<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 September 24, 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.
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(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 (Zip Code)
offices)
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 November 1, 2000, the Registrant had outstanding 13,132,000 shares of
its common stock, par value $0.001 per share.
<PAGE>
INDEX TO FORM 10-Q
------------------
<TABLE>
<CAPTION>
Part I. FINANCIAL INFORMATION:
Item 1. Consolidated Financial Statements
<S> <C>
Consolidated Balance Sheets -
September 24, 2000 (Unaudited) and December 26, 1999............................ 3
Consolidated Statements of Income (Unaudited) -
Three and Nine Months Ended September 24, 2000 and September 26, 1999........... 4
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 24, 2000 and September 26, 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............................................................... 16
Item 6. Exhibits and Reports on Form 8-K........................................... 16 - 17
</TABLE>
SIGNATURES
2
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NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
September 24, December 26,
------------- ------------
2000 1999
---- ----
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents........................... $ 5,558 $ 2,003
Restricted cash in NavigantVacations.com............ 10,096 14,965
Accounts receivable, less allowance for doubtful
accounts of $794 and $424 respectively............. 53,628 42,278
Prepaid expenses and other current assets........... 5,769 3,168
Deferred income taxes............................... 1,956 1,551
Income tax receivable............................... 1,516 2,368
-------- --------
Total current assets............................ 78,523 66,333
Property and equipment, net............................ 26,121 22,282
Intangible assets, net................................. 227,563 193,387
Deferred income taxes.................................. 1,200 1,160
Other assets........................................... 4,566 4,149
-------- --------
Total assets.................................... $337,973 $287,311
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term portion of long-term debt................ $ 12,222 $ 11,867
Short-term portion of capital lease obligations..... 723 800
Accounts payable.................................... 3,952 4,880
Accrued compensation................................ 8,523 8,740
Other accrued liabilities........................... 26,247 19,979
-------- --------
Total current liabilities....................... 51,667 46,266
Long-term debt, net of short-term portion.............. 131,024 93,844
Capital lease obligations.............................. 194 708
Other long-term liabilities............................ 7,393 6,410
-------- --------
Total liabilities............................... 190,278 147,228
-------- --------
Minority interest in NavigantVacations.com............. 14,381 15,120
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock; $.001 par value, 150,000,000 shares
authorized; 13,132,000 issued (13,075,000 at
December 26, 1999)................................. 13 13
Additional paid-in-capital.......................... 115,043 114,044
Treasury stock; 929,000 shares outstanding (460,000 (8,141) (3,520)
at December 26, 1999)..............................
Accumulated other comprehensive income (loss)....... (966) 122
Retained earnings................................... 27,365 14,304
-------- --------
Total stockholders' equity...................... 133,314 124,963
-------- --------
Total liabilities and stockholders' equity...... $337,973 $287,311
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
September 24, September 26, September 24, September 26,
------------- ------------- ------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues........................... $79,777 $55,682 $234,928 $168,320
Operating expenses................. 44,911 30,795 130,605 93,371
General and administrative expenses 22,057 14,539 64,034 43,087
Depreciation and amortization 2,962 2,434 8,970 7,434
expense...........................
Non-recurring restructuring charge. 1,900
------- ------- -------- --------
Operating income.............. 9,847 7,914 29,419 24,428
Other (income) expenses:
Interest expense................. 3,043 1,386 8,392 3,516
Interest income.................. (186) (14) (598) (28)
Other............................ 112 76 273 270
------- ------- -------- --------
Income before provision for income 6,878 6,466 21,352 20,670
taxes.............................
Provision for income taxes......... 2,868 2,773 8,910 8,881
------- ------- -------- --------
Income before minority interest.... 4,010 3,693 12,442 11,789
Minority interest.................. (481) (619)
------- ------- -------- --------
Net income......................... 4,491 3,693 13,061 11,789
Other comprehensive income (loss):
Foreign currency translation (613) 124 (1,088) 222
adjustment ------- ------- -------- --------
Comprehensive income $ 3,878 $ 3,817 $ 11,973 $ 12,011
======= ======= ======== ========
Weighted average number of common
shares outstanding:
Basic............................ 12,173 12,860 12,309 12,896
Diluted.......................... 12,233 12,916 12,453 12,924
Net income per share:..............
Basic............................ $0.37 $0.29 $1.06 $0.91
Diluted.......................... $0.37 $0.29 $1.05 $0.91
</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 Nine Months Ended
September 24, 2000 September 26, 1999
------------------ ------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income............................... $ 13,061 $ 11,789
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization expense... 8,970 7,434
Minority interest....................... (739)
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................... (3,323) (4,648)
Prepaid expenses and other assets..... (669) 311
Accounts payable...................... (1,641) 436
Accrued liabilities................... 518 (13,778)
Other long-term liabilities........... (1,465) 4,736
-------- --------
Net cash provided by operating
activities......................... 14,925 6,280
-------- --------
Cash flows from investing activities:
Additions to property and equipment, net
of disposals............................ (6,978) (3,723)
Proceeds from disposal of building....... 1,025
Restricted cash equivalents in
NavigantVacations.com, net.............. 4,869
Cash paid in acquisitions and earn-outs
consideration, net of cash received..... (36,819) (17,857)
-------- --------
Net cash used in investing
activities......................... (38,928) (20,555)
-------- --------
Cash flows from financing activities:
Payments of long-term debt............... (4,266) (4,274)
Proceeds from credit facility, net....... 37,000 26,631
Repurchase of common stock............... (4,621) (1,194)
Payment of debt issue costs.............. (2,725)
Proceeds from exercise of stock options,
net..................................... 241
-------- --------
Net cash provided by financing
activities......................... 28,354 18,438
-------- --------
Effect of exchange rate changes on cash.... (796) (92)
-------- --------
Net increase in cash and cash equivalents.. 3,555 4,071
Cash and cash equivalents at beginning of
period.................................... 2,003 315
-------- --------
Cash and cash equivalents at end of period. $ 5,558 $ 4,386
======== ========
Supplemental disclosures of cash flow
information:
Interest paid............................ $ 8,302 $ 3,405
Income taxes paid........................ $ 7,660 $ 10,578
</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 September 24, 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 nine
months ended September 24, 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 September 24, 2000, the Company made six
acquisitions. These six acquisitions were accounted for under the purchase
method for an aggregate purchase price of $41,066 consisting of cash, net of
cash acquired, of $34,734 and notes payable of $6,332. The total assets related
to these six acquisitions were $49,418 including intangible assets of $36,069.
The results of these acquisitions have been included in the Company's results
from their respective dates of acquisition. Additionally, additional purchase
consideration aggregating $2,085 has been paid during the period December 27,
1999 to September 24, 2000 based on subsequent earnings or completion of
financial audits of the acquired entity.
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, all five facilities have been
closed or consolidated and 128 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 nine
months ended September 24, 2000 is as follows:
<TABLE>
<CAPTION>
Employee Severance Facility Closures
and and
Termination Costs Consolidation Total
<S> <C> <C> <C>
Original restructuring accrual............. $ 1,584 $ 316 $ 1,900
Payments................................... (1,536) (103) (1,639)
Non-cash usage............................. (213) (213)
------- ----- -------
Balance at September 24, 2000.............. $ 48 $ 0 $ 48
======= ===== =======
</TABLE>
7
<PAGE>
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,
in Brazil and in the United Kingdom.
The Company's consolidated financial statements include the results of
operations for the six 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
<PAGE>
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 the above commission caps,
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 62.5% and 64.8% of total direct operating
expenses in the three and nine months ended September 24, 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 56.0% and 55.7% of total general and
administrative expenses in the three and nine months ended September 24, 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, all five facilities have been closed or consolidated and
approximately 128 employee positions have been eliminated. Management
anticipates that these measures will be completed by December 2000.
9
<PAGE>
Results of Operations
The following table sets forth various items as a percentage of revenues
for the three and nine months ended September 24, 2000 and September 26, 1999.
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months
---------------------------- -----------------------------
Ended
-----
September 24, September 26, September 24, September 26,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues...................... 100.0% 100.0% 100.0% 100.0%
Operating expenses............ 56.3 55.3 55.6 55.5
General and administrative
expenses..................... 27.7 26.1 27.3 25.6
Depreciation and amortization
expense...................... 3.7 4.4 3.8 4.4
Non-recurring restructuring
charge....................... 0.8
----- ----- ----- -----
Operating income........... 12.3 14.2 12.5 14.5
Interest expense, net......... 3.6 2.5 3.3 2.1
Other (income) expense........ 0.1 0.1 0.1 0.1
----- ----- ----- -----
Income before provision for
income taxes................. 8.6 11.6 9.1 12.3
Provision for income taxes.... 3.6 5.0 3.8 5.3
----- ----- ----- -----
Income before minority
interest..................... 5.0% 6.6% 5.3% 7.0%
===== ===== ===== =====
</TABLE>
Revenues
Consolidated revenues increased 43.3%, from $55.7 million for the three
months ended September 26, 1999 to $79.8 million for the three months ended
September 24, 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 $20.7 million in consolidated
revenues. Additionally, the Company has increased revenues in 2000 through
internal growth of 6.2% and improved national contracts with certain of its
vendors.
Consolidated revenues increased 39.6%, from $168.3 million for the nine
months ended September 26, 1999 to $234.9 million for the nine months ended
September 24, 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 $56.7 million in consolidated
revenues. Additionally, the Company has increased revenues in 2000 through
internal growth of 5.9% and improved national contracts with certain of its
vendors.
Operating Expenses
Operating expenses increased 45.8%, from $30.8 million, or 55.3% of
revenues, for the three months ended September 26, 1999 to $44.9 million, or
56.3% of revenues, for the three months ended September 24, 2000. The increase
in operating expense as a percentage of revenues was due primarily to the
increased customer service demands during the current quarter associated with
the United Airlines labor dispute and the poor weather partially offset by
internal growth and the result of spreading certain fixed operating expenses
over a larger revenue base during the quarter.
Operating expenses increased 39.9%, from $93.4 million, or 55.5% of
revenues, for the nine months ended September 26, 1999 to $130.6 million, or
55.6% of revenues, for the nine months ended September 24, 2000. The increase in
operating expense as a percentage of revenues was due primarily to the increased
customer service demands during the quarter associated with the United Airlines
labor dispute and the poor weather offset by internal growth and the result of
spreading certain fixed operating expenses over a larger revenue base during
2000.
10
<PAGE>
General and Administrative Expenses
General and administrative expenses increased 51.7%, from $14.5 million, or
26.1% of revenues, for the three months ended September 26, 1999 to $22.1
million, or 27.7% of revenues, for the three months ended September 24, 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 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.
General and administrative expenses increased 48.5%, from $43.1 million, or
25.6% of revenues, for the nine months ended September 26, 1999 to $64.0
million, or 27.3% of revenues, for the nine months ended September 24, 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 adding approximately $2.1 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 21.7%, from $2.4 million,
or 4.4% of revenues, for the three months ended September 26, 1999 to $3.0
million, or 3.7% of revenues, for the three months ended September 24, 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 21.3%, from $7.4 million,
or 4.4% of revenues, for the nine months ended September 26, 1999 to $9.0
million, or 3.8% of revenues, for the nine months ended September 24, 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 nine months ended September 26, 1999.
11
<PAGE>
Interest Expense, Net
Interest expense, net, increased from $1.4 million or 2.5% of revenues, for
the three months ended September 26, 1999 to $2.9 million, or 3.6% of revenues,
for the three months ended September 24, 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 September 24, 2000 increased to $136.2 million compared
to $78.1 million for the three months ended September 26, 1999 resulting in
approximately $1.0 million in additional interest expense. Additionally, the
increase in interest rates associated with the Federal Reserve rate increases
resulted in $600,000 additional interest expense as the Company's average
interest rate increased from 7.1% for the three months ended September 26, 1999
to 8.9% for the three months ended September 24, 2000.
Interest expense, net, increased from $3.5 million or 2.1% of revenues, for
the nine months ended September 26, 1999 to $7.8 million, or 3.3% of revenues,
for the nine months ended September 24, 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 nine months ended September 24, 2000 increased to $125.6 million compared to
$68.0 million for the nine months ended September 26, 1999 resulting in
approximately $3.0 million in interest expense. Additionally, the increase in
interest rates associated with the Federal Reserve rate increases resulted in
$1.9 million of additional interest expense as the Company's average interest
rate increased from 6.9% for the nine months ended September 26, 1999 to 8.9%
for the nine months ended September 24, 2000. The increase in interest expense
was partially offset by an increase in interest income of $600,000 attributable
to the investment of restricted cash for NavigantVacations.com.
Provision for Income Taxes
Provision for income taxes increased from $2.8 million for the three months
ended September 26, 1999 to $2.9 million for the three months ended September
24, 2000, reflecting effective income tax rates of 42.9% 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 rate in the three months
ended September 24, 2000 was slightly lower than the effective rate in the three
months ended September 26, 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 September 24, 2000.
Provision for income taxes remained constant at $8.9 million for the nine
months ended September 26, 1999 and for the nine months ended September 24,
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 rate in the nine months ended September 24,
2000 was slightly lower than the effective rate in the nine months ended
September 26, 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 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 nine months ended September 24, 2000.
Liquidity and Capital Resources
At September 24, 2000, the Company had cash of $5.6 million, excluding
restricted cash in NavigantVacations.com, working capital of $28.1 million
($18.0 million excluding restricted cash in NavigantVacations.com), borrowings
of $127.0 million under the Amended and Restated Credit Agreement from
NationsBank, N.A. as Administrative Agent (the "Credit Facility"), $17.2 million
of other indebtedness, including capital lease obligations, and available
capacity under the Credit Facility of $23.0 million. The Company's
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capitalization, defined as the sum of long-term debt and stockholders' equity at
September 24, 2000 was approximately $277.1 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.
During the nine months ended September 24, 2000, net cash provided by
operating activities was $14.9 million. Net cash used in investing activities
was $38.9 million, including $7.0 million for additions to property and
equipment, such as computer equipment and office furniture, and $36.8 million
for the acquisition of the 2000 Purchased Companies. Net cash provided by
financing activities was $28.4 million, consisting of $4.3 million for
repayments by the Company of long-term indebtedness and $4.6 million for the
repurchase of common stock offset by net increases of $37.0 million in the
Company's credit facility primarily to finance the 2000 Purchased Companies.
During the nine months ended September 26, 1999, net cash provided by
operating activities was $6.3 million. Net cash used in investing activities
was $20.6 million, including $3.7 million for additions to property and
equipment, such as computer equipment and office furniture, and $17.9 million
for the acquisition of the 1999 Purchased Companies, offset by the proceeds from
the sale of a building for $1.0 million. Net cash provided by financing
activities was $18.4 million, consisting of $4.3 million for repayments by the
Company of long-term indebtedness and $2.7 million for payment of debt issuance
costs attributable to the Company's new revolving credit facility 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.
On August 31, 2000, the Company signed an amendment to the Credit Facility,
increasing the revolving credit facility to $150.0 million with the same terms
and conditions.
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
flows 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
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are expected to be funded from cash flows 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.
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.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"). This accounting bulletin will become effective in the fourth quarter of
2000, and provides guidance in applying generally accepted accounting principles
to revenue recognition in financial statements. The Company believes that
adopting SAB 101 will not have a material effect on the Company's financial
position or results of operations.
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 nine months ended September 24, 2000, a 50 basis point
movement in the base rate or the LIBOR rate would approximate $545,000
annualized increase or decrease in interest expense.
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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 an appeal is pending in
the United States Court of Appeals for the Sixth 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 September 24, 2000, the approximate book value of these
two subsidiaries was $12.8 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 in which
U.S. Office Products is named as defendant. Those complaints were filed on
or about September
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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 have asked 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.
---------------------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION.
---------------------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
------------------------------------------
(a) Exhibits
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10.1 Amended and Restated Employment Agreement dated as of July 25,
2000 between Edward S. Adams and Navigant International, Inc.
10.2 Amended and Restated Employment Agreement dated as of July 25,
2000 between Robert C. Griffith and Navigant International, Inc.
10.3 Second Amendment to the Credit Agreement dated as of August 31,
2000
27.1 Financial Data Schedules
(b) Reports on Form 8-K
Not applicable.
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: November 7, 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 )
17
