Filed with the SEC from Nov 20 to Nov 26:
MoneyGram International (MGI)
Blum Capital Partners raised its stake to 16,056,435 shares (19.4%) from the 15,014,443 shares (18.2%) that it had reported owning on Nov. 11.
Corporate History and Acquisitions
MoneyGram International, Inc. (â€śMoneyGram,â€ť the â€śCompany,â€ť â€śwe,â€ť â€śusâ€ť and â€śourâ€ť) is a leading global payment services company. Our core purpose is to provide consumers with affordable, reliable and convenient payment services. We offer our products and services to consumers and businesses primarily through our network of agents and our financial institution customers. The diverse array of products and services we offer enables consumers, many of whom are not fully served by traditional financial institutions, to make payments and to transfer money around the world, helping them meet the financial demands of their daily lives.
Our business is conducted through our wholly owned subsidiary formerly known as Travelers Express Company, Inc. (â€śTravelersâ€ť), which has been in operation since 1940. In June 1998, we acquired MoneyGram Payment Systems, Inc. (â€śMPSIâ€ť), adding the MoneyGram Â® branded international money transfer services to our group of services. We were incorporated in Delaware on December 18, 2003 in connection with the June 30, 2004 spin-off from our parent company, Viad Corp (â€śViadâ€ť) (referred to hereafter as the â€śspin-offâ€ť). In the spin-off, Travelers was merged with our wholly owned subsidiary and Viad distributed all of our issued and outstanding shares of common stock to Viad stockholders in a tax-free distribution.
In April 2005, we acquired substantially all of the assets of ACH Commerce, LLC (â€śACH Commerceâ€ť), an automated clearing house (â€śACHâ€ť) payment processor. The acquisition provided the technology and systems platform to expand our bill payment services.
In 2005, we consolidated the operations of Travelers with MPSI to eliminate duplication and overlapping costs of operating the two businesses under separate corporate entities, and to complete the transition of our business from the Travelers Express brand to the MoneyGram brand. Effective December 31, 2005, the entity that was formerly Travelers merged with and into MPSI, with MPSI remaining as the surviving corporation and our primary operating subsidiary.
In May 2006, we completed the acquisition of Money Express S.r.l. (â€śMoney Expressâ€ť), a former super agent of our money transfer business in Italy. The acquisition of Money Express provides us with the opportunity for further network expansion and more control of marketing and promotional activities in the region. MoneyGram Payment Systems Italy, S.r.l. was established, which manages the former Money Express network comprised of approximately 900 active Italian agents.
In October 2007, we completed the acquisition of PropertyBridge, Inc., a provider of electronic payment processing services for the real estate management industry. The acquisition provides a solution in a new payment vertical and fits strategically with our build out of bill payment services.
During 2007, we continued to develop our retail strategy in Western Europe. Due to licensing requirements and marketing constraints in certain European countries, our preferred method of expanding the number of locations offering our services is through Company owned retail stores and kiosks in addition to our typical agent model. In May 2006, we formed a licensed financial institution entity in France, MoneyGram France S.A. We were granted the license in September 2006 and opened our first store in France shortly thereafter. As of the end of 2007, we are operating 16 Company owned retail stores or kiosks in France and 30 in Germany. We expect to open additional locations in these and other markets on a targeted basis.
During September 2007, the asset-backed securities market and broader credit markets began to experience significant disruption, with a general lack of liquidity in the markets and deterioration in fair value of mortgage-backed securities triggered by concerns surrounding sub-prime mortgages. In response to these concerns, the rating agencies undertook extensive reviews of asset-backed securities, particularly mortgage-backed securities. In late November and December 2007, the asset-backed securities and credit markets experienced further substantial deterioration under increasing concerns over defaults on mortgages and debt in general, as well as an increasingly negative view towards all structured investments and the credit market. In addition, the rating agencies continued their review of securities, issuing broad rating downgrades based on high levels of assumed future defaults. Under the terms of certain of our asset-backed securities, ratings downgrades of collateral securities can reduce the cash flows to all but the most senior investors even if there have been no actual losses incurred by the collateral securities. In December 2007, we began to experience adverse changes to the cash flows from some of our asset-backed investments as a result of the accumulating rating downgrades of the underlying collateral securities. As the market continued its substantial deterioration, we identified a need for additional capital. Through meetings with potential investors in late December 2007 and early January 2008, it became evident that we would need to divest certain investments in connection with any recapitalization to significantly reduce the risk of any further deterioration in the investment portfolio. We commenced a plan in January 2008 to realign our investment portfolio away from asset-backed securities and into highly liquid assets through the sale of a substantial portion of our investment portfolio. As a result of these developments, we recognized $1.2 billion of other-than-temporary impairments as a charge to earnings in December 2007.
On March 25, 2008, we completed a recapitalization transaction pursuant to which we received a substantial infusion of both equity and debt capital (the â€śCapital Transactionâ€ť) to support the long-term needs of the business and to provide necessary capital due to the investment portfolio losses. The equity component of the Capital Transaction consisted of the sale to affiliates of Thomas H. Lee Partners, L.P. (â€śTHLâ€ť) and affiliates of Goldman, Sachs & Co. (â€śGoldman Sachsâ€ť and together with THL, the â€śInvestorsâ€ť) in a private placement of 760,000 shares of Series B Participating Convertible Preferred Stock of the Company (the â€śSeries B Preferred Stockâ€ť) and shares of Series B-1 Participating Convertible Preferred Stock of the Company (the â€śSeries B-1 Preferred Stock,â€ť and together the â€śSeries B Stockâ€ť) for an aggregate purchase price of $760.0 million. The issuance of the Series B Stock gave THL and Goldman Sachs an initial equity interest of approximately 79%. Furthermore, in connection with the Capital Transaction, we paid Goldman Sachs an investment banking advisory fee equal to $7.5 million in the form of 7,500 shares of Series B-1 Preferred Stock. For a description of the terms of the Series B Stock, see â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€” Liquidity and Capital Resources â€” Sale of Investments and Capital Transactionâ€ť and Note 18 â€” Subsequent Events of the Notes to Consolidated Financial Statements.
As part of the Capital Transaction, we amended our Rights Agreement with Wells Fargo Bank, N.A., as rights agent, to exempt the issuance of the Series B Stock and stock into which the Series B Stock is convertible from the Rights Agreement. We also entered into a Registration Rights Agreement with the Investors which requires us to promptly file a shelf registration statement with the SEC relating to the Series B Stock issued to the Investors after a specified holding period. We are generally obligated to keep the shelf registration statement effective for up to 15 years or, if earlier, until all the securities owned by the Investors have been sold. The Investors are also entitled to five demand registrations and unlimited piggyback registrations.
As part of the Capital Transaction, MoneyGram Payment Systems Worldwide, Inc. (â€śWorldwideâ€ť), a wholly owned subsidiary of the Company, issued Goldman Sachs $500.0 million of senior secured second lien notes (the â€śNotesâ€ť) with a ten year maturity. For a description of the terms of the Notes, see â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€” Liquidity and Capital Resources â€” Sale of Investments and Capital Transactionâ€ť and Note 18 â€” Subsequent Events of the Notes to Consolidated Financial Statements. Additionally, Worldwide, as borrower, and the Company entered into a senior secured amended and restated credit agreement amending the Companyâ€™s existing $350.0 million debt facility, adding $250.0 million of term loans to bring the total facility to $600.0 million. The new facility includes $350.0 million in two term loan tranches and a $250.0 million revolving credit facility. For a description of the terms of the amended and restated credit facility, see â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€” Liquidity and Capital Resources â€” Sale of Investments and Capital Transactionâ€ť and Note 18 â€” Subsequent Events of the Notes to Consolidated Financial Statements.
For additional information regarding our business, including our financial results, see â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations.â€ť
We conduct our business through two segments: Global Funds Transfer and Payment Systems. In 2006, the sales, marketing and product development teams for the two segments were combined to take advantage of the overlap and synergies between the products and services offered by the two segments. However, management continues to review financial results and evaluate the performance of the Company based on these two segments. For financial information regarding our segments, see â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€” Results of Operations â€” Segment Performanceâ€ť and Note 16 â€” Segment Information of the Notes to Consolidated Financial Statements. Following is a description of each segment.
Global Funds Transfer Segment
Our Global Funds Transfer segment provides money transfer services, money orders and bill payment services to consumers. Our primary consumers are â€śunbanked,â€ť â€śunderbankedâ€ť and â€śconvenience users.â€ť â€śUnbanked consumersâ€ť are those consumers who do not have a traditional relationship with a financial institution. â€śUnderbanked consumersâ€ť are consumers who, while they may have a savings account with a financial institution, do not have a checking account. â€śConvenience usersâ€ť are consumers who, while they may have a checking account, prefer to use our products and services on the basis of convenience or value.
In 2007, the Global Funds Transfer segment had revenue of $771.0 million and an operating loss of $60.4 million, including net securities losses of $234.2 million primarily attributable to our money order product line. During 2007, 2006 and 2005, our international operations generated 21 percent, 20 percent and 19 percent, respectively, of our total fee and investment revenue, and 29 percent, 28 percent and 29 percent, respectively of our Global Funds Transfer segment fee and investment revenue.
We conduct our Global Funds Transfer operations primarily through a worldwide network of agents. Our largest agent, Wal-Mart Stores, Inc. (â€śWal-Martâ€ť), accounted for 20 percent, 17 percent and 13 percent of our total fee and investment revenue and 27 percent, 24 percent and 19 percent of the fee and investment revenue of our Global Funds Transfer segment in 2007, 2006 and 2005, respectively. Wal-Mart is the only customer that accounts for more than 10 percent of our total fee and investment revenue. Our contract with Wal-Mart in the U.S. provides for the sale by Wal-Mart of our money orders, money transfer services and real-time, urgent bill payment services on an exclusive basis. In conjunction with our Capital Transaction, we extended the term of the current agreement with Wal-Mart through January 2013, agreed to certain commission increases over the term of the contract and agreed to create a trust for the benefit of consumers who purchase money transfers and money orders at Wal-Mart locations.
During 2007, our largest agent in the United Kingdom increased the number of locations offering money transfers as they completed the installation of the AgentConnect Â® platform. Domestically, we had two new significant national retail agent signings and one significant agent renewal during 2007. During the first quarter of 2008, we extended the terms of the contracts with ACE Cash Express, Inc., in addition to Wal-Mart (two of our largest agents). During 2007, 2006 and 2005, our ten largest agents accounted for 36 percent, 34 percent, and 28 percent, respectively, of our total fee and investment revenue and 49 percent, 48 percent and 42 percent, respectively, of the fee and investment revenue of our Global Funds Transfer segment.
We provide Global Funds Transfer products and services utilizing a variety of proprietary point-of-sale platforms. We also operate two customer service call centers in the United States and contract for additional call center services in Bulgaria and, starting in late 2007, the Dominican Republic. These call centers provide multi-lingual customer service for both agents and consumers 24 hours per day, 365 days per year.
Money Transfers: During 2007, 94 percent of our Global Funds Transfer segment fee and other revenue was generated by our money transfer services (including bill payment). Money transfers are transfers of funds between consumers from one location to another. Money transfers are used by consumers who want to transfer funds quickly, safely and efficiently to another individual within a country or internationally. As of December 31, 2007, we provided money transfer services through approximately 143,000 money transfer agent locations in approximately 180 countries and territories worldwide. These agent locations are located in the following geographic regions: 33,300 locations in North America; 22,200 locations in Latin America (including Mexico which represents 10,600 locations); 44,200 locations in Western Europe and the Middle East; 10,800 locations in the Indian subcontinent;
13,600 locations in Asia Pacific; 13,700 locations in Eastern Europe; and 5,200 locations in Africa. As of the date of this filing, our money transfer agent locations have grown to 150,000.
We also offer our money transfer services on the internet via our rapidly growing MoneyGram eMoneyTransfer service that allows customers to send a money transfer at www.emoneygram.com using a credit card, debit card or a debit from a bank account. Finally, we offer our money transfer services through Company-owned retail locations. In the United States, we have Company-owned retail locations in New York and Florida. In 2007, we continued to open retail locations and kiosks in France and Germany. We plan to continue this strategy, as expanding our global network by increasing our agent locations and opening new Company-owned locations in select markets is a core growth strategy of the Company.
Our money transfer revenues are derived primarily from consumer transaction fees and revenues from currency exchange on international money transfers. In a typical money transfer, a consumer goes to an agent location, completes a form and pays the agent the money to be transferred, together with a fee. The agent enters the transaction data into a point-of-sale money transfer platform, which connects to our central data processing system. Our platforms include AgentConnect Â® , which is integrated onto the agentâ€™s point-of-sale system, and DeltaWorks Â® and Delta T3 Â® , which are separate software and stand-alone device platforms. Through our FormFree service, customers may contact our call center and a representative will collect the information over the telephone and enter it directly into our central data processing system. The funds are made available for payment to the designated recipient in various currencies throughout our agent network. The fee paid by the sender is based on the amount to be transferred and the location at which the funds are to be received. Both the â€śsendâ€ť and â€śreceiveâ€ť agents receive a commission from the transaction. In some instances, we offer our agents a tiered commission structure, rewarding the agent with a higher commission as the volume of its money transfer transactions increases.
We have corridor pricing capabilities that enable us to establish different consumer prices and foreign exchange rates for our money transfer services by location, for a broader segment such as defined zip code regions or for a widespread direct marketing area. We also have multi-currency technology that allows us to execute our money transfers directly between and among several different currencies. Where implemented, these capabilities allow our agents to settle with us in local currency and allow consumers to know the exact amount that will be received in the local currency of the receiving nation, or in U.S. dollars or Euros in certain countries.
During 2007, the gap between total revenue growth and money transfer transaction growth narrowed as we lapped the first year of implementation of the simplified pricing initiatives and the Euro strengthened against the U.S. dollar. Our simplified pricing structure reduced the number of pricing tiers, or bands, and allows our agents to more effectively communicate our value proposition to our customers. Our pricing philosophy generally is to maintain a price point below our higher priced competitor, but above the niche players in the market.
Money Orders: Money orders, much like checks, can be presented by the consumer to make a payment or for cash. Our Global Funds Transfer segment has its roots in the sale of money orders, a business we have been engaged in since 1940. Based on the number of money orders issued in 2007, we are the nationâ€™s leading issuer of money orders. In 2007, we issued approximately 246 million money orders through our network of almost 59,000 retail agent locations in the United States and Puerto Rico.
Our money orders are sold under the MoneyGram brand, as well as on a private label basis or co-branded with retail agents. In most cases, we receive transaction fees from our agents for each money order sold. In many cases, we receive additional monthly dispenser service fees from our agents for the money order dispenser equipment we provide. Furthermore, we generate income from the investment of funds that are remitted from our agents and which we invest until the money orders are cleared through the banking system, or escheat to the applicable states. Generally, a money order will remain outstanding for fewer than ten days. As discussed above, we experienced significant other-than-temporary impairments in our investment portfolio in 2007 and 19 percent of the losses are allocable to the money order product.
Bill Payment Services: Our bill payment suite of services allows consumers to make urgent payments or pay routine bills. Our bill payment services are divided into two categories: walk-in payments and electronic payments. These options enable convenience payers, just-in-time payers and delinquent debtors to pay bills through our network to certain creditors, or â€śbillers.â€ť Our billers include credit card companies, mortgage companies, auto finance companies, telecom companies, satellite companies, property management companies and third-party bill collectors. We work closely with our agents to identify billers in their service areas to target for our services. Generally, our bill payment services generate revenue from transaction fees charged to consumers for each bill payment transaction completed.
The largest portion of walk-in payments consists of our ExpressPayment Â® urgent bill payment service. Our ExpressPayment bill payment service, which is offered through our money transfer agent locations in the United States and select Caribbean countries, continues to grow as we add new billers to our network. As of December 31, 2007, we provide our ExpressPayment bill payment services to over 1,900 billers. The ExpressPayment bill payment service provides customers with same-day notification of credit to their account pursuant to our contract with the biller. Customers can also use the ExpressPayment service to load prepaid cards. Our ExpressPayment bill payment service is available for select billers for internet transactions at www.emoneygram.com.
Walk-in payments also include a new utility bill payment platform. Our FlashPay Â® and BuyPay Â® routine utility bill payment services are in the process of being converted to the new utility platform, implemented in 2007. Our utility payment product allows customers to make in-person payments of non-urgent bills at a low cost for credit to a biller typically within two to three days.
The acquisition of ACH Commerce in 2005 allowed us to enhance our electronic bill payment business and create a multi-faceted, full-suite of payment services. The acquisition of PropertyBridge in 2007 further expands our electronic bill payment suite of services. PropertyBridge offers a complete solution to the resident payment cycle, including the ability to electronically accept deposits and rent payments. The electronic payment portion of our bill payment services offers payment products by phone, IVR, web, and ACH processing along with check conversion. Consumers may select one-time or recurring ACH, credit or debit card payments to our contracted billers.
Payment Systems Segment
Our Payment Systems segment primarily provides financial institutions with payment processing services, which include official check outsourcing services and money orders for sale to their customers, as well as ACH processing services. Our customers are primarily comprised of financial institutions, thrifts and credit unions. As of December 31, 2007, we provide official check services to over 17,000 branch locations of over 1,900 financial institutions.
We primarily derive revenues in our Payment Systems segment from the investment of funds underlying the official check or financial institution money order. We invest funds from the official checks and money orders sold from the time the proceeds are remitted until the items are cleared. We also derive revenue from fees paid by our financial institution and corporate customers. In 2007, Payment Systems segment revenue was a loss of $614.4 million. As noted above, we experienced significant other-than-temporary impairments in our investment portfolio in 2007. Net securities losses of $955.6 million were allocated to the Payment Systems segment, which represents approximately 80 percent of the total losses recorded on our investment portfolio for 2007. The operating loss for 2007 was $920.1 million.
In the fourth quarter of 2007, we announced the strategic review of our official check business. As a result of the review, we have begun a restructuring of the official check business model by changing the commission structure and exiting certain large customer relationships. This restructuring will enable us to continue providing these essential services by focusing on small- to mid-sized institutions. We expect to exit contracts with most of our top ten official check customers, who together account for approximately $2 billion of our official check payment obligations. As of March 21, 2008, 45 of our over 1,900 financial institutions have provided some form of notification of intent to terminate their official check agreements with us. Outside of the top ten customers we planned to exit, these termination notifications represent $132.0 million of our average payment service obligations in 2007. Of the financial institutions that have provided notification, 32 financial institutions have stopped or reduced their issuance of official checks. We expect that most of our top ten official check financial institutions will stop issuing our official checks by the end of 2008. Also impacting the Payment Systems segment is the process commenced in January 2008 to realign our investment portfolio away from asset-backed securities into highly liquid assets. The realigned portfolio will consist primarily of cash equivalents, government and government agency securities. As a result, we anticipate that our profit margins in the official check business will be adversely affected by the lower yields in our realigned portfolio. While we expect our commission re-pricing initiatives under the official check restructuring to substantially offset the impact of the lower yields from the realigned portfolio, we will not know the final results of the re-pricing initiatives for some time.
Official Check Outsourcing Services: We provide official check outsourcing services through our PrimeLink Â® service. Financial institutions provide official checks, which include bank checks, cashier checks, teller checks and agent checks, to consumers for use in transactions when the payee requires a check drawn on a bank or other third party. Official checks are commonly used in consumer loan closings, such as closings of home and car loans, and other critical situations where the payee requires assurance of payment and funds availability. Financial institutions also use official checks to pay their own obligations. Our PrimeLink plus Â® product is an internet-based check issuance platform that allows financial institutions and other businesses with multiple locations to securely print official checks at remote locations on a client-controlled basis, eliminating the need to overnight the checks from the main office or wire transfer the funds. We provide PrimeLink and PrimeLink plus at a low cost to financial institutions and pay an agreed upon commission rate on the balance of funds underlying the official checks pending clearing of the items.
Money Orders: The Payment Systems segment also offers money orders through financial institutions in a manner very similar to the way the services are offered through our retail agents in our Global Funds Transfer segment.
Check Processing: Through our subsidiary FSMC, Inc. (â€śFSMCâ€ť), we offer high volume check processing and controlled disbursement processing. FSMC is a leading processor of promotional payments and rebates. Through FSMC, we also process checks issued under the Special Supplemental Nutrition Program to Women, Infants and Children administered by the U.S. Department of Agriculture through various states. Our revenues from this area are primarily derived from fees.
Clearing and Cash Management Bank Relationships
Our business involves the movement of money. On a daily basis, we move on average over $1.0 billion in cash to settle our payment instruments and related settlements with our agents and financial institutions. We receive a similar amount on a daily basis from our agents and financial institutions for the face amount and related fees of our payment instruments sold. We maintain contractual relationships with 13 clearing banks around the country in order to clear the official checks issued by our PrimeLink and PrimeLink plus customers, as well as money orders and share drafts. These financial institutions serve as the drawee bank or payable through bank on official check, money order and share draft items. For the clearing of money orders, we rely on one primary clearing bank. In addition, we maintain contractual relationships with a variety of domestic and international cash management banks for ACH and wire transfer services to process agent remittances and payments. The relationships with these clearing banks and cash management banks are a critical component of our ability to timely move monies on a global basis.
Sales and Marketing
We market our products and services through a number of dedicated sales and marketing teams. In the United States, we have a dedicated sales and marketing team that markets money transfer services, money orders and bill payment services on a regional basis to our two principal agent distribution channels: large national chain accounts and smaller chains and independent accounts. The agent locations consist of general merchandise, check cashing, grocery, drug and convenience store retailers and bank locations. We also have dedicated sales and marketing teams that market our bill payment services directly to billers. Finally, we have a dedicated team of sales and marketing professionals that market our PrimeLink official check services, money transfer services, PrimeLink plus services, money orders and ACH services to financial institutions. Our international sales and marketing for money transfer services is conducted by dedicated regional sales and marketing teams that are generally located in or near their regions: Western Europe, including the United Kingdom; Eastern Europe; Asia; the Middle East; Africa; Canada; and Mexico, Latin America and the Caribbean.
Our sales and marketing efforts continue to be supported by a wide range of consumer advertising methods. A core focus of building our brand awareness is signage, particularly ensuring that our signs are displayed at agent locations, as well as maintaining consistency in our signage and image globally.
Jess T. Hay Mr. Hay has served as Chairman of the Texas Foundation for Higher Education, a non-profit organization promoting higher education in the State of Texas, since 1987 and as Chairman of HCB Enterprises Inc., a private investment firm, since 1995. In 1994, Mr. Hay retired after 29 years of service as Chief Executive Officer of Lomas Financial Corporation, a financial services company. He retired from service on the board of SBC Communications Inc. (n/k/a AT&T Inc.), a telephone, wireless and data communications company, in 2004 and the board of Exxon Mobil Corporation, a petroleum refining company, in 2001. He is currently a director of Trinity Industries, Inc., an industrial transportation company, and Viad, a travel and recreation services, exhibition and event services company. Age 76.
Linda Johnson Rice Ms. Johnson Rice serves as President and Chief Executive Officer, and a director, of Johnson Publishing Company, Inc., publisher of Ebony and Jet magazines, positions that she has held since 2002. From 1987 to 2002, she was President and Chief Operating Officer of that company. She is also a director of Bausch & Lomb Inc., an ophthalmic goods company; Kimberly-Clark Corporation, a paper products company; and Omnicom Group Inc., an advertising services company. Age 49.
Albert M. Teplin Mr. Teplin is an economist and since 2003 has served as a consultant to the Board of Governors of the Federal Reserve System, the U.S. Department of Commerce, the International Monetary Fund, the European Central Bank and the Bank of Japan. Mr. Teplin served as Senior Economist for the Board of Governors of the Federal Reserve System from 2001 to 2003 and was Chief of the Flow of Funds Section of the Board of Governors of the Federal Reserve System from 1989 to 2001. Mr. Teplin is also a director of Viad. Age 60.
Timothy R. Wallace Mr. Wallace is Chairman, President and Chief Executive Officer of Trinity Industries, Inc., a diversified manufacturer of railcars, barges, highway safety products and various other industrial equipment, a position he has held since 1999. He was Chief Operating Officer of Trinity Industries, Inc. from 1996 through 1998. Age 53.
Board Voting Recommendation
The Board recommends to the stockholders that they vote â€śFORâ€ť the election of the director nominees. The four director nominees receiving the highest number of votes will be elected.
Directors Continuing in Office
For Terms Expiring at the 2008 Annual Meeting:
Monte E. Ford Mr. Ford is the Senior Vice President and Chief Information Officer of AMR Corporation, the parent company of American Airlines operating primarily in the airline industry, a position he has held since December 2000. From 1994 to 2000, he held various positions including Executive Vice President and Chief Information Officer for Associates First Capital Corporation, a financial services company. Mr. Ford started with The Associates in 1994 as Senior Vice President and Chief Information Officer of its consumer sector. From 1991 to 1994, he was with Bank of Boston as Senior Vice President of Technology. Prior to that, he worked at Digital Equipment Corporation, a computer products company, from 1982 to 1991, where he served in a number of positions of increasing responsibility, most recently as National Account Manager. He currently serves on the Board of Childrenâ€™s Medical Center and the Baylor Regional Medical Center, Grapevine. Age 47.
Judith K. Hofer Ms. Hofer is the retired President and Chief Executive Officer of May Merchandising/MDSI, a May Department Stores Company, a position she held from 2000 to 2002, and thereafter was a consultant to the May Department Stores Company from 2002 to 2005. Prior to that, Ms. Hofer served as President and Chief Executive Officer of Fileneâ€™s, a division of The May Department Stores Company, from 1996 to 2000. She is also a director of Payless Shoe Source, Inc., a retail shoe company, and Viad. Age 67.
Robert C. Krueger Mr. Krueger is a former U.S. Congressman, U.S. Ambassador-at-Large and Coordinator for Mexican Affairs, U.S. Ambassador, U.S. Senator, Duke University professor, vice provost and dean, and Distinguished Visiting Professor at Rice University, University of Texas and Texas State University. He is also the author of two books and over 250 magazine articles and newspaper columns. Mr. Krueger has acted as a consultant to third party businesses interested in international trade and U.S. government policy since 2000. He was a Visiting Research Fellow at Merton College, Oxford University in 2000, and prior thereto was U.S. Ambassador to Burundi from 1994 to 1996, U.S. Ambassador to Botswana, and Special Representative of the U.S. Secretary of State to Southern African Development Community from 1996 to 2000. Age 71.
Philip W. Milne Mr. Milne currently serves as our Chairman of the Board, a position he has held since January 2007, and our President and Chief Executive Officer, positions he has held since June 2004. He is also currently the President and Chief Executive Officer of our principal operating subsidiary, a position he has held since 1996. Mr. Milne joined our predecessor company in 1991 and served as General Manager of the official check business from 1991 until early 1992, as Vice President, General Manager of the Payment Systems segment from 1992 until early 1993, and as Vice President, General Manager of the Retail Payment Products group from 1993 to 1996. Age 47.
For Terms Expiring at the 2009 Annual Meeting:
Donald E. Kiernan Mr. Kiernan is the retired Senior Executive Vice President and Chief Financial Officer of SBC Communications, Inc. (n/k/a AT&T Inc.), a telephone, wireless and data communication services company. He served as Chief Financial Officer of SBC Communications, Inc. from 1993 until his retirement in 2001. Mr. Kiernan is also a director of Health Management Associates, Inc., a hospital and medical services company; LaBranche & Co. Inc., a broker-dealer specialist firm; and Seagate Technology, a technology services company. Age 66.
Douglas L. Rock Mr. Rock is the Chairman of the Board of Directors of Smith International, Inc., a worldwide supplier of products and services to the oil and gas exploration and production industry, a position that he has held since 1991, and Chief Executive Officer, a position he has held since 1989. He is also a director of CE Franklin Ltd., a Canadian supplier of products and services to the energy industry. Age 60.
OthĂłn Ruiz Montemayor Mr. Ruiz is Chairman of Grupo Valores Operativos Monterrey S.A.P.I. de C.V. and Grupo Inversiones Monterrey S.A. de C.V., private investment groups with interests in non-banking finance, real estate, reinsurance brokerage and natural gas exploration, positions he has held since 2004. Additionally, he is the Chairman of the Executive Board of the Forum de las Culturas, an international cultural event that will be held in Monterrey, Mexico in September 2007, a position he has held since September 2006. Mr. Ruiz was Chief Executive Officer of Grupo Financiero Banorte, S.A. de C.V., an integrated financial and banking group in Mexico from 1996 to 2004. Prior to that, he served in various positions at Fomento EconĂłmico Mexicano, S.A. de C.V., a holding company whose principal businesses include the production and distribution of beverages and packaging materials, operation of convenience stores and logistics management, including Chief Financial Officer from 1974 until 1985 and Chief Executive Officer from 1985 until 1995. Mr. Ruiz also served as Chairman of the Board of Directors of Banregio Grupo Financiero, S.A. de C.V., a financial and banking group headquartered in Monterrey, Mexico until September 2006. Age 63.
MANAGEMENT DISCUSSION FROM LATEST 10K
Basis of Presentation
On December 18, 2003, MoneyGram International, Inc. (â€śMoneyGramâ€ť) was incorporated in the state of Delaware as a subsidiary of Viad Corp (â€śViadâ€ť) to effect the spin off of Viadâ€™s payment services business operated by Travelers Express Company, Inc. (â€śTravelersâ€ť) to its stockholders (the â€śspin-offâ€ť). On June 30, 2004, Travelers was merged with a subsidiary of MoneyGram and Viad then distributed 88,556,077 shares of MoneyGram common stock to Viadâ€™s stockholders in a tax-free distribution. Effective December 31, 2005, the entity that was formerly Travelers was merged into MoneyGram Payment Systems, Inc. (â€śMPSIâ€ť), with MPSI remaining as the surviving corporation. References to â€śMoneyGram,â€ť the â€śCompany,â€ť â€śwe,â€ť â€śusâ€ť and â€śourâ€ť are to MoneyGram International, Inc. and its subsidiaries and consolidated entities. The financial statements in this Annual Report on Form 10-K are presented on a consolidated basis and include the accounts of the Company and our majority-owned subsidiaries. Our Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States of America (â€śGAAPâ€ť).
In 2005, we recorded a gain of $0.7 million (net of tax) due to the partial resolution of contingencies relating to the sale of Game Financial Corporation, which was completed in 2004. During 2007, we paid $3.3 million in connection with the settlement of a contingency arising from the Sale and Purchase Agreement related to the continued operations of Game Financial Corporation with one casino. We recognized a gain from discontinued operations of $0.3 million in the Consolidated Statements of (Loss) Income in 2007. The gain is comprised of the net of the reversal of the remaining liability and the recognition of a deferred tax asset valuation allowance. The following discussion of our results of operations is focused on our continuing businesses.
RESULTS OF OPERATIONS
Following are significant items affecting operating results from continuing operations in 2007:
â€˘ During 2007, we recorded $1.2 billion of net securities losses resulting from the decline in the value of our investment portfolio. This resulted in a net loss from continuing operations of $1.1 billion for 2007.
â€˘ Fee and other revenue increased 24 percent to $949.1 million in 2007 from $766.9 million in 2006, driven primarily by continued growth in money transfer transaction volume. Our Global Funds Transfer segment fee and other revenue grew 25 percent in 2007 over 2006, driven by 28 percent growth in money transfer transaction revenue and 27 percent growth in transaction volume.
â€˘ Expenses increased 16 percent in 2007 over 2006, driven primarily by increased transaction and operations support costs, increased headcount and increased infrastructure costs supporting the growth in our money transfer business and increases in depreciation and amortization.
During September 2007, the asset-backed securities market and broader credit markets began to experience significant disruption, with a general lack of liquidity in the markets and deterioration in fair value of mortgage-backed securities triggered by concerns surrounding sub-prime mortgages. In late November and December 2007, the asset-backed securities and credit markets experienced further substantial deterioration under increasing concerns over defaults on mortgages and debt in general, as well as an increasingly negative view towards all structured investments and the credit market. In December 2007, we began to experience adverse changes to the cash flows from some of our asset-backed investments. As the market continued its substantial deterioration, we identified a need for additional capital and commenced a plan in January 2008 to realign our investment portfolio away from asset-backed securities and into highly liquid assets through the sale of a substantial portion of the investment portfolio. As a result of these developments, we recognized $1.2 billion of other-than-temporary impairments in December 2007. See â€śLiquidity and Capital Resources â€” Impact of Credit Market Disruptionâ€ť for further information. The declines in the portfolio did not have an immediate impact on our liquidity, but rather created a need for long-term capital.
In December 2007, we completed our strategic review of our Payment Systems segment. As a result of this review, we have begun to restructure our official check business model by changing our commission structure and exiting certain large customer relationships. This restructuring will enable us to continue providing these essential services by focusing on small- to mid-sized institutions. We expect to exit contracts with most of our top ten official check customers, who together account for approximately $2 billion of our official check payment service obligations. Included in the top ten official check customers are the financial institutions for which we maintain special purpose entities (â€śSPEsâ€ť). With the sale of investments and the Capital Transaction (defined below), we believe we have sufficient liquidity to manage the exiting of these customers without disruption to daily operating liquidity needs.
The Company completed a recapitalization transaction on March 25, 2008 pursuant to which the Company received a substantial infusion of both equity and debt capital (the â€śCapital Transactionâ€ť) to support the long term needs of the business and to provide necessary capital due to the investment portfolio losses. The equity component consisted of a $760.0 million private placement of participating convertible preferred stock. The debt component consisted of the issuance of $500.0 million of senior secured second lien notes with a ten year maturity. Additionally, we entered into a senior secured amended and restated credit agreement amending the Companyâ€™s existing $350.0 million debt facility to increase the facility by $250.0 million to a total facility size of $600.0 million. The new facility includes $350.0 million in two term loan tranches and a $250.0 million revolving credit facility. For a description of the terms of the equity and debt components of the Capital Transaction discussed below, see â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€” Liquidity and Capital Resources â€” Sale of Investments and Capital Transactionâ€ť and Note 18 Subsequent Events of the Notes to Consolidated Financial Statements.
The net proceeds of the Capital Transaction were used to invest in cash equivalents to supplement our unrestricted assets.
Components of Net Revenue
Our net revenue consists of fee and other revenue, investment revenue and net securities gains and losses, less commission expense. We generate net revenue primarily by charging transaction fees in excess of third-party agent commissions, managing foreign currency exchange and managing our investments to provide returns in excess of commissions paid to financial institution customers.
We derive revenue primarily through service fees charged to consumers and through our investments. Fee and other revenue consist of transaction fees, foreign exchange and miscellaneous revenue. Transaction fees are fees earned on the sale of money transfers, retail money order and bill payment products and official check transactions. Money transfer transaction fees are fixed per transaction and may vary based upon the face value of the amount of the transaction and the location in which the money transfer originates and to which it is sent. Money order and bill payment transaction fees are fixed per transaction. Foreign exchange revenue is derived from the management of currency exchange spreads on international money transfer transactions. Miscellaneous revenue primarily consists of processing fees on rebate checks and controlled disbursements, service charges on aged outstanding money orders and money order dispenser fees.
Investment revenue consists of interest and dividends generated through the investment of cash balances received from the sale of official checks, money orders and other payment instruments. These cash balances are available to us for investment until the payment instrument is presented for payment. Investment revenue varies depending on the level of investment balances and the yield on our investments. Investment balances vary based on the number of payment instruments sold, the average face amount of those payment instruments and the average length of time that passes until the instruments are presented for payment. Net securities gains and losses consist of realized gains and losses on the sale of investments and other-than-temporary impairments of investments.
We incur commission expense on our money transfer products and our investments. We pay fee commissions to our third-party agents for money transfer services. In a money transfer transaction, both the agent initiating the transaction and the agent disbursing the funds receive a commission. The commission amount generally is based on a percentage of the fee charged to the consumers. We generally do not pay commissions to agents on the sale of money orders. Fee commissions also include the amortization of capitalized incentive payments to agents.
Investment commissions are amounts paid to financial institution customers based on the average outstanding cash balances generated by the sale of official checks, as well as costs associated with swaps and the sale of receivables program. In December 2007, the Company made a decision to cease selling receivables through a gradual reduction in the balances sold each period. As of January 2008, the Company did not have a sold receivables balance remaining (see further discussion on our sale of receivables program in Note 6 â€” Sale of Receivables of the Notes to Consolidated Financial Statements). In connection with our interest rate swaps, we pay a fixed amount to a counterparty and receive a variable rate payment in return. To the extent that the fixed rate exceeds the variable rate, we incur an expense related to the swap; conversely, if the variable rate exceeds the fixed rate, we receive income related to the swap. Under our receivables program, we sold our receivables at a discount to accelerate our cash flow; this discount was recorded as an expense. Commissions paid to financial institution customers generally are variable based on short-term interest rates. We utilize interest rate swaps, as described above, to convert a portion of our variable rate commission payments to fixed rate payments. These swaps assist us in managing the interest rate risk associated with the variable rate commissions paid to our financial institution customers.
For the year ended December 31, 2007, total revenue decreased 86 percent from 2006 due to the net securities losses of $1.2 billion resulting from other-than-temporary impairments. See â€śLiquidity and Capital Resources â€” Impact of Credit Market Disruptionâ€ť and Note 4 â€” Investments (Substantially Restricted) of the Notes to Consolidated Financial Statements for further information on our investments. Fee and other revenue increased 24 percent over 2006 due to continued growth in money transfer transaction volume. Total expenses, excluding commissions, increased 16 percent over 2006, reflecting increased infrastructure costs supporting the growth in our money transfer business and our global network, higher costs to support compliance activities and enhancements to our technology systems and additional headcount. Depreciation and amortization increased primarily due to our investment in agent equipment and signage, and our prior investments in computer hardware and capitalized software to enhance our support functions. Additionally, we recorded an impairment of goodwill related to a component of our Payment Systems segment. See further discussion of the impairment in Note 8 â€” Intangibles and Goodwill of the Notes to Consolidated Financial Statements.
A significant amount of our internationally originated transactions and settlements with international agents are conducted in the Euro. In addition, the operating expenses of most of our international subsidiaries are denominated in the Euro. In 2007, the Euro strengthened significantly against the U.S. Dollar. While the strong Euro benefits the internationally originated revenue in our Consolidated Statement of (Loss) Income, this benefit is significantly offset by the impact on commissions paid and operating expenses incurred in Euros. The impact of fluctuations in the Euro exchange rate on the Companyâ€™s consolidated net (loss) income has been minimal at approximately $3.2 million in 2007.
For the year ended December 31, 2006, total revenue and net revenue each grew by 19 percent over 2005 due to 41 percent growth in money transfer transaction volume. Total expenses, excluding commissions, increased 18 percent over 2005, which reflects additional headcount to support growth, increased marketing expenditures due to global brand initiatives and higher professional fees to support technology systems enhancements.
Fee and other revenue consists of fees on money transfer, money orders and official check transactions. For 2007, fee and other revenue increased by $182.2 million, or 24 percent, from 2006, primarily driven by growth in the money transfer business (including bill payment services). Growth in money transfer fee and other revenue (including bill payment services) continued to be in line with growth in money transfer transaction volume, which increased 27 percent during the year as a result of our network expansion and targeted pricing initiatives. Transaction growth resulted in incremental fee and other revenue of $179.0 million. This transaction growth was offset slightly by a $9.9 million decrease in money transfer fees resulting from targeted pricing initiatives and changes in geographic and product mix (money transfer versus urgent bill payment). The change in the Euro exchange rate increased total fee and other revenue by $21.5 million in 2007 compared to 2006.
Our simplified pricing initiatives, which were initiated in the first half of 2005, included reducing the number of pricing tiers or bands, allowing us to manage our price-volume dynamic while streamlining the point of sale process for our agents and customers. While simplified pricing initiatives have contributed to a lower average per transaction fee, we believe that the initiatives have contributed to our volume growth as simpler pricing and lower overall fees attracts new customers. During 2007, the gap between total revenue growth and money transfer transaction growth narrowed primarily because we lapped the first year of implementation of simplified pricing initiatives. Our pricing philosophy continues to be to maintain a price point below our higher priced competitor but above the niche players in the market. We anticipate money transfer revenue and money transfer volume growth percentages to remain in line, subject to fluctuations in the Euro exchange rate, pricing initiatives and product mix.
For 2006 and 2005, fee and other revenue was 66 percent and 62 percent of total revenue, respectively. Compared to 2005, fee and other revenue grew $159.9 million, or 26 percent, in 2006, primarily driven by transaction growth in our money transfer and bill payment services, with volumes increasing 41 percent during the year. Transaction volume growth in money transfer and bill payment services increased fee and other revenue by $196.5 million. Average per transaction fees in money transfer and bill payment services were lower in 2006, reducing fee and other revenue by $56.7 million primarily as a result of our simplified pricing initiative and as a result of shifts in product and geographic origination mix. Money transfer and bill payment transactions continued to drive fee and other revenue growth in 2006, while money order transactions, which have higher margins, declined. Our domestic transactions, which contributed lower revenue per transaction, grew at a faster rate than internationally originated transactions. The gap between total revenue growth and money transfer transaction growth narrowed in the fourth quarter of 2006 as we began to lap the first year of implementation of simplified pricing initiatives. The change in the Euro exchange rate increased revenue by $3.2 million compared to 2005.
Fee commissions consist primarily of fees paid to our third-party agents for the money transfer service. We generally do not pay fee commissions on our money order products. Fee commissions expense grew at a faster pace than fee revenue, increasing $95.9 million, or 30 percent, for 2007 as compared to the prior year, driven by higher money transfer transaction volume, tiered commissions and a stronger Euro. Higher money transfer transaction volumes increased fee commissions expense by $79.0 million, while higher average commissions per transaction increased commissions by $10.2 million, primarily from tiered commissions. Tiered commissions are commission rates that are adjusted upward, subject to certain caps, as an agentâ€™s transaction volume grows. We use tiered commission rates as an incentive for select agents to grow transaction volume by paying our agents for performance and allowing them to participate in adding market share for MoneyGram. The change in the Euro exchange rate increased fee commissions by $9.7 million in 2007 compared to 2006. For 2006, fee commissions expense increased $83.2 million, or 36 percent, over 2005, primarily due to higher transaction volume and tiered commissions. Higher money transfer transaction volumes increased fee commissions expense by $61.2 million, while average commissions per transaction increased $13.0 million, primarily from tiered commissions. The change in the Euro exchange rate increased fee commissions by $1.3 million in 2006 compared to 2005.
Net fee revenue increased 19 percent in 2007 compared to 2006, driven primarily by the increase in money transfer transaction volume. Growth in net fee revenue was lower than fee and other revenue growth primarily due to tiered commissions. Net fee revenue increased 20 percent in 2006 compared to 2005, driven by the increase in volume of money transfer and bill payment transactions. Growth in net fee revenue was lower than fee and other revenue growth in 2006 compared to 2005, primarily due to a shift in product mix towards money transfer and tiered commissions.
Investment revenue in 2007 increased one percent over 2006 due to wider spreads earned in 2007 and higher average investable balances in 2007, but were partially offset by higher investment revenue in 2006 that benefited from $14.0 million in cash flows from previously impaired investments and income from limited partnership interests. During the last half of 2007, our cash investments and adjustable rate securities, which are primarily tied to LIBOR, earned a wider spread due to the disruption in the credit markets. Investment revenue in 2006 increased seven percent over 2005 due to higher yields on the portfolio from rising short-term interest rates and the benefit from previously impaired investments and income from limited partnership interests, but was partially offset by lower average investable balances.
Investment commissions expense in 2007 increased two percent compared to the prior year, reflecting higher commissions paid to financial institution customers resulting from an increase of 5 basis points in the average federal funds rate over the prior year. Investment commissions expense in 2006 increased four percent compared to the prior year as rising short-term rates resulted in higher commissions paid to financial institution customers and increased the amount of the cost of receivables sold. The impact of rising rates in 2006 was significantly offset by lower swap costs. Lower swap costs are the result of maturing high rate swaps replaced by lower rate swaps, increases in short-term rates and lower notional swap balances.
The Company had $1.4 billion of outstanding swaps with an average fixed pay rate of 4.3 percent at December 31, 2007, compared to $2.6 billion with an average fixed pay rate of 4.3 percent at December 31, 2006. Approximately $1.4 billion of swaps matured during 2007. The run off of the lower priced swaps during 2007 increased investment commission expense over the same period in the prior year. Approximately seven percent of the notional value of our swaps will roll off during the first quarter of 2008. The remaining balance will roll off beginning in 2009 and continuing through 2012. In the first quarter of 2008, the Company terminated three outstanding swaps with a notional value of $32.0 million in connection with the sale of the investments related to these swaps.
Net investment revenue decreased 1 percent in 2007 compared to 2006 reflecting the benefit of pre-tax cash flow on previously impaired investments and income from limited partnerships recorded in 2006 and higher investment commission expense in 2007. Net investment margin decreased 3 basis points to 2.28 percent in 2007 compared to 2006, reflecting a decrease in net investment revenue and somewhat offset by an increase in average investable balances. During 2006, net investment revenue increased 14 percent compared to 2005, with the net investment margin increasing 40 basis points to 2.31 percent. During 2006, the average federal funds rate increased 175 basis points and the average 5-year U.S. Treasury Note increased 70 basis points. These changes in interest rates are representative of the flat yield curve environment in which we operated in 2006. During 2005, the average federal funds rate increased 187 basis points and the average 5-year U.S. Treasury Note increased 62 basis points. The 2006 and 2005 margins benefited from the investment revenue items discussed above, as well as the lower swap costs.
In January 2008, we commenced a process to realign our investment portfolio away from asset-backed securities into highly liquid assets. We anticipate the realigned portfolio will be comprised primarily of cash equivalents and government and government agency securities. In addition, the Company began a restructuring of its official check business model by changing its commission structure and exiting certain large customer relationships. As a result, we anticipate that our net investment margins will be adversely affected on a going forward basis by the lower yields in our realigned portfolio. While we expect our commission re-pricing initiatives under the official check restructuring to substantially offset the impact of the lower yields from the realigned portfolio, we will not know the final results of the re-pricing initiatives for some time.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Following are significant items affecting operating results during the third quarter of 2008 as compared to the third quarter of 2007:
â€˘ Fee and other revenue increased 18 percent to $286.0 million, driven by continued growth in money transfer (including bill payment) transaction volume. Our Global Funds Transfer segment fee and other revenue grew 18 percent in the third quarter of 2008, driven by 19 percent growth in money transfer transaction revenue and a 14 percent growth in transaction volume.
â€˘ Investment revenue decreased $69.8 million due to lower yields earned on our realigned investment portfolio and a substantial decrease in our investment balances from the planned departure of official check financial institution customers.
â€˘ We recorded $13.3 million of net securities losses comprised of mark-to-market losses in auction rate securities and impairments on other asset-backed securities. The recapitalization on March 25, 2008 included funds to cover these losses.
â€˘ Total commissions expense decreased $29.0 million, or 17 percent, due to lower investment balances from the planned departure of official check financial institution customers and lower official check commission rates from repricing initiatives, partially offset by an increase in fee commissions from money transfer transaction growth.
â€˘ Interest expense increased to $27.8 million in the third quarter of 2008 from $2.2 million in 2007 due to higher outstanding debt as a result of the recapitalization completed in March 2008.
â€˘ Expenses included a non-cash valuation loss of $47.2 million from changes in the fair value of embedded derivatives in our Series B Stock.
â€˘ As a result of the above items, we recognized a net loss of $38.6 million for the third quarter of 2008.
The Company completed a capital transaction on March 25, 2008 pursuant to which we received $1.5 billion of gross equity and debt capital to support the long-term needs of the business and provide necessary capital due to our investment portfolio losses (the â€śCapital Transactionâ€ť). The equity component consisted of a $760.0 million private placement of participating convertible preferred stock (the â€śSeries B Stockâ€ť). The debt component consisted of the issuance of $500.0 million of senior secured second lien notes with a ten year maturity. Additionally, we entered into a senior secured amended and restated credit agreement amending the Companyâ€™s existing $350.0 million debt facility to increase the facility by $250.0 million to a total facility size of $600.0 million. The Company has availability under the revolving facility of $97.4 million at September 30, 2008. For a description of the terms of the equity and debt components of the Capital Transaction, see â€śManagementâ€™s Discussion and Analysis of Financial Condition and Results of Operations â€” Liquidity and Capital Resourcesâ€ť as well as Note 9 â€” Mezzanine Equity and Note 12 â€” Debt of the Notes to Consolidated Financial Statements. The net proceeds of the Capital Transaction were invested in cash and cash equivalents to supplement our unrestricted assets.
Executive Management Changes
On June 19, 2008, the Company announced the departure of Philip W. Milne, Chairman, President and Chief Executive Officer, effective immediately. Anthony P. Ryan, Executive Vice President and Chief Operating Officer of the Company, has assumed the role of interim principal executive officer. The Companyâ€™s Board of Directors has designated a search committee and has retained an executive search firm to lead the process of identifying a new Chief Executive Officer. The Company has hired Mubashar Hameed as our new Chief Information Officer.
For the three months ended September 30, 2008, total revenue decreased $36.6 million, or 11 percent, compared to the same period in 2007, driven by a decrease in investment revenue of $69.8 million from lower yields earned on our realigned investment portfolio and a substantial decrease in our investment balances from the planned departure of financial institution customers. These decreases were significantly offset by an increase in fee and other revenue of $43.3 million, or 18 percent, for the three months ended September 30, 2008, driven by continued growth in money transfer (including bill payment) transaction volume. We recorded $13.3 million of net securities losses comprised of $4.9 million of mark-to-market losses in auction rate securities and $8.3 million of impairments on other asset-backed securities. See â€śLiquidity and Capital Resources â€” Impact of Credit Market Disruptionâ€ť and Note 4 â€” Investment Portfolio of the Notes to Consolidated Financial Statements for further information on our investments.
For the three months ended September 30, 2008, total commissions expense decreased $29.0 million, or 17 percent, compared to the same period in 2007 due to a $54.9 million decrease in investment commissions expense from a decline in the federal funds rate, lower commission rates paid due to repricing initiatives and lower investment balances for official check financial institution customers. This decrease was partially offset by $25.9 million of additional fee commissions as a result of money transfer transaction growth.
For the three months ended September 30, 2008, total expenses increased $80.1 million, or 66 percent, compared to the same period in 2007, primarily due to a valuation loss of $47.2 million and a $25.6 million increase in interest expense. The valuation loss resulted from changes in the fair value of embedded derivatives in our Series B Stock. See Note 5 â€” Derivative Financial Instruments of the Notes to Consolidated Financial Statements for further information. The Company and the Investors entered into a clarifying agreement in August 2008 which caused the embedded derivative liability to be reversed to â€śAdditional paid-in capital,â€ť with no further requirements for remeasurement. Higher interest expense is due to higher outstanding debt as a result of the Capital Transaction, as well as higher interest rates. See Note 12 â€” Debt of the Notes to Consolidated Financial Statements for further information on our debt. Transaction and operations support increased $4.3 million to support the growth in the money transfer business. Compensation and benefits increased $4.0 million, primarily from $2.2 million of severance costs.
For the nine months ended September 30, 2008, total revenue decreased $376.7 million, or 38 percent, compared to the same period in 2007 due to a $348.2 million increase in net securities losses, primarily from the realignment of our investment portfolio in the first quarter of 2008.
In addition, investment revenue decreased $170.9 million, or 57 percent, compared to the same period of 2007 from lower yields earned on the realigned portfolio and a substantial decrease in our investment balances from the planned departure of official check financial institution customers. These decreases were offset by growth of $142.3 million, or 21 percent, in fee and other revenue from continued growth in money transfer transaction volume.
For the nine months ended September 30, 2008, total commissions expense decreased $9.0 million, or 2 percent, reflecting a decline in the federal funds rate, lower commission rates from repricing initiatives and lower investment balances from official check financial institution customers. These decreases were partially offset by higher fee commissions from money transfer transaction volume growth and a $27.7 million loss upon the termination of interest rate swaps related to the official check business.
For the nine months ended September 30, 2008, total expenses increased by $131.7 million, or 37 percent, compared to the same period in 2007, primarily from a $60.5 million increase in interest expense, a $24.0 million increase in compensation and benefits, a $23.8 million increase in transactions and operations support and a $16.0 million valuation loss on embedded derivatives in our Series B Stock. Transaction and operations support, which includes $7.7 million of costs that were incurred for the Capital Transaction in the first quarter of 2008, increased to support the growth in the money transfer business. Interest expense, which includes a $2.0 million loss from the termination of swaps related to debt in the second quarter of 2008, increased from higher levels of outstanding debt and higher interest rates.
A significant amount of our internationally originated transactions and settlements with international agents are conducted in the Euro. In addition, the operating expenses of most of our international subsidiaries are denominated in the Euro. In the third quarter of 2008, the Euro strengthened against the U.S. Dollar. While the strong Euro benefits the internationally originated revenue in our Consolidated Statements of (Loss) Income, this benefit is significantly offset by the impact on fee commissions paid and operating expenses incurred in Euros.
Fee and other revenue consists of fees on money transfer (including bill payment), money orders and official check transactions. Fee and other revenue for the three and nine months ended September 30, 2008 increased by $43.3 million, or 18 percent, and $142.3 million, or 21 percent, respectively, compared to the same periods in 2007, primarily driven by growth in money transfer. Money transfer fee revenue grew 19 percent and 22 percent for the three and nine months ended September 30, 2008, respectively, while money transfer transaction volume increased 14 percent and 18 percent, respectively. Transaction growth resulted in incremental fee and other revenue of $37.8 million and $127.5 million for the three and nine months ended September 30, 2008, respectively, while changes in product and corridor mix increased our revenue by $2.5 million and $12.0 million, respectively. The change in the Euro exchange rate, which is reflected in each of the amounts discussed above, increased total fee and other revenue by $7.8 million and $25.6 million for the three and nine months ended September 30, 2008, respectively, compared to the same periods in 2007. Historically, the performance of the global remittance industry has been resilient during economic softness as money transfers are deemed essential to many. However, given the global economic uncertainty, we have less visibility to the future and believe growth rates could be impacted by slowing economic conditions. In addition, bill payment products may not be as resilient as money transfers given the more discretionary nature of items paid for by consumers using these products.
Fee commissions consist primarily of fees paid to our third-party agents for the money transfer service. We generally do not pay fee commissions on our money order products. During the three and nine months ended September 30, 2008, fee commissions expense increased $25.9 million, or 25 percent, and $82.0 million, or 28 percent, respectively, over the same periods in 2007. Higher money transfer transaction volumes increased fee commissions expense by $15.2 million and $55.6 million for the three and nine months ended September 30, 2008, respectively, while higher average commissions per transaction, primarily from Wal-Mart Stores, Inc (â€śWal-Martâ€ť), increased commissions by $4.5 million and $12.7 million, respectively. Amortization of signing bonuses increased $4.0 million and $8.5 million for the three and nine month periods ended September 30, 2008, respectively. The change in the Euro exchange rate, which is reflected in each of the amounts discussed above, increased fee commissions expense by $3.5 million and $13.5 million for the three and nine months ended September 30, 2008, respectively.
David J. Parrin
Welcome to our third quarter 2008 conference call. With me on the call today is Tony Ryan, our Executive Vice President and Chief Operating Officer. If youâ€™ve not yet seen our earnings release you can find it on our website at www.MoneyGram.com. We have also posted a brief slide presentation regarding todayâ€™s results on our website.
I must remind you that the various remarks we about future expectations, plans and prospects constitute forward-looking statements for purposes of the Safe Harbor Provisions in the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from expectations, plans and prospects contemplated in any forward-looking statements as a result of various factors including those discussed in our filings with the SEC.
I encourage everybody to read our SEC filings, including our 10-Q for the period ended September 30, 2008 which is expected to be filed to the SEC on November 10th, 2008. Additionally I want to note that this presentation includes certain non-GAAP financial measures including a presentation of EBITDA and adjusted EBITDA. The slides in our earnings release include a full reconciliation of these non-GAAP financial measures to the related GAAP financial measures.
With that out of the way Iâ€™ll now hand the call over to Tony to discuss our business results.
Anthony P. Ryan
Thanks to all of you for joining us on our third quarter 2008 conference call. Iâ€™ll start with the highlights from the quarter and offer an update on our business and the opportunity that we continue to see in money transfer. Dave will cover the financials including segment information and then I will wrap up with a summary before we go into the Q&A portion of our call. We invite you to follow along in our presentation which is posted on our website at www.MoneyGram.com.
Before we begin let me take a moment to thank our employees for their continued efforts to drive growth and profitability during the third quarter and to deliver on our purpose, to help people and businesses by providing affordable, reliable and convenient payment services. Starting with Slide 4 MoneyGram delivered another strong financial performance despite the turbulence in the financial markets and the economy in general.
We continue to maintain a strong balance sheet. Our unrestricted assets were $369 million as of September 30th, 2008. As we committed to do we maintained the conservative composition of our portfolio which is comprised of 90% cash and cash equivalents and 8% agency securities as of September 30th, 2008. Our results in the third quarter were driven by solid increases in money transfer agent locations which increased by 17% over the third quarter of last year.
This led to growth in money transfer including bill payment transactions of 14% while fee revenue from money transfer and bill payment transactions increased by 19%. Our official check product is now profitable as we benefited from the full effects of the re-pricing efforts in the quarter. We generated adjusted EBITDA of $74.5 million while reported EBITDA was $14 million for the quarter.
While we are pleased with our strong performance we are not complacent. We have seen some deterioration in corridors such as Mexico and Spain due to construction related employment issues in the immigration debate. On a relative basis our performance has been strong in these countries.
We are capitalizing on additional opportunities where we have less market penetration such as France, Germany, Asia and Eastern Europe and as you would expect in an uncertain time we are also diligently managing our expense base and carefully scrutinizing our capital expenditures.
Moving on to Slide 5 I will cover some key highlights. We delivered a solid quarter in our money transfer business with transaction growth of 14% year-over-year. the global diversification of our biggest segment global funds transfer is enabling us to deliver consistent results in a challenging economy.
Transactions originating internationally or outside North America grew 15% and now account for 21% of our volume. Domestically originated money transfers including bill payment grew 16% driven by continued expansion of our agent network and our MoneyGram Rewards Loyalty program.
Overall domestic growth was impacted by softness in our urgent bill payment product while economic conditions and immigration concerns have dampened the growth in the US to Mexico corridor. MoneyGram transactions decreased only 1% and we outperformed the market which according to Banco de Mexico was down 2.8% in the third quarter of 2008.
We increased our fee revenue in our core money transfer and bill payment business by 19% to $260 million in Q3 2008 from $219.1 million in Q3 2007. This was driven primarily by transaction growth, pricing stability, product mix and a benefit from the stronger Euro. Our adjusted EBITDA was $74.5 million for the third quarter providing substantial cash flow for continued investment in the core money transfer and bill payment products as well as to service our debt.
On a reported basis EBITDA was $14 million. We have a reconciliation to GAAP on Slide 16. With the repositioning of our smaller official check business we have seen markedly improved profitability as a result of our re-pricing initiative. Moving to Slide 6 as I mentioned during our last quarter call we are focused on five key corporate priorities and they are pursue profitable global growth, focus on operating efficiencies to drive margin expansion, invest capital only when meeting appropriate ROI thresholds, emphasize cash flow generation and maintain an investment portfolio strategy with minimal risk and volatility.
During our review of the financials Dave will illustrate how we are driving margin expansion and free cash flow, prudently investing capital and maintaining a low risk stable investment portfolio strategy. But before we get into that I wanted to take a few moments to demonstrate how we have been able to drive profitable global growth.
As you may recall in our second quarter call we had four key strategies which support this corporate goal. The first strategy is to expand our distribution. We continue to grow the money transfer business by maximizing existing agent relationships within our premier global agent network. Wal-Mart continues to roll out its dedicated money centers which are currently in 700 of its retail locations.
We are excited to be a part of this continued expansion as it brings Wal-Martâ€™s dedicated financial services offerings to more locations over time. In the US we have been preparing for the roll out of the CVS Pharmacy chain. Before roll out began in mid-October we now have nearly 1,400 installed locations and it is our expectation to have more than 6,000 locations live by year end.
This is a big win for us as CVS has the largest footprint of any pharmacy chain in the US. Last quarter we announced that we renewed that we renewed our multi-year agreement with Canada Post. We are rolling out 220 new locations in the fourth quarter and expect to bring our money transfer services to 2,000 additional Canada Post locations by mid-year 2009.
We also announced in the second quarter that we extended our agreement with Thomas Cook. During the quarter we have been preparing for the launch of their Going Places locations which are currently schedule to begin roll out in early November. Weâ€™re also expanding our distribution by adding new countries. We entered Serbia during the quarter through Agrobankaâ€™s extensive network of 120 branch locations.
We added the Czech Republic to our network in the quarter with the signing of Chequepoint. Weâ€™re currently in 28 Chequepoint locations and expect to grow the network to nearly 150 locations by the end of the year. We launched our services with BGD in Gabon, a Central African market with strong potential.
We continue to grow our presence in high potential markets. In Poland we signed three key agents, the post office, Bank DPS and Polandâ€™s largest electronic bill payment provider. This more than triples our network in this important country. In Germany we launched with GE Money Bank in six cities. We will go live with GE Money Bankâ€™s 95 location network in December giving us nationwide coverage.
We expanded our presence in South Korea with the signing of Kyongnam Bank one of the largest regional banks in the country. The bankâ€™s 150 locations represent a key add because they are primarily in more rural underserved areas. In Bangladesh we added our tenth bank agent Islami Bank Bangladesh.
In Latin America through our new agents Grupo Elektra and Banco Azteca we added more than 225 locations to Guatemala, Honduras, Panama and El Salvador. Grupo Elektra is already installed and processing transactions. As you can see we have delivered strong growth in emerging regions.
Eastern Europe is up 54%, Asia Pacific and the Indian subcontinent have gone 25% and Africa is up 20% year-over-year. our global network now stands at 162,000 up 17% from the prior year. moving on to Slide 11 another part of expanding our distribution is to control our network in selected markets where it makes sense be it regulatory, competitive or other factors.
During the quarter we finalized our acquisition of two super agents in Spain, MoneyCard World Express and Cambios Sol. We expect to complete our process to merge the two companies in the first quarter of 2009. These important acquisitions with a money transfer license in Spain which we will use to open additional locations in high traffic areas.
We continue to grow our own retail locations in France and Germany. In Germany we expanded our own retail locations to 29 and in France we now have 21 locations. We are seeing impressive year-over-year growth in both countries. The second strategy in pursuing profitable global growth is providing our consumers with a superior value. The primary vehicle for us providing value is the MoneyGram Rewards Loyalty card.
Our most loyal consumers receive faster transactions at the point of sale, tier discounts based on usage, notification of receipt of the funds sent and account management via www.MyMoneyGram.com. The MoneyGram Rewards program was launched in January of this year and we have already exceeded our annual goals for consumer acquisition and transaction usage.
Another part of our value proposition that continued during the quarter is the roll out of our multi-currency platform which provides consumers more choices in how they receive funds. In China we began offering pounds sterling and expanded our euro payout services and in Poland weâ€™re offering zloty, euro and the US dollar. The multi-currency options allow consumers to receive the currency of their choosing.
We now offer local currency or a choice of currencies in 127 countries and territories. A third element of driving profitable global growth is our strategy to deliver a superior low cost service platform to our agents and consumers. During the quarter we acquired a retail point of sale platform that we believe will significantly improve our efficiency as well as the customer service experience in our retail locations in France and Germany and in our own super agent businesses in Italy and Spain.
We are also continuing to roll out the platform which allows our consumers to conduct transactions without needing to complete a send form. This option now live in 15 countries provides added convenience to our customers, faster transaction speed for our agents and reduced forms expense. Additionally we continue to invest in our MoneyGram Rewards platform which provides faster transaction speed and other benefits for our agents and consumers.
MoneyGram Rewards is currently only offered in the US, however we plan to roll out to selected markets during 2009. Our final strategy to drive profitable global growth is to deliver enhanced payment product offerings for our customers. On the send side we continue to enhance our capabilities through products such as eMoney Transfer. Our consumers are responding positively as evidenced by online money transfer and bill payment transactions increasing 45% over the third quarter of last year.
We are also pleased to announce a multi-year agreement with Cardtronics. This opens up a new channel by combining our form free platform with ATMs. Through the agreement weâ€™ll be offering money transfer and bill payment services for walk up customers without the aid of an in store clerk in more than 2,000 7-11 locations nationwide. On the receive side we are providing our consumers with better control and choice over how their money is being delivered to recipients.
As we mentioned last quarter we launched our cash-to-account services in Mexico and Poland allowing senders to deposit money directly into a bank. Based on these early successes we are planning to continuing adding this convenient service to our customers in other receive markets. Now Iâ€™ll turn it over to Dave to discuss our financials.
David J. Parrin
As Tony discussed our third quarter results demonstrate the strength of our business, our relationships with our customers and agents and the commitment and talent of a great employee base. Iâ€™ll take the next few minutes to give you a view of our results excluding the items that do not have a significant impact on our operations.
As you can see in our slides and earnings tables we have adjusted certain measures by excluding net securities gains and losses as we believe these adjusted measures provide information useful to you in understanding the underlying operations of the company. If you look at Slide 16 youâ€™ll see that our adjusted EBITDA was $74.5 million this year compared to $75.3 million in the third quarter of last year.
As we said last quarter because of material changes in our capital structure we believe EBITDA is a more relevant measure of our performance. Weâ€™ve removed significant items that are not expected to recur or are portfolio related and reconciled those back to income taxes of income before income taxes so our EBITDA performance reinforces our corporate priority to drive cash flow.
The $74.5 million adjusted EBITDA provides ample financial flexibility to pursue our growth strategy and gives us a solid debt service coverage. Third quarter 2008 EBITDA increased from the second quarter because we saw an immediate benefit from the Q3 Fed Funds rate reduction in our commissions expense. At the same time we benefited from a lag in that Fed Funds rate reduction on our investment yield.
We had the benefit of our official check re-pricing and lower marketing spend in the third quarter. Higher marketing in support of fourth quarter agent roll outs and the stronger dollar that catch up from the Q3 Fed Funds rat reduction on the investment portfolio and the timing of [Ramadan] which increased our international money transfer [inaudible] by about 3% in the quarter will likely bring EBITDA in the fourth quarter more in line with the second quarter of 2008.
Letâ€™s look at the income statement on Slide 17. We had positive adjusted operating income of $22 million for the third quarter reflecting the ongoing strength of our core business. We increased fee and other revenue 18% driven by continued growth in the money transfer product. Investment revenue was down 68% reflecting reduced yields on a much lower risk investment portfolio, declining market interest rates and lower investment balances.
The second results start on Slide 18 with global funds transfer. Total reported revenue increased 9% despite a $19.3 million decrease in investment revenues. Most importantly total fee and other revenue increased 18% and continues to be driven by the growth in the money transfer product. Retail money order and other fee revenues you see on the slide increased 13% primarily from the acquisition of Property Bridge in October of 2007.
However the retail money order fee and other revenue related to retail money orders for the third quarter 2008 declined 3% compared with the third quarter of 2007 and volume declined on money orders 5% year-over-year. We anticipate higher volume declines in the fourth quarter. Investment revenue in global funds transfer decreased 78% in the third quarter because of lower balances from the money order product and lower yields on lower risk assets as well as decline in market interest rates.
Approximately 75% of our commissions expense growth was driven by higher money transfer transaction volume. The remainder was due to tiered commissions that went into affect the fourth quarter of last year. In the third quarter of 2007 commissions expense includes a higher commission rate on the extended Wal-Mart agreement as well as a higher signing bonus amortization.
Reported operating income in the third quarter was $39.5 million which was affected by lower investment revenue and net securities loss of $2 million resulting in an operating margin of 14.1% for the third quarter. On an adjusted basis you can see the operating income and margins are slightly better than reported but are down from 2007 due to significantly lower investment revenue.
Moving on to payment systems segment on Slide 19 last quarter we restructured the official check business by re-pricing the commission rates and exiting several large customer relationships. We anticipate the balances associated with these institutions will continue to run off over the next year or so. Additionally we are negotiating the exit of a handful of other official check relationships.
Most importantly on an adjusted basis operating income increased nearly 45% driven in large part by the re-pricing initiatives. We are pleased with the overall progress weâ€™ve made in right sizing and re-pricing this business with the goal of improving profitability which weâ€™ve achieved in a very short timeframe.
If you look at Slide 20 our realignment of the investment portfolio to highly liquidity assets supports our corporate priority to minimize risk and minimize volatility in our investment portfolio. At September 30th about 90% of the portfolio was in cash and cash equivalents and the remainder in government agency securities. Slide 20 provides more detail on the portfolio and the shift to the lower risk investments. At the end of the third quarter we also owned auction rate securities with a market value of $30 million which does not reflect a potential recovery for the pending settlement with our broker.
We also own CDOs with a market value of $52 million which represents a carrying value on an average of 7% of face value. While our goal is to sell these securities over time we believe they pose limited risk at current carrying values. At the end of the quarter our assets available to cover payment service obligations totaled $6.5 billion. With payment service obligations at $6.1 billion our unrestricted asset position stood at healthy $3.69 million which of course you can see on Slide 21.
The repositioning of the investment portfolio into lower risk assets has substantially changed our investment portfolio risk profile and the recapitalization was specifically designed to provide the liquidity and capital necessary to operate and grow our business. If you recall our discussion from last quarter auction rates for the CDOs that remain in the portfolio had an assumed zero value at the time of the recapitalization.
Assuming a zero value for these securities unrestricted assets are $286 million at September 30th an increase of nearly $30 million from the $257 million at June 30, 2008. So to wrap up the financials let me summarize a few items that will affect our results for the full year. Money transfer transaction volume and revenue are expected to grow albeit challenged by the global economic situation.
We continue to expect global funds transfer adjusted margins for the full year to be between 12% and 13%. Investment revenue will continue to decline on a year-over-year basis in both segments with the change in our investment strategy, lower interest rates and declining balances. We told you last quarter that we expected a net spread for the payment system segment to be about 135 to 145 basis points for the remainder of the year.
The actual spread in Q3 was 1.66%. This is primarily due to higher investments driven by customer balances in equity to a lesser extent the lower Fed Funds rate. Keep in mind that in a falling Fed Funds environment we typically have a benefit on increasing rates and have a negative impact on the spread. Many of these factors are likely to continue to have a favorable impact on the net investment spread in Q4.
However given the variability of the market weâ€™re not providing projection for the fourth quarter. We may see some additional mark-to-market losses on our auction rate securities and CDOs although the potential market value losses donâ€™t affect our liquidity as we ascribe zero value as I discussed earlier.
With that, Tony, Iâ€™ll turn it back to you.
Anthony P. Ryan
In summary MoneyGram is financially strong. We have a solid balance sheet with $369 million in unrestricted assets as of September 30th, 2008. We are generating substantial cash flow to continue to invest in the $400 billion money transfer opportunity and to service our debt. We maintain a conservative investment portfolio of 90% cash and cash equivalents and 80% agency securities as of September 30th, 2008.
We achieved strong growth in our core money transfer and bill payment business with fee revenue increasing 19% and agent locations increasing by 17%. Our official check product is once again profitable after the re-pricing efforts and most importantly we are executing our plan to achieve profitable global growth.
There are enormous market opportunities available to us and while it is impossible to predict the full impact of the weakening global economy we believe we have superior value proposition, the financial discipline and the right strategies to solidify our strong number two global money transfer position and to continue to grow our business profitably. Meanwhile we will continue to diligently manage our expenses and carefully scrutinize our capital investments as the effects of the turbulent global economy continue to play out in the days ahead.