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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

OR

Commission File Number 000-24387

NAVIGANT INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)

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 o

             As of October 26, 2002, the Registrant had outstanding 15,104,000 shares of its common stock, par value $0.001 per share and 1,231,000 shares of treasury stock outstanding.

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INDEX TO FORM 10-Q

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NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Data)

See accompanying notes to consolidated financial statements.

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NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)

See accompanying notes to consolidated financial statements.

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NAVIGANT INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands, unless otherwise noted)

See accompanying notes to consolidated financial statements.

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NAVIGANT INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, unless otherwise noted)

NOTE 1—BACKGROUND

         Navigant International, Inc. (the “Company”), a Delaware corporation, is the second largest corporate travel management company in the United States based on airline ticket sales. The Company manages all aspects of its clients’ travel processes, focusing on reducing their travel expenses. The Company, through Scheduled Airlines Traffic Offices, Inc. (“SatoTravel”), which was acquired June 2001, provides airline travel reservation services to the U.S. Government and its employees and private sector organizations.

         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. 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 United States of America 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 30, 2001.

         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 29, 2002, and the results of its operations and its 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 29, 2002 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—NEW ACCOUNTING PRONOUNCEMENTS

         The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, Accounting for Asset Retirement Obligations (“FAS 143”). The Company will adopt FAS 143 no later than December 30, 2002. Under FAS 143, the fair value of a liability for an asset retirement obligation covered under the scope of the statement would be recognized in the period in which the liability is incurred, with an offsetting increase in the carrying amount of the related long-lived asset. Over time, the liability would be accreted to its present value, and the capitalized cost would be depreciated over the useful life of the related asset. Upon settlement of the liability, an entity would either settle the obligation for its recorded amount or incur a gain or loss upon settlement. The Company believes that the adoption of FAS 143 will not have a significant effect on the Company’s results of operations or its financial position.

         The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“FAS 144”). The Company adopted FAS 144 on December 31, 2001. FAS 144 retains the fundamental provisions of existing generally accepted accounting principles with respect to the recognition and measurement of long-lived asset impairment contained in FAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (“FAS 121”). However, FAS 144 provides new guidance intended to address certain significant implementation issues associated with FAS 121, including expanded guidance with respect to appropriate cash flows to be used to determine whether recognition of any long-lived asset impairment is required, and if required how to measure the

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amount of the impairment. FAS 144 also requires that any net assets to be disposed of by sale be reported at the lower of carrying value or fair value less cost to sell, and expands the reporting of discontinued operations to include any component of an entity with operations and cash flows that can be clearly distinguished from the rest of the entity. The adoption of FAS 144 did not have a significant effect on the Company’s results of operations or its financial position.

         The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (“FAS 145”). This Statement rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. This statement amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to the sale-leaseback transactions. FAS 145 is effective for the Company for fiscal year 2002. The adoption of FAS 145 did not have a significant effect on the Company’s results of operations or its financial position.

                  The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“FAS 146”). This statement requires costs associated with exit or disposal activities, such as lease termination or employee severance costs, to be recognized when they are incurred rather than at the date of a commitment to an exit or disposal plan. FAS 146 replaces Emerging Issues Task Force Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring),” which previously provided guidance on this topic. FAS 146 is to be applied prospectively to exit or disposal activities initiated after December 30, 2002. Management believes that the adoption of FAS 146 will not have a significant effect on the Company’s results of operations or its financial position.

NOTE 4—DEFERRED INCOME

         On September 23, 2002, the Company entered into a new five-year contract with one of its vendors resulting in an upfront cash payment of approximately $30 million, which has been recorded as deferred income and will be recognized as income over the life of the contract. The cash proceeds received were used to make a voluntary prepayment on the Company’s $135 million bank credit facility on September 25, 2002.

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NOTE 5—INTEREST RATE SWAP DERIVATIVES

         The Company recognizes all derivative instruments on the balance sheet at their fair values and changes in fair value are recognized immediately in earnings, unless the derivatives qualify as hedges of future cash flows. The nature of the Company’s debt structure necessarily involves the management of various financial risks, primarily those related to changes in interest rates. Management has entered into derivative interest rate swaps, which are financial instruments, to mitigate or eliminate certain of those risks.

Fair-Value Hedges

         The Company had entered into an interest rate swap to convert a part of its nonprepayable, fixed-rate, long-term debt to floating-rate. The notional amount of these types of interest rate swaps aggregated $50 million. The Company’s policy was to convert between 40% and 70% of all nonprepayable, fixed-rate debt to floating-rate debt, with the percentage depending on contract interest rates, maturities and expected balance on the Company’s floating-rate revolving debt facility. This interest rate swap was accounted for as a fair-value hedge. However, with the current interest rate environment and the gain in the market value of the hedge instrument, the Company determined that it should unwind its hedge and lock in the existing rate. Therefore, on September 16, 2002, the Company received $428 as payment from the counter party to unwind the swap. This gain was recorded as deferred income and will be amortized over the remaining life of the debt of three years.

Cash Flow Hedges

         The Company also entered into a forward interest rate swap to convert floating-rate loans to fixed-rate loans. Specific amounts that the Company hedges are determined based on the prevailing market conditions and the current shape of the yield curve. The specific terms and notional amounts of the swaps are determined based on management’s assessment of future interest rates, as well as other factors, including short-term strategic initiatives. The notional amount of these types of interest rate swaps aggregated $75 million. For derivatives qualifying as hedges of future cash flows, the effective portion of changes in fair value is recorded temporarily as a component of equity, and is then recognized in earnings along with the related effects of the hedged items. Any ineffective portion of a hedge is reported in earnings as it occurs. For the nine months ended September 29, 2002, the Company did not report a loss or a gain associated with the total ineffectiveness of all cash flow hedges. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness. As of September 29, 2002, the fair value of the cash flow hedges aggregates an unrealized loss of $2,955 and is recorded in Other Long-Term Liabilities and as an offset to Accumulated Other Comprehensive Loss and Deferred Income Taxes. The change in value for the three and nine months ended September 29, 2002 is a gain of $147 and a loss of $1,078, respectively.

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NOTE 6—GOODWILL

         The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (“FAS 142”), which became effective for the Company on December 31, 2001. Under FAS 142, goodwill is no longer amortized. Rather, it is tested for impairment upon adoption and on an annual basis.

         The Company has two reporting units: general travel management and meetings and incentives. The carrying value of goodwill held by the Company as of September 29, 2002 that will no longer be amortized was $307,415, which consists of $299,999 related to the general travel management unit and $7,416 related to the meetings and incentives unit. The overall carrying value of goodwill increased by $1,130 from December 30, 2001 as a result of foreign currency adjustments and earn-out payments.

         With the adoption of FAS 142, the Company tested goodwill for impairment in the first quarter of 2002 and, going forward, will test goodwill for impairment on an annual basis in the third quarter of each fiscal year. Testing in the third quarter of 2002 compared the Company’s capitalization, defined as the sum of long-term debt and stockholders’ equity, to the estimated enterprise value calculated using EBITDA amounts and a predetermined multipler for each reporting unit. Based on this testing, management of the Company believes the goodwill held in both units is fully recoverable and that no impairment charges are necessary for the quarter ended September 29, 2002.

         The effects of the exclusion of goodwill amortization expenses were as follows:

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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 online 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, 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, 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, including changes or reductions in revenue as a consequence of, or related to, the failure, liquidation, bankruptcy or other reorganization of major travel suppliers, including airlines, rental car companies or hotel companies, and 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 30, 2001, 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 travel management services to corporations, government agencies and the military and, to a more limited extent, other travel services to these customers. The Company has operations throughout the United States, Canada, and the United Kingdom and also in Brazil, France, Scotland and thirteen other countries.

         The Company’s consolidated financial statements include the results of operations for the company acquired in a business combination in 2002 accounted for under the purchase method (the “2002 Purchased Company”) and for the five companies acquired in business combinations in 2001 accounted for under the purchase method (the “2001 Purchased Companies”) from their respective dates of acquisition.

         The Company has been adversely affected due to the terrorist attacks on the United States on September 11, 2001 as well as the continued, depressed economic conditions in the United States. During the three and nine months ended September 29, 2002, transactions were down 11% and 15%, respectively, from 2001 levels. Note that the 11% decrease in transactions from 2001 levels for the three months ended September 29, 2002 includes a high number of refunds granted in relation to the September 11 attacks and therefore is not necessarily indicative of changes in revenues.

Sources of Revenue

         Historically, arrangements between 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.

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Consequently, 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. Since 1995, the airlines have instituted various commission caps and cut the base commission on domestic and international tickets. The most recent commission cut occurred in March 2002, where most U.S. airlines eliminated base commissions paid to travel management companies, although several foreign carriers still pay base commissions.

         In response to the reduction and elimination of U.S. airline commissions and consistent with industry practice, the Company has entered into management contracts and service fee arrangements with nearly all 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 any 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. With the elimination of commissions by most U.S. airlines, the Company does not expect any excess domestic airline commissions available to pay to clients. In addition, the Company 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 $35 and $55 for each air travel ticket issued to such clients and retains any commissions collected from the airlines and other vendors.

         The Company believes that its management contracts and service fee arrangements have minimized the financial impact of past commission caps and cuts and will continue to do so as base airline commissions are eliminated. The Company believes that nearly all of its 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. Under these agreements, the airlines generally pay 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, annual payments or cost savings to the Company.

Expenses

         The Company’s direct operating expenses include principally labor expense (which comprised approximately 65.4% and 65.3% of total direct operating expenses in the three and nine months ended September 29, 2002, respectively), net 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 54.2% and 56.2% of total general and administrative expenses in the three and nine months ended September 29, 2002, respectively), occupancy costs and other costs.

         Labor expense as a percentage of total direct operating expense and general and administrative expenses increased as the Company restored 50% of the salary cuts implemented following the September 11 terrorist attacks at the start of the second quarter 2002 and the remaining 50% at the start of the third quarter 2002. This increased the overall salary expense by 5% and 10% in the second and third quarters, respectively.

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Results of Operations

         The following table sets forth various items as a percentage of revenues for the three and nine months ended September 29, 2002 and September 30, 2001.