10-K 1 mgi2013123110-k.htm 10-K MGI 2013.12.31 10-K
 
 
 
 
 
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, 2013.
 
¨
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
 
The NASDAQ Stock Market LLC
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 NASDAQ Stock Market LLC as of June 30, 2013, the last business day of the registrant’s most recently completed second fiscal quarter, was $483.5 million.
57,969,152 shares of common stock were outstanding as of February 26, 2014.
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 2014 Annual Meeting of Stockholders.
 
 
 
 
 



TABLE OF CONTENTS
 
 
 
Page
PART I.
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
PART II.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
 
PART III.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
PART IV.
Item 15.


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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 money transfer and payment services company. We provide affordable, reliable and convenient money transfer and payment services. Our primary consumers are persons who may not be fully served by other financial institutions, which we refer to as unbanked or underbanked consumers. Unbanked consumers do not have a relationship with a traditional financial institution. Underbanked consumers are not fully served by traditional financial institutions. The World Bank, a key source of industry analysis for developing countries, estimates that roughly half of the world's adult population, or 2.5 billion people, are unbanked or underbanked. As an alternative financial services provider, we provide these consumers with flexibility and convenience to help them meet the financial demands of their daily lives. Other consumers who use our services are convenience users and emergency users who may utilize traditional banking services, but prefer to use our services based on convenience, cost or to make urgent payments or transfers.
Our products include global money transfers, bill payment services, money order services and official check processing. Our global money transfer and bill payment services are our primary revenue drivers. Money transfers are movements of funds between consumers from the origination or "send" location and the designated "receive" locations. We also derive revenue from the sale of our money order and official check products and generate revenue from the investment of funds underlying outstanding official checks and money orders.
Our money transfer services enable our consumers to send and receive funds worldwide through our extensive global network of agent locations and Company-owned retail locations. Our agent locations have more than doubled since 2007 to approximately 336,000 locations, located in more than 200 countries and territories. We operate one primary customer care center in the U.S., with regional support centers providing ancillary services and 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 27 languages.
The MoneyGram® brand is recognized throughout the world. We use various trademarks and service marks in our business, including but not limited to MoneyGram, the Globe design logo, MoneyGram Bringing You Closer, ExpressPayment, MoneyGram xpress, Moneygrado, FormFree, AgentWorks, Agent Connect, Delta and PrimeLink, some of which are registered in the U.S. and other countries. This document also contains trademarks and service marks of other businesses that are the property of their respective holders and are used herein solely for identification purposes. We have omitted the ® and TM designations, as applicable, for the trademarks we reference.
The Company utilizes specific terms as related to our business throughout this document, including the following:
Corridor With regard to a money transfer transaction, a corridor is referred to as the originating "send" location and the designated "receive" location. Transactions and the related fee and other revenue are viewed as originating from the "send side" of a transaction.
Corridor mix The relative impact of consumers completing increased or decreased transactions in each available corridor versus the comparative prior period.
Face value The principal amount of each completed transaction, excluding any fees related to the transaction.
Foreign currency The impact of foreign currency exchange rate fluctuations is typically calculated as the difference between current period activity translated using the current period’s currency exchange rates and the comparable prior-year period’s currency exchange rates. We use this method to calculate the impact of changes in foreign currency exchange rates for all countries where the functional currency is not the U.S. dollar.
History and Development
We conduct our business primarily through our wholly owned subsidiary MoneyGram Payment Systems, Inc., or MPSI, under the MoneyGram brand. The Company was incorporated in Delaware on December 18, 2003 in connection with the June 30, 2004 spin-off from our former parent company, Viad Corporation. Through the Company's predecessors, we have been in operation for over 70 years. 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.
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

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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 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 shares of the B-1 Stock.
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 comprising independent and disinterested members of our board of directors.
On November 14, 2011, we filed a certificate of amendment to our Amended and Restated Certificate of Incorporation to effect a reverse stock split of our 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 1 to 125 to 1. All share and per share amounts have been retroactively adjusted to reflect the stock split with the exception of our treasury stock, which was not a part of the reverse stock split.
2013 Events
2013 Credit Agreement and Note Repurchase — On March 28, 2013, the Company entered into an Amended and Restated Credit Agreement with Bank of America, N.A., as administrative agent, or BOA, and the other financial institutions party thereto, as lenders, referred to herein as the 2013 Credit Agreement. The 2013 Credit Agreement provides for (i) a senior secured five-year revolving credit facility that may be used for revolving credit loans, swingline loans and letters of credit up to an aggregate principal amount of $125.0 million and (ii) a senior secured seven-year term loan facility up to an aggregate principal amount of $850.0 million.
In connection with the Company's entry into the 2013 Credit Agreement, the Company repaid in full all outstanding indebtedness and terminated all of the commitments under the Credit Agreement with BOA as Administrative Agent, and the lenders party thereto, referred to herein as the 2011 Credit Agreement. The Company also purchased all $325.0 million of the outstanding 13.25% senior secured second lien notes due 2018 of MoneyGram Payment Systems Worldwide, Inc. for a purchase price equal to 106.625 percent of the principal amount purchased, plus accrued and unpaid interest, referred to herein as the Note Repurchase. As a result, the Company incurred a pre-tax debt extinguishment charge of $45.3 million. The Company expects to realize estimated annual cash interest savings of $28.0 million as a result of the refinancing.
Deferred Prosecution Agreement — In the first quarter of 2013, a compliance monitor was selected pursuant to a requirement of our settlement with the U.S. Attorney’s Office for the Middle District of Pennsylvania, or MDPA, and the Asset Forfeiture and Money Laundering Section of the Criminal Division of the Department of Justice, or U.S. DOJ. Aaron Marcu is a litigation partner with Freshfields Bruckhaus Deringer LLP in New York and heads its global financial institutions litigation group. He was among the original list of potential monitors that we submitted to the U.S. DOJ. The first annual monitor report was provided to MoneyGram in November and per this report MoneyGram is required to make investments ranging from enhanced systems to more resources deployed in the field. For the twelve months ended December 31, 2013, we incurred $6.1 million of expense directly related to the monitor.
Walmart Renewal — In April of 2013, we commenced our renewed agreement with Wal-Mart Stores, Inc., or Walmart, which is our largest agent. We continue to provide certain money transfer services, bill payment services and money order services for consumers in Walmart stores located in the U.S. and Puerto Rico. Pursuant to the terms of the agreement, we serve as the “preferred provider” for money transfer services conducted at Walmart agent locations that are not otherwise conducted under a Walmart brand name, subject to certain exceptions.
Global Transformation Initiative — In 2013, we completed the Global Transformation Initiative, which commenced in the second quarter of 2010 when we announced the implementation of the 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 included investment in technology, organizational changes and relocation of certain operations, among other items. In connection with reorganization and restructuring activities during 2013, 2012 and 2011, the Company recorded total expenses of $3.2 million, $19.8 million and $23.5 million, respectively, which have all been paid as of December 31, 2013. This initiative generated annual pre-tax cost savings of approximately $30.0 million.

4


Business Acquisitions — During 2013, the Company acquired Nexxo Financial's full-service money transfer kiosk business, which consists of approximately 200 kiosks primarily located in California, Illinois and Texas. These kiosks offer automated, self-service money transfers to MoneyGram agents worldwide. Consumers will also be able to pay bills through these kiosks utilizing MoneyGram's extensive bill payment network. Additionally, the Company completed the acquisitions of Advanced ChronoCash Services S.A., referred to herein as ChronoCash, located in Athens, Greece, MoneyGlobe Payment Institution S.A., referred to herein as MoneyGlobe, located in Athens, Greece and the assets of Latino Services located in Atlanta, Georgia. The ChronoCash acquisition establishes a direct retail network for the Company in Greece, enabling a closer relationship with our consumers. The Latino Services acquisition increased the number of MoneyGram operated stores in the U.S. The acquisition of MoneyGlobe, a provider of cash-to-account money transfers from Greece to Bangladesh, will enable MoneyGram to offer a technology-driven solution that meets the unique needs of consumers in Greece. See Note 3 Acquisitions and Disposals of the Notes to the Consolidated Financial Statements for additional disclosure of details relating to acquisitions arising in 2013.
Our Segments
We manage our business primarily through two segments: Global Funds Transfer and Financial Paper Products. The following table presents the components of our consolidated revenue associated with our segments for the years ended December 31:
 
2013
 
2012
 
2011
Global Funds Transfer
 
 
 
 
 
Money transfer
87.3
%
 
85.7
%
 
83.4
%
Bill payment
6.9
%
 
7.9
%
 
9.0
%
Financial Paper Products
 
 
 
 
 
Money order
3.7
%
 
4.3
%
 
4.9
%
Official check
2.0
%
 
2.0
%
 
2.6
%
Other
0.1
%
 
0.1
%
 
0.1
%
Total revenue
100.0
%
 
100.0
%
 
100.0
%
See Note 15 — Segment Information of the Notes to the Consolidated Financial Statements for additional financial information about our segments and geographic areas.
During 2013, 2012 and 2011, our 10 largest agents accounted for 43 percent, 44 percent and 45 percent, respectively, of our total company fee and investment revenue and 44 percent, 46 percent and 48 percent, respectively, of the fee and investment revenue of our Global Funds Transfer segment. Walmart is our only agent that accounts for more than 10 percent of our total company fee and investment revenue. In 2013, 2012 and 2011, Walmart accounted for 27 percent, 28 percent and 29 percent, respectively, of our total company fee and investment revenue, and 28 percent, 30 percent and 31 percent, respectively, of the fee and investment revenue of our Global Funds Transfer segment.
Global Funds Transfer Segment
The Global Funds Transfer segment is our primary revenue driver, providing global money transfer services and bill payment services primarily to unbanked and underbanked consumers. We utilize a variety of proprietary point-of-sale platforms, including AgentConnect, which is integrated into an agent’s point-of-sale system, DeltaWorks and Delta T3, which are separate software and stand-alone device platforms, and MoneyGram Online.
We continue to focus on the growth of our Global Funds Transfer segment outside of the U.S. During 2013, 2012 and 2011, operations outside of the U.S. generated 40 percent, 38 percent and 38 percent, respectively, of our total company revenue, and 42 percent, 41 percent and 42 percent, respectively, of our total Global Funds Transfer segment revenue. In 2013, our Global Funds Transfer segment had total revenue of $1,389.8 million.
Global 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 provide us flexibility when establishing consumer fees and foreign exchange rates for our money transfer services, which allow us to remain competitive in all locations. In a cash-to-cash money transfer transaction, both the agent initiating the transaction and the receiving agent earn a commission that is generally based on a percentage of the fee charged to the consumer. When a money transfer transaction is initiated at a MoneyGram-owned store or kiosk or via our online platform, only the receiving agent earns a commission.
In certain countries, we have multi-currency technology that allows consumers a currency choice when initiating or receiving a money transfer. The currency choice typically consists of local currency, U.S. dollars and/or euros. These capabilities allow consumers to know the amount that will be received in the selected currency.

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The majority of our remittances constitute transactions in which cash is collected by one of our agents and payment is available for pick-up at another agent location. Typically, the designated recipient may receive the transferred funds within 10 minutes at any MoneyGram 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. Through our online product offerings, consumers can remit funds from a bank account, credit card or debit card.
We offer a variety of services to improve the consumers' experience at our agent locations. Through our FormFree service, consumers are directed to one of our customer care centers and a representative collects transaction information over the telephone, entering it directly into our central data processing system. Our MoneyGram xpress product enables consumers to pay for money transfers at a MoneyGram agent location, and provide the information necessary to complete the money transfer when and where it is convenient for them, via phone or any internet-enabled device.
We offer our money transfer services on the internet via our MoneyGram Online service in the U.S., United Kingdom, Germany and through affiliate websites. Through our MoneyGram Online service, consumers have the ability to send money from the convenience of their home or internet-enabled mobile device to any of our agent locations worldwide through a debit or credit card or three day service funding with a U.S. checking account. MoneyGram Online money transfer transactions grew 44 percent and revenue grew 22 percent in 2013 over the prior year.
In over 10 countries, we offer our money transfer services via virtual agents allowing our consumers to send international transfers conveniently from their mobile phone. We continue to expand our money transfer services to consumers through the addition of full service and staging kiosks, ATMs, prepaid cards and direct-to-bank account products in various markets around the world.
In 2013, we added approximately 26,000 net locations, bringing our global money transfer agent network to approximately 336,000 locations. The following table is a summary of our approximate money transfer agent locations by geographic area as of December 31:
 
2013
 
2012
 
2013 vs 2012
 
2013 vs 2012
 
 
 
 
 
(growth)
 
(%)
Latin America, excluding Mexico
22,000

 
20,000

 
2,000

 
10
 %
Mexico
16,000

 
15,000

 
1,000

 
7
 %
U.S. and Canada
55,000

 
53,000

 
2,000

 
4
 %
Western Europe
49,000

 
50,000

 
(1,000
)
 
(2
)%
Eastern Europe
64,000

 
52,000

 
12,000

 
23
 %
Indian subcontinent
60,000

 
55,000

 
5,000

 
9
 %
Asia Pacific
41,000

 
38,000

 
3,000

 
8
 %
Africa
23,000

 
22,000

 
1,000

 
5
 %
Middle East
6,000

 
5,000

 
1,000

 
20
 %
Total agent locations
336,000

 
310,000

 
26,000

 
8
 %

Our agents include large networks such as international post offices, financial institutions and retailers as well as a large number of agents specializing in specific corridors. Additionally, we have Company-owned retail locations in the U.S. and Western Europe. Some of our agents outside the U.S. manage sub-agents. We refer to these agents as super-agents. Although these sub-agents are under contract with these super-agents, the sub-agent locations typically have access to similar technology and services as our other agent locations. Many of our agents have multiple locations, a large number of which operate in locations that are open outside of traditional banking hours, for example on nights and weekends. Our agents know the markets they serve and they work with our sales and marketing teams to develop business plans for their markets, which may include contributing financial resources to, or otherwise supporting, our efforts to market the business.
Bill Payment Services — We derive our bill payment revenues primarily from transaction fees charged to consumers for each transaction completed. Our primary bill payment service offered is our ExpressPayment service, which we offer at substantially all of our money transfer agent and company-owned locations in the U.S., Canada and Puerto Rico, and at certain agent locations in select Caribbean countries.
Through our bill payment services, consumers can complete urgent bill payments, pay routine bills, or load and reload prepaid debit cards in cash at an agent location or through MoneyGram Online with a credit or debit card. We offer consumers same-day and two or three day payment service options; the service option is dependent upon our agreement with the biller. We offer over 13,000 payment options to billers in key industries, including the ability to allow the consumer to load or reload funds to nearly 300 prepaid debit card programs. These industries include the credit card, mortgage, auto finance, telecommunications, corrections, health care, utilities, property management, prepaid card and collections industries.

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Marketing — We have global marketing, product management and strategic partnership teams located in multiple geographical regions. We employ a strategy of developing products and marketing campaigns that are global, yet tailored to address our consumer base and local needs. A key component of our marketing efforts is our global branding. We use a marketing mix to support our brand, which includes traditional, digital and social media, point of sale materials, signage at our agent locations, targeted marketing campaigns, seasonal campaigns and sponsorships.
Sales — Our sales teams are organized by geographic area, product and delivery channel. We have dedicated teams that focus on developing our agent and biller networks to enhance the reach of our money transfer and bill payment products. Our agent requirements vary depending upon the type of outlet or location, and our sales teams continue to improve and strengthen our agent relationships with a goal of providing the optimal agent and consumer experience.
Competition — While the market for our money transfer and bill payment services continues to be very competitive, we remain the second largest money transfer service company in the world based on total face value of remittances in 2012. The World Bank estimated that by 2016 cross-border remittances will exceed $700 billion. We generally compete for money transfer agents on the basis of value, service, quality, technical and operational differences, price, commission and marketing efforts. We compete for money transfer consumers on the basis of trust, convenience, availability of outlets, price, technology and brand recognition.
Our competitors include a small number of large money transfer and bill payment providers, banks and a large number of small niche money transfer service providers that serve select regions. Our largest competitor in the money transfer industry is the Western Union Company, or Western Union, which competes with our bill payment services and money order businesses. We will encounter increasing competition as new technologies emerge that allow consumers to send and receive money through a variety of channels. We continue to be an innovator in the industry by diversifying our core money transfer revenue through new channels, such as online, mobile and other self-service offerings.
Financial Paper Products Segment
Our Financial Paper Products segment provides money orders to consumers through our retail agents and financial institutions located throughout the U.S. and Puerto Rico, and provides official check outsourcing services for financial institutions across the U.S.
In 2013, our Financial Paper Products segment generated revenues of $84.0 million from fee and other revenue and investment revenue. We earn revenue from the investment of funds underlying outstanding official checks and money orders. We refer to our cash and cash equivalents, interest-bearing investments, and available-for-sale investments collectively as our “investment portfolio.” Our investment portfolio primarily consists of low risk, highly liquid, short-term U.S. government securities and bank deposits that produce a low rate of return.
Money Orders — Consumers use our money orders to make payments in lieu of cash or personal checks. 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 eight days. We sell money orders under the MoneyGram brand and on a private label or co-branded basis with certain large retail and financial institution agents in the U.S. As of December 31, 2013, we issued money orders through our network of approximately 51,000 agent and financial institution locations in the U.S. and Puerto Rico.
Official Check Outsourcing Services — Official checks are used by consumers where a payee requires a check drawn on a bank. Financial institutions also use official checks to pay their own obligations. As with money orders, we generate revenue from our official check outsourcing services for U.S. banks and credit unions by charging per item and other fees, as well as from the investment of funds underlying outstanding official checks, which generally remain outstanding for fewer than four days. As of December 31, 2013, we provided official check outsourcing services through approximately 1,100 financial institutions at approximately 7,400 branch bank locations.
Marketing — We employ a wide range of marketing methods to support our sales efforts. A key component of our marketing efforts is our global branding. We use a marketing mix to support our brand, which includes traditional, digital and social media, point of sale materials, signage at our agent locations and targeted marketing campaigns. Official checks are financial institution branded and therefore all marketing to this segment is business to business.
Sales — Our sales teams are organized by geographic area, product and delivery channel. We have dedicated teams that focus on developing our agent and financial institution networks to enhance the reach of our official check and money order products. Our agent requirements vary depending upon the type of outlet or location, and our sales teams continue to improve and strengthen our agent relationships with a goal of providing the optimal agent and consumer experience.
Competition — Our money order competitors include a small number of large money order providers and a small number of regional and niche money order providers. Our largest competitors in the money order industry are Western Union and the United States Postal Service. We generally compete for money order agents on the basis of value, service, quality, technical and operational

7


differences, price, commission and marketing efforts. We compete for money order consumers on the basis of trust, convenience, availability of outlets, price, technology and brand recognition.
Official check competitors include financial institution solution providers, such as core data processors, and corporate credit unions. We generally compete against a financial institution’s desire to perform these processes in-house with support from these types of organizations. We compete for official check customers on the basis of value, service, quality, technical and operational differences, price and commission.
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 U.S. and other countries, including 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. Since 2009 we have invested over $120.0 million in our compliance and anti-fraud programs and prevented more than $365.0 million in fraud losses during the same time period.
Deferred Prosecution Agreement — In November 2012, we announced that a settlement was reached with the MDPA, and the U.S. DOJ, relating to the previously disclosed investigation of transactions involving certain of our U.S. and Canadian agents, as well as fraud complaint data and the consumer anti-fraud program, during the period from 2003 to early 2009. In connection with this settlement, we entered into a deferred prosecution agreement, or DPA, with the MDPA and U.S. DOJ dated November 8, 2012. Under the DPA, we agreed to a forfeiture of $100 million that is available to victims of the consumer fraud scams perpetrated through MoneyGram agents. In the first quarter of 2013, a compliance monitor was selected pursuant to a requirement of our settlement with the MDPA and the U.S. DOJ. Aaron Marcu is a litigation partner with Freshfields Bruckhaus Deringer LLP in New York and heads its global financial institutions litigation group. Aaron Marcu was among the original list of potential monitors that we submitted to the government.
Anti-Money Laundering Compliance — Our money transfer services are subject to anti-money laundering laws and regulations of the U.S., including the Bank Secrecy Act, as amended by the USA PATRIOT Act, as well as 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 government 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;
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 U.S. 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.

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Money Transfer and Payment Instrument Licensing — Almost all states in the U.S., the District of Columbia, Puerto Rico and the U.S. Virgin Islands and Guam require us to be licensed to conduct business within their jurisdictions. Our primary overseas operating subsidiary, MoneyGram International Ltd, is 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 or letters of credit, 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 U.S. 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.
Privacy Regulations — In the ordinary course of our business we collect certain types of data that subject us to privacy laws in the U.S. and abroad. In the U.S., 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 and 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.
Dodd-Frank Act — The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, was signed into law on July 21, 2010. The Dodd-Frank Act imposes additional regulatory requirements and creates additional regulatory oversight for us. The Dodd-Frank Act created a Bureau of Consumer Financial Protection, or the CFPB, which issues and enforces consumer protection initiatives governing financial products and services, including money transfer services, in the U.S. The CFPB’s Remittance Transfer Rule, which became effective on October 28, 2013, requires enhanced disclosure requirements, error resolution procedures, the extension of vicarious liability for the acts of our agents, refund requirements and other matters impacting how we offer international remittances in the U.S. We have modified our systems and consumer disclosures in order to comply with the requirements of the Remittance Transfer Rule.
Additionally, the Dodd-Frank Act assigns supervisory authority over “larger participants” (as such term is defined by the CFPB) of a market for consumer financial products or services. In January 2014, the CFPB issued a proposed rule which would amend the definition of larger participants by adding a new section to define larger participants of a market for international money transfers. If adopted, the rule would provide that a nonbank is a “larger participant” in the market for international money transfers if such nonbank and its affiliates provide $1,000,000 or more in aggregate annual international money transfers. We would fall within the scope of this rule if adopted. The CFPB has solicited comments on the proposed rule.
Foreign Exchange Regulation — Our money transfer services are subject to foreign currency exchange statutes of the U.S., as well as similar state laws and the laws of certain other countries in which we operate. Certain of these statutes require registration or licensure and reporting. Others may impose currency exchange restrictions with which we must comply.
Regulation of Prepaid Cards — We sell our MoneyGram-branded prepaid card in the U.S., in addition to loading prepaid cards of other card issuers through our ExpressPayment offering. Our prepaid cards and related loading services may be subject to federal and state laws and regulations, including laws related to consumer protection, licensing, escheat, anti-money laundering and the payment of wages. Certain of these federal and state statutes prohibit or limit fees and expiration dates on and/or require specific consumer disclosures related to certain categories of prepaid cards. We continually monitor developments in such statutes and regulations and our compliance with the same.
Clearing and Cash Management Bank Relationships
Our business involves the movement of money on a global basis on behalf of our consumers, our agents and ourselves. We buy and sell a number of global currencies and maintain a network of settlement accounts to facilitate the funding of money transfers and foreign exchange trades to ensure that funds are received on a timely basis. Our relationships with the clearing, trading and cash management banks are critical to an efficient and reliable global funding network.

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In the U.S., we have agreements with five active clearing banks that provide clearing and processing functions for official checks, money orders and other draft instruments. We employ four banks to clear our official checks and three banks to clear our retail money orders. We believe that this network of banks provides sufficient capacity to handle the current and projected volumes of items for these services.
We maintain significant relationships with major international banks which provide the capability to move money electronically as well as through domestic and international wire transfer networks. There are a limited number of banks that have the capabilities that are broad enough in scope to handle our volume and complexity. Consequently, we employ banks whose market is not limited to their own country or region, and have extensive systems capabilities and branch networks that can support settlement needs that are often unique to different countries around the world. In 2013, we activated our participation in the SWIFT network for international wire transfers, which improves access to all banks in the world while lowering the cost of these funds transfers.
Intellectual Property
The MoneyGram brand is important to our business. We have registered our MoneyGram trademark in the U.S. and in a majority of the other countries where we do business. We maintain a portfolio of other trademarks that are material to our Company, which were previously discussed in the "Overview" section of Item 1 of this Form 10-K. In addition, we maintain a portfolio of MoneyGram branded domain names.
We rely on a combination of patent, trademark and copyright laws, and trade secret protection and confidentiality or license agreements to protect our proprietary rights in products, services, know-how and information. 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 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 technologies. Our patents have in the past given us competitive advantages in the marketplace. We also have patent applications pending in the U.S. 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.
Employees
As of December 31, 2013, we had approximately 1,670 full-time employees in the U.S. and 920 full-time employees outside of the U.S. In addition, we engage contractors to support various aspects of our business. None of our employees in the U.S. are represented by a labor union. We consider our employee relations to be good.
Executive Officers of the Registrant
Pamela H. Patsley, age 57, has been Chairman and Chief Executive Officer of the Company since September 2009. From January to September 2009, she served as Executive Chairman of the Company. Prior to that, Ms. Patsley 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. She currently serves as a director of Texas Instruments, Inc., a semiconductor design and manufacturing company; and Dr. Pepper Snapple Group, Inc., a beverage company.
Juan Agualimpia, age 51, has served as Executive Vice President and 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. From 2005 to March 2009, Mr. Agualimpia served as Vice President and General Manager for the Art & Coloring Global Business Unit of Newell Rubbermaid. Mr. Agualimpia has 20 years of leadership experience in marketing, brand management, customer relationship management and product development.
Jeffrey J. Allback, age 51, has served as Executive Vice President and Chief Information Officer since September 2012. Mr. Allback previously served as Senior Vice President and Chief Technology Officer from April 2011 to September 2012. Prior to that, Mr. Allback served as Vice President, Systems Engineering of American Express, a multinational financial services corporation, from 2008 to 2010 and Vice President, Department Manager of Technology and Enterprise Architecture of AG Edwards and Sons Inc., a financial services holding company, from 2002 to 2008. Mr. Allback served in various roles of increasing responsibility at Morgan Stanley, a global financial services company, from 1994 to 2002.
Francis Aaron Henry, age 48, has served as Executive Vice President, General Counsel and Corporate Secretary since August 2012 and previously served as interim General Counsel from July 2012 to August 2012. He joined the Company in January 2011 as Senior Vice President, Assistant General Counsel, Global Regulatory and Privacy Officer. From 2008 to 2011, Mr. Henry was Assistant General Counsel at Western Union and from 2004-2008 Senior Counsel at Western Union.

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W. Alexander Hoffmann, age 42, has served as Executive Vice President, Global Product Management and Emerging Channels since February 2014. Mr. Hoffmann previously served as Senior Vice President, Global Product Management and Emerging Channels from July 2013 to February 2014. From 2007 to 2013, Mr. Hoffmann served in a variety of positions at PayPal, most recently as Senior Director of Europe, Middle East and Africa Consumer Growth. Prior to that, Mr. Hoffmann spent 12 years at McKinsey & Company in Brussels, Belgium, and Palo Alto, California, as an Associate Partner working with clients in the payments and telecommunications industries.
W. Alexander Holmes, age 39, has served as Executive Vice President, Chief Financial Officer and Chief Operating Officer since February 2014 and Executive Vice President and Chief Financial Officer since March 2012. He joined the Company in 2009 as Senior Vice President for Corporate Strategy and Investor Relations. From 2003 to 2009, Mr. Holmes served in a variety of positions at First Data Corporation, including chief of staff to the Chief Executive Officer, Director Investor Relations and Senior Vice President of Global Sourcing & Strategic Initiatives. From 2002 to 2003, he managed Western Union’s Benelux region from its offices in Amsterdam.
Grant A. Lines, age 49, has served as the Executive Vice President, Asia-Pacific, South Asia and Middle East since February 2014. Mr. Lines previously served as Senior Vice President, Asia-Pacific, South Asia and Middle East from February 2013 to February 2014. Prior to that, Mr. Lines served as General Manager of Black Label Solutions, a leading developer and supplier of computerized retail Point of Sale systems from May 2011 to December 2012. He served as Managing Director of First Data Corporation’s ANZ business, a global payment processing company, from September 2008 to February 2011. Mr. Lines served as Senior Vice President of First Data’s Strategic Business Development and General Manager ASEAN establishing Asian operations in Singapore from June 2004 to August 2008 and Senior Vice President with sales and marketing responsibilities in Australia and New Zealand from October 2000 to May 2004.
Angela M. McQuien, age 42, has been Vice President, Corporate Controller and Principal Accounting Officer since May 2013. From July 2012 to April 2013, she served in the role of Vice President and Corporate Controller. Ms. McQuien served as Chief Accounting Officer for Think Finance Inc. from December 2009 to July 2012. Prior to that, Ms. McQuien served as Director of Compliance and Controls at Dean Foods and she has held previous finance positions at Sabre Holdings. Ms. McQuien is a Certified Public Accountant and began her career at Deloitte & Touche LLP.
Peter E. Ohser, age 46, has been Executive Vice President, U.S. and Canada since February 2014. Mr. Ohser previously served as Senior Vice President, U.S. and Canada from February 2013 to February 2014. From June 2010 to January 2013, he served as Vice President, Independent Retail Channels & Outbound Corridors and from December 2007 to May 2010 he served as Director of Strategic Planning. He served as Director of Business Process and Organizational Readiness November 2006 to November 2007, Senior Manager Global Risk from 2004 to 2006, Manager, Global Risk from 2003 to 2004 and Supervisor, Risk from September 2002 to 2003. Mr. Ohser joined the Company in January 2001 as a Senior Risk Analyst. Prior to that, Mr. Ohser served in various finance roles in the mortgage and consumer finance industries.
Steven Piano, age 48, 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 of First Data International. From 1987 to 1996, Mr. Piano held human resources positions with Citibank, Dun & Bradstreet - Nielsen Media Research and Lehman Brothers.
Carl-Olav Scheible, age 47, has served as Executive Vice President, Europe, Africa and Emerging Channels since April 2012. From 2004 to 2012, he held a variety of leadership positions at PayPal, most recently serving as Managing Director-U.K. Mr. Scheible is a seasoned professional with 20 years of leadership experience in financial services and payments businesses, with most of that time spent in European markets.
Phyllis J. Skene-Stimac, age 54, has served as Senior Vice President and Chief Compliance Officer since February 2011. From June 2008 to December 2010, Ms. Skene-Stimac served as Deputy Chief Compliance Officer and Vice President Global Programs for Western Union and previously served as Vice President Compliance Operations from April 2004 to July 2005. From January 1999 to February 2003, Ms. Skene-Stimac served as the Director of Regulatory Affairs for First Data Corporation.
J. Lucas Wimer, age 48, has served as Executive Vice President, Global Operations since August 2012. He joined the Company in April 2010 as Executive Vice President, Operations and Technology. From January 2008 to April 2010, Mr. Wimer was a principal at THL, where he was responsible for business transformation programs in THL portfolio companies. From September 2003 to December 2007, he led corporate system development for Capital One. From 1993 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.

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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. Any materials filed with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE., Washington DC 20549. Information on the operation of the Public Reference Room can be found by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC which may be found at www.sec.gov.

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
We face intense competition, and if we are unable to continue to compete effectively, our business, financial condition and results of operations could 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, Western Union. With respect to our money transfer, bill payment and money order businesses, our primary competitor is Western Union. In addition, new competitors or alliances among established companies may emerge. Further, some of our competitors have larger and more established consumer bases and substantially greater financial, marketing and other resources than we have. 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.
If we fail to price our services appropriately relative to our competitors, consumers may not use our services, which could adversely affect our business and financial results. For example, transaction volume in certain key corridors where we face intense competition could be adversely affected by increasing pricing pressures between our money transfer services and those of some of our competitors, which could adversely affect our financial results. If we reduce prices in order to more effectively compete in these corridors, such reductions could adversely affect our financial results.
Money transfer, bill payment and money order services 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 will continue. In addition, consolidation among payment service companies has occurred 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 lose key agents, our business with our key agents is reduced, our key agents begin offering money transfer services under their own brand or engage other money transfer service providers, or we 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 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 be adversely affected.

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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 credit agreement. 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 2013, 2012 and 2011, our 10 largest agents accounted for 43 percent, 44 percent and 45 percent, respectively, of our total company fee and investment revenue and 44 percent, 46 percent and 48 percent, respectively, of the fee and investment revenue of our Global Funds Transfer segment. During 2013, 2012 and 2011, our largest agent, Walmart, accounted for 27 percent, 28 percent and 29 percent, respectively, of our total company fee and investment revenue, and 28 percent, 30 percent and 31 percent, respectively, of the fee and investment revenue of our Global Funds Transfer segment. If our contracts with Walmart or any of our other key agents are not renewed or are terminated, or if such agents reduce the number of their locations or the volume of their business with us, 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. In addition, if any of our key agents begin offering money transfer services under their own brand name, such as a possible Walmart branded product, or if they engage other money transfer service providers, either of which that may be permissible under our contract, our business, financial condition and results of operations could be adversely affected. Further, if any of our key agents renew their contracts with us, but on less favorable terms, 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 digital media, we subject ourselves to new types of consumer fraud risk because requirements relating to consumer 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, litigation expenses and reputational damage.
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.
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.
We operate in a highly regulated environment, and our business is subject to a wide range of laws and regulations that vary from country to country. We are also subject to oversight by various governmental agencies, both in the U.S. and abroad. In light of the current conditions in the global financial markets and economy, lawmakers and regulators in the U.S. in particular have increased their focus on the regulation of the financial services industry. New or modified regulations and increased oversight may have unforeseen or unintended adverse effects on the financial services industry, which could affect our business and operations.
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 to or from prohibited individuals. Additionally, we are subject to anti-money laundering laws in many other 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 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.
We are considered a Money Services Business in the U.S. under the Bank Secrecy Act, as amended by the USA PATRIOT Act of 2001. As such, we are subject to reporting, recordkeeping and anti-money laundering provisions in the U.S as well as many other jurisdictions. During 2013, there have been significant regulatory reviews and actions taken by U.S. and other regulators and law enforcement agencies against banks, Money Services Businesses and other financial institutions related to money laundering, and

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the trend appears to be greater scrutiny by regulators of potential money laundering activity through financial institutions. We are also subject to regulatory oversight and enforcement by The U.S. Department of the Treasury Financial Crimes Enforcement Network, or FinCEN. Any determination that we have violated the anti-money-laundering laws could have an adverse effect on our business, financial condition and results of operations. 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 and changes among the bank regulatory agencies. The Dodd-Frank Act requires enforcement by various governmental agencies, including the CFPB. Money transmitters such as the Company will be required to provide additional consumer information and disclosures, adopt error resolution standards, and adjust refund procedures for international transactions originating in the U.S. in a manner consistent with the Remittance Transfer Rule (a rule issued by the CFPB pursuant to the Dodd-Frank Act to amend Regulation E, which implements the Electronic Fund Transfer Act). In addition, the CFPB may adopt other regulations governing consumer financial services, including regulations defining unfair, deceptive, or abusive acts or practices, and new model disclosures. The CFPB’s authority to change regulations adopted in the past by other regulators, or to rescind or ignore past regulatory guidance, could increase our compliance costs and litigation exposure. Our litigation exposure may also be increased by the CFPB’s authority to limit or ban pre-dispute arbitration clauses. We may also be liable for failure of our agents to comply with the Dodd-Frank Act. We may also be subject to examination by the CFPB. The legislation and implementing regulations associated with the Dodd-Frank Act will increase our costs of compliance and will require changes in the way we and our agents conduct business.
We are also subject to regulations imposed by the Foreign Corrupt Practices Act, or the FCPA, in the U.S. and similar anti-bribery laws in other jurisdictions. Because of the scope and nature of our global operations, we experience a higher risk associated with the FCPA and similar anti-bribery laws than many other companies. We are subject to recordkeeping and other requirements imposed upon companies related to compliance with these laws.
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. If we fail to comply with the PSD, our business, financial condition and results of operations may be adversely impacted. Additionally, the U.S. 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. 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 and 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 consumer 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 and other litigation 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

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status, which could have a material adverse effect on our business, financial position and results of operations or consumers’ confidence in our business. 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 have received Civil Investigative Demands from a working group of nine state attorneys general who have initiated an investigation into whether we took adequate steps to prevent consumer fraud during the period starting in 2007. 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. We have submitted the information and documents requested by the states. No claims have been filed against MoneyGram at this time in connection with this investigation. Accordingly, we are unable to estimate the potential dollar amount of any loss in connection with this investigation or whether any loss in connection with this investigation could have a material adverse effect on our results of operations, cash flows or financial position. While we do not believe there is a basis for any claim or recovery with respect to this matter and intend to vigorously defend the Company if any claim is asserted, the outcome of these Civil Investigative Demands could include additional compliance costs and substantial fines, settlements or expenses and may adversely affect our business, financial condition and results of operations.
We face possible uncertainties relating to compliance with and the impact of the deferred prosecution agreement entered into with the U.S. federal government.
In November 2012, we announced that we had entered into a DPA with the MDPA/U.S. DOJ relating to the investigation of transactions involving certain of the Company’s U.S. and Canadian agents, as well as its fraud complaint data and consumer anti-fraud program, during the period from 2003 to early 2009. Under the DPA, the Company agreed to pay to the U.S. a $100.0 million forfeiture that is available to victims of the consumer fraud scams perpetrated through MoneyGram agents.
Pursuant to the DPA, the MDPA/U.S. DOJ filed a two-count criminal Information in the U.S. District Court for the Middle District of Pennsylvania. The MDPA/U.S. DOJ will seek dismissal with prejudice of the Information if the Company has complied with its obligations during the five-year term of the DPA. Under the DPA, the Company has agreed, among other things, to retain an independent compliance monitor for a period of five years, subject to adjustment to a shorter period under certain circumstances. If the Company fails to make progress towards its compliance obligations under the DPA, the independent compliance monitor could issue an unfavorable report, which could lead to heightened scrutiny by the MDPA and U.S. DOJ.
If the Company fails to comply with the DPA, the MDPA/U.S. DOJ have the right to prosecute the Company. While the Company expects to be in compliance with the DPA, a failure to comply, and a prosecution of the Company by the MDPA/U.S. DOJ, could lead to a severe material adverse effect upon the Company’s ability to conduct its business. Additionally, the terms of the DPA will impose additional costs upon the Company related to compliance and other required terms, and such additional compliance costs could be substantial. Additional compliance obligations could also have an adverse impact on the Company's operations. Furthermore, this does not resolve all inquiries from other governmental agencies such as FinCEN, which could result in additional costs, expenses and fines. The Company does not anticipate material adverse consequences from entry into the DPA on the Company’s reputation and business, but there can be no assurance that such unanticipated consequences will not occur.
We conduct money transfer transactions through agents in some regions that are politically volatile or, in a limited number of cases, which 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 services 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.
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 U.S. 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 securities losses, and our tax returns and tax positions are subject to review and audit by taxing authorities. The Internal Revenue Service, or the IRS, has issued Notices of Deficiency for 2005-2007 and 2009, and has also issued an Examination Report for 2008. The Company is contesting the adjustments in the Notices of Deficiency, which are related to deductions taken on securities losses. The IRS issued Notices of Deficiency disallowing among other items approximately $900.0 million of deductions on securities losses in the 2007, 2008 and 2009 tax returns. As of December 31, 2013, the Company had recognized a benefit of approximately $139.9 million relating to these deductions. If our petitions contesting the Notices of Deficiency are denied, the Company would be required to make cash payments of approximately $60.7 million, based on benefits taken and

15


taxable income earned through December 31, 2013. An unfavorable outcome in these audits 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.
Our substantial debt service obligations, significant debt covenant requirements and our credit rating could impair our access to capital and financial condition and adversely affect our ability to operate and grow our business.
We have substantial interest expense on our debt, and our ratings are below “investment grade.” This requires that we access capital markets that are subject to higher volatility than those that support higher rated companies. Since a significant portion of our cash flow from operations is dedicated to debt service, a reduction in cash flow could result in an event of default, or significantly restrict our access to capital. Our ratings below investment grade also create the potential for a cost of capital that is higher than other companies with which we compete.
We are also subject to capital requirements imposed by various regulatory bodies throughout the world. We may need access to external capital to support these regulatory requirements in order to maintain our licenses and our ability to earn revenue in these jurisdictions. An interruption of our access to capital could impair our ability to conduct business if our regulatory capital falls below requirements.
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.
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.
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.
We have significant exposure to loss in the event of a major bank failure or a loss of liquidity in the bank deposit market.
In the event of a major bank failure, where bank regulators elect to impose losses on uninsured depositors, we would face major risks to the recovery of our bank deposits used for the purpose of settling with our agents, and to the recovery of a significant portion of our investment portfolio. At December 31, 2013, we maintained cash, cash equivalents and interest bearing deposits of $3.0 billion at commercial banks in the United States in excess of the FDIC insurance limit of $250,000 per bank. We also had cash, cash equivalents and interest bearing deposits of $0.2 billion at commercial banks outside of the United States that are not subject to insurance protection against loss.
A major bank failure that results in a loss to depositors could cause a significant reduction in liquidity in the global financial system. Such an event could result in our inability to access funds in our investment portfolio, cash management accounts, and clearing accounts, which would limit our ability to settle our funds transfers and check presentments on a timely basis. Any delay in settlement of our payment services obligations can adversely impact our business, our financial condition, and our results of operations, as well as cause damage to relationships with our agents.
Such a liquidity event in the banking system could also result in our banks’ inability to meet their funding obligations under our revolving credit facility, which would also contribute to our difficulties in meeting our payment services obligations, especially in a global liquidity crisis. From time to time, we access the bank market for debt, which represents a significant portion of our capital structure. Our ability to access debt markets is essential to our liquidity, and the sustained loss of liquidity to debt markets could result in a material adverse impact on us, especially if our existing debt is approaching its maturity.

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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 U.S. 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.
Concerns regarding the financial health of certain European countries, and the impact that these countries might have on the sustainability of the euro, could adversely impact our business, results of operations and financing.
In the normal course of our business, we maintain significant euro denominated cash balances. In 2013, the euro was our second largest currency position in the world following the U.S. dollar. The secession of a country from the euro, or the demise of the use of the euro, could result in a sudden and substantial devaluation of the euro and other currencies against the U.S. dollar. In addition, financial markets could be impaired and bank liquidity could be restricted.
Our ability to generate fee revenue from our money transfer business could be impaired if the level of economic activity in the Eurozone were to decrease. Our own ability to fund our operations could be impaired if our access to our euro deposits were restricted, or if damage to the banking system were to result from a currency crisis. We could also lose value in our deposits, which in turn could be material to our operating results.
A breach of security in the systems on which we rely could adversely affect our business, financial condition and results of operations.
We obtain, transmit and store confidential consumer, employer and agent information in connection with certain of our services. These activities are subject to laws and regulations in the U.S. 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, adversely affect consumers’ confidence in our or our agents' business, cause inquiries and fines or penalties from regulatory or governmental authorities, cause a loss of consumers, subject us to lawsuits and subject us to potential financial losses. 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 and agents also may experience security breaches involving the storage and transmission of our data. If users gain improper access to our, our agents', or our contractors' 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 and legal proceedings, lead to reputational harm, cause a disruption in our operations, and make our consumers less confident in our services, which could have a material adverse effect on our business, financial condition and results of operations.

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Because our business is particularly dependent on the efficient and uninterrupted operation of our information technology, 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 services 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, computer virus, improper operation, improper action by our employees, agents, consumers, financial institutions or third party vendors or any other event impacting our systems or processes or our agents' or vendors’ systems or processes, we could suffer financial loss, loss of consumers, regulatory sanctions, lawsuits and damage to our reputation or consumers’ confidence in our business. 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 Walmart, contain service level standards pertaining to the operation of our system, and give the agent a right to collect damages or engage other providers 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.
In addition, 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.
Continued weakness in economic conditions, in both the U.S. 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 affected by, among other things, employment opportunities and overall economic conditions. Our consumers 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 U.S. or other countries that are important to our business, which could adversely affect our business, financial condition and 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 consumers 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 U.S. or other national economies important to our business were to deteriorate, our business, financial condition and 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 business, financial condition and results of operations.

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A significant change, 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 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 U.S. or Europe, are likely to reduce money transfer transaction volumes and therefore have an adverse effect on our results of operations. Furthermore, significant changes in international migration patterns could adversely affect 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 money transfer, bill payment and money order business is conducted through independent agents that provide our products and services to consumers at their business locations. Our agents receive the proceeds from the sale of our payment instruments and money transfers, and we must then collect these funds from the agents. If an agent becomes insolvent, files for bankruptcy, commits fraud or otherwise fails to remit payment instruments or money transfer proceeds to us, we must nonetheless pay the payment instrument 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, 2013, we had credit exposure to our agents of approximately $484.1 million in the aggregate spread across 11,355 agents.
Our official checks outsourcing business is conducted through banks and credit unions. Their customers issue official checks and money orders and remit to us the face amounts of those instruments the day after they are issued. We may be liable for payment on all of those instruments. As of December 31, 2013, we had credit exposure to our official check financial institution customers of approximately $282.0 million in the aggregate spread across 1,103 financial institutions.
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.
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.
In recent years, there has been a decline in overall paper-based transactions in the official check and money order business. 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. If we are not successful in retaining customers and agents that we wish to retain, and if 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.

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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, bill payment, money order, official check 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 more than 200 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 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.
In particular, a portion of our revenue is generated in currencies other than the U.S. dollar. As a result, we are subject to risks associated with changes in the value of our revenues denominated in foreign currencies. Fluctuations in foreign currency exchange rates could adversely affect our financial condition. See “Enterprise Risk Management—Foreign Currency Risk” in Item 7A of this Annual Report on Form 10-K for more information.
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 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.

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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 lack of management continuity or 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.
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 U.S. The acquisition and integration of businesses involve a number of risks. Such risks include, among others:
risks in connection with acquisitions and start-ups and potential expenses that could be incurred in connection therewith;
risks related to the integration of new businesses, including integrating facilities, personnel, financial systems, accounting systems, distribution, operations and general operating procedures;
the diversion of capital and management’s attention from our core business;
the impact on our financial condition and results of operations due to the timing of the new business or the failure of the new business to meet operating expectations; and
the assumption of unknown liabilities relating to the new business.
Risks associated with acquiring or starting new businesses could result in increased costs and other operating inefficiencies, which could have an adverse effect on our business, financial condition and results of operations.
We may not be able to implement our global transformation program as planned, the expected amount of costs associated with such program may exceed our forecasts and we may not be able to realize the full amount of estimated savings from such program.
We have announced our global transformation program and may implement additional initiatives in future periods. While our global transformation program is designed to enhance compliance, fuel multi-channel growth and improve our cost structure, there can be no assurance that the anticipated savings will be realized. Further, the costs to implement such initiatives may be greater than expected. If we do not realize the anticipated savings from these initiatives, or if the costs to implement them are greater than expected, our business, financial condition, and results of operations could be adversely affected.
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.

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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, 2013, THL held approximately 62.8 percent of our common shares outstanding. On a fully diluted basis, they held approximately 50.9 percent of the Company. 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 three members to our Board of Directors. Our current Board consists of nine directors, three of which have been appointed by THL, one of which is our Chief Executive Officer, and five 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 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 58.0 million shares outstanding as of December 31, 2013. 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. The Investors have sold 10.9 million shares of common stock pursuant to this registration statement, which leaves the Investors with 50.0 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.

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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. 

Item 1B. UNRESOLVED STAFF COMMENTS
None.

Item 2. PROPERTIES
The following table includes information concerning our material properties, all of which are leased, including location, use, approximate area in square feet and lease terms as of December 31, 2013:
Location
 
Use
 
Segment(s) Using Space
 
Square Feet
 
Lease Expiration
Minneapolis, MN(1)
 
Global Operations Center
 
Both
 
168,211

 
12/31/2015
Brooklyn Center, MN
 
Global Operations Center
 
Both
 
75,000

 
4/30/2015
Lakewood, CO
 
Call Center
 
Global Funds Transfer
 
68,165

 
3/31/2015
Dallas, TX
 
Corporate Headquarters
 
Both
 
54,956

 
6/30/2021
Frisco, TX
 
Global Operations Center
 
Both
 
25,287

 
6/30/2021
London, UK
 
Global Operations Center
 
Both
 
20,738

 
1/23/2021
(1)Included is approximately 52,879 square feet that has been sublet.
We also have a number of small leased office locations in the U.S., France, Germany, Italy and Spain. Additionally, we have small leased sales and marketing offices in 23 countries and territories around the world. We believe that our properties are sufficient to meet our current and projected needs. We periodically review our facility requirements and may acquire new facilities, or modify, consolidate, dispose of or sublet existing facilities, based on business needs.

Item 3. LEGAL PROCEEDINGS
Legal Proceedings — The matters set forth below are subject to uncertainties and outcomes that are not predictable. 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 litigation alleged.
Litigation Commenced Against the Company:
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:
State Civil Investigative Demands — MoneyGram has received Civil Investigative Demands from a working group of nine state attorneys general who have initiated an investigation into whether the Company took 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 filed against MoneyGram in connection with this investigation. Accordingly, we are unable to estimate the potential dollar amount of any loss in connection with this investigation or whether any loss in connection with this investigation could have a material adverse effect on our results of operations, cash flows or financial position. The Company does not believe there is a basis for any claim or recovery with respect to this matter and intends to vigorously defend itself if any claim is asserted.

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Other Matters — The Company is involved in various other government inquiries and other matters that arise from time to time. Management does not believe that after final disposition any of these other matters is likely to have a material adverse impact on the Company’s financial condition, results of operations and cash flows.
Actions Commenced by the Company:
CDO Litigation — In March 2012, the Company initiated an arbitration proceeding before the Financial Industry Regulatory Authority against Goldman Sachs & Co., or Goldman Sachs. The arbitration relates to MoneyGram’s purchase of Residential Mortgage Backed Securities and Collateral Debt Obligations that Goldman Sachs sold to MoneyGram during the 2005 through 2007 time frame. The Company alleges, among other things, that Goldman Sachs made material misrepresentations and omissions in connection with the sale of these products, ultimately causing significant losses to the Company for which the Company is currently seeking damages. Goldman Sachs owns, together with certain of its affiliates, approximately 19 percent of the shares of the Company’s common stock on a diluted basis, assuming conversion of the D Stock currently owned by Goldman Sachs and its affiliates.
Tax Litigation — On May 14, 2012 and December 17, 2012, the Company filed petitions in the U.S. Tax Court challenging the 2005-2007 and 2009 Notices of Deficiency, respectively, pursuant to which the IRS determined that the Company owes additional corporate income taxes because certain deductions relating to securities losses were capital in nature, rather than ordinary losses. The Company asserts that it properly deducted its securities losses and that, consequently, no additional corporate income taxes are owed. The IRS filed its responses to the Company’s petitions in July 2012 and February 2013 reasserting its original position relating to the years 2005-2007 and 2009. The cases have been consolidated before the U.S. Tax Court. In December 2013, the IRS filed a motion with the court for partial summary judgment in the case, and in February 2014 the Company filed its response to that motion which included the Company's request for partial summary judgment.

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 NASDAQ Stock Market LLC under the symbol “MGI”. No dividends on our common stock were declared by our Board of Directors in 2013 or 2012. See Note 11 — Stockholders’ Deficit of the Notes to the Consolidated Financial Statements for additional disclosure. 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. As of February 26, 2014, there were 9,722 stockholders of record of our common stock.
The high and low sales prices for our common stock for the periods presented were as follows for the respective periods:
 
2013
 
2012
Fiscal Quarter
High
 
Low
 
High
 
Low
First
$
18.11

 
$
13.17

 
$
19.50

 
$
16.64

Second
$
24.88

 
$
15.79

 
$
18.10

 
$
13.66

Third
$
23.39

 
$
19.34

 
$
16.71

 
$
14.30

Fourth
$
21.95

 
$
17.36

 
$
17.80

 
$
11.00

The Board of Directors has authorized the repurchase of a total of 12,000,000 shares, as announced 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 our 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, 2013, 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 did not repurchase any shares during 2013.
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 $50.0 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 2013 or 2012.
STOCKHOLDER RETURN PERFORMANCE
In 2013, we revised our peer group, which consists of payment services companies. Our previous peer group (Old Peer Group) included companies that were in the money remittance and payment industries. Our new peer group (New Peer Group) consists of previously included companies along with companies that effectively capture our competitive landscape given the products and services that we provide. Also, we excluded companies which are no longer publicly traded, or are not considered to be relevant in our competitive landscape.
The New Peer Group is comprised of the following companies: ACI Worldwide, Inc., Euronet Worldwide Inc., Fiserv, Inc., Global Payments Inc., Green Dot Corporation, Heartland Payment Systems, Inc., Higher One Holdings, Inc., Lending Processing Services, Inc., MasterCard, Inc., Total System Services, Inc., Visa, Inc., The Western Union Company and Xoom Corporation.
The Old Peer Group is comprised of the following companies: 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 following graph compares the cumulative total return from December 31, 2008 to December 31, 2013 for our common stock, our peer group index of payment services companies and the S&P 500 Index. The graph assumes the investment of $100 in each of our common stock, our New and Old Peer Group Indexes and the S&P 500 Index on December 31, 2008, and the reinvestment of all dividends as and when distributed. The graph is furnished and shall not be deemed “filed” with the SEC or subject to Section 18 of the Exchange Act, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.


25


COMPARISON OF CUMULATIVE TOTAL RETURN*
AMONG MONEYGRAM INTERNATIONAL, INC.,
S&P 500 INDEX AND PEER GROUP INDEX

*$100 invested on 12/31/2008 in stock or index, including reinvestment of dividends.
The following table is a summary of the cumulative total return for the fiscal years ending December 31:
 
12/31/2008
 
12/31/2009
 
12/31/2010
 
12/31/2011
 
12/31/2012
 
12/31/2013
MoneyGram International, Inc.
100.00

 
282.35

 
265.69

 
217.52

 
162.87

 
254.66

S&P 500
100.00

 
126.46

 
145.51

 
148.59

 
172.37

 
228.19

New Peer Group
100.00

 
156.97

 
139.69

 
186.77

 
247.40

 
385.12

Old Peer Group
100.00

 
158.45

 
144.82

 
196.08

 
261.39

 
407.35


26



Item 6. SELECTED FINANCIAL DATA
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. The following table presents our selected consolidated financial data for the years ended December 31:

2013
 
2012
 
2011
 
2010
 
2009
(Dollars in millions, except per share and location data)
 
 
 
 
 
 
 
 
 
Operating Results
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
Global Funds Transfer segment
$
1,389.8

 
$
1,255.2

 
$
1,152.7

 
$
1,053.3

 
$
1,025.4

Financial Paper Products segment
84.0

 
84.5

 
93.3

 
109.5

 
122.8

Other
0.6

 
1.5

 
1.8

 
3.9

 
13.5

Total revenue
$
1,474.4

 
$
1,341.2

 
$
1,247.8

 
$
1,166.7

 
$
1,161.7

 
 
 
 
 
 
 
 
 
 
Net income (loss)
$
52.4

 
$
(49.3
)
 
$
59.4

 
$
43.8

 
$
(1.9
)
 
 
 
 
 
 
 
 
 
 
Net income (loss) per common share:
 
 
 
 
 
 
 
 
 
Basic
$
0.73

 
$
(0.69
)
 
$
(9.03
)
 
$
(8.77
)
 
$
(11.87
)
Diluted
$
0.73

 
$
(0.69
)
 
$
(9.03
)
 
$
(8.77
)
 
$
(11.87
)
Financial Position
 
 
 
 
 
 
 
 
 
Assets in excess of payment service obligations (1)
$
318.8

 
$
227.9

 
$
211.7

 
$
230.2

 
$
313.3

Total assets
$
4,786.9

 
$
5,150.6

 
$
5,175.6

 
$
5,115.7

 
$
5,929.7

Long-term debt
$
842.9

 
$
809.9

 
$
810.9

 
$
639.9

 
$
796.8

Mezzanine equity (2)
$

 
$

 
$

 
$
999.4

 
$
864.3

Stockholders’ deficit
$
(77.0
)
 
$
(161.4
)
 
$
(110.2
)
 
$
(942.5
)
 
$
(883.0
)
Other Selected Data
 
 
 
 
 
 
 
 
 
Cash dividends declared per share
$

 
$

 
$

 
$

 
$

Number of money transfer locations
336,000

 
310,000

 
267,000

 
227,000

 
190,000

(1)
Assets in excess of payment service obligations is our payment service assets less our payment service obligations as calculated in Note 2 — Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements. Due to our regulatory capital requirements, we deem the following payment service assets, in their entirety, to be substantially restricted: cash and cash equivalents, receivables, net, interest-bearing investments and available-for-sale investments.
(2)
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, 2013, 2012 and 2011.

27



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. Our 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.
The comparisons presented in this MD&A refer to the same period in the prior year, unless otherwise noted. This MD&A is organized in the following sections:
Overview
Results of Operations
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
Cautionary Statements Regarding Forward-Looking Statements
OVERVIEW
MoneyGram is a leading global money transfer and payment services company operating in approximately 336,000 agent locations in more than 200 countries and territories. Our major products include global money transfers, bill payment services, money order services and official check processing. As an alternative financial services provider, our primary consumers are unbanked or underbanked consumers. We primarily offer services through third-party agents, including retail chains, independent retailers, post offices and other financial institutions. We continue to be an innovator in the industry by diversifying our core money transfer revenue through new channels, such as online, mobile, kiosks and other self-service channels.
Our global money transfer and bill payment services are our primary revenue drivers, accounting for 95 percent of total fee and other revenue for the year ended December 31, 2013. The market for money transfer and bill payment services remains very competitive, consisting of a small number of large competitors and a large number of small, niche competitors. While we are the second largest money transfer company in the world (based on total face value of remittances in 2012), we will encounter increasing competition as new technologies emerge that allow consumers to send and receive money in a variety of ways.
We manage our revenue and related commission expenses through two reporting segments: Global Funds Transfer and Financial Paper Products. Businesses that are not operated within these segments are categorized as “Other,” and are primarily related to discontinued products and businesses, and also contain corporate items. Our sales efforts are organized based on the nature of products and the services offered. Operating expenses are discussed based on the functional nature of the expense.
See summary of key 2013 events as disclosed in Part 1, Item 1, "2013 Events" of this Annual Report on Form 10-K.
Business Environment
Overall, our total revenue growth for the year ended December 31, 2013 was 10 percent, which was driven by the success of the money transfer product. Our money transfer fee and other revenue growth for the year ended December 31, 2013 was 12 percent, as our money transfer transaction growth for the year ended December 31, 2013 was 13 percent.
Throughout 2013, worldwide economic conditions continued to remain weak, as evidenced by high unemployment rates, government assistance to citizens and businesses on a global basis, restricted lending activity and low consumer confidence, among other factors. Historically, the 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. 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 2013, particularly in Europe. Also, there is continued political unrest in parts of the Middle East and Africa that contributed to volatile fluctuations in selected countries such as Egypt and Libya.
In 2013, the U.S. to Outbound corridors generated 18 percent transaction growth, which was primarily driven by sends to Mexico, which had transaction growth of 31 percent. Transaction growth originating outside of the U.S. grew 13 percent on a year over year basis, which was primarily driven by the Western European, Latin American and Caribbean regions. The U.S. to U.S. corridor grew seven percent and accounted for 30 percent of total money transfer transactions. At the end of 2012, our largest competitor announced significant price cuts in several markets. To date, we have limited our pricing actions primarily to certain online corridors and matched lower prices at our U.S. Walmart agent locations.
As of December 31, 2013, our money transfer agent base expanded eight percent to approximately 336,000 locations, compared to over 310,000 locations as of December 31, 2012, primarily due to expansion in the U.S., Russia and India. We continue to

28


review markets where we may have an opportunity to increase our presence through agent signings and acquisitions, specifically in countries or cities where we are underrepresented based on the World Bank's estimated country market size.
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 in the U.S. and other countries. We have continued to increase our compliance personnel headcount and make investments in our compliance-related technology and infrastructure. Since 2009 we have invested over $120.0 million in our compliance and anti-fraud programs and prevented more than $365.0 million in fraud losses during the same time period. In December of 2013, we launched our Compliance Enhancement Program, which is focused on improving our services for the consumers and completing the programs recommended in adherence with the DPA. On an ongoing basis we see a trend among state, federal and international regulators towards enhanced scrutiny of anti-money laundering compliance programs, as well as consumer fraud prevention and education.
Anticipated Trends for 2014
This discussion of trends expected to impact our business in 2014 is based on information presently available and contains certain assumptions, including assumptions regarding future economic conditions. Differences in actual economic conditions during 2014 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 2013, global economic conditions remained weak. We cannot predict the duration or extent of the severity of these weak 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. The World Bank is projecting eight percent remittance growth in 2014, which is an acceleration from 2013 estimates. Our growth has historically exceeded the World Bank projections.
We continue to review markets in which we may have an opportunity to increase prices based on increased brand awareness, loyalty and competitive positioning. We are monitoring consumer behavior to ensure that we continue our market share growth. Pricing actions from our competitors may also result in pricing changes for our products and services. As a result of our agent expansion and retention efforts, commissions expense and signing bonuses may increase throughout 2014.
We believe self-service channels are incremental to our existing strong cash-to-cash business and that MoneyGram can continue to strengthen our overall market position with accelerated investments. In 2014, we anticipate increasing our investment in our self-service channels business, which includes MoneyGram Online, mobile, account deposit services and kiosk-based money transfer and bill payment options. These channels for the money transfer products performed extremely well, recording 30% fee and other revenue growth as a result of 47% transaction growth for the twelve months ended December 31, 2013.
For our Financial Paper Products segment, we expect the decline in overall paper-based transactions to continue in 2014. 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 a decline in outstanding balances in 2014.
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. We have taken and will continue to take proactive steps that we feel are in the best interest of consumers to prevent consumer fraud, although we do not know which regions we may choose in which to take future action. Additionally, the terms of the DPA impose additional costs upon the Company related to compliance and other required terms, and such additional compliance costs could be substantial. As a result of the first annual monitor report, most of the major technology upgrades will need to be implemented in the next 12 months. As we continue to revise our processes and enhance our technology systems to meet regulatory trends and to comply with the terms of the DPA, our operating expenses for compliance may increase. Additional compliance obligations could also have an adverse impact on the Company's operations.
In February 2014, we announced our Global Transformation Program, which is centered around facilities and headcount rationalization, system efficiencies and headcount right-shoring and outsourcing. In relation to the Global Transformation Program, we are estimating to incur $30.0 million to $40.0 million in cash outlays over the next two years and generate an annual estimated pre-tax cost savings of approximately $15.0 million to $20.0 million exiting fiscal year 2015.
Financial Measures and Key Metrics
This Form 10-K includes financial information prepared in accordance with accounting principles generally accepted in the U.S., or GAAP, as well as certain non-GAAP financial measures that we use to assess our overall performance.

29


GAAP Measures We utilize certain financial measures prepared in accordance with GAAP to assess the Company's overall performance. These measures include, but are not limited to: fee and other revenue, fee and other commission expense, fee and other revenue less commissions, operating income and operating margin. Due to our regulatory capital requirements, we deem the following payment service assets, in their entirety, to be substantially restricted: cash and cash equivalents, receivables, net, interest-bearing investments and available-for-sale investments. Assets in excess of payment service obligations is our payment service assets less our payment service obligations. We use assets in excess of payment service obligations when assessing capital resources and liquidity. See Note 2 — Summary of Significant Accounting Policies of the Notes to the Consolidated Financial Statements for additional disclosure.
Non-GAAP Measures Generally, a non-GAAP financial measure is a numerical measure of financial performance, financial position, or cash flows that excludes (or includes) amounts that are included in (or excluded from) the most directly comparable measure calculated and presented in accordance with GAAP. The non-GAAP financial measures should be viewed as a supplement to, and not a substitute for, financial measures presented in accordance with GAAP. We strongly encourage investors and stockholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure. While we believe that these metrics enhance investors' understanding of our business, these metrics are not necessarily comparable with similarly named metrics of other companies. The following non-GAAP financial measures include:
EBITDA (earnings before interest, taxes, depreciation and amortization, including agent signing bonus amortization)
Adjusted EBITDA (EBITDA adjusted for significant items)
Adjusted Free Cash Flow (Adjusted EBITDA less cash interest expense, cash tax expense, cash payments for capital expenditures and cash payments for agent signing bonuses)
We believe that EBITDA, Adjusted EBITDA and Adjusted Free Cash Flow enhance investors' understanding of our business and performance. We use EBITDA and Adjusted EBITDA to review results of operations, forecast and budget, assess cash flow and allocate capital resources. We use Adjusted Free Cash Flow to assess our cash flow and capital resources. Since these are non-GAAP measures, the Company believes it is more appropriate to disclose these metrics after discussion and analysis of the GAAP financial measures.
Non-Financial Measures
We also use certain non-financial measures to assess our overall performance. These measures include, but are not limited to, transaction growth and money transfer agent base.

30


RESULTS OF OPERATIONS
The following table is a summary of the results of operations for the years ended December 31:
 
2013
 
2012
 
2011
 
2013 vs 2012
 
2012 vs 2011
 
2013 vs 2012
 
2012 vs 2011
(Amounts in millions)
 
 
 
 
 
 
($)
 
($)
 
(%)
 
(%)
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
Fee and other revenue
$
1,456.8

 
$
1,328.6

 
$
1,230.9

 
$
128.2

 
$
97.7

 
10
 %
 
8
 %
Investment revenue
17.6

 
12.6

 
16.9

 
5.0

 
(4.3
)
 
40
 %
 
(25
)%
Total revenue
1,474.4

 
1,341.2

 
1,247.8

 
133.2

 
93.4

 
10
 %
 
7
 %
Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Fee and other commissions expense
677.8

 
599.2

 
547.6

 
78.6

 
51.6

 
13
 %
 
9
 %
Investment commissions expense
0.4

 
0.3

 
0.4

 
0.1

 
(0.1
)
 
33
 %
 
(25
)%
Total commissions expense
678.2

 
599.5

 
548.0

 
78.7

 
51.5

 
13
 %
 
9
 %
Compensation and benefits
264.9

 
241.6

 
235.7

 
23.3

 
5.9

 
10
 %
 
3
 %
Transaction and operations support
253.7

 
355.7

 
227.8

 
(102.0
)
 
127.9

 
(29
)%
 
56
 %
Occupancy, equipment and supplies
49.0

 
47.7

 
47.7

 
1.3

 

 
3
 %
 
 %
Depreciation and amortization
50.7

 
44.3

 
46.0

 
6.4

 
(1.7
)
 
14
 %
 
(4
)%
Total operating expenses
1,296.5

 
1,288.8

 
1,105.2

 
7.7

 
183.6

 
1
 %
 
17
 %
Operating income
177.9

 
52.4

 
142.6

 
125.5

 
(90.2
)
 
240
 %
 
(63
)%
Other (income) expense
 
 
 
 
 
 
 
 
 
 
 
 
 
Net securities gains

 
(10.0
)
 
(32.8
)
 
10.0

 
22.8

 
(100
)%
 
70
 %
Interest expense
47.3

 
70.9

 
86.2

 
(23.6
)
 
(15.3
)
 
(33
)%
 
(18
)%
Debt extinguishment costs
45.3

 

 
37.5

 
45.3

 
(37.5
)
 
100
 %
 
(100
)%
Other costs

 
0.4

 
11.9

 
(0.4
)
 
(11.5
)
 
(100
)%
 
(97
)%
Total other expense, net
92.6

 
61.3

 
102.8

 
31.3

 
(41.5
)
 
51
 %
 
(40
)%
Income (loss) before income taxes
85.3

 
(8.9
)
 
39.8

 
94.2

 
(48.7
)
 
NM
 
NM
Income tax expense (benefit)
32.9

 
40.4

 
(19.6
)
 
(7.5
)
 
60.0

 
(19
)%
 
NM
Net Income (loss)
$
52.4

 
$
(49.3
)
 
$
59.4

 
$
101.7

 
$
(108.7
)
 
NM
 
NM
NM = Not meaningful
Fee and Other Revenue and Related Commission Expense
The following is a summary of fee and other revenue and related commission expense results for the years ended December 31:
 
2013
 
2012
 
2011
 
2013 vs 2012
 
2012 vs 2011
(Amounts in millions)
 
 
 
 
 
 
 
 
 
Fee and other revenue
$
1,456.8

 
$
1,328.6

 
$
1,230.9

 
10
%
 
8
%
Fee and other commissions expense
677.8

 
599.2

 
547.6

 
13
%
 
9
%
Fee and other commissions expense as a % of fee and other revenue
46.5
%
 
45.1
%
 
44.5
%
 
 
 
 

31


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, bill payment, money order and official check transactions. The Company derives money transfer revenues primarily from consumer transaction fees and the management of currency exchange spreads involving different "send" and "receive" countries. 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.
In 2013 and 2012, the Company generated fee and other revenue growth of $128.2 million, or 10 percent, and $97.7 million, or eight percent, respectively. For both 2013 and 2012, fee and other revenue growth was driven by transaction growth of the money transfer product and was partially offset by transaction declines from the bill payment, money order and official check products.
Fee and Other Commissions Expense
The Company incurs fee commissions primarily on our Global Funds Transfer products. In a money transfer transaction, both the agent initiating the transaction and the receiving agent earn a commission that is generally based on a percentage of the fee charged to the consumer. In a bill payment transaction, the agent initiating the transaction receives a commission and, in limited circumstances, the biller will generally earn a commission that is 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, except, in certain limited circumstances, for large agents where we may pay a fixed commission based on total money order transactions. Other commissions expense includes the amortization of capitalized agent signing bonus payments.
In 2013, fee and other commissions expense growth of $78.6 million, or 13 percent, was primarily due to the transaction growth from the money transfer product, changes in the corridor and agent mix, a step-up in the commission rate for a large agent and increased signing bonus amortization from our agent expansion and retention efforts. Commissions expense as a percentage of fee and other revenue increased to 46.5 percent in 2013 from 45.1 percent in 2012. In 2012, fee and other commissions expense growth of $51.6 million, or nine percent, was primarily due to money transfer volume growth and increased commission rate. Commissions expense as a percentage of fee and other revenue increased to 45.1 percent in 2012 from 44.5 percent in 2011.
Global Funds Transfer Fee and Other Revenue

The following discussion provides a summary of fee and other revenue for the Global Funds Transfer segment for the years ended December 31. Investment revenue is not included in the analysis. See "Investment Revenue Analysis" for additional information.
(Amounts in millions)
2013
 
2012
 
2011
 
2013 vs 2012
 
2012 vs 2011
Money transfer:
 
 
 
 
 
 
 
 
 
Fee and other revenue
$
1,287.5

 
$
1,148.5

 
$
1,039.5

 
12
 %
 
10
 %
Bill payment:
 
 
 
 
 
 
 
 
 
Fee and other revenue
102.0

 
106.1

 
112.6

 
(4
)%
 
(6
)%
Total Global Funds Transfer:
 
 
 
 
 
 
 
 
 
Fee and other revenue
$
1,389.5

 
$
1,254.6

 
$
1,152.1

 
11
 %
 
9
 %
Fee and other commissions expense
$
676.9

 
$
597.6

 
$
545.7

 
13
 %
 
10
 %
For 2013 and 2012, Global Funds Transfer fee and other revenue increased $134.9 million and $102.5 million, respectively, driven by money transfer volume growth of 13 percent and 14 percent, respectively. In 2013, bill payment revenue declined four percent as a result of transaction decline of two percent and a decrease in average fee per transactions as a result of industry mix. In 2012, bill payment fee and other revenue decreased primarily due to the 2011 PropertyBridge divestiture (See Note 3 Acquisitions and Disposals of the Notes to the Consolidated Financial Statements for additional disclosure). Excluding the divestiture, fee and other revenue decreased one percent and transactions grew five percent.
Money Transfer Transactions
The following table displays the percentage distribution of total money transfer transactions for the years ended December 31:
 
2013
 
2012
 
2011
U.S. to U.S.
30
%
 
31
%
 
32
%
U.S. to Outbound
36
%
 
35
%
 
35
%
Originating outside of the U.S.
34
%
 
34
%
 
33
%

32


The following table displays year over year money transfer transaction growth for the years ended December 31:
 
2013 vs 2012
 
2012 vs 2011
Total transactions
13
%
 
14
%
U.S. to U.S.
7
%
 
10
%
U.S. to Outbound
18
%
 
13
%
Originating outside of the U.S.
13
%
 
18
%
In 2013, the U.S. to Outbound corridors generated 18 percent transaction growth while accounting for 36 percent of our total money transfer transactions. The success in the U.S. to Outbound corridor was primarily driven by sends to Mexico, which had transaction growth of 31 percent for 2013. Transaction growth originating outside of the U.S. continued to grow at a double digit rate on a year over year basis and accounted for 34 percent of total money transfer transactions. The growth was primarily driven by the Western European, Latin American and Caribbean regions. The U.S. to U.S. corridor grew seven percent and accounted for 30 percent of total money transfer transactions.
In 2012, transaction growth originating outside of the U.S. was 18 percent and accounted for 34 percent of total money transfer transactions, as the growth was primarily driven by the Middle East and Latin American and Caribbean regions. The U.S. Outbound corridors generated 13 percent transaction growth while accounting for 35 percent of our total money transfer transactions. The success in the U.S. to outbound corridor was primarily driven by sends to Mexico, which had transaction growth of 21 percent for 2012. The U.S. to U.S. corridor grew 10 percent and accounted for 31 percent of total money transfer transactions.
Money Transfer Fee and Other Revenue 
The following table details the changes in money transfer fee and other revenue from the respective prior year for the years ended December 31:
(Amounts in millions)
2013
 
2012
Money transfer fee and other revenue for the prior year
$
1,148.5

 
$
1,039.5

Change resulting from:
 
 
 
Money transfer volume growth
147.1

 
141.6

Foreign currency exchange rate
5.4

 
(20.7
)
Corridor mix and average face value per transaction
(6.6
)
 
(10.5
)
Other
(6.9
)
 
(1.4
)
Money transfer fee and other revenue
$
1,287.5

 
$
1,148.5

In 2013, fee and other revenue growth was generated by transaction growth of 13 percent and positively impacted by movement in foreign currency exchange rates, partially offset by our corridor mix and average face value per transaction. In 2012, transaction growth of 14 percent was partially offset by movement in foreign currency exchange rates and our corridor mix and average face value per transaction.
Bill Payment Fee and Other Revenue
The following table details the changes in bill payment fee and other revenue from the respective prior year for the years ended December 31:
(Amounts in millions)
2013
 
2012
Bill payment fee and other revenue for the prior year
$
106.1

 
$
112.6

Change resulting from:
 
 
 
Bill payment volume
(2.5
)
 
4.6

Industry mix
(1.6
)
 
(6.0
)
Divestiture

 
(5.1
)
Bill payment fee and other revenue
$
102.0

 
$
106.1

In 2013, bill payment fee and other revenue decreased four percent, or $4.1 million as a result of transaction declines of two percent and lower average fees as a result of shifts in industry mix. The impact of changes in industry mix reflects our continued growth in new emerging industry verticals that generate a lower fee per transaction than our traditional industry verticals. Our traditional industry verticals, such as auto and credit card, have been negatively impacted by the economic conditions in the U.S.

33


In 2012, bill payment fee and other revenue decreased six percent and transactions declined three percent. Excluding the 2011 PropertyBridge divestiture, fee and other revenue decreased one percent and transactions grew five percent. The divestiture accounted for $5.1 million of the decline. Excluding the divestiture, volume growth accounted for an increase of $4.6 million, which was offset by a $6.0 million decline related to the lower average fees from changes in industry mix.
Global Funds Transfer Fee and Other Commissions Expense
The following table details the changes in fee and other commissions for the Global Funds Transfer segment from the respective prior year for the years ended December 31:
(Amounts in millions)
2013
 
2012
Global Funds Transfer commissions expense for the prior year
$
597.6

 
$
545.7

Change resulting from:
 
 
 
      Money transfer volume growth
60.6

 
49.0

      Money transfer commission rates
7.6

 
16.4

      Bill payment volumes
(1.6
)
 
(3.9
)
      Bill payment commission rates
1.0

 
(1.2
)
      Signing bonus amortization
8.9

 
1.2

      Foreign currency exchange rate
2.8

 
(9.4
)
      Other

 
(0.2
)
Global Funds Transfer commissions expense
$
676.9

 
$
597.6

In 2013, the Global Funds Transfer commission expense increased 13 percent, or $79.3 million. The increase in commission expense was primarily driven by transaction growth from the money transfer product, changes in the corridor and agent mix, the movement in foreign currency exchange rates, a step-up in the commission rate for a large agent and increased signing bonus amortization from our agent expansion and retention efforts, which was partially offset the transaction declines from the bill payment product.
In 2012, the Global Funds Transfer commission expense increased 10 percent, or $51.9 million. The increase in commission expense was primarily the result of the transaction growth from the money transfer product. Also contributing to the increases were changes in the corridor and agent mix and the increased signing bonus amortization from our agent expansion and retention efforts, which was partially offset by the transaction declines from the bill payment product and movement in foreign currency exchange rates.
Financial Paper Products Fee and Other Revenue and Fee and Other Commissions Expense
The following discussion provides a summary of fee and other revenue and fee and other commissions expense for the Financial Paper Product segment for the years ended December 31. Investment revenue is not included in the analysis below. See "Investment Revenue Analysis" for additional information.
(Amounts in millions)
2013
 
2012
 
2011
 
2013 vs 2012
 
2012 vs 2011
Money order:
 
 
 
 
 
 
 
 
 
Fee and other revenue
$
51.1

 
$
55.4

 
$
57.3

 
(8
)%
 
(3
)%
Official check:
 
 
 
 
 
 
 
 
 
Fee and other revenue
16.2

 
18.3

 
21.1

 
(11
)%
 
(13
)%
Total Financial Paper Products:
 
 
 
 
 
 
 
 
 
Fee and other revenue
$
67.3

 
$
73.7

 
$
78.4

 
(9
)%
 
(6
)%
Fee and other commissions expense
$
0.9

 
$
1.5

 
$
2.0

 
(40
)%
 
(25
)%
Money order fee and other revenue decreased in 2013 and 2012 due to transaction declines of nine percent and five percent, respectively, primarily due to attrition of agents and the continued migration by consumers to other payment methods. Official check fee and other revenue decreased in 2013 and 2012 due to the attrition of official check financial institutions. Fee and other commissions expense decreased by 40 percent and 25 percent in 2013 and 2012, respectively, due primarily to lower volumes.

34


Investment Revenue Analysis
The following discussion provides a summary of the Company's investment revenue and investment commission expense for the years ended December 31:
(Dollars in millions)
2013
 
2012
 
2011
 
2013 vs 2012
 
2012 vs 2011
Investment revenue
$
17.6

 
$
12.6

 
$
16.9

 
40
%
 
(25
)%
Investment commissions expense(1)
0.4

 
0.3

 
0.4

 
33
%
 
(25
)%
 
(1) Commissions are generated from the average outstanding cash balances of official checks sold.
Investment Revenue
Investment revenue consists primarily of interest income generated through the investment of cash balances received from the sale of official checks, money orders and other payment instruments. These cash balances are available to us for investment until the payment instrument is presented for payment. Investment revenue varies depending on the level of investment balances and the yield on our investments.
Investment revenue in 2013 increased $5.0 million, or 40 percent, when compared to 2012, due to an increase in income received on our cost recovery securities and a shift in investment allocation to longer term, higher yielding investments. Also partially offsetting the increase were lower average investment balances from the run-off of certain official check financial institution customers terminated in prior periods.
Investment revenue in 2012 decreased $4.3 million, or 25 percent, when compared to 2011. Lower prevailing yields earned on our investment portfolio, a decline in income received on our cost recovery securities and valuation adjustments related to private equity securities drove a substantial portion of the decrease. Lower average investment balances from the run-off of certain official check financial institution customers terminated in prior periods also contributed to the decline.
Investment Commissions Expense
Investment commissions expense consists of amounts paid to financial institution official check customers based on short-term interest rate indices multiplied by the average outstanding cash balances of official checks sold by that financial institution. Throughout 2013, investment commissions expense increased $0.1 million, or 33 percent, when compared to 2012, while investment commissions expense in 2012 decreased $0.1 million, or 25 percent, when compared to 2011.
Operating Expenses
The following table is a summary of the operating expenses for the years ended December 31:
 
2013
 
2012
 
2011
(Dollars in millions)
Dollars
 
Percent of Total Revenue
 
Dollars
 
Percent of Total Revenue
 
Dollars
 
Percent of Total Revenue
Compensation and benefits
$
264.9

 
18
%
 
$
241.6

 
18
%
 
$
235.7

 
19
%
Transaction and operations support
253.7

 
17
%
 
355.7

 
27
%
 
227.8

 
18
%
Occupancy, equipment and supplies
49.0

 
3
%
 
47.7

 
3
%
 
47.7

 
4
%
Depreciation and amortization
50.7

 
4
%
 
44.3

 
3
%
 
46.0

 
4
%
Total operating expenses
$
618.3

 
42
%
 
$
689.3

 
51
%
 
$
557.2

 
45
%
Included in the 2012 expenses were the legal expenses incurred for the settlement related to the MDPA/U.S. DOJ investigation and shareholder litigation, which accounted for $119.2 million, or nine percent, of total revenue, and were recorded in the "Transaction and operations support" line item. In 2013, total operating expenses as a percentage of total revenue was 42 percent, which was an improvement from 51 percent in 2012, or flat, when considering the legal expenses for the MDPA/U.S. DOJ and shareholder litigation. In 2011, total operating expenses as a percentage of total revenue was 45 percent, as a result of costs incurred for the 2011 Recapitalization.

35


Compensation and Benefits
Compensation and benefits include salaries and benefits, management incentive programs, related payroll taxes and other employee related costs. The following table is a summary of the change in compensation and benefits from the respective prior year for the years ended December 31:
(Amounts in millions)
2013
 
2012
Compensation and benefits expense for the prior year
$
241.6

 
$
235.7

Change resulting from:
 
 
 
Salaries, related payroll taxes and incentive compensation
26.9

 
9.3

Employee stock-based compensation
2.4

 
(7.1
)
Reorganization and restructuring
(5.8
)
 
0.5

Compliance enhancement program
0.1

 

Other employee benefits
(0.3
)
 
3.2

Compensation and benefits expense
$
264.9

 
$
241.6

In 2013, compensation and benefits expense increased primarily due to increased headcount, ordinary salary increases and changing employee base mix as we invest in our sales, market development and compliance functions. Employee stock-based compensation increased due to the annual grant of options and restricted stock units. Other employee benefits decreased due to lower insurance costs. Reorganization and restructuring costs decreased as we concluded our Global Transformation Initiative.
In 2012, salaries, related payroll taxes and incentive compensation increased from an increase in headcount, customary salary increases, our changing employee base mix as we invest in our sales, market development and compliance functions and higher sales incentives, partially offset by decreased incentive compensation and a reduction in temporary help. Other employee benefits increased due to executive severance, higher insurance costs and increased benefit plan expense, partially offset by movement in foreign currency exchange rates. Employee stock-based compensation decreased from grants fully vesting in prior periods and forfeitures, partially offset by new grants with longer vesting periods.
Transaction and Operations Support
Transaction and operations support 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 and travel costs, bank charges and the impact of foreign exchange rate movements on our monetary transactions, assets and liabilities denominated in a currency other than the U.S. dollar. The following table is a summary of the change in transaction and operations support from the respective prior year for the years ended December 31:
(Amounts in millions)
2013
 
2012
Transaction and operations support expense for the prior year
$
355.7

 
$
227.8

Change resulting from:
 
 
 
Legal expenses
(115.3
)
 
111.6

Contractor, consultant and outsourcing
7.7

 
22.1

Foreign exchange gains/losses
(1.0
)
 
(5.7
)
Compliance enhancement program
2.7

 

Agent support costs
3.9

 
0.2

Telecommunications
2.8

 
1.3

Other
(2.8
)
 
(1.6
)
Transaction and operations support expense
$
253.7

 
$
355.7

In 2013, transaction and operations support expense decreased as a result of decreased legal expenses related to the settlement in the MDPA/U.S. DOJ investigation and the shareholder litigation. The reduction in transaction and operations support expenses were partially offset by the ongoing IRS tax litigation. We incurred increased expenses for agent support costs and increased expenditures related to telecommunication costs as a result of continued network, product and infrastructure growth. As a result of the DPA, we incurred increased expenses for contractors and consultants, along with fees associated for the compliance enhancement program. Other expenses consist of decreased reorganization and restructuring costs as we concluded our Global Transformation Initiative offset by increases in travel expenses.
In 2012, transaction and operations support expense increased as a result of the following items: legal expenses, consultant fees and outsourcing costs and telecommunication costs. Legal expenses increased primarily due to regulatory matters and securities

36


litigation, partially offset by lower capital transaction activities, lower legal fees for regulatory matters, general advisement and licensing matters supporting operational activities. The MDPA/U.S. DOJ forfeiture of $100.0 million and the shareholder litigation expense of $6.5 million were the primary drivers of the increase. 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 became foreign exchange gains due to the impact of the foreign currency exchange rates on our growing current assets and current liabilities not denominated in U.S. dollars. Other expenses consist of decreased reorganization and restructuring costs for our Global Transformation Initiative offset by increased marketing costs due to the timing of marketing campaigns in 2012 and the loyalty program introduced in January 2012.
Occupancy, Equipment and Supplies
Occupancy, equipment and supplies include facilities rent and maintenance costs, software and equipment maintenance costs, freight and delivery costs and supplies. The following table is a summary of the change in occupancy, equipment and supplies from the respective prior year for the years ended December 31:
(Amounts in millions)
2013
 
2012
Occupancy, equipment and supplies expense for the prior year
$
47.7

 
$
47.7

Change resulting from:
 
 
 
Rent and building operating costs
0.9

 
0.5

Reorganization and restructuring
(0.6
)
 
(0.6
)
Forms and supplies
0.4

 
(2.3
)
Equipment maintenance
0.8

 
2.7

Other
(0.2
)
 
(0.3
)
Occupancy, equipment and supplies expense
$
49.0

 
$
47.7

In 2013, occupancy, equipment and supplies increased as a result of increased rent and building operation costs and equipment maintenance, as a result of our continued agent base growth, which was partially offset by decreased costs for reorganization and restructuring as we concluded our Global Transformation Initiative.
In 2012, occupancy, equipment and supplies remained flat. Tighter inventory levels for forms and supplies and lower reorganization and restructuring costs were offset by equipment maintenance and rent and building operation costs.
Depreciation and Amortization
Depreciation and amortization 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.
In 2013, depreciation and amortization increased $6.4 million, or 14 percent, when compared to 2012, primarily driven by higher depreciation expense for signage and increased leasehold improvements, partially offset by lower total amortization expense.
In 2012, depreciation and amortization decreased $1.7 million, or four percent, when compared to 2011, primarily driven by lower depreciation expense on point of sale equipment and lower depreciation expense on leasehold improvements, partially offset by increased depreciation on signage.
Other Expenses, Net
The following table is a summary of the components of other expenses, net for the years ended December 31:
(Amounts in millions)
2013
 
2012
 
2011
 
2013 vs 2012
 
2012 vs 2011
Net securities gains
$

 
$
(10.0
)
 
$
(32.8
)
 
$
10.0

 
$
22.8

Interest expense
47.3

 
70.9

 
86.2

 
(23.6
)
 
(15.3
)
Debt extinguishment costs
45.3

 

 
37.5

 
45.3

 
(37.5
)
Other costs

 
0.4

 
11.9

 
(0.4
)
 
(11.5
)
Total other expense, net
$
92.6

 
$
61.3

 
$
102.8

 
$
31.3

 
$
(41.5
)

37


Net Securities Gains — During 2013, we did not realize any net securities gains or losses. During 2012, two securities classified as other asset-backed securities were sold for a $10.0 million realized gain recognized in “Net securities gains” in the Consolidated Statements of Operations. These securities had previously been written down to a nominal fair value. In 2011, net securities gains of $32.8 million 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 value.
Interest Expense As a result of lower interest rates from the 2013 Credit Agreement and Note Repurchase, interest expense in 2013 decreased $23.6 million, from $70.9 million in 2012 to $47.3 million in 2013. Interest expense decreased to $70.9 million in 2012, from $86.2 million in 2011, as a result of lower interest rates from our refinancing activities.
Debt Extinguishment Costs — In connection with the termination of the 2011 Credit Agreement and the Note Repurchase, we recognized debt extinguishment costs of $45.3 million in the first quarter of 2013. We expensed $20.0 million of unamortized deferred financing costs and $2.3 million of debt discount and incurred $1.5 million of debt modification costs. Additionally, we incurred a prepayment penalty of $21.5 million for the Note Repurchase, which was expensed as debt extinguishment costs. We did not record debt extinguishment costs in 2012. See Note 9 — Debt of the Notes to the Consolidated Financial Statements for additional disclosure.
We recognized total debt extinguishment costs 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,we incurred a prepayment penalty of $23.2 million and wrote-off $9.1 million of unamortized deferred financing costs.
Other Costs — The following table is a summary of other costs, which include items deemed to be non-operating based on management’s assessment of the nature of the item in relation to our core operations for the years ended December 31:
(Amounts in millions)
2013
 
2012
 
2011
Other costs
 
 
 
 
 
Capital transaction costs
$

 
$

 
$
6.4

Loss on asset disposition

 
0.1

 
1.0

Asset impairments

 

 
4.5

Contribution from investors

 
0.3

 

Total other costs, net
$

 
$
0.4

 
$
11.9

Capital transactions costs relate to the 2011 Recapitalization and the secondary offering. Loss on asset disposition relates to land sold as part of our global business transformation and a former bill payment service. Asset impairments relate to land sold and intangible assets acquired in the second quarter of 2011.
Income Taxes
In 2013, the Company recognized a tax expense of $32.9 million on pre-tax income of $85.3 million benefiting from proceeds on securities that result in a release of valuation allowance offset by international taxes and the reversal of tax benefits recorded on canceled stock options for executive employee terminations. Changes in facts and circumstances may cause the Company to record additional tax expense or benefits in the future.
In 2012, the Company recognized a tax expense of $40.4 million on pre-tax loss of $8.9 million resulting from additions to uncertain tax positions and the reversal of the tax benefits recorded on canceled stock options for separated employees.
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 reorganization and restructuring expenses and a valuation allowance on a portion of deferred tax assets as a result of losses in certain jurisdictions outside of the U.S. 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.

38


Pre-Tax Operating Income and Operating Margin
The Company's management utilizes pre-tax operating income and operating margin when assessing both consolidated and segment operating performance and allocation of resources. Excluded from the segments' operating income are interest and other expenses related to our credit agreements, items related to our preferred stock, operating loss 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.
The following table provides a summary of pre-tax operating income and operating margin for the years ended December 31:
(Amounts in millions)
2013
 
2012
 
2011
Operating income:
 
 
 
 
 
Global Funds Transfer
$
162.6

 
$
149.6

 
$
124.8

Financial Paper Products
30.9

 
32.7

 
29.2

Total segment operating income
193.5

 
182.3

 
154.0

Other
(15.6
)
 
(129.9
)
 
(11.4
)
Total operating income
177.9

 
52.4

 
142.6

Net securities gains

 
(10.0
)
 
(32.8
)
Interest expense
47.3

 
70.9

 
86.2

Debt extinguishment costs
45.3

 

 
37.5

Other costs

 
0.4

 
11.9

Income (loss) before income taxes
$
85.3

 
$
(8.9
)
 
$
39.8

 
 
 
 
 
 
Total operating margin
12.1
%
 
3.9
%
 
11.4
%
Global Funds Transfer
11.7
%
 
11.9
%
 
10.8
%
Financial Paper Products
36.8
%
 
38.7
%
 
31.3
%
“Other” expenses in 2013 included $2.5 million of legal expenses in connection with the settlement related to the MDPA/U.S. DOJ investigation and the shareholder litigation, $1.5 million of severance and related costs from executive terminations as well as other net corporate costs of $11.6 million not allocated to the segments. “Other” expenses in 2012 included $119.2 million of legal expenses for the settlement in connection with the MDPA/U.S. DOJ investigation and the shareholder litigation, $1.0 million of severance and related costs from executive terminations as well as other net corporate costs of $7.6 million not allocated to the segments. “Other” expenses in 2011 included $4.8 million of legal settlements and related costs for securities litigation associated with the Company's 2011 Recapitalization, $0.3 million of asset impairments and other net corporate costs of $4.8 million not allocated to the segments.
In 2013, the Company experienced total operating income growth and improved total operating margin when compared to 2012, as total operating income increased to $177.9 million, from $52.4 million for the same period in 2012. The growth was primarily driven by the reduction of legal expenses, primarily resulting from the settlement related to the MDPA/U.S. DOJ investigation and the shareholder litigation. The Global Funds transfer segment generated operating income growth of $13.0 million, which was partially offset by a decline in operating income of $1.8 million from the Financial Paper Product segment.
In 2012, as a result of the settlement related to the MDPA/U.S. DOJ investigation and the shareholder litigation, the Company experienced a decline for both total operating income and total operating margins when compared to 2011. Total operating income for 2012 was $52.4 million, down from $142.6 million for the same period in 2011. The Company experienced operating income growth from the Global Funds Transfer segment and the Financial Paper Product segment of $24.8 million and $3.5 million, respectively.


39


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 indicators of the strength and performance of our 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.
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. These metrics are not necessarily comparable with similarly named metrics of other companies. The following table is a reconciliation of these non-GAAP financial measures to the related GAAP financial measures for the years ended December 31:
(Amounts in millions)
2013
 
2012
 
2011
Income (loss) before income taxes
$
85.3

 
$
(8.9
)
 
$
39.8

Interest expense
47.3

 
70.9

 
86.2

Depreciation and amortization
50.7

 
44.3

 
46.0

Amortization of agent signing bonuses
42.8

 
33.6

 
32.6

EBITDA
226.1

 
139.9

 
204.6

Significant items impacting EBITDA:
 
 
 
 
 
    Net securities gains

 
(10.0
)
 
(32.8
)
Severance and related costs(1)
1.5

 
1.0

 

    Reorganization and restructuring costs
3.2

 
19.3

 
23.5

Compliance enhancement program
2.8

 

 

Capital transaction costs(2)

 

 
6.4

Asset impairment charges(3)

 

 
3.4

Contribution from investors(4)

 
0.3

 

Debt extinguishment(5)
45.3

 

 
37.5

    Stock-based and contingent performance compensation(6)
14.1

 
9.2

 
16.3

Legal expenses(7)
2.5

 
119.2

 
4.8

Adjusted EBITDA
$
295.5

 
$
278.9

 
$
263.7

(1) Severance and related costs primarily from executive terminations.
(2) Professional and legal fees related to the 2011 Recapitalization.
(3) Impairments of assets in 2011 relate to the disposition of a business and software and intangible asset impairments.
(4) Expense resulting from payment by an investor to Walmart upon liquidation of such investor's investment as required by the Participation Agreement. See
Note 11 — Stockholders' Deficit of the Notes to the Consolidated Financial Statements for additional information.
(5) In 2013, debt extinguishment costs relate to the termination of our 2011 Credit Agreement and the Note Repurchase in connection with the 2013 Credit Agreement. In 2011, debt extinguishment costs relate to the termination of our 2008 senior facility in connection with the 2011 Recapitalization and the partial redemption of our second lien notes.
(6) Stock-based compensation and one-time contingent performance award payable after three years based on achievement of certain performance targets.
(7) Legal expenses are primarily in connection with the settlement related to the MDPA/U.S. DOJ investigation and certain ongoing legal matters.
As disclosed in our table above, our Adjusted EBITDA for the year ended December 31, 2013 adjusts $45.3 million of debt extinguishment costs in connection with the 2013 Credit Agreement. For the year ended December 31, 2012, legal expenses of $119.2 million were adjusted out of our Adjusted EBITDA, primarily due to the forfeiture related to the settlement of the MDPA/U.S. DOJ investigation and settlement of the shareholder lawsuit, as well as legal expenses related to these matters. For the year ended December 31, 2011, debt extinguishment costs of $37.5 million, related to the 2011 Credit Agreement, were adjusted.
For 2013, the Company generated EBITDA of $226.1 million and Adjusted EBITDA of $295.5 million. When compared to 2012, EBITDA increased $86.2 million, or 62 percent, primarily due to the reduction of legal expenses, decreased reorganization and restructuring costs of $16.1 million, which was partially offset by debt extinguishment costs and an increase in stock-based compensation of $4.9 million. In 2013, Adjusted EBITDA increased $16.6 million, or six percent, as a result of continued growth of our money transfer product. See additional descriptions of these changes in the "Results of Operations" section of Item 7 of this report.

40


For 2012, the Company generated EBITDA of $139.9 million and Adjusted EBITDA of $278.9 million. When compared to 2011, EBITDA decreased $64.7 million, or 32 percent, primarily due to increased legal expense and decreased net securities gains of $22.8 million, which were partially offset by a reduction in debt extinguishment cost and decreased stock-based compensation expense of $7.1 million. Adjusted EBITDA for 2012 increased $15.2 million, or six percent, from $263.7 million in 2011 to $278.9 million in 2012, primarily due to increased total revenue of $93.4 million, partially offset by increased total commissions expenses of $51.5 million and consulting and outsourcing of $22.1 million.
Acquisition and Disposal Activity
Acquisition and disposal activity is set forth in Note 3 — Acquisitions and Disposals of the Notes to the Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
We have various resources available 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, interest-bearing investments and available-for-sale investments collectively as our “investment portfolio.” Although it is a capital measure as defined, we utilize the assets in excess of payment service obligations measure shown below as the foundation for various liquidity analyses.
Assets in Excess of Payment Service Obligations
The following table shows the components of our assets in excess of payment service obligations as of December 31:
(Amounts in millions)
2013
 
2012
Cash and cash equivalents (substantially restricted)
$
2,228.5

 
$
2,683.2

Receivables, net (substantially restricted)
767.7

 
1,206.5

Interest-bearing investments (substantially restricted)
1,011.6

 
450.1

Available-for-sale investments (substantially restricted)
48.1

 
63.5

 
4,055.9

 
4,403.3

Payment service obligations
(3,737.1
)
 
(4,175.4
)
Assets in excess of payment service obligations
$
318.8

 
$
227.9

Our primary sources of liquidity include cash flows generated by the sale of our payment instruments, our cash and cash equivalent and interest-bearing investment balances, proceeds from our investment portfolio and credit capacity under our credit facilities. Our primary operating liquidity needs are related 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 ongoing 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 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 2013 Credit Agreement, will be sufficient to meet our anticipated funding requirements.

41


Cash and Cash Equivalents (substantially restricted) and Interest-bearing Investments (substantially restricted)
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 interest-bearing investments at financial institutions rated A3 or better by Moody’s Investor Service, or Moody’s, and A- or better by Standard & Poors, or S&P, and in U.S. government money market funds rated Aaa by Moody’s and AAA by S&P. If the rating agencies have split ratings, the Company uses the highest two out of three ratings across the rating agencies for disclosure purposes. If none of the rating agencies have the same rating, the Company uses the lowest rating across the agencies for disclosure purposes. As of December 31, 2013, cash and cash equivalents and interest-bearing investments totaled $3.2 billion, representing 99 percent of our total investment portfolio. Cash equivalents and interest-bearing investments consist of money market funds that invest in U.S. government and government agency securities, time deposits and certificates of deposit.
Available-for-sale Investments (substantially restricted)
Our investment portfolio includes $48.1 million of available-for-sale investments as of December 31, 2013. U.S. government agency residential mortgage-backed securities and U.S. government agency debentures compose $27.5 million of our available-for-sale investments, while other asset-backed securities compose the remaining $20.6 million.
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 active funding requirements on a timely basis. We have agreements with five active clearing banks that provide clearing and processing functions for official checks, money orders and other draft instruments. We have four active official check clearing banks, which provide sufficient capacity for our official check business. We rely on three active banks to clear our retail money orders and believe that these banks provide sufficient capacity for that business. We also maintain relationships with a variety of domestic and international cash management banks for EFT and wire transfer services used in the movement of consumer funds and agent settlements.
Special Purpose Entities
For certain financial institution customers, we established individual special purpose entities, or 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. For the years ending December 31, 2013 and 2012, the Company’s SPEs had cash and cash equivalents of $8.7 million and $29.9 million, respectively, and payment service obligations of $7.2 million and $24.0 million, respectively. See Note 1 — Description of the Business and Basis of Presentation of the Notes to the Consolidated Financial Statements for additional disclosure.
Credit Facilities
Our credit facility consists of the 2013 Credit Agreement, see Note 9 — Debt of the Notes to the Consolidated Financial Statements for additional disclosure. The following table is a summary of principal payments and debt issuance from January 1, 2011 to December 31, 2013:
 
2008 Senior Facility
 
2011 Credit Agreement
 
 
 
2013 Credit Agreement
 
 
(Amounts in millions)
Tranche A
 
Tranche B
 
Term loan
 
Incremental
term loan
 
Second Lien
Notes
 
Term credit facility
 
Total Debt
Balance at January 1, 2011
$
100.0

 
$
41.2

 
$

 
$

 
$
500.0

 
$

 
$
641.2

2011 new debt issued

 

 
390.0

 
150.0

 

 

 
540.0

2011 payments
(100.0
)
 
(41.2
)
 
(50.0
)
 
(0.4
)
 
(175.0
)
 

 
(366.6
)
2012 payments

 

 

 
(1.5
)
 

 

 
(1.5
)
2013 new debt issued

 

 

 

 

 
850.0

 
850.0

2013 payments

 

 
(340.0
)
 
(148.1
)
 
(325.0
)
 
(6.4
)
 
(819.5
)
Balance at December 31, 2013
$