. Our agents and financial institution customers receive the principal amount and fees related to the sale of our payment instruments, and we must then collect these funds from them. As a result, we have credit exposure to our agents and financial institution customers. Agents typically have from one to three days to remit the funds, with longer remittance schedules granted to international agents and certain domestic agents. As of December 31, 2009,2010, we had credit exposure to our agents of $436.4$594.0 million in the aggregate spread across over 14,00015,000 agents, of which
51
five three agents owed us in excess of $15.0 million each. As of December 31, 2009,2010, we had a credit exposure to our official check financial institution customers of approximately $482.0$375.7 million in the aggregate spread across 1,7001,400 financial institutions, of which one owed us in excess of $15.0 million.
Our strategy in managing credit risk related to receivables is to ensure that the revenue generation from an agent or financial institution customer is sufficient to provide for an appropriate level of credit risk and to reduce concentrations of risk through diversification, termination of agents or financial institution customers with poor risk-reward ratios or other means. Management’s decision during the fourth quarter of 2008 to terminate its ACH Commerce business was based primarily on a review of the credit risk associated with that business.
As our official checks are issued solely through financial institution customers, we do not consider our credit exposure related to receivables to be significant for official checks. Due to the larger average principal amount of money orders, we consider our credit exposure from money orders to be of higher risk than exposure due to money transfers. However, in the current macroeconomic environment and as a result of our international growth, credit risk related to our money transfer products is increasing. While the extent of credit risk may vary by product, the process for mitigating risk is substantially the same. We assess the creditworthiness of each potential agent before accepting them into our distribution network. This underwriting process includes not only a determination of whether to accept a new agent, but also the remittance schedule and volume of transactions that the agent will be allowed to perform in a given timeframe. We actively monitor the credit risk of our existing agents by conducting periodic comprehensive financial reviews and cash flow analyses of our agents that average high volumes of transactions and monitoring remittance patterns versus reported sales on a daily basis. In the current macroeconomic environment, we have tightened our underwriting requirements and have initiated earlier action against agents with a pattern of delayed or late remittances. We also utilize software embedded in our money transfer and retail money order point of sale equipment which provides credit risk management abilities. First, this software allows us to control both the number and dollar amount of transactions that can be completed by both agent and location in a particular timeframe. Second, this software allows us to monitor for suspicious transactions or volumes of sales, which assists us in uncovering irregularities such as money laundering, fraud or agent self-use. Finally, the software allows us to remotely disable the point of sale equipment to prevent agents from transacting if suspicious activity is noted or remittances are not received according to the agent’s contract. The point of sale software requires each location to be re-authorized on a daily basis for transaction processing. Where appropriate, we will also require bank-issued lines of credit to support our receivables and guarantees from the owners or parent companies, although such guarantees are often unsecured.
The risk related to official checks is mitigated by only selling these products through financial institution customers, who have never defaulted on their remittances to us and have had only rare instances of delayed remittances. Substantially all of our financial institution customers have anext-day remit requirement, which reduces thebuild-up of credit exposure at each financial institution. In addition, the termination of our top 10 financial institution customers in connection with the restructuring of our official check business in 2008 has resulted in less credit exposure at a relatively small number of financial institutions.
61
Agents who only sell money orders only typically have longer remit timeframes than other agents; in addition, the per transaction revenue tends to be smaller for money orders than for money transfers. As part of our review of the money order business, we evaluated our money order only agents to identify agents where the credit risk outweighs the revenue potential. The Company considered various mitigation actions for the identified agents, including termination of relationships, reductions in permitted transaction volumes and dollars, repricing the fees charged to the agent and prefunding by the agent of average remittances.
Investment Portfolio — Credit risk from the investment portfolio relates to the risk that we are unable to collect the interest or principal owed to us under the legal terms of the various securities. Losses due to credit risk would be reflected as “Net securities gains (losses)” and negatively impact our net revenue. We manage credit risk related to our investment portfolio by investing in short-term assets and in issuers with strong credit ratings. Our investment policy permits the investment of funds only in cash, cash equivalents and securities issued by United States government agencies with a maturity of 13 months or less. This policy relates to both cash generated from our operations and the reinvestment of proceeds from the investment portfolio. As shown below, approximately
52
99 percent of our investment portfolio is composed of cash, cash equivalents and securities issued by, or collateralized by securities issued by, United States government agencies at December 31, 2009:
| | | | | | | | | |
| | | | | | Percent of
| |
| | | Fair
| | | Investment
| |
| (Amounts in thousands) | | Value | | | Portfolio | |
| | |
| |
| Cash, time deposits and certificates of deposit held at large financial institutions | | $ | 1,671,335 | | | | 40.8 | % |
| Money markets collateralized by U.S. government agencies | | | 1,933,764 | | | | 47.1 | % |
| Securities issued by or collateralized by U.S. government agencies | | | 276,545 | | | | 6.7 | % |
| Cash held at international banks | | | 171,725 | | | | 4.2 | % |
| Other investments | | | 49,039 | | | | 1.2 | % |
| | | | | | | | | |
| Total investment portfolio | | $ | 4,102,408 | | | | 100.0 | % |
| | | | | | | | | |
Our credit risk primarily relates to the concentration of our investment portfolio in financial institutions and United States government agencies. We primarily hold assets at major financial institutions and manage the risk of concentration at these financial institutions by regularly monitoring their credit ratings. While the credit market crisis and recession have affected all financial institutions, those holding our assets are well capitalized and, to date, there have been no significant concerns as to their ability to honor all obligations related to our holdings. The concentration in United States government agencies includes agencies placed under conservatorship by the United States government in 2008 and extended unlimited lines of credit from the United States Treasury. The implicit guarantee of the United States government and its actions to date support our belief that the United States government will honor the obligations of its agencies if the agencies are unable to do so themselves.
Derivative Financial Instruments — Credit risk related to our derivative financial instruments relates to the risk that we are unable to collect amounts owed to us by the counterparties to our derivative agreements. With the termination of our interest rate swaps in the second quarter of 2008, our derivative financial instruments are used solely to manage exposures to fluctuations in foreign currency exchange rates. If the counterparties to any of our derivative financial instruments were to default inon payments or experience credit rating downgrades, the value of the derivative financial instruments would decline and adversely impact our operating income. We manage credit risk related to derivative financial instruments by entering into agreements with only major financial institutions and regularly monitoring the credit ratings of these financial institutions. We also only enter into agreements with financial institutions that are experienced in the foreign currency upon which the agreement is based.
Interest Rate Risk
Interest rate risk represents the risk that our operating results are negatively impacted, and our investment portfolio declines in value, due to changes in interest rates. Given the nature of the realigned investment portfolio, includingparticularly the high credit rating of financial institutions holding or issuing our cash, and cash equivalents and short-term investments, along with the implicit guarantee of the United StatesU.S. government backing our money markets and majority ofavailable-for-sale investments, we believe there is a low risk that the value of these securities would decline such that we would have a material adverse change in our stockholders’ equity. operating results. As of December 31, 2010, the Company held $538.6 million, or 16%, of the investment portfolio in fixed rate investments.
At December 31, 2009,2010, the Company’s “Other asset-backed securities” are priced on average at fourfive cents on the dollar for a total fair value of $22.1$23.7 million. While the Company does believe its “Other asset-backed securities” are at a high risk of further decline, the recapitalization2008 Recapitalization completed on March 25, 2008 included funds to cover all losses on these securities, as well as the trading investments. Accordingly, any resulting adverse movement in our stockholders’ equity or assets in excess of payment service obligations from further declines in investments would not result in regulatory or contractual compliance exceptions. At December 31, 2009, the combined fair value of the trading investment and related put option was $27.0 million as compared to the $29.4 million par value of the trading investment. The remaining auction rate security with related put option was called at par on February 12, 2010.
Our operating results are primarily impacted by interest rate risk through our net investment margin, which is investment revenue less commissions expense and interest expense. As the money transfer business is not materially affected by investment revenue and pays commissions that are not tied to an interest rate index, interest rate risk has the most impact on our money order and official check businesses. After the portfolio realignment, we are invested
53
primarily in interest-bearing cash accounts, deposit accounts, time deposits and United Statescertificates of deposit, and U.S. government money market funds. These types of investmentinvestments have minimal risk of declines in fair value from changes in interest rates.rates, with the interest rate resetting frequently, if not daily. Our commissions paid to financial institution customers are variable rate, based primarily on the federal funds effective rate and are reset daily. Accordingly, both our investment revenue and our investment commissions expense will decrease when rates decline and increase when rates rise. However, as commissionAs a result of our repricing initiative, described below, and the frequent resetting of interest rates reset more frequently than our investments,earned on the changes ininvestment portfolio, we believe that investment revenue will lag changes inand investment commissions expense. In a declining rate environment, our net investment margin will typically be benefited by this lag, while an increasing rate environment will typically have a negative impact on our net investment margin.would increase or decrease approximately in tandem. In addition, the investment portfolio and commission interest rates may differ, resulting in basis risk. We do not believe this risk is material and therefore do not currently employ any hedging strategies to address the basis risk between our commission rates and our investment portfolio, nor do we currently expect to employ such hedging strategies. As a result, our net investment margin may be adversely impacted if changes in the commission rate move by a larger percentage than the yield on our investment portfolio.
62
In the second quarter of 2008, we repriced our official check product to an average of federal funds effective rate less 85 basis points to better match our investment commission rate with our lower yield realigned portfolio. In the current environment, the federal funds effective rate is so low that most of our financial institution customers are in a “negative” commission position, in that we do not owe any commissions to our customers. While many of our contracts require the financial institution customers to pay us the negative commission amount, we have opted not to require such payment at this time. As the revenue earned by our financial institution customers from the sale of our official checks primarily comes from the receipt of their investment commissions from us, the negative commissions reduce the revenue our financial institution customers earn from our product. Accordingly, our financial institution customers may sharply reduce their issuances of official checks or choose to not renew their contracts with us if the negative commission positions continue. A substantial decline in the amount of official checks sold would reduce our investment balances, which would in turn result in lower investment revenue for us. As official checks are still required for many financial transactions, including home closings and vehicle purchases, we believe that risk is naturally mitigated in part. We continue to assess the potential impact of negative commissions on our official check business. While there are currently no plans for changes to our business as a result of the negative commissions, we may elect in the future to change some portion of our compensation structure for select financial institution customers to mitigate the risk of substantial declines in our investment balances.
The Senior FacilityOur senior facility is floating rate debt, resulting in decreases to interest expense in a declining rate environment and increases to interest expense when rates rise. The Company may elect an interest rate for the Senior Facilitysenior facility at each reset period based on the United States prime bank rate or the Eurodollar rate. For the revolving credit facility and Tranche A, the interest rate is either the United States prime bank rate plus 250 basis points or the Eurodollar rate plus 350 basis points. As of December 31, 20092010 the Company has no outstanding balance related to the revolving credit facility. For Tranche B, the interest rate is either the United States prime bank rate plus 400 basis points or the Eurodollar rate plus 500 basis points. Under the terms of the Senior Facility,senior facility, the interest rate determined using the Eurodollar index has a minimum rate of 2.50 percent. Through 2008, the Company paid interest using the Eurodollar rate. Effective with its first interest payment in 2009,Throughout 2010, the Company elected to use the United States prime bank rate as its basis. Elections are based on the index which is believedwe believe will yield the lowest interest rate until the next reset date. Interest rate risk is managed in part through index election.
The income statement simulation analysis below incorporates substantially all of our interest rate sensitive assets and liabilities, together with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. This analysis assumes the yield curve increases gradually over a one-year period. Components of our pre-tax loss whichincome that are interest rate sensitive include “Investment revenue,” “Investment commissions expense” and “Interest expense.” As a result of the current federal funds rate environment, the outcome of the income statement simulation analysis on “Investment commissions expense” in a declining rate scenario is not meaningful as we have no downside risk. In the current federal funds rate environment, the worst case scenario is that we would not owe any commissions to our financial institution customers as the commission rate would decline to zero or become negative. Accordingly, we have not presented the impact of the simulation in a declining rate
54
environment for “Investment commissions expense.” The following table summarizes the changes to affected components of the income statement under various scenarios.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Basis Point Change in Interest Rates | | | | Basis Point Change in Interest Rates |
| | | Down
| | Down
| | Down
| | Up
| | Up
| | Up
| | | | Down
| | Down
| | Down
| | Up
| | Up
| | Up
|
| (Amounts in thousands) | | 200 | | 100 | | 50 | | 50 | | 100 | | 200 | | | | 200 | | 100 | | 50 | | 50 | | 100 | | 200 |
| | |
| Interest income | | $ | (1,666 | ) | | $ | (1,666 | ) | | $ | (1,666 | ) | | $ | 8,424 | | | $ | 16,864 | | | $ | 33,795 | | | | | $ | (974 | ) | | $ | (862 | ) | | $ | (765 | ) | | $ | 3,398 | | | $ | 6,802 | | | $ | 13,512 | |
| Percent change | | | (10.4 | )% | | | (10.4 | )% | | | (10.4 | )% | | | 52.7 | % | | | 105.6 | % | | | 211.6 | % | | | | | (6.1 | )% | | | (5.4 | )% | | | (4.8 | )% | | | 21.3 | % | | | 42.6 | % | | | 84.6 | % |
| Investment commissions expense | | | NM | | | | NM | | | | NM | | | $ | (359 | ) | | $ | (717 | ) | | $ | (1,435 | ) | | | | | NM | | | | NM | | | | NM | | | $ | (72 | ) | | $ | (502 | ) | | $ | (7,347 | ) |
| Percent change | | | NM | | | | NM | | | | NM | | | | (57.5 | )% | | | (114.9 | )% | | | (230.0 | )% | | | | | NM | | | | NM | | | | NM | | | | (11.5 | )% | | | (80.4 | )% | | | (1177.4 | )% |
| Interest expense | | $ | 263 | | | $ | 263 | | | $ | 263 | | | $ | (569 | ) | | $ | (1,138 | ) | | $ | (2,276 | ) | | | | | NM | | | | NM | | | | NM | | | $ | (188 | ) | | $ | (230 | ) | | $ | (250 | ) |
| Percent change | | | 0.3 | % | | | 0.3 | % | | | 0.3 | % | | | (0.6 | )% | | | (1.3 | )% | | | (2.5 | )% | | | | | NM | | | | NM | | | | NM | | | | (0.2 | )% | | | (0.3 | )% | | | (0.3 | )% |
| Pre-tax loss from continuing operations | | | NM | | | | NM | | | | NM | | | $ | 7,496 | | | $ | 15,008 | | | $ | 30,084 | | | | | | NM | | | | NM | | | | NM | | | $ | 3,137 | | | $ | 6,069 | | | $ | 5,915 | |
| Percent change | | | NM | | | | NM | | | | NM | | | | 10.0 | % | | | 20.1 | % | | | 40.2 | % | | | | | NM | | | | NM | | | | NM | | | | 4.2 | % | | | 8.1 | % | | | 7.9 | % |
63
Foreign Currency Risk
We are exposed to foreign currency risk in the ordinary course of business givenas we offer our products and services through a network of agents and financial institutions with locations in approximately 190 countries and haveoperate subsidiaries in 11 countries. ThisAs this risk may have an adverse effect on our earnings and equity, so we hedge material transactional exposures when feasible using forward or option contracts. Translation risk, generated from consolidation oftranslating foreign currency-denominated earnings into United StatesU.S. dollars for reporting purposes, is not hedged as this is not considered an economic exposure. In 2009,2010, the decline of the euro exchange rate (net of hedging activities) resulted in a net benefitdecrease to our operating results of $1.6$3.0 million over 2008. Additionally, by2009. By policy, we do not speculate in foreign currencies; all currency trades relate to underlying transactional exposures.
Our primary source of transactional currency risk is the money transfer business wherebyin which funds are frequently transferred cross-border and we settle with agents in multiple currencies. Although this risk is somewhat limited due to the fact that these transactions are short-term in nature, we currently manage some of this risk with forward contracts to protect against potential short-term market volatility. Additionally,In addition, we buy and sell in the spot market daily to settle transactions. The primary currency pairs, based on volume, that are traded against the dollar in the spot and forward markets based on volume, include the European euro, Mexican peso, British pound and Indian rupee. The duration of forward contracts is typically less than one month.
Realized and unrealized gains or losses on transactional currency risk hedges and any associated revaluation of balance sheet exposures are recorded in “Transaction and operations support” in the Consolidated Statement of Loss.Income (Loss). The fair market value of any open hedges at period end are recorded in “Other assets” in the Consolidated Balance Sheets. The net effect of changes in foreign exchange rates and the related forward contracts for the year ended December 31, 20092010 was a loss of $5.3$5.4 million. We do not currently have any forward contracts that are designated as hedges for accounting purposes.
Counterparty risk on currency trades is managed through careful selection and ongoing evaluation of the financial institutions utilized as counterparties.
Had the euro appreciated/depreciated relative to the United StatesU.S. dollar by 20 percent from actual exchange rates for 2009,2010, pre-tax operating income would have increased/decreased $11.5$11.1 million for the year. This sensitivity analysis does not consider the impact of our hedging program.
Operational Risk
Operational risk represents the potential for loss resulting from our operations. This may include, but is not limited to the risk of fraud by employees or external parties, business continuation and disaster recovery, errors related to transaction processing and technology, unauthorized transactions and breaches of information security and compliance requirements. This risk may also include the potential legal actions that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulatory requirements. Management has
55
direct responsibility for identifying, controlling and monitoring operational risks within their business. Business managers maintain a system of controls to provide transaction authorization and execution, safeguarding of assets from misuse or theft, and to ensure the quality of financial and other data. Our Business Resiliency group works with each business function to develop plans to support business resumption activities including technology, networks and data centers. Our internal audit function tests the system of internal controls through risk-based audit procedures and reports on the effectiveness of internal controls to executive management and the Audit Committee of the Board of Directors.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures in the Consolidated Financial Statements.consolidated financial statements. Actual results could differ from those estimates. On a regular basis, management reviews its accounting policies, assumptions and estimates to ensure that our financial statements are presented fairly and in accordance with GAAP. See Note 32 —Summary of Significant Accounting Policiesof the Notes to Consolidated Financial Statements for a comprehensive list of our accounting policies.
64
Critical accounting policies are those policies that management believes are most important to the portrayal of our financial position and results of operations, and that require management to make estimates that are difficult, subjective or complex. Based on these criteria, management has identified and discussed with the Audit Committee the following critical accounting policies and estimates, including the methodology and disclosures related to those estimates.
Fair Value of Investment Securities — We hold investmentInvestment securities classified as trading andavailable-for-sale.available-for-sale Trading securities are recorded at fair value,value. Realized gains and losses andother-than-temporary impairments related to these investment securities, along with unrealized gains and losses related to trading securities, are reported in the “Net securities (gains) losses” line in the Consolidated Statements of Loss.Income (Loss). Unrealized gains and losses related toAvailable-for-saleavailable-for-sale securities are also recorded at fair value, with unrealized gains and losses recorded in accumulated other comprehensive loss in stockholders’ deficit.
We measure fair value as an “exit price,” or the exchange price that would be received for an asset in an orderly transaction between market participants on the measurement date. A three-level hierarchy has been established for fair value measurements based upon the observability of the inputs to the valuation of an asset or liability, and requires that the use of observable inputs be maximized and the use of unobservable inputs be minimized. The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.
The degree of management judgment involved in determining the fair value of an investment is dependent upon the availability of quoted market prices or observable market parameters. Fair value for the majority of our investments is estimated using quoted market prices in active markets for similar securities, broker quotes or industry-standard models that utilize independently sourced market parameters.
We receive prices from an independent pricing service for the vast majority of the fair value of our investment securities. We verify these prices through periodic internal valuations, as well as through comparison to comparable securities, any broker quotes received and liquidation prices. The independent pricing service will only provide a price for an investment if there is sufficient observable market information to obtain objective pricing. We receive prices from an independent pricing service for all investments classified as residential mortgage-backed securities and United StatesU.S. government agencies, as well as certain other asset-backed securities.
For investments that are not actively traded, or for which there is not sufficient observable market information, we estimate fair value using broker quotes when available. When such quotes are not available, and to verify broker quotes received, we estimate fair value using industry-standard pricing models that utilize independently sourced market observable parameters, discount margins for comparable securities adjusted for differences in our security, risk and liquidity premiums observed in the market place, default rates, prepayment speeds, loss severity and information specific to the underlying collateral to the investment. We maximize the use of market observable information to the extent possible, and make our best estimate of the assumptions that a similar market participant would make. Our other asset-backed securities are primarily valued through the use of broker quotes or internal valuations.
56
The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. Due to the subjective nature of these assumptions, the estimates determined may not be indicative of the actual exit price if the investment was sold at the measurement date. In the current market, the most subjective assumptions include the default rate of collateral securities and loss severity as it relates to our other asset-backed securities. As of December 31, 2009,2010, we continue to hold investments classified as other asset-backed securities with a fair value of $22.1$23.7 million. Using the highest and lowest prices received as part of the valuation process described above, the range of fair value for these securities was $21.7$23.2 million to $35.7$31.6 million. At December 31, 2009, $16.42010, $20.8 million, or less than 1 percent, of our total investment portfolio was valued using internal pricing information. Had we used theNo third party price was able to valuebe obtained for these internally priced securities, the value of these investments would have been $16.8 million.securities.
65
Goodwill — We perform impairment testing of our goodwill balances on an annual basisannually as of November 30, and whenever an impairment indicator is identified. The testing is performed by comparing the estimated fair value of our reporting units to their carrying values. The fair value of our reporting units is estimated based on expected future cash flows discounted using a weighted-average cost of capital rate (the “discount rate”). Our discount rate is based on our debt and equity balances, adjusted for current market conditions and investor expectations of return on our equity. In addition, an assumed terminal value is used to project future cash flows beyond base years. Assumptions used in our impairment testing, such as forecasted growth rates and the discount rate, are consistent with our internal forecasts and operating plans. The estimates and assumptions regarding expected cash flows, terminal values and the discount rate require considerable judgment and are based on historical experience, financial forecasts and industry trends and conditions.
As a result of impairment indicators, we recognized two goodwill impairment charges during 2009. In connection with the sale of FSMC, Inc., we recorded a charge of $0.6 million in the second quarter of 2009 to impair goodwill assigned to that reporting unit. We also impaired $3.2 million of goodwill in connection with the decision to discontinue certain bill payment products in the second quarter of 2009.
In connection with the annual impairment test for 2009,2010, we assessed the following reporting units: Global Funds Transfer, Retail Money Order, Financial Institution Money Order, Official Check and ACH Commerce. The Global Funds Transfer reporting unit, which had assigned goodwill of $425.6 million and the Retail Money Order reporting unit had assigned goodwill of $2.5$428.7 million. No goodwill is assigned to the other reporting units. As a result of the annual impairment test, we recorded a $2.5 million charge to fully impair the goodwill assigned to the Retail Money Order reporting unit, reflecting our expectations for the money order business as discussed in “Trends Expected to Impact 2010.” The annual impairment test indicated a fair value for the Global Funds Transfer reporting unit that was substantially in excess of the reporting unit’s carrying value. This excess is consistent with our expectations for the reporting unit and market indicators. Accordingly, we believe the goodwill assigned to the Global Funds Transfer reporting unit is not impaired. If the discount rate for the Global Funds Transfer reporting unit increases by 50 basis points from the rate used in our fair value estimate, fair value would be reduced by approximately $79.5$78.4 million, assuming all other components of the fair value estimate remain unchanged. If the growth rate for the Global Funds Transfer reporting unit decreases by 50 basis points from the rate used in our fair value estimate, fair value would be reduced by approximately $26.6$28.2 million, assuming all other components of the fair value estimate remain unchanged. Our estimated fair value for the Global Funds Transfer reporting unit would continue to be substantially in excess under either scenario.
Pension obligations — Through our qualified pension plan and various supplemental executive retirement plans, collectively referred to as our “pension” plans, we provide defined benefit pension plan coverage to certain of our employees and former employees of Viad. Our pension obligations under these plans are measured as of December 31 (the “measurement date”). Pension benefits and the related expense are based upon actuarial projections using assumptions regarding mortality, discount rates, long-term return on assets and other factors. Following are the
57
weighted-average actuarial assumptions used in calculating the benefit obligation as of each measurement date and the net periodic benefit cost for the year ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 | |
| | | | |
| |
| Net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | |
| Discount rate | | | 6.30% | | | | 6.50% | | | | 5.70% | | | | 5.80% | | | | 6.30% | | | | 6.50% | |
| Expected return on plan assets | | | 8.00% | | | | 8.00% | | | | 8.00% | | | | 8.00% | | | | 8.00% | | | | 8.00% | |
| Rate of compensation increase | | | 5.75% | | | | 5.75% | | | | 5.75% | | | | 5.75% | | | | 5.75% | | | | 5.75% | |
| Projected benefit obligation: | | | | | | | | | | | | | | | | | | | | | |
| Discount rate | | | 5.80% | | | | 6.30% | | | | 6.50% | | | | 5.30% | | | | 5.80% | | | | 6.30% | |
| Rate of compensation increase | | | 5.75% | | | | 5.75% | | | | 5.75% | | | | 5.75% | | | | 5.75% | | | | 5.75% | |
At each measurement date, the discount rate is based on the then current interest rates for high-quality, long-term corporate debt securities with maturities comparable to our obligations. The rate of compensation increase is applicable to the supplemental executive retirement plans (the “SERPs”) only and is based on historical compensation patterns for the plan participants and management’s expectations for future compensation patterns. Effective December 31, 2009,During 2010, benefit accruals under all but one of the supplemental executive retirement plans are frozen.SERPs were frozen; for the one SERP, service credit is frozen, but future pay increases continue to be applicable for active participants. Accordingly, the rate of compensation increase will nothas a nominal impact pension obligations measured subsequent to December 31, 2009, nor will it impact net periodic benefit cost subsequent toon the year ending December 31, 2010.valuation for 2010 and future years.
66
Our pension plan assets are primarily invested in marketable securities that have readily determinable current market values.interest-bearing cash accounts and commingled trust funds issued or sponsored by the plan trustee. Our investments are periodically realigned in accordance with the investment guidelines. The expected return on pension plan assets is based on our historical market experience, our pension plan investment strategy and our expectations for long-term rates of return. We also consider peer data and historical returns to assess the reasonableness and appropriateness of our expected return. Our pension plan investment strategy is reviewed annually and is based upon plan obligations, an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments. At December 31, 2009,2010, the pension assets are composed of approximately 5660 percent in United StatesU.S. domestic and international equity stock funds, approximately 3534 percent in fixed income securities such as global bond funds and corporate obligations, approximately 54 percent in a real estate limited partnership interest and approximately 42 percent in other securities.
The actual rate of return on average pension assets in 20092010 was 4.54.8 percent, as compared to a 264.5 percent declinerate of return in 2008 from the substantial disruption in the market and the global economic conditions.2009. We believe the 20092010 returns indicate somecontinued stabilization in the markets, and anticipate a return to historical long-term norms in the future. This is consistent with the widely accepted capital market principle that assets with higher volatility generate greater long-term returns and the historical cyclicality of the investment markets. Accordingly, we do not believe that the actual return for 20092010 is significantly different from the long-term expected return used to estimate the benefit obligation. In addition, the participants of our plans are relatively young, providing the plan assets with sufficient time to recover to historical return rates.
Our assumptions reflect our historical experience and management’s best judgment regarding future expectations. Certain of the assumptions, particularly the discount rate and expected return on plan assets, require significant judgment and could have a material impact on the measurement of our pension obligation. Changing the discount rate by 50 basis points would have increased/decreased 20092010 pension expense by $0.3$0.4 million. Changing the expected rate of return by 50 basis points would have increased/decreased 20082010 pension expense by $0.6$0.5 million.
Income Taxes — We are subject to income taxes in the United States and various foreign jurisdictions. In determining taxable income, income or losses before taxes are adjusted for various differences between local tax laws and generally accepted accounting principles. The determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, foreign currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact on the amount of income taxes that we provide during any given year.
58
Deferred tax assets and liabilities are recorded based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax basis, and operating loss and tax credit carry-backs and carry-forwards on a taxing jurisdiction basis. We measure deferred tax assets and liabilities using enacted statutory tax rates that will apply in the years in which we expect the temporary differences to be recovered or paid.
We establish valuation allowances for our deferred tax assets based on a more likely than not threshold. In assessing the need for a valuation allowance, we consider both positive and negative evidence related to the likelihood that the deferred tax assets will be realized. If, based on the weight of available evidence, it is deemed more likely than not that the deferred tax assets will not be realized, we establish or maintain a valuation allowance. We weigh the positive and negative evidence commensurate with the extent it may be objectively verified. It is generally difficult for positive evidence regarding projected future taxable income, exclusive of reversing taxable temporary differences, to outweigh objective negative evidence, particularly cumulative losses. Our assessment of whether a valuation allowance is required or should be adjusted requires judgment and is completed on a taxing jurisdiction basis. We consider, among other matters: the nature, frequency and severity of any cumulative financial reporting losses; the ability to carry back losses to prior years; future reversals of existing taxable temporary differences; tax planning strategies; and projections of future taxable income. The accounting treatment of our deferred taxes represents our best estimate of these items. A valuation allowance established or revised as a result of our assessment is recorded through “Income tax expense (benefit) expense”” in our Consolidated Statements of Loss.Income (Loss). Changes in our current estimates due to unanticipated events, or other factors, could have a material effect on our financial condition and results of operations.
67
We account for our liability for unrecognized tax benefits using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained upon audit by the tax authority, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon settlement. Our tax filings for various periods are subject to audit by various tax authorities. Actual tax amounts may be materially different from amounts accrued based upon the results of audits by the tax authorities. The amount of income tax or benefit recognized in our Consolidated Statements of LossIncome (Loss) includes the impact of reserve provisions and changes to reserves that are considered appropriate based on current information and management’s best estimate, as well as any applicable related net interest and penalties.
Prior to our June 2004 spin-off from Viad, income taxes were determined on a separate return basis as if we had not been eligible to be included in the consolidated income tax return of Viad and its affiliates. We are considered the divesting entity in the spin-off and treated as the “accounting successor” to Viad, with the continuing business of Viad is referred to as “New Viad.” As part of the spin-off, we entered into a Tax Sharing Agreement with Viad which provides for, among other things, the allocation between MoneyGram and New Viad of federal, state, local and foreign tax liabilities and tax liabilities resulting from the audit or other adjustment to previously filed tax returns. Although we believe that we have appropriately proportioned such taxes between MoneyGram and Viad, subsequent adjustments may occur upon filing of amended returns or resolution of audits by various taxing authorities.
Recent Accounting Developments
Recent accounting developments are set forth in Note 32 —Summary of Significant Accounting Policiesof the Notes to Consolidated Financial Statements.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report onForm 10-K and the documents incorporated by reference herein may contain forward-looking statements with respect to the financial condition, results of operation, plans, objectives, future performance and business of MoneyGram International, Inc. and its subsidiaries. Statements preceded by, followed by or that include words such as “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “believes” or similar expressions are intended to identify some of the forward-looking statements within the meaning of the
59
Private Securities Litigation Reform Act of 1995 and are included, along with this statement, for purposes of complying with the safe harbor provisions of that Act. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the risks and uncertainties described in this Annual Report onForm 10-K, including those described below and under Part I, Item 1A titled “Risk Factors,” and in the documents incorporated by reference herein. These forward-looking statements speak only as of the date on which such statements are made. We undertake no obligation to update publicly or revise any forward-looking statements for any reason, whether as a result of new information, future events or otherwise, except as required by federal securities law.
| | |
| | • | Substantial Debt Service and Dividend Obligations. Our substantial debt service and our covenant requirements may adversely impact our ability to obtain additional financing and to operate and grow our business and may make us more vulnerable to negative economic conditions. |
| |
| | • | Completion of the Proposed 2011 Recapitalization. Our proposed 2011 Recapitalization is subject to a number of conditions beyond our control that may prevent, delay or otherwise materially adversely affect the completion of the 2011 Recapitalization. |
|
| • | Significant Dilution to Stockholders and Control of New Investors.The Series B Stock issued to the Investors at the closing of the recapitalization,our 2008 Recapitalization, dividends accrued on the Series B Stock post-closing and potential special voting rights provided to the Investors’ designees on the Company’s Board of Directors significantly dilute the interests of our existing stockholders and give the Investors control of the Company. |
68
| | |
| | • | Sustained Disruptions in Financial Market Disruptions.or Financial Institution Liquidity. Disruption in global capital and creditthe financial markets or at financial institutions may adversely affect our liquidity, our agents’ liquidity, our access to credit and capital, our agents’ access to credit and capital and our earnings on our investment portfolio. |
| |
| | • | Sustained Negative Economic Conditions. Negative economic conditions generally and in geographic areas or industries that are important to our business may cause a decline in our transaction volume, and we may be unable to timely and effectively reduce our operating costs or take other actions in response to a significant decline in transaction volume. |
| |
| | • | International Migration Patterns. A material slow down or complete disruption of international migration patterns could adversely affect our money transfer volume and growth rate. |
| |
| | • | Retention of Global Funds Transfer Agents and Billers.We may be unable to maintain retail agent or biller relationships or we may experience a reduction in transaction volume from these relationships. |
| |
| | • | Stockholder Litigation and Related Risks. Stockholder lawsuits and other litigation or government investigations of the Company or its agents could result in material settlements, fines, penalties or legal fees. |
| |
| | • | Credit Risks. If we are unable to manage credit risks from our retail agents and official check financial institution customers, which risks may increase during negative economic conditions, our business could be harmed. |
| |
| | • | Fraud Risks. If we are unable to manage fraud risks from consumers or certain agents, which risks may increase during negative economic conditions, our business could be harmed. |
| |
| | • | Maintenance of Banking Relationships. We may be unable to maintain existing or establish new banking relationships, including the Company’s domestic and international clearing bank relationships, which could adversely affect our business, results of operation and our financial condition. |
| |
| | • | Interest Rate Fluctuations. Fluctuations in interest rates may negatively affect the net investment margin of our Official Checkofficial check and Money Ordermoney order businesses. |
| |
| | • | Repricing of our Official Check and Money Order Businesses.We may be unable to operate our official check and money order businesses profitably as a result of our revised pricing strategies. |
| |
| | • | Failure to Maintain Sufficient Capital. We may be unable to maintain sufficient capital to pursue our growth strategy, fund key strategic initiatives, and meet evolving regulatory requirements. |
| |
| | • | Failure to Attract and Retain Key Employees. We may be unable to attract and retain key employees. |
60
| | |
| | • | Development of New and Enhanced Products and Related Investment.We may be unable to successfully and timely implement new or enhanced technology and infrastructure, delivery methods and product and service offerings and to invest in new products or services and infrastructure. |
| |
| | • | Intellectual Property. If we are unable to adequately protect our brand and other intellectual property rights and avoid infringing on third-party intellectual property rights, our business could be harmed. |
| |
| | • | Competition. We may be unable to compete against our large competitors, niche competitors or new competitors that may enter the markets in which we operate. |
| |
| | • | United States and International Regulation. Failure by us or our agents to comply with the laws and regulatory requirements in the United States and abroad, including the recently enacted Dodd-Frank Act and the regulations developed thereunder or changes in laws, regulations or other industry practices and standards, could have an adverse effect on our results of operations.operations, or change our relationships with our customers, investors and other stakeholders. |
|
| • | Changes in Laws. The Dodd-Frank Act, as well as regulations required thereby, and other laws or regulations that may be adopted in the future, could adversely affect us. |
69
| | |
| • | Increased Regulation of Financial Services Companies. The Dodd-Frank Act increases the regulation of financial services companies generally, including non-bank financial companies supervised by the Federal Reserve. |
|
| • | Consumer Financial Protection Act. We will be subject to various provisions of the Consumer Financial Protection Act of 2010, which will result in a new regulator with new and expanded compliance requirements, which is likely to increase our costs. |
| |
| | • | Operation in Politically Volatile Areas. Offering money transfer services through agents in regions that are politically volatile or, in a limited number of cases, are subject to certain OFAC restrictions, could cause contravention of United StatesU.S. law or regulations by us or our agents, subject us to fines and penalties and cause us reputational harm. |
| |
| | • | Network and Data Security. A significant security or privacy breach in our facilities, networks or databases could harm our business. |
| |
| | • | Systems Interruption. A breakdown, catastrophic event, security breach, improper operation or other event impacting our systems or processes or the systems or processes of our vendors, agents and financial institution customers could result in financial loss, loss of customers, regulatory sanctions and damage to our brand and reputation. |
| |
| | • | Technology Scalability. We may be unable to scale our technology to match our business and transactional growth. |
| |
| | • | Company Retail Locations and Acquisitions. If we are unable to manage risks associated with running Company-owned retail locations and acquiring businesses, our business could be harmed. |
| |
| | • | International Risks. Our business and results of operation may be adversely affected by political, economic or other instability in countries that are important to our business. |
| |
| | • | Tax Matters. AnChanges in tax laws or an unfavorable outcome with respect to the audit of our tax returns or tax positions, or a failure by us to establish adequate reserves for tax events, could adversely affect our results of operations. |
| |
| | • | Status as a Bank Holding Company Subsidiary. If we areAs a deemed to be a subsidiary of a bank holding company our abilityregulated under the BHC Act of 1956, we are subject to engage in other businesses may be limited to those permissible for a bank holding company.supervision, regulation and regular examination by the Federal Reserve. |
| |
| | • | Internal Controls. Our inability to maintain compliance with the internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on our business. |
| |
| | • | Overhang of Convertible Preferred Stock to Float. Sales of a substantial number of shares of our common stock or the perception that significant sales could occur, may depress the trading price of our common stock. |
| |
| | • | ChangeDebt. If the Company issues a large amount of Control Restrictions. Through March 17, 2010, an Agreement betweendebt, it may be more difficult for the InvestorsCompany to obtain future financing and Wal-Mart could prevent an acquisition of the Company.our cash flow may not be sufficient to make required payments or repay our indebtedness when it matures. |
| |
| | • | Anti-Takeover Provisions. Our capital structure, our charter documents or specificand Delaware law contain provisions of Delaware lawthat may have the effect of delaying, deterring or preventing a merger or change of control of our Company. |
| |
| | • | NYSE Delisting. We may be unable to continue to satisfy the NYSE criteria for listing on the exchange. |
| |
| | • | Other Factors. Additional risk factors may be described in our other filings with the SEC from time to time. |
Actual results may differ materially from historical and anticipated results. These forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements to reflect events or circumstances arising after such date.
6170
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk disclosure is discussed under “Enterprise Risk Management” in Item 67 of this Annual Report onForm 10-K.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by Item 78 is found in a separate section of this Annual Report onForm 10-K on pages F-1 through F-54.F-65. See the “Index to Financial Statements” onpage F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and the Interim PrincipalChief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined inRule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and Interim PrincipalChief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective.
No changeIn the third quarter of 2010, the Company implemented a new technology system to enhance certain processes, particularly those related to its partnerset-up, settlement and partner servicing for the money transfer, bill payment and money order products. The new system will allow the Company to increase the flexibility of our back office, improve operating efficiencies and automate certain controls and compliance efforts. Other than process changes related to this implementation, there were no changes in the Company’s internal control over financial reporting (as defined inRule 13a-15(f) of the Exchange Act) during the fiscal quarter ended December 31, 2009 has2010 that have materially affected, or isare reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s annual report on internal control over financial reporting is provided onpage F-2 of this Annual Report onForm 10-K. The attestation report of the Company’s independent registered public accounting firm, Deloitte & Touche LLP, regarding the Company’s internal control over financial reporting is provided onpage F-3 of this Annual Report onForm 10-K.
Item 9B. OTHER INFORMATION
None.
6271
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by this Item is contained in the sections titled “Proposal 2: Election of Directors,” “Board of Directors and Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in our definitive Proxy Statement for our 20102011 Annual Meeting of Stockholders, and is incorporated herein by reference. Under the section of our definitive Proxy Statement incorporated by reference herein titled “Board of Directors and Governance — Board Committees — Audit Committee,” we identify the financial expert who serves on the Audit Committee of our Board of Directors. Information regarding our executive officers is contained in “Executive Officers of the Registrant” in Part I, Item 1 of this Annual Report onForm 10-K.
All of our employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions (the “Principal Officers”), are subject to our Code of Ethics and our Always Honest policy. Our directors are also subject to our Code of Ethics and our Always Honest policy. These documents are posted on our website at www.moneygram.com in the Investor Relations section, and are available in print free of charge to any stockholder who requests them at the address set forth below. We will disclose any amendments to, or waivers of, our Code of Ethics and our Always Honest Policy for directors or Principal Officers on our website.
Item 11. EXECUTIVE COMPENSATION
The information called for by this Item is contained in the sections titled “Compensation Discussion and Analysis,” “Executive Compensation,” “2009 Director Compensation,” “Human Resources and Nominating Committee Report” and “Compensation Committee Interlocks and Insider Participation” in our definitive Proxy Statement for our 20102011 Annual Meeting of Stockholders, and is incorporated herein by reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information called for by this Item is contained in the sections titled “Security Ownership of Management,” “Security Ownership of Certain Beneficial Owners” and “Proposal 1: Amendments to the MoneyGram International, Inc. 2005 Omnibus Incentive Plan — Equity Compensation Plan Information” in our definitive Proxy Statement for our 20102011 Annual Meeting of Stockholders, and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information called for by this Item is contained in the section titled “Board of Directors and Governance” under the captions “Director Independence,” “Policy and Procedures Regarding Transactions with Related Persons” and “Transactions with Related Persons” in our definitive Proxy Statement for our 20102011 Annual Meeting of Stockholders, and is incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information called for by this Item is contained in the section titled “Information Regarding Independent Registered Public Accounting Firm” in our definitive Proxy Statement for our 20102011 Annual Meeting of Stockholders, and is incorporated herein by reference.
6372
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| |
| (a) (1) | The financial statements listed in the “Index to Financial Statements and Schedules” are filed as part of this Annual Report onForm 10-K. |
| | |
| | (2) | All financial statement schedules are omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or notes thereto listed in the “Index to Financial Statements.” |
| |
| | (3) | Exhibits are filed with this Annual Report onForm 10-K or incorporated herein by reference as listed in the accompanying Exhibit Index. |
6473
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | | |
| | | MoneyGram International, Inc.
(Registrant) |
| | | |
| | By: /s/ Pamela H. Patsley Pamela H. Patsley
Chairman and Chief Executive Officer
(Principal Executive Officer)
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 15, 2010.
| | | |
| | | |
/s/ Pamela H. Patsley
Pamela H. Patsley | | Chairman and Chief Executive Officer
(Principal Executive Officer) |
| | | |
/s/ Jean C. BensonJames E. Shields
Jean C. BensonJames E. Shields | | SeniorExecutive Vice President and ControllerChief Financial Officer (Principal Accounting Officer and Interim Financial Officer) |
| | |
/s/ Rebecca L. Lobsinger
Rebecca L. Lobsinger | | Vice President, Controller
(Principal FinancialAccounting Officer) |
| | | |
*
Thomas M. HagertyJ. Coley Clark | | Director |
| | | |
*
Jess T. HayVictor W. Dahir | | Director |
| | |
*
Thomas M. Hagerty | | Director |
| | | |
*
Scott L. Jaeckel | | Director |
| | | |
*
Seth W. Lawry | | Director |
| | | |
*
Othón Ruiz Montemayor | | Director |
| | |
*
Pamela H. PatsleyAnn Mather | | Director |
| | | |
*
Ganesh B. Rao | | Director |
| | | |
*
Albert M. TeplinW. Bruce Turner | | Director |
| | | |
/s/ Timothy C. Everett
Timothy C. Everett
*As attorney-in-fact | | Executive Vice President, General Counsel and Corporate Secretary |
6574
EXHIBIT INDEX
| | | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
| |
| | 2 | .1 | | Separation and Distribution Agreement, dated as of June 30, 2004, by and among Viad Corp, MoneyGram International, Inc., MGI Merger Sub, Inc. and Travelers Express Company, Inc. (Incorporated by reference from Exhibit 2.1 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). | 2 | .1 | | Separation and Distribution Agreement, dated as of June 30, 2004, by and among Viad Corp, MoneyGram International, Inc., MGI Merger Sub, Inc. and Travelers Express Company, Inc. (Incorporated by reference from Exhibit 2.1 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). |
| | * 3 | .1 | | Amended and Restated Certificate of Incorporation of MoneyGram International, Inc., as amended. | 3 | .1 | | Amended and Restated Certificate of Incorporation of MoneyGram International, Inc., as amended (Incorporated by reference from Exhibit 3.1 to Registrant’s Annual Report onForm 10-K filed on March 15, 2010). |
| | 3 | .2 | | Bylaws of MoneyGram International, Inc., as amended and restated September 10, 2009 (Incorporated by reference from Exhibit 3.01 to Registrant’s Current Report onForm 8-K filed on September 16, 2009). | 3 | .2 | | Bylaws of MoneyGram International, Inc., as amended and restated September 10, 2009 (Incorporated by reference from Exhibit 3.01 to Registrant’s Current Report onForm 8-K filed on September 16, 2009). |
| | 4 | .1 | | Form of Specimen Certificate for MoneyGram Common Stock (Incorporated by reference from Exhibit 4.1 to Amendment No. 4 to Registrant’s Form 10 filed on June 14, 2004). | 3 | .3 | | Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of MoneyGram International, Inc. (Incorporated by reference from Exhibit 4.3 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). |
| | 4 | .2 | | Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of MoneyGram International, Inc. (Incorporated by reference from Exhibit 4.3 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). | 3 | .4 | | Certificate of Designations, Preferences and Rights of the Series B Participating Convertible Preferred Stock of MoneyGram International, Inc. (Incorporated by reference from Exhibit 4.2 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 4 | .3 | | Certificate of Designations, Preferences and Rights of the Series B Participating Convertible Preferred Stock of MoneyGram International, Inc. (Incorporated by reference from Exhibit 4.2 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | 3 | .5 | | Certificate of Designations, Preferences and Rights of theSeries B-1 Participating Convertible Preferred Stock of MoneyGram International, Inc. (Incorporated by reference from Exhibit 4.3 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 4 | .4 | | Certificate of Designations, Preferences and Rights of theSeries B-1 Participating Convertible Preferred Stock of MoneyGram International, Inc. (Incorporated by reference from Exhibit 4.3 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | 3 | .6 | | Certificate of Designations, Preferences and Rights of the Series D Participating Convertible Preferred Stock of MoneyGram International, Inc. (Incorporated by reference from Exhibit 4.4 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 4 | .5 | | Certificate of Designations, Preferences and Rights of the Series D Participating Convertible Preferred Stock of MoneyGram International, Inc. (Incorporated by reference from Exhibit 4.4 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | 4 | .1 | | Form of Specimen Certificate for MoneyGram Common Stock (Incorporated by reference from Exhibit 4.1 to Amendment No. 4 to Registrant’s Form 10 filed on June 14, 2004). |
| | 4 | .6 | | Indenture, dated as of March 25, 2008, by and among MoneyGram International, Inc., MoneyGram Payment Systems Worldwide, Inc., the other guarantors party thereto and Deutsche Bank Trust Company Americas, a New York banking corporation, as trustee and collateral agent (Incorporated by reference from Exhibit 4.1 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | 4 | .2 | | Indenture, dated as of March 25, 2008, by and among MoneyGram International, Inc., MoneyGram Payment Systems Worldwide, Inc., the other guarantors party thereto and Deutsche Bank Trust Company Americas, a New York banking corporation, as trustee and collateral agent (Incorporated by reference from Exhibit 4.1 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 4 | .7 | | Registration Rights Agreement, dated as of March 25, 2008, by and among the several Investor parties named therein and MoneyGram International, Inc. (Incorporated by reference from Exhibit 4.5 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | 4 | .3 | | Registration Rights Agreement, dated as of March 25, 2008, by and among the several Investor parties named therein and MoneyGram International, Inc. (Incorporated by reference from Exhibit 4.5 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 4 | .8 | | Exchange and Registration Rights Agreement, dated as of March 25, 2008, by and among MoneyGram Payment Systems Worldwide, Inc., each of the Guarantors listed on the signature pages thereto, GSMP V Onshore US, Ltd., GSMP V Offshore US, Ltd. and GSMP V Institutional US, Ltd. (Incorporated by reference from Exhibit 4.6 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | 4 | .4 | | Exchange and Registration Rights Agreement, dated as of March 25, 2008, by and among MoneyGram Payment Systems Worldwide, Inc., each of the Guarantors listed on the signature pages thereto, GSMP V Onshore US, Ltd., GSMP V Offshore US, Ltd. and GSMP V Institutional US, Ltd. (Incorporated by reference from Exhibit 4.6 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .1 | | Employee Benefits Agreement, dated as of June 30, 2004, by and among Viad Corp, MoneyGram International, Inc. and Travelers Express Company, Inc. (Incorporated by reference from Exhibit 10.1 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). | 10 | .1 | | Employee Benefits Agreement, dated as of June 30, 2004, by and among Viad Corp, MoneyGram International, Inc. and Travelers Express Company, Inc. (Incorporated by reference from Exhibit 10.1 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). |
| | 10 | .2 | | Tax Sharing Agreement, dated as of June 30, 2004, by and between Viad Corp and MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.2 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). | 10 | .2 | | Tax Sharing Agreement, dated as of June 30, 2004, by and between Viad Corp and MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.2 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). |
| | †10 | .3 | | MoneyGram International, Inc. 2004 Omnibus Incentive Plan, as amended February 17, 2005 (Incorporated by reference from Exhibit 99.1 to Registrant’s Current Report onForm 8-K filed on February 23, 2005). | †10 | .3 | | MoneyGram International, Inc. 2004 Omnibus Incentive Plan, as amended February 17, 2005 (Incorporated by reference from Exhibit 99.1 to Registrant’s Current Report onForm 8-K filed on February 23, 2005). |
| | †10 | .4 | | MoneyGram International, Inc. 2005 Omnibus Incentive Plan, as amended February 17, 2010 (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on February 22, 2010). | †10 | .4 | | MoneyGram International, Inc. 2005 Omnibus Incentive Plan, as amended February 17, 2010 (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on February 22, 2010). |
| | †10 | .5 | | Form of Amended and Restated Non-Employee Director Indemnification Agreement between MoneyGram International, Inc. and Non-Employee Directors of MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.02 to Registrant’s Current Report onForm 8-K filed on February 13, 2009). | †10 | .5 | | Form of Amended and Restated Non-Employee Director Indemnification Agreement between MoneyGram International, Inc. and Non-Employee Directors of MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.02 to Registrant’s Current Report onForm 8-K filed on February 13, 2009). |
6675
| | | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
| |
| | †10 | .6 | | Form of Employee Director Indemnification Agreement between MoneyGram International, Inc. and Employee Directors of MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.03 to Registrant’s Current Report onForm 8-K filed on February 13, 2009). | †10 | .6 | | Form of Employee Director Indemnification Agreement between MoneyGram International, Inc. and Employee Directors of MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.03 to Registrant’s Current Report onForm 8-K filed on February 13, 2009). |
| | †10 | .7 | | MoneyGram International, Inc. Performance Bonus Plan, as amended and restated February 17, 2010 (formerly known as the MoneyGram International, Inc. Management and Line of Business Incentive Plan) (Incorporated by reference from Exhibit 10.02 to Registrant’s Current Report onForm 8-K filed on February 22, 1010). | †10 | .7 | | MoneyGram International, Inc. Performance Bonus Plan, as amended and restated February 17, 2010 (formerly known as the MoneyGram International, Inc. Management and Line of Business Incentive Plan) (Incorporated by reference from Exhibit 10.02 to Registrant’s Current Report onForm 8-K filed on February 22, 1010). |
| | 10 | .8 | | Amended and Restated Trademark Security Agreement, dated as of March 25, 2008, by and between MoneyGram International, Inc. and JPMorgan Chase Bank, N.A., as collateral agent (Incorporated by reference from Exhibit 10.10 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). | 10 | .8 | | Amended and Restated Trademark Security Agreement, dated as of March 25, 2008, by and between MoneyGram International, Inc. and JPMorgan Chase Bank, N.A., as collateral agent (Incorporated by reference from Exhibit 10.10 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .9 | | Trademark Security Agreement, dated as of March 25, 2008, by and between PropertyBridge, Inc. and JPMorgan Chase Bank, N.A., as collateral agent (Incorporated by reference from Exhibit 10.11 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). | 10 | .9 | | Trademark Security Agreement, dated as of March 25, 2008, by and between PropertyBridge, Inc. and JPMorgan Chase Bank, N.A., as collateral agent (Incorporated by reference from Exhibit 10.11 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .10 | | Second Priority Trademark Security Agreement, dated as of March 25, 2008, by and between PropertyBridge, Inc., as grantor, and Deutsche Bank Trust Company Americas, as collateral agent for the secured parties (Incorporated by reference from Exhibit 10.12 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). | 10 | .10 | | Second Priority Trademark Security Agreement, dated as of March 25, 2008, by and between PropertyBridge, Inc., as grantor, and Deutsche Bank Trust Company Americas, as collateral agent for the secured parties (Incorporated by reference from Exhibit 10.12 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .11 | | Second Priority Trademark Security Agreement, dated as of March 25, 2008, by and between MoneyGram International, Inc., as grantor, and Deutsche Bank Trust Company Americas, as collateral agent for the secured parties (Incorporated by reference from Exhibit 10.13 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). | 10 | .11 | | Second Priority Trademark Security Agreement, dated as of March 25, 2008, by and between MoneyGram International, Inc., as grantor, and Deutsche Bank Trust Company Americas, as collateral agent for the secured parties (Incorporated by reference from Exhibit 10.13 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .12 | | Amended and Restated Patent Security Agreement, dated as of March 25, 2008, by and between MoneyGram International, Inc. and JPMorgan Chase Bank, N.A., as collateral agent (Incorporated by reference from Exhibit 10.14 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). | 10 | .12 | | Amended and Restated Patent Security Agreement, dated as of March 25, 2008, by and between MoneyGram International, Inc. and JPMorgan Chase Bank, N.A., as collateral agent (Incorporated by reference from Exhibit 10.14 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .13 | | Patent Security Agreement, dated as of March 25, 2008, by and between MoneyGram Payment Systems, Inc. and JPMorgan Chase Bank, N.A., as collateral agent (Incorporated by reference from Exhibit 10.15 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). | 10 | .13 | | Patent Security Agreement, dated as of March 25, 2008, by and between MoneyGram Payment Systems, Inc. and JPMorgan Chase Bank, N.A., as collateral agent (Incorporated by reference from Exhibit 10.15 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .14 | | Second Priority Patent Security Agreement, dated as of March 25, 2008, by and between MoneyGram Payment Systems, Inc., as grantor, and Deutsche Bank Trust Company Americas, as collateral agent for the secured parties (Incorporated by reference from Exhibit 10.16 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). | 10 | .14 | | Second Priority Patent Security Agreement, dated as of March 25, 2008, by and between MoneyGram Payment Systems, Inc., as grantor, and Deutsche Bank Trust Company Americas, as collateral agent for the secured parties (Incorporated by reference from Exhibit 10.16 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .15 | | Second Priority Patent Security Agreement, dated as of March 25, 2008, by and between MoneyGram International, Inc., as grantor, and Deutsche Bank Trust Company Americas, as collateral agent for the secured parties (Incorporated by reference from Exhibit 10.17 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). | 10 | .15 | | Second Priority Patent Security Agreement, dated as of March 25, 2008, by and between MoneyGram International, Inc., as grantor, and Deutsche Bank Trust Company Americas, as collateral agent for the secured parties (Incorporated by reference from Exhibit 10.17 to Registrants’ Current Report onForm 8-K filed on March 28, 2008). |
| | †10 | .16 | | Deferred Compensation Plan for Directors of MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.12 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). | †10 | .16 | | Deferred Compensation Plan for Directors of Viad Corp, as amended August 19, 2004 (Incorporated by reference from Exhibit 10.1 to Registrant’s Quarterly Report onForm 10-Q filed on November 12, 2004). |
| | †10 | .17 | | Deferred Compensation Plan for Directors of Viad Corp, as amended August 19, 2004 (Incorporated by reference from Exhibit 10.1 to Registrant’s Quarterly Report onForm 10-Q filed on November 12, 2004). | †10 | .17 | | Viad Corp Deferred Compensation Plan, as amended August 19, 2004 (Incorporated by reference from Exhibit 10.2 to Registrant’s Quarterly Report onForm 10-Q filed on November 12, 2004). |
| | †10 | .18 | | Viad Corp Deferred Compensation Plan, as amended August 19, 2004 (Incorporated by reference from Exhibit 10.2 to Registrant’s Quarterly Report onForm 10-Q filed on November 12, 2004). | †10 | .18 | | MoneyGram International, Inc. Executive Severance Plan (Tier I), as amended and restated August 16, 2007 (Incorporated by reference from Exhibit 99.03 to Registrant’s Current Report onForm 8-K filed on August 22, 2007). |
| | †10 | .19 | | MoneyGram International, Inc. Deferred Compensation Plan, as amended and restated August 16, 2007 (Incorporated by reference from Exhibit 99.01 to Registrant’s Current Report onForm 8-K filed on August 22, 2007). | †10 | .19 | | First Amendment of the Amended and Restated MoneyGram International, Inc. Executive Severance Plan (Tier I) (Incorporated by reference from Exhibit 10.20 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | †10 | .20 | | 2005 Deferred Compensation Plan for Directors of MoneyGram International, Inc., as amended and restated March 24, 2008 (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on September 9, 2008). | †10 | .20 | | MoneyGram International, Inc. Special Executive Severance Plan (Tier I) dated March 25, 2008 (Incorporated by reference from Exhibit 10.18 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | †10 | .21 | | MoneyGram International, Inc. Executive Severance Plan (Tier I), as amended and restated August 16, 2007 (Incorporated by reference from Exhibit 99.03 to Registrant’s Current Report onForm 8-K filed on August 22, 2007). | †10 | .21 | | MoneyGram International, Inc. Executive Severance Plan (Tier II), as amended and restated August 16, 2007 (Incorporated by reference from Exhibit 99.04 to Registrant’s Current Report onForm 8-K filed on August 22, 2007). |
6776
| | | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
| |
| | †10 | .22 | | First Amendment of the Amended and Restated MoneyGram International, Inc. Executive Severance Plan (Tier I) (Incorporated by reference from Exhibit 10.20 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | †10 | .22 | | First Amendment of the Amended and Restated MoneyGram International, Inc. Executive Severance Plan (Tier II) (Incorporated by reference from Exhibit 10.21 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | †10 | .23 | | MoneyGram International, Inc. Special Executive Severance Plan (Tier I) dated March 25, 2008 (Incorporated by reference from Exhibit 10.18 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | †10 | .23 | | MoneyGram International, Inc. Special Executive Severance Plan (Tier II) dated March 25, 2008 (Incorporated by reference from Exhibit 10.19 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | †10 | .24 | | MoneyGram International, Inc. Executive Severance Plan (Tier II), as amended and restated August 16, 2007 (Incorporated by reference from Exhibit 99.04 to Registrant’s Current Report onForm 8-K filed on August 22, 2007). | †10 | .24 | | MoneyGram Supplemental Pension Plan, as amended and restated December 28, 2007 (Incorporated by reference from Exhibit 99.01 to Registrant’s Current Report onForm 8-K filed on January 4, 2008). |
| | †10 | .25 | | First Amendment of the Amended and Restated MoneyGram International, Inc. Executive Severance Plan (Tier II) (Incorporated by reference from Exhibit 10.21 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | †10 | .25 | | First Amendment of MoneyGram Supplemental Pension Plan (Incorporated by reference from Exhibit 10.28 to Amendment No. 1 to Registrant’s Annual Report onForm 10-K/A filed on August 9, 2010). |
| | †10 | .26 | | MoneyGram International, Inc. Special Executive Severance Plan (Tier II) dated March 25, 2008 (Incorporated by reference from Exhibit 10.19 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | †10 | .26 | | Description of MoneyGram International, Inc. Director’s Charitable Matching Program (Incorporated by reference from Exhibit 10.13 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). |
| | †10 | .27 | | MoneyGram Supplemental Pension Plan, as amended and restated December 28, 2007 (Incorporated by reference from Exhibit 99.01 to Registrant’s Current Report onForm 8-K filed on January 4, 2008). | †10 | .27 | | Viad Corp Director’s Charitable Award Program (Incorporated by reference from Exhibit 10.14 to Amendment No. 3 to Registrant’s Form 10 filed on June 3, 2004). |
| | †10 | .28 | | Description of MoneyGram International, Inc. Director’s Charitable Matching Program (Incorporated by reference from Exhibit 10.13 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). | +10 | .28 | | Second Amended and Restated Credit Agreement, dated as of March 25, 2008, among MoneyGram International, Inc., MoneyGram Payment Systems Worldwide, Inc. and JPMorgan Chase Bank, N.A., individually and as letter of credit issuer, swing line lender, administrative agent and collateral agent and the other lenders party thereto (Incorporated by reference from Exhibit 10.30 to Registrant’s Annual Report onForm 10-K filed on March 15, 2010). |
| | †10 | .29 | | Viad Corp Director’s Charitable Award Program (Incorporated by reference from Exhibit 10.14 to Amendment No. 3 to Registrant’s Form 10 filed on June 3, 2004). | 10 | .29 | | Security Agreement, dated as of January 25, 2008, among MoneyGram International, Inc., MoneyGram Payment Systems, Inc., FSMC, Inc., CAG Inc., MoneyGram Payment Systems Worldwide, Inc., PropertyBridge, Inc., MoneyGram of New York LLC, and JPMorgan Chase Bank, N.A. (Incorporated by reference from Exhibit 99.03 to Registrant’s Current Report onForm 8-K filed on January 31, 2008). |
| | *+ 10 | .30 | | Second Amended and Restated Credit Agreement, dated as of March 25, 2008, among MoneyGram International, Inc., MoneyGram Payment Systems Worldwide, Inc. and JPMorgan Chase Bank, N.A., individually and as letter of credit issuer, swing line lender, administrative agent and collateral agent and the other lenders party thereto. | 10 | .30 | | Amended and Restated Security Agreement, dated as of March 25, 2008, among MoneyGram International, Inc., MoneyGram Payment Systems, Inc., FSMC, Inc., CAG Inc., MoneyGram Payment Systems Worldwide, Inc., PropertyBridge, Inc., MoneyGram of New York LLC, and JPMorgan Chase Bank, N.A., as collateral agent (Incorporated by reference from Exhibit 10.8 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .31 | | Security Agreement, dated as of January 25, 2008, among MoneyGram International, Inc., MoneyGram Payment Systems, Inc., FSMC, Inc., CAG Inc., MoneyGram Payment Systems Worldwide, Inc., PropertyBridge, Inc., MoneyGram of New York LLC, and JPMorgan Chase Bank, N.A. (Incorporated by reference from Exhibit 99.03 to Registrant’s Current Report onForm 8-K filed on January 31, 2008). | 10 | .31 | | Second Priority Security Agreement, dated as of March 25, 2008, among MoneyGram International, Inc., MoneyGram Payment Systems, Inc., FSMC, Inc., CAG Inc., MoneyGram Payment Systems Worldwide, Inc., PropertyBridge, Inc., MoneyGram of New York LLC, and Deutsche Bank Trust Company Americas, as collateral agent (Incorporated by reference from Exhibit 10.9 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .32 | | Amended and Restated Security Agreement, dated as of March 25, 2008, among MoneyGram International, Inc., MoneyGram Payment Systems, Inc., FSMC, Inc., CAG Inc., MoneyGram Payment Systems Worldwide, Inc., PropertyBridge, Inc., MoneyGram of New York LLC, and JPMorgan Chase Bank, N.A., as collateral agent (Incorporated by reference from Exhibit 10.8 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | 10 | .32 | | Amended and Restated Pledge Agreement, dated as of March 25, 2008, among MoneyGram International, Inc., MoneyGram Payment Systems, Inc., FSMC, Inc., CAG Inc., MoneyGram Payment Systems Worldwide, Inc., PropertyBridge, Inc., MoneyGram of New York LLC, and JPMorgan Chase Bank, N.A. (Incorporated by reference from Exhibit 10.6 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .33 | | Second Priority Security Agreement, dated as of March 25, 2008, among MoneyGram International, Inc., MoneyGram Payment Systems, Inc., FSMC, Inc., CAG Inc., MoneyGram Payment Systems Worldwide, Inc., PropertyBridge, Inc., MoneyGram of New York LLC, and Deutsche Bank Trust Company Americas, as collateral agent (Incorporated by reference from Exhibit 10.9 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | 10 | .33 | | Second Priority Pledge Agreement, dated as of March 25, 2008, among MoneyGram International, Inc., MoneyGram Payment Systems, Inc., FSMC, Inc., CAG Inc., MoneyGram Payment Systems Worldwide, Inc., PropertyBridge, Inc., MoneyGram of New York LLC, and Deutsche Bank Trust Company Americas (Incorporated by reference from Exhibit 10.7 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .34 | | Amended and Restated Pledge Agreement, dated as of March 25, 2008, among MoneyGram International, Inc., MoneyGram Payment Systems, Inc., FSMC, Inc., CAG Inc., MoneyGram Payment Systems Worldwide, Inc., PropertyBridge, Inc., MoneyGram of New York LLC, and JPMorgan Chase Bank, N.A. (Incorporated by reference from Exhibit 10.6 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | 10 | .34 | | Amended and Restated Purchase Agreement, dated as of March 17, 2008, among MoneyGram International, Inc. and the several Investor parties named therein (Incorporated by reference from Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed on March 18, 2008). |
| | 10 | .35 | | Second Priority Pledge Agreement, dated as of March 25, 2008, among MoneyGram International, Inc., MoneyGram Payment Systems, Inc., FSMC, Inc., CAG Inc., MoneyGram Payment Systems Worldwide, Inc., PropertyBridge, Inc., MoneyGram of New York LLC, and Deutsche Bank Trust Company Americas (Incorporated by reference from Exhibit 10.7 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | 10 | .35 | | Amended and Restated Fee Arrangement Letter, dated March 17, 2008, between THL Managers VI, LLC and MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.2 to Registrant’s Current Report onForm 8-K filed March 18, 2008). |
6877
| | | | | | | | | |
Exhibit
| Exhibit
| | | Exhibit
| | |
Number | Number | | Description | Number | | Description |
| |
| | 10 | .36 | | Amended and Restated Purchase Agreement, dated as of March 17, 2008, among MoneyGram International, Inc. and the several Investor parties named therein (Incorporated by reference from Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed on March 18, 2008). | 10 | .36 | | Amended and Restated Fee Arrangement Letter, dated March 17, 2008, between Goldman, Sachs & Co. and MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.3 to Registrant’s Current Report onForm 8-K filed on March 18, 2008). |
| | 10 | .37 | | Amended and Restated Fee Arrangement Letter, dated March 17, 2008, between THL Managers VI, LLC and MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.2 to Registrant’s Current Report onForm 8-K filed March 18, 2008). | 10 | .37 | | Fee Arrangement Letter, dated as of March 25, 2008, by and between the Investor parties named therein, Goldman, Sachs & Co. and MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.3 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .38 | | Amended and Restated Fee Arrangement Letter, dated March 17, 2008, between Goldman, Sachs & Co. and MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.3 to Registrant’s Current Report onForm 8-K filed on March 18, 2008). | 10 | .38 | | Subscription Agreement, dated as of March 25, 2008, by and between MoneyGram International, Inc. and The Goldman Sachs Group, Inc. (Incorporated by reference from Exhibit 10.4 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .39 | | Fee Arrangement Letter, dated as of March 25, 2008, by and between the Investor parties named therein, Goldman, Sachs & Co. and MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.3 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | +10 | .39 | | Amended and Restated Note Purchase Agreement, dated as of March 17, 2008, among MoneyGram Payment Systems Worldwide, Inc., MoneyGram International, Inc., GSMP V Onshore US, Ltd., GSMP V Offshore US, Ltd., GSMP V Institutional US, Ltd., and THL Managers VI, LLC. (Incorporated by reference from Exhibit 10.41 to Registrant’s Annual Report onForm 10-K filed on March 15, 2010). |
| | 10 | .40 | | Subscription Agreement, dated as of March 25, 2008, by and between MoneyGram International, Inc. and The Goldman Sachs Group, Inc. (Incorporated by reference from Exhibit 10.4 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | 10 | .40 | | Amended and Restated Fee Letter, dated March 17, 2008, among MoneyGram Payment Systems Worldwide, Inc., GSMP V Onshore US, Ltd., GSMP V Offshore US, Ltd., GSMP V Institutional US, Ltd., GS Capital Partners VI Fund, L.P., GS Capital Partners VI Offshore Fund, L.P., GS Capital Partners VI GmbH & Co. KG, GS Capital Partners VI Parallel, L.P., and THL Managers VI, LLC (Incorporated by reference from Exhibit 10.4 to Registrant’s Current Report onForm 8-K filed on March 18, 2008). |
| | *+ 10 | .41 | | Amended and Restated Note Purchase Agreement, dated as of March 17, 2008, among MoneyGram Payment Systems Worldwide, Inc., MoneyGram International, Inc., GSMP V Onshore US, Ltd., GSMP V Offshore US, Ltd., GSMP V Institutional US, Ltd., and THL Managers VI, LLC. | 10 | .41 | | Second Amended and Restated Note Purchase Agreement, dated as of March 24, 2008, among MoneyGram Payment Systems Worldwide, Inc., MoneyGram International, Inc., GSMP V Onshore US, Ltd., GSMP V Offshore US, Ltd., and GSMP V Institutional US, Ltd. (Incorporated by reference from Exhibit 10.5 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). |
| | 10 | .42 | | Second Amended and Restated Note Purchase Agreement, dated as of March 24, 2008, among MoneyGram Payment Systems Worldwide, Inc., MoneyGram International, Inc., GSMP V Onshore US, Ltd., GSMP V Offshore US, Ltd., and GSMP V Institutional US, Ltd. (Incorporated by reference from Exhibit 10.5 to Registrant’s Current Report onForm 8-K filed on March 28, 2008). | 10 | .42 | | MoneyGram Employee Equity Trust, effective as of June 30, 2004 (Incorporated by reference from Exhibit 10.16 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). |
| | 10 | .43 | | Amended and Restated Fee Letter, dated March 17, 2008, among MoneyGram Payment Systems Worldwide, Inc., GSMP V Onshore US, Ltd., GSMP V Offshore US, Ltd., GSMP V Institutional US, Ltd., GS Capital Partners VI Fund, L.P., GS Capital Partners VI Offshore Fund, L.P., GS Capital Partners VI GmbH & Co. KG, GS Capital Partners VI Parallel, L.P., and THL Managers VI, LLC (Incorporated by reference from Exhibit 10.4 to Registrant’s Current Report onForm 8-K filed on March 18, 2008). | †10 | .43 | | Form of MoneyGram International, Inc. 2004 Omnibus Incentive Plan Restricted Stock Agreement, as amended February 16, 2005 (Incorporated by reference from Exhibit 99.5 to Registrant’s Current Report onForm 8-K filed on February 23, 2005). |
| | 10 | .44 | | MoneyGram Employee Equity Trust, effective as of June 30, 2004 (Incorporated by reference from Exhibit 10.16 to Registrant’s Quarterly Report onForm 10-Q filed on August 13, 2004). | †10 | .44 | | Form of MoneyGram International, Inc. 2004 Omnibus Incentive Plan Non-Qualified Stock Option Agreement, as amended February 16, 2005 (Incorporated by reference from Exhibit 99.6 to Registrant’s Current Report onForm 8-K filed on February 23, 2005). |
| | †10 | .45 | | Form of MoneyGram International, Inc. 2004 Omnibus Incentive Plan Restricted Stock Agreement, as amended February 16, 2005 (Incorporated by reference from Exhibit 99.5 to Registrant’s Current Report onForm 8-K filed on February 23, 2005). | †10 | .45 | | Form of MoneyGram International, Inc. 2004 Omnibus Incentive Plan Non-Qualified Stock Option Agreement for Directors (Incorporated by reference from Exhibit 99.7 to Registrant’s Current Report onForm 8-K filed on February 23, 2005). |
| | †10 | .46 | | Form of MoneyGram International, Inc. 2004 Omnibus Incentive Plan Non-Qualified Stock Option Agreement, as amended February 16, 2005 (Incorporated by reference from Exhibit 99.6 to Registrant’s Current Report onForm 8-K filed on February 23, 2005). | †10 | .46 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Restricted Stock Agreement, effective June 30, 2005 (Incorporated by reference from Exhibit 99.2 to Registrant’s Current Report onForm 8-K filed on July 5, 2005). |
| | †10 | .47 | | Form of MoneyGram International, Inc. 2004 Omnibus Incentive Plan Non-Qualified Stock Option Agreement for Directors (Incorporated by reference from Exhibit 99.7 to Registrant’s Current Report onForm 8-K filed on February 23, 2005). | †10 | .47 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Restricted Stock Agreement, effective August 17, 2005 (US Version) (Incorporated by reference from Exhibit 99.7 to Registrant’s Current Report onForm 8-K filed on August 23, 2005). |
| | †10 | .48 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Restricted Stock Agreement, effective June 30, 2005 (Incorporated by reference from Exhibit 99.2 to Registrant’s Current Report onForm 8-K filed on July 5, 2005). | †10 | .48 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Restricted Stock Agreement, effective August 17, 2005 (UK Version) (Incorporated by reference from Exhibit 99.9 to Registrant’s Current Report onForm 8-K filed on August 23, 2005). |
| | †10 | .49 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Restricted Stock Agreement, effective August 17, 2005 (US Version) (Incorporated by reference from Exhibit 99.7 to Registrant’s Current Report onForm 8-K filed on August 23, 2005). | †10 | .49 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement, effective August 17, 2005 (US Version) (Incorporated by reference from Exhibit 99.6 to Registrant’s Current Report onForm 8-K filed on August 23, 2005). |
| | †10 | .50 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Restricted Stock Agreement, effective August 17, 2005 (UK Version) (Incorporated by reference from Exhibit 99.9 to Registrant’s Current Report onForm 8-K filed on August 23, 2005). | †10 | .50 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement, effective August 17, 2005 (UK Version) (Incorporated by reference from Exhibit 99.8 to Registrant’s Current Report onForm 8-K filed on August 23, 2005). |
| | †10 | .51 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement, effective August 17, 2005 (US Version) (Incorporated by reference from Exhibit 99.6 to Registrant’s Current Report onForm 8-K filed on August 23, 2005). | †10 | .51 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement, effective February 15, 2006 (US version) (Incorporated by reference from Exhibit 10.41 to Registrant’s Annual Report onForm 10-K filed on March 1, 2006). |
6978
| | | | | |
Exhibit
| | |
Number | | Description |
| |
| | †10 | .52 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement, effective August 17, 2005 (UK Version) (Incorporated by reference from Exhibit 99.8 to Registrant’s Current Report onForm 8-K filed on August 23, 2005). |
| †10 | .53 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement, effective February 15, 2006 (US version) (Incorporated by reference from Exhibit 10.41 to Registrant’s Annual Report onForm 10-K filed on March 1, 2006). |
| †10 | .54 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement, effective February 15, 2006 (UK Version) (Incorporated by reference from Exhibit 10.42 to Registrant’s Annual Report onForm 10-K filed on March 1, 2006). |
| | †10 | .55.53 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement, effective May 8, 2007 (Incorporated by reference from Exhibit 99.04 to Registrant’s Current Report onForm 8-K filed on May 14, 2007). |
| | †10 | .56.54 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement, effective August 11, 2009 (version 1) (Incorporated by reference from Exhibit 10.8 to Registrant’s Quarterly Report onForm 10-Q filed on November 9, 2009). |
| | †10 | .57.55 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement, effective August 11, 2009 (version 2) (Incorporated by reference from Exhibit 10.9 to Registrant’s Quarterly Report onForm 10-Q filed on November 9, 2009). |
| | †10 | .58.56 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement for Directors, effective August 17, 2005 (Incorporated by reference from Exhibit 99.4 to Registrant’s Current Report onForm 8-K filed on August 23, 2005). |
| | †10 | .59.57 | | Form of MoneyGram International, Inc. 2005 Omnibus Incentive Plan Non-Qualified Stock Option Agreement for Directors, effective February 15, 2006 (Incorporated by reference from Exhibit 10.43 to Registrant’s Annual Report onForm 10-K filed on March 1, 2006). |
| | †10 | .60.58 | | Amended and Restated Employment Agreement, dated September 1, 2009, between MoneyGram International, Inc. and Pamela H. Patsley (Incorporated by reference from Exhibit 10.02 to Registrant’s Current Report onForm 8-K filed on September 4, 2009). |
| | †10 | .61.59 | | Non-Qualified Stock Option Agreement, dated January 21, 2009, between MoneyGram International, Inc. and Pamela H. Patsley (Incorporated by reference from Exhibit 10.02 to Registrant’s Current Report onForm 8-K filed on January 22, 2009). |
| | †10 | .62.60 | | Non-Qualified Stock Option Agreement, dated May 12, 2009, between MoneyGram International, Inc. and Pamela H. Patsley (Incorporated by reference from Exhibit 10.02 to Registrant’s Current Report onForm 8-K filed on May 18, 2009). |
| | †10 | .63.61 | | Non-Qualified Stock Option Agreement, dated August 31, 2009, between MoneyGram International, Inc. and Pamela H. Patsley (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on September 4, 2009). |
| | †10 | .64.62 | | Amendment to Non-Qualified Stock Option Agreements, dated August 31, 2009, between MoneyGram International, Inc. and Pamela H. Patsley (Incorporated by reference from Exhibit 10.03 to Registrant’s Current Report onForm 8-K filed on September 4, 2009). |
| | †10 | .65.63 | | Non-Qualified Stock Option Agreement, dated August 11, 2009, between MoneyGram International, Inc. and Daniel J. O’Malley (Incorporated by reference from Exhibit 10.02 to Registrant’s Current Report onForm 8-K filed on August 13, 2009). |
| | †10 | .66.64 | | Employee Trade Secret, Confidential Information and Post-Employment Restriction Agreement, dated August 11, 2009, between MoneyGram International, Inc. and Daniel J. O’Malley (Incorporated by reference from Exhibit 10.03 to Registrant’s Current Report onForm 8-K filed on August 13, 2009). |
| | †10 | .67.65 | | Separation Agreement and Release of All Claims, dated as of June 18, 2008, between MoneyGram International, Inc. and Philip W. Milne (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on June 19, 2008). |
70
| | | | |
Exhibit
| | |
Number
| | Description
|
|
| | †10 | .68.66 | | Confidential Separation Agreement and Release of All Claims, dated as of April 7, 2008, by and between MoneyGram International, Inc. and Long Lake Partners, L.P. and William J. Putney (Incorporated by reference from Exhibit 99.01 to Registrant’s Current Report onForm 8-K filed on April 11, 2008). |
| | †10 | .69.67 | | Independent Consulting Agreement, dated as of April 8, 2008, by and between MoneyGram Payment Systems, Inc., including all of its parent organizations, holding companies, predecessors, divisions, affiliates, related companies and joint ventures, business units and subsidiaries, and William J. Putney (Incorporated by reference from Exhibit 99.02 to Registrant’s Current Report onForm 8-K filed on April 11, 2008). |
79
| | | | | |
Exhibit
| | |
Number | | Description |
| |
| | †10 | .68 | | Separation Agreement and Release of All Claims, dated as of March 20, 2009, between MoneyGram International, Inc. and David J. Parrin (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on March 20, 2009). |
| | †10 | .69 | | Separation Agreement and Release of All Claims, dated as of March 25, 2009, between MoneyGram International, Inc. and Mary A. Dutra (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on March 27, 2009) |
| | †10 | .70 | | Non-Qualified Stock Option Agreement, dated May 6, 2009, between MoneyGram International, Inc. and Anthony P. Ryan (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on May 12, 2009). |
| | †10 | .71 | | Severance Agreement, dated as of May 6, 2009, between MoneyGram International, Inc. and Anthony P. Ryan (Incorporated by reference from Exhibit 10.02 to Registrant’s Current Report onForm 8-K filed on May 12, 2009). |
| | †10 | .72 | | Employee Trade Secret, Confidential Information and Post-Employment Restriction Agreement, dated May 6, 2009, between MoneyGram Payment Systems, Inc. and Anthony P. Ryan (Incorporated by reference from Exhibit 10.03 to Registrant’s Current Report onForm 8-K filed on May 12, 2009). |
| | †10 | .73 | | Agreement and Release, dated May 6, 2009, between MoneyGram International, Inc. and Anthony P. Ryan (Incorporated by reference from Exhibit 10.04 to Registrant’s Current Report onForm 8-K filed on May 12, 2009). |
| | †10 | .74 | | Separation Agreement and Release of All Claims, dated October 21, 2009, between MoneyGram International, Inc. and Anthony P. Ryan (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on October 22, 2009). |
| | †10 | .75 | | Separation Agreement and Release of All Claims, dated as of July 16, 2009, between MoneyGram International, Inc. and Teresa H. Johnson (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on July 16, 2009). |
| | †10 | .76 | | Offer Letter, dated July 28, 2009, between MoneyGram International, Inc. and Jeffrey R. Woods (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on July 30, 2009). |
| | †10 | .77 | | Non-Qualified Stock Option Agreement, dated August 11, 2009, between MoneyGram International, Inc. and Jeffrey R. Woods (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on August 13, 2009). |
| | †10 | .78 | | Separation Agreement and Release of All Claims, dated as of January 15, 2010, between MoneyGram International, Inc. and Jeffrey R. Woods (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on January 19, 2010). |
| | †10 | .79 | | MoneyGram International, Inc. Performance Unit Incentive Plan, as amended and restated May 9, 2007 (Incorporated by reference from Exhibit 99.02 to Registrant’s Current Report onForm 8-K filed on May 14, 2007). |
| | †10 | .80 | | Form of MoneyGram International, Inc. Executive Compensation Trust Agreement (Incorporated by reference from Exhibit 99.01 to Registrant’s Current Report onForm 8-K filed on November 22, 2005). |
| | 10 | .81 | | First Amendment to the MoneyGram International, Inc. Executive Compensation Trust Agreement (Incorporated by reference from Exhibit 99.01 to Registrant’s Current Report onForm 8-K filed on August 22, 2006). |
| | †10 | .82 | | The MoneyGram International, Inc. Outside Directors’ Deferred Compensation Trust (Incorporated by reference from Exhibit 99.05 to Registrant’s Current Report onForm 8-K filed on November 22, 2005). |
| | 10 | .83 | | Money Services Agreement between Wal-Mart Stores, Inc. and MoneyGram Payment Systems, Inc. dated February 1, 2005 as amended (Incorporated by reference from Exhibit 10.71 to Registrant’s Annual Report onForm 10-K filed on March 25, 2008). |
| | †10 | .84 | | Form of Employee Trade Secret, Confidential Information and Post-Employment Restriction Agreement (Incorporated by reference from Exhibit 10.27 to Registrant’s Quarterly Report onForm 10-Q filed on May 12, 2008). |
| | †10 | .85 | | MoneyGram International, Inc. Severance Plan (Incorporated by reference from Exhibit 10.03 to Registrant’s Current Report onForm 8-K/A filed November 22, 2010). |
80
| | | | |
Exhibit
| | |
Number | | Description |
|
| | †10 | .70.86 | | SeparationMoneyGram International, Inc. Deferred Compensation Plan, as amended and restated April 12, 2010 (Incorporated by reference from Exhibit 10.1 to Registrant’s Current Report onForm 8-K filed April 14, 2010). |
| †10 | .87 | | 2005 Deferred Compensation Plan for Directors of MoneyGram International, Inc., as amended and restated April 12, 2010 (Incorporated by reference from Exhibit 10.2 to Registrant’s Current Report onForm 8-K filed April 14, 2010). |
| †10 | .88 | | Deferred Compensation Plan for Directors of MoneyGram International Inc., as amended and restated April 12, 2010 (Incorporated by reference from Exhibit 10.3 to Registrant’s Current Report onForm 8-K filed April 14, 2010). |
| †10 | .89 | | Letter Agreement, by and Release of All Claims, dated as of March 20, 2009, between MoneyGram International, Inc. and David J. ParrinJames E. Shields, effective as of July 13, 2010 (Incorporated by reference from Exhibit 10.7 to Registrant’s Quarterly Report onForm 10-Q filed August 9, 2010). |
| †10 | .90 | | Severance Agreement, by and between MoneyGram International, Inc. and James E. Shields, dated July 13, 2010 (Incorporated by reference from Exhibit 10.8 to Registrant’s Quarterly Report onForm 10-Q filed August 9, 2010). |
| †10 | .91 | | Employee Trade Secret, Confidential Information and Post-Employment Restriction Agreement, by and between MoneyGram International, Inc. and James E. Shields, dated July 21, 2010 (Incorporated by reference from Exhibit 10.9 to Registrant’s Quarterly Report onForm 10-Q filed August 9, 2010). |
| †10 | .92 | | Compromise Agreement, dated April 21, 2010, between MoneyGram International Ltd. and John Hempsey (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on March 20, 2009)April 26, 2010). |
| | †10 | .71.93 | | SeparationLetter Agreement, by and Release of All Claims, dated as of March 25, 2009, between MoneyGram International, Inc. and Mary A. DutraJean C. Benson, dated June 3, 2010 (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on March 27, 2009)June 9, 2010). |
| | †10 | .72.94 | | Non-Qualified Stock Option Agreement, datedSummary of Non-Employee Director Compensation Agreements, effective May 6, 2009, between26, 2010 (Incorporated by reference from Exhibit 10.10 to Registrant’s Quarterly Report onForm 10-Q filed August 9, 2010). |
| †10 | .95 | | Form of MoneyGram International, Inc. Restricted Stock Unit Award Agreement (Incorporated by reference from Exhibit 10.11 to Registrant’s Quarterly Report onForm 10-Q filed August 9, 2010). |
| †10 | .96 | | MoneyGram International, Inc. Deferred Compensation Plan, as amended and Anthony P. Ryanrestated February 16, 2011 (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on May 12, 2009)February 23, 2011). |
| | †10 | .73*21 | | Severance Agreement, dated as | Subsidiaries of May 6, 2009, between MoneyGram International, Inc. and Anthony P. Ryan (Incorporated by reference from Exhibit 10.02 to Registrant’s Current Report onForm 8-K filed on May 12, 2009).the Registrant |
| | †10 | .74*23 | | Employee Trade Secret, Confidential Information and Post-Employment Restriction Agreement, dated May 6, 2009, between MoneyGram Payment Systems, Inc. and Anthony P. Ryan (Incorporated by reference from Exhibit 10.03 to Registrant’s Current Report onForm 8-K filed on May 12, 2009). | Consent of Deloitte & Touche LLP |
| | †10 | .75*24 | | Agreement and Release, dated May 6, 2009, between MoneyGram International, Inc. and Anthony P. Ryan (Incorporated by reference from Exhibit 10.04 to Registrant’s Current Report onForm 8-K filed on May 12, 2009). | Power of Attorney |
| | †10*31 | .76.1 | | Separation Agreement and ReleaseSection 302 Certification of All Claims, dated October 21, 2009, between MoneyGram International, Inc. and Anthony P. Ryan (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on October 22, 2009).Chief Executive Officer |
| | †10*31 | .77.2 | | Separation Agreement and ReleaseSection 302 Certification of All Claims, dated as of July 16, 2009, between MoneyGram International, Inc. and Teresa H. Johnson (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on July 16, 2009).Chief Financial Officer |
| | †10*32 | .78.1 | | Offer Letter, dated July 28, 2009, between MoneyGram International, Inc. and Jeffrey R. Woods (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on July 30, 2009).Section 906 Certification of Chief Executive Officer |
| | †10*32 | .79.2 | | Non-Qualified Stock Option Agreement, dated August 11, 2009, between MoneyGram International, Inc. and Jeffrey R. Woods (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on August 13, 2009). |
| †10 | .80 | | Separation Agreement and ReleaseSection 906 Certification of All Claims, dated as of January 15, 2010, between MoneyGram International, Inc. and Jeffrey R. Woods (Incorporated by reference from Exhibit 10.01 to Registrant’s Current Report onForm 8-K filed on January 19, 2010). |
| †10 | .81 | | MoneyGram International, Inc. Performance Unit Incentive Plan, as amended and restated May 9, 2007 (Incorporated by reference from Exhibit 99.02 to Registrant’s Current Report onForm 8-K filed on May 14, 2007). |
| †10 | .82 | | Summary of Compensation for Non-Management Directors effective January 1, 2009 (Incorporated by reference from Exhibit 10.02 to Registrant’s Current Report onForm 8-K filed on September 9, 2008). |
| †10 | .83 | | Form of MoneyGram International, Inc. Executive Compensation Trust Agreement (Incorporated by reference from Exhibit 99.01 to Registrant’s Current Report onForm 8-K filed on November 22, 2005).Chief Financial Officer |
71
| | | | | |
Exhibit
| | |
Number | | Description |
| |
| | 10 | .84 | | First Amendment to the MoneyGram International, Inc. Executive Compensation Trust Agreement (Incorporated by reference from Exhibit 99.01 to Registrant’s Current Report onForm 8-K filed on August 22, 2006). |
| | 10 | .85 | | The MoneyGram International, Inc. Outside Directors’ Deferred Compensation Trust (Incorporated by reference from Exhibit 99.05 to Registrant’s Current Report onForm 8-K filed on November 22, 2005). |
| | +10 | .86 | | Money Services Agreement between Wal-Mart Stores, Inc. and MoneyGram Payment Systems, Inc. dated February 1, 2005 as amended (Incorporated by reference from Exhibit 10.71 to Registrant’s Annual Report onForm 10-K filed on March 25, 2008). |
| | 10 | .87 | | Form of Employee Trade Secret, Confidential Information and Post-Employment Restriction Agreement (Incorporated by reference from Exhibit 10.27 to Registrant’s Quarterly Report onForm 10-Q filed on May 12, 2008). |
| | 10 | .88 | | MoneyGram International, Inc. Severance Plan (Incorporated by reference from Exhibit 10.03 to Registrant’s Current Report onForm 8-K filed February 22, 2010). |
| | *21 | | | Subsidiaries of the Registrant |
| | *23 | | | Consent of Deloitte & Touche LLP |
| | *24 | | | Power of Attorney |
| | *31 | .1 | | Section 302 Certification of Chief Executive Officer |
| | *31 | .2 | | Section 302 Certification of Chief Financial Officer |
| | *32 | .1 | | Section 906 Certification of Chief Executive Officer |
| | *32 | .2 | | Section 906 Certification of Chief Financial Officer |
| | |
| † | | Indicates management contract or compensatory plan or arrangement required to be filed as an exhibit to this report. |
| | |
| + | | Confidential information has been omitted from this Exhibit and has been filed separately with the SEC pursuant to a confidential treatment request underRule 24b-2. |
7281
MoneyGram International, Inc.
Annual Report onForm 10-K
Items 8 and 15(a)
Index to Financial Statements
| | | | | |
| | | F-2 | |
| | | F-3 | |
| | | F-5 | |
| | | F-6 | |
| | | F-7 | |
| | | F-8 | |
| | | F-9 | |
| | | F-10 | |
F-1
Management’s Responsibility Statement
The management of MoneyGram International, Inc. is responsible for the integrity, objectivity and accuracy of the consolidated financial statements of the Company. The consolidated financial statements are prepared by the Company in accordance with accounting principles generally accepted in the United States of America using, where appropriate, management’s best estimates and judgments. The financial information presented throughout the Annual Report is consistent with that in the consolidated financial statements.
Management is also responsible for maintaining a system of internal controls and procedures designed to provide reasonable assurance that the books and records reflect the transactions of the Company and that assets are protected against loss from unauthorized use or disposition. Such a system is maintained through accounting policies and procedures administered by trained Company personnel and updated on a continuing basis to ensure their adequacy to meet the changing requirements of our business. The Company requires that all of its affairs, as reflected by the actions of its employees, be conducted according to the highest standards of personal and business conduct. This responsibility is reflected in our Code of Ethics.
To test compliance with the Company’s system of internal controls and procedures, the Company carries out an extensive audit program. This program includes a review for compliance with written policies and procedures and a comprehensive review of the adequacy and effectiveness of the internal control system. Although control procedures are designed and tested, it must be recognized that there are limits inherent in all systems of internal control and, therefore, errors and irregularities may nevertheless occur. Also, estimates and judgments are required to assess and balance the relative cost and expected benefits of the controls. Projection of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets quarterly with management, internal audit and the independent registered public accounting firm to discuss internal accounting control, auditing and financial reporting matters, as well as to determine that the respective parties are properly discharging their responsibilities. Both our independent registered public accounting firm and internal auditors have had and continue to have unrestricted access to the Audit Committee without the presence of management.
Management assessed the effectiveness of the Company’s internal controls over financial reporting as of December 31, 2009.2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in its Internal Control-Integrated Framework. Based on our assessment and those criteria, management believes that the Company designed and maintained effective internal control over financial reporting as of December 31, 2009.2010.
The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has been engaged to audit our financial statements and the effectiveness of the Company’s system of internal control over financial reporting. Their reports are included on pages F-3 and F-4 of this Annual Report onForm 10-K.
| | | |
| | /s/ Jean C. BensonJames E. Shields |
Pamela H. Patsley
Chairman and Chief Executive Officer
(Principal Executive Officer) | | Jean C. BensonJames E. Shields
SeniorExecutive Vice President and ControllerChief Financial Officer
(Interim Principal Financial Officer) |
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
MoneyGram International, Inc.
Minneapolis, MinnesotaDallas, Texas
We have audited the internal control over financial reporting of MoneyGram International, Inc. and subsidiaries (the “Company”) as of December 31, 2009,2010, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Responsibility Statement. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009,2010, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 20092010 of the Company and our report dated March 15, 20102011 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 15, 20102011
F-3
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
MoneyGram International, Inc.
Minneapolis, MinnesotaDallas, Texas
We have audited the accompanying consolidated balance sheets of MoneyGram International, Inc. and subsidiaries (the “Company”) as of December 31, 20092010 and 2008,2009, and the related consolidated statements of loss,income (loss), comprehensive income (loss), cash flows and stockholders’ (deficit) equitydeficit for each of the three years in the period ended December 31, 2009.2010. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of MoneyGram International, Inc. and subsidiaries at December 31, 20092010 and 2008,2009, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009,2010, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2009,2010, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 20102011 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Minneapolis, Minnesota
March 15, 20102011
F-4
MONEYGRAM INTERNATIONAL, INC.
| | | | | | | | | | | | | | | | | | | |
| AT DECEMBER 31, | | 2009 | | 2008 | | | | 2010 | | 2009 | | |
| | (Amounts in thousands, except share data) | (Amounts in thousands, except share data) | | | | | (Amounts in thousands, except share data) | | | | |
| |
ASSETS | ASSETS | ASSETS |
| Cash and cash equivalents | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | |
| Cash and cash equivalents (substantially restricted) | | | 3,776,824 | | | | 4,077,381 | | | | | | 2,865,941 | | | | 3,376,824 | | | |
| Receivables, net (substantially restricted) | | | 1,054,381 | | | | 1,264,885 | | | | | | 982,319 | | | | 1,054,381 | | | |
| Short-term investments (substantially restricted) | | | | 405,769 | | | | 400,000 | | | |
| Trading investments and related put options (substantially restricted) | | | 26,951 | | | | 47,990 | | | | | | — | | | | 26,951 | | | |
Available-for-sale investments (substantially restricted) | | | 298,633 | | | | 438,774 | | | | | | 160,936 | | | | 298,633 | | | |
| Property and equipment | | | 127,972 | | | | 156,263 | | | | | | 115,111 | | | | 127,972 | | | |
| Intangible assets | | | 7,680 | | | | 14,548 | | | | |
| Goodwill | | | 425,630 | | | | 434,337 | | | | | | 428,691 | | | | 425,630 | | | |
| Other assets | | | 211,592 | | | | 208,118 | | | | | | 156,969 | | | | 219,272 | | | |
| | | Total assets | | $ | 5,929,663 | | | $ | 6,642,296 | | | | | $ | 5,115,736 | | | $ | 5,929,663 | | | |
| | | | | |
| LIABILITIES | | | | | | | | | | | LIABILITIES |
| Payment service obligations | | $ | 4,843,454 | | | $ | 5,437,999 | | | | | $ | 4,184,736 | | | $ | 4,843,454 | | | |
| Debt | | | 796,791 | | | | 978,881 | | | | | | 639,946 | | | | 796,791 | | | |
| Pension and other postretirement benefits | | | 119,170 | | | | 130,900 | | | | | | 120,536 | | | | 119,170 | | | |
| Accounts payable and other liabilities | | | 188,933 | | | | 134,040 | | | | | | 113,647 | | | | 188,933 | | | |
| | | Total liabilities | | | 5,948,348 | | | | 6,681,820 | | | | | | 5,058,865 | | | | 5,948,348 | | | |
COMMITMENTS AND CONTINGENCIES(Note 16)
| | | | | | | | | | | |
COMMITMENTS AND CONTINGENCIES (NOTE 15) | | | | | | | | | | | |
| | | |
MEZZANINE EQUITY | | | | | | | | | | | | | | | | | | | | |
| Participating Convertible Preferred Stock-Series B, $0.01 par value, 800,000 shares authorized, 495,000 shares issued and outstanding | | | 539,084 | | | | 458,408 | | | | |
| Participating Convertible Preferred Stock-Series B, $0.01 par value, 760,000 shares authorized, 495,000 shares issued and outstanding | | | | 628,199 | | | | 539,084 | | | |
Participating ConvertiblePreferred Stock-Series B-1, $0.01 par value, 500,000 shares authorized, 272,500 shares issued and outstanding | | | 325,244 | | | | 283,804 | | | | | | 371,154 | | | | 325,244 | | | |
| | | Total mezzanine equity | | | 864,328 | | | | 742,212 | | | | | | 999,353 | | | | 864,328 | | | |
STOCKHOLDERS’ DEFICIT | | | | | | | | | | | | | | | | | | | | |
| Preferred shares, $0.01 par value, none issued | | | — | | | | — | | | | | | — | | | | — | | | |
| Common shares, $0.01 par value, 1,300,000,000 shares authorized, 88,556,077 shares issued | | | 886 | | | | 886 | | | | | | 886 | | | | 886 | | | |
| Additional paid-in capital | | | — | | | | 62,324 | | | | | | — | | | | — | | | |
| Retained loss | | | (694,914 | ) | | | (649,254 | ) | | | | | (771,544 | ) | | | (694,914 | ) | | |
| Unearned employee benefits | | | (8 | ) | | | (424 | ) | | | | | — | | | | (8 | ) | | |
| Accumulated other comprehensive loss | | | (35,671 | ) | | | (42,707 | ) | | | | | (31,879 | ) | | | (35,671 | ) | | |
| Treasury stock: 6,040,958 and 5,999,175 shares in 2009 and 2008 | | | (153,306 | ) | | | (152,561 | ) | | | |
| Treasury stock: 4,935,555 and 6,040,958 shares in 2010 and 2009 | | | | (139,945 | ) | | | (153,306 | ) | | |
| | | Total stockholders’ deficit | | | (883,013 | ) | | | (781,736 | ) | | | | | (942,482 | ) | | | (883,013 | ) | | |
| | | Total liabilities, mezzanine equity and stockholders’ deficit | | $ | 5,929,663 | | | $ | 6,642,296 | | | | | $ | 5,115,736 | | | $ | 5,929,663 | | | |
| |
See Notes to Consolidated Financial Statements
F-5
MONEYGRAM INTERNATIONAL, INC.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| FOR THE YEAR ENDED DECEMBER 31, | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | | |
| (Amounts in thousands, except per share data) | (Amounts in thousands, except per share data) | | | | | | (Amounts in thousands, except per share data) | | | | | |
| |
REVENUE | | | | | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | $ | 1,130,893 | | | $ | 1,105,676 | | | $ | 949,059 | | | $ | 1,145,312 | | | $ | 1,128,492 | | | $ | 1,108,451 | |
| Investment revenue | | | 33,219 | | | | 162,130 | | | | 398,234 | | | | 21,341 | | | | 33,219 | | | | 162,130 | |
| Net securities gains (losses) | | | 7,790 | | | | (340,688 | ) | | | (1,189,756 | ) | |
| | | Total revenue | | | 1,171,902 | | | | 927,118 | | | | 157,537 | | | | 1,166,653 | | | | 1,161,711 | | | | 1,270,581 | |
| Fee commissions expense | | | 497,105 | | | | 502,317 | | | | 410,301 | | |
EXPENSES | | | | | | | | | | | | | |
| Fee and other commissions expense | | | | 500,759 | | | | 497,105 | | | | 502,317 | |
| Investment commissions expense | | | 1,362 | | | | 102,292 | | | | 253,607 | | | | 737 | | | | 1,362 | | | | 102,292 | |
| | | Total commissions expense | | | 498,467 | | | | 604,609 | | | | 663,908 | | | | 501,496 | | | | 498,467 | | | | 604,609 | |
| | |
| | |
| Net revenue (losses) | | | 673,435 | | | | 322,509 | | | | (506,371 | ) | |
| | |
| | |
EXPENSES | | | | | | | | | | | | | |
| Compensation and benefits | | | 199,053 | | | | 224,580 | | | | 188,092 | | | | 226,422 | | | | 199,053 | | | | 224,580 | |
| Transaction and operations support | | | 284,277 | | | | 219,905 | | | | 191,066 | | | | 185,782 | | | | 284,277 | | | | 219,905 | |
| Occupancy, equipment and supplies | | | 47,425 | | | | 45,994 | | | | 44,704 | | | | 46,481 | | | | 47,425 | | | | 45,994 | |
| Interest expense | | | 107,911 | | | | 95,020 | | | | 11,055 | | |
| Depreciation and amortization | | | 57,091 | | | | 56,672 | | | | 51,979 | | | | 48,074 | | | | 57,091 | | | | 56,672 | |
| Valuation loss on embedded derivatives | | | — | | | | 16,030 | | | | — | | |
| Debt extinguishment loss | | | — | | | | 1,499 | | | | — | | |
| | | Total expenses | | | 695,757 | | | | 659,700 | | | | 486,896 | | |
| Total operating expenses | | | | 1,008,255 | | | | 1,086,313 | | | | 1,151,760 | |
| | | Loss from continuing operations before income taxes | | | (22,322 | ) | | | (337,191 | ) | | | (993,267 | ) | |
| Income tax (benefit) expense | | | (20,416 | ) | | | (75,806 | ) | | | 78,481 | | |
OPERATING INCOME | | | | 158,398 | | | | 75,398 | | | | 118,821 | |
| | | Loss from continuing operations | | | (1,906 | ) | | | (261,385 | ) | | | (1,071,748 | ) | |
| Loss from discontinued operations, net of tax | | | — | | | | — | | | | (249 | ) | |
| Other expense (income) | | | | | | | | | | | | | |
| Net securities (gains) losses | | | | (2,115 | ) | | | (7,790 | ) | | | 340,688 | |
| Interest expense | | | | 102,133 | | | | 107,911 | | | | 95,020 | |
| Other | | | | — | | | | (2,401 | ) | | | 20,304 | |
| | NET LOSS | | $ | (1,906 | ) | | $ | (261,385 | ) | | $ | (1,071,997 | ) | |
| Total other expenses, net | | | | 100,018 | | | | 97,720 | | | | 456,012 | |
| | BASIC AND DILUTED LOSS PER COMMON SHARE: | | | | | | | | | | | | | |
| Continuing operations | | $ | (1.48 | ) | | $ | (4.19 | ) | | $ | (12.94 | ) | |
| Discontinued operations, net of tax | | | — | | | | — | | | | — | | |
| Income (loss) before income taxes | | | | 58,380 | | | | (22,322 | ) | | | (337,191 | ) |
| | | Net loss per common share | | $ | (1.48 | ) | | $ | (4.19 | ) | | $ | (12.94 | ) | |
| Income tax expense (benefit) | | | | 14,579 | | | | (20,416 | ) | | | (75,806 | ) |
| | NET INCOME(LOSS) | | | $ | 43,801 | | | $ | (1,906 | ) | | $ | (261,385 | ) |
| | | |
| | | |
BASIC AND DILUTED LOSS PER COMMON SHARE | | | $ | (1.10 | ) | | $ | (1.48 | ) | | $ | (4.19 | ) |
Net loss available to common stockholders: | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss from continuing operations | | $ | (1,906 | ) | | $ | (261,385 | ) | | $ | (1,071,748 | ) | |
| Net income (loss) as reported | | | $ | 43,801 | | | $ | (1,906 | ) | | $ | (261,385 | ) |
| Accrued preferred stock dividends | | | (110,279 | ) | | | (76,593 | ) | | | — | | | | (125,005 | ) | | | (110,279 | ) | | | (76,593 | ) |
| Accretion recognized on preferred stock | | | (10,213 | ) | | | (7,736 | ) | | | — | | | | (10,020 | ) | | | (10,213 | ) | | | (7,736 | ) |
| | |
| | |
Net loss available to common stockholders from continuing operations | | | (122,398 | ) | | | (345,714 | ) | | | (1,071,748 | ) | |
| | |
| | |
Loss allocated to common stockholders from discontinued operations, net of tax | | | — | | | | — | | | | (249 | ) | |
| | Net loss available to common stockholders | | $ | (122,398 | ) | | $ | (345,714 | ) | | $ | (1,071,997 | ) | | | (91,224 | ) | | | (122,398 | ) | | | (345,714 | ) |
| | Weighted-average outstanding common shares | | | 82,499 | | | | 82,456 | | | | 82,818 | | | | 83,186 | | | | 82,499 | | | | 82,456 | |
| |
See Notes to Consolidated Financial Statements
F-6
MONEYGRAM INTERNATIONAL, INC.
| | | | | | | | | | | | | | | |
| FOR THE YEAR ENDED DECEMBER 31, | | 2009 | | | 2008 | | | 2007 | | | |
| |
| (Amounts in thousands) | | | | | | | | | |
| |
NET LOSS | | $ | (1,906 | ) | | $ | (261,385 | ) | | $ | (1,071,997 | ) | | |
OTHER COMPREHENSIVE INCOME (LOSS) | | | | | | | | | | | | | | |
Net unrealized gains (losses) onavailable-for-sale securities: | | | | | | | | | | | | | | |
| Net holding gains (losses) arising during the period, net of tax expense (benefit) of $0, $(134,570) and $(450,924) | | | 3,107 | | | | (219,561 | ) | | | (735,717 | ) | | |
Reclassification adjustment for net realized losses included
in net loss, net of tax benefit of $0, $124,097 and $452,033 | | | 4,071 | | | | 202,475 | | | | 737,528 | | | |
| |
| |
| | | | 7,178 | | | | (17,086 | ) | | | 1,811 | | | |
| |
| |
| Net unrealized (losses) gains on derivative financial instruments: | | | | | | | | | | | | | | |
| Net holding gains (losses) arising during the period, net of tax expense (benefit) of $1,329 and $(14,299) | | | — | | | | 2,168 | | | | (23,333 | ) | | |
| Reclassification adjustment for net unrealized (gains) losses included in net loss, net of tax (expense) benefit of $(478),$11,006 and ($4,510) | | | (780 | ) | | | 17,957 | | | | (7,357 | ) | | |
| |
| |
| | | | (780 | ) | | | 20,125 | | | | (30,690 | ) | | |
| |
| |
| Pension and postretirement benefit plans: | | | | | | | | | | | | | | |
| Reclassification of prior service costs for pension and postretirement benefit plans recorded to net loss, net of tax benefit of $106, $38 and $72 | | | 173 | | | | 62 | | | | 117 | | | |
| Reclassification of net actuarial loss for pension and postretirement benefit plans recorded to net loss, net of tax benefit of $2,785, $1,679 and $1,668 | | | 4,543 | | | | 2,740 | | | | 2,649 | | | |
| Valuation adjustment for pension and postretirement benefit plans, net of tax (benefit) expense of $(2,251), ($17,409) and $9,152 | | | (3,672 | ) | | | (28,405 | ) | | | 14,372 | | | |
| Unrealized foreign currency translation (losses) gains, net of tax (benefit) expense of $(249), $1,863 and $(2,257) | | | (406 | ) | | | 3,039 | | | | (3,682 | ) | | |
| |
| |
| Other comprehensive income (loss) | | | 7,036 | | | | (19,525 | ) | | | (15,423 | ) | | |
| |
| |
COMPREHENSIVE INCOME (LOSS) | | $ | 5,130 | | | $ | (280,910 | ) | | $ | (1,087,420 | ) | | |
| |
| |
| | | | | | | | | | | | | |
| FOR THE YEAR ENDED DECEMBER 31, | | 2010 | | | 2009 | | | 2008 | |
| | |
| (Amounts in thousands) | | | | | | | |
| |
NET INCOME(LOSS) | | $ | 43,801 | | | $ | (1,906 | ) | | $ | (261,385 | ) |
OTHER COMPREHENSIVE INCOME(LOSS) | | | | | | | | | | | | |
Net unrealized gains (losses) onavailable-for-sale securities: | | | | | | | | | | | | |
| Net holding gains (losses) arising during the period, net of tax expense (benefit) of $0, $0 and $(134,570) | | | 4,452 | | | | 3,107 | | | | (219,561 | ) |
| Reclassification adjustment for net realized losses included in net income (loss), net of tax benefit of $0, $0 and $124,097 | | | 334 | | | | 4,071 | | | | 202,475 | |
| |
| |
| | | | 4,786 | | | | 7,178 | | | | (17,086 | ) |
| |
| |
| Net unrealized (losses) gains on derivative financial instruments: | | | | | | | | | | | | |
| Net holding gains arising during the period, net of tax expense of $1,329 | | | — | | | | — | | | | 2,168 | |
| Reclassification adjustment for net unrealized (gains) losses included in net income (loss), net of tax (expense) benefit of $(478) and $11,006 | | | — | | | | (780 | ) | | | 17,957 | |
| |
| |
| | | | — | | | | (780 | ) | | | 20,125 | |
| |
| |
| Pension and postretirement benefit plans: | | | | | | | | | | | | |
| Reclassification of prior service costs for pension and postretirement benefit plans recorded to net income (loss), net of tax benefit of $32, $106 and $38 | | | 52 | | | | 173 | | | | 62 | |
| Reclassification of net actuarial loss for pension and postretirement benefit plans recorded to net income (loss), net of tax benefit of $1,913, $2,785 and $1,679 | | | 3,122 | | | | 4,543 | | | | 2,740 | |
| Valuation adjustment for pension and postretirement benefit plans, net of tax benefit of $2,697, $2,251 and $17,409 | | | (4,400 | ) | | | (3,672 | ) | | | (28,405 | ) |
| Unrealized foreign currency translation gains (losses), net of tax expense (benefit) of $142, $(249) and $1,863 | | | 232 | | | | (406 | ) | | | 3,039 | |
| |
| |
| Other comprehensive income (loss) | | | 3,792 | | | | 7,036 | | | | (19,525 | ) |
| |
| |
COMPREHENSIVE INCOME(LOSS) | | $ | 47,593 | | | $ | 5,130 | | | $ | (280,910 | ) |
| |
| |
See Notes to Consolidated Financial Statements
F-7
MONEYGRAM INTERNATIONAL, INC.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| FOR THE YEAR ENDED DECEMBER 31, | | 2009 | | 2008 | | 2007 | | | | 2010 | | 2009 | | 2008 | | |
| | (Amounts in thousands) | (Amounts in thousands) | | | | | | | (Amounts in thousands) | | | | | | |
| |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net loss | | $ | (1,906 | ) | | $ | (261,385 | ) | | $ | (1,071,997 | ) | | | |
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities: | | | | | | | | | | | | | | | |
| Net loss from discontinued operations | | | — | | | | — | | | | 249 | | | | |
| Net income (loss) | | | $ | 43,801 | | | $ | (1,906 | ) | | $ | (261,385 | ) | | |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) | | | | | | | | | | | | | | | |
| operating activities: | | | | | | | | | | | | | | | |
| Provision for deferred income taxes | | | (14,915 | ) | | | (425 | ) | | | 37,637 | | | | | | 10,023 | | | | (14,915 | ) | | | (425 | ) | | |
| Depreciation and amortization | | | 57,091 | | | | 56,672 | | | | 51,979 | | | | | | 48,074 | | | | 57,091 | | | | 56,672 | | | |
Other-than-temporary impairment charges | | | 4,069 | | | | 70,274 | | | | 1,193,210 | | | | | | 334 | | | | 4,069 | | | | 70,274 | | | |
| Net (gain) loss on sales and maturities of investments | | | (7,555 | ) | | | 256,299 | | | | (3,649 | ) | | | | | (2,449 | ) | | | (7,555 | ) | | | 256,299 | | | |
| Unrealized losses on trading investments | | | — | | | | 40,620 | | | | 195 | | | | |
| Valuation gain on put options related to trading investments | | | (4,304 | ) | | | (26,505 | ) | | | — | | | | |
| Unrealized (gains) losses on trading investments and related put options | | | | — | | | | (4,304 | ) | | | 14,115 | | | |
| Net amortization of investment premiums and discounts | | | 740 | | | | 735 | | | | (15,752 | ) | | | | | 193 | | | | 740 | | | | 735 | | | |
| Valuation loss on embedded derivative | | | — | | | | 16,030 | | | | — | | | | | | — | | | | — | | | | 16,030 | | | |
| Impairment of goodwill | | | 6,245 | | | | 8,809 | | | | 6,355 | | | | |
| Asset impairments and adjustments | | | 11,983 | | | | — | | | | 850 | | | | | | 2,158 | | | | 18,228 | | | | 8,809 | | | |
| Signing bonus amortization | | | 35,280 | | | | 37,261 | | | | 25,815 | | | | | | 29,247 | | | | 35,280 | | | | 37,261 | | | |
| Signing bonus payments | | | | (27,172 | ) | | | (22,176 | ) | | | (57,960 | ) | | |
| Amortization of debt discount and deferred financing costs | | | 12,765 | | | | 7,484 | | | | 197 | | | | | | 17,492 | | | | 12,765 | | | | 7,484 | | | |
| Debt extinguishment loss | | | — | | | | 1,499 | | | | — | | | | | | — | | | | — | | | | 1,499 | | | |
| Provision for uncollectible receivables | | | 21,432 | | | | 12,396 | | | | 8,532 | | | | | | 6,404 | | | | 21,432 | | | | 12,396 | | | |
| Non-cash compensation and pension expense | | | 9,608 | | | | 12,596 | | | | 14,177 | | | | | | 35,106 | | | | 9,608 | | | | 12,596 | | | |
| Other non-cash items, net | | | 4,650 | | | | 11,709 | | | | (28,088 | ) | | | | | 2,154 | | | | 4,650 | | | | 11,709 | | | |
| Change in foreign currency translation adjustments | | | (406 | ) | | | 3,039 | | | | (3,682 | ) | | | | | 232 | | | | (406 | ) | | | 3,039 | | | |
| Change in other assets | | | 27,860 | | | | (71,131 | ) | | | 5,401 | | | | | | (16,545 | ) | | | 31,246 | | | | (13,171 | ) | | |
| Change in accounts payable and other liabilities | | | (5,634 | ) | | | (95,622 | ) | | | 7,984 | | | | | | (32,853 | ) | | | 13,156 | | | | (95,622 | ) | | |
| | | Total adjustments | | | 158,909 | | | | 341,740 | | | | 1,301,410 | | | | | | 72,398 | | | | 158,909 | | | | 341,740 | | | |
| Change in cash and cash equivalents (substantially restricted) | | | 300,557 | | | | (2,524,402 | ) | | | (563,779 | ) | | | | | 510,883 | | | | 700,557 | | | | (2,524,402 | ) | | |
| Change in trading investments and related put options, net (substantially restricted) | | | 32,900 | | | | — | | | | 83,200 | | | | |
| Change in trading investments and related put options (substantially restricted) | | | | 29,400 | | | | 32,900 | | | | — | | | |
| Change in receivables, net (substantially restricted) | | | 186,619 | | | | 128,752 | | | | 342,681 | | | | | | 63,037 | | | | 186,619 | | | | 128,752 | | | |
| Change in payment service obligations | | | (594,545 | ) | | | (2,324,486 | ) | | | (447,319 | ) | | | | | (658,782 | ) | | | (594,545 | ) | | | (2,324,486 | ) | | |
| | | Net cash provided by (used in) continuing operating activities | | | 82,534 | | | | (4,639,781 | ) | | | (355,804 | ) | | | |
| Net cash provided by (used in) operating activities | | | | 60,737 | | | | 482,534 | | | | (4,639,781 | ) | | |
| | CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from sales of investments classified asavailable-for-sale | | | — | | | | 2,896,011 | | | | 321,693 | | | | |
Proceeds from maturities of investments classified asavailable-for-sale | | | 140,999 | | | | 493,320 | | | | 755,921 | | | | |
Purchases of investments classified asavailable-for-sale | | | — | | | | — | | | | (758,898 | ) | | | |
Proceeds from sales of investments classified asavailable-for-sale (substantially restricted) | | | | — | | | | — | | | | 2,896,011 | | | |
Proceeds from maturities of investments classified asavailable-for-sale (substantially restricted) | | | | 140,985 | | | | 140,999 | | | | 493,320 | | | |
| Purchase of short-term investments (substantially restricted) | | | | (707,137 | ) | | | (400,000 | ) | | | — | | | |
| Proceeds from maturities of short-term investments (substantially restricted) | | | | 701,368 | | | | — | | | | — | | | |
| Purchases of property and equipment | | | (37,948 | ) | | | (38,470 | ) | | | (70,457 | ) | | | | | (40,191 | ) | | | (37,948 | ) | | | (38,470 | ) | | |
| Proceeds from sale of business | | | 4,500 | | | | — | | | | — | | | | |
| Proceeds from disposal of property and equipment | | | | 7,537 | | | | — | | | | — | | | |
| Proceeds from disposal of a business | | | | — | | | | 4,500 | | | | — | | | |
| Cash paid for acquisitions, net of cash acquired | | | (3,210 | ) | | | (2,928 | ) | | | (29,212 | ) | | | | | (330 | ) | | | (3,210 | ) | | | (2,928 | ) | | |
| | | Net cash provided by investing activities | | | 104,341 | | | | 3,347,933 | | | | 219,047 | | | | |
| Net cash provided by (used in) investing activities | | | | 102,232 | | | | (295,659 | ) | | | 3,347,933 | | | |
| | CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Proceeds from issuance of debt | | | — | | | | 733,750 | | | | — | | | | | | — | | | | — | | | | 733,750 | | | |
| Transaction costs for issuance and amendment of debt | | | — | | | | (47,805 | ) | | | — | | | | | | — | | | | — | | | | (47,805 | ) | | |
| Payment on debt | | | (41,875 | ) | | | (1,875 | ) | | | — | | | | |
| Proceeds from revolving credit facility | | | — | | | | — | | | | 197,000 | | | | |
| Payment on revolving credit facility | | | (145,000 | ) | | | (100,000 | ) | | | (2,000 | ) | | | |
| Payments on debt | | | | (165,000 | ) | | | (41,875 | ) | | | (1,875 | ) | | |
| Payments on revolving credit facility | | | | — | | | | (145,000 | ) | | | (100,000 | ) | | |
| Proceeds from issuance of preferred stock | | | — | | | | 760,000 | | | | — | | | | | | — | | | | — | | | | 760,000 | | | |
| Transaction costs for issuance of preferred stock | | | — | | | | (52,222 | ) | | | — | | | | | | — | | | | — | | | | (52,222 | ) | | |
| Proceeds and tax benefit from exercise of stock options | | | — | | | | — | | | | 7,674 | | | | |
| Purchase of treasury stock | | | — | | | | — | | | | (45,992 | ) | | | |
| Cash dividends paid | | | — | | | | — | | | | (16,625 | ) | | | |
| Proceeds from exercise of stock options | | | | 2,031 | | | | — | | | | — | | | |
| | | Net cash (used in) provided by financing activities | | | (186,875 | ) | | | 1,291,848 | | | | 140,057 | | | | | | (162,969 | ) | | | (186,875 | ) | | | 1,291,848 | | | |
| | |
| | |
CASH FLOWS OF DISCONTINUED OPERATIONS | | | | | | | | | | | | | | | |
| Investing cash flows | | | — | | | | — | | | | (3,300 | ) | | | |
| | |
| | |
| Net cash used in discontinued operations | | | — | | | | — | | | | (3,300 | ) | | | |
| | NET CHANGE IN CASH AND CASH EQUIVALENTS | | | — | | | | — | | | | — | | | | | | — | | | | — | | | | — | | | |
CASH AND CASH EQUIVALENTS — Beginning of period | | | — | | | | — | | | | — | | | | | $ | — | | | $ | — | | | $ | — | | | |
| | CASH AND CASH EQUIVALENTS — End of period | | $ | — | | | $ | — | | | $ | — | | | | | $ | — | | | $ | — | | | $ | — | | | |
| |
See Notes to Consolidated Financial Statements
F-8
MONEYGRAM INTERNATIONAL, INC.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated
| | | | | | | | | |
| | | | | | Additional
| | | Retained
| | | Unearned
| | | Other
| | | | | | | | | |
| | | Common
| | | Paid-In
| | | (Loss)
| | | Employee
| | | Comprehensive
| | | Treasury
| | | | | | |
| (Amounts in thousands, except share data) | | Stock | | | Capital | | | Income | | | Benefits | | | Loss | | | Stock | | | Total | | | |
| |
| |
December 31, 2006 | | $ | 886 | | | $ | 71,900 | | | $ | 723,106 | | | $ | (17,185 | ) | | $ | (6,292 | ) | | $ | (103,352 | ) | | $ | 669,063 | | | |
| Cumulative effect of adoption of FIN 48 | | | | | | | | | | | (21,963 | ) | | | | | | | | | | | | | | | (21,963 | ) | | |
| Net loss | | | | | | | | | | | (1,071,997 | ) | | | | | | | | | | | | | | | (1,071,997 | ) | | |
| Dividends ($0.20 per share) | | | | | | | | | | | (16,625 | ) | | | | | | | | | | | | | | | (16,625 | ) | | |
| Employee benefit plans | | | | | | | 1,177 | | | | | | | | 13,905 | | | | | | | | (662 | ) | | | 14,420 | | | |
| Treasury shares acquired | | | | | | | | | | | | | | | | | | | | | | | (45,992 | ) | | | (45,992 | ) | | |
Net unrealized gain onavailable-for-sale securities | | | | | | | | | | | | | | | | | | | 1,811 | | | | | | | | 1,811 | | | |
| Net unrealized loss on derivative financial instruments | | | | | | | | | | | | | | | | | | | (30,690 | ) | | | | | | | (30,690 | ) | | |
| Amortization of prior service cost for pension and postretirement benefits, net of tax | | | | | | | | | | | | | | | | | | | 117 | | | | | | | | 117 | | | |
| Amortization of unrealized losses on pension and postretirement benefits, net of tax | | | | | | | | | | | | | | | | | | | 2,649 | | | | | | | | 2,649 | | | |
| Valuation adjustment for pension and postretirement benefit plans, net of tax | | | | | | | | | | | | | | | | | | | 14,372 | | | | | | | | 14,372 | | | |
| Unrealized foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | (3,682 | ) | | | | | | | (3,682 | ) | | |
| |
| |
December 31, 2007 | | | 886 | | | | 73,077 | | | | (387,479 | ) | | | (3,280 | ) | | | (21,715 | ) | | | (150,006 | ) | | | (488,517 | ) | | |
Cumulative adjustment forSFAS No. 158- change of measurement date | | | | | | | | | | | (390 | ) | | | | | | | (1,467 | ) | | | | | | | (1,857 | ) | | |
| Net loss | | | | | | | | | | | (261,385 | ) | | | | | | | | | | | | | | | (261,385 | ) | | |
| Reclassification of embedded derivative liability | | | | | | | 70,827 | | | | | | | | | | | | | | | | | | | | 70,827 | | | |
| Dividends on preferred stock | | | | | | | (76,593 | ) | | | | | | | | | | | | | | | | | | | (76,593 | ) | | |
| Accretion on preferred stock | | | | | | | (7,736 | ) | | | | | | | | | | | | | | | | | | | (7,736 | ) | | |
| Employee benefit plans | | | | | | | 2,749 | | | | | | | | 2,856 | | | | | | | | (2,555 | ) | | | 3,050 | | | |
Net unrealized loss onavailable-for-sale securities | | | | | | | | | | | | | | | | | | | (17,086 | ) | | | | | | | (17,086 | ) | | |
| Net unrealized gain on derivative financial instruments | | | | | | | | | | | | | | | | | | | 20,125 | | | | | | | | 20,125 | | | |
| Amortization of prior service cost for pension and postretirement benefits, net of tax | | | | | | | | | | | | | | | | | | | 62 | | | | | | | | 62 | | | |
| Amortization of unrealized losses on pension and postretirement benefits, net of tax | | | | | | | | | | | | | | | | | | | 2,740 | | | | | | | | 2,740 | | | |
| Valuation adjustment for pension and postretirement benefit plans, net of tax | | | | | | | | | | | | | | | | | | | (28,405 | ) | | | | | | | (28,405 | ) | | |
| Unrealized foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | 3,039 | | | | | | | | 3,039 | | | |
| |
| |
December 31, 2008 | | | 886 | | | | 62,324 | | | | (649,254 | ) | | | (424 | ) | | | (42,707 | ) | | | (152,561 | ) | | | (781,736 | ) | | |
| Net loss | | | | | | | | | | | (1,906 | ) | | | | | | | | | | | | | | | (1,906 | ) | | |
| Dividends on preferred stock | | | | | | | (66,525 | ) | | | (43,754 | ) | | | | | | | | | | | | | | | (110,279 | ) | | |
| Accretion on preferred stock | | | | | | | (10,213 | ) | | | | | | | | | | | | | | | | | | | (10,213 | ) | | |
| Employee benefit plans | | | | | | | 14,414 | | | | | | | | 416 | | | | | | | | (745 | ) | | | 14,085 | | | |
Net unrealized gain onavailable-for-sale securities | | | | | | | | | | | | | | | | | | | 7,178 | | | | | | | | 7,178 | | | |
| Reclassification of unrealized gain on derivative financial instruments, net of tax | | | | | | | | | | | | | | | | | | | (780 | ) | | | | | | | (780 | ) | | |
| Amortization of prior service cost for pension and postretirement benefits, net of tax | | | | | | | | | | | | | | | | | | | 173 | | | | | | | | 173 | | | |
| Amortization of unrealized losses on pension and postretirement benefits, net of tax | | | | | | | | | | | | | | | | | | | 4,543 | | | | | | | | 4,543 | | | |
| Valuation adjustment for pension and postretirement benefit plans, net of tax | | | | | | | | | | | | | | | | | | | (3,672 | ) | | | | | | | (3,672 | ) | | |
| Unrealized foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | (406 | ) | | | | | | | (406 | ) | | |
| |
| |
December 31, 2009 | | $ | 886 | | | $ | — | | | $ | (694,914 | ) | | $ | (8 | ) | | $ | (35,671 | ) | | $ | (153,306 | ) | | $ | (883,013 | ) | | |
| |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated
| | | | | | | | | |
| | | | | | Additional
| | | | | | Unearned
| | | Other
| | | | | | | | | |
| | | Common
| | | Paid-In
| | | Retained
| | | Employee
| | | Comprehensive
| | | Treasury
| | | | | | |
| (Amounts in thousands) | | Stock | | | Capital | | | Loss | | | Benefits | | | Loss | | | Stock | | | Total | | | |
| |
| |
December 31, 2007 | | $ | 886 | | | $ | 73,077 | | | $ | (387,479 | ) | | $ | (3,280 | ) | | $ | (21,715 | ) | | $ | (150,006 | ) | | $ | (488,517 | ) | | |
| Cumulative adjustment for SFAS No. 158 change of measurement date | | | | | | | | | | | (390 | ) | | | | | | | (1,467 | ) | | | | | | | (1,857 | ) | | |
| Net loss | | | | | | | | | | | (261,385 | ) | | | | | | | | | | | | | | | (261,385 | ) | | |
| Reclassification of embedded derivative liability | | | | | | | 70,827 | | | | | | | | | | | | | | | | | | | | 70,827 | | | |
| Accrued dividends on preferred stock | | | | | | | (76,593 | ) | | | | | | | | | | | | | | | | | | | (76,593 | ) | | |
| Accretion on preferred stock | | | | | | | (7,736 | ) | | | | | | | | | | | | | | | | | | | (7,736 | ) | | |
| Employee benefit plans | | | | | | | 2,749 | | | | | | | | 2,856 | | | | | | | | (2,555 | ) | | | 3,050 | | | |
Net unrealized loss onavailable-for-sale securities | | | | | | | | | | | | | | | | | | | (17,086 | ) | | | | | | | (17,086 | ) | | |
| Net unrealized gain on derivative financial instruments | | | | | | | | | | | | | | | | | | | 20,125 | | | | | | | | 20,125 | | | |
| Amortization of prior service cost for pension and postretirement benefits, net of tax | | | | | | | | | | | | | | | | | | | 62 | | | | | | | | 62 | | | |
| Amortization of unrealized losses on pension and postretirement benefits, net of tax | | | | | | | | | | | | | | | | | | | 2,740 | | | | | | | | 2,740 | | | |
| Valuation adjustment for pension and postretirement benefit plans, net of tax | | | | | | | | | | | | | | | | | | | (28,405 | ) | | | | | | | (28,405 | ) | | |
| Unrealized foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | 3,039 | | | | | | | | 3,039 | | | |
| |
| |
December 31, 2008 | | | 886 | | | | 62,324 | | | | (649,254 | ) | | | (424 | ) | | | (42,707 | ) | | | (152,561 | ) | | | (781,736 | ) | | |
| Net loss | | | | | | | | | | | (1,906 | ) | | | | | | | | | | | | | | | (1,906 | ) | | |
| Accrued dividends on preferred stock | | | | | | | (66,525 | ) | | | (43,754 | ) | | | | | | | | | | | | | | | (110,279 | ) | | |
| Accretion on preferred stock | | | | | | | (10,213 | ) | | | | | | | | | | | | | | | | | | | (10,213 | ) | | |
| Employee benefit plans | | | | | | | 14,414 | | | | | | | | 416 | | | | | | | | (745 | ) | | | 14,085 | | | |
Net unrealized gain onavailable-for-sale securities | | | | | | | | | | | | | | | | | | | 7,178 | | | | | | | | 7,178 | | | |
| Reclassification of unrealized gain on derivative financial instruments, net of tax | | | | | | | | | | | | | | | | | | | (780 | ) | | | | | | | (780 | ) | | |
| Amortization of prior service cost for pension and postretirement benefits, net of tax | | | | | | | | | | | | | | | | | | | 173 | | | | | | | | 173 | | | |
| Amortization of unrealized losses on pension and postretirement benefits, net of tax | | | | | | | | | | | | | | | | | | | 4,543 | | | | | | | | 4,543 | | | |
| Valuation adjustment for pension and postretirement benefit plans, net of tax | | | | | | | | | | | | | | | | | | | (3,672 | ) | | | | | | | (3,672 | ) | | |
| Unrealized foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | (406 | ) | | | | | | | (406 | ) | | |
| |
| |
December 31, 2009 | | | 886 | | | | — | | | | (694,914 | ) | | | (8 | ) | | | (35,671 | ) | | | (153,306 | ) | | | (883,013 | ) | | |
| Net income | | | | | | | | | | | 43,801 | | | | | | | | | | | | | | | | 43,801 | | | |
| Accrued dividends on preferred stock | | | | | | | (25,570 | ) | | | (99,435 | ) | | | | | | | | | | | | | | | (125,005 | ) | | |
| Accretion on preferred stock | | | | | | | (10,020 | ) | | | | | | | | | | | | | | | | | | | (10,020 | ) | | |
| Employee benefit plans | | | | | | | 35,590 | | | | (20,996 | ) | | | 8 | | | | | | | | 13,361 | | | | 27,963 | | | |
Net unrealized gain onavailable-for-sale securities | | | | | | | | | | | | | | | | | | | 4,786 | | | | | | | | 4,786 | | | |
| Amortization of prior service cost for pension and postretirement benefits, net of tax | | | | | | | | | | | | | | | | | | | 52 | | | | | | | | 52 | | | |
| Amortization of unrealized losses on pension and postretirement benefits, net of tax | | | | | | | | | | | | | | | | | | | 3,122 | | | | | | | | 3,122 | | | |
| Valuation adjustment for pension and postretirement benefit plans, net of tax | | | | | | | | | | | | | | | | | | | (4,400 | ) | | | | | | | (4,400 | ) | | |
| Unrealized foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | 232 | | | | | | | | 232 | | | |
| |
| |
December 31, 2010 | | $ | 886 | | | $ | — | | | $ | (771,544 | ) | | $ | — | | | $ | (31,879 | ) | | $ | (139,945 | ) | | $ | (942,482 | ) | | |
| |
| |
See Notes to Consolidated Financial Statements
F-9
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
| |
| Note 1 — | Description of the Business |
MoneyGram International, Inc. and its wholly owned subsidiaries (“MoneyGram”) offers products and services under its two reporting segments: Global Funds Transfer and Financial Paper Products. The Global Funds Transfer segment provides global money transfer services and bill payment services to consumers through a network of agents. The Financial Paper Products segment provides payment processing services, primarily official check outsourcing services, and money orders through financial institutions and agents. The Company’s headquarters areis located in Minneapolis, Minnesota,Dallas, Texas, United States of America. References to “MoneyGram,” the “Company,” “we,” “us” and “our” are to MoneyGram International, Inc. and its subsidiaries and consolidated entities.
MoneyGram was incorporated on December 18, 2003 in the state of Delaware as a subsidiary of Viad Corp (“Viad”) to effect the spin-off of Viad’s payment services business operated by Travelers Express Company, Inc. (“Travelers”) to its stockholders (the “spin-off”). On June 30, 2004 (the “Distribution Date”), Travelers was merged with a subsidiary of MoneyGram and Viad then distributed 88,556,077 shares of MoneyGram common stock in a tax-free distribution (the “Distribution”). Stockholders of Viad received one share of MoneyGram common stock for every share of Viad common stock owned on the record date of June 24, 2004. Due to the relative significance of MoneyGram to Viad, MoneyGram is the divesting entity and treated as the “accounting successor” to Viad for financial reporting purposes. Effective December 31, 2005, the entity that was formerly Travelers was merged into MoneyGram Payment Systems, Inc. (“MPSI”), a wholly owned subsidiary of MoneyGram, with MPSI remaining as the surviving corporation.
On March 25, 2008, the Company completed a recapitalization, pursuant to which the Company received $1.5 billion of gross equity and debt capital (collectively, the “2008 Recapitalization”) to support the long-term needs of the business and provide necessary capital due to the Company’s investment portfolio losses as described in Note 65 — Investment Portfolio. The equity component of the recapitalization2008 Recapitalization consisted of the sale in a private placement of Series B Participating Convertible Preferred Stock of the Company (the “B Stock”) andSeries B-1 Participating Convertible Preferred Stock of the Company (the “B-1 Stock,” and collectively with the B Stock, the “Series B Stock”). The debt component of the recapitalization2008 Recapitalization consisted of a senior secured amended and restated credit agreement entered into with a group of lenders (the “Senior Facility”“senior facility”) and the issuance of senior secured second lien notes (the “Notes”“second lien notes”). See Note 109 —Debtand Note 1211 —Mezzanine Equityfor further information regarding the equity and debt components.
Participation Agreement between the Investors and Walmart Stores, Inc. —On February 11, 2008, the affiliates of Thomas H. Lee Partners, L.P. (“THL”) and affiliates of Goldman, Sachs & Co. (“Goldman Sachs,” and collectively with THL, the “Investors”) entered into a Participation Agreement (as amended on March 17, 2008) with Walmart Stores, Inc. (“Walmart”) in connection with the recapitalization.2008 Recapitalization. The Company is not a direct party to the Participation Agreement, which was negotiated solely between the Investors and Walmart. Under the terms of the Participation Agreement, the Investors are obligated to pay Walmart certain percentages of accumulated cash payments received by the Investors in excess of the Investors’ original investment in the Company. Cash payments include dividends paid by the Company to the Investors and any cash payments received by the Investors in connection with the sale of any shares of the Company’s stock to an unaffiliated third party or upon redemption by the Company. Walmart, in its sole discretion, may elect to receive payments in cash or equivalent shares of stock held by the Investors. In addition, through March 17, 2010, the Investors must receive Walmart’s consent prior to voting in favor of, consenting to, or selling shares in a transaction that would cause a change in control of the Company, as defined by the Participation Agreement.
F-10
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has no obligation to Walmart or additional obligations to the Investors under the terms of the Participation Agreement. However, as the Company indirectly benefited from the agreement, the Company will recognizerecognizes the Participation Agreement in its consolidated financial statements as if the Company itself entered into
F-10
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
the agreement with Walmart. As Walmart may elect to receive any payments under the Participation Agreement in cash, the agreement is accounted for as a liability award. The Company will recognize a liability equal to the fair value of the Participation Agreement through a charge to the Consolidated Statements of LossIncome (Loss) based upon the probability that certain performance conditions will be met. The liability will be remeasured each period until settlement, with changes in fair value recognized in the Consolidated Statements of Loss.Income (Loss). Walmart’s ability to earn the award under the Participation Agreement is conditioned upon the Investors receiving cash payments related to the Company’s preferred stock in excess of the Investors’ original investment in the Company. While it is probable that performance conditions will be met at December 31, 2009,2010, the fair value of the liability is zero at this time as the Company’s discount rate, based on itscontractual debt interestand equity rates of returns and credit rating,implied market premiums, exceeds the dividend rate on the preferred stock.
| |
Note 32 — | Summary of Significant Accounting Policies |
Basis of Presentation — The consolidated financial statements of MoneyGram are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The Consolidated Balance Sheets are unclassified due to the short-term nature of the settlement obligations, contrasted with the ability to invest cash awaiting settlement in long-term investment securities.
During 2009,the fourth quarter of 2010, the Company reclassifiedrevised the presentation of its put optionsConsolidated Statements of Income (Loss) as a result of an internal review to enhance external reporting and management reporting. As a result of this review, the Company will no longer present net revenue, previously measured as total revenue less total commissions expense, as this measure was not found to be a meaningful metric internally or to our external users. The Company will continue to separately disclose “Commissions expense.” The Company has also presented an operating income measure consistent with management reporting and to more clearly delineate operating and non-operating items. As a result, certain items are now presented below the operating income line based on management’s assessment of their nature as non-operating, including securities (gains) losses, interest expense and (gains) losses related to trading investments fromcash flow hedges. In the Consolidated Balance Sheets, the Company has reclassified amounts related to intangible assets into “Other assets” due to “Tradingimmateriality. In the Consolidated Statements of Cash Flows, the Company has separately broken out “Signing bonus payments,” which were previously included in “Change in other assets,” to enhance transparency. All prior periods have been reclassified to conform to this new presentation.
Correction of Presentation of Short-term Investments — The Company has corrected the presentation of certain investments in time deposits and certificates of deposit in the 2009 and 2008 consolidated financial statements, reflecting the fact that these investments have original maturities in excess of three months but no greater than thirteen months. In the accompanying Consolidated Balance Sheet as of December 31, 2009, $400.0 million of investments previously presented as “Cash and cash equivalents (substantially restricted)” have now been properly presented as “Short-term investments (substantially restricted).” In addition, the related put optionsgross purchases and gross maturities of such short-term investments, previously presented net within “Change in cash and cash equivalents (substantially restricted)” in its Consolidated Balance Sheets to reflect the interaction of the two assets. Consistent with its classification of current tax positions, during 2009 the Company reclassified its net deferred tax positions into “Other assets” or “Accounts payable and other liabilities” depending on the net position. The balances as of December 31, 2008operating activities, have been revised to conform to the current presentation. These reclassifications were not material and had no impact on net loss, netproperly presented as cash flows from continuing operatinginvesting activities or stockholders’ deficit as previously reported.in the 2009 and 2008 Consolidated Statements of Cash Flows.
Principles of Consolidation — The consolidated financial statements include the accounts of MoneyGram International, Inc. and its subsidiaries. Inter-company profits, transactions and account balances have been eliminated in consolidation. The Company participates in various trust arrangements (special purpose entities or “SPEs”) related to official check processing agreements with financial institutions and structured investments within the investment portfolio.
F-11
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Working in cooperation with certain financial institutions, the Company historically established separate consolidated SPEs that provided these financial institutions with additional assurance of its ability to clear their official checks. The Company maintains control of the assets of the SPEs and receives all investment revenue generated by the assets. The Company remains liable to satisfy the obligations of the SPEs, both contractually and by operation of the Uniform Commercial Code, as issuer and drawer of the official checks. As the Company is the primary beneficiary and bears the primary burden of any losses, the SPEs are consolidated in the Consolidated Financial Statements.consolidated financial statements. The assets of the SPEs are recorded in the Consolidated Balance Sheets in a manner consistent with the assets of the Company based on the nature of the asset. Accordingly, the obligations have been recorded in the Consolidated Balance Sheets under “Payment service obligations.” The investment revenue generated by the assets of the SPEs is allocated to the Financial Paper Products segment in the Consolidated StatementStatements of Loss.Income (Loss). For the years ending December 31, 20092010 and 2008,2009, the Company’s SPEs had cash and cash equivalents of $143.6$83.2 million and $281.2$143.6 million, respectively, and payment service obligations of $115.3$76.9 million and $239.8$115.3 million, respectively.
In connection with the SPEs, the Company must maintain certain specified ratios of greater than 100 percent of segregated assets to outstanding payment instruments. These specified ratios require the Company to contribute additional assets if the fair value of the segregated assets is less than the outstanding payment instruments at any time. The segregated assets consist solely of cash and cash equivalents; therefore, the Company does not anticipate a need to contribute additional assets in the future to maintain the specified ratios as required by the SPEs. Under
F-11
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
certain limited circumstances, the related financial institution customers have the right to either demand liquidation of the segregated assets or to replace the Company as the administrator of the SPE. Such limited circumstances consist of material (and in most cases continued) failure of MoneyGram to uphold its warranties and obligations pursuant to its underlying agreements with the financial institution customers.
Certain structured investments owned by the Company represent beneficial interests in grantor trusts or other similar entities. These trusts typically contain an investment grade security, generally a United States Treasury strip, and an investment in the residual interest in a collateralized debt obligation, or in some cases, a limited partnership interest. For certain of these trusts, the Company owns a percentage of the beneficial interests which results in the Company absorbing a majority of the expected losses. Therefore, the Company consolidates these trusts by recording and accounting for the assets of the trust separately in the Consolidated Financial Statements.consolidated financial statements.
Management Estimates — — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statementsconsolidated financial statements and accompanying notes. Actual results could differ from those estimates.
Substantially Restricted — — The Company’s licensed entity MPSI is regulated by various state agencies that generally require the Company to maintain a pool of assets with an investment rating of A or higher (“permissible investments”) in an amount generally equal to the payment service obligations, as defined by each state, for those regulated payment instruments, namely teller checks, agent checks, money orders and money transfers. The regulatory payment service assets measure varies by state, but in all cases excludes investments rated below A-. The most restrictive states may also exclude assets held at banks that do not belong to a national insurance program, varying amounts of accounts receivable balancesand/or assets held in one of the SPEs. The regulatory payment service obligations measure varies by state, but in all cases is substantially lower than the Company’s payment service obligations as disclosed in the Consolidated Balance Sheets as the Company is not regulated by state agencies for payment service obligations resulting from outstanding cashier’s checks or for amounts payable to agents and brokers.
F-12
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In connection with theits credit facilities, one clearing bank agreement and the SPEs, the Company also has certain financial covenants that require it to maintain pre-defined ratios of certain assets to payment service obligations. The financial covenants under the credit facilities are described in Note 109 —Debt.One clearing bank agreement has financial covenants that include the maintenance of total cash, cash equivalents, receivables and investments in an amount at least equal to payment service obligations, as disclosed in the Consolidated Balance Sheets, as well as the maintenance of a minimum 103 percent ratio of total assets held at that bank to instruments estimated to clear through that bank. Financial covenants related to the SPEs include the maintenance of specified ratios of cash, cash equivalents and investments held in the SPE to the outstanding payment instruments issued by the related financial institution customer.
The regulatory and contractual requirements do not require the Company to specify individual assets held to meet its payment service obligations, nor is the Company required to deposit specific assets into a trust, escrow or other special account. Rather, the Company must maintain a pool of liquid assets sufficient to comply with the requirements. No third party places limitations, legal or otherwise, on the Company regarding the use of its individual liquid assets. The Company is able to withdraw, deposit or sell its individual liquid assets at will, with no prior notice or penalty, provided the Company maintains a total pool of liquid assets sufficient to meet the regulatory and contractual requirements.
The Company is not regulated by state agencies for payment service obligations resulting from outstanding cashier’s checks; however, the Company restricts a portion of the funds related to these payment instruments due to contractual arrangements and Company policy. Assets restricted for regulatory or contractual reasons are not available to satisfy working capital or other financing requirements. Consequently, the Company considers a significant amount of cash and cash equivalents, receivables and investments to be restricted to satisfy the liability to pay the principal amount of regulated payment service obligations upon presentment. Cash and cash equivalents,
F-12
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
receivables and investments exceeding payment service obligations are generally available; however, management considers a portion of these amounts as providing additional assurance that business needs and regulatory requirements are maintained during the normal fluctuations in the value of the Company’s payment service assets and obligations. The following table shows the amount of assets in excess of payment service obligations at December 31:
| | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | | | 2010 | | 2009 | | |
| | |
| Cash and cash equivalents (substantially restricted) | | $ | 3,776,824 | | | $ | 4,077,381 | | | | | $ | 2,865,941 | | | $ | 3,376,824 | | | |
| Receivables, net (substantially restricted) | | | 1,054,381 | | | | 1,264,885 | | | | | | 982,319 | | | | 1,054,381 | | | |
| Short-term investments (substantially restricted) | | | | 405,769 | | | | 400,000 | | | |
| Trading investments and related put options (substantially restricted) | | | 26,951 | | | | 47,990 | | | | | | — | | | | 26,951 | | | |
Available-for-sale investments (substantially restricted) | | | 298,633 | | | | 438,774 | | | | | | 160,936 | | | | 298,633 | | | |
| | | | | | 5,156,789 | | | | 5,829,030 | | | | | | 4,414,965 | | | | 5,156,789 | | | |
| Payment service obligations | | | (4,843,454 | ) | | | (5,437,999 | ) | | | | | (4,184,736 | ) | | | (4,843,454 | ) | | |
| | | Assets in excess of payment service obligations | | $ | 313,335 | | | $ | 391,031 | | | | | $ | 230,229 | | | $ | 313,335 | | | |
| |
Regulatory requirements also require MPSI to maintain positive net worth, with one state requiring that MPSI maintain positive tangible net worth. In its most restrictive state, the Company had excess permissible investments of $315.3$423.2 million over the state’s payment service obligations measure at December 31, 2009,2010, with substantially higher excess permissible investments for allmost other states. The Company was in compliance with its contractual and financial regulatory requirements as of December 31, 2009.2010.
Cash and Cash Equivalents (substantially restricted) — The Company defines cash and cash equivalents as cash on hand and all highly liquid debt instruments with original maturities of three months or less at the purchase date which the Company does not intend to rollover.date.
F-13
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Receivables, net (substantially restricted) — The Company has receivables due from financial institutions and agents for payment instruments sold.sold and amounts advanced by the Company to certain agents for operational and local regulatory compliance purposes. These receivables are outstanding from the day of the sale of the payment instrument until the financial institution or agent remits the funds to the Company. The Company provides an allowance for the portion of the receivable estimated to become uncollectible as determined based on known delinquent accounts and historical trends. Receivables are generally considered past due one day after the contractual remittance schedule, which is typically one to three days after the sale of the underlying payment instrument. Receivables are evaluated for collectibilitycollectability by examining the facts and circumstances surrounding each customer where an account is delinquent and a loss is deemed possible. Receivables are generally written off against the allowance one year after becoming past due. Following is a summary of activity within the allowance for losses:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | 2007 | | | | 2010 | | 2009 | | 2008 | | |
| | |
| Beginning balance | | $ | 16,178 | | | $ | 8,019 | | | $ | 6,824 | | | | | $ | 24,535 | | | $ | 16,178 | | | $ | 8,019 | | | |
| Charged to expense | | | 21,432 | | | | 12,396 | | | | 8,532 | | | | | | 6,404 | | | | 21,432 | | | | 12,396 | | | |
| Write-offs, net of recoveries | | | (13,075 | ) | | | (4,237 | ) | | | (7,337 | ) | | | | | (10,968 | ) | | | (13,075 | ) | | | (4,237 | ) | | |
| | | Ending balance | | $ | 24,535 | | | $ | 16,178 | | | $ | 8,019 | | | | | $ | 19,971 | | | $ | 24,535 | | | $ | 16,178 | | | |
| |
Sale of Receivables — The Company had an agreement to sell undivided percentage ownership interests in certain receivables, primarily from its money order agents. The Company sold receivables under this agreement to accelerate the cash flow available for investment. The receivables were sold without recourse to two commercial paper conduit trusts and represented a small percentage of the total assets in each trust. The Company’s rights and obligations were limited to the receivables transferred and the transactions were accounted for as sales. The assets and liabilities associated with the trusts, including the sold receivables, were not recorded or consolidated in the Company’s financial statements. In January 2008, the Company terminated the facility. The agreement included a
F-13
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5 percent holdback provision of the purchase price of the receivables, with the related cost included in the Consolidated Statements of Loss in “Investment commissions expense.” The expense recorded in 2008 and 2007 was $0.2 million and $23.3 million, respectively.
Investments (substantially restricted) — The Company classifies securities as short-term, trading oravailable-for-sale in its Consolidated Balance Sheets. The Company has no securities classified asheld-to-maturity. Time deposits and certificates of deposits with original maturities of greater than three months are classified as short-term investments and recorded at amortized cost. Securities that are bought and held principally for the purpose of resale in the near term are classified as trading securities. The Company records trading securities at fair value, with gains or losses reported in the Consolidated Statements of Loss.Income (Loss). Securities held for indefinite periods of time, including any securities that may be sold to assist in the clearing of payment service obligations or in the management of the investment portfolio, are classified asavailable-for-sale securities. These securities are recorded at fair value, with the net after-tax unrealized gain or loss recorded as a separate component of stockholders’ equity.deficit. Realized gains and losses andother-than-temporary impairments are recorded in the Consolidated Statements of Loss.Income (Loss).
Interest income on “Residential mortgage-backed securities” and “Other asset-backed securities” for which risk of credit loss is deemed remote is recorded utilizing the level yield method. Changes in estimated cash flows, both positive and negative, are accounted for with retrospective changes to the carrying value of investments in order to maintain a level yield over the life of the investment. Interest income on mortgage-backed and other asset-backed investmentssecurities for which risk of credit loss is not deemed remote is recorded under the prospective method as adjustments of yield.
Starting in the second quarter of 2008, interest income for “Other asset-backed securities” has been recorded under the prospective method as the risk of credit loss is not deemed remote.
During the second quarter of 2008, the Company began applyingapplies the cost recovery method of accounting for interest to its investments categorized as “Other asset-backed securities.” The cost recovery method accounts for interest on a cash basis and treats any interest payments received as deemed recoveries of principal, reducing the book value of the related security. When the book value of the related security is reduced to zero, interest payments are then recognized as income upon receipt. The Company began applying the cost recovery method of accounting as it believes it is probable that the Company will not recover all, or substantially all, of its principal investment and interest for its “Other asset-backed securities” given the sustained deterioration in the market, the collapse of many asset-backed securities and the low levels to which the securities have been written down.
F-14
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Securities with gross unrealized losses at the Consolidated Balance Sheetbalance sheet date are subject to a process for identifyingother-than-temporary impairments. Securities that the Company deems to beother-than-temporarily impaired are written down to fair value in the period the impairment occurs. The assessment of whether such impairment has occurred is based on management’s evaluation of the underlying reasons for the decline in fair value on an individual security basis. The Company considers a wide range of factors about the security and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and the prospects for recovery. The Company considers an investment to beother-than-temporarily impaired when it is deemed probable that the Company will not receive all of the cash flows contractually stipulated for the investment. The Company evaluates mortgage-backed and other asset-backed investments rated A and below for which risk of credit loss is deemed more than remote for impairment. When an adverse change in expected cash flows occurs, and if the fair value of a security is less than its carrying value, the investment is written down to fair value through a permanent reduction to its amortized cost. Securities gains and losses are recognized upon the sale, call or maturity of securities using the specific identification method to determine the cost basis of securities sold. Unrealized gains and losses resulting from changes in the fair value of trading investments and put options related to trading investments are recognized in the period in which the change occurs. Any impairment charges and other securities gains and losses are included in the Consolidated Statements of LossIncome (Loss) under “Net securities gains (losses).(gains) losses.”
Payment Service Obligations — Payment service obligations primarily consist of: outstanding payment instruments; amounts owed to financial institutions for funds paid to the Company to cover clearings of official check payment instruments, remittances and clearing adjustments; amounts owed to agents for funds paid to consumers on behalf of the Company; commissions owed to financial institution customers and agents for instruments sold; amounts owed to investment brokers for purchased securities; and unclaimed instruments owed to various states. These obligations are recognized by the Company at the time the underlying transactions occur.
F-14
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Value of Financial Instruments — Financial instruments consist of cash and cash equivalents, investments, derivatives receivables, payment service obligations, accounts payable and debt. The carrying values of cash and cash equivalents receivables, accounts payable and payment service obligationsshort-term investments approximate fair value due to the short-term nature of these instruments. The carrying value of the Company’s Senior Facilitysenior facility approximates fair value as interest related to the debt is variable rate. The carrying value of the Company’s fixed-rate Notesnotes also approximates fair value as the contractual interest rate is comparable to debt with similar maturities issued by companies with similar credit qualities. See Note 54 —Fair Value Measurementfor information regarding the principles and processes used to estimate the fair value of investments and derivatives.
Derivative Financial Instruments — The Company recognizes derivative instruments in the Consolidated Balance Sheets at fair value. The accounting for changes in the fair value depends on the intended use of the derivative and the resulting designation. For a derivative instrument designated as a fair value hedge, the Company recognizes the change in fair value in earnings in the period of change, together with the offsetting change in the hedged item. For a derivative instrument designated as a cash flow hedge, the Company initially reports the effective portion of the derivative’s change in fair value in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets, and subsequently reclassifies the net change in fair value into earnings when the hedged exposure affects earnings.
The Company evaluatesevaluated the hedge effectiveness of its derivatives designated as cash flow hedges at inception and on an on-going basis. Hedge ineffectiveness, if any, is recorded in earnings on the same line as the underlying transaction risk. When a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Any gainGain or loss on derivatives designated as cash flow hedges that arewere terminated or discontinued iswas recorded in the “Net securities gains (losses)” component“Investment commissions expense” or “Interest expense” in the Consolidated Statements of Loss.Income (Loss) based on the underlying transaction risk the derivative was originally hedging. For a derivative instrument that does not qualify, or is not designated, as a hedge, the change in fair value is recognized in “Transaction and operations support” under the operating section or in “Other” expense in the non-operating section in the Consolidated Statements of Loss.Income (Loss) based on the Company’s purpose for entering into the derivatives.
Cash flows resulting from derivative financial instruments are classified in the same category as the cash flows from the items being hedged. The Company does not use derivative instruments for trading or speculative purposes.
F-15
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property and Equipment — Property and equipment includes agent equipment, communication equipment, computer hardware, computer software, leasehold improvements, office furniture and equipment, land and signs, and is stated at cost net of accumulated depreciation. Property and equipment, with the exception of land, is depreciated using a straight-line method over the lesserterm of the estimated useful liveslease or lease term.license. Land is not depreciated. The cost and related accumulated depreciation of assets sold or disposed of are removed from the financial statements, with the resulting gain or loss, if any, recognized under the caption “Occupancy, equipment and supplies” in the Consolidated StatementStatements of Loss.Income (Loss). Estimated useful lives by major asset category are generally as follows:
| | | |
| Agent equipment | | 3 years |
| Communication equipment | | 5 years |
| Computer hardware | | 3 years |
| Computer software | | Lesser of the license term or 55-7 years |
| Leasehold improvements | | Lesser of the lease term or 10 years |
| Office furniture and equipment | | Lesser of the lease termuseful life or 7 years |
| Signage | | 3 years |
For the years ended December 31, 20092010 and 2008,2009, software development costs of $9.8$14.2 million and $10.9$9.8 million, respectively, were capitalized. At December 31, 20092010 and 2008,2009, there is $35.5$40.9 million and $37.6$35.5 million, respectively, of unamortized software development costs included in property and equipment.
Tenant allowances for leasehold improvements are capitalized as leasehold improvements upon completion of the improvement and depreciated over the shorter of the remaining term of the lease or 10 years.
F-15
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill and Intangible Assets and Goodwill — Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations and is assigned to the reporting unit in which the acquired business will operate. Intangible assets are recorded at their estimated fair value at the date of acquisition or at cost if internally developed. Goodwill and intangible assets with indefinite lives are not amortized, but are instead subject to impairment testing. Intangible assets with finite lives are amortized using a straight-line method over their respective useful lives as follows:
| | | |
| Customer lists | | 3-15 years |
| Patents | | 15 years |
| Non-compete agreements | | 3 years |
| Trademarks | | 36-40 years |
| Developed technology | | 5 years |
IntangibleGoodwill and intangible assets and goodwill are tested for impairment annually inas of November of each fiscal year,30, or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill is tested for impairment using a fair-value based approach, and is assessed at the reporting unit level, or the lowest level for which discrete financial condition and operating results are available.level. The carrying value of the reporting unit is compared to its estimated fair value, with any excess of carrying value over fair value deemed to be an impairment.indicator of potential impairment, in which case a second step is performed comparing the recorded amount of goodwill to its implied fair value. Intangible assets with finite lives and other long-lived assets are tested for impairment by comparing the carrying value of the assets to the estimated future undiscounted cash flows to be generated by the asset. If an impairment is determined to exist for goodwill and intangible assets, the carrying value of the asset is reduced to the estimated fair value.
F-16
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Payments on Long-Term Contracts — The Company makes payments to certain agents and financial institution customers as an incentive to enter into long-term contracts. The payments, or signing bonuses, are generally required to be refunded pro rata in the event of nonperformance under, or cancellation of, the contract by the customer. For contracts requiring payments to be refunded, the signing bonuses are capitalized and amortized over the life of the related contract as such costs are recoverable through future operations or, in the case of early termination, through penalties or refunds. Amortization of signing bonuses on long-term contracts is recorded in “Fee and other commissions expense” in the Consolidated Statements of Loss.Income (Loss). The carrying values of the signing bonuses are reviewed annually or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Signing bonuses for contracts that do not require a refund in the event of nonperformance or cancellation are expensed upon payment in “Fee and other commissions expense” in the Consolidated Statements of Loss.Income (Loss).
Income Taxes — The provision for income taxes is computed based on the pre-tax lossincome included in the Consolidated Statements of Loss.Income (Loss). Deferred income taxes result fromtax assets and liabilities are recorded based on the future tax consequences attributable to temporary differences that exist between the financial reporting basisstatement carrying value of assets and liabilities and their respective tax-reportingtax basis, and operating loss and tax credit carry-backs and carry-forwards on a taxing jurisdiction basis. DeferredWe measure deferred tax assets and liabilities are measured using the enacted statutory tax rates expected tothat will apply to taxable income in the years in which thosewe expect the temporary differences are expected to reverse. Valuation allowances are recordedbe recovered or paid. Our ability to reducerealize our deferred tax assets when it isdepends on our ability to generate sufficient taxable income within the carry-back or carry-forward periods provided for in the tax law. We establish valuation allowances for our deferred tax assets based on a more likely than not threshold. To the extent management believes that recovery is not likely, a tax benefit will not be realized.valuation allowance is established in the period in which the determination is made.
The Company adopted accounting guidance that addresses accounting for uncertainty in income taxes on January 1, 2007. The cumulative effect of applying this guidance was reported as a $22.0 million reduction to the opening balance of retained income. The liability for unrecognized tax benefits is recorded as a non-cash item in “Accounts payable and other liabilities” in the Consolidated Balance Sheets. The Company records interest and penalties for unrecognized tax benefits in “Income tax expense (benefit) expense”” in the Consolidated Statements of Loss.Income (Loss). See Note 1514 —Income Taxesfor further discussion.
Treasury Stock — Repurchased common stock is stated at cost and is presented as a separate reductioncomponent of stockholders’ deficit. See Note 1312 —Stockholders’ Deficitfor further discussion.
Foreign Currency Translation — The Company converts assets and liabilities of foreign operations to their United States dollar equivalents at rates in effect at the balance sheet dates, recording the translation adjustments
F-16
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets. Income statements of foreign operations are translated from the operation’s functional currency to United States dollar equivalents at the average exchange rate for the month. Foreign currency exchange transaction gains and losses are reported in “Transaction and operations support” in the Consolidated Statements of Loss.Income (Loss).
Revenue Recognition — The Company derives revenue primarily through service fees charged to consumers and its investing activity. A description of these revenues and recognition policies is as follows:
| | |
| | • | Fee and other revenues primarily consist of transaction fees and foreign exchange revenue. |
| | |
| | –• | Transaction fees consist primarily of fees earned on money transfer, money order, bill payment and official check transactions. The money transfer transaction fees vary based on the principal value of the transaction and the locations in which these money transfers originate and to which they are sent. The money order and bill payment transaction fees are fixed fees charged on a per item basis. Transaction fees are recognized at the time of the transaction or sale of the product. |
| | |
| | –• | Foreign exchange revenue is derived from the management of currency exchange spreads on money transfer transactions involving different “send” and “receive” currencies. Foreign exchange revenue is recognized at the time the exchange in funds occurs. |
F-17
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | |
| | –• | Other revenue consists of processing fees on rebate checks and controlled disbursements, service charges on aged outstanding money orders, money order dispenser fees and other miscellaneous charges. Through 2009, other revenue also included processing fees on rebate checks and controlled disbursements. These fees are recognized in earnings in the period the item is processed or earned. |
| | |
| | • | Investment revenue is derived from the investment of funds generated from the sale of payment instruments, primarily official checks and money orders, and consists of interest income, dividend income and amortization of premiums and discounts. Interest and dividends are recognized as earned, with the exception of interest related toavailable-for-sale investments classified as “Other asset-backed securities.” For “Other asset-backed securities,” interest is recognized using the cost recovery method as described under the accounting policy for“Investments (substantially restricted).”Premiums and discounts on investments are amortized using a straight-line method over the life of the investment. |
|
| • | Securities gains and losses are recognized upon the sale, call or maturity of securities using the specific identification method to determine the cost basis of securities sold. Impairments are recognized in the period the security is deemed to beother-than-temporarily impaired. Unrealized gains and losses resulting from changes in the fair value of trading investments and put options related to trading investments are recognized in the period in which the change occurs. |
Fee and Other Commissions Expense — The Company pays fee commissions to third-party agents for money transfer and bill payment services. In a money transfer transaction, both the agent initiating the transaction and the agent disbursing the funds receive a commission that is generally based on a percentage of the fee charged to the customer. The Company generally does not pay commissions to agents on the sale of money orders. Fee commissions are recognized at the time of the transaction. FeeOther commissions expense also includes the amortization of capitalized signing bonuses.
Investment Commissions Expense — Investment commissions expense includes amounts paid to financial institution customers based upon average outstanding balances generated by the sale of official checks, as well as costs associated with interest rate swaps hedging commission payments and the sale of receivables program. The Company terminated its interest rate swaps in the second quarter of 2008, as described in Note 76 —Derivative Financial Instruments,and terminated its sale of receivable program in the first quarter of 2008. Commissions paid to financial institution customers generally are variable based on short-term interest rates. Investment commissions are recognized each month based on the average outstanding balances of each financial institution customer and their contractual variable rate for that month.
F-17
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Marketing &and Advertising Expense — Marketing and advertising costs are expensed as incurred or at the time the advertising first takes place. Marketing and advertising expense was $47.1 million, $40.2 million and $52.9 million for 2010, 2009 and $56.5 million for 2009, 2008, and 2007, respectively.
Stock-Based Compensation — All stock-based compensation awards are measured at fair value at the date of grant and expensed over their vesting or service periods. For awards meeting the criteria for equity treatment, expense is recognized using the straight-line method. For awards meeting the criteria for liability treatment, the fair value is remeasured at each period and the pro-rata portion of the expense is recognized using the straight-line method. See Note 1413 —Stock-Based Compensationfor further discussion of the Company’s stock-based compensation.
Restructuring and Related Expenses —Restructuring and related expenses may consist of direct and incremental costs associated with restructuring and related activities, including severance; outplacement and other employee related benefits; facility closures, cease-use or related charges; asset impairments or accelerated depreciation; and other expenses related to relocation of various operations to existing or new Company facilities and third-party providers, including hiring, training, relocation, travel and professional fees. The Company records severance-related expenses once they are both probable and estimable related to severance provided under an on-going benefit arrangement. One-time, involuntary benefit arrangements and other exit costs are generally recognized when the liability is incurred. The Company evaluates impairment issues associated with restructuring activities when the carrying amount of the assets may not be fully recoverable, and also reviews the appropriateness of the remaining useful lives of impacted fixed assets.
In connection with restructuring and related activities during 2010, the Company recorded total expenses of $5.9 million, comprised of $3.0 million of severance costs in the “Compensation and benefits” line, $1.3 million of costs in the “Transaction and operations support” line and $1.6 million of facilities and related asset write-off charges in the “Occupancy, equipment and supplies” line of the Consolidated Statements of Income (Loss).
F-18
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Earnings Per Share — The Company utilizes the two-class method for computing basic earnings per common share, which reflects the amount of undistributed earnings allocated to the common stockholders using the participation percentage of each class of stock. Undistributed earnings is determined as the Company’s net loss less dividends declared or accumulated on preferred stock less any preferred stock accretion. The undistributed earnings allocated to the common stockholders are divided by the weighted-average number of common shares outstanding during the period to compute basic earnings per common share. Diluted earnings per common share reflects the potential dilution that could result if securities or incremental shares arising out of the Company’s stock-based compensation plans and the outstanding shares of Series B Stock were exercised or converted into common stock. Diluted earnings per common share assumes the exercise of stock options using the treasury stock method and the conversion of the Series B Stock using the if-converted method.
Potential common shares are excluded from the computation of diluted earnings per common share when the effect would be anti-dilutive. All potential common shares are anti-dilutive in periods of net loss available to common stockholders. Stock options are anti-dilutive when the exercise price of these instruments is greater than the average market price of the Company’s common stock for the period. The Series B Stock is anti-dilutive when the incremental earnings per share of Series B Stock on an if-converted basis is greater than the basic earnings per common share. Following are the potential common shares excluded from diluted earnings per common share as their effect would be anti-dilutive:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | | |
| |
| Shares related to stock options | | | 21,636 | | | | 3,577 | | | | 1,495 | | | | 37,321 | | | | 21,636 | | | | 3,577 | |
| Shares related to restricted stock | | | 28 | | | | 127 | | | | 249 | | | | 1 | | | | 28 | | | | 127 | |
| Shares related to preferred stock | | | 381,749 | | | | 337,637 | | | | — | | | | 431,751 | | | | 381,749 | | | | 337,637 | |
| | | Shares excluded from the computation | | | 403,413 | | | | 341,341 | | | | 1,744 | | | | 469,073 | | | | 403,413 | | | | 341,341 | |
| |
Recent Accounting Pronouncements and Related Developments — In April 2009,January 2010, the Financial Accounting Standards Board (“FASB”) issued guidanceAccounting Standards UpdateNo. 2010-06,Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.The amendments in this update require, among other things, new disclosures and clarifications of existing disclosures related to maketransfers in and out of Level 1 and Level 2 fair value measurements, further disaggregation of fair value measurement disclosures for each class of assets and liabilities and additional details of valuation techniques and inputs utilized. This update is consistent with theother-than-temporary impairments guidance more operational Company’s current accounting application for fair value measurements and to improve the presentation ofother-than-temporary impairments in the financial statements. This guidance replaces the existing requirement that the entity’s management assert it has both the intentdisclosures and ability to hold an impaired debt security until recovery with a requirement that management assert it doesdid not have the intent to sell the security and that it is more likely than not management will not have to sell the security before recovery of its cost basis. This guidance requires increased disclosure about the credit and noncredit components of impaired debt securities that are not expected to be sold, as well as increased disclosures regarding expected cash flows, credit losses and an aging of securities with unrealized losses. The Company adopted the guidance effective for the interim period ending June 30, 2009, with noa material impact on its Consolidated Financial Statements as the Company has the intent to sell its securities which generatedother-than-temporary impairments in 2009.Statements.
In June 2009,March 2010, the FASB issued guidance which amends previously issued derecognition guidance for financial transfersPatient Protection and Affordable Care Act and the Healthcare and Education Reconciliation Act of assets, eliminates2010 (collectively, the exemption from consolidation for qualifying SPEs and amends the consolidation guidance applicable to variable interest entities. This guidance will be effective for any financial transfers completed by the Company after January 1, 2010, and for consolidated financial statements prepared subsequent
F-18
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to December 31, 2009.“Act”) was signed into law. The Company is currently evaluatinghas evaluated the impact of this guidance onthe Act and has made the appropriate adjustments with no material impact to its Consolidated Financial Statements.
| |
Note 43 — | Acquisitions and Disposals |
Blue Dolphin Financial Services N.V. — On February 5, 2010, the Company acquired Blue Dolphin Financial Services N.V. (“Blue Dolphin”), a former super-agent in the Netherlands, for a purchase price of $1.4 million, including cash acquired of $1.1 million, and an earn-out potential of up to $1.4 million. The final earn-out was calculated as of December 31, 2010 in the amount of $0.8 million. As a result, the Company recorded a gain of $0.2 million in the “Transaction and operations support” line in the Consolidated Statements of Income (Loss). The acquisition of Blue Dolphin providesprovided the Company with the opportunity for further network expansion in the Netherlands and Belgium under the European Union Payment Services Directive and additional control over sales and marketing activities.
F-19
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company finalized its purchase price allocation in 2010, resulting in $3.1 million of goodwill assigned to the Company’s Global Funds Transfer segment, and the forgiveness of $2.7 million of liabilities. The Company incurred $0.1 million of transaction costs related to the acquisition in 2010, which are included in the “Transaction and operations support” line in the Consolidated Statements of Income (Loss). The operating results of Blue Dolphin subsequent to the acquisition date are included in the Company’s Consolidated Statements of Income (Loss). The financial impact of the acquisition is not material to the Consolidated Balance Sheets or Consolidated Statements of Income (Loss).
R. Raphaels & Sons PLC — On February 2, 2009, the Company acquired the French assets of R. Raphaels & Sons PLC (“Raphaels Bank”) for a purchase price of $3.2 million. The acquisition of Raphaels Bank provided the Company with five money transfer stores in and around Paris, France that have been integrated into its French retail operations.
The preliminaryCompany finalized its purchase price allocation as of December 31, 2009 includesin 2010, resulting in $2.0 million of goodwill assigned to the Company’s Global Funds Transfer segment. The purchase price allocation is preliminary pending the completion of the valuation of fixed assets, intangible assets and deferred taxes and will be completed in the first quarter of 2010. The Company incurred $0.2 million of transaction costs related to this acquisition in 2008 which are included in the “Transaction and operations support” line in the Consolidated Statements of Loss.Income (Loss). The operating results of Raphaels Bank subsequent to the acquisition date are included in the Company’s Consolidated Statements of Loss.Income (Loss). The financial impact of the acquisition is not material to the Consolidated Balance Sheets or Consolidated Statements of Loss.Income (Loss).
FSMC, Inc. —On May 15, 2009, the Company’s subsidiary FSMC, Inc. (“FSMC”), entered into an asset purchase agreement with Solutran, Inc. to sell certain assets and rights for a price of $4.5 million. As a result of the sale, which was completed in the third quarter of 2009, the Company recorded an impairment charge of $0.6 million to write off goodwill associated with FSMC. This impairment charge is recorded in the “Transaction and operations support” line in the Consolidated Statements of Loss.Income (Loss). The operating results of FSMC are not material to the Company’s Consolidated Statements of LossIncome (Loss) and the assets and liabilities are not material to the Company’s Consolidated Balance Sheets. FSMC is included in the Company’s “Other” results for segment reporting purposes.
ACH Commerce —After evaluating the Company’s market opportunity for certain of its electronic payment services, the Company announced a decision in December 2008 to exit the ACH Commerce business. In connection with this decision, the Company recognized an impairment charge of $8.8 million to write off the goodwill associated with ACH Commerce. In the third quarter of 2009, the Company recorded an impairment charge of $1.4 million on its proprietary software related to ACH Commerce. The impairment charge was recorded in the “Transaction and operations support” line in the Consolidated Statements of Loss.Income (Loss). ACH Commerce is not material to the Consolidated Statements of LossIncome (Loss) or the Consolidated Balance Sheets. ACH Commerce is included in the Company’s “Other” results for segment reporting purposes.
MoneyCard World Express, S.A. and Cambios Sol S.A. — In July 2008, the Company acquired MoneyCard World Express, S.A. (“MoneyCard”) and Cambios Sol S.A. (“Cambios Sol”), two of its former super-agents in Spain, for purchase prices of $3.4 million and $4.5 million, respectively, including cash acquired of $1.4 million and $4.1 million, respectively. The acquisition of these money transfer entities provided the Company with a money transfer license in Spain, as well as the opportunity for further network expansion and more control over marketing and promotional activities in the region.
F-20
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In 2009, the Company finalized its purchase price allocation, resulting in goodwill of $4.3 million assigned to the Company’s Global Funds Transfer segment and $1.4 million of intangible assets. The intangible assets consist primarily of customer lists and developed technology and are being amortized over useful lives ranging from three
F-19
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to five years. In addition, the Company recognized an indefinite life intangible asset of $0.6 million relating to the money transfer license. The purchase price allocation includes $0.5 million of transaction costs. The operating results of MoneyCard and Cambios Sol subsequent to the acquisition dates are included in the Company’s Consolidated Statements of Loss.Income (Loss). The financial impact of the acquisitions is not material to the Consolidated Balance Sheets or Consolidated Statements of Loss.Income (Loss).
PropertyBridge, Inc.Property Bridge — On October 1, 2007,After evaluating the Company’s market opportunity for certain of its electronic payment services, the Company acquired PropertyBridge, Inc. (“PropertyBridge”) for $28.1 million. PropertyBridge is a providerreceived approval from its Board of electronic payment processing services forDirectors in January 2011 and began to actively pursue the real estate management industrysale of Property Bridge in February 2011. Assets, liabilities, revenue and offers a complete solutionexpenses related to the resident payment cycle, including the ability to electronically accept security deposits and rent payments. Residents can pay rent online, by phone or in person and set up recurring payments. PropertyBridge is a component of the Company’s Global Funds Transfer segment.
In 2007, the Company finalized its purchase price allocation, resulting in goodwill of $24.1 million assigned to the Company’s Global Funds Transfer segment and intangible assets of $6.0 million, consisting primarily of customer lists, developed technology and a non-compete agreement. The intangible assetsProperty Bridge are being amortized over useful lives ranging from three to 15 years. The potential earn-out payment of up to $10.0 million contingent on PropertyBridge’s performance during 2008 was not achieved. The purchase price allocation included $0.2 million of transaction costs. The operating results of PropertyBridge subsequent to October 1, 2007 are included in the Company’s Consolidated Statements of Loss. The financial impact of the acquisition is not materialimmaterial to the Consolidated Balance Sheets or Consolidated Statementsas of Loss.
Game Financial Corporation — During 2007, the Company paid $3.3 million in connection with the settlement of a contingency in the SalesDecember 31, 2010 and Purchase Agreement related to the continued operations of Game Financial Corporation, which was sold in 2004, with one casino. The Company recognized a loss from discontinued operations of $0.3 million in the Consolidated Statements of Loss in 2007, representingIncome (Loss) for the recognition of a deferred tax asset valuation allowance, partially offset by the reversal of the remaining liability.year ended December 31, 2010.
Other Disposals — During 2009,2010, the Company decided to sellcompleted the sale of its corporate airplane.airplane with net proceeds of $7.5 million. Upon completion of the sale in the third quarter of 2010 the Company recorded an impairment charge of $1.5 million. In 2009, in connection with this decision to sell the airplane, the Company recognized a $7.0 million impairment charge. Impairment charges are recorded in the “Transaction and operations support” line in the Consolidated Statements of Loss.Income (Loss).
| |
Note 54 — | Fair Value Measurement |
The Company records certain of its assets and liabilities at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or the exit price, in an orderly transaction between market participants on the measurement date. A three-level hierarchy is used for fair value measurements based upon the observability of the inputs to the valuation of an asset or liability as of the measurement date. Under the hierarchy, the highest priority is given to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1), followed by observable inputs (Level 2) and unobservable inputs (Level 3). A financial instrument’s level within the hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Following is a description of the Company’s valuation methodologies for assets and liabilities measured at fair value:
Investments —For United States government agencies and residential mortgage-backed securities collateralized by United States government agency securities, fair value measures are generally obtained from independent sources, including a pricing service. AsBecause market quotes are generally not readily available or accessible for these specific securities, the pricing service generally measures fair value through the use of pricing models and observable inputs for similar assets and market data. Accordingly, these securities are classified as Level 2 financial instruments. The Company periodically corroborates the valuations provided by the pricing service through internal valuations utilizing externally developed cash flow models, comparison to actual transaction prices for any sold securities and any broker quotes received on the same security.
F-20F-21
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For other asset-backed securities, investments in limited partnerships and trading investments, market quotes are generally not available. If available, the Company will utilize a fair value measurement from a pricing service. The pricing service utilizes a pricing model based on market observable data and indices, such as quotes for comparable securities, yield curves, default indices, interest rates and historical prepayment speeds. If a fair value measurement is not available from the pricing service, the Company will utilize a broker quote if available. Due to a general lack of transparency in the process that the brokers use to develop prices, most valuations that are based on brokers’ quotes are classified as Level 3. If no broker quote is available, or if such quote cannot be corroborated by market data or internal valuations, the Company will perform internal valuations utilizing externally developed cash flow models. These pricing models are based on market observable spreads and, when available, observable market indices. The pricing models also use inputs such as the rate of future prepayments and expected default rates on the principal, which are derived by the Company based on the characteristics of the underlying structure and historical prepayment speeds experienced at the interest rate levels projected for the underlying collateral. The pricing models for certain asset-backed securities also include significant non-observable inputs such as internally assessed credit ratings for non-rated securities, combined with externally provided credit spreads. Observability of market inputs to the valuation models used for pricing certain of the Company’s investments deteriorated with the disruption to the credit markets as overall liquidity and trading activity in these sectors has been substantially reduced. Accordingly, securities valued using a pricing model have consistently been classified as Level 3 financial instruments.
Derivatives — Derivatives consist of interest rate swaps, foreign currency forward contracts and embedded derivatives containedThe Company also records the investments in the Series B Stock. As the Company’s derivative agreements are not exchange traded, the valuations are determined using pricing models with inputs that are observable in the market or that can be derived principally from, or corroborated by, observable market data.its defined benefit pension plan trust at fair value. The Company’s derivative agreements related to interest rate swaps and foreign currency forward contracts are well-established products, allowing the use of pricing models that are widely accepted in the industry. These models reflect the contractual termsmajority of the derivatives, includingplan’s investments are interest-bearing cash or common collective trusts issued and held by the period to maturity, and market-based parameters such as the price of the Company’s common stock, interest rates, volatility, credit spreads and the credit quality of the counterparty. For the interest rate swaps and forward contracts, these models do not contain a high level of subjectivity as the methodologies used in the models do not require significant judgment and the inputs are readily observable. Accordingly, the Company has classified its interest rate swaps and forward contracts as Level 2 financial instruments.plan’s trustee. The fair value of plan investments held by the embedded derivatives is estimated using a partial differential equation methodology and, to the extent possible, market observable or market corroborated data. However, certain assumptions, particularly the future volatilitytrustee of the Company’s common stock price,plan are subjective asdetermined by the trustee based on the current market data is either unobservable or may not be available on a consistent basis. Given the significancevalues of the future volatility tounderlying assets. In instances where market prices are not available, market values are determined by using bid quotations obtained from major market makers or security exchanges or bid quotations for identical or similar obligations. See Note 10— Pension and Other Benefitsfor further description of investments held by the fair value estimate, the Company has classified its embedded derivatives as Level 3 financial instruments.plan.
Other Financial Instruments — Other financial instruments consistconsisted of put options related to trading investments. The fair value of the put options isrelated to trading investments were estimated using the expected cash flows from the instruments assumingthrough their assumed exercise in June 2010.date. These cash flows arewere discounted at a rate corroborated by market data for a financial institution comparable to the put option counter-party, as well as the Company’s interest rate on its Notes.debt. The discounted cash flows of the put options arewere then reduced by the estimated fair value of the related trading investments. Given the subjectivity of the discount rate and the estimated fair value of the trading investments, the Company has classified its put options related to trading investments as Level 3 financial instruments. The fair value of the put options iswas remeasured each period, with the change in fair value recognized in earnings.
Debt — Debt is carried at amortized cost; however, the Company estimates the fair value of debt for disclosure purposes. The fair value of debt is estimated using market quotations, where available, credit ratings, observable market indices and other market data. As of December 31, 2009,2010, the fair value of Tranche A and Tranche B under the Senior FacilityCompany’s senior facility is estimated at $94.7$95.3 million and $199.0$40.0 million, respectively, as compared to carrying values of $100.0 million and $39.9 million, respectively. As of December 31, 2009,2010, the fair value of the Second Lien NotesCompany’s second lien notes is estimated at $492.5 million.$520.0 million as compared to a $500.0 million carrying value. See Note 9 —Debtfor more information on the Company’s debt.
Derivatives — Derivatives consist of forward contracts to hedge income statement exposure to foreign currency exchange risk arising from the Company’s assets and liabilities denominated in foreign currencies. The Company’s forward contracts are well-established products, allowing the use of standardized models that use market based inputs. These models do not contain a high level of subjectivity and the inputs are readily observable. Accordingly, the Company has classified its forward contracts as Level 2 financial instruments.
F-21F-22
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company had nohas financial liabilities related to its forward contracts recorded at a fair value as of $0.5 million and less than $0.1 million at December 31, 20092010 and 2008.2009. Due to the immateriality of these amounts, the Company has presented the assets and liabilities associated with its forward contracts as a net asset position in the table below. Following are the Company’s financial assets recorded at fair value by hierarchy level as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2010 | |
| (Amounts in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | | Level 1 | | Level 2 | | Level 3 | | Total | |
| | | | | |
| |
| Trading investments and related put options (substantially restricted) | | $ | — | | | $ | — | | | $ | 26,951 | | | $ | 26,951 | | |
Available-for-sale investments (substantially restricted): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United States government agencies | | | — | | | | 7,715 | | | | — | | | | 7,715 | | | $ | — | | | $ | 8,641 | | | $ | — | | | $ | 8,641 | |
| Residential mortgage-backed securities — agencies | | | — | | | | 268,830 | | | | — | | | | 268,830 | | | | — | | | | 128,585 | | | | — | | | | 128,585 | |
| Other asset-backed securities | | | — | | | | — | | | | 22,088 | | | | 22,088 | | | | — | | | | — | | | | 23,710 | | | | 23,710 | |
| Forward contracts | | | | — | | | | 582 | | | | — | | | | 582 | |
| | | Total financial assets | | $ | — | | | $ | 276,545 | | | $ | 49,039 | | | $ | 325,584 | | | $ | — | | | $ | 137,808 | | | $ | 23,710 | | | $ | 161,518 | |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | | | 2009 | |
| (Amounts in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | | | Level 1 | | Level 2 | | Level 3 | | Total | |
| | | | | |
| |
| Trading investments and related put options (substantially restricted) | | $ | — | | | $ | — | | | $ | 47,990 | | | $ | 47,990 | | | $ | — | | | $ | — | | | $ | 26,951 | | | $ | 26,951 | |
Available-for-sale investments (substantially restricted): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| United States government agencies | | | — | | | | 17,449 | | | | — | | | | 17,449 | | | | — | | | | 7,715 | | | | — | | | | 7,715 | |
| Residential mortgage-backed securities — agencies | | | — | | | | 391,797 | | | | — | | | | 391,797 | | | | — | | | | 268,830 | | | | — | | | | 268,830 | |
| Other asset-backed securities | | | — | | | | — | | | | 29,528 | | | | 29,528 | | | | — | | | | — | | | | 22,088 | | | | 22,088 | |
| Forward contracts | | | | — | | | | 5,332 | | | | — | | | | 5,332 | |
| | | Total financial assets | | $ | — | | | $ | 409,246 | | | $ | 77,518 | | | $ | 486,764 | | | $ | — | | | $ | 281,877 | | | $ | 49,039 | | | $ | 330,916 | |
| |
F-22
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below provides a roll-forward of the financial assets classified in Level 3 which are measured at fair value on a recurring basis for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | Trading
| | | | | | Total
| | | Trading
| | | | | | Total
| |
| | | Investments
| | | Other
| | | Level 3
| | | Investments
| | | Other
| | | Level 3
| |
| | | and Related
| | | Asset-Backed
| | | Financial
| | | and Related
| | | Asset-Backed
| | | Financial
| |
| (Amounts in thousands) | | Put Options | | | Securities | | | Assets | | | Put Options | | | Securities | | | Assets | |
| | |
| |
| Beginning balance | | $ | 47,990 | | | $ | 29,528 | | | $ | 77,518 | | | $ | 62,105 | | | $ | 2,478,832 | | | $ | 2,540,937 | |
| Issuance of put options | | | — | | | | — | | | | — | | | | 24,114 | | | | — | | | | 24,114 | |
| Sales and settlements | | | — | | | | — | | | | — | | | | — | | | | (2,355,014 | ) | | | (2,355,014 | ) |
| Realized gains | | | 7,557 | | | | — | | | | 7,557 | | | | — | | | | — | | | | — | |
| Realized losses | | | — | | | | (2 | ) | | | (2 | ) | | | — | | | | (13,760 | ) | | | (13,760 | ) |
| Principal paydowns | | | (32,900 | ) | | | (6,417 | ) | | | (39,317 | ) | | | — | | | | (16,073 | ) | | | (16,073 | ) |
Other-than-temporary impairments | | | — | | | | (4,069 | ) | | | (4,069 | ) | | | — | | | | (70,274 | ) | | | (70,274 | ) |
| Unrealized gains — instruments still held at the reporting date | | | 4,304 | | | | 4,557 | | | | 8,861 | | | | 2,391 | | | | 5,817 | | | | 8,208 | |
| Unrealized losses — instruments still held at the reporting date | | | — | | | | (1,509 | ) | | | (1,509 | ) | | | (40,620 | ) | | | — | | | | (40,620 | ) |
| |
| |
| Ending balance | | $ | 26,951 | | | $ | 22,088 | | | $ | 49,039 | | | $ | 47,990 | | | $ | 29,528 | | | $ | 77,518 | |
| |
| |
There were no financial liabilities classified in Level 3 for the year ended December 31, 2009. The table below provides a roll-forward for the year ended December 31, 2008 of the financial liabilities classified in Level 3.
| | | | | | | | | | | | | |
| | | 2008 | |
| | | | | | | | | Total
| |
| | | Embedded
| | | Derivative
| | | Level 3
| |
| | | Derivatives in
| | | Financial
| | | Financial
| |
| (Amounts in thousands) | | Preferred Stock | | | Instruments | | | Liabilities | |
| | |
| |
| Beginning balance | | $ | — | | | $ | 28,723 | | | $ | 28,723 | |
| Issuance of preferred stock | | | 54,797 | | | | — | | | | 54,797 | |
| Valuation losses | | | 16,030 | | | | 973 | | | | 17,003 | |
| Cash settlement of derivatives upon termination | | | — | | | | (29,696 | ) | | | (29,696 | ) |
| Reversal of liability to Additional paid-in capital | | | (70,827 | ) | | | — | | | | (70,827 | ) |
| |
| |
| Ending balance | | $ | — | | | $ | — | | | $ | — | |
| |
| |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | |
| | | Trading
| | | | | | Total
| | | Trading
| | | | | | Total
| |
| | | Investments
| | | Other
| | | Level 3
| | | Investments
| | | Other
| | | Level 3
| |
| | | and Related
| | | Asset-Backed
| | | Financial
| | | and Related
| | | Asset-Backed
| | | Financial
| |
| (Amounts in thousands) | | Put Options | | | Securities | | | Assets | | | Put Options | | | Securities | | | Assets | |
| | |
| |
| Beginning balance | | $ | 26,951 | | | $ | 22,088 | | | $ | 49,039 | | | $ | 47,990 | | | $ | 29,528 | | | $ | 77,518 | |
| Realized gains | | | 2,449 | | | | — | | | | 2,449 | | | | 7,557 | | | | — | | | | 7,557 | |
| Realized losses | | | — | | | | — | | | | — | | | | — | | | | (2 | ) | | | (2 | ) |
| Principal paydowns | | | (29,400 | ) | | | (3,711 | ) | | | (33,111 | ) | | | (32,900 | ) | | | (6,417 | ) | | | (39,317 | ) |
Other-than-temporary impairments | | | — | | | | (334 | ) | | | (334 | ) | | | — | | | | (4,069 | ) | | | (4,069 | ) |
| Unrealized gains — instruments still held at the reporting date | | | — | | | | 7,632 | | | | 7,632 | | | | 4,304 | | | | 4,557 | | | | 8,861 | |
| Unrealized losses — instruments still held at the reporting date | | | — | | | | (1,965 | ) | | | (1,965 | ) | | | — | | | | (1,509 | ) | | | (1,509 | ) |
| |
| |
| Ending balance | | $ | — | | | $ | 23,710 | | | $ | 23,710 | | | $ | 26,951 | | | $ | 22,088 | | | $ | 49,039 | |
| |
| |
F-23
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 65 — | Investment Portfolio |
The Company’s portfolio is invested in cash and cash equivalents, short-term investments, trading investments andavailable-for-sale investments, all of which are substantially restricted as described in Note 32 —Summary of Significant Accounting Policies. Components of the Company’s investment portfolio as of December 31, wereare as follows:
| | | | | | | | | |
| (Amounts in thousands) | | 2009 | | | 2008 | |
| | |
| |
| Cash | | $ | 1,243,060 | | | $ | 1,575,601 | |
| Money markets | | | 1,933,764 | | | | 1,626,788 | |
| Time deposits | | | 400,000 | | | | 874,992 | |
| Certificate of deposit | | | 200,000 | | | | — | |
| |
| |
| Cash and cash equivalents | | | 3,776,824 | | | | 4,077,381 | |
| Trading investments and related put options | | | 26,951 | | | | 47,990 | |
Available-for-sale investments | | | 298,633 | | | | 438,774 | |
| |
| |
| Total investment portfolio | | $ | 4,102,408 | | | $ | 4,564,145 | |
| |
| |
| | | | | | | | | |
| (Amounts in thousands) | | 2010 | | | 2009 | |
| | |
| |
| Cash | | $ | 1,042,381 | | | $ | 1,243,060 | |
| Money markets | | | 1,818,138 | | | | 1,933,764 | |
| Deposits | | | 5,422 | | | | 200,000 | |
| |
| |
| Cash and cash equivalents (substantially restricted) | | | 2,865,941 | | | | 3,376,824 | |
| Short-term investments (substantially restricted) | | | 405,769 | | | | 400,000 | |
| Trading investments and related put options (substantially restricted) | | | — | | | | 26,951 | |
Available-for-sale investments (substantially restricted) | | | 160,936 | | | | 298,633 | |
| |
| |
| Total investment portfolio | | $ | 3,432,646 | | | $ | 4,102,408 | |
| |
| |
Cash and Cash Equivalents (substantially restricted) — Cash and cash equivalents consist of cash, money-market securities and time deposits and a certificate of deposit.deposits. Cash primarily consists of interest-bearing deposit accounts and non-interest bearing transaction accounts. The Company’s money-market securities are invested in eightsix funds, all of which are AAA rated and consist of United States Treasury bills, notes or other obligations issued or guaranteed by the United States government and its agencies, as well as repurchase agreements secured by such instruments. TheDeposits consist of time deposits havewith original maturities of sixthree months or less, and are issued from financial institutions that are rated AA as of the date of this filing. The certificate
Short-Term Investments (substantially restricted) — Short-term investments consist of time deposits and certificates of deposit has a maturitywith original maturities of one yeargreater than three months but no more than thirteen months, and isare issued from an institution that isfinancial institutions rated AA as of the date of this filing.
Trading Investments and Related Put Options (substantially restricted) — As ofAt December 31, 2008,2009, the Company had one trading investments consisted of three securities: an auction rate security collateralized by commercial paperinvestment with a ratingfair value ofA-1/P-1 $11.8 million on a par value of $29.4 million, and original maturitiesa related put option with a fair value of less than 28 days; an auction rate security collateralized by perpetual preferred stock issued by the monoline insurer and paying a discretionary dividend; and perpetual preferred stock of a monoline insurer paying a discretionary dividend.$15.2 million. The Company also held three put options which, beginning in June 2010, allow the Company to put each trading security backinvestment was called at par toin February 2010, resulting in a $2.4 million gain recorded in “Net securities (gains) losses,” net of the trading firm that originally sold the security to the Company. Under the November 2008 buy-back program that generated the put options, the trading firm also had the right to callreversal of the related security at any time at par plus accrued interest. The Company has received all contractual interest payments, including the penalty rate payments, related to its trading investments.put option.
Two trading investments were called at par during 2009, resulting in a $7.6 million gain recorded in “Net securities gains (losses)(gains) losses,”, net of the reversal of the related put options. The fair value of the remaining trading investment iswas $11.8 million on a par value of $29.4 million as of December 31, 2009, which iswas unchanged from the prior year. The fair value of the related put option iswas $15.2 million, reflecting a valuation gain of $4.3 million from the passage of time. The put option will continue to be remeasured each period through earnings. In February 2010, the remaining trading investment was called at par.
The fair value of the trading investments as of December 31, 2008 was $21.5 million on a par value of $62.3 million. The fair value of the put options was $26.5 million as of December 31, 2008. The Company recorded a $14.1 million net valuation loss on its trading investments and related put options of $14.1 million during the year ended December 31, 2008 due to market concerns regarding the capital position of the monoline insurers and their intent to pay dividends on their preferred stock.
F-24
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Available-for-sale Investments (substantially restricted) —Available-for-sale investments consist of mortgage-backed securities, asset-backed securities and agency debenture securities. Afterother-than-temporary impairment charges, the amortized cost and fair value ofavailable-for-sale investments are as follows at December 31:
| | | | | | | | | | | | | | | | | | | | | |
| | | 2010 | |
| | | | | | Gross
| | | Gross
| | | | | | Net
| |
| | | Amortized
| | | Unrealized
| | | Unrealized
| | | Fair
| | | Average
| |
| (Amounts in thousands, except net average price) | | Cost | | | Gains | | | Losses | | | Value | | | Price | |
| | |
| |
| Residential mortgage-backed securities-agencies | | $ | 121,677 | | | $ | 7,001 | | | $ | (93 | ) | | $ | 128,585 | | | $ | 106.37 | |
| Other asset-backed securities | | | 10,690 | | | | 13,020 | | | | — | | | | 23,710 | | | | 4.68 | |
| United States government agencies | | | 7,273 | | | | 1,368 | | | | — | | | | 8,641 | | | | 96.01 | |
| |
| |
| Total | | $ | 139,640 | | | $ | 21,389 | | | $ | (93 | ) | | $ | 160,936 | | | $ | 25.27 | |
| |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | |
| | | | | | Gross
| | | Gross
| | | | | | Net
| |
| | | Amortized
| | | Unrealized
| | | Unrealized
| | | Fair
| | | Average
| |
| (Amounts in thousands, except net average price) | | Cost | | | Gains | | | Losses | | | Value | | | Price | |
| | |
| |
| Residential mortgage-backed securities — agencies | | $ | 259,563 | | | $ | 9,296 | | | $ | (29 | ) | | $ | 268,830 | | | $ | 104.13 | |
| Other asset-backed securities | | | 15,706 | | | | 6,382 | | | | — | | | | 22,088 | | | | 3.74 | |
| United States government agencies | | | 6,854 | | | | 861 | | | | — | | | | 7,715 | | | | 85.72 | |
| |
| |
| Total | | $ | 282,123 | | | $ | 16,539 | | | $ | (29 | ) | | $ | 298,633 | | | $ | 34.84 | |
| |
| |
| | | | | | | | | | | | | | | | | | | | | |
| | | 2008 | |
| | | | | | Gross
| | | Gross
| | | | | | Net
| |
| | | Amortized
| | | Unrealized
| | | Unrealized
| | | Fair
| | | Average
| |
| (Amounts in thousands, except net average price) | | Cost | | | Gains | | | Losses | | | Value | | | Price | |
| | |
| |
| Residential mortgage-backed securities — agencies | | $ | 385,276 | | | $ | 6,523 | | | $ | (2 | ) | | $ | 391,797 | | | $ | 102.37 | |
| Other asset-backed securities | | | 27,703 | | | | 1,825 | | | | — | | | | 29,528 | | | | 4.43 | |
| United States government agencies | | | 16,463 | | | | 986 | | | | — | | | | 17,449 | | | | 91.84 | |
| |
| |
| Total | | $ | 429,442 | | | $ | 9,334 | | | $ | (2 | ) | | $ | 438,774 | | | $ | 41.05 | |
| |
| |
At December 31, 2010 and 2009, approximately 85 percent and 93 percent, respectively, of theavailable-for-sale portfolio is invested in debentures of United States government agencies or securities collateralized by United States government agency debentures. These securities have always had the implicit backing of the United States government and the Company expects to receive full par value upon maturity or pay-down, as well as all interest payments. The Other asset-backed securities continue to have market exposure. The Company has factored this risk into its fair value estimates, with the average price of an asset-backed security at $0.05 per dollar of par at December 31, 2010.
Gains and Losses andOther-Than-Temporary Impairments — At December 31, 20092010 and 2008,2009, net unrealized gains of $16.5$21.3 million and $9.3$16.5 million, respectively, are included in the Consolidated Balance Sheets in “Accumulated other comprehensive loss.” No deferred tax liability is currently recognized for theDuring 2010, 2009 and 2008, net unrealized gains due to the deferred tax position described in Note 15 —Income Taxes. During 2009, 2008 and 2007, losses of $0.3 million, $4.1 million $326.6 million and $1,189.6$326.6 million, respectively, were reclassified from “Accumulated other comprehensive loss” to earnings“Net securities (gains) losses” in connection with the sale, maturity or pay-down of the underlying securities andother-than-temporary impairments and realized gains and losses recognized during the year. Net“Net securities gains (losses)(gains) losses” were as follows for the year ended December 31:
| | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | | 2008 | | | 2007 | |
| | |
| |
| Gross realized gains | | $ | — | | | $ | 34,200 | | | $ | 5,611 | |
| Gross realized losses | | | (2 | ) | | | (290,498 | ) | | | (1,962 | ) |
Other-than-temporary impairments | | | (4,069 | ) | | | (70,274 | ) | | | (1,193,210 | ) |
| |
| |
Net securities losses fromavailable-for-sale investments | | | (4,071 | ) | | | (326,572 | ) | | | (1,189,561 | ) |
| Unrealized gains (losses) from trading investments and related put options | | | 4,304 | | | | (14,116 | ) | | | (195 | ) |
| Realized gains from trading investments and related put options | | | 7,557 | | | | — | | | | — | |
| |
| |
| Net securities gains (losses) | | $ | 7,790 | | | $ | (340,688 | ) | | $ | (1,189,756 | ) |
| |
| |
| | | | | | | | | | | | | |
| (Amounts in thousands) | | 2010 | | | 2009 | | | 2008 | |
| | |
| |
Realized gains fromavailable-for-sale investments | | $ | — | | | $ | — | | | $ | (34,200 | ) |
Realized losses fromavailable-for-sale investments | | | — | | | | 2 | | | | 290,498 | |
Other-than-temporary impairments fromavailable-for-sale investments | | | 334 | | | | 4,069 | | | | 70,274 | |
| Valuation (gains) losses on trading investments and related put options | | | — | | | | (4,304 | ) | | | 14,116 | |
| Realized gains from trading investments and related put options | | | (2,449 | ) | | | (7,557 | ) | | | — | |
| |
| |
| Net securities (gains) losses | | $ | (2,115 | ) | | $ | (7,790 | ) | | $ | 340,688 | |
| |
| |
F-25
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company realigned its investment portfolio during the first quarter of 2008, resulting in the sale of securities with a fair value of $3.2 billion (afterother-than-temporary impairment charges) for proceeds of $2.9 billion and a net realized loss of $256.3 million. The net realized loss was the result of further deterioration in the markets during the first quarter of 2008 and the short timeframe over which the Company sold its securities. Proceeds from the sales were reinvested in cash and cash equivalents to supplement the Company’s assets in excess of payment service
F-25
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
obligations.Other-than-temporary impairment charges of $70.3 million during 2008 were the result of further deterioration in the markets. The Company continues to have the intent to sell its investments classified as “OtherOther asset-backed securities.”
At December 31, 2009 and 2008, approximately 93 percent of theavailable-for-sale portfolio is invested in debentures of United States government agencies or securities collateralized by United States government agency debentures. These securities have always had the implicit backing of the United States government. During 2008, the United States government took action to place certain agencies under conservatorship and provide unlimited lines of credit through the United States Treasury. These actions served to provide greater comfort to the market regarding the intent of the United States government to back the securities issued by its agencies. The Company expects to receive full par value of the securities upon maturity or pay-down, as well as all interest payments. The “Other asset-backed securities” continue to have market exposure. The Company has factored this risk into its fair value estimates, with the average price of an asset-backed security at $0.04 per dollar of par at December 31, 2009.
Investment Ratings — In rating the securities in its investment portfolio, the Company uses ratings from Moody’s Investor Service (“Moody’s”), Standard & Poors (“S&P”) and Fitch Ratings (“Fitch”). If the rating agencies have split ratings, the Company uses the highest rating from either Moody’s or S&Pacross the rating agencies for disclosure purposes. Securities issued or backed by United States government agencies are included in the AAA rating category. Investment grade is defined as a security having a Moody’s equivalent rating of Aaa, Aa, A or Baa or an S&P or Fitch equivalent rating of AAA, AA, A or BBB. The Company’s investments at December 31 consisted of the following ratings:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | | 2010 | | 2009 | |
| | | Number of
| | Fair
| | Percent of
| | Number of
| | | | Percent of
| | | Number of
| | Fair
| | Percent of
| | Number of
| | Fair
| | Percent of
| |
| (Dollars in thousands) | | Securities | | Value | | Investments | | Securities | | Fair Value | | Investments | | | Securities | | Value | | Investments | | Securities | | Value | | Investments | |
| | | | | |
| |
| AAA, including United States agencies | | | 34 | | | $ | 276,215 | | | | 92 | % | | | 42 | | | $ | 409,672 | | | | 94 | % | | | 25 | | | $ | 136,893 | | | | 85 | % | | | 34 | | | $ | 276,215 | | | | 92 | % |
| AA | | | — | | | | — | | | | 0 | % | | | 3 | | | | 5,064 | | | | 0 | % | |
| A | | | 1 | | | | 415 | | | | 0 | % | | | 5 | | | | 2,919 | | | | 1 | % | | | 0 | | | | — | | | | — | | | | 1 | | | | 415 | | | | 0 | % |
| BBB | | | 1 | | | | 1,842 | | | | 1 | % | | | 2 | | | | 543 | | | | 0 | % | | | 0 | | | | — | | | | — | | | | 1 | | | | 1,842 | | | | 1 | % |
| Below investment grade | | | 69 | | | | 20,161 | | | | 7 | % | | | 68 | | | | 20,576 | | | | 5 | % | | | 64 | | | | 24,043 | | | | 15 | % | | | 69 | | | | 20,161 | | | | 7 | % |
| | | Total | | | 105 | | | $ | 298,633 | | | | 100 | % | | | 120 | | | $ | 438,774 | | | | 100 | % | | | 89 | | | $ | 160,936 | | | | 100 | % | | | 105 | | | $ | 298,633 | | | | 100 | % |
| |
Had the Company used the lowest rating from either Moody’s or S&Pthe rating agencies in the information presented above, there would be no change to investments rated A or better would have remained the same as of December 31, 20092010 and been reduced by $3.5 million as of December 31, 2008.2009.
Contractual Maturities — The amortized cost and fair value ofavailable-for-sale securities at December 31, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations, sometimes without call or prepayment penalties. Maturities of mortgage-backed and other asset-backed securities depend on the repayment characteristics and experience of the underlying obligations.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | | 2010 | | 2009 | |
| | | Amortized
| | Fair
| | Amortized
| | Fair
| | | Amortized
| | Fair
| | Amortized
| | Fair
| |
| (Amounts in thousands) | | Cost | | Value | | Cost | | Value | | | Cost | | Value | | Cost | | Value | |
| | | | | |
| |
| After one year through five years | | $ | 6,854 | | | $ | 7,715 | | | $ | 1,003 | | | $ | 1,073 | | | $ | 7,273 | | | $ | 8,641 | | | $ | 6,854 | | | $ | 7,715 | |
| After five years through ten years | | | — | | | | — | | | | 15,460 | | | | 16,376 | | |
| Mortgage-backed and other asset-backed securities | | | 275,269 | | | | 290,918 | | | | 412,979 | | | | 421,325 | | | | 132,367 | | | | 152,295 | | | | 275,269 | | | | 290,918 | |
| | | Total | | $ | 282,123 | | | $ | 298,633 | | | $ | 429,442 | | | $ | 438,774 | | | $ | 139,640 | | | $ | 160,936 | | | $ | 282,123 | | | $ | 298,633 | |
| |
Fair Value Determination —The Company uses various sources of pricing for its fair value estimates of itsavailable-for-sale portfolio. The percentage of the portfolio for which the various pricing sources were used is as follows at December 31, 2010 and 2009: 81 percent and 91 percent, respectively, used a third party pricing service; 6 percent and 4 percent, respectively, used broker pricing; and 13 percent and 5 percent, respectively, used internal pricing.
Assessment of Unrealized Losses —At December 31, 2010 and 2009, the Company had nominal unrealized losses in itsavailable-for-sale portfolio, with one Residential mortgage-backed agency security in an unrealized loss position aged 12 months or more, after the recognition ofother-than-temporary impairment charges.
F-26
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
follows at December 31, 2009 and 2008: 91 percent and 93 percent, respectively, used a third party pricing service; 4 percent and 3 percent, respectively, used broker pricing; and 5 percent and 4 percent, respectively, used internal pricing.
Assessment of Unrealized Losses —At December 31, 2009 and 2008, the Company had nominal unrealized losses in itsavailable-for-sale portfolio, with no unrealized losses aged 12 months or more, after the recognition ofother-than-temporary impairment charges.
| |
Note 76 — | Derivative Financial Instruments |
The Company uses forward contracts to hedge income statement exposure to foreign currency exchange risk arising from its assets and liabilities denominated in foreign currencies. While these contracts economically hedge foreign currency risk, they are not designated as hedges for accounting purposes. The “Transaction and operations support” line in the Consolidated Statements of LossIncome (Loss) reflects losses of $5.4 million, $5.3 million and $5.5 million in 2010, 2009 and $1.5 million in 2009, 2008, and 2007, respectively, from the effect ofrespectively. These losses reflect changes in foreign exchange rates on foreign-denominated receivables and payables, which isand are net of a gain of $1.8 million, a loss of $5.2 million, and a gain of $4.3 million and a loss of $8.3 million from the related forward contracts for 2010, 2009 2008 and 2007,2008, respectively. As of December 31, 20092010 and 2008,2009, the Company had $59.4$123.8 million and $98.4$59.4 million, respectively, of outstanding notional amounts relating to its forward contracts.
At December 31, the Company reflects the following fair values of derivative forward contract instruments in its Consolidated Balance Sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Balance Sheet
| | Derivative Assets | | Derivative Liabilities | | Balance Sheet
| | Derivative Assets | | Derivative Liabilities |
| (Amounts in thousands) | | Location | | 2009 | | 2008 | | 2009 | | 2008 | | Location | | 2010 | | 2009 | | 2010 | | 2009 |
| | |
| Forward contracts | | Other assets | | $ | 5,361 | | | $ | 3,765 | | | $ | 29 | | | $ | 2,512 | | | Other assets | | $ | 1,117 | | | $ | 5,361 | | | $ | 535 | | | $ | 29 | |
| |
The Company is exposed to credit loss in the event of non-performance by counterparties to its derivative contracts. Collateral generally is not required of the counterparties or of the Company. In the unlikely event a counterparty fails to meet the contractual terms of the derivative contract, the Company’s risk is limited to the fair value of the instrument. The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counterparties. The Company has not had any historical instances of non-performance by any counterparties, nor does it anticipate any future instances of non-performance.
Historically, the Company entered into foreign currency forward contracts of 12 monthswith12-month durations to hedge forecasted foreign currency money transfer transactions. The Company designated these forward contracts as cash flow hedges. All cash flow hedges matured in 2009. The Company recognized a gain of $2.4 million gain and a loss of $2.8 million loss for the years ended December 31, 2009 and 2008, respectively, in the “Fee and other revenue”“Other” expense line in the non-operating section of the Consolidated Statements of Loss,Income (Loss), including $0.8 million of unrealized gains and $2.2 million of unrealized losses reclassified from “Accumulated other comprehensive loss”income (loss)” upon the final settlement of these cash flow hedges for the years ending December 31, 2009 and 2008. As of December 31, 2008, the Company had $0.8 million of unrealized gains on its cash flow hedges recorded in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets. The notional amount of outstanding cash flow hedges as of December 31, 2008 was $18.1 million, all of which matured in 2009. There were no outstanding cash flow hedges as of December 31, 2009.
The Company historically used interest rate swaps to hedge the variability of cash flows from its floating rate debt, as well as its floating rate commission payments to financial institution customers in the Financial Paper Products segment, primarily relating to the official check product. In connection with its restructuring of the official check business in 2008, the Company terminated certain of its financial institution customer relationships. The termination of the relationships led the Company to discontinue hedge accounting treatment in 2008 as the forecasted
F-27
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
transaction would no longer occur. The commission swaps were terminated in 2008, resulting in a $27.7 million loss being recognized in “Investment commissions expense” in the Consolidated Statements of Loss.Income (Loss). Additionally, as described in Note 109 —Debt, the Company’s Senior Facilitysenior facility was deemed extinguished as a result of the modifications made to the Senior Facility in connection with the recapitalization.2008 Recapitalization. As a result, the Company discontinued hedge accounting treatment of its debt swap and terminated the swap in 2008. As a result of the swap termination, the Company recognized a $2.0 million loss in “Interest expense” in the Consolidated Statements of Loss.Income (Loss).
F-27
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As described in Note 1211— Mezzanine Equity, the Company’s Series B Stock contains`contains a conversion option allowing the stockholder to convert the Series B Stock into shares of common stock. As the Certificate of Designation for the Series B Stock does not explicitly state that a net-cash settlement is not required in the event the Company has insufficient shares of common stock to effect a conversion, guidance from the Securities and Exchange Commission (the “SEC”) requires the Company to presume a net-cash settlement would be required. As a result, the conversion option met the definition of an embedded derivative requiring bifurcation and liability accounting treatment to the extent the Company did not have sufficient shares to effect a full conversion. As of March 31, 2008 and June 30, 2008, the Company had a shortfall of committed and authorized common stock, requiring the Company to recognize an embedded derivative. On August 11, 2008, the Investors and the Company formally clarified that the provisions of the Series B Stock do not allow the Investors to require the Company to net-cash settle the conversion option if the Company does not have sufficient shares of common stock to effect a conversion. Effective with this agreement, the Series B Stock conversion option no longer met the criteria for an embedded derivative requiring bifurcation and liability accounting treatment. Accordingly, the Company remeasured the liability through August 11, 2008 and then recorded the liability to “Additional paid-in capital” in the third quarter of 2008. The increase in the fair value of the liability from the issuance of the B Stock through August 11, 2008 of $16.0 million was recognized in the “Valuation loss on embedded derivatives” line in the Consolidated Statements of Loss.Income (Loss). There will be no further impact to the Company’s Consolidated Statements of LossIncome (Loss) as no further remeasurement of the conversion option is required.
The Series B Stock also contains a change of control redemption option which, upon exercise, requires the Company to cash settle the par value of the Series B Stock and any accumulated unpaid dividends at a 1 percent premium. As the cash settlement is made at a premium, the change of control redemption option meets the definition of an embedded derivative requiring bifurcation and liability accounting treatment. The fair value of the change of control redemption option was de minimus as of December 31, 20092010 and 2008.2009.
| |
Note 87 — | Property and Equipment |
Property and equipment consists of the following at December 31:
| | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | | 2010 | | 2009 | |
| | | | | |
| |
| Land | | $ | 2,907 | | | $ | 2,907 | | | $ | 2,907 | | | $ | 2,907 | |
| Office furniture and equipment | | | 38,871 | | | | 45,053 | | | | 32,633 | | | | 38,871 | |
| Leasehold improvements | | | 21,378 | | | | 18,522 | | | | 23,947 | | | | 21,378 | |
| Agent equipment | | | 78,973 | | | | 92,124 | | | | 67,766 | | | | 78,973 | |
| Signage | | | 51,584 | | | | 46,808 | | | | 62,774 | | | | 51,584 | |
| Computer hardware and software | | | 186,601 | | | | 179,408 | | | | 187,604 | | | | 186,601 | |
| | | | | | 380,314 | | | | 384,822 | | | | 377,631 | | | | 380,314 | |
| Accumulated depreciation | | | (252,342 | ) | | | (228,559 | ) | | | (262,520 | ) | | | (252,342 | ) |
| | | Total property and equipment | | $ | 127,972 | | | $ | 156,263 | | | $ | 115,111 | | | $ | 127,972 | |
| |
F-28
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Depreciation expense for the year ended December 31 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | | |
| |
| Office furniture and equipment | | $ | 4,600 | | | $ | 4,055 | | | $ | 4,131 | | | $ | 3,772 | | | $ | 4,600 | | | $ | 4,055 | |
| Leasehold improvements | | | 3,526 | | | | 2,593 | | | | 1,728 | | | | 3,885 | | | | 3,526 | | | | 2,593 | |
| Agent equipment | | | 11,449 | | | | 10,393 | | | | 8,585 | | | | 8,989 | | | | 11,449 | | | | 10,393 | |
| Signage | | | 10,891 | | | | 11,558 | | | | 9,814 | | | | 8,688 | | | | 10,891 | | | | 11,558 | |
| Computer hardware and software | | | 23,351 | | | | 23,692 | | | | 23,415 | | | | 20,314 | | | | 23,351 | | | | 23,692 | |
| | | Total depreciation expense | | $ | 53,817 | | | $ | 52,291 | | | $ | 47,673 | | | $ | 45,648 | | | $ | 53,817 | | | $ | 52,291 | |
| |
At December 31, 20092010 and 2008,2009, there was $1.2$3.9 million and $2.6$1.2 million, respectively, of property and equipment that had been received by the Company and included in “Accounts payable and other liabilities” in the Consolidated Balance Sheets.
TheIn connection with its decision to sell its corporate airplane, the Company recognized a $7.0 million impairment charge in 2009 and a $1.5 million impairment charge in connection with its decision to sell its corporate airplane.2010. The sale was completed in the third quarter of 2010. In 2009, the Company also fully impaired $1.4 million of software related to its ACH Commerce business based on changes in its exit plan. DuringIn 2008, and 2007, the Company decided to discontinue certain software development projects and recognized an impairment charge of $0.9 million and $0.2 million, respectively.million. All impairment charges are included in the “Transaction and operations support” line in the Consolidated StatementStatements of Loss.Income (Loss).
| |
Note 98 — | Goodwill and Intangible Assets and Goodwill |
Intangible assets at December 31 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | Gross
| | | | | | Net
| | | Gross
| | | | | | Net
| |
| | | Carrying
| | | Accumulated
| | | Carrying
| | | Carrying
| | | Accumulated
| | | Carrying
| |
| (Amounts in thousands) | | Value | | | Amortization | | | Value | | | Value | | | Amortization | | | Value | |
| | |
| |
| Amortized intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer lists | | $ | 15,307 | | | $ | (9,130 | ) | | $ | 6,177 | | | $ | 29,465 | | | $ | (17,486 | ) | | $ | 11,979 | |
| Non-compete agreements | | | 200 | | | | (150 | ) | | | 50 | | | | 3,417 | | | | (2,840 | ) | | | 577 | |
| Trademarks and license | | | 597 | | | | (1 | ) | | | 596 | | | | 981 | | | | (150 | ) | | | 831 | |
| Developed technology | | | 1,519 | | | | (662 | ) | | | 857 | | | | 1,519 | | | | (358 | ) | | | 1,161 | |
| |
| |
| Total intangible assets | | $ | 17,623 | | | $ | (9,943 | ) | | $ | 7,680 | | | $ | 35,382 | | | $ | (20,834 | ) | | $ | 14,548 | |
| |
| |
In 2009, the Company recorded impairment charges of $3.6 million related to customer lists and trademarks associated with its retail money order business. Intangible impairment charges are included in the “Transaction and operations support” line of the Consolidated Statements of Loss. No impairments of intangible assets were identified during 2008 and 2007. In connection with the acquisitions of MoneyCard and Cambios Sol in 2008, the Company recorded intangible assets of $1.4 million for customer lists, developed technology and a money transfer license.
Intangible asset amortization expense for 2009, 2008 and 2007 was $3.3 million, $4.4 million and $4.3 million, respectively. The estimated future intangible asset amortization expense is $2.3 million, $1.2 million, $0.7 million, $0.4 million and $0.3 million for 2010, 2011, 2012, 2013 and 2014, respectively.
F-29
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Following is a roll-forward of goodwill by reporting segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Global Funds Transfer | | Financial Paper Products | | Other | | | Global Funds Transfer | | Financial Paper Products | | Other | |
| | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 | | |
| (Amounts in thousands) | | | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 | |
| | | | | |
| |
| Balance at beginning of year: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | $ | 426,794 | | | $ | 422,487 | | | $ | 2,487 | | | $ | 2,487 | | | $ | 20,220 | | | $ | 20,220 | | | $ | 428,806 | | | $ | 426,794 | | | $ | 2,487 | | | $ | 2,487 | | | $ | 15,746 | | | $ | 20,220 | |
| Accumulated impairment charges | | | — | | | | — | | | | — | | | | — | | | | (15,164 | ) | | | (6,355 | ) | | | (3,176 | ) | | | — | | | | (2,487 | ) | | | — | | | | (15,746 | ) | | | (15,164 | ) |
| | | | | | 426,794 | | | | 422,487 | | | | 2,487 | | | | 2,487 | | | | 5,056 | | | | 13,865 | | | | 425,630 | | | | 426,794 | | | | — | | | | 2,487 | | | | — | | | | 5,056 | |
| Goodwill acquired | | | 2,012 | | | | 4,307 | | | | — | | | | — | | | | — | | | | — | | | | 3,061 | | | | 2,012 | | | | — | | | | — | | | | — | | | | — | |
| Impairment charge | | | (3,176 | ) | | | — | | | | (2,487 | ) | | | — | | | | (582 | ) | | | (8,809 | ) | | | — | | | | (3,176 | ) | | | — | | | | (2,487 | ) | | | — | | | | (582 | ) |
| Divestitures | | | — | | | | — | | | | — | | | | — | | | | (4,474 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (4,474 | ) |
| | | Balance at end of year: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Goodwill | | | 428,806 | | | | 426,794 | | | | 2,487 | | | | 2,487 | | | | 15,746 | | | | 20,220 | | | | 431,867 | | | | 428,806 | | | | 2,487 | | | | 2,487 | | | | 15,746 | | | | 15,746 | |
| Accumulated impairment charges | | | (3,176 | ) | | | — | | | | (2,487 | ) | | | — | | | | (15,746 | ) | | | (15,164 | ) | | | (3,176 | ) | | | (3,176 | ) | | | (2,487 | ) | | | (2,487 | ) | | | (15,746 | ) | | | (15,746 | ) |
| | | | | $ | 425,630 | | | $ | 426,794 | | | $ | — | | | $ | 2,487 | | | $ | — | | | $ | 5,056 | | | $ | 428,691 | | | $ | 425,630 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| |
Goodwill acquired in 2010 relates to the acquisition of Blue Dolphin. Goodwill acquired in 2009 relates to the acquisition of Raphaels Bank. Goodwill acquired in 2008 relates to the acquisitions of MoneyCard and Cambios Sol. Goodwill related to these acquisitions is not deductible for tax purposes.
The Company impaired $3.2 million of goodwill in 2009 allocated to the Global Funds Transfer segment associated with a decision to discontinue certain bill payment product offerings. In connection with the sale of FSMC in 2009, the Company recorded a charge of $0.6 million to impair goodwill that was in excess of the final sale price. In addition, goodwill was reduced by $4.5 million from the sale of FSMC. The Company also impaired $3.2 million of goodwill in 2009 in the Global Funds Transfer segment associated withFSMC reporting unit is not a decision to discontinue certain bill payment product offerings. In 2008, the Company decided to wind-down the customer-facing operations of the business formerly known as ACH Commerce after evaluating the market opportunity for certain of its electronic payment services. As a result, the Company recognized an impairment charge of $8.8 million in 2008 for the full amount of goodwill related to the ACH Commerce reporting unit. The FSMC and ACH Commerce reporting units are not componentscomponent of the Global Funds Transfer andor Financial Paper Products segments.
F-29
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company performed an annual assessment of goodwill during the fourth quarters of 2010, 2009 2008 and 2007.2008. As a result of the 2009 annual assessment, it was determined that the fair value of the retail money order reporting unit, a component of the Financial Paper Products segment, was fully impaired. The Company recorded an impairment charge of $2.5 million to the Financial Paper Products segment in 2009, which was calculated as the excess of the implied fair value of the retail money order reporting unit over the carrying amount of goodwill. There were no impairments recognized in 2010 and 2008 as a result of the annual impairment test. As a result of the 2007 annual assessment, it was determined that the fair value of the FSMC reporting unit was impaired. The Company recorded an impairment charge of $6.4 million to the FSMC reporting segment in 2007, which was calculated as the excess of the implied fair value over the carrying amount of goodwill. Goodwill impairment charges are included in the “Transaction and operations support” line of the Consolidated Statements of Loss.Income (Loss).
Intangible assets at December 31 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | |
| | | Gross
| | | | | | Net
| | | Gross
| | | | | | Net
| |
| | | Carrying
| | | Accumulated
| | | Carrying
| | | Carrying
| | | Accumulated
| | | Carrying
| |
| (Amounts in thousands) | | Value | | | Amortization | | | Value | | | Value | | | Amortization | | | Value | |
| | |
| |
| Amortized intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Customer lists | | $ | 15,592 | | | $ | (11,149 | ) | | $ | 4,443 | | | $ | 15,307 | | | $ | (9,130 | ) | | $ | 6,177 | |
| Non-compete agreements | | | 137 | | | | (40 | ) | | | 97 | | | | 200 | | | | (150 | ) | | | 50 | |
| Trademarks and license | | | 613 | | | | (15 | ) | | | 598 | | | | 597 | | | | (1 | ) | | | 596 | |
| Developed technology | | | 1,519 | | | | (965 | ) | | | 554 | | | | 1,519 | | | | (662 | ) | | | 857 | |
| |
| |
| Total intangible assets | | $ | 17,861 | | | $ | (12,169 | ) | | $ | 5,692 | | | $ | 17,623 | | | $ | (9,943 | ) | | $ | 7,680 | |
| |
| |
In 2010, the Company recorded impairment charges of $0.4 million related to customer lists as a result of acquired customer terminations. In 2009, the Company recorded impairment charges of $3.6 million related to customer lists and trademarks associated with its retail money order business. Intangible impairment charges are included in the “Transaction and operations support” line of the Consolidated Statements of Income (Loss). No impairments of intangible assets were identified during 2008.
Intangible asset amortization expense for 2010, 2009 and 2008 was $2.4 million, $3.3 million and $4.4 million, respectively. The estimated future intangible asset amortization expense is $1.2 million, $0.7 million, $0.4 million, $0.3 million and $0.3 million for 2011, 2012, 2013, 2014 and 2015, respectively.
Following is a summary of the outstanding debt at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2010 | | | 2009 | |
| | | | | | Weighted-
| | | | | | Weighted-
| |
| | | | | | Average
| | | | | | Average
| |
| (Amounts in thousands) | | Amount | | | Interest Rate | | | Amount | | | Interest Rate | |
| | |
| |
| Senior Tranche A Loan, due 2013 | | $ | 100,000 | | | | 5.75 | % | | $ | 100,000 | | | | 5.75 | % |
| Senior Tranche B Loan, net of unamortized discount, due 2013 | | | 39,946 | | | | 7.25 | % | | | 196,791 | | | | 7.25 | % |
| Second lien notes, due 2018 | | | 500,000 | | | | 13.25 | % | | | 500,000 | | | | 13.25 | % |
| |
| |
| Total debt | | $ | 639,946 | | | | | | | $ | 796,791 | | | | | |
| |
| |
F-30
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Following is a summary of the outstanding debt at December 31:
| | | | | | | | | | | | | | | | | |
| | | 2009 | | | 2008 | |
| | | | | | Weighted-
| | | | | | Weighted-
| |
| | | | | | Average
| | | | | | Average
| |
| (Amounts in thousands) | | Amount | | | Interest Rate | | | Amount | | | Interest Rate | |
| | |
| |
| Senior Tranche A Loan, due 2013 | | $ | 100,000 | | | | 5.75 | % | | $ | 100,000 | | | | 6.33 | % |
| Senior Tranche B Loan, net of unamortized discount, due 2013 | | | 196,791 | | | | 7.25 | % | | | 233,881 | | | | 7.78 | % |
| Senior revolving credit facility, due 2013 | | | — | | | | — | | | | 145,000 | | | | 6.27 | % |
| Second lien notes, due 2018 | | | 500,000 | | | | 13.25 | % | | | 500,000 | | | | 13.25 | % |
| |
| |
| Total debt | | $ | 796,791 | | | | | | | $ | 978,881 | | | | | |
| |
| |
Senior Facility — On March 25, 2008, the Company’s wholly owned subsidiary MoneyGram Payment Systems Worldwide, Inc. (“Worldwide”) entered into a senior secured amended and restated credit agreement of $600.0 million with JPMorgan Chase Bank, N.A. (“JPMorgan”) as Administrative Agent for a group of lenders (the “Senior Facility”“senior facility”). The Senior Facilitysenior facility was composed of a $100.0 million tranche A term loan (“Tranche A”), a $250.0 million tranche B term loan (“Tranche B”) and a $250.0 million revolving credit facility, each of which matures in March 2013. Tranche B was issued by the Company at a discount of 93.5 percent, or $16.3 million, which was recorded as a reduction to the carrying value of Tranche B and is being amortized over the life of the debt using the effective interest method. A portion of the proceeds from the issuance of Tranche B was used to repay $100.0 million of the revolving credit facility on March 25, 2008.
The Company may elect an interest rate for the Senior Facilitysenior facility at each reset period based on the United States prime bank rate or the Eurodollar rate. The interest rate election may be made individually for each term loan and each draw under the revolving credit facility. For Tranche A and the revolving credit facility, the interest rate is either the United States prime bank rate plus 250 basis points or the Eurodollar rate plus 350 basis points. For Tranche B, the interest rate is either the United States prime bank rate plus 400 basis points or the Eurodollar rate plus 500 basis points. Under the terms of the Senior Facility,senior facility, the interest rate determined using the Eurodollar index has a minimum rate of 2.50 percent. Fees on the daily unused availability under the revolving credit facility are 50 basis points. Substantially all of the Company’s non-financial assets are pledged as collateral for the loans under the Senior Facility,senior facility, with the collateral guaranteed by the Company’s material domestic subsidiaries. The non-financial assets of the material domestic subsidiaries are pledged as collateral for these guarantees.
During 2010 and 2009, the Company elected the United States prime bank rate as its interest basis, as compared tobasis. In 2010 and 2009, the Eurodollar rate in 2008.Company prepaid $165.0 million and $40.0 million, respectively, of its Tranche B loan. In 2009, the Company also paid $1.9 million of mandatory quarterly Tranche B payments. All mandatory payments through maturity have been satisfied. In 2009, the Company repaid the full $145.0 million outstanding under theits revolving credit facility. As of December 31, 2009,2010, the Company has $234.5$243.2 million of availability under the revolving credit facility, net of $15.5$6.8 million of outstanding letters of credit which reduce the amount available under the revolving credit facility. In addition to $1.9 million of mandatory quarterly payments, the Company prepaid $40.0 million of its Tranche B loan in December 2009. With this prepayment, all mandatory quarterly Tranche B payments have been fully prepaid through maturity.available. Amortization of the debt discount on Tranche B of $8.2 million, $4.8 million and $2.0 million during 2010, 2009 and 2008, respectively, is recorded in “Interest expense” in the Consolidated Statements of Loss. TheIncome (Loss). Amortization of the debt discount in 2010 and 2009 amortization includes a pro-rata write-offwrite-offs of $5.9 million and $1.9 million, respectively, as a result of the Tranche B prepayment.prepayments.
Second Lien Notes — As part of the recapitalization,2008 Recapitalization, Worldwide issued $500.0 million of senior secured second lien notes to Goldman Sachs (the “Notes”“second lien notes”), which will mature in March 2018. The interest rate on the Notessecond lien notes is 13.25 percent per year. Prior to March 25, 2011, the Company has the option to capitalize interest at a rate of 15.25 percent. If interest is capitalized, 0.50 percent of the interest is payable in cash and 14.75 percent is capitalized
F-31
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
into the outstanding principal balance. The Company paid the interest through December 31, 20092010 and anticipates that it will continue to pay the interest on the Notessecond lien notes for the foreseeable future.
Prior to the fifth anniversary, the Company may redeem some or all of the Notessecond lien notes at a price equal to 100 percent of the principal, plus any accrued and unpaid interest plus a premium equal to the greater of 1 percent or an amount calculated by discounting the sum of (a) the redemption payment that would be due upon the fifth anniversary plus (b) all required interest payments due through such fifth anniversary using the treasury rate plus 50 basis points. Starting with the fifth anniversary, the Company may redeem some or all of the Notessecond lien notes at prices expressed as a percentage of the outstanding principal amount of the Notessecond lien notes plus accrued and unpaid interest, starting at approximately 107 percent on the fifth anniversary, decreasing to 100 percent on or after the eighth anniversary. Upon a change of control, the Company is required to make an offer to repurchase the Notessecond lien notes at a price equal to 101 percent of the principal amount plus accrued and unpaid interest. The Company is also required to make an offer to repurchase the Notessecond lien notes with proceeds of certain asset sales that have not been reinvested in accordance with the terms of the Notessecond lien notes or have not been used to repay certain debt.
F-31
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inter-creditor Agreement — In connection with the above financing arrangements, the lenders under both the Senior Facilitysenior facility and the Notessecond lien notes entered into an inter-creditor agreement under which the lenders have agreed to waive certain rights and limit the exercise of certain remedies available to them for a limited period of time, both before and following a default under the financing arrangements.
364-Day Facility — On November 15, 2007, the Company entered into a $150.0 million revolving credit facility (the“364-Day Facility”) with JPMorgan. The Company did not borrow under the364-Day Facility in 2007 or 2008. In connection with the recapitalization on March 25, 2008, the Company terminated the364-Day Facility.
Debt Covenants and other restrictions — Borrowings under the Company’s debt agreements are subject to various covenants that limit the Company’s ability to: incur additional indebtedness; effect mergers and consolidations; sell assets or subsidiary stock; pay dividends and other restricted payments; invest in certain assets; and effect loans, advances and certain other transactions with affiliates. In addition, the Senior Facilitysenior facility has a covenant that places limitations on the use of proceeds from borrowings under the facility.
Both the Senior Facilitysenior facility and the Notessecond lien notes contain a financial covenant requiring the Company to maintain a minimum liquidity ratio of at least 1:1 for certain assets to outstanding payment service obligations. The Senior Facilitysenior facility also has two financial covenants referred to as the interest coverage ratio and senior secured debt ratio. The Company must maintain a minimum interest coverage ratio of 1.5:1 through September 30, 2010, 1.75:1 from December 31, 2010 through September 30, 2012 and 2:1 from December 31, 2012 through maturity. The senior secured debt ratio is not permitted to exceed 6:1 through September 30, 2010, 5.5:1 from December 31, 2010 through September 30, 2011, 5:1 from December 31, 2011 through September 30, 2012 and 4.5:1 from December 31, 2012 through maturity. At December 31, 2009,2010, the Company is in compliance with its financial covenants.
Deferred Financing Costs — In connection with the waivers obtained on the Senior Facility and the364-Day Facilitysenior facility during the first quarter of 2008, the Company capitalized financing costs of $1.5 million. The Company also capitalized $19.6 million and $33.4 million of financing costs for the amendment and restatement of the Senior Facilitysenior facility and the issuance of the Notes,second lien notes, respectively. These costs were capitalized in “Other assets” in the Consolidated Balance Sheets and are being amortized over the term of the related debt using the effective interest method.
Amortization of deferred financing costs of $9.3 million, $8.0 million and $5.5 million for the years ended December 31, 2010, 2009, and 2008, respectively, is recorded in “Interest expense” in the Consolidated Statements of Loss for the years ended December 31,Income (Loss). Amortization during 2010 and 2009 2008 and 2007 was $8.0 million, $5.5includes $2.7 million and $0.2$0.9 million, respectively. Amortization during 2009 includes $0.9 millionrespectively, for the write-off of a pro rata portion of deferred financing costs in connection with the prepaymentprepayments on Tranche B. In connection with the modification of the Senior Facilitysenior facility in 2008, the Company recognized a debt extinguishment loss of $1.5 million, reducing deferred financing costs. In addition, the Company expensed $0.4 million of unamortized deferred financing costs upon the termination of the364-Day Facility in 2008.
F-32
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest Paid in Cash — The Company paid $83.5 million, $94.4 million $84.0 million and $11.6$84.0 million of interest in 2010, 2009 and 2008, and 2007, respectively.
Maturities — Debt totaling $306.3 million will mature in 2013.
| |
Note 1110 — | Pensions and Other Benefits |
Pension Benefits — The Pension Plan is a frozen non-contributory funded defined benefit pension plan under which no new service or compensation credits are accrued by the plan participants. Cash accumulation accounts continue to be credited with interest credits until participants withdraw their money from the Pension Plan. It is the Company’s policy to fund the minimum required contribution each year.
Supplemental Executive Retirement Plans — The Company has obligations under various Supplemental Executive Retirement Plans (“SERPs”), which are unfunded non-qualified defined benefit pension plans providing postretirement income to their participants. Prior to 2009,As of December 31, 2010, all but one SERP was frozen to new participants and new benefits. Following a December 2009 amendment to two plans, allbenefit accruals under the SERPs are now frozen.frozen with the exception of one plan for which service is frozen but future pay increases are reflected for active participants. It is the Company’s policy to fund the SERPs as benefits are paid.
F-32
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Postretirement Benefits Other Than Pensions — The Company has unfunded defined benefit postretirement plans that provide medical and life insurance for its participants. The Company amended the postretirement benefit plan to close it to new participants as of December 31, 2009. Current enrolled retirees, as well as three former employees who are eligibleIn November 2010, the Board of Directors approved a change to enroll after their COBRA coverage ends, will remainthe plan whereby participants eligible for coverage.Medicare coverage will no longer be eligible for coverage under the plan effective July 1, 2011. The Company has determined that its postretirement benefit plan is actuarially equivalent to the Medicare Act and its application for determination of actuarial equivalence has been approved by the Medicare Retiree Drug Subsidy program. The Company’s funding policy is to make contributions to the postretirement benefits plans as benefits are paid.
Actuarial Valuation Assumptions — The measurement date for the Company’s defined benefit pension plan, SERPs and postretirement benefit plans is December 31. Following are the weighted-average actuarial assumptions used in calculating the benefit obligation and net benefit cost as of and for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension and SERPs | | Postretirement Benefits | | Pension and SERPs | | Postretirement Benefits |
| | | 2009 | | 2008 | | 2007 | | 2009 | | 2008 | | 2007 | | 2010 | | 2009 | | 2008 | | 2010 | | 2009 | | 2008 |
| | |
| Net periodic benefit cost: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Discount rate | | | 6.30 | % | | | 6.50 | % | | | 5.70 | % | | | 6.30 | % | | | 6.50 | % | | | 5.70 | % | | | 5.80 | % | | | 6.30 | % | | | 6.50 | % | | | 5.80 | % | | | 6.30 | % | | | 6.50 | % |
| Expected return on plan assets | | | 8.00 | % | | | 8.00 | % | | | 8.00 | % | | | — | | | | — | | | | — | | | | 8.00 | % | | | 8.00 | % | | | 8.00 | % | | | — | | | | — | | | | — | |
| Rate of compensation increase | | | 5.75 | % | | | 5.75 | % | | | 5.75 | % | | | — | | | | — | | | | — | | | | 5.75 | % | | | 5.75 | % | | | 5.75 | % | | | — | | | | — | | | | — | |
| Initial healthcare cost trend rate | | | — | | | | — | | | | — | | | | 8.50 | % | | | 9.00 | % | | | 9.50 | % | | | — | | | | — | | | | — | | | | 9.50 | % | | | 8.50 | % | | | 9.00 | % |
| Ultimate healthcare cost trend rate | | | — | | | | — | | | | — | | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % | | | — | | | | — | | | | — | | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % |
| Year ultimate healthcare cost trend rate is reached | | | — | | | | — | | | | — | | | | 2013 | | | | 2013 | | | | 2013 | | | | — | | | | — | | | | — | | | | 2019 | | | | 2013 | | | | 2013 | |
| Projected benefit obligation: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Discount rate | | | 5.80 | % | | | 6.30 | % | | | 6.50 | % | | | 5.80 | % | | | 6.30 | % | | | 6.50 | % | | | 5.30 | % | | | 5.80 | % | | | 6.30 | % | | | 5.30 | % | | | 5.80 | % | | | 6.30 | % |
| Rate of compensation increase | | | 5.75 | % | | | 5.75 | % | | | 5.75 | % | | | — | | | | — | | | | — | | | | 5.75 | % | | | 5.75 | % | | | 5.75 | % | | | — | | | | — | | | | — | |
| Initial healthcare cost trend rate | | | — | | | | — | | | | — | | | | 9.50 | % | | | 8.50 | % | | | 9.00 | % | | | — | | | | — | | | | — | | | | 9.00 | % | | | 9.50 | % | | | 8.50 | % |
| Ultimate healthcare cost trend rate | | | — | | | | — | | | | — | | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % | | | — | | | | — | | | | — | | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % |
| Year ultimate healthcare cost trend rate is reached | | | — | | | | — | | | | — | | | | 2019 | | | | 2013 | | | | 2013 | | | | — | | | | — | | | | — | | | | 2019 | | | | 2019 | | | | 2013 | |
The Company utilizes a building-block approach in determining the long-term expected rate of return on plan assets. Historical markets are studied and long-term historical relationships between equity securities and fixed income securities are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors, such as inflation and interest rates, are
F-33
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
evaluated before long-term capital market assumptions are determined. The long-term portfolio return also takes proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed for reasonableness and appropriateness.
The health care cost trend rate assumption has a significant effect on the amounts reported. A one-percentage point change in assumed health care trends would have the following effects for 2009:2010:
| | | | | | | | | | | | | | | | | |
| | | One Percentage
| | One Percentage
| | One Percentage
| | One Percentage
|
| (Amounts in thousands) | | Point Increase | | Point Decrease | | Point Increase | | Point Decrease |
| | |
| Effect on total of service and interest cost components | | $ | 329 | | | $ | (254 | ) | | $ | 6 | | | $ | (5 | ) |
| Effect on postretirement benefit obligation | | | 489 | | | | (403 | ) | | | 106 | | | | (90 | ) |
F-33
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pension Assets — The Company employs a total return investment approach whereby a mix of equitiesequity and fixed income securities are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and corporate financial condition. The investment portfolio contains a diversified blend of equity and fixed income securities. Furthermore, equity securities are diversified across United States andnon-United States stocks, as well as growth, value, and small and large capitalizations. Other assets, such as real estate and cash, are used judiciously to enhance long-term returns while improving portfolio diversification. The Company strives to maintain an equity and fixed income securities allocation mix of approximately 60 percent and 40 percent, respectively. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews and annual liability measurements.
The Company’s weighted-average asset allocation for the defined benefit pension plan by asset category at the measurement date of December 31 is as follows:
| | | | | | | | | | | | | | | | | |
| | | 2009 | | 2008 | | | 2010 | | 2009 | |
| | | | | |
| |
| Equity securities | | | 55.6 | % | | | 57.8 | % | | | 59.8 | % | | | 55.6 | % |
| Fixed income securities | | | 35.0 | % | | | 32.9 | % | | | 34.4 | % | | | 35.0 | % |
| Real estate | | | 5.5 | % | | | 5.1 | % | | | 3.9 | % | | | 5.5 | % |
| Other | | | 3.9 | % | | | 4.2 | % | | | 1.9 | % | | | 3.9 | % |
| | | Total | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
| |
The Company records its pension assets at fair value as described in Note 54 —Fair Value Measurement.Following areis a description of the Company’s financial assets recordedPlan’s investments at fair value by hierarchy level as of December 31:and valuation methodologies:
| | | | | | | | | | | | | | | | | |
| | | 2009 | |
| (Amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| |
| Equity securities | | $ | — | | | $ | 57,244 | | | $ | — | | | $ | 57,244 | |
| Fixed income | | | 5,008 | | | | 30,978 | | | | — | | | | 35,986 | |
| Real estate | | | — | | | | — | | | | 5,688 | | | | 5,688 | |
| Other | | | 2,298 | | | | 1,692 | | | | — | | | | 3,990 | |
| |
| |
| Total financial assets | | $ | 7,306 | | | $ | 89,914 | | | $ | 5,688 | | | $ | 102,908 | |
| |
| |
| | |
| • | Short-term investment fund— This fund is comprised of interest-bearing cash accounts and time deposits with original maturities of less than three months, and is valued at historical cost, which approximates fair value. Amounts in these investments are typically the result of temporary timing differences between receipts from other investments and reinvestment of those funds or benefit payments to plan participants. |
|
| • | Common collective trusts issued and held by the trustee— These investments in equity and fixed income securities comprise the substantial portion of the pension plan trust and are held in various common/collective trusts that are maintained by the trustee, who is regulated, supervised and subject to periodic examination by a state or federal agency. Common collective trusts are held by the trustee for the collective investment and reinvestment of assets contributed from employee benefit plans maintained by more than one employer or a controlled group of corporations. The fair value of the common collective trust is determined based on the price per unit held as of the end of a period as determined by the trustee in accordance with their valuation methodology. |
|
| • | Real estate— The pension plan trust holds an investment in a real estate development project. The fair value of this investment represents the estimated market value of the plan’s related ownership percentage of the project based upon an appraisal as of each balance sheet date. As of December 31, 2010 and 2009, there is no unfunded commitment or potential redemptions related to this asset. The fund strategy for this asset is long-term capital appreciation. |
|
| • | Experience fund investment contracts— These investments are actuarially determined annuity reserves for certain participants for whom annuities were purchased under a group annuity contract and were superseded and converted into an investment contract. The fair value is determined by multiplying their balances at cost times a discount factor, which is intended to recognize the difference between the investment yield at cost and the investment yield which prevailed generally at the balance sheet date for new investments of similar nature. The Company liquidated all but one of these investments in 2010 and invested the proceeds into common collective trusts. The remaining balance at December 31, 2010 relates to one contract which was in the process of being liquidated at period-end. |
F-34
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | |
| | | 2008 | |
| (Amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| |
| Equity securities | | $ | — | | | $ | 55,202 | | | $ | — | | | $ | 55,202 | |
| Fixed income | | | 12,661 | | | | 18,790 | | | | — | | | | 31,451 | |
| Real estate | | | — | | | | — | | | | 4,835 | | | | 4,835 | |
| Other | | | 2,175 | | | | 1,888 | | | | — | | | | 4,063 | |
| |
| |
| Total financial assets | | $ | 14,836 | | | $ | 75,880 | | | $ | 4,835 | | | $ | 95,551 | |
| |
| |
Following are the Plan’s financial assets recorded at fair value by hierarchy level as of December 31:
| | | | | | | | | | | | | | | | | |
| | | 2010 | |
| (Amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| |
| Short-term investment fund | | $ | 1,949 | | | $ | — | | | $ | — | | | $ | 1,949 | |
| Common collective trust — equity securities | | | | | | | | | | | | | | | | |
| Large Cap securities | | | — | | | | 47,178 | | | | — | | | | 47,178 | |
| Small Cap securities | | | — | | | | 10,641 | | | | — | | | | 10,641 | |
| International securities | | | — | | | | 6,282 | | | | — | | | | 6,282 | |
| Common collective trust — fixed income securities | | | | | | | | | | | | | | | | |
| Core fixed income | | | 4,943 | | | | 13,949 | | | | — | | | | 18,892 | |
| Long duration fixed income | | | — | | | | 17,973 | | | | — | | | | 17,973 | |
| Real estate | | | — | | | | — | | | | 4,194 | | | | 4,194 | |
| Experience fund investment contracts | | | — | | | | 27 | | | | — | | | | 27 | |
| |
| |
| Total financial assets | | $ | 6,892 | | | $ | 96,050 | | | $ | 4,194 | | | $ | 107,136 | |
| |
| |
| | | | | | | | | | | | | | | | | |
| | | 2009 | |
| (Amounts in thousands) | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| | |
| |
| Short-term investment fund | | $ | 2,298 | | | $ | — | | | $ | — | | | $ | 2,298 | |
| Common collective trust — equity securities | | | | | | | | | | | | | | | | |
| Large Cap securities | | | — | | | | 38,326 | | | | — | | | | 38,326 | |
| Small Cap securities | | | — | | | | 9,681 | | | | — | | | | 9,681 | |
| International securities | | | — | | | | 9,237 | | | | — | | | | 9,237 | |
| Common collective trust — fixed income securities | | | | | | | | | | | | | | | | |
| Core fixed income | | | 5,008 | | | | 24,323 | | | | — | | | | 29,331 | |
| Long duration fixed income | | | — | | | | 6,655 | | | | — | | | | 6,655 | |
| Real estate | | | — | | | | — | | | | 5,688 | | | | 5,688 | |
| Experience fund investment contracts | | | — | | | | 1,692 | | | | — | | | | 1,692 | |
| |
| |
| Total financial assets | | $ | 7,306 | | | $ | 89,914 | | | $ | 5,688 | | | $ | 102,908 | |
| |
| |
The Company’s pension plan assets include one security that the Company considers to be a Level 3 asset for valuation purposes. This security is an investment in a real estate joint venture and requires the use of unobservable inputs in its fair value measurement. The fair value of this asset as of December 31, 2010 and 2009 and 2008 was $5.7$4.2 million and $4.8$5.7 million, respectively. The change in fairreported net asset value offor this asset resulted in an unrealized loss of $1.5 million for 2010 and an unrealized gain on the fair value of $0.9 million for 2009, with no change in fair value for 2008.2009.
F-35
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Plan Financial Information — Net periodic benefit expense (income) for the defined benefit pension plan and SERPs and postretirement benefit plans includes the following components for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension and SERPs | | Postretirement Benefits | | | Pension and SERPs | | Postretirement Benefits | |
| (Amounts in thousands) | | 2009 | | 2008 | | 2007 | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | | 2010 | | 2009 | | 2008 | |
| | | | | |
| |
| Service cost | | $ | 894 | | | $ | 1,069 | | | $ | 2,298 | | | $ | 572 | | | $ | 543 | | | $ | 697 | | | $ | — | | | $ | 894 | | | $ | 1,069 | | | $ | — | | | $ | 572 | | | $ | 543 | |
| Interest cost | | | 12,659 | | | | 12,678 | | | | 11,900 | | | | 837 | | | | 822 | | | | 837 | | | | 11,876 | | | | 12,659 | | | | 12,678 | | | | 253 | | | | 837 | | | | 822 | |
| Expected return on plan assets | | | (9,403 | ) | | | (10,275 | ) | | | (10,083 | ) | | | — | | | | — | | | | — | | | | (8,664 | ) | | | (9,403 | ) | | | (10,275 | ) | | | — | | | | — | | | | — | |
| Amortization of prior service cost (credit) | | | 346 | | | | 414 | | | | 483 | | | | (352 | ) | | | (352 | ) | | | (294 | ) | | | 84 | | | | 346 | | | | 414 | | | | — | | | | (352 | ) | | | (352 | ) |
| Recognized net actuarial loss | | | 3,777 | | | | 2,528 | | | | 4,226 | | | | — | | | | — | | | | 90 | | | | 4,782 | | | | 3,777 | | | | 2,528 | | | | 15 | | | | — | | | | — | |
| Curtailment (gain) loss | | | (1,535 | ) | | | 658 | | | | — | | | | (12,804 | ) | | | — | | | | — | | | | — | | | | (1,535 | ) | | | 658 | | | | — | | | | (12,804 | ) | | | — | |
| | | Net periodic benefit expense (income) | | $ | 6,738 | | | $ | 7,072 | | | $ | 8,824 | | | $ | (11,747 | ) | | $ | 1,013 | | | $ | 1,330 | | |
| Net periodic expense (benefit) | | | $ | 8,078 | | | $ | 6,738 | | | $ | 7,072 | | | $ | 268 | | | $ | (11,747 | ) | | $ | 1,013 | |
| |
On January 1, 2008, the Company adopted a change in measurement date for its defined benefit pension plan and SERPs and the defined benefit postretirement benefit plans in accordance with applicable accounting guidance. The change in measurement date was adopted using the transition method of measuring its plan assets and benefit obligations as of January 1, 2008. Net periodic costs of $0.4 million for the period from the Company’s previous measurement date of November 30, 2007 through January 1, 2008 were recognized as a separate adjustment to “Retained loss,” net of tax. Changes in the fair value of the plan assets and benefit obligation for this period were recognized as an adjustment of $1.5 million to the opening balance of “Accumulated other comprehensive loss” in 2008.
The Company recognized a net $1.5 million curtailment gain in 2009 from the amendment of two SERPs and accumulated participant terminations. The amendment of the postretirement benefit plan resulted in a curtailment gain of $12.8 million in 2009. During 2008, the Company recorded a curtailment loss of $0.7 million under the SERPs related to the departure of the Company’s former chief executive officer and another executive officer. The postretirement benefits expense for 2010, 2009 2008 and 20072008 was reduced by less than $0.4 million due to subsidies received under the Medicare Prescription Drug, Improvement and Modernization Act of 2003. Subsidies to be received under the Medicare Act in 20102011 are not expected to be material.
Amounts recognized in other comprehensive income (loss) and net periodic benefit expense as of December 31 are as follows:
| | | | | | | | | |
| | | 2010 | |
| | | Pension and
| | | Postretirement
| |
| (Amounts in thousands) | | SERPs | | | Benefits | |
| | |
| |
| Net actuarial loss | | $ | 10,150 | | | $ | 1,100 | |
| Prior service credit | | | — | | | | (4,153 | ) |
| Amortization of net actuarial loss | | | (4,782 | ) | | | (15 | ) |
| Amortization of prior service cost | | | (84 | ) | | | — | |
| |
| |
| Total recognized in other comprehensive income (loss) | | $ | 5,284 | | | $ | (3,068 | ) |
| |
| |
| Total recognized in net periodic expense | | $ | 8,078 | | | $ | 268 | |
| |
| |
| Total recognized in net periodic expense and other comprehensive income (loss) | | $ | 13,362 | | | $ | (2,800 | ) |
| |
| |
F-35
F-36
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | |
| | | 2009 | |
| | | Pension and
| | | Postretirement
| |
| (Amounts in thousands) | | SERPs | | | Benefits | |
| | |
| |
| Net actuarial loss | | $ | 2,837 | | | $ | 3,086 | |
| Amortization of net actuarial loss | | | (3,777 | ) | | | — | |
| Amortization of prior service (cost) credit | | | (346 | ) | | | 352 | |
| Curtailment gain (loss) | | | | | | | | |
| Prior service (costs) credit | | | (2,124 | ) | | | 1,839 | |
| Net actuarial loss | | | (2,577 | ) | | | (973 | ) |
| |
| |
| Total recognized in other comprehensive income (loss) | | $ | (5,987 | ) | | $ | 4,304 | |
| |
| |
| Total recognized in net periodic expense (benefit) | | $ | 6,738 | | | $ | (11,747 | ) |
| |
| |
| Total recognized in net periodic expense (benefit) and other comprehensive income (loss) | | $ | 751 | | | $ | (7,443 | ) |
| |
| |
Amounts recognized in other comprehensive income (loss) and net periodic benefit expense for the year ended December 31, 2009 are as follows:
| | | | | | | | | |
| | | Pension and
| | | Postretirement
| |
| | | SERPs | | | Benefits | |
| | |
| |
| Net actuarial loss | | $ | 2,837 | | | $ | 3,086 | |
| Amortization of net actuarial loss | | | (3,777 | ) | | | — | |
| Amortization of prior service (cost) credit | | | (346 | ) | | | 352 | |
| Curtailment (gain) loss | | | | | | | | |
| Prior service costs | | | (2,124 | ) | | | 1,839 | |
| Net actuarial (gain) loss | | | (2,577 | ) | | | (973 | ) |
| |
| |
| Total recognized in other comprehensive income (loss) | | $ | (5,987 | ) | | $ | 4,304 | |
| |
| |
| Total recognized in net periodic benefit expense (income) | | $ | 6,738 | | | $ | (11,747 | ) |
| |
| |
| Total recognized in net periodic benefit expense (income) and other comprehensive income (loss) | | $ | 751 | | | $ | (7,443 | ) |
| |
| |
| | | | | | | | | |
| | | 2008 | |
| | | Pension and
| | | Postretirement
| |
| (Amounts in thousands) | | SERPs | | | Benefits | |
| | |
| |
| Net actuarial loss (gain) | | | 48,039 | | | | (442 | ) |
| Amortization of net actuarial loss | | | (2,740 | ) | | | — | |
| Amortization of prior service (cost) credit | | | (414 | ) | | | 352 | |
| |
| |
| Total recognized in other comprehensive income (loss) | | $ | 44,885 | | | $ | (90 | ) |
| |
| |
| Total recognized in net periodic expense | | $ | 7,072 | | | $ | 1,013 | |
| |
| |
| Total recognized in net periodic expense and other comprehensive income (loss) | | $ | 51,957 | | | $ | 923 | |
| |
| |
The estimated net loss and prior service cost for the defined benefit pension plan and SERPs that will be amortized from “Accumulated other comprehensive loss” into “Net periodic benefit expense” during 20102011 is $4.8$6.3 million ($3.03.9 million net of tax) and $0.1 million (lessless than $0.1 million, respectively. The estimated net of tax), respectively. Forloss and prior service credit for the for the postretirement benefit plans therethat will be no costs amortized from “Accumulated other comprehensive loss” into “Net periodic benefit expense” during 20102011 is $0.2 million ($0.1 million, net of tax) and $0.6 million ($0.4 million net of tax), respectively. These amounts are a result of the plan amendment to the postretirement benefit plans effective in 2011 as all plans are frozen.discussed further above.
F-37
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The benefit obligation and plan assets, changes to the benefit obligation and plan assets, and the funded status of the defined benefit pension plan and SERPs and the postretirement benefit plans as of and for the year ended December 31 are as follows:
| | | | | | | | | | | | | | | | | |
| | | Pension and SERPs | | | Postretirement Benefits | |
| (Amounts in thousands) | | 2009 | | | 2008 | | | 2009 | | | 2008 | |
| | |
| |
| Change in benefit obligation: | | | | | | | | | | | | | | | | |
| Benefit obligation at the beginning of the year | | $ | 207,454 | | | $ | 199,728 | | | $ | 13,416 | | | $ | 12,680 | |
| Service cost | | | 894 | | | | 1,069 | | | | 572 | | | | 543 | |
| Interest cost | | | 12,659 | | | | 12,678 | | | | 837 | | | | 822 | |
| Actuarial loss (gain) | | | 9,352 | | | | 6,280 | | | | 2,018 | | | | (442 | ) |
| Plan amendments | | | (6,236 | ) | | | — | | | | (11,937 | ) | | | — | |
| Adjustment for change in measurement date | | | — | | | | 490 | | | | — | | | | 68 | |
| Medicare Part D reimbursements | | | — | | | | — | | | | 3 | | | | 8 | |
| Benefits paid | | | (12,507 | ) | | | (12,790 | ) | | | (388 | ) | | | (263 | ) |
| |
| |
| Benefit obligation at the end of the year | | $ | 211,616 | | | $ | 207,455 | | | $ | 4,521 | | | $ | 13,416 | |
| |
| |
F-36
| | | | | | | | | | | | | | | | | |
| | | Pension and SERPs | | | Postretirement Benefits | |
| (Amounts in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
| | |
| |
| Change in benefit obligation: | | | | | | | | | | | | | | | | |
| Benefit obligation at the beginning of the year | | $ | 211,616 | | | $ | 207,454 | | | $ | 4,521 | | | $ | 13,416 | |
| Service cost | | | — | | | | 894 | | | | — | | | | 572 | |
| Interest cost | | | 11,876 | | | | 12,659 | | | | 253 | | | | 837 | |
| Actuarial loss | | | 11,417 | | | | 9,352 | | | | 1,100 | | | | 2,018 | |
| Plan amendments | | | — | | | | (6,236 | ) | | | (4,154 | ) | | | (11,937 | ) |
| Medicare Part D reimbursements | | | — | | | | — | | | | 32 | | | | 3 | |
| Benefits paid | | | (13,418 | ) | | | (12,507 | ) | | | (725 | ) | | | (388 | ) |
| |
| |
| Benefit obligation at the end of the year | | $ | 221,491 | | | $ | 211,616 | | | $ | 1,027 | | | $ | 4,521 | |
| |
| |
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension and SERPs | | Postretirement Benefits | | | Pension and SERPs | | Postretirement Benefits | |
| (Amounts in thousands) | | 2009 | | 2008 | | 2009 | | 2008 | | | 2010 | | 2009 | | 2010 | | 2009 | |
| | | | | |
| |
| Change in plan assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair value of plan assets at the beginning of the year | | $ | 95,551 | | | $ | 135,997 | | | $ | — | | | $ | — | | | $ | 102,908 | | | $ | 95,551 | | | $ | — | | | $ | — | |
| Actual return on plan assets | | | 15,918 | | | | (30,626 | ) | | | — | | | | — | | | | 9,931 | | | | 15,918 | | | | — | | | | — | |
| Employer contributions | | | 3,946 | | | | 3,636 | | | | 388 | | | | 263 | | | | 7,715 | | | | 3,946 | | | | 725 | | | | 388 | |
| Adjustment for change in measurement date | | | — | | | | (666 | ) | | | — | | | | — | | |
| Benefits paid | | | (12,507 | ) | | | (12,790 | ) | | | (388 | ) | | | (263 | ) | | | (13,418 | ) | | | (12,507 | ) | | | (725 | ) | | | (388 | ) |
| | | Fair value of plan assets at the end of the year | | $ | 102,908 | | | $ | 95,551 | | | $ | — | | | $ | — | | | $ | 107,136 | | | $ | 102,908 | | | $ | — | | | $ | — | |
| | | Unfunded status at the end of the year | | $ | (108,708 | ) | | $ | (111,904 | ) | | $ | (4,521 | ) | | $ | (13,416 | ) | | $ | (114,355 | ) | | $ | (108,708 | ) | | $ | (1,027 | ) | | $ | (4,521 | ) |
| |
The pension plan’s unfunded status decreasedof the Pension and SERPs increased by approximately 35 percent despite an increase inas the benefit obligation asincreased $9.9 million while the fair value of the pension plan assets increased $7.4$4.2 million during the year. The unfunded status of the defined benefit pension plan was $45.8 million and $43.0 million at December 31, 2010 and 2009, respectively, and the unfunded status of the SERPs was $68.6 million and $65.7 million at December 31, 2009.2010 and 2009, respectively.
Following are the components recognized in the Consolidated Balance Sheets relating to the defined benefit pension plan and SERPs and the postretirement benefit plans at December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension and SERPs | | Postretirement Benefits | | Pension and SERPs | | Postretirement Benefits |
| (Amounts in thousands) | | 2009 | | 2008 | | 2009 | | 2008 | | 2010 | | 2009 | | 2010 | | 2009 |
| | |
| Components recognized in the Consolidated Balance Sheets: | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension and other postretirement benefits liability | | $ | (108,708 | ) | | $ | (111,904 | ) | | $ | (4,521 | ) | | $ | (13,416 | ) | | $ | (114,355 | ) | | $ | (108,708 | ) | | $ | (1,027 | ) | | $ | (4,521 | ) |
| Deferred tax asset (liability) | | | 34,691 | | | | 36,966 | | | | 264 | | | | (474 | ) | |
| Accumulated other comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized losses (gains) for pension and postretirement benefits, net of tax | | | 56,378 | | | | 58,559 | | | | 542 | | | | (791 | ) | |
| Unrealized losses for pension and postretirement benefits, net of tax | | | | 59,706 | | | | 56,378 | | | | 1,067 | | | | 542 | |
| Prior service cost (credit) for pension and postretirement benefits, net of tax | | | 223 | | | | 1,754 | | | | — | | | | (1,335 | ) | | | 171 | | | | 223 | | | | (2,575 | ) | | | — | |
F-38
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The projected benefit obligation and accumulated benefit obligation for the defined benefit pension plan, SERPs and the postretirement benefit plans are in excess of the fair value of plan assets as shown below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Plan | | SERPs | | Postretirement Benefits | | Pension Plan | | SERPs | | Postretirement Benefits |
| (Amounts in thousands) | | 2009 | | 2008 | | 2009 | | 2008 | | 2009 | | 2008 | | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 |
| | |
| Projected benefit obligation | | $ | 145,933 | | | $ | 139,080 | | | $ | 65,683 | | | $ | 68,375 | | | $ | 4,521 | | | $ | 13,416 | | | $ | 152,904 | | | $ | 145,933 | | | $ | 68,587 | | | $ | 65,683 | | | $ | 1,027 | | | $ | 4,521 | |
| Accumulated benefit obligation | | | 145,933 | | | | 139,080 | | | | 65,683 | | | | 68,375 | | | | — | | | | — | | | | 152,904 | | | | 145,933 | | | | 68,587 | | | | 65,683 | | | | — | | | | — | |
| Fair value of plan assets | | | 102,909 | | | | 95,551 | | | | — | | | | — | | | | — | | | | — | | | | 107,136 | | | | 102,908 | | | | — | | | | — | | | | — | | | | — | |
Estimated future benefit payments for the defined benefit pension plan and SERPs and the postretirement benefit plans are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015-19 | | 2011 | | 2012 | | 2013 | | 2014 | | 2015 | | 2016-20 |
| | |
| Pension and SERPs | | $ | 13,815 | | | $ | 13,886 | | | $ | 14,249 | | | $ | 13,946 | | | $ | 17,543 | | | $ | 79,514 | | | $ | 14,284 | | | $ | 14,602 | | | $ | 14,393 | | | $ | 14,478 | | | $ | 20,000 | | | $ | 74,274 | |
| Postretirement benefits | | | 315 | | | | 315 | | | | 313 | | | | 329 | | | | 339 | | | | 1,608 | | | | 111 | | | | 95 | | | | 105 | | | | 112 | | | | 93 | | | | 334 | |
F-37
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company has a minimum required contribution of approximately $2.6$7.9 million for the defined benefit pension plan in 2010,2011, and will continue to make contributions to the SERPs and the postretirement benefit plans to the extent benefits are paid. Aggregate benefits paid for the unfunded plans are expected to be $4.4$4.6 million in 2010.2011.
Employee Savings Plan — The Company has an employee savings plan that qualifies under Section 401(k) of the Internal Revenue Code of 1986, as amended. Contributions to, and costs of, the 401(k) defined contribution plan totaled $3.7$3.4 million, $3.7 million and $3.4$3.7 million in 2010, 2009 2008 and 2007,2008, respectively. MoneyGram does not have an employee stock ownership plan.
Deferred Compensation Plans — Under the Deferred Compensation Plan for Directors of MoneyGram International, Inc., non-employee directors were allowed to defer all or part of their retainers, fees and stock awards in the form of stock units or cash prior to 2009. In 2007, the plan was amended to require that a portion of the retainer received by non-employee directors be deferred in stock units. In 2008, the plan was amended to state that directors who join the Board on or after March 24, 2008 shall not be eligible to participate in the plan. Effective January 1, 2009, voluntary deferrals of director fees and stock unit retainers under the plan were permanently discontinued. Deferrals made prior to 2009 will remain in the plan until such amounts become distributable in accordance with the Director’s deferral elections. In April 2010, the plan was amended to convert stock unit accounts into cash. Deferred cash accounts are credited quarterly with interest based on the one-year Constant Maturity rate.
Under the Deferred Compensation Plan for Management, prior to 2010, certain employees maycould elect to defer their base compensation and incentive pay in the form of cash. In addition, the Company makesmade contributions to thecertain participants’ accounts for profit sharing contributions beyond the IRS qualified plan limits. In April 2010, the plan was amended to discontinue all future deferrals under the plan. Management deferred accounts are generally payable on the deferral date based upon the timing and method elected by the participant. DeferredIn April 2010, the plan was amended to convert stock unit accounts are credited quarterly with dividend equivalents and will be adjusted in the event of a change in the Company’s capital structure from a stock split, stock dividend or other change.to cash. Deferred cash accounts are credited quarterly with interest at the one-year Constant Maturity rate.
In February 2011, the plan was amended to (a) terminate all employee deferral accounts on the amendment date and pay each participant the balance of the participant’s account in a long-term, medium-quality bond rate. Bothlump sum one year from termination and (b) cash out all employer deferral accounts if and when the account balance falls below the applicable dollar amount under Section 402(g)(1)(B) of the Internal Revenue Code.
F-39
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The deferred compensation plans are unfunded and unsecured, and the Company is not required to physically segregate any assets in connection with the deferred accounts. The Company has rabbi trusts associated with each deferred compensation plan which are funded through voluntary contributions by the Company. At December 31, 20092010 and 2008,2009, the Company had a liability related to the deferred compensation plans of $2.8$3.8 million and $2.6$5.0 million, respectively, recorded in the “Accounts payable and other liabilities” component in the Consolidated Balance Sheets. The rabbi trusts had a market value of $10.0$10.7 million and $9.2$10.0 million at December 31, 20092010 and 2008,2009, respectively, recorded in “Other assets” in the Consolidated Balance Sheets.
| |
Note 1211 — | Mezzanine Equity |
Preferred Stock — In connection with the recapitalization,2008 Recapitalization, the Company issued 495,000 shares of B Stock and 265,000 shares of B-1 Stock to the Investors for a purchase price of $495.0 million and $265.0 million, respectively. As a result of the issuance of the Series B Stock, the Investors had an equity interest of approximately 79 percent on March 25, 2008. With the accrual of dividends, the Investors had an equity interest of approximately 8284 percent and 8082 percent on December 31, 20092010 and 2008,2009, respectively. In addition, the Company capitalized $107.5 million of transaction costs, including $7.5 million paid through the issuance of 7,500 shares of B-1 Stock to Goldman Sachs. The B Stock is convertible into shares of common stock of the Company at a price of $2.50 per share, subject to adjustment. The B-1 Stock is convertible into B Stock by any stockholder other than Goldman Sachs. While held by Goldman Sachs, the B-1 Stock is convertible into Series D Participating Convertible Preferred Stock (“Series D Stock”), which is a non-voting common equivalent stock..
The Series B Stock pays a cash dividend of 10 percent. At the Company’s option, dividends may be accrued through March 25, 2013 at a rate of 12.5 percent in lieu of paying a cash dividend. If the Company is unable to pay the dividends in cash after March 25, 2013, dividends will accrue at a rate of 15 percent. The Company anticipates that it will accrue dividends on the Series B Stock for at least the next 12 months. While no dividends have been declared as of December 31, 2009,2010, the Company has accrued dividends through a charge to “Additional paid-in capital” to the extent available and through a charge to “Retained loss” for the remainder as
F-38
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accumulated and unpaid dividends are included in the redemption price of the Series B Stock. The Series B Stock also participates in any dividends declared on the common stock on an as-converted basis.
The Series B Stock may be redeemed at the option of the Company after March 25, 2013 if the average market price of its common stock trades aboveexceeds $15.00, subject to adjustment, forduring a period of thirty consecutive trading days. The Series B Stock will be redeemable at the option of the Investors after March 25, 2018 or upon a change of control. As of December 31, 2009,2010, the Company believes that it is not probable that the Series B Stock will become redeemable as (a) the contingencies for the change of control redemption option and the optional redemption by the Company are not met, and (b) these two contingencies may occur prior to the ability of the Investors to exercise their option to redeem. The B Stock votes as a class with the common stock of the Company and has a number of votes equal to (i) the number of shares of common stock issuable if all outstanding shares of B Stock were converted plus (ii) the number of shares of common stock issuable if all outstanding shares of B-1 Stock were converted into B Stock and subsequently converted into common stock.
F-40
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Series B Stock is recorded in the Company’s Consolidated Balance Sheets as “Mezzanine Equity”equity” as it has redemption features not solely within the Company’s control. The conversion feature in the B Stock met the definition of an embedded derivative requiring bifurcation during a portion of 2008. The change of control redemption option contained in the Series B Stock meets the definition of an embedded derivative requiring bifurcation. The original fair value of the embedded derivatives of $54.8 million was recognized as a reduction of “Mezzanine equity.” See Note 76 —Derivative Financial Instrumentsfor further discussion of the embedded derivatives in the Series B Stock. The Company capitalized transaction costs totaling $37.6 million and $17.2 million relating to the issuance of the B Stock and B-1 Stock, respectively, through a reduction of “Mezzanine Equity.equity.” As it is probable the Series B Stock will become redeemable in 2018, these transaction costs, along with the discount recorded in connection with the embedded derivatives, will be accreted to the Series B Stock redemption value of $767.5 million plus any accumulated but unpaid dividends over a10-year period using the effective interest method. Following is a summary of mezzanine equity activity:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Series
| | | | | | | Series
| |
| (Amounts in thousands) | | B Stock | | B-1 Stock | | B Stock | | | B Stock | | B-1 Stock | | B Stock | |
| | | |
| | |
| Balance at December 31, 2007 | | $ | — | | | $ | — | | | $ | — | | |
| Issuance of shares | | | 495,000 | | | | 272,500 | | | | 767,500 | | |
| Bifurcation of embedded derivative | | | (54,797 | ) | | | — | | | | (54,797 | ) | |
| Transaction costs related to the issuance of shares | | | (37,648 | ) | | | (17,172 | ) | | | (54,820 | ) | |
| Dividends accrued | | | 49,399 | | | | 27,194 | | | | 76,593 | | |
| Accretion | | | 6,454 | | | | 1,282 | | | | 7,736 | | |
| | | | |
| | Balance at December 31, 2008 | | | 458,408 | | | | 283,804 | | | | 742,212 | | | $ | 458,408 | | | $ | 283,804 | | | $ | 742,212 | |
| Dividends accrued | | | 71,124 | | | | 39,155 | | | | 110,279 | | | | 71,124 | | | | 39,155 | | | | 110,279 | |
| Accretion | | | 8,539 | | | | 1,674 | | | | 10,213 | | | | 8,539 | | | | 1,674 | | | | 10,213 | |
| Tax benefit on transaction costs | | | 1,013 | | | | 611 | | | | 1,624 | | | | 1,013 | | | | 611 | | | | 1,624 | |
| Balance at December 31, 2009 | | $ | 539,084 | | | $ | 325,244 | | | $ | 864,328 | | |
| | | Balance at December 31, 2009 | | | | 539,084 | | | | 325,244 | | | | 864,328 | |
| Dividends accrued | | | | 80,622 | | | | 44,383 | | | | 125,005 | |
| Accretion | | | | 8,493 | | | | 1,527 | | | | 10,020 | |
| | | |
| | | |
| Balance at December 31, 2010 | | | $ | 628,199 | | | $ | 371,154 | | | $ | 999,353 | |
| | | |
| | | |
Equity Registration Rights Agreement — As part ofThe Company and the recapitalization, the CompanyInvestors also entered into a Registration Rights Agreement (the “Equity Registration Rights Agreement”) on March 25, 2008, with respect to the Investors.Series B Stock and D Stock, and the common stock owned by the Investors and their affiliates (collectively, the “Registrable Securities”). Under the terms of the Equity Registration Rights Agreement, we are required, after a specified holding period, the Company mustto use our reasonable best efforts to promptly file with the SEC a shelf registration statement with the SEC relating to securities held by the Investors. The Company is generallyoffer and sale of the Registrable Securities. We are obligated to keep thesuch shelf registration statement continuously effective for up to 15 years or, ifunder the Securities Act of 1933, as amended (the “Securities Act”), until the earlier untilof (1) the date as of which all of the securities owned by the InvestorsRegistrable Securities have been sold.sold, (2) the date as of which each of the holders of the Registrable Securities is permitted to sell its Registrable Securities without registration pursuant to Rule 144 under the Securities Act and (3) fifteen years. The Investorsholders of the Registrable Securities are also entitled to five demand registrations and unlimited piggyback registrations.registrations during the term of the Equity Registration Rights Agreement. On December 14, 2010, we filed a shelf registration statement onForm S-3 with the Securities and Exchange Commission which would permit the offer and sale of the Registrable Securities, as required by the terms of the Equity Registration Rights Agreement. The registration statement also would permit the Company to offer and sell up to $500 million of its common stock, preferred stock, debt securities or any combination of these, from time to time, subject to market conditions and the Company’s capital needs. The registration statement is subject to review by the SEC and has not yet been declared effective by the SEC.
F-39F-41
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 1312 — | Stockholders’ Deficit |
Rights Agreement — In connection with the spin-off, MoneyGram adopted a rights agreement (the “Rights Agreement”) by and between the Company and Wells Fargo Bank, N.A., as the rights agent. The preferred share purchase rights (the “rights”) issuable under the Rights Agreement were attached to the shares of MoneyGram common stock distributed in the spin-off. In addition, pursuant to the Rights Agreement, one right was issued with each share of MoneyGram common stock issued after the spin-off.
As part of the recapitalization, the Company amended the Rights Agreement with Wells Fargo Bank, N.A. as rights agent to exempt the issuance of the Series B Stock from the Rights Agreement. On November 3, 2008, the Company amended the Rights Agreement, accelerating the expiration date to November 10, 2008. As of December 31, 2008, the Rights Agreement is no longer in effect.
Preferred Stock — The Company’s Certificate of Incorporation provides for the issuance of up to 7,000,000 shares of preferred stock that may be issued in one or more series, with each series to have certain rights and preferences as shall be determined by unlimited discretion of the Company’s Board of Directors, including, without limitation, voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences. At December 31, 20092010 and 2008,2009, the Company had the following designations of preferred shares: 2,000,000 shares of Series A junior participating preferred stock (“Series A Stock”); 800,000760,000 shares of B Stock; 500,000 shares of B-1 Stock; and 200,000 shares of Series D Stock. At December 31, 20092010 and 2008,2009, no Series A Stock or Series D Stock is issued or outstanding. See Note 1211 —Mezzanine Equityfor further information on the B Stock, B-1 Stock and Series D Stock.
Common Stock — The Company’s Certificate of Incorporation provides for the issuance of up to 1,300,000,000 shares of common stock with a par value of $0.01. In connection with the spin-off, MoneyGram was recapitalized such that there were 88,556,077 shares of MoneyGram common stock issued. The holders of MoneyGram common stock are entitled to one vote per share on all matters to be voted upon by its stockholders. The holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. The determination to pay dividends on common stock will be at the discretion of the Board of Directors and will depend on the Company’s financial condition, results of operations, cash requirements, prospects and such other factors as the Board of Directors may deem relevant. No dividends were paid in 2009.2010. Under the terms of the equity securities and debt issued in connection with the recapitalization,2008 Recapitalization, the Company’s ability to declare or pay dividends or distributions to the stockholders of the Company’s common stock is severely limited. The following is a summary of common stock issued and outstanding at December 31:
| | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | | 2010 | | 2009 | |
| | | | | |
| |
| Common shares issued | | | 88,556 | | | | 88,556 | | | | 88,556 | | | | 88,556 | |
| Treasury stock | | | (6,041 | ) | | | (5,999 | ) | | | (4,936 | ) | | | (6,041 | ) |
| | | Common shares outstanding | | | 82,515 | | | | 82,557 | | | | 83,620 | | | | 82,515 | |
| |
Treasury Stock — The Board of Directors has authorized the repurchase of a total of 12,000,000 shares. As of December 31, 2009,2010, the Company has repurchased 6,795,000 shares of common stock under this authorization and
F-40
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
has remaining authorization to repurchase up to 5,205,000 shares. There were no shares repurchased during 20082010 or 2009. Following is a summary of treasury stock share activity:
| | | | | |
| | | Treasury Stock
| |
| (Amounts in thousands) | | Shares | |
| | |
|
Balance at December 31, 2007 | | | 5,911 | |
Submission of shares for withholding taxes upon release of restricted stock and
forfeiture of shares of restricted stock | | | 88 | |
| |
| |
| Balance at December 31, 2008 | | | 5,999 | |
Submission of shares for withholding taxes upon release of restricted stock and
forfeiture of shares of restricted stock | | | 42 | |
| |
| |
| Balance at December 31, 2009 | | | 6,041 | |
Exercise of stock options and release of restricted stock, net of shares surrendered
for withholding taxes | | | (1,105 | ) |
|
|
| Balance at December 31, 2010 | | | 4,936 | |
| |
| |
F-42
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated Other Comprehensive Loss — The components of “Accumulated other comprehensive loss” at December 31 include:
| | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | | 2010 | | 2009 | |
| | | | | |
| |
Net unrealized gains on securities classified asavailable-for-sale | | $ | 16,510 | | | $ | 9,332 | | | $ | 21,296 | | | $ | 16,510 | |
| Unrealized gains on derivative financial instruments | | | — | | | | 780 | | |
| Cumulative foreign currency translation adjustments | | | 4,962 | | | | 5,368 | | | | 5,194 | | | | 4,962 | |
| Prior service cost for pension and postretirement benefits, net of tax | | | (223 | ) | | | (419 | ) | |
| Prior service credit (cost) for pension and postretirement benefits, net of tax | | | | 2,404 | | | | (223 | ) |
| Unrealized losses on pension and postretirement benefits, net of tax | | | (56,920 | ) | | | (57,768 | ) | | | (60,773 | ) | | | (56,920 | ) |
| | | Accumulated other comprehensive loss | | $ | (35,671 | ) | | $ | (42,707 | ) | | $ | (31,879 | ) | | $ | (35,671 | ) |
| |
| |
Note 1413 — | Stock-Based Compensation |
In connection with the spin-off, each holder of a Viad stock option was issued a stock option for MoneyGram common stock. The exercise price of each MoneyGram stock option issued in connection with the spin-off equals the exercise price of the Viad stock option times a fraction, the numerator of which was the closing price of a share of MoneyGram common stock on the first trading day subsequent to the date of spin-off and the denominator of which was that price plus the closing price of a share of Viad common stock on the first trading day subsequent to the date of spin-off (divided by four to reflect the post-spin Viad reverse stock split). These MoneyGram options are considered to have been issued under the MoneyGram International, Inc. 2004 Omnibus Incentive Plan. MoneyGram will take all tax deductions relating to the exercise of stock options and the vesting of restricted stock held by employees and former employees of MoneyGram, and Viad will take the deductions arising from options and restricted stock held by its employees and former employees.
On May 10, 2005, the Company’s stockholders approved the MoneyGram International, Inc. 2005 Omnibus Incentive Plan, which authorizes the issuance of awards of up to 7,500,000 shares of common stock. Effective upon the approval of the 2005 Omnibus Incentive Plan, no new awards may be granted under the 2004 Omnibus Incentive Plan. The 2005 Omnibus Incentive Plan provides for the following types of awards to officers, directors and certain key employees: (a) incentive and nonqualified stock options; (b) stock appreciation rights; (c) restricted stock and restricted stock units; (d) dividend equivalents; (e) performance based awards; and (f) stock and other stock-based awards. Shares related to forfeited and cancelled awards become available for new grants, as well as shares that are withheld for full or partial payment to the Company of the exercise price of awards. Shares that are withheld as satisfaction of tax obligations relating to an award, as well as previously issued shares used for payment of the
F-41
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
exercise price or satisfaction of tax obligations relating to an award, become available for new grants through May 10, 2015. The Company plans to satisfy stock option exercises and vesting of awards through the issuance of treasury stock. OnIn May 12, 2009, the stockholders of the Company approved a modification of the 2005 Omnibus Incentive Plan to increase the authorization for the issuance of awards from 7,500,000 shares of common stock to 47,000,000 shares of common stock. In May 2010, the stockholders of the Company approved a modification to the 2005 Omnibus Incentive Plan to increase the aggregate number of shares that may be granted to an eligible person in any calendar year from 10 million to 12 million shares, along with adding and clarifying provisions regarding certain limitations for performance awards denominated in shares and cash. As of December 31, 2009,2010, the Company has remaining authorization to issue awards of up to 12,587,4617,170,657 shares of common stock.
Stock Options — Prior to 2009, option awards were generally granted with an exercise price equal to the average of the high and low market price of the Company’s common stock on the date of grant. Beginning in 2009, option awards are generally granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. No stock options were granted in 2008. Stock options granted in 2007 become exercisable over a three-year period in an equal number of shares each year and have a term of 10 years. All outstanding stock options contain certain forfeiture and non-compete provisions.
F-43
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pursuant to the terms of all options granted in 2009 and 2010, 50 percent of the options awarded become exercisable through the passage of time (the “Time-based Tranche”) and 50 percent of the options awarded become exercisable upon the achievement of certain conditions (the “Performance-based Tranche”). The Time-based Tranche generally becomes exercisable over a five-year period in either (a) an equal number of shares each year or (b) for some issuances in 2009, a tranched vesting schedule whereby 15 percent of the Time-based Tranche vests immediately and then at rates of 10 to 20 percent each year. The Time-based Tranche for options granted to the Company’s Chairman and Chief Executive Officer becomes exercisable over a four-year period in an equal number of shares each year. The Performance-based Tranche becomes exercisable upon the achievement within five years of grant of the earlier of (a) a pre-defined common stock price for any period of 20 consecutive trading days, (b) a change in control of the Company resulting in a pre-defined per share consideration or (c) in the event the Company’s common stock does not trade on a United States exchange or trading market, a public offering resulting in the Company’s common stock meeting pre-defined equity values. All options granted in 2009 and 2010 have a term of 10 years. Options granted to the Chairman and Chief Executive Officer, as well as the Company’s former chief executive officer, contain certain forfeiture provisions, including the continuation of vesting terms for the12-month period immediately following termination by the Company without cause or voluntary termination for good reason, as defined by the award agreements. The Company’s Chairman and Chief Executive Officer was granted an option award on August 31, 2009 for 6,300,000 shares, of which 2,000,000 shares will not vest and are subject to forfeiture if the stockholders of the Company do not approve certain amendments to the MoneyGram International, Inc. 2005 Omnibus Incentive Plan. On August 31, 2009, options granted to the Company’s Chairman and Chief Executive Officer in January and May 2009 were modified to extend the timeframe under which the Performance-based Tranche may vest to August 31, 2014, provided employment is maintained through August 31, 2013. There was no incremental expense resulting from this modification.
For purposes of determining the fair value of stock option awards, the Company uses the Black-Scholes single option pricing model for the Time-based Tranches and a combination of Monte-Carlo simulation and the Black-Scholes single option pricing model for the Performance-based Tranches. Expected volatility is based on the historical volatility of the price of the Company’s common stock since the spin-off on June 30, 2004. The Company used the simplified method to estimate the expected term of the award and historical information to estimate the forfeiture rate. As the pattern of changes in the value of the Company’s common stock since late 2007 is substantially different from historical patterns, the nature of options granted since 2008 is substantially different from historical grants and there have been minimal stock option exercises since 2007, the Company is unable to make a more refined estimate than the use of the simplified method. The expected term represents the period of time that options are expected to be outstanding whileand the forfeiture rate represents the number of unvested options that will be forfeited by grantees due to termination of employment. In addition, the Company considers any expectations regarding future activity which could impact the expected term and forfeiture rate. The risk-free rate for the Black-Scholes model is based on the United States Treasury yield curve in effect at the time of grant for periods within the expected term of the option, while the risk-free rate for the Monte-Carlo simulation is based on the five-year United States Treasury yield in effect at the time of grant. Compensation cost, net of expected forfeitures, is recognized using a straight-line method over the vesting or service period. The following table provides weighted-average grant-date fair value and assumptions utilized to estimate the grant-date fair value of the options granted during the years ended December 31:
| | | | | | | |
| | | 2010 | | 2009 | | |
| |
| |
| Expected dividend yield | | 0.0% | | 0.0% | | |
| Expected volatility | | 72.9%-74.8% | | 72.8%-76.9% | | |
| Risk-free interest rate | | 1.8%-3.3% | | 2.3%-3.2% | | |
| Expected life | | 5.3-6.5 years | | 5.3-6.5 years | | |
| Weighted-average grant-date fair value per option | | $2.05 | | $1.49 | | |
F-42F-44
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
estimate the grant-date fair value of the options granted during the years ended December 31. No stock options were granted in 2008.
| | | | | |
| | | 2009 | | 2007 |
| |
| |
| Expected dividend yield | | 0.0% | | 0.7% |
| Expected volatility | | 72.8%-76.9% | | 29.1% |
| Risk-free interest rate | | 2.3%-3.2% | | 4.6% |
| Expected life | | 5.3-6.5 years | | 6.5 years |
| Weighted-average grant-date fair value per option | | $1.49 | | $11.47 |
| |
| |
Following is a summary of stock option activity for 2009:2010:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Weighted-
| | | | | | | | | Weighted-
| | | |
| | | | | Weighted-
| | Average
| | Aggregate
| | | | | Weighted-
| | Average
| | Aggregate
| |
| | | | | Average
| | Remaining
| | Intrinsic
| | | | | Average
| | Remaining
| | Intrinsic
| |
| | | | | Exercise
| | Contractual
| | Value
| | | | | Exercise
| | Contractual
| | Value
| |
| | | Shares | | Price | | Term | | ($000) | | | Shares | | Price | | Term | | ($000) | |
| | | | | |
| |
| Options outstanding at December 31, 2008 | | | 2,970,126 | | | $ | 20.49 | | | | | | | | | | |
| Options outstanding at December 31, 2009 | | | | 38,145,414 | | | $ | 3.35 | | | | | | | | | |
| Granted | | | 43,250,000 | | | | 2.18 | | | | | | | | | | | | 13,000,000 | | | | 2.87 | | | | | | | | | |
| Exercised | | | — | | | | — | | | | | | | | | | | | (1,098,750 | ) | | | 1.85 | | | | | | | | | |
| Forfeited/Expired | | | (8,074,712 | ) | | | 3.38 | | | | | | | | | | | | (10,149,190 | ) | | | 3.08 | | | | | | | | | |
| | | Options outstanding at December 31, 2009 | | | 38,145,414 | | | $ | 3.35 | | | | 8.38 years | | | $ | 22,307 | | |
| Options outstanding at December 31, 2010 | | | | 39,897,474 | | | $ | 3.31 | | | | 8.49 years | | | $ | 12,766 | |
| | | Vested or expected to vest at December 31, 2009 | | | 36,101,090 | | | $ | 3.41 | | | | 8.39 years | | | $ | 21,074 | | |
| Vested or expected to vest at December 31, 2010 | | | | 39,528,786 | | | $ | 3.32 | | | | 8.50 years | | | $ | 12,670 | |
| | | Options exercisable at December 31, 2009 | | | 3,969,596 | | | $ | 12.21 | | | | 5.64 years | | | $ | 1,302 | | |
| Options exercisable at December 31, 2010 | | | | 7,007,474 | | | $ | 6.96 | | | | 6.70 years | | | $ | 3,102 | |
| |
Restricted Stock and Performance-Based Restricted Stock — The Company has granted both restricted stock and performance-based restricted stock. The vesting of restricted stock is typically three years from the date of grant. All performance-based restricted stock awards have vested as of December 31, 2009.
Restricted stock awards were valued at the quoted market price of the Company’s common stock on the date of grant and expensed using the straight-line method over the vesting or service period of the award. Following is a summary of restricted stock activity for 2009:2010:
| | | | | | | | | | | | | | | | | |
| | | | | Weighted-
| | | | | Weighted
| |
| | | Total
| | Average
| | | Total
| | Average
| |
| | | Shares | | Price | | | Shares | | Price | |
| | | | | |
| |
| Restricted stock outstanding at December 31, 2008 | | | 91,671 | | | $ | 28.25 | | |
| Restricted stock outstanding at December 31, 2009 | | | | 9,674 | | | $ | 29.26 | |
| Vested | | | (56,117 | ) | | | 27.62 | | | | (9,674 | ) | | | 29.26 | |
| Forfeited | | | (25,880 | ) | | | 29.26 | | |
| | | Restricted stock outstanding at December 31, 2009 | | | 9,674 | | | $ | 29.26 | | |
| Restricted stock outstanding at December 31, 2010 | | | | — | | | $ | — | |
| |
Restricted Stock Units — In May 2010, the Company granted an aggregate of 223,888 restricted stock units to members of the Board of Directors, excluding the Chairman of the Board, as compensation for services to be provided. The restricted stock units vest on the first anniversary of their issuance and may only be settled in the Company’s common stock. The restricted stock units were valued at the quoted market price of the Company’s common stock on the date of grant and are being expensed to the “Compensation and benefits” line in the Consolidated Statements of Income (Loss) using the straight-line method over the vesting period.
Following is a summary of information related to the Company’s stock-based awards:
| | | | | | | | | | | | | |
| (Amounts in thousands) | | 2010 | | 2009 | | 2008 |
| |
| |
| Expense recognized related to options | | $ | 25,643 | | | $ | 14,459 | | | $ | 3,274 | |
| Expense recognized related to restricted stock | | | 8 | | | | (307 | ) | | | 417 | |
| Expense recognized related to restricted stock units | | | 360 | | | | — | | | | — | |
| Intrinsic value of options exercised | | | 1,263 | | | | — | | | | — | |
| Market value of restricted stock vested | | | 283 | | | | 1,550 | | | | 1,200 | |
| Cash received from option exercises | | | 2,031 | | | | — | | | | — | |
The following represents stock-based compensation information as of December 31, 2010:
| | | | | | | | | |
| | | | | Restricted Stock
|
| (Amounts in thousands) | | Options | | Units |
| |
| |
| Unrecognized compensation expense | | $ | 35,788 | | | $ | 240 | |
| Remaining weighted-average vesting period | | | 1.4 years | | | | 0.4 years | |
F-43F-45
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Following is a summary of pertinent information related to the Company’s stock-based awards:
| | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | | 2008 | | | 2007 | |
| | |
| |
| Expense recognized related to options | | $ | 14,459 | | | $ | 3,274 | | | $ | 3,852 | |
| Expense recognized related to restricted stock | | | (307 | ) | | | 417 | | | | 2,247 | |
| Intrinsic value of options exercised | | | — | | | | — | | | | 3,582 | |
| Cash received from option exercises | | | — | | | | — | | | | 6,606 | |
| Tax benefit realized for tax deductions from option exercises | | | — | | | | — | | | | 1,068 | |
| | | | | | | | | |
| (Amounts in thousands) | | Options | | Restricted Stock |
| |
| |
| Unrecognized compensation expense | | $ | 42,749 | | | $ | 8 | |
| Remaining weighted-average vesting period | | | 1.5 years | | | | 0.1 years | |
| |
| |
The components of loss from continuing operationsincome (loss) before income taxes are as follows for the year ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | | |
| |
| United States | | $ | (19,975 | ) | | $ | (345,063 | ) | | $ | (993,273 | ) | | $ | 56,872 | | | $ | (19,975 | ) | | $ | (345,063 | ) |
| Foreign | | | (2,347 | ) | | | 7,872 | | | | 6 | | | | 1,508 | | | | (2,347 | ) | | | 7,872 | |
| | | Loss from continuing operations before income taxes | | $ | (22,322 | ) | | $ | (337,191 | ) | | $ | (993,267 | ) | |
| Income (loss) before income taxes | | | $ | 58,380 | | | $ | (22,322 | ) | | $ | (337,191 | ) |
| |
International income consists of statutory income and losses from the Company’s international subsidiaries. Most of the Company’s wholly owned subsidiaries recognize revenue based solely on services agreements with MPSI. Income tax (benefit) expense related to continuing operations(benefit) is as follows for the year ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | | |
| |
| Current: | | | | | | | | | | | | | | | | | | | | | | | | |
| Federal | | $ | (8,172 | ) | | $ | (55,980 | ) | | $ | 35,445 | | | $ | (757 | ) | | $ | (8,172 | ) | | $ | (55,980 | ) |
| State | | | 669 | | | | (8,064 | ) | | | 3,999 | | | | 147 | | | | 669 | | | | (8,064 | ) |
| Foreign | | | 2,002 | | | | (13,938 | ) | | | 1,400 | | | | 5,166 | | | | 2,002 | | | | (13,938 | ) |
| | | Current income tax (benefit) expense | | | (5,501 | ) | | | (77,982 | ) | | | 40,844 | | |
| Deferred income tax (benefit) expense | | | (14,915 | ) | | | 2,176 | | | | 37,637 | | |
| Current income tax expense (benefit) | | | | 4,556 | | | | (5,501 | ) | | | (77,982 | ) |
| Deferred income tax expense (benefit) | | | | 10,023 | | | | (14,915 | ) | | | 2,176 | |
| | | Income tax (benefit) expense | | $ | (20,416 | ) | | $ | (75,806 | ) | | $ | 78,481 | | |
| Income tax expense (benefit) | | | $ | 14,579 | | | $ | (20,416 | ) | | $ | (75,806 | ) |
| |
As of December 31, 20092010 and 2008,2009, the Company had a net income tax payable of $6.3 million recorded in the “Accounts payable and other liabilities” line in the Consolidated Balance Sheets and a net income tax receivable of $1.3 million and $35.9 million, respectively, recorded in the “Other assets” line in the Consolidated Balance Sheets.Sheets, respectively. The Company received a $3.8 million federal income tax refund in 2010 and a $43.5 million federal income tax refund in 2009. Income taxes paid were $3.9 million, $2.2 million and $1.7 million for 2010, 2009 and a $24.7 million2008, respectively.
A reconciliation of the expected federal income tax refund in 2008. Income tax expense totaling $1.9 million in 2007at statutory rates for year ended to the actual taxes provided is included in “Loss from discontinued operations, net of tax” in the Consolidated Statements of Loss. Federal and state taxes paid were $2.2 million, $1.7 million and $16.0 million foras follows:
| | | | | | | | | | | | | |
| (Amounts in thousands) | | 2010 | | | 2009 | | | 2008 | |
| | |
| |
| Income tax at statutory federal income tax rate | | $ | 20,433 | | | $ | (7,813 | ) | | $ | (118,017 | ) |
| Tax effect of: | | | | | | | | | | | | |
| State income tax, net of federal income tax effect | | | 1,309 | | | | 2,051 | | | | 1,634 | |
| Valuation allowance | | | (10,016 | ) | | | (16,090 | ) | | | 44,639 | |
| Non-taxable loss on embedded derivatives | | | — | | | | — | | | | 5,611 | |
| Decrease in tax reserve | | | (377 | ) | | | (2,469 | ) | | | (7,761 | ) |
| Other | | | 3,230 | | | | 3,905 | | | | (1,186 | ) |
| |
| |
| | | | 14,579 | | | | (20,416 | ) | | | (75,080 | ) |
| Tax-exempt income | | | — | | | | — | | | | (726 | ) |
| |
| |
| Income tax expense (benefit) | | $ | 14,579 | | | $ | (20,416 | ) | | $ | (75,806 | ) |
| |
| |
F-44F-46
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2009, 2008 and 2007, respectively. A reconciliationWe had tax expense of $14.6 million in 2010, including the release of $11.9 million of valuation allowances on deferred tax assets in the U.S. jurisdiction. The decrease in the tax reserve in 2010 was driven by the favorable settlement or closing of years subject to state audit. “Other” for 2010 includes a change in the tax treatment of the expectedMedicare subsidy under the 2010 federal income tax at statutory rates for year endedhealthcare legislation and adjustments to the actualdeferred taxes provided ison fixed assets. Changes in facts and circumstances in the future may cause us to record additional tax benefits as follows:
| | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | | 2008 | | | 2007 | |
| | |
| |
| Income tax at statutory federal income tax rate | | $ | (7,813 | ) | | $ | (118,017 | ) | | $ | (347,643 | ) |
| Tax effect of: | | | | | | | | | | | | |
| State income tax, net of federal income tax effect | | | 2,051 | | | | 1,634 | | | | 3,606 | |
| Valuation allowance | | | (16,090 | ) | | | 44,639 | | | | 434,446 | |
| Non-taxable loss on embedded derivatives | | | — | | | | 5,611 | | | | — | |
| Decrease in tax reserve | | | (2,469 | ) | | | (7,761 | ) | | | — | |
| Other | | | 3,905 | | | | (1,186 | ) | | | (152 | ) |
| |
| |
| | | | (20,416 | ) | | | (75,080 | ) | | | 90,257 | |
| Tax-exempt income | | | — | | | | (726 | ) | | | (11,776 | ) |
| |
| |
| Income tax (benefit) expense | | $ | (20,416 | ) | | $ | (75,806 | ) | | $ | 78,481 | |
| |
| |
further deferred tax valuation allowances are released and carry-forwards are utilized.
We had a tax benefit of $20.4 million in 2009, primarily reflecting the release of $17.6 million of valuation allowances on deferred tax assets. Our pre-tax net loss of $22.3 million, when adjusted for our estimated book to tax differences, resultsresulted in taxable income, allowingwhich allowed us to release some valuation allowances on our tax loss carryovers. These book to tax differences include impairments on securities and other assets and accruals related to separated employees, litigation and unrealized foreign exchange losses. The decrease in tax reserve in 2009 was driven by the favorable settlement or closing of years subject to state audit. Included in “Other” for 2009 is $1.6 million of expense for the reversal of tax benefits upon the forfeiture of share-based awards and $2.3 million of expense on asset impairments. Changes in facts and circumstances in the future may cause us to record additional tax benefits as further deferred tax valuation allowances are released and carry-forwards are utilized. The Company continues to evaluate additional available tax positions related to the net securities losses.
In 2008, we had a $75.8 million tax benefit, primarily reflecting the recognition of a $90.5 million benefit in the fourth quarter of 2008 upon the completion of an evaluation of the technical merits of tax positions with respect to part of the net securities losses in 2008 and 2007. The $90.5 million benefit relates to the amount of tax carry-back we were able to utilize to recover tax payments made for fiscal 2005 through 2007. We had tax expense
During the second quarter of $78.5 million in 2007 on a pre-tax loss of $993.3 million, reflecting2010, the tax treatmentIRS completed its examination of the $1.2 billionCompany’s consolidated income tax returns for 2005 to 2007, and issued its Revenue Agent Report (“RAR”) challenging the Company’s tax position relating to net securities losses and disallowing $687.0 million of investmentdeductions taken in the 2007 tax return. The Company disagrees with the RAR regarding the net securities losses incurredand filed a protest letter. The Company has had initial conferences with the IRS Appeals Office in 2007.2010, and will continue these conferences in 2011. As of December 31, 2010, the Company has recognized a cumulative benefit of approximately $95.0 million relating to its net securities losses.
Deferred tax assets and liabilities are recorded based on the future tax consequences attributable to temporary differences that exist between the financial statement carrying value of assets and liabilities and their respective tax basis, and operating loss and tax credit carry-backs and carry-forwards on a taxing jurisdiction basis. We measureThe Company’s deferred tax assets and liabilities using enacted statutory tax rates that will apply inat December 31 are composed of the years in which we expect the temporary differences to be recovered or paid. Our ability to realize our deferred tax assets depends on our ability to generate sufficient taxable income within the carry-back or carry-forward periods provided for in the tax law. We establish valuation allowances for our deferred tax assets based on a more likely than not threshold. To the extent management believes that recovery is not likely, a valuation allowance is established in the period in which thefollowing:
| | | | | | | | | |
| (Amounts in thousands) | | 2010 | | | 2009 | |
| | |
| |
| Deferred tax assets: | | | | | | | | |
| Postretirement benefits and other employee benefits | | $ | 54,754 | | | $ | 49,145 | |
| Tax loss carryovers | | | 328,398 | | | | 319,005 | |
| Tax credit carryovers | | | 47,602 | | | | 46,577 | |
| Basis difference in revalued investments | | | 106,863 | | | | 114,708 | |
| Bad debt and other reserves | | | 7,185 | | | | 8,990 | |
| Other | | | — | | | | 22,703 | |
| Valuation allowance | | | (485,790 | ) | | | (496,149 | ) |
| |
| |
| Total deferred tax asset | | | 59,012 | | | | 64,979 | |
| |
| |
| Deferred tax liabilities: | | | | | | | | |
| Depreciation and amortization | | | (63,316 | ) | | | (61,520 | ) |
| |
| |
| Gross deferred tax liability | | | (63,316 | ) | | | (61,520 | ) |
| |
| |
| Net deferred tax (liability) asset | | $ | (4,304 | ) | | $ | 3,459 | |
| |
| |
F-45F-47
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
determination is made. The Company’s deferred tax assets and liabilities at December 31 are composed of the following:
| | | | | | | | | |
| (Amounts in thousands) | | 2009 | | | 2008 | |
| | |
| |
| Deferred tax assets: | | | | | | | | |
| Postretirement benefits and other employee benefits | | $ | 49,145 | | | $ | 52,133 | |
| Tax loss carryovers | | | 319,005 | | | | 308,870 | |
| Tax credit carryovers | | | 46,577 | | | | 45,394 | |
| Basis difference in revalued investments | | | 114,708 | | | | 126,341 | |
| Bad debt and other reserves | | | 8,990 | | | | 5,977 | |
| Other | | | 22,703 | | | | 7,126 | |
| Valuation allowance | | | (496,149 | ) | | | (494,310 | ) |
| |
| |
| Total deferred tax asset | | | 64,979 | | | | 51,531 | |
| |
| |
| Deferred tax liabilities: | | | | | | | | |
| Depreciation and amortization | | | (61,520 | ) | | | (63,507 | ) |
| Unrealized gain on derivative financial instruments | | | — | | | | (478 | ) |
| |
| |
| Gross deferred tax liability | | | (61,520 | ) | | | (63,985 | ) |
| |
| |
| Net deferred tax asset (liability) | | $ | 3,459 | | | $ | (12,454 | ) |
| |
| |
Net deferred tax asset positions are reflected in the “Other assets” line in the Consolidated Balance Sheets, while net deferred tax liability positions are included in the “Accounts payable and other liabilities” line in the Consolidated Balance Sheets. Our deferred tax assets increased in 2009 from estimated timing adjustments, finalizing the 2008 tax return and the affect of tax audit adjustments, primarily related to positions taken on the Company’s investment losses. The valuation allowance in 2009 increased from these additional deferred tax assets, substantially offset by the release of $17.6 million of valuation allowance, as described above. For 2008 and 2009, we believe a full valuation allowance is appropriate for the deferred tax assets related to the basis difference on investments and our tax attributes. Essentially all of ourthe deferred tax assets relate to the U.S. jurisdiction, where we are injurisdiction. The Company has determined that a netvaluation allowance is required for a significant portion of the deferred tax liability position, and we doassets as there is not believe we have sufficient positive evidence to overcome the significant negative evidence.evidence of a three year cumulative loss. Changes in facts and circumstances in the future may cause usthe Company to record additional tax benefits as further deferred tax valuation allowances are released and carry-forwards are utilized. We continueThe Company continues to evaluate additional available tax positions related to the net securities losses in prior years.
The amount and expiration dates of tax loss carry-forwards (not tax effected) and credit carry-forwards as of December 31, 20092010 are as follows:
| | | | | | | | | | | | | | | | | |
| | | Expiration
| | | | | Expiration
| | |
| (Amounts in thousands) | | Date | | Amount | | | Date | | Amount |
| | | | |
| |
| United States federal and state loss carry-forwards | | | 2012 - 2028 | | | $ | 865,561 | | | | 2012 - 2030 | | | $ | 892,974 | |
| United States federal tax credit carry-forwards | | | 2012 - 2028 | | | | 29,037 | | | | 2015 - 2028 | | | | 31,357 | |
| United States federal tax credit carry-forwards | | | Indefinite | | | | 17,540 | | | | Indefinite | | | | 16,245 | |
The Company, or one of its subsidiaries, files income tax returns in the United States federal jurisdiction and various states and foreign jurisdictions. With a few exceptions, the Company is no longer subject to foreign or United States federal, state and local income tax examinations for years prior to 2005. The Company is subject to foreign, United States federal and certain state income tax examinations for 2005 through 2008,2009, with a United States federal income tax examination for 2005 through 2007 currently in process.
F-46
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)administrative appeals.
Unrecognized tax benefits are recorded in “Accounts payable and other liabilities” in the Consolidated Balance Sheets. AFollowing is a reconciliation of unrecognized tax benefits for 2009 is as follows:the year ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | | |
| |
| Beginning balance | | $ | 13,089 | | | $ | 33,669 | | | $ | 33,351 | | | $ | 10,711 | | | $ | 13,089 | | | $ | 33,669 | |
| Additions based on tax positions related to the current year | | | 832 | | | | 5,711 | | | | 4,527 | | | | — | | | | 832 | | | | 5,711 | |
| Settlements | | | (1,029 | ) | | | — | | | | (1,965 | ) | | | (296 | ) | | | (1,029 | ) | | | — | |
| Lapse in statute of limitations | | | (2,181 | ) | | | (479 | ) | | | (3,399 | ) | | | (211 | ) | | | (2,181 | ) | | | (479 | ) |
| Reductions for tax positions of prior years | | | — | | | | (19,204 | ) | | | (748 | ) | | | — | | | | — | | | | (19,204 | ) |
| Foreign currency translation | | | — | | | | (6,608 | ) | | | 1,903 | | | | — | | | | — | | | | (6,608 | ) |
| | | Ending balance | | $ | 10,711 | | | $ | 13,089 | | | $ | 33,669 | | | $ | 10,204 | | | $ | 10,711 | | | $ | 13,089 | |
| |
As of December 31, 2009,2010, the liability for unrecognized tax benefits was $10.7$10.2 million, of which $4.2$3.7 million could impact the effective tax rate if recognized. The Company accrues interest and penalties for unrecognized tax benefits through “Income tax expense (benefit) expense”” in the Consolidated Statements of Loss.Income (Loss). For the years ended December 31, 2010, 2009 2008 and 2007,2008, the Company accrued approximately $0.3 million, $0.6 million and $2.8 million, and $3.5 millionrespectively, in interest and penalties in its Consolidated Statements of Loss,Income (Loss), respectively. As of December 31, 20092010 and 2008,2009, the Company had a liability of $1.7 million and $3.6 millioneach year for interest and penalties related to its unrecognized tax benefits, respectively.benefits. As of December 31, 2009,2010, it is not possible to reasonably estimate the expected change to the total amount of unrecognized tax positions over the next 12 months.
The Company does not consider its earnings in its foreign entities to be permanently reinvested. As of December 31, 20092010 and 2008,2009, a deferred tax liability of $6.2$4.8 million and $4.4$6.2 million, respectively, was recognized for the unremitted earnings of its foreign entities.
F-48
Prior to the Company’s spin-off from Viad, income taxes were determined on a separate return basis as if MoneyGram had not been eligible to be included in the consolidated income tax return of Viad and its affiliates. Subsequent to the spin-off, MoneyGram is considered the divesting entity and treated as the “accounting successor” to Viad and the continuing business of Viad is referred to as “New Viad.” As part of the Distribution, the Company entered into a Tax Sharing Agreement with Viad which provides for, among other things, the allocation between MoneyGram and New Viad of federal, state, local and foreign tax liabilities and tax liabilities resulting from the audit or other adjustment to previously filed tax returns. The Tax Sharing Agreement provides that through the Distribution Date, the results of MoneyGram and its subsidiaries’ operations are included in Viad’s consolidated United States federal income tax returns. In general, the Tax Sharing Agreement provides that MoneyGram will be liable for all federal, state, local, and foreign tax liabilities, including such liabilities resulting from the audit of or other adjustment to previously filed tax returns, that are attributable to the business of MoneyGram for periods through the Distribution Date, and that Viad will be responsible for all other of these taxes.MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
Note 1615 — | Commitments and Contingencies |
Operating Leases — The Company has various non-cancelable operating leases for buildings and equipment that terminate through 2017.2021. Certain of these leases contain rent holidays and rent escalation clauses based on pre-determined annual rate increases. The Company recognizes rent expense under the straight-line method over the term of the lease. Any difference between the straight-line rent amounts and amounts payable under the leases are recorded as deferred rent in “Accounts payable and other liabilities” in the Consolidated Balance Sheets. Cash or lease incentives received under certain leases are recorded as deferred rent when the incentive is received and amortized as a reduction to rent over the term of the lease using the straight-line method. Incentives received relating to tenant improvements are recognized as a reduction of rent expense under the straight-line method over the term of the lease. Tenant improvements are capitalized as leasehold improvements and depreciated over the shorter of the remaining term of the lease or 10 years. At December 31, 2009,2010, the deferred rent liability relating to these incentives was $2.1$1.9 million.
F-47
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Rent expense under operating leases was $15.3 million, $13.8 million and $12.7 million during 2010, 2009 and $11.4 million during 2009, 2008, and 2007, respectively. Minimum future rental payments for all non-cancelable operating leases with an initial term of more than one year are (amounts in thousands):
| | | | | | | | | |
| 2010 | | $ | 12,230 | | |
| 2011 | | | 11,218 | | | $ | 11,782 | |
| 2012 | | | 7,755 | | | | 9,255 | |
| 2013 | | | 5,843 | | | | 7,137 | |
| 2014 | | | 5,315 | | | | 6,549 | |
| 2015 | | | | 5,887 | |
| Thereafter | | | 5,661 | | | | 7,073 | |
| | | Total | | $ | 48,022 | | | $ | 47,683 | |
| |
Legal Proceedings — We areThe Company is involved in various claims, litigations and government inquiries that arise from time to time in the ordinary course of ourthe Company’s business. All of these matters are subject to uncertainties and outcomes that are not predictable with certainty. We accrueThe Company accrues for these matters as any resulting losses become probable and can be reasonably estimated. Further, we maintainthe Company maintains insurance coverage for many claims and litigations alleged. Management does not believe that after final disposition any of these matters is likely to have a material adverse impact on ourthe Company’s financial position.condition, results of operations and cash flows.
In relation to various legal matters, including those described below, the Company had $2.3 million and $97.9 million of liability recorded in the “Accounts payable and other liabilities” line in the Consolidated Balance Sheets as of December 31, 2010 and 2009, respectively. As of December 31, 2009, the Company had a $61.0 million related receivable from insurance carriers in the “Other assets” line in the Consolidated Balance Sheets. A net gain of $12.7 million and charges totaling $54.9 million, net of insurance recoveries, and $0.3 million were recorded in the “Transaction and operations support” line in the Consolidated Statements of Income (Loss) during 2010, 2009 and 2008, respectively
F-49
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Federal Securities Class Actions —The As previously disclosed, on March 9, 2010, the Company and certain of its present and former officers and directors are defendants inentered into a Settlement Agreement, subject to final approval of the court, to settle a consolidated class action case originally filed on October 3, 2008 in the United States District Court for the District of Minnesota captionedIn re MoneyGram International, Inc. Securities LitigationLitigation.. The Consolidated Complaint was filed on October 3, 2008, and alleges against each defendant violations of Section 10(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) andRule 10b-5 under the Exchange Act and alleges against Company officers violations of Section 20(a) of the Exchange Act. The Consolidated Complaint alleges failure to adequately disclose, in a timely manner, the nature and risks of the Company’s investments, as well as unrealized losses and other-than-temporary impairments related to certain of the Company’s investments. The Consolidated Complaint seeks recovery of losses incurred by stockholder class members in connection with their purchases of the Company’s securities. On February 24, 2010, the parties entered into a non-binding Memorandum of Understanding pursuant to which the parties agreed, subject to final approval of the parties and the court, to settle this actionsettlement provides for a cash payment of $80$80.0 million, all but $20$20.0 million of which would be paid by the Company’s insurance carriers. On March 9, 2010, the parties entered intoAt a Settlement Agreement to settle the casehearing on terms consistent with the Memorandum of Understanding. On March 10,June 18, 2010, the Court issued an Order that preliminarily approveda final order and judgment approving the settlement. The parties will seeksettlement became effective on July 26, 2010, when the time to appeal the Court’s final approvalorder and judgment expired without any appeal having been filed. The Company paid $20.0 million into an escrow account in March 2010 and the insurance carrier paid $60.0 million in April 2010, resulting in full settlement of the settlement at a hearing currently set for June 18, 2010. The Company recorded an $80.0 millionCompany’s liability for the settlement and a $60.0 million receivable from the insurance carriers, resulting in a $20.0 million net charge to the Consolidated Statements of Loss in 2009.this matter.
Minnesota Stockholder Derivative Claims — Certain of the Company’s present and former officers and directors arewere defendants in a consolidated shareholderstockholder derivative action in the United States District Court for the District of Minnesota captionedIn re MoneyGram International, Inc. Derivative Litigation. The Consolidated Complaint in this Action,action, which was filed on November 18, 2009 and arises out of the same matters at issue in the securities class action, alleges claims on behalf of the Company for, among other things, breach of fiduciary duties, unjust enrichment, abuse of control, and gross mismanagement. On February 24, 2010, the parties entered into a non-binding Memorandum of Understanding pursuant to which they agreed, subject to final approval of the parties and the court, to settle this action. TheOn March 31, 2010, the parties entered into a Stipulation of Settlement agreeing to settle the case on terms largely consistent with the Memorandum of UnderstandingUnderstanding. On April 1, 2010, the Court issued an Order that preliminarily approved the settlement, providing for notice to stockholders and scheduled a hearing on the settlement for June 18, 2010. The Stipulation of Settlement provides for changes to MoneyGram’sthe Company’s business, corporate governance and internal controls, some of which have already been implemented in whole or in part in connection with MoneyGram’s recent recapitalization.part. The Company also agreed to pay attorney fees and expenses to the plaintiff’s counsel in the amount of $1.3 million, with $1.0 million to be paid by the Company’s insurance carriers. The MemorandumOn June 21, 2010, the Court denied an objection to the settlement filed by a MoneyGram shareholder, Russell L. Berney, and issued a final order and judgment approving the settlement. On July 20, 2010, Mr. Berney filed a notice of Understanding is subject to negotiation and execution of definitive settlement documents containing usual and customary settlement terms, notice to shareholders and approvalappeal of the Court. The
F-48
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
final order and judgment in the United States Court of Appeals for the Eighth Circuit. On October 5, 2010, the Company recordedentered into a $1.3 million liabilitySettlement Agreement to settle the claims brought individually by Mr. Berney in this proceeding and a $1.0 million receivable from the Company’s insurance carriers, resulting in a net charge of $0.3 million to the Consolidated Statements of Loss in 2009.California Action discussed below.
ERISA Class Action —On April 22, 2008, Delilah Morrison, on behalf of herself and all other MoneyGram 401(k) Plan participants, brought an action in the United States District Court for the District of Minnesota. The complaint allegesalleged claims under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including claims that the defendants breached fiduciary duties by failing to manage the plan’s investment in Company stock, and by continuing to offer Company stock as an investment option when the stock was no longer a prudent investment. The complaint also allegesalleged that defendants failed to provide complete and accurate information regarding Company stock sufficient to advise plan participants of the risks involved with investing in Company stock and breached fiduciary duties by failing to avoid conflicts of interests and to properly monitor the performance of plan fiduciaries and fiduciary appointees. Finally, the complaint allegesalleged that to the extent that the Company is not a fiduciary, it is liable for knowingly participating in the fiduciary breaches as alleged. On August 7, 2008, plaintiff amended the complaint to add an additional plaintiff, name additional defendants and additional allegations. For relief, the complaint seekssought damages based on what the most profitable alternatives to Company stock would have yielded, unspecified equitable relief, costs and attorneys’ fees. On March 25, 2009, the Court granted in part and denied in part defendants’ motion to dismiss. On April 30, 2010, plaintiffs filed a motion for class certification, which defendants opposed in a brief filed May 28, 2010. On June 8, 2010, defendants filed a motion for partial summary judgment. Both motions were scheduled for hearing before the Court on October 22, 2010. On October 13, 2010, the Company entered into a Settlement Agreement which provides for a cash payment of $4.5 million, all but approximately $0.7 million of which was paid by the Company’s insurance carrier. The Court issued a final judgment and order approving the Settlement Agreement in October 2010.
F-50
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
California Action — On January 22, 2008, Russell L. Berney filed a complaint in Los Angeles Superior Court against the Company and its officers and directors, Thomas H. Lee Partners, L.P., and PropertyBridge, Inc. and two of its officers, alleging false and negligent misrepresentation, violations of California securities laws and unfair business practices with regard to disclosure of the Company’s investments. The complaint also allegesalleged derivative claims against the Company’s Board of Directors relating to the Board’s oversight of disclosure of the Company’s investments and with regard to the Company’s negotiations with Thomas H. Lee Partners, L.P. and Euronet Worldwide, Inc. The complaint seeks monetary damages, disgorgement, restitution or rescission of stock purchases, rescission of agreements with third parties, constructive trust and declaratory and injunctive relief, as well as attorneys’ fees and costs. In July 2008, an amended complaint was filed asserting an additional claim for declaratory relief. In September 2009, an amended complaint was filed alleging additional facts and naming additional defendants. The Company’s previously disclosed settlement in the Minnesota Stockholder Derivative Litigation and the Minnesota District Court’s April 1, 2010 Order preliminarily approving the settlement in the Minnesota Stockholder Derivative Litigation contain provisions enjoining MoneyGram stockholders from commencing or continuing to prosecute any litigation involving the claims to be settled in that case. On April 5, 2010, the California court stayed proceedings in this action pending the settlement hearing in the Minnesota Stockholder Derivative Litigation. The final order and judgment issued in connection with the Minnesota Stockholder Derivative Litigation on June 21, 2010 enjoined Mr. Berney from prosecuting the derivative claims alleged in the California Action that were settled in the Minnesota Stockholder Action. On October 5, 2010, the Company entered into a Settlement Agreement to settle the claims brought individually by Mr. Berney against the Company and the defendants. The Court issued a final judgment and order approving the Settlement Agreement in October 2010.
SEC InquiryPatent Action — — By letter dated February 4, 2008, the Company received notice from the Securities and Exchange Commission (“SEC”) that it is conducting an informal, non-public inquiry relating to the Company’s financial statements, reporting and disclosures related to the Company’s investment portfolio and offers and negotiations to sell the Company or its assets. The SEC’s notice states that it has not determined that any violations of the securities laws have occurred. On February 11, 2008 and November 5, 2008, the Company received additional letters from the SEC requesting certain information. The Company cooperated with the SEC on a voluntary basis.
Other Matters — On September 25, 2009, the United States District Court for the Western District of Texas, Austin returned a jury verdict in a patent suit brought against the Company by Western Union awardingon May 11, 2007, styledWestern Union v. MoneyGram Payment Systems, Inc., alleging patent infringement and seeking damages and an injunction. The District Court awarded $16.5 million to Western Union. The Company has appealed the verdict. On December 7, 2010 the Court of Appeals for the Federal Circuit ruled in favor of the Company, reversing the District Court’s ruling on the grounds of obviousness of the three underlying patents that were the subject of the appeal. The District Court proceeding also had involved a fourth patent, as to which no appeal was sought. The liability on that particular patent is expected to be approximately $150,000 subject to a review by the District Court. Western Union filed a petition for a re-hearing before the same panel of appellate judges or the entire appellate court “en banc”, which petition was denied by the Appellate Court on February 11, 2011.
Other Matters — The Company has been served with subpoenas to produce documents and testify before the Grand Jury in the Middle District of Pennsylvania. The subpoenas seek information in relation to the Company’s U.S. and Canadian agents, as well as certain transactions involving such agents, fraud complaint data, and the Company’s consumer anti-fraud program during the period 2004 to 2009. In addition, the Financial Crimes Enforcement Network of the US Treasury (“FinCEN”) has requested information concerning the Company’s reporting of fraudulent transactions during this period. The Company has provided the information requested pursuant to the subpoenas and continues to provide documents relating to its agents and the investigation. In November 2010, the Company met with the Assistant U.S. Attorney for the Middle District of Pennsylvania (“AUSA”) and representatives of FinCEN to discuss the investigation. The Company is in the process of providing additional information and scheduling a follow up meeting with the AUSA and FinCEN. No claims have been made against the Company at this time.
The Company has also received Civil Investigative Demands from a working group of nine state attorneys general who have initiated an investigation into whether the Company has taken adequate steps to prevent consumer fraud. The Civil Investigative Demands seek information and documents relating to the Company’s procedures to prevent fraudulent transfers and consumer complaint information. The Company continues to cooperate with the states in this matter. No claims have been made against the Company at this time.
F-51
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Due to the early stage of these other matters, the Company is unable to predict the outcome or the possible loss, or range of loss, if any, resulting therefrom.
In connection with its agreement with the Federal Trade Commission (“FTC”), the Company is making enhancements to its consumer anti-fraud program and, hasin 2009, paid $18.0 million into an FTC-administered fund to refund consumers who have been victimized through third-party fraud. The Company is continuing to cooperate with a government entity in a separate matter involving complaints that certain individuals or entities may have used our money transfer services for fraud-induced money transfers.
Credit Facilities — At December 31, 2009,2010, the Company has overdraft facilities through its Senior Facilitysenior facility consisting of $15.5$6.8 million of letters of credit to assist in the management of investments and the clearing of payment service obligations. All of these letters of credit are outstanding as of December 31, 2009.2010. These overdraft facilities reduce amounts available under the Senior Facility.senior facility. Fees on the letters of credit are paid in accordance with the terms of the Senior Facilitysenior facility described in Note 109 —Debt.
F-49
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other Commitments — The Company has agreements with certain co-investors to provide funds related to investments in limited partnership interests. As of December 31, 2009,2010, the total amount of unfunded commitments related to these agreements was $0.4$0.3 million. The Company has entered into a debt guarantee for $1.7 million on behalf of a money order and transfer agent. This debt guarantee will be reduced as the agent makes payments on its debt. The term of the debt guarantee is for an indefinite period. The Company accrued a liability of $0.3 million for the fair value of this debt guarantee. A corresponding deferred asset was recorded and was fully amortized as of March 2009. The amortization expense was recognized as part of “Transaction and operations support” expense in the Consolidated Statements of Loss.Income (Loss).
Minimum Commission Guarantees — In limited circumstances as an incentive to new or renewing agents, the Company may grant minimum commission guarantees for a specified period of time at a contractually specified amount. Under the guarantees, the Company will pay to the agent the difference between the contractually specified minimum commission and the actual commissions earned by the agent. Expense related to the guarantee is recognized in the “Fee commissions expense” line in the Consolidated Statements of Loss.Income (Loss).
As of December 31, 2009,2010, the liability for minimum commission guarantees is $1.7$0.3 million and the maximum amount that could be paid under the minimum commission guarantees is $7.9$2.2 million over a weighted average remaining term of 1.31.7 years. The maximum payment is calculated as the contractually guaranteed minimum commission times the remaining term of the contract and, therefore, assumes that the agent generates no money transfer transactions during the remainder of its contract. However, under the terms of certain agent contracts, the Company may terminate the contract if the projected or actual volume of transactions falls beneath a contractually specified amount. With respect to minimum commission guarantees expiring in 20092010 and 2008,2009, the Company paid $0.7$0.5 million and $0.6$0.7 million, respectively, or 1822 percent and 1518 percent, respectively, of the estimated maximum payment for the year.
| |
Note 1716 — | Segment Information |
The Company’s reporting segments are primarily organized based on the nature of products and services offered and the type of consumer served. During the fourth quarter of 2009, theThe Company revised its segment reporting to reflect changes in how itprimarily manages its business reviews operating performance and allocates resources. The Company now manages its business primarily through two reporting segments, Global Funds Transfer and Financial Paper Products. The Global Funds Transfer segment provides global money transfers and bill payment services and global money transfers to consumers through a network of agents and, in select markets, company-operated locations. The Financial Paper Products segment provides official check services to financial institutions in the United States and money orders to consumers through agentretail and financial institution locations in the United States and Puerto Rico.Rico, and provides official check services to financial institutions in the United States. One agent of both the Global Funds Transfer segment and the Financial Paper Products segment accounted for 30 percent, 29 percent 26 percent and 2026 percent of total fee and investment revenue in 2010, 2009 2008 and 2007,2008, respectively. Businesses which are not operated within these segments are categorized as “Other,” and primarily relate to discontinued products and businesses. Prior year results have been revised for comparative purposes.Segment pre-tax operating income and segment operating margin are used to review operating performance and allocate resources.
F-52
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Global Funds Transfer segment is managed as two geographical regions or operating segments, the Americas and EMEAAP, to coordinate sales, agent management and marketing activities. The Americas region is composed ofincludes the United States, Canada, Mexico, the Caribbean and Latin America. EMEAAP is composed of Europe, Middle East, Africa and the Asia Pacific. We monitorPacific region. The Company monitor’s performance and allocateallocates resources at both a regional and reporting segment level. As the two regions routinely interact in completing money transfer transactions and share systems, processes and licenses, we view the Global Funds Transfer segment as one global network. The nature of the consumers and products offered is the same for each region, and the regions utilize the same agent network, systems and support functions. In addition, the regions have similar regulatory requirements and economic characteristics. Accordingly, we aggregate the two regionsoperating segments into one reporting segment.
F-50
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segment accounting policies are the same as those described in Note 32 —Summary of Significant Accounting Policiesin the Notes to the Consolidated Financial Statements.. The Company manages its investment portfolio on a consolidated level, with no specific investment security assigned to a particular segment. However, investment revenue is allocated to each segment based on the average investable balances generated by that segment’s sale of payment instruments during the period. Net securities gains (losses)(gains) losses are not allocated to the segments as the investment portfolio is managed at a consolidated level. While the derivatives portfolio is also managed on a consolidated level, each derivative instrument is utilized in a manner that can be identified to a particular segment. Interest rate swaps historically used to hedge variable rate commissions were identified with the official check product in the Financial Paper Products segment, while forward foreign exchange contracts are identified with the money transfer product in the Global Funds Transfer segment. Any interest rate swaps related to the Company’s credit agreements are not allocated to the segments.
Also excluded from operating income for Global Funds Transfer and Financial Paper Products are interest and other expenses related to the Company’s credit agreements, items related to the Company’s preferred stock, operating income from businesses categorized as “Other,” certain pension and benefit obligation expenses, director deferred compensation plan expenses, executive severance and related costs, and certain legal and corporate costs not related to the performance of the segments and restructuring and reorganization costs. Unallocated expenses in 2010 include $5.9 million of costs associated with restructuring initiatives and $1.8 million of asset impairments in addition to other net corporate costs of $7.4 million not allocated to the segments. Unallocated expenses in 2009 include $20.3 million of legal reserves related to securities litigation and stockholder derivative claims, a net curtailment gain on benefit plans of $14.3 million, $7.0 million of asset impairments and $4.4 million of executive severance and related costs. Unallocated expensescosts in 2008 include $16.7addition to other net corporate costs of $12.9 million of executive severance and related costs and $7.7 million of transaction costs relatednot allocated to the recapitalization.segments.
The following tables set forth operating results, depreciation and amortization, capital expenditures and assets by segment for the year ended December 31:
| | | | | | | | | | | | | |
| (Amounts in thousands) | | 2010 | | | 2009 | | | 2008 | |
| | |
| |
| Revenue | | | | | | | | | | | | |
| Global Funds Transfer: | | | | | | | | | | | | |
| Money transfer | | $ | 926,733 | | | $ | 890,838 | | | $ | 874,722 | |
| Bill payment | | | 126,548 | | | | 134,611 | | | | 141,207 | |
| |
| |
| Total Global Funds Transfer | | | 1,053,281 | | | | 1,025,449 | | | | 1,015,929 | |
| Financial Paper Products: | | | | | | | | | | | | |
| Money order | | | 68,293 | | | | 74,880 | | | | 86,312 | |
| Official check | | | 41,222 | | | | 47,903 | | | | 151,881 | |
| |
| |
| Total Financial Paper Products | | | 109,515 | | | | 122,783 | | | | 238,193 | |
| Other | | | 3,857 | | | | 13,479 | | | | 16,459 | |
| |
| |
| Total revenue | | $ | 1,166,653 | | | $ | 1,161,711 | | | $ | 1,270,581 | |
| |
| |
F-51F-53
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables set forth operating results, depreciation and amortization, capital expenditures and assets by segment for the year ended December 31:
| | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | | 2008 | | | 2007 | |
| | |
| |
| Revenue | | | | | | | | | | | | |
| Global Funds Transfer: | | | | | | | | | | | | |
| Money transfer | | $ | 893,239 | | | $ | 871,947 | | | $ | 736,580 | |
| Bill payment | | | 134,611 | | | | 141,207 | | | | 122,122 | |
| |
| |
| Total Global Funds Transfer | | | 1,027,850 | | | | 1,013,154 | | | | 858,702 | |
| Financial Paper Products: | | | | | | | | | | | | |
| Money order | | | 74,880 | | | | 86,311 | | | | 155,391 | |
| Official check | | | 47,903 | | | | 151,881 | | | | 314,735 | |
| |
| |
| Total Financial Paper Products | | | 122,783 | | | | 238,192 | | | | 470,126 | |
| Other | | | 21,269 | | | | (324,228 | ) | | | (1,171,291 | ) |
| |
| |
| Total revenue | | $ | 1,171,902 | | | $ | 927,118 | | | $ | 157,537 | |
| |
| |
| Segment operating income: | | | | | | | | | | | | |
| Global Funds Transfer | | $ | 85,047 | | | $ | 139,428 | | | $ | 127,308 | |
| Financial Paper Products | | | 27,372 | | | | 30,169 | | | | 93,283 | |
| Other | | | (4,316 | ) | | | (19,883 | ) | | | (11,374 | ) |
| |
| |
| Total segment operating income | | | 108,103 | | | | 149,714 | | | | 209,217 | |
| Net securities gains (losses) | | | 7,790 | | | | (340,688 | ) | | | (1,189,756 | ) |
| Interest expense | | | (107,911 | ) | | | (95,020 | ) | | | (11,055 | ) |
| Valuation loss on embedded derivatives | | | — | | | | (16,030 | ) | | | — | |
| Debt extinguishment loss | | | — | | | | (1,499 | ) | | | — | |
| Other unallocated expenses | | | (30,304 | ) | | | (33,668 | ) | | | (1,673 | ) |
| |
| |
| Loss from continuing operations before income taxes | | $ | (22,322 | ) | | $ | (337,191 | ) | | $ | (993,267 | ) |
| |
| |
| | | | | | | | | | | | | |
| (Amounts in thousands) | | 2010 | | | 2009 | | | 2008 | |
| | |
| |
| Segment operating income: | | | | | | | | | | | | |
| Global Funds Transfer | | $ | 139,314 | | | $ | 82,647 | | | $ | 142,203 | |
| Financial Paper Products | | | 36,508 | | | | 27,372 | | | | 30,169 | |
| Other | | | (2,367 | ) | | | (4,316 | ) | | | (19,883 | ) |
| |
| |
| Total segment operating income | | | 173,455 | | | | 105,703 | | | | 152,489 | |
| Net securities (gains) losses | | | (2,115 | ) | | | (7,790 | ) | | | 340,688 | |
| Interest expense | | | 102,133 | | | | 107,911 | | | | 95,020 | |
| Other | | | — | | | | (2,401 | ) | | | 20,304 | |
| Other unallocated expenses | | | 15,057 | | | | 30,305 | | | | 33,668 | |
| |
| |
| Income (loss) before income taxes | | $ | 58,380 | | | $ | (22,322 | ) | | $ | (337,191 | ) |
| |
| |
F-52
| | | | | | | | | | | | | |
| (Amounts in thousands) | | 2010 | | | 2009 | | | 2008 | |
| | |
| |
| Depreciation and amortization: | | | | | | | | | | | | |
| Global Funds Transfer | | $ | 40,489 | | | $ | 43,512 | | | $ | 44,540 | |
| Financial Paper Products | | | 7,527 | | | | 12,590 | | | | 11,132 | |
| Other | | | 58 | | | | 989 | | | | 1,000 | |
| |
| |
| Total depreciation and amortization | | $ | 48,074 | | | $ | 57,091 | | | $ | 56,672 | |
| |
| |
| Capital expenditures: | | | | | | | | | | | | |
| Global Funds Transfer | | $ | 37,090 | | | $ | 32,236 | | | $ | 35,352 | |
| Financial Paper Products | | | 5,935 | | | | 6,005 | | | | 5,005 | |
| Other | | | — | | | | 17 | | | | — | |
| |
| |
| Total capital expenditures | | $ | 43,025 | | | $ | 38,258 | | | $ | 40,357 | |
| |
| |
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | |
| | | |
| | |
| Depreciation and amortization: | | | | | | | | | | | | | |
| Global Funds Transfer | | $ | 43,512 | | | $ | 44,540 | | | $ | 32,851 | | |
| Financial Paper Products | | | 12,590 | | | | 11,132 | | | | 18,310 | | |
| Other | | | 989 | | | | 1,000 | | | | 818 | | |
| | |
| | |
| Total depreciation and amortization | | $ | 57,091 | | | $ | 56,672 | | | $ | 51,979 | | |
| | |
| | |
| Capital expenditures: | | | | | | | | | | | | | |
| Global Funds Transfer | | $ | 32,236 | | | $ | 35,352 | | | $ | 42,679 | | |
| Financial Paper Products | | | 6,005 | | | | 5,005 | | | | 28,448 | | |
| Other | | | 17 | | | | — | | | | 15 | | |
| | |
| | |
| Total capital expenditures | | $ | 38,258 | | | $ | 40,357 | | | $ | 71,142 | | |
| | | | |
| | Assets: | | | | | | | | | | | | | | | | | | | | |
| Global Funds Transfer | | $ | 497,929 | | | $ | 570,463 | | | $ | 571,630 | | | $ | 1,017,574 | | | $ | 1,150,820 | |
| Financial Paper Products | | | 4,838,054 | | | | 5,430,779 | | | | 7,329,085 | | | | 3,797,911 | | | | 4,403,829 | |
| Other | | | 593,680 | | | | 641,054 | | | | 34,296 | | | | 300,251 | | | | 375,014 | |
| | | Total assets | | $ | 5,929,663 | | | $ | 6,642,296 | | | $ | 7,935,011 | | | $ | 5,115,736 | | | $ | 5,929,663 | |
| |
Geographic areas — International operations are located principally in Europe. International revenues are defined as revenues generated from money transfer transactions originating in a country other than the United States. Long-lived assets are principally located in the United States. The table below presents revenue by major geographic area for the year ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (Amounts in thousands) | | 2009 | | 2008 | | 2007 | | | 2010 | | 2009 | | 2008 | |
| | | | | |
| |
| United States | | $ | 799,413 | | | $ | 544,885 | | | $ | (142,766 | ) | | $ | 762,276 | | | $ | 789,222 | | | $ | 888,348 | |
| International | | | 372,489 | | | | 382,233 | | | | 300,303 | | | | 404,377 | | | | 372,489 | | | | 382,233 | |
| | | Total revenue | | $ | 1,171,902 | | | $ | 927,118 | | | $ | 157,537 | | | $ | 1,166,653 | | | $ | 1,161,711 | | | $ | 1,270,581 | |
| |
F-53F-54
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
| Note 17 — | Subsequent Event |
On March 7, 2011, the Company entered into a Recapitalization Agreement with THL and Goldman Sachs pursuant to which (i) THL will convert all of the shares of B Stock into shares of common stock in accordance with the Certificate of Designations, Preferences and Rights of Series B Participating Convertible Preferred Stock of MoneyGram International, Inc., (ii) Goldman Sachs will convert all of the shares of B-1 Stock into shares of D Stock in accordance with the Certificate of Designations, Preferences and Rights ofSeries B-1 Participating Convertible Preferred Stock of MoneyGram International, Inc., and (iii) THL will receive approximately 28.2 million additional shares of common stock and $140.8 million in cash, and Goldman Sachs will receive approximately 15,504 additional shares of D Stock (equivalent to approximately 15.5 million shares of common stock) and $77.5 million in cash (such transactions, collectively, the “2011 Recapitalization”).
Concurrently with entering into the Recapitalization Agreement, Worldwide and the Company entered into a Consent Agreement with the holders of the second lien notes in which the parties have agreed to enter into a supplemental indenture to the indenture governing the second lien notes that will, among other things, amend the indenture in order to permit the 2011 Recapitalization. In addition, the Company is currently working with certain of its relationship banks to put in place a new senior secured credit facility comprised of a revolver and a term loan, which would refinance the Company’s existing senior secured credit facility and provide the funding for the 2011 Recapitalization.
The 2011 Recapitalization has been approved unanimously by the Company’s board of directors following the recommendation of a special committee comprised of independent and disinterested members of our board of directors, and is subject to various conditions contained in the Recapitalization Agreement, including the approval of the 2011 Recapitalization or any other matter that requires approval under the Recapitalization Agreement (collectively the “Stockholder Approval Matters”) by the affirmative vote of a majority of the outstanding shares of our common stock and B Stock (on an as-converted basis), voting as a single class, and the affirmative vote of a majority of the outstanding shares of our common stock (not including the B Stock or any other stock of the Company held by any Investor), in each case voting on the Stockholder Approval Matters and the Company’s receipt of sufficient financing to consummate the 2011 Recapitalization.
If the 2011 Recapitalization is completed as intended, all amounts included in mezzanine equity would be converted into components of stockholders’ deficit. Unamortized transaction costs and discounts related to the mezzanine equity would be charged against additional paid-in capital to the extent available, with the remaining amount charged to retained loss. The conversion of the B Stock would result in an increase to common stock and additional paid-in capital, while the conversion of the B-1 Stock would result in the recognition of the D Stock within stockholders’ deficit. The shares of common stock and D Stock issued as additional consideration, along with additional consideration to be paid in cash, would be charged against retained loss and would reduce the amount of income available to common stockholders in the calculation of earnings per share for the period in which the conversion is completed. Upon entering into a new senior secured credit facility, the Company anticipates that the unamortized discounts and deferred financing costs related to the existing senior facility would be expensed in 2011.
| |
| Note 18 — | Quarterly Financial Data (Unaudited) |
The summation of quarterly earnings per share may not equate to the calculation for the full year as quarterly calculations are performed on a discrete basis.
F-55
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2010 Fiscal Quarters
| | | | | | | | | | | | | | | | | |
| (Amounts in thousands, except per share data) | | First | | | Second(1) | | | Third(1) | | | Fourth(1) | |
| | |
| |
| Revenue | | $ | 286,504 | | | $ | 283,897 | | | $ | 292,887 | | | $ | 303,365 | |
| Total operating expenses | | | 251,442 | | | | 247,119 | | | | 254,413 | | | | 255,281 | |
| |
| |
| Operating income | | | 35,062 | | | | 36,778 | | | | 38,474 | | | | 48,084 | |
| Total other expenses, net | | | 22,015 | | | | 27,717 | | | | 24,689 | | | | 25,597 | |
| |
| |
| Income before income taxes | | $ | 13,047 | | | $ | 9,061 | | | $ | 13,785 | | | $ | 22,487 | |
| |
| |
| Net income | | $ | 10,812 | | | $ | 6,848 | | | $ | 9,985 | | | $ | 16,156 | |
| |
| |
| Loss per common share | | | | | | | | | | | | | | | | |
| Basic and diluted | | $ | (0.26 | ) | | $ | (0.31 | ) | | $ | (0.30 | ) | | $ | (0.23 | ) |
2009 Fiscal Quarters
| | | | | | | | | | | | | | | | | |
| (Amounts in thousands, except per share data) | | First | | | Second (1) | | | Third (1) | | | Fourth (1) | |
| | |
| |
| Revenues | | $ | 279,891 | | | $ | 291,181 | | | $ | 304,450 | | | $ | 296,380 | |
| Commissions expense | | | 118,943 | | | | 122,118 | | | | 128,727 | | | | 128,679 | |
| |
| |
| Net revenue | | | 160,948 | | | | 169,063 | | | | 175,723 | | | | 167,701 | |
| Operating expenses, excluding commissions expense | | | 148,544 | | | | 172,653 | | | | 194,427 | | | | 180,133 | |
| |
| |
| Income (loss) before income taxes | | $ | 12,404 | | | $ | (3,590 | ) | | $ | (18,704 | ) | | $ | (12,432 | ) |
| |
| |
| Net income (loss) | | $ | 11,841 | | | $ | (3,317 | ) | | $ | (18,304 | ) | | $ | 7,874 | |
| |
| |
| Loss per common share | | | | | | | | | | | | | | | | |
| Basic and diluted | | $ | (0.20 | ) | | $ | (0.40 | ) | | $ | (0.60 | ) | | $ | (0.29 | ) |
2008 Fiscal Quarters
| | | | | | | | | | | | | | | | | |
| (Amounts in thousands, except per share data) | | First (2) | | | Second (2) | | | Third (2) | | | Fourth (2) | |
| | |
| |
| Revenues | | $ | 17,062 | | | $ | 286,088 | | | $ | 304,999 | | | $ | 318,969 | |
| Commissions expense | | | 214,121 | | | | 123,713 | | | | 141,365 | | | | 125,409 | |
| |
| |
| Net (losses) revenue | | | (197,059 | ) | | | 162,375 | | | | 163,634 | | | | 193,560 | |
| Operating expenses, excluding commissions expense | | | 146,056 | | | | 138,955 | | | | 202,098 | | | | 172,592 | |
| |
| |
| (Loss) income before income taxes | | $ | (343,115 | ) | | $ | 23,420 | | | $ | (38,464 | ) | | $ | 20,968 | |
| |
| |
| Net (loss) income | | $ | (360,855 | ) | | $ | 15,161 | | | $ | (38,552 | ) | | $ | 122,861 | |
| |
| |
| (Loss) earnings per common share | | | | | | | | | | | | | | | | |
| Basic | | $ | (4.40 | ) | | $ | (0.11 | ) | | $ | (0.80 | ) | | $ | 0.23 | |
| Diluted | | $ | (4.40 | ) | | $ | (0.11 | ) | | $ | (0.80 | ) | | $ | 0.22 | |
| | | | | | | | | | | | | | | | | |
| (Amounts in thousands, except per share data) | | First | | | Second(2) | | | Third(2) | | | Fourth(2) | |
| | |
| |
| Revenue | | $ | 278,102 | | | $ | 286,280 | | | $ | 301,712 | | | $ | 295,617 | |
| Total operating expenses | | | 240,446 | | | | 268,123 | | | | 297,027 | | | | 280,717 | |
| |
| |
| Operating income | | | 37,656 | | | | 18,157 | | | | 4,685 | | | | 14,900 | |
| Total other expenses, net | | | 25,252 | | | | 21,747 | | | | 23,389 | | | | 27,332 | |
| |
| |
| Income (loss) before income taxes | | $ | 12,404 | | | $ | (3,590 | ) | | $ | (18,704 | ) | | $ | (12,432 | ) |
| |
| |
| Net income (loss) | | $ | 11,841 | | | $ | (3,317 | ) | | $ | (18,304 | ) | | $ | 7,874 | |
| |
| |
| Loss per common share | | | | | | | | | | | | | | | | |
| Basic and diluted | | $ | (0.20 | ) | | $ | (0.40 | ) | | $ | (0.60 | ) | | $ | (0.29 | ) |
| | |
| (1) | | Operating expenses in the second quarter of 2010 include an impairment charge of $1.5 million. Operating expenses in the second, third and fourth quarters of 2010 include restructuring and reorganization costs of $1.9 million, $1.6 million and $2.3 million, respectively. Operating expenses in the third quarter of 2010 include legal accruals of $1.8 million. Operating expenses in the fourth quarter of 2010 include the reversal of a legal accrual of $16.4 million. |
|
| (2) | | Operating expenses in the second and third quarters of 2009 include legal accruals of $12.0 million and $22.5 million, respectively. Operating expenses in the fourth quarter of 2009 include $20.3 million of legal accruals and a $15.5 million curtailment gain on the Company’s benefit plans. |
| |
(2)Note 19 — | | Revenue in the first quarter of 2008 includes $256.3 million of net realized losses from the realignment of the investment portfolio, $45.3 million ofother-than-temporaryCondensed Consolidating Financial Statements impairments and $5.7 million of unrealized losses on trading investments. Revenue in the second quarter of 2008 includes $21.2 million of unrealized losses on trading investments and $9.1 million of other than temporary impairments. Revenue in the third quarter of 2008 includes $8.4 million ofother-than-temporary impairments and $4.9 million of unrealized losses on trading investments. Revenue in the fourth quarter of 2008 includes a $26.5 million gain from put options relating to trading investments, $8.8 million of unrealized losses on trading investments and $7.5 million of other-than-temporary impairments. |
In the event the Company offers debt securities pursuant to an effective registration statement onForm S-3, these debt securities may be guaranteed by certain of its subsidiaries. Accordingly, the Company is providing condensed consolidating financial information in accordance with SECRegulation S-XRule 3-10,Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.If the Company issues debt securities, the following 100 percent directly or indirectly owned subsidiaries could fully and unconditionally guarantee the debt securities on a joint and several basis: MoneyGram Payment Systems Worldwide, Inc.; MoneyGram Payment Systems, Inc.; PropertyBridge, Inc.; and MoneyGram of New York LLC (collectively, the “Guarantors”).
F-54F-56
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following information represents condensed, consolidating Balance Sheets as of December 31, 2010 and 2009, along with condensed, consolidating Statements of Income (Loss) and Statements of Cash Flows for the years ended December 31, 2010, 2009 and 2008. The condensed, consolidating financial information presents financial information in separate columns for MoneyGram International, Inc. on a Parent-only basis carrying its investment in subsidiaries under the equity method; Guarantors on a combined basis, carrying investments in subsidiaries that are not expected to guarantee the debt (collectively, the “Non-Guarantors”) under the equity method; Non-Guarantors on a combined basis; and eliminating entries. The eliminating entries primarily reflect intercompany transactions, such as accounts receivable and payable, fee revenue and commissions expense and the elimination of equity investments and income in subsidiaries. As described in Note 2 —Summary of Significant Accounting Policiesthe Company has corrected the presentation of certain investments in time deposits and certificates of deposit in the 2009 and 2008 condensed, consolidating financial statements.
F-57
MONEYGRAM INTERNATIONAL, INC.
CONDENSED, CONSOLIDATING BALANCE SHEETS
FOR THE YEAR ENDED DECEMBER 31, 2010
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Subsidiary
| | | Non-
| | | | | | | |
| (Amounts in thousands) | | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Consolidated | |
| | |
| |
ASSETS | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Cash and cash equivalents (substantially restricted) | | | 108 | | | | 2,704,865 | | | | 160,968 | | | | — | | | | 2,865,941 | |
| Receivables, net (substantially restricted) | | | — | | | | 970,108 | | | | 12,211 | | | | — | | | | 982,319 | |
| Short-term investments (substantially restricted) | | | — | | | | 405,769 | | | | — | | | | — | | | | 405,769 | |
| Investments and related put options (substantially restricted) | | | — | | | | 160,936 | | | | — | | | | — | | | | 160,936 | |
| Property and equipment | | | — | | | | 93,006 | | | | 22,105 | | | | — | | | | 115,111 | |
| Goodwill | | | — | | | | 306,878 | | | | 121,813 | | | | — | | | | 428,691 | |
| Other assets | | | — | | | | 141,469 | | | | 15,500 | | | | — | | | | 156,969 | |
| Equity investments in subsidiaries | | | 265,990 | | | | 168,978 | | | | — | | | | (434,968 | ) | | | — | |
| Intercompany receivables | | | | | | | 260,803 | | | | — | | | | (260,803 | ) | | | — | |
| |
| |
| Total assets | | $ | 266,098 | | | $ | 5,212,812 | | | $ | 332,597 | | | $ | (695,771 | ) | | $ | 5,115,736 | |
| |
| |
LIABILITIES AND STOCKHOLDERS’ DEFICIT (EQUITY) | | | | | | | | | | | | | | | | | | | | |
| Payment service obligations | | $ | — | | | $ | 4,095,734 | | | $ | 89,002 | | | $ | — | | | $ | 4,184,736 | |
| Debt | | | — | | | | 639,946 | | | | — | | | | — | | | | 639,946 | |
| Pension and other postretirement benefits | | | — | | | | 119,008 | | | | 1,528 | | | | — | | | | 120,536 | |
| Accounts payable and other liabilities | | | 6,631 | | | | 92,134 | | | | 14,882 | | | | — | | | | 113,647 | |
| Intercompany liabilities | | | 202,596 | | | | — | | | | 58,207 | | | | (260,803 | ) | | | — | |
| |
| |
| Total liabilities | | | 209,227 | | | | 4,946,822 | | | | 163,619 | | | | (260,803 | ) | | | 5,058,865 | |
| Mezzanine equity | | | 999,353 | | | | — | | | | — | | | | — | | | | 999,353 | |
| Total stockholders’ deficit (equity) | | | (942,482 | ) | | | 265,990 | | | | 168,978 | | | | (434,968 | ) | | | (942,482 | ) |
| |
| |
| Total liabilities, mezzanine equity and stockholders’ deficit (equity) | | $ | 266,098 | | | $ | 5,212,812 | | | $ | 332,597 | | | $ | (695,771 | ) | | $ | 5,115,736 | |
| |
| |
F-58
MONEYGRAM INTERNATIONAL, INC.
CONDENSED, CONSOLIDATING STATEMENTS OF INCOME(LOSS)
FOR THE YEAR ENDED DECEMBER 31, 2010
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Subsidiary
| | | Non-
| | | | | | | |
| (Amounts in thousands) | | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Consolidated | |
| | |
| |
REVENUE | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | $ | — | | | $ | 1,125,014 | | | $ | 204,267 | | | $ | (183,969 | ) | | $ | 1,145,312 | |
| Investment revenue | | | — | | | | 21,080 | | | | 261 | | | | — | | | | 21,341 | |
| |
| |
| Total revenue | | | — | | | | 1,146,094 | | | | 204,528 | | | | (183,969 | ) | | | 1,166,653 | |
EXPENSES | | | | | | | | | | | | | | | | | | | | |
| Fee and other commissions expense | | | — | | | | 527,539 | | | | 91,647 | | | | (118,427 | ) | | | 500,759 | |
| Investment commissions expense | | | — | | | | 737 | | | | — | | | | — | | | | 737 | |
| |
| |
| Total commissions expense | | | — | | | | 528,276 | | | | 91,647 | | | | (118,427 | ) | | | 501,496 | |
| Compensation and benefits | | | (217 | ) | | | 175,521 | | | | 51,118 | | | | — | | | | 226,422 | |
| Transaction and operations support | | | 1,564 | | | | 208,966 | | | | 40,794 | | | | (65,542 | ) | | | 185,782 | |
| Occupancy, equipment and supplies | | | — | | | | 36,987 | | | | 9,494 | | | | — | | | | 46,481 | |
| Depreciation and amortization | | | — | | | | 37,412 | | | | 10,662 | | | | — | | | | 48,074 | |
| |
| |
| Total operating expenses | | | 1,347 | | | | 987,162 | | | | 203,715 | | | | (183,969 | ) | | | 1,008,255 | |
| |
| |
OPERATING (LOSS) INCOME | | | (1,347 | ) | | | 158,932 | | | | 813 | | | | — | | | | 158,398 | |
| |
| |
| Other expense (income) | | | | | | | | | | | | | | | | | | | | |
| Net securities (gains) losses | | | — | | | | (2,115 | ) | | | — | | | | — | | | | (2,115 | ) |
| Interest expense | | | — | | | | 102,133 | | | | — | | | | — | | | | 102,133 | |
| Other | | | — | | | | — | | | | — | | | | — | | | | — | |
| |
| |
| Total other expenses, net | | | — | | | | 100,018 | | | | — | | | | — | | | | 100,018 | |
| |
| |
| (Loss) income before income taxes | | | (1,347 | ) | | | 58,914 | | | | 813 | | | | — | | | | 58,380 | |
| Income tax (benefit) expense | | | (471 | ) | | | 11,113 | | | | 3,937 | | | | — | | | | 14,579 | |
| |
| |
| (Loss) income after income taxes | | | (876 | ) | | | 47,801 | | | | (3,124 | ) | | | — | | | | 43,801 | |
| Equity income (loss) in subsidiaries | | | 44,677 | | | | (3,124 | ) | | | — | | | | (41,553 | ) | | | — | |
| |
| |
NET INCOME(LOSS) | | $ | 43,801 | | | $ | 44,677 | | | $ | (3,124 | ) | | $ | (41,553 | ) | | $ | 43,801 | |
| |
| |
F-59
MONEYGRAM INTERNATIONAL, INC.
CONDENSED, CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2010
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Subsidiary
| | | Non-
| | | | | | | |
| (Amounts in thousands) | | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Consolidated | |
| | |
| |
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | | $ | (21,872 | ) | | $ | 73,029 | | | $ | 9,580 | | | $ | — | | | $ | 60,737 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
| Proceeds from maturities of investments | | | — | | | | 140,985 | | | | — | | | | — | | | | 140,985 | |
| Net purchases of short-term investments | | | — | | | | (5,769 | ) | | | — | | | | — | | | | (5,769 | ) |
| Purchases of property and equipment, net of disposals | | | — | | | | (17,901 | ) | | | (14,753 | ) | | | — | | | | (32,654 | ) |
| Cash paid for acquisitions, net of cash acquired | | | — | | | | (1,436 | ) | | | 1,106 | | | | — | | | | (330 | ) |
| Capital contributions to subsidiaries | | | | | | | (4,067 | ) | | | — | | | | 4,067 | | | | — | |
| Dividends from subsidiaries | | | 20,000 | | | | — | | | | — | | | | (20,000 | ) | | | — | |
| |
| |
| Net cash provided by (used in) investing activities | | | 20,000 | | | | 111,812 | | | | (13,647 | ) | | | (15,933 | ) | | | 102,232 | |
| |
| |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
| Payments on debt | | | — | | | | (165,000 | ) | | | — | | | | — | | | | (165,000 | ) |
| Proceeds from exercise of stock options | | | 2,031 | | | | — | | | | — | | | | — | | | | 2,031 | |
| Intercompany financings | | | (159 | ) | | | 159 | | | | — | | | | — | | | | — | |
| Capital contributions from parent | | | — | | | | | | | | 4,067 | | | | (4,067 | ) | | | — | |
| Dividends to parent | | | — | | | | (20,000 | ) | | | — | | | | 20,000 | | | | — | |
| |
| |
| Net cash used in financing activities | | | 1,872 | | | | (184,841 | ) | | | 4,067 | | | | 15,933 | | | | (162,969 | ) |
| |
| |
NET CHANGE IN CASH AND CASH EQUIVALENTS | | | — | | | | — | | | | — | | | | — | | | | — | |
CASH AND CASH EQUIVALENTS — Beginning of period | | | — | | | | | | | | — | | | | | | | | — | |
| |
| |
CASH AND CASH EQUIVALENTS — End of period | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| |
| |
F-60
MONEYGRAM INTERNATIONAL, INC.
CONDENSED, CONSOLIDATING BALANCE SHEETS
FOR THE YEAR ENDED DECEMBER 31, 2009
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Subsidiary
| | | Non-
| | | | | | | |
| (Amounts in thousands) | | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Consolidated | |
| | |
| |
ASSETS | | | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Cash and cash equivalents (substantially restricted) | | | — | | | | 3,170,259 | | | | 206,565 | | | | — | | | | 3,376,824 | |
| Receivables, net (substantially restricted) | | | — | | | | 1,047,459 | | | | 6,922 | | | | — | | | | 1,054,381 | |
| Short-term investments (substantially restricted) | | | — | | | | 400,000 | | | | — | | | | — | | | | 400,000 | |
| Investments and related put options (substantially restricted) | | | — | | | | 325,584 | | | | — | | | | — | | | | 325,584 | |
| Property and equipment | | | — | | | | 111,015 | | | | 16,957 | | | | — | | | | 127,972 | |
| Goodwill | | | — | | | | 306,878 | | | | 118,752 | | | | — | | | | 425,630 | |
| Other assets | | | 60,294 | | | | 129,983 | | | | 28,995 | | | | — | | | | 219,272 | |
| Equity investments in subsidiaries | | | 237,521 | | | | 164,676 | | | | — | | | | (402,197 | ) | | | — | |
| Intercompany receivables | | | | | | | 301,227 | | | | — | | | | (301,227 | ) | | | — | |
| |
| |
| Total assets | | $ | 297,815 | | | $ | 5,957,081 | | | $ | 378,191 | | | $ | (703,424 | ) | | $ | 5,929,663 | |
| |
| |
LIABILITIES AND STOCKHOLDERS’ DEFICIT (EQUITY) | | | | | | | | | | | | | | | | | | | | |
| Payment service obligations | | $ | — | | | $ | 4,719,520 | | | $ | 123,934 | | | $ | — | | | $ | 4,843,454 | |
| Debt | | | — | | | | 796,791 | | | | — | | | | — | | | | 796,791 | |
| Pension and other postretirement benefits | | | — | | | | 118,069 | | | | 1,101 | | | | — | | | | 119,170 | |
| Accounts payable and other liabilities | | | 87,773 | | | | 85,180 | | | | 15,980 | | | | — | | | | 188,933 | |
| Intercompany liabilities | | | 228,727 | | | | — | | | | 72,500 | | | | (301,227 | ) | | | — | |
| |
| |
| Total liabilities | | | 316,500 | | | | 5,719,560 | | | | 213,515 | | | | (301,227 | ) | | | 5,948,348 | |
| Mezzanine equity | | | 864,328 | | | | — | | | | — | | | | — | | | | 864,328 | |
| Total stockholders’ deficit (equity) | | | (883,013 | ) | | | 237,521 | | | | 164,676 | | | | (402,197 | ) | | | (883,013 | ) |
| |
| |
| Total liabilities, mezzanine equity and stockholders’ deficit (equity) | | $ | 297,815 | | | $ | 5,957,081 | | | $ | 378,191 | | | $ | (703,424 | ) | | $ | 5,929,663 | |
| |
| |
F-61
MONEYGRAM INTERNATIONAL, INC.
CONDENSED, CONSOLIDATING STATEMENTS OF (LOSS) INCOME
FOR THE YEAR ENDED DECEMBER 31, 2009
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Subsidiary
| | | Non-
| | | | | | | |
| (Amounts in thousands) | | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Consolidated | |
| | |
| |
REVENUE | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | $ | — | | | $ | 1,123,375 | | | $ | 126,810 | | | $ | (121,693 | ) | | $ | 1,128,492 | |
| Investment revenue | | | — | | | | 31,208 | | | | 2,011 | | | | — | | | | 33,219 | |
| |
| |
| Total revenue | | | — | | | | 1,154,583 | | | | 128,821 | | | | (121,693 | ) | | | 1,161,711 | |
EXPENSES | | | | | | | | | | | | | | | | | | | | |
| Fee and other commissions expense | | | — | | | | 514,142 | | | | 21,573 | | | | (38,610 | ) | | | 497,105 | |
| Investment commissions expense | | | — | | | | 1,362 | | | | — | | | | — | | | | 1,362 | |
| |
| |
| Total commissions expense | | | — | | | | 515,504 | | | | 21,573 | | | | (38,610 | ) | | | 498,467 | |
| Compensation and benefits | | | 3,942 | | | | 155,008 | | | | 40,103 | | | | — | | | | 199,053 | |
| Transaction and operations support | | | 42,878 | | | | 267,375 | | | | 57,107 | | | | (83,083 | ) | | | 284,277 | |
| Occupancy, equipment and supplies | | | — | | | | 37,999 | | | | 9,426 | | | | — | | | | 47,425 | |
| Depreciation and amortization | | | — | | | | 44,979 | | | | 12,112 | | | | — | | | | 57,091 | |
| |
| |
| Total operating expenses | | | 46,820 | | | | 1,020,865 | | | | 140,321 | | | | (121,693 | ) | | | 1,086,313 | |
| |
| |
OPERATING (LOSS) INCOME | | | (46,820 | ) | | | 133,718 | | | | (11,500 | ) | | | — | | | | 75,398 | |
| |
| |
| Other expense (income) | | | | | | | | | | | | | | | | | | | | |
| Net securities (gains) losses | | | — | | | | (7,790 | ) | | | — | | | | — | | | | (7,790 | ) |
| Interest expense | | | — | | | | 107,911 | | | | — | | | | — | | | | 107,911 | |
| Other | | | — | | | | (2,401 | ) | | | — | | | | — | | | | (2,401 | ) |
| |
| |
| Total other expenses, net | | | — | | | | 97,720 | | | | — | | | | — | | | | 97,720 | |
| |
| |
| (Loss) income before income taxes | | | (46,820 | ) | | | 35,998 | | | | (11,500 | ) | | | — | | | | (22,322 | ) |
| Income tax (benefit) expense | | | (16,387 | ) | | | (6,010 | ) | | | 1,981 | | | | — | | | | (20,416 | ) |
| |
| |
| (Loss) income after income taxes | | | (30,433 | ) | | | 42,008 | | | | (13,481 | ) | | | — | | | | (1,906 | ) |
| Equity income (loss) in subsidiaries | | | 28,527 | | | | (13,481 | ) | | | — | | | | (15,046 | ) | | | — | |
| |
| |
NET (LOSS) INCOME | | $ | (1,906 | ) | | $ | 28,527 | | | $ | (13,481 | ) | | $ | (15,046 | ) | | $ | (1,906 | ) |
| |
| |
F-62
MONEYGRAM INTERNATIONAL, INC.
CONDENSED, CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2009
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Subsidiary
| | | Non-
| | | | | | | |
| (Amounts in thousands) | | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Consolidated | |
| | |
| |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES | | $ | 25,847 | | | $ | 423,763 | | | $ | 32,924 | | | $ | — | | | $ | 482,534 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
| Proceeds from maturities of investments | | | — | | | | 140,999 | | | | — | | | | — | | | | 140,999 | |
| Net purchases of short-term investments | | | — | | | | (400,000 | ) | | | — | | | | — | | | | (400,000 | ) |
| Purchases of property and equipment | | | — | | | | (26,253 | ) | | | (11,695 | ) | | | — | | | | (37,948 | ) |
| Cash paid for acquisitions, net of cash acquired | | | — | | | | — | | | | (3,210 | ) | | | — | | | | (3,210 | ) |
| Proceeds from disposal of a business | | | — | | | | 4,500 | | | | — | | | | — | | | | 4,500 | |
| Dividends from subsidiaries | | | — | | | | 18,019 | | | | — | | | | (18,019 | ) | | | — | |
| |
| |
| Net cash provided by (used in) investing activities | | | — | | | | (262,735 | ) | | | (14,905 | ) | | | (18,019 | ) | | | (295,659 | ) |
| |
| |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
| Payments on debt | | | — | | | | (186,875 | ) | | | — | | | | — | | | | (186,875 | ) |
| Intercompany financings | | | (25,847 | ) | | | 25,847 | | | | — | | | | — | | | | — | |
| Dividends to parent | | | — | | | | — | | | | (18,019 | ) | | | 18,019 | | | | — | |
| |
| |
| Net cash (used in) provided by financing activities | | | (25,847 | ) | | | (161,028 | ) | | | (18,019 | ) | | | 18,019 | | | | (186,875 | ) |
| |
| |
NET CHANGE IN CASH AND CASH EQUIVALENTS | | | — | | | | — | | | | — | | | | — | | | | — | |
CASH AND CASH EQUIVALENTS — Beginning of period | | | — | | | | | | | | — | | | | | | | | — | |
| |
| |
CASH AND CASH EQUIVALENTS — End of period | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| |
| |
F-63
MONEYGRAM INTERNATIONAL, INC.
CONDENSED, CONSOLIDATING STATEMENTS OF (LOSS) INCOME
FOR THE YEAR ENDED DECEMBER 31, 2008
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Subsidiary
| | | Non-
| | | | | | | |
| (Amounts in thousands) | | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Consolidated | |
| | |
| |
REVENUE | | | | | | | | | | | | | | | | | | | | |
| Fee and other revenue | | $ | — | | | $ | 1,101,379 | | | $ | 116,407 | | | $ | (109,335 | ) | | $ | 1,108,451 | |
| Investment revenue | | | — | | | | 135,218 | | | | 26,912 | | | | — | | | | 162,130 | |
| |
| |
| Total revenue | | | — | | | | 1,236,597 | | | | 143,319 | | | | (109,335 | ) | | | 1,270,581 | |
EXPENSES | | | | | | | | | | | | | | | | | | | | |
| Fee and other commissions expense | | | — | | | | 519,792 | | | | 12,015 | | | | (29,490 | ) | | | 502,317 | |
| Investment commissions expense | | | — | | | | 102,292 | | | | — | | | | — | | | | 102,292 | |
| |
| |
| Total commissions expense | | | — | | | | 622,084 | | | | 12,015 | | | | (29,490 | ) | | | 604,609 | |
| Compensation and benefits | | | 17,688 | | | | 170,525 | | | | 36,367 | | | | — | | | | 224,580 | |
| Transaction and operations support | | | 12,406 | | | | 242,566 | | | | 44,778 | | | | (79,845 | ) | | | 219,905 | |
| Occupancy, equipment and supplies | | | — | | | | 39,599 | | | | 6,395 | | | | — | | | | 45,994 | |
| Depreciation and amortization | | | — | | | | 44,984 | | | | 11,688 | | | | — | | | | 56,672 | |
| |
| |
| Total operating expenses | | | 30,094 | | | | 1,119,758 | | | | 111,243 | | | | (109,335 | ) | | | 1,151,760 | |
| |
| |
OPERATING (LOSS) INCOME | | | (30,094 | ) | | | 116,839 | | | | 32,076 | | | | — | | | | 118,821 | |
| |
| |
| Other expense (income) | | | | | | | | | | | | | | | | | | | | |
| Net securities (gains) losses | | | — | | | | 246,719 | | | | 93,969 | | | | — | | | | 340,688 | |
| Interest expense | | | 6,478 | | | | 88,542 | | | | — | | | | — | | | | 95,020 | |
| Other | | | 16,030 | | | | 4,274 | | | | — | | | | — | | | | 20,304 | |
| |
| |
| Total other expenses, net | | | 22,508 | | | | 339,535 | | | | 93,969 | | | | — | | | | 456,012 | |
| |
| |
| (Loss) income before income taxes | | | (52,602 | ) | | | (222,696 | ) | | | (61,893 | ) | | | — | | | | (337,191 | ) |
| Income tax (benefit) expense | | | (18,411 | ) | | | (58,580 | ) | | | 1,185 | | | | — | | | | (75,806 | ) |
| |
| |
| (Loss) income after income taxes | | | (34,191 | ) | | | (164,116 | ) | | | (63,078 | ) | | | — | | | | (261,385 | ) |
| Equity (loss) income in subsidiaries | | | (227,194 | ) | | | (63,078 | ) | | | — | | | | 290,272 | | | | — | |
| |
| |
NET (LOSS) INCOME | | $ | (261,385 | ) | | $ | (227,194 | ) | | $ | (63,078 | ) | | $ | 290,272 | | | $ | (261,385 | ) |
| |
| |
F-64
MONEYGRAM INTERNATIONAL, INC.
CONDENSED, CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2008
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | Subsidiary
| | | Non-
| | | | | | | |
| (Amounts in thousands) | | Parent | | | Guarantors | | | Guarantors | | | Eliminations | | | Consolidated | |
| | |
| |
NET CASH PROVIDED USED IN OPERATING ACTIVITIES | | $ | (46,315 | ) | | $ | (3,880,047 | ) | | $ | (713,419 | ) | | $ | — | | | $ | (4,639,781 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
| Proceeds from sales of investments | | | — | | | | 2,004,482 | | | | 891,529 | | | | — | | | | 2,896,011 | |
| Proceeds from maturities of investments | | | — | | | | 351,983 | | | | 141,337 | | | | — | | | | 493,320 | |
| Purchases of property and equipment | | | — | | | | (31,537 | ) | | | (6,933 | ) | | | — | | | | (38,470 | ) |
| Cash paid for acquisitions, net of cash acquired | | | — | | | | (474 | ) | | | (2,454 | ) | | | — | | | | (2,928 | ) |
| Capital contributions to subsidiaries | | | (760,000 | ) | | | | | | | | | | | 760,000 | | | | — | |
| Dividends from subsidiaries | | | — | | | | 310,060 | | | | — | | | | (310,060 | ) | | | — | |
| |
| |
| Net cash (used in) provided by investing activities | | | (760,000 | ) | | | 2,634,514 | | | | 1,023,479 | | | | 449,940 | | | | 3,347,933 | |
| |
| |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | | | | | |
| Net proceeds from issuance of debt | | | — | | | | 685,945 | | | | — | | | | — | | | | 685,945 | |
| Payments on debt | | | — | | | | (101,875 | ) | | | — | | | | — | | | | (101,875 | ) |
| Net proceeds from issuance of preferred stock | | | 707,778 | | | | — | | | | — | | | | — | | | | 707,778 | |
| Intercompany financings | | | 98,537 | | | | (98,537 | ) | | | — | | | | — | | | | — | |
| Capital contributions from parent | | | — | | | | 760,000 | | | | — | | | | (760,000 | ) | | | — | |
| Dividends to parent | | | — | | | | — | | | | (310,060 | ) | | | 310,060 | | | | — | |
| |
| |
| Net cash provided by (used in) financing activities | | | 806,315 | | | | 1,245,533 | | | | (310,060 | ) | | | (449,940 | ) | | | 1,291,848 | |
| |
| |
NET CHANGE IN CASH AND CASH EQUIVALENTS | | | — | | | | — | | | | — | | | | — | | | | — | |
CASH AND CASH EQUIVALENTS — Beginning of period | | | — | | | | | | | | — | | | | | | | | — | |
| |
| |
CASH AND CASH EQUIVALENTS — End of period | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| |
| |
F-65
(This page intentionally left blank.)
F-66
