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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 24, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to _________________
Commission file number 000-24387
NAVIGANT INTERNATIONAL, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 52-2080967
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
84 INVERNESS CIRCLE EAST
ENGLEWOOD, COLORADO 80112
- ---------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (303) 706-0800
--------------
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------- -------
As of December 1, 1998, the Registrant had outstanding 12,963,281
shares of its common stock, par value $0.001 per share.
<PAGE>
INDEX TO FORM 10-Q
------------------
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C> <C>
Consolidated Balance Sheet
October 24, 1998 (Unaudited) and April 25, 1998.................. 3
Consolidated Statement of Income (Unaudited)
Three and Six Months Ended October 24, 1998 and October 25, 1997 4
Consolidated Statement of Cash Flows (Unaudited)
Six Months Ended October 24, 1998 and October 25, 1997.......... 5
Notes to Consolidated Financial Statements........................ 6-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 8-15
Item 3. Quantitative and Qualitative Disclosures
about Market Risks.............................................. 15
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings................................................. 16
Item 2. Changes in Securities............................................. 16
Item 3. Defaults Upon Senior Securities................................... 16
Item 4. Submission of Matters to a Vote of Security Holders............... 16
Item 5. Other Information................................................. 16
Item 6. Exhibits and Reports on Form 8-K.................................. 17
SIGNATURES
</TABLE>
2
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NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
October 24, 1998 April 25, 1998
----------------------- --------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 1,827 $ 8,217
Accounts receivable, less allowance for doubtful accounts of $523 and
$377, respectively....................................................... 28,986 21,286
Prepaid expenses and other current assets................................. 2,187 2,207
Deferred income taxes..................................................... 418
Short-term receivable from U.S. Office Products........................... 592
-------- --------
Total current assets.................................................. 33,418 32,302
Property and equipment, net.................................................. 20,693 18,358
Intangible assets, net....................................................... 136,849 87,240
Other assets................................................................. 1,764 852
-------- --------
Total assets.......................................................... $192,724 $138,752
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt........................................................... $ 1,111 $ 494
Accounts payable.......................................................... 3,568 4,805
Accrued compensation...................................................... 6,690 3,413
Accrued taxes............................................................. 1,807
Other accrued liabilities................................................. 12,494 11,710
-------- --------
Total current liabilities............................................. 25,670 20,422
Long-term debt............................................................... 47,411 2,430
Long-term payable to U.S. Office Products.................................... 12,668
Deferred income taxes........................................................ 117 74
Other long-term liabilities.................................................. 3,097 1,119
-------- --------
Total liabilities..................................................... 76,295 36,713
Commitments and contingencies
Stockholders' equity:
Common stock; $.001 par value, 150,000,000 shares authorized;
12,978,281 issued and outstanding....................................... 13
Additional paid-in-capital................................................ 111,843
Divisional equity......................................................... 95,595
Cumulative translation adjustment......................................... (82) (96)
Retained earnings......................................................... 4,655 6,540
-------- --------
Total stockholders' equity............................................ 116,429 102,039
-------- --------
Total liabilities and stockholders' equity............................ $192,724 $138,752
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
October 24, 1998 October 25, 1997 October 24, 1998 October 25, 1997
-------------------- -------------------- -------------------- --------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues............................... $48,752 $27,026 $89,330 $46,556
Operating expenses..................... 27,806 15,321 50,961 26,214
------- ------- ------- -------
Gross profit...................... 20,946 11,705 38,369 20,342
General and administrative expenses.... 14,443 9,129 26,497 14,989
Amortization expense 963 438 1,675 650
Strategic restructuring costs.......... 2,826
------- ------- ------- -------
Operating income.................. 5,540 2,138 7,371 4,703
Other (income) expenses:
Interest expense..................... 814 58 1,081 200
Interest income...................... (6) (116) (75) (209)
Other................................ 32 (38) 54 (38)
------- ------- ------- -------
Income before provision for income
taxes................................. 4,700 2,234 6,311 4,750
Provision for income taxes............. 2,079 1,027 2,957 2,185
------- ------- ------- -------
Net income............................. $ 2,621 $ 1,207 $ 3,354 $ 2,565
======= ======= ======= =======
Other comprehensive income:
Foreign currency translation adjustment 77 (14)
------- ------- ------- -------
Comprehensive income $ 2,698 $ 1,207 $ 3,340 $ 2,565
======= ======= ======= =======
Weighted average number of common
shares outstanding:
Basic................................ 12,978 11,040 13,081 10,836
Diluted.............................. 12,985 11,333 13,125 11,074
Net income per share:..................
Basic................................ $0.20 $0.11 $0.26 $0.24
Diluted.............................. $0.20 $0.11 $0.26 $0.23
</TABLE>
See accompanying notes to consolidated financial statements.
4
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NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the Six Months Ended
October 24, October 25,
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 3,354 $ 2,565
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense.................... 3,607 1,610
Non-cash portion of strategic restructuring costs........ 2,677
Changes in current assets and liabilities (net of assets
acquired and liabilities assumed in combinations
accounted for under the purchase method):
Accounts receivable.................................... (1,019) (4,241)
Prepaid expenses and other current assets.............. 806 464
Accounts payable....................................... (2,248) (123)
Accrued liabilities.................................... (340) (1,250)
Other liabilities...................................... 531 (502)
-------- -------
Net cash provided by (used in) operating activities.. 7,368 (1,477)
-------- -------
Cash flows from investing activities:
Additions to property and equipment, net of disposals..... (2,762) (990)
Cash paid in acquisitions, net of cash received........... (51,082) 1,255
-------- -------
Net cash provided by (used in) investing activities (53,844) 265
-------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. 54,690 55
Payments of long-term debt................................ (9,625) (1,269)
Payment of debt issue costs............................... (570)
Payment of dividend to U.S. Office Products Company....... (6,889)
Proceeds from issuance of common stock.................... 15,240
Net advances from (payments to) U.S. Office Products
Company.................................................. (12,760) (34)
-------- -------
Net cash provided by (used in) financing activities.. 40,086 (1,248)
-------- -------
Net increase (decrease) in cash and cash equivalents........ (6,390) (2,460)
Cash and cash equivalents at beginning of period............ 8,217 6,952
-------- -------
Cash and cash equivalents at end of period.................. $ 1,827 $ 4,492
======== =======
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 756 $ 200
Income taxes paid......................................... $ 516 $ 17
</TABLE>
See accompanying notes to consolidated financial statements.
5
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NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
NOTE 1--BACKGROUND
Navigant International, Inc. ("Navigant" or the "Company") is a Delaware
Corporation which was a wholly-owned subsidiary of U.S. Office Products Company
("U.S. Office Products") at April 25, 1998. On June 9, 1998, as part of its
comprehensive restructuring plan, U.S. Office Products spun-off its Corporate
Travel Services division as an independent, publicly owned company. This
transaction was effected through the distribution of shares of the Company to
U.S. Office Products shareholders (the "Distribution"). Prior to the
Distribution, U.S. Office Products contributed its equity interests in certain
wholly-owned subsidiaries associated with U.S. Office Products' Corporate Travel
Services division to the Company. U.S. Office Products and the Company also
entered into a number of agreements to facilitate the Distribution and the
transition of the Company to an independent business enterprise. At the date of
the Distribution, U.S. Office Products allocated $15,000 in debt plus any
additional debt incurred by U.S. Office Products for acquisitions through the
date of the Distribution to the Company. The debt payable to U.S. Office
Products was repaid upon the completion of the Distribution. Additionally, in
connection with the Distribution, the Company sold 2.0 million shares of the
Company's common stock in an initial public offering ("IPO"). The gross
proceeds to the Company from the IPO were $18,000 and the expenses incurred were
as follows: (i) $1,260 for the underwriters discount and non-accountable expense
allowance; and (ii) approximately $1,500 for other expenses, including legal,
accounting and printing fees. The Company used the net proceeds in the IPO of
approximately $15,240 to repay a portion of the outstanding indebtedness.
The Company's operations are primarily concentrated in one market segment -
airline travel- and the customers are geographically diverse with no single
customer base concentrated in a single industry. Management considers a downturn
in this market segment to be unlikely. The Company's operations are seasonal,
with the November and December periods having the lowest airline bookings.
NOTE 2--BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
the Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosure normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. A description of
the Company's accounting policies and other financial information is included in
the audited consolidated financial statements as filed with the Securities and
Exchange Commission in the Company's Annual Report on Form 10-K for the year
ended April 25, 1998.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of October 24, 1998, and the results of
operations and cash flows for the periods presented. All such adjustments are
of a normal recurring nature. The results of operations for the three and six
months ended October 24, 1998, are not necessarily indicative of the results
that may be achieved for the full fiscal year and cannot be used to indicate
financial performance for the entire year.
The consolidated financial statements for the period prior to the
Distribution reflect the assets, liabilities, divisional equity, revenues and
expenses that were directly related to the Company as it was operated within
U.S. Office Products. In cases involving assets and liabilities not specifically
identifiable to any particular business of U.S. Office Products, only those
assets and liabilities transferred to the Company prior to the Distribution were
included in the Company's separate consolidated balance sheet. The Company's
statement of income includes all of the related costs of doing business
including an allocation of certain general corporate expenses of U.S. Office
Products which were not directly related to these businesses including certain
corporate executives' salaries, accounting and legal fees,
6
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departmental costs for accounting, finance, legal, purchasing, marketing and
human resources as well as other general overhead costs. These allocations were
based on a variety of factors, dependent upon the nature of the costs being
allocated, including revenues, number and size of acquisitions and number of
employees. Management believes these allocations were made on a reasonable
basis.
U.S. Office Products used a centralized approach to cash management and the
financing of its operations. As a result, minimal amounts of cash and cash
equivalents were allocated to the Company at the time of the Distribution. The
consolidated statement of income includes an allocation of interest expense on
all debt allocated to the Company.
NOTE 3--BUSINESS COMBINATIONS
In the six months ended October 24, 1998, the Company made five
acquisitions under the purchase method for an aggregate purchase price of
$51,082 in cash. Additionally, the Company completed an acquisition on November
13, 1998 and an another acquisition on November 16, 1998. Both of these
acquisitions will be accounted for under the purchase method for an aggregate
purchase price of $9,980 in cash. The total assets related to these seven
acquisitions were $71,902 including intangible assets of $60,086. The results
of these acquisitions have been or will be included in the Company's results
from their respective dates of acquisition.
In fiscal 1998, the Company made seven acquisitions accounted for under the
purchase method for an aggregate purchase price of $82,362, consisting of
3,802,367 shares of common stock with a market value of $83,780 and net of
$1,418 of cash acquired. The total assets related to these seven acquisitions
were $104,776, including intangible assets of $82,218. The results of these
acquisitions have been included in the Company's results from their respective
dates of acquisition.
The following presents the unaudited pro forma results of operations of the
Company for the three and six months ended October 24, 1998 and October 25, 1997
and includes the results of the companies acquired as if all such purchase
acquisitions had been made at the beginning of each period presented, including
the two acquisitions subsequent to October 24, 1998. The results presented below
include certain pro forma adjustments to reflect the amortization of intangible
assets acquired, adjustments in executive compensation of $900 and $587 for the
three months ended October 24, 1998 and October 25, 1997, respectively, and
$1,356 and $30 for the six months ended October 24, 1998 and October 25, 1997,
respectively, and the inclusion of a federal income tax provision on all
earnings:
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
------------------------------------ ------------------------------------
October 24, 1998 October 25, 1997 October 24, 1998 October 25, 1997
----------------- ----------------- ----------------- -----------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues................................ $52,820 $53,843 $107,217 $108,819
Net income.............................. $ 2,929 $ 2,806 $ 6,350 $ 6,014
Net income per share basic............. $ 0.23 $ 0.22 $ 0.49 $ 0.46
Net income per share diluted........... $ 0.23 $ 0.22 $ 0.49 $ 0.46
</TABLE>
The unaudited pro forma results of operations are prepared for
comparative purposes only and do not necessarily reflect the results that would
have occurred had the acquisitions occurred at the beginning of each fiscal
period or the results which may occur in the future.
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS.
- ----------------------
Statements contained in this Quarterly Report on Form 10-Q which are not
historical in nature are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements include, without limitation, statements in Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
regarding intent, belief or current expectations of the Company or its officers
with respect to, among other things, trends in the travel industry, the
Company's business and growth strategies, the Company's use of technology, the
Company's distribution of services, the continued use of travel agents by
corporate customers, the use of co-branding involving the Company's
subsidiaries, the Company's Year 2000 compliance, the Company's payment or non-
payment of dividends, implementation by the Company of management contracts and
transaction fees with corporate customers, and planned cost reduction measures.
Such forward-looking statements involve certain risks and uncertainties
that could cause actual results to differ materially from anticipated results.
These risks and uncertainties include changes or reductions in the commission
structure in the travel industry, changes in laws or regulations concerning the
travel industry, trends in the travel industry (including consolidation and
increased use of the Internet and computer on-line services), the ability of the
Company to successfully integrate the operations of existing or acquired travel
agency companies, any loss or modification of material contracts the Company has
with travel suppliers or current customers, a variety of factors such as a
recession or slower economic growth, weather conditions and concerns for
passenger safety that could cause a decline in travel demand, potential
liability for taxes associated with the Distribution and potential liabilities
allocated to the Company pursuant to the Distribution Agreement entered into in
connection with the Distribution, as well as the risk factors set forth in Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations Risk Factors," of the Company's Annual Report on Form 10-K for the
fiscal year ended April 25, 1998, the risk factor set forth in Item 2.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations Year 2000 Issues" of this Report and other factors as may be
identified from time to time in the Company's filings with the Securities and
Exchange Commission or in the Company's press releases.
INTRODUCTION
Navigant, which combines sixteen regional corporate travel agencies,
provides corporate travel management services and, to a more limited extent,
other travel services, throughout the United States, in Canada and in the United
Kingdom.
The Company generates revenues principally from (i) base and incentive
override commissions on air travel tickets, (ii) fees for services rendered to
customers and (iii) commissions on hotel reservations and car rentals. Air
travel ticketing generates the largest portion of the Company's revenues. In the
three months ended October 24, 1998 and October 25, 1997, air travel
commissions, including both base commissions and incentive override commissions,
accounted for approximately 69.2% and 72.4% respectively, of the Company's
revenues. In the six months ended October 24, 1998 and October 25, 1997, air
travel commissions, including both base commissions and incentive override
commissions, accounted for approximately 68.1% and 72.6% respectively, of the
Company's revenues.
The methods by which airlines compensate travel agents have changed
considerably in recent years and continue to be in flux. Historically, airlines
paid a percentage commission on ticket price for each domestic and international
air travel ticket issued by a travel agent. Subsequent to 1995, most major
United States airlines imposed commission caps of $25 on domestic one-way air
travel and $50 on domestic round-trip tickets. In October 1997, the airlines
reduced base commissions on tickets to approximately 8% of the ticket price. In
November 1998, most major airlines imposed commission
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caps of $50 on international one-way air travel and $100 on international round-
trip tickets. The reduction of base commissions may reduce the Company's gross
revenue and gross margin below historical levels, subject to the Company's
successful implementation of additional transaction fees as discussed below.
In response to the reductions in the commissions paid to travel
agents, travel agents are in the process of changing financial arrangements with
their corporate customers either by implementing management contracts, in the
case of middle market and larger customers, or by charging transaction fees.
Under management contracts, the Company typically deducts its direct operating
expenses, indirect overhead costs and a management fee from commission revenues
collected for travel arrangements made on behalf of the customer. If the
commission revenues exceed the amounts deducted, the Company may share a
negotiated amount of the excess with the customer. If the commission revenues do
not cover the amounts deducted, the customer pays the difference to the Company.
Fee income recognized under management contracts has historically been derived
from commissions paid by the airlines. As a result, the Company does not prepare
separate reports distinguishing payments under management contracts from air
travel commission income. Management believes that the implementation of these
measures should mitigate the negative impact that the commission reduction has
had on gross revenue and gross margin.
After the airlines instituted the commission cap in 1995 and reduced
base commissions in October 1997, travel agencies, including the Company, began
charging transaction fees for some services to non-contract customers. The
Company typically charges between $10 and $15 per ticket for tickets issued to
customers that do not have a management contract with the Company. Following
the international commission cap in November 1998, it is expected that the per
ticket charge will be increased.
The remainder of Navigant's revenues derive largely from commissions
on hotel reservations and car rentals. In accordance with industry practice, the
Company receives a commission equal to approximately 10% of the hotel rate for
each hotel reservation and 5% of the base rental car rate for each rental car
reservation that it makes. Some of the Company's customers negotiate special
hotel rates that do not produce commissions. In the three months ended October
24, 1998 and October 25, 1997, hotel and rental car commissions accounted for
approximately 12.8% and 11.5% respectively, of Navigant's revenues. In the six
months ended October 24, 1998 and October 25, 1997, hotel and rental car
commissions accounted for approximately 13.0% and 11.6% respectively, of
Navigant's revenues.
As part of the Company's increased focus on operational areas, the
Company expects to undertake cost reduction measures including the elimination
of duplicate facilities, the consolidation of certain operating functions, and
the deployment of common information systems. The implementation of the cost
reduction measures will involve the incurrence by the Company of certain
restructuring costs. At the present time, the formal plans to implement a
restructuring are being reviewed by the Company's senior management. The current
estimates indicate that the aggregate restructuring costs will be between four
and five million dollars which the Company expects to finalize and record in the
third or fourth quarter of fiscal 1999.
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RESULTS OF OPERATIONS
The following table sets forth various items as a percentage of
revenues for the three months and six months ended October 24, 1998 and October
25, 1997.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
----------------------------------- -----------------------------------
October 24, October 25, October 24, October 25,
1998 1997 1998 1997
----------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues......................................... 100.0% 100.0% 100.0% 100.0%
Operating Expenses............................... 57.0 56.7 57.0 56.3
----- ----- ----- -----
Gross profit................................... 43.0 43.3 43.0 43.7
General and administrative expenses.............. 29.6 33.8 29.7 32.2
Amortization expense............................. 2.0 1.6 1.9 1.4
Non-recurring costs.............................. 3.2
----- ----- ----- -----
Operating income............................... 11.4 7.9 8.2 10.1
Interest expense, net............................ 1.7 (0.3) 1.2 (0.1)
Other (income) expense...........................
----- ----- ----- -----
Income before provision for income taxes......... 9.7 8.3 7.0 10.2
Provision for income taxes....................... 4.3 3.8 3.2 4.7
----- ----- ----- -----
Net income....................................... 5.4% 4.5% 3.8% 5.5%
===== ===== ===== =====
</TABLE>
REVENUES
Revenues increased 80.4%, from $27.0 million for the three months ended
October 25, 1997 to $48.8 million for the three months ended October 24, 1998.
This increase was primarily due to the inclusion of the revenues from the ten
companies acquired in business combinations accounted for under the purchase
method subsequent to July 1997.
Revenues increased 91.9%, from $46.6 million for the six months ended
October 25, 1997 to $89.3 million for the six months ended October 24, 1998.
This increase was primarily due to the inclusion of the revenues from the twelve
companies acquired in business combinations accounted for under the purchase
method from June 1997 through October 1998.
GROSS PROFIT
Gross profit increased 78.9%, from $11.7 million, or 43.3% of revenues, for
the three months ended October 25, 1997 to $20.9 million, or 43.0% of revenues
for the three months ended October 24, 1998. The decrease in gross profit as a
percentage of revenues was due primarily to airlines reducing base commissions
on tickets to approximately 8% of the ticket price. This reduction became
effective in October 1997.
Gross profit increased 88.6%, from $20.3 million, or 43.7% of revenues, for
the six months ended October 25, 1997 to $38.4 million, or 43.0% of revenues for
the six months ended October 24, 1998. The decrease in gross profit as a
percentage of revenues was due primarily to airlines reducing base commissions
on tickets to approximately 8% of the ticket price as noted above.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased 58.2%, from $9.1 million, or
33.8% of revenues, for the three
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months ended October 25, 1997 to $14.4 million, or 29.6% of revenues, for the
three months ended October 24, 1998. The decrease in general and administrative
expenses as a percentage of revenues was due primarily to spreading of the fixed
general and administrative expenses over a larger revenue base.
General and administrative expenses increased 76.8%, from $15.0 million, or
32.2% of revenues, for the six months ended October 25, 1997 to $26.5 million,
or 29.7% of revenues, for the three months ended October 24, 1998. The decrease
in general and administrative expenses as a percentage of revenues was due
primarily to spreading of the fixed general and administrative expenses over a
larger revenue base.
AMORTIZATION EXPENSE
Amortization expense increased from $438,000, or 1.6% of revenues, for the
three months ended October 25, 1997 to $963,000, or 2.0% of revenues for the
three months ended October 24, 1998. This increase is due exclusively to the
increase in the number of purchase acquisitions included in the results for the
three months ended October 25, 1997 versus the three months ended October 24,
1998.
Amortization expense increased from $650,000, or 1.4% of revenues, for the
six months ended October 25, 1997 to $1,675,000, or 1.9% of revenues for the six
months ended October 24, 1998. This increase is due exclusively to the increase
in the number of purchase acquisitions included in the results for the six
months ended October 25, 1997 versus the six months ended October 24, 1998.
STRATEGIC RESTRUCTURING COSTS
The Company incurred non-recurring strategic restructuring costs of $2.8
million during the six months ended October 24, 1998 as a result of U.S. Office
Products Company's purchase of a pro rata portion of the Company's stock options
pursuant to a tender offer made in connection with the Distribution in June
1998. This is recorded as a compensation charge and is a non-cash expense.
INTEREST EXPENSE, NET
Interest expense, net increased from $(58,000) for the three months ended
October 25, 1997 to $808,000 for the three months ended October 24, 1998,
reflecting additional debt issued to fund the acquisition of the companies
acquired from May 1998 through October 1998. Prior to May 1998, all
acquisitions were financed with the issuance of common stock.
Interest expense, net increased from $(9,000) for the six months ended
October 25, 1997 to $1,006,000 for the six months ended October 24, 1998,
reflecting additional debt issued to fund the acquisition of the companies
acquired from May 1998 through October 1998.
PROVISION FOR INCOME TAXES
Provision for income taxes increased from $1.0 million for the three months
ended October 25, 1997 to $2.1 million for the three months ended October 24,
1998, reflecting effective income tax rates of 46.0% and 44.2%, respectively.
Provision for income taxes increased from $2.2 million for the six months
ended October 25, 1997 to $3.0 million for the six months ended October 24,
1998, reflecting effective income tax rates of 46.0% and 46.9%, respectively.
The high effective income tax rate, compared to the federal statutory rate
of 35.0%, was primarily due to the nondeductible goodwill amortization resulting
from the acquisitions of the eight companies from June 1997 through May 1998.
The fluctuation in the effective tax rate is dependent upon the pre-tax income
in relation to the nondeductible goodwill amortization.
11
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LIQUIDITY AND CAPITAL RESOURCES
At October 24, 1998, the Company had cash of $1.8 million and working
capital of $8.7 million. The Company's capitalization, defined as the sum of
long-term debt and stockholders' equity at October 24, 1998 was approximately
$163.8 million. The Company's primary sources of capital have been cash flow
from operations, bank indebtedness and the sale of equity securities. Cash has
been used primarily to finance acquisitions.
During the six months ended October 24, 1998, net cash provided by
operating activities was $7.4 million. Net cash used in investing activities was
$53.8 million, including $51.1 million for the acquisition of five businesses
and $2.8 million in additions to property and equipment, such as computer
equipment and office furniture. Net cash provided by financing activities was
$40.0 million, consisting of $15.2 million raised in the Company's IPO, $54.7
million from indebtedness borrowings to finance acquisitions, offset by $12.8
million and $9.6 million for repayments by the Company of advances from U.S.
Office Products and indebtedness and $6.9 million for a dividend in accordance
with the terms of the Distribution Agreement, respectively.
During the six months ended October 25, 1997, net cash used in operating
activities was $1.5 million. Net cash provided by investing activities was
$265,000, including $990,000 for additions to property and equipment, such as
computer equipment and office furniture offset by $1.3 million of cash acquired
with the purchase of six companies. Net cash used in financing activities was
$1.2 million, consisting of $1.3 million for repayments by the Company of
indebtedness.
The Company's initial public offering (the "Offering") of 2,000,000 shares
of Common Stock at $9.00 per share, was declared effective on June 9, 1998. The
gross proceeds to the Company in the Offering were $18,000,000 and the expenses
incurred were as follows: (i) $1,260,000 for the underwriters discount and non-
accountable expense allowance; and (ii) approximately $1,500,000 for other
expenses, including legal, accounting and printing fees.
In June 1998, the Company obtained a secured $60.0 million revolving credit
facility from NationsBank, N.A. as Administrative Agent. The facility has been
used to pay off approximately $16.4 million of U.S. Office Products' debt that
was allocated to the Company in the Distribution. Proceeds from the Offering
were then used to repay a portion of the approximately $16.4 million the Company
borrowed under the credit facility. The credit facility will be available for
working capital, capital expenditures, and acquisitions, subject to compliance
with the applicable covenants. As of December 1, 1998, approximately $8.0
million of the credit facility was available for the Company's borrowing needs.
NationsBanc Montgomery Securities LLC, one of the underwriters for the Offering
and an affiliate of NationsBank, N.A., is the Arranger and Syndication Agent.
The credit facility will terminate five years from the effective date of the
credit facility. Interest on borrowings under the credit facility will accrue at
a rate of, at the Company's option, either (i) LIBOR plus a margin of between
1.00% and 2.00%, depending on the Company's funded debt to EBITDA ratio, or (ii)
the Alternative Base Rate (defined as the higher of (x) the NationsBank, N.A.
prime rate and (y) the Federal Funds rate plus .50%) plus a margin of between 0%
and .75%, depending on the Company's funded debt to EBITDA ratio. Indebtedness
under the credit facility will be secured by substantially all of the assets of
the Company. The credit facility is subject to terms and conditions typical of
facilities of such size and includes certain financial covenants.
FLUCTUATIONS IN QUARTERLY RESULTS OF OPERATIONS
The domestic and international travel industry is extremely seasonal. The
results of the Company have fluctuated because of seasonal variations in the
travel industry, especially the leisure travel segment. Net revenues and net
income for the Company are generally higher in the second and third calendar
quarters. The Company expects this seasonality to continue in the future. The
Company's quarterly results of operations may also be subject to fluctuations as
a result of fare wars by travel
12
<PAGE>
suppliers, changes in relationships with certain travel suppliers, changes in
the mix of services offered by the Company, extreme weather conditions or other
factors affecting travel. Unexpected variations in quarterly results could also
adversely affect the price of the Company's common stock, which in turn could
limit the ability of the Company to make acquisitions.
As the Company continues to complete acquisitions, it may become subject to
additional seasonal influences. Quarterly results also may be materially
affected by the timing of acquisitions, the timing and magnitude of costs
related to such acquisitions, variations in the prices paid by the Company for
the products it sells, the mix of products sold and general economic conditions.
Moreover, the operating margins of companies acquired may differ substantially
from those of the Company, which could contribute to the further fluctuation in
its quarterly operating results. Therefore, results for any quarter are not
necessarily indicative of the results that the Company may achieve for any
subsequent fiscal quarter or for a full fiscal year.
INFLATION
The Company does not believe that inflation has had a material impact on
its results of operations.
NEW ACCOUNTING PRONOUNCEMENTS
Reporting Comprehensive Income. In June 1997, FASB issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company intends to adopt SFAS No. 130 in
fiscal 1999. Implementation of this disclosure standard does not have a
material affect on the Company's financial position or results of operations.
Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for
reporting information about operating segments in annual and interim financial
statements. Operating segments are determined consistent with the way management
organizes and evaluates financial information internally for making decisions
and assessing performance. It also requires related disclosures about products,
geographic areas, and major customers. SFAS 131 is effective for fiscal years
beginning after December 15, 1997. The Company intends to adopt SFAS 131 at the
end of fiscal 1999. Implementation of this disclosure standard will not affect
the Company's financial position or results of operations.
YEAR 2000 ISSUES
The Company has implemented a program to attempt to assess, remediate, and
mitigate the potential impact of problems associated with the Year 2000
throughout the Company. A "Year 2000 Problem" is one where systems either fail
to operate as expected or cease to be operational because date dependent
functions improperly interpret dates after December 31, 1999.
As part of the Company's program, the Company has assigned staff, including
staff at each operating company, to identify hardware, software, and other
systems which may be affected by the Year 2000 Problem. The staff has also been
instructed to determine, and monitor, the progress made by the
13
<PAGE>
Company's material vendors in remediating and mitigating their Year 2000
Problems. The staff provides periodic reports to senior management, who advise
the Board of Directors.
The Company has reviewed its primary software systems, including its
various computer reservation systems, mid-office systems, and back-office
systems, and has determined which systems are and are not adversely affected by
the Year 2000 Problem. Software in these systems which are adversely impacted
by the Year 2000 Problem have been, or are scheduled to be, replaced with
compliant systems. In some cases, such as with computer reservation systems,
the Company must rely on the efforts and ability of its vendors to replace non-
compliant software systems. The computer reservation system vendors, however,
have repeatedly given public assurances that their systems will be compliant and
will be fully installed prior to February, 1999. The Company is also converting
its operating companies to back-office accounting software which is warranted as
Year 2000 compliant. Conversion of operating companies whose current back-
office accounting software will be adversely affected by the Year 2000 Problem
is expected to be complete by April 30, 1999. The Company has also identified
Year 2000 compliant mid-office software systems which can be used by its
operating companies to replace non-compliant systems.
The Company has also reviewed its material computer hardware systems, and
has determined which systems are and are not adversely affected by the Year 2000
Problem. Systems associated with the Company's computer reservation systems and
back-office accounting systems which are adversely affected by the Year 2000
Problem have been, or will be, replaced in conjunction with the replacement of
the appropriate software systems.
The Company is in the process of identifying other non-information
technology systems, including telephone, HVAC, mechanical, and security systems,
which may be adversely affected by the Year 2000 Problem. The Company plans to
have this process compete by February 1999, and systems that are discovered to
be adversely impacted will be replaced or repaired as necessary.
In addition, the Company and its individual operating companies are in the
process of requesting information from their other major vendors concerning
these vendors' Year 2000 readiness. The Company has requested that it receive
this information by January 1999. The Company, however, cannot control this
process, but must rely on the cooperation of the vendors involved.
To date, the Company has not incurred material costs of remediation, and it
does not expect to incur material costs in the future. The costs of replacing
some systems are being borne by the vendors, while other costs are within the
Company's normal and expected capital expenditure budget. Some elements of the
Company's Year 2000 plan, such as the consolidation of the back-office
accounting systems, are being undertaken for business reasons apart from the
Year 2000 concerns, and any Year 2000 benefit is an incidental bonus. The
Company believes its total incremental costs related to the Year 2000
problem remediation will be less than $250,000.
If the Company's efforts to remediate its Year 2000 problems, or if any
of the Company's material vendors, such as its computer reservation
system vendors, are not Year 2000 compliant, the Company's ability to make
travel reservations for its customers could be jeopardized, and could,
therefore, cause a decrease in the Company's revenues. The Company is in the
process of developing contingency plans to address these situations. The
Company plans to finalize its contingency plans by June 1999.
This section contains historical information, as well as forward looking
statements withing the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995, particularly in reference to
statements regarding the Company's expectations with respect to the Company's
plans and objectives for assessment and remediation of Year 2000 Problems. In
addition, one can generally identify forward looking statements by the use of
terms such as "may," "will,"
14
<PAGE>
"expect," and "believe," as well as the nagatives thereof, variations thereon,
or similar terminology. The Company bases such statements upon management's
current expectations. Forward looking statements are subject to or may be
impacted by a number of factors, risks and uncertainties that could cause actual
results to differ materially from those described in forward looking statements.
Moreover, the Company's Year 2000 readiness program is an ongoing process and
the estimates of costs and completion dates for various components of the
program are subject to change.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
- -------------------------------------------------------------------
Not applicable.
15
<PAGE>
PART II. OTHER INFORMATION.
- ----------------------------
ITEM 1. LEGAL PROCEEDINGS.
---------------------------
The Company and its operating subsidiaries are involved in various
legal actions in the ordinary course of their business. The Company
believes that none of these actions will have a material adverse effect on
its business, financial condition, and results of operations.
Jonathan Ledecky and U.S. Office Products Company ("USOP") have been
named as defendants in several law suits, which allege that Mr. Ledecky and
USOP violated various provisions of the securities laws of the United
States. The plaintiffs generally claim that Mr. Ledecky, on behalf of
USOP, made a series of materially false and misleading statements in
connection with USOP's tender offer and the related restructuring. (As
part of that restructuring, the Company was created and its shares
distributed from USOP to USOP's shareholders.) Neither the Company nor any
of its executive officers have been named as defendants in these suits.
Mr. Ledecky, however, is a member of the Board of Directors of the Company.
As part of the restructuring, the Company, USOP, and the other
distributed companies, Aztec Technology Partners, Inc., School Specialty,
Inc., and Workflow Management, Inc., entered into an Agreement and Plan of
Distribution dated as of June 9, 1998 (the "Distribution Agreement"). In
the Distribution Agreement, the Company (and the other distributed
companies) agreed to indemnify USOP for certain liabilities, which could
include claims such as those made against USOP in the lawsuits described
above. If USOP were entitled to indemnification under the Distribution
Agreement, the Company's indemnification obligation, however, would be
limited to 5.2% of USOP's indemnifiable loss, up to a maximum of $1.75
million.
The validity and the amount of the claims made in the lawsuits is
uncertain. USOP and Mr. Ledecky are expected to defend the suits
vigorously. Moreover, the Company has not received any claim, notice, or
demand from USOP for indemnification related to the lawsuits under the
Distribution Agreement. Consequently, the amount of the Company's
indemnification obligation to USOP, if any, is likewise uncertain.
ITEM 2. CHANGES IN SECURITIES.
-------------------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-----------------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
---------------------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION.
---------------------------
Not applicable.
16
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
------------------------------------------
(a) Exhibits
Not applicable.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K that was subsequently
amended by a Form 8-K/A dated October 9, 1998, covering the
acquisition by the Company of Arrington Travel Center, Inc. on
July 28, 1998.
The Company filed a report on Form 8-K dated September 30, 1998,
covering the acquisition by the Company of World Express Travel,
Inc. on September 17, 1998.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date: December 8, 1998.
NAVIGANT INTERNATIONAL, INC.
A DELAWARE CORPORATION
BY: /S/ ROBERT C. GRIFFITH
----------------------------
NAME: ROBERT C. GRIFFITH
TITLE: CHIEF FINANCIAL OFFICER AND TREASURER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
18
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<PAGE>
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-START> JUL-26-1998 JUL-26-1998
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