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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 June 27, 1999
OR
[ ] 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
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(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
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As of July 31, 1999, the Registrant had outstanding 12,911,000 shares
of its common stock, par value $0.001 per share.
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INDEX TO FORM 10-Q
------------------
Part I. FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Consolidated Balance Sheets -
June 27, 1999 (Unaudited) and December 27, 1998..................3
Consolidated Statements of Income (Unaudited) -
Three and Six Months Ended June 27, 1999 and June 28, 1998.......4
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 27, 1999 and June 28, 1998.................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.................................................17
Item 6. Exhibits and Reports on Form 8-K..................................17
SIGNATURES
</TABLE>
2
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NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
June 27, 1999 December 27, 1998
--------------------- ----------------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 2,646 $ 315
Accounts receivable, less allowance for doubtful accounts of $424 and $413,
respectively........................................................... 31,725 27,744
Prepaid expenses and other current assets................................. 2,854 2,517
Deferred income taxes..................................................... 2,676 2,610
-------- --------
Total current assets.................................................. 39,901 33,186
Property and equipment, net.................................................. 20,925 21,569
Intangible assets, net....................................................... 156,393 150,554
Other assets................................................................. 2,532 1,539
-------- --------
Total assets.......................................................... $219,751 $206,848
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term portion of long-term debt...................................... $ 4,635 $ 4,437
Short-term portion of capital lease obligations........................... 564 564
Accounts payable.......................................................... 3,172 2,875
Accrued compensation...................................................... 6,522 5,907
Accrued income taxes...................................................... 1,432 1,334
Other accrued liabilities................................................. 14,514 16,861
-------- --------
Total current liabilities............................................. 30,839 31,978
Long-term debt, net of short-term portion.................................... 57,783 56,436
Capital lease obligations.................................................... 704 1,026
Deferred income taxes........................................................ 785 835
Other long-term liabilities.................................................. 7,424 2,448
-------- --------
Total liabilities..................................................... 97,535 92,723
Commitments and contingencies
Stockholders' equity:
Common stock; $.001 par value, 150,000,000 shares authorized;
12,911,000 issued and outstanding (12,929,000 at December 27, 1998)..... 13 13
Additional paid-in-capital................................................ 112,837 112,939
Accumulated other comprehensive income.................................... 3 (95)
Retained earnings......................................................... 9,363 1,268
-------- --------
Total stockholders' equity............................................ 122,216 114,125
-------- --------
Total liabilities and stockholders' equity............................ $219,751 $206,848
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
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NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
June 27, 1999 June 28, 1998 June 27, 1999 June 28, 1998
-------------------- -------------------- -------------------- --------------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues............................... $ 58,035 $ 41,463 $ 112,638 $ 79,172
Operating expenses..................... 32,104 23,709 62,576 45,329
------------- ------------- ------------- -------------
Gross profit...................... 25,931 17,754 50,062 33,843
General and administrative expenses.... 14,101 11,143 28,586 22,103
Non-recurring expenses................. 5,061 5,061
Depreciation and amortization expense.. 2,539 1,517 4,962 3,084
------------- ------------- ------------- -------------
Operating income.................. 9,291 33 16,514 3,595
Other (income) expenses:
Interest expense..................... 1,035 158 2,130 353
Interest income...................... (7) (85) (15) (167)
Other................................ 171 21 196 (46)
------------- ------------- ------------- -------------
Income before provision for income
taxes................................. 8,092 (61) 14,203 3,455
Provision for income taxes............. 3,461 826 6,108 2,579
------------- ------------- ------------- -------------
Net income (loss)...................... $ 4,631 $ (887) $ 8,095 $ 876
============= ============= ============= =============
Other comprehensive income:
Foreign currency translation adjustment 127 (51) 98 14
------------- ------------- ------------- -------------
Total Comprehensive income $ 4,758 $ (938) $ 8,193 $ 890
============= ============= ============= =============
Weighted average number of common
shares outstanding:
Basic................................ 12,911 13,306 12,914 13,335
Diluted.............................. 12,937 13,448 12,930 13,515
Net income (loss) per share:...........
Basic................................ $ 0.36 $ (0.07) $ 0.63 $ 0.07
Diluted.............................. $ 0.36 $ (0.07) $ 0.63 $ 0.06
</TABLE>
See accompanying notes to consolidated financial statements.
4
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NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
For the Six Months Ended
June 27, 1999 June 28, 1998
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 8,095 $ 876
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense.................... 4,962 3,084
Non-recurring charges.................................... 3,290
Changes in current assets and liabilities (net of assets
acquired and liabilities assumed in combinations
accounted for under the purchase method):
Accounts receivable.................................... (3,006) (799)
Prepaid expenses and other assets...................... (1,251) 72
Accounts payable....................................... 110 (397)
Accrued liabilities.................................... (4,677) (2,942)
Other long-term liabilities............................ 4,976 (796)
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Net cash provided by operating activities............ 9,209 2,388
------- -------
Cash flows from investing activities:
Additions to property and equipment, net of disposals..... (2,650) (2,014)
Proceeds from disposal of building........................ 1,025
Cash paid in acquisitions and earn-outs consideration,
net of cash received..................................... (4,579) (1,373)
------- -------
Net cash used in investing activities................ (6,204) (3,387)
------- -------
Cash flows from financing activities:
Payments of long-term debt................................ (2,671) (2,329)
Proceeds from credit facility, net........................ 2,331 5,857
Repurchase of common stock................................ (102)
Proceeds from issuance of common stock.................... 14,992
Payment of dividend to U. S. Office Products.............. (6,889)
Payment of debt issue costs............................... (656)
Net advances from U.S. Office Products Company............ (8,786)
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Net cash provided by (used in) financing activities.. (442) 2,189
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Effect of exchange rate changes on cash..................... (232) 103
Net increase in cash and cash equivalents................... 2,331 1,293
Cash and cash equivalents at beginning of period............ 315 6,048
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Cash and cash equivalents at end of period.................. $ 2,646 $ 7,341
======= =======
Supplemental disclosures of cash flow information:
Interest paid............................................. $ 1,878 $ 302
Income taxes paid......................................... $ 6,334 $ 873
</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. (the "Company"), a Delaware corporation, is
one of the five largest corporate travel management companies in the United
States based on airline sales. The Company manages all aspects of its client's
travel processes, focusing on reducing their travel expenses.
The Company's operations are primarily concentrated in one market segment -
airline travel - and its 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. The
majority of the leisure travel services the Company provides are directed to the
Company's corporate customers and the related financial information is not
separately stated in the Company's internal reports.
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 December 27, 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 June 27, 1999, 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 June 27, 1999, 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.
Effective for the December 27, 1998 reporting period, the Company changed
its fiscal year from a fiscal year ending on the last Saturday in April to a
fiscal year ending on the last Sunday in December. The financial statements
have been restated from the previously reported results to conform to this
change.
NOTE 3--BUSINESS COMBINATIONS
In June 1999, the Company made two acquisitions (the "1999 Purchased
Companies") accounted for under the purchase method for an aggregate purchase
price of $5,398 consisting of cash, net of cash acquired, of $4,201 and notes
payable of $1,197. The total assets related to these two acquisitions were
$6,898, including intangible assets of $5,767. The results of these
acquisitions have been included in the Company's results from their respective
dates of acquisition.
NOTE 4--NON-RECURRING CHARGES
The Company implemented a cost reduction measure that commenced in November
1998 and resulted in the Company's recording a restructuring charge of $3.18
million in November and December 1998. Management
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anticipates that these measures will be completed by September 1999. The 1998
charge includes the closure of 20 facilities, the sale of one building and the
severance associated with the termination of approximately 130 employees. To
date, 12 facilities have been closed or consolidated, one location has been sold
and 66 employees have been terminated. The activity in the restructuring
liability during the six months ended June 27, 1999 is as follows:
<TABLE>
<CAPTION>
Employee Facility
Severance and Closures and
Termination Costs Consolidation Total
<S> <C> <C> <C>
Balance at December 27, 1998............... $ 659 $ 958 $1,617
Payments................................... (187) (352) (539)
Non-cash usage............................. (53) (53)
----- ----- ------
Balance at June 27, 1999................... $ 472 $ 553 $1,025
===== ===== ======
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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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 management
companies 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
service fees with corporate clients, planned cost reduction measures and
fluctuations in the Company's quarterly results of operations.
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 service industry, changes in laws or regulations
concerning the travel service industry, trends in the travel service industry
(including competition, 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 management companies, limitations
on the availability of funds or other capital resources to finance future
acquisitions, limitations on the Company's use of the pooling-of-interest
methods to account for future acquisitions, the Company's ability to negotiate
favorable travel management contracts with its current and future customers, any
loss or modification of material contracts the Company has with travel suppliers
or current customers, the Company's Year 2000 compliance, liabilities arising
under indemnification and contribution agreements entered into by the Company in
connection with its spin-off from U.S. Office Products Company ("U.S. Office
Products") in June 1998, changes in the Company's ability to amortize goodwill,
an impairment of goodwill due to downturn in the cash flows relating to past
acquisitions, and 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, 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 December 27, 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 Quarterly Report on Form 10-Q 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
The Company 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's consolidated financial statements include the results of
operations for the two companies acquired in business combinations in June 1999
accounted for under the purchase method (the "1999 Purchased Companies") and the
eight companies acquired in business combinations in 1998 accounted for under
the purchase method (the "1998 Purchased Companies") from their respective
dates of acquisition.
Sources of Revenue
Historically, arrangements between corporate travel management companies
and their clients generally did not provide for any direct compensation from
clients for travel bookings and services completed on their behalf.
Consequently, corporate travel management companies were largely
8
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dependent for their revenues on the point of sale percentage commissions paid by
the airlines for each ticket issued and to a lesser extent on hotel and car
rental commissions. In 1995, the airlines instituted a commission cap of $50 on
round-trip domestic tickets and $25 on one-way domestic tickets. In October
1997, the airlines cut the base commission on domestic and international tickets
from 10% to 8% of the ticket price. The Company and other travel management
companies were significantly affected by these commission reductions,
particularly the October 1997 reduction, which resulted in a decrease in gross
revenue per transaction.
In response to the reduction in airline commissions and consistent with
growing industry practice, the Company has entered into management contracts and
service fee arrangements with a significant number of its clients. Although the
terms of the Company's management contracts vary depending on the type of
services provided and by client, the Company typically deducts a pre-negotiated
management fee, its direct operating expenses and its indirect overhead costs
from commissions collected for travel arrangements made on behalf of the client.
If the commissions do not exceed the amounts deducted, the client pays the
difference to the Company. If the commissions exceed the amounts deducted, the
Company typically pays the excess to the client. In addition, the Company
typically charges a service fee for each ticket and other transactions to
clients who do not have a management contract with the Company. The Company
charges between $10 and $35 for each air travel ticket issued to such clients
and retains all of the related commissions collected from the airlines.
In October 1998, the airlines instituted a commission cap of $100 on round-
trip international tickets and $50 on one-way international tickets. The Company
believes that its management contracts and service fee arrangements should
minimize the financial impact of this commission cap, as well as any future
changes in the airline commission rates. The Company believes that at least 65%
of its total transactions are currently generated from clients under management
contracts and service fee arrangements.
The Company has entered into agreements with major airlines for the payment
of "incentive override" commissions in addition to the base commissions
described above. Under these agreements, the airlines generally pay additional
commissions on domestic and international air travel if the volume of the
Company's ticket sales surpasses specified thresholds, which typically are based
on the airlines' share of the relevant markets.
Expenses
The Company's direct operating expenses include principally labor expense
(which comprised approximately 71.6% and 69.2% of total direct operating
expenses in the three and six months ended June 27, 1999), net commission
payments to clients under management contracts, communication costs and other
costs associated with the selling and processing of travel reservations.
The Company's general and administrative expenses include principally labor
expense (which comprised approximately 58.5% and 57.8% of total general and
administrative expenses in the three and six months ended June 27, 1999),
occupancy costs and other costs.
1998 Non-Recurring Charges
As part of the Company's increased focus on operational matters in 1998, it
undertook a formal plan approved by its Board of Directors for cost reduction
measures including the elimination of duplicative facilities, the consolidation
of certain operating functions and the deployment of common information systems.
The implementation of the cost reduction measures commenced in November 1998 and
resulted in the Company's recording an aggregate restructuring charge of $3.18
million in November and December 1998.
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Management anticipates that these measures will be completed by September 1999.
The 1998 charge includes the closure of 20 facilities, the sale of one building
and the severance associated with the termination of approximately 130
employees. To date, 12 facilities have been closed or consolidated, one building
has been sold and approximately 66 employees have been terminated.
Results of Operations
The following table sets forth various items as a percentage of revenues
for the three and six months ended June 27, 1999 and June 28, 1998.
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
-------------------------- ------------------------
Ended Ended
----- -----
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues......................................... 100.0% 100.0% 100.0% 100.0%
Operating Expenses............................... 55.3 57.2 55.6 57.3
----- ----- ----- -----
Gross profit................................... 44.7 42.8 44.4 42.7
General and administrative expenses.............. 24.3 26.9 25.4 27.9
Depreciation and amortization expense............ 4.4 3.6 4.3 3.9
Non-recurring costs.............................. 12.2 6.4
----- ----- ----- -----
Operating income............................... 16.0 0.1 14.7 4.5
Interest expense, net............................ 1.8 0.2 1.9 0.2
Other (income) expense........................... 0.3 0.0 0.2 (0.1)
----- ----- ----- -----
Income before provision for income taxes......... 13.9 (0.1) 12.6 4.4
Provision for income taxes....................... 5.9 2.0 5.4 3.3
----- ----- ----- -----
Net income....................................... 8.0% (2.1)% 7.2% 1.1%
===== ===== ===== =====
</TABLE>
Revenues
Consolidated revenues increased 40.0%, from $41.5 million for the three
months ended June 28, 1998 to $58.0 million for the three months ended June 27,
1999. This increase was primarily due to the inclusion of the revenues from the
1998 Purchased Companies from their respective dates of acquisition.
Additionally, the Company has increased revenues in 1999 from certain vendors
associated with improved national contracts with these vendors.
Consolidated revenues increased 42.3%, from $79.2 million for the six
months ended June 28, 1998 to $112.6 million for the six months ended June 27,
1999. This increase was primarily due to the inclusion of the revenues from the
1998 Purchased Companies from their respective dates of acquisition.
Additionally, the Company has increased revenues in 1999 from certain vendors
associated with improved national contracts with these vendors.
Gross Profit
Gross profit increased 46.1%, from $17.8 million, or 42.8% of revenues, for
the three months ended June 28, 1998 to $25.9 million, or 44.7% of revenues, for
the three months ended June 27, 1999. The increase in gross profit as a
percentage of revenues was due primarily to an increase in revenue from certain
vendors associated with improved national contracts with these vendors.
Additionally, the Company experienced improved gross profit attributable to the
conversion of several customer arrangements in 1998 and 1999 to management
contracts and service fee arrangements, and because certain fixed operating
expenses are being spread over a larger revenue base.
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Gross profit increased 47.9%, from $33.8 million, or 42.7% of revenues, for the
six months ended June 28, 1998 to $50.1 million, or 44.5% of revenues, for the
six months ended June 27, 1999. The increase in gross profit as a percentage of
revenues was due primarily to an increase in revenue from certain vendors
associated with improved national contracts with these vendors. Additionally,
the Company experienced improved gross profit attributable to the conversion of
several customer arrangements in 1998 and 1999 to management contracts and
service fee arrangements, and because certain fixed operating expenses are being
spread over a larger revenue base.
General and Administrative Expenses
General and administrative expenses increased 26.5%, from $11.1 million, or
26.9% of revenues, for the three months ended June 28, 1998 to $14.1 million, or
24.3% of revenues, for the three months ended June 27, 1999. The decrease in
general and administrative expenses as a percentage of revenues was due
primarily to the 1998 Purchased Companies having lower general and
administrative expenses as a percentage of revenues than the Company and certain
fixed general and administrative expenses being spread over a larger revenue
base. Additionally, the Company has begun implementing integration efforts to
reduce redundant facilities and functions which has resulted in a decrease in
general and administrative expenses during the three months ended June 27, 1999.
General and administrative expenses increased 29.3%, from $22.1 million, or
27.9% of revenues, for the six months ended June 28, 1998 to $28.6 million, or
25.4% of revenues, for the six months ended June 27, 1999. The decrease in
general and administrative expenses as a percentage of revenues was due
primarily to the 1998 Purchased Companies having lower general and
administrative expenses as a percentage of revenues than the Company and certain
fixed general and administrative expenses being spread over a larger revenue
base. Additionally, the Company has begun implementing integration efforts to
reduce redundant facilities and functions which has resulted in a decrease in
general and administrative expenses during the six months ended June 27, 1999.
Depreciation and Amortization Expense
Depreciation and amortization expense increased from $1.5 million, or 3.6%
of revenues, for the three months ended June 28, 1998 to $2.5 million, or 4.4%
of revenues, for the three months ended June 27, 1999. This increase was due to
the increase in the number of purchase acquisitions included in the results for
1999 compared to 1998.
Depreciation and amortization expense increased from $3.1 million, or 3.9%
of revenues, for the six months ended June 28, 1998 to $5.0 million, or 4.3% of
revenues, for the six months ended June 27, 1999. This increase was due to the
increase in the number of purchase acquisitions included in the results for 1999
compared to 1998.
Interest Expense, Net
Interest expense, net, increased from $73,000 or 0.2% of revenues, for the
three months ended June 28, 1998 to $1.0 million, or 1.8% of revenues, for the
three months ended June 27, 1999. The increase was attributable to the
acquisitions of the 1998 Purchased Companies which were financed with
borrowings.
Interest expense, net, increased from $186,000 or 0.2% of revenues, for the six
months ended June 28, 1998 to $2.1 million, or 1.9% of revenues, for the six
months ended June 27, 1999. The increase was attributable to the acquisitions
of the 1998 Purchased Companies which were financed with borrowings.
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Provision for Income Taxes
Provision for income taxes increased from $826,000 for the three months
ended June 28, 1998 to $3.5 million for the three months ended June 27, 1999,
reflecting effective income tax rates of 1354.1% and 42.8%, respectively.
Provision for income taxes increased from $2.6 million for the six months
ended June 28, 1998 to $6.1 million for the six months ended June 27, 1999,
reflecting effective income tax rates of 74.6% and 43.0%, respectively.
The high effective income tax rate compared to the federal statutory rate
of 35%, was primarily due to an increase in non-deductible goodwill amortization
resulting from acquisition activity. The three and six months ended June 27,
1999 effective rate was lower than the three and six months ended June 28, 1998
effective rate, respectively, due to a lower ratio of non-deductible goodwill
amortization to pre-tax income in that period than in the three and six months
ended June 28, 1998.
Liquidity and Capital Resources
At June 27, 1999, the Company had cash of $2.6 million, working capital of
$9.1 million, borrowings of $55.0 million under the revolving credit facility
from NationsBank, N.A. and U.S. Bank National Association as lenders (the
"Credit Facility"), $8.7 million of other indebtedness, including capital lease
obligations, and available capacity under the Credit Facility of $20.0 million.
The Company's capitalization, defined as the sum of long-term debt and
stockholders' equity at June 27, 1999 was approximately $185.9 million.
The Company has financed its operational growth and acquisitions from
internally generated cash flow from operations and borrowings from commercial
banks or other lenders. These borrowings were generally secured by the accounts
receivable and other assets of the Company.
The Company anticipates that its cash flow from operations and borrowings
under the Credit Facility will provide sufficient cash to enable the Company to
meet its working capital needs, debt service requirements and planned capital
expenditures for property and equipment through fiscal 1999.
During the six months ended June 27, 1999, net cash provided by operating
activities was $9.2 million. Net cash used in investing activities was $6.2
million, including $2.7 million for additions to property and equipment, such as
computer equipment and office furniture, and $4.6 million for the acquisition of
the 1999 Purchased Companies, offset by the proceeds from the sale of a building
for $1 million. Net cash used in financing activities was $0.4 million,
consisting of $2.7 million for repayments by the Company of long-term
indebtedness offset by net increases in the Company's credit facility primarily
to finance the 1999 Purchased Companies.
During the six months ended June 28, 1998, net cash provided by operating
activities was $2.4 million. Net cash used in investing activities was $3.4
million, including $2.0 million for additions to property and equipment, such as
computer equipment and office furniture, and $1.4 million for the acquisition of
a business in May 1998. Net cash provided by financing activities was $2.2
million, consisting of $5.9 million in proceeds from the Credit Facility and
$15.0 million from the Stock Offering, partially offset by repayment to U.S.
Office Products of the $8.8 million of indebtedness allocated to the Company in
the Travel Distribution (net of advances from U.S. Office Products in 1998) and
by $6.9 million of dividends to U.S. Office Products.
In June 1998, the Company obtained the Credit Facility, a secured $60.0
million revolving credit facility, which is available for working capital,
capital expenditures, and acquisitions, subject to compliance with the
applicable covenants. The Credit Facility is scheduled to expire in June 2003.
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Interest on borrowings under the Credit Facility accrues 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 is 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.
On April 26, 1999, the Company entered into a short term $15 million bridge
loan agreement, thereby expanding its Credit Facility. The expansion matures on
August 26, 1999 and includes certain financial and other covenants substantially
similar to the Credit Facility. Consequently, as of June 27, 1999, the
Company's available capacity under the Credit Facility, including the bridge
loan, is $20.0 million
The Company intends to continue to pursue acquisition opportunities and may
be in various stages of negotiation, due diligence and documentation of
potential acquisitions at any time. The timing, size or success of any
acquisition effort and the associated potential capital commitments cannot be
predicted. The Company expects to fund future acquisitions primarily with cash
flow from operations and borrowings, including borrowings under the Credit
Facility, as well as issuance of additional equity or debt. To the extent the
Company funds a significant portion of the consideration for future acquisitions
with cash, it may have to increase the amount available for borrowing under the
Credit Facility or obtain other sources of financing through the public or
private sale of debt or equity securities. There can be no assurance that the
Company will be able to secure such financing if and when it is needed or on
terms the Company deems acceptable. If the Company is unable to secure
acceptable financing, its acquisition program could be negatively affected.
Capital expenditures for equipment and expansion of facilities are expected to
be funded from cash flow from operations and supplemented as necessary by
borrowings under the Credit Facility.
Fluctuations in Quarterly Results of Operations
The business travel industry is seasonal and the Company's results have
fluctuated because of these seasonal variations. 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 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.
13
<PAGE>
New Accounting Pronouncements
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("FAS 133"). FAS 133 is effective for all fiscal quarters
of all fiscal years beginning after June 15, 1999 (January 1, 2000 for the
Company). FAS 133 requires that all derivative instruments be recorded on the
balance sheet at their fair value. Changes in the fair value of derivatives are
to be recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. The Company believes that, due to
its limited use of derivative instruments, the adoption of FAS 133 will not have
a significant effect on the Company's results of operations or its financial
position.
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 subsidiary, 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 Company's
material vendors in remediating and mitigating their Year 2000 Problems. The
staff provides periodic reports to senior management, who advises 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. The Company has
received warranties from two of its major computer reservation system vendors
assuring that their software and hardware will not have a Year 2000 Problem.
The Company is attempting to obtain the same warranty from its other computer
reservation system vendors. On February 4, 1999, all computer reservation
systems passed a significant test as they began booking reservations in the year
2000.
The Company is also converting its subsidiaries to back-office accounting
software warranted as Year 2000 compliant. Conversion of subsidiaries whose
current back-office accounting software will be adversely affected by the Year
2000 Problem is expected to be complete by August 31, 1999. The Company has
also identified Year 2000 compliant mid-office software systems that can be used
by its subsidiaries 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
14
<PAGE>
Year 2000 Problem. The Company plans to have this process complete by September
1999. Systems that are discovered to be adversely impacted will be replaced or
repaired as necessary.
In addition, the Company and its individual subsidiaries are in the process
of requesting information from their other major vendors concerning these
vendors' Year 2000 readiness. To date, the Company has received Year 2000
readiness disclosures from approximately 97% of its significant, national
vendors, and from approximately 65% of its significant, local vendors. None of
the vendors who have responded have disclosed material Year 2000 Problems which
will not be remediated before December 31, 1999. The Company continues to seek
information from its other major vendors. The Company, however, cannot assure
that it will receive satisfactory responses from these vendors. Consequently,
as part of the Company's contingency planning, it is evaluating whether to
discontinue relationships with vendors who have not provided satisfactory
disclosure by the end of September 1999.
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 are not
successful, 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. If any such
Year 2000 problems persist, they could cause a material 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 August 1999 but these plans may not adequately address any
unforeseen circumstances. In addition, the companies that the Company may
acquire may have Year 2000 Problems that require remediation.
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," "expect," and "believe," as well as the negatives
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.
- -------------------------------------------------------------------
Market risks relating to the Company's operations result primarily from
changes in interest rates. The Company's interest rate exposure relates
primarily to long-term debt obligations. A significant portion of the Company's
interest expense is based upon variable interest rates of its bank's prime rate
or the Eurodollar rate, as discussed in Footnote 9 of the Notes to Consolidated
Financial Statements in the Company's Annual Report on form 10-K for the year
ended December 27, 1998. Based upon the Company's average borrowings under the
Credit Facility for the six months ended June 27, 1999, a 25 basis point
movement in the base rate or the LIBOR rate would approximate $215,000
annualized increase or decrease in interest expense.
15
<PAGE>
PART II. OTHER INFORMATION.
- ----------------------------
ITEM 1. LEGAL PROCEEDINGS.
---------------------------
The Company has been named as a defendant in a lawsuit filed by the
previous stockholders of two of the Company's subsidiaries. The lawsuit
also names certain executive officers of U.S. Office Products as
defendants. The plaintiffs allege that the named U.S. Office Products
executive officers made fraudulent misrepresentations and omissions about
U.S. Office Products' accounting methods, the value of U.S. Office
Products' stock and U.S. Office Products' intent to spin-off its travel
business to its existing shareholders (the "Travel Distribution"). The
plaintiffs contend that such alleged misrepresentations and omissions
induced the plaintiffs to sell their businesses to U.S. Office Products.
The Company has been named in the lawsuit as a successor to U.S. Office
Products' travel businesses. The plaintiffs contend that they may seek
rescission of the purchases of these two subsidiaries or damages for the
value of the assets of the two subsidiaries from the Company and have
requested that the Company be required to hold such assets in a
constructive trust for the plaintiffs. The Company's management intends to
vigorously defend against this lawsuit.
U.S. Office Products has also been named as a defendant in at least 10
lawsuits which allege that U.S. Office Products made a series of materially
false and misleading statements in connection with the Travel Distribution
and in connection with U.S. Office Products' related tender offer and
restructuring. The validity and the amount of the claims made in the
lawsuits is uncertain.
In connection with the Travel Distribution, the Company agreed to
indemnify U.S. Office Products for certain liabilities, which could include
claims such as those made against U.S. Office Products in these lawsuits.
If U.S. Office Products were entitled to indemnification under this
agreement, the Company's indemnification obligation, however, would be
limited to 5.2% of U.S. Office Products' indemnifiable loss, up to a
maximum of $1.75 million.
The Company and its subsidiaries are also involved in various other
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.
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.
---------------------------------------------------------------
At the Company's Annual Meeting of Stockholders, held on June 14,
1999, the Company's stockholders elected the following directors for a
three-year term: Paul J. Blackney. The director was elected by the
following number of votes:
For Withheld
--- --------
16
<PAGE>
Paul J. Blackney 11,854,817 31,162
The remaining directors whose terms continue after the meeting date
are Edward S. Adams, D. Craig Young, Ned A. Minor and Vassilios
Sirpolaidis.
The Stockholders also ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants
for fiscal 1999 by a vote of 11,861,487 for, 16,288 against, and 8,204
abstained.
ITEM 5. OTHER INFORMATION.
---------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
------------------------------------------
(a) Exhibits
27.1 Financial Data Schedules
(b) Reports on Form 8-K
Not applicable.
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: August 10, 1999.
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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NAVIGANT'S
1999 2ND QUARTER AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-26-1999 DEC-26-1999
<PERIOD-START> DEC-28-1998 DEC-28-1998
<PERIOD-END> JUN-27-1999 JUN-27-1999
<CASH> 2,646 0
<SECURITIES> 0 0
<RECEIVABLES> 32,149 0
<ALLOWANCES> (424) 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 39,901 0
<PP&E> 32,485 0
<DEPRECIATION> 11,560 0
<TOTAL-ASSETS> 219,751 0
<CURRENT-LIABILITIES> 30,839 0
<BONDS> 0 0
0 0
0 0
<COMMON> 112,850 0
<OTHER-SE> 9,366 0
<TOTAL-LIABILITY-AND-EQUITY> 219,751 0
<SALES> 58,035 112,638
<TOTAL-REVENUES> 58,035 112,638
<CGS> 32,104 62,576
<TOTAL-COSTS> 48,744 96,124
<OTHER-EXPENSES> 0 0
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<INTEREST-EXPENSE> 1,035 2,130
<INCOME-PRETAX> 8,092 14,203
<INCOME-TAX> 3,461 6,108
<INCOME-CONTINUING> 4,631 8,095
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,631 8,095
<EPS-BASIC> 0.36 0.63
<EPS-DILUTED> 0.36 0.63
</TABLE>
