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 September 30, 1998
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 October 31, 1998, 99,412,058 shares of Common Stock ($1.50 par
value) were outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VIAD CORP
CONSOLIDATED BALANCE SHEET
September 30, December 31,
(000 omitted, except share data) 1998 1997
----------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 16,432 $ 12,341
Receivables, less allowance of
$5,024 and $4,805 112,435 131,620
Inventories 74,066 105,331
Deferred income taxes 35,672 29,444
Other current assets 37,219 29,207
----------- -----------
275,824 307,943
Funds, agents' receivables and current
maturities of investments restricted
for a subsidiary's payment service
obligations, after eliminating $90,000
of such funds invested in Viad
commercial paper 116,882 617,887
----------- -----------
Total current assets 392,706 925,830
Investments restricted for a subsidiary's
payment service obligations 2,221,825 1,615,464
Property and equipment 454,712 470,052
Other investments and assets 112,472 113,274
Deferred income taxes 72,841 74,659
Intangibles 847,168 531,034
----------- -----------
$ 4,101,724 $ 3,730,313
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 128,492 $ 145,641
Accrued compensation 92,574 75,589
Other current liabilities 162,912 134,477
Current portion of long-term debt 34,752 32,291
----------- -----------
418,730 387,998
Payment service obligations 2,345,387 2,248,004
----------- -----------
Total current liabilities 2,764,117 2,636,002
Long-term debt 475,053 377,849
Pension and other benefits 67,647 62,988
Other deferred items and
insurance reserves 156,991 109,323
Minority interests 2,547 8,378
$4.75 Redeemable preferred stock 6,622 6,612
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 314,209 291,414
Retained income 298,786 209,127
Unearned employee benefits and other (146,618) (121,968)
Unrealized gain on securities
classified as available for sale,
net of tax 27,490 13,625
Cumulative translation adjustments (6,215) (3,022)
Common stock in treasury, at cost,
371,170 and 516,926 shares (8,515) (9,625)
---------- ----------
Total common stock and other equity 628,747 529,161
----------- -----------
$ 4,101,724 $ 3,730,313
=========== ===========
<FN>
See Notes to Consolidated Financial Statements.
VIAD CORP
STATEMENT OF CONSOLIDATED INCOME
Quarter ended Nine months ended
September 30, September 30,
(000 omitted, ----------------------- ------------------------
(except per share data) 1998 1997 1998 1997
---------- ---------- ---------- ----------
REVENUES $ 672,393 $ 622,226 $1,932,244 $ 1,806,897
---------- ---------- ---------- ----------
Costs and expenses:
Costs of sales and services 596,687 553,971 1,749,677 1,641,286
Corporate activities and
nonoperating items, net 5,422 6,910 17,362 22,412
Sale of trade accounts
receivable expense 1,123 1,110 3,338 3,330
Interest expense 10,261 11,471 31,668 38,073
Nonrecurring items:
Provision for payments
previously received
pursuant to patent litigation 10,642
Gains on sales of businesses (26,684) (47,839)
Minority interests 1,105 555 1,571 1,039
---------- ---------- ---------- ----------
587,914 574,017 1,766,419 1,706,140
---------- ---------- ---------- ----------
Income before income taxes 84,479 48,209 165,825 100,757
Income taxes 27,446 14,359 52,791 29,712
---------- ---------- ---------- ----------
INCOME BEFORE EXTRAORDINARY CHARGE 57,033 33,850 113,034 71,045
Extraordinary charge for
early retirement of debt,
net of tax benefit of $4,554 (8,458)
---------- ---------- ---------- ----------
NET INCOME $ 57,033 $ 33,850 $ 113,034 $ 62,587
========== ========== ========== ==========
DILUTED NET INCOME PER COMMON SHARE:
Income before extraordinary
charge $ 0.58 $ 0.36 $ 1.14 $ 0.75
Extraordinary charge (0.09)
---------- ---------- ---------- ----------
Diluted net income per
common share $ 0.58 $ 0.36 $ 1.14 $ 0.66
========== ========== ========== ==========
BASIC NET INCOME PER COMMON SHARE:
Income before extraordinary
charge $ 0.60 $ 0.37 $ 1.19 $ 0.77
Extraordinary charge (0.09)
---------- ---------- ---------- ----------
Basic net income per
common share $ 0.60 $ 0.37 $ 1.19 $ 0.68
========== ========== ========== ==========
Average outstanding common shares 94,595 91,077 94,331 90,547
Additional dilutive shares related
to stock-based compensation 4,000 3,162 4,023 2,910
---------- ---------- ---------- ----------
Average outstanding and potentially
dilutive common shares 98,595 94,239 98,354 93,457
========== ========== ========== ==========
Dividends declared per
common share $ 0.08 $ 0.08 $ 0.24 $ 0.24
========== ========== ========== ==========
Preferred stock dividends $ 282 $ 282 $ 846 $ 845
========== ========== ========== ==========
<FN>
See Notes to Consolidated Financial Statements.
VIAD CORP
STATEMENT OF RETAINED INCOME
Nine months ended September 30,
(000 omitted) 1998 1997
----------- -----------
Balance, beginning of year $ 209,127 $ 146,664
Net income 113,034 62,587
Dividends on common and
preferred shares (23,606) (22,715)
Adjust distribution of consumer
products business to Viad
stockholders for post-closing
settlements (1,216)
Other 231 186
----------- -----------
Balance, end of period $ 298,786 $ 185,506
=========== ===========
<FN>
See Notes to Consolidated Financial Statements.
VIAD CORP
STATEMENT OF COMPREHENSIVE INCOME
Quarter ended Nine months ended
September 30, September 30,
----------------------- -----------------------
(000 omitted) 1998 1997 1998 1997
---------- ---------- ---------- ----------
Net income $ 57,033 $ 33,850 $ 113,034 $ 62,587
Other comprehensive income
(loss), net of tax:
Unrealized gain (loss) on
securities classified as
available for sale:
Holding gains arising
during the period 15,912 8,469 19,946 12,370
Reclassification adjustment
for realized gains included
in net income (2,427) (2,084) (6,081) (3,201)
---------- ---------- ---------- ----------
13,485 6,385 13,865 9,169
---------- ---------- ---------- ----------
Foreign currency translation
adjustments:
Holding losses arising
during the period (1,217) (902) (3,244) (1,318)
Reclassification adjustment
for sale of investment in
a foreign entity included
in net income 51
---------- ---------- ---------- ----------
(1,217) (902) (3,193) (1,318)
---------- ---------- ---------- ----------
Other comprehensive income 12,268 5,483 10,672 7,851
---------- ---------- ---------- ----------
Comprehensive income $ 69,301 $ 39,333 $ 123,706 $ 70,438
========== ========== ========== ==========
<FN>
See Notes to Consolidated Financial Statements.
VIAD CORP
STATEMENT OF CONSOLIDATED CASH FLOWS
Nine months ended September 30,
(000 omitted) 1998 1997
----------- -----------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income $ 113,034 $ 62,587
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 64,331 58,995
Deferred income taxes (10,683) 2,879
Extraordinary charge for early
retirement of debt 8,458
Gains on sales of businesses and
assets, net (62,494) (12,812)
Other noncash items, net 10,461 9,596
Change in operating assets and liabilities:
Receivables and inventories (5,754) (54,958)
Payment service assets and
obligations, net 572,776 334,608
Accounts payable and
accrued compensation 17,684 (3,612)
Other assets and liabilities, net 8,267 (24,552)
----------- -----------
Net cash provided by operating activities 707,622 381,189
----------- -----------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Capital expenditures (57,466) (71,178)
Purchase of asset previously leased (20,997)
Acquisitions of businesses, net of
cash acquired (335,870) (18,676)
Proceeds from sales of businesses and
other assets, net 185,265 177,716
Investments restricted for payment
service obligations:
Proceeds from sales and maturities of
securities classified as available
for sale 698,273 535,441
Proceeds from maturities of securities
classified as held to maturity 85,576 25,061
Purchases of securities classified
as available for sale (1,233,696) (765,767)
Purchases of securities classified
as held to maturity (96,309) (97,525)
Investments in and advances to
discontinued operations, net (21,319)
----------- -----------
Net cash used by investing activities (754,227) (257,244)
----------- -----------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Payments on long-term borrowings (2,408) (75,780)
Premium paid upon early retirement of debt (13,012)
Net change in short-term borrowings
classified as long-term debt 98,000 (21,003)
Dividends on common and preferred stock (23,606) (22,715)
Proceeds from issuances of treasury stock,
net of exchanges 14,403 16,373
Common stock purchased for treasury (17,274)
Cash payments on swap agreements (18,419) (2,273)
----------- -----------
Net cash provided (used) by
financing activities 50,696 (118,410)
----------- -----------
Net increase in cash and
cash equivalents 4,091 5,535
Cash and cash equivalents, beginning of year 12,341 4,422
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,432 $ 9,957
=========== ===========
<FN>
See Notes to Consolidated Financial Statements.
VIAD CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--Basis of Preparation
The Consolidated Financial Statements of Viad Corp ("Viad") include
the accounts for 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 to Stockholders for the year ended
December 31, 1997.
Effective April 1, 1998, Viad sold its Aircraft Services International
Group ("ASIG"), which conducted fueling and ground-handling
operations. ASIG's operations were included in Viad's Airline
Catering and Services segment until the date of sale.
Effective June 1, 1998, Viad acquired MoneyGram Payment Systems, Inc.
("MoneyGram"), a provider of consumer money wire transfer services.
MoneyGram's operations are included in Viad's Travel and Leisure and
Payment Services segment results from the date of acquisition.
Effective September 15, 1998, Viad sold its duty-free and shipboard
concessions business, Greyhound Leisure Services, Inc. ("GLSI").
GLSI's operations were included in Viad's Travel and Leisure and
Payment Services segment until the date of sale.
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 September 30, 1998, and its results of operations and
its cash flows for the quarters and nine months ended September 30,
1998 and 1997 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
1998 presentation.
NOTE B--Fiduciary Assets Restricted for Payment Service Obligations
A Viad payment services subsidiary generates funds from the issuance
of money orders and other payment instruments, with the related
liability classified as "Payment service obligations." The funds are
invested primarily 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. Accordingly, such
fiduciary assets are not available to satisfy working capital or other
financing requirements of Viad.
Following is a summary of amounts related to the payment service
obligations, including excess funds:
September 30, December 31,
(000 omitted) 1998 1997
----------- -----------
Fiduciary Assets:
Funds, agents' receivables and current
maturities of investments restricted
for payment service obligations,
including $90,000 invested in Viad
commercial paper (1) $ 206,882 $ 707,887
Investments restricted for payment
service obligations (2) 2,221,825 1,615,464
----------- -----------
2,428,707 2,323,351
Payment service obligations 2,345,387 2,248,004
----------- -----------
Asset carrying amounts in excess
of 1:1 funding coverage of payment
service obligations (2) $ 83,320 $ 75,347
=========== ===========
<FN>
(1) See Note E of Notes to Consolidated Financial Statements for description of
Viad's revolving bank credit agreement, which supports its commercial paper
obligations.
(2) See Note C of Notes to Consolidated Financial Statements for a summary of
investments and their classification and carrying amounts in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." As
detailed therein, securities classified as "available for sale" are carried at fair
value, and the fair value of securities classified as "held to maturity" exceeded
their carrying amounts by $21,501,000 and $10,724,000 at September 30, 1998, and
December 31, 1997, respectively. Accordingly, the aggregate fair value of
investments restricted for payment service obligations (less current maturities) was
$2,243,326,000 and $1,626,188,000 at September 30, 1998, and December 31, 1997,
respectively; the aggregate fair value of fiduciary assets was $2,450,208,000 and
$2,334,075,000 at September 30, 1998, and December 31, 1997, respectively; and the
aggregate fair value of fiduciary assets in excess of 1:1 funding coverage of
payment service obligations was $104,821,000 and $86,071,000 at September 30, 1998,
and December 31, 1997, respectively.
NOTE C--Investments Restricted for Payment Service Obligations
Investments restricted for payment service obligations include the
following debt and equity securities:
September 30, December 31,
(000 omitted) 1998 1997
----------- -----------
Securities available for sale, at
fair value (amortized cost of
$1,617,779 and $1,074,371) $ 1,662,845 $ 1,096,706
Securities held to maturity, at
amortized cost (fair value of
$598,038 and $559,497) 576,537 548,773
----------- -----------
2,239,382 1,645,479
Less current maturities (17,557) (30,015)
----------- -----------
$ 2,221,825 $ 1,615,464
=========== ===========
NOTE D--MoneyGram Acquisition
On May 26, 1998, Viad announced that its cash tender offer for
MoneyGram at $17.35 per share had attracted a sufficient number of
shares to result in the acquisition of MoneyGram. Approximately 67
percent of the 16,513,800 MoneyGram shares outstanding were tendered.
The funding for the MoneyGram shares tendered was financed in early
June 1998 with short-term borrowings. Payment for the remaining 33
percent of the outstanding MoneyGram shares was completed on July 10,
1998, with funds from additional short-term borrowings, following
approval of an agreement and plan of merger by MoneyGram stockholders.
MoneyGram's operations are included in Viad's Travel and Leisure and
Payment Services segment results beginning June 1, 1998. The
acquisition was accounted for as a purchase. The purchase price,
including acquisition costs, is being allocated to the net tangible
and intangible assets acquired based on estimated fair values at the
date of acquisition, as follows:
(000 omitted)
Assets acquired:
Property and equipment $ 7,206
Intangibles, primarily goodwill 297,499
Other assets 17,107
Liabilities assumed (39,352)
----------
Net cash paid $ 282,460
==========
Viad is still gathering certain information required to complete the
allocation of the purchase price. Further adjustments may arise as a
result of this analysis.
NOTE E--Debt
At September 30, 1998 and December 31, 1997, Viad classified as long-
term debt $148,000,000 and $50,000,000, respectively, of short-term
borrowings which, along with the $90,000,000 of commercial paper
issued to Viad's payment services subsidiary, are supported by unused
commitments under a $300,000,000 long-term revolving bank credit
agreement.
As discussed further in Note F of Notes to Consolidated Financial
Statements, Viad sold ASIG and GLSI effective April 1, 1998, and
September 15, 1998, respectively. The sale proceeds were used to
repay short-term borrowings. As discussed in Note D of Notes to
Consolidated Financial Statements, Viad completed its cash tender
offer for MoneyGram at $17.35 per share in early June. The funding
for the acquisition of MoneyGram's shares was financed with short-
term borrowings supported by Viad's long-term revolving bank credit
agreement.
In late March 1997, Viad repurchased $58,414,000 par value of its 10.5
percent subordinated debentures at a premium, resulting in an
extraordinary after-tax charge of $8,458,000.
NOTE F--Nonrecurring Items
Following protracted efforts, including formal mediation, to settle
patent infringement litigation initiated by Viad's Payment Services
subsidiary, Travelers Express Company, Inc. ("TECI"), against
Integrated Payment Systems ("IPS"), a subsidiary of First Data
Corporation, TECI petitioned the Federal District Court in May 1998 to
set aside a settlement term sheet entered into more than three years
previously because of the parties' failure to agree on final
settlement terms. At the same time, TECI tendered back to IPS amounts
which IPS had paid to TECI pursuant to the term sheet. The Court
granted TECI's motion and set a trial date for its patent infringement
lawsuit against IPS. While TECI expects a favorable outcome, the
timing and amount of recovery pursuant to litigation cannot be
assured. Accordingly, TECI recorded a one-time provision in the
second quarter of 1998 for the payments received from IPS (which had
been reported as income in prior years), plus interest thereon and
related expenses totaling $10,642,000 ($6,917,000 after-tax).
Effective April 1, 1998, Viad sold ASIG. ASIG's operations were
included in Viad's Airline Catering and Services segment until the
date of sale. After repaying short-term borrowings with proceeds of
the sale, Viad terminated certain related interest rate swap
agreements. The gain on the sale of ASIG, after deducting costs of
sale and related expense provisions, was $21,155,000 ($13,201,000
after-tax).
Effective September 15, 1998, Viad sold GLSI. GLSI's operations were
included in Viad's Travel and Leisure and Payment Services segment
until the date of sale. The gain on sale, after deducting costs of
sale and related expense provisions was $26,684,000 ($15,650,000
after-tax).
NOTE G--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 nine months ended September 30, is as
follows:
(000 omitted) 1998 1997
----------- -----------
Computed income taxes at statutory
federal income tax rate of 35% $ 58,039 $ 35,265
Nondeductible goodwill amortization 2,816 2,637
Minority interests 550 364
State income taxes 4,812 3,501
Tax-exempt income (15,496) (11,518)
Adjustment to estimated annual
effective rate 650 500
Other, net 1,420 (1,037)
----------- -----------
Provision for income taxes $ 52,791 $ 29,712
=========== ===========
NOTE H--Supplementary Information--Revenues and Operating Income
Quarter ended Nine months ended
September 30, September 30,
-------------------------- -----------------------
(000 omitted) 1998 1997 1998 1997
---------- ---------- ---------- ----------
Revenues:
Airline Catering and
Services:
Catering $ 237,083 $ 213,625 $ 669,149 $ 596,488
Fueling and ground-
handling (sold as
of 4/1/98) 30,912 30,594 90,867
---------- ---------- ---------- ----------
237,083 244,537 699,743 687,355
Convention Services 187,276 181,310 625,448 612,977
Travel and Leisure and
Payment Services (1) 206,754 148,148 471,194 365,540
Duty-free and ship-
board concessions
(sold as of 9/15/98) 41,280 48,231 135,859 141,025
---------- ---------- ---------- ----------
248,034 196,379 607,053 506,565
---------- ---------- ---------- ----------
$ 672,393 $ 622,226 $ 1,932,244 $1,806,897
========== ========== ========== ==========
Operating Income:
Airline Catering and
Services (2):
Catering $ 23,006 $ 21,708 $ 53,717 $ 50,044
Fueling and ground-
handling (sold as
of 4/1/98) 2,634 2,723 8,744
---------- ---------- ---------- ----------
23,006 24,342 56,440 58,788
Convention Services (2) 16,435 14,046 63,492 54,273
Travel and Leisure and
Payment Services (1)(2):
Before nonrecurring
item and duty-free and
shipboard concessions 34,106 27,084 54,780 44,773
Nonrecurring item (3) (10,642)
Duty-free and shipboard
concessions (sold as
of 9/15/98) 2,159 2,783 7,855 7,777
---------- ---------- ---------- ----------
36,265 29,867 51,993 52,550
---------- ---------- ---------- ----------
Total principal business
segments (2)(3) 75,706 68,255 171,925 165,611
Corporate activities and
nonoperating items,
net (2) (5,422) (6,910) (17,362) (22,412)
Sale of trade accounts
receivable expense (1,123) (1,110) (3,338) (3,330)
---------- ---------- ---------- ----------
$ 69,161 $ 60,235 $ 151,225 $ 139,869
========== ========== ========== ==========
<FN>
(1) A Viad payment services subsidiary is investing increasing amounts in tax-exempt
securities. On a fully taxable equivalent basis, revenues and operating income would be
higher by $10,459,000 and $7,103,000 for the 1998 and 1997 quarters, respectively, and by
$28,306,000 and $21,040,000 for the 1998 and 1997 nine month periods, respectively.
(2) In 1998, Viad began charging its operating subsidiaries an increased allocation of
Corporate expenses, which is offset by reductions in expense for Corporate activities for
the 1998 periods.
(3) A one-time provision totaling $10,642,000 was recorded by a Viad payment services
subsidiary in the second quarter of 1998 for payments previously received pursuant to
patent litigation (which had been recorded as income in prior years), including interest
thereon and related expenses. See Note F of Notes to Consolidated Financial Statements.
NOTE I--Impact of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS
No. 133, which becomes effective in the year 2000 but may be adopted
earlier, requires that entities record all derivatives as assets or
liabilities, measured at fair value, with the change in fair value
recognized in earnings or in other comprehensive income, depending on
the use of the derivative and whether it qualifies for hedge
accounting. SFAS No. 133 amends or supersedes several current
accounting Statements. Viad is in the process of analyzing SFAS No.
133 and the impact on its consolidated financial position and results
of operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS:
Effective April 1, 1998, Viad sold its Aircraft Services International
Group ("ASIG"), which conducted fueling and ground-handling
operations. ASIG's operations were included in Viad's Airline
Catering and Services segment until the date of sale.
Effective June 1, 1998, Viad acquired MoneyGram Payment Systems, Inc.
("MoneyGram"), a provider of consumer money wire transfer services, as
the result of a cash tender offer. MoneyGram's operations are
included in Viad's Travel and Leisure and Payment Services segment
results from the date of acquisition.
Effective September 15, 1998, Viad sold its duty-free and shipboard
concessions business, Greyhound Leisure Services, Inc. ("GLSI").
GLSI's operations were included in Viad's Travel and Leisure and
Payment Services segment until the date of sale.
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 first paragraph of the
results section of Management's Discussion and Analysis of Results of
Operations and Financial Condition presented in the Viad Corp Annual
Report to Stockholders for the year ended December 31, 1997.
In 1998, Viad began charging its operating subsidiaries an increased
allocation of Corporate expenses. The increased charges for Corporate
expenses reduced 1998 operating income of Viad's segments, resulting
in lower reported increases over 1997 segment operating income levels.
All per share figures discussed are stated on the diluted basis.
COMPARISON OF THIRD QUARTER OF 1998 TO THE THIRD QUARTER OF 1997:
In the third quarter of 1998, revenues increased $50.2 million, or 8.1
percent, to $672.4 million from $622.2 million in 1997. The 1998
third quarter operating income of Viad's principal business segments
increased $7.5 million, or 10.9 percent, over that of 1997. A payment
services subsidiary continues to invest increasing amounts of its
growing money order and official check funds in tax-exempt securities.
On a fully taxable equivalent basis, and excluding the effects of ASIG
and GLSI (sold as of April 1, 1998, and September 15, 1998,
respectively), third quarter revenues rose 16.6 percent and operating
income of Viad's principal business segments was up 20.1 percent (21.9
percent before the increased corporate allocation).
Net income for the third quarter of 1998 was $57.0 million, or $0.58
per share. Excluding the gain on sale of GLSI of $15.7 million (net
of income taxes of $11.0 million), or $0.16 per share, income for the
third quarter of 1998 was $41.4 million, or $0.42 per share. Net
income for the 1997 quarter was $33.9 million, or $0.36 per share.
There were 4.4 million more average common and equivalent shares
outstanding in the 1998 quarter than in the 1997 quarter, due
primarily to the acquisition of Game Financial Corporation in December
1997 (for approximately 2.6 million shares of Viad stock), stock
option exercises and the effects of a higher Viad stock price on the
calculation of additional common shares arising from unexercised stock
options. A stock repurchase program (which commenced in July 1998) is
having the intended effect of reducing the dilution otherwise
resulting from common shares issued upon exercise of stock options and
in connection with other stock compensation plans.
AIRLINE CATERING AND SERVICES.
The third quarter 1998 revenues of the Airline Catering and Services
group were $237.1 million, a decrease of 3.0 percent from the 1997
third quarter revenues of $244.5 million. Operating income decreased
$1.3 million, or 5.5 percent. Excluding the effects of ASIG (sold
effective as of April 1, 1998), 1998 third quarter revenues from
airline catering increased 11.0 percent, operating income increased
$1.3 million, or 6.0 percent (7.4 percent before the increased
corporate allocation), and operating margins decreased slightly to 9.7
percent (9.8 percent before the increased corporate allocation) from
1997's 10.2 percent. Revenue increases were driven by airline traffic
growth and new business added over the past year, including the June
1998 acquisition of a catering kitchen in Las Vegas. Margins and
operating income growth were affected by the start-up of new and
replacement kitchens and the effects of the Northwest Airlines strike
in the third quarter.
CONVENTION SERVICES.
Convention Services third quarter 1998 revenues increased $6.0
million, or 3.3 percent, to $187.3 million from $181.3 million in the
1997 third quarter. GES Exposition Services ("GES") continued to
eliminate low-margin business during the 1998 quarter, and
Exhibitgroup/Giltspur revenues were 3.1 percent lower than last year
due to certain customers delaying delivery of their exhibits into the
fourth quarter. Operating income increased $2.4 million, or 17.0
percent (20.8 percent before the increased corporate allocation), and
operating margins increased from 7.7 percent in the 1997 quarter to
8.8 percent (9.1 percent before the increased corporate allocation).
Both GES and Exhibitgroup/Giltspur had solid gains in operating income
due to improved cost controls and higher margin business in the 1998
quarter. Acquisitions completed during the second quarter of 1998
also contributed to the segment's improved third quarter performance.
TRAVEL AND LEISURE AND PAYMENT SERVICES.
Revenues of the Travel and Leisure and Payment Services companies were
$248.0 million for the third quarter of 1998, up $51.7 million, or
26.3 percent, from 1997 third quarter revenues, while operating income
increased $6.4 million, or 21.4 percent. Excluding the effects of
GLSI (sold effective as of September 15, 1998), third quarter revenues
increased 39.6 percent and operating income increased 25.9 percent.
On the fully taxable equivalent basis, third quarter revenues and
operating income would have been higher by $10.5 million and $7.1
million in 1998 and 1997, respectively. Excluding GLSI, revenues on
the fully taxable equivalent basis would have increased 39.9 percent,
and operating income would have increased 30.4 percent (31.5 percent
before the increased corporate allocation). Operating margins on this
same basis were 20.5 percent (20.7 percent before the increased
corporate allocation) in the third quarter of 1998, down slightly from
22.0 percent in the 1997 third quarter.
Results for the third quarter of 1998 were driven by contributions
from Game Financial Corporation ("Game," acquired in December 1997)
and MoneyGram (acquired as of June 1, 1998) and by continuing strong
growth at Travelers Express. Both Game and MoneyGram have lower
operating margins than Travelers Express' traditional business. The
third quarter of 1998 also included full operation of Restaura's
concession operations at Bank One Ballpark, home of the new Arizona
Diamondbacks major league baseball franchise, which helped to overcome
effects of a third quarter strike at General Motors plants where
Restaura provides contract foodservice.
On the fully taxable equivalent basis, payment services revenues and
operating income increased $68.7 million and $9.0 million,
respectively, over those of the 1997 third quarter, due to
contributions from the Game and MoneyGram acquisitions as well as
continuing rapid growth in official check business.
Travel tour service revenues decreased $6.3 million from those of the
1997 third quarter, due primarily to the decline in Japanese tourism
into Canada. Operating income decreased $100,000, as reductions in
operating costs offset most of the effects of the revenue decline.
Restaura foodservice revenues and operating income increased $9.6
million and $3.0 million, respectively, over those of the 1997 third
quarter. The third quarter of 1998 included full operation of
concessions at Bank One Ballpark, which helped overcome effects of the
aforementioned third quarter strike at General Motors plants.
CORPORATE ACTIVITIES AND NONOPERATING ITEMS, NET.
Corporate activities and nonoperating items, net, decreased $1.5
million in the third quarter of 1998 compared to the third quarter of
1997. As discussed above, Viad began charging its operating
subsidiaries an increased allocation of Corporate expenses in 1998.
SALE OF TRADE ACCOUNTS RECEIVABLE EXPENSE.
Sale of trade accounts receivable expense in the third quarter of 1998
was even with that of the 1997 third quarter, as the level of trade
receivables sold was unchanged from the prior year.
INTEREST EXPENSE.
Interest expense decreased $1.2 million in the 1998 third quarter.
Repayment of debt and termination of related interest rate swaps with
proceeds from the previously described sale of ASIG as of April 1,
1998, as well as debt repayment with proceeds from the previously
described sale of GLSI as of September 15, 1998, and other sales of
noncore assets and businesses in 1997 and 1998, more than offset the
impact of new borrowings incurred in 1998 for the MoneyGram
acquisition.
INCOME TAXES.
The effective tax rate in the 1998 third quarter was 32.5 percent.
Excluding the effects of the $26.7 million gain on the sale of GLSI,
the effective tax rate for the third quarter of 1998 was 28.4 percent
compared to 29.8 percent for the third quarter of 1997.
COMPARISON OF FIRST NINE MONTHS OF 1998 TO THE FIRST NINE MONTHS OF
1997:
Revenues for the first nine months of 1998 increased $125.3 million,
or 6.9 percent, to $1.93 billion from $1.81 billion in the same period
of 1997. Operating income of Viad's principal business segments
(excluding a $10.6 million provision for payments previously received
pursuant to patent litigation, as discussed in Note F of Notes to
Consolidated Financial Statements) increased $17.0 million, or 10.2
percent, over that of 1997. On the fully taxable equivalent basis,
and excluding the provision noted above and the effects of ASIG and
GLSI (sold as of April 1, 1998, and September 15, 1998, respectively),
revenues rose 12.4 percent and operating income was up 17.7 percent
(19.9 percent before the increased corporate allocation).
Net income for the first nine months of 1998 was $113.0 million, or
$1.14 per share. Excluding the gains on sales of businesses of $28.8
million (net of income taxes of $19.0 million), or $0.29 per share,
and excluding the provision for payments previously received pursuant
to patent litigation of $6.9 million (net of tax benefit of $3.7
million), or $0.07 per share, income for the first nine months of 1998
was $91.1 million, or $0.92 per share. Net income for the first nine
months of 1997 was $62.6 million, or $0.66 per share, after deducting
an extraordinary charge of $8.5 million (net of tax benefit of $4.6
million), or $0.09 per share, for the early retirement of debt.
Nine months ended September 30, 1998 1997
----------- -----------
Income before extraordinary
charge (000 omitted):
Before nonrecurring items $ 91,100 $ 71,045
Provision for patent infringement
payments received, net of tax
benefit of $3,725 (6,917)
Gains on sales of businesses,
net of tax provision of
$18,988 28,851
----------- -----------
Income before extraordinary charge $ 113,034 $ 71,045
=========== ===========
Diluted income before extraordinary
charge per common share (dollars):
Before nonrecurring items $ 0.92 $ 0.75
Provision for patent infringement
payments received (0.07)
Gains on sales of businesses 0.29
----------- -----------
Diluted income before extraordinary
charge per common share $ 1.14 $ 0.75
=========== ===========
There were 4.9 million more average common and equivalent shares
outstanding in the 1998 nine month period than in the same period of
1997 for the reasons previously discussed.
AIRLINE CATERING AND SERVICES.
Nine month revenues of the Airline Catering and Services group were
$699.7 million in 1998, a 1.8 percent increase from the 1997 first
half revenues of $687.4 million. Operating income decreased $2.3
million, or 4.0 percent. Excluding the effects of ASIG (sold
effective as of April 1, 1998), nine month revenues from airline
catering increased 12.2 percent, and operating income increased $3.7
million, or 7.3 percent (9.2 percent before the increased corporate
allocation), over that of the 1997 period. These results were
accomplished primarily as a result of new business added over the past
year, including expansion of American Airlines business to six new
cities late in the second quarter of 1997 and the acquisition of a
catering kitchen in Las Vegas in June 1998, as well as airline traffic
growth, which more than offset the effects of the Northwest Airlines
strike in the 1998 third quarter. Excluding ASIG, operating margins
decreased slightly to 8.0 percent (8.2 percent before the increased
corporate allocation)from 1997's 8.4 percent, due to start-up costs
associated with new business and new and replacement kitchens and to
the effects of the Northwest Airlines strike.
CONVENTION SERVICES.
Convention Services' 1998 nine month revenues of $625.4 million were
$12.5 million, or 2.0 percent, greater than the 1997 nine month
period. GES has concentrated on eliminating low-margin business
during 1998, resulting in a disproportionately low revenue increase.
In addition, certain Exhibitgroup/Giltspur customers delayed delivery
of their exhibits into the fourth quarter of 1998. Operating income
for the segment increased $9.2 million, or 17.0 percent (20.0 percent
before the increased corporate allocation), and operating margins
increased to 10.2 percent (10.4 percent before the increased corporate
allocation) from 8.9 percent in 1997. These increases were due to
improved cost controls and higher margin business in 1998.
Acquisitions completed during the second quarter of 1998 also
contributed to the segment's improved performance.
TRAVEL AND LEISURE AND PAYMENT SERVICES.
For the first nine months of 1998, revenues of the Travel and Leisure
and Payment Services companies were $607.1 million, up $100.5 million,
or 19.8 percent, from those of the 1997 period. Excluding the
provision for payments previously received pursuant to patent
litigation, which had been recorded as income in prior years, plus
interest thereon and related expenses (see Note F of Notes to
Consolidated Financial Statements), operating income increased 19.2
percent to $62.6 million. Also excluding the effects of GLSI (sold
effective as of September 15, 1998), nine month revenues increased
28.9 percent and operating income increased 22.4 percent. On the
fully taxable equivalent basis, nine month revenues and operating
income for the segment would have been higher by $28.3 million and
$21.0 million in 1998 and 1997, respectively. On the fully taxable
equivalent basis, and excluding GLSI, revenues would have increased
29.2 percent and operating income would have increased 26.2 percent
(28.1 percent before the increased corporate allocation). On this
same basis, 1998 operating margins decreased slightly to 16.6 percent
(16.9 percent before the increased corporate allocation) from 17.0
percent in 1997.
On the fully taxable equivalent basis and excluding the provision for
patent infringement payments received, payment services revenues and
operating income increased $131.9 million and $14.0 million,
respectively, over those of 1997's first nine months, due primarily to
results generated from the Game and MoneyGram acquisitions (acquired
in December 1997 and June 1998, respectively), continuing strong
growth in official check business, and increased investment income
arising from larger investment balances.
Travel tour service revenues decreased $8.3 million from those of the
first nine months of 1997, primarily as a result of weaker off-season
package tour traffic in the first quarter of 1998 and a decline in
Japanese and other Asian tourism into Canada. Operating income
improved $200,000, as operating cost reductions more than offset the
effects of the revenue decline.
Restaura foodservice revenues and operating income for the first nine
months of 1998 increased $16.8 million and $4.8 million, respectively,
from those of the same period in 1997, primarily due to full operation
of concessions for Bank One Ballpark's inaugural season, which began
late in the first quarter of 1998. The ballpark business helped
overcome effects of a third quarter strike at General Motors plants
where Restaura provides contract foodservice.
CORPORATE ACTIVITIES AND NONOPERATING ITEMS, NET.
Corporate activities and nonoperating items, net, decreased $5.1
million in the first nine months of 1998 compared to the same period
in 1997. As discussed previously, Viad began charging its operating
subsidiaries an increased allocation of Corporate expenses in 1998.
SALE OF TRADE ACCOUNTS RECEIVABLE EXPENSE.
Expenses from the sale of trade accounts receivable for the first nine
months of 1998 was essentially even with those of the 1997 period, as
the level of trade receivables sold was unchanged from the prior year.
INTEREST EXPENSE.
Interest expense for the first nine months of 1998 decreased $6.4
million from that of the same period of 1997. Repayment of debt and
termination of related interest rate swaps with proceeds from the
previously described sale of ASIG as of April 1, 1998, as well as debt
repayment with proceeds from the previously described sale of GLSI as
of September 15, 1998, and other sales of noncore assets and
businesses in 1997 and 1998 along with the repurchase of $58.4 million
par value of Viad's 10.5 percent subordinated debentures in March
1997, more than offset the impact of new borrowings incurred for the
MoneyGram acquisition.
INCOME TAXES.
The effective tax rate for the first nine months of 1998 was 31.8
percent. Excluding the effects of the gains on the sales of ASIG and
GLSI and the $10.6 million provision for payments previously received
pursuant to patent litigation, the effective tax rate for the first
nine months of 1998 was 29.2 percent compared to 29.5 percent for the
1997 period.
LIQUIDITY AND CAPITAL RESOURCES:
Viad's total debt at September 30, 1998 was $509.8 million compared
with $410.1 million at December 31, 1997. The debt-to-capital ratio
at September 30, 1998 was 0.44 to 1 compared to 0.43 to 1 at December
31, 1997. As mentioned above, Viad sold ASIG and GLSI in April 1998
and September 1998, respectively. The sale proceeds were used to
repay short-term borrowings. In mid-1998, Viad completed its cash
tender offer for MoneyGram at $17.35 per share. The acquisition was
financed with short-term borrowings supported by Viad's long-term
revolving bank credit agreement.
In June 1998, Viad's payment services subsidiary amended its agreement
to sell undivided percentage ownership interests in certain
receivables. The maximum amount to be sold under the agreement was
increased from $250 million to $400 million, and the expiration date
was extended to June 30, 2003. The items included in the program were
expanded to include receivables from bill payment agents as well as
receivables from money order agents. The receivables are sold in
order to accelerate payment services' cash flow for investment in
admissible securities.
During July 1998, Viad announced a stock repurchase program for the
purpose of replenishing 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 the third quarter of 1998, 689,000 shares were
purchased for a total price of $17.3 million. Year-to-date proceeds
received from the issuances of treasury stock related to stock option
exercises was $14.4 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 to Stockholders for the year
ended December 31, 1997.
READINESS FOR THE YEAR 2000:
Viad is continuing the implementation of initiatives necessary to make
its systems, products and infrastructure "Year 2000" compliant on a
timely basis, including replacing and/or updating certain systems.
Internal initiatives to address Year 2000 compliance within each
business unit have been broken down into various phases, including the
following:
1. Identification of business systems and applications subject to Year
2000 risk;
2. Assessment of such business systems and applications to determine
the appropriate method of correcting Year 2000 problems;
3. Implementation of corrective measures to bring systems and
applications to Year 2000 compliance;
4. Testing and maintaining Year 2000 compliance.
Although no assurances can be made, Viad believes that it has
identified all material systems and applications that are subject to
Year 2000 risk and has either achieved Year 2000 compliance or
initiated the implementation of plans to achieve timely Year 2000
compliance for such systems. A significant portion of Viad's Year 2000
initiatives have been finished with the remainder in various stages of
completion. Viad's entire Year 2000 project is expected to be
completed by mid-1999. Incremental costs (primarily for software
consultants and outside programming help) necessary to bring systems
and applications into Year 2000 compliance are being expensed as
incurred. Viad currently estimates that the incremental cost of its
Year 2000 projects will total approximately $13.5 million, of which
approximately 70 percent will have been expensed by the end of 1998,
including about 10 percent in 1997. A substantial portion of the
aggregate Year 2000 cost estimate pertains to efforts at Viad's
payment services operations, where remediation of several key systems
has already been completed, with the remaining systems scheduled for
completion by the end of 1999's first quarter. The Year 2000 costs
are exclusive of costs which would have been incurred as part of
normal systems and application replacements and/or upgrades to meet
current and future business needs. Viad continues to monitor and
evaluate the additional efforts and costs associated with the Year
2000 initiative.
Viad is also communicating with key vendors, service providers,
customers and other third parties with whom business is conducted to
determine the nature of any impact of Year 2000 issues on Viad. While
Viad does not anticipate any material adverse effect on its business
or its financial position or results of operations as a result of
failure of such parties to achieve Year 2000 readiness, no assurance
can be given that the parties on whom Viad relies will have accurately
assessed and completed their Year 2000 remediation requirements.
Viad's aggregate cost estimate does not include any expenses that may
be incurred as a result of the failure of any such parties to become
Year 2000 compliant.
As a part of its Year 2000 initiative, Viad is developing contingency
plans for actions that would need to be taken in the event any
critical system of Viad and/or key vendors, service providers,
customers and other third parties with whom Viad conducts business was
not Year 2000 compliant. Viad believes, based on information available
to date, that it will be able to accomplish its total Year 2000
transition by mid-1999, without any material adverse effect on its
business operations, products, financial position or results of
operations. However, due to the complexity and pervasiveness of the
Year 2000 issues and in particular the uncertainty regarding the
compliance programs of third parties, no assurance can be given that
successful transition will be achieved by the Year 2000 deadline or
that Viad would not suffer any material adverse effect on its
business, financial position or results of operations if such changes
are not completed timely.
FORWARD-LOOKING STATEMENTS:
Statements made in this Quarterly Report on Form 10-Q, including those
relating to expectations of or current trends in growth in air
traffic, consumer demand, new business, improved cost controls and
Year 2000 compliance issues, are forward-looking statements and are
made pursuant to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Such statements involve risks and
uncertainties which may cause results to differ materially from those
set forth in those statements. Among other things, the rate of
expansion of flights to new locations, consumer demand patterns,
purchasing decisions related to customer demand for trade show
services, additional competition from existing and new competitors,
consolidation and growth patterns within the industries in which Viad
competes, and the timely achievement of Year 2000 compliance by Viad
and third parties with whom Viad conducts business, may individually
or in combination impact future results. In addition to the factors
mentioned elsewhere, economic, competitive, governmental,
technological and other factors could affect the forward-looking
statements contained in this filing.
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
third quarter of 1998.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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)
November 10, 1998 By /s/ Richard C. Stephan
--------------------------
Richard C. Stephan
Vice President-Controller
(Chief Accounting Officer
and Authorized Officer)