10-Q 1 e10-q.txt 10-Q 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, 2000 Commission file number 001-11015 VIAD CORP (Exact name of registrant as specified in its charter) 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) 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 30, 2000, 92,837,060 shares of Common Stock ($1.50 par value) were outstanding. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VIAD CORP CONSOLIDATED BALANCE SHEETS
June 30, 2000 December 31, (000 omitted, except number of shares) (Unaudited) 1999 ---------------------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 42,468 $ 33,106 Short-term investments 28,442 95,545 Receivables 76,511 43,276 Inventories 101,170 73,687 Deferred income taxes 35,122 36,990 Other current assets 39,807 36,664 ---------------------------------------------------------------------------------------------------------------- 323,520 319,268 Funds, agents' receivables and current maturities of investments restricted for payment service obligations, after eliminating $25,000 and $50,000 invested in Viad commercial paper 780,524 602,893 ---------------------------------------------------------------------------------------------------------------- Total current assets 1,104,044 922,161 Investments in securities 166,262 173,359 Investments restricted for payment service obligations 3,248,764 2,936,171 Property and equipment 305,580 313,623 Other investments and assets 110,582 121,159 Deferred income taxes 94,093 115,058 Intangibles 646,270 629,340 ---------------------------------------------------------------------------------------------------------------- $ 5,675,595 $ 5,210,871 ================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term bank loans $ 13,523 $ 13,855 Accounts payable 114,834 82,465 Other current liabilities 203,806 204,228 Current portion of long-term debt 26,323 32,814 ---------------------------------------------------------------------------------------------------------------- 358,486 333,362 Payment service obligations 3,988,729 3,587,834 ---------------------------------------------------------------------------------------------------------------- Total current liabilities 4,347,215 3,921,196 Long-term debt 359,291 342,603 Pension and other postretirement benefits 71,369 71,402 Other deferred items and insurance liabilities 140,821 154,435 Minority interests 3,900 5,950 $4.75 Redeemable preferred stock 6,649 6,640 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 276,138 289,798 Retained income 695,103 643,352 Unearned employee benefits and other (109,354) (129,818) Accumulated other comprehensive income: Unrealized loss on securities classified as available for sale (54,004) (70,021) Cumulative translation adjustments (7,119) (4,935) Minimum pension liability adjustment (1,674) (1,674) Common stock in treasury, at cost, 6,902,865 and 5,497,132 shares (202,350) (167,667) ---------------------------------------------------------------------------------------------------------------- Total common stock and other equity 746,350 708,645 ---------------------------------------------------------------------------------------------------------------- $ 5,675,595 $ 5,210,871 ================================================================================================================
See Notes to Consolidated Financial Statements. Page 2 3 VIAD CORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Quarter ended June 30, Six months ended June 30, (000 omitted, except per share data) 2000 1999 2000 1999 ---------------------------------------------------------------------------------------------------------------- Revenues (Note H): Ongoing operations $ 464,165 $ 407,508 $ 867,083 $ 764,637 Sold businesses 12,363 12,888 17,664 29,164 ---------------------------------------------------------------------------------------------------------------- 476,528 420,396 884,747 793,801 ---------------------------------------------------------------------------------------------------------------- Costs and expenses: Costs of sales and services 416,306 365,648 783,234 708,653 Corporate activities 4,757 5,141 9,518 10,294 Net interest expense 2,298 7,132 4,431 13,627 Minority interests 370 785 508 1,286 ---------------------------------------------------------------------------------------------------------------- 423,731 378,706 797,691 733,860 ---------------------------------------------------------------------------------------------------------------- Income before income taxes 52,797 41,690 87,056 59,941 Income taxes 10,489 8,666 18,695 12,067 ---------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 42,308 33,024 68,361 47,874 Income from discontinued operations 11,143 16,678 ---------------------------------------------------------------------------------------------------------------- NET INCOME $ 42,308 $ 44,167 $ 68,361 $ 64,552 ================================================================================================================ DILUTED INCOME PER COMMON SHARE: CONTINUING OPERATIONS $ 0.46 $ 0.33 $ 0.74 $ 0.48 Discontinued operations 0.12 0.17 ---------------------------------------------------------------------------------------------------------------- Net income per share $ 0.46 $ 0.45 $ 0.74 $ 0.65 ================================================================================================================ BASIC INCOME PER COMMON SHARE: Continuing operations $ 0.47 $ 0.34 $ 0.76 $ 0.49 Discontinued operations 0.12 0.18 ---------------------------------------------------------------------------------------------------------------- Net income per share $ 0.47 $ 0.46 $ 0.76 $ 0.67 ================================================================================================================ Average outstanding common shares 89,301 94,863 89,608 94,751 Additional dilutive shares related to stock-based compensation 2,447 3,645 2,369 3,729 ---------------------------------------------------------------------------------------------------------------- Average outstanding and potentially dilutive common shares 91,748 98,508 91,977 98,480 ================================================================================================================ Dividends declared per common share $ 0.09 $ 0.09 $ 0.18 $ 0.17 ================================================================================================================ Preferred stock dividends $ 284 $ 282 $ 567 $ 565 ================================================================================================================
See Notes to Consolidated Financial Statements. Page 3 4 VIAD CORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Quarter ended June 30, Six months ended June 30, (000 omitted) 2000 1999 2000 1999 ---------------------------------------------------------------------------------------------------------------------------------- Net income $ 42,308 $ 44,167 $ 68,361 $ 64,552 ---------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss), net of tax: Unrealized gain (loss) on securities classified as available for sale: Holding gains (losses) arising during the period 1,030 (39,283) 16,836 (43,430) Reclassification adjustment for realized gains included in net income (673) (802) (819) (2,209) ----------------------------------------------------------------------------------------------------------------------------------- 357 (40,085) 16,017 (45,639) ----------------------------------------------------------------------------------------------------------------------------------- Unrealized foreign currency translation adjustments: Holding gains (losses) arising during the period (1,829) 1,022 (2,184) 1,203 ----------------------------------------------------------------------------------------------------------------------------------- Other comprehensive income (loss) (1,472) (39,063) 13,833 (44,436) ----------------------------------------------------------------------------------------------------------------------------------- Comprehensive income $ 40,836 $ 5,104 $ 82,194 $ 20,116 ===================================================================================================================================
See Notes to Consolidated Financial Statements. Page 4 5 VIAD CORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six months ended June 30, (000 omitted) 2000 1999 --------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES: Net income $ 68,361 $ 64,552 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 35,499 30,114 Deferred income taxes 12,543 (9,025) Income from discontinued operations (16,678) Gains on sales of businesses, property and other assets, net (2,390) (4,391) Other noncash items, net 2,011 6,133 Change in operating assets and liabilities: Receivables and inventories (49,451) 4,383 Payment service assets and obligations, net 219,427 398,115 Accounts payable and accrued compensation 10,661 (16,250) Other assets and liabilities, net (3,772) (5,998) --------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 292,889 450,955 --------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES: Capital expenditures (18,590) (25,456) Acquisitions of businesses, net of cash acquired (24,155) (10,587) Proceeds from sales of businesses, property and other assets, net 2,858 53,991 Proceeds from sales and maturities of securities 970,835 581,316 Purchases of securities (1,175,860) (981,208) Cash used by discontinued operations (34,598) --------------------------------------------------------------------------------------------------------- Net cash used by investing activities (244,912) (416,542) --------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES: Payments on long-term borrowings (30,319) (2,337) Net change in short-term borrowings 39,805 33,000 Dividends on common and preferred stock (16,728) (16,754) Exercise of stock options 7,084 16,240 Common stock purchased for treasury (38,457) (55,010) --------------------------------------------------------------------------------------------------------- Net cash used by financing activities (38,615) (24,861) --------------------------------------------------------------------------------------------------------- Net increase in cash and cash equivalents 9,362 9,552 Cash and cash equivalents, beginning of year 33,106 15,554 --------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 42,468 $ 25,106 =========================================================================================================
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, 1999. On July 13, 2000, Viad completed the sale of its concession operations at America West Arena and Bank One Ballpark in Phoenix, Arizona. The sale of the concession operations will be recorded in the third quarter of 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." 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, 2000, and its results of operations and its cash flows for the quarters and six months ended June 30, 2000 and 1999 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 2000 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 subsidiary to satisfy the liability to pay, upon presentment, the face amount of such payment service obligations. In addition, certain funds and other investments and the fair value of off-balance-sheet swap agreements (described below) of Payment Services subsidiaries are available if necessary to meet such obligations. Accordingly, such assets of Payment Services subsidiaries 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 variable rate expense of selling receivables from its bill payment and money order agents through the purchase of swap agreements. The swap agreements effectively convert such variable rate payments to fixed rate payments. The fair value of such swap agreements, while not recorded on Viad's Consolidated Balance Sheets, normally increases when the fair values of fixed rate, long-term debt investments held by Payment Services subsidiaries 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 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 off-balance-sheet swap agreements:
June 30, December 31, (000 omitted) 2000 1999 --------------------------------------------------------------------------------------------------------------------------- Funds, agents' receivables and current maturities of investments restricted for payment service obligations, including $25,000 and $50,000 invested in Viad commercial paper (1) $ 805,524 $ 652,893 Investments restricted for payment service obligations (2) 3,248,764 2,936,171 Other assets available for payment service obligations 14,307 3,009 Payment service obligations (3,988,729) (3,587,834) Fair value of off-balance-sheet swap agreements (3) 58,991 56,708 --------------------------------------------------------------------------------------------------------------------------- Total $ 138,857 $ 60,947 ===========================================================================================================================
(1) The commercial paper is supported by Viad's revolving bank credit agreement (see Note E). (2) 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 Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (see Note C). The decrease in the unrealized loss for the first six months of 2000 was due principally to decreases in longer-term market interest rates. (3) The fair value represents the estimated amounts that Viad would receive from counterparties to terminate the swap agreements at June 30, 2000 and December 31, 1999. NOTE C - INVESTMENTS RESTRICTED FOR PAYMENT SERVICE OBLIGATIONS Investments restricted for payment service obligations include the following debt and equity securities:
June 30, December 31, (000 omitted) 2000 1999 --------------------------------------------------------------------------------------------------------------------------- Securities classified as available for sale, at fair value (amortized cost of $2,355,930 and $2,278,793) $ 2,270,841 $ 2,167,250 Securities classified as held to maturity, at amortized cost (fair value of $985,184 and $771,668) 990,130 788,068 --------------------------------------------------------------------------------------------------------------------------- 3,260,971 2,955,318 Less current maturities (12,207) (19,147) --------------------------------------------------------------------------------------------------------------------------- $ 3,248,764 $ 2,936,171 ===========================================================================================================================
Page 7 8 NOTE D - NET INTEREST EXPENSE Net interest expense consists of the following:
Quarter ended June 30, Six months ended June 30, (000 omitted) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------------------- Interest expense $ 6,041 $ 7,132 $ 12,652 $ 13,627 Interest income (1) (3,743) (8,221) -------------------------------------------------------------------------------------------------------------------------------- Net interest expense $ 2,298 $ 7,132 $ 4,431 $ 13,627 ================================================================================================================================
(1) Represents income related to investment of a portion of the proceeds from the sale of Dobbs International Services, Inc. (sold July 1, 1999). These securities 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." NOTE E - DEBT At June 30, 2000 and December 31, 1999, Viad classified as long-term debt $84,137,000 and $44,000,000, respectively, of short-term borrowings which, along with the $25,000,000 and $50,000,000, respectively, of commercial paper issued to a Viad Payment Services subsidiary, are supported by unused commitments under a $300,000,000 long-term revolving bank credit agreement. 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:
(000 omitted) 2000 1999 -------------------------------------------------------------------------------------------------------------------------- Computed income taxes at statutory federal income tax rate of 35% $ 30,470 $ 20,979 Nondeductible goodwill amortization 1,682 1,624 State income taxes 1,800 1,244 Tax-exempt income (17,072) (13,271) Adjustment to estimated annual effective rate 1,900 1,750 Other, net (85) (259) -------------------------------------------------------------------------------------------------------------------------- Provision for income taxes $ 18,695 $ 12,067 ==========================================================================================================================
NOTE G - IMPACT OF STAFF ACCOUNTING BULLETIN In December 1999, the Securities and Exchange Commission ("SEC") released Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101") that summarizes the SEC's views in applying generally accepted accounting principles to revenue recognition in financial statements. Adoption of SAB 101 is not expected to have a material effect on Viad's financial position, results of operations or cash flows. Page 8 9 NOTE H - 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 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.
Quarter ended June 30, Six months ended June 30, (000 omitted) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- Revenues: Payment Services $ 167,635 $ 141,845 $ 319,485 $ 272,980 Convention and Event Services 295,638 259,831 557,490 494,951 ------------------------------------------------------------------------------------------------------------------------------- Reportable segments 463,273 401,676 876,975 767,931 Travel and Recreation Services 18,415 20,413 22,915 24,275 ------------------------------------------------------------------------------------------------------------------------------- SUBTOTAL, ONGOING OPERATIONS 481,688 422,089 899,890 792,206 Sold travel and recreation businesses (1) 12,363 12,888 17,664 29,164 Intercompany interest elimination (677) (1,671) (1,622) (3,326) Less taxable equivalent adjustment (16,846) (12,910) (31,185) (24,243) ------------------------------------------------------------------------------------------------------------------------------- $ 476,528 $ 420,396 $ 884,747 $ 793,801 =============================================================================================================================== Operating income: Payment Services $ 38,310 $ 30,322 $ 68,056 $ 54,452 Convention and Event Services 33,326 33,292 60,790 57,330 ------------------------------------------------------------------------------------------------------------------------------- Reportable segments 71,636 63,614 128,846 111,782 Travel and Recreation Services 4,815 3,509 3,317 1,644 ------------------------------------------------------------------------------------------------------------------------------- SUBTOTAL, ONGOING OPERATIONS 76,451 67,123 132,163 113,426 Sold travel and recreation businesses (1) 1,294 2,206 2,157 (709) Corporate activities (4,757) (5,141) (9,518) (10,294) Intercompany interest elimination (677) (1,671) (1,622) (3,326) Less taxable equivalent adjustment (16,846) (12,910) (31,185) (24,243) ------------------------------------------------------------------------------------------------------------------------------- 55,465 49,607 91,995 74,854 Net interest expense (2,298) (7,132) (4,431) (13,627) Minority interests (370) (785) (508) (1,286) ------------------------------------------------------------------------------------------------------------------------------- Income before income taxes $ 52,797 $ 41,690 $ 87,056 $ 59,941 ===============================================================================================================================
(1) On July 13, 2000, Viad completed the sale of its concession operations at America West Arena and Bank One Ballpark in Phoenix, Arizona. The sold travel and recreation businesses category includes revenues and operating results of the sold concession operations through June 30, 2000, along with the results of other sold businesses not classified as discontinued operations up to their respective dates of sale. The sale of the concession operations will be recorded in the third quarter of 2000. Page 9 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS: Viad Corp ("Viad") focuses on two principal service businesses: Payment Services and Convention and Event Services. On July 13, 2000, Viad completed the sale of its concession operations at America West Arena and Bank One Ballpark in Phoenix, Arizona. The sold travel and recreation businesses category includes revenues and operating results of the sold concession operations through June 30, 2000, along with the results of other sold businesses not classified as discontinued operations up to their respective dates of sale. The sale of the concession operations will be recorded in the third quarter of 2000. There were no other material changes in the nature of Viad's business, nor were there any other 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, 1999. All per share figures discussed are stated on the diluted basis. COMPARISON OF SECOND QUARTER OF 2000 TO THE SECOND QUARTER OF 1999: In the second quarter of 2000, revenues increased $56.1 million, or 13.4 percent, to $476.5 million from $420.4 million in 1999. Revenues of ongoing operations on a fully taxable equivalent basis, excluding the sold travel and recreation businesses, rose 14.1 percent for the quarter. Income from continuing operations for the second quarter of 2000 was $42.3 million, or $0.46 per share, an increase of 39.4 percent on a per share basis from the 1999 second quarter income from continuing operations of $33.0 million, or $0.33 per share. Cash earnings per share on the diluted basis, defined as income from continuing operations plus after-tax goodwill amortization, was $0.50, up 39 percent from the 1999 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. Net income for the second quarter of 2000 was also $42.3 million, or $0.46 per share, compared to $44.2 million, or $0.45 per share, in the second quarter of 1999. The second quarter of 1999 included $11.1 million, or $0.12 per share, income from discontinued operations, representing the operating results of Dobbs International Services, Inc. ("Dobbs"), sold July 1, 1999. There were 6.8 million fewer average outstanding and potentially dilutive common shares in the second quarter of 2000 than in the second quarter of 1999, due primarily to stock repurchases made in 2000. In addition, a lower average Viad stock price in 2000 contributed to fewer additional dilutive shares related to unexercised stock options. PAYMENT SERVICES. A Payment Services subsidiary invests substantial amounts of its growing money order and official check funds in tax-exempt securities, which have lower pre-tax yields but produce higher income on an after-tax basis than comparable taxable investments. On the fully taxable equivalent basis, second quarter 2000 revenues of the Payment Services segment were $167.6 million, up $25.8 million, or 18.2 percent, from 1999 second quarter revenues. Operating income increased $8.0 million, or 26.3 percent. Operating margins on the fully taxable equivalent basis were 22.9 percent in the second quarter of 2000, up from 21.4 percent in the 1999 first quarter. Results were Page 10 11 driven by continuing strong growth and the ramp up of key new accounts in official check and money orders which resulted in higher investment income. Average invested funds grew 30 percent over the 1999 quarter. Game Financial's solid operations also contributed to the quarter. Transaction volume growth for MoneyGram was strong in Latin America and international money transfers, offset partially by continued weakness in the U.S.-to-Mexico corridor. The number of MoneyGram agent locations grew 20 percent year-over-year and increased 26 percent internationally. CONVENTION AND EVENT SERVICES. Convention and Event Services revenues increased $35.8 million, or 13.8 percent, to $295.6 million in the second quarter of 2000. Operating income for the segment was even with that of the second quarter of 1999. Operating margins were 11.3 percent in the second quarter of 2000 versus 12.8 percent in the second quarter of 1999. Exhibitgroup/Giltspur reported strong gains in both revenue and operating income. GES Exposition Services also reported higher revenues for the quarter, but show rotation, higher show production costs and slower than anticipated profit generation on start-up products resulted in lower operating income compared to the 1999 quarter. Pressure on operating margins will continue into the third quarter as GES continues to focus on cost reduction efforts. TRAVEL AND RECREATION SERVICES. Revenues of the ongoing travel and recreation businesses were $18.4 million for the second quarter of 2000, down $2.0 million, or 9.8 percent, from 1999 second quarter revenues, while operating income was up $1.3 million, or 37.2 percent, in the second quarter of 2000. The decrease in revenue relates primarily to the discontinuance of a lower margin package tour business, along with increased competition in the charter and sightseeing business. Operating income increased due to higher margins and cost reductions. CORPORATE ACTIVITIES. Expenses of corporate activities decreased 7.5 percent in the second quarter of 2000 compared to the second quarter of 1999. NET INTEREST EXPENSE. Interest income of $3.7 million in the second quarter was generated from the investment of the cash proceeds remaining from the July 1, 1999 sale of Dobbs after repayment of short-term borrowings, repurchase of treasury shares and the funding of acquisitions. Interest expense in the second quarter of 2000 decreased $1.1 million from that in the 1999 second quarter as a result of lower average borrowings during the 2000 quarter, offset partially by the effects of higher short-term interest rates. INCOME TAXES. The effective tax rate in the 2000 second quarter was 19.9 percent compared to 20.8 percent for the second quarter 1999. The relatively low effective tax rate is primarily attributable to tax-exempt investment income from Viad's Payment Services businesses. COMPARISON OF FIRST SIX MONTHS OF 2000 TO THE FIRST SIX MONTHS OF 1999: Revenues for the first six months of 2000 increased $90.9 million, or 11.5 percent, to $884.7 million from $793.8 million in 1999. Revenues of ongoing operations on a fully taxable equivalent basis, excluding the sold travel and recreation businesses, rose 13.6 percent. Income from continuing operations for the first six months of 2000 was $68.4 million, or $0.74 per share, an increase of 54.2 percent on a per share basis from the 1999 six months income from continuing operations of $47.9 million, or $0.48 per share. Cash earnings per share, as defined above, was $0.82 for the first six months of 2000, up 52 percent from the 1999 period. Net income for the first six months of 2000 was also $68.4 million, or $0.74 per share, compared to $64.6 million, or $0.65 per share, in the first six months of 1999. The first six months of 1999 included $16.7 million, or $0.17 per share, from discontinued operations, representing the operating results of Dobbs. Page 11 12 There were 6.5 million fewer average outstanding and potentially dilutive common shares in the first six months of 2000 than in the first six months of 1999, due primarily to stock repurchases made in 2000. In addition, a lower average Viad stock price in 2000 contributed to fewer additional dilutive shares related to unexercised stock options. PAYMENT SERVICES. On the fully taxable equivalent basis, revenues of the Payment Services segment for the first six months of 2000 were $319.5 million, up $46.5 million, or 17.0 percent, from 1999 six month revenues, while operating income increased $13.6 million, or 25.0 percent. Operating margins on the fully taxable equivalent basis were 21.3 percent for the first six months of 2000, up from 19.9 percent in the first six months of 1999. Results were driven by continuing strong growth in money order, official check and Game Financial operations, with the ramp up of key new accounts contributing to the gains. Transaction volume for MoneyGram grew in the low double digits over the prior year, with strong growth in Latin America and international, offset partially by continued weakness in the U.S.-to-Mexico corridor. CONVENTION AND EVENT SERVICES. Convention and Event Services revenues increased $62.5 million, or 12.6 percent, to $557.5 million from $495.0 million in the 1999 six month period. Operating income for the segment increased to $60.8 million, up $3.5 million from $57.3 million in the 1999 six months. Operating margins were 10.9 percent compared with 11.6 percent in 1999. Exhibitgroup/Giltspur reported strong gains in both revenue and operating income. GES Exposition Services also reported higher revenues for the period, but show rotation, higher show production costs and slower than anticipated profit generation on start-up products resulted in lower operating income and margins compared to the first six months of 1999. TRAVEL AND RECREATION SERVICES. For the first six months of 2000, revenues of the ongoing travel and recreation businesses were $22.9 million, down $1.4 million, or 5.6 percent, from the first six months of 1999, while operating income increased $1.7 million for the same period. The decrease in revenue relates primarily to the discontinuance of a lower margin package tour business, along with increased competition in the charter and sightseeing business. Operating income increased due to higher margins and cost reductions. CORPORATE ACTIVITIES. Expenses of corporate activities decreased 7.5 percent for the first six months of 2000 compared to the first six months of 1999. NET INTEREST EXPENSE. Interest income of $8.2 million in the first six months of 2000 was generated from the investment of the cash proceeds remaining from the July 1, 1999 sale of Dobbs after repayment of short-term borrowings, repurchase of treasury shares and the funding of acquisitions. Interest expense for the first six months of 2000 was $12.7 million compared to $13.6 million for the comparable period of 1999. Lower average borrowings during 2000 were partially offset by the effects of an increase in short-term interest rates. INCOME TAXES. The effective tax rate for the first six months of 2000 was 21.5 percent compared to 20.1 percent for the first six months of 1999. The relatively low effective tax rate is primarily attributable to tax-exempt investment income from Viad's Payment Services businesses. LIQUIDITY AND CAPITAL RESOURCES: Viad's total debt at June 30, 2000 was $399.1 million compared with $389.3 million at December 31, 1999. The debt-to-capital ratio was 0.35 to 1 at June 30, 2000 and at December 31, 1999. Page 12 13 During the first six months of 2000, Viad repurchased 1,519,000 treasury shares for $38.5 million under Viad's stock repurchase programs. Net proceeds from the exercise of stock options, including tax benefits on stock option exercises, totaled $7.1 million during the first six months of 2000. The balance of the investments in securities arising from the July 1, 1999 sale of Dobbs totaled $194.7 million at June 30, 2000. The balance declined $74.2 million since December 31, 1999, primarily as a result of funding acquisitions during the first quarter of 2000 and the repurchase of treasury shares. 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 includes the fully taxable equivalent adjustment. EBITDA for the first six months of 2000 was $166.4 million, an increase of 30.1 percent over that of the comparable 1999 period. In May 2000, a Viad Payment Services subsidiary amended its agreement to sell undivided percentage ownership interests in certain receivables from bill payment and money order agents. The maximum amount to be sold under the agreement was increased from $400 million to $450 million. 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, 1999. 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 expectations of or current trends in future growth, productivity improvements, consumer demand, new business, investment policies, cost reduction efforts 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, consumer demand patterns, 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 As described in Note B, 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. 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 expense of selling receivables 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 the purchase of swap agreements which convert the variable rate payments to fixed rates. Viad is also exposed to short-term interest rate risk on certain of its debt obligations and trade accounts receivable sales. Page 13 14 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 increase in pre-tax income would be approximately $932,000. A hypothetical 10 percent proportionate decrease in interest rates, based on the same set of assumptions, would result in an annual decrease in pre-tax income of approximately $766,000. 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 $99.1 million (along with an after-tax decrease in accumulated other comprehensive income of approximately $60.4 million), an estimated off-balance-sheet increase in the fair value of Viad's swap agreements of approximately $48.5 million and an estimated off-balance-sheet decrease in the fair value of Viad's fixed-rate debt of approximately $3.7 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 $93.3 million (along with an after-tax increase in accumulated other comprehensive income of approximately $56.9 million), an estimated off-balance-sheet decrease in the fair value of Viad's swap agreements of approximately $48.5 million and an estimated off-balance-sheet increase in the fair value of Viad's fixed-rate debt of approximately $3.8 million. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The annual meeting of stockholders of Viad Corp was held May 9, 2000. (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:
Robert H. Bohannon Affirmative Vote ............................ 80,554,468 Withheld Authority .......................... 1,014,481 Douglas L. Rock Affirmative Vote ............................ 80,697,309 Withheld Authority .......................... 871,640 John C. Tolleson Affirmative Vote ............................. 80,930,157 Withheld Authority ........................... 638,792
Page 14 15 2. The appointment of Deloitte & Touche LLP to audit the accounts of Viad and its subsidiaries for the fiscal year 2000.
Affirmative Vote ........................... 81,116,452 Against .................................... 352,801 Abstentions ................................ 99,696
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit No. 10A - Copy of employment agreement between Viad Corp and Paul B. Mullen dated March 1, 2000 Exhibit No. 10B - Copy of amendment dated May 9, 2000 to Viad Corp Supplemental Pension Plan (Amended and Restated as of December 1, 1999) Exhibit No. 10C - Copy of amendment dated May 9, 2000 to Travelers Express Company, Inc. Supplemental Pension Plan dated March 30, 1997 Exhibit No. 10D - Copy of amendment dated May 9, 2000 to GES Exposition Services, Inc. Supplemental Executive Retirement Plan, as amended effective January 1, 1998 Exhibit No. 27 - Financial Data Schedule (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, 2000 By /s/ Catherine L. Stevenson ----------------------------- Catherine L. Stevenson Vice-President - Controller (Chief Accounting Officer and Authorized Officer) Page 15