As filed with the Securities and Exchange Commission on February 26, 2002
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
For the Fiscal Year Ended December 31, 2001
VIAD CORP
Registrant’s telephone number, including area code: 602-207-4000
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yesx Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
As of January 31, 2002, 88,910,703 shares of Common Stock ($1.50 par value) were outstanding and the aggregate market value of the Common Stock (based on its closing price per share on such date) held by nonaffiliates was approximately $2.2 billion.
Documents Incorporated by Reference
A portion of the Proxy Statement for the Annual Meeting of Stockholders of Viad Corp to be held May 14, 2002 is incorporated by reference into Part III of this Report.
TABLE OF CONTENTS
INDEX
PART I
Item 1. Business
Viad Corp (“Viad” or the “Corporation”) is comprised of operating companies and a division which constitute a diversified services business. Most of Viad’s services are provided to businesses for use by their customers. Accordingly, the Corporation primarily markets its services through more than 110,000 retail and financial locations (payment services), and to numerous tradeshow organizers and exhibitors (convention and event services). Occupying the number one or number two position in many of the markets in which they compete, each of the Corporation’s businesses seek to provide quality, convenient and cost-effective services with a discernible difference to the ultimate users and thereby be considered a value-added provider by Viad’s business customers.
Viad’s services are classified into two reportable business segments, namely (1) Payment Services, and (2) Convention and Event Services. The Corporation also provides Travel and Recreation Services. A description of each of the Viad reportable business segments, the travel and recreation businesses, and recent developments relating to each follows.
Viad Business Units
Viad is built around several operating groups which are leading competitors in their businesses, including companies engaged in payment services (Travelers Express Company, Inc., MoneyGram Payment Systems, Inc., and Game Financial Corporation), and convention and event services (GES Exposition Services, Inc. and the Exhibitgroup/ Giltspur division). Viad business units also provide travel tour services (Brewster Transport Company Limited) and recreation services (Glacier Park, Inc.).
Payment Services
Viad’s payment services business is conducted by the Travelers Express group of companies. These companies engage in a variety of payment service activities, including issuance and processing of money orders, processing of official checks and share drafts, and money transfer and cash access services.
Travelers Express sells money orders to the public through more than 62,000 agent locations and financial institutions in the United States and Puerto Rico, and is one of the nation’s leading issuers of money orders, issuing more than 324 million money orders in 2001. Travelers Express also provides processing services for approximately 8,500 branch locations of banks, credit unions and other financial institutions which offer official checks (used by financial institutions in place of their own bank check or cashier’s check) and share drafts (the credit union industry’s version of a personal check). In addition, MoneyGram Payment Systems, Inc. (“MoneyGram”), a subsidiary of Travelers Express, provides money transfer services through approximately 50,000 agent locations in more than 150 countries worldwide. Some of the company’s agent locations sell or provide both money orders and money transfer services. Travelers Express also provides in-person electronic bill payment services for various companies, whose consumers pay their utility, car payment, and other bills at conveniently located retail stores. Additionally, the company provides high volume processing of refund and rebate checks, food vouchers, gift certificates, and other financial instruments. Another subsidiary, Game Financial Corporation (“Game Financial”) provides cash access services to the gaming industry. Game Financial provides three primary services: installing and maintaining automatic teller machines in casinos and check cashing locations; providing cash advances on consumers’ credit cards for customers who utilize the automatic teller machines; and cashing checks at casinos. Game Financial provides these services to approximately 63 casinos.
Approximately 7.9% of payment services revenue is generated by a single customer, with no other customer accounting for more than 5% of payment services revenue.
Convention and Event Services
Convention and event services are provided by the Corporation’s GES Exposition Services and Exhibitgroup/ Giltspur companies.
GES Exposition Services, Inc. (“GES”), one of North America’s leading suppliers of convention services to trade associations, show management companies and exhibitors, provides tradeshow design and planning, decorating, exhibit design and fabrication, installation and dismantling, display rental, custom graphics, furnishings, electrical, freight-handling, logistics, transportation, and management services for conventions, tradeshows, associations, and corporate and special events. GES provides convention services through a network of offices in North America’s most active and popular tradeshow service markets. GES will have full service operations in 18 U.S. cities, down from 21 U.S. cities in early 2001, as a result of the restructuring of the company as described in Note C of Notes to Consolidated Financial Statements of the Corporation, and four Canadian cities.
Exhibitgroup/ Giltspur, a division of the Corporation, operates one of the largest exhibit and display businesses in the United States. The company is a designer, builder, installer and warehouser of convention, tradeshow, museum and other exhibits and displays. In the U.S., the company will have operations in 13 U.S. cities, down from 21 U.S. cities in early 2001, as a result of the restructuring of the company as described in Note C of Notes to Consolidated Financial Statements of the Corporation. The company will have five full service manufacturing locations and the remaining eight will be sales and design offices. Additionally, the company has operations in one Canadian city, one city in the United Kingdom, and one city in Germany, and operates through an international network of strategic partners that gives Exhibitgroup/ Giltspur the ability to serve customers worldwide. The company also offers exhibition marketing strategy with a full program of implementation services such as multimedia, video and web design.
Travel and Recreation Services
Travel and recreation services are provided by the Brewster Transport and Glacier Park business units.
Brewster Transport Company Limited (“Brewster Transport”), an Alberta, Canada corporation, has a 109-year heritage of providing sightseeing packages and tours to travelers visiting Canada’s rich and varied landscapes. In that regard, it provides regularly scheduled bus service, operates tour and charter buses within the Canadian Rockies, conducts travel agency, hotel, and snowcoach tour operations and operates the Sulphur Mountain Gondola. Brewster Transport owns and operates 94 motorcoaches and three transit buses, as well as 21 snowcoaches which transport sightseers on tours of the glaciers of the Columbia Icefield. The snowcoach glacier tours and the Sulfur Mountain Gondola are two of the largest tourist attractions in the Canadian Rockies.
Glacier Park, Inc. (“Glacier Park”) operates seven historic lodges in and around Glacier National Park in Montana and Waterton Lakes National Park, Canada. These parks are located in a unique alpine wilderness in a remote area of the United States and Canada and are well known for their rugged mountains and glaciers. Services provided include room management, food and beverage operations, retail operations and transportation services.
Competition
The Corporation’s businesses generally compete on the basis of discernible differences, value, quality, price, convenience and service, and encounter substantial competition from a large number of providers of similar services, including numerous well-known local, regional and national companies, private payment service companies and the U.S. Postal Service (money orders), many of which have greater resources than the Corporation. Travelers Express also competes on the basis of number and location of sales outlets, business automation and technology. First Data Corporation and its subsidiaries Western Union Financial Services, Inc., Orlandi Valuta and Global Cash Access; the U.S. Postal Service; American Express; Federal Home Loan Banks and Imperial Bank are the principal competitors of Travelers Express. On a national basis, Freeman Decorating Company is the principal competitor of GES, and The George P. Johnson Company is the principal competitor of Exhibitgroup/ Giltspur.
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Patents and Trademarks
United States patents are currently granted for a term of 20 years from the date a patent application is filed. The Viad companies own a number of patents which give them competitive advantages in the marketplace, including a number of patents owned by Exhibitgroup/ Giltspur covering exhibit systems and by Travelers Express for automated money order dispensing systems. The Travelers Express patents cover security, automated reporting and control, and other features which are important in the issuance of money orders.
United States trademark registrations are for a term of 10 years, renewable every 10 years as long as the trademarks are used in the regular course of trade. The Viad companies maintain a portfolio of trademarks representing substantial goodwill in the businesses using the marks.
Many trademarks used by Viad and its businesses, including the TRAVELERS EXPRESS, MONEYGRAM, EXHIBITGROUP/ GILTSPUR, and GES service marks, have substantial importance and value. Certain rights in processing equipment and software held by Travelers Express and its subsidiaries also provide competitive advantage.
Government Regulation
Compliance with legal requirements and government regulations are a day-to-day integral part of the Corporation’s operations and represent a normal cost of doing business. Financial transaction reporting and state banking department regulations affect Travelers Express and MoneyGram, and state gaming department regulations, as well as various Native American tribal regulations, affect Game Financial. Environmental, labor and employment and other regulations affect virtually all operations.
Employees
Viad operating units had approximately 5,800 employees at December 31, 2001 as follows:
Viad believes that relations with its employees are satisfactory and that collective bargaining agreements expiring in 2002 will be renegotiated in the ordinary course of business without adverse effect on Viad’s operations.
Viad had 81 employees at its corporate center at December 31, 2001 providing management, financial and accounting, internal auditing, tax, administrative, legal and other services to its operating units and handling residual matters pertaining to businesses previously discontinued or sold by the Corporation. Viad is managed by a Board of Directors comprised of seven non-employee directors and one employee director and has an executive management team consisting of six Viad officers (including the one employee director) and four principal executives of significant operating divisions or companies.
Seasonality
Convention and event service activity may vary significantly depending on the frequency and timing of shows (some shows are not held each year and some shows may shift between quarters). Viad’s travel and recreation operations generally experience peak activity during the summer months. Viad’s 2001 quarterly diluted earnings per share (before restructuring charges and other items), as a percentage of the full year’s earnings per share, were approximately 22% (first quarter), 32% (second quarter), 24% (third quarter), and 22% (fourth quarter). See Notes S and T of Notes to Consolidated Financial Statements of the Corporation.
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Shelf Registration
Under a Shelf Registration filed in 1994 with the Securities and Exchange Commission, Viad can issue up to an aggregate $500 million of debt and equity securities. While the Shelf Registration is effective, it requires amendment to ensure immediate access to the capital markets. Viad intends to prepare and file such amendment. No securities have been issued under the program.
Financial Information about Restatement
Information regarding the Corporation’s restatement of its audited financial statements for 2000, 1999, and 1998 is provided in Note B of Notes to Consolidated Financial Statements of the Corporation.
Financial Information about Restructuring and Other Items
Information regarding restructuring charges and other items is provided in Note C of Notes to Consolidated Financial Statements of the Corporation.
Financial Information about Segments
Business segment financial information is provided in Note S of Notes to Consolidated Financial Statements of the Corporation.
Financial Information about Geographic Areas
Geographic area financial information is provided in Note S of Notes to Consolidated Financial Statements of the Corporation.
Item 2. Properties
Viad and its subsidiaries operate service or production facilities and maintain sales and service offices in the United States, Canada, the United Kingdom, and Germany. The Corporation also conducts business in certain other foreign countries.
Viad’s headquarters are located at Viad Tower in Phoenix, Arizona. Excluding space which Viad subleases to third parties, Viad leases approximately 60,000 square feet.
Payment Services operates 27 leased facilities for processing, sales and administrative purposes located in the United States, United Kingdom, and Puerto Rico. The principal operations for money order and official check processing and Travelers Express corporate headquarters are located in Minnesota. The principal money transfer service center is located in Colorado. Payment Services has 17 retail stores, with 15 in New York, one in Florida, and one in New Jersey. All Payment Services properties are leased.
Convention and Event Services operates 17 offices and 51 multi-use facilities (exhibit construction, sales and design, office and/or warehouse). The multi-use facilities range in size from approximately 100,000 square feet to 475,000 square feet. Three of the multi-use facilities are owned; all other properties are leased. All of the properties are in the United States, except for three offices and seven multi-use facilities that are located in Canada, one office and one multi-use facility located in the United Kingdom and three multi-use facilities located in Germany. GES and Exhibitgroup/ Giltspur corporate headquarters are located in Las Vegas, Nevada, and Roselle, Illinois, respectively.
Travel and Recreation Services operates three offices, nine retail stores, two bus terminals, four garages, an icefield tour facility, a gondola lift operation, and nine hotels/ lodges (with approximately 900 rooms, and ancillary foodservice and recreational facilities). Three offices, seven retail stores and six hotels/ lodges are in the United States. Two retail stores, the bus terminals, garages, icefield tour facility, gondola lift operation, and three hotels/ lodges are located in Canada. Travel and Recreation Services owns four hotels/ lodges and five other hotels/ lodges that are operated pursuant to concessionaire agreements. One bus terminal and three garages are owned; the icefield tour facility and gondola lift operation are owned and operated through lease agreements with Parks Canada; and all other properties are leased.
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Management believes that the Corporation’s facilities in the aggregate are adequate and suitable for their purposes and that capacity is sufficient for current needs.
Item 3. Legal Proceedings
Viad and certain subsidiaries are plaintiffs or defendants to various actions, proceedings and pending claims. Certain of these pending legal actions are or purport to be class actions. Some of the foregoing involve, or may involve, compensatory, punitive or other damages. Litigation is subject to many uncertainties and it is possible that some of the legal actions, proceedings or claims could be decided against Viad. Although the amount of liability at December 31, 2001, with respect to certain of these matters is not ascertainable, Viad believes that any resulting liability, after taking into consideration amounts already provided for, will not have a material effect on Viad’s financial statements.
Viad is subject to various environmental laws and regulations of the United States as well as of the states and other countries in whose jurisdictions Viad has or had operations and is subject to certain international agreements. As is the case with many companies, Viad faces exposure to actual or potential claims and lawsuits involving environmental matters. Although Viad is a party to certain environmental disputes, Viad believes that any liabilities resulting therefrom, after taking into consideration amounts already provided for, exclusive of any potential insurance recoveries, will not have a material effect on Viad’s financial statements.
Item 4. Submission of Matters to a Vote of Securityholders
No matters were submitted to a vote of security holders during the fourth quarter of 2001.
Optional Item. Executive Officers of Registrant
Executive Officers of Viad Corp
The names, ages and positions of the Executive Officers of the Corporation as of February 22, 2002, are listed below:
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Executive Officers of Viad Corp’s Subsidiaries or Divisions Not Listed Above
The term of office of the Executive Officers is until the next annual organization meetings of the Boards of Directors of Viad or appropriate subsidiaries, all of which are scheduled for May or June of this year.
The Directors of Viad are divided into three classes, with the terms of one class of Directors to expire at each Annual Meeting of Stockholders. The current term of office of Robert H. Bohannon is scheduled to expire at the 2003 Annual Meeting of Stockholders.
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PART II
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
The principal market on which the common stock of Viad is traded is the New York Stock Exchange. The common stock is also admitted for trading on the American, Chicago, Cincinnati, Pacific, and Philadelphia Exchanges. The following tables summarize the high and low market prices as reported on the New York Stock Exchange Composite Tape and the cash dividends declared for the two years ended December 31:
SALES PRICE RANGE OF COMMON STOCK
DIVIDENDS DECLARED ON COMMON STOCK
Regular quarterly dividends were paid on Viad common stock on the first business day of January, April, July and October.
As of January 31, 2002, there were 26,250 stockholders of record of Viad’s common stock.
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Item 6. Selected Financial Data
SELECTED FINANCIAL AND OTHER DATA
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Results of Operations:
Viad Corp (“Viad”) focuses on two principal service businesses: Payment Services and Convention and Event Services.
As a result of a comprehensive and detailed review of Exhibitgroup/ Giltspur accounts conducted as part of Viad’s restructuring and related facility closures announced in the 2001 third quarter, Viad determined it was necessary to restate its audited financial statements for 2000, 1999 and 1998. The restatement of prior periods, attributable only to Exhibitgroup/ Giltspur, has no impact on previously reported cash, revenues from continuing operations or on the unaudited quarterly results previously reported for 2001. All income from continuing operations, per share amounts and operating income for the Convention and Event Services segment discussed below for 2000 and 1999 have been restated. See Note B of Notes to Consolidated Financial Statements.
As discussed in Note C of Notes to Consolidated Financial Statements, in the 2001 third quarter Viad recorded restructuring charges totaling $66.1 million (pre-tax), relating principally to the closure and consolidation of certain facilities and severance in Viad’s Convention and Event Services segment. Approximately 80 percent of the facility closures and consolidation had been completed and 60 percent of the positions had been eliminated as of December 31, 2001. Viad is on target with the restructuring process and expects to substantially complete the restructuring activities by March 2002.
The following discussion and analysis should be read in conjunction with the accompanying Consolidated Financial Statements, which include the accounts of Viad and all of its subsidiaries. All per share figures discussed are stated on the diluted basis.
2001 vs. 2000:
Revenues for 2001 were $1.7 billion, down slightly from the 2000 amount. Viad Payment Services subsidiaries invests funds from the sale of official checks, money orders and other payment instruments in tax-exempt securities, which have lower pre-tax yields but produce higher income on an after-tax basis than comparable taxable investments. Even though nontaxable investments generally have higher after-tax yields than taxable investments, Viad has shifted its mix of nontaxable and taxable investments to balance its alternative minimum tax position. At December 31, 2001, tax-exempt investments represented 22 percent of the total investment portfolio versus 45 percent at December 31, 2000. On a fully taxable equivalent basis, as though amounts were invested in taxable investments and excluding the effects of sold businesses, revenues of ongoing operations were $1.7 billion, down 3.9 percent from $1.8 billion in 2000.
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Including the restructuring charges and other items described in Note C of Notes to Consolidated Financial Statements, net income for 2001 was $51.1 million, or $0.58 per share, compared with net income of $140.8 million, or $1.54 per share in 2000. Income before restructuring charges and other items was $112.3 million, or $1.29 per share, compared with comparable income of $139.9 million, or $1.53 per share, in 2000, down 15.7 percent on a per share basis.
There were 4.6 million fewer average outstanding and potentially dilutive common shares in 2001 than in 2000, due primarily to the stock repurchase programs described in “Liquidity and Capital Resources.” In addition, a lower Viad stock price during 2001 contributed to fewer additional dilutive shares related to unexercised stock options.
Payment Services. Revenues of the Payment Services segment on the fully taxable equivalent basis were $760.7 million in 2001, a 13.3 percent increase over 2000 revenues of $671.7 million. On the same basis and before restructuring charges and other items, operating income was $176.6 million, a 10.3 percent increase over 2000 operating income of $160.1 million. Operating margins decreased to 23.2 percent in 2001 from 23.8 percent in 2000. The increase in operating income was driven by continuing solid growth in official check operations, continued improvements in MoneyGram and by the leveraging of the existing infrastructure, as Payment Services experienced double-digit growth in the number of financial institution locations and in the number of locations that sell or provide both money orders and money transfer services. MoneyGram experienced strong transaction volume growth in Latin America, International and in its Express Payment business. Average investable funds for 2001 were $5.0 billion, up 31.2 percent from 2000 levels, however, results were partially offset by lower effective interest rates on new investments. Results were impacted by the effects of a shift in a portion of the mix in investments from nontaxable to taxable investments. Even though nontaxable investments generally have higher after-tax yields than taxable investments, Viad has shifted its mix of nontaxable and taxable investments to balance its alternative minimum tax position. At December 31, 2001, tax-exempt investments represented 22 percent of the total investment portfolio versus 45 percent at December 31, 2000.
Convention and Event Services. Revenues of the Convention and Event Services segment were $884.0 million in 2001, a decrease of 14.3 percent from 2000 revenues of $1.0 billion. Operating income before restructuring charges and other items was $32.6 million, a decrease of 56.9 percent from the 2000 operating income of $75.5 million. Operating margins decreased to 3.7 percent in 2001 from 7.3 percent in 2000. Revenues for the segment were negatively impacted by the overall softness in the economy, the events of September 11th and by show rotation (some shows do not occur every year). Many customers delayed or canceled exhibit construction or refurbished old exhibits rather than build new exhibits in response to the uncertain economy. Certain shows and exhibit orders were canceled following the events of September 11th and convention attendance trends declined due to travel concerns. The loss of the Key3Media Group, Inc. (“Key3Media”) tradeshows in August 2000 also impacted full year 2001 revenues. The segment continues to focus on eliminating and controlling overhead and other costs, including the implementation of restructuring plans to change its organizational structure in an effort to make operations more efficient and competitive. In spite of these actions, economic pressure on the industry is expected to challenge the convention and event segment throughout 2002.
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Travel and Recreation Services. Revenues of the ongoing travel and recreation businesses, described in Note S of Notes to Consolidated Financial Statements, decreased $11.0 million, or 15.2 percent, to $61.5 million in 2001. The revenue decrease resulted primarily from an overall decrease in traffic from Japanese and European tourists and to a decrease in overall package tours and charter volumes. The declines in tourism were reflective of the soft economy, higher fuel costs and the September 11th terrorist attacks. Operating income for the travel and recreation businesses was $14.7 million, a decrease of $4.4 million, or 23.1 percent, from that of 2000, primarily due to reduced tourism volume.
Corporate Activities. The $2.2 million increase in corporate activities expense from 2000 to 2001 was due primarily to a write-down of a noncore investment resulting from its impairment, deemed to be other than temporary.
Other Investment Income. Investment income associated with Corporate securities (see Note F of Notes to Consolidated Financial Statements) declined $7.5 million due primarily to lower average investment levels throughout the majority of 2001 as funds were used for stock repurchases as described in “Liquidity and Capital Resources.” Lower average interest rates during 2001 also contributed to the decline.
Interest Expense. Interest expense increased slightly to $25.9 million in 2001 from $25.3 million in 2000, primarily as a result of slightly higher average debt outstanding during the year, substantially offset by lower average interest rates. Approximately 38 and 27 percent of the average debt outstanding during 2001 and 2000, respectively, related to short-term borrowings that are subject to variable interest rates.
Income Taxes. Excluding the effect of the restructuring charges and other items, the 2001 effective tax rate was 23.6 percent, up from 15.2 percent in 2000. The relatively low rate compared to the statutory federal rate is primarily attributable to tax-exempt income from Viad’s Payment Services businesses. The higher rate for 2001 is due to lower tax-exempt investment income in proportion to total pre-tax income, resulting from the shift in the mix of investments from nontaxable to taxable investments. Even though nontaxable investments generally have higher after-tax yields than taxable investments, Viad has shifted its mix of nontaxable and taxable investments to balance its alternative minimum tax position. In addition, due to lower operating income in the Convention and Event Services segment, tax savings associated with filing consolidated state income tax returns is lower than anticipated, resulting in a higher effective state tax rate.
2000 vs. 1999:
Revenues for 2000 were $1.7 billion compared with $1.6 billion in 1999. On a fully taxable equivalent basis, and excluding the effects of sold businesses, revenues of ongoing operations were $1.8 billion in 2000, up 11.5 percent from $1.6 billion in 1999.
Including the restructuring charges and other items described in Note C of Notes to Consolidated Financial Statements, income from continuing operations for 2000 was $140.8 million, or $1.54 per share, compared with income from continuing operations of $122.5 million, or $1.26 per share in 1999. Income from continuing operations before restructuring charges and other items was $139.9 million, or $1.53 per share, compared with comparable income of $116.3 million, or $1.20 per share, in 1999.
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Net income for 2000 was $140.8 million, or $1.54 per share. Net income for 1999 was $341.4 million, or $3.53 per share, including income from discontinued operations of $219.0 million, or $2.27 per share. Income from discontinued operations in 1999 included the gain on sale of Dobbs International Services Inc. (“Dobbs”) of $213.4 million, or $2.21 per share.
There were 5.5 million fewer average outstanding and potentially dilutive common shares in 2000 than in 1999, due primarily to the stock repurchase programs described in “Liquidity and Capital Resources.” In addition, a lower Viad stock price during 2000 contributed to fewer additional dilutive shares related to unexercised stock options.
Payment Services. Revenues of the Payment Services segment on the fully taxable equivalent basis were $671.7 million in 2000, a 15.5 percent increase over 1999 segment revenues of $581.5 million. On the same basis, operating income was $160.1 million, a 24.6 percent increase over 1999 operating income of $128.5 million. Operating margins increased to 23.8 percent in 2000 from 22.1 percent in 1999. These results were driven by continuing strong growth in traditional Travelers Express money order and official check operations and by the leveraging of existing infrastructure, as Payment Services experienced double-digit growth in the number of financial locations and in the number of locations that sell or provide both money orders and money transfer services. MoneyGram experienced strong transaction volume growth in Latin America, International and Express Payment, offset by continued weakness in the U.S.-to-Mexico corridor. Average investable balances of money order and official check operations for 2000 were $3.8 billion, up 23.0 percent from 1999 levels, resulting in higher investment income.
Convention and Event Services. Revenues of the Convention and Event Services segment were $1.0 billion in 2000, an increase of 10.7 percent from 1999 revenues of $932.8 million. Operating income was $75.5 million, a decrease of 15.9 percent from 1999 operating income of $89.8 million. Operating margins decreased to 7.3 percent in 2000 from 9.6 percent in 1999. The 2000 fourth quarter and full year revenues for the segment were impacted by approximately $15 million resulting from the loss of the Key3Media tradeshows. Continued higher labor and certain show production costs, combined with failure to move aggressively in eliminating and controlling overhead and other costs during the latter part of the year, also contributed to lower margins for the segment.
Travel and Recreation Services. Revenues of the ongoing travel and recreation businesses decreased $6.5 million, or 8.2 percent, to $72.5 million in 2000. The revenue decrease resulted primarily from an overall decrease in traffic from U.S., Canadian and Japanese tourists and the discontinuance of a lower margin package tour business. Operating income for the travel and recreation businesses was $19.1 million, an increase of $2.8 million, or 16.9 percent, over that of 1999, primarily due to higher margin business, cost reduction efforts, and the full year results of an acquisition made in late 1999.
Corporate Activities. The $9.6 million decrease in corporate activities expense from 1999 to 2000, was due primarily to $6.8 million lower expense provisions associated with Viad’s incentive plans because aggressive financial goals and targets linked to stock price appreciation were not achieved. Corporate cost reduction efforts also contributed to the decline.
Other Investment Income. Other investment income, relating to Corporate securities, totaled $13.1 million and $14.5 million in 2000 and 1999, respectively. This investment income was generated from the investment of a portion of the cash proceeds from the July 1999 sale of Dobbs. The decline in interest income is due primarily to the use of investment proceeds for the purchase of treasury shares.
Interest Expense. Interest expense decreased to $25.3 million in 2000 from $26.9 million in 1999, primarily as a result of lower average debt levels during 2000, offset partially by higher average interest rates.
Income Taxes. Excluding the effect of restructuring charges and other items, the 2000 effective tax rate was 15.2 percent, down from 19.1 percent in 1999. The actual tax rate for 2000 is lower than in previous years due to higher tax-exempt investment income in proportion to total pre-tax income. This resulted from growth in investments in tax-exempt securities from the Payment Services businesses along with lower operating income from the Convention and Event Services businesses.
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Liquidity and Capital Resources:
Viad’s total debt at December 31, 2001 was $396.8 million compared with $447.1 million at December 31, 2000. The debt-to-capital ratio at December 31, 2001 was 0.35 to 1, compared to 0.37 to 1 at December 31, 2000. Capital is defined as total debt plus minority interests, preferred stock and common stock and other equity.
Viad began its stock repurchase program in July 1998 for the purpose of replacing common shares issued upon exercise of stock options and in connection with other stock compensation plans, with the intended effect of reducing dilution caused by the issuance of such shares. During 1999, Viad announced a program to repurchase up to $200 million of its common stock. In October 2000, Viad announced its intent to repurchase an additional $50 million of its common stock and in January 2001, Viad announced its intent to repurchase an additional 2 million to 3 million shares of its common stock. Under these plans, 1,416,000 shares were repurchased in 2001 for $34.6 million at an average price of $24.45 and 6,231,000 shares were repurchased in 2000 for $147.2 million at an average price of $23.62. Substantially all share repurchases in 2001 were made during the 2001 first quarter. Given the uncertainty in the economy, share repurchases have been deferred in order to prudently conserve cash.
Proceeds from the exercise of stock options, including tax benefits on stock option exercises, totaled $22.8 million and $20.1 million in 2001 and 2000, respectively. The level of future cash generated from stock option exercises may vary depending on Viad’s stock price compared to the option exercise price and the ability of the grantees to exercise stock options.
With respect to working capital, in order to minimize the effects of borrowing costs on earnings, Viad strives to maintain current assets at the lowest practicable levels while at the same time taking advantage of payment terms offered by trade creditors and obtaining advance deposits from customers for certain projects and services. However, working capital requirements may fluctuate significantly from seasonal factors as well as changes in levels of receivables and inventories caused by numerous business factors.
Viad satisfies a portion of its working capital and other financing requirements with short-term borrowings (through commercial paper, bank note programs and bank lines of credit). Effective August 31, 2001, Viad completed credit facilities totaling $425 million to replace and consolidate its previous $300 million revolving bank credit agreement, various letter of credit support facilities and a Canadian credit facility without substantially increasing Viad’s overall credit capacity. Under these facilities, short-term borrowings are supported by a $200 million short-term 364-day facility (with a one-year term out provision, at Viad’s option, in the event a new facility is not established) and a $225 million five-year facility. Unused commitments (net of amounts used to support short-term borrowings and letters of credit) under the facility totaled $182 million at December 31, 2001. Borrowings under the facilities are subject to various covenants, including standard equity and other financial ratio calculations, among others. The borrowings are also subject to increases in borrowing costs if debt ratings are not maintained at current levels. Default under the covenants relating to any of Viad’s debt agreements could result in cross defaults to other debt agreements. At December 31, 2001, Viad guaranteed $34.5 million of subsidiary obligations of which 85 percent represents obligations associated with operating leases and other unused credit facilities. The remaining 15 percent represents subsidiary obligations included in total debt in the Consolidated Balance Sheets.
The ability of Viad to maintain its investment grade rating is critical as it affects the cost of borrowing. In addition, major clearing banks and financial institution customers of Viad’s Payment Services require that Viad maintain an investment grade rating. Any ratings downgrade could increase Viad’s cost of borrowing, result in termination of debt, or require certain actions be performed to rectify such a situation. Such a downgrade could also have a negative effect on Viad’s ability to attract and retain new or existing customers. Being placed on credit watch with negative implications could also affect Viad’s cost of borrowing for its short-
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Payment Services has agreements with clearing banks that provide processing and clearing functions for money orders and official checks. Certain contracts have covenants that require the maintenance of specified levels of capital for Viad’s Payment Services operations. Any changes in specified capital levels may require additional capital contributions be made by Viad to Payment Services and/or may require Payment Services to change the mix of its investments or increase the level of investment liquidity, which could result in lower rates of return.
Capital spending has been reduced by obtaining, where appropriate, equipment and other property under operating leases. Cash flows from operations and proceeds from the sales of noncore businesses and assets during the past three years have generally been sufficient to fund capital expenditures, acquire businesses and pay cash dividends to stockholders. Although no assurance can be given, Viad expects operating cash flows and short-term borrowings to be sufficient to finance its ongoing business, maintain adequate capital levels and meet covenant and investment grade rating requirements. Should financing requirements exceed such sources of funds, Viad believes it has adequate external financing sources available, including unused commitments under its credit facilities, to cover any shortfall.
EBITDA is a measure of Viad’s ability to service debt, fund capital expenditures, and finance growth, and should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with generally accepted accounting principles. EBITDA is defined by Viad as income from continuing operations before interest expense, income taxes, depreciation and amortization and restructuring charges and other items and includes the fully taxable equivalent adjustment. In 2001, EBITDA was $289 million, down 11.1% from 2000. EBITDA in 2000 was $325 million, up 13.8 percent from 1999.
Viad’s Payment Services subsidiaries generate funds from the sale of official checks, money orders and other payment instruments, with the related liabilities classified as “Payment service obligations.” Substantially all of the proceeds of such sales are invested in permissible securities, principally high-quality debt instruments. These investments are restricted by state regulatory agencies for use by the subsidiaries to satisfy the liability to pay, upon presentment, the face amount of such payment service obligations. Such assets are not available to satisfy working capital or other financing requirements of Viad. Accordingly, the securities are included in the Consolidated Balance Sheets under the caption, “Investments restricted for payment service obligations.” Certain additional assets of the Payment Services subsidiaries relating to payment service obligations, including cash on hand, funds in transit from agents and securities expected to be sold or maturing within one year, are included under the caption, “Funds, agents’ receivables and current maturities of investments restricted for payment service obligations.” Although the Payment Services investment portfolio exposes Viad to certain credit risks, Viad believes the high quality of the investments reduces this risk. Approximately 99 percent of the investments at December 31, 2001 have a rating of A or higher or are collateralized by federal agency securities. Although Payment Services’ investment portfolio is highly diversified, if any one issuer were unable to pay its obligations or were to enter into bankruptcy, Payment Services may have to sell the investment and reinvest the proceeds in permissible securities and/or could lose a portion or a substantial amount of the investment with such issuer. Under normal circumstances there is no requirement to sell long-term debt securities prior to their maturity, as the funds from ongoing sales of money orders and other payment instruments and funds from maturing long-term and short-term investments are expected to be adequate to settle payment service obligations as they are presented. Fluctuations in the balances of Payment Services’ assets and obligations result from varying levels of sales of money orders and other payment instruments, the timing of agents’ receivables, and the timing of the presentment of such instruments.
Working in cooperation with certain financial institutions, Payment Services has established separate consolidated entities and processes that provide these financial institutions with additional assurance of the ability to clear their official checks. These processes include maintenance of specified ratios of segregated investments to outstanding payment instruments. In some cases, alternative credit support has been purchased by Payment Services that provide backstop funding as additional security for payment of their
15
A Viad Payment Services subsidiary has an agreement to sell, on a periodic basis, undivided percentage ownership interests in certain receivables from bill payment and money order agents in an amount not to exceed $450 million. The agreement runs through June 2003, but the decision to sell receivables is made daily. In addition, there is also no requirement for the purchasing bank to purchase the receivables. The receivables are sold in order to accelerate Payment Services’ cash flow for investments in permissible securities.
Viad’s Payment Services subsidiaries have various lines of credit, overdraft facilities and reverse repurchase agreements totaling $755 million available to assist in the management of their investments and the clearing of payment service obligations. No borrowings were outstanding under these facilities at December 31, 2001 or 2000.
Viad sold treasury stock in 1992 to Viad’s Employee Equity Trust (the “Trust”) to fund certain existing employee compensation and benefit plans over the scheduled 15-year term of the Trust. For financial reporting purposes, the Trust is consolidated with Viad. The fair market value of the shares held by the Trust, representing unearned employee benefits, is recorded as a deduction from common stock and other equity and is reduced as employee benefits are funded. At December 31, 2001, approximately 2,875,000 shares remained in the Trust and were available to fund future benefit obligations.
Viad has certain unfunded pension and other postretirement benefit plans that require payments over extended periods of time. Such future benefit payments are not expected to materially affect Viad’s liquidity.
Viad is subject to various environmental laws and regulations of the United States as well as of the states and other countries in whose jurisdictions Viad has or had operations and is subject to certain international agreements. As is the case with many companies, Viad faces exposure to actual or potential claims and lawsuits involving environmental matters. Although Viad is a party to certain environmental disputes, Viad believes that any liabilities resulting therefrom, after taking into consideration amounts already provided for, exclusive of any potential insurance recovery, should not have a material effect on Viad’s financial position, results of operations or cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Viad’s market risk exposures relate primarily to fluctuations in interest rates and, to a lesser degree, to fluctuations in foreign exchange rates. Interest rate risk is the risk that changing interest rates will adversely affect the market value and earnings of the company. Foreign exchange risk is the risk that fluctuating exchange rates will adversely affect earnings. Viad’s exposure to these risks is primarily associated with its Payment Services business. Certain derivative financial instruments are used as part of Viad’s risk management strategy to manage these exposures. Derivatives are not used for speculative purposes.
The company is exposed to foreign exchange risk as Viad has certain receivables and payables denominated in foreign currencies. Viad primarily utilizes forward contracts to hedge its exposure to fluctuations in foreign exchange rates. Forward contracts relating to Payment Services’ wire transfer transactions generally have maturities less than thirty days, and forward contracts relating to other receivables or payables generally have maturities less than ninety days. 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.
The company’s earnings can be adversely affected by changing interest rates. A portion of Viad’s Payment Services business involves the payment of commissions to selling agents of its official check program. A Payment Services subsidiary has also entered into agreements to sell receivables from its bill payment and money order agents. The commissions and net proceeds from the agents’ receivables sales are computed based
16
Stockholders’ equity can be adversely affected by changing interest rates, as changes in the fair value of securities classified as available for sale (after-tax) and changes in the fair value of derivative financial instruments (after-tax) 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.
Viad is also exposed to short-term interest rate risk on certain of its debt obligations. Viad currently does not use derivative financial instruments to hedge cash flows for such obligations.
Earnings Sensitivity to Interest Rate Changes. Based on a hypothetical 10 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, the effects of the swap agreements and the expected borrowing level of variable-rate debt, the increase in pre-tax income would be approximately $3.4 million. A hypothetical 10 percent proportionate decrease in interest rates, based on the same set of assumptions, would result in a decrease in pre-tax income of approximately $1.7 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.
Fair Value Sensitivity to Interest Rate Changes. The fair value of securities classified as available for sale, derivative financial instruments and fixed-rate debt is sensitive to changes in interest rates. A 10 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 $100.1 million (along with an after-tax decrease in accumulated other comprehensive income of approximately $61.1 million), an estimated increase in the fair value of derivative financial instruments of approximately $50.9 million (along with an after-tax increase in accumulated other comprehensive income of approximately $31.0 million) and an estimated off-balance-sheet decrease in the fair value of fixed-rate debt of approximately $1.5 million at December 31, 2001. A 10 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 $95.9 million (along with an after-tax increase in accumulated other comprehensive income of approximately $58.5 million), an estimated off-balance-sheet decrease in the fair value of derivative financial instruments of approximately $50.9 million (along with an after-tax decrease in accumulated other comprehensive income of approximately $31.0 million) and an estimated off-balance-sheet increase in the fair value of fixed-rate debt of approximately $1.6 million at December 31, 2001. These amounts are estimated based on a certain set of assumptions about interest rates and portfolio balance growth.
Interest Rate Risk and Market Risk Oversight. Viad has established several levels of risk management oversight and control. An investment committee, comprised of senior officers of Viad and Payment Services, and reporting to the Chief Executive Officer of Viad, routinely reviews investment and risk management strategies and results. Additionally, the company employs an independent advisor to its investment committee. Viad maintains formal procedures for entering into derivative transactions, and management regularly monitors and reports to the Audit Committee of the Board of Directors on such activity. The agreements are with major financial institutions which are currently expected to fully perform under the terms of the agreements, thereby mitigating the credit risk from the transactions in the event of nonperformance by the counterparties. In addition, Viad regularly monitors the credit ratings of the counterparties, and the likelihood of default is considered remote.
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Recent Accounting Pronouncements:
As discussed in Note A of Notes to Consolidated Financial Statements, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 142, which is effective for Viad on January 1, 2002, specifies that goodwill and certain intangibles with indefinite lives will no longer be amortized but instead will be subject to periodic impairment testing. As part of the transition provisions, Viad will be required to measure goodwill for impairment as of January 1, 2002. Viad is in the process of evaluating the impact of SFAS No. 142. SFAS No. 144, which is also effective for Viad on January 1, 2002, supersedes existing accounting guidance on asset impairment under SFAS No. 121. Viad does not anticipate that SFAS No. 144 will have any material impact on its financial position or results of operations.
Forward-Looking Statements:
As provided by the safe harbor provision under the “Private Securities Litigation Reform Act of 1995,” Viad cautions readers that, in addition to the historical information contained herein, this Annual Report on Form 10-K includes certain information, assumptions and discussions that may constitute forward-looking statements. These forward-looking statements are not historical facts, but reflect current estimates, projections, or expectations of or current trends in future growth, operating cash flows, availability of short-term borrowings, consumer demand, new business, investment policies, productivity improvements, ongoing cost reduction efforts, efficiency, competitiveness, tax rates, restructuring plans (including timing and realization of cost savings) and market risk disclosures. Actual results could differ materially from those projected in forward-looking statements. Viad’s businesses can be affected by a host of risks and uncertainties. Among other things, gains and losses of customers, consumer demand patterns, labor relations, purchasing decisions related to customer demand for convention and event services, existing and new competition, industry alliances and consolidation and growth patterns within the industries in which Viad competes may individually or in combination impact future results. In addition to the factors mentioned elsewhere, economic, competitive, governmental, technological, capital marketplace and other factors could affect the forward-looking statements contained in this Annual Report.
Item 8. Financial Statements and Supplementary Data
Refer to Index to Financial Statements on page 22 for required information.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding Directors of the Registrant is included in the Proxy Statement for the Annual Meeting of Stockholders of Viad to be held on May 14, 2002, and is incorporated herein by reference. Information regarding executive officers of Registrant is located at page 5 of this Report.
Item 11. Executive Compensation
Information regarding executive compensation is contained in the Proxy Statement for the Annual Meeting of Stockholders of Viad to be held on May 14, 2002, and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Information regarding security ownership of certain beneficial owners and management is contained in the Proxy Statement for the Annual Meeting of Stockholders of Viad to be held on May 14, 2002, and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
2. None.
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SIGNATURES
Pursuant to the requirements of Section 13 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, in Phoenix, Arizona, on the 22nd day of February, 2002.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Date: February 22, 2002
20
Date: February 21, 2002
21
INDEX TO FINANCIAL STATEMENTS
22
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements.
F-1
CONSOLIDATED STATEMENTS OF INCOME
F-2
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
F-3
CONSOLIDATED STATEMENTS OF CASH FLOWS
F-4
CONSOLIDATED STATEMENTS OF COMMON STOCK AND OTHER EQUITY
F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. Significant Accounting Policies
Principles of Consolidation. The Consolidated Financial Statements of Viad Corp (“Viad”) include the accounts of Viad and all of its subsidiaries. All significant intercompany account balances and transactions between Viad and its subsidiaries have been eliminated in consolidation.
Use of Estimates. The Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures at the date of the financial statements and the reported results of operations during the period. Actual results could differ from those estimates.
Cash and Cash Equivalents. Viad considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Certain cash equivalents are classified as “Short-term investments.” See Note F.
Investments in Securities. Corporate securities, other than securities held by Payment Services, are included in the Consolidated Balance Sheets under the caption, “Investments in securities” with the current portion and investments with original maturities of three months or less included under the caption, “Short-term investments.” In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” Viad classifies these investments as available for sale. See Note F.
Assets Restricted for Payment Service Obligations.Viad’s Payment Services subsidiaries generate funds from the sale of official checks, money orders and other payment instruments, with the related liabilities classified as “Payment service obligations.” Substantially all of the proceeds of such sales are invested in permissible securities, principally high-quality debt instruments. These investments, along with related cash and funds in transit, are restricted by state regulatory agencies for use by the subsidiaries to satisfy the liability to pay, upon presentment, the face amount of the payment service obligations. In addition, certain other assets of the Payment Services subsidiaries are available if necessary to meet such obligations. Such assets are not available to satisfy working capital or other financing requirements of Viad. Securities are included in the Consolidated Balance Sheets under the caption, “Investments restricted for payment service obligations.” Certain additional assets of the Payment Services subsidiaries relating to payment service obligations, including cash on hand, funds in transit from agents, and securities expected to be sold or maturing within one year, are included under the caption, “Funds, agents’ receivables and current maturities of investments restricted for payment service obligations.”
In accordance with SFAS No. 115, Viad classifies these investment securities restricted for payment service obligations as either available for sale or held to maturity. See Note G.
Inventories. Inventories, which consist primarily of exhibit materials and supplies used in providing services, are stated at the lower of cost (first-in, first-out and specific identification methods) or market.
Long-Lived Assets. Viad reviews the carrying values of its long-lived assets and identifiable intangibles for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable in accordance with the provisions of SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.”
Property and Equipment. Property and equipment are stated at cost, net of accumulated depreciation and any impairment write-downs pursuant to SFAS No. 121. Property and equipment are depreciated principally on the straight-line method over the estimated useful lives of the assets: buildings, 15 to 40 years; equipment, 3 to 10 years; and leasehold improvements, over the shorter of the lease term or useful life.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Intangibles. Intangibles, including goodwill, are carried at cost less accumulated amortization and any impairment write-downs pursuant to SFAS No. 121. Intangibles are amortized on the straight-line method over the estimated lives or periods of expected benefit, but not in excess of 40 years. (See Recent Accounting Pronouncements below).
Insurance Liabilities. Viad is self-insured up to certain limits for workers’ compensation, automobile, product and general liability, property loss and medical claims. Viad has also retained and provided for certain insurance liabilities in conjunction with the sales of businesses. Provisions for losses for claims incurred, including estimated claims incurred but not yet reported, are made based on Viad’s prior historical experience, claims frequency and other factors. Viad has purchased insurance for amounts in excess of the self-insured levels.
Derivative Financial Instruments. Viad uses derivative financial instruments as part of its risk management strategy to manage exposure to fluctuations in interest and foreign currency rates. Derivatives are not used for speculative purposes. Amounts receivable or payable under derivative swap agreements used to hedge exposure of interest rate changes on variable rate commission payments and net proceeds from agents’ receivables sales are accrued and recognized as an adjustment to the expense of the related transaction. The change in fair value of the derivative is 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 as a hedge will be reflected at fair value, with changes in value recognized through earnings. Forward derivative contracts used to hedge assets and liabilities denominated in foreign currencies 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, was not significant. As discussed in Note K, on January 1, 2001, Viad adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and its related amendments and interpretations. SFAS No. 133 requires that entities record all derivatives as either assets or liabilities, measured at fair value.
Fair Value of Financial Instruments. The carrying values of cash and cash equivalents, receivables, accounts payable and payment service obligations approximate fair value due to the short-term maturities of these instruments. The fair value of investments in debt and equity securities is disclosed in Notes F and G. The estimated fair value of debt and derivative financial instruments is disclosed in Notes J and K, respectively. Considerable judgement is required in interpreting market data and assumptions used to develop the estimates of fair value. Accordingly, the estimates presented may not be indicative of the amounts that Viad could realize in a current market exchange. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value amounts.
Revenue Recognition. Revenue is recognized when services are performed, fees are earned, or products are delivered. Convention service revenue is recognized upon completion of the tradeshow or event. Revenue on certain long-term exhibit contracts is recognized on the percentage of completion method. Revenues include investment earnings on assets restricted for payment service obligations.
Stock-Based Compensation. As permitted by SFAS No. 123, “Accounting for Stock-Based Compensation,” Viad uses the intrinsic value method prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock-based compensation plans.
Net Income Per Common Share. Employee Stock Ownership Plan (“ESOP”) shares are treated as outstanding for net income per share calculations. Shares held by the Employee Equity Trust (the “Trust”) are not considered outstanding for net income per share calculations until the shares are released from the Trust.
F-7
Reclassifications. Certain prior year amounts have been reclassified to conform to the 2001 presentation.
Recent Accounting Pronouncements. In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets” (effective for Viad on January 1, 2002). SFAS No. 142 specifies that goodwill and certain intangibles with indefinite lives will no longer be amortized but instead will be subject to periodic impairment testing. Had SFAS No. 142 been adopted January 1, 2001, the impact of ceasing goodwill amortization (based on Viad’s current levels of goodwill) would have increased net income in 2001 by approximately $14,300,000, or $0.16 per diluted share. Intangible assets with finite lives will continue to be amortized over their respective useful lives. Viad will be required to measure goodwill for impairment as of January 1, 2002 as part of the transition provisions. For Viad, the impairment analysis must be completed no later than June 30, 2002. Any impairment resulting from these transition tests will be recorded and recognized as the cumulative effect of a change in accounting principle. Viad is in the process of evaluating the impact of SFAS No. 142 on its other intangible assets and has not yet determined if a cumulative effect adjustment will be required upon adoption.
In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (effective for Viad on January 1, 2002). SFAS No. 144 supersedes existing accounting guidance on asset impairment under SFAS No. 121. Among other provisions, the new rules change the criteria for classifying an asset as held-for-sale. The standard also broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations, and changes the timing of recognizing losses on such operations. Viad does not anticipate that this new standard will have any material impact on its financial position or results of operations.
B. Restatement of Financial Statements
Subsequent to the issuance of Viad’s 2000 consolidated financial statements, management determined that the financial statements for 2000, 1999, and 1998 required restatement due to errors identified at Exhibitgroup/ Giltspur (one of two operating companies included in the Convention and Event Services segment).
In the 2001 third quarter, Viad recorded a pre-tax restructuring charge of $66,100,000 (See Note C) relating, in large part, to the closure and consolidation of certain of Exhibitgroup/ Giltspur’s facilities. As the company undertook the actual closure process, it discovered that, in addition to the amounts included in the restructuring charge, certain charges and expenses relating to the accounting for work-in-process costs after completion of associated job(s), raw material inventories and other current liabilities were necessary. Upon reviewing those additional items, it was determined that some of them related to prior periods. As a result, Viad determined it was necessary to restate its audited financial statements for 2000, 1999 and 1998.
The restatement is attributable only to Exhibitgroup/ Giltspur. The restatement reduced Viad’s cumulative three-year (2000, 1999 and 1998) income from continuing operations by a total of $12,426,000 from $370,395,000, as originally reported, or by 3.4 percent as follows: $3,673,000, or $0.04 per share (2000), $6,104,000, or $0.06 per share (1999) and $2,649,000, or $0.03 per share (1998). Operating income for the Convention and Event Services segment (see Note S) and all applicable income and per share amounts for 2000, 1999 and 1998 presented herein have been restated. For restated unaudited quarterly data for 2000, see Note T.
F-8
A summary of the effects of the restatement on Viad’s Consolidated Statements of Income and related segment data for the years ended December 31, is as follows:
A summary of the effects of the restatement on Viad’s Consolidated Balance Sheets at December 31 is as follows:
C. Restructuring Charges and Other Items
In the 2001 third quarter, Viad recorded restructuring charges totaling $66,100,000 ($39,910,000 after-tax) associated with the closure and consolidation of certain facilities, severance and other employee benefits of which $3,730,000 (relating to the write-down of certain inventories) was charged to “Cost of sales and
F-9
services.” The remaining $62,370,000 was classified under the caption “Restructuring charges and other items.”
The charges, 93 percent relating to the Convention and Event Services segment, consist of costs associated with the closure and consolidation of certain facilities and severance and other employee benefits related to the elimination of approximately 800 positions across numerous regions, business functions and job classes. The charges also include amounts for the write-down (net of estimated sales proceeds) of certain inventories and fixed assets, facility closure and lease termination costs (less estimated sublease income) and other exit costs. The write-down of assets was based on impairment analyses, including discounted cash flow and estimates of the net realizable value of the assets to be disposed.
A summary of the restructuring charges, amounts utilized and remaining accrued liability balance is as follows:
Payments under long-term lease obligations will continue to be made over the remaining terms of the leases. Approximately 80 percent of the facility closures and consolidation had been completed and 60 percent of the positions had been eliminated as of December 31, 2001.
Also in the 2001 third quarter, Viad’s payment services subsidiary, Travelers Express Company, Inc. (“Travelers Express”) recorded a charge totaling $5,000,000 ($3,026,000 after-tax) resulting from the bankruptcy of a large money order agent in September 2001.
In August 2000, Key3Media Group, Inc. (“Key3Media”), a company spun off by Ziff-Davis Inc., terminated a long-term agreement with GES Exposition Services, Inc. (“GES”) to produce tradeshows. The companies had been involved in litigation regarding the contract termination. During the second quarter of 2001, GES and Key3Media agreed to end the litigation. As a result of the settlement, Viad recorded a noncash provision totaling $29,274,000 ($18,267,000 after-tax) in the 2001 second quarter representing primarily the write-off of net receivables and prepayments made to Key3Media. The settlement will have no adverse impact on future operations.
In July 2000, Viad sold its concession operations at America West Arena and Bank One Ballpark in Phoenix, Arizona. Viad recorded a gain of $10,256,000 ($5,655,000 after-tax) on the sale, after deducting costs of sale and related expense provisions. Also in the third quarter of 2000, Viad recorded a charge of $8,165,000 ($4,778,000 after-tax) to streamline and consolidate certain operations in Viad’s Convention and Event Services segment. In addition to costs related to reductions in headcount, the charge included the write-down of certain fixed assets and facility closure costs.
In the second quarter of 1998, Travelers Express petitioned the Federal District Court to set aside a settlement term sheet under a patent infringement litigation initiated by Travelers Express against Integrated Payment Systems (“IPS”), a subsidiary of First Data Corporation, because of the parties’ failure to agree on final settlement terms. At that time, Travelers Express recorded a provision totaling $10,642,000 ($6,917,000 after-tax) and tendered back to IPS amounts which IPS had paid to Travelers Express pursuant to the term
F-10
sheet. In December 1999, the Court reinstated the settlement and ordered IPS to pay back to Travelers Express the amounts paid in 1998 and to resume scheduled payments as provided by the term sheet. Accordingly, after deducting legal and other costs, Travelers Express recorded a gain of $8,176,000 ($5,314,000 after-tax) in the fourth quarter of 1999.
In 1999, Viad adopted the equity method of accounting for its approximately 10% investment in the Arizona Diamondbacks (“Diamondbacks”) baseball franchise limited partnership. Noncash charges totaling $8,252,000 ($5,268,000 after-tax) were recorded in 1999 representing Viad’s pro-rata share of the Diamondbacks cumulative losses. On December 31, 1999, Viad contributed a portion of its investment in the Diamondbacks limited partnership to the Viad Corp Medical Plan Trust to fund certain postretirement benefits. The contribution, which was recorded at fair value, resulted in a gain of $2,377,000 ($1,483,000 after-tax). Viad’s remaining ownership interest is accounted for under the cost method.
In February 2000, Viad settled certain litigation in existence at the end of 1999 and recorded a provision in 1999 totaling $9,950,000 ($6,209,000 after-tax) including legal and other costs.
In January 1999, Viad sold the contract foodservice operations of Restaura, Inc. The public service division units of Restaura were sold in March 1999. After providing for costs of sale and related expense provisions, the net gain was not material.
Viad completed the sale of its duty-free and shipboard concessions business, Greyhound Leisure Services, Inc. (“GLSI”) in September 1998. The gain on sale recorded in 1998, after deducting costs of sale and related expense provisions, was $26,684,000 ($15,650,000 after-tax). Upon Viad’s collection of a subordinated note receivable and resolution of contingencies related to the sale of GLSI, an additional gain of $17,325,000 ($10,811,000 after-tax) was recorded in 1999.
Results of operations up to dates of sale of these sold businesses (not classified as discontinued operations) are included in Viad’s “Sold travel and recreation businesses” category. See Note S. In connection with the sales, Viad has retained and provided for certain environmental, insurance and other liabilities.
D. Acquisitions of Businesses
During 2000, Viad purchased a small Convention and Event Services company, and during 1999, Viad purchased several small Convention and Event Services companies. Also during 1999, Viad purchased a 71 percent interest in a small Travel and Recreation Services company; the remaining minority interest was acquired in 2000 and 2001. The acquisitions were accounted for as purchases. The purchase prices, including acquisition costs, were allocated to the net tangible and identifiable intangible assets acquired based on estimated fair values at the dates of the acquisitions. The difference between the purchase prices and the related fair values of net assets acquired represents goodwill.
The accompanying financial statements include the accounts and results of operations from the dates of acquisition. The results of operations of the acquired companies from the beginning of the year to the dates of acquisition are not material to the consolidated results of operations.
F-11
Net cash paid, the estimated fair value of assets acquired and debt and other liabilities assumed for the years ended December 31 were as follows:
E. Discontinued Operations
In July 1999, Viad sold Dobbs International Services, Inc. In connection with the sale, Viad retained and provided for certain environmental and other liabilities.
Revenues applicable to the discontinued operations totaled $438,179,000 in 1999. The caption “Income from discontinued operations” in the Consolidated Statements of Income for the year ended December 31, 1999 includes the following:
F. Investments in Securities
Corporate securities, other than securities held by Payment Services as described in Note G, that are being held for an indefinite period of time pending Viad’s use to fund strategic acquisitions, purchase treasury shares or pay down debt are included in the Consolidated Balance Sheets under the caption, “Investments in securities.” The current portion and investments with original maturities of three months or less (including money market investments totaling $118,021,000 at December 31, 2001) are included under the caption, “Short-term investments.” Securities are classified as available for sale and are carried at fair market value in accordance with SFAS No. 115. The net unrealized holding loss of $67,000 (net of a deferred tax asset of $42,000) at December 31, 2001 and the net unrealized holding gain of $139,000 (net of a deferred tax liability of $88,000) at December 31, 2000, are included in the Consolidated Balance Sheets as a component of “Accumulated other comprehensive income.” Income arising from these investments is included in the Consolidated Statements of Income under the caption, “Other investment income.”
F-12
A summary of securities classified as available for sale at December 31, 2001 is presented below:
A summary of securities classified as available for sale at December 31, 2000 is presented below:
Maturities of mortgage-backed and other asset-backed securities depend on the repayment characteristics and experience of the underlying obligations.
Gross gains and losses are based on the specific identification method of determining cost. No gains or losses were realized during 2001 or 2000. Gross losses of $34,000 were realized during 1999.
G. Assets Restricted for Payment Service Obligations
Viad’s Payment Services subsidiaries generate funds from the sale of official checks, money orders and other payment instruments, with the related liabilities classified as “Payment service obligations.” Substantially all of the proceeds of such sales, along with certain additional subsidiary funds, are invested in permissible securities, principally high-quality debt instruments. These investments, along with related cash and funds in transit, are restricted by state regulatory agencies for use by the subsidiaries to satisfy the liability to pay, upon presentment, the face amount of the payment service obligations. In addition, certain other assets of the Payment Services subsidiaries are available, if necessary, to meet such obligations. Such assets are not available to satisfy working capital or other financing requirements of Viad. Accordingly, securities are included in the Consolidated Balance Sheets under the caption, “Investments restricted for payment service obligations.” Certain additional assets of the Payment Services subsidiaries relating to payment service obligations, including cash on hand, funds in transit from agents and securities expected to be sold or maturing within one year, are included under the caption, “Funds, agents’ receivables and current maturities of investments restricted for payment service obligations.” In December 1999 and in July 2000, Viad made capital contributions of approximately $50,000,000 in each period to a Payment Services subsidiary. The proceeds were invested by the subsidiary in debt securities that are included in the caption, “Investments restricted for payment service obligations.”
Viad regularly monitors credit and market risk exposures and takes steps to mitigate the likelihood of these exposures resulting in actual loss. Although the Payment Services investment portfolio exposes Viad to certain credit risks, Viad believes the high quality of its investments reduces this risk (approximately 99 percent of the investments at December 31, 2001, have a rating of A or higher or are collateralized by federal agency securities).
As described in Note K, a Payment Services subsidiary uses swap agreements to hedge a substantial portion of the variable rate commission payments to its selling agents and the net proceeds of selling receivables from its bill payment and money order agents. The swap agreements effectively convert such
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variable rates to fixed rates. The fair value of such swap agreements generally increases when market values of fixed rate, long-term debt investments decline and vice versa.
Under normal circumstances, the swap agreements will not be terminated prior to maturity, nor is there any requirement to sell long-term debt securities prior to maturity, as the funds flow from ongoing sales of money orders and other payment instruments and funds from maturing long-term and short-term investments are expected to be adequate to settle payment service obligations as they are presented. In addition, Viad’s Payment Services subsidiaries have various lines of credit, overdraft facilities and reverse repurchase agreements totaling $755,000,000 available to assist in the management of investments and the clearing of payment service obligations. Amounts outstanding under reverse repurchase agreements are required to be collateralized by securities. No amounts were outstanding under these arrangements at December 31, 2001 or 2000.
Presented as additional information below is a summary of asset and liability carrying amounts related to the payment service obligations, along with the fair value of related swap agreements at December 31:
Payment Services securities classified in accordance with SFAS No. 115 are presented below.
Securities Classified as Available for Sale. Securities that are being held for indefinite periods of time, including those securities which may be sold to assist in the clearing of payment service obligations or in the management of investments, are classified as securities available for sale and are carried at fair value. The net unrealized holding gains of $29,943,000 (net of a deferred tax liability of $19,144,000) and $517,000 (net of a deferred tax liability of $331,000) at December 31, 2001 and 2000, respectively, are included in the Consolidated Balance Sheets as a component of “Accumulated other comprehensive income.” The unrealized gains during 2001 and 2000 were due principally to decreases in longer-term market interest rates.
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Gross gains and losses from sales of securities are based on the specific identification method of determining cost. Gross gains of $15,796,000, $6,738,000, and $6,972,000 were realized during 2001, 2000, and 1999, respectively. Gross losses of $3,890,000, $46,000, and $79,000 were realized during 2001, 2000, and 1999 respectively.
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Securities Classified as Held to Maturity. Securities classified as held to maturity consist of securities that management has the ability and intent to hold to maturity and are carried at amortized cost. A summary of securities classified as held to maturity at December 31, 2001 is presented below:
On January 1, 2001, Viad transferred $260,026,000 in book value of securities classified as held to maturity to securities classified as available for sale as permitted in conjunction with the initial application of SFAS No. 133 without calling into question management’s intent or ability to hold other securities as held to maturity. The transfer was reflected as an increase in the carrying value of the investments of $6,184,000, with a corresponding deferred tax liability of $2,412,000 and a transition adjustment of $3,772,000 in other comprehensive income.
A summary of securities classified as held to maturity at December 31, 2000 is presented below:
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Scheduled Maturities. Scheduled maturities of securities at December 31, 2001 are presented below:
Actual maturities may differ from scheduled maturities because the borrowers have the right to call or prepay certain obligations, sometimes without penalties. Maturities of mortgage-backed and other asset-backed securities depend on the repayment characteristics and experience of the underlying obligations.
H. Property and Equipment
Property and equipment at December 31 consisted of the following:
I. Intangibles
Intangibles at December 31 consisted of the following:
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J. Debt
Long-term debt at December 31 was as follows:
Viad satisfies its short-term borrowing requirements with bank lines of credit and the issuance of commercial paper and promissory notes. At December 31, 2001 and 2000, there was $457,000 and $2,666,000, respectively, of short-term borrowings outstanding under bank notes payable.
Effective August 31, 2001, Viad completed credit facilities totaling $425,000,000, replacing and consolidating its previous $300,000,000 revolving bank credit agreement. The facilities support short-term borrowings, letters of credit and a Canadian facility without substantially increasing Viad’s overall credit capacity. The $425,000,000 includes a $225,000,000 five-year facility and a $200,000,000 364-day facility. The interest rate applicable to borrowings under the credit facilities is indexed to the London Interbank Offering Rate (“LIBOR”), plus appropriate spreads. The facilities also provide for commitment fees. Such spreads and fees will change moderately should Viad’s debt ratings change. Short-term borrowings totaling $166,000,000, and $145,503,000 at December 31, 2001 and 2000, respectively, have been classified as long-term debt, pursuant to the unused commitments under the applicable long-term credit facility. Unused commitments (net of amounts used to support short-term borrowings and letters of credit) under the facilities totaled $182,000,000 at December 31, 2001.
Annual maturities of long-term debt due in the next five years will approximate $42,224,000 (2002), $269,286,000 (2003), $20,815,000 (2004), $10,831,000 (2005), $862,000 (2006) and $52,353,000 thereafter. Included in the year 2003 is $166,000,000 which represents the maturity of short-term borrowings assuming the borrowings were due under the one-year term out provisions of the 364-day facility.
The weighted average interest rate on total debt excluding interest expense unrelated to debt obligations was 5.8%, 6.4%, and 6.0% for 2001, 2000, and 1999, respectively.
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Interest paid in 2001, 2000, and 1999 was $27,118,000, $22,910,000, and $31,287,000, respectively.
Under a Shelf Registration filed in 1994 with the Securities and Exchange Commission, Viad can issue up to an aggregate $500,000,000 of debt and equity securities. While the Shelf Registration is effective, it requires amendment to ensure immediate access to the capital markets. Viad intends to prepare and file such amendment. No securities have been issued under the program.
The estimated fair value of total debt was $403,169,000 and $447,585,000 at December 31, 2001 and 2000, respectively. The fair value of debt was estimated by discounting the future cash flows using rates currently available for debt of similar terms and maturity. The carrying values of the commercial paper and promissory notes were assumed to approximate fair values due to their short-term maturities.
K. Derivative Financial Instruments
Viad uses derivative financial instruments as part of its risk management strategy to manage exposure to fluctuations in interest and foreign currency rates. Derivatives are not used for speculative purposes.
A portion of Viad’s Payment Services business involves the payment of variable-rate commissions to selling agents of its official check program. In addition, a Viad Payment Services subsidiary has agreements to sell, on a periodic basis, undivided percentage ownership interests in certain receivables from bill payment and money order agents in an amount not to exceed $450,000,000. The agreement expires in June 2003. The receivables, sold at a discount based on short-term variable interest rates, are sold in order to accelerate Payment Services’ cash flow for investment in permissible securities as described in Note G.
The Payment Services subsidiary services the receivables that were sold in exchange for a fee commensurate with the cost of servicing. The balance of sold agents’ receivables as of December 31, 2001 and 2000 was $347,000,000 and $388,000,000, respectively. The average agents’ receivables sold approximated $444,000,000, $433,000,000 and $377,000,000 during 2001, 2000, and 1999, respectively. The expense of selling the agents’ receivables, discounted based on short-term variable interest rates, was $30,095,000, $30,396,000, and $26,352,000 in 2001, 2000, and 1999, respectively, and is included in “Costs of sales and services.”
Variable-to-fixed derivative financial instruments (swap agreements) have been entered into to mitigate the effects of fluctuations on commission expense and on the net proceeds from agents’ receivable sales. The notional amount of the variable-to-fixed swap agreements totaled $3,195,000,000 at December 31, 2001, with an average pay rate of 5.4% and an average receive rate of 1.7%. The variable-rate portion of the swaps is generally based on Treasury bill, federal funds, or commercial paper rates. The agreements expire as follows: $375,000,000 (2002), $795,000,000 (2003), $225,000,000 (2004), $975,000,000 (2005), $600,000,000 (2006) and $225,000,000 (2007).
The swap agreements are contracts to exchange fixed and floating payments periodically over the life 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 exposure to credit loss. The amounts to be paid or received under the swap agreements are accrued consistent with the terms of the agreements and market interest rates and are recognized as an adjustment to the expense of the related transaction.
Viad maintains formal procedures for entering into swap transactions, and management regularly monitors and reports to the Audit Committee of the Board of Directors on swap activity. The agreements are with major financial institutions which are currently expected to fully perform under the terms of the agreements, thereby mitigating the credit risk from the transactions in the event of nonperformance by the counterparties. In addition, Viad regularly monitors the credit ratings of the counterparties, and the likelihood of default is considered remote.
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On January 1, 2001, Viad adopted SFAS No. 133 and its related amendments and interpretations. SFAS No. 133 requires that entities record all derivatives as either assets or liabilities, measured at fair value (representing the estimated amount Viad would pay to counterparties to terminate the swap agreements), with the change in fair value of the derivative recognized in earnings or in other comprehensive income, depending on the use of the derivative and whether it qualifies for hedge accounting. Viad’s swap agreements have been designated and qualify as cash flow hedges. The length of time over which future cash flows are hedged ranges from one to six years.
Upon the adoption of SFAS No. 133, Viad recorded a liability of $12,297,000 (representing the fair value of Viad’s swap agreements), a corresponding deferred tax asset of $4,796,000, and a transition adjustment of $7,501,000 reflected in other comprehensive income. At December 31, 2001, the current portion of the fair value of the swap agreements totaling $11,518,000 is included under the caption “Other current assets,” and $7,291,000 is included under the caption “Other current liabilities.” The noncurrent portion of the swap agreements totaling $91,414,000 is included under the caption, “Derivative financial instruments.”
The effective portion of the change in fair values of derivatives that qualify as cash flow hedges under SFAS No. 133 is recorded in other comprehensive income. Amounts receivable or payable under the swap 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 Income Statements under “Costs of sales and services.” The amount recognized in earnings due to ineffectiveness of the cash flow hedges was not material. No cash flow hedges were discontinued during the year.
Viad is also exposed to foreign currency exchange risk. Forward derivative contracts used to hedge assets and liabilities denominated in foreign currencies are recorded on the Consolidated Balance Sheets at fair value, with the change in fair value reflected in earnings. Viad records these forward contracts consistent with the accounting requirements under SFAS No. 52, “Foreign Currency Translation.” While these contracts economically hedge Viad’s foreign currency risk, they are not designated as hedges for accounting purposes under SFAS No. 133. 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.
L. Earnings Per Share
The following is a reconciliation of the numerators and denominators of diluted and basic per share computations for income from continuing operations:
Options to purchase 2,643,598, 1,377,898 and 179,235 shares of common stock were outstanding during 2001, 2000 and 1999, respectively, but were not included in the computation of diluted earnings per share because the effect would be antidilutive.
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M. Preferred Stock and Common Stock and Other Equity
Viad has 442,352 shares of $4.75 Preferred Stock authorized, of which 340,352 shares are issued. The holders of the $4.75 Preferred Stock are entitled to a liquidation preference of $100 per share and to annual cumulative sinking fund redemptions of 6,000 shares. Viad presently holds 105,372 shares which will be applied to this sinking fund requirement; the 234,980 shares held by others are scheduled to be redeemed in the years 2019 to 2058. In addition, Viad has authorized 5,000,000 and 2,000,000 shares of Preferred Stock and Junior Participating Preferred Stock, respectively.
Viad has one Preferred Stock Purchase Right (“Right”) outstanding on each outstanding share of its common stock. The Rights contain provisions to protect stockholders in the event of an unsolicited attempt to acquire Viad that is not believed by the Board of Directors to be in the best interest of stockholders. The Rights are represented by the common share certificates and are not exercisable or transferable apart from the common stock until such a situation arises. Viad may redeem the Rights at $0.01 per Right prior to the time any person or group has acquired 20% or more of Viad’s shares. Viad has reserved 1,000,000 shares of Junior Participating Preferred Stock for issuance in connection with the Rights.
Viad funds its matching contributions to employees’ 401(k) plans through a leveraged ESOP. All eligible employees of Viad and its participating affiliates, other than certain employees covered by collective bargaining agreements that do not expressly provide for participation of such employees in an ESOP, may participate in the ESOP.
In 1989, the ESOP borrowed $40,000,000 to purchase treasury shares from Viad. The ESOP’s obligation to repay this borrowing is guaranteed by Viad; therefore, the unpaid balance of the borrowing ($16,925,000 and $18,675,000 at December 31, 2001 and 2000, respectively) has been reflected in the accompanying Consolidated Balance Sheets as long-term debt. The same amounts, representing unearned employee benefits, have been recorded as a deduction from common stock and other equity. The liability is reduced as the ESOP repays the borrowing, and the amount offsetting common stock and other equity is reduced as stock is allocated to employees and benefits are charged to expense. The ESOP intends to repay the loan (plus interest) using Viad contributions and dividends received on the unallocated Viad shares held by the ESOP.
Information regarding ESOP transactions for the years ended December 31 was as follows:
Shares are released for allocation to participants based upon the ratio of the current year’s principal and interest payments to the sum of the total principal and interest payments expected over the remaining life of the plan. Expense is recognized based upon the greater of cumulative cash payments to the plan or 80% of the cumulative expense that would have been recognized under the shares allocated method, in accordance with Emerging Issues Task Force Issue No. 89-8, “Expense Recognition for Employee Stock Ownership Plans.” Under this method, Viad has recorded expense of $1,701,000, $1,631,000, and $2,067,000 in 2001, 2000, and 1999, respectively.
Unallocated shares held by the ESOP totaled 1,860,000 and 2,095,000 at December 31, 2001 and 2000, respectively. Shares allocated during 2001 and 2000 totaled 235,000 and 207,000, respectively.
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In 1992, Viad sold treasury stock to Viad’s Employee Equity Trust (the “Trust”) in exchange for a promissory note. The Trust is used to fund certain existing employee compensation and benefit plans. For financial reporting purposes, the Trust is consolidated with Viad and the promissory note ($27,697,000 at December 31, 2001) and dividend and interest transactions are eliminated in consolidation. The fair market value ($68,074,000 and $78,185,000 at December 31, 2001 and 2000, respectively) of the 2,874,753 and 3,399,343 remaining shares held by the Trust at December 31, 2001 and 2000, respectively, representing unearned employee benefits, is shown as a deduction from common stock and other equity and is reduced as employee benefits are funded. The difference between the cost and fair value of shares held is included in additional capital.
At December 31, 2001, retained income of $216,047,000 was unrestricted as to payment of dividends by Viad.
N. Stock-Based Compensation
In 1997, stockholders adopted the Viad Corp Omnibus Incentive Plan (“Omnibus Plan”). The Omnibus Plan provides for the following types of awards to officers, directors and certain key employees: (a) incentive and nonqualified stock options; (b) stock appreciation rights (“SARs”); (c) restricted stock; and (d) performance-based awards. The number of shares available for grant under the Omnibus Plan in each calendar year is equal to 2% of the total number of shares of common stock outstanding as of the first day of each year. Any shares available for grant in a particular calendar year which are not granted in such year are added to the shares available for grant in any subsequent calendar year.
Stock options are granted for terms of ten years at an exercise price based on the market value at the date of grant, and are exercisable 50% after one year with the balance exercisable after two years from the date of grant. Stock options granted since 1998 contain certain forfeiture and noncompete provisions.
Performance-based stock awards (82,200 and 77,200 shares awarded in 2000 and 1999, respectively, at a fair market value per share of $24.44, and $29.50, respectively) vest at the end of a three-year period from the date of grant, based on total shareholder return relative to the applicable stock and industry indices specified at the time of each award. Vested shares with respect to performance periods beginning in 1998, 1997, and 1996 totaled 26,646 in 2001, 70,361 in 2000, and 139,815 in 1999, respectively. Throughout the performance period, holders of the performance-based stock have the right to receive dividends and vote the shares but may not sell, assign, transfer, pledge or otherwise encumber the stock. There were no performance-based stock awards granted in 2001.
Restricted stock and performance-driven restricted stock awards of 340,600 shares were granted in 2001 at a weighted average price (based on fair market value at date of grant) of $21.69 per share. The restricted stock awards vest three years from the date of grant. Performance-driven restricted stock vests five years from the date of grant; but, a portion of the award may vest, on an accelerated basis, as early as three years from the date of grant if certain long-term incentive performance targets are met or exceeded. Holders of the restricted stock have the right to receive dividends and vote the shares, but may not sell, assign, transfer, pledge or otherwise encumber the stock.
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Information with respect to stock options for the years ended December 31 is as follows:
The following table summarizes information concerning stock options outstanding and exercisable at December 31, 2001:
Viad applies APB Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized for its stock-based compensation plans other than for performance-based and restricted stock awards, which gave rise to compensation expense aggregating $1,261,000, $727,000, and $4,607,000 in 2001, 2000, and 1999, respectively.
Assuming Viad had recognized compensation cost for stock options and performance-based and restricted stock awards in accordance with the fair value method of accounting defined in SFAS No. 123, income from continuing operations and diluted income per share from continuing operations would be as presented in the table below. Compensation cost calculated under SFAS No. 123 is recognized ratably over the vesting period and is net of estimated forfeitures and the tax benefit on nonqualified stock options.
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For purposes of applying SFAS No. 123, the estimated fair value of stock options granted during 2001, 2000, and 1999 was $7.25, $8.15, and $9.17 per share, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:
O. Income Taxes
Deferred income tax assets (liabilities) included in the Consolidated Balance Sheets at December 31 related to the following:
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The (benefit) provision for income taxes on income from continuing operations for the years ended December 31 consisted of the following:
Certain tax benefits related primarily to stock option exercises and dividends paid to the ESOP totaling $6,733,000, $8,417,000, and $8,832,000 in 2001, 2000, and 1999, respectively, were credited to common stock and other equity.
Eligible subsidiaries (including sold and discontinued businesses up to their respective disposition dates) are included in the consolidated federal and other applicable income tax returns of Viad. Income tax refunds received in 2001 and income taxes paid in 2000 and 1999 including amounts paid on behalf of the sold and discontinued businesses, including refunds received related to prior years, amounted to $16,429,000, $11,261,000, and $99,271,000, respectively.
A reconciliation of the provision for income taxes on income from continuing operations and the amount that would be computed using statutory federal income tax rates for the years ended December 31 was as follows:
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United States and foreign income before income taxes from continuing operations for the years ended December 31 was as follows:
P. Pension and Other Postretirement Benefits
Pension Benefits. Viad has trusteed, noncontributory pension plans that cover certain employees. Pension benefits are supplemented, in most cases, by defined matching company stock contributions to employees’ 401(k) plans as described in Note M. In addition, Viad retained the obligations for such benefits for employees of certain sold businesses. 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. 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.
Net periodic pension cost for defined benefit plans for the years ended December 31 includes the following components:
Contributions to multiemployer pension plans totaled $14,617,000, $16,456,000, and $13,578,000 in 2001, 2000, and 1999, respectively. Costs of 401(k) defined contribution and other pension plans totaled $2,054,000, $2,464,000, and $1,383,000 in 2001, 2000, and 1999, respectively.
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The following table indicates the plans’ funded status and amounts recognized in Viad’s Consolidated Balance Sheets at December 31:
The total amounts recognized in Viad’s Consolidated Balance Sheets at December 31 were as follows:
Postretirement Benefits Other Than Pensions. Viad and certain of its subsidiaries have defined benefit postretirement plans that provide medical and life insurance for certain eligible employees, retirees and
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dependents. The related postretirement benefit liabilities are recognized over the period that services are provided by employees. In addition, Viad retained the obligations for such benefits for retirees of certain sold businesses. While the plans have no funding requirements, Viad may fund the plans. As described in Note C, on December 31, 1999, Viad contributed a portion of its investment in the Arizona Diamondbacks limited partnership to the Viad Corp Medical Plan Trust to fund certain postretirement benefits.
The net periodic postretirement benefit cost for the years ended December 31 included the following components:
The status of the plans as of December 31 is set forth below:
The assumed health care cost trend rate used in measuring the 2001 and 2000 accumulated postretirement benefit obligation was 6% and 7%, respectively, declining to 5% for the year 2002 and remaining at that level thereafter for retirees below age 65; and 5.5% and 6.0%, respectively, declining to 5% for the year 2002 and remaining at that level thereafter for retirees above age 65.
A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 2001 by approximately $3,804,000 and
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the ongoing annual expense by approximately $377,000. A one-percentage-point decrease in the assumed health care cost trend rate for each year would decrease the accumulated postretirement benefit obligation as of December 31, 2001 by approximately $3,237,000 and the ongoing annual expense by approximately $311,000.
Weighted Average Assumptions. Weighted average assumptions used at December 31 were as follows:
Q. Leases
Certain offices, equipment, and other facilities are leased. The leases expire over periods generally ranging from one to 12 years, and some leases provide for renewal options ranging from one to 29 years. Leases which expire are generally renewed or replaced by similar leases.
At December 31, 2001, Viad’s future minimum rental payments and related sublease rentals receivable with respect to noncancelable operating leases with terms in excess of one year were as follows:
Net rent expense under operating leases for the years ended December 31 consisted of the following:
R. Litigation, Claims and Other Contingencies
Viad and certain of its subsidiaries are plaintiffs or defendants to various actions, proceedings and pending claims. Certain of these pending legal actions are or purport to be class actions. Some of the foregoing involve, or may involve, compensatory, punitive or other damages. Litigation is subject to many uncertainties and it is possible that some of the legal actions, proceedings, or claims could be decided against Viad. Although the amount of liability at December 31, 2001, with respect to certain of these matters is not ascertainable, Viad believes that any resulting liability, after taking into consideration amounts already provided for, will not have a material effect on Viad’s financial statements.
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S. Segment Information
Viad measures profit and performance of its operations on the basis of operating income before restructuring charges and other items.
The accounting policies of the operating segments are the same as those described in Note A, except that an adjustment is made to the Payment Services segment to present revenues and operating income on a fully taxable equivalent basis as though amounts were invested in taxable investments. Consolidated revenues, operating income and interest expense for 2000 and 1999 also reflect the elimination of intercompany interest payments on investments in Viad commercial paper by a Payment Services subsidiary. Intersegment sales and transfers are not significant. Corporate activities include expenses not allocated to operations. Depreciation and amortization are the only significant noncash items for the reportable segments.
Viad’s two reportable segments are Payment Services and Convention and Event Services. The Payment Services segment sells money orders through agents, performs official check and negotiable instrument clearing services for banks and credit unions, and provides cash access services to gaming establishments throughout the United States. In addition, the segment provides consumer money wire transfer services throughout the world. The Convention and Event Services segment provides decorating, exhibit design and fabrication, installation and dismantling, and electrical, transportation and management services for conventions, tradeshows, associations and other corporate events; and designs and builds convention, tradeshow, museum and other exhibits and displays throughout the world.
The remaining categories represent ongoing Travel and Recreation Services businesses below reportable segment quantitative thresholds, sold businesses not classified as discontinued operations, and corporate activities. These categories are presented to reconcile to total results. Ongoing Travel and Recreation Services includes Viad’s Canadian travel tour service subsidiary, which operates tours and charters in the Canadian Rockies and conducts hotel operations and snowcoach tours of the Columbia Icefield; and Glacier Park, Inc., which operates historic lodges in and around Glacier National Park. Sold businesses are described in Note C.
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Disclosures regarding Viad’s reportable segments with reconciliations to consolidated totals are presented in the accompanying tables.
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Geographic Areas. Viad’s foreign operations are located principally in Canada and Europe. Convention and Event Services revenues are designated as foreign based on the originating location of the product or service plus exports to foreign shows. Payment Services foreign revenues are defined as revenues generated from wire transfer transactions originating in a country other than the United States. Long-lived assets are attributed to domestic or foreign based principally on physical location of the assets. Long-lived assets consist of “Property and equipment” and “Other investments and assets.” The table below presents the financial information by major geographic area:
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T. Condensed Consolidated Quarterly Results (Unaudited)
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REPORT OF MANAGEMENT
The management of Viad Corp has the responsibility for preparing and assuring the integrity and objectivity of the accompanying financial statements and other financial information in this report. The financial statements were developed using accounting principles generally accepted in the United States of America and appropriate policies, consistently applied. They reflect, where applicable, management’s best estimates and judgments and include relevant disclosures and explanations.
Viad’s financial statements have been audited by Deloitte & Touche LLP. Their audit was conducted in accordance with auditing standards generally accepted in the United States of America. The Independent Auditors’ Report appears below.
Management has established and maintains a system of internal control that it believes provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets, and the prevention and detection of fraudulent financial reporting. The system of internal control is believed to provide for appropriate division of responsibilities and is documented by written policies and procedures that are utilized by employees involved in the financial reporting process. Viad also maintains a comprehensive internal auditing function which independently monitors compliance and assesses the effectiveness of the internal controls and recommends potential improvements thereto.
In addition, as part of their audit of Viad’s financial statements, the independent auditors review and evaluate selected internal accounting and other controls to establish a basis for reliance thereon in determining the audit tests to be applied. There is close coordination of audit planning and coverage between Viad’s internal auditing function and the independent auditors. Management has considered the recommendations of both internal auditing and the independent auditors concerning Viad’s system of internal control and has taken actions believed to be cost-effective in the circumstances to implement appropriate recommendations and otherwise enhance controls. Management believes that Viad’s system of internal control accomplishes the objectives discussed herein.
The Board of Directors oversees Viad’s financial reporting through its Audit Committee. The Audit Committee regularly meets with management and, jointly and separately, with the independent auditors and internal auditing management to review interest rate swap activity, accounting, auditing, financial reporting and internal control matters and the effectiveness of Viad’s Corporate Compliance Program.
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INDEPENDENT AUDITORS’ REPORT
To the Stockholders and Board of Directors of Viad Corp:
We have audited the accompanying consolidated balance sheets of Viad Corp as of December 31, 2001 and 2000, and the related consolidated statements of income, comprehensive income, cash flows, and common stock and other equity for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Viad Corp as of December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note B of Notes to Consolidated Financial Statements, the accompanying consolidated balance sheet as of December 31, 2000, and the related consolidated statements of income, comprehensive income, cash flows and common stock and other equity for the years ended December 31, 2000 and 1999, have been restated.
Phoenix, Arizona
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EXHIBIT INDEX