<PAGE>
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 25, 2000
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 incorporation (I.R.S. Employer
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 August 1, 2000, the Registrant had outstanding 13,100,000 shares
of its common stock, par value $0.001 per share and 929,000 shares of treasury
stock outstanding.
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INDEX TO FORM 10-Q
------------------
<TABLE>
<S> <C>
Part I. FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets -
June 25, 2000 (Unaudited) and December 26, 1999...................................... 3
Consolidated Statements of Income (Unaudited) -
Three and Six Months Ended June 25, 2000 and June 27, 1999........................... 4
Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended June 25, 2000 and June 27, 1999..................................... 5
Notes to Consolidated Financial Statements............................................... 6 - 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 8 - 14
Item 3. Quantitative and Qualitative Disclosures
about Market Risks................................................................... 14
Part II. OTHER INFORMATION:
Item 1. Legal Proceedings........................................................................ 15 - 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)
ASSETS
<TABLE>
<CAPTION>
June 25 December 26,
------- ------------
2000 1999
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.................................................. $ 4,268 $ 2,003
Restricted cash NavigantVacations.com...................................... 13,825 14,965
Accounts receivable, less allowance for doubtful accounts of $653 and $424,
respectively............................................................. 49,239 42,278
Prepaid expenses and other current assets.................................. 4,502 3,168
Deferred income taxes...................................................... 1,502 1,551
Income tax receivable...................................................... 105 2,368
---------- ----------
Total current assets.................................................. 73,441 66,333
Property and equipment, net.................................................... 23,257 22,282
Intangible assets, net......................................................... 212,677 193,387
Deferred income taxes.......................................................... 1,274 1,160
Other assets................................................................... 4,191 4,149
---------- ----------
Total assets.......................................................... $ 314,840 $ 287,311
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term portion of long-term debt....................................... $ 14,296 $ 11,867
Short-term portion of capital lease obligations............................ 817 800
Accounts payable........................................................... 5,107 4,880
Accrued compensation....................................................... 9,915 8,740
Other accrued liabilities.................................................. 21,399 19,979
---------- ----------
Total current liabilities............................................. 51,534 46,266
Long-term debt, net of short-term portion...................................... 112,867 93,844
Capital lease obligations...................................................... 312 708
Other long-term liabilities.................................................... 6,401 6,410
---------- ----------
Total liabilities..................................................... 171,114 147,228
---------- ----------
Minority interest in NavigantVacations.com..................................... 14,982 15,120
---------- ----------
Commitments and contingencies
Stockholders' equity:
Common stock; $.001 par value, 150,000,000 shares authorized
13,100,000 issued and outstanding (13,075,000 at December 26,1999........ 13 13
Additional paid-in-capital................................................. 114,272 114,044
Treasury Stock............................................................. (8,060) (3,520)
Accumulated other comprehensive income (loss).............................. (353) 122
Retained earnings.......................................................... 22,872 14,304
---------- ----------
Total stockholders' equity............................................ 128,744 124,963
---------- ----------
Total liabilities and stockholders' equity............................ $ 314,840 $ 287,311
========== ==========
</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 25, 2000 June 27, 1999 June 25, 2000 June 27, 1999
------------- ------------- ------------- -------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues ............................................. $ 81,838 $ 58,035 $ 155,151 $ 112,638
Operating expenses.................................... 45,122 32,104 85,694 62,576
General and administrative expenses................... 21,931 14,101 41,977 28,586
Depreciation and amortization expense................. 3,044 2,539 6,008 4,962
Non-recurring restructuring charge.................... 1,900
------------ -------------- ------------- -------------
Operating income............................. 11,741 9,291 19,572 16,514
Other (income) expenses:
Interest expense.................................. 2,892 1,035 5,349 2,130
Interest income................................... (193) (7) (411) (15)
Other............................................. 111 171 160 196
------------ -------------- ------------- -------------
Income before provision for income taxes.............. 8,931 8,092 14,474 14,203
Provision for income taxes............................ 3,629 3,461 6,042 6,108
------------ -------------- ------------- -------------
Income before minority interest....................... 5,302 4,631 8,432 8,095
Minority interest..................................... (213) (138)
------------ -------------- ------------- -------------
Net income............................................ 5,515 4,631 8,570 8,095
Other comprehensive income (loss):
Foreign currency translation adjustment............... (479) 127 (475) 98
------------ -------------- ------------- -------------
Comprehensive income.................................. $ 5,036 $ 4,758 $ 8,095 $ 8,193
============= ============= ============= =============
Weighted average number of common shares outstanding:
Basic............................................. 12,250 12,911 12,310 12,914
Diluted........................................... 12,377 12,937 12,521 12,930
Net income per share:.................................
Basic............................................. $ 0.45 $ 0.36 $ 0.70 $ 0.63
Diluted........................................... $ 0.45 $ 0.36 $ 0.68 $ 0.63
</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 25, 2000 June 27, 1999
------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................... $ 8,570 $ 8,095
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization expense.............................. 6,008 4,962
Minority interest.................................................. (138)
Non-cash portion of restructuring charge........................... 213
Changes in current assets and liabilities (net of assets acquired
and liabilities assumed in combinations accounted for under the
purchase method):
Accounts receivable............................................. (2,128) (3,006)
Prepaid expenses and other assets............................... (1,605) (1,251)
Accounts payable................................................ 42 110
Accrued liabilities............................................. 2,210 (4,677)
Other long-term liabilities..................................... (1,370) 4,976
---------- ----------
Net cash provided by operating activities................... 11,802 9,209
---------- ----------
Cash flows from investing activities:
Additions to property and equipment, net of disposals................ (3,312) (2,650)
Proceeds from disposal of building................................... 1,025
Restricted cash equivalents in NavigantVacations.com, net............ 1,140
Cash paid in acquisitions and earn-outs consideration, net of cash
received........................................................ (18,943) (4,579)
---------- ----------
Net cash used in investing activities....................... (21,115) (6,204)
---------- ----------
Cash flows from financing activities:
Payments of long-term debt........................................... (2,600) (2,671)
Proceeds from credit facility, net................................... 18,744 2,331
Repurchase of common stock........................................... (4,540) (102)
Proceeds from exercise of stock options, net......................... 230
---------- ----------
Net cash provided by (used in) financing activities......... 11,834 (442)
---------- ----------
Effect of exchange rate changes on cash.................................. (256) (232)
---------- ----------
Net increase in cash and cash equivalents................................ 2,265 2,331
Cash and cash equivalents at beginning of period......................... 2,003 315
---------- ----------
Cash and cash equivalents at end of period............................... $ 4,268 $ 2,646
========== ==========
Supplemental disclosures of cash flow information:
Interest paid........................................................ $ 4,495 $ 1,878
Income taxes paid.................................................... $ 3,803 $ 6,334
</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 four largest corporate travel management companies in the United
States based on airline sales. The Company manages all aspects of its clients'
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 accounting
principles generally accepted in the U.S. 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 26, 1999.
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 25, 2000, 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 25, 2000, 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.
NOTE 3--BUSINESS COMBINATIONS
From December 27, 1999 to June 25, 2000, the Company made three
acquisitions. These three acquisitions were accounted for under the purchase
method for an aggregate purchase price of $23,173 consisting of cash, net of
cash acquired, of $18,243 and notes payable of $4,930. The total assets related
to these three acquisitions were $24,721 including intangible assets of $19,760.
The results of these acquisitions have been included in the Company's results
from their respective dates of acquisition.
6
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NOTE 4--NON-RECURRING RESTRUCTURING CHARGES
The Company implemented a cost reduction measure that commenced in
March 2000 and resulted in the Company's recording a restructuring charge of
$1.9 million in February and March 2000. The 2000 charge provides for the
closure of five facilities and the severance associated with the elimination of
approximately 130 employee positions. To date, five facilities have been closed
or consolidated and 105 employee positions have been eliminated. Management
believes that these measures will be substantially completed as of December
2000. The activity in the restructuring liability during the six months ended
June 25, 2000 is as follows:
<TABLE>
<CAPTION>
Employee Facility
Severance and Closures and
Termination Costs Consolidation Total
<S> <C> <C> <C>
Original restructuring accrual..... $ 1,584 $ 316 $ 1,900
Payments........................... (1,376) (106) (1,482)
Non-cash usage..................... (213) (213)
----------- ----------- -----------
Balance at June 25, 2000........... $ 208 $ (3) $ 205
=========== =========== ===========
</TABLE>
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 management
companies by corporate clients, the use of co-branding involving the Company's
subsidiaries, 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 clients, any
loss or modification of material contracts the Company has with travel suppliers
or current clients, 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 26,
1999, 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 three companies acquired in business combinations in 2000
accounted for under the purchase method (the "2000 Purchased Companies") and the
ten companies acquired in business combinations in 1999 accounted for under the
purchase method (the "1999 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
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 October 1998, the airlines instituted a commission
cap of $100 on
8
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round-trip international tickets and $50 on one-way international tickets. Most
recently, in October 1999, the airlines further cut the base commission on
domestic and international tickets from 8% to 5% of the ticket price. The
previous commission caps of $50 on round-trip domestic tickets and $25 on one-
way domestic tickets and $100 on round-trip international tickets and $50 on
one-way international tickets remained in effect.
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
typically charges between $20 and $40 for each air travel ticket issued to such
clients and retains all of the related commissions collected from the airlines.
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 substantially all 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. Additionally, the Company has
negotiated favorable contracts with selected computer reservation systems
vendors, hotel commission clearinghouses and rental car companies. Some of these
contracts provide payments to the Company of up-front fees or annual payments or
cost savings to the Company.
Expenses
The Company's direct operating expenses include principally labor
expense (which comprised approximately 61.6% and 64.1% of total direct operating
expenses in the three and six months ended June 25, 2000, respectively), 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 55.6% and 54.9% of total general
and administrative expenses in the three and six months ended June 25, 2000,
respectively), occupancy costs and other costs.
2000 Non-Recurring Restructuring Charge
As part of the Company's increased focus on regional operational
structures and process flow in 2000, it undertook a formal plan approved by its
Board of Directors for cost reduction measures including the elimination
duplicative facilities and the consolidation of certain regional operating
functions. The implementation of the cost reduction measures commenced in March
2000 and resulted in the Company's recording an aggregate restructuring charge
of $1.9 million in February and March 2000.
The 2000 charge provides for the closure of five facilities and the
severance associated with the elimination of approximately 130 employee
positions. To date, five facilities have been closed or consolidated and
approximately 105 employee positions have been eliminated. Management
anticipates that these measures will be completed by December 2000.
9
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Results of Operations
The following table sets forth various items as a percentage of
revenues for the three and six months ended June 25, 2000 and June 27, 1999.
<TABLE>
<CAPTION>
For the Three Months For the Six Months
-------------------- ------------------
Ended Ended
----- -----
June 25, June 27, June 25, June 27,
2000 2000 2000 1999
---- ----- ---- ----
<S> <C> <C> <C> <C>
Revenues................................................ 100.0% 100.0% 100.0% 100.0%
Operating expenses...................................... 55.1 55.3 55.2 55.6
General and administrative expenses..................... 26.9 24.3 27.1 25.4
Depreciation and amortization expense................... 3.7 4.4 3.9 4.3
Non-recurring restructuring charge...................... 1.2
------ ------ ------- ------
Operating income.................................... 14.3 16.0 12.6 14.7
Interest expense, net................................... 3.3 1.8 3.2 1.9
Other (income) expense.................................. 0.1 0.3 0.1 0.2
------ ------ ------- ------
Income before provision for income taxes................ 10.9 13.9 9.3 12.6
Provision for income taxes.............................. 4.4 5.9 3.9 5.4
------ ------ ------- ------
6.5% 8.0% 5.4% 7.2%
====== ====== ======= ======
</TABLE>
Revenues
Consolidated revenues increased 41.0%, from $58.0 million for the three
months ended June 27, 1999 to $81.8 million for the three months ended June 25,
2000. This increase was primarily due to the inclusion of the revenues from the
2000 and 1999 Purchased Companies from their respective dates of acquisition,
which added approximately $19.1 million in consolidated revenues. Additionally,
the Company has increased revenues in 2000 through internal growth of 5.8% and
improved national contracts with certain of its vendors.
Consolidated revenues increased 37.7%, from $112.6 million for the six
months ended June 27, 1999 to $155.2 million for the six months ended June 25,
2000. This increase was primarily due to the inclusion of the revenues from the
2000 and 1999 Purchased Companies from their respective dates of acquisition,
which added approximately $34.1 million in consolidated revenues. Additionally,
the Company has increased revenues in 2000 through internal growth of 5.5% and
improved national contracts with certain of its vendors.
Operating Expenses
Operating expenses increased 40.5%, from $32.1 million, or 55.3% of
revenues, for the three months ended June 27, 1999 to $45.1 million, or 55.1% of
revenues, for the three months ended June 25, 2000. The decrease in operating
expense as a percentage of revenues was due primarily to the internal growth and
the result of spreading certain fixed operating expenses over a larger revenue
base.
Operating expenses increased 36.9%, from $62.6 million, or 55.6% of
revenues, for the six months ended June 27, 1999 to $85.7 million, or 55.2% of
revenues, for the six months ended June 25, 2000. The decrease in operating
expense as a percentage of revenues was due primarily to the internal growth and
the result of spreading certain fixed operating expenses over a larger revenue
base.
General and Administrative Expenses
10
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General and administrative expenses increased 55.5%, from $14.1 million,
or 24.3% of revenues, for the three months ended June 27, 1999 to $21.9 million,
or 26.9% of revenues, for the three months ended June 25, 2000. The increase in
general and administrative expenses as a percentage of revenues was due
primarily to incremental costs associated with the start-up of
NavigantVacations.com prior to the new release of its website adding
approximately $816,000 of additional general and overhead costs. Additionally,
the 2000 Purchased Companies and the 1999 Purchased Companies acquired in the
latter part of 1999 had a higher general and administrative expenses as a
percentage of revenues than the Company due to the recency of these acquisitions
and the general overlap of several of their administrative functions as the
regions formalized their operating structure. The Company took the non-recurring
restructuring charge to eliminate several of these positions throughout the
balance of 2000.
General and administrative expenses increased 46.8%, from $28.6 million,
or 25.4% of revenues, for the six months ended June 27, 1999 to $42.0 million,
or 27.1% of revenues, for the six months ended June 25, 2000. The increase in
general and administrative expenses as a percentage of revenues was due
primarily to incremental costs associated with the start-up of
NavigantVacations.com prior to the new release of its website adding
approximately $1.0 million of additional general and overhead costs.
Additionally, the 2000 Purchased Companies and the 1999 Purchased Companies
acquired in the latter part of 1999 had a higher general and administrative
expenses as a percentage of revenues than the Company due to the recency of
these acquisitions and the general overlap of several of their administrative
functions as the regions formalized their operating structure. The Company took
the non-recurring restructuring charge to eliminate several of these positions
throughout the balance of 2000.
Depreciation and Amortization Expense
Depreciation and amortization expense increased 19.9%, from $2.5 million,
or 4.4% of revenues, for the three months ended June 27, 1999 to $3.0 million,
or 3.7% of revenues, for the three months ended June 25, 2000. This increase was
due to the increase in the number of purchase acquisitions and the resultant
higher goodwill amortization included in the results for 2000 compared to 1999.
Depreciation and amortization expense increased 21.1%, from $5.0 million,
or 4.3% of revenues, for the six months ended June 27, 1999 to $6.0 million, or
3.9% of revenues, for the six months ended June 25, 2000. This increase was due
to the increase in the number of purchase acquisitions and the resultant higher
goodwill amortization included in the results for 2000 compared to 1999 .
Non-recurring Restructuring Charge
As part of the Company's increased focus on regional operational
structures and process flow in 2000, it undertook a formal plan approved by its
Board of Directors for cost reduction measures including the elimination of
duplicative facilities and the consolidation of certain regional operating
functions. The implementation of the cost reduction measures commenced in March
2000 and resulted in the Company's recording an aggregate restructuring charge
of $1.9 million in February and March 2000. The Company did not incur any
restructuring charges in the three and six months ended June 27, 1999.
Interest Expense, Net
Interest expense, net, increased from $1.0 million or 1.8% of revenues,
for the three months ended June 27, 1999 to $2.7 million, or 3.3% of revenues,
for the three months ended June 25, 2000. The increase was attributable to
financing the acquisitions of the 1999 and 2000 Purchased Companies with
borrowings under the Company's credit facility as the average debt balance for
the three months ended June 25, 2000 increased to $127.5 million compared to
$60.2 million for the three months ended June 27, 1999 resulting in
approximately $1.1 million in additional interest expense. Additionally, the
increase in interest rates associated with the Federal Reserve rate increases
11
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resulted in $600,000 additional interest expense as the Company's average
interest rate increased from 6.9% for the three months ended June 27, 1999 to
9.0% for the three months ended June 25, 2000.
Interest expense, net, increased from $2.1 million or 1.9% of revenues,
for the six months ended June 27, 1999 to $4.9 million, or 3.2% of revenues, for
the six months ended June 25, 2000. The increase was attributable to financing
the acquisitions of the 1999 and 2000 Purchased Companies with borrowings under
the Company's credit facility as the average debt balance for the six months
ended June 25, 2000 increased to $116.4 million compared to $61.6 million for
the six months ended June 27, 1999 resulting in approximately $1.9 million in
interest expense. Additionally, the increase in interest rates associated with
the Federal Reserve rate increases resulted in $1.3 million of additional
interest expense as the Company's average interest rate increased from 6.9% for
the six months ended June 27, 1999 to 9.0% for the six months ended June 25,
2000. The increase in interest expense was partially offset by an increase in
interest income of $400,000 attributable to the investment of restricted cash
for NavigantVacations.com.
Provision for Income Taxes
Provision for income taxes increased from $3.5 million for the three
months ended June 27, 1999 to $3.6 million for the three months ended June 25,
2000, reflecting effective income tax rates of 42.8% and 40.7%, respectively.
The high effective income tax rate compared to the federal statutory rate of
35%, was primarily due to non-deductible goodwill amortization resulting from
acquisition activity. The effective rates in the three months ended June 25,
2000 was slightly lower than the effective rates in the three months ended June
27, 1999 due to a lower ratio of non-deductible goodwill amortization to pre-tax
income in the later period as a result of the mix of acquisitions in late 1999
and early 2000 that caused the level of deductible goodwill to non-deductible
goodwill to be more favorable and a higher level of pre-tax income in the three
months ended June 25, 2000.
Provision for income taxes decreased from $6.1 million for the six months
ended June 27, 1999 to $6.0 million for the six months ended June 25, 2000,
reflecting effective income tax rates of 43.0% and 41.7%, respectively. The high
effective income tax rate compared to the federal statutory rate of 35%, was
primarily due to non-deductible goodwill amortization resulting from acquisition
activity. The effective rates in the six months ended June 25, 2000 was slightly
lower than the effective rates in the six months ended June 27, 1999 due to a
lower ratio of non-deductible goodwill amortization to pre-tax income in the
later period as a result of the mix of acquisitions in late 1999 and early 2000
that caused the level of deductible goodwill to non-deductible goodwill to be
more favorable and a higher level of pre-tax income in the six months ended June
25, 2000.
Liquidity and Capital Resources
At June 25, 2000, the Company had cash of $4.3 million, excluding
restricted cash in NavigantVacations.com, working capital of $21.9 million ($8.1
million excluding restricted cash in NavigantVacations.com), borrowings of
$109.0 million under the Amended and Restated Credit Agreement from NationsBank,
N.A. as Administrative Agent (the "Credit Facility"), $19.3 million of other
indebtedness, including capital lease obligations, and available capacity under
the Credit Facility of $16.0 million. The Company's capitalization, defined as
the sum of long-term debt and stockholders' equity at June 25, 2000 was
approximately $257.0 million.
The Company has financed its operational growth and acquisitions
primarily from internally generated cash flow from operations and borrowings
under the Credit Facility. These borrowings are 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 at least fiscal 2002 based on
current budgets.
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During the six months ended June 25, 2000, net cash provided by operating
activities was $11.8 million. Net cash used in investing activities was $21.1
million, including $3.3 million for additions to property and equipment, such as
computer equipment and office furniture, and $18.9 million for the acquisition
of the 2000 Purchased Companies. Net cash provided by financing activities was
$11.8 million, consisting of $2.6 million for repayments by the Company of long-
term indebtedness and $4.5 million for the repurchase of common stock offset by
net increases of $18.7 million in the Company's credit facility primarily to
finance the 2000 Purchased Companies.
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. 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.
In August 1999, the Company obtained the Credit Facility, a secured
$125.0 million revolving credit facility to replace the Company's existing $60.0
million revolving credit facility and a $15.0 million short term bridge loan
agreement. The Credit Facility is available for working capital, capital
expenditures, and acquisitions, subject to compliance with the applicable
covenants. The Credit Facility is scheduled to expire in August 2004. 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 1.25% and 2.75%, 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 .25% and 1.75%, 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.
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
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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
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, as subsequently
amended, is effective for all fiscal quarters of all fiscal years beginning
after June 15, 2000 (January 1, 2001 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.
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 26, 1999. Based upon the Company's average borrowings under the
Credit Facility for the six months ended June 25, 2000, a 50 basis point
movement in the base rate or the LIBOR rate would approximate $580,000
annualized increase or decrease in interest expense.
14
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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 U.S. Office Products Company and certain former and
present executive officers of U.S. Office Products Company as defendants.
The lawsuit was instituted on January 19, 1999, in the Circuit Court for
the County of Kent, State of Michigan. The defendants removed the suit to
the Southern Division of the United States District Court for the Western
District of Michigan. The case was subsequently transferred to the United
States District Court for the District of Columbia, to be consolidated
with other pending actions against U. S. Office Products. The parties
have appealed various rulings of the District Court, and these appeals
are pending in both the United States Court of Appeals for the Sixth
Circuit and the United States Court of Appeals for the District of
Columbia Circuit.
The plaintiffs allege that U.S. Office Products and the named
U.S. Office Products executive officers made fraudulent
misrepresentations and omissions about among other things, U.S. Office
Products' plans to engage in a restructuring which would include a spin-
off of 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.
As of June 25, 2000, the approximate book value of these two subsidiaries
was $12.7 million. The Company intends to vigorously defend against this
lawsuit.
Individuals purporting to represent various classes composed of
stockholders who purchased shares of U.S. Office Products common stock
between June 5, 1997 and November 2, 1998 filed six actions in the United
States District Court for the Southern District of New York and four
actions in the United States District Court of the District of Columbia
in late 1998 and early 1999. Each of the actions named Jonathan Ledecky
(a former director of Navigant), U.S. Office Products, and, in some
cases, Sands Brothers & Co. Ltd. as defendants. Navigant has not been
named as a defendant in these actions. The actions claim that the
defendants made misstatements, failed to disclose material information,
and otherwise violated Sections 10(b) and/or 14 of the Securities
Exchange Act of 1934 and Rules 10b-5 and 14a-9 thereunder in connection
with U.S. Office Products' Strategic Restructuring. Two of the actions
alleged a violation of Sections 11, 12 and/or 15 of the Securities Act of
1933 and/or breach of contract under California law relating to U.S.
Office Products' acquisition of Mail Boxes Etcetera. The actions seek
declaratory relief, unspecified money damages and attorney's fees. All of
these actions have been consolidated and transferred to the United States
District Court for the District of Columbia. A consolidated amended
complaint was filed on July 29, 1999, naming U.S. Office Products and Mr.
Ledecky as defendants.
Sellers of two businesses that U.S. Office Products acquired in
the fall of 1997 and that were spun off in connection with U.S. Office
Products' Strategic Restructuring (which included the Travel
Distribution) also have filed complaints in the United States District
Court for the District of Delaware, and the United States District Court
for the District of Connecticut. These lawsuits were filed on February
10, 1999 and March 3, 1999, respectively, and name, among others, U.S.
Office Products as a defendant. Both of these cases have been transferred
and consolidated for pretrial purposes with the purported class-action
pending in the United States District Court for the District of Columbia.
Sellers of two other businesses acquired in October 1997 and
December 1997 that were not spun off by U.S. Office Products have also
filed complaints in state court in Kentucky and state court in Indiana
15
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in which U.S. Office Products is named as defendant. Those complaints
were filed on or about September 2, 1999, and September 30, 1999. These
cases have been removed to federal district court, and U.S. Office
Products has sought to have both cases transferred and consolidated with
the cases pending in the United States District Court for the District of
Columbia. Each of these disputes generally relates to events surrounding
the Strategic Restructuring, and the complaints that have been filed
assert claims of violation of federal and/or state securities and other
laws, fraud, misrepresentation, conspiracy, breach of contract,
negligence, and/or breach of fiduciary duty.
In October 1999, the United States District Court for the
District of Columbia ordered that the parties in all of the cases before
it engage in mediation, and "administratively closed" the cases that had
been consolidated until completion of the mediation process. Mediation
sessions were held in December 1999 and January 2000, but were
unsuccessful. The plaintiffs are now asking that the cases be reopened.
On April 14, 1998, a stockholder purporting to represent a class
composed of all U.S. Office Products' stockholders filed an action in the
Delaware Chancery Court. The action names U.S. Office Products and its
directors, including Mr. Ledecky, as defendants, and claims that the
directors breached their fiduciary duty to stockholders of U.S. Office
Products by changing the terms of the self tender offer for U.S. Office
Products' common stock that was a part of the Strategic Restructuring
Plan to include employee stock options. The complaint seeks injunctive
relief, damages and attorneys' fees. The directors filed an answer
denying the claims against them, and U.S. Office Products has moved to
dismiss all claims against it.
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, likely
would be limited to 5.2% of U.S. Office Products' indemnifiable loss, up
to a maximum of $1.75 million.
Navigant is also involved in various other legal actions arising
in the ordinary course of its business. Navigant 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 20,
2000, the Company's stockholders elected the following directors for a
three-year term: Ned A. Minor and D. Craig Young. The directors were
elected by the following number of votes:
For Withheld
--- --------
Ned A. Minor 12,205,445 9,476
D. Craig Young 12,205,445 9,476
The remaining directors whose terms continue after the meeting
date are Edward S. Adams and Vassilios Sirpolaidis.
The Stockholders also ratified the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants for
fiscal 2000 by a vote of 12,201,553 for, 7,707 against, and 5,661
abstained.
16
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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
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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 8, 2000.
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
