e10vq
Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 10-Q

     
(Mark One)
   
þ
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the Quarterly Period Ended June 30, 2004
 
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
    For the transition period from           to

Commission File Number 001-31950

MoneyGram International, Inc.

(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)

1550 Utica Avenue South,
Minneapolis, Minnesota
(Address of principal executive offices)
  16-1690064
(I.R.S. Employer
Identification No.)

55416
(Zip Code)

(952) 591-3000

(Registrant’s telephone number, including area code)

Not applicable

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


     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes o          No þ*


The Registrant has not been subject to filing requirements for 90 days.

      Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No þ

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

      As of July 30, 2004, 88,556,077 shares of Common Stock, $0.01 par value, were outstanding.




TABLE OF CONTENTS

       
  2
    2
 
         Consolidated Balance Sheets
  2
    3
    4
    5
    6
    32
    48
    49
  50
    50
  52
  53
 Separation and Distribution Agreement
 Amended and Restated Certificate of Incorporation
 Bylaws
 Rights Agreement
 Certificate of Designations, Preferences and Rights
 Employee Benefits Agreement
 Tax Sharing Agreement
 Interim Services Agreement
 2004 Omnibus Incentive Plan
 Management Incentive Plan
 Deferred Compensation Plan
 Executive Severance Plan (Tier I)
 Executive Severance Plan (Tier II)
 Supplemental 401(k) Plan
 Deferred Compensation Plan for Directors
 Description of Director's Charitable Matching Program
 Employee Equity Trust
 Section 302 Certification of Chief Executive Officer
 Section 302 Certification of Chief Financial Officer
 Section 906 Certification of Chief Executive Officer
 Section 906 Certification of Chief Financial Officer

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Table of Contents

PART I. FINANCIAL INFORMATION

 
Item 1. Financial Statements

MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

                   
June 30 December 31
2004 2003


(In thousands except
share data)
(Unaudited)
ASSETS
Cash and cash equivalents
  $     $ 33,832  
Cash and cash equivalents (substantially restricted) (Note 2)
    1,028,814       1,025,026  
Receivables, net (substantially restricted)
    910,226       755,734  
Investments (substantially restricted) (Note 4)
    6,369,762       6,013,757  
Property and equipment (Note 7)
    91,254       95,207  
Intangible assets (Note 8)
    18,757       18,818  
Goodwill (Note 8)
    395,526       395,526  
Assets of discontinued operations (Note 3)
          641,724  
Other assets
    156,148       242,530  
     
     
 
 
Total assets
  $ 8,970,487     $ 9,222,154  
     
     
 
LIABILITIES
Payment service obligations (Note 2)
  $ 7,862,106     $ 7,421,481  
Debt (Note 9)
    150,000       201,351  
Derivative financial instruments (Note 5)
    82,996       174,588  
Pension and other postretirement benefits (Note 14)
    104,003       101,039  
Preferred stock subject to mandatory redemption (Note 10)
          6,733  
Accounts payable and other liabilities (Note 16)
    272,801       115,922  
Liabilities of discontinued operations (Note 3)
          332,257  
     
     
 
 
Total liabilities
    8,471,906       8,353,371  
COMMITMENTS AND CONTINGENCIES (Note 16)
               
STOCKHOLDERS’ EQUITY
Common shares, $.01 par value: 250,000,000 shares authorized, 88,556,077 issued and outstanding
    886       149,610  
Additional paid-in capital
    80,069       218,783  
Retained income
    461,903       863,944  
Unearned employee benefits and other
    (32,410 )     (35,442 )
Accumulated other comprehensive loss (Note 12)
    (11,867 )     (35,208 )
Treasury stock
          (292,904 )
     
     
 
 
Total stockholders’ equity
    498,581       868,783  
     
     
 
 
Total liabilities and stockholders’ equity
  $ 8,970,487     $ 9,222,154  
     
     
 

See Notes to Consolidated Financial Statements

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Table of Contents

MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

                                     
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




(In thousands except share and per share data)
(Unaudited)
REVENUE:
                               
 
Fee and other revenue (Note 2)
  $ 122,084     $ 102,828     $ 235,706     $ 199,891  
 
Investment revenue (Note 4)
    77,580       82,017       154,234       168,655  
 
Securities gains and losses, net (Note 4)
    156       2,876       1,201       (9,199 )
     
     
     
     
 
   
Total revenue
    199,820       187,721       391,141       359,347  
 
Fee commissions expense (Note 2)
    43,925       34,987       84,428       66,934  
 
Investment commissions expense (Note 2)
    53,706       60,802       103,451       119,728  
     
     
     
     
 
   
Total commissions expense
    97,631       95,789       187,879       186,662  
     
     
     
     
 
   
Net revenue
    102,189       91,932       203,262       172,685  
EXPENSES:
                               
 
Compensation and benefits
    33,644       26,533       66,389       54,599  
 
Transaction and operations support
    27,447       25,296       55,687       50,682  
 
Depreciation and amortization
    7,396       6,626       14,619       13,149  
 
Occupancy, equipment and supplies
    8,119       6,962       15,715       13,335  
 
Interest expense
    1,905       2,765       3,127       5,995  
 
Debt tender and redemption costs
    20,661             20,661        
     
     
     
     
 
   
Total expenses
    99,172       68,182       176,198       137,760  
     
     
     
     
 
Income from continuing operations before income taxes
    3,017       23,750       27,064       34,925  
Income tax expense (Note 11)
    3,587       3,293       8,420       2,078  
     
     
     
     
 
(Loss) income from continuing operations (Note 3)
    (570 )     20,457       18,644       32,847  
(Loss) income and gain from discontinued operations, net of tax
    (497 )     20,411       21,282       30,052  
     
     
     
     
 
NET (LOSS) INCOME
  $ (1,067 )   $ 40,868     $ 39,926     $ 62,899  
     
     
     
     
 
Basic earnings per share
                               
(Loss) income from continuing operations
  $ (0.01 )   $ 0.24     $ 0.21     $ 0.38  
(Loss) income from discontinued operations, net of tax
          0.23       0.25       0.34  
     
     
     
     
 
(Loss) earnings per common share
  $ (0.01 )   $ 0.47     $ 0.46     $ 0.72  
     
     
     
     
 
Average outstanding common shares
    86,929       86,224       86,819       86,116  
     
     
     
     
 
Diluted income per share
                               
(Loss) income from continuing operations
  $ (0.01 )   $ 0.24     $ 0.21     $ 0.38  
(Loss) income from discontinued operations, net of tax
          0.23       0.25       0.34  
     
     
     
     
 
(Loss) earnings per common share
  $ (0.01 )   $ 0.47     $ 0.46     $ 0.72  
     
     
     
     
 
Average outstanding and potentially dilutive common shares
    86,929       86,508       87,306       86,418  
     
     
     
     
 

See Notes to Consolidated Financial Statements

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MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                     
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




(In thousands)
(Unaudited)
Net (loss) income
  $ (1,067 )   $ 40,868     $ 39,926     $ 62,899  
Other comprehensive income:
                               
 
Unrealized gains on available-for-sale securities
                               
   
Reclassification of securities from held-to-maturity to available-for-sale, net of tax expense
                      30,222  
   
Holding (losses) gains arising during the period, net of tax expense
    (76,249 )     16,966       (42,235 )     13,874  
   
Net reclassification adjustment for net realized (losses) gains included in net income, net of tax expense (benefit)
    (321 )     (1,754 )     (3,300 )     (4,476 )
     
     
     
     
 
      (76,570 )     15,212       (45,535 )     39,620  
     
     
     
     
 
 
Unrealized losses on derivative financial instruments:
                               
   
Holding gains (losses) arising during the period, net of tax benefit
    52,985       (14,739 )     31,753       (30,993 )
   
Net reclassifications from other comprehensive income to net income, net of tax benefit (expense)
    19,463       21,548       37,702       42,949  
     
     
     
     
 
      72,448       6,809       69,455       11,956  
     
     
     
     
 
 
Unrealized foreign currency translation gains
    (172 )     919       (580 )     655  
     
     
     
     
 
 
Other comprehensive income (loss)
    (4,294 )     22,940       23,340       52,231  
     
     
     
     
 
Comprehensive income
  $ (5,361 )   $ 63,808     $ 63,266     $ 115,130  
     
     
     
     
 

See Notes to Consolidated Financial Statements.

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MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
                                         
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




(In thousands)
(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
                               
 
Net (loss) income
  $ (1,067 )   $ 40,868     $ 39,926     $ 62,899  
     
     
     
     
 
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
                               
   
Net earnings (losses) in discontinued operations
    497       (20,411 )     (21,282 )     (30,052 )
   
Depreciation and amortization
    7,396       6,626       14,619       13,148  
   
Investment impairment charges and adjustments
    683               6,611       20,813  
   
Provision for deferred income taxes
    (4,384 )     (8,982 )     (8,297 )     (11,965 )
   
Net gain on sale of investments
    (838 )     (2,877 )     (7,812 )     (7,719 )
   
Debt redemption and retirement costs
    20,661               20,661          
   
Net amortization of investment premium (discount)
    6,938       14,054       14,617       20,423  
   
Other noncash items, net
    (3,769 )     456       (1,378 )     1,317  
   
Changes in foreign currency translation adjustments
    (70 )     919       (478 )     654  
   
Loss on sale of property and equipment
    200       88       704       94  
   
Changes in assets and liabilities:
                               
     
Other assets
    9,436       1,052       (10,763 )     4,492  
     
Accounts payable and other liabilities
    (7,468 )     (2,232 )     5,848       (1,717 )
     
     
     
     
 
       
Total adjustments
    29,282       (11,307 )     13,050       9,488  
   
Change in cash and cash equivalents (substantially restricted)
    19,519       (170,846 )     (4,409 )     298,019  
   
Change in receivables, net (substantially restricted)
    (148,019 )     (204,281 )     (150,921 )     (683,487 )
   
Change in payment service obligations
    181,376       787,470       440,625       936,272  
     
     
     
     
 
       
Net cash provided by continuing operating activities
    81,091       441,904       338,271       623,191  
 
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
   
Proceeds from sales and maturities of investments classified as available-for-sale
    790,884       1,087,721       1,477,694       1,943,612  
   
Proceeds from maturities of investment securities classified as held-to-maturity
                      283,690  
   
Purchases of investments classified as available-for-sale
    (835,858 )     (1,424,367 )     (1,820,908 )     (2,639,873 )
   
Purchases of property and equipment
    (6,978 )     (6,006 )     (13,069 )     (11,231 )
   
Cash paid for acquisition of minority interest of MoneyGram International Limited
                      (105,080 )
   
Proceeds from the sale of Game Financial Corporation
                  15,247          
   
Other investing activities
          (304 )     (960 )     (1,596 )
     
     
     
     
 
       
Net cash used in investing activities
    (51,952 )     (342,956 )     (341,996 )     (530,478 )
 
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
   
Payments on debt retirement
    (206,858 )     (94,244 )     (205,182 )     (100,528 )
   
Proceeds from borrowings
    150,000             150,000        
   
Proceeds from sale of reverse repurchase agreements
    173,000             173,000        
   
Proceeds from exercise of options
          556       457       1,440  
   
Preferred stock redemption
    (23,895 )           (23,895 )      
   
Purchase of treasury stock
          (976 )           (976 )
   
Cash dividends paid
    (7,822 )     (8,039 )     (15,629 )     (16,078 )
     
     
     
     
 
       
Net cash provided by (used in) financing activities
    84,425       (102,703 )     78,751       (116,142 )
 
Net cash (used in) provided by discontinued operations
    (113,564 )     (5,444 )     (108,858 )     2,444  
 
NET DECREASE IN CASH AND CASH EQUIVALENTS
          (9,199 )     (33,832 )     (20,985 )
 
CASH AND CASH EQUIVALENTS — Beginning of period
          27,339       33,832       39,125  
     
     
     
     
 
 
CASH AND CASH EQUIVALENTS — End of period
  $     $ 18,140     $     $ 18,140  
     
     
     
     
 

See Notes to Consolidated Financial Statements

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MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
                                                         
Accumulated
Unearned Other
Employee Comprehensive Common
Common Additional Retained Benefits (Loss) Stock in
Stock Capital Income and Other Income Treasury Total







(In thousands)
(Unaudited)
December 31, 2003
  $ 149,610     $ 218,783     $ 863,944     $ (35,442 )   $ (35,208 )   $ (292,904 )   $ 868,783  
Net income
                40,993                         40,993  
Dividends on common stock
                (7,807 )                       (7,807 )
Employee benefit plans
          (4,635 )           2,815             5,474       3,654  
Treasury shares acquired
                                         
Unrealized foreign currency translation adjustment
                            (408 )           (408 )
Unrealized gain on available-for-sale securities
                            31,035             31,035  
Unrealized loss on derivative financial instruments
                            (2,992 )           (2,992 )
Other, net
                48                         48  
     
     
     
     
     
     
     
 
March 31, 2004
    149,610       214,148       897,178       (32,627 )     (7,573 )     (287,430 )     933,306  
Net income
                (1,067 )                       (1,067 )
Dividends on common stock
                (7,822 )                       (7,822 )
Employee benefit plans
          4,972             217             (345 )     4,844  
Unrealized foreign currency translation adjustment
                            (172 )           (172 )
Unrealized gain on available-for-sale securities
                            (76,570 )           (76,570 )
Unrealized loss on derivative financial instruments
                            72,448             72,448  
Other, net
                    170                               170  
Spin off from Viad Corp (Note 3)
    (148,724 )     (139,051 )     (426,556 )                 287,775       (426,556 )
     
     
     
     
     
     
     
 
June 30, 2004
  $ 886     $ 80,069     $ 461,903     $ (32,410 )   $ (11,867 )   $     $ 498,581  
     
     
     
     
     
     
     
 

See Notes to Consolidated Financial Statements

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MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)
(Dollars in thousands unless otherwise stated)
 
1. Description of the Business and Background

      MoneyGram International, Inc. offers products and services including global money transfer, urgent bill payment services, issuance and processing of money orders, processing of official checks and share drafts, controlled dispursement processing, and routine bill payment service. These products and services are offered to consumers and businesses through a network of agents and financial institution customers.

      On December 18, 2003, MoneyGram International, Inc. was incorporated in the state of Delaware as a subsidiary of Viad Corp (“Viad”) to effect the spin off of Viad’s payment services business operated by Travelers Express Company, Inc. (“Travelers”) to its shareholders. References to “MoneyGram,” the “Company,” “we,” “us” and “our” are to MoneyGram International, Inc. and its subsidiaries and consolidated entities. On June 30, 2004 (the” Distribution Date”), Travelers was merged with a subsidiary of MoneyGram and Viad then distributed 88.6 million shares of MoneyGram common stock in a tax-free distribution (the “Distribution”). Shareholders of Viad received one share of MoneyGram common stock for every share of Viad common stock owned on the record date, June 24, 2004. Due to the relative significance of MoneyGram to Viad, MoneyGram is the divesting entity and treated as the “accounting successor” to Viad for financial reporting purposes in accordance with Emerging Issues Task Force (“EITF”) Issue No. 02-11, Accounting for Reverse Spinoffs. See Note 3 regarding the spin-off transaction and resulting discontinued operations of Viad.

 
2. Summary of Significant Accounting Policies

      Basis of Presentation — The consolidated financial statements of MoneyGram are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated balance sheets are unclassified due to the short-term nature of its settlement obligations, contrasted with the ability to invest cash awaiting settlement in long-term investment securities.

      Principles of Consolidation — The consolidated financial statements include the accounts of MoneyGram International, Inc. and its subsidiaries. All material intercompany profits, transactions, and account balances have been eliminated in consolidation.

      Consolidation of Special Purpose Entities — We participate in various trust arrangements (special purpose entities) related to official check processing agreements with financial institutions and structured investments within the investment portfolio. These special purpose entities are included in our consolidated financial statements. Working in cooperation with certain financial institutions, we have established separate consolidated entities (special-purpose entities) and processes that provide these financial institutions with additional assurance of our ability to clear their official checks. These processes include maintenance of specified ratios of segregated investments to outstanding payment instruments, typically 1 to 1. In some cases, alternative credit support has been purchased that provides backstop funding as additional security for payment of instruments. However, we remain liable to satisfy the obligations, both contractually and by operation of the Uniform Commercial Code, as issuer and drawer of the official checks. Accordingly, the obligations have been recorded in the Consolidated Balance Sheets under “Payment service obligations.” Under certain limited circumstances, clients have the right to either demand liquidation of the segregated assets to replace us as the administrator of the special-purpose entity. Such limited circumstances consist of material (and in most cases continued) failure of MoneyGram to uphold its warranties and obligations pursuant to its underlying agreements with the financial institution clients. While an orderly liquidation of assets would be required, any of these actions by a client could nonetheless diminish the value of the total investment portfolio, decrease earnings, and result in loss of the

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MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

client or other customers or prospects. We offer the special-purpose entity to certain financial institution clients as a benefit unique in the payment services industry.

      Certain structured investments we own represent beneficial interests in grantor trusts or other similar entities. These trusts typically contain an investment grade security, generally a U.S. Treasury strip, and an investment in the residual interest in a collateralized debt obligation, or in some cases, a limited partnership interest. For certain of these trusts, we own a majority of the beneficial interests, and therefore, consolidate those trusts by recording and accounting for the assets of the trust separately in our consolidated financial statements.

      Management Estimates — The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

      Reclassifications — Certain reclassifications have been made to prior periods financial statements to conform to the current presentation.

      Cash and Cash Equivalents, Receivables, and Investments — We generate funds from the sale of money orders, official checks (including cashier’s checks, teller checks, and agent checks), and other payment instruments (classified as “Payment service obligations” in the Consolidated Balance Sheets), the proceeds of which are invested in cash and cash equivalents and investments until the time needed to satisfy the liability to pay the face amount of such payment service obligations upon presentment.

        Cash and Cash Equivalents (substantially restricted) — We consider cash on hand and all highly liquid debt instruments purchased with original maturities of three months or less to be cash and cash equivalents.
 
        Receivables, net (substantially restricted) — We have receivables due from financial institutions and agents for payment instruments sold. These receivables are outstanding from the day of the sale of the payment instrument, until the financial institution or agent remits the funds to us. We provide an allowance for the portion of the receivable estimated to become uncollectible using historical charge-off and recovery patterns, as well as current economic conditions.
 
        We sell an undivided percentage ownership interest in certain of these receivables, primarily receivables from our money order agents. The sale is recorded in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. Upon sale, we remove the sold agent receivables from the Consolidated Balance Sheets.
 
        Investments (substantially restricted) — Our investments consist primarily of mortgage-backed securities, other asset-backed securities, state and municipal government obligations, and corporate debt securities. These investments are held in custody with major financial institutions. We classify securities as available-for-sale or held-to-maturity in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. During the first quarter of 2003, we determined that we no longer had the positive intent to hold to maturity the securities classified as held-to-maturity due to the desire to have more flexibility in managing the investment portfolio. Therefore, on March 31, 2003, we reclassified securities in the portfolio from held-to-maturity to available-for-sale. As a result of this reclassification, we cannot hold held-to-maturity securities until March 31, 2005. There are no securities classified as trading securities.
 
        Securities held for indefinite periods of time, including those securities that may be sold to assist in the clearing of payment service obligations or in the management of securities, are classified as securities available-for-sale. These securities are reported at fair value, with the net after-tax unrealized gain or loss reported as a separate component of stockholders’ equity.

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        Other asset-backed securities are collateralized by various types of loans and leases, including home equity, corporate, manufactured housing, credit card, and airline. Interest income on mortgage-backed and other asset-backed securities for which risk of credit loss is deemed remote is recorded utilizing the level yield method. Changes in estimated cash flows, both positive and negative, are accounted for with retrospective changes to the carrying value of investments in order to maintain a level yield over the life of the investment. Interest income on mortgage-backed and other asset-backed investments for which risk of credit loss is not deemed remote is recorded under the prospective method in accordance with EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets, as adjustments of yield.
 
        Securities with gross unrealized losses at the consolidated balance sheet date are subject to our process for identifying other-than-temporary impairments in accordance with SFAS No. 115 “Accounting For Certain Investments in Debt and Equity Securities,” and EITF Issue No. 99-20. We write down to fair value those securities that we deem to be other-than-temporarily impaired in the period the securities are deemed to be impaired. Under SFAS No. 115, the assessment of whether such impairment has occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value. We consider a wide range of factors about the security and use our best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. We evaluate investments rated A and below for impairment under EITF Issue No. 99-20. When an adverse change in expected cash flows occurs and if the fair value of a security is less than its carrying value, the investment is written down to fair value. Any impairment charges are included in the Consolidated Statement of Income under “Securities gains and losses, net.” Fair value is generally based on quoted market prices. However, certain investment securities are not readily marketable. As a result, the carrying value of these investments is based on cash flow projections, which require a significant degree of management judgment as to default and recovery rates of the underlying investments.
 
        Substantially Restricted — We are regulated by various state agencies, which generally require us to maintain liquid assets and investments with an investment rating of A or higher, in an amount generally equal to the payment service obligation for those regulated payment instruments, namely teller checks, agent checks, money orders, and money transfers. Consequently, a significant amount of cash and cash equivalents, receivables, and investments are restricted to satisfy the liability to pay the face amount of regulated payment service obligations upon presentment. We are not regulated by state agencies for payment service obligations resulting from outstanding cashier’s checks; however, we restrict a portion of the funds related to these payment instruments due to contractual arrangements, and/or Company policy. Accordingly, assets restricted for regulatory or contractual reasons are not available to satisfy working capital or other financing requirements.
 
        We have unrestricted cash and cash equivalents, receivables, and investments to the extent those assets exceed all payment service obligations. The following table shows the total amount of assets restricted for payment service obligations and unrestricted assets:
                 
June 30 December 31
2004 2003


Cash and cash equivalents
  $ 1,028,814     $ 1,025,026  
Receivables, net
    910,226       755,734  
Investments
    6,369,762       6,013,757  
     
     
 
      8,308,802       7,794,517  
Amounts restricted to cover payment service obligations
    7,862,106       7,421,481  
     
     
 
Unrestricted assets
  $ 446,696     $ 373,036  
     
     
 

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      Derivative Financial Instruments — We recognize derivative instruments as either assets or liabilities on the Consolidated Balance Sheets and measure those instruments at fair value. The accounting for changes in the fair value depends on the intended use of the derivative and the resulting designation.

      For a derivative instrument designated as a fair value hedge, we recognize the gain or loss in earnings in the period of change together with the offsetting loss or gain on the hedged item attributed to the risk being hedged. For a derivative instrument designated as a cash flow hedge, we initially report the effective portion of the derivative’s gain or loss as a component of other comprehensive gain or loss and subsequently reclassify it into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately.

      For a derivative instrument that does not qualify, or is not designated, as a hedge, the change in fair value is recognized in “Transaction and operations support” in the Consolidated Statements of Income.

      The effective portion of the change in fair value of derivatives that qualify as cash flow hedges under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, is recorded in other comprehensive income. Amounts receivable or payable under the derivative agreements are reclassified from other comprehensive income to net income as an adjustment to the expense of the related transaction. These amounts are included in the Consolidated Statements of Income under “Investment commissions expense.”

      We use derivative instruments to manage exposures to foreign currency risk. The objective in holding derivatives is to minimize the volatility of earnings and cash flow associated with changes in foreign currency. We purchase currency options and designate these currency options as cash flow hedges of foreign currency forecasted transactions related to certain operating revenues. We enter into foreign currency forwards to hedge forecasted foreign currency money transfer transactions and designate these derivatives as cash flow hedges. We also enter into foreign exchange forward contracts to minimize the short-term impact of currency fluctuations. The foreign exchange forward contracts are not designated as accounting hedges, and all changes in fair value are recognized in earnings in the period of change.

      Fair Value of Financial Instruments — The estimated fair value of financial instruments has been determined using available market information and the valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, these estimates may not be indicative of the amounts we could realize in a current market exchange. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.

      Allowance for Losses on Agent Receivables — We provide an allowance for potential losses from receivables from agents. We continually evaluate receivables from agents and financial institutions for collectibility and possible write-off by examining the facts and circumstances surrounding each customer where a loss is deemed possible.

      Property and Equipment — Property and equipment includes office equipment, software and hardware, and leasehold improvements, which are stated at cost, net of accumulated depreciation. Property and equipment is depreciated using a straight-line method over estimated useful lives ranging from two to ten years for all assets except leasehold improvements, which are amortized using the straight-line method over the lesser of the lease term or useful life of the asset. We capitalize certain software development costs in accordance with Statement of Position No. 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. (See Note 7)

      Intangible Assets and Goodwill — Goodwill and certain intangible assets with indefinite lives are not amortized but instead are subject to periodic impairment testing. We performed an annual assessment of these assets during the fourth quarter 2003 and determined that there was no impairment. The fair value

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was estimated using the expected present value of future cash flows. Intangible assets with finite lives are amortized over their respective useful lives (See Note 8).

      Payments on Long-Term Contracts — We make incentive payments to certain agents and financial institution customers as an incentive to enter into long-term contracts. The payments are generally required to be refunded pro rata in the event of nonperformance or cancellation by the customer and are capitalized and amortized over the life of the related agent or financial institution contracts as management is satisfied that such costs are recoverable through future operations, minimums, penalties, or refunds in case of early termination. We review the carrying values of these incentive payments whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable in accordance with the provisions of SFAS No. 144, Accounting for the Impairment and Disposal of Long-Lived Assets.

      Income Taxes — Income taxes were determined on a separate return basis as if MoneyGram had not been eligible to be included in the consolidated income tax return of Viad and its affiliates. Deferred income taxes result from temporary differences between the financial reporting basis of assets and liabilities and their respective tax-reporting basis. Future tax benefits are recognized to the extent that realization of such benefits is more likely than not (See Note 11).

      Foreign Currency Translation — The Euro is the functional currency of MoneyGram International Limited (“MIL”), a wholly-owned subsidiary of MoneyGram. Assets and liabilities for MIL are translated into U.S. dollars based on the exchange rate in effect at the balance sheet date. Income statement accounts are translated at the average exchange rate during the period covered. Translation adjustments arising from the use of differing exchange rates from period to period are included in the Consolidated Balance Sheets as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive loss.”

      Revenue Recognition — We derive revenue primarily through service fees charged to consumers and through investments. A description of these revenues and recognition policies are as follows:

  •  Fee revenues primarily consist of transaction fees, foreign exchange revenue, and other revenue.

  –  Transaction fees consist primarily of fees earned on the sale of money transfers, retail money orders, and bill payment services. The money transfer transaction fees are fixed fees per transaction that may vary based upon the face value of the amount of the transaction and the locations in which these money transfers originate and to which they are sent. The money order and bill payment transaction fees are fixed fees charged on a per item basis and are recognized at the time of the transaction or sale of the product.
 
  –  Foreign exchange revenue is derived from the management of currency exchange spreads (as a percentage of face value of the transaction) on international money transfer transactions. Foreign exchange revenue is recognized at the time the exchange in funds occurs.
 
  –  Other revenue consists of processing fees on rebate checks and controlled disbursements, service charges on aged outstanding money orders, money order dispenser fees, and other miscellaneous charges. These fees are recognized in earnings in the period the item is processed or billed.

  •  Investment revenue is derived from the investment of funds generated from the sale of official checks, money orders and other payment instruments. These funds are available for investment until the items are presented for payment. Interest and dividends are recognized as earned.
 
  •  Securities gains and losses are recognized on the sale of securities, and impairments are recognized on securities with gross unrealized losses and other-than-temporary impairments in the period the other-than-temporary impairment occurs.

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      Fee Commissions Expense — We pay fee commissions to third-party agents for money transfer services. In a money transfer transaction, both the agent initiating the transaction and the agent disbursing the funds receive a commission. The commission amount is generally based on a percentage of the fee charged to the customer. Fee commissions also include the amortization of the capitalized incentive payments to agents. We generally do not pay commissions to agents on the sale of money orders.

      Investment Commissions Expense — Investment commissions expense includes amounts paid to financial institution customers based upon average outstanding balances generated by the sale of official checks, costs associated with swaps, and the sale of receivables program. Commissions paid to financial institution customers generally are variable based on short-term interest rates; however, a portion of the commission expense has been fixed through the use of interest rate swap agreements.

      Stock Based Compensation — Prior to the Distribution, certain of our employees participated in Viad employee incentive plans and received awards consisting of stock options, restricted stock or other deferred compensation that are described more fully in Note 15. We accounted for these stock option grants under the intrinsic value method in accordance with Accounting Principles Board Opinion (“APB”) No. 25 (“APB 25”), Accounting for Stock Issued to Employees. Accordingly, no compensation expense has been recognized for our stock-based compensation plans other than for performance-based and restricted stock awards, which gave rise to compensation expense aggregating $0.9 million and $0.4 million during the three months ending June 30, 2004 and 2003 respectively, and $0.5 and $0.6 million during the six months ending June 30, 2004 and 2003, respectively. Assuming that we had recognized compensation cost for stock options and performance-based stock awards in accordance with the fair value method of accounting defined in SFAS No. 123, Accounting for Stock-Based Compensation net income and diluted and basic income per share would be as presented in the following table. Compensation cost calculated under SFAS No. 123 is recognized ratably over the vesting period and is net of estimated forfeitures and tax benefits.

                                   
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




Net (loss) income, as reported
  $ (1,067 )   $ 40,868     $ 39,926     $ 62,899  
Plus: stock-based compensation expense recorded under APB 25, net of tax
                      28  
Less: stock-based compensation expense determined under the fair value method, net of tax
    (345 )     (874 )     (1,406 )     (2,777 )
     
     
     
     
 
Pro forma net (loss) income
  $ (1,412 )   $ 39,994     $ 38,520     $ 60,150  
     
     
     
     
 
Basic (loss) income per share:
                               
 
As reported
  $ (0.01 )   $ 0.47     $ 0.46     $ 0.72  
     
     
     
     
 
 
Pro forma
  $ (0.02 )   $ 0.46     $ 0.44     $ 0.70  
     
     
     
     
 
Diluted income per share:
                               
 
As reported
  $ (0.01 )   $ 0.47     $ 0.46     $ 0.72  
     
     
     
     
 
 
Pro forma
  $ (0.02 )   $ 0.46     $ 0.44     $ 0.70  
     
     
     
     
 

      For purposes of applying SFAS No. 123, the estimated fair value of stock options granted during 2004 and 2003 was $4.82 and $3.80 per share, respectively. The fair value of each stock option grant was

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estimated on the date of grant using the Black-Scholes single option pricing model with the following assumptions:

         
2004 2003


Expected dividend yield
  1.9%   2.3%
Expected volatility
  28.5%   30.4%
Risk-free interest rate
  3.2%   2.7%
Expected life
  5 years   5 years

      Income per share — Basic income per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Since our common stock was not issued until June 30, 2004, the weighted average number of common shares outstanding for each period is the number of Viad shares outstanding. Diluted income per common share is calculated by adjusting weighted average outstanding shares, assuming conversion of all potentially dilutive stock options.

      Recent Accounting Pronouncements — In May 2004, the FASB issued Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) FAS 106-2 on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”), which was enacted into law on December 8, 2003. The Act introduces a Medicare prescription drug benefit, as well as a federal subsidy to sponsors of retiree health care plans that provide a benefit that is at least substantially equivalent to the Medicare benefit. The FASB had previously issued FSP FAS 106-1 which permitted the one-time election to defer recognition of the effects of the Act until further authoritative guidance was issued. With FSP FAS 106-2, which superceded FSP FAS 106-1, the election to defer recognition expired and specific guidance was provided in accounting for the subsidy, whether a previous election had been made to either defer or not defer the effects of the Act. The FSP is effective for the first reporting period beginning after June 15, 2004, which for the Company will be the third quarter of 2004. The impact of the future financial position or results of operations cannot presently be determined.

      Effective March 31, 2004, EITF Issue No. 03-1 The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments was issued. EITF Issue No. 03-1 provides guidance for determining the meaning of “other-than-temporarily impaired” and its application to certain debt and equity securities within the scope of SFAS No. 115 and investments accounted for under the cost method. The guidance requires that investments which have declined in value due to credit concerns or solely due to changes in interest rates must be recorded as other-than-temporarily impaired unless the Company can assert and demonstrate its intention to hold the security for a period of time sufficient to allow for a recovery of fair value up to or beyond the cost of the investment which might mean maturity. This issue also requires disclosures assessing the ability and intent to hold investments in instances in which an investor determines that an investment with a fair value less than cost is not other-than-temporarily impaired. The guidance for evaluating whether an investment is other-than-temporarily impaired should be applied to reporting periods beginning after June 15, 2004. As of June 30, 2004, we had total unrealized pre-tax losses in our available-for-sale portfolio of $52.0 million ($31.5 million after-tax), included in “Accumulated other comprehensive loss”, which would have been the maximum loss required to be recognized if we did not have the intent and ability to hold these securities until recovery. This unrealized loss is measured as of a point in time and could fluctuate significantly as interest rates change.

 
3. Discontinued Operations
 
Viad Corp

      MoneyGram is considered the divesting entity and treated as the “accounting successor” to Viad for financial reporting purposes. The continuing business of Viad is referred to as “New Viad.” The spin off of

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

New Viad was accounted for pursuant to APB Opinion No. 29, Accounting for Nonmonetary Transactions and was accounted for based upon the recorded amounts of the net assets divested. We charged directly to equity as a dividend the historical cost carrying amount of the net assets of New Viad of $426 million. As a result, the results of operations of New Viad (with certain adjustments) are included in the Statements of Consolidated Income in “(Loss) income and gain from discontinued operations” in accordance with the provisions of SFAS No. 144. Also included in “(Loss) income and gain from discontinued operations” for the periods ended June 30, 2004, is a one-time charge for spin-off related costs of $14.1 million.

      The results of operations of Viad, included in “(Loss) income and gain from discontinued operations” include the following:

                                 
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




Revenue
  $ 207,378     $ 236,190     $ 414,933     $ 461,528  
(Loss) earnings before income taxes
    (2,648 )     31,019       13,495       49,164  
(Loss) income from discontinued operations
    (1,615 )     19,762       8,232       28,763  

      As part of the transaction, we have several agreements with Viad for the purpose of governing the relationship. A Separation and Distribution Agreement provides for the principal corporate transactions required to effect the separation of MoneyGram from Viad and the spin-off and other matters governing the relationship between New Viad and MoneyGram following the spin-off. The Employee Benefits Agreement provides for the allocation of employees, employee benefit plans and associated liabilities and related assets between Viad and MoneyGram. The Interim Services Agreement provides for services to be provided by Viad for MoneyGram on an interim basis. The Tax Sharing Agreement provides for the allocation of federal, state, and foreign tax liabilities for all periods through the Distribution Date.

      The services to be provided under the Interim Services Agreement will generally be provided by New Viad for a term of two years beginning on the Distribution Date. We may, at any time after the first year anniversary of the Distribution, request termination of the service upon 90 days advance notice to Viad. However, certain services may not be terminated prior to the second anniversary of the Distribution Date without Viad’s consent.

 
Game Financial Corporation

      During the first quarter of 2004, we completed the sale of one of our subsidiaries, Game Financial Corporation (“Game Financial”), for approximately $43 million in cash, resulting in net cash received of $15.2 million. Game Financial provides cash access services to casinos and gaming establishments throughout the United States. As a result of the sale, we recorded a gain of approximately $18.9 million ($11.4 million after-tax) in the first quarter of 2004. In addition, in June 2004 we recorded a gain of $1.1 million (net of taxes) as a result of the settlement of a lawsuit brought by Game Financial. We may record future after-tax gains of approximately $4 million, based on contingencies in the Sales and Purchase Agreement related to the continued operations of Game Financial with two casinos. Game Financial was a part of our Payment Systems segment.

      In accordance with SFAS No. 144, the results of operations of Game Financial and the gain on the disposal of Game Financial have been reflected as components of discontinued operations. All prior periods in the Consolidated Statements of Income have therefore been restated. Game Financial assets and liabilities have not been historically restated on the Consolidated Balance Sheets.

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      The results of operations of Game Financial, included in “(Loss) income and gain from discontinued operations” include the following:

                                 
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




Revenue
  $     $ 15,921     $ 10,668     $ 33,303  
Earnings before income taxes
          1,072       852       2,131  
Gain on disposition
                11,417        
Income and gain from discontinued operations
    1,118       648       13,050       1,289  

      Components of Game Financial included in the Consolidated Balance Sheets at December 31, 2003 consists of the following:

         
Cash
  $ 33,576  
Other assets
    8,687  
Liabilities
    22,557  
     
 
Net assets
  $ 19,706  
     
 
 
4. Investments (Substantially Restricted)

      The amortized cost and market value of investments by type are as follows:

                                     
June 30, 2004

Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value




Available-for-Sale:
                               
 
Obligations of states and political subdivisions
  $ 912,149     $ 47,651     $ (795 )   $ 959,005  
 
Mortgage-backed and other asset-backed securities
    4,494,790       83,617       (39,478 )     4,538,929  
 
U.S. government agencies
    488,328       1,177       (5,733 )     483,772  
 
Debt securities issued by foreign governments
                       
 
Corporate debt securities
    301,123       16,751       (2,323 )     315,551  
 
Preferred and common stock
    75,458       705       (3,658 )     72,505  
     
     
     
     
 
   
Total
  $ 6,271,848     $ 149,901     $ (51,987 )   $ 6,369,762  
     
     
     
     
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

                                     
December 31, 2003

Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value




Available-for-Sale:
                               
 
Obligations of states and political subdivisions
  $ 938,693     $ 73,663     $ (271 )   $ 1,012,085  
 
Mortgage-backed and other asset-backed securities
    4,092,067       92,131       (20,926 )     4,163,272  
 
U.S. government agencies
    405,378       6,068       (405 )     411,041  
 
Debt securities issued by foreign governments
    5,373       321             5,694  
 
Corporate debt securities
    323,747       23,142       (721 )     346,168  
 
Preferred and common stock
    75,546       1,601       (1,650 )     75,497  
     
     
     
     
 
   
Total
  $ 5,840,804     $ 196,926     $ (23,973 )   $ 6,013,757  
     
     
     
     
 

      On March 31, 2003, we reclassified securities in the portfolio with an amortized cost of $1.2 billion from held-to-maturity to available-for-sale. The gross unrealized gains and losses related to these securities were $55.3 million and $5.3 million, respectively, on the date of transfer, which were recorded in “Accumulated other comprehensive loss”. At June 30, 2004 and December 31, 2003 we had no securities classified as held-to-maturity, and due to the above reclassification, we cannot classify investments as held-to-maturity until March 31, 2005.

      The amortized cost and market value of securities at June 30, 2004, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations, sometimes without call or prepayment penalties. Maturities of mortgage-backed and other asset-backed securities depend on the repayment characteristics and experience of the underlying obligations.

                   
June 30, 2004

Amortized Market
Cost Value


In one year or less
  $ 24,852     $ 25,121  
After one year through five years
    227,943       235,063  
After five years through ten years
    971,222       997,675  
After ten years
    477,583       500,469  
Mortgage-backs and other asset-backed securities
    4,494,790       4,538,929  
Preferred and common stock
    75,458       72,505  
     
     
 
 
Total
  $ 6,271,848     $ 6,369,762  
     
     
 

      At June 30, 2004 and December 31, 2003, net unrealized gains were $59,728 (net of taxes of $38,187) and $105,501 (net of taxes of $67,452) respectively, and are included in the Consolidated Balance Sheets as a separate component of stockholders’ equity under the caption “Accumulated other comprehensive loss.”

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Gross realized gains and losses on sales of securities classified as available-for-sale, using the specific identification method, and other-than-temporary impairments were as follows:

                                 
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




Gross realized gains
  $ 1,921     $ 3,270     $ 8,976     $ 7,899  
Gross realized losses
    (1,082 )     (394 )     (1,164 )     (561 )
Other-than-temporary impairments
    (683 )           (6,611 )     (16,537 )
     
     
     
     
 
Securities gains and losses, net
  $ 156     $ 2,876     $ 1,201     $ (9,199 )
     
     
     
     
 

      At June 30, 2004, the investment portfolio had the following aged unrealized losses:

                                                   
Less Than 12 Months 12 Months or More Total



Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses






Obligations of states and political sub-divisions
  $ 47,539     $ (795 )   $     $     $ 47,539     $ (795 )
Mortgage-backed and other asset-backed securities
    1,804,904       (30,539 )     262,671       (8,939 )     2,067,575       (39,478 )
U.S. government agencies
    377,967       (5,733 )                 377,967       (5,733 )
Corporate debt securities
    83,558       (1,844 )     7,303       (479 )     90,861       (2,323 )
Preferred and common stock
    30,775       (1,258 )     7,600       (2,400 )     38,375       (3,658 )
     
     
     
     
     
     
 
 
Total
  $ 2,344,743     $ (40,169 )   $ 277,574     $ (11,818 )   $ 2,622,317     $ (51,987 )
     
     
     
     
     
     
 

      At December 31, 2003, the investment portfolio had the following aged unrealized losses:

                                                   
Less Than 12 Months 12 Months or More Total



Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses






Obligations of states and political sub-divisions
  $ 18,670     $ (271 )   $     $     $ 18,670     $ (271 )
Mortgage-backed and other asset-backed securities
    1,383,395       (14,554 )     163,036       (6,372 )     1,546,431       (20,926 )
U.S. government agencies
    81,747       (405 )                 81,747       (405 )
Corporate debt securities
    38,319       (721 )                 38,319       (721 )
Preferred and common stock
                8,350       (1,650 )     8,350       (1,650 )
     
     
     
     
     
     
 
 
Total
  $ 1,522,131     $ (15,951 )   $ 171,386     $ (8,022 )   $ 1,693,517     $ (23,973 )
     
     
     
     
     
     
 

      We have determined that the unrealized losses reflected above represent temporary impairments. Thirty two securities and nineteen securities had unrealized losses for more than 12 months as of June 30, 2004 and December 31, 2003, respectively. We believe that the unrealized losses generally are caused by liquidity discounts and increases in the risk premiums required by market participants rather than a fundamental weakness in the credit quality of the issuer or underlying assets.

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5. Derivative Financial Instruments

      Derivative contracts are financial instruments such as forwards, futures, swaps or option contracts and derive their value from underlying assets, reference rates, indices or a combination of these factors. A derivative contract generally represents future commitments to purchase or sell financial instruments at specified terms on a specified date or to exchange currency or interest payment streams based on the contract or notional amount. Derivative contracts exclude certain cash instruments, such as mortgage-backed securities, interest only and principal-only obligations and indexed debt instruments that derive their values or contractually required cash flows from the price of some other security or index.

      Cash flow hedges are hedges that use derivatives to offset the variability of expected future cash flows. Variability can arise in floating rate assets, floating rate liabilities or from certain types of forecasted transactions, as well as from changes in interest rates or currency exchange rates. We have entered into foreign currency forward derivatives to hedge forecasted foreign currency money transfer transactions. We designate these currency forwards as cash flow hedges. We have also entered into swap agreements to mitigate the effects of interest rate fluctuations on commissions paid to financial institution customers of our Payment Services segment. The agreements involve varying degrees of credit and market risk in addition to amounts recognized in the financial statements. We designate these swaps as cash flow hedges.

      The swap agreements are contracts to pay fixed and receive floating payments periodically over the lives of the agreements without the exchange of the underlying notional amounts. The notional amounts of such agreements are used to measure amounts to be paid or received and do not represent the amount of the exposure to credit loss. The amounts to be paid or received under the swap agreements are accrued in accordance with the terms of the agreements and market interest rates. The counterparties are major financial institutions, which are expected to perform fully under the terms of the agreements. We monitor the credit ratings of the counterparties; the likelihood of default is considered remote.

      The notional amount of the swap agreements totaled $3.5 billion and $3.1 billion at June 30, 2004 and December 31, 2003, respectively, with an average fixed pay rate of 4.79%, and 5.0% and an average variable receive rate of 1.3% and 0.9% at June 30, 2004 and December 31, 2003, respectively. The variable rate portion of the swaps is generally based on treasury bill, federal funds, or commercial paper rates. The agreements expire as follows:

         
Notional
Amount

2004
  $ 100,000  
2005
    975,000  
2006
    620,000  
2007
    1,200,000  
2008 and after
    592,000  
     
 
    $ 3,487,000  
     
 

      We estimate that approximately $43.2 million net of tax, of the unrealized loss recognized in other comprehensive income as of June 30, 2004, will be reclassified to net income within the next 12 months. The amount recognized in earnings due to ineffectiveness of the cash flow hedges is not material. No cash flow hedges were terminated during the first six months of 2004.

      Fair value hedges are hedges that mitigate the risk of change in the fair values of assets, liabilities and certain types of firm commitments. We use fair value hedges to manage the impact of changes in fluctuating interest rates on certain available-for-sale securities. Interest rate swaps are used to modify exposure to interest rate risk by converting fixed rate assets to a floating rate. All amounts have been

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

included in earnings consistent with the hedged transaction in the Consolidated Statements of Income under the caption “Investment revenue.” Realized gains of $2.1 million were recognized on fair value hedges discontinued during 2003. One fair value hedge was terminated during 2004, resulting in no gain or loss.

      We use derivatives to hedge exposures for economic reasons, including circumstances in which the hedging relationship does not qualify for hedge accounting. We are exposed to foreign currency exchange risk and utilize forward contracts to hedge assets and liabilities denominated in foreign currencies. While these contracts economically hedge foreign currency risk, they are not designated as hedges for accounting purposes under SFAS No. 133. Accordingly, the contracts are recorded on the Consolidated Balance Sheets at fair value, with the change in fair value reflected in earnings. The effect of changes in foreign exchange rates on the foreign-denominated receivables and payables, net of the effect of the related forward contracts, is not significant.

 
6. Sale of Receivables

      We have an agreement to sell undivided percentage ownership interests in certain receivables primarily from our money order agents. These receivables are sold to two commercial paper conduit trusts and represent a small percentage of the total assets in each trust. Our rights and obligations are limited to the receivables transferred, and are accounted for as sales. The assets and liabilities associated with the trust, including the sold receivables, are not recorded or consolidated in our financial statements. The agreement expires in June 2006. The receivables are sold to accelerate the cash flow for investments. The balance cannot exceed $450 million. The balance of sold receivables as of June 30, 2004, and December 31, 2003 was $379 million and $329 million respectively. The expense of selling the agent receivable is included in the Consolidated Statements of Income under the caption “Investment commissions expense.” The agreement includes a 5% holdback provision of the purchase price of the receivables. The average receivables sold approximated $407 million and $433 million during the three months ended June 30, 2004, and 2003, respectively, and $411 million and $437 million during the six months ended June 30, 2004 and 2003, respectively. The expense of selling the agent receivables was $2,161 and $2,491 for the three months ended June 30, 2004 and 2003, respectively, and $4,328 and $5,092 for the six months ended June 30, 2004, and 2003, respectively.

 
7. Property and Equipment

      Property and equipment consist of the following:

                 
June 30 December 31
2004 2003


Office furniture, equipment and leasehold improvements
  $ 16,641     $ 21,831  
Agent equipment
    108,265       111,001  
Computer hardware and software
    80,139       76,664  
     
     
 
      205,045       209,496  
Accumulated depreciation
    (113,791 )     (114,289 )
     
     
 
    $ 91,254     $ 95,207  
     
     
 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Included in computer hardware and software are capitalized software development costs. At June 30, 2004 and December 31, 2003, the net capitalized costs were $35,765 and $35,926 respectively.

                                   
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




Depreciation of office furniture, equipment, and leasehold improvements
  $ 2,712     $ 2,329     $ 5,444     $ 4,507  
Depreciation on agent equipment
    2,154       2,259       4,287       4,506  
Amortization expense of capitalized software
    1,984       1,563       3,866       3,186  
     
     
     
     
 
 
Total depreciation
  $ 6,850     $ 6,151     $ 13,597     $ 12,199  
     
     
     
     
 
 
8. Intangible Assets and Goodwill

      A summary of intangible assets at June 30, 2004 is presented below:

                         
Gross Net
Carrying Accumulated Carrying
Value Amortization Value



Amortized intangible assets:
                       
Customer lists
  $ 30,568     $ (17,765 )   $ 12,803  
Patents
    13,200       (10,698 )     2,502  
Trademarks
    480       (155 )     325  
     
     
     
 
      44,248       (28,618 )     15,630  
Unamortized intangible assets:
                       
Pension intangible assets
    3,127             3,127  
     
     
     
 
Total intangible assets
  $ 47,375     $ (28,618 )   $ 18,757  
     
     
     
 

      A summary of intangible assets as December 31, 2003 is presented below:

                         
Gross Net
Carrying Accumulated Carrying
Value Amortization Value



Amortized intangible assets:
                       
Customer lists
  $ 29,607     $ (17,062 )   $ 12,545  
Patents
    13,200       (10,385 )     2,815  
Trademarks
    480       (149 )     331  
     
     
     
 
      43,287       (27,596 )     15,691  
Unamortized intangible assets:
                       
Pension intangible assets
    3,127             3,127  
     
     
     
 
Total intangible assets
  $ 46,414     $ (27,596 )   $ 18,818  
     
     
     
 

      Intangible asset amortization expense for the three months ended June 30, 2004 and June 30, 2003 was $546 and $475, respectively. Intangible asset amortization expense for the six months ended June 30, 2004 and June 30, 2003 was $1,022 and $950 respectively.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Estimated remaining amortization expense for years ending December 31 is:

         
2004
  $ 2,214  
2005
    2,214  
2006
    1,959  
2007
    1,959  
2008
    1,646  

      There were no additions to goodwill and no impairment losses during the first six months of 2004. The changes in the carrying amount of goodwill for the year ended December 31, 2003 are as follows:

         
January 1, 2003
  $ 297,704  
Acquisition of minority interest in MoneyGram International Limited
    97,822  
     
 
December 31, 2003
  $ 395,526  
     
 
 
9. Debt

      In connection with the spin-off, we entered into bank credit facilities providing availability of up to $350 million, in the form of a $250 million 4 year revolving credit facility, and a $100 million term loan. On June 30, 2004 we borrowed $150 million (consisting of the $100 million term loan and $50 million under the revolving credit facility) that we paid to Viad. The interest rate on both the term loan and the credit facility on June 30, 2004 was initially 4.0% and became an indexed rate of LIBOR plus 60 basis points shortly thereafter, subject to adjustment in the event of a change in our debt rating. The term loan is due in two equal installments on the third and fourth anniversary of the loan. Any advances drawn on the revolving credit facility must be repaid by June 30, 2008. The loans are unsecured obligations of MoneyGram, and are guaranteed on an unsecured basis by MoneyGram’s material domestic subsidiaries. The proceeds from any future advances may be used for general corporate expenses and to support letters of credit.

      Borrowings under the facilities are subject to various covenants, including interest coverage ratio, leverage ratio and consolidated total indebtedness ratio. The interest coverage ratio of earnings before interest and taxes to interest expense must not be less than 3.5 to 1.0. The leverage ratio of total debt to total capitalization must be less than 0.5 to 1.0. The consolidated total indebtedness ratio of total debt to earnings before interest, taxes, depreciation and amortization must be less than 3.0 to 1.0. At June 30, 2004, we were in compliance with these covenants. There are other restrictions that are customary for facilities of this type including limits on dividends, indebtedness, stock repurchases, asset sales, merger, acquisitions and liens.

      In connection with the spin-off, Viad repurchased substantially all of its outstanding medium-term notes and subordinated debentures in the amount of $52.6 million. The amounts not paid off were retained by New Viad. Viad also repaid all of its outstanding commercial paper in the amount of $188 million and retired its industrial revenue bonds of $9 million.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      On December 31, 2003, debt included the historical debt of Viad excluding amounts directly allocable to New Viad as follows:

                 
Weighted Avg
Amount Interest Rate


Commercial paper
  $ 168,000       1.1 %
Senior notes
    35,000       6.3 %
Other obligations
    9,848       3.6 %
Subordinated debt
    18,503       5.0 %
     
         
      231,351          
Portion allocated to Viad Corp
    (30,000 )     10.5 %
     
         
    $ 201,351          
     
         
 
10. $4.75 Preferred Stock Subject to Mandatory Redemption

      Preferred stock consists of Viad’s preferred stock, which Viad redeemed in connection with the spin-off. At December 31, 2003, Viad had 442,352 authorized shares of $4.75 preferred stock which was subject to mandatory redemption provisions with a stated value of $100 per share, of which 328,352 shares where issued. Of the total shares issued, 234,983 shares were outstanding at a net carrying value of $6.7 million, and 93,369 where held by Viad. On July 1, 2003, Viad adopted SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, and accordingly, the $4.75 preferred stock was classified as a liability under the caption “$4.75 Preferred stock subject to mandatory redemption” in the Consolidated Balance Sheets. In addition, dividends of $572,000 declared subsequent to the adoption of SFAS No. 150 have been included as interest expense in the Consolidated Statements of Income. In periods prior to July 1, 2003, dividends on the $4.75 preferred stock were reported as an adjustment to income to compute income available to common shareholders.

 
11. Income Taxes

      Income taxes were determined on a separate return basis as if MoneyGram had not been eligible to be included in the consolidated income tax return of Viad and its affiliates. As part of the Distribution, we entered into a Tax Sharing Agreement with Viad which provides for, among other things, the allocation between MoneyGram and New Viad of federal, state, local and foreign tax liabilities and tax liabilities resulting from the audit or other adjustment to previously filed tax returns.

      The Tax Sharing Agreement provides that through the Distribution Date, the results of MoneyGram and its subsidiaries’ operations are included in Viad’s consolidated U.S. federal income tax returns. In general, the Tax Sharing Agreement provides that MoneyGram will be liable for all federal, state, local, and foreign tax liabilities, including such liabilities resulting from the audit of or other adjustment to previously filed tax returns, that are attributable to the business of MoneyGram for periods through the Distribution Date, and that Viad will be responsible for all other of these taxes.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      Income tax expense related to continuing operations consists of:

                                   
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




Current:
                               
 
Federal
  $ 2,974     $ 11,250     $ 7,816     $ 11,904  
 
State
    744       1,451       1,155       2,063  
 
Foreign
    4,253       (426 )     7,746       76  
     
     
     
     
 
      7,971       12,275       16,717       14,043  
Deferred
    (4,384 )     (8,982 )     (8,297 )     (11,965 )
     
     
     
     
 
    $ 3,587     $ 3,293     $ 8,420     $ 2,078  
     
     
     
     
 

      A reconciliation of the expected federal income tax at statutory rates to the actual taxes provided on income from continuing operations is:

                                     
Six Months Ended June 30

2004  % 2003  %




Income tax at statutory federal income tax rate
  $ 9,472       35.0 %   $ 12,224       35.0 %
Tax effect of:
                               
 
State income tax, net of federal income tax effect
    1,278       4.7 %     1,072       3.1 %
Nondeductible debt redemption costs
    6,690       24.7 %           0.0 %
   
Other
    (83 )     (0.3 )%     185       0.5 %
     
     
     
     
 
      17,357       64.1 %     13,481       38.6 %
Tax-exempt income
    (8,937 )     (33.0 )%     (11,403 )     (32.6 )%
     
     
     
     
 
Income tax expense
  $ 8,420       31.1 %   $ 2,078       5.9 %
     
     
     
     
 

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      Deferred income taxes reflect temporary differences between amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws at enacted tax rates expected to be in effect when such differences reverse. Temporary differences, which give rise to deferred tax assets (liabilities), are:

                   
June 30 December 31
2004 2003


Depreciation and amortization
  $ (26,546 )   $ (24,670 )
State income taxes
    (1,327 )     (1,172 )
Bad debt and other reserves
    2,976       1,997  
Pension and other employee benefits
    40,781       41,537  
Prepaid expenses and other assets
    (11,978 )     (12,364 )
Miscellaneous reserves and accruals
    6,607       6,646  
Unrealized gain on securities classified as available-for-sale
    (38,186 )     (67,605 )
Unrealized loss on derivative financial investments
    23,665       68,072  
Basis difference in revalued investments
    27,203       24,889  
Alternative Minimum Tax credits
    35,464       34,464  
Other deferred assets
    7,423       4,604  
Other deferred liabilities
    (6,569 )     (5,765 )
     
     
 
 
Net deferred tax assets
  $ 59,513     $ 70,633  
     
     
 

      Components of net deferred taxes on the Consolidated Balance Sheets include:

                 
June 30 December 31
2004 2003


Deferred tax assets
  $ 144,119     $ 182,209  
Deferred tax liabilities
    (84,606 )     (111,576 )
     
     
 
    $ 59,513     $ 70,633  
     
     
 

      We have not established a valuation reserve for the deferred tax assets since we believe it is more likely than not that the deferred tax assets will be realized. Net deferred taxes are included in the Consolidated Balance Sheets in “Other assets.”

 
12. Stockholders’ Equity

      MoneyGram’s Certificate of Incorporation provides for the issuance of up to 250,000,000 shares of common stock with a par value of $.01 and 7,000,000 shares of preferred stock with a par value of $.01. On the Distribution Date, MoneyGram was recapitalized such that the number of shares of MoneyGram common stock outstanding was equal to the number of shares of Viad common stock outstanding at the close of business on the record date. At June 30, 2004, no preferred stock was issued and outstanding. Stockholder’s equity at December 31, 2003 consisted of 200,000,000 common shares authorized, 99,739,925 shares issued with a $1.50 par value.

      The holders of MoneyGram common stock are entitled to one vote per share on all matters to be voted upon by its stockholders. The holders of common stock have no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions applicable to the common stock. The determination to pay dividends on common stock will be at the discretion of the Board of Directors and will depend on our financial condition, results of operations, cash requirements, prospects and such other factors as the Board of Directors may deem relevant.

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      The components of Accumulated other comprehensive loss include:

                 
June 30 December 31
2004 2003


Unrealized gain on securities classified as available-for-sale
  $ 59,728     $ 105,263  
Unrealized loss on derivative financial instruments
    (37,015 )     (106,472 )
Cumulative foreign currency translation adjustments
    3,956       4,537  
Minimum pension liability adjustment
    (38,536 )     (38,536 )
     
     
 
    $ (11,867 )   $ (35,208 )
     
     
 
 
13. Earnings Per Share

      Basic earnings per share are calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period. Since our common stock was not issued until June 30, 2004, the weighted average number of common shares outstanding during each period presented equals Viad’s historical weighted average number of common shares outstanding for applicable periods.

      The following table presents the calculation of basic and diluted net (loss) income per share (in thousands, except per share amounts):

                                 
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




(Loss) income from continuing operations
  $ (570 )   $ 20,457     $ 18,644     $ 32,847  
Preferred stock dividend
          (286 )           (572 )
     
     
     
     
 
Income available to common stockholders
  $ (570 )   $ 20,171     $ 18,644     $ 32,275  
     
     
     
     
 
Average outstanding common shares
    86,929       86,224       86,819       86,116  
     
     
     
     
 
Additional dilutive shares related to stock-base compensation
          284       487       302  
     
     
     
     
 
Average outstanding and potentially dilutive common shares
    86,929       86,508       87,306       86,418  
     
     
     
     
 
Diluted (loss) income per share from continuing operations
  $ (0.01 )   $ 0.24     $ 0.21     $ 0.38  
     
     
     
     
 
Basic (loss) income per share from continuing operations
  $ (0.01 )   $ 0.24     $ 0.21     $ 0.38  
     
     
     
     
 
Dividends
  $ 0.09     $ 0.09     $ 0.18     $ 0.18  
     
     
     
     
 

      Options to purchase 6,052,164 and 5,630,459 shares of common stock were outstanding at June 30, 2004 and December 31, 2003, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive.

 
14. Pensions and Other Benefits

      Pension Benefits — Prior to the Distribution, MoneyGram was a participating employer in the Viad Companies Retirement Income Plan (the “Plan”) of which the plan administrator was Viad. At the time of the Distribution, we assumed sponsorship of the Plan, which is a noncontributory defined benefit pension plan covering all employees who meet certain age and length-of-service requirements. Viad retained the pension liability for a portion of the employees in its Exhibitgroup/ Giltspur subsidiary, and one sold business, which approximates 8% of consolidated Viad’s benefit obligation at December 31, 2003.

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Effective December 31, 2003, benefits under the Plan ceased accruing with no change in benefits earned through this date, and a curtailment gain of $3.8 million was recorded in “Compensation and benefits” in the Consolidated Statement of Income. It is our policy to fund the minimum required contribution for the year. MoneyGram’s benefit obligation related to pension plans at December 31, 2003 was $137,478. We have contributed $0.3 million to our funded pension plan during the first six months of 2004, and presently anticipate contributing $1.8 million more during the remainder of 2004.

      Supplemental Executive Retirement Plan — In connection with the spin-off, we assumed responsibility for all but a portion of the Viad Supplemental Executive Retirement Plan (“SERP”), while Viad retained the benefit obligation related to two of its subsidiaries, which represents 13% of consolidated Viad’s benefit obligation at December 31, 2003. We created the MoneyGram International, Inc. SERP (“MoneyGram SERP”), a nonqualified defined benefit pension plan which provides postretirement income to eligible employees selected by the Board of Directors such that the SERP will be eligible for exemption under Parts Two, Three, and Four of Title I of the Employee Retirement Income Security Act of 1974, as amended. Our benefit obligation related to the MoneyGram SERP at December 31, 2003 was $48,303. We have paid $1.3 million of benefits during the first six months of 2004, and presently anticipate paying an additional $1.3 million during the remainder of 2004.

      Net periodic pension cost for defined benefit includes the following components:

                                 
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




Service cost
  $ 465     $ 781     $ 930     $ 1,562  
Interest cost
    2,800       2,823       5,600       5,646  
Expected return on plan assets
    (2,176 )     (2,385 )     (4,352 )     (4,770 )
Amortization of prior service cost
    192       129       384       258  
Recognized net actuarial loss
    963       530       1,925       1,014  
     
     
     
     
 
Net periodic pension cost
  $ 2,244     $ 1,878     $ 4,487     $ 3,710  
     
     
     
     
 

      Postretirement Benefits Other Than Pensions — We have unfunded defined benefit postretirement plans that provide medical and life insurance for eligible employees, retirees, and dependents. The related postretirement benefit liabilities are recognized over the period that services are provided by the employees. Upon the Distribution, we assumed the benefit obligation for current and former employees assigned to MoneyGram. Viad retained the benefit obligation for postretirement benefits other than pensions for all Viad and non-MoneyGram employees with the exception of one executive. Our benefit obligation at December 31, 2003 related to the postretirement benefits other than pensions was $10,750. We anticipate paying $0.1 million to our other postretirement benefits plan during 2004.

      Net periodic postretirement benefit cost includes the following components

                                 
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




Service cost
  $ 149     $ 125     $ 298     $ 249  
Interest cost
    160       149       321       298  
Expected return on plan assets
                       
Amortization of prior service cost
    (72 )     (72 )     (144 )     (144 )
Recognized net actuarial loss
    15       7       30       16  
     
     
     
     
 
Net periodic postretirement benefit cost
  $ 252     $ 209     $ 505     $ 419  
     
     
     
     
 

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MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      In May 2004, the FASB issued FASB Staff Position (“FSP”) FAS 106-2 on the accounting for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”), which was enacted into law on December 8, 2003. The FASB had previously issued FSP FAS 106-1 which permitted the one-time election to defer recognition of the effects of the Act until further authoritative guidance was issued. With FSP FAS 106-2, which superceded FSP FAS 106-1, the election to defer recognition expired and specific guidance was provided in accounting for the subsidy, whether a previous election had been made to either defer or not defer the effects of the Act. The FSP is effective for the first reporting period beginning after June 15, 2004, which for the Company will be the third quarter of 2004. The impact of the future financial position or results of operations cannot presently be determined.

      Employee Savings Plan — We have an employee savings plan that qualifies under Section 401(k) of the Internal Revenue Code. Contributions to, and costs of, the 401(k) defined contribution plan totaled $972 and $1,279 in the first six months of 2004, and all of 2003. At the time of the Distribution, MoneyGram’s new savings plan assumed all liabilities under the Viad Employees Stock Ownership Plan (the “Viad ESOP”) for benefits of the current and former employees assigned to MoneyGram, and the related trust received a transfer of the corresponding account balances. MoneyGram does not have an Employee Stock Ownership Plan.

      Employee Equity Trust — Viad sold treasury stock in 1992 to its employee equity trust to fund certain existing employee compensation and benefit plans. In connection with the spin-off, Viad transferred 1,632,964 shares of MoneyGram stock to a MoneyGram International, Inc. employee equity trust (the “Trust”) to be used by MoneyGram to fund employee compensation and benefit plans. The fair market value of the shares held by this Trust, representing unearned employee benefits, is recorded as a deduction from common stock and other equity and is reduced as employee benefits are funded. For financial reporting purposes, the Trust is consolidated.

 
15. Stock-Based Compensation

      We have adopted a stock compensation plan, the 2004 MoneyGram Omnibus Incentive Plan, to provide for the following types of awards to officers, directors, and certain key employees: (a) incentive and nonqualified stock options; (b) stock appreciation rights; (c) restricted stock; and (d) performance based awards. Additionally, non-employee directors will receive an initial grant of nonqualified options when they become directors. Non-employee directors receive an additional grant of nonqualified options each year of their term.

      As of the Distribution Date, each Viad option that immediately prior to the Distribution Date was outstanding and not exercised was adjusted to consist of two options: (1) an option to purchase shares of Viad common stock and (2) an option to purchase shares of MoneyGram common stock. The exercise price of the Viad stock option was adjusted by multiplying the exercise price of the old stock option by a fraction, the numerator of which was the closing price of a share of Viad common stock on the first trading day after the Distribution Date (divided by four to reflect the post-spin Viad reverse stock split) and the denominator of which was that price plus the closing price for a share of MoneyGram common stock on the first trading day after the Distribution Date. The exercise price of each MoneyGram stock option equals the exercise price of each old stock option times a fraction, the numerator of which is the closing price of a share of MoneyGram common stock on the first trading day after the Distribution Date and the denominator of which is that price plus the closing price of a share of Viad common stock on the first trading day after the Distribution Date (divided by four to reflect the post-spin Viad reverse stock split). These MoneyGram options are considered to have been issued under the MoneyGram 2004 Omnibus Incentive Plan.

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MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      MoneyGram will take all tax deductions relating to the exercise of stock options and the vesting of restricted stock held by employees and former employees of MoneyGram, and Viad will take the deductions arising from options and restricted stock held by its employees and former employees.

      Stock options granted in 2004 are exercisable one fifth after one year, and one fifth each subsequent year until fully vested after the fifth anniversary of the grant date, and have a term of 7 years. Stock options granted in 2003 are exercisable one third after one year, two thirds after two years and the balance after three years from the date of grant, and have a term of 10 years. Stock options granted in calendar years 2002 and prior are exercisable 50 percent after one year with the balance exercisable after two years from the date of grant. All stock options granted since 1998 contain certain forfeiture and noncompete provisions.

      Restricted stock and performance-based restricted stock awards of 254,625 shares were granted during the first six months of 2004 at a weighted average price (based on fair market value at the date of grant) of $17.30, and vest three years from the date of grant. On the Distribution Date, our Chairman of the Board was granted a restricted stock award under our 2004 Omnibus Incentive Plan of 50,000 shares of common stock, of which 25,000 shares vested immediately and 25,000 shares will vest on June 30, 2006. Restricted stock and performance-based restricted stock awards of 415,700 shares were granted in 2003 at a weighted average price (based on fair market value at the date of grant) of $15.62. The restricted stock awards vest three years from the date of grant. Performance-based restricted stock awards granted in 2003 vested one third after the first year and will vest two thirds after two years and the balance after three years from the date of grant because incentive performance targets established in the year of grant were achieved. Future vesting is subject generally to continued employment with MoneyGram or Viad. Full ownership of shares could vest on an accelerated basis if performance targets established are met at certain achievement levels. Holders of restricted stock and performance-based restricted stock have the right to receive dividends and vote the shares, but may not sell, assign, transfer, pledge or otherwise encumber the stock.

      Information with respect to MoneyGram stock options for the periods ended is as follows:

                           
Weighted
Total Average Options
Shares Exercise Price Exercisable



Options outstanding at December 31, 2002
    5,460,465       17.36       3,711,237  
 
Granted
    937,150       15.66          
 
Exercised
    (297,865 )     10.54          
 
Canceled
    (469,291 )     18.74          
     
                 
Options outstanding at December 31, 2003
    5,630,459       17.31       4,322,053  
 
Granted
    774,700       17.30          
 
Exercised
    (239,822 )     19.32          
 
Canceled
    (113,173 )     10.60          
     
                 
Options outstanding at June 30, 2004
    6,052,164       17.78       4,732,200  
     
                 

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MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table summarizes information concerning stock options outstanding and exercisable at June 30, 2004:

                                         
Options Outstanding Options Exercisable


Weighted Average Weighted Weighted
Remaining Average Average
Range of Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price






$9.30 to $15.57
    883,285       2.4 years     $ 11.91       848,286     $ 11.87  
$15.61 to $15.69
    1,292,819       8.2 years       15.64       737,678       15.65  
$16.05 to $19.07
    1,020,313       4.9 years       18.66       1,001,689       18.69  
$19.19 to $19.32
    1,620,547       6.5 years       19.25       911,847       19.19  
$19.37 to $22.46
    1,235,200       6.6 years       21.37       1,232,700       21.38  
     
                     
         
$9.30 to $22.46
    6,052,164       6.0 years       17.78       4,732,200       17.82  
     
                     
         
 
16. Commitments and Contingencies

      We have various noncancelable operating leases for buildings and equipment. Minimum future rental payments for all noncancelable operating leases with an initial term of more than one year are:

         
2004
  $ 5,284  
2005
    5,383  
2006
    5,136  
2007
    4,963  
2008
    5,025  
Later
    25,859  

      We are party to litigation matters and claims that are in the normal course of our operations. While the results of litigation and claims cannot be predicted with certainty, management believes that the final outcome of such matters will not have a material adverse effect on the Company’s consolidated financial statements.

      At June 30, 2004, we have various reverse repurchase agreements and overdraft facilities totaling $2.1 billion to assist in the management of investments and the clearing of payment service obligations. Included in this amount are agreements with one of the clearing banks totaling $1.0 billion. At June 30, 2004, borrowed balances included a reverse repurchase agreement for $173 million recorded in “Accounts payable and other liabilities” on the Consolidated Balance Sheets. At December 31, 2003, $2.0 million was outstanding under an overdraft facility.

      We have agreements with certain other co-investors to provide funds related to investments in limited partnership interests. As of June 30, 2004, the total amount of unfunded commitments related to these agreements was $13.5 million.

 
17. Segment Information

      Our business is conducted through two reportable segments: Global Funds Transfer and Payment Systems. The Global Funds Transfer segment primarily provides money transfer services through a network of global retail agents and domestic money orders. In addition, Global Funds Transfer provides a full line of bill payment services. The Payment Systems segment primarily provides official check services for financial institutions in the United States, and processes controlled disbursements. In addition, Payment Systems sells money orders through financial institutions in the United States. No single customer in either segment accounted for more than 10% of revenue during the first six months of 2004.

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MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The business segments are determined based upon factors such as the type of customers, the nature of products and services provided and the distribution channels used to provide those services. Segment pre-tax operating income and segment operating margin are used to evaluate performance and allocate resources. “Other corporate activities” includes corporate overhead and interest expense that is not allocated to the segments.

      We manage our investment portfolio on a consolidated level and the specific investment securities are not identifiable to a particular segment. However, we allocate revenue to our segments based upon allocated average investable balances and an allocated yield. Average investable balances are allocated to our segments based on the average balances generated by that segment’s sale of payment instruments. The investment yield is generally allocated based on the total average investment yield. Gains and losses are allocated based upon the allocation of average investable balances. Our derivatives portfolio is also managed on a consolidated level and the derivative instruments are not specifically identifiable to a particular segment. The total costs associated with our swap portfolio are allocated to each segment based upon the percentage of that segment’s average investable balances to the total average investable balances.

      The following table reconciles segment operating income to the income from continuing operations before income taxes as reported in the financial statements.

                                     
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




Revenue:
                               
 
Global Funds Transfer
  $ 128,165     $ 111,500     $ 249,133     $ 216,725  
 
Payment Systems
    71,655       76,221       142,008       142,622  
     
     
     
     
 
    $ 199,820     $ 187,721     $ 391,141     $ 359,347  
     
     
     
     
 
Operating income:
                               
 
Global Funds Transfer
  $ 24,777     $ 24,169     $ 45,755     $ 45,859  
 
Payment Systems
    5,848       6,289       15,038       3,678  
     
     
     
     
 
      30,625       30,458       60,793       49,537  
   
Debt tender and redemption costs
    20,661               20,661          
   
Interest expense
    1,905       2,765       3,127       5,995  
   
Other unallocated expenses
    5,042       3,943       9,941       8,617  
     
     
     
     
 
 
Income from continuing operations before income taxes
  $ 3,017     $ 23,750     $ 27,064     $ 34,925  
     
     
     
     
 
Depreciation and amortization:
                               
 
Global Funds Transfer
  $ 6,386     $ 5,921     $ 12,728     $ 11,770  
 
Payment Systems
    1,010       705       1,891       1,379  
     
     
     
     
 
    $ 7,396     $ 6,626     $ 14,619     $ 13,149  
     
     
     
     
 
Capital expenditures:
                               
 
Global Funds Transfer
  $ 6,988     $ 5,985     $ 12,716     $ 10,605  
 
Payment Systems
    57       21       352       406  
     
     
     
     
 
    $ 7,045     $ 6,006     $ 13,068     $ 11,011  
     
     
     
     
 

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MONEYGRAM INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

      The following table reconciles segment assets to total assets reported in the financial statements.

                     
June 30 December 31
2004 2003


Assets:
               
 
Global Funds Transfer
  $ 2,381,716     $ 2,700,500  
 
Payment Systems
    6,588,771       6,112,957  
 
Corporate
          408,697  
     
     
 
   
Total assets
  $ 8,970,487     $ 9,222,154  
     
     
 

      Geographic areas. Our foreign operations are located principally in Europe. We define foreign revenues as revenues generated from money transfer transactions originating in a country other than the United States. Long lived assets are principally located in the United States.

      The table below presents the financial information by major geographic area:

                                     
Three Months Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




Revenues:
                               
 
United States
  $ 162,881     $ 157,307     $ 320,455     $ 302,489  
 
Foreign
    36,939       30,414       70,686       56,858  
     
     
     
     
 
   
Total Revenue
  $ 199,820     $ 187,721     $ 391,141     $ 359,347  
     
     
     
     
 

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

      The following discussion should be read in conjunction with MoneyGram International, Inc.’s consolidated financial statements and related notes. Reference to “MoneyGram”, the “Company”, “we”, “us” and “our” are to MoneyGram International Inc., and its subsidiaries and consolidated entities. This discussion contains forward-looking statements that involve risks and uncertainties. MoneyGram’s actual results could differ materially from those anticipated due to various factors discussed under “Forward-Looking Statements” and elsewhere in this Quarterly Report.

Overview

 
Our Separation from Viad Corp:

      On July 24, 2003, Viad Corp (“Viad”) announced a plan to separate its payment services segment, operated by Travelers Express Company, Inc. (“Travelers”), from its other businesses into a new company and to effect a tax-free distribution of its shares in that company to Viad’s shareholders. On December 18, 2003, MoneyGram was incorporated in Delaware as a subsidiary of Viad for the purpose of effecting the proposed distribution. On June 30, 2004, Travelers was merged with a wholly owned subsidiary of MoneyGram and then Viad distributed 88,556,077 shares of MoneyGram common stock to Viad shareholders in a tax-free distribution. Shareholders of Viad received one share of MoneyGram common stock for every one share of Viad common stock owned.

      The businesses of MoneyGram consist solely of the payment services business. The continuing business of Viad, which is referred herein to as “New Viad,” consists of the businesses of the convention show services, exhibit design and construction, and travel and recreation services operations, including Viad’s centralized corporate functions located in Phoenix, Arizona. Notwithstanding the legal form of the spin-off, due to the relative significance of MoneyGram to Viad, MoneyGram is considered the divesting entity and treated as the accounting successor to Viad for financial reporting purposes in accordance with the EITF No. 02-11, Accounting for Reverse Spinoffs. The spin-off of New Viad has been accounted for pursuant to Accounting Principles Board (“APB”) Opinion No. 29, Accounting for Non-Monetary Transactions. MoneyGram charged directly to equity as a dividend $426.6 million, which is the historical cost carrying amount of the net assets of New Viad.

      As part of the separation from Viad, we entered into a variety of agreements with Viad to govern each of our responsibilities related to the distribution. These agreements include a Separation and Distribution Agreement, a Tax Sharing Agreement, an Employee Benefits Agreement, and an Interim Services Agreement.

      In connection with the spin-off, we entered into bank credit facilities providing availability of up to $350 million, in the form of a $250 million revolving credit facility and $100 million term loan. On June 30, 2004 we borrowed $150 million under these facilities which was paid to Viad and used by Viad to repay $188 million of its commercial paper. Viad also retired a substantial majority of its outstanding subordinated debentures and medium term notes for an aggregate amount of $52.6 million (including a tender premium), retired industrial revenue bonds of $9.0 million, and redeemed outstanding preferred stock at an aggregate call price of approximately $24.0 million. The remaining $200 million of the MoneyGram credit facilities is available for general corporate purposes.

 
Our Business:

      MoneyGram operates in two reportable business segments (previously reported as the payment services segment by Viad) as follows:

        Global Funds Transfer — this segment provides global money transfer services, money orders and bill payment services to consumers through a network of agents. Fee revenues are driven by transaction volume and contract pricing through a network of agents and customers. In addition, investment and related income is generated by investing funds received from the sale of money orders until the instruments are settled.

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Table of Contents

        Payment Systems — this segment provides financial institutions with payment processing services, primarily of official check outsourcing services, and money orders for sale to their customers, and processes controlled disbursements. Investment and related income is generated by investing funds received from the sale of payment instruments until such instruments are settled. In addition, revenue is derived from fees paid by its customers.
 
Basis of Presentation:

      Our consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the historical results of operations of New Viad in discontinued operations in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. There are certain amounts related to other investment income, debt and costs associated with Viad’s centralized corporate functions that are related to Viad but in accordance with GAAP, are not allowed to be reflected in discontinued operations. The consolidated financial statements may not necessarily be indicative of our results of operations, financial position and cash flows in the future or what our results of operations, financial position and cash flows would have been had we operated as a stand-alone company during the periods presented.

 
Highlights:

      The following are financial highlights of the second quarter 2004 and other recent trends:

  •  Total revenue increased 6 percent to $199.8 million
 
  •  Fee and other revenue increased 19 percent to 122.1 million
 
  •  Global money transfer transaction volume increased 35 percent and revenue increased over 25 percent
 
  •  Loss per share from continuing operations was $0.01, including non-recurring debt tender and redemption costs related to Viad’s debt which amounts to $0.22 per share

      In 2002 and 2003, we faced market challenges and difficult economic conditions. While our businesses experienced increased transaction volume and higher investment balances, our operating income growth was slowed due to historically low interest rates and unprecedented mortgage refinancing activity. With higher average float balances from greater numbers of official checks issued for mortgage refinancings, and accelerated prepayments from mortgage-backed securities in our portfolio, funds were invested or reinvested at the historically low interest rates. Furthermore, we recorded significant other-than-temporary impairment losses and adjustments on certain investments in 2003.

      In March 2004, we completed the sale of Game Financial Corporation for approximately $43 million in cash. Game Financial Corporation provides cash access services to casinos and gaming establishments throughout the United States. As a result of the sale, we recorded an after-tax gain of approximately $11 million in the first quarter of 2004. In addition, in June 2004, we recorded an after-tax gain of $1.1 million from the settlement of a lawsuit brought by Game Financial Corporation. These amounts are reflected in the consolidated income statements in “(Loss) income and gain from discontinued operations, net of tax.”

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Results of Operations

 
Financial Summary

      The following tables provide the results of our operations and the results of our operations as a percentage of revenue for the periods indicated:

 
Table One — Quarter Results of Operations
                                             
As a
Quarter Ended Percentage of
June 30 Revenue

2004 vs
2004 2003 2003 2004 2003





(Dollars in thousands)
REVENUE:
                                       
 
Fee and other revenue
  $ 122,084     $ 102,828       19 %     61 %     55 %
 
Investment revenue
    77,580       82,017       (5 )%     39 %     44 %
 
Securities gains and losses, net
    156       2,876       (95 )%     0 %     1 %
     
     
     
     
     
 
   
Total revenue
    199,820       187,721       6 %     100 %     100 %
 
Fee commissions expense
    43,925       34,987       26 %     22 %     19 %
 
Investment commissions expense
    53,706       60,802       (12 )%     27 %     32 %
     
     
     
     
     
 
   
Total commissions expense
    97,631       95,789       2 %     49 %     51 %
     
     
     
     
     
 
   
Net revenue
    102,189       91,932       11 %     51 %     49 %
 
EXPENSES:
                                       
 
Compensation and benefits
    33,644       26,533       27 %     17 %     14 %
 
Transaction and operations support
    27,447       25,296       9 %     14 %     13 %
 
Depreciation and amortization
    7,396       6,626       12 %     4 %     4 %
 
Occupancy, equipment and supplies
    8,119       6,962       17 %     4 %     4 %
 
Interest expense
    1,905       2,765       (31 )%     1 %     1 %
 
Debt tender and redemption costs
    20,661             NM       10 %     0 %
     
     
     
     
     
 
   
Total expenses
    99,172       68,182       45 %     50 %     36 %
     
     
     
     
     
 
Income from continuing operations before income taxes
    3,017       23,750       (87 )%     1 %     13 %
Income tax expense
    3,587       3,293       9 %     1 %     2 %
     
     
     
     
     
 
(Loss) income from continuing operations
  $ (570 )   $ 20,457       (103 )%     0 %     11 %
     
     
     
     
     
 


NM — Not meaningful

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Table Two — Year-to-Date Results of Operations
                                             
As a
Six Months Ended Percentage of
June 30 Revenue

2004 vs
2004 2003 2003 2004 2003





(Dollars in thousands)
REVENUE:
                                       
 
Fee and other revenue
  $ 235,706     $ 199,891       18 %     60 %     56 %
 
Investment revenue
    154,234       168,655       (9 )%     40 %     47 %
 
Securities gains and losses, net
    1,201       (9,199 )     (113 )%     0 %     (3 )%
     
     
     
     
     
 
   
Total revenue
    391,141       359,347       9 %     100 %     100 %
 
Fee commissions expense
    84,428       66,934       26 %     22 %     19 %
 
Investment commissions expense
    103,451       119,728       (14 )%     26 %     33 %
     
     
     
     
     
 
   
Total commissions expense
    187,879       186,662       1 %     48 %     52 %
     
     
     
     
     
 
   
Net revenue
    203,262       172,685       18 %     52 %     48 %
EXPENSES:
                                       
 
Compensation and benefits
    66,389       54,599       22 %     17 %     15 %
 
Transaction and operations support
    55,687       50,682       10 %     14 %     14 %
 
Depreciation and amortization
    14,619       13,149       11 %     4 %     4 %
 
Occupancy, equipment and supplies
    15,715       13,335       18 %     4 %     4 %
 
Interest expense
    3,127       5,995       (48 )%     1 %     2 %
 
Debt tender and redemption costs
    20,661             NM       5 %     0 %
     
     
     
     
     
 
   
Total expenses
    176,198       137,760       28 %     45 %     38 %
     
     
     
     
     
 
Income from continuing operations before income taxes
    27,064       34,925       (23 )%     7 %     10 %
Income tax expense
    8,420       2,078       305 %     2 %     1 %
     
     
     
     
     
 
Income from continuing operations
  $ 18,644     $ 32,847       (43 )%     5 %     9 %
     
     
     
     
     
 


NM — Not meaningful
 
Revenue

      Net fee revenue — The following table provides a summary of our fee and other revenue, fee commissions expense and fee commissions expense as a percentage of our fee and other revenue for the periods indicated:

 
Table Three — Net Fee Revenue Analysis
                                                   
Quarter Ended Six Months Ended
June 30 June 30

2004 vs
2004 vs
2004 2003 2003 2004 2003 2003






(Dollars in thousands)
Fee and other revenue
  $ 122,084     $ 102,828     $ 19,256     $ 235,706     $ 199,891     $ 35,815  
Fee commissions expense
    43,925       34,987       8,938       84,428       66,934       17,494  
     
     
     
     
     
     
 
 
Net fee revenue
  $ 78,159     $ 67,841     $ 10,318     $ 151,278     $ 132,957     $ 18,321  
     
     
     
     
     
     
 
Commissions as a % of revenue
    36.0 %     34.0 %             35.8 %     33.5 %        

      Fee and other revenue includes fees on money transfer transactions, money orders and, to a lesser extent, official check transactions. It is a growing portion of our total revenue, increasing to 61 percent of total revenue for the second quarter of 2004 from 55 percent for the second quarter of 2003. Fee and other

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revenue in the second quarter 2004 was up 19 percent compared to the second quarter of 2003 and, for the first six months of 2004 was up 18 percent compared to the prior year. These increases are primarily driven by transaction growth in our money transfer and urgent bill payment products, with volume increasing 35 percent and 34 percent during the three and six-month periods ended June 30, 2004, compared to prior periods, respectively. Revenue growth rates are lower than transaction growth rates due to targeted pricing initiatives in the money transfer business as well as product mix (higher money transfer transaction growth with flat money order growth).

      Fee commissions consist primarily of fees paid to our third-party agents for the money transfer service. Fee commissions expense was up 26 percent for both the three and six-month periods ended June 30, 2004, compared to the prior year periods, primarily driven by higher transaction volume.

      Net fee revenue increased $10.3 million or 15 percent in the second quarter of 2004 and $18.3 million or 14 percent in the first six months in 2004, driven by the increase in money transfer and urgent bill payment transactions. Growth in net fee revenue was less than fee and other revenue growth and money transfer transaction growth primarily due to the targeted pricing initiatives as well as product mix.

      Net investment revenue — The following table provides a summary of the investment revenue and investment commissions expense associated with our investment portfolio for the periods indicated:

 
Table Four — Net Investment Revenue Analysis
                                                   
Quarter Ended Six Months Ended
June 30 June 30

2004 vs
2004 vs
2004 2003 2003 2004 2003 2003






(Dollars in thousands)
Components of net investment revenue:
                                               
 
Investment revenue
  $ 77,580     $ 82,017     $ (4,437 )   $ 154,234     $ 168,655     $ (14,421 )
 
Investment commissions expense(1)
    53,706       60,802       (7,096 )     103,451       119,728       (16,277 )
     
     
     
     
     
     
 
Net investment revenue
  $ 23,874     $ 21,215     $ 2,659     $ 50,783     $ 48,927     $ 1,856  
     
     
     
     
     
     
 
Average balances:
                                               
 
Cash equivalents and investments
  $ 6,888,115     $ 7,142,154     $ (254,039 )   $ 6,736,531     $ 6,940,122     $ (203,591 )
 
Payment service obligations(2)
    5,510,137       5,792,583       (282,446 )     5,334,893       5,568,136       (233,243 )
Average yields earned and rates paid(3):
                                               
 
Investment yield
    4.53 %     4.61 %     (0.08 )%     4.60 %     4.90 %     (0.30 )%
 
Investment commission rate
    3.92 %     4.21 %     (0.29 )%     3.90 %     4.34 %     (0.44 )%
Net investment margin
    1.39 %     1.19 %     0.20 %     1.52 %     1.42 %     0.10 %


(1)  Investment commissions expense reported includes payments made to financial institution customers, costs associated with swaps and the sale of receivables program.
 
(2)  Commissions are paid to financial institution customers based upon average outstanding balances generated by the sale of official checks only. The average balance in the table reflects only the payment service obligations for which commissions are paid and does not include the average balance of the sold receivables ($407 million and $433 million for the second quarter of 2004 and 2003, respectively, and $411 million and $437 million for the first six months of 2004 and 2003, respectively) as these are not recorded on the consolidated balance sheets.
 
(3)  Average yields/rates are calculated by dividing the applicable amount shown in the “components of net investment revenue” section by the applicable amount shown in the “Average balances” section

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divided by the number of days in the period presented and multiplied by the number of days in the year. The “Net investment margin” is calculated by dividing “Net investment revenue” by the “Cash equivalents and investments” average balance divided by the number of days in the period presented and multiplied by the number of days in the year.

      Investment revenue in the second quarter and first six months of 2004 declined by 5 percent and 9 percent, respectively, over the same periods in 2003 due to lower average investable balances in the portfolio as well as lower interest yields earned on the investment portfolio. The average investable balances in 2003 were driven by the unprecedented mortgage refinancing activity that occurred during late 2002 and into 2003 due to the dramatic decline in interest rates. Refinancing activities caused an increase in the sale of official checks and, therefore, an increase in our average investable balances. In 2004, the refinancing activity declined from 2003 causing average investable balances to decline. The refinancing activity in 2003 also caused a significant increase in the prepayments of mortgage-backed debt securities in our investment portfolio which we reinvested at lower interest rates. Consequently, the yield declined 8 basis points in the second quarter 2004 and 30 basis points year to date 2004 compared to the same periods in 2003.

      Investment commissions expense in the second quarter and first six months of 2004 declined by 12 percent and 14 percent from the same periods in 2003, primarily driven by lower interest rates. Commission expense paid to our financial institution customers, which is based on short-term interest rate indices, declined due to lower short-term interest rates. The average federal funds rate declined by 24 basis points in each of the comparable periods. Commission expense also declined as lower notional balances resulted in less swap expense.

      Net investment revenue increased by 13 percent and 4 percent for the second quarter and first six months of 2004 compared to the same periods in 2003. The net interest margin was 1.39 percent in the second quarter 2004, up 20 basis points over second quarter 2003. The net interest margin was 1.52 percent in the first six months of 2004, up 10 basis points compared to the prior year period. These increases were due to lower investment commissions. We anticipate the full year 2004 net interest margin will be in the range of 1.25 percent to 1.30 percent, declining compared to the first six months of 2004 primarily due to increased swap costs.

      Securities gains and losses, net — The following table provides a summary of the realized gains and losses and impairments during the periods presented:

 
Table Five — Summary of Gains, Losses and Impairments
                                                   
Quarter Ended Six Months Ended
June 30 June 30

2004 vs
2004 vs
2004 2003 2003 2004 2003 2003






(In thousands)
Gross realized gains
  $ 1,921     $ 3,270     $ (1,349 )   $ 8,976     $ 7,899     $ 1,077  
Gross realized losses
    (1,082 )     (394 )     (688 )     (1,164 )     (561 )     (603 )
Other-than-temporary impairments
    (683 )             (683 )     (6,611 )     (16,537 )     9,926  
     
     
     
     
     
     
 
 
Securities gains and losses, net
  $ 156     $ 2,876     $ (2,720 )   $ 1,201     $ (9,199 )   $ 10,400  
     
     
     
     
     
     
 

      Net securities gains in the second quarter declined as a result of increasing interest rates. Other-than-temporary impairments are related to certain asset-backed securities which experienced adverse changes in estimated future cash flows in the periods reported. The investment is impaired to the extent that the recorded value of the investments exceeds fair value.

     Expenses

      Expenses include various MoneyGram operating expenses, other than commissions. As MoneyGram is the accounting successor to Viad, these expenses also include corporate overhead that Viad did not allocate to its subsidiaries and, consequently, cannot be classified as discontinued operations. Included in expenses

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for the first six months of 2004 is approximately $10.0 million that will not be incurred by MoneyGram in the future. However, we are obligated under the Interim Services Agreement to pay approximately $1.6 million annually, beginning on July 1, 2004, for certain corporate services to be provided to MoneyGram by Viad. In addition, MoneyGram expects to incur public company and related expenses in the range of $5.0 to $6.0 million in the second half of 2004.

      Following is a discussion of the operating expenses for the second quarter and year-to-date periods as presented in Tables One and Two.

      Compensation and benefits — Compensation and benefits includes salaries and benefits, management incentive programs, severance costs and other employee related costs. Compensation and benefits in the second quarter of 2004 increased 27 percent over 2003. Because of the significant impact that declining interest rates had on the Company’s performance in 2003, incentive accruals were substantially lower in 2003. In addition, the total number of our employees was higher in 2004 because we increased personnel to drive money transfer growth. Employee benefit costs, including pension expense, increased $2.4 million or 50 percent in the second quarter 2004 compared to 2003.

      Compensation and benefits for the first six months 2004, increased 22 percent over the same period in 2003 for the same reasons the quarterly expenses increased. Employee benefit costs, including pension expense, increased $4.5 million or 43 percent in the first six months of 2004 compared to 2003.

      Transaction and operations support — Transaction and operations support expenses include marketing costs, professional fees and other outside services costs, telecommunications and forms expense related to our products. Transaction and operations support costs were up 9 percent in the second quarter 2004 over 2003 and up 10 percent for the year to date period over 2003, primarily driven by transaction growth.

      Depreciation and amortization — Depreciation and amortization includes depreciation on point of sale equipment, computer hardware and software (including capitalized software development costs), and office furniture, equipment and leasehold improvements. Depreciation and amortization expense in the second quarter and first six months of 2004 was up 12 percent and 11 percent over the same period in 2003, primarily due to the amortization of capitalized software developed to enhance the money transfer platform. These investments helped drive the growth in the money transfer product.

      Occupancy, equipment and supplies — Occupancy, equipment and supplies includes facilities rent and maintenance costs, software and equipment maintenance costs, freight and delivery costs, and supplies. Occupancy, equipment and supplies in the second quarter and year-to-date 2004 increased 17 percent and 18 percent over 2003 primarily due to increased facilities rent and increased cost of equipment and software.

      Interest expense — Interest expense in the second quarter of 2004 was down 31 percent over 2003 and declined 48 percent for the first six months of 2004 on lower average outstanding debt balances. Viad paid down debt in anticipation of the spin-off. Lower average interest rates on those balances also contributed to the decline in interest expense. MoneyGram borrowed $150 million on June 30, 2004, and expects interest expense to be approximately $2 million for the last half of 2004 based on current interest rates.

      Debt tender and redemption costs — Debt tender and redemption costs of $20.7 million relate to the redemption of Viad’s preferred shares and tender of its subordinated debt and medium term notes in connection with the spin-off.

      Income taxes — The effective tax rate of 119 percent and 31 percent in the second quarter and first six months of 2004, respectively, was affected by the costs related to the redemption of Viad’s redeemable preferred shares which is not tax deductible. Excluding the redemption costs, the effective tax rate would have been 18 percent in the second quarter and 19 percent for the first six months of 2004. The relatively low effective tax rate is primarily attributable to income from tax-exempt bonds in our investment portfolio. Tax-exempt bonds are declining as a percentage of the portfolio which has caused, and in the future will cause, the effective tax rate to increase. We anticipate the effective tax rate to be in the low to mid 20 percent range for the last six months of 2004.

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      Segment Performance

      We measure financial performance by our two business segments — Global Funds Transfer and Payment Systems. The business segments are determined based upon factors such as the type of customers, the nature of products and services provided and the distribution channels used to provide those services. Segment pre-tax operating income and segment operating margin are used to evaluate performance and allocate resources. “Other unallocated expenses” includes corporate overhead and interest expense that is not allocated to the segments.

      We manage our investment portfolio on a consolidated level and the specific investment securities are not identifiable to a particular segment. However, we allocate revenue to our segments based upon allocated average investable balances and an allocated yield. Average investable balances are allocated to our segments based upon the average balances generated by that segments sale of payment instruments. The investment yield is generally allocated based upon the total average investment yield. Gains and losses are allocated based upon the allocation of average investable balances. Our derivatives portfolio is also managed on a consolidated level and the derivative instruments are not specifically identifiable to a particular segment. The total costs associated with our swap portfolio are allocated to each segment based upon the percentage of that segment’s average investable balances to the total average investable balances. The following table reconciles segment operating income to income from continuing operations before income taxes as reported in the financial statements:

 
Table Six — Segment Information
                                   
Quarter Ended Six Months Ended
June 30 June 30


2004 2003 2004 2003




(In thousands)
Operating income:
                               
 
Global Funds Transfer
  $ 24,777     $ 24,169     $ 45,755     $ 45,859  
 
Payment Systems
    5,848       6,289       15,038       3,678  
     
     
     
     
 
      30,625       30,458       60,793       49,537  
Debt tender and redemption costs
    20,661             20,661        
Interest expense
    1,905       2,765       3,127       5,995  
Other unallocated expenses
    5,042       3,943       9,941       8,617  
     
     
     
     
 
Income from continuing operations before income taxes
  $ 3,017     $ 23,750     $ 27,064     $ 34,925  
     
     
     
     
 

      Included in other unallocated expenses for the first six months of 2004 is approximately $5.5 million that will not be incurred by MoneyGram in the future.

 
Global Funds Transfer Segment
 
Table Seven — Global Funds Transfer Segment
                                                   
Quarter Ended Six Months Ended
June 30 June 30

2004 vs
2004 vs
2004 2003 2003 2004 2003 2003






(Dollars in thousands)
Revenue
  $ 128,165     $ 111,500       15 %   $ 249,133     $ 216,725       15 %
Operating income
    24,777       24,169       3 %     45,755       45,859       0 %
 
Operating margin
    19.3 %     21.7 %             18.4 %     21.2 %        

      Global Funds Transfer revenue increased by 15 percent in both the second quarter and the year-to-date period 2004, primarily driven by the growth in the money transfer and urgent bill payment services as total transaction volume grew 35 percent and 34 percent in the same periods. Domestic originated

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transactions (including urgent bill payment) grew 38 percent and 37 percent in the second quarter and first six months of 2004, while international originated transactions grew by 25 percent and 24 percent for the same periods. This growth is a result of our targeted pricing initiatives to provide a strong consumer value proposition supported by targeted marketing efforts. In addition, the money transfer agent base expanded by 18 percent over the second quarter of 2003, primarily in the international markets.

      Retail money order volume increased slightly in the second quarter and the first six months of 2004. While we continue to focus on signing new locations, we believe the money order market as a whole will decline over time. Investment revenue in Global Funds Transfer declined slightly in the second quarter and first six months of 2004 compared to 2003, primarily due to lower interest rates earned on the portfolio as the average investable balances remained relatively flat.

      Commissions expense consists of fees paid to our third-party agents for the money transfer service and costs associated with swaps and the sale of receivables program. Commissions expense in the second quarter and first six months of 2004 was up 23 percent and 22 percent compared to the prior year periods, primarily driven by the growth in fee revenue which was up 15 percent. Commissions expense as a percentage of revenue increased over the prior year primarily due to business mix as we continue to see growth in the money transfer business compared to money orders. We anticipate this trend to continue with the continued growth of the money transfer business.

      Global Funds Transfer operating margins declined as a result of declining interest rates and the mix of business with money transfer activity increasing and the higher margin money order product declining as a percentage of the business.

 
Payment Systems Segment
 
Table Eight — Payment Systems Segment
                                                   
Quarter Ended Six Months Ended
June 30 June 30

2004 vs
2004 vs
2004 2003 2003 2004 2003 2003






(Dollars in thousands)
Revenue
  $ 71,655     $ 76,221       (6 )%   $ 142,008     $ 142,622       0 %
Operating income
    5,848       6,289       (7 )%     15,038       3,678       309 %
 
Operating margin
    8.2 %     8.3 %             10.6 %     2.6 %        
Taxable equivalent basis(1):
                                               
 
Revenue
  $ 76,878     $ 82,755       (7 )%   $ 152,447     $ 155,627       (2 )%
 
Operating income
    11,071       12,823       (14 )%     25,477       16,682       53 %
 
Operating margin
    14.4 %     15.5 %             16.7 %     10.7 %        


(1)  The taxable equivalent basis numbers are non-GAAP measures that are used by the Company’s management to evaluate the effect of tax-exempt securities on the payment systems segment. The tax-exempt investments in the investment portfolio have lower pre-tax yields but produce higher income on an after-tax basis than comparable taxable investments. An adjustment is made to present revenue and operating income resulting from amounts invested in tax-exempt securities on a taxable equivalent basis. The adjustment is calculated using a 35 percent tax rate and is $5.2 million and $6.5 million for the second quarter 2004 and 2003, respectively, and $10.4 and $13.0 for the first six months of 2004 and 2003, respectively. The presentation of taxable equivalent basis numbers is supplemental to results presented under GAAP and may not be comparable to similarly titled measures used by other companies. These non-GAAP measures should be used in addition to, but not a substitute for measures presented under GAAP.

      Payment Systems revenue includes investment revenue, fees charged to our official check financial institution customers and fees earned on our rebate processing business. Revenue in the second quarter 2004 declined by 6 percent compared to 2003, primarily due to lower average balances in the investment

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portfolio. Revenue was flat in the first six months of 2004 compared to the prior year period as investment revenue declined 10 percent, offset by an increase in net securities gains and in fee revenue. The decline in investment revenue is due to a decline in average investable balances as well as a decline in yield, both of which were affected by the mortgage refinancing activity and declining interest rates.

      Commissions expense includes payments made to financial institution customers based on official check average investable balances and short-term interest rate indices, as well as costs associated with swaps and the sale of receivables program. Commissions expense declined 13 percent and 14 percent in the second quarter and first six months of 2004, compared to the same periods in 2003, because of lower interest rates and lower average investable balances. The average federal funds rate in the second quarter and the first six months of 2004 declined by 24 basis points from the average federal funds rate for the same periods in 2003. In addition, commission expense declined due to lower swap costs on lower notional balances.

      Payment Systems operating margin was 8.2 percent in the second quarter 2004, relatively flat compared to second quarter 2003. On a taxable equivalent basis, the operating margin in the second quarter 2004 was 14.4 percent down slightly from 2003. The second quarter 2004 operating margin was affected by the decline in investment revenue, offset by the decline in commissions expense. The operating margin for the first six months of 2004 was 10.6 percent, up from 2.6 percent in 2003. The taxable equivalent operating margin for the first six months of 2004 was 16.7 percent, up 6 percentage points from 10.7 percent in 2003. The 2003 operating margin was affected by net securities losses and the 2004 operating margin benefited from lower commissions expense.

Liquidity and Capital Resources

      One of our primary financial goals is to maintain an adequate level of liquidity to manage the fluctuations in the balances of payment service assets and obligations resulting from varying levels of sales of official checks, money orders and other payment instruments, the timing of the collections of receivables, and the timing of the presentment of such instruments for payment. In addition, we strive to maintain adequate levels of liquidity for capital expenditures and other normal operating cash needs.

      At June 30, 2004, we had cash and cash equivalents of $1.0 billion, net receivables of $910 million and investments of $6.4 billion, all substantially restricted for payment service obligations. We rely on the funds from ongoing sales of payment instruments and portfolio cash flows to settle payment service obligations as they are presented. Due to the continuous nature of the sales and settlement of our payment instruments, we are able to invest in securities with a longer term than the average life of our payment instruments.

      We are regulated by various state agencies, which generally require us to maintain liquid assets and investments with an investment rating of A or higher, in an amount generally equal to the payment service obligation for regulated payment instruments (teller checks, agent checks, money orders and money transfers). We are not regulated by state agencies for our payment service obligations resulting from outstanding cashier’s checks; however, we restrict the funds related to these payment instruments due to contractual arrangements and/or Company policy. Accordingly, assets restricted for regulatory or contractual reasons, or by Company policy, are not available to satisfy working capital or other financing requirements.

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      We have unrestricted cash and cash equivalents, receivables, and investments to the extent those assets exceed all payment service obligations. The following table summarizes the assets restricted for payment service obligations and unrestricted assets:

 
Table Nine — Unrestricted Assets
                 
June 30 December 31
2004 2003


(In thousands)
Cash and cash equivalents
  $ 1,028,814     $ 1,025,026  
Receivables, net
    910,226       755,734  
Investments
    6,369,762       6,013,757  
     
     
 
      8,308,802       7,794,517  
Amounts restricted to cover payment service obligations
    7,862,106       7,421,481  
     
     
 
Unrestricted assets
  $ 446,696     $ 373,036  
     
     
 
 
Cash Flows

      Net cash provided by operating activities was $81.1 million for the second quarter of 2004. To understand the cash flow activity of our business, the cash used in or provided by operating activities relating to the payment service assets and obligations should be reviewed in conjunction with the related cash provided by or used in investing activities related to our investment portfolio. During the second quarter of 2004, the net change in cash and cash equivalents (substantially restricted), receivables, net (substantially restricted) and payment service obligations combined with the proceeds from and purchases of investments classified as available-for-sale was relatively small with a net increase of $7.9 million. Before the changes in cash and cash equivalents (substantially restricted), receivables, net (substantially restricted) and payment service obligations cash used in operating activities was $28.2 million for the second quarter of 2004.

      Net cash used in investing activities was $52.0 million for the second quarter 2004. These amounts primarily consist of investing the cash flow from the sale of our payment instruments included in the operating cash flows as discussed above. We also had capital expenditures for property and equipment of $7.0 million primarily related to certain leasehold improvements and information systems.

      Net cash provided by financing activities during the second quarter of 2004 was $84.4 million. During the quarter Viad paid off its commercial paper, retired a substantial majority of its outstanding subordinated debentures and medium term notes and retired industrial revenue bonds which is reflected in the Consolidated Statements of Cash Flows as “Payments on debt retirement” of $206.9 million. Viad also redeemed its outstanding preferred stock for $23.9 million. MoneyGram borrowed $150 million under its bank credit facilities as discussed below. On June 30, 2004 we also received proceeds of $173 million under a reverse repurchase agreement that was outstanding for one day. We utilize reverse repurchase agreements for short term cash flow needs to manage our portfolio and the funding of our payment service obligations.

 
Other Funding Sources

      In connection with the spin off, MoneyGram entered into bank credit facilities providing availability of up to $350 million, in the form of a $250 million four-year revolving credit facility and a $100 million term loan. On June 30, 2004, the Company borrowed $150 million (consisting of the $100 million term loan and $50 million under the revolving credit facility) and paid the proceeds to Viad. The remaining amount of the credit facilities is available for general corporate purposes and to support letters of credit. The interest rate on both the term loan and the credit facility is LIBOR plus 60 basis points, subject to adjustment in the event of a change in our debt rating. The term loan is due in two equal installments on the third and fourth anniversary of the loan. The revolving credit facility expires on June 30, 2008. The

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loans are guaranteed on an unsecured basis by MoneyGram’s material domestic subsidiaries. Borrowings under the bank credit facilities are subject to various covenants including interest coverage ratio, leverage ratio and consolidated total indebtedness ratio. The interest coverage ratio of earnings before interest and taxes to interest expense must not be less than 3.5 to 1.0. The leverage ratio of total debt to total capitalization must be less than 0.5 to 1.0. The consolidated total indebtedness to total debt to earnings before interest, taxes, depreciation and amortization must be less than 3.0 to 1.0. At June 30, 2004, we were in compliance with these covenants. There are other restrictions that are customary for facilities of this type including limits on dividends, indebtedness, stock repurchases, asset sales, mergers, acquisitions and liens.

      At June 30, 2004, we had reverse repurchase agreements and various overdraft facilities totaling $2.1 billion available to assist in the management of our investments and the clearing of payment service obligations. At June 30, 2004, $173.0 million was outstanding under a reverse repurchase agreement and at December 31, 2003, $2.0 million was outstanding under an overdraft facility.

 
Other Funding Requirements

      The following table presents MoneyGram’s contractual obligations at June 30, 2004:

 
Table Ten — Contractual Obligations
                                           
Payments Due by Period

Less Than After
Total 1 Year 1-3 Years 3-5 Years 5 Years





(In thousands)
Debt
  $ 150,000     $     $ 50,000     $ 100,000     $  
Operating leases
    50,650       5,284       10,519       9,938       24,909  
Derivative financial instruments
    59,932       70,905       (2,474 )     (7,855 )     (644 )
Other obligations(1)
    187,348       183,471       3,818       59          
     
     
     
     
     
 
 
Total contractual cash obligations
  $ 447,930     $ 259,660     $ 61,863     $ 102,142     $ 24,265  
     
     
     
     
     
 


(1)  Other obligations include $173 million outstanding under a reverse repurchase agreement, capital lease obligations of $732 thousand and funding commitments of $13.5 million related to private equity obligations.

      MoneyGram has certain funded, noncontributory pension plans that cover certain employees. Funding policies provide that payments to defined benefit pension trusts shall be equal to the minimum funding required by applicable regulations. During the second half of 2004, MoneyGram expects to contribute $1.8 million to the funded pension plans. MoneyGram also has certain unfunded pension plans that require benefit payments over extended periods of time and we expect to pay benefits of $1.3 million during the second half of 2004. See “Critical Accounting Policies — Pension obligations”.

      We have agreements with clearing banks that provide processing and clearing functions for money orders and official checks. One clearing bank contract has covenants that include maintenance of total cash and cash equivalents, receivables and investments substantially restricted for payment services obligations at least equal to total outstanding payment service obligations; maintenance of a minimum ratio of total assets held at that bank to instruments clearing through that bank of 103 percent and the certain of the financial covenants contained in the credit facilities.

      Working in cooperation with certain financial institutions, we have established separate consolidated entities (special-purpose entities) and processes that provide these financial institutions with additional assurance of our ability to clear their official checks. These processes include maintenance of specified ratios of segregated investments to outstanding payment instruments, typically 1 to 1. In some cases, alternative credit support has been purchased that provides backstop funding as additional security for payment of instruments. However, we remain liable to satisfy the obligations, both contractually and by

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operation of the Uniform Commercial Code, as issuer and drawer of the official checks. Accordingly, the obligations have been recorded in the Consolidated Balance Sheets under “Payment service obligations.” Under certain limited circumstances, clients have the right to either demand liquidation of the segregated assets or replace us as the administrator of the special-purpose entity. Such limited circumstances consist of material (and in most cases continued) failure of MoneyGram to uphold its warranties and obligations pursuant to its underlying agreements with the financial institution clients. While an orderly liquidation of assets would be required, any of these actions by a client could nonetheless diminish the value of the total investment portfolio, decrease earnings, and result in loss of the client or other customers or prospects. We offer the special- purpose entity to certain financial institution clients as a benefit unique in the payment services industry.

      The Company has investment grade ratings of BBB/ Baa2 and a stable outlook from the major credit rating agencies. Our ability to maintain an investment grade rating is important because it affects the cost of borrowing and certain financial institution customers require that we maintain an investment grade rating. Any ratings downgrade could increase our cost of borrowing or require certain actions to be performed to rectify such a situation. A downgrade could also have an effect on our ability to attract new customers and retain existing customers.

      Although no assurance can be given, we expect operating cash flows and short-term borrowings to be sufficient to finance our ongoing business, maintain adequate capital levels, and meet debt and clearing agreement covenants and investment grade rating requirements. Should financing requirements exceed such sources of funds, we believe we have adequate external financing sources available, including unused commitments under our credit facilities, to cover any shortfall.

      Viad sold treasury stock in 1992 to its employee equity trust to fund certain existing employee compensation and benefit plans. In connection with the spin-off, Viad transferred 1,632,964 shares of MoneyGram stock to a MoneyGram International, Inc. employee equity trust (the “Trust”) to be used by MoneyGram to fund employee compensation and benefit plans. The fair market value of the shares held by this Trust, representing unearned employee benefits, is recorded as a deduction from common stock and other equity and is reduced as employee benefits are funded. For financial reporting purposes, the Trust is consolidated.

Capital Adequacy

      On June 30, 2004, MoneyGram charged directly to equity as a dividend, the historical cost carrying amount of the net assets of Viad in the amount of $426.6 million.

      We have not yet determined whether we will pay dividends on MoneyGram common stock (and if so, the amount), and we may determine not to pay any dividends on MoneyGram common stock. Any future determination to pay dividends on MoneyGram common stock will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, cash requirements, prospects and such other factors as our Board of Directors may deem relevant.

      Stockholders’ equity can be affected adversely by changing interest rates, as after tax changes in the fair value of securities classified as available for sale and in the fair value of derivative financial instruments are included as components of stockholder’s equity under the caption “Accumulated changes in other comprehensive loss.” The fair value of derivative financial instruments generally increases when the market value of fixed rate long-term investments decline and vice versa. However, an increase or decrease in stockholder’s equity related to changes in the fair value of securities classified as available for sale may not be offset, in whole or in part, by the decrease or increase in stockholders’ equity related to changes in the fair value of derivative financial instruments.

Off-Balance Sheet Arrangements

      We have an agreement to sell, on a periodic basis, undivided percentage ownership interests in certain receivables, primarily from our money order agents, in an amount not to exceed $450 million. These

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receivables are sold to commercial paper conduits (trusts) sponsored by a financial institution and represent a small percentage of the total assets in these conduits. Our rights and obligations are limited to the receivables transferred, and are accounted for as sales transactions under SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The assets and liabilities associated with these conduits, including our sold receivables, are not recorded or included in our financial statements. The agreement expires in June 2006. The business purpose of this arrangement is to accelerate cash flow for investment. The receivables are sold at a discount based upon short-term interest rates. Executive management regularly reviews performance under the terms of the agreement.

      Any transactions and strategies, including any potential off-balance sheet arrangements, that materially affect investment results and cash flows must generally be approved by MoneyGram’s Board of Directors. Once any such transactions or strategies are implemented, MoneyGram’s Asset and Liability Committee (“ALCO”), which is comprised of senior officers of MoneyGram and which reports to MoneyGram’s chief executive officer, is responsible for monitoring such transactions. MoneyGram’s ALCO committee is also responsible for reviewing any such proposed transactions and making recommendations to MoneyGram’s Chief Executive Officer.

Critical Accounting Policies

      The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements. Critical accounting policies are those policies that management believes are most important to the portrayal of a company’s financial position and results of operations, and that require management to make estimates that are difficult, subjective or complex. Based on this criteria, management has identified the following critical accounting policies and estimates, and the methodology and disclosures related to those estimates:

      Fair Value of Investment Securities — Our investment securities are classified as available-for-sale, including securities being held for indefinite periods of time, and those securities that may be sold to assist in the clearing of payment service obligations or in the management of securities. These securities are carried at market value (or fair value), with the net after-tax unrealized gain or loss reported as a separate component of stockholders’ equity. Fair value is generally based on quoted market prices. However, certain investment securities are not readily marketable. As a result, the carrying value of these investments is based on cash flow projections which require a significant degree of management judgment as to default and recovery rates of the underlying investments. Accordingly, the estimates determined may not be indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. In general, as interest rates increase, the fair value of the available-for-sale portfolio and stockholders’ equity decreases and as interest rates fall, the fair value of the available-for-sale portfolio increases as well as stockholders’ equity.

      Other Than Temporary Impairments — Securities with gross unrealized losses at the consolidated balance sheet date are subjected to the Company’s process for identifying other-than-temporary impairments in accordance with SFAS No. 115, Accounting For Certain Investments in Debt and Equity Securities, and EITF Issue No. 99-20. The Company writes down to fair value securities that it deems to be other-then-temporarily impaired in the period the securities are deemed to be impaired. Under SFAS No. 115, the assessment of whether such impairment has occurred is based on management’s case-by-case evaluation of the underlying reasons for the decline in fair value. Management considers a wide range of factors about the security and uses its best judgment in evaluating the cause of the decline in the estimated fair value of the security and in assessing the prospects for recovery. The Company evaluates investments rated A and below for impairment under EITF Issue No. 99-20. When an adverse change in expected cash flows occurs and if the fair value of a security is less that its carrying value, the investment is written down to fair value. The evaluation for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of

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whether declines in the fair value of investments are other than temporary. The risks and uncertainties include changes in general economic conditions, the issuer’s financial condition or near term recovery prospects and the effects of changes in interest rates. In addition, for securitized financial assets with contractual cash flows (e.g. asset-backed securities), projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral.

      We recorded $6.6 million and $16.5 million of other-than-temporary impairment losses in the first six months of 2004 and 2003, respectively, primarily related to certain other asset-backed securities, collateralized mortgage obligations and certain structured notes held in our investment portfolio. Adverse changes in estimated cash flows in the future could result in impairment losses to the extent that the recorded value of such investments exceeds fair value.

      Derivative financial instruments — Derivative financial instruments are used as part of MoneyGram’s risk management strategy to manage exposure to fluctuations in interest and foreign currency rates. MoneyGram does not enter into derivatives for speculative purposes. Derivatives are accounted for in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and its related amendments and interpretations. The derivatives are recorded as either assets or liabilities on the balance sheet at fair value, with the change in fair value recognized in earnings or in other comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting. A derivative that does not qualify, or is not designated, as a hedge will be reflected at fair value, with changes in value recognized through earnings. The estimated fair value of derivative financial instruments has been determined using available market information and certain valuation methodologies. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates determined may not be indicative of the amounts that could be realized in a current market exchange. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. While MoneyGram intends to continue to meet the conditions to qualify for hedge accounting treatment under SFAS No. 133, if hedges did not qualify as highly effective or if forecasted transactions did not occur, the changes in the fair value of the derivatives used as hedges would be reflected in earnings. MoneyGram does not believe it is exposed to more than a nominal amount of credit risk in its hedging activities as the counterparties are generally well-established, well-capitalized financial institutions.

      Goodwill — SFAS No. 142, Goodwill and Other Intangible Assets, requires annual impairment testing of goodwill based on the estimated fair value of MoneyGram’s reporting units. The fair value of MoneyGram’s reporting units is estimated based on discounted expected future cash flows using a weighted average cost of capital rate. Additionally, an assumed terminal value is used to project future cash flows beyond base years. The estimates and assumptions regarding expected cash flows, terminal values and the discount rate require considerable judgment and are based on historical experience, financial forecasts, and industry trends and conditions.

      Pension obligations — MoneyGram has trusteed, noncontributory pension plans that cover certain employees of MoneyGram and Viad, and former employees of Viad and of sold operations of Viad. Through December 31, 2000, the principal retirement plan was structured using a traditional defined benefit formula based primarily on final average pay and years of service. Benefits earned under this formula ceased accruing at December 31, 2000, with no change to retirement benefits earned through that date. Effective January 1, 2001, benefits began accruing under a cash accumulation account formula based upon a percentage of pay plus interest. Effective January 1, 2004, benefits under the cash accumulation formula ceased accruing new benefits for service periods subsequent to December 31, 2003 with no change in benefits earned through that date. Funding policies provide that payments to defined benefit pension trusts shall be at least equal to the minimum funding required by applicable regulations. Certain defined pension benefits, primarily those in excess of benefit levels permitted under qualified pension plans, are unfunded. In determining the projected benefit obligation at December 31, 2003, MoneyGram assumed a discount rate of 6.25 percent and an expected return on plan assets of 8.75 percent, both of which were determined with the assistance of an external actuary. The weighted average assumptions used to determine the net periodic benefit cost for year ended December 31, 2003, was a discount rate of

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6.75 percent, an expected return on plan assets of 8.75 percent and a rate compensation increase of 4.50 percent. MoneyGram’s pension expense was $6.9 million for 2003, not including the $3.8 million curtailment gain resulting from the freezing of the defined benefit pension plan. MoneyGram’s pension expense for the first six months of 2004 was $4.5 million.

      MoneyGram’s discount rate used in determining future pension obligations is measured on November 30 and is based on rates determined by actuarial analysis and management review.

      In developing the expected rate of return, MoneyGram employs a total return investment approach whereby a mix of equities and fixed income securities are used to maximize the long-term return of plan assets for a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status, and corporate financial condition. MoneyGram’s current asset allocation consists of approximately 55 percent in large capitalization and international equities, approximately 35 percent in fixed income securities such as long-term treasury bonds, intermediate government bonds and global bonds, approximately seven percent in a real estate limited partnership interest and three percent in other securities. The investment portfolio contains a diversified blend of equity and fixed income securities. Furthermore, equity securities are diversified across U.S. and non-U.S. stocks. Other assets such as real estate and cash are used judiciously to enhance long-term returns while improving portfolio diversification. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews and annual liability measurements.

      Additionally, historical markets are studied and long-term historical relationships between equity securities and fixed income securities are preserved consistent with the widely accepted capital market principle that assets with higher volatility generate a greater return over the long run. Current market factors such as inflation and interest rates are evaluated before long-term capital market assumptions are determined. The long-term portfolio return also takes proper consideration of diversification and rebalancing. Peer data and historical returns are reviewed for reasonableness and appropriateness.

      MoneyGram’s pension assets are primarily invested in marketable securities that have readily determinable current market values. MoneyGram’s investments are rebalanced regularly to stay within the investment guidelines. MoneyGram will continue to evaluate its pension assumptions, including its rate of return, and will adjust these factors as necessary.

      Future actual pension income or expense will depend on future investment performance, changes in future rates and various other factors related to the populations participating in MoneyGram’s pension plans.

      Stock-based compensation — As permitted by SFAS No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, MoneyGram uses the intrinsic value method prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its stock-based compensation plans. Accordingly, MoneyGram does not use the fair value method to value stock options in accordance with SFAS No. 123. See notes to consolidated financial statements for the pro forma impact of stock-based awards using the fair value method of accounting.

Recent Accounting Developments

      Recent accounting pronouncements are set forth in Note 2 to the consolidated financial statements and are incorporated herein by reference.

Forward Looking Statements

      The statements contained in this document regarding the business of MoneyGram International, Inc. that are not historical facts are forward-looking statements and are made under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management’s

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current expectations and are subject to uncertainty and changes in circumstances due to a number of factors, including, but not limited to:

  •  fluctuations in interest rates that may materially adversely affect revenue derived from investment of funds received from the sale of payment instruments;
 
  •  material changes in the market value of securities we hold;
 
  •  material changes in our need for and the availability of liquid assets;
 
  •  successful management of the credit and fraud risks of retail agents, and the credit risk related to our investment portfolio;
 
  •  continued growth rates approximating recent levels for consumer money transfer transactions and other payment product markets;
 
  •  renewal of material retail agent and financial institution customer contracts, or loss of business from significant agents or customers;
 
  •  technological and competitive changes in the payment services industry;
 
  •  changes in laws, regulations or other industry practices and standards which may require significant systems redevelopment, reduce the market for or value of the company’s products or services or render products or services less profitable or obsolete;
 
  •  continued political stability in countries in which MoneyGram has material agent relationships;
 
  •  material lawsuits or investigations;
 
  •  catastrophic events that could materially adversely impact operating facilities, communication systems and technology of MoneyGram, its clearing banks or major customers, or that may have a material adverse impact on current economic conditions or levels of consumer spending;
 
  •  material breach of security of any of our systems; and
 
  •  other factors more fully discussed in MoneyGram’s filings with the Securities and Exchange Commission.

      Actual results may differ materially from historical and anticipated results. These forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements to reflect events or circumstances arising after such date.

 
Item 3. Quantitative and Qualitative Disclosures About Market Risk

      MoneyGram’s market risk exposure relates to fluctuations in interest rates and to a lesser degree, relate to fluctuations in foreign exchange rates. Interest rate risk is the potential reduction of net interest income as a result of changes in interest rates and is concentrated in our investment portfolio. In addition, we pay commissions to our financial institution customers and have costs associated with our sale of receivables program which are based on short-term variable interest rates. Certain derivative instruments are used as part of our risk management strategy. Derivatives are not used for speculative purposes. We also have exposure to changing rates related to pension and postretirement plan assumptions including the expected return on plan assets, the discount rate and the health care cost trend rate.

      We are also exposed to foreign exchange risk as we have certain receivables and payables denominated in foreign currencies. We primarily utilize forward contracts to hedge our exposure to fluctuations in foreign exchange rates. Forward contracts relating to money transfer transactions generally have maturities less than thirty days and forward contracts related to the receivables and payables are generally less than twelve months. The forward contracts are recorded on the Consolidated Balance Sheets, and the effect of changes in foreign exchange rates on the foreign-denominated receivables and payables, net of the effect of the related forward contracts, is not significant.

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      We are also exposed to short-term interest risk on our bank credit facilities. We currently do not use derivative financial instruments to hedge cash flows for these obligations.

      Fair Value Sensitivity to Interest Rate Changes. Stockholders’ equity can be affected adversely by changing interest rates, as after-tax changes in the fair value of securities classified as available-for-sale and in the fair value of derivative financial instruments are included as a component of stockholders’ equity. The fair value of derivative financial instruments generally increases when the market value of fixed rate, long-term debt investments decline and vice versa. However, an increase or decrease in stockholders’ equity related to changes in the fair value of securities classified as available-for-sale, may not be offset, in whole or in part, by the decrease or increase in stockholders’ equity related to changes in the fair value of derivative financial instruments. A ten percent proportionate increase in interest rates would result in an estimated decrease in the fair value of securities classified as available-for-sale of approximately $52.5 million (reflected as an after-tax decrease in accumulated other comprehensive income of approximately $32.0 million) and an estimated increase in the fair value of derivative financial instruments of approximately $16.9 million (reflected as an after-tax increase in accumulated other comprehensive income of approximately $10.3 million) at June 30, 2004. A ten percent proportionate decrease in interest rates would result in an estimated increase in the fair value of securities classified as available-for-sale of approximately $42.8 million (reflected as an after-tax increase in accumulated other comprehensive income of approximately $26.1 million) and an estimated decrease in the fair value of derivative financial instruments of approximately $17.0 million (reflected as an after-tax decrease in accumulated other comprehensive income of approximately $10.4 million) at June 30, 2004. These amounts are estimated based on a certain set of assumptions about interest rates and portfolio balance growth and are not necessarily indicative of actual current period factors.

      Earnings Sensitivity to Interest Rate Changes. Based on a hypothetical ten percent proportionate increase in interest rates from the average level of interest rates during the last twelve months, and taking into consideration expected investment positions, commissions paid to selling agents, growth in new business, effects of the swap agreements and expected borrowing level of variable-rate debt, the increase in pre-tax income would be approximately $5.0 million. A hypothetical ten percent proportionate decrease in interest rates, based on the same set of assumptions, would result in a decrease in pre-tax income of approximately $7.9 million. These amounts are estimated based on a certain set of assumptions about interest rates and portfolio balance growth and do not represent expected results.

 
Item 4. Controls and Procedures

      Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of June 30, 2004, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2004. During the quarter ended June 30, 2004, there were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

 
Item 6. Exhibits and Reports on Form 8-K

      (a) Exhibits

         
Exhibit
Number Description


  *2.1     Separation and Distribution Agreement, dated as of June 30, 2004, by and among Viad Corp, MoneyGram International, Inc., MGI Merger Sub, Inc. and Travelers Express Company, Inc.
  *3.1     Amended and Restated Certificate of Incorporation
  *3.2     Bylaws of MoneyGram International, Inc.
  4.1     Form of Specimen Certificate for MoneyGram Common Stock (Incorporated by reference from Exhibit 4.1 to Amendment No. 4 to Registrant’s Form 10)
  *4.2     Rights Agreement, dated as of June 30, 2004, between MoneyGram International, Inc. and Wells Fargo Bank, N.A. as Rights Agent
  *4.3     Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of MoneyGram International, Inc.
  *10.1     Employee Benefits Agreement, dated as of June 30, 2004, by and among Viad Corp, MoneyGram International, Inc. and Travelers Express Company, Inc.
  *10.2     Tax Sharing Agreement, dated as of June 30, 2004, by and between Viad Corp and MoneyGram International, Inc.
  *10.3     Interim Services Agreement, dated as of June 30, 2004, between Viad Corp and MoneyGram International, Inc.
  *†10.4     MoneyGram International, Inc. 2004 Omnibus Incentive Plan
  †10.5     Form of Indemnification Agreement between MoneyGram International, Inc. and Directors of MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.5 to Amendment No. 4 to Registrant’s Form 10)
  *†10.6     MoneyGram International, Inc. Management Incentive Plan, dated June 30, 2004, pursuant to the 2004 MoneyGram International, Inc. Omnibus Incentive Plan
  *†10.7     MoneyGram International, Inc. Deferred Compensation Plan, as stated July 1, 2004
  *†10.8     MoneyGram International, Inc. Executive Severance Plan (Tier I)
  *†10.9     MoneyGram International, Inc. Executive Severance Plan (Tier II)
  *†10.10     MoneyGram International, Inc. Supplemental 401(k) Plan
  †10.11     Travelers Express Company, Inc. Supplemental Pension Plan (Incorporated by reference from Exhibit 10.11 to Amendment No. 3 to Registrant’s Form 10)
  *†10.12     Deferred Compensation Plan for Directors of MoneyGram International, Inc.
  *†10.13     Description of MoneyGram International, Inc. Director’s Charitable Matching Program
  †10.14     Director’s Charitable Award Program (Incorporated by reference from Exhibit 10.14 to Amendment No. 3 to Registrant’s Form 10)
  10.15     $350,00,000 Credit Agreement, dated as of June 29, 2004, among MoneyGram International, Inc., the Lenders named therein, and Bank One, NA, as Agent (Incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 30, 2004)
  *10.16     MoneyGram Employee Equity Trust, effective as of June 30, 2004
  *31.1     Section 302 Certification of Chief Executive Officer
  *31.2     Section 302 Certification of Chief Financial Officer

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Exhibit
Number Description


  *32.1     Section 906 Certification of Chief Executive Officer
  *32.2     Section 906 Certification of Chief Financial Officer


Filed herewith.

†  Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.

      (b) Reports on Form 8-K

      The following Current Reports on Form 8-K were filed with or furnished to the SEC during the quarterly period covered by this report:

  •  Current Report on Form 8-K dated July 29, 2004 furnishing the financial results for the Company’s 2004 second quarter ended June 30, 2004.
 
  •  Current Report on Form 8-K filed July 1, 2004 announcing the completion of the spin-off of the Company from Viad Corp.
 
  •  Current Report on Form 8-K filed June 30, 2004 announcing that the Company entered into a $350 million credit facility.
 
  •  Current Report on Form 8-K dated June 17, 2004 furnishing the Company’s spin-off investor presentation materials.

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SIGNATURES

      Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

  MONEYGRAM INTERNATIONAL, INC.
  (Registrant)

  By:  /s/ JEAN C. BENSON
 
  Jean C. Benson
  Vice President — Controller
  (Chief Accounting Officer
  and Authorized Officer)

August 13, 2004

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EXHIBIT INDEX

         
Exhibit
Number Description


  *2.1     Separation and Distribution Agreement, dated as of June 30, 2004, by and among Viad Corp, MoneyGram International, Inc., MGI Merger Sub, Inc. and Travelers Express Company, Inc.
  *3.1     Amended and Restated Certificate of Incorporation
  *3.2     Bylaws of MoneyGram International, Inc.
  4.1     Form of Specimen Certificate for MoneyGram Common Stock (Incorporated by reference from Exhibit 4.1 to Amendment No. 4 to Registrant’s Form 10)
  *4.2     Rights Agreement, dated as of June 30, 2004, between MoneyGram International, Inc. and Wells Fargo Bank, N.A. as Rights Agent
  *4.3     Certificate of Designations, Preferences and Rights of Series A Junior Participating Preferred Stock of MoneyGram International, Inc.
  *10.1     Employee Benefits Agreement, dated as of June 30, 2004, by and among Viad Corp, MoneyGram International, Inc. and Travelers Express Company, Inc.
  *10.2     Tax Sharing Agreement, dated as of June 30, 2004, by and between Viad Corp and MoneyGram International, Inc.
  *10.3     Interim Services Agreement, dated as of June 30, 2004, between Viad Corp and MoneyGram International, Inc.
  *†10.4     MoneyGram International, Inc. 2004 Omnibus Incentive Plan
  †10.5     Form of Indemnification Agreement between MoneyGram International, Inc. and Directors of MoneyGram International, Inc. (Incorporated by reference from Exhibit 10.5 to Amendment No. 4 to Registrant’s Form 10)
  *†10.6     MoneyGram International, Inc. Management Incentive Plan, dated June 30, 2004, pursuant to the 2004 MoneyGram International, Inc. Omnibus Incentive Plan
  *†10.7     MoneyGram International, Inc. Deferred Compensation Plan, as stated July 1, 2004
  *†10.8     MoneyGram International, Inc. Executive Severance Plan (Tier I)
  *†10.9     MoneyGram International, Inc. Executive Severance Plan (Tier II)
  *†10.10     MoneyGram International, Inc. Supplemental 401(k) Plan
  †10.11     Travelers Express Company, Inc. Supplemental Pension Plan (Incorporated by reference from Exhibit 10.11 to Amendment No. 3 to Registrant’s Form 10)
  *†10.12     Deferred Compensation Plan for Directors of MoneyGram International, Inc.
  *†10.13     Description of MoneyGram International, Inc. Director’s Charitable Matching Program
  †10.14     Director’s Charitable Award Program (Incorporated by reference from Exhibit 10.14 to Amendment No. 3 to Registrant’s Form 10)
  10.15     $350,00,000 Credit Agreement, dated as of June 29, 2004, among MoneyGram International, Inc., the Lenders named therein, and Bank One, NA, as Agent (Incorporated by reference from Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed June 30, 2004)
  *10.16     MoneyGram Employee Equity Trust, effective as of June 30, 2004
  *31.1     Section 302 Certification of Chief Executive Officer
  *31.2     Section 302 Certification of Chief Financial Officer

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Exhibit
Number Description


  *32.1     Section 906 Certification of Chief Executive Officer
  *32.2     Section 906 Certification of Chief Financial Officer


Filed herewith.

†  Denotes management contract or compensatory plan or arrangement required to be filed as an exhibit to this report.

54

exv2w1
 

Exhibit 2.1

SEPARATION AND DISTRIBUTION AGREEMENT

BY AND AMONG

VIAD CORP

MONEYGRAM INTERNATIONAL, INC.

MGI MERGER SUB, INC.

AND

TRAVELERS EXPRESS COMPANY, INC.

DATED AS OF

JUNE 30, 2004

 


 

TABLE OF CONTENTS

         
ARTICLE I DEFINITIONS
    1  
1.01 General
    1  
1.02 References to Time
    9  
ARTICLE II THE MERGER
    9  
2.01 The Merger
    9  
2.02 Effective Time
    9  
2.03 Effect on Stock
    9  
2.04 Surviving Corporation Articles of Incorporation; By-laws
    10  
2.05 Surviving Corporation Directors; Officers
    10  
2.06 Cash Accounts
    10  
2.07 MoneyGram Certificate of Incorporation; Bylaws; Rights Plan
    10  
2.08 Board of Directors
    10  
ARTICLE III ACTIONS PRIOR TO THE EFFECTIVE TIME AND THE DISTRIBUTION
    11  
3.01 Redemption of Viad Preferred Stock
    11  
3.02 Debt Tender Offers
    11  
3.03 The Dividend
    12  
3.04 Recapitalization of MoneyGram
    13  
3.05 Other Agreements
    13  
3.06 Credit Agreements
    13  
ARTICLE IV THE DISTRIBUTION
    14  
4.01 Actions Prior to the Distribution
    14  
4.02 The Distribution
    15  
4.03 Conditions to Distribution
    15  
4.04 Conditions for the Benefit of Viad
    16  
ARTICLE V SURVIVAL, RELEASE, ASSUMPTION AND INDEMNIFICATION
    17  
5.01 Survival of Agreements
    17  
5.02 Release of Pre-Merger Claims
    17  
5.03 Taxes; Plan Audits
    19  
5.04 Assumption and Indemnification
    19  
5.05 Procedure for Indemnification
    21  
5.06 Remedies Cumulative
    22  

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ARTICLE VI ACCESS TO INFORMATION
    23  
6.01 Provision of Corporate Records
    23  
6.02 Access to Information
    23  
6.03 Production of Witnesses
    23  
6.04 Retention of Records
    23  
6.05 Confidentiality
    24  
6.06 Tax Matters
    24  
ARTICLE VII NO REPRESENTATIONS OR WARRANTIES; EXCEPTIONS
    24  
7.01 No Representations or Warranties; Exceptions
    24  
ARTICLE VIII INSURANCE
    24  
8.01 Insurance Coverage
    24  
8.02 Post-Merger Claims
    25  
8.03 Administration and Reserves
    25  
8.04 Payment or Refund of Premiums, Retentions and Losses with Respect to MoneyGram Liabilities
    25  
8.05 Allocation of Insurance Proceeds; Cooperation
    26  
8.06 Reimbursement of Expenses
    26  
8.07 Insurer Insolvency
    26  
8.08 Assumption of Management of Liabilities
    27  
8.09 No Reduction of Coverage
    27  
8.10 Future Insurance Coverage
    27  
8.11 Assistance, Waiver of Conflict and Shared Defense
    27  
ARTICLE IX FURTHER ASSURANCES AND ADDITIONAL COVENANTS
    27  
9.01 Further Assurances
    27  
9.02 Publicity
    28  
9.03 Certain Business Matters
    29  
ARTICLE X TERMINATION
    29  
10.01 Termination
    29  
10.02 Effect of Termination
    29  
ARTICLE XI MISCELLANEOUS
    29  
11.01 Complete Agreement
    29  
11.02 Expenses
    29  
11.03 Governing Law
    30  
11.04 Notices
    30  
11.05 Amendment and Modification
    30  

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11.06 Successors and Assigns; No Third-Party Beneficiaries
    30  
11.07 Counterparts
    31  
11.08 Interpretation
    31  
11.09 Legal Enforceability
    31  
11.10 References; Construction
    31  
11.11 Corporate Power
    31  
11.12 Waivers of Default
    32  

SCHEDULES

     
Schedule 1.01(a)
  MoneyGram Insurance Policies
Schedule 1.01(b)
  MoneyGram Subsidiaries
Schedule 1.01(c)
  Certain Insurance Policies Relating to Viad and MoneyGram
Schedule 2.08
  Directors of Viad and MoneyGram
Schedule 5.04(b)(iii)
  Certain Litigations
Schedule 8.04
  Certain MoneyGram Insurance Policies

EXHIBITS

     
Exhibit A
  Form of Restated Certificate of Incorporation of MoneyGram
Exhibit B
  Form of Amended and Restated Bylaws of MoneyGram
Exhibit C
  Rights Agreement of MoneyGram

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SEPARATION AND DISTRIBUTION AGREEMENT

     THIS SEPARATION AND DISTRIBUTION AGREEMENT, dated as of June 30, 2004, is by and among Viad Corp, a Delaware corporation (“Viad”), Travelers Express Company, Inc., a Minnesota corporation and direct wholly-owned subsidiary of Viad (“TECI”), MoneyGram International, Inc., a Delaware corporation and direct wholly-owned subsidiary of Viad (“MoneyGram”), and MGI Merger Sub, Inc., a Minnesota corporation and a direct wholly-owned subsidiary of MoneyGram (“Merger Sub”).

W I T N E S S E T H:

     WHEREAS, the Boards of Directors of Viad, TECI, MoneyGram and Merger Sub have determined that it is appropriate and desirable: (1) for TECI to pay to Viad the Dividend; (2) for Merger Sub to merge with and into TECI, with TECI as the surviving corporation, and as a result of that Merger, all shares of capital stock of TECI outstanding prior to the Merger being cancelled and TECI becoming a direct wholly-owned subsidiary of MoneyGram; (3) in connection with the Merger for MoneyGram to make a cash payment to Viad of $150 million; and (4) following the Merger, for Viad to distribute to the holders of the issued and outstanding shares of Viad Common Stock at the close of business on the Record Date all of the issued and outstanding shares of MoneyGram Common Stock;

          WHEREAS, the Merger is intended to be treated as a contribution of the stock of TECI to MoneyGram for federal income tax purposes;

          WHEREAS, the Merger and the Distribution are intended to qualify as a tax-free reorganization and distribution under Sections 368(a)(1)(D) and 355 of the Code; and

          WHEREAS, the parties have determined that it is necessary and desirable to set forth the principal corporate transactions required to effect the Merger and the Distribution and to set forth other agreements that will govern certain other matters prior to or following such transactions;

          NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and intending to be legally bound thereby, the parties agree as follows:

ARTICLE I
DEFINITIONS

     Section 1.01 General. As used herein, the following terms shall have the following meanings (such meanings to be equally applicable to both the singular and plural forms of the terms defined):

     Acceptable Credit Rating: A long-term credit rating by Standard & Poor’s Ratings Group that is at least BBB- or by Moody’s Investors Service that is at least Baa3; provided, however, that if MoneyGram applies for and receives long-term credit ratings from both Standard & Poor’s Ratings Group and Moody’s Investors Service, such ratings shall be at least BBB- from Standard & Poor’s Ratings Group and Baa3 from Moody’s Investors Service.

 


 

     Action: any claim, demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any federal, state, local, foreign or international Governmental Authority or any arbitration or mediation tribunal.

     Affiliate: with respect to any specified Person, a Person that directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with, such specified Person; provided, however, that for purposes hereof, no member of either Group shall be deemed to be an Affiliate of any member of the other Group.

     Agent: Viad, in the capacity as distribution agent, or at Viad’s election, another distribution agent to be appointed by Viad, in each case, to distribute the shares of MoneyGram Common Stock to the holders of shares of Viad Common Stock pursuant to the Distribution.

     Agreement: this Separation and Distribution Agreement, including all of the Schedules and Exhibits hereto.

     Articles of Merger: the articles of merger to be filed with the Minnesota Secretary of State as contemplated by the MBCA in connection with the Merger.

     Assets: any and all assets and properties of any kind whatsoever, whether tangible or intangible, real, personal or mixed and any and all rights, contracts and claims, including the following: (1) cash, notes and accounts receivable (whether current or non-current); (2) certificates of deposit, banker’s acceptances, stock, debentures, evidences of indebtedness, certificates of interest or participation in profit-sharing agreements, collateral-trust certificates, reorganization certificates or subscriptions, transferable shares, investment contracts, voting-trust certificates, fractional undivided interests in oil, gas or other mineral rights, puts, calls, straddles, options and other securities of any kind; (3) trade secrets, confidential information, U.S. and foreign registered and unregistered trademarks, service marks, service names, trade styles and trade names, product bar codes and associated goodwill; U.S. and foreign patents; U.S. and foreign statutory, common law and registered copyrights; applications for any of the foregoing, rights to use the foregoing and other rights in, to and under the foregoing; (4) rights under leases, contracts, licenses, software license and development agreements, permits, distribution arrangements, sales and purchase agreements, other agreements and business arrangements; (5) real estate and buildings and other improvements thereon; (6) leasehold improvements, fixtures, trade fixtures, machinery, equipment (including transportation and office equipment), tools, dies and furniture; (7) office supplies, production supplies, spare parts, other miscellaneous supplies and other tangible property of any kind; (8) raw materials, work-in-process, finished goods, consigned goods and other inventories; (9) prepayments or prepaid expenses; (10) claims, causes of action, choses in action, rights of recovery and rights of set-off of any kind; (11) the right to receive mail, payments on accounts receivable and other communications; (12) lists of advertisers, records pertaining to advertisers and accounts, personnel records, lists and records pertaining to suppliers and agents, and books, ledgers, files and business records of every kind; (13) advertising materials and other printed or written materials; (14) goodwill as a going concern and other intangible properties; (15) employee contracts, including any rights thereunder to restrict an employee from competing in certain respects and all rights under employee patent and trade secret agreements; and (16) licenses and authorizations issued by any Governmental Authority.

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     Business Day: any day other than a Saturday, a Sunday or a day on which banking institutions located in the States of Arizona, Minnesota, New York or Delaware are authorized or obligated by law or executive order to close.

     Claims Administration: the processing of claims made under the Insurance Policies, including the reporting of claims to the insurance carrier, management and defense of claims and provision for appropriate releases upon settlement of claims.

     Code: the Internal Revenue Code of 1986, as amended.

     Commission: the Securities and Exchange Commission.

     Distribution: the distribution by Viad pursuant to Article IV hereof of all of the issued and outstanding shares of MoneyGram Common Stock owned by Viad to holders of shares of Viad Common Stock.

     Distribution Date: as defined in Section 4.03 hereof.

     Distribution Registration Statement: the registration statement on Form 10 to effect the registration under the Exchange Act of the MoneyGram Common Stock.

     Dividend: as defined in Section 3.03(a) hereof.

     Effective Time: as defined in Section 2.02 hereof.

     Employee Benefits Agreement: the Employee Benefits Agreement, dated as of the date hereof, by and among Viad, MoneyGram and TECI.

     Estimated Net Income: an amount equal to (1) the consolidated Net Income of TECI for the Interim Period, minus (2) the sum of all dividends paid by TECI to Viad during the Interim Period in respect of income of TECI earned in the Interim Period other than a special dividend of $7.25 million paid by TECI in respect of certain deferred employee compensation (it being understood and agreed that the payment made by MoneyGram under Section 2.03(a) hereof shall not be included in this clause (2)), which amount shall be estimated in good faith by Viad, based on discussions with the financial staff of Viad and TECI prior to the Effective Time.

     Exchange Act: the Securities Exchange Act of 1934, as amended, together with the rules and regulations promulgated thereunder.

     Final Net Income: an amount equal to (1) the consolidated Net Income of TECI for the Interim Period, minus (2) the sum of all dividends paid by TECI to Viad during the Interim Period in respect of income of TECI earned in the Interim Period other than a special dividend of $7.25 million paid by TECI in respect of certain deferred employee compensation (it being understood and agreed that the payment made by MoneyGram under Section 2.03(a) hereof shall not be included in this clause (2)), as agreed to (or deemed to be agreed to) by Viad and MoneyGram in accordance with the terms of Section 3.03 hereof or resulting from the determinations made by the Neutral Auditors in accordance with Section 3.03 hereof.

-3-


 

     Foreign Exchange Rate: with respect to any currency other than United States dollars, as of any date, the average of the opening bid and asked rates on such date at which such currency may be exchanged for United States dollars as quoted by Citibank, N.A., except that, with respect to any Indemnifiable Loss covered by insurance, the Foreign Exchange Rate for such currency shall be determined as set forth in Section 5.04(e)(ii) hereof.

     Former MoneyGram Businesses: all of the businesses and operations (1) heretofore but not currently conducted by any member of the MoneyGram Group or (2) currently or heretofore conducted by any former Subsidiary of any such member.

     Former Viad Businesses: all of the businesses and operations (1) heretofore but not currently conducted by any member of the Viad Group or (2) currently or heretofore conducted by any former Subsidiary of any such member, other than any Former MoneyGram Business.

     Governmental Authority: any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority.

     Group: either the MoneyGram Group or the Viad Group, as the context requires.

     Indemnifiable Losses: all losses, Liabilities, damages, claims, demands, judgments or settlements of any nature or kind whatsoever, known or unknown, fixed, accrued, absolute or contingent, liquidated or unliquidated, including all reasonable costs and expenses (legal, accounting or otherwise as such costs are incurred) relating thereto, suffered by an Indemnitee.

     Indemnifying Party: a Person that is obligated hereunder to provide indemnification.

     Indemnitee: a Person that may seek indemnification hereunder.

     Indemnity Payment: an amount that an Indemnifying Party is required to pay to an Indemnitee pursuant to Article V hereof.

     Information: all records, books, contracts, instruments, computer data and other data and information, whether written or unwritten.

     Information Statement: the Information Statement to be sent to holders of shares of Viad Common Stock in connection with the Distribution.

     Insurance Administration: with respect to each Insurance Policy, (1) the accounting for premiums (including retrospectively rated premiums), defense costs, indemnity payments, deductibles and retentions as appropriate under the terms and conditions of each of the Insurance Policies, (2) the reporting to excess insurance carriers of any losses or claims that may cause the per-occurrence or aggregate limits of any Insurance Policy to be exceeded and (3) the distribution of Insurance Proceeds as contemplated hereby.

     Insurance Policy: insurance policies and insurance contracts of any kind that are owned or maintained by any member of either Group as the insured interest, including primary and excess policies, comprehensive general liability policies, crime, employee dishonesty,

-4-


 

employment practices liability, property and casualty, automobile, aircraft and workers’ compensation insurance policies and self-insurance and captive insurance company arrangements, together with the rights, benefits and privileges thereunder, but not including any policies that fund Plans.

     Insurance Proceeds: those monies received by an insured from an insurance carrier or paid by an insurance carrier on behalf of the insured (including defense costs of any third party claim), in either case net of any applicable premium adjustment, retrospectively rated premium, deductible, retention, cost or reserve paid or held by or for the benefit of such insured.

     Insured Claims: those Liabilities that, individually or in the aggregate, are covered within the terms and conditions of any of the Insurance Policies, whether or not subject to deductibles, coinsurance, uncollectability or retrospectively rated premium adjustments, but only to the extent that such Liabilities are within applicable Insurance Policy limits, including aggregates.

     Interim Period: the period beginning on January 1, 2004 and ending on the date on which the Effective Time is to occur.

     Interim Period Financial Statements: as defined in Section 3.03(b) hereof.

     Interim Services Agreement: the Interim Services Agreement, dated as of the date hereof, by and between Viad and MoneyGram.

     IRS: the Internal Revenue Service.

     Liabilities: all debts, liabilities and obligations, whether absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, and whether or not the same would properly be reflected on a balance sheet prepared in accordance with U.S. generally accepted accounting principles, including all costs and expenses relating thereto.

     Material Adverse Effect: a material adverse effect on (1) the business, assets, liabilities, financial condition, results of operations or prospects of Viad or TECI, or (2) the ability of Viad, TECI or MoneyGram to perform its obligations hereunder.

     MBCA: the Minnesota Business Corporation Act.

     Medium-Term Note Offer: as defined in Section 3.02 hereof.

     Medium-Term Notes: the outstanding Medium-Term Notes, Series A, due 2004, 2005 and 2009, issued by Viad (as successor to The Dial Corp) on October 12, 1993, each governed by the MTN Indenture.

     Merger: the merger of Merger Sub with and into TECI.

     Merger Sub: as defined in the Preamble hereto.

-5-


 

     MoneyGram: as defined in the Preamble hereto.

     MoneyGram Assets: (1) all of the outstanding shares of all classes of capital stock of the MoneyGram Subsidiaries; (2) all of the Assets of such Subsidiaries; (3) all of the Assets held by any member of either Group immediately prior to the Effective Time, that are used or held primarily for use in or necessary to the operation of the MoneyGram Business, including those Assets reflected on MoneyGram’s audited balance sheet as of December 31, 2003; and (4) the claims under and any proceeds from the lawsuit captioned Game Financial Corp. v. Global Cash Access, LLC (Minn. Dist. Ct., File No. CT-03-007098).

     MoneyGram Business: all of the businesses conducted immediately prior to the Distribution Date by any member of either Group and reported by Viad in the “Payment Services” segment in the footnotes to the Viad consolidated financial statements (or that would have been so reported had it been conducted on December 31, 2003) in Viad’s Annual Report on Form 10-K for the year ended December 31, 2003.

     MoneyGram Claim: any claim against any MoneyGram Individual or member of the MoneyGram Group with respect to any injury, loss, Liability, damage or expense that (1) is or was incurred or asserted to have been incurred prior to the Distribution Date in, or in connection with, the conduct of the Viad Assets, the MoneyGram Assets, the Viad Business, the Former Viad Businesses, the MoneyGram Business or the Former MoneyGram Businesses and (2) arose or may have arisen out of one or more occurrences or events that are or may be insured or insurable under one or more of the Viad Policies.

     MoneyGram Common Stock: the common stock, $0.01 par value per share, of MoneyGram.

     MoneyGram Group: MoneyGram and the MoneyGram Subsidiaries.

     MoneyGram Individual: as defined in the Employee Benefits Agreement.

     MoneyGram Liabilities: subject to the provisions of the Other Agreements, (1) all of the Liabilities of any member of either Group that relate directly to the MoneyGram Assets or the MoneyGram Business as conducted immediately prior to the Effective Time, or that relate directly to any Former MoneyGram Business, in each case whether incurred or arising prior to, on or after the Effective Time and (2) all Liabilities of any member of the MoneyGram Group under or pursuant to any Other Agreement.

     MoneyGram New Credit Agreement: The credit agreement to be entered into by and among MoneyGram, as borrower, and an agent or co-agents selected by MoneyGram pursuant to which MoneyGram may borrow funds, in form and substance reasonably acceptable to the Board of Directors of MoneyGram, but that, in any event, shall permit sufficient borrowings such that MoneyGram may comply with its obligations to be performed on or prior to the Distribution Date hereunder.

     MoneyGram Policies: all Insurance Policies, current and past, that relate to the MoneyGram Business and do not relate to the Viad Business, including the Insurance Policies listed on Schedule 1.01(a) hereto.

-6-


 

     MoneyGram Subsidiaries: all of the corporations, limited liability companies, business trusts and other Persons listed on Schedule 1.01(b) hereto.

     MoneyGram Support Agreements: any obligation or agreement of the Viad Group under any guarantee, letter of credit, letter of comfort or working capital maintenance agreement obtained prior to the Distribution Date for the benefit of the MoneyGram Business or any member of the MoneyGram Group.

     MTN Indenture: the indenture, dated as of April 1, 1993, between Viad (as successor to The Dial Corp) and The Chase Manhattan Bank, N.A., as trustee.

     Net Income: net income determined in accordance with U.S. generally accepted accounting principles, as applied in accordance with the past practice of TECI and Viad, without taking into account any amounts expensed by MoneyGram under Section 11.02 hereof or any proceeds received by MoneyGram from the lawsuit captioned Game Financial Corp. v. Global Cash Access, LLC (Minn. Dist. Ct., File No. CT-03-007098).

     Neutral Auditors: as defined in Section 3.03(e) hereof.

     NYSE: The New York Stock Exchange, Inc.

     Offers: as defined in Section 3.02 hereof.

     Other Agreements: the Interim Services Agreement, the Employee Benefits Agreement and the Tax Sharing Agreement.

     Person: an individual, a general or limited partnership, a joint venture, a corporation, a trust, an unincorporated organization, a limited liability company, any other entity and any Governmental Authority.

     Plan: as defined in the Employee Benefits Agreement.

     Record Date: the close of business on the date to be determined by the Board of Directors of Viad, or the Executive Committee thereof, as the record date for determining holders of shares of Viad Common Stock entitled to receive shares of MoneyGram Common Stock in the Distribution.

     Representative: with respect to any Person, any of such Person’s directors, officers, employees, agents, consultants, advisors, accountants, attorneys and representatives.

     Resolution Period: as defined in Section 3.03(d) hereof.

     Service Agreement: any third-party administrator or claims handling agreement of any kind or nature to which any member of either Group is directly or indirectly a party, in effect as of the date hereof, related to the handling of MoneyGram Claims.

     Subordinated Debt Offer: as defined in Section 3.02(a) hereof.

-7-


 

     Subordinated Debentures: the outstanding 10 1/2% Subordinated Debentures due May 15, 2006, issued by Viad (as successor to The Greyhound Corporation) on February 21, 1986.

     Subordinated Debt Indenture: the indenture, dated as of November 15, 1985, between Viad (as successor to The Greyhound Corporation) and Continental Illinois National Bank & Trust Company of Chicago as trustee.

     Subsidiary: with respect to any specified Person, any corporation or other legal entity of which such Person or any of its Subsidiaries controls or owns, directly or indirectly, stock or other equity interests representing in excess of 50% of the votes entitled to be cast in the election of members to the board of directors or similar governing body; provided, however, that for purposes hereof, (1) the MoneyGram Subsidiaries shall be deemed to be Subsidiaries of MoneyGram and (2) neither MoneyGram nor any of the MoneyGram Subsidiaries shall be deemed to be Subsidiaries of Viad or any of Viad’s Subsidiaries.

     Surviving Corporation: as defined in Section 2.01 hereof.

     Tax: as defined in the Tax Sharing Agreement.

     Tax Sharing Agreement: the Tax Sharing Agreement, dated as of the date hereof, by and between Viad and MoneyGram.

     TECI: as defined in the Preamble hereto.

     Third-Party Claim: any claim, demand, action, suit, countersuit, arbitration, inquiry, proceeding or investigation by or before any Governmental Authority or any arbitration or mediation tribunal asserted by a Person that is not a party hereto.

     Transfer Tax: all transfer, documentary, sales, use, registration, value-added and other similar Taxes (including interest, penalties and additions to such Taxes).

     Viad: as defined in the Preamble hereto.

     Viad Assets: any and all Assets (other than the MoneyGram Assets) held immediately prior to the Effective Time by any member of either Group.

     Viad Business: all of the businesses, other than the MoneyGram Business, conducted immediately prior to the Effective Time by any member of either Group.

     Viad Common Stock: the common stock, $1.50 par value per share, of Viad.

     Viad Group: Viad and its Affiliates, other than members of the MoneyGram Group.

     Viad Individual: as defined in the Employee Benefits Agreement.

-8-


 

     Viad Liabilities: subject to the provisions of the Other Agreements, (1) all of the Liabilities, other than the MoneyGram Liabilities, of any member of either Group; and (2) all Liabilities of any member of the Viad Group under or pursuant to any Other Agreement.

     Viad New Credit Agreement: The credit agreement to be entered into by and among Viad, as borrower, and an agent or co-agents selected by Viad pursuant to which Viad may borrow funds, in form and substance reasonably acceptable to the Board of Directors of Viad.

     Viad Plan: as defined in the Employee Benefits Agreement.

     Viad Policies: all Insurance Policies, current and past, which relate to both the Viad Business and the MoneyGram Business, including the Insurance Policies listed on Schedule 1.01(c) hereto.

     Viad Preferred Stock: The $4.75 Preferred Stock, without par value but with a liquidation preference of $100 per share, of Viad.

     Section 1.02 References to Time. All references herein to times of the day shall be to New York City time.

ARTICLE II
THE MERGER

     Section 2.01 The Merger. At the Effective Time and on the terms and subject to the conditions set forth herein and in the MBCA, Merger Sub shall be merged with and into TECI, the separate corporate existence of Merger Sub shall cease and TECI shall continue as the surviving corporation (the “Surviving Corporation”). At the Effective Time, the effect of the Merger shall be as provided herein and in the Articles of Merger and the applicable provisions of the MBCA.

     Section 2.02 Effective Time. No later than the Distribution Date, the parties shall cause the Merger to be consummated by filing the Articles of Merger as contemplated by the MBCA, together with any required certificates, with the Secretary of State of the State of Minnesota, in such forms as required by, and executed in accordance with, the relevant provisions of the MBCA. The Merger shall be effective at the time of the later to occur of the filing of the Articles of Merger and such related certificates and such later time specified in the Articles of Merger (the “Effective Time”).

     Section 2.03 Effect on Stock. At the Effective Time, as a result of the Merger and without any action on the part of TECI and Merger Sub, or any holder of the capital stock thereof:

          (a) Each share of capital stock of TECI issued and outstanding immediately prior to the Effective Time shall cease to be outstanding, shall be canceled and retired, and in consideration therefor, MoneyGram shall make an aggregate cash payment to Viad in the amount of $150 million.

-9-


 

          (b) Each share of common stock of Merger Sub issued and outstanding immediately prior to the Effective Time shall constitute one validly issued, fully paid and nonassessable share of common stock of the Surviving Corporation.

     Section 2.04 Surviving Corporation Articles of Incorporation; By-laws.

          (a) The articles of incorporation of TECI as in effect immediately prior to the Effective Time shall be the articles of incorporation of the Surviving Corporation until thereafter amended as provided by applicable law and such articles of incorporation.

          (b) The bylaws of TECI as in effect immediately prior to the Effective Time shall be the bylaws of the Surviving Corporation until thereafter amended as provided by applicable law.

     Section 2.05 Surviving Corporation Directors; Officers.

          (a) The directors of TECI immediately prior to the Effective Time shall, from and after the Effective Time, be the directors of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or retirement in accordance with the articles of incorporation and bylaws of the Surviving Corporation.

          (b) The officers of TECI immediately prior to the Effective Time shall, from and after the Effective Time, be the officers of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or retirement in accordance with the articles of incorporation and bylaws of the Surviving Corporation.

     Section 2.06 Cash Accounts. The cash accounts at the Effective Time of Viad and each Viad Subsidiary and TECI and each MoneyGram Subsidiary shall remain the property of each respective company or Subsidiary.

     Section 2.07 MoneyGram Certificate of Incorporation; Bylaws; Rights Plan. At or prior to the Effective Time, Viad and MoneyGram shall each take all actions that may be required to provide for the adoption by MoneyGram of the Restated Certificate of Incorporation of MoneyGram substantially in the form attached as Exhibit A hereto, the Amended and Restated Bylaws of MoneyGram substantially in the form attached as Exhibit B hereto, and the Rights Agreement of MoneyGram substantially in the form attached as Exhibit C hereto.

     Section 2.08 Boards of Directors. Prior to the Effective Time, Viad shall take all actions that may be required to cause the Board of Directors of Viad to consist of the individuals specified on part A of Schedule 2.08 hereto, and to cause the Board of Directors MoneyGram to consist of the individuals identified on part B of Schedule 2.08 hereto.

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ARTICLE III
ACTIONS PRIOR TO THE EFFECTIVE TIME AND THE DISTRIBUTION

     Section 3.01 Redemption of Viad Preferred Stock. Prior to the Effective Time, Viad shall deposit for the pro rata benefit of the holders of the shares of Viad Preferred Stock in trust with a bank or trust company in good standing, having capital, surplus and undivided profits aggregating at least $25 million according to its latest published statement of condition, the funds necessary to redeem all of the outstanding shares of Viad Preferred Stock. Prior to the Effective Time, Viad shall give such bank or trust company irrevocable authorization promptly to give notice of such redemption to the holders of the Viad Preferred Stock, and Viad shall take all other steps necessary for the Viad Preferred Stock to be deemed redeemed at or prior to the Effective Time.

     Section 3.02 Debt Tender Offers.

          (a) At such time prior to the Effective Time as determined by Viad in its sole and absolute discretion, Viad shall commence an offer to purchase all of the outstanding Medium-Term Notes under the MTN Indenture and all of the Subordinated Debentures (“Medium-Term Note Offer” and “Subordinated Debt Offer,” respectively, and collectively, the “Offers”) at an amount per note or debenture, as applicable, at least equal to the outstanding principal amount plus accrued and unpaid interest of each such note or debenture, as applicable. In connection with the Offers, Viad shall solicit consents from the holders of the Subordinated Debentures and the Medium-Term Notes to amend the Subordinated Debt Indenture and the MTN Indenture, respectively, to eliminate substantially all of the restrictive covenants from those indentures in the event all of the Subordinated Debentures or Medium-Term Notes, as the case may be, are not tendered for repurchase in the Offers. It shall be a condition to the Subordinated Debt Offer that the holders of at least a majority in outstanding principal amount of the Subordinated Debentures sufficient to satisfy the requirements specified in the Subordinated Debt Indenture for amendments to the Subordinated Debt Indenture by holders of the Subordinated Debentures consent to an amendment of the Subordinated Debt Indenture eliminating substantially all of the restrictive covenants contained in such Indenture, and tender their Subordinated Debentures to Viad, and it shall be a condition to the Medium-Term Note Offer that the holders of at least two-thirds in outstanding principal amount of the Medium-Term Notes sufficient to satisfy the requirements specified in the MTN Indenture for amendments to the MTN Indenture by holders of the Medium-Term Notes consent to an amendment of the MTN eliminating substantially all of the restrictive covenants contained in such Indenture, and tender their Medium-Term Notes to Viad. Such conditions may be waived by Viad in its sole and absolute discretion.

          (b) To the extent that any notes or debentures outstanding under the MTN Indenture or the Subordinated Debt Indenture are not repurchased by Viad in the Offers, except as otherwise provided in Section 3.02(c), Viad shall be solely responsible for all obligations with respect to such notes and debentures (including all payments of principal, interest and premium thereon). All liabilities relating to the Offers shall be Viad Liabilities.

          (c) In the event that the holders of at least a majority in principal amount of Subordinated Debentures do not consent to the amendment of the Subordinated Debt Indenture

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and tender their Subordinated Debentures to Viad in the Offers, MoneyGram shall take all action necessary to, effective as of the Effective Time, assume and become a co-obligor with Viad with respect to all of Viad’s obligations under the Subordinated Debt Indenture in accordance with the terms thereof (it being understood and agreed that MoneyGram shall have no similar obligation with respect to the MTN Indenture). Notwithstanding the foregoing, as between the Viad Group, on one hand, and the MoneyGram Group, on the other hand, all obligations under the Subordinated Debt Indenture are (i) Viad Liabilities, and none of such obligations shall be considered to be MoneyGram Liabilities, and (ii) the primary obligation of Viad, and, if any member of the MoneyGram Group is required to make any payment therefor, Viad shall reimburse such payment in the full amount of such payment within one Business Day of receipt of notice that such payment has been made.

     Section 3.03 The Dividend.

          (a) Prior to the Effective Time, TECI shall declare a dividend (the "Dividend”) in an aggregate amount equal to the Final Net Income and shall immediately pay to Viad an amount equal to Estimated Net Income, with the final payment of the Dividend being made in accordance with Section 3.03(f) hereof.

          (b) Within 90 calendar days following the Effective Time, MoneyGram shall prepare and deliver to Viad statements of income and cash flows for the Interim Period, and a balance sheet as of the date on which the Effective Time is to occur, for TECI and its subsidiaries (as such may be adjusted following resolution of disputes in accordance with this Section 3.03, the “Interim Period Financial Statements”). The Interim Period Financial Statements shall be prepared on a consolidated basis in accordance with U.S. generally accepted accounting principles, as applied in accordance with the past practice of TECI and Viad. Based on the Interim Period Financial Statements and this Section 3.03, MoneyGram shall prepare a certificate setting forth a calculation of (1) the consolidated Net Income of TECI for the Interim Period, minus (2) the sum of all dividends paid by TECI to Viad during the Interim Period in respect of income of TECI earned in the Interim Period other than a special dividend of $7.25 million paid by TECI in respect of certain deferred employee compensation (it being understood and agreed that the payment made by MoneyGram under Section 2.03(a) hereof shall not be included in this clause (2).

          (c) During the preparation of the Interim Period Financial Statements and the calculation of Final Net Income, and the period of any dispute within the contemplation of this Section 3.03, MoneyGram shall: (1) provide Viad with reasonable access to the books, records, facilities and employees of TECI; and (2) cooperate fully with Viad, including by providing on a timely basis all information necessary or useful in the calculation of Final Net Income.

          (d) After receipt of the calculation of Final Net Income, Viad shall use commercially reasonable efforts to review promptly the calculation of Final Net Income. Unless Viad delivers written notice to MoneyGram on or prior to the 90th calendar day following the delivery of certificate contemplated by Section 3.03(b) hereof (or such longer time as MoneyGram and Viad may agree) specifying in reasonable detail the amount, nature and basis of all disputed items, Viad shall be deemed to have accepted and agreed to the calculation of Final Net Income. If Viad so notifies MoneyGram of its objection to the calculation of Final Net

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Income, MoneyGram and Viad shall, within 30 calendar days following such notice (or such longer period as Viad and MoneyGram may agree) (the “Resolution Period”), attempt to resolve their differences and any resolution by them as to any disputed amounts shall be final, binding and conclusive.

          (e) If, at the conclusion of the Resolution Period, there remain amounts in dispute, then all amounts remaining in dispute shall be submitted to an internationally recognized accounting firm that has no material relationship with Viad to be selected by Viad (the “Neutral Auditor”) within ten calendar days after the expiration of the Resolution Period. Each party agrees to execute, if requested by the Neutral Auditor, a reasonable engagement letter, including customary indemnities. All fees and expenses relating to the work, if any, to be performed by the Neutral Auditors shall be borne pro rata as between Viad on the one hand and MoneyGram on the other, in proportion to the final allocation of the dollar amounts remaining in dispute between Viad and MoneyGram as determined by the Neutral Auditors such that the prevailing party pays the lesser proportion of the fees and expenses. The Neutral Auditors shall act as an arbitrator to determine, based solely on the provisions of this Section 3.03 and the presentations by Viad and MoneyGram, and not by independent review, only those issues still in dispute. The Neutral Auditors’ determination shall be made as promptly as reasonably practical following their selection, shall be set forth in a written statement delivered to Viad and MoneyGram and shall be final, binding and conclusive.

          (f) In the event that (1) Final Net Income is greater than Estimated Net Income, MoneyGram shall make an additional cash payment to Viad in an amount equal to the excess of Final Net Income over Estimated Net Income (which amount represents the declared but unpaid portion of the Dividend), or (2) Estimated Net Income is greater than Final Net Income, Viad shall make a cash payment to MoneyGram in an amount equal to the excess of Estimated Net Income over Final Net Income (which amount represents the amount paid by MoneyGram to Viad in excess of the Dividend).

     Section 3.04 Recapitalization of MoneyGram. On or prior to the Distribution Date, Viad shall consummate a recapitalization of the MoneyGram Common Stock, such that the number of shares of MoneyGram Common Stock outstanding immediately prior to the effective time of the Distribution (in accordance with Section 4.02(b) hereof) shall equal the number of shares of Viad Common Stock outstanding at the close of business on the Record Date.

     Section 3.05 Other Agreements. Each of Viad and MoneyGram shall enter into or to cause the appropriate members of its Group to enter into each Other Agreement on or prior to the Distribution Date. If there shall be a conflict between the provisions hereof and the provisions of any Other Agreement, the provisions of the Other Agreement shall control.

     Section 3.06 Credit Agreements. Each of the parties shall use reasonable best efforts to obtain, prior to the Effective Time, all necessary consents, waivers or amendments to each bank credit agreement, debt security or other financing facility to which it or any of its Subsidiaries is a party or by which it or any of its Subsidiaries is bound, or to refinance such agreement, security or facility, in each case on terms satisfactory to Viad and MoneyGram as may be necessary to permit the Merger and the Distribution to be consummated without any material breach of the terms of such agreement, security or facility. Each of Viad and

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MoneyGram shall use reasonable best efforts to enter into, prior to the Effective Time, the MoneyGram New Credit Agreement and the Viad New Credit Agreement.

ARTICLE IV
THE DISTRIBUTION

     Section 4.01 Actions Prior to the Distribution. Prior to the Distribution Date, and in each case at the request of and to the extent requested by Viad:

          (a) Viad and MoneyGram shall prepare the Distribution Registration Statement. MoneyGram shall file with the Commission the Distribution Registration Statement. Viad and MoneyGram shall use their reasonable best efforts to cause the Distribution Registration Statement to become effective under the Exchange Act as promptly as reasonably practicable. Viad and MoneyGram shall prepare and, to the extent required under applicable law, file with the Commission the Information Statement and any requisite no-action letters which Viad deems are necessary, proper or desirable to effect the Distribution. Viad and MoneyGram shall each use their respective reasonable best efforts to obtain all necessary approvals from the Commission with respect thereto, if any, as soon as practicable. After the Distribution Registration Statement becomes effective, Viad shall mail the Information Statement to the holders of Viad Common Stock as of the Record Date.

          (b) The parties shall use their reasonable best efforts to take all such actions as may be necessary, proper or appropriate under state securities and blue sky laws in connection with the transactions contemplated hereby.

          (c) Viad and MoneyGram shall prepare, and MoneyGram shall file and seek to make effective, an application for the listing on the NYSE of the MoneyGram Common Stock to be distributed in the Distribution, subject to official notice of issuance.

          (d) The parties shall cooperate in preparing, filing with the Commission and causing to become effective any registration statements or amendments thereto that are necessary or appropriate in order to effect the transactions contemplated hereby or to reflect the establishment of, or amendments to, any Plans contemplated hereby.

          (e) Subject to the satisfaction or waiver of the conditions set forth in Section 4.03 hereof, the Board of Directors of Viad, or the Executive Committee thereof, if so authorized by the Board of Directors, shall establish the Record Date and any appropriate procedures in connection with the Distribution.

          (f) Except as otherwise contemplated by the Other Agreements, each of Viad and MoneyGram shall use its reasonable best efforts to settle all intercompany receivables, payables, loans or advances between any member of the Viad Group and any member of the MoneyGram Group within 60 days after the Distribution Date. Any amounts that remain outstanding thereafter shall be resolved pursuant to the terms hereof and of the Other Agreements.

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     Section 4.02 The Distribution.

          (a) MoneyGram shall cooperate with Viad to accomplish the Distribution and shall, at Viad’s direction, promptly take any and all actions necessary, proper or desirable to effect the Distribution.

          (b) Subject to the satisfaction of the conditions set forth in Section 4.03 hereof, on or prior to the Distribution Date, Viad shall deliver to the Agent for the benefit of holders of Viad Common Stock on the Record Date a single stock certificate, duly endorsed by Viad in blank, representing all of the outstanding shares of MoneyGram Common Stock then owned by Viad or any member of the Viad Group, and shall cause the transfer agent for the shares of Viad Common Stock to instruct the Agent to distribute on the Distribution Date the appropriate number of such shares of MoneyGram Common Stock to each such holder or designated transferee or transferees of such holder. The Distribution shall be effective at 11:59 p.m. on the Distribution Date.

          (c) Each holder of Viad Common Stock on the Record Date (or such holder’s designated transferee or transferees) shall be entitled to receive in the Distribution a number of shares of MoneyGram Common Stock equal to the number of shares of Viad Common Stock held by such holder on the Record Date.

     Section 4.03 Conditions to Distribution. Viad shall have the sole and absolute discretion to determine the date of consummation of the Distribution; and such date as so determined by Viad in accordance with this Article IV is referred to herein as the “Distribution Date.” Viad’s intention to consummate the Distribution is subject to the satisfaction or waiver of the conditions set forth below, and Viad shall not complete the Distribution unless all such conditions are satisfied (or waived by Viad in its sole and absolute discretion).

          (a) The MoneyGram Common Stock to be distributed in the Distribution shall have been approved for listing on the NYSE, subject to official notice of issuance;

          (b) The Distribution Registration Statement shall have become effective, and no stop order with respect thereto shall be in effect;

          (c) All material authorizations, consents, approvals and clearances of all Governmental Authorities required to permit the valid consummation of the Distribution shall have been obtained; and no such authorization, consent, approval or clearance shall contain any conditions that would have a Material Adverse Effect; and all statutory requirements for such valid consummation shall have been fulfilled;

          (d) The consummation of the Distribution will not violate, conflict with, result in a breach of any provision under, constitute a default (or an event that, with or without notice or lapse of time, or both, would constitute a default) under, result in the termination of or a right of termination or cancellation under, accelerate or result in a right of acceleration of the performance required by, or require any approval, waiver or consent under, any material contract, indenture, preferred stock certificate of designation or Plan of any member of the Viad Group or any member of the MoneyGram Group;

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          (e) There shall not have occurred any event or occurrence, or exist any state of facts, that would have a Material Adverse Effect, including, among other things, any such effect resulting from or arising in connection with any terrorist attacks or the outbreak or escalation of hostilities involving the United States or the declaration by the United States of a national emergency or war or the occurrence of any other similar calamity or crisis;

          (f) The Board of Directors of Viad shall have declared a dividend payable to the holders of Viad Common Stock of shares of MoneyGram Common Stock and in connection with the declaration of such dividend shall have determined that the declaration and payment of such dividend is in the best interests of Viad and the holders of Viad Common Stock;

          (g) Viad shall have provided the NYSE with the prior written notice of the Record Date required by Rule 10b-17 of the Exchange Act and the rules and regulations of the NYSE;

          (h) No preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a Governmental Authority and no statute, rule, regulation or executive order promulgated or enacted by any Governmental Authority, shall be in effect preventing the consummation of the Distribution;

          (i) The Distribution shall be payable in accordance with applicable law;

          (j) (1) Viad shall have received the rulings from the IRS requested in the documents submitted to the IRS by Viad relating to the treatment of the Merger, the Distribution and related transactions, such rulings shall be satisfactory to Viad in its sole and absolute discretion, and (2) no event or circumstance shall have occurred that could reasonably be expected to have any adverse effect on such rulings;

          (k) One or more of members of the MoneyGram Group shall have been substituted, as of the Distribution Date, in all respects for the Viad Group or any member thereof in respect of all MoneyGram Support Agreements;

          (l) A letter or letters from the relevant ratings agency or agencies shall have been received stating that after the Distribution and subject to the conditions set forth therein, the long term debt of MoneyGram shall have an Acceptable Credit Rating; and

          (m) The MoneyGram New Credit Agreement, the Viad New Credit Agreement and the Other Agreements shall be in effect.

     Section 4.04 Conditions for the Benefit of Viad. The foregoing conditions are for the sole benefit of Viad and shall not give rise to or create any duty on the part of Viad or the Viad Board of Directors to waive or not waive such conditions or in any way limit Viad’s right to terminate this Agreement as set forth in Article X hereof or alter the consequences of any such termination from those specified in such Article. Any determination made by the Board of Directors of Viad in good faith prior to the Distribution Date concerning the satisfaction or waiver of any or all of the conditions set forth in Section 4.03 hereof shall be conclusive.

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ARTICLE V
SURVIVAL, RELEASE, ASSUMPTION AND INDEMNIFICATION

     Section 5.01 Survival of Agreements. All covenants and agreements of the parties contained herein shall survive the Distribution Date.

     Section 5.02 Release of Pre-Merger Claims.

          (a) Except as provided in Section 5.02(c) hereof, effective as of the Effective Time, MoneyGram does hereby, for itself and each other member of the MoneyGram Group, their respective Affiliates (other than any member of the Viad Group), successors and assigns, and all Persons that at any time prior to the Effective Time have been stockholders, directors, officers, agents or employees of any member of the MoneyGram Group (in each case, in their respective capacities as such), remise, release and forever discharge Viad and the members of the Viad Group, their respective Affiliates (other than any member of the MoneyGram Group), successors and assigns, and all Persons who at any time prior to the Effective Time have been stockholders, directors, officers, agents or employees of any member of the Viad Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed at or before the Effective Time, including in connection with the transactions and all other activities to implement the Merger and the Distribution.

          (b) Except as provided in Section 5.02(c) hereof, effective as of the Effective Time, Viad does hereby, for itself and each other member of the Viad Group, their respective Affiliates (other than any member of the MoneyGram Group), successors and assigns, and all Persons that at any time prior to the Effective Time have been stockholders, directors, officers, agents or employees of any member of the Viad Group (in each case, in their respective capacities as such), remise, release and forever discharge MoneyGram and the members of the MoneyGram Group, their respective Affiliates (other than any member of the Viad Group), successors and assigns, and all Persons who at any time prior to the Effective Time have been stockholders, directors, officers, agents or employees of any member of the MoneyGram Group (in each case, in their respective capacities as such), and their respective heirs, executors, administrators, successors and assigns, from any and all Liabilities whatsoever, whether at law or in equity (including any right of contribution), whether arising under any contract or agreement, by operation of law or otherwise, existing or arising from any acts or events occurring or failing to occur or alleged to have occurred or to have failed to occur or any conditions existing or alleged to have existed at or before the Effective Time, including in connection with the transactions and all other activities to implement the Merger and the Distribution.

          (c) Nothing contained in Section 5.02(a) or (b) hereof shall impair any right of any Person to enforce this Agreement or any Other Agreement, in accordance with the terms hereof and thereof. Nothing contained in Section 5.02(a) or (b) hereof shall release any Person from:

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               (i) any Liability, contingent or otherwise, assumed, transferred, assigned or allocated to the Group of which such Person is a member in accordance with this Agreement or any Other Agreement or any other Liability of any member of any Group hereunder or under any Other Agreement, it being understood and agreed that all Viad Liabilities have been allocated to Viad and all MoneyGram Liabilities have been allocated to MoneyGram;

               (ii) except with respect to categories of Liabilities, products, services and refunds that are covered by any Other Agreement (with respect to which Section 5.02(c)(i) shall govern), any Liability to pay or reimburse for services provided in the ordinary course of business to a member of one Group by a member of the other Group prior to the Effective Time or for unpaid amounts for products or services or refunds owing on products or services due on a value-received basis for work done by a member of one Group at the request or on behalf of a member of the other Group;

               (iii) except as otherwise provided herein or in any Other Agreement, any Liability relating to any intercompany receivables, payables, loans or advances between any member of the Viad Group and any member of the MoneyGram Group existing at the Effective Time;

               (iv) any Liability that any party may have with respect to indemnification or contribution pursuant hereto for claims brought against any party by third parties, which Liability shall be governed by the provisions of this Article V or, if applicable, the appropriate provisions of the Other Agreements; or

               (v) any Liability the release of which would result in the release of any Person other than a Person released pursuant to this Section 5.02.

In addition, nothing contained in Section 5.02(a) or (b) hereof shall release any party from honoring its existing obligations to indemnify any director, officer or employee of either Group who was a director, officer or employee of such party, at or prior to the Effective Time, to the extent such director, officer or employee becomes a named defendant in any Action involving such party, and was entitled to such indemnification pursuant to then existing obligations; provided, however, that to the extent applicable, Section 5.04 hereof shall determine whether any party shall be required to indemnify the other in respect of such Liability.

          (d) MoneyGram shall not make, and shall not permit any member of the MoneyGram Group to make, any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification, against Viad or any member of the Viad Group, or any other Person released pursuant to Section 5.02(a) hereof, with respect to any Liabilities released pursuant to Section 5.02(a) hereof. Viad shall not, and shall not permit any member of the Viad Group, to make any claim or demand, or commence any Action asserting any claim or demand, including any claim of contribution or any indemnification against MoneyGram or any member of the MoneyGram Group, or any other Person released pursuant to Section 5.02(b) hereof, with respect to any Liabilities released pursuant to Section 5.02(b) hereof.

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          (e) It is the intent of each party, by virtue of the provisions of this Section 5.02, to provide for a full and complete release and discharge of all Liabilities existing or arising from all acts and events occurring or failing to occur or alleged to have occurred or to have failed to occur and all conditions existing or alleged to have existed at or before the Effective Time, between or among MoneyGram or any member of the MoneyGram Group, on the one hand, and Viad or any member of the Viad Group, on the other hand (including any contractual agreements or arrangements existing or alleged to exist between or among any such members at or before the Effective Time), except as expressly set forth in Section 5.02(c) hereof. At any time, at the request of any party, each other party shall cause each member of its respective Group to execute and deliver releases reflecting the provisions of this Section 5.02.

     Section 5.03 Taxes; Plan Audits. This Article V shall not be applicable to any Indemnifiable Losses or Liabilities related to Taxes, which shall be governed by the Tax Sharing Agreement. In addition, this Article V shall not be applicable to any Indemnifiable Losses or Liabilities related to any Action by any Governmental Authority related to the Viad Plans, which shall be governed by Section 8.04 of the Employee Benefits Agreement.

     Section 5.04 Assumption and Indemnification.

          (a) Subject to Section 5.03 hereof and the Other Agreements, from and after the Effective Time, Viad shall retain or assume (as between the Viad Group and the MoneyGram Group), as the case may be, and shall indemnify, defend and hold harmless each MoneyGram Individual and each member of the MoneyGram Group, and each of their Representatives and Affiliates, from and against:

               (i) all Liabilities for Third-Party Claims relating to, arising out of or due to, directly or indirectly, the Distribution or to the service prior to the Effective Time by any MoneyGram Individual as an officer, director or employee of any member of the Viad Group, except as provided in the Employee Benefits Agreement and except to the extent covered by insurance; provided such indemnification would be permitted by law if such officer, director or employee made a claim for indemnification;

               (ii) all Viad Liabilities;

               (iii) any material breach by Viad or any member of the Viad Group hereof or of any Other Agreement;

               (iv) all Indemnifiable Losses of any such MoneyGram Individual, member of the MoneyGram Group, Representative or Affiliate relating to, arising out of or due to, directly or indirectly, the Viad Assets, the Viad Liabilities, the Viad Business, the Former Viad Businesses, the Viad Individuals or the Viad Group’s Representatives, whether relating to or arising out of occurrences prior to, at or after the Effective Time, including any Indemnifiable Losses that Viad may incur as a result of any litigation set forth on Schedule 5.04(b)(iii); and

               (v) all Liabilities related to or arising out of any untrue statement or alleged untrue statement of a material fact or omission to state a material fact required to be stated in any portion of the Distribution Registration Statement or the Information Statement (or any preliminary or final form thereof or any amendment thereto), or necessary to make the

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statements therein not misleading, but only to the extent that such material relates solely to Viad or any member of the Viad Group; and

               (vi) all Viad obligations under Section 3.02(c) hereof.

          (b) Subject to Section 5.03 hereof and the Other Agreements, and except as specifically provided in Section 5.04(a) hereof, from and after the Effective Time, MoneyGram shall retain or assume (as between the Viad Group and the MoneyGram Group), and shall indemnify, defend and hold harmless each Viad Individual and each member of the Viad Group, and each of their Representatives and Affiliates, from and against:

               (i) all MoneyGram Liabilities;

               (ii) any material breach by MoneyGram or any member of the MoneyGram Group hereof or of any Other Agreement;

               (iii) all Indemnifiable Losses of any such Viad Individual, member of the Viad Group, Representative or Affiliate relating to, arising out of or due to, directly or indirectly, the MoneyGram Assets, the MoneyGram Liabilities, the MoneyGram Business, the Former MoneyGram Businesses, the MoneyGram Individuals or the MoneyGram Group’s Representatives, whether relating to or arising out of occurrences prior to, at or after the Effective Time;

               (iv) all Liabilities for Third-Party Claims relating to, arising out of or due to, directly or indirectly, the Distribution or to the service prior to the Effective Time by any Viad Individual as an officer, director or employee of any member of the MoneyGram Group, except as provided in the Employee Benefits Agreement and except to the extent covered by insurance; provided such indemnification would be permitted by law if such officer, director or employee made a claim for indemnification; and

               (v) all Liabilities relating to or arising out of any untrue statement or alleged untrue statement of a material fact or omission or alleged omission to state a material fact required to be stated in any portion of the Distribution Registration Statement or the Information Statement (or any preliminary or final form thereof or any amendment thereto), or necessary to make the statements therein not misleading, except to the extent that Viad is liable therefor pursuant to Section 5.04(a)(v) hereof.

          (c) If an Indemnitee realizes a Tax benefit or detriment by reason of having incurred an Indemnifiable Loss for which such Indemnitee receives an Indemnity Payment from an Indemnifying Party or by reason of receiving an Indemnity Payment, then such Indemnitee shall pay to such Indemnifying Party an amount equal to the Tax benefit (as and when actually realized in cash), or such Indemnifying Party shall pay to such Indemnitee an additional amount equal to the Tax detriment (taking into account any Tax detriment resulting from the receipt of such additional amounts), as the case may be. An Indemnitee shall claim any Tax benefit to which it is entitled by reason of an Indemnifiable Loss. If, following a payment by an Indemnitee or an Indemnifying Party pursuant to this Section 5.04(c) in respect of a Tax benefit or detriment, there is an adjustment to the amount of such Tax benefit or detriment, then each of

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Viad and MoneyGram shall make appropriate payments to the other, including the payment of interest thereon at the federal statutory rate then in effect, to reflect such adjustments.

          (d) The amount that an Indemnifying Party is required to pay to any Indemnitee pursuant to this Section 5.04 shall be reduced (including retroactively) by any Insurance Proceeds and other amounts actually recovered by such Indemnitee in reduction of the related Indemnifiable Loss, it being understood and agreed that each party shall use its reasonable best efforts to collect any such proceeds or other amounts to which it or any of its Subsidiaries is entitled, without regard to whether it is the Indemnifying Party hereunder. If an Indemnitee receives an Indemnity Payment in respect of an Indemnifiable Loss and subsequently receives Insurance Proceeds or other amounts in respect of such Indemnifiable Loss, then such Indemnitee shall pay to such Indemnifying Party an amount equal to the difference between (1) the sum of the amount of such Indemnity Payment and the amount of such Insurance Proceeds or other amounts actually received and (2) the amount of such Indemnifiable Loss, adjusted (at such time as appropriate adjustment can be determined) in each case to reflect any premium adjustment attributable to such claim. Notwithstanding anything to the contrary in this Section 5.04, each party’s indemnity under this Section 5.04 shall include the increased cost and expense of purchasing insurance against future losses, provided and to the extent that such cost and expense is directly attributable to Indemnifiable Losses.

          (e) If any Indemnity Payment required to be made hereunder or under any Other Agreement is denominated in a currency other than United States dollars, the amount of such payment shall be translated into United States dollars using the Foreign Exchange Rate for such currency determined in accordance with the following rules:

               (i) with respect to an Indemnifiable Loss arising from payment by a financial institution under a guarantee, comfort letter, letter of credit, foreign exchange contract or similar instrument, the Foreign Exchange Rate for such currency shall be determined as of the date on which such financial institution is reimbursed;

               (ii) with respect to an Indemnifiable Loss covered by insurance, the Foreign Exchange Rate for such currency shall be the Foreign Exchange Rate employed by the insurance company providing such insurance in settling such Indemnifiable Loss with the Indemnifying Party; and

               (iii) with respect to an Indemnified Loss not described in clause (i) or (ii) of this Section 5.04(e), the Foreign Exchange Rate for such currency shall be determined as of the date that notice of the claim with respect to such Indemnifiable Loss is given to the Indemnitee.

     Section 5.05 Procedure for Indemnification.

          (a) If any Indemnitee receives notice of the assertion of any Third-Party Claim with respect to which an Indemnifying Party is obligated hereunder to provide indemnification, such Indemnitee shall give such Indemnifying Party notice thereof promptly after becoming aware of such Third-Party Claim; provided, however, that the failure of any Indemnitee to give notice as provided in this Section 5.05 shall not relieve any Indemnifying

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Party of its obligations under this Article V, except to the extent that such Indemnifying Party is actually prejudiced by such failure to give notice. Such notice shall describe such Third-Party Claim in reasonable detail and, if practicable, shall indicate the estimated amount of the Indemnifiable Loss that has been or may be sustained by such Indemnitee.

          (b) An Indemnifying Party, at such Indemnifying Party’s own expense and through counsel chosen by such Indemnifying Party (which counsel shall be reasonably satisfactory to the Indemnitee), may elect to defend any Third-Party Claim, with such an election by the Indemnifying Party being deemed an admission of its obligation to indemnify the Indemnitee with respect to such Third-Party Claim. If an Indemnifying Party elects to defend a Third-Party Claim, then, within ten Business Days after receiving notice of such Third-Party Claim (or sooner, if the nature of such Third-Party Claim so requires), such Indemnifying Party shall notify the Indemnitee of its intent to do so, and such Indemnitee shall cooperate in the defense of such Third-Party Claim. Such Indemnifying Party shall pay such Indemnitee’s reasonable out-of-pocket expenses incurred in connection with such cooperation. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third-Party Claim, such Indemnifying Party shall not be liable to such Indemnitee under this Article V for any legal or other expenses subsequently incurred by such Indemnitee in connection with the defense thereof; provided, however, that such Indemnitee shall have the right to employ one law firm as counsel to represent such Indemnitee (which firm shall be reasonably satisfactory to the Indemnifying Party) if, in such Indemnitee’s reasonable judgment, either a conflict of interest between such Indemnitee and such Indemnifying Party exists in respect of such claim or there may be defenses available to such Indemnitee that are different from or in addition to those available to such Indemnifying Party, and in that event (1) the reasonable fees and expenses of one such separate counsel for all such Indemnitees shall be paid by such Indemnifying Party and (2) each of such Indemnifying Party and such Indemnitee shall have the right to conduct its own defense in respect of such claim. If an Indemnifying Party elects not to defend against a Third-Party Claim, or fails to notify an Indemnitee of its election as provided in this Section 5.05 within the period of ten Business Days described above, such Indemnitee may defend, compromise and settle such Third-Party Claim; provided, however, that no such Indemnitee may compromise or settle any such Third-Party Claim without the prior written consent of the Indemnifying Party, which consent shall not be withheld unreasonably. Notwithstanding the foregoing, the Indemnifying Party shall not, without the prior written consent of the Indemnitee, (1) settle or compromise any Third-Party Claim or consent to the entry of any judgment that does not include as an unconditional term thereof the delivery by the claimant or plaintiff to the Indemnitee of a written release from all Liability in respect of such Third-Party Claim or (2) settle or compromise any Third-Party Claim in any manner that may adversely affect the Indemnitee.

     Section 5.06 Remedies Cumulative. The remedies provided in this Article V shall be cumulative and shall not preclude assertion by any Indemnitee of any other rights or the seeking of any other remedies against any Indemnifying Party.

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ARTICLE VI
ACCESS TO INFORMATION

     Section 6.01 Provision of Corporate Records. Prior to or as promptly as practicable after the Distribution Date, Viad shall deliver to MoneyGram all corporate books and records of the MoneyGram Group and copies of all corporate books and records of the Viad Group relating to the MoneyGram Assets, the MoneyGram Liabilities or the MoneyGram Business, including in each case all active agreements, active litigation files and government filings. From and after the Effective Time, all books, records and copies so delivered shall be the property of MoneyGram.

     Section 6.02 Access to Information. From and after the Distribution Date, each of Viad and MoneyGram shall (and shall cause its controlled Affiliates to) afford to the other and to the other’s Representatives reasonable access and duplicating rights during normal business hours to all Information within such party’s possession relating to such other party’s businesses, Assets or Liabilities (including such Information as may be necessary to such other party to fulfill its obligations under the Other Agreements), insofar as such access is reasonably requested by such other party; provided, however, that the requesting party shall reimburse the providing party for all reasonable costs and expenses incurred in connection the provision of such requested Information. Without limiting the foregoing, Information may be requested under this Section 6.02 for audit, accounting, claims and litigation purposes, as well as for purposes of fulfilling disclosure and reporting obligations, it being understood and agreed that MoneyGram may request and shall be provided under this Section 6.02 such Information as may be necessary for MoneyGram to fulfill its status and obligations as “accounting successor” to Viad (including correspondence with the U.S. Securities and Exchange Commission, Hyperion databases, accounting position and policy memoranda, correspondence with independent auditors and details of restructuring costs and expenses).

     Section 6.03 Production of Witnesses. After the Distribution Date, each of Viad and MoneyGram shall use reasonable efforts to make available to the other, upon written request, its (and its controlled Affiliates’) directors, officers, employees and agents as witnesses to the extent that any such Person may reasonably be requested (giving consideration to business demands of such individuals) in connection with any legal, administrative or other proceedings in which the requesting party may from time to time be involved.

     Section 6.04 Retention of Records. Except as otherwise required by law or agreed in writing, or as otherwise provided in the Tax Sharing Agreement, each of Viad and MoneyGram shall retain, for a period of at least seven years following the Distribution Date, all significant Information in such party’s possession or under its control relating to the business, Assets or Liabilities of the other party and, after the expiration of such seven-year period, prior to destroying or disposing of any of such Information, (a) the party proposing to dispose of or destroy any such Information shall provide no less than 30 days’ prior written notice to the other party, specifying the Information proposed to be destroyed or disposed of and (b) if, prior to the scheduled date for such destruction or disposal, the other party requests in writing that any of the Information proposed to be destroyed or disposed of be delivered to such other party, the party proposing to dispose of or destroy such Information promptly shall arrange for the delivery of the requested Information to a location specified by, and at the expense of, the requesting party.

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     Section 6.05 Confidentiality. From and after the Distribution Date, each of Viad and MoneyGram shall hold, and shall use its reasonable best efforts to cause its Affiliates and Representatives to hold, in strict confidence all Information concerning the other party obtained by it prior to the Distribution Date or furnished to it by such other party pursuant hereto or to any Other Agreement and shall not release or disclose such Information to any other Person, except its Representatives, who shall be bound by the provisions of this Section 6.05; provided, however, that Viad and MoneyGram may disclose such Information to the extent that (a) disclosure is compelled by judicial or administrative process or, in the opinion of such party’s counsel, by other requirements of law (provided that the party compelled to disclose such Information shall provide at least ten days prior notice to the other party) or (b) such party can show that such Information was (1) available to such party on a nonconfidential basis prior to its disclosure by the other party, (2) in the public domain through no fault of such party or (3) lawfully acquired by such party from other sources after the time that it was furnished to such party pursuant hereto or to any Other Agreement. Notwithstanding the foregoing, each of Viad and MoneyGram shall be deemed to have satisfied its obligations under this Section 6.05 with respect to any Information if it exercises the same care with regard to such Information as it takes to preserve confidentiality for its own similar Information.

     Section 6.06 Tax Matters. The foregoing provisions of this Article VI shall not apply with respect to tax matters, which shall instead be governed by Article IV of the Tax Sharing Agreement.

ARTICLE VII
NO REPRESENTATIONS OR WARRANTIES; EXCEPTIONS

     Section 7.01 No Representations or Warranties; Exceptions. MoneyGram understands and agrees that no member of the Viad Group is, in this Agreement or in any other agreement or document, representing or warranting to MoneyGram in any way as to the MoneyGram Assets, the MoneyGram Liabilities, or the MoneyGram Business or as to any consents or approvals required in connection with the consummation of the transactions contemplated hereby, it being agreed and understood that MoneyGram shall take all of the MoneyGram Assets transferred to it or any other member of the MoneyGram Group “as is, where is” and that, except as provided in Section 9.01 hereof, MoneyGram shall bear the economic and legal risk that conveyances of the MoneyGram Assets shall prove to be insufficient or that the title of any member of the MoneyGram Group to any MoneyGram Assets shall be other than good and marketable and free from encumbrances.

ARTICLE VIII
INSURANCE

     Section 8.01 Insurance Coverage.

          (a) The parties intend by this Agreement that MoneyGram and each member of the MoneyGram Group be successors-in-interest to all rights that any member of the MoneyGram Group may have as of the Effective Time as a subsidiary, affiliate, division or department of Viad or as an insured party prior to the Effective Time under any Insurance Policy issued to Viad by any insurance carrier or under any agreements related to such policies executed