XNYS:MGI Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(mark one)

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period Ended March 31, 2012

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from              to             .

Commission File Number: 001-31950

 

 

MONEYGRAM INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   16-1690064
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
2828 N. Harwood St., 15th Floor
Dallas, Texas
  75201
(Address of principal executive offices)   (Zip Code)

(214) 999-7552

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    (Do not check if a smaller reporting company)   Accelerated filer   x
Non-accelerated filer   ¨      Smaller reporting company   ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of April 27, 2012, 57,836,029 shares of common stock, $0.01 par value, were outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION   

Item 1. Financial Statements

  

Consolidated Balance Sheets

     3   

Consolidated Statements of Income

     4   

Consolidated Statements of Comprehensive Income

     5   

Consolidated Statements of Cash Flows

     6   

Consolidated Statement of Stockholders’ Deficit

     7   

Notes to Consolidated Financial Statements

     8   

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     45   

Item 4. Controls and Procedures

     45   
PART II. OTHER INFORMATION   

Item 1. Legal Proceedings

     45   

Item 1A. Risk Factors

     47   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     47   

Item 6. Exhibits

     47   

Signatures

     48   

Exhibit Index

     49   

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

MONEYGRAM INTERNATIONAL, INC.

CONSOLIDATED BALANCE SHEETS

UNAUDITED

 

(Amounts in thousands, except share data)

   March 31,
2012
    December 31,
2011
 

ASSETS

    

Cash and cash equivalents

   $ —        $ —     

Cash and cash equivalents (substantially restricted)

     2,547,250        2,572,174   

Receivables, net (substantially restricted)

     1,210,506        1,220,065   

Short-term investments (substantially restricted)

     525,356        522,024   

Available-for-sale investments (substantially restricted)

     93,127        102,771   

Property and equipment

     116,883        116,341   

Goodwill

     428,691        428,691   

Other assets

     214,365        213,512   
  

 

 

   

 

 

 

Total assets

   $ 5,136,178      $ 5,175,578   
  

 

 

   

 

 

 

LIABILITIES

    

Payment service obligations

   $ 4,152,604      $ 4,205,375   

Debt

     810,623        810,888   

Pension and other postretirement benefits

     118,690        120,252   

Accounts payable and other liabilities

     146,747        149,261   
  

 

 

   

 

 

 

Total liabilities

     5,228,664        5,285,776   

COMMITMENTS AND CONTINGENCIES (NOTE 12)

    

STOCKHOLDERS’ DEFICIT

    

Participating Convertible Preferred Stock-Series D, $0.01 par value, 200,000 shares authorized, 109,239 issued at March 31, 2012 and December 31, 2011

     281,898        281,898   

Common Stock, $0.01 par value, 162,500,000 shares authorized, 62,263,963 shares issued at March 31, 2012 and December 31, 2011

     623        623   

Additional paid-in capital

     992,711        989,188   

Retained loss

     (1,206,285     (1,216,543

Accumulated other comprehensive loss

     (34,131     (38,028

Treasury stock: 4,427,934 and 4,429,184 shares at March 31, 2012 and December 31, 2011, respectively

     (127,302     (127,336
  

 

 

   

 

 

 

Total stockholders’ deficit

     (92,486     (110,198
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 5,136,178      $ 5,175,578   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

3


Table of Contents

MONEYGRAM INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF INCOME

UNAUDITED

 

(Amounts in thousands, except per share data)

   Three Months Ended March 31,  
   2012      2011  

REVENUE

     

Fee and other revenue

   $ 314,918       $ 290,009   

Investment revenue

     3,177         4,015   
  

 

 

    

 

 

 

Total revenue

     318,095         294,024   

EXPENSES

     

Fee and other commissions expense

     141,915         129,060   

Investment commissions expense

     77         140   
  

 

 

    

 

 

 

Total commissions expense

     141,992         129,200   

Compensation and benefits

     59,064         59,295   

Transaction and operations support

     58,214         50,409   

Occupancy, equipment and supplies

     12,211         11,753   

Depreciation and amortization

     10,683         11,666   
  

 

 

    

 

 

 

Total operating expenses

     282,164         262,323   
  

 

 

    

 

 

 

OPERATING INCOME

     35,931         31,701   
  

 

 

    

 

 

 

Other expense

     

Interest expense

     17,883         20,613   
  

 

 

    

 

 

 

Total other expenses, net

     17,883         20,613   
  

 

 

    

 

 

 

Income before income taxes

     18,048         11,088   
  

 

 

    

 

 

 

Income tax expense (benefit)

     7,779         (2,957
  

 

 

    

 

 

 

NET INCOME

   $ 10,269       $ 14,045   
  

 

 

    

 

 

 

INCOME (LOSS) PER COMMON SHARE

  

Basic

   $ 0.14       $ (2.08

Diluted

   $ 0.14       $ (2.08

Net income (loss) available to common stockholders:

     

Net income as reported

   $ 10,269       $ 14,045   

Accrued preferred stock dividends

     —           (33,209

Accretion recognized on preferred stock

     —           (2,559
  

 

 

    

 

 

 

Net income (loss) available to common stockholders

   $ 10,269       $ (21,723
  

 

 

    

 

 

 

Weighted-average outstanding common shares and equivalents used in computing earnings per share

     

Basic

     71,490         10,455   

Diluted

     71,651         10,455   

See Notes to Consolidated Financial Statements

 

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Table of Contents

MONEYGRAM INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

UNAUDITED

 

(Amounts in thousands)

   Three Months Ended March 31,  
   2012     2011  

NET INCOME

   $ 10,269      $ 14,045   

OTHER COMPREHENSIVE INCOME

    

Net unrealized gains on available-for-sale securities:

  

Net holding gains arising during the period, net of tax expense of $532 and $0

     974        1,944   

Pension and postretirement benefit plans:

    

Reclassification of prior service credit for pension and postretirement benefit plans recorded to net income, net of tax expense of $57 and $57

     (92     (92

Reclassification of net actuarial loss for pension and postretirement benefit plans recorded to net income, net of tax benefit of $596 and $621

     972        1,012   

Unrealized foreign currency translation gains, net of tax expense of $1,252 and $443

     2,043        723   
  

 

 

   

 

 

 

Other comprehensive income

     3,897        3,587   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 14,166      $ 17,632   
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

MONEYGRAM INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

 

     Three Months Ended March 31,  

(Amounts in thousands)

   2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 10,269      $ 14,045   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     10,683        11,666   

Asset impairments and net losses upon disposal

     247        (282

Amortization of debt discount and deferred financing costs

     1,397        1,591   

Provision for uncollectible receivables

     1,463        1,349   

Non-cash compensation and pension expense

     5,331        6,922   

Other non-cash items, net

     (1,483     455   

Changes in foreign currency translation adjustments

     2,043        723   

Signing bonus amortization

     8,343        7,948   

Signing bonus payments

     (4,934     (6,778

Change in other assets

     458        4,239   

Change in accounts payable and other liabilities

     (4,430     (20,095
  

 

 

   

 

 

 

Total adjustments

     19,118        7,738   

Change in cash and cash equivalents (substantially restricted)

     24,924        89,932   

Change in receivables, net (substantially restricted)

     8,096        24,025   

Change in payment service obligations

     (52,771     (139,471
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     9,636        (3,731
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Proceeds from maturities of investments classified as available-for-sale (substantially restricted)

     10,820        17,462   

Purchases of short-term investments (substantially restricted)

     (211,756     (205,441

Proceeds from maturities of short-term investments (substantially restricted)

     210,113        200,500   

Purchases of property and equipment

     (18,632     (8,973

Proceeds from disposal of assets and businesses

     172        —     
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (9,283     3,548   
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Payments on debt

     (375     —     

Proceeds from exercise of stock options

     22        183   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (353     183   
  

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     —          —     

CASH AND CASH EQUIVALENTS - Beginning of period

     —          —     
  

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS - End of period

   $ —        $ —     
  

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

6


Table of Contents

MONEYGRAM INTERNATIONAL, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

UNAUDITED

 

(Amounts in thousands)

   Preferred
Stock
     Common
Stock
     Additional
Paid-In
Capital
     Retained
Loss
    Accumulated
Other
Comprehensive
Loss
    Treasury
Stock
    Total  

December 31, 2011

   $ 281,898       $ 623       $ 989,188       $ (1,216,543   $ (38,028   $ (127,336   $ (110,198

Net income

     —           —           —           10,269        —          —          10,269   

Employee benefit plans

     —           —           3,523         (11     —          34        3,546   

Net unrealized gain on available-for-sale securities, net of tax

     —           —           —           —          974        —          974   

Amortization of prior service cost for pension and postretirement benefits, net of tax

     —           —           —           —          (92     —          (92

Amortization of unrealized losses on pension and postretirement benefits, net of tax

     —           —           —           —          972        —          972   

Unrealized foreign currency translation adjustment, net of tax

     —           —           —           —          2,043        —          2,043   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

March 31, 2012

   $ 281,898       $ 623       $ 992,711       $ (1,206,285   $ (34,131   $ (127,302   $ (92,486
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Basis of Presentation

The accompanying unaudited consolidated financial statements of MoneyGram International, Inc. (“MoneyGram” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for future periods. For further information, refer to the Consolidated Financial Statements and Notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

Participation Agreement between the Investors and Wal-Mart Stores, Inc. — As previously disclosed, the Investors have a Participation Agreement with Wal-Mart Stores, Inc. (“Wal-Mart”), under which the Investors are obligated to pay Wal-Mart certain percentages of any accumulated cash payments received by the Investors in excess of the Investors’ original investment in the Company. While the Company is not a party to, and has no obligations to Wal-Mart or additional obligations to the Investors under, the Participation Agreement, the Company must recognize the Participation Agreement in its consolidated financial statements as the Company indirectly benefits from the agreement. A liability and the related expense associated with the Participation Agreement would be recognized by the Company in the period in which it becomes probable that a liquidity event will occur that would require the Investors to make a payment to Wal-Mart (a “liquidity event”). Upon payment by the Investors to Wal-Mart, the liability would be released through a credit to the Company’s additional paid-in capital. The amount of the non-operating expense could be material to the Company’s financial position or results of operations, but would have no impact on the Company’s cash flows. As liquidity events are dependent on many external factors and uncertainties, the Company does not consider a liquidity event to be probable at this time, and has not recognized a liability or expense related to the Participation Agreement. The additional consideration paid to the Investors in connection with the 2011 Recapitalization did not result in a liquidity event as the amounts received by the Investors are less than their original investment in the Company.

Note 2 — Assets in Excess of Payment Service Obligations

The following table shows the amount of assets in excess of payment service obligations at March 31, 2012 and December 31, 2011:

 

(Amounts in thousands)

   March 31,
2012
    December 31,
2011
 

Cash and cash equivalents (substantially restricted)

   $ 2,547,250      $ 2,572,174   

Receivables, net (substantially restricted)

     1,210,506        1,220,065   

Short-term investments (substantially restricted)

     525,356        522,024   

Available-for-sale investments (substantially restricted)

     93,127        102,771   
  

 

 

   

 

 

 
     4,376,239        4,417,034   

Payment service obligations

     (4,152,604     (4,205,375
  

 

 

   

 

 

 

Assets in excess of payment service obligations

   $ 223,635      $ 211,659   
  

 

 

   

 

 

 

The Company was in compliance with its contractual and financial regulatory requirements as of March 31, 2012 and December 31, 2011.

 

8


Table of Contents

Note 3 — Fair Value Measurement

The following tables set forth the Company’s financial assets and liabilities measured at fair value by hierarchy level:

 

     Balance at
March 31,
     Fair Value at March 31, 2012  

(Amounts in thousands)

   2012      Level 1      Level 2      Level 3      Total  

Financial assets:

              

Available-for-sale investments (substantially restricted):

              

United States government agencies

   $ 8,856       $ —         $ 8,856       $ —         $ 8,856   

Residential mortgage-backed securities - agencies

     58,874         —           58,874         —           58,874   

Other asset-backed securities

     25,397         —           —           25,397         25,397   

Investment related to deferred compensation trust

     8,497         8,497         —           —           8,497   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 101,624       $ 8,497       $ 67,730       $ 25,397       $ 101,624   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Forward contracts

   $ 739       $ —         $ 739       $ —         $ 739   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Balance at
December 31,
     Fair Value at December 31, 2011  

(Amounts in thousands)

   2011      Level 1      Level 2      Level 3      Total  

Financial assets:

              

Available-for-sale investments (substantially restricted):

              

United States government agencies

   $ 8,827       $ —         $ 8,827       $ —         $ 8,827   

Residential mortgage-backed securities - agencies

     69,712         —           69,712         —           69,712   

Other asset-backed securities

     24,232         —           —           24,232         24,232   

Investment related to deferred compensation trust

     8,118         8,118         —           —           8,118   

Forward contracts

     399         —           399         —           399   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 111,288       $ 8,118       $ 78,938       $ 24,232       $ 111,288   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities:

              
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Forward contracts

   $ 46       $ —         $ 46       $ —         $ 46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For other asset–backed securities, investments in limited partnerships and trading investments, market quotes are generally not available. If available, the Company will utilize a fair value measurement from a pricing service. The pricing service utilizes a pricing model based on market observable data and indices, such as quotes for comparable securities, yield curves, default indices, interest rates and historical prepayment speeds. If a fair value measurement is not available from the pricing service, the Company will utilize a broker quote if available. Due to a general lack of transparency in the process that the brokers use to develop prices, most valuations that are based on brokers’ quotes are classified as Level 3. If no broker quote is available, or if such quote cannot be corroborated by market data or internal valuations, the Company will perform internal valuations utilizing externally developed cash flow models. These pricing models are based on market observable spreads and, when available, observable market indices. The pricing models also use inputs such as the rate of future prepayments and expected default rates on the principal,which are derived by the Company based on the characteristics of the underlying structure and historical prepayment speeds experienced at the interest rate levels projected for the underlying collateral. The pricing models for certain asset–backed securities also include significant non–observable inputs such as internally assessed credit ratings for non–rated securities, combined with externally provided credit spreads. Observability of market inputs to the valuation models used for pricing certain of the Company’s investments deteriorated with the disruption to the credit markets as overall liquidity and trading activity in these sectors has been substantially reduced. Accordingly, securities valued using a pricing model have consistently been classified as Level 3 financial instruments. The table below provides a roll-forward of the ‘Other asset-backed securities’, the only financial assets classified in Level 3, which are measured at fair value on a recurring basis, for the three months ended March 31, 2012 and 2011:

 

     Three Months Ended
March  31,
 

(Amounts in thousands)

   2012     2011  

Beginning balance

   $ 24,232      $ 23,710   

Realized gains

     —          —     

Realized losses

     —          —     

Principal paydowns

     (64     (410

Other-than-temporary impairments

     —          —     

Unrealized gains - instruments still held at the reporting date

     2,050        4,093   

Unrealized losses - instruments still held at the reporting date

     (821     (1,053
  

 

 

   

 

 

 

Ending balance

   $ 25,397      $ 26,340   
  

 

 

   

 

 

 

 

9


Table of Contents

When applicable, realized gains and losses and other-than-temporary impairments related to available-for-sale investment securities are reported in the “Net securities (gains) losses” line in the Consolidated Statements of Income. Unrealized gains and losses related to available-for-sale securities are recorded in accumulated other comprehensive loss in stockholders’ deficit.

Assets and liabilities that are disclosed at fair value Debt is carried at amortized cost; however, the Company estimates the fair value of debt for disclosure purposes. The fair value of debt is estimated using market quotations, where available, credit ratings, observable market indices and other market data (Level 2). As of March 31, 2012, the fair value of the senior secured facility is $484.4 million compared to the carrying value of $486.0 million. As of March 31, 2012, the fair value of the Company’s second lien notes is estimated at $337.2 million compared to a carrying value of $325.0 million. As of December 31, 2011, the fair value of the senior secured facility is $479.8 million compared to the carrying value of $489.6 million. As of December 31, 2011 the fair value of the Company’s second lien notes is estimated at $335.6 million compared to a carrying value of $325.0 million.

Note 4 — Investment Portfolio

Components of the Company’s investment portfolio are as follows:

 

(Amounts in thousands)

   March 31,
2012
     December 31,
2011
 

Cash

   $ 2,069,309       $ 2,016,451   

Money markets

     477,887         555,659   

Deposits

     54         64   
  

 

 

    

 

 

 

Cash and cash equivalents (substantially restricted)

     2,547,250         2,572,174   

Short-term investments (substantially restricted)

     525,356         522,024   

Available-for-sale investments (substantially restricted)

     93,127         102,771   
  

 

 

    

 

 

 

Total investment portfolio

   $ 3,165,733       $ 3,196,969   
  

 

 

    

 

 

 

Cash and Cash Equivalents (substantially restricted) — Cash and cash equivalents consist of cash, money-market securities and deposits. Cash primarily consists of interest-bearing deposit accounts and non-interest bearing transaction accounts. The Company’s money-market securities are invested in six funds, all of which are AAA rated and consist of United States Treasury bills, notes or other obligations issued or guaranteed by the United States government and its agencies, as well as repurchase agreements secured by such instruments. Deposits consist of time deposits with original maturities of three months or less, and are issued from financial institutions that are rated BBB or better as of the date of this filing.

Short-term Investments (substantially restricted) — Short-term investments consist of time deposits and certificates of deposit with original maturities of greater than three months but no more than thirteen months, and are issued from financial institutions rated A+ as of the date of this filing.

 

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Table of Contents

Available-for-sale Investments (substantially restricted) — Available-for-sale investments consist of mortgage-backed securities, asset-backed securities and agency debenture securities. After other-than-temporary impairment charges, the amortized cost and fair value of available-for-sale investments are as follows at March 31, 2012:

 

     March 31, 2012  

(Amounts in thousands, except net average price)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
     Net
Average
Price
 

Residential mortgage-backed securities-agencies

   $ 54,330       $ 4,544       $ —         $ 58,874       $ 109.13   

Other asset-backed securities

     8,565         16,832         —           25,397         5.78   

United States government agencies

     7,840         1,016         —           8,856         98.40   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 70,735       $ 22,392       $ —         $ 93,127       $ 18.53   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

After other-than-temporary impairment charges, the amortized cost and fair value of available-for-sale investments were as follows at December 31, 2011:

 

     December 31, 2011  

(Amounts in thousands, except net average price)

   Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
     Net
Average
Price
 

Residential mortgage-backed securities - agencies

   $ 65,211       $ 4,501       $ —         $ 69,712       $ 107.63   

Other asset-backed securities

     8,951         15,281         —           24,232         5.49   

United States government agencies

     7,723         1,104         —           8,827         98.08   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 81,885       $ 20,886       $ —         $ 102,771       $ 21.83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At March 31, 2012 and December 31, 2011, approximately 73 percent and 76 percent, respectively, of the available-for-sale portfolio were invested in debentures of United States government agencies or securities collateralized by United States government agency debentures. These securities have the implicit backing of the United States government, and the Company expects to receive full par value upon maturity or pay-down, as well as all interest payments. The “Other asset-backed securities” continue to have market exposure, as factored into the fair value estimates, with the average price of an asset-backed security at $0.06 per dollar of par at March 31, 2012.

Gains and Losses and Other-Than-Temporary Impairments — At March 31, 2012 and December 31, 2011, net unrealized gains of $22.5 million and $21.5 million, respectively, are included in the Consolidated Balance Sheets in “Accumulated other comprehensive loss.” During the three months ended March 31, 2012 and 2011, no net gains or losses were reclassified from “Accumulated other comprehensive loss” to “Net securities gains” in connection with other-than-temporary impairments and realized gains and losses recognized during the period.

Investment Ratings — In rating the securities in its investment portfolio, the Company uses ratings from Moody’s Investor Service (“Moody’s”), Standard & Poors (“S&P”) and Fitch Ratings (“Fitch”). If the rating agencies have split ratings, the Company uses the highest rating across the rating agencies for disclosure purposes. Securities issued or backed by United States government agencies are included in the AAA rating category. Investment grade is defined as a security having a Moody’s equivalent rating of Aaa, Aa, A or Baa or an S&P or Fitch equivalent rating of AAA, AA, A or BBB. The Company’s investments at March 31, 2012 and December 31, 2011 consisted of the following ratings:

 

     March 31, 2012     December 31, 2011  

(Dollars in thousands)

   Number of
Securities
     Fair
Value
     Percent of
Investments
    Number of
Securities
     Fair
Value
     Percent of
Investments
 

AAA, including United States agencies

     23       $ 67,467         72     24       $ 78,267         76

Below investment grade

     59         25,660         28     60         24,504         24
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

     82       $ 93,127         100     84       $ 102,771         100
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Had the Company used the lowest rating from the rating agencies in the information presented above, there would be a less than $0.1 million change to investments rated A or better at March 31, 2012 and December 31, 2011.

Contractual Maturities — The amortized cost and fair value of available-for-sale securities at March 31, 2012 and December 31, 2011, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities as borrowers may have the right to call or prepay obligations, sometimes without call or prepayment penalties. Maturities of mortgage-backed and other asset-backed securities depend on the repayment characteristics and experience of the underlying obligations.

 

     March 31, 2012      December 31, 2011  

(Amounts in thousands)

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

One year or less

   $ 1,001       $ 1,034       $ —         $ —     

After one year through five years

     6,839         7,822         7,723         8,827   

Mortgage-backed and other asset-backed securities

     62,895         84,271         74,162         93,944   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 70,735       $ 93,127       $ 81,885       $ 102,771   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fair Value Determination — The Company uses various sources of pricing for its fair value estimates of its available-for-sale portfolio. The percentage of the portfolio for which the various pricing sources were used is as follows at March 31, 2012 and December 31, 2011: 65 percent and 69 percent, respectively, used a third party pricing service; 15 percent and 13 percent, respectively, used broker pricing; and 20 percent and 18 percent, respectively, used internal pricing.

Assessment of Unrealized Losses — As of March 31, 2012, the Company had a nominal amount of unrealized losses in its available-for-sale portfolio, with one residential mortgage-backed agency security in an unrealized loss position aged 12 months or more, after the recognition of other-than-temporary impairment charges. At December 31, 2011, the Company had no unrealized losses in its available-for-sale portfolio.

Note 5 — Derivative Financial Instruments

The Company uses forward contracts to manage its foreign currency needs and exchange risk arising from its assets and liabilities denominated in foreign currencies. While these contracts economically hedge foreign currency risk, they are not designated as hedges for accounting purposes. The “Transaction and operations support” line in the Consolidated Statements of Income includes the following (gains) losses related to assets and liabilities denominated in foreign currencies:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012     2011  

Net realized foreign currency gains

   $ (4,486   $ (6,590

Net losses from the related forward contracts

     3,965        8,086   
  

 

 

   

 

 

 

Net (gains) losses from foreign currency transactions and related forward contracts

   $ (521   $ 1,496   
  

 

 

   

 

 

 

As of March 31, 2012 and December 31, 2011, the Company had $66.2 million and $65.5 million, respectively, of outstanding notional amounts relating to its forward contracts. At March 31, 2012 and December 31, 2011, the Company reflects the following fair values of derivative forward contract instruments in its Consolidated Balance Sheets:

 

            Derivative Assets      Derivative Liabilities  

(Amounts in thousands)

   Balance  Sheet
Location
     March 31,
2012
     December 31,
2011
     March 31,
2012
     December 31,
2011
 

Forward contracts

    
 
Other
assets
  
  
   $ —         $ 399       $ 739       $ 46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 6 — Property and Equipment

Property and equipment consists of the following at March 31, 2012 and December 31, 2011:

 

(Amounts in thousands)

   March 31,
2012
    December 31,
2011
 

Computer hardware and software

   $ 205,251      $ 196,168   

Signage

     81,280        80,303   

Agent equipment

     69,278        69,643   

Office furniture and equipment

     35,274        36,733   

Leasehold improvements

     23,721        27,562   

Land

     410        410   
  

 

 

   

 

 

 
     415,214        410,819   

Accumulated depreciation

     (298,331     (294,478
  

 

 

   

 

 

 

Total property and equipment

   $ 116,883      $ 116,341   
  

 

 

   

 

 

 

Depreciation expense for the three months ended March 31, 2012 and 2011 is as follows:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012      2011  

Computer hardware and software

   $ 5,062       $ 5,410   

Signage

     2,770         2,271   

Agent equipment

     1,079         1,803   

Office furniture and equipment

     901         972   

Leasehold improvements

     709         873   
  

 

 

    

 

 

 

Total depreciation expense

   $ 10,521       $ 11,329   
  

 

 

    

 

 

 

At March 31, 2012 and December 31, 2011, there was $2.7 million and $9.9 million, respectively, of property and equipment that had been received by the Company and included in “Accounts payable and other liabilities” in the Consolidated Balance Sheets.

During the three months ended March 31, 2012, the Company recognized a disposal loss of $0.4 million on furniture and equipment related to the closing of an office location. The loss is recorded in the “Occupancy, equipment and supplies” line in the Consolidated Statements of Income.

 

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Table of Contents

Note 7 — Debt

Following is a summary of the Company’s outstanding debt:

 

     2011 Credit Agreement              

(Amounts in thousands)

   Senior secured
credit facility
due 2017
    Senior secured
incremental term
loan due 2017
    Second Lien
Notes

due 2018
    Total Debt  

Balance at December 31, 2011

   $ 339,232      $ 146,656      $ 325,000      $ 810,888   

Payments

     —          (375     —          (375

Accretion of discount

     33        77        —          110   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 339,265      $ 146,358      $ 325,000      $ 810,623   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average interest rate

     4.44     4.44     13.25  
  

 

 

   

 

 

   

 

 

   

2008 Senior Facility — In connection with the Company’s recapitalization transaction in May 2011 (the “2011 Recapitalization”), the 2008 senior facility was terminated. Prior to the termination, the Company was able to elect an interest rate for the 2008 senior facility at each reset period based on the JP Morgan prime bank rate or the Eurodollar rate. During the three months ended March 31, 2011, the Company elected the United States prime bank rate as its interest basis, and had a weighted average interest rate of 5.75 percent for the Senior Tranche A Loan and 7.25% for the Senior Tranche B Loan. The Company recognized $0.1 million of discount accretion through the “Interest expense” line in the Consolidated Statements of Income during the three months ending March 31, 2011.

2011 Credit Agreement —The Company may elect an interest rate under the agreement governing the Company’s senior secured credit facility (the “2011 Credit Agreement”) at each reset period based on the Bank of America alternate base rate or the Eurodollar rate. The interest rate election may be made individually for the term loan, incremental term loan and each draw under the revolving credit facility. The interest rate is either the BOA prime rate plus 225 basis points or the Eurodollar rate plus 300 basis points. Since inception of the 2011 Credit Agreement, the Company elected the Eurodollar rate as its primary interest basis, with a minimal amount of the term debt at the Bank of America alternate base rate. Under the terms of the 2011 Credit Agreement, the interest rate determined using the Eurodollar rate has a minimum rate of 1.25 percent.

Fees on the daily unused availability under the revolving credit facility are 62.5 basis points. Substantially all of the Company’s non-financial assets are pledged as collateral for the loans under the 2011 Credit Agreement, with the collateral guaranteed by the Company’s material domestic subsidiaries. The non-financial assets of the material domestic subsidiaries are pledged as collateral for these guarantees. As of March 31, 2012, the Company has $137.3 million of availability under the revolving credit facility, net of $12.7 million of outstanding letters of credit that reduce the amount available. At March 31, 2012 there were no amounts outstanding under the revolving credit facility.

Following is the debt discount amortization recorded in “Interest expense” in the Consolidated Statements of Income for the three months ended March 31:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012      2011  

Total amortization of discount

   $ 110       $ 144   
  

 

 

    

 

 

 

Second Lien Notes — Prior to the fifth anniversary of the issuance of the notes, the Company may redeem some or all of the second lien notes at a price equal to 100 percent of the principal, plus any accrued and unpaid interest plus a premium equal to the greater of one percent or an amount calculated by discounting the sum of (a) the redemption payment that would be due upon the fifth anniversary plus (b) all required interest payments due through such fifth anniversary using the treasury rate plus 50 basis points. Starting with the fifth anniversary of the issuance of the notes, the Company may redeem some or all of the second lien notes at prices expressed as a percentage of the outstanding principal amount of the second lien notes plus accrued and unpaid interest, starting at approximately 107 percent on the fifth anniversary, decreasing to 100 percent on or after the eighth anniversary. Upon a change of control, as defined by the Note Purchase Agreement, the Company is required to make an offer to repurchase the second lien notes at a price equal to 101 percent of the principal amount plus accrued and unpaid interest. The Company is also required to make an offer to repurchase the second lien notes with proceeds of certain asset sales that have not been reinvested in accordance with the terms of the second lien notes or have not been used to repay certain debt.

Inter-creditor Agreement — In connection with the above financing arrangements, both the lenders under the 2011 Credit Agreement and the trustee on behalf of the holders of the second lien notes entered into an inter-creditor agreement under which the lenders and trustee have agreed to waive certain rights and limit the exercise of certain remedies available to them for a limited period of time, both before and following a default under the financing arrangements.

 

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Table of Contents

Debt Covenants and Other Restrictions — Borrowings under the Company’s debt agreements are subject to various covenants that limit the Company’s ability to: incur additional indebtedness; create or incur additional liens; effect mergers and consolidations; make certain acquisitions; sell assets or subsidiary stock; pay dividends and other restricted payments; invest in certain assets; and effect loans, advances and certain other transactions with affiliates. In addition, the 2011 Credit Agreement has a covenant that places limitations on the use of proceeds from borrowings under the facility.

The indenture governing the second lien notes contains a financial covenant requiring the Company to maintain a minimum liquidity ratio of at least 1:1 for certain assets to outstanding payment service obligations. The 2011 Credit Agreement also has quarterly financial covenants to maintain the following interest coverage and total leverage ratios:

 

     Interest
Coverage
Minimum
Ratio
     Total
Leverage
Not To
Exceed
 

Present through September 30, 2012

     2.00:1         4.75:1   

December 31, 2012 through September 30, 2013

     2.15:1         4.625:1   

December 31, 2013 through September 30, 2014

     2.15:1         4.375:1   

December 31, 2014 through September 30, 2015

     2.25:1         4.00:1   

December 31, 2015 through September 30, 2016

     2.25:1         3.75:1   

December 31, 2016 through maturity

     2.25:1         3.50:1   

At March 31, 2012, the Company was in compliance with its financial covenants.

Deferred Financing Costs —The Company capitalized financing costs in “Other assets” in the Consolidated Balance Sheets and amortized them over the term of the related debt using the effective interest method. Amortization is recorded in “Interest expense” in the Consolidated Statements of Income. Following is a summary of the deferred financing costs at March 31:

 

     2011 Credit Agreement              

(Amounts in thousands)

   Senior secured
credit facility
    Senior secured
incremental term
    Senior revolving
credit facility
    Second Lien
Notes
    Total Deferred
Financing Costs
 

Balance at December 31, 2011

   $ 6,882      $ 3,092      $ 3,523      $ 16,649      $ 30,146   

Amortization of deferred financing costs

     (293     (201     (201     (649     (1,344

Write-off of deferred financing costs

     —          (7     —          —          (7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 6,589      $ 2,884      $ 3,322      $ 16,000      $ 28,795   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest Paid in Cash — The Company paid $16.5 million and $18.7 million of interest for the three months ended March 31, 2012 and 2011, respectively.

Maturities — At March 31, 2012, debt totaling $481.0 million will mature in 2017 and $325.0 million will mature in 2018, while debt principal totaling $8.3 million will be paid in increments of $0.4 million quarterly through 2017.

Note 8 — Pensions and Other Benefits

Net periodic benefit expense for the Company’s defined benefit pension plan and combined supplemental executive retirement plans (“SERPs”) includes the following components:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012     2011  

Interest cost

   $ 2,639      $ 2,841   

Expected return on plan assets

     (1,969     (2,056

Amortization of prior service cost (credit)

     7        7   

Recognized net actuarial loss

     1,470        1,572   
  

 

 

   

 

 

 

Net periodic benefit expense

   $ 2,147      $ 2,364   
  

 

 

   

 

 

 

 

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Table of Contents

Benefits paid through the defined benefit pension plan were $2.4 million and $2.2 million for the three months ended March 31, 2012 and 2011, respectively. The Company made contributions to the defined benefit pension plan of $1.4 million and $0.9 million during the three months ended March 31, 2012 and 2011, respectively. Benefits paid through, and contributions made to, the combined SERPs were $0.8 million and $1.1 million for the three months ended March 31, 2012 and 2011, respectively.

Following is a summary of the net actuarial loss and prior service costs for the defined benefit pension plan and combined SERPs that the Company amortized from “Accumulated other comprehensive loss” into “Net periodic benefit expense”:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012     2011  

Net actuarial loss

   $ 1,470      $ 1,572   

Tax benefit on net actuarial loss

     (558     (598

Prior service costs

     7        7   

Tax benefit on prior service costs

     (3     (3
  

 

 

   

 

 

 

Net amortization from accumulated other comprehensive income

   $ 916      $ 978   
  

 

 

   

 

 

 

Net periodic benefit expense for the Company’s postretirement benefit plans includes the following components:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012     2011  

Interest cost

   $ 24      $ 13   

Amortization of prior service cost (credit)

     (156     (156

Recognized net actuarial loss

     98        61   
  

 

 

   

 

 

 

Net periodic benefit expense

   $ (34   $ (82
  

 

 

   

 

 

 

Benefits paid through, and contributions made to, the postretirement benefit plans were less than $0.1 million for both the three months ended March 31, 2012 and 2011.

Following is a summary of the net actuarial loss and prior service credit for the postretirement benefit plans that the Company amortized from “Accumulated other comprehensive loss” into “Net periodic benefit expense”:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012     2011  

Net actuarial loss

   $ 98      $ 61   

Tax benefit on net actuarial loss

     (37     (23

Prior service costs (credits)

     (156     (156

Tax expense (benefit) on prior service costs

     59        60   
  

 

 

   

 

 

 

Net amortization from accumulated other comprehensive income

   $ (36   $ (58
  

 

 

   

 

 

 

Contribution expense for the 401(k) defined contribution plan was $0.8 million for both the three months ended March 31, 2012 and 2011.

 

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Table of Contents

International Benefit Plans — The Company’s international subsidiaries have certain defined contribution benefit plans. Contributions expense related to international plans were $0.4 million and $0.3 million for the three months ended March 31, 2012 and 2011, respectively.

Deferred Compensation Plans — In the first quarter of 2011, the MoneyGram International, Inc. Deferred Compensation Plan, a non-qualified, frozen, deferred compensation plan for a select group of management and highly compensated employees, was amended to terminate all employee deferral accounts on the amendment date and pay each participant the balance of their account in a lump sum no earlier than one year from termination and no later than December 31, 2012. In the three months ended March 31, 2012, the Company made $0.5 million in payments and no further payments are due under the amendments made in the first quarter of 2011.

The deferred compensation plans are unfunded and unsecured and the Company is not required to physically segregate any assets in connection with the deferred accounts. The Company has rabbi trusts associated with each deferred compensation plan which are funded through voluntary contributions by the Company. At March 31, 2012 and December 31, 2011, the Company had a liability related to the deferred compensation plans of $2.6 million and $3.4 million respectively, recorded in the “Accounts payable and other liabilities” line in the Consolidated Balance Sheets. The rabbi trusts had a market value of $8.5 million and $8.1 million at March 31, 2012 and December 31, 2011, respectively, recorded in “Other assets” in the Consolidated Balance Sheets.

Note 9 — Stockholders’ Deficit

Reverse Stock Split — On November 14, 2011, the Company filed a certificate of amendment to its Amended and Restated Certificate of Incorporation to effect a reverse stock split of the Company’s common stock at a reverse stock split ratio of 1-for-8. All share and per share amounts have been retroactively adjusted to reflect the stock split with the exception of the Company’s treasury stock, which was not a part of the reverse stock split.

Following is a summary of the activity of the Company’s stock authorized, issued and outstanding:

 

     D Stock      Common Stock      Treasury
Stock
 

(Amounts in thousands)

   Authorized      Issued      Outstanding      Authorized      Issued      Outstanding     

December 31, 2011

     200         109         109         162,500         62,264         57,835         (4,429

Stock option exercise

     —           —           —           —           —           1         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2012

     200         109         109         162,500         62,264         57,836         (4,428
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     D Stock      Common Stock      Treasury
Stock
 

(Amounts in thousands)

   Authorized      Issued      Outstanding      Authorized      Issued      Outstanding     

December 31, 2010

     —           —           —           162,500         15,389         10,453         (4,936

Stock option exercise

     —           —           —           —           —           90         90   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

March 31, 2011

     —           —           —           162,500         15,389         10,543         (4,846
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Common Stock — 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, conversion 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 applicable laws and the Company’s financial condition, results of operations, cash requirements, prospects and such other factors as the Board of Directors may deem relevant. No dividends were paid during the three months ended March 31, 2012. The Company’s ability to declare or pay dividends or distributions to the holders of the Company’s common stock is restricted under the Company’s 2011 Credit Agreement and the indenture governing the Company’s second lien notes.

 

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Table of Contents

Accumulated Other Comprehensive Loss — The components of “Accumulated other comprehensive loss” at March 31, 2012 and December 31, 2011 include:

 

(Amounts in thousands)

   March 31,
2012
    December 31,
2011
 

Net unrealized gains on securities classified as available-for-sale, net of tax

   $ 22,453      $ 21,479   

Cumulative foreign currency translation adjustments, net of tax

     3,064        1,021   

Prior service credit for pension and postretirement benefits, net of tax

     1,942        2,034   

Unrealized losses on pension and postretirement benefits, net of tax

     (61,590     (62,562
  

 

 

   

 

 

 

Accumulated other comprehensive loss

   $ (34,131   $ (38,028
  

 

 

   

 

 

 

Note 10 — Stock-Based Compensation

The MoneyGram International, Inc. 2005 Omnibus Incentive Plan (“2005 Plan”) provides for the granting of equity-based compensation awards, including stock options, stock appreciation rights, restricted stock units and restricted stock awards (collectively, “share-based awards”) to officers, employees and directors. The Company is authorized to issue a total of 5,875,000 of share-based awards. As of March 31, 2012, the Company has remaining authorization to issue future grants of up to 1,374,738 shares.

The calculated fair value of share-based awards is recognized as compensation cost using the straight-line method over the vesting or service period in the Company’s financial statements. Stock-based compensation is recognized only for those options, restricted stock units and stock appreciation rights expected to vest, with forfeitures estimated at the date of grant and evaluated and adjusted periodically to reflect the Company’s historical experience and future expectations. Any change in the forfeiture assumption will be accounted for as a change in estimate, with the cumulative effect of the change on periods previously reported being reflected in the financial statements of the period in which the change is made.

Following is a summary of stock-based compensation expense for the three months ended March 31:

 

(Amounts in thousands)

   Three Months Ended
March  31,
 
   2012      2011  

Expense recognized related to stock options

   $ 3,182       $ 4,451   

Expense recognized related to restricted stock units

     341         148   

Expense related to stock appreciation rights

     9         —     
  

 

 

    

 

 

 

Stock-based compensation expense

   $ 3,532       $ 4,599   
  

 

 

    

 

 

 

Stock Options —Option awards are generally granted with an exercise price equal to the closing market price of the Company’s common stock on the date of grant. All outstanding stock options contain certain forfeiture and non-compete provisions.

Pursuant to the terms of grants made in 2012, options awarded become exercisable through the passage of time over a four-year period in an equal number of shares each year, and have a term of 10 years.

 

18


Table of Contents

For purposes of determining the fair value of stock options awarded in 2012, the Company uses the Black-Scholes single option pricing model. The following table provides weighted-average grant-date fair value and assumptions utilized to estimate the grant-date fair value of the options granted during the three months ended March 31, 2012:

 

Expected dividend yield (1)

     0.0%   

Expected volatility (2)

     71.37% - 71.79%   

Risk-free interest rate (3)

     1.23% - 1.53%   

Expected life (4)

     6.25 years   

Weighted-average grant-date fair value per option

     $11.59 - $11.88   

 

(1) 

Expected dividend yield represents the level of dividends expected to be paid on the Company’s common stock over the expected term of the option. The Company does not anticipate declaring any dividends at this time.

(2) 

Expected volatility is the amount by which the Company’s stock price has fluctuated or will fluctuate during the expected term of the option. The Company’s expected volatility is calculated based on the historical volatility of the price of the Company’s common stock since the spin-off from Viad Corporation on June 30, 2004. The Company also considers any known or anticipated factors that will likely impact future volatility.

(3) 

The risk-free interest rate for the Black-Scholes model is based on the United States Treasury yield curve in effect at the time of grant for periods within the expected term of the option, while the risk-free rate for the Monte-Carlo simulation is based on the five-year United States Treasury yield in effect at the time of grant.

(4) 

Expected life represents the period of time that options are expected to be outstanding. The expected life was determined using the simplified method as the pattern of changes in the value of the Company’s common stock and exercise activity since late 2007 has been inconsistent and substantially different from historical patterns. Additionally, there have been minimal stock option exercises, which would be representative of the Company’s normal exercise activity since 2007. Accordingly, the Company does not believe that historical terms are relevant to the assessment of the expected life of the grant. Based on these factors, the Company does not believe that it has the ability to make a more refined estimate than the use of the simplified method.

A summary of the Company’s stock option activity for the three months ended March 31, 2012 is as follows:

 

     Shares     Weighted-
Average
Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term
     Aggregate
Intrinsic
Value
($000)
 

Options outstanding at December 31, 2011

     5,365,085      $ 23.45         

Granted

     42,218        18.18         

Exercised

     (1,250     17.36         

Forfeited/Expired

     (50,726     145.63         
  

 

 

   

 

 

       

Options outstanding at March 31, 2012

     5,355,327      $ 22.26         7.78 years       $ 4,397   
  

 

 

   

 

 

    

 

 

    

 

 

 

Vested or expected to vest at March 31, 2012

     5,196,467      $ 22.28         7.75 years       $ 4,353   
  

 

 

   

 

 

    

 

 

    

 

 

 

Options exercisable at March 31, 2012

     1,261,699      $ 26.63         6.82 years       $ 2,390   
  

 

 

   

 

 

    

 

 

    

 

 

 

The following represents stock option compensation information as of March 31, 2012:

 

(Amounts in thousands)

   Three Months Ended
March 31,
 
   2012      2011  

Intrinsic value of options exercised

   $ 1,025       $ 80,410   

Cash received from option exercises

   $ 22       $ 183   

Unrecognized stock option expense

   $ 21,220      

Remaining weighted-average vesting period

     1.5 years      

Restricted Stock Units — In the first quarter of 2012, the Company issued performance-based restricted stock units to certain employees, which will vest and become payable in shares of common stock to the extent the Company attains the performance goals applicable to the performance period. The performance goal is based on the degree to which the Company’s average annual adjusted EBITDA, defined as earnings before interest, taxes, depreciation and amortization and less certain non-recurring or other unexpected expenses, meets, exceeds or falls short of the target performance goal of achieving an average annual adjusted EBITDA increase of 10 percent over a three year period. Under the terms of the grant, 50 percent of the

 

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target restricted stock units may vest on the second anniversary and 50 percent may vest on the third anniversary if the performance goal is achieved as of such dates. The number of restricted stock units that vest is determined on a pro rata basis by the extent to which the performance goal is met within a threshold minimum and maximum. In the event the target performance goal is not met, but the Company achieves a minimum performance goal of an average annual adjusted EBITDA growth of five percent, the participant will be entitled to vest in 50 percent of the target number of restricted stock units. In the event the Company achieves its maximum performance goal of an average annual adjusted EBITDA growth of 20 percent, the participant will be entitled to 200 percent of the target number of restricted stock units.

The fair value of restricted stock units is calculated based on the stock price at the time of grant. For performance-based restricted stock units, expense is recognized if achievement of the performance goal is deemed probable, with the amount of expense recognized based on the Company’s best estimate of the ultimate achievement level. For the 2012 performance based restricted stock unit grants, the grant date fair value at the minimum, target and maximum thresholds is $0.4 million, $0.9 million and $1.7 million, respectively. As of March 31, 2012, the Company believes it is probable it will achieve the performance goal at the target level on the third anniversary. For grants to employees, expense is recognized in the “Compensation and benefits” line and expense for grants to Directors is recorded in the “Transaction and operations support” line in the Consolidated Statements of Income using the straight-line method over the vesting period.

A summary of the Company’s restricted stock unit activity for the three months ended March 31, 2012 is as follows:

 

     Total
Shares
    Weighted
Average
Price
 

Restricted stock units outstanding at December 31, 2011

     337,676      $ 17.77   

Granted

     48,922        18.20   

Forfeited

     (1,120     18.00   
  

 

 

   

 

 

 

Restricted stock units outstanding at March 31, 2012

     385,478      $ 17.82   
  

 

 

   

 

 

 

As of March 31, 2012, the Company’s outstanding restricted stock units had unrecognized compensation expense of $2.4 million and a remaining weighted-average vesting period of 2.5 years. Unrecognized restricted stock unit expense and the remaining weighted-average vesting period are presented under the Company’s current estimate of achievement of the target performance goal on the third anniversary. Unrecognized restricted stock unit expense as of March 31, 2012 under the minimum and maximum thresholds is $1.2 million and $4.6 million, respectively.

Note 11 — Income Taxes

For the three months ended March 31, 2012, the Company had $7.8 million of income tax expense on pre-tax income of $18.0 million. For the three months ended March 31, 2011, the Company had $3.0 million of income tax benefit on pre-tax income of $11.1 million, primarily reflecting a discrete benefit of $3.5 million for the reversal of a portion of the valuation allowance on domestic deferred tax assets. Changes in facts and circumstances may cause the Company to record additional tax expense or benefits in the future. The Company paid $0.1 million of federal and state income taxes for each of the three months ended March 31, 2012 and 2011.

For the three months ended March 31, 2012, interest and penalties for unrecognized tax benefits were less than $0.1 million compared to $0.1 million for the three months ended March 31, 2011. The Company records interest and penalties for unrecognized tax benefits in “Income tax expense (benefit)” in the Consolidated Statements of Income. As of March 31, 2012 and December 31, 2011, the Company had a liability of $1.6 million for interest and penalties within “Accounts payable and other liabilities” in the Consolidated Balance Sheets.

During the second quarter of 2010, the IRS completed its examination of the Company’s consolidated income tax returns for 2005 to 2007 and issued its Revenue Agent Report (“RAR”) challenging the Company’s tax position relating to net securities losses and disallowing the related deductions. The Company disagreed with the RAR regarding the net securities losses and filed a protest letter. The Company had conferences with the IRS Appeals Office in 2010 and through October 2011, but was unable to reach agreement with the IRS Appeals Division. A Notice of Deficiency related to these items was received in April 2012. The Company is also currently under examination for its 2008 and 2009 tax returns, which had similar deductions, and received an RAR for 2008 and 2009 in April 2012. The Company anticipates receiving a Notice of Deficiency within the next 12 months. The Company intends to petition the United States Tax Court contesting the adjustments in the Notice of Deficiency. Approximately $955.0 million of cumulative deductions were taken for net securities losses in its 2007, 2008 and

 

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2009 tax returns. As of March 31, 2012, the Company has recognized a cumulative benefit of approximately $136.1 million relating to these deductions. The Company continues to believe that the amounts recorded in its consolidated financial statements reflect its best estimate of the ultimate outcome of this matter.

Note 12 — Commitments and Contingencies

Operating Leases — The Company has various non-cancelable operating leases for buildings and equipment with terms through 2021. Certain of these leases contain rent holidays and rent escalation clauses based on pre-determined annual rate increases. The Company recognizes rent expense under the straight-line method over the term of the lease. Any difference between the straight-line rent amounts and amounts payable under the leases are recorded as deferred rent in “Accounts payable and other liabilities” in the Consolidated Balance Sheets. Cash or lease incentives received under certain leases are recorded as deferred rent when the incentive is received and amortized as a reduction to rent over the term of the lease using the straight-line method. Incentives received relating to tenant improvements are recognized as a reduction of rent expense under the straight-line method over the term of the lease. Tenant improvements are capitalized as leasehold improvements and depreciated over the shorter of the remaining term of the lease or 10 years. At March 31, 2012, the deferred rent liability relating to incentives was $2.4 million.

Rent expense under operating leases was $3.8 million and $4.1 million for the three months ended March 31, 2012 and 2011, respectively. Minimum future rental payments for all non-cancelable operating leases with an initial term of more than one year are (amounts in thousands):

 

Year 1

   $ 13,122   

Year 2

     12,251   

Year 3

     11,419   

Year 4

     7,376   

Year 5

     3,065   

Thereafter

     10,254   
  

 

 

 

Total

   $ 57,487   
  

 

 

 

Credit Facilities — At March 31, 2012, the Company has overdraft facilities through its senior facility consisting of $12.7 million of letters of credit to assist in the management of investments and the clearing of payment service obligations. All of these letters of credit were outstanding as of March 31, 2012. These overdraft facilities reduce amounts available under the senior facility. Fees on the letters of credit are paid in accordance with the terms of the senior facility described in Note 7 — Debt.

Minimum Commission Guarantees — In limited circumstances as an incentive to new or renewing agents, the Company may grant minimum commission guarantees for a specified period of time at a contractually specified amount. Under the guarantees, the Company will pay to the agent the difference between the contractually specified minimum commission and the actual commissions earned by the agent. Expense related to the guarantee is recognized in the “Fee commissions expense” line in the Consolidated Statements of Income.

As of March 31, 2012, the liability for minimum commission guarantees is $1.9 million and the maximum amount that could be paid under the minimum commission guarantees is $7.1 million over a weighted average remaining term of 3.7 years. The maximum payment is calculated as the contractually guaranteed minimum commission times the remaining term of the contract and, therefore, assumes that the agent generates no money transfer transactions during the remainder of its contract. However, under the terms of certain agent contracts, the Company may terminate the contract if the projected or actual volume of transactions falls beneath a contractually specified amount. With respect to minimum commission guarantees expiring in the three months ended March 31, 2012, the Company paid less than $0.1 million, or 6 percent, of the estimated maximum payment for the year.

Other Commitments — The Company has agreements with certain co-investors to provide funds related to investments in limited partnership interests. As of March 31, 2012, the total amount of unfunded commitments related to these agreements was $0.3 million. The amortization expense was recognized as part of “Transaction and operations support” expense in the Consolidated Statements of Income.

Legal Proceedings — The matters set forth below are subject to uncertainties and outcomes that are not predictable with certainty. The Company accrues for these matters as any resulting losses become probable and can be reasonably estimated.

 

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Further, the Company maintains insurance coverage for many claims and litigations alleged. In relation to various legal matters, including those described below, the Company had $3.6 million and $3.0 million of liability recorded in the “Accounts payable and other liabilities” line in the Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011, respectively. A charge of $1.6 million and $0.8 million, net of insurance recoveries, was recorded in the “Transaction and operations support” line in the Consolidated Statements of Income during the three months ended March 31, 2012 and 2011, respectively.

Litigation Commenced Against the Company:

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

On May 12, 2011 a complaint was filed in the County Court at Law No. 3 in Dallas County, Texas by Hilary Kramer purporting to be a class action complaint on behalf of all shareholders and a shareholder derivative complaint against the Company, THL, Goldman Sachs and each of the Company’s directors. Ms. Kramer alleged in her complaint that she is a stockholder of the Company and asserted, among other things, (i) breach of fiduciary duty claims against the Company’s directors, THL and Goldman Sachs and (ii) claims for aiding and abetting breach of fiduciary duties against Goldman Sachs. Ms. Kramer purported to sue on her own behalf and on behalf of the Company and its stockholders. Ms. Kramer sought to, among other things, enjoin the 2011 Recapitalization. The defendants have moved for the Texas court to stay this litigation in favor of the Pittman litigation in Delaware, which has an overlapping class definition.

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

Government Investigations:

MoneyGram has been served with subpoenas to produce documents and testify before a grand jury in the U.S. District Court for the Middle District of Pennsylvania. The subpoenas sought information related to, inter alia, MoneyGram’s U.S. and Canadian agents, as well as certain transactions involving such agents, fraud complaint data, and MoneyGram’s consumer anti-fraud program during the period from 2004 to 2009. MoneyGram has provided information requested pursuant to the subpoenas and continues to provide additional information relating to the investigation. In addition, the Company has been provided with subpoenas for the testimony of certain current and former employees in connection with the investigation. The Company has also been notified of a request for interviews of one current executive officer and one former chief executive officer of the Company. The U.S. Department of the Treasury Financial Crimes Enforcement Network (“FinCEN”) also requested information, which information was subsequently provided by MoneyGram, concerning MoneyGram’s reporting of fraudulent transactions during this period. In November 2010, MoneyGram met with representatives from the U.S. Attorney’s Office for the Middle District of Pennsylvania (the “MDPA USAO”) and representatives of FinCEN to discuss the investigation. In July 2011, MoneyGram had further discussions with the MDPA USAO and representatives of the Asset Forfeiture and Money Laundering Section of the U.S. Department of Justice (“US DOJ”). MoneyGram has been informed that it is being investigated by the federal grand jury in connection with these matters for the period 2004 to early 2009 as well as MoneyGram’s anti-money laundering program during that period. In January 2012, meetings were held between representatives of the Company, the MDPA USAO and the Criminal Division of the US DOJ to discuss the investigation. MoneyGram continues to engage in discussions and cooperate with such government representatives regarding the ongoing investigation. During the course of these discussions, the Company was advised that consideration is being given to a range of possible outcomes,

 

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including the seeking of criminal penalties against the Company. However, no conclusions can be drawn at this time as to the outcome of the investigation, and we are unable to predict the probable loss, or range of loss, if any, associated with this matter. On March 19, 2012, the Company entered into a tolling agreement with the U.S. Attorney’s Office for the Middle District of Pennsylvania and the Asset Forfeiture and Money Laundering Section of the Criminal Division of the Department of Justice that tolled the statute of limitations applicable to any criminal proceedings that the government might later initiate to include the period from March 23, 2012 through and including December 31, 2012.

MoneyGram has also received Civil Investigative Demands from a working group of nine state attorneys general who have initiated an investigation into whether the Company has taken adequate steps to prevent consumer fraud during the period from 2007 to 2011. The Civil Investigative Demands seek information and documents relating to the Company’s procedures to prevent fraudulent transfers and consumer complaint information. MoneyGram continues to cooperate fully with the states in this matter. MoneyGram has submitted the information and documents requested by the states. No claims have been made against MoneyGram at this time.

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

Action Commenced by the Company:

In March 2012, MoneyGram International initiated an arbitration proceeding before the Financial Industry Regulatory Authority (“FINRA”) against Goldman Sachs & Co. (“Goldman”). The arbitration relates to MoneyGram’s purchase of Residential Mortgage Backed Securities (“RMBS”) and Collateral Debt Obligations (“CDO”) that Goldman sold to MoneyGram during the 2005 through 2007 timeframe. The Company alleges, among other things, that Goldman made material misrepresentations and omissions in connection with the sale of these products, ultimately causing significant losses to the Company for which the Company is currently seeking damages. Goldman owns, together with certain of its affiliates, approximately 19 percent of the shares of the Company’s common stock on a diluted basis, assuming conversion of the D Stock currently owned by Goldman and its affiliates.

Note 13 — Earnings per Common Share

For discrete periods from January 1, 2008 through June 30, 2011, the Company utilized the two-class method for computing basic earnings per common share, which reflects the amount of undistributed earnings allocated to the common stockholders using the participation percentage of each class of stock. Undistributed earnings was determined as the Company’s net income less dividends declared, accumulated, deemed or paid on preferred stock. The undistributed earnings allocated to the common stockholders are divided by the weighted-average number of common shares outstanding during the period to compute basic earnings per common share.

For all periods in which it is outstanding, the Company’s Series D Participating Convertible Preferred Stock (“D Stock”) is included in the weighted-average number of common shares outstanding utilized to calculate basic earnings per common share as the D Stock is deemed a common stock equivalent. Diluted earnings per common share reflects the potential dilution that could result if securities or incremental shares arising out of the Company’s stock-based compensation plans and the outstanding shares of the Company’s Series B Participating Convertible Preferred Stock (collectively, the “Series B Stock”) were exercised or converted into common stock. Diluted earnings per common share assumes the exercise of stock options using the treasury stock method and the conversion of the Series B Stock using the if-converted method.

Effective for discrete periods beginning after June 30, 2011, the Company no longer applies the two-class method of calculating basic earnings per share as the Series B Stock is no longer outstanding and the D Stock is deemed a common stock equivalent. Following is a reconciliation of the weighted-average share amounts used in calculating earnings per share:

 

(Amounts in thousands)

   Three Months Ended
March 31,
 
   2012      2011  

Basic common shares outstanding

     71,490         10,455   

Shares related to stock options

     143         —     

Shares related to restricted stock and stock units

     18         —     
  

 

 

    

 

 

 

Diluted common shares outstanding

     71,651         10,455   
  

 

 

    

 

 

 

 

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Potential common shares are excluded from the computation of diluted earnings per common share when the effect would be anti-dilutive. All potential common shares are anti-dilutive in periods of net loss available to common stockholders. Stock options are anti-dilutive when the exercise price of these instruments is greater than the average market price of the Company’s common stock for the period. The Series B Stock is anti-dilutive when the incremental earnings per share of Series B Stock on an if-converted basis is greater than the basic earnings per common share. Following are the weighted-average potential common shares excluded from diluted earnings per common share as their effect would be anti-dilutive:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012      2011  

Shares related to stock options

     4,846         5,135   

Shares related to restricted stock and stock units

     323         —     

Shares related to preferred stock

     —           55,629   
  

 

 

    

 

 

 

Shares excluded from the computation

     5,169         60,764   
  

 

 

    

 

 

 

Note 14 — Recent Accounting Pronouncements

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011–04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, (“ASU 2011–04”). ASU 2011–04 amends Accounting Standards Codification (“ASC”) 820, Fair Value Measurements, (“ASC 820”), providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011–04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. The Company adopted ASU 2011–04 on January 1, 2012, which resulted in additional fair value measurement disclosures.

In June 2011, the FASB issued ASU No. 2011–05, Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income, (“ASU 2011–05”) to amend financial statement presentation guidance for other comprehensive income (“OCI”). Under ASU 2011–05, the statement of income and OCI can be presented either as a continuous statement or in two separate consecutive statements. As such, the option to present the components of other comprehensive income as part of the statement of stockholders’ equity is eliminated. The amendments in ASU 2011–05 do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU 2011–05 was adopted on January 1, 2012 with no impact to the Company’s Consolidated Financial Statements.

Note 15 — Segment Information

The Company conducts its business through two reportable segments, Global Funds Transfer and Financial Paper Products. Businesses that are not operated within these segments are categorized as “Other,” and primarily relate to discontinued products and businesses. One of the Company’s agents of both the Global Funds Transfer segment and the Financial Paper Products segment accounted for 29.1 percent and 30.0 percent of total revenue for the three months ended March 31, 2012 and 2011, respectively. The following tables set forth revenue, operating results, depreciation and amortization, capital expenditures and assets by segment:

 

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Table of Contents
     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012      2011  

Revenue:

     

Global Funds Transfer:

     

Money transfer

   $ 268,491       $ 239,704   

Bill payment

     27,644         30,077   
  

 

 

    

 

 

 

Total Global Funds Transfer

     296,135         269,781   

Financial Paper Products:

     

Money order

     14,890         15,730   

Official check

     6,778         8,166   
  

 

 

    

 

 

 

Total Financial Paper Products

     21,668         23,896   

Other

     292         347   
  

 

 

    

 

 

 

Total revenue

   $ 318,095       $ 294,024   
  

 

 

    

 

 

 

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012     2011  

Segment operating income:

    

Global Funds Transfer

   $ 33,282      $ 26,447   

Financial Paper Products

     8,990        8,380   

Other

     (569     (263
  

 

 

   

 

 

 

Total segment operating income

     41,703        34,564   

Other unallocated expenses

     5,772        2,863   
  

 

 

   

 

 

 

Total operating income

     35,931        31,701   

Interest expense

     17,883        20,613   
  

 

 

   

 

 

 

Income before income taxes

   $ 18,048      $ 11,088   
  

 

 

   

 

 

 

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012      2011  

Depreciation and amortization:

     

Global Funds Transfer

   $ 9,749       $ 10,113   

Financial Paper Products

     914         1,544   

Other

     20         9   
  

 

 

    

 

 

 

Total depreciation and amortization

   $ 10,683       $ 11,666   
  

 

 

    

 

 

 

Capital expenditures:

     

Global Funds Transfer

   $ 9,537       $ 6,891   

Financial Paper Products

     2,033         874   
  

 

 

    

 

 

 

Total capital expenditures

   $ 11,570       $ 7,765   
  

 

 

    

 

 

 

 

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Geographic areas — International operations are located principally in Europe. International revenues are defined as revenues generated from money transfer transactions originating in a country other than the United States. Long-lived assets are principally located in the United States. The table below presents revenue by major geographic area for the three months ended March 31:

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012      2011  

United States

   $ 200,532       $ 187,898   

International

     117,563         106,126   
  

 

 

    

 

 

 

Total revenue

   $ 318,095       $ 294,024   
  

 

 

    

 

 

 

Note 16 — Condensed Consolidating Financial Statements

In the event the Company offers debt securities pursuant to an effective registration statement on Form S-3, such debt securities may be guaranteed by certain of its subsidiaries. Accordingly, the Company is providing condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. If the Company issues debt securities, the following 100 percent directly or indirectly owned subsidiaries could fully and unconditionally guarantee the debt securities on a joint and several basis: MoneyGram Payment Systems Worldwide, Inc.; MoneyGram Payment Systems, Inc.; PropertyBridge, Inc.; and MoneyGram of New York LLC (collectively, the “Guarantors”).

The following information represents condensed, consolidating Balance Sheets as of March 31, 2012 and December 31, 2011, along with condensed, consolidating Statements of Income (Loss), Statements of Comprehensive Income and Statements of Cash Flows for the three months ended March 31, 2012 and 2011. The condensed, consolidating financial information presents financial information in separate columns for MoneyGram International, Inc. on a parent-only basis carrying its investment in subsidiaries under the equity method; Guarantors on a combined basis, carrying investments in subsidiaries that are not expected to guarantee the debt (collectively, the “Non-Guarantors”) under the equity method; Non-Guarantors on a combined basis; and eliminating entries. The eliminating entries primarily reflect intercompany transactions, such as accounts receivable and payable, fee revenue and commissions expense and the elimination of equity investments and income in subsidiaries.

 

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MONEYGRAM INTERNATIONAL, INC.

CONDENSED, CONSOLIDATING BALANCE SHEETS

AS OF MARCH 31, 2012

 

(Amounts in thousands)

   Parent     Subsidiary
Guarantors
     Non-
Guarantors
     Eliminations     Consolidated  

ASSETS

            

Cash and cash equivalents

   $ —        $ —         $ —         $ —        $ —     

Cash and cash equivalents (substantially restricted)

     546        2,456,657         90,047         —          2,547,250   

Receivables, net (substantially restricted)

     —          1,192,829         17,677         —          1,210,506   

Short-term investments (substantially restricted)

     —          500,000         25,356         —          525,356   

Available-for-sale investments (substantially restricted)

     —          93,127         —           —          93,127   

Property and equipment

     —          89,859         27,024         —          116,883   

Goodwill

     —          306,878         121,813         —          428,691   

Other assets

     5,169        190,066         18,885         —          214,120   

Equity investments in subsidiaries

     100,750        177,662         —           (278,412     —     

Intercompany receivables

     —          180,983         —           (180,738     245   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 106,465      $ 5,188,061       $ 300,802       $ (459,150   $ 5,136,178   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

            

Payment service obligations

   $ —        $ 4,099,572       $ 53,032       $ —        $ 4,152,604   

Debt

     —          810,623         —           —          810,623   

Pension and other postretirement benefits

     —          116,908         1,782         —          118,690   

Accounts payable and other liabilities

     62,885        60,208         23,654         —          146,747   

Intercompany liabilities

     136,066        —           44,672         (180,738     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     198,951        5,087,311         123,140         (180,738     5,228,664   

Total stockholders’ (deficit) equity

     (92,486     100,750         177,662         (278,412     (92,486
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ (deficit) equity

   $ 106,465      $ 5,188,061       $ 300,802       $ (459,150   $ 5,136,178   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

MONEYGRAM INTERNATIONAL, INC.

CONDENSED, CONSOLIDATING BALANCE SHEETS

AS OF DECEMBER 31, 2011

 

(Amounts in thousands)

   Parent     Subsidiary
Guarantors
     Non-
Guarantors
     Eliminations     Consolidated  

ASSETS

            

Cash and cash equivalents

   $ —        $ —         $ —         $ —        $ —     

Cash and cash equivalents (substantially restricted)

     524        2,462,106         109,544         —          2,572,174   

Receivables, net (substantially restricted)

     —          1,204,903         15,162         —          1,220,065   

Short-term investments (substantially restricted)

     —          500,000         22,024         —          522,024   

Available-for-sale investments (substantially restricted)

     —          102,771         —           —          102,771   

Property and equipment

     —          87,172         29,169         —          116,341   

Goodwill

     —          306,878         121,813         —          428,691   

Other assets

     4,820        190,295         18,397         —          213,512   

Equity investments in subsidiaries

     85,436        177,385         —           (262,821     —     

Intercompany receivables

     —          187,441         —           (187,441     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 90,780      $ 5,218,951       $ 316,109       $ (450,262   $ 5,175,578   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

            

Payment service obligations

   $ —        $ 4,138,418       $ 66,957       $ —        $ 4,205,375   

Debt

     —          810,888         —           —          810,888   

Pension and other postretirement benefits

     —          118,580         1,672         —          120,252   

Accounts payable and other liabilities

     54,803        65,629         28,829         —          149,261   

Intercompany liabilities

     146,175        —           41,266         (187,441     —     
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     200,978        5,133,515         138,724         (187,441     5,285,776   

Total stockholders’ (deficit) equity

     (110,198     85,436         177,385         (262,821     (110,198
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ (deficit) equity

   $ 90,780      $ 5,218,951       $ 316,109       $ (450,262   $ 5,175,578   
  

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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MONEYGRAM INTERNATIONAL, INC.

CONDENSED, CONSOLIDATING STATEMENTS OF INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 2012

 

(Amounts in thousands)

   Parent     Subsidiary
Guarantors
    Non-
Guarantors
    Eliminations     Consolidated  

REVENUE

          

Fee and other revenue

   $ —        $ 340,367      $ 69,312      $ (94,761   $ 314,918   

Investment revenue

     —          2,943        234        —          3,177   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     —          343,310        69,546        (94,761     318,095   

EXPENSES

          

Fee and other commissions expense

     —          179,454        37,873        (75,412     141,915   

Investment commissions expense

     —          77        —          —          77   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commissions expense

     —          179,531        37,873        (75,412     141,992   

Compensation and benefits

     —          44,026        15,038        —          59,064   

Transaction and operations support

     1,766        64,022        11,775        (19,349     58,214   

Occupancy, equipment and supplies

     —          9,019        3,192        —          12,211   

Depreciation and amortization

     —          7,599        3,084        —          10,683   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,766        304,197        70,962        (94,761     282,164   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OPERATING (LOSS) INCOME

     (1,766     39,113        (1,416     —          35,931   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expense

          

Interest expense

     —          17,883        —          —          17,883   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses, net

     —          17,883        —          —          17,883   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (1,766     21,230        (1,416     —          18,048   

Income tax (benefit) expense

     (618     8,361        36        —          7,779   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income after income taxes

     (1,148     12,869        (1,452     —          10,269   

Equity income (loss) in subsidiaries

     11,417        (1,452     —          (9,965     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 10,269      $ 11,417      $ (1,452   $ (9,965   $ 10,269   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

28


Table of Contents

MONEYGRAM INTERNATIONAL, INC.

CONDENSED, CONSOLIDATING STATEMENTS OF INCOME (LOSS)

FOR THE THREE MONTHS ENDED MARCH 31, 2011

 

(Amounts in thousands)

   Parent     Subsidiary
Guarantors
    Non-
Guarantors
     Eliminations     Consolidated  

REVENUE

           

Fee and other revenue

   $ —        $ 284,678      $ 63,273       $ (57,942   $ 290,009   

Investment revenue

     —          3,935        80         —          4,015   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

     —          288,613        63,353         (57,942     294,024   

EXPENSES

           

Fee and other commissions expense

     —          135,088        26,942         (32,970     129,060   

Investment commissions expense

     —          140        —           —          140   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total commissions expense

     —          135,228        26,942         (32,970     129,200   

Compensation and benefits

     (31     44,142        15,184         —          59,295   

Transaction and operations support

     1,024        66,076        8,281         (24,972     50,409   

Occupancy, equipment and supplies

     —          8,811        2,942         —          11,753   

Depreciation and amortization

     —          9,037        2,629         —          11,666   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total operating expenses

     993        263,294        55,978         (57,942     262,323   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING (LOSS) INCOME

     (993     25,319        7,375         —          31,701   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other expense

           

Interest expense

     —          20,613        —           —          20,613   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total other expenses, net

     —          20,613        —           —          20,613   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) income before income taxes

     (993     4,706        7,375         —          11,088   

Income tax (benefit) expense

     (347     (2,910     300         —          (2,957
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) income after income taxes

     (646     7,616        7,075         —          14,045   

Equity income (loss) in subsidiaries

     14,691        7,075        —           (21,766     —     
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

NET INCOME (LOSS)

   $ 14,045      $ 14,691      $ 7,075       $ (21,766   $ 14,045   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

MONEYGRAM INTERNATIONAL, INC.

CONDENSED, CONSOLIDATING STATEMENTS OF COMPREHENSIVEINCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2012

 

(Amounts in thousands)

   Parent     Subsidiary
Guarantors
    Non-
Guarantors
    Eliminations     Consolidated  

NET INCOME

   $ 10,269      $ 11,417      $ (1,452   $ (9,965   $ 10,269   

OTHER COMPREHENSIVE INCOME

          

Net unrealized gains on available-for-sale securities:

          

Net holding gains arising during the period, net of tax expense of $532

     974        974        —          (974     974   

Pension and postretirement benefit plans:

          

Reclassification of prior service credit for pension and postretirement benefit plans recorded to net income, net of tax expense of $57

     (92     (92     —          92        (92

Reclassification of net actuarial loss for pension and postretirement benefit plans recorded to net income, net of tax benefit of $596

     972        972        —          (972     972   

Unrealized foreign currency translation gains, net of tax expense of $1,252

     2,043        2,043        1,062        (3,105     2,043   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     3,897        3,897        1,062        (4,959     3,897   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 14,166      $ 15,314      $ (390   $ (14,924   $ 14,166   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

MONEYGRAM INTERNATIONAL, INC.

CONDENSED, CONSOLIDATING STATEMENTS OF COMPREHENSIVEINCOME

FOR THE THREE MONTHS ENDED MARCH 31, 2011

 

(Amounts in thousands)

   Parent     Subsidiary
Guarantors
    Non-
Guarantors
     Eliminations     Consolidated  

NET INCOME

   $ 14,045      $ 14,691      $ 7,075       $ (21,766   $ 14,045   

OTHER COMPREHENSIVE INCOME

           

Net unrealized gains on available-for-sale securities:

           

Net holding gains arising during the period, net of tax expense of $0

     1,944        1,944        —           (1,944     1,944   

Pension and postretirement benefit plans:

           

Reclassification of prior service credit for pension and postretirement benefit plans recorded to net income, net of tax expense of $57

     (92     (92     —           92        (92

Reclassification of net actuarial loss for pension and postretirement benefit plans recorded to net income, net of tax benefit of $621

     1,012        1,012        —           (1,012     1,012   

Unrealized foreign currency translation gains, net of tax expense of $443

     723        1,049        369         (1,418     723   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Other comprehensive income

     3,587        3,913        369         (4,282     3,587   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

COMPREHENSIVE INCOME

   $ 17,632      $ 18,604      $ 7,444       $ (26,048   $ 17,632   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

MONEYGRAM INTERNATIONAL, INC.

CONDENSED, CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2012

 

(Amounts in thousands)

   Parent     Subsidiary
Guarantors
    Non-
Guarantors
    Eliminations     Consolidated  

NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES

   $ 10,087      $ (5,234   $ 4,783      $ —        $ 9,636   

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Proceeds from maturities of investments (substantially restricted)

     —          10,820        —          —          10,820   

Purchases of short-term investments (substantially restricted)

     —          (200,000     (11,756     —          (211,756

Proceeds from maturities of short-term investments (substantially restricted)

     —          200,000        10,113        —          210,113   

Purchases of property and equipment, net of disposals

     —          (14,825     (3,807     —          (18,632

Proceeds from disposal of assets and businesses

     —          172        —          —          172   

Capital contribution from subsidiary guarantors

     —          (667     —          667        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     —          (4,500     (5,450     667        (9,283
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Payments on debt

     —          (375     —          —          (375

Proceeds from exercise of stock options

     22        —          —          —          22   

Intercompany financings

     (10,109     10,109        —          —          —     

Capital contribution to non-guarantors

     —          —          667        (667     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (10,087     9,734        667        (667     (353
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     —          —          —          —          —     

CASH AND CASH EQUIVALENTS - Beginning of period

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS - End of period

   $ —        $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

MONEYGRAM INTERNATIONAL, INC.

CONDENSED, CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2011

 

(Amounts in thousands)

   Parent     Subsidiary
Guarantors
    Non-
Guarantors
    Eliminations     Consolidated  

NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES

   $ (2,983   $ (16,079   $ 15,331      $ —        $ (3,731

CASH FLOWS FROM INVESTING ACTIVITIES:

          

Proceeds from maturities of investments (substantially restricted)

     —          17,462        —          —          17,462   

Purchases of short-term investments (substantially restricted)

     —          (194,142     (11,299     —          (205,441

Proceeds from maturities of short-term investments (substantially restricted)

     —          200,500        —          —          200,500   

Purchases of property and equipment, net of disposals

     —          (4,259     (4,714     —          (8,973

Capital contribution from subsidiary guarantors

     —          (682     —          682        —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     —          18,879        (16,013     682        3,548   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

          

Proceeds from exercise of stock options

     183        —          —          —          183   

Intercompany financings

     2,800        (2,800     —          —          —     

Capital contribution to non-guarantors

     —          —          682        (682     —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     2,983        (2,800     682        (682     183   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NET CHANGE IN CASH AND CASH EQUIVALENTS

     —          —          —          —          —     

CASH AND CASH EQUIVALENTS - Beginning of period

     —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

CASH AND CASH EQUIVALENTS - End of period

   $ —        $ —        $ —        $ —        $ —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and related Notes of MoneyGram International, Inc. (“MoneyGram,” the “Company,” “we,” “us” and “our”). 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 Quarterly Report on Form 10-Q.

RESULTS OF OPERATIONS

 

(Amounts in thousands)

   Three Months Ended
March 31,
    %
Change
 
   2012      2011    
     (unaudited)      (unaudited)        

Revenue

       

Fee and other revenue

   $ 314,918       $ 290,009        9

Investment revenue

     3,177         4,015        (21 )% 
  

 

 

    

 

 

   

 

 

 

Total revenue

     318,095         294,024        8
  

 

 

    

 

 

   

 

 

 

Expenses

       

Fee and other commissions expense

     141,915         129,060        10

Investment commissions expense

     77         140        (45 )% 
  

 

 

    

 

 

   

 

 

 

Total commissions expense

     141,992         129,200        10

Compensation and benefits

     59,064         59,295        (0 )% 

Transaction and operations support

     58,214         50,409        15

Occupancy, equipment and supplies

     12,211         11,753        4

Depreciation and amortization

     10,683         11,666        (8 )% 
  

 

 

    

 

 

   

 

 

 

Total operating expenses

     282,164         262,323        8
  

 

 

    

 

 

   

 

 

 

Operating income

     35,931         31,701        13
  

 

 

    

 

 

   

 

 

 

Other expense

       

Interest expense

     17,883         20,613        (13 )% 
  

 

 

    

 

 

   

 

 

 

Total other expense, net

     17,883         20,613        (13 )% 
  

 

 

    

 

 

   

 

 

 

Income before income taxes

     18,048         11,088        63
  

 

 

    

 

 

   

 

 

 

Income tax expense (benefit)

     7,779         (2,957     363
  

 

 

    

 

 

   

 

 

 

Net income

   $ 10,269       $ 14,045        (27 )% 
  

 

 

    

 

 

   

 

 

 

Following is a summary of our operating results in the first quarter of 2012 as compared to the first quarter of 2011:

 

   

Total fee and other revenue increased $24.9 million, or nine percent, to $314.9 million due to higher money transfer fee and other revenue, partially offset by lower revenue from bill payment products and the Financial Paper Products segment. Volume growth of 15 percent drove the increase in money transfer fee and other revenue, but was partially offset by a lower average money transfer face amount per transaction, changes in corridor mix and the lower euro exchange rate.

 

   

Investment revenue decreased $0.8 million, or 21 percent, to $3.2 million due to lower yields earned on our investment portfolio and a decline in average investable balances.

 

   

Total commissions expense increased $12.8 million, or 10 percent, due to money transfer volume growth, partially offset by the lower euro exchange rate and lower commissions expense related to bill payment products and the Financial Paper Products segment.

 

   

Total operating expenses increased $19.8 million, or eight percent, driven primarily by the increase in commissions expense, higher transaction and operations support expense and $2.9 million of incremental restructuring expense, partially offset by a decrease in depreciation and amortization. For the three months ended March 31, 2012, we recorded $5.8 million of costs associated with restructuring activities.

 

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Interest expense decreased 13 percent to $17.9 million, reflecting lower interest rates from our 2011 refinancing activities, partially offset by higher debt balances.

 

   

In the first quarter of 2012, we had an income tax expense of $7.8 million on pre-tax income of $18.0 million, reflecting the absence of valuation allowance reversals made in the prior year. In the first quarter of 2011, we recognized a discrete $3.5 million benefit and had a lower effective tax rate from the reversal of a portion of the valuation allowances on domestic deferred tax assets.

 

   

The decline in the euro exchange rate decreased total revenue by $3.6 million and total expenses by $3.1 million, for a net decrease to our income before income taxes of $0.5 million.

FEE AND OTHER REVENUE AND COMMISSIONS EXPENSE

 

     Three Months Ended
March 31,
    %
Change
 

(Amounts in thousands)

   2012     2011    

Fee and other revenue

   $ 314,918      $ 290,009        9

Fee and other commissions expense

     141,915        129,060        10

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

     45.1     44.5  

Fee and Other Revenue For the three months ended March 31, 2012, fee and other revenue growth of $24.9 million, or nine percent, was primarily driven by money transfer transaction volume growth of 15 percent, partially offset by a lower euro exchange rate and lower foreign exchange revenue, changes in corridor mix and lower average face value per transaction. Bill payment products primarily saw revenue declines from lower average fees per transaction while money order and official check fee and other revenue decreased due to volume declines. See the “Segment Performance” section for more detailed discussion.

Fee and Other Commissions For the three months ended March 31, 2012, fee and other commissions expense growth of $12.9 million, or ten percent, was primarily due to money transfer volume growth, partially offset by a lower euro exchange rate and lower average bill payment fees per transaction and Financial Paper Product volumes. Commissions expense grew at a faster rate than revenue due to payment at a higher tier from volume growth achievement for certain key agents and corridor mix. Commissions expense as a percent of fee and other revenue increased to 45.1 from 44.5 percent in the three months ended March 31, 2012 and 2011, respectively, primarily from the continued shift in overall product mix towards the Global Funds Transfer segment, particularly the money transfer product. Agents in the Global Funds Transfer segment are compensated through commissions we pay to them, whereas our Financial Paper Products agents and financial institution customers primarily earn their revenue through per item fees they charge directly to the consumer. See the “Segment Performance” section for more detailed discussion.

NET INVESTMENT REVENUE ANALYSIS

 

     Three Months Ended
March 31,
    %
Change
 

(Amounts in thousands)

   2012     2011    

Investment revenue

   $ 3,177      $ 4,015        (21 )% 

Investment commissions expense

     (77     (140     (45 )% 
  

 

 

   

 

 

   

 

 

 

Net investment revenue

   $ 3,100      $ 3,875        (20 )% 
  

 

 

   

 

 

   

 

 

 

Average balances:

      

Cash equivalents and investments

   $ 3,139,085      $ 3,384,783        (7 )% 

Payment service obligations

   $ 2,185,093      $ 2,398,738        (9 )% 

Average yields earned and rates paid:

      

Investment yield

     0.41     0.48  

Investment commission rate

     0.01     0.02  

Net investment margin

     0.40     0.46  

 

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The average investment yield is calculated by dividing investment revenue by the average cash equivalents and investment balances for the period. The average investment commissions rate is calculated by dividing investment commissions expense by the average payment service obligations for the period. The net investment margin is calculated by dividing net investment revenue by the average cash equivalents and investment balances for the period, then dividing that amount by the number of days in the period and multiplying by the number of days in the year.

Investment revenue Investment revenue consists of interest and dividends generated through the investment of cash balances received primarily from the sale of official checks, money orders and other payment instruments. Investment revenue decreased $0.8 million, or 21 percent, in the three months ended March 31, 2012 due to lower yields earned on our investment portfolio and lower average investment balances from the run-off of certain official check financial institution customers terminated in prior periods.

Investment commissions expense Investment commissions expense consists of amounts paid to financial institution customers based on short-term interest rate indices times the average outstanding cash balances of official checks sold by the financial institution. Investment commissions expense decreased $0.1 million, or 45 percent, for the three months ended March 31, 2012, primarily from lower interest rates.

Net investment revenue and margin As a result of the factors discussed above, net investment revenue decreased $0.8 million, or 20 percent, for the three months ended March 31, 2012, while the net investment margin decreased 0.06 percentage points.

OPERATING EXPENSES

The following discussion relates to operating expenses, other than commissions expense, which is discussed under the section “Fee and Other Revenue and Commissions Expense.”

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

 

(Amounts in thousands)

      

For the three months ending March 31, 2011

   $ 59,295   

Change from:

  

Salaries and related payroll taxes

     (1,981

Employee stock-based compensation

     (1,068

Restructuring and reorganization

     1,154   

Other employee benefits

     725   

Impact of change in Euro currency

     646   

Incentive compensation

     293   
  

 

 

 

For the three months ending March 31, 2012

   $ 59,064   
  

 

 

 

Salaries and related payroll taxes decreased from lower headcount and temporary help from our restructuring and outsourcing initiatives, partially offset by ordinary salary increases. Employee stock–based compensation decreased from grants fully vesting in prior periods and forfeitures, partially offset by new grants with longer vesting periods. Restructuring and reorganization costs increased primarily due to temporary help utilized during initiatives associated with the centralization and relocation of certain functions. Other employee benefits increased due to executive severance and higher insurance costs, partially offset by lower expenses from our benefit plans. Incentive compensation increased primarily from ordinary salary increases that increased the compensation base as compared to the prior year.

 

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Transaction and operations support — Transaction and operations support expense primarily includes: marketing; professional fees and other outside services; telecommunications; agent support costs, including forms related to our products; non–compensation employee costs, including training, travel and relocation; bank charges; and the impact of foreign exchange rate movements on our monetary transactions, assets and liabilities denominated in a currency other than the U.S. dollar. Following is a summary of the change in transaction and operations support:

 

(Amounts in thousands)

      

For the three months ending March 31, 2011

   $ 50,409   

Change from:

  

Contractor, consultant and outsourcing fees

     4,404   

Legal expenses

     2,397   

Restructuring and reorganization

     1,615   

Marketing costs

     1,593   

Impact of change in Euro currency

     558   

Foreign currency transaction gains/losses

     (2,019

Other

     (743
  

 

 

 

For the three months ending March 31, 2012

   $ 58,214   
  

 

 

 

In 2012, transaction and operations support expense increased from the following items:

 

   

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

 

   

Legal expenses increased primarily due to securities litigation and related to our May 2011 recapitalization and the Middle District of Pennsylvania U.S. Attorney investigation, partially offset by lower capital transaction activities.

 

   

Restructuring and reorganization costs increased primarily due to resourcing costs for the centralization and relocation of certain functions, including on-going initiatives outside of the United States.

 

   

Marketing costs increased from our new loyalty program introduced in January 2012, partially offset by timing of marketing activities.

 

   

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

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. Occupancy, equipment and supplies increased $0.5 million, or four percent, for the three months ended March 31, 2012. In 2012, we recorded $0.1 million of incremental facility related costs associated with restructuring activities, $0.6 million of incremental equipment maintenance costs and $0.2 million of disposal costs, partially offset by a $0.6 million decrease in supply costs and rent. Changes in the euro exchange rate increased occupancy, equipment and supplies by $0.1 million.

Depreciation and amortization — Depreciation and amortization includes depreciation on point of sale equipment, agent signage, computer hardware and software, office furniture and equipment, along with amortization of leasehold improvements, capitalized software development costs and intangible assets. Depreciation and amortization for the three months ended March 31, 2012 decreased $1.0 million, or eight percent, primarily from lower depreciation expense on point of sale equipment, office furniture and equipment and capitalized software, partially offset by an increase in signage depreciation. Changes in the euro exchange rate decreased depreciation and amortization expense by $0.1 million.

OTHER EXPENSE (INCOME)

Interest expense — Interest expense decreased $2.7 million, or 13 percent, for the three months ended March 31, 2012 due to lower interest rates from our refinancing activities in 2011, partially offset by higher debt balances.

Income taxes — For the three months ended March 31, 2012, the Company had $7.8 million of income tax expense on pre-tax income of $18.0 million, reflecting the absence of valuation allowance reversals made in the prior year. In 2011, our tax rate benefited from the release of valuation allowances. In addition, the first quarter of 2011 had a discrete benefit of $3.5 million from the release of a portion of the valuation allowances on domestic deferred tax assets.

 

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EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (“EBITDA”) AND ADJUSTED EBITDA

We believe that EBITDA (earnings before interest, taxes, depreciation and amortization, including agent signing bonus amortization) and Adjusted EBITDA (EBITDA adjusted for significant items) provide useful information to investors because they are indicators of the strength and performance of ongoing business operations, including our ability to service debt and fund capital expenditures, acquisitions and operations. These calculations are commonly used as a basis for investors, analysts and credit rating agencies to evaluate and compare the operating performance and value of companies within our industry. In addition, our debt agreements require compliance with financial measures similar to Adjusted EBITDA. Finally, EBITDA and Adjusted EBITDA are financial measures used by management in reviewing results of operations, forecasting, assessing cash flow and capital, allocating resources and establishing employee incentive programs.

Although we believe EBITDA and Adjusted EBITDA enhance investors’ understanding of our business and performance, these non-GAAP financial measures should not be considered an exclusive alternative to accompanying GAAP financial measures. The following table is a reconciliation of these non-GAAP financial measures to the related GAAP financial measures.

 

     Three Months Ended
March 31,
 

(Amounts in thousands)

   2012      2011  

Income before income taxes

   $ 18,048       $ 11,088   

Interest expense

     17,883         20,613   

Depreciation and amortization

     10,683         11,666   

Amortization of agent signing bonuses