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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-14350
MONEYGRAM PAYMENT SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 84-1327808
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
7401 W. Mansfield Avenue 80235
Lakewood, Colorado (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (303) 716-6800
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
------------------- ------------------------
Common Stock (par value $.01 per share) New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
------------------------
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. x Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
Common shares of the registrant outstanding at March 18, 1997 were
16,625,000. The aggregate market value, as of March 18, 1997, of such common
shares held by non-affiliates of the registrant was approximately $125 million.
(Aggregate market value estimated solely for the purposes of this report. This
shall not be construed as an admission for the purposes of determining affiliate
status.)
Documents Incorporated By Reference
Part III: Portions of the Registrant's Proxy Statement relating to the Annual
Meeting of Stockholders to be held on May 13, 1997.
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MONEYGRAM PAYMENT SYSTEMS, INC.
1996 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I Page
----
Background.................................................................. 1
Item 1. Business........................................................ 2
Item 2. Properties...................................................... 7
Item 3. Legal Proceedings............................................... 7
Item 4. Submission of Matters to a Vote of Security Holders............. 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. ........................................ 8
Item 6. Selected Financial Data......................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ....................................... 11
Item 8. Financial Statements and Supplementary Data..................... 13
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. ....................................... 13
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 13
Item 11. Executive Compensation.......................................... 14
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 14
Item 13. Certain Relationships and Related Transactions.................. 14
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K .................................................... 14
BACKGROUND
MoneyGram Payment Systems, Inc. (the "Company" or "MoneyGram") was
incorporated as a subsidiary of Integrated Payment Systems Inc. ("IPS"), a
wholly owned subsidiary of First Data Corporation ("First Data"), in January
1996 to acquire certain assets and liabilities of IPS' consumer money wire
transfer service business marketed under the name "MoneyGram" ("the Business").
On June 12, 1995, First Data entered into a merger agreement with First
Financial Management Corporation ("FFM"), the parent company of Western Union
Financial Services, Inc. ("Western Union"). In order to obtain the approval of
the Federal Trade Commission ("FTC") of its merger with FFM, First Data entered
into a "Consent Decree" with the FTC which required First Data to divest the
sales and marketing functions associated with the consumer money wire transfer
of the Company or Western Union.
Following the signing of the Consent Decree, First Data decided to divest the
sales and marketing functions associated with the Business. Pursuant to that
decision and the Hold Separate Agreement, which First Data had entered into with
the FTC, First Data identified those operations and functions necessary to
operate the Business as a stand alone entity, reconfigured the shared customer
service center and commenced the separation of information and services related
to the Business within IPS's data center in anticipation of contributing certain
assets and liabilities to the Company and consummating a public offering ("IPO")
of the Company's Common Shares ("Common Shares"). The IPO occurred on December
11, 1996.
To effect the transition of the Business to the Company (the "Transition"),
First Data and the Company entered into the following agreements:
1. Contribution Agreement. Pursuant to this Agreement, IPS, and/or certain of
its affiliates, contributed to the Company (a) $12 million for general
corporate purposes, (b) certain software, copyrights and trademarks, (c)
the economic benefit of the agreements with the Business' agents, (d) the
customer service center operations, (e) the leasehold interest in the
Lakewood, Colorado premises, and (f) certain other personal property, all
related to the Business. In exchange, the Company issued and delivered to
IPS 16,624,900 Common Shares.
2. Operations Agreement. Under this Agreement, which has an initial two-year
term, IPS or its affiliates, will perform for the Company data processing
services, management services, disaster recovery services for the
Company's Lakewood, Colorado customer service center, voice center
services and certain corporate support services. The management services
include those functions that IPS must perform in order for the Business to
be in compliance with applicable licensing and other legal requirements
until such time as the Company has obtained the licenses to own and
operate a consumer money wire transfer service in its own name. Under the
Operations Agreement, the Company is obligated to obtain all licenses to
operate the Business in its own name upon the earlier of the expiration of
the initial two-year term or within 180 days after termination of the
Operations Agreement in accordance with its terms.
3. Software License Agreement. Pursuant to this Agreement, IPS has granted to
the Company a perpetual, irrevocable, worldwide, nonexclusive,
royalty-free license to use certain application software in the Business
or for any other purpose. Certain software used by MoneyGram agents who
enter transactions electronically, and application software used to
process all MoneyGram transactions, were contributed to the Company
pursuant to the Contribution Agreement.
4. Short-Term Working Capital Facility ("Facility"). Pursuant to the
Facility, the Company may borrow from time-to-time, on a revolving basis,
an amount up to $20 Million. The interest rate on all outstanding
borrowings under the Facility is the prime rate, as announced by Chase
Manhattan Bank, N.A., plus one percent, and the Facility will terminate on
June 13, 1997. The Company has not borrowed under the Facility.
1
5. The Service Mark Letter Agreement. Pursuant to the Service Mark Letter
Agreement, the Company, First Data and Western Union have agreed not to
sue each other in respect of the service marks "The Better Way to Wire
Money", "Wire Money in Minutes" and "Money in Minutes", and certain other
similar phrases, whether in English or another language, during the
two-year period commencing December 11, 1996. The Service Mark Letter
Agreement also provides that, at the option of the Company at any time
during such two-year period, Western Union, IPS and the Company will
execute a License Agreement and the Service Mark Letter Agreement will
then terminate.
If executed, the License Agreement provides that Western Union will grant
to the Company a non-exclusive and royalty-free license to use "The Better
Way to Wire Money" and "Money in Minutes Worldwide" in English and certain
other languages (but not Spanish) in certain countries, always accompanied
by the word "MoneyGram" and to use "Wire Money in Minutes" in the United
States in English, always accompanied by the word "MoneyGram". The Company
will relinquish to Western Union any rights it may have in, and will be
prohibited from otherwise using, these marks, as well as other specified
marks Western Union uses. Western Union will covenant not to use "The
Better Way to Wire Money" in English in certain countries, including the
United States.
6. Human Resources Agreement. This Agreement, among First Data, IPS and the
Company, defines the duties, obligations and liabilities of First Data and
IPS and the Company with respect to the transition of employees from First
Data and IPS to the Company. Pursuant to the Human Resources Agreement,
First Data, IPS and the Company have each agreed, for a one-year period
from December 11, 1996, not to solicit or hire each other's employees.
7. Telecommunication Services Sharing Agreement. This Agreement, between
First Data and the Company, provides that First Data shall cooperate and
use reasonable efforts to facilitate the provision of telecommunication
services to the Company under First Data's agreements with its various
long-distance telecommunication service providers. This Agreement permits
the Company to choose among such long-distance providers and to benefit
from First Data's tariff rates. The Company, in exchange, has agreed to
use the telecommunication services provided by First Data's
telecommunication service providers exclusively for all of the Company's
person-to-person telephone calls.
ITEM 1. BUSINESS.
Overview
The Company is a leading non-bank provider of consumer money wire transfer
services, with a strong, well-recognized brand name. It offers customers the
ability to transfer funds quickly, reliably and conveniently through its
approximately 20,000 agent locations in 87 countries worldwide. MoneyGram
targets its services to individuals without traditional banking relationships,
expatriates who send money to their country of origin, traditional bank
customers in need of emergency money transfer services, tourists without local
bank accounts and businesses that need rapid and economical money transfer
services. The Company also provides cash advance and express bill payment
services through many of its agent locations in the United States.
The number of agent locations has grown from 11,600 in 1991 to approximately
20,000 in March 1997. In 1995 and 1996, the Company processed 5.4 million and
5.8 million transactions, respectively, and transferred $1.6 billion and $1.5
billion principal amount of funds, respectively.
Customers and Markets
Consumers sending expatriate remittance funds and individuals without bank
accounts are the two largest segments of repetitive money transfer customers.
The Federal Reserve Board of Governors estimates that there are approximately
2
23 million households in the United States without traditional banking
relationships. Additionally, industry analysts estimate that there are an
increasing number of people who remit funds to their respective countries of
origin on a regular basis.
The Company believes international consumer money transfers will continue to
grow primarily due to the combination of increased migration and greater
consumer awareness. The Company believes that migration dynamics throughout
Latin America, the Caribbean, Europe and Asia provide attractive growth
potential for consumer money transfer services. The Company intends to target
advertising and promotional campaigns to raise awareness of MoneyGram services
to new groups of consumers.
The MoneyGram Agent Network
The Company has an extensive global network of agents in the United States,
Mexico and in 85 other countries around the world. The Company's agent network
includes a variety of types of businesses, including supermarkets, check
cashers, convenience stores, travel agencies, collection agencies, bus stations
and credit unions.
A limited number of the Company's top agents generate a significant
percentage of the Company's transaction volume and revenues. In 1995 and 1996,
respectively, the Company's top 10 selling agents accounted for approximately
42% and 43% of the Company's transaction volume and 43% and 42% of the Company's
transaction fee revenues. Three of the top 10 MoneyGram agents in 1996, Banco
Nacional de Mexico S.N.C. ("Banamex"), Ace Cash Express ("Ace") and the Chicago
Currency Exchange, were each involved in transactions representing over 10% of
the Company's total revenues. The agreement with Banamex expires in April, 2002
and the agent contract with Ace expires in 2000. The Chicago Currency Exchange
consists of approximately 85 separate agent contracts with owners of Chicago
Currency Exchange locations which expire in 2000 or 2001.
ExpressPayment and Cash Advance
ExpressPayment, a service which provides consumers with a way to quickly pay
third party loans, bills or debt, is one of the fastest growing segments of the
money transfer industry. The Company maintains contracts with entities such as
credit card companies, lending institutions and collection agencies
("Creditors") which provide customers with credit and require a means by which
customers can make overdue payments directly to Creditors. To use
ExpressPayment, the Creditor directs the consumer to visit a MoneyGram location
and transmit the amount due. The consumer pays the principal amount owed and
typically, a $10.50 flat fee to the MoneyGram agent. A MoneyGram money transfer
check automatically prints out at the Creditor's office as immediately usable
funds, or in some cases, an electronic file transmission is issued to the
Creditor.
The Cash Advance product is an ancillary service offered by the Company
which allows the customer to receive a cash advance of up to $1,000 on a Visa or
MasterCard. Fees vary based on the amount advanced.
New Products
The Company introduced a phone card product in the fourth quarter of 1996.
Customers can purchase a phone card in denominations of $5, $10, $20 or $50 and
use the card to make calls from any phone. International calls typically also
can be made with a phone card. The Company is well positioned to service the
phone card market and believes that the phone card is a natural complement to
its existing products. The Company has entered into a distribution agreement
with MCI Telecommunications Corporation, which will provide the
telecommunications services product support and customer service for the new
phone card product.
3
The Money Transfer Process
The actual collection and payout of funds in MoneyGram's money transfer
process is handled by the MoneyGram agents. Selling MoneyGram agents collect the
money to be transferred plus the transaction fee from the customer sending the
funds. The following morning the Company, through an automated clearing house
transfer, debits the selling agents' bank accounts for the dollar value of all
of the MoneyGram agents' transactions processed on the previous day and the
corresponding transaction fees.
Receiving MoneyGram agents are authorized to pay out the transferred funds
to the recipient customer through confirmation of a reference number for the
transaction. The entire process generally is completed on a same day or next day
basis. The receipt of the transmitted funds is location independent; a customer
can receive the funds from any MoneyGram agent within most of the Company's
agent network regardless of the sender's location. In most instances, the
receive agents are reimbursed for this payment by depositing a pre-signed money
transfer check into their bank account. The Company pays selling agents and
receiving agents their commissions at the end of each month; a percentage of the
consumer fee for a send transaction and a flat fee for a receive transaction.
Currently, the Company provides a free three-minute long distance telephone
call with each transaction within the United States or between the United States
and the Americas so that the sender may provide the recipient with notice of the
transaction.
MoneyGram Pricing and Fees
The Company is compensated for its money transfer services through fees paid
by the sender and, in certain international transactions, revenues from foreign
exchange conversion. Transaction fees are charged to customers according to a
graduated schedule based upon the principal amount of the transaction.
Sales and Marketing
The Company advertises primarily through spot television ads, radio, print
and other media including billboards and bus benches. The Company has
implemented advertising and promotion strategies, including discounted price
promotions, intended to increase its market share and broaden the brand
recognition of the MoneyGram service in its target markets.
The MoneyGram agent network is supported by a nationwide sales and account
development team which recruits and trains the Company's agents. This team
provides a variety of services to MoneyGram agents including training,
automation, assistance with cooperative advertising and provision of signage.
Operations
The Company's operations are located at its Lakewood, Colorado facility. The
Lakewood facility houses the Company's primary customer service center which is
staffed 24 hours a day, 365 days a year. The Company processes an average of
21,000 voice calls per day and has operators fluent in fourteen languages and at
least 50% of the operators are bilingual.
4
International Transactions
Mexico
The Company's primary receive agent in Mexico is Banamex. The agreement with
Banamex only allows the Company to process or pay United States to Mexico
MoneyGram money transfers through Banamex as its receiving agent, except for the
limited circumstances in which the Company had a relationship with a MoneyGram
agent in Mexico prior to September 1, 1994 or in specific regions of Mexico
where Banamex does not have a branch location. The agreement with Banamex is
effective through April 17, 2002 and provides for an automatic five year renewal
unless either party notifies the other of its intent to cancel 90 days prior to
the end of the term. Currently, Banamex processes or pays money transfers in
Mexico only on behalf of the Business. Western Union has agreed with the Company
that prior to the earlier of the termination of the Banamex Agreement or April
17, 2002, Western Union shall not use Banamex to process, directly or
indirectly, United States to Mexico consumer money wire transfer service
transactions on behalf of Western Union.
The Americas and Europe
Management views the international markets other than Mexico as its next
area of potential transaction growth. Focusing on particular corridors, the
Company is currently seeking to expand its global presence. Send transaction
volume to the Caribbean and Latin America has increased, and the advent of send
as well as receive capabilities by MoneyGram agents in the region is broadening
the Company's customer base and fostering growth in this market. The Company's
agent network in Latin America is increasing, with new MoneyGram agents in
Uruguay, the Cayman Islands, Dominica and the Bahamas.
In Europe, the Company has recently added MoneyGram agents in the U.K.,
Spain, Germany, Switzerland, Belgium, Norway and Ireland.
The Company believes that future growth should occur as migration patterns
continue and advertising and promotional efforts increase international
awareness of the MoneyGram service. Future markets of focus include those
countries with rapid growth rates or inefficient and expensive delivery systems.
Competition
The consumer money transfer and other payment products industry is highly
competitive. The principal methods of competition are price and number and
quality of agents and agent locations. The Company faces competition from other
consumer money wire transfer service providers as well as from other payment
products which offer consumers the ability to transfer funds to others. Non-bank
consumer money wire transfer services are provided primarily by two global
companies, MoneyGram and Western Union.
Recently, competition has increased through the entry of new competitors or
expanded services offered by existing competitors, particularly in the U.S. to
Mexico market. Orlandi Valuta, previously a competitor in the Los Angeles to
Mexico corridor, has expanded its U.S. presence to other locations and states.
The Company faces additional competition from the U.S. Postal Service which has
announced plans to offer two new money transfer products to Mexico. Niche
competitors who serve specific migratory corridors also compete with the
Company, including several Mexican banks which have recently begun to offer
consumer money wire transfer services from the United States to Mexico. Niche
competitors are able to focus on particular geographic corridors and eliminate
the expenses associated with maintaining nationwide and worldwide agent
networks.
The Company also faces competition from bank and non-bank providers of other
types of payment products and services, including money orders, automated teller
machines and similar retail electronic networks that could allow consumers to
transfer funds to others.
5
Proprietary Rights and Trademarks
The Company uses certain service marks in the Business, including
"MoneyGram," "The Better Way to Wire Money," "Wire Money in Minutes" and "Money
in Minutes Worldwide." Many of these marks have been refused initial
registration by the U.S. Patent and Trademark Office or are concurrently being
used by Western Union, the Company's principal competitor.
IPS has registered "MoneyGram" in certain countries and has applications
pending to register the mark in the United States and in substantially all other
countries in which the Company is conducting, or intends imminently to conduct,
business. In the United States and in certain other countries, the trademark
examiners initially have refused to register "MoneyGram" on the grounds that it
is merely descriptive of the service. In the United States, the trademark
examiner, on appeal, refused to register "MoneyGram" on the grounds that it is
generic. The Company intends to defend vigorously the registrability of
"MoneyGram." However, no assurance can be given that "MoneyGram" will be
registered in any country where applications are pending.
Western Union is using, among other marks, "The Best Way to Send Money" and
"The Fastest Way to Send Money" and has registered these marks in the United
States and in other countries. IPS, on behalf of MoneyGram, applied to register
"The Better Way to Wire Money" in the United States, and the U.S. trademark
examiner rejected the application due to Western Union's prior registrations for
said marks.
Western Union uses "Money in Minutes" and has registered this mark in the
U.S. and has applied to register the mark in certain other countries. IPS, on
behalf of MoneyGram, applied to register "Wire Money in Minutes" in the United
States and expects that the U.S. trademark examiner will reject IPS's
application due to Western Union's prior United States registration.
The Company and Western Union have no current dispute regarding the
Company's use of "The Better Way to Wire Money," "Wire Money in Minutes" or
"Money in Minutes Worldwide," and the two entities have concurrently used these
or similar marks for some time. However, the Company's and Western Union's
respective rights to these marks and to similar marks are unsettled. For
additional information, see "Background".
Regulation and Licensing
State Regulations
Forty-three states, the District of Columbia and Puerto Rico currently have
sale of checks or money transmission laws which require that firms which engage
in the business of transmitting funds by wire and/or issuing checks and other
payment instruments obtain a license prior to engaging in such businesses. Most
U.S. jurisdictions also require the posting of a bond to protect the public from
insolvency or default by the issuer. Some U.S. jurisdictions also require
licensees to maintain highly-rated, liquid investments in an amount equal to the
amount of their outstanding payment obligations and many require the issuer to
maintain a minimum net worth and impose various reporting requirements.
IPS currently holds all of the licenses necessary to conduct the operations
of the Business. The Company has begun to apply for its licenses and as of March
18, 1997 it had received 15 of the required 47 licenses. While there is no
guarantee that the Company will obtain the aforementioned licenses, it is
anticipated that it will obtain them by December 31, 1997. Failure to obtain a
license in a particular state could preclude the Company from conducting the
Business in that state.
Federal Regulation
The Company and its agents are subject to the Bank Secrecy Act ("BSA") and
the Money Laundering Control Act ("MLCA"), which were adopted to combat "money
laundering". The BSA requires money transmitters to maintain
6
certain records, verify the identity of customers and periodically file certain
reports. The MLCA criminalizes certain transactions, including transfers of
funds through money transmitters such as the Company and the MoneyGram agents,
that involve funds derived from certain specified unlawful activities and that
are performed with the requisite knowledge or intent.
Non-U.S. Regulation
Some foreign countries have licensing requirements and other regulations
applicable to the Business. Such regulations may include both international
anti-money laundering initiatives and local regulation of money transmission.
Although the business of consumer money wire transfer is not separately
licensed as in the U.S., in some jurisdictions the local agent or the
transmitter must hold a banking or foreign exchange license. In these instances,
the Company generally requires proof of the appropriate permit from the local
agent prior to its offering the MoneyGram service.
Employees
The Company has approximately 500 employees, including approximately 100 in
sales, marketing and customer service, approximately 325 in customer service
center operations, and approximately 75 in operational, general and
administrative functions. None of the Company's employees are represented by a
labor union, and the Company believes that its employee relations are good.
ITEM 2. PROPERTIES.
The Company leases executive office and customer service center space at
7401 West Mansfield Avenue in Lakewood, Colorado and executive office space at
Park 80 West in Saddle Brook, New Jersey. The former is pursuant to a lease
which expires in April 2002 and the latter is pursuant to a lease which expires
in April 2003.
ITEM 3. LEGAL PROCEEDINGS.
The Company is currently not engaged in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Prior to the Company's IPO, IPS, then the Company's sole shareholder, took
action, on written consent dated October 30, 1996, to elect the Company's
current directors.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Shares are listed on the New York Stock Exchange, Inc. ("NYSE").
The following table sets forth, for the indicated calendar periods, the reported
high and low prices of the Common Shares on the NYSE Composite Tape. The Common
Shares have been listed on the NYSE since December 11, 1996.
1996 High Low
Fourth quarter (December 11 through December 31) 14-1/2 13-1/4
1997
First quarter (through March 18) 14 7-5/8
At March 18, 1997, there were 25 holders of record of the Common Shares.
No dividends were paid on the Common Shares in 1996 or 1997 and the Company is
prohibited by the Facility from paying dividends on its Common Shares except to
the extent such cash dividends would not exceed ten percent of the Company's net
income arising after September 30, 1996.
8
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL AND OPERATING DATA
(UNAUDITED)
The following table sets forth selected financial data presented on a
carve-out basis for the Transition and are derived from historical financial
data of IPS. The financial data include allocations of operating and general and
administrative expenses to the Company from IPS. Such allocations do not
necessarily reflect the expenses that would have been or will be incurred by the
Company operating as a stand-alone entity. Management of the Company believes
that costs have been determined and allocated on a reasonable basis and all
costs attributable to conducting the Business have been included in the
Company's Financial Statements. In the opinion of management, such expenses
would not be materially affected by the Company operating as a stand-alone
entity. See Note 1 of Notes to Financial Statements. The selected financial data
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
appearing elsewhere in this document. The financial and operating information
for the years ended December 31, 1992 and 1993 are derived from unaudited
financial statements not included in this document.
Year Ended December 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(in thousands, except per share data and percentages)
Statement of Operations Data:
Revenues:
Fee and other .......................... $108,578 $ 94,242 $ 71,015 $ 48,815 $ 30,519
Foreign exchange ....................... 29,141 42,826 20,373 3,070 1,280
-------- -------- -------- -------- --------
Total revenues ....................... 137,719 137,068 91,388 51,885 31,799
Expenses:
Agent commissions and amortization
of agent contract acquisition costs .. 44,255 34,801(1) 28,742 22,112 17,957
Processing ............................. 24,941 25,542 15,334 12,361 11,022
Advertising and promotion .............. 29,113 33,822 19,523 13,708 7,847
Selling, service and general
and administrative ................... 15,734(2) 13,247(2) 8,378 6,900 5,243
-------- -------- -------- -------- --------
Total expenses ....................... 114,043 107,412 71,977 55,081 42,069
Income (loss) before income taxes ....... 23,676 29,656 19,411 (3,196) (10,270)
Net income (loss) ....................... $ 14,631 $ 18,294 $ 12,176 $ (2,077) $ (6,778)
Pro forma net income (loss) per
common share (3) ....................... $ .88 $ 1.10 $ .73 $ (.12) $ (.41)
Balance Sheet Data (at end of period:)
Assets restricted to settlement of
MoneyGram transactions ................. $ 11,287 $ 26,010 $ 20,927 $ 12,827 $ 11,573
Fixed assets at cost, net of depreciation 9,127 6,000 3,084 1,275 1,123
Costs of acquiring agent contracts,
net of amortization .................... 18,175 7,979 3,401 1,956 2,864
Total assets ............................ 113,729 41,618 28,583 16,502 16,009
Total liabilities ....................... 24,299 40,449 35,411 17,358 14,996
Stockholders' equity (deficit) .......... 89,430 1,169 (6,828) (856) 1,013
Operating Data:
Number of MoneyGram agent
locations (at end of period) ........... 18.5 17.2 16.0 14.1 13.1
Number of transactions .................. 5,781 5,393 3,285 2,040 1,114
- --------
(1) Net of a $2.5 million commission rebate from Banamex received by the Company
during the first quarter of 1995.
(2) Includes costs and expenses related to obtaining consents from MoneyGram
agents to permit the assignment of their agent contracts to the Company of
$375,000 in the fourth quarter of 1995 and $500,000 in 1996.
(3) Gives effect to the Company's issuance to IPS of 16,624,900 Common Shares
prior to the IPO.
9
QUARTERLY SUMMARY
The following table presents unaudited interim operating results of the
Company. The Company believes that the following information includes all
adjustments (consisting only of normal, recurring adjustments) that the Company
considers necessary for a fair and consistent presentation, in accordance with
generally accepted accounting principles, of such information. The financial and
operating results for any interim period are not necessarily indicative of
results for any future interim period.
Quarter Ended
-----------------------------------------------------------------------------------------
1996 1995
--------------------------------------------- ---------------------------------------
March 31 June 30 Sept. 30 Dec. 31 March 31 June 30 Sept. 30 Dec. 31
------- ------- ------- ------- ------- ------- ------- -------
(in thousands, except per share data)
Revenues:
Fee and other.............. $27,567 $29,686 $26,901 $24,424 $18,899 $28,420 $25,615 $21,308
Foreign exchange .......... 8,044 7,731 7,046 6,320 13,928 10,480 8,737 9,681
------- ------- ------- ------- ------- ------- ------- -------
Total revenues .......... 35,611 37,417 33,947 30,744 32,827 38,900 34,352 30,989
Expenses:
Agent commissions and
amortization of agent
contract acquisition
costs .................. 10,925 11,690 11,250 10,390 5,770(1) 10,475 9,342 9,214
Processing ................ 6,822 5,906 5,970 6,243 5,289 6,338 5,873 8,042
Advertising and
promotion (2) .......... 8,814 7,949 5,584 6,766 7,737 8,265 8,013 9,807
Selling and service ....... 2,221(3) 2,555(3) 2,869(3) 2,937 1,510 1,742 1,993 2,280(3)
General and
administrative ......... 1,391 1,225 1,231 1,305 1,294 1,391 1,455 1,582
------- ------- ------- ------- ------- ------- ------- -------
Total expenses .......... 30,173 29,325 26,904 27,641 21,600 28,211 26,676 30,925
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes .................. 5,438 8,092 7,043 3,103 11,227 10,689 7,676 64
Income tax expense ........ 2,083 3,099 2,676 1,187 4,302 4,095 2,941 24
------- ------- ------- ------- ------- ------- ------- -------
Net income .................. $ 3,355 $ 4,993 $ 4,367 $ 1,916 $ 6,925 $ 6,594 $ 4,735 $ 40
======= ======= ======= ======= ======= ======= ======= =======
Net income per common
share (4) ................ $ .20 $ .30 $ .26 $ .12 $ .42 $ .39 $ .29 $ --
Number of transactions ...... 1,505 1,481 1,400 1,395 1,232 1,316 1,276 1,569
- ----------
(1) Net of a $2.5 million commission rebate from Banamex received by the Company
during the first quarter of 1995.
(2) Prior to 1996, the Company recorded advertising and promotion expenses based
on transaction volumes for interim reporting purposes. Beginning in 1996,
the Company recorded advertising and promotion expenses based on actual
expenses incurred during the interim period. If the Company had continued to
record advertising and promotion expenses based on transaction volumes,
advertising and promotion expenses for 1996 would have been approximately
$2.0 million less for the first quarter, $.5 million more for the second
quarter and $1.4 million more for the third quarter and $.1 million more for
the fourth quarter.
(3) Includes costs and expenses related to obtaining consents from MoneyGram
agents to permit the assignment of their agent contracts to the Company of
$375,000 in the fourth quarter of 1995, $300,000 in the first quarter of
1996, $150,000 in the second quarter of 1996 and $50,000 in the third
quarter of 1996.
(4) Gives effect to the Company's issuance to IPS of 16,624,900 Common Shares
prior to the IPO.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Revenues. The Company's revenues were $137.7 million in 1996 as compared
with $137.1 million in 1995. This was the result of a 15% increase in fee
revenues, partially offset by a decline in foreign exchange revenues.
Fee Revenues increased to $108.6 million from $94.2 million in 1995. This
revenue growth was due to a 7% increase in transactions, to approximately 5.8
million transactions in 1996 from approximately 5.4 million transactions in 1995
and an 8% increase in the average fee per transaction that was attributable to a
lower level of price promotion during 1996. These growth factors were partially
offset by a lower average principal amount per transaction.
Foreign exchange revenues, substantially all of which arise from U.S. to
Mexico transactions, decreased 32% to $29.1 million in 1996 compared with $42.8
million for 1995. The foreign exchange revenue during 1995 was unusually high
primarily due to the volatility of the Mexican peso during this period. The
Mexican government has taken steps to stabilize the economy and alleviate the
political unrest and as a result, the peso was less volatile in late 1995 and
during 1996. In addition, the average principal per transaction declined,
resulting in less foreign exchange revenue.
Expenses. The Company's total operating expenses increased 6% to $114.0
million in 1996 compared with $107.4 million during 1995 mainly as a result of
increased transactions and fee revenue.
Agent commissions increased 27% to $44.3 million in 1996 from $34.8 million
in 1995. This increase was mainly due to the higher level of fee revenue (15%)
and agent rebates associated with the 1995 price promotions.
Although transaction volume increased, total processing expenses decreased
2% to $24.9 million in 1996 from $25.5 million in 1995, primarily due to
operational efficiencies and reduced telecommunications expense.
Advertising and promotion expenses decreased 14% to $29.1 million during
1996 from $33.8 million in 1995. This was due to a decrease from the unusually
high advertising and discretional promotional expenses incurred in 1995.
Selling and service expenses increased by 41% to $10.6 million in 1996 from
$7.5 million in 1995. This is attributable to an increase in the number of sales
and service employees hired to further expand and support the agent network as a
separate entity. During the first nine months of 1996, the Company incurred
approximately $500,000 in salaries, commissions and out-of-pocket expenses
related to obtaining consents from agents to permit the assignment of their
contracts to the Company.
General and administrative expenses decreased by 10% to $5.2 million in 1996
from $5.7 million in 1995 as a result of certain costs being attributable
directly to the IPO.
Operating Income. Operating income decreased by 20% to $23.7 million in 1996
from $29.7 million in 1995 primarily as a result of the decline in foreign
exchange revenue mentioned above.
11
Year Ended December 31, 1995 Compared with Year Ended December 31, 1994
Revenues. The Company's revenues increased 50% in 1995 to $137.1 million
from $91.4 million for 1994. This growth reflected a 64% increase in the number
of transactions processed from 3.3 million to 5.4 million.
This was partially offset by a decrease of 19% in the average fee revenues
earned per transaction. The decrease in the average fee per transaction in 1995
compared with 1994 was primarily due to the 21 additional weeks of price
promotions in 1995. The growth in the number of transactions is attributable to
the Company's advertising campaigns, its discount price and other promotions, as
well as greater availability of the MoneyGram service resulting from an 8%
growth, from 16,000 to 17,200, in the number of MoneyGram agent locations. The
decrease in average fee revenues per transaction was due to increased usage by
customers who took advantage of the promotional discount prices by transmitting
lower principal amounts.
The Company's foreign exchange revenue, substantially all of which arises
from U.S. to Mexico transactions, increased 110% from $20.4 million to $42.8
million. This growth in foreign exchange revenues from Mexican transactions was
a result of a 71% increase in the number of such transactions, coupled with a
25% increase in the average foreign exchange revenue earned per transaction,
resulting from the increased volatility in the value of the Mexican peso versus
the U.S. dollar. The foreign exchange revenues realized by the Company in 1995
were substantially larger than in prior years, primarily due to the significant
volatility in the value of the Mexican peso. Accordingly, the Company's average
foreign exchange revenues per transaction in 1995 are not indicative of what the
Company expects to achieve in the future.
Expenses. The Company's total operating expenses increased 49% to $107.4
million in 1995 from $72.0 million in 1994. Higher average fee revenues and the
increased volume of transactions processed resulted in higher commissions to
agents and higher processing costs, while the Company's marketing and price
promotions contributed to significantly increased advertising and promotion
expenses.
Agent commissions increased 21% to $34.8 million from $28.7 million, as a
result of the 33% increase in fee revenue partially offset by rebates from the
agents in association with the 1995 price promotions.
Processing expense increased 67% to $25.5 million in 1995, principally as a
result of the growth in transaction volume.
Advertising and promotion expense increased to $33.8 million in 1995 from
$19.5 million in 1994 as a result of advertising and promotion strategies
designed to increase market share and broaden the brand recognition of the
MoneyGram service in its target markets. In addition, during the fourth quarter
of 1995, in conjunction with the price promotion, the Company paid its agents
discretionary, promotion-related cash payments of approximately $1.2 million.
Selling and service expense increased by 103% to $7.5 million as a result of
an increase in the number of sales and service employees hired to further expand
the MoneyGram agent network, increased sales commissions associated with the
increase in agents and an increase in marketing costs associated with the
Company's advertising campaigns. In addition, during the fourth quarter of 1995,
the Company incurred approximately $375,000 of salaries, commission and other
out-of-pocket expenses related to obtaining consents from MoneyGram agents to
permit the assignment of their contracts to IPS.
General and administrative expenses increased by 22% in 1995 to $5.7 million
due to an overall increase in the number of employees as a result of growth in
the Business.
Operating Income. Operating income increased 53% to $29.7 million in 1995
from $19.4 million in 1994.
12
Liquidity and Capital Resources
Total cash and cash equivalents, which is comprised of short term
investments, was $18.0 million at December 31, 1996. In prior years all
available cash was transferred to IPS as a Return of Capital.
Cash flow from operations was $17.1 million in 1996 as compared with $21.4
million in 1995 and $23.3 million in 1994. The decline in 1996 from 1995 was
mainly due to a $3.7 million receivable from IPS. The receivable includes items
that previously were settled through the Return of Capital.
Cash used for investing activities was $20.2 million in 1996 as compared
with $11.1 million in 1995 and $5.1 million in 1994. The increase of $9.1
million over 1995 was primarily the result of payments to existing agents for
extending the term of their contracts by an average of five years.
In 1996, IPS contributed $12 million dollars as per the Contribution
Agreement, as defined in Note 1 to the financial statements, and assumed certain
obligations of the Company, both of which generated positive cash flows of $21.1
million. The Company has relied primarily on cash flows from operating
activities to support its capital investment program. Management expects that
future recurring capital needs will be largely met by funds generated from
operating activities.
The IPS Facility commitment, as defined in Note 1 to the financial
statements, of $20 million has not been used to date and the Company does not
intend to utilize it before the termination date. Management expects to
negotiate a credit facility with a third party prior to the expiration of the
IPS Facility.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See the Financial Statements, together with the report thereon of Ernst &
Young LLP, dated March 14, 1997, on pages 16 through 28 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
See the Proxy Statement for the Company's 1997 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
13
ITEM 11. EXECUTIVE COMPENSATION.
See the Proxy Statement for the Company's 1997 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
See the Proxy Statement for the Company's 1997 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See the Proxy Statement for the Company's 1997 Annual Meeting of
Stockholders, which information is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) (1) Index to Financial Statements:
The Financial Statements and the notes thereto, together with the
report thereon of Ernst & Young LLP, dated March 14, 1997, appear on
pages 16 through 28 of this Report. Financial statement schedules not
included in this Report have been omitted because they are not
applicable or the required information is shown on the Financial
Statements or notes thereto.
(a) (2) Financial Statement Schedules:
None
(a) (3) Exhibits:
The following exhibits are filed as part of this Annual Report or,
where indicated, were heretofore filed and are hereby incorporated by
reference.
2.1 Contribution Agreement, dated as of December 10, 1996, among the
Company, IPS and First Data.
3.1 Certificate of Incorporation of the Company, as amended to date
(incorporated herein by reference to Exhibit 3.1 of the Company's
Registration Statement No. 333-228).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement No. 333-228).
10.1 Operations Agreement, dated as of December 10, 1996, among the Company,
IPS and First Data Technologies, Inc.
10.2 Software License Agreement, dated as of December 10, 1996, between the
Company and IPS.
14
10.3 Service Mark Letter Agreement, dated as of December 10, 1996, among
Western Union Financial Services, Inc., First Data and the Company
which includes the Service Mark License Agreement among such parties as
an exhibit thereto.
10.4 Human Resources Agreement, dated as of December 10, 1996, among the
Company, IPS and First Data.
10.5 Telecommunications Services Sharing Agreement, dated as of December 10,
1996, between the Company and First Data.
10.6 Agreement among American Express Travel Related Services Company, Inc.,
Banamex and California Commerce Bank, as amended (subject to a request
for confidential treatment pursuant to Rule 406 of the Securities Act)
(incorporated by reference to Exhibit 10.7 to the Company's
Registration Statement No.
333-228).
10.7 1996 Stock Option Plan of the Company.
10.8 1996 Broad-Based Stock Option Plan.
10.9 Lease Agreement between the Company and the Mutual Life Insurance
Company of New York in respect of certain facilities located in
Lakewood, Colorado (incorporated by reference to Exhibit 10.10 the
Company's Registration Statement No. 333-228).
10.10 Short-Term Working Capital Facility, dated as of December 10, 1996,
between First Data and the Company.
10.11 Letter Agreement between the Company and Western Union regarding
Banamex (incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement No. 333-228).
23.1 Consent of Independent Auditors
(b)(1) Reports on Form 8-K:
None
15
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders of
MoneyGram Payment Systems, Inc.
We have audited the accompanying balance sheets of MoneyGram Payment
Systems, Inc. (the "Company") as of December 31, 1996 and 1995, and the related
statements of operations, changes in stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of MoneyGram Payment Systems,
Inc. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
March 14, 1997
16
MONEYGRAM PAYMENT SYSTEMS, INC.
BALANCE SHEETS
(in thousands, except share amounts)
December 31,
-----------------
ASSETS 1996 1995
------------------------------------ ---- ----
Current Assets:
Cash and cash equivalents ............................................. $ 17,996 $ --
Assets restricted to settlement of MoneyGram transactions .... ........ 11,287 26,010
Fee revenue receivable ................................................ 587 1,165
Receivable from IPS ................................................... 3,659 --
Prepaid and other current assets ...................................... 648 271
-------- -------
Total current assets .................................................. 34,177 27,446
Fixed assets at cost, net of depreciation; 1996 - $7,911; 1995 - $3,953 ... 9,127 6,000
Deferred tax asset (Note 4) ............................................... 52,250 193
Costs of acquiring agent contracts, net of amortization:
1996 - $4,903; 1995 - $1,952 .......................................... 18,175 7,979
-------- -------
Total assets .............................................................. $113,729 $41,618
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities:
Liabilities relating to unsettled MoneyGram transactions ............ $11,287 $26,010
Accounts payable and accrued liabilities .............................. 5,726 7,743
Commissions payable ................................................... 7,286 6,696
-------- -------
Total current liabilities ............................................. 24,299 40,449
-------- -------
Stockholders' Equity:
Common stock, $.01 par value, authorized 100,000,000 shares; issued and
outstanding 16,625,000 shares ..................................... 166 166
Capital surplus ....................................................... 85,089 11,459
Retained earnings/(Accumulated deficit) ............................... 4,175 (10,456)
-------- -------
Total stockholders' equity ............................................ 89,430 1,169
Total liabilities and stockholders' equity ............................ $113,729 $41,618
======== =======
See accompanying notes.
17
MONEYGRAM PAYMENT SYSTEMS, INC.
STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended December 31,
-----------------------------
1996 1995 1994
---- ---- ----
Revenues:
Fee revenue, net of refunds .............. $108,578 $ 94,242 $71,015
Foreign exchange ......................... 29,141 42,826 20,373
-------- -------- -------
Total revenues ....................... 137,719 137,068 91,388
-------- -------- -------
Expenses:
Agent commissions and amortization of
agent contract acquisition costs...... 44,255 34,801 28,742
Processing ............................... 24,941 25,542 15,334
Advertising and promotion ................ 29,113 33,822 19,523
Selling and service ...................... 10,582 7,525 3,700
General and administrative ............... 5,152 5,722 4,678
-------- -------- -------
Total expenses........................ 114,043 107,412 71,977
-------- -------- -------
Income before income taxes ................... 23,676 29,656 19,411
Income tax expense............................ 9,045 11,362 7,235
-------- -------- -------
Net income ................................... $ 14,631 $ 18,294 $12,176
======== ======== =======
Net income per common share .................. $ .88 $ 1.10 $ .73
======== ======== =======
Weighted average shares and equivalents
outstanding ............................... 16,630 16,625 16,625
See accompanying notes.
18
MONEYGRAM PAYMENT SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
------------------------------
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income .................................... $ 14,631 $ 18,294 $ 12,176
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization expense ......... 6,910 3,762 1,889
Other noncash charges ......................... 192 (22) 25
Changes in operating assets and liabilities:
Assets restricted to settlement of
MoneyGram transactions .................... 14,723 (5,083) (8,100)
Accounts receivable ....................... 578 (255) (773)
Receivable from IPS ....................... (3,659) -- --
Prepaid and other assets .................. (377) (181) 21
Liabilities relating to unsettled
MoneyGram transactions ................ (14,723) 5,083 8,100
Accounts payable and other liabilities .... (1,177) (189) 9,953
-------- -------- --------
Net cash provided by operating activities ..... 17,098 21,409 23,291
-------- -------- --------
Cash flows from investing activities:
Purchase of equipment and signage ............. (7,095) (4,638) (2,739)
Costs of acquiring agent contracts ............ (13,137) (6,474) (2,404)
-------- -------- --------
Net Cash used for investing activities ........ (20,232) (11,112) (5,143)
-------- -------- --------
Cash flows from financing activities:
Net transfer from (to) IPS .................... 21,130 (10,297) (18,148)
-------- -------- --------
Net cash provided(used) by financing activities 21,130 (10,297) (18,148)
-------- -------- --------
Cash and cash equivalents ..................... $ 17,996 $ -- $ --
======== ======== ========
No cash was paid for taxes or interest expense in 1996, 1995 and 1994.
See accompanying notes.
19
MONEYGRAM PAYMENT SYSTEMS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
Retained
Earnings/ Total
Common Capital (Accumulated Stockholders'
Stock Surplus Deficit) Equity/(Deficit)
----- ------- ------- ----------------
Balance December 31, 1993 ............ $ 166 $ 39,904 $(40,926) $ (856)
Net income ....................... -- -- 12,176 12,176
Return of capital to IPS ......... -- (18,148) -- (18,148)
------- -------- -------- --------
Balance December 31, 1994 ............ 166 21,756 (28,750) (6,828)
Net income ....................... -- -- 18,294 18,294
Return of capital to IPS ......... -- (10,297) -- (10,297)
------- -------- -------- --------
Balance December 31, 1995 ............ 166 11,459 (10,456) 1,169
Net income ....................... -- -- 14,631 14,631
Capital contribution from IPS .... -- 21,130 -- 21,130
Deferred tax asset ............... -- 52,500 -- 52,500
------- -------- -------- --------
Balance December 31, 1996 ............ $ 166 $ 85,089 $ 4,175 $ 89,430
======= ======== ======== ========
See accompanying notes.
20
MONEYGRAM PAYMENT SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Background and Basis of Presentation
Background
MoneyGram Payment Systems, Inc. (the "Company" or "MoneyGram") is a non-bank
provider of consumer money wire transfer service. MoneyGram targets its services
to individuals without traditional banking relationships.
The Company was until December 11, 1996 (the date of the MoneyGram IPO, "the
IPO Date"), a wholly owned subsidiary of Integrated Payment Systems Inc.
("IPS"), which is a wholly owned subsidiary of First Data Corporation ("First
Data").
Pursuant to a management agreement (the "TRS Management Agreement") among
First Data, IPS and American Express Travel Related Services Company, Inc.
("TRS"), a wholly owned subsidiary of American Express, IPS managed the TRS
payment instruments business, which included the MoneyGram business ("the
Business"), under TRS licenses. For the periods presented in the accompanying
financial statements, up to the IPO Date, the Business has been conducted
through an extensive network of TRS selling agents. In accordance with the TRS
Management Agreement, the contracts with these selling agents were negotiated
and managed by IPS but executed in the name of TRS. IPS and First Data agreed to
indemnify TRS against any losses, damages and costs with respect to the payment
instruments of TRS; therefore, MoneyGram's financial statements have been
prepared as if it were the issuer of the payment instruments.
In October 1995, First Data consummated a merger transaction with First
Financial Management Corporation whose subsidiary Western Union Financial
Services, Inc. ("Western Union"), provides money transfer services similar to
MoneyGram. In January 1996, First Data entered into a consent decree with the
Federal Trade Commission ("FTC") regarding MoneyGram and Western Union. Under
the terms of the consent decree, First Data was allowed to perform processing
services for both MoneyGram and Western Union, but it was permitted to retain
the sales and marketing functions of only one of the two businesses. In
addition, First Data and the FTC entered into a "hold separate" agreement
whereby the Business was to be managed and maintained as a separate, ongoing
business, independent of all other First Data businesses and independent of the
Western Union business. Among its provisions the "hold separate" agreement
required that, prior to consummation of the divestiture, IPS expend not less
than $24 million annually on MoneyGram advertising and promotion with no less
than $10 million to be expended for any two consecutive quarterly periods. This
agreement further required that, during the "hold separate" period, IPS pay the
MoneyGram sales force 120% of the standard 1995 sales commission rates. The hold
separate arrangement continued until the IPO Date.
First Data decided to comply with the divestiture requirements of the
consent decree through a public stock offering of the Company's common stock by
IPS (the "Offering"). In conjunction with the Offering, the Company was formed
as a wholly owned subsidiary of IPS in January 1996. In accordance with the
Contribution Agreement among the Company, First Data and IPS, certain assets
necessary to operate the Business (the "MoneyGram Assets") were transferred,
subject to certain liabilities, to the Company in exchange for 16,624,900 shares
of the Company's common stock. The accompanying financial statements have been
prepared as if this exchange had been consummated prior to January 1, 1994 and
the assets and liabilities are reflected therein at their historical cost basis.
The MoneyGram Assets included certain proprietary rights and trademarks material
to the conduct of the Business; the net economic benefits under certain
MoneyGram agent contracts; certain applications software; the leases, leasehold
improvements, personal property and third party contracts associated with
MoneyGram's Lakewood, Colorado customer service center; and certain personal
property and leases related to property, such as computers and signage, provided
to MoneyGram agents for their use in providing MoneyGram services. In addition,
pursuant to the Contribution Agreement, IPS contributed $12 million in cash to
the Company and paid certain liabilities prior to the IPO Date. Such capital
contributions are reflected in the Company's 1996 financial statements.
21
In conjunction with the Offering, the Company, IPS and affiliates of IPS
have also entered into an operations agreement (the "Operations Agreement"), a
software license agreement (the "Software License Agreement"), a short-term
working capital facility (the "Facility"), with a commitment in an amount equal
to $20 million, a service mark letter agreement (the "Service Mark Letter
Agreement"), a Service Mark License Agreement, a human resources agreement (the
"Human Resources Agreement") and a telecommunications services sharing agreement
(the "Telecom Agreement"). The Operations Agreement requires IPS to provide the
Company with certain data processing services, including the processing of
MoneyGram transactions for a period of two years, certain management services
necessary for the Company to comply with state licensing requirements until such
time as the Company is fully licensed in all states to offer consumer money
transfer services in its own name and certain additional support services. These
services are provided to the Company at First Data's good faith estimate of its
actual cost of providing such services (including reasonable allocations of
overhead expenses). The Software License Agreement provides the Company with a
perpetual, assignable, nonexclusive, royalty free, worldwide, irrevocable
license to use certain software used in operating the Business. Under the
Facility, the Company may borrow from time-to-time, on a revolving, unsecured
basis, to fund its working capital requirements. Any borrowings thereunder will
bear interest of the prime rate, as announced by Chase Manhattan Bank, N.A.,
plus 1% per annum. The Company is prohibited by the Facility from paying
dividends except to the extent such dividends would not exceed ten percent of
the Company's net income arising after September 30, 1996. The Facility will
terminate 180 days from the IPO Date. Pursuant to the Service Mark Letter
Agreement, the Company and First Data have agreed not to sue one another in
respect of certain disputed marks for a period of two years commencing at the
IPO Date and, at the option of the Company, it may cause Western Union and IPS
to enter into an agreement pursuant to which Western Union would grant the
Company a license to use certain of these disputed service marks in certain
languages. The Human Resource Agreement provides for the transfer of employees
from First Data to the Company and the Telecom Agreement provides the Company
access to telecommunications services provided to First Data at First Data's
tariff rates.
Financial Statement Presentation
The accompanying financial statements have been prepared as if the
transaction and agreements described immediately above were consummated and/or
entered into prior to January 1, 1994. These financial statements present the
financial position, results of operations and cash flows attributable to
MoneyGram, which was operated as a product line of IPS, through the IPO Date.
The following paragraphs set forth the methodologies and assumptions utilized in
preparing the accompanying financial statements.
Balance Sheets
The balance sheet caption "Liabilities relating to unsettled MoneyGram
transactions" represents the principal value of all unsettled MoneyGram
transactions where the recipients have not yet picked up their funds. Since IPS
did not maintain specific cash or investment portfolio accounts for its
products, the 1995 balance sheet reflects zero balances for cash and cash
equivalents. All excess cash was transferred to IPS through a return of capital.
Specific fiduciary assets maintained by IPS for MoneyGram and the consequent
amounts due from IPS relative to the unsettled MoneyGram transactions liability
are included in the accompanying balance sheet under the caption "Assets
restricted to settlement of MoneyGram transactions".
Statements of Operations
The statements of operations reflect revenues and related commission
expenses that are distinct and separately identifiable to MoneyGram as well as
an estimate of allocable investment earnings based upon IPS investment returns
applied to an estimated average cash position.
Until the IPO Date, MoneyGram was a part of IPS' retail services product
group; accordingly, with the exception of agent commission and advertising
expenses, a substantial portion of the expenses in the accompanying statements
of
22
operations represents allocations of IPS costs. IPS' accounting systems provide
for the capturing of costs on a functional cost center basis. Certain cost
centers relate exclusively and others relate substantially to the MoneyGram
service, and have been allocated accordingly, to the Company. The expenses,
included in the accompanying statements of operations, attributable to these
cost centers amounted to $25.4 million, $26.0 million and $13.7 million for the
years ended December 31, 1996, 1995 and 1994, respectively. These expenses
relate principally to IPS' two customer service centers and other processing
costs. The remaining $15.7 million, $12.8 million and $10.0 million of expenses,
excluding agent commissions and advertising, represent allocations that are
based upon various factors which, in the opinion of management, approximate
actual usage. These allocated expenses relate to legal, finance and accounting,
treasury, human resources, sales and other support functions. Included in these
allocated expenses are allocations of IPS general and administrative expenses,
based upon the Company's proportion of IPS' gross revenues. The statements of
operations do not include any allocations of First Data general and
administrative expenses as such costs are not considered to be variable as a
result of the Company's operations. Management of the Company believes that
costs have been determined and allocated on a reasonable basis and all costs
attributable to conducting the Business have been included in the accompanying
statements of operations.
In the opinion of the Company's management, the Company's expenses, as
reflected in the accompanying statements of operations, will not be materially
affected as a result of its becoming a stand-alone entity and its execution of
the Contribution Agreement, the Operations Agreement and the Facility.
2. Summary of Significant Accounting Policies
Revenue Recognition
Fee revenue, net of refunds, represents the transaction fee charged by the
selling agent to the consumer and is recognized at the date of sale. Foreign
exchange revenue represents the Company's share of amounts attributable to
favorable spreads between wholesale foreign currency purchase rates and the
retail exchange rate charged to consumers, principally with respect to Mexican
pesos. Commissions to agents are either a percentage of the transaction fee
charged to the consumer or a fixed dollar amount per transaction and also
include amounts attributable to minimum commission guarantees with respect to
certain agents. Commissions to agents, including guaranteed commissions, are
expensed as incurred.
Net Earnings Per Share
Net income per common share is computed using the weighted-average number of
common shares and common share equivalents outstanding during each period.
Common share equivalents represent the effect of outstanding stock options.
Cash and Cash Equivalents
The Company has classified as cash equivalents its investments in the
highest grade federal government discount notes and commercial paper each with a
maturity of less than thirty days. The investments are stated at cost, which
approximates fair value.
Fixed Assets
Fixed assets are stated at cost less accumulated depreciation and
amortization. Fixed assets comprise personal computers, equipment, furniture and
fixtures, leasehold improvements and agent signage. These assets are depreciated
over their estimated useful lives ranging from 3 to 8 years. Depreciation is
computed using the straight-line method.
23
Advertising and Promotional Expense
The Company records advertising and promotional expense based on actual
expenses incurred.
Costs of Acquiring Agent Contracts
Amounts paid to acquire multi-year exclusive contracts with agents are
capitalized and amortized on a straight-line basis over the life of the related
contract (3 to 5 years).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates.
3. Related Party Transactions
In addition to the relationships set forth and the other information
described in Note 1, the Company, has other transactions and relationships with
First Data.
The allocated expenses in the accompanying statements of operations, as
described in Note 1, include allocations from First Data and affiliates of $2.3
million, $3.9 million and $2.6 million for the years ended December 31, 1996,
1995 and 1994, respectively. The First Data allocations relate principally to
the Company's estimated portion of its participation in certain First Data
insurance, benefit and incentive plans. In addition, the Company received
certain other services, including the estimated portion of charges to the
Company for data processing services provided by First Data Technologies, Inc.,
a wholly owned subsidiary of First Data, of $2.1 million, $2.2 million and $1.6
million for the years ended December 31, 1996, 1995 and 1994, respectively.
4. Income Taxes
The Company has accounted for income taxes under the liability method
required by SFAS No. 109, Accounting for Income Taxes. The taxable income of the
Company for the periods up to the IPO Date has been included in the taxable
income of IPS, which is included in the consolidated U.S. federal income tax
return of First Data. Except as described below, the Company's provision for
income taxes has been computed as if it were a separate tax-paying entity.
During the periods presented there was no formal tax-sharing agreement
between the Company, IPS and First Data, however, First Data subsidiaries remit
current taxes payable to First Data and are entitled to reimbursement from First
Data for current tax benefits. The provision for income taxes has been computed
as if the Company were a subsidiary of First Data and, therefore, the tax
benefits resulting from taxable losses incurred by the Company during and prior
to 1994 have been recorded in those years. As a result, the accompanying
financial statements do not reflect any benefit for utilization of tax loss
carry forwards.
As a result of the IPO, the tax basis (for federal income tax purposes) of
the MoneyGram Assets has increased from the tax basis in the hands of IPS to
their fair market value at the IPO Date (determined by reference to the initial
public offering price). Such tax treatment will produce a tax benefit to the
Company in future years through depreciation or amortization deductions or
through decreased gain or (subject to certain limitations) increased loss on the
disposition of any MoneyGram asset. Pursuant to the requirements of SFAS No. 109
the Company recorded a deferred tax asset (with a corresponding credit to
capital surplus) for the tax effect of the excess of the MoneyGram assets
following the Contribution over their net book value. The amount of the deferred
tax asset that was recorded at the IPO Date was
24
reduced by a valuation allowance of 12% or $7 million which is based upon
management's judgment as to the likelihood of the Company generating sufficient
taxable income to realize the assets through future tax deductions under the
"more likely than not" criteria prescribed by SFAS No. 109.
The income tax provision consists of the following (in thousands):
Year ended December 31,
------------------------------
1996 1995 1994
------ ------- ------
Federal............................. $7,885 $ 9,850 $6,556
State and local..................... 1,160 1,512 679
------ ------- ------
Total............................... $9,045 $11,362 $7,235
====== ======= ======
Deferred income taxes result from the recognition of temporary differences.
Temporary differences are differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that will
result in differences between income for tax purposes and income for financial
statement purposes in future years. The deferred tax provision was immaterial
for the years 1995 and 1994.
As a result of the IPO in December 1996, MoneyGram was no longer included in
the consolidated U.S. federal income tax return of First Data. For this short
period ending December 31, 1996, MoneyGram filed a separate U.S. federal income
tax return in which the Company utilized approximately $250 thousand of its
deferred tax asset. The primary component of the Company's deferred tax asset as
of December 31, 1996, on a stand alone basis, results from the differences in
book and tax basis in the carrying value of certain assets.
The reconciliation of income tax computed at the U.S. federal statutory tax
rate to income tax expense is (in thousands):
Year ended December 31,
------------------------------
1996 1995 1994
------ ------- ------
Tax at U.S. statutory rate.......... $8,287 $10,379 $6,794
Increases in taxes resulting from
State and local taxes, net of
federal income tax benefit....... 758 983 441
------ ------- ------
Income tax expense............. $9,045 $11,362 $7,235
====== ======= ======
5. Retirement Plans and Retiree Medical Benefits
MoneyGram's employees were covered under First Data's benefit plans through
December 31, 1996. First Data sponsored a defined benefit and a defined
contribution retirement plan covering full-time employees of First Data and its
participating subsidiaries, of which MoneyGram was considered one. Retirement
benefits under the defined benefit plan are based primarily upon length of
service and compensation. The defined contribution plan allows eligible
employees to contribute a percentage of their compensation to the plan and
provides for certain employer matching, service-related and other contributions.
During 1994, First Data restructured these plans to allow employees to elect to
cease accruing benefits under the defined benefit plan in exchange for enhanced
employer contributions under the defined contribution plan. Employees hired
subsequent to 1994 do not participate in the defined benefit plan. All
liabilities associated with these plans are the responsibility of First Data.
25
Pursuant to the terms of the Human Resources Agreement among First Data, IPS
and the Company, employees transitioning from First Data to the Company have
been fully vested in their First Data retirement benefits. On January 1, 1997,
the Company adopted and implemented a defined contribution plan that mirrored
First Data's plan.
The Company does not provide to its retirees any form of health care or life
insurance benefits, other than those benefits required by law. Any benefits
provided will be fully paid for by the retirees without any corporate subsidy.
6. Operating Lease Commitments and Rental Expense
Certain facilities and operating equipment utilized in the operations of the
Business are leased under cancelable and noncancelable agreements. Rental
expense amounted to $0.8 million, $0.8 million and $0.4 million for the years
ended December 31, 1996, 1995 and 1994, respectively. These amounts relate
primarily to a portion of the rent expense attributable to IPS' customer service
centers. Future minimum lease payments at December 31, 1996 are: $1.0 million
for 1997 and 1998, $1.1 million for 1999 and 2000, $1.2 million for 2001 and $.6
million thereafter. Certain leases on office space contain renewal options and
escalation clauses providing for additional rentals based upon maintenance,
utility and tax increases.
7. Commitments and Contingencies
In certain instances, certain MoneyGram agents have been guaranteed minimum
commissions. As of December 31, 1996, the remaining maximum commitment amounts
to approximately $65.6 million as follows on a calendar year basis: 1997--$13.2
million; 1998--$14.2 million; 1999--$15.6 million; 2000--$16.7 million;
2001--$3.9 million; and years following--$2.0 million. Historically, MoneyGram's
volume growth has been sufficient to mitigate required performance under these
guarantees, and net payments under these guarantees amounted to $3.2 million,
$1.3 million and $2.0 million during the years ended December 31, 1996, 1995 and
1994, respectively.
MoneyGram is involved in litigation primarily arising in the normal course
of its business. In the opinion of management, MoneyGram's recovery or
liability, if any, under any pending litigation would not materially affect the
Company's financial condition or operations.
The Company currently offers its customers a free three minute phone call
with most transactions. In addition at December 1996 the Company began selling
phone cards through its agents. During 1996, the Company entered into a three
year agreement with a telecommunications provider for voice telephone services,
guaranteeing $14 million in usage by July 2000. The cost of previously providing
free phone calls was $2.9 million and $2.6 million in 1996 and 1995. Based on
annual growth in transactions and future phone card sales, management believes
that this commitment will be paid through normal operating costs.
8. Fixed Assets
The details of fixed assets, as shown on the balance sheet, are as follows:
December 31,
----------------
1996 1995
---- ----
Gross assets:
Leasehold improvements................. 1,132 -
Agent signs............................ 5,610 3,910
Computer related equipment............. 9,480 5,486
All other.............................. 816 557
------ -----
17,038 9,953
Less accumulated depreciation.......... 7,911 3,953
------ -----
Total fixed assets .................... 9,127 6,000
====== ======
26
9. Stock Options
In connection with the IPO, the Board of Directors of the Company adopted,
and IPS as the Company's sole stockholder approved, the Company's 1996 Stock
Option Plan (the "1996 Stock Option Plan") and the Company's 1996 Broad-Based
Stock Option Plan. The Company has reserved for issuance under the 1996 Stock
Option Plan and the 1996 Broad-Based Stock Option Plan 1,175,000 and 25,000
shares of common stock, respectively. The exercise price of the options granted
is $12.00, which is the price at which shares were initially offered to the
public. Options are vested at a rate of 25 percent per year over a four year
period from the date of grant.
Options Authorized 1,200,000
Granted (1,162,575)
Cancelled 250
----------
Available 37,675
==========
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 "Accounting for Stock-Based Compensation" ("SFAS No. 123") which established
financial accounting and reporting standards for stock-based employee
compensation plans. SFAS No. 123 permits companies to account for stock-based
compensation under Accounting Principles Board No. 25 ("APB No. 25") or adopt
SAFS No. 123 and reflect the fair value of stock options in the statement of
operations as additional expense.
The Company will follow APB No. 25 and its related interpretations in
accounting for its stock-based compensation plans. No compensation cost has been
recognized in the Statements of Operations for the stock options granted during
1996. The disclosure requirements of SFAS No. 123 require companies which do not
record the fair value in the statements of operations to provide pro forma
disclosures of net income and earnings per share in the notes to the financial
statements as if the fair value of the stock-based compensation had been
recorded.
The Company utilized a Black-Scholes option pricing model to quantify the
pro forma effect on net income and earnings per share of the fair value of the
options granted during 1996. Based on the results of the model, the value of the
options granted in December 1996 is $308 thousand with the following weighted
assumptions: no annual dividends, an expected life of 5 years, expected
volatility of 40% and a risk-free interest rate of 6.2%. The Company's 1996 pro
forma net income would have been $14.4 million compared to actual net income of
$14.6 million and pro forma earnings per common share would have been $.87
compared to $.88.
10. Credit Risk and Certain Relationships
Credit risk results from the possibility that a loss may occur from the
failure of another party to perform according to the terms of a contract. In the
case of MoneyGram, the principal risk is that a selling agent fails to remit the
proceeds of a transaction to the Company. The Company mitigates this risk
through extensive credit evaluations prior to entering into a contractual
relationship and thereafter monitors performance to ensure compliance. The
agents are required to deposit daily the principal and fees received the prior
day into a trust account, and these funds are drawn down daily by MoneyGram.
MoneyGram agents conduct business in thousands of locations. Further, the nature
of the agents' principal businesses is diverse and the agent base includes
supermarkets, department and convenience stores, travel agents and check cashing
establishments.
Approximately 55%, 64% and 60% of MoneyGram's total revenues (including
foreign exchange revenues and allocated investment income) were derived from
money transfer transactions from the United States to Mexico during the years
ended December 31, 1996, 1995 and 1994, respectively. The Mexican receive agent
for substantially all of these transactions is a major Mexican financial
institution operating under the terms of a contract expiring in April 2002.
27
11. Subsequent Events
On February 12, 1997, MoneyGram and Thomas Cook announced the formation of a
joint venture that is 51% owned by MoneyGram. MoneyGram contributed the economic
value of certain of its international agents and Thomas Cook contributed use of
its sales force. The joint venture will expand the distribution of MoneyGram
services on an international basis. This venture will be accounted for as a
wholly owned subsidiary, with minority interest.
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
MoneyGram Payment Systems, Inc.
(Registrant)
By: /s/ James F. Calvano
---------------------------------
James F. Calvano
Chairman of the Board and
Chief Executive Officer
March 25, 1997
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 and on the dates indicated:
Name Title Date
/s/ James F. Calvano Chairman of the Board and March 25, 1997
- ------------------------------ Chief Executive Officer
James F. Calvano (Principal Executive Officer)
/s/ Robbin L. Ayers Director and Executive March 25, 1997
- ------------------------------ Vice President
Robbin L. Ayers
/s/ John M. Fowler Director, Executive Vice March 25, 1997
- ------------------------------ President and Chief Financial
John M. Fowler Officer (Principal Financial
and Accounting Officer)
/s/ Brian J. Fitzpatrick Director March 25, 1997
- -------------------------------
Brian J. Fitzpatrick
/s/ William D. Guth Director March 25, 1997
- -------------------------------
William D. Guth
/s/ Sanford Miller Director March 25, 1997
- -------------------------------
Sanford Miller
29