1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2001 Commission file number 001-11015 VIAD CORP (Exact name of registrant as specified in its charter) <TABLE> <S> <C> DELAWARE 36-1169950 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1850 N. CENTRAL AVE., PHOENIX, ARIZONA 85077 (Address of principal executive offices) (Zip Code) </TABLE> Registrant's telephone number, including area code (602) 207-4000 Indicate by check mark whether the registrant (1) has filed all Exchange Act 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. Yes x No ------- ------- As of June 29, 2001, 88,385,367 shares of Common Stock ($1.50 par value) were outstanding.
2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VIAD CORP CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> June 30, 2001 December 31, (000 omitted, except share data) (Unaudited) 2000 - -------------------------------- ----------- ---- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 36,509 $ 42,298 Short-term investments 67,401 42,538 Receivables 106,016 115,792 Inventories 87,818 87,131 Deferred income taxes 38,456 40,050 Other current assets 40,289 32,511 ----------- ----------- 376,489 360,320 Funds, agents' receivables and current maturities of investments restricted for payment service obligations 1,154,869 1,194,545 ----------- ----------- Total current assets 1,531,358 1,554,865 Investments in securities 48,636 41,018 Investments restricted for payment service obligations 4,495,438 3,630,615 Property and equipment 280,475 286,157 Other investments and assets 88,467 102,967 Deferred income taxes 47,509 46,596 Intangibles 631,497 638,013 ----------- ----------- $ 7,123,380 $ 6,300,231 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term bank loans $ 26,375 $ 2,666 Accounts payable 73,446 81,146 Other current liabilities 184,557 180,738 Current portion of long-term debt 42,134 67,134 ----------- ----------- 326,512 331,684 Payment service obligations 5,428,533 4,607,296 ----------- ----------- Total current liabilities 5,755,045 4,938,980 Long-term debt 359,148 377,306 Pension and other postretirement benefits 73,580 74,280 Other deferred items and insurance liabilities 172,018 135,588 Minority interests 3,844 4,263 $4.75 Redeemable preferred stock 6,668 6,658 Common stock and other equity: Common stock, $1.50 par value, 200,000,000 shares authorized, 99,739,925 shares issued 149,610 149,610 Additional capital 241,946 245,634 Retained income 780,910 755,041 Unearned employee benefits and other (91,336) (94,804) Accumulated other comprehensive income: Unrealized gain on securities classified as available for sale 11,484 656 Unrealized loss on derivative financial instruments (30,458) Cumulative translation adjustments (9,798) (8,612) Minimum pension liability adjustment (1,795) (1,795) Common stock in treasury, at cost, 11,354,558 and 10,676,444 shares (297,486) (282,574) ----------- ----------- Total common stock and other equity 753,077 763,156 ----------- ----------- $ 7,123,380 $ 6,300,231 =========== =========== </TABLE> See Notes to Consolidated Financial Statements. Page 2
3 VIAD CORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> Quarter ended June 30, Six months ended June 30, (000 omitted, except per share data) 2001 2000 2001 2000 - ------------------------------------ ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues $444,566 $476,528 $904,130 $884,747 -------- -------- -------- -------- Costs and expenses: Costs of sales and services 386,565 416,306 801,243 783,234 Corporate activities and minority interests 4,113 5,127 8,680 10,026 Net interest expense 5,298 2,298 11,563 4,431 Nonrecurring item 29,274 29,274 -------- -------- -------- -------- 425,250 423,731 850,760 797,691 -------- -------- -------- -------- Income before income taxes 19,316 52,797 53,370 87,056 Income taxes 1,907 10,489 11,659 18,695 -------- -------- -------- -------- NET INCOME $ 17,409 $ 42,308 $ 41,711 $ 68,361 ======== ======== ======== ======== DILUTED NET INCOME PER COMMON SHARE $ 0.20 $ 0.46 $ 0.48 $ 0.74 Average outstanding and potentially dilutive common shares 86,090 91,748 86,381 91,977 ======== ======== ======== ======== BASIC NET INCOME PER COMMON SHARE $ 0.20 $ 0.47 $ 0.48 $ 0.76 Average outstanding common shares 85,158 89,301 85,359 89,608 ======== ======== ======== ======== Dividends declared per common share $ 0.09 $ 0.09 $ 0.18 $ 0.18 ======== ======== ======== ======== Preferred stock dividends $ 284 $ 284 $ 568 $ 567 ======== ======== ======== ======== </TABLE> See Notes to Consolidated Financial Statements. Page 3
4 VIAD CORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) <TABLE> <CAPTION> Quarter ended June 30, Six months ended June 30, (000 omitted) 2001 2000 2001 2000 - ------------- ---- ---- ---- ---- <S> <C> <C> <C> <C> Net income $ 17,409 $ 42,308 $ 41,711 $ 68,361 -------- -------- -------- -------- Other comprehensive income (loss), net of tax: Unrealized gain (loss) on securities classified as available for sale: Transition adjustment, effective January 1, 2001, resulting from the transfer of securities classified as held-to-maturity to securities classified as available-for-sale 3,772 Holding (losses) gains arising during the period (13,677) 1,030 11,523 16,836 Reclassification adjustment for net realized gains included in net income (1,534) (673) (4,467) (819) -------- -------- -------- -------- (15,211) 357 10,828 16,017 -------- -------- -------- -------- Unrealized gain (loss) on derivative financial instruments: Cumulative effect of transition adjustment upon initial application of Statement of Financial Accounting Standards No. 133 on January 1, 2001 (7,501) Holding gains (losses) arising during the period 4,406 (30,444) Net reclassifications from other comprehensive income to net income 5,841 7,487 -------- -------- -------- -------- 10,247 -- (30,458) -- -------- -------- -------- -------- Unrealized foreign currency translation adjustments: Holding gains (losses) arising during the period 2,634 (1,829) (1,186) (2,184) -------- -------- -------- -------- Other comprehensive (loss) income (2,330) (1,472) (20,816) 13,833 -------- -------- -------- -------- Comprehensive income $ 15,079 $ 40,836 $ 20,895 $ 82,194 ======== ======== ======== ======== </TABLE> See Notes to Consolidated Financial Statements. Page 4
5 VIAD CORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> Six months ended June 30, (000 omitted) 2001 2000 - ------------- ---- ---- <S> <C> <C> CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES: Net income $ 41,711 $ 68,361 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 34,922 34,959 Deferred income taxes 13,749 12,543 Nonrecurring item 29,274 Other noncash items, net (6,044) (2,029) Change in operating assets and liabilities: Receivables and inventories 1,459 (49,225) Accounts payable and accrued compensation (8,676) 4,383 Other assets and liabilities, net (17,626) (394) ----------- ----------- 88,769 68,598 Change in Payment service assets and obligations, net 855,812 216,322 ----------- ----------- Net cash provided by operating activities 944,581 284,920 ----------- ----------- CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES: Capital expenditures (24,788) (18,590) Acquisitions of businesses, net of cash acquired (865) (24,155) Proceeds from disposals of businesses, property and other assets, net 225 14,063 Proceeds from sales and maturities of securities 1,249,628 970,835 Purchases of securities (2,116,951) (1,175,860) ----------- ----------- Net cash used by investing activities (892,751) (233,707) ----------- ----------- CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES: Payments on long-term borrowings (25,333) (30,319) Net change in short-term borrowings 6,211 39,805 Dividends on common and preferred stock (15,972) (16,728) Exercise of stock options 12,097 3,848 Common stock purchased for treasury (34,622) (38,457) ----------- ----------- Net cash used by financing activities (57,619) (41,851) ----------- ----------- Net (decrease) increase in cash and cash equivalents (5,789) 9,362 Cash and cash equivalents, beginning of year 42,298 33,106 ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 36,509 $ 42,468 =========== =========== </TABLE> See Notes to Consolidated Financial Statements. Page 5
6 VIAD CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PREPARATION The Consolidated Financial Statements of Viad Corp ("Viad") include the accounts of Viad and all of its subsidiaries. This information should be read in conjunction with the financial statements set forth in the Viad Corp Annual Report on Form 10-K for the year ended December 31, 2000. Accounting policies utilized in the preparation of the financial information herein presented are the same as set forth in Viad's annual financial statements except as modified for interim accounting policies which are within the guidelines set forth in Accounting Principles Board Opinion No. 28, "Interim Financial Reporting" and the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" as discussed in Note D. The interim consolidated financial information is unaudited. In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly Viad's financial position as of June 30, 2001, and its results of operations and its cash flows for the quarters and six months ended June 30, 2001 and 2000 have been included. Interim results of operations are not necessarily indicative of the results of operations for the full year. Certain prior year amounts have been reclassified to conform with the 2001 presentation. NOTE B - ASSETS RESTRICTED FOR PAYMENT SERVICE OBLIGATIONS Viad's Payment Services subsidiaries generate funds from the sale of 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 debt instruments. Such 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 such payment service obligations. In addition, certain other assets of Payment Services subsidiaries are available if necessary to meet such obligations. Accordingly, such assets are not available to satisfy working capital or other financing requirements of Viad. As described in notes to Viad's annual financial statements, a Payment Services subsidiary hedges 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 through swap agreements (see Note D). The swap agreements effectively convert such variable rates to fixed rates. 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 items as they are presented. Page 6
7 The following is a summary of asset and liability carrying amounts related to the payment service obligations, including additional subsidiary funds and the fair value of related swap agreements: <TABLE> <CAPTION> June 30, December 31, (000 omitted) 2001 2000 - ------------- ---- ---- <S> <C> <C> Funds, agents' receivables and current maturities of investments restricted for payment service obligations, $ 1,154,869 $ 1,194,545 Investments restricted for payment service obligations (1) 4,495,438 3,630,615 Other assets available for payment service obligations 24,723 24,781 Payment service obligations (5,428,533) (4,607,296) Fair value of swap agreements (2) (48,877) (12,297) ----------- ----------- Total $ 197,620 $ 230,348 =========== =========== </TABLE> (1) Securities classified as "available-for-sale" are carried at market value, and securities classified as "held-to-maturity" are carried at amortized cost in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (see Note C). (2) The fair value represents the estimated amounts that Viad would pay to counterparties to terminate the swap agreements at June 30, 2001 and December 31, 2000. At December 31, 2000, the fair value of such swap agreements was not included in Viad's Consolidated Balance Sheet (see Note D). NOTE C - INVESTMENTS RESTRICTED FOR PAYMENT SERVICE OBLIGATIONS Effective January 1, 2001, Viad elected to transfer $260,026,000 in carrying 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 reflected in other comprehensive income. Investments restricted for payment service obligations are classified as follows: <TABLE> <CAPTION> June 30, December 31, (000 omitted) 2001 2000 - ------------- ---- ---- <S> <C> <C> Securities classified as available-for-sale, at fair value (amortized cost of $3,037,858 and $2,309,645) $ 3,055,835 $ 2,310,493 Securities classified as held-to-maturity, at amortized cost (fair value of $1,466,499 and $1,357,531) 1,439,603 1,325,225 ----------- ----------- 4,495,438 3,635,718 Less current maturities (5,103) ----------- ----------- $ 4,495,438 $ 3,630,615 =========== =========== </TABLE> Page 7
8 NOTE D - 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. The receivables are sold at a discount, based on short-term variable interest rates. Variable-to-fixed rate swap agreements have been entered into to mitigate the effects of fluctuations on commission expense and on the net proceeds from the agents' receivable sales. 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, 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 two to seven years. Upon 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 June 30, 2001, the fair value of the swap agreements in the Consolidated Balance Sheet is classified under the caption, "Other deferred items and insurance liabilities." 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 quarter. Viad is also exposed to foreign currency exchange risk. Forward 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, was not significant. NOTE E - DEBT At June 30, 2001 and December 31, 2000, Viad classified as long-term debt $128,000,000 and $145,503,000, respectively, of short-term borrowings. These borrowings are supported by unused commitments under a $300,000,000 long-term revolving bank credit agreement. Page 8
9 NOTE F - INCOME TAXES A reconciliation of the provision for income taxes and the amount that would be computed using statutory federal income tax rates on income before income taxes for the six months ended June 30, is as follows: <TABLE> <CAPTION> (000 omitted) 2001 2000 - ------------- ---- ---- <S> <C> <C> <C> <C> Computed income taxes at statutory federal income tax rate $ 18,680 35.0% $ 30,470 35.0% Nondeductible goodwill amortization 1,743 3.3% 1,682 1.9% State income taxes 2,126 4.0% 1,800 2.1% Other, net 1,261 2.3% 418 0.5% --------- ---- --------- ---- 23,810 44.6% 34,370 39.5% Tax-exempt income (14,451) (27.1%) (17,575) (20.2%) Adjustment to estimated annual effective rate (1) 2,300 4.3% 1,900 2.2% --------- ---- --------- ---- Provision for income taxes (2) $ 11,659 21.8% $ 18,695 21.5% ========= ==== ========= ==== </TABLE> (1) Generally accepted accounting principles for interim financial reporting (APB Opinion No. 28) requires that income taxes be provided based on the estimated effective tax rate expected to be applicable for the entire fiscal year. (2) Excluding the effect of the nonrecurring item, the effective tax rate for the first six months of 2001 was 27.4 percent. The estimated tax rate for 2001 before the nonrecurring item is higher than in 2000 due to lower tax-exempt income in proportion to total pre-tax income, resulting from a shift in the mix of investments from higher-yield nontaxable to lower-yield taxable investments, as Viad balances its alternative minimum tax position. NOTE G - SUPPLEMENTARY INFORMATION - REVENUES AND OPERATING INCOME Viad measures profit and performance of its operations on the basis of operating income before nonrecurring items. An adjustment is made to the Payment Services segment to present revenues and operating income on a fully taxable equivalent basis for income resulting from investments in tax-exempt securities. Intersegment sales and transfers are not significant. Corporate activities include expenses not allocated to operations. Consolidated revenues, operating income and interest expense in 2000 reflect the elimination of intercompany interest payments on investments in Viad commercial paper by a Payment Services subsidiary. Disclosures regarding Viad's reportable segments along with reconciliations to consolidated totals are presented below. Page 9
10 <TABLE> <CAPTION> Quarter ended June 30, Six months ended June 30, (000 omitted) 2001 2000 2001 2000 - ------------- ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues: Payment Services $ 187,020 $ 167,635 $ 366,318 $ 319,485 Convention and Event Services 254,447 295,638 543,956 557,490 --------- --------- --------- --------- Reportable segments 441,467 463,273 910,274 876,975 Travel and Recreation Services 15,876 18,415 19,535 22,915 --------- --------- --------- --------- SUBTOTAL, ONGOING OPERATIONS 457,343 481,688 929,809 899,890 Sold travel and recreation businesses 12,363 17,664 Intercompany interest elimination (677) (1,622) Less taxable equivalent adjustment (12,777) (16,846) (25,679) (31,185) --------- --------- --------- --------- $ 444,566 $ 476,528 $ 904,130 $ 884,747 ========= ========= ========= ========= Operating income before nonrecurring item: Payment Services $ 43,682 $ 38,310 $ 78,477 $ 68,056 Convention and Event Services 23,485 33,326 48,228 60,790 --------- --------- --------- --------- Reportable segments 67,167 71,636 126,705 128,846 Travel and Recreation Services 3,611 4,815 1,861 3,317 --------- --------- --------- --------- SUBTOTAL, ONGOING OPERATIONS 70,778 76,451 128,566 132,163 Sold travel and recreation businesses 1,294 2,157 Corporate activities and minority interests (4,113) (5,127) (8,680) (10,026) Intercompany interest elimination (677) (1,622) Less taxable equivalent adjustment (12,777) (16,846) (25,679) (31,185) --------- --------- --------- --------- 53,888 55,095 94,207 91,487 Other investment income 1,490 3,743 2,770 8,221 Interest expense (6,788) (6,041) (14,333) (12,652) Nonrecurring item (29,274) (29,274) --------- --------- --------- --------- Income before income taxes $ 19,316 $ 52,797 $ 53,370 $ 87,056 ========= ========= ========= ========= </TABLE> NOTE H - NONRECURRING ITEM On August 18, 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 have been involved in litigation regarding the contract termination. GES and Key3Media have agreed to end the litigation. As a result of the settlement, Viad recorded a second quarter noncash provision totaling $29,274,000 ($18,267,000 after-tax, or $0.21 per diluted share) representing primarily the write-off of net receivables and prepayments made to Key3Media. The settlement will have no adverse impact on future operations. NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets" (effective for Viad on January 1, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. Viad is in the process of evaluating the financial statement impact of adoption of SFAS No. 142. Page 10
11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS: Viad Corp ("Viad") focuses on two principal service businesses: Payment Services and Convention and Event Services. There were no material changes in the nature of Viad's business, nor were there any changes in the general characteristics of its operations as described and discussed in the "Results of Operations" section of Management's Discussion and Analysis of Results of Operations and Financial Condition presented in the Viad Corp Annual Report on Form 10-K for the year ended December 31, 2000. All per share figures discussed are stated on the diluted basis. COMPARISON OF SECOND QUARTER OF 2001 TO THE SECOND QUARTER OF 2000: In the second quarter of 2001, revenues decreased 6.7 percent, to $444.6 million from $476.5 million in 2000. Payment Services invests in an appropriate mix of tax-exempt and taxable investments. The tax-exempt investments have lower pre-tax yields but produce higher income on an after-tax basis than comparable taxable investments. Revenues of ongoing operations on a fully taxable equivalent basis were $457.3 million in the 2001 second quarter, down 5.1 percent. Operating income on the same basis was $70.8 million for the 2001 second quarter compared with $76.5 million for the prior year, and operating margins were 15.5 percent in 2001 compared to 15.9 percent in 2000. See Note G of Notes to Consolidated Financial Statements. Net income for the second quarter of 2001 was $17.4 million, or $0.20 per share, compared to $42.3 million, or $0.46 per share, for the second quarter of 2000. Excluding a nonrecurring, noncash provision related to the resolution of the Key3Media litigation (described further in Note H of Notes to Consolidated Financial Statements), second quarter 2001 income was $35.7 million, or $0.41 per share. <TABLE> <CAPTION> Quarter ended June 30, (000 omitted, except per share data) 2001 2000 - ------------------------------------ ---- ---- <S> <C> <C> INCOME BEFORE NONRECURRING ITEM $ 35,676 $ 42,308 Nonrecurring item (18,267) -------- ---------- Net income $ 17,409 $ 42,308 ======== ========== DILUTED NET INCOME PER COMMON SHARE: INCOME BEFORE NONRECURRING ITEM $ 0.41 $ 0.46 Nonrecurring item (0.21) -------- ---------- Net income per share $ 0.20 $ 0.46 ======== ========== </TABLE> Cash earnings per share, defined as income before nonrecurring items plus after-tax goodwill amortization, was $0.45, down 10 percent from the 2000 second quarter. Cash earnings per share does not represent a measure of cash flows from operations as defined by generally accepted accounting principles and may not be comparable to similarly titled measures reported by other companies. There were 5.7 million fewer average outstanding and potentially dilutive common shares in the second quarter of 2001 than in the second quarter of 2000, due primarily to share repurchases during 2000 and in the first quarter of 2001. Page 11
12 PAYMENT SERVICES. On the fully taxable equivalent basis, second quarter 2001 revenues of the Payment Services segment were $187.0 million, up $19.4 million, or 11.6 percent, from 2000 second quarter revenues. On the same basis, operating income increased $5.4 million, or 14.0 percent. Operating margins on the fully taxable equivalent basis improved to 23.4 percent in the second quarter of 2001 compared with 22.9 percent in the 2000 second quarter. Official check operations reported continuing strong growth, reflecting the ramp-up of new business. Average investable funds were $4.7 billion, up 27 percent from the 2000 quarter. The growth in investable balances was partially offset by lower interest rates. MoneyGram transaction volume grew 21 percent in the 2001 quarter, with all corridors showing improvement. MoneyGram's agent base expanded by 29 percent over the 2000 quarter. These results were partially offset by the effects of a shift in a portion of the mix of investments from higher-yield nontaxable to lower-yield taxable investments as Viad balances its alternative minimum tax position. At December 31, 2000, tax-exempt investments represented 45% of the total investment portfolio versus 27% at June 30, 2001. This shift in the mix of investments contributed to lower growth in revenue and operating income. In addition, Game Financial revenue and operating income growth declined from historic levels due to a heightened competitive pricing environment and a slowdown in customer transactions due to a soft economy. CONVENTION AND EVENT SERVICES. Convention and Event Services revenues decreased $41.2 million, or 13.9 percent, to $254.4 million in the second quarter of 2001. Operating income for the segment decreased $9.8 million, or 29.5 percent, from the second quarter of 2000. Operating margins were 9.2 percent in the second quarter of 2001 versus 11.3 percent in the second quarter of 2000. More than half of the revenue decline relates to show rotation and the loss of Key3Media shows. Results for the second quarter were also impacted by overall softness in the economy. Customers began to delay or cancel exhibit construction or refurbish old exhibits rather than building new exhibits. Revenue at certain tradeshows was down, resulting from a decline in attendance by exhibitors, especially in the technology sector. This pressure is expected to continue throughout the remainder of the year. The segment continues to focus on eliminating and controlling overhead and other costs. As described in the "Recent Developments" section, the segment is finalizing plans to change its organizational structure to make operations more efficient and competitive. TRAVEL AND RECREATION SERVICES. Revenues of the ongoing travel and recreation businesses were $15.9 million for the second quarter of 2001, down $2.5 million, or 13.8 percent, from 2000 second quarter revenues. Operating income was $3.6 million in the 2001 second quarter compared to $4.8 million in the 2000 second quarter. Operating margins were 22.7 percent in the second quarter of 2001 compared with 26.1 percent in the prior year. These results are primarily due to a decline in tourism to Canada and Glacier National Park (Montana) resulting from uncertainty in the economy and high fuel costs. NET INTEREST EXPENSE. Other investment income was $1.5 million and $3.7 million in the second quarter of 2001 and 2000, respectively. The decline in interest income is due primarily to the use of investment proceeds for the purchase of treasury shares throughout 2000 and in the first quarter of 2001. Interest expense in the second quarter of 2001 increased to $6.8 million in the second quarter of 2001 compared to $6.0 million in the second quarter of 2000. Lower short-term interest rates were offset by higher average borrowings during the 2001 quarter. INCOME TAXES. Excluding the nonrecurring item, the effective tax rate in the 2001 second quarter was 26.6 percent compared to 19.9 percent for the second quarter of 2000. The relatively low effective tax rate compared to the statutory federal rate is primarily attributable to tax-exempt income from Viad's Payment Services businesses. Page 12
13 COMPARISON OF FIRST SIX MONTHS OF 2001 TO THE FIRST SIX MONTHS OF 2000: Revenues for the first six months of 2001 increased $19.4 million, or 2.2 percent, to $904.1 million from $884.7 million in 2000. Revenues of ongoing operations on a fully taxable equivalent basis rose 3.3 percent to $929.8 million. Operating income on the same basis was $128.6 million for the first six months of 2001 compared with $132.2 million for the prior year, and operating margins were 13.8 percent in 2001 compared to 14.7 percent in 2000. See Note G of Notes to Consolidated Financial Statements. Net income for the first six months of 2001 was $41.7 million, or $0.48 per share, compared to $68.4 million, or $0.74 per share, for the first six months of 2000. Before the nonrecurring item previously discussed, net income for the first six months of 2001 was $60.0 million, or $0.69 per share. <TABLE> <CAPTION> Six months ended June 30, (000 omitted, except per share data) 2001 2000 - ------------------------------------ ---- ---- <S> <C> <C> INCOME BEFORE NONRECURRING ITEM $ 59,978 $ 68,361 Nonrecurring item (18,267) -------- ---------- Net income $ 41,711 $ 68,361 ======== ========== DILUTED NET INCOME PER COMMON SHARE: INCOME BEFORE NONRECURRING ITEM $ 0.69 $ 0.74 Nonrecurring item (0.21) -------- ---------- Net income per share $ 0.48 $ 0.74 ======== ========== </TABLE> Cash earnings per share, as defined above, was $0.77 for the first six months of 2001, down 6.1 percent from the comparable 2000 period. There were 5.6 million fewer average outstanding and potentially dilutive common shares in the first six months of 2001 than in the first six months of 2000, due primarily to share repurchase programs throughout 2000 and during the first quarter of 2001. PAYMENT SERVICES. On the fully taxable equivalent basis, revenues of the Payment Services segment for the first six months of 2001 were $366.3 million, up $46.8 million, or 14.7 percent, from 2000 six month revenues. On the same basis, operating income increased $10.4 million, or 15.3 percent. Operating margins on the fully taxable equivalent basis were 21.4 percent for the first six months of 2001, compared with 21.3 percent in the first six months of 2000. Official check operations continued strong growth, reflecting the ramp-up of key new accounts. Transaction volume for MoneyGram grew 19 percent over the prior year, with strong growth in Express Payment and in the Latin America and international corridors. Average investable funds were 27 percent higher in 2001 than in the 2000 period, resulting in higher investment income. CONVENTION AND EVENT SERVICES. Convention and Event Services revenues decreased $13.5 million, or 2.4 percent, to $544.0 million from $557.5 million in the 2000 six month period. Operating income for the segment was $48.2 million, down $12.6 million from $60.8 million in the 2000 period. Operating margins were 8.9 percent compared with 10.9 percent in 2000. Results were impacted by higher labor costs and show rotation. The segment continues to focus on eliminating and controlling overhead and other costs, but many customers are delaying or scaling back exhibit construction and attendance at tradeshows in response to the uncertainty in the economy. This pressure is expected to continue throughout the remainder of the year. As described previously, the segment is finalizing plans to change its organizational structure to make operations more efficient and competitive. See "Recent Developments." Page 13
14 TRAVEL AND RECREATION SERVICES. For the first six months of 2001, revenues of the ongoing travel and recreation businesses were $19.5 million, down $3.4 million, or 14.8 percent, from the first six months of 2000, while operating income decreased $1.5 million for the same period. The decrease in revenue and operating income relates primarily to a decrease in package tour volume and higher fuel costs. NET INTEREST EXPENSE. Other investment income was $2.8 and $8.2 million in the first six months of 2001 and 2000, respectively. The decline in interest income is due primarily to the use of investment proceeds for the purchase of treasury shares throughout 2000 and during the first quarter of 2001. Interest expense for the first six months of 2001 was $14.3 million compared to $12.7 million for the comparable 2000 period. Higher average borrowings during 2001 were partially offset by the effects of a decrease in short-term interest rates. INCOME TAXES. Excluding the nonrecurring item, the effective tax rate for the first six months of 2001 was 27.4 percent compared to 21.5 percent for the first six months of 2000. The relatively low effective tax rate compared to the statutory federal rate is primarily attributable to tax-exempt income from Viad's Payment Services businesses. APB Opinion No. 28 requires that income taxes be provided based on the estimated effective tax rate expected to be applicable for the entire fiscal year. The estimated annual tax rate for 2001 is expected to be higher than the rate in 2000 due to lower tax-exempt income in proportion to total pre-tax income, resulting from a shift in the mix of investments from higher-yield nontaxable to lower-yield taxable investments as Viad balances its alternative minimum tax position. LIQUIDITY AND CAPITAL RESOURCES: Viad's total debt at June 30, 2001 was $427.7 million compared with $447.1 million at December 31, 2000. The debt-to-capital ratio was 0.36 to 1 at June 30, 2001 and 0.37 to 1 at December 31, 2000. During the first six months of 2001 (primarily in the first quarter), Viad purchased 1.4 million treasury shares for $34.6 million under Viad's stock repurchase programs. Net proceeds from the exercise of stock options totaled $12.1 million during the first six months of 2001. 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 net income before interest expense, income taxes, depreciation and amortization and nonrecurring items and includes the fully taxable equivalent adjustment. EBITDA for the first six months of 2001 was $157.6 million, down from $165.9 million in the 2000 period, resulting from lower operating income and the decline in investment income. There were no other material changes in Viad's financial condition nor were there any substantive changes relative to matters discussed in the "Liquidity and Capital Resources" section of Management's Discussion and Analysis of Results of Operations and Financial Condition as presented in Viad Corp's Annual Report on Form 10-K for the year ended December 31, 2000. RECENT DEVELOPMENTS: In light of the uncertain economy, Viad is taking steps to ensure that its cost structure is more competitive, especially in the Convention and Event Services segment. Therefore, in the third quarter of 2001, Viad will finalize and begin implementation of a restructuring plan that includes facility closures and workforce reductions, which is expected to result in a third quarter pre-tax charge of approximately $25 million to $30 million. Page 14
15 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 Quarterly Report on Form 10-Q includes certain forward-looking statements, assumptions and discussions, including those relating to estimates, plans, expectations of or current trends in future growth, productivity improvements, consumer demand, new business, investment policies, ongoing cost reduction efforts, efficiency, competitiveness, tax rates, restructuring plans and market risk disclosures. Such statements involve risks and uncertainties which may cause results to differ materially from those set forth in those statements. 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 filing. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Viad's primary market risk exposures are fluctuations in interest rates and foreign exchange rates. Certain derivative financial instruments are used as part of Viad's risk management strategy to manage exposure to changes in these rates. Derivatives are not used for speculative purposes. As described in Notes B and C, debt and equity securities classified as "available-for-sale" are carried at fair value, with the net unrealized holding gain or loss included in the Consolidated Balance Sheets as a component of "Accumulated other comprehensive income." A portion of Viad's Payment Services business involves the payment of commissions to selling agents of its official check program as described in Note D. A Viad Payment Services subsidiary has also entered into agreements to sell receivables from its bill payment and money order agents. The agent commissions and net proceeds from the agents' receivables sales are computed based on short-term variable interest rates that subject Viad to risk arising from changes in such rates. Viad has hedged a substantial portion of this risk through swap agreements that convert the variable-rate payments to fixed rates. Viad is also exposed to short-term interest rate risk on certain of its debt obligations. 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 payable to selling agents, growth in new business, the effects of the swap agreements and the expected borrowing level of variable-rate debt, the annual decrease in pre-tax income would be approximately $4.2 million. A hypothetical 10 percent proportionate decrease in interest rates, based on the same set of assumptions, would result in an annual increase in pre-tax income of approximately $4.3 million. The fair value of securities classified as available-for-sale, the fair value of the swap agreements and the fair value of fixed-rate debt are 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 $87.3 million (along with an after-tax decrease in accumulated other comprehensive income of approximately $53.3 million), an estimated increase in the fair value of Viad's swap agreements of approximately $53.9 million (along with an after-tax increase in accumulated other comprehensive income of $32.9 million) and an estimated off-balance-sheet decrease in the fair value of Viad's fixed-rate debt of approximately $2.1 million. 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 $84.6 million (along with an after-tax increase in accumulated other comprehensive income of approximately $51.6 million), an estimated Page 15
16 off-balance-sheet decrease in the fair value of Viad's swap agreements of approximately $53.9 million (along with an after-tax decrease in accumulated other comprehensive income of $32.9 million) and an estimated off-balance-sheet increase in the fair value of Viad's fixed-rate debt of approximately $2.2 million. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On August 18, 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 have been involved in litigation regarding the contract termination. GES and Key3Media have agreed to end the litigation. As a result of the settlement, Viad recorded a second quarter noncash provision totaling $29,274,000 ($18,267,000 after-tax, or $0.21 per diluted share) representing primarily the write-off of net receivables and prepayments made to Key3Media. The settlement will have no adverse impact on future operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of stockholders of Viad Corp was held May 8, 2001. (b) Not applicable-(i) proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934; (ii) there was no solicitation in opposition to management's nominees as listed in the proxy statement; and (iii) all such nominees were elected. (c) Matters voted upon at the annual meeting for which proxies were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934: 1. The election of Directors as follows: <TABLE> <S> <C> Jess Hay Affirmative Vote............................. 78,067,328 Withheld Authority........................... 1,247,041 Linda Johnson Rice Affirmative Vote............................. 78,491,104 Withheld Authority........................... 823,265 Timothy R. Wallace Affirmative Vote............................. 78,524,669 Withheld Authority........................... 789,700 </TABLE> 2. The appointment of Deloitte & Touche LLP to audit the accounts of Viad and its subsidiaries for the fiscal year 2001. <TABLE> <S> <C> Affirmative Vote............................. 77,006,736 Against...................................... 2,214,799 Abstentions.................................. 92,834 </TABLE> Page 16
17 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit No. 10.A - Copy of First Amendment dated as of May 8, 2001, to the Viad Corp Supplemental TRIM Plan. Exhibit No. 10.B - Copy of Viad Corp Supplemental Pension Plan, as amended and restated effective January 1, 2001. (b) No reports on Form 8-K were filed by the registrant during the quarter for which this report is filed. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VIAD CORP (Registrant) July 25, 2001 By /s/ Catherine L. Stevenson ----------------------------- Catherine L. Stevenson Vice President - Controller (Chief Accounting Officer and Authorized Officer) Page 17
18 EXHIBIT INDEX <TABLE> <CAPTION> EXHIBITS.# - ---------- <S> <C> 10.A Copy of First Amendment dated as of May 8, 2001, to the Viad Corp Supplemental TRIM Plan 10.B Copy of Viad Corp Supplemental Pension Plan, as amended and restated effective January 1, 2001. </TABLE>