10-K 1 d270185d10k.htm FORM 10-K FORM 10-K
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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, 2011.

 

  ¨ 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: 001-31950

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.)

2828 N. Harwood St., 15th Floor

Dallas, Texas

 

75201

(Zip Code)

(Address of principal executive offices)

 

Registrant’s telephone number, including area code

(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  ¨        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  ¨        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  ¨

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 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        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 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.    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” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨        Accelerated filer  þ                            Non-accelerated filer  ¨                    Smaller reporting company  ¨

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨         No  þ

The aggregate market value of voting and nonvoting 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, 2011, the last business day of the registrant’s most recently completed second fiscal quarter, was $277.3 million.

57,834,779 shares of common stock were outstanding as of February 28, 2012.

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 2012 Annual Meeting of Stockholders.

 

 

 

 


Table of Contents

TABLE OF CONTENTS

 

        

Page

 

PART I.

  
Item 1.  

Business

     3   
 

History and Development

     3   
 

Our Business

     4   
 

Our Segments

     5   
 

Global Funds Transfer Segment

     5   
 

Financial Paper Products Segment

     6   
 

Product and Infrastructure Development and Enhancements

     7   
 

Sales and Marketing

     7   
 

Competition

     8   
 

Regulation

     8   
 

Clearing and Cash Management Bank Relationships

     10   
 

Intellectual Property

     10   
 

Employees

     11   
 

Executive Officers of the Registrant

     11   
 

Available Information

     12   
Item 1A.  

Risk Factors

     12   
Item 1B.  

Unresolved Staff Comments

     26   
Item 2.  

Properties

     26   
Item 3.  

Legal Proceedings

     26   
Item 4.  

Mine Safety Disclosures

     28   

PART II.

  
Item 5.   Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
     28   
Item 6.  

Selected Financial Data

     29   
Item 7.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     31   
Item 7A.  

Quantitative and Qualitative Disclosures about Market Risk

     69   
Item 8.  

Financial Statements and Supplementary Data

     69   
Item 9.  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     70   
Item 9A.  

Controls and Procedures

     70   
Item 9B.  

Other Information

     70   

PART III.

  
Item 10.  

Directors, Executive Officers and Corporate Governance

     70   
Item 11.  

Executive Compensation

     70   
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      71   
Item 13.  

Certain Relationships and Related Transactions, and Director Independence

     71   
Item 14.  

Principal Accountant Fees and Services

     71   

PART IV.

  
Item 15.  

Exhibits and Financial Statement Schedules

     71   
Signatures      72   
Exhibit Index      73   

 

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PART I

 

 

Item 1. BUSINESS

 

 

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 financial paper products. 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 money transfer services are available at approximately 267,000 agent locations in approximately 192 countries and territories. Our services enable consumers throughout the world to transfer money and pay bills, helping them meet financial demands of their daily lives. Our bill 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 is www.moneygram.com.

History and Development

We conduct our business primarily through our wholly owned subsidiary MoneyGram Payment Systems, Inc., or MPSI, under the MoneyGram brand. Through its predecessor, Travelers Express Company, Inc., or Travelers Express, the Company has been in operation for over 70 years.

In March 2008, we completed a recapitalization pursuant to which we received an infusion of $1.5 billion of gross equity and debt capital, referred to herein as the 2008 Recapitalization. The equity component consisted of the sale to affiliates of Thomas H. Lee Partners, L.P., or THL, and affiliates of Goldman, Sachs & Co. or 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, or the B Stock, and Series B-1 Participating Convertible Preferred Stock of the Company, or 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 2008 Recapitalization, our wholly owned subsidiary, MoneyGram Payment Systems Worldwide, Inc., or Worldwide, issued Goldman Sachs $500.0 million of senior secured second lien notes with a 10-year maturity, or the Second Lien Notes. We also entered into a senior secured amended and restated credit agreement with JPMorgan Chase Bank, N.A., or JPMorgan, as agent for a group of lenders, bringing the total facility to $600.0 million. The amended facility included $350.0 million in two term loan tranches and a $250.0 million revolving credit facility.

In May 2011, we completed a second recapitalization, referred to herein as the 2011 Recapitalization. Pursuant to the 2011 Recapitalization, (i) THL, as the holder of all of the B Stock, converted 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, as the holder of all of the B-1 Stock, converted all of the shares of B-1 Stock into shares of Series D Participating Convertible Preferred Stock of the Company, or 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 received approximately 3.5 million additional shares of our common stock and $140.8 million in cash, and Goldman Sachs received approximately 15,503 additional shares of D Stock and $77.5 million in cash. The 2011 Recapitalization was 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.

 

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Concurrently with entering into the Recapitalization Agreement, Worldwide and the Company entered into a consent agreement, or the Consent Agreement, with certain affiliates of Goldman Sachs, or the GS Note Holders, who are holders of the Notes. Pursuant to the Consent Agreement, the parties thereto entered into a supplemental indenture to the indenture governing the Notes that amended the indenture in order to permit the 2011 Recapitalization. In addition, the Company entered into a new senior secured credit facility, or the 2011 Credit Facility, comprised of a $150 million, five-year revolver and a $390 million six-and-a-half-year term loan, which refinanced the Company’s existing senior secured credit facility and provided the funding for the 2011 Recapitalization.

On November 14, 2011, the Company filed a certificate of amendment to its Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Company’s common stock at a reverse stock split ratio of 1-for-8 and to decrease the number of authorized shares of common stock from 1,300,000,000 to 162,500,000. As the par value of common stock was not affected, $3.5 million was transferred from common stock to additional paid in capital. In connection with the reverse stock split, the conversion ratio of the D Stock to common stock decreased from 1,000 to 125. All share and per share amounts have been retroactively adjusted to reflect the stock split with the exception of the Company’s treasury stock, which was not a part of the reverse stock split.

In November and December 2011, the Company completed a secondary offering pursuant to which the Investors sold an aggregate of 10,237,524 shares in an underwritten offering. In connection with the secondary offering, 63,950 shares of D Stock were converted to 7,993,762 shares of common stock. The Company did not receive proceeds from the offering.

In connection with the secondary offering, the Company exercised an option to redeem $175.0 million of its Second Lien Notes. The redemption was completed through the issuance of a $150.0 million incremental term loan under the 2011 Credit Agreement, with the remaining balance paid from cash and cash equivalents. In connection with the redemption, the Company incurred a prepayment penalty of $23.2 million.

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 and the destination location. The designated recipient may receive the transferred funds 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 a limited number of Company-owned retail locations in the United States and Western Europe. We also offer our money transfer services through the Internet, agent websites, mobile phone, kiosks, ATMs, receive cards and direct-to-bank account products in various markets around the world.

Our primary bill payment service offering is our ExpressPayment® service, which we offer at all of our money transfer agent locations in the United States and at certain agent locations in select Caribbean countries. Through our ExpressPayment service, a consumer can pay cash for bills at an agent location and obtain same-day notification of payment to the consumer’s account with its creditor, also referred to as 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 at 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 2011, 2010 and 2009, our 10 largest agents accounted for 45 percent, 50 percent and 48 percent, respectively, of our total company fee and investment revenue and 48 percent, 54 percent and 53 percent,

 

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respectively, of the fee and investment revenue of our Global Funds Transfer segment. Wal-Mart Stores, Inc. is our only agent that accounts for more than 10 percent of our total company fee and investment revenue. In 2011,

2010 and 2009, Wal-Mart accounted for 29 percent, 30 percent and 29 percent, respectively, of our total company fee and investment revenue, and 31 percent, 32 percent and 32 percent, respectively, of the fee and investment revenue of our Global Funds Transfer segment. Our contract with Wal-Mart in the United States, which runs through January 2013, provides for Wal-Mart’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.

Our Segments

We manage our business primarily through two segments: Global Funds Transfer and Financial Paper Products. The table below presents the components of our consolidated revenue associated with our segments for the year ended December 31:

 

      2011     2010     2009  

Global Funds Transfer

      

Money transfer

     83.4     79.4     76.7

Bill payment

     9.0     10.8     11.6

Financial Paper Products

      

Money order

     4.9     5.9     6.4

Official check

     2.6     3.5     4.1

Other

     0.1     0.4     1.2
  

 

 

   

 

 

   

 

 

 

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 may be unbanked or underbanked. Unbanked consumers are those consumers who do not have a traditional relationship with a financial institution. 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 and emergency users who may have a checking account with a financial institution but prefer to use our services on the basis of convenience, cost or to make emergency payments. We primarily offer services to consumers through third-party agents, including retail chains, independent retailers and financial institutions.

In 2011, our Global Funds Transfer segment had total fee and investment revenue of $1,153.0 million. We continue to focus on the growth of our Global Funds Transfer segment outside of the United States. During 2011, 2010 and 2009, operations outside of the United States generated 32 percent, 28 percent and 27 percent, respectively, of our total company fee and investment revenue, and 35 percent, 31 percent and 31 percent, respectively, of our Global Funds Transfer segment fee and investment revenue in each of these years. In 2011, we added approximately 40,000 net locations, bringing our global agent network to approximately 267,000 locations.

 

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Following is a summary of our agent locations by geography:

 

YEAR ENDED DECEMBER 31,

   2011  

Latin America

     18,000   

Mexico

     14,000   

North America

     41,000   

Western Europe

     46,000   

Eastern Europe

     46,000   

Indian subcontinent

     45,000   

Asia Pacific

     35,000   

Africa

     18,000   

Middle East

     4,000   
  

 

 

 

Total Agent Locations

     267,000   
  

 

 

 

We provide Global Funds Transfer products and services utilizing a variety of proprietary point-of-sale platforms. Our platforms include AgentConnect®, which is integrated into an agent’s point-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 various countries. We provide call center services 24 hours per day, 365 days per year and provide customer service in approximately 30 languages.

Money 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.

As of December 31, 2011, we offer money transfers to consumers in a choice of local currency or United States dollars and/or euros in 141 countries, 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 consumers to know the amount that will be received in the local currency of the receiving country, or in U.S. dollars or euros in certain countries.

Bill Payment Services — We derive our bill payment revenues primarily from transaction fees charged to consumers for each bill payment transaction completed. Through our bill payment services, consumers can make urgent payments or pay routine bills through our network to certain billers. We maintain relationships with billers in key 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. Our bill payment services also enable consumers to load and reload prepaid debit cards. Our bill payment services also allow customers to make low-cost, in-person payments of non-urgent utility bills for credit to a biller, typically within two to three days.

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 2011, our Financial Paper Products segment generated revenues of $93.3 million. Since early 2008, our investment portfolio has consisted of lower risk, highly liquid, short-term U.S. government securities that produce a lower rate of return, which has resulted in lower revenues and profit margins in our Financial Paper Products segment.

 

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Money 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 ten 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 2011, we issued approximately 161.9 million money orders through our network of 55,100 agent and financial institution locations in the United States and Puerto Rico. 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.

Official Check Outsourcing 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 4.1 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, 2011, we provide official check outsourcing services at approximately 8,500 branch locations of more than 1,300 financial institutions. We issued 24.2 million and 30.3  million official checks in 2011 and 2010, 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.

We are reaching new customers through alternate and self-service money transfer delivery channels. We offer our money transfer services on the Internet via our MoneyGram Online service in the United States, United Kingdom 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 transfer services to consumers through the addition of kiosks, ATMs, receive cards and direct-to-bank account products in various markets. We also introduced the convenience of cash-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. We continue to expand product offerings in key markets such as multi-currency options in China, direct-to-account in Brazil and customer-directed receives in the Ukraine.

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. MoneyGram Online transactions and revenue grew 30 percent in 2011 over the prior year. 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 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 continue 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 through a number of dedicated sales and marketing teams, and continually assess the effectiveness of our sales and marketing efforts.

A wide range of marketing methods continue to support our sales efforts. A key component of our advertising and marketing efforts is our global branding. We use a marketing mix to support the global brand, which includes

 

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traditional media and digital and social media, point of sale materials, MoneyGram-branded signage at our agent locations, a loyalty program and targeted direct marketing programs and seasonal campaigns and sponsorships.

Our sales teams are organized by geographic area, channel and product. We have dedicated support teams that focus on developing our agent and biller networks to enhance the reach of our money transfer, bill payment and money order products. Our agent requirements vary depending upon the type of outlet or location, and our sales teams continue to work to improve and strengthen our agent partnerships with a goal of providing the optimal customer 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 niche person-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 that allows consumers to send $50 of principal for a $5 fee at most locations, or $4.75 at a Wal-Mart location.

Regulation

Compliance with laws and regulations is a highly complex and integral part of our day-to-day operations. Our operations are subject to a wide range of laws and regulations of the United States and other countries, including international, 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, or OFAC; money transfer and payment instrument licensing laws; escheatment laws; privacy, 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 programs to comply with the most recent legal and regulatory changes. During 2011, we increased our compliance personnel headcount and made investments in our compliance-related technology and infrastructure.

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 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;

 

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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 primarily through third-party agents with whom we contract and do not directly control. As a money services business, we and our 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 — Almost all states in the United 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. Our primary overseas operating subsidiary, MoneyGram International Ltd, became a licensed payment institution under the Payment Services Regulations adopted in the United Kingdom pursuant to 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 across jurisdictions, but generally include cash and cash equivalents, U.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 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 — 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.

Privacy Regulations — In the ordinary course of our business, we collect certain types of data that 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, or 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’s Data Protection Directive, or the Data Protection Directive. We abide by the U.S. Department of Commerce’s Safe Harbor framework principles to assist in compliance with the Data Protection Directive. In some cases, the privacy laws of a European Union member state may be more restrictive than what is required under the Data 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.

 

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Banking Regulations — We completed an underwritten secondary offering of 10,237,524 shares of our common stock held by Goldman Sachs and others in November and December 2011. Prior to that time, we were deemed a “controlled subsidiary” of Goldman Sachs & Co., a bank holding company under the Bank Holding Company Act of 1956, as amended, or the BHC Act, as a result of Goldman Sachs’ ownership of shares of our non-voting D Stock. Although 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 which may then convert the D Stock into common stock. In conjunction with the secondary offering of our common stock, we also made a partial redemption of our Second Lien Notes held by Goldman Sachs in the aggregate principal amount of $175 million. As result of these transactions and discussions with the Federal Reserve, Goldman Sachs has informed us that the Company is no longer deemed a controlled subsidiary of Goldman Sachs. Therefore, we believe we are no longer subject to the regulations that apply to controlled subsidiaries of bank holding companies, or to reporting requirements, examination or supervision by the Federal Reserve under the BHC Act.

Recent Federal Legislation in the United States — The Dodd-Frank Wall Street Reform and Consumer Protection Act, or 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, or the Bureau, which issues and enforces consumer protection initiatives governing financial products and services, including money transfer services, in the United States. We will be required to provide enhanced disclosures to our money transfer customers, which will require us to modify our systems and current consumer disclosures. Enhanced disclosure requirements, error resolution procedures, the extent of vicarious liability for acts of our agents, refund requirements and other matter impacting how we offer international remittances in the United States were set forth in the Final Remittance Rule that was issued by the Bureau on January 20, 2012 and published in the Federal Register on February 7, 2012. The effective date of the Remittance Rule is February 7, 2013.

Regulation of Prepaid Cards — 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. 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 and 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, or 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. In addition, some large international banks have opted not to bank money service businesses. As a result, we also utilize regional or country-based banking partners in addition to large cash management banks.

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 globe with arrows logo, ExpressPayment, MoneyGram Rewards, FormFree, and PrimeLink marks. In addition, we maintain a portfolio of MoneyGram branded domain names.

 

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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. We 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. We believe we take appropriate measures to protect our intellectual property to the extent such intellectual property can be protected.

We own U.S. and foreign patents related to our money order and money transfer technology. Our U.S. patents have in the past given us competitive advantages in the marketplace. We also have patent applications pending in the United States that relate to our money transfer, money order 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.

Employees

As of December 31, 2011, we had approximately 1,399 full-time employees in the United States and 737 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

Pamela H. Patsley, age 55, 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.

Juan Agualimpia, age 49, has served as Executive Vice President, Chief Marketing Officer since February 2011. Mr. Agualimpia previously served as Senior Vice President and 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 and General Manager for the Art & Coloring Global Business Unit of Newell Rubbermaid from 2005 to March 2009.

David B. Brown, age 49, has served as Senior Vice President, Chief Accounting Officer since January 2012. Mr. Brown previously served as Chief Financial Officer of Dresser, Inc., a privately held energy industry infrastructure manufacturer, from 2010 to 2011. Prior to that, Mr. Brown served in various roles of increasing responsibility at Dresser, Inc. from 2007 to 2010. From 2003 to 2007, Mr. Brown held various financial positions at The Brink’s Company. From 1996 to 2003, Mr. Brown held financial positions at LSG Sky Chefs. In 1995, Mr. Brown was a consultant for Halliburton, and from 1985 to 1995 he held the position of Audit Senior Manager at Price Waterhouse L.L.P.

Timothy C. Everett, age 49, 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.

W. Alexander Holmes, age 37, has served as Senior Vice President, Corporate Strategy and Investor Relations since June of 2009. Mr. Holmes previously served as Senior Vice President, Global Sourcing and Strategic Initiatives at First Data Corporation, a global payment processing company, from 2007 to 2009. From 2004 to 2007, Mr. Holmes served in various roles of increasing responsibility at First Data Corporation. Prior to that, Mr. Holmes managed the Benelux region at the Western Union Company, a global money transfer company, from 2002 to 2003. Mr. Holmes joined First Data in 2000 and served in various finance roles until

 

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early 2002. From 1997 to 2000, Mr. Holmes was at the University of Colorado’s system administration office where he managed a number of ERP implementation projects.

Daniel J. O’Malley, age 47, has served as Executive Vice President, Americas and Emerging Markets since June 2011. Mr. O’Malley previously served as Executive Vice President, 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 46, 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 50, 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 46, 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

We make our reports on Forms 10-K, 10-Q and 8-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, or the SEC. Our principal executive offices are located at 2828 N. Harwood Street, 15th Floor, 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 on Form 10-K or our other filings with the SEC could have a material impact on our business, financial condition or results of operations.

RISK FACTORS

Risks Related to our Business and Industry

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 international migration patterns are

 

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affected by, among other things, employment opportunities and overall economic conditions. Our customers tend to be employed 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 number 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 conditions in the United States or other national economies important to our business were to deteriorate further, our results of operations could be adversely impacted. Additionally, if our consumer transactions decline or international 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.

If consumers’ confidence in our business or in traditional money transfer providers generally deteriorates, our business, financial position and results of operations could be adversely affected.

Our business is built on consumers’ confidence in our brands and our ability to provide fast, reliable money transfer services. Erosion in consumers’ confidence in our business, or in traditional money transfer providers as a means to transfer money, could adversely impact transaction volumes, which would in turn adversely impact our business, financial position and results of operations.

A number of factors could adversely affect consumers’ confidence in our business, or in traditional money transfer providers generally, many of which are beyond our control, and could have an adverse impact on our results of operations. These factors include:

 

   

changes or proposed changes in laws or regulations that have the effect of making it more difficult for consumers to transfer money using traditional money transfer providers;

 

   

actions by federal, state or foreign regulators that interfere with our ability to transfer consumers’ money reliably, for example, attempts to seize money transfer funds;

 

   

federal, state or foreign legal requirements, including those that require us to provide consumer data to a greater extent than is currently required;

 

   

any significant interruption in our systems, including by fire, natural disaster, power loss, telecommunications failure, terrorism, vendor failure, unauthorized entry and computer viruses; and

 

   

any breach of our security policies or legal requirements resulting in a compromise of consumer data.

Many of our money transfer consumers are migrants. Consumer advocacy groups or governmental agencies could consider the migrants to be disadvantaged and entitled to protection, enhanced consumer disclosure, or other different treatment. If governments implement new laws or regulations that limit our right to set fees and/or foreign exchange spreads, or if consumer advocacy groups are able to generate widespread support for positions that are detrimental to our business, then our business, financial position and results of operations could be adversely affected.

A material slow down or complete disruption in international migration patterns could adversely affect our business, financial condition and results of operations.

Our money transfer business relies in part on international 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

 

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events (such as war, 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.

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 servicing our debt, or that we will be allowed to make such expenditures under the terms of our debt agreements. If we are unable to meet these demands, we could lose customers and our business, financial condition and results of operations could be adversely affected.

A substantial portion of our transaction volume is generated by a limited number of key agents. During 2011 and 2010, our 10 largest agents accounted for 45 percent and 50 percent, respectively, of our total company fee and investment revenue and 48 percent and 54 percent, respectively, of the fee and investment revenue of our Global Funds Transfer segment. In 2011 and 2010, our largest agent, Wal-Mart, accounted for 29 percent and 30 percent, respectively, of our total company fee and investment revenue and 31 percent and 32 percent, respectively, of the fee and investment revenue of our Global Funds Transfer segment. The term of our agreement with Wal-Mart runs through January 2013. If Wal-Mart or any of our other key agents do not renew their contracts with us, or if such agents 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 could be adversely affected. Further, if Wal-Mart or any of our other key agents renew their contracts with us, but on less favorable terms, our business, financial condition and results of operations could be adversely affected.

MoneyGram and our agents are subject to numerous U.S. and international laws and regulations. Failure to comply with these laws and regulations could result in material settlements, fines or penalties or changes in our or our agents’ business operations and may adversely affect our business, financial condition and results of operations.

Our business is subject to a wide range of laws and regulations that vary from country to country. The money transfer business is subject to a variety of regulations aimed at preventing money laundering and terrorism. We are subject to U.S. federal anti-money laundering laws, including the Bank Secrecy Act and the requirements of OFAC, which prohibit us from transmitting money to specified countries or on behalf of prohibited individuals. Additionally, we are subject to 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 and privacy and data protection laws. Many of these laws are constantly evolving, unclear and inconsistent across various jurisdictions, making compliance challenging.

There has been increased public attention and heightened legislation and regulations regarding money laundering, terrorist financing, corporate use and disclosure of personal information, data protection, information security and consumer privacy. The legal, political and business environments in these particular areas are

 

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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, or 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 other companies. We are also subject to regulatory oversight and enforcement by FinCEN. Any determination that we have violated these laws could have an adverse effect on our business, financial condition and results of operations. We are subject to several investigations by the U.S. federal government and several U.S. state governments.

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. Money transmitters such as the Company will be required to provide additional consumer information and disclosures, adopt error resolution standards meeting the Bureau’s regulatory requirements, and adjust refund procedures for international transactions originating in the United States. We may be liable for failure of our agents to comply with the Dodd-Frank Act. The Bureau and the regulations it has adopted and will adopt will necessitate operational changes and additional costs, but we cannot predict its effects upon us or our business at this time. The new legislation and implementing regulations associated with the Dodd-Frank Act may increase our costs of compliance, and may require changes in the way we conduct business.

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, or PSD, imposes potential liability on us for the conduct of our agents and the commission of third party fraud utilizing our services. We modified our business operations in the European Union in 2009 and 2010 in light of the PSD and will likely experience additional costs associated with addressing PSD compliance. If we fail to comply with the PSD, our business, financial condition 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 condition and results of operations.

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. 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 affect our ability to distribute our services and the cost of providing such services. Many of our high volume agents are in the check cashing industry. Any regulatory action that negatively impacts 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 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 demonstrating a greater inclination than they have in the past to hold money services businesses like ours to higher standards and to monitor for possible violations of laws and regulations by agents. Our systems, employees and processes may not be sufficient to detect and prevent violations 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 these fines and penalties, a failure by us or our agents to comply with applicable laws and regulations also could seriously damage our reputation and result in diminished revenue and profit and increase our operating costs.

 

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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.

Litigation or investigations involving us or our agents could result in material settlements, fines or penalties and may adversely affect our business, financial condition and results of operations.

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, as well as certain money laundering activities, which may result in fines, penalties, judgments, 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 be predicted.

Regulatory and judicial proceedings and potential adverse developments in connection with ongoing 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 but may include substantial fines and expenses, as well as the revocation of required licenses or registrations or the loss of approved status, which could have a material adverse effect on our business, financial position and results of operations. 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.

We are subject to several investigations by the U.S. federal government and several U.S. state governments.

We have been served with subpoenas to produce documents and testify before a grand jury in the U.S. District Court for the Middle District of Pennsylvania. The subpoenas sought information related to, inter alia, our U.S. and Canadian agents, as well as certain transactions involving such agents, fraud complaint data, and our consumer anti-fraud program during the period from 2004 to 2009. We have provided information requested pursuant to the subpoenas, and continue to provide additional information relating to the investigation. In addition, the Company has been provided with subpoenas for the testimony of certain current and former employees in connection with the investigation. The Company has also been notified of a request for interviews of one current executive officer and one former chief executive officer of the Company. The U.S. Department of the Treasury Financial Crimes Enforcement Network, or FinCEN, also requested information, which we subsequently provided, concerning our reporting of fraudulent transactions during this period. In November 2010, we met with representatives from the U.S. Attorney’s Office for the Middle District of Pennsylvania, or the MDPA USAO, and representatives of FinCEN to discuss the investigation. In July 2011, we had further discussions with the MDPA USAO and representatives of the Asset Forfeiture and Money Laundering Section of the U.S. Department of Justice, or the US DOJ. We have been informed that we are being investigated by the federal grand jury in connection with these matters for the period 2004 to early 2009 as well as our anti-money laundering program during that period. In January 2012, meetings were held between our representatives, the MDPA USAO and the Criminal Division of the US DOJ to discuss the investigation. We continue to engage in discussions and cooperate with such government representatives regarding the ongoing investigation. During the course of these discussions, we were advised that consideration is being given to a range of possible outcomes, including the seeking of criminal penalties against us. However, no conclusions can be drawn at this time as to the outcome of the investigation and we are unable to predict the probable loss, or range of loss, if any, associated with this matter.

We have also received Civil Investigative Demands from a working group of nine state attorneys general who have initiated an investigation into whether we have taken adequate steps to prevent consumer fraud during the

 

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period from 2007 to 2011. The Civil Investigative Demands seek information and documents relating to our procedures to prevent fraudulent transfers and consumer complaint information. We continue to cooperate fully with the states’ attorneys in this matter. We have submitted the information and documents requested by the states. No claims have been made against us at this time.

If any charges or claims are brought with respect to these investigations, we could face substantial fines, damage awards, attorneys’ and other legal expenses and fees, or regulatory consequences, such as the revocation of required licenses or registrations or the loss of approved status, which could have a material adverse effect on our business, financial position and results of operations. In addition, if any charges or claims are brought, and regardless of whether or not successfully prosecuted, we could face negative publicity that could adversely affect our important customer relationships, which could have a material adverse effect on our business, financial position and results of operations. Adverse developments related to these investigations, including any expansion of their scope, could negatively impact our Company and could divert the efforts and attention of our management team from our ordinary business operations.

We conduct money transfer transactions through agents in some regions that are politically volatile or, in a limited number of cases, that 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. It is possible that our money transfer service or other products could be used by wrong-doers in contravention of U.S. law or regulations. Such circumstances 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.

Our substantial debt service 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 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 flows 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 and other corporate initiatives;

 

   

our debt agreements contain financial and restrictive covenants that 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 changing economic, regulatory and industry conditions;

 

   

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 ability to pay cash dividends to the holders of our common stock is significantly restricted; 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.

 

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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.

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.

We face certain 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 access funds in our investment portfolio, deposit accounts and clearing accounts 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.

 

   

Clearing and cash management banks that conduct our official check, money order and money transfer businesses could fail or experience sustained deterioration in liquidity. This could lead to our inability to clear our payment service instruments and move funds on a global and timely basis as required to settle our obligations and collect partner receivables.

 

   

Our revolving credit facility is one source of funding for our 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.

 

   

We maintain cash at commercial banks in the United States in amounts in excess of the Federal Deposit Insurance Corporation limit of $250,000. In the event of a failure at a commercial bank where we maintain our deposits, we may incur a loss to the extent such loss exceeds the insurance limitation.

If 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.

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. Further, we may not be able to meet new capital requirements introduced or required by our regulators. Further, although we are no longer considered a bank holding company for purposes of U.S. law or the law of any other jurisdiction, as a global provider of payments services and in light of the changing regulatory environment in various jurisdictions, we could become subject to new capital requirements introduced or imposed by our regulators that could require us to issue securities that would qualify as Tier 1 regulatory capital under the Basel Committee accords or retain earnings over a period of time. In addition, given our leveraged nature and the significant restrictive covenants in our debt agreements, there can be no assurance that we will have access to sufficient capital. Failure to meet capital requirements or to have access to sufficient capital could materially impact our business, financial condition and results of operations.

We face credit risks from our retail agents and 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

 

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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, 2011, we had credit exposure to our agents of approximately $352.0 million in the aggregate spread across 12,000 agents, of which four owed us in excess of $15.0 million.

Our official checks outsourcing business is conducted through financial institutions. Our 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. We are liable for payment on all of those instruments except cashier’s checks. As of December 31, 2011, we had credit exposure to our official check financial institution customers of approximately $350.8 million in the aggregate spread across 1,300 financial institutions, of which one owed us in excess of $15.0 million.

We monitor the creditworthiness of our agents and financial institution customers on an ongoing basis. There can be no assurance that the models and approaches we use to assess and monitor the creditworthiness of our agents and financial institution customers 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.

An inability by us or our 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. Our 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. There can be no assurance that we will be able to establish and maintain adequate banking relationships.

If we cannot maintain a sufficient relationship with a 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. Utilizing a global network of banks 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, potentially adversely impacting our cash flow. Maintaining a global network of banks may also increase our overall costs for banking services.

We and our agents are considered Money Service Businesses in the United States under the Bank Secrecy Act. U.S. regulators are increasingly taking the position that Money Service Businesses, as a class, are high risk businesses. In addition, the creation of anti-money laundering laws has created concern and awareness among banks of the negative implications of aiding and abetting money laundering activity. As a result, certain of our agents have been denied access to retail banking services in certain markets regardless of the mitigating factors and controls in place to prevent anti-money laundering law violations. If our agents are unable to obtain sufficient banking relationships, they may not be able to offer our services, which could adversely affect our business, financial condition and results of operations.

 

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We may be unable to operate our official check and money order businesses profitably if we are not successful in retaining those partners that we wish to retain.

We have reduced the commission rate we pay to our official check financial institution customers, and have implemented, and in some cases increased, per-item and other fees for our official check and money order services. Due to the current low interest rate environment, our official check financial 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, a low interest rate environment and contractual rights, there can be no assurance that we will retain official check financial institution customers and money order agents that we wish to retain. If we are not successful in retaining 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, financial condition and results of operations could be adversely affected.

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 is 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.

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, or Western Union. 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 competitor is Western Union. 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 niche person-to-person money transfer service providers. The electronic bill payment services within our Global Funds Transfer segment compete in a highly fragmented consumer-to-business payment 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.

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 service companies has occurred

 

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and could continue to occur in the future. 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 could be adversely affected.

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. If 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. We may make future investments or enter into strategic alliances to develop new technologies and services or to implement infrastructure changes 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 successful. If such investments and strategic alliances are not successful, they could have a material adverse effect on our business, financial condition and results of operations.

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;

 

   

the implementation of U.S. sanctions, resulting in bank closures in certain countries and the ultimate freezing of our assets;

 

   

burdens of complying with a wide variety of laws and regulations;

 

   

possible fraud or 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 of 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.

 

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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 infringe on the rights of others, our business, prospects, financial condition and results of operations could be adversely affected.

The MoneyGram(R) 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 was 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 third party claims alleging that we infringe their intellectual property rights or have misappropriated other proprietary rights. We may be required to spend resources to defend 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 results of operation.

Failure to attract and retain key employees could have a material adverse impact on our business.

Our success depends to a large extent upon our ability to attract and retain key employees. The loss of one or more members of our executive management team could harm our business and future development. A failure to attract and retain key personnel could also have a material adverse impact on our business.

A breach of security of our systems could adversely affect our business.

We obtain, transmit and store confidential customer, employer and agent information in connection with certain of our services. These activities are subject to laws and regulations in the United States and other jurisdictions. The requirements imposed by these laws and regulations, which often differ materially among the many jurisdictions, are designed to protect the privacy of personal information and to prevent that information from being inappropriately disclosed. Any 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, cause a loss of customers and subject us to lawsuits. 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, which could have a material adverse effect on our business, financial condition and results of operations.

Because our business is particularly dependent on the efficient and uninterrupted operation of our computer network systems and data 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

 

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our vendors’ systems or processes, we could suffer financial loss, loss of customers, regulatory sanctions, lawsuits 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. In addition, any work stoppages or other labor actions by employees who support our systems or perform any of our major functions could adversely affect our business. Certain of our agent contracts, including our contract with Wal-Mart, 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.

If we are unable to effectively operate and adapt 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 or start-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. 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 or start-up businesses, 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.

Concerns regarding the European debt crisis and market perceptions concerning the instability of the euro, the potential re-introduction of individual currencies within the Eurozone, or the potential dissolution of the euro entirely, could adversely affect our business, results of operations and financing.

As a result of the debt crisis with respect to countries in Europe, in particular most recently in Greece, Italy, Ireland, Portugal and Spain, the European Commission created the European Financial Stability Facility, or the EFSF, and the European Financial Stability Mechanism, or the EFSM, to provide funding to countries using the euro as their currency, or the Eurozone, that are in financial difficulty and seek such support. In March 2011, the European Council agreed on the need for Eurozone countries to establish a permanent financial stability mechanism, the European Stability Mechanism, which will be activated by mutual agreement, to assume the role of the EFSF and the EFSM in providing external financial assistance to Eurozone countries after June 2013. Despite these measures, concerns persist regarding the debt burden of certain Eurozone countries and their ability to meet future financial obligations, the overall stability of the euro and the suitability of the euro as a single currency given the diverse economic and political circumstances in individual Eurozone countries.

These concerns could lead to the re-introduction of individual currencies in one or more Eurozone countries, or, in more extreme circumstances, the possible dissolution of the euro currency entirely. Should the euro dissolve

 

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entirely, the legal and contractual consequences for holders of euro-denominated obligations would be determined by laws in effect at such time. In addition, concerns over the effect of this financial crisis on financial institutions in Europe and globally could have an adverse impact on the capital markets generally.

Changes in tax laws and unfavorable outcomes of tax positions we take could adversely affect our tax expense and liquidity.

Our future tax rate could be adversely affected by changes in tax laws, both domestically and internationally. From time to time, the United States and foreign, state and local governments consider legislation that could increase our effective tax rates. If changes to applicable tax laws are enacted, our results of operations could be negatively impacted.

We file tax returns and take positions with respect to federal, state, local and international taxation, including positions that relate to our historical net security losses, and our tax returns and tax positions are subject to review and audit by taxing authorities. We expect to receive a Notice of Deficiency within the next 12 months disallowing approximately $908.5 million of cumulative deductions taken relating to net security losses. Through December 31, 2011, we recognized a cumulative federal benefit of approximately $136.1 million relating to these deductions. If our petition regarding the Notice of Deficiency is denied, the Company would be required to make cash payments of $105.4 million based on benefits taken through December 31, 2011. An unfavorable outcome in this audit or other tax reviews or audits could result in higher tax expense, including interest and penalties, which could adversely affect our results of operations and cash flows. We establish reserves for material known tax exposures; however, there can be no assurance that an actual taxation event would not exceed our reserves.

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.

Risks Related to Ownership of our Stock

THL owns a substantial percentage of our common stock, and its interests may differ from the interests of our other common stockholders.

As of December 31, 2011, THL held approximately 64.1 percent of our common stock. As a result, THL is 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. THL also has sufficient voting power to amend our organizational documents. We cannot provide assurance that the interests of THL will coincide with the interests of other holders of our common stock. THL’s 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.

In view of their significant ownership stake in the Company, THL has appointed four members to our Board of Directors. The size of our Board has been set at nine directors, four of which are independent. Our Certificate of Incorporation provides that, as long as the Investors have a right to designate directors to our Board, THL shall have the right to designate two to four directors who shall each have equal votes and who shall have such number

 

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of votes equal to the number of directors as is proportionate to the Investors’ common stock ownership, calculated on a fully-converted basis, as if all of the shares of D Stock were converted to common shares. Therefore, each director designated by THL will have multiple votes and each other director will have one vote.

We have significant overhang of salable common stock and D Stock held by the Investors relative to the public float of our common stock.

The trading market for our common stock was first established in June 2004. The public float in that market now consists of approximately 62.3 million shares issued and 57.8 million shares outstanding as of December 31, 2011. In accordance with the terms of the Registration Rights Agreement entered into between us and the Investors at the closing of the 2008 Recapitalization, we have an effective registration statement on Form S-3 that permits the offer and sale by the Investors of all of the common stock or D Stock currently held by the Investors. In 2011, the Investors sold 10.2 million shares of common stock pursuant to this registration statement, which leaves the Investors with 50.7 million shares of common stock that can still be sold pursuant to the registration statement. The registration statement also permits us to offer and sell up to $500 million of our common stock, preferred stock, debt securities or any combination of these securities, from time to time, subject to market conditions and our 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.

Our 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 charter documents contain provisions that may discourage third parties from seeking to acquire the Company. These provisions and specific provisions of Delaware law relating to business combinations with interested stockholders may have the effect of delaying, deterring or preventing certain business combinations, including a merger or change in control of the Company. Some of these provisions may discourage a future acquisition of the Company even if stockholders would receive an attractive value for their shares or if a significant number of our 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.

Our board of directors has the power to issue series of preferred stock and to designate the rights and preferences of those series, which could adversely affect the voting power, dividend, liquidation and other rights of holders of our common stock.

Under our certificate of incorporation, our board of directors has the power to issue series of preferred stock and to designate the rights and preferences of those series. Therefore, our board of directors may designate a new series of preferred stock with the rights, preferences and privileges that the board of directors deems appropriate, including special dividend, liquidation and voting rights. The creation and designation of a new series of preferred stock could adversely affect the voting power, dividend, liquidation and other rights of holders of our common stock and, possibly, any other class or series of stock that is then in existence.

The market price of our common stock may be volatile.

The market price of our common stock may fluctuate significantly in response to a number of factors, some of which may be beyond our control. These factors include the perceived prospects or actual operating results of our business; changes in estimates of our operating results by analysts, investors or our management; our actual operating results relative to such estimates or expectations; actions or announcements by us or our competitors; litigation and judicial decisions; legislative or regulatory actions; and changes in general economic or market conditions. In addition, the stock market in general has from time to time experienced extreme price and volume fluctuations. These market fluctuations could reduce the market price of our common stock for reasons unrelated to our operating performance.

 

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Item 1B. UNRESOLVED STAFF COMMENTS

 

 

None.

 

 

 

Item 2. PROPERTIES

 

 

 

Location

  

Use

  

Segment(s) Using Space

   Square Feet      Lease Expiration  

Dallas, TX

   Corporate Headquarters    Both      46,291         6/30/2021   

Minneapolis, MN

   Global Operations Center    Both      134,000         12/31/2015   

Brooklyn Center, MN

   Global Operations Center    Both      75,000         4/30/2015   

Lakewood, CO

   Call Center    Global Funds Transfer      113,849         3/31/2015   

London, UK

   Global Operations Center    Both      20,738         1/31/2021   

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. Not included in the above table is approximately 34,211 square feet in Minneapolis, Minnesota that has been sublet. Subsequent to December 31, 2011, the Company entered into an agreement to lease 25,287 square feet of office space in Frisco, Texas and an agreement for early termination of one of its leases in Lakewood, CO consisting of 45,684 square feet. The Company has vacated this portion of the property per the agreement. 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, India, Italy, the Netherlands, Nigeria, Russia, South Africa, Spain, Ukraine, United Arab Emirates, and Switzerland. We believe that our properties are sufficient to meet our current and projected needs.

 

 

 

Item 3. LEGAL PROCEEDINGS

 

 

The matters set forth below are subject to uncertainties and outcomes that are not predictable with certainty. The Company accrues for these matters as any resulting losses become probable and can be reasonably estimated. Further, the Company maintains insurance coverage for many claims and litigations alleged.

Litigation Commenced Against the Company:

Shareholder Litigation — On April 15, 2011 a complaint was filed in the Court of Chancery of the State of Delaware by Willie R. Pittman purporting to be a class action complaint on behalf of all shareholders and a shareholder derivative complaint against the Company, THL, Goldman Sachs and each of the Company’s directors. Ms. Pittman alleges in her complaint that she is a stockholder of the Company and asserts, among other things, (i) breach of fiduciary duty and disclosure claims against the Company’s directors, THL and Goldman Sachs, (ii) breach of the Company’s certificate of incorporation claims against the Company, THL and Goldman Sachs, and (iii) claims for aiding and abetting breach of fiduciary duties against Goldman Sachs. Ms. Pittman purports to sue on her own behalf and on behalf of the Company and its stockholders. Pittman sought to, among other things, enjoin or rescind the 2011 Recapitalization. On April 29, 2011 the plaintiff filed an amended complaint to add two additional plaintiffs, Susan Seales and Stephen Selzer. On May 16, 2011 a hearing to enjoin or rescind the 2011 Recapitalization was held in the Court of Chancery of the State of Delaware, and at the hearing, the plaintiffs’ request for a preliminary injunction was denied. The 2011 Recapitalization was completed on May 18, 2011. Since that time, Ms. Pittman has withdrawn as a putative class representative; Ms. Seales and Mr. Selzer remain as plaintiffs. The plaintiffs seek to recover damages of some or all of the cash and stock payments made to THL and Goldman Sachs by the Company in connection with the recapitalization transaction. This litigation is ongoing and is scheduled for trial in the second quarter of 2012.

On May 12, 2011 a complaint was filed in the County Court at Law No. 3 in Dallas County, Texas by Hilary Kramer purporting to be a class action complaint on behalf of all shareholders and a shareholder derivative complaint against the Company, THL, Goldman Sachs and each of the Company’s directors. Ms. Kramer alleges

 

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in her complaint that she is a stockholder of the Company and asserts, among other things, (i) breach of fiduciary duty claims against the Company’s directors, THL and Goldman Sachs and (ii) claims for aiding and abetting breach of fiduciary duties against Goldman Sachs. Ms. Kramer purports to sue on her own behalf and on behalf of the Company and its stockholders. Ms. Kramer sought to, among other things, enjoin the 2011 Recapitalization. The defendants have moved for the Texas court to stay this litigation in favor of the Pittman litigation in Delaware, which has an overlapping class definition.

Other Matters — The Company is involved in various claims and litigation that arise from time to time in the ordinary course of the Company’s business. Management does not believe that after final disposition any of these matters is likely to have a material adverse impact on the Company’s financial condition, results of operations and cash flows.

Government Investigations:

MoneyGram has been served with subpoenas to produce documents and testify before a grand jury in the U.S. District Court for the Middle District of Pennsylvania. The subpoenas sought information related to, inter alia, 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. MoneyGram has provided information requested pursuant to the subpoenas and continues to provide additional information relating to the investigation. In addition, the Company has been provided with subpoenas for the testimony of certain current and former employees in connection with the investigation. The Company has also been notified of a request for interviews of one current executive officer and one former chief executive officer of the Company. The U.S. Department of the Treasury Financial Crimes Enforcement Network, or FinCEN, also requested information, which information was subsequently provided by MoneyGram, concerning MoneyGram’s reporting of fraudulent transactions during this period. In November 2010, MoneyGram met with representatives from the U.S. Attorney’s Office for the Middle District of Pennsylvania, or the MDPA USAO, and representatives of FinCEN to discuss the investigation. In July 2011, MoneyGram had further discussions with the MDPA USAO and representatives of the Asset Forfeiture and Money Laundering Section of the U.S. Department of Justice, or the US DOJ. MoneyGram has been informed that it is being investigated by the federal grand jury in connection with these matters for the period 2004 to early 2009 as well as MoneyGram’s anti-money laundering program during that period. In January 2012, meetings were held between representatives of the Company, the MDPA USAO and the Criminal Division of the US DOJ to discuss the investigation. MoneyGram continues to engage in discussions and cooperate with such government representatives regarding the ongoing investigation. During the course of these discussions, the Company was advised that consideration is being given to a range of possible outcomes, including the seeking of criminal penalties against the Company. However, no conclusions can be drawn at this time as to the outcome of the investigation, and we are unable to predict the probable loss, or range of loss, if any, associated with this matter.

MoneyGram 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 during the period from 2007 to 2011. The Civil 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 the states in this matter. MoneyGram has submitted the information and documents requested by the states. No claims have been made against MoneyGram at this time.

Other Matters — The Company is involved in various government inquiries and other matters that arise from time to time. Management does not believe that after final disposition any of these matters is likely to have a material adverse impact on the Company’s financial condition, results of operations and cash flows.

 

 

 

Item 4. MINE SAFETY DISCLOSURES

 

 

Not applicable.

 

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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 2011 or 2010. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Mezzanine Equity and Stockholders’ Deficit” and Note 12 — Stockholders’ Deficit of the Notes to Consolidated Financial Statements. As of February 28, 2012, there were 10,482 stockholders of record of our common stock. On November 14, 2011, we effected a one-for-eight reverse stock split of our issued and outstanding common stock. All share and per share amounts have been retroactively adjusted to reflect the stock split with the exception of the Company’s treasury stock, which was not a part of the reverse stock split.

The high and low sales prices for our common stock for the periods presented were as follows:

 

     2011      2010  
Fiscal Quarter    High      Low      High      Low  

 

 

First

   $ 27.44       $ 19.44       $ 31.28       $ 20.24   

Second

   $ 33.12       $ 25.12       $ 32.08       $ 18.72   

Third

   $ 29.28       $ 16.72       $ 23.20       $ 15.92   

Fourth

   $ 23.04       $ 15.90       $ 23.52       $ 18.00   

The Board of Directors has authorized the repurchase of a total of 12,000,000 shares, 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. The Company may consider repurchasing shares from time-to-time, subject to limitations in our debt agreements. 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, 2011, we have repurchased 6,795,017 shares of our common stock under this authorization and have remaining authorization to repurchase up to 5,204,983 shares. The Company repurchased 17 shares in the fourth quarter of 2011. The following table summarizes the share repurchases during the three months ended December 31, 2011:

 

Period

   (a)
Total number  of
shares
purchased
     (b)
Average price
paid  per share
     (c)
Total number of
shares purchased as
part of publicly
announced plans or
programs
     (d)
Maximum
number of shares
that may yet be
purchased
under the plans or
programs (1)
 

October 1 – October 31

           

November 1 – November 30

           

December 1 – December 31

     17         16.28         17         5,204,983   

Total

     17         —           17         5,204,983   

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 incremental build-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 2011 and 2010.

 

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STOCKHOLDER RETURN PERFORMANCE

The following graph compares the cumulative total return from December 31, 2006 to December 31, 2011 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, referred to as the Peer Group Index, 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 graph assumes the investment of $100 in each of our common stock, our Peer Group Index and the S&P 500 Index on December 31, 2006, 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

 

LOGO

 

*$100 invested on 12/31/06 in stock or index, including reinvestment of dividends.

Fiscal year ending December 31.

     12/31/2006      12/31/2007      12/31/2008      12/31/2009      12/31/2010      12/31/2011  

MONEYGRAM INTERNATIONAL, INC.

     100.00         49.47         3.28         9.27         8.72         7.14   

S&P 500 INDEX

     100.00         105.49         66.46         84.05         96.71         98.75   

PEER GROUP INDEX

     100.00         124.59         78.48         124.26         113.57         153.63   

 

 

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

 

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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,   2011     2010     2009     2008     2007  

 

 
(Dollars and shares in thousands, except per share data)                              

Operating Results

         

Revenue

         

Global Funds Transfer segment

  $ 1,152,716      $ 1,053,281      $ 1,025,449      $ 1,015,929      $ 861,403   

Financial Paper Products segment

    93,332        109,515        122,783        238,193        470,127   

Other

    1,721        3,857        13,479        16,459        18,463   

 

 

Total revenue

    1,247,769        1,166,653        1,161,711        1,270,581        1,349,993   

Total operating expenses

    1,105,252        1,008,255        1,086,313        1,151,760        1,139,749   

 

 

Operating income

    142,517        158,398        75,398        118,821        210,244   

Total other expense, net (1)

    102,747        100,018        97,720        456,012        1,203,512   

 

 

Income (loss) from continuing operations before income taxes (2)

    39,770        58,380        (22,322     (337,191     (993,268

 

 

Income tax expense (benefit)

    (19,636     14,579        (20,416     (75,806     78,481   

 

 

Income (loss) from continuing operations

  $ 59,406      $ 43,801      $ (1,906   $ (261,385   $ (1,071,749

 

 

(Loss) earnings per common share:

         

Basic

  $ (9.03   $ (8.77   $ (11.87   $ (33.54   $ (103.55

Diluted

  $ (9.03   $ (8.77   $ (11.87   $ (33.54   $ (103.55

Weighted-average shares outstanding:

         

Basic

    48,576        10,398        10,312        10,307        10,352   

Diluted

    48,576        10,398        10,312        10,307        10,352   

Financial Position

         

Excess (shortfall) of assets over payment service obligations (3)

  $ 211,659      $ 230,229      $ 313,335      $ 391,031      $ (551,812

Substantially restricted assets (3)

    4,417,034        4,414,965        5,156,789        5,829,030        7,210,658   

Total assets

    5,175,578        5,115,736        5,929,663        6,642,296        7,935,011   

Payment service obligations

    4,205,375        4,184,736        4,843,454        5,437,999        7,762,470   

Long-term debt

    810,888        639,946        796,791        978,881        345,000   

Mezzanine equity (4)

           999,353        864,328        742,212          

Stockholders' (deficit) equity (4)

    (110,198     (942,482     (883,013     (781,736     (488,517

Other Selected Data

         

Capital expenditures

  $ 50,136      $ 43,025      $ 38,258      $ 40,357      $ 71,142   

Depreciation and amortization

  $ 46,051      $ 48,074      $ 57,091      $ 56,672      $ 51,979   

Cash dividends declared per share

  $      $      $      $      $ 0.20   

Average investable balances (5)

  $ 3,255,405      $ 3,684,317      $ 4,246,507      $ 4,866,339      $ 6,346,442   

Net investment margin (6)

    0.51     0.56     0.75     1.23     2.28

Approximate number of countries and territories served

    190        190        190        190        180   

Number of money order locations (7)

    45,000        46,000        49,000        59,000        59,000   

Number of money transfer locations (7)

    267,000        227,000        190,000        176,000        143,000   

 

(1) 

Total other expense, net for 2011 includes net securities gains of $32.8 million from the receipt of settlements equal to all outstanding principal from two securities classified in ‘other asset-backed securities’ previously written down to a nominal fair value and debt extinguishment costs of $37.5 million relating to the termination of the 2008 senior facility in connection with the 2011 Recapitalization and the partial redemption of the Second Lien Notes. Total 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. Total other expense, net for 2007 includes net losses of $1.2 billion related to other-than-temporary impairments in the Company’s investment portfolio.

 

(2) 

Income from continuing operations before income taxes for 2011 includes $4.8 million of legal accruals related primarily to shareholder litigation, $3.4 million of asset impairments and $23.5 million of expense related to our global transformation initiative. Income from continuing operations before income taxes for

 

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  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 and asset 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 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 discontinued business. Loss from continuing operations before income taxes for 2007 includes a goodwill impairment of $6.4 million related to a discontinued business.

 

(3) 

Assets in excess of payment service obligations are substantially restricted assets less payment service obligations as calculated in Note 2 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements. Substantially restricted assets are composed of cash and cash equivalents, receivables and investments.

 

(4) 

Mezzanine Equity related to our Series B Stock. Following the 2011 Recapitalization, all amounts included in mezzanine equity were converted into components of stockholders’ deficit and no shares of Series B Stock remained issued at December 31, 2011. See Note 11 — Mezzanine Equity of 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 29,000, 27,000, 28,000, 30,000 and 18,000 locations in 2011, 2010, 2009, 2008 and 2007, respectively, which 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” and under the caption “Risk Factors” in Part 1, Item 1A of this Annual Report on Form 10-K.

Basis of Presentation

The financial statements in this Annual Report on Form 10-K are presented on a consolidated basis and include the accounts of the Company and our subsidiaries. See Note 2 — Summary of Significant Accounting Policies of 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, also referred to as GAAP.

Fee and other revenue — Fee and other revenue consists of transaction fees, foreign exchange revenue and miscellaneous revenue. Transaction fees are 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, 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.

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.

 

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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.

Fee and 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. Other commissions expense 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.

RESULTS OF OPERATIONS

 

                      2011     2010     2011     2010  
                      vs.     vs.     vs.     vs.  
YEAR ENDED DECEMBER 31,   2011     2010     2009     2010     2009     2010     2009  

 

 
(Amounts in thousands)                     ($)     ($)     (%)     (%)  

Revenue

             

Fee and other revenue

  $ 1,230,858      $ 1,145,312      $ 1,128,492      $ 85,546      $ 16,820        7     1

Investment revenue

    16,911        21,341        33,219        (4,430     (11,878     (21 )%      (36 )% 

 

 

Total revenue

    1,247,769        1,166,653        1,161,711        81,116        4,942        7     0

 

 

Expenses

             

Fee and other commissions expense

    547,573        500,759        497,105        46,814        3,654        9     1

Investment commissions expense

    431        737        1,362        (306     (625     (42 )%      (46 )% 

 

 

Total commissions expense

    548,004        501,496        498,467        46,508        3,029        9     1

Compensation and benefits

    235,696        226,422        199,053        9,274        27,369        4     14

Transaction and operations support

    227,762        185,782        284,277        41,980        (98,495     23     (35 )% 

Occupancy, equipment and supplies

    47,739        46,481        47,425        1,258        (944     3     (2 )% 

Depreciation and amortization

    46,051        48,074        57,091        (2,023     (9,017     (4 )%      (16 )% 

 

 

Total operating expenses

    1,105,252        1,008,255        1,086,313        96,997        (78,058     10     (7 )% 

 

 

Operating income

    142,517        158,398        75,398        (15,881     83,000        (10 )%      110

 

 

Other expense

             

Net securities gains

    (32,816     (2,115     (7,790     (30,701     5,675        NM        NM   

Interest expense

    86,165        102,133        107,911        (15,968     (5,778     (16 )%      (5 )% 

Debt extinguishment costs

    37,522                      37,522               NM        NM   

Other

    11,876               (2,401     11,876        2,401        NM        NM   

 

 

Total other expenses, net

    102,747        100,018        97,720        2,729        2,298        3     2

 

 

Income (loss) before income taxes

    39,770        58,380        (22,322     (18,610     80,702        NM        NM   

 

 

Income tax (benefit) expense

    (19,636     14,579        (20,416     (34,215     34,995        NM        NM   

 

 

Net income (loss)

  $ 59,406      $ 43,801      $ (1,906   $ 15,605      $ 45,707        NM        NM   

 

 

 

NM = Not meaningful

 

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Following is a summary of our operating results in 2011:

 

   

Total fee and other revenue increased in 2011 due to an increase in money transfer fee and other revenue, partially offset by lower revenue from bill payment products and the Financial Paper Products segment and the impact of certain businesses and products that were discontinued in 2010. Volume growth of 14 percent and the higher euro exchange rate drove the increase in money transfer fee and other revenue, partially offset by lower average money transfer fees per transaction, corridor mix and the $50 price band. See further discussion under Fee and Other Revenue and Commissions Expense.

 

   

Investment revenue decreased in 2011 due to a decline in average investment balances and lower yields earned on our investment portfolio.

 

   

Total commissions expense increased in 2011 due to money transfer volume growth, the higher euro exchange rate and signing bonus amortization, partially offset by lower volumes from bill payment products.

 

   

Total operating expenses increased in 2011 due to higher commissions expense, $15.2 million of incremental restructuring and reorganization costs, investments in marketing and higher legal and compensation costs. Legal costs in 2010 benefited from a $16.4 million reversal of a patent litigation settlement.

 

   

During 2011, the Company recognized $32.8 million of settlements equal to all outstanding principal from two securities. These securities had previously been written down to a nominal fair value.

 

   

Interest expense decreased 16 percent to $86.2 million in 2011 from $102.1 million in 2010, reflecting lower interest rates from refinancing activity, partially offset by higher outstanding debt balances.

 

   

We had an income tax benefit of $19.6 million on pre-tax income of $39.8 million in 2011, primarily reflecting the release of $34.0 million of valuation allowances on U.S. deferred tax assets related to historical net securities losses and a $9.7 million benefit from the disposition of a business.

 

   

The increase in the euro exchange rate increased total revenue by $16.5 million and total expenses by $12.7 million, for a net increase to our income before income taxes of $3.8 million.

Following is a summary of significant actions taken by the Company and economic conditions during the year that impacted our operating results, liquidity and capital structure in 2011:

Capital Transactions — Following shareholder approval on May 18, 2011, the Company completed the 2011 Recapitalization with THL and Goldman Sachs. As a result of the recapitalization, (i) THL converted all of its shares of the B Stock into 35.8 million shares of common stock and (ii) Goldman Sachs converted all of its shares of the B-1 Stock into 157,686 shares of D Stock, and (iii) THL received 3.5 million additional shares of common stock and $140.8 million in cash, and Goldman Sachs received 15,503 additional shares of D Stock and $77.5 million in cash. Under the 2011 Recapitalization, the Investors received a cash dividend payment for amounts earned under the terms of the B and B-1 Stock for the period from March 26, 2011 through May 18, 2011. During the year ended December 31, 2011, the Company recognized expense of $5.4 million for transaction costs related to the 2011 Recapitalization, which are recorded in the “Other” line in the Consolidated Statements of Income.

On November 14, 2011, the Company effected a reverse stock split of the Company’s common stock at a ratio of 1-for-8 and decreased the number of authorized shares of common stock from 1,300,000,000 to 162,500,000. All share and per share amounts have been retroactively adjusted to reflect the stock split with the exception of the Company’s treasury stock, which was not a part of the reverse stock split.

In November and December 2011, the Company completed a secondary offering pursuant to which the Investors sold an aggregate of 10,237,524 shares in an underwritten offering. In connection with the secondary offering, 63,950 shares of D Stock were converted to 7,993,762 shares of common stock. The Company did not receive proceeds from the offering and incurred transaction costs totaling $1.0 million for the year ended December 31, 2011, which are recorded in the “Other” line in the Consolidated Statement of Income.

 

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Debt Refinancings — On May 18, 2011, the Company entered into a credit agreement in connection with the New Credit Facility, referred to herein as the 2011 Credit Agreement, consisting of a $150.0 million, five-year revolving credit facility and a $390.0 million, six-and-one-half-year term loan. On November 21, 2011, the Company entered into an amendment to the 2011 Credit Agreement and obtained in incremental term loan in an aggregate principal amount of $150 million. The net proceeds from the term loan under the 2011 Credit Agreement were used to consummate the 2011 Recapitalization and to refinance the Company’s existing 2008 senior facility. In connection with this refinancing, the Company incurred a $5.2 million debt extinguishment loss from the pro-rata write-off of unamortized deferred financing costs.

In connection with the secondary offering, the Company exercised an option to redeem a portion of its Second Lien Notes in November 2011. The redemption was completed through the issuance of the $150.0 million incremental term loan under the 2011 Credit Agreement, with the remaining balance paid from cash and cash equivalents. In connection with the redemption, the Company incurred a prepayment penalty of $23.2 million and wrote-off $9.1 million of unamortized deferred financing costs, for a total debt extinguishment loss of $32.3 million.

Global Economic Conditions — Throughout 2011, worldwide economic conditions continued to remain weak, as evidenced by high 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 continued to fluctuate by corridor and country in 2011, particularly in Europe.

The Company experienced transaction growth in Northern Europe, which was somewhat offset by weakness in Spain, Italy and Greece from economic and regulatory factors. New regulations in Italy, which include a tax on non-European Union residents and send limits at non-bank locations, limited our consumers’ ability to send money and slowed growth in the country. The impact of the new legislation was partially offset as a large Italian agent has a higher send limit than non-bank locations.

In addition, bill payment products available in the United States are not as resilient as money transfers given the consumer credit markets and the more discretionary nature of some items paid for by consumers using these products. Accordingly, the volume of bill payment transactions continued to be adversely impacted in 2011, particularly in the auto, housing and credit card sectors. The Company continues to actively pursue strategic initiatives to mitigate the economic impact on bill payment products, including the addition of 1,500 billers to the MoneyGram network and expansion of the products into Canada during 2011. While there have been some indicators of moderation and improvement during the fourth quarter of 2011, particularly in the United States, we continue to have limited visibility into the future and believe growth rates will continue to be hampered in 2012.

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 Wal-Mart location. As discussed further in Global Funds Transfer Segment, the $50 price band impacted revenue growth, as 2011 was the first full year of the pricing change.

Global Transformation Initiative — In the second quarter of 2010, we announced the implementation of 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 includes organizational changes, relocation of certain operations and investment in technology, among other items. The Company has incurred $20.7 million and $5.4 million of cash outlays in 2011 and 2010, respectively, and recorded $23.5 million and $5.9 million of expenses during 2011 and 2010, respectively. We anticipate this initiative to generate annual pre-tax cost savings of $25.0 million to $30.0 million when fully implemented in 2012.

 

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FEE AND OTHER REVENUE AND COMMISSIONS EXPENSE

The following discussion provides a summary overview of results. See discussion for the Global Funds Transfer and Financial Paper Products segments for more detailed explanations of our results.

 

                       2011     2010  
                       vs.     vs.  
YEAR ENDED DECEMBER 31,    2011     2010     2009     2010     2009  

 

 
(Amounts in thousands)                   

Fee and other revenue

   $ 1,230,858      $ 1,145,312      $ 1,128,492        7     1

Fee and other commissions expense

     547,573        500,759        497,105        9     1

Fee and other commissions expense as a % of fee and other revenue

     44.5     43.7     44.1    

Fee and Other Revenue

In 2011, fee and other revenue growth of $85.5 million, or seven percent, was primarily driven by money transfer transaction volume growth, a higher euro exchange rate and higher foreign exchange revenue, partially offset by changes in corridor mix, lower average face value per transaction and the $50 price band in the United States. Bill payment products, money order and official check fee and other revenue decreased due to volume declines.

In 2010, fee and other revenue growth of $16.8 million, or one percent, was primarily driven by money transfer transaction volume growth, changes in corridor mix and higher foreign exchange revenue, partially offset by a lower euro exchange rate and the introduction of the $50 price band in the United States. Official check fee and other revenue increased from repricing initiatives, partially offset by the run-off of financial institution customers. Bill payment products and money order fee and other revenue decreased from volume declines, with bill payment products also being adversely impacted by lower average fees per transaction due to industry mix.

Fee and Other Commissions

In 2011, fee and other commissions expense growth of $46.8 million, or nine percent, was primarily due to money transfer volume growth, a higher euro exchange rate and increased signing bonus amortization, partially offset by lower bill payment and money order volumes. Signing bonus amortization increased due to the signing of new agents. Commissions expense grew at a faster rate than revenue due to pay-out at a higher tier level from volume growth for certain key agents and corridor mix. Commissions expense as a percent of fee and other revenue increased to 44.5 percent in 2011 from 43.7 percent in 2010, primarily from the continued shift in overall product mix towards the Global Funds Transfer segment, particularly the money transfer product. Agents in the Global Funds Transfer segment are compensated through commissions we pay to them, whereas our Financial Paper Products agents and financial institution customers primarily earn their revenue through per item fees they charge directly to the consumer.

In 2010, fee and other commissions expense growth of $3.7 million, or one percent, was primarily due to money transfer transaction volume growth, partially offset by a lower euro exchange rate, a decrease in signing bonus amortization, lower average money transfer commission rates, declines in volumes for bill payment, money order and official check, and lower average bill payment fees from changes in industry mix. Signing bonus amortization decreased as certain historical signing bonuses were fully amortized in the prior year. Commissions expense as a percent of fee and other revenue increased to 43.7 percent in 2010 from 44.1 percent in 2009, primarily from the continued shift in overall product mix towards the Global Funds Transfer segment, particularly the money transfer product.

 

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Net Investment Revenue Analysis

 

                       2011     2010  
                       vs.     vs.  
YEAR ENDED DECEMBER 31,    2011     2010     2009     2010     2009  

 

 
(Amounts in thousands)                   

Investment revenue

   $ 16,911      $ 21,341      $ 33,219        (21 )%      (36 )% 

Investment commissions expense

     (431     (737     (1,362     (42 )%      (46 )% 

 

 

Net investment revenue

   $ 16,480      $ 20,604      $ 31,857        (20 )%      (35 )% 

 

 

Average balances:

          

Cash equivalents and investments

   $ 3,255,405      $ 3,684,317      $ 4,246,507        (12 )%      (13 )% 

Payment service obligations

     2,310,993        2,659,171        3,048,100        (13 )%      (13 )% 

Average yields earned and rates paid (1):

          

Investment yield

     0.52     0.58     0.78    

Investment commission rate

     0.02     0.03     0.04    

Net investment margin(2)

     0.51     0.56     0.75    

 

(1) 

Commissions are paid to financial institution customers based on amounts generated by the sale of official checks only.

 

(2) 

Average yields and 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.

Investment revenue in 2011 decreased $4.4 million, or 21 percent, compared to 2010. Lower average investment balances from the run-off of certain official check financial institution customers terminated in prior periods drove $2.5 million of the decrease, while lower yields earned on our investment portfolio drove a decrease of $1.9 million.

Investment revenue in 2010 decreased $11.9 million, or 36 percent, compared to 2009. Lower yields earned on our investment portfolio drove $7.5 million of the decrease, while lower average investment balances from the run-off of certain official check financial institution customers terminated in prior periods drove $4.4 million of the decrease.

Investment commissions expense in 2011 decreased $0.3 million, or 42 percent, compared to 2010 primarily from lower interest rates. Due to the sustained low federal funds rate, most of our financial institution customers continue to be in a “negative” commission position as of December 31, 2011, 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 amounts, we have opted at this time to impose certain per-item and other fees rather than require payment of the negative commission amounts. We continue to monitor the negative commissions and assess our current fee structure for possible further changes.

Investment commissions expense in 2010 decreased $0.6 million, or 46 percent, compared to 2009 from lower rates resulting from the second phase of the repricing initiative that was implemented in the second quarter of 2009 and lower average investment balances.

 

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OPERATING EXPENSES

The following discussion relates to operating expenses, excluding commissions expense.

Compensation and benefits — Compensation and benefits includes salaries and benefits, management incentive programs, related payroll taxes and other employee related costs. Following is a summary of the change in compensation and benefits:

 

YEAR ENDED DECEMBER 31,    2011     2010  

 

 
(Amounts in thousands)             

Compensation and benefits expense for the prior year

   $ 226,422      $ 199,053   

Change from:

    

Incentive compensation

     8,084        1,636   

Salaries and related payroll taxes

     6,458        3,561   

Restructuring and reorganization

     3,603        2,970   

Impact of change in Euro currency

     2,542        (2,826

Employee stock-based compensation

     (9,994     11,470   

Other employee benefits

     (1,419     10,558   

 

 

Compensation and benefits expense for the years ended December 31,

   $ 235,696      $ 226,422   

 

 

In 2011, incentive compensation increased primarily from stronger performance against current year objectives. Salaries and related payroll taxes increased from ordinary salary increases and our changing employee base mix as we invest in our sales, market development and compliance functions, partially offset by lower headcount from our restructuring and outsourcing initiatives. Restructuring and reorganization costs increased primarily due to employee severance costs associated with the centralization and relocation of certain functions. Employee stock-based compensation decreased from grants fully vesting in prior periods and forfeitures, partially offset by new grants. Other employee benefits decreased due to medical claim reimbursements in 2011 and non-restructuring severance costs in 2010. We incurred higher expense associated with our legacy defined benefit plans from the impact of lower interest rates on our obligations under those plans, net of a reduction in the number of eligible participants and reduced benefits in the legacy post-retirement medical plan.

In 2010, incentive compensation increased from higher participation levels that increased the compensation base as compared to the prior year, partially offset by lower sales incentives accruals. Salaries and related payroll taxes increased from ordinary salary increases. Restructuring and reorganization costs increased primarily due to employee severance costs associated with the centralization and relocation of certain functions. Stock-based compensation increased from grants made in 2010 and the second half of 2009 in connection with executive hires. Other employee benefits in 2009 included a $14.3 million net curtailment gain on benefit plans, partially offset by $3.9 million of executive severance costs.

Transaction and operations support — Transaction and operations support expense primarily includes: marketing; professional fees and other outside services; telecommunications; agent support costs, including forms related to our products; non-compensation employee costs, including training, travel and relocation; bank charges; and the impact of foreign exchange rate movements on our monetary transactions, assets and liabilities

 

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denominated in a currency other than the U.S. dollar. Following is a summary of the change in transaction and operations support:

 

YEAR ENDED DECEMBER 31,    2011     2010  
(Amounts in thousands)             

Transaction and operations support expense for the prior year

   $ 185,782      $ 284,277   

Change from:

    

Legal reserves

     10,990        (72,078

Restructuring and reorganization

     10,690        1,303   

Marketing costs

     10,434        6,901   

Consultant fees and outsourcing

     6,647        (641

Foreign currency transaction losses

     3,287        2,474   

Goodwill and asset impairments

     (1,558     (16,206

Other

     1,322        (5,223

Provision for loss

     168        (15,025

 

 

Transaction and operations support expense for the years ended December 31,

   $ 227,762      $ 185,782   

 

 

In 2011, transaction and operations support expense increased from the following items, inclusive of $0.3 million of incremental expense from the higher euro exchange rate:

 

   

Legal fees and reserves increased primarily due to a $16.4 million benefit in 2010 from the reversal of a reserve for a patent litigation matter, partially offset by lower settlement reserve additions for securities and other litigation matters. In addition, we incurred overall lower legal fees for regulatory matters, general advisement and licensing matters supporting operational activities.

 

   

Restructuring and reorganization costs increased primarily due to employee relocation and resourcing costs for the centralization and relocation of certain functions, including preparation for further centralization and operational changes in 2012.

 

   

Marketing costs increased from our expanded investment in marketing and the timing of marketing campaigns in 2011. During 2011, the Company increased its investment in marketing as a percent of revenue to return to historic levels and support growth in money transfer. In future years, we expect to return to more normalized increases in marketing expense.

 

   

Consultant fees and outsourcing costs increased primarily due to the outsourcing of certain transactional support and information technology activities, as well as tax advisement and our continued investment in the enhancement of our operational processes and systems that support our infrastructure.

 

   

Foreign exchange losses increased due to the impact of high volatility in foreign currency exchange rates on our growing assets, liabilities, revenue and expenses not denominated in the U.S. dollar.

 

   

Other expenses primarily relate to incremental employee costs from headcount additions to support business growth and initiatives and invest in the development of our personnel, as well as increased security costs from process enhancements and business and product growth. Targeted cost savings initiatives related to telecommunications and agent forms partially offset these increases.

 

   

Included in 2010 expense is $1.5 million impairment from the disposition of a corporate aircraft.

In 2010, transaction and operations support expense decreased from the following items, inclusive of a $3.1 million benefit from a lower euro exchange rate:

 

   

Legal reserves and fees benefited in 2010 from a $16.4 million reversal of a reserve for a patent litigation matter. In addition, expenses in 2009 included $54.8 million of settlements related to securities litigation, the Federal Trade Commission and an unfavorable patent litigation ruling.

 

   

Restructuring and reorganization costs relate to the early phases of our global business transformation, primarily for the relocation of certain functions and preparation for 2011 actions.

 

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Marketing costs increased to support transaction and agent growth.

 

   

Foreign exchange losses increased due to the impact of high volatility in foreign currency exchange rates on our growing assets, liabilities, revenue and expenses not denominated in the U.S. dollar.

 

   

Other expenses decreased from targeted cost savings initiatives, particularly related to telecommunications and agent forms, partially offset by costs related to the implementation of the European Union Payment Services Directive and international licensing requirements.

 

   

Provision for loss increased primarily due to the closure of an international agent.

 

   

Goodwill and asset impairments in 2009 related to the disposition of two businesses and a corporate aircraft, discontinuation of certain bill payment product offerings and the Financial Paper Products segment.

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 2011 increased $1.3 million, or three percent, compared to 2010 primarily due to $1.0 million of restructuring costs relating to facility consolidation and relocation, partially offset by cost reductions due to our facilities rationalization efforts. As reflected in the amounts discussed above, the increase in the euro exchange rate increased occupancy, equipment and supplies expense by $0.6 million in 2011.

Expenses in 2010 decreased $0.9 million, or two 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.

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 $2.0 million, or four percent, in 2011 compared to 2010, primarily from lower depreciation expense on point of sale equipment, computer hardware and other equipment, partially offset by an increase in amortization of capitalized software from the 2010 implementation of a new system that increased the flexibility of our back office and improved operating efficiencies. As reflected in the amounts discussed above, the increase in the euro exchange rate increased depreciation and amortization expense by $0.5 million in 2011. 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 expense may increase in the future.

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.

 

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OTHER EXPENSE, NET

Net Securities Gains — Following is a summary of the components of net securities gains:

 

                       2011     2010  
                       vs.     vs.  
YEAR ENDED DECEMBER 31,    2011     2010     2009     2010     2009  
(Amounts in thousands)                               

Realized gains from available-for-sale investments

   $ (32,820   $      $      $ (32,820   $   

Realized losses from available-for-sale investments

                   2               (2

Other-than-temporary impairments from available-for-sale investments

     4        334        4,069        (330     (3,735

Valuation gains on trading investments and related put options

                   (4,304            4,304   

Realized gains from trading investments and related put options

            (2,449     (7,557     2,449        5,108   

 

 

Net securities gains

   $ (32,816   $ (2,115   $ (7,790   $ (30,701   $ 5,675   

 

 

Net securities gains of $32.8 million in 2011 reflect the receipt of settlements equal to all outstanding principal from two securities classified in “other asset-backed securities.” These securities had previously been written down to a nominal fair value. In 2010, net securities gains include 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 of other-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 of other-than-temporary impairments related to other asset-backed securities.

Interest expense — Interest expense decreased to $86.2 million in 2011 from $102.1 million in 2010 due to lower interest rates from our refinancing activities, partially offset by higher debt balances. Based on our outstanding debt balances and interest rates in effect at December 31, 2011, our interest expense is estimated at approximately $65.4 million in 2012. This amount will be reduced by any prepayments of debt we may make in 2012. As a result of our debt refinancings in 2011, we anticipate a significant reduction in interest expense in 2012.

Interest expense decreased to $102.1 million in 2010 from $107.9 million in 2009 from 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 2011. 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.

Debt Extinguishment Loss — The Company recognized total debt extinguishment losses of $37.5 million in 2011. In connection with the refinancing of our 2008 senior debt facility in May 2011, we recorded $5.2 million of debt extinguishment costs, primarily from the write-off of unamortized deferred financing costs. In connection with the partial redemption of the Second Lien Notes in November 2011, the Company incurred a prepayment penalty of $23.2 million and wrote-off $9.1 million of unamortized deferred financing costs. See Note 9 — Debt in the Notes to Consolidated Financial Statements for further information.

Other — Other expenses as summarized below include items deemed to be non-operating based on management’s assessment of the nature of the item in relation to our core operations.

 

(Amounts in thousands)    2011      2010      2009  

Capital transaction costs

   $ 6,446       $       $   

Disposal loss from asset dispositions

     972                   

Impairment loss from asset dispositions

     4,458                   

Gain on forward foreign currency contracts

                     (2,401

 

 

Total other

   $ 11,876       $       $ (2,401

 

 

 

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Capital transactions costs relate to the 2011 Recapitalization and the secondary offering. Losses from asset dispositions relate to land sold as part of our global business transformation and a former bill payment service. Impairment losses relate to land sold and held for sale and intangible assets acquired in the second quarter of 2011. In 2009, the Company recognized a gain upon maturity of derivative contracts hedging forecasted revenues denominated in Euro.

Income taxes — In 2011, the Company recognized a tax benefit of $19.6 million, reflecting benefits of $34.0 million for the reversal of a portion of the valuation allowance on domestic deferred tax assets and $9.7 million on the sale of assets. Partially offsetting the benefit is tax expense for non-deductible restructuring expenses and a valuation allowance on a portion of deferred tax assets as a result of losses in certain jurisdictions outside of the United States. The effective tax rate for 2011 reflects the expected utilization of net tax loss carry-forwards based on the Company’s review of current facts and circumstances, including the three year cumulative income position and expectations that the Company will maintain a cumulative income position in the future. Changes in facts and circumstances may cause the Company to record additional tax expense or benefits in the future. Based on current facts and circumstances, the Company does not anticipate any valuation allowance adjustments that will materially affect the effective rate in 2012.

In 2010, the Company had tax expense of $14.6 million, 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. 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.

In 2009, the Company recognized a tax benefit of $20.4 million, 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, resulted in taxable income, which 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.

During the second quarter of 2010, the IRS completed its examination of the Company’s consolidated income tax returns for 2005 to 2007, and issued its Revenue Agent Report, or RAR, challenging the Company’s tax position relating to net securities losses and disallowing the related deductions. The Company disagrees with the RAR regarding the net securities losses and filed a protest letter. The Company had conferences with the IRS Appeals Office in 2010 and through October 2011, but was unable to reach agreement with the IRS Appeals Division. The Company is also currently under examination for its 2008 and 2009 tax returns, which had similar deductions. As a result, the Company expects to receive Notices of Deficiency within the next 12 months disallowing approximately $908.5 million of cumulative deductions taken for net securities losses in its 2007, 2008 and 2009 tax returns. As of December 31, 2011, the Company has recognized a cumulative benefit of approximately $136.1 million relating to these deductions. If the Notices of Deficiency contain adjustments with which the Company does not agree, the Company anticipates that it will file a petition in the United States Tax Court contesting such adjustments. While we believe our position will be sustained, if the Company’s petition is denied in its entirety, the expense the Company would recognize as of December 31, 2011 is $144.0 million, including any interest. The Company continues to believe that the amounts recorded in its consolidated financial statements reflect its best estimate of the ultimate outcome of this matter.

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.

 

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Although we believe that 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.

 

YEAR ENDED DECEMBER 31,    2011     2010     2009  
(Amounts in thousands)                   

Income (loss) before income taxes

   $ 39,770      $ 58,380      $ (22,322

Interest expense

     86,165        102,133        107,911   

Depreciation and amortization

     46,051        48,074        57,091   

Amortization of agent signing bonuses

     32,618        29,247        35,280   

 

 

EBITDA

     204,604        237,834        177,960   

Significant items impacting EBITDA:

      

Net securities gains

     (32,816     (2,115     (7,790

Severance and related costs

     (31     (346     4,353   

Restructuring and reorganization costs

     23,470        5,853          

Capital transaction costs

     6,446                 

Asset impairment charges

     3,372        1,829        18,329   

Debt extinguishment

     37,522       

Stock-based compensation expense

     16,281        26,011        14,152   

Net curtailment gain on benefit plans

                   (14,339

Legal accruals

     4,817        (14,572     54,750   

 

 

Adjusted EBITDA

   $ 263,665      $ 254,494      $ 247,415   

 

 

For 2011, EBITDA decreased $33.2 million, or 14 percent, to $204.6 million from $237.8 million in 2010. Adjusted EBITDA for 2011 increased $9.2 million, or four percent, from $254.5 million in 2010 to $263.7 million in 2011, primarily due to money transfer growth, partially offset by increases in marketing spend, compensation, fee commissions expenses and lower net investment revenue.

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 three percent, to $254.5 million from $247.4 million in 2009, primarily due to money transfer growth and cost savings initiatives.

SEGMENT PERFORMANCE

Our reporting segments are primarily organized based on the nature of products and services offered and the type of consumer served. We primarily manage our business 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 that are not operated within these segments are categorized as “Other,” and primarily relate to discontinued products and businesses. Segment pre-tax operating income and segment operating margin are used to review operating performance and allocate resources.

Segment accounting policies are the same as those described in Note 2 — Summary of Significant Accounting Policies in 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. Investment revenue is allocated to each segment based on the average investment balances generated by that segment’s sale of payment instruments during the period. Net securities (gains) losses are not allocated as the segments do not have control

 

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over portfolio investment decisions. 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.

Unallocated expenses in 2011 include $9.5 million of corporate costs and $0.4 million of costs associated with our global transformation initiative. In 2010, unallocated expenses include $7.4 million of corporate costs, $5.9 million of costs associated with our global transformation initiative and $1.8 million of asset impairments.

Following is a reconciliation of segment operating income to the consolidated operating results:

 

YEAR ENDED DECEMBER 31,    2011     2010     2009  

(Amounts in thousands)

Operating income:

      

Global Funds Transfer

   $ 124,793      $ 139,314      $ 82,647   

Financial Paper Products

     29,168        36,508        27,372   

Other

     (1,556     (2,367     (4,316

 

 

Total segment operating income

     152,405        173,455        105,703   

Other unallocated expenses

     9,888        15,057        30,305   

 

 

Total operating income

     142,517        158,398        75,398   

Net securities gains

     (32,816     (2,115     (7,790

Interest expense

     86,165        102,133        107,911   

Debt extinguishment costs

     37,522                 

Other

     11,876               (2,401

 

 

Income (loss) before income taxes

   $ 39,770      $ 58,380      $ (22,322

 

 

 

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GLOBAL FUNDS TRANSFER SEGMENT

 

                       2011     2010  
                       vs.     vs.  
YEAR ENDED DECEMBER 31,    2011     2010     2009     2010     2009  
(Amounts in thousands)                               

Money transfer revenue:

          

Fee and other revenue

   $ 1,039,525      $ 926,489      $ 890,675        12     4

Investment revenue

     562        244        163        130     50

 

 

Total money transfer revenue

     1,040,087        926,733        890,838        12     4

Bill payment revenue:

          

Fee and other revenue

     112,625        126,467        134,535        (11 )%      (6 )% 

Investment revenue

     4        81        76        (95 )%      7

 

 

Total bill payment revenue

     112,629        126,548        134,611        (11 )%      (6 )% 

Total Global Funds Transfer revenue:

          

Fee and other revenue

     1,152,150        1,052,956        1,025,210        9     3

Investment revenue

     566        325        239        74     36

 

 

Total Global Funds Transfer revenue

     1,152,716        1,053,281        1,025,449        9     3

 

 

Commissions expense

   $ 545,688      $ 496,645      $ 488,116        10     2

Operating income

   $ 124,793      $ 139,314      $ 82,647        (10 )%      69

Operating margin

     10.8     13.2     8.1    

Total revenue in the Global Funds Transfer segment consists primarily of fees on money transfers and bill payment transactions. For 2011 and 2010, Global Funds Transfer total revenue increased $99.4 million and $27.8 million, respectively, driven by money transfer volume growth, partially offset by a decline in bill payment revenue.

Money Transfer Fee and Other Revenue

 

YEAR ENDED DECEMBER 31,    2011     2010  
(Amounts in thousands)             

Money Transfer fee and other revenue for the prior year

   $ 926,489      $ 890,675   

Change from:

    

Volume

     126,673        77,441   

Euro exchange rate

     16,456        (18,088

Corridor mix and average face value per transaction

     (19,889     2,471   

Introduction of $50 price band

     (9,286     (24,628

Other

     (918     (1,382

 

 

Money Transfer fee and other revenue for the year ended December 31,

   $ 1,039,525      $ 926,489   

 

 

In 2011, money transfer fee and other revenue increased 12 percent, driven by transaction volume growth of 14 percent and a higher euro exchange rate, partially offset by unfavorable changes in corridor mix, lower average face value per transaction and lower average money transfer fees from the $50 price band in the United States.

In 2010, money transfer fee and other revenue increased four percent due to transaction volume growth of nine percent, favorable changes in corridor mix and higher average face value per transaction, 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. In addition, money transfer fee and other revenue in 2009 included $1.3 million of early termination fees.

 

 

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Money Transfer Transactions and Agent Locations

 

     2011     2010  
     vs.     vs.  
YEAR ENDED DECEMBER 31,    2010     2009  

Total transactions

     14     9

Transactions originating outside of the United States

     15     15

Transactions originating in the United States

     13     6

Transactions originating in the United States excluding those sent to Mexico

     13     8

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 in the United States, excluding transactions sent to Mexico, increased due primarily to an increase in intra-United States remittances. Transactions sent to Mexico grew by 12 percent. Mexico represented approximately nine percent of our total transactions in 2011 and 2010.

Our money transfer agent base expanded 18 percent, 20 percent and eight percent in 2011, 2010 and 2009, respectively, primarily due to expansion in Africa, Asia Pacific, Indian subcontinent, Eastern Europe, Latin America and Western Europe.

Bill Payment Fee and Other Revenue

Bill payment fee and other revenue decreased 11 percent in 2011, with lower volumes contributing an $11.3 million decline and lower average fees from changes in industry mix contributing a $2.5 million decline. In 2010, bill payment fee and other revenue decreased six percent, with lower average fees from changes in industry mix contributing a $5.3 million decline and lower volumes contributing a $2.8 million decline. The impact of changes in industry mix reflect our continued growth 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. Bill payment transaction volume decreased seven percent and one percent in 2011 and 2010, respectively.

Global Funds Transfer Commissions Expense

 

YEAR ENDED DECEMBER 31,    2011     2010  
(Amounts in thousands)             

Global Funds Transfer commissions expense for the prior year

   $ 496,645      $ 488,116   

Change from:

    

Money Transfer volume growth

     43,046        23,662   

Euro exchange rate

     7,941        (7,406

Money transfer commission rates

     452        (1,240

Signing bonuses

     3,644        (3,874

Bill payment volumes

     (6,238     (2,946

Bill payment commission rates

     164        368   

Other

     34        (35

 

 

Global Funds Transfer commissions expense for the year ended December 31

   $ 545,688      $ 496,645   

 

 

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 2011, signing bonus expense increased due to new agent signings. In 2010, signing bonus expense decreased as certain historical signing bonuses were fully amortized or written off in the prior year.

Operating Margin

The Global Funds Transfer segment operating margin decreased to 10.8 percent in 2011 from 13.2 percent in 2010. The lower margin in 2011 primarily reflects changes in corridor mix and average face value per money

 

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transfer transaction, higher signing bonus expense and higher marketing and compensation expense, partially offset by money transfer revenue growth net of related commissions expense. Included in the 2010 operating margin is a $16.4 million benefit from a legal accrual reversal in 2010 related to a Global Funds Transfer patent, which added a 155 basis point benefit to the 2010 operating margin.

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, which added a 155 basis point benefit to the 2010 operating margin. 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 international agent and a $3.2 million goodwill impairment charge related to a discontinued bill payment product. After considering these items, the 2010 operating margin benefited from money transfer volume growth and lower signing bonus amortization, partially offset by lower bill payment revenue.

FINANCIAL PAPER PRODUCTS SEGMENT

 

                       2011     2010  
                       vs.     vs.  
YEAR ENDED DECEMBER 31,    2011     2010     2009     2010     2009  
(Amounts in thousands)                               

Money order revenue:

          

Fee and other revenue

   $ 57,350      $ 64,342      $ 69,296        (11 )%      (7 )% 

Investment revenue

     3,100        3,951        5,584        (22 )%      (29 )% 

 

 

Total money order revenue

     60,450        68,293        74,880        (11 )%      (9 )% 

Official check revenue:

          

Fee and other revenue

     21,069        25,696        23,690        (18 )%      8

Investment revenue

     11,813        15,526        24,213        (24 )%      (36 )% 

 

 

Total official check revenue

     32,882        41,222        47,903        (20 )%      (14 )% 

Total Financial Paper Products revenue:

          

Fee and other revenue

     78,419        90,038        92,986        (13 )%      (3 )% 

Investment revenue

     14,913        19,477        29,797        (23 )%      (35 )% 

 

 

Total Financial Paper Products revenue

     93,332        109,515        122,783        (15 )%      (11 )% 

 

 

Commissions expense

   $ 2,396      $ 3,931      $ 8,295        (39 )%      (53 )% 

Operating income

   $ 29,168      $ 36,508      $ 27,372        (20 )%      33

Operating margin

     31.3     33.3     22.3    

Total revenue in the Financial Paper Products segment consists of per-item fees charged to our financial institution customers and retail agents and investment revenue. Financial Paper Products revenue decreased $16.2 million and $13.3 million in 2011 and 2010, respectively.

 

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Financial Paper Products Revenue

 

YEAR ENDED DECEMBER 31,    2011     2010  
(Amounts in thousands)             

Financial Paper Products revenue for the prior year

   $ 109,515      $ 122,783   

Change in:

    

Investment Revenue

    

Lower yields

     (1,946     (7,480

Average investable balances

     (2,484     (4,398

Other investment revenue

     (134     1,557   

Money order fee and other revenue

     (6,992     (4,954

Official check fee and other revenue

     (4,627     2,007   

 

 

Financial Paper Products revenue for the year ended December 31

   $ 93,332      $ 109,515   

 

 

Money order fee and other revenue decreased in 2011 due to a seven percent decline in volumes attributed to the 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 decreased from 2010 due to the run-off of official check financial institution customers. See Net Investment Revenue Analysis for discussion related to changes in investment revenue.

In 2010, money order fee and other revenue decreased due to a 15 percent decline in volumes 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 increased from 2009 due to our official check repricing initiatives, partially offset by the run-off of official check financial institution customers. See Net Investment Revenue Analysis for discussion related to changes in investment revenue.

Financial Paper Products Commissions Expense

 

     2011     2010  
     vs.     vs.  
YEAR ENDED DECEMBER 31,    2010     2009  
(Amounts in thousands)             

Financial Paper Products commissions expense for the prior year

   $ 3,931      $ 8,295   

Change in:

    

Money order agent rebates from repricing initiatives

     (957     (1,267

Signing bonus amortization

     (272     (2,472

Investable balances

     (97     (174

Investment rate

     (209     (451

 

 

Financial Paper Products commissions expense for the year ended December 31

   $ 2,396      $ 3,931   

 

 

Commissions expense in the Financial Paper Products segment includes payments made to financial institution customers based on amounts generated by the sale of official checks times short-term interest rate indices, payments on money order transactions and amortization of signing bonuses. Commissions expense decreased 39 percent and 53 percent in 2011 and 2010, respectively, due primarily to lower money order agent rebates from our repricing initiatives and lower signing bonus amortization, as well as lower investment balances resulting from the run-off of official check financial institution customers. See Net Investment Revenue Analysis for further discussion of investment commissions expense.

 

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Operating Margin

The operating margin for the Financial Paper Products segment decreased to 31.3 percent in 2011 from 33.3 percent in 2010 due to volume and investment revenue declines. The operating margin for the Financial Paper Products 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.

TRENDS EXPECTED TO IMPACT 2012

The discussion of trends expected to impact our business in 2012 is based on information presently available and contains certain assumptions regarding future economic conditions. Differences in actual economic conditions during 2012 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 on Form 10-K for additional factors that could cause results to differ materially from those contemplated by the following forward-looking statements.

Throughout 2011, 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.

While there is uncertainty around the global economy and the remittance industry, the World Bank, a key source of industry analysis for developing countries, is projecting seven percent remittance growth in 2012. Our growth has historically exceeded the World Bank projections. Our expansion in key global growth markets and strong partnership focus with our agents will continue to fuel this growth. Additionally, agent expansion and increasing productivity in our existing agent locations through marketing support, customer acquisition and new product innovation will drive growth. We believe all of these efforts will not only help to mitigate the effects of the current global economic conditions, but position us for enhanced market share and growth when the economy begins to recover.

For our Financial Paper Products segment, we expect the decline in overall paper-based transactions to continue in 2012. As a result of the pricing 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 has resulted in low or no commissions being paid to our official check financial institution customers. As a result, we anticipate that the Financial Paper Products segment will continue to experience financial institution and agent attrition in 2012.

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. As we continue to revise our processes and enhance our technology systems to meet regulatory trends, our operating expenses for compliance may increase.

Acquisition and Disposal Activity

Acquisition and disposal activity is set forth in Note 3 — Acquisitions and Disposals of the Notes to Consolidated Financial Statements.

 

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LIQUIDITY AND CAPITAL RESOURCES

We have various resources available to us for purposes of managing liquidity and capital needs, including our 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 and available-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.

Assets in Excess of Payment Service Obligations

 

(Amounts in thousands)    2011     2010  

Cash and cash equivalents (substantially restricted)

   $ 2,572,174      $ 2,865,941   

Receivables, net (substantially restricted)

     1,220,065        982,319   

Short-term investments (substantially restricted)

     522,024        405,769   

Available-for-sale investments (substantially restricted)

     102,771        160,936   

 

 
     4,417,034        4,414,965   

Payment service obligations

     (4,205,375     (4,184,736

 

 

Assets in excess of payment service obligations

   $ 211,659      $ 230,229   

 

 

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. 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 receive in and pay out a similar amount of funds on a daily basis to collect and settle the principal amount of our payment instruments sold and related fees and commissions with our end consumers and agents. 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.

We also seek to maintain funding capacity beyond our daily operating needs to provide a cushion through the normal fluctuations in our payment service assets and obligations, as well as to provide working capital for the operational and growth requirements of our business. While the assets in excess of payment service obligations would be available to us for our general operating needs and investment in the Company, we consider our assets in excess of payment service obligations as assurance that regulatory and contractual requirements are maintained. We believe we have sufficient liquid assets and funding capacity to operate and grow our business for the next 12 months. Should our liquidity needs exceed our operating cash flows, we believe that external financing sources, including availability under the 2011 Credit Agreement, will be sufficient to meet our anticipated funding requirements.

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, or Moody’s, and AA- or better by Standard & Poors, or S&P, and in U.S. government money market funds rated Aaa by Moody’s and AA+ by S&P. As of December 31, 2011, cash and cash equivalents and short-term

 

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investments totaled $3.1 billion, representing 97 percent of our total investment portfolio. Cash equivalents and short-term investments consist of money market funds that invest in U.S. government and government agency securities, time deposits and certificates of deposit.

Clearing and Cash Management Banks — We collect and disburse money through a network of clearing and cash management banks. The relationships with these banks are a critical component of our ability to maintain our global cash management requirements on a 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 seven official check clearing banks, of which four banks are currently operating under post-termination arrangements of their contracts. The remaining three 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, or 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 relationships with a variety of domestic and international cash management banks for ACH and wire transfer services used 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, and some of these large international banks have opted not to bank money service businesses. As a result, we also utilize regional or country-based banking 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 investment 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 investment 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.

Consistent with 2010, the combined SPEs held 2 percent of our $3.2 billion portfolio as of December 31, 2011. As the SPEs relate to financial institution customers we terminated in connection with the restructuring of our official check business, we expect the SPEs to decline as a percentage of our portfolio.

 

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Credit Facilities — Our credit facilities consist of the 2011 Credit Agreement and Second Lien Notes. See Note 9 — Debt of the Notes to the Consolidated Financial Statements for further information. Following is a summary of principal payments and debt issuance from January 1, 2009 to December 31, 2011:

 

    2008 Senior Facility     2011 Credit Agreement              
(Amounts in thousands)   Tranche A     Tranche B     Revolving facility     Term loan     Incremental term loan     Second Lien Notes     Total Debt  

Balance at January 1, 2009

  $ 100,000      $ 248,125      $ 145,000      $      $      $ 500,000      $ 993,125   

2009 payments

           (41,875     (145,000                          (186,875

2010 payments

           (165,000                                 (165,000

2011 new debt issued

                         390,000        150,000               540,000   

2011 payments

    (100,000     (41,250            (50,000     (375     (175,000     (366,625

 

 

Balance at December 31, 2011

  $      $      $      $ 340,000      $ 149,625      $ 325,000      $ 814,625   

 

 

Outside of payments relating to refinance debt, we have paid down $427.3 million of our outstanding debt since January 1, 2009. 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:

 

           Original                       
     Interest Rate     Facility      Outstanding      2012  
(Amounts in thousands)    for 2011     Size      2011      2010      Interest (1)  

Senior Tranche A Loan, due 2013

     5.75   $       $       $ 100,000       $   

Senior Tranche B, net of discount, due 2013

     7.25                     39,946           

Senior revolving credit facility, due 2013

     5.75                               

 

 

2008 Credit Agreement

                       139,946           

Senior secured credit facility, net of discount, due 2017

     4.52     390,000         339,232                 15,555   

Senior secured incremental term loan, net of discount, due 2017

     4.50     150,000         146,656                 6,820   

Senior revolving credit facility, due 2016

            150,000                           

 

 

2011 Credit Agreement

       690,000         485,888                 22,375   

Second lien notes, due 2018

     13.25     500,000         325,000         500,000         43,063   

 

 

Total debt

     $ 1,190,000       $ 810,888       $ 639,946       $ 65,438   

 

 

 

 

(1)

Reflects interest expected to be paid in 2012 using the rates in effect on December 31, 2011, assuming no prepayments of principal.

Our revolving credit facility has $137.3 million of borrowing capacity as of December 31, 2011, net of $12.7 million of outstanding letters of credit. The incremental term loan has quarterly principal payments of $0.4 million beginning September 30, 2011, with the remaining outstanding principal due November 2017. At each reset period, we may elect an interest rate for the 2011 Credit Agreement, based on the BOA prime rate plus 225 basis points or the Eurodollar rate plus 325 basis points. If the Eurodollar rate is elected, there is a minimum rate of 1.25 percent. Fees on the daily unused availability under the revolving credit facility are 62.5 basis points. Since inception of the 2011 Credit Agreement and through the date of this filing, the Company elected the Eurodollar rate as its primary interest basis, with a minimal amount of the term debt at the BOA prime rate. Our 2011 Credit Agreement has a provision to step down our applicable borrowing margin by .25 percent if our leverage ratio falls below 3.0.

Our 2011 Credit Agreement contains 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

 

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facility and/or causing acceleration of amounts due under the credit facilities. The financial covenants in our 2011 Credit Agreement measure leverage, interest coverage and liquidity. Leverage is measured through a senior secured debt ratio calculated as consolidated indebtedness to consolidated EBITDA, adjusted for certain items such as net securities (gains) losses, stock-based compensation expense, certain legal settlements and asset impairments, among other items, also referred to as adjusted EBITDA. This measure is similar, but not identical, to the measure discussed under 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 adjusted for various exclusions. We are in compliance with all financial covenants as of December 31, 2011 by a substantial margin.

The terms of our 2011 Credit Agreement also place restrictions on certain types of payments we may make, including dividends on our common stock, acquisitions and the funding of foreign subsidiaries, among others. We do not anticipate that these restrictions will 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 incremental build-up based on our consolidated net income in future periods. No dividends were paid on our common stock in 2011, and we do not anticipate declaring any dividends on our common stock during 2012.

Equity Registration Rights Agreement — The Company and the Investors also entered into a Registration Rights Agreement, or 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, also referred to collectively as the Registrable Securities. Under the terms of the Equity Registration Rights Agreement, we are required to file with the SEC a shelf registration statement relating to the offer and sale of the Registrable Securities and keep such shelf registration statement continuously effective under the Securities Act of 1933, as amended, or 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 six demand registrations and unlimited piggyback registrations during the term of the Equity Registration Rights Agreement. On July 17, 2011, the SEC declared effective a shelf registration statement on Form S-3 that permits the offer and sale of the Registrable Securities, as required by the terms of the Equity Registration Rights Agreement. 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. In December 2011, the Company completed the secondary offering pursuant to which the Investors sold an aggregate of 10,237,524 shares of Company common stock at a price of $16.25 per share in an underwritten offering.

Credit Ratings — As of December 31, 2011 our credit ratings from Moody’s and S&P were B1 and BB-, respectively. 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, reduce our weighted average cost of capital and obtain more favorable terms with our lenders, agents and clearing and cash management banks.

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. Through 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 in an amount generally equal to the regulatory payment service obligation measure, as defined by each 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, without prior notice, penalty or limitations.

 

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The regulatory requirements in the United States are similar to our internal measure of assets in excess of payment service obligations set forth in Assets in Excess of Payment Service Obligations. The regulatory payment service assets measure varies by state. The most restrictive states may exclude assets held at banks that do not belong to a national insurance program, varying amounts of accounts receivable balances and/or assets held in 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 result 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 equal 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, 2011, we had approximately $79.5 million of cash deployed outside of the United States to meet regulatory requirements.

We were in compliance with all financial regulatory requirements as of December 31, 2011. We believe that our liquidity and capital resources will remain sufficient to ensure on-going compliance with all financial regulatory requirements.

Available-for-sale Investments — Our investment portfolio includes $102.8 million of available-for-sale investments as of December 31, 2011. U.S. government agency residential mortgage-backed securities and U.S. government agency debentures compose $78.5 million of our available-for-sale investments, while other asset-backed securities compose the remaining $24.2 million. In completing our 2008 Recapitalization in 2008, we contemplated that our other asset-backed securities might decline further in value. Accordingly, the capital raised assumed a zero value for these securities and any further unrealized losses and impairments on these securities are already funded and would not cause us to seek additional capital or financing.

Other Funding Sources and Requirements

Contractual Obligations — The following table includes aggregated information about the Company’s contractual obligations that impact our liquidity and capital needs. The table includes information about payments due under specified contractual obligations, aggregated by type of contractual obligation.

Contractual Obligations

 

     Payments due by period  
            Less than                    More than  
(Amounts in thousands)    Total      1 year      1-3 years      4-5 years      5 years  

Debt, including interest payments

   $ 1,219,547       $ 68,513       $ 136,120       $ 135,103       $ 879,811   

Operating leases

     53,952         12,927         22,446         10,956         7,623   

Signing bonuses

     11,337         4,700         6,105         532           

Signage

     1,920         1,920                           

Marketing

     8,338         8,338                           

Other obligations

     291         291                           

 

 

Total contractual cash obligations

   $ 1,295,385       $ 96,689       $ 164,671       $ 146,591       $ 887,434   

 

 

 

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Debt consists of amounts outstanding under our 2011 Credit Agreement and the Second Lien Notes at December 31, 2011, as shown in Schedule of Credit Facilities, as well as related interest payments, facility fees and annual commitment fees. Our Consolidated Balance Sheet at December 31, 2011 includes $810.9 million of debt, net of unamortized discounts of $3.7 million, and $0.3 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, 2011, and assuming no prepayments of principal and the continued payment of interest on the Second Lien Notes. Operating leases consist of various leases for buildings and equipment used in our business. Signing bonuses are payments to certain agents and financial institution customers as an incentive to enter into long-term contracts. Marketing and signage are purchase order commitments. 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 this table as the timing and/or amount of payments are difficult to estimate.

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 made contributions of $7.9 million to the defined benefit pension plan during 2011. We anticipate a minimum contribution of up to $10.2 million to the pension plan trust in 2012. We also have certain unfunded pension and postretirement plans that require benefit payments over extended periods of time. During 2011, we paid benefits totaling $4.6 million related to these unfunded plans. Benefit payments under these unfunded plans are expected to be $4.1 million in 2012. 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 Note 10 — Pensions and Other Benefits of the Notes to the Consolidated Financial Statements for further information.

The liability for unrecognized tax benefits was $9.6 million as of December 31, 2011. In addition, the Company expects to receive Notices of Deficiency from the IRS disallowing cumulative deductions taken for 2007, 2008 and 2009. If the Notices of Deficiency contain adjustments with which the Company does not agree, the Company anticipates that it will file a petition in the United States Tax Court contesting such adjustments. While we believe the Company’s position will be sustained, if the Company’s petition is denied in its entirety, the Company would be required to make cash payments of $105.4 million based on benefits taken through December 31, 2011. As there is a high degree of uncertainty regarding the timing of potential future cash outflows associated with liabilities, we are unable to make a reasonably reliable estimate of the amount and period in which these liabilities might be paid. These amounts are excluded from the table above as there is a high degree of uncertainty regarding the amount and timing of future cash outflows.

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, 2011, the minimum commission guarantees had a maximum payment of $7.2 million over a weighted average remaining term of 3.5 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, 2011, the liability for minimum commission guarantees is $1.7 million. Minimum commission guarantees are not reflected in the table above.

 

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Analysis of Cash Flows

Cash Flows from Operating Activities

 

YEAR ENDED DECEMBER 31,    2011     2010     2009  
(Amounts in thousands)                   

Net income (loss)

   $ 59,406      $ 43,801      $ (1,906

Total adjustments to reconcile net income (loss)

     61,617        72,398        158,909   

 

 

Net cash provided by operating activities before changes in payment service assets and obligations

     121,023        116,199        157,003   

 

 

Change in cash and cash equivalents (substantially restricted)

     291,767        510,883        700,557   

Change in trading investments and related put options, net (substantially restricted)

            29,400        32,900   

Change in receivables, net (substantially restricted)

     (245,319     63,037        186,619   

Change in payment service obligations

     20,639        (658,782     (594,545

 

 

Net change in payment service assets and obligations

     67,087        (55,462     325,531   

 

 

Net cash provided by continuing operating activities

   $ 188,110      $ 60,737      $ 482,534   

 

 

Operating activities generated net cash of $188.1 million, $60.7 million and $482.5 million in 2011, 2010 and 2009, respectively. Our net cash provided by operating activities before changes in payment service assets and obligations was $121.0 million, $116.2 million and $157.0 million in 2011, 2010 and 2009, respectively. Changes in our payment service assets and obligations generated an additional $67.1 million and $325.5 million of operating cash flows in 2011 and 2009, respectively, and utilized $55.5 million of operating cash flows in 2010, from the timing of collection and settlement of our payment service assets and obligations, as well as the changes in composition of our investment portfolio. While we consider our overall investment portfolio to be part of our operations, in accordance with GAAP, investments in cash and cash equivalents and trading investments are presented as part of operating activities, while investments in short-term and available-for-sale investment securities are presented as part of investing activities. 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 net cash flows from investing activities related to our short-term investments and available-for-sale investments.

We received income tax refunds of $3.8 million and $43.5 million during 2010 and 2009, respectively, and made income tax payments of $3.9 million and $2.2 million, respectively. We also reinvested $141.0 million and $32.9 million of proceeds from our available-for-sale investments and trading investments, respectively, into cash and cash equivalents during 2009.

Due to our regulatory capital requirements, we deem our payment service assets in their entirety to be substantially restricted. As a result, we do not separately display in our statement of cash flows an “unrestricted” measure of cash and cash equivalents and the related change in such measure for the period. If we were to separately display such an “unrestricted” measure, it would approximate our assets in excess of payment service obligations measure, and the amount of change for the period would approximate the change in our assets in excess of payment service obligations for the period. Our assets in excess of payment service obligations decreased $18.6 million, $83.1 million and $77.7 million during 2011, 2010 and 2009, respectively, primarily reflecting our continued debt pay-downs.

 

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Cash Flows from Investing Activities

 

YEAR ENDED DECEMBER 31,    2011     2010     2009  
(Amounts in thousands)                   

Net investment activity

   $ (28,729   $ 135,216      $ (259,001

Purchases of property and equipment

     (44,223     (40,191     (37,948

Cash paid for acquisitions, net of cash acquired

     (53     (330     (3,210

Proceeds from disposal of assets and businesses

     2,683        7,537        4,500   

 

 

Net cash (used in) provided by investing activities

   $ (70,322   $ 102,232      $ (295,659

 

 

Investing activities used cash of $70.3 million in 2011, primarily for the purchase of $28.7 million of short-term investments, net of investment maturities and settlements and $44.2 million of capital expenditures, partially offset by proceeds of $2.7 million from disposal of assets and a business. Proceeds of $511.6 million from the maturity and settlement of available-for-sale and short-term investments were reinvested into short-term investments.

Investing activities generated cash of $102.2 million in 2010, primarily from excess proceeds of $135.2 million from the maturity and settlement of investments that were reinvested into cash equivalents and proceeds of $7.5 million from the sale of the corporate airplane, partially offset by the purchase of $40.2 million of capital expenditures and a $0.3 million payment, net of cash acquired, for the acquisition of Blue Dolphin.

Investing activities used cash of $295.7 million in 2009, primarily for the purchase of $259.0 million of short-term investments, net of investment maturities, $37.9 million of capital expenditures and $3.2 million for the acquisition of Raphaels Bank, partially offset by proceeds of $4.5 million from the sale of FSMC, Inc.

Cash Flows from Financing Activities

 

YEAR ENDED DECEMBER 31,    2011     2010     2009  
(Amounts in thousands)                   

Proceeds from issuance of debt

   $ 536,025      $      $   

Transaction costs for issuance and amendment of debt

     (17,066              

Payments on debt

     (366,625     (165,000     (41,875

Prepayment penalty on debt

     (23,188              

Payments on revolving credit facilities

                   (145,000

Additional consideration issued in connection with the conversion of mezzanine equity

     (218,333              

Transaction costs for the conversion and issuance of stock

     (5,444              

Cash dividend paid on mezzanine equity

     (20,477              

Transaction costs for the secondary offering

     (3,396              

Proceeds from exercise of stock options

     716        2,031          

 

 

Net cash used in financing activities

   $ (117,788   $ (162,969   $ (186,875

 

 

In 2011, financing activities used $117.8 million of cash primarily associated with the debt prepayments and transaction costs related to our 2011 Recapitalization and debt refinancing. In 2010, financing activities used $163.0 million of cash primarily for $165.0 million prepayments on Tranche B of our 2008 senior facility, partially offset by $2.0 million of cash from the exercise of stock options. In 2009, financing activity used cash of $186.9 million for payments totaling $145.0 million to pay our revolving credit facility in full and payments totaling $41.9 million on Tranche B of our 2008 senior facility, consisting of a $40.0 million prepayment and $1.9 million of mandatory quarterly payments.

 

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Mezzanine Equity and Stockholders’ Deficit

Mezzanine Equity — See Note 11 — Mezzanine Equity of the Notes to the Consolidated Financial Statements for information regarding the mezzanine equity.

Stockholders’ Deficit — The Company is authorized to repurchase up to 12,000,000 shares. As of December 31, 2011, we had repurchased a total of 6,795,017 shares of our common stock under this authorization and have remaining authorization to purchase up to 5,204,983 shares.

Under the terms of our outstanding credit facilities, we are limited in our ability to pay dividends on our common stock. No dividends were paid on our common stock in 2011 and we do not anticipate declaring any dividends on our common stock during 2012.

Off-Balance Sheet Arrangements

None.

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” 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 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 practices 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 risks we have deemed most critical to our business and the strategies we use to manage and mitigate such risks. 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” and under “Risk Factors” in Part 1, Item 1A of this Annual Report on Form 10-K.

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.

Investment 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 primary exposure to credit risk arises through the concentration of a large amount of our investment portfolio at a few large financial institutions, also referred to as financial institution risk, as well as a concentration in securities issued by, or collateralized by, U.S. government agencies.

At December 31, 2011, the Company’s investment portfolio of $3.2 billion was primarily comprised of cash, U.S. government money market funds, bank deposits and bank time deposits. Based on investment policy restrictions in the Company’s second lien note indenture, investments are limited to U.S. Government Securities and securities of agencies of the U.S. Government, certificates of deposit and time deposits with banks with

 

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minimum debt ratings of A3 (Moody’s) and A- (S&P), commercial paper with minimum ratings of A-1 (Moody’s) and P-1 (S&P) and U.S. dollar denominated SEC registered senior notes of corporations with minimum ratings of A3 and A-. No maturity in the portfolio can exceed 24 months from the date of purchase.

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. As a result of the credit market crisis, several financial institutions have faced capital and liquidity issues that 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.

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 were not insured by a Temporary Liquidity Guarantee Program (“TLGP”) - equivalent program, we have required certain credit union customers to provide us with larger balances on deposit and/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 2011 Credit Agreement 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.

The 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.

 

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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 $24.2 million of the investment portfolio is invested in cash, cash equivalents, short-term investments and investments issued or collateralized by U.S. government agencies. Approximately 97 percent of the portfolio is invested in cash, cash equivalents and short-term investments, with 97 percent of our total investment portfolio invested at financial institutions located within the United States. At December 31, 2011, our investment portfolio was distributed among 53 financial institutions as shown below. To prevent duplication in counts, the number of financial institutions holding our investment portfolio is shown on an incremental basis.

 

    Number of           Percent of  
    Financial           Investment  
(Amounts in thousands)   Institutions     Amount     Portfolio  

Cash equivalents collateralized by securities issued by U.S. government agencies

    6      $ 555,659        17

Available-for-sale investments issued or collateralized by U.S. government agencies

    N/A        78,539        2

Cash, cash equivalents and short-term investments at institutions rated AA

    7        1,749,917        55

Cash, cash equivalents and short-term investments at institutions rated A

    6        664,609        21

Cash, cash equivalents and short-term investments at institutions rated below BBB

    8        15,976        1

Other asset-backed securities

    N/A        24,232        1

 

 

Investment portfolio held within the United States

    27        3,088,932        97

 

 

Cash held on-hand at owned retail locations

    N/A        8,861          

Cash, cash equivalents and short-term investments held at institutions rated AA

    6        27,745        1

Cash, cash equivalents and short-term investments at
institutions rated A

    7        41,049        1

Cash, cash equivalents and short-term investments at
institutions rated below A

    13        30,382        1

 

 

Investment portfolio held outside the United States

    26        108,037        3

 

 

Total investment portfolio

    53      $ 3,196,969        100

 

 

Receivables — We have credit exposure to receivables from our agents through the money transfer and money order settlement process. These receivables originate from independent agents who collect funds from customers who are transferring money or buying money orders, and agents who receive proceeds from us in anticipation of payment to the recipients of money transfers. The Company has a credit risk management function that conducts the underwriting of credit on new agents as well as conducting credit surveillance on all agents to monitor their financial health and the history of settlement activity with us. The Company’s credit risk management function also maintains daily contact with agents, and performs a collection function. The annual credit losses from our agents are less than .55 percent, and have been declining for the last three years. As of December 31, 2011, we had a credit exposure to our official check financial institution customers of approximately $350.8 million in the aggregate spread across 1,300 financial institutions, of which one owed us in excess of $15.0 million.

We also have credit exposure to receivables from our financial institution customers for business conducted by the Financial Paper Products segment. Financial institutions will collect proceeds for official checks and money orders and remit those proceeds to us. Credit risk among financial institutions has increased in the current macroeconomic environment. We actively monitor the credit risk associated with financial institutions such as banks and credit unions, and have not incurred any losses associated with the failure or merger of any bank or non-bank financial institution customer.

 

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The timely remittance of funds by our agents and financial institution customers is an important component of our liquidity. 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 alteration 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.

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, 2011, we had credit exposure to our agents of $352.0 million in the aggregate spread across over 12,000 agents, of which four agents owed us in excess of $15.0 million.

While the extent of credit risk may vary by product, the process for mitigating risk is similar. 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 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.

Credit risk management is complimented through functionality within our point of sale system, which can enforce credit limits on a real-time basis and monitor for suspicious and unauthorized transactions. The system also permits us to remotely disable an agent’s terminals and cause a cessation of transactions.

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. 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 on 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.

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 credit risk profile of the investment portfolio and the low level of interest rates, 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 operating results. As of December 31, 2011, the Company held $600.9 million, or 19 percent, of the investment portfolio in fixed rate investments.

At December 31, 2011, the Company’s “Other asset-backed securities” are priced on average at five percent of face value for a total fair value of $24.2 million. Included in other asset-backed securities are collateralized debt obligations backed primarily by high-grade debt, mezzanine equity tranches of collateralized debt obligations and home equity loans, along with private equity investments. While the Company does believe its “Other asset-backed securities” are at a risk of further decline, the 2008 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.

Our operating results are primarily impacted by interest rate risk through our net investment margin, which is investment revenue less commissions 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. We are invested primarily in interest-bearing cash

 

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accounts, deposit accounts, time deposits and certificates of deposit, and U.S. government money market funds. These types of investments have minimal risk of declines in fair value from changes in interest rates. Our commissions paid to financial institution customers are variable rate, which was zero in 2011, 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.

In the second quarter of 2008, we repriced our official check product to an average below the federal funds rate 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.

Our 2011 Credit Agreement is variable rate 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 credit facility at each reset period based on the BOA prime bank rate or the Eurodollar rate.

The income statement below incorporates substantially all of our interest rate sensitive assets and liabilities together with forecasted changes in the balance sheet and assumptions that reflect changes in all interest rates pertaining to the balance sheet. This analysis assumes that interest rates change suddenly, as in an interest rate “shock,” and remain at the changed level for the next twelve months. Components of our pre-tax income that are interest rate sensitive include “Investment Revenue”, “Investment Commissions Expense”, and “Interest Expense”. In the current interest rate environment where rates are approaching zero, our risk associated with declining rates is not material. A rapidly rising interest rate environment would be beneficial to the Company because variable rate assets exceed our variable rate liabilities, and certain of our variable rate liabilities will not react to increases in interest rates until those rates exceed the floor set for the index rate on the corresponding debt.

The following table summarizes the changes to affected components of the income statement under various ramp scenarios:

 

     Basis Point Change in Interest Rates  
     Down     Down     Down     Up     Up      Up  
(Amounts in thousands)    200     100     50     50     100      200  

Investment revenue

   $ (2,041   $ (1,978   $ (1,757   $ 4,194      $ 8,402       $ 16,853   

Investment commissions expense

     NM        NM        NM      $ (204   $ (455    $ (5,989

Interest expense

     NM        NM        NM      $      $       $ (953

Change in pretax income

   $ (1,985   $ (1,923   $ (1,701   $ 3,991      $ 7,947       $ 9,911   

NM = Not meaningful

The following table summarizes the changes to affected components of the income statement under various shock scenarios:

 

     Basis Point Change in Interest Rates  
     Down     Down     Down     Up     Up      Up  
(Amounts in thousands)    200     100     50     50     100      200  

Investment revenue

   $ (4,341   $ (4,125   $ (3,324   $ 9,762      $ 19,582       $ 39,243   

Investment commissions expense

     NM        NM        NM      $ (869   $ (3,025    $ (23,154

Interest expense

     NM        NM        NM      $      $ (171    $ (4,833

Change in pretax income

   $ (4,264   $ (4,048   $ (3,247   $ 8,893      $ 16,386       $ 11,257   

NM = Not meaningful

 

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Foreign Currency Risk

We are exposed to foreign currency risk in the ordinary course of business as we offer our products and services through a network of agents and financial institutions with locations in 192 countries and operate subsidiaries in 12 countries. Translation risk, generated from translating foreign currency-denominated earnings into U.S. dollars for reporting purposes, is not hedged as this is not considered an economic exposure. In 2011, the decline of the euro exchange rate (net of hedging activities) resulted in a net decrease to our operating results of $3.0 million over 2010. By policy, we do not speculate in foreign currencies; all currency trades relate to underlying transactional exposures.

Substantial increases in the credit risk of countries within the European Union, coupled with recessionary forces, have caused high levels of volatility, and a trend of declining value of the euro against the U.S. dollar. High inter-day volatility will result in higher risk of currency revaluation due to the timing differences between when our customers pay our agents for their money transfers, and when those proceeds are collected. In addition, currency volatility can also impact the value of cash balances that are maintained to support the level of our customer activity. Other countries that had extremely high volatility versus the U.S. dollar in 2011 were India and Mexico, both of which are significant corridors for our money transfer business.

Resolution of the financial crisis affecting Europe relative to the risk of default on the sovereign debt of Greece, Italy, Spain, and Portugal, will be necessary to reduce our foreign currency risk. The impact of austerity measures being taken by all of the highly leveraged countries that participate in the euro will also continue to exert recessionary forces on much of the European Union, which in turn can continue to exert a weakening force on the euro. Economic uncertainty in the United States and its major trading partners will also cause higher levels of volatility for all major currencies versus the U.S. dollar which could increase foreign currency risk on an ongoing basis.

Our primary source of transactional currency risk is the money transfer business in 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. The primary currency pairs, based on volume, that are traded against the dollar in the spot and forward markets 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 and any associated revaluation of balance sheet exposures are recorded in “Transaction and operations support” in the Consolidated Statement of Income (Loss). The fair market value of any open forward contracts 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, 2011 was a loss of $8.7 million.

Had the euro appreciated/depreciated relative to the U.S. dollar by 20 percent from actual exchange rates for 2011, pre-tax operating income would have increased/decreased $14.7 million for the year. There are inherent limitations in this sensitivity analysis, primarily due to the assumption that foreign exchange rate movements are linear and instantaneous, that the unhedged exposure is static, and that we would not hedge any additional exposure. As a result, the analysis is unable to reflect the potential effects of more complex market changes that could arise, which may positively or negatively affect income.

 

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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 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.

 

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CRITICAL ACCOUNTING POLICIES

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts and related disclosures in the 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. Our significant accounting policies are discussed in Note 2 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements.

Critical accounting policies are those policies that management believes are very 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.

 

Description

  

Judgments and Uncertainties

  

Effect if Actual Results Differ From
Assumptions

Fair Value of Investment Securities

 

The Company has available-for-sale investments that are recorded at their estimated fair value. Our available-for-sale investments are comprised primarily of U.S. government agency debenture securities and residential mortgage-backed securities collateralized by U.S. government agency debenture securities. In addition, we hold other asset-backed securities and have historically held three trading investments.

 

We estimate fair value for our investments as an “exit price,” or the exchange price that would be received for an asset in an orderly transaction between market participants. Observable price quotes for our exact securities are not available. For our government agency debentures and residential mortgage-backed securities, similar securities trade with sufficient regularity to allow observation of market inputs needed to estimate fair value. For our other asset-backed securities, the overall liquidity and trading within the relevant markets is not strong. Accordingly, observable market inputs are not as readily available and estimating fair value is more subjective.

  

 

The degree of management judgment involved in determining the fair value of an investment is dependent upon the availability of quoted market prices, observable market inputs and the extent to which the relevant investment markets are active.

 

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, loss severity and risk premiums as it relates to our other asset-backed securities.

  

 

As of December 31, 2011, we hold investments classified as other asset-backed securities with a fair value of $24.2 million. Using the highest and lowest prices received or internally estimated during the valuation process, the range of fair value for these securities was $23.5 million to $28.1 million.

 

At December 31, 2011, $18.8 million, or less than one percent, of our total investment portfolio was valued using internal pricing information. No third party price was able to be obtained for these securities.

 

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Description

  

Judgments and Uncertainties

  

Effect if Actual Results Differ From
Assumptions

Goodwill

 

We perform impairment testing of our goodwill balances annually as of November 30 and whenever events or changes in circumstances indicate the carrying value of our goodwill may not be recoverable.

 

Goodwill impairment is determined using a two-step process. The first step identifies if a potential impairment exists by comparing the fair value of each reporting unit to its carrying amount. If the fair value exceeds the carrying amount, goodwill is not considered to have a potential impairment and the second step of the test is not necessary. However, if the carrying amount exceeds the fair value, the second step is performed to determine the implied fair value of a reporting unit’s goodwill by comparing the reporting unit’s fair value to the allocated fair values of all assets and liabilities as if the reporting unit had been acquired in a business combination. If the carrying amount of goodwill exceeds its implied fair value, an impairment is recognized in an amount equal to that excess.

  

 

Fair value of a reporting unit and goodwill is estimated using a discounted cash flow model. The estimates and assumptions used in this model regarding expected cash flows, growth rates, terminal values and the discount rate require considerable judgment and are based on historical experience, financial forecasts and industry trends and conditions.

 

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 are consistent with our internal forecasts and operating plans.

  

 

The carrying value of goodwill assigned to the Global Funds Transfer reporting unit at December 31, 2011 was $428.7 million. No goodwill is assigned to the other reporting units. 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.

 

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 $177.9 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 $35.1 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.

 

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Description

  

Judgments and Uncertainties

  

Effect if Actual Results Differ From
Assumptions

Pension

 

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 employees of Viad Corp, our former parent. Our pension obligations under these plans are measured as of December 31, or the measurement date. Pension benefit obligations and the related expense are based upon actuarial projections using assumptions regarding mortality, discount rates, long-term return on assets and other factors.

 

Our pension plan assets are primarily invested in 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.

  

 

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.

 

At each measurement date, the discount rate is based on the then current interest rate yield curves for long-term corporate debt securities with maturities rate AA comparable to our obligations.

 

The expected return on pension plan assets is based on our historical market experience, our pension asset allocations 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 assumption. Our pension plan asset allocations are reviewed annually and are based upon plan obligations, an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments.

  

 

The discount rates for the 2011, 2010 and 2009 net periodic benefit cost pension plans and SERPs were 5.30 percent, 5.80 percent and 6.30 percent, respectively. The discount rate for the projected benefit obligation for the pension plan for 2011 and 2010 was 4.90 percent and 5.30 percent, respectively, while the discount rate for the SERPs was 4.80 percent and 5.30 percent, respectively.

 

The long-term expected rate of return for the 2011, 2010 and 2009 net periodic benefit cost for the pension plan was eight percent. The actual rate of return on average plan assets in 2011 and 2010 was 4.14 percent and 4.80 percent.

 

Lower discount rates increase the plan obligation and subsequent year pension expense, while higher discount rates decrease the plan obligation and subsequent year pension expense. Decreasing the discount rate by 50 basis points would have increased 2011 pension expense by $0.4 million. If the discount rate increased by 50 basis points pension expense would have decreased by $0.3 million. Changing the expected rate of return by 50 basis points would have increased/decreased 2011 pension expense by $0.5 million.

 

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Description

  

Judgments and Uncertainties

   Effect if Actual Results Differ From
Assumptions

Income Taxes – Tax Contingencies

 

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.

 

We file tax returns in various states within the United States and various countries. Our tax filings for various periods are subject to audit by various tax authorities, with United States federal income tax filings for 2005 and 2009 subject to audit.

 

The benefits of tax positions are recorded in the income statement if we determine it is more-likely-than–not, based on the technical merits of the position, that the tax position will be sustained upon examination, including any related appeals or litigation.

  

 

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. 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.

 

These assumptions and probabilities are periodically reviewed and revised based upon new information.

  

 

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.

 

Actual tax amounts may be materi
ally different from amounts
accrued based upon the results of
audits due to different inter
pretations by the tax authorities
than those of the Company. While
we believe that our reserves are
adequate to cover reasonably
expected tax risks, an unfavorable
tax settlement generally requires
the use of cash and an increase in
the amount of income tax expense
that we recognize. A favorable tax
settlement generally requires a
decrease in the amount of income
taxes that we recognize.

Income Taxes—Valuation of Deferred Tax Assets

 

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.

 

The carrying amount of deferred tax assets must be reduced through a valuation allowance if it is more-likely-than-not the deferred tax asset will not be realized.

 

In the period in which a valuation allowance is recorded, we would record significant tax expense, whereas a tax benefit would be recorded in the period a valuation allowance is reversed.

  

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. 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.

 

We also consider our best estimate of the outcome of any on-going examinations based on the technical merits of the position, historical procedures and case law, among other items.

   As of December 31, 2011, we
have recorded a valuation allow
ance of $476.3 million against
gross net deferred tax assets of
$546.1 million. The valuation
allowance primarily relates to our
tax loss carryovers and basis dif
ference in revalued investments.

 

While we believe that the basis for
estimating our valuation allowance
is strong, 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.

 

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Description

  

Judgments and Uncertainties

  

Effect if Actual Results Differ From
Assumptions

Stock-based compensation

 

The Company has a stock-based compensation plan, which includes stock options, restricted stock units, restricted stock awards and stock appreciation rights. Certain awards are subject to market and performance conditions at threshold, target and maximum levels.

 

For purposes of determining the fair value of stock option awards, the Company uses the Black-Scholes single option pricing model. Compensation cost, net of estimated forfeitures, is recognized using a straight-line method over the vesting or service period.

  

 

Assumptions for stock-based compensation include estimating the future volatility of our stock price, expected dividend yield, employee turnover and employee exercise activity.

 

Performance-based share awards require management to make assumptions regarding the likelihood of achieving market and performance goals. Assumptions used in our assessment are consistent with our internal forecasts and operating plans and assume achievement of performance conditions at target.

  

 

A 10 percent change in our volatility, forfeiture rate and term of grant for the year ended December 31, 2011, would have affected net income by $1.6 million.

 

If the Company assumed that the performance conditions for stock-based awards would not be met, stock-based compensation expense would have decreased by $9.6 million. If the Company assumed that share awards would meet their maximum threshold, expense would have increased by $0.6 million.

Recent Accounting Developments

Recent accounting developments are set forth in Note 2 — Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and the documents incorporated by reference herein may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements with respect to, among other things, the financial condition, results of operations, plans, objectives, future performance and business of MoneyGram and its subsidiaries. Forward-looking statements can be identified by words such as “believes,” “estimates,” “expects,” “projects,” “plans,” “anticipates,” “continues,” “will,” “should,” “could,” “may,” “would” and other similar expressions. These forward-looking statements speak only as of the date they are made, and MoneyGram undertakes no obligation to publicly update or revise any forward-looking statement, except as required by federal securities law. These forward-looking statements are based on management’s current expectations, beliefs and assumptions and are subject to certain risks, uncertainties and changes in circumstances due to a number of factors. These factors include, but are not limited to:

 

   

continued weakness in economic conditions, in both the United States and global markets;

 

   

consumers’ confidence in our business;

 

   

a material slow down or complete disruption of international migration patterns;

 

   

our ability to maintain agent or biller relationships, or a reduction in transaction volume from these relationships;

 

   

the ability of us and our agents to comply with U.S. and international laws and regulations, including the Dodd-Frank Act;

 

   

litigation involving MoneyGram or its agents, which could result in material settlements, fines or penalties;

 

   

ongoing investigations involving MoneyGram by the U.S. federal government and several state governments which could result in criminal or civil penalties, revocation of required licenses or registrations, termination of contracts, other administrative actions or lawsuits and negative publicity;

 

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our offering of money transfer services through agents in regions that are politically volatile or, in a limited number of cases, that are subject to certain OFAC restrictions;

 

   

our substantial debt service obligations, significant debt covenant requirements and credit rating;

 

   

sustained financial market illiquidity, or illiquidity at our clearing, cash management and custodial financial institutions;

 

   

our ability to maintain sufficient capital;

 

   

our ability to manage credit risks from our retail agents and official check financial institution customers;

 

   

the ability of MoneyGram and its agents to maintain adequate banking relationships;

 

   

our ability to retain partners to operate our official check and money order businesses;

 

   

our ability to manage fraud risks from consumers or agents;

 

   

our ability to compete effectively;

 

   

our ability to successfully develop and timely introduce new and enhanced products and services;

 

   

our investments in new products, services or infrastructure changes;

 

   

our ability to manage risks associated with our international sales and operations;

 

   

our ability to attract and retain key employees;

 

   

our ability to adequately protect our brand and intellectual property rights and to avoid infringing on the rights of others;

 

   

a security or privacy breach in our systems;

 

   

disruptions to our computer systems and data centers;

 

   

our ability to effectively operate and adapt our technology to match our business growth;

 

   

our ability to manage risks related to the operation of retail locations and the acquisition or start-up of businesses;

 

   

the European debt crisis and market perceptions concerning the euro, the potential re-introduction of individual currencies within the Eurozone or the potential dissolution of the euro;

 

   

changes in tax laws or an unfavorable outcome with respect to tax positions, or a failure by us to establish adequate reserves for tax events;

 

   

our ability to maintain effective internal controls;

 

   

our capital structure and the special voting rights provided to designees of THL on our Board of Directors; and

 

   

the risks and uncertainties described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of this Annual Report on Form 10-K, as well as any additional risk factors that may be described in our other filings with the SEC from time to time.

 

 

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

Market risk disclosure is discussed under “Enterprise Risk Management” in Item 7 of this Annual Report on Form 10-K.

 

 

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

 

The information called for by Item 8 is found in a separate section of this Annual Report on Form 10-K on pages F-1 through F-65. See the “Index to Financial Statements” on page F-1.

 

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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

 

None.

 

 

Item 9A. CONTROLS AND PROCEDURES

 

 

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed or submitted under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in company reports filed or submitted under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report (the “Evaluation Date”), the Company’s management carried out an evaluation, under the supervision and with the participation of the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures were effective.

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the fiscal quarter ended December 31, 2011 that have materially affected, or are 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 on page F-2 of this Annual Report on Form 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 on page F-3 of this Annual Report on Form 10-K.

 

 

Item 9B. OTHER INFORMATION

 

 

None.

PART III

 

 

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

 

The information called for by this Item is contained in Item 1 of this Annual Report on Form 10-K under the caption “Executive Officers of the Registrant” and in our definitive Proxy Statement for our 2012 Annual Meeting of Stockholders, and is incorporated herein by reference.

All of our employees, including our principal executive officer, principal financial officer, principal accounting officer and controller, or persons performing similar functions, also referred to as the Principal Officers, are subject to our Code of Conduct. Our directors are also subject to our Code of Conduct. 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 Conduct for directors or Principal Officers on our website.

 

 

Item 11. EXECUTIVE COMPENSATION

 

 

The information called for by this Item is contained in our definitive Proxy Statement for our 2012 Annual Meeting of Stockholders, and is incorporated herein by reference.

 

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Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER. MATTERS

 

 

The information called for by this Item is contained in our definitive Proxy Statement for our 2012 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 our definitive Proxy Statement for our 2012 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 our definitive Proxy Statement for our 2012 Annual Meeting of Stockholders, and is incorporated herein by reference.

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 on Form 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 on Form 10-K or incorporated herein by reference as listed in the accompanying Exhibit Index.

 

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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)

Date: March 8, 2012

    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 and on the dates indicated.

 

/s/    Pamela H. Patsley   

Chairman and Chief
Executive Officer

(Principal Executive Officer)

  

March 8, 2012

Pamela H. Patsley      
/s/    James E. Shields   

Executive Vice President
and Chief Financial Officer

(Principal Financial Officer)

  

March 8, 2012

James E. Shields      
/s/    David B. Brown   

Senior Vice President
and Chief Accounting Officer

(Principal Accounting Officer)

  

March 8, 2012

David B. Brown      

 

 

    

        Directors

     
     J. Coley Clark    Seth W. Lawry      
     Victor W. Dahir    Ann Mather      
     Thomas M. Hagerty    Ganesh B. Rao      
     Scott L. Jaeckel    W. Bruce Turner      

 

By:   /s/ Timothy C. Everett     March 8, 2012
  Timothy C. Everett    
  Attorney-in-fact    

 

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EXHIBIT INDEX

 

Exhibit

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 on Form 10-Q filed on August 13, 2004).
2.2    Recapitalization Agreement, dated as of March 7, 2011, among MoneyGram International, Inc., certain affiliates and co-investors of Thomas H. Lee Partners, L.P. and Goldman, Sachs & Co. and certain of its affiliates (including “Annex A—Form of Certificate of Amendment of Certificate of Designations, Preferences and Rights of Series D Participating Convertible Preferred Stock of MoneyGram International, Inc.) (Incorporated by reference from Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed March 9, 2011).
2.3    Amendment No. 1 to Recapitalization Agreement, dated as of May 4, 2011, among MoneyGram International, Inc., certain affiliates and co-investors of Thomas H. Lee Partners, L.P. and Goldman, Sachs & Co. and certain of its affiliates (Incorporated by reference from Exhibit 2.1 to Registrant’s Current Report on Form 8-K filed May 6, 2011).
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 on Form 10-K filed on March 15, 2010).
3.2    Certificate of Amendment of Amended and Restated Certificate of Incorporation of MoneyGram International, Inc., dated May 18, 2011 (Incorporated by reference from Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed May 23, 2011).
3.3    Certificate of Amendment of Amended and Restated Certificate of Incorporation of MoneyGram International, Inc., filed with the Secretary of State of the State of Delaware on November 14, 2011 (Incorporated by reference from Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed November 14, 2011).
3.4    Bylaws of MoneyGram International, Inc., as amended and restated September 10, 2009 (Incorporated by reference from Exhibit 3.01 to Registrant’s Current Report on Form 8-K filed on September 16, 2009).
3.5    Amendment to Bylaws of MoneyGram International, Inc., dated as of January 25, 2012 (Incorporated by reference from Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed January 27, 2012).
3.6    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 on Form 10-Q filed on August 13, 2004).
3.7    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 on Form 8-K filed on March 28, 2008).
3.8    Certificate of Designations, Preferences and Rights of the Series B-1 Participating Convertible Preferred Stock of MoneyGram International, Inc. (Incorporated by reference from Exhibit 4.3 to Registrant’s Current Report on Form 8-K filed on March 28, 2008).
3.9    Amended and Restated Certificate of Designations, Preferences and Rights of Series D Participating Convertible Preferred Stock of MoneyGram International, Inc., dated May 18, 2011 (Incorporated by reference from Exhibit 3.2 to Registrant’s Current Report on Form 8-K filed May 23, 2011).
3.10    Certificate of Elimination of the Series B Participating Convertible Preferred Stock of MoneyGram International, Inc., dated May 18, 2011 (Incorporated by reference from Exhibit 3.3 to Registrant’s Current Report on Form 8-K filed May 23, 2011).
3.11    Certificate of Elimination of the Series B-1 Participating Convertible Preferred Stock of MoneyGram International, Inc., dated May 18, 2011 (Incorporated by reference from Exhibit 3.4 to Registrant’s Current Report on Form 8-K filed May 23, 2011).
3.12    Certificate of Elimination of Series A Junior Participating Preferred Stock, dated September 27, 2011 (Incorporated by reference from Exhibit 3.1 to Registrant’s Current Report on Form 8-K filed September 28, 2011).

 

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    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).
    4.2    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 on Form 8-K filed on March 28, 2008).
  *4.3    First Supplemental Indenture relating to the 13.25% Senior Secured Second Lien Notes due 2018, dated as of August 6, 2009, among MoneyGram Payment Systems Worldwide, Inc., as issuer, MoneyGram International, Inc. and the other guarantors named therein and Deutsche Bank Trust Company Americas, as trustee and collateral agent.
  *4.4    Second Supplemental Indenture relating to the 13.25% Senior Secured Second Lien Notes due 2018, dated as of July 29, 2010, among MoneyGram Payment Systems Worldwide, Inc., as issuer, MoneyGram International, Inc. and the other guarantors named therein and Deutsche Bank Trust Company Americas, as trustee and collateral agent.
    4.5    Third Supplemental Indenture relating to the 13.25% Senior Secured Second Lien Notes due 2018, dated as of April 19, 2011, among MoneyGram Payment Systems Worldwide, Inc., as issuer, MoneyGram International, Inc. and the other guarantors named therein and Deutsche Bank Trust Company Americas, as trustee and collateral agent (Incorporated by reference from Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed on April 21, 2011).
    4.6    Fourth Supplemental Indenture relating to the 13.25% Senior Secured Second Lien Notes due 2018, dated as of September 29, 2011, among MoneyGram Payment Systems Worldwide, Inc., as issuer, MoneyGram International, Inc. and the other guarantors named therein and Deutsche Bank Trust Company Americas, as trustee and collateral agent (Incorporated by reference from Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed September 30, 2011).
    4.7    Fifth Supplemental Indenture relating to the 13.25% Senior Secured Second Lien Notes due 2018, dated as of November 15, 2011, among MoneyGram Payment Systems Worldwide, Inc., as issuer, MoneyGram International, Inc. and the other guarantors named therein and Deutsche Bank Trust Company Americas, as trustee and collateral agent (Incorporated by reference from Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed November 16, 2011).
    4.8    Sixth Supplemental Indenture relating to the 13.25% Senior Secured Second Lien Notes due 2018, dated as of November 21, 2011, among MoneyGram Payment Systems Worldwide, Inc., as issuer, MoneyGram International, Inc. and the other guarantors named therein and Deutsche Bank Trust Company Americas, as trustee and collateral agent (Incorporated by reference from Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed November 22, 2011).
    4.9    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 on Form 8-K filed on March 28, 2008).
    4.10    Amendment No. 1 to Registration Rights Agreement, dated as of May 18, 2011, by and among MoneyGram International, Inc., certain affiliates and co-investors of Thomas H. Lee Partners, L.P., and certain affiliates of Goldman, Sachs & Co. (Incorporated by reference from Exhibit 4.1 to Registrant’s Current Report on Form 8-K filed May 23, 2011).
    4.11    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 on Form 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 on Form 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 on Form 10-Q filed on August 13, 2004).

 

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†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 on Form 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 on Form 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 on Form 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 on Form 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 on Form 8-K filed on February 22, 1010).
  10.8    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 on Form 8-K filed on March 28, 2008).
  10.9    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 on Form 8-K filed on March 28, 2008).
  10.10    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 on Form 8-K filed on March 28, 2008).
  10.11    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 on Form 8-K filed on March 28, 2008).
†10.12    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 on Form 10-Q filed on November 12, 2004).
†10.13    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 on Form 8-K filed on August 22, 2007).
†10.14    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 on Form 8-K filed on March 28, 2008).
†10.15    MoneyGram Supplemental Pension Plan, as amended and restated December 28, 2007 (Incorporated by reference from Exhibit 99.01 to Registrant’s Current Report on Form 8-K filed on January 4, 2008).
†10.16    First Amendment of MoneyGram Supplemental Pension Plan (Incorporated by reference from Exhibit 10.28 to Amendment No. 1 to Registrant’s Annual Report on Form 10-K/A filed on August 9, 2010).
†10.17    Description of MoneyGram International, Inc. Director’s Charitable Matching Program (Incorporated by reference from Exhibit 10.13 to Registrant’s Quarterly Report on Form 10-Q filed on August 13, 2004).
†10.18    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).

 

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  10.19    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 on Form 8-K filed on March 28, 2008).
  10.20 <