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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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Annual Report pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934 for the fiscal year ended December 31,
2004. |
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Transition Report pursuant to Section 13 or 15(d) of the
Securities
Exchange Act of 1934 for the Transition period
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Commission File Number: 1-31950
MONEYGRAM INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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16-1690064 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
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1550 Utica Avenue South, Suite 100,
Minneapolis, Minnesota
(Address of principal executive offices) |
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55416
(Zip Code) |
Registrant’s telephone number, including area code
(952) 591-3000
Securities registered pursuant to Section 12(b) of the
Act:
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Name of each exchange on which registered |
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Common stock, $0.01 par value
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the
Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
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 an accelerated
filer (as defined in Exchange Act
Rule 12b-2). Yes o No þ
The market value of common stock held by non-affiliates of the
registrant, computed by reference to the last sales price as of
July 1, 2004, the registrant’s first day of
“regular-way trading” on the New York Stock Exchange,
was $1,811 million. 85,743,159 shares of common stock were
outstanding as of February 25, 2005.
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 2005 annual meeting of stockholders to be held
on May 10, 2005.
TABLE OF CONTENTS
PART I
Item 1. BUSINESS
MoneyGram International, Inc. (“MoneyGram,” the
“Company,” “we,” “us” and
“our”) is a leading global payment services company.
Our mission is to provide consumers with affordable, reliable
and convenient payment services. We offer our products and
services to consumers and businesses through our network of
agents and our financial institution customers. The diverse
array of products and services we offer enables consumers, most
of whom are not fully served by traditional financial
institutions, to make payments and to transfer money around the
world, helping them meet the financial demands of their daily
lives.
Our business is conducted through our wholly owned subsidiary,
Travelers Express Company, Inc. (“Travelers”), which
has been in operation since 1940. We acquired MoneyGram Payment
Systems, Inc. in June 1998, adding MoneyGram® branded
international money transfer services to our group of Global
Funds Transfer services. We were incorporated in Delaware on
December 18, 2003 in connection with the June 30, 2004
spin-off from our parent company, Viad Corp (“Viad”)
(referred to hereafter as the “spin-off”). In the
spin-off, Travelers was merged with a wholly owned subsidiary of
MoneyGram, and then Viad distributed all the issued and
outstanding shares of MoneyGram common stock to Viad
stockholders in a tax-free distribution. Stockholders of Viad
received one share of MoneyGram common stock for every one share
of Viad common stock owned. See “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Our Separation from Viad Corp.”
In March 2004, we completed the sale of our subsidiary, Game
Financial Corporation, for approximately $43.0 million in
cash to continue our focus on our core businesses. Game
Financial Corporation provides cash access services to casinos
and gaming establishments throughout the United States. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Basis of
Presentation.”
For additional information regarding our business, including our
financial results, see “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
We operate our business in two segments: Global Funds Transfer
and Payment Systems. Following is a description of each segment.
For financial information regarding our segments, see
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Results of
Operations — Segment Performance” and
Note 17 of the Notes to Consolidated Financial Statements.
Global Funds Transfer Segment
Our Global Funds Transfer segment provides money transfer
services, money orders and bill payment services to consumers.
Our primary consumers are “unbanked,”
“underbanked” and “convenience users.”
“Unbanked consumers” are those consumers who do not
have a traditional relationship with a financial institution.
“Underbanked consumers” are consumers who, while they
may have a savings account with a financial institution, do not
have a checking account. “Convenience users” are
consumers who, while they may have a checking account, prefer to
use our products and services on the basis of convenience or
value.
We conduct our Global Funds Transfer operations through a
worldwide network of agents. During 2004 and 2003, our ten
largest agents accounted for 27 percent and
21 percent, respectively, of our total revenues and
41 percent and 35 percent of the revenues of our
Global Funds Transfer segment. Our largest agent accounted for
nine percent and five percent of our total revenues and
14 percent and eight percent of the revenues of our Global
Funds Transfer segment in 2004 and 2003, respectively. In 2004,
Global Funds Transfer segment revenue was $532.1 million
and operating income was $102.6 million.
We provide Global Funds Transfer products and services utilizing
a variety of proprietary point-of-sale platforms. We also
operate two customer service call centers in the United States
and contract for additional call center services in Bulgaria.
These call centers provide multi-lingual customer service for
both agents and consumers 24 hours per day, 365 days
per year.
MoneyGram Money Transfers: Money transfers are transfers
of funds between consumers from one location to another. Money
transfers are used by consumers who want to transfer funds
quickly, safely and
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efficiently to another individual within the United States or
internationally. As of December 31, 2004, we provide money
transfer services through over 77,000 agent locations in
approximately 170 countries worldwide. Our money transfer
revenues are derived primarily from consumer transaction fees
and revenues from currency exchange on international money
transfers.
In a typical money transfer, a consumer goes to an agent
location, completes a form and pays the agent the money to be
transferred, together with a fee. The agent enters the
transaction data into a point-of-sale money transfer platform,
which connects to our central data processing system. Through
our FormFree service, customers may contact our call center and
a representative will collect the information over the telephone
and enter it directly into our central data processing system.
The funds are made available for payment in various currencies
throughout our agent network. The fee paid by the sender is
based on the amount to be transferred and the location at which
the funds are to be received. Both the “send” and
“receive” agents receive a commission from the
transaction. In March 2004, we launched our MoneyGram eMoney
Transfer service that also allows customers to conduct money
transfer transactions on the internet at www.emoneygram.com
using a credit card or a debit from a bank account. At
December 31, 2004, we offer this service only to
U.S. residents outside the state of California.
Money Orders: Money orders, much like checks, can be
presented by the consumer to make a payment or for cash. Our
Global Funds Transfer segment has its roots in the sale of money
orders, a business we have been engaged in since 1940. Based on
the number of money orders issued in 2004, we are the
nation’s leading issuer of money orders. In 2004, we issued
approximately 278 million money orders through our network
of almost 54,000 retail agent locations in the United States and
Puerto Rico.
Our money orders are sold under the Travelers Express brand, on
a private label basis or co-branded with retail agents. In most
cases, we receive transaction fees from our agents for each
money order sold. In many cases, we also receive monthly
dispenser service fees from our agents for the money order
dispenser equipment we provide. In addition, we generate income
from the investment of funds that are remitted from our agents
and which we invest until the money orders are cleared through
the banking system, or are escheated to the applicable states.
Generally a money order will remain outstanding for fewer than
ten days.
Bill Payment Services: Our bill payment services allow
consumers to make urgent payments or pay routine bills. Our
ExpressPayment® urgent bill payment service is offered
through our money transfer agent locations in the United States.
Our ExpressPayment urgent bill payment service, which is
provided under contract with billers, enables delinquent debtors
and just-in-time payers to pay bills generally with same-day
credit to a growing group of creditors. Our contracted billers
include credit card companies, mortgage companies, auto finance
companies, sub-prime lenders, cellular and long distance
telephone companies and third-party bill collectors. Our
ExpressPayment bill payment service has grown as we have added
new billers to our network. We work closely with our agents to
identify billers in their service areas to target for this
service. In March 2004, our ExpressPayment bill payment service
became available for internet transactions at www.emoneygram.com.
Our FlashPay and BuyPay routine bill payment services are
available at selected agent locations. These services allow
unbanked and underbanked consumers to pay routine bills with
cash at a convenient location. We remit the payments by means of
wire transfer or check and the consumer’s account is
typically credited within one week. These routine bill payment
services also afford utilities a method of complying with
regulatory requirements that they provide their customers with a
given number of locations at which customers may pay their
bills. We receive a transaction fee from our agents for each
bill payment completed.
Payment Systems Segment
Our Payment Systems segment provides financial institutions with
payment processing services, primarily official check
outsourcing services and money orders for sale to their
customers. Our customers are primarily comprised of financial
institutions, thrifts and credit unions. We provide official
check services to over 17,000 branch locations of
approximately 1,800 financial institutions. Customers include a
broad array of financial institutions, including large banks,
regional banks and small community banks. During 2004 and 2003,
our ten largest financial institution customers accounted for
14 percent and 17 percent, respectively, of our total
revenues and 39 percent and 43 percent, respectively, of
the revenues of our Payment Systems segment. Our largest
financial institution customer generated approximately four
percent and five percent of our total revenues and approximately
ten percent and 12 percent of the revenues in
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our Payment Systems segment in 2004 and 2003, respectively.
We primarily derive revenues from our financial institution
customers from the investment of funds underlying the official
check or financial institution money order. We invest funds
representing customer items from the time the proceeds are
remitted until they are cleared. We also derive revenue from
fees paid by our customers. In 2004, Payment Systems segment
revenue was $294.5 million and operating income was
$27.2 million.
Official Check Outsourcing Services: We provide official
check outsourcing services through our PrimeLink® service.
Financial institutions provide official checks, which include
bank checks, cashier checks, teller checks and agent checks, to
consumers for use in transactions when the payee requires a
check drawn on a bank or other third party. Official checks are
commonly used in consumer loan closings, such as closings of
home and car loans, and other critical situations where the
payee requires assurance of payment and funds availability.
Financial institutions also use official checks to pay their own
obligations. Our PrimeLinkplus® product is an
internet-based check issuance platform that allows financial
institutions and other businesses with multiple locations to
securely print official checks at remote locations on a
client-controlled basis, eliminating the need to overnight the
checks from the main office or wire transfer the funds. We
provide these outsourcing services at a low cost to financial
institutions and pay an agreed upon commission rate on the
balance of funds underlying the official checks pending clearing
of the items. We clear the official check items pursuant to
contracts with clearing banks as a service to our official check
customers.
Money Orders: The Payment Systems segment also offers
money orders through financial institutions in a manner very
similar to money orders offered through our retail agents in our
Global Funds Transfer segment. In 2004, approximately
20 million, or seven percent, of our total money orders
were sold through financial institutions.
Controlled Disbursement Processing: We process WIC checks
through our subsidiary, FSMC, Inc. WIC checks are issued under
the Special Supplemental Nutrition Program to Women, Infants and
Children administered by the U.S. Department of Agriculture
through the various states. FSMC, Inc. also processes other
controlled disbursements, such as rebate checks. Our revenues
from this area are primarily derived from fees.
Sales and Marketing
Global Funds Transfer Segment: We market our Global Funds
Transfer segment products and services through a number of
dedicated sales and marketing teams. In the United States, our
dedicated sales and marketing teams market money transfer
services, money orders and bill payment services on a regional
basis to our three principal distribution channels: large
national agent accounts, smaller, independent accounts and check
cashing outlets. We also have dedicated sales and marketing
teams that market our urgent bill payment services directly to
billers. Our international sales and marketing for money
transfer services is conducted by dedicated regional sales and
marketing teams that are generally located in or near their
regions: Northern Europe; Southern Europe; Eastern Europe; Asia;
the Middle East; Africa; and Mexico, Latin America and the
Caribbean.
We have introduced corridor pricing capabilities that enable us
to establish different consumer prices for our money transfer
services by defined transaction corridors, such as narrowly
defined zip code regions or widespread direct marketing areas.
We are currently adding additional capabilities, including
implementing multi-currency technology that allows us to execute
our money transfers between and among an increased number of
different currencies. Where implemented, these capabilities
allow our agents to settle with us in local currency and allow
consumers to know the exact amount that will be received in the
local currency of the receiving nation, or in U.S. or Euro
dollars in certain countries.
Payment Systems Segment: We market our PrimeLink official
check services through a dedicated team of official check sales
and marketing professionals. In addition, we have dedicated
teams of sales and marketing professionals for our
PrimeLinkplus product and for our sales of money order
services through banks. All marketing efforts are localized and
customized to specific segments of the market. Relationship
marketing is the substance of our approach to the market. We
have an intertwined network of relationships with technology
providers, banks that provide marketing endorsements, banking
associations, consultants and others, including alliances with
Wells Fargo and the Credit Union National Association.
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Product Development and Enhancements
Our product development activities have focused on new ways to
transfer money and pay bills. In March 2004, we launched our
MoneyGram eMoney Transfer service that allows online money
transfers and bill payments to be initiated on our website using
credit cards and bank account debits. We are developing a
prepaid debit card that we plan to introduce in the first half
of 2005. The debit card would allow customers to load cash onto
a card that can be used to make purchases and ATM withdrawals.
The cards would be reloadable at designated MoneyGram agent
locations. In addition, we are enhancing our systems to provide
customers with the ability to transfer money directly into a
bank account. We believe these features will provide customers
with added flexibility and convenience to help meet their
financial services needs.
Competition
The various industries in which we operate are very competitive,
and we face a variety of competitors across our businesses. New
competitors or alliances among established companies may emerge.
We compete for agents and financial institution customers on the
basis of value, service, quality, technical and operational
differences, price and financial incentives paid to agents once
they have entered into an agreement. In turn, we compete for
consumers on the basis of number and location of agent
locations, price, convenience and technology.
The Global Funds Transfer segment of our business competes in a
concentrated industry, with a small number of large competitors
and a large number of small, niche competitors. Our large
competitors are other providers of money orders and money
transfer services, including Western Union, a subsidiary of
First Data Corporation, other subsidiaries of First Data
Corporation and the U.S. Postal Service with respect to money
orders. We also compete with banks and niche person-to-person
money transfer service providers that serve select send and
receive corridors.
The Payment Systems segment of our business competes in a
concentrated industry with a small number of large competitors.
Our competitors in this segment are Integrated Payment Systems,
a subsidiary of First Data Corporation, and Federal Home Loan
Banks. We also compete with financial institutions that have
developed internal processing capabilities or services similar
to ours and do not outsource these services.
Regulation
Compliance with legal requirements and government regulations is
an integral part of our operations. Financial transaction
reporting and state banking department regulations also affect
our business.
As a money order issuer and a money transmitter, we must comply
with a number of domestic and international regulatory
requirements, including:
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federal and state anti-money laundering and the federal
government’s Office of Foreign Assets Control
(“OFAC”) regulations; |
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laws of various foreign countries regulating the ability to
conduct a money transfer business and requiring compliance with
anti-money laundering regulations; |
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state unclaimed property reporting; and |
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state, federal and international privacy laws. |
In the United States, 45 states, the District of Columbia
and Puerto Rico require us to be licensed in order to conduct
business within their jurisdiction. Requirements to be so
licensed generally include minimum net worth, surety bonds,
operational procedures and reserves or “permissible
investments” that must be maintained in an amount
equivalent to all outstanding payment obligations issued by us.
The types of securities that are considered “permissible
investments” vary from state to state, but generally
include U.S. government securities and other highly rated
debt instruments. Most states require us to file reports on a
quarterly or more frequent basis, verifying our compliance with
their requirements.
Internationally, we are registered as required in Germany, the
Netherlands, Switzerland and the United Kingdom. The regulatory
requirements in Germany and the United Kingdom are focused
mainly on money laundering prevention. In addition, many
international jurisdictions impose restrictions on the type of
entity that can serve as a money transfer agent. In some
jurisdictions, we are restricted to doing business with banks or
other licensed financial entities.
We and our agents are required to report suspicious activity. In
addition, under the Patriot Act, money service businesses,
including our agents, are required
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to establish anti-money laundering compliance programs that
include:
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internal policies and controls; |
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the designation of a compliance officer; |
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ongoing employee training; and |
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an independent review function. |
Unclaimed property laws of every state, the District of Columbia
and Puerto Rico require that we track the relevant information
on each money order or money transfer and, if unclaimed at the
end of the statutory abandonment period, that we remit the
proceeds of the unclaimed property to the appropriate
jurisdiction. State abandonment periods for money orders and
money transfers range from three to seven years, while those for
official checks are generally three to five years. Certain
foreign jurisdictions also may have unclaimed property laws,
though we do not have material amounts subject to any such law.
In the ordinary course of our business, we collect certain types
of consumer data and thus are subject to privacy laws. We are
subject to the Gramm-Leach-Bliley Act of 1999 (the “GLB
Act”), which requires that financial institutions have in
place policies regarding the collection and disclosure of
information considered nonpublic personal information. We comply
with the GLB Act by posting a privacy notice on our website, as
well as posting a privacy notice on the forms completed by
individuals in order to use services (for example, on our money
transfer “send” form). We also have
confidentiality/information security agreements in place with
our third-party vendors and service providers to the extent
required by the GLB Act. In addition, we collect personal data
flowing from the European Union to other countries, and thus are
subject to the European Personal Data Protection Directive (the
“Directive”). The Directive prohibits the transfer of
personal data to non-European Union member nations that do not
provide adequate protection for personal data. We comply with
the safe harbor permitted by the Directive by filing with the
U.S. Department of Commerce, publicly declaring our privacy
policy for information collected outside of the United States by
posting our privacy policy on our website, and requiring our
agents in the European Union to notify customers of the privacy
policy.
If we were to fail to comply with any applicable laws and
regulations, this failure could result in restrictions on our
ability to provide our products and services, as well as the
imposition of civil fines and criminal penalties. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Enterprise Risk
Management — Regulatory Risk.”
Intellectual Property
We rely on a combination of patent, trademark, copyright, trade
secret law and confidentiality or license agreements to protect
our proprietary rights in products, services, know-how and
information. Intellectual property laws afford limited
protection. Certain rights in processing equipment and software
held by us and our subsidiaries provide us with a competitive
advantage, even though not all of these rights are protected
under intellectual property laws. It may be possible for a third
party to copy our products and services or otherwise obtain and
use our proprietary information without our permission.
U.S. patents are currently granted for a term of 20 years
from the date a patent application is filed. We own U.S. and
foreign patents related to our money order technology. Our
U.S. patents have in the past given us competitive
advantages in the marketplace, including a number of patents for
automated money order dispensing systems. However, many of these
patents have expired. We do not consider the remaining patents,
or the expiration of the patents, to be material to our
operations and do not believe that they provide any material
competitive advantage or disadvantage. We also have patent
applications pending in the United States that relate to our
money transfer and PrimeLink technology and business methods.
U.S. trademark registrations are for a term of 10 years and
are renewable every 10 years as long as the trademarks are
used in the regular course of trade. We register our trademarks
in a number of other countries where we do business. We maintain
a portfolio of trademarks representing substantial goodwill in
our businesses. Many of our trademarks, including the
MoneyGram®, Travelers Express®, ExpressPayment®
and PrimeLink® marks and our globe with arrows logo, have
substantial importance and value to our business.
Relationship with Viad
For the purpose of governing the relationship between MoneyGram
and Viad after the spin-off, we entered into various agreements
with Viad as described below. These agreements have been filed
with the Securities and Exchange Commission, and the following
sum-
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maries are qualified in their entirety by reference to the
agreements as filed. See also Note 3 of the Notes to the
Consolidated Financial Statements.
Separation and Distribution Agreement. The separation and
distribution agreement governs, among other things, the
principal corporate transactions that were required to effect
the separation of MoneyGram from Viad and the spin-off, the
transfer to and the continued operation by MoneyGram of the
global funds transfer and payment systems businesses, the
division between MoneyGram and Viad of liabilities and other
matters governing the relationship between Viad and MoneyGram
following the spin-off.
Employee Benefits Agreement. The employee benefits
agreement provides for the allocation of employees, employee
benefit plans and the transfer, assignment and assumption of
associated liabilities and related assets between Viad and
MoneyGram. Generally, subject to some exceptions summarized
below, Viad remains responsible for compensation and benefit
liabilities for employees and former employees assigned to it,
and MoneyGram is responsible for compensation and benefit
liabilities for employees and former employees assigned to it.
Under the agreement, MoneyGram assumed sponsorship of
Viad’s qualified pension plan, under which all benefit
accruals have been frozen. MoneyGram also assumed certain
liabilities under Viad’s supplemental executive retirement
plans and certain liabilities under deferred compensation and
medical benefit plans for certain directors and executive
officers of Viad.
The employee benefits agreement also provided for the treatment
of stock options and restricted stock held by current and former
employees of MoneyGram, as well as current and former Viad
employees.
Interim Services Agreement. Under the interim services
agreement, Viad provides specified services to MoneyGram on an
interim basis, including tax matter services, internal audit
services, real estate services and insurance accounting and
claims processing services. Viad charges a fee for its services
determined and allocated according to methods consistent with
those in place before the spin-off. The services will generally
be provided for a term of up to two years from the spin-off date.
Tax Sharing Agreement. The tax sharing agreement
provides, among other things, for the allocation between Viad
and MoneyGram of federal, state, local and foreign tax
liabilities for all periods through the spin-off date. In
general, the tax sharing agreement provides that MoneyGram will
be liable for all federal, state, local and foreign tax
liabilities that are attributable to the business of MoneyGram
for periods through the spin-off date, and that Viad will be
responsible for all other of these taxes for periods through the
spin-off date. Under Treasury regulations, MoneyGram and its
domestic subsidiaries are severally liable (as is Viad and its
domestic subsidiaries) to the IRS for any federal income taxes
of the consolidated group for periods before the spin-off and
for the taxable year of the consolidated group that includes the
spin-off date.
The tax sharing agreement also places restrictions upon Viad and
MoneyGram regarding certain sales of assets, certain sales or
issuances of additional stock or other securities (including
securities convertible into stock) and the entry into certain
types of corporate transactions during a restriction period that
continues for 24 months after the spin-off.
Employees
At December 31, 2004, we had approximately 1,550 full-time
employees in the United States and 100 full-time employees
internationally. In addition, we use contractors to support
certain of our international sales and marketing efforts. None
of our employees are represented by a labor union, and we
consider our employee relations to be good.
Executive Officers of the Registrant
Philip W. Milne, age 45, has served as our President
and Chief Executive Officer and as a Director of MoneyGram since
June 2004. He is also the President and Chief Executive Officer
of Travelers Express Company, Inc., our principle operating
subsidiary, a position he has held since 1996. Mr. Milne
joined Travelers Express Company, Inc. in 1991 and served as
General Manager of the official check business from 1991 until
early 1992, as Vice President, General Manager of the Payment
Systems segment from 1992 until early 1993, and as Vice
President, General Manager of the Global Payment Products group
from 1993 to 1996.
David J. Parrin, age 50, has served as the Vice
President, Chief Financial Officer of MoneyGram since June 2004.
Mr. Parrin joined the company in June 2002 as the Vice
President and Chief Financial Officer of Travelers Express
Company, Inc. From 1998 to 2002, he was with the investment firm
of Dain Rauscher Corporation (now RBC Dain Rauscher
Corporation), serving since 1999 as Executive Vice President and
Chief Financial Officer. From 1994 to 1998,
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he served as Senior Vice President and Corporate Controller of
U.S. Bancorp. Prior to that, Mr. Parrin spent 17 years
with the accounting firm of Ernst & Young LLP, serving most
recently as audit partner.
Jean C. Benson, age 37, has served as the Vice
President, Controller of MoneyGram since June 2004.
Ms. Benson joined the company in August 2001 as the Vice
President, Controller of Travelers Express Company, Inc. From
1994 to 2001, Ms. Benson was at Metris Companies, Inc., a
financial products and services company, serving as Corporate
Controller and Executive Vice President of Finance since 1996.
Ms. Benson began her career as an auditor with the accounting
firm of Deloitte & Touche LLP from 1990 to 1994.
Theodore F. Ceglia, age 41, has served as Vice President,
Treasurer of MoneyGram since June 2004. Mr. Ceglia joined
the company in February 2003 as Vice President, Treasurer of
Travelers Express Company, Inc. Mr. Ceglia was the Chief
Financial Officer of ArrowHead Capital Management Corp., an
asset management firm, since July 2002. From January 2002 to
February 2003, he also owned and operated Capital Management
Solutions LLC, a corporate finance consulting firm. From 1998 to
2001, Mr. Ceglia was Managing Director and Treasurer at the
investment firm of RBC Dain Rauscher Corporation.
Mary A. Dutra, age 53, has served as Vice President,
General Manager of Payment Systems of MoneyGram since June 2004.
Ms. Dutra joined the company in 1988 as Manager of Payment
Services of Travelers Express Company, Inc. and has served in
positions of increasing responsibility, advancing most recently
to the position of General Manager and Vice President, Global
Operations.
Teresa H. Johnson, age 53, has served as Vice President,
General Counsel and Secretary of MoneyGram since June 2004.
Ms. Johnson served as Vice President and Chief Legal
Counsel of Travelers Express Company, Inc. since joining the
company in 1997. From 1992 to 1997, she was employed at
SUPERVALU INC., a food retailer and distributor, serving most
recently as Associate General Counsel and Corporate Secretary.
William J. Putney, age 42, has served as Vice President,
Chief Investment Officer of MoneyGram since June 2004.
Mr. Putney joined the company in 1993, serving as Portfolio
Manager until being named Vice President, Chief Investment
Officer of Travelers Express Company, Inc. in 1996. Prior to
joining the company, Mr. Putney held positions as a trader,
investment analyst and portfolio manager.
Anthony P. Ryan, age 42, has served as the Vice
President, General Manager of Global Funds Transfer of MoneyGram
since June 2004, a position he held at Travelers Express
Company, Inc. since 2001. He previously served as Chief
Financial Officer from 1997 to 2001 and as Controller from 1996
to 1997. Prior to joining the company, Mr. Ryan spent
10 years at First Data Corporation, serving most recently
as Director of Finance.
Cindy J. Stemper, age 47, has served as Vice President of
Human Resources and Facilities of MoneyGram since June 2004.
Ms. Stemper joined the company in 1984 and has served in
positions of increasing responsibility at Travelers Express
Company, Inc., advancing most recently to the position of Vice
President of Human Resources in 1996.
Available Information
Our principal executive offices are located at 1550 Utica Avenue
South, Minneapolis, Minnesota 55416, telephone
(952) 591-3000. Our website address is www.moneygram.com.
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 as soon as reasonably
practicable after they are filed with or furnished to the
Securities and Exchange Commission.
7
Item 2. PROPERTIES
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| Location |
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Use |
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Square Feet | |
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Lease Expiration | |
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Minneapolis, MN
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Corporate Headquarters |
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156,500 |
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12/31/2015 |
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Brooklyn Center, MN
|
|
Global Operations Center |
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|
75,000 |
|
|
|
1/31/2012 |
|
|
Brooklyn Center, MN
|
|
Global Operations Center |
|
|
44,000 |
|
|
|
1/31/2012 |
|
|
Lakewood, CO
|
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Call Center |
|
|
68,165 |
|
|
|
3/31/2012 |
|
Information concerning our material properties, all of which are
leased, including location, use, approximate area in square feet
and lease terms, is set forth above. We also have a number of
other smaller office locations in New York City, Florida and in
the United Kingdom, as well as small sales and marketing offices
in Germany, Hong Kong, Greece, Dubai, Russia, Italy, South
Africa, Australia, China and the Netherlands. We believe that
our properties are sufficient to meet our current and projected
needs.
Item 3. LEGAL PROCEEDINGS
We are party to a variety of legal proceedings that arise in the
normal course of our business. In these actions, plaintiffs may
request punitive or other damages that may not be covered by
insurance. We accrue for these items as losses become probable
and can be reasonably estimated. While the results of these
legal proceedings cannot be predicted with certainty, management
believes that the final outcome of these proceedings will not
have a material adverse effect on our consolidated results of
operations or financial position.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
Not applicable.
8
PART II
Item 5. MARKET FOR THE REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our stock is traded on the New York Stock Exchange under the
symbol MGI. Our Board of Directors declared and paid a quarterly
cash dividend of $0.01 per share of common stock in each of the
third and fourth quarters of 2004. In addition, the Board of
Directors declared a dividend of $0.01 per share of common stock
on February 17, 2005 to be paid on April 1, 2005 to
stockholders of record on March 17, 2005. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations —
Stockholders’ Equity” and Note 12 of the Notes to
Consolidated Financial Statements. The terms of our credit
facility place restrictions on the payment of dividends. For a
description of the restrictions, see Note 9 of the Notes to the
Consolidated Financial Statements. As of February 25, 2005,
there were approximately 20,971 stockholders of record of our
common stock.
Our separation from Viad Corp was completed on June 30,
2004 and our common stock began “regular-way trading”
on the New York Stock Exchange on July 1, 2004.
Consequently, historical quarterly price information is not
available for shares of our common stock for fiscal 2003 or for
the quarterly periods ended March 31, 2004 and
June 30, 2004. The high and low sales prices for our common
stock for the quarterly periods ended September 30, 2004
and December 31, 2004 were as follows:
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Third Quarter | |
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Fourth Quarter | |
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Low | |
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High | |
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Low | |
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High | |
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2004
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|
$ |
16.40 |
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$ |
22.75 |
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$ |
16.90 |
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$ |
21.52 |
|
On November 18, 2004, our Board of Directors authorized the
repurchase, at our discretion, of up to 2,000,000 common shares
on the open market. The authorization was announced publicly in
our press release issued on November 18, 2004. This repurchase
authorization is effective until such time as the Company has
repurchased 2,000,000 common shares. There were no repurchases
of common stock made outside of the Company’s current
repurchase authorization. MoneyGram common stock tendered to the
Company in connection with the exercise of stock options or
vesting of restricted stock are not considered repurchased
shares under the terms of the repurchase authorization.
The following table sets forth information in connection with
purchases made by us, or on our behalf, of shares of our common
stock during the quarterly period ended December 31, 2004.
Included in the November 2004 activity are 85,955 shares
surrendered to the Company in connection with the vesting of
restricted stock.
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Total Number of | |
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Maximum | |
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Shares Purchased | |
|
Number of Shares | |
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as Part of | |
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that May Yet Be | |
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Publicly | |
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Purchased Under | |
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Total Number of | |
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Average Price | |
|
Announced Plan | |
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the Plan | |
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Shares Purchased | |
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Paid per Share | |
|
or Program | |
|
or Program | |
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October 1-October 31, 2004
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— |
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— |
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|
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— |
|
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— |
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November 1-November 30, 2004
|
|
|
222,455 |
|
|
$ |
20.16 |
|
|
|
136,500 |
|
|
|
1,863,500 |
|
|
December 1-December 31, 2004
|
|
|
633,799 |
|
|
$ |
21.14 |
|
|
|
633,799 |
|
|
|
1,229,701 |
|
Item 6. SELECTED FINANCIAL DATA
The following table presents our selected consolidated financial
data for the periods indicated. The information set forth below
should be read in conjunction with “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements and
notes thereto. For the basis of presentation of the information
set forth below, see “Management’s Discussion and
Analysis of Financial Condition and Results of
Operations — Basis of Presentation.”
9
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Years Ended December 31 | |
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2004 | |
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2003 | |
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2002 | |
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2001 | |
|
2000 | |
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(Dollars and shares in thousands, except per share data) | |
|
Operating Results
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Revenue
|
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|
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|
|
|
|
|
|
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| |
Global Funds Transfer segment
|
|
$ |
532,064 |
|
|
$ |
450,108 |
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|
$ |
412,953 |
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|
$ |
379,945 |
|
|
$ |
337,633 |
|
| |
Payment Systems segment
|
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|
294,466 |
|
|
|
287,115 |
|
|
|
294,737 |
|
|
|
255,615 |
|
|
|
195,991 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Total revenue
|
|
|
826,530 |
|
|
|
737,223 |
|
|
|
707,690 |
|
|
|
635,560 |
|
|
|
533,624 |
|
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Commissions
|
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|
403,473 |
|
|
|
377,333 |
|
|
|
358,420 |
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|
|
301,272 |
|
|
|
227,656 |
|
| |
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|
|
|
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|
|
|
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|
|
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Net Revenue
|
|
|
423,057 |
|
|
|
359,890 |
|
|
|
349,270 |
|
|
|
334,288 |
|
|
|
305,968 |
|
|
Expenses
|
|
|
334,037 |
|
|
|
271,719 |
|
|
|
262,583 |
|
|
|
258,809 |
|
|
|
246,017 |
|
| |
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|
|
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Income from continuing operations before income taxes
|
|
|
89,020 |
|
|
|
88,171 |
|
|
|
86,687 |
|
|
|
75,479 |
|
|
|
59,951 |
|
|
Income tax expense
|
|
|
23,891 |
|
|
|
12,485 |
|
|
|
11,923 |
|
|
|
4,385 |
|
|
|
(15,096 |
) |
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|
|
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Net income from continuing operations
|
|
$ |
65,129 |
|
|
$ |
75,686 |
|
|
$ |
74,764 |
|
|
$ |
71,094 |
|
|
$ |
75,047 |
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Earnings per share from continuing operations: (1)
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Basic
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$ |
0.75 |
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$ |
0.87 |
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$ |
0.87 |
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$ |
0.83 |
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$ |
0.85 |
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Diluted
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|
0.75 |
|
|
|
0.87 |
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|
|
0.86 |
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|
|
0.82 |
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|
0.83 |
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Shares outstanding
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Basic
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|
86,916 |
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|
|
86,223 |
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|
|
86,178 |
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|
|
85,503 |
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|
|
88,802 |
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Diluted
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|
87,330 |
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|
|
86,619 |
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|
|
86,716 |
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|
|
86,322 |
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|
90,925 |
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Financial Position
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Unrestricted assets (2)
|
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$ |
393,920 |
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$ |
373,036 |
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$ |
346,122 |
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$ |
240,710 |
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$ |
217,913 |
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|
Restricted assets (2)
|
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|
7,640,581 |
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|
|
7,421,481 |
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|
|
7,825,955 |
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|
|
6,649,722 |
|
|
|
4,875,254 |
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Total assets
|
|
|
8,630,735 |
|
|
|
9,222,154 |
|
|
|
9,675,430 |
|
|
|
8,375,301 |
|
|
|
6,551,492 |
|
|
Payment service obligations
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|
7,640,581 |
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|
|
7,421,481 |
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7,825,955 |
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|
|
6,649,722 |
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|
|
4,875,254 |
|
|
Long-term debt (3)
|
|
|
150,000 |
|
|
|
201,351 |
|
|
|
294,879 |
|
|
|
322,670 |
|
|
|
361,323 |
|
|
Redeemable preferred stock (4)
|
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|
— |
|
|
|
6,733 |
|
|
|
6,704 |
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|
|
6,679 |
|
|
|
6,658 |
|
|
Stockholders’ equity (5)
|
|
|
565,191 |
|
|
|
868,783 |
|
|
|
718,947 |
|
|
|
758,556 |
|
|
|
793,635 |
|
|
Other Selected Data
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Capital expenditures
|
|
$ |
29,589 |
|
|
$ |
27,128 |
|
|
$ |
26,842 |
|
|
$ |
32,225 |
|
|
$ |
24,810 |
|
|
Depreciation and amortization
|
|
|
29,567 |
|
|
|
27,295 |
|
|
|
25,894 |
|
|
|
30,552 |
|
|
|
27,148 |
|
|
Cash dividends declared per share (6)
|
|
|
0.20 |
|
|
|
0.36 |
|
|
|
0.36 |
|
|
|
0.36 |
|
|
|
0.36 |
|
|
Average investable balances (7)
|
|
|
6,772,124 |
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|
|
6,979,247 |
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|
|
6,131,145 |
|
|
|
4,992,650 |
|
|
|
3,814,477 |
|
|
Net investment margin (8)
|
|
|
1.42 |
% |
|
|
1.30 |
% |
|
|
1.81 |
% |
|
|
1.96 |
% |
|
|
1.75 |
% |
|
Approximate number of countries served
|
|
|
170 |
|
|
|
160 |
|
|
|
155 |
|
|
|
152 |
|
|
|
150 |
|
|
Number of money order and money transfer locations
|
|
|
116,032 |
|
|
|
104,963 |
|
|
|
98,816 |
|
|
|
95,334 |
|
|
|
81,571 |
|
|
|
| (1) |
Earnings per share for 2000 through 2003 is based on outstanding
shares of Viad Corp common stock. On June 30, 2004, Viad
effected a 1:1 distribution of MoneyGram common stock, for
a total distribution of 88,556,077 shares. |
| |
| (2) |
Unrestricted and restricted assets are comprised of cash and
cash equivalents, receivables and investments. See Note 2
of the Notes to Consolidated Financial Statements for the
determination of unrestricted assets. |
10
|
|
| (3) |
Long-term debt for 2000 through 2003 represents Viad’s
long-term debt prior to the June 30, 2004 spin-off. In
connection with the spin-off, Viad repurchased
$52.6 million of its medium-term notes and subordinated
debt. In addition, Viad repaid $188.0 million of its
outstanding commercial paper and retired $9.0 million of
industrial revenue bonds. |
| |
| (4) |
Redeemable preferred stock relates solely to shares issued by
Viad and redeemed in connection with the June 30, 2004
spin-off. |
| |
| (5) |
Stockholders’ equity for 2000 through 2003 represents
Viad’s capital structure prior to the June 30, 2004
spin-off. |
| |
| (6) |
Cash dividends declared per share for 2000 through 2003 is based
on dividends declared by Viad to holders of its common stock.
Viad declared dividends of $0.18 per share during the first
half of 2004. MoneyGram declared dividends of $0.02 per
share during the second half of 2004. |
| |
| (7) |
Investable balances are comprised of cash and cash equivalents
and investments. |
| |
| (8) |
Net investment margin is determined as net investment revenue
(investment revenue less investment commissions) divided by
daily average investable balances. |
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with
MoneyGram International, Inc.’s consolidated financial
statements and related notes. This discussion contains
forward-looking statements that involve risks and uncertainties.
MoneyGram’s actual results could differ materially from
those anticipated due to various factors discussed under
“Forward-Looking Statements” and elsewhere in this
Annual Report on Form 10-K.
Our Separation from Viad Corp
On July 24, 2003, Viad announced a plan to separate its
payment services segment, operated by Travelers, from its other
businesses into a new company, and to effect a tax-free
distribution of its shares in that company to Viad’s
stockholders. On December 18, 2003, MoneyGram was
incorporated in Delaware as a subsidiary of Viad for the purpose
of effecting the proposed distribution. On June 30, 2004,
Travelers was merged with a wholly owned subsidiary of
MoneyGram, and then Viad distributed 88,556,077 shares of
MoneyGram common stock to Viad stockholders in a tax-free
distribution. Stockholders of Viad received one share of
MoneyGram common stock for every one share of Viad common stock
owned.
The continuing business of Viad consists of the businesses of
the convention show services, exhibit design and construction,
and travel and recreation services operations, including
Viad’s centralized corporate functions located in Phoenix,
Arizona (“New Viad”). Notwithstanding the legal form
of the spin-off, due to the relative significance of MoneyGram
to Viad, MoneyGram is considered the divesting entity and
treated as the accounting successor to Viad for financial
reporting purposes in accordance with the Emerging Issues Task
Force (“EITF”) Issue No. 02-11 Accounting for
Reverse Spin-offs. The spin-off of New Viad has been
accounted for pursuant to Accounting Principles Board
(“APB”) Opinion No. 29, Accounting for
Non-Monetary Transactions. MoneyGram charged
$426.6 million directly to equity as a dividend, which is
the historical cost carrying amount of the net assets of New
Viad.
As part of the separation from Viad, we entered into a variety
of agreements with Viad to govern each of our responsibilities
related to the distribution. These agreements include a
Separation and Distribution Agreement, a Tax Sharing Agreement,
an Employee Benefits Agreement and an Interim Services
Agreement. See “Business — Relationship with
Viad.”
In connection with the spin-off, we entered into a bank credit
agreement providing availability of up to $350.0 million in
the form of a $250.0 million revolving credit facility and
a $100.0 million term loan. On June 30, 2004, we
borrowed $150.0 million under this facility, which was paid
to and used by Viad to repay $188.0 million of its
commercial paper. Viad also retired a substantial majority of
its outstanding subordinated debentures and medium term notes
for an aggregate amount of $52.6 million (including a
tender premium), retired industrial revenue bonds of
$9.0 million and redeemed outstanding preferred stock at an
aggregate call price of $23.9 million. The
11
remaining $200.0 million of the MoneyGram credit facilities
is available for general corporate purposes.
Basis of Presentation
Our consolidated financial statements are prepared in conformity
with accounting principles generally accepted in the United
States of America (“GAAP”). The consolidated financial
statements include the historical results of operations of Viad
in discontinued operations in accordance with the provisions of
Statement of Financial Accounting Standards (“SFAS”)
No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. There are certain amounts related to
other investment income, debt and costs associated with
Viad’s centralized corporate functions that are related to
Viad, but in accordance with GAAP are not allowed to be
reflected in discontinued operations as these costs were not
specifically allocated to Viad subsidiaries. The consolidated
financial statements may not necessarily be indicative of our
results of operations, financial position and cash flows in the
future or what our results of operations, financial position and
cash flows would have been had we operated as a stand-alone
company during the periods presented.
In March 2004, we completed the sale of Game Financial
Corporation for approximately $43.0 million in cash. Game
Financial Corporation provides cash access services to casinos
and gaming establishments throughout the United States. As a
result of the sale, we recorded an after-tax gain of
$11.4 million in the first quarter of 2004. In addition, in
June 2004, we recorded an after-tax gain of $1.1 million
from the settlement of a lawsuit brought by Game Financial
Corporation. These amounts are reflected in the Consolidated
Statements of Income in “Income and gain from discontinued
operations, net of tax.”
The “Income and gain from discontinued operations, net of
tax” component in the consolidated statement of income
contains the operating results of Viad, including spin related
costs of $14.6 million, in addition to the Game Financial
Corporation gains totaling $12.5 million as described
above. The following discussion of our results of operations is
focused on our continuing businesses.
RESULTS OF OPERATIONS
Highlights
Following are highlights of operating results from continuing
operations and trends in 2004:
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|
| |
• |
The Global Funds Transfer segment revenue grew 18 percent
in 2004, driven by 28 percent revenue growth in money
transfer. |
| |
| |
• |
Our money order transaction volume was relatively flat in 2004,
despite a market trend of declining paper-based instruments.
Based on current industry information, the trend in paper-based
payment instruments is estimated to be an annual decline of
five to eight percent. |
| |
| |
• |
The net investment margin of 1.42 percent (see
Table 3) improved over the 2003 net investment margin of
1.30 percent primarily due to declining swap costs. |
| |
| |
• |
We had net securities gains of $9.6 million pre-tax in 2004
compared to net securities losses of $4.9 million in 2003.
This improvement resulted primarily from the early pay off of a
security in the third quarter of 2004 for a gain and lower
impairment costs as the overall credit quality of our portfolio
improved over 2003. |
| |
| |
• |
A charge of $20.7 million pre-tax for preferred stock and
debt redemption costs was incurred in connection with the
spin-off. |
| |
| |
• |
We wrote off capitalized technology costs primarily related to a
discontinued development project with Concorde EFS in the third
quarter of 2004. The third quarter charge of $3.1 million
pre-tax is included in “Transaction and operations
support” expense. |
| |
| |
• |
We wrote off other intangible assets related to acquired
customer lists for a known departure of a customer in the third
quarter of 2004. The charge of $2.1 million pre-tax is
included in “Transaction and operations support”
expense. |
| |
| |
• |
We incurred $10.2 million of spin-off transaction costs in
the first half of 2004 as the accounting successor to Viad that
could not be reflected in discontinued operations. |
In 2003 and 2002, we faced market challenges and difficult
economic conditions. While our businesses experienced increased
transaction volume and higher investment balances, our operating
income growth was slowed due to historically low interest rates
and unprecedented mortgage refinancing activity. With higher
average float balances from greater numbers of
12
official checks issued for mortgage refinancings, and
accelerated prepayments from mortgage-backed securities in our
portfolio, funds were invested or reinvested at historically low
interest rates. We also recorded significant
other-than-temporary impairment losses and adjustments on
certain investments in 2003 and 2002 as the overall credit
quality of our portfolio declined. In 2004, the refinancing
activity declined from 2003, causing average investable balances
to decline. Although credit quality in our investment portfolio
improved and swap costs declined, the increase in short-term
interest rates that began in 2004 mitigated these improvements.
Components of Net Revenue
Our net revenue consists of fee and other revenue, investment
revenue and net securities gains and losses, less commission
expense. We generate net revenue primarily by charging
transaction fees in excess of third-party agent commissions,
managing foreign currency exchange and managing our investments
to provide returns in excess of commissions paid to financial
institution customers.
We derive revenue primarily through service fees charged to
consumers and through our investments. Fee and other revenue
consist of transaction fees, foreign exchange and other revenue.
Transaction fees are fees earned on the sale of money transfers,
retail money order and bill payment products. Money transfer
transaction fees are fixed per transaction and may vary based
upon the face value of the amount of the transaction and the
location in which the money transfer originates and to which it
is sent. Money order and bill payment transaction fees are fixed
per transaction. Foreign exchange revenue is derived from the
management of currency exchange spreads on international money
transfer transactions. Other revenue consists of processing fees
on rebate checks and controlled disbursements, service charges
on aged outstanding money orders, money order dispenser fees and
other miscellaneous charges.
Investment revenue consists of interest and dividends 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 balances vary based on the
number of payment instruments sold, the average face amount of
those payment instruments and the average length of time that
passes until the instruments are presented for payment. Net
securities gains and losses consist of realized gains and losses
on the sale of investments, as well as other-than-temporary
impairments of investments.
We incur commission expense on our money transfer products and
our investments. We pay fee commissions to our third-party
agents for money transfer services. In a money transfer
transaction, both the agent initiating the transaction and the
agent disbursing the funds receive a commission. The commission
amount generally is based on a percentage of the fee charged to
the consumers. We generally do not pay commissions to agents on
the sale of money orders. Fee commissions also include the
amortization of capitalized incentive payments to agents.
Investment commissions are amounts paid to financial institution
customers based on the average outstanding cash balances
generated by the sale of official checks, as well as costs
associated with swaps and the sale of receivables program. In
connection with our interest rate swaps, we pay a fixed amount
to a counterparty and receive a variable rate payment in return.
To the extent that the fixed rate exceeds the variable rate, we
incur an expense related to the swap; conversely, if the
variable rate exceeds the fixed rate, we receive income related
to the swap. Under our receivables program, we sell our
receivables at a discount to accelerate our cash flow; this
discount is recorded as an expense. Commissions paid to
financial institution customers generally are variable based on
short-term interest rates. We utilize interest rate swaps, as
described above, to convert a portion of our variable rate
commission payments to fixed rate payments. These swaps assist
us in managing the interest rate risk associated with the
variable rate commissions paid to our financial institution
customers.
13
Table 1 — Results of Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
As a Percentage of | |
| |
|
|
|
|
|
|
|
2004 | |
|
2003 | |
|
Total Revenue | |
| |
|
|
|
|
|
|
|
vs | |
|
vs | |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 | |
|
2002 | |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
|
|
|
|
|
|
|
|
(%) | |
| |
|
(Dollars in thousands) | |
|
(%) | |
|
(%) | |
|
(%) | |
|
(%) | |
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fee and other revenue
|
|
$ |
500,940 |
|
|
$ |
419,002 |
|
|
$ |
365,635 |
|
|
|
20 |
|
|
|
15 |
|
|
|
61 |
|
|
|
57 |
|
|
|
52 |
|
| |
Investment revenue
|
|
|
315,983 |
|
|
|
323,099 |
|
|
|
351,332 |
|
|
|
(2 |
) |
|
|
(8 |
) |
|
|
38 |
|
|
|
44 |
|
|
|
50 |
|
| |
Securities gains and losses, net
|
|
|
9,607 |
|
|
|
(4,878 |
) |
|
|
(9,277 |
) |
|
|
NM |
|
|
|
NM |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total revenue
|
|
|
826,530 |
|
|
|
737,223 |
|
|
|
707,690 |
|
|
|
12 |
|
|
|
4 |
|
|
|
100 |
|
|
|
100 |
|
|
|
100 |
|
| |
Fee commissions expense
|
|
|
183,561 |
|
|
|
144,997 |
|
|
|
118,268 |
|
|
|
27 |
|
|
|
23 |
|
|
|
22 |
|
|
|
20 |
|
|
|
17 |
|
| |
Investment commissions expense
|
|
|
219,912 |
|
|
|
232,336 |
|
|
|
240,152 |
|
|
|
(5 |
) |
|
|
(3 |
) |
|
|
27 |
|
|
|
32 |
|
|
|
34 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total commissions expense
|
|
|
403,473 |
|
|
|
377,333 |
|
|
|
358,420 |
|
|
|
7 |
|
|
|
5 |
|
|
|
49 |
|
|
|
51 |
|
|
|
51 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net revenue
|
|
|
423,057 |
|
|
|
359,890 |
|
|
|
349,270 |
|
|
|
18 |
|
|
|
3 |
|
|
|
51 |
|
|
|
49 |
|
|
|
49 |
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Compensation and benefits
|
|
|
126,641 |
|
|
|
107,497 |
|
|
|
99,689 |
|
|
|
18 |
|
|
|
8 |
|
|
|
15 |
|
|
|
15 |
|
|
|
14 |
|
| |
Transaction and operations support
|
|
|
120,767 |
|
|
|
101,513 |
|
|
|
96,608 |
|
|
|
19 |
|
|
|
5 |
|
|
|
15 |
|
|
|
14 |
|
|
|
14 |
|
| |
Depreciation and amortization
|
|
|
29,567 |
|
|
|
27,295 |
|
|
|
25,894 |
|
|
|
8 |
|
|
|
5 |
|
|
|
4 |
|
|
|
4 |
|
|
|
4 |
|
| |
Occupancy, equipment and supplies
|
|
|
30,828 |
|
|
|
25,557 |
|
|
|
25,180 |
|
|
|
21 |
|
|
|
1 |
|
|
|
4 |
|
|
|
3 |
|
|
|
4 |
|
| |
Interest expense
|
|
|
5,573 |
|
|
|
9,857 |
|
|
|
15,212 |
|
|
|
(43 |
) |
|
|
(35 |
) |
|
|
1 |
|
|
|
1 |
|
|
|
2 |
|
| |
Debt tender and redemption costs
|
|
|
20,661 |
|
|
|
— |
|
|
|
— |
|
|
|
NM |
|
|
|
NM |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total expenses
|
|
|
334,037 |
|
|
|
271,719 |
|
|
|
262,583 |
|
|
|
23 |
|
|
|
3 |
|
|
|
40 |
|
|
|
37 |
|
|
|
37 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
89,020 |
|
|
|
88,171 |
|
|
|
86,687 |
|
|
|
1 |
|
|
|
2 |
|
|
|
11 |
|
|
|
12 |
|
|
|
12 |
|
|
Income tax expense
|
|
|
23,891 |
|
|
|
12,485 |
|
|
|
11,923 |
|
|
|
91 |
|
|
|
5 |
|
|
|
3 |
|
|
|
2 |
|
|
|
2 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
65,129 |
|
|
$ |
75,686 |
|
|
$ |
74,764 |
|
|
|
(14 |
) |
|
|
1 |
|
|
|
8 |
|
|
|
10 |
|
|
|
11 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM =
Not meaningful
Compared to 2003, total revenue in 2004 increased by
$89.3 million, or 12 percent, and net revenue
increased $63.2 million, or 18 percent, primarily
driven by transaction growth in the money transfer business and
an increase in net securities gains. Total revenue in 2003
increased by $29.5 million, or four percent, and net
revenue increased $10.6 million, or three percent, over
2002, driven by transaction growth in the money transfer
business, partially offset by lower investment revenue.
Total expenses, excluding commissions, increased in 2004 by
$62.3 million, or 23 percent, over 2003. Total
expenses in 2004 include debt tender and redemption costs of
$20.7 million related to the redemption of Viad’s
preferred shares and tender for its subordinated debt and medium
term notes in connection with the spin-off. Other increases to
total expenses totaled $41.6 million and were driven by
transaction growth, marketing and employee-related expenses
supporting our revenue growth. Total expenses, excluding
commissions, increased in 2003 by $9.1 million, or
three percent, over 2002, primarily due to higher incentive
and profit-sharing compensation as more incentive targets were
met, the addition of employees and related compensation expense
and higher transaction and operations support costs.
14
Table 2 — Net Fee Revenue Analysis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
2004 vs | |
|
2003 vs | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Fee and other revenue
|
|
$ |
500,940 |
|
|
$ |
419,002 |
|
|
$ |
365,635 |
|
|
$ |
81,938 |
|
|
$ |
53,367 |
|
|
Fee commissions expense
|
|
|
(183,561 |
) |
|
|
(144,997 |
) |
|
|
(118,268 |
) |
|
|
(38,564 |
) |
|
|
(26,729 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net fee revenue
|
|
$ |
317,379 |
|
|
$ |
274,005 |
|
|
$ |
247,367 |
|
|
$ |
43,374 |
|
|
$ |
26,638 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions as a % of fee and other revenue
|
|
|
36.6 |
% |
|
|
34.6 |
% |
|
|
32.3 |
% |
|
|
|
|
|
|
|
|
Fee and other revenue includes fees on money transfer
transactions, money orders and official check transactions. It
is a growing portion of our total revenue, increasing to
61 percent of total revenue for 2004 from 52 percent
in 2002. Fee and other revenue in 2004 grew 20 percent
compared to the prior year, primarily driven by transaction
growth in our money transfer and urgent bill payment services,
with volume increasing 36 percent during the year. Revenue
growth rates are lower than money transfer volume growth rates
due to targeted pricing initiatives in the money transfer
business and product mix (higher money transfer transaction
growth with flat money order growth).
For 2003 and 2002, fee and other revenue was 57 and
52 percent of total revenue, respectively, with
15 percent growth in 2003 over the prior year. This
increase is primarily driven by transaction growth in our money
transfer and urgent bill payment services, with volume
increasing 32 percent during 2003. As in 2004, revenue
growth rates are lower than money transfer volume growth rates.
Fee commissions consist primarily of fees paid to our
third-party agents for the money transfer service. Fee
commissions expense was up 27 percent for 2004 as compared
to the prior year, primarily driven by higher transaction
volume. Fiscal 2003 fee commissions expense was up
23 percent over 2002, again primarily due to higher
transaction volume.
Net fee revenue increased $43.4 million, or
16 percent, in 2004 as compared to 2003, driven by the
increase in money transfer and urgent bill payment transactions.
Growth in net fee revenue was lower than fee and other revenue
growth primarily due to the pricing structure of certain large
money order customers, as well as product mix. Net fee revenue
increased $26.6 million, or 11 percent, in 2003 as
compared to 2002 primarily due to the increase in money transfer
and urgent bill payment transaction volumes. Growth in net fee
revenue was lower than fee and other revenue growth in 2003,
primarily due to product mix.
Table 3 — Net Investment Revenue Analysis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
2004 vs | |
|
2003 vs | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Components of net investment revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Investment revenue
|
|
$ |
315,983 |
|
|
$ |
323,099 |
|
|
$ |
351,332 |
|
|
$ |
(7,116 |
) |
|
$ |
(28,233 |
) |
| |
Investment commissions expense (1)
|
|
|
(219,912 |
) |
|
|
(232,336 |
) |
|
|
(240,152 |
) |
|
|
12,424 |
|
|
|
7,816 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment revenue
|
|
$ |
96,071 |
|
|
$ |
90,763 |
|
|
$ |
111,180 |
|
|
$ |
5,308 |
|
|
$ |
(20,417 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cash equivalents and investments
|
|
$ |
6,772,124 |
|
|
$ |
6,979,247 |
|
|
$ |
6,131,145 |
|
|
$ |
(207,123 |
) |
|
$ |
848,102 |
|
| |
Payment service obligations (2)
|
|
|
5,370,768 |
|
|
|
5,615,562 |
|
|
|
4,706,324 |
|
|
|
(244,794 |
) |
|
|
909,238 |
|
|
Average yields earned and rates paid (3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Investment yield
|
|
|
4.67 |
% |
|
|
4.63 |
% |
|
|
5.73 |
% |
|
|
0.04 |
% |
|
|
(1.10 |
%) |
| |
Investment commission rate
|
|
|
4.09 |
% |
|
|
4.14 |
% |
|
|
5.10 |
% |
|
|
(0.04 |
%) |
|
|
(0.97 |
%) |
|
Net investment margin
|
|
|
1.42 |
% |
|
|
1.30 |
% |
|
|
1.81 |
% |
|
|
0.12 |
% |
|
|
(0.51 |
%) |
|
|
| (1) |
Investment commissions expense includes payments made to
financial institution customers based on short-term interest
rate indices on the outstanding balances of official checks sold
by that financial institution, as well as costs associated with
swaps and the sale of receivables program. |
15
|
|
| (2) |
Commissions are paid to financial institution customers based
upon average outstanding balances generated by the sale of
official checks only. The average balance in the table reflects
only the payment service obligations for which commissions are
paid and does not include the average balance of the sold
receivables ($404.6 million, $428.1 and $440.0 million
for 2004, 2003 and 2002, respectively) as these are not recorded
in the Consolidated Balance Sheets. |
| |
| (3) |
Average yields/rates are calculated by dividing the applicable
amount shown in the “Components of net investment
revenue” section by the applicable amount shown in the
“Average balances” section. The “Net investment
margin” is calculated by dividing “Net investment
revenue” by the “Cash equivalents and
investments” average balance. |
Investment revenue declined two percent in 2004 over 2003,
primarily driven by lower average investable balances. The
higher average investable balances in 2003 resulted from the
unprecedented mortgage refinancing activity that occurred during
late 2002 and into 2003 due to the dramatic decline in interest
rates. Refinancing activities caused an increase in the sale of
official checks and, therefore, an increase in our average
investable balances. In 2004, the refinancing activity declined,
causing average investable balances to decline. The refinancing
activity in 2003 also caused a significant increase in the
prepayments of mortgage-backed debt securities in our investment
portfolio, the proceeds of which we reinvested at lower interest
rates. Investment revenue decreased eight percent in 2003 versus
2002, primarily due to our reinvestment in lower interest rate
securities resulting from the significant prepayments of
mortgage-backed debt securities, partially offset by higher
average investable balances.
Investment commissions expense in 2004 declined by five percent
from 2003, primarily due to lower swap costs, partially offset
by higher commissions paid to financial institution customers as
a result of higher short-term rates. Lower swap costs are the
result of maturing high rate swaps being replaced by lower rate
swaps, increases in the short-term rates and lower notional swap
balances. Investment commissions expense in 2003 decreased by
three percent from 2002, primarily due to lower swap balances
and lower commissions paid to financial institution customers as
short-term interest rates declined in 2003.
Net investment revenue increased by six percent in 2004 compared
to 2003, with the net investment margin increasing 12 basis
points to 1.42 percent. During the same period, the average
Fed Funds rate increased 22 basis points and the average 5-year
U.S. Treasury Note increased 47 basis points. The unprecedented
mortgage refinancing activity in 2003 and 2002 caused the net
investment margin to fall 51 basis points in 2003, while the
2004 net investment margins benefited from declining swap costs.
Net investment revenue decreased by 18 percent in 2003
compared to 2002, with the net investment margin declining 51
basis points to 1.30 percent. During the same period, the
Fed Funds rate declined 54 basis points and the 5-year U.S.
Treasury Note declined 93 basis points.
Table 4 — Summary of Gains, Losses and
Impairments
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
2004 vs | |
|
2003 vs | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Gross realized gains
|
|
$ |
31,903 |
|
|
$ |
26,058 |
|
|
$ |
20,594 |
|
|
$ |
5,845 |
|
|
$ |
5,464 |
|
|
Gross realized losses
|
|
|
(6,364 |
) |
|
|
(3,019 |
) |
|
|
(4,094 |
) |
|
|
(3,345 |
) |
|
|
1,075 |
|
|
Other-than-temporary impairments
|
|
|
(15,932 |
) |
|
|
(27,917 |
) |
|
|
(25,777 |
) |
|
|
11,985 |
|
|
|
(2,140 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net securities gains and losses
|
|
$ |
9,607 |
|
|
$ |
(4,878 |
) |
|
$ |
(9,277 |
) |
|
$ |
14,485 |
|
|
$ |
4,399 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As shown in Table 4, net securities gains and losses increased
in 2004 to a net gain of $9.6 million from a net loss of
$4.9 million in 2003 as a result of the early pay off of a
security held in the investment portfolio and lower impairment
charges. Impairments in 2004 related primarily to investments
backed by aircraft and manufactured housing collateral. The
decline in impairments in 2004 reflects the overall improvement
in the credit quality of our portfolio. Net securities gains and
losses increased in fiscal 2003 from a net loss of
$9.3 million in 2002 as a result of the repositioning of
the portfolio and market conditions in 2003.
16
Expenses
Expenses include various operating expenses, other than
commissions. As MoneyGram is the accounting successor to Viad,
expenses through June 30, 2004 also include corporate
overhead that Viad did not allocate to its subsidiaries and,
consequently, cannot be classified as discontinued operations.
Included in the first six months of 2004 are approximately
$10.2 million of these expenses, which will not be incurred
by MoneyGram in the future. However, we are obligated under an
Interim Services Agreement with Viad to pay approximately
$1.6 million annually from July 1, 2004 for certain
corporate services provided to MoneyGram by Viad. In addition,
during the second half of 2004, MoneyGram incurred approximately
$4.6 million in public company and related expenses.
Following is a discussion of the operating expenses for the
periods presented in Table 1.
Compensation and benefits — Compensation and
benefits includes salaries and benefits, management incentive
programs, severance costs and other employee related costs.
Included in 2004 are $4.3 million of expenses allocated
from Viad that will not recur in 2005. Compensation and benefits
increased 18 percent in 2004 compared to 2003, primarily driven
by higher incentive accruals, higher pension and benefit costs
and hiring of additional employees. In addition, 2003 benefited
from a pension curtailment gain of $3.8 million. Because of
the adverse impact that declining interest rates had on the
Company’s performance in 2003, incentive accruals were
substantially lower in 2003. The total number of employees
increased in 2004 to drive money transfer growth and handle
public company responsibilities. Compensation and benefits
increased eight percent in 2003 compared to 2002, primarily
driven by additional employees supporting the money transfer
growth and higher incentive accruals, partially offset by the
$3.8 million pension curtailment gain.
Transaction and operations support —
Transaction and operations support expenses include marketing
costs, professional fees and other outside services costs,
telecommunications and forms expense related to our products.
Included in 2004 are $5.4 million of expenses allocated
from Viad that will not recur in 2005. Transaction and
operations support costs were up 19 percent in 2004 over
2003, partially driven by the impairment of capitalized
technology costs of $4.5 million related to the
discontinued development of a project with Concorde EFS and
other discontinued projects and the impairment of intangible
assets of $2.1 million related to a purchased customer list
for an expected customer departure. The remaining increase in
transaction and operations support expense is driven primarily
by higher insurance costs, public company costs and higher
provisions for uncollectible agent receivables. The higher
provision for uncollectible agent receivables is primarily the
result of losses experienced in the check casher channel.
Certain agents, particularly in New York, have experienced
reduced liquidity as a result of the withdrawal of a major
financial institution that previously served this channel.
Transaction and operations support expenses increased five
percent in 2003 over 2002, primarily due to higher legal and
other professional services in the money transfer business and
increases in general insurance costs and recruiting costs,
partially offset by higher interest income. In addition, 2002
included $5.3 million of minority interest expense related
to a joint venture.
Depreciation and amortization — Depreciation
and amortization includes depreciation on point of sale
equipment, computer hardware and software (including capitalized
software development costs), and office furniture, equipment and
leasehold improvements. Depreciation and amortization expense
was up eight percent in 2004 over 2003, primarily due to the
amortization of capitalized software developed to enhance the
money transfer platform. These investments helped drive the
growth in the money transfer product. Fiscal 2003 saw an
increase of five percent in depreciation and amortization
expense over 2002, primarily due to investments in money
transfer equipment and money order signage.
Occupancy, equipment and supplies — Occupancy,
equipment and supplies includes facilities rent and maintenance
costs, software and equipment maintenance costs, freight and
delivery costs, and supplies. Included in 2004 are
$0.4 million of expenses allocated from Viad that will not
recur in 2005. Occupancy, equipment and supplies in 2004
increased 21 percent over 2003, primarily due to normal
increases in facilities rent, higher software maintenance costs
and losses on disposal of equipment. Fiscal 2003 saw a one
percent increase in occupancy, equipment and supplies expense
over 2002, primarily due to software and equipment maintenance
costs.
Interest expense — Interest expense declined
43 percent in 2004 as compared to 2003 on lower average
outstanding debt balances and lower average interest
17
rates. Viad paid down $249.6 million of debt in 2004 in
connection with the spin-off. Beginning in the second half of
2004, interest expense incurred relates to the
$150.0 million MoneyGram borrowed under its credit facility
on June 30, 2004 in connection with the spin-off. Interest
expense on this MoneyGram debt was $2.4 million in 2004,
including amortization of deferred financing costs. Interest
expense in 2003 declined 35 percent over 2002 due to lower
average interest rates and lower average outstanding debt
balances resulting from $100.0 million of medium-term
senior notes that matured in 2003.
Debt tender and redemption costs — Debt tender
and redemption costs incurred during 2004 of $20.7 million
relate to the redemption of Viad’s preferred shares and
tender for its subordinated debt and medium term notes in
connection with the spin-off. No such costs were incurred in
2003 or 2002. These costs will not recur in 2005.
Income taxes — The effective tax rate was
27 percent in 2004 compared to 14 percent in 2003. The
corporate tax rate is lower than the statutory rate due
primarily to income from tax-exempt bonds in our investment
portfolio. The 2004 effective tax rate is higher than 2003
mainly due to the costs related to the redemption of Viad’s
redeemable preferred shares, which are not tax deductible. We
expect our marginal tax rate to be approximately 25 percent
in 2005. The effective tax rate for 2003 remained stable from
2002.
Segment Performance
We measure financial performance by our two business segments:
|
|
| |
Global Funds Transfer — this segment provides global
money transfer services, money orders and bill payment services
to consumers through a network of agents. Fee revenue is driven
by transaction volume and fees per transaction. In addition,
investment and related income is generated by investing funds
received from the sale of money orders until the instruments are
settled. |
| |
| |
Payment Systems — this segment provides financial
institutions with payment processing services, primarily
official check outsourcing services and money orders for sale to
their customers, and processes controlled disbursements.
Investment and related income is generated by investing funds
received from the sale of payment instruments until the
instruments are settled. In addition, revenue is derived from
per-item fees paid by our financial institution customers. |
The business segments are determined based upon factors such as
the type of customers, the nature of products and services
provided and the distribution channels used to provide those
services. Segment pre-tax operating income and segment operating
margin are used to evaluate performance and allocate resources.
We manage our investment portfolio on a consolidated level and
the specific investment securities are not identifiable to a
particular segment. However, average investable balances are
allocated to our segments based upon the average balances
generated by that segment’s sale of payment instruments.
The investment yield is generally allocated based upon the total
average investment yield. Gains and losses are allocated based
upon the allocation of average investable balances. Our
derivatives portfolio is also managed on a consolidated level
and the derivative instruments are not specifically identifiable
to a particular segment. The total costs associated with our
derivatives portfolio are allocated to each segment based upon
the percentage of that segment’s average investable
balances to the total average investable balances. Table 5
reconciles segment operating income to income from continuing
operations before income taxes as reported in the financial
statements.
18
Table 5 — Segment Information
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Operating income:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Global Funds Transfer
|
|
$ |
102,606 |
|
|
$ |
96,823 |
|
|
$ |
93,909 |
|
| |
Payment Systems
|
|
|
27,163 |
|
|
|
15,123 |
|
|
|
21,658 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total segment operating income
|
|
|
129,769 |
|
|
|
111,946 |
|
|
|
115,567 |
|
|
Debt tender and redemption costs
|
|
|
20,661 |
|
|
|
— |
|
|
|
— |
|
|
Interest expense
|
|
|
5,573 |
|
|
|
9,857 |
|
|
|
15,212 |
|
|
Other unallocated expenses
|
|
|
14,515 |
|
|
|
13,918 |
|
|
|
13,668 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$ |
89,020 |
|
|
$ |
88,171 |
|
|
$ |
86,687 |
|
| |
|
|
|
|
|
|
|
|
|
Other unallocated expenses include Viad corporate overhead that
was not allocated to its subsidiaries and could not be
classified as discontinued operations, as well as certain
pension and benefit obligation expenses that were retained by
MoneyGram in the spin-off that are not allocated to the
segments. After the spin-off, other unallocated expense
represents pension and benefit obligation expense, as well as
interim service fees paid to Viad. These expenses totaled
$4.3 million in the second half of 2004.
Table 6 — Global Funds Transfer Segment
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
2004 vs | |
|
2003 vs | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Revenue
|
|
$ |
532,064 |
|
|
$ |
450,108 |
|
|
$ |
412,953 |
|
|
|
18 |
% |
|
|
9 |
% |
|
Operating income
|
|
|
102,606 |
|
|
|
96,823 |
|
|
|
93,909 |
|
|
|
6 |
% |
|
|
3 |
% |
|
Operating margin
|
|
|
19.3 |
% |
|
|
21.5 |
% |
|
|
22.7 |
% |
|
|
(2.2 |
%) |
|
|
(1.2 |
%) |
Global Funds Transfer revenue includes investment revenue,
securities gains and losses and fees on money transfers, retail
money orders and bill payment products. Revenue increased
18 percent in 2004 over 2003, primarily driven by the
growth in the money transfer and urgent bill payment services as
total transaction volume grew 36 percent. Domestic
originated transactions (including urgent bill payment) grew
38 percent, while international originated transactions
grew 31 percent for the same periods. This growth is a
result of our targeted pricing initiatives to provide a strong
consumer value proposition supported by targeted marketing
efforts. In addition, the money transfer agent base expanded
22 percent over 2003, primarily in the international
markets, to over 77,000 locations. Revenue increased nine
percent in 2003 over 2002, primarily driven by money transfer
and bill payment services as transaction volumes increased by
32 percent. The money transfer and bill payment services
growth was partially offset by a decline in money order fee
revenue due to declining transaction volumes and lower
investment revenue from declining interest rates.
Retail money order volume was flat in 2004, despite an industry
trend of declining paper-based instruments. Investment revenue
in Global Funds Transfer increased four percent in 2004 compared
to 2003 primarily due to higher average investable balances.
Revenue in 2004 also included $2.3 million in net
securities gains, compared to a $1.0 million net loss in
2003. Retail money order volume declined seven percent in 2003
from 2002 due to the loss of certain agents, partially offset by
strong growth in sales at one customer.
Commissions expense in 2004 was up 24 percent compared to
2003, primarily driven by the 20 percent combined growth in
fee and other revenue. Commissions expense as a percentage of
revenue of 39.2 percent in 2004 increased from 36.7 percent
in 2003 primarily due to the pricing structure of certain large
money order customers, as well as product mix as we continue to
see growth in the money transfer business compared to money
orders. We anticipate this trend to continue with the continued
growth of the money transfer business. As compared to 2002,
commissions expense in 2003 was up 16 percent, primarily
driven by the 16 percent combined growth in fee and other
revenue. Commissions expense as a percentage of
19
revenue increased from 34.5 percent in 2002 due to the
shift in business mix towards money transfer.
Operating income in 2004 includes $2.3 million in net
securities gains and a $4.5 million charge for capitalized
technology costs. The operating margin of 19.3 percent in
2004 decreased from the margin of 21.5 percent in 2003 as a
result of the product mix shift from retail money orders to
money transfer, as well as the decline in margins of the retail
money order business. Fiscal 2003 operating margin decreased
from 2002 operating margin of 22.7 due to the product mix shift
to money transfer.
Table 7 — Payment Systems Segment
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
2004 vs | |
|
2003 vs | |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Revenue
|
|
$ |
294,466 |
|
|
$ |
287,115 |
|
|
$ |
294,737 |
|
|
|
3 |
% |
|
|
(3% |
) |
|
Operating income
|
|
|
27,163 |
|
|
|
15,123 |
|
|
|
21,658 |
|
|
|
80 |
% |
|
|
(30% |
) |
|
Operating margin
|
|
|
9.2% |
|
|
|
5.3% |
|
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
|
Taxable equivalent basis (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Revenue
|
|
$ |
315,207 |
|
|
$ |
312,627 |
|
|
$ |
323,195 |
|
|
|
1 |
% |
|
|
(3% |
) |
| |
Operating income
|
|
|
47,905 |
|
|
|
40,635 |
|
|
|
50,116 |
|
|
|
18 |
% |
|
|
(19% |
) |
| |
Operating margin
|
|
|
15.2% |
|
|
|
13.0% |
|
|
|
15.5 |
% |
|
|
|
|
|
|
|
|
(1) The
taxable equivalent basis numbers are non-GAAP measures that are
used by the Company’s management to evaluate the effect of
tax-exempt securities on the Payment Systems segment. The
tax-exempt investments in the investment portfolio have lower
pre-tax yields, but produce higher income on an after-tax basis
than comparable taxable investments. An adjustment is made to
present revenue and operating income resulting from amounts
invested in tax-exempt securities on a taxable equivalent basis.
The adjustment is calculated using a 35 percent tax rate
and is $20.7 million, $25.5 million and
$28.5 million for 2004, 2003 and 2002, respectively. The
presentation of taxable equivalent basis numbers is supplemental
to results presented under GAAP and may not be comparable to
similarly titled measures used by other companies. These
non-GAAP measures should be used in addition to, but not as a
substitute for measures presented under GAAP.
Payment Systems revenue includes investment revenue, securities
gains and losses, per-item fees charged to our official check
financial institution customers and fees earned on our rebate
processing business. Revenue increased three percent during 2004
compared to 2003, due to an increase in net securities gains and
fee revenue, partially offset by a decline in investment
revenue. Net securities gains increased $11.2 million
during 2004 primarily because of the early pay off of a security
held in the portfolio, partially offset by impairments of
certain securities and realized losses from repositioning the
portfolio. Investment revenue declined four percent during 2004
compared to 2003 primarily due to lower investable balances as
the heavy consumer refinancing activity during 2003 declined.
Revenue decreased three percent during 2003 as compared to 2002,
primarily due to the interest rate environment. The lower
interest rates earned in 2003 were primarily due to the
unprecedented mortgage refinance activity, which caused higher
average float balances and prepayments of mortgage-backed debt
securities held in the portfolio. The higher float balances and
proceeds from prepayments were reinvested in investments with
lower interest rates than those seen in 2002. This caused the
average investment yield to decline 110 basis points in 2003 to
4.63 percent from 5.73 percent in 2002.
Commissions expense includes payments made to financial
institution customers based on official check average investable
balances and short-term interest rate indices, as well as costs
associated with swaps and the sale of receivables program.
Commissions expense declined six percent in 2004 as compared to
2003, primarily due to lower swap costs, partially offset by
higher commissions paid to financial institution customers.
Commissions expense decreased two percent in 2003 as compared to
2002, primarily due to lower commissions paid to financial
institution customers, partially offset by higher swap costs.
The operating margin for 2004 increased to 9.2 percent
(15.2 percent on a taxable equivalent basis) as compared to
2003 operating margin of 5.3 percent (13.0 percent on
a taxable equivalent basis), primarily due to higher net
securities gains. Operating income in 2004 includes
$7.3 million of net securities gains and a
20
charge of $2.1 million related to intangible assets.
Operating margin for 2003 declined from the 2002 operating
margin of 7.3 percent (15.5 percent on a taxable equivalent
basis), primarily due to the interest rate environment.
Outlook
We believe that the following key items will have an impact on
our future operations. We expect:
|
|
|
| |
• |
To deliver earnings per share from continuing operations in 2005
in the range of $0.99 to $1.03, with income from continuing
operations before taxes growing 28 to 35 percent. |
| |
| |
• |
Net revenues to grow six to 12 percent to $450.0 to
$475.0 million. |
| |
| |
• |
Our net investment margin in 2005 to be 130 to 140 basis points. |
| |
| |
• |
Investable balances to average $6.5 billion in 2005. |
| |
| |
• |
To continue paying a $0.01 per share quarterly cash dividend,
subject to Board approval. |
| |
| |
• |
To increase our marketing expenditures over 40 percent to
solidify brand recognition. |
| |
| |
• |
To no longer incur certain overhead costs allocated to us by
Viad prior to the spin-off. These costs were $10.2 million
during the first half of 2004. |
| |
| |
• |
Our public company expenses to increase. In addition to other
public company expenses, 2005 will be our first year of
attesting to the operational effectiveness of our internal
controls under Section 404 of the Sarbanes-Oxley Act, with the
related costs expected to amount to approximately $0.01 per
share. |
| |
| |
• |
Our effective tax rate to be approximately 25 percent in
2005. |
In 2005, we will be required to begin recognizing expense on our
stock option awards under the new guidance of SFAS
No. 123R, Share-Based Payment. We did not factor the
impact of this new requirement into the expectations set forth
above; however, assuming we adopt SFAS No. 123R on
January 1, 2005, we expect the impact of expensing our
stock options to be approximately $0.02 per share in 2005.
LIQUIDITY AND CAPITAL RESOURCES
One of our primary financial goals is to maintain adequate
liquidity to manage the fluctuations in the balances of payment
service assets and obligations resulting from sales of official
checks, money orders and other payment instruments, the timing
of the collections of receivables, and the timing of the
presentment of such instruments for payment. In addition, we
strive to maintain adequate liquidity for capital expenditures
and other normal operating cash needs.
At December 31, 2004, we had cash and cash equivalents of
$927.0 million, net receivables of $772.0 million and
investments of $6,335.5 million, all substantially
restricted for payment service obligations. We rely on the funds
from ongoing sales of payment instruments and portfolio cash
flows to settle payment service obligations as they are
presented. Due to the continuous nature of the sales and
settlement of our payment instruments, we are able to invest in
securities with a longer term than the average life of our
payment instruments.
We are regulated by various state agencies, which generally
require us to maintain liquid assets and investments with a
rating of A or higher, in an amount generally equal to the
payment service obligation for regulated payment instruments
(teller checks, agent checks, money orders and money transfers).
We are not regulated by state agencies for our payment service
obligations resulting from outstanding cashier’s checks;
however, we restrict the funds related to these payment
instruments due to contractual arrangements and/or Company
policy. Accordingly, assets restricted for regulatory or
contractual reasons, and by Company policy are not available to
satisfy working capital or other financing requirements.
As of December 31, 2004 and 2003, we had unrestricted cash
and cash equivalents, receivables, and investments to the extent
those assets exceed all payment service obligations as
summarized in Table 8. These amounts are generally available;
however, management considers a portion of these amounts as
providing additional assurance that regulatory requirements are
maintained during the normal fluctuations in the value of
investments.
21
Table 8 — Unrestricted Assets
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Cash and cash equivalents
|
|
$ |
927,042 |
|
|
$ |
1,025,026 |
|
|
Receivables, net
|
|
|
771,966 |
|
|
|
755,734 |
|
|
Investments
|
|
|
6,335,493 |
|
|
|
6,013,757 |
|
| |
|
|
|
|
|
|
| |
|
|
8,034,501 |
|
|
|
7,794,517 |
|
|
Amounts restricted to cover payment service obligations
|
|
|
(7,640,581 |
) |
|
|
(7,421,481 |
) |
| |
|
|
|
|
|
|
| |
Unrestricted assets
|
|
$ |
393,920 |
|
|
$ |
373,036 |
|
| |
|
|
|
|
|
|
Table 9 — Cash Flows Provided By or Used In
Operating Activities
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Net income
|
|
$ |
86,412 |
|
|
$ |
113,902 |
|
|
$ |
57,886 |
|
|
Total adjustments to reconcile net income
|
|
|
87,722 |
|
|
|
61,507 |
|
|
|
43,382 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net cash provided by continuing operating activities before
changes in payment service assets and obligations
|
|
|
174,134 |
|
|
|
175,409 |
|
|
|
101,268 |
|
|
Change in cash and cash equivalents (substantially restricted)
|
|
|
75,937 |
|
|
|
286,364 |
|
|
|
(554,374 |
) |
|
Change in receivables, net (substantially restricted)
|
|
|
(22,654 |
) |
|
|
(243,789 |
) |
|
|
166,439 |
|
|
Change in payment service obligations
|
|
|
219,100 |
|
|
|
(404,474 |
) |
|
|
1,176,233 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net change in payment service assets and obligations
|
|
|
272,383 |
|
|
|
(361,899 |
) |
|
|
788,298 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash provided by (used in) continuing operating activities
|
|
$ |
446,517 |
|
|
$ |
(186,490 |
) |
|
$ |
889,566 |
|
| |
|
|
|
|
|
|
|
|
|
Table 9 summarizes the cash flows provided by (used in)
continuing operating activities. Net cash provided by continuing
operating activities before changes in payment service assets
and obligations was $174.1 million and $175.4 million
for 2004 and 2003, respectively, for a decrease of
$1.3 million. The decrease is primarily due to the lower
net income in 2004. We realized an increase of
$74.1 million in 2003 compared to net cash provided by
continuing operating activities before changes in payment
service assets and obligations of $101.3 million in 2002. This
increase is primarily due to higher net income and the timing of
payment on accounts payable and other liabilities.
To understand the cash flow activity of our business, the cash
provided by (used in) operating activities relating to the
payment service assets and obligations should be reviewed in
conjunction with the related cash provided by (used in)
investing activities related to our investment portfolio. Table
10 summarizes the cash flows provided by or used by payment
service assets and obligations, net of investment activity:
22
Table 10 — Cash Flows Provided By or Used In
Payment Service Assets and Obligations, Net of Investment
Activity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Net change in payment service assets or obligations
|
|
$ |
272,383 |
|
|
$ |
(361,899 |
) |
|
$ |
788,298 |
|
|
Proceeds from sales and maturities of investments
|
|
|
2,851,895 |
|
|
|
5,354,783 |
|
|
|
3,239,625 |
|
|
Purchases of investments
|
|
|
(3,098,498 |
) |
|
|
(4,888,918 |
) |
|
|
(4,117,626 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net investment activity
|
|
|
(246,603 |
) |
|
|
465,865 |
|
|
|
(878,001 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Cash flows provided by (used in) payment service assets and
obligations, net of investment activity
|
|
$ |
25,780 |
|
|
$ |
103,966 |
|
|
$ |
(89,703 |
) |
| |
|
|
|
|
|
|
|
|
|
During 2004, the cash flows provided by payment service assets
and obligations, net of investment activity, decreased
$78.2 million over 2003 primarily due to lower levels of
investment activity. In 2003, the Company repositioned its
portfolio and experienced a high rate of prepayments on its
mortgage-backed securities, generating significant levels of
proceeds and purchasing activity as the proceeds were
reinvested. Amounts not reinvested were primarily used to cover
payment service obligations presented for payment. Net
investment activity in 2004 represents more normal investment
activity levels, as well as growth in the business. During 2003,
the cash flows provided by payment service assets and
obligations, net of investment activity, increased $193.7
million from 2002. The high level of consumer refinancing that
began in late 2002 resulted in a significant increase in payment
service obligations and security purchases to invest the higher
levels of float.
Table 11 — Cash Flows Provided By or Used In
Investing Activities
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Net investment activity
|
|
$ |
(246,603 |
) |
|
$ |
465,865 |
|
|
$ |
(878,001 |
) |
|
Purchases of property and equipment
|
|
|
(29,589 |
) |
|
|
(27,128 |
) |
|
|
(26,842 |
) |
|
Cash paid for acquisition of minority interest
|
|
|
— |
|
|
|
(105,080 |
) |
|
|
— |
|
|
Proceeds from sale of Game Financial Corporation
|
|
|
15,247 |
|
|
|
— |
|
|
|
— |
|
|
Other
|
|
|
428 |
|
|
|
(1,341 |
) |
|
|
(1,420 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Other investing activity
|
|
|
(13,914 |
) |
|
|
(133,549 |
) |
|
|
(28,262 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Net cash (used in) provided by investing activities
|
|
$ |
(260,517 |
) |
|
$ |
332,316 |
|
|
$ |
(906,263 |
) |
| |
|
|
|
|
|
|
|
|
|
Table 11 summarizes the net cash provided by (used in)
investing activities. Investing activities primarily consist of
activity within our investment portfolio as previously
discussed. Other investing activity used cash of $13.9 million,
$133.5 million and $28.3 million in 2004, 2003 and
2002, respectively. In 2004, we received $15.2 million in
proceeds from the sale of Game Financial Corporation. In 2003,
we paid $105.1 million to acquire the remaining interest in
MoneyGram International Limited. Capital expenditures for
property and equipment of $29.6 million, $27.1 million
and $26.8 million in 2004, 2003 and 2002, respectively,
increased as we continued to invest in the money transfer
platform.
Cash Flows from Financing Activities: Net cash used in
financing activities was $111.0 million,
$139.6 million and $87.8 million in 2004, 2003 and
2002, respectively. During 2004, the main uses of cash related
to the redemption of Viad’s debt and redeemable preferred
stock for approximately $203.0 million and
$23.9 million, respectively, payments of dividends totaling
$17.4 million and the purchase of treasury stock for
$16.2 million. (Dividends paid and treasury stock purchased
by the Company subsequent to the spin-off totaled
$1.8 million and $16.2 million, respectively.) Sources
of cash in 2004 related to the $150.0 million in borrowings
made under the Company’s credit facility entered into in
connection with the spin-off. During 2003, the Company paid down
$105.7 million of debt and the revolver balance decreased
$5.0 million. In addition, the Company paid dividends
totaling $31.6 million and acquired treasury stock at a
cost of $1.0 million in 2003. Uses of cash in
23
2002 related to normal payments on debt of $44.2 million,
payment of dividends totaling $32.1 million and the
acquisition of treasury stock at a cost of $28.3 million.
Borrowings under the revolver increased $6.5 million in
2002 and the Company received proceeds upon stock option
exercises totaling $10.4 million. All 2003 and 2002
financing activities relate to actions taken by Viad.
Other Funding Sources and Requirements
In connection with the spin-off, MoneyGram entered into a bank
credit facility providing availability of up to
$350.0 million in the form of a $250.0 million
four-year revolving credit facility and a $100.0 million
term loan. On June 30, 2004, the Company borrowed
$150.0 million (consisting of the $100.0 million term
loan and $50.0 million under the revolving credit facility)
and used all of the proceeds to pay merger consideration to Viad
in connection with the spin-off. The remaining amount of the
credit facility is available for general corporate purposes and
to support letters of credit. The interest rate on both the term
loan and the credit facility is LIBOR plus 60 basis points,
subject to adjustment in the event of a change in our debt
rating. The term loan is due in two equal installments on the
third and fourth anniversary of the loan. The revolving credit
facility expires on June 30, 2008. The loans are guaranteed
on an unsecured basis by MoneyGram’s material domestic
subsidiaries. Borrowings under the bank credit facilities are
subject to various covenants, including interest coverage ratio,
leverage ratio and consolidated total indebtedness ratio. The
interest coverage ratio of earnings before interest and taxes to
interest expense must not be less than 3.5 to 1.0. The leverage
ratio of total debt to total capitalization must be less than
0.5 to 1.0. The consolidated total indebtedness ratio of total
debt to earnings before interest, taxes, depreciation and
amortization must be less than 3.0 to 1.0. At December 31,
2004, we were in compliance with these covenants. There are
other restrictions that are customary for facilities of this
type including limits on dividends, indebtedness, stock
repurchases, asset sales, mergers, acquisitions and liens. Under
the facility, our aggregate annual dividends and stock
repurchases generally may not exceed 30 percent of
consolidated net income of the prior year.
At December 31, 2004, we had reverse repurchase agreements,
letters of credit and various overdraft facilities totaling
$1.9 billion available to assist in the management of our
investments and the clearing of payment service obligations.
There where no amounts outstanding under the reverse repurchase
agreements or the overdraft facilities at December 31, 2004.
Table 12 — Contractual Obligations
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments due by period | |
| |
|
| |
| |
|
|
|
Less than | |
|
|
|
More than | |
| |
|
Total | |
|
1 year | |
|
1-3 years | |
|
3-5 years | |
|
5 years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Debt
|
|
$ |
150,000 |
|
|
$ |
— |
|
|
$ |
150,000 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Capital lease obligations
|
|
|
560 |
|
|
|
240 |
|
|
|
320 |
|
|
|
— |
|
|
|
— |
|
|
Operating leases
|
|
|
47,289 |
|
|
|
5,280 |
|
|
|
10,280 |
|
|
|
9,838 |
|
|
|
21,891 |
|
|
Derivative financial instruments
|
|
|
56,879 |
|
|
|
47,197 |
|
|
|
14,767 |
|
|
|
(4,575 |
) |
|
|
(510 |
) |
|
Interim services agreement
|
|
|
2,461 |
|
|
|
1,641 |
|
|
|
820 |
|
|
|
— |
|
|
|
— |
|
|
Other obligations
|
|
|
9,627 |
|
|
|
9,157 |
|
|
|
470 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total contractual cash obligations
|
|
$ |
266,816 |
|
|
$ |
63,515 |
|
|
$ |
176,657 |
|
|
$ |
5,263 |
|
|
$ |
21,381 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt consists of amounts outstanding under the term loan and
revolving credit facility at December 31, 2004, as
described in “Other Funding Sources.” Capital and
operating leases consist of various leases relating to buildings
and equipment. Derivative financial instruments represent the
net payable (receivable) under our interest rate swap
agreements. The interim services agreement is the obligation
under our agreement with Viad for certain services to be
provided to the Company as described in Note 3 of the Notes to
the Consolidated Financial Statements. Other obligations are
unfunded capital commitments related to our limited partnership
interests included in our investment portfolio.
MoneyGram has funded, noncontributory pension plans. Funding
policies provide that payments to
24
defined benefit pension trusts shall be equal to the minimum
funding required by applicable regulations. During 2004,
MoneyGram contributed $2.2 million to the funded pension
plans and expects to contribute $13.0 million in 2005. MoneyGram
also has certain unfunded pension and postretirement plans that
require benefit payments over extended periods of time. During
2004, we paid benefits totaling $2.8 million related to
these unfunded plans. Benefit payments under these unfunded
plans are expected to be $3.0 million in 2005. Expected
contributions and benefit payments under these plans are not
included in the table above. See “Critical Accounting
Policies — Pension obligations” for further
discussion of these plans.
We have agreements with clearing banks that provide processing
and clearing functions for money orders and official checks. One
clearing bank contract has covenants that include maintenance of
total cash and cash equivalents, receivables and investments
substantially restricted for payment services obligations at
least equal to total outstanding payment service obligations, as
well as maintenance of a minimum ratio of total assets held at
that bank to instruments clearing through that bank of
103 percent. We are in compliance with these covenants at
December 31, 2004.
Working in cooperation with various financial institutions, we
established separate consolidated entities (special purpose
entities) and processes that provide these financial
institutions with additional assurance of our ability to clear
their official checks. These processes include maintenance of
specified ratios of segregated investments to outstanding
payment instruments, typically 1 to 1. In one instance,
alternative credit support has been purchased that provides
backstop funding as additional security for payment of
instruments. However, we remain liable to satisfy the
obligations, both contractually and/or by operation of the
Uniform Commercial Code, as issuer and drawer of the official
checks. Accordingly, the obligations have been recorded in the
Consolidated Balance Sheets under “Payment service
obligations.” Under limited circumstances, clients have the
right to either demand liquidation of the segregated assets or
replace us as the administrator of the special-purpose entity.
Such limited circumstances consist of material (and in most
cases continued) failure of MoneyGram to uphold its warranties
and obligations pursuant to its underlying agreements with the
financial institution clients. While an orderly liquidation of
assets would be required, any of these actions by a client could
nonetheless diminish the value of the total investment
portfolio, decrease earnings, and result in loss of the client
or other customers or prospects. We offer the special purpose
entity to certain financial institution clients as a benefit
unique in the payment services industry.
The Company has investment grade ratings of BBB/ Baa2 and a
stable outlook from the major credit rating agencies. Our
ability to maintain an investment grade rating is important
because it affects the cost of borrowing and certain financial
institution customers require that we maintain an investment
grade rating. Any ratings downgrade could increase our cost of
borrowing or require certain actions to be performed to rectify
such a situation. A downgrade could also have an effect on our
ability to attract new customers and retain existing customers.
Although no assurance can be given, we expect operating cash
flows and short-term borrowings to be sufficient to finance our
ongoing business, maintain adequate capital levels, and meet
debt and clearing agreement covenants and investment grade
rating requirements. Should financing requirements exceed such
sources of funds, we believe we have adequate external financing
sources available, including unused commitments under our credit
facilities, to cover any shortfall.
Stockholders’ Equity
On June 30, 2004, MoneyGram charged the historical cost
carrying amount of the net assets of Viad in the amount of
$426.6 million directly to equity as a dividend.
On November 18, 2004, the Board authorized a plan to
repurchase, at the Company’s discretion, up to 2,000,000
shares of MoneyGram common stock. The Company repurchased
770,299 shares of its common stock under this plan at an average
cost of $21.01 per share.
On August 19, 2004, the Board of Directors of MoneyGram
International, Inc. declared the Company’s initial
quarterly cash dividend of $0.01 per share on the common stock.
This first quarterly dividend totaling $0.9 million was
paid on October 1, 2004 to stockholders of record at the
close of business on September 16, 2004. On
November 18, 2004, the Board of Directors declared a
quarterly cash dividend of $0.01 per share of common stock to be
paid on January 3, 2005 to stockholders of record on Decem-
25
ber 16, 2004. This dividend totaling $0.9 million was
paid by MoneyGram to the transfer agent on December 31,
2004 and was distributed to the stockholders of record on
January 3, 2005. In addition, the Board of Directors
declared a dividend of $0.01 per share of common stock on
February 17, 2005 to be paid on April 1, 2005 to
stockholders of record on March 17, 2005. The terms of our
credit facility place restrictions on the payment of dividends.
For a description of the restrictions, see Note 9 of the Notes
to the Consolidated Financial Statements. Otherwise, any future
determination to pay dividends on MoneyGram common stock will be
at the discretion of our Board of Directors and will depend on
our financial condition, results of operations, cash
requirements, prospects and such other factors as our Board of
Directors may deem relevant. The Company intends to continue
paying a quarterly dividend of $0.01 per share in 2005, subject
to Board approval, which will be funded through cash generated
from operating activities.
Viad sold treasury stock in 1992 to its employee equity trust to
fund certain existing employee compensation and benefit plans.
In connection with the spin-off, Viad transferred 1,632,964
shares of MoneyGram common stock to the MoneyGram International,
Inc. employee equity trust (the “Trust”) to be used by
MoneyGram to fund employee compensation and benefit plans. At
December 31, 2004, the Trust had 1,390,163 shares of
MoneyGram common stock. The market value of the shares held by
this Trust of $29.4 million at December 31, 2004
represents unearned employee benefits that are recorded as a
deduction from common stock and other equity and is reduced as
employee benefits are funded. For financial reporting purposes,
the Trust is consolidated.
Off-Balance Sheet Arrangements
We have an agreement to sell, on a periodic basis, undivided
percentage ownership interests in certain receivables, primarily
from our money order agents, in an amount not to exceed
$450.0 million. These receivables are sold to commercial
paper conduits (trusts) sponsored by a financial
institution and represent a small percentage of the total assets
in these conduits. Our rights and obligations are limited to the
receivables transferred, and are accounted for as sales
transactions under SFAS No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities. The assets and liabilities associated with
these conduits, including our sold receivables, are not recorded
or included in our financial statements. The agreement expires
in June 2006. The business purpose of this arrangement is to
accelerate cash flow for investment. The receivables are sold at
a discount based upon short-term interest rates. Executive
management regularly reviews performance under the terms of the
agreement. On average we sold receivables totaling
$404.6 million during 2004 for a total discount of
$9.9 million.
The Finance and Investment Committee of the Board of Directors
generally must approve any transactions and strategies,
including any potential off-balance sheet arrangements, that
materially affect investment results and cash flows.
ENTERPRISE RISK MANAGEMENT
Risk is an inherent part of our business. Interest rate risk,
liquidity risk, credit risk, operational risk, regulatory risk
and foreign currency exchange risk are the principal risks in
our business activities. The Company’s risk management
objective is to monitor and control risk exposures to produce
steady earnings growth and long-term economic value. The extent
to which we properly and effectively manage each of the various
types of risk is critical to our financial condition and
profitability.
Management implements Board approved policies covering the
Company’s funding, investments and use of derivatives. The
Company’s Board of Directors has established a Finance and
Investment Committee, consisting of four independent Board
members, which oversees the investment, capital, credit and
foreign currency policies and strategies. An Asset/ Liability
Committee, comprised of senior management, routinely reviews
investment and risk management strategies and results. The
Board’s Finance and Investment Committee receives periodic
reports regarding the investment portfolio and results.
The following discussion of our risk management procedures for
our principal risks and the estimated amounts of our exposure
contains forward-looking statements. The analyses used to assess
such risks are not predictions of future events, and actual
results may vary significantly due to events in the markets in
which we operate and certain other factors as described in the
following discussion.
26
Interest Rate Risk
Interest rate risk represents the potential reduction in net
investment revenue as a result of fluctuations in market
interest rates. Fluctuations in interest rates affect the
revenue produced by our investment portfolio, the amount of
commissions that we pay to customers in our Payment Systems
segment, the net proceeds from our sale of receivables and the
amounts that we receive under our interest rate derivatives. As
a result, our net investment revenue, which is the difference or
“spread” between the amount we earn on our investment
portfolio and the commissions we pay and the discount on the
sale of receivables, net of the effect of interest rate
derivatives or “swaps”, is subject to interest rate
risk as the components of net investment revenue are not
perfectly matched through time and across all possible interest
rate scenarios. Interest rate risk is concentrated in the
investment portfolio.
Certain investments in our portfolio, primarily fixed-rate
mortgage-backed investments, are subject to prepayment with no
penalty to the borrower. As interest rates decrease, borrowers
are more likely to prepay fixed-rate debt, resulting in cash
flows that are received earlier than expected. Replacing the
higher-rate investments that prepay with lower rate investments
could reduce our net investment revenue. Conversely, an increase
in interest rates may result in slower than expected prepayments
and, therefore, cash flows that are received later than
expected. In this case, there is risk that the cost of our
commission payments may reprice faster than our investments and
at a higher cost, which could reduce our net investment revenue.
An additional component of interest rate risk is market risk
that arises from fluctuations in interest rates that may result
in changes in the values of investments and swaps. Rate
movements can affect the repricing of assets and liabilities
differently, as well as their market value. Stockholders’
equity can also be adversely affected by changing interest
rates, as after-tax changes in the fair value of securities
classified as available-for-sale and after-tax changes in the
fair value of swaps are reflected as increases and decreases to
a component of stockholders’ equity. The fair value of our
swaps generally increases when the market value of fixed rate,
long-term debt investments decline and vice versa. However, the
changes in the fair value of swaps and investments may not fully
offset in stockholders’ equity.
The Company’s strategy in managing interest rate risk is to
deliver consistent net interest margins and economic value over
varying interest rate environments. One element to our strategy
is to purchase assets that have similar cash flow patterns to
our payment service obligations through time and various
interest rate environments. To carry out this strategy, we
purchase assets that match the average life and duration of our
payment service obligations within a range that achieves stable
net interest margins. In addition, we purchase assets across a
wide spectrum of average lives to achieve the desired asset
duration. We also use several different types of assets,
including derivatives, to alter the average life of our assets
and liabilities to match the duration of our payment service
obligations within a desired range. A second element to our
strategy is to regularly assess the portfolio’s exposure to
changes in rates. We use a wide range of risk measures and
analyses to manage the exposure, including on-going business
risk measures and analyses, run-off measures of the existing
portfolio and stress test scenarios. The two main evaluators
used by the Company are net income at risk and duration gap. Net
income at risk is measured using a static and forecasted
portfolio under various interest rate shock environments.
Duration gap is the estimated gap between our assets and
liabilities and summarizes the extent that estimated cash flows
are matched over time across various interest rate environments.
The third element to our strategy is setting parameters for
rebalancing actions to help attain corporate margin objectives.
Management develops rebalancing actions based upon a number of
factors that include both net investment revenue at risk and
duration gap, as well as current market conditions. Internal
indicators are used to determine when the risk profile of our
assets should be re-examined. As the risk measures begin to move
beyond our internal indicators, we consider actions to bring
them into the preferred ranges, with an emphasis on time horizon
and earnings objectives.
The Company uses derivatives as an important tool in managing
interest rate risk. Derivatives are used by the Company as a
hedging tool; we do not enter into speculative trading
positions. The Company typically uses interest rate swaps to
hedge interest rate risk on its variable rate commission
payments to financial institution customers in its Payment
Systems segment. Through these interest rate swaps, the Company
can effectively convert our variable rate commission payments to
a fixed rate payment.
The Company uses net investment revenue simulation analysis and
market value of equity modeling for measuring and analyzing
consolidated interest rate risk. The net investment revenue
simulation analysis incorporates substantially all of the
Company’s inter-
27
est sensitive assets and liabilities, together with forecasted
changes in the balance sheet and assumptions that reflect the
current interest rate environment. Through these simulations,
management estimates the impact on interest rate sensitive
income of immediate and sustained changes (a “shock”)
to the yield curve for a one-year period. The market value of
equity measures the degree to which the market values of the
Company’s interest rate sensitive assets and liabilities
will change given a shock to the short-term and long-term
interest rates. Table 13 summarizes the changes to our pre-tax
operating income and market value of equity under various shock
scenarios.
Table 13 — Interest Rate Sensitivity Analysis
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Basis Point Change in Interest Rates | |
| |
|
| |
| |
|
Down | |
|
Down | |
|
Down | |
|
Up | |
|
Up | |
|
Up | |
| |
|
200 | |
|
100 | |
|
50 | |
|
50 | |
|
100 | |
|
200 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Pre-tax income from continuing operations
|
|
$ |
(1,300 |
) |
|
$ |
600 |
|
|
$ |
500 |
|
|
$ |
(1,100 |
) |
|
$ |
(2,700 |
) |
|
$ |
(6,200 |
) |
|
Percent change
|
|
|
(1.0% |
) |
|
|
0.5% |
|
|
|
0.4% |
|
|
|
(0.8% |
) |
|
|
(2.1% |
) |
|
|
(4.7% |
) |
|
Market value of equity
|
|
$ |
146,800 |
|
|
$ |
80,400 |
|
|
$ |
40,400 |
|
|
$ |
(41,300 |
) |
|
$ |
(83,000 |
) |
|
$ |
(164,100 |
) |
|
Percent change
|
|
|
25.8% |
|
|
|
14.1% |
|
|
|
7.1% |
|
|
|
(7.3% |
) |
|
|
(14.6% |
) |
|
|
(28.9% |
) |
Liquidity Risk
Liquidity risk represents the potential inability of the Company
to meet its payment service obligations, as well as the
potential reduction in earnings if unexpected liquidity needs
forced the Company to liquidate its investment portfolio or
secure other financing. We are subject to risks relating to
daily liquidity needs, as well as extraordinary events, such as
the unexpected loss of a customer.
The Company manages its exposure to liquidity risk by
maintaining a liquidity portfolio, a revolving credit facility,
various overdraft facilities, reverse repurchase agreements and
an agreement to sell certain receivables. The Company assesses
its liquidity needs daily based on normal business operations
and stress environments. At December 31, 2004, the Company
had availability under its revolving credit facility of
$139.6 million, as well as overdraft facilities, letters of
credit and reverse repurchase agreements totaling $1.9 billion.
Credit Risk
Credit risk represents the potential risk that the Company may
not collect on interest and/or principal associated with its
investments, as well as counterparty risk associated with its
derivative financial instruments. The Company is also exposed to
the potential risk that the Company may not collect on funds
received by agents in connection with money transfers and money
orders.
Approximately 70 percent of the Company’s investment
portfolio at December 31, 2004 consists of securities that
are not issued or guaranteed by the U.S. government. If the
issuer of any of these securities or counterparties to any of
our derivative financial instruments were to default in payments
or otherwise experience credit problems, the value of the
investments and derivative financial instruments would decline
and adversely impact our investment portfolio and earnings. As
it relates to the investment portfolio, the Company’s
strategy is to maximize the relative value versus return on each
security, sector and collateral class. The Company uses a
comprehensive process to manage its credit risk relating to
investments, including active credit monitoring and quantitative
sector analysis. The Company also addresses credit risk by
investing primarily in investments with ratings of A3/ A- or
higher or which are collateralized by federal agency securities,
as well as ensuring proper diversification of the portfolio by
limiting individual investments to one percent of the total
portfolio. Approximately 80 percent of the Company’s
investment portfolio at December 31, 2004 consists of
securities with an AA or better rating. The Company manages its
credit risk related to its derivative financial instruments by
entering into agreements only with major financial institutions
and regularly monitoring the credit ratings of these financial
institutions.
Due to the nature of our business, the vast majority of our
Global Funds Transfer business is conducted through independent
agents. Our agents receive the proceeds from the sale of our
payment instruments and we must then collect these funds from
the agents. As a
28
result, we have credit exposure to our agents, which averages
approximately $1,100 million, representing a combination of
money orders, money transfers and bill payment proceeds. This
credit exposure is spread across almost 27,000 agents, of
which 13 owe us in excess of $15.0 million each at any
one time. Agents typically have from one to three days to remit
the funds, with longer remittance schedules granted to
international agents and certain domestic agents under certain
circumstances. The Company assesses the creditworthiness of each
potential agent before accepting it into our distribution
network. The Company actively monitors the credit risk of active
agents on an on-going basis by conducting periodic comprehensive
financial reviews and cash flow analysis of our agents who
average high volumes of money order sales. In addition, the
Company frequently takes additional steps to minimize agent
credit risk, such as requiring owner guarantees, corporate
guarantees and other forms of security where appropriate. The
Company monitors remittance patterns versus reported sales by
agent on a daily basis. The Company also utilizes software
embedded in each point of sale terminal to control both the
number and dollar amount of money orders sold. This software
also allows the Company to monitor for suspicious transactions
or volumes of sales, assisting the Company in uncovering
irregularities such as money laundering, fraud or agent
self-use. Finally, the Company has the ability to remotely
disable money order dispensers or transaction devices to prevent
agents from issuing money orders or performing money transfers
if suspicious activity is noted or remittances are not received
according to the agent’s contract. The point of sale
software requires each location to be re-authorized on a daily
basis for transaction processing.
Operational Risk
Operational risk represents the risk of direct or indirect loss
resulting from inadequate or failed internal processes, people
and systems or from external events. We rely on the ability of
our employees and our internal systems and processes to process
a large number of transactions in an efficient, uninterrupted
and error-free manner. In addition, we rely on third-party
vendors to process and clear our money orders and official
checks. We currently rely on ten principal clearing banks, two
of which clear our money orders and eight of which clear our
official checks. In the event of a breakdown, security breach or
improper operation of our systems or processes, or improper
action by our employees, agents, customer financial institutions
or third party vendors, we could suffer financial loss, loss of
customers, regulatory sanctions and damage to our reputation. In
addition, we currently operate in approximately 170 countries
and plan to continue to expand our international business. 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, potential instability in
certain regions, changes in foreign policy and adoption of
foreign laws detrimental to our business.
In order to mitigate and control operational risk, we have
developed and continue to enhance specific policies and
procedures that are designed to identify, measure, control and
manage operational risk at levels we believe are appropriate
throughout the organization and within such departments as
accounting, operations, technology, legal and compliance. These
control mechanisms attempt to ensure that operations policies
and procedures are being followed and that our various
businesses are operating within established corporate policies
and limits. We have disaster recovery plans in place that we
believe will cover critical systems on a company-wide basis, and
redundancies are built into the systems. We also use periodic
self-assessments and internal audit reviews as a further check
on operational risk.
Regulatory Risk
Regulatory risk represents the risk of non-compliance with
applicable legal and regulatory requirements. The Company is
generally subject to extensive regulation in the various
jurisdictions in which we conduct our business, including state
regulation, U.S. federal anti-money laundering laws, the
requirements of the Office of Foreign Assets Control (which
prohibit us from transmitting money to specified countries or on
behalf of prohibited individuals), the 2001 U.S.A. Patriot Act
and foreign regulations. Failure to comply with the laws and
regulatory requirements could result in, among other things,
revocation of required licenses or registrations, loss of
approved status, termination of contracts with customers and
enforcement actions and fines. We have established procedures
that are designed to ensure compliance with applicable
regulatory requirements, including those relating to, among
others, money laundering, suspicious activity, privacy and
recordkeeping. The Company has a Compliance Officer who is
responsible for ensuring compliance with our regulatory
requirements, as well as a team of employees dedicated to
maintaining compliance with licensing and reporting obligations
and ensuring com-
29
pliance with anti-money laundering requirements. We have
established internal policies relating to business conduct,
ethics and compliance with applicable requirements, as well as
procedures designed to ensure that these policies are followed.
Foreign Currency Exchange Risk
Foreign currency exchange risk represents the potential adverse
effect on the Company’s earnings from fluctuations in
foreign exchange rates affecting certain receivables and
payables denominated in foreign currencies. The Company is
primarily affected by fluctuations in the U.S. dollar as
compared to the British pound and the Euro. The foreign currency
exposure that does exist is limited by the fact that foreign
currency denominated assets and liabilities are generally very
short-term in nature. The Company primarily utilizes forward
contracts to hedge its exposure to fluctuations in exchange
rates. These forward contracts generally have maturities of less
than thirty days. The forward contracts are recorded on the
Consolidated Balance Sheets, and the net effect of changes in
exchange rates and the related forward contracts is not
significant.
Had the British pound and Euro increased up to twenty percent
over actual exchange rates for 2004, pre-tax operating income
would have seen a benefit of up to $1.1 million for the
year. Had the British pound and Euro decreased up to twenty
percent over actual exchange rates for 2004, pre-tax operating
income would have seen a decrease of up to $1.7 million for
the year. This sensitivity analysis considers both the impact on
translation of our foreign denominated revenue and expense
streams and the impact on our hedging program.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP
requires estimates and assumptions that affect the reported
amounts of assets and liabilities, revenues and expenses, and
related disclosures of contingent assets and liabilities in the
consolidated financial statements. Critical accounting policies
are those policies that management believes are most important
to the portrayal of a company’s financial position and
results of operations, and that require management to make
estimates that are difficult, subjective or complex. Based on
this criteria, management has identified and discussed with the
Audit Committee the following critical accounting policies and
estimates, and the methodology and disclosures related to those
estimates:
Fair Value of Investment Securities — Our
investment securities are classified as available-for-sale,
including securities being held for indefinite periods of time
and those securities that may be sold to assist in the clearing
of payment service obligations or in the management of
securities. These securities are carried at market value (or
fair value), with the net after-tax unrealized gain or loss
reported as a separate component of stockholders’ equity.
Fair value is generally based on quoted market prices. However,
certain investment securities are not readily marketable. As a
result, the carrying value of these investments is based on cash
flow projections that require a significant degree of management
judgment as to default and recovery rates of the underlying
investments. Accordingly, the estimates determined may not be
indicative of the amounts that could be realized in a current
market exchange. The use of different market assumptions or
valuation methodologies may have a material effect on the
estimated fair value amounts. In general, as interest rates
increase, the fair value of the available-for-sale portfolio and
stockholders’ equity decreases and as interest rates fall,
the fair value of the available-for-sale portfolio increases,
along with stockholders’ equity.
Other Than Temporary Impairments — Securities
with gross unrealized losses at the consolidated balance sheet
date are subjected to the Company’s process for identifying
other-than-temporary impairments in accordance with SFAS
No. 115, Accounting For Certain Investments in Debt and
Equity Securities, and EITF Issue No. 99-20,
Recognition of Interest Income and Impairment on Purchased
and Retained Beneficial Interests in Securitized Financial
Assets. The Company writes down to fair value securities
that it deems to be other-then-temporarily impaired in the
period the securities are deemed to be impaired. Under SFAS
No. 115, the assessment of whether such impairment has
occurred is based on management’s case-by-case evaluation
of the underlying reasons for the decline in fair value.
Management considers a wide range of factors about the security
and uses its best judgment in evaluating the cause of the
decline in the estimated fair value of the security and in
assessing the prospects for recovery. The Company evaluates
investments rated A and below for which risk of credit loss is
deemed more than remote for impairment under EITF
30
Issue No. 99-20. When an adverse change in expected cash flows
occurs, and if the fair value of a security is less that its
carrying value, the investment is written down to fair value.
The evaluation for other than temporary impairments is a
quantitative and qualitative process, which is subject to risks
and uncertainties in the determination of whether declines in
the fair value of investments are other than temporary. The
risks and uncertainties include changes in general economic
conditions, the issuer’s financial condition or near term
recovery prospects, the effects of changes in interest rates,
the length of time and the extent to which the market value of
the investment has been less than cost and the Company’s
intent and ability to hold the investment for a period of time
sufficient to allow for any anticipated recovery in market
value. In addition, for securitized financial assets with
contractual cash flows (e.g. asset-backed securities),
projections of expected future cash flows may change based upon
new information regarding the performance of the underlying
collateral.
We recorded $15.9 million, $27.9 million and
$25.8 million of other-than-temporary impairment losses in
2004, 2003 and 2002, respectively, primarily related to other
asset-backed securities, collateralized mortgage obligations and
structured notes held in our investment portfolio. Adverse
changes in estimated cash flows in the future could result in
impairment losses to the extent that the recorded value of such
investments exceeds fair value.
Derivative financial instruments — Derivative
financial instruments are used as part of our risk management
strategy to manage exposure to fluctuations in interest and
foreign currency rates. We do not enter into derivatives for
speculative purposes. Derivatives are accounted for in
accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and its related
amendments and interpretations. The derivatives are recorded as
either assets or liabilities on the balance sheet at fair value,
with the change in fair value recognized in earnings or in other
comprehensive income depending on the use of the derivative and
whether it qualifies for hedge accounting. A derivative that
does not qualify, or is not designated, as a hedge will be
reflected at fair value, with changes in value recognized
through earnings. The estimated fair value of derivative
financial instruments has been determined using available market
information and certain valuation methodologies. However,
considerable judgment is required in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates
determined may not be indicative of the amounts that could be
realized in a current market exchange. The use of different
market assumptions or valuation methodologies may have a
material effect on the estimated fair value amounts. While
MoneyGram intends to continue to meet the conditions to qualify
for hedge accounting treatment under SFAS No. 133, if
hedges did not qualify as highly effective or if forecasted
transactions did not occur, the changes in the fair value of the
derivatives used as hedges would be reflected in earnings.
MoneyGram does not believe it is exposed to more than a nominal
amount of credit risk in its hedging activities as the
counterparties are generally well-established, well-capitalized
financial institutions.
Goodwill — SFAS No. 142, Goodwill and
Other Intangible Assets, requires annual impairment testing
of goodwill based on the estimated fair value of
MoneyGram’s reporting units. The fair value of
MoneyGram’s reporting units is estimated based on
discounted expected future cash flows using a weighted average
cost of capital rate. Additionally, an assumed terminal value is
used to project future cash flows beyond base years. The
estimates and assumptions regarding expected cash flows,
terminal values and the discount rate require considerable
judgment and are based on historical experience, financial
forecasts, and industry trends and conditions. During the third
quarter of 2004, MoneyGram recorded a charge of
$2.1 million related to certain intangible assets.
Pension obligations — MoneyGram has trusteed,
noncontributory pension plans that cover certain employees of
MoneyGram, as well as former employees of Viad and of sold
operations of Viad. Through December 31, 2000, the
principal retirement plan was structured using a traditional
defined benefit formula based primarily on final average pay and
years of service. Benefits earned under this formula ceased
accruing at December 31, 2000, with no change to retirement
benefits earned through that date. Effective January 1,
2001, benefits began accruing under a cash accumulation account
formula based upon a percentage of pay plus interest. Benefits
under the cash accumulation formula ceased accruing at
December 31, 2003, with no change in benefits earned
through that date. Funding policies provide that payments to
defined benefit pension trusts shall be at least equal to the
minimum funding required by applicable regulations. Certain
defined pension benefits, primarily those in excess of benefit
levels permitted under qualified pension plans, are unfunded.
31
MoneyGram’s discount rate used in determining future
pension obligations is measured on November 30 and is based
on rates determined by actuarial analysis and management review.
Following are the assumptions used to measure the projected
benefit obligation as of December 31, and the net periodic
benefit cost for the year ended December 31:
| |
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|
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|
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|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Discount rate
|
|
|
6.00% |
|
|
|
6.25% |
|
|
|
6.75% |
|
| |
Rate of compensation increase
|
|
|
4.50% |
|
|
|
4.50% |
|
|
|
4.50% |
|
|
Net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Discount rate
|
|
|
6.25% |
|
|
|
6.75% |
|
|
|
7.25% |
|
| |
Expected return on plan assets
|
|
|
8.75% |
|
|
|
8.75% |
|
|
|
10.00% |
|
| |
Rate of compensation increase
|
|
|
4.50% |
|
|
|
4.50% |
|
|
|
4.50% |
|
MoneyGram’s pension expense for 2004, 2003 and 2002 was
$9.0 million, $6.9 million and $3.0 million,
respectively. In addition, MoneyGram recorded a
$3.8 million curtailment gain in fiscal 2003 resulting from
the freezing of the defined benefit pension plan. Pension
expense is calculated based upon the actuarial assumptions shown
above. For 2004, the pension expense consisted of service cost
of $1.7 million, interest cost of $11.3 million,
amortization of prior service cost of $0.8 million and
recognized net actuarial loss of $4.0 million less expected
return on plan assets of $8.8 million. The fair value of
pension plan assets increased to $98.1 million at
December 31, 2004 from $96.4 million at December 31,
2003 due to the actual return on plan assets and employer
contributions exceeding benefits paid. Employer contributions
increased $2.3 million over 2003, while benefits paid
increased $0.9 million over 2003.
The discount rates used to determine benefit obligation and
pension expense is reviewed on an annual basis. Lowering the
discount rate by 50 basis points would have increased 2004
pension expense by $0.7 million, while increasing the
discount rate by 50 basis points would have decreased 2004
pension expense by $0.5 million.
In developing the expected rate of return, MoneyGram employs a
total return investment approach whereby a mix of equities and
fixed income securities are used to maximize the long-term
return of plan assets for a prudent level of risk. Risk
tolerance is established through careful consideration of plan
liabilities, plan funded status, and corporate financial
condition. MoneyGram’s current asset allocation consists of
approximately 56 percent in large capitalization and
international equity stock funds, approximately 38 percent in
fixed income securities such as global bond funds and corporate
obligations, approximately three percent in a real estate
limited partnership interest and three percent in other
securities. The investment portfolio contains a diversified
blend of equity and fixed income securities. Furthermore, equity
security funds are diversified across U.S. and non-U.S. stocks.
Other assets such as real estate and cash are used judiciously
to enhance long-term returns while improving portfolio
diversification. Investment risk is measured and monitored on an
ongoing basis through quarterly investment portfolio reviews and
annual liability measurements.
Additionally, historical markets are studied and long-term
historical relationships between equity securities and fixed
income securities are preserved consistent with the widely
accepted capital market principle that assets with higher
volatility generate a greater return over the long run. Current
market factors such as inflation and interest rates are
evaluated before long-term capital market assumptions are
determined. The long-term portfolio return also takes proper
consideration of diversification and rebalancing. Peer data and
historical returns are reviewed for reasonableness and
appropriateness.
MoneyGram’s pension assets are primarily invested in
marketable securities that have readily determinable current
market values. MoneyGram’s investments are rebalanced
regularly to stay within the investment guidelines. MoneyGram
reviews the expected rate of return in connection with
significant changes in the pension asset allocation, the
investing strategy or in inflation and interest rates. The
actual rate of return on average pension assets in 2004 was
8.00 percent, as compared to the expected rate of return of
8.75 percent. As the expected rate of return is a long-term
assumption and the widely accepted capital market principle is
that assets with higher volatility generate greater long-term
returns, we do not believe that the
32
actual return for one year is significantly different from the
expected return used to determine the benefit obligation.
Changing the expected rate of return by 50 basis points
would have increased 2004 pension expense by $0.5 million.
Future actual pension income or expense will depend on future
investment performance, changes in future rates and various
other factors related to the populations participating in
MoneyGram’s pension plans.
Stock-based compensation — As permitted by SFAS
No. 123, Accounting for Stock-Based Compensation and SFAS
No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure, MoneyGram uses the
intrinsic value method prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related
interpretations in accounting for its stock-based compensation
plans. Under our stock option plans, options are granted at
exercise prices equal to the market price of our stock on the
date of grant; accordingly, under APB 25, no compensation
expense is recognized on these options. Under our restricted
stock and performance based restricted stock plans, compensation
expense is measured under APB 25 at the market price of our
stock on the date of grant and is recognized over the vesting
period of the award. See Note 2 of the Notes to the Consolidated
Financial Statements for the pro forma impact of stock-based
awards using the fair value method of accounting. As described
in Note 2 of the Notes to the Consolidated Financial Statements,
the Company will be required to use the fair value method to
account for its stock-based compensation plans beginning in 2005
under the newly issued SFAS No. 123R, Share-Based
Payment.
Recent Accounting Developments
Recent accounting developments are set forth in Note 2 of the
Notes to the Consolidated Financial Statements.
FORWARD LOOKING STATEMENTS
The statements contained in this Annual Report on Form 10-K
that are not historical facts are forward-looking statements and
are made under the Safe Harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements are
based on management’s current expectations and are subject
to uncertainty and changes in circumstances due to a number of
factors, including, but not limited to:
|
|
| |
• Interest Rate Fluctuations. Fluctuations in
interest rates may materially adversely affect revenue derived
from investment of funds received from the sale of our payment
instruments. See “Enterprise Risk Management —
Interest Rate Risk” above. |
| |
| |
• Market Value of Securities. Material changes
in the market value of securities we hold may materially
adversely affect our results of operation and financial
condition. See “Enterprise Risk Management — Interest
Rate Risk” above. |
| |
| |
• Liquidity. Material changes in our need for
and the availability of liquid assets may affect our ability to
meet our payment service obligations and may materially
adversely affect our results of operation and financial
condition. See “Enterprise Risk Management — Liquidity
Risk” above. |
| |
| |
• Credit Risk. If an issuer of securities in
our investment portfolio defaulted on its payment obligations,
the value of our securities would decline, adversely affecting
the value of our investment portfolio. In addition, we may face
credit risk if we are unable to collect on funds received by
agents for our products and services or if we experience fraud.
See “Enterprise Risk Management — Credit Risk”
above. |
| |
| |
• Business Interruption. We may suffer direct
or indirect losses resulting from inadequate or failed internal
processes, people and systems or from third parties or external
events. See “Enterprise Risk Management — Operational
Risk” above. |
| |
| |
• International. Our business and results of
operations may be adversely affected by political, economic or
other instability in countries in which we have material agent
relationships. See “Enterprise Risk Management —
Operational Risk” above. |
| |
| |
• Security. We may be subject to a material
breach of security of any of our systems. See “Enterprise
Risk Management — Operational Risk” above. |
| |
| |
• Regulation. Changes in laws, regulations or
other industry practices and standards may require |
33
|
|
| |
significant systems redevelopment, reduce the market for or
value of our products or services or render our products or
services less profitable or obsolete. See “Enterprise Risk
Management — Regulatory Risk” above. |
| |
| |
• Foreign Currency Exchange. Our results of
operations may be adversely affected by fluctuations in foreign
currency exchange rates affecting certain receivables and
payables denominated in foreign currency. See “Enterprise
Risk Management — Foreign Currency Exchange Risk.” |
| |
| |
• Growth Rates. We cannot anticipate whether
growth rates approximating recent levels for consumer money
transfer transactions and other payment product markets will
continue. |
| |
| |
• Agent Retention. We may be unable to renew
material retail agent and financial institution customer
contracts, or we may experience a loss of business from
significant agents or customers. |
| |
| |
• Competition. We may be unable to compete
against our large competitors, niche competitors or new
competitors that may enter the markets in which we operate. |
| |
| |
• Product Development. We may be unable to
compete or develop new products to keep pace with technological
and competitive changes in the payment services industry. |
| |
| |
• Litigation. Our business and results of
operations may be materially adversely affected by lawsuits or
investigations. |
| |
| |
• Intellectual Property. The loss of our
intellectual property protection or the inability to secure or
enforce intellectual property protection could harm our business
and prospects. |
| |
| |
• Internal Controls. We may be unable to timely
comply with the internal control provisions of Section 404
of the Sarbanes-Oxley Act of 2002. |
| |
| |
• Catastrophic Events. Catastrophic events
could materially adversely impact our operating facilities,
communication systems and technology, our clearing banks or
major customers, or may have a material adverse impact on
current economic conditions or levels of consumer spending. See
“Enterprise Risk Management — Operational
Risk” above. |
Actual results may differ materially from historical and
anticipated results. These forward-looking statements speak only
as of the date on which such statements are made, and we
undertake no obligation to update such statements to reflect
events or circumstances arising after such date.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market risk disclosure is discussed under “Enterprise Risk
Management” in Management’s Discussion and Analysis
Financial Condition and Results of Operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
The information called for by Item 8 is found in a separate
section of this Annual Report on Form 10-K on pages F-1
through F-42. See the “Index to Financial Statements”
on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this report (the
“Evaluation Date”), the Company carried out an
evaluation, under the supervision and with the participation of
management, including the Chief Executive Officer and the Chief
Financial Officer, of the effectiveness of the design and
operation of the Company’s
34
disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). Based upon that
evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the Evaluation Date, the
Company’s disclosure controls and procedures were
adequately designed to ensure that information required to be
disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in applicable rules
and forms.
No change in the Company’s internal control over financial
reporting (as defined in Rule 13a-15(f) of the Exchange
Act) during the fiscal quarter ended December 31, 2004, has
materially affected, or is reasonably likely to materially
affect, the Company’s internal control over financial
reporting.
Item 9B. OTHER INFORMATION
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
The information contained in the sections entitled
“Proposal 1: Election of Directors,” “Board of
Directors and Governance” and “Security Ownership of
Certain Beneficial Owners — Section 16(a)
Beneficial Ownership Reporting Compliance” in our
definitive Proxy Statement for our 2005 Annual Meeting of
Stockholders is incorporated herein by reference. Under the
section of our definitive Proxy Statement incorporated by
reference herein entitled “The Board of Directors and
Governance — Board Committees — Audit
Committee,” we identify the financial expert who serves on
the Audit Committee of our Board of Directors. Information
regarding our executive officers is contained in Part I
above under the heading “Executive Officers of the
Registrant.”
All of our employees, including our principal executive officer,
principal financial officer, principal accounting officer and
controller, or persons performing similar functions (the
“Principal Officers”), are subject to our Code of
Ethics and our Always Honest policy. Our directors are also
subject to our Code of Ethics and our Always Honest policy.
These documents are posted on our website at www.moneygram.com
in the Investor Relations section, and are available in print
free of charge to any stockholder who requests them at the
address set forth below. We will disclose any amendments to or
waivers of our Code of Ethics and our Always Honest Policy for
directors or Principal Officers on our website.
We also have adopted a set of Corporate Governance Guidelines
and charters for all of our Board Committees, including the
Audit, Corporate Governance and Nominating and Human Resources
Committees. Our Corporate Governance Guidelines and committee
charters are posted on our website at www.moneygram.com in the
Investor Relations section and are available in print free of
charge to any stockholder who requests them. Written requests
for our Code Ethics, Always Honest policy, Corporate Governance
Guidelines and committee charters should be addressed to
MoneyGram International, Inc., 1550 Utica Avenue South,
Minneapolis, Minnesota 55416, Attention: Corporate Secretary.
Item 11. EXECUTIVE COMPENSATION
The information contained in the sections entitled “Board
of Directors and Governance — Compensation of
Directors,” “Board of Directors and
Governance — Human Resources Committees Interlocks and
Insider Participation,” “Executive Compensation and
Other Information” and “Stockholder Return Performance
Graph” in our definitive Proxy Statement for our 2005
Annual Meeting of Stockholders is incorporated herein by
reference.
35
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information contained in the sections entitled
“Security Ownership of Management,” “Security
Ownership of Certain Beneficial Owners” and
“Proposal 2: Approval of the MoneyGram International,
Inc. 2005 Omnibus Incentive Plan — Equity Compensation
Plan Information” in our definitive Proxy Statement for our
2005 Annual Meeting of Stockholders is incorporated herein by
reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The information contained in the section entitled “Certain
Relationships and Related Transactions” in our definitive
Proxy Statement for our 2005 Annual Meeting of Stockholders is
incorporated herein by reference.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information contained in the section entitled “Audit
Committee Report — Information Regarding Independent
Registered Public Accounting Firm” in our definitive Proxy
Statement for our 2005 Annual Meeting of Stockholders is
incorporated herein by reference.
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
|
|
| (a) (1) |
The financial statements listed in the “Index to Financial
Statements and Schedules” are filed as part of this Report. |
|
|
| (2) |
All financial statement schedules are omitted because they are
not applicable or the required information is included in the
consolidated financial statements or notes thereto listed in the
“Index to Financial Statements.” |
| |
| (3) |
Exhibits are filed with this Form 10-K or incorporated
herein by reference as listed in the accompanying
Exhibit Index. |
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
| |
MoneyGram International, Inc. |
| |
(Registrant) |
| |
|
|
|
|
| |
|
|
|
By: /s/ Philip W. Milne
Philip W. Milne
President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on
March 4, 2005.
| |
|
|
|
|
| |
/s/ Philip W. Milne
Philip
W. Milne |
|
President, Chief Executive Officer and Director
(Principal Executive Officer) |
| |
/s/ David J. Parrin
David
J. Parrin |
|
Vice President and Chief Financial Officer
(Principal Financial Officer) |
| |
/s/ Jean C. Benson
Jean
C. Benson |
|
Vice President and Controller
(Principal Accounting Officer) |
| |
*
Robert
H. Bohannon |
|
Chairman |
| |
*
Jess
Hay |
|
Director |
| |
*
Judith
K. Hofer |
|
Director |
| |
*
Donald
E. Kiernan |
|
Director |
| |
*
Robert
C. Krueger |
|
Director |
| |
*
Linda
Johnson Rice |
|
Director |
| |
*
Douglas
L. Rock |
|
Director |
| |
*
Dr.
Albert M. Teplin |
|
Director |
| |
*
Timothy
R. Wallace |
|
Director |
| |
/s/ Teresa H. Johnson
Teresa
H. Johnson
* As attorney-in-fact |
|
Vice President, General Counsel and Secretary |
37
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
|
2.1
|
|
Separation and Distribution Agreement, dated as of June 30,
2004, by and among Viad Corp, MoneyGram International, Inc., MGI
Merger Sub, Inc. and Travelers Express Company, Inc.
(Incorporated by reference from Exhibit 2.1 to
Registrant’s Quarterly Report on Form 10-Q filed on
August 13, 2004). |
|
3.1
|
|
Amended and Restated Certificate of Incorporation of MoneyGram
International, Inc. (Incorporated by reference from
Exhibit 3.1 to Registrant’s Quarterly Report on
Form 10-Q filed on August 13, 2004). |
|
3.2
|
|
Bylaws of MoneyGram International, Inc. (Incorporated by
reference from Exhibit 3.2 to Registrant’s Quarterly
Report on Form 10-Q filed on August 13, 2004). |
|
4.1
|
|
Form of Specimen Certificate for MoneyGram Common Stock
(Incorporated by reference from Exhibit 4.1 to Amendment
No. 4 to Registrant’s Form 10 filed on
June 14, 2004). |
|
4.2
|
|
Rights Agreement, dated as of June 30, 2004, between
MoneyGram International, Inc. and Wells Fargo Bank, N.A. as
Rights Agent (Incorporated by reference from Exhibit 4.2 to
Registrant’s Quarterly Report on Form 10-Q filed on
August 13, 2004). |
|
4.3
|
|
Certificate of Designations, Preferences and Rights of
Series A Junior Participating Preferred Stock of MoneyGram
International, Inc. (Incorporated by reference from
Exhibit 4.3 to Registrant’s Quarterly Report on
Form 10-Q filed on August 13, 2004). |
|
10.1
|
|
Employee Benefits Agreement, dated as of June 30, 2004, by
and among Viad Corp, MoneyGram International, Inc. and Travelers
Express Company, Inc. (Incorporated by reference from
Exhibit 10.1 to Registrant’s Quarterly Report on
Form 10-Q filed on August 13, 2004). |
|
10.2
|
|
Tax Sharing Agreement, dated as of June 30, 2004, by and
between Viad Corp and MoneyGram International, Inc.
(Incorporated by reference from Exhibit 10.2 to
Registrant’s Quarterly Report on Form 10-Q filed on
August 13, 2004). |
|
10.3
|
|
Interim Services Agreement, dated as of June 30, 2004,
between Viad Corp and MoneyGram International, Inc.
(Incorporated by reference from Exhibit 10.3 to
Registrant’s Quarterly Report on Form 10-Q filed on
August 13, 2004). |
|
†10.4
|
|
MoneyGram International, Inc. 2004 Omnibus Incentive Plan, as
amended February 17, 2005 (Incorporated by reference from
Exhibit 99.1 to the Registrant’s Current Report on
Form 8-K filed on February 23, 2005). |
|
†10.5
|
|
Form of Indemnification Agreement between MoneyGram
International, Inc. and Directors of MoneyGram International,
Inc. (Incorporated by reference from Exhibit 10.5 to
Amendment No. 4 to Registrant’s Form 10 filed on
June 14, 2004). |
|
†10.6
|
|
MoneyGram International, Inc. Management and Line of Business
Incentive Plan, as amended on February 17, 2005, pursuant
to the 2004 MoneyGram International, Inc. Omnibus Incentive Plan
(Incorporated by reference from Exhibit 99.2 to the
Registrant’s Current Report on Form 8-K filed on
February 23, 2005). |
|
†10.7
|
|
MoneyGram International, Inc. Deferred Compensation Plan, as
stated July 1, 2004 (Incorporated by reference from
Exhibit 10.7 to Registrant’s Quarterly Report on
Form 10-Q filed on August 13, 2004). |
|
†10.8
|
|
MoneyGram International, Inc. Executive Severance Plan
(Tier I) (Incorporated by reference from Exhibit 10.8
to Registrant’s Quarterly Report on Form 10-Q filed on
August 13, 2004). |
|
†10.9
|
|
MoneyGram International, Inc. Executive Severance Plan
(Tier II) (Incorporated by reference from Exhibit 10.9
to Registrant’s Quarterly Report on Form 10-Q filed on
August 13, 2004). |
|
†10.10
|
|
MoneyGram International, Inc. Supplemental 401(k) Plan
(Incorporated by reference from Exhibit 10.10 to
Registrant’s Quarterly Report on Form 10-Q filed on
August 13, 2004). |
|
†10.11
|
|
Travelers Express Company, Inc. Supplemental Pension Plan
(Incorporated by reference from Exhibit 10.11 to Amendment
No. 3 to Registrant’s Form 10 filed on
June 3, 2004). |
|
†10.12
|
|
Deferred Compensation Plan for Directors of MoneyGram
International, Inc. (Incorporated by reference from
Exhibit 10.12 to Registrant’s Quarterly Report on
Form 10-Q filed on August 13, 2004). |
38
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
|
†10.13
|
|
Description of MoneyGram International, Inc. Director’s
Charitable Matching Program (Incorporated by reference from
Exhibit 10.13 to Registrant’s Quarterly Report on
Form 10-Q filed on August 13, 2004). |
|
†10.14
|
|
Director’s Charitable Award Program (Incorporated by
reference from Exhibit 10.14 to Amendment No. 3 to
Registrant’s Form 10 filed on June 3, 2004). |
|
10.15
|
|
$350,00,000 Credit Agreement, dated as of June 29, 2004,
among MoneyGram International, Inc., the Lenders named therein,
and Bank One, NA, as Agent (Incorporated by reference from
Exhibit 10.1 to the Registrant’s Current Report on
Form 8-K filed June 30, 2004). |
|
10.16
|
|
MoneyGram Employee Equity Trust, effective as of June 30,
2004 (Incorporated by reference from Exhibit 10.16 to
Registrant’s Quarterly Report on Form 10-Q filed on
August 13, 2004). |
|
†10.17
|
|
Deferred Compensation Plan for Directors of Viad Corp, as
amended August 19, 2004 (Incorporated by reference from
Exhibit 10.1 to Registrant’s Quarterly Report on
Form 10-Q filed on November 12, 2004). |
|
†10.18
|
|
Viad Corp Deferred Compensation Plan, as amended August 19,
2004 (Incorporated by reference from Exhibit 10.2 to
Registrant’s Quarterly Report on Form 10-Q filed on
November 12, 2004). |
|
†10.19
|
|
Form of MoneyGram International, Inc. 2004 Omnibus Incentive
Plan Restricted Stock Agreement, as amended February 16,
2005 (Incorporated by reference from Exhibit 99.5 to the
Registrant’s Current Report on Form 8-K filed on
February 23, 2005). |
|
†10.20
|
|
Form of MoneyGram International, Inc. 2004 Omnibus Incentive
Plan Performance-Based Restricted Stock Agreement (Incorporated
by reference from Exhibit 10.3 to Registrant’s
Quarterly Report on Form 10-Q filed on November 12,
2004). |
|
†10.21
|
|
Form of MoneyGram International, Inc. 2004 Omnibus Incentive
Plan Incentive Stock Option Agreement (Incorporated by reference
from Exhibit 10.4 to Registrant’s Quarterly Report on
Form 10-Q filed on November 12, 2004). |
|
†10.22
|
|
Form of MoneyGram International, Inc. 2004 Omnibus Incentive
Plan Non-Qualified Stock Option Agreement, as amended
February 16, 2005 (Incorporated by reference from
Exhibit 99.6 to the Registrant’s Current Report on
Form 8-K filed on February 23, 2005). |
|
†10.23
|
|
Form of MoneyGram International, Inc. 2004 Omnibus Incentive
Plan Non-Qualified Stock Option Agreement for Directors
(Incorporated by reference from Exhibit 99.7 to the
Registrant’s Current Report on Form 8-K filed on
February 23, 2005). |
|
†10.24
|
|
Form of MoneyGram International, Inc. 2004 Omnibus Incentive
Plan Restricted Stock Agreement for Directors (Incorporated by
reference from Exhibit 99.8 to the Registrant’s
Current Report on Form 8-K filed on February 23, 2005). |
|
†10.25
|
|
Employment Agreement, dated October 26, 2004, between
MoneyGram International, Inc. and Philip W. Milne (Incorporated
by reference from Exhibit 99.1 to the Registrant’s
Current Report on Form 8-K filed on October 27, 2004). |
|
†10.26
|
|
2005 Deferred Compensation Plan for Directors of MoneyGram
International, Inc., adopted December 17, 2004
(Incorporated by reference from Exhibit 99.1 to the
Registrant’s Current Report on Form 8-K filed on
December 22, 2004). |
|
†10.27
|
|
MoneyGram International, Inc. Performance Unit Incentive Plan
(Incorporated by reference from Exhibit 99.3 to the
Registrant’s Current Report on Form 8-K filed on
February 23, 2005). |
|
†10.28
|
|
Description of MoneyGram International, Inc. Compensation for
Non-Management Members of Board of Directors and of Board
Committees (Incorporated by reference from Exhibit 99.4 to
the Registrant’s Current Report on Form 8-K filed on
February 23, 2005). |
|
*21
|
|
Subsidiaries of the Registrant |
|
*23
|
|
Consent of Deloitte & Touche LLP |
|
*24
|
|
Power of Attorney |
39
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
| |
|
|
|
*31.1
|
|
Section 302 Certification of Chief Executive Officer |
|
*31.2
|
|
Section 302 Certification of Chief Financial Officer |
|
*32.1
|
|
Section 906 Certification of Chief Executive Officer |
|
*32.2
|
|
Section 906 Certification of Chief Financial Officer |
|
|
| † |
Indicates management contract or compensatory plan or
arrangement required to be filed as an exhibit to this report. |
40
MoneyGram International, Inc.
Annual Report on Form 10-K
Items 8 and 15(a)
Index to Financial Statements
| |
|
|
|
|
|
|
|
|
F-2 |
|
|
Financial Statements
|
|
|
|
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
|
|
|
F-5 |
|
|
|
|
|
F-6 |
|
|
|
|
|
F-7 |
|
|
|
|
|
F-8 |
|
|
|
|
|
F-9 |
|
F-1
Management’s Responsibility Statement
The management of MoneyGram International, Inc. is responsible
for the integrity, objectivity and accuracy of the consolidated
financial statements of the Company. The consolidated financial
statements are prepared by the Company in accordance with
accounting principles generally accepted in the United States of
America using, where appropriate, management’s best
estimates and judgments. The financial information presented
throughout the Annual Report is consistent with that in the
consolidated financial statements.
Management is also responsible for maintaining a system of
internal controls and procedures designed to provide reasonable
assurance that the books and records reflect the transactions of
the Company and that assets are protected against loss from
unauthorized use or disposition. Such a system is maintained
through accounting policies and procedures administered by
trained Company personnel and updated on a continuing basis to
ensure their adequacy to meet the changing requirements of our
business. The Company requires that all of its affairs, as
reflected by the actions of its employees, be conducted
according to the highest standards of personal and business
conduct. This responsibility is reflected in our Code of Ethics.
At the end of our next fiscal year, our independent auditors
will report on our assertions as to the effectiveness of our
internal control over financial reporting as required under
Section 404 of the Sarbanes-Oxley Act of 2002.
The Audit Committee of the Board of Directors, which is composed
solely of outside directors, meets quarterly with management,
internal audit and the independent registered public accounting
firm to discuss internal accounting control, auditing and
financial reporting matters, as well as to determine that the
respective parties are properly discharging their
responsibilities. Both our independent registered public
accounting firm and internal auditors have had and continue to
have unrestricted access to the Audit Committee without the
presence of management.
| |
|
|
|
/s/ Philip W. Milne
|
|
/s/ David J. Parrin
|
Philip W. Milne
President and
Chief Executive Officer |
|
David J. Parrin
Vice President,
Chief Financial Officer |
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
MoneyGram International, Inc.
Minneapolis, Minnesota
We have audited the consolidated financial statements of
MoneyGram International, Inc and subsidiaries (the
“Company”) as of December 31, 2004 and 2003, and
the related consolidated statements of income, comprehensive
income, cash flows and stockholders’ equity for each of the
three years in the period ended December 31, 2004. These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
MoneyGram International, Inc. and subsidiaries as of
December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2004, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ Deloitte
& Touche LLP
Minneapolis, Minnesota
March 2, 2005
F-3
MONEYGRAM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
At December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands, | |
| |
|
except share data) | |
|
Assets
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$ |
— |
|
|
$ |
33,832 |
|
|
Cash and cash equivalents (substantially restricted) (Note 2)
|
|
|
927,042 |
|
|
|
1,025,026 |
|
|
Receivables (substantially restricted) (Note 2)
|
|
|
771,966 |
|
|
|
755,734 |
|
|
Investments (substantially restricted) (Note 4)
|
|
|
6,335,493 |
|
|
|
6,013,757 |
|
|
Property and equipment (Note 7)
|
|
|
88,154 |
|
|
|
95,207 |
|
|
Intangible assets (Note 8)
|
|
|
15,210 |
|
|
|
18,818 |
|
|
Goodwill (Note 8)
|
|
|
395,526 |
|
|
|
395,526 |
|
|
Assets of discontinued operations (Note 3)
|
|
|
— |
|
|
|
641,724 |
|
|
Deferred tax assets
|
|
|
31,841 |
|
|
|
70,633 |
|
|
Other assets
|
|
|
65,503 |
|
|
|
171,897 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
8,630,735 |
|
|
$ |
9,222,154 |
|
| |
|
|
|
|
|
|
| |
|
Liabilities and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
|
Payment service obligations (Note 2)
|
|
$ |
7,640,581 |
|
|
$ |
7,421,481 |
|
|
Debt (Note 9)
|
|
|
150,000 |
|
|
|
201,351 |
|
|
Derivative financial instruments (Note 5)
|
|
|
65,063 |
|
|
|
174,588 |
|
|
Pension and other postretirement benefits (Note 14)
|
|
|
110,661 |
|
|
|
101,039 |
|
|
Preferred stock subject to mandatory redemption (Note 10)
|
|
|
— |
|
|
|
6,733 |
|
|
Accounts payable and other liabilities
|
|
|
99,239 |
|
|
|
115,922 |
|
|
Liabilities of discontinued operations (Note 3)
|
|
|
— |
|
|
|
332,257 |
|
| |
|
|
|
|
|
|
| |
Total liabilities
|
|
|
8,065,544 |
|
|
|
8,353,371 |
|
|
Commitments and contingencies (Note 16)
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
|
Preferred shares — undesignated, $0.01 par value,
5,000,000 authorized,
none issued
|
|
|
— |
|
|
|
— |
|
|
Preferred shares — junior participating, $0.01 par
value, 2,000.000 authorized,
none issued
|
|
|
— |
|
|
|
— |
|
|
Common shares, $.01 par value: 250,000,000 shares authorized,
88,556,077
and 99,739,925 shares issued in 2004 and 2003
|
|
|
886 |
|
|
|
149,610 |
|
|
Additional paid-in capital
|
|
|
79,833 |
|
|
|
218,783 |
|
|
Retained income
|
|
|
506,609 |
|
|
|
863,944 |
|
|
Unearned employee benefits and other
|
|
|
(31,037 |
) |
|
|
(35,442 |
) |
|
Accumulated other comprehensive income (loss) (Note 12)
|
|
|
25,691 |
|
|
|
(35,208 |
) |
|
Treasury stock: 801,130 and 11,382,364 shares in 2004 and 2003
|
|
|
(16,791 |
) |
|
|
(292,904 |
) |
| |
|
|
|
|
|
|
| |
Total stockholders’ equity
|
|
|
565,191 |
|
|
|
868,783 |
|
| |
|
|
|
|
|
|
| |
|
Total liabilities and stockholders’ equity
|
|
$ |
8,630,735 |
|
|
$ |
9,222,154 |
|
| |
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-4
MONEYGRAM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands, except | |
| |
|
share and per share data) | |
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fee and other revenue
|
|
$ |
500,940 |
|
|
$ |
419,002 |
|
|
$ |
365,635 |
|
| |
Investment revenue
|
|
|
315,983 |
|
|
|
323,099 |
|
|
|
351,332 |
|
| |
Net securities gains and losses
|
|
|
9,607 |
|
|
|
(4,878 |
) |
|
|
(9,277 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
Total revenue
|
|
|
826,530 |
|
|
|
737,223 |
|
|
|
707,690 |
|
| |
Fee commissions expense
|
|
|
183,561 |
|
|
|
144,997 |
|
|
|
118,268 |
|
| |
Investment commissions expense
|
|
|
219,912 |
|
|
|
232,336 |
|
|
|
240,152 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total commissions expense
|
|
|
403,473 |
|
|
|
377,333 |
|
|
|
358,420 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Net revenue
|
|
|
423,057 |
|
|
|
359,890 |
|
|
|
349,270 |
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Compensation and benefits
|
|
|
126,641 |
|
|
|
107,497 |
|
|
|
99,689 |
|
| |
Transaction and operations support
|
|
|
120,767 |
|
|
|
101,513 |
|
|
|
96,608 |
|
| |
Depreciation and amortization
|
|
|
29,567 |
|
|
|
27,295 |
|
|
|
25,894 |
|
| |
Occupancy, equipment and supplies
|
|
|
30,828 |
|
|
|
25,557 |
|
|
|
25,180 |
|
| |
Interest expense
|
|
|
5,573 |
|
|
|
9,857 |
|
|
|
15,212 |
|
| |
Debt tender and redemption costs
|
|
|
20,661 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total expenses
|
|
|
334,037 |
|
|
|
271,719 |
|
|
|
262,583 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
89,020 |
|
|
|
88,171 |
|
|
|
86,687 |
|
|
Income tax expense
|
|
|
23,891 |
|
|
|
12,485 |
|
|
|
11,923 |
|
| |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
65,129 |
|
|
|
75,686 |
|
|
|
74,764 |
|
|
Income (loss) and gain from discontinued operations, net of
tax
|
|
|
21,283 |
|
|
|
38,216 |
|
|
|
(16,878 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$ |
86,412 |
|
|
$ |
113,902 |
|
|
$ |
57,886 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.75 |
|
|
$ |
0.87 |
|
|
$ |
0.87 |
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
0.24 |
|
|
|
0.44 |
|
|
|
(0.21 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
$ |
0.99 |
|
|
$ |
1.31 |
|
|
$ |
0.66 |
|
| |
|
|
|
|
|
|
|
|
|
|
Average outstanding common shares
|
|
|
86,916 |
|
|
|
86,223 |
|
|
|
86,178 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$ |
0.75 |
|
|
$ |
0.87 |
|
|
$ |
0.86 |
|
|
Income (loss) from discontinued operations, net of tax
|
|
|
0.24 |
|
|
|
0.44 |
|
|
|
(0.21 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Earnings per common share
|
|
$ |
0.99 |
|
|
$ |
1.31 |
|
|
$ |
0.65 |
|
| |
|
|
|
|
|
|
|
|
|
|
Average outstanding and potentially dilutive common shares
|
|
|
87,330 |
|
|
|
86,619 |
|
|
|
86,716 |
|
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-5
MONEYGRAM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Net income
|
|
$ |
86,412 |
|
|
$ |
113,902 |
|
|
$ |
57,886 |
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net unrealized gains on available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Reclassification of securities from held-to-maturity to
available-for-sale, net of tax expense of $18,133
|
|
|
— |
|
|
|
30,222 |
|
|
|
— |
|
| |
|
Net holding (losses) gains arising during the period, net
of tax expense (benefit) of ($66), ($11,788) and $32,777
|
|
|
(110 |
) |
|
|
(19,647 |
) |
|
|
54,628 |
|
| |
|
Reclassification adjustment for net realized (losses) gains
included in net income, net of tax expense (benefit) of
$3,603, ($1,829) and ($3,479)
|
|
|
(6,005 |
) |
|
|
3,048 |
|
|
|
5,798 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(6,115 |
) |
|
|
13,623 |
|
|
|
60,426 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Net unrealized gains (losses) on derivative financial
instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net holding losses arising during the period, net of tax benefit
of $2,437, $25,617 and $108,184
|
|
|
(4,062 |
) |
|
|
(42,695 |
) |
|
|
(180,306 |
) |
| |
|
Reclassifications from other comprehensive income to net income,
net of tax benefit of $43,504, $52,069 and $50,175
|
|
|
72,507 |
|
|
|
86,781 |
|
|
|
83,624 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
68,445 |
|
|
|
44,086 |
|
|
|
(96,682 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Unrealized foreign currency translation gains, net of tax
expense of $1,085, $1,709 and $938
|
|
|
1,807 |
|
|
|
2,848 |
|
|
|
1,564 |
|
| |
Minimum pension liability adjustment, net of tax benefit of
$1,943, $4,940 and $10,180
|
|
|
(3,238 |
) |
|
|
(8,234 |
) |
|
|
(16,967 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Other comprehensive income (loss)
|
|
|
60,899 |
|
|
|
52,323 |
|
|
|
(51,659 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$ |
147,311 |
|
|
$ |
166,225 |
|
|
$ |
6,227 |
|
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-6
MONEYGRAM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income
|
|
$ |
86,412 |
|
|
$ |
113,902 |
|
|
$ |
57,886 |
|
| |
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net earnings in discontinued operations
|
|
|
(21,283 |
) |
|
|
(37,027 |
) |
|
|
(16,878 |
) |
| |
|
Depreciation and amortization
|
|
|
29,567 |
|
|
|
27,295 |
|
|
|
25,894 |
|
| |
|
Investment impairment charges
|
|
|
15,932 |
|
|
|
27,917 |
|
|
|
25,777 |
|
| |
|
Provision for deferred income taxes
|
|
|
6,282 |
|
|
|
(14,416 |
) |
|
|
(11,050 |
) |
| |
|
Net gain on sale of investments
|
|
|
(25,539 |
) |
|
|
(23,039 |
) |
|
|
(16,500 |
) |
| |
|
Debt redemption and retirement costs
|
|
|
20,661 |
|
|
|
— |
|
|
|
— |
|
| |
|
Net amortization of investment premium
|
|
|
19,070 |
|
|
|
38,242 |
|
|
|
(4,351 |
) |
| |
|
Asset impairments and adjustments
|
|
|
6,590 |
|
|
|
4,275 |
|
|
|
3,100 |
|
| |
|
Provision for uncollectible receivables
|
|
|
6,422 |
|
|
|
3,987 |
|
|
|
5,932 |
|
| |
|
Non-cash compensation expense
|
|
|
1,934 |
|
|
|
1,378 |
|
|
|
1,103 |
|
| |
|
Other non-cash items, net
|
|
|
2,817 |
|
|
|
5,695 |
|
|
|
(30,158 |
) |
| |
|
Changes in foreign currency translation adjustments
|
|
|
1,807 |
|
|
|
2,848 |
|
|
|
1,564 |
|
| |
|
Loss on sale of property and equipment
|
|
|
1,603 |
|
|
|
373 |
|
|
|
987 |
|
| |
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Other assets
|
|
|
27,381 |
|
|
|
(5,745 |
) |
|
|
5,917 |
|
| |
|
|
Accounts payable and other liabilities
|
|
|
(5,522 |
) |
|
|
29,724 |
|
|
|
52,045 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Total adjustments
|
|
|
87,722 |
|
|
|
61,507 |
|
|
|
43,382 |
|
| |
|
Change in cash and cash equivalents (substantially restricted)
|
|
|
75,937 |
|
|
|
286,364 |
|
|
|
(554,374 |
) |
| |
|
Change in receivables, net (substantially restricted)
|
|
|
(22,654 |
) |
|
|
(243,789 |
) |
|
|
166,439 |
|
| |
|
Change in payment service obligations
|
|
|
219,100 |
|
|
|
(404,474 |
) |
|
|
1,176,233 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash provided by (used in) continuing operating activities
|
|
|
446,517 |
|
|
|
(186,490 |
) |
|
|
889,566 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Proceeds from sales of investments classified as
available-for-sale
|
|
|
1,053,128 |
|
|
|
1,660,238 |
|
|
|
1,345,821 |
|
| |
Proceeds from maturities of investments classified as
available-for-sale
|
|
|
1,798,767 |
|
|
|
3,410,855 |
|
|
|
1,148,417 |
|
| |
Proceeds from maturities of investment securities classified as
held-to-maturity
|
|
|
— |
|
|
|
283,690 |
|
|
|
745,387 |
|
| |
Purchases of investments classified as available-for-sale
|
|
|
(3,098,498 |
) |
|
|
(4,888,918 |
) |
|
|
(3,341,956 |
) |
| |
Purchase of investments classified as held-to-maturity
|
|
|
— |
|
|
|
— |
|
|
|
(775,670 |
) |
| |
Purchases of property and equipment
|
|
|
(29,589 |
) |
|
|
(27,128 |
) |
|
|
(26,842 |
) |
| |
Cash paid for acquisition of MoneyGram International Limited
|
|
|
— |
|
|
|
(105,080 |
) |
|
|
— |
|
| |
Proceeds from the sale of Game Financial Corporation, net of
cash sold
|
|
|
15,247 |
|
|
|
— |
|
|
|
— |
|
| |
Other investing activities
|
|
|
428 |
|
|
|
(1,341 |
) |
|
|
(1,420 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(260,517 |
) |
|
|
332,316 |
|
|
|
(906,263 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Payments on debt
|
|
|
(205,182 |
) |
|
|
(105,738 |
) |
|
|
(44,230 |
) |
| |
Proceeds from debt
|
|
|
100,000 |
|
|
|
— |
|
|
|
— |
|
| |
Net change in revolver
|
|
|
50,000 |
|
|
|
(5,000 |
) |
|
|
6,543 |
|
| |
Proceeds from exercise of options
|
|
|
1,693 |
|
|
|
3,745 |
|
|
|
10,372 |
|
| |
Preferred stock redemption
|
|
|
(23,895 |
) |
|
|
— |
|
|
|
— |
|
| |
Purchase of treasury stock
|
|
|
(16,181 |
) |
|
|
(976 |
) |
|
|
(28,309 |
) |
| |
Cash dividends paid
|
|
|
(17,409 |
) |
|
|
(31,603 |
) |
|
|
(32,149 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Net cash used in financing activities
|
|
|
(110,974 |
) |
|
|
(139,572 |
) |
|
|
(87,773 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net cash provided by (used in) discontinued operations
|
|
|
(108,858 |
) |
|
|
(11,547 |
) |
|
|
108,555 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(33,832 |
) |
|
|
(5,293 |
) |
|
|
4,085 |
|
|
Cash and cash equivalents — beginning of period
|
|
|
33,832 |
|
|
|
39,125 |
|
|
|
35,040 |
|
| |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents — end of period
|
|
$ |
— |
|
|
$ |
33,832 |
|
|
$ |
39,125 |
|
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-7
MONEYGRAM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Unearned | |
|
Accumulated | |
|
|
|
|
| |
|
|
|
|
|
|
|
Employee | |
|
Other | |
|
Common | |
|
|
| |
|
Common | |
|
Additional | |
|
Retained | |
|
Benefits | |
|
Comprehensive | |
|
Stock in | |
|
|
| |
|
Stock | |
|
Capital | |
|
Income | |
|
and Other | |
|
(Loss) Income | |
|
Treasury | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Balance at December 31, 2001
|
|
$ |
149,610 |
|
|
$ |
225,003 |
|
|
$ |
755,478 |
|
|
$ |
(52,616 |
) |
|
$ |
(35,872 |
) |
|
$ |
(283,047 |
) |
|
$ |
758,556 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
57,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57,886 |
|
|
Dividends ($0.36 per share)
|
|
|
|
|
|
|
|
|
|
|
(32,149 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,149 |
) |
|
Employee benefit plans
|
|
|
|
|
|
|
(9,126 |
) |
|
|
|
|
|
|
12,211 |
|
|
|
|
|
|
|
11,311 |
|
|
|
14,396 |
|
|
Treasury shares acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,309 |
) |
|
|
(28,309 |
) |
|
Unrealized foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,564 |
|
|
|
|
|
|
|
1,564 |
|
|
Unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,426 |
|
|
|
|
|
|
|
60,426 |
|
|
Unrealized loss on derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(96,682 |
) |
|
|
|
|
|
|
(96,682 |
) |
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,967 |
) |
|
|
|
|
|
|
(16,967 |
) |
|
Other, net
|
|
|
|
|
|
|
(5 |
) |
|
|
226 |
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
226 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
$ |
149,610 |
|
|
$ |
215,872 |
|
|
$ |
781,441 |
|
|
$ |
(40,405 |
) |
|
$ |
(87,531 |
) |
|
$ |
(300,040 |
) |
|
$ |
718,947 |
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
113,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113,902 |
|
|
Dividends ($0.36 per share)
|
|
|
|
|
|
|
|
|
|
|
(31,603 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,603 |
) |
|
Employee benefit plans
|
|
|
|
|
|
|
2,911 |
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
8,112 |
|
|
|
11,105 |
|
|
Treasury shares acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(976 |
) |
|
|
(976 |
) |
|
Unrealized foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,848 |
|
|
|
|
|
|
|
2,848 |
|
|
Unrealized gain on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,623 |
|
|
|
|
|
|
|
13,623 |
|
|
Unrealized gain on derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,086 |
|
|
|
|
|
|
|
44,086 |
|
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,234 |
) |
|
|
|
|
|
|
(8,234 |
) |
|
Contribution to Viad Corp Medical Plan Trust
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,881 |
|
|
|
|
|
|
|
|
|
|
|
4,881 |
|
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
204 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
$ |
149,610 |
|
|
$ |
218,783 |
|
|
$ |
863,944 |
|
|
$ |
(35,442 |
) |
|
$ |
(35,208 |
) |
|
$ |
(292,904 |
) |
|
$ |
868,783 |
|
|
Spin off from Viad Corp (Note 3)
|
|
|
(148,724 |
) |
|
|
(139,051 |
) |
|
|
(426,556 |
) |
|
|
|
|
|
|
|
|
|
|
287,775 |
|
|
|
(426,556 |
) |
|
Net income
|
|
|
|
|
|
|
|
|
|
|
86,412 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,412 |
|
|
Dividends ($0.20 per share)
|
|
|
|
|
|
|
|
|
|
|
(17,409 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,409 |
) |
|
Employee benefit plans
|
|
|
|
|
|
|
101 |
|
|
|
|
|
|
|
4,405 |
|
|
|
|
|
|
|
4,519 |
|
|
|
9,025 |
|
|
Treasury shares acquired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16,181 |
) |
|
|
(16,181 |
) |
|
Unrealized foreign currency translation adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,807 |
|
|
|
|
|
|
|
1,807 |
|
|
Unrealized loss on available-for-sale securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,115 |
) |
|
|
|
|
|
|
(6,115 |
) |
|
Unrealized gain on derivative financial instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,445 |
|
|
|
|
|
|
|
68,445 |
|
|
Minimum pension liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,238 |
) |
|
|
|
|
|
|
(3,238 |
) |
|
Other, net
|
|
|
|
|
|
|
|
|
|
|
218 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
$ |
886 |
|
|
$ |
79,833 |
|
|
$ |
506,609 |
|
|
$ |
(31,037 |
) |
|
$ |
25,691 |
|
|
$ |
(16,791 |
) |
|
$ |
565,191 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements
F-8
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of the Business
MoneyGram International, Inc. offers products and services
including global money transfer, urgent bill payment services,
issuance and processing of money orders, processing of official
checks and share drafts, controlled disbursement processing and
routine bill payment service. These products and services are
offered to consumers and businesses through a network of agents
and financial institution customers located around the world.
On December 18, 2003, MoneyGram International, Inc.
(“MoneyGram”) was incorporated in the state of
Delaware as a subsidiary of Viad Corp (“Viad”) to
effect the spin off of Viad’s payment services business
operated by Travelers Express Company, Inc.
(“Travelers”) to its stockholders. On June 30,
2004 (the “Distribution Date”), Travelers was merged
with a subsidiary of MoneyGram, and Viad then distributed
88,556,077 million shares of MoneyGram common stock in a
tax-free distribution (the “Distribution”).
Stockholders of Viad received one share of MoneyGram common
stock for every share of Viad common stock owned on the record
date, June 24, 2004. Due to the relative significance of
MoneyGram to Viad, MoneyGram is the divesting entity and treated
as the “accounting successor” to Viad for financial
reporting purposes in accordance with Emerging Issues Task Force
(“EITF”) Issue No. 02-11, Accounting for
Reverse Spinoffs. See Note 3 regarding the spin-off
transaction and resulting discontinued operations of Viad.
References to “MoneyGram,” the “Company,”
“we,” “us” and “our” are to
MoneyGram International, Inc. and its subsidiaries and
consolidated entities.
Note 2. Summary of Significant Accounting
Policies
Basis of Presentation — The consolidated
financial statements of MoneyGram are prepared in conformity
with accounting principles generally accepted in the United
States of America (“GAAP”). The Consolidated Balance
Sheets are unclassified due to the short-term nature of the
settlement obligations, contrasted with the ability to invest
cash awaiting settlement in long-term investment securities.
Principles of Consolidation — The consolidated
financial statements include the accounts of MoneyGram
International, Inc. and its subsidiaries. All material
inter-company profits, transactions, and account balances have
been eliminated in consolidation.
Consolidation of Special Purpose Entities — We
participate in various trust arrangements (special purpose
entities) related to official check processing agreements with
financial institutions and structured investments within the
investment portfolio. These special purpose entities are
included in our consolidated financial statements. Working in
cooperation with certain financial institutions, we have
established separate consolidated entities (special-purpose
entities) and processes that provide these financial
institutions with additional assurance of our ability to clear
their official checks. These processes include maintenance of
specified ratios of segregated investments to outstanding
payment instruments, typically 1 to 1. In some cases,
alternative credit support has been purchased that provides
backstop funding as additional security for payment of
instruments. However, we remain liable to satisfy the
obligations, both contractually and by operation of the Uniform
Commercial Code, as issuer and drawer of the official checks.
Accordingly, the obligations have been recorded in the
Consolidated Balance Sheets under “Payment service
obligations.” Under certain limited circumstances, clients
have the right to either demand liquidation of the segregated
assets or to replace us as the administrator of the
special-purpose entity. Such limited circumstances consist of
material (and in most cases continued) failure of MoneyGram to
uphold its warranties and obligations pursuant to its underlying
agreements with the financial institution clients. While an
orderly liquidation of assets would be required, any of these
actions by a client could nonetheless diminish the value of the
total investment portfolio, decrease earnings, and result in
loss of the client or other customers or prospects. We offer the
special purpose entity to certain financial institution clients
as a benefit unique in the payment services industry.
F-9
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Certain structured investments we own represent beneficial
interests in grantor trusts or other similar entities. These
trusts typically contain an investment grade security, generally
a U.S. Treasury strip, and an investment in the residual
interest in a collateralized debt obligation, or in some cases,
a limited partnership interest. For certain of these trusts, we
own a majority of the beneficial interests, and therefore,
consolidate those trusts by recording and accounting for the
assets of the trust separately in our consolidated financial
statements.
Management Estimates — The preparation of
financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates.
Reclassifications — Certain reclassifications
have been made to prior period financial statements to conform
to the current presentation.
Cash and Cash Equivalents, Receivables and
Investments — We generate funds from the sale of
money orders, official checks (including cashier’s checks,
teller checks, and agent checks) and other payment instruments
(classified as “Payment service obligations” in the
Consolidated Balance Sheets). The proceeds are invested in cash
and cash equivalents and investments until needed to satisfy the
liability to pay the face amount of the payment service
obligations upon presentment.
|
|
| |
Cash and Cash Equivalents (substantially
restricted) — We consider cash on hand and all
highly liquid debt instruments purchased with original
maturities of three months or less to be cash and cash
equivalents. |
| |
| |
Receivables, net (substantially restricted) —
We have receivables due from financial institutions and agents
for payment instruments sold. These receivables are outstanding
from the day of the sale of the payment instrument until the
financial institution or agent remits the funds to us. We
provide an allowance for the portion of the receivable estimated
to become uncollectible using historical charge-off and recovery
patterns, as well as current economic conditions. |
| |
| |
We sell an undivided percentage ownership interest in certain of
these receivables, primarily receivables from our money order
agents. The sale is recorded in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 140,
Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities. Upon sale, we remove the
sold agent receivables from the Consolidated Balance Sheets as
we have surrendered control over those receivables. |
| |
| |
Investments (substantially restricted) — Our
investments consist primarily of mortgage-backed securities,
other asset-backed securities, state and municipal government
obligations and corporate debt securities, and are recorded at
fair value. These investments are held in custody with major
financial institutions. We classify securities as
available-for-sale or held-to-maturity in accordance with SFAS
No. 115, Accounting for Certain Investments in Debt and
Equity Securities. During the first quarter of 2003, we
determined that we no longer had the positive intent to hold to
maturity the securities classified as held-to-maturity due to
the desire to have more flexibility in managing the investment
portfolio. Accordingly, on March 31, 2003, we reclassified
securities in the portfolio from held-to-maturity to
available-for-sale. As a result of this reclassification, we
cannot classify any securities as held-to-maturity until
March 31, 2005. |
| |
| |
Securities held for indefinite periods of time, including those
securities that may be sold to assist in the clearing of payment
service obligations or in the management of securities, are
classified as securities available-for-sale. These securities
are reported at fair value, with the net after-tax unrealized
gain or loss reported as a separate component of
stockholders’ equity. There are no securities classified as
trading securities. |
| |
| |
Other asset-backed securities are collateralized by various
types of loans and leases, including home equity, corporate,
manufactured housing, credit card and airline. Interest income
on mortgage-backed and other asset-backed securities for which
risk of credit loss is deemed remote is recorded utilizing the
level yield method. Changes in estimated cash flows, both
positive and negative, are accounted for with retrospective
changes to the carrying value of investments in order to
maintain a |
F-10
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
| |
level yield over the life of the investment. Interest income on
mortgage-backed and other asset-backed investments for which
risk of credit loss is not deemed remote is recorded under the
prospective method as adjustments of yield in accordance with
EITF Issue No. 99-20, Recognition of Interest Income and
Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets. |
| |
| |
Securities with gross unrealized losses at the Consolidated
Balance Sheet date are subject to our process for identifying
other-than-temporary impairments in accordance with SFAS
No. 115 and EITF Issue No. 99-20. Securities
that we deem to be other-than-temporarily impaired are written
down to fair value in the period the impairment occurs. Under
SFAS No. 115, the assessment of whether such impairment has
occurred is based on management’s case-by-case evaluation
of the underlying reasons for the decline in fair value. We
consider a wide range of factors about the security and use our
best judgment in evaluating the cause of the decline in the
estimated fair value of the security and in assessing the
prospects for recovery. We evaluate mortgage-backed and other
asset-backed investments rated A and below for which risk of
credit loss is deemed more than remote for impairment under EITF
Issue No. 99-20. When an adverse change in expected cash
flows occurs, and if the fair value of a security is less than
its carrying value, the investment is written down to fair
value. Any impairment charges are included in the Consolidated
Statement of Income under “Net securities gains and
losses.” |
Substantially Restricted — We are regulated by
various state agencies which generally require us to maintain
liquid assets and investments with an investment rating of A or
higher in an amount generally equal to the payment service
obligation for those regulated payment instruments, namely
teller checks, agent checks, money orders, and money transfers.
Consequently, a significant amount of cash and cash equivalents,
receivables and investments are restricted to satisfy the
liability to pay the face amount of regulated payment service
obligations upon presentment. We are not regulated by state
agencies for payment service obligations resulting from
outstanding cashier’s checks; however, we restrict a
portion of the funds related to these payment instruments due to
contractual arrangements and/or Company policy. Assets
restricted for regulatory or contractual reasons are not
available to satisfy working capital or other financing
requirements.
We have unrestricted cash and cash equivalents, receivables and
investments to the extent those assets exceed all payment
service obligations. These amounts are generally available;
however, management considers a portion of these amounts as
providing additional assurance that regulatory requirements are
maintained during the normal fluctuations in the value of
investments. The following table shows the total amount of
unrestricted assets at December 31:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Cash and cash equivalents
|
|
$ |
927,042 |
|
|
$ |
1,025,026 |
|
|
Receivables, net
|
|
|
771,966 |
|
|
|
755,734 |
|
|
Investments
|
|
|
6,335,493 |
|
|
|
6,013,757 |
|
| |
|
|
|
|
|
|
| |
|
|
8,034,501 |
|
|
|
7,794,517 |
|
|
Amounts restricted to cover payment service obligations
|
|
|
(7,640,581 |
) |
|
|
(7,421,481 |
) |
| |
|
|
|
|
|
|
| |
Unrestricted assets
|
|
$ |
393,920 |
|
|
$ |
373,036 |
|
| |
|
|
|
|
|
|
Derivative Financial Instruments — We recognize
derivative instruments as either assets or liabilities on the
Consolidated Balance Sheet and measure those instruments at fair
value. The accounting for changes in the fair value depends on
the intended use of the derivative and the resulting designation.
For a derivative instrument designated as a fair value hedge, we
recognize the gain or loss in earnings in the period of change,
together with the offsetting loss or gain on the hedged item.
For a derivative instrument designated as a cash flow hedge, we
initially report the effective portion of the derivative’s
gain or loss in “Accumulated other comprehensive gain
(loss)” in the Consolidated Statement of Stockholders’
Equity and subsequently reclassify the net gain or loss into
earnings when the hedged exposure affects earnings. Derivatives
designated as hedges are expected to be highly effective as the
critical terms of these instruments are the same as the
underlying risks being hedged. The Company evaluates hedge
effectiveness at its inception and on an on-going basis. Hedge
ineffectiveness, if any, is recorded in earnings on the
F-11
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
same line as the underlying transaction risk. When a derivative
is no longer expected to be highly effective, hedge accounting
is discontinued. Any gain or loss on derivatives designated as
hedges that are terminated or discontinued is recorded in the
“Net securities gains and losses” component in the
Consolidated Statements of Income. For a derivative instrument
that does not qualify, or is not designated, as a hedge, the
change in fair value is recognized in “Transaction and
operations support” in the Consolidated Statements of
Income.
Fair Value of Financial Instruments — Financial
instruments consist of cash and cash equivalents, investments,
derivatives, receivables, payment service obligations, accounts
payable and debt. The carrying values of cash and cash
equivalents, receivables, accounts payable and payment service
obligations approximate fair value due to the short-term nature
of these instruments. The carrying values of debt approximate
fair value as interest related to the debt is variable rate. The
fair value of investments and derivatives is generally based on
quoted market prices. However, certain investment securities are
not readily marketable. The fair value of these investments is
based on cash flow projections that require a significant degree
of management judgment as to default and recovery rates of the
underlying investments. Accordingly, these estimates may not be
indicative of the amounts we could realize in a current market
exchange. The use of different market assumptions or valuation
methodologies may have a material effect on the estimated fair
value amounts of these investments.
Allowance for Losses on Receivables — The
Company provides an allowance for potential losses from
receivables from agents and financial institutions. The
allowance is determined based on known delinquent accounts and
historical trends. Receivables are evaluated for collectibility
and possible write-off by examining the facts and circumstances
surrounding each customer where an account is delinquent and a
loss is deemed possible. Following is a summary of activity
within the allowance for losses:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Beginning balance at January 1,
|
|
$ |
6,968 |
|
|
$ |
7,863 |
|
|
$ |
7,850 |
|
|
Charged to expense
|
|
|
6,422 |
|
|
|
3,987 |
|
|
|
5,932 |
|
|
Write-offs, net of recoveries
|
|
|
(5,460 |
) |
|
|
(4,882 |
) |
|
|
(5,919 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Ending balance at December 31,
|
|
$ |
7,930 |
|
|
$ |
6,968 |
|
|
$ |
7,863 |
|
| |
|
|
|
|
|
|
|
|
|
Property and Equipment — Property and equipment
includes office equipment, software and hardware and leasehold
improvements and is stated at cost, net of accumulated
depreciation. Property and equipment is depreciated using a
straight-line method over the assets’ estimated useful
lives ranging from ten years for office furniture and equipment,
five to seven years for agent equipment and three to five years
for computer hardware and software. Leasehold improvements are
amortized using the straight-line method over the lesser of the
lease term or useful life of the asset. The cost and related
accumulated depreciation of assets sold or disposed of are
removed from the accounts and the resulting gain or loss, if
any, is recognized under the caption “Occupancy, equipment
and supplies” in the Consolidated Statement of Income. We
capitalize certain software development costs in accordance with
Statement of Position No. 98-1, Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use.
Intangible Assets and Goodwill — Goodwill
represents the excess of the purchase price over the fair value
of net assets acquired in business combinations under the
purchase method of accounting. Intangible assets are recorded at
cost. Goodwill and intangible assets with indefinite lives are
not amortized, but are instead subject to impairment testing on
an annual basis and whenever there is an impairment indicator.
Intangible assets with finite lives are amortized using a
straight-line method over their respective useful lives of seven
to fifteen years for customer lists, 36 to 40 years
for trademarks and 24 years for patents. Intangible assets
are tested for impairment whenever events or changes in
circumstances indicate that its carrying amount may not be
recoverable.
Goodwill is tested for impairment using a fair-value based
approach. The Company assesses goodwill at the reporting unit
level, which is determined to be the
F-12
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
lowest level at which management reviews cash flows for a
business. Goodwill, which is generated solely through
acquisitions, is allocated to the reporting unit in which the
acquired business operates. The carrying value of the reporting
unit is compared to its estimated fair value; any excess of
carrying value over fair value is deemed to be an impairment.
Intangible, and other long-lived, assets are tested for
impairment by comparing the carrying value of the assets to the
estimated future undiscounted cash flows. If an impairment is
determined to exist for goodwill and intangible assets, the
carrying value of the asset is reduced to the estimated fair
value.
Payments on Long-Term Contracts — We make
incentive payments to certain agents and financial institution
customers as an incentive to enter into long-term contracts. The
payments are generally required to be refunded pro rata in the
event of nonperformance or cancellation by the customer.
Payments are capitalized and amortized over the life of the
related agent or financial institution contracts as management
is satisfied that such costs are recoverable through future
operations, minimums, penalties or refunds in case of early
termination. Amortization of payments on long-term contracts is
recorded in “Fees commission expense” in the
Consolidated Statement of Income. We review the carrying values
of these incentive payments whenever events or changes in
circumstances indicate that the carrying amounts may not be
recoverable in accordance with the provisions of SFAS
No. 144, Accounting for the Impairment and Disposal of
Long-Lived Assets.
Income Taxes — Prior to the Distribution,
income taxes were determined on a separate return basis as if
MoneyGram had not been eligible to be included in the
consolidated income tax return of Viad and its affiliates. The
provision for income taxes is computed based on the pretax
income included in the Consolidated Statement of Income.
Deferred income taxes result from temporary differences between
the financial reporting basis of assets and liabilities and
their respective tax-reporting basis. Deferred tax assets and
liabilities are measured using the enacted tax rates expected to
apply to taxable income in the years in which those temporary
differences are expected to reverse. Valuation allowances are
recorded to reduce deferred tax assets when it is more likely
than not that a tax benefit will not be realized.
Treasury Stock — Repurchased common stock is
stated at cost and is presented as a separate reduction of
stockholders’ equity.
Foreign Currency Translation — The Euro is the
functional currency of MoneyGram International Limited
(“MIL”), a wholly owned subsidiary of MoneyGram.
Assets and liabilities for MIL are translated into
U.S. dollars based on the exchange rate in effect at the
balance sheet date. Income statement accounts are translated at
the average exchange rate during the period covered. Translation
adjustments arising from the use of differing exchange rates
from period to period are included in “Accumulated other
comprehensive income (loss)” in the Consolidated Balance
Sheet.
Revenue Recognition — We derive revenue
primarily through service fees charged to consumers and our
investing activity. A description of these revenues and
recognition policies are as follows:
|
|
| |
• Fee revenues primarily consist of transaction fees,
foreign exchange revenue and other revenue. |
|
|
| |
– Transaction fees consist primarily of fees earned on
the sale of money transfers, retail money orders and bill
payment services. The money transfer transaction fees are fixed
fees per transaction that may vary based upon the face value of
the amount of the transaction and the locations in which these
money transfers originate and to which they are sent. The money
order and bill payment transaction fees are fixed fees charged
on a per item basis. Transaction fees are recognized at the time
of the transaction or sale of the product. |
| |
| |
– Foreign exchange revenue is derived from the
management of currency exchange spreads (as a percentage of face
value of the transaction) on international money transfer
transactions. Foreign exchange revenue is recognized at the time
the exchange in funds occurs. |
| |
| |
– Other revenue consists of processing fees on rebate
checks and controlled disbursements, service charges on aged
outstanding money orders, money order dispenser fees and other
miscellaneous charges. These fees are recognized in earnings in
the period the item is processed or billed. |
F-13
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
|
|
| |
• Investment revenue is derived from the investment of
funds generated from the sale of official checks, money orders
and other payment instruments and consists of interest income,
dividend income and amortization of premiums and discounts.
These funds are available for investment until the items are
presented for payment. Interest and dividends are recognized as
earned. Premiums and discounts on investments are amortized over
the life of the investment. |
| |
| |
• Securities gains and losses are recognized upon the
sale of securities using the specific identification method to
determine the cost basis of securities sold. Impairments are
recognized in the period the security is deemed to be
other-than-temporarily impaired. |
Fee Commissions Expense — We pay fee
commissions to third-party agents for money transfer services.
In a money transfer transaction, both the agent initiating the
transaction and the agent disbursing the funds receive a
commission. The commission amount is generally based on a
percentage of the fee charged to the customer. We generally do
not pay commissions to agents on the sale of money orders. Fee
commissions are recognized at the time of the transaction. Fee
commissions also include the amortization of the capitalized
incentive payments to agents.
Investment Commissions Expense — Investment
commissions expense includes amounts paid to financial
institution customers based upon average outstanding balances
generated by the sale of official checks and costs associated
with swaps and the sale of receivables program. Commissions paid
to financial institution customers generally are variable based
on short-term interest rates; however, a portion of the
commission expense has been fixed through the use of interest
rate swap agreements. Investment commissions are generally
recognized each month based on the average outstanding balances
and the contractual variable rate for that month.
Stock Based Compensation — We account for stock
option grants under the intrinsic value method in accordance
with Accounting Principles Board Opinion No. 25
(“APB 25”), Accounting for Stock Issued to
Employees. This method defines compensation cost for stock
options as the excess, if any, of the quoted market price of the
Company’s stock at the date of the grant over the amount
the employee must pay to acquire the stock. As our stock option
plans require the employee to pay an amount equal to the market
price on the date of grant, no compensation expense is
recognized under APB 25. Performance-based stock and
restricted stock awards are accounted for under the fair value
method under SFAS No. 123, Accounting for
Stock-Based Compensation and are valued at the quoted market
price of the Company’s stock at the date of grant and are
expensed using the straight-line method over the vesting or
service period of the award.
Assuming that we had recognized compensation cost for stock
option grants in accordance with the fair value method of
accounting defined in SFAS No. 123, net income and
diluted and basic income per share would be as presented in the
following table. Compensation cost calculated under
SFAS No. 123 is recognized using a straight-line
method over the vesting period and is net of estimated
forfeitures and tax benefits.
F-14
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands, except per share | |
| |
|
data) | |
|
Net income, as reported
|
|
$ |
86,412 |
|
|
$ |
113,902 |
|
|
$ |
57,886 |
|
|
Plus: stock-based compensation expense recorded under
APB 25, net of tax
|
|
|
— |
|
|
|
28 |
|
|
|
— |
|
|
Less: stock-based compensation expense determined under the fair
value method, net of tax
|
|
|
(2,386 |
) |
|
|
(4,680 |
) |
|
|
(5,612 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$ |
84,026 |
|
|
$ |
109,250 |
|
|
$ |
52,274 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
0.99 |
|
|
$ |
1.31 |
|
|
$ |
0.66 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Pro forma
|
|
|
0.97 |
|
|
|
1.27 |
|
|
|
0.61 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
0.99 |
|
|
$ |
1.31 |
|
|
$ |
0.65 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Pro forma
|
|
|
0.96 |
|
|
|
1.26 |
|
|
|
0.60 |
|
| |
|
|
|
|
|
|
|
|
|
For purposes of applying SFAS No. 123, the estimated fair
value of stock options granted during 2004, 2003 and 2002 was
$5.49, $4.00 and $6.03 per share, respectively. The fair value
of each stock option grant was estimated on the date of grant
using the Black-Scholes single option pricing model with the
following assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Expected dividend yield
|
|
|
0.2 |
% |
|
|
1.8 |
% |
|
|
1.3 |
% |
|
Expected volatility
|
|
|
25.2 |
% |
|
|
30.4 |
% |
|
|
30.1 |
% |
|
Risk-free interest rate
|
|
|
3.2 |
% |
|
|
2.7 |
% |
|
|
4.9 |
% |
|
Expected life
|
|
|
5 years |
|
|
|
5 years |
|
|
|
5 years |
|
Earnings per share — Basic earnings per common
share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the
period. Since our common stock was not issued until
June 30, 2004, the weighted average number of common shares
outstanding for the first half of 2004, 2003 and 2002 is the
number of Viad shares outstanding. Diluted earnings per common
share is calculated by adjusting weighted average outstanding
shares for the assumed conversion of all potentially dilutive
stock options.
Recent Accounting Pronouncements — Effective
March 31, 2004, EITF No. 03-1, The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments, was issued. EITF No. 03-1 provides
guidance for determining the meaning of
“other-than-temporarily impaired” and its application
to certain debt and equity securities within the scope of
SFAS No. 115 and investments accounted for under the
cost method. The guidance requires that investments which have
declined in value due to credit concerns or solely due to
changes in interest rates must be recorded as
other-than-temporarily impaired unless the Company can assert
and demonstrate its intention to hold the security for a period
of time sufficient to allow for a recovery of fair value up to
or beyond the cost of the investment which might mean maturity.
EITF No. 03-1 also requires disclosures assessing the
ability and intent to hold investments in instances in which an
investor determines that an investment with a fair value less
than cost is not other-than-temporarily impaired. On
September 30, 2004, the Financial Accounting Standards
Board (“FASB”) issued Staff Position (“FSP”)
EITF Issue 03-1-1, which indefinitely delayed the effective
date of the guidance on how to evaluate and recognize an
impairment loss that is other than temporary, pending issuance
of proposed FSP EITF Issue 03-1-a. As of December 31,
2004, we had total unrealized pre-tax losses in our
available-for-sale portfolio of $19.4 million that are
already reflected in Stockholders’ Equity. These unrealized
F-15
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
losses are measured as of a point in time and could fluctuate
significantly as interest rates change.
In December 2004, the FASB issued an SFAS No. 123R,
Share-Based Payment. This standard, which is effective
for the Company beginning in the third quarter of 2005, requires
that all share-based compensation awards be measured at fair
value at the date of grant and expensed over their vesting or
service periods. The Company will adopt SFAS No. 123R on
January 1, 2005 using the modified prospective method. We
anticipate that the impact of adopting SFAS No. 123R will
result in annual expense in 2005 of approximately
$2.8 million based on known grants.
In May 2004, the FASB issued FSP SFAS 106-2 on the
accounting for the effects of the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 (the
“Medicare Act”), which was enacted into law on
December 8, 2003, and which provides a federal subsidy to
employers that sponsor postretirement health care plans that
provide certain prescription drug benefits to the extent such
benefits are deemed “actuarially equivalent” to
Medicare Part D. The Company made a one-time election,
under the previously issued FSP SFAS 106-1, to defer
recognition of the effects of the Medicare Act until further
authoritative guidance was issued. With the issuance of FSP
FAS 106-2 in May 2004, which superceded FSP
SFAS 106-1, specific guidance was provided in accounting
for the subsidy. The Company adopted FSP SFAS 106-2 on
July 1, 2004, using the prospective method. Refer to
Note 14 for the effects of the Medicare Act on our
Consolidated Balance Sheets and Consolidated Statements of
Income.
On October 22, 2004, the President signed the American Jobs
Creation Act of 2004 (the “Jobs Act”). The Jobs Act
creates a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85
percent dividends received deduction for certain dividends from
controlled foreign corporations. The Company has historically
recognized a deferred tax liability on its undistributed foreign
earnings as these earnings were not considered indefinitely
reinvested. As of December 31, 2004, the Company has
deferred tax liabilities of $4.1 million related to
undistributed foreign earnings of $30.8 million. Although
the deduction is subject to a number of limitations and, as of
today, significant uncertainty remains as to how to interpret
numerous provisions in the Jobs Act, the Company believes that
it has the information necessary to make an informed decision on
the impact of the Jobs Act on its repatriation plans. Based on
that decision, the Company does not plan to repatriate any
amounts as extraordinary dividends, as defined by the Jobs Act,
during 2005. The Company will continue to recognize a deferred
tax liability on its undistributed foreign earnings.
Note 3. Discontinued Operations and Acquisitions
Viad Corp: MoneyGram is considered the divesting entity
and treated as the “accounting successor” to Viad for
financial reporting purposes. The continuing business of Viad is
referred to as “New Viad.” The spin off of
New Viad was accounted for pursuant to APB
Opinion No. 29, Accounting for Nonmonetary
Transactions, and was based upon the recorded amounts of the
net assets divested. On June 30, 2004, we charged the
historical cost carrying amount of the net assets of
New Viad of $426.6 million directly to equity as a
dividend. As a result, the results of operations of
New Viad (with certain adjustments) are included in the
Consolidated Statement of Income in “Income and gain from
discontinued operations” in accordance with the provisions
of SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Also included in “Income
and gain from discontinued operations” in the Consolidated
Statement of Income for 2004 is a charge for spin-off related
costs of $14.6 million relating primarily to legal and
consulting costs.
F-16
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The results of operations of Viad included in “Income and
gain from discontinued operations” in the Consolidated
Statement of Income include the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Revenue
|
|
$ |
414,933 |
|
|
$ |
770,468 |
|
|
$ |
844,486 |
|
|
Earnings (loss) before income taxes
|
|
|
13,495 |
|
|
|
60,142 |
|
|
|
(32,157 |
) |
|
Income (loss) from discontinued operations
|
|
|
8,233 |
|
|
|
36,386 |
|
|
|
(19,455 |
) |
As part of the transaction, we entered into several agreements
with Viad for the purpose of governing the relationship. A
Separation and Distribution Agreement provides for the principal
corporate transactions required to effect the separation of
MoneyGram from Viad and the spin-off and other matters governing
the relationship between New Viad and MoneyGram following the
spin-off. The Employee Benefits Agreement provides for the
allocation of employees, employee benefit plans and associated
liabilities and related assets between Viad and MoneyGram. The
Interim Services Agreement provides for services to be provided
by Viad for MoneyGram on an interim basis. The Tax Sharing
Agreement provides for the allocation of federal, state, and
foreign tax liabilities for all periods through the Distribution
Date.
The services to be provided under the Interim Services Agreement
will generally be provided by New Viad for a term of two years
beginning on the Distribution Date. We may, at any time after
the first year anniversary of the Distribution, request
termination of the service upon 90 days advance notice to
Viad. However, certain services may not be terminated prior to
the second anniversary of the Distribution Date without
Viad’s consent. Under the Interim Services Agreement, we
will incur annual expenses of $1.6 million. During 2004,
expenses totaling $0.8 million were recognized in
connection with this agreement.
In January 2005, the Company acquired a 50% interest in a
corporate aircraft owned by Viad at a cost of $8.6 million.
The Company will pay 50% of all fixed costs associated with this
asset and is responsible for the variable costs associated with
its direct usage of the asset.
Game Financial Corporation: During the first quarter of
2004, we completed the sale of one of our subsidiaries, Game
Financial Corporation (“Game Financial”), for
approximately $43.0 million in cash, resulting in net cash
received of $15.2 million. Game Financial provides cash
access services to casinos and gaming establishments throughout
the United States. As a result of the sale, we recorded a gain
of approximately $18.9 million ($11.4 million
after-tax) in 2004. In addition, we recorded a gain of
$1.1 million (net of taxes) in 2004 as a result of the
settlement of a lawsuit brought by Game Financial. We may record
future after-tax gains of approximately $4.0 million, based
on contingencies in the Sales and Purchase Agreement related to
the continued operations of Game Financial with two casinos.
Game Financial was a part of our Payment Systems segment.
In accordance with SFAS No. 144, the results of operations
of Game Financial and the gain on the disposal of Game Financial
have been reflected as components of discontinued operations.
All prior periods in the historical Consolidated Statements of
Income have therefore been restated. Game Financial assets and
liabilities have not been restated on the Consolidated Balance
Sheets. The results of operations of Game Financial, included in
“Income and gain from discontinued operations” include
the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Revenue
|
|
$ |
10,668 |
|
|
$ |
36,548 |
|
|
$ |
37,920 |
|
|
Earnings before income taxes
|
|
|
852 |
|
|
|
3,025 |
|
|
|
4,260 |
|
|
Gain on disposition
|
|
|
11,417 |
|
|
|
— |
|
|
|
— |
|
|
Income and gain from discontinued operations
|
|
|
13,050 |
|
|
|
1,830 |
|
|
|
2,577 |
|
F-17
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Components of Game Financial included in the Consolidated
Balance Sheets at December 31, 2003 consists of the
following:
| |
|
|
|
|
| |
|
(Dollars in thousands) | |
|
Cash
|
|
$ |
33,576 |
|
|
Other assets
|
|
|
8,687 |
|
|
Liabilities
|
|
|
22,557 |
|
| |
|
|
|
|
Net Assets
|
|
$ |
19,706 |
|
| |
|
|
|
MoneyGram International Limited: In January 2003, the
Company paid $105.1 million to acquire the remaining 49
percent minority interest in MoneyGram International Limited
(“MIL”). MIL provides international sales and
marketing services for the Company, primarily in Europe, Africa,
Asia and Australia. Prior to the acquisition, the Company owned
a 51 percent interest in MIL and accordingly, MIL was
consolidated prior to the acquisition. As a result of the
acquisition, the Company owns 100 percent of MIL.
Note 4. Investments (Substantially Restricted)
The amortized cost and market value of investments are as
follows at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Market | |
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Obligations of states and political subdivisions
|
|
$ |
863,691 |
|
|
$ |
59,855 |
|
|
$ |
(249 |
) |
|
$ |
923,297 |
|
|
Mortgage-backed and other asset-backed securities
|
|
|
4,442,162 |
|
|
|
94,706 |
|
|
|
(12,905 |
) |
|
|
4,523,963 |
|
|
U.S. government agencies
|
|
|
369,446 |
|
|
|
2,683 |
|
|
|
(718 |
) |
|
|
371,411 |
|
|
Corporate debt securities
|
|
|
442,145 |
|
|
|
19,463 |
|
|
|
(1,652 |
) |
|
|
459,956 |
|
|
Preferred and common stock
|
|
|
59,411 |
|
|
|
1,318 |
|
|
|
(3,863 |
) |
|
|
56,866 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
6,176,855 |
|
|
$ |
178,025 |
|
|
$ |
(19,387 |
) |
|
$ |
6,335,493 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The amortized cost and market value of investments are as
follows at December 31, 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Gross | |
|
Gross | |
|
|
| |
|
Amortized | |
|
Unrealized | |
|
Unrealized | |
|
Market | |
| |
|
Cost | |
|
Gains | |
|
Losses | |
|
Value | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Obligations of states and political subdivisions
|
|
$ |
938,693 |
|
|
$ |
73,663 |
|
|
$ |
(271 |
) |
|
$ |
1,012,085 |
|
|
Mortgage-backed and other asset-backed securities
|
|
|
4,092,067 |
|
|
|
92,131 |
|
|
|
(20,926 |
) |
|
|
4,163,272 |
|
|
U.S. government agencies
|
|
|
405,378 |
|
|
|
6,068 |
|
|
|
(405 |
) |
|
|
411,041 |
|
|
Debt securities issued by foreign governments
|
|
|
5,373 |
|
|
|
320 |
|
|
|
— |
|
|
|
5,693 |
|
|
Corporate debt securities
|
|
|
323,747 |
|
|
|
23,142 |
|
|
|
(720 |
) |
|
|
346,169 |
|
|
Preferred and common stock
|
|
|
75,546 |
|
|
|
1,601 |
|
|
|
(1,650 |
) |
|
|
75,497 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
5,840,804 |
|
|
$ |
196,925 |
|
|
$ |
(23,972 |
) |
|
$ |
6,013,757 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
On March 31, 2003, we reclassified securities in the
portfolio with an amortized cost of $1.2 billion from
held-to-maturity to available-for-sale. The gross unrealized
gains and losses related to these securities were $55.3 million
and $5.3 million, respectively, on the date of transfer,
which were recorded in “Accumulated other comprehensive
income (loss)” in the Consolidated Balance Sheet. At
December 31, 2004 and 2003 we had no securities classified
as held-to-maturity.
F-18
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The amortized cost and market value of securities at
December 31, 2004, by contractual maturity, are shown
below. Actual maturities may differ from contractual maturities
because borrowers may have the right to call or prepay
obligations, sometimes without call or prepayment penalties.
Maturities of mortgage-backed and other asset-backed securities
depend on the repayment characteristics and experience of the
underlying obligations.
| |
|
|
|
|
|
|
|
|
|
| |
|
Amortized | |
|
Market | |
| |
|
Cost | |
|
Value | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
In one year or less
|
|
$ |
30,154 |
|
|
$ |
30,566 |
|
|
After one year through five years
|
|
|
233,181 |
|
|
|
239,993 |
|
|
After five years through ten years
|
|
|
927,440 |
|
|
|
972,166 |
|
|
After ten years
|
|
|
484,507 |
|
|
|
511,939 |
|
|
Mortgage-backed and other asset-backed securities
|
|
|
4,442,162 |
|
|
|
4,523,963 |
|
|
Preferred and common stock
|
|
|
59,411 |
|
|
|
56,866 |
|
| |
|
|
|
|
|
|
| |
Total
|
|
$ |
6,176,855 |
|
|
$ |
6,335,493 |
|
| |
|
|
|
|
|
|
At December 31, 2004 and 2003, net unrealized gains of
$158.6 million ($99.1 million net of tax) and
$173.0 million ($105.3 million net of tax),
respectively, are included in the Consolidated Balance Sheets in
“Accumulated other comprehensive income (loss).”
During 2004, 2003 and 2002, $16.0 million,
$14.4 million and $10.3 million, respectively, was
reclassified from “Accumulated other comprehensive income
(loss)” to earnings in connection with the sale of the
underlying securities.
Gross realized gains and losses on sales of securities
classified as available-for-sale, using the specific
identification method, and other-than-temporary impairments were
as follows for the year ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Gross realized gains
|
|
$ |
31,903 |
|
|
$ |
26,058 |
|
|
$ |
20,594 |
|
|
Gross realized losses
|
|
|
(6,364 |
) |
|
|
(3,019 |
) |
|
|
(4,094 |
) |
|
Other-than-temporary impairments
|
|
|
(15,932 |
) |
|
|
(27,917 |
) |
|
|
(25,777 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Net securities gains and losses
|
|
$ |
9,607 |
|
|
$ |
(4,878 |
) |
|
$ |
(9,277 |
) |
| |
|
|
|
|
|
|
|
|
|
At December 31, 2004, the investment portfolio had the
following aged unrealized losses:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less Than 12 months | |
|
12 Months or More | |
|
Total | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Unrealized | |
|
|
|
Unrealized | |
|
|
|
Unrealized | |
| |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
|
Fair Value | |
|
Losses | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Obligations of states and political sub-divisions
|
|
$ |
14,749 |
|
|
$ |
(136 |
) |
|
$ |
8,789 |
|
|
$ |
(113 |
) |
|
$ |
23,538 |
|
|
$ |
(249 |
) |
|
Mortgage-backed and other asset-backed securities
|
|
|
1,207,356 |
|
|
|
(9,135 |
) |
|
|
169,746 |
|
|
|
(3,770 |
) |
|
|
1,377,102 |
|
|
|
(12,905 |
) |
|
U.S. government agencies
|
|
|
106,769 |
|
|
|
(718 |
) |
|
|
— |
|
|
|
— |
|
|
|
106,769 |
|
|
|
(718 |
) |
|
Corporate debt securities
|
|
|
171,492 |
|
|
|
(1,331 |
) |
|
|
7,296 |
|
|
|
(321 |
) |
|
|
178,788 |
|
|
|
(1,652 |
) |
|
Preferred and common stock
|
|
|
15,884 |
|
|
|
(1,063 |
) |
|
|
7,200 |
|
|
|
(2,800 |
) |
|
|
23,084 |
|
|
|
(3,863 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
1,516,250 |
|
|
$ |
(12,383 |
) |
|
$ |
193,031 |
|
|
$ |
(7,004 |
) |
|
$ |
1,709,281 |
|
|
$ |
(19,387 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
At December 31, 2003, the investment portfolio had the
following aged unrealized losses:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Less Than 12 Months | |
|
12 Months or More | |
|
Total | |
| |
|
| |
|
| |
|
| |
| |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
|
Fair | |
|
Unrealized | |
| |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
|
Value | |
|
Losses | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Obligations of states and political sub-divisions
|
|
$ |
18,670 |
|
|
$ |
(271 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
18,670 |
|
|
$ |
(271 |
) |
|
Mortgage-backed and other asset-backed securities
|
|
|
1,383,395 |
|
|
|
(14,554 |
) |
|
|
163,036 |
|
|
|
(6,371 |
) |
|
|
1,546,431 |
|
|
|
(20,925 |
) |
|
U.S. government agencies
|
|
|
81,747 |
|
|
|
(405 |
) |
|
|
— |
|
|
|
— |
|
|
|
81,747 |
|
|
|
(405 |
) |
|
Corporate debt securities
|
|
|
38,319 |
|
|
|
(721 |
) |
|
|
— |
|
|
|
— |
|
|
|
38,319 |
|
|
|
(721 |
) |
|
Preferred and common stock
|
|
|
— |
|
|
|
— |
|
|
|
8,350 |
|
|
|
(1,650 |
) |
|
|
8,350 |
|
|
|
(1,650 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
|
|
$ |
1,522,131 |
|
|
$ |
(15,951 |
) |
|
$ |
171,386 |
|
|
$ |
(8,021 |
) |
|
$ |
1,693,517 |
|
|
$ |
(23,972 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We have determined that the unrealized losses reflected above
represent temporary impairments. Twenty-one securities and
nineteen securities had unrealized losses for more than
12 months as of December 31, 2004 and 2003,
respectively. We believe that the unrealized losses generally
are caused by liquidity discounts and increases in the risk
premiums required by market participants, rather than a
fundamental weakness in the credit quality of the issuer or
underlying assets.
Of the $19.4 million of unrealized losses at
December 31, 2004, $16.6 million relates to securities
with an unrealized loss position of less than 20 percent of
amortized cost, the degree of which suggests that these
securities do not pose a high risk of being other than
temporarily impaired. Of the $16.6 million, $15.9 million
relates to unrealized losses on investment grade fixed income
securities. Investment grade is defined as a security having a
Moody’s equivalent rating of Aaa, Aa, A or Baa or a
Standard & Poor’s equivalent rating of AAA, AA, A or
BBB. The remaining $0.7 million of unrealized losses less
than 20 percent of amortized cost relates to U.S.
government agency fixed income securities. One preferred stock
security has an unrealized loss of $2.8 million at
December 31, 2004 that is greater than or equal to
20 percent of amortized cost. This security was evaluated
considering factors such as the financial condition and near and
long-term prospects of the issuer and deemed to be temporarily
impaired.
Note 5. Derivative Financial Instruments
Derivative contracts are financial instruments such as forwards,
futures, swaps or option contracts that derive their value from
underlying assets, reference rates, indices or a combination of
these factors. A derivative contract generally represents future
commitments to purchase or sell financial instruments at
specified terms on a specified date or to exchange currency or
interest payment streams based on the contract or notional
amount. The Company uses derivative instruments primarily to
manage exposures to fluctuations in foreign currency exchange
rates and interest rates.
Cash flow hedges use derivatives to offset the variability of
expected future cash flows. Variability can arise in floating
rate assets and liabilities, from changes in interest rates or
currency exchange rates or from certain types of forecasted
transactions. The Company enters into foreign currency forward
contracts of generally less than thirty and ninety days to hedge
forecasted foreign currency money transfer transactions. The
Company designates these currency forwards as cash flow hedges.
If the forecasted transaction underlying the hedge is no longer
anticipated to occur, any gain or loss recorded in equity is
reclassified into earnings.
The Company has also entered into swap agreements to mitigate
the effects on cash flows of interest rate fluctuations on
commissions paid to financial institution customers of our
Payment Services segment. The agreements involve varying degrees
of credit and market risk in addition to amounts recognized in
the
F-20
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
financial statements. These swaps are designated as cash flow
hedges. The swap agreements are contracts to pay fixed and
receive floating payments periodically over the lives of the
agreements without the exchange of the underlying notional
amounts. The notional amounts of such agreements are used to
measure amounts to be paid or received and do not represent the
amount of the exposure to credit loss. The amounts to be paid or
received under the swap agreements are accrued in accordance
with the terms of the agreements and market interest rates.
The notional amount of the swap agreements totaled
$3.4 billion and $3.1 billion at December 31, 2004 and
2003, respectively, with an average fixed pay rate of 4.8%, and
5.0% and an average variable receive rate 2.1% and 0.9% at
December 31, 2004 and 2003, respectively. The variable rate
portion of the swaps is generally based on Treasury bill,
federal funds, or 6 month LIBOR. As the swap payments are
settled, the net difference between the fixed amount the Company
pays and the variable amount the Company receives is reflected
in the Consolidated Statements of Income in “Investment
commissions expense”. The Company estimates that
approximately $29.5 million (net of tax) of the unrealized
loss reflected in the “Accumulated other comprehensive
income (loss)” component in the Consolidated Balance Sheet
as of December 31, 2004, will be reflected in the
Consolidated Statement of Income in “Investment commissions
expense” within the next 12 months as the swap
payments are settled. The agreements expire as follows:
| |
|
|
|
|
| |
|
Notional Amount | |
| |
|
| |
| |
|
(Dollars in thousands) | |
|
2005
|
|
$ |
975,000 |
|
|
2006
|
|
|
630,000 |
|
|
2007
|
|
|
1,200,000 |
|
|
2008
|
|
|
100,000 |
|
|
Thereafter
|
|
|
502,000 |
|
| |
|
|
|
| |
|
$ |
3,407,000 |
|
| |
|
|
|
The amount recognized in earnings due to ineffectiveness of the
cash flow hedges is not material.
Fair value hedges use derivatives to mitigate the risk of
changes in the fair values of assets, liabilities and certain
types of firm commitments. The Company uses fair value hedges to
manage the impact of changes in fluctuating interest rates on
certain available-for-sale securities. Interest rate swaps are
used to modify exposure to interest rate risk by converting
fixed rate assets to a floating rate. All amounts have been
included in earnings along with the hedged transaction in the
Consolidated Statement of Income in “Investment
revenue.” Realized gains of $0.1 million and
$2.1 million were recognized on fair value hedges
discontinued during 2004 and 2003. No fair value hedges were
discontinued in 2002.
The Company uses derivatives to hedge exposures for economic
reasons, including circumstances in which the hedging
relationship does not qualify for hedge accounting. The Company
is exposed to foreign currency exchange risk and utilize forward
contracts to hedge assets and liabilities denominated in foreign
currencies. While these contracts economically hedge foreign
currency risk, they are not designated as hedges for accounting
purposes under SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. The effect of changes in
foreign exchange rates on the foreign-denominated receivables
and payables, net of the effect of the related forward
contracts, recorded in the Consolidated Statement of Income is
not significant.
The Company is exposed to credit loss in the event of
nonperformance by counterparties to its derivative contracts.
Collateral generally is not required of the counterparties or of
the Company. In the unlikely event a counterparty fails to meet
the contractual terms of the derivative contract, the
Company’s risk is limited to the fair value of the
instrument. The Company actively monitors its exposure to credit
risk through the use of credit approvals and credit limits, and
by selecting major international banks and financial
institutions as counterparties. The Company has not had any
historical instances of non-performance by any counterparties,
nor does it anticipate any future instances of non-performance.
Note 6. Sale of Receivables
The Company has an agreement to sell undivided percentage
ownership interests in certain receivables primarily from our
money order agents. These receivables are sold to two commercial
paper conduit trusts
F-21
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
and represent a small percentage of the total assets in each
trust. Our rights and obligations are limited to the receivables
transferred, and the transactions are accounted for as sales.
The assets and liabilities associated with the trusts, including
the sold receivables, are not recorded or consolidated in our
financial statements. The agreement expires in June 2006. The
receivables are sold to accelerate the cash flow for
investments. The aggregate amount of receivables sold at any
time cannot exceed $450.0 million. The balance of sold
receivables as of December 31, 2004 and 2003 was
$345.5 million and $329.2 million respectively. The
agreement includes a 5% holdback provision of the purchase price
of the receivables. The average receivables sold approximated
$404.6 million and $428.1 million during 2004 and
2003, respectively. The expense of selling the agent receivables
is included in the Consolidated Statement of Income in
“Investment commissions expense” and totaled
$9.9 million, $9.5 million and $12.4 million
during 2004, 2003 and 2002, respectively.
Note 7. Property and Equipment
Property and equipment consists of the following at
December 31:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Office furniture, equipment and leasehold improvements
|
|
$ |
20,166 |
|
|
$ |
25,987 |
|
|
Agent equipment
|
|
|
102,679 |
|
|
|
106,845 |
|
|
Computer hardware and software
|
|
|
81,712 |
|
|
|
76,664 |
|
| |
|
|
|
|
|
|
| |
|
|
204,557 |
|
|
|
209,496 |
|
|
Accumulated depreciation
|
|
|
(116,403 |
) |
|
|
(114,289 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
88,154 |
|
|
$ |
95,207 |
|
| |
|
|
|
|
|
|
Depreciation expense for the year ended December 31 is as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Depreciation of office furniture, equipment, and leasehold
improvements
|
|
$ |
2,272 |
|
|
$ |
2,319 |
|
|
$ |
2,591 |
|
|
Depreciation on agent equipment
|
|
|
12,776 |
|
|
|
12,561 |
|
|
|
12,283 |
|
|
Amortization expense of capitalized software
|
|
|
12,453 |
|
|
|
10,514 |
|
|
|
9,176 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total depreciation expense
|
|
$ |
27,501 |
|
|
$ |
25,394 |
|
|
$ |
24,050 |
|
| |
|
|
|
|
|
|
|
|
|
Included in computer hardware and software are capitalized
software development costs. At December 31, 2004 and 2003,
the net capitalized costs were $31.4 million and
$35.9 million, respectively.
During 2004, the Company determined that an impairment existed
on $4.5 million of software costs related primarily to a
joint development project with Concord EFS utilizing ATMs to
facilitate money transfers and other discontinued projects. The
impairment loss was related to our Global Funds Transfer segment
and is included in the Consolidated Statement of Income in
“Transaction and operations support.”
F-22
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 8. Intangibles and Goodwill
Intangible assets at December 31, 2004 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross | |
|
|
|
Net | |
| |
|
Carrying | |
|
Accumulated | |
|
Carrying | |
| |
|
Value | |
|
Amortization | |
|
Value | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Customer lists
|
|
$ |
28,688 |
|
|
$ |
(18,491 |
) |
|
$ |
10,197 |
|
| |
Patents
|
|
|
13,200 |
|
|
|
(11,010 |
) |
|
|
2,190 |
|
| |
Trademarks
|
|
|
481 |
|
|
|
(161 |
) |
|
|
320 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
42,369 |
|
|
|
(29,662 |
) |
|
|
12,707 |
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Pension intangible assets
|
|
|
2,503 |
|
|
|
— |
|
|
|
2,503 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
44,872 |
|
|
$ |
(29,662 |
) |
|
$ |
15,210 |
|
| |
|
|
|
|
|
|
|
|
|
During the third quarter of 2004, the Company evaluated the
recoverability of certain purchased customer list intangibles
due to the expected departure of a particular customer. To
determine recoverability, the Company estimated future cash
flows over the remaining useful life and calculated the fair
value. An impairment loss of $2.1 million was recognized
for the amount in which the carrying amount exceeded the fair
value amount. This loss is included on the Consolidated
Statement of Income in “Transaction and operations
support” and relates to our Payment Systems segment.
Intangible assets at December 31, 2003 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Gross | |
|
|
|
Net | |
| |
|
Carrying | |
|
Accumulated | |
|
Carrying | |
| |
|
Value | |
|
Amortization | |
|
Value | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Customer lists
|
|
$ |
29,607 |
|
|
$ |
(17,062 |
) |
|
$ |
12,545 |
|
| |
Patents
|
|
|
13,200 |
|
|
|
(10,385 |
) |
|
|
2,815 |
|
| |
Trademarks
|
|
|
480 |
|
|
|
(149 |
) |
|
|
331 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
43,287 |
|
|
|
(27,596 |
) |
|
|
15,691 |
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Pension intangible assets
|
|
|
3,127 |
|
|
|
— |
|
|
|
3,127 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
46,414 |
|
|
$ |
(27,596 |
) |
|
$ |
18,818 |
|
| |
|
|
|
|
|
|
|
|
|
Intangible asset amortization expense for 2004, 2003 and 2002
was $2.1 million, $1.9 million and $1.8 million,
respectively. Estimated remaining amortization expense is
$2.1 million, $2.1 million, $2.1 million,
$1.8 million and $1.4 million for the years ending
December 31, 2005, 2006, 2007, 2008 and 2009, respectively.
F-23
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Following is a reconciliation of goodwill:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Global Funds | |
|
Payment | |
|
Total | |
| |
|
Transfer | |
|
Systems | |
|
Goodwill | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Balance as of January 1, 2003
|
|
$ |
280,629 |
|
|
$ |
17,075 |
|
|
$ |
297,704 |
|
| |
Goodwill acquired
|
|
|
97,822 |
|
|
|
— |
|
|
|
97,822 |
|
| |
Impairment losses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003
|
|
|
378,451 |
|
|
|
17,075 |
|
|
|
395,526 |
|
| |
Goodwill acquired
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Impairment losses
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004
|
|
$ |
378,451 |
|
|
$ |
17,075 |
|
|
$ |
395,526 |
|
| |
|
|
|
|
|
|
|
|
|
There were no changes to goodwill during 2004. During 2003,
additions to goodwill of $97.8 million related to the
acquisition of the remaining minority interest in MoneyGram
International Limited was recorded and allocated to the Global
Funds Transfer segment. The amount of goodwill expected to be
deductible for tax purposes is not significant. The Company
performed an annual assessment of goodwill during the fourth
quarter of 2004 and determined that there was no impairment.
Note 9. Debt
Debt consisted of the following at December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
|
|
Weighted | |
|
|
|
Weighted | |
| |
|
|
|
Average | |
|
|
|
Average | |
| |
|
|
|
Interest | |
|
|
|
Interest | |
| |
|
Amount | |
|
Rate | |
|
Amount | |
|
Rate | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Senior term note, due through 2008
|
|
$ |
100,000 |
|
|
|
2.79 |
% |
|
$ |
— |
|
|
|
|
|
|
Senior revolving credit facility, due through 2008
|
|
|
50,000 |
|
|
|
2.79 |
% |
|
|
— |
|
|
|
|
|
|
Commercial Paper
|
|
|
— |
|
|
|
|
|
|
|
168,000 |
|
|
|
1.1 |
% |
|
Senior notes, due 2009
|
|
|
— |
|
|
|
|
|
|
|
35,000 |
|
|
|
6.3 |
% |
|
Other obligations, due through 2016
|
|
|
— |
|
|
|
|
|
|
|
9,848 |
|
|
|
3.6 |
% |
|
Subordinated debt, due 2006
|
|
|
— |
|
|
|
|
|
|
|
18,503 |
|
|
|
5.0 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
150,000 |
|
|
|
|
|
|
|
231,351 |
|
|
|
|
|
|
Portion allocated to Viad
|
|
|
— |
|
|
|
|
|
|
|
(30,000 |
) |
|
|
10.5 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
150,000 |
|
|
|
|
|
|
$ |
201,351 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
In connection with the spin-off, the Company entered into a bank
credit facility providing availability of up to
$350.0 million in the form of a $250.0 million
4 year revolving credit facility and a $100.0 million
term loan. On June 30, 2004, the Company borrowed
$150.0 million (consisting of the $100.0 million term
loan and $50.0 million under the revolving credit facility)
that was paid to Viad. The interest rate on both the term loan
and the credit facility is an indexed rate of LIBOR plus
60 basis points, with one, two, three and six month
repricing options. On December 31, 2004, the interest rate
was 3.1% (exclusive of the effects of commitment fees and other
costs), respectively. The interest rate is subject to adjustment
in the event of a change in our debt rating. The term loan is
due in two equal installments on the third and fourth
anniversary of the loan. Any advances drawn on the revolving
credit facility must be repaid by June 30,
F-24
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2008. The loans are unsecured obligations of MoneyGram, and are
guaranteed on an unsecured basis by MoneyGram’s material
domestic subsidiaries. The proceeds from any future advances may
be used for general corporate expenses and to support letters of
credit. Any letters of credit issued reduce the amount available
under the revolving credit facility (see Note 16). The
Company pays a fee on the facilities regardless of the usage
ranging from 0.1% to 0.375% depending upon our credit rating.
During 2004, our facility fee was 0.15%. The Company incurred
$1.2 million of financing costs in connection with this
transaction. These costs have been capitalized and are being
amortized over the life of the debt.
Borrowings under the facilities are subject to various
covenants, including interest coverage ratio, leverage ratio and
consolidated total indebtedness ratio. The interest coverage
ratio of earnings before interest and taxes to interest expense
must not be less than 3.5 to 1.0. The leverage ratio of total
debt to total capitalization must be less than 0.5 to 1.0. The
consolidated total indebtedness ratio of total debt to earnings
before interest, taxes, depreciation and amortization must be
less than 3.0 to 1.0. At December 31, 2004, the Company was
in compliance with these covenants. There are other restrictions
customary for facilities of this type, including limits on
dividends, indebtedness, stock repurchases, asset sales, merger,
acquisitions and liens. Under the terms of the facilities,
dividends paid and stock repurchased may not exceed
$20.0 million in the aggregate from the date of the
spin-off through December 31, 2004. Going forward, annual
dividends and stock repurchases in the aggregate generally may
not exceed 30 percent of consolidated net income of the
prior year.
In connection with the spin-off, Viad repurchased substantially
all of its outstanding medium-term notes and subordinated
debentures in the amount of $52.6 million. The amounts not
paid off were retained by New Viad. Viad also repaid all of its
outstanding commercial paper in the amount of
$188.0 million and retired its industrial revenue bonds of
$9.0 million. The Company incurred a loss of
$3.5 million in connection with these activities.
On December 31, 2003, debt consisted of the historical debt
of Viad, excluding the portion directly allocable to New Viad.
Scheduled annual maturities of amounts classified as debt at
December 31, 2004 are shown below. Total interest paid on
outstanding debt was $2.0 million, $13.5 million and
$18.6 million in 2004, 2003 and 2002, respectively.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Revolving | |
|
Senior | |
|
|
| |
|
Credit | |
|
Term | |
|
|
| |
|
Facility | |
|
Loan | |
|
Total | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
2007
|
|
$ |
— |
|
|
$ |
50,000 |
|
|
$ |
50,000 |
|
|
2008
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
100,000 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
50,000 |
|
|
$ |
100,000 |
|
|
$ |
150,000 |
|
| |
|
|
|
|
|
|
|
|
|
Note 10. $4.75 Preferred Stock Subject to Mandatory
Redemption
Preferred stock consists of Viad’s preferred stock, which
Viad redeemed in connection with the spin-off for an aggregate
call price of $23.9 million. At December 31, 2003,
Viad had 442,352 authorized shares of $4.75 preferred stock that
were subject to mandatory redemption provisions with a stated
value of $100.00 per share, of which 328,352 shares were
issued. Of the total shares issued, 234,983 shares were
outstanding at a net carrying value of $6.7 million, and
93,369 shares were held by Viad. On July 1, 2003, Viad
adopted SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and
Equity, and accordingly, the $4.75 preferred stock was
classified as a liability under the caption “Preferred
stock subject to mandatory redemption” in the Consolidated
Balance Sheets. In addition, dividends of $0.6 million
declared subsequent to the adoption of SFAS No. 150 have
been included as interest expense in the Consolidated Statements
of Income. In periods prior to July 1, 2003, dividends on
the $4.75 preferred stock were reported as an adjustment to
income to compute income available to common stockholders.
F-25
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 11. Income Taxes
The components of earnings before income taxes from continuing
operations are as follows for the year ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Earnings before income taxes from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
United States
|
|
$ |
53,507 |
|
|
$ |
64,259 |
|
|
$ |
71,178 |
|
| |
Foreign
|
|
|
35,513 |
|
|
|
23,912 |
|
|
|
15,509 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total
|
|
$ |
89,020 |
|
|
$ |
88,171 |
|
|
$ |
86,687 |
|
| |
|
|
|
|
|
|
|
|
|
Income tax expense related to continuing operations for the year
ended December 31 consists of:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
4,386 |
|
|
$ |
24,370 |
|
|
$ |
15,346 |
|
| |
State
|
|
|
4,962 |
|
|
|
3,233 |
|
|
|
3,771 |
|
| |
Foreign
|
|
|
8,261 |
|
|
|
(702 |
) |
|
|
3,856 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Current income tax expense
|
|
|
17,609 |
|
|
|
26,901 |
|
|
|
22,973 |
|
|
Deferred income tax expense
|
|
|
6,282 |
|
|
|
(14,416 |
) |
|
|
(11,050 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
23,891 |
|
|
$ |
12,485 |
|
|
$ |
11,923 |
|
| |
|
|
|
|
|
|
|
|
|
Income tax expense totaling $13.8 million and
$25.0 million in 2004 and 2003, respectively, and an income
tax benefit of $11.0 million in 2002 is included in
“Income and gain from discontinued operations, net of
tax” in the Consolidated Statement of Income. Taxes paid
were $35.7 million, $24.1 million and $31.4 million
for 2004, 2003 and 2002, respectively.
A reconciliation of the expected federal income tax at statutory
rates to the actual taxes provided on income from continuing
operations for the year ended December 31 is:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
% | |
|
2003 | |
|
% | |
|
2002 | |
|
% | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Income tax at statutory federal income tax rate
|
|
$ |
31,157 |
|
|
|
35.0% |
|
|
$ |
30,860 |
|
|
|
35.0% |
|
|
$ |
30,340 |
|
|
|
35.0% |
|
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
State income tax, net of federal income tax effect
|
|
|
910 |
|
|
|
1.0% |
|
|
|
959 |
|
|
|
1.1% |
|
|
|
1,293 |
|
|
|
1.5% |
|
| |
Preferred stock redemption costs
|
|
|
6,004 |
|
|
|
6.7% |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other
|
|
|
1,348 |
|
|
|
1.5% |
|
|
|
1,166 |
|
|
|
1.3% |
|
|
|
1,993 |
|
|
|
2.3% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
39,419 |
|
|
|
44.2% |
|
|
|
32,985 |
|
|
|
37.4% |
|
|
|
33,626 |
|
|
|
38.8% |
|
|
Tax-exempt income
|
|
|
(15,528 |
) |
|
|
(17.4% |
) |
|
|
(20,500 |
) |
|
|
(23.2% |
) |
|
|
(21,703 |
) |
|
|
(25.0% |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$ |
23,891 |
|
|
|
26.8% |
|
|
$ |
12,485 |
|
|
|
14.2% |
|
|
$ |
11,923 |
|
|
|
13.8% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Deferred income taxes reflect temporary differences between
amounts of assets and liabilities for financial reporting
purposes and such amounts as measured by tax laws at enacted tax
rates expected to be in effect when such differences reverse.
Temporary differences, which give rise to deferred tax assets
(liabilities), at December 31 are:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
| |
Postretirement benefits and other employee benefits
|
|
$ |
47,689 |
|
|
$ |
41,223 |
|
| |
Alternative Minimum Tax credits
|
|
|
34,976 |
|
|
|
34,464 |
|
| |
Unrealized loss on derivative financial investments
|
|
|
22,816 |
|
|
|
68,072 |
|
| |
Basis difference in revalued investments
|
|
|
28,279 |
|
|
|
24,889 |
|
| |
Bad debt and other reserves
|
|
|
2,963 |
|
|
|
1,997 |
|
| |
Other
|
|
|
1,938 |
|
|
|
3,659 |
|
| |
|
|
|
|
|
|
| |
|
Gross deferred tax assets
|
|
|
138,661 |
|
|
|
174,304 |
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
| |
Unrealized gain on securities classified as available-for-sale
|
|
|
(59,489 |
) |
|
|
(67,605 |
) |
| |
Depreciation and amortization
|
|
|
(42,644 |
) |
|
|
(32,357 |
) |
| |
Basis difference in investment income
|
|
|
(3,728 |
) |
|
|
(2,537 |
) |
| |
State income taxes
|
|
|
(959 |
) |
|
|
(1,172 |
) |
| |
|
|
|
|
|
|
| |
|
Gross deferred tax liabilities
|
|
|
(106,820 |
) |
|
|
(103,671 |
) |
| |
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$ |
31,841 |
|
|
$ |
70,633 |
|
| |
|
|
|
|
|
|
The Company does not consider its earnings in its foreign
entities to be permanently reinvested. As of December 31,
2004 and 2003, a deferred tax liability of $4.1 million and
$1.0 million was recognized for the unremitted earnings of
its foreign entities.
Included in “Employee benefit plans” in the
Consolidated Statement of Stockholders’ Equity in 2004 is
$0.6 million of tax benefits recognized in connection with
the exercise of stock options. Tax benefits recognized in
connection with the exercise of stock options were less than
$0.1 million in 2003 and 2002.
We have not established a valuation reserve for the deferred tax
assets since we believe it is more likely than not that the
deferred tax assets will be realized. Net deferred taxes are
included in the Consolidated Balance Sheets in “Other
assets.”
Prior to the spin off, income taxes were determined on a
separate return basis as if MoneyGram had not been eligible to
be included in the consolidated income tax return of Viad and
its affiliates. As part of the Distribution, we entered into a
Tax Sharing Agreement with Viad which provides for, among other
things, the allocation between MoneyGram and New Viad of
federal, state, local and foreign tax liabilities and tax
liabilities resulting from the audit or other adjustment to
previously filed tax returns.
The Tax Sharing Agreement provides that through the Distribution
Date, the results of MoneyGram and its subsidiaries’
operations are included in Viad’s consolidated U.S. federal
income tax returns. In general, the Tax Sharing Agreement
provides that MoneyGram will be liable for all federal, state,
local, and foreign tax liabilities, including such liabilities
resulting from the audit of or other adjustment to previously
filed tax returns, that are attributable to the business of
MoneyGram for periods through the Distribution Date, and that
Viad will be responsible for all other of these taxes.
F-27
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 12. Stockholders’ Equity
Rights Agreement: In connection with the spin-off,
MoneyGram adopted a Rights Agreement (“the Rights
Agreement”) by and between the Company and Wells Fargo
Bank, N.A., as the Rights Agent. The preferred share purchase
rights (“the rights”) issuable under the Rights
Agreement were attached to the shares of MoneyGram common stock
distributed in the spin-off. In addition, pursuant to the Rights
Agreement, one right will be issued with each share of MoneyGram
common stock issued after the spin-off. The rights are
inseparable from MoneyGram common stock and will allow its
holder to purchase one one-hundredth of a share of MoneyGram
series A junior participating preferred stock for $100.00, once
the rights become exercisable. The rights become exercisable ten
days after a person or group acquires, or begins a tender or
exchange offer for, 15 percent or more of the
Company’s outstanding common stock. In the event a person
or group acquires 15 percent or more of the Company’s
outstanding common stock, and subject to certain conditions and
exceptions more fully described in the Rights Agreement, each
right will entitle the holder (other than the person or group
acquiring 15 percent or more of the Company’s
outstanding common stock) to purchase shares of MoneyGram common
stock having a market value equal to $200.00. The rights are
redeemable at the discretion of the Company’s Board of
Directors for $0.01 per right and will expire, unless earlier
redeemed, on June 30, 2014. Each one one-hundredth of a
share of MoneyGram preferred stock, if issued, will not be
redeemable, will entitle holders to quarterly dividend payments
of the greater of $0.01 per share or an amount equal to the
dividend paid on one share of MoneyGram common stock, will have
the same voting power as one share of MoneyGram common stock and
will entitle holders, upon liquidation, to receive the greater
of $1.00 per share or the payment made on one share of MoneyGram
common stock.
Preferred Stock: MoneyGram’s Certificate of
Incorporation provides for the issuance of up to 5,000,000
shares of undesignated preferred stock and up to 2,000,000
shares of series A junior participating preferred stock.
Undesignated preferred stock may be issued in one or more
series, with each series to have those rights and preferences,
including, without limitation, voting rights, dividend rights,
conversion rights, redemption privileges and liquidation
preferences, as shall be determined by unlimited discretion of
MoneyGram’s Board of Directors. Series A junior
participating preferred stock has been reserved for issuance
upon exercise of preferred share purchase rights. At
December 31, 2004, no preferred stock is issued or
outstanding.
Common Stock: MoneyGram’s Certificate of
Incorporation provides for the issuance of up to 250,000,000
shares of common stock with a par value of $0.01. On the
Distribution Date, MoneyGram was recapitalized such that the
88,556,077 shares of MoneyGram common stock outstanding was
equal to the number of shares of Viad common stock outstanding
at the close of business on the record date. Stockholders’
equity at December 31, 2003 and 2002 represented
Viad’s capital structure consisting of 200,000,000 common
shares authorized and 99,739,925 shares issued with a $1.50 par
value.
The holders of MoneyGram common stock are entitled to one vote
per share on all matters to be voted upon by its stockholders.
The holders of common stock have no preemptive or conversion
rights or other subscription rights. There are no redemption or
sinking fund provisions applicable to the common stock. The
determination to pay dividends on common stock will be at the
discretion of the Board of Directors and will depend on our
financial condition, results of operations, cash requirements,
prospects and such other factors as the Board of Directors may
deem relevant.
On August 19, 2004, the Board of Directors declared the
Company’s initial quarterly cash dividend of $0.01 per
share. The dividend was paid on October 1, 2004 to stockholders
of record at the close of business on September 16, 2004.
The total amount of the dividend was $0.9 million. On
November 18, 2004, the Board of Directors declared the
Company’s second quarterly cash dividend of $0.01 per
share. The Company paid $0.9 million to the transfer agent
on December 31, 2004 and the cash dividend was distributed
by the transfer agent on January 3, 2005. On
February 17,
F-28
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2005, the Board of Directors declared a quarterly cash dividend
of $0.01 per share to be paid on April 1, 2005 to
stockholders of record on March 17, 2005.
Treasury Stock: Through June 30, 2004, treasury
stock represented Viad common stock repurchased and held by the
Company. As of December 31, 2003, the Company held
11,382,364 shares of Viad common stock in treasury. On November
18, 2004, the Board of Directors authorized a plan to
repurchase, at the Company’s discretion, up to 2,000,000
shares of MoneyGram International, Inc. common stock with the
intended effect of returning value to the stockholders and
reducing dilution caused by the issuance of stock in connection
with stock-based compensation described in Note 15. During the
last six months of 2004, the Company repurchased 770,299 shares
at an average cost of $21.01 per share. At December 31,
2004, there are 801,130 shares of stock held in treasury.
Following is a summary of common stock and treasury stock share
activity:
| |
|
|
|
|
|
|
|
|
| |
|
Common | |
|
Treasury | |
| |
|
Stock | |
|
Stock | |
| |
|
| |
|
| |
| |
|
(Amounts in thousands) | |
|
Balance at January 1, 2003
|
|
|
99,740 |
|
|
|
11,638 |
|
|
Stock repurchases
|
|
|
— |
|
|
|
40 |
|
|
Net submission of shares upon exercise of stock options
|
|
|
— |
|
|
|
28 |
|
|
Net issuance upon vesting of restricted stock
|
|
|
— |
|
|
|
(324 |
) |
| |
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
99,740 |
|
|
|
11,382 |
|
|
Net submission of shares upon exercise of stock options
|
|
|
— |
|
|
|
37 |
|
|
Net issuance upon vesting of restricted stock
|
|
|
— |
|
|
|
(235 |
) |
|
Impact of spin-off
|
|
|
(11,184 |
) |
|
|
(11,184 |
) |
| |
|
|
|
|
|
|
|
Balance at June 30, 2004
|
|
|
88,556 |
|
|
|
— |
|
|
Stock repurchases
|
|
|
— |
|
|
|
770 |
|
|
Net submission of shares upon exercise of stock options
|
|
|
— |
|
|
|
36 |
|
|
Net issuance upon vesting of restricted stock
|
|
|
— |
|
|
|
(5 |
) |
| |
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
88,556 |
|
|
|
801 |
|
| |
|
|
|
|
|
|
Accumulated Other Comprehensive Income: The components of
accumulated other comprehensive income (loss) at
December 31 include:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Unrealized gain on securities classified as available-for-sale
|
|
$ |
99,148 |
|
|
$ |
105,263 |
|
|
Unrealized loss on derivative financial instruments
|
|
|
(38,027 |
) |
|
|
(106,472 |
) |
|
Cumulative foreign currency translation adjustments
|
|
|
6,344 |
|
|
|
4,537 |
|
|
Minimum pension liability adjustment
|
|
|
(41,774 |
) |
|
|
(38,536 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
25,691 |
|
|
$ |
(35,208 |
) |
| |
|
|
|
|
|
|
F-29
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 13. Earnings Per Share
Basic earnings per share is calculated by dividing net income by
the weighted average number of common shares outstanding during
the period. Since our common stock was not issued until
June 30, 2004, the weighted average number of common shares
outstanding during each period presented equals Viad’s
historical weighted average number of common shares outstanding
through that date.
The following table presents the calculation of basic and
diluted net income per share for the year ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars and shares in thousands, | |
| |
|
except per share data) | |
|
Income from continuing operations
|
|
$ |
65,129 |
|
|
$ |
75,686 |
|
|
$ |
74,764 |
|
|
Preferred stock dividend
|
|
|
— |
|
|
|
(572 |
) |
|
|
(1,141 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations available to common
stockholders
|
|
|
65,129 |
|
|
|
75,114 |
|
|
|
73,623 |
|
|
Income from discontinued operations, net of tax
|
|
|
21,283 |
|
|
|
38,216 |
|
|
|
(16,878 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
|
$ |
86,412 |
|
|
$ |
113,330 |
|
|
$ |
56,745 |
|
| |
|
|
|
|
|
|
|
|
|
|
Average outstanding common shares
|
|
|
86,916 |
|
|
|
86,223 |
|
|
|
86,178 |
|
|
Additional dilutive shares related to stock-based compensation
|
|
|
414 |
|
|
|
396 |
|
|
|
538 |
|
| |
|
|
|
|
|
|
|
|
|
|
Average outstanding and potentially dilutive common shares
|
|
|
87,330 |
|
|
|
86,619 |
|
|
|
86,716 |
|
| |
|
|
|
|
|
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic earnings per share from continuing operations
|
|
$ |
0.75 |
|
|
$ |
0.87 |
|
|
$ |
0.87 |
|
| |
Basic earnings per share from discontinued operations, net of tax
|
|
|
0.24 |
|
|
|
0.44 |
|
|
|
(0.21 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Basic earnings per share
|
|
$ |
0.99 |
|
|
$ |
1.31 |
|
|
$ |
0.66 |
|
| |
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted earnings per share from continuing operations
|
|
$ |
0.75 |
|
|
$ |
0.87 |
|
|
$ |
0.86 |
|
| |
Diluted earnings per share from discontinued operations, net of
tax
|
|
|
0.24 |
|
|
|
0.44 |
|
|
|
(0.21 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Diluted earnings per share
|
|
$ |
0.99 |
|
|
$ |
1.31 |
|
|
$ |
0.65 |
|
| |
|
|
|
|
|
|
|
|
|
Options to purchase 2,778,299, 3,432,258 and 3,590,806 shares of
common stock were outstanding at December 31, 2004, 2003
and 2002, respectively, but were not included in the computation
of diluted earnings per share because the effect would be
antidilutive.
Note 14. Pensions and Other Benefits
Pension Benefits — Prior to the Distribution,
MoneyGram was a participating employer in the Viad Companies
Retirement Income Plan (the “Plan”) of which the plan
administrator was Viad. At the time of the Distribution, the
Company assumed sponsorship of the Plan, which is a
noncontributory defined benefit pension plan covering all
employees who meet certain age and length-of-service
requirements. Viad retained the pension liability for a portion
of the employees in its Exhibitgroup/ Giltspur subsidiary and
one sold business, which represented eight percent of
Viad’s benefit obligation at December 31, 2003.
Effective December 31, 2003, benefits under the Plan ceased
accruing with no change in benefits earned through this date. A
curtailment gain of $3.8 million was recorded in
“Compensation and benefits” in the
F-30
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Consolidated Statement of Income. It is our policy to fund the
minimum required contribution for the year.
Supplemental Executive Retirement Plan (SERP) —
In connection with the spin-off, the Company assumed
responsibility for all but a portion of the Viad SERP, while
Viad retained the benefit obligation related to two of its
subsidiaries, representing 13 percent of Viad’s
benefit obligation at December 31, 2003. Another SERP, the
MoneyGram International, Inc. SERP, is a nonqualified defined
benefit pension plan, which provides postretirement income to
eligible employees selected by the Board of Directors. It is our
policy to fund the supplemental executive retirement plan as
benefits are paid.
Net periodic pension cost for the defined benefit pension plan
and combined SERPs includes the following components for the
year ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Service cost
|
|
$ |
1,717 |
|
|
$ |
2,912 |
|
|
$ |
2,776 |
|
|
Interest cost
|
|
|
11,333 |
|
|
|
11,260 |
|
|
|
11,119 |
|
|
Expected return on plan assets
|
|
|
(8,804 |
) |
|
|
(9,627 |
) |
|
|
(11,935 |
) |
|
Amortization of prior service cost
|
|
|
768 |
|
|
|
516 |
|
|
|
579 |
|
|
Recognized net actuarial loss
|
|
|
3,990 |
|
|
|
1,854 |
|
|
|
456 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost
|
|
$ |
9,004 |
|
|
$ |
6,915 |
|
|
$ |
2,995 |
|
| |
|
|
|
|
|
|
|
|
|
Benefits expected to be paid through the defined benefit pension
plan and combined SERPS are $11.3 million,
$12.2 million, $12.5 million, $12.5 million,
$12.7 million and $65.1 million for 2005, 2006, 2007,
2008, 2009 and for the five years starting 2010, respectively.
Contributions to the defined benefit pension plan and combined
SERPS are expected to be $15.7 million in 2005.
The actuarial valuation date for the defined benefit pension
plan and SERPs is November 30. Following are the weighted
average actuarial assumptions used in calculating the benefit
obligation and net benefit cost as of and for the years ended
December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Net benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Discount rate
|
|
|
6.25% |
|
|
|
6.75% |
|
|
|
7.25% |
|
| |
Expected return on plan assets
|
|
|
8.75% |
|
|
|
8.75% |
|
|
|
10.00% |
|
| |
Rate of compensation increase
|
|
|
4.50% |
|
|
|
4.50% |
|
|
|
4.50% |
|
|
Benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Discount rate
|
|
|
6.00% |
|
|
|
6.25% |
|
|
|
6.75% |
|
| |
Rate of compensation increase
|
|
|
4.50% |
|
|
|
4.50% |
|
|
|
4.50% |
|
The Company utilizes a building-block approach in determining
the long-term expected rate of return on plan assets. Historical
markets are studied and long-term historical relationships
between equity securities and fixed income securities are
preserved consistent with the widely accepted capital market
principle that assets with higher volatility generate a greater
return over the long run. Current market factors such as
inflation and interest rates are evaluated before long-term
capital market assumptions are determined. The long-term
portfolio return also takes proper consideration of
diversification and rebalancing. Peer data and historical
returns are reviewed for reasonableness and appropriateness.
F-31
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The benefit obligation and plan assets, changes to the benefit
obligation and plan assets and a reconciliation of the funded
status of the defined benefit pension plan and combined SERPs as
of and for the year ended December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
| |
Benefit obligation at the beginning of the year
|
|
$ |
185,782 |
|
|
$ |
171,896 |
|
| |
Service cost
|
|
|
1,717 |
|
|
|
2,912 |
|
| |
Interest cost
|
|
|
11,333 |
|
|
|
11,260 |
|
| |
Actuarial (gain) or loss
|
|
|
6,374 |
|
|
|
10,854 |
|
| |
Curtailment gain
|
|
|
— |
|
|
|
(1,127 |
) |
| |
Benefits paid
|
|
|
(10,934 |
) |
|
|
(10,013 |
) |
| |
|
|
|
|
|
|
| |
Benefit obligation at the end of the year
|
|
$ |
194,272 |
|
|
$ |
185,782 |
|
| |
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets at the beginning of the year
|
|
$ |
96,435 |
|
|
$ |
96,862 |
|
| |
Actual return on plan assets
|
|
|
7,771 |
|
|
|
7,033 |
|
| |
Employer contributions
|
|
|
4,853 |
|
|
|
2,553 |
|
| |
Benefits paid
|
|
|
(10,934 |
) |
|
|
(10,013 |
) |
| |
|
|
|
|
|
|
| |
Fair value of plan assets at the end of the year
|
|
$ |
98,125 |
|
|
$ |
96,435 |
|
| |
|
|
|
|
|
|
|
Reconciliations of funded status:
|
|
|
|
|
|
|
|
|
| |
Funded (unfunded) status
|
|
$ |
(96,147 |
) |
|
$ |
(89,347 |
) |
| |
Unrecognized actuarial (gain) loss
|
|
|
72,264 |
|
|
|
68,847 |
|
| |
Unrecognized prior service cost
|
|
|
4,008 |
|
|
|
4,776 |
|
| |
|
|
|
|
|
|
| |
Net amount recognized in Consolidated Balance Sheets
|
|
$ |
(19,875 |
) |
|
$ |
(15,724 |
) |
| |
|
|
|
|
|
|
|
Amounts recognized in Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
| |
Accrued benefit liability
|
|
$ |
(89,217 |
) |
|
$ |
(82,024 |
) |
| |
Intangible asset
|
|
|
2,503 |
|
|
|
3,127 |
|
| |
Deferred tax asset
|
|
|
25,065 |
|
|
|
24,637 |
|
| |
Additional minimum liability
|
|
|
41,774 |
|
|
|
38,536 |
|
| |
|
|
|
|
|
|
| |
Net amount recognized in Consolidated Balance Sheets
|
|
$ |
(19,875 |
) |
|
$ |
(15,724 |
) |
| |
|
|
|
|
|
|
The projected benefit obligation and accumulated benefit
obligation for both the defined benefit pension plan and the
combined SERPs are in excess of the fair value of plan assets.
Following is a summary of the defined benefit pension plan and
the combined SERPs:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Defined Benefit | |
|
|
| |
|
Pension Plan | |
|
Combined SERPs | |
| |
|
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
| |
|
| |
|
Projected benefit obligation
|
|
$ |
142,494 |
|
|
$ |
137,478 |
|
|
$ |
51,778 |
|
|
$ |
48,304 |
|
|
Accumulated benefit obligation
|
|
|
142,494 |
|
|
|
137,478 |
|
|
|
44,622 |
|
|
|
40,863 |
|
|
Fair value of plan assets
|
|
|
98,125 |
|
|
|
96,435 |
|
|
|
— |
|
|
|
— |
|
F-32
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The Company’s weighted average asset allocation for the
funded pension plan by asset category at December 31 is as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
|
Equity securities
|
|
|
56.2% |
|
|
|
54.4% |
|
|
Fixed income securities
|
|
|
38.2% |
|
|
|
35.3% |
|
|
Real estate
|
|
|
2.6% |
|
|
|
7.0% |
|
|
Other
|
|
|
3.0% |
|
|
|
3.3% |
|
| |
|
|
|
|
|
|
| |
|
|
100.0% |
|
|
|
100.0% |
|
| |
|
|
|
|
|
|
The Company employs a total return investment approach whereby a
mix of equities and fixed income securities are used to maximize
the long-term return of plan assets for a prudent level of risk.
Risk tolerance is established through careful consideration of
plan liabilities, plan funded status and corporate financial
condition. The investment portfolio contains a diversified blend
of equity and fixed income securities. Furthermore, equity
securities are diversified across U.S. and non-U.S. stocks, as
well as growth, value and small and large capitalizations. Other
assets such as real estate and cash are used judiciously to
enhance long-term returns while improving portfolio
diversification. The Company strives to maintain an equity and
fixed income securities allocation mix of approximately
55 percent and 35 percent, respectively. Investment
risk is measured and monitored on an ongoing basis through
quarterly investment portfolio reviews and annual liability
measurements.
Postretirement Benefits Other Than Pensions —
The Company has unfunded defined benefit postretirement
plans that provide medical and life insurance for eligible
employees, retirees, and dependents. The related postretirement
benefit liabilities are recognized over the period that services
are provided by the employees. Upon the Distribution, the
Company assumed the benefit obligation for current and former
employees assigned to MoneyGram. Viad retained the benefit
obligation for postretirement benefits other than pensions for
all Viad and non-MoneyGram employees, with the exception of one
executive.
In May 2004, the FASB issued FASB Staff Position
(“FSP”) FAS 106-2 on the accounting for the
effects of the Medicare Prescription Drug, Improvement and
Modernization Act of 2004 (the “Act”) which was
enacted into law on December 8, 2003. The Act introduces a
Medicare prescription drug benefit, as well as a federal subsidy
to sponsors of retiree health care plans that provide a benefit
that is at least substantially equivalent to the Medicare
benefit. The Company made a one-time election, under the
previously issued FSP FAS 106-1, to defer recognition of
the effects of the Act until further authoritative guidance was
issued. With FSP FAS 106-2, which superceded FSP
FAS 106-1, specific guidance was provided in accounting for
the subsidy. The Company adopted FSP FAS 106-2 in the third
quarter of 2004 using the prospective method, which means the
reduction of the Accumulated Postretirement Benefit Obligation
(APBO) of $1.4 million is recognized over future
periods. This reduction in the APBO is due to a subsidy
available on prescription drug benefits provided to plan
participants determined to be actuarially equivalent to the Act.
While specific guidance regarding the determination as to
whether a plan is actuarially equivalent is not currently
available, the Company believes that its postretirement plan
will be actuarially equivalent to the Act. The postretirement
benefits expense for the second half of 2004 was reduced by
$90,000 due to the reductions in the APBO and the current period
service cost.
F-33
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The Company’s funding policy is to make contributions to
the plan as benefits are required to be paid. Net periodic
postretirement benefit cost includes the following components
for the year ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Service cost
|
|
$ |
515 |
|
|
$ |
490 |
|
|
$ |
354 |
|
|
Interest cost
|
|
|
593 |
|
|
|
578 |
|
|
|
476 |
|
|
Amortization of prior service cost
|
|
|
(294 |
) |
|
|
(288 |
) |
|
|
(288 |
) |
|
Recognized net actuarial loss
|
|
|
14 |
|
|
|
18 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$ |
828 |
|
|
$ |
798 |
|
|
$ |
542 |
|
| |
|
|
|
|
|
|
|
|
|
The benefit obligation and plan assets, changes to the benefit
obligation and plan assets and a reconciliation of the funded
status of the defined benefit postretirement plan as of and for
the year ended December 31 are as follows:
| |
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
| |
Benefit obligation at the beginning of the year
|
|
$ |
10,570 |
|
|
$ |
8,964 |
|
| |
Service cost
|
|
|
515 |
|
|
|
490 |
|
| |
Interest cost
|
|
|
593 |
|
|
|
578 |
|
| |
Plan amendments
|
|
|
(71 |
) |
|
|
— |
|
| |
Actuarial (gain) or loss
|
|
|
(456 |
) |
|
|
496 |
|
| |
Benefits paid
|
|
|
(128 |
) |
|
|
(117 |
) |
| |
|
|
|
|
|
|
| |
Benefit obligation at the end of the year
|
|
$ |
11,023 |
|
|
$ |
10,411 |
|
| |
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
| |
Fair value of plan assets at the beginning of the year
|
|
$ |
— |
|
|
$ |
— |
|
| |
Employer contributions
|
|
|
128 |
|
|
|
117 |
|
| |
Benefits paid
|
|
|
(128 |
) |
|
|
(117 |
) |
| |
|
|
|
|
|
|
| |
Fair value of plan assets at the end of the year
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
|
Reconciliations of funded status:
|
|
|
|
|
|
|
|
|
| |
Funded (unfunded) status
|
|
$ |
(11,023 |
) |
|
$ |
(10,411 |
) |
| |
Unrecognized actuarial (gain) loss
|
|
|
1,293 |
|
|
|
1,927 |
|
| |
Unrecognized prior service cost
|
|
|
(2,781 |
) |
|
|
(3,004 |
) |
| |
|
|
|
|
|
|
| |
Accrued benefit liability
|
|
$ |
(12,511 |
) |
|
$ |
(11,488 |
) |
| |
|
|
|
|
|
|
Benefits expected to be paid are $0.2 million,
$0.2 million, $0.3 million, $0.3 million,
$0.3 million and $2.0 million for 2005, 2006, 2007,
2008, 2009 and for the five years starting 2010, respectively.
Subsidies to be received under The Act beginning in 2006 are not
expected to be material. The Company will continue to make
contributions to the plan to the extent benefits are paid.
The Company’s actuarial valuation date for the
postretirement plan is November 30. The weighted-average
discount rate used to determine the actuarial present value of
the accumulated postretirement projected benefit obligation for
the years ended December 31, 2004 and 2003 are is
6.00 percent and 6.25 percent, respectively. The
weighted-average discount rates used to determine the net
postretirement benefit cost for 2004, 2003 and 2002 are
6.25 percent, 6.75 percent and 7.25 percent,
respectively.
The health care cost trend rate assumption has a significant
effect on the amounts reported. For mea-
F-34
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
surement purposes, a 10.00 percent annual rate of increase
in the per capita cost of covered health care benefits was
assumed for both 2004 and 2003, respectively. For 2004, the rate
was assumed to decrease gradually to 5.00 percent by the
year 2010 and remain at that level thereafter. For 2003, the
rate was assumed to decrease gradually to 5.00 percent by
the year 2008 and remain at that level thereafter. A
one-percentage point change in assumed health care trends would
have the following effects:
| |
|
|
|
|
|
|
|
|
| |
|
One | |
|
One | |
| |
|
Percentage | |
|
Percentage | |
| |
|
Point | |
|
Point | |
| |
|
Increase | |
|
Decrease | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Effect on total of service and interest cost components
|
|
$ |
259 |
|
|
$ |
(209 |
) |
|
Effect on postretirement benefit obligation
|
|
|
2,144 |
|
|
|
(1,745 |
) |
Employee Savings Plan — The Company has an
employee savings plan that qualifies under Section 401(k)
of the Internal Revenue Code. Contributions to, and costs of,
the 401(k) defined contribution plan totaled $1.9 million,
$1.2 million and $1.2 million in 2004, 2003 and 2002,
respectively. At the time of the Distribution, MoneyGram’s
new savings plan assumed all liabilities under the Viad
Employees Stock Ownership Plan (the “Viad ESOP”) for
benefits of the current and former employees assigned to
MoneyGram, and the related trust received a transfer of the
corresponding account balances. MoneyGram does not have an
Employee Stock Ownership Plan.
Employee Equity Trust — Viad sold treasury
stock in 1992 to its employee equity trust to fund certain
existing employee compensation and benefit plans. In connection
with the spin-off, Viad transferred 1,632,964 shares of
MoneyGram common stock to a MoneyGram International, Inc.
employee equity trust (the “Trust”) to be used by
MoneyGram to fund employee compensation and benefit plans. The
fair market value of the shares held by this Trust, representing
unearned employee benefits is recorded as a deduction from
common stock and other equity and is reduced as employee
benefits are funded. For financial reporting purposes, the Trust
is consolidated. As of December 31, 2004, 1,390,163 shares
of MoneyGram common stock remained in the trust.
Deferred Compensation Plans — Viad had a
deferred compensation plan for its non-employee directors and a
deferred compensation plan for certain members of management. In
connection with the deferred compensation plans, Viad funded
certain amounts through a rabbi trust. At December 31,
2003, the rabbi trust had a market value of $9.1 million,
while the liability for the deferred compensation plans was
$16.1 million. In connection with the spin-off, the Company
paid a dividend of $7.25 million to Viad, which was used to
pay certain liabilities under the deferred compensation plans.
The Company assumed liabilities totaling $6.6 million
related to the plans and retained rabbi trust assets totaling
$5.5 million. Subsequent to the spin-off, the Company
adopted a deferred compensation plan for its non-employee
directors, as a well as a deferred compensation plan for certain
members of management. Under the director deferred compensation
plan, non-employee directors may defer all or part of their
retainers and fees in the form of stock units or cash. Director
deferred accounts are payable upon resignation from the Board.
Under the management deferred compensation plan, participants
may defer the receipt of incentive compensation awards in the
form of stock units or cash. Management deferred accounts are
generally payable under the timing and method elected by the
participant on the deferral date. Deferred stock unit accounts
under both plans are credited quarterly with dividend
equivalents and will be adjusted in the event of a change in our
capital structure from a stock split, stock dividend or other
change. Deferred cash accounts under both plans are credited
quarterly with interest at a long-term, medium-quality bond
rate. Both deferred compensation plans are unfunded and
unsecured and the Company is not required to physically
segregate any assets in connection with the deferred accounts.
At December 31, 2004, the Company had a liability related
to the deferred compensation plans of $5.9 million recorded
in the “Other liabilities” component in the
Consolidated Balance Sheet. The rabbi trust had a market value
of $6.0 million at December 31, 2004.
F-35
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Note 15. Stock-Based Compensation
As of the Distribution Date, each Viad option that immediately
prior to the Distribution Date was outstanding and not exercised
was adjusted to consist of two options: (1) an option to
purchase shares of Viad common stock and (2) an option to
purchase shares of MoneyGram common stock. The exercise price of
the Viad stock option was adjusted by multiplying the exercise
price of the old stock option by a fraction, the numerator of
which was the closing price of a share of Viad common stock on
the first trading day after the Distribution Date (divided by
four to reflect the post-spin Viad reverse stock split) and the
denominator of which was that price plus the closing price for a
share of MoneyGram common stock on the first trading day after
the Distribution Date. The exercise price of each MoneyGram
stock option equals the exercise price of each old stock option
times a fraction, the numerator of which is the closing price of
a share of MoneyGram common stock on the first trading day after
the Distribution Date and the denominator of which is that price
plus the closing price of a share of Viad common stock on the
first trading day after the Distribution Date (divided by four
to reflect the post-spin Viad reverse stock split). These
MoneyGram options are considered to have been issued under the
MoneyGram 2004 Omnibus Incentive Plan.
MoneyGram will take all tax deductions relating to the exercise
of stock options and the vesting of restricted stock held by
employees and former employees of MoneyGram, and Viad will take
the deductions arising from options and restricted stock held by
its employees and former employees.
In connection with the spin-off, the Company adopted the 2004
MoneyGram Omnibus Incentive Plan to provide for the following
types of awards to officers, directors, and certain key
employees: (a) incentive and nonqualified stock options;
(b) stock appreciation rights; (c) restricted stock;
and (d) performance based awards. Additionally, non-employee
directors will receive an initial grant of nonqualified options
when they become directors and an additional grant of
nonqualified options each year of their term. Under the 2004
Omnibus Incentive Plan, the Company may grant any combination of
awards up to the equivalent of two percent of the outstanding
shares of common stock in each period. Any equivalent shares not
used in a fiscal period may be carried over to the next fiscal
period. Forfeited and cancelled awards become available for new
grants. As of December 31, 2004, the Company has remaining
authorization to issue awards totaling up to
3,471,220 million shares of common stock under the 2004
Omnibus Incentive Plan.
Stock options granted in 2004 become exercisable in a five-year
period in an equal number of shares each year and have a term of
seven years. Stock options granted in 2003 become exercisable in
a three-year period in an equal number of shares each year and
have a term of ten years. Stock options granted in calendar
years 2002 and prior became exercisable in a two-year period in
an equal number of shares each year and have a term of ten
years. All stock options granted since 1998 contain certain
forfeiture and non-compete provisions.
F-36
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Following is a summary of stock option activity:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted | |
|
|
| |
|
|
|
Average | |
|
|
| |
|
Total | |
|
Exercise | |
|
Options | |
| |
|
Shares | |
|
Price | |
|
Exercisable | |
| |
|
| |
|
| |
|
| |
|
Options outstanding at December 31, 2001
|
|
|
5,650,668 |
|
|
$ |
16.29 |
|
|
|
3,466,201 |
|
| |
Granted
|
|
|
1,082,217 |
|
|
|
20.57 |
|
|
|
|
|
| |
Exercised
|
|
|
(703,923 |
) |
|
|
12.27 |
|
|
|
|
|
| |
Canceled
|
|
|
(568,497 |
) |
|
|
19.26 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2002
|
|
|
5,460,465 |
|
|
|
17.36 |
|
|
|
3,711,237 |
|
| |
Granted
|
|
|
937,150 |
|
|
|
15.66 |
|
|
|
|
|
| |
Exercised
|
|
|
(297,865 |
) |
|
|
10.54 |
|
|
|
|
|
| |
Canceled
|
|
|
(469,291 |
) |
|
|
18.74 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2003
|
|
|
5,630,459 |
|
|
|
17.31 |
|
|
|
4,322,053 |
|
| |
Granted
|
|
|
724,700 |
|
|
|
19.32 |
|
|
|
|
|
| |
Exercised
|
|
|
(519,169 |
) |
|
|
12.03 |
|
|
|
|
|
| |
Canceled
|
|
|
(239,249 |
) |
|
|
18.70 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Options outstanding at December 31, 2004
|
|
|
5,596,741 |
|
|
|
17.99 |
|
|
|
4,370,671 |
|
| |
|
|
|
|
|
|
|
|
|
The following table summarizes information concerning stock
options outstanding and exercisable at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding | |
|
Options Exercisable | |
| |
|
| |
|
| |
| |
|
|
|
Weighted | |
|
|
|
|
| |
|
|
|
Average | |
|
Weighted | |
|
|
|
Weighted | |
| |
|
|
|
Remaining | |
|
Average | |
|
|
|
Average | |
| Range of |
|
|
|
Contractual | |
|
Exercise | |
|
|
|
Exercise | |
| Exercise Prices |
|
Shares | |
|
Life (Years) | |
|
Price | |
|
Shares | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
$9.94 to $15.62
|
|
|
1,459,408 |
|
|
|
5.50 |
|
|
$ |
14.16 |
|
|
|
921,735 |
|
|
$ |
13.31 |
|
|
$15.68 to $18.87
|
|
|
1,374,182 |
|
|
|
5.25 |
|
|
|
17.73 |
|
|
|
1,365,851 |
|
|
|
17.73 |
|
|
$19.00 to $19.32
|
|
|
1,592,297 |
|
|
|
6.15 |
|
|
|
19.24 |
|
|
|
913,897 |
|
|
|
19.18 |
|
|
$19.37 to $21.25
|
|
|
744,254 |
|
|
|
7.20 |
|
|
|
20.78 |
|
|
|
742,588 |
|
|
|
20.78 |
|
|
$22.46 to $22.46
|
|
|
426,600 |
|
|
|
4.35 |
|
|
|
22.46 |
|
|
|
426,600 |
|
|
|
22.46 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$9.94 to $22.46
|
|
|
5,596,741 |
|
|
|
5.76 |
|
|
$ |
17.99 |
|
|
|
4,370,671 |
|
|
$ |
18.08 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has granted both restricted stock and
performance-based restricted stock. The vesting of restricted
stock is typically three years from the date of grant. The
vesting of performance-based restricted stock is contingent upon
the Company obtaining certain financial thresholds established
on the grant date. Provided the incentive performance targets
established in the year of grant are achieved, the
performance-based restricted stock awards granted in 2004 and
2003 will vest in a three-year period from the date of grant in
an equal number of shares each year. Full ownership of shares
could vest on an accelerated basis if performance targets
established are met at certain achievement levels. The
performance-based restricted stock awards granted in 2002 will
vest in 2006 and 2007 in an equal number of shares each year.
Future vesting in all cases is subject generally to continued
employment with MoneyGram or Viad. Holders of restricted stock
and performance-based restricted stock have the right to receive
dividends and vote the shares, but may not sell, assign,
transfer, pledge or otherwise encumber the stock. On the
Distribution Date, our Chairman of the Board was granted a
restricted stock award under our 2004 Incentive Plan of 50,000
shares of common stock, of which 25,000 shares vested
immediately and 25,000
F-37
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
shares will vest on June 30, 2006. The Company recognized
compensation expense totaling $1.9 million,
$1.4 million and $1.1 million in 2004, 2003 and 2002,
respectively, related to its restricted stock awards. Following
is a summary of restricted stock activity:
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
Weighted | |
| |
|
Total | |
|
Average | |
| |
|
Shares | |
|
Price | |
| |
|
| |
|
| |
|
Restricted stock outstanding at December 31, 2001
|
|
|
295,900 |
|
|
$ |
16.58 |
|
| |
Granted
|
|
|
363,616 |
|
|
|
21.23 |
|
| |
|
|
|
|
|
|
|
Restricted stock outstanding at December 31, 2002
|
|
|
659,516 |
|
|
|
19.14 |
|
| |
Granted
|
|
|
406,700 |
|
|
|
16.70 |
|
| |
|
|
|
|
|
|
|
Restricted stock outstanding at December 31, 2003
|
|
|
1,066,216 |
|
|
|
18.21 |
|
| |
Granted
|
|
|
342,900 |
|
|
|
19.52 |
|
| |
Vested and issued
|
|
|
(294,721 |
) |
|
|
16.62 |
|
| |
Canceled
|
|
|
(17,250 |
) |
|
|
17.70 |
|
| |
|
|
|
|
|
|
|
Restricted stock outstanding at December 31, 2004
|
|
|
1,097,145 |
|
|
|
19.06 |
|
| |
|
|
|
|
|
|
Note 16. Commitments and Contingencies
Operating Leases: The Company has various noncancelable
operating leases for buildings and equipment that terminate
through 2015. Certain of these leases contain rent escalation
clauses based on pre-determined annual rate increases. The
Company recognizes rent expense under the straight-line method.
Rent expense under these operating leases totaled
$6.5 million, $5.8 million and $5.4 million
during 2004, 2003 and 2002 respectively. Minimum future rental
payments for all noncancelable operating leases with an initial
term of more than one year are (dollars in thousands):
| |
|
|
|
|
|
2005
|
|
$ |
5,279 |
|
|
2006
|
|
|
5,266 |
|
|
2007
|
|
|
5,014 |
|
|
2008
|
|
|
4,906 |
|
|
2009
|
|
|
4,932 |
|
|
Later
|
|
|
21,892 |
|
| |
|
|
|
| |
|
$ |
47,289 |
|
| |
|
|
|
F-38
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Legal Proceedings: The Company is party to a variety of
legal proceedings that arise in the normal course of our
business. While the results of these legal proceedings cannot be
predicted with certainty, management believes that the final
outcome of these proceedings will not have a material adverse
effect on the Company’s consolidated results of operations
or financial position.
Credit Facilities: At December 31, 2004, the Company
has various reverse repurchase agreements, letters of credit and
overdraft facilities totaling $1.9 billion to assist in the
management of investments and the clearing of payment service
obligations. These credit facilities are in addition to
available amounts under the revolving credit agreement described
in Note 9. Included in this amount is an uncommitted reverse
repurchase agreement with one of the clearing banks totaling
$1.0 billion. Overdraft facilities consist of a $20.0
million line of credit and $60.4 million of letters of
credit. The letters of credit reduce amounts available under the
revolving credit agreement. Fees on the letters of credit are
paid in accordance with the terms of the revolving credit
agreement described in Note 9. At December 31, 2004, there
were no amounts outstanding under the overdraft facilities and
there were no investments sold under the reverse repurchase
agreements.
The Company has agreements with certain other co-investors to
provide funds related to investments in limited partnership
interests. As of December 31, 2004, the total amount of
unfunded commitments related to these agreements was
$9.6 million.
Note 17. Segment Information
Our business is conducted through two reportable segments:
Global Funds Transfer and Payment Systems. The Global Funds
Transfer segment primarily provides money transfer services
through a network of global retail agents and domestic money
orders. In addition, Global Funds Transfer provides a full line
of bill payment services. The Payment Systems segment primarily
provides official check services for financial institutions in
the United States, and processes controlled disbursements. In
addition, Payment Systems sells money orders through financial
institutions in the United States. No single customer or agent
in either segment accounted for more than 10 percent of
total revenue or receivables during 2004, 2003 or 2002.
The business segments are determined based upon factors such as
the type of customers, the nature of products and services
provided and the distribution channels used to provide those
services. Segment pre-tax operating income and segment operating
margin are used to evaluate performance and allocate resources.
“Other unallocated expenses” includes corporate
overhead and interest expense that is not allocated to the
segments.
The Company manages its investment portfolio on a consolidated
level and the specific investment securities are not
identifiable to a particular segment. However, revenues are
allocated to the segments based upon allocated average
investable balances and an allocated yield. Average investable
balances are allocated to the segments based on the average
balances generated by that segment’s sale of payment
instruments. The investment yield is generally allocated based
on the total average total investment yield. Gains and losses
are allocated based upon the allocation of average investable
balances. The derivatives portfolio is also managed on a
consolidated level and the derivative instruments are not
specifically identifiable to a particular segment. The total
costs associated with the swap portfolio are allocated to each
segment based upon the percentage of that segment’s average
investable balances to the total average investable balances.
F-39
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The following table reconciles segment operating income to the
income from continuing operations before income taxes as
reported in the financial statements for the year ended
December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Global Funds Transfer:
|
|
|
532,064 |
|
|
|
450,108 |
|
|
|
412,953 |
|
| |
Payment Systems
|
|
|
294,466 |
|
|
|
287,115 |
|
|
|
294,737 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total revenue
|
|
$ |
826,530 |
|
|
$ |
737,223 |
|
|
$ |
707,690 |
|
| |
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Global Funds Transfer
|
|
$ |
102,606 |
|
|
$ |
96,823 |
|
|
$ |
93,909 |
|
| |
Payment Systems
|
|
|
27,163 |
|
|
|
15,123 |
|
|
|
21,658 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total operating income
|
|
|
129,769 |
|
|
|
111,946 |
|
|
|
115,567 |
|
| |
Debt tender and redemption costs
|
|
|
20,661 |
|
|
|
— |
|
|
|
— |
|
| |
Interest expense
|
|
|
5,573 |
|
|
|
9,857 |
|
|
|
15,212 |
|
| |
Other unallocated expenses
|
|
|
14,515 |
|
|
|
13,918 |
|
|
|
13,668 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Income from continuing operations before income taxes
|
|
$ |
89,020 |
|
|
$ |
88,171 |
|
|
$ |
86,687 |
|
| |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Global Funds Transfer
|
|
$ |
25,856 |
|
|
$ |
24,255 |
|
|
$ |
23,481 |
|
| |
Payment Systems
|
|
|
3,711 |
|
|
|
3,040 |
|
|
|
2,413 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total depreciation and amortization
|
|
$ |
29,567 |
|
|
$ |
27,295 |
|
|
$ |
25,894 |
|
| |
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Global Funds Transfer
|
|
$ |
27,712 |
|
|
$ |
25,891 |
|
|
$ |
23,655 |
|
| |
Payment Systems
|
|
|
1,877 |
|
|
|
1,237 |
|
|
|
3,187 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Total capital expenditures
|
|
$ |
29,589 |
|
|
$ |
27,128 |
|
|
$ |
26,842 |
|
| |
|
|
|
|
|
|
|
|
|
The following table reconciles segment assets to total assets
reported in the financial statements as of December 31:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
Assets
|
|
|
|
|
|
|
|
|
| |
Global funds transfer
|
|
$ |
2,436,961 |
|
|
$ |
2,700,500 |
|
| |
Payment systems
|
|
|
6,191,802 |
|
|
|
6,112,957 |
|
| |
Corporate
|
|
|
1,972 |
|
|
|
408,697 |
|
| |
|
|
|
|
|
|
| |
|
Total assets
|
|
$ |
8,630,735 |
|
|
$ |
9,222,154 |
|
| |
|
|
|
|
|
|
Geographic areas — Foreign operations are
located principally in Europe. Foreign revenues are defined as
revenues generated from money transfer transactions originating
in a country other than the United States. Long lived assets are
principally located in the United States.
F-40
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The table below presents revenue by major geographic area for
the year ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands) | |
|
United States
|
|
$ |
675,129 |
|
|
$ |
618,610 |
|
|
$ |
618,680 |
|
|
Foreign
|
|
|
151,401 |
|
|
|
118,613 |
|
|
|
89,010 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Total revenue
|
|
$ |
826,530 |
|
|
$ |
737,223 |
|
|
$ |
707,690 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Note 18. |
Quarterly Financial Data (Unaudited) |
2004 Fiscal Quarters
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands, except per share data) | |
|
Revenues
|
|
$ |
191,321 |
|
|
$ |
199,820 |
|
|
$ |
216,153 |
|
|
$ |
219,236 |
|
|
Commission expense
|
|
|
90,249 |
|
|
|
97,631 |
|
|
|
104,305 |
|
|
|
111,288 |
|
|
Net revenues
|
|
|
101,072 |
|
|
|
102,189 |
|
|
|
111,848 |
|
|
|
107,948 |
|
|
Operating expenses, excluding commission expense
|
|
|
77,026 |
|
|
|
99,172 |
|
|
|
78,388 |
|
|
|
79,451 |
|
|
Income from continuing operations before income taxes
|
|
|
24,046 |
|
|
|
3,017 |
|
|
|
33,460 |
|
|
|
28,497 |
|
|
Income (loss) from continuing operations
|
|
|
19,213 |
|
|
|
(570 |
) |
|
|
24,515 |
|
|
|
21,971 |
|
|
Income (loss) from discontinued operations, net of taxes
|
|
|
21,780 |
|
|
|
(497 |
) |
|
|
— |
|
|
|
— |
|
|
Net income (loss)
|
|
|
40,993 |
|
|
|
(1,067 |
) |
|
|
24,515 |
|
|
|
21,971 |
|
|
Earnings (loss) from continuing operations per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
0.23 |
|
|
|
(0.01 |
) |
|
|
0.28 |
|
|
|
0.25 |
|
| |
Diluted
|
|
|
0.23 |
|
|
|
(0.01 |
) |
|
|
0.28 |
|
|
|
0.25 |
|
|
Earnings from discontinued operations per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
0.24 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Diluted
|
|
|
0.24 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
0.47 |
|
|
|
(0.01 |
) |
|
|
0.28 |
|
|
|
0.25 |
|
| |
Diluted
|
|
|
0.47 |
|
|
|
(0.01 |
) |
|
|
0.28 |
|
|
|
0.25 |
|
F-41
MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2003 Fiscal Quarters
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First | |
|
Second | |
|
Third | |
|
Fourth | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
(Dollars in thousands, except per share data) | |
|
Revenues
|
|
$ |
171,626 |
|
|
$ |
187,721 |
|
|
$ |
188,048 |
|
|
$ |
189,828 |
|
|
Commission expense
|
|
|
90,873 |
|
|
|
95,789 |
|
|
|
97,272 |
|
|
|
93,399 |
|
|
Net revenues
|
|
|
80,753 |
|
|
|
91,932 |
|
|
|
90,776 |
|
|
|
96,429 |
|
|
Operating expenses, excluding commission expense
|
|
|
69,578 |
|
|
|
68,182 |
|
|
|
69,146 |
|
|
|
64,813 |
|
|
Income from continuing operations before income taxes
|
|
|
11,175 |
|
|
|
23,750 |
|
|
|
21,630 |
|
|
|
31,616 |
|
|
Income from continuing operations
|
|
|
12,390 |
|
|
|
20,457 |
|
|
|
18,488 |
|
|
|
24,351 |
|
|
Income from discontinued operations, net of taxes
|
|
|
9,641 |
|
|
|
20,411 |
|
|
|
6,348 |
|
|
|
1,816 |
|
|
Net income
|
|
|
22,031 |
|
|
|
40,868 |
|
|
|
24,836 |
|
|
|
26,167 |
|
|
Earnings from continuing operations per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
0.13 |
|
|
|
0.24 |
|
|
|
0.22 |
|
|
|
0.28 |
|
| |
Diluted
|
|
|
0.13 |
|
|
|
0.24 |
|
|
|
0.22 |
|
|
|
0.28 |
|
|
Earnings from discontinued operations per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
0.12 |
|
|
|
0.23 |
|
|
|
0.07 |
|
|
|
0.02 |
|
| |
Diluted
|
|
|
0.12 |
|
|
|
0.23 |
|
|
|
0.07 |
|
|
|
0.02 |
|
|
Earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
0.25 |
|
|
|
0.47 |
|
|
|
0.29 |
|
|
|
0.30 |
|
| |
Diluted
|
|
|
0.25 |
|
|
|
0.47 |
|
|
|
0.29 |
|
|
|
0.30 |
|
F-42