UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2003
Commission File Number 001-11015
VIAD CORP
| Delaware (State or other jurisdiction of incorporation or organization) |
36-1169950 (I.R.S. Employer Identification No.) |
|
| 1850 N. Central Ave., Phoenix, Arizona (Address of principal executive offices) |
85077 (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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
As of April 30, 2003, 88,416,582 shares of Common Stock ($1.50 par value) were outstanding.
PART I. Financial Information
Item 1. Financial Statements
VIAD CORP
CONSOLIDATED BALANCE SHEETS
(Unaudited)
| December 31, | ||||||||||
| March 31, 2003 | 2002 | |||||||||
| (as restated, See Note 2) | ||||||||||
| (in thousands, except share data) | ||||||||||
Assets |
||||||||||
Current assets: |
||||||||||
Cash and cash equivalents |
$ | 40,926 | $ | 57,219 | ||||||
Other investments in securities |
162,409 | 246,338 | ||||||||
Receivables, net |
72,783 | 50,818 | ||||||||
Inventories |
38,855 | 41,839 | ||||||||
Deferred income taxes |
51,813 | 55,747 | ||||||||
Other current assets |
37,385 | 35,366 | ||||||||
| 404,171 | 487,327 | |||||||||
Funds, agent receivables and current maturities of investments available
or restricted for payment service obligations |
1,961,105 | 1,904,015 | ||||||||
Total current assets |
2,365,276 | 2,391,342 | ||||||||
Investments available or restricted for payment service obligations |
6,398,868 | 6,268,080 | ||||||||
Property and equipment, net |
247,296 | 248,099 | ||||||||
Other investments and assets |
62,366 | 58,079 | ||||||||
Deferred income taxes |
114,771 | 125,894 | ||||||||
Goodwill |
648,658 | 549,461 | ||||||||
Other intangible assets, net |
34,938 | 34,474 | ||||||||
Total Assets |
$ | 9,872,173 | $ | 9,675,429 | ||||||
Liabilities and Stockholders’ Equity |
||||||||||
Current liabilities: |
||||||||||
Accounts payable |
$ | 58,835 | $ | 63,188 | ||||||
Other current liabilities |
241,920 | 230,857 | ||||||||
Current portion of long-term debt |
103,978 | 103,995 | ||||||||
| 404,733 | 398,040 | |||||||||
Payment service obligations |
8,099,454 | 7,945,760 | ||||||||
Total current liabilities |
8,504,187 | 8,343,800 | ||||||||
Long-term debt |
251,553 | 257,662 | ||||||||
Pension and other postretirement benefits |
112,272 | 110,895 | ||||||||
Derivative financial instruments |
114,247 | 126,527 | ||||||||
Other deferred items and insurance liabilities |
139,012 | 133,288 | ||||||||
Minority interests |
11,098 | 18,659 | ||||||||
$4.75 Redeemable preferred stock |
6,711 | 6,704 | ||||||||
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 |
208,805 | 215,872 | ||||||||
Retained income |
795,487 | 781,441 | ||||||||
Unearned employee benefits and other |
(61,585 | ) | (66,143 | ) | ||||||
Accumulated other comprehensive income (loss): |
||||||||||
Unrealized gain on securities classified as available-for-sale |
116,048 | 91,640 | ||||||||
Unrealized loss on derivative financial instruments |
(145,410 | ) | (150,557 | ) | ||||||
Cumulative foreign currency translation adjustments |
(3,864 | ) | (9,655 | ) | ||||||
Minimum pension liability adjustment |
(34,274 | ) | (34,274 | ) | ||||||
Common stock in treasury, at cost, 11,318,031 and 11,638,090 shares |
(291,724 | ) | (300,040 | ) | ||||||
Total common stock and other equity |
733,093 | 677,894 | ||||||||
Total Liabilities and Stockholders’ Equity |
$ | 9,872,173 | $ | 9,675,429 | ||||||
See Notes to Consolidated Financial Statements.
Page 2
VIAD CORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three months ended March 31, | ||||||||||
| 2003 | 2002 | |||||||||
| (as restated, See Note 2) | ||||||||||
| (in thousands, except per share data) | ||||||||||
Revenues: |
||||||||||
Convention show services |
$ | 174,942 | $ | 193,379 | ||||||
Payment services transaction fees |
114,444 | 98,304 | ||||||||
Payment services investment income |
74,567 | 82,541 | ||||||||
Exhibit design and construction |
47,114 | 61,428 | ||||||||
Hospitality and recreation services |
3,282 | 3,170 | ||||||||
Total revenues |
414,349 | 438,822 | ||||||||
Costs and expenses: |
||||||||||
Costs of services |
327,872 | 333,724 | ||||||||
Costs of products sold |
49,305 | 58,772 | ||||||||
Corporate activities and minority interests |
3,745 | 4,560 | ||||||||
Net interest expense |
3,048 | 3,789 | ||||||||
Total costs and expenses |
383,970 | 400,845 | ||||||||
Income before income taxes and change in accounting principle |
30,379 | 37,977 | ||||||||
Income tax expense |
8,348 | 9,581 | ||||||||
Income before change in accounting principle |
22,031 | 28,396 | ||||||||
Change in accounting principle, net of tax |
— | (37,739 | ) | |||||||
Net income (loss) |
$ | 22,031 | $ | (9,343 | ) | |||||
Diluted income (loss) per common share |
||||||||||
Income per share before change in accounting principle |
$ | 0.25 | $ | 0.33 | ||||||
Change in accounting principle, net of tax |
— | (0.44 | ) | |||||||
Net income (loss) per common share |
$ | 0.25 | $ | (0.11 | ) | |||||
Average outstanding and potentially dilutive common shares |
86,326 | 86,728 | ||||||||
Basic income (loss) per common share |
||||||||||
Income per share before change in accounting principle |
$ | 0.25 | $ | 0.33 | ||||||
Change in accounting principle, net of tax |
— | (0.44 | ) | |||||||
Net income (loss) per common share |
$ | 0.25 | $ | (0.11 | ) | |||||
Average outstanding common shares |
86,008 | 86,095 | ||||||||
Dividends declared per common share |
$ | 0.09 | $ | 0.09 | ||||||
See Notes to Consolidated Financial Statements.
Page 3
VIAD CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three months ended March 31, | ||||||||||
| 2003 | 2002 | |||||||||
| (as restated, See Note 2) | ||||||||||
| (in thousands) | ||||||||||
Net income (loss) |
$ | 22,031 | $ | (9,343 | ) | |||||
Other
comprehensive income (loss): |
||||||||||
Unrealized gains (losses) on available-for-sale securities: |
||||||||||
Reclassification of securities from held-to-maturity to
available-for-sale, net of tax expense |
30,222 | — | ||||||||
Holding
losses arising during the period, net of tax benefit |
(3,092 | ) | (20,954 | ) | ||||||
Reclassification adjustment for net realized
gains included in net income (loss), net of tax expense |
(2,722 | ) | (2,149 | ) | ||||||
| 24,408 | (23,103 | ) | ||||||||
Unrealized gains on derivative financial instruments: |
||||||||||
Holding
gains (losses) arising during the period, net of tax |
(16,254 | ) | 10,855 | |||||||
Net reclassifications from other comprehensive
income to net income (loss), net of tax benefit |
21,401 | 18,712 | ||||||||
| 5,147 | 29,567 | |||||||||
Unrealized foreign currency translation gains (losses) |
5,791 | (341 | ) | |||||||
Other comprehensive income |
35,346 | 6,123 | ||||||||
Comprehensive
income (loss) |
$ | 57,377 | $ | (3,220 | ) | |||||
See Notes to Consolidated Financial Statements.
Page 4
VIAD CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended March 31, | ||||||||||
| 2003 | 2002 | |||||||||
| (as restated, See Note 2) | ||||||||||
| (in thousands) | ||||||||||
Cash flows from operating activities: |
||||||||||
Net income (loss) |
$ | 22,031 | $ | (9,343 | ) | |||||
Adjustments to reconcile net income (loss) to net cash
provided by operating activities: |
||||||||||
Depreciation and amortization |
12,215 | 13,157 | ||||||||
Deferred income taxes |
(3,806 | ) | 739 | |||||||
Change in accounting principle |
— | 40,000 | ||||||||
Investment impairment charges |
20,813 | 6,199 | ||||||||
Gains on dispositions of property and other assets |
(4,842 | ) | (3,528 | ) | ||||||
Other noncash items, net |
6,263 | 2,142 | ||||||||
Change in operating assets and liabilities: |
||||||||||
Receivables |
(23,109 | ) | (33,220 | ) | ||||||
Inventories |
2,984 | 6,212 | ||||||||
Accounts payable |
(4,353 | ) | 3,604 | |||||||
Other assets and liabilities, net |
13,017 | 27,525 | ||||||||
| 41,213 | 53,487 | |||||||||
Change in payment service assets and obligations, net |
144,735 | 12,333 | ||||||||
Net cash provided by operating activities |
185,948 | 65,820 | ||||||||
Cash flows from investing activities: |
||||||||||
Capital expenditures |
(7,206 | ) | (7,004 | ) | ||||||
Acquisition
of minority interest, net of proceeds from disposals of property
and other assets |
(97,633 | ) | 11 | |||||||
Proceeds from sales and maturities of available-for-sale securities |
855,891 | 719,048 | ||||||||
Proceeds from maturities of held-to-maturity securities |
283,690 | 163,742 | ||||||||
Purchases of available-for-sale securities |
(1,215,506 | ) | (639,053 | ) | ||||||
Purchases of held-to-maturity securities |
— | (291,606 | ) | |||||||
Net cash used in investing activities |
(180,764 | ) | (54,862 | ) | ||||||
Cash flows from financing activities: |
||||||||||
Payments on long-term borrowings |
(207 | ) | (210 | ) | ||||||
Net change in short-term borrowings |
(6,000 | ) | (5,457 | ) | ||||||
Dividends paid on common and preferred stock |
(8,039 | ) | (8,043 | ) | ||||||
Dividend paid to minority interest |
(8,115 | ) | — | |||||||
Proceeds from exercise of stock options |
884 | 3,124 | ||||||||
Purchases of common stock for treasury |
— | (1,219 | ) | |||||||
Net cash used in financing activities |
(21,477 | ) | (11,805 | ) | ||||||
Net decrease in cash and cash equivalents |
(16,293 | ) | (847 | ) | ||||||
Cash and cash equivalents, beginning of year |
57,219 | 46,593 | ||||||||
Cash and cash equivalents, end of period |
$ | 40,926 | $ | 45,746 | ||||||
See Notes to Consolidated Financial Statements.
Page 5
VIAD CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 – Basis of Preparation and Principles of Consolidation
The accompanying unaudited consolidated financial statements of Viad Corp (Viad or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. Certain prior period amounts have been reclassified to conform to the current period presentation.
The consolidated financial statements include the accounts of Viad and all of its wholly-owned subsidiaries. The consolidated financial statements also include the accounts of MoneyGram International Limited (MIL), which was a majority-owned subsidiary prior to the acquisition of the remaining minority interest by the Company in January 2003. See Note 4, “Acquisition of Minority Interest.” All significant intercompany account balances and transactions between Viad and its subsidiaries have been eliminated in consolidation.
Viad’s Payment Services segment participates in various trust arrangements (special-purpose entities) related to structured investments within its investment portfolio, official check processing agreements with financial institutions, and the sale of certain receivables. Certain structured investments owned by Viad represent beneficial interests in grantor trusts or other similar entities. These trusts typically contain an investment grade security, generally a U.S. Treasury strip, and an investment in the residual interest in a collateralized debt obligation (CDO equity), or in some cases, a limited partnership interest. For certain of these trusts, Payment Services owns the majority of the beneficial interests, and therefore, consolidates those trusts by recording and accounting for the assets of the trust separately in Viad’s consolidated financial statements.
In connection with its official check business, the Payment Services segment has established separate trust entities and processes that provide certain financial institution customers additional assurance of the Company’s ability to clear their official checks. The assets, liabilities, revenues and expenses associated with these arrangements are consolidated in Viad’s financial statements. Additionally, the Payment Services segment has an agreement to sell, on a periodic basis, undivided percentage ownership interests in certain receivables primarily from its money order agents. These receivables are sold to a commercial paper conduit and represent a small percentage of the total assets in such conduit. Viad’s rights and obligations are limited to the receivables transferred, and are accounted for as a sales transaction under Statement of Financial Accounting Standards No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” The assets and liabilities associated with the conduit, including the sold receivables, are not recorded or consolidated in Viad’s financial statements.
See Note 13, “Recent Accounting Pronouncements,” for further information regarding consolidation of variable interest entities.
Note 2 – Restatement of Financial Statements
Viad’s Payment Services float portfolio of approximately $7.3 billion (consisting of $6.4 billion of “Investments available or restricted for payment service obligations” and $869.2 million of cash and investments included under “Funds, agent receivables and current maturities of investments available or restricted for payment service obligations”) consists primarily of mortgage-backed and other asset-backed securities, state and municipal government obligations and corporate debt securities. Included in other asset-backed securities were certain structured investments, which the Payment Services segment began
Page 6
purchasing in 1999. These structured investments are designed to be “principal-protected” and generally consist of a zero coupon U.S. Treasury or government agency strip security combined with a CDO equity. In certain cases, the structured investment consists of an investment grade security and a limited partnership interest. At maturity, the amount of the zero coupon or investment grade security generally equals the purchase price of the total structured investment. The structured investments are typically held in the form of a note issued by a trust, which had purchased the two underlying securities described above. At March 31, 2003, the total value recorded of structured notes held in the portfolio was approximately $213 million, after the adjustment described below.
Payment Services routinely performs a review of the actual and projected cash flows related to the structured notes and historically applied the accounting treatment prescribed by Emerging Issues Task Force Issue No. 96-12, “Recognition of Interest Income and Balance Sheet Classification of Structured Notes” (EITF 96-12). Furthermore, these structured notes were accounted for as single debt instruments, representing the combined characteristics of the individual securities. The accounting treatment under EITF 96-12 generally provides for a level yield over the life of the investment and requires a retrospective adjustment to interest income upon a change in projected cash flows.
Subsequent to the issuance of its financial statements for the year ended December 31, 2002, and prior to the announcement of first quarter 2003 earnings, it was determined that the majority of the structured notes should have been accounted for under the provisions of Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (EITF 99-20). EITF 99-20 generally requires those applicable investments to be written down to fair value when an adverse change in actual or projected cash flows occurs.
It was also determined that certain of these structured notes should have been consolidated in the financial statements to the extent that Payment Services owned a majority of the beneficial interests in the trust which was formed to create the structured note. Consolidation of these trusts requires that the two components of the structured note be accounted for as separate securities in the financial statements in contrast to the single debt instrument approach previously taken. The effect of the consolidation is that increases in the market value of the U.S. treasury strips cannot offset other-than-temporary impairment losses on the equity component. Also, CDO equity should have been accounted for under EITF 99-20, and the equity method of accounting should have been applied to the structured notes containing limited partnership interests. Under the equity method, a proportionate share of income or losses should be recorded as an adjustment to the original investment amount and reflected through earnings.
Based on the retroactive application of EITF 99-20, the equity method of accounting, and the consolidation of the individual securities within the structured notes for which Payment Services owns a majority of the related trust, it was determined that aggregate impairment losses and interest income adjustments of $60.0 million (pre-tax) related to the structured note investments should be recorded. The aggregate remaining equity component of the structured notes, after the adjustments, is approximately $46 million, representing less than one percent of the total float portfolio value. Based on the timing of the changes in cash flows, and the effects of consolidating certain structured note investments, the impairment losses and adjustments did not relate exclusively to the first quarter of 2003, but also related to the 2002 and 2001 financial results. The impairment losses and interest income adjustments were recorded in the Consolidated Statements of Income under “Payment services investment income,” except for $3.0 million ($1.9 million after-tax) of the 2001 adjustment which represents a cumulative effect of a change in accounting principle related to EITF 99-20, effective April 1, 2001. The reduction in net income was $18.2 million, or $0.21 per diluted share for 2002 and $6.5 million, or $0.08 per diluted share for 2001 (including the cumulative change adjustment described above). Furthermore, the CDO equity and limited partnership interests are classified in “Other asset-backed securities” and the zero coupon treasury strips are classified as “U.S. government agencies.” See Note 5, “Assets and Investments Available or Restricted for Payment Service Obligations.”
Viad intends to restate its 2002 and 2001 consolidated financial statements to reflect the adjustments described above.
Page 7
A summary of the significant effects of the restatement on Viad’s Consolidated Statements of Income and related segment data is presented below. Certain reclassifications have been made to the As Previously Reported amounts to conform to the current presentation. The change in accounting principle in 2002 reflects the retroactive application of SFAS 142.
| Year ended December 31, | |||||||||||||||||||||||||
| Three months ended | |||||||||||||||||||||||||
| March 31, 2002 | 2002 | 2001 | |||||||||||||||||||||||
| (as | (as | (as | |||||||||||||||||||||||
| previously | previously | previously | |||||||||||||||||||||||
| reported) | (as restated) | reported) | (as restated) | reported) | (as restated) | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||
Total Company: |
|||||||||||||||||||||||||
Total revenues |
$ | 445,021 | $ | 438,822 | $ | 1,646,984 | $ | 1,618,105 | $ | 1,659,390 | $ | 1,652,022 | |||||||||||||
Income before income taxes and
changes in accounting principles |
$ | 44,176 | $ | ||||||||||||||||||||||